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 23 locations occupy a total of approximately 239,600 square feet, all of which are leased. In addition, effective October 2019, the Company entered into a lease agreement to move its corporate offices from Liberty Corner, New Jersey to Warren, New Jersey. The lease agreement covers approximately 315,000 square feet of office space. Management believes that the above-described office space is adequate for its current and anticipated needs.
(3) Based on weighted average basic common shares outstanding of 40.3 million, 40.4 million, 40.6 million, 41.3 million, and 43.4 million for 2019, 2018, 2017, 2016, and 2015, respectively.
(6) Based on 40.8 million, 40.7 million, 40.8 million, 40.9 million, and 42.7 million common shares outstanding for December 31, 2019, 2018, 2017, 2016, and 2015, respectively.
Worldwide insurance and reinsurance market conditions continued to be competitive. Generally, there was ample insurance and reinsurance capacity relative to demand, as well as, additional capital from the capital markets through insurance linked financial instruments. These financial instruments such as side cars, catastrophe bonds and collateralized reinsurance funds, 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 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. Although insured catastrophe losses for 2019 were slightly below recent annual averages, there were numerous natural catastrophes in 2018 with total industry losses estimated to be $90 billion. The costliest event was the Camp Wildfire in California, the deadliest and most destructive California fire on record. These 2018 catastrophe losses followed another record year of catastrophes in 2017 where total industry losses for the worldwide events were estimated at $140 billion. These catastrophe losses included 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. 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. While the future impact on market conditions from these catastrophes cannot be determined at this time, there is a growing industry consensus that there is some firming of (re)insurance rates for the areas impacted by the recent catastrophes.
Rates also appear to be firming in some of the casualty lines of business, particularly in the casualty lines that have seen significant losses such as excess casualty and directors and officers’ liability. Other casualty lines are experiencing modest rate increase, while some lines such as workers’ compensation are experiencing softer market conditions.
Net Investment Income. Net investment income increased by 11.3% to $647.1 million in 2019 compared with investment income of $581.2 million in 2018. Net pre-tax investment income, as a percentage of average invested assets, was 3.3% in 2019 compared to 3.2% in 2018. The increases in both income and yield were primarily the result of higher income from our growing fixed maturity portfolio and higher income from our limited partnerships, partially offset by lower dividend income from our equity portfolio.
recognized net derivative gains of $6.4 million, $0.5 million and $9.6 million in 2019, 2018 and 2017, respectively. The change in the fair value of these equity index put option contracts is generally indicative of the change in the equity markets and interest rates over the same periods.
Incurred losses and LAE increased by 25.0% to $5,651.4 million in 2018, compared to $4,522.6 million in 2017, primarily due to an increase in current year attritional losses of $711.9 million, mainly due to the impact of the increase in premiums earned and changes in the mix of business, and unfavorable development of $561.2 million on prior years catastrophe losses, mainly related to Hurricanes Harvey, Irma and Maria and the 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. These increases were partially offset by a decrease of $263.6 million in current year catastrophe losses. The current year catastrophe losses of $1,239.0 million are outlined above. The $1,502.5 million of current year catastrophe losses in 2017 related to Hurricane Irma ($558.1 million), Hurricane Maria ($361.7 million), Hurricane Harvey ($316.7 million), the 2017 Northern California wildfires ($149.9 million), the Mexico City earthquake ($31.0 million), the South Africa Knysna fires ($23.7 million), Cyclone Debbie in Australia ($22.1 million), the Peru storms ($14.9 million), the 2017 US Midwest storms ($12.9 million) and the Southern California wildfires ($11.6 million).
Interest, Fees and Bond Issue Cost Amortization Expense. Interest, fees and other bond amortization expense was $31.7 million, $31.0 million and $31.6 million in 2019, 2018 and 2017, 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 4.3% as of December 31, 2019.
During 2018, the Company completed its accounting, including interpretation of the additional guidance issued by the IRS and U.S. Treasury, and recognized an income tax benefit of $28.4 million primarily related to the 2017 tax return to tax provision true-up recorded in 2018.
Our net income was $1,009.5 million, $89.0 million and $482.8 million in 2019, 2018 and 2017, respectively. The changes were primarily driven by the financial component fluctuations explained above.
Our combined ratio decreased by 13.3 points to 95.5% in 2019, compared to 108.8% in 2018. The loss ratio component decreased 15.0 points in 2019 over the same period last year mainly due to lower catastrophe losses in 2019 compared to 2018 and less unfavorable development on prior years catastrophe losses. The commission and brokerage ratio components increased to 23.0% in 2019 compared to 21.9% in 2018 mainly due to the impact of lower reinstatement premiums in 2019 and changes in the mix of business. The other underwriting expense ratios increased to 6.0% in 2019 compared to 5.4% in 2018 mainly due to higher variable compensation in 2019 compared to 2018.
Shareholders’ equity increased by $1,272.1 million to $9,132.9 million at December 31, 2019 from $7,860.8 million at December 31, 2018, principally as a result of $1,009.5 million of net income, $483.8 million of unrealized appreciation on investments net of tax, $30.9 million of share-based compensation transactions and $14.0 million of net foreign currency translation adjustments, partially offset by $234.3 million of shareholder dividends, the repurchase of 0.1 million common shares for $24.6 million and $7.1 million of net benefit plan obligation adjustments, net of tax.
The pre-tax equivalent total return for the bond portfolio was approximately 6.3%, 2.9% and 4.3%, respectively, in 2019, 2018 and 2017. The pre-tax equivalent return adjusts the yield on tax-exempt bonds to the fully taxable equivalent.
million of other-than-temporary impairments. In 2017, we recorded $139.0 million of net gains from fair value re-measurements and $21.3 million of net realized capital gains from sales of investments, partially offset by $7.1 million of other-than-temporary impairments. The fixed maturity and equity sales during these years related primarily to adjusting the portfolios for overall market changes and individual credit shifts.
The U.S. Reinsurance operation writes property and casualty reinsurance and specialty lines of business, including Marine, Aviation, Surety and Accident and Health (“A&H”) business, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies primarily within the U.S. The International operation writes non-U.S. property and casualty reinsurance through Everest Re’s branches in Canada and Singapore and through offices in Brazil, Miami and New Jersey. The Bermuda operation provides reinsurance and insurance to worldwide property and casualty markets through brokers and directly with ceding companies from its Bermuda office and reinsurance to the United Kingdom and European markets through its UK branch and Ireland Re. The Insurance operation writes property and casualty insurance directly and through brokers, surplus lines brokers and general agents within the U.S., Canada and Europe.
Segment Expenses. Commission and brokerage expense increased by 23.8% to $703.8 million in 2019 compared to $568.4 million in 2018. The increases are mainly due to the impact of the increases in premiums earned, higher contingent commission, changes in the mix of business towards additional pro rata business and significantly higher reinstatement premiums in 2018 which have no commission charge. Segment other underwriting expenses increased to $68.8 million in 2019 from $60.3 million in 2018. The increases were mainly due to changes in the mix of business.
Premiums. Gross written premiums increased by 6.8% to $1,648.6 million in 2019 compared to $1,543.9 million in 2018, primarily due to increases in facultative property and casualty writings and business written through our Canada and Singapore branches, partially offset by a negative impact of $25.0 million from the movement of foreign exchange rates. Net written premiums increased by 6.4% to $1,551.8 million in 2019 compared to $1,458.7 million in 2018. The change is consistent with the change in gross written premiums. Premiums earned increased 2.5% to $1,475.7 million in 2019 compared to $1,439.9 million in 2018. 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.
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 are outlined above. The $456.3 million of current year catastrophe losses in 2017 related to
Segment Expenses. Commission and brokerage decreased by 5.9% to $342.4 million in 2019 compared to $364.0 million in 2018. The decrease was mainly due to lower contingent commissions and changes in the mix of business. Segment other underwriting expenses increased slightly to $41.7 million in 2019 compared to $39.0 million in 2018.
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.
Premiums. Gross written premiums increased by 4.7% to $1,744.9 million in 2019 compared to $1,666.3 million in 2018, primarily due to increased Bermuda casualty and property business and business written through the U.K. Branch, partially offset by a negative impact of $28.6 million from the movement of foreign exchange rates. Net written premiums increased by 3.8% to $1,666.9 million in 2019 compared to $1,605.5 million in 2018, which is consistent with the change in gross written premiums. Premiums earned increased 16.6% to $1,544.2 million in 2019 compared to $1,324.2 million in 2018. 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.
Premiums. Gross written premiums increased by 23.4% to $2,777.5 million in 2019 compared to $2,250.6 million in 2018. This increase was related to most lines of business including casualty, energy, accident and health and premiums written through the Lloyd’s Syndicate. Net written premiums increased by 22.5% to $2,092.2 million in 2019 compared to $1,708.0 million in 2018, which is consistent with the change in gross written premiums. Premiums earned increased 16.7% to $1,912.4 million in 2019 compared to $1,638.6 million in 2018. 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 9.3% to $2,250.6 million in 2018 compared to $2,059.2 million in 2017. This increase was related to most lines of business including casualty, energy, accident and health and premiums written through the Lloyd’s Syndicate. Net written premiums increased by 4.7% to $1,708.0 million in 2018 compared to $1,630.6 million in 2017. The difference between the change in gross written premiums compared to the change in net written premiums was primarily due to varying utilization of reinsurance. Premiums earned increased 12.1% to $1,638.6 million in 2018 compared to $1,461.4 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.
Incurred losses and LAE increased by 17.1% to $1,247.7 million in 2019 compared to $1,065.8million in 2018, mainly due to an increase of $178.6 million in current year attritional losses, related to the impact of the increase in premiums earned and $35.8 million less of favorable development on prior years attritional losses. These impacts were partially offset by a decrease of $39.1 million in current year catastrophe losses. The current year catastrophe losses of $4.0 million in 2019 related primarily to Hurricane Dorian ($4.0 million). The $43.1 million of current year catastrophe losses in 2018 related primarily to Hurricane Michael ($24.0 million), Hurricane Florence ($9.5 million), the U.S. winter storms ($7.1 million), other 2018 California wildfires ($1.5 million) and Australia hailstorm ($1.0 million).
Segment Expenses. Commission and brokerage increased by 13.5% to $303.5 million in 2019 compared to $267.4 million in 2018. The increase in 2019 was mainly due to the impact of the increase in premiums earned. Segment other underwriting expenses increased to $280.1 million in 2019 compared to $228.7 million in 2018. 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.
companies because there are no consistently applied actuarial or accounting standards governing such presentations. Our recorded reserves reflect our best point estimate of our liabilities and our actuarial methodologies focus on developing such point estimates. We calculate the ranges subsequently, based on the historical variability of such reserves.
Premiums Written and Earned. Premiums written by us are earned ratably over the coverage periods of the related insurance and reinsurance contracts. We establish unearned premium reserves to cover the unexpired portion of each contract. Such reserves, for assumed reinsurance, are computed using pro rata methods based on statistical data received from ceding companies. Premiums earned, and the related costs, which have not yet been reported to us, are estimated and accrued. Because of the inherent lag in the reporting of written and
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 4.6% of the portfolio, that are either valued by brokers or investment advisors. In many 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, 2019 and 2018, our investment portfolio included $1,498.4 million and $1,427.8 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 $20,748.5 million at December 31, 2019, an increase of $2,315.4 million compared to $18,433.1 million at December 31, 2018. This increase was primarily the result of $1,852.0 million of cash flows from operations, $532.9 million of pre-tax unrealized depreciation, $168.1 million in fair value re-measurements, $108.3 million in equity adjustments of our limited partnership investments and $51.3 million due to fluctuations in foreign currencies, partially offset by $234.3 million paid out in dividends to shareholders, $26.2 million of unsettled securities, repurchases of 0.1 million common shares for $24.6 million and $20.9 million of other-than-temporary impairments.
For the portion needed to satisfy global outstanding liabilities, we generally invest in taxable and tax-preferenced fixed income securities with an average credit quality of A1. For the U.S. portion of this portfolio, our mix of taxable and tax-preferenced investments is adjusted periodically, consistent with our current and projected U.S. operating results, market conditions and our tax position. This global fixed maturity securities portfolio is externally managed by independent, professional investment managers using portfolio guidelines approved by internal management.
Reinsurance receivables for both paid and recoverable on unpaid losses totaled $1,763.5 million at December 31, 2019 and $1,787.6 million at December 31, 2018. At December 31, 2019, $682.8 million, or 38.7%, was receivable from Mt. Logan Re collateralized segregated accounts; $147.8 million, or 8.4%, was receivable from Munich Re and $95.5 million, or 5.4%, was receivable from Zurich. No other retrocessionaire accounted for more than 5% of our receivables.
Loss and LAE Reserves. Gross loss and LAE reserves totaled $13,611.3 million and $13,119.1 million at December 31, 2019 and 2018, respectively.
There can be no assurance that reserves for, and losses from, claim obligations will not increase in the future, possibly by a material amount. However, we believe that our existing reserves and reserving methodologies lessen the probability that any such increase would have a material adverse effect on our financial condition, results of operations or cash flows.
With respect to asbestos only, at December 31, 2019, we had net asbestos loss reserves of $222.9 million, or 97.5%, of total net A&E reserves, all of which was for assumed business.
In 2015, we sold Mt. McKinley to Clearwater Insurance Company. Concurrently with the closing, we entered into a retrocession treaty with an affiliate of Clearwater. Per the retrocession treaty, we retroceded 100% of the liabilities associated with certain Mt. McKinley policies, which had been reinsured by Bermuda Re. As consideration for entering into the retrocession treaty, Bermuda Re transferred cash of $140.3 million, an amount equal to the net loss reserves as of the closing date. Of the $140.3 million of net loss reserves retroceded, $100.5 million were related to A&E business. The maximum liability retroceded under the retrocession treaty will be $440.3 million, equal to the retrocession payment plus $300.0 million. We will retain liability for any amounts exceeding the maximum liability retroceded under the retrocession treaty.
On December 20, 2019, the retrocession treaty was amended and included a partial commutation. As a result of this amendment and partial commutation, gross A&E reserves and correspondingly reinsurance receivable were reduced by $43.4 million. In addition, the maximum liability permitted to be retroceded increased to $450.3 million.
Liquidity. Our liquidity requirements are generally met from positive cash flow from operations. Positive cash flow results from reinsurance and insurance premiums being collected prior to disbursements for claims, which disbursements generally take place over an extended period after the collection of premiums, sometimes a period of many years. Collected premiums are generally invested, prior to their use in such disbursements, and investment income provides additional funding for loss payments. Our net cash flows from operating activities were $1,852.0 million, $610.1 million and $1,162.7 million for the years ended December 31, 2019, 2018 and 2017, respectively. Additionally, these cash flows reflected net tax recoveries of $148.6 million and $65.1 million in for the years ended December 31, 2019 and 2018, respectively, and net tax payments of $53.7 million for the year ended December 31, 2017, as well as net catastrophe loss payments of $868.8 million, $1,125.9 million and $745.0 million for the years ended December 31, 2019, 2018 and 2017, respectively.
As the timing of payments for claims and benefits cannot be predicted with certainty, we maintain portfolios of long term invested assets with varying maturities, along with short-term investments that provide additional liquidity for payment of claims. At December 31, 2019 and December 31, 2018, we held cash and short-term investments of $1,222.7 million and $897.1 million, respectively. Our short-term investments are generally readily marketable and can be converted to cash. In addition to these cash and short-term investments, at December 31, 2019, we had $1,457.9 million of available for sale fixed maturity securities maturing within one year or less, $6,869.4 million maturing within one to five years and $4,551.5 million maturing after five years. Our $931.5 million of equity securities are comprised primarily of publicly traded securities that can be easily liquidated. We believe that these fixed maturity and equity securities, in conjunction with the short-term investments and positive cash flow from operations, provide ample sources of liquidity for the expected payment of losses in the near future. We do not anticipate selling a significant amount of securities or using available credit facilities to pay losses and LAE but have the ability to do so. Sales of securities might result in realized capital gains or losses. At December 31, 2019 we had $351.5 million of net pre-tax unrealized appreciation related to fixed maturity securities, comprised of $472.6 million of pre-tax unrealized appreciation and $121.2 million of pre-tax unrealized depreciation.
Management generally expects annual positive cash flow from operations, which reflects the strength of overall pricing. However, given the recent set of catastrophic events, cash flow from operations may decline and could become negative in the near term as significant claim payments are made related to the catastrophes. However, as indicated above, the Company has ample liquidity to settle its catastrophe claims.
The Group 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 $5,371.0 million plus 25% of consolidated net income for each of Group’s fiscal quarters, for which statements are available ending on or after March 31, 2016 and for which consolidated net income is positive, plus 25% of any increase in consolidated net worth during such period attributable to the issuance of ordinary and preferred shares, which at December 31, 2019, was $6,256.1 million. As of December 31, 2019, the Company was in compliance with all Group Credit Facility covenants.
At December 31, 2019 and 2018, the Company had no outstanding short-term borrowings from the Group Credit Facility revolving credit line. At December 31, 2019, the Group Credit Facility had $33.7 million outstanding letters of credit under tranche one and $589.7 million outstanding letters of credit under tranche two. At December 31, 2018, the Group Credit Facility had no outstanding letters of credit under tranche one and $558.8 million outstanding letters of credit under tranche two.
Effective November 7, 2019, Everest International renewed its credit facility with Lloyds Bank plc (“Everest International Credit Facility”). The current renewal of the Everest International Credit Facility provides up to £47.0 million for the issuance of standby letters of credit on a collateralized basis. The Company pays a commitment fee of 0.1% per annum on the average daily amount of the remainder of (1) the aggregate amount available under the facility and (2) the aggregate amount of drawings outstanding under the facility. The Company pays a credit commission fee of 0.35% per annum on drawings outstanding under the facility.
At December 31, 2019 and 2018, Everest International Credit Facility had £47.0 million and £26.0 outstanding letters of credit, respectively.
Costs incurred in connection with the Group Credit Facility and Everest International Credit Facility were $0.4 million for December 31, 2019 and 2018, respectively.
No single computer model or group of models is currently capable of projecting the amount and probability of loss in all global geographic regions in which we conduct business. In addition, the form, quality and granularity of underwriting exposure data furnished by (re)insureds is not uniformly compatible with the data requirements for our licensed models, which adds to the inherent imprecision in the potential loss projections. Further, the results from multiple models and analytical methods must be combined to estimate potential losses by and across business units. Also, while most models have been updated to incorporate claims information from recent catastrophic events, catastrophe model projections are still inherently imprecise. In addition, uncertainties with respect to future climatic patterns and cycles could add further uncertainty to loss projections from models based on historical data.
We believe that our greatest worldwide 1 in 100 year exposure to a single catastrophic event is to an earthquake affecting California, where we estimate we have a PML exposure, net of third party reinsurance, of $715.1 million. See also table under ITEM 1, “Business - Risk Management of Underwriting and Retrocession Arrangements”.
uninterrupted technology services for major systems outages with alternative secure data centers available in case of broader outages.
(1) Interest expense on long term notes is calculated at the variable floating rate of 4.3% as of December 31, 2019.
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 changes addressed by the Rule that are applicable to the Company are 1) elimination of the requirement to disclose dividend per share information on the face of the Statements of Operations and Comprehensive Income (Loss) and 2) 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. The Rule became effective for all financial reports filed after November 5, 2018 (30 days after its publication in the Federal Register), except for the additional requirement for the Statements of Changes in Shareholders’ Equity which can be implemented for first quarter 2019 reporting. The Company has adopted the portions of the Rule that became effective November 5, 2018. The portion of the Rule related to the new requirement for the Statements of Changes in Shareholders’ Equity was adopted by the Company in the first quarter of 2019.
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
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, 2018. The Company does not expect the adoption of ASU 2017-08 to have a material impact on its financial statements.
Disclosure of Restricted Cash. In November 2016, FASB issued ASU 2016-18 and in August 2016, FASB issued ASU 2016-15 which outline 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.
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.
The tables below display the potential impact of market value fluctuations and after-tax unrealized appreciation on our fixed maturity portfolio (including $414.7 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 estimates on mortgage-backed securities, changes in prepayment expectations under different interest rate environments were taken into account. For legal entities with a non-U.S. dollar functional currency, the effective duration of the involved portfolio of securities was used as a proxy for the market value change under the various interest rate change scenarios.
We had $13,611.3 million and $13,119.1 million of gross reserves for losses and LAE as of December 31, 2019 and 2018, respectively. These amounts are recorded at their nominal value, as opposed to present value, which would reflect a discount adjustment to reflect the time value of money. Since losses are paid out over a period of time, the present value of the reserves is less than the nominal value. As interest rates rise, the present value of the reserves decreases and, conversely, as interest rates decline, the present value increases. These movements are the opposite of the interest rate impacts on the fair value of investments. While the difference between present value and nominal value is not reflected in our financial statements, our financial results will include investment income over time from the investment portfolio until the claims are paid. Our loss and loss reserve obligations have an expected duration of approximately 3.1 years, which is reasonably consistent with our fixed income portfolio. If we were to discount our loss and LAE reserves, net of ceded reserves, the discount would be approximately $1.4 billion resulting in a discounted reserve balance of approximately $10.6 billion, representing approximately 61.5% of the value of the fixed maturity investment portfolio funds.