UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

_X_    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2018
___  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number 1-15731
EVEREST RE GROUP, LTD.
(Exact name of registrant as specified in its charter)


Bermuda
 
98-0365432
(State or other jurisdiction of
incorporation or organization)
 
 
(I.R.S. Employer
Identification No.)
Seon Place – 4th Floor
141 Front Street
PO Box HM 845
Hamilton HM 19, Bermuda
441-295-0006

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

             
Securities registered pursuant to Section 12(b) of the Act:
 
 
Title of Each Class
Common Shares, $.01 par value per share
 
Name of Each Exchange on Which Registered
New York Stock Exchange
 

             
Securities registered pursuant to Section 12(g) of the Act:  None

             
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES
X
 
NO
 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

YES
   
NO
X

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

YES
X
 
NO
 


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

YES
X
 
NO
 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [   ]

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

Large accelerated filer
X
 
Accelerated filer
 
Non-accelerated filer
   
Smaller reporting company
 

 
Emerging  growth company
 

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

YES
   
NO
X

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

YES
   
NO
X

The aggregate market value on June 30, 2018, the last business day of the registrant’s most recently completed second quarter, of the voting shares held by non-affiliates of the registrant was $9,417,452 thousand.

At February 1, 2019, the number of shares outstanding of the registrant’s common shares was 40,675,221.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required by Items 10, 11, 12, 13 and 14 of Form 10-K is incorporated by reference into Part III hereof from the registrant’s proxy statement for the 2018 Annual General Meeting of Shareholders, which will be filed with the Securities and Exchange Commission within 120 days of the close of the registrant’s fiscal year ended December 31, 2018.



EVEREST RE GROUP, LTD

TABLE OF CONTENTS
FORM 10-K



 
Page
 
PART I
     
Item 1.
Business
1
Item 1A.
Risk Factors
25
 
Item 1B.
Unresolved Staff Comments
37
Item 2.
Properties
38
Item 3.
Legal Proceedings
38
Item 4.
Mine Safety Disclosures
38
     
     
PART II
     
Item 5.
Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
38
Item 6.
Selected Financial Data
41
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
42
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
78
Item 8.
Financial Statements and Supplementary Data
78
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
78
Item 9A.
Controls and Procedures
78
Item 9B.
Other Information
79
     
     
PART III
     
Item 10.
Directors, Executive Officers and Corporate Governance
79
Item 11.
Executive Compensation
79
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
79
Item 13.
Certain Relationships and Related Transactions, and Director Independence
79
Item 14.
Principal Accountant Fees and Services
80
     
     
PART IV
     
Item 15.
Exhibits and Financial Statement Schedules
80



PART I

Unless otherwise indicated, all financial data in this document have been prepared using accounting principles generally accepted in the United States of America (“GAAP”).  As used in this document, “Group” means Everest Re Group, Ltd.; “Holdings Ireland” means Everest Underwriting Group (Ireland) Limited; “Ireland Re” means Everest Reinsurance Company (Ireland), designated activity company; “Holdings” means Everest Reinsurance Holdings, Inc.; “Everest Re” means Everest Reinsurance Company and its subsidiaries (unless the context otherwise requires); and the “Company”, “we”, “us”, and “our” means Everest Re Group, Ltd. and its subsidiaries.

ITEM 1.  BUSINESS

The Company.
Group, a Bermuda company, was established in 1999 as a wholly-owned subsidiary of Holdings.  On February 24, 2000, a corporate restructuring was completed and Group became the new parent holding company of Holdings.  Holdings continues to be the holding company for the Company’s U.S. based operations.  Holders of shares of common stock of Holdings automatically became holders of the same number of common shares of Group.  Prior to the restructuring, Group had no significant assets or capitalization and had not engaged in any business or prior activities other than in connection with the restructuring.

In connection with the February 24, 2000 restructuring, Group established a Bermuda-based reinsurance subsidiary, Everest Reinsurance (Bermuda), Ltd. (“Bermuda Re”), which commenced business in the second half of 2000.  Group also formed Everest Global Services, Inc., a Delaware subsidiary, to perform administrative functions for Group and its U.S. based and non-U.S. based subsidiaries.

On December 30, 2008, Group contributed Holdings to its Irish holding company, Holdings Ireland.  Holdings Ireland is a direct subsidiary of Group and was established to serve as a holding company for the U.S. and Irish reinsurance and insurance subsidiaries.  Effective July 1, 2016, the Company established a new Irish holding company, Everest Dublin Insurance Holdings Limited (Ireland) (“Everest Dublin Holdings”) and contributed Ireland Re to Everest Dublin Holdings.

Holdings, a Delaware corporation, was established in 1993 to serve as the parent holding company of Everest Re, a Delaware property and casualty reinsurer formed in 1973.  Until October 6, 1995, Holdings was an indirect wholly-owned subsidiary of The Prudential Insurance Company of America (“The Prudential”).  On October 6, 1995, The Prudential sold its entire interest in Holdings in an initial public offering.

During the fourth quarter of 2017, the Company established a new Irish insurance subsidiary, Everest Insurance Ireland, designated activity company (“Ireland Insurance”), which writes insurance business mainly in the European markets.

During the third quarter of 2016, the Company established domestic subsidiaries, Everest Premier Insurance Company (“Everest Premier”) and Everest Denali Insurance Company (“Everest Denali”), which are being used in the continued expansion of the Insurance operations.

Effective August 24, 2016, the Company sold its wholly-owned subsidiary, Heartland Crop Insurance Company (“Heartland”), a managing agent for crop insurance, to CGB Diversified Services, Inc. (“CGB”).  The operating results of Heartland for the period owned are included within the Company’s financial statements.

The Company’s principal business, conducted through its operating segments, is the underwriting of reinsurance and insurance in the U.S., Bermuda and international markets.  The Company had gross written premiums, in 2018, of $8.5 billion with approximately 73% representing reinsurance and 27% representing insurance.  Shareholders’ equity at December 31, 2018 was $7.9 billion.  The Company underwrites reinsurance both through brokers and directly with ceding companies, giving it the flexibility to pursue business based on the ceding company’s preferred reinsurance purchasing method.  The Company underwrites insurance principally through brokers, surplus lines brokers and general agent relationships.  Group’s active operating subsidiaries, other than Ireland Insurance which is not yet rated, are each rated A+ (“Superior”) by
1


A.M. Best Company (“A.M. Best”), a leading provider of insurer ratings that assigns financial strength ratings to insurance companies based on their ability to meet their obligations to policyholders.

Following is a summary of the Company’s principal operating subsidiaries:

·
Bermuda Re, a Bermuda insurance company and a direct subsidiary of Group, is registered in Bermuda as a Class 4 insurer and long-term insurer and is authorized to write property and casualty and life and annuity business.  Bermuda Re commenced business in the second half of 2000.  Bermuda Re’s UK branch writes property and casualty reinsurance to the United Kingdom and European markets.  At December 31, 2018, Bermuda Re had shareholder’s equity of $3.1 billion.

·
Everest International Reinsurance, Ltd. (“Everest International”), a Bermuda insurance company and a direct subsidiary of Group, is registered in Bermuda as a Class 4 insurer and is authorized to write property and casualty business.  Through 2018, all of Everest International’s business has been inter-affiliate quota share reinsurance assumed from Everest Re, the UK branch of Bermuda Re, Ireland Re and Ireland Insurance.  In 2015, Everest International issued additional capital as part of a capital restructuring initiative within the Company to support a planned increase in international business production, which includes supporting Group’s Lloyd’s of London Syndicate corporate member.  At December 31, 2018, Everest International had shareholder’s equity of $2.7 billion.

·
Ireland Re, an Ireland reinsurance company and an indirect subsidiary of Group, is licensed to write non-life reinsurance, both directly and through brokers, for the London and European markets.

·
Ireland Insurance, an Ireland insurance company and an indirect subsidiary of Group, is licensed to write insurance for the European markets.

·
Everest Re, a Delaware insurance company and a direct subsidiary of Holdings, is a licensed property and casualty insurer and/or reinsurer in all states, the District of Columbia, Puerto Rico and Guam and is authorized to conduct reinsurance business in Canada, Singapore and Brazil.  Everest Re underwrites property and casualty reinsurance for insurance and reinsurance companies in the U.S. and international markets.  At December 31, 2018, Everest Re had statutory surplus of $3.7 billion.

·
Everest Insurance Company of Canada (“Everest Canada”), a Canadian insurance company and direct subsidiary of Holdings Ireland, is licensed to write property and casualty insurance in all Canadian provinces.

·
Everest National Insurance Company (“Everest National”), a Delaware insurance company and a direct subsidiary of Everest Re, is licensed in 50 states, the District of Columbia and Puerto Rico and is authorized to write property and casualty insurance on an admitted basis in the jurisdictions in which it is licensed.  The majority of Everest National’s business is reinsured by its parent, Everest Re.

·
Everest Indemnity Insurance Company (“Everest Indemnity”), a Delaware insurance company and a direct subsidiary of Everest Re, writes excess and surplus lines insurance business in the U.S. on a non-admitted basis.  Excess and surplus lines insurance is specialty property and liability coverage that an insurer not licensed to write insurance in a particular jurisdiction is permitted to provide to insureds when the specific specialty coverage is unavailable from admitted insurers.  Everest Indemnity is licensed in Delaware and is eligible to write business on a non-admitted basis in all other states, the District of Columbia and Puerto Rico.  The majority of Everest Indemnity’s business is reinsured by its parent, Everest Re.

·
Everest Security Insurance Company (“Everest Security”), a Georgia insurance company and a direct subsidiary of Everest Re, writes property and casualty insurance on an admitted basis in Georgia and Alabama and is approved as an eligible surplus lines insurer in Delaware.  The majority of Everest Security’s business is reinsured by its parent, Everest Re.

2


·
Everest International Assurance, Ltd. (“Everest Assurance”), a Bermuda company and a direct subsidiary of Holdings is registered in Bermuda as a Class 3A general business insurer and as a Class C long-term insurer.  Everest Assurance has made a one-time election under section 953(d) of the U.S. Internal Revenue Code to be a U.S. income tax paying “Controlled Foreign Corporation.”  By making this election, Everest Assurance is authorized to write life reinsurance and casualty reinsurance in both Bermuda and the U.S.

·
Everest Denali, a Delaware insurance company and a direct subsidiary of Everest Re, is licensed to write property and casualty insurance in 49 states and the District of Columbia.

·
Everest Premier, a Delaware insurance company and a direct subsidiary of Everest Re, is licensed to write property and casualty insurance in 49 states and the District of Columbia.

·
Heartland, a Kansas based managing general agent and a direct subsidiary of Holdings, was acquired on January 2, 2011.  Heartland specializes in crop insurance, which is written mainly through Everest National.  Effective August 24, 2016, the Company sold Heartland to CGB.  The operating results of Heartland for the period owned are included within the Company’s financial statements.

Reinsurance Industry Overview.
Reinsurance is an arrangement in which an insurance company, the reinsurer, agrees to indemnify another insurance or reinsurance company, the ceding company, against all or a portion of the insurance risks underwritten by the ceding company under one or more insurance contracts.  Reinsurance can provide a ceding company with several benefits, including a reduction in its net liability on individual risks or classes of risks, catastrophe protection from large and/or multiple losses and/or a reduction in operating leverage as measured by the ratio of net premiums and reserves to capital.  Reinsurance also provides a ceding company with additional underwriting capacity by permitting it to accept larger risks and write more business than would be acceptable relative to the ceding company’s financial resources.  Reinsurance does not discharge the ceding company from its liability to policyholders; rather, it reimburses the ceding company for covered losses.

There are two basic types of reinsurance arrangements:  treaty and facultative.  Treaty reinsurance obligates the ceding company to cede and the reinsurer to assume a specified portion of a type or category of risks insured by the ceding company.  Treaty reinsurers do not separately evaluate each of the individual risks assumed under their treaties, instead, the reinsurer relies upon the pricing and underwriting decisions made by the ceding company.  In facultative reinsurance, the ceding company cedes and the reinsurer assumes all or part of the risk under a single insurance contract. Facultative reinsurance is negotiated separately for each insurance contract that is reinsured.  Facultative reinsurance, when purchased by ceding companies, usually is intended to cover individual risks not covered by their reinsurance treaties because of the dollar limits involved or because the risk is unusual.

Both treaty and facultative reinsurance can be written on either a pro rata basis or an excess of loss basis.  Under pro rata reinsurance, the ceding company and the reinsurer share the premiums as well as the losses and expenses in an agreed proportion.  Under excess of loss reinsurance, the reinsurer indemnifies the ceding company against all or a specified portion of losses and expenses in excess of a specified dollar amount, known as the ceding company's retention or reinsurer's attachment point, generally subject to a negotiated reinsurance contract limit.

In pro rata reinsurance, the reinsurer generally pays the ceding company a ceding commission.  The ceding commission generally is based on the ceding company’s cost of acquiring the business being reinsured (commissions, premium taxes, assessments and miscellaneous administrative expense and may contain profit sharing provisions, whereby the ceding commission is adjusted based on loss experience).  Premiums paid by the ceding company to a reinsurer for excess of loss reinsurance are not directly proportional to the premiums that the ceding company receives because the reinsurer does not assume a proportionate risk.  There is usually no ceding commission on excess of loss reinsurance.

3


Reinsurers may purchase reinsurance to cover their own risk exposure. Reinsurance of a reinsurer's business is called a retrocession.  Reinsurance companies cede risks under retrocessional agreements to other reinsurers, known as retrocessionaires, for reasons similar to those that cause insurers to purchase reinsurance: to reduce net liability on individual or classes of risks, protect against catastrophic losses, stabilize financial ratios and obtain additional underwriting capacity.

Reinsurance can be written through intermediaries, generally professional reinsurance brokers, or directly with ceding companies.  From a ceding company's perspective, the broker and the direct distribution channels have advantages and disadvantages.  A ceding company's decision to select one distribution channel over the other will be influenced by its perception of such advantages and disadvantages relative to the reinsurance coverage being placed.

Business Strategy.
The Company’s business strategy is to sustain its leadership position within targeted reinsurance and insurance markets, provide effective management throughout the property and casualty underwriting cycle and thereby achieve an attractive return for its shareholders.  The Company’s underwriting strategies seek to capitalize on its i) financial strength and capacity, ii) global franchise, iii) stable and experienced management team, iv) diversified product and distribution offerings, v) underwriting expertise and disciplined approach, vi) efficient and low-cost operating structure and vii) effective enterprise risk management practices.

The Company offers treaty and facultative reinsurance and admitted and non-admitted insurance. The Company’s products include the full range of property and casualty reinsurance and insurance coverages, including marine, aviation, surety, errors and omissions liability (“E&O”), directors’ and officers’ liability (“D&O”), medical malpractice, other specialty lines, accident and health (“A&H”) and workers’ compensation.

The Company’s underwriting strategies emphasizes underwriting profitability over premium volume.  Key elements of this strategy include careful risk selection, appropriate pricing through strict underwriting discipline and adjustment of the Company’s business mix in response to changing market conditions.  The Company focuses on reinsuring companies that effectively manage the underwriting cycle through proper analysis and pricing of underlying risks and whose underwriting guidelines and performance are compatible with its objectives.

The Company’s underwriting strategies emphasize flexibility and responsiveness to changing market conditions.  The Company believes that its existing strengths, including its broad underwriting expertise, global presence, strong financial ratings and substantial capital, facilitate adjustments to its mix of business geographically, by line of business and by type of coverage, allowing it to participate in those market opportunities that provide the greatest potential for underwriting profitability.  The Company’s insurance operations complement these strategies by accessing business that is not available on a reinsurance basis.  The Company carefully monitors its mix of business across all operations to avoid unacceptable geographic or other risk concentrations.

Commencing in 2015 the Company initiated a strategic build out of its insurance platform through the investment in key leadership hires which in turn has brought significant underwriting talent and stronger direction in achieving its insurance program strategic goals of increased premium volume and improved underwriting results.  Recent growth is coming from highly diversified areas including newly launched lines of business, as well as product and geographic expansion in existing lines of business.  The Company is building a world-class insurance platform capable of offering products across lines and geographies, complementing its leading global reinsurance franchise.  As part of this initiative, the Company launched a new syndicate through Lloyd’s of London and formed Ireland Insurance, providing access to additional international business and new product opportunities to further diversify and broaden its insurance portfolio going forward.

Marketing.
The Company writes business on a worldwide basis for many different customers and lines of business, thereby obtaining a broad spread of risk.  The Company is not substantially dependent on any single customer, small group of customers, line of business or geographic area.  For the 2018 calendar year, no single customer (ceding company or insured) generated more than 3% of the Company’s gross written premiums.  The
4


Company believes that a reduction of business from any one customer would not have a material adverse effect on its future financial condition or results of operations.

Approximately 66%, 27% and 7% of the Company’s 2018 gross written premiums were written in the broker reinsurance, insurance and direct reinsurance markets, respectively.

The broker reinsurance market consists of several substantial national and international brokers and a number of smaller specialized brokers.  Brokers do not have the authority to bind the Company with respect to reinsurance agreements, nor does the Company commit in advance to accept any portion of a broker’s submitted business.  Reinsurance business from any ceding company, whether new or renewal, is subject to acceptance by the Company.  Brokerage fees are generally paid by reinsurers.  The Company’s ten largest brokers accounted for an aggregate of approximately 52% of gross written premiums in 2018.  The largest broker, Marsh and McLennan, accounted for approximately 20% of gross written premiums.  The second largest broker, Aon Benfield Re, accounted for approximately 16% of gross written premiums.  The Company believes that a reduction of business assumed from any one broker would not have a material adverse effect on the Company.

The direct reinsurance market remains an important distribution channel for reinsurance business written by the Company.  Direct placement of reinsurance enables the Company to access clients who prefer to place their reinsurance directly with reinsurers based upon the reinsurer’s in-depth understanding of the ceding company’s needs.

The Company’s insurance business writes direct business targeting commercial, property and casualty.  It also writes business through brokers, surplus lines brokers and general agents.  In 2018, Arrowhead General Insurance Agency accounted for approximately 3% of the Company’s gross written premium.  No other single general agent generated more than 2% of the Company’s gross written premiums.

The Company continually evaluates each business relationship, including the underwriting expertise and experience brought to bear through the involved distribution channel, performs analyses to evaluate financial security, monitors performance and adjusts underwriting decisions accordingly.

Segment Results.
The U.S. Reinsurance operation writes property and casualty reinsurance and specialty lines of business, including Marine, Aviation, Surety and Accident and Health (“A&H”) business, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies primarily within the U.S.  The International operation writes non-U.S. property and casualty reinsurance through Everest Re’s branches in Canada and Singapore and through offices in Brazil, Miami and New Jersey.  The Bermuda operation provides reinsurance and insurance to worldwide property and casualty markets through brokers and directly with ceding companies from its Bermuda office and reinsurance to the United Kingdom and European markets through its UK branch and Ireland Re.  The Insurance operation writes property and casualty insurance directly and through brokers, surplus lines brokers and general agents within the U.S., Canada and Europe.

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 loss adjustment expenses (“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 utilizes inter-affiliate reinsurance, although such reinsurance does not materially impact segment results, as business is generally reported within the segment in which the business was first produced.  For selected financial information regarding these segments, see ITEM 8, “Financial Statements and Supplementary Data” -  Note 17 of Notes to Consolidated Financial Statements and ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation - Segment Results”.
5


Underwriting Operations.
The following five year table presents the distribution of the Company’s gross written premiums by its segments:  U.S. Reinsurance, International, Bermuda and Insurance.  The premiums for each segment are further split between property and casualty business and, for reinsurance business, between pro rata or excess of loss business:


   
Gross Written Premiums by Segment
 
   
Years Ended December 31, 2018
 
(Dollars in millions)
 
2018
   
2017
   
2016
   
2015
   
2014
 
U.S. Reinsurance
                                                           
Property
                                                           
Pro Rata (1)
 
$
1,069.6
     
12.6
%
 
$
848.4
     
11.8
%
 
$
495.2
     
8.2
%
 
$
591.3
     
10.0
%
 
$
665.7
     
11.6
%
Excess
   
1,031.9
     
12.2
%
   
1,085.2
     
15.1
%
   
1,054.2
     
17.5
%
   
1,065.3
     
18.1
%
   
887.6
     
15.4
%
Casualty
                                                                               
Pro Rata (1)
   
702.2
     
8.3
%
   
460.7
     
6.4
%
   
378.2
     
6.3
%
   
319.9
     
5.4
%
   
382.4
     
6.6
%
Excess
   
210.6
     
2.5
%
   
198.7
     
2.8
%
   
198.2
     
3.3
%
   
171.3
     
2.9
%
   
218.8
     
3.8
%
Total (2)
   
3,014.3
     
35.6
%
   
2,593.0
     
36.1
%
   
2,125.8
     
35.2
%
   
2,147.9
     
36.5
%
   
2,154.5
     
37.4
%
                                                                                 
International
                                                                               
Property
                                                                               
Pro Rata (1)
 
$
679.8
     
8.0
%
 
$
577.5
     
8.1
%
   
671.9
     
11.1
%
   
699.3
     
11.9
%
   
846.0
     
14.7
%
Excess
   
424.7
     
5.0
%
   
377.9
     
5.3
%
   
337.4
     
5.6
%
   
411.2
     
7.0
%
   
488.1
     
8.5
%
Casualty
                                                                               
Pro Rata (1)
   
281.0
     
3.3
%
   
236.4
     
3.3
%
   
111.7
     
1.9
%
   
113.4
     
1.9
%
   
152.9
     
2.7
%
Excess
   
158.4
     
1.9
%
   
125.0
     
1.7
%
   
109.7
     
1.8
%
   
110.4
     
1.9
%
   
116.5
     
2.0
%
Total (2)
   
1,543.9
     
18.2
%
   
1,316.7
     
18.4
%
   
1,230.7
     
20.4
%
   
1,334.2
     
22.6
%
   
1,603.6
     
27.8
%
                                                                                 
Bermuda
                                                                               
Property
                                                                               
Pro Rata (1)
 
$
422.6
     
5.0
%
 
$
294.0
     
4.1
%
   
261.1
     
4.3
%
   
265.8
     
4.5
%
   
252.4
     
4.4
%
Excess
   
229.4
     
2.7
%
   
222.0
     
3.1
%
   
175.5
     
2.9
%
   
165.3
     
2.8
%
   
183.8
     
3.2
%
Casualty
                                                                               
Pro Rata (1)
   
773.7
     
9.1
%
   
407.7
     
5.7
%
   
318.6
     
5.3
%
   
281.0
     
4.8
%
   
178.5
     
3.1
%
Excess
   
240.6
     
2.8
%
   
281.2
     
3.9
%
   
135.2
     
2.2
%
   
165.2
     
2.8
%
   
171.7
     
3.0
%
Total (2)
   
1,666.3
     
19.7
%
   
1,205.0
     
16.8
%
   
890.4
     
14.8
%
   
877.3
     
14.9
%
   
786.4
     
13.7
%
                                                                                 
Total Reinsurance
                                                                               
Property
                                                                               
Pro Rata (1)
 
$
2,172.0
     
25.6
%
 
$
1,719.9
     
24.0
%
   
1,428.2
     
23.7
%
   
1,556.4
     
26.4
%
   
1,764.1
     
30.6
%
Excess
   
1,686.0
     
19.9
%
   
1,685.1
     
23.5
%
   
1,567.1
     
26.0
%
   
1,641.8
     
27.9
%
   
1,559.5
     
27.1
%
Casualty
                                                                               
Pro Rata (1)
   
1,756.9
     
20.7
%
   
1,104.8
     
15.4
%
   
808.5
     
13.4
%
   
714.3
     
12.1
%
   
713.8
     
12.4
%
Excess
   
609.7
     
7.2
%
   
604.9
     
8.4
%
   
443.1
     
7.3
%
   
446.9
     
7.6
%
   
507.0
     
8.8
%
Total (2)
   
6,224.6
     
73.4
%
   
5,114.7
     
71.3
%
   
4,246.9
     
70.4
%
   
4,359.4
     
74.0
%
   
4,544.5
     
78.9
%
                                                                                 
Insurance
                                                                               
Property
                                                                               
Pro Rata (1)
 
$
645.9
     
7.6
%
 
$
725.1
     
10.1
%
   
716.4
     
11.9
%
   
592.2
     
10.1
%
   
414.0
     
7.2
%
Excess
   
-
     
0.0
%
   
-
     
0.0
%
   
-
     
0.0
%
   
-
     
0.0
%
   
-
     
0.0
%
Casualty
                                                                               
Pro Rata (1)
   
1,604.6
     
18.9
%
   
1,334.1
     
18.6
%
   
1,070.6
     
17.7
%
   
940.1
     
16.0
%
   
804.4
     
14.0
%
Excess
   
-
     
0.0
%
   
-
     
0.0
%
   
-
     
0.0
%
   
-
     
0.0
%
   
-
     
0.0
%
Total (2)
   
2,250.6
     
26.6
%
   
2,059.2
     
28.7
%
   
1,787.0
     
29.6
%
   
1,532.3
     
26.0
%
   
1,218.4
     
21.1
%
                                                                                 
Total Company
                                                                               
Property
                                                                               
Pro Rata (1)
 
$
2,818.0
     
33.2
%
 
$
2,445.1
     
34.1
%
   
2,144.6
     
35.5
%
   
2,148.6
     
36.5
%
   
2,178.1
     
37.8
%
Excess
   
1,686.0
     
19.9
%
   
1,685.1
     
23.5
%
   
1,567.1
     
26.0
%
   
1,641.8
     
27.9
%
   
1,559.5
     
27.1
%
Casualty
                                                                               
Pro Rata (1)
   
3,361.5
     
39.7
%
   
2,438.9
     
34.0
%
   
1,879.1
     
31.1
%
   
1,654.3
     
28.1
%
   
1,518.2
     
26.3
%
Excess
   
609.7
     
7.2
%
   
604.9
     
8.4
%
   
443.1
     
7.3
%
   
446.9
     
7.6
%
   
507.0
     
8.8
%
Total (2)
   
8,475.2
     
100.0
%
   
7,173.9
     
100.0
%
 
$
6,033.9
     
100.0
%
 
$
5,891.7
     
100.0
%
 
$
5,762.9
     
100.0
%
__________________
                                                                               
(1) For purposes of the presentation above, pro rata includes all insurance and reinsurance attaching to the first dollar of loss incurred by the ceding company.
                 
(2) Certain totals and subtotals may not reconcile due to rounding.
                                                         

6


U.S. Reinsurance Segment.  The Company’s U.S. Reinsurance segment writes property and casualty reinsurance and specialty lines of business, including Marine, Aviation, Surety and A&H business, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies within the U.S.  The marine and aviation business is written primarily through brokers and contains a significant international component. Surety business consists mainly of reinsurance of contract surety bonds.  The Company targets certain brokers and, through the broker market, specialty companies and small to medium sized standard lines companies.  The Company also targets companies that place their business predominantly in the direct market, including small to medium sized regional ceding companies, and seeks to develop long-term relationships with those companies.  In addition, the U.S. Reinsurance segment writes portions of reinsurance programs for large, national insurance companies.

In 2018, $1,970.0 million of gross written premiums were attributable to U.S. treaty property business, of which 52.2% was written on a pro rata basis and 47.8% was written on an excess of loss basis.  The Company’s property underwriters utilize sophisticated underwriting methods to analyze and price property business.  The Company manages its exposures to catastrophe and other large losses by limiting exposures on individual contracts and limiting aggregate exposures to catastrophes in any particular zone and across contiguous zones.

U.S. treaty casualty business accounted for $734.4 million of gross written premiums in 2018, of which 85.6% was written on a pro rata basis and 14.4% was written on an excess of loss basis.  The treaty casualty business consists of professional liability, D&O liability, workers’ compensation, financial lines, excess and surplus lines and other liability coverages.  As a result of the complex technical nature of most of these risks, the Company’s casualty underwriters tend to specialize by line of business and work closely with the Company’s pricing actuaries.

The Company’s facultative unit conducts business both through brokers and directly with ceding companies, and consists of three underwriting units representing property, casualty, and national brokerage lines of business.  Business is written from a facultative headquarters office in New York and satellite offices in Chicago and Oakland.  In 2018, $92.7 million, $39.1 million and $15.5 million of gross written premiums were attributable to the casualty, property and national brokerage lines of business, respectively.

The marine and aviation unit’s 2018 gross written premiums totaled $86.2 million, all of which was written on a treaty basis and primarily sourced through reinsurance brokers.  Of the marine and aviation gross written premiums in 2018, marine treaties represented 59.0% and consisted mainly of hull and cargo coverage.  In 2018, the marine unit’s premiums were written 65.3% on an excess of loss basis and 34.7% on a pro rata basis.  Of the marine and aviation gross written premiums in 2018, aviation premiums accounted for 41.0% and included reinsurance of airline and general aviation risks.  In 2018, the aviation unit's premiums were written 89.5% on a pro rata basis and 10.5% on an excess of loss basis.

In 2018, gross written premiums of the surety unit totaled $50.3 million, 81.1% of which was written on a pro rata basis.  Most of the portfolio is reinsurance of contract surety bonds written directly with ceding companies, with the remainder being trade credit reinsurance, mostly in international markets.

In 2018, gross written premium of the A&H reinsurance unit totaled $15.5 million, of which 74.5% was written through brokers.

The Company writes assumed business with the segregated cells of Mt. Logan Re Ltd. (Bermuda) (“Mt. Logan Re”) which represents a diversified set of catastrophe exposures, diversified by risk/peril and across different geographical regions globally.  In 2018, gross written premium totaled $10.6 million, which was all on a property excess of loss basis.

In 2018, 95.9% and 4.1% of the U.S. Reinsurance segment’s gross written premiums were written in the broker reinsurance and direct reinsurance markets, respectively.

International Segment.  The Company’s International segment focuses on opportunities in the international reinsurance markets.  The Company targets several international markets, including: Canada, with a branch in Toronto; Asia, with a branch in Singapore and its Lloyd’s Syndicate; and Latin America, Brazil, Africa and the
7


Middle East, which business is serviced from Everest Re’s Miami and New Jersey offices.  The Company also writes from New Jersey “home-foreign” business, which provides reinsurance on the international portfolios of U.S. insurers.  Of the Company’s 2018 international gross written premiums, 71.5% represented property business, while 28.5% represented casualty business.  As with its U.S. operations, the Company’s International segment focuses on financially sound companies that have strong management and underwriting discipline and expertise.  Of the Company’s international business, 70.9% was written through brokers, with 29.1% written directly with ceding companies.

Gross written premiums of the Company’s Canadian branch totaled $173.5 million in 2018 and consisted of 35.0% of excess property business, 25.5% of pro rata casualty business, 21.5% of excess casualty business, and 18.0% of pro rata property business.  Of the Canadian gross written premiums, 75.2% consisted of treaty reinsurance, while 24.8% was facultative reinsurance.

The Company’s Singapore branch covers the Asian markets and accounted for $199.8 million of gross written premiums in 2018 and consisted of 50.8% of excess property business, 36.8% of pro rata property business, 9.5% of pro rata casualty business and 2.9% of excess casualty business.

Gross written premium of the Company’s Singapore Lloyd’s Syndicate totaled $4.1 million primarily on property business.

International business written out of Everest Re’s Miami and New Jersey offices accounted for $1,166.5 million of gross written premiums in 2018 and consisted of 45.9% of pro rata treaty property business, 19.4% of excess treaty property business, 18.4% of pro rata treaty casualty business, 13.3% of facultative property and casualty business and 3.0% of excess treaty casualty business.  Of this international business, 60.5% was sourced from Latin America, 22.0% was sourced from the Middle East, 11.0% was home-foreign business and 6.5% was sourced from Africa.

Bermuda Segment.  The Company’s Bermuda segment writes property and casualty reinsurance through Bermuda Re and property and casualty reinsurance through its UK branch as well as through Ireland Re.  In 2018, Bermuda Re had gross written premiums of $761.7 million, virtually all of which was treaty reinsurance.

In 2018, the UK branch of Bermuda Re wrote $610.8 million of gross treaty reinsurance premium consisting of 59.8% of pro rata casualty business, 20.0% of excess casualty business, 11.1% of pro rata property business and 9.1% of excess property business.

In 2018, Ireland Re wrote $293.8 million of gross treaty reinsurance premium consisting of 34.7% of pro rata casualty business, 28.0% of pro rata property business, 19.9% of excess property business, and 17.4% of excess casualty business.

Insurance Segment.  The Insurance segment writes property and casualty insurance, including medical stop loss insurance, directly and through brokers, surplus lines brokers and general agents within the U.S., Canada and through the Company’s Lloyd’s Syndicate.  In 2018, the Company’s Insurance segment wrote $2,250.6 million of gross written premiums, of which 71.0% was casualty and 29.0% was property, principally targeting commercial property and casualty business.  Insurance business written directly through the Company’s offices represented $1,576.0 million or 70.0% of the segment’s premium and $674.6 million or 30% was written through program administrators.

The Everest Specialty Commercial unit wrote $998.2 million in premium comprised of primary and excess casualty, and sports, leisure and entertainment business of $579.0 million, direct monoline workers compensation writings of $190.0 million and property business of $229.2 million.  Everest Underwriting Partners unit wrote $458.8 million in premium comprised of $210.8 million in workers compensation program business, $46.3 million of non-standard auto business and $201.7 million of other property and casualty business.  A&H primary insurance wrote $278.9 million in premium, Lloyd’s Syndicate wrote $151.4 million and our Canadian offices wrote $77.2 million.   The Everest Specialty Underwriters unit wrote $286.1 million in premium consisting primarily of management and professional liability coverages for financial institutions and other commercial enterprises.
8


Geographic Areas.  The Company conducts its business in Bermuda, the U.S. and a number of foreign countries.  For select financial information about geographic areas, see ITEM 8, “Financial Statements and Supplementary Data” -  Note 17 of Notes to the Consolidated Financial Statements.  Risks attendant to the foreign operations of the Company parallel those attendant to the U.S. operations of the Company, with the primary exception of foreign exchange risks.  For more information about the risks, see ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Safe Harbor Disclosure”.

Underwriting.
One of the Company’s strategies is to "lead" as many of the reinsurance treaties it underwrites as possible.  The Company leads on approximately two-thirds of its treaty reinsurance business as measured by premium.  The lead reinsurer on a treaty generally accepts one of the largest percentage shares of the treaty and is in the strongest position to negotiate price, terms and conditions.  Management believes this strategy enables it to obtain more favorable terms and conditions on the treaties on which it participates.  When the Company does not lead the treaty, it may still suggest changes to any aspect of the treaty.  The Company may decline to participate on a treaty based upon its assessment of all relevant factors.

The Company’s treaty underwriting process involves a team approach among the Company’s underwriters, actuaries and claim staff.  Treaties are reviewed for compliance with the Company’s general underwriting standards and most larger treaties are subjected to detailed actuarial analysis.  The actuarial models used in such analyses are tailored in each case to the subject exposures and loss experience.  The Company does not separately evaluate each of the individual risks assumed under its treaties.  The Company does, however, evaluate the underwriting guidelines of its ceding companies to determine their adequacy prior to entering into a treaty.  The Company may also conduct underwriting, operational and claim audits at the offices of ceding companies to monitor adherence to underwriting guidelines.  Underwriting audits focus on the quality of the underwriting staff, pricing and risk selection and rate monitoring over time.  Claim audits may be performed in order to evaluate the client’s claims handling abilities and practices.

The Company’s facultative underwriters operate within guidelines specifying acceptable types of risks, limits and maximum risk exposures.  Specified classes of large premium U.S. risks are referred to Everest Re’s New York facultative headquarters for specific review before premium quotations are given to clients.  In addition, the Company’s guidelines require certain types of risks to be submitted for review because of their aggregate limits, complexity or volatility, regardless of premium amount on the underlying contract.  Non-U.S. risks exhibiting similar characteristics are reviewed by senior managers within the involved operations.

In addition to its own underwriting staff, the Company’s insurance operations write casualty coverages for homogeneous risks through select program managers.  These programs are evaluated based upon actuarial analysis and the program manager’s capabilities.  The Company’s rates, forms and underwriting guidelines are tailored to specific risk types.  The Company’s underwriting, actuarial, claim and financial functions work closely with its program managers to establish appropriate underwriting and processing guidelines as well as appropriate performance monitoring mechanisms.

Risk Management of Underwriting and Reinsurance Arrangements

Underwriting Risk and Accumulation Controls.  Each segment and business unit manages its underwriting risk in accordance with established guidelines. These guidelines place dollar limits on the amount of business that can be written based on a variety of factors, including (re)insured company profile, line of business, geographic location and risk hazards. In each case, the guidelines permit limited exceptions, which must be authorized by the Company’s senior management. Management regularly reviews and revises these guidelines in response to changes in business unit product offerings, market conditions, risk versus reward analyses and the Company’s enterprise and underwriting risk management processes.

9


The operating results and financial condition of the Company can be adversely affected by catastrophe and other large losses. The Company manages its exposure to catastrophes and other large losses by:

·
selective underwriting practices;

·
diversifying its risk portfolio by geographic area and by types and classes of business;

·
limiting its aggregate catastrophe loss exposure in any particular geographic zone and contiguous zones;

·
purchasing reinsurance and/or retrocessional protection to the extent that such coverage can be secured cost-effectively. See “Reinsurance and Retrocession Arrangements”.

Like other insurance and reinsurance companies, the Company is exposed to multiple insured losses arising out of a single occurrence, whether a natural event, such as a hurricane or an earthquake, or other catastrophe, such as an explosion at a major factory.  A large catastrophic event can be expected to generate insured losses to multiple reinsurance treaties, facultative certificates and direct insurance policies across various lines of business.

The Company focuses on potential losses that could result from any single event or series of events as part of its evaluation and monitoring of its aggregate exposures to catastrophic events. Accordingly, the Company employs various techniques to estimate the amount of loss it could sustain from any single catastrophic event or series of events in various geographic areas. These techniques range from deterministic approaches, such as tracking aggregate limits exposed in catastrophe-prone zones and applying reasonable damage factors, to modeled approaches that attempt to scientifically measure catastrophe loss exposure using sophisticated Monte Carlo simulation techniques that forecast frequency and severity of potential losses on a probabilistic basis.

No single computer model, or group of models, is currently capable of projecting the amount and probability of loss in all global geographic regions in which the Company conducts business. In addition, the form, quality and granularity of underwriting exposure data furnished by (re)insureds is not uniformly compatible with the data requirements for the Company’s licensed models, which adds to the inherent imprecision in the potential loss projections. Further, the results from multiple models and analytical methods must be combined to estimate potential losses by and across business units.  Also, while most models have been updated to incorporate claims information from recent catastrophic events, catastrophe model projections are still inherently imprecise.  In addition, uncertainties with respect to future climatic patterns and cycles could add further uncertainty to loss projections from models based on historical data.

Nevertheless, when combined with traditional risk management techniques and sound underwriting judgment, catastrophe models are a useful tool for underwriters to price catastrophe exposed risks and for providing management with quantitative analyses with which to monitor and manage catastrophic risk exposures by zone and across zones for individual and multiple events.

Projected catastrophe losses are generally summarized in terms of the probable maximum loss (“PML”).  The Company defines PML as its anticipated loss, taking into account contract terms and limits, caused by a single catastrophe affecting a broad contiguous geographic area, such as that caused by a hurricane or earthquake.  The PML will vary depending upon the modeled simulated losses and the make-up of the in force book of business.  The projected severity levels are described in terms of “return periods”, such as “100-year events” and “250-year events”.  For example, a 100-year PML is the estimated loss to the current in-force portfolio from a single event which has a 1% probability of being exceeded in a twelve month period.  In other words, it corresponds to a 99% probability that the loss from a single event will fall below the indicated PML.  It is important to note that PMLs are estimates.  Modeled events are hypothetical events produced by a stochastic model.  As a result, there can be no assurance that any actual event will align with the modeled event or that actual losses from events similar to the modeled events will not vary materially from the modeled event PML.

10


From an enterprise risk management perspective, management sets limits on the levels of catastrophe loss exposure the Company may underwrite.  The limits are revised periodically based on a variety of factors, including but not limited to the Company’s financial resources and expected earnings and risk/reward analyses of the business being underwritten.

The Company may purchase reinsurance to cover specific business written or the potential accumulation or aggregation of exposures across some or all of its operations.  Reinsurance purchasing decisions consider both the potential coverage and market conditions including the pricing, terms, conditions, availability and collectability of coverage, with the aim of securing cost effective protection from financially secure counterparties. The amount of reinsurance purchased has varied over time, reflecting the Company’s view of its exposures and the cost of reinsurance.

Management estimates that the projected net economic loss from its largest 100-year event in a given zone represents approximately 10% of its December 31, 2018 shareholders’ equity.  Economic loss is the PML exposure, net of third party reinsurance, reduced by estimated reinstatement premiums to renew coverage and estimated income taxes.  The impact of income taxes on the PML depends on the distribution of the losses by corporate entity, which is also affected by inter-affiliate reinsurance.  Management also monitors and controls its largest PMLs at multiple points along the loss distribution curve, such as loss amounts at the 20, 50, 100, 250, 500 and 1,000 year return periods.  This process enables management to identify and control exposure accumulations and to integrate such exposures into enterprise risk, underwriting and capital management decisions.

The Company’s catastrophe loss projections, segmented by risk zones, are updated quarterly and reviewed as part of a formal risk management review process.  The table below reflects the Company’s PML exposure, net of third party reinsurance at various return periods for its top three zones/perils (as ranked by the largest 1 in 100 year economic loss) based on loss projection data as of January 1, 2019, adjusted to reflect Industry Loss Warranty (ILW) purchases at the same level the Company had available during 2018.

Return Periods (in years)
 
1 in 20
1 in 50
 
1 in 100
 
1 in 250
 
1 in 500
 
1 in 1,000
Exceeding Probability
   
5.0%
   
2.0%
   
1.0%
   
0.4%
   
0.2%
   
0.1%
(Dollars in millions)
                                               
Zone/ Peril
                                               
Southeast U.S., Wind
 
$
639
   
$
888
   
$
1,036
   
$
1,315
   
$
1,583
   
$
2,444
 
California, Earthquake
   
136
     
470
     
781
     
1,132
     
1,302
     
1,571
 
Texas, Wind
   
158
     
467
     
769
     
1,077
     
1,152
     
1,236
 


The projected net economic losses, defined as PML exposures, net of third party reinsurance, reinstatement premiums and estimated income taxes, for the top three zones/perils scheduled above are as follows:


Return Periods (in years)
 
1 in 20
 
1 in 50
 
1 in 100
 
1 in 250
 
1 in 500
 
1 in 1,000
Exceeding Probability
   
5.0%
   
2.0%
   
1.0%
   
0.4%
   
0.2%
   
0.1%
(Dollars in millions)
                                               
Zone/ Peril
                                               
Southeast U.S., Wind
 
$
440
   
$
636
   
$
759
   
$
986
   
$
1,198
   
$
1,883
 
California, Earthquake
   
111
     
374
     
626
     
903
     
1,045
     
1,255
 
Texas, Wind
   
121
     
354
     
578
     
809
     
871
     
941
 


The Company believes that its methods of monitoring, analyzing and managing catastrophe exposures provide a credible risk management framework, which is integrated with its enterprise risk management, underwriting and capital management plans.  However, there is much uncertainty and imprecision inherent in the catastrophe models and the catastrophe loss estimation process generally.  As a result, there can be no assurance that the Company will not experience losses from individual events that exceed the PML or other return period projections, perhaps by a material amount.  Nor can there be assurance that the Company will not experience events impacting multiple zones, or multiple severe events that could, in the aggregate, exceed the Company’s PML expectations by a significant amount.

11


Terrorism Risk.  While the Company writes some reinsurance contracts covering terrorism, the Company’s risk management philosophy is to limit the amount of exposure by geographic region, and to strictly manage coverage for properties in areas that may be considered a target for terrorists.  Providing terrorism coverage on reinsurance contracts is negotiable, and many, but not all, treaties contain exclusions which limit much of this risk.  While many property insurance policies are required to offer coverage for terrorism, this coverage is often not purchased.  However, terrorism is typically covered by worker compensation policies.  As a result, the Company is exposed to losses from terrorism on both its reinsurance and its insurance book of business, particularly its workers’ compensation and property policies.  However, the insurance book generally does not insure large corporations or corporate locations that represent large concentrations of risk.

The U.S. Terrorism Risk Insurance Program Reauthorization Act of 2015 provides some protection to the insurance book of business.  It also provides indirect protection to exposed reinsurance treaties.  However, the Company is still exposed to risk of loss from terrorism due to deductibles, co-pays and uncovered lines of business.

Reinsurance and Retrocession Arrangements.  The Company may purchase reinsurance to cover specific business written or the potential accumulation or aggregation of exposures across some or all of its operations.  Reinsurance purchasing decisions consider both the potential coverage and market conditions including the pricing, terms, conditions and availability of coverage, with the aim of securing cost effective protection.  The amount of reinsurance purchased has varied over time, reflecting the Company’s view of its exposures and the cost of reinsurance.  In recent years, the Company has increased its use of reinsurance offered through capital market facilities.

The Company participates in “common account” retrocessional arrangements for certain reinsurance treaties whereby a ceding company purchases reinsurance for the benefit of itself and its reinsurers under one or more of its reinsurance treaties.  Common account retrocessional arrangements reduce the effect of individual or aggregate losses to all participating companies, including the ceding company, with respect to the involved treaties.

All of the Company’s reinsurance and retrocessional agreements transfer significant reinsurance risk and therefore, are accounted for as reinsurance in accordance with the Financial Accounting Standards Board (“FASB”) guidance.

At December 31, 2018, the Company had $1,787.6 million in reinsurance receivables with respect to both paid and unpaid losses ceded.  Of this amount, $683.8 million, or 38.3%, was receivable from Mt. Logan Re collateralized segregated accounts; $125.5 million, or 7.0%, was receivable from Munich Reinsurance America, Inc. (“Munich Re”) $122.1 million, or 6.8%, was receivable from Zurich Versicherungs Gesellschaft (“Zurich”); and $103.1 million, or 5.8%, was receivable from Resolution Group Reinsurance (Barbados) Limited (“Resolution Group”);.  The receivables from Resolution Group are fully collateralized by an individual trust agreement.  No other retrocessionaire accounted for more than 5% of our receivables.  Although management carefully selects its reinsurers, the Company is subject to credit risk with respect to its reinsurance because the ceding of risk to reinsurers does not relieve the Company of its liability to insureds or ceding companies.  See ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition”.

Claims.
Reinsurance claims are managed by the Company’s professional claims staff whose responsibilities include reviewing initial loss reports and coverage issues, monitoring claims handling activities of ceding companies, establishing and adjusting proper case reserves and approving payment of claims.  In addition to claims assessment, processing and payment, the claims staff selectively conducts comprehensive claim audits of both specific claims and overall claim procedures at the offices of selected ceding companies.  Insurance claims are generally handled by third party claims service providers who have limited authority and are subject to oversight by the Company’s professional claims staff.

12


The Company intensively manages its asbestos and environmental (“A&E”) exposures through a dedicated, centrally managed claim staff with experienced claim and legal professionals who specialize in the handling of such exposures.  They actively manage each individual insured and reinsured account, responding to claim developments with evaluations of the involved exposures and adjustment of reserves as appropriate.  Specific or general claim developments that may have material implications for the Company are regularly communicated to senior management, actuarial, legal and financial areas.  Senior management and claim management personnel meet at least quarterly to review the Company’s overall reserve positions and make changes, if appropriate.  The Company continually reviews its internal processing, communications and analytics, seeking to enhance the management of its A&E exposures, in particular in regard to changes in asbestos claims and litigation.

Reserves for Unpaid Property and Casualty Losses and LAE.
Significant periods of time may elapse between the occurrence of an insured loss, the reporting of the loss to the insurer and the reinsurer and the payment of that loss by the insurer and subsequent payments to the insurer by the reinsurer.  To recognize liabilities for unpaid losses and LAE, insurers and reinsurers establish reserves, which are balance sheet liabilities representing estimates of future amounts needed to pay reported and unreported claims and related expenses for losses that have already occurred.  Actual losses and LAE paid may deviate, perhaps substantially, from such reserves.  To the extent reserves prove to be insufficient to cover actual losses and LAE after taking into account available reinsurance coverage, the Company would have to recognize such reserve shortfalls and incur a charge to earnings, which could be material in the period such recognition takes place.  See ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Loss and LAE Reserves”.

As part of the reserving process, insurers and reinsurers evaluate historical data and trends and make judgments as to the impact of various factors such as legislative and judicial developments that may affect future claim amounts, changes in social and political attitudes that may increase loss exposures and inflationary and general economic trends. While the reserving process is difficult and subjective for insurance companies, the inherent uncertainties of estimating such reserves are even greater for the reinsurer, due primarily to the longer time between the date of an occurrence and the reporting of any attendant claims to the reinsurer, the diversity of development patterns among different types of reinsurance treaties or facultative contracts, the necessary reliance on the ceding companies for information regarding reported claims and differing reserving practices among ceding companies. In addition, trends that have affected development of liabilities in the past may not necessarily occur or affect liability development in the same manner or to the same degree in the future.  As a result, actual losses and LAE may deviate, perhaps substantially, from estimates of reserves reflected in the Company's consolidated financial statements.

The Company’s loss and LAE reserves represent management’s best estimate of the ultimate liability.  While there can be no assurance that these reserves will not need to be increased in the future, management believes that the Company’s existing reserves and reserving methodologies reduce the likelihood that any such increases would have a material adverse effect on the Company’s financial condition, results of operations or cash flows.  These statements regarding the Company’s loss reserves are forward looking statements within the meaning of the U.S. federal securities laws and are intended to be covered by the safe harbor provisions contained therein.  See ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Safe Harbor Disclosure”.

Like many other property and casualty insurance and reinsurance companies, the Company has experienced loss development for prior accident years, which has impacted losses and LAE reserves and caused corresponding effects to income (loss) in the periods in which the adjustments were made.  There can be no assurance that adverse development from prior years will not occur in the future or that such adverse development will not have a material adverse effect on net income (loss).

13


The following table presents a reconciliation of beginning and ending reserve balances for the periods indicated on a GAAP basis:


   
Years Ended December 31,
 
(Dollars in millions)
 
2018
   
2017
   
2016
 
                   
Gross reserves at beginning of period
 
$
11,884.3
   
$
10,312.3
   
$
9,951.8
 
Incurred related to:
                       
Current year
   
5,264.3
     
4,816.0
     
3,434.9
 
Prior years
   
387.1
     
(293.4
)
   
(295.3
)
Total incurred losses
   
5,651.4
     
4,522.6
     
3,139.6
 
Paid related to:
                       
Current year
   
1,700.7
     
1,280.6
     
745.6
 
Prior years
   
3,011.2
     
2,062.6
     
2,043.0
 
Total paid losses
   
4,711.9
     
3,343.2
     
2,788.6
 
Foreign exchange/translation adjustment
   
(111.7
)
   
170.9
     
(99.9
)
Change in reinsurance receivables on unpaid losses and LAE
   
407.0
     
221.8
     
109.4
 
Gross reserves at end of period
 
$
13,119.1
   
$
11,884.3
   
$
10,312.3
 
                         
(Some amounts may not reconcile due to rounding.)
                       


Current year incurred losses were $5,264.3 million, $4,816.0 million and $3,434.9 million at December 31, 2018, 2017 and 2016, respectively.  The increase in current year incurred losses was primarily due to an increase in attritional losses due to a 16.7% increase in premiums earned.  The $407.0 million increase in reinsurance recoverables from December 31, 2018 to December 31, 2017 is primarily related to the additional catastrophe losses incurred in 2018 as well as a retroactive reinsurance transaction with a Mt. Logan Re segregated account effective in the second quarter of 2018.

Incurred prior years’ reserves increased by $387.1 million in 2018 and decreased by $293.4 million and $295.3 million in 2017 and 2016, respectively.  The increase for 2018 was mainly due to $561.2 million of adverse development on prior years catastrophe losses, primarily related to Hurricanes Harvey, Irma and Maria, as well as the 2017 California wildfires.  The increase in loss estimates for Hurricanes Harvey, Irma and Maria was mostly driven by re-opened claims, loss inflation from higher than expected loss adjustment expenses and in particular, their impact on aggregate covers.  This reserve increase was partially offset by $174.1 million of favorable development on prior years attritional losses which mainly related to U.S. and international property and casualty reinsurance business, as well as favorable development in the Insurance segment which largely related to workers’ compensation business.

The decrease for 2017 was attributable to favorable development in the reinsurance segments of $238.4 million, related primarily to property and short-tail business in the U.S. and Bermuda as well as favorable development on prior year catastrophe losses, partially offset by $37.1 million of adverse development on A&E reserves. The insurance segment also experienced favorable development on prior year reserves of $55.0 million mainly on its workers compensation business, which is largely written in California.

The decrease for 2016 was attributable to favorable development in the reinsurance segments of $468.7 million related primarily to property and short-tail business in the U.S., property business in Canada, Latin America, Middle East and Africa, as well as favorable development on prior year catastrophe losses, partially offset by $53.9 million of adverse development on asbestos and environmental (“A&E”) reserves.  Part of the favorable development in the reinsurance segments related to the 2015 loss from the explosion at the Chinese port of Tianjin.  In 2015, this loss was originally estimated to be $60.0 million.  At December 31, 2016, this loss was projected to be $16.7 million resulting in $43.3 million of favorable development in 2016.  The net favorable development in the reinsurance segments was partially offset by $173.4 million of unfavorable development in the insurance segment primarily related to run-off construction liability and umbrella program business.

Since the Company has operations in many countries, part of the Company’s loss and LAE reserves are in foreign currencies and translated to U.S. dollars for each reporting period.  Fluctuations in the exchange rates for the currencies, period over period, affect the U.S. dollar amount of outstanding reserves.  The translation adjustment line at the bottom of the table eliminates the impact of the exchange fluctuations from the reserve re-estimates.
14


The Company’s loss reserving methodologies continuously monitor the emergence of loss and loss development trends, seeking, on a timely basis, to both adjust reserves for the impact of trend shifts and to factor the impact of such shifts into the Company’s underwriting and pricing on a prospective basis.

Reserves for Asbestos and Environmental Losses and LAE.
At December 31, 2018, the Company’s gross reserves for A&E claims represented 2.6% of its total reserves.  The Company’s A&E liabilities stem from Mt. McKinley’s direct insurance business and Everest Re’s assumed reinsurance business.  Liabilities related to Mt. McKinley’s direct business, which had been ceded to Bermuda Re previously, were retroceded to an affiliate of Clearwater Insurance Company in July 2015, concurrent with the sale of Mt. McKinley to Clearwater Insurance Company.  There are significant uncertainties in estimating the amount of the Company’s potential losses from A&E claims and ultimate values cannot be estimated using traditional reserving techniques.  See ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asbestos and Environmental Exposures” and Item 8, “Financial Statements and Supplementary Data” - Note 3 of Notes to Consolidated Financial Statements.

The following table summarizes the composition of the Company’s total reserves for A&E losses, gross and net of reinsurance, for the periods indicated:


   
Years Ended December 31,
 
(Dollars in millions)
 
2018
   
2017
   
2016
 
Gross reserves
 
$
347.5
   
$
449.0
   
$
441.1
 
Reinsurance receivable
   
(86.0
)
   
(130.9
)
   
(122.0
)
Net reserves
 
$
261.5
   
$
318.1
   
$
319.1
 
                         
(Some amounts may not reconcile due to rounding.)
                       


On July 13, 2015, the Company sold Mt. McKinley to Clearwater Insurance Company.  Concurrently with the closing, the Company entered into a retrocession treaty with an affiliate of Clearwater.  Per the retrocession treaty, the Company retroceded 100% of the liabilities associated with certain Mt. McKinley policies, which had been reinsured by Bermuda Re. As consideration for entering into the retrocession treaty, Bermuda Re transferred cash of $140.3 million, an amount equal to the net loss reserves as of the closing date.  Of the $140.3 million of net loss reserves retroceded, $100.5 million were related to A&E business.  The maximum liability retroceded under the retrocession treaty will be $440.3 million, equal to the retrocession payment plus $300.0 million.  The Company will retain liability for any amounts exceeding the maximum liability retroceded under the retrocession treaty.

Additional losses, including those relating to latent injuries and other exposures, which are as yet unrecognized, the type or magnitude of which cannot be foreseen by either the Company or the industry, may emerge in the future. Such future emergence could have material adverse effects on the Company’s future financial condition, results of operations and cash flows.

Future Policy Benefit Reserves.
The Company wrote a limited amount of life and annuity reinsurance in its Bermuda segment.  Future policy benefit liabilities for annuities are reported at the accumulated fund balance of these contracts.  Reserves for those liabilities include mortality provisions with respect to life and annuity claims, both reported and unreported. Actual experience in a particular period may be worse than assumed experience and, consequently, may adversely affect the Company’s operating results for that period. See ITEM 8, “Financial Statements and Supplementary Data” - Note 1F of Notes to Consolidated Financial Statements.
15


Activity in the reserve for future policy benefits is summarized for the periods indicated:


   
At December 31,
 
(Dollars in millions)
 
2018
   
2017
   
2016
 
Balance at beginning of year
 
$
51.0
   
$
55.1
   
$
58.9
 
Liabilities assumed
   
0.1
     
0.1
     
0.2
 
Adjustments to reserves
   
0.8
     
(0.4
)
   
0.3
 
Benefits paid in the current year
   
(5.1
)
   
(3.7
)
   
(4.3
)
Balance at end of year
 
$
46.8
   
$
51.0
   
$
55.1
 
                         
(Some amounts may not reconcile due to rounding.)
                       


Investments.
The board of directors of each of the Company’s operating subsidiaries is responsible for establishing investment policy and guidelines and, together with senior management, for overseeing their execution.

The Company’s principal investment objectives are to ensure funds are available to meet its insurance and reinsurance obligations and to maximize after-tax investment income while maintaining a high quality diversified investment portfolio.  Considering these objectives, the Company views its investment portfolio as having two components: 1) the investments needed to satisfy outstanding liabilities (its core fixed maturities portfolio) and 2) investments funded by the Company’s shareholders’ equity.

For the portion needed to satisfy global outstanding liabilities, the Company generally invests in taxable and tax-preferenced fixed income securities with an average credit quality of Aa3.  For the U.S. portion of this portfolio, the Company’s mix of taxable and tax-preferenced investments is adjusted periodically, consistent with the Company’s current and projected U.S. operating results, market conditions and our tax position.  This global fixed maturity securities portfolio is externally managed by independent, professional investment managers using portfolio guidelines approved by the Company.

Over the past several years, the Company has expanded the allocation of its investments funded by shareholders’ equity to include:  1) a greater percentage of publicly traded equity securities, 2) emerging market fixed maturities through mutual fund structures, as well as individual holdings, 3) high yield fixed maturities, 4) bank and private loan securities and 5) private equity limited partnership investments.  The objective of this portfolio diversification is to enhance the risk-adjusted total return of the investment portfolio by allocating a prudent portion of the portfolio to higher return asset classes, which are also less subject to changes in value with movements in interest rates.  The Company limits its allocation to these asset classes because of 1) the potential for volatility in their values and 2) the impact of these investments on regulatory and rating agency capital adequacy models.  The Company uses investment managers experienced in these markets and adjusts its allocation to these investments based upon market conditions.  At December 31, 2018, the market value of investments in these investment market sectors, carried at both market and fair value, approximated 52% of shareholders’ equity.

The duration of an investment is based on the maturity of the security but also reflects the payment of interest and the possibility of early prepayments.  The Company’s fixed income investment guidelines include a general duration guideline.  This investment duration guideline is established and periodically revised by management, which considers economic and business factors, as well as the Company’s average duration of potential liabilities, which, at December 31, 2018, is estimated at approximately 3.0 years, based on the estimated payouts of underwriting liabilities using standard duration calculations.

The duration of the fixed income portfolio at December 31, 2018 and 2017 was 3.0 years and 3.1 years, respectively.  The Company shortened the duration of its portfolio in recent years in response to very low available yields, particularly on securities with longer maturities.  As a result, the Company has focused on purchasing high quality, shorter duration investments and investments with floating rate yields.  These investments will be less subject to decline in market value as interest rates rise in the future, as forecasted by most investment analysts.

For each currency in which the Company has established substantial loss and LAE reserves, the Company seeks to maintain invested assets denominated in such currency in an amount approximately equal to the
16


estimated liabilities.  Approximately 29% of the Company’s consolidated reserves for losses and LAE and unearned premiums represent amounts payable in foreign currencies.

The Company’s net investment income was $581.2 million, $542.9 million and $473.1 million for the years ended December 31, 2018, 2017 and 2016, respectively.  The increase from 2017 to 2018 was primarily due to higher income from the growing fixed income portfolio and an increase in limited partnership income, partially offset by lower dividend income from our equity portfolio.  The increase from 2016 to 2017 was primarily due to an increase in limited partnership income and higher income from the growing fixed income portfolio, partially offset by lower dividend income from our equity portfolio.

The Company had net realized capital losses for 2018 of $127.1 million.  In 2018, the Company recorded $67.3 million of net losses from fair value re-measurements, $51.7 million of net realized capital losses from sales of investments and $8.1 million of other-than-temporary impairments.  In 2017, net realized capital gains were $153.2 million due to $139.0 million of net gains from fair value re-measurements and $21.3 million of net realized capital gains from sales of investments, partially offset by $7.1 million of other-than-temporary impairments.  In 2016, net realized capital losses were $7.2 million due to $31.6 million of other-than-temporary impairments on fixed maturity securities, $28.0 million of realized capital loss from the sale of its Heartland subsidiary and $6.7 million of net realized capital losses from sales of investments, partially offset by $59.1 million of gains due to fair value re-measurements.

The Company’s cash and invested assets totaled $18.4 billion at December 31, 2018, which consisted of 87.5% fixed maturities and cash, of which 91.8% were investment grade; 8.6% other invested assets and 3.9% equity securities.  The average maturity of fixed maturity securities was 3.9 years at December 31, 2018, and their overall duration was 3.0 years.

As of December 31, 2018, the Company did not have any direct investments in commercial real estate or direct commercial mortgages or any material holdings of derivative investments (other than equity index put option contracts as discussed in ITEM 8, “Financial Statements and Supplementary Data” - Note 4 of Notes to Consolidated Financial Statements) or securities of issuers that are experiencing cash flow difficulty to an extent that the Company’s management believes could threaten the issuer’s ability to meet debt service payments, except where other-than-temporary impairments have been recognized.

The Company’s investment portfolio includes structured commercial mortgage-backed securities (“CMBS”) with a book value of $329.9 million and a market value of $326.7 million.  CMBS securities comprising more than 97% of the December 31, 2018 market value are rated AAA by Standard & Poor’s Financial Services LLC (“Standard & Poor’s”).  Furthermore, CMBS securities comprising more than 98% of the market value are rated investment grade by Standard & Poor’s.

The following table reflects investment results for the Company for the periods indicated:


   
December 31,
 
                     
Pre-tax
   
Pre-tax
 
         
Pre-tax
   
Pre-tax
   
Realized Net
   
Unrealized Net
 
   
Average
   
Investment
   
Effective
   
Capital (Losses)
   
Capital Gains
 
(Dollars in millions)
 
Investments (1)
   
Income (2)
   
Yield
   
Gains (3)
   
(Losses)
 
2018
 
$
18,430.8
   
$
581.2
     
3.15
%
 
$
(127.1
)
 
$
(250.9
)
2017
   
17,840.2
     
542.9
     
3.04
%
   
153.2
     
(94.8
)
2016
   
16,967.2
     
473.1
     
2.79
%
   
(7.2
)
   
96.6
 
2015
   
16,692.8
     
473.5
     
2.84
%
   
(184.1
)
   
(194.0
)
2014
   
16,487.5
     
530.5
     
3.22
%
   
84.0
     
20.3
 
____________________________________________________
(1)
Average of the beginning and ending carrying values of investments and cash, less net funds held, future policy benefit reserve, and non-interest bearing cash.  Bonds, common stock and redeemable and non-redeemable preferred stocks are carried at market value.  Common stock, which are actively managed, are carried at fair value.
   
(2)
After investment expenses, excluding realized net capital gains (losses).
     
(3)
Included in 2018, 2017, 2016, 2015 and 2014 are fair value re-measurements of ($67.3) million, $139.0 million, $59.1 million, ($45.6) million and $121.7 million, respectively.

(Some amounts may not reconcile due to rounding.)
17


The amortized cost, market value and gross unrealized appreciation and depreciation of available for sale, fixed maturity, equity security investments, carried at market value and other-than-temporary impairments (“OTTI”) in accumulated other comprehensive income (“AOCI”) are as follows for the periods indicated:


   
At December 31, 2018
 
   
Amortized
   
Unrealized
   
Unrealized
   
Market
   
OTTI in AOCI
 
(Dollars in thousands)
 
Cost
   
Appreciation
   
Depreciation
   
Value
   
(a)
 
Fixed maturity securities
                             
U.S. Treasury securities and obligations of
                             
U.S. government agencies and corporations
 
$
2,629.5
   
$
16.8
   
$
(15.2
)
 
$
2,631.1
   
$
-
 
Obligations of U.S. states and political subdivisions
   
490.0
     
12.9
     
(2.8
)
   
500.1
     
0.4
 
Corporate securities
   
5,538.6
     
48.5
     
(141.6
)
   
5,445.5
     
1.7
 
Asset-backed securities
   
545.4
     
0.2
     
(5.5
)
   
540.1
     
-
 
Mortgage-backed securities
                                       
Commercial
   
329.9
     
2.2
     
(5.4
)
   
326.7
     
-
 
Agency residential
   
1,832.8
     
7.3
     
(43.8
)
   
1,796.3
     
-
 
Non-agency residential
   
10.2
     
-
     
-
     
10.2
     
-
 
Foreign government securities
   
1,335.3
     
34.7
     
(55.8
)
   
1,314.2
     
0.1
 
Foreign corporate securities
   
2,694.9
     
64.0
     
(97.8
)
   
2,661.1
     
0.3
 
Total fixed maturity securities
 
$
15,406.6
   
$
186.6
   
$
(367.9
)
 
$
15,225.3
   
$
2.5
 
Equity securities
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
                                         
(Some amounts may not reconcile due to rounding.)
                                       



   
At December 31, 2017
 
   
Amortized
   
Unrealized
   
Unrealized
   
Market
   
OTTI in AOCI
 
(Dollars in thousands)
 
Cost
   
Appreciation
   
Depreciation
   
Value
   
(a)
 
Fixed maturity securities
                             
U.S. Treasury securities and obligations of
                             
U.S. government agencies and corporations
 
$
1,541.0
   
$
9.8
   
$
(14.1
)
 
$
1,536.7
   
$
-
 
Obligations of U.S. states and political subdivisions
   
563.8
     
22.1
     
(0.4
)
   
585.5
     
-
 
Corporate securities
   
5,658.4
     
81.8
     
(41.2
)
   
5,699.0
     
2.5
 
Asset-backed securities
   
532.5
     
0.9
     
(2.0
)
   
531.4
     
-
 
Mortgage-backed securities
                                       
Commercial
   
235.8
     
0.6
     
(2.4
)
   
234.0
     
-
 
Agency residential
   
2,236.3
     
10.4
     
(35.8
)
   
2,210.9
     
-
 
Non-agency residential
   
0.5
     
-
     
(0.1
)
   
0.4
     
-
 
Foreign government securities
   
1,305.1
     
43.8
     
(34.8
)
   
1,314.1
     
0.2
 
Foreign corporate securities
   
2,616.2
     
77.0
     
(48.4
)
   
2,644.8
     
0.9
 
Total fixed maturity securities
 
$
14,689.6
   
$
246.4
   
$
(179.2
)
 
$
14,756.8
   
$
3.6
 
Equity securities
 
$
130.3
   
$
2.6
   
$
(3.4
)
 
$
129.5
   
$
-
 
                                         
(Some amounts may not reconcile due to rounding.)
                                       
 
(a)  Represents the amount of OTTI recognized in AOCI.  Amount includes unrealized gains and losses on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date.

The following table represents the credit quality distribution of the Company’s fixed maturities for the periods indicated:


   
At December 31,
 
   
2018
   
2017
 
(Dollars in millions)
 
Market
   
Percent of
   
Market
   
Percent of
 
Rating Agency Credit Quality Distribution:
 
Value
   
Total
   
Value
   
Total
 
AAA
 
$
6,698.1
     
44.0
%
 
$
5,909.1
     
40.0
%
AA
   
2,345.0
     
15.4
%
   
2,544.9
     
17.2
%
A
   
3,082.2
     
20.2
%
   
3,374.0
     
22.9
%
BBB
   
1,783.7
     
11.7
%
   
1,637.0
     
11.1
%
BB
   
609.0
     
4.0
%
   
640.0
     
4.3
%
B
   
270.0
     
1.8
%
   
333.3
     
2.3
%
Rated below B
   
18.6
     
0.1
%
   
29.9
     
0.2
%
Other
   
418.7
     
2.8
%
   
288.6
     
2.0
%
Total
 
$
15,225.3
     
100.0
%
 
$
14,756.8