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EVEREST REINSURANCE HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share amounts and par value per share)	June 30, 2021			December 31, 2020
	(unaudited)
ASSETS:
Fixed maturities – available for sale, at market value (amortized cost: 2021, $11,255,282; 2020, $10,248,650, allowances for credit losses: 2021, $(23,783); 2020, $(1,566))	$	11,553,817		$	10,643,565
Equity securities, at fair value		1,449,667			1,288,767
Short-term investments (cost: 2021, $503,452; 2020, $708,043)		503,452			707,905
Other invested assets		1,430,635			1,094,933
Other invested assets, at fair value		1,977,109			1,796,479
Cash		545,746			378,518
Total investments and cash		17,460,426			15,910,167
Note Receivable - affiliated		300,000			300,000
Accrued investment income		107,263			80,196
Premiums receivable		1,827,456			1,591,980
Reinsurance recoverables - unaffiliated		1,558,378			1,505,650
Reinsurance recoverables - affiliated		2,434,943			2,701,655
Funds held by reinsureds		290,439			267,599
Deferred acquisition costs		428,744			379,707
Prepaid reinsurance premiums		405,847			363,489
Other assets		693,482			616,640
TOTAL ASSETS	$	25,506,978			23,717,083
LIABILITIES:
Reserve for losses and loss adjustment expenses	$	12,486,199		$	11,654,950
Unearned premium reserve		2,660,110			2,385,174
Funds held under reinsurance treaties		48,553			46,894
Other net payable to reinsurers		346,577			277,390
Losses in course of payment		200,174			161,154
Income taxes net payable		299,208			192,877
Senior notes due 6/1/2044		397,254			397,194
Senior notes due 10/15/2050		979,784			979,524
Long term notes due 5/1/2067		223,724			223,674
Borrowings from FHLB		310,000			310,000
Accrued interest on debt and borrowings		9,641			10,460
Unsettled securities payable		99,159			206,693
Other liabilities		484,991			456,786
Total liabilities		18,545,374			17,302,770
Commitments and Contingencies (Note 6)		(nil)			(nil)
STOCKHOLDER'S EQUITY:
Common shares, par value: $0.01; 3,000 shares authorized; 1,000 shares issued and outstanding (2021 and 2020)		-			-
Additional paid-in capital		1,101,316			1,101,092
Accumulated other comprehensive income (loss), net of deferred income tax expense (benefit) $60,978 at 2021 and $71,080 at 2020		229,835			268,018
Retained earnings		5,630,453			5,045,203
Total stockholder's equity		6,961,604			6,414,313
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY	$	25,506,978		$	23,717,083
The accompanying notes are an integral part of the consolidated financial statements.

 

1

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EVEREST REINSURANCE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2021			2020			2021			2020
	(unaudited)						(unaudited)
REVENUES:
Premiums earned	$	1,766,555		$	1,538,960		$	3,463,455		$	3,032,965
Net investment income		248,135			35,153			395,858			109,354
Net realized capital gains (losses):
Credit allowances on fixed maturity securities		(15,075)			(7,826)			(22,217)			(19,925)
Other net realized capital gains (losses)		198,838			(471,534)			340,991			(202,568)
Total net realized capital gains (losses)		183,763			(479,360)			318,774			(222,493)
Other income (expense)		(1,867)			(5,122)			2,112			(9,620)
Total revenues		2,196,586			1,089,631			4,180,199			2,910,206
CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses		1,095,618			975,832			2,449,702			2,005,345
Commission, brokerage, taxes and fees		386,848			355,699			736,702			678,803
Other underwriting expenses		109,930			94,131			219,725			195,339
Corporate expenses		7,618			3,514			12,199			7,235
Interest, fee and bond issue cost amortization expense		15,537			6,922			31,071			14,382
Total claims and expenses		1,615,551			1,436,098			3,449,399			2,901,104
INCOME (LOSS) BEFORE TAXES		581,035			(346,467)			730,800			9,102
Income tax expense (benefit)		115,228			(75,874)			145,550			(36,950)
NET INCOME (LOSS)	$	465,807		$	(270,593)		$	585,250		$	46,052
Other comprehensive income (loss), net of tax:
Unrealized appreciation (depreciation) ("URA(D)") on securities arising during the period		43,410			243,550			(66,448)			66,026
Less: reclassification adjustment for realized losses (gains) included in net income (loss)		6,442			3,543			7,932			31,429
Total URA(D) on securities arising during the period		49,852			247,093			(58,516)			97,455
Foreign currency translation adjustments		13,985			8,436			16,247			(21,197)
Reclassification adjustment for amortization of net (gain) loss included in net income (loss)		2,043			1,806			4,086			2,726
Total benefit plan net gain (loss) for the period		2,043			1,806			4,086			2,726
Total other comprehensive income (loss), net of tax		65,880			257,335			(38,183)			78,984
COMPREHENSIVE INCOME (LOSS)	$	531,687		$	(13,258)		$	547,067		$	125,036
The accompanying notes are an integral part of the consolidated financial statements.

 

2

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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
Balance, June 30		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
Share-based compensation plans		116			101
Balance, June 30		1,101,316			1,100,882
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)
Net increase (decrease) during the period		65,880			257,335
Balance, June 30		229,835			143,308
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
Net income (loss)		465,807			(270,593)
Balance, June 30		5,630,453			4,739,382
TOTAL STOCKHOLDER'S EQUITY, June 30	$	6,961,604		$	5,983,572
The accompanying notes are an integral part of the consolidated financial statements.

 

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EVEREST REINSURANCE HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

	Six Months Ended
	June 30,
(Dollars in thousands)	2021			2020
	(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	585,250		$	46,052
Adjustments to reconcile net income to net cash provided by operating activities:
Decrease (increase) in premiums receivable		(233,770)			(147,210)
Decrease (increase) in funds held by reinsureds, net		(21,256)			(13,336)
Decrease (increase) in reinsurance recoverables		226,291			233,199
Decrease (increase) in income taxes		116,483			(41,843)
Decrease (increase) in prepaid reinsurance premiums		(40,542)			15,928
Increase (decrease) in reserve for losses and loss adjustment expenses		812,725			205,192
Increase (decrease) in unearned premiums		272,722			90,640
Increase (decrease) in other net payable to reinsurers		66,461			89,520
Increase (decrease) in losses in course of payment		39,117			118,964
Change in equity adjustments in limited partnerships		(201,379)			50,809
Distribution of limited partnership income		27,905			30,916
Change in other assets and liabilities, net		(93,690)			(75,931)
Non-cash compensation expense		18,406			15,462
Amortization of bond premium (accrual of bond discount)		15,535			4,436
Net realized capital (gains) losses		(318,774)			222,493
Net cash provided by (used in) operating activities		1,271,484			845,291
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from fixed maturities matured/called - available for sale, at market value		1,153,258			494,544
Proceeds from fixed maturities sold - available for sale, at market value		242,072			337,723
Proceeds from equity securities sold - at fair value		346,088			213,003
Distributions from other invested assets		70,811			119,727
Cost of fixed maturities acquired - available for sale, at market value		(2,401,534)			(1,226,251)
Cost of equity securities acquired - at fair value		(358,790)			(222,818)
Cost of other invested assets acquired		(210,373)			(215,569)
Net change in short-term investments		205,323			(308,979)
Net change in unsettled securities transactions		(129,026)			37,744
Net cash provided by (used in) investing activities		(1,082,171)			(770,876)
CASH FLOWS FROM FINANCING ACTIVITIES:
Tax benefit from share-based compensation, net of expense		(18,182)			(15,258)
Cost of debt repurchase		-			(10,648)
Net cash provided by (used in) financing activities		(18,182)			(25,906)
EFFECT OF EXCHANGE RATE CHANGES ON CASH		(3,903)			(14,015)
Net increase (decrease) in cash		167,228			34,495
Cash, beginning of period		378,518			411,122
Cash, end of period	$	545,746		$	445,617
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid (recovered)	$	28,859		$	4,763
Interest paid		31,520			14,782
The accompanying notes are an integral part of the consolidated financial statements.

 

4

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NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

 

For the Three and Six Months Ended June 30, 2021, and 2020

 

1. GENERAL

 

Everest Reinsurance Holdings, Inc. (“Holdings”), 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 as of June 30, 2021 and December 31, 2020 and for the three and six months ended June 30, 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 and six months ended June 30, 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.

 

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.

 

 

5

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3. INVESTMENTS

 

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 June 30, 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	$	538,733		$	-		$	14,207		$	(106)		$	552,834
Obligations of U.S. states and political subdivisions		573,398			-			35,932			(986)			608,344
Corporate securities		3,539,895			(18,475)			131,825			(23,239)			3,630,006
Asset-backed securities		2,989,971			(4,915)			32,904			(2,426)			3,015,534
Mortgage-backed securities
Commercial		575,995			-			28,512			(2,478)			602,029
Agency residential		1,019,028			-			21,091			(6,168)			1,033,951
Non-agency residential		5,633			-			4			(2)			5,635
Foreign government securities		717,562			-			41,661			(2,571)			756,652
Foreign corporate securities		1,295,067			(393)			58,756			(4,600)			1,348,830
Total fixed maturity securities	$	11,255,282		$	(23,783)		$	364,892		$	(42,574)		$	11,553,817

 

	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

 

 

6

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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 June 30, 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	$	640,570		$	646,794		$	658,561		$	659,622
Due after one year through five years		2,980,474			3,077,758			2,911,285			3,036,151
Due after five years through ten years		2,095,560			2,191,943			1,927,265			2,079,866
Due after ten years		948,051			980,172			848,014			875,412
Asset-backed securities		2,989,971			3,015,534			2,450,807			2,474,170
Mortgage-backed securities
Commercial		575,995			602,029			512,388			550,080
Agency residential		1,019,028			1,033,951			937,166			965,100
Non-agency residential		5,633			5,636			3,164			3,164
Total fixed maturity securities	$	11,255,282		$	11,553,817		$	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						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2021			2020			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	$	63,124		$	311,927		$	(74,026)		$	123,520
Change in unrealized appreciation (depreciation), pre-tax		63,124			311,927			(74,026)			123,520
Deferred tax benefit (expense)		(13,272)			(64,834)			15,510			(26,065)
Change in unrealized appreciation (depreciation), net of deferred taxes, included in stockholder's equity	$	49,852		$	247,093		$	(58,516)		$	97,455

 

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

 

7

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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.

 

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.

 

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 June 30, 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	$	81,465		$	(106)		$	-		$	-		$	81,465		$	(106)
Obligations of U.S. states and political subdivisions		20,473			(214)			3,189			(772)			23,662			(986)
Corporate securities		760,710			(21,706)			83,158			(1,533)			843,868			(23,239)
Asset-backed securities		640,155			(2,199)			8,539			(227)			648,694			(2,426)
Mortgage-backed securities
Commercial		108,610			(2,478)			-			-			108,610			(2,478)
Agency residential		603,966			(6,118)			10,242			(50)			614,208			(6,168)
Non-agency residential		-			-			156			(2)			156			(2)
Foreign government securities		88,608			(2,570)			1,009			(1)			89,617			(2,571)
Foreign corporate securities		231,115			(3,741)			10,755			(858)			241,870			(4,600)
Total fixed maturity securities	$	2,535,102		$	(39,132)		$	117,048		$	(3,442)		$	2,652,150		$	(42,574)

 

 

8

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	Duration of Unrealized Loss at June 30, 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	$	71,420		$	(1,509)		$	1,009		$	(1)		$	72,429		$	(1,510)
Due in one year through five years		494,028			(8,866)			82,946			(1,288)			576,974			(10,154)
Due in five years through ten years		406,678			(9,302)			10,967			(1,103)			417,645			(10,405)
Due after ten years		210,245			(8,660)			3,189			(772)			213,434			(9,432)
Asset-backed securities		640,155			(2,199)			8,539			(227)			648,694			(2,426)
Mortgage-backed securities		712,576			(8,596)			10,398			(51)			722,974			(8,647)
Total fixed maturity securities	$	2,535,102		$	(39,132)		$	117,048		$	(3,442)		$	2,652,150		$	(42,574)

 

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at June 30, 2021 were $2,652,150 thousand and $42,574 thousand, respectively. The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at June 30, 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 $39,132 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, foreign government securities as well as commercial and agency residential mortgage backed securities. Of these unrealized losses, $27,803 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating agency. The $3,442 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. Of these unrealized losses $1,421 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 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.

 

 

9

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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 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.

 

 

10

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

 

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2021			2020			2021			2020
Fixed maturities	$	91,895		$	74,897		$	177,016		$	148,985
Equity securities		3,385			2,024			6,308			3,616
Short-term investments and cash		83			578			236			2,148
Other invested assets
Limited partnerships		126,407			(40,465)			178,558			(33,469)
Dividends from preferred shares of affiliate		7,758			7,758			15,516			15,516
Other		25,856			(2,962)			31,875			(16,034)
Gross investment income before adjustments		255,384			41,830			409,509			120,762
Funds held interest income (expense)		2,732			901			6,221			4,158
Interest income from Parent		1,281			1,281			2,549			2,563
Gross investment income		259,397			44,012			418,279			127,483
Investment expenses		(11,262)			(8,859)			(22,421)			(18,129)
Net investment income	$	248,135		$	35,153		$	395,858		$	109,354
(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. The net investment income from limited partnerships is dependent upon the Company’s share of the net asset values of interests underlying each limited partnership. 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 $1,342,994 thousand in limited partnerships and private placement loan securities at June 30, 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 June 30, 2021, the market value of investments in the facility consolidated within the Company’s balance sheets was $381,679 thousand.

 

 

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Other invested assets, at fair value, as of June 30, 2021 and December 31, 2020, were comprised of preferred shares held in Everest Preferred International Holdings, Ltd. (“Preferred Holdings”), a wholly-owned subsidiary of Group.

 

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

 

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2021			2020			2021			2020
Fixed maturity securities, market value:
Allowances for credit losses	$	(15,075)		$	(7,826)		$	(22,217)		$	(19,925)
Gains (losses) from sales		4,128			1,963			8,055			(18,974)
Fixed maturity securities, fair value:
Gains (losses) from fair value adjustments		-			(272)			-			(1,395)
Equity securities, fair value:
Gains (losses) from sales		585			16,274			6,823			(11,328)
Gains (losses) from fair value adjustments		103,824			148,205			141,375			26,536
Other invested assets		2,748			1,292			4,094			(1,035)
Other invested assets, fair value:
Gains (losses) from fair value adjustments		87,552			(639,058)			180,630			(196,579)
Short-term investment gains (losses)		1			62			14			207
Total net realized capital gains (losses)	$	183,763		$	(479,360)		$	318,774		$	(222,493)

	Roll Forward of Allowance for Credit Losses
	Three Months Ended June 30, 2021												Six Months Ended June 30, 2021
				Asset			Foreign									Asset			Foreign
	Corporate			Backed			Corporate						Corporate			Backed			Corporate
	Securities			Securities			Securities			Total			Securities			Securities			Securities			Total
Beginning Balance	$	(3,588)		$	(4,915)		$	(205)		$	(8,708)		$	(1,205)		$	-		$	(361)		$	(1,566)
Credit losses on securities where credit
losses were not previously recorded		(13,538)			-			(188)			(13,726)			(15,921)			(4,915)			(188)			(21,024)
Increases in allowance on previously
impaired securities		(1,468)			-			-			(1,468)			(1,468)			-			-			(1,468)
Decreases in allowance on previously
impaired securities		-			-			-			-			-			-			-			-
Reduction in allowance due to disposals		119			-			-			119			119			-			156			275
Balance as of June 30, 2021	$	(18,475)		$	(4,915)		$	(393)		$	(23,783)		$	(18,475)		$	(4,915)		$	(393)		$	(23,783)

 

	Roll Forward of Allowance for Credit Losses
	Three Months Ended June 30, 2020												Six Months Ended June 30, 2020
				Foreign			Foreign									Foreign			Foreign
	Corporate			Government			Corporate						Corporate			Government			Corporate
	Securities			Securities			Securities			Total			Securities			Securities			Securities			Total
Beginning Balance	$	(11,468)		$	(70)		$	(561)		$	(12,099)		$	-		$	-		$	-		$	-
Credit losses on securities where credit
losses were not previously recorded		(10,355)			-			-			(10,355)			(21,823)			(70)			(561)			(22,454)
Increases in allowance on previously
impaired securities		(555)			-			(211)			(766)			(555)			-			(211)			(766)
Decreases in allowance on previously
impaired securities		1,238			-			116			1,354			1,238			-			116			1,354
Reduction in allowance due to disposals		1,742			70			129			1,941			1,742			70			129			1,941
Balance as of June 30, 2020	$	(19,398)		$	-		$	(527)		$	(19,925)		$	(19,398)		$	-		$	(527)		$	(19,925)

 

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.

 

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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						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2021			2020			2021			2020
Proceeds from sales of fixed maturity securities	$	165,443		$	173,479		$	242,072		$	337,723
Gross gains from sales		8,850			8,755			15,199			10,601
Gross losses from sales		(4,722)			(6,792)			(7,144)			(29,575)
Proceeds from sales of equity securities	$	64,775		$	8,842		$	346,088		$	213,003
Gross gains from sales		2,633			18,172			14,937			20,753
Gross losses from sales		(2,048)			(1,898)			(8,114)			(32,081)

 

4. RESERVES FOR LOSSES AND LAE

 

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

 

	Six Months Ended June 30,
(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		2,450,567			2,006,988
Prior years		(865)			(1,643)
Total incurred losses and LAE		2,449,702			2,005,345
Paid related to:
Current year		550,907			474,372
Prior years		898,284			1,025,866
Total paid losses and LAE		1,449,191			1,500,238
Foreign exchange/translation adjustment and cumulative adjustment due to adoption of ASU 2016-13		9,986			(26,906)
Net reserves end of period		8,713,971			6,472,371
Plus reinsurance recoverables		3,772,228			3,910,952
Gross reserves end of period	$	12,486,199		$	10,383,323
(Some amounts may not reconcile due to rounding.)

 

Current year incurred losses were $2,450,567 thousand for the six months ended June 30, 2021 and $2,006,988 thousand for the six months ended June 30, 2020, respectively. The increase in current year incurred losses in 2021 compared to 2020 was primarily due to a $250,850 thousand increase in current year catastrophe losses as well as the impact of the increase in premiums earned. In addition, current year incurred losses for the three and six months ended June 30, 2020 included $37,991 thousand and $73,691 thousand of losses associated with the COVID-19 Pandemic which did not recur in 2021.

 

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

 

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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 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 1Inputs 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.

 

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 June 30, 2021, $1,455,085 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 June 30, 2021 and December 31, 2020 of $1,116,408 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

 

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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.

 

In addition to the valuations from investment managers, some of the fixed maturities with fair values categorized as Level 3 result when prices are not available from the nationally recognized pricing services. The asset managers may obtain non-binding price quotes for the securities from brokers. The single broker quotes are provided by market makers or broker-dealers who are recognized as market participants in the markets in which they are providing the quotes. The prices received from brokers are reviewed for reasonableness by the third party asset managers and the Company. If the broker quotes are for foreign denominated securities, the quotes are converted to U.S. dollars using currency exchange rates from nationally recognized sources. In limited circumstances when broker prices are not available for private placements, the Company will value the securities using comparable market information or receive fair values from investment managers.

 

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 June 30, 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.

 

 

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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)		June 30, 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		$	552,834		$	-		$	552,834		$	-
Obligations of U.S. States and political subdivisions			608,344			-			608,344			-
Corporate securities			3,630,006			-			2,995,083			634,923
Asset-backed securities			3,015,534			-			2,200,258			815,276
Mortgage-backed securities
Commercial			602,029			-			602,029			-
Agency residential			1,033,951			-			1,033,951			-
Non-agency residential			5,635			-			5,635			-
Foreign government securities			756,652			-			756,652			-
Foreign corporate securities			1,348,830			-			1,343,944			4,886
Total fixed maturities, market value			11,553,817			-			10,098,732			1,455,085
Equity securities, fair value			1,449,667			1,412,711			36,956			-
Other invested assets, fair value			1,977,109			-			-			1,977,109

 

 

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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, $289,278 thousand and $224,698 thousand of investments within other invested assets on the consolidated balance sheets as of June 30, 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 June 30, 2021												Six Months Ended June 30, 2021
				Asset												Asset
(Dollars in thousands)	Corporate Securities			Backed Securities			Foreign Corporate			Total			Corporate Securities			Backed Securities			Foreign Corporate			Total
Beginning balance	$	633,893		$	785,360		$	5,598		$	1,424,851		$	630,843		$	623,033		$	5,700		$	1,259,576
Total gains or (losses) (realized/unrealized)
Included in earnings		(13,762)			206			138			(13,418)			(15,550)			(3,962)			140			(19,372)
Included in other comprehensive income (loss)		4,583			7,610			(85)			12,108			7,418			4,475			(36)			11,857
Purchases, issuances and settlements		10,209			22,100			(765)			31,544			12,212			191,730			(918)			203,024
Transfers in and/or (out) of Level 3		-			-			-			-			-			-			-			-
Ending balance	$	634,923		$	815,276		$	4,886		$	1,455,085		$	634,923		$	815,276		$	4,886		$	1,455,085
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	$	(17,279)		$	(4,915)		$	-		$	(22,194)		$	(17,279)		$	(4,915)		$	-		$	(22,194)
(Some amounts may not reconcile due to rounding.)

 

 

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	Total Fixed Maturities, Market Value
	Three Months Ended June 30, 2020												Six Months Ended June 30, 2020
				Asset												Asset
(Dollars in thousands)	Corporate Securities			Backed Securities			Foreign Corporate			Total			Corporate Securities			Backed Securities			Foreign Corporate			Total
Beginning balance	$	642,432		$	238,631		$	-		$	881,063		$	546,939		$	153,641		$	1,751		$	702,331
Total gains or (losses) (realized/unrealized)
Included in earnings		(248)			121			(97)			(224)			(462)			125			(97)			(434)
Included in other comprehensive income (loss)		(549)			18,092			(40)			17,503			(3,906)			2,210			(40)			(1,736)
Purchases, issuances and settlements		14,346			38,886			5,434			58,666			113,410			139,754			3,683			256,847
Transfers in and/or (out) of Level 3		(4,795)			-			977			(3,818)			(4,795)			-			977			(3,818)
Ending balance	$	651,186		$	295,730		$	6,274		$	953,190		$	651,186		$	295,730		$	6,274		$	953,190
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.)

 

The net transfers to/(from) Level 3, fair value measurements using significant unobservable inputs for fixed maturities, market value were $(3,818) thousand for both the three and six months ended June 30, 2020. The transfers during 2020 were previously priced by investment managers and were subsequently priced using a recognized pricing service as of June 30, 2020.

	Total Fixed Maturities, Fair Value
	Three Months Ended June 30, 2020						Six Months Ended June 30, 2020
	Foreign						Foreign
(Dollars in thousands)	Corporate			Total			Corporate			Total
Beginning balance fixed maturities at fair value	$	4,703		$	4,703		$	5,826		$	5,826
Total gains or (losses) (realized/unrealized)
Included in earnings		(272)			(272)			(1,395)			(1,395)
Included in other comprehensive income (loss)		-			-			-			-
Purchases, issuances and settlements		-			-			-			-
Transfers in and/or (out) of Level 3		-			-			-			-
Ending balance	$	4,431		$	4,431		$	4,431		$	4,431
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.)

 

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

 

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2021			2020			2021			2020
Equity securities
Balance, beginning of period	$	-		$	-		$	-		$	-
Total (gains) or losses (realized/unrealized)
Included in earnings		-			-			-			-
Included in other comprehensive income (loss)		-			-			-			-
Purchases, issuances and settlements		-			9,877			-			9,877
Transfers in and/or (out) of Level 3		-			-			-			-
Balance, end of period	$	-		$	9,877		$	-		$	9,877
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 liabilities still held at the reporting date	$	-		$	-		$	-		$	-
(Some amounts may not reconcile due to rounding.)

 

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						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2021			2020			2021			2020
Other invested assets, fair value:
Beginning balance	$	1,889,558		$	2,425,061		$	1,796,479		$	1,982,582
Total gains or (losses) (realized/unrealized)
Included in earnings		87,551			(639,058)			180,630			(196,579)
Included in other comprehensive income (loss)		-			-			-			-
Purchases, issuances and settlements		-			-			-			-
Transfers in and/or (out) of Level 3		-			-			-			-
Ending balance	$	1,977,109		$	1,786,003		$	1,977,109		$	1,786,003
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.

 

19

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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 June 30, 2021			At December 31, 2020
(Dollars in thousands)
The Prudential	$	139,236		$	140,773
Unaffiliated life insurance company		33,492			35,128

 

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 June 30, 2021									Six Months Ended June 30, 2021
(Dollars in thousands)	Before Tax			Tax Effect			Net of Tax			Before Tax			Tax Effect			Net of Tax
Unrealized appreciation (depreciation) ("URA(D)") on securities - non-credit related temporary	$	54,925			(11,515)		$	43,410		$	(84,094)			17,646		$	(66,448)
Reclassification of net realized losses (gains) included in net income (loss)		8,198			(1,757)			6,442			10,068			(2,136)			7,932
Foreign currency translation adjustments		17,712			(3,727)			13,985			20,568			(4,321)			16,247
Reclassification of amortization of net gain (loss) included in net income (loss)		2,586			(543)			2,043			5,172			(1,086)			4,086
Total other comprehensive income (loss)	$	83,421		$	(17,542)		$	65,880		$	(48,286)		$	10,103		$	(38,183)
(Some amounts may not reconcile due to rounding)

 

	Three Months Ended June 30, 2020									Six Months Ended June 30, 2020
(Dollars in thousands)	Before Tax			Tax Effect			Net of Tax			Before Tax			Tax Effect			Net of Tax
Unrealized appreciation (depreciation) ("URA(D)") on securities - temporary	$	307,356			(63,806)		$	243,550		$	83,586			(17,560)		$	66,026
Reclassification of net realized losses (gains) included in net income (loss)		4,570			(1,027)			3,543			39,934			(8,505)			31,429
Foreign currency translation adjustments		10,675			(2,239)			8,436			(26,857)			5,660			(21,197)
Reclassification of amortization of net gain (loss) included in net income (loss)		2,286			(480)			1,806			3,451			(725)			2,726
Total other comprehensive income (loss)	$	324,887		$	(67,552)		$	257,335		$	100,114		$	(21,130)		$	78,984
(Some amounts may not reconcile due to rounding)

 

 

20

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

 

	Three Months Ended						Six Months Ended						Affected line item within the
	June 30,						June 30,						statements of operations and
AOCI component	2021			2020			2021			2020			comprehensive income (loss)
(Dollars in thousands)
URA(D) on securities	$	8,198		$	4,570		$	10,068		$	39,934		Other net realized capital gains (losses)
		(1,757)			(1,027)			(2,136)			(8,505)		Income tax expense (benefit)
	$	6,442		$	3,543		$	7,932		$	31,429		Net income (loss)
Benefit plan net gain (loss)	$	2,586		$	2,286		$	5,172		$	3,451		Other underwriting expenses
		(543)			(480)			(1,086)			(725)		Income tax expense (benefit)
	$	2,043		$	1,806		$	4,086		$	2,726		Net income (loss)
(Some amounts may not reconcile due to rounding)

 

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						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2021			2020			2021			2020
Beginning balance of URA (D) on securities	$	204,793		$	(25,025)		$	313,161		$	124,612
Current period change in URA (D) of investments - non-credit related		49,852			247,093			(58,516)			97,455
Ending balance of URA (D) on securities		254,645			222,068			254,645			222,068
Beginning balance of foreign currency translation adjustments		30,989			(15,367)			28,727			14,267
Current period change in foreign currency translation adjustments		13,985			8,436			16,247			(21,197)
Ending balance of foreign currency translation adjustments		44,974			(6,931)			44,974			(6,931)
Beginning balance of benefit plan net gain (loss)		(71,827)			(73,635)			(73,870)			(74,556)
Current period change in benefit plan net gain (loss)		2,043			1,806			4,086			2,726
Ending balance of benefit plan net gain (loss)		(69,784)			(71,829)			(69,784)			(71,829)
Ending balance of accumulated other comprehensive income (loss)	$	229,835		$	143,308		$	229,835		$	143,308

 

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 June 30, 2021, the total amount on deposit in the trust account was $1,011,769 thousand.

 

The Company entered into various 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 table below summarizes the various agreements:

 

 

21

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(Dollars in thousands)
Class		Description		Effective Date		Expiration Date		Limit
Series 2017-1 Class A-2		US, Canada, Puerto Rico – Named Storm and Earthquake Events		4/13/2017		4/13/2022			50,000
Series 2017-1 Class B-2		US, Canada, Puerto Rico – Named Storm and Earthquake Events		4/13/2017		4/13/2022			75,000
Series 2017-1 Class C-2		US, Canada, Puerto Rico – Named Storm and Earthquake Events		4/13/2017		4/13/2022			175,000
Series 2018-1 Class A-1		US, Canada, Puerto Rico – Named Storm and Earthquake Events		4/30/2018		5/6/2022			62,500
Series 2018-1 Class B-1		US, Canada, Puerto Rico – Named Storm and Earthquake Events		4/30/2018		5/6/2022			200,000
Series 2018-1 Class A-2		US, Canada, Puerto Rico – Named Storm and Earthquake Events		4/30/2018		5/5/2023			62,500
Series 2018-1 Class B-2		US, Canada, Puerto Rico – Named Storm and Earthquake Events		4/30/2018		5/5/2023			200,000
Series 2019-1 Class A-1		US, Canada, Puerto Rico – Named Storm and Earthquake Events		12/12/2019		12/19/2023			150,000
Series 2019-1 Class B-1		US, Canada, Puerto Rico – Named Storm and Earthquake Events		12/12/2019		12/19/2023			275,000
Series 2019-1 Class A-2		US, Canada, Puerto Rico – Named Storm and Earthquake Events		12/12/2019		12/19/2024			150,000
Series 2019-1 Class B-2		US, Canada, Puerto Rico – Named Storm and Earthquake Events		12/12/2019		12/19/2024			275,000
Series 2020-1 Class A-1		US, Canada, Puerto Rico – Named Storm and Earthquake Events		4/8/2021		4/21/2025			150,000
Series 2020-1 Class B-1		US, Canada, Puerto Rico – Named Storm and Earthquake Events		4/8/2021		4/21/2025			85,000
Series 2020-1 Class C-1		US, Canada, Puerto Rico – Named Storm and Earthquake Events		4/8/2021		4/21/2025			85,000
Series 2020-1 Class A-2		US, Canada, Puerto Rico – Named Storm and Earthquake Events		4/8/2021		4/20/2026			150,000
Series 2020-1 Class B-2		US, Canada, Puerto Rico – Named Storm and Earthquake Events		4/8/2021		4/20/2026			90,000
Series 2020-1 Class C-2		US, Canada, Puerto Rico – Named Storm and Earthquake Events		4/8/2021		4/20/2026			90,000
		Total available limit as of June 30, 2021						$	2,325,000

 

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. The proceeds from the issuance of the Notes listed below are held in reinsurance trusts 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.

 

22

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(Dollars in thousands)
Note Series		Issue Date			Maturity Date		Amount
Series 2017-1 Class A-2		4/13/2017			4/13/2022			50,000
Series 2017-1 Class B-2		4/13/2017			4/13/2022			75,000
Series 2017-1 Class C-2		4/13/2017			4/13/2022			175,000
Series 2018-1 Class A-1		4/30/2018			5/6/2022			62,500
Series 2018-1 Class B-1		4/30/2018			5/6/2022			200,000
Series 2018-1 Class A-2		4/30/2018			5/5/2023			62,500
Series 2018-1 Class B-2		4/30/2018			5/5/2023			200,000
Series 2019-1 Class A-1		12/12/2019			12/19/2023			150,000
Series 2019-1 Class B-1		12/12/2019			12/19/2023			275,000
Series 2019-1 Class A-2		12/12/2019			12/19/2024			150,000
Series 2019-1 Class B-2		12/12/2019			12/19/2024			275,000
Series 2020-1 Class A-1		4/8/2021			4/21/2025			150,000
Series 2020-1 Class B-1		4/8/2021			4/21/2025			85,000
Series 2020-1 Class C-1		4/8/2021			4/21/2025			85,000
Series 2020-1 Class A-2		4/8/2021			4/20/2026			150,000
Series 2020-1 Class B-2		4/8/2021			4/20/2026			90,000
Series 2020-1 Class C-2		4/8/2021			4/20/2026			90,000

 

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.

 

							June 30, 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		$	397,254		$	505,284		$	397,194		$	528,000
3.5% Senior notes	10/07/2020		10/15/2050		1,000,000		$	979,784		$	1,068,990		$	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 is paid semi-annually on June 1 and December 1 of each year.

 

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 is 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						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2021			2020			2021			2020
Interest expense incurred 4.868% Senior notes	$	4,868		$	4,868		$	9,736		$	9,736
Interest expense incurred 3.5% Senior notes	$	8,805		$	-		$	17,610		$	-

 

 

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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.

 

June 30, 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

$

223,724

$

214,772

$

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 May 17, 2021 to August 15, 2021 is 2.54%.

 

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 $11,483 thousand and $13,183 thousand of its outstanding long term subordinated notes during the three and six months ended June 30, 2020, respectively. The Company realized a gain of $2,034 thousand and $2,536 thousand from the repurchase of the long term subordinated notes during the three and six months ended June 30, 2020, respectively. No repurchases of debt were made during the three and six months ended June 30, 2021.

 

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.

 

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

 

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2021			2020			2021			2020
Interest expense incurred	$	1,460		$	2,000		$	2,922		$	4,539

 

11. FEDERAL HOME LOAN BANK MEMBERSHIP

 

Everest Re is 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 June 30, 2021, Everest Re had admitted assets of approximately $18,197,177 thousand which provides borrowing capacity of up to approximately $1,819,717 thousand.

 

24

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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 June 30, 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. The Company measures its underwriting results using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which, respectively, divide incurred losses, commissions and brokerage and other underwriting expenses by premiums earned.

 

The Company does not maintain separate balance sheet data for its operating segments. Accordingly, the Company does not review and evaluate the financial results of its operating segments based upon balance sheet data.

 

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

 

	Three Months Ended						Six Months Ended
Reinsurance	June 30,						June 30,
(Dollars in thousands)	2021			2020			2021			2020
Gross written premiums	$	1,439,254		$	1,124,895		$	2,859,337		$	2,433,089
Net written premiums		1,291,229			992,750			2,500,042			2,106,984
Premiums earned	$	1,232,157		$	1,062,833		$	2,409,327		$	2,069,868
Incurred losses and LAE		739,440			630,658			1,709,757			1,313,366
Commission and brokerage		324,989			292,286			615,545			553,187
Other underwriting expenses		32,999			26,599			69,288			56,446
Underwriting gain (loss)	$	134,729		$	113,290		$	14,737		$	146,869

 

 

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	Three Months Ended						Six Months Ended
Insurance	June 30,						June 30,
(Dollars in thousands)	2021			2020			2021			2020
Gross written premiums	$	877,776		$	713,352		$	1,591,028		$	1,380,123
Net written premiums		637,106			508,801			1,193,636			1,033,275
Premiums earned	$	534,398		$	476,127		$	1,054,128		$	963,097
Incurred losses and LAE		356,177			345,174			739,944			691,979
Commission and brokerage		61,859			63,413			121,157			125,616
Other underwriting expenses		76,932			67,532			150,437			138,893
Underwriting gain (loss)	$	39,430		$	8		$	42,590		$	6,609

 

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						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2021			2020			2021			2020
Underwriting gain (loss)	$	174,159		$	113,298		$	57,327		$	153,478
Net investment income		248,135			35,153			395,858			109,354
Net realized capital gains (losses)		183,763			(479,360)			318,774			(222,493)
Corporate expense		(7,618)			(3,514)			(12,199)			(7,235)
Interest, fee and bond issue cost amortization expense		(15,537)			(6,922)			(31,071)			(14,382)
Other income (expense)		(1,867)			(5,122)			2,112			(9,620)
Income (loss) before taxes	$	581,035		$	(346,467)		$	730,800		$	9,102

 

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						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2021			2020			2021			2020
Canada gross written premiums	$	68,955		$	71,021		$	103,285		$	134,658

 

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

 

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 $1,281 thousand and $1,281 thousand for the three months ended June 30, 2021 and 2020, respectively and $2,549 thousand and $2,563 thousand for the six months ended June 30, 2021 and 2020, respectively.

 

Group entered into a $200,000 thousand long term note agreement with Everest Re as of August 5, 2021. The note will pay interest annually at a rate of 1.00% and is scheduled to mature in August, 2030.

 

 

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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 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						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2021			2020			2021			2020
Dividends received on preferred stock of affiliate	$	7,758		$	7,758		$	15,516		$	15,516

 

 

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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. As of June 30, 2021, and December 31, 2020, the Company has a reinsurance recoverable of $883,428 thousand and $886,350 thousand, respectively, recorded on its balance sheet due from Bermuda Re.

 

 

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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						Six Months Ended
Bermuda Re	June 30,						June 30,
(Dollars in thousands)	2021			2020			2021			2020
Ceded written premiums	$	73,689		$	31,669		$	144,487		$	62,169
Ceded earned premiums		73,734			31,813			144,611			62,313
Ceded losses and LAE		19,986			12,208			(10,164)			(9,951)

 

	Three Months Ended						Six Months Ended
Everest International	June 30,						June 30,
(Dollars in thousands)	2021			2020			2021			2020
Ceded written premiums	$	-		$	-		$	-		$	-
Ceded earned premiums		-			-			-			-
Ceded losses and LAE		-			(7)			-			16

 

	Three Months Ended						Six Months Ended
Everest Canada	June 30,						June 30,
(Dollars in thousands)	2021			2020			2021			2020
Assumed written premiums	$	-		$	(235)		$	-		$	1
Assumed earned premiums		-			(46)			-			(7)
Assumed losses and LAE		7			(948)			66			650

 

	Three Months Ended						Six Months Ended
Lloyd's Syndicate 2786	June 30,						June 30,
(Dollars in thousands)	2021			2020			2021			2020
Assumed written premiums	$	73		$	630		$	672		$	(2,401)
Assumed earned premiums		112			639			641			(2,183)
Assumed losses and LAE		1,796			(1,438)			214			(624)

 

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						Six Months Ended
Mt. Logan Re Segregated Accounts	June 30,						June 30,
(Dollars in thousands)	2021			2020			2021			2020
Ceded written premiums	$	46,571		$	41,864		$	127,943		$	137,214
Ceded earned premiums		60,117			60,412			126,105			140,267
Ceded losses and LAE		21,613			36,835			94,607			74,300

 

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.

 

 

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

 

Pension Benefits	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2021			2020			2021			2020
Service cost	$	2,738		$	2,041		$	5,476		$	6,052
Interest cost		1,999			2,563			3,998			5,046
Expected return on plan assets		(5,580)			(5,197)			(11,161)			(10,394)
Amortization of net (income) loss		2,731			2,462			5,461			3,675
Net periodic benefit cost	$	1,888		$	1,869		$	3,774		$	4,379

 

Other Benefits	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2021			2020			2021			2020
Service cost	$	281		$	311		$	564		$	452
Interest cost		181			215			362			429
Amortization of prior service cost		(144)			(176)			(289)			(224)
Net periodic benefit cost	$	318		$	350		$	637		$	657
(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 and six months ended June 30, 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. Between July and August 2021, numerous wildfires have occurred in the western United States which have caused widespread damage. The Company is in the preliminary stage of assessing the impact of these wildfires on the Company’s financial results for the third quarter of 2021. It is difficult at this time to provide an accurate estimate of the financial impact of these events, including as a result of the preliminary nature of the information available and provided thus far by industry participants, the magnitude and recent occurrence of the events and other factors. The estimated losses for these wildfires will be reported in the Company’s third quarter 2021 financial results. However, the Company anticipates that the losses from these events will adversely impact third quarter 2021 financial statements.

 

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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 and its subsequent variants. Globally, many countries mandated that their citizens remain at home and many non-essential businesses have continued to be physically closed. We activated our operational resiliency plan across our global footprint and all of our critical operations are functioning effectively from remote locations. We continue to service and meet the needs of our clients while ensuring the safety and health of our employees and customers.

 

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

 

Prior to the pandemic, there was a growing industry consensus that there was some firming of (re)insurance rates for the areas impacted by the recent catastrophes. The increased frequency of catastrophe losses in 2020 and 2021 appears to be further pressuring the increase of rates. As business activity continues to regain strength, rates also appear to be firming in most lines of business, particularly in the casualty lines that had seen significant losses such as excess casualty and directors’ and officers’ liability. Other casualty lines are experiencing modest rate increase, while some lines such as workers’ compensation were experiencing softer market conditions. It is too early to tell what will be the impact on pricing conditions but it is likely to change depending on the line of business and geography.

 

 

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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.

 

 

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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		Six Months Ended						Percentage
	June 30,						Increase/		June 30,						Increase/
(Dollars in millions)	2021			2020			(Decrease)		2021			2020			(Decrease)
Gross written premiums	$	2,317.1		$	1,838.2		26.0%		$	4,450.4		$	3,813.2		16.7%
Net written premiums		1,928.4			1,501.6		28.4%			3,693.7			3,140.3		17.6%
REVENUES:
Premiums earned	$	1,766.6		$	1,539.0		14.8%		$	3,463.5		$	3,033.0		14.2%
Net investment income		248.1			35.2		NM			395.9			109.4		262.0%
Net realized capital gains (losses)		183.8			(479.4)		-138.3%			318.8			(222.5)		-243.3%
Other income (expense)		(1.9)			(5.1)		-62.7%			2.1			(9.6)		-121.9%
Total revenues		2,196.5			1,089.6		101.6%			4,180.2			2,910.2		43.6%
CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses		1,095.6			975.8		12.3%			2,449.7			2,005.3		22.2%
Commission, brokerage, taxes and fees		386.8			355.7		8.8%			736.7			678.8		8.5%
Other underwriting expenses		109.9			94.1		16.8%			219.7			195.3		12.5%
Corporate expense		7.6			3.5		116.8%			12.2			7.2		68.6%
Interest, fee and bond issue cost amortization expense		15.6			6.9		124.5%			31.1			14.4		116.0%
Total claims and expenses		1,615.5			1,436.1		12.5%			3,449.4			2,901.1		18.9%
INCOME (LOSS) BEFORE TAXES		581.0			(346.5)		NM			730.8			9.1		NM
Income tax expense (benefit)		115.3			(75.9)		NM			145.6			(37.0)		NM
NET INCOME (LOSS)	$	465.8		$	(270.6)		NM			585.3		$	46.1		NM
RATIOS:							Point Change								Point Change
Loss ratio		62.0%			63.4%		(1.4)		$	70.7%			66.1%		4.6
Commission and brokerage ratio		21.9%			23.1%		(1.2)			21.3%			22.4%		(1.1)
Other underwriting expense ratio		6.2%			6.1%		0.1			6.3%			6.4%		(0.1)
Combined ratio		90.1%			92.6%		(2.5)			98.3%			94.9%		3.4
	At			At			Percentage
	June 30,			December 31,			Increase/
(Dollars in millions)	2021			2020			(Decrease)
Balance sheet data:
Total investments and cash	$	17,460.4		$	15,910.2		9.7%
Total assets		25,507.0			23,717.1		7.5%
Loss and loss adjustment expense reserves		12,486.2			11,655.0		7.1%
Total debt		1,910.8			1,910.4		0.0%
Total liabilities		18,545.4			17,302.8		7.2%
Stockholder's equity		6,961.6			6,414.3		8.5%
(Some amounts may not reconcile due to rounding)
(NM, not meaningful)

 

 

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Revenues.

 

Premiums. Gross written premiums increased by 26.0% to $2,317.1 million for the three months ended June 30, 2021, compared to $1,838.2 million for the three months ended June 30, 2020, reflecting a $314.4 million, or 27.9%, increase in our reinsurance business and a $164.4 million, or 23.0%, 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. Gross written premiums increased by 16.7% to $4,450.4 million for the six months ended June 30, 2021, compared to $3,813.2 million for the six months ended June 30, 2020, reflecting a $426.2 million, or 17.5%, increase in our reinsurance business and a $210.9 million, or 15.3%, 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 28.4% to $1,928.4 million for the three months ended June 30, 2021, compared to $1,501.6 million for the three months ended June 30, 2020 and increased by 17.6% to $3,693.7 million for the six months ended June 30, 2021, compared to $3,140.3 million for the six months ended June 30, 2020, which is consistent with the change in gross written premiums. Premiums earned increased by 14.8% to $1,766.6 million for the three months ended June 30, 2021, compared to $1,539.0 million for the three months ended June 30, 2020 and increased by 14.2% to $3,463.5 million for the six months ended June 30, 2021, compared to $3,033.0 million for the six months ended June 30, 2020. The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

 

Net Investment Income. Net investment income increased to $248.1 million for the three months ended June 30, 2021 compared with net investment income of $35.2 million for the three months ended June 30, 2020. Net investment income increased to $395.9 million for the six months ended June 30, 2021 compared with net investment income of $109.4 million for the six months ended June 30, 2020. Net pre-tax investment income as a percentage of average invested assets was 6.1% and 1.2% for the three months ended June 30, 2021 and 2020, respectively and was 5.0% and 1.9% for the six months ended June 30, 2021 and June 30, 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. The limited partnership income primarily reflects increases in their reported net asset values. As such, until these asset values are monetized and the resultant income is distributed, they are subject to future increases or decreases in the asset value, and the results may be volatile.

 

Net Realized Capital Gains (Losses). Net realized capital gains were $183.8 million and net realized capital losses were $479.4 million for the three months ended June 30, 2021 and 2020, respectively. The net realized capital gains of $183.8 million for the three months ended June 30, 2021, were comprised of $191.4 million of gains from fair value re-measurements and $7.5 million of gains from sales of investments, partially offset by $15.1 million in net allowances for credit losses. The net realized capital losses of $479.4 million for the three months ended June 30, 2020, were comprised of $491.2 million of losses from fair value re-measurements and $7.8 million of net allowances for credit losses partially offset by $19.6 million of gains from sales of investments.

 

Net realized capital gains were $318.8 million and net realized capital losses were $222.5 million for the six months ended June 30, 2021 and 2020, respectively. The net realized capital gains of $318.8 million for the six months ended June 30, 2021 were comprised of $322.0 million of gains from fair value re-measurements and $19.0 million of gains from sales of investments, partially offset by $22.2 million in net allowances for credit losses. The net realized capital losses of $222.5 million for the six months ended June 30, 2020 were comprised of $171.5 million of losses from fair value re-measurements, $31.1 million of losses from sales of investments and $19.9 million of net allowances for credit losses.

 

 

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Other Income (Expense). We recorded other expense of $1.9 million and $5.1 million for the three months ended June 30, 2021 and 2020, respectively. We recorded other income of $2.1 million and other expense of $9.6 million for the six months ended June 30, 2021 and 2020, respectively. The change was primarily the result of fluctuations in foreign currency exchange rates.

 

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 June 30,
	Current			Ratio %/			Prior			Ratio %/			Total			Ratio %/
(Dollars in millions)	Year			Pt Change			Years			Pt Change			Incurred			Pt Change
2021
Attritional	$	1,076.7		60.9%			$	(0.5)		0.0%			$	1,076.2		60.9%
Catastrophes		35.0		2.0%				(15.6)		-0.9%				19.4		1.1%
Total	$	1,111.7		62.9%			$	(16.1)		-0.9%			$	1,095.6		62.0%
2020
Attritional	$	965.9		62.8%			$	0.2		0.0%			$	966.1		62.8%
Catastrophes		14.7		1.0%				(4.9)		-0.3%				9.8		0.6%
Total	$	980.5		63.7%			$	(4.7)		-0.3%			$	975.8		63.4%
Variance 2021/2020
Attritional	$	110.8		(1.9)	pts		$	(0.6)		-	pts		$	110.1		(1.9)	pts
Catastrophes		20.4		1.0	pts			(10.7)		(0.6)	pts			9.7		0.5	pts
Total	$	131.1		(0.9)	pts		$	(11.3)		(0.6)	pts		$	119.8		(1.4)	pts

 

	Six Months Ended June 30,
	Current			Ratio %/			Prior			Ratio %/			Total			Ratio %/
(Dollars in millions)	Year			Pt Change			Years			Pt Change			Incurred			Pt Change
2021
Attritional	$	2,155.1		62.2%			$	(1.5)		0.0%			$	2,153.6		62.2%
Catastrophes		295.5		8.5%				0.6		0.0%				296.1		8.5%
Total	$	2,450.6		70.7%			$	(0.9)		0.0%			$	2,449.7		70.7%
2020
Attritional	$	1,962.3		64.7%			$	(1.0)		0.0%			$	1,961.4		64.7%
Catastrophes		44.7		1.5%				(0.7)		0.0%				44.0		1.4%
Total	$	2,007.0		66.2%			$	(1.6)		-0.1%			$	2,005.3		66.1%
Variance 2021/2020
Attritional	$	192.7		(2.5)	pts		$	(0.5)		-	pts		$	192.2		(2.5)	pts
Catastrophes		250.9		7.0	pts			1.3		-	pts			252.1		7.1	pts
Total	$	443.6		4.5	pts		$	0.8		-	pts		$	444.4		4.6	pts
(Some amounts may not reconcile due to rounding.)

 

Incurred losses and LAE increased by 12.3% to $1,095.6 million for the three months ended June 30, 2021 compared to $975.8 million for the three months ended June 30, 2020, primarily due to an increase of $110.8 million in current year attritional losses, mainly related to the impact of the increase in premiums earned partially offset by $38.0 million of COVID-19 losses incurred in 2020 which did not recur in 2021, and an increase of $20.4 million in current year catastrophe losses. The current year catastrophe losses of $35.0 million for the three months ended June 30, 2021 related to Tropical Storm Claudette, Texas winter storms, and the Victoria Australia floods. The current year catastrophe losses of $14.7 million for the three months ended June 30, 2020 related to the U.S. civil unrest ($15.0 million) and the Nashville tornadoes ($2.8 million), partially offset by a reduction in the loss estimate for the 2020 Australia fires ($3.1 million).

 

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Incurred losses and LAE increased by 22.2% to $2,449.7 million for the six months ended June 30, 2021 compared to $2,005.3 million for the six months ended June 30, 2020, primarily due to an increase of $250.9 million in current year catastrophe losses and an increase of $192.7 million in current year attritional losses, mainly related to the impact of the increase in premiums earned partially offset by $73.7 million of COVID-19 losses incurred in 2020 which did not recur in 2021. The current year catastrophe losses of $295.5 million for the six months ended June 30, 2021 primarily related to the Texas winter storms ($263.0 million), with the remaining losses emanating from Tropical Storm Claudette, Victoria Australia floods and the 2021 Australia floods. The current year catastrophe losses of $44.7 million for the six months ended June 30, 2020 related to the U.S. civil unrest ($15.0 million), the Nashville tornadoes ($12.8 million), Australia East Coast storms ($10.0 million) and the Australia fires ($6.8 million).

 

Commission, Brokerage, Taxes and Fees. Commission, brokerage, taxes and fees increased to $386.8 million for the three months ended June 30, 2021 compared to $355.7 million for the three months ended June 30, 2020. Commission, brokerage, taxes and fees increased to $736.7 million for the six months ended June 30, 2021 compared to $678.8 million for the six months ended June 30, 2020. The increases were mainly due to the impact of the increase in premiums earned and changes in the mix of business.

 

Other Underwriting Expenses. Other underwriting expenses increased to $109.9 million for the three months ended June 30, 2021 compared to $94.1 million for the three months ended June 30, 2020. Other underwriting expenses increased to $219.7 million for the six months ended June 30, 2021 compared to $195.3 million for the six months ended June 30, 2020. These increases were mainly due to the 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 to $7.6 million from $3.5 million for the three months ended June 30, 2021 and 2020, respectively, and increased to $12.2 million from $7.2 million for the six months ended June 30, 2021 and 2020, respectively. The increases were mainly due to higher compensation costs from increased staff count.

 

Interest, Fees and Bond Issue Cost Amortization Expense. Interest, fees and other bond amortization expense was $15.6 million and $6.9 million for the three months ended June 30, 2021 and 2020, respectively. Interest, fees and other bond amortization expense was $31.1 million and $14.4 million for the six months ended June 30, 2021 and 2020, respectively. The variances in expenses were 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 2.54% as of June 30, 2021.

 

Income Tax Expense (Benefit). We had an income tax expense of $115.3 million and $145.6 million for the three and six months ended June 30, 2021, respectively. We had an income tax benefit of $75.9 million and income tax expense of $37.0 million for the three and six months ended June 30, 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 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 and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020 results primarily from higher investment income and earned premiums offset by catastrophe losses.

 

The Coronavirus Aid, Relief and Economic Security Act (“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

 

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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 $465.8 million and net loss was $270.6 million, for the three months ended June 30, 2021 and 2020 respectively. Our net income was $585.3 million and $46.1 million, for the six months ended June 30, 2021 and 2020 respectively. The changes were primarily driven by the financial component fluctuations explained above.

 

Ratios.

Our combined ratio decreased by 2.5 points to 90.1% for the three months ended June 30, 2021 compared to 92.6% for the three months ended June 30, 2020 and increased by 3.4 points to 98.3% for the six months ended June 30, 2021 compared to 94.9% for the six months ended June 30, 2020. The loss ratio component decreased by 1.4 points and increased by 4.6 points for the three and six months ended June 30, 2021, respectively, over the same period last year. The quarter over quarter decrease was mainly due to lower catastrophe losses as well as $38.0 million of COVID-19 losses incurred in 2020 which did not recur in 2021. The year over year increase was mainly due to an increase of $250.9 million in current year catastrophe losses, partially offset by $73.7 million of COVID-19 losses incurred in 2020 which did not recur in 2021. The commission and brokerage ratio component decreased to 21.9% for the three months ended June 30, 2021 compared to 23.1% for the three months ended June 30, 2020 and decreased to 21.3% for the six months ended June 30, 2021 compared to 22.4% for the six months ended June 30, 2020, reflecting changes in affiliated reinsurance agreements and changes in the mix of business. The other underwriting expense ratio remained relatively flat at 6.2% and 6.1% for the three months ended June 30, 2021 and 2020, respectively as well as 6.3% and 6.4% for the six months ended June 30, 2021 and 2020, respectively.

 

Stockholder's Equity.

Stockholder’s equity increased by $547.3 million to $6,961.6 million at June 30, 2021 from $6,414.3 million at December 31, 2020, principally as a result of $585.3 million of net income, $16.3 million of net foreign currency translation adjustments and $4.1 million of net benefit plan obligation adjustments, partially offset by $58.5 million of net unrealized depreciation on investments, net of tax.

 

Consolidated Investment Results

 

Net Investment Income.

Net investment income increased to $248.1 million for the three months ended June 30, 2021 compared to $35.2 million for the three months ended June 30, 2020. Net investment income increased to $395.9 million for the six months ended June 30, 2021 compared to $109.4 million for the six months ended June 30, 2020. The increases were primarily the result of an increase in limited partnership income and higher income from our fixed income portfolio. The limited partnership income primarily reflects increases in their reported net asset values. As such, until these asset values are monetized and the resultant income is distributed, they are subject to future increases or decreases in the asset value, and the results may be volatile.

 

 

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

 

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Dollars in millions)	2021			2020			2021			2020
Fixed maturities	$	91.9		$	74.9		$	177.0		$	149.0
Equity securities		3.4			2.0			6.3			3.6
Short-term investments and cash		0.1			0.5			0.2			2.1
Other invested assets
Limited partnerships		126.4			(40.5)			178.6			(33.5)
Dividends from preferred shares of affiliate		7.7			7.7			15.5			15.5
Other		25.9			(2.9)			31.9			(16.0)
Gross investment income before adjustments		255.4			41.7			409.5			120.7
Funds held interest income (expense)		2.7			1.0			6.2			4.2
Interest income from Parent		1.2			1.3			2.6			2.6
Gross investment income		259.3			44.0			418.3			127.5
Investment expenses		11.2			8.8			22.4			18.1
Net investment income	$	248.1		$	35.2		$	395.9		$	109.4
(Some amounts may not reconcile due to rounding.)

 

 

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Net Realized Capital Gains (Losses).

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

 

	Three Months Ended June 30,									Six Months Ended June 30,
(Dollars in millions)	2021			2020			Variance			2021			2020			Variance
Gains (losses) from sales:
Fixed maturity securities, market value
Gains	$	8.9		$	8.8		$	0.1		$	15.2		$	10.6		$	4.6
Losses		(4.7)			(6.8)			2.1			(7.1)			(29.6)			22.5
Total		4.2			2.0			2.2			8.1			(19.0)			27.1
Equity securities, fair value
Gains		2.6			18.2			(15.6)			14.9			20.8			(5.9)
Losses		(2.0)			(1.9)			(0.1)			(8.1)			(32.1)			24.0
Total		0.6			16.3			(15.7)			6.8			(11.3)			18.1
Other invested assets
Gains		4.2			1.6			2.6			5.6			4.6			1.0
Losses		(1.5)			(0.2)			(1.3)			(1.6)			(5.6)			4.0
Total		2.8			1.4			1.4			4.1			(1.0)			5.1
Short Term Investments:
Gains		-			0.1			(0.1)			-			0.2			(0.2)
Losses		-			-			-			-			-			-
Total		-			0.1			(0.1)			-			0.2			(0.2)
Total net realized gains (losses) from sales
Gains		15.7			28.7			(13.0)			35.7			36.2			(0.5)
Losses		(8.2)			(8.9)			0.7			(16.8)			(67.3)			50.5
Total		7.5			19.6			(12.1)			19.0			(31.1)			50.1
Allowances for credit losses:		(15.1)			(7.8)			(7.3)			(22.2)			(19.9)			(2.3)
Gains (losses) from fair value adjustments:
Fixed maturities, fair value		-			(0.3)			0.3			-			(1.4)			1.4
Equity securities, fair value		103.8			148.2			(44.4)			141.4			26.5			114.9
Other invested assets, fair value		87.5			(639.1)			726.6			180.6			(196.6)			377.2
Total		191.4			(491.2)			682.6			322.0			(171.5)			493.5
Total net realized gains (losses)	$	183.8		$	(479.4)		$	663.2		$	318.8		$	(222.5)		$	541.3
(Some amounts may not reconcile due to rounding.)

 

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
Annualized pre-tax yield on average cash and invested assets	6.1%		1.2%		5.0%		1.9%
Annualized after-tax yield on average cash and invested assets	4.9%		1.0%		4.0%		1.5%

 

Net Realized Capital Gains (Losses). Net realized capital gains were $183.8 million and net realized capital losses were $479.4 million for the three months ended June 30, 2021 and 2020, respectively. The net realized capital gains of $183.8 million for the three months ended June 30, 2021, were comprised of $191.4 million of gains from fair value re-measurements and $7.5 million of gains from sales of investments, partially offset by $15.1 million in net allowances for credit losses. The net realized capital losses of $479.4 million for the three months ended June 30, 2020, were comprised of $491.2 million of losses from fair value re-measurements and $7.8 million of net allowances for credit losses partially offset by $19.6 million of gains from sales of investments.

 

 

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Net realized capital gains were $318.8 million and net realized capital losses were $222.5 million for the six months ended June 30, 2021 and 2020, respectively. The net realized capital gains of $318.8 million for the six months ended June 30, 2021 were comprised of $322.0 million of gains from fair value re-measurements and $19.0 million of gains from sales of investments, partially offset by $22.2 million in net allowances for credit losses. The net realized capital losses of $222.5 million for the six months ended June 30, 2020 were comprised of $171.5 million of losses from fair value re-measurements, $31.1 million of losses from sales of investments and $19.9 million of net 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.

 

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 June 30,											Six Months Ended June 30,
(Dollars in millions)	2021			2020			Variance			% Change		2021			2020			Variance			% Change
Gross written premiums	$	1,439.3		$	1,124.9		$	314.4		27.9%		$	2,859.3		$	2,433.1		$	426.2		17.5%
Net written premiums		1,291.2			992.8			298.5		30.1%			2,500.0			2,107.0			393.1		18.7%
Premiums earned	$	1,232.2		$	1,062.8		$	169.3		15.9%		$	2,409.3		$	2,069.9		$	339.5		16.4%
Incurred losses and LAE		739.4			630.7			108.8		17.3%			1,709.8			1,313.4			396.4		30.2%
Commission and brokerage		325.0			292.3			32.7		11.2%			615.5			553.2			62.4		11.3%
Other underwriting expenses		33.0			26.6			6.4		24.1%			69.3			56.4			12.8		22.7%
Underwriting gain (loss)	$	134.7		$	113.3		$	21.4		18.9%		$	14.7		$	146.9		$	(132.1)		-90.0%
										Point Chg											Point Chg
Loss ratio		60.0%			59.4%					0.6			71.0%			63.5%					7.5
Commission and brokerage ratio		26.4%			27.5%					(1.1)			25.5%			26.7%					(1.2)
Other underwriting ratio		2.7%			2.4%					0.3			2.9%			2.7%					0.2
Combined ratio		89.1%			89.3%					(0.2)			99.4%			92.9%					6.5
(Some amounts may not reconcile due to rounding.)
(NM, not meaningful)

 

Premiums. Gross written premiums increased by 27.9% to $1,439.3 million for the three months ended June 30, 2021 from $1,124.9 million for the three months ended June 30, 2020 primarily due to increases in property pro

 

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rata business, property excess of loss business and casualty excess of loss writings. Net written premiums increased by 30.1% to $1,291.2 million for the three months ended June 30, 2021 compared to $992.8 million for the three months ended June 30, 2020, which is consistent with the change in gross written premiums. Premiums earned increased 15.9% to $1,232.2 million for the three months ended June 30, 2021 compared to $1,062.8 million for the three months ended June 30, 2020. The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

 

Gross written premiums increased by 17.5% to $2,859.3 million for the six months ended June 30, 2021 from $2,433.1 million for the six months ended June 30, 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 18.7% to $2,500.0 million for the six months ended June 30, 2021 compared to $2,107.0 million for the six months ended June 30, 2020, which is consistent with the change in gross written premiums. Premiums earned increased 16.4% to $2,409.3 million for the six months ended June 30, 2021 compared to $2,069.9 million for the six months ended June 30, 2020. The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

 

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

 

	Three Months Ended June 30,
	Current			Ratio %/			Prior			Ratio %/			Total			Ratio %/
(Dollars in millions)	Year			Pt Change			Years			Pt Change			Incurred			Pt Change
2021
Attritional	$	730.7		59.3%			$	0.5		0.0%			$	731.2		59.3%
Catastrophes		25.0		2.0%				(16.7)		-1.4%				8.3		0.7%
Total segment	$	755.7		61.3%			$	(16.2)		-1.3%			$	739.4		60.0%
2020
Attritional	$	635.4		59.8%			$	-		0.0%			$	635.4		59.8%
Catastrophes		(0.4)		0.0%				(4.4)		-0.4%				(4.7)		-0.4%
Total segment	$	635.1		59.8%			$	(4.4)		-0.4%			$	630.7		59.4%
Variance 2021/2020
Attritional	$	95.3		(0.5)	pts		$	0.5		-	pts		$	95.8		(0.5)	pts
Catastrophes		25.4		2.0	pts			(12.3)		(1.0)	pts			13.0		1.1	pts
Total segment	$	120.6		1.5	pts		$	(11.8)		(1.0)	pts		$	108.8		0.6	pts

 

 

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	Six Months Ended June 30,
	Current			Ratio %/			Prior			Ratio %/			Total			Ratio %/
(Dollars in millions)	Year			Pt Change			Years			Pt Change			Incurred			Pt Change
2021
Attritional	$	1,472.5		61.1%			$	0.5		0.0%			$	1,472.9		61.1%
Catastrophes		238.0		9.9%				(1.2)		0.0%				236.8		9.8%
Total segment	$	1,710.5		71.0%			$	(0.7)		0.0%			$	1,709.8		71.0%
2020
Attritional	$	1,290.1		62.3%			$	(0.6)		0.0%			$	1,289.4		62.3%
Catastrophes		24.2		1.2%				(0.2)		0.0%				23.9		1.2%
Total segment	$	1,314.2		63.5%			$	(0.9)		0.0%			$	1,313.4		63.5%
Variance 2021/2020
Attritional	$	182.4		(1.2)	pts		$	1.1		-	pts		$	183.5		(1.2)	pts
Catastrophes		213.9		8.7	pts			(1.0)		-	pts			212.9		8.7	pts
Total segment	$	396.2		7.5	pts		$	0.1		-	pts		$	396.4		7.5	pts
(Some amounts may not reconcile due to rounding.)

Incurred losses increased by 17.3% to $739.4 million for the three months ended June 30, 2021 compared to $630.7 million for the three months ended June 30, 2020. The rise in incurred losses was primarily due to an increase of $95.3 million in current year attritional losses, mainly related to the impact of the increase in premiums earned partially offset by $25.4 million of COVID-19 losses incurred in 2020 which did not recur in 2021, and $25.4 million on current years catastrophe losses. The $25.0 million of current year catastrophe losses for the three months ended June 30, 2021 related to Tropical Storm Claudette and the Victoria Australia floods. The ($0.4) million of current year catastrophe losses for the three months ended June 30, 2020 related to the Nashville tornadoes ($2.8 million) which was more than offset by a reduction in the loss estimate for the 2020 Australia fires.

 

Incurred losses increased by 30.2% to $1,709.8 million for the six months ended June 30, 2021 compared to $1,313.4 million for the six months ended June 30, 2020. The rise in incurred losses was primarily due to an increase of $213.9 million on current years catastrophe losses and an increase of $182.4 million in current year attritional losses, primarily related to the impact of the increase in premiums earned and partially offset by $45.4 million of COVID-19 losses incurred in 2020 which did not recur in 2021. The $238.0 million of current year catastrophe losses for the six months ended June 30, 2021 primarily related to the Texas winter storms ($205.5 million), with the remaining losses emanating from Tropical Storm Claudette, Victoria Australia floods and the 2021 Australia floods. The current year catastrophe losses of $24.2 million for the six months ended June 30, 2020 primarily related to Australia East Coast storms ($10.0 million), Nashville tornadoes ($7.3 million) and the 2020 Australia fires ($6.9 million).

 

Segment Expenses. Commission and brokerage increased to $325.0 million for the three months ended June 30, 2021 compared to $292.3 million for the three months ended June 30, 2020. Commission and brokerage increased to $615.5 million for the six months ended June 30, 2021 compared to $553.2 million for the six months ended June 30, 2020. The increases were mainly due to the impact of the increase in premiums earned and changes in the mix of business.

 

Segment other underwriting expenses increased to $33.0 million for the three months ended June 30, 2021 from $26.6 million for the three months ended June 30, 2020. Segment other underwriting expenses increased to $69.3 million for the six months ended June 30, 2021 from $56.4 million for the six months ended June 30, 2020. These were mainly due to the impact of the increase in premiums earned.

 

 

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Insurance.

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

 

	Three Months Ended June 30,											Six Months Ended June 30,
(Dollars in millions)	2021			2020			Variance			% Change		2021			2020			Variance			% Change
Gross written premiums	$	877.8		$	713.4		$	164.4		23.0%		$	1,591.0		$	1,380.1		$	210.9		15.3%
Net written premiums		637.1			508.8			128.3		25.2%			1,193.6			1,033.3			160.4		15.5%
Premiums earned	$	534.4		$	476.1		$	58.3		12.2%		$	1,054.1		$	963.1		$	91.0		9.4%
Incurred losses and LAE		356.2			345.2			11.0		3.2%			739.9			692.0			48.0		6.9%
Commission and brokerage		61.9			63.4			(1.6)		-2.5%			121.2			125.6			(4.5)		-3.6%
Other underwriting expenses		76.9			67.5			9.4		13.9%			150.4			138.9			11.5		8.3%
Underwriting gain (loss)	$	39.4		$	-		$	39.4		NM		$	42.6		$	6.6		$	36.0		NM
										Point Chg											Point Chg
Loss ratio		66.7%			72.5%					(5.8)			70.2%			71.8%					(1.6)
Commission and brokerage ratio		11.6%			13.3%					(1.7)			11.5%			13.0%					(1.5)
Other underwriting ratio		14.4%			14.2%					0.2			14.3%			14.4%					(0.1)
Combined ratio		92.6%			100.0%					(7.3)			96.0%			99.3%					(3.2)
(Some amounts may not reconcile due to rounding.)
(NM, not meaningful)

 

Premiums. Gross written premiums increased by 23.0% to $877.8 million for the three months ended June 30, 2021 compared to $713.4 million for the three months ended June 30, 2020. The rise in gross written premiums was primarily due to increases in specialty casualty business, property business and professional liability business. Net written premiums increased by 25.2% to $637.1 million for the three months ended June 30, 2021 compared to $508.8 million for the three months ended June 30, 2020, which is consistent with the change in gross written premiums. Premiums earned increased 12.2% to $534.4 million for the three months ended June 30, 2021 compared to $476.1 million for the three months ended June 30, 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.

 

Gross written premiums increased by 15.3% to $1,591.0 million for the six months ended June 30, 2021 compared to $1,380.1 million for the six months ended June 30, 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 15.5% to $1,193.6 million for the six months ended June 30, 2021 compared to $1,033.3 million for the six months ended June 30, 2020, which is consistent with the change in gross written premiums. Premiums earned increased 9.4% to $1,054.1 million for the six months ended June 30, 2021 compared to $963.1 million for the six months ended June 30, 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.

 

 

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

 

	Three Months Ended June 30,
	Current			Ratio %/			Prior			Ratio %/			Total			Ratio %/
(Dollars in millions)	Year			Pt Change			Years			Pt Change			Incurred			Pt Change
2021
Attritional	$	346.0		64.7%			$	(1.0)		-0.2%			$	345.0		64.6%
Catastrophes		10.0		1.9%				1.1		0.2%				11.1		2.1%
Total segment	$	356.0		66.6%			$	0.2		0.0%			$	356.2		66.7%
2020
Attritional	$	330.5		69.4%			$	0.2		0.0%			$	330.7		69.5%
Catastrophes		15.0		3.2%				(0.5)		-0.1%				14.5		3.0%
Total segment	$	345.5		72.6%			$	(0.3)		-0.1%			$	345.2		72.5%
Variance 2021/2020
Attritional	$	15.5		(4.7)	pts		$	(1.2)		(0.2)	pts		$	14.4		(4.9)	pts
Catastrophes		(5.0)		(1.3)	pts			1.6		0.3	pts			(3.4)		(0.9)	pts
Total segment	$	10.5		(6.0)	pts		$	0.5		0.1	pts		$	11.0		(5.8)	pts

 

	Six Months Ended June 30,
	Current			Ratio %/			Prior			Ratio %/			Total			Ratio %/
(Dollars in millions)	Year			Pt Change			Years			Pt Change			Incurred			Pt Change
2021
Attritional	$	682.6		64.8%			$	(2.0)		-0.2%			$	680.6		64.6%
Catastrophes		57.5		5.5%				1.8		0.2%				59.3		5.6%
Total segment	$	740.1		70.2%			$	(0.2)		0.0%			$	739.9		70.2%
2020
Attritional	$	672.3		69.8%			$	(0.3)		0.0%			$	671.9		69.8%
Catastrophes		20.5		2.1%				(0.5)		0.0%				20.0		2.1%
Total segment	$	692.8		71.9%			$	(0.8)		-0.1%			$	692.0		71.8%
Variance 2021/2020
Attritional	$	10.3		(5.0)	pts		$	(1.6)		(0.2)	pts		$	8.7		(5.2)	pts
Catastrophes		37.0		3.4	pts			2.3		0.2	pts			39.3		3.5	pts
Total segment	$	47.3		(1.6)	pts		$	0.6		-	pts		$	48.0		(1.7)	pts
(Some amounts may not reconcile due to rounding.)

 

Incurred losses and LAE increased by 3.2% to $356.2 million for the three months ended June 30, 2021 compared to $345.2 million for the three months ended June 30, 2020, mainly due to an increase of $15.5 million in current year attritional losses primarily related to the impact of the increase in premiums earned partially offset by $12.5 million of COVID-19 losses incurred in 2020 which did not recur in 2021. The $10.0 million of current year catastrophe losses for the three months ended June 30, 2021, related to Texas winter storms ($10.0 million). The $15.0 million of current year catastrophe losses for the three months ended June 30, 2020, related to the U.S. civil unrest ($15.0 million).

 

Incurred losses and LAE increased by 6.9% to $739.9 million for the six months ended June 30, 2021 compared to $692.0 million for the six months ended June 30, 2020, mainly due to an increase of $37.0 million in current year catastrophe losses and an increase of $10.3 million in current year attritional losses. The rise in current year attritional losses was primarily due to the impact of the increase in premiums earned and partially offset by $28.2 million of COVID-19 losses incurred in 2020 which did not recur in 2021. The $57.5 million of current year catastrophe losses for the six months ended June 30, 2021, related to Texas winter storms ($57.5 million). The $20.5 million of current year catastrophe losses for the six months ended June 30, 2020, related to the U.S. civil unrest ($15.0 million) and the Nashville tornadoes ($5.5 million).

 

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Segment Expenses. Commission and brokerage decreased slightly to $61.9 million for the three months ended June 30, 2021 compared to $63.4 million for the three months ended June 30, 2020. Commission and brokerage decreased slightly to $121.2 million for the six months ended June 30, 2021 compared to $125.6 million for the six months ended June 30, 2020. The decreases were mainly due to the changes in the mix of business and changes to affiliated reinsurance agreements.

 

Segment other underwriting expenses increased to $76.9 million for the three months ended June 30, 2021 compared to $67.5 million for the three months ended June 30, 2020. Segment other underwriting expenses increased to $150.4 million for the six months ended June 30, 2021 compared to $138.9 million for the six months ended June 30, 2020. The increases were 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.

 

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.

 

 

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Interest Rate Risk. Our $17.5 billion investment portfolio, at June 30, 2021, is principally comprised of fixed maturity securities, which are generally subject to interest rate risk and some foreign currency exchange rate risk, and some equity securities, which are subject to price fluctuations and some foreign exchange rate risk. The overall economic impact of the foreign exchange risks on the investment portfolio is partially mitigated by changes in the dollar value of foreign currency denominated liabilities and their associated income statement impact.

 

Interest rate risk is the potential change in value of the fixed maturity securities portfolio, including short-term investments, from a change in market interest rates. In a declining interest rate environment, it includes prepayment risk on the $1,641.5 million of mortgage-backed securities in the $11,553.8 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 $503.5 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 June 30, 2021
(Dollars in millions)	-200			-100			-			100			200
Total Market/Fair Value	$	12,825.3		$	12,441.3		$	12,057.3		$	11,673.3		$	11,289.2
Market/Fair Value Change from Base (%)		6.4%			3.2%			0.0%			-3.2%			-6.4%
Change in Unrealized Appreciation
After-tax from Base ($)	$	606.8		$	303.4		$	-		$	(303.4)		$	(606.8)

 

We had $12,486.2 million and $11,654.9 million of gross reserves for losses and LAE as of June 30, 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.

 

 

 

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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 June 30, 2021
(Dollars in millions)	-20%			-10%			0%			10%			20%
Fair/Market Value of the Equity Portfolio	$	1,159.7		$	1,304.7		$	1,449.7		$	1,594.6		$	1,739.6
After-tax Change in Fair/Market Value		(229.0)			(114.5)			-			114.5			229.0

 

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

 

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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 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.

 

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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
104	Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

 

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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: August 12, 2021

 

 

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