BERKLEY W R CORP – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
W. R. Berkley Corporation is an insurance holding company that is among the largest commercial lines writers inthe United States and operates worldwide in two segments of the property and casualty business: Insurance and Reinsurance & Monoline Excess. Our decentralized structure provides us with the flexibility to respond quickly and efficiently to local or specific market conditions and to pursue specialty business niches. It also allows us to be closer to our customers in order to better understand their individual needs and risk characteristics. While providing our business units with certain operating autonomy, our structure allows us to capitalize on the benefits of economies of scale through centralized capital, investment, reinsurance, enterprise risk management, and actuarial, financial and corporate legal staff support. The Company's primary sources of revenues and earnings are its insurance operations and its investments. An important part of our strategy is to form new operating units to capitalize on various business opportunities. Over the years, the Company has formed numerous operating units that are focused on important parts of the economy in theU.S. , including healthcare, cyber security, energy and agriculture, and on growing international markets, including theAsia-Pacific region ,South America andMexico . The profitability of the Company's insurance business is affected primarily by the adequacy of premium rates. The ultimate adequacy of premium rates is not known with certainty at the time an insurance policy is issued because premiums are determined before claims are reported. The ultimate adequacy of premium rates is affected mainly by the severity and frequency of claims, which are influenced by many factors, including natural and other disasters, regulatory measures and court decisions that define and change the extent of coverage and the effects of economic inflation on the amount of compensation for injuries or losses. General insurance prices are also influenced by available insurance capacity, i.e., the level of capital employed in the industry, and the industry's willingness to deploy that capital. The Company's profitability is also affected by its investment income and investment gains. The Company's invested assets are invested principally in fixed maturity securities. The return on fixed maturity securities is affected primarily by general interest rates, as well as the credit quality and duration of the securities. The Company also invests in equity securities, merger arbitrage securities, investment funds, private equity, loans and real estate related assets. The Company's investments in investment funds and its other alternative investments have experienced, and the Company expects to continue to experience, greater fluctuations in investment income. The Company's share of the earnings or losses from investment funds is generally reported on a one-quarter lag in order to facilitate the timely completion of the Company's consolidated financial statements. OnMarch 7, 2022 , the Company sold a real estate investment consisting of an office building located inLondon for £718 million. The Company realized a pretax gain of$317 million in the first quarter of 2022, before transaction expenses and the impact of foreign currency, including the reversal of the currency translation adjustment. The gain was$251 million after such adjustments. The COVID-19 pandemic, including the related impact on theU.S. and global economies, continued to affect our results of operations. At the same time, COVID-19 has led to reduced loss frequency in certain lines of business (which partially returned to pre-pandemic levels as many economies and legal systems have reopened). The ultimate impact of COVID-19 on the economy and the Company's results of operations, financial position and liquidity is not within the Company's control and remains unclear due to, among other factors, its ongoing impact and uncertainty in connection with its claims, reserves and reinsurance recoverables. Critical Accounting Estimates The following presents a discussion of accounting policies and estimates relating to reserves for losses and loss expenses, assumed premiums and allowance for expected credit losses on investments. Management believes these policies and estimates are the most critical to its operations and require the most difficult, subjective and complex judgments. Reserves for Losses and Loss Expenses. To recognize liabilities for unpaid losses, either known or unknown, insurers establish reserves, which is a balance sheet account representing estimates of future amounts needed to pay claims and related expenses with respect to insured events which have occurred. Estimates and assumptions relating to reserves for losses and loss expenses are based on complex and subjective judgments, often including the interplay of specific uncertainties with related accounting and actuarial measurements. Such estimates are also susceptible to change as significant periods of time may 28 -------------------------------------------------------------------------------- elapse between the occurrence of an insured loss, the report of the loss to the insurer, the ultimate determination of the cost of the loss and the insurer's payment of that loss. In general, when a claim is reported, claims personnel establish a "case reserve" for the estimated amount of the ultimate payment based upon known information about the claim at that time. The estimate represents an informed judgment based on general reserving practices and reflects the experience and knowledge of the claims personnel regarding the nature and value of the specific type of claim. Reserves are also established on an aggregate basis to provide for losses incurred but not reported ("IBNR") to the insurer, potential inadequacy of case reserves and the estimated expenses of settling claims, including legal and other fees and general expenses of administrating the claims adjustment process. Reserves are established based upon the then current legal interpretation of coverage provided. In examining reserve adequacy, several factors are considered in estimating the ultimate economic value of losses. These factors include, among other things, historical data, legal developments, changes in social attitudes and economic conditions, including the effects of inflation. The actuarial process relies on the basic assumption that past experience, adjusted judgmentally for the effects of current developments and anticipated trends, is an appropriate basis for predicting future outcomes. Reserve amounts are based on management's informed estimates and judgments using currently available data. As additional experience and other data become available and are reviewed, these estimates and judgments may be revised. This may result in reserve increases or decreases that would be reflected in our results in periods in which such estimates and assumptions are changed. Reserves do not represent an exact calculation of liability. Rather, reserves represent an estimate of what management expects the ultimate settlement and claim administration will cost. While the methods for establishing reserves are well tested over time, some of the major assumptions about anticipated loss emergence patterns are subject to uncertainty. These estimates, which generally involve actuarial projections, are based on management's assessment of facts and circumstances then known, as well as estimates of trends in claims severity and frequency, judicial theories of liability and other factors, including the actions of third parties which are beyond the Company's control. These variables are affected by external and internal events, such as inflation and economic volatility, judicial and litigation trends, reinsurance coverage, legislative changes and claim handling and reserving practices, which make it more difficult to accurately predict claim costs. The inherent uncertainties of estimating reserves are greater for certain types of liabilities where long periods of time elapse before a definitive determination of liability is made. Because setting reserves is inherently uncertain, the Company cannot provide assurance that its current reserves will prove adequate in light of subsequent events. Loss reserves included in the Company's financial statements represent management's best estimates based upon an actuarially derived point estimate and other considerations. The Company uses a variety of actuarial techniques and methods to derive an actuarial point estimate for each operating unit. These methods include paid loss development, incurred loss development, paid and incurred Bornhuetter-Ferguson methods and frequency and severity methods. In circumstances where one actuarial method is considered more credible than the others, that method is used to set the point estimate. For example, the paid loss and incurred loss development methods rely on historical paid and incurred loss data. For new lines of business, where there is insufficient history of paid and incurred claims data, or in circumstances where there have been significant changes in claim practices, the paid and incurred loss development methods would be less credible than other actuarial methods. The actuarial point estimate may also be based on a judgmental weighting of estimates produced from each of the methods considered. Industry loss experience is used to supplement the Company's own data in selecting "tail factors" and in areas where the Company's own data is limited. The actuarial data is analyzed by line of business, coverage and accident or policy year, as appropriate, for each operating unit. The establishment of the actuarially derived loss reserve point estimate also includes consideration of qualitative factors that may affect the ultimate losses. These qualitative considerations include, among others, the impact of re-underwriting initiatives, changes in the mix of business, changes in distribution sources and changes in policy terms and conditions. Examples of changes in terms and conditions that can have a significant impact on reserve levels are the use of aggregate policy limits, the expansion of coverage exclusions, whether or not defense costs are within policy limits, and changes in deductibles and attachment points. The key assumptions used to arrive at the best estimate of loss reserves are the expected loss ratios, rate of loss cost inflation, and reported and paid loss emergence patterns. Expected loss ratios represent management's expectation of losses at the time the business is written, before any actual claims experience has emerged. This expectation is a significant determinant of the estimate of loss reserves for recently written business where there is little paid or incurred loss data to consider. Expected loss ratios are generally derived from historical loss ratios adjusted for the impact of rate changes, loss cost trends and known changes in the type of risks underwritten. Expected loss ratios are estimated for each key line of business within each operating unit. Expected loss cost inflation is particularly important for the long-tail lines, such as excess casualty, and claims with a high medical component, such as workers' compensation. Reported and paid loss emergence patterns are used to project current 29 -------------------------------------------------------------------------------- reported or paid loss amounts to their ultimate settlement value. Loss development factors are based on the historical emergence patterns of paid and incurred losses, and are derived from the Company's own experience and industry data. The paid loss emergence pattern is also significant to excess and assumed workers' compensation reserves because those reserves are discounted to their estimated present value based upon such estimated payout patterns. Management believes the estimates and assumptions it makes in the reserving process provide the best estimate of the ultimate cost of settling claims and related expenses with respect to insured events which have occurred; however, different assumptions and variables could lead to significantly different reserve estimates. Loss frequency and severity are measures of loss activity that are considered in determining the key assumptions described in our discussion of loss and loss expense reserves, including expected loss ratios, rate of loss cost inflation and reported and paid loss emergence patterns. Loss frequency is a measure of the number of claims per unit of insured exposure, and loss severity is a measure of the average size of claims. Factors affecting loss frequency include the effectiveness of loss controls and safety programs and changes in economic activity or weather patterns. Factors affecting loss severity include changes in policy limits, retentions, rate of inflation and judicial interpretations. Another factor affecting estimates of loss frequency and severity is the loss reporting lag, which is the period of time between the occurrence of a loss and the date the loss is reported to the Company. The length of the loss reporting lag affects our ability to accurately predict loss frequency (loss frequencies are more predictable for lines with short reporting lags) as well as the amount of reserves needed for incurred but not reported losses (less IBNR is required for lines with short reporting lags). As a result, loss reserves for lines with short reporting lags are likely to have less variation from initial loss estimates. For lines with short reporting lags, which include commercial automobile, primary workers' compensation, other liability (claims-made) and property business, the key assumption is the loss emergence pattern used to project ultimate loss estimates from known losses paid or reported to date. For lines of business with long reporting lags, which include other liability (occurrence), products liability, excess workers' compensation and liability reinsurance, the key assumption is the expected loss ratio since there is often little paid or incurred loss data to consider. Historically, the Company has experienced less variation from its initial loss estimates for lines of businesses with short reporting lags than for lines of business with long reporting lags. The key assumptions used in calculating the most recent estimate of the loss reserves are reviewed each quarter and adjusted, to the extent necessary, to reflect the latest reported loss data, current trends and other factors observed. If the actual level of loss frequency and severity are higher or lower than expected, the ultimate losses will be different than management's estimate. The following table reflects the impact of changes (which could be favorable or unfavorable) in frequency and severity, relative to our assumptions, on our loss estimate for claims occurring in 2022: (In thousands) Frequency (+/-) Severity (+/-) 1% 5% 10% 1%$ 116,072 $ 349,370 $ 640,993 5% 349,370 591,908 895,081 10% 640,993 895,081 1,212,690 Our net reserves for losses and loss expenses of approximately$14.6 billion as ofMarch 31, 2023 relate to multiple accident years. Therefore, the impact of changes in frequency or severity for more than one accident year could be higher or lower than the amounts reflected above. The impact of such changes would likely be manifested gradually over the course of many years, as the magnitude of the changes became evident. Approximately$3.0 billion , or 21%, of the Company's net loss reserves as ofMarch 31, 2023 relate to the Reinsurance & Monoline Excess segment. There is a higher degree of uncertainty and greater variability regarding estimates of excess workers' compensation and assumed reinsurance loss reserves. In the case of excess workers' compensation, our policies generally attach at$1 million or higher. The claims which reach our layer therefore tend to involve the most serious injuries and many remain open for the lifetime of the claimant, which extends the claim settlement tail. These claims also occur less frequently but tend to be larger than primary claims, which increases claim variability. In the case of assumed reinsurance our loss reserve estimates are based, in part, upon information received from ceding companies. If information received from ceding companies is not timely or correct, the Company's estimate of ultimate losses may not be accurate. Furthermore, due to delayed reporting of claim information by ceding companies, the claim settlement tail for assumed reinsurance is also extended. Management considers the impact of delayed reporting and the extended tail in its selection of loss development factors for these lines of business. Information received from ceding companies is used to set initial expected loss ratios, to establish case reserves and to estimate reserves for incurred but not reported losses on assumed reinsurance business. This information, which is generally provided through reinsurance intermediaries, is gathered through the underwriting process and from periodic claim reports and other correspondence with ceding companies. The Company performs underwriting and claim audits of selected ceding 30 -------------------------------------------------------------------------------- companies to determine the accuracy and completeness of information provided to the Company. The information received from the ceding companies is supplemented by the Company's own loss development experience with similar lines of business as well as industry loss trends and loss development benchmarks. Following is a summary of the Company's reserves for losses and loss expenses by business segment: March 31, December 31, (In thousands) 2023 2022 Insurance$ 11,524,946 $ 11,233,924 Reinsurance & Monoline Excess 3,047,087
3,014,955
Net reserves for losses and loss expenses 14,572,033 14,248,879
Ceded reserves for losses and loss expenses 2,859,602 2,762,344
Gross reserves for losses and loss expenses
Following is a summary of the Company's net reserves for losses and loss
expenses by major line of business:
Reported Case Incurred But Total (In thousands) Reserves Not ReportedMarch 31, 2023 Other liability$ 1,819,236 $ 4,009,866 $ 5,829,102 Workers' compensation (1) 1,022,327 878,769 1,901,096 Professional liability 495,427 1,326,097 1,821,524 Commercial automobile 624,234 561,947 1,186,181 Short-tail lines (2) 391,540 395,503 787,043Total Insurance 4,352,764 7,172,182 11,524,946
Reinsurance & Monoline Excess (1) (3) 1,531,257 1,515,830
3,047,087 Total$ 5,884,021 $ 8,688,012 $ 14,572,033 December 31, 2022 Other liability$ 1,808,700 $ 3,826,444 $ 5,635,144 Workers' compensation (1) 1,023,961 899,215 1,923,176 Professional liability 501,572 1,243,604 1,745,176 Commercial automobile 629,149 528,398 1,157,547 Short-tail lines (2) 403,974 368,907 772,881Total Insurance 4,367,356 6,866,568 11,233,924
Reinsurance & Monoline Excess (1) (3) 1,551,687 1,463,268
3,014,955 Total$ 5,919,043 $ 8,329,836 $ 14,248,879 ___________ (1) Reserves for workers' compensation and Reinsurance & Monoline Excess are net of an aggregate net discount of$411 million and$416 million as ofMarch 31, 2023 andDecember 31, 2022 , respectively.
(2) Short-tail lines include commercial multi-peril (non-liability), inland
marine, accident and health, fidelity and surety, boiler and machinery and other
lines.
(3) Reinsurance & Monoline Excess includes property and casualty reinsurance, as
well as operations that solely retain risk on an excess basis.
The Company evaluates reserves for losses and loss adjustment expenses on a quarterly basis. Changes in estimates of prior year losses are reported when such changes are made. The changes in prior year loss reserve estimates are generally the result of ongoing analysis of recent loss development trends. Original estimates are increased or decreased as additional information becomes known regarding individual claims and aggregate claim trends. Certain of the Company's insurance and reinsurance contracts are retrospectively rated, whereby the Company collects more or less premiums based on the level of loss activity. For those contracts, changes in loss and loss adjustment expenses for prior years may be fully or partially offset by additional or return premiums. 31 -------------------------------------------------------------------------------- Net prior year development (i.e., the sum of prior year reserve changes and prior year earned premiums changes) for the three months endedMarch 31, 2023 and 2022 are as follows: (In thousands) 2023 2022
Increase in prior year loss reserves$ (28,205)
Increase in prior year earned premiums 4,313
4,407
Net (unfavorable) favorable prior year development
The COVID-19 global pandemic has impacted, and may further impact, the Company's results through its effect on claim frequency and severity. Loss cost trends have been impacted and may be further impacted by COVID-19-related claims in certain lines of business. Losses incurred from COVID-19-related claims have been offset, to a certain extent, by lower claim frequency in certain lines of our businesses; however, as the economy and legal systems have reopened, the benefit of lower claim frequency has partially abated. The ultimate net impact of COVID-19 on the Company remains uncertain. New variants of the COVID-19 virus continue to create risks with respect to loss costs and the potential for renewed impact of the other effects of COVID-19 associated with economic conditions, inflation, and social distancing and work from home rules. Most of the COVID-19-related claims reported to the Company to date involve certain short-tailed lines of business, including contingency and event cancellation, business interruption, and film production delay. The Company has also received COVID-19-related claims for longer-tailed casualty lines of business such as workers' compensation and other liability; however, the estimated incurred loss impact for these reported claims are not material at this time. Given the continuing uncertainty regarding the pandemic's pervasiveness, the future impact that the pandemic may have on claim frequency and severity remains uncertain at this time. The Company has estimated the potential COVID-19 impact to its contingency and event cancellation, workers' compensation, and other lines of business under a number of possible scenarios; however, due to COVID-19's continued evolving impact, there remains uncertainty around the Company's COVID-19 reserves. In addition, should the pandemic continue or worsen as a result of new COVID-19 variants or otherwise, governments in the jurisdictions where we operate may impose restrictions, including lockdowns, as well as renew their efforts to expand policy coverage terms beyond the policy's intended coverage. Accordingly, losses arising from these actions, and the other factors described above, could exceed the Company's reserves established for those related policies. As ofMarch 31, 2023 , the Company had recognized losses for COVID-19-related claims activity, net of reinsurance, of approximately$344 million , of which$291 million relates to the Insurance segment and$53 million relates to the Reinsurance & Monoline Excess segment. Such$344 million of COVID-19-related losses included$339 million of reported losses and$5 million of IBNR. For the three months endedMarch 31, 2023 , the Company recognized current accident year losses for COVID-19-related claims activity, net of reinsurance, of approximately$43 thousand , all of which relates to the Insurance segment. During the three months endedMarch 31, 2023 , adverse prior year development (net of additional and return premiums) of$24 million included$17 million for the Insurance segment and$7 million for the Reinsurance & Monoline Excess segment. This overall adverse development for both segments was primarily attributed to property catastrophe losses related to 2022 events which were still being adjusted and settled during the first quarter of 2023. In particular, losses related toU.S. winter storms which occurred during the month of December were a significant driver of the development, as information gathering and evaluation of many of these losses were still ongoing into the new year. In addition to the property prior year adverse development discussed above, during the first quarter of 2023, the Insurance segment experienced adverse prior year development on casualty lines for the 2016 through 2019 accident years, which was offset by favorable prior year development on casualty lines for the 2022 accident year. The adverse development on the 2016 through 2019 accident years was concentrated in the other liability line of business, and to a lesser degree, professional liability, including medical professional. The development, which particularly impacted business attaching excess of primary policy limits, was driven by a larger than expected number of large losses reported. The Company believes social inflation is contributing to an increase in the frequency of large losses for these accident years. Social inflation can include higher settlement demands from plaintiffs, use of tactics such as litigation funding by the plaintiffs' bar, negative public sentiment towards large businesses and corporations, and erosion of tort reforms, among others. The favorable prior year development on casualty lines for the 2022 accident year in the Insurance segment was concentrated in the other liability, professional liability, and workers' compensation lines of business. Due to uncertainty regarding incurred loss frequency and severity in light of ongoing social inflation and the emergence from the COVID-19 pandemic, the Company set its initial loss ratios for the 2022 accident year prudently, and largely maintained these estimates through the end of 2022. The reported loss experience to date for these lines of business for the 2022 accident year has been 32 --------------------------------------------------------------------------------
significantly better than was expected, and the Company has begun to react to
this favorable emergence in the first quarter of 2023 for these lines.
During the three months endedMarch 31, 2022 , favorable prior year development (net of additional and return premiums) of$1 million included$6 million of favorable development for the Insurance segment, largely offset by$5 million of adverse development for the Reinsurance & Monoline Excess segment. The overall favorable development for the Insurance segment was primarily attributable to favorable development on the 2021 accident year, largely offset by adverse development on the 2015 through 2019 accident years. The favorable development on the 2021 accident year was concentrated in the commercial auto liability, other liability and accident and health (employer stop loss) lines of business. The Company continued to experience lower reported claim frequency in commercial auto and other liability in 2021 relative to historical averages, and lower reported incurred losses relative to our expectations. These trends began in 2020, and were likely caused by the impacts of the COVID-19 pandemic, including, for example, lockdowns, reduced driving/traffic, significant work from home, court closures, and similar reduced activities and travel. While reported claim frequency in these lines increased in 2021 relative to 2020, it remained below the historical levels pre- the start of the COVID-19 pandemic. Due to the ongoing uncertainty regarding the ultimate impacts of the COVID-19 pandemic on accident year 2021 incurred losses, the Company remains cautious in factoring in these trends in setting its initial loss ratio picks for this year. As accident year 2021 has begun to mature, we have recognized some of the favorable reported experience in our ultimate loss picks made as ofMarch 31, 2022 . The adverse development on the 2015 through 2019 accident years is concentrated in the other liability line of business, and to a lesser degree professional liability and commercial auto liability. The development is driven by a larger than expected number of large losses reported. The large losses particularly impacted the excess and surplus lines casualty classes of business. The overall adverse development for the Reinsurance & Monoline Excess segment was driven mainly by adverse development in the non-proportional reinsurance assumed liability and professional liability lines of business, largely offset by favorable development in excess workers' compensation. Both the adverse and favorable development was spread across many prior accident years. The adverse development was associated primarily with ourU.S. assumed reinsurance business, and related to accounts insuring construction projects and professional liability exposures. The favorable excess workers' compensation development was driven by continued lower claim frequency and reported losses relative to our expectations and to favorable claim settlements. Reserve Discount. The Company discounts its liabilities for certain workers' compensation reserves. The amount of workers' compensation reserves that were discounted was$1,448 million and$1,464 million atMarch 31, 2023 andDecember 31, 2022 , respectively. The aggregate net discount for those reserves, after reflecting the effects of ceded reinsurance, was$411 million and$416 million atMarch 31, 2023 andDecember 31, 2022 , respectively. AtMarch 31, 2023 , discount rates by year ranged from 0.7% to 6.5%, with a weighted average discount rate of 3.4%. Substantially all of the workers' compensation discount (97% of total discounted reserves atMarch 31, 2023 ) relates to excess workers' compensation reserves. In order to properly match loss expenses with income earned on investment securities supporting the liabilities, reserves for excess workers' compensation business are discounted using risk-free discount rates determined by reference to theU.S. Treasury yield curve. These rates are determined annually based on the weighted average rate for the period. Once established, no adjustments are made to the discount rate for that period, and any increases or decreases in loss reserves in subsequent years are discounted at the same rate, without regard to when any such adjustments are recognized. The expected loss and loss expense payout patterns subject to discounting are derived from the Company's loss payout experience. The Company also discounts reserves for certain other long-duration workers' compensation reserves (representing approximately 3% of total discounted reserves atMarch 31, 2023 ), including reserves for quota share reinsurance and reserves related to losses regarding occupational lung disease. These reserves are discounted at statutory rates permitted by theDepartment of Insurance of the State of Delaware . Assumed Reinsurance Premiums. The Company estimates the amount of assumed reinsurance premiums that it will receive under treaty reinsurance agreements at the inception of the contracts. These premium estimates are revised as the actual amount of assumed premiums is reported to the Company by the ceding companies. As estimates of assumed premiums are made or revised, the related amount of earned premiums, commissions and incurred losses associated with those premiums are recorded. Estimated assumed premiums receivable were approximately$61 million atMarch 31, 2023 and$60 million atDecember 31, 2022 . The assumed premium estimates are based upon terms set forth in reinsurance agreements, information received from ceding companies during the underwriting and negotiation of agreements, reports received from ceding companies and discussions and correspondence with reinsurance intermediaries. The Company also considers its own view of market conditions, economic trends and experience with similar lines of business. These premium estimates represent management's best estimate of the ultimate amount of premiums to be received under its assumed reinsurance agreements. 33 --------------------------------------------------------------------------------
Allowance for Expected Credit Losses on Investments.
Fixed Maturity Securities - For fixed maturity securities in an unrealized loss position where the Company intends to sell, or it is more likely than not that it will be required to sell the security before recovery in value, the amortized cost basis is written down to fair value through net investment gains (losses). For fixed maturity securities in an unrealized loss position where the Company does not intend to sell, or it is more likely than not that it will not be required to sell the security before recovery in value, the Company evaluates whether the decline in fair value has resulted from credit losses or all other factors (non-credit factors). In making this assessment, the Company considers the extent to which fair value is less than amortized cost, changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, an allowance for expected credit losses is recorded for the credit loss through net investment gains (losses), limited by the amount that the fair value is less than the amortized cost basis. The allowance is adjusted for any change in expected credit losses and subsequent recoveries through net investment gains (losses). The impairment related to non-credit factors is recognized in other comprehensive income (loss). The Company's credit assessment of allowance for expected credit losses uses a third party model for available for sale and held to maturity securities, as well as loans receivable. The allowance for expected credit losses is generally based on the performance of the underlying collateral under various economic and default scenarios that involve subjective judgments and estimates by management. Modeling these securities involves various factors, such as projected default rates, the nature and realizable value of the collateral, if any, the ability of the issuer to make scheduled payments, historical performance and other relevant economic and performance factors. A discounted cash flow analysis is used to ascertain the amount of the allowance for expected credit losses, if any. In general, the model reverts to the rating-level long-term average marginal default rates based on 10 years of historical data, beyond the forecast period. For other inputs, the model in most cases reverts to the baseline long-term assumptions linearly over 5 years beyond the forecast period. The long-term assumptions are based on the historical averages. The Company classifies its fixed maturity securities by credit rating, primarily based on ratings assigned by credit rating agencies. For purposes of classifying securities with different ratings, the Company uses the average of the credit ratings assigned, unless in limited situations the Company's own analysis indicates an internal rating is more appropriate. Securities that are not rated by a rating agency are evaluated and classified by the Company on a case-by-case basis. A summary of the Company's non-investment grade fixed maturity securities that were in an unrealized loss position atMarch 31, 2023 is presented in the table below: Number of Aggregate ($ in thousands) Securities Fair Value Gross Unrealized Loss Foreign government 33$ 105,347 $ 64,516 Corporate 16 45,507 3,789 State and municipal 1 12,066 2,936 Mortgage-backed 14 4,202 199 Asset-backed 1 8 8 Total 65$ 167,130 $ 71,448 As ofMarch 31, 2023 , the Company has recorded an allowance for expected credit losses on fixed maturity securities of$37 million . The Company has evaluated the remaining fixed maturity securities in an unrealized loss position and believes the unrealized losses are due primarily to temporary market and sector-related factors rather than to issuer-specific factors. None of these securities are delinquent or in default under financial covenants. Based on its assessment of these issuers, the Company expects them to continue to meet their contractual payment obligations as they become due. Loans Receivable - For loans receivable, the Company estimates an allowance for expected credit losses based on relevant information about past events, including historical loss experience, current conditions and forecasts that affect the expected collectability of the amortized cost of the financial asset. The allowance for expected credit losses is presented as a reduction to amortized cost of the financial asset in the consolidated balance sheet and changes to the estimate for expected credit losses are recognized through net investment gains (losses). Loans receivable are reported net of an allowance for expected credit losses of$2 million as of bothMarch 31, 2023 andDecember 31, 2022 , respectively.
Fair Value Measurements. The Company's fixed maturity available for sale
securities, equity securities, and its arbitrage trading account securities are
carried at fair value. Fair value is defined as "the price that would be
received to sell an
34 -------------------------------------------------------------------------------- asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date." The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for similar assets in active markets. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs may only be used to measure fair value to the extent that observable inputs are not available. The fair value of the vast majority of the Company's portfolio is based on observable data (other than quoted prices) and, accordingly, is classified as Level 2. In classifying particular financial securities in the fair value hierarchy, the Company uses its judgment to determine whether the market for a security is active and whether significant pricing inputs are observable. The Company determines the existence of an active market by assessing whether transactions occur with sufficient frequency and volume to provide reliable pricing information. The Company determines whether inputs are observable based on the use of such information by pricing services and external investment managers, the uninterrupted availability of such inputs, the need to make significant adjustments to such inputs and the volatility of such inputs over time. If the market for a security is determined to be inactive or if significant inputs used to price a security are determined to be unobservable, the security is categorized in Level 3 of the fair value hierarchy. Because many fixed maturity securities do not trade on a daily basis, the Company utilizes pricing models and processes which may include benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. Market inputs used to evaluate securities include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Quoted prices are often unavailable for recently issued securities that are infrequently traded or securities that are only traded in private transactions. For publicly traded securities for which quoted prices are unavailable, the Company determines fair value based on independent broker quotations and other observable market data. For securities traded only in private negotiations, the Company determines fair value based primarily on the cost of such securities, which is adjusted to reflect prices of recent placements of securities of the same issuer, financial data, projections and business developments of the issuer and other relevant information.
The following is a summary of pricing sources for the Company's fixed maturity
securities available for sale as of
Carrying Percent ($ in thousands) Value of Total
Pricing source:
Independent pricing services
Syndicate manager
67,780 0.4 Directly by the Company based on: Observable data 416,401 2.3 Total$ 18,039,347 100.0 % Independent pricing services - Substantially all of the Company's fixed maturity securities available for sale were priced by independent pricing services (generally oneU.S. pricing service plus additional pricing services with respect to a limited number of foreign securities held by the Company). The prices provided by the independent pricing services are generally based on observable market data in active markets (e.g., broker quotes and prices observed for comparable securities). The determination of whether markets are active or inactive is based upon the volume and level of activity for a particular asset class. The Company reviews the prices provided by pricing services for reasonableness based upon current trading levels for similar securities. If the prices appear unusual to the Company, they are re-examined and the value is either confirmed or revised. In addition, the Company periodically performs independent price tests of a sample of securities to ensure proper valuation and to verify our understanding of how securities are priced. As ofMarch 31, 2023 , the Company did not make any adjustments to the prices provided by the pricing services. Based upon the Company's review of the methodologies used by the independent pricing services, these securities were classified as Level 2. Syndicate manager - The Company has a 15% participation in a Lloyd's syndicate, and the Company's share of the securities owned by the syndicate is priced by the syndicate's manager. The majority of the securities are liquid, short duration fixed maturity securities. The Company reviews the syndicate manager's pricing methodology and audited financial statements and holds discussions with the syndicate manager as necessary to confirm its understanding and agreement with security prices. Based upon the Company's review of the methodologies used by the syndicate manager, these securities were classified as Level 2. 35 -------------------------------------------------------------------------------- Observable data - If independent pricing is not available, the Company prices the securities directly. Prices are based on observable market data where available, including current trading levels for similar securities and non-binding quotations from brokers. The Company generally requests two or more quotes. If more than one quote is received, the Company sets a price within the range of quotes received based on its assessment of the credibility of the quote and its own evaluation of the security. The Company generally does not adjust quotes obtained from brokers. Since these securities were priced based on observable data, they were classified as Level 2. Cash flow model - If the above methodologies are not available, the Company prices securities using a discounted cash flow model based upon assumptions as to prevailing credit spreads, interest rates and interest rate volatility, time to maturity and subordination levels. Discount rates are adjusted to reflect illiquidity where appropriate. These securities were classified as Level 3. 36 --------------------------------------------------------------------------------
Results of Operations for the Three Months Ended
Business Segment Results
Following is a summary of gross and net premiums written, net premiums earned, loss ratios (losses and loss expenses incurred expressed as a percentage of net premiums earned), expense ratios (underwriting expenses expressed as a percentage of net premiums earned) and GAAP combined ratios (sum of loss ratio and expense ratio) for each of our business segments for the three months endedMarch 31, 2023 and 2022. The GAAP combined ratio represents a measure of underwriting profitability, excluding investment income. A GAAP combined ratio in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit. ($ in thousands) 2023 2022 Insurance: Gross premiums written$ 2,652,234 $ 2,484,799 Net premiums written 2,210,834 2,073,291 Net premiums earned 2,181,876 1,962,835 Loss ratio 62.8 % 59.5 % Expense ratio 28.7 % 28.1 % GAAP combined ratio 91.5 % 87.6 % Reinsurance & Monoline Excess: Gross premiums written$ 397,083 $ 375,038 Net premiums written 363,990 339,963 Net premiums earned 309,556 286,252 Loss ratio 54.5 % 59.9 % Expense ratio 29.5 % 29.5 % GAAP combined ratio 84.0 % 89.4 % Consolidated: Gross premiums written$ 3,049,317 $ 2,859,837 Net premiums written 2,574,824 2,413,254 Net premiums earned 2,491,432 2,249,087 Loss ratio 61.8 % 59.5 % Expense ratio 28.8 % 28.3 % GAAP combined ratio 90.6 % 87.8 % Net Income to Common Stockholders. The following table presents the Company's net income to common stockholders and net income per diluted share for the three months endedMarch 31, 2023 and 2022: (In thousands, except per share data) 2023 2022 Net income to common stockholders$ 294,126 $ 590,638 Weighted average diluted shares 277,339 279,157 Net income per diluted share$ 1.06 $ 2.12 The Company reported net income to common stockholders of$294 million in 2023 compared to$591 million in 2022. The$297 million decrease in net income was primarily due to an after-tax reduction in net investment gains of$270 million due to the sale of a real estate investment in 2022 and the reduced gain from change in market value on equity securities, an after-tax reduction in underwriting income of$31 million primarily due to increased storm and property losses, an increase of$17 million in tax expense due to a change in the effective tax rate, an after-tax increase in foreign currency losses of$11 million mainly due to the weakening of theU.S. dollar againstU.K. sterling and Euro in 2023, an after-tax increase in corporate expenses of$10 million due to increased performance-based compensation costs and an after-tax decrease in profits from non-insurance businesses of$1 million , partially offset by an after-tax increase in net investment income of$39 million primarily due to rising interest rates and a larger investment portfolio related to fixed maturity securities, an after-tax reduction in interest expense of$2 million due to debt repayments in 2022 and an after-tax increase in insurance service income of$2 million . The number of weighted average diluted shares decreased by 1.8 million for 2023 compared to 2022, mainly reflecting shares repurchased in the the first quarter of 2023. Premiums. Gross premiums written were$3,049 million in 2023, an increase of 7% from$2,860 million in 2022. The increase was due to a$167 million increase in the Insurance segment and a$22 million increase in the Reinsurance & Monoline 37 --------------------------------------------------------------------------------
Excess segment. Approximately 79% of premiums expiring in 2023 were renewed, and
82% of premiums expiring in 2022 were renewed.
Average renewal premium rates for insurance and facultative reinsurance
increased 7.2% in 2023 when adjusted for changes in exposures, and increased
8.3% excluding workers' compensation.
A summary of gross premiums written in 2023 compared with 2022 by line of
business within each business segment follows:
•Insurance - gross premiums increased 7% to$2,652 million in 2023 from$2,485 million in 2022. Gross premiums increased$94 million (10%) for other liability,$80 million (14%) for short-tail lines,$21 million (7%) for commercial auto and$8 million (3%) for workers' compensation, partially offset by a reduction of$36 million (9%) for professional liability. •Reinsurance & Monoline Excess - gross premiums increased 6% to$397 million in 2023 from$375 million in 2022. Gross premiums increased$12 million (12%) for monoline excess,$6 million (9%) for property reinsurance and$4 million (2%) for casualty reinsurance.
Net premiums written were
written premiums were 16% in both 2023 and 2022.
Premiums earned increased 11% to$2,491 million in 2023 from$2,249 million in 2022. Insurance premiums (including the impact of rate changes) are generally earned evenly over the policy term, and accordingly, recent rate increases will be earned over the upcoming quarters. Premiums earned in 2023 are related to business written during both 2023 and 2022. Audit premiums were$91 million in 2023 compared with$70 million in 2022 due to an increase in exposures.
Net Investment Income. Following is a summary of net investment income for the
three months ended
Average Annualized Amount Yield ($ in thousands) 2023 2022 2023 2022 Fixed maturity securities, including cash and cash equivalents and loans receivable$ 195,642 $ 101,284 3.8 % 2.2 % Arbitrage trading account 18,256 9,187 9.4 3.1 Equity securities 13,746 10,856 4.8 4.7 Investment funds 2,180 52,012 0.5 13.7 Real estate (3,711) 2,146 (1.1) 0.5 Gross investment income 226,113 175,485 3.5 3.0 Investment expenses (2,715) (1,973) - - Total$ 223,398 $ 173,512 3.5 % 2.9 % Net investment income increased 29% to$223 million in 2023 from$174 million in 2022 due primarily to a$94 million increase in income from fixed maturity securities mainly driven by rising interest rates and a larger investment portfolio, a$9 million increase from the arbitrage trading account and a$3 million increase from equity securities, partially offset by a$50 million decrease in income from investment funds primarily due to financial service and consumer goods funds, a$6 million decrease in real estate and a$1 million increase in investment expenses. The Company maintained the shortened duration of its fixed maturity security portfolio, thereby reducing the potential impact of mark-to-market on the portfolio and positioning the Company to react quickly to changes in the current interest rate environment. Average invested assets, at cost (including cash and cash equivalents), were$25.7 billion in 2023 up 8.3% from$23.7 billion in 2022. Insurance Service Fees. The Company earns fees from an insurance distribution business, a third-party administrator and as a servicing carrier of workers' compensation assigned risk plans for certain states. Insurance service fees increased to$33 million in 2023 from$28 million in 2022, mainly due to organic growth within the business. Net Realized and Unrealized Gains on Investments. The Company buys and sells securities and other investment assets on a regular basis in order to maximize its total return on investments. Decisions to sell securities and other investment assets are based on management's view of the underlying fundamentals of specific investments as well as management's expectations regarding interest rates, credit spreads, currency values and general economic conditions. Net realized and unrealized gains on investments were$23 million in 2023 compared with$370 million in 2022. The gains of$23 million in 2023 reflected an 38 -------------------------------------------------------------------------------- increase in unrealized gains on equity securities of$43 million partially offset by net realized losses on investments of$20 million . The gains of$370 million in 2022 reflected net realized gains on investments of$277 million (primarily a$251 million net gain from the sale of a real estate investment inLondon after transaction expenses and the foreign currency impact, including the reversal of the currency translation adjustment), and an increase in unrealized gains on equity securities of$93 million . Change in Allowance for Expected Credit Losses on Investments. Based on credit factors, the allowance for expected credit losses is increased or decreased depending on the percentage of unrealized loss relative to amortized cost by security, changes in rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. For the three months endedMarch 31, 2023 , the pre-tax change in allowance for expected credit losses on investments decreased by$399 thousand ($315 thousand after-tax), which is reflected in net investment gains, primarily due to change in estimate. For the three months endedMarch 31, 2022 , the pre-tax change in allowance for expected credit losses on investments increased by$4 million ($3 million after-tax), which is reflected in net investment gains, primarily due to change in estimate. Revenues from Non-Insurance Businesses. Revenues from non-insurance businesses were derived from businesses engaged in the distribution of promotional merchandise, world-wide textile solutions and aviation-related businesses that provide services to aviation markets, including (i) the distribution, manufacturing, repair and overhaul of aircraft parts and components, (ii) the sale of new and used aircraft, and (iii) avionics, fuel, maintenance, storage and charter services. Revenues from non-insurance businesses were$124 million in 2023 and$98 million in 2022. The increase mainly relates to aviation-related business and the commercial and residential textile business, which we acquired in 2022, partially offset by the decrease of promotional merchandise and existing textile business. Losses and Loss Expenses. Losses and loss expenses increased to$1,539 million in 2023 from$1,339 million in 2022. The consolidated loss ratio was 61.8% in 2023 and 59.5% in 2022. Catastrophe losses, net of reinsurance recoveries, were$48 million (including current accident year losses of approximately$43 thousand related to COVID-19) in 2023 and$29 million (including losses of approximately$1 million related to COVID-19) in 2022. Adverse prior year reserve development (net of premium offsets) was$24 million in 2023 and favorable prior year reserve development was$1 million in 2022. The loss ratio excluding catastrophe losses and prior year reserve development increased 0.6 points to 58.9% in 2023 from 58.3% in 2022.
A summary of loss ratios in 2023 compared with 2022 by business segment
follows:
•Insurance - The loss ratio was 62.8% in 2023 and 59.5% in 2022. Catastrophe losses were$45 million in 2023 compared with$11 million in 2022. Adverse prior year reserve development was$17 million in 2023, principally from property catastrophe losses, and favorable prior year reserve development was$6 million in 2022. The loss ratio excluding catastrophe losses and prior year reserve development increased 0.6 points to 59.9% in 2023 from 59.3% in 2022. •Reinsurance & Monoline Excess - The loss ratio was 54.5% in 2023 and 59.9% in 2022. Catastrophe losses were$3 million in 2023 compared with$18 million in 2022. Adverse prior year reserve development was$7 million in 2023 and$5 million in 2022. The loss ratio excluding catastrophe losses and prior year reserve development decreased 0.2 points to 51.5% in 2023 from 51.7% in 2022.
Other Operating Costs and Expenses. Following is a summary of other operating
costs and expenses for the three months ended
($ in thousands) 2023
2022
Policy acquisition and insurance operating expenses
Insurance service expenses 25,180
22,466
Net foreign currency losses (gains) 9,495
(4,168) Other costs and expenses 72,624 60,148 Total$ 825,575 $ 713,899 Policy acquisition and insurance operating expenses are comprised of commissions paid to agents and brokers, premium taxes and other assessments and internal underwriting costs. Policy acquisition and insurance operating expenses increased 13% and net premiums earned increased 11% from 2022. The expense ratio (underwriting expenses expressed as a percentage of net premiums earned) increased by 0.5 points to 28.8% in 2023 from 28.3% in 2022 mainly due to lower ceding commissions, increased compensation costs and new start-up operating unit expenses.
Service expenses, which represent the costs associated with the fee-based
businesses, were
39 -------------------------------------------------------------------------------- Net foreign currency gains result from transactions denominated in a currency other than a company's operating functional currency. Net foreign currency losses was$9 million in 2023 compared to gains of$4 million in 2022, primarily related to the strengthening of theU.K. sterling and Euro against theU.S. dollar in 2023. Other costs and expenses represent general and administrative expenses of the parent company and other expenses not allocated to business segments, including the cost of certain long-term incentive plans and new business ventures. Other costs and expenses increased to$73 million in 2023 from$60 million in 2022, primarily due to the increase in compensation related costs in 2023. Expenses from Non-Insurance Businesses. Expenses from non-insurance businesses represent costs associated with businesses engaged in the distribution of promotional merchandise, world-wide textile solutions and aviation-related businesses that include (i) cost of goods sold related to aircraft and products sold and services provided, and (ii) general and administrative expenses. Expenses from non-insurance businesses were$123 million in 2023 compared to$95 million in 2022. The increase mainly relates to the aviation-related business and the residential and commercial textile business, which we acquired in 2022, partially offset by the decrease of promotional merchandise and existing textile business. Interest Expense. Interest expense was$32 million in 2023 and$35 million in 2022. In the first quarter of 2022, the Company repaid at maturity its$77 million aggregate principal amount of 8.7% senior notes in January and its$350 million aggregate principal amount of 4.625% senior notes in March. Income Taxes. The effective income tax rate was 21.4% and 19.0% for the three months endedMarch 31, 2023 and 2022, respectively. The higher effective income tax rate for the three months endedMarch 31, 2023 , as compared to the earlier period, was primarily due to a net reduction to the Company's valuation allowance against foreign tax credits and foreign net operating losses. The Company has not providedU.S. deferred income taxes on the undistributed earnings of approximately$173 million of its non-U.S. subsidiaries since these earnings are intended to be permanently reinvested in the non-U.S. subsidiaries. In the future, if such earnings were distributed, the Company projects that the incremental tax, if any, will be immaterial. 40
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Investments
As part of its investment strategy, the Company establishes a level of cash and highly liquid short-term and intermediate-term securities that, combined with expected cash flow, it believes is adequate to meet its payment obligations. In addition to fixed maturity securities, the Company invests in equity securities, merger arbitrage securities, investment funds, private equity, loans and real estate related assets. The Company's investments in investment funds and its other alternative investments have experienced, and the Company expects to continue to experience, greater fluctuations in investment income. The Company also attempts to maintain an appropriate relationship between the average duration of the investment portfolio and the approximate duration of its liabilities (i.e., policy claims and debt obligations). The average duration of the fixed maturity portfolio, including cash and cash equivalents, were 2.4 years at bothMarch 31, 2023 andDecember 31, 2022 . The Company's fixed maturity investment portfolio and investment-related assets as ofMarch 31, 2023 were as follows: Carrying Percent ($ in thousands) Value of Total Fixed maturity securities: U.S. government and government agencies$ 1,049,267 4.2 % State and municipal: Special revenue 1,674,483 6.7 Local general obligation 434,679 1.7 State general obligation 422,832 1.7 Corporate backed 196,817 0.8 Pre-refunded (1) 108,915 0.4 Total state and municipal 2,837,726 11.3 Mortgage-backed: Agency 1,081,356 4.4 Commercial 583,745 2.3 Residential-Prime 232,602 0.9 Residential-Alt A 3,425 - Total mortgage-backed 1,901,128 7.6 Asset-backed 3,845,453 15.4 Corporate: Industrial 3,385,444 13.6 Financial 2,626,304 10.5 Utilities 627,327 2.5 Other 486,574 1.9 Total corporate 7,125,649 28.5
Foreign government and foreign government agencies 1,331,890 5.4
Total fixed maturity securities
18,091,113 72.4 Equity securities: Common stocks 1,057,599 4.2 Preferred stocks 222,356 0.9 Total equity securities 1,279,955 5.1 Cash and cash equivalents (2) 1,843,534 7.4 Investment funds 1,601,567 6.5 Real estate 1,338,504 5.4 Arbitrage trading account 609,001 2.4 Loans receivable 194,944 0.8 Total investments$ 24,958,618 100.0 % ____________________ (1) Pre-refunded securities are securities for which an escrow account has been established to fund the remaining payments of principal and interest through maturity. Such escrow accounts are funded almost exclusively withU.S. Treasury andU.S. government agency securities.
(2) Cash and cash equivalents includes trading accounts receivable from brokers
and clearing organizations, trading account securities sold but not yet
purchased and unsettled purchases.
41 --------------------------------------------------------------------------------Fixed Maturity Securities . The Company's investment policy with respect to fixed maturity securities is generally to purchase instruments with the expectation of holding them to their maturity. However, management of the available for sale portfolio is considered necessary to maintain an approximate matching of assets and liabilities as well as to adjust the portfolio as a result of changes in financial market conditions and tax considerations. The Company's philosophy related to holding or selling fixed maturity securities is based on its objective of maximizing total return. The key factors that management considers in its investment decisions as to whether to hold or sell fixed maturity securities are its view of the underlying fundamentals of specific securities as well as its expectations regarding interest rates, credit spreads and currency values. In a period in which management expects interest rates to rise, the Company may sell longer duration securities in order to mitigate the impact of an interest rate rise on the fair value of the portfolio. Similarly, in a period in which management expects credit spreads to widen, the Company may sell lower quality securities, and in a period in which management expects certain foreign currencies to decline in value, the Company may sell securities denominated in those foreign currencies. The sale of fixed maturity securities in order to achieve the objective of maximizing total return may result in realized gains or losses; however, there is no reason to expect these gains or losses to continue in future periods.
and preferred stocks in companies with potential growth opportunities in
different sectors, mainly in the financial institutions and energy sectors.
Investment Funds. AtMarch 31, 2023 , the carrying value of investment funds was$1,602 million , including investments in financial services funds of$445 million , other funds of$367 million (which includes a deferred compensation trust asset of$34 million ), transportation funds of$337 million , real estate funds of$217 million , infrastructure funds of$119 million and energy funds of$117 million . Investment funds are generally reported on a one-quarter lag. Real Estate. Real estate is directly owned property held for investment. AtMarch 31, 2023 , real estate properties in operation included a long-term ground lease inWashington D.C. , an office complex inNew York City and the completed portion of a mixed-use project inWashington D.C. In addition, part of the previously mentioned mixed-use project inWashington D.C. is under development. The Company expects to fund further development costs for the project with a combination of its own funds and external financing. During the first quarter of 2022, the Company sold an office building inLondon . Arbitrage Trading Account. The arbitrage trading account is comprised of direct investments in arbitrage securities. Merger arbitrage is the business of investing in the securities of publicly held companies that are the targets in announced tender offers and mergers. Loans Receivable. Loans receivable, which are carried at amortized cost (net of allowance for expected credit losses), had an amortized cost of$195 million and an aggregate fair value of$187 million atMarch 31, 2023 . The amortized cost of loans receivable is net of an allowance for expected credit losses of$2 million as ofMarch 31, 2023 . Loans receivable include real estate loans of$176 million that are secured by commercial and residential real estate located primarily inLondon andNew York . Real estate loans generally earn interest at fixed or stepped interest rates and have maturities through 2026. Loans receivable include commercial loans of$19 million that are secured by business assets and have fixed interest rates with varying maturities not exceeding 10 years. Market Risk. The fair value of the Company's investments is subject to risks of fluctuations in credit quality and interest rates. The Company uses various models and stress test scenarios to monitor and manage interest rate risk. The Company attempts to manage its interest rate risk by maintaining an appropriate relationship between the effective duration of the investment portfolio and the approximate duration of its liabilities (i.e., policy claims and debt obligations). The effective duration for the fixed maturity portfolio (including cash and cash equivalents) was 2.4 years at bothMarch 31, 2023 andDecember 31, 2022 .
In addition, the fair value of the Company's international investments is
subject to currency risk. The Company attempts to manage its currency risk by
matching its foreign currency assets and liabilities where considered
appropriate.
42 --------------------------------------------------------------------------------
Liquidity and Capital Resources
Cash Flow. Cash flow provided from operating activities decreased to$445 million in the three months endedMarch 31, 2023 from$478 million in the three months endedMarch 31, 2022 , primarily due to increased loss and loss expense payments partially offset by an increase in premium receipts. The Company's insurance subsidiaries' principal sources of cash are premiums, investment income, service fees and proceeds from sales and maturities of portfolio investments. The principal uses of cash are payments for claims, taxes, operating expenses and dividends. The Company expects its insurance subsidiaries to fund the payment of losses with cash received from premiums, investment income and fees. The Company generally targets an average duration for its investment portfolio that is within 1.5 years of the average duration of its liabilities so that portions of its investment portfolio mature throughout the claim cycle and are available for the payment of claims if necessary. In the event operating cash flow and proceeds from maturities and prepayments of fixed income securities are not sufficient to fund claim payments and other cash requirements, the remainder of the Company's cash and investments is available to pay claims and other obligations as they become due. The Company's investment portfolio is highly liquid, with approximately 79% invested in cash, cash equivalents and marketable fixed maturity securities as ofMarch 31, 2023 . If the sale of fixed maturity securities were to become necessary, a realized gain or loss equal to the difference between the cost and sales price of securities sold would be recognized. Debt. AtMarch 31, 2023 , the Company had senior notes, subordinated debentures and other debt outstanding with a carrying value of$2,837 million and a face amount of$2,865 million . In the first quarter of 2022, the Company repaid at maturity its$77 million aggregate principal amount of 8.7% senior notes in January and its$350 million aggregate principal amount of 4.625% senior notes in March. The maturities of the outstanding debt are$5 million in 2024,$5 million in 2025,$250 million in 2037,$350 million in 2044,$470 million in 2050,$400 million in 2052,$185 million in 2058,$300 million in 2059,$250 million in 2060, and$650 million in 2061. OnApril 1, 2022 , the Company entered into a senior unsecured revolving credit facility that provides for revolving, unsecured borrowings up to an aggregate of$300 million with a$50 million sublimit for letters of credit. The Company may increase the amount available under the facility to a maximum of$500 million subject to obtaining lender commitments for the increase and other customary conditions. Borrowings under the facility may be used for working capital and other general corporate purposes. All borrowings under the facility must be repaid byApril 1, 2027 , except that letters of credit outstanding on that date may remain outstanding untilApril 1, 2028 (or such later date approved by all lenders). Our ability to utilize the facility is conditioned on the satisfaction of representations, warranties and covenants that are customary for facilities of this type. As ofMarch 31, 2023 , there were no borrowings outstanding under the facility. Equity. AtMarch 31, 2023 , total common stockholders' equity was$6.9 billion , common shares outstanding were 262,536,530 and stockholders' equity per outstanding share was$26.45 . During the three months endedMarch 31, 2023 , the Company repurchased 2,038,391 shares of its common stock for$135.2 million . In the first quarter of 2023, the board of directors of the Company declared a regular quarterly cash dividend of$0.10 per share and a special cash dividend of$0.50 per share. The number of common shares outstanding excludes shares held in a grantor trust established by the Company for delivery upon settlement of vested but mandatorily deferred RSUs. Total Capital. Total capitalization (equity, debt and subordinated debentures) was$9.8 billion atMarch 31, 2023 . The percentage of the Company's capital attributable to senior notes, subordinated debentures and other debt was 29% atMarch 31, 2023 and 30% atDecember 31, 2022 . 43
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EVEREST RE GROUP LTD – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
ASSURANT, INC. – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
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