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EVEREST RE GROUP LTD – 10-Q – MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Edgar Glimpses
Industry Conditions.
The worldwide insurance and reinsurance 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 insurance and reinsurance 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 byA.M. Best and/orStandard & 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 insurance and reinsurance 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 theU.S. ,Bermuda and international insurance and reinsurance markets with numerous global competitors. Our competitors include independent reinsurance and insurance companies, subsidiaries or affiliates of established worldwide insurance companies, reinsurance departments of certain insurance companies, domestic and international underwriting operations, including underwriting syndicates atLloyd's of London and certain government sponsored risk transfer vehicles. Some of these competitors have greater financial resources than we do and have established long-term and continuing business relationships, which can be a significant competitive advantage. In addition, the lack of strong barriers to entry into the reinsurance business and recently, the securitization of insurance and reinsurance 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 is 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 is primarily driven by the desire to achieve greater risk diversification and potentially higher returns on their investments. This competition generally has a negative impact on rates, terms and conditions; however, the impact varies widely by market and coverage. Based on recent competitive behaviors in the insurance and reinsurance industry, natural catastrophe events and the macroeconomic backdrop, there has been some dislocation in the market which we expect to have a positive impact on rates and terms and conditions, generally, though local market specificities can vary. The increased frequency of catastrophe losses experienced throughout recent years appears to be pressuring the increase of rates. As business activity continues to regain strength after the pandemic and current macroeconomic uncertainty, rates 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. The impact on pricing conditions is likely to change depending on the line of business and geography. 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. The war in theUkraine is ongoing and an evolving event. Economic and legal sanctions have been levied againstRussia , specific named individuals and entities connected to the Russian government, as well as businesses located in theRussian Federation and/or owned by Russian nationals by numerous countries, includingthe United States . The significant political and economic uncertainty surrounding the war and associated sanctions have impacted economic and investment markets both withinRussia and around the world. 29
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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 shareholders' equity for the periods indicated.
Three Months Ended Percentage
March 31, Increase/
(Dollars in millions) 2023 2022 (Decrease)
Gross written premiums $ 3,743 $ 3,186 17.5 %
Net written premiums 3,329 2,812 18.4 %
REVENUES:
Premiums earned $ 3,100 $ 2,792 11.0 %
Net investment income 260 243 7.0 %
Net gains (losses) on investments 5 (154) -103.3 %
Other income (expense) (79) 15 NM
Total revenues 3,286 2,896 13.5 %
CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses 1,966 1,790 9.9 %
Commission, brokerage, taxes and fees 661 605 9.3 %
Other underwriting expenses 200 161 23.8 %
Corporate expenses 19 14 34.9 %
Interest, fees and bond issue cost
amortization expense 32 24 33.1 %
Total claims and expenses 2,878 2,594 10.9 %
INCOME (LOSS) BEFORE TAXES 408 302 35.0 %
Income tax expense (benefit) 43 4 NM
NET INCOME (LOSS) $ 365 $ 298 22.6 %
Point
RATIOS: Change
Loss ratio 63.4 % 64.1 % (0.7)
Commission and brokerage ratio 21.3 % 21.7 % (0.4)
Other underwriting expense ratio 6.4 % 5.8 % 0.6
Combined ratio 91.2 % 91.6 % (0.4)
At At Percentage
March 31, December 31, Increase/
(Dollars in millions, except per share amounts) 2023 2022 (Decrease)
Balance sheet data:
Total investments and cash $ 31,435 $ 29,872 5.2 %
Total assets 41,839 39,966 4.7 %
Loss and loss adjustment expense reserves 22,878 22,065 3.7 %
Total debt 3,085 3,084 - %
Total liabilities 32,825 31,525 4.1 %
Shareholders' equity 9,014 8,441 6.8 %
Book value per share 229.49 215.54 6.5 %
(NM, not meaningful)
(Some amounts may not reconcile due to rounding.)
Revenues.
Premiums. Gross written premiums increased by 17.5% to$3.7 billion for the three months endedMarch 31, 2023 , compared to$3.2 billion for the three months endedMarch 31, 2022 , reflecting a$451 million , or 20.6%, increase in our reinsurance business and a$105 million , or 10.5%, increase in our insurance business. The increase in reinsurance premiums was primarily due to increases in casualty pro rata business, property pro rata business and financial lines of 30 -------------------------------------------------------------------------------- Table of Contents business. The increase in insurance premiums was primarily due to increases in property/short tail business and other specialty lines of business. Net written premiums increased by 18.4% to$3.3 billion for the three months endedMarch 31, 2023 , compared to$2.8 billion for the three months endedMarch 31, 2022 , which is consistent with the percentage change in gross written premiums. Premiums earned increased by 11.0% to$3.1 billion during the three months endedMarch 31, 2023 , compared to$2.8 billion during the three months endedMarch 31, 2022 . The change in premiums earned relative to net written premiums was primarily the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period. Other Income (Expense). We recorded other expense of$79 million and other income of$15 million for the three months endedMarch 31, 2023 and 2022, respectively. The changes were primarily the result of fluctuations in foreign currency exchange rates. We recognized foreign currency exchange expense of$85 million for the three months endedMarch 31, 2023 and foreign currency exchange income of$13 million for the three months endedMarch 31, 2022 .
Net Investment Income. Refer to Consolidated Investments Results Section below.
Section below.
Claims and Expenses.
Incurred Losses and Loss Adjustment Expenses. The following table presents our
incurred losses and loss adjustment expenses ("LAE") for the periods indicated.
Three Months Ended March 31,
Current Ratio %/ Prior Ratio %/ Total Ratio %/
(Dollars in millions) Year Pt Change Years Pt Change Incurred Pt Change
2023
Attritional $ 1,851 59.7 % $ - - % $ 1,851 59.7 %
Catastrophes 115 3.7 % - - % 115 3.7 %
Total $ 1,966 63.4 % $ - - % $ 1,966 63.4 %
2022
Attritional $ 1,676 60.0 % $ (1) - % $ 1,675 60.0 %
Catastrophes 115 4.1 % - - % 115 4.1 %
Total $ 1,791 64.1 % $ (1) - % $ 1,790 64.1 %
Variance 2023/2022
Attritional $ 175 (0.3) pts $ 1 - pts $ 176 (0.3) pts
Catastrophes - (0.4) pts - - pts - (0.4) pts
Total $ 175 (0.7) pts $ 1 - pts $ 176 (0.7) pts
(Some amounts may not reconcile due to rounding.)
Incurred losses and LAE increased by 9.9% to$2.0 billion for the three months endedMarch 31, 2023 , compared to$1.8 billion for the three months endedMarch 31, 2022 , primarily due to an increase of$175 million in current year attritional losses. The increase in current year attritional losses was mainly due to the impact of the increase in premiums earned. The current year catastrophe losses of$115 million for the three months endedMarch 31, 2023 related primarily to the 2023 Turkey earthquakes ($75.0 million ), and the 2023New Zealand storms ($40.0 million ). The$115 million of current year catastrophe losses for the three months endedMarch 31, 2022 related primarily to the 2022Australia floods ($75.0 million ), the 2022 European storms ($30.0 million ), and the 2022 MarchU.S. storms ($10.0 million ). Catastrophe losses and loss expenses typically have a material effect on our incurred losses and loss adjustment expense results and can vary significantly from period to period. Losses from natural catastrophes contributed 3.7 percentage points to the combined ratio for the three months endedMarch 31, 2023 , compared with 4.1 percentage points for the three months endedMarch 31, 2022 . The Company has up to$350.0 million of catastrophe bond protection ("CAT Bond") that attaches at a$48.1 billion Property Claims Services ("PCS") Industry loss threshold. This recovery would be recognized on a pro-rata basis up to a$63.8 billion PCS Industry loss level. PCS's current industry estimate of$48.9 billion issued inApril 2023 exceeds the attachment point. The potential recovery under the CAT Bond is currently estimated to 31
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be$19 million but is subject to further revision of the industry loss estimate. No portion of the potential CAT bond recovery has been included in the Company's current financial results. Commission, Brokerage, Taxes and Fees. Commission, brokerage, taxes and fees increased by 9.3% to$661 million for the three months endedMarch 31, 2023 compared to$605 million for the three months endedMarch 31, 2022 . The increase was primarily due to the impact of the increase in premiums earned and changes in the mix of business. Other Underwriting Expenses. Other underwriting expenses were$200 million and$161 million for the three months endedMarch 31, 2023 andMarch 31, 2022 , respectively. The increase in other underwriting expenses was mainly due to the impact of the increase in premiums earned as well as the continued build out of our insurance operations, including an expansion of the international insurance platform. Corporate Expenses. Corporate expenses, which are general operating expenses that are not allocated to segments, were$19 million and$14 million for the three months endedMarch 31, 2023 and 2022, respectively. The increase from 2022 to 2023 was mainly due to information technology costs and external consulting costs. Interest, Fees and Bond Issue Cost Amortization Expense. Interest, fees and other bond amortization expense was$32 million and$24 million for the three months endedMarch 31, 2023 and 2022, respectively. Interest expense was mainly impacted by the movement in the floating interest rate related to the long-term subordinated notes, which is reset quarterly per the note agreement, as well as variable interest rate costs on borrowings from FHLB. Income Tax Expense (Benefit). We had income tax expense of$43 million and$4 million for the three months endedMarch 31, 2023 and 2022, respectively. Income tax expense is primarily a function of the geographic location of the Company's pre-tax income and the statutory tax rates in those jurisdictions. The effective tax rate ("ETR") is primarily affected by tax-exempt investment income, foreign tax credits and dividends. Variations in the ETR generally result from changes in the relative levels of pre-tax income, including the impact of catastrophe losses and net capital gains (losses), among jurisdictions with different tax rates. OnAugust 16, 2022 , the Inflation Reduction Act of 2022 ("IRA") was enacted. We have evaluated the tax provisions of the IRA, the most significant of which are the corporate alternative minimum tax and the share repurchase excise tax and do not expect the legislation to have a material impact on our results of operations. As theIRS issues additional guidance, we will evaluate any impact to our consolidated financial statements.
Net Income (Loss).
Our net income was
the financial component fluctuations explained above.
Ratios.
Our combined ratio decreased by 0.4 points to 91.2% for the three months endedMarch 31, 2023 , compared to 91.6% for the three months endedMarch 31, 2022 . The loss ratio component decreased by 0.7 points for the three months endedMarch 31, 2023 over the same period last year mainly due to changes in the mix of business and no change in catastrophe losses despite the considerable increase in gross written premiums. The commission and brokerage ratio components decreased to 21.3% for the three months endedMarch 31, 2023 compared to 21.7% for the three months endedMarch 31, 2022 . The decrease was mainly due to changes in the mix of business. The other underwriting expense ratios increased to 6.4% for the three months endedMarch 31, 2023 compared to 5.8% for the three months endedMarch 31, 2022 . These increases were mainly due to higher insurance operations costs. Shareholders' Equity. Shareholders' equity increased by$573 million to$9.0 billion atMarch 31, 2023 from$8.4 billion atDecember 31, 2022 , principally as a result of$365 million of net income,$249 million of unrealized appreciation on available for sale fixed maturity portfolio net of tax and$31 million of net foreign currency translation adjustments, partially offset by$65 million of shareholder dividends and$7 million of share-based compensation transactions.
Consolidated Investment Results
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Net Investment Income.
Net investment income increased by 7.0% to$260 million for the three months endedMarch 31, 2023 compared with net investment income of$243 million for the three months endedMarch 31, 2022 . The increase for the three months endedMarch 31, 2023 was primarily the result of higher income from fixed maturity investments and short-term investments due to rising reinvestment rates, partially offset by a decline in limited partnership income. The limited partnership income primarily reflects decreases in their reported net asset values. As such, until these asset values are monetized and the resultant income is distributed, they are subject to future increases or decreases in the asset value, and the results may be volatile. The following table shows the components of net investment income for the periods indicated. Three Months Ended March 31, (Dollars in millions) 2023 2022 Fixed maturities$ 247 $ 148 Equity securities 1 4 Short-term investments and cash 17 - Other invested assets Limited partnerships (15) 88 Other 22 12 Gross investment income before adjustments 272
253
Funds held interest income (expense) -
4
Future policy benefit reserve income (expense) - - Gross investment income 272 256 Investment expenses (12) (13) Net investment income$ 260 $ 243
(Some amounts may not reconcile due to rounding.)
The following table shows a comparison of various investment yields for the
periods indicated.
Three Months Ended
March 31,
2023 2022
Annualized pre-tax yield on average cash and
invested assets 3.2 % 3.3 %
Annualized after-tax yield on average cash and
invested assets 2.8 % 2.9 %
Annualized return on invested assets 3.3 % 1.2 %
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The following table presents the composition of our net gains (losses) on
investments for the periods indicated.
Three Months Ended March 31,
(Dollars in millions) 2023 2022 Variance
Realized gains (losses) from dispositions:
Fixed maturity securities - available for
sale
Gains $ 11 $ 20 $ (9)
Losses (9) (17) 8
Total 2 3 (1)
Equity securities
Gains 7 4 4
Losses - (15) 15
Total 7 (12) 19
Other Invested Assets
Gains - 5 (5)
Losses - - -
Total - 4 (4)
Total net realized gains (losses) from
dispositions
Gains 18 28 (10)
Losses (9) (33) 24
Total 9 (5) 14
Allowance for credit losses (8) (12) 4
Gains (losses) from fair value adjustments
Equity securities 4 (137) 141
Total 4 (137) 141
Total net gains (losses) on investments $ 5 $
(154) $ 159
(Some amounts may not reconcile due to rounding.)
Net gains (losses) on investments during the three months endedMarch 31, 2023 primarily relate to net gains from fair value adjustments on equity securities in the amount of$4 million as a result of equity market increases during the first quarter of 2023. In addition, we realized$9 million of gains due to the disposition of investments and recorded an increase to the allowance for credit losses of$8 million . Segment Results. The Company manages its reinsurance and insurance operations as autonomous units and key strategic decisions are based on the aggregate operating results and projections for these segments of business. 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 theU.S. ,Bermuda , andIreland offices, as well as, through branches inCanada ,Singapore , theUnited Kingdom andSwitzerland . The Insurance operation writes property and casualty insurance directly and through brokers, surplus lines brokers and general agents within theU.S. ,Bermuda ,Canada ,Europe ,Singapore andSouth America through its offices in theU.S. ,Canada ,Chile ,Singapore , theUnited Kingdom ,Ireland and branches located inthe Netherlands ,France ,Germany andSpain .
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
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generally monitors and evaluates the financial performance of these operating
segments based upon their underwriting results.
Underwriting results include earned premium less LAE incurred, commission and brokerage expenses and other underwriting expenses. We measure our underwriting results using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which, respectively, divide incurred losses, commissions and brokerage and other underwriting expenses by premiums earned.
The Company does not maintain separate balance sheet data for its operating
segments. Accordingly, the Company does not review and evaluate the financial
results of its operating segments based upon balance sheet data.
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 re-evaluation is made.
The following discusses the underwriting results for each of our segments for
the periods indicated.
Reinsurance.
The following table presents the underwriting results and ratios for the
Reinsurance segment for the periods indicated.
Three Months Ended March 31,
(Dollars in millions) 2023 2022 Variance % Change
Gross written premiums $ 2,637 $ 2,186 451 20.6 %
Net written premiums 2,454 2,081 373 17.9 %
Premiums earned $ 2,242 $ 2,066 $ 176 8.5 %
Incurred losses and LAE 1,411 1,325 86 6.5 %
Commission and brokerage 560 514 46 9.0 %
Other underwriting expenses 63 50 13 25.4 %
Underwriting gain (loss) $ 207 $ 177 $ 30 17.1 %
Point Chg
Loss ratio 62.9 % 64.1 % (1.2)
Commission and brokerage ratio 25.0 % 24.9 % 0.1
Other underwriting expense ratio 2.8 % 2.4 % 0.4
Combined ratio 90.8 % 91.4 % (0.6)
(NM, Not Meaningful)
(Some amounts may not reconcile due to rounding.)
Premiums. Gross written premiums increased by 20.6% to $2.6 billion for the
three months ended March 31, 2023 from $2.2 billion for the three months ended
March 31, 2022 , primarily due to increases in casualty pro rata business,
property pro rata business and financial lines of business. Net written premiums
increased by 17.9% to $2.5 billion for the three months ended March 31, 2023
compared to $2.1 billion for the three months ended March 31, 2022 , which is
consistent with the percentage change in gross written premiums. Premiums earned
increased by 8.5% to $2.2 billion for the three months ended March 31, 2023 ,
compared to $2.1 billion for the three months ended March 31, 2022 . The change
in premiums earned relative to net written premiums was primarily the result of
timing; premiums are earned ratably over the coverage period whereas written
premiums are recorded at the initiation of the coverage period.
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Incurred Losses and LAE. The following table presents the incurred losses and
LAE for the Reinsurance segment for the periods indicated.
Three Months Ended March
31,
Current Ratio %/ Prior Ratio %/ Total Ratio %/
(Dollars in millions) Year Pt Change Years Pt Change Incurred Pt Change
2023
Attritional $ 1,298 57.9 % $ - - % 1,298 57.9 %
Catastrophes 113 5.0 % - % 113 5.0 %
Total Segment $ 1,411 62.9 % $ - - % $ 1,411 62.9 %
2022
Attritional $ 1,216 58.9 % $ (2) -0.1 % 1,215 58.8 %
Catastrophes 110 5.3 % - - % 110 5.3 %
Total Segment $ 1,326 64.2 % $ (2) -0.1 % $ 1,325 64.1 %
Variance 2023/2022
Attritional $ 82 (1.0) pts $ 2 0.1 pts $ 83 (0.9) pts
Catastrophes 3 (0.3) pts - - pts 3 (0.3) pts
Total Segment $ 85 (1.3) pts $ 2 0.1 pts $ 86 (1.2) pts
Incurred losses increased by 6.5% to $1.4 billion for the three months ended
March 31, 2023 , compared to $1.3 billion for the three months ended March 31,
2022 . The increase was primarily due to an increase of $82 million in current
year attritional losses. The increase in current year attritional losses was
mainly related to the impact of the increase in premiums earned. The current
year catastrophe losses of $113 million for the three months ended March 31,
2023 related primarily to the 2023 Turkey earthquakes ($75.0 million ) and the
2023 New Zealand storms ($38.0 million ). The $110 million of current year
catastrophe losses for the three months ended March 31, 2022 related primarily
to the 2022 Australia floods ($75.0 million ), the 2022 European storms ($30.0
million ), and the 2022 March U.S. storms ($5.0 million ).
Segment Expenses. Commission and brokerage expense increased by 9.0% to $560
million for the three months ended March 31, 2023 compared to $514 million for
the three months ended March 31, 2022 . The increase was mainly due to the impact
of the increase in premiums earned. Segment other underwriting expenses
increased to $63 million for the three months ended March 31, 2023 from $50
million for the three months ended March 31, 2022 . The increase was due to
increased personnel and direct and indirect expenditures supporting the
increased premium volume of the segment.
Insurance.
The following table presents the underwriting results and ratios for the
Insurance segment for the periods indicated.
Three Months Ended March 31,
(Dollars in millions) 2023 2022 Variance % Change
Gross written premiums $ 1,106 $ 1,001 $ 105 10.5 %
Net written premiums 875 731 145 19.7 %
Premiums earned $ 858 $ 726 $ 133 18.2 %
Incurred losses and LAE 555 465 90 19.4 %
Commission and brokerage 101 91 10 11.1 %
Other underwriting expenses 136 111 25 23.1 %
Underwriting gain (loss) $ 66 $ 59 $ 7 12.1 %
Point Chg
Loss ratio 64.7% 64.1% 0.6
Commission and brokerage ratio 11.8% 12.5% (0.7)
Other underwriting expense ratio 15.9% 15.3% 0.6
Combined ratio 92.4% 91.9% 0.5
(NM not meaningful)
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(Some amounts may not reconcile due to rounding.)
Premiums. Gross written premiums increased by 10.5% to$1.1 billion for the three months endedMarch 31, 2023 compared to$1.0 billion for the three months endedMarch 31, 2022 . The increase in insurance premiums was primarily due to increases in property/short tail business and other specialty lines of business. Net written premiums increased by 19.7% to$875 million for the three months endedMarch 31, 2023 compared to$731 million for the three months endedMarch 31, 2022 . The higher percentage change in net written premiums compared to gross written premiums is due to higher net retention resulting from changes in the mix of business. Premiums earned increased 18.2% to$858 million for the three months endedMarch 31, 2023 compared to$726 million for the three months endedMarch 31, 2022 .
Incurred Losses and LAE. The following table presents the incurred losses and
LAE for the Insurance segment for the periods indicated.
Three Months Ended March
31,
Current Ratio %/ Prior Ratio %/ Total Ratio %/
(Dollars in millions) Year Pt Change Years Pt Change Incurred Pt Change
2023
Attritional $ 553 64.5 % $ - - % 553 64.5 %
Catastrophes 2 0.2 % - - % 2 0.2 %
Total Segment $ 555 64.7 % $ - - % $ 555 64.7 %
2022
Attritional $ 460 63.3 % $ 1 0.1 % 460 63.4 %
Catastrophes 5 0.7 % - - % 5 0.7 %
Total Segment $ 465 64.0 % $ 1 0.1 % $ 465 64.1 %
Variance 2023/2022
Attritional $ 94 1.2 pts $ (1) (0.1) pts $ 93 1.1 pts
Catastrophes (3) (0.5) pts - - pts (3) (0.5) pts
Total Segment $ 91 0.7 pts $ (1) (0.1) pts $ 90 0.6 pts
(Some amounts may not reconcile due to rounding.)
Incurred losses and LAE increased by 19.4% to$555 million for the three months endedMarch 31, 2023 compared to$465 million for the three months endedMarch 31, 2022 . The increase was mainly due to an increase of$94 million in current year attritional losses. The increase in current year attritional losses was primarily due to the impact of the increase in premiums earned. The current year catastrophe losses of$2 million related to the 2023 New Zealand storms. The$5 million of current year catastrophe losses for the three months endedMarch 31, 2022 related to the 2022 MarchU.S. storms. Segment Expenses. Commission and brokerage increased by 11.1% to$101 million for the three months endedMarch 31, 2023 compared to$91 million for the three months endedMarch 31, 2022 . Segment other underwriting expenses increased to$136 million for the three months endedMarch 31, 2023 compared to$111 million for the three months endedMarch 31, 2022 . The increases were mainly due to the impact of the increase in premiums earned and increased expenses related to the continued build out of the insurance business, including an expansion of the international insurance platform.
FINANCIAL CONDITION
Investments. Total investments were$29.8 billion atMarch 31, 2023 , an increase of$1.3 billion compared to$28.5 billion atDecember 31, 2022 . The rise in investments was primarily related to an increase in fixed maturities, available for sale due to an overall net purchase of$1.0 billion of fixed maturities, available for sale during the first quarter of 2023. The Company's limited partnership investments are comprised of limited partnerships that invest in private equity, private credit and private real estate. Generally, the limited partnerships are reported on a month or quarter lag. We receive annual audited financial statements for all of the limited partnerships which are prepared using fair value accounting in accordance with FASB guidance. For the quarterly reports, the Company reviews the financial reports for 37
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any unusual changes in carrying value. If the Company becomes aware of a
significant decline in value during the lag reporting period, the loss will be
recorded in the period in which the Company identifies the decline.
The table below summarizes the composition and characteristics of our investment
portfolio for the periods indicated.
At At
March 31, 2023 December 31, 2022
Fixed income portfolio duration (years) 3.0
3.1
Fixed income composite credit quality A+ A+ Reinsurance Recoverables. Reinsurance recoverables for both paid and unpaid losses totaled$2.3 billion and$2.2 billion atMarch 31, 2023 andDecember 31, 2022 , respectively. AtMarch 31, 2023 ,$500 million , or 21.6%, was receivable fromMt. Logan Re collateralized segregated accounts;$269 million , or 11.7%, was receivable fromMunich Reinsurance America, Inc. ("Munich Re") and$135 million , or 5.8% was receivable fromEndurance Specialty Holdings, Ltd. ("Endurance"). No other retrocessionaire accounted for more than 5% of our recoverables.
Loss and LAE Reserves. Gross loss and LAE reserves totaled
The following tables summarize gross outstanding loss and LAE reserves by
segment, classified by case reserves and IBNR reserves, for the periods
indicated.
At March 31, 2023
Case IBNR Total % of
(Dollars in millions) Reserves Reserves Reserves Total
Reinsurance $ 6,186 $ 10,329 $ 16,515 72.2 %
Insurance 1,842 4,250 6,093 26.6 %
Total excluding A&E 8,028 14,579 22,607 98.8 %
A&E 132 139 271 1.2 %
Total including A&E $ 8,160 $ 14,718 $ 22,878 100.0 %
(Some amounts may not reconcile due to rounding.)
At December 31, 2022
Case IBNR Total % of
(Dollars in millions) Reserves Reserves Reserves Total
Reinsurance $ 6,045 $ 9,818 $ 15,862 71.9 %
Insurance 1,863 4,062 5,925 26.9 %
Total excluding A&E 7,908 13,880 21,787 98.7 %
A&E 138 140 278 1.3 %
Total including A&E $ 8,046 $ 14,019 $ 22,065 100.0 %
(Some amounts may not reconcile due to rounding.)
Changes in premiums earned and business mix, reserve re-estimations, catastrophe
losses and changes in catastrophe loss reserves and claim settlement activity
all impact loss and LAE reserves by segment and in total.
Our carried loss and LAE reserves represent management's best estimate of our
ultimate liability for unpaid claims. We continuously re-evaluate our reserves,
including re-estimates of prior period reserves, taking into consideration all
available information and, in particular, newly reported loss and claim
experience. Changes in reserves resulting from such re-evaluations are reflected
in incurred losses in the period when the re-evaluation is made. Our analytical
methods and processes operate at multiple levels including individual contracts,
groupings of like contracts, classes and lines of business, internal business
units, segments, accident years, legal entities, and in the aggregate. In order
to set appropriate reserves, we make qualitative and quantitative analyses and
judgments at these various levels. We utilize actuarial science, business
expertise and management judgment in a manner intended to ensure the accuracy
and consistency of our reserving practices. Management's best estimate is
developed through collaboration with actuarial, underwriting, claims, legal and
finance departments and culminates with the input of reserve committees. Each
segment
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reserve committee includes the participation of the relevant parties from
actuarial, finance, claims and segment senior management and has the
responsibility for recommending and approving management's best estimate.
Reserves are further reviewed by Everest's Chief Reserving Actuary and senior
management. The objective of such process is to determine a single best estimate
viewed by management to be the best estimate of its ultimate loss liability.
Nevertheless, our reserves are estimates, which are subject to variation, which
may be significant.
There can be no assurance that reserves for, and losses from, claim obligations
will not increase in the future, possibly by a material amount. However, we
believe that our existing reserves and reserving methodologies lessen the
probability that any such increase would have a material adverse effect on our
financial condition, results of operations or cash flows.
Asbestos and Environmental Exposures. Asbestos and Environmental ("A&E")
exposures represent a separate exposure group for monitoring and evaluating
reserve adequacy. The following table summarizes the outstanding loss reserves
with respect to A&E reserves on both a gross and net of retrocessions basis for
the periods indicated.
At At
March 31, December 31,
(Dollars in millions) 2023 2022
Gross reserves $ 271 $ 278
Ceded reserves (20) (21)
Net reserves $ 251 $ 257
(Some amounts may not reconcile due to rounding.)
With respect to asbestos only, at
reserves of
for assumed business.
Ultimate loss projections for A&E liabilities cannot be accomplished using standard actuarial techniques. We believe that our A&E reserves represent management's best estimate of the ultimate liability; however, there can be no assurance that ultimate loss payments will not exceed such reserves, perhaps by a significant amount. Industry analysts use the "survival ratio" to compare the A&E reserves among companies with such liabilities. The survival ratio is typically calculated by dividing a company's current net reserves by the three year average of annual paid losses. Hence, the survival ratio equals the number of years that it would take to exhaust the current reserves if future loss payments were to continue at historical levels. Using this measurement, our net three year asbestos survival ratio was 6.7 years atMarch 31, 2023 . These metrics can be skewed by individual large settlements occurring in the prior three years and therefore, may not be indicative of the timing of future payments.
LIQUIDITY AND CAPITAL RESOURCES
Capital. Shareholders' equity atMarch 31, 2023 andDecember 31, 2022 was$9.0 billion and$8.4 billion , respectively. Management's objective in managing capital is to ensure its overall capital level, as well as the capital levels of its operating subsidiaries, exceed the amounts required by regulators, the amount needed to support our current financial strength ratings from rating agencies and our own economic capital models. The Company's capital has historically exceeded these benchmark levels. Our two main operating companies Bermuda Re andEverest Re are regulated by theBermuda Monetary Authority ("BMA") and theState of Delaware ,Department of Insurance , respectively. Both regulatory bodies have their own capital adequacy models based on statutory capital as opposed to GAAP basis equity. Failure to meet the required statutory capital levels could result in various regulatory restrictions, including business activity and the payment of dividends to their parent companies. 39
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The regulatory targeted capital and the actual statutory capital for Bermuda Re
and
Bermuda Re (2) Everest Re (2)
At December 31, At December 31,
(Dollars in millions) 2023 2022 2023 2022
Regulatory targeted capital $ 2,217 $ 2,169 $ 3,353 $ 2,960
Actual capital $ 2,759 $ 3,184 $ 5,553 $ 5,717
(1)Regulatory targeted capital represents the target capital level from the
applicable year's BSCR calculation.
(2)Regulatory targeted capital represents 200% of the RBC authorized control
level calculation for the applicable year.
Our financial strength ratings as determined by A.M. Best , Standard & Poor's and
Moody's are important as they provide our customers and investors with an
independent assessment of our financial strength using a rating scale that
provides for relative comparisons. We continue to possess significant financial
flexibility and access to debt and equity markets as a result of our financial
strength, as evidenced by the financial strength ratings as assigned by
independent rating agencies.
We maintain our own economic capital models to monitor and project our overall
capital, as well as the capital at our operating subsidiaries. A key input to
the economic models is projected income and this input is continually compared
to actual results, which may require a change in the capital strategy.
During the first quarter of 2023, there were no shares repurchased in the open
market. We paid $65 million in dividends to adjust our capital position and
enhance long-term expected returns to our shareholders. In 2022, we repurchased
241,273 shares for $61 million in the open market and paid $255 million in
dividends. We may at times enter into a Rule 10b5-1 repurchase plan agreement to
facilitate the repurchase of shares. On May 22, 2020 , our existing Board
authorization to purchase up to 30 million of our shares was amended to
authorize the purchase of up to 32 million shares. As of March 31, 2023 , we had
repurchased 30.8 million shares under this authorization.
We may continue, from time to time, to seek to retire portions of our
outstanding debt securities through cash repurchases, in open-market purchases,
privately negotiated transactions or otherwise. Such repurchases, if any, will
be subject to and depend on prevailing market conditions, our liquidity
requirements, contractual restrictions and other factors. The amounts involved
in any such transactions, individually or in the aggregate, may be material.
Liquidity. Our liquidity requirements are generally met from positive cash flow
from operations. Positive cash flow results from reinsurance and insurance
premiums being collected prior to disbursements for claims, which disbursements
generally take place over an extended period after the collection of premiums,
sometimes a period of many years. Collected premiums are generally invested,
prior to their use in such disbursements, and investment income provides
additional funding for loss payments. Our net cash flows from operating
activities were $1.1 billion and $846 million for the three months ended March
31, 2023 and 2022, respectively. Additionally, these cash flows reflected net
catastrophe loss payments of $198 million and $196 million for the three months
ended March 31, 2023 and 2022, respectively and net tax payments of $2 million
and $3 million for the three months ended March 31, 2023 and 2022, respectively.
If disbursements for claims and benefits, policy acquisition costs and other
operating expenses were to exceed premium inflows, cash flow from reinsurance
and insurance operations would be negative. The effect on cash flow from
insurance operations would be partially offset by cash flow from investment
income. Additionally, cash inflows from investment maturities - both short-term
investments and longer term maturities are available to supplement other
operating cash flows. We do not expect to supplement negative insurance
operations cash flows from investment dispositions.
As the timing of payments for claims and benefits cannot be predicted with
certainty, we maintain portfolios of long-term invested assets with varying
maturities, along with short-term investments that provide additional liquidity
for payment of claims. At March 31, 2023 and December 31, 2022 , we held cash and
short-term investments of $2.6 billion and $2.4 billion , respectively. Our
short-term investments are generally readily marketable and can be converted to
cash. In addition to these cash and short-term investments, at March 31, 2023 ,
we had $1.4 billion of available for sale fixed maturity securities maturing
within one year or less, $7.9 billion maturing within one to five years and $5.4
billion maturing after five years. Our $250 million of equity securities are
comprised primarily of publicly traded securities that we believe can be easily
liquidated. We believe that these fixed maturity and equity securities, in
conjunction with the short-term investments and positive cash flow from
operations, provide ample sources of liquidity for the expected payment of
losses in the near future. We do not anticipate selling a significant amount of
securities to pay losses and LAE. At March 31, 2023 we had $1.6 billion of net
pre-tax unrealized depreciation related to fixed maturity - available for
40
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sale securities, comprised of
and
Management generally expects annual positive cash flow from operations, which reflects the strength of overall pricing. However, given the recent set of catastrophic events, cash flow from operations may decline and could become negative in the near term as significant claim payments are made related to the catastrophes. However, as indicated above, the Company has ample liquidity to settle its catastrophe claims and/or any payments due for its catastrophe bond program. In addition to our cash flows from operations and liquid investments, we also have multiple active credit facilities that provide commitments of up to$1.5 billion of collateralized standby letters of credit to support business written by ourBermuda operating subsidiaries. In addition, the Company has the ability to request access to an additional$440 million of uncommitted credit facilities, which would require approval from the applicable lender. There is no guarantee the uncommitted capacity will be available to us on a future date. See Note 9 - Credit Facilities for further details.
Market Sensitive Instruments.
TheSEC'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, fixed maturity portfolio, while maintaining an adequate level of liquidity. Our mix of investments is adjusted periodically, consistent with our current and projected operating results and market conditions. The fixed maturity securities in the investment portfolio are comprised of non-trading 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. Interest Rate Risk. Our$31.4 billion investment portfolio, atMarch 31, 2023 , 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$4.5 billion of mortgage-backed securities in the$24.4 billion fixed maturity portfolio. Prepayment risk results from potential accelerated principal payments that shorten the average life and thus the expected yield of the security. The table below displays the potential impact of market value fluctuations and after-tax unrealized appreciation on our fixed maturity portfolio (including$1.0 billion of short-term investments) for the period indicated based on upward and downward parallel and immediate 100 and 200 basis point shifts in interest rates. For legal entities with aU.S. dollar functional currency, this modeling was performed on each security individually. To generate appropriate price estimates on mortgage-backed securities, changes in prepayment expectations under different interest rate environments were 41
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taken into account. For legal entities with a non-U.S. dollar functional currency, the effective duration of the involved portfolio of securities was used as a proxy for the market value change under the various interest rate change scenarios. Impact of Interest Rate Shift in Basis Points At March 31, 2023 -200 -100 0 100 200 (Dollars in millions) Total Fair Value$ 26,918 $ 26,168 $ 25,419 $ 24,670 $ 23,921 Fair Value Change from Base (%) 5.9 % 2.9 % - % (2.9) % (5.9) % Change in Unrealized Appreciation After-tax from Base ($)$ 1,317 $ 659 $ -
We had$22.9 billion and$22.1 billion of gross reserves for losses and LAE as ofMarch 31, 2023 andDecember 31, 2022 , respectively. These amounts are recorded at their nominal value, as opposed to present value, which would reflect a discount adjustment to reflect the time value of money. Since losses are paid out over a period of time, the present value of the reserves is less than the nominal value. As interest rates rise, the present value of the reserves decreases and, conversely, as interest rates decline, the present value increases. These movements are the opposite of the interest rate impacts on the fair value of investments. While the difference between present value and nominal value is not reflected in our financial statements, our financial results will include investment income over time from the investment portfolio until the claims are paid. Our loss and loss reserve obligations have an expected duration of approximately 3.8 years, which is reasonably consistent with our fixed income portfolio. If we were to discount our loss and LAE reserves, net of ceded reserves, the discount would be approximately$3.8 billion resulting in a discounted reserve balance of approximately$16.9 billion , representing approximately 66.6% of the value of the fixed maturity investment portfolio funds. Equity Risk. Equity risk is the potential change in fair value of the common stock, preferred stock and mutual fund portfolios arising from changing prices. Our equity investments consist of a diversified portfolio of individual securities and mutual funds, which invest principally in high quality common and preferred stocks that are traded on the major exchanges, and mutual fund investments in emerging market debt. The primary objective of the equity portfolio is to obtain greater total return relative to our core bonds over time through market appreciation and income.
The table below displays the impact on fair value and after-tax change in fair
value of a 10% and 20% change in equity prices up and down for the period
indicated.
Impact of Percentage
Change in Equity Fair Values
At March 31, 2023 (Dollars in millions) -20% -10% 0% 10% 20% Fair Value of the Equity Portfolio$ 200 $ 225 $ 250 $ 275 $ 300 After-tax Change in Fair Value$ (41) $ (20) $
-
Foreign Currency Risk. Foreign currency risk is the potential change in value, income and cash flow arising from adverse changes in foreign currency exchange rates. Each of our non-U.S. /Bermuda ("foreign") operations maintains capital in the currency of the country of its geographic location consistent with local regulatory guidelines. Each foreign operation may conduct business in its local currency, as well as the currency of other countries in which it operates. The primary foreign currency exposures for these foreign operations are the Canadian Dollar, the Singapore Dollar, the British Pound Sterling and the Euro. We mitigate foreign exchange exposure by generally matching the currency and duration of our assets to our corresponding operating liabilities. In accordance with FASB guidance, the impact on the fair 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 theU.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 theU.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", 42
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"will", "should", "could", "anticipate", "estimate", "expect", "plan",
"believe", "predict", "potential" and "intend". Forward-looking statements
contained in this report include:
•the effects of catastrophic and pandemic events on our financial statements; •estimates of our catastrophe exposure; •information regarding our reserves for losses and LAE; •our failure to accurately assess underwriting risk; •decreases in pricing for property and casualty reinsurance and insurance; •our ability to maintain our financial strength ratings; •the failure of our insured, intermediaries and reinsurers to satisfy their obligations; •our inability or failure to purchase reinsurance; •consolidation of competitors, customers and insurance and reinsurance brokers; •the effect on our business of the highly competitive nature of our industry, including the effect of new entrants to, competing products for and consolidation in the (re)insurance industry; •our ability to retain our key executive officers and to attract or retain the executives and employees necessary to manage our business; •the performance of our investment portfolio; •our ability to determine any impairments taken on our investments; •foreign currency exchange rate fluctuations; •the effect of cybersecurity risks, including technology breaches or failure, on our business; •the CARES Act; •the impact of the Tax Cut and Jobs Act; •the adequacy of capital in relation to regulatory required capital; and •the ability ofEverest Re , Holdings,Everest Underwriting Group (Ireland) Limited ,Everest Dublin Insurance Holdings Limited (Ireland ),Bermuda Re and Everest International Reinsurance, Ltd. 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.
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BERKLEY W R CORP – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
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