Everest Re’s corporate offices are located in approximately 230,500 square feet of leased office space in Liberty Corner, New Jersey. Bermuda Re’s corporate offices are located in approximately 12,300 total square feet of leased office space in Hamilton, Bermuda. The Company’s other 25 locations occupy a total of approximately 223,650 square feet, all of which are leased. Management believes that the above-described office space is adequate for its current and anticipated needs.
Based on weighted average basic common shares outstanding of 40.4 million, 40.6 million, 41.3 million, 43.4 million and 45.4 million for 2018, 2017, 2016, 2015 and 2014, respectively.
Based on weighted average diluted common shares outstanding of 40.6 million, 40.8 million, 41.6 million, 43.8 million and 45.8 million for 2018, 2017, 2016, 2015 and 2014, respectively.
Premiums. Gross written premiums increased by 18.1% to $8,475.2 million in 2018, compared to $7,173.9 million in 2017, reflecting a $1,109.9 million, or 21.7%, increase in our reinsurance business and a $191.3 million, or 9.3%, increase in our insurance business. The increase in reinsurance premiums was mainly due to increases in treaty property and treaty casualty writings, rise in mortgage business, growth in Latin American business, and increases in production from our U.K. branch and Ireland office. The rise in insurance premiums was primarily due to increases in many lines of business, including casualty, energy, accident and health and business written through the Lloyd’s Syndicate. Net written premiums increased by 18.7% to $7,414.4 million in 2018, compared to $6,244.7 million in 2017. This change is consistent with the change in gross written premiums. Premiums earned increased by 16.7% to $6,931.7 million in 2018, compared to $5,937.8 million in 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.
Gross written premiums increased by 18.9% to $7,173.9 million in 2017, compared to $6,033.9 million in 2016, reflecting an $867.8 million, or 20.4%, increase in our reinsurance business and a $272.2 million, or 15.2%, increase in our insurance business. The increase in reinsurance premiums was mainly due to new crop reinsurance transactions, increases in treaty property and financial lines of business and the influx of reinstatement premiums related to multiple catastrophe events in the third quarter. The rise in insurance premiums was related to most lines of business, including property, retail casualty, accident and health and business written through the Lloyd’s Syndicate, partially offset by the impact of the sale of Heartland. Net written premiums increased by 18.5% to $6,244.7 million in 2017, compared to $5,270.9 million in 2016. This change is consistent with the change in gross written premiums. Premiums earned increased by 11.6% to $5,937.8 million in 2017, compared to $5,320.5 million in 2016. 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.
Other Income (Expense). We recorded other expense of $9.1 million, $35.4 million and $10.6 million in 2018, 2017 and 2016, respectively. The changes were primarily the result of fluctuations in foreign currency exchange rates, income related to Mt. Logan Re and changes in deferred gains related to any retroactive reinsurance transactions. We recognized foreign currency exchange income of $18.1 million in 2018 and foreign currency exchange expense of $25.5 million and $21.2 million in 2017 and 2016, respectively.
Incurred losses and LAE increased by 44.0% to $4,522.6 million in 2017, compared to $3,139.6 million in 2016, primarily due to an increase of $1,114.6 million in current year catastrophe losses and an increase in current year attritional losses of $266.4 million, mainly due to the impact of the increase in premiums earned and $56.6 million of less favorable development on prior years catastrophe losses in 2017 compared to 2016. These increases were partially offset by an additional $54.7 million of favorable development on prior years attritional losses in 2017 compared to 2016. The $263.4 million of favorable
Other Underwriting Expenses. Other underwriting expenses were $371.5 million, $318.8 million and $302.7 million in 2018, 2017 and 2016, respectively. The increases in other underwriting expenses were mainly due to the impact of the increases in premiums earned and costs incurred to support the continued expansion of the insurance business.
Corporate Expenses. Corporate expenses, which are general operating expenses that are not allocated to segments, were $30.7 million, $25.9 million and $27.2 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Interest, Fees and Bond Issue Cost Amortization Expense. Interest, fees and other bond amortization expense was $31.0 million, $31.6 million and $36.2 million in 2018, 2017 and 2016, respectively. The changes in expense were primarily due to the movements in the floating interest rate related to the long term subordinated notes, which is reset quarterly per the note agreement. The floating rate was 5.0% as of December 31, 2018.
Income Tax Expense (Benefit). We had an income tax benefit of $330.0 million in 2018 and $63.8 million in 2017, which included $8.2 million of tax expense related to the enactment of the TCJA, and income tax expense of $103.5 million in 2016, respectively. Income tax expense is primarily a function of the geographic location of the Company’s pre-tax income and the statutory tax rates in those jurisdictions. The effective tax rate (“ETR”) is primarily affected by tax-exempt investment income, foreign tax credits and dividends. Variations in the ETR generally result from changes in the relative levels of pre-tax income, including the impact of catastrophe losses and net capital gains (losses), among jurisdictions with different tax rates. The change in income tax expense (benefit) was primarily due to the increase in incurred losses, including catastrophe losses, and loss adjustment expenses from 2017 to 2018. In addition, the tax rate was lowered from 35% in 2017 to 21% in 2018 under the TCJA.
Our net income was $103.6 million, $469.0 million and $996.3 million in 2018, 2017 and 2016, respectively. The changes were primarily driven by the financial component fluctuations explained above.
Our combined ratio increased by 16.5 points to 103.5% in 2017, compared to 87.0% in 2016. The loss ratio component increased 17.2 points in 2017 over the same period last year. The change was mainly due to the increases in current year catastrophe losses. The commission and brokerage ratio components decreased to 22.0% in 2017 from 22.3% in 2016, reflecting changes in the mix of business and the impact from reinstatement premiums. The other underwriting expense ratios decreased to 5.3% in 2017 from 5.7% in 2016, mainly due to a reduction in variable compensation combined with the growth in premiums earned.
Net investment income increased by 7.1% to $581.2 million in 2018 compared with investment income of $542.9 million in 2017. The increase was primarily due to higher income from our growing fixed maturity portfolio and an increase in limited partnership income, partially offset by lower dividend income from our equity portfolio.
The pre-tax equivalent total return for the bond portfolio was approximately 2.9%, 4.3% and 5.0%, respectively, in 2018, 2017 and 2016. The pre-tax equivalent return adjusts the yield on tax-exempt bonds to the fully taxable equivalent.
The following table presents the composition of our net realized capital gains (losses) for the periods indicated.
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.
Gross written premiums increased by 22.0% to $2,593.0 million in 2017 from $2,125.8 million in 2016, primarily due to an increase in the new crop reinsurance business, an increase in treaty property business and the influx of reinstatement premiums due to the catastrophe losses and an increase in mortgage business. Net written premiums increased by 13.9% to $2,245.4 million in 2017 compared to $1,970.6 million in 2016. The difference between the change in gross written premiums compared to the change in net written premiums is primarily due to varying utilization of reinsurance. Premiums earned increased by 5.3% to $2,181.2 million in 2017, compared to $2,072.2 million in 2016. The change in premiums earned relative to net written premiums is primarily the result of changes in the mix of business and timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.
2017, compared to $1,068.5 million in 2016, primarily due to an increase of $581.6 million in current year catastrophe losses, partially offset by $39.1 million of more favorable development on prior years attritional losses in 2017 compared to 2016. The $165.5 million of favorable development on prior years attritional losses in 2017 was mainly related to property and short tail business. The $715.7 million of current year catastrophe losses in 2017 are outlined above. The $134.1 million of current year catastrophe losses in 2016 related to Hurricane Matthew ($86.2 million), the 2016 U.S. storms ($20.4 million), 2016 Tennessee wildfire ($14.7 million) and Hurricane Hermine ($13.5 million).
Commission and brokerage expenses decreased by 0.7% to $462.5 million in 2017 compared to $466.0 million in 2016. The decrease is mainly due to the impact of the new crop reinsurance contract which generally has a lower expense ratio and other changes in the mix of business. Segment other underwriting expenses increased slightly to $55.9 million in 2017 from $54.1 million in 2016.
Premiums. Gross written premiums increased by 17.3% to $1,543.9 million in 2018 compared to $1,316.7 million in 2017, primarily due to the increases in Latin American business and business written through our Canada and Singapore branches, partially offset by a negative impact of $20.6 million from the movement of foreign exchange rates. Net written premiums increased by 18.6% to $1,458.7 million in 2018 compared to $1,229.6 million in 2017. The change is consistent with the change in gross written premiums. Premiums earned increased 19.8% to $1,439.9 million in 2018 compared to $1,202.0 million in 2017. The change in premiums earned relative to net written premiums is primarily the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.
Incurred losses and LAE decreased by 6.3% to $992.7 million in 2018 compared to $1,059.6 million in 2017, primarily due to a decrease of $291.0 million on current year catastrophe losses and $27.4 million of favorable development on prior years attritional losses. These decreases were partially offset by an increase of $154.9 million on current year attritional losses, primarily due to the impact of the increase in premiums earned, and $94.7 million of unfavorable development on prior years catastrophe losses, mainly related to Hurricanes Harvey, Irma and Maria as well as the 2017 Mexico earthquake. The current year catastrophe losses of $165.3 million in 2018 related primarily to Typhoon Jebi ($60.1 million), Cyclone Mekunu ($43.7 million), Australia hailstorm ($24.0 million), Typhoon Trami ($23.0 million), Japan floods ($9.5 million), Hurricane Michael ($3.0 million) and Hurricane Florence ($2.0 million). The $456.3 million of current year catastrophe losses in 2017 related to Hurricane Maria ($263.2 million), Hurricane Irma ($107.6 million), the Mexico City earthquake ($25.6 million), the South Africa Knysna fires ($24.0 million), Cyclone Debbie in Australia ($17.1 million), the Peru storms ($15.2 million) and Hurricane Harvey ($3.7 million).
Segment Expenses. Commission and brokerage increased by 26.5% to $364.0 million in 2018 compared to $287.7 million in 2017. These increases are mainly due to the impact of the increases in premiums earned and changes in the mix of business. Segment other underwriting expenses increased slightly to $39.0 million in 2018 compared to $38.8 million in 2017.
The following table presents the underwriting results and ratios for the Bermuda segment for the periods indicated.
Gross written premiums increased by 35.3% to $1,205.0 million in 2017 compared to $890.4 million in 2016, primarily due to increased casualty and financial lines of business written through the Bermuda office and increased production from the U.K. and Ireland offices, partially offset by a negative impact of $6.5 million from the movement of foreign exchange rates. Net written premiums increased by 36.9% to $1,139.1 million in 2017 compared to $831.9 million in 2016, which is consistent with the change in gross written premiums. Premiums earned increased 30.5% to $1,093.3 million in 2017 compared to $838.0 million in 2016. 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.
Incurred Losses and LAE. The following table presents the incurred losses and LAE for the Bermuda segment for the periods indicated.
Segment Expenses. Commission and brokerage increased by 7.0% to $267.4 million in 2018 compared to $250.1 million in 2017. The increase in 2018 was mainly due to the impact of the increase in premiums earned. Segment other underwriting expenses increased to $228.7 million in 2018 compared to $186.1 million in 2017. The increase was mainly due to the impact of the increase in premiums earned and increased expenses related to the continued build out of the insurance business.
Commission and brokerage increased by 21.8% to $250.1 million in 2017 compared to $205.3 million in 2016. The increase was mainly due to the impact of the increase in premiums earned and changes in the mix of business. Segment other underwriting expenses increased to $186.1 million in 2017 compared to $176.8 million in 2016. The increase was mainly due to the impact of the increase in premiums earned and increased expenses related to the continued build out of the insurance business.
It is more difficult to accurately estimate loss reserves for reinsurance liabilities than for insurance liabilities. At December 31, 2018, we had reinsurance reserves of $9,940.0 million and insurance loss reserves of $3,179.0 million, of which $272.3 million and $75.2 million, respectively, were loss reserves for A&E liabilities. A detailed discussion of additional considerations related to A&E exposures follows later in this section.
We sort both our reinsurance and insurance reserves into exposure groupings for actuarial analysis. We assign our business to exposure groupings so that the underlying exposures have reasonably homogeneous loss development characteristics and are large enough to facilitate credible estimation of ultimate losses. We periodically review our exposure groupings and we may change our groupings over time as our business changes. We currently use over 200 exposure groupings to develop our reserve estimates. One of the key selection characteristics for the exposure groupings is the historical duration of the claims settlement
Our reserves include an estimate of our ultimate liability for A&E claims. Our A&E liabilities emanate from Everest Re’s assumed reinsurance business. Liabilities related to Mt. McKinley’s direct business, which had been ceded to Bermuda Re previously, were retroceded to an affiliate of Clearwater Insurance Company in 2015, concurrent with the sale of Mt. McKinley to Clearwater Insurance Company. There are significant uncertainties surrounding our estimates of our potential losses from A&E claims. Among the uncertainties are: (a) potentially long waiting periods between exposure and manifestation of any bodily injury or property damage; (b) difficulty in identifying sources of asbestos or environmental contamination; (c) difficulty in properly allocating responsibility and/or liability for asbestos or environmental damage; (d) changes in underlying laws and judicial interpretation of those laws; (e) the potential for an asbestos or environmental claim to involve many insurance providers over many policy periods; (f) questions concerning interpretation and application of insurance and reinsurance coverage; and (g) uncertainty regarding the number and identity of insureds with potential asbestos or environmental exposure.
Reinsurance Receivables. We have purchased reinsurance to reduce our exposure to adverse claim experience, large claims and catastrophic loss occurrences. Our ceded reinsurance provides for recovery from reinsurers of a portion of losses and loss expenses under certain circumstances. Such reinsurance does not relieve us of our obligation to our policyholders. In the event our reinsurers are unable to meet their obligations under these agreements or are able to successfully challenge losses ceded by us under the contracts, we will not be able to realize the full value of the reinsurance receivable balance. To minimize exposure from uncollectible reinsurance receivables, we have a reinsurance security committee that evaluates the financial strength of each reinsurer prior to our entering into a reinsurance arrangement. In some cases, we may hold full or partial collateral for the receivable, including letters of credit, trust assets and cash. Additionally, creditworthy foreign reinsurers of business written in the U.S., as well as capital markets’ reinsurance mechanisms, are generally required to secure their obligations. We have established reserves for uncollectible balances based on our assessment of the collectability of the outstanding balances. As of December 31, 2018 and 2017, the reserve for uncollectible balances was $15.0 million. Actual uncollectible amounts may vary, perhaps substantially, from such reserves, impacting income (loss) in the period in which the change in reserves is made. See also ITEM 8, “Financial Statements and Supplementary Data” - Note 11 of Notes to the Consolidated Financial Statements and “Financial Condition - Reinsurance Receivables” below.
Investment Valuation. Our fixed income investments are classified for accounting purposes as available for sale and are carried at market value or fair value in our consolidated balance sheets. Our equity securities are all carried at fair value, as of January 1, 2018, due to the adoption of ASU 2016-01. Most securities we own are traded on national exchanges where market values are readily available. Some of our commercial mortgage-backed securities (“CMBS”) are valued using cash flow models and risk-adjusted discount rates. We hold some privately placed securities, less than 2.9% of the portfolio, that are either valued by brokers or investment advisors. In most instances, values provided by an investment advisor are supported with opinions from qualified independent third parties. In limited circumstances when broker or investment advisor prices are not available for a private placement, we will value the securities using comparable market information. At December 31, 2018 and 2017, our investment portfolio included $1,427.8 million and $1,074.6 million, respectively, of limited partnership investments whose values are reported pursuant to the equity method of accounting. We carry these investments at values provided by the managements of the limited partnerships and due to inherent reporting lags, the carrying values are based on values with “as of” dates from one month to one quarter prior to our financial statement date.
Cash and Invested Assets. Aggregate invested assets, including cash and short-term investments, were $18,433.1 million at December 31, 2018, a decrease of $193.5 million compared to $18,626.5 million at December 31, 2017. This decrease was primarily the result of $329.4 million in fair value re-measurements, $250.9 million of pre-tax unrealized depreciation, $216.2 million paid out in dividends to shareholders, $143.1 million due to fluctuations in foreign currencies, repurchases of 0.3 million common shares for $75.3 million and $8.1 million of other-than-temporary impairments, partially offset by $610.1 million of cash flows from operations, $102.1 million in equity adjustments of our limited partnership investments, $46.1 million of unsettled securities and $29.3 million of amortization bond premium.
Over the past several years, we have expanded the allocation of our investments funded by shareholders’ equity to include: 1) a greater percentage of publicly traded equity securities, 2) emerging market fixed maturities through mutual fund structures, as well as individual holdings, 3) high yield fixed maturities, 4) bank and private loan securities and 5) private equity limited partnership investments. The objective of this portfolio diversification is to enhance the risk-adjusted total return of the investment portfolio by allocating a prudent portion of the portfolio to higher return asset classes, which are also less subject to changes in value with movements in interest rates. We limit our allocation to these asset classes because of 1) the potential for volatility in their values and 2) the impact of these investments on regulatory and rating agency capital adequacy models. We use investment managers experienced in these markets and adjust our allocation to these investments based upon market conditions. At December 31, 2018, the market value of investments in these investment market sectors, carried at both market and fair value, approximated 51.9% of shareholders’ equity.
Reinsurance receivables for both paid and recoverable on unpaid losses totaled $1,787.6 million at December 31, 2018 and $1,348.2 million at December 31, 2017. At December 31, 2018, $683.8 million, or 38.3%, was receivable from Mt. Logan Re collateralized segregated accounts; $125.5 million, or 7.0%,
was receivable from Munich Re; $122.1 million, or 6.8%, was receivable from Zurich; and $103.1 million, or 5.8%,
was receivable from Resolution Group. The receivables from Resolution Group are fully collateralized by an individual trust agreement. No other retrocessionaire accounted for more than 5% of our receivables.
Industry analysts use the “survival ratio” to compare the A&E reserves among companies with such liabilities. The survival ratio is typically calculated by dividing a company’s current net reserves by the three year average of annual paid losses. Hence, the survival ratio equals the number of years that it would take to exhaust the current reserves if future loss payments were to continue at historical levels. Using this measurement, our net three year asbestos survival ratio was 5.7 years at December 31, 2018. These metrics can be skewed by individual large settlements occurring in the prior three years and therefore, may not be indicative of the timing of future payments.
Shareholders’ Equity. Our shareholders’ equity decreased to $7,903.8 million as of December 31, 2018 from $8,369.2 million as of December 31, 2017. This decrease was the result of $228.2 million of unrealized depreciation on investments, net of tax, $216.2 million of shareholder dividends, $76.8 million of net foreign currency translation adjustments, and repurchases of 0.3 million common shares for $75.3 million, partially offset by $103.6 million of net income, $23.0 million of share-based compensation transactions and $4.5 million of net benefit plan obligation adjustments.
Capital. Shareholders’ equity at December 31, 2018 and December 31, 2017 was $7,903.8 million and $8,369.2 million, respectively. Management’s objective in managing capital is to ensure its overall capital level, as well as the capital levels of its operating subsidiaries, exceed the amounts required by regulators, the amount needed to support our current financial strength ratings from rating agencies and our own economic capital models. The Company’s capital has historically exceeded these benchmark levels.
2018 BSCR calculation is not yet due to be completed; however, the Company anticipates that Bermuda Re's December 31, 2018 actual capital will exceed the targeted capital level.
In 2018, we repurchased 0.3 million shares for $75.3 million in the open market and paid $216.2 million in dividends to adjust our capital position and enhance long term expected returns to our shareholders. During 2017, we repurchased 0.2 million shares for $50.0 million in the open market and paid $207.2 million in dividends. We may at times enter into a Rule 10b5-1 repurchase plan agreement to facilitate the repurchase of shares. On November 19, 2014, our existing Board authorization to purchase up to 25 million of our shares was amended to authorize the purchase of up to 30 million shares. As of December 31, 2018, we had repurchased 28.6 million shares under this authorization.
The Everest International Credit Facility requires Group to maintain a debt to capital ratio of not greater than 0.35 to 1 and to maintain a minimum net worth. Minimum net worth is an amount equal to the sum of $5,326.0 million (70% of consolidated net worth as of December 31, 2015), plus 25% of consolidated net income for each of Group’s fiscal quarters, for which statements are available ending on or after January 1, 2015 and for which net income is positive, plus 25% of any increase in consolidated net worth of Group
during such period attributable to the issuance of ordinary and preferred shares, which at December 31, 2018, was $5,985.7 million. As of December 31, 2018, the Company was in compliance with all Everest International Credit Facility requirements.
At December 31, 2018 and 2017, Everest International Credit Facility had £26.0 and £0.0 million outstanding letters of credit, respectively.
Projected catastrophe losses are generally summarized in terms of the PML. We define PML as our anticipated loss, taking into account contract terms and limits, caused by a single catastrophe affecting a broad contiguous geographic area, such as that caused by a hurricane or earthquake. The PML will vary depending upon the modeled simulated losses and the make-up of the in force book of business. The projected severity levels are described in terms of “return periods”, such as “100-year events” and “250-year events”. For example, a 100-year PML is the estimated loss to the current in-force portfolio from a single event which has a 1% probability of being exceeded in a twelve month period. In other words, it corresponds to a 99% probability that the loss from a single event will fall below the indicated PML. It is important to note that PMLs are estimates. Modeled events are hypothetical events produced by a stochastic model. As a result, there can be no assurance that any actual event will align with the modeled event or that actual losses from events similar to the modeled events will not vary materially from the modeled event PML.
We believe that our greatest worldwide 1 in 100 year exposure to a single catastrophic event is to a hurricane affecting the U.S. southeast coast, where we estimate we have a PML exposure, net of third party reinsurance, of $1,036.3 million. See also table under ITEM 1, “Business - Risk Management of Underwriting and Retrocession Arrangements”.
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 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 reclassified 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 decided to early adopt the guidance as of December 31, 2017. The adoption resulted in a reclass of $1,250 thousand between AOCI and retained earnings during the fourth quarter of 2017. As an accounting policy, the Company has adopted the aggregate portfolio approach for releasing disproportionate income tax effects from AOCI.
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. In 2018, the Company recorded adjustments to the amount of tax expense it recorded in 2017 with respect to the TCJA as estimated amounts were finalized, which did not 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.
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 $1,201 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.
Disclosures for Investments in Certain Entities that Calculate Net Asset Value Per Share. In May 2015, the FASB issued ASU 2015-07, which removes the requirement to categorize, within the fair value hierarchy, investments for which fair values are estimated using the net asset value practical expedient provided by Accounting Standards Codification 820, Fair Value Measurement. The updated guidance is effective for annual reporting periods beginning after December 15, 2015. The Company implemented this guidance effective in the fourth quarter of 2016. The adoption did not have a material impact on the Company’s financial statements.
Interest Rate Risk. Our $18.4 billion investment portfolio, at December 31, 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.
In June 2016, the United Kingdom approved a referendum to exit the European Union (commonly referred to as "Brexit") which resulted in volatility in global stock markets and currency exchange rates, and has increased political, economic and global market uncertainty. The formal negotiation process for the United Kingdom to exit the European Union will determine the timing and terms of such an exit. The Company has a Lloyd’s of London Syndicate and Bermuda Re has a branch operation in the United Kingdom. The nature and extent of the impact of Brexit on regulation, interest rates, currency exchange rates and financial markets is still uncertain and may adversely affect our operations.