(1) Catastrophe losses are presented net of reinsurance and reinstatement premiums. Catastrophe insurance provides coverage for one event. When limits are exhausted, some contractual arrangements provide for the availability of additional coverage upon the payment of additional premium. This additional premium is referred to as reinstatement premium.
The pandemic has caused significant volatility in the global financial markets. Interest rates plummeted, credit spreads widened and the equity markets lost value. We saw our fixed maturity and equity portfolios decline in value resulting in realized and unrealized investment losses in our March 31, 2020 financial statements. However, the financial markets rebounded during the remaining quarters of 2020 and we recognized after-tax realized gains of $389.4 million and unrealized gains of $667.7 million in our financial statements for these three quarters. Nevertheless, the lack of business activity may lead to an increase in bankruptcies and corresponding credit losses.
Prior to the pandemic, there was a growing industry consensus that there was some firming of (re)insurance rates for the areas impacted by the recent catastrophes. The increased frequency of catastrophe losses in 2020 appears to be further pressuring the increase of rates. Rates also appear to be firming in some of the casualty lines of business, particularly in the casualty lines that had seen significant losses such as excess casualty and directors’ and officers’ liability. Other casualty lines are experiencing modest rate increase, while some lines such as workers’ compensation were experiencing softer market conditions. It is too early to tell what will be the impact on pricing conditions but it is likely to change depending on the line of business and geography.
Gross written premiums increased by 7.8% to $9,133.4 million in 2019, compared to $8,475.2 million in 2018, reflecting a $526.9 million, or 23.4%, increase in our insurance business and a $131.3 million, or 2.1%, increase in our reinsurance business. 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. The increase in reinsurance premiums was mainly due to increases in treaty casualty writings and mortgage business, partially offset by a decline in treaty property business, including lower reinstatement premiums, and a $55.5 million negative impact from the movement of foreign exchange rates. Net written premiums increased by 5.5% to $7,824.4 million in 2019, compared to $7,414.4 million in 2018. This change is consistent with the change in gross written premiums. Premiums earned increased by 6.8% to $7,403.7 million in 2019, compared to $6,931.7 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.
Net Realized Capital Gains (Losses). Net realized capital gains were $267.6 million and $185.0 million in 2020 and 2019, respectively, and net realized capital losses were $127.1 million in 2018. The net realized capital gains of $267.6 million in 2020 were comprised of $280.4 million of net gains from fair value re-measurements, partially offset by $11.1 million of net realized capital losses from sales of investments, and $1.7 million of net allowances for credit losses. The net realized capital gains of $185.0 million in 2019 were comprised of $167.0 million of net gains from fair value re-measurements and $38.9 million of net realized capital gains from sales of investments, partially offset by $20.9 million of other-than-temporary impairments. The net realized capital losses of $127.1 million in 2018 were comprised of $67.3 million of net losses from fair value re-measurements, $51.7 million of net realized capital losses from sales of investments and $8.1 million of other-than-temporary impairments.
contracts and changes in deferred gains related to any retroactive reinsurance transactions. We recognized foreign currency exchange expense of $7.3 million in 2020, foreign currency exchange expense of $13.4 million in 2019 and foreign currency exchange income of $2.4 million in 2018.
Other Underwriting Expenses. Other underwriting expenses were $511.2 million, $440.9 million and $371.5 million in 2020, 2019 and 2018, 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.
Our net income was $514.2 million, $1,009.5 million and $89.0 million in 2020, 2019 and 2018, respectively. The changes were primarily driven by the financial component fluctuations explained above.
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 114,633 common shares for $24.6 million and $7.1 million of net benefit plan obligation adjustments, net of tax.
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 re-evaluation is made.
Gross written premiums increased by 2.1% to $6,355.9 million in 2019 from $6,244.6 million in 2018, primarily due to increases in treaty casualty writings and mortgage business, partially offset by a decline in treaty property business, including lower reinstatement premiums, and a $55.5 million negative impact from the movement of foreign exchange rates. Net written premiums increased by 0.5% to $5,732.3 million in 2019 compared to $5,706.5 million in 2018 which is consistent with the change in gross written premiums. Premiums earned increased by 3.7% to $5,491.3 million in 2019, compared to $5,293.1 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.
of $236.9 million in current year attritional losses, mainly due to the impact of changes in the mix of business, primarily writing more treaty casualty. The current year catastrophe losses of $541.5 million in 2019 are outlined above. The $1,195.9 million of current year catastrophe losses in 2018 related primarily to Hurricane Michael ($438.0 million), Camp wildfire ($322.0 million), Woolsey wildfire ($154.0 million), Typhoon Jebi ($80.0 million), Hurricane Florence ($64.3 million), Cyclone Mekunu ($43.7 million), Typhoon Trami ($25.0 million), Australia hailstorm ($24.0 million), other 2018 California wildfires ($23.1 million) and Japan floods ($5.5 million).
Segment Expenses. Commission and brokerage expense increased by 10.9% to $1,552.4 million in 2020 compared to $1,400.2 million in 2019. 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 $175.7 million in 2020 from $160.8 million in 2019. The increase was mainly due to changes in the mix of business and the impact of the increase in premiums earned.
Commission and brokerage expense increased by 11.9% to $1,400.2 million in 2019 compared to $1,251.6 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 $160.8 million in 2019 from $142.9 million in 2018. The increases were mainly due to changes in the mix of business and the impact of the increase in premiums earned.
Premiums. Gross written premiums increased by 15.2% to $3,200.6 million in 2020 compared to $2,777.5 million in 2019. This rise was related to increases in specialty casualty business, property business and professional liability business. Net written premiums increased by 12.3% to $2,349.4 million in 2020 compared to $2,092.2 million in 2019. 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 15.8% to $2,215.4 million in 2019 compared to $1,912.4 million in 2019. 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 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.
Incurred losses and LAE increased by 29.6% to $1,617.4 million in 2020 compared to $1,247.7 million in 2019. The increase was mainly due to a rise of $281.5 million in current year attritional losses, primarily related to $104.0 million of losses from the COVID-19 pandemic and the impact of the increase in premiums earned, as well as an increase of $64.0 million in current year catastrophe losses. The current year catastrophe losses of $68.0 million in 2020 related to Hurricane Laura ($18.5 million), Hurricane Sally ($15.9 million), the 2020 U.S. Civil Unrest ($10.4 million), Hurricane Zeta ($8.0 million), the Nashville tornadoes ($5.5 million), the Derecho storms ($3.0 million), the Calgary storms in Canada ($2.5 million), Hurricane Isaias ($2.2 million) and Hurricane Delta ($2.0 million). The $4.0 million of current year catastrophe losses in 2019 related primarily to Hurricane Dorian ($4.0 million).
current year catastrophe losses of $4.0 million in 2019 are outlined above. 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 5.7% to $320.9 million in 2020 compared to $303.5 million in 2019. The increase in 2019 was mainly due to the impact of the increase in premiums earned. Segment other underwriting expenses increased to $335.5 million in 2020 compared to $280.1 million in 2019. 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.
Loss and LAE Reserves. Our most critical accounting policy is the determination of our loss and LAE reserves. We maintain reserves equal to our estimated ultimate liability for losses and LAE for reported and unreported claims for our insurance and reinsurance businesses. Because reserves are based on estimates of ultimate losses and LAE by underwriting or accident year, we use a variety of statistical and actuarial techniques to monitor reserve adequacy over time, evaluate new information as it becomes known and adjust reserves whenever an adjustment appears warranted. We consider many factors when setting reserves including: (1) our exposure base and projected ultimate premiums earned; (2) our expected loss ratios by product and class of business, which are developed collaboratively by underwriters and actuaries; (3) actuarial methodologies and assumptions which analyze our loss reporting and payment experience, reports from ceding companies and historical trends, such as reserving patterns, loss payments and product mix; (4) current legal interpretations of coverage and liability; and (5) economic conditions. Our insurance and reinsurance loss and LAE reserves represent management’s best estimate of our ultimate liability. Actual losses and LAE ultimately paid may deviate, perhaps substantially, from such reserves. Our net income (loss) will be impacted in a period in which the change in estimated ultimate losses and LAE is recorded. See also ITEM 8, “Financial Statements and Supplementary Data” - Note 1 of Notes to the Consolidated Financial Statements.
It is more difficult to accurately estimate loss reserves for reinsurance liabilities than for insurance liabilities. At December 31, 2020, we had reinsurance reserves of $12,034.2 million, of which $217.7 million were loss reserves for A&E liabilities, and insurance loss reserves of $4,364.8 million. A detailed discussion of additional considerations related to A&E exposures follows later in this section.
Given the inherent variability in our loss reserves, we have developed an estimated range of possible gross reserve levels. A table of ranges by segment, accompanied by commentary on potential and historical variability, is included in “Financial Condition - Loss and LAE Reserves”. The ranges are statistically developed using the exposure groups used in the reserve estimation process and aggregated to the segment level. For each exposure group, our actuaries calculate a range for each accident year based principally on two variables. The first is the historical changes in losses and LAE incurred but not reported (“IBNR”) for each accident year over time; the second is volatility of each accident year’s held reserves related to estimated ultimate losses, also
over time. Both are measured at various ages from the end of the accident year through the final payout of the year’s losses. Ranges are developed for the exposure groups using statistical methods to adjust for diversification; the ranges for the exposure groups are aggregated to the segment level, likewise, with an adjustment for diversification. Our estimates of our reserve variability may not be comparable to those of other 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.
annually. The probability of default factors are historical insurer and reinsurer defaults for liabilities with similar durations to the reinsured liabilities as estimated through multiple economic cycles. Credit ratings are forward-looking and consider a variety of economic outcomes. The Company's evaluation of the required allowance for reinsurance receivable considers the current economic environment as well as macroeconomic scenarios.
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 earned premiums by our ceding companies, we use standard accepted actuarial methodologies to estimate earned but not reported premium at each financial reporting date. These earned but not reported premiums are combined with reported earned premiums to comprise our total premiums earned for determination of our incurred losses and loss and LAE reserves. Commission expense and incurred losses related to the change in earned but not reported premium are included in current period company and segment financial results. See also ITEM 8, “Financial Statements and Supplementary Data” - Note 1 of Notes to the Consolidated Financial Statements.
At December 31, 2020, we had unrealized gains, net of tax, of $724.2 million compared to unrealized gains, net of tax, of $304.4 million at December 31, 2019. Gains and losses from market fluctuations for investments held at market value are reflected as comprehensive income (loss) in the consolidated balance sheets. Gains and losses from market fluctuations for investments held at fair value are reflected as net realized capital gains and
Cash and Invested Assets. Aggregate invested assets, including cash and short-term investments, were $25,461.6 million at December 31, 2020, an increase of $4,713.1 million compared to $20,748.5 million at December 31, 2019. This increase was primarily the result of $2,873.6 million of cash flows from operations, $979.4 million of proceeds from the issuance of senior notes, $465.2 million of pre-tax unrealized appreciation, $310.0 million of proceeds from Federal Home Loan Bank (“FHLB”) borrowings, $239.9 million in fair value re-measurements, $194.6 million of unsettled securities, $180.0 million due to fluctuations in foreign currencies and $103.8 million in equity adjustments of our limited partnership investments, partially offset by $249.1 million paid out in dividends to shareholders and repurchases of 1.0 million common shares for $200.0 million.
Reinsurance receivables for both paid and recoverable on unpaid losses totaled $1,994.6 million at December 31, 2020 and $1,763.5 million at December 31, 2019. At December 31, 2020, $699.7 million, or 35.1%, was receivable from Mt. Logan Re collateralized segregated accounts and $211.6 million, or 10.6%, was receivable from Munich Re. No other retrocessionaire accounted for more than 5% of our receivables.
(2) Although totals are displayed for both the low and high range amounts, it should be noted that statistically the range of the total is not equal to the sum of the ranges of the segments.
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
Shareholders’ Equity. Our shareholders’ equity increased to $9,726.2 million as of December 31, 2020 from $9,132.9 million as of December 31, 2019. This increase was the result of $514.2 million of net income, $419.7 million of unrealized appreciation on investments net of tax, $86.3 million of net foreign currency translation adjustments, $25.6 million of share-based compensation transactions and $0.7 million of net benefit plan obligation adjustments, net of tax, partially offset by $249.1 million of shareholder dividends, the repurchase of 970,892 common shares for $200.0 million and $4.2 million of cumulative adjustment from the adoption of ASU 2016-13.
Our shareholders’ equity increased to $9,132.9 million as of December 31, 2019 from $7,860.8 million as of December 31, 2018. This increase was the 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 114,633 common shares for $24.6 million and $7.1 million of net benefit plan obligation adjustments, net of tax.
Capital. Shareholders’ equity at December 31, 2020 and December 31, 2019 was $9,726.2 million and $9,132.9 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.
Our financial strength ratings as determined by A.M. Best, Standard & Poor’s and Moody’s are important as they provide our customers and investors with an independent assessment of our financial strength using a rating scale that provides for relative comparisons. We continue to possess significant financial flexibility and access to debt and equity markets as a result of our financial strength, as evidenced by the financial strength ratings as assigned by independent rating agencies. See also ITEM 1, Business - “Financial Strength Ratings”.
In 2020, we repurchased 970,892 shares for $200.0 million in the open market and paid $249.1 million in dividends to adjust our capital position and enhance long term expected returns to our shareholders. During 2019, we repurchased 114,633 shares for $24.6 million in the open market and paid $234.3 million in dividends. We may at times enter into a Rule 10b5-1 repurchase plan agreement to facilitate the repurchase of shares. On May 22, 2020, our existing Board authorization to purchase up to 30 million of our shares was amended to authorize the purchase of up to 32 million shares. As of December 31, 2020, we had repurchased 29.6 million shares under this authorization.
If disbursements for claims and benefits, policy acquisition costs and other operating expenses were to exceed premium inflows, cash flow from reinsurance and insurance operations would be negative. The effect on cash
flow from insurance operations would be partially offset by cash flow from investment income. Additionally, cash inflows from investment maturities and dispositions, both short-term investments and longer term maturities are available to supplement other operating cash flows.
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, 2020 and December 31, 2019, we held cash and short-term investments of $1,936.6 million and $1,222.7 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, 2020, we had $1,374.7 million of available for sale fixed maturity securities maturing within one year or less, $6,774.8 million maturing within one to five years and $6,061.7 million maturing after five years. Our $1,472.2 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, 2020 we had $816.9 million of net pre-tax unrealized appreciation related to fixed maturity securities, comprised of $941.7 million of pre-tax unrealized appreciation and $124.8 million of pre-tax unrealized depreciation.
Effective May 26, 2016, Group, Bermuda Re and Everest International entered into a five year, $800.0 million senior credit facility with a syndicate of lenders, which amended and restated in its entirety the June 22, 2012, four year, $800.0 million senior credit facility. Both the May 26, 2016 and June 22, 2012 senior credit facilities, which have similar terms, are referred to as the “Group Credit Facility”. Wells Fargo Corporation (“Wells Fargo Bank”) is the administrative agent for the Group Credit Facility, which consists of two tranches. Tranche one provides up to $200.0 million of unsecured revolving credit for liquidity and general corporate purposes, and for the issuance of unsecured standby letters of credit. The interest on the revolving loans shall, at the Company’s option, be either (1) the Base Rate (as defined below) or (2) an adjusted London Interbank Offered Rate (“LIBOR”) plus a margin. The Base Rate is the higher of (a) the prime commercial lending rate established by Wells Fargo Bank, (b) the Federal Funds Rate plus 0.5% per annum or (c) the one month LIBOR Rate plus 1.0% per annum. The amount of margin and the fees payable for the Group Credit Facility depends on Group’s senior unsecured debt rating. Tranche two exclusively provides up to $600.0 million for the issuance of standby letters of credit on a collateralized basis.
At December 31, 2020 and 2019, the Company had no outstanding short-term borrowings from the Group Credit Facility revolving credit line. At December 31, 2020, the Group Credit Facility had $164.2 million outstanding letters of credit under tranche one and $589.7 million outstanding letters of credit under tranche two. 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.
Effective May 12, 2020, Everest International amended its credit facility with Lloyds Bank plc (“Everest International Credit Facility”). The current amendment of the Everest International Credit Facility provides up to £52.2 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.
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 $6,393.0 million (70% of consolidated net worth as of December 31, 2019), plus 25% of consolidated net income for each of Group’s fiscal quarters, for which statements are available ending on or after January 1, 2020 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, 2020, was $6,528.0 million. As of December 31, 2020, the Company was in compliance with all Everest International Credit Facility requirements.
At December 31, 2020 and 2019, Everest International Credit Facility had £52.2 million and £47.0 outstanding letters of credit, respectively.
Costs incurred in connection with the Group Credit Facility and Everest International Credit Facility were $0.8 million and $0.4 million for December 31, 2020 and 2019, 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
Management estimates that the projected net economic loss from its largest 100-year event in a given zone represents approximately 6.7% of its December 31, 2020 shareholders’ equity. Economic loss is the PML exposure, net of third party reinsurance, reduced by estimated reinstatement premiums to renew coverage and estimated income taxes. The impact of income taxes on the PML depends on the distribution of the losses by corporate entity, which is also affected by inter-affiliate reinsurance. Management also monitors and controls its largest PMLs at multiple points along the loss distribution curve, such as loss amounts at the 20, 50, 100, 250, 500 and 1,000 year return periods. This process enables management to identify and control exposure accumulations and to integrate such exposures into enterprise risk, underwriting and capital management decisions.
We believe that our greatest worldwide 1 in 100 year exposure to a single catastrophic event is to a wind event affecting the Southeastern United States, where we estimate we have a PML exposure, net of third party reinsurance, of $925 million. See also table under ITEM 1, “Business - Risk Management of Underwriting and Retrocession Arrangements”.
If such a single catastrophe loss were to occur, management estimates that the economic loss to us would be approximately $648.0 million. The estimate involves multiple variables, including which Everest entity would experience the loss, and as a result there can be no assurance that this amount would not be exceeded.
We may purchase reinsurance to cover specific business written or the potential accumulation or aggregation of exposures across some or all of our operations. Reinsurance purchasing decisions consider both the potential coverage and market conditions including the pricing, terms, conditions, availability and collectability of
Information Technology. Everest’s information technology is a key component of its business operations. Information technology systems and services are hosted at public and private cloud service providers across multiple datacenters with processing performed at the office locations of our operating subsidiaries and branches. In addition, our mainframe processing is performed by a third-party vendor at a separate location. We have implemented security procedures, and regularly assess and enhance our security protocols, to ensure that our key business systems are protected, secured and backed up at off-site locations so that they can be restored promptly if necessary. We have business continuity plans and disaster recovery plans along with periodic testing of those plans to ensure we are capable of providing uninterrupted technology services in the event of major systems outages with alternative secure datacenters available in case of broader outages.
Our business operations depend on the proper functioning and availability of our information technology platform, which includes data processing and related electronic communications. We communicate electronically internally and externally with our brokers, program managers, clients, third-party vendors, regulators, and others. These communications and the data we handle may include personal, confidential or proprietary information. We ensure that all our systems, data and electronic transmissions are appropriately protected with the latest technology safeguards and meet regulatory standards.
(1) Interest expense on long term notes is calculated at the variable floating rate of 2.6% as of December 31, 2020.
(2) Loss and LAE reserves represent management’s best estimate of losses from claim and related settlement costs. Both the amounts and timing of such payments are estimates, and the inherent variability of resolving claims as well as changes in market conditions make the timing of cash flows uncertain. Therefore, the ultimate amount and timing of loss and LAE payments could differ from our estimates.
During 2020, 2019 and 2018, we declared and paid common shareholder dividends of $249.1 million, $234.3 million and $216.2 million, respectively. As an insurance holding company, we are partially dependent on dividends and other permitted payments from our subsidiaries to pay cash dividends to our shareholders. The payment of dividends to Group by Holdings Ireland and Everest Dublin Holdings is subject to Irish corporate and regulatory restrictions; the payment of dividends to Holdings Ireland by Holdings and to Holdings by Everest Re is subject to Delaware regulatory restrictions; and the payment of dividends to Group by Bermuda Re, Everest International or Mt. Logan Re is subject to Bermuda insurance regulatory restrictions. Management expects that, absent extraordinary catastrophe losses, such restrictions should not affect Everest Re’s ability to declare and pay dividends sufficient to support Holdings’ general corporate needs and that Holdings Ireland, Everest Dublin Holdings, Bermuda Re and Everest International will have the ability to declare and pay dividends sufficient to support Group’s general corporate needs. For the years ended December 31, 2020, 2019 and 2018, Everest Re paid dividends to Holdings of $0.0 million, $300.0 million and $0.0 million, respectively, and EGS paid dividends to Holdings of $0.0 million, $0.0 million and $90.0 million, respectively. For the years ended December 31, 2020, 2019 and 2018, Bermuda Re paid dividends to Group of $650.0 million, $600.0 million and $750.0 million, respectively; Everest International paid dividends to Group of $0.0 million, $0.0 million and $200.0 million, respectively; and Mt. Logan Re paid no dividends to Group. See ITEM 1, “Business - Regulatory Matters - Dividends” and ITEM 8, “Financial Statements and Supplementary Data” - Note 14 of Notes to Consolidated Financial Statements.
Accounting for Income Taxes. In December 2019, The Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, which provides simplification of existing guidance for income taxes, including the removal of certain exceptions related to recognition of deferred tax liabilities on foreign subsidiaries. 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 2019-12 on its financial statements.
Accounting for Cloud Computing Arrangement. In August 2018, 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 adopted the guidance as of January 1, 2020. The adoption of ASU 2018-15 did not have a material impact on the Company’s financial statements.
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.
Valuation of Financial Instruments. In June 2016, FASB issued ASU 2016-13 (and has subsequently issued related guidance and amendments in ASU 2019-11 and ASU 2019-10 in November 2019) which outline guidance on the valuation of and accounting for assets measured at amortized cost and available for sale debt securities. The new guidance requires the carrying value of assets measured at amortized cost, including reinsurance and premiums receivables to be presented as the net amount expected to be collected on the financial asset (amortized cost less an allowance for credit losses valuation account). The allowance reflects expected credit losses of the financial asset which considers available information using a combination both historical information, current market conditions and reasonable and supportable forecasts. For available-for-sale debt securities, the guidance modified the previous other than temporary impairment model, now requiring an allowance for estimated credit related losses rather than a permanent impairment, 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 adopted the guidance effective January 1, 2020, on a modified retrospective basis. The adoption resulted in a cumulative reduction of $4,214 thousand in retained earnings, net of tax, which is disclosed separately within the Consolidated Statements of Shareholders’ Equity.
Our current investment strategy seeks to maximize after-tax income through a high quality, diversified, fixed maturity portfolio, while maintaining an adequate level of liquidity. Our mix of investments is adjusted periodically, consistent with our current and projected operating results and market conditions. The fixed maturity securities in the investment portfolio are comprised of non-trading available for sale securities. Additionally, we have invested in equity securities.
Interest Rate Risk. Our $25.5 billion investment portfolio at December 31, 2020, is principally comprised of fixed maturity securities, which are generally subject to interest rate risk and some foreign currency exchange rate risk, and some equity securities, which are subject to price fluctuations and some foreign exchange rate risk. The overall economic impact of the foreign exchange risks on the investment portfolio is partially mitigated by changes in the dollar value of foreign currency denominated liabilities and their associated income statement impact.
Interest rate risk is the potential change in value of the fixed maturity securities portfolio, including short-term investments, from a change in market interest rates. In a declining interest rate environment, it includes prepayment risk on the $3,263.2 million of mortgage-backed securities in the $20,040.2 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.