EVEREST REINSURANCE HOLDINGS INC – 10-Q – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS
Industry conditions.
The worldwide reinsurance and insurance businesses are highly competitive, as well as cyclical by product and market. As such, financial results tend to fluctuate with periods of constrained availability, higher rates and stronger profits followed by periods of abundant capacity, lower rates and constrained profitability. Competition in the types of reinsurance and insurance business that we underwrite is based on many factors, including the perceived overall financial strength of the reinsurer or insurer, ratings of the reinsurer or insurer 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 reinsurance and insurance business offered, services offered, speed of claims payment and reputation and experience in lines written. Furthermore, the market impact from these competitive factors related to reinsurance and insurance is generally not consistent across lines of business, domestic and international geographical areas and distribution channels. We compete in theU.S. and international reinsurance and insurance markets with numerous global competitors. Our competitors include independent reinsurance and insurance companies, subsidiaries or affiliates of established worldwide insurance companies, reinsurance departments of certain insurance companies, domestic and international underwriting operations, and certain government sponsored risk transfer vehicles. Some of these competitors have greater financial resources than we do and have established long term and continuing business relationships, which can be a significant competitive advantage. In addition, the lack of strong barriers to entry into the reinsurance business and recently, the securitization of reinsurance and insurance risks through capital markets provide additional sources of potential reinsurance and insurance capacity and competition. Worldwide insurance and reinsurance market conditions historically have been competitive. Generally, there was ample insurance and reinsurance capacity relative to demand, as well as additional capital from the capital markets through insurance linked financial instruments. These financial instruments such as side cars, catastrophe bonds and collateralized reinsurance funds, provided capital markets with access to insurance and reinsurance risk exposure. The capital markets demand for these products was being primarily driven by a low interest environment and the desire to achieve greater risk diversification and potentially higher returns on their investments. This increased competition was generally having a negative impact on rates, terms and conditions; however, the impact varies widely by market and coverage. The industry continues to deal with the impacts of a global pandemic, COVID-19 and its subsequent variants. We continue to service and meet the needs of our clients while ensuring the safety and health of our employees and customers. Prior to the pandemic, there was a growing industry consensus that there was some firming of (re)insurance rates for the areas impacted by the recent catastrophes. The increased frequency of catastrophe losses that continued to be experienced in 2022 and throughout 2021 appears to be further pressuring the increase of rates. As business activity continues to regain strength, rates also appear to be firming in most lines of business, particularly in the casualty lines that had seen significant losses such as excess casualty and directors' and officers' liability. Other casualty lines are experiencing modest rate increase, while some lines such as workers' compensation were experiencing softer market conditions. It is too early to tell what the impact on pricing conditions will be, but it is likely to change depending on the line of business and geography. While we are unable to predict the full impact the pandemic will have on the insurance industry as it continues to have a negative impact on the global economy, we are well positioned to continue to service our clients. Our capital position remains a source of strength, with high quality invested assets, significant liquidity and a low operating expense ratio. Our diversified global platform with its broad mix of products, distribution and geography is resilient. 29
-------------------------------------------------------------------------------- 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. To the best of our knowledge at this time, the Company has limited financial exposure related to the Russian invasion of theUkraine . However, given the ongoing nature of the war and the high degree of uncertainty around both exposures and coverage, a reasonable estimation of potential loss is not credible at this time. 30 --------------------------------------------------------------------------------
Financial summary.
We monitor and evaluate our overall performance based upon financial results.
The following table displays a summary of the consolidated net income (loss),
ratios and stockholder's equity for the periods indicated:
Three Months Ended Percentage
March 31, Increase/
(Dollars in millions) 2022 2021 (Decrease)
Gross written premiums $ 2,205.0 $ 2,133.3 3.4%
Net written premiums 1,796.2 1,765.3 1.7%
REVENUES:
Premiums earned $ 1,828.6 $ 1,696.9 7.8%
Net investment income 156.1 147.7 5.7%
Net gains (losses) on investments (226.6) 135.0 NM
Other income (expense) (9.4) 4.0 NM
Total revenues 1,748.7 1,983.6 -11.8%
CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses 1,225.7 1,354.1 -9.5%
Commission, brokerage, taxes and fees 384.6 349.9 9.9%
Other underwriting expenses 117.8 109.8 7.3%
Corporate expense 5.8 4.6 25.9%
Interest, fee and bond issue cost amortization
expense 24.1 15.5 55.0%
Total claims and expenses 1,757.9 1,833.8 -4.1%
INCOME (LOSS) BEFORE TAXES (9.2) 149.8 -106.1%
Income tax expense (benefit) (10.2) 30.3 -133.7%
NET INCOME (LOSS) $ 1.1 $ 119.4 -99.1%
Point
RATIOS: Change
Loss ratio 67.0% 79.8% (12.8)
Commission and brokerage ratio 21.0% 20.6% 0.4
Other underwriting expense ratio 6.4% 6.5% (0.1)
Combined ratio 94.5% 106.9% (12.4)
At At Percentage
March 31, December 31, Increase/
(Dollars in millions) 2022 2021 (Decrease)
Balance sheet data:
Total investments and cash $ 19,540.5 $ 19,718.8 -0.9%
Total assets 27,305.5 27,695.0 -1.4%
Provisions for claims and settlement expenses 13,403.6 13,121.2
2.2%
Total debt 3,088.9 3,088.6 0.0%
Total liabilities 20,659.5 20,656.9 0.0%
Stockholder's equity 6,646.0 7,038.0 -5.6%
(Some amounts may not reconcile due to rounding)
(NM, not meaningful)
31
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Revenues. Premiums. Gross written premiums increased by 3.4% to$2.2 billion for the three months endedMarch 31, 2022 , compared to$2.1 billion for the three months endedMarch 31, 2021 , reflecting a$112.1 million , or 15.7%, increase in our Insurance business and a$40.4 million , or 2.8%, decrease in our reinsurance business. The rise in insurance premiums was primarily due to increases in specialty casualty business and other specialty business. The decrease in reinsurance premiums was mainly due to a decline property pro rata business. Net written premiums increased by 1.7% to$1.80 billion for the three months endedMarch 31, 2022 , compared to$1.77 billion for the three months endedMarch 31, 2021 , which is consistent with the change in gross written premiums. Premiums earned increased by 7.8% to$1.8 billion for the three months endedMarch 31, 2022 , compared to$1.7 billion for the three months endedMarch 31, 2021 . The change in premiums earned relative to net written premiums is 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. Accordingly, the significant increases in gross written premiums from pro rata business during the latter half of 2021 contributed to the current quarter percentage increase in net earned premiums.
Other income (expenses). We recorded other expenses of
income from
respectively. The change is mainly the result of foreign currency fluctuations
exchange rate.
Net investment income. See the Consolidated Investment Results section below.
Section below.
Claims and Expenses.
Losses Incurred and Loss Settlement Costs. The following table shows our
losses incurred 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
2022
Attritional $ 1,138.5 62.3% $ - 0.0% $ 1,138.5 62.3%
Catastrophes 80.5 4.4% 6.7 0.4% 87.2 4.8%
Total $ 1,218.9 66.7% $ 6.7 0.4% $ 1,225.7 67.0%
2021
Attritional $ 1,078.4 63.6% $ (1.0) -0.1% $ 1,077.4 63.5%
Catastrophes 260.5 15.4% 16.2 1.0% 276.7 16.4%
Total $ 1,338.9 79.0% $ 15.2 0.9% $ 1,354.1 79.8%
Variance 2022/2021
Attritional $ 60.1 (1.3) pts $ 1.0 0.1 pts $ 61.1 (1.2) pts
Catastrophes (180.0) (11.0) pts (9.4) (0.6) pts (189.5) (11.6) pts
Total $ (119.9) (12.3) pts $ (8.4) (0.5) pts $ (128.4) (12.8) pts
Incurred losses and LAE decreased by 9.5% to $1.2 billion for the three months
ended March 31, 2022 compared to $1.4 billion for the three months ended March
31, 2021 , primarily due to a decline of $180.0 million in current year
catastrophe losses, partially offset by an increase of $60.1 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 $80.5 million for the three months ended March 31, 2022
related to 2022 Australia floods ($70.5 million ) and the 2022 March U.S. storms
($10.0 million ). The current year catastrophe
32
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losses of
million
Commission, Brokerage, Taxes and Fees. Commission, brokerage, taxes and fees increased to$384.6 million for the three months endedMarch 31, 2022 compared to$349.9 million for the three months endedMarch 31, 2021 . The increase was mainly due to the impact of the increase in premiums earned and changes in the mix of business. Other Underwriting Expenses. Other underwriting expenses increased to$117.8 million for the three months endedMarch 31, 2022 compared to$109.8 million for the three months endedMarch 31, 2021 . The increases were mainly due to the impact of increase in premiums earned and costs incurred to support the expansion of the insurance business. Corporate Expenses. Corporate expenses, which are general operating expenses that are not allocated to segments, have increased to$5.8 million from$4.6 million for the three months endedMarch 31, 2022 and 2021, respectively. The increase was mainly due to higher compensation costs from increased staff count. Interest, Fees and Bond Issue Cost Amortization Expense. Interest, fees and other bond amortization expense was$24.1 million and$15.5 million for the three months endedMarch 31, 2022 and 2021, respectively. The variance in expense was primarily due to the issuance of$1.0 billion of senior notes inOctober 2021 . Interest expense was also impacted by the movements in the floating interest rate related to the long term subordinated notes, which is reset quarterly per the note agreement. The floating rate was 2.89% as ofMarch 31, 2022 . Income Tax Expense (Benefit). We had income tax benefit of$10.2 million and income tax expense of$30.3 million for the three months endedMarch 31, 2022 and 2021, 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, foreign exchange gains (losses) and net gains (losses) on investments, among jurisdictions with different tax rates. Net Income (Loss). Our net income was$1.1 million and$119.4 million , for the three months endedMarch 31, 2022 and 2021 respectively. The changes were primarily driven by the financial component fluctuations explained above.
Reports.
Our combined ratio decreased by 12.4 points to 94.5% for the three months endedMarch 31, 2022 , compared to 106.9% for the three months endedMarch 31, 2021 . The loss ratio component decreased 12.8 points for the three months endedMarch 31, 2022 over the same period last year mainly due to a decline of$180.0 million in current year catastrophe losses. The commission and brokerage ratio components increased slightly to 21.0% for the three months endedMarch 31, 2022 compared to 20.6% for the three months endedMarch 31, 2021 mainly due to changes in the mix of business. The other underwriting expense ratios decreased slightly to 6.4% for the three months endedMarch 31, 2022 compared to 6.5% for the three months endedMarch 31, 2021 .
Equity.
Stockholder's equity decreased by$392.0 million to$6.6 billion atMarch 31, 2022 from$7.0 billion atDecember 31, 2021 , principally as a result of$392.0 million of net unrealized depreciation on investments, net of tax and$1.9 million of net foreign currency translation adjustments, partially offset by$1.1 million of net income and$0.8 million of net benefit plan obligation adjustments, net of tax. The movement in the unrealized depreciation on investments was driven by the change in interest rates on the Company's fixed maturity portfolio. 33
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Consolidated investment results
Net investment income.
Net investment income increased to$156.1 million for the three months endedMarch 31, 2022 compared to$147.7 million for the three months endedMarch 31, 2021 . The increase was primarily the result of increases in income from fixed maturity securities and other alternative investments, partially offset by a decline in income from limited partnerships. The limited partnership income primarily reflects increases in their reported net asset values. As such, until these asset values are monetized and the resultant income is distributed, they are subject to future increases or decreases in the asset value, and the results may be volatile. The following table shows the components of net investment income for the periods indicated: Three Months Ended March 31, (Dollars in millions) 2022 2021 Fixed maturities$ 94.4 $ 85.1 Equity securities 4.2 2.9 Short-term investments and cash 0.2 0.1 Other invested assets Limited partnerships 43.5 52.2 Dividends from preferred shares of affiliate 7.8 7.8 Other 11.8 6.0 Gross investment income before adjustments 161.9 154.1 Funds held interest income (expense) 2.8 3.5 Interest income from Parent 1.8 1.3 Gross investment income 166.5 158.9 Investment expenses 10.4 11.2 Net investment income$ 156.1 $ 147.7
(Some amounts may not add up due to rounding.)
The following table shows a comparison of various investment yields for the
periods indicated.
Three Months Ended
March 31,
2022 2021
Annualized pre-tax return on average and invested cash
assets
3.3%
3.8%
Annualized after-tax yield on average cash and
invested assets 2.6% 3.1%
34
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The following table shows the composition of our net gains (losses) on
investments for the periods indicated:
Three Months Ended March 31, (Dollars in millions) 2022 2021 Variance Realized gains (losses) from dispositions: Fixed maturity securities Gains$ 3.2 $ 6.3 $ (3.2) Losses (8.2) (2.4) (5.8) Total (5.1) 3.9 (9.0) Equity securities, fair value Gains 3.5 12.3 (8.8) Losses (11.8) (6.1) (5.7) Total (8.3) 6.2 (14.5) Other invested assets Gains 4.3 1.4 2.9 Losses (0.3) (0.1) (0.2) Total 3.9 1.3 2.6 Short Term Investments: Gains - - - Losses (0.1) - (0.1) Total (0.1) - (0.1) Total net realized gains (losses) from dispositions Gains 10.9 20.1 (9.1) Losses (20.5) (8.6) (11.9) Total (9.6) 11.5 (21.0) Allowances for credit losses: (1.6)
(7.1) 5.5
Gains (losses) from fair value adjustments: Equity securities, fair value (130.8) 37.6 (168.4) Other invested assets, fair value (84.6) 93.1 (177.7) Total (215.4)
130.6 (346.0)
Total net gains (losses) on investments$ (226.6) $
135.0
(Some amounts may not add up due to rounding.)
Net gains (losses) on investments during the three months endedMarch 31, 2022 primarily relate to net losses from fair value adjustments on equity securities in the amount of$130.8 million as a result of equity market declines during the first quarter of 2022 and net losses of$84.6 million from fair value adjustments on other invested assets.
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 risks on a worldwide basis in 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 inthe United States as well as through branches inCanada andSingapore . The Insurance operation writes property and casualty insurance directly and through brokers, surplus lines brokers and general agents withinthe United States . 35
-------------------------------------------------------------------------------- These segments are managed independently, but conform with corporate guidelines with respect to pricing, risk management, control of aggregate catastrophe exposures, capital, investments and support operations. Management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting results. Underwriting results include earned premium less losses and LAE incurred, commission and brokerage expenses and other underwriting expenses. We measure our underwriting results using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which respectively, divide incurred losses, commissions and brokerage and other underwriting expenses by premiums earned.
The Company does not maintain separate balance sheet data for its operations
segments. Accordingly, the Company does not review or assess the financial condition
results of its operating segments based on 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 the re-evaluation is made.
The following presents the underwriting results for each of our segments for
the periods indicated:
Reinsurance.
The following table presents the technical results and the ratios for the
Reinsurance segment for the periods indicated.
Three Months Ended March 31, (Dollars in millions) 2022 2021 Variance % Change Gross written premiums$ 1,379.7 $ 1,420.1 $ (40.4) -2.8% Net written premiums 1,185.3 1,208.8 (23.5) -1.9% Premiums earned$ 1,209.3 $ 1,177.2 $ 32.1 2.7% Incurred losses and LAE 820.5 970.3 (149.8) -15.4% Commission and brokerage 315.3 290.6 24.8 8.5% Other underwriting expenses 31.0 36.3 (5.3) -14.6% Underwriting gain (loss)$ 42.5 $ (120.0) $ 162.5 135.5% Point Chg Loss ratio 67.8% 82.4% (14.6) Commission and brokerage ratio 26.1% 24.7% 1.4 Other underwriting ratio 2.6% 3.1% (0.5) Combined ratio 96.5% 110.2% (13.7) (Some amounts may not reconcile due to rounding.) (NM, not meaningful) Premiums. Gross written premiums decreased by 2.8% to$1.38 billion for the three months endedMarch 31, 2022 from$1.42 billion for the three months endedMarch 31, 2021 primarily due to a decline in property pro rata business. Net written premiums decreased by 1.9% to$1.19 billion for the three months endedMarch 31, 2022 compared to$1.21 billion for the three months endedMarch 31, 2021 , which is consistent with the change in gross written premiums. Premiums earned increased 2.7% to$1.21 billion for the three months endedMarch 31, 2022 compared to$1.18 billion for the three months endedMarch 31, 2021 . The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period. Accordingly, the increases in gross written premiums from pro rata business during the latter half of 2021 contributed to the current quarter percentage increase in net earned premiums. 36
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Losses incurred and LAE. The following tables show the losses incurred 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
2022
Attritional $ 737.6 61.0% $ 0.4 0.0% $ 738.0 61.0%
Catastrophes 75.5 6.2% 7.0 0.6% 82.5 6.8%
Total segment $ 813.1 67.2% $ 7.4 0.6% $ 820.5 67.8%
2021
Attritional $ 741.8 63.0% $ - 0.0% $ 741.8 63.0%
Catastrophes 213.0 18.1% 15.5 1.3% 228.5 19.4%
Total segment $ 954.8 81.1% $ 15.5 1.3% $ 970.3 82.4%
Variance 2022/2021
Attritional $ (4.2) (2.0) pts $ 0.4 - pts $ (3.8) (2.0) pts
Catastrophes (137.5) (11.9) pts (8.5) (0.7) pts
(146.0) (12.6) points
Total Segment
Incurred losses decreased by 15.4% to$820.5 million for the three months endedMarch 31, 2022 , compared to$970.3 million for the three months endedMarch 31, 2021 . The decrease was primarily due to a decrease of$137.5 million in current year catastrophe losses. The current year catastrophe losses of$75.5 million for the three months endedMarch 31, 2022 related primarily to 2022 Australia floods ($70.5 million ) and the 2022 MarchU.S. storms ($5.0 million ). The$213.0 million of current year catastrophe losses for the three months endedMarch 31, 2021 related toTexas winter storms ($205.5 million ), and the 2021 Australia floods ($7.5 million ). Segment Expenses. Commission and brokerage expenses increased to$315.3 million for the three months endedMarch 31, 2022 compared to$290.6 million for the three months endedMarch 31, 2021 . The increase was mainly due to the impact of the increase in premiums earned and changes in the mix of business. Segment other underwriting expenses decreased to$31.0 million for the three months endedMarch 31, 2022 from$36.3 million for the three months endedMarch 31, 2021 . The decrease was mainly due to was mainly due to lower variable compensation expenses. Insurance.
The following table presents the technical results and the ratios for the
Insurance segment for the periods indicated.
Three Months Ended March 31, (Dollars in millions) 2022 2021 Variance % Change Gross written premiums$ 825.3 $ 713.3 $ 112.1 15.7% Net written premiums 610.9 556.5 54.3 9.8% Premiums earned$ 619.3 $ 519.7 $ 99.5 19.2% Incurred losses and LAE 405.2 383.8 21.5 5.6% Commission and brokerage 69.3 59.3 10.0 16.9% Other underwriting expenses 86.8 73.5 13.3 18.1% Underwriting gain (loss)$ 58.0 $ 3.2 $ 54.8 NM Point Chg Loss ratio 65.4% 73.8% (8.4) Commission and brokerage ratio 11.2% 11.4% (0.2) Other underwriting ratio 14.0% 14.1% (0.1) Combined ratio 90.6% 99.4% (8.8) (Some amounts may not reconcile due to rounding.) (NM, not meaningful) 37
-------------------------------------------------------------------------------- Premiums. Gross written premiums increased by 15.7% to$825.3 million for the three months endedMarch 31, 2022 compared to$713.3 million for the three months endedMarch 31, 2021 . The rise in gross written premiums was primarily due to increases in specialty casualty business and other specialty business. Net written premiums increased by 9.8% to$610.9 million for the three months endedMarch 31, 2022 compared to$556.5 million for the three months endedMarch 31, 2021 . The difference between the change in net earned premiums compared to the change in gross written premiums is due to varying utilization of reinsurance. Premiums earned increased 19.2% to$619.3 million for the three months endedMarch 31, 2022 compared to$519.7 million for the three months endedMarch 31, 2021 . The change in premiums earned is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period. Accordingly, the significant increases in gross written premiums during the latter half of 2021 contributed to the current quarter percentage increase in net earned premiums.
Losses incurred and LAE. The following tables show the losses incurred 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
2022
Attritional $ 400.9 64.7% $ (0.4) -0.1% $ 400.5 64.7%
Catastrophes 5.0 0.8% (0.3) 0.0% 4.7 0.8%
Total segment $ 405.9 65.5% $ (0.7) -0.1% $ 405.2 65.4%
2021
Attritional $ 336.6 64.8% $ (1.0) -0.2% $ 335.6 64.6%
Catastrophes 47.5 9.1% 0.7 0.1% 48.2 9.3%
Total segment $ 384.1 73.9% $ (0.3) -0.1% $ 383.8 73.8%
Variance 2022/2021
Attritional $ 64.3 (0.1) pts $ 0.6 0.1 pts $ 64.9 0.1 pts
Catastrophes (42.5) (8.3) pts (0.9) (0.1) pts (43.4) (8.5) pts
Total segment $ 21.8 (8.4) pts $ (0.3) - pts $ 21.5 (8.4) pts
Incurred losses and LAE increased by 5.6% to $405.2 million for the three months
ended March 31, 2022 compared to $383.8 million for the three months ended March
31, 2021 , mainly due to an increase of $64.3 million in current year attritional
losses which is primarily related to the impact of the increase in premiums
earned, partially offset by a decrease of $42.5 million in current year
catastrophe losses. The $5.0 million of current year catastrophe losses for the
three months ended March 31, 2022 , related to the 2022 March U.S. storms. The
$47.5 million of current year catastrophe losses for the three months ended
March 31, 2021 , related to Texas winter storms.
Segment Expenses. Commission and brokerage increased to $69.3 million for the
three months ended March 31, 2022 compared to $59.3 million for the three months
ended March 31, 2021 . The increase was mainly due to the impact of the increase
in premiums earned.
Segment other underwriting expenses increased to $86.8 million for the three
months ended March 31, 2022 compared to $73.5 million for the three months ended
March 31, 2021 . The increase was mainly due to the impact of the increase in
premiums earned and increased expenses related to the continued build out of the
insurance business.
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. 38 -------------------------------------------------------------------------------- Our current investment strategy seeks to maximize after-tax income through a high quality, diversified, taxable and tax-preferenced fixed maturity portfolio, while maintaining an adequate level of liquidity. Our mix of taxable and tax-preferenced investments is adjusted periodically, consistent with our current and projected operating results, market conditions and our tax position. The fixed maturity securities in the investment portfolio are comprised of non-trading available for sale securities. Additionally, we have invested in equity securities. The overall investment strategy considers the scope of present and anticipated Company operations. In particular, estimates of the financial impact resulting from non-investment asset and liability transactions, together with our capital structure and other factors, are used to develop a net liability analysis. This analysis includes estimated payout characteristics for which our investments provide liquidity. This analysis is considered in the development of specific investment strategies for asset allocation, duration and credit quality. The change in overall market sensitive risk exposure principally reflects the asset changes that took place during the period. Interest Rate Risk. Our$19.5 billion investment portfolio, atMarch 31, 2022 , is principally comprised of fixed maturity securities, which are generally subject to interest rate risk and some foreign currency exchange rate risk, and some equity securities, which are subject to price fluctuations and some foreign exchange rate risk. The overall economic impact of the foreign exchange risks on the investment portfolio is partially mitigated by changes in the dollar value of foreign currency denominated liabilities and their associated income statement impact. Interest rate risk is the potential change in value of the fixed maturity securities portfolio, including short-term investments, from a change in market interest rates. In a declining interest rate environment, it includes prepayment risk on the$1.7 billion of mortgage-backed securities in the$12.8 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$573.5 million of short-term investments) for the period indicated based on upward and downward parallel and immediate 100 and 200 basis point shifts in interest rates. For legal entities with aU.S. dollar functional currency, this modeling was performed on each security individually. To generate appropriate price estimate on mortgage-backed securities, changes in prepayment expectations under different interest rate environments were taken into account. For legal entities with non-U.S. dollar functional currency, the effective duration of the involved portfolio of securities was used as a proxy for the market value change under the various interest rate change scenarios. Impact of Interest Rate Shift in Basis Points At March 31, 2022 (Dollars in millions) -200 -100 - 100 200 Total Market/Fair Value$ 14,125.2 $ 13,755.2 $ 13,385.1 $ 13,015.1 $ 12,645.1 Market/Fair Value Change from Base (%) 5.5% 2.8% 0.0% -2.8% -5.5% Change in Unrealized Appreciation After-tax from Base ($)$ 584.6 $ 292.3 $ -$ (292.3) $ (584.6) We had$13.4 billion and$13.1 billion of gross reserves for losses and LAE as ofMarch 31, 2022 andDecember 31, 2021 , respectively. These amounts are recorded at their nominal value, as opposed to present value, which would reflect a discount adjustment to reflect the time value of money. Since losses are paid out over a period of time, the present value of the reserves is less than the nominal value. As interest rates rise, the present value of the reserves decreases and, conversely, as interest rates decline, the present value increases. These movements are the opposite of the interest rate impacts on the fair value of investments. While the difference between present value and nominal value is not reflected in our financial statements, our financial results will include investment income over time from the investment portfolio until the claims are paid. Our loss and loss reserve obligations have an expected duration that is reasonably consistent with our fixed income portfolio. 39 -------------------------------------------------------------------------------- Equity Risk. Equity risk is the potential change in fair and/or market value of the common stock, preferred stock and mutual fund portfolios arising from changing prices. Our equity investments consist of a diversified portfolio of individual securities. The primary objective of the equity portfolio is to obtain greater total return relative to our core bonds over time through market appreciation and income. The table below displays the impact on fair/market value and after-tax change in fair/market value of a 10% and 20% change in equity prices up and down for the periods indicated. Impact of Percentage Change
in fair values/market values
At March 31, 2022 (Dollars in millions) -20% -10% 0% 10% 20%
Fair/market value of equity portfolio
1,731.8$ 1,905.0 $ 2,078.1 After-tax Change in Fair/Market Value (273.6) (136.8) - 136.8 273.6 Foreign Currency Risk. Foreign currency risk is the potential change in value, income and cash flow arising from adverse changes in foreign currency exchange rates. Each of our non-U.S. ("foreign") operations maintains capital in the currency of the country of its geographic location consistent with local regulatory guidelines. Each foreign operation may conduct business in its local currency, as well as the currency of other countries in which it operates. The primary foreign currency exposures for these foreign operations are theSingapore and Canadian Dollars. We mitigate foreign exchange exposure by generally matching the currency and duration of our assets to our corresponding operating liabilities. In accordance with FASB guidance, the impact on the market value of available for sale fixed maturities due to changes in foreign currency exchange rates, in relation to functional currency, is reflected as part of other comprehensive income. Conversely, the impact of changes in foreign currency exchange rates, in relation to functional currency, on other assets and liabilities is reflected through net income as a component of other income (expense). In addition, we translate the assets, liabilities and income of non-U.S. dollar functional currency legal entities to 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", "will", "should", "could", "anticipate", "estimate", "expect", "plan", "believe", "predict", "potential" and "intend". Forward-looking statements contained in this report include information regarding our reserves for losses and LAE, the CARES Act, the impact of the TCJA, the adequacy of our provision for uncollectible balances, estimates of our catastrophe exposure, the effects of catastrophic and pandemic events on our financial statements and the ability of our subsidiaries to pay dividends. Forward-looking statements only reflect our expectations and are not guarantees of performance. These statements involve risks, uncertainties and assumptions. Actual events or results may differ materially from our expectations. Important factors that could cause our actual events or results to be materially different from our expectations include those discussed under the caption ITEM 1A, "Risk Factors" in the Company's most recent 10-K filing. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.