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EX-32.1 - EXHIBIT 32-1 - EVEREST REINSURANCE HOLDINGS INCexhibit321.htm
EX-31.2 - EXHIBIT 31-2 - EVEREST REINSURANCE HOLDINGS INCexhibit312.htm
EX-31.1 - EXHIBIT 31-1 - EVEREST REINSURANCE HOLDINGS INCexhibit311.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2021

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission file number 1-14527

 

EVEREST REINSURANCE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware

 

22-3263609

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

100 Everest Way

Warren, New Jersey 07059

 (908) 604-3000

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive office)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES      NO 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

YES      NO 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ 

 

Accelerated filer ☐ 

Non-accelerated Filer ☑ 

 

Smaller reporting company 

 

 

Emerging growth company 

 

Indicate by check mark if the registrant is an emerging growth company and has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange act.

YES      NO 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES      NO 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

Number of Shares Outstanding

Class

 

At May 1, 2021

Common Shares, $0.01 par value

 

1,000

 

The Registrant meets the conditions set forth in General Instruction H (1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format permitted by General Instruction H of Form 10-Q. 

 

 


 

EVEREST REINSURANCE HOLDINGS, INC.

 

Table of Contents

Form 10-Q

 

 

 

 

Page

PART I

 

 

 

 

FINANCIAL INFORMATION

 

 

 

 

Item 1.

 

Financial Statements

 

 

 

 

 

 

 

Consolidated Balance Sheets at March 31, 2021 (unaudited) and December 31, 2020

1

 

 

 

 

 

 

Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended March 31, 2021 and 2020 (unaudited)

2

 

 

 

 

 

 

Consolidated Statements of Changes in Stockholder’s Equity for the three months ended March 31, 2021 and 2020 (unaudited)

3

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the three months ended March 31, 2021 and 2020 (unaudited)

4

 

 

 

 

 

 

Notes to Consolidated Interim Financial Statements (unaudited)

5

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operation

30

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

41

 

 

 

 

Item 4.

 

Controls and Procedures

41

 

 

 

 

PART II

 

 

 

 

OTHER INFORMATION

 

 

 

 

Item 1.

 

Legal Proceedings

42

 

 

 

 

Item 1A.

 

Risk Factors

42

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

42

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

42

 

 

 

 

Item 4.

 

Mine Safety Disclosures

42

 

 

 

 

Item 5.

 

Other Information

42

 

 

 

 

Item 6.

 

Exhibits

43

 


 

EVEREST REINSURANCE HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

 

 

 

 

(Dollars in thousands, except share amounts and par value per share)

March 31, 2021

 

December 31, 2020

 

(unaudited)

 

 

 

ASSETS:

 

 

 

 

 

Fixed maturities - available for sale, at market value (amortized cost: 2021, $10,799,513; 2020, $10,248,650 allowances for credit losses: 2021, ($8,708); 2020, ($1,566))

$

11,050,001

 

$

10,643,565

Equity securities, at fair value

 

1,226,120

 

 

1,288,767

Short-term investments (cost: 2021, $620,398; 2020, $708,043)

 

620,395

 

 

707,905

Other invested assets (cost: 2021, $1,177,837; 2020, $1,094,933)

 

1,177,837

 

 

1,094,933

Other invested assets, at fair value

 

1,889,558

 

 

1,796,479

Cash

 

518,681

 

 

378,518

Total investments and cash

 

16,482,592

 

 

15,910,167

Note Receivable - affiliated

 

300,000

 

 

300,000

Accrued investment income

 

94,239

 

 

80,196

Premiums receivable

 

1,611,678

 

 

1,591,980

Reinsurance receivables - unaffiliated

 

1,562,846

 

 

1,505,650

Reinsurance receivables - affiliated

 

2,578,710

 

 

2,701,655

Funds held by reinsureds

 

275,084

 

 

267,599

Deferred acquisition costs

 

388,746

 

 

379,707

Prepaid reinsurance premiums

 

363,706

 

 

363,489

Other assets

 

651,421

 

 

616,640

TOTAL ASSETS

$

24,309,022

 

 

23,717,083

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

Reserve for losses and loss adjustment expenses

$

12,184,204

 

$

11,654,950

Unearned premium reserve

 

2,454,077

 

 

2,385,174

Funds held under reinsurance treaties

 

44,769

 

 

46,894

Other net payable to reinsurers

 

358,519

 

 

277,390

Losses in course of payment

 

141,053

 

 

161,154

Income taxes net payable

 

193,453

 

 

192,877

Senior notes due 6/1/2044

 

397,224

 

 

397,194

Senior notes due 10/15/2050

 

979,654

 

 

979,524

Long term notes due 5/1/2067

 

223,699

 

 

223,674

Borrowings from FHLB

 

310,000

 

 

310,000

Accrued interest on debt and borrowings

 

24,035

 

 

10,460

Unsettled securities payable

 

127,283

 

 

206,693

Other liabilities

 

441,251

 

 

456,786

Total liabilities

 

17,879,221

 

 

17,302,770

Commitments and Contingencies (Note 6)

 

(nil)

 

 

(nil)

 

 

 

 

 

 

STOCKHOLDER'S EQUITY:

 

 

 

 

 

Common stock, par value: $0.01; 3,000 shares authorized;

  1,000 shares issued and outstanding (2021 and 2020)

 

-

 

 

-

Additional paid-in capital

 

1,101,200

 

 

1,101,092

Accumulated other comprehensive income (loss), net of deferred income

  tax expense (benefit) of $43,436 at 2021 and $71,080 at 2020

 

163,955

 

 

268,018

Retained earnings

 

5,164,646

 

 

5,045,203

Total stockholder's equity

 

6,429,801

 

 

6,414,313

TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY

$

24,309,022

 

$

23,717,083

 

 

 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

1 


 

EVEREST REINSURANCE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

 

Three Months Ended

 

March 31,

(Dollars in thousands)

2021

 

2020

 

(unaudited)

REVENUES:

 

 

 

 

 

Premiums earned

$

1,696,900

 

$

1,494,005

Net investment income

 

147,723

 

 

74,201

Net realized capital gains (losses):

 

 

 

 

 

Credit allowances on fixed maturity securities

 

(7,142)

 

 

(12,099)

Other net realized capital gains (losses)

 

142,153

 

 

268,966

Total net realized capital gains (losses)

 

135,011

 

 

256,867

Other income (expense)

 

3,979

 

 

(4,498)

Total revenues

 

1,983,613

 

 

1,820,575

 

 

 

 

 

 

CLAIMS AND EXPENSES:

 

 

 

 

 

Incurred losses and loss adjustment expenses

 

1,354,084

 

 

1,029,513

Commission, brokerage, taxes and fees

 

349,854

 

 

323,104

Other underwriting expenses 

 

109,795

 

 

101,208

Corporate expenses

 

4,581

 

 

3,721

Interest, fee and bond issue cost amortization expense

 

15,534

 

 

7,460

Total claims and expenses

 

1,833,848

 

 

1,465,006

 

 

 

 

 

 

INCOME (LOSS) BEFORE TAXES

 

149,765

 

 

355,569

Income tax expense (benefit) 

 

30,322

 

 

38,924

 

 

 

 

 

 

NET INCOME (LOSS) 

$

119,443

 

$

316,645

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

Unrealized appreciation (depreciation) ("URA(D)")

  on securities arising during the period

 

(109,858)

 

 

(177,524)

Less: reclassification adjustment for realized

  losses (gains) included in net income (loss)

 

1,490

 

 

27,886

Total URA(D) on securities arising during

  the period

 

(108,368)

 

 

(149,638)

 

 

 

 

 

 

Foreign currency translation adjustments

 

2,262

 

 

(29,633)

Reclassification adjustment for amortization of net

  (gain) loss included in net income (loss)

 

2,043

 

 

920

Total benefit plan net gain (loss) for the period

 

2,043

 

 

920

Total other comprehensive income (loss), net of tax

 

(104,063)

 

 

(178,351)

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS)  

$

15,380

 

$

138,294

 

 

 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

 

 

 

2 


 

EVEREST REINSURANCE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF

CHANGES IN STOCKHOLDER’S EQUITY

 

(Dollars in thousands, except share amounts)

2021

 

2020

 

(unaudited)

COMMON STOCK (shares outstanding):

 

 

 

 

 

Balance, January 1

 

1,000

 

 

1,000

Balance, March 31

 

1,000

 

 

1,000

 

 

 

 

 

 

ADDITIONAL PAID-IN CAPITAL:

 

 

 

 

 

Balance, January 1

$

1,101,092

 

$

1,100,678

Share-based compensation plans

 

108

 

 

103

Balance, March 31

 

1,101,200

 

 

1,100,781

 

 

 

 

 

 

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),

NET OF DEFERRED INCOME TAXES:

 

 

 

 

 

Balance, January 1

 

268,018

 

 

64,324

Net increase (decrease) during the period

 

(104,063)

 

 

(178,351)

Balance, March 31

 

163,955

 

 

(114,027)

 

 

 

 

 

 

RETAINED EARNINGS:

 

 

 

 

 

Balance, January 1

 

5,045,203

 

 

4,692,423

Change to beginning balance due to adoption of ASU 2016-13

 

-

 

 

907

Net income (loss)

 

119,443

 

 

316,645

Balance, March 31

 

5,164,646

 

 

5,009,975

 

 

 

 

 

 

TOTAL STOCKHOLDER'S EQUITY, March 31

$

6,429,801

 

$

5,996,729

 

 

 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

3 


 

EVEREST REINSURANCE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

Three Months Ended

 

March 31,

(Dollars in thousands)

2021

 

2020

 

(unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income (loss) 

$

119,443

 

$

316,645

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Decrease (increase) in premiums receivable

 

(20,229)

 

 

(88,422)

Decrease (increase) in funds held by reinsureds, net

 

(9,734)

 

 

(20,983)

Decrease (increase) in reinsurance receivables

 

70,548

 

 

97,388

Decrease (increase) in income taxes

 

28,199

 

 

35,413

Decrease (increase) in prepaid reinsurance premiums

 

404

 

 

30,259

Increase (decrease) in reserve for losses and loss adjustment expenses

 

528,062

 

 

106,144

Increase (decrease) in unearned premiums

 

68,743

 

 

112,401

Increase (decrease) in other net payable to reinsurers

 

80,245

 

 

84,561

Increase (decrease) in losses in course of payment

 

(19,876)

 

 

976

Change in equity adjustments in limited partnerships

 

(54,558)

 

 

6,063

Distribution of limited partnership income

 

11,015

 

 

9,486

Change in other assets and liabilities, net

 

(25,976)

 

 

(76,651)

Non-cash compensation expense

 

9,004

 

 

7,528

Amortization of bond premium (accrual of bond discount)

 

6,823

 

 

1,385

Net realized capital (gains) losses

 

(135,011)

 

 

(256,867)

Net cash provided by (used in) operating activities

 

657,102

 

 

365,327

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Proceeds from fixed maturities matured/called - available for sale, at market value

 

76,628

 

 

257,000

Proceeds from fixed maturities sold - available for sale, at market value

 

492,943

 

 

164,244

Proceeds from equity securities sold - at fair value

 

281,313

 

 

204,161

Distributions from other invested assets

 

32,201

 

 

76,391

Cost of fixed maturities acquired - available for sale, at market value

 

(1,140,719)

 

 

(713,474)

Cost of equity securities acquired - at fair value

 

(174,877)

 

 

(167,914)

Cost of other invested assets acquired

 

(51,719)

 

 

(101,663)

Net change in short-term investments

 

87,694

 

 

(45,503)

Net change in unsettled securities transactions

 

(99,747)

 

 

(34,793)

Net cash provided by (used in) investing activities

 

(496,283)

 

 

(361,551)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Tax benefit from share-based compensation, net of expense

 

(8,896)

 

 

(7,425)

Cost of debt repurchase

 

-

 

 

(1,198)

Net cash provided by (used in) financing activities

 

(8,896)

 

 

(8,623)

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

(11,760)

 

 

(20,301)

 

 

 

 

 

 

Net increase (decrease) in cash

 

140,163

 

 

(25,148)

Cash, beginning of period

 

378,518

 

 

411,122

Cash, end of period

$

518,681

 

$

385,974

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

Income taxes paid (recovered)

$

2,001

 

$

3,558

Interest paid

 

1,775

 

 

2,712

 

 

 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

4 


 

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

 

For the Three Months Ended March 31, 2021, and 2020

 

1.  GENERAL

 

As used in this document, “Holdings” means Everest Reinsurance Holdings, Inc., a Delaware company and direct subsidiary of Everest Underwriting Group (Ireland) Limited (“Holdings Ireland”); “Group” means Everest Re Group, Ltd. (Holdings Ireland’s parent); “Bermuda Re” means Everest Reinsurance (Bermuda), Ltd., a subsidiary of Group; “Everest Re” means Everest Reinsurance Company and its subsidiaries, a subsidiary of Holdings (unless the context otherwise requires) and the “Company” means Holdings and its subsidiaries.

 

2.  BASIS OF PRESENTATION

 

The unaudited interim consolidated financial statements of the Company for the three months ended March 31, 2021 and 2020 include all adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair statement of the results on an interim basis. Certain financial information, which is normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), has been omitted since it is not required for interim reporting purposes. The December 31, 2020 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.  The results for the three months ended March 31, 2021 and 2020 are not necessarily indicative of the results for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, 2020, 2019 and 2018 included in the Company’s most recent Form 10-K filing. 

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities (and disclosure of contingent assets and liabilities) at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Ultimate actual results could differ, possibly materially, from those estimates. This is particularly true given the fluid and continuing nature of the COVID-19 pandemic.  This is an ongoing event and so is the Company’s evaluation and analysis.  While the Company’s analysis considers all aspects of its operations, it does not take into account legal, regulatory or legislative intervention that could retroactively mandate or expand coverage provisions. Given the uncertainties in the current public health and economic environment, there could be an adverse impact on results for the Property & Casualty industry and the Company for the remainder of the year.  The impact is dependent on the shape and length of the economic recovery.

 

All intercompany accounts and transactions have been eliminated. 

 

Application of Recently Issued Accounting Standard Changes. 

 

Accounting for Income Taxes.  In December 2019, The Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, which provides simplification of existing guidance for income taxes, including the removal of certain exceptions related to recognition of deferred tax liabilities on foreign subsidiaries. The guidance is effective for annual reporting periods beginning after December 15, 2020 and interim periods within that annual reporting period. The Company adopted the guidance effective January 1, 2021. The adoption of ASU 2019-12 did not have a material impact on the Company’s financial statements.

 

Accounting for Cloud Computing Arrangement.  In August 2018, FASB issued ASU 2018-15, which outlines accounting for implementation costs of a cloud computing arrangement that is a service contract.  This guidance requires that implementation costs of a cloud computing arrangement that is a service contract must be capitalized and expensed in accordance with the existing provisions provided in Subtopic 350-40 regarding development of internal use software. In addition, any capitalized implementation costs should be amortized over the term of the hosting arrangement.  The guidance is effective for annual reporting periods beginning after December 15, 2019 and interim periods within that annual reporting period. The Company adopted the

 

5 


 

guidance as of January 1, 2020. The adoption of ASU 2018-15 did not have a material impact on the Company’s financial statements.

 

Valuation of Financial Instruments.  In June 2016, FASB issued ASU 2016-13 (and has subsequently issued related guidance and amendments in ASU 2019-11 and ASU 2019-10 in November 2019) which outline guidance on the valuation of and accounting for assets measured at amortized cost and available for sale debt securities.  The new guidance requires the carrying value of assets measured at amortized cost, including reinsurance and premiums receivable, to be presented as the net amount expected to be collected on the financial asset (amortized cost less an allowance for credit losses valuation account). The allowance reflects expected credit losses of the financial asset which considers available information using a combination both historical information, current market conditions and reasonable and supportable forecasts.  For available-for-sale debt securities, the guidance modified the previous other than temporary impairment model, now requiring an allowance for estimated credit related losses rather than a permanent impairment, which will be limited to the amount by which fair value is below amortized cost.  The guidance is effective for annual and interim reporting periods beginning after December 15, 2019.  The Company adopted the guidance effective January 1, 2020, on a modified retrospective basis.  The adoption resulted in a cumulative adjustment of $907 thousand in retained earnings, net of tax, which is disclosed separately within the Consolidated Statements of Shareholders’ Equity.

 

Any issued guidance and pronouncements, other than those directly referenced above, are deemed by the Company to be either not applicable or immaterial to its financial statements. 

 

3.  INVESTMENTS

 

Effective January 1, 2020, the Company adopted ASU 2016-13 which modified the previous other than temporary impairment model for available for sale fixed maturity securities.  The guidance requires the Company to record allowances for credit losses for securities that are deemed to have valuation deterioration due to credit related factors.  The following tables show amortized cost, allowance for credit losses, gross unrealized appreciation, gross unrealized depreciation and market value of available for sale, fixed maturity securities as of the dates indicated:

 

At March 31, 2021

 

Amortized

 

Allowances for

 

Unrealized

 

Unrealized

 

Market

(Dollars in thousands)

Cost

 

Credit Losses

 

Appreciation

 

Depreciation

 

Value

Fixed maturity securities 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and obligations of

  U.S. government agencies and corporations

$

622,352

 

$

-

 

$

16,658

 

$

(167)

 

$

638,843

Obligations of U.S. states and political

  subdivisions

 

565,697

 

 

-

 

 

32,092

 

 

(2,741)

 

 

595,048

Corporate securities

 

3,660,209

 

 

(3,588)

 

 

114,692

 

 

(41,884)

 

 

3,729,429

Asset-backed securities

 

2,471,769

 

 

(4,915)

 

 

25,459

 

 

(2,210)

 

 

2,490,103

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

554,472

 

 

-

 

 

23,276

 

 

(5,158)

 

 

572,590

Agency residential

 

989,178

 

 

-

 

 

24,826

 

 

(8,153)

 

 

1,005,851

Non-agency residential

 

6,262

 

 

-

 

 

4

 

 

(2)

 

 

6,264

Foreign government securities

 

734,630

 

 

-

 

 

38,724

 

 

(4,065)

 

 

769,289

Foreign corporate securities

 

1,194,944

 

 

(205)

 

 

55,057

 

 

(7,212)

 

 

1,242,584

Total fixed maturity securities

$

10,799,513

 

$

(8,708)

 

$

330,788

 

$

(71,592)

 

$

11,050,001

 

 

6 


 

 

At December 31, 2020

 

Amortized

 

Allowances for

 

Unrealized

 

Unrealized

 

Market

(Dollars in thousands)

Cost

 

Credit Losses

 

Appreciation

 

Depreciation

 

Value

Fixed maturity securities 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and obligations of

  U.S. government agencies and corporations

$

659,957

 

$

-

 

$

22,032

 

$

-

 

$

681,989

Obligations of U.S. states and political

  subdivisions

 

543,646

 

 

-

 

 

34,655

 

 

(1,255)

 

 

577,046

Corporate securities

 

3,316,525

 

 

(1,205)

 

 

166,072

 

 

(31,480)

 

 

3,449,912

Asset-backed securities

 

2,450,807

 

 

-

 

 

28,585

 

 

(5,222)

 

 

2,474,170

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

512,388

 

 

-

 

 

37,875

 

 

(183)

 

 

550,080

Agency residential

 

937,166

 

 

-

 

 

28,630

 

 

(696)

 

 

965,100

Non-agency residential

 

3,164

 

 

-

 

 

2

 

 

(2)

 

 

3,164

Foreign government securities

 

694,132

 

 

-

 

 

51,317

 

 

(3,211)

 

 

742,238

Foreign corporate securities

 

1,130,865

 

 

(361)

 

 

73,265

 

 

(3,903)

 

 

1,199,866

Total fixed maturity securities

$

10,248,650

 

$

(1,566)

 

$

442,433

 

$

(45,952)

 

$

10,643,565

 

The amortized cost and market value of fixed maturity securities are shown in the following tables by contractual maturity. Mortgage-backed securities are generally more likely to be prepaid than other fixed maturity securities. As the stated maturity of such securities may not be indicative of actual maturities, the totals for mortgage-backed and asset-backed securities are shown separately. 

 

 

At March 31, 2021

 

At December 31, 2020

 

Amortized

 

Market

 

Amortized

 

Market

(Dollars in thousands)

Cost

 

Value

 

Cost

 

Value

Fixed maturity securities – available for sale

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

$

710,217

 

$

715,721

 

$

658,561

 

$

659,622

Due after one year through five years

 

2,970,305

 

 

3,077,551

 

 

2,911,285

 

 

3,036,151

Due after five years through ten years

 

2,348,514

 

 

2,421,105

 

 

1,927,265

 

 

2,079,866

Due after ten years

 

748,796

 

 

760,816

 

 

848,014

 

 

875,412

Asset-backed securities

 

2,471,769

 

 

2,490,103

 

 

2,450,807

 

 

2,474,170

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

554,472

 

 

572,590

 

 

512,388

 

 

550,080

Agency residential

 

989,178

 

 

1,005,851

 

 

937,166

 

 

965,100

Non-agency residential

 

6,262

 

 

6,264

 

 

3,164

 

 

3,164

Total fixed maturity securities

$

10,799,513

 

$

11,050,001

 

$

10,248,650

 

$

10,643,565

 

The changes in net unrealized appreciation (depreciation) for the Company’s investments are derived from the following sources for the periods as indicated:

 

 

 

Three Months Ended

 

 

March 31,

(Dollars in thousands)

 

2021

 

2020

Increase (decrease) during the period between the market value and cost of investments carried at market value, and deferred taxes thereon:   

 

 

 

 

 

 

Fixed maturity securities

 

$

(137,150)

 

$

(188,407)

Change in unrealized appreciation (depreciation), pre-tax

 

 

(137,150)

 

 

(188,407)

Deferred tax benefit (expense)

 

 

28,782

 

 

38,769

Change in unrealized appreciation (depreciation),  net of deferred taxes, included in stockholder's equity  

 

$

(108,368)

 

$

(149,638)

 

 

7 


 

The Company reviews all of its fixed maturity, available for sale securities whose fair value has fallen below their amortized cost at the time of review.  The Company then assesses whether the decline in value is due to non-credit related or credit related factors.  In making its assessment, the Company evaluates the current market and interest rate environment as well as specific issuer information.  Generally, a change in a security’s value caused by a change in the market, interest rate or foreign exchange environment does not constitute a credit impairment, but rather a non-credit related decline in market value.  Non-credit related declines in market value are recorded as unrealized losses in accumulated other comprehensive income (loss).  If the Company intends to sell the security or is more likely than not to sell the security, the Company records the entire fair value adjustment in net realized capital gains (losses) in the Company’s consolidated statements of operations and comprehensive income (loss).  If the Company determines that the decline is credit related and the Company does not have the intent to sell the security; and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis, the Company establishes a credit allowance equal to the estimated credit loss and is recorded in net realized capital gains (losses) in the Company’s consolidated statements of operations and comprehensive income (loss).  The amount of the allowance for a given security will generally be the difference between a discounted cash flow model and the Company’s carrying value.  The fair value adjustment that is non-credit related is recorded as a component of other comprehensive income (loss), net of tax, and is included in accumulated other comprehensive income (loss) in the Company’s consolidated balance sheets. The Company will adjust the credit allowance account for future changes in credit loss estimates for a security and record this adjustment through net realized capital gains (losses) in the Company’s consolidated statements of operations and comprehensive income (loss).

 

The Company does not create an allowance for uncollectible interest.  If interest is not received when due, the interest receivable is immediately reversed and no additional interest is accrued. If future interest is received that has not been accrued, it is recorded as income at that time.

 

Prior to the adoption of ASU 2016-13 effective January 1, 2020, estimated credit losses were recorded as adjustments to the carrying value of the security and any subsequent improvement in market value were recorded through other comprehensive income.

 

The Company’s assessments are based on the issuers’ current and expected future financial position, timeliness with respect to interest and/or principal payments, speed of repayments and any applicable credit enhancements or breakeven constant default rates on mortgage-backed and asset-backed securities, as well as relevant information provided by rating agencies, investment advisors and analysts. 

 

Retrospective adjustments are employed to recalculate the values of asset-backed securities. All of the Company’s asset-backed and mortgage-backed securities have a pass-through structure. Each acquisition lot is reviewed to recalculate the effective yield. The recalculated effective yield is used to derive a book value as if the new yield were applied at the time of acquisition. Outstanding principal factors from the time of acquisition to the adjustment date are used to calculate the prepayment history for all applicable securities. Conditional prepayment rates, computed with life to date factor histories and weighted average maturities, are used in the calculation of projected prepayments for pass-through security types.

 

 

8 


 

The tables below display the aggregate market value and gross unrealized depreciation of fixed maturity securities, by security type and contractual maturity, in each case subdivided according to length of time that individual securities had been in a continuous unrealized loss position for the periods indicated: 

 

 

Duration of Unrealized Loss at March 31, 2021 By Security Type

 

Less than 12 months

 

Greater than 12 months

 

Total

 

 

 

 

Gross

 

 

 

 

Gross

 

 

 

 

Gross

 

Market

 

Unrealized

 

Market

 

Unrealized

 

Market

 

Unrealized

(Dollars in thousands)

Value

 

Depreciation

 

Value

 

Depreciation

 

Value

 

Depreciation

Fixed maturity securities -

  available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and

  obligations of U.S. government

  agencies and corporations

$

38,242

 

$

(167)

 

$

-

 

$

-

 

$

38,242

 

$

(167)

Obligations of U.S. states and

  political subdivisions

 

56,822

 

 

(1,710)

 

 

12,079

 

 

(1,031)

 

 

68,901

 

 

(2,741)

Corporate securities

 

790,015

 

 

(24,012)

 

 

187,655

 

 

(17,872)

 

 

977,670

 

 

(41,884)

Asset-backed securities

 

240,987

 

 

(1,749)

 

 

22,773

 

 

(461)

 

 

263,760

 

 

(2,210)

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

120,334

 

 

(5,158)

 

 

-

 

 

-

 

 

120,334

 

 

(5,158)

Agency residential

 

529,830

 

 

(8,000)

 

 

12,012

 

 

(153)

 

 

541,842

 

 

(8,153)

Non-agency residential

 

3,529

 

 

-

 

 

156

 

 

(2)

 

 

3,685

 

 

(2)

Foreign government securities

 

69,597

 

 

(1,550)

 

 

22,968

 

 

(2,515)

 

 

92,565

 

 

(4,065)

Foreign corporate securities

 

248,667

 

 

(5,705)

 

 

14,374

 

 

(1,507)

 

 

263,041

 

 

(7,212)

Total fixed maturity securities

$

2,098,023

 

$

(48,051)

 

$

272,017

 

$

(23,541)

 

$

2,370,040

 

$

(71,592)

 

 

Duration of Unrealized Loss at March 31, 2021 By Maturity

 

Less than 12 months

 

Greater than 12 months

 

Total

 

 

 

 

Gross

 

 

 

 

Gross

 

 

 

 

Gross

 

Market

 

Unrealized

 

Market

 

Unrealized

 

Market

 

Unrealized

(Dollars in thousands)

Value

 

Depreciation

 

Value

 

Depreciation

 

Value

 

Depreciation

Fixed maturity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

$

45,431

 

$

(823)

 

$

27,415

 

$

(3,064)

 

$

72,846

 

$

(3,887)

Due in one year through five years

 

434,857

 

 

(7,796)

 

 

112,809

 

 

(3,662)

 

 

547,666

 

 

(11,458)

Due in five years through ten years

 

544,227

 

 

(18,240)

 

 

9,671

 

 

(658)

 

 

553,898

 

 

(18,898)

Due after ten years

 

178,828

 

 

(6,285)

 

 

87,181

 

 

(15,541)

 

 

266,009

 

 

(21,826)

Asset-backed securities

 

240,987

 

 

(1,749)

 

 

22,773

 

 

(461)

 

 

263,760

 

 

(2,210)

Mortgage-backed securities

 

653,693

 

 

(13,158)

 

 

12,168

 

 

(155)

 

 

665,861

 

 

(13,313)

Total fixed maturity securities

$

2,098,023

 

$

(48,051)

 

$

272,017

 

$

(23,541)

 

$

2,370,040

 

$

(71,592)

 

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at March 31, 2021 were $2,370,040 thousand and $71,592 thousand, respectively.  The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at March 31, 2021, did not exceed 0.2% of the overall market value of the Company’s fixed maturity securities.  In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector. The $48,051 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of domestic and foreign corporate securities as well as commercial and agency residential mortgage backed securities. Of these unrealized losses, $42,125 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating agency. The $23,541 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to domestic and foreign corporate securities as well as foreign government securities. Of these unrealized losses $5,374 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating agency. There was no gross unrealized depreciation for mortgage-backed securities related to sub-prime and alt-A loans. In all instances, there were no projected cash flow shortfalls to recover the full book

 

9 


 

value of the investments and the related interest obligations.  The mortgage-backed securities still have excess credit coverage and are current on interest and principal payments. 

 

The Company, given the size of its investment portfolio and capital position, does not have the intent to sell these securities; and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis.  In addition, all securities currently in an unrealized loss position are current with respect to principal and interest payments.

 

The tables below display the aggregate market value and gross unrealized depreciation of fixed maturity securities, by security type and contractual maturity, in each case subdivided according to length of time that individual securities had been in a continuous unrealized loss position for the periods indicated:

 

 

Duration of Unrealized Loss at December 31, 2020 By Security Type

 

Less than 12 months

 

Greater than 12 months

 

Total

 

 

 

 

Gross

 

 

 

 

Gross

 

 

 

 

Gross

 

Market

 

Unrealized

 

Market

 

Unrealized

 

Market

 

Unrealized

(Dollars in thousands)

Value

 

Depreciation

 

Value

 

Depreciation

 

Value

 

Depreciation

Fixed maturity securities -

  available for sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Obligations of U.S. states and

  political subdivisions

 

19,524

 

 

(999)

 

 

4,059

 

 

(256)

 

 

23,583

 

 

(1,255)

Corporate securities

 

240,601

 

 

(7,799)

 

 

188,853

 

 

(23,681)

 

 

429,454

 

 

(31,480)

Asset-backed securities

 

223,919

 

 

(4,573)

 

 

81,952

 

 

(649)

 

 

305,871

 

 

(5,222)

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

37,414

 

 

(182)

 

 

3,983

 

 

(1)

 

 

41,397

 

 

(183)

Agency residential

 

235,809

 

 

(682)

 

 

1,573

 

 

(14)

 

 

237,382

 

 

(696)

Non-agency residential

 

161

 

 

(2)

 

 

-

 

 

-

 

 

161

 

 

(2)

Foreign government securities

 

10,505

 

 

(373)

 

 

25,793

 

 

(2,838)

 

 

36,298

 

 

(3,211)

Foreign corporate securities

 

57,900

 

 

(2,182)

 

 

18,349

 

 

(1,721)

 

 

76,249

 

 

(3,903)

Total fixed maturity securities

$

825,833

 

$

(16,792)

 

$

324,562

 

$

(29,160)

 

$

1,150,395

 

$

(45,952)

 

 

Duration of Unrealized Loss at December 31, 2020 By Maturity

 

Less than 12 months

 

Greater than 12 months

 

Total

 

 

 

 

Gross

 

 

 

 

Gross

 

 

 

 

Gross

 

Market

 

Unrealized

 

Market

 

Unrealized

 

Market

 

Unrealized

(Dollars in thousands)

Value

 

Depreciation

 

Value

 

Depreciation

 

Value

 

Depreciation

Fixed maturity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

$

28,802

 

$

(1,218)

 

$

34,555

 

$

(4,142)

 

$

63,357

 

$

(5,360)

Due in one year through five years

 

150,106

 

 

(5,828)

 

 

116,987

 

 

(4,783)

 

 

267,093

 

 

(10,611)

Due in five years through ten years

 

81,492

 

 

(1,634)

 

 

13,118

 

 

(435)

 

 

94,610

 

 

(2,069)

Due after ten years

 

68,130

 

 

(2,673)

 

 

72,394

 

 

(19,136)

 

 

140,524

 

 

(21,809)

Asset-backed securities

 

223,919

 

 

(4,573)

 

 

81,952

 

 

(649)

 

 

305,871

 

 

(5,222)

Mortgage-backed securities

 

273,384

 

 

(866)

 

 

5,556

 

 

(15)

 

 

278,940

 

 

(881)

Total fixed maturity securities

$

825,833

 

$

(16,792)

 

$

324,562

 

$

(29,160)

 

$

1,150,395

 

$

(45,952)

 

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2020 were $1,150,395 thousand and $45,952 thousand, respectively.  The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at December 31, 2020, did not exceed 0.2% of the overall market value of the Company’s fixed maturity securities.  In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector. The $16,792 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of domestic and foreign corporate securities as well as asset backed securities. Of these unrealized losses, $12,522 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating agency.  The $29,160 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to domestic and foreign corporate securities and foreign

 

10 


 

government securities. Of these unrealized losses $5,856 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating agency. There was no gross unrealized depreciation for mortgage-backed securities related to sub-prime and alt-A loans. In all instances, there were no projected cash flow shortfalls to recover the full book value of the investments and the related interest obligations.  The mortgage-backed securities still have excess credit coverage and are current on interest and principal payments. 

 

The components of net investment income are presented in the tables below for the periods indicated: 

 

 

Three Months Ended

 

March 31,

(Dollars in thousands)

2021

 

2020

Fixed maturities

$

85,121

 

$

74,088

Equity securities

 

2,923

 

 

1,592

Short-term investments and cash

 

153

 

 

1,570

Other invested assets

 

 

 

 

 

Limited partnerships

 

52,151

 

 

6,996

Dividends from preferred shares of affiliate

 

7,758

 

 

7,758

Other

 

6,019

 

 

(13,072)

Gross investment income before adjustments

 

154,125

 

 

78,932

Funds held interest income (expense)

 

3,489

 

 

3,257

Interest income from Parent

 

1,268

 

 

1,282

Gross investment income

 

158,882

 

 

83,471

Investment expenses

 

(11,159)

 

 

(9,270)

Net investment income

$

147,723

 

$

74,201

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

The Company records results from limited partnership investments on the equity method of accounting with changes in value reported through net investment income. Due to the timing of receiving financial information from these partnerships, the results are generally reported on a one month or quarter lag.  If the Company determines there has been a significant decline in value of a limited partnership during this lag period, a loss will be recorded in the period in which the Company identifies the decline.

 

The Company had contractual commitments to invest up to an additional $1,025,888 thousand in limited partnerships and private placement loans at March 31, 2021. These commitments will be funded when called in accordance with the partnership and loan agreements, which have investment periods that expire, unless extended, through 2026.

 

The Company participates in a private placement liquidity sweep facility (“the facility”).  The primary purpose of the facility is to enhance the Company’s return on its short-term investments and cash positions.  The facility invests in high quality, short-duration securities and permits daily liquidity. The Company consolidates its participation in the facility. As of March 31, 2021, the market value of investments in the facility consolidated within the Company’s balance sheets was $409,481 thousand. 

 

 

11 


 

Other invested assets, at fair value, as of March 31, 2021 and December 31, 2020, were comprised of preferred shares held in Preferred Holdings, an affiliated company.

 

The components of net realized capital gains (losses) are presented in the table below for the periods indicated: 

 

 

Three Months Ended

 

March 31,

(Dollars in thousands)

2021

 

2020

Fixed maturity securities, market value:

 

 

 

 

 

Allowances for credit losses

$

(7,142)

 

$

(12,099)

Gains (losses) from sales

 

3,927

 

 

(20,937)

Fixed maturity securities, fair value:

 

 

 

 

 

Gains (losses) from fair value adjustments

 

-

 

 

(1,123)

Equity securities, fair value:

 

 

 

 

 

Gains (losses) from sales

 

6,238

 

 

(27,602)

Gains (losses) from fair value adjustments

 

37,551

 

 

(121,669)

Other invested assets

 

1,346

 

 

(2,327)

Other invested assets, fair value:

 

 

 

 

 

Gains (losses) from fair value adjustments

 

93,078

 

 

442,479

Short-term investment gains (losses)

 

13

 

 

145

Total net realized capital gains (losses)

$

135,011

 

$

256,867

 

 

Roll Forward of Allowance for Credit Losses

 

Three Months Ended March 31, 2021

 

Three Months Ended March 31, 2020

 

 

 

 

Asset

 

Foreign

 

 

 

 

 

 

 

Asset

 

Foreign

 

 

 

 

Corporate

 

Backed

 

Corporate

 

 

 

 

Corporate

 

Backed

 

Corporate

 

 

 

 

Securities

 

Securities

 

Securities

 

Total

 

Securities

 

Securities

 

Securities

 

Total

Beginning Balance

$

(1,205)

 

$

-

 

$

(361)

 

$

(1,566)

 

$

-

 

$

-

 

$

-

 

$

-

Credit losses on securities where credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

losses were not previously recorded

 

(2,383)

 

 

(4,915)

 

 

-

 

 

(7,298)

 

 

(11,468)

 

 

(70)

 

 

(561)

 

 

(12,099)

Increases in allowance on previously

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

impaired securities

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

Decreases in allowance on previously

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

impaired securities

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

Reduction in allowance due to disposals

 

-

 

 

-

 

 

156

 

 

156

 

 

-

 

 

-

 

 

-

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of March 31

$

(3,588)

 

$

(4,915)

 

$

(205)

 

$

(8,708)

 

$

(11,468)

 

$

(70)

 

$

(561)

 

$

(12,099)

 

The Company recorded as net realized capital gains (losses) in the consolidated statements of operations and comprehensive income (loss) fair value re-measurements, allowances for credit losses per ASU 2016-13 and write-downs in the value of securities deemed to be impaired on an other-than-temporary basis in prior years as displayed in the table above.

 

 

12 


 

The proceeds and split between gross gains and losses, from sales of fixed maturity and equity securities, are presented in the table below for the periods indicated: 

 

 

Three Months Ended

 

March 31,

(Dollars in thousands)

2021

 

2020

Proceeds from sales of fixed maturity securities

$

492,943

 

$

164,244

Gross gains from sales

 

6,349

 

 

1,846

Gross losses from sales

 

(2,422)

 

 

(22,783)

 

 

 

 

 

 

Proceeds from sales of equity securities

$

281,313

 

$

204,161

Gross gains from sales

 

12,304

 

 

2,581

Gross losses from sales

 

(6,066)

 

 

(30,183)

 

4.  RESERVES FOR LOSSES AND LAE

 

Activity in the reserve for losses and LAE is summarized for the periods indicated: 

 

 

Three Months Ended March 31,

(Dollars in thousands)

 

2021

 

 

2020

Gross reserves beginning of period

$

11,654,950

 

$

10,209,519

Less reinsurance recoverables

 

(3,951,474)

 

 

(4,215,348)

Net reserves beginning of period

 

7,703,476

 

 

5,994,171

Incurred related to:

 

 

 

 

 

Current year

 

1,338,891

 

 

1,026,442

Prior years

 

15,193

 

 

3,071

Total incurred losses and LAE

 

1,354,084

 

 

1,029,513

Paid related to:

 

 

 

 

 

Current year 

 

168,423

 

 

138,778

Prior years

 

527,470

 

 

593,482

Total paid losses and LAE

 

695,893

 

 

732,260

 

 

 

 

 

 

Foreign exchange/translation adjustment and cumulative adjustment due to adoption of ASU 2016-13

 

(6,819)

 

 

(36,673)

 

 

 

 

 

 

Net reserves end of period

 

8,354,848

 

 

6,254,751

Plus reinsurance recoverables

 

3,829,356

 

 

4,016,471

Gross reserves end of period

$

12,184,204

 

$

10,271,222

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

Current year incurred losses were $1,338,891 thousand for the three months ended March 31, 2021 and $1,026,442 thousand for the three months ended March 31, 2020, respectively. The increase in current year incurred losses in 2021 compared to 2020 was primarily due to a $230,500 thousand increase in current year catastrophe losses as well as the impact of the increase in premiums earned.

 

5.  FAIR VALUE

 

GAAP guidance regarding fair value measurements address how companies should measure fair value when they are required to use fair value measures for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP.  It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date.  In addition, it establishes a three-level valuation hierarchy for the disclosure of fair value measurements.  The valuation hierarchy is based on the transparency of inputs to the valuation of an asset or liability.  The level in the hierarchy within which a given fair value measurement falls is determined based on

 

13 


 

the lowest level input that is significant to the measurement, with Level 1 being the highest priority and Level 3 being the lowest priority. 

 

The levels in the hierarchy are defined as follows:

 

Level 1:

Inputs to the valuation methodology are observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in an active market;

Level 2:

Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument;

Level 3:

Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

The Company’s fixed maturity and equity securities are primarily managed by third party investment asset managers.  The investment asset managers managing publicly traded securities obtain prices from nationally recognized pricing services.  These services seek to utilize market data and observations in their evaluation process.  They use pricing applications that vary by asset class and incorporate available market information and when fixed maturity securities do not trade on a daily basis the services will apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing.  In addition, they use model processes, such as the Option Adjusted Spread model to develop prepayment and interest rate scenarios for securities that have prepayment features. 

 

In limited instances where prices are not provided by pricing services or in rare instances when a manager may not agree with the pricing service, price quotes on a non-binding basis are obtained from investment brokers.  The investment asset managers do not make any changes to prices received from either the pricing services or the investment brokers.  In addition, the investment asset managers have procedures in place to review the reasonableness of the prices from the service providers and may request verification of the prices.  In addition, the Company continually performs analytical reviews of price changes and tests the prices on a random basis to an independent pricing source.  No material variances were noted during these price validation procedures.  In limited situations, where financial markets are inactive or illiquid, the Company may use its own assumptions about future cash flows and risk-adjusted discount rates to determine fair value.  At March 31, 2021, $1,424,851 thousand of fixed maturities, market value were fair valued using unobservable inputs. The majority of the fixed maturities, market value, were valued by investment managers’ valuation committees and many of these fair values were substantiated by valuations from independent third parties.  The Company has procedures in place to evaluate these independent third party valuations. At December 31, 2020, $1,259,576 thousand of fixed maturities, market value were fair valued using unobservable inputs.

 

The Company internally manages a public equity portfolio which had a fair value at March 31, 2021 and December 31, 2020 of $912,126 thousand and $784,746 thousand, respectively, and all prices were obtained from publicly published sources. 

 

Equity securities denominated in U.S. currency with quoted prices in active markets for identical assets are categorized as Level 1 since the quoted prices are directly observable.  Equity securities traded on foreign exchanges are categorized as Level 2 due to the added input of a foreign exchange conversion rate to determine fair or market value.  The Company uses foreign currency exchange rates published by nationally recognized sources.

 

All categories of fixed maturity securities listed in the tables below are generally categorized as Level 2, since a particular security may not have traded but the pricing services are able to use valuation models with observable market inputs such as interest rate yield curves and prices for similar fixed maturity securities in terms of issuer, maturity and seniority.  For foreign government securities and foreign corporate securities, the fair values provided by the third party pricing services in local currencies, and where applicable, are converted to U.S. dollars using currency exchange rates from nationally recognized sources.

 

The fixed maturities with fair values categorized as Level 3 result when prices are not available from the nationally recognized pricing services. 

 

 

14 


 

The composition and valuation inputs for the presented fixed maturities categories Level 1 and Level 2 are as follows:

·         U.S. Treasury securities and obligations of U.S. government agencies and corporations are primarily comprised of U.S. Treasury bonds and the fair value is based on observable market inputs such as quoted prices, reported trades, quoted prices for similar issuances or benchmark yields;

·         Obligations of U.S. states and political subdivisions are comprised of state and municipal bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities, benchmark yields and credit spreads;

·         Corporate securities are primarily comprised of U.S. corporate and public utility bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities, benchmark yields and credit spreads;

·         Asset-backed and mortgage-backed securities fair values are based on observable inputs such as quoted prices, reported trades, quoted prices for similar issuances or benchmark yields and cash flow models using observable inputs such as prepayment speeds, collateral performance and default spreads;

·         Foreign government securities are comprised of global non-U.S. sovereign bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities and models with observable inputs such as benchmark yields and credit spreads and then, where applicable, converted to U.S. dollars using an exchange rate from a nationally recognized source;

·         Foreign corporate securities are comprised of global non-U.S. corporate bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities and models with observable inputs such as benchmark yields and credit spreads and then, where applicable, converted to U.S. dollars using an exchange rate from a nationally recognized source.

 

Other invested assets, at fair value, were categorized as Level 3 at March 31, 2021 and December 31, 2020, since it represented a privately placed convertible preferred stock issued by an affiliate. The stock was received in exchange for shares of the Company’s parent.  The 25 year redeemable, convertible preferred stock with a 1.75% coupon is valued using a pricing model. The pricing model includes observable inputs such as the U.S. Treasury yield curve rate T note constant maturity 10 year and the swap rate on the Company’s June 1, 2044, 4.868% senior notes, with adjustments to reflect the Company’s own assumptions about the inputs that market participants would use in pricing the asset.

 

 

15 


 

The following table presents the fair value measurement levels for all assets, which the Company has recorded at fair value (fair and market value) as of the period indicated: 

 

 

 

 

 

 

Fair Value Measurement Using:

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

 

 

in Active

 

Significant

 

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

 

Assets

 

Inputs

 

Inputs

(Dollars in thousands)

 

March 31, 2021

 

(Level 1)

 

(Level 2)

 

(Level 3)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities, market value

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and obligations of

  U.S. government agencies and corporations

 

$

638,843

 

$

-

 

$

638,843

 

$

-

Obligations of U.S. States and political subdivisions

 

 

595,048

 

 

-

 

 

595,048

 

 

-

Corporate securities

 

 

3,729,429

 

 

-

 

 

3,095,536

 

 

633,893

Asset-backed securities

 

 

2,490,103

 

 

-

 

 

1,704,743

 

 

785,360

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

572,590

 

 

-

 

 

572,590

 

 

-

Agency residential

 

 

1,005,851

 

 

-

 

 

1,005,851

 

 

-

Non-agency residential

 

 

6,264

 

 

-

 

 

6,264

 

 

-

Foreign government securities

 

 

769,289

 

 

-

 

 

769,289

 

 

-

Foreign corporate securities

 

 

1,242,584

 

 

-

 

 

1,236,986

 

 

5,598

Total fixed maturities, market value

 

 

11,050,001

 

 

-

 

 

9,625,150

 

 

1,424,851

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities, fair value

 

 

1,226,120

 

 

1,191,064

 

 

35,056

 

 

-

Other invested assets, fair value

 

 

1,889,558

 

 

-

 

 

-

 

 

1,889,558

 

 

16 


 

 

The following table presents the fair value measurement levels for all assets, which the Company has recorded at fair value (fair and market value) as of the period indicated.

 

 

 

 

Fair Value Measurement Using:

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

 

in Active

 

Significant

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

Assets

 

Inputs

 

Inputs

(Dollars in thousands)

December 31, 2020

 

(Level 1)

 

(Level 2)

 

(Level 3)

Assets:

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities, market value

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and obligations of

  U.S. government agencies and corporations

$

681,989

 

$

-

 

$

681,989

 

$

-

Obligations of U.S. States and political subdivisions

 

577,046

 

 

-

 

 

577,046

 

 

-

Corporate securities

 

3,449,912

 

 

-

 

 

2,819,068

 

 

630,844

Asset-backed securities

 

2,474,170

 

 

-

 

 

1,851,137

 

 

623,033

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

550,080

 

 

-

 

 

550,080

 

 

-

Agency residential

 

965,100

 

 

-

 

 

965,100

 

 

-

Non-agency residential

 

3,164

 

 

-

 

 

3,164

 

 

-

Foreign government securities

 

742,238

 

 

-

 

 

742,238

 

 

-

Foreign corporate securities

 

1,199,866

 

 

-

 

 

1,194,167

 

 

5,699

Total fixed maturities, market value

 

10,643,565

 

 

-

 

 

9,383,989

 

 

1,259,576

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities, fair value

 

1,288,767

 

 

1,222,158

 

 

66,609

 

 

-

Other invested assets, fair value

 

1,796,479

 

 

-

 

 

-

 

 

1,796,479

 

In addition, $240,892 thousand and $224,698 thousand of investments within other invested assets on the consolidated balance sheets as of March 31, 2021 and December 31, 2020, respectively, are not included within the fair value hierarchy tables as the assets are measured at NAV as a practical expedient to determine fair value. 

 

The following tables present the activity under Level 3, fair value measurements using significant unobservable inputs by asset type, for the periods indicated: 

 

 

Total Fixed Maturities, Market Value

 

Three Months Ended March 31, 2021

 

Corporate

 

Asset

 

Foreign

 

 

 

(Dollars in thousands)

Securities

 

Backed Securities

 

Corporate

 

Total

Beginning balance

$

630,843

 

$

623,033

 

$

5,700

 

$

1,259,576

Total gains or (losses) (realized/unrealized)

 

 

 

 

 

 

 

 

 

 

 

Included in earnings

 

(1,788)

 

 

(4,168)

 

 

2

 

 

(5,954)

Included in other comprehensive

  income (loss)

 

2,835

 

 

(3,135)

 

 

49

 

 

(251)

Purchases, issuances and settlements

 

2,003

 

 

169,630

 

 

(153)

 

 

171,480

Transfers in and/or (out) of Level 3

 

-

 

 

-

 

 

-

 

 

-

Ending balance

$

633,893

 

$

785,360

 

$

5,598

 

$

1,424,851

The amount of total gains or losses for the

  period included in earnings (or changes in

  net assets) attributable to the change in

  unrealized gains or losses relating to

  assets still held at the reporting date

$

-

 

$

-

 

$

-

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

17 


 

 

Total Fixed Maturities, Market Value

 

Three Months Ended March 31, 2020

 

Corporate

 

Asset

 

Foreign

 

 

 

(Dollars in thousands)

Securities

 

Backed Securities

 

Corporate

 

Total

Beginning balance

$

546,939

 

$

153,641

 

$

1,751

 

$

702,331

Total gains or (losses) (realized/unrealized)

 

 

 

 

 

 

 

 

 

 

 

Included in earnings

 

(214)

 

 

4

 

 

-

 

 

(210)

Included in other comprehensive income (loss)

 

(3,357)

 

 

(15,882)

 

 

-

 

 

(19,239)

Purchases, issuances and settlements

 

99,064

 

 

100,868

 

 

(1,751)

 

 

198,181

Transfers in and/or (out) of Level 3

 

-

 

 

-

 

 

-

 

 

-

Ending balance

$

642,432

 

$

238,631

 

$

-

 

$

881,063

The amount of total gains or losses for the

  period included in earnings (or changes in

  net assets) attributable to the change in

  unrealized gains or losses relating to

  assets still held at the reporting date

$

(539)

 

$

-

 

$

-

 

$

(539)

 

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

Total Fixed Maturities, Fair Value

 

Three Months Ended March 31, 2021

 

Foreign

 

 

 

(Dollars in thousands)

Corporate

 

Total

Beginning balance fixed maturities at fair value

$

-

 

$

-

Total gains or (losses) (realized/unrealized)

 

 

 

 

 

Included in earnings

 

-

 

 

-

Included in other comprehensive income (loss)

 

-

 

 

-

Purchases, issuances and settlements

 

-

 

 

-

Transfers in and/or (out) of Level 3

 

-

 

 

-

Ending balance

$

-

 

$

-

The amount of total gains or losses for the period

  included in earnings (or changes in net assets)

  attributable to the change in unrealized gains or

  losses relating to assets still held at the

  reporting date

$

-

 

$

-

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

 

Total Fixed Maturities, Fair Value

 

Three Months Ended March 31, 2020

 

Foreign

 

 

 

(Dollars in thousands)

Corporate

 

Total

Beginning balance fixed maturities at fair value

$

5,826

 

$

5,826

Total gains or (losses) (realized/unrealized)

 

 

 

 

 

Included in earnings

 

(1,123)

 

 

(1,123)

Included in other comprehensive income (loss)

 

-

 

 

-

Purchases, issuances and settlements

 

-

 

 

-

Transfers in and/or (out) of Level 3

 

-

 

 

-

Ending balance

$

4,703

 

$

4,703

The amount of total gains or losses for the period

  included in earnings (or changes in net assets)

  attributable to the change in unrealized gains or

  losses relating to assets still held at the

  reporting date

$

-

 

$

-

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

 

18 


 

The following table presents the activity under Level 3, fair value measurements using significant unobservable inputs by other invested assets, for the periods indicated: 

 

 

Three Months Ended

 

March 31,

(Dollars in thousands)

2021

 

2020

Other invested assets, fair value:

 

 

 

 

 

Beginning balance

$

1,796,479

 

$

1,982,582

Total gains or (losses) (realized/unrealized)

 

 

 

 

 

Included in earnings

 

93,079

 

 

442,479

Included in other comprehensive income (loss)

 

-

 

 

-

Purchases, issuances and settlements

 

-

 

 

-

Transfers in and/or (out) of Level 3

 

-

 

 

-

Ending balance

$

1,889,558

 

$

2,425,061

The amount of total gains or losses for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at the reporting date

$

-

 

$

-

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

6.  COMMITMENTS AND CONTINGENCIES

 

In the ordinary course of business, the Company is involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine the Company’s rights and obligations under insurance and reinsurance agreements.  In some disputes, the Company seeks to enforce its rights under an agreement or to collect funds owing to it.  In other matters, the Company is resisting attempts by others to collect funds or enforce alleged rights.  These disputes arise from time to time and are ultimately resolved through both informal and formal means, including negotiated resolution, arbitration and litigation.  In all such matters, the Company believes that its positions are legally and commercially reasonable.  The Company considers the statuses of these proceedings when determining its reserves for unpaid loss and loss adjustment expenses.

 

Aside from litigation and arbitrations related to these insurance and reinsurance agreements, the Company is not a party to any other material litigation or arbitration.

 

The Company has entered into separate annuity agreements with The Prudential Insurance Company of America (“The Prudential”) and an additional unaffiliated life insurance company in which the Company has either purchased annuity contracts or become the assignee of annuity proceeds that are meant to settle claim payment obligations in the future. In both instances, the Company would become contingently liable if either The Prudential or the unaffiliated life insurance company were unable to make payments related to the respective annuity contract.

 

The table below presents the estimated cost to replace all such annuities for which the Company was contingently liable for the periods indicated: 

 

 

At March 31, 2021

 

At December 31, 2020

(Dollars in thousands)

 

The Prudential

$

139,981

 

$

140,773

Unaffiliated life insurance company

 

32,835

 

 

35,128

 

 

19 


 

7.  COMPREHENSIVE INCOME (LOSS)

 

The following tables present the components of comprehensive income (loss) in the consolidated statements of operations and comprehensive income (loss) for the periods indicated: 

 

 

Three Months Ended March 31, 2021

(Dollars in thousands)

Before Tax

 

Tax Effect

 

Net of Tax

Unrealized appreciation (depreciation) ("URA(D)") on securities - non-credit related temporary

$

(139,019)

 

 

29,161

 

$

(109,858)

Reclassification of net realized losses (gains) included in net income (loss)

 

1,870

 

 

(379)

 

 

1,490

Foreign currency translation adjustments

 

2,856

 

 

(594)

 

 

2,262

Reclassification of amortization of net gain (loss) included in net income (loss)

 

2,586

 

 

(543)

 

 

2,043

Total other comprehensive income (loss)

$

(131,708)

 

$

27,645

 

$

(104,063)

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding)

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2020

(Dollars in thousands)

Before Tax

 

Tax Effect

 

Net of Tax

Unrealized appreciation (depreciation) ("URA(D)") on securities - temporary

$

(223,770)

 

$

46,246

 

$

(177,524)

Reclassification of net realized losses (gains) included in net income (loss)

 

35,364

 

 

(7,478)

 

 

27,886

Foreign currency translation adjustments

 

(37,532)

 

 

7,899

 

 

(29,633)

Reclassification of amortization of net gain (loss) included in net income (loss)

 

1,165

 

 

(245)

 

 

920

Total other comprehensive income (loss)

$

(224,773)

 

$

46,422

 

$

(178,351)

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding)

 

 

 

 

 

 

 

 

 

The following table presents details of the amounts reclassified from AOCI for the periods indicated: 

 

 

Three Months Ended

 

Affected line item within the

 

March 31,

 

statements of operations and

AOCI component

2021

 

2020

 

comprehensive income (loss)

(Dollars in thousands)

 

 

 

 

 

 

 

URA(D) on securities

$

1,870

 

$

35,364

 

Other net realized capital gains (losses)

 

 

(379)

 

 

(7,478)

 

Income tax expense (benefit)

 

$

1,490

 

$

27,886

 

Net income (loss)

Benefit plan net gain (loss)

$

2,586

 

$

1,165

 

Other underwriting expenses

 

 

(543)

 

 

(245)

 

Income tax expense (benefit)

 

$

2,043

 

$

920

 

Net income (loss)

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding)

 

 

20 


 

The following table presents the components of accumulated other comprehensive income (loss), net of tax, in the consolidated balance sheets for the periods indicated: 

 

 

Three Months Ended

 

March 31,

(Dollars in thousands)                   

2021

 

2020

Beginning balance of URA (D) on securities

$

313,161

 

$

124,612

Current period change in URA (D) of investments - non-credit related

 

(108,368)

 

 

(149,638)

Ending balance of URA (D) on securities

 

204,793

 

 

(25,025)

 

 

 

 

 

 

Beginning balance of foreign currency translation adjustments

 

28,727

 

 

14,267

Current period change in foreign currency translation adjustments

 

2,262

 

 

(29,633)

Ending balance of foreign currency translation adjustments

 

30,989

 

 

(15,367)

 

 

 

 

 

 

Beginning balance of benefit plan net gain (loss)

 

(73,870)

 

 

(74,556)

Current period change in benefit plan net gain (loss)

 

2,043

 

 

920

Ending balance of benefit plan net gain (loss)

 

(71,827)

 

 

(73,635)

 

 

 

 

 

 

Ending balance of accumulated other comprehensive income (loss)

$

163,955

 

$

(114,027)

 

8.  COLLATERALIZED REINSURANCE AND TRUST AGREEMENTS

 

A subsidiary of the Company, Everest Re, has established a trust agreement, which effectively uses Everest Re’s investments as collateral, as security for assumed losses payable to non-affiliated ceding companies.  At March 31, 2021, the total amount on deposit in the trust account was $928,624 thousand.

 

On December 1, 2015, the Company entered into two collateralized reinsurance agreements with Kilimanjaro Re Limited (“Kilimanjaro”), a Bermuda based special purpose reinsurer, to provide the Company with catastrophe reinsurance coverage.  These agreements are multi-year reinsurance contracts which cover named storm and earthquake events. The first agreement provides up to $300,000 thousand of reinsurance coverage from named storms and earthquakes in the United States, Puerto Rico and Canada.  The second agreement provides up to $325,000 thousand of reinsurance coverage from named storms and earthquakes in the United States, Puerto Rico and Canada. These reinsurance agreements expired in December 2020.

 

On April 13, 2017, the Company entered into six collateralized reinsurance agreements with Kilimanjaro to provide the Company with annual aggregate catastrophe reinsurance coverage.  The initial three agreements are four year reinsurance contracts which cover named storm and earthquake events.  These agreements provide up to $225,000 thousand, $400,000 thousand and $325,000 thousand, respectively, of annual aggregate reinsurance coverage from named storms and earthquakes in the United States, Puerto Rico and Canada. The subsequent three agreements are five year reinsurance contracts which cover named storm and earthquake events.  These agreements provide up to $50,000 thousand, $75,000 thousand and $175,000 thousand, respectively, of annual aggregate reinsurance coverage from named storms and earthquakes in the United States, Puerto Rico and Canada. 

 

On April 30, 2018, the Company entered into four collateralized reinsurance agreements with Kilimanjaro to provide the Company with catastrophe reinsurance coverage.  These agreements are multi-year reinsurance contracts which cover named storm and earthquake events. The first two agreements are four year reinsurance contracts which provide up to $62,500 thousand and $200,000 thousand, respectively, of annual aggregate reinsurance coverage from named storms and earthquakes in the United States, Puerto Rico, the U.S. Virgin Islands and Canada.  The remaining two agreements are five year reinsurance contracts which provide up to $62,500 thousand and $200,000 thousand, respectively, of annual aggregate reinsurance coverage from named storms and earthquakes in the United States, Puerto Rico, the U.S. Virgin Islands and Canada.

 

 

21 


 

On December 12, 2019, the Company entered into four collateralized reinsurance agreements with Kilimanjaro to provide the Company with catastrophe reinsurance coverage.  These agreements are multi-year reinsurance contracts which cover named storm and earthquake events.  The first two agreements are four year reinsurance contracts which provide up to $150,000 thousand and $275,000 thousand, respectively, of annual aggregate reinsurance coverage from named storms and earthquakes in the United States, Puerto Rico, the U.S. Virgin Islands and Canada.  The remaining two agreements are five year reinsurance contracts which provide up to $150,000 thousand and $275,000 thousand, respectively, of annual aggregate reinsurance coverage from named storms and earthquakes in the United State, Puerto Rico, the U.S. Virgin Islands and Canada.

 

On April 8, 2021, the Company entered into six collateralized reinsurance agreements with Kilimanjaro to provide the Company with catastrophe reinsurance coverage.  These agreements are multi-year reinsurance contracts which cover named storm and earthquake events.  The first three agreements are four year reinsurance contracts which provide up to $150,000 thousand, $85,000 thousand and $85,000 thousand, respectively, of annual aggregate reinsurance coverage from named storms and earthquakes in the United States, Puerto Rico, the U.S. Virgin Islands and Canada.  The remaining three agreements are five year reinsurance contracts which provide up to $150,000 thousand, $90,000 thousand and $90,000 thousand, respectively, of annual aggregate reinsurance coverage from named storms and earthquakes in the United States, Puerto Rico, the U.S. Virgin Islands and Canada.

 

Recoveries under these collateralized reinsurance agreements with Kilimanjaro are primarily dependent on estimated industry level insured losses from covered events, as well as, the geographic location of the events.  The estimated industry level of insured losses is obtained from published estimates by an independent recognized authority on insured property losses.  Currently, none of the published insured loss estimates for catastrophe events during the applicable covered periods of the various agreements have exceeded the single event retentions or aggregate retentions under the terms of the agreements that would result in a recovery.

 

Kilimanjaro has financed the various property catastrophe reinsurance coverages by issuing catastrophe bonds to unrelated, external investors.  On December 1, 2015, Kilimanjaro issued $625,000 thousand of notes (“Series 2015-1 Notes).  The $625,000 thousand of Series 2015-1 Notes were fully redeemed and are no longer outstanding.  On April 13, 2017, Kilimanjaro issued $950,000 thousand of notes (“Series 2017-1 Notes) and $300,000 thousand of notes (“Series 2017-2 Notes). On April 30, 2018, Kilimanjaro issued $262,500 thousand of notes (“Series 2018-1 Notes”) and $262,500 thousand of notes (“Series 2018-2 Notes”). On December 12, 2019 Kilimanjaro issued $425,000 thousand of notes (“Series 2019-1 Notes”) and $425,000 thousand of notes (“Series 2019-2 Notes’”). On April 8, 2021 Kilimanjaro issued $320,000 thousand of notes (“Series 2021-1 Notes”) and $330,000 thousand of notes (“Series 2021-2 Notes”).  The proceeds from the issuance of the Notes listed above are held in reinsurance trust throughout the duration of the applicable reinsurance agreements and invested solely in US government money market funds with a rating of at least “AAAm” by Standard & Poor’s. 

 

9.  SENIOR NOTES

 

The table below displays Holdings’ outstanding senior notes.  Market value is based on quoted market prices, but due to limited trading activity, these senior notes are considered Level 2 in the fair value hierarchy. 

 

 

 

 

 

 

 

 

March 31, 2021

 

December 31, 2020

 

 

 

 

 

 

 

Consolidated

 

 

 

 

Consolidated

 

 

 

 

 

 

 

 

Principal

 

Balance Sheet

 

Market

 

Balance Sheet

 

Market

(Dollars in thousands)

Date Issued

 

Date Due

 

Amounts

 

Amount

 

Value

 

Amount

 

Value

4.868% Senior notes

06/05/2014

 

06/01/2044

 

400,000

 

$

397,224

 

$

479,616

 

$

397,194

 

$

528,000

3.5% Senior notes

10/07/2020

 

10/15/2050

 

1,000,000

 

$

979,654

 

$

976,480

 

$

979,524

 

$

1,138,100

 

On June 5, 2014, Holdings issued $400,000 thousand of 30 year senior notes at 4.868%, which will mature on June 1, 2044. Interest will be paid semi-annually on June 1 and December 1 of each year. 

 

 

22 


 

On October 7, 2020, Holdings issued $1,000,000 thousand of 30 year senior notes an interest coupon rate of 3.5% which will mature on October 15, 2050.  Interest will be paid semi-annually on April 15th and October 15th of each year.

 

Interest expense incurred in connection with these senior notes is as follows for the periods indicated:

 

 

Three Months Ended

 

March 31,

(Dollars in thousands)

2021

 

2020

Interest expense incurred 4.868% Senior Notes

$

4,868

 

$

4,868

Interest expense incurred 3.5% Senior Notes

$

8,805

 

$

-

 

10.  LONG TERM SUBORDINATED NOTES

 

The table below displays Holdings’ outstanding fixed to floating rate long term subordinated notes.  Market value is based on quoted market prices, but due to limited trading activity, these subordinated notes are considered Level 2 in the fair value hierarchy. 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2021

 

December 31, 2020

 

 

 

Original

 

 

 

 

 

Consolidated

 

 

 

 

Consolidated

 

 

 

 

 

 

Principal

 

Maturity Date

 

Balance

 

Market

 

Balance

 

Market

(Dollars in thousands)

Date Issued

 

Amount

 

Scheduled

 

Final

 

Sheet Amount

 

Value

 

Sheet Amount

 

Value

Long term subordinated notes

04/26/2007

 

$

400,000

 

05/15/2037

 

05/01/2067

 

$

223,699

 

$

207,648

 

$

223,674

 

$

206,447

                                         

 

During the fixed rate interest period from May 3, 2007 through May 14, 2017, interest was at the annual rate of 6.6%, payable semi-annually in arrears on November 15 and May 15 of each year, commencing on November 15, 2007.  During the floating rate interest period from May 15, 2017 through maturity, interest will be based on the 3 month LIBOR plus 238.5 basis points, reset quarterly, payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year, subject to Holdings’ right to defer interest on one or more occasions for up to ten consecutive years.  Deferred interest will accumulate interest at the applicable rate compounded quarterly for periods from and including May 15, 2017.  The reset quarterly interest rate for February 16, 2021 to May 16, 2021 is 2.58%. 

 

Holdings may redeem the long term subordinated notes on or after May 15, 2017, in whole or in part at 100% of the principal amount plus accrued and unpaid interest; however, redemption on or after the scheduled maturity date and prior to May 1, 2047 is subject to a replacement capital covenant.  This covenant is for the benefit of certain senior note holders and it mandates that Holdings receive proceeds from the sale of another subordinated debt issue, of at least similar size, before it may redeem the subordinated notes.  Effective upon the maturity of the Company’s 5.40% senior notes on October 15, 2014, the Company’s 4.868% senior notes, due on June 1, 2044, have become the Company’s long term indebtedness that ranks senior to the long term subordinated notes. 

 

The Company repurchased and retired $0 thousand and $1,700 thousand of its outstanding long term subordinated notes during the three months ended March 31, 2021 and 2020, respectively. The Company realized a gain of $0 thousand and $502 thousand from the repurchase of the long term subordinated notes during the three months ended March 31, 2021 and 2020, respectively.

 

On March 19, 2009, Group announced the commencement of a cash tender offer for any and all of the 6.60% fixed to floating rate long term subordinated notes.  Upon expiration of the tender offer, the Company had reduced its outstanding debt by $161,441 thousand. In addition, during 2020, the Company repurchased and retired $13,183 thousand of these notes.

 

 

23 


 

Interest expense incurred in connection with these long term subordinated notes is as follows for the periods indicated:

 

 

Three Months Ended

 

March 31,

(Dollars in thousands)

2021

 

2020

Interest expense incurred

$

1,462

 

$

2,538

           

 

11.  FEDERAL HOME LOAN BANK MEMBERSHIP

 

Effective August 15, 2019, Everest Reinsurance Company (“Everest Re”) became a member of the Federal Home Loan Bank of New York (“FHLBNY”), which allows Everest Re to borrow up to 10% of its statutory admitted assets.  As of March 31, 2021, Everest Re had admitted assets of approximately $17,280,068 thousand which provides borrowing capacity of up to approximately $1,728,007 thousand. 

 

During 2020, Everest Re borrowed $400,000 thousand under its FHLBNY capacity. The borrowings have interest payable at an interest rate of 0.35%.  As of March 31, 2021, $310,000 of these borrowings remain outstanding, with maturities in November and December 2021. The FHLBNY membership agreement requires that 4.5% of borrowed funds be used to acquire additional membership stock.

 

 

12.  SEGMENT REPORTING

 

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 United States as well as through branches in Canada and Singapore.  The Insurance operation writes property and casualty insurance directly and through brokers, surplus lines brokers and general agents within the United States.

 

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 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. 

 

 

24 


 

The following tables present the underwriting results for the operating segments for the periods indicated:

 

 

Three Months Ended

Reinsurance

March 31,

(Dollars in thousands)

2021

 

2020

Gross written premiums

$

1,420,082

 

$

1,308,194

Net written premiums

 

1,208,813

 

 

1,114,235

 

 

 

 

 

 

Premiums earned

$

1,177,170

 

$

1,007,034

Incurred losses and LAE

 

970,318

 

 

682,707

Commission and brokerage

 

290,556

 

 

260,901

Other underwriting expenses

 

36,289

 

 

29,847

Underwriting gain (loss)

$

(119,994)

 

$

33,579

 

 

Three Months Ended

Insurance

March 31,

(Dollars in thousands)

2021

 

2020

Gross written premiums

$

713,252

 

$

666,771

Net written premiums

 

556,530

 

 

524,474

 

 

 

 

 

 

Premiums earned

$

519,730

 

$

486,970

Incurred losses and LAE

 

383,766

 

 

346,805

Commission and brokerage

 

59,298

 

 

62,203

Other underwriting expenses

 

73,505

 

 

71,361

Underwriting gain (loss)

$

3,161

 

$

6,601

 

The following table reconciles the underwriting results for the operating segments to income (loss) before taxes as reported in the consolidated statements of operations and comprehensive income (loss) for the periods indicated:

 

 

Three Months Ended

 

March 31,

(Dollars in thousands)

2021

 

2020

Underwriting gain (loss)

$

(116,833)

 

$

40,180

Net investment income

 

147,723

 

 

74,201

Net realized capital gains (losses)

 

135,011

 

 

256,867

Corporate expense

 

(4,581)

 

 

(3,721)

Interest, fee and bond issue cost amortization expense

 

(15,534)

 

 

(7,460)

Other income (expense)

 

3,979

 

 

(4,498)

Income (loss) before taxes

$

149,765

 

$

355,569

 

The Company produces business in the U.S. and internationally.  The net income deriving from assets residing in the individual foreign countries in which the Company writes business are not identifiable in the Company’s financial records.  Based on gross written premium, the table below presents the largest country, other than the U.S., in which the Company writes business, for the periods indicated: 

 

 

Three Months Ended

 

March 31,

(Dollars in thousands)

2021

 

2020

Canada gross written premiums

$

34,330

 

$

63,637

           

 

No other country represented more than 5% of the Company’s revenues. 

 

 

25 


 

13.  RELATED-PARTY TRANSACTIONS

 

Parent

 

Group entered into a $300,000 thousand long term note agreement with Everest Re as of December 17, 2019. The note will pay interest annually at a rate of 1.69% and is scheduled to mature in December, 2028. This transaction is presented as a Note Receivable – Affiliated in the Consolidated Balance Sheet of Holdings. The Company recognized interest income related to this long term note of $1,268 thousand and $1,282 thousand for the three months ended March 31, 2021 and 2020, respectively.

 

Group’s Board of Directors approved an amended share repurchase program authorizing Group and/or its subsidiary Holdings to purchase Group’s common shares through open market transactions, privately negotiated transactions or both.  The table below represents the amendments to the share repurchase program for the common shares approved for repurchase. 

 

 

 

Common

 

 

Shares

 

 

Authorized for

Amendment Date

 

Repurchase

(Dollars in thousands)

 

 

09/21/2004

 

5,000,000

07/21/2008

 

5,000,000

02/24/2010

 

5,000,000

02/22/2012

 

5,000,000

05/15/2013

 

5,000,000

11/19/2014

 

5,000,000

05/22/2020

 

2,000,000

 

 

32,000,000

 

Holdings had purchased and held 9,719,971 Common Shares of Group, which were purchased in the open market between February 2007 and March 2011.

 

In December, 2015, Holdings transferred the 9,719,971 Common Shares of Group, which it held as other invested assets, at fair value, valued at $1,773,214 thousand, to Preferred Holdings, an affiliated entity and subsidiary of Group, in exchange for 1,773.214 preferred shares of Preferred Holdings with a $1,000 thousand par value and 1.75% annual dividend rate.  After the exchange, Holdings no longer holds any shares or has any ownership interest in Group. 

 

Holdings has reported the preferred shares in Preferred Holdings, as other invested assets, fair value, in the consolidated balance sheets with changes in fair value re-measurement recorded in net realized capital gains (losses) in the consolidated statements of operations and comprehensive income (loss).  The following table presents the dividends received on the preferred shares of Preferred Holdings and on the Parent shares that are reported as net investment income in the consolidated statements of operations and comprehensive income (loss) for the period indicated. 

 

 

Three Months Ended

 

March 31,

(Dollars in thousands)

2021

 

2020

Dividends received on preferred stock of affiliate

$

7,758

 

$

7,758

           

 

 

26 


 

Affiliates

 

The Company has engaged in reinsurance transactions with Bermuda Re, Everest International Reinsurance Ltd. (“Everest International”), Mt. Logan Re, Everest Insurance Company of Canada (“Everest Canada”) and Lloyd’s Syndicate 2786, which are affiliated companies primarily driven by enterprise risk and capital management considerations under which business is ceded at market rates and terms.

 

The table below represents affiliated quota share reinsurance agreements ("whole account quota share") for all new and renewal business for the indicated coverage period: 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Single

 

 

 

 

 

 

 

Percent

 

Assuming

 

 

 

Occurrence

 

Aggregate

 

Coverage Period

 

Ceding Company

 

Ceded

 

Company

 

Type of Business

 

Limit

 

Limit

 

01/01/2010-12/31/2010

 

Everest Re

 

44.0

%

 

Bermuda Re

 

property / casualty business

 

150,000

 

325,000

 

01/01/2011-12/31/2011

 

Everest Re

 

50.0

%

 

Bermuda Re

 

property / casualty business

 

150,000

 

300,000

 

01/01/2012-12/31/2014

 

Everest Re

 

50.0

%

 

Bermuda Re

 

property / casualty business

 

100,000

 

200,000

 

01/01/2015-12/31/2016

 

Everest Re

 

50.0

%

 

Bermuda Re

 

property / casualty business

 

162,500

 

325,000

 

01/01/2017-12/31/2017

 

Everest Re

 

60.0

%

 

Bermuda Re

 

property / casualty business

 

219,000

 

438,000

 

01/01/2010-12/31/2010

 

Everest Re- Canadian Branch

 

60.0

%

 

Bermuda Re

 

property business

 

350,000

(1)

-

 

01/01/2011-12/31/2011

 

Everest Re- Canadian Branch

 

60.0

%

 

Bermuda Re

 

property business

 

350,000

(1)

-

 

01/01/2012-12/31/2012

 

Everest Re- Canadian Branch

 

75.0

%

 

Bermuda Re

 

property / casualty business

 

206,250

(1)

412,500

(1)

01/01/2013-12/31/2013

 

Everest Re- Canadian Branch

 

75.0

%

 

Bermuda Re

 

property / casualty business

 

150,000

(1)

412,500

(1)

01/01/2014-12/31/2017

 

Everest Re- Canadian Branch

 

75.0

%

 

Bermuda Re

 

property / casualty business

 

262,500

(1)

412,500

(1)

01/01/2012-12/31/2017

 

Everest Canada

 

80.0

%

 

Everest Re-

  Canadian Branch

 

property business

 

-

 

-

 

01/01/2020

 

Everest International Assurance

 

100.0

%

 

Bermuda Re

 

life business

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Amounts shown are Canadian dollars.

 

Effective January 1, 2018, Everest Re entered into a twelve month whole account aggregate stop loss reinsurance contract (“stop loss agreement”) with Bermuda Re.  The stop loss agreement provides coverage for ultimate net losses on applicable net earned premiums above a retention level, subject to certain other coverage limits and conditions.  The stop loss agreement was most recently renewed effective January 1, 2021. 

 

In addition, Everest Re entered into a property catastrophe excess of loss reinsurance contract with Bermuda Re, effective January 1, 2019.  The contract provides $100,000 thousand of reinsurance coverage for property catastrophe losses above certain attachment points. This agreement expired on December 31, 2019 and was not renewed.

 

The table below represents loss portfolio transfer (“LPT”) reinsurance agreements whereby net insurance exposures and reserves were transferred to an affiliate. 

 

(Dollars in thousands)

Effective

 

Transferring

 

Assuming

 

 

% of Business or

 

 

Covered Period

Date

 

Company

 

Company

 

 

Amount of Transfer

 

 

of Transfer

10/01/2001

 

Everest Re  (Belgium Branch)

 

Bermuda Re

 

 

100

%

 

 

All years

10/01/2008

 

Everest Re

 

Bermuda Re

 

$

747,022

 

 

 

01/01/2002-12/31/2007

12/31/2017

 

Everest Re

 

Bermuda Re

 

$

970,000

 

 

 

All years

 

On December 31, 2017, the Company entered into a LPT agreement with Bermuda Re.  The LPT agreement covers subject loss reserves of $2,336,242 thousand for accident years 2017 and prior.  As a result of the LPT agreement, the Company transferred $1,000,000 thousand of cash and fixed maturity securities and transferred $970,000 thousand of loss reserves to Bermuda Re.  As part of the LPT agreement, Bermuda Re will provide an additional $500,000 thousand of adverse development coverage on the subject loss reserves. 

 

 

27 


 

The following tables summarize the premiums and losses ceded by the Company to Bermuda Re and Everest International, respectively, and premiums and losses assumed by the Company from Everest Canada and Lloyd’s syndicate 2786 for the periods indicated: 

 

 

Three Months Ended

Bermuda Re

March 31,

(Dollars in thousands)

2021

 

2020

Ceded written premiums

$

70,798

 

$

30,500

Ceded earned premiums

 

70,877

 

 

30,500

Ceded losses and LAE

 

(30,150)

 

 

(22,159)

 

 

Three Months Ended

Everest International

March 31,

(Dollars in thousands)

2021

 

2020

Ceded written premiums

$

-

 

$

-

Ceded earned premiums

 

-

 

 

-

Ceded losses and LAE

 

-

 

 

22

 

 

Three Months Ended

Everest Canada

March 31,

(Dollars in thousands)

2021

 

2020

Assumed written premiums

$

-

 

$

236

Assumed earned premiums

 

-

 

 

39

Assumed losses and LAE

 

59

 

 

1,598

 

 

Three Months Ended

Lloyd's Syndicate 2786

March 31,

(Dollars in thousands)

2021

 

2020

Assumed written premiums

$

599

 

$

(3,031)

Assumed earned premiums

 

529

 

 

(2,822)

Assumed losses and LAE

 

(1,582)

 

 

814

 

The following table summarizes the premiums and losses that are ceded by the Company to Mt. Logan Re segregated accounts and assumed by the Company from Mt. Logan Re segregated accounts.

 

 

Three Months Ended

Mt. Logan Re Segregated Accounts

March 31,

(Dollars in thousands)

2021

 

2020

Ceded written premiums

$

81,371

 

$

95,350

Ceded earned premiums

 

65,988

 

 

79,855

Ceded losses and LAE

 

72,994

 

 

37,465

Assumed written premiums

 

-

 

 

-

Assumed earned premiums

 

-

 

 

-

Assumed losses and LAE

 

-

 

 

-

 

14.  RETIREMENT BENEFITS

 

The Company maintains both qualified and non-qualified defined benefit pension plans for its U.S. employees employed prior to April 1, 2010.  Generally, the Company computes the benefits based on average earnings over a period prescribed by the plans and credited length of service.  The Company’s non-qualified defined benefit pension plan provided compensating pension benefits for participants whose benefits have been curtailed under the qualified plan due to Internal Revenue Code limitations.  Effective January 1, 2018, participants of the Company’s non-qualified defined benefit pension plan may no longer accrue additional service benefits. 

 

 

28 


 

Net periodic benefit cost for U.S. employees included the following components for the periods indicated: 

 

Pension Benefits

Three Months Ended

 

March 31,

(Dollars in thousands)

2021

 

2020

Service cost

$

2,738

 

$

4,011

Interest cost

 

1,999

 

 

2,483

Expected return on plan assets

 

(5,580)

 

 

(5,197)

Amortization of net (income) loss 

 

2,730

 

 

1,213

Net periodic benefit cost

$

1,887

 

$

2,510

 

Other Benefits

Three Months Ended

 

March 31,

(Dollars in thousands)

2021

 

2020

Service cost

$

281

 

$

141

Interest cost

 

181

 

 

215

Amortization of prior service cost

 

(144)

 

 

(48)

Net periodic benefit cost

$

318

 

$

308

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

The service cost component of net periodic benefit costs is included within other underwriting expenses on the consolidated statement of operations and comprehensive income (loss).  In accordance with ASU 2017-07, other staff compensation costs are also primarily recorded within this line item. 

 

The Company did not make any contributions to the qualified pension benefit plan for the three months ended March 31, 2021 and 2020, respectively.

 

15.  INCOME TAXES

 

The Company is domiciled in the United States and has subsidiaries domiciled within the United States with significant branches in Canada and Singapore.  The Company’s non-U.S. branches are subject to income taxation at varying rates in their respective domiciles. 

 

The Company generally applies the estimated annual effective tax rate approach for calculating its tax provision for interim periods as prescribed by ASC 740-270, Interim Reporting.  Under the estimated annual effective tax rate approach, the estimated annual effective tax rate is applied to the interim year-to-date pre-tax income/loss to determine the income tax expense or benefit for the year-to-date period.  The tax expense or benefit for the quarter represents the difference between the year-to-date tax expense or benefit for the current year-to-date period less such amount for the immediately preceding year-to-date period. Management considers the impact of all known events in its estimation of the Company’s annual pre-tax income/loss and effective tax rate.

 

16.  SUBSEQUENT EVENTS

 

The Company has evaluated known recognized and non-recognized subsequent events. The Company does not have any subsequent events to report. 

 

29 


 

ITEM 2.  MANAGEMENT’S DISCUSSION 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. 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, 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 activated our operational resiliency plan across our global footprint and all of our critical operations are functioning effectively from remote locations.  We continue to service and meet the needs of our clients while ensuring the safety and health of our employees and customers.

 

There continues to be a negative impact on industry underwriting results from the pandemic.  These impacts vary significantly from country to country depending on the rate of infections and the corresponding mandated business restrictions. 

 

Prior to the pandemic, there was a growing industry consensus that there was some firming of (re)insurance rates for the areas impacted by the recent catastrophes.  The increased frequency of catastrophe losses in 2020 appears to be further pressuring the increase of rates.  Rates also appear to be firming in most lines of business, particularly in the casualty lines that had seen significant losses such as excess casualty and directors’ and officers’ liability.  Other casualty lines are experiencing modest rate increase, while some lines such as workers’ compensation were experiencing softer market conditions. It is too early to tell what will be the impact on pricing conditions but it is likely to change depending on the line of business and geography.

 

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.

 

30 


 

 

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 stockholder’s equity for the periods indicated: 

 

 

Three Months Ended

 

 Percentage  

 

March 31,

 

Increase/

(Dollars in millions)

2021

 

2020

 

(Decrease)

Gross written premiums

$

2,133.3

 

$

1,975.0

 

8.0%

Net written premiums

 

1,765.3

 

 

1,638.7

 

7.7%

 

 

 

 

 

 

 

 

REVENUES:

 

 

 

 

 

 

 

Premiums earned

$

1,696.9

 

$

1,494.0

 

13.6%

Net investment income

 

147.7

 

 

74.2

 

99.1%

Net realized capital gains (losses)

 

135.0

 

 

256.9

 

-47.4%

Other income (expense)

 

4.0

 

 

(4.5)

 

-188.5%

Total revenues

 

1,983.6

 

 

1,820.6

 

9.0%

 

 

 

 

 

 

 

 

CLAIMS AND EXPENSES:

 

 

 

 

 

 

 

Incurred losses and loss adjustment expenses

 

1,354.1

 

 

1,029.5

 

31.5%

Commission, brokerage, taxes and fees

 

349.9

 

 

323.1

 

8.3%

Other underwriting expenses

 

109.8

 

 

101.2

 

8.5%

Corporate expense

 

4.6

 

 

3.7

 

23.1%

Interest, fee and bond issue cost amortization expense

 

15.5

 

 

7.5

 

108.2%

Total claims and expenses

 

1,833.8

 

 

1,465.0

 

25.2%

 

 

 

 

 

 

 

 

INCOME (LOSS) BEFORE TAXES

 

149.8

 

 

355.6

 

-57.9%

Income tax expense (benefit)

 

30.3

 

 

38.9

 

-22.1%

NET INCOME (LOSS)

$

119.4

 

$

316.6

 

-62.3%

 

 

 

 

 

 

 

 

RATIOS:

 

 

 

 

 

 

Point

Change

Loss ratio

 

79.8%

 

 

68.9%

 

10.9

Commission and brokerage ratio

 

20.6%

 

 

21.6%

 

(1.0)

Other underwriting expense ratio

 

6.5%

 

 

6.8%

 

(0.3)

Combined ratio

 

106.9%

 

 

97.3%

 

9.6

 

 

 

 

 

 

 

 

 

At

 

At

 

 Percentage  

 

March 31,

 

December 31,

 

Increase/

(Dollars in millions)

2021

 

2020

 

(Decrease)

Balance sheet data:

 

 

 

 

 

 

 

Total investments and cash

$

16,482.6

 

$

 15,910.2  

 

3.6%

Total assets

 

24,309.0

 

 

 23,717.1  

 

2.5%

Loss and loss adjustment expense reserves

 

12,184.2

 

 

 11,655.0  

 

4.5%

Total debt

 

1,910.6

 

 

 1,910.4  

 

0.0%

Total liabilities

 

17,879.2

 

 

 17,302.8  

 

3.3%

Stockholder's equity

 

6,429.8

 

 

 6,414.3  

 

0.2%

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding)

(NM, not meaningful)

 

 

31 


 

Revenues.

 

Premiums.  Gross written premiums increased by 8.0% to $2,133.3 million for the three months March 31, 2021, compared to $1,975.0 million for the three months ended March 31, 2020, reflecting a $111.9 million, or 8.6%, increase in our reinsurance business and a $46.5 million, or 7.0%, increase in our insurance business. The increase in reinsurance premiums was mainly due to increases in property pro rata business, property excess of loss business and casualty excess of loss writings. The rise in insurance premiums was primarily due to increases in specialty casualty business, property business and professional liability business, partially offset by a decline in workers’ compensation business.

 

Net written premiums increased by 7.7% to $1,765.3 million for the three months ended March 31, 2021, compared to $1,638.7 million for the three months ended March 31, 2020, which is consistent with the change in gross written premiums. Premiums earned increased by 13.6% to $1,696.9 million for the three months ended March 31, 2021, compared to $1,494.0 million for the three months ended March 31, 2020. The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

 

Net Investment Income.  Net investment income increased 99.1% to $147.7 million for the three months ended March 31, 2021 compared with net investment income of $74.2 million for the three months ended March 31, 2020. Net pre-tax investment income as a percentage of average invested assets was 3.8% and 2.6% for the three months ended March 31, 2021 and 2020, respectively. The increases in both income and yield were primarily the result of an increase in limited partnership income and higher income from our fixed income portfolio.

 

Net Realized Capital Gains (Losses).  Net realized capital gains were $135.0 million and $256.9 million for the three months ended March 31, 2021 and 2020, respectively. The net realized capital gains of $135.0 million for the three months ended March 31, 2021, were comprised of $130.6 million of gains from fair value re-measurements and $11.5 million of gains from sales of investments, partially offset by $7.1 million in net allowances for credit losses. The net realized capital gains of $256.9 million in 2020 were comprised of $319.7 million of gains from fair value re-measurements, partially offset by $50.7 million of losses from sales of investments and $12.1 million of allowances for credit losses.

 

Other Income (Expense).  We recorded other income of $4.0 million and other expense of $4.5 million for the three months ended March 31, 2021 and 2020, respectively. The change was primarily the result of fluctuations in foreign currency exchange rates. 

 

 

32 


 

Claims and Expenses.

 

Incurred Losses and Loss Adjustment Expenses.  The following table presents our incurred losses and loss adjustment expenses (“LAE”) for the periods indicated. 

 

 

Three Months Ended March 31,

 

Current

 

Ratio %/

 

Prior

 

Ratio %/

 

Total

 

Ratio %/

(Dollars in millions)

Year

 

Pt Change

 

Years

 

Pt Change

 

Incurred

 

Pt Change

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$

1,078.4

 

63.6%

 

 

$

(1.0)

 

-0.1%

 

 

$

1,077.4

 

63.5%

 

Catastrophes

 

260.5

 

15.4%

 

 

 

16.2

 

1.0%

 

 

 

276.7

 

16.4%

 

Total

$

1,338.9

 

79.0%

 

 

$

15.2

 

0.9%

 

 

$

1,354.1

 

79.8%

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$

996.4

 

66.7%

 

 

$

(1.1)

 

-0.1%

 

 

$

995.3

 

66.6%

 

Catastrophes

 

30.0

 

2.0%

 

 

 

4.2

 

0.3%

 

 

 

34.2

 

2.3%

 

Total

$

1,026.4

 

68.7%

 

 

$

3.1

 

0.2%

 

 

$

1,029.5

 

68.9%

 

Variance 2021/2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$

82.0

 

(3.1)

pts

 

$

0.1

 

-

pts

 

$

82.1

 

(3.1)

pts

Catastrophes

 

230.5

 

13.4

pts

 

 

12.0

 

0.7

pts

 

 

242.5

 

14.1

pts

Total

$

312.5

 

10.3

pts

 

$

12.1

 

0.7

pts

 

$

324.6

 

10.9

pts

 

Incurred losses and LAE increased by 31.5% to $1,354.1 million for the three months ended March 31, 2021 compared to $1,029.5 million for the three months ended March 31, 2020, primarily due to an increase of $230.5 million in current year catastrophe losses and an increase of $82.0 million in current year attritional losses, mainly related to the impact of the increase in premiums earned partially offset by $35.7 million of COVID-19 losses incurred in 2020. The current year catastrophe losses of $260.5 million for the three months ended March 31, 2021 related to Texas winter storms ($253.0 million), and the 2021 Aussie floods ($7.5 million). The current year catastrophe losses of $30.0 million for the three months ended March 31, 2020 related to the Nashville tornadoes ($10.0 million), Australia East Coast storms ($10.0 million) and the Australia fires ($10.0 million).

 

Commission, Brokerage, Taxes and Fees.  Commission, brokerage, taxes and fees increased to $349.9 million for the three months ended March 31, 2021 compared to $323.1 million for the three months ended March 31, 2020. The increase was mainly due to the impact of the increase in premiums earned and changes in affiliated reinsurance agreements.

 

Other Underwriting Expenses. Other underwriting expenses increased to $109.8 million for the three months ended March 31, 2021 compared to $101.2 million for the three months ended March 31, 2020. These increases were mainly due to changes in affiliated reinsurance agreements, impact of increase in premiums earned and costs incurred to support the expansion of the insurance business. 

  

Corporate Expenses. Corporate expenses, which are general operating expenses that are not allocated to segments, have increased slightly to $4.6 million from $3.7 million for the three months ended March 31, 2021 and 2020, respectively. The increases were mainly due to higher compensation costs.

 

Interest, Fees and Bond Issue Cost Amortization Expense.  Interest, fees and other bond amortization expense was $15.5 million and $7.5 million for the three months ended March 31, 2021 and 2020, respectively. The variance in expense was primarily due to interest expense on the $1,000.0 million of senior notes issued in October 2020 and the movement in the floating interest rate related to the long term subordinated notes, which is reset quarterly per the note agreement. The floating rate was 2.6% as of March 31, 2021 compared to 4.1% as of March 31, 2020.

 

Income Tax Expense (Benefit).  We had an income tax expense of $30.3 million and $38.9 million for the three months ended March 31, 2021 and 2020, respectively.  Income tax benefit or expense is primarily a function of the geographic location of the Company’s pre-tax income and the statutory tax rates in those jurisdictions.  The effective tax rate (“ETR”) is primarily affected by tax-exempt investment income, qualifying dividends, and

 

33 


 

foreign tax credits. 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 March 31, 2021 as compared to the three months ended March 31, 2020 results primarily from higher investment income and earned premiums offset by higher catastrophe losses and the impact of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) incurred in the first quarter of 2020. 

 

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 five 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 $119.4 million and $316.6 million, for the three months ended March 31, 2021 and 2020 respectively. The changes were primarily driven by the financial component fluctuations explained above. 

 

Ratios.

Our combined ratio increased by 9.6 points to 106.9% for the three months ended March 31, 2021 compared to 97.3% for the three months ended March 31, 2020. The loss ratio component increased by 10.9 points for the three months ended March 31, 2021 over the same period last year mainly due to an increase of $230.5 million in current year catastrophe losses. The commission and brokerage ratio component decreased to 20.6% for the three months ended March 31, 2021 compared to 21.6% for the three months ended March 31, 2020, reflecting changes in affiliated reinsurance agreements and changes in the mix of business. The other underwriting expense ratio decreased slightly to 6.5% for the three months ended March 31, 2021 from 6.8% for the three months ended March 31, 2020.

 

Stockholder's Equity.

Stockholder’s equity increased by $15.5 million to $6,429.8 million at March 31, 2021  from $6,414.3 million at December 31, 2020, principally as a result of $119.4 million of net income, $2.3 million of net foreign currency translation adjustments and $2.0 million of net benefit plan obligation adjustments, partially offset by $108.4 million of net unrealized depreciation on investments, net of tax.

 

Consolidated Investment Results

 

Net Investment Income. 

Net investment income increased by 99.1% to $147.7 million for the three months ended March 31, 2021 compared to $74.2 million for the three months ended March 31, 2020. This increase was primarily the result of an increase in limited partnership income and higher income from our fixed income portfolio.

 

 

34 


 

The following table shows the components of net investment income for the periods indicated: 

 

 

Three Months Ended

 

March 31,

(Dollars in millions)

2021

 

2020

Fixed maturities

$

85.1

 

$

74.1

Equity securities

 

2.9

 

 

1.6

Short-term investments and cash

 

0.1

 

 

1.6

Other invested assets

 

 

 

 

 

Limited partnerships

 

52.2

 

 

7.0

Dividends from preferred shares of affiliate

 

7.8

 

 

7.8

Other

 

6.0

 

 

(13.1)

Gross investment income before adjustments

 

154.1

 

 

79.0

Funds held interest income (expense)

 

3.5

 

 

3.2

Interest income from Parent

 

1.3

 

 

1.3

Gross investment income

 

158.9

 

 

83.5

Investment expenses

 

11.2

 

 

9.3

Net investment income

$

147.7

 

$

74.2

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

The following tables show a comparison of various investment yields for the periods indicated:

 

 

At

 

At

 

March 31,

 

December 31,

 

2021

 

2020

Imbedded pre-tax yield of cash and invested assets

3.0%

 

3.1%

Imbedded after-tax yield of cash and invested assets

2.4%

 

2.5%

 

 

Three Months Ended

 

March 31,

 

2021

 

2020

Annualized pre-tax yield on average cash and invested assets

3.8%

 

2.6%

Annualized after-tax yield on average cash and invested assets

3.1%

 

2.1%

 

 

35 


 

Net Realized Capital Gains (Losses).

The following table presents the composition of our net realized capital gains (losses) for the periods indicated: 

 

 

Three Months Ended March 31,

(Dollars in millions)

2021

 

2020

 

Variance

Gains (losses) from sales:

 

 

 

 

 

 

 

 

Fixed maturity securities, market value

 

 

 

 

 

 

 

 

Gains

$

6.3

 

$

1.8

 

$

4.5

Losses

 

(2.4)

 

 

(22.8)

 

 

20.4

Total

 

3.9

 

 

(21.0)

 

 

24.9

Equity securities, fair value

 

 

 

 

 

 

 

 

Gains

 

12.3

 

 

2.6

 

 

9.7

Losses

 

(6.1)

 

 

(30.2)

 

 

24.1

Total

 

6.2

 

 

(27.6)

 

 

33.8

Other invested assets

 

 

 

 

 

 

 

 

Gains

 

1.4

 

 

3.0

 

 

(1.6)

Losses

 

(0.1)

 

 

(5.4)

 

 

5.3

Total

 

1.3

 

 

(2.4)

 

 

3.7

    Short Term Investments:

 

 

 

 

 

 

 

 

         Gains

 

-

 

 

0.1

 

 

(0.1)

         Losses

 

-

 

 

-

 

 

-

     Total

 

-

 

 

0.1

 

 

(0.1)

Total net realized gains (losses) from sales

 

 

 

 

 

 

 

 

Gains

 

20.1

 

 

7.5

 

 

12.6

Losses

 

(8.6)

 

 

(58.4)

 

 

49.8

Total

 

11.5

 

 

(50.7)

 

 

62.2

 

 

 

 

 

 

 

 

 

Allowances for credit losses:

 

(7.1)

 

 

(12.1)

 

 

5.0

 

 

 

 

 

 

 

 

 

Gains (losses) from fair value adjustments:

 

 

 

 

 

 

 

 

Fixed maturities, fair value

 

-

 

 

(1.1)

 

 

1.1

Equity securities, fair value

 

37.6

 

 

(121.7)

 

 

159.3

Other invested assets, fair value

 

93.1

 

 

442.5

 

 

(349.4)

Total

 

130.6

 

 

319.7

 

 

(189.1)

 

 

 

 

 

 

 

 

 

Total net realized gains (losses)

$

135.0

 

$

256.9

 

$

(121.9)

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

 

 

 

Net Realized Capital Gains (Losses). Net realized capital gains were $135.0 million and $256.9 million for the three months ended March 31, 2021 and 2020, respectively. The net realized capital gains of $135.0 million for the three months ended March 31, 2021, were comprised of $130.6 million of gains from fair value re-measurements and $11.5 million of gains from sales of investments, partially offset by $7.1 million in net allowances for credit losses. The net realized capital gains of $256.9 million in 2020 were comprised of $319.7 million of gains from fair value re-measurements, partially offset by $50.7 million of losses from sales of investments and $12.1 million of allowances for credit losses.

 

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 United States as well as through branches in Canada and Singapore.  The Insurance operation writes property and casualty insurance directly and through brokers, surplus lines brokers and general agents within the United States.

 

 

36 


 

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 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. 

 

Our loss and LAE reserves are management’s best estimate of our ultimate liability for unpaid claims.  We re-evaluate our estimates on an ongoing basis, including all prior period reserves, taking into consideration all available information and, in particular, recently reported loss claim experience and trends related to prior periods.  Such re-evaluations are recorded in incurred losses in the period in which the re-evaluation is made. 

 

The following discusses the underwriting results for each of our segments for the periods indicated: 

 

Reinsurance.

The following table presents the underwriting results and ratios for the Reinsurance segment for the periods indicated.

 

 

Three Months Ended March 31,

(Dollars in millions)

2021

 

2020

 

Variance

 

% Change

Gross written premiums

$

1,420.1

 

$

1,308.2

 

$

111.9

 

8.6%

Net written premiums

 

1,208.8

 

 

1,114.2

 

 

94.6

 

8.5%

 

 

 

 

 

 

 

 

 

 

 

Premiums earned

$

1,177.2

 

$

1,007.0

 

$

170.2

 

16.9%

Incurred losses and LAE

 

970.3

 

 

682.7

 

 

287.6

 

42.1%

Commission and brokerage

 

290.6

 

 

260.9

 

 

29.7

 

11.4%

Other underwriting expenses

 

36.3

 

 

29.8

 

 

6.5

 

21.6%

Underwriting gain (loss)

$

(120.0)

 

$

33.6

 

$

(153.6)

 

NM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Point Chg

Loss ratio

 

82.4%

 

 

67.8%

 

 

 

 

14.6

Commission and brokerage ratio

 

24.7%

 

 

25.9%

 

 

 

 

(1.2)

Other underwriting ratio

 

3.1%

 

 

3.0%

 

 

 

 

0.1

Combined ratio

 

110.2%

 

 

96.7%

 

 

 

 

13.5

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

(NM, not meaningful)

 

Premiums.  Gross written premiums increased by 8.6% to $1,420.1 million for the three months ended March 31, 2021 from $1,308.2 million for the three months ended March 31, 2020 primarily due to increases in property pro rata business, property excess of loss business and casualty excess of loss writings. Net written premiums increased by 8.5% to $1,208.8 million for the three months ended March 31, 2021 compared to $1,114.2 million for the three months ended March 31, 2020, which is consistent with the change in gross written premiums. Premiums earned increased 16.9% to $1,177.2 million for the three months ended March 31, 2021 compared to $1,007.0 million for the three months ended March 31, 2020. The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

 

 

37 


 

Incurred Losses and LAE.  The following tables present the incurred losses and LAE for the Reinsurance segment for the periods indicated.

 

 

Three Months Ended March 31,

 

Current

 

Ratio %/

 

Prior

 

Ratio %/

 

Total

 

Ratio %/

(Dollars in millions)

Year

 

Pt Change

 

Years

 

Pt Change

 

Incurred

 

Pt Change

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$

741.8

 

63.0%

 

 

$

-

 

0.0%

 

 

$

741.8

 

63.0%

 

Catastrophes

 

213.0

 

18.1%

 

 

 

15.5

 

1.3%

 

 

 

228.5

 

19.4%

 

Total segment

$

954.8

 

81.1%

 

 

$

15.5

 

1.3%

 

 

$

970.3

 

82.4%

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$

654.7

 

65.0%

 

 

$

(0.6)

 

-0.1%

 

 

$

654.0

 

64.9%

 

Catastrophes

 

24.5

 

2.4%

 

 

 

4.2

 

0.4%

 

 

 

28.7

 

2.8%

 

Total segment

$

679.2

 

67.4%

 

 

$

3.5

 

0.3%

 

 

$

682.7

 

67.8%

 

Variance 2021/2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$

87.1

 

(2.0)

pts

 

$

0.6

 

0.1

pts

 

$

87.8

 

(1.9)

pts

Catastrophes

 

188.5

 

15.7

pts

 

 

11.3

 

0.9

pts

 

 

199.8

 

16.6

pts

Total segment

$

275.6

 

13.7

pts

 

$

12.0

 

1.0

pts

 

$

287.6

 

14.6

pts

 

Incurred losses increased by 42.1% to $970.3 million for the three months ended March 31, 2021 compared to $682.7 million for the three months ended March 31, 2020.  The rise in incurred losses was primarily due to an increase of $188.5 million on current years catastrophe losses and an increase of $87.1 million in current year attritional losses, primarily related to the impact of the increase in premiums earned. The $213.0 million of current year catastrophe losses for the three months ended March 31, 2021 related to Texas winter storms ($205.5 million), and the 2021 Aussie floods  ($7.5 million).The current year catastrophe losses of $24.5 million for the three months ended March 31, 2020 primarily related to Australia East Coast storms ($10.0 million), Australia fires (10.0 million) and the Nashville tornadoes ($4.5 million).

Segment Expenses.  Commission and brokerage increased to $290.6 million for the three months ended March 31, 2021 compared to $260.9 million for the three months ended March 31, 2020. The increase was mainly due to the impact of the increase in premiums earned. Segment other underwriting expenses increased to $36.3 million for the three months ended March 31, 2021 from $29.8 million for the three months ended March 31, 2020, mainly due to the impact of the increase in premiums earned and changes in affiliated reinsurance agreements.

 

Insurance.

The following table presents the underwriting results and ratios for the Insurance segment for the periods indicated. 

 

 

Three Months Ended March 31,

(Dollars in millions)

2021

 

2020

 

Variance

 

% Change

Gross written premiums

$

713.3

 

$

666.8

 

$

46.5

 

7.0%

Net written premiums

 

556.5

 

 

524.5

 

 

32.0

 

6.1%

 

 

 

 

 

 

 

 

 

 

 

Premiums earned

$

519.7

 

$

487.0

 

$

32.7

 

6.7%

Incurred losses and LAE

 

383.8

 

 

346.8

 

 

37.0

 

10.7%

Commission and brokerage

 

59.3

 

 

62.2

 

 

(2.9)

 

-4.7%

Other underwriting expenses

 

73.5

 

 

71.4

 

 

2.1

 

2.9%

Underwriting gain (loss)

$

3.2

 

$

6.6

 

$

(3.4)

 

-52.1%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Point Chg

Loss ratio

 

73.8%

 

 

71.2%

 

 

 

 

2.6

Commission and brokerage ratio

 

11.4%

 

 

12.8%

 

 

 

 

(1.4)

Other underwriting ratio

 

14.1%

 

 

14.6%

 

 

 

 

(0.5)

Combined ratio

 

99.4%

 

 

98.6%

 

 

 

 

0.7

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

(NM, not meaningful)

 

 

38 


 

Premiums. Gross written premiums increased by 7.0% to $713.3 million for the three months ended March 31, 2021 compared to $666.8 million for the three months ended March 31, 2020. The rise in gross written premiums was primarily due to increases in specialty casualty business, property business and professional liability business, partially offset by a decline in workers’ compensation business. Net written premiums increased by 6.1% to $556.5 million for the three months ended March 31, 2021 compared to $524.5 million for the three months ended March 31, 2020, which is consistent with the change in gross written premiums. Premiums earned increased 6.7% to $519.7 million for the three months ended March 31, 2021 compared to $487.0 million for the three months ended March 31, 2020. The change in premiums earned 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 tables present the incurred losses and LAE for the Insurance segment for the periods indicated. 

 

 

Three Months Ended March 31,

 

Current

 

Ratio %/

 

Prior

 

Ratio %/

 

Total

 

Ratio %/

(Dollars in millions)

Year

 

Pt Change

 

Years

 

Pt Change

 

Incurred

 

Pt Change

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$

336.6

 

64.8%

 

 

$

(1.0)

 

-0.2%

 

 

$

335.6

 

64.6%

 

Catastrophes

 

47.5

 

9.1%

 

 

 

0.7

 

0.1%

 

 

 

48.2

 

9.3%

 

Total segment

$

384.1

 

73.9%

 

 

$

(0.3)

 

-0.1%

 

 

$

383.8

 

73.8%

 

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$

341.8

 

70.2%

 

 

$

(0.5)

 

-0.1%

 

 

$

341.3

 

70.1%

 

Catastrophes

 

5.5

 

1.1%

 

 

 

-

 

0.0%

 

 

 

5.5

 

1.1%

 

Total segment

$

347.3

 

71.3%

 

 

$

(0.5)

 

-0.1%

 

 

$

346.8

 

71.2%

 

Variance 2021/2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$

(5.2)

 

(5.4)

pts

 

$

(0.5)

 

(0.1)

pts

 

$

(5.7)

 

(5.5)

pts

Catastrophes

 

42.0

 

8.0

pts

 

 

0.7

 

0.1

pts

 

 

42.7

 

8.2

pts

Total segment

$

36.8

 

2.6

pts

 

$

0.2

 

-

pts

 

$

37.0

 

2.6

pts

 

Incurred losses and LAE increased by 10.7% to $383.8 million for the three months ended March 31, 2021 compared to $346.8 million for the three months ended March 31, 2020, mainly due to an increase of $42.0 million in current year catastrophe losses. The $47.5 million of current year catastrophe losses for the three months ended March 31, 2021, related to Texas winter storms ($47.5 million). The current year catastrophe losses for the three months ended March 31, 2020 of $5.5 million related to the Nashville tornadoes ($5.5 million).

 

Segment Expenses.  Commission and brokerage decreased to $59.3 million for the three months ended March 31, 2021 compared to $62.2 million for the three months ended March 31, 2020. The decrease was primarily due to changes in the mix of business. Segment other underwriting expenses increased to $73.5 million for the three months ended March 31, 2021 compared to $71.4 million for the three months ended March 31, 2020, mainly due to the impact of the increase in premiums earned and expenses related to the continued build out of the insurance business.

 

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. 

 

39 


 

 

The overall investment strategy considers the scope of present and anticipated Company operations.  In particular, estimates of the financial impact resulting from non-investment asset and liability transactions, together with our capital structure and other factors, are used to develop a net liability analysis.  This analysis includes estimated payout characteristics for which our investments provide liquidity.  This analysis is considered in the development of specific investment strategies for asset allocation, duration and credit quality.  The change in overall market sensitive risk exposure principally reflects the asset changes that took place during the period. 

 

Interest Rate Risk.  Our $16.5 billion investment portfolio, at March 31, 2021, is principally comprised of fixed maturity securities, which are generally subject to interest rate risk and some foreign currency exchange rate risk, and some equity securities, which are subject to price fluctuations and some foreign exchange rate risk.  The overall economic impact of the foreign exchange risks on the investment portfolio is partially mitigated by changes in the dollar value of foreign currency denominated liabilities and their associated income statement impact. 

 

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 $1,584.7 million of mortgage-backed securities in the $11,050.0 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 $620.4 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 estimate on mortgage-backed securities, changes in prepayment expectations under different interest rate environments were taken into account.  For legal entities with non-U.S. dollar functional currency, the effective duration of the involved portfolio of securities was used as a proxy for the market value change under the various interest rate change scenarios. 

 

 

Impact of Interest Rate Shift in Basis Points

 

At March 31, 2021

(Dollars in millions)

-200

 

-100

 

-

 

100

 

200

Total Market/Fair Value

$

12,388.5

 

$

12,029.4

 

$

11,670.4

 

$

11,311.4

 

$

10,952.3

Market/Fair Value Change from Base (%)

 

6.2%

 

 

3.1%

 

 

0.0%

 

 

-3.1%

 

 

-6.2%

Change in Unrealized Appreciation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After-tax from Base ($)

$

567.3

 

$

283.6

 

$

-

 

$

(283.6)

 

$

(567.3)

 

We had $12,184.2 million and $11,654.9 million of gross reserves for losses and LAE as of March 31, 2021 and December 31, 2020, respectively. These amounts are recorded at their nominal value, as opposed to present value, which would reflect a discount adjustment to reflect the time value of money. Since losses are paid out over a period of time, the present value of the reserves is less than the nominal value. As interest rates rise, the present value of the reserves decreases and, conversely, as interest rates decline, the present value increases. These movements are the opposite of the interest rate impacts on the fair value of investments. While the difference between present value and nominal value is not reflected in our financial statements, our financial results will include investment income over time from the investment portfolio until the claims are paid. Our loss and loss reserve obligations have an expected duration that is reasonably consistent with our fixed income portfolio.

 

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. 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.

 

 

 

40 


 

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 periods indicated. 

 

 

Impact of Percentage Change in Equity Fair/Market Values

 

At March 31, 2021

(Dollars in millions)

-20%

 

-10%

 

0%

 

10%

 

20%

Fair/Market Value of the Equity Portfolio

$

980.9

 

$

1,103.5

 

$

1,226.1

 

$

1,348.7

 

$

1,471.3

After-tax Change in Fair/Market Value

 

(193.7)

 

 

(96.9)

 

 

-

 

 

96.9

 

 

193.7

 

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. (“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 Singapore and Canadian Dollars.  We mitigate foreign exchange exposure by generally matching the currency and duration of our assets to our corresponding operating liabilities.  In accordance with FASB guidance, the impact on the market value of available for sale fixed maturities due to changes in foreign currency exchange rates, in relation to functional currency, is reflected as part of other comprehensive income.  Conversely, the impact of changes in foreign currency exchange rates, in relation to functional currency, on other assets and liabilities is reflected through net income as a component of other income (expense).  In addition, we translate the assets, liabilities and income of non-U.S. dollar functional currency legal entities to the U.S. dollar.  This translation amount is reported as a component of other comprehensive income. 



SAFE HARBOR DISCLOSURE

This report contains forward-looking statements within the meaning of 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 TCJA, the adequacy of our provision for uncollectible balances, estimates of our catastrophe exposure, the effects of catastrophic and pandemic events on our financial statements and the ability of our subsidiaries to pay dividends.  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 “Market Sensitive Instruments” in PART I – ITEM 2. 



ITEM 4.  CONTROLS AND PROCEDURES

 

As of the end of the period covered by this report, our management carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)).  Based on their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, also conducted

 

41 


 

an evaluation of our internal control over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  Based on that evaluation, there has been no such change during the quarter covered by this report. 



PART II

 

ITEM 1.  LEGAL PROCEEDINGS

 

In the ordinary course of business, the Company is involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine the Company’s rights and obligations under insurance and reinsurance agreements.  In some disputes, the Company seeks to enforce its rights under an agreement or to collect funds owing to it.  In other matters, the Company is resisting attempts by others to collect funds or enforce alleged rights.  These disputes arise from time to time and are ultimately resolved through both informal and formal means, including negotiated resolution, arbitration and litigation.  In all such matters, the Company believes that its positions are legally and commercially reasonable.  The Company considers the statuses of these proceedings when determining its reserves for unpaid loss and loss adjustment expenses.

 

Aside from litigation and arbitrations related to these insurance and reinsurance agreements, the Company is not a party to any other material litigation or arbitration.



ITEM 1A.  RISK FACTORS

 

No material changes.

 



ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.



ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

 

None.



ITEM 4.  MINE SAFETY DISCLOSURES

 

Not applicable.



ITEM 5.  OTHER INFORMATION

 

None. 



 

42 


 

ITEM 6.  EXHIBITS

 

Exhibit Index:

 

 

 

Exhibit No.

Description

 

 

31.1

Section 302 Certification of Juan C. Andrade

 

 

31.2

Section 302 Certification of Mark Kociancic

 

 

32.1

Section 906 Certification of Juan C. Andrade and Mark Kociancic

 

 

101.INS

XBRL Instance Document

 

 

101.SCH

XBRL Taxonomy Extension Schema

 

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase

 

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase

 

 

101.LAB

XBRL Taxonomy Extension Labels Linkbase

 

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase

 

 

43 


 

Everest Reinsurance Holdings, Inc.

Signatures

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

 

 

 

 

 

 

 

Everest Reinsurance Holdings, Inc.

 

 

 

(Registrant)

 

 

 

 

 

 

 

 

 

 

 

 

 

/S/ MARK KOCIANCIC

 

 

 

Mark Kociancic

 

 

 

Executive Vice President and

 

 

 

 

Chief Financial Officer

 

 

 

 

 

 

 

 

(Duly Authorized Officer and Principal Financial Officer)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dated:  May 17, 2021

 

 

 

 

               

 

 

44