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

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED:
September 30, 2018
 
Commission file number:
1-14527

EVEREST REINSURANCE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
22-3263609
(State or other jurisdiction of
incorporation or organization)
 
 
(I.R.S. Employer
Identification No.)
477 Martinsville Road
Post Office Box 830
Liberty Corner, New Jersey 07938-0830
(908) 604-3000

(Address, including zip code, and telephone number, including area code,
of registrant's principal executive office)
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).

YES
X
 
NO
 

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
   
Accelerated filer
 
 
Non-accelerated filer
X
 
 
Smaller reporting company
 
 
(Do not check if 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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

   
Number of Shares Outstanding
Class
 
At November 1, 2018
Common Shares, $0.01 par value
 
1,000

The Registrant meets the conditions set forth in General Instruction H (1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format permitted by General Instruction H of Form 10-Q.


EVEREST REINSURANCE HOLDINGS, INC.

Table of Contents
Form 10-Q


Page
PART I

FINANCIAL INFORMATION

         
Item 1.
 
Financial Statements
 
         
   
Consolidated Balance Sheets at September 30, 2018 (unaudited) and
 
     
December 31, 2017
1
       
   
Consolidated Statements of Operations and Comprehensive Income (Loss) for the
 
     
three and nine months ended September 30, 2018 and 2017 (unaudited)
2
         
   
Consolidated Statements of Changes in Stockholder's Equity for the three and
 
     
nine months ended September 30, 2018 and 2017 (unaudited)
3
         
   
Consolidated Statements of Cash Flows for the nine months ended
 
     
September 30, 2018 and 2017 (unaudited)
4
         
   
Notes to Consolidated Interim Financial Statements (unaudited)
5
         
Item 2.
 
Management's Discussion and Analysis of Financial Condition and
 
     
Results of Operation
32
       
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
49
         
Item 4.
 
Controls and Procedures
49
         

PART II

OTHER INFORMATION

         
Item 1.
 
Legal Proceedings
50
         
Item 1A.
 
Risk Factors
50
       
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
50
       
Item 3.
 
Defaults Upon Senior Securities
50
       
Item 4.
 
Mine Safety Disclosures
50
       
Item 5.
 
Other Information
50
       
Item 6.
 
Exhibits
51

EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS



   
September 30,
   
December 31,
 
(Dollars in thousands, except par value per share)
 
2018
   
2017
 
   
(unaudited)
       
ASSETS:
           
Fixed maturities - available for sale, at market value
 
$
5,233,454
   
$
4,971,921
 
     (amortized cost: 2018, $5,282,911; 2017, $4,927,622)
               
Fixed maturities - available for sale, at fair value
   
2,373
     
-
 
Equity securities, at fair value
   
850,539
     
822,375
 
Short-term investments (cost: 2018, $607,238; 2017, $241,506)
   
607,233
     
241,506
 
Other invested assets (cost: 2018, $817,833; 2017, $835,597)
   
817,833
     
838,694
 
Other invested assets, at fair value
   
1,692,221
     
1,807,473
 
Cash
   
375,758
     
229,552
 
         Total investments and cash
   
9,579,411
     
8,911,521
 
Note receivable - affiliated
   
250,000
     
250,000
 
Accrued investment income
   
42,248
     
35,376
 
Premiums receivable
   
1,442,660
     
1,301,827
 
Reinsurance receivables - unaffiliated
   
1,245,783
     
1,180,648
 
Reinsurance receivables - affiliated
   
3,975,756
     
4,940,039
 
Income taxes
   
101,468
     
87,110
 
Funds held by reinsureds
   
237,571
     
210,939
 
Deferred acquisition costs
   
344,434
     
307,741
 
Prepaid reinsurance premiums
   
353,410
     
346,708
 
Other assets
   
264,313
     
316,603
 
TOTAL ASSETS
 
$
17,837,054
   
$
17,888,512
 
                 
LIABILITIES:
               
Reserve for losses and loss adjustment expenses
 
$
9,519,478
   
$
9,343,028
 
Unearned premium reserve
   
1,808,870
     
1,607,622
 
Funds held under reinsurance treaties
   
44,790
     
40,536
 
Other net payable to reinsurers
   
384,630
     
491,299
 
4.868% Senior notes due 6/1/2044
   
396,924
     
396,834
 
6.6% Long term notes due 5/1/2067
   
236,634
     
236,561
 
Accrued interest on debt and borrowings
   
7,869
     
2,727
 
Unsettled securities payable
   
99,045
     
25,338
 
Other liabilities
   
272,571
     
331,844
 
         Total liabilities
   
12,770,811
     
12,475,789
 
                 
Commitments and Contingencies (Note 6)
               
                 
STOCKHOLDER'S EQUITY:
               
Common stock, par value: $0.01; 3,000 shares authorized;
               
     1,000 shares issued and outstanding (2018 and 2017)
   
-
     
-
 
Additional paid-in capital
   
387,980
     
387,841
 
Accumulated other comprehensive income (loss), net of deferred income tax expense
               
     (benefit) of ($25,892) at 2018 and ($299) at 2017
   
(97,093
)
   
(942
)
Retained earnings
   
4,775,356
     
5,025,824
 
         Total stockholder's equity
   
5,066,243
     
5,412,723
 
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY
 
$
17,837,054
   
$
17,888,512
 
                 
The accompanying notes are an integral part of the consolidated financial statements.
               



1

EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)



   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2018
   
2017
   
2018
   
2017
 
   
(unaudited)
 
(unaudited)
REVENUES:
                       
Premiums earned
 
$
1,230,771
   
$
518,507
   
$
3,526,617
   
$
1,457,759
 
Net investment income
   
90,298
     
73,417
     
232,277
     
206,166
 
Net realized capital gains (losses):
                               
Other-than-temporary impairments on fixed maturity securities
   
(2,834
)
   
(1,473
)
   
(3,741
)
   
(4,179
)
Other-than-temporary impairments on fixed maturity securities
                               
transferred to other comprehensive income (loss)
   
-
     
-
     
-
     
-
 
Other net realized capital gains (losses)
   
32,852
     
229,962
     
(68,713
)
   
258,145
 
Total net realized capital gains (losses)
   
30,018
     
228,489
     
(72,454
)
   
253,966
 
Other income (expense)
   
(1,385
)
   
1,486
     
1,420
     
21,996
 
Total revenues
   
1,349,702
     
821,899
     
3,687,860
     
1,939,887
 
                                 
CLAIMS AND EXPENSES:
                               
Incurred losses and loss adjustment expenses
   
970,297
     
1,331,558
     
2,912,312
     
1,918,508
 
Commission, brokerage, taxes and fees
   
288,212
     
34,545
     
832,671
     
147,565
 
Other underwriting expenses
   
78,800
     
57,713
     
230,377
     
181,805
 
Corporate expenses
   
2,488
     
1,132
     
7,597
     
6,241
 
Interest, fee and bond issue cost amortization expense
   
7,796
     
7,161
     
22,732
     
23,974
 
Total claims and expenses
   
1,347,593
     
1,432,109
     
4,005,689
     
2,278,093
 
                                 
INCOME (LOSS) BEFORE TAXES
   
2,109
     
(610,210
)
   
(317,829
)
   
(338,206
)
Income tax expense (benefit)
   
(22,556
)
   
(220,486
)
   
(64,914
)
   
(153,318
)
                                 
NET INCOME (LOSS)
 
$
24,665
   
$
(389,724
)
 
$
(252,915
)
 
$
(184,888
)
                                 
Other comprehensive income (loss), net of tax:
                               
Unrealized appreciation (depreciation) ("URA(D)") on securities arising during the period
   
(6,932
)
   
530
     
(71,919
)
   
13,794
 
Less: reclassification adjustment for realized losses (gains) included in net income (loss)
   
2,534
     
(1,674
)
   
(2,147
)
   
(8,618
)
Total URA(D) on securities arising during the period
   
(4,398
)
   
(1,144
)
   
(74,066
)
   
5,176
 
                                 
Foreign currency translation adjustments
   
(2,930
)
   
34,281
     
(25,084
)
   
43,220
 
                                 
Reclassification adjustment for amortization of net (gain) loss included in net income (loss)
   
1,816
     
1,369
     
5,446
     
5,377
 
Total benefit plan net gain (loss) for the period
   
1,816
     
1,369
     
5,446
     
5,377
 
Total other comprehensive income (loss), net of tax
   
(5,512
)
   
34,507
     
(93,704
)
   
53,774
 
                                 
COMPREHENSIVE INCOME (LOSS)
 
$
19,153
   
$
(355,217
)
 
$
(346,619
)
 
$
(131,114
)
                                 
The accompanying notes are an integral part of the consolidated financial statements.
                 


2

EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDER'S EQUITY



   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands, except share amounts)
 
2018
   
2017
   
2018
   
2017
 
   
(unaudited)
 
(unaudited)
 
COMMON STOCK (shares outstanding):
                       
Balance, beginning of period
   
1,000
     
1,000
     
1,000
     
1,000
 
Balance, end of period
   
1,000
     
1,000
     
1,000
     
1,000
 
                                 
ADDITIONAL PAID-IN CAPITAL:
                               
Balance, beginning of period
 
$
387,936
   
$
387,705
   
$
387,841
   
$
387,567
 
Share-based compensation plans
   
44
     
67
     
139
     
205
 
Balance, end of period
   
387,980
     
387,772
     
387,980
     
387,772
 
                                 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
                               
NET OF DEFERRED INCOME TAXES:
                               
Balance, beginning of period
   
(91,581
)
   
(17,048
)
   
(942
)
   
(36,315
)
Change to beginning balance due to adoption of Accounting Standards Update 2016-01
   
-
     
-
     
(2,447
)
   
-
 
Net increase (decrease) during the period
   
(5,512
)
   
34,507
     
(93,704
)
   
53,774
 
Balance, end of period
   
(97,093
)
   
17,459
     
(97,093
)
   
17,459
 
                                 
RETAINED EARNINGS:
                               
Balance, beginning of period
   
4,750,691
     
5,152,137
     
5,025,824
     
4,947,301
 
Change to beginning balance due to adoption of Accounting Standards Update 2016-01
   
-
     
-
     
2,447
     
-
 
Net income (loss)
   
24,665
     
(389,724
)
   
(252,915
)
   
(184,888
)
Balance, end of period
   
4,775,356
     
4,762,413
     
4,775,356
     
4,762,413
 
                                 
TOTAL STOCKHOLDER'S EQUITY, END OF PERIOD
 
$
5,066,243
   
$
5,167,644
   
$
5,066,243
   
$
5,167,644
 
                                 
The accompanying notes are an integral part of the consolidated financial statements.
                               


3


EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS



   
Nine Months Ended
 
   
September 30,
 
(Dollars in thousands)
 
2018
   
2017
 
   
(unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income (loss)
 
$
(252,915
)
 
$
(184,888
)
Adjustments to reconcile net income to net cash provided by operating activities:
               
Decrease (increase) in premiums receivable
   
(142,519
)
   
(432,477
)
Decrease (increase) in funds held by reinsureds, net
   
(22,523
)
   
415
 
Decrease (increase) in reinsurance receivables
   
888,922
     
(649,539
)
Decrease (increase) in income taxes
   
11,069
     
(206,857
)
Decrease (increase) in prepaid reinsurance premiums
   
(7,165
)
   
(330,345
)
Increase (decrease) in reserve for losses and loss adjustment expenses
   
199,220
     
1,579,394
 
Increase (decrease) in unearned premiums
   
202,760
     
310,237
 
Increase (decrease) in other net payable to reinsurers
   
(106,203
)
   
336,582
 
Increase (decrease) in losses in course of payment
   
36,979
     
110,669
 
Change in equity adjustments in limited partnerships
   
(58,996
)
   
(20,415
)
Distribution of limited partnership income
   
48,773
     
23,174
 
Change in other assets and liabilities, net
   
(98,702
)
   
(88,580
)
Non-cash compensation expense
   
8,779
     
7,675
 
Amortization of bond premium (accrual of bond discount)
   
4,842
     
13,675
 
Net realized capital (gains) losses
   
72,454
     
(253,966
)
Net cash provided by (used in) operating activities
   
784,775
     
214,754
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from fixed maturities matured/called - available for sale, at market value
   
556,195
     
771,950
 
Proceeds from fixed maturities sold - available for sale, at market value
   
552,982
     
1,063,126
 
Proceeds from fixed maturities sold - available for sale, at fair value
   
1,751
     
-
 
Proceeds from equity securities sold - at fair value
   
616,330
     
302,407
 
Distributions from other invested assets
   
1,010,121
     
1,459,677
 
Cost of fixed maturities acquired - available for sale, at market value
   
(1,515,045
)
   
(1,809,485
)
Cost of fixed maturities acquired - available for sale, at fair value
   
(4,381
)
   
-
 
Cost of equity securities acquired - at fair value
   
(603,856
)
   
(326,444
)
Cost of other invested assets acquired
   
(1,059,712
)
   
(1,584,617
)
Net change in short-term investments
   
(280,114
)
   
79,509
 
Net change in unsettled securities transactions
   
110,139
     
(189,980
)
Net cash provided by (used in) investing activities
   
(615,590
)
   
(233,857
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Tax benefit from share-based compensation, net of expense
   
(6,193
)
   
(7,471
)
Net cash provided by (used in) financing activities
   
(6,193
)
   
(7,471
)
                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
   
(16,786
)
   
31,111
 
                 
Net increase (decrease) in cash
   
146,206
     
4,537
 
Cash, beginning of period
   
229,552
     
297,794
 
Cash, end of period
 
$
375,758
   
$
302,331
 
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Income taxes paid (recovered)
 
$
(75,361
)
 
$
53,273
 
Interest paid
   
17,426
     
19,783
 
                 
The accompanying notes are an integral part of the consolidated financial statements.
               


4

 
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Nine Months Ended September 30, 2018 and 2017

1. GENERAL

As used in this document, "Holdings" means Everest Reinsurance Holdings, Inc., a Delaware company and direct subsidiary of Everest Underwriting Group (Ireland) Limited ("Holdings Ireland"); "Group" means Everest Re Group, Ltd. (Holdings Ireland's parent); "Bermuda Re" means Everest Reinsurance (Bermuda), Ltd., a subsidiary of Group; "Everest Re" means Everest Reinsurance Company and its subsidiaries, a subsidiary of Holdings (unless the context otherwise requires) and the "Company" means Holdings and its subsidiaries.

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 will be used in the continued expansion of the Insurance operations.

2. BASIS OF PRESENTATION

The unaudited consolidated financial statements of the Company for the three and nine months ended September 30, 2018 and 2017 include all adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair statement of the results on an interim basis.  Certain financial information, which is normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), has been omitted since it is not required for interim reporting purposes. The December 31, 2017 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.  The results for the three and nine months ended September 30, 2018 and 2017 are not necessarily indicative of the results for a full year.  These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, 2017, 2016 and 2015 included in the Company's most recent Form 10-K filing.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities (and disclosure of contingent assets and liabilities) at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Ultimate actual results could differ, possibly materially, from those estimates.

All intercompany accounts and transactions have been eliminated.

Certain reclassifications and format changes have been made to prior years' amounts to conform to the 2018 presentation.

Application of Recently Issued Accounting Standard Changes.

Simplification of Disclosure Requirements.  In August 2018, the Securities and Exchange Commission ("SEC") issued Final Rule Release #33-10532 ("the Rule") which addresses the simplification of the SEC's disclosure requirements for quarterly and annual financial reports.  The main change addressed by the Rule that is applicable to the Company is a new requirement to disclose changes in equity by line item with subtotals for each interim reporting period on the Statements of Changes in Shareholders' Equity.  This portion of the Rule will be effective for first quarter 2019 reporting and will be adopted by the Company at that time.

Accounting for Cloud Computing Arrangement.  In August 2018, The Financial Accounting Standards Board ("FASB") issued ASU 2018-15, which outlines accounting for implementation costs of a cloud computing arrangement that is a service contract.  This guidance requires that implementation costs of a cloud computing arrangement that is a service contract must be capitalized and expensed in accordance with the existing provisions provided in Subtopic 350-40 regarding development of internal use software. In addition, any capitalized implementation costs should be amortized over the term of the hosting arrangement.  The guidance is effective for annual reporting periods beginning after December 15, 2019 and interim periods
5


within that annual reporting period. The Company is currently evaluating the impact of the adoption of ASU 2018-15 on its financial statements.

Accounting for Long Duration Contracts.  In August 2018, FASB issued ASU 2018-12, which discusses changes to the recognition, measurement and presentation of long duration contracts.  The main provisions of this guidance address the following:  1) In determining liability for future policy benefits, companies must review cash flow assumptions at least annually and the discount rate assumption at each reporting period date 2) Amortization of deferred acquisition costs has been simplified to be in constant level proportion to either premiums, gross profits or gross margins 3) Disaggregated roll forwards of beginning and ending liabilities for future policy benefits are required. The guidance is effective for annual reporting periods beginning after December 15, 2020 and interim periods within that annual reporting period. The Company is currently evaluating the impact of the adoption of ASU 2018-12 on its financial statements.

Accounting for Deferred Taxes in Accumulated Other Comprehensive Income (AOCI).  In February 2018, FASB issued ASU 2018-02 which outlines guidance on the treatment of trapped deferred taxes contained within AOCI on the consolidated balance sheets.  The new guidance allows the amount of trapped deferred taxes in AOCI, resulting from the change in the U.S. tax rate from 35% to 21% upon enactment of the Tax Cuts and Jobs Act ("TCJA"), to be reclassed as part of retained earnings in the consolidated balance sheets.  The guidance is effective for annual and interim reporting periods beginning after December 15, 2018, but early adoption is allowed. The Company has decided to early adopt the guidance as of December 31, 2017.  The adoption resulted in a reclass of $325 thousand between AOCI and retained earnings during the fourth quarter of 2017.

Accounting for Impact on Income Taxes due to Tax Reform. In December 2017, the SEC issued Staff Accounting Bulletin ("SAB") 118 which provides guidance on the application of FASB Accounting Standards Codification ("ASC") Topic 740, Income Taxes, due to the enactment of TCJA.  SAB 118 became effective upon release. The Company has adopted the provisions of SAB 118 with respect to measuring the tax effects for the modifications to the determination of tax basis loss reserves. Because of uncertainty in how the Internal Revenue Service ("IRS") intends to implement the modifications and the necessary transition calculation, the Company has determined that a reasonable estimate cannot be determined and has followed the provisions of the tax laws that were in effect prior to the modifications. In 2018, the Company expects to record adjustments to the amount of tax expense it recorded in 2017 with respect to the TCJA as estimated amounts are finalized.  Further adjustments are not expected to have a material impact on the Company's financial statements.

Amortization of Bond Premium.  In March 2017, FASB issued ASU 2017-08 which outlines guidance on the amortization period for premium on callable debt securities.  The new guidance requires that the premium on callable debt securities be amortized through the earliest call date rather than through the maturity date of the callable security.  The guidance is effective for annual and interim reporting periods beginning after December 15, 2019. The Company does not expect the adoption of ASU 2017-08 to have a material impact on its financial statements.

Presentation and Disclosure of Net Periodic Benefit Costs.  In March 2017, FASB issued ASU 2017-07 which outlines guidance on the presentation of net periodic costs of benefit plans.  The new guidance requires that the service cost component of net periodic benefit costs be reported within the same line item of the statements of operations as other compensation costs are reported.  Other components of net periodic benefit costs should be reported separately.  Footnote disclosure is required to state within which line items of the statements of operations the components are reported. The guidance is effective for annual and interim reporting periods beginning after December 15, 2017. The Company adopted the guidance effective January 1, 2018. The adoption of ASU 2017-07 did not have a material impact on the Company's financial statements.

6


Disclosure of Restricted Cash.  In November 2016, FASB issued ASU 2016-18 and in August 2016, FASB issued ASU 2016-15 which outlines guidance on the presentation in the statements of cash flows of changes in restricted cash. The new guidance requires that the statements of cash flows should reflect all changes in cash, cash equivalents and restricted cash in total and not segregated individually.  The guidance is effective for annual and interim reporting periods beginning after December 15, 2017. The Company adopted the guidance effective January 1, 2018.  The adoption of ASU 2016-18 and ASU 2016-15 did not have a material impact on the Company's financial statements.

Intra-Entity Asset Transfers.  In October 2016, FASB issued ASU 2016-16 which outlines guidance on the tax accounting for intra-entity asset sales and transfers, other than inventory.  The new guidance requires that reporting entities recognize tax expense from the intra-entity transfer of an asset in the seller's tax jurisdiction at the time of transfer and recognize any deferred tax asset in the buyer's tax jurisdiction at the time of transfer.  The guidance is effective for annual and interim reporting periods beginning after December 15, 2017. The Company adopted the guidance effective January 1, 2018. The adoption of ASU 2016-16 did not have a material impact on the Company's financial statements.

Valuation of Financial Instruments.  In June 2016, FASB issued ASU 2016-13 which outline guidance on the valuation of and accounting for assets measured at amortized cost and available for sale debt securities. The carrying value of assets measured at amortized cost will now be presented as the amount expected to be collected on the financial asset (amortized cost less an allowance for credit losses valuation account).  Available for sale debt securities will now record credit losses through an allowance for credit losses, which will be limited to the amount by which fair value is below amortized cost. The guidance is effective for annual and interim reporting periods beginning after December 15, 2019. The Company is currently evaluating the impact of the adoption of ASU 2016-13 on its financial statements.

Leases.  In February 2016, FASB issued ASU 2016-02 (and subsequently issued ASU 2018-11 in July, 2018) which outlines new guidance on the accounting for leases. The new guidance requires the recognition of lease assets and lease liabilities on the balance sheets for most leases that were previously deemed operating leases and required only lease expense presentation in the statements of operations.  The guidance is effective for annual and interim reporting periods beginning after December 15, 2018.  The Company is currently evaluating the impact of the adoption of ASU 2016-02 on its financial statements.

Recognition and Measurement of Financial Instruments.  In January 2016, the FASB issued ASU 2016-01 which outlines revised guidance on the accounting for equity investments. The new guidance states that all equity investments in unconsolidated entities will be measured at fair value, with the change in value being recorded through the income statement rather than being recorded within other comprehensive income. The updated guidance is effective for annual and interim reporting periods beginning after December 15, 2017.  The Company adopted the guidance effective January 1, 2018. The adoption of ASU 2016-01 resulted in a cumulative change adjustment of $2,447 thousand between AOCI and retained earnings, which is disclosed separately within the consolidated statement of changes in shareholders equity.

Disclosures about Short-Duration Contracts. In May 2015, the FASB issued ASU 2015-09, authoritative guidance regarding required disclosures associated with short duration insurance contracts.  The new disclosure requirements focus on information about initial claim estimates and subsequent claim estimate adjustment, methodologies in estimating claims and the timing, frequency and severity of claims related to short duration insurance contracts. This guidance is effective for annual reporting periods beginning after December 15, 2015 and interim reporting periods beginning after December 15, 2016.  The Company implemented this guidance effective in the fourth quarter of 2016.

Revenue Recognition.  In May 2014, the FASB issued ASU 2014-09 and in August 2015, FASB issued ASU 2015-14 which outline revised guidance on the recognition of revenue arising from contracts with customers. The new guidance states that reporting entities should apply certain steps to determine when revenue should be recognized, based upon fulfillment of performance obligations to complete contracts. The updated guidance is effective for annual and interim reporting periods beginning after December 15, 2017. The Company adopted the guidance effective January 1, 2018. The adoption of ASU 2014-09 and ASU 2015-14 did not have a material impact on the Company's financial statements.
7


Any issued guidance and pronouncements, other than those directly referenced above, are deemed by the Company to be either not applicable or immaterial to its financial statements.

3.  INVESTMENTS

The amortized cost, market value and gross unrealized appreciation and depreciation of available for sale, fixed maturity, 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 September 30, 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
 
$
784,825
   
$
1,029
   
$
(19,369
)
 
$
766,485
   
$
-
 
Obligations of U.S. states and political subdivisions
   
506,023
     
11,063
     
(3,060
)
   
514,026
     
471
 
Corporate securities
   
2,247,866
     
16,038
     
(38,042
)
   
2,225,862
     
407
 
Asset-backed securities
   
150,814
     
61
     
(1,320
)
   
149,555
     
-
 
Mortgage-backed securities
                                       
Commercial
   
49,344
     
-
     
(933
)
   
48,411
     
-
 
Agency residential
   
94,813
     
324
     
(2,941
)
   
92,196
     
-
 
Non-agency residential
   
2,119
     
8
     
-
     
2,127
     
-
 
Foreign government securities
   
519,222
     
13,036
     
(13,165
)
   
519,093
     
-
 
Foreign corporate securities
   
927,885
     
13,917
     
(26,103
)
   
915,699
     
319
 
Total fixed maturity securities
 
$
5,282,911
   
$
55,476
   
$
(104,933
)
 
$
5,233,454
   
$
1,197
 



   
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
 
$
671,449
   
$
658
   
$
(7,594
)
 
$
664,513
   
$
-
 
Obligations of U.S. states and political subdivisions
   
563,789
     
22,124
     
(444
)
   
585,469
     
-
 
Corporate securities
   
2,009,665
     
28,003
     
(13,459
)
   
2,024,209
     
129
 
Asset-backed securities
   
138,203
     
207
     
(386
)
   
138,024
     
-
 
Mortgage-backed securities
                                       
Commercial
   
52,121
     
115
     
(485
)
   
51,751
     
-
 
Agency residential
   
114,435
     
511
     
(1,658
)
   
113,288
     
-
 
Non-agency residential
   
51
     
7
     
-
     
58
     
-
 
Foreign government securities
   
514,048
     
17,065
     
(7,493
)
   
523,620
     
-
 
Foreign corporate securities
   
863,861
     
20,121
     
(12,993
)
   
870,989
     
377
 
Total fixed maturity securities
 
$
4,927,622
   
$
88,811
   
$
(44,512
)
 
$
4,971,921
   
$
506
 


(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.

8


The amortized cost and market value of fixed maturity securities are shown in the following tables by contractual maturity. Mortgage-backed securities are generally more likely to be prepaid than other fixed maturity securities. As the stated maturity of such securities may not be indicative of actual maturities, the totals for mortgage-backed and asset-backed securities are shown separately.


   
At September 30, 2018
   
At December 31, 2017
 
   
Amortized
   
Market
   
Amortized
   
Market
 
(Dollars in thousands)
 
Cost
   
Value
   
Cost
   
Value
 
Fixed maturity securities – available for sale
                       
    Due in one year or less
 
$
464,584
   
$
462,929
   
$
319,858
   
$
320,746
 
    Due after one year through five years
   
2,750,584
     
2,704,551
     
2,601,898
     
2,595,237
 
    Due after five years through ten years
   
1,172,127
     
1,170,791
     
1,051,431
     
1,069,617
 
    Due after ten years
   
598,526
     
602,894
     
649,625
     
683,200
 
Asset-backed securities
   
150,814
     
149,555
     
138,203
     
138,024
 
Mortgage-backed securities
                               
Commercial
   
49,344
     
48,411
     
52,121
     
51,751
 
Agency residential
   
94,813
     
92,196
     
114,435
     
113,288
 
Non-agency residential
   
2,119
     
2,127
     
51
     
58
 
Total fixed maturity securities
 
$
5,282,911
   
$
5,233,454
   
$
4,927,622
   
$
4,971,921
 


The changes in net unrealized appreciation (depreciation) for the Company's investments are derived from the following sources for the periods as indicated:


   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2018
   
2017
   
2018
   
2017
 
Increase (decrease) during the period between the market value and cost
                       
of investments carried at market value, and deferred taxes thereon:
                       
Fixed maturity securities
 
$
(5,899
)
 
$
(3,197
)
 
$
(94,451
)
 
$
9,077
 
Fixed maturity securities, other-than-temporary impairment
   
326
     
(158
)
   
691
     
(3,974
)
Other invested assets
   
-
     
1,595
     
-
     
2,860
 
Change in unrealized  appreciation (depreciation), pre-tax
   
(5,573
)
   
(1,760
)
   
(93,760
)
   
7,963
 
Deferred tax benefit (expense)
   
1,243
     
561
     
19,839
     
(4,178
)
Deferred tax benefit (expense), other-than-temporary impairment
   
(68
)
   
55
     
(145
)
   
1,391
 
Change in unrealized appreciation (depreciation),
                               
net of deferred taxes, included in stockholder's equity
 
$
(4,398
)
 
$
(1,144
)
 
$
(74,066
)
 
$
5,176
 


The Company frequently reviews all of its fixed maturity, available for sale securities for declines in market value and focuses its attention on securities whose fair value has fallen below 80% of their amortized cost at the time of review.  The Company then assesses whether the decline in value is temporary or other-than-temporary.  In making its assessment, the Company evaluates the current market and interest rate environment as well as specific issuer information.  Generally, a change in a security's value caused by a change in the market, interest rate or foreign exchange environment does not constitute an other-than-temporary impairment, but rather a temporary decline in market value.  Temporary declines in market value are recorded as unrealized losses in accumulated other comprehensive income (loss).  If the Company determines that the decline is other-than-temporary and the Company does not have the intent to sell the security; and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis, the carrying value of the investment is written down to fair value.  The fair value adjustment that is credit or foreign exchange related is recorded in net realized capital gains (losses) in the Company's consolidated statements of operations and comprehensive income (loss). The fair value adjustment that is non-credit related is recorded as a component of other comprehensive income (loss), net of tax, and is included in accumulated other comprehensive income (loss) in the Company's consolidated balance sheets.  The Company's assessments are based on the issuers' current and expected future financial position, timeliness with respect to interest and/or principal payments, speed of repayments and any applicable credit enhancements or breakeven constant default rates on mortgage-backed and asset-backed securities, as well as relevant information provided by rating agencies, investment advisors and analysts.
9


Retrospective adjustments are employed to recalculate the values of asset-backed securities. All of the Company's asset-backed and mortgage-backed securities have a pass-through structure. Each acquisition lot is reviewed to recalculate the effective yield. The recalculated effective yield is used to derive a book value as if the new yield were applied at the time of acquisition. Outstanding principal factors from the time of acquisition to the adjustment date are used to calculate the prepayment history for all applicable securities. Conditional prepayment rates, computed with life to date factor histories and weighted average maturities, are used in the calculation of projected prepayments for pass-through security types.

The tables below display the aggregate market value and gross unrealized depreciation of fixed maturity securities, by security type and contractual maturity, in each case subdivided according to length of time that individual securities had been in a continuous unrealized loss position for the periods indicated:


   
Duration of Unrealized Loss at September 30, 2018 By Security Type
 
   
Less than 12 months
   
Greater than 12 months
   
Total
 
         
Gross
         
Gross
         
Gross
 
         
Unrealized
         
Unrealized
         
Unrealized
 
(Dollars in thousands)
 
Market Value
   
Depreciation
   
Market Value
   
Depreciation
   
Market Value
   
Depreciation
 
Fixed maturity securities - available for sale
                                   
U.S. Treasury securities and obligations of
                                   
U.S. government agencies and corporations
 
$
496,059
   
$
(10,363
)
 
$
232,583
   
$
(9,006
)
 
$
728,642
   
$
(19,369
)
Obligations of U.S. states and political subdivisions
   
105,936
     
(1,377
)
   
36,436
     
(1,683
)
   
142,372
     
(3,060
)
Corporate securities
   
989,478
     
(23,269
)
   
265,588
     
(14,773
)
   
1,255,066
     
(38,042
)
Asset-backed securities
   
91,624
     
(1,165
)
   
12,889
     
(155
)
   
104,513
     
(1,320
)
Mortgage-backed securities
                                               
Commercial
   
22,409
     
(396
)
   
26,002
     
(537
)
   
48,411
     
(933
)
Agency residential
   
48,576
     
(1,119
)
   
36,445
     
(1,822
)
   
85,021
     
(2,941
)
Non-agency residential
   
698
     
-
     
-
     
-
     
698
     
-
 
Foreign government securities
   
230,922
     
(3,184
)
   
153,714
     
(9,981
)
   
384,636
     
(13,165
)
Foreign corporate securities
   
351,496
     
(10,103
)
   
240,213
     
(16,000
)
   
591,709
     
(26,103
)
Total fixed maturity securities
 
$
2,337,198
   
$
(50,976
)
 
$
1,003,870
   
$
(53,957
)
 
$
3,341,068
   
$
(104,933
)



   
Duration of Unrealized Loss at September 30, 2018 By Maturity
 
   
Less than 12 months
   
Greater than 12 months
   
Total
 
         
Gross
         
Gross
         
Gross
 
         
Unrealized
         
Unrealized
         
Unrealized
 
(Dollars in thousands)
 
Market Value
   
Depreciation
   
Market Value
   
Depreciation
   
Market Value
   
Depreciation
 
Fixed maturity securities
                                   
Due in one year or less
 
$
232,647
   
$
(1,363
)
 
$
51,818
   
$
(5,280
)
 
$
284,465
   
$
(6,643
)
Due in one year through five years
   
1,305,379
     
(26,391
)
   
692,804
     
(33,773
)
   
1,998,183
     
(60,164
)
Due in five years through ten years
   
414,043
     
(11,906
)
   
147,476
     
(10,707
)
   
561,519
     
(22,613
)
Due after ten years
   
221,822
     
(8,636
)
   
36,436
     
(1,683
)
   
258,258
     
(10,319
)
Asset-backed securities
   
91,624
     
(1,165
)
   
12,889
     
(155
)
   
104,513
     
(1,320
)
Mortgage-backed securities
   
71,683
     
(1,515
)
   
62,447
     
(2,359
)
   
134,130
     
(3,874
)
Total fixed maturity securities
 
$
2,337,198
   
$
(50,976
)
 
$
1,003,870
   
$
(53,957
)
 
$
3,341,068
   
$
(104,933
)


The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at September 30, 2018 were $3,341,068 thousand and $104,933 thousand, respectively.  The market value of securities for the single issuer (the United States government) whose securities comprised the largest unrealized loss position at September 30, 2018, did not exceed 14.0% of the overall market value of the Company's fixed maturity securities. The market value of securities for the issuer with the second largest unrealized loss comprised less than 1.0% of the company's fixed maturity securities. In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector.  The $50,976 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of domestic and foreign corporate securities, U.S. government agencies and foreign government securities.  Of these unrealized losses, $38,253 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating agency.  The $53,957 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily due to foreign and domestic corporate securities, foreign government securities and U.S. government agencies.  Of these
10

unrealized losses $52,199 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating agency. There was no gross unrealized depreciation for mortgage-backed securities related to sub-prime and alt-A loans. In all instances, there were no projected cash flow shortfalls to recover the full book value of the investments and the related interest obligations.  The mortgage-backed securities still have excess credit coverage and are current on interest and principal payments.

The Company, given the size of its investment portfolio and capital position, does not have the intent to sell these securities; and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis.  In addition, all securities currently in an unrealized loss position are current with respect to principal and interest payments.

The tables below display the aggregate market value and gross unrealized depreciation of fixed maturity securities, by security type and contractual maturity, in each case subdivided according to length of time that individual securities had been in a continuous unrealized loss position for the periods indicated:


   
Duration of Unrealized Loss at December 31, 2017 By Security Type
 
   
Less than 12 months
   
Greater than 12 months
   
Total
 
         
Gross
         
Gross
         
Gross
 
         
Unrealized
         
Unrealized
         
Unrealized
 
(Dollars in thousands)
 
Market Value
   
Depreciation
   
Market Value
   
Depreciation
   
Market Value
   
Depreciation
 
Fixed maturity securities - available for sale
                                   
U.S. Treasury securities and obligations of
                                   
U.S. government agencies and corporations
 
$
446,963
   
$
(2,921
)
 
$
198,684
   
$
(4,673
)
 
$
645,647
   
$
(7,594
)
Obligations of U.S. states and political subdivisions
   
4,400
     
(27
)
   
37,886
     
(417
)
   
42,286
     
(444
)
Corporate securities
   
455,431
     
(6,674
)
   
216,715
     
(6,785
)
   
672,146
     
(13,459
)
Asset-backed securities
   
75,196
     
(328
)
   
7,991
     
(58
)
   
83,187
     
(386
)
Mortgage-backed securities
                                               
Commercial
   
26,650
     
(264
)
   
5,972
     
(221
)
   
32,622
     
(485
)
Agency residential
   
46,234
     
(322
)
   
58,135
     
(1,336
)
   
104,369
     
(1,658
)
Foreign government securities
   
159,852
     
(1,567
)
   
121,018
     
(5,926
)
   
280,870
     
(7,493
)
Foreign corporate securities
   
263,547
     
(4,590
)
   
109,727
     
(8,403
)
   
373,274
     
(12,993
)
Total fixed maturity securities
 
$
1,478,273
   
$
(16,693
)
 
$
756,128
   
$
(27,819
)
 
$
2,234,401
   
$
(44,512
)



   
Duration of Unrealized Loss at December 31, 2017 By Maturity
 
   
Less than 12 months
   
Greater than 12 months
   
Total
 
         
Gross
         
Gross
         
Gross
 
         
Unrealized
         
Unrealized
         
Unrealized
 
(Dollars in thousands)
 
Market Value
   
Depreciation
   
Market Value
   
Depreciation
   
Market Value
   
Depreciation
 
Fixed maturity securities
                                   
Due in one year or less
 
$
102,939
   
$
(498
)
 
$
40,006
   
$
(1,627
)
 
$
142,945
   
$
(2,125
)
Due in one year through five years
   
973,217
     
(10,291
)
   
488,945
     
(18,917
)
   
1,462,162
     
(29,208
)
Due in five years through ten years
   
189,103
     
(3,713
)
   
116,136
     
(5,216
)
   
305,239
     
(8,929
)
Due after ten years
   
64,934
     
(1,277
)
   
38,943
     
(444
)
   
103,877
     
(1,721
)
Asset-backed securities
   
75,196
     
(328
)
   
7,991
     
(58
)
   
83,187
     
(386
)
Mortgage-backed securities
   
72,884
     
(586
)
   
64,107
     
(1,557
)
   
136,991
     
(2,143
)
Total fixed maturity securities
 
$
1,478,273
   
$
(16,693
)
 
$
756,128
   
$
(27,819
)
 
$
2,234,401
   
$
(44,512
)


The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2017 were $2,234,401 thousand and $44,512 thousand, respectively.  The market value of securities for the single issuer (the United States government) whose securities comprised the largest unrealized loss position at December 31, 2017, did not exceed 13.0% of the overall market value of the Company's fixed maturity securities. The market value of securities for the issuer with the second largest unrealized loss comprised less than 0.9% of the company's fixed maturity securities. In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector.  The $16,693 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of domestic and foreign corporate securities, U.S. government agencies and corporations and foreign government securities.  Of these unrealized losses, $13,043 thousand were related to securities that were rated investment grade by
11


at least one nationally recognized statistical rating agency.  The $27,819 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily due to foreign and domestic corporate securities, foreign government securities, U.S. government agencies and corporations and agency residential mortgage-backed securities.  Of these unrealized losses $26,463 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating agency. There was no gross unrealized depreciation for mortgage-backed securities related to sub-prime and alt-A loans. In all instances, there were no projected cash flow shortfalls to recover the full book value of the investments and the related interest obligations.  The mortgage-backed securities still have excess credit coverage and are current on interest and principal payments.

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


   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2018
   
2017
   
2018
   
2017
 
Fixed maturities
 
$
51,834
   
$
48,335
   
$
142,776
   
$
144,916
 
Equity securities
   
2,651
     
6,267
     
10,681
     
19,385
 
Short-term investments and cash
   
2,110
     
648
     
4,340
     
1,628
 
Other invested assets
                               
Limited partnerships
   
25,573
     
11,878
     
54,213
     
20,632
 
Dividends from preferred shares of affiliate
   
7,758
     
7,758
     
23,274
     
23,274
 
Other
   
6,061
     
1,484
     
10,716
     
4,232
 
Gross investment income before adjustments
   
95,987
     
76,370
     
246,000
     
214,067
 
Funds held interest income (expense)
   
906
     
1,098
     
4,505
     
4,015
 
Interest income from Parent
   
1,075
     
1,075
     
3,225
     
3,225
 
Gross investment income
   
97,968
     
78,543
     
253,730
     
221,307
 
Investment expenses
   
(7,670
)
   
(5,126
)
   
(21,453
)
   
(15,141
)
Net investment income
 
$
90,298
   
$
73,417
   
$
232,277
   
$
206,166
 
                                 
(Some amounts may not reconcile due to rounding.)
                               


The Company records results from limited partnership investments on the equity method of accounting with changes in value reported through net investment income. Due to the timing of receiving financial information from these partnerships, the results are generally reported on a one month or quarter lag.  If the Company determines there has been a significant decline in value of a limited partnership during this lag period, a loss will be recorded in the period in which the Company identifies the decline.

The Company had contractual commitments to invest up to an additional $331,814 thousand in limited partnerships at September 30, 2018.  These commitments will be funded when called in accordance with the partnership agreements, which have investment periods that expire, unless extended, through 2023.

Beginning in the first quarter of 2016, the Company participated in a private placement liquidity sweep facility ("the facility").  The primary purpose of the facility is to enhance the Company's return on its short-term investments and cash positions.  The facility invests in high quality, short-duration securities and permits daily liquidity.  Through the second quarter of 2018, the Company's participation in the facility was classified within other invested assets on the Company's Balance Sheets.

In third quarter of 2018, the Company has consolidated its participation in the facility.  As a result, the underlying investments are now recorded in the various investment line items within the Company's balance sheet, rather than as part of other invested assets.  As of September 30, 2018, the market value of investments in the facility consolidated within the Company's balance sheets is $471,641 thousand.

Other invested assets, at fair value, as of September 30, 2018 and December 31, 2017, were comprised of preferred shares held in Preferred Holdings, an affiliated company.

12


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


   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2018
   
2017
   
2018
   
2017
 
Fixed maturity securities, market value:
                       
Other-than-temporary impairments
 
$
(2,834
)
 
$
(1,473
)
 
$
(3,741
)
 
$
(4,179
)
Gains (losses) from sales
   
(1,288
)
   
3,842
     
4,670
     
16,814
 
Fixed maturity securities, fair value:
                               
Gains (losses) from sales
   
(717
)
   
-
     
(1,799
)
   
-
 
Gains (losses) from fair value adjustments
   
584
     
-
     
1,542
     
-
 
Equity securities, fair value:
                               
Gains (losses) from sales
   
9,915
     
(1,479
)
   
5,833
     
3,465
 
Gains (losses) from fair value adjustments
   
36,269
     
29,645
     
34,805
     
82,006
 
Other invested assets
   
913
     
85
     
1,497
     
84
 
Other invested assets, fair value:
                               
Gains (losses) from fair value adjustments
   
(12,816
)
   
197,869
     
(115,252
)
   
155,775
 
Short-term investment gains (losses)
   
(8
)
   
-
     
(9
)
   
1
 
Total net realized capital gains (losses)
 
$
30,018
   
$
228,489
   
$
(72,454
)
 
$
253,966
 


The Company recorded as net realized capital gains (losses) in the consolidated statements of operations and comprehensive income (loss) both fair value re-measurements and write-downs in the value of securities deemed to be impaired on an other-than-temporary basis as displayed in the table above.  The Company had no other-than-temporary impaired securities where the impairment had both a credit and non-credit component.

The proceeds and split between gross gains and losses, from sales of fixed maturity and equity securities, are presented in the table below for the periods indicated:


   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2018
   
2017
   
2018
   
2017
 
Proceeds from sales of fixed maturity securities
 
$
184,810
   
$
410,636
   
$
554,733
   
$
1,063,126
 
Gross gains from sales
   
2,519
     
7,931
     
11,512
     
23,674
 
Gross losses from sales
   
(4,524
)
   
(4,089
)
   
(8,641
)
   
(6,860
)
                                 
Proceeds from sales of equity securities
 
$
186,403
   
$
52,754
   
$
616,330
   
$
302,407
 
Gross gains from sales
   
13,764
     
2,199
     
21,670
     
13,774
 
Gross losses from sales
   
(3,849
)
   
(3,678
)
   
(15,837
)
   
(10,309
)


13


4.  RESERVES FOR LOSSES AND LAE

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


   
Nine Months Ended
 
Twelve Months Ended
   
September 30,
 
December 31,
(Dollars in thousands)
 
2018
   
2017
 
Gross reserves at January 1
 
$
9,343,028
   
$
8,331,288
 
Less reinsurance recoverables
   
(5,727,268
)
   
(4,199,791
)
Net reserves at January 1
   
3,615,760
     
4,131,497
 
                 
Incurred related to:
               
Current year
   
2,431,606
     
2,157,498
 
Prior years
   
480,706
     
(117,747
)
Total incurred losses and LAE
   
2,912,312
     
2,039,751
 
                 
Paid related to:
               
Current year
   
639,528
     
1,607,601
 
Prior years
   
1,129,263
     
957,933
 
Total paid losses and LAE
   
1,768,791
     
2,565,534
 
                 
Foreign exchange/translation adjustment
   
(23,093
)
   
10,046
 
                 
Net reserves at December 31
   
4,736,188
     
3,615,760
 
Plus reinsurance recoverables
   
4,783,290
     
5,727,268
 
Gross reserves at December 31
 
$
9,519,478
   
$
9,343,028
 


Incurred prior years' reserves increased by $480,706 thousand for the nine months ended September 30, 2018 and decreased by $117,747 thousand for the year ended December 31, 2017.  The increase for the nine months ended September 30, 2018, resulted from unfavorable development on prior years catastrophe losses 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 reported in the second quarter of 2018 and loss inflation from higher than expected loss adjustment expenses and in particular, their impact on aggregate covers.  The decrease for 2017 was attributable to favorable development in the reinsurance segments of $84,809 thousand related primarily to property and short-tail business in the U.S., as well as favorable development on prior year catastrophe losses, partially offset by $25,194 thousand of adverse development on A&E reserves. The insurance segment also experienced favorable development on prior year reserves of $32,938 thousand mainly on its workers compensation business, which is largely written in California.

5.  FAIR VALUE

GAAP guidance regarding fair value measurements address how companies should measure fair value when they are required to use fair value measures for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP.  It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date.  In addition, it establishes a three-level valuation hierarchy for the disclosure of fair value measurements.  The valuation hierarchy is based on the transparency of inputs to the valuation of an asset or liability.  The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement, with Level 1 being the highest priority and Level 3 being the lowest priority.

14


The levels in the hierarchy are defined as follows:

Level 1:
Inputs to the valuation methodology are observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in an active market;

Level 2:
Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument;

Level 3:
Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The Company's fixed maturity and equity securities are primarily managed by third party investment asset managers.  The investment asset managers obtain prices from nationally recognized pricing services.   These services seek to utilize market data and observations in their evaluation process.  They use pricing applications that vary by asset class and incorporate available market information and when fixed maturity securities do not trade on a daily basis the services will apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing.  In addition, they use model processes, such as the Option Adjusted Spread model to develop prepayment and interest rate scenarios for securities that have prepayment features.

In limited instances where prices are not provided by pricing services or in rare instances when a manager may not agree with the pricing service, price quotes on a non-binding basis are obtained from investment brokers.  The investment asset managers do not make any changes to prices received from either the pricing services or the investment brokers.  In addition, the investment asset managers have procedures in place to review the reasonableness of the prices from the service providers and may request verification of the prices.  In addition, the Company continually performs analytical reviews of price changes and tests the prices on a random basis to an independent pricing source.   No material variances were noted during these price validation procedures.  In limited situations, where financial markets are inactive or illiquid, the Company may use its own assumptions about future cash flows and risk-adjusted discount rates to determine fair value.  Due to the unavailability of prices for one-hundred and three private placement securities at September 30, 2018, an investment manager's valuation committee valued one hundred one of these private placement securities at $377,938 thousand. In addition, the Company valued two private placement securities at $13,750 thousand, representing par value.  Due to the unavailability of prices for sixty-five private placement securities at December 31, 2017, an investment manager's valuation committee valued the sixty-five securities at $165,173 thousand.

The Company internally manages a public equity portfolio which had a fair value at September 30, 2018 and December 31, 2017 of $241,537 thousand and $245,043 thousand, respectively, and all prices were obtained from publicly published sources.

Equity securities denominated in U.S. currency with quoted prices in active markets for identical assets are categorized as level 1 since the quoted prices are directly observable.  Equity securities traded on foreign exchanges are categorized as level 2 due to the added input of a foreign exchange conversion rate to determine fair or market value.  The Company uses foreign currency exchange rates published by nationally recognized sources.

All categories of fixed maturity securities listed in the tables below are generally categorized as level 2, since a particular security may not have traded but the pricing services are able to use valuation models with observable market inputs such as interest rate yield curves and prices for similar fixed maturity securities in terms of issuer, maturity and seniority.  For foreign government securities and foreign corporate securities, the fair values provided by the third party pricing services in local currencies, and where applicable, are converted to U.S. dollars using currency exchange rates from nationally recognized sources.
15


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

The composition and valuation inputs for the presented fixed maturities categories are as follows:

·
U.S. Treasury securities and obligations of U.S. government agencies and corporations are primarily comprised of U.S. Treasury bonds and the fair value is based on observable market inputs such as quoted prices, reported trades, quoted prices for similar issuances or benchmark yields;

·
Obligations of U.S. states and political subdivisions are comprised of state and municipal bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities, benchmark yields and credit spreads;

·
Corporate securities are primarily comprised of U.S. corporate and public utility bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities, benchmark yields and credit spreads;

·
Asset-backed and mortgage-backed securities fair values are based on observable inputs such as quoted prices, reported trades, quoted prices for similar issuances or benchmark yields and cash flow models using observable inputs such as prepayment speeds, collateral performance and default spreads;

·
Foreign government securities are comprised of global non-U.S. sovereign bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities and models with observable inputs such as benchmark yields and credit spreads and then, where applicable, converted to U.S. dollars using an exchange rate from a nationally recognized source;

·
Foreign corporate securities are comprised of global non-U.S. corporate bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities and models with observable inputs such as benchmark yields and credit spreads and then, where applicable, converted to U.S. dollars using an exchange rate from a nationally recognized source.

Other invested assets, at fair value, was categorized as Level 3 at September 30, 2018 and December 31, 2017, since it represented a privately placed convertible preferred stock issued by an affiliate.  The stock was received in exchange for shares of the Company's parent.  The 25 year redeemable, convertible preferred stock with a 1.75% coupon is valued using a pricing model. The pricing model includes observable inputs such as the U.S. Treasury yield curve rate T note constant maturity 20 year and the swap rate on the Company's June 1, 2044, 4.868% senior notes, with adjustments to reflect the Company's own assumptions about the inputs that market participants would use in pricing the asset.

16


The following table presents the fair value measurement levels for all assets, which the Company has recorded at fair value (fair and market value) as of the period indicated:


         
Fair Value Measurement Using:
 
         
Quoted Prices
             
         
in Active
   
Significant
       
         
Markets for
   
Other
   
Significant
 
         
Identical
   
Observable
   
Unobservable
 
         
Assets
   
Inputs
   
Inputs
 
(Dollars in thousands)
 
September 30, 2018
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets:
                       
Fixed maturities, market value
                       
U.S. Treasury securities and obligations of
                       
U.S. government agencies and corporations
 
$
766,485
   
$
-
   
$
766,485
   
$
-
 
Obligations of U.S. States and political subdivisions
   
514,026
     
-
     
514,026
     
-
 
Corporate securities
   
2,225,862
     
-
     
1,848,708
     
377,154
 
Asset-backed securities
   
149,555
     
-
     
149,555
     
-
 
Mortgage-backed securities
                               
Commercial
   
48,411
     
-
     
48,411
     
-
 
Agency residential
   
92,196
     
-
     
92,196
     
-
 
Non-agency residential
   
2,127
     
-
     
2,127
     
-
 
Foreign government securities
   
519,093
     
-
     
519,093
     
-
 
Foreign corporate securities
   
915,699
     
-
     
903,538
     
12,161
 
Total fixed maturities, market value
   
5,233,454
     
-
     
4,844,139
     
389,315
 
                                 
Fixed maturities, fair value
   
2,373
     
-
     
-
     
2,373
 
Equity securities, fair value
   
850,539
     
824,356
     
26,183
     
-
 
Other invested assets, fair value
   
1,692,221
     
-
     
-
     
1,692,221
 


There were no transfers between Level 1 and Level 2 for the nine months ended September 30, 2018.

The following table presents the fair value measurement levels for all assets, which the Company has recorded at fair value (fair and market value) as of the period indicated:


         
Fair Value Measurement Using:
 
         
Quoted Prices
             
         
in Active
   
Significant
       
         
Markets for
   
Other
   
Significant
 
         
Identical
   
Observable
   
Unobservable
 
         
Assets
   
Inputs
   
Inputs
 
(Dollars in thousands)
 
December 31, 2017
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets:
                       
Fixed maturities, market value
                       
U.S. Treasury securities and obligations of
                       
U.S. government agencies and corporations
 
$
664,513
   
$
-
   
$
664,513
   
$
-
 
Obligations of U.S. States and political subdivisions
   
585,469
     
-
     
585,469
     
-
 
Corporate securities
   
2,024,209
     
-
     
1,865,988
     
158,221
 
Asset-backed securities
   
138,024
     
-
     
138,024
     
-
 
Mortgage-backed securities
                               
Commercial
   
51,751
     
-
     
51,751
     
-
 
Agency residential
   
113,288
     
-
     
113,288
     
-
 
Non-agency residential
   
58
     
-
     
58
     
-
 
Foreign government securities
   
523,620
     
-
     
523,620
     
-
 
Foreign corporate securities
   
870,989
     
-
     
864,037
     
6,952
 
Total fixed maturities, market value
   
4,971,921
     
-
     
4,806,748
     
165,173
 
                                 
Equity securities, fair value
   
822,375
     
800,542
     
21,833
     
-
 
Other invested assets, fair value
   
1,807,473
     
-
     
-
     
1,807,473
 

17


In addition $110,029 thousand and $79,505 thousand of investments within other invested assets on the consolidated balance sheets as of September 30, 2018 and December 31, 2017, respectively, are not included within the fair value hierarchy tables as the assets are measured at NAV as a practical expedient to determine fair value.

The following tables present the activity under Level 3, fair value measurements using significant unobservable inputs by asset type, for the periods indicated:


   
Total Fixed Maturities, Market Value
 
   
Three Months Ended September 30, 2018
   
Nine Months Ended September 30, 2018
 
   
Corporate
   
Foreign
         
Corporate
   
Foreign
       
(Dollars in thousands)
 
Securities
   
Corporate
   
Total
   
Securities
   
Corporate
   
Total
 
Beginning balance
 
$
329,249
   
$
12,615
   
$
341,864
   
$
158,221
   
$
6,952
   
$
165,173
 
Total gains or (losses) (realized/unrealized)
                                               
Included in earnings
   
(1,935
)
   
(472
)
   
(2,407
)
   
(590
)
   
(882
)
   
(1,472
)
Included in other comprehensive income (loss)
   
(450
)
   
-
     
(450
)
   
(25
)
   
-
     
(25
)
Purchases, issuances and settlements
   
50,290
     
18
     
50,308
     
219,548
     
4,341
     
223,889
 
Transfers in and/or (out) of Level 3
   
-
     
-
     
-
     
-
     
1,750
     
1,750
 
Ending balance
 
$
377,154
   
$
12,161
   
$
389,315
   
$
377,154
   
$
12,161
   
$
389,315
 
                                                 
The amount of total gains or losses for the period included
                                               
in earnings (or changes in net assets) attributable to the
                                               
change in unrealized gains or losses relating to assets
                                               
still held at the reporting date
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
                                                 
(Some amounts may not reconcile due to rounding.)
                                               



   
Total Fixed Maturities, Market Value
 
   
Three Months Ended September 30, 2017
   
Nine Months Ended September 30, 2017
 
   
Corporate
   
Foreign
         
Corporate
   
Foreign
       
(Dollars in thousands)
 
Securities
   
Corporate
   
Total
   
Securities
   
Corporate
   
Total
 
Beginning balance
 
$
86,140
   
$
3,151
   
$
89,291
   
$
65,197
   
$
2,538
   
$
67,735
 
Total gains or (losses) (realized/unrealized)
                                               
Included in earnings
   
283
     
210
     
493
     
1,208
     
314
     
1,522
 
Included in other comprehensive income (loss)
   
18
     
(230
)
   
(212
)
   
161
     
(230
)
   
(69
)
Purchases, issuances and settlements
   
15,628
     
-
     
15,628
     
35,503
     
509
     
36,012
 
Transfers in and/or (out) of Level 3
   
-
     
-
     
-
     
-
     
-
     
-
 
Ending balance
 
$
102,069
   
$
3,131
   
$
105,200
   
$
102,069
   
$
3,131
   
$
105,200
 
                                                 
The amount of total gains or losses for the period included
                                               
in earnings (or changes in net assets) attributable to the
                                               
change in unrealized gains or losses relating to assets
                                               
still held at the reporting date
 
$
-
   
$
-
   
$
-
   
$
-
   
$
-
   
$
-
 
                                                 
(Some amounts may not reconcile due to rounding.)
                                               

18



   
Total Fixed Maturities, Fair Value
 
   
Three Months Ended September 30, 2018
   
Nine Months Ended September 30, 2018
 
   
Foreign
         
Foreign
       
(Dollars in thousands)
 
Corporate
   
Total
   
Corporate
   
Total
 
Beginning balance fixed maturities at fair value
 
$
3,192
   
$
3,192
   
$
-
   
$
-
 
Total gains or (losses) (realized/unrealized)
                               
Included in earnings
   
(101
)
   
(101
)
   
(257
)
   
(257
)
Included in other comprehensive income (loss)
   
(32
)
   
(32
)
   
-
     
-
 
Purchases, issuances and settlements
   
(686
)
   
(686
)
   
2,630
     
2,630
 
Transfers in and/or (out) of Level 3
   
-
     
-
     
-
     
-
 
Ending balance
 
$
2,373
   
$
2,373
   
$
2,373
   
$
2,373
 
                                 
The amount of total gains or losses for the period included
                               
in earnings (or changes in net assets) attributable to the
                               
change in unrealized gains or losses relating to assets
                               
still held at the reporting date
 
$
-
   
$
-
   
$
-
   
$
-
 
                                 
(Some amounts may not reconcile due to rounding.)
                               



   
Total Fixed Maturities, Fair Value
 
   
Three Months Ended September 30, 2017
   
Nine Months Ended September 30, 2017
 
   
Foreign
         
Foreign
       
(Dollars in thousands)
 
Corporate
   
Total
   
Corporate
   
Total
 
Beginning balance fixed maturities at fair value
 
$
-
   
$
-
   
$
-
   
$
-
 
Total gains or (losses) (realized/unrealized)
                               
Included in earnings
   
-
     
-
     
-
     
-
 
Included in other comprehensive income (loss)
   
-
     
-
     
-
     
-
 
Purchases, issuances and settlements
   
-
     
-
     
-
     
-
 
Transfers in and/or (out) of Level 3
   
-
     
-
     
-
     
-
 
Ending balance
 
$
-
   
$
-
   
$
-
   
$
-
 
                                 
The amount of total gains or losses for the period included
                               
in earnings (or changes in net assets) attributable to the
                               
change in unrealized gains or losses relating to assets
                               
still held at the reporting date
 
$
-
   
$
-
   
$
-
   
$
-
 
                                 
(Some amounts may not reconcile due to rounding.)
                               


The net transfers to/(from) level 3, fair value measurements using significant unobservable inputs were $0 thousand and $1,750 thousand for both the three and nine months ended September 30, 2018 for fixed maturities, market value.  The transfers were related to securities that were priced using a recognized pricing service as of December 31, 2017.  The securities were subsequently priced using single non-binding broker quotes as of September 30, 2018.

19


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


   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2018
   
2017
   
2018
   
2017
 
Other invested assets, fair value:
                       
Beginning balance
 
$
1,705,037
   
$
1,724,532
   
$
1,807,473
   
$
1,766,626
 
Total gains or (losses) (realized/unrealized)
                               
Included in earnings
   
(12,816
)
   
197,870
     
(115,252
)
   
155,776
 
Included in other comprehensive income (loss)
   
-
     
-
     
-
     
-
 
Purchases, issuances and settlements
   
-
     
-
     
-
     
-
 
Transfers in and/or (out) of Level 3
   
-
     
-
     
-
     
-
 
Ending balance
 
$
1,692,221
   
$
1,922,402
   
$
1,692,221
   
$
1,922,402
 
                                 
The amount of total gains or losses for the period included in earnings
                               
(or changes in net assets) attributable to the change in unrealized
                               
gains or losses relating to assets still held at the reporting date
 
$
-
   
$
-
   
$
-
   
$
-
 
                                 
(Some amounts may not reconcile due to rounding.)
                               


6.  COMMITMENTS AND CONTINGENCIES

In the ordinary course of business, the Company is involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine the Company's rights and obligations under insurance and reinsurance agreements.  In some disputes, the Company seeks to enforce its rights under an agreement or to collect funds owing to it.  In other matters, the Company is resisting attempts by others to collect funds or enforce alleged rights.  These disputes arise from time to time and are ultimately resolved through both informal and formal means, including negotiated resolution, arbitration and litigation.  In all such matters, the Company believes that its positions are legally and commercially reasonable.  The Company considers the statuses of these proceedings when determining its reserves for unpaid loss and loss adjustment expenses.

Aside from litigation and arbitrations related to these insurance and reinsurance agreements, the Company is not a party to any other material litigation or arbitration.

The Company has entered into separate annuity agreements with The Prudential Insurance Company of America ("The Prudential") and an additional unaffiliated life insurance company in which the Company has either purchased annuity contracts or become the assignee of annuity proceeds that are meant to settle claim payment obligations in the future. In both instances, the Company would become contingently liable if either The Prudential or the unaffiliated life insurance company were unable to make payments related to the respective annuity contact.

The table below presents the estimated cost to replace all such annuities for which the Company was contingently liable for the periods indicated:


   
At September 30,
 
At December 31,
(Dollars in thousands)
 
2018
 
2017
The Prudential
 
$
143,592
   
$
144,618
 
Unaffiliated life insurance company
   
34,038
   
$
34,444
 


20


7.  COMPREHENSIVE INCOME (LOSS)

The following tables present the components of comprehensive income (loss) in the consolidated statements of operations and comprehensive income (loss) for the periods indicated:


   
Three Months Ended September 30, 2018
   
Nine Months Ended September 30, 2018
 
(Dollars in thousands)
 
Before Tax
   
Tax Effect
   
Net of Tax
   
Before Tax
   
Tax Effect
   
Net of Tax
 
Unrealized appreciation (depreciation) ("URA(D)") on securities - temporary
 
$
(9,109
)
 
$
1,919
   
$
(7,190
)
 
$
(92,026
)
 
$
19,561
   
$
(72,465
)
URA(D) on securities - OTTI
   
326
     
(68
)
   
258
     
691
     
(145
)
   
546
 
Reclassification of net realized losses (gains) included in net income (loss)
   
3,210
     
(676
)
   
2,534
     
(2,425
)
   
278
     
(2,147
)
Foreign currency translation adjustments
   
(3,723
)
   
793
     
(2,930
)
   
(31,781
)
   
6,697
     
(25,084
)
Reclassification of amortization of net gain (loss) included in net income (loss)
   
2,298
     
(482
)
   
1,816
     
6,893
     
(1,447
)
   
5,446
 
Total other comprehensive income (loss)
 
$
(6,998
)
 
$
1,486
   
$
(5,512
)
 
$
(118,648
)
 
$
24,944
   
$
(93,704
)
                                                 
(Some amounts may not reconcile due to rounding)
                                               



   
Three Months Ended September 30, 2017
   
Nine Months Ended September 30, 2017
 
(Dollars in thousands)
 
Before Tax
   
Tax Effect
   
Net of Tax
   
Before Tax
   
Tax Effect
   
Net of Tax
 
Unrealized appreciation (depreciation) ("URA(D)") on securities - temporary
 
$
852
   
$
(219
)
 
$
633
   
$
24,656
   
$
(8,279
)
 
$
16,377
 
URA(D) on securities - OTTI
   
(158
)
   
55
     
(103
)
   
(3,974
)
   
1,391
     
(2,583
)
Reclassification of net realized losses (gains) included in net income (loss)
   
(2,454
)
   
780
     
(1,674
)
   
(12,719
)
   
4,101
     
(8,618
)
Foreign currency translation adjustments
   
52,740
     
(18,459
)
   
34,281
     
66,492
     
(23,272
)
   
43,220
 
Reclassification of amortization of net gain (loss) included in net income (loss)
   
2,107
     
(738
)
   
1,369
     
8,273
     
(2,896
)
   
5,377
 
Total other comprehensive income (loss)
 
$
53,088
   
$
(18,581
)
 
$
34,507
   
$
82,729
   
$
(28,955
)
 
$
53,774
 
                                                 
(Some amounts may not reconcile due to rounding)
                                               


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


   
Three Months Ended
   
Nine Months Ended
     
   
September 30,
   
September 30,
   
Affected line item within the statements of
AOCI component
 
2018
   
2017
   
2018
   
2017
   
operations and comprehensive income (loss)
(Dollars in thousands)
                               
URA(D) on securities
 
$
3,210
   
$
(2,454
)
 
$
(2,425
)
 
$
(12,719
)
 
Other net realized capital gains (losses)
     
(676
)
   
780
     
278
     
4,101
   
Income tax expense (benefit)
   
$
2,534
   
$
(1,674
)
 
$
(2,147
)
 
$
(8,618
)
 
Net income (loss)
                                          
Benefit plan net gain (loss)
 
$
2,298
   
$
2,107
   
$
6,893
   
$
8,273
   
Other underwriting expenses
     
(482
)
   
(738
)
   
(1,447
)
   
(2,896
)
 
Income tax expense (benefit)
   
$
1,816
   
$
1,369
   
$
5,446
   
$
5,377
   
Net income (loss)
                                          
(Some amounts may not reconcile due to rounding)
                                       


21


The following table presents the components of accumulated other comprehensive income (loss), net of tax, in the consolidated balance sheets for the periods indicated:


   
Nine Months Ended
   
Twelve Months Ended
 
   
September 30,
   
December 31,
 
(Dollars in thousands)
 
2018
   
2017
 
             
Beginning balance of URA (D) on securities
 
$
37,442
   
$
39,041
 
Change to beginning balance due to adoption of Accounting Standards Update 2016-01
   
(2,447
)
   
-
 
Current period change in URA (D) of investments - temporary
   
(74,612
)
   
(5,284
)
Current period change in URA (D) of investments - non-credit OTTI
   
546
     
(2,949
)
Reclass due to early adoption of ASU 2018-02
   
-
     
6,634
 
Ending balance of URA (D) on securities
   
(39,071
)
   
37,442
 
                 
Beginning balance of foreign currency translation adjustments
   
33,545
     
(9,852
)
Current period change in foreign currency translation adjustments
   
(25,084
)
   
37,427
 
Reclass due to early adoption of ASU 2018-02
   
-
     
5,970
 
Ending balance of foreign currency translation adjustments
   
8,461
     
33,545
 
                 
Beginning balance of benefit plan net gain (loss)
   
(71,929
)
   
(65,504
)
Current period change in benefit plan net gain (loss)
   
5,446
     
6,504
 
Reclass due to early adoption of ASU 2018-02
   
-
     
(12,929
)
Ending balance of benefit plan net gain (loss)
   
(66,483
)
   
(71,929
)
                 
Ending balance of accumulated other comprehensive income (loss)
 
$
(97,093
)
 
$
(942
)


8.  COLLATERALIZED REINSURANCE AND TRUST AGREEMENTS

A subsidiary of the Company, Everest Re, has established a trust agreement, which effectively uses Everest Re's investments as collateral, as security for assumed losses payable to non-affiliated ceding companies.  At September 30, 2018, the total amount on deposit in the trust account was $547,603 thousand.

On April 24, 2014, the Company entered into two collateralized reinsurance agreements with Kilimanjaro Re Limited ("Kilimanjaro"), a Bermuda based special purpose reinsurer, to provide the Company with catastrophe reinsurance coverage.  These agreements are multi-year reinsurance contracts which cover specified named storm and earthquake events.  The first agreement provides up to $250,000 thousand of reinsurance coverage from named storms in specified states of the Southeastern United States.  The second agreement provides up to $200,000 thousand of reinsurance coverage from named storms in specified states of the Southeast, Mid-Atlantic and Northeast regions of the United States and Puerto Rico as well as reinsurance coverage from earthquakes in specified states of the Southeast, Mid-Atlantic, Northeast and West regions of the United States, Puerto Rico and British Columbia.  These reinsurance agreements expired in April, 2018.

On November 18, 2014, the Company entered into a collateralized reinsurance agreement with Kilimanjaro to provide the Company with catastrophe reinsurance coverage.  This agreement is a multi-year reinsurance contract which covers specified earthquake events.  The agreement provides up to $500,000 thousand of reinsurance coverage from earthquakes in the United States, Puerto Rico and Canada.

On December 1, 2015 the Company entered into two collateralized reinsurance agreements with Kilimanjaro to provide the Company with catastrophe reinsurance coverage.  These agreements are multi-year reinsurance contracts which cover named storm and earthquake events.  The first agreement provides up to $300,000 thousand of reinsurance coverage from named storms and earthquakes in the United States, Puerto Rico and Canada.  The second agreement provides up to $325,000 thousand of reinsurance coverage from named storms and earthquakes in the United States, Puerto Rico and Canada.

22


On April 13, 2017 the Company entered into six collateralized reinsurance agreements with Kilimanjaro to provide the Company with annual aggregate catastrophe reinsurance coverage.  The initial three agreements are four year reinsurance contracts which cover named storm and earthquake events.  These agreements provide up to $225,000 thousand, $400,000 thousand and $325,000 thousand, respectively, of annual aggregate reinsurance coverage from named storms and earthquakes in the United States, Puerto Rico and Canada. The subsequent three agreements are five year reinsurance contracts which cover named storm and earthquake events.  These agreements provide up to $50,000 thousand, $75,000 thousand and $175,000 thousand, respectively, of annual aggregate reinsurance coverage from named storms and earthquakes in the United States, Puerto Rico and Canada.

On April 30, 2018 the Company entered into four collateralized reinsurance agreements with Kilimanjaro Re to provide the Company with catastrophe reinsurance coverage.  These agreements are multi-year reinsurance contracts which cover named storm and earthquake events.  The first two agreements are four year reinsurance contracts which provide up to $62,500 thousand and $200,000 thousand, respectively, of annual aggregate reinsurance coverage from named storms and earthquakes in the United States, Puerto Rico, the U.S. Virgin Islands and Canada.  The remaining two agreements are five year reinsurance contracts which provide up to $62,500 thousand and $200,000 thousand, respectively, of annual aggregate reinsurance coverage from named storms and earthquakes in the United States, Puerto Rico, the U.S. Virgin Islands and Canada.

Recoveries under these collateralized reinsurance agreements with Kilimanjaro are primarily dependent on estimated industry level insured losses from covered events, as well as, the geographic location of the events.  The estimated industry level of insured losses is obtained from published estimates by an independent recognized authority on insured property losses.  As of December 31, 2017, none of the published insured loss estimates for the 2017 catastrophe events have exceeded the single event retentions under the terms of the agreements that would result in a recovery.  In addition, the aggregation of the to date published insured loss estimates for the 2017 covered events have not exceeded the aggregated retentions for recovery.  However, if the published estimates for insured losses for the covered 2017 events increase, the aggregate losses may exceed the aggregate event retentions under the agreements, resulting in a recovery.

Kilimanjaro has financed the various property catastrophe reinsurance coverages by issuing catastrophe bonds to unrelated, external investors.  On April 24, 2014, Kilimanjaro issued $450,000 thousand of notes ("Series 2014-1 Notes"). The $450,000 thousand of Series 2014-1 Notes were fully redeemed on April 30, 2018 and are no longer outstanding.  On November 18, 2014, Kilimanjaro issued $500,000 thousand of notes ("Series 2014-2 Notes").  On December 1, 2015, Kilimanjaro issued $625,000 thousand of notes ("Series 2015-1 Notes).  On April 13, 2017, Kilimanjaro issued $950,000 thousand of notes ("Series 2017-1 Notes) and $300,000 thousand of notes ("Series 2017-2 Notes). On April 30, 2018, Kilimanjaro issued $262,500 thousand of notes ("Series 2018-1 Notes") and $262,500 thousand of notes ("Series 2018-2 Notes"). The proceeds from the issuance of the Notes listed above are held in reinsurance trust throughout the duration of the applicable reinsurance agreements and invested solely in US government money market funds with a rating of at least "AAAm" by Standard & Poor's.

9.  SENIOR NOTES

The table below displays Holdings' outstanding senior notes.  Market value is based on quoted market prices, but due to limited trading activity, these senior notes are considered Level 2 in the fair value hierarchy.


               
September 30, 2018
   
December 31, 2017
 
               
Consolidated Balance
         
Consolidated Balance
       
(Dollars in thousands)
Date Issued
 
Date Due
 
Principal Amounts
   
Sheet Amount
   
Market Value
   
Sheet Amount
   
Market Value
 
4.868% Senior notes
06/05/2014
 
06/01/2044
   
400,000
   
$
396,924
   
$
395,924
   
$
396,834
   
$
420,340
 


On June 5, 2014, Holdings issued $400,000 thousand of 30 year senior notes at 4.868%, which will mature on June 1, 2044. Interest will be paid semi-annually on June 1 and December 1 of each year.
23


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


   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2018
   
2017
   
2018
   
2017
 
Interest expense incurred
 
$
4,868
   
$
4,868
   
$
14,604
   
$
14,604
 


10.  LONG TERM SUBORDINATED NOTES

The table below displays Holdings' outstanding fixed to floating rate long term subordinated notes.  Market value is based on quoted market prices, but due to limited trading activity, these subordinated notes are considered Level 2 in the fair value hierarchy.


           
Maturity Date
 
September 30, 2018
   
December 31, 2017
 
      
Original
            
Consolidated Balance
         
Consolidated Balance
       
(Dollars in thousands)
Date Issued
 
Principal Amount
   
Scheduled
 
Final
 
Sheet Amount
   
Market Value
   
Sheet Amount
   
Market Value
 
6.6% Long term subordinated notes
04/26/2007
 
$
400,000
   
05/15/2037
 
05/01/2067
 
$
236,634
   
$
234,981
   
$
236,561
   
$
233,072
 


During the fixed rate interest period from May 3, 2007 through May 14, 2017, interest was at the annual rate of 6.6%, payable semi-annually in arrears on November 15 and May 15 of each year, commencing on November 15, 2007.  During the floating rate interest period from May 15, 2017 through maturity, interest will be based on the 3 month LIBOR plus 238.5 basis points, reset quarterly, payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year, subject to Holdings' right to defer interest on one or more occasions for up to ten consecutive years.  Deferred interest will accumulate interest at the applicable rate compounded quarterly for periods from and including August 15, 2017. The reset quarterly interest rate for August 15, 2018 to November 14, 2018 is 4.70%.

Holdings may redeem the long term subordinated notes on or after May 15, 2017, in whole or in part at 100% of the principal amount plus accrued and unpaid interest; however, redemption on or after the scheduled maturity date and prior to May 1, 2047 is subject to a replacement capital covenant.  This covenant is for the benefit of certain senior note holders and it mandates that Holdings receive proceeds from the sale of another subordinated debt issue, of at least similar size, before it may redeem the subordinated notes.  Effective upon the maturity of the Company's 5.40% senior notes on October 15, 2014, the Company's 4.868% senior notes, due on June 1, 2044, have become the Company's long term indebtedness that ranks senior to the long term subordinated notes.

On March 19, 2009, Group announced the commencement of a cash tender offer for any and all of the 6.60% fixed to floating rate long term subordinated notes.  Upon expiration of the tender offer, the Company had reduced its outstanding debt by $161,441 thousand.

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


   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2018
   
2017
   
2018
   
2017
 
Interest expense incurred
 
$
2,875
   
$
2,240
   
$
7,968
   
$
9,210
 


11.  SEGMENT REPORTING

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, Singapore and through offices in Brazil, Miami and New Jersey.  The Insurance operation writes property and casualty insurance directly and through brokers, surplus lines brokers and general agents mainly within the U.S.
24


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

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


   
Three Months Ended
   
Nine Months Ended
 
U.S. Reinsurance
 
September 30,
   
September 30,
 
(Dollars in thousands)
 
2018
   
2017
   
2018
   
2017
 
Gross written premiums
 
$
940,839
   
$
908,346
   
$
2,237,170
   
$
1,962,297
 
Net written premiums
   
703,944
     
295,645
     
1,557,706
     
649,883
 
                                 
Premiums earned
 
$
528,867
   
$
242,350
   
$
1,437,761
   
$
652,953
 
Incurred losses and LAE
   
394,621
     
678,926
     
1,404,349
     
919,107
 
Commission and brokerage
   
156,500
     
31,698
     
432,531
     
115,243
 
Other underwriting expenses
   
16,250
     
12,094
     
48,608
     
40,623
 
Underwriting gain (loss)
 
$
(38,504
)
 
$
(480,368
)
 
$
(447,727
)
 
$
(422,020
)



   
Three Months Ended
   
Nine Months Ended
 
International
 
September 30,
   
September 30,
 
(Dollars in thousands)
 
2018
   
2017
   
2018
   
2017
 
Gross written premiums
 
$
363,359
   
$
363,186
   
$
1,129,097
   
$
975,296
 
Net written premiums
   
340,701
     
130,180
     
1,012,933
     
345,387
 
                                 
Premiums earned
 
$
331,921
   
$
123,915
   
$
1,003,993
   
$
355,366
 
Incurred losses and LAE
   
315,850
     
410,543
     
751,696
     
557,416
 
Commission and brokerage
   
78,180
     
25,101
     
240,953
     
72,426
 
Other underwriting expenses
   
9,991
     
8,241
     
29,946
     
26,293
 
Underwriting gain (loss)
 
$
(72,100
)
 
$
(319,970
)
 
$
(18,602
)
 
$
(300,769
)



   
Three Months Ended
   
Nine Months Ended
 
Insurance
 
September 30,
   
September 30,
 
(Dollars in thousands)
 
2018
   
2017
   
2018
   
2017
 
Gross written premiums
 
$
454,993
   
$
429,593
   
$
1,491,438
   
$
1,351,491
 
Net written premiums
   
333,836
     
144,935
     
1,105,223
     
442,237
 
                                 
Premiums earned
 
$
369,983
   
$
152,242
   
$
1,084,863
   
$
449,440
 
Incurred losses and LAE
   
259,826
     
242,089
     
756,267
     
441,985
 
Commission and brokerage
   
53,532
     
(22,254
)
   
159,187
     
(40,104
)
Other underwriting expenses
   
52,559
     
37,378
     
151,823
     
114,889
 
Underwriting gain (loss)
 
$
4,066
   
$
(104,971
)
 
$
17,586
   
$
(67,330
)


25


The following table reconciles the underwriting results for the operating segments to income (loss) before taxes as reported in the consolidated statements of operations and comprehensive income (loss) for the periods indicated:


   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2018
   
2017
   
2018
   
2017
 
Underwriting gain (loss)
 
$
(106,538
)
 
$
(905,309
)
 
$
(448,743
)
 
$
(790,119
)
Net investment income
   
90,298
     
73,417
     
232,277
     
206,166
 
Net realized capital gains (losses)
   
30,018
     
228,489
     
(72,454
)
   
253,966
 
Corporate expense
   
(2,488
)
   
(1,132
)
   
(7,597
)
   
(6,241
)
Interest, fee and bond issue cost amortization expense
   
(7,796
)
   
(7,161
)
   
(22,732
)
   
(23,974
)
Other income (expense)
   
(1,385
)
   
1,486
     
1,420
     
21,996
 
Income (loss) before taxes
 
$
2,109
   
$
(610,210
)
 
$
(317,829
)
 
$
(338,206
)
                                 
(Some amounts may not reconcile due to rounding.)
                               


The Company produces business in the U.S. and internationally.  The net income deriving from assets residing in the individual foreign countries in which the Company writes business are not identifiable in the Company's financial records.  Based on gross written premium, the table below presents the largest country, other than the U.S., in which the Company writes business, for the periods indicated:


   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2018
   
2017
   
2018
   
2017
 
Canada gross written premiums
 
$
41,005
   
$
30,625
   
$
125,586
   
$
94,777
 


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

12.  RELATED-PARTY TRANSACTIONS

Parent

Group entered into a $250,000 thousand long term promissory note agreement with Holdings as of December 31, 2014.  The note will mature on December 31, 2023 and has an interest rate of 1.72% that is payable annually.  This transaction is presented as a Note Receivable – Affiliated in the Consolidated Balance Sheets of Holdings.  Interest income in the amount of $1,075 thousand was recorded by Holdings for the three months ended September 30, 2018 and 2017, respectively.  Interest income in the amount of $3,225 thousand was recorded by Holdings for the nine months ended September 30, 2018 and 2017, respectively.

Group's Board of Directors approved an amended share repurchase program authorizing Group and/or its subsidiary Holdings to purchase Group's common shares through open market transactions, privately negotiated transactions or both.  The table below represents the amendments to the share repurchase program for the common shares approved for repurchase.


   
 Common Shares
   
 Authorized for
Amendment Date
 
 Repurchase
(Dollars in thousands)
   
     
09/21/2004
 
 5,000,000
07/21/2008
 
 5,000,000
02/24/2010
 
 5,000,000
02/22/2012
 
 5,000,000
05/15/2013
 
 5,000,000
11/19/2014
 
 5,000,000
   
 30,000,000

26


Holdings had purchased and held 9,719,971 Common Shares of Group, which were purchased in the open market between February 2007 and March 2011.

In December, 2015, Holdings transferred the 9,719,971 Common Shares of Group, which it held as other invested assets, at fair value, valued at $1,773,214 thousand, to Preferred Holdings, an affiliated entity and subsidiary of Group, in exchange for 1,773.214 preferred shares of Preferred Holdings with a $1,000 thousand par value and 1.75% annual dividend rate.  After the exchange, Holdings no longer holds any shares or has any ownership interest in Group.

Holdings reported both its Parent shares and preferred shares in Preferred Holdings, as other invested assets, fair value, in the consolidated balance sheets with changes in fair value re-measurement recorded in net realized capital gains (losses) in the consolidated statements of operations and comprehensive income (loss).  The following table presents the dividends received on the preferred shares of Preferred Holdings and on the Parent shares that are reported as net investment income in the consolidated statements of operations and comprehensive income (loss) for the period indicated.


   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2018
   
2017
   
2018
   
2017
 
Dividends received on preferred stock of affiliate
 
$
7,758
   
$
7,758
   
$
23,274
   
$
23,274
 


Affiliated Companies

Everest Global Services, Inc. ("Global Services"), an affiliate of Holdings, provides centralized management and home office services, through a management agreement, to Holdings and other affiliated companies within Holdings' consolidated structure.  Services provided by Everest Global include executive managerial services, legal services, actuarial services, accounting services, information technology services and others.


The following table presents the expenses incurred by Holdings from services provided by Everest Global for the periods indicated.


   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2018
   
2017
   
2018
   
2017
 
Expenses incurred
 
$
27,238
   
$
25,465
   
$
82,684
   
$
71,694
 


27


Affiliates

The table below represents affiliated quota share reinsurance agreements ("whole account quota share") for all new and renewal business for the indicated coverage period:
 
 
(Dollars in thousands)
                           
       
Percent
 
Assuming
     
Single
   
Aggregate
 
Coverage Period
 
Ceding Company
 
Ceded
 
Company
 
Type of Business
 
Occurrence Limit
   
 Limit
 
                             
01/01/2010-12/31/2010
 
Everest Re
 
44.0%
 
Bermuda Re
 
property / casualty business
 
 150,000
   
 325,000
 
                             
01/01/2011-12/31/2011
 
Everest Re
 
50.0%
 
Bermuda Re
 
property / casualty business
 
 150,000
   
 300,000
 
                             
01/01/2012-12/31/2014
 
Everest Re
 
50.0%
 
Bermuda Re
 
property / casualty business
 
 100,000
   
 200,000
 
                             
01/01/2015-12/31/2016
 
Everest Re
 
50.0%
 
Bermuda Re
 
property / casualty business
 
 162,500
   
 325,000
 
                             
01/01/2017-12/31/2017
 
Everest Re
 
60.0%
 
Bermuda Re
 
property / casualty business
 
 219,000
   
 438,000
 
                             
01/01/2010-12/31/2010
 
Everest Re- Canadian Branch
 
60.0%
 
Bermuda Re
 
property business
 
 350,000
(1)
 
-
 
01/01/2011-12/31/2011
 
Everest Re- Canadian Branch
 
60.0%
 
Bermuda Re
 
property business
 
 350,000
(1)
  -  
01/01/2012-12/31/2012
 
Everest Re- Canadian Branch
 
75.0%
 
Bermuda Re
 
property / casualty business
 
 206,250
(1)
 
 412,500
 (1)
01/01/2013-12/31/2013
 
Everest Re- Canadian Branch
 
75.0%
 
Bermuda Re
 
property / casualty business
 
 150,000
(1)
 
 412,500
 (1)
01/01/2014-12/31/2017
 
Everest Re- Canadian Branch
 
75.0%
 
Bermuda Re
 
property / casualty business
 
 262,500
(1)
 
 412,500
 (1)
                             
01/01/2012-12/31/2017
 
Everest Canada
 
80.0%
 
Everest Re- Canadian Branch
 
property business
 
-
   
-
 
                             
(1)  Amounts shown are Canadian dollars.
                         
 
As of December 31, 2017, the Company decided not to renew its quota share reinsurance agreements between Everest Re and Bermuda Re, between Everest Re-Canadian branch and Bermuda Re and between Everest Canada and the Everest Re-Canadian branch due to economic implications of the enactment of TCJA on December 22, 2017.

Effective January 1, 2018, Everest Re entered into a twelve month whole account aggregate stop loss reinsurance contract ("stop loss agreement") with Bermuda Re.  The stop loss agreement provides coverage for ultimate net losses on applicable net earned premiums above a retention level, subject to certain other coverage limits and conditions.

The table below represents loss portfolio transfer ("LPT") reinsurance agreements whereby net insurance exposures and reserves were transferred to an affiliate.



(Dollars in thousands)
                    
                       
Effective
 
Transferring
 
Assuming
 
% of Business or
   
Covered Period
Date
 
Company
 
Company
 
Amount of Transfer
   
of Transfer
                       
09/19/2000
 
Mt. McKinley
 
Bermuda Re
   
100
%
 
All years
10/01/2001
 
Everest Re  (Belgium Branch)
 
Bermuda Re
   
100
%
 
All years
10/01/2008
 
Everest Re
 
Bermuda Re
 
$
747,022
   
01/01/2002-12/31/2007
12/31/2017
 
Everest Re
 
Bermuda Re
 
$
970,000
   
All years

On December 31, 2017, the Company entered into a LPT agreement with Bermuda Re.  The LPT agreement covers subject loss reserves of $2,336,242 thousand for accident years 2017 and prior.  As a result of the LPT agreement, the Company transferred $1,000,000 thousand of cash and fixed maturity securities and transferred $970,000 thousand of loss reserves to Bermuda Re.  As part of the LPT agreement, Bermuda Re will provide an additional $500,000 thousand of adverse development coverage on the subject loss reserves.
28


The following tables summarize the premiums and losses ceded by the Company to Bermuda Re and Everest International, respectively, and premiums and losses assumed by the Company from Everest Canada and Lloyd's syndicate 2786 for the periods indicated:


   
Three Months Ended
   
Nine Months Ended
 
Bermuda Re
 
September 30,
   
September 30,
 
(Dollars in thousands)
 
2018
   
2017
   
2018
   
2017
 
Ceded written premiums
 
$
146,513
   
$
911,866
   
$
421,804
   
$
2,228,538
 
Ceded earned premiums
   
148,228
     
796,194
     
432,459
     
2,005,965
 
Ceded losses and LAE
   
34,683
     
650,460
     
70,791
     
1,379,164
 



   
Three Months Ended
   
Nine Months Ended
 
Everest International
 
September 30,
 
September 30,
(Dollars in thousands)
 
2018
   
2017
   
2018
   
2017
 
Ceded written premiums
 
$
-
   
$
21
   
$
-
   
$
(4
)
Ceded earned premiums
   
-
     
38
     
-
     
13
 
Ceded losses and LAE
   
(5
)
   
(13
)
   
(362
)
   
(631
)



   
Three Months Ended
   
Nine Months Ended
 
Everest Canada
 
September 30,
 
September 30,
(Dollars in thousands)
 
2018
   
2017
   
2018
   
2017
 
Assumed written premiums
 
$
-
   
$
13,028
   
$
-
   
$
39,008
 
Assumed earned premiums
   
-
     
13,464
     
-
     
38,201
 
Assumed losses and LAE
   
(1,388
)
   
7,448
     
1,958
     
21,418
 



   
Three Months Ended
   
Nine Months Ended
 
Lloyd's Syndicate 2786
 
September 30,
 
September 30,
(Dollars in thousands)
 
2018
   
2017
   
2018
   
2017
 
Assumed written premiums
 
$
1,056
   
$
15,984
   
$
795
   
$
34,069
 
Assumed earned premiums
   
2,876
     
15,042
     
13,826
     
31,766
 
Assumed losses and LAE
   
2,883
     
7,893
     
10,909
     
16,157
 


Everest Re sold net assets of its UK branch to Bermuda Re and provided Bermuda Re with a reserve indemnity agreement allowing for indemnity payments of up to 90% of ₤25.0 million of the excess of 2002 and prior reserves, provided that any recognition of profit from the reserves for 2002 and prior underwriting years is taken into account.

Effective February 27, 2013, Group established a new subsidiary, Mt. Logan Re, which is a Class 3 insurer based in Bermuda.  Effective July 1, 2013, Mt. Logan Re established separate segregated accounts for its business activity, which will invest in a diversified set of catastrophe exposures.

The following table summarizes the premiums and losses that are ceded by the Company to Mt. Logan Re segregated accounts and assumed by the Company from Mt. Logan Re segregated accounts.


   
Three Months Ended
   
Nine Months Ended
 
Mt. Logan Re Segregated Accounts
 
September 30,
 
September 30,
(Dollars in thousands)
 
2018
   
2017
   
2018
   
2017
 
Ceded written premiums
 
$
53,340
   
$
54,057
   
$
154,779
   
$
131,939
 
Ceded earned premiums
   
44,699
     
46,696
     
149,674
     
131,361
 
Ceded losses and LAE
   
23,087
     
180,540
     
130,994
     
223,973
 
                                 
Assumed written premiums
 
$
3,219
   
$
2,587
   
$
7,866
   
$
9,082
 
Assumed earned premiums
   
3,219
     
2,587
     
7,866
     
9,082
 
Assumed losses and LAE
   
-
     
-
     
-
     
-
 


29


13. RETIREMENT BENEFITS

The Company maintains both qualified and non-qualified defined benefit pension plans and a retiree health plan for its U.S. employees employed prior to April 1, 2010.

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


Pension Benefits
 
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2018
   
2017
   
2018
   
2017
 
Service cost
 
$
2,977
   
$
2,737
   
$
8,931
   
$
9,335
 
Interest cost
   
2,585
     
2,509
     
7,754
     
7,060
 
Expected return on plan assets
   
(3,670
)
   
(3,263
)
   
(11,011
)
   
(9,572
)
Amortization of net (income) loss
   
2,237
     
2,091
     
6,710
     
8,172
 
Net periodic benefit cost
 
$
4,129
   
$
4,074
   
$
12,384
   
$
14,995
 



Other Benefits
 
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2018
   
2017
   
2018
   
2017
 
Service cost
 
$
446
   
$
392
   
$
1,339
   
$
1,273
 
Interest cost
   
307
     
296
     
920
     
793
 
Amortization of prior service cost
   
(33
)
   
(33
)
   
(98
)
   
(98
)
Amortization of net (income) loss
   
94
     
48
     
282
     
199
 
Net periodic benefit cost
 
$
814
   
$
703
   
$
2,443
   
$
2,167
 
                                 
(Some amounts may not reconcile due to rounding.)
                               


The service cost component of net periodic benefit costs is included within other underwriting expenses on the consolidated statement of operations and comprehensive income (loss).  In accordance with ASU 2017-07, other staff compensation costs are also primarily recorded within this line item.

The Company contributed $77,000 thousand to the qualified pension benefit plan during the three and nine months ended September 30, 2018.  The Company contributed $10,000 thousand to the qualified pension benefit plan during the three and nine months ended September 30, 2017.

14. INCOME TAXES

The Company is domiciled in the United States and has subsidiaries domiciled within the United States with significant branches in Canada and Singapore.  The Company's non-U.S. branches are subject to income taxation at varying rates in their respective domiciles.  The Tax Cuts and Jobs Act ("TCJA") was passed on December 22, 2017.  The primary changes from TCJA affecting the Company is a reduction of the corporate income tax rate from 35% to 21% beginning January 1, 2018 as well as the imposition of a new Base Erosion and Anti-abuse Tax ("BEAT") of 5% in 2018 and 10% from 2019 – 2025 and 12.5% thereafter on certain transactions with non-US affiliates of the Company.

The Company generally applies the estimated annual effective tax rate approach for calculating its tax provision for interim periods as prescribed by ASC 740-270, Interim Reporting.  Under the estimated annual effective tax rate approach, the estimated annual effective tax rate is applied to the interim year-to-date pre-tax income/loss to determine the income tax expense or benefit for the year-to-date period.  If the annual effective tax rate approach produces a year-to-date tax benefit which exceeds the amount which is estimated to be recoverable for the full year, then the tax benefit for the interim reporting period will be limited as prescribed under ASC 740-270 to the estimated recoverable based on the year-to-date result.  The tax expense or benefit for the quarter represents the difference between the year-to-date tax expense or benefit for the current year-to-date period less such amount for the immediately preceding year-to-date period. Management considers the impact of all known events in its estimation of the Company's annual pre-tax income/loss and effective tax rate.

30


15.  SUBSEQUENT EVENTS

The Company has evaluated known recognized and non-recognized subsequent events.  In October 2018, Hurricane Michael impacted the Southeastern United States and there are currently active wildfires in Northern and Southern California.  Due to the recentness of these events, the Company is unable to estimate the amount of losses at this time.  However, the Company anticipates that the losses will adversely impact fourth quarter financial statements.
 
31

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Industry Conditions.
The worldwide reinsurance and insurance businesses are highly competitive, as well as cyclical by product and market.  As such, financial results tend to fluctuate with periods of constrained availability, higher rates and stronger profits followed by periods of abundant capacity, lower rates and constrained profitability.  Competition in the types of reinsurance and insurance business that we underwrite is based on many factors, including the perceived overall financial strength of the reinsurer or insurer, ratings of the reinsurer or insurer by A.M. Best and/or Standard & Poor's, underwriting expertise, the jurisdictions where the reinsurer or insurer is licensed or otherwise authorized, capacity and coverages offered, premiums charged, other terms and conditions of the reinsurance and insurance business offered, services offered, speed of claims payment and reputation and experience in lines written.  Furthermore, the market impact from these competitive factors related to reinsurance and insurance is generally not consistent across lines of business, domestic and international geographical areas and distribution channels.

We compete in the U.S. and international reinsurance and insurance markets with numerous global competitors. Our competitors include independent reinsurance and insurance companies, subsidiaries or affiliates of established worldwide insurance companies, reinsurance departments of certain insurance companies, domestic and international underwriting operations, including underwriting syndicates at Lloyd's of London and certain government sponsored risk transfer vehicles.  Some of these competitors have greater financial resources than we do and have established long term and continuing business relationships, which can be a significant competitive advantage.  In addition, the lack of strong barriers to entry into the reinsurance business and recently, the securitization of reinsurance and insurance risks through capital markets provide additional sources of potential reinsurance and insurance capacity and competition.

Worldwide insurance and reinsurance market conditions continued to be very competitive, particularly in the property catastrophe and casualty reinsurance lines of business.  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, provide capital markets with access to insurance and reinsurance risk exposure.  The capital markets demand for these products is being primarily driven by the current low interest rate environment and the desire to achieve greater risk diversification and potentially higher returns on their investments.  This increased competition is generally having a negative impact on rates, terms and conditions; however, the impact varies widely by market and coverage.

Rates tend to fluctuate by specific region and products, particularly areas recently impacted by large catastrophic events.  There was an unprecedented series of catastrophes in the third quarter of 2017 with Hurricanes Harvey, Irma and Maria, as well as a significant earthquake in Mexico City.  Additional catastrophe events occurred in the fourth quarter of 2017 with the wild fires in California and Hurricanes Nate and Ophelia.  The total industry losses for all of these worldwide events have been estimated to exceed $140 billion.  This was the second consecutive year with higher than average catastrophe losses.  During 2016, catastrophe losses included the Fort McMurray Canadian wildfire, Hurricane Matthew which affected a large area of the Caribbean and southeastern United States, storms and an earthquake in Ecuador.  Catastrophe events are also impacting 2018 results with Hurricanes Florence and Michael, Typhoons Jebi and Trami, Cyclone Mekunu, Japan floods and California wildfires.  While the future impact on market conditions from these catastrophes cannot be determined at this time, there was some firming in the markets impacted by the 2016 catastrophes and as catastrophe losses increased in 2017, there is a growing industry consensus that there will be some firming of (re)insurance rates for the areas impacted by the catastrophes.

Commencing in 2015, we initiated a strategic build out of our insurance platform through the investment in key leadership hires which in turn has brought significant underwriting talent and stronger direction in achieving our 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.  We are building a world-class insurance platform capable of offering products across lines and geographies, complementing our leading global reinsurance franchise.
32


Overall, we believe that given our size, strong ratings, distribution system, reputation, expertise and capital market vehicle activity the current marketplace conditions provide profit opportunities.  We continue to employ our strategy of targeting business that offers the greatest profit potential, while maintaining balance and diversification in our overall portfolio.

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
   
Nine Months Ended
   
Percentage
 
   
September 30,
   
Increase/
   
September 30,
   
Increase/
 
(Dollars in millions)
 
2018
   
2017
   
(Decrease)
   
2018
   
2017
   
(Decrease)
 
Gross written premiums
 
$
1,759.2
   
$
1,701.1
     
3.4
%
 
$
4,857.7
   
$
4,289.1
     
13.3
%
Net written premiums
   
1,378.5
     
570.8
     
141.5
%
   
3,675.9
     
1,437.5
     
155.7
%
                                                 
REVENUES:
                                               
Premiums earned
 
$
1,230.8
   
$
518.5
     
137.4
%
 
$
3,526.6
   
$
1,457.8
     
141.9
%
Net investment income
   
90.3
     
73.4
     
23.0
%
   
232.3
     
206.2
     
12.7
%
Net realized capital gains (losses)
   
30.0
     
228.5
     
-86.9
%
   
(72.5
)
   
254.0
     
-128.5
%
Other income (expense)
   
(1.4
)
   
1.5
     
-193.2
%
   
1.4
     
22.0
     
-93.5
%
Total revenues
   
1,349.7
     
821.9
     
64.2
%
   
3,687.9
     
1,939.9
     
90.1
%
                                                 
CLAIMS AND EXPENSES:
                                               
Incurred losses and loss adjustment expenses
   
970.3
     
1,331.6
     
-27.1
%
   
2,912.3
     
1,918.5
     
51.8
%
Commission, brokerage, taxes and fees
   
288.2
     
34.5
   
NM
     
832.7
     
147.6
   
NM
 
Other underwriting expenses
   
78.8
     
57.7
     
36.5
%
   
230.4
     
181.8
     
26.7
%
Corporate expense
   
2.5
     
1.1
     
119.8
%
   
7.6
     
6.2
     
21.7
%
Interest, fee and bond issue cost amortization expense
   
7.8
     
7.2
     
8.9
%
   
22.7
     
24.0
     
-5.2
%
Total claims and expenses
   
1,347.6
     
1,432.1
     
-5.9
%
   
4,005.7
     
2,278.1
     
75.8
%
                                                 
INCOME (LOSS) BEFORE TAXES
   
2.1
     
(610.2
)
   
-100.3
%
   
(317.8
)
   
(338.2
)
   
-6.0
%
Income tax expense (benefit)
   
(22.6
)
   
(220.5
)
   
-89.8
%
   
(64.9
)
   
(153.3
)
   
-57.7
%
NET INCOME (LOSS)
 
$
24.7
   
$
(389.7
)
   
-106.3
%
 
$
(252.9
)
 
$
(184.9
)
   
36.8
%
                                                 
RATIOS:
                 
Point Change
                   
Point Change
 
Loss ratio
   
78.8
%
   
256.8
%
   
(178.0
)
   
82.6
%
   
131.6
%
   
(49.0
)
Commission and brokerage ratio
   
23.4
%
   
6.7
%
   
16.7
     
23.6
%
   
10.1
%
   
13.5
 
Other underwriting expense ratio
   
6.5
%
   
11.1
%
   
(4.6
)
   
6.5
%
   
12.5
%
   
(6.0
)
Combined ratio
   
108.7
%
   
274.6
%
   
(165.9
)
   
112.7
%
   
154.2
%
   
(41.5
)
                                                 
                           
At
   
At
   
Percentage
 
                           
September 30,
   
December 31,
   
Increase/
 
(Dollars in millions)
                           
2018
     
2017
   
(Decrease)
 
Balance sheet data:
                                               
Total investments and cash
                         
$
9,579.4
   
$
8,911.5
     
7.5
%
Total assets
                           
17,837.1
     
17,888.5
     
-0.3
%
Loss and loss adjustment expense reserves
                           
9,519.5
     
9,343.0
     
1.9
%
Total debt
                           
633.6
     
633.4
     
0.0
%
Total liabilities
                           
12,770.8
     
12,475.8
     
2.4
%
Stockholder's equity
                           
5,066.2
     
5,412.7
     
-6.4
%
                                                 
(Some amounts may not reconcile due to rounding)
                                               
(NM, not meaningful)
                                               


33


Revenues.

Premiums.  Gross written premiums increased by 3.4% to $1,759.2 million for the three months ended September 30, 2018, compared to $1,701.1 million for the three months ended September 30, 2017, reflecting a $32.7 million, or 2.6%, increase in our reinsurance business and a $25.4 million, or 5.9%, increase in our insurance business.  The increase in reinsurance premiums was mainly due to the increase in treaty casualty business, partially offset by a decline in treaty property business primarily as a result of $138.7 million of lower reinstatement premiums in the third quarter of 2018 compared with the third quarter of 2017 as a result of lower catastrophe losses in 2018.  The rise in insurance premiums was primarily due to increases in many lines of business, including casualty, property and energy.  Gross written premiums increased by 13.3% to $4,857.7 million for the nine months ended September 30, 2018, compared to $4,289.1 million for the nine months ended September 30, 2017, reflecting a $428.7 million, or 14.6%, increase in our reinsurance business and a $139.9 million, or 10.4%, increase in our insurance business.  The increase in reinsurance premiums was mainly due to the increases in treaty property business, treaty casualty business and Latin American business, partially offset by a $110.8 million decline in reinstatement premiums.  The rise in insurance premiums was primarily due to increases in many lines of business, including casualty, energy and accident and health.

Net written premiums increased by 141.5% to $1,378.5 million for the three months ended September 30, 2018, compared to $570.8 million for the three months ended September 30, 2017, and increased by 155.7% to $3,675.9 million for the nine months ended September 30, 2018, compared to $1,437.5 million for the nine months ended September 30, 2017.  The difference between the change in gross written premiums compared to the change in net written premiums is primarily due to the impact of changes in affiliated reinsurance contracts, particularly the non-renewal of the quota share agreement between Everest Re and Bermuda Re as of December 31, 2017.  Effective January 1, 2018, Everest Re entered into an aggregate stop loss agreement with Bermuda Re.  Premiums ceded to Bermuda Re during the three months ended September 30, 2018 were $146.5 million compared with $911.9 million during the three months ended September 30, 2017.  Premiums ceded to Bermuda Re during the nine months ended September 30, 2018 were $421.8 million compared with $2,228.5 million during the nine months ended September 30, 2017.  Premiums earned increased by 137.4% to $1,230.8 million for the three months ended September 30, 2018, compared to $518.5 million for the three months ended September 30, 2017 and increased by 141.9% to $3,526.6 million for the nine months ended September 30, 2018, compared to $1,457.8 million for the nine months ended September 30, 2017.  The change in premiums earned relative to net written premiums is due to timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

Net Investment Income.  Net investment income increased 23.0% to $90.3 million for the three months ended September 30, 2018 compared with net investment income of $73.4 million for the three months ended September 30, 2017 and increased by 12.7% to $232.3 million for the nine months ended September 30, 2018 compared with net investment income of $206.2 million for the nine months ended September 30, 2017.  Net pre-tax investment income as a percentage of average invested assets was 3.9% for the three months ended September 30, 2018, compared to 3.0% for the three months ended September 30, 2017 and was 3.4% for the nine months ended September 30, 2018 compared to 2.8% for the nine months ended September 30, 2017, respectively.  The increases for both the three and nine months ended September 30, 2018 were primarily due to increases in limited partnership income, partially offset by a decline in income from equity securities.

Net Realized Capital Gains (Losses).  Net realized capital gains were $30.0 million and $228.5 million for the three months ended September 30, 2018 and 2017, respectively.  The net realized capital gains of $30.0 million for the three months ended September 30, 2018, were comprised of $23.9 million of gains from fair value re-measurements and $8.9 million of gains from sales of investments, partially offset by $2.8 million of other-than-temporary impairments.  The net realized capital gains of $228.5 million for the three months ended September 30, 2017 were comprised of $227.5 million of gains from fair value re-measurements and $2.4 million of gains from sales of investments, partially offset by $1.5 million of other-than-temporary impairments.

34


Net realized capital losses were $72.5 million and net realized capital gains were $254.0 million for the nine months ended September 30, 2018 and 2017, respectively.  The net realized capital losses of $72.5 million for the nine months ended September 30, 2018, were comprised of $79.0 million of losses from fair value re-measurements and $3.7 million of other-than-temporary impairments, partially offset by $10.2 million of gains from sales of investments.  The net realized capital gains of $254.0 million for the nine months ended September 30, 2017, were comprised of $237.8 million of gains from fair value re-measurements and $20.3 million of gains from sales of investments, partially offset by $4.2 million of other-than-temporary impairments.

Other Income (Expense).  We recorded other expense of $1.4 million and other income of $1.4 million for the three and nine months ended September 30, 2018, respectively.  We recorded other income of $1.5 million and $22.0 million for the three and nine months ended September 30, 2017, respectively. The changes were primarily the result of fluctuations in foreign currency exchange rates.

Claims and Expenses.

Incurred Losses and Loss Adjustment Expenses.  The following table presents our incurred losses and loss adjustment expenses ("LAE") for the periods indicated.


   
Three Months Ended September 30,
   
Current
   
Ratio %/
 
Prior
   
Ratio %/
 
Total
   
Ratio %/
(Dollars in millions)
 
Year
   
Pt Change
 
Years
   
Pt Change
 
Incurred
   
Pt Change
2018
                                                 
Attritional
 
$
772.3
     
62.7
%
   
$
3.2
     
0.3
%
   
$
775.5
     
63.0
%
 
Catastrophes
   
208.3
     
16.9
%
 
   
(13.5
)
   
-1.1
%
 
   
194.8
     
15.8
%
 
Total
 
$
980.6
     
79.6
%
 
 
$
(10.3
)
   
-0.8
%
 
 
$
970.3
     
78.8
%
 
                                                                
2017
                                                             
Attritional
 
$
325.6
     
62.8
%
   
$
(0.9
)
   
-0.2
%
   
$
324.7
     
62.6
%
 
Catastrophes
   
1,007.8
     
194.4
%
 
   
(0.9
)
   
-0.2
%
 
   
1,006.9
     
194.2
%
 
Total
 
$
1,333.4
     
257.2
%
 
 
$
(1.8
)
   
-0.4
%
 
 
$
1,331.6
     
256.8
%
 
                                                                
Variance 2018/2017
                                                             
Attritional
 
$
446.7
     
(0.1
)
pts
 
$
4.1
     
0.5
 
pts
 
$
450.8
     
0.4
 
pts
Catastrophes
   
(799.5
)
   
(177.5
)
pts
   
(12.6
)
   
(0.9
)
pts
   
(812.1
)
   
(178.4
)
pts
Total
 
$
(352.8
)
   
(177.6
)
pts
 
$
(8.5
)
   
(0.4
)
pts
 
$
(361.3
)
   
(178.0
)
pts



   
Nine Months Ended September 30,
   
Current
   
Ratio %/
 
Prior
   
Ratio %/
 
Total
   
Ratio %/
(Dollars in millions)
 
Year
   
Pt Change
 
Years
   
Pt Change
 
Incurred
   
Pt Change
2018
                                                 
Attritional
 
$
2,158.7
     
61.3
%
   
$
-
     
0.0
%
   
$
2,158.7
     
61.3
%
 
Catastrophes
   
272.9
     
7.7
%
 
   
480.7
     
13.6
%
 
   
753.6
     
21.3
%
 
Total
 
$
2,431.6
     
69.0
%
 
 
$
480.7
     
13.6
%
 
 
$
2,912.3
     
82.6
%
 
                                                                
2017
                                                             
Attritional
 
$
878.8
     
60.3
%
   
$
4.4
     
0.3
%
   
$
883.2
     
60.6
%
 
Catastrophes
   
1,039.3
     
71.3
%
 
   
(3.9
)
   
-0.3
%
 
   
1,035.3
     
71.0
%
 
Total
 
$
1,918.1
     
131.6
%
 
 
$
0.5
     
0.0
%
 
 
$
1,918.5
     
131.6
%
 
                                                                
Variance 2018/2017
                                                             
Attritional
 
$
1,279.9
     
1.0
 
pts
 
$
(4.4
)
   
(0.3
)
pts
 
$
1,275.5
     
0.7
 
pts
Catastrophes
   
(766.4
)
   
(63.6
)
pts
   
484.6
     
13.9
 
pts
   
(281.7
)
   
(49.7
)
pts
Total
 
$
513.5
     
(62.6
)
pts
 
$
480.2
     
13.6
 
pts
 
$
993.8
     
(49.0
)
pts
                                                                
(Some amounts may not reconcile due to rounding.)
                                                             


35


Incurred losses and LAE decreased by 27.1% to $970.3 million for the three months ended September 30, 2018, compared to $1,331.6 million for the three months ended September 30, 2017, primarily due to a decrease of $799.5 million in current year catastrophe losses, partially offset by an increase in current year attritional losses of $446.7 million, mainly due to the impact of the increase in premiums earned, changes in the mix of business and changes in affiliated reinsurance agreements, including the non-renewal of the quota share agreement with Bermuda Re as of December 31, 2017 and the implementation of an aggregate stop loss agreement with Bermuda Re as of January 1, 2018.  The current year catastrophe losses of $208.3 million for the three months ended September 30, 2018, mainly related to Hurricane Florence ($77.0 million), Typhoon Jebi ($66.6 million), Typhoon Trami ($25.0 million), the 2018 California wildfires ($24.7 million) and Japan Floods ($15.0 million).  The current year catastrophe losses of $1,007.8 million for the three months ended September 30, 2017 related to Hurricane Irma ($476.2 million), Hurricane Maria ($318.9 million), Hurricane Harvey ($180.7 million) and the Mexico City earthquake ($32.1 million).

Incurred losses and LAE increased by 51.8% to $2,912.3 million for the nine months ended September 30, 2018, compared to $1,918.5 million for the nine months ended September 30, 2017, primarily due to an increase in current year attritional losses of $1,279.9 million, mainly due to the impact of the increase in premiums earned, changes in the mix of business and changes in affiliated reinsurance agreements, including the non-renewal of the quota share agreement with Bermuda Re as of December 31, 2017 and the implementation of an aggregate stop loss agreement with Bermuda Re as of January 1, 2018. The increase in incurred losses and LAE also resulted from $480.7 million of unfavorable development on prior years catastrophe losses in 2018, mainly related to Hurricanes Harvey, Irma and Maria and the 2017 California wildfires. These increases were partially offset by a decrease of $766.4 million of current year catastrophe losses.  The current year catastrophe losses of $272.9 million for the nine months ended September 30, 2018 related to Hurricane Florence ($77.0 million), Typhoon Jebi ($66.6 million), Cyclone Mekunu ($47.7 million), Typhoon Trami ($25.0 million), the 2018 California wildfires ($24.7 million), the U.S. winter storms ($16.9 million) and Japan Floods ($15.0 million).  The current year catastrophe losses of $1,039.3 million for the nine months ended September 30, 2017 related to Hurricane Irma ($476.2 million), Hurricane Maria ($318.9 million), Hurricane Harvey ($180.7 million), the Mexico City earthquake ($32.1 million), the South Africa Knysna fires ($10.0 million), Cyclone Debbie in Australia ($8.3 million), the Peru storms ($6.9 million) and the 2017 US Midwest storms ($6.2 million).

Commission, Brokerage, Taxes and Fees.  Commission, brokerage, taxes and fees increased to $288.2 million for the three months ended September 30, 2018 compared to $34.5 million for the three months ended September 30, 2017.  Commission, brokerage, taxes and fees increased to $832.7 million for the nine months ended September 30, 2018 compared to $147.6 million for the nine months ended September 30, 2017.  The increase was mainly due to changes in affiliated reinsurance agreements, including the non-renewal of the quota share agreement with Bermuda Re as of December 31, 2017, increases in premiums earned with lower levels of reinstatement premium which do not have commissions and changes in the mix of business toward additional pro rata business.

Other Underwriting Expenses.  Other underwriting expenses were $78.8 million and $57.7 million for the three months ended September 30, 2018 and 2017, respectively. Other underwriting expenses were $230.4 million and $181.8 million for the nine months ended September 30, 2018 and 2017, respectively.  The increases were mainly due to changes in affiliated reinsurance agreements, including the non-renewal of the quota share agreement with Bermuda Re as of December 31, 2017, impact of increases in premium earned, costs incurred to support the expansion of the insurance business and higher variable compensation costs in 2018 compared to 2017.

Corporate Expenses.  Corporate expenses, which are general operating expenses that are not allocated to segments, were $2.5 million and $1.1 million for the three months ended September 30, 2018 and 2017, respectively, and $7.6 million and $6.2 million for the nine months ended September 30, 2018 and 2017, respectively.

Interest, Fees and Bond Issue Cost Amortization Expense.  Interest, fees and other bond amortization was $7.8 million and $7.2 million for the three months ended September 30, 2018 and 2017, respectively.  Interest, fees and other bond amortization was $22.7 million and $24.0 million for the nine months ended September 30, 2018 and 2017, respectively.  The changes in expense were primarily due to the movements
36


in the floating interest rate related to the long term subordinated notes, which is reset quarterly per the note agreement.  The floating rate was 4.7% as of September 30, 2018.

Income Tax Expense (Benefit).  Income tax benefit was $22.6 million and $220.5 million for the three months ended September 30, 2018 and 2017, respectively. Income tax benefit was $64.9 million and $153.3 million for the nine months ended September 30, 2018 and 2017, respectively.  Income tax expense/benefit is primarily a function of the Company's pre-tax income and the statutory tax rate, as affected by tax-exempt investment income and foreign tax credits and as calculated under the annualized effective tax rate ("AETR") method. Variations in taxes generally result from changes in the relative levels of pre-tax income, including the impact of catastrophe losses and net capital gains (losses).  However, if the AETR approach produces a year-to-date tax benefit which exceeds the amount which is estimated to be recoverable for the full year, then the tax benefit for the interim reporting period will be limited, as prescribed under ASC 740-270, to the estimated tax recoverable based on the year-to-date results. In addition, the enactment of the Tax Cuts Job Act ("TCJA") on December 22, 2017 reduced the U.S. corporate tax rate to 21% from 35%.

Net Income (Loss).
Our net income was $24.7 million and our net loss was $389.7 million for the three months ended September 30, 2018 and 2017, respectively.  Our net loss was $252.9 million and $184.9 million for the nine months ended September 30, 2018 and 2017, respectively.  The changes were primarily driven by the financial component fluctuations explained above.

Ratios.
Our combined ratio decreased by 165.9 points to 108.7% for the three months ended September 30, 2018 compared to 274.6% for the three months ended September 30, 2017, and decreased by 41.5 points to 112.7% for the nine months ended September 30, 2018 compared to 154.2% for the nine months ended September 30, 2017.  The loss ratio component decreased by 178.0 points and 49.0 points for the three and nine months ended September 30, 2018, respectively, over the same period last year mainly due to lower current year catastrophe losses and changes in affiliated reinsurance agreements.  The commission and brokerage ratio component increased to 23.4% for the three months ended September 30, 2018 compared to 6.7% for the three months ended September 30, 2017, and increased to 23.6% for the nine months ended September 30, 2018 compared to 10.1% for the nine months ended September 30, 2017 reflecting changes in affiliated reinsurance agreements, changes in the mix of business and lower reinstatement premiums in 2018 compared to 2017.  The other underwriting expense ratio decreased to 6.5% for the three months ended September 30, 2018 from 11.1% for the three months ended September 30, 2017 and decreased to 6.5% for the nine months ended September 30, 2018 from 12.5% for the nine months ended September 30, 2017, mainly due to the impact of changes in affiliated reinsurance contracts and changes in the mix of business.

Stockholder's Equity.
Stockholder's equity decreased by $346.5 million to $5,066.2 million at September 30, 2018 from $5,412.7 million at December 31, 2017, principally as a result of $252.9 million of net loss, $74.1 million of net unrealized depreciation on investments, net of tax and $25.1 million of net foreign currency translation adjustments, partially offset by $5.4 million of net benefit plan obligation adjustments.

Consolidated Investment Results

Net Investment Income.
Net investment income increased by 23.0% to $90.3 million for the three months ended September 30, 2018 compared to $73.4 million for the three months ended September 30, 2017.  Net investment income increased by 12.7% to $232.3 million for the nine months ended September 30, 2018 compared to $206.2 million for the nine months ended September 30, 2017.  The increases for both the three and nine months ended September 30, 2018 were primarily due to increases in limited partnership income, partially offset by a decline in income from equity securities.

37


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


   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in millions)
 
2018
   
2017
   
2018
   
2017
 
Fixed maturities
 
$
51.9
   
$
48.3
   
$
142.8
   
$
144.9
 
Equity securities
   
2.7
     
6.3
     
10.7
     
19.4
 
Short-term investments and cash
   
2.1
     
0.6
     
4.3
     
1.6
 
Other invested assets
                               
Limited partnerships
   
25.6
     
11.8
     
54.2
     
20.6
 
Dividends from preferred shares of affiliate
   
7.8
     
7.8
     
23.3
     
23.3
 
Other
   
6.0
     
1.5
     
10.7
     
4.2
 
Gross investment income before adjustments
   
96.0
     
76.4
     
246.0
     
214.1
 
Funds held interest income (expense)
   
0.9
     
1.1
     
4.5
     
4.0
 
Interest income from Parent
   
1.1
     
1.1
     
3.2
     
3.2
 
Gross investment income
   
98.0
     
78.5
     
253.7
     
221.3
 
Investment expenses
   
(7.7
)
   
(5.1
)
   
(21.5
)
   
(15.1
)
Net investment income
 
$
90.3
   
$
73.4
   
$
232.3
   
$
206.2
 
                                 
(Some amounts may not reconcile due to rounding.)
                               


The following tables show a comparison of various investment yields for the periods indicated:


         
At
 
At
         
September 30,
 
December 31,
         
2018
 
2017
Imbedded pre-tax yield of cash and invested assets at December 31
       
3.4%
 
3.4%
Imbedded after-tax yield of cash and invested assets at December 31
       
2.7%
 
2.7%



 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
Annualized pre-tax yield on average cash and invested assets
3.9%
 
3.0%
 
3.4%
 
2.8%
Annualized after-tax yield on average cash and invested assets
3.1%
 
2.1%
 
2.7%
 
2.0%


38


Net Realized Capital Gains (Losses).
The following table presents the composition of our net realized capital gains (losses) for the periods indicated:


   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
(Dollars in millions)
 
2018
   
2017
   
Variance
   
2018
   
2017
   
Variance
 
Gains (losses) from sales:
                                   
Fixed maturity securities, market value
                                   
Gains
 
$
2.5
   
$
8.0
   
$
(5.5
)
 
$
11.5
   
$
23.7
   
$
(12.2
)
Losses
   
(3.8
)
   
(4.1
)
   
0.3
     
(6.8
)
   
(6.9
)
   
0.1
 
Total
   
(1.3
)
   
3.9
     
(5.2
)
   
4.7
     
16.8
     
(12.1
)
                                                 
Fixed maturity securities, fair value
                                               
Gains
   
-
     
-
     
-
     
-
     
-
     
-
 
Losses
   
(0.7
)
   
-
     
(0.7
)
   
(1.8
)
   
-
     
(1.8
)
Total
   
(0.7
)
   
-
     
(0.7
)
   
(1.8
)
   
-
     
(1.8
)
                                                 
Equity securities, fair value
                                               
Gains
   
13.8
     
2.2
     
11.6
     
21.7
     
13.8
     
7.9
 
Losses
   
(3.8
)
   
(3.7
)
   
(0.1
)
   
(15.8
)
   
(10.3
)
   
(5.5
)
Total
   
10.0
     
(1.5
)
   
11.5
     
5.8
     
3.5
     
2.3
 
                                                 
Other invested assets
                                               
Gains
   
0.9
     
-
     
0.9
     
1.5
     
-
     
1.5
 
Losses
   
-
     
-
     
-
     
-
     
-
     
-
 
Total
   
0.9
     
-
     
0.9
     
1.5
     
-
     
1.5
 
                                                 
Total net realized gains (losses) from sales
                                               
Gains
   
17.2
     
10.2
     
7.0
     
34.7
     
37.5
     
(2.8
)
Losses
   
(8.3
)
   
(7.8
)
   
(0.5
)
   
(24.5
)
   
(17.2
)
   
(7.3
)
Total
   
8.9
     
2.4
     
6.4
     
10.2
     
20.3
     
(10.1
)
                                                 
Other than temporary impairments:
   
(2.8
)
   
(1.5
)
   
(1.3
)
   
(3.7
)
   
(4.2
)
   
0.5
 
                                                 
Gains (losses) from fair value adjustments:
                                               
Fixed maturities, fair value
   
0.5
     
-
     
0.5
     
1.5
     
-
     
1.5
 
Equity securities, fair value
   
36.3
     
29.6
     
6.7
     
34.8
     
82.0
     
(47.2
)
Other invested assets, fair value
   
(12.9
)
   
197.9
     
(210.8
)
   
(115.3
)
   
155.8
     
(271.1
)
Total
   
23.9
     
227.5
     
(203.6
)
   
(79.0
)
   
237.8
     
(316.8
)
                                                 
Total net realized gains (losses)
 
$
30.0
   
$
228.5
   
$
(198.5
)
 
$
(72.5
)
 
$
254.0
   
$
(326.5
)
                                                 
(Some amounts may not reconcile due to rounding.)
                                               


Net realized capital gains were $30.0 million and $228.5 million for the three months ended September 30, 2018 and 2017, respectively.  For the three months ended September 30, 2018, we recorded $23.9 million of gains from fair value re-measurements and $8.9 million of gains from sales of investments, partially offset by $2.8 million of other-than-temporary impairments. For the three months ended September 30, 2017 we recorded $227.5 million of net realized capital gains due to fair value re-measurements and $2.4 million of net realized capital gains from sales of investments, partially offset by $1.5 million of other-than-temporary impairments.  The fixed maturity and equity sales related primarily to adjusting the portfolios for overall market changes and individual credit shifts.

Net realized capital losses were $72.5 million and net realized capital gains were $254.0 million for the nine months ended September 30, 2018 and 2017, respectively.  For the nine months ended September 30, 2018, we recorded $79.0 million of losses from fair value re-measurements and $3.7 million of other-than-temporary impairments, partially offset by $10.2 million of gains from sales of investments.  For the nine months ended September 30, 2017 we recorded $237.8 million of net realized capital gains due to fair value re-measurements and $20.3 million of net realized capital gains from sales of investments, partially offset by $4.2 million of other-than-temporary impairments. The fixed maturity and equity sales related primarily to adjusting the portfolios for overall market changes and individual credit shifts.

39


Segment Results.
The U.S. Reinsurance operation 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 primarily within the U.S.  The International operation writes non-U.S. property and casualty reinsurance through Everest Re's branches in Canada, Singapore and through offices in Brazil, Miami and New Jersey.  The Insurance operation writes property and casualty insurance directly, through brokers, surplus lines brokers and general agents mainly within the U.S.

These segments are managed independently, but conform with corporate guidelines with respect to pricing, risk management, control of aggregate catastrophe exposures, capital, investments and support operations.  Management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting results.

Underwriting results include earned premium less losses and LAE incurred, commission and brokerage expenses and other underwriting expenses.  We measure our underwriting results using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which respectively, divide incurred losses, commissions and brokerage and other underwriting expenses by premiums earned.

Our loss and LAE reserves are management's best estimate of our ultimate liability for unpaid claims.  We re-evaluate our estimates on an ongoing basis, including all prior period reserves, taking into consideration all available information and, in particular, recently reported loss claim experience and trends related to prior periods.  Such re-evaluations are recorded in incurred losses in the period in which the re-evaluation is made.

The following discusses the underwriting results for each of our segments for the periods indicated:

U.S. Reinsurance.
The following table presents the underwriting results and ratios for the U.S. Reinsurance segment for the periods indicated.


   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
(Dollars in millions)
 
2018
   
2017
   
Variance
   
% Change
   
2018
   
2017
   
Variance
   
% Change
 
Gross written premiums
 
$
940.8
   
$
908.3
   
$
32.5
     
3.6
%
 
$
2,237.2
   
$
1,962.3
   
$
274.9
     
14.0
%
Net written premiums
   
703.9
     
295.6
     
408.3
     
138.1
%
   
1,557.7
     
649.9
     
907.8
     
139.7
%
                                                                 
Premiums earned
 
$
528.9
   
$
242.4
   
$
286.5
     
118.2
%
 
$
1,437.8
   
$
653.0
   
$
784.8
     
120.2
%
Incurred losses and LAE
   
394.6
     
678.9
     
(284.3
)
   
-41.9
%
   
1,404.3
     
919.1
     
485.2
     
52.8
%
Commission and brokerage
   
156.5
     
31.7
     
124.8
   
NM
     
432.5
     
115.2
     
317.3
   
NM
 
Other underwriting expenses
   
16.3
     
12.1
     
4.2
     
34.4
%
   
48.6
     
40.6
     
8.0
     
19.7
%
Underwriting gain (loss)
 
$
(38.5
)
 
$
(480.4
)
 
$
441.9
     
-92.0
%
 
$
(447.7
)
 
$
(422.0
)
 
$
(25.7
)
   
6.1
%
                                                                 
                           
Point Chg
                           
Point Chg
 
Loss ratio
   
74.6
%
   
280.1
%
           
(205.5
)
   
97.7
%
   
140.8
%
           
(43.1
)
Commission and brokerage ratio
   
29.6
%
   
13.1
%
           
16.5
     
30.1
%
   
17.6
%
           
12.5
 
Other underwriting ratio
   
3.1
%
   
5.0
%
           
(1.9
)
   
3.3
%
   
6.2
%
           
(2.9
)
Combined ratio
   
107.3
%
   
298.2
%
           
(190.9
)
   
131.1
%
   
164.6
%
           
(33.5
)
                                                                 
(Some amounts may not reconcile due to rounding.)
                                                               
(NM, not meaningful)
                                                               


Premiums.  Gross written premiums increased by 3.6% to $940.8 million for the three months ended September 30, 2018 from $908.3 million for the three months ended September 30, 2017, primarily due to an increase in treaty casualty business and marine and aviation business.  These increases were partially offset by a decline in treaty property business primarily as a result of $121.7 million of lower reinstatement premiums in the third quarter of 2018 compared with the third quarter of 2017 as a result of lower catastrophe losses in 2018.  Net written premiums increased by 138.1% to $703.9 million for the three months ended September 30, 2018 compared to $295.6 million for the three months ended September 30, 2017.  The difference between the change in gross written premiums compared to the change in net written premiums is primarily due to the impact of changes in affiliated reinsurance contracts, including the non-
40


renewal of the quota share agreement with Bermuda Re as of December 31, 2017 and the implementation of an aggregate stop loss agreement with Bermuda Re for 2018.  Premiums earned increased 118.2% to $528.9 million for the three months ended September 30, 2018 compared to $242.4 million for the three months ended September 30, 2017.  The change in premiums earned relative to net written premiums is due to timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

Gross written premiums increased by 14.0% to $2,237.2 million for the nine months ended September 30, 2018 from $1,962.3 million for the nine months ended September 30, 2017, primarily due to an increase in treaty property business, treaty casualty business and marine and aviation business, partially offset by lower reinstatement premiums.  Net written premiums increased by 139.7% to $1,557.7 million for the nine months ended September 30, 2018 compared to $649.9 million for the nine months ended September 30, 2017.  The difference between the change in gross written premiums compared to the change in net written premiums is primarily due to the impact of changes in affiliated reinsurance contracts, including the non-renewal of the quota share agreement with Bermuda Re as of December 31, 2017 and the implementation of an aggregate stop loss agreement with Bermuda Re for 2018.  Premiums earned increased 120.2% to $1,437.8 million for the nine months ended September 30, 2018 compared to $653.0 million for the nine months ended September 30, 2017.  The change in premiums earned relative to net written premiums is due to timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

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


   
Three Months Ended September 30,
   
Current
   
Ratio %/
 
Prior
   
Ratio %/
 
Total
   
Ratio %/
(Dollars in millions)
 
Year
   
Pt Change
 
Years
   
Pt Change
 
Incurred
   
Pt Change
2018
                                                 
Attritional
 
$
340.1
     
64.3
%
   
$
5.2
     
1.0
%
   
$
345.3
     
65.3
%
 
Catastrophes
   
97.5
     
18.4
%
 
   
(48.2
)
   
-9.1
%
 
   
49.3
     
9.3
%
 
Total segment
 
$
437.6
     
82.7
%
 
 
$
(43.0
)
   
-8.1
%
 
 
$
394.6
     
74.6
%
 
                                                                
2017
                                                             
Attritional
 
$
128.0
     
52.8
%
   
$
(0.4
)
   
-0.2
%
   
$
127.5
     
52.6
%
 
Catastrophes
   
551.6
     
227.6
%
 
   
(0.2
)
   
-0.1
%
 
   
551.4
     
227.5
%
 
Total segment
 
$
679.6
     
280.4
%
 
 
$
(0.6
)
   
-0.3
%
 
 
$
678.9
     
280.1
%
 
                                                                
Variance 2018/2017
                                                             
Attritional
 
$
212.1
     
11.5
 
pts
 
$
5.6
     
1.2
 
pts
 
$
217.8
     
12.7
 
pts
Catastrophes
   
(454.1
)
   
(209.2
)
pts
   
(48.0
)
   
(9.0
)
pts
   
(502.1
)
   
(218.2
)
pts
Total segment
 
$
(242.0
)
   
(197.7
)
pts
 
$
(42.4
)
   
(7.8
)
pts
 
$
(284.3
)
   
(205.5
)
pts



   
Nine Months Ended September 30,
   
Current
   
Ratio %/
 
Prior
   
Ratio %/
 
Total
   
Ratio %/
(Dollars in millions)
 
Year
   
Pt Change
 
Years
   
Pt Change
 
Incurred
   
Pt Change
2018
                                                 
Attritional
 
$
901.8
     
62.7
%
   
$
-
     
0.0
%
   
$
901.8
     
62.7
%
 
Catastrophes
   
101.6
     
7.1
%
 
   
401.0
     
27.9
%
 
   
502.6
     
35.0
%
 
Total segment
 
$
1,003.4
     
69.8
%
 
 
$
401.0
     
27.9
%
 
 
$
1,404.3
     
97.7
%
 
                                                                
2017
                                                             
Attritional
 
$
374.8
     
57.4
%
   
$
(4.7
)
   
-0.7
%
   
$
370.0
     
56.7
%
 
Catastrophes
   
553.2
     
84.7
%
 
   
(4.1
)
   
-0.6
%
 
   
549.1
     
84.1
%
 
Total segment
 
$
928.0
     
142.1
%
 
 
$
(8.8
)
   
-1.3
%
 
 
$
919.1
     
140.8
%
 
                                                                
Variance 2018/2017
                                                             
Attritional
 
$
527.0
     
5.3
 
pts
 
$
4.7
     
0.7
 
pts
 
$
531.8
     
6.0
 
pts
Catastrophes
   
(451.6
)
   
(77.6
)
pts
   
405.1
     
28.5
 
pts
   
(46.5
)
   
(49.1
)
pts
Total segment
 
$
75.4
     
(72.3
)
pts
 
$
409.8
     
29.2
 
pts
 
$
485.2
     
(43.1
)
pts
                                                                
(Some amounts may not reconcile due to rounding.)
                                                             

41


Incurred losses decreased by 41.9% to $394.6 million for the three months ended September 30, 2018 compared to $678.9 million for the three months ended September 30, 2017.  The decline was primarily due to a decrease of $454.1 million in current year catastrophe losses and $48.2 million of favorable development on prior years catastrophe losses in 2018.  The decreases were partially offset by an increase of $212.1 million in current year attritional losses mainly due to the impact of the increase in premiums earned and changes in affiliated reinsurance agreements, including the non-renewal of the quota share agreement with Bermuda Re as of December 31, 2017 and the implementation of an aggregate stop loss agreement with Bermuda Re as of January 1, 2018.  The current year catastrophe losses of $97.5 million for the three months ended September 30, 2018 primarily related to Hurricane Florence ($58.0 million), the 2018 California wildfires ($23.2 million), Typhoon Jebi ($6.5 million), Japan Floods ($5.5 million), the U.S. winter storms ($2.3 million) and  Typhoon Trami ($2.0 million). The current year catastrophe losses of $551.6 million for the three months ended September 30, 2017 related to Hurricane Irma ($348.6 million), Hurricane Harvey ($128.5 million), Hurricane Maria ($74.0 million), and the Mexico City earthquake ($1.1 million).

Incurred losses increased by 52.8% to $1,404.3 million for the nine months ended September 30, 2018 compared to $919.1 million for the nine months ended September 30, 2017.  The increase was primarily due to a rise of $527.0 million in current year attritional losses mainly due to the impact of the increase in premiums earned and changes in affiliated reinsurance agreements, including the non-renewal of the quota share agreement with Bermuda Re as of December 31, 2017 and the implementation of an aggregate stop loss agreement with Bermuda Re as of January 1, 2018. The increase in incurred losses also resulted from $401.0 million of unfavorable development on prior years catastrophe losses in 2018 primarily related to Hurricane Harvey, Irma and Maria and the 2017 California wildfires.  The increases in loss estimates for Hurricane Harvey, Irma and Maria was mostly driven by re-opened claims reported in the second quarter of 2018 and loss inflation from higher than expected loss adjustment expenses and in particular, their impact on aggregate covers.  These increases were partially offset by a decrease of $451.6 million of current year catastrophe losses.  The current year catastrophe losses of $101.6 million for the nine months ended September 30, 2018 primarily related to Hurricane Florence ($58.0 million), the 2018 California wildfires ($23.2 million), Typhoon Jebi ($6.5 million), the U.S. winter storms ($6.4 million), Japan Floods ($5.5 million) and  Typhoon Trami ($2.0 million). The current year catastrophe losses of $553.2 million for the nine months ended September 30, 2017 related to Hurricane Irma ($348.6 million), Hurricane Harvey ($128.5 million), Hurricane Maria ($74.0 million), the Mexico City earthquake ($1.1 million) and the 2017 U.S. Storms ($1.4 million).

Segment Expenses.  Commission and brokerage increased to $156.5 million for the three months ended September 30, 2018 compared to $31.7 million for the three months ended September 30, 2017. Commission and brokerage increased to $432.5 million for the nine months ended September 30, 2018 compared to $115.2 million for the nine months ended September 30, 2017The increases were mainly due to changes in affiliated reinsurance agreements, including the non-renewal of the quota share agreement with Bermuda Re as of December 31, 2017, the impact of the increases in premiums earned and changes in the mix of business towards additional pro rata business.

Segment other underwriting expenses increased to $16.3 million for the three months ended September 30, 2018 from $12.1 million for the three months ended September 30, 2017.  Segment other underwriting expenses increased to $48.6 million for the nine months ended September 30, 2018 from $40.6 million for the nine months ended September 30, 2017, mainly due to the impact of changes in affiliated reinsurance contracts, impact of the increases in premiums earned and higher variable compensation costs in 2018 compared to 2017.

42


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


   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
(Dollars in millions)
 
2018
   
2017
   
Variance
   
% Change
   
2018
   
2017
   
Variance
   
% Change
 
Gross written premiums
 
$
363.4
   
$
363.2
   
$
0.2
     
0.1
%
 
$
1,129.1
   
$
975.3
   
$
153.8
     
15.8
%
Net written premiums
   
340.7
     
130.2
     
210.5
     
161.7
%
   
1,012.9
     
345.4
     
667.5
     
193.3
%
                                                                 
Premiums earned
 
$
331.9
   
$
123.9
   
$
208.0
     
167.9
%
 
$
1,004.0
   
$
355.4
   
$
648.6
     
182.5
%
Incurred losses and LAE
   
315.9
     
410.5
     
(94.7
)
   
-23.1
%
   
751.7
     
557.4
     
194.3
     
34.9
%
Commission and brokerage
   
78.2
     
25.1
     
53.1
     
211.6
%
   
241.0
     
72.4
     
168.5
     
232.7
%
Other underwriting expenses
   
10.0
     
8.2
     
1.8
     
21.2
%
   
29.9
     
26.3
     
3.7
     
13.9
%
Underwriting gain (loss)
 
$
(72.1
)
 
$
(320.0
)
 
$
247.9
     
-77.5
%
 
$
(18.6
)
 
$
(300.8
)
 
$
282.2
     
-93.8
%
                                                                 
                           
Point Chg
                           
Point Chg
 
Loss ratio
   
95.2
%
   
331.3
%
           
(236.1
)
   
74.9
%
   
156.9
%
           
(82.0
)
Commission and brokerage ratio
   
23.6
%
   
20.3
%
           
3.3
     
24.0
%
   
20.4
%
           
3.6
 
Other underwriting ratio
   
2.9
%
   
6.6
%
           
(3.7
)
   
3.0
%
   
7.3
%
           
(4.4
)
Combined ratio
   
121.7
%
   
358.2
%
           
(236.5
)
   
101.9
%
   
184.6
%
           
(82.8
)
                                                                 
(Some amounts may not reconcile due to rounding.)
                                                               
(NM, not meaningful)
                                                               


Premiums.  Gross written premiums remained relatively flat at $363.4 million for the three months ended September 30, 2018 compared to $363.2 million for the three months ended September 30, 2017. Net written premiums increased by 161.7% to $340.7 million for the three months ended September 30, 2018 compared to $130.2 million for the three months ended September 30, 2017.  The difference between the change in gross written premiums compared to the change in net written premiums is primarily due to the impact of changes in affiliated reinsurance contracts including the non-renewal of the quota share agreement with Bermuda Re as of December 31, 2017.  Premiums earned increased 167.9% to $331.9 million for the three months ended September 30, 2018 compared to $123.9 million for the three months ended September 30, 2017.  The change in premiums earned relative to net written premiums is due to timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

Gross written premiums increased by 15.8% to $1,129.1 million for the nine months ended September 30, 2018 compared to $975.3 million for the nine months ended September 30, 2017, primarily due to increases in Latin American business and business written through our Canada and Singapore branches.  Net written premiums increased by 193.3% to $1,012.9 million for the nine months ended September 30, 2018 compared to $345.4 million for the nine months ended September 30, 2017.  The difference between the change in gross written premiums compared to the change in net written premiums is primarily due to the impact of changes in affiliated reinsurance contracts including the non-renewal of the quota share agreement with Bermuda Re as of December 31, 2017.  Premiums earned increased 182.5% to $1,004.0 million for the nine months ended September 30, 2018 compared to $355.4 million for the nine months ended September 30, 2017.  The change in premiums earned relative to net written premiums is due to timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

43


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


   
Three Months Ended September 30,
   
Current
   
Ratio %/
 
Prior
   
Ratio %/
 
Total
   
Ratio %/
(Dollars in millions)
 
Year
   
Pt Change
 
Years
   
Pt Change
 
Incurred
   
Pt Change
2018
                                                 
Attritional
 
$
182.2
     
54.9
%
   
$
-
     
0.0
%
   
$
182.2
     
54.9
%
 
Catastrophes
   
96.3
     
29.0
%
 
   
37.4
     
11.3
%
 
   
133.7
     
40.3
%
 
Total segment
 
$
278.5
     
83.9
%
 
 
$
37.4
     
11.3
%
 
 
$
315.9
     
95.2
%
 
                                                                
2017
                                                             
Attritional
 
$
64.0
     
51.7
%
   
$
0.7
     
0.6
%
   
$
64.7
     
52.3
%
 
Catastrophes
   
346.6
     
279.7
%
 
   
(0.8
)
   
-0.7
%
 
   
345.8
     
279.0
%
 
Total segment
 
$
410.6
     
331.4
%
 
 
$
(0.1
)
   
-0.1
%
 
 
$
410.5
     
331.3
%
 
                                                                
Variance 2018/2017
                                                             
Attritional
 
$
118.2
     
3.2
 
pts
 
$
(0.7
)
   
(0.6
)
pts
 
$
117.5
     
2.6
 
pts
Catastrophes
   
(250.3
)
   
(250.7
)
pts
   
38.2
     
12.0
 
pts
   
(212.2
)
   
(238.7
)
pts
Total segment
 
$
(132.1
)
   
(247.5
)
pts
 
$
37.5
     
11.4
 
pts
 
$
(94.7
)
   
(236.1
)
pts



   
Nine Months Ended September 30,
   
Current
   
Ratio %/
 
Prior
   
Ratio %/
 
Total
   
Ratio %/
(Dollars in millions)
 
Year
   
Pt Change
 
Years
   
Pt Change
 
Incurred
   
Pt Change
2018
                                                 
Attritional
 
$
520.3
     
51.8
%
   
$
-
     
0.0
%
   
$
520.3
     
51.8
%
 
Catastrophes
   
146.3
     
14.6
%
 
   
85.1
     
8.5
%
 
   
231.4
     
23.1
%
 
Total segment
 
$
666.6
     
66.4
%
 
 
$
85.1
     
8.5
%
 
 
$
751.7
     
74.9
%
 
                                                                
2017
                                                             
Attritional
 
$
182.9
     
51.5
%
   
$
2.6
     
0.7
%
   
$
185.5
     
52.2
%
 
Catastrophes
   
371.7
     
104.6
%
 
   
0.2
     
0.1
%
 
   
371.9
     
104.7
%
 
Total segment
 
$
554.6
     
156.1
%
 
 
$
2.8
     
0.8
%
 
 
$
557.4
     
156.9
%
 
                                                                
Variance 2018/2017
                                                             
Attritional
 
$
337.4
     
0.3
 
pts
 
$
(2.6
)
   
(0.7
)
pts
 
$
334.8
     
(0.4
)
pts
Catastrophes
   
(225.4
)
   
(90.0
)
pts
   
84.9
     
8.4
 
pts
   
(140.5
)
   
(81.6
)
pts
Total segment
 
$
112.0
     
(89.7
)
pts
 
$
82.3
     
7.7
 
pts
 
$
194.3
     
(82.0
)
pts
                                                                
(Some amounts may not reconcile due to rounding.)
                                                             


Incurred losses and LAE decreased by 23.1% to $315.9 million for the three months ended September 30, 2018 compared to $410.5 million for the three months ended September 30, 2017, primarily due to a decrease of $250.3 million of on current year catastrophe losses, partially offset by an increase of $118.2 million in current year attritional losses mainly due to the impact of the increase in premiums earned and changes in affiliated reinsurance agreements, including the non-renewal of the quota share agreement with Bermuda Re as of December 31, 2017 and $37.4 million of unfavorable development on prior years catastrophe losses mainly related to Hurricane Harvey, Irma and Maria.  The current year catastrophe losses of $96.3 million for the three months ended September 30, 2018 primarily related to Typhoon Jebi ($60.1 million), Typhoon Trami ($23.0 million), Japan Floods ($9.5 million) and Hurricane Florence ($6.0 million). The current year catastrophe losses of $346.6 million for the three months ended September 30, 2017 related to Hurricane Maria ($236.2 million), Hurricane Irma ($77.5 million), the Mexico City earthquake ($31.1 million) and Hurricane Harvey ($1.4 million).

Incurred losses and LAE increased by 34.9% to $751.7 million for the nine months ended September 30, 2018 compared to $557.4 million for the nine months ended September 30, 2017, primarily due to an increase of $337.4 million in current year attritional losses related to the increase in premiums earned and changes in affiliated reinsurance agreements, including the non-renewal of the quota share agreement with Bermuda Re as of December 31, 2017 and $85.1 million of unfavorable development on prior years catastrophe losses mainly related to Hurricane Harvey, Irma and Maria. The increase was partially offset by a decrease of $225.4 million on current year catastrophe losses. The current year catastrophe losses of $146.3 million for the nine months ended September 30, 2018 primarily related to Typhoon Jebi ($60.1
44


million), Cyclone Mekunu ($47.7 million), Typhoon Trami ($23.0 million), Japan Floods ($9.5 million) and Hurricane Florence ($6.0 million). The current year catastrophe losses of $371.7 million for the nine months ended September 30, 2017 related to Hurricane Maria ($236.2 million), Hurricane Irma ($77.5 million), the Mexico City earthquake ($31.1 million), the South Africa Knysna fires ($10.1 million), Cyclone Debbie in Australia ($8.3 million), the Peru storms ($7.1 million) and Hurricane Harvey ($1.4 million).

Segment Expenses.  Commission and brokerage increased to $78.2 million for the three months ended September 30, 2018 compared to $25.1 million for the three months ended September 30, 2017. Commission and brokerage increased to $241.0 million for the nine months ended September 30, 2018 compared to $72.4 million for the nine months ended September 30, 2017The increases was mainly due to changes in affiliated reinsurance agreements, including the non-renewal of the quota share agreement with Bermuda Re as of December 31, 2017, the impact of increases in premiums earned and changes in the mix of business.

Segment other underwriting expenses increased to $10.0 million for the three months ended September 30, 2018 from $8.2 million for the three months ended September 30, 2017, and increased to $29.9 million for the nine months ended September 30, 2018 from $26.3 million for the nine months ended September 30, 2017.  The increases were mainly due to the impact of the increases in premiums earned and higher variable compensation costs in 2018 compared to 2017.

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


   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
(Dollars in millions)
 
2018
   
2017
   
Variance
   
% Change
   
2018
   
2017
   
Variance
   
% Change
 
Gross written premiums
 
$
455.0
   
$
429.6
   
$
25.4
     
5.9
%
 
$
1,491.4
   
$
1,351.5
   
$
139.9
     
10.4
%
Net written premiums
   
333.8
     
144.9
     
188.9
     
130.3
%
   
1,105.2
     
442.2
     
663.0
     
149.9
%
                                                                 
Premiums earned
 
$
370.0
   
$
152.2
   
$
217.7
     
143.0
%
 
$
1,084.9
   
$
449.4
   
$
635.4
     
141.4
%
Incurred losses and LAE
   
259.8
     
242.1
     
17.7
     
7.3
%
   
756.3
     
442.0
     
314.3
     
71.1
%
Commission and brokerage
   
53.5
     
(22.3
)
   
75.8
   
NM
     
159.2
     
(40.1
)
   
199.3
   
NM
 
Other underwriting expenses
   
52.6
     
37.4
     
15.2
     
40.6
%
   
151.8
     
114.9
     
36.9
     
32.1
%
Underwriting gain (loss)
 
$
4.1
   
$
(105.0
)
 
$
109.0
     
-103.9
%
 
$
17.6
   
$
(67.3
)
 
$
84.9
     
-126.1
%
                                                                 
                           
Point Chg
                           
Point Chg
 
Loss ratio
   
70.2
%
   
159.0
%
           
(88.8
)
   
69.7
%
   
98.3
%
           
(28.6
)
Commission and brokerage ratio
   
14.5
%
   
-14.6
%
           
29.1
     
14.7
%
   
-8.9
%
           
23.6
 
Other underwriting ratio
   
14.2
%
   
24.5
%
           
(10.3
)
   
14.0
%
   
25.6
%
           
(11.6
)
Combined ratio
   
98.9
%
   
168.9
%
           
(70.0
)
   
98.4
%
   
115.0
%
           
(16.6
)
                                                                 
(Some amounts may not reconcile due to rounding.)
                                                               
(NM, not meaningful)
                                                               


Premiums.  Gross written premiums increased by 5.9% to $455.0 million for the three months ended September 30, 2018 compared to $429.6 million for the three months ended September 30, 2017.  This increase was primarily driven by expansion of various insurance lines of business including casualty, property and energy.  Net written premiums increased by 130.3% to $333.8 million for the three months ended September 30, 2018 compared to $144.9 million for the three months ended September 30, 2017.  The difference between the change in gross written premiums compared to the change in net written premiums is primarily due to the impact of affiliated reinsurance agreements, including the impact of the non-renewal of the quota share agreement between Everest Re and Bermuda Re.  Premiums earned increased 143.0% to $370.0 million for the three months ended September 30, 2018 compared to $152.2 million for the three months ended September 30, 2017.  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, as well as changes in the mix of business.

45


Gross written premiums increased by 10.4% to $1,491.4 million for the nine months ended September 30, 2018 compared to $1,351.5 million for the nine months ended September 30, 2017.  This increase was primarily driven by expansion of various insurance lines of business including casualty and energy.  Net written premiums increased by 149.9% to $1,105.2 million for the nine months ended September 30, 2018 compared to $442.2 million for the nine months ended September 30, 2017The difference between the change in gross written premiums compared to the change in net written premiums is primarily due to the impact of affiliated reinsurance agreements, including the impact of the non-renewal of the quota share agreement between Everest Re and Bermuda Re.  Premiums earned increased 141.4% to $1,084.9 million for the nine months ended September 30, 2018 compared to $449.4 million for the nine months ended September 30, 2017.  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, as well as changes in the mix of business.

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


   
Three Months Ended September 30,
   
Current
   
Ratio %/
 
Prior
   
Ratio %/
 
Total
   
Ratio %/
(Dollars in millions)
 
Year
   
Pt Change
 
Years
   
Pt Change
 
Incurred
   
Pt Change
2018
                                                 
Attritional
 
$
250.0
     
67.5
%
   
$
(2.0
)
   
-0.5
%
   
$
248.0
     
67.0
%
 
Catastrophes
   
14.5
     
3.9
%
 
   
(2.7
)
   
-0.7
%
 
   
11.8
     
3.2
%
 
Total segment
 
$
264.5
     
71.4
%
 
 
$
(4.7
)
   
-1.2
%
 
 
$
259.8
     
70.2
%
 
                                                                
2017
                                                             
Attritional
 
$
133.6
     
87.7
%
   
$
(1.2
)
   
-0.8
%
   
$
132.4
     
86.9
%
 
Catastrophes
   
109.6
     
72.0
%
 
   
0.1
     
0.1
%
 
   
109.7
     
72.1
%
 
Total segment
 
$
243.2
     
159.7
%
 
 
$
(1.1
)
   
-0.7
%
 
 
$
242.1
     
159.0
%
 
                                                                
Variance 2018/2017
                                                             
Attritional
 
$
116.4
     
(20.2
)
pts
 
$
(0.8
)
   
0.3
 
pts
 
$
115.6
     
(19.9
)
pts
Catastrophes
   
(95.1
)
   
(68.1
)
pts
   
(2.8
)
   
(0.8
)
pts
   
(97.9
)
   
(68.9
)
pts
Total segment
 
$
21.3
     
(88.3
)
pts
 
$
(3.6
)
   
(0.5
)
pts
 
$
17.7
     
(88.8
)
pts



   
Nine Months Ended September 30,
   
Current
   
Ratio %/
 
Prior
   
Ratio %/
 
Total
   
Ratio %/
(Dollars in millions)
 
Year
   
Pt Change
 
Years
   
Pt Change
 
Incurred
   
Pt Change
2018
                                                 
Attritional
 
$
736.7
     
67.9
%
   
$
-
     
0.0
%
   
$
736.7
     
67.9
%
 
Catastrophes
   
25.0
     
2.3
%
 
   
(5.4
)
   
-0.5
%
 
   
19.6
     
1.8
%
 
Total segment
 
$
761.7
     
70.2
%
 
 
$
(5.4
)
   
-0.5
%
 
 
$
756.3
     
69.7
%
 
                                                                
2017
                                                             
Attritional
 
$
321.2
     
71.4
%
   
$
6.5
     
1.4
%
   
$
327.7
     
72.8
%
 
Catastrophes
   
114.4
     
25.5
%
 
   
(0.1
)
   
0.0
%
 
   
114.3
     
25.5
%
 
Total segment
 
$
435.6
     
96.9
%
 
 
$
6.4
     
1.4
%
 
 
$
442.0
     
98.3
%
 
                                                                
Variance 2018/2017
                                                             
Attritional
 
$
415.5
     
(3.5
)
pts
 
$
(6.5
)
   
(1.4
)
pts
 
$
409.0
     
(4.9
)
pts
Catastrophes
   
(89.4
)
   
(23.2
)
pts
   
(5.3
)
   
(0.5
)
pts
   
(94.7
)
   
(23.7
)
pts
Total segment
 
$
326.1
     
(26.7
)
pts
 
$
(11.8
)
   
(1.9
)
pts
 
$
314.3
     
(28.6
)
pts
                                                                
(Some amounts may not reconcile due to rounding.)
                                                             


Incurred losses and LAE increased by 7.3% to $259.8 million for the three months ended September 30, 2018 compared to $242.1 million for the three months ended September 30, 2017, mainly due to an increase of $116.4 million in current year attritional losses resulting from the impact of the increase in premiums earned and changes in affiliated reinsurance agreements, including the non-renewal of the quota share agreement with Bermuda Re as of December 31, 2017. The increase was partially offset by a decrease of $95.1 million in current year catastrophe losses.  The current year catastrophe losses of $14.5 million for the three months ended September 30, 2018 primarily related to the Hurricane Florence ($13.0 million) and the 2018 California wildfires ($1.5 million). The current year catastrophe losses of $109.6
46


million for the three months ended September 30, 2017 related to Hurricane Harvey ($50.8 million), Hurricane Irma ($50.1 million) and Hurricane Maria ($8.7 million).

Incurred losses and LAE increased by 71.1% to $756.3 million for the nine months ended September 30, 2018 compared to $442.0 million for the nine months ended September 30, 2017, mainly due to an increase of $415.5 million in current year attritional losses, resulting from the impact of the increase in premiums earned and changes in affiliated reinsurance agreements, including the non-renewal of the quota share agreement with Bermuda Re as of December 31, 2017. The increase was partially offset by a decrease of $89.4 million in current year catastrophe losses.  The current year catastrophe losses of $25.0 million for the nine months ended September 30, 2018 primarily related to Hurricane Florence ($13.0 million), the U.S. winter storms ($10.5 million) and the 2018 California wildfires ($1.5 million). The current year catastrophe losses of $114.4 million for the nine months ended September 30, 2017 primarily related to Hurricane Harvey ($50.8 million), Hurricane Irma ($50.1 million), Hurricane Maria ($8.7 million) and the 2017 US Midwest Storms ($4.8 million).

Segment Expenses.  Commission and brokerage increased to $53.5 million for the three months ended September 30, 2018 compared to ($22.3) million for the three months ended September 30, 2017.  Commission and brokerage increased to $159.2 million for the nine months ended September 30, 2018 compared to ($40.1) million for the nine months ended September 30, 2017The increases were mainly due to changes in affiliated reinsurance agreements, including the non-renewal of the quota share agreement with Bermuda Re as of December 31, 2017, the impact of increases in premiums earned and changes in the mix of business.

Segment other underwriting expenses increased to $52.6 million for the three months ended September 30, 2018 compared to $37.4 million for the three months ended September 30, 2017. Segment other underwriting expenses increased to $151.8 million for the nine months ended September 30, 2018 compared to $114.9 million for the nine months ended September 30, 2017. The increases were mainly due to the impact of the increases in premiums earned, expenses related to the continued build out of the insurance business and higher variable compensation costs in 2018 compared to 2017.

Market Sensitive Instruments.
The SEC's Financial Reporting Release #48 requires registrants to clarify and expand upon the existing financial statement disclosure requirements for derivative financial instruments, derivative commodity instruments and other financial instruments (collectively, "market sensitive instruments").  We do not generally enter into market sensitive instruments for trading purposes.

Our current investment strategy seeks to maximize after-tax income through a high quality, diversified, taxable and tax-preferenced fixed maturity portfolio, while maintaining an adequate level of liquidity.  Our mix of taxable and tax-preferenced investments is adjusted periodically, consistent with our current and projected operating results, market conditions and our tax position.  The fixed maturity securities in the investment portfolio are comprised of non-trading available for sale securities.  Additionally, we have invested in equity securities.

The overall investment strategy considers the scope of present and anticipated Company operations.  In particular, estimates of the financial impact resulting from non-investment asset and liability transactions, together with our capital structure and other factors, are used to develop a net liability analysis.  This analysis includes estimated payout characteristics for which our investments provide liquidity.  This analysis is considered in the development of specific investment strategies for asset allocation, duration and credit quality.  The change in overall market sensitive risk exposure principally reflects the asset changes that took place during the period.

Interest Rate Risk.  Our $9.6 billion investment portfolio, at September 30, 2018, 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.
47


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 $142.7 million of mortgage-backed securities in the $5,235.8 million fixed maturity portfolio.  Prepayment risk results from potential accelerated principal payments that shorten the average life and thus the expected yield of the security.

The table below displays the potential impact of market value fluctuations and after-tax unrealized appreciation on our fixed maturity portfolio (including $607.2 million of short-term investments) for the period indicated based on upward and downward parallel and immediate 100 and 200 basis point shifts in interest rates.  For legal entities with a U.S. dollar functional currency, this modeling was performed on each security individually. To generate appropriate price estimate on mortgage-backed securities, changes in prepayment expectations under different interest rate environments were taken into account.  For legal entities with non-U.S. dollar functional currency, the effective duration of the involved portfolio of securities was used as a proxy for the market value change under the various interest rate change scenarios.


   
Impact of Interest Rate Shift in Basis Points
 
   
At September 30, 2018
 
(Dollars in millions)
   
-200
     
-100
     
0
     
100
     
200
 
Total Market/Fair Value
 
$
6,175.1
   
$
6,008.0
   
$
5,843.1
   
$
5,679.4
   
$
5,516.9
 
Market/Fair Value Change from Base (%)
   
5.7
%
   
2.8
%
   
0.0
%
   
-2.8
%
   
-5.6
%
Change in Unrealized Appreciation
                                       
After-tax from Base ($)
 
$
262.3
   
$
130.3
   
$
-
   
$
(129.3
)
 
$
(257.7
)


We had $9,519.5 million and $9,343.0 million of gross reserves for losses and LAE as of September 30, 2018 and December 31, 2017, respectively.  These amounts are recorded at their nominal value, as opposed to present value, which would reflect a discount adjustment to reflect the time value of money.  Since losses are paid out over a period of time, the present value of the reserves is less than the nominal value.  As interest rates rise, the present value of the reserves decreases and, conversely, as interest rates decline, the present value increases.  These movements are the opposite of the interest rate impacts on the fair value of investments.  While the difference between present value and nominal value is not reflected in our financial statements, our financial results will include investment income over time from the investment portfolio until the claims are paid.  Our loss and loss reserve obligations have an expected duration that is reasonably consistent with our fixed income portfolio.

Equity Risk.  Equity risk is the potential change in fair and/or market value of the common stock, preferred stock and mutual fund portfolios arising from changing prices.  Our equity investments consist of a diversified portfolio of individual securities.  The primary objective of the equity portfolio is to obtain greater total return relative to our core bonds over time through market appreciation and income.

The table below displays the impact on fair/market value and after-tax change in fair/market value of a 10% and 20% change in equity prices up and down for the periods indicated.


   
Impact of Percentage Change in Equity Fair/Market Values
 
   
At September 30, 2018
 
(Dollars in millions)
   
-20%
   
-10%
   
0%
   
10%
   
20%
Fair/Market Value of the Equity Portfolio
 
$
680.4
   
$
765.5
   
$
850.5
   
$
935.6
   
$
1,020.6
 
After-tax Change in Fair/Market Value
   
(134.4
)
   
(67.2
)
   
-
     
67.2
     
134.4
 


Foreign Currency Risk.  Foreign currency risk is the potential change in value, income and cash flow arising from adverse changes in foreign currency exchange rates.  Each of our non-U.S. ("foreign") operations maintains capital in the currency of the country of its geographic location consistent with local regulatory guidelines.  Each foreign operation may conduct business in its local currency, as well as the currency of other countries in which it operates.  The primary foreign currency exposures for these foreign operations are the Singapore and Canadian Dollars.  We mitigate foreign exchange exposure by generally matching the currency and duration of our assets to our corresponding operating liabilities.  In accordance with FASB guidance, the impact on the market value of available for sale fixed maturities due to changes in foreign
48


currency exchange rates, in relation to functional currency, is reflected as part of other comprehensive income.  Conversely, the impact of changes in foreign currency exchange rates, in relation to functional currency, on other assets and liabilities is reflected through net income as a component of other income (expense).  In addition, we translate the assets, liabilities and income of non-U.S. dollar functional currency legal entities to the U.S. dollar.  This translation amount is reported as a component of other comprehensive income.

SAFE HARBOR DISCLOSURE
This report contains forward-looking statements within the meaning of the U.S. federal securities laws.  We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in the federal securities laws.  In some cases, these statements can be identified by the use of forward-looking words such as "may", "will", "should", "could", "anticipate", "estimate", "expect", "plan", "believe", "predict", "potential" and "intend".  Forward-looking statements contained in this report include information regarding our reserves for losses and LAE, the impact of the TCJA, the adequacy of our provision for uncollectible balances, estimates of our catastrophe exposure, the effects of catastrophic events on our financial statements and the ability of our subsidiaries to pay dividends.  Forward-looking statements only reflect our expectations and are not guarantees of performance. These statements involve risks, uncertainties and assumptions.  Actual events or results may differ materially from our expectations.  Important factors that could cause our actual events or results to be materially different from our expectations include those discussed under the caption ITEM 1A, "Risk Factors" in the Company's most recent 10-K filing. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Instruments.  See "Market Sensitive Instruments" in PART I – ITEM 2.


ITEM 4.    CONTROLS AND PROCEDURES

As of the end of the period covered by this report, our management carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")).  Based on their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms.  Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  Based on that evaluation, there has been no such change during the quarter covered by this report.


49


PART II

ITEM 1.    LEGAL PROCEEDINGS

In the ordinary course of business, the Company is involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine the Company's rights and obligations under insurance and reinsurance agreements.  In some disputes, the Company seeks to enforce its rights under an agreement or to collect funds owing to it.  In other matters, the Company is resisting attempts by others to collect funds or enforce alleged rights.  These disputes arise from time to time and are ultimately resolved through both informal and formal means, including negotiated resolution, arbitration and litigation.  In all such matters, the Company believes that its positions are legally and commercially reasonable.  The Company considers the statuses of these proceedings when determining its reserves for unpaid loss and loss adjustment expenses.

Aside from litigation and arbitrations related to these insurance and reinsurance agreements, the Company is not a party to any other material litigation or arbitration.


ITEM 1A.  RISK FACTORS

No material changes.


ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.


ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4.    MINE SAFETY DISCLOSURES

Not applicable.


ITEM 5.    OTHER INFORMATION

None.


50


ITEM 6.    EXHIBITS

Exhibit Index:
 
   
Exhibit No.
Description
   
   31.1
Section 302 Certification of Dominic J. Addesso
   
   31.2
Section 302 Certification of Craig Howie
   
   32.1
Section 906 Certification of Dominic J. Addesso and Craig Howie
   
   101.INS
XBRL Instance Document
   
   101.SCH
XBRL Taxonomy Extension Schema
   
   101.CAL
XBRL Taxonomy Extension Calculation Linkbase
   
   101.DEF
XBRL Taxonomy Extension Definition Linkbase
   
   101.LAB
XBRL Taxonomy Extension Labels Linkbase
   
   101.PRE
XBRL Taxonomy Extension Presentation Linkbase
51

Everest Reinsurance Holdings, Inc.

Signatures



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



         
   
Everest Reinsurance Holdings, Inc.
 
   
(Registrant)
 
         
         
   
/S/ CRAIG HOWIE
 
   
Craig Howie
 
   
Executive Vice President and
 
     
Chief Financial Officer
 
         
   
(Duly Authorized Officer and Principal Financial Officer)
         
         
         
Dated:  November 14, 2018