PART I
Unless otherwise indicated, all financial data in this document have been prepared using accounting principles generally accepted in the United States of America (“GAAP”). As used in this document, “Group” means Everest Re Group, Ltd. (formerly; “Holdings Ireland” means Everest Reinsurance Group, Ltd.);Risk Holdings (Ireland), Limited; “Holdings” means Everest Reinsurance Holdings, Inc.; “Everest Re” means Everest Reinsurance Company and its subsidiaries (unless the context otherwise requires); and the “Company”, “we”, “us”, and “our” means Everest Re Group, Ltd. and its subsidiaries, except when referring to periods prior to February 24, 2000, when it means Holdings and its subsidiaries.
ITEM 1. Business
BUSINESS
The Company
Company.
Group, a Bermuda company, was established in 1999 as a wholly-owned subsidiary of Holdings. On February 24, 2000, a corporate restructuring was completed and Group became the new parent holding company of Holdings,Holdings. Holdings continues to be the holding company for the Company’s U.S. based operations. Holders of shares of common stock of Holdings automatically became holders of the same number of common shares of Group. Prior to the restructuring, Group had no significant assets or capitalization and had not engaged in any business or prior activities other than in connection with the restructuring.
In connection with the February 24, 2000 restructuring, Group established a Bermuda-based reinsurance subsidiary, Everest Reinsurance (Bermuda), Ltd. (“Bermuda Re”), which commenced business in the second half of 2000. Group also formed Everest Global Services, Inc., a Delaware subsidiary, to perform administrative and back-office functions for Group and its U.S. based and non-U.S. based subsidiaries.
On December 30, 2008, Group contributed Holdings to its recently established Irish holding company, Holdings Ireland. Holdings Ireland is a direct subsidiary of Group and was established to serve as a holding company for the U.S. and Irish reinsurance and insurance subsidiaries.
Holdings, a Delaware corporation, was established in 1993 to serve as the parent holding company of Everest Re, a Delaware property and casualty reinsurer formed in 1973. Until October 6, 1995, Holdings was an indirect wholly-owned subsidiary of The Prudential Insurance Company of America (“The Prudential”). On October 6, 1995, The Prudential sold its entire interest in the shares of common stock of Holdings in an initial public offering (the “IPO”).offering.
The Company’s principal business, conducted through its operating subsidiaries,segments, is the underwriting of reinsurance and insurance in the U.S., Bermuda and international markets. The Company had gross written premiums in 20062008 of $4.0$3.7 billion with approximately 78%79.0% representing reinsurance and 22%21.0% representing insurance, and shareholders’insurance. Shareholders’ equity at December 31, 2006 of $5.12008 was $5.0 billion. The Company underwrites reinsurance both through brokers and directly with ceding companies, giving it the flexibility to pursue business based on the ceding company’s preferred reinsurance purchasing method. The Company underwrites insurance principally through general agent relationships and surplus lines brokers. Group’s active operating subsidiaries, excluding Mt. McKinley Insurance Company (“Mt. McKinley”), which is in run-off, are each rated A+ (“Superior”) by A.M. Best Company (“A.M. Best”), a leading provider of insurer ratings that assigns financial strength ratings to insurance companies based on their ability to meet their obligations to policyholders.
Following is a summary of the Company’s principal operating subsidiaries:
Bermuda Re, a Bermuda insurance company and a direct subsidiary of Group, is registered in Bermuda as a Class 4 insurer and long-term insurer and is authorized to write property and casualty business and life and annuity business. Bermuda Re commenced business in the second half of 2000. On January 1, 2004 Bermuda Re purchased the UK branch of Everest Re. Bermuda Re’s UK branch provideswrites property and casualty reinsurance to the United Kingdom and European markets. At December 31, 2008, Bermuda Re had shareholders’ equity at December 31, 2006 of $2.1$2.3 billion.
1
Everest Re, a Delaware insurance company and a direct subsidiary of Holdings, is a licensed property and casualty insurer and/or reinsurer in all states (except Nevada and Wyoming), the District of Columbia and Puerto Rico and is authorized to conduct reinsurance business in Canada, Singapore and Singapore.Brazil. Everest Re underwrites property and casualty reinsurance for insurance and reinsurance companies in the U.S. and international markets. At December 31, 2008, Everest Re had statutory surplus at December 31, 2006 of $2.7$2.3 billion.
Everest National Insurance Company (“Everest National”), a Delaware insurance company and a direct subsidiary of Everest Re, is licensed in 47 states and the District of Columbia and is authorized to write property and casualty insurance on an admitted basis in the jurisdictions in which it is licensed. The majority of Everest National’s business is reinsured by its parent, Everest Re.
Everest Indemnity Insurance Company (“Everest Indemnity”), a Delaware insurance company and a direct subsidiary of Everest Re, writes excess and surplus lines insurance business in the U.S. on a non-admitted basis. Excess and surplus lines insurance is specialty property and liability coverage that an insurer not licensed to write insurance in a particular jurisdiction is permitted to provide to insureds when the specific specialty coverage is unavailable from admitted insurers. Everest Indemnity is licensed in Delaware and is eligible to write business on a non-admitted basis in 49all other states, the District of Columbia and Puerto Rico. The majority of Everest Indemnity’s business is reinsured by its parent, Everest Re.
Everest Security Insurance Company (“Everest Security”), formerly Southeastern Security Insurance Company, a Georgia insurance company and a direct subsidiary of Everest Re, was acquired in January 2000 and writes property and casualty insurance on an admitted basis in Georgia and Alabama. The majority of Everest Security’s business is reinsured by its parent, Everest Re.
Mt. McKinley, a Delaware insurance company and a direct subsidiary of Holdings, was acquired by Holdings in September 2000 from The Prudential. Mt. McKinley was formed by Everest Re in 1978 to write excess and surplus lines insurance business in the U.S. In 1985, Mt. McKinley ceased writing new and renewal insurance and commenced a run-off operation to service claims arising from its previously written business. In 1991, Mt. McKinley was distributed to its ultimate parent, The Prudential. Effective September 19, 2000, Mt. McKinley and Bermuda Re entered into a loss portfolio transfer reinsurance agreement, whereby Mt. McKinley transferred, for arm’s-length consideration, all of its net insurance exposures and reserves to Bermuda Re.
Reinsurance Industry Overview
Overview.
Reinsurance is an arrangement in which an insurance company, the reinsurer, agrees to indemnify another insurance or reinsurance company, the ceding company, against all or a portion of the insurance risks underwritten by the ceding company under one or more insurance contracts. Reinsurance can provide a ceding company with several benefits, including a reduction in its net liability on individual risks or classes of risks, catastrophe protection from large and/or multiple losses and/or a reduction in operating leverage as measured by the ratio of net premiums and assistance in maintaining acceptable financial ratios.reserves to capital. Reinsurance also provides a ceding company with additional underwriting capacity by permitting it to accept larger risks and write more business than would be possible without a concomitant increase in capital and surplus.acceptable relative to the ceding company’s financial resources. Reinsurance however, does not discharge the ceding company from its liability to policyholders.policyholders; rather, it reimburses the ceding company for covered losses.
2
There are two basic types of reinsurance arrangements: treaty and facultative reinsurance. In treatyfacultative. Treaty reinsurance obligates the ceding company is obligated to cede and the reinsurer is obligated to assume a specified portion of a type or category of risks insured by the ceding company. Treaty reinsurers do not separately evaluate each of the individual risks assumed under their treatiestreaties: instead, the reinsurer relies upon the pricing and consequently, after a review of the ceding company’s underwriting practices, are largely dependent on the original risk underwriting decisions made
by the ceding company. In facultative reinsurance, the ceding company cedes and the reinsurer assumes all or part of the risk under a single insurance contract. Facultative reinsurance is negotiated separately for each insurance contract that is reinsured. Facultative reinsurance, normally iswhen purchased by ceding companies, forusually is intended to cover individual risks not covered by their reinsurance treaties either for amounts in excessbecause of the dollar limits of their reinsurance treatiesinvolved or for unusual risks.because the risk is unusual.
Both treaty and facultative reinsurance can be written on either a pro rata basis or an excess of loss basis. Under pro rata reinsurance, the ceding company and the reinsurer share the premiums as well as the losses and expenses in an agreed proportion. Under excess of loss reinsurance, the reinsurer indemnifies the ceding company against all or a specified portion of losses and expenses in excess of a specified dollar amount, known as the ceding company’scompany's retention or reinsurer’sreinsurer's attachment point, generally subject to a negotiated reinsurance contract limit.
In pro rata reinsurance, the reinsurer generally pays the ceding company a ceding commission. The ceding commission generally is based on the ceding company’s cost of acquiring the business being reinsured (commissions, premium taxes, assessments and miscellaneous administrative expense)expense and may contain profit sharing provisions, whereby the ceding commission is adjusted based on loss experience). Premiums paid by the ceding company to a reinsurer for excess of loss reinsurance are not directly proportional to the premiums that the ceding company receives because the reinsurer does not assume a proportionate risk. There is usually no ceding commission on excess of loss reinsurance.
Reinsurers may purchase reinsurance to cover their own risk exposure. Reinsurance of a reinsurer’sreinsurer's business is called a retrocession. Reinsurance companies cede risks under retrocessional agreements to other reinsurers, known as retrocessionaires, for reasons similar to those that cause insurers to purchase reinsurance: to reduce net liability on individual or classes of risks, protect against catastrophic losses, stabilize financial ratios and obtain additional underwriting capacity.
Reinsurance can be written through intermediaries, generally professional reinsurance brokers, or directly with ceding companies. From a ceding company’scompany's perspective, both the broker and the direct distribution channels have advantages and disadvantages. A ceding company’scompany's decision to select one distribution channel over the other will be influenced by its perception of such advantages and disadvantages relative to the reinsurance coverage being placed.
Business Strategy
Strategy.
The Company’s business strategy is to sustain its leadership position within its targettargeted reinsurance and insurance markets, provide effective management throughout the property and casualty underwriting cycle and thereby achieve an attractive return for its shareholders. The Company’s underwriting strategies seek to capitalize on its i) financial strength and capacity;capacity, ii) global franchise;franchise, iii) stable and experienced management team;team, iv) diversified product and distribution offering;offerings, v) underwriting expertise and disciplined approach;approach, vi) efficient and low-cost operating structure and vii) prudenteffective enterprise risk management approach to catastrophe exposures and retrocessional costs.practices.
The Company offers treaty and facultative reinsurance and admitted and non-admitted insurance. The Company’s products include the full range of property and casualty reinsurance and insurance coverages, including marine, aviation, surety, errors and omissions liability (“E&O”), directors’ and officers’ liability (“D&O”), medical malpractice, other specialty lines, accident and health (“A&H”) and workers’ compensation.
3
The Company distributes its products through direct and broker reinsurance channels in U.S., Bermuda and international markets.
The Company’s underwriting strategy emphasizes underwriting profitability over premium volume. Key elements of this strategy include careful risk selection, appropriate pricing through strict underwriting discipline and adjustment of the Company’s business mix to respondin response to changing market conditions. The Company focuses on reinsuring companies that effectively manage the underwriting cycle through proper analysis and pricing of underlying risks and whose underwriting guidelines and performance are compatible with its objectives.
The Company’s underwriting strategy emphasizes flexibility and responsiveness to changing market conditions, such as increased demand or favorable pricing trends. The Company believes that its existing strengths, including its broad underwriting expertise, U.S., Bermuda and internationalglobal presence, strong financial ratings and substantial capital, facilitate adjustments to its mix of business geographically, by line of business and by type of coverage, allowing it to capitalize onparticipate in those market opportunities that provide the greatest potential for underwriting profitability. The Company’s insurance operations complement these strategies by providing access toaccessing business that is not available on a reinsurance basis. The Company carefully monitors its mix of business across all operations to avoid unacceptable geographic or other risk concentrations.
Marketing
Marketing.
The Company writes business on a worldwide basis for many different customers and for many lines of business, thereby obtaining a broad spread of risk. The Company is not substantially dependent on any single customer, small group of customers, line of business or geographic area. For the 20062008 calendar year, no single customer (ceding company or insured) generated more than 6.7%7.2% of the Company’s gross written premiums. The Company does not believebelieves that a reduction of business from any one customer would not have a material adverse effect on its future financial condition or results of operations.
Approximately 66.3%68%, 11.0%11% and 22.7%21% of the Company’s 20062008 gross written premiums were written in the broker reinsurance, direct reinsurance and insurance markets, respectively. The Company’s ability to write reinsurance both through brokers and directly with ceding companies gives it the flexibility to write business based on the ceding company’s preferred reinsurance purchasing method.
The broker reinsurance market consists of several substantial national and international brokers and a number of smaller specialized brokers. Brokers do not have the authority to bind the Company with respect to reinsurance agreements, nor does the Company commit in advance to accept any portion of a broker’s submitted business. Reinsurance business from any ceding company, whether new or renewal, is subject to acceptance by the Company. Brokerage fees are generally paid by reinsurers. The Company’s ten largest brokers accounted for an aggregate of approximately 58.7%62% of gross written premiums in 2006, with2008. The largest broker, Aon Benfield Re, accounts for approximately 21% of gross written premiums, as a result of the merger of the two largest brokers accountingcompanies in early 2008. In 2007, Aon Re Global, Inc. and Benfield Group Limited, individually, each accounted for approximately 17.2% (Marsh &10% of gross written premiums. In 2008, the second largest broker, Marsh and McLennan Companies, Inc.) and 14.2% (Willis Group, Ltd.), accounted for approximately 15% of gross written premiums. The Company does not believebelieves that a reduction of business assumed from any one broker would not have a materiallymaterial adverse effect on the Company.
The direct reinsurance market remains an important distribution channel for reinsurance business written by the Company. Direct placement of reinsurance enables the Company to access clients who prefer to place their reinsurance directly with reinsurers based upon the reinsurer’s in-depth understanding of the ceding company’s needs.
The Company’s insurance business is written principally through general agents and surplus lines brokers. In 2006, no2008, C.V. Starr & Company accounted for approximately 7% of the Company’s gross written premium. No other single general agent generated more than 5% of the Company’s gross written premiums. In June 2004, the Company received notification of termination with respect to its contract with American All-Risk Insurance Services, LLC, which accounted for approximately 7.8% of the Company’s 2004 gross written premiums.
4
Under the terms of the contract, the agency continued to produce business exclusively for the Company through October 15, 2004. The business produced under this relationship continued in force through the policy expiration dates or cancellation.
The Company continually evaluates each business relationship, including the underwriting expertise and experience brought to bear through the involved distribution channel, performs analyses to evaluate financial security, monitors performance and adjusts underwriting decisions accordingly.
Segment Information
Results.
The Company, through its subsidiaries, operates in five segments: U.S. Reinsurance, U.S. Insurance, Specialty Underwriting, International and Bermuda. The U.S. Reinsurance operation writes property and casualty reinsurance, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies within the U.S. The U.S. Insurance operation writes property and casualty insurance primarily through general agents and surplus lines brokers within the U.S. The Specialty Underwriting operation writes A&H, marine, aviation and surety business within the U.S. and worldwide through brokers and directly with ceding companies. The International operation writes non-U.S. property and casualty reinsurance through Everest Re’s branches in Canada and Singapore and offices in addition to foreign business written through Everest Re’s Miami and New Jersey offices.Jersey. The Bermuda operation provides reinsurance and insurance to worldwide property and casualty markets and reinsurance to life insurers through brokers and directly with ceding companies from its Bermuda office and property and casualty reinsurance to the United Kingdom and European markets through its UK branch.
These segments are managed in a carefully coordinated fashion with strong elements of central control with respect to pricing, risk management, control of aggregate exposures to catastrophe events,exposures, capital, investments and support operations. Management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting results.
Underwriting results include earned premium less losses and loss adjustment expenses (“LAE”) incurred, commission and brokerage expenses and other underwriting expenses andexpenses. Underwriting results are analyzedmeasured using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which, respectively, divide incurred losses, commissions and brokerage and other underwriting expenses by earned premium.premiums earned. The Company utilizes inter-affiliate reinsurance, butalthough such reinsurance generally does not materially impact segment results, as business is generally reported within the segment in which the business was first produced. For selected financial information regarding these segments, see ITEM 8, “Financial Statements and Supplementary Data” - Note 1820 of Notes to Consolidated Financial Statements.Statements and ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operation - Segment Results”.
Underwriting Operations
Operations.
The following five year table presents the distribution of the Company’s gross written premiums segmented by its segments: U.S. Reinsurance, U.S. Insurance, Specialty Underwriting, International and Bermuda operations.Bermuda. The premiums for each operationsegment are further split between property and casualty business and, for reinsurance business, between pro rata or excess of loss business:
5
| Gross Written Premiums by Segment | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross Written Premiums by Operation Years Ended December 31, | Years Ended December 31, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | (Dollars in millions) | 2006 | 2005 | 2004 | 2003 | 2002 | 2008 |
| 2007 |
| 2006 |
| 2005 |
| 2004 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| U.S. Reinsurance |
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| Property |
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| Pro Rata (1) | $ | 379.7 | 9.5 | % | $ | 414.0 | 10.1 | % | $ | 339.7 | 7.2 | % | $ | 357.8 | 7.8 | % | $ | 148.7 | 5.2 | % | $ 332.9 | 9.1% |
| $ 455.9 | 11.2% |
| $ 379.7 | 9.5% |
| $ 414.0 | 10.1% |
| $ 339.7 | 7.2% | |||||||||||||||||||||||||||||||||||||||
| Excess | 303.2 | 7.6 | % | 236.9 | 5.8 | % | 208.8 | 4.4 | % | 241.0 | 5.3 | % | 177.8 | 6.2 | % | 320.9 | 8.7% |
| 332.2 | 8.1% |
| 303.2 | 7.6% |
| 236.9 | 5.8% |
| 208.8 | 4.4% | ||||||||||||||||||||||||||||||||||||||||||||
| Casualty |
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| Pro Rata (1) | 446.7 | 11.2 | % | 529.4 | 12.9 | % | 702.8 | 14.9 | % | 625.7 | 13.7 | % | 219.2 | 7.7 | % | 67.4 | 1.8% |
| 216.5 | 5.3% |
| 446.7 | 11.2% |
| 529.4 | 12.9% |
| 702.8 | 14.9% | ||||||||||||||||||||||||||||||||||||||||||||
| Excess | 207.1 | 5.2 | % | 205.9 | 5.0 | % | 226.8 | 4.8 | % | 527.8 | 11.5 | % | 348.9 | 12.3 | % | 236.7 | 6.4% |
| 189.0 | 4.6% |
| 207.1 | 5.2% |
| 205.9 | 5.0% |
| 226.8 | 4.8% | ||||||||||||||||||||||||||||||||||||||||||||
| Total (2) | 1,336.7 | 33.4 | % | 1,386.2 | 33.8 | % | 1,478.1 | 31.4 | % | 1,752.3 | 38.3 | % | 894.6 | 31.4 | % | 957.9 | 26.0% |
| 1,193.5 | 29.3% |
| 1,336.7 | 33.4% |
| 1,386.2 | 33.8% |
| 1,478.1 | 31.4% | ||||||||||||||||||||||||||||||||||||||||||||
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| U.S. Insurance |
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| Property |
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| Pro Rata (1) | 40.6 | 1.0 | % | 196.9 | 4.8 | % | 159.0 | 3.4 | % | 42.9 | 0.9 | % | 6.5 | 0.2 | % | 29.8 | 0.8% |
| 85.6 | 2.1% |
| 40.6 | 1.0% |
| 196.9 | 4.8% |
| 159.0 | 3.4% | ||||||||||||||||||||||||||||||||||||||||||||
| Excess | - | 0.0 | % | - | 0.0 | % | - | 0.0 | % | - | 0.0 | % | - | 0.0 | % | - | 0.0% |
| - | 0.0% |
| - | 0.0% |
| - | 0.0% |
| - | 0.0% | ||||||||||||||||||||||||||||||||||||||||||||
| Casualty |
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| Pro Rata (1) | 825.7 | 20.6 | % | 735.6 | 17.9 | % | 1,008.8 | 21.4 | % | 1,026.6 | 22.5 | % | 815.0 | 28.6 | % | 742.0 | 20.2% |
| 800.0 | 19.6% |
| 825.7 | 20.6% |
| 735.6 | 17.9% |
| 1,008.8 | 21.4% | ||||||||||||||||||||||||||||||||||||||||||||
| Excess | - | 0.0 | % | - | 0.0 | % | - | 0.0 | % | - | 0.0 | % | - | 0.0 | % | - | 0.0% |
| - | 0.0% |
| - | 0.0% |
| - | 0.0% |
| - | 0.0% | ||||||||||||||||||||||||||||||||||||||||||||
| Total (2) | 866.3 | 21.7 | % | 932.5 | 22.7 | % | 1,167.8 | 24.8 | % | 1,069.5 | 23.4 | % | 821.5 | 28.9 | % | 771.8 | 21.0% |
| 885.6 | 21.7% |
| 866.3 | 21.7% |
| 932.5 | 22.7% |
| 1,167.8 | 24.8% | ||||||||||||||||||||||||||||||||||||||||||||
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| Specialty Underwriting | Specialty Underwriting |
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| Property |
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| Pro Rata (1) | 179.3 | 4.5 | % | 206.1 | 5.0 | % | 374.8 | 8.0 | % | 396.7 | 8.7 | % | 397.5 | 14.0 | % | 218.9 | 6.0% |
| 190.2 | 4.7% |
| 179.3 | 4.5% |
| 206.1 | 5.0% |
| 374.8 | 8.0% | ||||||||||||||||||||||||||||||||||||||||||||
| Excess | 37.5 | 0.9 | % | 65.2 | 1.6 | % | 65.4 | 1.4 | % | 64.3 | 1.4 | % | 43.8 | 1.5 | % | 29.7 | 0.8% |
| 51.1 | 1.3% |
| 37.5 | 0.9% |
| 65.2 | 1.6% |
| 65.4 | 1.4% | ||||||||||||||||||||||||||||||||||||||||||||
| Casualty |
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| Pro Rata (1) | 28.5 | 0.7 | % | 30.7 | 0.7 | % | 34.1 | 0.7 | % | 28.1 | 0.6 | % | 41.9 | 1.5 | % | 8.1 | 0.2% |
| 23.6 | 0.6% |
| 28.5 | 0.7% |
| 30.7 | 0.7% |
| 34.1 | 0.7% | ||||||||||||||||||||||||||||||||||||||||||||
| Excess | 5.9 | 0.1 | % | 12.6 | 0.3 | % | 12.8 | 0.3 | % | 13.8 | 0.3 | % | 5.3 | 0.2 | % | 3.7 | 0.1% |
| 5.1 | 0.1% |
| 5.9 | 0.1% |
| 12.6 | 0.3% |
| 12.8 | 0.3% | ||||||||||||||||||||||||||||||||||||||||||||
| Total (2) | 251.2 | 6.3 | % | 314.6 | 7.6 | % | 487.1 | 10.4 | % | 502.9 | 11.0 | % | 488.5 | 17.2 | % | 260.4 | 7.1% |
| 270.1 | 6.6% |
| 251.2 | 6.3% |
| 314.6 | 7.6% |
| 487.1 | 10.4% | ||||||||||||||||||||||||||||||||||||||||||||
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| Total U.S. |
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| Property |
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| Pro Rata (1) | 599.6 | 15.0 | % | 817.0 | 19.9 | % | 873.5 | 18.6 | % | 797.4 | 17.4 | % | 552.7 | 19.4 | % | 581.6 | 15.8% |
| 731.7 | 17.9% |
| 599.6 | 15.0% |
| 817.0 | 19.9% |
| 873.5 | 18.6% | ||||||||||||||||||||||||||||||||||||||||||||
| Excess | 340.7 | 8.5 | % | 302.1 | 7.4 | % | 274.2 | 5.8 | % | 305.3 | 6.7 | % | 221.6 | 7.8 | % | 350.6 | 9.5% |
| 383.3 | 9.4% |
| 340.7 | 8.5% |
| 302.1 | 7.4% |
| 274.2 | 5.8% | ||||||||||||||||||||||||||||||||||||||||||||
| Casualty |
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| Pro Rata (1) | 1,300.9 | 32.5 | % | 1,295.7 | 31.5 | % | 1,745.7 | 37.1 | % | 1,680.4 | 36.8 | % | 1,076.1 | 37.8 | % | 817.5 | 22.2% |
| 1,040.1 | 25.5% |
| 1,300.9 | 32.5% |
| 1,295.7 | 31.5% |
| 1,745.7 | 37.1% | ||||||||||||||||||||||||||||||||||||||||||||
| Excess | 213.0 | 5.3 | % | 218.5 | 5.3 | % | 239.6 | 5.1 | % | 541.6 | 11.8 | % | 354.2 | 12.4 | % | 240.3 | 6.5% |
| 194.1 | 4.8% |
| 213.0 | 5.3% |
| 218.5 | 5.3% |
| 239.6 | 5.1% | ||||||||||||||||||||||||||||||||||||||||||||
| Total (2) | 2,454.2 | 61.3 | % | 2,633.3 | 64.1 | % | 3,133.0 | 66.6 | % | 3,324.7 | 72.7 | % | 2,204.6 | 77.4 | % | 1,990.1 | 54.1% |
| 2,349.2 | 57.6% |
| 2,454.2 | 61.3% |
| 2,633.3 | 64.1% |
| 3,133.0 | 66.6% | ||||||||||||||||||||||||||||||||||||||||||||
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| International (4) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
International |
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| Property |
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| Pro Rata (1) | 415.4 | 10.4 | % | 421.4 | 10.3 | % | 426.0 | 9.1 | % | 328.5 | 7.2 | % | 229.4 | 8.1 | % | 535.3 | 14.6% |
| 451.6 | 11.1% |
| 415.4 | 10.4% |
| 421.4 | 10.3% |
| 426.0 | 9.1% | ||||||||||||||||||||||||||||||||||||||||||||
| Excess | 195.6 | 4.9 | % | 160.4 | 3.9 | % | 159.7 | 3.4 | % | 118.6 | 2.6 | % | 78.4 | 2.8 | % | 228.3 | 6.2% |
| 212.9 | 5.2% |
| 195.6 | 4.9% |
| 160.4 | 3.9% |
| 159.7 | 3.4% | ||||||||||||||||||||||||||||||||||||||||||||
| Casualty |
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| Pro Rata (1) | 53.9 | 1.3 | % | 66.4 | 1.6 | % | 51.2 | 1.1 | % | 31.3 | 0.7 | % | 30.6 | 1.1 | % | 71.6 | 1.9% |
| 68.3 | 1.7% |
| 53.9 | 1.3% |
| 66.4 | 1.6% |
| 51.2 | 1.1% | ||||||||||||||||||||||||||||||||||||||||||||
| Excess | 66.8 | 1.7 | % | 58.4 | 1.4 | % | 50.8 | 1.1 | % | 42.4 | 0.9 | % | 26.1 | 0.9 | % | 69.4 | 1.9% |
| 73.1 | 1.8% |
| 66.8 | 1.7% |
| 58.4 | 1.4% |
| 50.8 | 1.1% | ||||||||||||||||||||||||||||||||||||||||||||
| Total (2) | 731.7 | 18.3 | % | 706.6 | 17.2 | % | 687.7 | 14.6 | % | 520.8 | 11.4 | % | 364.5 | 12.8 | % | 904.7 | 24.6% |
| 805.9 | 19.8% |
| 731.7 | 18.3% |
| 706.6 | 17.2% |
| 687.7 | 14.6% | ||||||||||||||||||||||||||||||||||||||||||||
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| Bermuda Operations (4) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Bermuda |
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| Property |
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| Pro Rata (1) | 312.3 | 7.8 | % | 322.9 | 7.8 | % | 309.7 | 6.6 | % | 230.0 | 5.0 | % | 136.1 | 4.8 | % | 305.7 | 8.3% |
| 282.2 | 6.9% |
| 312.3 | 7.8% |
| 322.9 | 7.8% |
| 309.7 | 6.6% | ||||||||||||||||||||||||||||||||||||||||||||
| Excess | 174.3 | 4.4 | % | 151.8 | 3.7 | % | 232.5 | 4.9 | % | 239.5 | 5.2 | % | 80.5 | 2.8 | % | 164.2 | 4.5% |
| 201.6 | 4.9% |
| 174.3 | 4.4% |
| 151.8 | 3.7% |
| 232.5 | 4.9% | ||||||||||||||||||||||||||||||||||||||||||||
| Casualty |
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| Pro Rata (1) | 230.7 | 5.8 | % | 208.8 | 5.1 | % | 227.0 | 4.8 | % | 175.4 | 3.8 | % | 19.8 | 0.7 | % | 178.8 | 4.9% |
| 326.1 | 8.0% |
| 230.7 | 5.8% |
| 208.8 | 5.1% |
| 227.0 | 4.8% | ||||||||||||||||||||||||||||||||||||||||||||
| Excess | 97.7 | 2.4 | % | 85.2 | 2.1 | % | 114.2 | 2.4 | % | 83.3 | 1.8 | % | 41.0 | 1.4 | % | 134.7 | 3.7% |
| 112.5 | 2.8% |
| 97.7 | 2.4% |
| 85.2 | 2.1% |
| 114.2 | 2.4% | ||||||||||||||||||||||||||||||||||||||||||||
| Total (2) (3) | 815.0 | 20.4 | % | 768.7 | 18.7 | % | 883.4 | 18.8 | % | 728.2 | 15.9 | % | 277.4 | 9.7 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total Company | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Property | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pro Rata (1) | 1,327.3 | 33.2 | % | 1,561.3 | 38.0 | % | 1,609.2 | 34.2 | % | 1,355.9 | 29.6 | % | 918.2 | 32.3 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Excess | 710.6 | 17.8 | % | 614.3 | 15.0 | % | 666.4 | 14.2 | % | 663.4 | 14.5 | % | 380.5 | 13.4 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Casualty | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Pro Rata (1) | 1,585.5 | 39.6 | % | 1,570.9 | 38.2 | % | 2,023.9 | 43.0 | % | 1,887.2 | 41.3 | % | 1,126.5 | 39.6 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Excess | 377.5 | 9.4 | % | 362.1 | 8.8 | % | 404.6 | 8.6 | % | 667.3 | 14.6 | % | 421.3 | 14.8 | % | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total (2) | $ | 4,000.9 | 100.0 | % | $ | 4,108.6 | 100.0 | % | $ | 4,704.1 | 100.0 | % | $ | 4,573.8 | 100.0 | % | $ | 2,846.5 | 100.0 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| ______________ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total (2) | 783.4 | 21.4% |
| 922.5 | 22.7% |
| 815.0 | 20.4% |
| 768.7 | 18.7% |
| 883.4 | 18.8% |
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Total Company |
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Property |
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Pro Rata (1) | 1,422.6 | 38.7% |
| 1,465.6 | 35.9% |
| 1,327.3 | 33.2% |
| 1,561.3 | 38.0% |
| 1,609.2 | 34.2% |
Excess | 743.2 | 20.2% |
| 797.8 | 19.6% |
| 710.6 | 17.8% |
| 614.3 | 15.0% |
| 666.4 | 14.2% |
Casualty |
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Pro Rata (1) | 1,067.9 | 29.0% |
| 1,434.5 | 35.2% |
| 1,585.5 | 39.6% |
| 1,570.9 | 38.2% |
| 2,023.9 | 43.0% |
Excess | 444.4 | 12.1% |
| 379.7 | 9.3% |
| 377.5 | 9.4% |
| 362.1 | 8.8% |
| 404.6 | 8.6% |
Total (2) | $3,678.1 | 100.0% |
| $4,077.6 | 100.0% |
| $4,000.9 | 100.0% |
| $4,108.6 | 100.0% |
| $4,704.1 | 100.0% |
___________ |
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(1) For purposes of the presentation above, pro rata includes all insurance and reinsurance attaching to the first dollar of loss incurred by the ceding company. |
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(2) Certain totals and subtotals may not reconcile due to rounding. |
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(1) For purposes of the presentation above, pro rata includes reinsurance attaching to the first dollar of loss incurred by the ceding company and insurance.(2) Certain totals and subtotals may not reconcile due to rounding.(3) Includes immaterial amounts of life and annuity premium.(4) International and Bermuda operations for 2003 and 2002 have been restated in accordance with FAS 131 due to the sale of the UK branch.
6
U.S. Reinsurance Operation.Segment.The Company’s U.S. Reinsurance operationsegment writes property and casualty reinsurance, both treaty and facultative, through reinsurance brokers as well as directly with ceding companies within the U.S. The Company targets certain brokers and, through the broker market, specialty companies and small to medium sized standard lines companies. The Company also targets companies that place their business predominantly in the direct market, including small to medium sized regional ceding companies, and seeks to develop long-term relationships with those companies. In addition, the U.S. Reinsurance operationsegment writes portions of reinsurance programs for large, national insurance companies.
In 2006, $587.42008, $609.3 million of gross written premiums were attributable to U.S. treaty property business, of which 35.4%54.6% was written on a pro rata basis and 45.4% was written on an excess of loss basis and 64.6% was written on a pro rata basis. The Company’s property underwriters utilize sophisticated underwriting methods to analyze and price property business. The Company manages its exposures to catastrophe and other large losses by limiting exposures on individual contracts and limiting aggregate exposures to catastrophes in any particular zone and across contiguous zones.
U.S. treaty casualty business accounted for $533.5$261.2 million of gross written premiums in 2006,2008, of which 22.1%25.8% was written on a pro rata basis and 74.2% was written on an excess of loss basis and 77.9% was written on a pro rata basis. The treaty casualty business consists of professional liability, D&O liability, workers’ compensation, excess and surplus lines and other liability coverages. As a result of the complex technical nature of most of these risks, the Company’s casualty underwriters tend to specialize by line of business and work closely with the Company’s pricing actuaries.
The Company’s facultative unit conducts business both through brokers and directly with ceding companies, and consists of four underwriting units representing property, casualty, specialty and national brokerage lines of business. Business is written from a facultative headquarters office in New York and satellite offices in Chicago and Oakland. In 2006, $70.62008, $33.2 million, $107.1$40.1 million, $13.2$2.7 million and $24.9$11.3 million of gross written premiums were attributable to the property, casualty, specialty and national brokerage lines of business, respectively.
In 2006, 87.8%2008, 92.3%, 9.1%6.0% and 3.1%1.7% of the U.S. Reinsurance operation’ssegment’s gross written premiums were written in the broker reinsurance, direct reinsurance and insurance markets, respectively.
U.S. Insurance Operation.Segment.In 2006,2008, the Company’s U.S. Insurance operationsegment wrote $866.3$771.8 million of gross written premiums, of which 95.3%96.1% was casualty predominantly workers’ compensation insurance and 4.7%3.9% was property. Of the total business written, Everest National wrote $587.5$601.1 million and Everest Re wrote $13.9$28.0 million, principally targeting commercial property and casualty business written through general agents with program administrators. Workers’ compensation business accounted for $302.6$196.7 million, or 34.9%25.5% of the total business written, including $170.0$126.0 million, or 56.2%64.1%, of California workers’ compensation business. Non-workers’ compensation business represented $563.7 million, or 65.1% of the total business written.written in California. Everest Indemnity wrote $239.0$121.4 million, principally excess and surplus lines insurance business written through surplus lines brokers. Everest Security wrote $25.9$21.4 million, principally non-standard auto insurance written through retail agents. With respect to insurance written through general agents and surplus lines brokers, the Company supplements the initial underwriting process with periodic claims, underwriting and operational reviews and ongoing monitoring.
Specialty Underwriting Operation.Segment.The Company’s Specialty Underwriting operationsegment writes A&H, marine, aviation and surety reinsurance. The A&H unit primarily focuses on health reinsurance of traditional indemnity plans, self-insured health plans, accident coverages and specialty medical plans. The marine and aviation unit focuses on ceding companies with a particular expertise in marine and aviation business. The marine and aviation business is written primarily through brokers and contains a significant international component written primarily inthrough the London market. Surety business underwritten by the Company consists mainly of reinsurance of contract surety bonds.
7
GrossIn 2008, gross written premiums of the A&H unit in 2006 totaled $83.3$80.2 million, mostlyprimarily written through brokers.
Gross written premiums of the
The marine and aviation unit in 2006unit’s 2008 gross written premiums totaled $97.4$131.5 million, substantially all of which was written on a treaty basis and sourced through reinsurance brokers. Marine treaties represented 64.6% ofOf the marine and aviation gross written premiums in 20062008, marine treaties represented 91.0% and consisted mainly of hull and energycargo coverage. Approximately 43.4%78.7% of the marine unitunit’s premiums in 20062008 were written on a pro rata basis and 56.6% as21.3% on an excess of loss. Aviation premiums accounted for 35.4% ofloss basis. Of the marine and aviation gross written premiums in 20062008, aviation premiums accounted for 9.0% and included reinsurance for airlinesof airline and general aviation.aviation risks. Approximately 82.9%68.9% of the aviation unit’sunit's premiums in 20062008 was written on a pro rata basis and 17.1% as31.1% on an excess of loss.loss basis.
In 2006,2008, gross written premiums of the surety unit totaled $70.5$48.8 million, 99.8%100% of which werewas written on a pro rata basis. Most of the portfolio is reinsurance of contract surety bonds written directly with ceding companies, with the remainder being trade credit reinsurance, mostly in international markets.
International Operation.Segment.The Company’s International operationsegment focuses on opportunities in the international reinsurance markets. The Company targets several international markets, including: Canada, with a branch in Toronto; Asia, with a branch in Singapore; and Latin America, Africa and the Middle East, which business is serviced from Everest Re’s Miami and New Jersey offices. The Company also writes from New Jersey “home-foreign” business, which provides reinsurance on the international portfolios of U.S. insurers. Approximately 83.5% ofOf the Company’s 20062008 international gross written premiums, 84.4% represented property business, while 16.5%15.6% represented casualty business. As with its U.S. operations, the Company’s International operationsegment focuses on financially sound companies that have strong management and underwriting discipline and expertise. Approximately 71.9% ofOf the Company’s international business, 71.9% was written through brokers, with 28.1% written directly with ceding companies.
Gross written premiums of the Company’s Canadian branch totaled $152.1$138.2 million in 20062008 and consisted of 31.3% of pro rata property (29.0%),business, 29.1% of excess property (24.4%),business, 7.7% of pro rata casualty (15.4%)business and 31.9% of excess casualty (31.2%). Approximately 74.5% ofbusiness. Of the Canadian gross written premiums, 74.5% consisted of treaty reinsurance, while 25.5% was facultative reinsurance.
The Company’s Singapore branch covers the Asian markets and accounted for $143.0$189.6 million of gross written premiums in 2006. This business2008 and consisted of 60.7% of pro rata property (53.6%),business, 33.9% of excess property (40.8%),business, 3.3% of pro rata casualty (3.6%)business and 2.1% of excess casualty (2.0%).business.
International business written out of Everest Re’s Miami and New Jersey offices accounted for $435.7$576.7 million of gross written premiums in 20062008 and consisted of 65.3% of pro rata treaty property (67.6%),business, 9.5% of pro rata treaty casualty (5.8%),business, 16.4% of excess treaty property (15.6%),business, 3.5% of excess treaty casualty (3.5%)business and 5.3% of facultative property and casualty (7.5%).business. Of this international business, 59.8%58.2% was sourced from Latin America, 21.7%25.4% was sourced from the Middle East, 8.5%8.0% was sourced from Africa 8.3%and 7.4% was “home-foreign” business, 1.5% was sourced from Asia and 0.2% was sourced from Europe.home-foreign business.
Bermuda Operation.Segment.The Company’s Bermuda operationsegment writes property and casualty insurance and reinsurance through Bermuda Re and property and casualty reinsurance through its UK branch. In 2006, the2008, Bermuda operationRe had gross property and casualty written premiums of $267.5$257.7 million, accounting for virtually all of its business, of which $47.6 million or 17.8% was facultative reinsurance or individual risk insurance and $218.6 million or 81.7% was treaty reinsurance.
In 2006,2008, the UK branch of Bermuda Re wrote $547.5$525.7 million of gross treaty reinsurance premium consisting of 41.7% of pro rata property (44.1%),business, 19.3% of excess property (18.8%),business, 19.5% of pro rata casualty (23.6%)business and 19.5% of excess casualty (13.5%).business.
8
Geographic Areas
Areas.The Company conducts its business in Bermuda, the U.S. and a number of foreign countries. For select financial information about geographic areas, see ITEM 8, “Financial Statements and Supplementary Data” - Note 1820 of Notes to the Consolidated Financial Statements. Risks attendant to the foreign operations of the Company parallel those attendant to the U.S. operations of the Company, with the primary exception of foreign exchange risks. For more information about the risks, see ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Safe Harbor Disclosure”.
UnderwritingTheUnderwriting.
One of the Company’s ability to write both property and casualty risks allows it to underwrite entire contracts or major portions thereof that might otherwise need to be syndicated among several reinsurers. The Company’s strategystrategies is to “lead” in"lead" as many of the reinsurance treaties it underwrites as possible. The Company leads on approximately two-thirds of its treaty reinsurance business as measured by premium. The lead reinsurer on a treaty generally accepts one of the largest percentage shares of the treaty and is in the strongest position to negotiate price, terms and conditions. Management believes this strategy enables it to obtain more favorable terms and conditions on the treaties on which it participates. When the Company does not lead the treaty, it may still suggest changes to any aspect of the treaty. The Company may decline to participate on a treaty based upon its assessment of all relevant factors.
The Company’s treaty underwriting process emphasizesinvolves a team approach among the Company’s underwriters, actuaries and claim staff. Treaties are reviewed for compliance with the Company’s general underwriting standards and certainmost larger treaties are evaluated, in part, based uponsubjected to detailed actuarial analyses by the Company.analysis. The actuarial models used in such analyses are tailored in each case to the subject exposures and loss experience. The Company does not separately evaluate each of the individual risks assumed under its treaties. The Company does, however, evaluate the underwriting guidelines of its ceding companies to determine their adequacy prior to entering into a treaty. The Company when appropriate,may also conductsconduct underwriting, operational and claim audits at the offices of ceding companies to monitor adherence to underwriting guidelines. Underwriting audits focus on the quality of the underwriting staff, pricing and risk selection and rate monitoring over time. Claim audits when appropriate, aremay be performed in order to evaluate the client’s claims handling abilities and practices.
The Company’s facultative underwriters operate within guidelines specifying acceptable types of risks, limits and maximum risk exposures. Specified classes of large premium U.S. risks are referred to Everest Re’s New York facultative headquarters for specific review before premium quotations are given to clients. In addition, the Company’s guidelines require certain types of risks to be submitted for review because of their aggregate limits, complexity or volatility, regardless of premium amount on the underlying contract. Non-U.S. risks exhibiting similar characteristics are reviewed by senior managers within the involved operations.
The Company’s insurance operations principally write casualty coverages for homogeneous risks through select program managers. These programs are evaluated based upon actuarial analysis and the program manager’s capabilities. The Company’s rates, forms and underwriting guidelines are tailored to specific risk types. The Company’s underwriting, actuarial, claim and financial functions work closely with its program managers to establish appropriate underwriting and processing guidelines as well as appropriate performance monitoring mechanisms.
Risk Management of Underwriting and Retrocession Arrangements
Underwriting Risk and Accumulation Controls.Each segment and business unit manages its underwriting risk in accordance with established guidelines. These guidelines place dollar limits on the amount of business that can be written based on a variety of factors, including ceding company profile, line of business, geographic location and risk hazards. In each case, the guidelines permit limited exceptions, which must be authorized by the Company’s senior management. Management regularly reviews and revises these guidelines in response to
9
changes in business unit market conditions, risk versus reward analyses and the Company’s enterprise and underwriting risk management processes.
The operating results and financial condition of the Company can be adversely affected by catastrophe and other large losses. The Company manages its exposure to catastrophes and other large losses by:
selective underwriting practices;
diversifying its risk portfolio by geographic area and by types and classes of business;
limiting its aggregate catastrophe loss exposure in any particular geographic zone and contiguous zones;
purchasing reinsurance and/or retrocessional protection to the extent that such coverage can be secured cost-effectively. See "Retrocession Arrangements"“Retrocession Arrangements”.
Like other insurance and reinsurance companies, the Company is exposed to multiple insured losses arising out of a single occurrence, whether a natural event, such as a hurricane or an earthquake, or other catastrophe, such as an explosion at a major factory. A large catastrophic event can be expected to generate insured losses to multiple reinsurance treaties, facultative certificates and across lines of business.
The Company focuses on potential portfolio losses that could result from any single event or series of events as part of its evaluation and monitoring of its aggregate exposures to catastrophic events. Accordingly, the Company employs various techniques to estimate the amount of loss it could sustain from any single catastrophic event in various geographic areas. These techniques range from non-modeled deterministic approaches—approaches, such as tracking aggregate limits exposed in catastrophe-prone zones and applying historic damage factors—factors, to modeled approaches that attempt to scientifically measure catastrophe risksloss exposure using sophisticated Monte Carlo simulation techniques that forecast frequency and severity of expected losses on a probabilistic basis.
No single universalcomputer model or group of models is currently capable of projecting the amount and probability of loss in all global geographic regions in which the Company conducts business. In addition, the form, quality and granularity of underwriting exposure data furnished by ceding companies is not uniformly compatible with the data requirements for the Company’s licensed models, which adds to the inherent imprecision in the potential loss projections. Further, the results from multiple models and analytical methods must be combined and interpolated to estimate potential losses by and across business units. The combination of techniques potentially adds to the imprecision of the Company’s estimates. Also, while most models have been updated in 2006 to better incorporate factors that contributed to unprecedented industry storm losses in 2004 and 2005, such as flood, storm surge and demand surge, catastrophe model projections are inherently imprecise. In addition, uncertainties with respect to future climatic patterns and cycles add to the already significant uncertainty of loss projections from models using historic long-termlong term frequency and severity data.
Nevertheless, when combined with traditional risk management techniques and sound underwriting judgment, catastrophe models are a useful tool for underwriters to price catastrophe exposed risks and for providing management with quantitative analyses with which to monitor and manage catastrophic risk exposures by zone and across zones for individual and multiple events.
Projected catastrophe losses are generally summarized in terms of the probable maximum loss (“PML”). The Company defines PML as its anticipated loss, taking into account contract terms and limits, caused by a single catastrophe affecting a broad contiguous geographic area, such as that caused by a hurricane or earthquake. The PML will vary depending upon the severity of 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
10
“250-year “250-year events”. For example, a 100-year PML corresponds tois the estimated loss from a single event which has a 1% probability of being exceeded in a twelve month period. Conversely, 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.
From aan enterprise risk management perspective, management sets limits on the levels of catastrophe loss exposure the Company endeavorsmay underwrite. The limits are revised periodically based on a variety of factors, including but not limited to manage its catastrophe risk profile suchthe Company’s financial resources and expected earnings and risk/reward analyses of the business being underwritten.
Management estimated that the projected economic loss from its largest 100-year event does not exceed approximately $500 million.10% of its projected 2009 shareholders’ equity. Economic loss is viewed as the gross PML loss reduced by estimated reinstatement premiums to renew coverage and 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 processes.decisions.
The Company’s catastrophe loss projections, segmented by risk zones, are updated quarterly and reviewed as part of a formal risk management review process. The table below reflects the Company’s pre-tax PMLs at various return times for its top three zones/perils (as ranked by the largest 1 in 100 year events) based on loss projection data as of January 1, 2007:2009:
| (Dollars in millions) | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Return Periods (in years) | 1 in 20 | 1 in 50 | 1 in 100 | 1 in 250 | 1 in 500 | 1 in 1,000 | ||||||||||||||
| Exceeding Probability | 5.0% | 2.0% | 1.0% | 0.4% | 0.2% | 0.1% | ||||||||||||||
| Zone/Area, Peril | ||||||||||||||||||||
| Southeast U.S., Wind | $ | 368 | $ | 575 | $ | 777 | $ | 1,045 | $ | 1,227 | $ | 1,296 | ||||||||
| Europe, Wind | 288 | 539 | 702 | 809 | 915 | 952 | ||||||||||||||
| California, Earthquake | 235 | 410 | 532 | 686 | 872 | 1,045 | ||||||||||||||
Return Periods (in years) |
| 1 in 20 | 1 in 50 | 1 in 100 | 1 in 250 | 1 in 500 | 1 in 1,000 |
Exceeding Probability |
| 5.0% | 2.0% | 1.0% | 0.4% | 0.2% | 0.1% |
(Dollars in millions) |
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Zone/Area, Peril |
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Southeast U.S., Wind |
| $ 303 | $ 625 | $ 845 | $ 1,067 | $ 1,211 | $ 1,397 |
Europe, Wind |
| 156 | 397 | 561 | 681 | 755 | 820 |
Japan, Earthquake |
| 44 | 198 | 477 | 660 | 739 | 871 |
The projected economic losses for the top three zones/perils scheduled above PML table is both gross and net of retrocessional coverage. are as follows:
Return Periods (in years) |
|
| 1 in 100 | 1 in 250 | 1 in 500 | 1 in 1,000 |
Exceeding Probability |
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| 1.0% | 0.4% | 0.2% | 0.1% |
(Dollars in millions) |
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Zone/Area, Peril |
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Southeast U.S., Wind |
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| $ 534 | $ 679 | $ 772 | $ 893 |
Europe, Wind |
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| 390 | 478 | 532 | 577 |
Japan, Earthquake |
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| 349 | 465 | 515 | 599 |
While the Company considers purchasing corporate level retrocessional protection by evaluating the underlying exposures in comparison to the availability of cost-effective protection, there was no such retrocessional coverage in place at January 1, 2007.2009. The Company continues to evaluate the availability and cost of various retrocessional products and lessloss mitigation approaches in the marketplace.
The projected economic losses for the three highest 1 in 100 PML losses in the above table are as follows: for the Southeast U.S. wind storm, $471 million; for the European windstorm, $462 million and for California earthquake, $350 million. The projection for the Southeast windstorm does not consider any impacts from the recently enacted Florida insurance reform that increases insurers’ access to the Florida Hurricane Catastrophe Fund, thus potentially reducing the amount of reinsurance purchased from the private reinsurance markets. The Company is unable to predict if this will reduce future reinsurance coverage in Florida and correspondingly reduce the PML for a Southeast windstorm.
The Company believes that its methods of monitoring, analyzing and managing catastrophe exposures provide a credible risk management framework, which can be integrated with its enterprise risk management, underwriting business and capital management activities.plans. However, there is much uncertainty and imprecision inherent in the catastrophe models risk management framework and underlying exposures.the catastrophe loss estimation process generally. As a result, there can be no assurance that the Company will not experience losses from individual events that exceed the PML or other return period projections, perhaps by a material amount. Nor can there be assurance that the Company will not experience events
11
impacting multiple zones, or multiple severe events that could, in the aggregate, exceed the Company’s PML expectations by a significant amount.
Terrorism Risk.The Company does not have significant exposure to losses from terrorism risk. While the Company writes some reinsurance contracts covering terrorists’ events of terrorism, the Company’s risk management philosophy is to limit the amount of coverage provided and specifically not provide terrorism coverage for properties or in areas that may be considered a target for terrorists. Although providing terrorism coverage on reinsurance contracts is negotiable, most insurance policies mandate inclusion of terrorism coverage. As a result, the Company is exposed to losses from terrorism on its U.S. insurance book of business, particularly its workers’ compensation policies; however,policies. However, the Company generally does not insure the large corporations or corporate locations that would result in arepresent large concentrationconcentrations of risk.
As a result of its limited exposure, the Company does not believe the U.S. Terrorism Risk Insurance Act of 2002 that was signed into law November 2002 and amended in December 2005 and December 2007 has had or will have a significant impact on its operations.
Retrocession Arrangements. The Company considers retrocessional agreements to reduce its exposure on specific business written and potential accumulations of exposures across some or all of the Company’s operations. Where reinsurance is purchased, the agreements provide for recovery of a portion of losses and loss adjustment expenses from retrocessionaires. The level of retrocessional coverage varies over time, reflecting the underwriter’s and/or Company’s view of the changing dynamics of both the underlying exposure and the reinsurance markets. All retrocessional purchasing decisions consider both the potential coverage and market conditions with respect to the pricing, terms, conditions and availability of such coverage, with the aim of securing cost-effective protection. No assurance can be given that the Company will seek or be able to obtain retrocessional coverage in the future similar to that in place currently or in the past.
The Company does not typically purchase significant retrocessional coverage for specific reinsurance business written, but it will do so when management deems it to be prudent and/or cost-effective to reinsure a portion of the specific risks being assumed. The Company also participates in “common account” retrocessional arrangements for certain reinsurance treaties whereby a ceding company purchases reinsurance for the benefit of itself and its reinsurers under one or more of its reinsurance treaties. Common account retrocessional arrangements reduce the effect of individual or aggregate losses to all participating companies, including the ceding company, with respect to the involved treaties.
The Company typically considers the purchase of reinsurance to cover insurance program exposures written by the U.S. Insurance operation.segment. The type of reinsurance coverage considered is dependent upon individual risk exposures, individual program exposures, aggregate exposures by line of business, overall segment and corporate wide exposures and the cost effectiveness of available reinsurance. Facultative reinsurance will typically be considered for large individual accounts with large exposureexposures and quota share reinsurance will generally be considered for individualentire programs of business. In evaluating the purchase of reinsurance for a line of business, the Company generally seeks to limit exposure to individual claim severity as opposed to frequency.
The Company also considers purchasing corporate level retrocessional protection covering the potential accumulation of exposures. Such consideration includes balancing the underlying exposures against the availability of cost-effective retrocessional protection. For years ended December 31, 1999, 2000 and 2001, the Company purchased accident year aggregate excess of loss retrocession coverage that provided up to $175 million of coverage for each year. These excess of loss policies provided coverage if Everest Re’s consolidated statutory basis accident year loss ratio exceeded a specified attachment point for each year of coverage. The attachment point was net of inuring reinsurance and included adjustable premium provisions that effectively caused the Company to offset, on a pre-tax income basis, up to approximately 57% of such ceded losses. The maximum recovery for each year was $175 million before giving effect to the adjustable premium. As of
12
December 31, 2005, the Company had ceded the maximum limits under all three contracts. The Company has not purchased similar corporate level coverage subsequent to December 31, 2001.
All of the Company’s reinsurance and retrocessional agreements transfer significant reinsurance risk and therefore, are accounted for as reinsurance under Statement of Financial Accounting Standards (“FAS”) No. 113, “Accounting and Reporting for Reinsurance of Short Duration and Long Duration Contracts”.
In connection with the Company’s acquisition of Mt. McKinley in September 2000,
At December 31, 2008, the Company had coverage under an aggregate excess of loss reinsurance agreement provided by Prudential Property and Casualty Insurance Company of Indiana (“Prupac”), a wholly-owned subsidiary of The Prudential. On October 31, 2003, LM Property & Casualty Insurance Company (“LM”) completed its purchase of Prupac and its obligations from The Prudential. The Prudential continues to guarantee LM’s obligation under this agreement. This agreement covers 80%, or $160 million, of the first $200 million of any adverse loss reserve development on the carried reserves of Mt. McKinley at the date of acquisition and reimburses the Company as such losses are paid by the Company. Cessions under this reinsurance agreement exhausted the limit available under the contract at December 31, 2003.
As of December 31, 2006, the Company carried as an asset $772.8$657.2 million in reinsurance receivables with respect to losses ceded. Of this amount, $169.4$185.4 million, or 21.9%28.2%, was receivable from Transatlantic Reinsurance Company (“Transatlantic”), $100.9 million, or 13.1%, was receivable from LM, $100.2 million, or 13.0%, was receivable from Founders Insurance Company Limited (“Founders”), which is partially collateralized by a trust,; $100.0 million, or 12.9%15.2%, was receivable from Continental Insurance Company (“Continental”("Continental"), $52.5; $57.0 million, or 6.8%, was receivable from subsidiaries of London Reinsurance Group (“London Life”), which is fully collateralized by letters of credit, and $42.7 million, or 5.5%8.7%, was receivable from Munich Reinsurance Company (“Munich Re”); $39.6 million, or 6.0%, was receivable from ACE Property and Casualty Insurance Company (“Ace”); $36.9 million, or 5.6%, was receivable from Berkley Insurance Company (“Berkley”) and $33.8 million, or 5.1%, was receivable from C.V. Starr (Bermuda) (“C.V. Starr”). In addition, the Company has $227.3 million receivable from Founders Insurance Company Limited (“Founders”), for which the Company has recorded a full provision for uncollectibility. No other retrocessionaire accounted for more than 5% of the Company’s receivables. Although management carefully selects its reinsurers, the Company is subject to credit risk with respect to its reinsurance because the ceding of risk to reinsurers does not relieve the Company of its liability to insureds or ceding companies. See ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition”.
The Company’s arrangements with London Life and Continental are managed on a funds held basis, which means that the Company has retained the premiums earned by the retrocessionaire to secure obligations of the retrocessionaire, recorded them as a liability, credited interest on the balances at a stated contractual rate and reduced the liability account as payments become due. As of December 31, 2006,2008, such funds had reduced the Company’s net exposure to Continental to $33.2 million. As of December 31, 2005, such funds had reduced the Company’s net exposure to London Life to $115.4 million, effectively 100% of which has been secured by letters of credit, and its exposure to Continental to $38.7$20.6 million.
Claims
Claims.
Reinsurance claims are managed by the Company’s professional claims staff whose responsibilities include reviewing initial loss reports and coverage issues, monitoring claims handling activities of ceding companies, establishing and adjusting proper case reserves and approving payment of claims. In addition to claims assessment, processing and payment, the claims staff selectively conducts comprehensive claim audits of both specific claims and overall claim procedures at the offices of selected ceding companies. Insurance claims, except those relating to Mt. McKinley’s business, are generally handled by third party claims service providers who have limited authority and are subject to oversight by the Company’s professional claims staff.
The Company intensively manages its asbestos and environmental (“A&E”) exposures through dedicated, centrally managed claim staffs for Mt. McKinley and Everest Re. Both are staffed with experienced claim and legal professionals who specialize in the handling of such exposures. These units actively manage each individual insured and reinsured account, responding to claim developments with evaluations of the involved
13
exposures and adjustment of reserves as appropriate. Specific or general claim developments that may have material implications for the Company are regularly communicated to senior management, actuarial, legal and financial areas. Senior management and claim management personnel meet at least quarterly to review the Company’s overall reserve positions and make changes, if appropriate. The Company continually reviews its internal processing, communications and analytics, seeking to enhance the management of its A&E exposures, in particular in regard to changes in asbestos claims and litigation.
Reserves for Unpaid Property and Casualty Losses and Loss Adjustment Expenses
LAE.
Significant periods of time may elapse between the occurrence of an insured loss, the reporting of the loss to the insurer and the reinsurer and the payment of that loss by the insurer and subsequent payments to the insurer by the reinsurer. To recognize liabilities for unpaid losses and LAE, insurers and reinsurers establish reserves, which are balance sheet liabilities representing estimates of future amounts needed to pay reported and unreported claims and related expenses for losses that have already occurred. Actual losses and LAE paid may deviate, perhaps substantially, from such reserves. To the extent reserves prove to be insufficient to cover actual losses and LAE after taking into account available reinsurance coverage, the Company would have to recognize such reserve shortfalls and incur a charge to earnings, which could be material in the period such recognition takes place. See ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Loss and LAE Reserves”.
As part of the reserving process, insurers and reinsurers evaluate historical data and trends and make judgments as to the impact of various factors such as legislative and judicial developments that may affect future claim amounts, changes in social and political attitudes that may increase loss exposures and inflationary and general economic trends. While the reserving process is difficult and subjective for insurance companies, the inherent uncertainties of estimating such reserves are even greater for the reinsurer, due primarily to the longer time between the date of an occurrence and the reporting of any attendant claims to the reinsurer, the diversity of development patterns among different types of reinsurance treaties or facultative contracts, the necessary reliance on the ceding companies for information regarding reported claims and differing reserving practices among ceding companies. In addition, trends that have affected development of liabilities in the past may not necessarily occur or affect liability development in the same manner or to the same degree in the future. As a result, actual losses and LAE may deviate, perhaps substantially, from estimates of reserves reflected in the Company’sCompany's consolidated financial statements.
Like many other property and casualty insurance and reinsurance companies, the Company has experienced adverse loss development for prior accident years, which has led to adjustmentsincreases in losses and LAE reserves. The increase in net reserves for prior accident years reduced netand corresponding charges to income in the periods in which the adjustments were made. There can be no assurance that adverse development from prior years will not continue in the future or that such adverse development will not have a material adverse effect on net income.
Changes in Historical Reserves
Reserves.
The following table shows changes in historical loss reserves for the Company for 19961998 and subsequent years. The table is presented on a GAAP basis except that the Company’s loss reserves for its Canadian branch operations are presented in Canadian dollars, the impact of which is not material. The top line of the table shows the estimated initial reserves for unpaid losses and LAE recorded at each year end date. The upper (paid) portion of the table presents the related cumulative amounts paid through each subsequent year on those claims for which reserves were carried as of each specific year end. The lower (liability re-estimated) portion shows the re-estimated amount of the previously recordedoriginal reserves based on experience as of the end of each succeeding year. The reserve estimates arehave been revised as more information becomesbecame known about the actual claims for which the initial reserves were carried. The cumulative redundancy/(deficiency)/redundancy line represents the cumulative change in estimates since the initial reserve was established. It is equal to the initial reserve less the latest estimate of the ultimate liability.
14
Since the Company has international operations, some of its loss reserves are established in foreign currencies and converted to U.S. dollars for financial reporting. Changes in conversion rates from period-to-periodperiod to period impact the U.S. dollar value of carried reserves and correspondingly, the cumulative redundancy/(deficiency)deficiency line of the table. However, unlike other reserve development that affects net income, the impact of currency translation is a component of other comprehensive income. To differentiate these two reserve development components, the translation impacts for each calendar year are reflected in the table of Effects on Pre-tax Income Resulting from Reserve Re-estimates.
Each amount other than the original reserves in the top half of the table below includes the effects of all changes in amounts for prior periods. For example, if a loss settled in 19992001 for $100,000, was first reserved in 19961998 at $60,000 and remained unchanged until settlement, the $40,000 deficiency (actual loss minus original estimate) would be included inaffect the cumulative redundancy/(deficiency) indeficiency for each of the years in the period 1996 through 1998 shown below.and 2000. Conditions and trends that have affected development of the ultimate liability in the past are not indicative of future developments. Accordingly, it is not appropriate to extrapolate future redundancies or deficiencies based on this table.
15
| Ten Year GAAP Loss Development Table Presented Net of Reinsurance with Supplemental Gross Data (1) (2) (3) | Ten Year GAAP Loss Development Table Presented Net of Reinsurance with Supplemental Gross Data (1) (2) (3) | Ten Year GAAP Loss Development Table Presented Net of Reinsurance with Supplemental Gross Data (1) (2) (3) | ||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Years Ended December 31, |
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| (Dollars in millions) | (Dollars in millions) | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | |||||||||||||||||||||||
| Net Reserves for unpaid |
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| loss and LAE | $ | 2,551.6 | $ | 2,810.0 | $ | 2,953.5 | $ | 2,977.4 | $ | 3,364.9 | $ | 3,472.5 | $ | 3,895.8 | $ | 5,158.4 | $ | 6,766.9 | $ | 8,175.4 | $ | 8,078.9 | $2,953.5 | $2,977.4 | $3,364.9 | $3,472.5 | $3,895.8 | $5,158.4 | $6,766.9 | $8,175.4 | $8,078.9 | $8,324.7 | $8,214.7 | |||||||||||||
| Paid (cumulative) as of: |
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| One year later | 331.2 | 450.8 | 484.3 | 673.4 | 718.1 | 892.7 | 902.6 | 1,141.7 | 1,553.1 | 2,116.9 | 484.3 | 673.4 | 718.1 | 892.7 | 902.6 | 1,141.7 | 1,553.1 | 2,116.9 | 1,915.4 | 1,816.4 |
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| Two years later | 619.2 | 747.9 | 955.3 | 1,159.1 | 1,264.2 | 1,517.9 | 1,641.7 | 1,932.6 | 2,412.3 | 955.3 | 1,159.1 | 1,264.2 | 1,517.9 | 1,641.7 | 1,932.6 | 2,412.3 | 3,447.8 | 3,192.8 |
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| Three years later | 813.7 | 1,101.5 | 1,295.5 | 1,548.3 | 1,637.5 | 2,033.5 | 2,176.8 | 2,404.6 | 1,295.5 | 1,548.3 | 1,637.5 | 2,033.5 | 2,176.8 | 2,404.6 | 3,181.4 | 4,485.2 |
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| Four years later | 1,055.9 | 1,363.1 | 1,575.9 | 1,737.8 | 2,076.0 | 2,413.1 | 2,485.2 | 1,575.9 | 1,737.8 | 2,076.0 | 2,413.1 | 2,485.2 | 2,928.5 | 3,854.8 |
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| Five years later | 1,253.0 | 1,592.5 | 1,693.3 | 1,787.2 | 2,286.4 | 2,612.3 | 1,693.3 | 1,787.2 | 2,286.4 | 2,612.3 | 2,836.6 | 3,451.1 |
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| Six years later | 1,450.2 | 1,673.4 | 1,673.9 | 1,856.0 | 2,482.5 | 1,673.9 | 1,856.0 | 2,482.5 | 2,867.9 | 3,241.5 |
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| Seven years later | 1,510.2 | 1,665.3 | 1,711.1 | 2,017.5 | 1,711.1 | 2,017.5 | 2,705.9 | 3,172.2 |
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| Eight years later | 1,516.1 | 1,669.3 | 1,799.2 | 1,799.2 | 2,141.0 | 2,998.5 |
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| Nine years later | 1,503.2 | 1,731.6 | 1,879.3 | 2,260.8 |
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| Ten years later | 1,544.9 | 1,975.6 |
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| Net Liability re-estimated |
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| One year later | 2,548.4 | 2,836.2 | 2,918.1 | 2,985.2 | 3,364.9 | 3,612.6 | 4,152.7 | 5,470.4 | 6,633.7 | 8,419.8 | 2,918.1 | 2,985.2 | 3,364.9 | 3,612.6 | 4,152.7 | 5,470.4 | 6,633.7 | 8,419.8 | 8,356.7 | 8,112.9 |
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| Two years later | 2,575.9 | 2,802.2 | 2,921.6 | 2,977.2 | 3,484.6 | 3,901.8 | 4,635.0 | 5,407.1 | 6,740.5 | 2,921.6 | 2,977.2 | 3,484.6 | 3,901.8 | 4,635.0 | 5,407.1 | 6,740.5 | 8,609.2 | 8,186.3 |
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| Three years later | 2,546.0 | 2,794.7 | 2,910.3 | 3,070.5 | 3,688.6 | 4,400.0 | 4,705.3 | 5,654.5 | 2,910.3 | 3,070.5 | 3,688.6 | 4,400.0 | 4,705.3 | 5,654.5 | 7,059.9 | 8,489.7 |
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| Four years later | 2,528.0 | 2,773.5 | 2,924.5 | 3,202.6 | 4,210.3 | 4,516.7 | 5,062.5 | 2,924.5 | 3,202.6 | 4,210.3 | 4,516.7 | 5,062.5 | 6,073.1 | 6,996.7 |
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| Five years later | 2,515.7 | 2,765.2 | 3,002.2 | 3,430.3 | 4,216.5 | 4,814.0 | 3,002.2 | 3,430.3 | 4,216.5 | 4,814.0 | 5,507.1 | 6,093.4 |
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| Six years later | 2,507.9 | 2,778.9 | 2,997.8 | 3,338.1 | 4,379.3 | 2,997.8 | 3,338.1 | 4,379.3 | 5,240.2 | 5,544.9 |
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| Seven years later | 2,510.1 | 2,767.3 | 2,941.6 | 3,356.7 | 2,941.6 | 3,356.7 | 4,773.4 | 5,257.5 |
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| Eight years later | 2,517.3 | 2,738.7 | 2,931.5 | 2,931.5 | 3,597.6 | 4,768.1 |
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| Nine years later | 2,517.6 | 2,738.4 | 3,190.9 | 3,575.7 |
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| Ten years later | 2,528.1 | 3,159.7 |
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| Cumulative redundancy/ | ||||||||||||||||||||||||||||||||||||||||||||||
| (deficiency) | $ | 23.5 | $ | 71.6 | $ | 22.0 | $ | (379.3 | ) | $ | (1,014.4 | ) | $ | (1,341.5 | ) | $ | (1,166.7 | ) | $ | (496.1 | ) | $ | 26.5 | $ | (244.4 | ) | ||||||||||||||||||||
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Cumulative (deficiency)/redundancy | $(206.2) | $(598.3) | $(1,403.2) | $(1,785.1) | $(1,649.1) | $(935.0) | $(229.8) | $(314.3) | $(107.4) | $ 211.8 |
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| Gross liability- |
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| end of year | $ | 3,298.2 | $ | 3,498.7 | $ | 3,869.2 | $ | 3,705.2 | $ | 3,853.7 | $ | 4,356.0 | $ | 4,985.8 | $ | 6,424.7 | $ | 7,886.6 | $ | 9,175.1 | $ | 8,888.0 | $3,869.2 | $3,705.2 | $3,853.7 | $4,356.0 | $4,985.8 | $6,424.7 | $7,886.6 | $9,175.1 | $8,888.0 | $9,032.2 | $8,905.9 | |||||||||||||
| Reinsurance receivable | 746.6 | 688.7 | 915.7 | 727.8 | 488.8 | 883.5 | 1,090.0 | 1,266.3 | 1,119.7 | 999.7 | 809.1 | 915.7 | 727.8 | 488.8 | 883.5 | 1,090.0 | 1,266.3 | 1,119.7 | 999.7 | 809.1 | 707.4 | 691.2 | ||||||||||||||||||||||||
| Net liability-end of year | 2,551.6 | 2,810.0 | 2,953.5 | 2,977.4 | 3,364.9 | 3,472.5 | 3,895.8 | 5,158.4 | 6,766.9 | 8,175.4 | 8,078.9 | $2,953.5 | $2,977.4 | $3,364.9 | $3,472.5 | $3,895.8 | $5,158.4 | $6,766.9 | $8,175.4 | $8,078.9 | $8,324.8 | $8,214.7 | ||||||||||||||||||||||||
| Gross re-estimated | ||||||||||||||||||||||||||||||||||||||||||||||
| liability at | ||||||||||||||||||||||||||||||||||||||||||||||
| at December 31, 2006 | 3,914.0 | 3,992.3 | 4,142.4 | 4,605.9 | 5,491.9 | 6,194.1 | 6,402.2 | 6,986.3 | 7,860.3 | 9,397.5 | ||||||||||||||||||||||||||||||||||||
Gross re-estimated liability |
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at December 31, 2008 | $4,465.9 | $4,921.1 | $6,047.5 | $6,685.7 | $6,951.6 | $7,481.7 | $8,170.2 | $9,572.8 | $9,010.8 | $8,829.3 |
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| Re-estimated receivable |
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| at December 31, 2006 | 1,386.0 | 1,253.8 | 1,210.9 | 1,249.2 | 1,112.6 | 1,380.1 | 1,339.7 | 1,331.8 | 1,119.8 | 977.7 | ||||||||||||||||||||||||||||||||||||
at December 31, 2008 | 1,306.2 | 1,345.3 | 1,279.4 | 1,428.2 | 1,406.7 | 1,388.2 | 1,173.4 | 1,083.0 | 824.5 | 716.4 |
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| Net re-estimated liability |
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| at December 31, 2006 | 2,528.1 | 2,738.4 | 2,931.5 | 3,356.7 | 4,379.3 | 4,814.0 | 5,062.5 | 5,654.5 | 6,740.5 | 8,419.8 | ||||||||||||||||||||||||||||||||||||
at December 31, 2008 | $3,159.7 | $3,575.7 | $4,768.1 | $5,257.5 | $5,544.9 | $6,093.4 | $6,996.7 | $8,489.7 | $8,186.3 | $8,112.9 |
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| Gross cumulative |
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| (deficiency)/redundancy | $ | (595.6 | ) | $ | (493.6 | ) | $ | (273.2 | ) | $ | (900.7 | ) | $ | (1,638.2 | ) | $ | (1,838.1 | ) | $ | (1,416.4 | ) | $ | (561.6 | ) | $ | 26.3 | $ | (222.5 | ) | $(596.7) | $(1,215.9) | $(2,193.8) | $(2,329.7) | $(1,965.8) | $(1,056.9) | $(283.6) | $(397.7) | $(122.9) | $ 202.9 |
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| ______________ | ||||||||||||||||||||||||||||||||||||||||||||||
(1) Includes $480.9 million relating to Mt. McKinley at December 31, 2000, principally reflecting $491.1 million of Mt. McKinley reserves at the acquisition date. | (1) Includes $480.9 million relating to Mt. McKinley at December 31, 2000, principally reflecting $491.1 million of Mt. McKinley reserves at the acquisition date. |
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(2) The Canadian Branch reserves are reflected in Canadian dollars. | (2) The Canadian Branch reserves are reflected in Canadian dollars. |
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(3) Some amounts may not reconcile due to rounding. | (3) Some amounts may not reconcile due to rounding. |
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(1) Includes $480.9 million relating to Mt. McKinley at December 31, 2000, principally reflecting $491.1 million of Mt. McKinley reserves at the acquisition date.(2) The cumulative redundancy/(deficiency) includes the impact of foreign currency translation adjustments, except for the Canadian branch reserves, which are reflected in Canadian dollars.(3) Some totals may not reconcile due to rounding.
Six of the most recent seven years
Every year in the above table, reflectexcept 2007, reflects a cumulative deficiencies,deficiency, also referred to as adverse development, with the largest indicated cumulative deficiency in 2001. Three active classes of business were the principal contributors to those deficiencies: 1) the run-off of asbestos claims for both direct and reinsurance business has significantly contributed to the cumulative deficiencies in thefor all years 1999 through 2003:presented except 2007; 2) professional liability reinsurance, general casualty reinsurance and workers’ compensation insurance. insurance contributed to the deficiencies for years 1999 through 2003; and 3) property catastrophe adverse development contributed to the deficiency for 2005.
In 2005,2007, the Company completed a detailed study of its asbestos experience and its cedants’ asbestos exposures and also considered industry trends. The Company’s Claims Department undertook a contract by contract analysis of its direct business and projected those findings to its assumed reinsurance business. The Company’s actuaries utilized nine methodologies to project its potential ultimate liabilities including projections based on internal data and assessments, extrapolations of non-public and publicly available data for the Company’s cedants and benchmarking against industry data and experience. As a result of the study, the Company increased its gross reinsurance asbestos reserves by $250.0 million and increased its gross direct asbestos reserves by $75.0 million. These reserve increases, as well as adverse development on asbestos in prior years, have a significant impact on the cumulative deficiency was
16
principally duedeficiencies. Absent the asbestos development, only years 2000 through 2003 would reflect cumulative deficiencies on net reserves, with the remaining years reflecting cumulative redundancies. Subsequent to adverse development of property catastrophes. In addition to these active business classes, therethe study, the Company’s loss activity has continued to be adverse experience onbeen in line with expectations per the reserves established at December 31, 2007. The Company’s A&E reserves.reserves represent management’s best estimate of the ultimate liability, however, there can be no assurance that ultimate loss payments will not exceed such reserves, perhaps by a significant amount. No additional reserve strengthening was made in 2008.
In the professional liability reinsurance class, the late 1990s and early 2000s saw a proliferation of claims relating to bankruptcies and other corporate, financial and/or management improprieties. This resulted in an increase in the frequency and severity of claims under the professional liability policies reinsured by the Company. In the general casualty area, the Company has experienced claim frequency and severity greater than expected in the Company’s pricing and reserving assumptions, particularly for accident years 1999 and 2000. This experience reflects unfavorable trends in litigation and economic variability. With respect to both of these classes, another factor was the increasingly competitive conditions in insurance and reinsurance markets during this period. While the Company seeks to manage the impact of competitive condition changes on its results, it is generally unable to insulate itself entirely from the underlying industry cycles of its principal businesses. See ITEM 1, “Business – Competition”.
In the workers’ compensation insurance class, the majority of which was written in California, the Company has experienced adverse development primarily for accident years 2001 and 2002 due to higher than expected claim frequency and severity. As a result of significant growth in this book of business in a challenging business environment, the Company’s writings in this class were subject to more relative variability than arein some of its established and/or stable lines of business. Although cumulative results through 20062008 continue to be quite profitable for this book of business, there has beenwas some deterioration in claim frequency and severity related to accident years 2001 and 2002.
Management believes that adequate provision has been made for the
The Company’s loss and LAE reserves.reserves represent management’s best estimate of the ultimate liability. While there can be no assurance that these reserves will not need to be increased in the future, management believes that the Company’s existing reserves and reserving methodologies and retrocessional arrangements reduce the likelihood that any such increases would have a material adverse effect on the Company’s financial condition, results of operations or cash flows. These statements regarding the Company’s loss reserves are forward looking statements within the meaning of the U.S. federal securities laws and are intended to be covered by the safe harbor provisions contained therein. See ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Safe Harbor Disclosure”.
17
The following table is derived from the Ten Year GAAP Loss Development Table above and summarizes the effect of reserve re-estimates, net of reinsurance, on calendar year operations by accident year for the same ten year period ended December 31, 2006.2008. Each column represents the amount of net reserve re-estimates made in the indicated calendar year and shows the accident years to which the re-estimates are applicable. The amounts in the total accident year column on the far right represent the cumulative reserve re-estimates for the indicated accident years.
Since the Company has operations in many countries, part of the Company’s loss and LAE reserves are in foreign currencies and translated to U.S. dollars for each reporting period. Fluctuations in the exchange rates for the currencies, period over period, affect the U.S. dollar amount of outstanding reserves. The translation adjustment line at the bottom of the table eliminates the impact of the exchange fluctuations from the reserve re-estimates.
| Effects on Pre-tax Income Resulting from Reserves Re-estimates (1) | ||||||||||||||||||||||||||||||||||||||
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| Cumulative Re-estimates for Each | ||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | Accident Year | |||||||||||||||||||||||||||
| Accident Years | ||||||||||||||||||||||||||||||||||||||
| 1996 & prior | $ | 3.2 | $ | (27.5 | ) | $ | 29.9 | $ | 18.0 | $ | 12.3 | $ | 7.8 | $ | (2.2 | ) | $ | (7.2 | ) | $ | (0.3 | ) | $ | (10.5 | ) | $ | 23.5 | |||||||||||
| 1997 | 1.3 | 4.1 | (10.4 | ) | 8.9 | 0.4 | (11.5 | ) | 18.8 | 28.8 | 10.8 | 51.2 | ||||||||||||||||||||||||||
| 1998 | 1.4 | (11.0 | ) | (9.8 | ) | (22.5 | ) | (64.0 | ) | (7.2 | ) | 27.6 | 9.8 | (75.8 | ) | |||||||||||||||||||||||
| 1999 | (4.3 | ) | (3.3 | ) | (79.1 | ) | (54.4 | ) | (232.1 | ) | 36.0 | (28.7 | ) | (365.9 | ) | |||||||||||||||||||||||
| 2000 | (7.9 | ) | (26.4 | ) | (71.9 | ) | (294.1 | ) | (98.3 | ) | (144.2 | ) | (642.9 | ) | ||||||||||||||||||||||||
| 2001 | (20.4 | ) | (85.2 | ) | 23.5 | (110.6 | ) | (134.4 | ) | (327.1 | ) | |||||||||||||||||||||||||||
| 2002 | 32.3 | 15.9 | 46.4 | (60.0 | ) | 34.7 | ||||||||||||||||||||||||||||||||
| 2003 | 170.3 | 133.7 | 109.7 | 413.7 | ||||||||||||||||||||||||||||||||||
| 2004 | 69.9 | 140.7 | 210.5 | |||||||||||||||||||||||||||||||||||
| 2005 | (137.6 | ) | (137.6 | ) | ||||||||||||||||||||||||||||||||||
| Total calendar | ||||||||||||||||||||||||||||||||||||||
| year effect | $ | 3.2 | $ | (26.2 | ) | $ | 35.4 | $ | (7.8 | ) | $ | 0.0 | $ | (140.1 | ) | $ | (256.9 | ) | $ | (312.0 | ) | $ | 133.3 | $ | (244.4 | ) | $ | (815.6 | ) | |||||||||
| Canada (2) | 9.6 | 8.3 | (11.0 | ) | 4.9 | 7.4 | (1.4 | ) | (26.6 | ) | (16.3 | ) | (6.6 | ) | (0.5 | ) | ||||||||||||||||||||||
| Translation Adjustment | 49.3 | - | (17.0 | ) | (26.9 | ) | (17.7 | ) | 38.4 | 86.7 | 78.9 | (100.3 | ) | 109.3 | ||||||||||||||||||||||||
| Re-estimate of net reserve after translation adjustmen | $ | 62.1 | $ | (17.9 | ) | $ | 7.4 | $ | (29.8 | ) | $ | (10.3 | ) | $ | (103.1 | ) | $ | (196.8 | ) | $ | (249.4 | ) | $ | 26.4 | $ | (135.6 | ) | |||||||||||
| ______________ | ||||||||||||||||||||||||||||||||||||||
(1) Some totals may not reconcile due to rounding.(2)
Effects on Pre-tax Income Resulting from Reserves Re-estimates |
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(Dollars in millions) | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 |
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1998 and prior | $ 35.4 | $ (3.4) | $ 11.4 | $(14.3) | $(77.7) | $ 4.4 | $ 56.2 | $ 10.1 | $(259.4) | $ 31.2 |
| $ (206.2) |
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1999 |
| (4.3) | (3.3) | (79.1) | (54.4) | (232.1) | 36.0 | (28.7) | 18.4 | (9.3) |
| (356.8) |
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2000 |
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| (7.9) | (26.4) | (71.9) | (294.1) | (98.3) | (144.2) | (153.2) | (16.6) |
| (812.6) |
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2001 |
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| (20.4) | (85.2) | 23.5 | (110.6) | (134.4) | (32.1) | (22.7) |
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2002 |
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| 32.3 | 15.9 | 46.4 | (60.0) | (18.4) | (20.5) |
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2003 |
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| 170.3 | 133.7 | 109.7 | 26.0 | 17.5 |
| 457.2 |
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2004 |
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| 69.9 | 140.7 | 99.2 | 83.5 |
| 393.2 |
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2005 |
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| (137.6) | 130.1 | 56.3 |
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2006 |
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| (88.4) | 50.9 |
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2007 |
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Total calendar year effect | $ 35.4 | $ (7.8) | $ - | $(140.1) | $(256.9) | $(312.0) | $133.3 | $(244.4) | $(277.8) | $211.8 |
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Canada (1) | (11.0) | 4.9 | 7.4 | (1.4) | (26.6) | (16.3) | (6.6) | (0.5) | (49.6) | 63.7 |
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Translation adjustment | (17.0) | (26.9) | (17.7) | 38.4 | 86.7 | 78.9 | (100.3) | 109.3 | 120.9 | (310.4) |
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Re-estimate of net reserve after translation adjustment | $ 7.4 | $(29.8) | $(10.3) | $(103.1) | $(196.8) | $(249.4) | $ 26.4 | $(135.6) | $(206.5) | $(34.9) |
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(Some amounts may not reconcile due to rounding.) |
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(1) | This adjustment converts Canadian dollars to U.S. dollars. |
The reserve development by accident year reflected in the above table was generally the result of the same factors described above that caused the deficiencies shown in the Ten Year GAAP Loss Development Table. The unfavorable development experienced in the 1998 through 2001and prior and 2000 accident years relates principally to the previously discussed asbestos development. Other business areas contributing to adverse development were casualty reinsurance, including professional liability classes and workers’ compensation insurance, where, in retrospect, the Company’s initial estimates of losses were underestimated principally as the result of unanticipated variability in the underlying exposures. The favorable development for accident years 20022003 through 2004 relates primarily to favorable experience with respect to property reinsurance business. In addition, casualty reinsurance has reflected favorable development for accident years 2003 to 2006. The unfavorable development experienced in the 20052006 accident year relates primarilywas principally due to property catastrophes from the unprecedented hurricanes of 2005.reserve increases for one credit insurance program, which is in run-off.
18
The Company’s loss reserving methodologies continuously monitor the emergence of loss and loss development trends, seeking, on a timely basis, to both adjust reserves for the impact of trend shifts and to factor the impact of such shifts into itsthe Company’s underwriting and pricing on a prospective basis.
The following table presents a reconciliation of beginning and ending reserve balances for the yearsperiods indicated on a GAAP basis:
| Reconciliation of Reserves for Losses and LAE | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
Years Ended December 31, | |||||||||||
| (Dollars in millions) | 2006 | 2005 | 2004 | ||||||||
| Gross reserves at beginning of period | $ | 9,126.7 | $ | 7,836.3 | $ | 6,361.2 | |||||
| Incurred related to: | |||||||||||
| Current year | 2,298.8 | 3,750.7 | 3,041.7 | ||||||||
| Prior years | 135.6 | (26.4 | ) | 249.4 | |||||||
| Total incurred losses | 2,434.4 | 3,724.3 | 3,291.1 | ||||||||
| Paid related to: | |||||||||||
| Current year | 522.7 | 664.9 | 607.1 | ||||||||
| Prior years | 2,116.9 | 1,553.1 | 1,141.7 | ||||||||
| Total paid losses | 2,639.6 | 2,218.0 | 1,748.8 | ||||||||
| Foreign exchange/translation adjustment | 109.3 | (100.3 | ) | 78.9 | |||||||
| Change in reinsurance receivables on unpaid losses and LAE | (190.7 | ) | (115.6 | ) | (146.1 | ) | |||||
| Gross reserves at end of period | $ | 8,840.1 | $ | 9,126.7 | $ | 7,836.3 | |||||
Development of prior year incurred losses was
| Years Ended December 31, | ||||
(Dollars in millions) | 2008 |
| 2007 |
| 2006 |
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Gross reserves at beginning of period | $ 9,040.6 |
| $ 8,840.1 |
| $ 9,126.7 |
Incurred related to: |
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Current year | 2,404.1 |
| 2,341.6 |
| 2,298.8 |
Prior years | 34.9 |
| 206.5 |
| 135.6 |
Total incurred losses | 2,439.0 |
| 2,548.1 |
| 2,434.4 |
Paid related to: |
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Current year | 495.1 |
| 452.2 |
| 522.7 |
Prior years | 1,816.4 |
| 1,915.4 |
| 2,116.9 |
Total paid losses | 2,311.5 |
| 2,367.6 |
| 2,639.6 |
Foreign exchange/translation adjustment | (310.4) |
| 120.9 |
| 109.3 |
Change in reinsurance receivables on unpaid losses and LAE | (17.0) |
| (100.9) |
| (190.7) |
Gross reserves at end of period | $ 8,840.7 |
| $ 9,040.6 |
| $ 8,840.1 |
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(Some amounts may not reconcile due to rounding.) |
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Prior years’ reserves increased by $34.9 million, $206.5 million and $135.6 million unfavorablefor the years ended December 31, 2008, 2007 and 2006, respectively. The increase for 2008 was attributable to $85.3 million of reserve development for a run-off auto loan credit insurance program and a $32.6 million adverse arbitration decision; partially offset by net favorable development on the remainder of the Company’s reserves.
The 2007 prior years’ reserves increase of $206.5 million was attributable to $387.5 million of adverse development on A&E reserves, partially offset by favorable development on attritional (non-catastrophe, non-A&E) reserves. The increase in the A&E reserves was primarily due to an extensive in-house study conducted by the Company’s actuarial and claim units.
The increase for 2006 $26.4 million favorable in 2005 and $249.4 million unfavorable in 2004. Such losses werewas the result of additional development of the reserve development noted above, as well as inherent uncertainty in establishing loss2005 catastrophes and LAE reserves.A&E, which was partially offset by favorable attritional development.
Reserves for Asbestos and Environmental Losses and Loss Adjustment ExpensesAs of year end 2006, 7.4% of reserves reflect an estimate forLAE.
At December 31, 2008, the Company’s ultimate liabilitygross reserves for A&E claims for which ultimate value cannot be estimated using traditional reserving techniques.represented 8.9% of its total reserves. The Company’s A&E liabilities stem from Mt. McKinley’s direct insurance business and Everest Re’s assumed reinsurance business. There are significant uncertainties in estimating the amount of the Company’s potential losses from A&E claims.claims and ultimate values cannot be estimated using traditional reserving techniques. See ITEM 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Asbestos and Environmental Exposures” and Item 8, “Financial Statements and Supplementary Data” - Note 3 of Notes to Consolidated Financial Statements.
Mt. McKinley’s book of direct A&E exposed insurance policies is relatively small and homogenous. It also arises from a limited period, effectivefrom 1978 to 1984. The book is basedwas principally on excess liability, policies, thereby limiting exposure analysis to a limited number of policies and forms. As a result of this focused structure, the Company believes that it is able to comprehensively analyze its exposures, allowing it to identify, analyze and actively monitor those claims which have unusual exposure, including policies inon which it may be exposed to pay expenses in addition to policy limits or on which non-products asbestos claims.coverage may be contended.
The Company endeavors to be actively engagedengage with every insured account posing significant potential asbestos exposure to Mt. McKinley. Such engagement can take the form of pursuing a final settlement, negotiation, litigation, or the monitoring of claim activity under Settlement in Place (“SIP”) agreements. SIP agreements generally condition an insurer’s payment upon the actual claim experience of the insured and may have annual payment caps or other measures to control the insurer’s payments. The Company’s Mt. McKinley operation is currently managing eight SIP agreements, three of which were executed prior to the acquisition of Mt. McKinley in 2000. The Company’s preference with respect to coverage settlements is to execute settlements that call for a fixed schedule of payments, because such settlements eliminate future uncertainty.
19
The Company has significantly enhanced its classification of insureds by exposure characteristics over time, as well as its analysis by insured for those it considers to be more exposed or active. Those insureds identified as relatively less exposed or active are subject to less rigorous, but still active management, with an emphasis on monitoring those characteristics, which may indicate an increasing exposure or levels of activity. The Company continually focuses on further enhancement of the detailed estimation processes used to evaluate potential exposure of policyholders, including those that may not have reported significant A&E losses.
Everest Re’s book of assumed reinsurance is relatively concentrated within a modest number of A&E exposed relationships. It also arises from a limited period, effectivelyfrom 1977 to 1984. Because the book of business is relatively concentrated and the Company has been managing the A&E exposures for many years, its claim staff is familiar with the ceding companies that have generated most of these liabilities in the past and which are therefore most likely to generate future liabilities. The Company’s claim staff has developed familiarity both with the nature of the business written by its ceding companies and the claims handling and reserving practices of those companies. This level of familiarity enhances the quality of the Company’s analysis of its exposure through those companies. As a result, the Company believes that it can identify those claims on which it has unusual exposure, such as non-products asbestos claims, for concentrated attention. However, in setting reserves for its reinsurance liabilities, the Company relies on claims data supplied, both formally and informally by its ceding companies and brokers. This furnished information is not always timely or accurate and can impact the accuracy and timeliness of the Company’s ultimate loss projections.
The following table summarizes the composition of the Company’s total reserves for A&E losses, gross and net of reinsurance, for the years ended December 31:periods indicated:
| (Dollars in millions) | 2006 | 2005 | 2004 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Case reserves reported by ceding companies | $ | 135.6 | $ | 125.2 | $ | 148.5 | |||||
| Additional case reserves established by the Company (assumed reinsurance) (1) | 152.1 | 157.6 | 151.3 | ||||||||
| Case reserves established by the Company (direct insurance) | 213.7 | 243.5 | 272.1 | ||||||||
| Incurred but not reported reserves | 148.7 | 123.3 | 156.4 | ||||||||
| Gross reserves | 650.1 | 649.6 | 728.3 | ||||||||
| Reinsurance receivable | (138.7 | ) | (199.1 | ) | (221.6 | ) | |||||
| Net reserves | $ | 511.4 | $ | 450.5 | $ | 506.7 | |||||
| ______________ | |||||||||||
(1) Additional reserves are case specific reserves determined
| Years Ended December 31, | ||||
(Dollars in millions) | 2008 |
| 2007 |
| 2006 |
Case reserves reported by ceding companies | $ 161.0 |
| $ 144.5 |
| $ 135.6 |
Additional case reserves established by the Company (assumed reinsurance) (1) | 139.7 |
| 147.1 |
| 152.1 |
Case reserves established by the Company (direct insurance) | 133.8 |
| 148.2 |
| 213.7 |
Incurred but not reported reserves | 352.3 |
| 483.0 |
| 148.7 |
Gross reserves | 786.8 |
| 922.8 |
| 650.1 |
Reinsurance receivable | (37.7) |
| (95.4) |
| (138.7) |
Net reserves | $ 749.1 |
| $ 827.4 |
| $ 511.4 |
______________ |
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(1) | Additional reserves are case specific reserves established by the Company in excess of those reported by the ceding company, based on the Company’s assessment of the covered loss. |
(Some amounts may not reconcile due to be needed over and above those reported by the ceding company.rounding.)
Additional losses, including those relating to latent injuries and other exposures, which are as yet unrecognized, the type or magnitude of which cannot be foreseen by either the Company or the industry, may emerge in the future. Such future emergence could have material adverse effects on the Company’s future financial condition, results of operations and cash flows.
Future Policy Benefit Reserves
Reserves.
The Company writes a limited amount of life and annuity reinsurance in its Bermuda segment. Future policy benefit liabilities for annuities are reported at the accumulated fund balance of these contracts. Reserves for those liabilities include both mortality and morbidity provisions with respect to life and annuity claims, both reported and unreported. Actual experience in a particular period may be worse than assumed experienceassumedexperience and, consequently, may adversely affect the Company’s operating results for that period. See ITEM 8, “Financial Statements and Supplementary Data” - Note 1F of Notes to Consolidated Financial Statements.
20
Activity in the reserve for future policy benefits is summarized as follows:for the periods indicated:
| Years Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | 2006 | 2005 | 2004 | ||||||||
| Balance at beginning of year | $ | 133.2 | $ | 152.2 | $ | 205.3 | |||||
| Liabilities assumed | 0.3 | 0.2 | 0.3 | ||||||||
| Adjustments to reserves | 3.0 | 11.6 | 8.5 | ||||||||
| Benefits paid in the current year | (35.5 | ) | (30.8 | ) | (19.5 | ) | |||||
| Contract terminations | - | - | (42.4 | ) | |||||||
| Balance at end of year | $ | 101.0 | $ | 133.2 | $ | 152.2 | |||||
| At December 31, | ||||
(Dollars in millions) | 2008 |
| 2007 |
| 2006 |
Balance at beginning of year | $ 78.4 |
| $ 101.0 |
| $ 133.2 |
Liabilities assumed | 0.2 |
| 0.2 |
| 0.3 |
Adjustments to reserves | 6.5 |
| 2.4 |
| 3.0 |
Benefits paid in the current year | (19.0) |
| (25.2) |
| (35.5) |
Balance at end of year | $ 66.2 |
| $ 78.4 |
| $ 101.0 |
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(Some amounts may not reconcile due to rounding.) |
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Investments
Investments.
The board of directors of each of the Company’s operating subsidiaries is responsible for establishing investment policy and guidelines and, together with senior management, for overseeing their execution.
The Company’s principal investment objectives are to ensure funds are available to meet its insurance and reinsurance obligations and to maximize after-tax investment income while maintaining a high quality diversified investment portfolio. Considering these objectives, the Company views its investment portfolio as having two components; 1) the investments needed to satisfy outstanding liabilities and 2) investments funded by the Company’s shareholders’ equity.
For outstanding liabilities, the Company invests in taxable and tax-preferenced fixed income securities with an average credit quality of Aa,Aa2, as rated by the independent investment rating service of Moody’s.Moody’s Investors Service, Inc. (“Moody’s”). The Company’s mix of taxable and tax-preferenced investments is adjusted continuously,periodically, consistent with the Company’s current and projected operating results, market conditions and the Company’s tax position. This fixed maturity portfolio is externally managed by an independent, professional investment manager using portfolio guidelines approved by the Company.
Over the past few years, the Company hashad reallocated a portion of its shareholders’ equity investment portfolio to equity securities to include 1) publicly traded equity securities primarily exchange traded funds, and 2) private equity limited partnership investments. The objective of this portfolio diversification iswas to enhance the risk-adjusted total return of the investment portfolio by allocating a prudent portion of the portfolio to higher return asset classes. The Company hashad limited its allocation to these asset classes because of 1) the potential for volatility in their values and the concomitant impact on the Company’s capital and 2) the impact of these investments on regulatory and rating agency capital adequacy models.models as well as our own economic capital model. As a result of the slowdown in the global economy the concomitant decline in equity values and the liquidity crisis affecting the financial markets, the Company significantly reduced its exposure to public equities during the fourth quarter of 2008 and correspondingly increased its holdings in short-term investments. At December 31, 2006,2008, the market or fair value of investments in equity and limited partnership securities approximated 40%16% of shareholders’ equity.equity, a decrease of 22 points from 38% of shareholders’ equity at December 31, 2007.
The Company’s fixed income investment guidelines include a general duration guideline of five to six years.
The duration of an investment is based on the maturity of the security but also reflects the payment of interest and the possibility of early prepayments. The Company’s fixed income investment guidelines include a general duration guideline. This investment duration guideline is established and periodically revised by management, which considers economic and business factors, as well as the Company’s average duration of potential liabilities, which, at December 31, 2006,2008, is estimated at approximately 3.84.2 years, based on the estimated payouts of underwriting liabilities using standard duration calculations.
The duration of the fixed income portfolio at December 31, 20062008 was 4.1 years, downup slightly from 4.33.9 years at the prior year end. This shortenedThe duration mainly reflectsof the Company’s elevated short-term investment holdings in response to relatively low interest rates combined with a flat to negative yield curve. In addition, at various timesportfolio reached 4.4 years during the past three yearssecond and third quarters, as the Company shortenedtook advantage of favorable pricing for municipal and agency mortgage-backed securities. The duration declined during the fourth quarter as public equity securities were liquidated and the proceeds invested in response to market interest rate movements by purchasing interest only strips of mortgage-backed securities (“interest only strips”). The interest only strips give the holder the right to receive interest payments at a stated coupon rate on an underlying pool of mortgages.short-term securities.
21
The interest payments on the outstanding mortgages are guaranteed by entities generally rated AAA. The ultimate cash flow from these investments is primarily dependent upon the average life of the underlying mortgage pool. Generally, as mortgage rates decline, mortgagors are more likely to prepay their mortgage loans, which decreases the average life of a mortgage pool and decreases expected cash flows. Conversely, as mortgage rates rise, repayments are more likely to slow and ultimate cash flows will tend to rise. Accordingly, the market value of these investments tends to increase as general interest rates rise and decline as general interest rates fall. These movements are generally counter to the impact of interest rate movements on the Company’s other fixed income investments. The Company held no interest only strip investments at December 31, 2006.
For each currency in which the Company has established substantial loss and LAE reserves, the Company seeks to maintain invested assets denominated in such currency in an amount approximately comparableequal to the estimated liabilities. Approximately 10.5%20% of the Company’s consolidated reserves for losses and LAE and unearned premiums represent estimated amounts payable in foreign currencies.
The Company’s overall financial strength and results of operations are, in part, dependent on the quality and performance of its investment portfolio. NetThe turmoil in the financial markets and decline in the global economy resulted in a reduction in the Company’s net investment income to $565.9 million compared with $682.4 million and net realized capital gains (losses) on the Company’s invested assets constituted 14.7%, 13.4%, and 11.7% of the Company’s revenues$629.4 million for the years ended December 31, 2007 and 2006, 2005respectively. The decline was primarily the result of losses incurred in 2008 on the Company’s investments in limited partnerships that invested in public equities, relative to income in the prior two years.
In addition to the reductions in investment income, the economic and 2004,financial market declines resulted in net realized capital losses for the year of $695.8 million. These net realized capital losses resulted from the fair value adjustments and realized losses on the Company’s equity securities portfolio of $508.2 million, other-than-temporary impairment losses from the Company’s fixed maturity portfolio of $176.5 million and realized capital losses and fair value adjustments from fixed maturity investments of $11.1 million. In contrast, the Company recognized realized gains of $86.3 million and $35.1 million for the years ended December 31, 2007 and 2006, respectively.
The Company’s cash and invested assets totaled $14.0$13.7 billion at December 31, 2006,2008, which consisted of 85.1%94.0% fixed maturities and cash of which 97.6%98.7% were investment grade, 11.6%1.0% equity securities and 3.3%5.0% other invested assets. The average maturity of fixed maturities was 7.47.2 years at December 31, 2006,2008, and their overall duration was 4.1 years.
As of December 31, 2006,2008, the Company did not have any direct investments in commercial real estate or direct commercial mortgages or any material holdings of derivative investments other(other than equity index putsput options as discussed in ITEM 8, “Financial Statements and Supplementary Data” - Note 24 of Notes to Consolidated Financial Statements,Statements) or securities of issuers that are experiencing cash flow difficulty to an extent that the Company’s management believes could threaten the issuer’s ability to meet debt service payments, except where other than temporary impairments have been recognized.
As
The Company’s investment portfolio includes structured commercial mortgage-backed securities (“CMBS”) with a book value of December 31, 2006, the Company’s common stock portfolio, which is comprised primarily of publicly traded equity index funds, had$440.8 million and a market value of $1,613.7$350.7 million. All of the Company’s investments in these securities are rated AAA by Standard & Poor’s Ratings Services (“Standard & Poor’s”) except for one, which is rated AA and had book and market values of $9.9 million comprising 11.6%and $4.5 million, respectively.
At December 31, 2008, the Company’s fixed maturity portfolio included $13.0 million in book value of totalasset-backed securities with sub-prime mortgage loan exposure. Sub-prime mortgage loans generally represent loans made to borrowers with limited or blemished credit records. At December 31, 2008 almost 100% of the Company’s asset-backed securities with sub-prime exposure were investment grade and the market value of these investments and cash.was $11.9 million.
The following table reflects investment results for the Company for each of the five years ended December 31:
| (Dollars in millions) | Average Investments (1) | Pre-tax Investment Income (2) | Pre-tax Effective Yield | Pre-tax Realized Net Capital Gains (Losses) | Pre-tax Unrealized Net Capital (Losses) Gains | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | $ | 13,446.5 | $ | 629.4 | 4.68 | % | $ | 35.1 | $ | 131.7 | |||||||
| 2005 | 12,067.8 | 522.8 | 4.33 | % | 90.3 | (77.8 | ) | ||||||||||
| 2004 | 10,042.2 | 495.9 | 4.94 | % | 89.6 | 40.1 | |||||||||||
| 2003 | 7,779.1 | 402.6 | 5.18 | % | (38.0 | ) | 68.1 | ||||||||||
| 2002 | 6,068.1 | 350.7 | 5.78 | % | (50.0 | ) | 135.9 | ||||||||||
| ______________ | |||||||||||||||||
(1) Average of the beginning and ending carrying values of investments and cash, less net funds held, future policy benefit reserve, and non-interest bearing cash. Bonds, common stock and redeemable and non-redeemable preferred stocks are carried at market value.(2) After investment expenses, excluding realized net capital gains (losses).periods indicated:
22
|
| December 31, | ||||||||
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|
|
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|
|
| Pre-tax |
| Pre-tax |
|
|
|
| Pre-tax |
| Pre-tax |
| Realized Net |
| Unrealized Net |
|
| Average |
| Investment |
| Effective |
| Capital (Losses) |
| Capital (Losses) |
(Dollars in millions) |
| Investments (1) |
| Income (2) |
| Yield |
| Gains (3) |
| Gains |
2008 |
| $ 14,411.8 |
| $ 565.9 |
| 3.93% |
| $ (695.8) |
| $ (310.4) |
2007 |
| 14,491.7 |
| 682.4 |
| 4.71% |
| 86.3 |
| 21.4 |
2006 |
| 13,446.5 |
| 629.4 |
| 4.68% |
| 35.1 |
| 131.7 |
2005 |
| 12,067.8 |
| 522.8 |
| 4.33% |
| 90.3 |
| (77.8) |
2004 |
| 10,042.2 |
| 495.9 |
| 4.94% |
| 89.6 |
| 40.1 |
|
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(1) Average of the beginning and ending carrying values of investments and cash, less net funds held, future policy benefit reserve, and | ||||||||||
non-interest bearing cash. |
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(2) After investment expenses, excluding realized net capital (losses) gains. |
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| ||||
(3) In 2008, includes ($276.0) million of fair value re-measurements and in 2007, includes $76.6 million of fair value re-measurements. | ||||||||||
(Some amounts may not reconcile due to rounding.) |
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The following table summarizestables summarize fixed maturities as of December 31, 2006 and 2005:for the periods indicated:
| (Dollars in millions) | Amortized Cost | Unrealized Appreciation | Unrealized Depreciation | Market Value | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, 2006: | ||||||||||||||
| U.S. Treasury securities and obligations of U.S. | ||||||||||||||
| government agencies and corporations | $ | 229.2 | $ | 1.3 | $ | (3.8 | ) | $ | 226.7 | |||||
| Obligations of states and political subdivisions | 3,633.2 | 164.4 | (5.2 | ) | 3,792.4 | |||||||||
| Corporate securities | 2,877.1 | 33.9 | (55.0 | ) | 2,856.0 | |||||||||
| Mortgage-backed securities | 1,626.0 | 2.8 | (34.8 | ) | 1,594.0 | |||||||||
| Foreign government securities | 1,019.9 | 18.6 | (10.1 | ) | 1,028.4 | |||||||||
| Foreign corporate securities | 824.8 | 11.4 | (13.8 | ) | 822.4 | |||||||||
| Total | $ | 10,210.2 | $ | 232.4 | $ | (122.7 | ) | $ | 10,319.9 | |||||
December 31, 2005: | ||||||||||||||
| U.S. Treasury securities and obligations of U.S. | ||||||||||||||
| government agencies and corporations | $ | 205.0 | $ | 0.1 | $ | (3.5 | ) | $ | 201.6 | |||||
| Obligations of states and political subdivisions | 3,615.0 | 153.4 | (8.1 | ) | 3,760.3 | |||||||||
| Corporate securities | 2,857.4 | 51.9 | (49.9 | ) | 2,859.4 | |||||||||
| Mortgage-backed securities | 1,556.0 | 4.4 | (33.2 | ) | 1,527.2 | |||||||||
| Foreign government securities | 1,047.7 | 33.5 | (1.7 | ) | 1,079.5 | |||||||||
| Foreign corporate securities | 591.1 | 28.0 | (5.0 | ) | 614.1 | |||||||||
| Total | $ | 9,872.2 | $ | 271.3 | $ | (101.4 | ) | $ | 10,042.1 | |||||
| At December 31, 2008 | ||||||
| Amortized |
| Unrealized |
| Unrealized |
| Market |
(Dollars in millions) | Cost |
| Appreciation |
| Depreciation |
| Value |
U.S. Treasury securities and obligations of U.S. |
|
|
|
|
|
|
|
government agencies and corporations | $ 354.2 |
| $ 55.2 |
| $ (0.7) |
| $ 408.7 |
Obligations of states and political subdivisions | 3,846.7 |
| 113.8 |
| (164.9) |
| 3,795.6 |
Corporate securities | 2,690.8 |
| 61.6 |
| (227.7) |
| 2,524.7 |
Mortgage-backed securities | 1,988.4 |
| 26.3 |
| (136.3) |
| 1,878.4 |
Foreign government securities | 1,087.7 |
| 118.0 |
| (23.6) |
| 1,182.1 |
Foreign corporate securities | 964.3 |
| 56.8 |
| (51.0) |
| 970.1 |
Total | $ 10,932.1 |
| $ 431.7 |
| $ (604.2) |
| $ 10,759.6 |
|
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(Some amounts may not reconcile due to rounding) |
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| At December 31, 2007 | ||||||
| Amortized |
| Unrealized |
| Unrealized |
| Market |
(Dollars in millions) | Cost |
| Appreciation |
| Depreciation |
| Value |
U.S. Treasury securities and obligations of U.S. |
|
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|
government agencies and corporations | $ 224.6 |
| $ 7.1 |
| $ (0.1) |
| $ 231.6 |
Obligations of states and political subdivisions | 3,512.7 |
| 138.4 |
| (2.5) |
| 3,648.6 |
Corporate securities | 2,557.8 |
| 33.4 |
| (55.6) |
| 2,535.6 |
Mortgage-backed securities | 1,636.5 |
| 9.5 |
| (18.8) |
| 1,627.2 |
Foreign government securities | 1,123.0 |
| 25.2 |
| (6.6) |
| 1,141.6 |
Foreign corporate securities | 1,061.8 |
| 14.9 |
| (15.7) |
| 1,061.0 |
Total | $ 10,116.4 |
| $ 228.5 |
| $ (99.3) |
| $ 10,245.6 |
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(Some amounts may not reconcile due to rounding.) |
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The following table represents the credit quality distribution of the Company’s fixed maturities as of December 31:for the periods indicated:
| 2006 | 2005 | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Rating Agency Credit Quality Distribution (Dollars in millions) | Market Value | Percent of Total | Market Value | Percent of Total | |||||||||||||
| AAA | $ | 6,301.9 | 61.1 | % | $ | 5,923.0 | 59.0 | % | |||||||||
| AA | 1,213.3 | 11.7 | % | 1,087.4 | 10.8 | % | |||||||||||
| A | 1,628.5 | 15.8 | % | 1,794.8 | 17.9 | % | |||||||||||
| BBB | 886.6 | 8.6 | % | 943.3 | 9.4 | % | |||||||||||
| BB | 197.0 | 1.9 | % | 208.2 | 2.1 | % | |||||||||||
| B | 80.8 | 0.8 | % | 74.4 | 0.7 | % | |||||||||||
| Other | 11.8 | 0.1 | % | 11.0 | 0.1 | % | |||||||||||
| Total | $ | 10,319.9 | 100.0 | % | $ | 10,042.1 | 100.0 | % | |||||||||
23
| At December 31, | ||||||
| 2008 |
| 2007 | ||||
(Dollars in millions) | Market |
| Percent of |
| Market |
| Percent of |
Rating Agency Credit Quality Distribution: | Value |
| Total |
| Value |
| Total |
AAA | $ 4,554.9 |
| 42.3% |
| $ 6,422.0 |
| 62.7% |
AA | 2,591.8 |
| 24.1% |
| 1,250.5 |
| 12.2% |
A | 2,259.3 |
| 21.0% |
| 1,510.3 |
| 14.7% |
BBB | 1,201.7 |
| 11.2% |
| 847.2 |
| 8.3% |
BB | 85.2 |
| 0.8% |
| 152.8 |
| 1.5% |
B | 43.2 |
| 0.4% |
| 58.2 |
| 0.6% |
Other | 23.5 |
| 0.2% |
| 4.6 |
| 0.0% |
Total | $ 10,759.6 |
| 100.0% |
| $ 10,245.6 |
| 100.0% |
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
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The following table summarizes fixed maturities by contractual maturity as of December 31, 2006:
| (Dollars in millions) | Market Value | Percent of Total | ||||||
|---|---|---|---|---|---|---|---|---|
| Maturity category: | ||||||||
| Less than one year | $ | 637.1 | 6.2 | % | ||||
| 1-5 years | 2,479.7 | 24.0 | % | |||||
| 5-10 years | 2,008.1 | 19.5 | % | |||||
| After 10 years | 3,601.0 | 34.9 | % | |||||
| Subtotal | 8,725.9 | 84.6 | % | |||||
| Mortgage-backed securities (1) | 1,594.0 | 15.4 | % | |||||
| Total | $ | 10,319.9 | 100.0 | % | ||||
| ______________ | ||||||||
(1) Mortgage-backed securities generally are more likely to be prepaid than other fixed maturities. Therefore, contractual maturities are excluded from this table since they may not be indicative of actual maturities.for the period indicated:
|
| At December 31, 2008 | ||
|
| Market |
| Percent of |
(Dollars in millions) |
| Value |
| Total |
Maturity category: |
|
|
|
|
Less than one year |
| $ 606.4 |
| 5.6% |
1-5 years |
| 2,605.8 |
| 24.2% |
5-10 years |
| 2,375.9 |
| 22.1% |
After 10 years |
| 3,293.1 |
| 30.6% |
Subtotal |
| 8,881.2 |
| 82.5% |
Mortgage-backed securities (1) |
| 1,878.4 |
| 17.5% |
Total |
| $ 10,759.6 |
| 100.0% |
_________________ |
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(1) Mortgage-backed securities generally are more likely to be prepaid than other fixed maturities. Therefore, contractual maturities are | ||||
excluded from this table since they may not be indicative of actual maturities. |
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(Some amounts may not reconcile due to rounding.) |
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Financial Strength Ratings
Ratings.
The following table shows the current financial strength ratings of the Company’s operating subsidiaries as reported by A.M. Best, Standard & Poor’s Rating Services (“Standard & Poor’s”) and Moody’s Investors Service, Inc. (“Moody’s”).Moody’s. These ratings are based upon factors of concern to policyholders and should not be considered an indication of the degree or lack of risk involved in a direct or indirect equity investment in an insurance or reinsurance company.
All of the below-mentioned ratings are continually monitored and revised, if necessary, by each of the rating agencies. The ratings presented in the following table were in effect as of February 28, 2009.
The Company believes that its ratings, in general, have become increasinglyare important to its operations because they provide the Company’s customers and investors with an independent assessment of the Company’s underlying financial strength using a scale that provides for relative comparisons. Strong financial ratings are particularly important for reinsurance companies. Ceding companies must rely on their reinsurers to pay covered losses well into the future. As a result, a highly rated reinsurer is generally preferred.
Operating | Subsidiary: | A.M. Best | Standard & | Poor's* | Moody's | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Everest Re | A+ (Superior) | AA- (Very Strong) | Aa3 (Excellent) | |||||||||||||||||||||
Bermuda Re | A+ (Superior) | AA- (Very Strong) | Aa3 (Excellent) | |||||||||||||||||||||
Everest International | A+ (Superior) | Not Rated | Not Rated | |||||||||||||||||||||
Everest National | A+ (Superior) | AA- (Very Strong) | Not Rated | |||||||||||||||||||||
Everest Indemnity | A+ (Superior) | Not Rated | Not Rated | |||||||||||||||||||||
Everest Security | A+ (Superior) | Not Rated | Not Rated | |||||||||||||||||||||
Mt. McKinley | Not Rated | Not Rated | Not Rated | |||||||||||||||||||||
____________________
* Standard & Poor’s placed the Company’s ratings on Credit Watch with negative implications, effective December 19, 2008. S&P stated in their release that they may conclude to lower the ratings one rating level.
A.M. Best states that the “A+” (“Superior”) rating is assigned to those companies which, in its opinion, have a superior ability to meet their ongoing obligations to policyholders based on A.M. Best’s comprehensive quantitative and qualitative evaluation of a company’s balance sheet strength, operating performance and business profile. Standard & Poor’s states that the “AA-” rating is assigned to those insurance companies which, in its opinion, have very strong financial security characteristics with respect to their ability to pay under its insurance policies and contracts in accordance with their terms. The Standard & Poor’s ratings were placed on Credit Watch with negative implications on December 19, 2008. Ratings are placed on Credit Watch when an event or a deviation from an expected trend occurs and Standard & Poor’s requires additional information to evaluate the rating. Possible resolutions are a one notch downgrade to A+, retention of the existing ratings with a “stable outlook” or a “negative outlook.” Management has met with Standard & Poor’s and provided additional information. It is not possible to predict the outcome of Standard & Poor’s review at this point. Management does not believe that a one notch downgrade would have a materially adverse affect on the Company’s business. Moody’s states that insurance companies rated “Aa” offer excellent financial security. Together with the Aaa rated companies, Aa rated companies constitute what are generally known as high-grade companies, with Aa rated companies generally having somewhat larger long-term risks.
24
Subsidiaries other than Everest Re and Bermuda Re may not be rated by some or any rating agencies because such ratings are not considered essential by the individual subsidiary’s customers or because of the limited nature of the subsidiary’s operations. In particular, Mt. McKinley is not rated because it is in run-off status.
Debt Ratings
Ratings.
The following table shows the debt ratings by A.M. Best, Standard & Poor’s and Moody’s of the Holdings’ senior notes due March 15, 2010 and October 15, 2014 and Everest Re Capital Trust (“Capital Trust”)long term notes due May 1, 2067 and Everest Re Capital Trust II’s (“Capital Trust II”) trust preferred securities due November 15, 2032 and March 29, 2034, respectively, all of which are considered investment grade. Debt ratings are athe rating agencies’ current assessment of the credit worthiness of an obligor with respect to a specific obligation.
A.M. Best | Standard & | Poor's* | Moody's | |||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Senior Notes | a- | (Excellent) | A- | (Strong) | A3 | (Good security) | ||||||||||||||||||||
Trust Preferred Securities | bbb | (Good) | BBB | (Adequate) | Baa1 | (Adequate security) | ||||||||||||||||||||
Long Term Notes | bbb+ | (Good) | BBB | (Adequate) | Baa1 | (Adequate security) | ||||||||||||||||||||
____________________
* Standard & Poor’s placed the Company’s ratings on Credit Watch with negative implications, effective December 19, 2008. S&P stated in their release that they may conclude to lower the ratings one rating level.
A debt rating of “a” or “a-” is assigned by A.M. Best where the issuer, in A.M. Best’s opinion, has a strong ability to meet the terms of the obligation. A debt rating of “A-”“ is assigned by Standard & Poor’s where the obligor has a strong capacity to meet its financial commitment on the obligation, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rated categories. Standard & Poor’s assigns a debt rating of “BBB” to issues that exhibit adequate protection parameters although adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. The Standard & Poor’s ratings were placed on Credit Watch with negative implications on December 19, 2008. Ratings are placed on Credit Watch when an event or a deviation from an expected trend occurs and Standard & Poor’s requires additional information to evaluate the rating. Possible resolutions are a one notch downgrade, retention of the existing ratings with a “stable outlook” or a “negative outlook.” Management has met with Standard & Poor’s and provided additional information. It is not possible to predict the outcome of Standard & Poor’s review at this point. Management does not believe that a one notch downgrade would have a materially adverse affect on the Company’s business. According to Moody’s, a debt rating of “A3” is assigned to issues that are considered upper-medium-grade obligations and subject to low credit risk. Obligations rated “Baa1” are subject to moderate credit risk and are considered medium-grade and as such may possess certain speculative characteristics.
Competition
Competition.
The worldwide reinsurance and insurance businesses are highly competitive, as well as cyclical by product and market. As a result, financial results tend to fluctuate with periods of constrained availability, high rates and strong profits followed by periods of abundant capacity, low rates and constrained profitability. Competition in the types of reinsurance and insurance business that the Company underwrites is based on many factors, including the perceived overall financial strength of the reinsurer or insurer, ratings of the reinsurer or insurer by A.M. Best and/or Standard & Poor’s, (“S&P”), underwriting expertise, the jurisdictions where the reinsurer or insurer is licensed or otherwise authorized, capacity and coverages offered, premiums charged, other terms and conditions of the reinsurance and insurance business offered, services offered, speed of claims payment and reputation and experience in lines written. TheseFurthermore, the market impact from these competitive factors operate at the individual market participant levelrelated to varying degrees, as applicable to the specific participant’s circumstances. They also operate in aggregatereinsurance and insurance is generally not consistent across the reinsurance industry more generally, contributing, in combination with economic conditionslines of business, domestic and variations in the reinsurance buying practices of insurance companies (by participantinternational geographical areas and in the aggregate), to cyclical movements in reinsurance rates, terms and conditions and ultimately reinsurance industry aggregate financial results.distribution channels.
The Company competes in the U.S., Bermuda and international reinsurance and insurance markets with numerous global competitors. The Company’s competitors include independent reinsurance and insurance companies, subsidiaries or affiliates of established worldwide insurance companies, reinsurance departments of certain insurance companies and domestic and international underwriting operations, including underwriting syndicates at Lloyd’s. Some of these competitors have greater financial resources than the Company does and have established long-termlong term and continuing business relationships, which can be a significant competitive advantage. In addition, the lack of strong barriers to entry into the reinsurance business and the potential for securitization of reinsurance and insurance risks through capital markets provide additional sources of potential reinsurance and insurance capacity and competition.
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In 2006,During the Company observed strong price increases,latter part of 2007 and more restricted limits, in those property lines and regions that were most affected by the catastrophe events of 2005, principally Hurricanes Katrina, Rita and Wilma. Reinsurance capacity in these areas was constrained, particularly for catastrophe reinsurance, which includes southeastern U.S. exposures andthroughout 2008, there has been a significant slowdown in the retrocessionglobal economy. Excessive availability and energy lines. The record catastrophe lossesuse of 2005 have also generallycredit, particularly by individuals, led to modest strengtheningincreased defaults on sub-prime mortgages in the U.S. and elsewhere, falling values for houses and many commodities prices and contracting consumer spending. The significant increase in default rates negatively impacted the value of mortgage-backed securities held by both foreign and domestic institutions. The defaults have led to a corresponding increase in foreclosures, which have driven down housing values, resulting in additional losses on the asset-backed securities. During the third and fourth quarters of 2008, the credit markets deteriorated dramatically, evidenced by widening credit spreads and dramatically reduced availability of credit. Many financial institutions, including some insurance entities, experienced liquidity crises due to immediate demands for funds for withdrawals or collateral, combined with falling asset values and their inability to sell assets to meet the increased demands. As a result, several financial institutions have failed or been acquired at distressed prices, while others have received loans from the U.S. propertygovernment to continue operations. The liquidity crisis significantly increased the spreads on fixed maturities and, at the same time, had a dramatic and negative impact on the stock markets around the world. The combination of losses on securities from failed or impaired companies combined with the decline in values of fixed maturities and equity securities has resulted in significant declines in the capital bases of most insurance and reinsurance companies. It is too early to predict the timing and extent of impact the capital deterioration will have on insurance and reinsurance market conditions. There is an expectation that these events will ultimately result in increased rates for insurance and reinsurance in certain segments of the market, but there is no assurance that this will be the case.
Worldwide insurance and reinsurance market conditions continued to be very competitive. Generally, there was ample insurance and reinsurance capacity relative to demand. The Company noted, however, that in many markets and lines, thatthe rates of decline have little or no substantive catastrophe exposureslowed, pricing in some segments was relatively flat and price stabilizationthere was upward movement in some others. Competition and its effect on rates, terms and conditions vary widely by market and coverage yet continues to be most prevalent in the U.S. casualty insurance and reinsurance markets. However, certainIn addition to demanding lower rates and improved terms, ceding companies have retained more of their business by reducing quota share percentages, purchasing excess of loss covers in lieu of quota shares, and increasing retentions on excess of loss business. The Company’s quota share premiums have declined, particularly on catastrophe exposed property business, due to slower growth and increased purchases of common account covers by ceding companies, which reduces the premiums subject to the quota share contract. The U.S. insurance markets in which the Company participates, remains extremely competitive as well, particularly in the workers’ compensation, public entity and contractor sectors. While the Company’s U.S. casualty lines continuegrowth has slowed, given the specialty nature of its business and its underwriting discipline, the Company believes the impact on the profitability of its business to exhibit weakerbe less pronounced than on the market conditions led bygenerally.
Rate decreases in the medical stop lossinternational markets have generally been less pronounced than in the U.S., and D&O reinsurance classes, as well as the California workers’ compensation insurance line.Company has seen some increases, particularly for catastrophe exposed business. The Company believeshas grown its business in the Middle East, Latin America and Asia and has expanded its international reach by opening a new office in Brazil to capitalize on the recently expanded opportunity for professional reinsurers in that U.S. casualtymarket and on the economic growth expected for Brazil in the future.
The reinsurance industry has experienced a period of falling rates and volume. Profit opportunities have become generally remains adequately priced;less available over time; however increased price competition at the insurance company levelunfavorable trends appear to have abated somewhat. The Company is now seeing smaller rate declines, pockets of stability and cedants’ increased appetitesome increases in some markets and for retaining more profitable business net following several years of hard-market conditions, may result in modestly softer reinsurance pricing. The Company’s U.S. insurance operation is less affected by these standard casualty insurance market conditions given its specialty insurance program orientation. Finally, the Company continues to observe generally stable property reinsurance market conditions in most countries outside of the U.S., except for hardening property market conditions in Mexico following Hurricane Wilma, while casualty rates are softening.
U.S. property reinsurance market conditions tightened, particularly within peak catastrophe zones, during 2006. This market hardening was particularly pronounced in third quarter renewals with incrementally higher rate changes and even more restrictive coverage terms than earlier in 2006. As a result, many reinsurance buyers were not able to fully place their reinsurance program and have been forced to raise retention levels and/or reduce catastrophe limit purchases. In turn, insurance companies continue to adjust limits and coverages and increase the premium rates they charge their customers. Together, these trends have generally resulted in insurance companies retaining more property risk exposure and being more prone to potential future earnings volatility than in past years. This trend reflects an imbalance between reinsurance supply and demand.some coverages. As a result of this imbalancevery significant investment and higher rates, additional competition is enteringcatastrophe losses incurred by both primary insurers and reinsurers over the marketpast year, but principally in the form of new companiesthird and alternative risk transfer mechanisms. In January 2007, the Florida legislature enacted insurance reform that increases insurer’s access to the Florida Hurricane Catastrophe Fund, thus potentially reducing the amount of reinsurance purchased from the private reinsurance market. The Company is unable to predict the impact on future market conditions from the increased competitionfourth quarters, industry-wide capital has declined and legislative reform. In addition to these market forces, reinsurers continue to reassess their risk appetites and rebalance their property portfolios to reflect improved price to exposure metrics against the backdrop of: (i) recent revisions to the industry’s catastrophe loss projection models, which are indicating significantly higher loss potentials and consequently higher pricing requirements and (ii) elevated rating agency scrutiny has increased. There is an expectation that given the rate softening that has occurred over the past several quarters, the industry-wide decline in capital combined with volatile and inaccessible capital requirementsmarkets and a looming recession, will lead to a hardening of insurance and reinsurance marketplace rates, terms and conditions. It is too early to gauge the extent of hardening, if any, that will occur; however, it appears that much of the redundant capital has been wrung out of the industry, and the stage is set for many catastrophe exposed companies.firmer markets.
In light of its 2005 catastrophe experience, the Company reexamined its risk management practices, concluded that its control framework operated generally as intended and made appropriate portfolio adjustments to its property reinsurance operations during the first nine months of 2006. This portfolio repositioning, particularly within peak catastrophe zones, including Southeast U.S., Mexico and Gulf of Mexico, has enabled the Company to benefit from these dislocated markets by carefully shifting the mix of its writings toward the most profitable classes, lines, customers and territories and enhancing portfolio balance and diversification.
Overall, the Company believes that current marketplace conditions offer solidprofit opportunities for the Companyit, given its strong ratings, distribution system, reputation and expertise. The Company continues to employ its opportunistic strategy of targeting those segments offeringbusiness that offers the greatest profit potential, while maintaining balance and diversification in its overall portfolio.
Employees
Employees.
As of February 1, 2007,2009, the Company employed 736858 persons. Management believes that employee relations are good. None of the Company’s employees are subject to collective bargaining agreements, and the Company is not aware of any current efforts to implement such agreements.
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Regulatory Matters
Matters.
The Company and its insurance subsidiaries are subject to regulation under the insurance statutes of the various jurisdictions in which they conduct business, including essentially all states of the U.S., Canada, Singapore, Brazil (licensed in 2008), the United Kingdom and Bermuda. In addition, the Company is currently in the process of applying for a reinsurance license in Ireland. These regulations vary from jurisdiction to jurisdiction and are generally designed to protect ceding insurance companies and policyholders by regulating the Company’s conduct of business, financial integrity and ability to meet its obligations. Many of these regulations require reporting of information designed to allow insurance regulators to closely monitor the Company’s performance.
Insurance Holding Company Regulation.Under applicable U.S. laws and regulations, no person, corporation or other entity may acquire a controlling interest in the Company, unless such person, corporation or entity has obtained the prior approval for such acquisition from the Insurance Commissionersinsurance commissioners of Delaware and the other states in which the Company’s insurance subsidiaries are domiciled or deemed domiciled, currently California and Georgia. Under these laws, “control” is presumed when any person acquires, directly or indirectly, 10% or more of the voting securities of an insurance company. To obtain the approval of any change in control, the proposed acquirer must file an application with the relevant insurance commissioner disclosing, among other things, the background of the acquirer and that of its directors and officers, the acquirer’s financial condition and its proposed changes in the management and operations of the insurance company. U.S. state regulators also require prior notice or regulatory approval of material inter-affiliate transactions within the holding company structure.
The Insurance Companies Act of Canada requires prior approval by the Minister of Finance of anyone acquiring a significant interest in an insurance company authorized to do business in Canada. In addition, the Company is subject to regulation by the insurance regulators of other states and foreign jurisdictions in which it is authorized to do business. Certain of these states and foreign jurisdictions impose regulations regulating the ability of any person to acquire control of an insurance company authorized to do business in that jurisdiction without appropriate regulatory approval similar to those described above.
Dividends.Under Bermuda law, Group is prohibited from declaring or paying a dividend if such payment would reduce the realizable value of its assets to an amount less than the aggregate value of its liabilities and its issued share capital and share premium (additional paid-in capital) accounts. Group’s ability to pay dividends and its operating expenses is partially dependent upon dividends from its subsidiaries. The payment of dividends by insurance subsidiaries is limited under Bermuda law as well as the laws of the
various U.S. states in which Group’s insurance and reinsurance subsidiaries are domiciled or deemed domiciled. The limitations are generally based upon net income and compliance with applicable policyholders’ surplus or minimum solvency and liquidity requirements as determined in accordance with the relevant statutory accounting practices. As Holdings has outstanding debt obligations, it is dependent upon dividends and other permissible payments from its operating subsidiaries to enable it to meet its debt and operating expense obligations and to pay dividends to Group.
Under Bermuda law, Bermuda Re isand Everest International are unable to declare or make payment of a dividend if it failsthey fail to meet itstheir minimum solvency margin or minimum liquidity ratio. As a long-term insurer,long term insurers, Bermuda Re isand Everest International are also unable to declare or pay a dividend to anyone who is not a policyholder unless, after payment of the dividend, the value of the assets in its long-termtheir long term business fund, as certified by itstheir approved actuary, exceeds itstheir liabilities for long-termlong term business by at least the $250,000 minimum solvency margin. Prior approval of the Bermuda Monetary Authority is required if Bermuda Re’s or Everest International’s dividend payments would reduce itstheir prior year end total statutory capital by 15.0% or more. At December 31, 2006,2008, Bermuda Re and Everest International exceeded their solvency and liquidity requirements by a significant margin.
The payment of dividends to Holdings by Everest Re is subject to limitations imposed by Delaware law. Generally, Everest Re may only pay dividends out of its statutory earned surplus, which was $2,704.1$2,342.4 million at December 31, 2006,2008, and only after it has given 10 days prior notice to the Delaware Insurance Commissioner.
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During this 10-day period, the Commissioner may, by order, limit or disallow the payment of ordinary dividends if the Commissioner finds the insurer to be presently or potentially in financial distress. Further, the maximum amount of dividends that may be paid without the prior approval of the Delaware Insurance Commissioner in any twelve month period is the greater of (1) 10% of anthe insurer’s statutory surplus as of the end of the prior calendar year or (2) the insurer’s statutory net income, not including realized capital gains, for the prior calendar year. Accordingly, the maximum amount that will be available for the payment of dividends by Everest Re in 20072009 without triggering the requirement for prior approval of regulatory authorities in connection with a dividend is $270.4$315.6 million. In addition, Everest Re has $300.0 million available for payment of dividends in 2009 from the extraordinary dividend approval from the Insurance Commissioner of Delaware.
Insurance Regulation. Neither BermudaNeitherBermuda Re nor Everest International is admitted to do business in any jurisdiction in the U.S. Both conduct their insurance business from their offices in Bermuda, and in the case of Bermuda Re, its branch in the UK. In Bermuda, Bermuda Re and Everest International are regulated by the Insurance Act 1978 (as amended) and related regulations (the “Act”). The Act establishes solvency and liquidity standards and auditing and reporting requirements and subjects Bermuda Re and Everest International to the supervision, investigation and intervention powers of the Bermuda Monetary Authority. Under the Act, Bermuda Re and Everest International, as Class 4 insurers, are each required to maintain a principal office in Bermuda, to maintain a minimum of $100 million in statutory capital and surplus, to have an independent auditor approved by the Bermuda Monetary Authority conduct an annual audit and report on their respective statutory and U.S. GAAP financial statements and filings and to have an appointed loss reserve specialist (also approved by the Bermuda Monetary Authority) review and report on their respective loss reserves annually.
Bermuda Re isand Everest International are also registered under the Act as a long-term insurerlong term insurers and isare thereby authorized to write life and annuity business. As a long-term insurer,long term insurers, Bermuda Re isand Everest International are required to maintain $250,000 in statutory capital separate from itstheir Class 4 minimum statutory capital and surplus, to maintain a long-termlong term business fund,funds, to separately account for this business and to have an approved actuary prepare a certificate concerning its long-termtheir long term business assets and liabilities to be filed annually.
U.S. domestic property and casualty insurers, including reinsurers, are subject to regulation by their state of domicile and by those states in which they are licensed. The regulation of reinsurers is typically focused on financial condition, investments, management and operation. The rates and policy terms of reinsurance agreements are generally not subject to direct regulation by any governmental authority.
The operations of Everest Re’s foreign branch offices in Canada and Singapore are subject to regulation by the insurance regulatory officials of those jurisdictions. Management believes that the Company is in compliance with applicable laws and regulations pertaining to its business and operations. Effective January 1, 2004, Everest Re sold its United Kingdom branch to Bermuda Re. Business for this branch was previously included in the International segment and is now included in the Bermuda segment. As a result of this transaction, Bermuda Re’s operations in the United Kingdom and worldwide are subject to regulation by the Financial Services Authority (the “FSA”). The FSA imposes solvency, capital adequacy, audit, financial reporting and other regulatory requirements on insurers transacting business in the United Kingdom. Bermuda Re presently meets or exceeds all of the FSA’s solvency and capital requirements.
U.S. domestic property and casualty insurers, including reinsurers, are subject to regulation by their state of domicile and by those states in which they are licensed. The regulation of reinsurers is typically focused on
financial condition, investments, management and operation. The rates and policy terms of reinsurance agreements are generally not subject to direct regulation by any governmental authority.
The operations of Everest Re’s foreign branch offices in Canada and Singapore are subject to regulation by the insurance regulatory officials of those jurisdictions. Management believes that the Company is in compliance with applicable laws and regulations pertaining to its business and operations.
Everest Indemnity, Everest National, Everest Security and Mt. McKinley are subject to regulations similar to the U.S. regulations applicable to Everest Re. In addition, Everest National and Everest Security must comply with substantial regulatory requirements in each state where they conduct business. These additional requirements include, but are not limited to, rate and policy form requirements, requirements with regard to licensing, agent appointments, participation in residual markets and claim handling procedures. These regulations are primarily designed for the protection of policyholders.
Licenses.Everest Re is a licensed property and casualty insurer and/or reinsurer in all states (except Nevada and Wyoming), the District of Columbia and Puerto Rico. In New Hampshire and Puerto Rico, Everest Re is
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licensed for reinsurance only. Such licensing enables U.S. domestic ceding company clients to take credit for uncollateralized reinsurance receivables from Everest Re in their statutory financial statements.
Everest Re is licensed as a property and casualty reinsurer in Canada. It is also authorized to conduct reinsurance business in Singapore.Singapore and Brazil. Everest Re can also write reinsurance in other foreign countries. Because some jurisdictions require a reinsurer to register in order to be an acceptable market for local insurers, Everest Re is registered as a foreign insurer and/or reinsurer in the following countries: Argentina, Bolivia, Chile, Colombia, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Peru, Venezuela and the Philippines. Everest National is licensed in 47 states and the District of Columbia. Everest Indemnity is licensed in Delaware and is eligible to write insurance on a surplus lines basis in 49 states, the District of Columbia and Puerto Rico. Everest Security is licensed in Georgia and Alabama. Mt. McKinley is licensed in Delaware and California. Bermuda Re and Everest International are registered as Class 4 and long term insurers in Bermuda. Bermuda Re is also registered as a long-term insurer in Bermuda and an authorized reinsurer in the U.K.
Periodic Examinations.Everest Re, Everest National, Everest Indemnity, Everest Security and Mt. McKinley are subject to periodic financial examination (usually every 3three years) of their affairs by the insurance departments of the states in which they are licensed, authorized or accredited. Everest Re’s, Everest National’s, Everest Security’s, Everest Indemnity’s and Mt. McKinley’s last examination reports were as of December 31, 2003, while Everest National’s last examination was as of December 31, 2001.2006. None of these reports contained any material findings or recommendations. In addition, U.S. insurance companies are subject to examinations by the various state insurance departments where they are licensed concerning compliance with applicable conduct of business regulations.
NAIC Risk-Based Capital Requirements.The U.S. National Association of Insurance Commissioners (“NAIC”) employshas developed a formula to measure the amount of capital appropriate for a property and casualty insurance company to support its overall business operations in light of its size and risk profile. The major categories of a company’s risk profile are its asset risk, credit risk, and underwriting risk. The standards are an effort by the NAIC to prevent insolvencies, to ward off other financial difficulties of insurance companies and to establish uniform regulatory standards among state insurance departments.
Under the approved formula, a company’s statutory surplus is compared to its risk based capital (“RBC”). If this ratio is above a minimum threshold, no action is necessary. Below this threshold are four distinct action levels at which aan insurer’s domiciliary state regulator can intervene with increasing degrees of authority over a domestican insurer as the ratio of surplus to RBC decreases. The mildest intervention requires an insurer to submit a plan of appropriate corrective actions. The most severe action requires an insurer to be rehabilitated or liquidated.
Based on their financial positions at December 31, 2006,2008, Everest Re, Everest National, Everest Indemnity and Everest Security significantly exceed the minimum thresholds. Since Mt. McKinley ceased writing new and renewal insurance in 1985, its domiciliary regulator, the Delaware Insurance Commissioner, has exempted Mt. McKinley from complying with RBC requirements.
Various proposals to change the RBC formula arise from time to time. The Company is unable to predict whether any such proposal will be adopted, the form in which any such proposals would be adopted or the effect, if any, the adoption of any such proposal or change in the RBC calculations would have on the Company.
Tax Matters.
The following summary of the taxation of the Company is based on current law. There can be no assurance that legislative, judicial, or administrative changes will not be enacted that materially affectsaffect this summary.
Bermuda.Under Bermuda law, no income, withholding or capital gains taxes are imposed upon Group and its Bermuda subsidiaries. Group and its Bermuda subsidiaries have received an undertaking from the Minister of
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Finance in Bermuda that, in the event of any taxes being imposed, Group and its Bermuda subsidiaries will be exempt from taxation in Bermuda until March 2016. Non-Bermuda branches of Bermuda subsidiaries are subject to local taxes in the jurisdictions in which they operate.
United States.Group’s U.S. subsidiaries conduct business in and are subject to taxation in the U.S. Non-U.S. branches of U.S. subsidiaries are subject to local taxation in the jurisdictions in which they operate. Should the U.S. subsidiaries distribute current or accumulated earnings and profits in the form of dividends or otherwise, to Group, the Company would be subject to withholding taxes. Group and its Bermuda subsidiaries believe that they have operated and will continue to operate their businesses in a manner that will not cause them to generate income treated as effectively connected with the conduct of a trade or business within the U.S. On this basis, Group does not expect that it and its Bermuda subsidiaries will be required to pay U.S. corporate income taxes other than withholding taxes on certain investment income and premium excise taxes. If Group or its Bermuda subsidiaries were to become subject to U.S. income tax;tax, there could be a material adverse effect on the Company’s financial condition, results of operations and cash flows.
United Kingdom.Bermuda Re’s UK branch conducts business in the UK and is subject to taxation in the UK. Bermuda Re believes that it has operated and will continue to operate its Bermuda operation in a manner which will not cause them to be subject to UK taxation. If Bermuda Re’s Bermuda operations were to become subject to UK income tax, there could be a material adverse impact on the Company’s financial condition, results of operations and cash flow.
Available Information
Information.
The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements and amendments to those reports are available free of charge through the Company’s internet website at http://www.everestre.com as soon as reasonably practicable after such reports are electronically filed with the Securities and Exchange Commission (the “SEC”).
ITEM 1A. Risk Factors
RISK FACTORS
In addition to the other information provided in this report, the following risk factors should be considered when evaluating an investment in our securities. If the circumstances contemplated by the individual risk factors materialize, our business, financial condition and results of operations could be materially and adversely affected and the trading price of our common shares could decline significantly.
RISKS RELATING TO OUR BUSINESS
Deterioration in the public debt and equity markets could lead to additional investment losses.
The prolonged and severe disruptions in the public debt and equity markets, including among other things, widening of credit spreads, bankruptcies and government intervention in a number of large financial institutions, have resulted in significant realized and unrealized losses in our investment portfolio. For the year ended December 31, 2008, we incurred $695.8 million of realized and $310.4 million of unrealized investment losses. Depending on market conditions, we could incur substantial additional realized and unrealized losses in future periods, which could have a material adverse impact on our results of operations, equity, business and insurer financial strength and debt ratings.
Our results could be adversely affected by catastrophic events.
We are exposed to unpredictable catastrophic events, including weather-related and other natural catastrophes, as well as acts of terrorism. Any material reduction in our operating results caused by the occurrence of one or more catastrophes could inhibit our ability to pay dividends or to meet our interest and principal payment obligations. We define a catastrophe as an event that causes a pre-tax loss on property exposures before reinsurance of at least $5.0 million, before corporate level reinsurance and taxes. Effective for the third quarter 2005, industrial risk losses have been excluded from catastrophe losses, with prior periods adjusted for comparison purposes. By way of illustration, during the past five calendar years, pre-tax catastrophe losses, net of contract specific reinsurance but before cessions under corporate reinsurance programs, were as follows:
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| Calendar year | Pre-tax catastrophe losses | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
Calendar year: |
| Pre-tax catastrophe losses | ||||||||
(Dollars in millions) |
|
|
|
| ||||||
2008 |
|
|
| $ | 364.3 | |||||
2007 |
|
|
| 160.0 | ||||||
| 2006 | $ | 287.9 | million |
|
| 287.9 | ||||
| 2005 | $ | 1,485.7 | million |
|
| 1,485.7 | ||||
| 2004 | $ | 390.0 | million |
|
| 390.0 | ||||
| 2003 | $ | 35.0 | million | |||||||
| 2002 | $ | 30.0 | million | |||||||
Our losses from future catastrophic events could exceed our projections.
We use projections of possible losses from future catastrophic events of varying types and magnitudes as a strategic underwriting tool. We use these loss projections to estimate our potential catastrophe losses in certain geographic areas and decide on the purchase of retrocessional coverage or other actions to limit the extent of potential losses in a given geographic area. These loss projections are approximations, reliant on a mix of quantitative and qualitative processes, and actual losses may exceed the projections by a material amount.amount, resulting in a material adverse effect on our financial condition and results of operations.
We focus on potential losses that can be generated by any single event as part of our evaluation and monitoring of our aggregate exposure to catastrophic events. Accordingly, we employ various techniques to estimate the amount of loss we could sustain from any single catastrophic event in various geographical areas. These techniques range from non-modeled deterministic approaches – such as tracking aggregate limits exposed in catastrophe-prone zones and applying historic damage factors – to modeled approaches that scientifically measure catastrophe risks using sophisticated Monte Carlo simulation techniques that provide insights into the frequency and severity of expected losses on a probabilistic basis.
If our loss reserves are inadequate to meet our actual losses, net income would be reduced or we could incur a loss.
We are required to maintain reserves to cover our estimated ultimate liability of losses and loss adjustment expensesLAE for both reported and unreported claims incurred. These reserves are only estimates of what we believe the settlement and administration of claims will cost based on facts and circumstances known to us. In setting reserves for our reinsurance liabilities, we rely on claim data supplied by our ceding companies and brokers and we employ actuarial and statistical projections. The information received from our ceding companies is not always timely or accurate, which can contribute to inaccuracies in our loss projections. Because of the uncertainties that surround our estimates of loss and LAE reserves, we cannot be certain that ultimate loss and LAE payments will not exceed our estimates. If our reserves are deficient, we would be required to increase loss reserves in the period in which such deficiencies are identified which would cause a charge to our earnings and a reduction of capital. By way of illustration, during the past five calendar years, the reserve re-estimation process resulted in a decrease to our pre-tax net income in four of the years:
| Calendar year | Effect on pre-tax net income | ||||
|---|---|---|---|---|---|
| 2006 | $ | 135.6 | million decrease | ||
| 2005 | $ | 26.4 | million increase | ||
| 2004 | $ | 249.4 | million decrease | ||
| 2003 | $ | 196.8 | million decrease | ||
| 2002 | $ | 103.1 | million decrease | ||
Calendar year: |
| Effect on pre-tax net income | |||
(Dollars in millions) |
|
|
|
|
|
2008 |
|
| $ | 34.9 | decrease |
2007 |
|
|
| 206.5 | decrease |
2006 |
|
|
| 135.6 | decrease |
2005 |
|
|
| 26.4 | increase |
2004 |
|
|
| 249.4 | decrease |
See ITEM 1, “Business —- Changes in Historical Reserves,” which provides a more detailed chart showing the effect of reserve re-estimates on calendar year operating results for the past ten years.
The difficulty in estimating our reserves is significantly more challenging as it relates to reserving for potential A&E liabilities. At year-end 2006,2008, roughly 7%8.9% of our gross reserves were comprised of A&E reserves. A&E
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liabilities are especially hard to estimate for many reasons, including the long delays between exposure and manifestation of any bodily injury or property damage, difficulty in identifying the source of the asbestos or environmental contamination, long reporting delays and difficulty in properly allocating liability for the asbestos or environmental damage. Legal tactics and judicial and legislative developments affecting the scope of insurers’ liability, which can be difficult to predict, also contribute to uncertainties in estimating reserves for A&E liabilities.
The failure to accurately assess underwriting risk and establish adequate premium rates could reduce our net income or result in a net loss.
Our success depends on our ability to accurately assess the risks associated with the businesses on which the risk is retained. If we fail to accurately assess the risks we retain, we may fail to establish adequate premium rates to cover our losses and LAE. This could reduce our net income and even result in a net loss.
In addition, losses may arise from events or exposures that are not anticipated when the coverage is priced. An example of an unanticipated event is the terrorist attacks on September 11, 2001. Neither the magnitude of loss on a single line of business nor the combined impact on several lines of business from an act of terrorism on such a large scale was contemplated when we priced our coverages. In addition to unanticipated events, we also face the unanticipated expansion of our exposures, particularly in long-tail liability lines. An example of this is the expansion over time of the scope of insurers’ legal liability within the mass tort arena, particularly for A&E exposures discussed above.
Decreases in pricing for property and casualty reinsurance and insurance could reduce our net income.
The worldwide reinsurance and insurance businesses are highly competitive, as well as cyclical by product and market. These cycles, as well as other factors that influence aggregate supply and demand for property and casualty insurance and reinsurance products, are outside of our control. The supply of (re)insurance is driven by prevailing prices and levels of capacity that may fluctuate in response to a number of factors including large catastrophic losses and investment returns being realized in the insurance industry. Demand for (re)insurance is influenced by underwriting results of insurers and insureds, including catastrophe losses, and prevailing general economic conditions. If any of these factors were to result in a decline in the demand for (re)insurance or an overall increase in (re)insurance capacity, our net income could decrease.
If rating agencies downgrade the ratings of our insurance subsidiaries, future prospects for growth and profitability could be significantly and adversely affected.
Our active insurance company subsidiaries currently hold financial strength ratings assigned by third-party rating agencies which assess and rate the claims paying ability and financial strength of insurers and reinsurers. Our active subsidiaries carry an “A+” (“Superior”)” rating from A.M. Best. Everest Re, Bermuda Re and Everest National hold an “AA–” (“Very Strong”)” rating from Standard & Poor’s. Everest Re and Bermuda Re hold an “Aa3“Aa3” (“Excellent”)” rating from Moody’s. Financial strength ratings are used by client companies and agents and brokers that place the business as an important means of assessing the financial strength and quality of reinsurers. A downgrade or withdrawal of any of these ratings might adversely affect our ability to market our insurance products and could have a material and adverse effect on future prospects for growth and profitability.
During the last five years, no active subsidiary of ours has experienced a financial strength rating downgrade. However, we cannot assure that a downgrade will not occur in the future if we do not continue to meet the evolving criteria expected of our current rating. In that regard, several of the rating agencies are in the process of modifying their approaches to evaluating catastrophic risk relative to their capital and risk management requirements. Therefore, we cannot predict the outcome of this reassessment or its potential impact upon our ratings.
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Consistent with market practice, much of our treaty reinsurance business allows the ceding company to terminate the contract or seek collateralization of our obligations in the event of a rating downgrade below a certain threshold. The termination provision would generally be triggered only if a rating fell below A.M. Best’s A- rating level, which is three levels below Everest Re’s current rating of A+. To a lesser extent, Everest Re also has modest exposure to reinsurance contracts that contain provisions for obligatory funding of outstanding liabilities in the event of a rating agency downgrade. That provision would also generally be triggered only if Everest Re’s rating fell below A.M. Best’s A- rating level.
The failure of our insureds, intermediaries and reinsurers to satisfy their obligations to us could reduce our net income.
In accordance with industry practice, we have uncollateralized receivables from insureds, agents and brokers and/or rely on agents and brokers to process our payments. We may not be able to collect amounts due from insureds, agents and brokers, resulting in a reduction to net income.
We are also subject to the credit risk of reinsurers in connection with retrocessional arrangements because the transfer of risk to a reinsurer does not relieve us of our liability to the insured. In addition, reinsurers may be unwilling to pay us even though they are able to do so. The failure of one or more of our reinsurers to honor their obligations to us in a timely fashion would impact our cash flow and reduce our net income and could cause us to incur a significant loss.
If we are unable or choose not to purchase reinsurance and transfer risk to reinsurers, our net income could be reduced or we could incur a net loss in the event of unusual loss experience.
We are generally less reliant on the purchase of reinsurance than many of our competitors, in part because of our strategic emphasis on underwriting discipline and management of the cycles inherent in our business. We try to separate our risk taking process from our risk mitigation process in order to avoid developing too great a reliance on reinsurance. Thus, we generally evaluate, underwrite, select and price our products prior to consideration of reinsurance. However, our underwriters generally consider purchasing reinsurance with respect to specific insurance contracts or programs, and our senior management generally considers purchasing reinsurance with respect to potential accumulations of exposures across some or all of our operations, where reinsurance is deemed prudent from a risk mitigation perspective or is expected to have a positive cost/benefit relationship. Because we generally purchase reinsurance only when we expect a net benefit, the percentage of business that we reinsure, as indicated below, variesmay vary considerably from year to year, depending on our view of the relationship between cost and expected benefit for the contract period.
| 2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Percentage of ceded written premiums to gross written premiums | 3.1 | % | 3.3 | % | 3.7 | % | 5.6 | % | 7.3 | % | |||||||
| 2008 | 2007 | 2006 | 2005 | 2004 |
Percentage of ceded written premiums to gross written premiums | 4.7% | 3.9% | 3.1% | 3.3% | 3.7% |
Changes in the availability and cost of reinsurance, which are subject to market conditions that are outside of our control, have thus reduced to some extent our ability to use reinsurance to tailor the risks we assume on a contract or program basis or to mitigate or balance exposures across our reinsurance operations. Because we have reduced our level ofpurchased minimal reinsurance purchases in recent years, our net income could be reduced following a large unreinsured event or adverse overall claims experience.
Our industry is highly competitive and we may not be able to compete successfully in the future.
Our industry is highly competitive and subject to pricing cycles that can be pronounced. We compete globally in the U.S., Bermuda and international reinsurance and insurance markets with numerous competitors. Our competitors include independent reinsurance and insurance companies, subsidiaries or affiliates of established
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worldwide insurance companies, reinsurance departments of certain insurance companies and domestic and international underwriting operations, including underwriting syndicates at Lloyd’s.
According to Standard & Poor’s, we rank among the top ten global reinsurance groups, in which 80%two-thirds of the market share is concentrated. The worldwide premium available to the reinsurance market, for both life and non-life business, was estimated to be $190 billion in 2007 according to data compiled by the International Association of Insurance Supervisors. The top twenty groups in our industry represent 95%approximately 75% of the market’sthese revenues. The leaders in this market are Munich Re, Swiss Re, (including Employers Re), Berkshire Hathaway, Hannover Re and syndicates at Lloyd’s. Some of these competitors have greater financial resources than we do and have established long-termlong term and continuing business relationships throughout the
industry, which can be a significant competitive advantage. In addition, the lack of strong barriers to entry into the reinsurance business and the potential for securitization of reinsurance and insurance risks through capital markets provide additional sources of potential reinsurance and insurance capacity and competition. We may not be able to compete successfully in the future should there be a significant change to the competitive landscape of our market.
We are dependent on our key personnel.
Our success has been, and will continue to be, dependent on the ability to retain the services of existing key executive officers and to attract and retain additional qualified personnel in the future. The loss of the services of any key executive officer or the inability to hire and retain other highly qualified personnel in the future could adversely affect our ability to conduct business. Generally, we consider key executive officers to be those individuals who have the greatest influence in setting overall policy and controlling operations: Chairman and Chief Executive Officer, Joseph V. Taranto (age 57)59), Vice-Chairman and Chief Underwriting Officer Thomas J. Gallagher (age 60), President and Chief Operating Officer, Thomas J. GallagherRalph E. Jones, III (age 58)52), and Executive Vice President and Chief Financial Officer, Craig Eisenacher (age 59)61). Of those three officers, weWe have employment contracts with Mr. Taranto and Mr. Eisenacher. Mr. Taranto’s contract hasJones, which have been previously filed with the SEC and was most recently amended on August 31, 2005 to extend Mr. Taranto’s termwhich currently provide for terms of employment from March 31, 2006 until March 31, 2008. Mr. Eisenacher’s contract has been previously filed with the SECending on December 5, 2006 for a term of employment from December 18, 2006 until December 19, 2008.31, 2009. We are not aware that any of the above threefour officers are planning to leave Group or retire in the near future. We do not maintain any key employee insurance on any of our employees.
Special considerations apply to our Bermuda operations. Under Bermuda law, non-Bermudians, other than spouses of Bermudians and individuals holding permanent resident certificates, are not permitted to engage in any gainful occupation in Bermuda without a work permit issued by the Bermuda government. A work permit is only granted or extended if the employer can show that, after a proper public advertisement, no Bermudian, spouse of a Bermudian or individual holding a permanent resident certificate is available who meets the minimum standards for the position. The Bermuda government places a six-year term limit on individuals with work permits, subject to specified exemptions for persons deemed to be key employees of businesses with a significant physical presence in Bermuda. Currently, all sevensix of our Bermuda-based professional employees who require work permits have been granted permits by the Bermuda government that expire at various times between March 2006May 2009 and December 2008.2011. This includes Mark de Saram, the chief executive officer of our Bermuda reinsurance operation. In the event his work permit were not renewed, we could lose his services, thereby adversely affecting our ability to conduct our business in Bermuda until we were able to replace him with an individual in Bermuda who did not require a work permit or who was granted the permit. The Company has an employment contract with Mr. de Saram, which was previously filed with the SEC and was most recently amended on October 31, 200616, 2008 to extend Mr. de Saram’s term of employment fromto November 1, 2006 until November 1, 2008.2010.
Our investment values and investment income could decline because they are exposed to interest rate, credit, and market risks.
A significant portion of our investment portfolio consists of fixed income securities and smaller portions consist of equity securities and other investments. Both the fair market value of our invested assets and associated
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investment income fluctuate depending on general economic and market conditions. For example, the fair market value of our predominant fixed income portfolio generally increases or decreases inversely to fluctuations in interest rates. The fair market value of our fixed income securities could also decrease as a result of a downturn in the business cycle, such as the downturn we are currently experiencing, that causes the credit quality of such securities to deteriorate. The net investment income that we realize from future investments in fixed income securities will generally increase or decrease with interest rates.
Interest rate fluctuations also can cause net investment income from fixed income investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, to differ from the income anticipated from those securities at the time of purchase. In addition, if issuers of individual investments are unable to meet their obligations, investment income will be reduced and realized capital losses may arise.
Because all
The majority of our fixed income securities are classified as available for sale and temporary changes in the market value of these investments as well as equities are reflected as changes to our shareholders’ equity. Our actively managed equity security portfolio is fair valued and any changes in fair value are reflected as net realized capital gains or losses. As a result, a decline in the value of the securities in our portfolio reduces our capital or could cause us to incur a loss.
We have invested a growing portion of our investment portfolio in common stock or equity-relatedequity securities. The value of these assets fluctuate with equitychanges in the markets. In times of economic weakness, the marketfair value and liquidity of these assets may decline, and may negatively impact net income and capital.income. We also invest in non-traditional investments which have different risk characteristics than traditional fixed income and equity securities. These alternative investments are comprised primarily of private equity limited partnerships. The changes in value and investment income/(loss) for these partnerships are more volatile than over-the-counter securities.
The following table quantifies the portion of our investment portfolio that consists of fixed income securities, equity securities and asset-backed investments that carry prepayment risk.
| (Dollars in thousands) Type of Security | As of December 31, 2006 | % of Total | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Fixed income: | ||||||||||||||
| Mortgage-backed securities | $ | 1,593,974 | 11.4 | % | ||||||||||
| Other asset-backed | 419,833 | 3.0 | % | |||||||||||
| Total asset-backed | 2,013,807 | 14.4 | % | |||||||||||
| Other fixed income | 8,306,043 | 59.5 | % | |||||||||||
| Total fixed income | 10,319,850 | 73.9 | % | |||||||||||
| Equity securities | 1,613,678 | 11.6 | % | |||||||||||
| Other invested assets | 467,193 | 3.3 | % | |||||||||||
| Cash and short-term investments | 1,556,366 | 11.2 | % | |||||||||||
| Total Investments and Cash | $ | 13,957,087 | 100.0 | % | ||||||||||
| At |
|
|
(Dollars in millions) | December 31, 2008 |
| % of Total |
Mortgage-backed securities | $ 1,878.4 |
| 13.7% |
Other asset-backed | 253.2 |
| 1.8% |
Total asset-backed | 2,131.6 |
| 15.5% |
Other fixed income | 8,628.0 |
| 62.9% |
Total fixed income, at market value | 10,759.6 |
| 78.4% |
Fixed income, at fair value | 43.1 |
| 0.3% |
Equity securities, at market value | 16.9 |
| 0.1% |
Equity securities, at fair value | 119.8 |
| 0.9% |
Other invested assets | 679.4 |
| 5.0% |
Cash and short-term investments | 2,095.5 |
| 15.3% |
Total investments and cash | $ 13,714.3 |
| 100.0% |
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
|
|
We may experience foreign currency exchange losses that reduce our net income and capital levels.
Through our Bermuda and international operations, we conduct business in a variety of foreign (non-U.S.) currencies, principally the Euro, the British pound, the Canadian dollar, and the Singapore dollar. Assets, liabilities, revenues and expenses denominated in foreign currencies are exposed to changes in currency exchange rates. Our functional currency is the U.S. dollar, and exchange rate fluctuations relative to the U.S. dollar may materially impact our results and financial position. In 2006,2008, we wrote approximately 28.6%32.3% of our reinsurance coverages in non-U.S. currencies; as of December 31, 2006,2008, we maintained approximately 13.3%14.6% of our investment portfolio in investments denominated in non-U.S. currencies. During 2008, 2007 and 2006, 2005, 2004, the impact on our quarterly pre-tax net income from exchange rate fluctuations ranged from a loss of $6.5$10.1 million to a gain of $5.9$13.1 million.
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RISKS RELATING TO REGULATION
Insurance laws and regulations restrict our ability to operate and any failure to comply with those laws and regulations could have a material adverse effect on our business.
We are subject to extensive and increasing regulation under U.S., state and foreign insurance laws. These laws limit the amount of dividends that can be paid to us by our operating subsidiaries, impose restrictions on the amount and type of investments that we can hold, prescribe solvency, accounting and internal control standards that must be met and maintained and require us to maintain reserves. These laws also require disclosure of material inter-affiliate transactions and require prior approval of “extraordinary” transactions. Such “extraordinary” transactions include declaring dividends from operating subsidiaries that exceed
statutory thresholds. These laws also generally require approval of changes of control of insurance companies. The application of these laws could affect our liquidity and ability to pay dividends, interest and other payments on securities, as applicable, and could restrict our ability to expand business operations through acquisitions of new insurance subsidiaries. We may not have or maintain all required licenses and approvals or fully comply with the wide variety of applicable laws and regulations or the relevant authority’s interpretation of the laws and regulations. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, the insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities or monetarily penalize us. These types of actions could have a material adverse effect on our business. To date, no material fine, penalty or restriction has been imposed on us for failure to comply with any insurance law or regulation.
Current legal
The extreme dislocation of the financial markets, combined with the new Congress and Presidential administration in the United States, has increased the likelihood of changes in the way the financial services industry is regulated. It is possible that insurance regulation will be drawn into this process, and that federal regulatory activities related toinitiatives in the insurance industry including investigations into contingent commission arrangements and certain finite risk or non-traditional products could affect our business and the industry.
emerge. The insurance industry has experienced uncertainty and negative publicity as a result of current litigation, investigations, and regulatory activity by various insurance, governmental, and enforcement authorities, including the SEC, with regard to certain practices within the insurance industry. These practices include the payment of contingent commissions by insurance companies to insurance brokers and agents, the solicitation and provision of fictitious or inflated quotes, and the accounting treatment for finite reinsurance or other non-traditional, loss mitigation insurance and reinsurance products.
At this time, it appears the effects of these investigations will have more of an impact on specific companies being investigated rather than the industry as a whole, with greater transparency and financial reporting disclosures being required for the entire industry in these areas; however, the future impact of such initiatives, if any, on our operation, net income or financial condition can notcannot be determined at this time.
Regulatory challenges in the United States could adversely affect the ability of Everest Bermuda to conduct business.
Everest Bermuda does not intend to be licensed or admitted as an insurer or reinsurer in any U.S. jurisdiction. Under current law, Everest Bermuda generally will be permitted to reinsure U.S. risks from its office in Bermuda without obtaining those licenses. However, the insurance and reinsurance regulatory framework is subject to periodic legislative review and revision. In the past, there have been congressional and other initiatives in the United States regarding increased supervision and regulation of the insurance industry, including proposals to supervise and regulate reinsurers domiciled outside the United States. If Everest Bermuda were to become subject to any insurance laws of the United States or any U.S. state at any time in the future, it might be required to post deposits or maintain minimum surplus levels and might be prohibited from engaging in lines of business or from writing some types of policies. Complying with those laws could have a material adverse effect on our ability to conduct business in Bermuda and international markets.
Everest Bermuda may need to be licensed or admitted in additional jurisdictions to develop its business.
As Everest Bermuda’s business develops, it will monitor the need to obtain licenses in jurisdictions other than Bermuda and the U.K., where it has an authorized branch, in order to comply with applicable law or to be able to engage in additional insurance-related activities. In addition, Everest Bermuda may be at a competitive disadvantage in jurisdictions where it is not licensed or does not enjoy an exemption from licensing relative to competitors that are so licensed or exempt from licensing. Everest Bermuda may not be able to obtain any additional licenses that it determines are necessary or desirable. Furthermore, the process of obtaining those licenses is often costly and may take a long time.
Everest Bermuda’s ability to write reinsurance may be severely limited if it is unable to arrange for security to back its reinsurance.
Many jurisdictions do not permit insurance companies to take credit for reinsurance obtained from unlicensed or non-admitted insurers on their statutory financial statements without appropriate security. Everest Bermuda’s reinsurance clients typically require it to post a letter of credit or enter into other security arrangements. If Everest Bermuda is unable to obtain or maintain a letter of credit facility on commercially acceptable terms or is unable to arrange for other types or security, its ability to operate its business may be severely limited. If Everest Bermuda defaults on any letter of credit that it obtains, it may be required to prematurely liquidate a substantial portion of its investment portfolio and other assets pledged as collateral.
RISKS RELATING TO GROUP’SGROUP'S SECURITIES
Because of our holding company structure, our ability to pay dividends, interest and principal is dependent on our receipt of dividends, loan payments and other funds from our subsidiaries.
Group and Holdings are holding companies, each of whose most significant assets consists of the stock of their operating subsidiaries. As a result, each of Group’s and Holdings’ ability to pay dividends, interest or other payments on its securities in the future will depend on the earnings and cash flows of the operating subsidiaries and the ability of the subsidiaries to pay dividends or to advance or repay funds to it. This ability is subject to general economic, financial, competitive, regulatory and other factors beyond our control. Payment of dividends and advances and repayments from some of the operating subsidiaries are regulated by U.S., state and foreign insurance laws and regulatory restrictions, including minimum solvency and liquidity thresholds. Accordingly, the operating subsidiaries may not be able to pay dividends or advance or repay funds to usGroup and
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Holdings in the future, which could prevent us from paying dividends, interest or other payments on our securities.
Provisions in Group’s bye-laws could have an anti-takeover effect, which could diminish the value of its common shares.
Group’s bye-laws contain provisions that may entrench directors and make it more difficult for shareholders to replace directors even if the shareholders consider it beneficial to do so. In addition, these provisions could delay or prevent a change of control that a shareholder might consider favorable. The effect of these provisions could be to prevent a shareholder from receiving the benefit from any premium over the market price of our common shares offered by a bidder in a potential takeover. Even in the absence of an attempt to effect a change in management or a takeover attempt, these provisions may adversely affect the prevailing market price of our common shares if they are viewed as discouraging takeover attempts in the future.
For example, Group’s bye-laws contain the following provisions that could have an anti-takeover effect:
election of directors is staggered, meaning that the members of only one of three classes of directors are selected each year;
shareholders have limited ability to remove directors;
the total voting power of any shareholder owning more than 9.9% of the common shares will be reduced to 9.9% of the total voting power of the common shares;
the board of directors may decline to register any transfer of common shares if it has reason to believe that the transfer would result in:
i) any person that is not an investment company beneficially owning more than 5.0% of any class of the issued and outstanding share capital of Group,
ii) any person holding controlled shares in excess of 9.9% of any class of the issued and outstanding share capital of Group, or
iii) any adverse tax, regulatory or legal consequences to Group, any of its subsidiaries or any of its shareholders;
Group also has the option to redeem or purchase all or part of a shareholder’s common shares to the extent the board of directors determines it is necessary or advisable to avoid or cure any adverse or potential adverse consequences if:
i) any person that is not an investment company beneficially owns more than 5.0% of any class of the issued and outstanding share capital of Group,
ii) any person holds controlled shares in excess of 9.9% of any class of the issued and outstanding share capital of Group, or
iii) share ownership by any person may result in adverse tax, regulatory or legal consequences to Group, any of its subsidiaries or any other shareholder.
The Board of Directors has indicated that it will apply these bye-law provisions in such manner that “passive institutional investors” will be treated similarly to investment companies. For this purpose, “passive
37
institutional investors” include all persons who are eligible, pursuant to Rule 13d-1(b)(1) under the U.S. Securities Exchange Act of 1934, to file a short-form statement on Schedule 13G, other than an insurance company or any parent holding company or control person of an insurance company.
Applicable insurance laws may also have an anti-takeover effect.
Before a person can acquire control of a U.S. insurance company, prior written approval must be obtained from the insurance commissioner of the state where that insurance company is domiciled. Prior to granting approval of an application to acquire control of a domestic insurance company, a state insurance commissioner will consider such factors as the financial strength of the applicant, the integrity and competence of the applicant’s board of directors and executive officers, the acquiror’s plans for changes to the insurance company’s board of directors and executive officers, the acquiror’s plans for the future operations of the insurance company and any anti-competitive results that may arise from the consummation of the acquisition of control. Because any person who acquired control of Group would thereby acquire indirect control of its insurance company subsidiaries in the U.S., the insurance change of control laws of Delaware, California and Georgia would apply to such a transaction. This could have the effect of delaying or even preventing such a change of control.
Investors in Group may have more difficulty in protecting their interests than investors in a U.S. corporation.
The Companies Act 1981 of Bermuda (the “Companies Act”), differs in material respects from the laws applicable to U.S. corporations and their shareholders. The following is a summary of material differences between the Companies Act, as modified in some instances by provisions of Group’s bye-laws, and Delaware corporate law that could make it more difficult for investors in Group to protect their interests than investors in a U.S. corporation. Because the following statements are summaries, they do not address all aspects of Bermuda law that may be relevant to Group and its shareholders.
Alternate Directors.Group’s bye-laws provide, as permitted by Bermuda law, that each director may appoint an alternate director, who shall have the power to attend and vote at any meeting of the board of directors or committee at which that director is not personally present and to sign written consents in place of that director. Delaware law does not provide for alternate directors.
Committees of the Board of Directors.Group’s bye-laws provide, as permitted by Bermuda law, that the board of directors may delegate any of its powers to committees that the board appoints, and those committees may consist partly or entirely of non-directors. Delaware law allows the board of directors of a corporation to delegate many of its powers to committees, but those committees may consist only of directors.
Interested Directors.Bermuda law and Group’s bye-laws provide that if a director has a personal interest in a transaction to which the company is also a party and if the director discloses the nature of this personal interest at the first opportunity, either at a meeting of directors or in writing to the directors, then the company will not be able to declare the transaction void solely due to the existence of that personal interest
and the director will not be liable to the company for any profit realized from the transaction. In addition, after a director has made the declaration of interest referred to above, he or she is allowed to be counted for purposes of determining whether a quorum is present and to vote on a transaction in which he or she has an interest, unless disqualified from doing so by the chairman of the relevant board meeting. Under Delaware law, an interested director could be held liable for a transaction in which that director derived an improper personal benefit. Additionally, under Delaware law, a corporation may be able to declare a transaction with an interested director to be void unless one of the following conditions is fulfilled:
the material facts as to the interested director’s relationship or interests are disclosed or are known to the board of directors and the board in good faith authorizes the transaction by the affirmative vote of a majority of the disinterested directors,directors;
38
the material facts are disclosed or are known to the shareholders entitled to vote on the transaction and the transaction is specifically approved in good faith by the holders of a majority of the voting shares; or
the transaction is fair to the corporation as of the time it is authorized, approved or ratified.
Transactions with Significant Shareholders.As a Bermuda company, Group may enter into business transactions with its significant shareholders, including asset sales, in which a significant shareholder receives, or could receive, a financial benefit that is greater than that received, or to be received, by other shareholders with prior approval from Group’s board of directors but without obtaining prior approval from the shareholders. In the case of an amalgamation, in which two or more companies join together and continue as a single company, a resolution of shareholders approved by a majority of at least 75% of the votes cast is required in addition to the approval of the board of directors, except in the case of an amalgamation with and between wholly-owned subsidiaries. If Group was a Delaware corporation, any business combination with an interested shareholder (which, for this purpose, would include mergers and asset sales of greater than 10% of Group’s assets that would otherwise be considered transactions in the ordinary course of business) within a period of three years from the time the person became an interested shareholder would require prior approval from shareholders holding at least 66 2/3% of Group’s outstanding common shares not owned by the interested shareholder, unless the transaction qualified for one of the exemptions in the relevant Delaware statute or Group opted out of the statute. For purposes of the Delaware statute, an “interested shareholder” is generally defined as a person who together with that person’s affiliates and associates owns, or within the previous three years did own, 15% or more of a corporation’s outstanding voting shares.
Takeovers.Under Bermuda law, if an acquiror makes an offer for shares of a company and, within four months of the offer, the holders of not less than 90% of the shares that are the subject of the offer tender their shares, the acquiror may give the nontendering shareholders notice requiring them to transfer their shares on the terms of the offer. Within one month of receiving the notice, dissenting shareholders may apply to the court objecting to the transfer. The burden is on the dissenting shareholders to show that the court should exercise its discretion to enjoin the transfer. The court will be unlikely to do this unless there is evidence of fraud or bad faith or collusion between the acquiror and the tendering shareholders aimed at unfairly forcing out minority shareholders. Under another provision of Bermuda law, the holders of 95% of the shares of a company (the “acquiring shareholders”) may give notice to the remaining shareholders requiring them to sell their shares on the terms described in the notice. Within one month of receiving the notice, dissenting shareholders may apply to the court for an appraisal of their shares. Within one month of the court’s appraisal, the acquiring shareholders are entitled either to acquire all shares involved at the price fixed by the court or cancel the notice given to the remaining shareholders. If shares were acquired under the notice at a price below the court’s appraisal price, the acquiring shareholders must either pay the difference in price or cancel the notice and return the shares thus acquired to the shareholder, who must then refund the purchase price. There are no comparable provisions under Delaware law.
Inspection of Corporate Records.Members of the general public have the right to inspect the public documents of Group available at the office of the Registrar of Companies and Group’s registered office, both in Bermuda. These documents include the memorandum of association, which describes Group’s permitted purposes and powers, any amendments to the memorandum of association and documents relating to any
increase or reduction in Group’s authorized share capital. Shareholders of Group have the additional right to inspect Group’s bye-laws, minutes of general meetings of shareholders and audited financial statements that must be presented to the annual general meeting of shareholders. The register of shareholders of Group also is open to inspection by shareholders without charge, and to members of the public for a fee. Group is required to maintain its share register at its registered office in Bermuda. Group also maintains a branch register in the offices of its transfer agent in the U.S., which is open for public inspection as required under the Companies Act. Group is required to keep at its registered office a register of its directors and officers that is open for inspection by members of the public without charge. However, Bermuda law does not provide a general right for shareholders to inspect
39
or obtain copies of any other corporate records. Under Delaware law, any shareholder may inspect or obtain copies of a corporation’s shareholder list and its other books and records for any purpose reasonably related to that person’s interest as a shareholder.
Shareholder’s Suits.The rights of shareholders under Bermuda law are not as extensive as the rights of shareholders under legislation or judicial precedent in many U.S. jurisdictions. Class actions and derivative actions are generally not available to shareholders under the laws of Bermuda. However, the Bermuda courts ordinarily would be expected to follow English case law precedent, which would permit a shareholder to bring an action in the name of Group to remedy a wrong done to Group where the act complained of is alleged to be beyond the corporate power of Group or illegal or would result in the violation of Group’s memorandum of association or bye-laws. Furthermore, the court would give consideration to acts that are alleged to constitute a fraud against the minority shareholders or where an act requires the approval of a greater percentage of Group’s shareholders than actually approved it. The winning party in an action of this type generally would be able to recover a portion of attorneys’ fees incurred in connection with the action. Under Delaware law, class actions and derivative actions generally are available to stockholders for breach of fiduciary duty, corporate waste and actions not taken in accordance with applicable law. In these types of actions, the court has discretion to permit the winning party to recover its attorneys’ fees.
Limitation of Liability of Directors and Officers.Group’s bye-laws provide that Group and its shareholders waive all claims or rights of action that they might have, individually or in the right of the Company, against any director or officer for any act or failure to act in the performance of that director’s or officer’s duties. However, this waiver does not apply to claims or rights of action that arise out of fraud or dishonesty. This waiver may have the effect of barring claims arising under U.S. federal securities laws. Under Delaware law, a corporation may include in its certificate of incorporation provisions limiting the personal liability of its directors to the corporation or its stockholders for monetary damages for many types of breach of fiduciary duty. However, these provisions may not limit liability for any breach of the duty of loyalty, acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law, the authorization of unlawful dividends, stock repurchases or stock redemptions, or any transaction from which a director derived an improper personal benefit. Moreover, Delaware provisions would not be likely to bar claims arising under U.S. federal securities laws.
Indemnification of Directors and Officers.Group’s bye-laws provide that Group shall indemnify its directors or officers to the full extent permitted by law against all actions, costs, charges, liabilities, loss, damage or expense incurred or suffered by them by reason of any act done, concurred in or omitted in the conduct of Group’s business or in the discharge of their duties. Under Bermuda law, this indemnification may not extend to any matter involving fraud or dishonesty of which a director or officer may be guilty in relation to the company, as determined in a final judgment or decree not subject to appeal. Under Delaware law, a corporation may indemnify a director or officer who becomes a party to an action, suit or proceeding because of his position as a director or officer if (1) the director or officer acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and (2) if the action or proceeding involves a criminal offense, the director or officer had no reasonable cause to believe his or her conduct was unlawful.
Enforcement of Civil Liabilities.Group is organized under the laws of Bermuda. Some of our directors and officers may reside outside the U.S. A substantial portion of our assets are or may be located in jurisdictions outside the U.S. A person may not be able to effect service of process within the U.S. on directors and officers of Group and those experts who reside outside the U.S. A person also may not be able to recover against them or Group on judgments of U.S. courts or to obtain original judgments against them or Group in
Bermuda courts, including judgments predicated upon civil liability provisions of the U.S. federal securities laws.
Dividends.Bermuda law does not allow a company to declare or pay a dividend, or make a distribution out of contributed surplus, if there are reasonable grounds for believing that a company, after the payment is made,
40
would be unable to pay its liabilities as they become due, or that the realizable value of a company’s assets would be less, as a result of the payment, than the aggregate of its liabilities and its issued share capital and share premium accounts. The share capital account represents the aggregate par value of a company’s issued shares, and the share premium account represents the aggregate amount paid for issued shares over and above their par value. Under Delaware law, subject to any restrictions contained in a company’s certificate of incorporation, a company may pay dividends out of the surplus or, if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Surplus is the amount by which the net assets of a corporation exceed its stated capital. Delaware law also provides that dividends may not be paid out of net profits at any time when stated capital is less than the capital represented by the outstanding stock of all classes having a preference upon the distribution of assets.
RISKS RELATING TO TAXATION
If U.S. tax law changes, our net income may be reduced.
In the last few years, some members of Congress have expressed concern about U.S. corporations that move their place of incorporation to low-tax jurisdictions. Also, some members of Congress have expressed concern over a competitive advantage that foreign-controlled insurers and reinsurers may have over U.S. controlled insurers and reinsurers due to the purchase of reinsurance by U.S. insurers from affiliates operating in some foreign jurisdictions, including Bermuda. Although the existing legislation that increases the U.S. tax burden on so-called “inverting” companies does not apply to us, we do not know whether any similarit is possible that future legislation that would be disadvantageous to our Bermuda insurance subsidiaries will evercould be enacted into law.enacted. If itany such legislation were enacted, the U.S. tax burden on our Bermuda operations, or on some business ceded from our licensed U.S. insurance subsidiaries to some offshore reinsurers, could be increased. This would reduce our net income.
Group and/or Bermuda Re may be subject to U.S. corporate income tax, which would reduce our net income.
Bermuda Re.The income of Bermuda Re is a significant portion of our worldwide income from operations. We have established guidelines for the conduct of our operations that are designed to ensure that Bermuda Re is not engaged in the conduct of a trade or business in the U.S. Based on its compliance with those guidelines, we believe that Bermuda Re should not be required to pay U.S. corporate income tax, other than withholding tax on U.S. source dividend and interest income. However, if the Internal Revenue Service (“IRS”) were to successfully contend that Bermuda Re was engaged in a trade or business in the U.S., Bermuda Re would be required to pay U.S. corporate income tax on any income that is subject to the taxing jurisdiction of the U.S., and possibly the U.S. branch profits tax. Even if the IRS were to successfully contend that Bermuda Re was engaged in a U.S. trade or business, we believe that the U.S.-Bermuda tax treaty would preclude the IRS from taxing Bermuda Re’s income except to the extent that its income were attributable to a permanent establishment maintained by that subsidiary. We do not believe that Bermuda Re has a permanent establishment in the U.S. If the IRS were to successfully contend that Bermuda Re did have income attributable to a permanent establishment in the U.S., Bermuda Re would be subject to U.S. tax on that income.
Group.We conduct our operations in a manner designed to minimize our U.S. tax exposure. Based on our compliance with guidelines designed to ensure that we generate only immaterial amounts, if any, of income that is subject to the taxing jurisdiction of the U.S., we believe that we should be required to pay only immaterial amounts, if any, of U.S. corporate income tax, other than withholding tax on U.S. source dividend and interest income. However, if the IRS successfully contended that we had material amounts of income that is subject to the taxing jurisdiction of the U.S., we would be required to pay U.S. corporate income tax on
that income, and possibly the U.S. branch profits tax. Prior to January 1, 2005, our principal executive offices were located in Barbadostax and as a result, even if the IRS had successfully contended that we had material amounts of income that was subject to the taxing jurisdiction of the U.S., we believe that the U.S.-Barbados tax treaty would have precluded the IRS from taxing our income, except to the extent that our income was attributable to a permanent establishment
41
maintained by us in the U.S. Since we moved our principal executive offices out of Barbados as of December 31, 2004 and since the United States and Barbados recently made effective a protocol to the U.S.-Barbados tax treaty that strengthens the limitation of benefits provisions of that treaty, the U.S.-Barbados tax treaty will no longer provide any protection to us. Nevertheless, we do not believe that we have material amounts of income subject to the taxing jurisdiction of the U.S. If the IRS successfully contended, however, that we did have income subject to tax in the U.S., the imposition of such tax on that income would reduce our net income.
If Bermuda Re became subject to U.S. income tax on its income or if we became subject to U.S. income tax, our income could also be subject to the U.S. branch profits tax. In that event, Group and Bermuda Re would be subject to taxation at a higher combined effective rate than if they were organized as U.S. corporations. The combined effect of the 35% U.S. corporate income tax rate and the 30% branch profits tax rate is a net tax rate of 54.5%. The imposition of these taxes would reduce our net income.
Group and/or Bermuda Re may become subject to Bermuda tax, which would reduce our net income.
Group and Bermuda Re are not subject to income or capital gains taxes in Bermuda. Both companies have received an assurance from the Bermuda Minister of Finance under The Exempted Undertakings Tax Protection Act 1966 of Bermuda to the effect that if any legislation is enacted in Bermuda that imposes any tax computed on profits or income, or computed on any capital asset, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then that tax will not apply to us or to any of our operations or our shares, debentures or other obligations until March 28, 2016. This assurance does not prevent the application of any of those taxes to persons ordinarily resident in Bermuda and does not prevent the imposition of any tax payable in accordance with the provisions of The Land Tax Act 1967 of Bermuda or otherwise payable in relation to any land leased to Group or Bermuda Re. There are currently no procedures for extending these assurances. As a result, Group and Bermuda Re could be subject to taxes in Bermuda after March 28, 2016, which would reduce our net income.
Our net income will be reduced if U.S. excise and withholding taxes are increased.
Bermuda Re is subject to an excise tax on reinsurance and insurance premiums it collects with respect to risks located in the U.S. In addition, Bermuda Re may be subject to withholding tax on dividend and interest income from U.S. sources. These taxes could increase and other taxes could be imposed in the future on Bermuda Re’s business, which would reduce our net income.
ITEM 1B. Unresolved Staff CommentsNone.UNRESOLVED STAFF COMMENTS
None.
ITEM 2. Properties
PROPERTIES
Everest Re’s corporate offices are located in approximately 129,700203,800 square feet of leased office space in Liberty Corner, New Jersey. Bermuda Re’s corporate offices are located in approximately 3,600 total square feet of leased office space in Hamilton, Bermuda. The Company’s other thirteenfifteen locations occupy a total of approximately 75,00088,100 square feet, all of which are leased. Management believes that the above-described office space is adequate for its current and anticipated needs.
ITEM 3. Legal Proceedings
LEGAL PROCEEDINGS
In the ordinary course of business, the Company is involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine the Company’s rights and
42
obligations under insurance, reinsurance and other contractual agreements. In some disputes, the Company seeks to enforce its rights under an agreement or to collect funds owing to it. In other matters, the Company is resisting attempts by others to collect funds or enforce alleged rights. These disputes arise from time to time and as they arise are addressed, and ultimately resolved through both informal and formal means, including negotiated resolution, arbitration and litigation. In all such matters, the Company believes that its positions are legally and commercially reasonable. While the final outcome of these matters cannot be predicted with certainty, the Company does not believe that any of these matters, when finally resolved, will have a materialmaterially adverse effect on the Company’s financial position or liquidity. However, an adverse resolution of one or more of these items in any one quarter or fiscal year could have a materialmaterially adverse effect on the Company’s results of operations in that period.
In May 2005, Holdings received and responded to a subpoena from the SEC seeking information regarding certain loss mitigation insurance products. The Company has stated that Holdings will fully cooperate with this and any future inquiries and Holdings provided the requested information. Holdings does not believe that it has engaged in any improper business practices with respect to loss mitigation insurance products.
The Company’s insurance subsidiaries have also received and have responded to broadly distributed information requests by state regulators including among others, from Delaware and Georgia.
ITEM 4. Submission of Matters to a Vote of Security HoldersNone.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity SecuritiesInformation.
Market Information
The common shares of Group trade on the New York Stock Exchange under the symbol, “RE”. QuarterlyThe quarterly high and low market prices of the Company’sGroup’s common shares in 2006 and 2005 were as follows:for the periods indicated:
| High | Low | |||||||
|---|---|---|---|---|---|---|---|---|
| 2006 | ||||||||
| First Quarter: | $ | 103.03 | $ | 91.51 | ||||
| Second Quarter: | 94.06 | 85.87 | ||||||
| Third Quarter: | 99.63 | 86.87 | ||||||
| Fourth Quarter: | 102.51 | 96.92 | ||||||
2005 | ||||||||
| First Quarter: | $ | 90.80 | $ | 85.01 | ||||
| Second Quarter: | 93.00 | 82.20 | ||||||
| Third Quarter: | 100.02 | 91.94 | ||||||
| Fourth Quarter: | 107.34 | 90.03 | ||||||
| 2008 |
| 2007 | ||
| High | Low |
| High | Low |
First Quarter | $ 105.04 | $ 87.02 |
| $ 99.89 | $ 92.53 |
Second Quarter | 96.69 | 79.71 |
| 108.64 | 94.49 |
Third Quarter | 95.00 | 74.69 |
| 113.56 | 94.01 |
Fourth Quarter | 82.08 | 60.75 |
| 114.08 | 96.26 |
Number of Holders of Common Shares
Shares.
The number of record holders of common shares as of February 15, 20071, 2009 was 62. That number does not include the beneficial owners of shares held in “street” name or held through participants in depositories, such as The Depository Trust Company.
43
Dividend History and Restrictions
Restrictions.
In 1995, the Board of Directors of the Company established a policy of declaring regular quarterly cash dividends and has paid a regular quarterly dividend in each quarter since the fourth quarter of 1995. The Company declared and paid its regular quarterly cash dividend of $0.12 per share for the first three quarters of 2006, $0.24 per share for the fourth quarter of 2006 and $0.11$0.48 per share for each quarter of 2005.the four quarters of 2008 and 2007. A committee of the Company’s Board of Directors declared a dividend of $0.48 per share, payable on or before March 23, 200718, 2009 to shareholders of record on March 5, 2007.4, 2009.
The declaration and payment of future dividends, if any, by the Company will be at the discretion of the Board of Directors and will depend upon many factors, including the Company’s earnings, financial condition, business needs and growth objectives, capital and surplus requirements of its operating subsidiaries, regulatory restrictions, rating agency considerations and other factors. As an insurance holding company, the Company is partially dependent on dividends and other permitted payments from its subsidiaries to pay cash dividends to its stockholders. The payment of dividends to Group by Holdings and to Holdings by Everest Re is subject to Delaware regulatory restrictions and the payment of dividends to Group by Bermuda Re is subject to Bermuda insurance regulatory restrictions. See “Regulatory Matters – Dividends” and ITEM 8, “Financial Statements and Supplementary Data” - Note 14A16 of Notes to Consolidated Financial Statements.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Issuer Purchases of Equity Securities | ||||
| (a) | (b) | (c) | (d) |
Period | Total Number of Shares (or Units) Purchased (1) | Average Price Paid per Share (or Unit) | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (2) |
January 1 - 31, 2008 | 0 | NA | 0 | 2,472,200 |
February 1 - 29, 2008 | 499,391 | $ 98.4849 | 493,400 | 1,978,800 |
March 1 - 31, 2008 | 615,527 | $ 93.1271 | 558,600 | 1,420,200 |
April 1 - 30, 2008 | 0 | NA | 0 | 1,420,200 |
May 1 - 31, 2008 | 278,300 | $ 89.4757 | 278,300 | 1,141,900 |
June 1 - 30, 2008 | 0 | NA | 0 | 1,141,900 |
July 1 - 31, 2008 | 0 | NA | 0 | 6,141,900 |
August 1 - 31, 2008 | 302,000 | $ 82.8036 | 302,000 | 5,839,900 |
September 1 - 30, 2008 | 6,070 | $ 83.9665 | 0 | 5,839,900 |
October 1 - 31, 2008 | 0 | NA | 0 | 5,839,900 |
November 1 - 30, 2008 | 0 | NA | 0 | 5,839,900 |
December 1 - 31, 2008 | 0 | NA | 0 | 5,839,900 |
Total | 1,701,288 | $ 92.2373 | 1,632,300 | 5,839,900 |
(1) Included were 68,988 shares withheld as payment for taxes on restricted shares that became unrestricted in the year.
(2) On September 21, 2004, the Company’s Board of Directors approved an amended share repurchase program authorizing the Company and/or its subsidiary Holdings to purchase up to an aggregate of 5,000,000 of the Company’s common shares through open market transactions, privately negotiated transactions or both. On July 21, 2008, the Company’s executive committee of the Board of Directors approved an amendment to the September 21, 2004 share repurchase program authorizing the Company and/or its subsidiary Holdings to purchase up to an aggregate of 10,000,000 of the Company’s common shares (recognizing that the number of shares authorized for repurchase has been reduced by those shares that have already been purchased) in open market transactions, privately negotiated transactions or both.
(Some amounts may not reconcile due to rounding.)
Recent Sales of Unregistered SecuritiesNone.Securities.
44
None.
Performance Graph
Graph.
The following Performance Graph compares cumulative total shareholder returns on the Common Shares (assuming reinvestment of dividends) from December 31, 20012003 through December 31, 2006,2008, with the cumulative total return of the Standard & Poor’s 500 Index and the Standard & Poor’s Insurance (Property and Casualty) Index.
* $100 invested on 12/31/01 in stock or index-including reinvestment of dividends. Fiscal year ended December 31.
Copyright © 2007 Standard & Poor’s, a division of The McGraw-Hill Companies, Inc. All rights reserved.www.researchdatagroup.com/S&P.htm
ITEM 6. Selected Financial Data
SELECTED FINANCIAL DATA
The following selected consolidated GAAP financial data of the Company as of and for the years ended December 31, 2008, 2007, 2006, 2005 2004, 2003 and 20022004 were derived from the consolidated financial statements of the Company, which were audited by PricewaterhouseCoopers LLP. The following financial data should be read in conjunction with the Consolidated Financial Statements and accompanying notes.
45
| Years Ended December 31, | Years Ended December 31, | |||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions, except per share amounts) | (Dollars in millions, except per share amounts) | 2006 | 2005 | 2004 | 2003 | 2002 | 2008 |
| 2007 |
| 2006 |
| 2005 |
| 2004 | |||||||||||
| Operating data: |
| |||||||||||||||||||||||||
| Gross written premiums | $ | 4,000.9 | $ | 4,108.6 | $ | 4,704.1 | $ | 4,573.8 | $ | 2,846.5 | $ 3,678.1 |
| $ 4,077.6 |
| $ 4,000.9 |
| $ 4,108.6 |
| $ 4,704.1 | |||||||
| Net written premiums | 3,875.7 | 3,972.0 | 4,531.5 | 4,315.4 | 2,637.6 | 3,505.2 |
| 3,919.4 |
| 3,875.7 |
| 3,972.0 |
| 4,531.5 | ||||||||||||
| Premiums earned | 3,853.2 | 3,963.1 | 4,425.1 | 3,737.9 | 2,273.7 | 3,694.3 |
| 3,997.5 |
| 3,853.2 |
| 3,963.1 |
| 4,425.1 | ||||||||||||
| Net investment income | 629.4 | 522.8 | 495.9 | 402.6 | 350.7 | 565.9 |
| 682.4 |
| 629.4 |
| 522.8 |
| 495.9 | ||||||||||||
| Net realized capital gains (losses) | 35.1 | 90.3 | 89.6 | (38.0 | ) | (50.0 | ) | |||||||||||||||||||
Net realized capital (losses) gains | (695.8) |
| 86.3 |
| 35.1 |
| 90.3 |
| 89.6 | |||||||||||||||||
| Incurred losses and loss adjustment |
| |||||||||||||||||||||||||
| expenses (including catastrophes) | 2,434.4 | 3,724.3 | 3,291.1 | 2,600.2 | 1,629.4 | 2,439.0 |
| 2,548.1 |
| 2,434.4 |
| 3,724.3 |
| 3,291.1 | ||||||||||||
| Total catastrophe losses (1) | 283.0 | 1,403.9 | 390.0 | 35.0 | 30.0 | |||||||||||||||||||||
Net catastrophe losses (1) | 307.2 |
| 126.5 |
| 283.0 |
| 1,403.9 |
| 390.0 | |||||||||||||||||
| Commission, brokerage, taxes and fees | 883.3 | 914.8 | 975.2 | 863.9 | 551.8 | 930.7 |
| 961.8 |
| 883.3 |
| 914.8 |
| 975.2 | ||||||||||||
| Other underwriting expenses | 138.0 | 129.8 | 114.9 | 98.0 | 71.3 | 162.3 |
| 152.6 |
| 138.0 |
| 129.8 |
| 114.9 | ||||||||||||
| Interest, fee and bond issue cost | ||||||||||||||||||||||||||
Interest, fees and bond issue cost |
| |||||||||||||||||||||||||
| amortization expense | 69.9 | 74.4 | 76.6 | 58.0 | 45.1 | 79.2 |
| 91.6 |
| 69.9 |
| 74.4 |
| 76.6 | ||||||||||||
| Income (loss) before taxes | 991.8 | (280.9 | ) | 559.7 | 491.2 | 262.0 | ||||||||||||||||||||
| Income tax expense (benefit) | 150.9 | (62.3 | ) | 64.9 | 65.2 | 30.7 | ||||||||||||||||||||
| Net income (loss) (2) | 840.8 | (218.7 | ) | 494.9 | 426.0 | 231.3 | ||||||||||||||||||||
(Loss) income before taxes | (83.6) |
| 1,028.0 |
| 991.8 |
| (280.9) |
| 559.7 | |||||||||||||||||
Income tax (benefit) expense | (64.8) |
| 188.7 |
| 150.9 |
| (62.3) |
| 64.9 | |||||||||||||||||
Net (loss) income (2) | (18.8) |
| 839.3 |
| 840.8 |
| (218.7) |
| 494.9 | |||||||||||||||||
| ||||||||||||||||||||||||||
| Net income (loss) per basic share (3) | $ | 12.99 | $ | (3.79 | ) | $ | 8.85 | $ | 7.89 | $ | 4.60 | |||||||||||||||
Net (loss) income per basic share (3) | $ (0.30) |
| $ 13.30 |
| $ 12.99 |
| $ (3.79) |
| $ 8.85 | |||||||||||||||||
|
| |||||||||||||||||||||||||
| Net income (loss) per diluted share (4) | $ | 12.87 | $ | (3.79 | ) | $ | 8.71 | $ | 7.74 | $ | 4.52 | |||||||||||||||
Net (loss) income per diluted share (4) | $ (0.30) |
| $ 13.19 |
| $ 12.87 |
| $ (3.79) |
| $ 8.71 | |||||||||||||||||
| ||||||||||||||||||||||||||
| Dividends paid per share | $ | 0.60 | $ | 0.44 | $ | 0.40 | $ | 0.36 | $ | 0.32 | $ 1.92 |
| $ 1.92 |
| $ 0.60 |
| $ 0.44 |
| $ 0.40 | |||||||
| ||||||||||||||||||||||||||
| Certain GAAP financial ratios: (5) |
| |||||||||||||||||||||||||
| Loss ratio | 63.2 | % | 94.0 | % | 74.4 | % | 69.6 | % | 71.7 | % | 66.0% |
| 63.7% |
| 63.2% |
| 94.0% |
| 74.4% | |||||||
| Other underwriting expense ratio | 26.5 | % | 26.3 | % | 24.6 | % | 25.7 | % | 27.4 | % | 29.6% |
| 27.9% |
| 26.5% |
| 26.3% |
| 24.6% | |||||||
| Combined ratio (2) | 89.7 | % | 120.3 | % | 99.0 | % | 95.3 | % | 99.1 | % | 95.6% |
| 91.6% |
| 89.7% |
| 120.3% |
| 99.0% | |||||||
| ||||||||||||||||||||||||||
| Balance sheet data (at end of period): |
| |||||||||||||||||||||||||
| Total investments and cash | $ | 13,957.1 | $ | 12,970.8 | $ | 11,530.2 | $ | 9,321.3 | $ | 7,265.6 | $ 13,714.3 |
| $ 14,936.2 |
| $ 13,957.1 |
| $ 12,970.8 |
| $ 11,530.2 | |||||||
| Total assets | 17,107.6 | 16,474.5 | 15,072.8 | 12,689.5 | 9,871.2 | 16,846.6 |
| 17,999.5 |
| 17,107.6 |
| 16,474.5 |
| 15,072.8 | ||||||||||||
| Loss and LAE reserves | 8,840.1 | 9,126.7 | 7,836.3 | 6,361.2 | 4,905.6 | 8,840.7 |
| 9,040.6 |
| 8,840.1 |
| 9,126.7 |
| 7,836.3 | ||||||||||||
| Total debt | 995.6 | 995.5 | 1,245.3 | 735.6 | 735.4 | 1,179.1 |
| 1,178.9 |
| 995.6 |
| 995.5 |
| 1,245.3 | ||||||||||||
| Total liabilities | 11,999.9 | 12,334.8 | 11,360.2 | 9,524.6 | 7,502.5 | 11,886.2 |
| 12,314.7 |
| 11,999.9 |
| 12,334.8 |
| 11,360.2 | ||||||||||||
| Shareholders' equity | 5,107.7 | 4,139.7 | 3,712.5 | 3,164.9 | 2,368.6 | 4,960.4 |
| 5,684.8 |
| 5,107.7 |
| 4,139.7 |
| 3,712.5 | ||||||||||||
| Book value per share (6) | 78.53 | 64.04 | 66.09 | 56.84 | 46.55 | 80.77 |
| 90.43 |
| 78.53 |
| 64.04 |
| 66.09 | ||||||||||||
___________________ |
|
| ||||||||||||||||||||||||
(1)
(1) | Catastrophe losses are presented net of |
(2) | Some amounts may not reconcile due to rounding. |
(3) | Based on weighted average basic shares outstanding of 61.7 million, 63.1 million, 64.7 million, 57.6 million and 55.9 million for 2008, 2007, 2006, 2005 and 2004, respectively. |
(4) | Based on weighted average diluted shares outstanding of 61.7 million, 63.6 million, 65.3 million, 57.6 million and 56.8 million for 2008, 2007, 2006, 2005 and 2004, respectively. |
(5) | Loss ratio is the GAAP losses and LAE incurred as a percentage of GAAP net premiums earned. Underwriting expense ratio is the GAAP commissions, brokerage, taxes, fees and other underwriting expenses as a percentage of GAAP net premiums earned. Combined ratio is the sum of the loss ratio and underwriting expense ratio. |
(6) | Based on 61.4 million, 62.9 million, 65.0 million, 64.6 million and 56.2 million shares outstanding for December 31, 2008, 2007, 2006, 2005 and 2004, respectively. |
46
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following is a discussion and analysis of theour results of operations and financial condition of the Company. This discussion and analysiscondition. It should be read in conjunction with the Consolidated Financial Statements and accompanying notes thereto presented under ITEM 8, “Financial Statements and Supplementary Data”.
INDUSTRY CONDITIONSIndustry Conditions.
The worldwide reinsurance and insurance businesses are highly competitive, as well as cyclical by product and market. As a result, financial results tend to fluctuate with periods of constrained availability, high rates and strong profits followed by periods of abundant capacity, low rates and constrained profitability. Competition in the types of reinsurance and insurance business that the Company underwriteswe underwrite is based on many factors, including the perceived overall financial strength of the reinsurer or insurer, ratings of the reinsurer or insurer by A.M. Best and/or S&P,Standard & Poor’s, underwriting expertise, the jurisdictions where the reinsurer or insurer is licensed or otherwise authorized, capacity and coverages offered, premiums charged, other terms and conditions of the reinsurance and insurance business offered, services offered, speed of claims payment and reputation and experience in lines written. TheseFurthermore, the market impact from these competitive factors operate at the individual market participant levelrelated to varying degrees, as applicable to the specific participant’s circumstances. They also operate in aggregatereinsurance and insurance is generally not consistent across the reinsurance industry more generally, contributing, in combination with economic conditionslines of business, domestic and variations in the reinsurance buying practices of insurance companies (by participantinternational geographical areas and in the aggregate), to cyclical movements in reinsurance rates, terms and conditions and ultimately reinsurance industry aggregate financial results.distribution channels.
The Company competes
We compete in the U.S., Bermuda and international reinsurance and insurance markets with numerous global competitors. The Company’sOur competitors include independent reinsurance and insurance companies, subsidiaries or affiliates of established worldwide insurance companies, reinsurance departments of certain insurance companies and domestic and international underwriting operations, including underwriting syndicates at Lloyd’s. Some of these competitors have greater financial resources than the Companywe do and have established long-termlong term and continuing business relationships, which can be a significant competitive advantage. In addition, the lack of strong barriers to entry into the reinsurance business and the potential for securitization of reinsurance and insurance risks through capital markets provide additional sources of potential reinsurance and insurance capacity and competition.
During the latter part of 2007 and throughout 2008, there has been a significant slowdown in the global economy. Excessive availability and use of credit, particularly by individuals, led to increased defaults on sub-prime mortgages in the U.S. and elsewhere, falling values for houses and many commodities and contracting consumer spending. The significant increase in default rates negatively impacted the value of asset-backed securities held by both foreign and domestic institutions. The defaults have led to a corresponding increase in foreclosures, which have driven down housing values, resulting in additional losses on the asset-backed securities. During the third and fourth quarters of 2008, the credit markets deteriorated dramatically, evidenced by widening credit spreads and dramatically reduced availability of credit. Many financial institutions, including some insurance entities, experienced liquidity crises due to immediate demands for funds for withdrawals or collateral, combined with falling asset values and their inability to sell assets to meet the increased demands. As a result, several financial institutions have failed or been acquired at distressed prices, while others have received loans from the U.S. government to continue operations. The liquidity crisis significantly increased the spreads on fixed maturities and, at the same time, had a dramatic and negative impact on the stock markets around the world. The combination of losses on securities from failed or impaired companies combined with the decline in values of fixed maturities and equity securities has resulted in significant declines in the capital bases of most insurance and reinsurance companies. It is too early to predict the timing and extent of impact the capital deterioration will have on insurance and reinsurance market conditions. There is an expectation that these events will ultimately result in increased rates for insurance and reinsurance in certain segments of the market, but there is no assurance that this will not be the case.
Worldwide insurance and reinsurance market conditions continued to be very competitive. Generally, there was ample insurance and reinsurance capacity relative to demand. We noted, however, that in many markets and lines, the rates of decline have slowed, pricing in some segments was relatively flat and there was upward movement in some others. Competition and its effect on rates, terms and conditions vary widely by market and coverage yet continues to be most prevalent in the U.S. casualty insurance and reinsurance
markets. In 2006,addition to demanding lower rates and improved terms, ceding companies have retained more of their business by reducing quota share percentages, purchasing excess of loss covers in lieu of quota shares, and increasing retentions on excess of loss business. Our quota share premiums have declined, particularly on catastrophe exposed property business, due to slower growth and increased purchases of common account covers by ceding companies, which reduces the Company observed strong pricepremiums subject to the quota share contract. The U.S. insurance markets in which we participate were extremely competitive as well, particularly in the workers’ compensation, public entity and contractor sectors. While our growth has slowed, given the specialty nature of our business and our underwriting discipline, we believe the impact on the profitability of our business will be less pronounced than on the market generally.
Rates in the international markets have generally been more adequate than in the U.S., and we have seen some increases, and more restricted limits, in those property lines and regions that were most affected by the catastrophe events of 2005, principally Hurricanes Katrina, Rita and Wilma. Reinsurance capacity in these areas was constrained, particularly for catastrophe reinsurance, which includes southeastern U.S. exposures andexposed business. We have grown our business in the retrocessionMiddle East, Latin America and energy lines. Asia. We are expanding our international reach by opening a new office in Brazil to capitalize on the recently expanded opportunity for professional reinsurers in that market and on the economic growth expected for Brazil in the future.
The record catastrophe lossesreinsurance industry has experienced a period of 2005falling rates and volume. Profit opportunities have alsobecome generally ledless available over time; however the unfavorable trends appear to modest strengtheninghave abated somewhat. We are now seeing smaller rate declines, pockets of stability and some increases in some markets and for U.S. property lines that have little or no substantive catastrophe exposure and price stabilization in most casualty insurance and reinsurance markets. However, certain of the Company’s U.S. casualty lines continue to exhibit weaker market conditions led by the medical stop loss and D&O reinsurance classes, as well as the California workers’ compensation insurance line. The Company believes that U.S. casualty reinsurance generally remains adequately priced; however, increased price competition at the insurance company level and cedants’ increased appetite for retaining more profitable business net following several years of hard-market conditions, may result in modestly softer reinsurance pricing. The Company’s U.S. insurance operation is less affected by these standard casualty insurance market conditions given its specialty insurance program orientation. Finally, the Company continues to observe generally stable property reinsurance market conditions in most countries outside of the U.S., except for hardening property market conditions in Mexico following Hurricane Wilma, while casualty rates are softening.
U.S. property reinsurance market conditions tightened, particularly within peak catastrophe zones, during 2006. This market hardening was particularly pronounced in third quarter renewals with incrementally higher rate changes and even more restrictive coverage terms than earlier in 2006. As a result, many reinsurance buyers were not able to fully place their reinsurance program and have been forced to raise retention levels and/or
47
reduce catastrophe limit purchases. In turn, insurance companies continue to adjust limits and coverages and increase the premium rates they charge their customers. Together, these trends have generally resulted in insurance companies retaining more property risk exposure and being more prone to potential future earnings volatility than in past years. This trend reflects an imbalance between reinsurance supply and demand.some coverages. As a result of this imbalancevery significant investment and higher rates, additional competition is enteringcatastrophe losses incurred by both primary insurers and reinsurers over the marketpast year, but principally in the form of new companiesmost recent six months, industry-wide capital has declined and alternative risk transfer mechanisms. In January 2007, the Florida legislature enacted insurance reform that increases insurer’s access to the Florida Hurricane Catastrophe Fund, thus potentially reducing the amount of reinsurance purchased from the private reinsurance market. The Company is unable to predict the impact on future market conditions from the increased competition and legislative reform. In addition to these market forces, reinsurers continue to reassess their risk appetites and rebalance their property portfolios to reflect improved price to exposure metrics against the backdrop of: (i) recent revisions to the industry’s catastrophe loss projection models, which are indicating significantly higher loss potentials and consequently higher pricing requirements and (ii) elevated rating agency scrutiny has increased. There is an expectation that given the rate softening that has occurred over the past several quarters, the industry-wide decline in capital combined with volatile and unreceptive markets and a looming recession, will lead to a hardening of insurance and reinsurance marketplace rates, terms and conditions. It is too early to gauge the extent of hardening, if any, that will occur; however, it appears that much of the redundant capital requirementshas been wrung out of the industry, and the stage is set for many catastrophe exposed companies.firmer markets.
In light of its 2005 catastrophe experience, the Company reexamined its risk management practices, concluded that its control framework operated
January, 2009, renewal rates, particularly for property catastrophes and retrocessional covers and in international markets were generally as intended and made appropriate portfolio adjustmentsfirmer compared to its property reinsurance operations during the first nine months of 2006. This portfolio repositioning, particularly within peak catastrophe zones, including Southeast U.S., Mexico and Gulf of Mexico, has enabled the Company to benefit from these dislocated markets by carefully shifting the mix of its writings toward the most profitable classes, lines, customers and territories and enhancing portfolio balance and diversification.a year ago.
Overall, the Company believeswe believe that current marketplace conditions offer solidprofit opportunities for the Companyus given itsour strong ratings, distribution system, reputation and expertise. The Company continuesWe continue to employ its opportunisticour strategy of targeting those segments offeringbusiness that offers the greatest profit potential, while maintaining balance and diversification in itsour overall portfolio.
48
FINANCIAL SUMMARYFinancial Summary.The Company’s management monitors
We monitor and evaluatesevaluate our overall Company performance based upon financial results. The following table displays a summary of the consolidated net (loss) income, (loss), ratios and shareholders’ equity for the yearsperiods indicated:
| Years Ended December 31, |
| Percentage Increase/(Decrease) | ||||||
(Dollars in millions) | 2008 |
| 2007 |
| 2006 |
| 2008/2007 |
| 2007/2006 |
Gross written premiums | $ 3,678.1 |
| $ 4,077.6 |
| $ 4,000.9 |
| -9.8% |
| 1.9% |
Net written premiums | 3,505.2 |
| 3,919.4 |
| 3,875.7 |
| -10.6% |
| 1.1% |
|
|
|
|
|
|
|
|
|
|
REVENUES: |
|
|
|
|
|
|
|
|
|
Premiums earned | $ 3,694.3 |
| $ 3,997.5 |
| $ 3,853.2 |
| -7.6% |
| 3.7% |
Net investment income | 565.9 |
| 682.4 |
| 629.4 |
| -17.1% |
| 8.4% |
Net realized capital (losses) gains | (695.8) |
| 86.3 |
| 35.1 |
| NM |
| 146.1% |
Net derivative expense | (20.9) |
| (2.1) |
| (0.4) |
| NM |
| NM |
Other (expense) income | (15.9) |
| 18.0 |
| 0.1 |
| -188.2% |
| NM |
Total revenues | 3,527.6 |
| 4,782.0 |
| 4,517.3 |
| -26.2% |
| 5.9% |
|
|
|
|
|
|
|
|
|
|
CLAIMS AND EXPENSES: |
|
|
|
|
|
|
|
|
|
Incurred losses and loss adjustment expenses | 2,439.0 |
| 2,548.1 |
| 2,434.4 |
| -4.3% |
| 4.7% |
Commission, brokerage, taxes and fees | 930.7 |
| 961.8 |
| 883.3 |
| -3.2% |
| 8.9% |
Other underwriting expenses | 162.3 |
| 152.6 |
| 138.0 |
| 6.4% |
| 10.6% |
Interest, fees and bond issue cost amortization expense | 79.2 |
| 91.6 |
| 69.9 |
| -13.5% |
| 31.0% |
Total claims and expenses | 3,611.2 |
| 3,754.1 |
| 3,525.6 |
| -3.8% |
| 6.5% |
|
|
|
|
|
|
|
|
|
|
(LOSS) INCOME BEFORE TAXES | (83.6) |
| 1,028.0 |
| 991.8 |
| -108.1% |
| 3.7% |
Income tax (benefit) expense | (64.8) |
| 188.7 |
| 150.9 |
| -134.4% |
| 25.0% |
NET (LOSS) INCOME | $ (18.8) |
| $ 839.3 |
| $ 840.8 |
| -102.2% |
| -0.2% |
|
|
|
|
|
|
|
|
|
|
RATIOS: |
|
|
|
|
|
| Point Change | ||
Loss ratio | 66.0% |
| 63.7% |
| 63.2% |
| 2.3 |
| 0.5 |
Commission and brokerage ratio | 25.2% |
| 24.1% |
| 22.9% |
| 1.1 |
| 1.2 |
Other underwriting expense ratio | 4.4% |
| 3.8% |
| 3.6% |
| 0.6 |
| 0.2 |
Combined ratio | 95.6% |
| 91.6% |
| 89.7% |
| 4.0 |
| 1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| At December 31, |
| Percentage Increase/(Decrease) | ||||||
(Dollars in millions, except per share amounts) | 2008 |
| 2007 |
| 2006 |
| 2008/2007 |
| 2007/2006 |
Balance sheet data: |
|
|
|
|
|
|
|
|
|
Total investments and cash | $ 13,714.3 |
| $ 14,936.2 |
| $ 13,957.1 |
| -8.2% |
| 7.0% |
Total assets | 16,846.6 |
| 17,999.5 |
| 17,107.6 |
| -6.4% |
| 5.2% |
Loss and loss adjustment expense reserves | 8,840.7 |
| 9,040.6 |
| 8,840.1 |
| -2.2% |
| 2.3% |
Total debt | 1,179.1 |
| 1,178.9 |
| 995.6 |
| 0.0% |
| 18.4% |
Total liabilities | 11,886.2 |
| 12,314.7 |
| 11,999.9 |
| -3.5% |
| 2.6% |
Shareholders' equity | 4,960.4 |
| 5,684.8 |
| 5,107.7 |
| -12.7% |
| 11.3% |
Book value per share | 80.77 |
| 90.43 |
| 78.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(NM, not meaningful) |
|
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
|
|
|
|
|
|
|
|
Revenues.
| Years Ended December 31, | Percentage Increase/(Decrease) | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2006 | 2005 | 2004 | 2006/2005 | 2005/2004 | ||||||||||||||||||
Gross written premiums | $ | 4,000,870 | $ | 4,108,562 | $ | 4,704,135 | -2.6 | % | -12.7 | % | |||||||||||||
| Net written premiums | 3,875,714 | 3,972,041 | 4,531,488 | -2.4 | % | -12.3 | % | ||||||||||||||||
REVENUES: | |||||||||||||||||||||||
| Premiums earned | $ | 3,853,153 | $ | 3,963,093 | $ | 4,425,082 | -2.8 | % | -10.4 | % | |||||||||||||
| Net investment income | 629,378 | 522,833 | 495,908 | 20.4 | % | 5.4 | % | ||||||||||||||||
| Net realized capital gains | 35,067 | 90,284 | 89,614 | -61.2 | % | 0.7 | % | ||||||||||||||||
| Net derivative expense | (410 | ) | (2,638 | ) | (2,660 | ) | 84.4 | % | 0.8 | % | |||||||||||||
| Other income (expense) | 112 | (11,116 | ) | 9,562 | N | M | N | M | |||||||||||||||
| Total revenues | 4,517,300 | 4,562,456 | 5,017,506 | -1.0 | % | -9.1 | % | ||||||||||||||||
| CLAIMS AND EXPENSES: | |||||||||||||||||||||||
| Incurred losses and loss adjustment expenses | 2,434,420 | 3,724,317 | 3,291,139 | -34.6 | % | 13.2 | % | ||||||||||||||||
| Commission, brokerage, taxes and fees | 883,254 | 914,847 | 975,176 | -3.5 | % | -6.2 | % | ||||||||||||||||
| Other underwriting expenses | 137,977 | 129,800 | 114,870 | 6.3 | % | 13.0 | % | ||||||||||||||||
| Interest, fee and bond issue | |||||||||||||||||||||||
| cost amortization expense | 69,899 | 74,413 | 76,610 | -6.1 | % | -2.9 | % | ||||||||||||||||
| Total claims and expenses | 3,525,550 | 4,843,377 | 4,457,795 | -27.2 | % | 8.6 | % | ||||||||||||||||
| INCOME (LOSS) BEFORE TAXES | 991,750 | (280,921 | ) | 559,711 | 453.0 | % | -150.2 | % | |||||||||||||||
| Income tax expense (benefit) | 150,922 | (62,254 | ) | 64,853 | 342.4 | % | -196.0 | % | |||||||||||||||
| NET INCOME (LOSS) | $ | 840,828 | $ | (218,667 | ) | $ | 494,858 | 484.5 | % | -144.2 | % | ||||||||||||
| RATIOS: | Point | Change | Point | Change | |||||||||||||||||||
| Loss ratio | 63.2 | % | 94.0 | % | 74.4 | % | (30.8 | ) | 19.6 | ||||||||||||||
| Commission and brokerage ratio | 22.9 | % | 23.1 | % | 22.0 | % | (0.2 | ) | 1.1 | ||||||||||||||
| Other underwriting expense ratio | 3.6 | % | 3.2 | % | 2.6 | % | 0.4 | 0.6 | |||||||||||||||
| Combined ratio | 89.7 | % | 120.3 | % | 99.0 | % | (30.6 | ) | 21.3 | ||||||||||||||
December 31, | |||||||||||||||||||||||
| (Dollars in millions) | 2006 | 2005 | 2004 | ||||||||||||||||||||
| Shareholders' equity | $ | 5,107.7 | $ | 4,139.7 | $ | 3,712.5 | 23.4 | % | 11.5 | % | |||||||||||||
(NM, not meaningful) | |||||||||||||||||||||||
The Company’s 2006 results were very strong with net income of $840.8Premiums.Gross written premiums decreased by $399.4 million, or 9.8%, in 2008 compared to 2007, reflecting a decline of $285.6 million in our reinsurance business and $113.8 million in our U.S. insurance business. The decline in our reinsurance business was primarily attributable to continued competitive conditions in both the property and casualty sectors of the market, especially in the U.S., partially offset by strong renewals and higher rates in international markets. Insurance segment premiums were also lower, as conditions for workers’ compensation, public equity and contractors business became increasingly competitive, which reduced the volume of business that met our underwriting and pricing criteria. Net written premiums decreased $414.2 million, or 10.6%, in 2008 compared to 2007, primarily due to the decrease in gross written premiums and an increase in written premiums ceded, most of which was in the U.S. insurance segment. Correspondingly, premiums earned decreased $303.2 million, or 7.6%, in 2008 compared to 2007. The lesser percentage decrease in net loss of $218.7 million for 2005. This significant earnings improvement reflects the favorable effect of a benign U.S. hurricane seasonpremiums earned relative to unprecedented Company and industry hurricane losses experienced in 2005, as well as favorable underlying underwriting fundamentals.net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are reflected at the initiation of the coverage period.
49
Gross written premiums declined for 2006increased by $76.7 million, or 1.9%, in 2007 compared to 2005 as2006, reflecting growth of $57.4 million in our reinsurance business and $19.3 million in our U.S. insurance business. The increase in our reinsurance business is primarily attributable to the Company continued its disciplined underwriting and risk management practices. In particular,strengthening of other currencies against the Company repositioned its U.S. property reinsurance portfoliodollar. Premiums written in strengthening currencies converted to more U.S. dollars resulting in improved pricing, but lower premium volume. The premium volume decline also reflects much lowercomparatively higher reported premiums. Net written premiums increased $43.7 million, or 1.1%, in 2007 compared to 2006, slightly less than the growth in gross written premiums due to the run-off insurance creditchange in the mix of our program business and the resulting change in reinsurance. Premiums earned increased $144.3 million, or 3.7%, in 2007 compared to 2006.
Net Investment Income. Net investment income decreased by 17.1% in 2008 compared to 2007, primarily due to a cut backnet investment loss from our limited partnership investments, particularly those which were principally invested in treaty casualty writings in responsepublic equities, and lower rates on short and long term bonds. Pre-tax investment income as a percentage of average invested assets was 4.0% for 2008 compared to market softening in many U.S. casualty reinsurance classes.4.9% for 2007.
Investment
Net investment income increased by 8.4% in 2007 compared to 2006, primarily due to the growth in invested assets to $14.9 billion at December 31, 2007 from $14.0 billion at December 31, 2006. The growth in invested assets was principally driven by $854.4 million of operating cash flows. Pre-tax investment portfolio yield for 2007 was 4.9% compared to 4.8% for 2006.
Net Realized Capital (Losses) Gains.Net realized capital losses were $695.8 million for 2008, while 2007 and 2006 had net realized capital gains of $86.3 million and $35.1 million, respectively.
The net realized capital losses for 2008 were primarily the result of the credit crisis impacting the global financial markets, which drove down the values of equity and fixed income securities. As such, our equity security portfolio decreased $277.5 million as a result of fair value adjustments and our fixed maturities decreased $176.5 million due to other-than-temporary impairments. In addition, we recognized $243.3 million of net realized capital losses, principally from the growthsale of equity securities we owned as we realigned our investment portfolios. We report changes in fair values of our equity securities as realized capital gains or losses in accordance with FAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities – including an amendment to FASB Statement No. 115” (“FAS 159”), and we report realized losses on our fixed income portfolio from other-than-temporary impairments as realized capital losses in accordance with FAS No. 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FAS 115-1”).
Net realized gains in 2007 consisted of $76.6 million in changes in fair value of the invested asset baseequity securities and greater$18.1 million from sales of equity securities and fixed maturity securities, partially offset by $8.4 million of other-than-temporary impairments of the fixed maturity securities. Net realized gains in 2006 were the result of sales from fixed maturities of $12.8 million and equity securities of $22.3 million.
Net Derivative Expense.In 2005 and prior, we sold seven equity index put options, which are outstanding. These contracts meet the definition of a derivative under FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”). We recognized net derivative expense of $20.9 million, $2.1 million and $0.4 million for 2008, 2007 and 2006, respectively. The net derivative expense represents changes in the fair value of these contracts. The increased expense in 2008 was driven by declines in the underlying indexes and interest rates, which are the primary determinants of the contracts’ fair values.
Other (Expense) Income.We recorded expense of $15.9 million for 2008 and income from limited partnership investments.of $18.0 million and $0.1 million for 2007 and 2006, respectively, which were primarily the result of fluctuations in foreign currency exchange rates over the periods.
Claims and Expenses.
Incurred Losses and LAE.The Company’s shareholders’ equityfollowing table presents our incurred losses and LAE for the periods indicated.
| Years Ended December 31, | |||||||||||||
| Current |
| Ratio %/ |
| Prior |
| Ratio %/ |
| Total |
| Ratio %/ | |||
(Dollars in millions) | Year |
| Pt Change |
| Years |
| Pt Change |
| Incurred |
| Pt Change | |||
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional (a) | $ 2,050.3 |
| 55.5% |
|
| $ 24.4 |
| 0.7% |
|
| $ 2,074.7 |
| 56.2% |
|
Catastrophes | 353.8 |
| 9.6% |
|
| 10.5 |
| 0.3% |
|
| 364.3 |
| 9.9% |
|
A&E | - |
| 0.0% |
|
| - |
| 0.0% |
|
| - |
| 0.0% |
|
Total segment | $ 2,404.1 |
| 65.1% |
|
| $ 34.9 |
| 0.9% |
|
| $ 2,439.0 |
| 66.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional (a) | $ 2,189.3 |
| 54.8% |
|
| $ (188.7) |
| -4.7% |
|
| $ 2,000.6 |
| 50.0% |
|
Catastrophes | 152.3 |
| 3.8% |
|
| 7.7 |
| 0.2% |
|
| 160.0 |
| 4.0% |
|
A&E | - |
| 0.0% |
|
| 387.5 |
| 9.7% |
|
| 387.5 |
| 9.7% |
|
Total segment | $ 2,341.6 |
| 58.6% |
|
| $ 206.5 |
| 5.2% |
|
| $ 2,548.1 |
| 63.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional (a) | $ 2,283.2 |
| 59.3% |
|
| $ (243.3) |
| -6.3% |
|
| $ 2,039.9 |
| 52.9% |
|
Catastrophes | 15.6 |
| 0.4% |
|
| 272.3 |
| 7.1% |
|
| 287.9 |
| 7.5% |
|
A&E | - |
| 0.0% |
|
| 106.6 |
| 2.8% |
|
| 106.6 |
| 2.8% |
|
Total segment | $ 2,298.8 |
| 59.7% |
|
| $ 135.6 |
| 3.5% |
|
| $ 2,434.4 |
| 63.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance 2008/2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional (a) | $ (139.0) |
| 0.7 | pts |
| $ 213.1 |
| 5.4 | pts |
| $ 74.1 |
| 6.1 | pts |
Catastrophes | 201.5 |
| 5.8 | pts |
| 2.7 |
| 0.1 | pts |
| 204.3 |
| 5.9 | pts |
A&E | - |
| - | pts |
| (387.5) |
| (9.7) | pts |
| (387.5) |
| (9.7) | pts |
Total segment | $ 62.5 |
| 6.5 | pts |
| $ (171.7) |
| (4.3) | pts |
| $ (109.2) |
| 2.3 | pts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance 2007/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional (a) | $ (93.9) |
| (4.5) | pts |
| $ 54.6 |
| 1.6 | pts |
| $ (39.3) |
| (2.9) | pts |
Catastrophes | 136.7 |
| 3.4 | pts |
| (264.6) |
| (6.9) | pts |
| (127.9) |
| (3.5) | pts |
A&E | - |
| - | pts |
| 280.9 |
| 6.9 | pts |
| 280.9 |
| 6.9 | pts |
Total segment | $ 42.8 |
| (1.1) | pts |
| $ 70.9 |
| 1.7 | pts |
| $ 113.7 |
| 0.5 | pts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Attritional losses exclude catastrophe and A&E losses. |
|
|
|
|
|
|
|
|
|
|
| |||
(Some amounts may not reconcile due to rounding.) |
|
|
|
|
|
|
|
|
|
|
| |||
Incurred losses and LAE were lower by $109.2 million, or 4.3%, in 2008 compared to 2007. Attritional losses were lower than in 2007, largely the result of lower net earned premiums. The current year attritional loss ratio crept up by 0.7 points compared to 2007, the result of softer rates in the U.S. reinsurance segment mitigated somewhat by improved loss ratios in the other segments, particularly, international.
We experienced $24.4 million of adverse reserve development on our attritional reserves in 2008 compared to $188.7 million of favorable reserve development in 2007. The adverse development in 2008 was the result of $85.3 million of development on loss reserves for a run-off auto loan credit insurance program and
a $32.6 million adverse arbitration decision. These items more than offset approximately $93.5 million of favorable development on the remainder of our attritional reserves.
Catastrophe losses, at $364.3 million, were $204.3 million higher than in 2007, driven by hurricanes Gustav and Ike and a major snowstorm in China. While 2008 ranks as one of the costliest years on record for insured natural catastrophe losses, our losses were generally in line with our modeled expected annual aggregate catastrophe losses as developed through our enterprise risk and catastrophe exposure management processes.
We strengthened our asbestos reserves by $387.5 million in 2007, and had no development in 2008 as loss activity in 2008 was in line with expected as per the reserves established at December 31, 2007.
Incurred losses and LAE increased by $1.0 billion to $5.1 billion$113.7 million, or 4.7%, in 2006, principally attributable2007 compared to the record net income generated during the year.same period in 2006. This compares to an increase of $0.4 billion to $4.1 billion in 2005.
Revenues. Gross and net written premiums declined 2.6% and 2.4%, respectively, for 2006 compared to 2005, while net premiums earned declined 2.8% in 2006 compared to 2005. The decrease in full year net premiums earned was primarily due to a $280.9 million increase in A&E loss reserve strengthening, which was partially offset by lower catastrophe losses of $127.9 million and lower attritional losses of $39.3 million. The increase in A&E reserves was due to an extensive in-house study by our actuarial and claim units. The decrease in catastrophe losses reflects the decrease in prior years’ development.
Commission, Brokerage, Taxes and Fees.Commission, brokerage, taxes and fees decreased by $31.1 million, or 3.2%, in 2008 compared to 2007. This directly variable expense was influenced by the decline in net earned premiums partially offset by higher commission rates on new insurance programs, higher contingent commissions and higher ceding commissions on some reinsurance treaties due to more competitive market conditions as well as business mix.
Commission, brokerage, taxes and fees increased by $78.5 million, or 8.9% in 2007 compared to 2006. The increase in net earned premiums, an increase in ceding commissions due to market conditions and higher commissions on new insurance programs were the principal drivers of the increase.
Other Underwriting Expenses.Other underwriting expenses for 2008 were $162.3 million compared to $152.6 million for 2007. The increase is primarily due to higher compensation and benefits expense resulting from increased staff, primarily in the U.S. insurance segmentInsurance segment. Included in other underwriting expenses were corporate expenses, which are expenses that are not allocated to segments, of 7.5%, reflective of: i) a reduction in credit business$13.8 million and $13.1 million for 2008 and 2007, respectively.
Other underwriting expenses for 2007 were $152.6 million compared to $138.0 million for 2006. The increase was primarily due to higher compensation and benefits expense resulting from an auto loan insurance program which is in run-off; and ii) continued reductionsincreased staff, primarily in the California workers’ compensation writingsU.S. Insurance segment. Included in other underwriting expenses were corporate expenses of $13.1 million and $26.5 million for 2007 and 2006, respectively. The decrease was primarily due to competitive market conditions.the allocation of share-based compensation expense in 2007 to segments.
Interest, Fees and Bond Issue Cost Amortization Expense.Interest and other expense was $79.2 million and $91.6 million for 2008 and 2007, respectively. The decrease was primarily due to the acceleration of amortization of the bond issue costs for the junior subordinated debt securities which were retired in November, 2007, with no such expense in 2008. In addition, the interest reduction on the retired junior subordinated notes was partially offset by the interest on the new long term notes.
Interest and other expense was $91.6 million and $69.9 million for 2007 and 2006, respectively. The increase was due to the new long term notes we issued in April, 2007 and the acceleration of the amortization of the bond issue costs associated with the November 15, 2007 early retirement of the 7.85% junior subordinated debt securities.
Income Tax (Benefit) Expense.Our income tax was a benefit of $64.8 million in 2008, principally as a result of net premiums earnedrealized capital losses due to fair value re-measurements, other-than-temporary impairments and losses on sales of public equity securities. We had income tax expense of $188.7 million and $150.9 million for 2007 and 2006, respectively, primarily due to income from operations and net realized capital gains in both periods. Our income tax is primarily a function of the worldwide reinsurance segmentsstatutory tax rates and corresponding pre-tax income in the aggregate decreasedjurisdictions where we operate, coupled with the impact from tax-preferenced investment income. Variations in our effective tax rate generally result from changes in the relative levels of pre-tax income among jurisdictions with different tax rates.
Net (Loss) Income.
Our net loss was $18.8 million for 2008 compared to $839.3 million of net income for 2007. This decrease was primarily driven by 1.5%after-tax net realized capital losses and increased catastrophe losses in 2008 compared to after-tax net realized capital gains and fewer catastrophe losses in 2007.
Ratios.
Our combined ratio increased by 4.0 points to 95.6% for 2006, reflecting multiple segment level factors, including a significant return premium2008 compared to 91.6% for a Florida property quota share contract cancelled2007. The loss ratio component increased 2.3 points for 2008, principally due to the increase in 2006,current year catastrophe losses and attritional prior years’ reserve development, partially offset by the absence of sizable reinstatement premiums triggereddevelopment on A&E reserves in 20052008. The commission and brokerage ratio component increased by 1.1 points for 2008 due to the increased commission rates on new insurance programs and higher contingent commissions. The other underwriting expense ratio component increased minimally by 0.6 points for 2008.
Our combined ratio increased by 1.9 points to 91.6% in 2007 compared to 89.7% in 2006. The loss ratio component increased 0.5 points for 2007, principally due to prior year A&E losses. The commission and brokerage ratio component increased by 1.2 points for 2007. The underwriting expense ratio component increased minimally by 0.2 points for 2007.
Shareholders’ Equity.
Shareholders’ equity decreased by $724.4 million to $4,960.4 million in 2008 from severe catastrophic events,$5,684.8 million in 2007, principally as wella result of $236.6 million of unrealized depreciation, net of tax, on investments, $193.3 million of foreign currency translation adjustments, the repurchase of 1.6 million common shares for $150.7 million, $118.6 million of shareholder dividends, pension adjustments, net of tax, of $25.2 million and net loss of $18.8 million, partially offset by share-based compensation transactions of $20.0 million. The increase in unrealized depreciation is due to the current financial market liquidity crisis that has resulted in significantly increased credit spreads and concomitantly lower corporate and municipal security values.
Shareholders’ equity increased by $577.1 million to $5,684.8 million in 2007 from $5,107.7 million in 2006, principally as a result of the exercise$839.3 million of continued underwriting disciplines which emphasizes potential profitability over volume.net income, $65.4 million from foreign currency translation adjustments, unrealized appreciation and pension adjustments, and $35.1 million of share-based compensation transactions, partially offset by the repurchase of 2.5 million common shares at a cost of $241.6 million and the payment of $121.4 million of shareholder dividends.
Consolidated Investment Results
Net Investment Income.
Net investment income decreased 17.1% to $565.9 million in 2008 from $682.4 million in 2007, primarily due to losses incurred on our limited partnership investments, particularly those that invested in public equity securities, in 2008 compared to income in 2007.
Net investment income increased 20.4% for8.4% to $682.4 million in 2007 from $629.4 million in 2006, comparedprimarily due to 2005, reflecting continued year-over-yeara growth in invested assets to $14.9 billion at December 31, 2007 from $14.0 billion at December 31, 2006. The asset growth emanated largely from continued positive cash flow from operations andoperations.
The following table shows the components of net investment income for the periods indicated:
| Years Ended December 31, | ||||
(Dollars in millions) | 2008 |
| 2007 |
| 2006 |
Fixed maturities | $ 543.4 |
| $ 496.6 |
| $ 508.5 |
Equity securities | 19.9 |
| 24.7 |
| 21.2 |
Short-term investments and cash | 52.1 |
| 109.1 |
| 61.0 |
Other invested assets |
|
|
|
|
|
Limited partnerships | (42.2) |
| 59.2 |
| 54.7 |
Other | 2.3 |
| 3.1 |
| 2.9 |
Total gross investment income | 575.5 |
| 692.7 |
| 648.4 |
Interest credited and other expense | (9.6) |
| (10.3) |
| (19.0) |
Total net investment income | $ 565.9 |
| $ 682.4 |
| $ 629.4 |
| . |
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
|
|
|
|
The following table shows a $43.2 million increase in income from limited partnership investments. The averagecomparison of various investment portfolio yields for 2006 were 4.6%the periods indicated:
| 2008 |
| 2007 |
| 2006 |
Imbedded pre-tax yield of cash and invested assets at December 31 | 4.5% |
| 4.7% |
| 4.6% |
Imbedded after-tax yield of cash and invested assets at December 31 | 4.0% |
| 3.9% |
| 4.0% |
|
|
|
|
|
|
Annualized pre-tax yield on average cash and invested assets | 4.0% |
| 4.9% |
| 4.8% |
Annualized after-tax yield on average cash and invested assets | 3.4% |
| 4.1% |
| 4.2% |
Because of our historical income orientation, we have generally managed our investments to maximize reportable income. The following table provides a comparison of our total return by asset class relative to broadly accepted industry benchmarks for the periods indicated:
| 2008 |
| 2007 |
| 2006 |
Fixed income portfolio total return | 0.3% |
| 5.0% |
| 4.6% |
Lehman bond aggregate index | 5.2% |
| 7.0% |
| 4.3% |
|
|
|
|
|
|
Common equity portfolio total return | -40.9% |
| 9.2% |
| 19.2% |
S&P 500 index | -37.0% |
| 5.5% |
| 15.8% |
|
|
|
|
|
|
Other invested asset portfolio total return | -7.4% |
| 13.5% |
| 19.8% |
The pre-tax equivalent total return for the bond portfolio was approximately 2.1%, 5.7% and 4.0% after-tax, slightly higher compared5.3%, respectively, for 2008, 2007 and 2006. The pre-tax equivalent return adjusts the yield on tax-exempt bonds to the prior year.fully taxable equivalent.
Net Realized Capital (Losses) Gains.
The following table presents the composition of our net realized capital (losses) gains for the periods indicated:
| Years Ended December 31, |
| 2008/2007 |
| 2007/2006 | ||||||
(Dollars in millions) | 2008 |
| 2007 |
| 2006 |
| Variance | % Change |
| Variance | % Change |
(Losses) gains from sales: |
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, market value |
|
|
|
|
|
|
|
|
|
|
|
Gains | $ 14.5 |
| $ 2.6 |
| $ 14.9 |
| $ 11.9 | NM |
| $ (12.3) | -82.6% |
Losses | (27.2) |
| (8.5) |
| (2.0) |
| (18.7) | 220.0% |
| (6.5) | NM |
Total | (12.6) |
| (5.9) |
| 12.8 |
| (6.7) | 113.6% |
| (18.7) | -145.6% |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, fair value |
|
|
|
|
|
|
|
|
|
|
|
Gains | 0.1 |
| - |
| - |
| 0.1 | NM |
| - | NM |
Losses | - |
| - |
| - |
| - | NM |
| - | NM |
Total | 0.1 |
| - |
| - |
| 0.1 | NM |
| - | NM |
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities, market value |
|
|
|
|
|
|
|
|
|
|
|
Gains | - |
| - |
| 34.1 |
| - | NM |
| (34.1) | -100.0% |
Losses | - |
| - |
| (11.8) |
| - | NM |
| 11.8 | -100.0% |
Total | - |
| - |
| 22.3 |
| - | NM |
| (22.3) | -100.0% |
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities, fair value |
|
|
|
|
|
|
|
|
|
|
|
Gains | 23.4 |
| 45.9 |
| - |
| (22.5) | -49.0% |
| 45.9 | NM |
Losses | (254.1) |
| (22.0) |
| - |
| (232.1) | NM |
| (22.0) | NM |
Total | (230.6) |
| 24.0 |
| - |
| (254.6) | NM |
| 24.0 | NM |
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized capital (losses) gains from sales |
|
|
|
|
|
|
|
|
|
| |
Gains | 38.0 |
| 48.5 |
| 49.0 |
| (10.5) | -21.6% |
| (0.5) | -1.0% |
Losses | (281.3) |
| (30.4) |
| (13.9) |
| (250.9) | NM |
| (16.6) | 119.8% |
Total | (243.3) |
| 18.1 |
| 35.1 |
| (261.4) | NM |
| (17.1) | -48.7% |
|
|
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairments: | (176.5) |
| (8.4) |
| - |
| (168.1) | NM |
| (8.4) | NM |
|
|
|
|
|
|
|
|
|
|
|
|
(Losses) gains from fair value adjustments: |
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, fair value | 1.5 |
| - |
| - |
| 1.5 | NM |
| - | NM |
Equity securities, fair value | (277.5) |
| 76.6 |
| - |
| (354.1) | NM |
| 76.6 | NM |
Total | (276.0) |
| 76.6 |
| - |
| (352.6) | NM |
| 76.6 | NM |
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized capital (losses) gains | $ (695.8) |
| $ 86.3 |
| $ 35.1 |
| $ (782.1) | NM |
| $ 51.1 | 145.6% |
|
|
|
|
|
|
|
|
|
|
|
|
(NM, not meaningful) |
|
|
|
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
|
|
|
|
|
|
|
|
|
|
We recorded $276.0 million in net realized capital losses due to fair value re-measurement on fixed maturities and equity securities for 2008 and $76.6 million of net realized capital gains due to fair value re-measurements on equity securities for 2007. In addition, we recorded other-than-temporary impairments of $176.5 million and $8.4 million for 2008 and 2007, respectively. These net realized capital losses were modest in relationattributable to the Company’s invested asset base, mainly reflecting normal portfolio management activities in response to changes in interest ratescurrent financial liquidity crisis and related global economic downturn. Numerous financial corporations have either filed for bankruptcy or received assistance from the U.S. Government. This activity has severely impacted both the equity and credit spreads.markets. Equities are trading at multiyear lows, spreads on fixed maturities are at unprecedented levels and many securities have been downgraded by rating agencies.
Expenses.Segment Results. The Company’s incurred losses and loss adjustment expenses (“LAE”) decreased 34.6% in 2006 compared to 2005, primarily due to the relative absence of current year catastrophe losses.
The Company’s loss ratio improvement of 31 points for 2006 compared to 2005 included a 30 point improvement due to the relative absence of current year catastrophes.
Commission, brokerage, and tax expenses decreased by 3.5% in 2006 from 2005. The 2.8% decline in earned premiums in 2006 compared to 2005 was the principal driver of the decrease in this directly variable expense. Other underwriting expenses for 2006 increased by 6.3% compared to 2005, all due to growth in corporate non-allocated expenses.
The Company’s effective income tax rate for 2006 was 15.2% compared with the effective tax rate for 2005 of 22.2%, which was impacted by the large catastrophe losses.
SEGMENT INFORMATIONThe Company, through itsThrough our subsidiaries, operateswe operate in five segments: U.S. Reinsurance, U.S. Insurance, Specialty Underwriting, International and Bermuda. The U.S. Reinsurance operation writes property and casualty reinsurance, on both a treaty and facultative reinsurance,basis, through reinsurance brokers, as well as directly with ceding companies within the U.S. The U.S. Insurance operation writes property and casualty insurance primarily through general agents and
50
surplus lines brokers within the U.S. The Specialty Underwriting operation writes A&H, marine, aviation and surety business within the U.S. and worldwide through brokers and directly with ceding companies. The International operation writes non-U.S. property and casualty reinsurance through Everest Re’s branches in Canada and Singapore and offices in addition to foreign business written through Everest Re’s Miami and New Jersey offices.Jersey. The Bermuda operation provides reinsurance and insurance to worldwide property and casualty markets and reinsurance to life insurers through brokers and directly with ceding companies from its Bermuda office and reinsurance to the United Kingdom and European markets through its UK branch.
These segments are managed in a carefully coordinated fashion with strong elements of central control, with respect to pricing, risk management, control of aggregate catastrophe exposures, to catastrophic events, capital, investments and support operations. Management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting results.
Underwriting results include earned premium less losses and LAE incurred, commission and brokerage expenses and other underwriting expenses and are analyzedexpenses. We measure our underwriting results using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which respectively, divide incurred losses, commissions and brokerage and other underwriting expenses by earned premium. The Company utilizesWe utilize inter-affiliate reinsurance, butalthough such reinsurance generally does not materially impact segment results, as business is generally reported within the segment in which the business was first produced. For selected financial information regarding these segments, see Note 18 of Notes to Consolidated Financial Statements.
The following tables present the relevant underwriting results for the operating segments for the three years ended December 31, 2006, 2005 and 2004:
| U.S. Reinsurance | |||||||||||
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| Gross written premiums | $ | 1,336,728 | $ | 1,386,168 | $ | 1,478,159 | |||||
| Net written premiums | 1,331,677 | 1,383,690 | 1,468,466 | ||||||||
Premiums earned | $ | 1,281,055 | $ | 1,396,133 | $ | 1,473,545 | |||||
| Incurred losses and loss adjustment expenses | 851,172 | 1,479,560 | 1,168,563 | ||||||||
| Commission and brokerage | 298,111 | 358,101 | 373,581 | ||||||||
| Other underwriting expenses | 24,946 | 23,981 | 23,390 | ||||||||
| Underwriting gain (loss) | $ | 106,826 | $ | (465,509 | ) | $ | (91,989 | ) | |||
U.S. Insurance | |||||||||||
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| Gross written premiums | $ | 866,294 | $ | 932,469 | $ | 1,167,808 | |||||
| Net written premiums | 753,324 | 815,316 | 1,019,716 | ||||||||
Premiums earned | $ | 761,685 | $ | 823,015 | $ | 937,576 | |||||
| Incurred losses and loss adjustment expenses | 519,904 | 530,781 | 658,777 | ||||||||
| Commission and brokerage | 123,087 | 132,630 | 130,380 | ||||||||
| Other underwriting expenses | 48,918 | 51,911 | 49,277 | ||||||||
| Underwriting gain | $ | 69,776 | $ | 107,693 | $ | 99,142 | |||||
51
Specialty Underwriting | |||||||||||
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| Gross written premiums | $ | 251,209 | $ | 314,630 | $ | 487,072 | |||||
| Net written premiums | 243,819 | 299,316 | 470,571 | ||||||||
Premiums earned | $ | 244,501 | $ | 301,454 | $ | 459,284 | |||||
| Incurred losses and loss adjustment expenses | 163,925 | 317,917 | 302,010 | ||||||||
| Commission and brokerage | 67,829 | 79,692 | 129,209 | ||||||||
| Other underwriting expenses | 6,559 | 6,756 | 7,068 | ||||||||
| Underwriting gain (loss) | $ | 6,188 | $ | (102,911 | ) | $ | 20,997 | ||||
International | |||||||||||
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| Gross written premiums | $ | 731,745 | $ | 706,584 | $ | 687,657 | |||||
| Net written premiums | 730,717 | 704,870 | 684,390 | ||||||||
Premiums earned | $ | 719,475 | $ | 683,435 | $ | 655,694 | |||||
| Incurred losses and loss adjustment expenses | 382,839 | 574,653 | 419,101 | ||||||||
| Commission and brokerage | 180,541 | 166,968 | 161,106 | ||||||||
| Other underwriting expenses | 13,830 | 12,622 | 11,298 | ||||||||
| Underwriting gain (loss) | $ | 142,265 | $ | (70,808 | ) | $ | 64,189 | ||||
Bermuda | |||||||||||
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| Gross written premiums | $ | 814,894 | $ | 768,711 | $ | 883,439 | |||||
| Net written premiums | 816,177 | 768,849 | 888,345 | ||||||||
Premiums earned | $ | 846,437 | $ | 759,056 | $ | 898,983 | |||||
| Incurred losses and loss adjustment expenses | 516,580 | 821,406 | 742,688 | ||||||||
| Commission and brokerage | 213,686 | 177,456 | 180,900 | ||||||||
| Other underwriting expenses | 17,193 | 16,153 | 13,998 | ||||||||
| Underwriting gain (loss) | $ | 98,978 | $ | (255,959 | ) | $ | (38,603 | ) | |||
52
The following table reconciles the underwriting results for the operating segments to income before tax as reported in the consolidated statements of operations and comprehensive income for the three years ended December 31:
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Underwriting gain (loss) | $ | 424,033 | $ | (787,494 | ) | $ | 53,736 | ||||
| Net investment income | 629,378 | 522,833 | 495,908 | ||||||||
| Net realized capital gains | 35,067 | 90,284 | 89,614 | ||||||||
| Net derivative expense | (410 | ) | (2,638 | ) | (2,660 | ) | |||||
| Corporate expenses | (26,531 | ) | (18,377 | ) | (9,839 | ) | |||||
| Interest, fee and bond issue cost amortization expense | (69,899 | ) | (74,413 | ) | (76,610 | ) | |||||
| Other income (expense) | 112 | (11,116 | ) | 9,562 | |||||||
| Income (loss) before taxes | $ | 991,750 | $ | (280,921 | ) | $ | 559,711 | ||||
CONSOLIDATED RESULTS OF OPERATIONSYEAR ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005Premiums Written. Gross written premiums decreased 2.6% to $4,000.9 million in 2006 from $4,108.6 million in 2005. The Specialty Underwriting operation decreased 20.2% ($63.4 million), driven by a $53.2 million reduction in A&H premiums, as pricing for this business continues to be difficult and a $23.6 million decrease in marine and aviation premiums, partially offset by a $13.4 million increase in surety premiums. The U.S. Insurance operation decreased 7.1% ($66.2 million), mainly reflecting continued reductions in the California workers’ compensation business and run-off of the credit business. The U.S. Reinsurance operation decreased 3.6% ($49.4 million), principally reflecting a $72.7 million decrease in treaty casualty business, partially offset by a $16.4 million increase in treaty property business and by an $11.6 million increase in facultative business. Partially offsetting these declines was a 6.0% ($46.2 million) increase in the Bermuda operation, reflecting increases in treaty business in the UK, Europe and Bermuda, partially offset by decreased facultative business in Bermuda. The International operation increased 3.6% ($25.2 million), primarily due to a $47.1 million increase in international business written through the Miami and New Jersey offices, representing primarily Latin American business and by a $22.8 million increase in Canadian business, partially offset by a $44.1 million decrease in Asian business. The Company endeavors to write only business that meets its profit criteria; generally, increases and decreases in a line of business or region are the result of changing perceptions of the profit opportunities in the various markets.
Ceded premiums decreased to $125.2 million in 2006 from $136.5 million in 2005. Ceded premiums generally relate to specific reinsurance purchased by the U.S. Insurance operation and fluctuate based upon the level of premiums written in the individual reinsured programs.
Net written premiums decreased by 2.4% to $3,875.7 million in 2006 from $3,972.0 million in 2005, reflecting the $107.7 million decrease in gross written premiums and the $11.4 million decrease in ceded premiums.
Premium Revenues. Net premiums earned decreased by 2.8% to $3,853.2 million in 2006 from $3,963.1 million in 2005. Contributing to this decrease was an 18.9% ($57.0 million) decrease in the Specialty Underwriting operation, an 8.2% ($115.1 million) decrease in the U.S. Reinsurance operation, a 7.5% ($61.3 million) decrease in the U.S. Insurance operation, partially offset by an 11.5% ($87.4 million) increase in the Bermuda operation and a 5.3% ($36.0 million) increase in the International operation. Additional premiums, related to catastrophe business, included in net earned premiums contributed $4.9 million and $81.8 million for 2006 and 2005, respectively. The changes reflect period to period changes in net written premiums and business mix, together with normal variability in earning patterns. Business mix changes occur not only as the Company shifts emphasis between products, lines of business, distribution channels and markets, but also as individual
53
contracts renew or non-renew, almost always with changes in coverage, structure, prices and/or terms and as new contracts are accepted. As premium reporting, earnings, loss and commission characteristics derive from the provisions of individual contracts, the continuous turnover of individual contracts, arising from both strategic shifts and daily underwriting decisions, can and does introduce appreciable variability in various underwriting line items. Changes in estimates of the reporting patterns of ceding companies also affect premiums earned.
ExpensesIncurred Losses and LAE. The Company’sOur loss and LAE reserves reflectare our best estimate of our ultimate liability for unpaid claims. We re-evaluate our estimates of ultimate claim liability. Such estimates are re-evaluated on an ongoing basis, including re-estimates ofall prior period reserves, taking into consideration all available information and, in particular, recently reported loss and claim experience and trends related to prior periods. The effect of suchSuch re-evaluations isare recorded in incurred losses in the period in which re-evaluation is made.
The following discusses the underwriting results for each of our segments for the current period.periods indicated:
U.S. Reinsurance.
The following table showspresents the componentsunderwriting results and ratios for the U.S. Reinsurance segment for the periods indicated.
| Years Ended December 31, |
| 2008/2007 |
| 2007/2006 | ||||||
(Dollars in millions) | 2008 |
| 2007 |
| 2006 |
| Variance | % Change |
| Variance | % Change |
Gross written premiums | $ 957.9 |
| $ 1,193.5 |
| $ 1,336.7 |
| $ (235.6) | -19.7% |
| $ (143.2) | -10.7% |
Net written premiums | 948.8 |
| 1,183.1 |
| 1,331.7 |
| (234.3) | -19.8% |
| (148.6) | -11.2% |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned | $ 1,050.3 |
| $ 1,282.9 |
| $ 1,281.1 |
| $ (232.5) | -18.1% |
| $ 1.8 | 0.1% |
Incurred losses and LAE | 798.2 |
| 705.4 |
| 851.2 |
| 92.8 | 13.1% |
| (145.8) | -17.1% |
Commission and brokerage | 273.3 |
| 327.2 |
| 298.1 |
| (53.9) | -16.5% |
| 29.1 | 9.8% |
Other underwriting expenses | 32.2 |
| 33.3 |
| 24.9 |
| (1.1) | -3.3% |
| 8.3 | 33.4% |
Underwriting (loss) gain | $ (53.3) |
| $ 217.0 |
| $ 106.8 |
| $ (270.3) | -124.6% |
| $ 110.2 | 103.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Point Chg |
|
| Point Chg |
Loss ratio | 76.0% |
| 55.0% |
| 66.4% |
|
| 21.0 |
|
| (11.4) |
Commission and brokerage ratio | 26.0% |
| 25.5% |
| 23.3% |
|
| 0.5 |
|
| 2.2 |
Other underwriting expense ratio | 3.1% |
| 2.6% |
| 2.0% |
|
| 0.5 |
|
| 0.6 |
Combined ratio | 105.1% |
| 83.1% |
| 91.7% |
|
| 22.0 |
|
| (8.6) |
|
|
|
|
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
|
|
|
|
|
|
|
|
| |
Premiums.Gross written premiums decreased by 19.7% to $957.9 million in 2008 from $1,193.5 million in 2007, primarily due to a $104.9 million (14.7%) decrease in treaty property volume, a $71.7million (21.6%) decrease in treaty casualty volume and a $57.9 million (39.9%) decrease in facultative volume. Property premiums were lower due to increased common account reinsurance protections, particularly on one Florida quota share account and two quota share non-renewals. Our treaty casualty premium was lower than last year as we reduced this book to a group of core accounts in response to the softer market conditions. Facultative volume decreased due to ceding companies retaining a greater portion of gross premiums and a marketplace that remains competitive. Net written premiums decreased 19.8% to $948.8 million in 2008 compared to $1,183.1 million in 2007, primarily due to the decrease in gross written premiums. Net premiums earned correspondingly decreased 18.1% to $1,050.3 million for 2008 compared to $1,282.9 million for 2007, consistent with the change in net written premiums.
Gross written premiums decreased by 10.7% to $1,193.5 million for 2007 from $1,336.7 million for 2006, primarily due to a $202.6 million (37.9%) decrease in treaty casualty volume and a $70.5 million (32.7%) decrease in facultative volume, partially offset by a $126.8 million (21.6%) increase in treaty property volume. The increase in treaty property writings emanated principally from new quota share treaties. The more competitive environment for the U.S. casualty business resulted in reduced opportunities to write this business profitably. Net written premiums decreased 11.2% to $1,183.1 million for 2007 compared to $1,331.7 million for 2006, primarily due to the decrease in gross written premiums. Net premiums earned increased slightly to $1,282.9 million for 2007 compared to $1,281.1 million for 2006. The change in net 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 Company’scoverage period.
Incurred Losses and LAE.The following table presents the incurred losses and LAE for 2006 and 2005:
| December 31, 2006 | December 31, 2005 | ||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||||||||||||||
| All Segments | |||||||||||||||||||||||||||||||||||
| Attritional (a) | $ | 2,283 | .2 | $ | (243 | .3) | $ | 2,039 | .9 | $ | 2,383 | .6 | $ | (226 | .3) | $ | 2,157 | .2 | |||||||||||||||||
| Catastrophes | 15 | .6 | 272 | .3 | 287 | .9 | 1,367 | .2 | 118 | .5 | 1,485 | .7 | |||||||||||||||||||||||
| A&E | - | 106 | .6 | 106 | .6 | - | 81 | .4 | 81 | .4 | |||||||||||||||||||||||||
| Total All segments | $ | 2,298 | .8 | $ | 135 | .6 | $ | 2,434 | .4 | $ | 3,750 | .7 | $ | (26 | .4) | $ | 3,724 | .3 | |||||||||||||||||
| Loss Ratio | 59.7 | % | 3.5 | % | 63.2 | % | 94.6 | % | -0.7 | % | 94.0 | % | |||||||||||||||||||||||
(a) Attritional losses exclude catastrophe and A&E losses | |||||||||||||||||||||||||||||||||||
| (Some amounts may not reconcile due to rounding.) | |||||||||||||||||||||||||||||||||||
The Company’s incurred losses and LAE decreased 34.6% to $2,434.4 million in 2006 from $3,724.3 million in 2005, due to significantly reduced current year catastrophe losses and a reduction in current and prior years attritional losses, partially offset by increased prior years reserve development on catastrophe and A&E losses. Incurred losses and LAE in 2006 reflected ceded losses and LAE of $109.5 million compared to ceded losses and LAE in 2005 of $95.2 million.
The Company’s loss ratio, which is calculated by dividing incurred losses and LAE by current year net premiums earned, improved by 30.8 points to 63.2% over the comparable 2005 period, principally due to a 34.1 point improvement of current year catastrophe losses, partially offset by 4.2 points related to an increase in prior years reserve strengthening.
54
The following table shows the U.S. Reinsurance segment componentsfor the periods indicated.
| Years Ended December 31, | |||||||||||||
| Current |
| Ratio %/ |
| Prior |
| Ratio %/ |
| Total |
| Ratio %/ | |||
(Dollars in millions) | Year |
| Pt Change |
| Years |
| Pt Change |
| Incurred |
| Pt Change | |||
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 471.3 |
| 44.9% |
|
| $ 52.9 |
| 5.0% |
|
| $ 524.2 |
| 49.9% |
|
Catastrophes | 253.5 |
| 24.1% |
|
| 20.4 |
| 1.9% |
|
| 273.9 |
| 26.1% |
|
A&E | - |
| 0.0% |
|
| - |
| 0.0% |
|
| - |
| 0.0% |
|
Total segment | $ 724.9 |
| 69.0% |
|
| $ 73.3 |
| 7.0% |
|
| $ 798.2 |
| 76.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 583.9 |
| 45.5% |
|
| $ (139.9) |
| -10.9% |
|
| $ 443.9 |
| 34.6% |
|
Catastrophes | 0.1 |
| 0.0% |
|
| (5.0) |
| -0.4% |
|
| (4.9) |
| -0.4% |
|
A&E | - |
| 0.0% |
|
| 266.4 |
| 20.8% |
|
| 266.4 |
| 20.8% |
|
Total segment | $ 584.0 |
| 45.5% |
|
| $ 121.4 |
| 9.5% |
|
| $ 705.4 |
| 55.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 683.6 |
| 53.4% |
|
| $ (50.4) |
| -3.9% |
|
| $ �� 633.2 |
| 49.4% |
|
Catastrophes | 8.9 |
| 0.7% |
|
| 181.7 |
| 14.2% |
|
| 190.6 |
| 14.9% |
|
A&E | - |
| 0.0% |
|
| 27.4 |
| 2.1% |
|
| 27.4 |
| 2.1% |
|
Total segment | $ 692.5 |
| 54.1% |
|
| $ 158.7 |
| 12.4% |
|
| $ 851.2 |
| 66.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance 2008/2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ (112.5) |
| (0.6) | pts |
| $ 192.8 |
| 15.9 | pts |
| $ 80.3 |
| 15.3 | pts |
Catastrophes | 253.4 |
| 24.1 | pts |
| 25.4 |
| 2.3 | pts |
| 278.8 |
| 26.5 | pts |
A&E | - |
| - | pts |
| (266.4) |
| (20.8) | pts |
| (266.4) |
| (20.8) | pts |
Total segment | $ 140.9 |
| 23.5 | pts |
| $ (48.1) |
| (2.5) | pts |
| $ 92.8 |
| 21.0 | pts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance 2007/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ (99.8) |
| (7.9) | pts |
| $ (89.5) |
| (7.0) | pts |
| $ (189.3) |
| (14.8) | pts |
Catastrophes | (8.8) |
| (0.7) | pts |
| (186.7) |
| (14.6) | pts |
| (195.5) |
| (15.3) | pts |
A&E | - |
| - | pts |
| 239.0 |
| 18.6 | pts |
| 239.0 |
| 18.6 | pts |
Total segment | $ (108.5) |
| (8.6) | pts |
| $ (37.2) |
| (2.9) | pts |
| $ (145.8) |
| (11.4) | pts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
|
|
|
|
|
|
|
|
|
|
| ||
Incurred losses were $92.8 million (21.0 points) higher in 2008 compared to 2007, primarily due to catastrophe losses from Hurricanes Gustav and Ike and unfavorable reserve development on prior years’ losses, including $32.6 million for an unfavorable arbitration decision relating to a 2001 retrocessional cover. We had no reserve adjustments in 2008 for A&E losses, which experienced $266.4 million adverse development in 2007.
Incurred losses were $145.8 (11.4 points) lower for 2007 compared to 2006, primarily due to lower catastrophe losses. We experienced $181.7 million of catastrophe loss development in 2006 which did not recur in 2007, which contributed another 14.6 points. In addition, we had a greater amount of favorable reserve development related to prior years, which provided 7.0 points of improvement. These favorable factors were partially mitigated by an 18.6 point increase driven by asbestos reserve strengthening.
Segment Expenses.Commission and brokerage expenses decreased to $273.3 million for 2008 from $327.2 million in 2007 or by 16.5%, generally in line with the 18.1% decrease in net earned premiums. Segment other underwriting expenses for 2008 decreased slightly to $32.2 million from $33.3 million for 2007.
Commission and brokerage increased by 9.8% to $327.2 million for 2007 from $298.1 million in 2006, principally due to an $18.9 million increase in contingent commissions and somewhat higher base ceding commissions. Segment other underwriting expenses for 2007 increased to $33.3 million from $24.9 million
for 2006, principally due to the allocation of certain corporate charges to segments, which had been previously retained in corporate expenses.
U.S. Insurance.
The following table presents the underwriting results and ratios for the U.S. Insurance segment for the periods indicated.
| Years Ended December 31, |
| 2008/2007 |
| 2007/2006 | ||||||
(Dollars in millions) | 2008 |
| 2007 |
| 2006 |
| Variance | % Change |
| Variance | % Change |
Gross written premiums | $ 771.8 |
| $ 885.6 |
| $ 866.3 |
| $ (113.8) | -12.9% |
| $ 19.3 | 2.2% |
Net written premiums | 617.0 |
| 744.3 |
| 753.3 |
| (127.3) | -17.1% |
| (9.0) | -1.2% |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned | $ 705.5 |
| $ 735.9 |
| $ 761.7 |
| $ (30.4) | -4.1% |
| $ (25.8) | -3.4% |
Incurred losses and LAE | 549.9 |
| 556.4 |
| 519.9 |
| (6.5) | -1.2% |
| 36.5 | 7.0% |
Commission and brokerage | 146.7 |
| 136.2 |
| 123.1 |
| 10.5 | 7.7% |
| 13.1 | 10.7% |
Other underwriting expenses | 64.3 |
| 58.2 |
| 48.9 |
| 6.1 | 10.5% |
| 9.3 | 19.0% |
Underwriting (loss) gain | $ (55.4) |
| $ (14.9) |
| $ 69.8 |
| $ (40.5) | NM |
| $ (84.7) | -121.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Point Chg |
|
| Point Chg |
Loss ratio | 77.9% |
| 75.6% |
| 68.3% |
|
| 2.3 |
|
| 7.3 |
Commission and brokerage ratio | 20.8% |
| 18.5% |
| 16.1% |
|
| 2.3 |
|
| 2.4 |
Other underwriting expense ratio | 9.2% |
| 7.9% |
| 6.4% |
|
| 1.3 |
|
| 1.5 |
Combined ratio | 107.9% |
| 102.0% |
| 90.8% |
|
| 5.9 |
|
| 11.2 |
|
|
|
|
|
|
|
|
|
|
|
|
(NM, not meaningful) |
|
|
|
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
|
|
|
|
|
|
|
|
| |
Premiums.Gross written premiums decreased by 12.9% to $771.8 million for 2008 from $885.6 million for 2007. Conditions for workers’ compensation, contractors and public entity business have gotten increasingly competitive, which has reduced the volume of business that meets our underwriting and pricing criteria. A little less than half of the shortfall compared to last year was from the C.V. Starr program, where we have lost public entity accounts because we did not match market pricing and terms. In addition, the $76.3 million of gross written premium we assumed on a new program in 2007 did not recur in 2008. Net written premiums decreased by 17.1% to $617.0 million for 2008 compared to $744.3 million for 2007. The decrease in net written premiums was larger than the decline in gross written premiums primarily due to increased reinsurance cessions. Net premiums earned decreased 4.1% to $705.5 million for 2008 from $735.9 million for 2007. The lesser reduction in net premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are reflected at the initiation of the coverage period.
Gross written premiums increased by 2.2% to $885.6 million for 2007 from $866.3 million for 2006. The increase is primarily the result of a new program we assumed late in 2007 with approximately $76 million of gross written premium. Absent this new program, gross written premiums would have decreased due to the further decline in our workers’ compensation and contractors liability writings in response to increased competition. Net written premiums decreased by 1.2% to $744.3 million for 2007 compared to $753.3 million for 2006 as our retention level fell slightly. Net premiums earned decreased 3.4% to $735.9 million for 2007 from $761.7 million for 2006, in line with the decrease in net written premiums.
Incurred Losses and LAE.The following table presents the incurred losses and LAE for 2006 and 2005:
| December 31, 2006 | December 31, 2005 | ||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||||||||||||||
| Attritional | $ | 683 | .6 | $ | (50 | .4) | $ | 633 | .2 | $ | 824 | .3 | $ | (63 | .3) | $ | 760 | .9 | |||||||||||||||||
| Catastrophes | 8 | .9 | 181 | .7 | 190 | .6 | 634 | .6 | 72 | .5 | 707 | .2 | |||||||||||||||||||||||
| A&E | - | 27 | .4 | 27 | .4 | - | 11 | .5 | 11 | .5 | |||||||||||||||||||||||||
| Total segment | $ | 692 | .5 | $ | 158 | .7 | $ | 851 | .2 | $ | 1,458 | .8 | $ | 20 | .7 | $ | 1,479 | .6 | |||||||||||||||||
| Loss Ratio | 54.1 | % | 12.4 | % | 66.4 | % | 104.5 | % | 1.5 | % | 106.0 | % | |||||||||||||||||||||||
(Some amounts may not reconcile due to rounding.) | |||||||||||||||||||||||||||||||||||
Thethe U.S. Reinsurance segment’s incurredInsurance segment for the periods indicated.
| Years Ended December 31, | |||||||||||||
| Current |
| Ratio %/ |
| Prior |
| Ratio %/ |
| Total |
| Ratio %/ | |||
(Dollars in millions) | Year |
| Pt Change |
| Years |
| Pt Change |
| Incurred |
| Pt Change | |||
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 481.0 |
| 68.2% |
|
| $ 69.1 |
| 9.8% |
|
| $ 550.1 |
| 78.0% |
|
Catastrophes | - |
| 0.0% |
|
| (0.3) |
| 0.0% |
|
| (0.3) |
| 0.0% |
|
Total segment | $ 481.0 |
| 68.2% |
|
| $ 68.8 |
| 9.8% |
|
| $ 549.9 |
| 77.9% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 518.5 |
| 70.5% |
|
| $ 38.3 |
| 5.2% |
|
| $ 556.8 |
| 75.7% |
|
Catastrophes | - |
| 0.0% |
|
| (0.4) |
| -0.1% |
|
| (0.4) |
| -0.1% |
|
Total segment | $ 518.5 |
| 70.5% |
|
| $ 37.9 |
| 5.1% |
|
| $ 556.4 |
| 75.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 588.0 |
| 77.2% |
|
| $ (68.5) |
| -9.0% |
|
| $ 519.5 |
| 68.2% |
|
Catastrophes | - |
| 0.0% |
|
| 0.4 |
| 0.1% |
|
| 0.4 |
| 0.1% |
|
Total segment | $ 588.0 |
| 77.2% |
|
| $ (68.1) |
| -8.9% |
|
| $ 519.9 |
| 68.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance 2008/2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ (37.5) |
| (2.3) | pts |
| $ 30.8 |
| 4.6 | pts |
| $ (6.7) |
| 2.3 | pts |
Catastrophes | - |
| - | pts |
| 0.2 |
| 0.0 | pts |
| 0.2 |
| 0.0 | pts |
Total segment | $ (37.5) |
| (2.3) | pts |
| $ 31.0 |
| 4.7 | pts |
| $ (6.5) |
| 2.3 | pts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance 2007/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ (69.5) |
| (6.8) | pts |
| $ 106.8 |
| 14.2 | pts |
| $ 37.3 |
| 7.5 | pts |
Catastrophes | - |
| - | pts |
| (0.8) |
| (0.1) | pts |
| (0.8) |
| (0.1) | pts |
Total segment | $ (69.5) |
| (6.7) | pts |
| $ 106.0 |
| 14.0 | pts |
| $ 36.5 |
| 7.3 | pts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
|
|
|
|
|
|
|
|
|
|
| ||
Incurred losses and LAE decreased 42.5%, or $628.4by 1.2% to $549.9 million for 2008 from $556.4 million for 2007 driven by the 4.1% decrease in net earned premium and a 2.3 point reduction in the current year loss ratio. In 2008, we strengthened reserves for an auto loan credit insurance program by $85.3 million as the deterioration in general economic conditions adversely impacted loan performance resulting in unforeseen increases in loan default rates and claim amounts. We had strengthened the reserves for this program by $64.7 million in 2007. We commuted our remaining liability on this program with the largest policyholder representing approximately one third of the remaining loss exposure. Given the magnitude of our current reserves, the maturity of the remaining insured portfolio and the reduced principal exposure, we believe future loss development, if any, related to this program will not be material. Other than as related to this run-off program, the segment experienced favorable reserve development in both 2008 and 2007.
Incurred losses and LAE increased by 7.0% to $556.4 million for 2007 from $519.9 million for 2006 as the segment loss ratio increased by 7.3 points to 75.6%. From a ratio perspective, the swing in prior years’ development from favorable in 2006 to adverse in 2007 resulted in 14.0 points of increase. The adverse development in 2007 was the result of $64.7 million of adverse reserve run-off on a canceled auto loan credit insurance program, partially offset by favorable development on the remainder of the reserves. The 2007 accident year loss ratio was 70.5% which was 6.7 points lower than 2006. The 2006 accident year loss ratio was negatively impacted by the auto loan credit insurance program discussed above.
Segment Expenses.Commission and brokerage increased by 7.7% to $146.7 million for 2008 from $136.2 million in 2007, principally due to higher commissions on two new programs. Segment other underwriting expenses for 2008 increased to $64.3 million as compared to 2005,$58.2 million for 2007, primarily due to significantly reduced current year catastrophe losses,increased compensation costs associated with increased staff.
Commission and brokerage increased by 10.7% to $136.2 million for 2007 from $123.1 million in 2006, principally within the treaty property unit and decreased earned premiums. The segment’s loss ratio improved by 39.6 points from 2005 due to a decreasean increase in catastrophe losses, coupled with an improvementregular commission on new programs and higher profit commissions. Segment other underwriting expenses for 2007 increased to $58.2 million as compared to $48.9 million for 2006 due to the allocation of certain corporate charges to segments, which had been previously retained in the overall attritional loss ratio. The segment’s attritional loss ratio improvement generally results from more favorable current year pricing, principally on the property business.corporate expenses.
Specialty Underwriting.
The following table showspresents the U.S. Insuranceunderwriting results and ratios for the Specialty Underwriting segment componentsfor the periods indicated.
| Years Ended December 31, |
| 2008/2007 |
| 2007/2006 | ||||||
(Dollars in millions) | 2008 |
| 2007 |
| 2006 |
| Variance | % Change |
| Variance | % Change |
Gross written premiums | $ 260.4 |
| $ 270.1 |
| $ 251.2 |
| $ (9.7) | -3.6% |
| $ 18.9 | 7.5% |
Net written premiums | 254.2 |
| 263.8 |
| 243.8 |
| (9.6) | -3.6% |
| 20.0 | 8.2% |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned | $ 251.8 |
| $ 262.0 |
| $ 244.5 |
| $ (10.2) | -3.9% |
| $ 17.5 | 7.1% |
Incurred losses and LAE | 165.9 |
| 173.3 |
| 163.9 |
| (7.4) | -4.3% |
| 9.3 | 5.7% |
Commission and brokerage | 70.8 |
| 68.5 |
| 67.8 |
| 2.3 | 3.4% |
| 0.7 | 1.0% |
Other underwriting expenses | 8.1 |
| 8.5 |
| 6.6 |
| (0.4) | -4.8% |
| 1.9 | 29.0% |
Underwriting gain | $ 7.0 |
| $ 11.7 |
| $ 6.2 |
| $ (4.7) | -40.0% |
| $ 5.5 | 89.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Point Chg |
|
| Point Chg |
Loss ratio | 65.9% |
| 66.1% |
| 67.0% |
|
| (0.2) |
|
| (0.9) |
Commission and brokerage ratio | 28.1% |
| 26.2% |
| 27.8% |
|
| 1.9 |
|
| (1.6) |
Other underwriting expense ratio | 3.2% |
| 3.2% |
| 2.7% |
|
| - |
|
| 0.5 |
Combined ratio | 97.2% |
| 95.5% |
| 97.5% |
|
| 1.7 |
|
| (2.0) |
|
|
|
|
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
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|
|
| |
Premiums.Gross written premiums decreased by 3.6% to $260.4 million for 2008 from $270.1 million for 2007. Aviation premiums were lower by $16.9 million (58.9%) owing to very competitive market conditions. A&H premiums were lower by $15.4 million (16.1%) largely due to lower premiums under certain quota share contracts where the ceding companies have culled their books to improve their loss experience. Marine premiums were up by $19.8 million (19.8%) due to higher premiums on our quota share covers and improved rates across the book. Surety premiums were up $2.8 million or 6.1%. Net written premiums decreased 3.6% to $254.2 million for 2008 compared to $263.8 million for 2007, as a result of the decrease in gross written premiums. Net premiums earned decreased 3.9% to $251.8 million for 2008 compared to $262.0 million for 2007, in line with the change in net written premiums.
Gross written premiums increased by 7.5% to $270.1 million for 2007 from $251.2 million for 2006, primarily due to a $36.9 million (58.7%) increase in marine premiums and a $12.2 million (14.7%) increase in A&H premiums, partially offset by a $24.6 million (34.9%) decrease in surety premiums and a $5.7 million (16.5%) decrease in aviation premiums. The increased marine premium growth emanated from growth in existing quota share business as well as new quota share contracts. We continued to decrease our aviation and surety writings, in response to more competitive market conditions. Net written premiums increased 8.2% to $263.8 million for 2007 compared to $243.8 million for 2006, as a result of the increase in gross written premiums. Net premiums earned increased 7.1% to $262.0 million for 2007 compared to $244.5 million for 2006, in line with the growth in net written premiums.
Incurred Losses and LAE.The following table presents the incurred losses and LAE for 2006 and 2005:the Specialty Underwriting segment for the periods indicated.
| December 31, 2006 | December 31, 2005 | ||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||||||||||||||
| Attritional | $ | 588 | .0 | $ | (68 | .5) | $ | 519 | .5 | $ | 548 | .9 | $ | (19 | .5) | $ | 529 | .5 | |||||||||||||||||
| Catastrophes | - | 0 | .4 | 0 | .4 | 1 | .3 | - | 1 | .3 | |||||||||||||||||||||||||
| Total segment | $ | 588 | .0 | $ | (68 | .1) | $ | 519 | .9 | $ | 550 | .2 | $ | (19 | .5) | $ | 530 | .8 | |||||||||||||||||
| Loss Ratio | 77.2 | % | -8.9 | % | 68.3 | % | 66.9 | % | -2.4 | % | 64.5 | % | |||||||||||||||||||||||
(Some amounts may not reconcile due to rounding.) | |||||||||||||||||||||||||||||||||||
The U.S. Insurance segment’s incurred
| Years Ended December 31, | |||||||||||||
| Current |
| Ratio %/ |
| Prior |
| Ratio %/ |
| Total |
| Ratio %/ | |||
(Dollars in millions) | Year |
| Pt Change |
| Years |
| Pt Change |
| Incurred |
| Pt Change | |||
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 150.8 |
| 59.9% |
|
| $ (7.5) |
| -3.0% |
|
| $ 143.3 |
| 56.9% |
|
Catastrophes | 17.5 |
| 7.0% |
|
| 5.1 |
| 2.0% |
|
| 22.6 |
| 9.0% |
|
Total segment | $ 168.3 |
| 66.9% |
|
| $ (2.5) |
| -1.0% |
|
| $ 165.9 |
| 65.9% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 146.2 |
| 55.8% |
|
| $ 3.3 |
| 1.2% |
|
| $ 149.4 |
| 57.0% |
|
Catastrophes | 0.4 |
| 0.2% |
|
| 23.5 |
| 9.0% |
|
| 23.9 |
| 9.1% |
|
Total segment | $ 146.6 |
| 55.9% |
|
| $ 26.7 |
| 10.2% |
|
| $ 173.3 |
| 66.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 141.2 |
| 57.7% |
|
| $ (38.2) |
| -15.6% |
|
| $ 103.0 |
| 42.1% |
|
Catastrophes | - |
| 0.0% |
|
| 60.9 |
| 24.9% |
|
| 60.9 |
| 24.9% |
|
Total segment | $ 141.2 |
| 57.7% |
|
| $ 22.7 |
| 9.3% |
|
| $ 163.9 |
| 67.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance 2008/2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 4.7 |
| 4.1 | pts |
| $ (10.8) |
| (4.2) | pts |
| $ (6.1) |
| (0.1) | pts |
Catastrophes | 17.1 |
| 6.8 | pts |
| (18.4) |
| (6.9) | pts |
| (1.3) |
| (0.1) | pts |
Total segment | $ 21.8 |
| 11.0 | pts |
| $ (29.2) |
| (11.2) | pts |
| $ (7.4) |
| (0.2) | pts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance 2007/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 5.0 |
| (2.0) | pts |
| $ 41.4 |
| 16.9 | pts |
| $ 46.4 |
| 14.9 | pts |
Catastrophes | 0.4 |
| 0.2 | pts |
| (37.5) |
| (16.0) | pts |
| (37.1) |
| (15.8) | pts |
Total segment | $ 5.4 |
| (1.8) | pts |
| $ 4.0 |
| 0.9 | pts |
| $ 9.3 |
| (0.9) | pts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
|
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|
|
|
|
|
|
|
| ||
Incurred losses and LAE decreased 2.0%, or $10.9to $165.9 million for 2008 compared to $173.3 million for 2007, as both attritional losses and catastrophe losses were similar for the two periods. The bulk of the 2008 catastrophe losses emanated from Hurricanes Gustav and Ike, while the 2007 losses were primarily caused by late reported marine losses from Hurricane Rita.
Incurred losses and LAE increased 5.7% to $173.3 million for 2007 compared to $163.9 million for 2006, asgenerally proportional to the increase in net earned premiums. The loss ratio for the current accident year was slightly lower in 2007 compared to 2005, primarily due2006. We experienced 10.2 points of adverse development in 2007 compared to reduced earned premiums, which9.3 points in 2006. Catastrophe loss development, principally within the marine business related to Hurricane Katrina, was the continued reductionprincipal driver of the overall development in both 2007 and 2006.
Segment Expenses.Commission and brokerage increased 3.4% to $70.8 million in 2008 from $68.5 million in 2007 due primarily to the California workers’ compensation business and run-offcombined impacts of a credit program. The segment’s loss ratio increased 3.8 points from 2005, primarily due toan increase in proportional premiums written, which generate higher lossesceding commissions, on the credit program.
55
The following table shows the Specialty Underwriting segment components of incurred losses and LAE for 2006 and 2005:
| December 31, 2006 | December 31, 2005 | ||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||||||||||||||
| Attritional | $ | 141 | .2 | $ | (38 | .2) | $ | 103 | .0 | $ | 186 | .5 | $ | (33 | .0) | $ | 153 | .4 | |||||||||||||||||
| Catastrophes | - | 60 | .9 | 60 | .9 | 147 | .6 | 16 | .9 | 164 | .5 | ||||||||||||||||||||||||
| Total segment | $ | 141 | .2 | $ | 22 | .7 | $ | 163 | .9 | $ | 334 | .1 | $ | (16 | .1) | $ | 317 | .9 | |||||||||||||||||
| Loss Ratio | 57.7 | % | 9.3 | % | 67.0 | % | 110.8 | % | -5.4 | % | 105.5 | % | |||||||||||||||||||||||
(Some amounts may not reconcile due to rounding.) | |||||||||||||||||||||||||||||||||||
The Specialty Underwriting segment’s incurred losses and LAE decreased 48.4%, or $154.0 million, for 2006 as compared to 2005, primarily due to decreased catastrophe losses and a reduction in earned premiums across all classes of business. Correspondingly, the segment’s loss ratio improved by 38.5 points from 2005.
The following table shows the International segment components of incurred losses and LAE for 2006 and 2005:
| December 31, 2006 | December 31, 2005 | ||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||||||||||||||
| Attritional | $ | 389 | .3 | $ | (31 | .7) | $ | 357 | .5 | $ | 386 | .1 | $ | (66 | .1) | $ | 319 | .9 | |||||||||||||||||
| Catastrophes | 6 | .7 | 18 | .6 | 25 | .3 | 237 | .8 | 16 | .9 | 254 | .7 | |||||||||||||||||||||||
| Total segment | $ | 396 | .0 | $ | (13 | .1) | $ | 382 | .8 | $ | 623 | .9 | $ | (49 | .2) | $ | 574 | .7 | |||||||||||||||||
| Loss Ratio | 55.0 | % | -1.8 | % | 53.2 | % | 91.3 | % | -7.2 | % | 84.1 | % | |||||||||||||||||||||||
(Some amounts may not reconcile due to rounding.) | |||||||||||||||||||||||||||||||||||
The International segment’s incurred losses and LAE decreased 33.4%, or $191.8 million, for 2006 as compared to 2005, reflecting lower catastrophe losses. The segment’s loss ratio improved by 30.9 points from 2005, primarily due to reduced current year catastrophe losses incurred in Canada, Asia and international.
56
The following table shows the Bermuda segment components of incurred losses and LAE for 2006 and 2005:
| December 31, 2006 | December 31, 2005 | ||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||||||||||||||
| Attritional | $ | 481 | .2 | $ | (54 | .4) | $ | 426 | .7 | $ | 437 | .8 | $ | (44 | .4) | $ | 393 | .5 | |||||||||||||||||
| Catastrophes | - | 10 | .7 | 10 | .7 | 345 | .9 | 12 | .2 | 358 | .0 | ||||||||||||||||||||||||
| A&E | - | 79 | .2 | 79 | .2 | - | 69 | .9 | 69 | .9 | |||||||||||||||||||||||||
| Total segment | $ | 481 | .2 | $ | 35 | .4 | $ | 516 | .6 | $ | 783 | .7 | $ | 37 | .7 | $ | 821 | .4 | |||||||||||||||||
| Loss Ratio | 56.8 | % | 4.2 | % | 61.0 | % | 103.2 | % | 5.0 | % | 108.2 | % | |||||||||||||||||||||||
(Some amounts may not reconcile due to rounding.) | |||||||||||||||||||||||||||||||||||
The Bermuda segment’s incurred losses and LAE decreased 37.1%, or $304.8 million, for 2006 as compared to 2005. The segment’s loss ratio improved by 47.2 points from 2005, due to a reduction in catastrophe losses in the current yearmarine business and an increase in favorable developmentcontingent commission on prior period attritional reserves, partially offset by A&E reserve strengthening. The net prior year improvement was more than offset by an increase in the current year attritional losses reflecting increased earned premiums and a mix of business shift toward more casualty business.
Underwriting Expenses. The Company’s expense ratio, which is calculated by dividing underwriting expenses by net premiums earned, was 26.5% for 2006 compared to 26.3% for 2005.
The following table shows the expense ratios for each of the Company’s operating segments for 2006 and 2005.
| Segment Expense Ratios | ||||||||
|---|---|---|---|---|---|---|---|---|
| Segment | 2006 | 2005 | ||||||
| U.S. Reinsurance | 25.3 | % | 27.3 | % | ||||
| U.S. Insurance | 22.5 | % | 22.4 | % | ||||
| Specialty Underwriting | 30.5 | % | 28.6 | % | ||||
| International | 27.0 | % | 26.3 | % | ||||
| Bermuda | 27.3 | % | 25.5 | % | ||||
Segment underwriting expenses decreased by 3.1% to $994.7 million for 2006 from $1,026.3 million in 2005. Commission, brokerage, taxes and fees decreased by $31.6 million, principally due to decreases in premium volume and changes in the mix and ofaviation business. Segment other underwriting expenses were $0.1decreased slightly to $8.1 million for both 20062008 from $8.5 million for 2008.
Commission and 2005. Contributingbrokerage increased 1.0% to the segment underwriting expense decreases were a 15.5% ($59.0 million) decrease$68.5 million in the U.S. Reinsurance operation, a 14.0% ($12.1 million) decrease in the Specialty Underwriting operation and a 6.8% ($12.5 million) decrease in the U.S. Insurance operation, partially offset by an 19.3% ($37.3 million) increase in the Bermuda operation and an 8.2% ($14.8 million) increase in the International operation. The changes for each operation’s expenses principally resulted2007 from changes in commission expenses due to changes in premium volume and business mix by class and type and, in some cases, changes in the use of specific reinsurance.
The Company’s combined ratio, which is the sum of the loss and expense ratios, decreased by 30.6 points to 89.7% in 2006 compared to 120.3% in 2005, as a result of lower catastrophe and attritional losses.
57
The following table shows the combined ratios for each of the Company’s operating segments in 2006 and 2005. The combined ratios for all operations were impacted by the loss and expense ratio variations noted above.
| Segment Combined Ratios | ||||||||
|---|---|---|---|---|---|---|---|---|
| Segment | 2006 | 2005 | ||||||
| U.S. Reinsurance | 91.7 | % | 133.3 | % | ||||
| U.S. Insurance | 90.8 | % | 86.9 | % | ||||
| Specialty Underwriting | 97.5 | % | 134.1 | % | ||||
| International | 80.2 | % | 110.4 | % | ||||
| Bermuda | 88.3 | % | 133.7 | % | ||||
Investment Results. Net investment income increased 20.4% to $629.4$67.8 million in 2006 due primarily to premium growth. Segment other underwriting expenses increased 29.0% to $8.5 million for 2007 from $522.8$6.6 million for 2006, primarily due to the allocation of certain corporate charges to segments, which had been previously retained in 2005, primarily reflecting the growth in invested assets to $14.0 billion in 2006 from $13.0 billion in 2005 and a $43.2 million increase in investment income from limited partnership investments. Investment income from equity investments in limited partnerships fluctuates from year to year depending on the performance of the individual investments made by the partnerships as well as the movement in the equity markets. Period to period changes in investment income are also impacted by changes in the level and mix of invested assets, prevailing interest rates and price movements in the equity markets.corporate expenses.
International.
The following table showspresents the components of net investment incomeunderwriting results and ratios for the years ended as indicated:
| (Dollars in thousands) | 2006 | 2005 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Fixed maturities | $ | 508,524 | $ | 496,959 | |||||||
| Equity securities | 22,281 | 16,582 | |||||||||
| Short-term investments | 56,845 | 20,128 | |||||||||
| Other investment income | 60,702 | 14,591 | |||||||||
| Total gross investment income | 648,352 | 548,260 | |||||||||
| Interest credited and other expense | (18,974 | ) | (25,427 | ) | |||||||
| Total net investment income | $ | 629,378 | $ | 522,833 | |||||||
The following table shows a comparison of various investment yieldsInternational segment for the year indicated:
| 2006 | 2005 | |||||||
|---|---|---|---|---|---|---|---|---|
| Imbedded pre-tax yield of cash and invested assets at December 31 | 4.6 | % | 4.5 | % | ||||
| Imbedded after-tax yield of cash and invested assets at December 31 | 4.0 | % | 3.9 | % | ||||
Annualized pre-tax yield on average cash and invested assets | 4.8 | % | 4.4 | % | ||||
| Annualized after-tax yield on average cash and invested assets | 4.2 | % | 3.8 | % | ||||
58
The Company, because of its historical income orientation, had generally managed its investments to maximize reportable income. Starting in 2004, the Company began investing a portion of its assets in equity securities, principally in response to perceived changes in the relative attractiveness of the debt and equity markets. In 2006, the Company added $330.5 million of equity securities into the overall investment portfolio. The Company also added $180.4 million of other invested assets, principally limited partnerships. The following table provides a comparison of the Company’s total return by asset class relative to broadly accepted industry benchmarks for 2006 and 2005.
| 2006 | 2005 | |||||||
|---|---|---|---|---|---|---|---|---|
| Company's fixed income portfolio total return | 4.6 | % | 3.2 | % | ||||
| Lehman bond aggregate index | 4.3 | % | 2.4 | % | ||||
Company's common equity portfolio total return | 19.2 | % | 13.8 | % | ||||
| S & P 500 index | 15.8 | % | 4.9 | % | ||||
Company's other invested asset portfolio total return | 19.8 | % | 7.2 | % | ||||
Net realized capital gains of $35.1 million in 2006 emanated from realized capital gains on the Company’s investments of $49.0 million, resulting principally from gains on equity securities of $34.1 million and fixed maturities of $14.9 million, partially offset by $13.9 million of realized capital losses, resulting principally from losses on equity securities of $11.9 million and fixed maturities of $2.0 million including $14.0 thousand from other than temporary market declines. Net realized capital gains of $90.3 million in 2005, reflected realized capital gains on the Company’s investments of $106.2 million, including $41.3 million on the sale of interest only strips investments, partially offset by $15.9 million of realized capital losses, which included $7.0 million related to the write-downs in the value of interest only strips deemed to be impaired on an other than temporary basis in accordance with Emerging Issues Task Force Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets” (“EITF 99-20”).periods indicated.
The Company had issued seven equity put options in prior years, which were outstanding at December 31, 2006. These products meet the definition of derivatives under FAS 133. The Company recognized net derivative expense of $0.4 million and $2.6 million in 2006 and 2005, respectively, reflecting changes in the fair value of the equity put options.
| Years Ended December 31, |
| 2008/2007 |
| 2007/2006 | ||||||
(Dollars in millions) | 2008 |
| 2007 |
| 2006 |
| Variance | % Change |
| Variance | % Change |
Gross written premiums | $ 904.7 |
| $ 805.9 |
| $ 731.7 |
| $ 98.8 | 12.3% |
| $ 74.1 | 10.1% |
Net written premiums | 902.1 |
| 806.0 |
| 730.7 |
| 96.2 | 11.9% |
| 75.3 | 10.3% |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned | $ 885.5 |
| $ 803.8 |
| $ 719.5 |
| $ 81.6 | 10.2% |
| $ 84.4 | 11.7% |
Incurred losses and LAE | 504.8 |
| 501.9 |
| 382.8 |
| 2.9 | 0.6% |
| 119.1 | 31.1% |
Commission and brokerage | 230.9 |
| 199.5 |
| 180.5 |
| 31.5 | 15.8% |
| 18.9 | 10.5% |
Other underwriting expenses | 19.8 |
| 18.6 |
| 13.8 |
| 1.1 | 6.2% |
| 4.8 | 34.7% |
Underwriting gain | $ 129.9 |
| $ 83.8 |
| $ 142.3 |
| $ 46.1 | 55.0% |
| $ (58.4) | -41.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Point Chg |
|
| Point Chg |
Loss ratio | 57.0% |
| 62.4% |
| 53.2% |
|
| (5.4) |
|
| 9.2 |
Commission and brokerage ratio | 26.1% |
| 24.8% |
| 25.1% |
|
| 1.3 |
|
| (0.3) |
Other underwriting expense ratio | 2.2% |
| 2.4% |
| 1.9% |
|
| (0.2) |
|
| 0.5 |
Combined ratio | 85.3% |
| 89.6% |
| 80.2% |
|
| (4.3) |
|
| 9.4 |
|
|
|
|
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
|
|
|
|
|
|
|
|
| |
Corporate, Non-allocated Expenses. Corporate underwriting expenses not allocated to segments were $26.5 million in 2006, compared to $18.4 million in 2005, primarily due to increase in share-based compensation expense.Premiums.
Interest, fees and bond issue cost amortization expense in 2006 and 2005 were $69.9 million and $74.4 million, respectively. Interest, fees and bond issue cost amortization expense in 2006 included $31.1 million related to the senior notes, $37.5 million related to the junior subordinated debt securities, $0.9 million related to the bond issue cost amortization and $0.4 million related to the credit line under the Company’s revolving credit facilities. Interest, fees and bond issue cost amortization expense in 2005 included $35.5 million related to the senior notes, $37.5 million related to the junior subordinated debt securities, $1.0 million to the bond issue cost amortization and $0.4 million related to the credit line under the Company’s revolving credit facilities. Interest expense on senior notes decreased due to the retirement on March 15, 2005 of the 8.5% senior notes issued on March 14, 2000.
Other income in 2006 was $0.1 million and other expense in 2005 was $11.1 million. The change was primarily due to the fluctuation in foreign currency exchange.
59
Income Taxes. The Company’s income tax expense is primarily a function of the statutory tax rates and corresponding net income in the jurisdictions where the Company operates, coupled with the impact from tax preferenced investment income. Variations in the effective tax rate generally result from changes in the relative levels of pre-tax income among jurisdictions with different tax rates. The Company recorded income tax expense of $150.9 million in 2006 compared to an income tax benefit of $62.3 million in 2005. The increase was primarily due to the significant change in pre-tax income in 2006 compared to the pre-tax loss in 2005.
Net Income (Loss). Net income was $840.8 million in 2006 compared to a net loss of $218.7 million in 2005, primarily caused by much larger catastrophe losses in 2005 than in 2006.
YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004Premiums Written.Gross written premiums decreased 12.7%increased by 12.3% to $4,108.6$904.7 million for 2008 from $805.9 million for 2007. Due, in 2005part, to our strong financial strength ratings, we obtained increased participations on treaties in most regions over the course of the past twelve months. As well, we benefited from $4,704.1 millionnew business writings as some insurers sought to increase the financial strength ratings of their reinsurance panels. In addition, we obtained some preferential signings including preferential terms and conditions, and benefited from higher rates in 2004 reflecting a disciplined underwriting response to modest reinsurance market softening that affected all segments, resulting in an overall premium decline.some markets. Premiums declined 35.4% ($172.4 million) in the Specialty Underwriting operation, primarily due to a $145.4 million decrease in A&H business and a $47.9 million decrease in surety business, partially offset by a $20.9 million increase in marine and aviation business. The U.S. Insurance operation decreased 20.2% ($235.3 million), principally as a result of a $242.6 million decrease in workers’ compensation, resulting primarily from changes in the California workers’ compensation market. The Bermuda operation decreased 13.0% ($114.7 million), reflecting declines in individual risk underwritten insurance and reinsurance in Bermuda and in motor business reinsurance in the U.K. The U.S. Reinsurance operation decreased 6.2% ($92.0 million), principally relating to a $173.1 million decrease in treaty casualty business and a $29.3 million decrease in facultative business, partially offset by a $118.9 million increase in treaty property business. The International operation increased 2.8% ($18.9 million), resulting primarily from a $75.0 million increase in Asian business, partially offset by a $43.6 million decrease in international business written through the Miami and New Jersey offices representing primarily Latin American business and an $11.3increased by $106.0 million decrease in(22.5%); the Asian branch increased by $24.2 million (14.6%), while premiums for the Canadian business.
Ceded premiumsbranch decreased to $136.5by $31.8 million in 2005 from $172.6 million in 2004, principally resulting from the decrease in gross premiums in the U.S. Insurance operations. Ceded premiums generally relate to specific reinsurance purchased by the U.S. Insurance operation and fluctuate based upon the level of premiums written in the individual reinsured programs.
(18.7%). Net written premiums decreasedincreased by 12.3%11.9% to $3,972.0$902.1 million in 2005 from $4,531.5for 2008 compared to $806.0 million in 2004, reflectingfor 2007, principally as a result of the $595.6 million decreaseincrease in gross written premiums and the $36.1 million decrease in ceded premiums.
Premium Revenues. Net premiums earned decreased by 10.4%increased 10.2% to $3,963.1$885.5 million in 2005 from $4,425.1for 2008 compared to $803.8 million in 2004. Contributing to this decrease was a 34.4% ($157.8 million) decrease infor 2007, generally consistent with the Specialty Underwriting operation, a 15.6% ($139.9 million) decrease in the Bermuda operation, a 12.2% ($114.6 million) decrease in the U.S. Insurance operation and a 5.3% ($77.4 million) decrease in the U.S. Reinsurance operation, partially offset by a 4.2% ($27.7 million) increase in the International operation. Partially tempering the decline in net premiums earned in 2005 were $81.8 million of reinstatement premiums of which $64.4 million were due to Hurricanes Katrina and Wilma. Generally, catastrophe reinsurance provides coverage for one event; however, 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. There were no such reinstatement premiums for 2004. All of these changes reflect period to period changes in net written premiums.
Gross written premiums increased by 10.1% to $805.9 million for 2007 from $731.7 million for 2006. Approximately half of this increase was attributable to the impact of other currencies strengthening against the U.S. dollar. We wrote reinsurance contracts in multiple currencies and as these currencies strengthened and were converted to U.S. dollars for financial reporting, they converted to higher dollar values. Business written through the Miami and New Jersey offices increased by $35.0 million (8.0%), business written through the Asian branch increased by $22.3 million (15.6%) and business mix, togetherwritten through the Canadian branch increased by $17.9 million (11.8%). We have experienced strong fundamental growth in geographic areas where economic growth and demand for reinsurance is strong. Net written premiums increased by 10.3% to $806.0 million for 2007 compared to $730.7 million for 2006, principally as a result of the increase in gross written premiums. Net premiums earned increased 11.7% to $803.8 million for 2007 compared to $719.5 million for 2006, consistent with normal variabilitythe increase in earnings patterns. Business mix changes occur not only as the Company shifts emphasis between products, lines of business, distribution channels and markets, but also as individual contracts renew or non-renew, almost always with changes in coverage, structure, prices and/or terms, and as new contracts are accepted with coverages, structures, prices and/or terms different from those of expiring contracts. As premium reporting, earnings, loss and commission characteristics derive from the provisions of individual contracts, the continuous turnover of individualnet written premiums.
60
contracts, arising from both strategic shifts and day to day underwriting, can and does introduce appreciable background variability in various underwriting line items. Changes in estimates related to the reporting patterns of ceding companies also affect premiums earned.
Expenses
Incurred Losses and LAE. The Company’s loss and LAE reserves reflect estimates of ultimate claim liability. Such estimates are re-evaluated on an ongoing basis, including re-estimates of prior period reserves, taking into consideration all available information and, in particular, newly reported loss and claim experience. The effect of such re-evaluations impacts incurred losses for the current period.
The following table showspresents the components of the Company’s incurred losses and LAE for 2005the International segment for the periods indicated.
| Years Ended December 31, | |||||||||||||
| Current |
| Ratio %/ |
| Prior |
| Ratio %/ |
| Total |
| Ratio %/ | |||
(Dollars in millions) | Year |
| Pt Change |
| Years |
| Pt Change |
| Incurred |
| Pt Change | |||
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 501.4 |
| 56.6% |
|
| $ (33.5) |
| -3.8% |
|
| $ 467.9 |
| 52.8% |
|
Catastrophes | 43.5 |
| 4.9% |
|
| (6.7) |
| -0.8% |
|
| 36.9 |
| 4.2% |
|
Total segment | $ 544.9 |
| 61.5% |
|
| $ (40.1) |
| -4.5% |
|
| $ 504.8 |
| 57.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 435.6 |
| 54.2% |
|
| $ (10.9) |
| -1.4% |
|
| $ 424.7 |
| 52.8% |
|
Catastrophes | 75.4 |
| 9.4% |
|
| 1.8 |
| 0.2% |
|
| 77.2 |
| 9.6% |
|
Total segment | $ 511.0 |
| 63.6% |
|
| $ (9.1) |
| -1.1% |
|
| $ 501.9 |
| 62.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 389.3 |
| 54.1% |
|
| $ (31.7) |
| -4.4% |
|
| $ 357.5 |
| 49.7% |
|
Catastrophes | 6.7 |
| 0.9% |
|
| 18.6 |
| 2.6% |
|
| 25.3 |
| 3.5% |
|
Total segment | $ 396.0 |
| 55.0% |
|
| $ (13.1) |
| -1.8% |
|
| $ 382.8 |
| 53.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance 2008/2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 65.8 |
| 2.4 | pts |
| $ (22.5) |
| (2.4) | pts |
| $ 43.3 |
| 0.0 | pts |
Catastrophes | (31.9) |
| (4.5) | pts |
| (8.4) |
| (1.0) | pts |
| (40.4) |
| (5.5) | pts |
Total segment | $ 33.9 |
| (2.1) | pts |
| $ (31.0) |
| (3.4) | pts |
| $ 2.9 |
| (5.4) | pts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance 2007/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 46.3 |
| 0.1 | pts |
| $ 20.8 |
| 3.1 | pts |
| $ 67.1 |
| 3.1 | pts |
Catastrophes | 68.8 |
| 8.5 | pts |
| (16.8) |
| (2.4) | pts |
| 51.9 |
| 6.1 | pts |
Total segment | $ 115.1 |
| 8.6 | pts |
| $ 4.0 |
| 0.7 | pts |
| $ 119.1 |
| 9.2 | pts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
|
|
|
|
|
|
|
|
|
|
| ||
Incurred losses and 2004:
| December 31, 2005 | December 31, 2004 | ||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||||||||||||||
| All Segments | |||||||||||||||||||||||||||||||||||
| Attritional (a) | $ | 2,383 | .6 | $ | (226 | .3) | $ | 2,157 | .2 | $ | 2,612 | .9 | $ | 128 | .7 | $ | 2,741 | .7 | |||||||||||||||||
| Catastrophes | 1,367 | .2 | 118 | .5 | 1,485 | .7 | 428 | .8 | (38 | .7) | 390 | .0 | |||||||||||||||||||||||
| A&E | - | 81 | .4 | 81 | .4 | - | 159 | .4 | 159 | .4 | |||||||||||||||||||||||||
| Total All segments | $ | 3,750 | .7 | $ | (26 | .4) | $ | 3,724 | .3 | $ | 3,041 | .7 | $ | 249 | .4 | $ | 3,291 | .1 | |||||||||||||||||
| Loss Ratio | 94.6 | % | -0.7 | % | 94.0 | % | 68.7 | % | 5.6 | % | 74.4 | % | |||||||||||||||||||||||
(a) Attritional losses exclude catastrophe and A&E losses | |||||||||||||||||||||||||||||||||||
| (Some amounts may not reconcile due to rounding.) | |||||||||||||||||||||||||||||||||||
LAE increased slightly to $504.8 million for 2008 compared to $501.9 million for 2007. The Company’s incurredsegment loss ratio decreased by 5.4 points for 2008 compared to 2007 due to lower current year catastrophe losses in 2008 compared to 2007. The 2008 current year catastrophe losses included a large snowstorm in China and Hurricanes Gustav and Ike. In addition, increased favorable development on prior years’ reserves period over period contributed to the lower loss ratio.
Incurred losses and LAE increased by 31.1% to $501.9 million for 2007 compared to $382.8 million for 2006. The segment loss ratio increased by 9.2 points, principally due to an increase in the catastrophe loss ratio by 6.1 points. In 2007, catastrophe losses included Tabasco, Mexico floods, New South Wales storm, Peruvian earthquake, Hurricane Dean, and Jakarta flood. In addition, the reduction in favorable reserve development, year over year, accounted for the increase in the segment loss ratio in 2007 compared to 2006.
Segment Expenses.Commission and brokerage increased 15.8% to $230.9 million for 2008 from $199.5 million in 2007. The increase was principally due to the growth in premiums earned. In addition, the commission and brokerage ratio increased largely due to increased contingent commissions emanating from the profitable results. Segment other underwriting expenses for 2008 increased to $19.8 million compared to $18.6 million for 2007.
Commission and brokerage increased 10.5% to $199.5 million for 2007 from $180.5 million in 2006, consistent with the increase in premiums. Segment other underwriting expenses for 2007 increased to $18.6 million compared to $13.8 million for 2006, primarily due to the allocation of certain corporate charges to segments, which had been previously retained in corporate expenses.
Bermuda.
The following table presents the underwriting results and ratios for the Bermuda segment for the periods indicated.
| Years Ended December 31, |
| 2008/2007 |
| 2007/2006 | ||||||
(Dollars in millions) | 2008 |
| 2007 |
| 2006 |
| Variance | % Change |
| Variance | % Change |
Gross written premiums | $ 783.4 |
| $ 922.5 |
| $ 814.9 |
| $ (139.1) | -15.1% |
| $ 107.6 | 13.2% |
Net written premiums | 783.1 |
| 922.3 |
| 816.2 |
| (139.2) | -15.1% |
| 106.1 | 13.0% |
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned | $ 801.2 |
| $ 912.9 |
| $ 846.4 |
| $ (111.7) | -12.2% |
| $ 66.4 | 7.9% |
Incurred losses and LAE | 420.3 |
| 611.2 |
| 516.6 |
| (190.9) | -31.2% |
| 94.6 | 18.3% |
Commission and brokerage | 208.9 |
| 230.4 |
| 213.7 |
| (21.5) | -9.3% |
| 16.7 | 7.8% |
Other underwriting expenses | 24.2 |
| 20.9 |
| 17.2 |
| 3.3 | 15.6% |
| 3.7 | 21.7% |
Underwriting gain | $ 147.8 |
| $ 50.4 |
| $ 99.0 |
| $ 97.5 | 193.4% |
| $ (48.6) | -49.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Point Chg |
|
| Point Chg |
Loss ratio | 52.5% |
| 67.0% |
| 61.0% |
|
| (14.5) |
|
| 6.0 |
Commission and brokerage ratio | 26.1% |
| 25.2% |
| 25.3% |
|
| 0.9 |
|
| (0.1) |
Other underwriting expense ratio | 2.9% |
| 2.3% |
| 2.0% |
|
| 0.6 |
|
| 0.3 |
Combined ratio | 81.5% |
| 94.5% |
| 88.3% |
|
| (13.0) |
|
| 6.2 |
|
|
|
|
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
|
|
|
|
|
|
|
|
| |
Premiums.Gross written premiums decreased 15.1% to $783.4 million for 2008 compared to $922.5 million for 2007. The Bermuda home office premiums were down for 2008 compared to 2007 by $69.7 million, principally due to a discontinued account and conversion of a large casualty quota share to excess of loss coverage. The U.K. branch premiums were down $69.1 million due to the non-renewal of two casualty proportional contracts. Net written premiums decreased 15.1% to $783.1 million for 2008 compared to $922.3 million for 2007 and net premiums earned decreased 12.2% to $801.2 million for 2008 compared to $912.9 million for 2007, commensurate with the decrease in gross written premiums.
Gross written premiums increased 13.2% to $3,724.3$922.5 million in 2005for 2007 compared to $814.9 million for 2006. Premiums written from $3,291.1the Bermuda office increased $61.0 million in 2004.and premiums written from the UK office increased $47.3 million. The increase in the Bermuda office premiums was driven by growth in worldwide treaty casualty reinsurance business and approximately half of the increase from the UK office was driven by the Pound Sterling currency strengthening against the U.S. dollar during 2007. Net written premiums increased 13.0% to $922.3 million for 2007 compared to $816.2 million for 2006, commensurate with the increase in gross written premiums. Net premiums earned increased 7.9% to $912.9 million for 2007 compared to $846.4 million for 2006. The change in net premiums earned relative to the net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are reflected at the initiation of the coverage period.
Incurred Losses and LAE.The following table presents the incurred losses and LAE was principally attributable tofor the increase in estimated losses due to property catastrophes, partially offset by favorable attritional prior period reserve development and a lower level of earned premiums. Bermuda segment for the periods indicated.
| Years Ended December 31, | |||||||||||||
| Current |
| Ratio %/ |
| Prior |
| Ratio %/ |
| Total |
| Ratio %/ | |||
(Dollars in millions) | Year |
| Pt Change |
| Years |
| Pt Change |
| Incurred |
| Pt Change | |||
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 445.7 |
| 55.6% |
|
| $ (56.6) |
| -7.1% |
|
| $ 389.1 |
| 48.6% |
|
Catastrophes | 39.3 |
| 4.9% |
|
| (8.1) |
| -1.0% |
|
| 31.2 |
| 3.9% |
|
A&E | - |
| 0.0% |
|
| - |
| 0.0% |
|
| - |
| 0.0% |
|
Total segment | $ 485.0 |
| 60.5% |
|
| $ (64.7) |
| -8.1% |
|
| $ 420.3 |
| 52.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 505.2 |
| 55.3% |
|
| $ (79.4) |
| -8.7% |
|
| $ 425.8 |
| 46.6% |
|
Catastrophes | 76.3 |
| 8.4% |
|
| (12.1) |
| -1.3% |
|
| 64.2 |
| 7.0% |
|
A&E | - |
| 0.0% |
|
| 121.2 |
| 13.3% |
|
| 121.2 |
| 13.3% |
|
Total segment | $ 581.6 |
| 63.7% |
|
| $ 29.6 |
| 3.2% |
|
| $ 611.2 |
| 67.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 481.2 |
| 56.8% |
|
| $ (54.4) |
| -6.4% |
|
| $ 426.7 |
| 50.4% |
|
Catastrophes | - |
| 0.0% |
|
| 10.7 |
| 1.3% |
|
| 10.7 |
| 1.3% |
|
A&E | - |
| 0.0% |
|
| 79.2 |
| 9.4% |
|
| 79.2 |
| 9.4% |
|
Total segment | $ 481.2 |
| 56.8% |
|
| $ 35.4 |
| 4.2% |
|
| $ 516.6 |
| 61.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance 2008/2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ (59.5) |
| 0.3 | pts |
| $ 22.8 |
| 1.6 | pts |
| $ (36.7) |
| 1.9 | pts |
Catastrophes | (37.1) |
| (3.5) | pts |
| 4.0 |
| 0.3 | pts |
| (33.1) |
| (3.2) | pts |
A&E | - |
| - | pts |
| (121.2) |
| (13.3) | pts |
| (121.2) |
| (13.3) | pts |
Total segment | $ (96.6) |
| (3.2) | pts |
| $ (94.3) |
| (11.3) | pts |
| $ (190.9) |
| (14.5) | pts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance 2007/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 24.1 |
| (1.5) | pts |
| $ (25.0) |
| (2.3) | pts |
| $ (0.9) |
| (3.8) | pts |
Catastrophes | 76.3 |
| 8.4 | pts |
| (22.8) |
| (2.6) | pts |
| 53.6 |
| 5.8 | pts |
A&E | - |
| - | pts |
| 42.0 |
| 3.9 | pts |
| 42.0 |
| 3.9 | pts |
Total segment | $ 100.4 |
| 6.9 | pts |
| $ (5.8) |
| (1.0) | pts |
| $ 94.6 |
| 6.0 | pts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
|
|
|
|
|
|
|
|
|
|
| ||
Incurred losses and LAE decreased 31.2% to $420.3 million for 2008 compared to $611.2 million for 2007. The principal driver of the decrease was the absence of development on A&E loss reserves in 2005 reflected ceded2008, which reduced the segment loss ratio by 13.3 points.
Incurred losses and LAE of $95.2increased 18.3% to $611.2 million for 2007 compared to ceded$516.6 million for 2006. The segment loss ratio for Bermuda increased 6.0 points, reflecting a 5.8 point increase in catastrophe losses and LAE in 2004 of $141.0 million.
The Company’s loss ratio, which is calculated by dividing incurred losses and LAE by net premiums earned, increased by 19.6 percentage points to 94.0% in 2005 from 74.4% in 2004. This 19.6 point year over year loss ratio increase was primarily the result of a 28.73.9 point increase due to catastrophefor A&E losses, partially offset by a 10.23.8 point improvement indecrease for attritional and A&E prior year reserve development.
Incurred losses and LAE include catastrophe losses, which include the impact of both current period events and favorable and unfavorable development on prior period events and are net of reinsurance. Individual catastrophe losses are reported net of specific reinsurance, but before recoveries under corporate level reinsurance and potential incurred but not reported (“IBNR”) loss reserve offsets. Catastrophe losses, net of contract specific cessions, were $1,485.7 million in 2005, related principally to aggregate estimated losses driven by Hurricanes Katrina, Rita and Wilma with catastrophe losses of $765.9 million, $151.0 million and $381.6 million, respectively, but also reflected catastrophe losses related to hurricanes Emily ($19.8 million) and Dennis ($7.0 million), floods in India ($13.2 million), Calgary ($9.6 million) and Europe ($6.2 million) and storms in Ontario ($12.9 million).losses. The 2005 results also reflect net unfavorable reserve development on 2004 and prior catastrophes of $118.5 million. Catastrophe losses, net of contract specific cessions, were $390.0 million in 2004, related principally to aggregate estimated losses of $428.8 million from Hurricanes Charley, Frances, Ivan and Jeanne, Pacific typhoons, Edmonton hailstorms and the Asian tsunami, which were partially offset by $33.4 million of reserve reductions related to the 2001 World Trade Center losses.
61
Net favorable prior period reserve adjustments for the year ended December 31, 2005 were $26.4 million compared to net unfavorable prior period reserve adjustments of $249.4 million in 2004. For the year ended December 31, 2005, the favorable reserve adjustments included net favorable attritional reserve adjustments of $226.3 million related primarily to property business classes, partially offset by net unfavorable prior period catastrophe adjustments of $118.5 million related primarily to the 2004 hurricanes and net unfavorable A&E adjustments of $81.4 million. For the year ended December 31, 2004, the unfavorable prior period reserve adjustments included net unfavorable A&E adjustments of $159.4 million and net unfavorable attritional development of approximately $128.7 million relating primarily to casualty reinsurance. Partially offsetting the 2004 unfavorable development was $38.7 million of favorable catastrophe development principally related to the reduction of reserves for the World Trade Center events. It is important to note that attritional reserve development arises from the re-evaluation of accident year results and that such re-evaluations may also impact premiums and commissions attributed by accident year, generally mitigating, in part, the impact of loss developments and that such impacts are recorded as part of the overall reserve evaluation process.
Aggregate reserve development related to A&E exposures was $81.4 million and $159.4 million for the years ended December 31, 2005 and 2004, respectively. The Company has A&E exposure related to contracts written by the Company prior to 1986 and to claim obligations acquired as part of the Mt. McKinley acquisition in September 2000. The reserve strengthening on business written by the Company, net of reinsurance, was $11.5 million and the net strengthening on the acquired Mt. McKinley business was $69.9 million in 2005. Substantially all of the Company’s A&E exposures relate to insurance and reinsurance contracts with coverage periods prior to 1986. Given the uncertainties surrounding the settlement of A&E losses, management is unable to establish a meaningful range for these obligations.
The following table shows the U.S. Reinsurance segment components of incurred losses and LAE for 2005 and 2004:
| December 31, 2005 | December 31, 2004 | ||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||||||||||||||
| Attritional | $ | 824 | .3 | $ | (63 | .3) | $ | 760 | .9 | $ | 805 | .4 | $ | 102 | .2 | $ | 907 | .6 | |||||||||||||||||
| Catastrophes | 634 | .6 | 72 | .5 | 707 | .2 | 285 | .5 | (34 | .8) | 250 | .7 | |||||||||||||||||||||||
| A&E | - | 11 | .5 | 11 | .5 | - | 10 | .3 | 10 | .3 | |||||||||||||||||||||||||
| Total segment | $ | 1,458 | .8 | $ | 20 | .7 | $ | 1,479 | .6 | $ | 1,090 | .9 | $ | 77 | .7 | $ | 1,168 | .6 | |||||||||||||||||
| Loss Ratio | 104.5 | % | 1.5 | % | 106.0 | % | 74.0 | % | 5.3 | % | 79.3 | % | |||||||||||||||||||||||
(Some amounts may not reconcile due to rounding.) | |||||||||||||||||||||||||||||||||||
The U.S. Reinsurance segment’s incurred losses and LAE increased 26.6%, or $311.0 million, for 2005 as compared to 2004. The segment’s loss ratio increased by 26.7 points over 2004 due to current year catastrophe losses and unfavorable prior period catastrophe reserve adjustments, partially offset by favorable attritional loss development.
The prior years unfavorable loss development for the year ended December 31, 2004 was primarily attributable to a proliferation of claims related to bankruptcies and other financial management improprieties during the late 1990‘s and early 2000. This increased number of claims, combined with larger claims, had significantly increased incurred losses on the professional liability policies. In the general casualty area, the Company continued to experience losses greater than historical trends for accident years 1998 through 2001.
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The following table shows the U.S. Insurance segment components of incurred losses and LAE for 2005 and 2004:
| December 31, 2005 | December 31, 2004 | ||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||||||||||||||
| Attritional | $ | 548 | .9 | $ | (19 | .5) | $ | 529 | .5 | $ | 614 | .5 | $ | 43 | .3 | $ | 657 | .8 | |||||||||||||||||
| Catastrophes | 1 | .3 | - | 1 | .3 | 1 | .0 | - | 1 | .0 | |||||||||||||||||||||||||
| Total segment | $ | 550 | .2 | $ | (19 | .5) | $ | 530 | .8 | $ | 615 | .5 | $ | 43 | .3 | $ | 658 | .8 | |||||||||||||||||
| Loss Ratio | 66.9 | % | -2.4 | % | 64.5 | % | 65.6 | % | 4.6 | % | 70.3 | % | |||||||||||||||||||||||
(Some amounts may not reconcile due to rounding.) | |||||||||||||||||||||||||||||||||||
The U.S. Insurance segment’s incurred losses and LAE decreased 19.4%, or $128.0 million, for 2005 as compared to 2004. The segment’s loss ratio improved by 5.8 points from 2004 primarily due to favorable prior period adjustments principally on the California workers’ compensation business for the 2004 accident year as the results of benefit reform have become clearerinclude winter storm Kyrill and the 2004 unfavorable prior period reserve adjustments related principally to the casualty classes for accident years 2000 through 2002, where the Company strengthened its reserves for California workers’ compensation insurance. While management believes the cumulative results through 2005 remain quite positive, thereJune and July, 2007 London floods. The increase in A&E losses was some deterioration in claim frequency and severity related to accident years 2001 and 2002.
The following table shows the Specialty Underwriting segment components of incurred losses and LAE for 2005 and 2004:
| December 31, 2005 | December 31, 2004 | ||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||||||||||||||
| Attritional | $ | 186 | .5 | $ | (33 | .0) | $ | 153 | .4 | $ | 279 | .6 | $ | 3 | .6 | $ | 283 | .2 | |||||||||||||||||
| Catastrophes | 147 | .6 | 16 | .9 | 164 | .5 | 17 | .3 | 1 | .5 | 18 | .8 | |||||||||||||||||||||||
| Total segment | $ | 334 | .1 | $ | (16 | .1) | $ | 317 | .9 | $ | 296 | .9 | $ | 5 | .1 | $ | 302 | .0 | |||||||||||||||||
| Loss Ratio | 110.8 | % | -5.4 | % | 105.5 | % | 64.6 | % | 1.1 | % | 65.8 | % | |||||||||||||||||||||||
(Some amounts may not reconcile due to rounding.) | |||||||||||||||||||||||||||||||||||
The Specialty Underwriting segment’s incurred losses and LAE increased 5.3%, or $15.9 million, for 2005 as compared to 2004, due to the significant catastrophe losses in 2005strengthening of asbestos reserves, principally for the direct business.
Segment Expenses.Commission and development of catastrophes from prior years. The segment’s loss ratio increased by 39.7 points over 2004, primarily duebrokerage decreased 9.3% to increased catastrophe losses, however was partially offset by favorable attritional loss development on the marine, aviation, surety and A&H classes of business.
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The following table shows the International segment components of incurred losses and LAE for 2005 and 2004:
| December 31, 2005 | December 31, 2004 | ||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||||||||||||||
| Attritional | $ | 386 | .1 | $ | (66 | .1) | $ | 319 | .9 | $ | 346 | .5 | $ | (13 | .3) | $ | 333 | .2 | |||||||||||||||||
| Catastrophes | 237 | .8 | 16 | .9 | 254 | .7 | 87 | .6 | (1 | .7) | 85 | .9 | |||||||||||||||||||||||
| Total segment | $ | 623 | .9 | $ | (49 | .2) | $ | 574 | .7 | $ | 434 | .1 | $ | (15 | .1) | $ | 419 | .1 | |||||||||||||||||
| Loss Ratio | 91.3 | % | -7.2 | % | 84.1 | % | 66.2 | % | -2.3 | % | 63.9 | % | |||||||||||||||||||||||
(Some amounts may not reconcile due to rounding.) | |||||||||||||||||||||||||||||||||||
The International segment’s incurred losses and LAE increased 37.1%, or $155.6$208.9 million for 2005 as compared to 2004. The segment’s loss ratio increased by 20.2 points over 2004, primarily reflective of the significant property catastrophe losses in 2005 and development on prior years’ catastrophes, partially offset by an improvement in attritional prior year reserves on the Canadian, Asian and international business.
The following table shows the Bermuda segment components of incurred losses and LAE for 2005 and 2004:
| December 31, 2005 | December 31, 2004 | ||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||||||||||||||
| Attritional | $ | 437 | .8 | $ | (44 | .4) | $ | 393 | .5 | $ | 566 | .9 | $ | (6 | .9) | $ | 560 | .0 | |||||||||||||||||
| Catastrophes | 345 | .9 | 12 | .2 | 358 | .0 | 37 | .4 | (3 | .8) | 33 | .6 | |||||||||||||||||||||||
| A&E | - | 69 | .9 | 69 | .9 | - | 149 | .1 | 149 | .1 | |||||||||||||||||||||||||
| Total segment | $ | 783 | .7 | $ | 37 | .7 | $ | 821 | .4 | $ | 604 | .3 | $ | 138 | .4 | $ | 742 | .7 | |||||||||||||||||
| Loss Ratio | 103.2 | % | 5.0 | % | 108.2 | % | 67.2 | % | 15.4 | % | 82.6 | % | |||||||||||||||||||||||
(Some amounts may not reconcile due to rounding.) | |||||||||||||||||||||||||||||||||||
The Bermuda segment’s incurred losses and LAE increased 10.6%, or $78.72008 from $230.4 million for 2005 as compared to 2004. The segment’s loss ratio increased by 25.6 points over 2004, reflecting catastrophe losses2007, principally the result of a decline in 2005 and prior period catastrophe development, partially offset by favorable prior period attritional reserves, primarily from the UK branch produced business. The A&E reserve development for both 2005 and 2004 primarily related to asbestos exposures that were assumed through the September 19, 2000 loss portfolio transfer from Mt. McKinley.
Underwriting Expenses. The Company’s expense ratio, which is calculated by dividing underwriting expenses by net premiums earned was 26.3% for 2005 compared to 24.6% for 2004.
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The following table showsand the expense ratios for each of the Company’s operating segments for 2005 and 2004.
| Segment Expense Ratios | ||||||||
|---|---|---|---|---|---|---|---|---|
| Segment | 2005 | 2004 | ||||||
| U.S. Reinsurance | 27.3 | % | 26.9 | % | ||||
| U.S. Insurance | 22.4 | % | 19.1 | % | ||||
| Specialty Underwriting | 28.6 | % | 29.6 | % | ||||
| International | 26.3 | % | 26.3 | % | ||||
| Bermuda | 25.5 | % | 21.7 | % | ||||
Segment underwriting expenses decreased by 5.0% to $1,026.3 million in 2005 from $1,080.2 million in 2004. Commission, brokerage, taxes and fees decreased by $60.3 million, principally reflecting decreases in premium volume and changeschange in the mix of business. Segment other underwriting expenses for 2008 increased by $6.4to $24.2 million as the Company continuedcompared to expand operations. Contributing$20.9 million for 2007, primarily due to the segment underwriting expense decreases were a 36.6% ($49.8 million) decrease in the Specialty Underwriting operation, a 3.8% ($14.9 million) decrease in the U.S. Reinsurance operation and a 0.7% ($1.3 million) decrease in the Bermuda operation, partially offset by a 4.2% ($7.2 million)general increase in operations to support the International operation and a 2.7% ($4.9 million) increase in the U.S. Insurance operation. The changes for each operation’s expenses principally resulted from changes in commission expenses related to changes in premium volume and business mix by class and type and, in some cases, changes in the use of specific reinsurance, as well as the underwriting performance of the underlying business.
The Company’s combined ratio, which is the sum of the loss and expense ratios, increased by 21.3 percentage points to 120.3% in 2005 as compared to 99.0% in 2004, with the increase principally resulting from elevated catastrophe losses, partially offset by improved prior year development.
The following table shows the combined ratios for each of the Company’s operating segments in 2005 and 2004. The combined ratios for all operations were impacted by the loss and expense ratio variability noted above.
| Segment Combined Ratios | ||||||||
|---|---|---|---|---|---|---|---|---|
| Segment | 2005 | 2004 | ||||||
| U.S. Reinsurance | 133.3 | % | 106.2 | % | ||||
| U.S. Insurance | 86.9 | % | 89.4 | % | ||||
| Specialty Underwriting | 134.1 | % | 95.4 | % | ||||
| International | 110.4 | % | 90.2 | % | ||||
| Bermuda | 133.7 | % | 104.3 | % | ||||
Investment Results. Net investment income increased 5.4% to $522.8 million in 2005 from $495.9 million in 2004, reflecting growth in invested assets tempered by lower investment yields and lower returns from limited partnership investments. Investable assets increased by $1.4 billion to $13.0 billion in 2005, principally reflecting the effects of investing $1,070.6 million cash flow from operations during the year and $758.2 million net proceeds from issuance of common shares, partially offset by $250.0 million in debt repayment. The lower investment yield reflects the Company’s elevated short-term investments following its common share capital raising in the fourth quarter, which also reduced the investment income portfolio duration. Investment income for the limited partnerships for the year ended December 31, 2005 and 2004 was $11.5 million and $41.8 million, respectively.
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The following table shows the components of net investment income for the years ended as indicated:
| (Dollars in thousands) | 2005 | 2004 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Fixed maturities | $ | 496,959 | $ | 475,906 | |||||||
| Equity securities | 16,582 | 8,453 | |||||||||
| Short-term investments | 20,128 | 6,913 | |||||||||
| Other investment income | 14,591 | 44,126 | |||||||||
| Total gross investment income | 548,260 | 535,398 | |||||||||
| Interest credited and other expense | (25,427 | ) | (39,490 | ) | |||||||
| Total net investment income | $ | 522,833 | $ | 495,908 | |||||||
The following table shows a comparison of various investment yields for the years indicated:
| 2005 | 2004 | |||||||
|---|---|---|---|---|---|---|---|---|
| Imbedded pre-tax yield of cash and invested assets at December 31 | 4.5 | % | 4.7 | % | ||||
| Imbedded after-tax yield of cash and invested assets at December 31 | 3.9 | % | 4.1 | % | ||||
Annualized pre-tax yield on average cash and invested assets | 4.4 | % | 5.0 | % | ||||
| Annualized after-tax yield on average cash and invested assets | 3.8 | % | 4.2 | % | ||||
The Company, because of its historical income orientation, has generally considered total return, the combination of income yieldCommission and capital appreciation/depreciation,brokerage increased 7.8% to be relatively less important as a measure of performance than its overall income yield. However, in 2005, with changes the Company perceived in overall investment market conditions, the Company continued to reweight its view of total return and added $350.4 million in 2005 of equity securities into the overall investment portfolio. The Company also added $125.2 million of other invested assets, principally limited partnerships. The following table provides a comparison of the Company’s total return by asset class relative to broadly accepted industry benchmarks for 2005 and 2004.
| 2005 | 2004 | |||||||
|---|---|---|---|---|---|---|---|---|
| Company's fixed income portfolio total return | 3.2 | % | 6.5 | % | ||||
| Lehman bond aggregate index | 2.4 | % | 4.3 | % | ||||
Company's common equity portfolio total return | 13.8 | % | 21.9 | % | ||||
| S & P 500 index | 4.9 | % | 10.9 | % | ||||
Company's other invested asset portfolio total return | 7.2 | % | 43.2 | % | ||||
The Company’s net realized capital gains were $90.3 million in 2005, which reflected realized capital gains on the Company’s investments of $106.2 million, including $41.3 million on the sale of interest only strips investments, partially offset by $15.9 million of realized capital losses, which included $7.0 million related to the write-downs in the value of interest only strips deemed to be impaired on an other than temporary basis in accordance with EITF 99-20. Net realized capital gains were $89.6 million in 2004, which reflected realized capital gains on the Company’s investments of $164.3 million, including $118.2 million on the sale of interest only strip investments, partially offset by $74.7 million of realized capital losses, which included $65.0 million related to the write-downs in the value of interest only strips deemed to be impaired on an other than temporary basis in accordance with EITF 99-20.
The Company has issued seven equity put options in its product portfolio at December 31, 2005, which were outstanding. These products meet the definition of a derivative under Financial Accounting Standards No. 133. The Company recognized net derivative expense of $2.6 million and $2.7 million in 2005 and 2004,
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respectively, reflecting changes in fair value for the equity put options. See also Note 2 of Notes to the Consolidated Financial Statements.
Corporate, Non-allocated Expenses. Corporate underwriting expenses not allocated to segments were $18.4$230.4 million for 2005 as compared to $9.82007 from $213.7 million for 2004 as the Company expanded its infrastructure to support operations.
Interest, fees and bond issue cost amortization expense in 2005 and 2004 were $74.4 million and $76.6 million, respectively. Interest, fees and bond issue cost amortization expense in 2005 included $35.5 million related to the senior notes, $37.5 million related to the junior subordinated debt securities, $1.0 million related to the bond issue cost amortization and $0.4 million related to the credit line under the Company’s revolving credit facilities. Interest, fees and bond issue cost amortization expense in 2004 included $41.9 million related to the senior notes, $32.4 million related to the junior subordinated debt securities, $1.1 million related to the bond issue cost amortization and $1.2 million related to the credit line under the Company’s revolving credit facilities. The lower interest expense on the senior notes was2006, principally due to the retirement of the 8.5% senior notes due March 15, 2005, partially offset by the issuance of new 5.4% senior notes on October 12, 2004.
Other expenseincrease in 2005 was $11.1premiums earned. Segment other underwriting expenses for 2007 increased to $20.9 million compared to other income of $9.6$17.2 million in 2004. The change in net other expense for 2005 from net other income in 2004 was2006, primarily due to variabilitythe allocation of certain corporate charges to segments, which had been previously retained in the impact of foreign exchange.corporate expenses.
Income Taxes.Critical Accounting Policies The Company’s income tax expense is primarily a function of the statutory tax rates and corresponding net income in the jurisdictions where the Company operates, coupled with the impact from tax preferenced investment income. Variations generally reflect changes in the relative levels of pre-tax income between jurisdictions with different tax rates, and specifically for 2005, also reflected the significant increase in incurred losses relating to catastrophes resulting, ultimately, in a pre-tax loss for the year. The Company recognized income tax benefits of $62.3 million in 2005 compared to income tax expense of $64.9 million in 2004.The 2004 tax expense was impacted by various issues, including the transfer of the Company’s UK branch to Bermuda Re, giving rise to a net tax expense.
Net (Loss) Income. Net loss was $218.7 million in 2005 compared to net income of $494.9 million in 2004, with the change primarily reflecting reduced underwriting profitability due to catastrophe losses, partially offset by favorable prior period reserve development, related tax benefits and improved investment income.
CRITICAL ACCOUNTING POLICIES
The following is a summary of the critical accounting policies related to accounting estimates that (1) require management to make assumptions about highly uncertain matters and (2) could materially impact the consolidated financial statements if management made different assumptions.
LOSS ANDLoss and LAE RESERVES. The Company’sReserves.Our most critical accounting policy is the determination of itsour loss and LAE reserves. The Company maintainsWe maintain reserves equal to itsour estimated ultimate liability for losses and LAE with respect tofor reported and unreported claims relating to both itsfor our insurance and reinsurance businesses. Because reserves are based on estimates of ultimate losses and LAE by underwriting or accident year, management, useswe use a variety of statistical and actuarial techniques to monitor reserve adequacy over time, and evaluatesevaluate new information as it becomes known and adjustsadjust reserves whenever an adjustment appears warranted. Management considersWe consider many factors when setting reserves including: (1) the Company’sour exposure base generally itsand projected ultimate premiums earned; (2) itsour expected loss ratios by product and class categories as determined through extensive interaction between itsof business, which are developed collaboratively by underwriters and actuaries; (3) actuarial methodologies which analyze the Company’sour loss reporting and payment experience, informationreports from ceding companies and historical trends, such as reserving patterns, loss payments and product mix; (4) current legal interpretations of coverage and liability; (5) economic conditions; and (6) the uncertainties discussed below regarding reserve requirements
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our liability for asbestos and environmental (A&E)A&E claims. Based on these considerations, management believes that adequate provision has been made for the Company’sOur insurance and reinsurance loss and LAE reserves.reserves represent our best estimate of our ultimate liability. Actual losses and LAE ultimately paid may deviate, perhaps substantially, from such reserves, impactingreserves. Our net income will be impacted in thea period in which the change in estimated ultimate loss projectionslosses and LAE is recorded. See also ITEM 8, “Financial Statements and Supplementary Data” - Note 1 of Notes to the Consolidated Financial Statements.
The Company notes that there generally
It is more uncertainty in establishingdifficult to accurately estimate loss reserves for reinsurance liabilities than for insurance liabilities. At December 31, 2006 the Company2008 we had reinsurance reserves of $6,720.7$6,626.4 million and insurance loss reserves of $2,119.4$2,214.3 million, of which $260.4$533.2 million and $320.5$200.9 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.
The detailed data required to evaluate ultimate losses for our insurance business is accumulated from the Company’sour underwriting and claim systems. Reserving for reinsurance requires evaluation of loss information received from ceding companies. Ceding companies report losses to the Companyus in many forms dependent on the type of contract and the negotiatedagreed or contractual reporting requirements. Generally, proportional/quota share contracts require the submission of a monthly/quarterly account, which includes premium and loss settlement activity for the period with corresponding reserves as established by the ceding company. This information is recorded into the Company’sour records. For certain proportional contracts, there is also an individual loss reporting clause, which requireswe may require a detailed loss report onfor claims that exceed a certain dollar threshold or relate to a particular type of loss. Excess of loss and facultative contracts generally require individual loss reporting with precautionary notices generally sentprovided when losses reacha loss reaches a significant percentage of the attachment point of the contract or when certain causes of loss or types of injury occur. AllOur experienced claims staff handles individual loss reports and supporting claim information are managed by the Company’s experienced claims staff.information. Based on its ownour evaluation of thea claim, the Companywe may choose to establish additional case reserves (ACRs) as a supplement abovein addition to the case reserves reported by the ceding company. To ensure ceding companies are submitting required and accurate data, the Underwriting, Claim, Reinsurance Accounting and Internal Audit departments of the Company perform various reviews of theour ceding carriers,companies, particularly larger ceding companies.companies, including on-site audits.
Both
We sort both our reinsurance and insurance reserves are categorized into exposure groupings for actuarial analysis. TheWe assign our business to exposure groupings are selected in suchso that the underlying exposures have reasonably homogeneous loss development characteristics butand are large enough to make thefacilitate credible estimation of ultimate losses credible. The selection oflosses. We periodically review our exposure groupings is reviewed periodically and we may change our grouping over time as the Company’sour business changes. The CompanyWe currently usesuse over 200 exposure groupings to develop itsour reserve estimates. One of the key selection characteristics for the exposure groupings is the lengthhistorical duration of time it historically takes to report and settle claims. Claims thatthe claims settlement process. Business in which claims are reported and settled relatively quickly are commonly referred to as short tail lines, and principally derive from property coverages. Casualty claims onlines. On the other hand, casualty claims tend to take longer to be reported and settled and casualty lines are generally referred to as long tail lines. ShorterOur estimates of ultimate
losses for shorter tail lines, arewith the exception of loss estimates for large catastrophic events, generally subject toexhibit less volatility inthan those for the ultimate loss estimation and re-estimation process than longer tail lines.
The same accepted
We use similar actuarial methodologies, such as Borhuetter-Ferguson, expected loss ratio, and chain ladder reserving methods and Borhuetter Ferguson, supplemented by judgment where appropriate, are used to develop an estimate ofour ultimate losses and LAE for each exposure group. Although the samewe use similar actuarial methodologies are used for both short tail and long tail lines, the faster reporting of experience for the short tail lines allows us to have greater confidence in our estimates of ultimate losses for short tail lines at an earlier reliance on the estimates derived from the reported loss experience based methodsstage than is possible for the long tail lines. As a result, we utilize, as well, exposure-based methods to estimate our ultimate losses for longer tail lines, especially for which, consequently, reliance must be placed on the exposure based estimates.immature accident years. For both short and long tail lines, we supplement these general approaches are supplemented by judgment in determining the ultimate losses and LAE for each exposure group. Projectedwith analytically based judgments. We cannot estimate losses from widespread catastrophic events, such as hurricanes, generally cannot be estimated using traditional actuarial models. The loss estimatesmethods. We estimate losses for these types of events are judgmentally established based on available information derived from the Company’scatastrophe models, quantitative and qualitative exposure analyses, reports and communications from ceding companies and management’s
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judgment.development patterns for historically similar events. Due to the inherent uncertainty in estimating such losses, these estimates are subject to variability, the potential for which increases with the severity and complexity of the underlying event.
There are
Our key actuarial assumptions contain no explicit provisions for reserve uncertainty imbedded in the key actuarial assumptions or added tonor do we supplement the actuarially determined reserves. In situations where historical results have been volatile or the class of business is new and immature, the Company actuaries’ ultimate reserve selections may implicitly include a provisionreserves for uncertainty, but this is not significant in relation to the entire reserve balance and is not separately captured on a quantitative basis.uncertainty.
The amount of
Our carried reserves at the end of each reporting period is the amountdate are our best estimate of projected ultimate unpaid losses and LAE reduced by the cumulative amount paid. Similarly, IBNR reserves are determined by subtracting case reserves and ACRs from total loss reserves. Detailedat that date. We complete detailed reserve studies for each exposure group are completed once a yearannually for our reinsurance operations and quarterly for insurance.our insurance operations. The completed annual reinsurance reserve studies are rolled forward“rolled forward” for each accounting period until the subsequent reserve study is completed. The roll forward analysis includes a comparison ofroll-forward process involves comparing actual reported losses to actuarially expected losses. Anylosses based on the most recent reserve study. We analyze significant variancevariances between actual and expected losses is investigated and appropriatepost adjustments recorded. For the years presented, there were no significant changes in the key actuarial methodologies and procedures used to project ultimate losses and therefore, loss reserve changes principally result from changes in managements’ estimates of ultimate losses from amounts reported in prior periods.our reserves as warranted.
Given the inherent variability in our loss reserves, the Company haswe have developed an estimated range of possible gross reserve levels. ThisA table of ranges by segment, accompanied by commentary on potential and historical variability, is included in Financial“Financial Condition under- Loss and LAE Reserves.Reserves”. The ranges are statistically developed using the same exposure groups used in the reserve settingestimation process and aggregated to the segment level. The starting point for developing the ranges is the reported reserves, which reflect the Company’s best estimate of ultimate unpaid losses. For each exposure group, the Company calculatesour actuaries calculate a range for each accident year reflecting actuarial judgment forbased principally on two variables. The first is the historical patternchanges in losses and LAE incurred but not reported (“IBNR”) for each accident year over time; the second is volatility of ratios of IBNReach accident year’s held reserves related to premiums earnedestimated ultimate losses, also over time. Both are measured at various ages from the levelend of the underlying business’s maturity relative to its ultimate expected outcome. The second isaccident year through the uncertainty associated withfinal payout of the underlying business’s position within its underwriting cycle. The ranges by yearyear’s losses. Ranges are then aggregated to develop a rangedeveloped for the exposure group taking into account correlations that exist. Thegroups using statistical methods to adjust for diversification; the ranges for the exposure groups are then aggregated to the segment again accountinglevel, likewise, with an adjustment for existing correlations. The Company notes that its presentationdiversification. Our estimates of this information isour reserve variability may not directlybe comparable to similar presentationsthose of other companies asbecause there are no consistently applied actuarial or accounting standards governing such presentations. The Company further notes that itsOur recorded reserves reflect the Company’sour best point estimate of itsour liabilities and that itsour actuarial methodologies focus on developing such point estimates around whichestimates. We calculate the ranges are subsequently, developed.based on the historical variability of such reserves.
ASBESTOS AND ENVIRONMENTAL EXPOSURES. The Company continuesAsbestos and Environmental Exposures.We continue to receive claims under expired contracts, both insurance and reinsurance contracts, asserting alleged injuries and/or damages relating to or resulting from environmental pollution and hazardous substances, including asbestos. The Company’s environmentalEnvironmental claims typically involve potentialassert liability for (a) the mitigation or remediation of environmental contamination or (b) bodily injury or property damagesdamage caused by the release of hazardous substances into the land, air or water. The Company’s asbestosAsbestos claims typically involve potentialassert liability for bodily injury from exposure to asbestos or for property damage resulting from asbestos or products containing asbestos.
The Company’s
Our reserves include an estimate of the Company’sour ultimate liability for A&E claims. This estimate is made based on judgmental assessment of the underlying exposures as the result of: (1) longOur A&E liabilities emanate from Mt. McKinley’s direct insurance business and variable reporting delays, both from insureds to insurance companies and from ceding companies to reinsurers; (2) historical data, which is more limited and variable on A&E losses than historical information on other types of casualty claims; and (3) unique aspects of A&E exposures for which ultimate value cannot be estimated using traditional reserving techniques.Everest Re’s assumed reinsurance business. There are significant uncertainties in estimating the amountsurrounding our estimates of the Company’s
69
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.
With respect to asbestos claims in particular, several additional factors have emerged in recent years that further compound the difficulty in estimating the Company’sour liability. These developments include: (a) a changing mix of claim types represented in new filings, with the significant growth over a short period of time in the number of claims filed, in part reflecting a much more aggressive plaintiff bar and including claims against defendants who may only have a “peripheral” connection to asbestos; (b) a disproportionaterelative percentage of claims filed by individuals with no functional injury, which should have little to no financial value but that have increasingly been considered in jury verdicts and settlements; (c)impairment first increasing then decreasing over the growth in the number and significance of bankruptcy filings by companies as a result of asbestos claims (including, more recently, bankruptcy filings in which companies attempt to resolve their asbestos liabilities in a manner that is prejudicial to insurers and forecloses insurers from participating in the negotiation of asbestos related bankruptcy reorganization plans); (d) the concentration of claims in a small number of states that favor plaintiffs; (e)past several years; (b) the growth in the number of claims that might impactwhere coverage is sought under the general liability portion of insurance policies rather than the product liability portion; (f) measures adopted by specific courts to ameliorate the worst procedural abuses; (g)(c) an increase in settlement values being paid to asbestos claimants, especially those with cancer or functional impairment; (h)(d) the slow development of asbestos bankruptcy cases, as a result of which many of the critical legal issues arising in those cases are still unresolved at the appellate level; (e) measures adopted by specific courts to ameliorate the worst procedural abuses; (f) legislation in some states to address asbestos litigation issues; and (i)(g) the potential that other states or the U.S. Congress may adopt legislation on asbestos litigation. Anecdotal evidence suggests that new claims filing rates have decreased, that new filings of asbestos-driven bankruptcies have decreased and that various procedural and legislative reforms are beginning to diminish the potential ultimate liability for asbestos losses.
Management believes
We believe that these uncertainties and factors continue to render reserves for A&E, and particularly asbestos losses, significantly less subject to traditional actuarial analysis than reserves for other types of losses. Given these uncertainties, management believes that no meaningful range for such ultimate losses can be established. The Company establishesWe establish reserves to the extent that, in the judgment of management, the facts and prevailing law reflect an exposure for the Companyus or itsour ceding companies. The Company’s A&E liabilities stem from Mt. McKinley’s
We have direct insurance business and Everest Re’s assumed reinsurance business.
In connectionrelationships with the acquisition of Mt. McKinley which has significant exposurepolicyholders and we attempt to A&E claims, LM provided reinsuranceuphold our contractual rights and assert valid defenses to Mt. McKinley covering 80% ($160.0 million) of the first $200.0 million of any adverse development of Mt. McKinley’s reserves as of September 19, 2000 andcoverage where appropriate. The Prudential guaranteed LM’s obligations to Mt. McKinley. Cessions under this reinsurance agreement exhausted the limit available under the contract at December 31, 2003.
Due to the uncertainties discussed above, the ultimate losses attributable to A&E, and particularly asbestos, may be subject to more variability than are non-A&E reserves and such variation could have a material adverse effect on the Company’s financial condition, results of operations and/or cash flows. See also Notes 1 and 3 of Notes to the Consolidated Financial Statements.
With respect to Mt. McKinley, where the Company has a direct relationship with policyholders, the Company’s aggressive litigation posture and the uncertainties inherent in the asbestos coverage and bankruptcy litigationlitigations have provided anus the opportunity to actively engage in settlement negotiations with a number of those policyholders who have potentially significant asbestos liabilities. Those discussions are oriented towardsaimed at achieving reasonable negotiated settlements that limit Mt. McKinley’s liability to a given policyholder to a sum certain. Because of uncertaintiesthe risks and risksuncertainties inherent in litigation, the Companywe cannot be certain that in every instance
70
this approach will lead to a negotiated settlementssettlement in the range expected by the Company.us in each or every instance. Between 2004 and 2006, the Company2008, we concluded such settlements or reached agreement in principle with 1419 of itsour high profile policyholders. The Company currently has identified 8We continue the approach of attempting to negotiate with such policyholders based on their past claim activity and/or potential futurethat may have significant asbestos liabilities, as “High Profile Policyholders” and its settlement efforts are generally directed at such policyholders, in part because their exposures have developed to the point where bothwe and the policyholder and the Company have sufficient information to be motivated to settle. The Company believesWe believe that this active approach will ultimately result in a more cost-effective liquidation of Mt. McKinley’s liabilities than a passive approach, although it may also introduce additional variability in Mt. McKinley’s losses and cash flows as reserves are adjusted to reflect the developments in litigation, negotiations and, ultimately, potential settlements.
There is lesslittle potential for similar settlements with respect to the Company’sof our reinsurance asbestos claims. Cedingclaims where we have no direct relationships with the insureds. Our ceding companies with theirhave the direct obligation to insureds and overall responsibilityare responsible for their own claim settlements,settlements. They are not consistently aggressiveprompt in developing and providing claim settlement information and conveying this information to their reinsurers, which can introduce significantinconsistencies and perhaps inappropriatesignificant delays in the reporting of asbestos claims/exposures to reinsurers.reinsurers, including us. These delays not only extend the timing of reinsurance claim settlements, but also restrictlimit the available information available tofrom which reinsurers, including us, estimate the reinsurers’their ultimate exposure. See the discussion below under the heading “Financial Condition – Loss and LAE Reserves”.
Due to the uncertainties discussed above, the ultimate losses attributable to A&E, and particularly asbestos, may be subject to more variability than are non-A&E reserves and such variation could have a material adverse effect on our financial condition, results of operations and/or cash flows. See also ITEM 8, “Financial Statements and Supplementary Data” - Notes 1 and 3 of Notes to the Consolidated Financial Statements.
REINSURANCE RECEIVABLES. The Company purchasesReinsurance Receivables.We have purchased reinsurance to reduce itsour exposure to adverse claim experience, large claims and catastrophic loss occurrences. These agreements provideOur ceded reinsurance provides for recovery from reinsurers of a portion of losses and loss expenses under certain circumstances without relieving the insurercircumstances. Such reinsurance does not relieve us of itsour obligation to the policyholder.our policyholders. In the event our reinsurers wereare unable to meet their obligations under these agreements or wereare able to successfully challenge losses ceded by the Companyus under the contracts, the Company wouldwe will not be able to realize the full value of the reinsurance recoverablereceivable 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, the Companywe 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. are generally required to secure their obligations. The Company establishesWe have established reserves for uncollectible balances based on management’sour assessment of the collectibility of the outstanding balances. As of December 31, 20062008 and 2005,2007, the reserve for uncollectible balances was $87.0$247.9 million and $25.0$173.0 million, respectively. To minimize exposure from uncollectible reinsurance receivables, the Company has a reinsurance credit security committee that generally evaluates the financial strength of a reinsurer prior to entering into a reinsurance arrangement. Management believes that adequate provision has been made for the Company’s uncollectible balances. Actual uncollectible amounts may vary, perhaps substantially, from such reserves, impacting income in the period in which the change in reserves is made. See also ITEM 8, “Financial Statements and Supplementary Data” - Note 113 of Notes to the Consolidated Financial Statements and “Financial Condition – Reinsurance Receivables” below.
PREMIUMS WRITTEN AND EARNED.Premiums Written and Earned.Premiums written by the Companyus are earned ratably over the coverage periods of the related insurance and reinsurance contracts or policies. Unearnedcontracts. We establish unearned premium reserves are established to cover the remainderunexpired portion of the unexpired contract period.each contract. Such reserves are established based upon reports received from ceding companies or computed using pro rata methods based on statistical data.data received from ceding companies. Premiums earned, and the related costs, which have not yet been reported to the Company,us, are estimated and accrued. Because of the inherent lag in the reporting of written and earned premiums by the Company’sour ceding companies, we use standard accepted actuarial methodologies are used 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 the exposure baseour total premiums earned for determining the Company’sdetermination 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.
71
The following table displays the estimated components of earned but not reported premiums by segment at December 31 for the yearsperiods indicated:
| (Dollars in thousands) | Earned But Not Reported Premium By Segment | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2005 | 2004 | |||||||||
| U.S. Reinsurance | $ | 426,238 | $ | 549,866 | $ | 485,880 | |||||
| U.S. Insurance | 16,474 | 21,267 | 38,487 | ||||||||
| Specialty Underwriting | 85,243 | 84,963 | 136,687 | ||||||||
| International | 199,852 | 225,664 | 216,632 | ||||||||
| Bermuda | 160,581 | 121,147 | 233,940 | ||||||||
| Total | $ | 888,388 | $ | 1,002,908 | $ | 1,111,626 | |||||
| At December 31, | ||||
(Dollars in millions) | 2008 |
| 2007 |
| 2006 |
U.S. Reinsurance | $ 289.2 |
| $ 405.3 |
| $ 426.2 |
U.S. Insurance | 13.9 |
| 13.7 |
| 16.5 |
Specialty Underwriting | 82.2 |
| 82.8 |
| 85.2 |
International | 181.0 |
| 178.5 |
| 199.9 |
Bermuda | 185.1 |
| 202.2 |
| 160.6 |
Total | $ 751.3 |
| $ 882.5 |
| $ 888.4 |
(Some amounts may not reconcile due to rounding.) |
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INVESTMENT VALUATION. The Company’s investment portfolio consists ofInvestment 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. Accordingly, these securities are marked toalso held as available for sale and are carried at market on a quarterly basis.or fair value. Most securities we own are traded on national exchanges where market values are readily available. The Company holdsSome 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 0.5% of the portfolio, that are either valued by brokers or an investment advisor or by the Company using cash flow projections.advisor. At December 31, 2006, the Company’s2008 and 2007, our investment portfolio included $442.5$644.8 million and $623.6 million, respectively, of limited partnership investments whose valuevalues are reported pursuant to the equity method of accounting, which management believes approximates market value. In 2005,accounting. We carry these investments at values provided by the Company owned interest only strips that were accounted for in accordance with EITF 99-20, which sets forthmanagements of the rules for determining when these securities must be written down to fair valuelimited partnerships and due to impairment. Unrealized gains and lossesinherent reporting lags, the carrying values are based on values with “as of” dates from market fluctuations are reflected as comprehensive income, while market value declines that are considered other than temporary impairments are reflected in the incomeone month to one quarter prior to our financial statement as realized capital losses. date.
As of December 31, 20062008 and 2005, the Company2007, we had net unrealized losses, net of tax, of $163.4 million and net unrealized gains, net of tax, of $302.9 million and $214.6$73.2 million, respectively. The Company considersGains and losses from market fluctuations for investments held at market value are reflected as comprehensive income 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 losses in the consolidated statements of operations and comprehensive income (loss) in accordance with the provisions of FAS 159. Market value declines for the fixed income portfolio, which are considered other-than-temporary impairments are reflected in our consolidated statements of operations and comprehensive income (loss), as realized capital losses. We consider many factors when determining whether a market value decline is other than temporary,other-than-temporary, including: (1) our ability and intent to hold the security, (2) the length of time the market value has been below book value, (2)(3) the credit strength of the issuer, (3)(4) the issuer’s market sector, (4)(5) the length of time to maturity and (5)(6) for asset backedasset-backed securities, increases in prepayments.prepayments, credit enhancements and underlying default rates. If managementmanagement’s assessments change in the future, the Companywe may ultimately record a realized loss after management originally concluded that the decline in value was temporary. See also ITEM 8, “Financial Statements and Supplementary Data” - Note 1 of Notes to the Consolidated Financial Statements.
FINANCIAL CONDITIONCASH AND INVESTED ASSETS.
Cash and Invested Assets.Aggregate invested assets, including cash and short-term investments, were $13,957.1$13,714.3 million at December 31, 2006 and $12,970.82008, a decrease of $1,221.9 million, compared to $14,936.2 million at December 31, 2005.2007. This increase in cash and invested assets resulteddecrease was primarily from $636.3the result of $657.6 million in foreign exchange losses on our portfolio securities and cash, flows from operations, $176.4$310.4 million of foreign currency translation gains, $35.1unrealized depreciation, a $276.0 million decline due to fair value adjustments, $243.3 million of net realized capital gainslosses on sales, $176.5 million of other-than-temporary impairments, repurchases of 1.6 million of our common shares for $150.7 million and a $131.7$118.6 million increasepaid out in net pre-tax unrealized appreciation of the Company’s investments comprised of a $191.9 million increase in pre-tax unrealized appreciation on the equity securities portfolio,dividends to shareholders, partially offset by a $60.2$663.0 million decrease in pre-tax unrealized appreciation in fixed maturities portfolio. Cumulative gross pre-tax unrealized appreciation and depreciation across the Company’s investment portfolio were $594.5 million and $122.8 million, respectively, at December 31, 2006 compared to $443.1 million and $103.1 million, respectively, at December 31, 2005.of cash flows from operations.
The Company’s
Our principal investment objectives are to ensure funds are available to meet itsour insurance and reinsurance obligations and to maximize after-tax investment income while maintaining a high quality diversified investment portfolio. Considering these objectives, the Company views itswe view our investment portfolio as having two components;components: 1) the investments needed to satisfy outstanding liabilities and 2) investments funded by the Company’sour shareholders’ equity.
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For the portion needed to satisfy outstanding liabilities, the Company investswe invest in taxable and tax-preferenced fixed income securities with an average credit quality of Aa,Aa2, as rated by the independent investment rating service of Moody’s. The Company’sOur mix of taxable and tax-preferenced investments is adjusted continuously,periodically, consistent with the Company’sour current and projected operating results, market conditions and the Company’sour tax position. This fixed maturity portfolio is externally managed by an independent, professional investment manager using portfolio guidelines approved by the Company.us.
Over the past few years, the Company haswe had reallocated its shareholders’our equity investment portfolio to includeinclude: 1) publicly traded equity securities primarily exchange traded funds, and 2) private equity limited partnership investments. The objective of this portfolio diversification iswas to enhance the risk-adjusted total return of the investment portfolio by allocating a prudent portion of the portfolio to higher return asset classes. The Company hasWe had limited itsour 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. As a result of the dramatic slowdown in the global economy and the liquidity crisis affecting the financial markets, we significantly reduced our exposure to public equities during the fourth quarter of 2008 and correspondingly increased our holdings in short-term investments during the fourth quarter. At December 31, 2006,2008, the market or fair value of investments in equity and limited partnership securities approximated 40%16% of shareholders’ equity.
During 2005 and 2004,equity, a decrease of 22 points from the Company invested in interest only strips. These investments were intended to mitigate potential decreases in unrealized appreciation on the Company’s fixed income portfolio during a period when management believed there was high potential for increased general interest rates. These securities give the holder the right to receive interest payments38% of shareholders’ equity at a stated coupon rate on an underlying pool of mortgages. The interest payments on the outstanding mortgages are guaranteed by entities generally rated AAA. The ultimate cash flow from these investments is primarily dependent upon the average life of the mortgage pool. Generally, as mortgage rates decline, mortgagors tend to pre-pay their mortgage loans which decreases the average life of a mortgage pool and reduces expected cash flows. Conversely, as mortgage rates rise, prepayments are more likely to slow and ultimate cash flows tend to rise. Accordingly, the market value of these investments tends to increase as general interest rates rise and decline as general interest rates fall. These movements are generally counter to the impact of interest rate movements on the Company’s other fixed income investments. Although the Company invested in interest only strips during 2005 and 2004, the Company had liquidated its positions in interest only strips and held no such securities at or after December 31, 2005.2007.
The tables below summarize the composition and characteristics of the Company’sour investment portfolio at December 31:
| 2006 | 2005 | 2004 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Fixed maturities | 73.9% | 77.5% | 86.3% | ||||||||
| Equity securities | 11.6% | 8.4% | 5.6% | ||||||||
| Short-term investments | 9.4% | 11.1% | 5.1% | ||||||||
| Other invested assets | 3.3% | 2.2% | 1.4% | ||||||||
| Cash | 1.8% | 0.8% | 1.6% | ||||||||
| Total investments and cash | 100.0% | 100.0% | 100.0% | ||||||||
2006 | 2005 | 2004 | |||||||||
| Fixed income portfolio duration | 4.1 years | 4.3 years | 5.2 years | ||||||||
| Fixed income composite credit quality | Aa2 | Aa1 | Aa2 | ||||||||
| Imbedded end of period yield, pre-tax | 4.6% | 4.5% | 4.7% | ||||||||
| Imbedded end of period yield, after-tax | 4.0% | 3.9% | 4.1% | ||||||||
The increase in equity securities and other invested assets reflects a modest and continuing reweightingas of the Company’s target investment mix.dates indicated:
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| December 31, | ||
| 2008 |
| 2007 |
Fixed maturities, market value | 78.5% |
| 68.6% |
Fixed maturities, fair value | 0.3% |
| 0.0% |
Equity securities - market value | 0.1% |
| 0.1% |
Equity securities - fair value | 0.9% |
| 10.3% |
Short-term investments | 13.8% |
| 14.9% |
Other invested assets | 4.9% |
| 4.4% |
Cash | 1.5% |
| 1.7% |
Total investments and cash | 100.0% |
| 100.0% |
| December 31, | ||
| 2008 |
| 2007 |
Fixed income portfolio duration (years) | 4.1 |
| 3.9 |
Fixed income composite credit quality | Aa2 |
| Aa2 |
Imbedded end of period yield, pre-tax | 4.5% |
| 4.7% |
Imbedded end of period yield, after-tax | 4.0% |
| 3.9% |
The following table provides a comparison of the Company’sour total return by asset class relative to broadly accepted industry benchmarks for the yearsperiods indicated:
| 2006 | 2005 | |||||||
|---|---|---|---|---|---|---|---|---|
| Company's fixed income portfolio total return | 4.6 | % | 3.2 | % | ||||
| Lehman bond aggregate index | 4.3 | % | 2.4 | % | ||||
Company's common equity portfolio total return | 19.2 | % | 13.8 | % | ||||
| S & P 500 index | 15.8 | % | 4.9 | % | ||||
Company's other invested asset portfolio total return | 19.8 | % | 7.2 | % | ||||
| 2008 |
| 2007 |
| 2006 |
Fixed income portfolio total return | 0.3% |
| 5.0% |
| 4.6% |
Lehman bond aggregate index | 5.2% |
| 7.0% |
| 4.3% |
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Common equity portfolio total return | -40.9% |
| 9.2% |
| 19.2% |
S & P 500 index | -37.0% |
| 5.5% |
| 15.8% |
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Other invested asset portfolio total return | -7.4% |
| 13.5% |
| 19.8% |
The pre-tax equivalent total return for the bond portfolio was approximately 2.1%, 5.7% and 5.3%, respectively, for 2008, 2007 and 2006. The pre-tax equivalent return adjusts the yield on tax-exempt bonds to the fully taxable equivalent.
REINSURANCE RECEIVABLES.Reinsurance Receivables.Reinsurance receivables for both paid and unpaid losses totaled $772.8$657.2 million at December 31, 2006, $1,048.72008 and $666.2 million at December 31, 2005, and $1,210.8 million at December 31, 2004.2007. At December 31, 2006, $169.42008, $185.4 million, or 21.9%28.2%, was receivable from Transatlantic, $100.9Transatlantic; $100.0 million, or 13.1%15.2%, was receivable from LM, whose obligations are guaranteed by The Prudential, $100.2Continental; $57.0 million, or 13.0%, was receivable from Founders, $100.0 million, or 12.9%, was receivable from Continental, which is partially collaterized by funds held arrangements, $52.5 million, or 6.8%, was receivable from subsidiaries of London Life, which is fully collateralized by letters of credit, and $42.7 million, or 5.5%8.7%, was receivable from Munich Re.Re; $39.6 million, or 6.0%, was receivable from Ace; $36.9 million, or 5.6%, was receivable from Berkley and $33.8 million or 5.1% was receivable from C.V. Starr. The receivable from Continental is collateralized by a funds held arrangementsarrangement under which we have retained the premiums earned by the retrocessionaire to secure obligations of the retrocessionaire, recorded them as a liability, credited interest on the balances at a stated contractual rate and reduced the liability account as payments become due. In addition, $227.3 million was receivable from Founders, for which the Company has retained the premium payments due the retrocessionaire, recognized liabilitiesrecorded a full provision for such amounts and reduced such liabilities as payments are due from the retrocessionaire.uncollectibility. No other retrocessionaire accounted for more than 5% of the Company’sour receivables.
LOSS ANDLoss and LAE RESERVES.Reserves.Gross loss and LAE reserves totaled $8,840.1$8,840.7 million at December 31, 2006, $9,126.72008 and $9,040.6 million at December 31, 2005 and $7,836.3 million at December 31, 2004. The decrease in 2006 was primarily attributable to the payout in 2006 of catastrophe loss reserves held at December 31, 2005, partially offset by unfavorable net prior period reserve strengthening. The increases in 2005 and 2004 were primarily attributable to increased catastrophe losses, partially offset by favorable net prior period reserve adjustments and reduced premiums earned.2007.
The following tables summarize gross outstanding loss and LAE reserves by segment, segregated intoclassified by case reserves and IBNR reserves, which are managed on a combined basis, for the yearsperiods indicated:
| Gross Reserves By Segment | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| As of December 31, 2006 | ||||||||||||||
| (Dollars in thousands) | Case Reserves | IBNR Reserves | Total Reserves | % of Total | ||||||||||
| U.S. Reinsurance | $ | 1,641,661 | $ | 2,061,722 | $ | 3,703,383 | 41.9 | % | ||||||
| U.S. Insurance | 591,384 | 1,010,998 | 1,602,382 | 18.1 | % | |||||||||
| Specialty Underwriting | 338,719 | 145,646 | 484,365 | 5.5 | % | |||||||||
| International | 535,135 | 380,208 | 915,343 | 10.3 | % | |||||||||
| Bermuda | 817,536 | 666,997 | 1,484,533 | 16.8 | % | |||||||||
| Total excluding A&E | 3,924,435 | 4,265,571 | 8,190,006 | 92.6 | % | |||||||||
| A&E | 501,387 | 148,747 | 650,134 | 7.4 | % | |||||||||
| Total including A&E | $ | 4,425,822 | $ | 4,414,318 | $ | 8,840,140 | 100.0 | % | ||||||
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| As of December 31, 2005 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | Case Reserves | IBNR Reserves | Total Reserves | % of Total | ||||||||||
| U.S. Reinsurance | $ | 1,654,597 | $ | 2,423,192 | $ | 4,077,789 | 44.7 | % | ||||||
| U.S. Insurance | 583,729 | 948,288 | 1,532,017 | 16.8 | % | |||||||||
| Specialty Underwriting | 273,369 | 184,719 | 458,088 | 5.0 | % | |||||||||
| International | 577,276 | 434,541 | 1,011,817 | 11.1 | % | |||||||||
| Bermuda | 618,066 | 779,465 | 1,397,531 | 15.3 | % | |||||||||
| Total excluding A&E | 3,707,037 | 4,770,205 | 8,477,242 | 92.9 | % | |||||||||
| A&E | 526,210 | 123,250 | 649,460 | 7.1 | % | |||||||||
| Total including A&E | $ | 4,233,247 | $ | 4,893,455 | $ | 9,126,702 | 100.0 | % | ||||||
As of December 31, 2004 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | Case Reserves | IBNR Reserves | Total Reserves | % of Total | ||||||||||
| U.S. Reinsurance | $ | 1,354,647 | $ | 2,174,762 | $ | 3,529,409 | 45.0 | % | ||||||
| U.S. Insurance | 599,200 | 793,451 | 1,392,651 | 17.7 | % | |||||||||
| Specialty Underwriting | 215,187 | 158,793 | 373,980 | 4.8 | % | |||||||||
| International | 421,804 | 359,073 | 780,877 | 10.0 | % | |||||||||
| Bermuda | 425,273 | 605,791 | 1,031,064 | 13.2 | % | |||||||||
| Total excluding A&E | 3,016,111 | 4,091,870 | 7,107,981 | 90.7 | % | |||||||||
| A&E | 571,939 | 156,386 | 728,325 | 9.3 | % | |||||||||
| Total including A&E | $ | 3,588,050 | $ | 4,248,256 | $ | 7,836,306 | 100.0 | % | ||||||
Gross Reserves By Segment |
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| At December 31, 2008 | ||||||
| Case |
| IBNR |
| Total |
| % of |
(Dollars in millions) | Reserves |
| Reserves |
| Reserves |
| Total |
U.S. Reinsurance | $ 1,384.7 |
| $ 1,884.1 |
| $ 3,268.8 |
| 37.0% |
U.S. Insurance | 589.1 |
| 1,217.8 |
| 1,806.9 |
| 20.4% |
Specialty Underwriting | 260.8 |
| 163.4 |
| 424.2 |
| 4.8% |
International | 664.3 |
| 427.3 |
| 1,091.6 |
| 12.3% |
Bermuda | 634.9 |
| 827.4 |
| 1,462.3 |
| 16.5% |
Total excluding A&E | 3,533.7 |
| 4,520.1 |
| 8,053.8 |
| 91.1% |
A&E | 434.5 |
| 352.3 |
| 786.8 |
| 8.9% |
Total including A&E | $ 3,968.2 |
| $ 4,872.4 |
| $ 8,840.7 |
| 100.0% |
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(Some amounts may not reconcile due to rounding.) |
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The changes by segment generally reflect changes
| At December 31, 2007 | ||||||
| Case |
| IBNR |
| Total |
| % of |
(Dollars in millions) | Reserves |
| Reserves |
| Reserves |
| Total |
U.S. Reinsurance | $ 1,414.2 |
| $ 1,907.0 |
| $ 3,321.2 |
| 36.8% |
U.S. Insurance | 597.5 |
| 1,083.7 |
| 1,681.2 |
| 18.6% |
Specialty Underwriting | 273.2 |
| 161.3 |
| 434.5 |
| 4.8% |
International | 632.0 |
| 472.8 |
| 1,104.8 |
| 12.2% |
Bermuda | 753.1 |
| 823.0 |
| 1,576.1 |
| 17.4% |
Total excluding A&E | 3,670.0 |
| 4,447.8 |
| 8,117.8 |
| 89.8% |
A&E | 439.8 |
| 483.0 |
| 922.8 |
| 10.2% |
Total including A&E | $ 4,109.8 |
| $ 4,930.8 |
| $ 9,040.6 |
| 100.0% |
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
|
|
|
|
|
|
Changes in earned premium, changes inpremiums and business mix, the impact of reserve re-estimations, catastrophe losses and changes in catastrophe loss reserves together with claim settlement activity. The fluctuations for A&E reflect the impact of reserve re-evaluations and claim settlement activity.
The Company’sactivity all impact loss and LAE reserves are anby segment and in total.
Our loss and LAE reserves represent our best estimate of theour ultimate liability for unpaid claims. Such estimates are re-evaluated on an ongoing basis,We continuously re-evaluate our reserves, including re-estimates of prior period reserves, taking into consideration all available information and, in particular, newly reported loss and claim experience. SuchChanges in reserves resulting from such re-evaluations impactare reflected in incurred losses in the period when the re-evaluation is made. The Company notes that itsOur analytical methods and processes operate at multiple levels including individual contracts, groupings of like contracts, classes and lines of business, internal business units, segments, legal entities, and in the aggregate. The complexities of the Company’s businessIn order to set appropriate reserves, we make qualitative and operations requirequantitative analyses and adjustments, both qualitative and quantitative,judgments at these various levels. Additionally, the attribution of reserves, changechanges in reserves and incurred losses betweenamong accident yearyears requires qualitative and underwriting year requiresquantitative adjustments and allocations both qualitative and quantitative, at these various levels. All of these processes, methods and practices appropriately balanceWe utilize actuarial science, business expertise and management judgment in a manner intended to assure the accuracy precision and consistency of the Company’sour reserving practices, which are fundamental to the Company’s operation. The Company notes however, that the underlyingpractices. Nevertheless, our reserves are estimates, which are subject to variation.variation, which may be significant.
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, management believeswe believe that the Company’sour existing reserves and reserving methodologies lessen the probability that any such increase would have a material adverse effect on the Company’sour financial condition, results of operations or cash flows. In this context, the Company noteswe note that over the past 10 years, its pastour calendar year operations have been affected variably by effects from prior period reserve re-estimates, with such effects ranging from a favorable $62.1$26.4 million in 1997,2005, representing 2.2%0.5% of the net prior period reserves for the year in which the adjustment was made, to an unfavorable $249.4 million in 2004, representing 3.7% of the net prior period reserves for the year in which the adjustment was made. The
75
Company has noted that variability had increased for years 1999 to 2003 and has taken actions to attempt to reduce year to year variability prospectively.
The Company hasWe have included ranges for loss reserve estimates determined by the Company’sour actuaries, which are derivedhave been developed through a combination of objective and subjective criteria. The Company notes that itsOur presentation of this information ismay not be directly comparable to similar presentations of other companies as there are no consistently applied actuarial or accounting standards governing such presentations. The Company further notes that itsOur recorded reserves are an aggregation of our best point estimates for approximately 200 reserve groups and reflect the Company’sour best point estimate of itsour liabilities. The Company’sOur actuarial methodologies develop point estimates rather than ranges and the ranges are developed subsequently.subsequently based upon historical and prospective variability measures.
The following table below represents the reserve levels and ranges as of December 31, 2006 for each of our business segments for the Company’s business segments.period indicated:
| Outstanding Reserves and Ranges By Segment (1) As of December 31, 2006 | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | As Reported | Low Range % (2) | Low Range (2) | High Range % (2) | High Range (2) | ||||||||||||
| Gross Reserves By Segment | |||||||||||||||||
| U.S. Reinsurance | $ | 3,703,383 | -9.7% | $ | 3,345,617 | 9.7% | $ | 4,061,149 | |||||||||
| U.S. Insurance | 1,602,382 | -14.8% | 1,364,624 | 14.8% | 1,840,140 | ||||||||||||
| Specialty Underwriting | 484,365 | -14.3% | 414,993 | 14.3% | 553,736 | ||||||||||||
| International | 915,343 | -8.8% | 834,606 | 8.8% | 996,082 | ||||||||||||
| Bermuda | 1,484,533 | -9.0% | 1,351,016 | 9.0% | 1,618,018 | ||||||||||||
| Total Gross Reserves | |||||||||||||||||
| (excluding A&E) | 8,190,006 | -8.1% | 7,528,021 | 8.1% | 8,851,991 | ||||||||||||
| A&E (All Segments) (3) (4) | 650,134 | NA | 650,134 | NA | 650,134 | ||||||||||||
| Total Gross Reserves (4) | $ | 8,840,140 | NA | $ | 8,178,155 | NA | $ | 9,502,125 | |||||||||
| ______________ | |||||||||||||||||
(1) There can be no assurance that reserves will not ultimately exceed the indicated ranges, requiring additional income statement expense.(2) Although totals are displayed for both the low range 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.(3) Given the uncertainties surrounding the settlement of A&E losses, management is unable to establish a range for these obligations. As a result, these reserves which relate principally to the U.S. Reinsurance and Bermuda segments, have been segregated from reserves for which a range has been determined.(4) NA means not applicable
|
| Outstanding Reserves and Ranges By Segment (1) | ||||||||
|
| At December 31, 2008 | ||||||||
|
| As |
| Low |
| Low |
| High |
| High |
(Dollars in millions) |
| Reported |
| Range % (2) |
| Range (2) |
| Range % (2) |
| Range (2) |
Gross Reserves By Segment |
|
|
|
|
|
|
|
|
| |
U.S. Reinsurance |
| $ 3,268.8 |
| -14.3% |
| $ 2,802.2 |
| 14.3% |
| $ 3,735.3 |
U.S. Insurance |
| 1,806.9 |
| -20.9% |
| 1,430.1 |
| 20.9% |
| 2,183.7 |
Specialty Underwriting | 424.2 |
| -16.2% |
| 355.3 |
| 16.2% |
| 493.1 | |
International |
| 1,091.6 |
| -10.8% |
| 973.5 |
| 10.8% |
| 1,209.8 |
Bermuda |
| 1,462.3 |
| -8.0% |
| 1,344.8 |
| 8.0% |
| 1,579.9 |
Total Gross Reserves |
|
|
|
|
|
|
|
|
| |
(excluding A&E) |
| 8,053.8 |
| -10.6% |
| 7,196.8 |
| 10.6% |
| 8,910.9 |
A&E (All Segments) | 786.8 |
| -13.7% |
| 679.0 |
| 13.7% |
| 894.6 | |
Total Gross Reserves | $ 8,840.7 |
| -10.3% |
| 7,927.4 |
| 10.3% |
| 9,754.0 | |
|
|
|
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
|
|
|
|
|
|
| ||
_______________
(1) | There can be no assurance that reserves will not ultimately exceed the indicated ranges requiring additional income statement expense. |
(2) | Although totals are displayed for both the low and high range amounts, because of the statistical methods employed, the range of the total is not equal to the sum of the ranges of the segments. |
Depending on the specific segment, the range derived for the loss reserves, excluding reserves for A&E exposures, ranges from minus 8.8%8.0% to minus 14.8%20.9% for the low range and from plus 8.8%8.0% to plus 14.8%20.9% for the high range. Both the higher and lower ranges are associated with the U.S. Insurance segment. The Company notes that the widthsize of the range is dependent onupon the level of confidence associated with the outcome. Within each range, management’sour best estimate of loss reserves is based onupon the point estimatederived by the Company’sour actuaries in detailed reserve studies. Such ranges are necessarily subjective due to the lack of generally accepted actuarial standards with respect to their development. For the above presentation, management haswe have assumed what it believeswe believe is a reasonable confidence level but notesnote that there can be no assurance that the Company’sour claim obligations will not vary within and potentially outside of these ranges, requiring incurred loss adjustments in the period the variability is recognized. The Company is not able to establish a meaningful range for A&E reserves.ranges.
Additional losses, including those relating to latent injuries, and other exposures, which are as yet unrecognized, the type or magnitude of which cannot be foreseen by the Companyus or the reinsurance and insurance industry generally, may emerge in the future. Such future emergence, to the extent not covered by existing retrocessional
76
retrocessional contracts, could have material adverse effects on the Company’sour future financial condition, results of operations and cash flows.
The Company has
We have exposure to insured A&E losses through itsour Mt. McKinley operation with respect to insurance policiesand reinsured A&E losses and through Everest Re with respect to reinsurance contracts.Re. In each case, the Company’sour management and analyses of itsour exposures take into account a number of features of itsour business that differentiate the Company’sour exposures from many other insurers and reinsurers that have significant A&E exposures.
Mt. McKinley began writing small amounts of A&E exposed insurance in 1975 and increased the volume of its writings in 1977.1978. These writings ceased in 1984, giving Mt. McKinley an approximate 10-year window of potential A&E exposure, which is appreciably shorter than is the case for many companies with significant A&E exposure. Additionally, due to changes in and standardization of policy forms, it is rare for policies in the 1970s and 1980s to have been issued without aggregate limits on the product liability coverage; policiescoverage. Policies issued in earlier decades were generally more likely to lack aggregate limits.
The vast majority of Mt. McKinley’s A&E exposed insurance policies are excess casualty policies, with aggregate coverage limits, which by definition also have protection afforded by underlying coverage.limits. Mt. McKinley’s attachment points vary but generally are excess of millions, often tens of millions, of dollars of underlying coverage. The excess nature of most of Mt. McKinley’s policies also offers insulation against “non-product” claims (for example, claims arising under general liability coverage). Although under some circumstances an excess policy could be exposed to non-product claims, such claims generally pose more of a risk to primary policies because non-product claims are generally less likely to aggregate. In addition, environmentalaggregate since each non-product claim is a separate loss; whereas for product claims, all claims related to a given product “aggregate” as one loss. Environmental claims arise under general liability coverage, and generally do not aggregate. Thus, these claims tend to create exposure for primary policies to a greater extent than excess policies.
Virtually all of the Mt. McKinley policies that are still potentially exposed to claims have policy language providing that expenses are covered only within limits rather than in addition to limits. This is a substantial difference from primary coverage, which would most often cover expenses in addition to limits.
Everest Re was formed in 1973 but was not fully engaged in underwriting casualty business, under which A&E exposures generally arise, until 1974, and it effectively eliminated A&E exposures beginning in 1984 through contract exclusions effected in 1984.exclusions. Therefore, Everest Re has an approximate 11-year window of A&E exposure, much shorter than that of many long established reinsurance companies that have significant A&E exposures.companies. In the earlier years of its existence, Everest Re was not as heavily involved in casualty business as inmainly wrote property business, which generally is not exposed to asbestos claims. Everest Re generally took smaller lines of exposure per contract than many other reinsurers operating in the casualty reinsurance market and those lines were generally also smaller than the excess limits provided by Mt. McKinley policies. This means that the potential adverse development on Everest Re’s reinsurance business is likely to be smaller than companies having greater exposures per risk. Everest Re reinsured both primary and excess policies. However, its claim experience to date indicates that the majority of its reinsuranceexposure was on excess policies. As a result, most of Everest Re’s exposure derives from excess policies, similar to those directly written by Mt. McKinley.
With respect to both the Mt. McKinley
Asbestos and Everest Re operations, the Company was not a member of the Asbestos Claims Facility (“Wellington”) or the Center for Claims Resolution (“CCR”) claim settlement facilities. Insurers supporting those facilities made broad commitments concerning the application of insurance coverage to asbestos claims. With respect to its direct insurance exposures, the fact that the Company has not made those commitments may allow it to resolve insurance exposure to Wellington/CCR insureds more economically than if it had joined these facilities. With respect to its reinsurance exposures, although the Company was not a signatory to the Wellington or CCR facilities, it issued reinsurance contracts to ceding companies that were signatories. Because the insurers supporting these facilities have generally paid their
77
exposures more quickly than non-signatory insurers, the Company believes that this has generally meant that it has paid its reinsurance exposure more quickly than it likely would have if it had not been subject to Wellington/CCR payments.
The Company believes that its Environmental Exposures.A&E exposures are uniquerepresent a separate exposure group for monitoring and differentiated, by the points noted above, from those insurers and reinsurers with appreciable A&E exposure but there can be no assurance that such factors will protect the Company from adverse development, perhaps material, or allow it to secure advantages in the settlement of its claims obligations.
evaluating reserve adequacy. The following table summarizes incurred losses and outstanding loss reserves with respect to A&E reserves on both a gross and net of retrocessions basis for the yearsperiods indicated:
| Asbestos and Environmental Reserves Years Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | 2006 | 2005 | 2004 | ||||||||
| Gross Basis: | |||||||||||
| Beginning of period reserves | $ | 649.5 | $ | 728.3 | $ | 765.3 | |||||
Incurred losses and LAE: | |||||||||||
| Reported losses | 87.9 | 110.2 | 297.1 | ||||||||
| Change in IBNR | 25.5 | (33.1 | ) | (125.4 | ) | ||||||
| Total incurred losses and LAE | 113.4 | 77.1 | 171.7 | ||||||||
| Paid losses | (112.7 | ) | (155.9 | ) | (208.7 | ) | |||||
| End of period reserves | $ | 650.1 | $ | 649.5 | $ | 728.3 | |||||
Net Basis: | |||||||||||
| Beginning of period reserves | $ | 450.4 | $ | 506.7 | $ | 534.4 | |||||
Incurred losses and LAE: | |||||||||||
| Reported losses | 81.6 | 102.3 | 271.8 | ||||||||
| Change in IBNR | 25.0 | (20.9 | ) | (112.4 | ) | ||||||
| Total incurred losses and LAE | 106.6 | 81.4 | 159.4 | ||||||||
| Paid losses | (45.5 | ) | (137.7 | ) | (187.1 | ) | |||||
| End of period reserves | $ | 511.4 | $ | 450.4 | $ | 506.7 | |||||
| (Some amounts may not reconcile due to rounding) | |||||||||||
| At December 31, | ||||
(Dollars in millions) | 2008 |
| 2007 |
| 2006 |
Gross Basis: |
|
|
|
|
|
Beginning of period reserves | $ 922.8 |
| $ 650.1 |
| $ 649.5 |
Incurred losses and LAE: |
|
|
|
|
|
Reported losses | 130.7 |
| 70.8 |
| 87.9 |
Change in IBNR | (130.7) |
| 334.2 |
| 25.5 |
Total incurred losses and LAE | - |
| 405.0 |
| 113.4 |
Paid losses | (136.0) |
| (132.3) |
| (112.7) |
End of period reserves | $ 786.8 |
| $ 922.8 |
| $ 650.1 |
|
|
|
|
|
|
Net Basis: |
|
|
|
|
|
Beginning of period reserves | $ 827.4 |
| $ 511.4 |
| $ 450.4 |
Incurred losses and LAE: |
|
|
|
|
|
Reported losses | 120.0 |
| 69.9 |
| 81.6 |
Change in IBNR | (120.0) |
| 317.6 |
| 25.0 |
Total incurred losses and LAE | - |
| 387.5 |
| 106.6 |
Paid losses | (78.3) |
| (71.6) |
| (45.5) |
End of period reserves | $ 749.1 |
| $ 827.4 |
| $ 511.4 |
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
|
|
|
|
At December 31, 2006,2008, the gross reserves for A&E losses were comprised of $135.6$161.0 million representing case reserves reported by ceding companies, $152.1$139.7 million representing additional case reserves established by the Companyus on assumed reinsurance claims, $213.7$133.8 million representing case reserves established by the Companyus on direct excess insurance claims, including Mt. McKinley, and $148.7$352.3 million representing IBNR reserves.
With respect to asbestos only, at December 31, 2008, we had gross asbestos loss reserves of $734.1 million, or 93.3%, of total A&E reserves, of which $533.2 million was for assumed business and $200.9 million was for direct business.
The Company incurred adverse developmentfollowing tables summarize reserve and claim activity on a gross and net of ceded reinsurance basis for our reinsurance and direct asbestos exposures:
Asbestos - Reinsurance | At December 31, | ||||
(Dollars in millions) | 2008 |
| 2007 |
| 2006 |
Gross Basis: |
|
|
|
|
|
Beginning of period reserves | $ 585.3 |
| $ 320.5 |
| $ 313.4 |
Incurred losses and LAE: |
|
|
|
|
|
Reported losses | 71.3 |
| 39.2 |
| 54.1 |
Change in IBNR | (71.3) |
| 265.8 |
| (2.7) |
Total incurred losses and LAE | - |
| 305.0 |
| 51.4 |
Paid losses | (52.2) |
| (40.2) |
| (44.3) |
End of period reserves | $ 533.2 |
| $ 585.3 |
| $ 320.5 |
|
|
|
|
|
|
Net Basis: |
|
|
|
|
|
Beginning of period reserves | $ 557.4 |
| $ 302.0 |
| $ 289.5 |
Incurred losses and LAE: |
|
|
|
|
|
Reported losses | 66.2 |
| 40.4 |
| 50.9 |
Change in IBNR | (66.2) |
| 255.6 |
| 3.6 |
Total incurred losses and LAE | - |
| 296.0 |
| 54.5 |
Paid losses | (49.1) |
| (40.6) |
| (42.0) |
End of period reserves | $ 508.2 |
| $ 557.4 |
| $ 302.0 |
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
|
|
|
|
Asbestos - Direct | At December 31, | ||||
(Dollars in millions) | 2008 |
| 2007 |
| 2006 |
Gross Basis: |
|
|
|
|
|
Beginning of period reserves | $ 273.6 |
| $ 260.5 |
| $ 255.5 |
Incurred losses and LAE: |
|
|
|
|
|
Reported losses | 51.6 |
| 23.2 |
| 36.6 |
Change in IBNR | (51.6) |
| 76.8 |
| 25.4 |
Total incurred losses and LAE | - |
| 100.0 |
| 62.0 |
Paid losses | (72.7) |
| (86.9) |
| (57.0) |
End of period reserves | $ 200.9 |
| $ 273.6 |
| $ 260.5 |
|
|
|
|
|
|
Net Basis: |
|
|
|
|
|
Beginning of period reserves | $ 205.9 |
| $ 140.4 |
| $ 75.8 |
Incurred losses and LAE: |
|
|
|
|
|
Reported losses | 46.6 |
| 21.8 |
| 33.8 |
Change in IBNR | (46.6) |
| 69.8 |
| 23.8 |
Total incurred losses and LAE | - |
| 91.6 |
| 57.6 |
Paid losses | (18.6) |
| (26.1) |
| 7.0 |
End of period reserves | $ 187.3 |
| $ 205.9 |
| $ 140.4 |
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
|
|
|
|
Ultimate loss projections for A&E liabilities cannot be accomplished using standard actuarial techniques. In 2007, we completed a detailed study of our asbestos experience and our cedants’ asbestos exposures and also considered industry trends. Our Claims Department undertook a contract by contract analysis of $113.4our direct business and projected those findings to our assumed reinsurance business. Our actuaries utilized nine methodologies to project our potential ultimate liabilities including projections based on internal data and assessments, extrapolations of non-public and publicly available data for our cedants and benchmarking against industry data and experience. As a result of the study, we increased our gross reinsurance asbestos reserves by $250.0 million and $77.1 million forour gross direct asbestos reserves by $75.0 million. Subsequent to the years ended December 31, 2006 and 2005, respectively. These increases arestudy, we have not experienced significant claims activity related to asbestos. We believe that our A&E reserves represent our best estimate of the result of re-evaluationsultimate liability, however, there can be no assurance that ultimate loss payments will not exceed such reserves, perhaps by management ofa significant amount. No additional information received from insureds and ceding companies, ongoing litigation, additional claims received and settlement activity. Management closely monitors this additional information and adjusts reserves accordingly.reserve strengthening was made in 2008.
Industry analysts have developed a measurement, known asuse the survival ratio,“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
78
years that it would take to exhaust the current reserves based onif future loss payments were to continue at historical payment levels. Using this measurement, the Company’sour net three year A&Easbestos survival ratio was 4.12.8 years for direct business and 11.6 years for reinsurance business at December 31, 2006. Adjusting2008. From a comparison perspective, A.M. Best published survival ratios as of December 31, 2007, the latest available information, of 8.2 years for the effect ofoverall insurance industry and 13.6 years for the reinsurance ceded under the reinsurance agreement with LM, this ratio rises to the equivalent of 5.0 years at December 31, 2006. The cession of $100.9 million to the stop loss reinsurance provided by LM in connection with the acquisition of Mt. McKinley results in unpaid proceeds that are not reflected in past net payments and effectively extends the funding available for future net payments.sector.
Because the survival ratio was developed as a comparative measure of reserve strength and does not ofindicate absolute reserve adequacy, the Company considers,we consider, but doesdo not rely on, the survival ratio when evaluating itsour reserves. In particular, the Company noteswe note that year to year loss payment variability can be material. This is due, in part, to the Company’sour orientation to negotiated settlements, particularly on itsour Mt. McKinley exposures, which significantly impairsreduces the credibility and utility of this measure as an analytical tool. During 2006, the Company2008, we made asbestos net claim payments of $16.6$46.2 million to Mt McKinley high profile claimants where the claim was either closed or a settlement washad been reached. Such payments, which are non-repetitive, distort the Company’sdownward our three year survival ratio for 20062008 and will continue to do so for 20072009 and 2008.2010. Adjusting for such settlements, recognizing that total settlements are generally considered fully reserved to an agreed settlement, the Company considerswe consider that itsour adjusted A&Easbestos survival ratio for net unsettled claims is 7.79.2 years, which is closer to prevailing industry norms.
Developments in 2006 and 2005 affecting asbestos exposures in general and
Shareholders’ Equity.Our shareholders’ equity decreased to $4,960.4 million as of December 31, 2008 from $5,684.8 million as of December 31, 2007. This decrease was the Company’s asbestos exposures in particular, together with enhancements in the Company’s claim management and analytical processes, resulted in the reserve strengthening noted earlier. These developments and actions have increased the emphasisresult of unrealized depreciation on asbestos exposures as a separate component of the Company’s A&E exposures. Despite the Company’s approach of handling A&E exposures on a combined basis, management believes additional disclosure of the asbestos element of its A&E exposures is appropriate.
The following tables summarize reserve and claim activity for asbestos claims, gross andinvestments, net of ceded reinsurance,tax, of $236.6 million, $193.3 million of foreign currency translation adjustments, the repurchase of 1.6 million common shares for the periods indicated with particular emphasis$150.7 million, $118.6 million of shareholder dividends and a net loss of $18.8 million, partially offset by $18.7 million of additional paid in capital on the differentiation of insured categories within the Mt. McKinley operation, which the Company believes reflects the most volatile element of its asbestos exposures for the years ended December 31:share-based compensation transactions.
79
| Gross Asbestos Exposures (1) | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | 2006 | 2005 | 2004 | ||||||||
| Beginning of period reserves: | |||||||||||
| Direct Operations (Mt. McKinley) | |||||||||||
| Settlements in place ("SIP") (2) | $ | 130.6 | $ | 125.2 | $ | 110.1 | |||||
| Actively managed (3) | - | - | - | ||||||||
| Remaining high profile insureds | 55.4 | 110.8 | 98.8 | ||||||||
| Other direct exposures | 39.9 | 12.5 | 11.9 | ||||||||
| Incurred by not reported ("IBNR") | 29.6 | 70.8 | 187.0 | ||||||||
| 255.5 | 319.3 | 407.8 | |||||||||
| Reinsurance Operations (Everest Re) | |||||||||||
| Case reserves | 252.7 | 262.7 | 196.1 | ||||||||
| IBNR | 60.7 | 50.3 | 48.9 | ||||||||
| 313.4 | 313.0 | 244.9 | |||||||||
| Total beginning of period reserves | 568.9 | 632.3 | 652.7 | ||||||||
| Incurred losses and LAE: | |||||||||||
| Direct Operations (Mt. McKinley) | |||||||||||
| SIP settlements in place (2) | (1.9 | ) | 80.1 | 163.1 | |||||||
| Actively managed (3) | - | - | - | ||||||||
| Remaining high profile insureds | 33.7 | (50.4 | ) | 19.7 | |||||||
| Other direct exposures | 4.9 | 41.7 | 1.6 | ||||||||
| IBNR | 25.4 | (41.2 | ) | (116.2 | ) | ||||||
| 62.0 | 30.2 | 68.2 | |||||||||
| Reinsurance Operations (Everest Re) | |||||||||||
| Reported Losses | 54.1 | 36.4 | 102.1 | ||||||||
| IBNR | (2.7 | ) | 10.4 | 1.5 | |||||||
| 51.4 | 46.8 | 103.6 | |||||||||
| Total incurred losses and LAE | 113.4 | 77.0 | 171.7 | ||||||||
| Paid losses: | |||||||||||
| Direct Operations (Mt. McKinley) | |||||||||||
| SIP settlements in place (2) | 18.7 | 74.7 | 148.0 | ||||||||
| Actively managed (3) | - | - | - | ||||||||
| Remaining high profile insureds | 34.9 | 5.0 | 7.7 | ||||||||
| Other direct exposures | 3.5 | 14.3 | 1.0 | ||||||||
| 57.1 | 94.0 | 156.7 | |||||||||
| Reinsurance Operations (Everest Re) | 44.3 | 46.4 | 35.4 | ||||||||
| Total paid losses | 101.4 | 140.4 | 192.1 | ||||||||
| End of period reserves: | |||||||||||
| Direct Operations (Mt. McKinley) | |||||||||||
| SIP settlements in place (2) | 110.0 | 130.6 | 125.2 | ||||||||
| Actively managed (3) | - | - | - | ||||||||
| Remaining high profile insureds | 54.2 | 55.4 | 110.8 | ||||||||
| Other direct exposures | 41.3 | 39.9 | 12.5 | ||||||||
| IBNR | 54.9 | 29.6 | 70.8 | ||||||||
| 260.5 | 255.5 | 319.3 | |||||||||
| Reinsurance Operations (Everest Re) | |||||||||||
| Case reserves | 262.6 | 252.7 | 262.7 | ||||||||
| IBNR | 57.9 | 60.7 | 50.3 | ||||||||
| 320.5 | 313.4 | 313.0 | |||||||||
| Total end of period reserves | $ | 581.0 | $ | 568.9 | $ | 632.3 | |||||
| ______________ (1) Some totals may not reconcile due to rounding. | |||||||||||
| (2) Under SIP agreements, payments depend upon the insured's actual claims experience and may be subject to annual caps or other controls on the rate of payment. | |||||||||||
| (3) Actively Managed means that Mt. McKinley is managing the defense of claims against the insured. | |||||||||||
3 Year Survival Ratio | 4.0 | ||||||||||
| 3 Year Survival Ratio excluding SIP and actively managed | 7.3 | ||||||||||
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| Net Asbestos Exposures (1) | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | 2006 | 2005 | 2004 | ||||||||
| Beginning of period reserves: | |||||||||||
| Direct Operations (Mt. McKinley) | |||||||||||
| Settlements in place ("SIP") (2) | $ | 120.1 | $ | 111.4 | $ | 99.3 | |||||
| Actively managed (3) | - | - | - | ||||||||
| Remaining high profile insureds | 53.0 | 104.6 | 89.7 | ||||||||
| Losses Ceded to LM | (160.0 | ) | (160.0 | ) | (160.0 | ) | |||||
| Other direct exposures | 35.4 | 11.4 | 9.4 | ||||||||
| IBNR | 27.3 | 63.8 | 165.3 | ||||||||
| 75.8 | 131.2 | 203.7 | |||||||||
| Reinsurance Operations (Everest Re) | |||||||||||
| Case reserves | 241.1 | 245.6 | 183.5 | ||||||||
| IBNR | 48.4 | 31.0 | 32.7 | ||||||||
| 289.5 | 276.6 | 216.2 | |||||||||
| Total beginning of period reserves | 365.3 | 407.8 | 419.9 | ||||||||
| Incurred losses and LAE: | |||||||||||
| Direct Operations (Mt. McKinley) | |||||||||||
| SIP settlements in place (2) | (2.1 | ) | 76.7 | 146.3 | |||||||
| Actively managed (3) | - | - | - | ||||||||
| Remaining high profile insureds | 30.7 | (46.9 | ) | 22.1 | |||||||
| Losses Ceded to LM | - | - | - | ||||||||
| Other direct exposures | 5.3 | 35.1 | 3.1 | ||||||||
| IBNR | 23.8 | (36.5 | ) | (101.6 | ) | ||||||
| 57.6 | 28.4 | 69.9 | |||||||||
| Reinsurance Operations (Everest Re) | |||||||||||
| Reported Losses | 50.9 | 35.6 | 91.8 | ||||||||
| IBNR | 3.6 | 17.4 | (1.7 | ) | |||||||
| 54.5 | 53.0 | 90.1 | |||||||||
| Total incurred losses and LAE | 112.1 | 81.4 | 160.0 | ||||||||
| Paid losses: | |||||||||||
| Direct Operations (Mt. McKinley) | |||||||||||
| SIP settlements in place (2) | 16.6 | 68.0 | 134.3 | ||||||||
| Actively managed (3) | - | - | - | ||||||||
| Remaining high profile insureds | 32.0 | 4.7 | 7.0 | ||||||||
| Pru Pac cession | (59.1 | ) | |||||||||
| Other direct exposures | 3.4 | 11.1 | 1.1 | ||||||||
| (7.0 | ) | 83.8 | 142.4 | ||||||||
| Reinsurance Operations (Everest Re) | 42.0 | 40.1 | 29.7 | ||||||||
| Total paid losses | 35.0 | 123.9 | 172.1 | ||||||||
| End of period reserves: | |||||||||||
| Direct Operations (Mt. McKinley) | |||||||||||
| SIP settlements in place (2) | 101.3 | 120.1 | 111.4 | ||||||||
| Actively managed (3) | - | - | - | ||||||||
| Remaining high profile insureds | 51.6 | 53.0 | 104.6 | ||||||||
| Losses Ceded to LM | (100.9 | ) | (160.0 | ) | (160.0 | ) | |||||
| Other direct exposures | 37.3 | 35.4 | 11.4 | ||||||||
| IBNR | 51.1 | 27.3 | 63.8 | ||||||||
| 140.4 | 75.8 | 131.2 | |||||||||
| Reinsurance Operations (Everest Re) | |||||||||||
| Case reserves | 250.0 | 241.1 | 245.6 | ||||||||
| IBNR | 52.0 | 48.4 | 31.0 | ||||||||
| 302.0 | 289.5 | 276.6 | |||||||||
| Total end of period reserves (4) | $ | 442.4 | $ | 365.3 | $ | 407.8 | |||||
| ______________ (1) Some totals may not reconcile due to rounding. | |||||||||||
| (2) Under SIP agreements, payments depend upon the insured's actual claims experience and may be subject to annual caps or other controls on the rate of payment. | |||||||||||
| (3) Actively Managed means that Mt. McKinley is managing the defense of claims against the insured. | |||||||||||
| (4) Includes $232.0 million ceded to and collected from The Prudential as part of the Company's stop loss protection resulting from the initial public offering in 1995. | |||||||||||
3 Year Survival Ratio | 4.0 | ||||||||||
| 3 Year Survival Ratio excluding stop loss | 4.9 | ||||||||||
| 3 Year Survival Ratio excluding SIP, actively managed & stop loss | 7.7 | ||||||||||
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The Company’s net three year survival ratio on its asbestos exposures only was 4.0 years for the period ended December 31, 2006. This three year survival ratio, when adjusted for the effect of the reinsurance ceded under the stop loss cover from LM, was 4.9 years and, when adjusted for settlements in place and structured settlements, which are either fully funded by reserves or subject to financial terms that substantially limit the potential variability in the liability, and the stop loss protection from LM, was 7.7 years.
SHAREHOLDERS’ EQUITY.The Company’s shareholders’ equity increased to $5,684.8 million as of December 31, 2007 from $5,107.7 million as of December 31, 2006, from $4,139.7 million as of December 31, 2005, principally reflecting $840.8due to $839.3 million of net income for 2006, a $54.1 million increase due to net currency translation, a $38.6 million increase in net share-based compensation activity and a $88.3 million increase in net unrealized appreciation on investments,the twelve months ended December 31, 2007, partially offset by $39.0the repurchase of 2.5 million common shares for $241.6 million and $121.4 million of shareholder dividends and an increase of $15.0 million in accumulated other comprehensive income due to FAS 158 for pensions. The Company’s shareholders’ equity increased to $4,139.7 million as of December 31, 2005 from $3,712.5 million as of December 31, 2004, principally reflecting $758.2 million in net proceeds from the issuance of common shares, partially offset by $218.7 million of net loss for 2005, a $27.0 million decrease in net currency translation, a $77.8 million decrease in net unrealized appreciation on investments, $25.4 million shareholder dividends and an increase of $2.9 million in the minimum pension liability.dividends.
LIQUIDITY AND CAPITAL RESOURCESCAPITAL. The Company’s
Capital.Our business operations are in part dependent on the Company’sour financial strength and financial strength ratings, and the market’s perception thereof,of our financial strength, as measured by shareholders’ equity, which was $5,107.7$4,960.4 million and $4,139.7$5,684.8 million at December 31, 20062008 and 2005,2007, respectively. The Company possessesWe possess significant financial flexibility and access to the debt and equity markets as a result of itsour perceived financial strength, as evidenced by the financial strength ratings as assigned by independent rating agencies. The Company continuously monitors itsDuring the last six months of 2008, the capital markets have been illiquid in reaction to the deepening credit crisis which has led to bank and other financial institution failures and effective failures. Credit spreads have soared and the equity markets have declined significantly during this period making access to the capital
markets, for even highly rated companies, difficult and costly. Our capital position as well as investment and security market conditions and responds accordingly.remains strong, commensurate with our financial ratings. We have ample liquidity to meet our financial obligations for the foreseeable future. Therefore, we have no foreseeable need to tap the capital markets in the near term.
From time to time, the Company haswe have used open market share repurchases to effectively adjust itsour capital position. In September 2004, the Company’sposition and enhance long term expected returns to our shareholders. On July 21, 2008, our existing authorization to purchase itsup to 5 million of our shares was amended to authorize the repurchasepurchase of up to 510 million shares. It made no such purchases in 2006 or in 2005. The Company notes that, outsideAs of its open market repurchase program, it repurchased 21,384 shares in 2006 and 10,430 shares in 2005 from employees in connection with restricted share vestings where individual employees chose to discharge withholding tax liabilities on vesting shares by the surrender of a portion of such shares. In 2005, 328 shares were surrendered from a non-employee in connection with payment of the option exercise price. At December 31, 2006, there remained 52008, we had repurchased 4.2 million shares under the repurchasethis authorization.
On December 1, 2005, the Company filed a17, 2008, we renewed our shelf registration statement on Form S-3S-3ASR with the SEC, as a Well Known Seasoned Issuer under the new registration and offering revisions to the Securities Act of 1933. Generally, under thisIssuer. This shelf registration statement can be used by Group is authorized to issueregister common shares, preferred shares, debt securities, warrants, share purchase contracts and hybrid securities,share purchase units; by Holdings is authorized to issueregister debt securities and by Everest Re Capital Trust III (“Capital Trust III”) is authorized to issueregister trust preferred securities.
On June 27, 2003, the Company filed a shelf registration statement on Form S-3 with the SEC, providing for the issuance of up to $975.0 million of securities. Generally, under this shelf registration statement, Group was authorized to issue common shares, preferred shares, debt securities, warrants and hybrid securities, Holdings was authorized to issue debt securities and Capital Trust II and Capital Trust III were authorized to issue trust preferred securities. This shelf registration statement became effective on December 22, 2003 and was
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exhausted with the October 6, 2005 transaction described below. The following securities were issued issued pursuant to that registration statement.
On March 14, 2000, Holdings completed a public offering of $200.0 million principal amount of 8.75% senior notes due March 15, 2010 and $250.0 million principal amount of 8.50% senior notes due and retired March 15, 2005. During 2000, the net proceeds of these offerings and additional funds were distributed by Holdings to Group.
LIQUIDITY. The Company’sLiquidity.Our principal investment objectives are to ensure funds are available to meet itsour insurance and reinsurance obligations and to maximize after-tax investment income while maintaining a high quality diversified investment portfolio. Considering these objectives, the Company views itswe view our investment portfolio as having two components; 1) the investments needed to satisfy outstanding liabilities and 2) investments funded by the Company’sour shareholders’ equity.
For the portion needed to satisfy outstanding liabilities, the Company investswe invest in taxable and tax-preferenced fixed income securities with an average credit quality of Aa,Aa2, as rated by the independent investment rating service of Moody’s. The Company’sOur mix of taxable and tax-preferenced investments is adjusted continuously,periodically, consistent with the Company’sour current and projected operating results, market conditions and the Company’sour tax position. This fixed maturity portfolio is externally managed by an independent, professional investment manager using portfolio guidelines approved by the Company.us.
Over the past few years, the Company haswe had reallocated its shareholders’our equity investment portfolio to include 1) publicly traded equity securities primarily exchange traded funds, and 2) private equity limited partnership investments. The objective of this portfolio diversification iswas to enhance the risk-adjusted total return of the investment portfolio by allocating a prudent portion of the portfolio to higher return asset classes. The Company hasWe had limited itsour 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. As a result of the concomitant decline in equity values slowdown in the global economy and the liquidity crisis affecting the financial markets, we significantly reduced our exposure to public equities during the fourth quarter of 2008 and correspondingly increased our holdings in short-term investments during the fourth quarter. At December 31, 2006,2008, the market or fair value of investments in equity and limited partnership securities approximated 40%16% of shareholders’ equity.
The Company’s
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
83
investment income provides additional funding for loss payments. The Company’sOur net cash flows from operating activities were $663.0 million, $854.4 million and $636.3 million $1,070.6 million and $1,490.9 millionforfor the years ended December 31, 2006, 20052008, 2007 and 2004,2006, respectively. Additionally, these cash flows reflected net tax payments of $46.6$11.0 million, $110.9$282.6 million and $100.0$46.6 million for the years ended December 31, 2006, 20052008, 2007 and 2004,2006, respectively; net catastrophe loss payments of $896.5$290.5 million, $459.7$443.1 million and $200.9$896.5 million for the years ended December 31, 2006, 20052008, 2007 and 2004,2006, respectively; and net A&E settlementspayments of $45.5$78.3 million, $137.7$71.6 million and $187.1$45.5 million for the years ended December 31, 2008, 2007 and 2006, 2005 and 2004, respectively. The decrease in net cash flows from operations in 2006 compared with 2005 was primarily due to higher claim payments on catastrophes. The decrease in net cash flows from operations in 2005 compared with 2004 was primarily due to higher claim payments on catastrophes combined with lower premium volume.
If disbursements for claims and benefits, policy acquisition costs and other operating expenses were to exceed premium inflows, cash flow from 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 flowinflows from investment maturities and dispositions, both short termshort-term investments and longer term maturities would further mitigate the impact on totalare available to supplement other operating cash flow.flows.
As the timing of payments for claims and benefits cannot be predicted with certainty, the Company maintainswe 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, 20062008 and December 31, 2005 the Company2007, we held cash and short-term investments of $1,556.4$2,095.5 million and $1,551.0$2,476.3 million, respectively. All of our short-term investments are readily marketable and can be converted to cash. In addition to these cash and short-term investments at December 31, 2006, the Company2008, we had $0.6 billion, at fair value,$606.4 million of available for sale fixed maturity securities maturing within one year or less, $2.5 billion$2,605.8 million maturing within one to five years and $7.2 billion$5,669.0 million maturing after five years. The Company’s $1.6 billionOur $136.7 million of equity securities are comprised primarily of publicly traded securities that can be easily liquidated. TheseWe believe that these fixed maturity and equity securities, in conjunction with the short-term investments and positive cash flow from operations, provide adequateample sources of liquidity for the expected payment of losses in the near future. The Company doesWe do not anticipate selling securities or using available credit facilities to pay losses and LAE but hashave the ability to do so. Sales of securities might result in realized capital gains or losses and the Company notes that at December 31, 2006 it2008 we had $471.7$178.4 million of net pre-tax unrealized appreciation,depreciation, comprised of $594.5$612.1 million of pre-tax unrealized appreciationdepreciation and $122.8$433.7 million of pre-tax unrealized depreciation.appreciation.
Management expects the trend ofannual positive cash flow from operations, which in general reflects the strength of overall pricing, to persist over the near term; however, cashflow from operations will continue to be negatively impacted by the payout ofterm, absent any unusual catastrophe loss reserves.activity. In the intermediate and long term, the trendour cash flow from operations will be impacted by the extent to which competitive pressures affect overall pricing in the Company’sour markets and the extent to which the Company successfully maintains itsour premium receipts are impacted by our strategy of emphasizing underwriting profitability.profitability over premium volume.
Effective December 8, 2004,July 27, 2007, Group, Bermuda Re and Everest International entered into a threenew five year, $750.0$850.0 million senior credit facility with a syndicate of lenders, (the “Groupreplacing the December 8, 2004, senior credit facilities, which would have expired on December 8, 2007. Both the July 27, 2007 and December 8, 2004 senior credit facilities are referred to as the ��Group Credit Facility”). Wachovia Bank, a subsidiary of Wells Fargo Corporation (“Wachovia Bank”), is the administrative agent for the Group Credit Facility. The Group Credit Facility, which consists of two tranches. Tranche one provides up to $250.0$350.0 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, of each of the borrowers, 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 of interest established by Wachovia Bank from time to time as its prime rate or (b) the Federal Funds rate, in each caseRate plus 0.5% per annum. The amount of margin and the fees payable for the Group Credit Facility dependdepends on Group’s senior unsecured debt rating. Tranche two exclusively provides up to $500.0 million for the issuance of collateralized standby letters of credit.credit on a collateralized basis.
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 (i) $2,898.0$3,575.4 million (base
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amount) plus (ii) (A) 25% of consolidated net income for each of Group’s fiscal quarters, for which statements are available ending on or after January 1, 2007 and (B) 50%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. The base amount is resetshares, which at the end of each fiscal year to be the greater of 70% of Group’s consolidated net worth as of the last day of the fiscal year and the calculated minimum amount of net worth prior to the last day of the fiscal year.December 31, 2008, was $3,856.5 million. As of December 31, 2006,2008, the Company was in compliance with theseall Group Credit Facility covenants.
During the year ended
At December 31, 2006,2008, there were no outstanding borrowingsletters of credit under tranche one and $411.9 million issued under tranche two of the Group Credit Facility. As ofAt December 31, 2006, $185.42007, there were outstanding letters of credit of $22.0 million of the $500.0and $288.0 million available forunder tranche one and tranche two of standby letters of credit was used. In addition, the Company had $274.6 million in letters of credit outstanding at December 31, 2006 under a $350.0 million bilateral agreement with Citibank. All of these letters of credit are collateralized by the Company’s cash and investments. These letters of credit are generally used to collateralize reinsurance assumed by Bermuda Re from jurisdictions where collateralization is generally required for the ceding company to receive financial statement credit for such reinsurance recoverables from its principal regulator. Bermuda Re and Everest International also used trust arrangements to provide collateralization to ceding companies, including affiliates. The Company generally avoids providing collateral except where required for ceding companies to receive credit from their regulators. Additionally, at December 31, 2006, $135.7 million of assets were deposited in trust accounts, primarily on behalf of Bermuda Re, as security for assumed losses payable to certain non-affiliated ceding companies.Group Credit Facility, respectively.
Effective August 23, 2006, Holdings entered into a new five year, $150.0 million senior revolving credit facility with a syndicate of lenders, replacing the October 10, 2003 three year senior revolving credit facility, which expired on October 10, 2006. Both the August 23, 2006 and October 10, 2003 senior revolving credit agreements, which have similar terms, are referred to as the “Holdings Credit Facility”. Citibank N.A. is the administrative agent for the Holdings Credit Facility. The Holdings Credit Facility ismay be used for liquidity and general corporate purposes. The Holdings Credit Facility provides for the borrowing of up to $150.0 million with interest at a rate selected by Holdings equal to either, (1) the Base Rate (as defined below) or (2) a periodic fixed rate equal to the Eurodollar Rate plus an applicable margin. The Base Rate means a fluctuating interest rate per annum in effect from time to time to be equal to the higher of (a) the rate of interest publicly
announced by Citibank as its prime rate or (b) 0.5% per annum above the Federal Funds Rate, in each case plus the applicable margin. The amount of margin and the fees payable for the Holdings Credit Facility depends upon Holdings’ senior unsecured debt rating.
The Holdings Credit Facility requires Holdings to maintain a debt to capital ratio of not greater than 0.35 to 1 and Everest Re to maintain its statutory surplus at $1.5 billion plus 25% of future aggregate net income and 25% of future aggregate capital contributions after December 31, 2005.2005, which at December 31, 2008, was $1,821.1 million. As of December 31, 2006,2008, Holdings was in compliance with these covenants.
As of December 31, 2006 and 2005, there were no outstandingall Holdings Credit Facility borrowings.covenants.
Interest expense
At December 31, 2008 and fees2007, there were outstanding letters of credit of $28.0 million and $17.2 million, respectively, under the Holdings Credit Facility.
Costs incurred in connection with the Group Credit Facility and the Holdings Credit Facility were $0.4$1.3 million and $1.4 million for the years ended December 31, 20062008 and 2005. Interest expense and fees incurred in connection with the Holdings Credit Facility was $1.2 million for the year ended December 31, 2004.2007, respectively.
EXPOSURE TO CATASTROPHES.Exposure to Catastrophes.Like other insurance and reinsurance companies, the Company iswe are exposed to multiple insured losses arising out of a single occurrence, whether a natural event, such as a hurricane or an earthquake, or other catastrophe, such as an explosion at a major factory. A large catastrophic event can be expected to generate insured losses to multiple reinsurance treaties, facultative certificates and across lines of business.
The Company focuses
We focus on potential losses that could result from any single event, or series of events as part of itsour evaluation and monitoring of itsour aggregate exposures to catastrophic events. Accordingly, the Company employs
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we employ various techniques to estimate the amount of loss itwe could sustain from any single catastrophic event in various geographic areas. These techniques range from non-modeled deterministic approaches—approaches, such as tracking aggregate limits exposed in catastrophe-pronecatastrophe prone zones and applying historic damage factors—factors, to modeled approaches that scientifically measure catastrophe risks using sophisticated Monte Carlo simulation techniques that forecast frequency and severity of expected losses on a probabilistic basis.
No single universal model is currentycurrently capable of projecting the amount and probability of loss in all global geographic regions in which the Company conductswe conduct business. In addition, the form, quality and granularity of underwriting exposure data furnished by ceding companies is not uniformly compatible with the data requirements for the Company’sour 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 and interpolated to estimate potential losses by and across business units. The combination of techniques potentially adds to the imprecision of the Company’sour estimates. Also, while most models have been updated in 2006 to better incorporate factors that contributed to unprecedented industry storm losses in 2004 and 2005, such as flood, storm surge and demand surge, catastrophe model projections are inherently imprecise. In addition, uncertainties with respect to future climatic patterns and cycles add to the already significant uncertainty of loss projections from models using historic long-termlong term frequency and severity data.
Nevertheless, when combined with traditional risk management techniques and sound underwriting judgment, catastrophe models are a useful tool for underwriters to price catastrophe exposed risks and for providing management with quantitative analyses with which to monitor and manage catastrophic risk exposures by zone and across zones for individual and multiple events.
Projected catastrophe losses are generally summarized in terms of the PML. The Company definesWe define PML as its anticipated loss, taking into account contract terms and limits, caused by a single catastrophe affecting a broad contiguous geographic area, such as that caused by a hurricane or earthquake. The PML will vary depending upon the severity of 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 corresponds to the estimated loss from a single event which has a 1% probability of being exceeded in a twelve month period. Conversely, it corresponds to a 99% probability that the loss from a single event will fall below the indicated PML. It is important to notes 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.
From aan enterprise risk management perspective, management sets limits on the Company endeavorslevels of catastrophe loss exposure we may underwrite. The limits are revised periodically based on a variety of factors, including but not limited to manage its catastrophe risk profile suchour financial resources and expected earnings and risk/reward analyses of the business being underwritten.
Management estimated that the projected economic loss from its largest 100-year event does not exceed approximately $500 million.10% of its projected 2009 shareholders’ equity. Economic loss is viewed as the gross PML loss reduced by estimated reinstatement premiums to renew coverage and 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 processes.decisions.
The Company’s
Our catastrophe loss projections, segmented by risk zones, are updated quarterly and reviewed as part of a formal risk management review process.
The Company believes
We believe that itsour greatest worldwide 1 in 100 year exposure to a single catastrophic event is to a hurricane affecting the U.S. southeast coast, where the Company estimates it haswe estimate we have a gross PML exposure of $777$845 million. See also table under “RiskITEM 1, “Business - Risk Management of Underwriting and Retrocession Arrangements”.
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If such a single catastrophe loss were to occur, management estimates that the economic loss to the Companyus would be approximately $471$534 million. The impact represents approximately 9% of the Company’s beginning of year capital. 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.
The Company
We may purchase reinsurance to cover specific business written or the potential accumulation or aggregation of exposures across some or all of the Company’sour operations. Reinsurance purchasing decisions consider both the potential coverage and market conditions including the pricing, terms, conditions and availability of coverage, with the aim of securing cost effective protection. The amount of reinsurance purchased has varied over time, reflecting the Company’sour view of itsour exposures and the cost of reinsurance.
For 2004, 2005 and thus far in 2006, the Company has
We have not recently purchased corporate retrocessional protection and hashave generally de-emphasized the purchase of specific reinsurance by itsour underwriters, reflecting the Company’sour view that itsour exposures, in the context of itsour capital, financial position and current market pricing, do not warrant reinsurance purchases at current price levels. For 1999, 2000 and 2001, the Company purchased accident year aggregate excess of loss retrocession coverage, which provided up to $175.0 million of recoveries per accident year if Everest Re’s consolidated statutory basis accident year loss ratio exceeded a loss ratio attachment point provided in the contract for the respective accident years. Each arrangement provided for an adjustment premium, which reduced the net benefit by approximately 50%, in the event that the coverage was used. The limit has been fully utilized and there are no remaining limits available under these agreements. See ITEM 1, “Business —- Risk Management of Underwriting and Retrocession Arrangements” for further details.
CONTRACTUAL OBLIGATIONS.Contractual Obligations.The following table shows the Company’sour contractual obligations for the year ended December 31, 2006:period indicated:
| (Dollars in millions) | Payments due by period | ||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Contractual obligations | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | ||||||||||||
| 8.75% Senior notes | $ | 200.0 | $ | - | $ | - | $ | 200.0 | $ | - | |||||||
| 5.4% Senior notes | 250.0 | - | - | - | 250.0 | ||||||||||||
| Junior subordinated debt | 546.4 | - | - | - | 546.4 | ||||||||||||
| Interest expense | 1,138.5 | 67.3 | 134.7 | 108.4 | 828.1 | ||||||||||||
| Employee benefit plans | 4.0 | 4.0 | - | - | - | ||||||||||||
| Operating lease agreements | 32.6 | 7.7 | 14.9 | 8.4 | 1.6 | ||||||||||||
| Gross reserve for losses and LAE (1) | 8,840.0 | 2,156.7 | 3,108.0 | 939.4 | 2,636.0 | ||||||||||||
| Total | $ | 11,011.5 | $ | 2,235.7 | $ | 3,257.6 | $ | 1,256.2 | $ | 4,262.1 | |||||||
(1) Loss and LAE reserves represent the Company’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 outflows uncertain. Therefore, the ultimate amount and timing of loss and LAE payments could differ from the Company’s
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(Dollars in millions) |
| Total |
| 1 year |
| 1-3 years |
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| 5 years |
8.75% Senior notes | $ 200.0 |
| $ - |
| $ 200.0 |
| $ - |
| $ - | |
5.40% Senior notes | 250.0 |
| - |
| - |
| - |
| 250.0 | |
Junior subordinated debt | 329.9 |
| - |
| - |
| - |
| 329.9 | |
6.6% Long term notes | 400.0 |
| - |
| - |
| - |
| 400.0 | |
Interest expense (1) | 2,152.6 |
| 77.2 |
| 128.2 |
| 119.5 |
| 1,827.7 | |
Employee benefit plans | 5.1 |
| 5.1 |
| - |
| - |
| - | |
Operating lease agreements | 93.6 |
| 8.6 |
| 17.8 |
| 16.4 |
| 50.8 | |
Gross reserve for losses and LAE (2) | 8,840.7 |
| 1,806.5 |
| 3,218.8 |
| 1,064.5 |
| 2,750.9 | |
Total |
| $ 12,271.9 |
| $ 1,897.4 |
| $ 3,564.8 |
| $ 1,200.4 |
| $ 5,609.3 |
|
|
|
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
|
|
|
|
|
|
| ||
_________________
(1) | Interest expense on 6.6% long term notes is assumed to be fixed through contractual term. |
(2) | Loss and LAE reserves represent our 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. |
The contractual obligations for senior notes, long term notes and junior subordinated debt are the responsibility of Holdings. The Company hasWe have sufficient cash flow, liquidity, investments and access to capital markets to satisfy these obligations,obligations. Holdings generally depends for its funding upon dividends from Everest Re, its operating insurance subsidiary for its funding, capital contributions from Group or access to the capital markets. The Company’sOur various operating insurance and reinsurance subsidiaries have sufficient cash flow, liquidity and investments to settle outstanding reserves for losses and LAE. Management believes that the Company,we, and each of itsour entities, have sufficient financial resources or ready access thereto, to meet all obligations.
87
DIVIDENDSDividends.
During 2008, 2007 and 2006, 2005 and 2004, the Companywe declared and paid shareholder dividends of $39.0$118.6 million, $25.4$121.4 million and $22.4$39.0 million, respectively. As an insurance holding company, the Company iswe are partially dependent on dividends and other permitted payments from itsour subsidiaries to pay cash dividends to itsour shareholders. The payment of dividends to Group by Holdings and to Holdings by Everest Re is subject to Delaware regulatory restrictions and the payment of dividends to Group by Bermuda 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 and Bermuda Re will have the ability to declare and pay dividends sufficient to support Group’s general corporate needs. For the years ended December 31, 2006, 20052008, 2007 and 2004,2006, Everest Re paid dividends to Holdings of $100.0$285.0 million, $75.0$245.0 million and $70.0$100.0 million, respectively. For the years ended December 31, 2006, 20052008, 2007 and 2004,2006, Bermuda Re paid dividends to Group of $60.0$120.0 million, $45.0$0.0 million and $15.0$60.0 million, respectively. See ITEM 1, “Business – Regulatory Matters – Dividends” and ITEM 8, “Financial Statements and Supplementary Data” - Note 14A16 of Notes to Consolidated Financial Statements.
APPLICATION OF NEW ACCOUNTING STANDARDSApplication of New Accounting Standards.
In December 2004, theJuly 2006, Financial Accounting Standards Board (“FASB”) issued Statement 123(R) “Share-Based Payment” (“FAS 123(R)”), which is effective for fiscal years beginning after June 15, 2005. The Company adopted FAS 123(R) effective January 1, 2006. FAS 123(R) requires all share-based compensation awards, granted, modified or settled after December 15, 1994 to be accounted for using the fair value method of accounting. Under the modified prospective application, compensation cost is recognized for the outstanding, non-vested awards based on the grant date fair value of those awards as calculated under Statement of Financial Accounting Standards No. 123 “Accounting for Stock-Based Compensation” (“FAS 123”). The Company implemented FAS 123 prospectively for grants issued on or after January 1, 2002. The adoption of FAS 123(R) resulted in $169,037 of additional compensation expense for the year ended December 31, 2006 for options granted prior to FAS 123.
In November 2005, the FASB issued FASB Staff Position (“FSP”) FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FAS 115-1”), which is effective for reporting periods beginning after December 15, 2005. FAS 115-1 addresses the determination of when an investment is considered impaired, whether the impairment is other than temporary and the measurement of an impairment loss. FAS 115-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses not recognized as other-than-temporary impairments. The Company adopted FAS 115-1 prospectively effective January 1, 2006. The Company believes it has appropriately recorded realized losses for all securities owned that have experienced an other-than-temporary impairment, and all unrealized losses in its investment portfolio are temporary in nature.
In July 2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”), which is effective for fiscal years beginning after December 15, 2006. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes” (“FAS 109”). FIN 48 prescribes the financial statement recognition and measurement criteria for the financial statements for tax positions taken or expected to be taken in a tax return. Further, FIN 48 expands the required disclosures associated with uncertain tax positions. The Company will adoptAs a result of the
implementation of FIN 48, on January 1, 2007. The Company does not believewe recorded no adjustment in the impact of implementing FIN 48 will be material on its consolidated financial statements.liability for unrecognized income tax benefits and no adjustment to beginning retained earnings.
In September 2006, the FASB issued Statement of Financial Accounting StandardsFAS No. 157 “Fair Value Measurements” (“FAS 157���157”), which is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.. FAS 157 defines fair value, establishes a framework for measuring fair value consistently in GAAP and expands disclosures about fair value measurements. The Company will adoptWe adopted FAS
88
157 onas of January 1, 2008. The Company does not believe the impact of implementing FAS 157 will be material on its consolidated financial statements.2007.
In September 2006, the FASB issued Statement of Financial Accounting StandardsFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“FAS 158”), which is effective for employers with publicly traded equity securities as of the end of the fiscal year ending after December 15, 2006.. FAS 158 requires an employer to (a) recognize in its financial statements an asset for a plan’s over funded status or a liability for a plan’s under funded status, (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year and (c) recognize changes in the funded status of a defined benefit postretirementpost-retirement plan in the year in which the changes occur as other comprehensive income. The CompanyWe adopted FAS 158 for the reporting period ended December 31, 2006.
In February 2007, the FASB issued FAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment to FASB Statement No. 115” (“FAS 159”). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The impactobjective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. We adopted FAS 159 as of January 1, 2007.
In March 2008, the FASB issued FAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133” (“FAS 161”). FAS 161 requires entities to provide additional disclosures on derivative and hedging activities regarding their effect on financial position, financial performance and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We will adopt FAS 161 on January 1, 2009.
In October 2008, the Company’s consolidated balance sheets atFASB issued FASB Staff Position FAS 157-3 “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active” (“FAS 157-3”). FAS 157-3 clarifies the application of FAS No. 157 “Fair Value Measurements” (“FAS 157”), in a market that is not active. This FASB Staff Position was effective upon issuance.
In December 2008, the FASB issued FASB Staff Position FAS 132(R)-1 “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FAS 132(R)-1”). FAS 132(R)-1 requires additional disclosures about plan assets. Additional disclosures include investment policies and strategies, fair value of each major plan asset category, inputs and valuation techniques used to develop fair value and any significant concentrations of risk. This FASB Staff Position is effective for fiscal years ending after December 15, 2009. The Company will adopt FAS 132(R)-1 for the reporting period ending December 31, 2006 was a $23.1 million pre-tax, or $15.0 million after-tax, reduction to accumulated other comprehensive income.2009.
MARKET SENSITIVE INSTRUMENTSMarket Sensitive Instruments.
The SEC’s Financial Reporting Release #48 requires registrants to clarify and expand upon the existing financial statement disclosure requirements for derivative financial instruments, derivative commodity instruments and other financial instruments (collectively, “market sensitive instruments”). The Company doesWe do not generally enter into market sensitive instruments for trading purposes.
The Company’s
Our current investment strategy seeks to maximize after-tax income through a high quality, diversified, taxable and tax-preferenced fixed maturity portfolio, while maintaining an adequate level of liquidity. The Company’sOur mix of taxable and tax-preferenced investments is adjusted continuously,periodically, consistent with itsour current and projected operating results, market conditions and the Company’sour tax position. The fixed maturities in the investment portfolio are comprised of non-trading available for sale securities. Additionally, the Company investswe have invested in equity securities, which it believes will enhance the risk-adjusted total return of the investment portfolio. The Company hassecurities. We have also written a small number of equity index put options.
The overall investment strategy considers the scope of present and anticipated Company operations. In particular, estimates of the financial impact resulting from non-investment asset and liability transactions, together with the Company’sour capital structure and other factors, are used to develop a net liability analysis. This analysis includes estimated payout characteristics for which theour investments of the Company provide liquidity. This analysis is considered in the development of specific investment strategies for asset allocation, duration and credit quality. The change in overall market sensitive risk exposure principally reflects the asset changes that took place during the period.
Interest Rate Risk. The Company’s $14.0Our $13.7 billion investment portfolio at December 31, 20062008 is principally comprised of fixed maturity securities, which are generally subject to interest rate risk and 17.1%, are subject tosome foreign currency exchange rate risk, and some equity securities, which are subject to price fluctuations.fluctuations and some foreign exchange rate risk. The impact of the foreign exchange risks on the investment portfolio is generallypartially 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 portfolio, including short-term investments, from a change in market interest rates. In a declining interest rate environment, it includes prepayment risk on the $1,594.0$1,878.4 million of mortgage-backed securities in the $10,319.9$10,802.7 million fixed maturity portfolio. Prepayment risk results from potential accelerated principal payments that shorten the average life and thus the expected yield of the security.
The tables below display the potential impact of market value fluctuations and after-tax unrealized appreciation on the Company’sour fixed maturity portfolio (including $1.3 billion$1,889.8 million of short-term investments) as of December 31, 2006 and 2005for the periods indicated based on upward and downward parallel and immediate 100 and 200 basis point shifts in interest
89
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. All amounts are in U.S. dollars and are presented in millions.
| 2006 Interest Rate Shift in Basis Points | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| -200 | -100 | 0 | 100 | 200 | |||||||||||||
| Total Market Value | $ | 12,621.7 | $ | 12,124.6 | $ | 11,626.3 | $ | 11,085.3 | $ | 10,521.7 | |||||||
| Market Value Change from Base (%) | 8.6 | % | 4.3 | % | 0.0 | % | -4.7 | % | -9.5 | % | |||||||
| Change in Unrealized Appreciation | |||||||||||||||||
| After-tax from Base ($) | $ | 747.8 | $ | 374.7 | $ | - | $ | (403.5 | ) | $ | (820.6 | ) | |||||
2005 Interest Rate Shift in Basis Points | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| -200 | -100 | 0 | 100 | 200 | |||||||||||||
| Total Market Value | $ | 12,516.8 | $ | 12,007.4 | $ | 11,485.9 | $ | 10,931.9 | $ | 10,377.0 | |||||||
| Market Value Change from Base (%) | 9.0 | % | 4.5 | % | 0.0 | % | -4.8% | -9.7% | |||||||||
| Change in Unrealized Appreciation | |||||||||||||||||
| After-tax from Base ($) | $ | 773.7 | $ | 390.4 | $ | - | $ | (410.7 | ) | $ | (820.7 | ) | |||||
The Company
| Impact of Interest Rate Shift in Basis Points | |||||||||
| At December 31, 2008 | |||||||||
| -200 |
| -100 |
| 0 |
| 100 |
| 200 |
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
Total Market/Fair Value | $ 13,836.0 |
| $ 13,277.1 |
| $ 12,692.5 |
| $ 12,088.1 |
| $ 11,507.2 |
|
Market/Fair Value Change from Base (%) | 9.0 | % | 4.6 | % | 0.0 | % | -4.8 | % | -9.3 | % |
Change in Unrealized Appreciation |
|
|
|
|
|
|
|
|
|
|
After-tax from Base ($) | $ 857.0 |
| $ 436.9 |
| $ - |
| $ (453.6) |
| $ (893.9) |
|
| Impact of Interest Rate Shift in Basis Points | |||||||||
| At December 31, 2007 | |||||||||
| -200 |
| -100 |
| 0 |
| 100 |
| 200 |
|
(Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
Total Market/Fair Value | $ 13,471.3 |
| $ 12,981.6 |
| $ 12,471.3 |
| $ 11,900.2 |
| $ 11,322.5 |
|
Market/Fair Value Change from Base (%) | 8.0 | % | 4.1 | % | 0.0 | % | -4.6 | % | -9.2 | % |
Change in Unrealized Appreciation |
|
|
|
|
|
|
|
|
|
|
After-tax from Base ($) | $ 750.4 |
| $ 382.2 |
| $ - |
| $ (423.3) |
| $ (849.7) |
|
We had $8,840.1$8,840.7 million and $9,126.7$9,040.6 million of gross reserves for losses and LAE as of December 31, 20062008 and December 31, 2005.2007, respectively. These amounts are recorded at their nominal value, as opposed to fairpresent 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 fairpresent value of the reserves is less than the nominal value. As interest rates rise, the fairpresent value of the reserves decreases and, conversely, as interest rates decline, the fairpresent value
increases. These movements are the opposite of the interest rate impacts on the fair value of investments. While the difference between fairpresent value and nominal value is not reflected in the Company’sour financial statements, the Company’sour financial results will include investment income over time from the investment portfolio until the claims are paid. The Company’sOur loss and loss reserve obligations have an expected duration of approximately 3.84.2 years, which is reasonably consistent with the Company’sour fixed income portfolio. If the Companywe were to discount itsour loss and LAE reserves, net of $0.8$0.7 billion of reinsurance receivables on unpaid losses, the discount would be approximately $1.5 billion resulting in a discounted reserve balance of approximately $6.5$6.7 billion, representing approximately 56%53% of the market value of the fixed maturity investment portfolio funds.
Equity Risk.Equity risk is the potential change in fair and/or market value of the common stock and preferred stock portfolios arising from changing equity prices. The Company’sOur equity investments are mainlyconsist of a diversified portfolio of individual securities and exchange traded and mutual funds, which invest principally in high quality common and preferred stocks that are traded on the major exchanges in the U.S.exchanges. The primary objective in managingof the equity portfolio iswas to provide capital growthobtain greater total return relative to bonds over time through market appreciation and income.
90
The tables below display the impact on market value and after-tax unrealized appreciation of a 10% and 20% change in equity prices up and down as of December 31, 2006 and 2005. The growth in exposure is primarily due tofor the growth in the equity portfolio. All amounts are in U.S. dollars and are presented in millions.periods indicated.
| 2006 Change in Equity Values in Percent | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| -20% | -10% | 0% | 10% | 20% | |||||||||||||
| Market Value of the Equity Portfolio | $ | 1,290.9 | $ | 1,452.3 | $ | 1,613.7 | $ | 1,775.0 | $ | 1,936.4 | |||||||
| After-tax Change in Unrealized Appreciation | $ | (239.5 | ) | $ | (119.7 | ) | $ | - | $ | 119.7 | $ | 239.5 | |||||
2005 Change in Equity Values in Percent | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| -20% | -10% | 0% | 10% | 20% | |||||||||||||
| Market Value of the Equity Portfolio | $ | 872.7 | $ | 981.7 | $ | 1,090.8 | $ | 1,199.9 | $ | 1,309.0 | |||||||
| After-tax Change in Unrealized Appreciation | $ | (146.5 | ) | $ | (73.3 | ) | $ | - | $ | 73.3 | $ | 146.5 | |||||
| Impact of Percentage Change in Equity Fair/Market Values | ||||||||
| At December 31, 2008 | ||||||||
(Dollars in millions) | -20% | -10% | 0% | 10% | 20% | ||||
Fair/Market Value of the Equity Portfolio | $ 109.4 |
| $ 123.1 |
| $ 136.7 |
| $ 150.4 |
| $ 164.1 |
After-tax Change in Fair/Market Value | (18.0) |
| (9.0) |
| - |
| 9.0 |
| 18.0 |
| Impact of Percentage Change in Equity Fair/Market Values | ||||||||
| At December 31, 2007 | ||||||||
(Dollars in millions) | -20% | -10% | 0% | 10% | 20% | ||||
Fair/Market Value of the Equity Portfolio | $ 1,248.0 |
| $ 1,404.0 |
| $ 1,560.0 |
| $ 1,716.0 |
| $ 1,871.9 |
After-tax Change in Fair/Market Value | (244.5) |
| (122.3) |
| - |
| 122.3 |
| 244.5 |
Foreign Currency Risk.Foreign currency risk is the potential change in value, income and cash flow arising from adverse changes in foreign currency exchange rates. Each of the Company’sour non-U.S./Bermuda (“foreign”) operations maintains capital in the currency of the country of its geographic location consistent with local regulatory guidelines. Generally, the Company preferswe prefer to maintain the capital of itsour operations in U.S. dollar assets, although this varies by regulatory jurisdiction in accordance with market needs. Each foreign operation may conduct business in its local currency, as well as the currency of other countries in which it operates. The primary foreign currency exposures for these foreign operations are the Canadian Dollar, the British Pound Sterling and the Euro. The Company mitigatesWe mitigate foreign exchange exposure by generally matching the currency and duration of itsour assets to itsour corresponding operating liabilities. In accordance with Financial Accounting Standards Board StatementFAS No. 52, “Foreign Currency Translation”, the Company translateswe translate the assets, liabilities and income of non-U.S. dollar functional currency legal entities to the U.S. dollar. This translation amount is reported as a component of other comprehensive income. As of December 31, 20062008 there has been no material change in exposure to foreign exchange rates as compared to December 31, 2005.2007.
The tables below display the potential impact of a parallel and immediate 10% and 20% increase and decrease in foreign exchange rates on the valuation of invested assets subject to foreign currency exposure as of December 31, 2006 and 2005.for the periods indicated. This analysis includes the after-tax impact of translation from transactional currency to functional currency as well as the after-tax impact of translation from functional currency to the U.S. dollar reporting currency. All amounts are in U.S. dollars and are presented in millions.
| 2006 Change in Foreign Exchange Rates in Percent | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| -20% | -10% | 0% | 10% | 20% | |||||||||||||
| Total After-tax Foreign Exchange Exposure | $ | (92.3 | ) | $ | (54.6 | ) | $ | - | $ | 66.8 | $ | 142.9 | |||||
2005 Change in Foreign Exchange Rates in Percent | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| -20% | -10% | 0% | 10% | 20% | |||||||||||||
| Total After-tax Foreign Exchange Exposure | $ | (101. | 0) | $ | (57.0 | ) | $ | - | $ | 66.4 | $ | 139.9 | |||||
| Change in Foreign Exchange Rates in Percent | ||||||||
| At December 31, 2008 | ||||||||
(Dollars in millions) | -20% | -10% | 0% | 10% | 20% | ||||
|
|
|
|
|
|
|
|
|
|
Total After-tax Foreign Exchange Exposure | $ (71.1) |
| $ (47.9) |
| $ - |
| $ 65.9 |
| $ 145.3 |
| Change in Foreign Exchange Rates in Percent | ||||||||
| At December 31, 2007 | ||||||||
(Dollars in millions) | -20% | -10% | 0% | 10% | 20% | ||||
|
|
|
|
|
|
|
|
|
|
Total After-tax Foreign Exchange Exposure | $ (90.6) |
| $ (56.9) |
| $ - |
| $ 73.7 |
| $ 160.0 |
Equity Index Put Options.Although not considered material in the context of the Company’sour aggregate exposure to market sensitive instruments, the Company haswe have issued six equity index put options based on the S&P 500 index and one equity index put
91
option based on the FTSE 100 index, that are market sensitive and sufficiently unique to warrant supplemental disclosure.
The Company has
We sold six equity index put options based on the S&P 500 index for total consideration, net of commissions, of $22.5 million. These contracts each have a single exercise date, with original maturities ranging from 12 to 30 years and strike prices ranging from $1,141.21 to $1,540.63. No amounts will be payable under these contracts if the S&P 500 index is at or above the strike priceprices on the exercise dates, which currently fall between June 2017 and March 2031. If the S&P 500 index is lower than the strike price on the applicable exercise date, the amount due will vary proportionately with the percentage by which the index is below the strike price. Based on historical index volatilities and trends and the December 31, 20062008 index value, the Company estimateswe estimate the probability for each contract of the S&P 500 index falling below the strike price on the exercise date to be less than 4.4%55%. The theoretical maximum payouts under the contracts would occur if on each of the exercise dates the S&P 500 index value were zero. TheAt December 31, 2008, the present value of these theoretical maximum payouts using a 6.0%6% discount factor is $213.2was $239.6 million.
The Company has
We sold one equity index put option based on the FTSE 100 index for total consideration, net of commissions, of $6.7 million. This contract has an exercise date of July 2020 and a strike price of £5,989.75. No amount will be payable under this contract if the FTSE 100 index is at or above the strike price on the exercise date. If the FTSE 100 index is lower than the strike price on the applicable exercise date, the amount due will vary proportionately with the percentage by which the index is below the strike price. Based on historical index volatilities and trends and the December 31, 20062008 index value, the Company estimateswe estimate the probability that the FTSE 100 index contract will befall below the strike price on the exercise date to be less than 7.0%57%. The theoretical maximum payout under the contract would occur if on the exercise date the FTSE 100 index value was zero. TheAt December 31, 2008, the present value of the theoretical maximum payout using a 6.0%6% discount factor is $29.2was $24.2 million.
Because the equity index put options are derivatives withinmeet the frameworkdefinition of a derivative under FAS 133, the Company reportswe report the fair value of these instruments in itsour consolidated balance sheetsheets as a liability and recordsrecord any changes to fair value in its statementour consolidated statements of operations. The Company has recordedoperations and comprehensive income as net derivative expense or income. Our financial statements reflect fair values for itsour obligations on these equity put options at December 31, 20062008 and 20052007 of $37.5$60.6 million and $36.3$39.7 million, respectively; however, the Company doeswe do not believe that the ultimate settlement of these transactions is likely to require a payment that would exceed the initial consideration received or any payment at all.
As there is no active market for these instruments, the determination of their fair value is based on an industry accepted option pricing model, which requires estimates and assumptions, including those regarding volatility and expected rates of return.
92
The tables below estimatedisplay the impact of potential movements in interest rates and the equity indices, which are the principal factors affecting fair value of these instruments, looking forward from the fair value at December 31, 2006 and 2005. Thesefor the period indicated. As these are estimates, and there can be no assurance regarding future market performance. The asymmetrical results of the interest rate and S&P 500 and FTSE 100 indices shift reflect that the liability cannot fall below zero whereas it can increase to its theoretical maximum.
| As of December 31, 2006 Equity Indices Put Options Obligation – Sensitivity Analysis | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | |||||||||||||||||
| Interest Rate Shift in Basis Points: | -100 | -50 | 0 | 50 | 100 | ||||||||||||
| Total Market Value | $ | 52.8 | $ | 44.6 | $ | 37.5 | $ | 31.5 | $ | 26.5 | |||||||
| Market Value Change from Base (%) | -40.7 | % | -18.8 | % | 0.0 | % | 16.0 | % | 29.5 | % | |||||||
| Equity Indices Shift in Points: | -200 | -100 | 0 | 100 | 200 | ||||||||||||
| Total Market Value | $ | 45.1 | $ | 41.1 | $ | 37.5 | $ | 34.4 | $ | 31.7 | |||||||
| Market Value Change from Base (%) | -20.2 | % | -9.4 | % | 0.0 | % | 8.2 | % | 15.4 | % | |||||||
| Combined Interest Rate / Equity Indices Shift: | -100/-200 | -50/-100 | 0/0 | 50/100 | 100/200 | ||||||||||||
| Total Market Value | $ | 62.6 | $ | 48.6 | $ | 37.5 | $ | 28.9 | $ | 22.1 | |||||||
| Market Value Change from Base (%) | -66.9 | % | -29.5 | % | 0.0 | % | 23.1 | % | 41.0 | % | |||||||
As of December 31, 2005 Equity Indices Put Options Obligation – Sensitivity Analysis | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | |||||||||||||||||
| Interest Rate Shift in Basis Points: | -100 | -50 | 0 | 50 | 100 | ||||||||||||
| Total Market Value | $ | 52.6 | $ | 43.8 | $ | 36.3 | $ | 30.1 | $ | 24.8 | |||||||
| Market Value Change from Base (%) | -44.8 | % | -20.5 | % | 0.0 | % | 17.2 | % | 31.7 | % | |||||||
| Equity Indices Shift in Points: | -200 | -100 | 0 | 100 | 200 | ||||||||||||
| Total Market Value | $ | 45.4 | $ | 40.5 | $ | 36.3 | $ | 32.8 | $ | 29.7 | |||||||
| Market Value Change from Base (%) | -24.9 | % | -11.4 | % | 0.0 | % | 9.8 | % | 18.3 | % | |||||||
| Combined Interest Rate / Equity Indices Shift: | -100/-200 | -50/-100 | 0/0 | 50/100 | 100/200 | ||||||||||||
| Total Market Value | $ | 64.5 | $ | 48.6 | $ | 36.3 | $ | 27.0 | $ | 20.0 | |||||||
| Market Value Change from Base (%) | -77.4 | % | -33.7 | % | 0.0 | % | 25.7 | % | 45.0 | % | |||||||
93
|
| Equity Indices Put Options Obligation – Sensitivity Analysis | ||||||||||||
(Dollars in millions) |
| At December 31, 2008 | ||||||||||||
Interest Rate Shift in Basis Points: |
| -200 |
| -100 | 0 |
| 100 |
| 200 | |||||
Total Fair Value |
| $ 105.5 |
|
| $ 80.2 |
| $ 60.6 |
|
| $ 45.4 |
|
| $ 33.8 |
|
Fair Value Change from Base (%) |
| -74.2 | % |
| -32.4 | % | 0.0 | % |
| 25.0 | % |
| 44.1 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Indices Shift in Points (S&P 500/FTSE 100): |
| -500/-2000 |
| -250/-1000 | 0 |
| 250/1000 |
| 500/2000 | |||||
Total Fair Value |
| $ 134.5 |
|
| $ 89.0 |
| $ 60.6 |
|
| $ 42.3 |
|
| $ 30.4 |
|
Fair Value Change from Base (%) |
| -122.0 | % |
| -47.0 | % | 0.0 | % |
| 30.1 | % |
| 49.8 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Interest Rate / |
| -200/ |
| -100/ |
|
|
|
| 100/ |
|
| 200/ |
| |
Equity Indices Shift (S&P 500/FTSE 100): |
| -500/-2000 |
| -250/-1000 | 0/0 |
| 250/1000 |
|
| 500/2000 |
| |||
Total Fair Value |
| $ 202.5 |
|
| $ 113.9 |
| $ 60.6 |
|
| $ 30.8 |
|
| $ 15.1 |
|
Fair Value Change from Base (%) |
| -234.4 | % |
| -88.0 | % | 0.0 | % |
| 49.2 | % |
| 75.1 | % |
|
| Equity Indices Put Options Obligation – Sensitivity Analysis | ||||||||||||
(Dollars in millions) |
| At December 31, 2007 | ||||||||||||
Interest Rate Shift in Basis Points: |
| -200 |
| -100 | 0 |
| 100 |
| 200 | |||||
Total Fair Value |
| $ 74.4 |
|
| $ 54.5 |
| $ 39.7 |
|
| $ 28.7 |
|
| $ 20.7 |
|
Fair Value Change from Base (%) |
| -87.6 | % |
| -37.4 | % | 0.0 | % |
| 27.5 | % |
| 47.8 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Indices Shift in Points (S&P 500/FTSE 100): |
| -500/-2000 |
| -250/-1000 | 0 |
| 250/1000 |
| 500/2000 | |||||
Total Fair Value |
| $ 66.5 |
|
| $ 50.8 |
| $ 39.7 |
|
| $ 31.7 |
|
| $ 25.7 |
|
Fair Value Change from Base (%) |
| -67.8 | % |
| -28.0 | % | 0.0 | % |
| 20.1 | % |
| 35.1 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Interest Rate / |
| -200/ |
| -100/ |
|
|
|
| 100/ |
|
| 200/ |
| |
Equity Indices Shift (S&P 500/FTSE 100): |
| -500/-2000 |
| -250/-1000 | 0/0 |
| 250/1000 |
|
| 500/2000 |
| |||
Total Fair Value |
| $ 115.4 |
|
| $ 68.4 |
| $ 39.7 |
|
| $ 22.6 |
|
| $ 12.7 |
|
Fair Value Change from Base (%) |
| -191.0 | % |
| -72.6 | % | 0.0 | % |
| 43.0 | % |
| 68.1 | % |
SAFE HARBOR DISCLOSURESafe Harbor Disclosure.
This report contains forward-looking statements within the meaning of the U.S. federal securities laws. The Company intendsWe intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in the federal securities laws. In some cases, these statements can be identified by the use of forward-looking words such as “may”, “will”, “should”, “could”, “anticipate”, “estimate”, “expect”, “plan”, “believe”, “predict”, “potential” and “intend”. Forward-looking statements contained in this report include information regarding the Company’sour reserves for losses and LAE, the adequacy of the Company’sour provision for uncollectible balances, estimates of the Company’sour catastrophe exposure, the effects of catastrophic events on the Company’sour financial statements, the ability of Everest Re, Holdings and Bermuda Re to pay dividends and the settlement costs of the Company’sour specialized equity put options. Forward-looking statements only reflect the Company’sour expectations and are not guarantees of performance. These statements involve risks, uncertainties and assumptions. Actual events or results may differ materially from the Company’sour expectations. Important factors that could cause the Company’sour actual events or results to be materially different from the Company’sour expectations include those discussed under the caption, Item 1A.ITEM
1A, “Risk Factors”. The Company undertakesWe undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See “Market Sensitive Instruments” in ITEM 7.
ITEM 8. Financial Statements and Supplementary Data
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules listed in the accompanying Index to Financial Statements and Schedules on page F-1 are filed as part of this report.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. Controls and Procedures
CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Procedures.
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exchange Act)“Exchange Act”), our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.
Management’s Report on Internal Control Over Financial ReportingTheReporting.
Our management of the Company is responsible for establishing and maintaining adequate internal controls over financial reporting. The Company’sOur internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’sour financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
94
Management has assessed the effectiveness of the Company’sour internal control over financial reporting as of December 31, 2006.2008. In making this assessment, itwe used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) inInternal Control – Integrated Framework. Based on our assessment we concluded that, as of December 31, 2006, the Company’s2008, our internal control over financial reporting is effective based on those criteria.
Management’s assessment of the
The effectiveness of the Company’s internal control over financial reporting as of December 31, 20062008, has been audited by PricewaterhouseCoopers LLP, the Company’san independent registered public accounting firm, as stated in their report, in Part IV, Item 15, “Report of Independent Registered Public Accounting Firm”.which appears herein.
Changes in Internal Control over Financial Reporting
Reporting.
As required by Rule 13a-15(d) of the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated our internal control over financial reporting to determine whether any changes occurred during the fourth fiscal quarter covered by this annual report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there has been no such change during the fourth quarter.
ITEM 9B. Other InformationNone.OTHER INFORMATION
None.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Reference is made to the sections captioned “Information Concerning Nominees”, “Information Concerning Continuing Directors and Executive Officers”, “Section 16(a) Beneficial Ownership Reporting Compliance”, “Code of Ethics for CEO and Senior Financial Officers”, “Audit Committee” and “Nominating and Governance Committee” in the Company’sour proxy statement for the 20072009 Annual General Meeting of Shareholders, which will be filed with the Commission within 120 days of the close of the Company’sour fiscal year ended December 31, 20062008 (the “Proxy Statement”), which sections are incorporated herein by reference.
ITEM 11. Executive Compensation
EXECUTIVE COMPENSATION
Reference is made to the sections captioned “Directors’ Compensation” and “Compensation of Executive Officers” in the Proxy Statement, which are incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
Reference is made to the sections captioned “Common Share Ownership by Directors and Executive Officers”, “Principal Holders of Common Shares” and “Equity“Securities Authorized for Insurance Under Equity Compensation Plans” in the Proxy Statement, which are incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Reference is made to the section captioned “Certain Transactions with Directors” in the Proxy Statement, which is incorporated herein by reference.
95
ITEM 14.Principal Accountant Fees and Services
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Reference is made to the section captioned “Audit Committee Report” in the Proxy Statement, which is incorporated herein by reference.
PART IV
ITEM 15. Exhibits and Financial Statement SchedulesEXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Financial Statements and Schedules
Schedules.
The financial statements and schedules listed in the accompanying Index to Financial Statements and Schedules on page F-1 are filed as part of this report.
Exhibits
Exhibits.
The exhibits listed on the accompanying Index to Exhibits on page E-1 are filed as part of this report except that the certifications in Exhibit 32 are being furnished to the SEC, rather than filed with the SEC, as permitted under applicable SEC rules.
96
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 28, 2007.March 2, 2009.
| EVEREST RE GROUP, LTD. |
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| By: | / |
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| Joseph V. Taranto (Chairman and Chief Executive Officer) |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature |
| Title |
| Date |
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/ |
| Chairman and Chief Executive Officer and Director (Principal Executive Officer) |
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Joseph V. Taranto | ||||
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/ | Vice Chairman and Chief Underwriting Officer and Director | March 2, 2009 | ||
Thomas J. Gallagher | ||||
/S/ RALPH E. JONES, III | President and Chief Operating Officer | March 2, 2009 | ||
Ralph E. Jones, III | ||||
/S/ CRAIG EISENACHER |
| Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
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Craig Eisenacher | ||||
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/ |
| Comptroller (Principal Accounting Officer) |
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Keith T. Shoemaker | ||||
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/ |
| Director |
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Martin Abrahams | ||||
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/ |
| Director |
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Kenneth J. Duffy |
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/ |
| Director |
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John R. Dunne |
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/ |
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| Director |
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William F. Galtney, Jr. |
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/ |
| Director |
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John A. Weber |
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97
INDEX TO EXHIBITS | |||
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Exhibit No. | |||
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| 2.1 | Agreement and Plan of Merger among Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd. and Everest Re Merger Corporation, incorporated herein by reference to Exhibit 2.1 to the Registration Statement on Form S-4 (No. 333-87361) | |
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| 3.1 | Memorandum of Association of Everest Re Group, Ltd., incorporated herein by reference to Exhibit 3.1 to the Registration Statement on Form S-4 (No. 333-87361) | |
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| 3.2 | Bye-Laws of Everest Re Group, Ltd., | |
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| 4.1 | Specimen Everest Re Group, Ltd. common share certificate, incorporated herein by reference to Exhibit 4.1 of the Registration Statement on Form S-4 (No. 333-87361) | |
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| 4.2 | Indenture, dated March 14, 2000, between Everest Reinsurance Holdings, Inc. and The Chase Manhattan Bank (now known as JPMorgan Chase Bank), as Trustee, incorporated herein by reference to Exhibit 4.1 to Everest Reinsurance Holdings, Inc. Form 8-K filed on March 15, 2000 | |
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| 4.3 | First Supplemental Indenture relating to the 8.5% Senior Notes due March 15, 2005, dated March 14, 2000, between Everest Reinsurance Holdings, Inc. and The Chase Manhattan Bank, as Trustee, incorporated herein by reference to Exhibit 4.2 to Everest Reinsurance Holdings, Inc. Form 8-K filed on March 15, 2000 | |
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| 4.4 | Second Supplemental Indenture relating to the 8.75% Senior Notes due March 15, 2010, dated March 14, 2000, between Everest Reinsurance Holdings, Inc. and The Chase Manhattan Bank, as Trustee, incorporated herein by reference to Exhibit 4.3 to the Everest Reinsurance Holdings, Inc. Form 8-K filed on March 15, 2000 | |
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| 4.5 | Junior Subordinated Indenture, dated November 14, 2002, between Everest Reinsurance Holdings, Inc. and JPMorgan Chase Bank as Trustee, incorporated herein by reference to Exhibit 4.5 to the Registration Statement on Form S-3 (No. 333-106595) | |
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| 4.6 | First Supplemental Indenture relating to Holdings 7.85% Junior Subordinated Debt Securities due November 15, 2032, dated as of November 14, 2002, among Holdings, Group and JPMorgan Chase Bank, as Trustee, incorporated herein by reference to Exhibit 10.2 to Everest Re Group, Ltd. Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (the “second quarter 2003 10-Q”) | |
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| 4.7 | Amended and Restated Trust Agreement of Everest Re Capital Trust, dated as of November 14, 2002, incorporated herein by reference to Exhibit 10.1 to the second quarter 2003 10-Q | |
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| 4.8 | Guarantee Agreement, dated as of November 14, 2002, between Holdings and JPMorgan Chase Bank, incorporated herein by reference to Exhibit 10.3 to the second quarter 2003 10-Q | |
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| 4.9 | Expense Agreement, dated as of November 14, 2002, between Holdings and Everest Re Capital Trust, incorporated herein by reference to Exhibit 10.4 to the second quarter 2003 10-Q | |
E-1
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| 4.10 | Second Supplemental Indenture relating to Holdings 6.20% Junior Subordinated Debt Securities due March 29, 2034, dated as of March 29, 2004, among Holdings, Group and JPMorgan Chase Bank, as Trustee, incorporated herein by reference to Exhibit 4.1 to Everest Reinsurance Holdings, Inc. Form 8-K filed on March 30, 2004 (the “March 30, 2004 8-K”) | |
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| 4.11 | Amended and Restated Trust Agreement of Everest Re Capital Trust II, dated as of March 29, 2004, incorporated herein by reference to Exhibit 4.2 to the March 30, 2004 8-K | |
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| 4.12 | Guarantee Agreement, dated as of March 29, 2004, between Holdings and JPMorgan Chase Bank, incorporated herein by reference to Exhibit 4.3 to the March 30, 2004 8-K | |
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| 4.13 | Expense Agreement, dated as of March 29, 2004, between Holdings and Everest Re Capital Trust, incorporated herein by reference to Exhibit 4.4 to the March 30, 2004 8-K | |
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| 4.14 | Third Supplemental Indenture relating to Holdings 5.40% Senior Notes due October 15, 2014, dated as of October 12, 2004, among Holdings and JPMorgan Chase Bank, as Trustee, incorporated herein by reference to Exhibit 4.1 to Everest Reinsurance Holdings, Inc. Form 8-K filed on October 12, 2004 | |
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| *10.1 | Everest Re Group, Ltd. Annual Incentive Plan effective January 1, 1999, incorporated herein by reference to Exhibit 10.1 to Everest Reinsurance Holdings, Inc. Annual Report on Form 10-K for the year ended December 31, 1998 (the “1998 10-K”) | |
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| *10.2 | Everest Re Group, Ltd. Amended 1995 Stock Incentive Plan, incorporated herein by reference to Exhibit 10.3 to Everest Reinsurance Holdings, Inc. Annual Report on Form 10-K for the year ended December 31, 1995 (the “1995 10-K”) | |
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| *10.3 | Everest Re Group, Ltd. 1995 Stock Option Plan for Non-Employee Directors, incorporated herein by reference to Exhibit 4.3 to the Registration Statement on Form S-8 (No. 333-05771) | |
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| *10.4 | Resolution adopted by Board of Directors of Everest Reinsurance Holdings, Inc. on April 1, 1999 awarding stock options to outside Directors, incorporated herein by reference to Exhibit 10.25 to Everest Reinsurance Holdings, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (the “second quarter 1999 10-Q”) | |
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| *10.5 | Resolution adopted by the Board of Directors of Everest Reinsurance Holdings, Inc. on February 23, 2000 awarding stock options to outside Directors, incorporated herein by reference to Exhibit 10.8 to the 1999 10-K | |
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| *10.6 | Form of Non-Qualified Stock Option Award Agreement to be entered into between Everest Re Group, Ltd. and participants in the 1995 Stock Incentive Plan, incorporated herein by reference to Exhibit 10.15 to the 1995 10-K | |
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| *10.7 | Form of Restricted Stock Agreement to be entered into between Everest Re Group, Ltd. and participants in the 1995 Stock Incentive Plan, incorporated herein by reference to Exhibit 10.16 to the 1995 10-K | |
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| Form of Stock Option Agreement (Version 1) to be entered into between Everest Re Group, Ltd. and participants in the 1995 Stock Option Plan for Non-Employee Directors, incorporated herein by reference to Exhibit 10.17 to the 1995 10-K |
E-2
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| *10.9 | Form of Stock Option Agreement (Version 2) to be entered into between Everest Re Group, Ltd. and participants in the 1995 Stock Option Plan for Non-Employee Directors, incorporated herein by reference to Exhibit 10.18 to the 1995 10-K | |
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| *10.10 | Form of Stock Option Agreement for Non-Employee Directors, incorporated herein by reference to Exhibit 10.34 to the 1999 10-K | |
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| *10.11 | Deferred Compensation Plan, as amended, for certain U.S. employees of Everest Re Group, Ltd. and its participating subsidiaries incorporated herein by reference to Exhibit 10.20 to the 1998 10-K | |
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| *10.12 | Senior Executive Change of Control Plan, incorporated herein by reference to Exhibit 10.24 to Everest Reinsurance Holdings, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 1998 | |
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| *10.13 | Executive Performance Annual Incentive Plan adopted by stockholders on May 20, 1999, incorporated herein by reference to Exhibit 10.26 to the second quarter 1999 10-Q | |
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| *10.14 | Employment Agreement with Joseph V. Taranto executed on July 15, 1998, incorporated herein by reference to Exhibit 10.21 to Everest Reinsurance Holdings, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (the “second quarter 1998 10-Q”) | |
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| *10.15 | Amendment of Employment Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd. and Joseph V. Taranto dated February 15, 2000, incorporated herein by reference to Exhibit 10.29 to the 1999 10-K | |
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| *10.16 | Change of Control Agreement with Joseph V. Taranto effective July 15, 1998, incorporated herein by reference to Exhibit 10.22 to the second quarter 1998 10-Q | |
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| *10.17 | Amendment of Change of Control Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd. and Joseph V. Taranto dated February 15, 2000, incorporated herein by reference to Exhibit 10.30 to the 1999 10-K | |
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| 10.18 | Stock Purchase Agreement between The Prudential Insurance Company of America and Everest Reinsurance Holdings, Inc. for the sale of common stock of Gibraltar Casualty Company dated February 24, 2000, incorporated herein by reference to Exhibit 10.32 to the 1999 10-K | |
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| 10.19 | Amendment No. 1 to Stock Purchase Agreement between The Prudential Insurance Company of America and Everest Reinsurance Holdings, Inc. for the sale of common stock of Gibraltar Casualty Company dated August 8, 2000, incorporated herein by reference to Exhibit 10.1 to the Everest Re Group, Ltd. Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 | |
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| 10.20 | Proportional Excess of Loss Reinsurance Agreement entered into between Gibraltar Casualty Company and Prudential Property and Casualty Insurance Company, incorporated herein by reference to Exhibit 10.24 to the 2000 10-K | |
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| 10.21 | Guarantee Agreement made by The Prudential Insurance Company of America in favor of Gibraltar Casualty Company, incorporated herein by reference to Exhibit 10.25 to the 2000 10-K | |
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| 10.22 | Lease, effective December 26, 2000 between OTR, an Ohio general partnership, and Everest Reinsurance Company, incorporated herein by reference to Exhibit 10.26 to the 2000 10-K |
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E-3
| *10.23 | Amendment of Employment Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global Services, Inc. and Joseph V. Taranto, dated March 30, 2001, incorporated herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Report on Form 10-Q for the quarter ended March 31, 2001 (the “first quarter 2001 10-Q”) | |
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| *10.24 | Amendment of Employment Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global Services, Inc. and Joseph V. Taranto, dated April 20, 2001, incorporated herein by reference to Exhibit 10.2 to the first quarter 2001 10-Q | |
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| *10.25 | Amendment of Change of Control Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global Services, Inc. and Joseph V. Taranto, dated March 30, 2001, incorporated herein by reference to Exhibit 10.3 to the first quarter 2001 10-Q | |
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| *10.26 | Resolution adopted by the Board of Directors of Everest Re Group, Ltd. on September 20, 2001 awarding stock options to outside Directors, incorporated herein by reference to Exhibit 10.30 to Everest Re Group, Ltd. Report on Form 10-K for the year ended December 31, 2001 (the “2001 10-K”) | |
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| *10.27 |
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| Everest Re Group, Ltd. 2002 Stock Incentive Plan, incorporated herein by reference to Exhibit 4.1 to the Registration Statement on Form S-8 (No. 333-97049) | ||
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| * | Amendment of Employment Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global Services, Inc. and Joseph V. Taranto, dated April 18, 2003, incorporated herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K filed on April 21, 2003 | |
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| * | Everest Re Group, Ltd. 2003 Non-Employee Director Equity Compensation Plan, incorporated herein by reference to Exhibit 4.1 to the Registration Statement on Form S-8 (No. 333-105483) | |
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| Tax Assurance from the Bermuda Minister of Finance, dated September 20, 1999, incorporated herein by reference to Exhibit 10.5 to Everest Re Group, Ltd. Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (the “second quarter 2003 10-Q”) | |
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| * |
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10.31 |
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| Employment Agreement between Everest Reinsurance (Bermuda), Ltd. and Mark S. de Saram, dated October 14, 2004, incorporated herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K filed on October 14, 2004 | ||
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| * | Amendment to Employment Agreement between Everest Reinsurance (Bermuda), Ltd. and Mark S. de Saram, dated December 8, 2004, incorporated herein by reference to Exhibit 10.2 to Everest Re Group, Ltd. Form 8-K filed on December 14, 2004 |
E-4
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10.33 | Credit Agreement dated as of December 8, 2004 among Everest Re Group, Ltd., Everest Reinsurance (Bermuda), Ltd., Everest International Reinsurance, Ltd., certain Lenders party thereto and Wachovia Bank, N.A., as Administrative Agent, incorporated herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K filed on December 14, 2004 | ||
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| * | Description of non-employee director compensation arrangements, incorporated herein by reference to Exhibit 10.46 to Everest Re Group, Ltd., Report on Form 10-K for the year ended December 31, 2005
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| * | Form of Non-Qualified Stock Option Award Agreement under the Everest Re Group, Ltd. 2003 Non-Employee Director Equity Compensation Plan, incorporated herein by reference to Exhibit 10.47 to Everest Re Group, Ltd., Report on Form 10-K for the year ended December 31, 2004 | |
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| * | Amendment of Employment Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global Services, Inc. and Joseph V. Taranto, dated August 31, 2005, incorporated by reference to Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K filed on August 31, 2005 | |
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| * | Form of Restricted Stock Award Agreement under the Everest Re Group, Ltd. 2003 Non-Employee Director Equity Compensation Plan, incorporated by reference to Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K filed on September 22, 2005 | |
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| Credit Agreement, dated August 23, 2006, between Everest Reinsurance Holdings, Inc., the lenders named therein and Citibank, National Association, as administrative agent, providing for a $150.0 million five year revolving credit facility, incorporated herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Quarterly Report on Form 10-Q for the quarter ended September 30, 2006. This new agreement replaces the October 10, 2003 three year senior revolving credit facility which expired on October 10, 2006 | |
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| * | Amendment to Employment Agreement between Everest Reinsurance (Bermuda), Ltd. and Mark S. de Saram, dated October 31, 2006, incorporated herein by reference to Exhibit 10.2 to Everest Re Group, Ltd. Form 8-K filed on November 3, 2006 | |
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| * | Employment Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global Services, Inc. and Craig E. Eisenacher, dated December 18, 2006, incorporated herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K filed on December 5, 2006 | |
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| *10.41 | Amendment to Employment Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc. and Joseph V. Taranto, dated April 5, 2007, incorporated herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K filed on April 5, 2007 | |
10.42 | Credit Agreement, dated July 27, 2007, between Everest Reinsurance (Bermuda), Ltd. and Everest International Reinsurance, Ltd., certain lenders party thereto and Wachovia Bank, N.A. as administrative agent, incorporated herein by reference to Exhibit 10.1 Form 8-K filed on July 27, 2007 | ||
*10.43 | Amendment to Change of Control Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global Services and Joseph Taranto, dated April 5, 2007, incorporated herein by reference to Exhibit 10.2 to Everest Re Group, Ltd. Form 8-K filed on April 5, 2007 | ||
*10.44 | Amendment to Employment Agreement between Everest Reinsurance (Bermuda), Ltd. and Mark S. deSaram, dated October 16, 2008, incorporated herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K filed on October 20, 2008 | ||
*10.45 | Employment Agreement between Everest Global Services, Inc. and Ralph E. Jones III, dated November 21, 2008, incorporated herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K filed on December 4, 2008 | ||
21.1 | Subsidiaries of the registrant, filed herewith | ||
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| 23.1 | Consent of PricewaterhouseCoopers LLP, filed herewith | |
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| 31.1 | Section 302 Certification of Joseph V. Taranto, filed herewith | |
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| 31.2 | Section 302 Certification of Craig Eisenacher, filed herewith | |
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| 32.1 | Section 906 Certification of Joseph V. Taranto and Craig Eisenacher, furnished herewith | |
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* Management contract or compensatory plan or arrangement. | |||
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EVEREST RE GROUP, LTD. | |||||||
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES | |||||||
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| Pages | ||||||
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Report of Independent Registered Public Accounting Firm | F-2 | ||||||
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Consolidated Balance Sheets at December 31, | F-4 | ||||||
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Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended |
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| December 31, | F-5 | |||||
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Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended |
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| December 31, | F-6 | |||||
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Consolidated Statements of Cash Flows for the Years Ended |
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| December 31, | F-7 | |||||
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Notes to Consolidated Financial Statements | F-8 | ||||||
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Schedules |
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I | Summary of Investments Other Than Investments in Related Parties at December 31, | S-1 | |||||
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II | Condensed Financial Information of Registrant: |
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| Balance Sheets as of December 31, | S-2 | ||||
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| Statements of Operations for the Years Ended December 31, | S-3 | ||||
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| Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006 | S-4 | ||||
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III | Supplementary Insurance Information for the Years Ended December 31, | S-5 | |||||
| 2006 | ||||||
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IV | Reinsurance for the Years Ended December 31, | S-6 | |||||
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Schedules other than those listed above are omitted for the reason that they are not applicable or the information is otherwise contained in the Financial Statements. | |||||||
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F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of Everest Re Group, Ltd.: |
We have completed integrated audits of Everest Re Group, Ltd.‘s consolidated financial statements and of its internal control over financial reporting as of December 31, 2006 in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements and financial statement schedules
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Everest Re Group, Ltd. and its subsidiaries (the “Company”) at December 31, 20062008 and 2005,2007, and the results of its operations and its cash flows for each of the three years in the period ended 2006December 31, 2008 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. TheseAlso in our opinion, the Company maintained, in all material respects, effective internal control over financial statements and financial statement schedules arereporting as of December 31, 2008, based on criteria established in Internal Control - Integrated Framework issued by the responsibilityCommittee of Sponsoring Organizations of the Company’s management. Our responsibilityTreadway Commission (COSO). The Company's management is to express an opinion onresponsible for these financial statements and financial statement schedules, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedules, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditaudits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditmisstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements includesincluded examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinion.opinions.
Internal control over
As discussed in Note 1 to the consolidated financial reporting
Also, in our opinion, management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A., thatstatements, the Company maintained effective internal control over financial reporting as of December 31, 2006 based on criteria establishedadopted SFAS No. 157, “Fair Value Measurements” and SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” in Internal Control- Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control- Integrated Framework issued by the COSO. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management’s assessment and on the effectiveness of the Company’s internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.2007.
F-2
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
New York, New YorkFebruary 28, 2007
F-3March 2, 2009
EVEREST RE GROUP, LTD. CONSOLIDATED BALANCE SHEETS | ||||||||
| December 31, | ||||||||
| (Dollars in thousands, except par value per share) | 2006 | 2005 | ||||||
ASSETS: | ||||||||
| Fixed maturities - available for sale, at market value | ||||||||
| (amortized cost: 2006, $10,210,165; 2005, $9,872,239) | $ | 10,319,850 | $ | 10,042,134 | ||||
| Equity securities, at market value (cost: 2006, $1,252,595; 2005, $922,090) | 1,613,678 | 1,090,825 | ||||||
| Short-term investments | 1,306,498 | 1,443,751 | ||||||
| Other invested assets (cost: 2006, $466,232; 2005, $285,385) | 467,193 | 286,812 | ||||||
| Cash | 249,868 | 107,275 | ||||||
| Total investments and cash | 13,957,087 | 12,970,797 | ||||||
| Accrued investment income | 141,951 | 133,213 | ||||||
| Premiums receivable | 1,136,787 | 1,188,866 | ||||||
| Reinsurance receivables | 772,813 | 1,048,749 | ||||||
| Funds held by reinsureds | 284,809 | 286,856 | ||||||
| Deferred acquisition costs | 388,117 | 352,745 | ||||||
| Prepaid reinsurance premiums | 67,757 | 84,798 | ||||||
| Deferred tax asset | 220,047 | 234,562 | ||||||
| Current federal income taxes receivable | - | 75,022 | ||||||
| Other assets | 138,202 | 98,932 | ||||||
| TOTAL ASSETS | $ | 17,107,570 | $ | 16,474,539 | ||||
| LIABILITIES: | ||||||||
| Reserve for losses and loss adjustment expenses | $ | 8,840,140 | $ | 9,126,702 | ||||
| Future policy benefit reserve | 100,962 | 133,155 | ||||||
| Unearned premium reserve | 1,612,250 | 1,596,309 | ||||||
| Funds held under reinsurance treaties | 70,982 | 190,641 | ||||||
| Losses in the course of payment | 55,290 | 19,434 | ||||||
| Commission reserves | 23,665 | 19,378 | ||||||
| Other net payable to reinsurers | 47,483 | 50,354 | ||||||
| Current federal income taxes payable | 43,002 | - | ||||||
| 8.75% Senior notes due 3/15/2010 | 199,560 | 199,446 | ||||||
| 5.4% Senior notes due 10/15/2014 | 249,652 | 249,617 | ||||||
| Junior subordinated debt securities payable | 546,393 | 546,393 | ||||||
| Accrued interest on debt and borrowings | 10,041 | 10,041 | ||||||
| Other liabilities | 200,463 | 193,375 | ||||||
| Total liabilities | 11,999,883 | 12,334,845 | ||||||
| Commitments and Contingencies (Note 15) | ||||||||
SHAREHOLDERS' EQUITY: | ||||||||
| Preferred shares, par value: $0.01; 50 million shares authorized; | ||||||||
| no shares issued and outstanding | - | - | ||||||
| Common shares, par value: $0.01; 200 million shares authorized; | ||||||||
| (2006) 65.0 million and (2005) 64.6 million issued | 650 | 646 | ||||||
| Additional paid-in capital | 1,770,496 | 1,731,746 | ||||||
| Accumulated other comprehensive income, net of deferred income taxes of | ||||||||
| $175.0 million at 2006 and $134.9 million at 2005 | 348,543 | 221,146 | ||||||
| Retained earnings | 2,987,998 | 2,186,156 | ||||||
| Total shareholders' equity | 5,107,687 | 4,139,694 | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 17,107,570 | $ | 16,474,539 | ||||
| The accompanying notes are an integral part of the consolidated financial statements. | ||||||||
F-4
EVEREST RE GROUP, LTD. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) | |||||||||||
| Years Ended December 31, | |||||||||||
| (Dollars in thousands, except per share amounts) | 2006 | 2005 | 2004 | ||||||||
REVENUES: | |||||||||||
| Premiums earned | $ | 3,853,153 | $ | 3,963,093 | $ | 4,425,082 | |||||
| Net investment income | 629,378 | 522,833 | 495,908 | ||||||||
| Net realized capital gains | 35,067 | 90,284 | 89,614 | ||||||||
| Net derivative expense | (410 | ) | (2,638 | ) | (2,660 | ) | |||||
| Other income (expense) | 112 | (11,116 | ) | 9,562 | |||||||
| Total revenues | 4,517,300 | 4,562,456 | 5,017,506 | ||||||||
| CLAIMS AND EXPENSES: | |||||||||||
| Incurred losses and loss adjustment expenses | 2,434,420 | 3,724,317 | 3,291,139 | ||||||||
| Commission, brokerage, taxes and fees | 883,254 | 914,847 | 975,176 | ||||||||
| Other underwriting expenses | 137,977 | 129,800 | 114,870 | ||||||||
| Interest expense on senior notes | 31,149 | 35,514 | 41,954 | ||||||||
| Interest expense on junior subordinated debt | 37,449 | 37,449 | 32,392 | ||||||||
| Amortization of bond issue costs | 938 | 1,019 | 1,071 | ||||||||
| Interest and fee expense on credit facilities | 363 | 431 | 1,193 | ||||||||
| Total claims and expenses | 3,525,550 | 4,843,377 | 4,457,795 | ||||||||
| INCOME (LOSS) BEFORE TAXES | 991,750 | (280,921 | ) | 559,711 | |||||||
| Income tax expense (benefit) | 150,922 | (62,254 | ) | 64,853 | |||||||
| NET INCOME (LOSS) | $ | 840,828 | $ | (218,667 | ) | $ | 494,858 | ||||
| Other comprehensive income (loss), net of tax | 142,417 | (107,591 | ) | 48,660 | |||||||
| COMPREHENSIVE INCOME (LOSS) | $ | 983,245 | $ | (326,258 | ) | $ | 543,518 | ||||
| PER SHARE DATA: | |||||||||||
| Average shares outstanding (000's) | 64,724 | 57,649 | 55,929 | ||||||||
| Net income (loss) per common share - basic | $ | 12.99 | $ | (3.79 | ) | $ | 8.85 | ||||
| Average diluted shares outstanding (000's) | 65,324 | 57,649 | 56,826 | ||||||||
| Net income (loss) per common share - diluted | $ | 12.87 | $ | (3.79 | ) | $ | 8.71 | ||||
| The accompanying notes are an integral part of the consolidated financial statements. | |||||||||||
EVEREST RE GROUP, LTD. |
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|
CONSOLIDATED BALANCE SHEETS |
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| December 31, | ||
(Dollars in thousands, except par value per share) | 2008 |
| 2007 |
|
|
|
|
ASSETS: |
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|
|
Fixed maturities - available for sale, at market value | $ 10,759,612 |
| $ 10,245,585 |
(amortized cost: 2008, $10,932,076; 2007, $10,116,353) |
|
|
|
Fixed maturities - available for sale, at fair value | 43,090 |
| - |
Equity securities - available for sale, at market value (cost: 2008, $14,915; 2007, $14,481) | 16,900 |
| 14,797 |
Equity securities - available for sale, at fair value | 119,829 |
| 1,535,263 |
Short-term investments | 1,889,799 |
| 2,225,708 |
Other invested assets (cost: 2008, $687,265; 2007, $661,795) | 679,356 |
| 664,252 |
Cash | 205,694 |
| 250,567 |
Total investments and cash | 13,714,280 |
| 14,936,172 |
Accrued investment income | 149,215 |
| 145,056 |
Premiums receivable | 908,110 |
| 989,921 |
Reinsurance receivables | 657,169 |
| 666,164 |
Funds held by reinsureds | 331,817 |
| 342,615 |
Deferred acquisition costs | 354,992 |
| 399,563 |
Prepaid reinsurance premiums | 79,379 |
| 88,239 |
Deferred tax asset | 442,367 |
| 227,825 |
Federal income taxes recoverable | 32,295 |
| 47,368 |
Other assets | 176,966 |
| 156,559 |
TOTAL ASSETS | $ 16,846,590 |
| $ 17,999,482 |
|
|
|
|
LIABILITIES: |
|
|
|
Reserve for losses and loss adjustment expenses | $ 8,840,660 |
| $ 9,040,606 |
Future policy benefit reserve | 66,172 |
| 78,417 |
Unearned premium reserve | 1,335,511 |
| 1,567,098 |
Funds held under reinsurance treaties | 83,431 |
| 75,601 |
Losses in the course of payment | 45,654 |
| 63,366 |
Commission reserves | 52,460 |
| 48,753 |
Other net payable to reinsurers | 51,138 |
| 68,494 |
8.75% Senior notes due 3/15/2010 | 199,821 |
| 199,685 |
5.4% Senior notes due 10/15/2014 | 249,728 |
| 249,689 |
6.6% Long term notes due 5/1/2067 | 399,643 |
| 399,639 |
Junior subordinated debt securities payable | 329,897 |
| 329,897 |
Accrued interest on debt and borrowings | 11,217 |
| 11,217 |
Other liabilities | 220,903 |
| 182,250 |
Total liabilities | 11,886,235 |
| 12,314,712 |
|
|
|
|
Commitments and contingencies (Note 17) |
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|
|
|
|
|
|
SHAREHOLDERS' EQUITY: |
|
|
|
Preferred shares, par value: $0.01; 50 million shares authorized; |
|
|
|
no shares issued and outstanding | - |
| - |
Common shares, par value: $0.01; 200 million shares authorized; (2008) 65.6 million and |
|
|
|
(2007) 65.4 million issued | 656 |
| 654 |
Additional paid-in capital | 1,824,552 |
| 1,805,844 |
Accumulated other comprehensive (loss) income, net of deferred income tax benefit of |
|
|
|
$16.5 million at 2008 and expense of $87.2 million at 2007 | (291,851) |
| 163,155 |
Treasury shares, at cost; (2008) 4.2 million shares and (2007) 2.5 million shares | (392,329) |
| (241,584) |
Retained earnings | 3,819,327 |
| 3,956,701 |
Total shareholders' equity | 4,960,355 |
| 5,684,770 |
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ 16,846,590 |
| $ 17,999,482 |
| |||
The accompanying notes are an integral part of the consolidated financial statements. |
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|
|
EVEREST RE GROUP, LTD. |
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|
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS |
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|
|
AND COMPREHENSIVE (LOSS) INCOME |
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|
|
|
| Years Ended December 31, | ||||
(Dollars in thousands, except per share amounts) | 2008 |
| 2007 |
| 2006 |
|
|
|
|
|
|
REVENUES: |
|
|
|
|
|
Premiums earned | $ 3,694,301 |
| $ 3,997,498 |
| $ 3,853,153 |
Net investment income | 565,887 |
| 682,392 |
| 629,378 |
Net realized capital (losses) gains | (695,830) |
| 86,283 |
| 35,067 |
Net derivative expense | (20,900) |
| (2,124) |
| (410) |
Other (expense) income | (15,879) |
| 17,998 |
| 112 |
Total revenues | 3,527,579 |
| 4,782,047 |
| 4,517,300 |
|
|
|
|
|
|
CLAIMS AND EXPENSES: |
|
|
|
|
|
Incurred losses and loss adjustment expenses | 2,438,972 |
| 2,548,138 |
| 2,434,420 |
Commission, brokerage, taxes and fees | 930,694 |
| 961,788 |
| 883,254 |
Other underwriting expenses | 162,349 |
| 152,604 |
| 137,977 |
Interest, fees and bond issue cost amortization expense | 79,171 |
| 91,561 |
| 69,899 |
Total claims and expenses | 3,611,186 |
| 3,754,091 |
| 3,525,550 |
|
|
|
|
|
|
(LOSS) INCOME BEFORE TAXES | (83,607) |
| 1,027,956 |
| 991,750 |
Income tax (benefit) expense | (64,849) |
| 188,681 |
| 150,922 |
|
|
|
|
|
|
NET (LOSS) INCOME | $ (18,758) |
| $ 839,275 |
| $ 840,828 |
Other comprehensive (loss) income, net of tax | (455,006) |
| 65,427 |
| 142,417 |
|
|
|
|
|
|
COMPREHENSIVE (LOSS) INCOME | $ (473,764) |
| $ 904,702 |
| $ 983,245 |
|
|
|
|
|
|
PER SHARE DATA: |
|
|
|
|
|
Average shares outstanding (000's) | 61,674 |
| 63,118 |
| 64,724 |
Net (loss) income per common share - basic | $ (0.30) |
| $ 13.30 |
| $ 12.99 |
|
|
|
|
|
|
Average diluted shares outstanding (000's) | 61,674 |
| 63,629 |
| 65,324 |
Net (loss) income per common share - diluted | $ (0.30) |
| $ 13.19 |
| $ 12.87 |
The accompanying notes are an integral part of the consolidated financial statements. |
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|
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|
|
F-5
EVEREST RE GROUP, LTD. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY | |||||||||||
| Years Ended December 31, | |||||||||||
| (Dollars in thousands, except share amounts) | 2006 | 2005 | 2004 | ||||||||
COMMON SHARES (shares outstanding): | |||||||||||
| Balance, beginning of period | 64,643,338 | 56,177,902 | 55,677,044 | ||||||||
| Issued during the period, net | 400,638 | 8,465,436 | 500,858 | ||||||||
| Balance, end of period | 65,043,976 | 64,643,338 | 56,177,902 | ||||||||
| COMMON SHARES (par value): | |||||||||||
| Balance, beginning of period | $ | 646 | $ | 566 | $ | 561 | |||||
| Issued during the period, net | 4 | 80 | 5 | ||||||||
| Balance, end of period | 650 | 646 | 566 | ||||||||
| ADDITIONAL PAID-IN CAPITAL: | |||||||||||
| Balance, beginning of period | 1,731,746 | 975,917 | 949,401 | ||||||||
| Share-based compensation plans | 38,593 | 755,650 | 26,331 | ||||||||
| Other | 157 | 179 | 185 | ||||||||
| Balance, end of period | 1,770,496 | 1,731,746 | 975,917 | ||||||||
| ACCUMULATED OTHER COMPREHENSIVE INCOME, | |||||||||||
| NET OF DEFERRED INCOME TAXES: | |||||||||||
| Balance, beginning of period | 221,146 | 328,737 | 280,077 | ||||||||
| Net increase (decrease) during the period | 142,417 | (107,591 | ) | 48,660 | |||||||
| Adjustment to initially apply FASB Statement No. 158, net of tax | (15,020 | ) | - | - | |||||||
| Balance, end of period | 348,543 | 221,146 | 328,737 | ||||||||
| RETAINED EARNINGS: | |||||||||||
| Balance, beginning of period | 2,186,156 | 2,430,248 | 1,957,811 | ||||||||
| Net income (loss) | 840,828 | (218,667 | ) | 494,858 | |||||||
| Dividends declared ($0.60 per share in 2006, | |||||||||||
| $0.44 per share in 2005 and $0.40 per share in 2004) | (38,986 | ) | (25,425 | ) | (22,421 | ) | |||||
| Balance, end of period | 2,987,998 | 2,186,156 | 2,430,248 | ||||||||
| TREASURY SHARES AT COST: | |||||||||||
| Balance, beginning of period | - | (22,950 | ) | (22,950 | ) | ||||||
| Sale of treasury shares | - | 22,950 | - | ||||||||
| Balance, end of period | - | - | (22,950 | ) | |||||||
| TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD | $ | 5,107,687 | $ | 4,139,694 | $ | 3,712,518 | |||||
| The accompanying notes are an integral part of the consolidated financial statements. | |||||||||||
EVEREST RE GROUP, LTD. |
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|
|
|
|
CONSOLIDATED STATEMENTS OF |
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|
|
|
|
CHANGES IN SHAREHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
|
|
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|
|
|
| Years Ended December 31, | ||||
(Dollars in thousands, except share amounts) | 2008 |
| 2007 |
| 2006 |
|
|
|
|
|
|
COMMON SHARES (shares outstanding): |
|
|
|
|
|
Balance, beginning of period | 62,863,845 |
| 65,043,976 |
| 64,643,338 |
Issued during the period, net | 182,482 |
| 347,669 |
| 400,638 |
Treasury shares acquired | (1,632,300) |
| (2,527,800) |
| - |
Balance, end of period | 61,414,027 |
| 62,863,845 |
| 65,043,976 |
|
|
|
|
|
|
COMMON SHARES (par value): |
|
|
|
|
|
Balance, beginning of period | $ 654 |
| $ 650 |
| $ 646 |
Issued during the period, net | 2 |
| 4 |
| 4 |
Balance, end of period | 656 |
| 654 |
| 650 |
|
|
|
|
|
|
ADDITIONAL PAID-IN CAPITAL: |
|
|
|
|
|
Balance, beginning of period | 1,805,844 |
| 1,770,496 |
| 1,731,746 |
Share-based compensation plans | 18,540 |
| 35,142 |
| 38,593 |
Other | 168 |
| 206 |
| 157 |
Balance, end of period | 1,824,552 |
| 1,805,844 |
| 1,770,496 |
|
|
|
|
|
|
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME, |
|
|
|
|
|
NET OF DEFERRED INCOME TAXES: |
|
|
|
|
|
Balance, beginning of period | 163,155 |
| 348,543 |
| 221,146 |
Cumulative effect to adopt FAS No. 159, net of tax | - |
| (250,815) |
| - |
Net (decrease) increase during the period | (455,006) |
| 65,427 |
| 142,417 |
Adjustment to initially apply FAS No. 158, net of tax | - |
| - |
| (15,020) |
Balance, end of period | (291,851) |
| 163,155 |
| 348,543 |
|
|
|
|
|
|
RETAINED EARNINGS: |
|
|
|
|
|
Balance, beginning of period | 3,956,701 |
| 2,987,998 |
| 2,186,156 |
Cumulative effect to adopt FAS No. 159, net of tax | - |
| 250,815 |
| - |
Net (loss) income | (18,758) |
| 839,275 |
| 840,828 |
Dividends declared ($1.92 per share in 2008 and 2007 |
|
|
|
|
|
$0.60 per share in 2006) | (118,616) |
| (121,387) |
| (38,986) |
Balance, end of period | 3,819,327 |
| 3,956,701 |
| 2,987,998 |
|
|
|
|
|
|
TREASURY SHARES AT COST: |
|
|
|
|
|
Balance, beginning of period | (241,584) |
| - |
| - |
Purchase of treasury shares | (150,745) |
| (241,584) |
| - |
Balance, end of period | (392,329) |
| (241,584) |
| - |
|
|
|
|
|
|
TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD | $ 4,960,355 |
| $ 5,684,770 |
| $ 5,107,687 |
The accompanying notes are an integral part of the consolidated financial statements. |
|
|
|
|
|
F-6
EVEREST RE GROUP, LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||||||
| Years Ended December 31, | |||||||||||
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net income (loss) | $ | 840,828 | $ | (218,667 | ) | $ | 494,858 | ||||
| Adjustments to reconcile net income (loss) to net cash provided by | |||||||||||
| operating activities: | |||||||||||
| Decrease (increase) in premiums receivable | 70,596 | 113,548 | (254,723 | ) | |||||||
| Increase in funds held by reinsureds, net | (96,777 | ) | (198,243 | ) | (137,490 | ) | |||||
| Decrease in reinsurance receivables | 304,769 | 139,423 | 85,119 | ||||||||
| Increase in deferred tax asset | (25,524 | ) | (71,048 | ) | (31,150 | ) | |||||
| (Decrease) increase in reserve for losses and loss adjustment expenses | (432,494 | ) | 1,398,935 | 1,387,555 | |||||||
| Decrease in future policy benefit reserve | (32,193 | ) | (19,024 | ) | (53,096 | ) | |||||
| Increase in unearned premiums | 1,627 | 8,178 | 86,541 | ||||||||
| Increase (decrease) in other assets and liabilities, net | 3,477 | (27,714 | ) | (26,730 | ) | ||||||
| Non-cash compensation expense | 15,127 | 8,003 | 4,684 | ||||||||
| Amortization of bond premium | 21,797 | 27,298 | 24,719 | ||||||||
| Amortization of underwriting discount on senior notes | 149 | 162 | 204 | ||||||||
| Realized capital gains | (35,067 | ) | (90,284 | ) | (89,614 | ) | |||||
| Net cash provided by operating activities | 636,315 | 1,070,567 | 1,490,877 | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Proceeds from fixed maturities matured/called - available for sale | 872,428 | 704,687 | 659,426 | ||||||||
| Proceeds from fixed maturities sold - available for sale | 182,869 | 1,420,287 | 1,451,166 | ||||||||
| Proceeds from equity securities sold | 281,093 | 217,909 | 17,995 | ||||||||
| Proceeds from other invested assets sold | 76,307 | 53,565 | 6,814 | ||||||||
| Cost of fixed maturities acquired - available for sale | (1,291,871 | ) | (2,423,060 | ) | (3,215,214 | ) | |||||
| Cost of equity securities acquired | (568,966 | ) | (555,778 | ) | (437,132 | ) | |||||
| Cost of other invested assets acquired | (219,067 | ) | (175,782 | ) | (31,511 | ) | |||||
| Net sales (purchases) of short-term securities | 150,379 | (853,499 | ) | (432,279 | ) | ||||||
| Net (increase) decrease in unsettled securities transactions | (11,322 | ) | 159 | (19,273 | ) | ||||||
| Net cash used in investing activities | (528,150 | ) | (1,611,512 | ) | (2,000,008 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Common shares issued during the period | 23,627 | 732,595 | 21,837 | ||||||||
| Dividends paid to shareholders | (38,986 | ) | (25,425 | ) | (22,421 | ) | |||||
| Sale of treasury shares, net of tax | - | 38,261 | - | ||||||||
| (Repayment) proceeds from issuance of senior notes | - | (250,000 | ) | 246,651 | |||||||
| Net proceeds from issuance of junior subordinated notes | - | - | 319,997 | ||||||||
| Repayments on revolving credit agreement | - | - | (70,000 | ) | |||||||
| Net cash (used in) provided by financing activities | (15,359 | ) | 495,431 | 496,064 | |||||||
| EFFECT OF EXCHANGE RATE CHANGES ON CASH | 49,787 | (32,141 | ) | 13,138 | |||||||
| Net increase (decrease) in cash | 142,593 | (77,655 | ) | 71 | |||||||
| Cash, beginning of period | 107,275 | 184,930 | 184,859 | ||||||||
| Cash, end of period | $ | 249,868 | $ | 107,275 | $ | 184,930 | |||||
| SUPPLEMENTAL CASH FLOW INFORMATION | |||||||||||
| Cash transactions: | |||||||||||
| Income taxes paid, net | $ | 46,616 | $ | 110,945 | $ | 100,007 | |||||
| Interest paid | $ | 68,910 | $ | 79,617 | $ | 72,605 | |||||
The accompanying notes are an integral part of the consolidated financial statements. | |||||||||||
F-7
EVEREST RE GROUP, LTD. |
|
|
|
|
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years Ended December 31, | ||||
(Dollars in thousands) |
| 2008 |
| 2007 |
| 2006 |
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
Net (loss) income |
| $ (18,758) |
| $ 839,275 |
| $ 840,828 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
Decrease in premiums receivable |
| 36,119 |
| 155,552 |
| 70,596 |
Increase in funds held by reinsureds, net |
| (26,826) |
| (48,944) |
| (96,777) |
(Increase) decrease in reinsurance receivables |
| (82,241) |
| 126,328 |
| 304,769 |
Increase in deferred tax asset |
| (110,848) |
| (30,279) |
| (25,524) |
Increase (decrease) in reserve for losses and loss adjustment expenses |
| 220,324 |
| 96,627 |
| (432,494) |
Decrease in future policy benefit reserve |
| (12,244) |
| (22,545) |
| (32,193) |
(Decrease) increase in unearned premiums |
| (199,673) |
| (57,617) |
| 1,627 |
Change in equity adjustments in limited partnerships |
| 100,812 |
| (45,101) |
| (54,497) |
Change in other assets and liabilities, net |
| 28,760 |
| (81,271) |
| 57,974 |
Non-cash compensation expense |
| 16,305 |
| 17,119 |
| 15,127 |
Amortization of bond premium/(accrual of bond discount) |
| 15,256 |
| (8,594) |
| 21,797 |
Amortization of underwriting discount on senior notes |
| 179 |
| 164 |
| 149 |
Net realized capital losses (gains) |
| 695,830 |
| (86,283) |
| (35,067) |
Net cash provided by operating activities |
| 662,995 |
| 854,431 |
| 636,315 |
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
Proceeds from fixed maturities matured/called - available for sale, at market value |
| 968,789 |
| 1,248,811 |
| 872,428 |
Proceeds from fixed maturities matured/called - available for sale, at fair value |
| 1,900 |
| - |
| - |
Proceeds from fixed maturities sold - available for sale, at market value |
| 279,526 |
| 275,557 |
| 182,869 |
Proceeds from equity securities sold - available for sale, at market value |
| - |
| - |
| 281,093 |
Proceeds from equity securities sold - available for sale, at fair value |
| 1,439,844 |
| 1,547,135 |
| - |
Distributions from other invested assets |
| 121,009 |
| 58,682 |
| 76,307 |
Cost of fixed maturities acquired - available for sale, at market value |
| (2,691,857) |
| (1,338,865) |
| (1,291,871) |
Cost of fixed maturities acquired - available for sale, at fair value |
| (43,414) |
| - |
| - |
Cost of equity securities acquired - available for sale, at market value |
| (1,038) |
| - |
| (568,966) |
Cost of equity securities acquired - available for sale, at fair value |
| (532,584) |
| (1,391,450) |
| - |
Cost of other invested assets acquired |
| (247,349) |
| (195,448) |
| (219,067) |
Net change in short-term securities |
| 311,322 |
| (852,659) |
| 150,379 |
Net change in unsettled securities transactions |
| 3,828 |
| (4,779) |
| (11,322) |
Net cash used in investing activities |
| (390,024) |
| (653,016) |
| (528,150) |
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
Common shares issued during the period, net |
| 2,405 |
| 18,233 |
| 23,627 |
Purchase of treasury shares |
| (150,745) |
| (241,584) |
| - |
Net proceeds from redemption of junior subordinated debt securities |
| - |
| (216,496) |
| - |
Net proceeds from issuance of long term notes |
| - |
| 395,637 |
| - |
Dividends paid to shareholders |
| (118,616) |
| (121,387) |
| (38,986) |
Net cash used in financing activities |
| (266,956) |
| (165,597) |
| (15,359) |
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH |
| (50,888) |
| (35,119) |
| 49,787 |
|
|
|
|
|
|
|
Net (decrease) increase in cash |
| (44,873) |
| 699 |
| 142,593 |
Cash, beginning of period |
| 250,567 |
| 249,868 |
| 107,275 |
Cash, end of period |
| $ 205,694 |
| $ 250,567 |
| $ 249,868 |
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION |
|
|
|
|
|
|
Cash transactions: |
|
|
|
|
|
|
Income taxes paid |
| $ 10,955 |
| $ 282,568 |
| $ 46,616 |
Interest paid |
| $ 78,140 |
| $ 83,138 |
| $ 68,910 |
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements. |
|
|
|
|
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2006, 20052008, 2007 and 20042006
1.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Business and Basis of Presentation
Presentation.
Everest Re Group, Ltd. (“Group”), a Bermuda company, through its subsidiaries, principally provides reinsurance and insurance in the U.S., Bermuda and international markets. As used in this document, the “Company” means Group and its subsidiaries. Prior to December 31, 2004, Group’s principal executive office was located in Barbados. On December 31, 2004 the Company closed30, 2008, Group contributed Everest Reinsurance Holdings, Inc. and its principal executive office in Barbados andsubsidiaries to its recently established its principal executive office in Bermuda.Irish holding company, Everest Risk Holdings (Ireland), Limited.
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The statements include all of the following domestic and foreign direct and indirect subsidiaries of Group: Everest Reinsurance Holdings, Inc. (“Holdings”), Everest Reinsurance (Bermuda), Ltd. (“Bermuda Re”), Everest International Reinsurance, Ltd. (“Everest International”), Everest International Holdings, Ltd., Mt. McKinley Insurance Company (“Mt. McKinley”), Everest Global Services, Inc. (“Global Services”), Everest Reinsurance (Bermuda), Ltd. (“Bermuda Re”), Everest Re Advisors, Ltd., Everest Advisors (Ireland) Ltd., Everest Advisors (UK), Ltd., Everest AdvisorsRisk Holdings (Ireland), Limited (“Holdings Ireland”), Everest Re Advisors, Ltd.Reinsurance Holdings, Inc. (“Holdings”), Mt. McKinley Insurance Company (“Mt. McKinley”), Mt. McKinley Managers, L.L.C., Workcare Southeast, Inc., Workcare Southeast of Georgia, Inc., Everest Reinsurance Company (“Everest Re”), Everest National Insurance Company (“Everest National”), Everest Indemnity InsuranceReinsurance Company (“Everest Indemnity”)Ltda. (Brazil), Everest Security Insurance Company (“Everest Security”)Mt. Whitney Securities, Inc., Everest Insurance Company of Canada (“Everest Canada”), Mt. McKinley Managers, L.L.C.Everest Indemnity Insurance Company (“Everest Indemnity”), Workcare Southeast, Inc. and Workcare Southeast of Georgia, Inc.Everest Security Insurance Company (“Everest Security”). All amounts are reported in U.S. dollars.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities (and disclosure of contingent assets and liabilities) at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. All intercompany accounts and transactions have been eliminated. Ultimate actual results could differ, possibly materially, from those estimates.
Certain reclassifications and format changes have been made to prior years’ amounts to conform to the 2008 presentation.
B. Investments
Investments.
Fixed maturity and market value equity security investments are all classified as available for sale. Unrealized appreciation and depreciation, as a result of temporary changes in market value during the period, are reflected in shareholders’ equity, net of income taxes in “accumulated other comprehensive income”. Equity in the consolidated balance sheets. Actively managed equity securities are carried at marketfair value with unrealized appreciation or depreciation,fair value re-measurements reflected as a resultnet realized capital gains and losses in the consolidated statements of temporary changes in market value during the period, reflected in shareholders’ equity, net of income taxes in “accumulated otheroperations and comprehensive income”.income. Unrealized losses on fixed maturities, and equity securities, which are deemed other than temporary,other-than-temporary, are charged to net income as net realized capital losses. Short-term investments are stated at cost, which approximates market value. Realized gains or losses on salesales of investments are determined on the basis of identified cost. For non-publicly traded securities, market prices are determined through the use of pricing models that evaluate securities relative to the U.S. Treasury yield curve, taking into account the issue type, credit quality and cash flow characteristics of each security. For publicly traded securities, market value is based on quoted market prices.prices or valuation models that use observable market inputs. When a sector of the financial markets is inactive or illiquid, the Company may use its own assumptions about future cash flows and risk-adjusted discount rates to determine fair value. Retrospective adjustments are employed to recalculate the values of loan-backed and asset-backed securities. Each acquisition lot is reviewed to recalculate the effective yield. The recalculated effective yield is used to derive a book value as if the new yield were applied at the time of acquisition. Outstanding principal factors from the time of acquisition to the adjustment date are used to calculate the prepayment history for all applicable securities. Conditional prepayment rates, computed with life to date factor histories and weighted average maturities, are used to affecteffect the calculation of projected and prepayments for pass-through security types. Other invested assets
F-8
include limited partnerships, rabbi trusts and rabbi trusts.an affiliated entity. Limited partnerships and the affiliated entity are valued pursuant toaccounted for under the equity method of accounting, which management believes approximates market value.can be recorded on a monthly or quarterly lag.
C. Uncollectible Receivable Balances
Balances.
The Company provides reserves for uncollectible reinsurance balances based on management’s assessment of the collectibility of the outstanding balances. Such reserves were $99.9$264.1 million at December 31, 2006, of which $62.0 million is due to the credit program,2008 and $38.6$188.2 million at December 31, 2005.2007.
D. Deferred Acquisition Costs
Costs.
Acquisition costs, consisting principally of commissions and brokerage expenses and certain premium taxes and fees that vary with and are directly associated with the Company’s reinsurance and insurance business incurred at the time a contract or policy is issued and that vary with and are directly related to the Company’s reinsurance and insurance business, are deferred and amortized over the period in which the related premiums are earned, generally one year. Deferred acquisition costs are limited to their estimated realizable value by line of business based on the related unearned premiums, anticipated claims and claim expenses and anticipated investment income. Deferred acquisition costs amortized to income were $930.7 million, $961.8 million and $883.3 million $914.8 millionin 2008, 2007 and $975.2 million in 2006, 2005 and 2004, respectively.
The present value of in force annuity business is included in deferred acquisition costs. This value is amortized over the expected life of the business atfrom the time of acquisition. The amortization each year is a function of the gross profits each year in relation to the total gross profits expected over the life of the business, discounted at an assumed net credit rate.
E. Reserve for Losses and Loss Adjustment Expenses
Expenses.
The reserve for losses and loss adjustment expenses (“LAE”) is based on individual case estimates and reports received from ceding companies. A provision is included for losses and LAE incurred but not reported (“IBNR”) based on past experience. A provision is also included for certain potential liabilities relating to asbestos and environmental (“A&E”) exposures, which liabilities cannot be estimated withusing traditional reserving techniques. See also Note 3. The reserves are reviewed periodically and any changes in estimates are reflected in earnings in the period the adjustment is made. Management believes that adequate provision has been made forThe Company’s loss and LAE reserves represent management’s best estimate of the Company’s losses and LAE.ultimate liability. Loss and LAE reserves are presented gross of reinsurance receivables and incurred losses and LAE are presented net of ceded reinsurance.
Accruals for commissions are established for reinsurance contracts that provide for the stated commission percentage to increase or decrease based on the loss experience of the contract. Changes in estimates for such arrangements are recorded as commission expense. Accruals are determined through the review of theCommission accruals for contracts that have thesewith adjustable features and are estimated based on expected loss and LAE.
F. Future Policy Benefit Reserve
Reserve.
Liabilities for future policy benefits on annuity policies are carried at their accumulated values. Reserves for policy benefits include both mortality and morbidity claims in the process of settlement and IBNR claims. Interest rate assumptions used to estimate liabilities for policy benefits range from 3.97%2.34% to 5.70%5.88%. Actual experience in a particular period may vary.
fluctuate from expected results.
G. Premium Revenues
Revenues.
Written premiums are earned ratably over the periods of the related insurance and reinsurance contracts or policies.contracts. Unearned premium reserves are established relative to cover the remainder of the unexpired contract period. Such reserves are established based upon reports received from ceding companies or estimated using pro rata methods based on statistical data. Reinstatement premiums represent additional premium received on catastrophe reinsurance coverages, most prevalently catastrophe related, when limits have been exhausteddepleted under the original reinsurance contract and
F-9
additional coverage is granted. Written and earned premiums and the related costs, which have not yet been reported to the Company, are estimated and accrued. Premiums are net of ceded reinsurance.
Annuity premiums are recognized as revenue over the premium-paying period of the policies.
H. Income Taxes
Taxes.
Holdings and its wholly-owned subsidiaries file a consolidated U.S. federal income tax return. Foreign branches of subsidiaries file local tax returns as required. Group and subsidiaries not included in Holdings’ consolidated tax return file separate company U.S. federal income tax returns as required. The UK branch of Bermuda Re files a UK income tax return. Deferred income taxes have been recorded to recognize the tax effect of temporary differences between the financial reporting and income tax bases of assets and liabilities.liabilities, which arise because of differences between GAAP and income tax accounting rules.
I. Foreign Currency
Currency.
Assets and liabilities relating to foreign operations are translated into U.S. dollars at the exchange rates in effect at the balance sheet date; revenues and expenses are translated into U.S. dollars using average exchange rates.rates in effect during the reporting period. Gains and losses resulting from translating foreign currency financial statements, net of deferred income taxes, are excluded from net income and accumulated in shareholders’ equity. Gains and losses resulting from foreign currency transactions, other than debt securities available for sale, are recorded through the statementconsolidated statements of operations.operations and comprehensive income (loss) in other income (expense). Gains and losses resulting from changes in the foreign currency exchange rates on debt securities, available for sale at market value, are recorded in the consolidated balance sheets in accumulated other comprehensive income (loss) as unrealized appreciation (depreciation).
J. Earnings per Share
Per Common Share.
Basic earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per share reflect the potential dilution that would occur if options granted under various share-based compensation plans were exercised resulting in the issuance of common shares that would shareparticipate in the earnings of the entity.
Net (loss) income (loss) per common share has been computed below, based upon weighted average common basic and dilutive shares outstanding.
| (Dollars in thousands, except per share amounts) | 2006 | 2005 | 2004 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
Net income (loss) (numerator) | $ | 840,828 | $ | (218,667 | ) | $ | 494,858 | ||||
| Weighted average common and effect of dilutive shares | |||||||||||
| used in the computation of net income (loss) per share: | |||||||||||
| Weighted average shares outstanding - basic (denominator) | 64,724 | 57,649 | 55,929 | ||||||||
| Effect of dilutive shares | 600 | 918 | 897 | ||||||||
| Weighted average shares outstanding - diluted (denominator) | 65,324 | 58,567 | 56,826 | ||||||||
| Weighted average common equivalent shares when anti-dilutive | - | 57,649 | - | ||||||||
| Net income (loss) per common share: | |||||||||||
| Basic | $ | 12.99 | $ | (3.79 | ) | $ | 8.85 | ||||
| Diluted | $ | 12.87 | $ | (3.79 | ) | $ | 8.71 | ||||
| Years Ended December 31, | ||||
(Dollars in thousands, except per share amounts) | 2008 |
| 2007 |
| 2006 |
|
|
|
|
|
|
Net (loss) income (numerator) | $ (18,758) |
| $ 839,275 |
| $ 840,828 |
|
|
|
|
|
|
Weighted average common and effect of dilutive shares |
|
|
|
|
|
used in the computation of net (loss) income per share: |
|
|
|
|
|
Weighted average shares outstanding - basic (denominator) | 61,674 |
| 63,118 |
| 64,724 |
Effect of dilutive shares | 304 |
| 511 |
| 600 |
Weighted average shares outstanding - diluted (denominator) | 61,978 |
| 63,629 |
| 65,324 |
Weighted average common equivalent shares when anti-dilutive | 61,674 |
| - |
| - |
|
|
|
|
|
|
Net (loss) income per common share: |
|
|
|
|
|
Basic | $ (0.30) |
| $ 13.30 |
| $ 12.99 |
Diluted | $ (0.30) |
| $ 13.19 |
| $ 12.87 |
Options to purchase 983,000 common shares at prices ranging from $87.40 to $99.98 per share were outstanding at the end of 2008 but were not included in the computation of earnings per diluted share as the options’ exercise prices were greater than the average market price of the common shares for the relevant period. All options to purchase common shares at the end of 2007 were included in the computation of diluted earnings per share as the average market price of the common shares was greater than all of the options’ exercise prices during the relevant period. Options to purchase 310,200 common shares at prices ranging from $95.485 to $99.980 were outstanding at the end of 2006 and options to purchase 315,000 common shares at prices ranging from $95.050 to $95.485 per share were outstanding at the end of 20052006 but were not included in the computation of earnings per diluted share for 2006, and 2005, respectively, because the options’ exercise price wasprices were greater than the average market price of the common shares. All outstanding options expire on or between September 26, 2007April 1, 2009 and September 27, 2016.February 20, 2018.
F-10
K. Segmentation
Segmentation.
The Company, through its subsidiaries, operates in five segments: U.S. Reinsurance, U.S. Insurance, Specialty Underwriting, International and Bermuda. See also Note 18.20.
L. Derivatives
Derivatives.
The Company has issuedsold seven equity index put options in its product portfolio,option contracts, which are outstanding. These productscontracts meet the definition of a derivative under Statement of Financial Accounting Standards (“FAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”). The Company’s position in these contracts is unhedged and isthese contracts are accounted for as a derivativederivatives in accordance with FAS 133. Accordingly, these contracts are carried at fair value and are recorded in “Other liabilities” in the consolidated balance sheets andwith changes in fair value areduring the period recorded in the consolidated statements of operations and comprehensive income (loss). income.
M. Deposit Assets and Liabilities
Liabilities.
In the normal course of its operations, the Company may enter into contracts that do not meet the risk transfer provisions of Statement of Financial Accounting StandardsFAS No. 113, “Accounting and Reporting for Reinsurance of Short Duration and Long Duration Contracts”. Such contracts are accounted for using the deposit accounting method.method and are included in other liabilities. For such contracts, the Company originally records deposit liabilities for an amount equivalent to the assets received. Actuarial studies are used to estimate the final liabilities under such contracts with any change reflected in the consolidated statements of operations and comprehensive income (loss). income.
N. Share-Based Employee Compensation
Compensation.
Prior to 2002, the Company accounted for its share-based employee compensation plans under the recognition and measurement provisions of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations. Effective January 1, 2002, the Company adopted the fair value recognition provisions of Statement of Financial Accounting StandardsFAS No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”) prospectively tofor all employee awards granted, modified or settled after January 1, 2002. Effective January 1, 2006, the Company adopted Statement of Financial Accounting StandardsFAS No. 123(R) “Share-Based Payment” (“FAS 123(R)”). See also Note 16.18.
Prior to January 1, 2002, the compensation cost for the Company’s share-based compensation plans were determined based on APB 25. If the fair value at the grant dates for awards granted under those plans prior to January 1, 2002 were calculated consistent with the method of FAS 123, the Company’s net income (loss) and earnings per share would have been reduced to the pro forma amounts indicated below:
| (Dollars in thousands, except per share amounts) | 2005 | 2004 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Net income (loss) | As reported | $ | (218,667 | ) | $ | 494,858 | |||||
| Pro forma | $ | (219,052 | ) | $ | 493,931 | ||||||
| Earnings per share - basic | As reported | $ | (3.79 | ) | $ | 8.85 | |||||
| Pro forma | $ | (3.80 | ) | $ | 8.83 | ||||||
| Earnings per share - diluted | As reported | $ | (3.79 | ) | $ | 8.71 | |||||
| Pro forma | $ | (3.80 | ) | $ | 8.69 | ||||||
The fair value of each option grant accounted for in accourdance with APB 25 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: (i) dividend yields ranging from 0.5% to 0.9%, (ii) expected volatility ranging from 32.9% to 45.8%, (iii) risk-free interest rates ranging from 4.7% to 7.0% and (iv) expected lives of 7.3 to 7.5 years.
F-11
O. Policyholder Dividends
Dividends.
The Company issues certain insurance policies with dividend payment features. These policyholders share in the operating results of their respective policies in the form of dividends declared. Dividends to policyholders are accrued during the period in which the related premiums are earned and are determined based on the terms of the individual policies.
P. Application of New Accounting Standards
Standards.
In December 2004,July 2006, the Financial Accounting Standards Board (“FASB”) issued FAS 123(R), which is effective for fiscal years beginning after June 15, 2005. The Company adopted FAS 123(R) effective January 1, 2006. FAS 123(R) requires all share-based compensation awards, granted, modified or settled after December 15, 1994 to be accounted for using the fair value method of accounting. Under the modified prospective application, compensation cost is recognized for the outstanding, non-vested awards based on the grant date fair value of those awards as calculated under FAS 123. The Company implemented FAS 123 prospectively for grants issued on or after January 1, 2002. The adoption of FAS 123(R) resulted in $169,037 of additional compensation expense for the year ended December 31, 2006 for options granted prior to FAS 123.
In November 2005, the FASB issued FASB Staff Position (“FSP”) FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FAS 115-1”), which is effective for reporting periods beginning after December 15, 2005. FAS 115-1 addresses the determination as to when an investment is considered impaired, whether the impairment is other than temporary and the measurement of an impairment loss. FAS 115-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses not recognized as other-than-temporary impairments. The Company adopted FAS 115-1 prospectively effective January 1, 2006. The Company believes that all unrealized losses in its investment portfolio are temporary in nature.
In July 2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”), which iswas effective for fiscal years beginning after December 15, 2006. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes” (“FAS 109”). FIN 48 prescribes the financial statement recognition and measurement criteria for the financial statements for tax positions taken or expected to be taken in a tax return. Further, FIN 48 expands the required disclosures associated with uncertain tax positions. The Company will adoptAs a result of the implementation of FIN 48, on January 1, 2007. Thethe Company does not believerecorded no adjustment in the impact of implementing FIN 48 will be material on its consolidated financial statements.liability for unrecognized income tax benefits and no adjustment to beginning retained earnings.
In September 2006, the FASB issued Statement of Financial Accounting StandardsFAS No. 157 “Fair Value Measurements” (“FAS 157”), which is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.. FAS 157 defines fair value, establishes a framework for measuring fair value consistently in GAAP and expands disclosures about fair value measurements. The Company will adoptadopted FAS 157 onas of January 1, 2008. The Company does not believe the impact of implementing FAS 157 will be material on its consolidated financial statements.2007.
In September 2006, the FASB issued Statement of Financial Accounting StandardsFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“FAS 158”), which iswas effective for employers with publicly traded equity securities as of the end of the fiscal year ending after December 15, 2006. FAS 158 requires an employer to (a) recognize in its financial statements an asset for a plan’s over funded status or a liability for a plan’s
under funded status, (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year and (c) recognize changes in the funded status of a defined benefit postretirementpost-retirement plan in the year in which the changes occur as other comprehensive income. The Company adopted FAS 158 for the reporting period ended December 31, 2006.
In February 2007, the FASB issued FAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment to FASB Statement No. 115” (“FAS 159”). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The impactobjective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company adopted FAS 159 as of January 1, 2007.
In March 2008, the FASB issued FAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133” (“FAS 161”). FAS 161 requires entities to provide additional disclosures on derivative and hedging activities regarding their effect on financial position, financial performance and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company will adopt FAS 161 on January 1, 2009.
In October 2008, the Company’s consolidated balance sheets atFASB issued FASB Staff Position FAS 157-3 “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active” (“FAS 157-3”). FAS 157-3 clarifies the application of FAS No. 157 “Fair Value Measurements” (“FAS 157”), in a market that is not active. This FASB Staff Position was effective upon issuance.
In December 2008, the FASB issued FASB Staff Position FAS 132(R)-1 “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FAS 132(R)-1”). FAS 132(R)-1 requires additional disclosures about plan assets. Additional disclosures include investment policies and strategies, fair value of each major plan asset category, inputs and valuation techniques used to develop fair value and any significant concentrations of risk. This FASB Staff Position is effective for fiscal years ending after December 15, 2009. The Company will adopt FAS 132(R)-1 for the reporting period ending December 31, 2006 was a $23.1 million pre-tax, or $15.0 million after-tax, reduction to accumulated other comprehensive income.2009.
F-12
Q. Investments – Interest Only StripsDuring 2005 and 2004, the Company invested in interest only strips of mortgage-backed securities (“interest only strips”). These securities give the holder the right to receive interest payments at a stated coupon rate on an underlying pool of mortgages. The interest payments on the outstanding mortgages are guaranteed by entities generally rated AAA. The ultimate cash flow from these investments is primarily dependent upon the average life of the mortgage pool. Generally, as mortgage rates decline, mortgagors are more likely to prepay their mortgage loans which decreases the average life of a mortgage pool and decreases expected cash flows. Conversely, as mortgage rates rise, repayments are more likely to slow and ultimate cash flows will tend to rise. Accordingly, the market value of these investments tends to increase as general interest rates rise and decline as general interest rates fall. These movements are generally counter to the impact of interest rate movements on the Company’s other fixed income investments. The Company held no interest only strips investments at December 31, 2006 and 2005.
The Company accounted for its investment in interest only strips in accordance with Emerging Issues Task Force Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets” (“EITF 99-20”). EITF 99-20 sets forth the rules for recognizing interest income on all credit-sensitive mortgage and asset-backed securities and certain prepayment-sensitive securities, including agency interest only strips, whether purchased or retained in securitization, as well as the rules for determining when these securities must be written down to fair value because of impairment. EITF 99-20 requires decreases in the valuation of residual interests in securitizations to be recorded as a reduction to the carrying value of the residual interests through a charge to earnings, rather than an unrealized loss in shareholders’ equity, when any portion of the decline in fair value is attributable to, as defined by EITF 99-20, an impairment loss. The Company recorded a pre-tax and after-tax realized capital loss due to impairments of $7.0 million and $5.6 million, respectively, for the year ended December 31, 2005 and $65.1 million and $49.7 million, respectively, for the year ended December 31, 2004. As a result of liquidating the interest only strips portfolios, the Company recognized pre-tax and after-tax realized capital gains of $41.3 million and $32.5 million, respectively, for the year ended December 31, 2005 and pre-tax and after-tax realized capital gains of $118.2 million and $91.0 million, respectively, for the year ended December 31, 2004.
F-13
2. INVESTMENTS
The amortized cost, market value, and gross unrealized appreciation and depreciation of available for sale, market value fixed maturity investments and equity securitiessecurity investments are presented inas follows for the tables below:periods indicated:
| (Dollars in thousands) | Amortized Cost | Unrealized Appreciation | Unrealized Depreciation | Market Value | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| As of December 31, 2006 | ||||||||||||||
| Fixed maturities - available for sale | ||||||||||||||
| U.S. Treasury securities and obligations of | ||||||||||||||
| U.S. government agencies and corporations | $ | 229,241 | $ | 1,277 | $ | (3,838 | ) | $ | 226,680 | |||||
| Obligations of U.S. states and political subdivisions | 3,633,188 | 164,403 | (5,220 | ) | 3,792,371 | |||||||||
| Corporate securities | 2,877,074 | 33,913 | (55,009 | ) | 2,855,978 | |||||||||
| Mortgage-backed securities | 1,626,017 | 2,784 | (34,827 | ) | 1,593,974 | |||||||||
| Foreign government securities | 1,019,826 | 18,695 | (10,163 | ) | 1,028,358 | |||||||||
| Foreign corporate securities | 824,819 | 11,374 | (13,704 | ) | 822,489 | |||||||||
| Total fixed maturities | $ | 10,210,165 | $ | 232,446 | $ | (122,761 | ) | $ | 10,319,850 | |||||
| Equity securities | $ | 1,252,595 | $ | 361,083 | $ | - | $ | 1,613,678 | ||||||
As of December 31, 2005 | ||||||||||||||
| Fixed maturities - available for sale | ||||||||||||||
| U.S. Treasury securities and obligations of | ||||||||||||||
| U.S. government agencies and corporations | $ | 205,020 | $ | 143 | $ | (3,540 | ) | $ | 201,623 | |||||
| Obligations of U.S. states and political subdivisions | 3,614,956 | 153,376 | (8,052 | ) | 3,760,280 | |||||||||
| Corporate securities | 2,857,444 | 51,825 | (49,869 | ) | 2,859,400 | |||||||||
| Mortgage-backed securities | 1,556,017 | 4,391 | (33,209 | ) | 1,527,199 | |||||||||
| Foreign government securities | 1,047,725 | 33,514 | (1,662 | ) | 1,079,577 | |||||||||
| Foreign corporate securities | 591,077 | 28,055 | (5,077 | ) | 614,055 | |||||||||
| Total fixed maturities | $ | 9,872,239 | $ | 271,304 | $ | (101,409 | ) | $ | 10,042,134 | |||||
| Equity securities | $ | 922,090 | $ | 170,412 | $ | (1,677 | ) | $ | 1,090,825 | |||||
| At December 31, 2008 | ||||||
| Amortized |
| Unrealized |
| Unrealized |
| Market |
(Dollars in thousands) | Cost |
| Appreciation |
| Depreciation |
| Value |
Fixed maturities - available for sale |
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of |
|
|
|
|
|
|
|
U.S. government agencies and corporations | $ 354,195 |
| $ 55,186 |
| $ (663) |
| $ 408,718 |
Obligations of U.S. states and political subdivisions | 3,846,754 |
| 113,885 |
| (164,921) |
| 3,795,718 |
Corporate securities | 2,690,786 |
| 61,552 |
| (227,692) |
| 2,524,646 |
Mortgage-backed securities | 1,988,359 |
| 26,331 |
| (136,298) |
| 1,878,392 |
Foreign government securities | 1,087,731 |
| 117,973 |
| (23,598) |
| 1,182,106 |
Foreign corporate securities | 964,251 |
| 56,813 |
| (51,032) |
| 970,032 |
Total fixed maturities | $ 10,932,076 |
| $ 431,740 |
| $ (604,204) |
| $ 10,759,612 |
Equity securities | $ 14,915 |
| $ 1,985 |
| $ - |
| $ 16,900 |
| At December 31, 2007 | ||||||
| Amortized |
| Unrealized |
| Unrealized |
| Market |
(Dollars in thousands) | Cost |
| Appreciation |
| Depreciation |
| Value |
Fixed maturities - available for sale |
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of |
|
|
|
|
|
|
|
U.S. government agencies and corporations | $ 224,563 |
| $ 7,166 |
| $ (108) |
| $ 231,621 |
Obligations of U.S. states and political subdivisions | 3,512,694 |
| 138,375 |
| (2,540) |
| 3,648,529 |
Corporate securities | 2,557,801 |
| 33,418 |
| (55,613) |
| 2,535,606 |
Mortgage-backed securities | 1,636,537 |
| 9,483 |
| (18,784) |
| 1,627,236 |
Foreign government securities | 1,122,993 |
| 25,240 |
| (6,613) |
| 1,141,620 |
Foreign corporate securities | 1,061,765 |
| 14,953 |
| (15,745) |
| 1,060,973 |
Total fixed maturities | $ 10,116,353 |
| $ 228,635 |
| $ (99,403) |
| $ 10,245,585 |
Equity securities | $ 14,481 |
| $ 316 |
| $ - |
| $ 14,797 |
The amortized cost and market value of fixed maturities are shown in the following table by contractual maturity. Mortgage-backed securities generally are more likely to be prepaid than other fixed maturities. As the stated maturity of such securities may not be indicative of actual maturities, the total for mortgage-backed securities is shown separately.
| December 31, 2006 | ||||||||
|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | Amortized Cost | Market Value | ||||||
| Fixed maturities – available for sale | ||||||||
| Due in one year or less | $ | 639,458 | $ | 637,105 | ||||
| Due after one year through five years | 2,485,777 | 2,479,673 | ||||||
| Due after five years through ten years | 2,031,904 | 2,008,054 | ||||||
| Due after ten years | 3,427,009 | 3,601,044 | ||||||
| Mortgage-backed securities | 1,626,017 | 1,593,974 | ||||||
| Total | $ | 10,210,165 | $ | 10,319,850 | ||||
F-14
|
|
|
|
| At December 31, 2008 | ||
|
|
|
|
| Amortized |
| Market |
(Dollars in thousands) |
|
|
|
| Cost |
| Value |
Fixed maturities – available for sale |
|
|
|
|
|
|
|
Due in one year or less |
|
|
|
| $ 612,286 |
| $ 606,397 |
Due after one year through five years |
|
|
|
| 2,548,027 |
| 2,605,822 |
Due after five years through ten years |
|
|
|
| 2,383,660 |
| 2,375,877 |
Due after ten years |
|
|
|
| 3,399,744 |
| 3,293,124 |
Mortgage-backed securities |
|
|
|
| 1,988,359 |
| 1,878,392 |
Total |
|
|
|
| $ 10,932,076 |
| $ 10,759,612 |
The changes in net unrealized (losses) gains (losses) offor the Company’s investments of the Company are derived from the following sources:sources for the periods indicated:
| Years Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| Increase (decrease) during the period between the market value and cost | |||||||||||
| of investments carried at market value, and deferred taxes thereon: | |||||||||||
| Fixed maturities | $ | (60,210 | ) | $ | (167,660 | ) | $ | (31,608 | ) | ||
| Equity securities | 192,348 | 89,582 | 71,179 | ||||||||
| Other invested assets | (466 | ) | 291 | 520 | |||||||
| Increase (decrease) in unrealized appreciation, pre-tax | 131,672 | (77,787 | ) | 40,091 | |||||||
| Deferred taxes | (43,399 | ) | 31 | (14,376 | ) | ||||||
| Increase (decrease) in unrealized appreciation, | |||||||||||
| net of deferred taxes, included in shareholders’ equity | $ | 88,273 | $ | (77,756 | ) | $ | 25,715 | ||||
|
|
|
|
| Years Ended December 31, | ||
(Dollars in thousands) |
|
|
|
| 2008 |
| 2007 |
(Decrease) increase during the period between the market value and cost |
|
|
|
| |||
of investments carried at market value, and deferred taxes thereon: |
|
|
|
| |||
Fixed maturities |
|
|
|
| $ (301,694) |
| $ 19,546 |
Equity securities |
|
|
|
| 1,669 |
| 315 |
Other invested assets |
|
|
|
| (10,366) |
| 1,496 |
Change in unrealized (depreciation) appreciation, pre-tax |
|
|
| (310,391) |
| 21,357 | |
Deferred taxes |
|
|
|
| 73,812 |
| (178) |
Change in unrealized (depreciation) appreciation, |
|
|
|
|
|
|
|
net of deferred taxes, included in shareholders’ equity |
|
|
| $ (236,579) |
| $ 21,179 | |
The Company frequently reviews its investment portfolio for declines in market value and focuses its attention on securities whose fair value has fallen below 80% of their amortized value at the time of review. The Company then assesses whether the decline in value is temporary or “other than temporary”.other-than-temporary. In making its assessment, the Company evaluates the current market and interest rate environment as well as specific issuer information and the Company’s ability and intent to hold to maturity.recovery. Generally, a change in a
security’s value caused by a change in the market or interest rate environment does not constitute an other-than-temporary impairment, but rather a temporary decline in market value. Temporary declines in market value are recorded as unrealized losses in accumulated other comprehensive income. If the Company security’s value caused by a change in the market or interest rate environment does not constitute an other-than-temporary impairment, but rather a temporary decline in market value. Temporary declines in market value are recorded as unrealized losslosses in accumulated other comprehensive income. If the Company determines that the decline is “other than temporary”,other-than-temporary, the carrying value of the investment is written down to fair value and a realized loss is recorded in the Company’s consolidated statements of operations and comprehensive income (loss). income. The Company’s assessments are based on the issuer’sissuers current and expected future financial position, timeliness with respect to interest and/or principal payments, speed of repayments and any applicable credit enhancements or breakeven constant default rates on asset-backed securities, as well as relevant information provided by rating agencies, investment advisors and analysts.
F-15
The tables below display the aggregate fairmarket value and gross unrealized depreciation of fixed maturity securities, by investment category and maturity category by length of time that individual securities havehad been in a continuous unrealized loss position as of December 31, 2006:for the period indicated:
| Duration of unrealized loss as of December 31, 2006 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Less than 12 months | Greater than 12 months | Total | ||||||||||||||||||
| (Dollars in thousands) | Fair Value | Gross Unrealized Depreciation | Fair Value | Gross Unrealized Depreciation | Fair Value | Gross Unrealized Depreciation | ||||||||||||||
| Fixed maturity securities | ||||||||||||||||||||
| U.S. government | ||||||||||||||||||||
| agencies and authorities | $ | 13,150 | $ | (39 | ) | $ | 175,170 | $ | (3,799 | ) | $ | 188,320 | $ | (3,838 | ) | |||||
| States, municipalities | ||||||||||||||||||||
| and political subdivisions | 94,242 | (363 | ) | 500,006 | (4,857 | ) | 594,248 | (5,220 | ) | |||||||||||
| Foreign governments | 631,035 | (7,293 | ) | 136,421 | (2,870 | ) | 767,456 | (10,163 | ) | |||||||||||
| All other corporate | 1,087,398 | (14,162 | ) | 2,998,379 | (89,378 | ) | 4,085,777 | (103,540 | ) | |||||||||||
| Total fixed maturities | 1,825,825 | (21,857 | ) | 3,809,976 | (100,904 | ) | 5,635,801 | (122,761 | ) | |||||||||||
| Equity securities | - | - | - | - | - | - | ||||||||||||||
| Total | $ | 1,825,825 | $ | (21,857 | ) | $ | 3,809,976 | $ | (100,904 | ) | $ | 5,635,801 | $ | (122,761 | ) | |||||
Duration of unrealized loss as of December 31, 2006 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Less than 12 months | Greater than 12 months | Total | ||||||||||||||||||
| (Dollars in thousands) | Fair Value | Gross Unrealized Depreciation | Fair Value | Gross Unrealized Depreciation | Fair Value | Gross Unrealized Depreciation | ||||||||||||||
| Fixed maturity securities | ||||||||||||||||||||
| Due in one year or less | $ | 121,653 | $ | (492 | ) | $ | 389,813 | $ | (2,653 | ) | $ | 511,466 | $ | (3,145 | ) | |||||
| Due in one year through | ||||||||||||||||||||
| five years | 745,692 | (5,200 | ) | 1,078,492 | (23,963 | ) | 1,824,184 | (29,163 | ) | |||||||||||
| Due in five years through | ||||||||||||||||||||
| ten years | 493,717 | (9,961 | ) | 938,054 | (29,593 | ) | 1,431,771 | (39,554 | ) | |||||||||||
| Due after ten years | 182,906 | (4,432 | ) | 207,747 | (11,641 | ) | 390,653 | (16,073 | ) | |||||||||||
| Mortgage-backed securities | 281,857 | (1,772 | ) | 1,195,870 | (33,054 | ) | 1,477,727 | (34,826 | ) | |||||||||||
| Total fixed maturities | $ | 1,825,825 | $ | (21,857 | ) | $ | 3,809,976 | $ | (100,904 | ) | $ | 5,635,801 | $ | (122,761 | ) | |||||
| Duration by security type of unrealized loss at December 31, 2008 | ||||||||||
| Less than 12 months | Greater than 12 months |
| Total | |||||||
|
|
| Gross |
|
|
| Gross |
|
|
| Gross |
|
|
| Unrealized |
|
|
| Unrealized |
|
|
| Unrealized |
(Dollars in thousands) | Market Value |
| Depreciation |
| Market Value |
| Depreciation |
| Market Value |
| Depreciation |
Fixed maturity securities |
|
|
|
|
|
|
|
|
|
|
|
U.S. government |
|
|
|
|
|
|
|
|
|
|
|
agencies and authorities | $ 5,686 |
| $ (663) |
| $ - |
| $ - |
| $ 5,686 |
| $ (663) |
States, municipalities |
|
|
|
|
|
|
|
|
|
|
|
and political subdivisions | 1,471,807 |
| (146,293) |
| 176,555 |
| (18,628) |
| 1,648,362 |
| (164,921) |
Foreign governments | 139,077 |
| (18,613) |
| 27,164 |
| (4,985) |
| 166,241 |
| (23,598) |
All other corporate | 1,377,573 |
| (187,170) |
| 1,363,970 |
| (227,852) |
| 2,741,543 |
| (415,022) |
Total fixed maturities | $ 2,994,143 |
| $ (352,739) |
| $ 1,567,689 |
| $ (251,465) |
| $ 4,561,832 |
| $ (604,204) |
| Duration by maturity of unrealized loss at December 31, 2008 | ||||||||||
| Less than 12 months | Greater than 12 months |
| Total | |||||||
|
|
| Gross |
|
|
| Gross |
|
|
| Gross |
|
|
| Unrealized |
|
|
| Unrealized |
|
|
| Unrealized |
(Dollars in thousands) | Market Value |
| Depreciation |
| Market Value |
| Depreciation |
| Market Value |
| Depreciation |
Fixed maturity securities |
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less | $ 116,392 |
| $ (9,948) |
| $ 137,344 |
| $ (6,636) |
| $ 253,736 |
| $ (16,584) |
Due in one year through |
|
|
|
|
|
|
|
|
|
|
|
five years | 616,653 |
| (43,141) |
| 408,242 |
| (37,157) |
| 1,024,895 |
| (80,298) |
Due in five years through |
|
|
|
|
|
|
|
|
|
|
|
ten years | 453,394 |
| (51,146) |
| 406,672 |
| (67,259) |
| 860,066 |
| (118,405) |
Due after ten years | 1,538,082 |
| (195,094) |
| 312,337 |
| (57,525) |
| 1,850,419 |
| (252,619) |
Mortgage-backed securities | 269,622 |
| (53,410) |
| 303,094 |
| (82,888) |
| 572,716 |
| (136,298) |
Total fixed maturities | $ 2,994,143 |
| $ (352,739) |
| $ 1,567,689 |
| $ (251,465) |
| $ 4,561,832 |
| $ (604,204) |
The aggregate fairmarket value and gross unrealized losses related to investments in an unrealized loss position as of December 31, 2006 is $5,635.82008 were $4,561.8 million and $122.8$604.2 million, respectively. There arewere no material concentrationsunrealized losses on a single security that exceeded 0.25% of the market value of the fixed maturities at December 31, 2008. In addition, there was no significant concentration of unrealized losses by issuer, security type or industry within the fixed maturity portfolio.in any one market sector. The $21.9$352.7 million of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year arewere generally comprised of highly rated government, municipal, and corporate bonds and aremortgage-backed securities with the losses primarily the result of interest rates being higher than whenwidening credit spreads from the securities were purchased.financial markets crisis during the latter part of the year. Of these unrealized losses, $20.6
$346.6 million arewere related to securities that arewere rated investment grade or better by aat least one nationally recognized statistical rating organization.
The $100.9$251.5 million of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for more than one year are also related primarily comprised ofto highly rated government, municipal, and corporate bonds and aremortgage-backed securities and were also the result of interest rates being higher than whenwidening credit spreads during the securities were purchased.latter part of the year. Of
F-16
these unrealized losses, $94.8$224.5 million are related to securities that arewere rated investment grade or better by aat least one nationally recognized statistical rating organization. The gross unrealized depreciation greater than 12 months for mortgage-backed securities includes only $4.7 million related to sub-prime and alt-A loans.
The Company, given the size of its investment portfolio and capital position, has the ability to hold these securities until recovery of market value. In addition, all securities currently in an unrealized loss position are current with respect to principal and interest payments.
The tabletables below displaysdisplay the aggregate fairmarket value and gross unrealized depreciation of fixed maturity securities, by investment category and maturity category by length of time that individual securities havehad been in a continuous unrealized loss position as of December 31, 2005:for the period indicated:
| Duration of unrealized loss as of December 31, 2005 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Less than 12 months | Greater than 12 months | Total | ||||||||||||||||||
| (Dollars in thousands) | Fair Value | Gross Unrealized Depreciation | Fair Value | Gross Unrealized Depreciation | Fair Value | Gross Unrealized Depreciation | ||||||||||||||
| Fixed maturity securities | ||||||||||||||||||||
| U.S. government | ||||||||||||||||||||
| agencies and authorities | $ | 142,625 | $ | (2,245 | ) | $ | 40,210 | $ | (1,295 | ) | $ | 182,835 | $ | (3,540 | ) | |||||
| States, municipalities | ||||||||||||||||||||
| and political subdivisions | 586,115 | (4,007 | ) | 169,256 | (4,046 | ) | 755,371 | (8,053 | ) | |||||||||||
| Foreign governments | 213,567 | (1,427 | ) | 14,249 | (235 | ) | 227,816 | (1,662 | ) | |||||||||||
| All other corporate | 2,178,929 | (41,198 | ) | 1,223,945 | (46,956 | ) | 3,402,874 | (88,154 | ) | |||||||||||
| Total fixed maturities | 3,121,236 | (48,877 | ) | 1,447,660 | (52,532 | ) | 4,568,896 | (101,409 | ) | |||||||||||
| Equity securities | 27,943 | (1,677 | ) | - | - | 27,943 | (1,677 | ) | ||||||||||||
| Total | $ | 3,149,179 | $ | (50,554 | ) | $ | 1,447,660 | $ | (52,532 | ) | $ | 4,596,839 | $ | (103,086 | ) | |||||
| Duration by security type of unrealized loss at December 31, 2007 | ||||||||||
| Less than 12 months | Greater than 12 months |
| Total | |||||||
|
|
| Gross |
|
|
| Gross |
|
|
| Gross |
|
|
| Unrealized |
|
|
| Unrealized |
|
|
| Unrealized |
(Dollars in thousands) | Market Value |
| Depreciation |
| Market Value |
| Depreciation |
| Market Value |
| Depreciation |
Fixed maturity securities |
|
|
|
|
|
|
|
|
|
|
|
U.S. government |
|
|
|
|
|
|
|
|
|
|
|
agencies and authorities | $ - |
| $ - |
| $ 8,668 |
| $ (108) |
| $ 8,668 |
| $ (108) |
States, municipalities |
|
|
|
|
|
|
|
|
|
|
|
and political subdivisions | 161,999 |
| (1,704) |
| 96,266 |
| (836) |
| 258,265 |
| (2,540) |
Foreign governments | 59,211 |
| (2,179) |
| 433,733 |
| (4,434) |
| 492,944 |
| (6,613) |
All other corporate | 439,242 |
| (10,485) |
| 2,765,239 |
| (79,657) |
| 3,204,481 |
| (90,142) |
Total fixed maturities | $ 660,452 |
| $ (14,368) |
| $ 3,303,906 |
| $ (85,035) |
| $ 3,964,358 |
| $ (99,403) |
| Duration by maturity of unrealized loss at December 31, 2007 | ||||||||||
| Less than 12 months | Greater than 12 months |
| Total | |||||||
|
|
| Gross |
|
|
| Gross |
|
|
| Gross |
|
|
| Unrealized |
|
|
| Unrealized |
|
|
| Unrealized |
(Dollars in thousands) | Market Value |
| Depreciation |
| Market Value |
| Depreciation |
| Market Value |
| Depreciation |
Fixed maturity securities |
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less | $ 22,635 |
| $ (144) |
| $ 336,605 |
| $ (1,122) |
| $ 359,240 |
| $ (1,266) |
Due in one year through |
|
|
|
|
|
|
|
|
|
|
|
five years | 119,785 |
| (2,923) |
| 810,658 |
| (14,498) |
| 930,443 |
| (17,421) |
Due in five years through |
|
|
|
|
|
|
|
|
|
|
|
ten years | 204,084 |
| (3,592) |
| 772,000 |
| (30,318) |
| 976,084 |
| (33,910) |
Due after ten years | 274,221 |
| (7,226) |
| 274,652 |
| (20,796) |
| 548,873 |
| (28,022) |
Mortgage-backed securities | 39,727 |
| (483) |
| 1,109,991 |
| (18,301) |
| 1,149,718 |
| (18,784) |
Total fixed maturities | $ 660,452 |
| $ (14,368) |
| $ 3,303,906 |
| $ (85,035) |
| $ 3,964,358 |
| $ (99,403) |
The aggregate fairmarket value and gross unrealized losses related to investments in an unrealized loss position as of December 31, 2005 are $4,596.82007 were $3,964.4 million and $103.1$99.4 million, respectively. There were no material concentrations of unrealized losses by issuer, security type or industry within the fixed maturity portfolio. The $48.9$14.4 million of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year arewere generally comprised of highly rated government,
municipal and corporate bonds and arethe losses were primarily the result of interest rates being higher than whenwidening credit spreads during the securities were purchased.latter part of the year. Of these unrealized losses, $44.3$11.9 million arewere related to securities that arewere rated investment grade or better by aat least one nationally recognized statistical rating organization.
The $52.5$85.0 million of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for more than one year are also related primarily comprised ofto highly rated government, municipal and corporate bonds and arewere the result of interest rates being higher than whenwidening credit spreads during the securities were purchased.latter part of the year. Of these unrealized losses, $49.1$80.2 million are related to securities that arewere rated investment grade or better by aat least one nationally recognized statistical rating organization.
F-17
The components of net investment income are presented in the table below:
| Years Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| Fixed maturities | $ | 508,524 | $ | 496,959 | $ | 475,906 | |||||
| Equity securities | 22,281 | 16,582 | 8,453 | ||||||||
| Short-term investments | 56,845 | 20,128 | 6,913 | ||||||||
| Other investment income | 60,702 | 14,591 | 44,126 | ||||||||
| Total gross investment income | 648,352 | 548,260 | 535,398 | ||||||||
| Interest credited and other expense | (18,974 | ) | (25,427 | ) | (39,490 | ) | |||||
| Total net investment income | $ | 629,378 | $ | 522,833 | $ | 495,908 | |||||
Other investment incomebelow for 2006, 2005 and 2004 primarily includes income earned onthe periods indicated:
| Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
Fixed maturities | $ 543,425 |
| $ 496,599 |
| $ 508,524 |
Equity securities | 19,946 |
| 24,709 |
| 21,158 |
Short-term investments and cash | 52,088 |
| 109,050 |
| 61,034 |
Other invested assets |
|
|
|
|
|
Limited partnerships | (42,231) |
| 59,216 |
| 54,698 |
Other | 2,280 |
| 3,094 |
| 2,938 |
Total gross investment income | 575,508 |
| 692,668 |
| 648,352 |
Interest credited and other expense | (9,621) |
| (10,276) |
| (18,974) |
Total net investment income | $ 565,887 |
| $ 682,392 |
| $ 629,378 |
The losses from the limited partnership investments of $54.7 million, $11.5 millionemanated from several partnerships that invest in public equity securities. The Company is a passive investor in these partnerships and $41.8 million, respectively.has less than a 10% participation.
The Company hashad contractual commitments to invest up to an additional $316.7$258.9 million in its limited partnership investmentspartnerships at December 31, 2006.2008. These commitments will be funded as required bywhen called in accordance with the partnership agreements, which have investment periods that expire, no later than 2012.unless extended, through 2014.
The components of net realized capital (losses) gains are presented in the table below:below for the periods indicated:
| Years Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| Fixed maturities | $ | 12,790 | $ | 77,242 | $ | 90,008 | |||||
| Equity securities | 22,280 | 13,043 | (395 | ) | |||||||
| Short-term investments | (3 | ) | (1 | ) | 1 | ||||||
| Total | $ | 35,067 | $ | 90,284 | $ | 89,614 | |||||
| Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
Fixed maturities, market value: |
|
|
|
|
|
Other-than-temporary impairments | $ (176,470) |
| $ (8,407) |
| $ (14) |
(Losses) gains from sales | (12,630) |
| (5,902) |
| 12,804 |
Fixed maturities, fair value: |
|
|
|
|
|
Gains from sales | 102 |
| - |
| - |
Gains from fair value adjustments | 1,473 |
| - |
| - |
Equity securities, market value: |
|
|
|
|
|
Gains from sales | - |
| - |
| 22,280 |
Equity securities, fair value: |
|
|
|
|
|
(Losses) gains from sales | (230,648) |
| 23,952 |
| - |
(Losses) gains from fair value adjustments | (277,526) |
| 76,622 |
| - |
Other invested assets gains | - |
| 13 |
| - |
Short-term investments (losses) gains | (131) |
| 5 |
| (3) |
Total net realized capital (losses) gains | $ (695,830) |
| $ 86,283 |
| $ 35,067 |
Proceeds from sales of fixed maturity investments during 2008, 2007 and 2006 2005 and 2004 were $182.9$279.5 million, $1,420.3$275.6 million and $1,451.2$182.9 million, respectively. Gross gains of $14.9$14.5 million, $89.6$2.6 million and $163.8$14.9 million and gross losses of $2.1$27.2 million, $5.3$8.5 million and $8.3$2.0 million were realized on those fixed maturity sales during 2006, 20052008, 2007 and 2004,2006, respectively. Proceeds from sales of equity security investments during 2008, 2007 and 2006 2005 and 2004 were $281.1$1,439.8 million, $218.0$1,547.1 million and $18.0$281.1 million, respectively. Gross gains of $34.1$23.4 million, $16.6$45.9 million and $0.5$34.1 million and gross losses of $11.8$254.1 million, $3.6$22.0 million and $0.9$11.8 million were realized on those equity sales during 2006, 20052008, 2007 and 2004,2006, respectively.
Net realized capital gains include $0.0 million, $7.0 million and $65.1 million of
Included in net realized capital losses for 2008, 2007 and 2006 2005was $176.5 million, $8.4 million and 2004, respectively, related to the impairment of interest only strips in accordance with EITF 99-20. In addition, realized capital losses for 2006, 2005 and 2004 included $13.3 thousand, $7.0 million and $522.6 thousand, respectively, related tofor write-downs in the value of securities deemed to be impaired on an other than temporaryother-than-temporary basis.
Securities with a carrying value amount of $1,352.8$1,257.4 million at December 31, 20062008 were on deposit with various state or governmental insurance departments in compliance with insurance laws.
The Company has sold six equity put options based on the Standard & Poor’s 500 (“S&P 500”) index for total consideration, net of commission, of $22.5 million. At December 31, 2006, fair value for these equity put options was $30.1 million. These contracts each have a single exercise date, with original maturities ranging from 12 to 30 years and strike prices ranging from $1,141.21 to $1,540.63. No amounts will be payable under these contracts if the S&P 500 index is at or above the strike price on the exercise dates, which currently fall
F-18
between June 2017 and March 2031. If the S&P 500 index is lower than the strike price on the applicable exercise date, the amount due would vary proportionately with the percentage by which the index is below the strike price. The theoretical maximum payouts under the contracts would occur if on each of the exercise dates the S&P 500 index value were zero. The present value of these theoretical maximum payouts using a 6% discount factor is $213.2 million. Based on historical index volatilities and trends and the December 31, 2006 index value, the Company estimates the probability that each S&P 500 index contract will be below the strike price on the exercise date to be between 0.2% and 4.4%.
The Company has sold one equity put option based on the FTSE 100 index for total consideration, net of commissions, of $6.7 million. At December 31, 2006, fair value for this equity put option was $7.4 million. This contract has an exercise date of July 2020 and a strike price of £5,989.75. No amount will be payable under this contract if the FTSE 100 index is at or above the strike price on the exercise date. If the FTSE 100 index is lower than the strike price on the applicable exercise date, the amount due will vary proportionately with the percentage by which the index is below the strike price. The theoretical maximum payout under the contract would occur if on the exercise date the FTSE 100 index value was zero. The present value of the theoretical maximum payout using a 6.0% discount factor and current exchange rate is $29.2 million. Based on historical index volatilities and trends and the December 31, 2006 index value, the Company estimates the probability that this FTSE 100 index contract will be below the strike price on the exercise date to be 7.0%.
These equity put options meet the definition of a derivative under FAS 133. The Company’s position in these contracts is unhedged and is accounted for as a derivative in accordance with FAS 133. Accordingly, these contracts are carried at fair value and are recorded in “Other liabilities” in the consolidated balance sheets and changes in fair value are recorded in the consolidated statements of operations and comprehensive (loss) income.
As there is no active market for these instruments, the determination of their fair value is based on an industry accepted option pricing model, Black-Scholes, which requires estimates and assumptions, including those regarding volatility and expected rates of return.
F-19
3. RESERVE FOR LOSSES, LAE AND LAE
FUTURE POLICY BENEFIT RESERVE
Reserves for losses and LAE.
Activity in the reserve for losses and LAE is summarized as follows:for the periods indicated:
| Years Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| Gross reserves at January 1 | $ | 9,126,702 | $ | 7,836,306 | $ | 6,361,245 | |||||
| Less reinsurance recoverables | (999,184 | ) | (1,114,861 | ) | (1,261,100 | ) | |||||
| Net reserves at January 1 | 8,127,518 | 6,721,445 | 5,100,145 | ||||||||
| Incurred related to: | |||||||||||
| Current year | 2,298,805 | 3,750,712 | 3,041,702 | ||||||||
| Prior years | 135,615 | (26,395 | ) | 249,437 | |||||||
| Total incurred losses and LAE | 2,434,420 | 3,724,317 | 3,291,139 | ||||||||
| Paid related to: | |||||||||||
| Current year | 522,711 | 664,845 | 607,066 | ||||||||
| Prior years | 2,116,935 | 1,553,145 | 1,141,663 | ||||||||
| Total paid losses and LAE | 2,639,646 | 2,217,990 | 1,748,729 | ||||||||
| Foreign exchange/translation adjustment | 109,331 | (100,254 | ) | 78,890 | |||||||
| Net reserves at December 31 | 8,031,623 | 8,127,518 | 6,721,445 | ||||||||
| Plus reinsurance recoverables | 808,517 | 999,184 | 1,114,861 | ||||||||
| Gross reserves at December 31 | $ | 8,840,140 | $ | 9,126,702 | $ | 7,836,306 | |||||
Gross loss
| At December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
Gross reserves at January 1 | $ 9,040,606 |
| $ 8,840,140 |
| $ 9,126,702 |
Less reinsurance recoverables | (707,523) |
| (808,517) |
| (999,184) |
Net reserves at January 1 | 8,333,083 |
| 8,031,623 |
| 8,127,518 |
|
|
|
|
|
|
Incurred related to: |
|
|
|
|
|
Current year | 2,404,100 |
| 2,341,595 |
| 2,298,805 |
Prior years | 34,872 |
| 206,543 |
| 135,615 |
Total incurred losses and LAE | 2,438,972 |
| 2,548,138 |
| 2,434,420 |
|
|
|
|
|
|
Paid related to: |
|
|
|
|
|
Current year | 495,028 |
| 452,209 |
| 522,711 |
Prior years | 1,816,427 |
| 1,915,358 |
| 2,116,935 |
Total paid losses and LAE | 2,311,455 |
| 2,367,567 |
| 2,639,646 |
|
|
|
|
|
|
Foreign exchange/translation adjustment | (310,449) |
| 120,889 |
| 109,331 |
|
|
|
|
|
|
Net reserves at December 31 | 8,150,151 |
| 8,333,083 |
| 8,031,623 |
Plus reinsurance recoverables | 690,509 |
| 707,523 |
| 808,517 |
Gross reserves at December 31 | $ 8,840,660 |
| $ 9,040,606 |
| $ 8,840,140 |
Prior years’ reserves increased by $34.9 million, $206.5 million and LAE reserves are $8,840.1$135.6 million atfor the years ended December 31, 2008, 2007 and 2006, $9,126.7 million at December 31, 2005 and $7,836.3 million at December 31, 2004.respectively. The decrease in 2006increase for 2008 was primarily attributable to lower current year catastrophe losses$85.3 million of reserve development for a run-off auto loan credit insurance program and a decrease in earned premiums. $32.6 million adverse arbitration decision; partially offset by net favorable development on the remainder of the Company’s reserves.
The 2007 prior years’ reserves increase in 2005of $206.5 million was primarily attributable to elevated catastrophe loss$387.5 million of adverse development on A&E reserves, partially offset by an increase in claim settlements, a decrease in premiums earned and favorable net prior period reserve adjustments.development on attritional (non-catastrophe, non-A&E) reserves. The increase in 2004the A&E reserves was primarily attributabledue to increased premiums earned, net prior period reserve adjustments in select areas,an extensive in-house study by the Company’s actuarial and claim units.
The increase in catastrophe lossesfor 2006 was the result of additional development of the 2005 catastrophes and normal variability in claim settlements.A&E, which was partially offset by favorable attritional development.
Reinsurance receivables for both paid and unpaid losses totaled $772.8$657.2 million at December 31, 2006, $1,048.72008 and $666.2 million at December 31, 2005 and $1,210.8 million at December 31, 2004.2007. At December 31, 2006, $169.42008, $185.4 million, or 21.9%28.2%, was receivable from Transatlantic Reinsurance Company (“Transatlantic”), $100.9 million, or 13.1%, was receivable from LM Property and Casualty Insurance Company (“LM”), which in late 2003 purchased Prudential Property and Casualty Insurance Company of Indiana (“Prupac”) and whose obligations continue to be guaranteed by The Prudential Insurance Company of America (“The Prudential”), $100.2 million, or 13.0%, was receivable from Founders Insurance Company Limited (“Founders”), which is partially collateralized by a trust,Company; $100.0 million, or 12.9%15.2%, was receivable from Continental Insurance Company (“Continental”), which is partially collateralized by funds held arrangements, $52.5Company; $57.0 million, or 6.8%, was receivable from subsidiaries of London Reinsurance Group (“London Life”), which is fully collateralized by letters of credit, and $42.7 million, or 5.5%8.7%, was receivable from Munich Reinsurance Company; $39.6 million, or 6.0%, was receivable from ACE Property and Casualty Insurance Company; $36.9 million, or 5.6%, was receivable from Berkley Insurance Company (“Munich Re”)and $33.8 million or 5.1% was receivable from C.V. Starr (Bermuda). The receivable from Continental Insurance Company is collateralized by a funds held arrangement under which the Company haswe have retained the premium payments due the retrocessionaire, recognized liabilities for such amounts and reduced such liabilities as payments are due from the retrocessionaire. In addition, $227.3 million was receivable from Founders Insurance Company Limited, for which the Company has recorded a full provision for uncollectibility. No other retrocessionaire accounted for more than 5% of the Company’sour receivables.
F-20
Activity in the reserve for future policy benefits is summarized as follows:
| Years Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| Balance at beginning of year | $ | 133,155 | $ | 152,179 | $ | 205,275 | |||||
| Liabilities assumed | 292 | 216 | 300 | ||||||||
| Adjustments to reserves | 2,967 | 11,639 | 8,544 | ||||||||
| Benefits paid in the current year | (35,452 | ) | (30,879 | ) | (19,543 | ) | |||||
| Contract terminations | - | - | (42,397 | ) | |||||||
| Balance at end of year | $ | 100,962 | $ | 133,155 | $ | 152,179 | |||||
The Company continues to receive claims under expired insurance and reinsurance contracts, asserting alleged injuries and/or damages that occurred while the contracts were in force relating to or resulting from environmental pollution and hazardous substances, including asbestos (i.e. A&E). The Company’s asbestosasbestos. Environmental claims typically involve potentialassert liability for (a) the mitigation or remediation of environmental contamination or (b) bodily injury or property damage caused by the release of hazardous substances into the land, air or water. Asbestos claims typically assert liability for bodily injury from exposure to asbestos or for property damage resulting from asbestos or products containing asbestos.
The Company’s environmental claims typically involve potential liability for (a) the mitigation or remediation of environmental contamination or (b) bodily injury or property damages caused by the release of hazardous substances into the land, air or water.
As of December 31, 2006, roughly 7% of the Company’s gross reserves areinclude an estimate of the Company’s ultimate liability for A&E claims. The Company’s A&E liabilities stememanate from Mt. McKinley’s direct insurance business and Everest Re’s assumed reinsurance business. This estimate is made based on assessmentsAll of the underlying exposures ascontracts of insurance and reinsurance under which the result of (1) long and variable reporting delays, both from insureds to insurance companies and from ceding companies to reinsurers; (2) historical data, which isCompany has received claims during the past three years expired more limited and variable on A&E losses than historical information on other types of casualty claims; and (3) unique aspects of A&E exposures for which ultimate value cannot be estimated using traditional reserving techniques.20 years ago. There are significant uncertainties in estimating the amount ofsurrounding the Company’s potential losses fromreserves for its A&E claims. Among the uncertainties are: (a) potential passing of many years 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.
With respect to asbestos claims in particular, several additional factors have emerged in recent years that further compound the difficulty in estimating the Company’s liability. These developments include: (a) the significant growth over a short period of time in the number of claims filed, in part reflecting a much more aggressive plaintiff bar and including claims against defendants who may only have a “peripheral” connection to asbestos; (b) a disproportionate percentage of claims filed by individuals with no physical injury, which should have little to no financial value but which have increasingly been considered in jury verdicts and settlements; (c) the growth in the number and significance of bankruptcy filings by companies as a result of asbestos claims (including, more recently, bankruptcy filings in which companies attempt to resolve their asbestos liabilities in a manner that is prejudicial to insurers and forecloses insurers from participating in the negotiation of asbestos related bankruptcy reorganization plans); (d) the concentration of claims in a small number of states that favor plaintiffs; (e) the growth in the number of claims that might impact the general liability portion of insurance policies rather than the product liability portion; (f) measures adopted by specific courts to ameliorate the worst procedural abuses; (g) an increase in settlement values being paid to asbestos claimants, especially those with cancer or functional impairment; (h) legislation in some states to address asbestos litigation issues; and (i) the potential that other states or the U. S. Congress may adopt legislation on asbestos litigation. Anecdotal evidence suggest that new
F-21
claims filing rates have decreased, that new filings of asbestos-driven bankruptcies have decreased and legislative reforms are beginning to diminish the potential ultimate liability for asbestos losses.
Management believes that these uncertainties and factors continue to render reserves for A&E and particularly asbestos losses significantly less subject to traditional actuarial analysis than reserves for other types of losses. Given these uncertainties, management believes that no meaningful range for such ultimate losses can be established, particularly for asbestos. Further, A&E reserves may be subject to more variability than non-A&E reserves and such variation could have a material adverse effect on the Company’s financial condition, results of operation and/or cash flow. The Company establishes reserves to the extent that, in the judgment of management, the facts and prevailing law reflect an exposure for the Company or its ceding companies.
The following table summarizes incurred losses with respect to A&E on both areserves gross and net of retrocessional basisreinsurance for the yearsperiods indicated:
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross basis: | |||||||||||
| Beginning of period reserves | $ | 649,460 | $ | 728,325 | $ | 765,257 | |||||
| Incurred losses | 113,400 | 77,050 | 171,729 | ||||||||
| Paid losses | (112,726 | ) | (155,915 | ) | (208,661 | ) | |||||
| End of period reserves | $ | 650,134 | $ | 649,460 | $ | 728,325 | |||||
Net basis: | |||||||||||
| Beginning of period reserves | $ | 450,350 | $ | 506,675 | $ | 534,369 | |||||
| Incurred losses | 106,595 | 81,351 | 159,422 | ||||||||
| Paid losses | (45,533 | ) | (137,676 | ) | (187,116 | ) | |||||
| End of period reserves | $ | 511,412 | $ | 450,350 | $ | 506,675 | |||||
| At December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
Gross basis: |
|
|
|
|
|
Beginning of period reserves | $ 922,843 |
| $ 650,134 |
| $ 649,460 |
Incurred losses | - |
| 405,000 |
| 113,400 |
Paid losses | (136,000) |
| (132,291) |
| (112,726) |
End of period reserves | $ 786,843 |
| $ 922,843 |
| $ 650,134 |
|
|
|
|
|
|
Net basis: |
|
|
|
|
|
Beginning of period reserves | $ 827,384 |
| $ 511,412 |
| $ 450,350 |
Incurred losses | - |
| 387,534 |
| 106,595 |
Paid losses | (78,314) |
| (71,562) |
| (45,533) |
End of period reserves | $ 749,070 |
| $ 827,384 |
| $ 511,412 |
At December 31, 2006,2008, the gross reserves for A&E losses were comprised of $135.6$161.0 million representing case reserves reported by ceding companies, $152.1$139.7 million representing additional case reserves established by the Company on assumed reinsurance claims, $213.7$133.8 million representing case reserves established by the Company on direct excess insurance claims, including Mt. McKinley, and $148.7$352.3 million representing IBNR reserves. Roughly 89%
With respect to asbestos only, at December 31, 2008, the Company had gross asbestos loss reserves of $734.1 million, or 93.3%, or $581.0 million, of grosstotal A&E reserves, relate to asbestos of which $320.5$533.2 million was for assumed business and $260.5$200.9 million was for direct excess business.
In 2007, the Company completed a detailed study of its experience and its cedants’ exposures and also considered industry trends. The Company’s Claims Department undertook a contract by contract analysis of its direct business and projected those findings to its assumed reinsurance business. The Company’s actuaries utilized nine methodologies to project potential ultimate liabilities including projections based on internal data and assessments, extrapolations of non-public and publicly available data for the Company’s cedants and benchmarking against industry data and experience. As a result of the study, the Company made changes to gross asbestos reserves. The Company has not experienced significant claims activity related to environmental exposures other than asbestos. The Company’s A&E reserves represent management’s best estimate of the ultimate liability, however, there can be no assurance that ultimate loss payments will not exceed such reserves, perhaps by a significant amount. No additional reserve strengthening was made in 2008.
In connection with the acquisition of Mt. McKinley, which has significant exposure to A&E claims, LM provided reinsurance to Mt. McKinley covering 80% ($160.0 million) of the first $200.0 million of any adverse development of Mt. McKinley’s reserves as of September 19, 2000 and The Prudential guaranteed LM’s obligations to Mt. McKinley. CessionsCoverage under this reinsurance agreement was exhausted as of December 31, 2003.
Future Policy Benefit Reserve.
Activity in the limit availablereserve for future policy benefits is summarized for the periods indicated:
| At December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
Balance at beginning of year | $ 78,417 |
| $ 100,962 |
| $ 133,155 |
Liabilities assumed | 190 |
| 168 |
| 292 |
Adjustments to reserves | 6,546 |
| 2,414 |
| 2,967 |
Benefits paid in the current year | (18,981) |
| (25,127) |
| (35,452) |
Balance at end of year | $ 66,172 |
| $ 78,417 |
| $ 100,962 |
4. FAIR VALUE
Effective January 1, 2007, the Company adopted and implemented FAS 159 for its actively managed equity securities. The Company implemented a more active management strategy for these securities and FAS 159 provided guidance on accounting and presentation of these investments in the Company’s consolidated financial statements. Upon adoption of FAS 159, the Company recognized a $250.8 million positive cumulative-effect adjustment to retained earnings, net of $110.3 million of tax.
The Company records fair value re-measurements as net realized capital gains or losses in the consolidated statements of operations and comprehensive income (loss). The Company recorded $276.0 million in net realized capital losses due to fair value re-measurement on fixed maturities and equity securities at fair value for the year ended December 31, 2008. The Company recorded $76.6 million in net realized capital gains due to fair value re-measurements on equity securities at fair value for the year ended December 31, 2007.
The Company’s fixed maturities and equity securities are managed by third party investment asset managers and market and fair values for these securities are obtained from third party pricing services retained by the investment asset managers. In limited instances where prices are not provided by the pricing services, price quotes on a non-binding basis are obtained from investment brokers. The investment asset managers have procedures in place to review the reasonableness of the prices from the service providers and may obtain additional price quotes for verification. In addition, the Company tests the prices on a random basis to an independent pricing source. In limited situations, where financial markets are inactive or illiquid, the Company may use its own assumptions about future cash flows and risk-adjusted discount rates to determine fair value.
Fixed maturities are categorized as Level 2, Significant Other Observable Inputs, since a particular security may not have traded but the pricing services are able to use valuation models with observable market inputs such as interest rate yield curves and prices for similar fixed maturities in terms of issuer, maturity and seniority. Valuations that are derived from techniques in which one or more of the significant inputs are unobservable (including assumptions about risk) are categorized as Level 3, Significant Unobservable Inputs. These securities include broker priced securities and valuation of less liquid securities such as commercial mortgage-backed securities and the Company’s equity index put options.
Equity securities in U.S. denominated currency are categorized as Level 1, Quoted Prices in Active Markets for Identical Assets, since the securities are actively traded on an exchange and prices are based on quoted prices from the exchange. Equity securities traded on foreign exchanges are categorized as Level 2 due to potential foreign exchange adjustments to fair or market value.
The Company sold six equity index put options based on the Standard & Poor’s 500 (“S&P 500”) index for total consideration, net of commissions, of $22.5 million. At December 31, 2008, fair value for these equity put options was $54.6 million. These contracts each have a single exercise date, with maturities ranging from 12 to 30 years and strike prices ranging from $1,141.21 to $1,540.63. No amounts will be payable under these contracts if the S&P 500 index is at or above the strike prices on the exercise dates, which fall between June 2017 and March 2031. If the S&P 500 index is lower than the strike price on the applicable exercise date, the amount due would vary proportionately with the percentage by which the index is below the strike price. Based on historical index volatilities and trends and the December 31, 2008 index value, the Company estimates the probability for each contract of the S&P 500 index falling below the strike price on the exercise date to be less than 55%. The theoretical maximum payouts under the contracts would occur if on each of the exercise dates the S&P 500 index value were zero. At December 31, 2008, the present value of these theoretical maximum payouts using a 6% discount factor was $239.6 million.
The Company sold one equity index put option based on the FTSE 100 index for total consideration, net of commissions, of $6.7 million. At December 31, 2008, fair value for this equity put option was $6.0 million. This contract has an exercise date of July 2020 and a strike price of £5,989.75. No amount will be payable under this contract if the FTSE 100 index is at or above the strike price on the exercise date. If the FTSE 100 index is lower than the strike price on the exercise date, the amount due will vary proportionately with the percentage by which the index is below the strike price. Based on historical index volatilities and trends and the December 31, 2008 index value, the Company estimates the probability that the FTSE 100 index contract will fall below the strike price on the exercise date to be less than 57%. The theoretical maximum payout under the contract would occur if on the exercise date the FTSE 100 index value was zero. At December 31, 2008, the present value of the theoretical maximum payout using a 6% discount factor and current exchange rate was $24.2 million.
These equity index put options meet the definition of a derivative under FAS 133. The Company’s position in these contracts is unhedged. The Company recorded the change in fair value of $20.9 million, $2.1 million and $0.4 million for the years ended December 31, 2008, 2007 and 2006, respectively, as net derivative expense in the consolidated statements of operations and comprehensive (loss) income.
Collateral held in respect to these equity index put options at December 31, 2003.2008, was $32.2 million.
The fair value was calculated using an industry accepted option pricing model, Black-Scholes, which used the following assumptions:
4.
| At December 31, 2008 | ||
|
|
| Contract |
| Contracts |
| based on |
| based on |
| FTSE 100 |
| S & P 500 Index |
| Index |
Equity index | 903.3 |
| 4,434.2 |
Interest rate | 5.03% to 5.78% |
| 5.43% |
Time to maturity | 8.4 to 22.3 yrs |
| 11.6 yrs |
Volatility | 21.5% to 24.4% | 25.8% |
The following tables present the fair value measurement levels for all assets and liabilities, which the Company has recorded at fair value as of the periods indicated:
|
|
|
| Fair Value Measurement Using: | ||||
|
|
|
| Quoted Prices |
|
|
|
|
|
|
|
| in Active |
| Significant |
|
|
|
|
|
| Markets for |
| Other |
| Significant |
|
|
|
| Identical |
| Observable |
| Unobservable |
|
|
|
| Assets |
| Inputs |
| Inputs |
(Dollars in thousands) |
| December 31, 2008 |
| (Level 1) |
| (Level 2) |
| (Level 3) |
Assets: |
|
|
|
|
|
|
|
|
Fixed maturities, market value | $ 10,759,612 |
| $ - |
| $ 10,466,005 |
| $ 293,607 | |
Fixed maturities, fair value |
| 43,090 |
| - |
| 43,090 |
| - |
Equity securities, market value | 16,900 |
| 16,900 |
| - |
| - | |
Equity securities, fair value |
| 119,829 |
| 119,104 |
| 725 |
| - |
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Equity put options |
| $ 60,552 |
| $ - |
| $ - |
| $ 60,552 |
|
|
|
| Fair Value Measurement Using: | ||||
|
|
|
| Quoted Prices |
|
|
|
|
|
|
|
| in Active |
| Significant |
|
|
|
|
|
| Markets for |
| Other |
| Significant |
|
|
|
| Identical |
| Observable |
| Unobservable |
|
|
|
| Assets |
| Inputs |
| Inputs |
(Dollars in thousands) |
| December 31, 2007 |
| (Level 1) |
| (Level 2) |
| (Level 3) |
Assets: |
|
|
|
|
|
|
|
|
Fixed maturities, market value | $ 10,245,585 |
| $ - |
| $ 9,977,607 |
| $ 267,978 | |
Equity securities, market value | 14,797 |
| 14,797 |
| - |
| - | |
Equity securities, fair value |
| 1,535,263 |
| 1,361,789 |
| 173,474 |
| - |
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Equity index put options |
| $ 39,653 |
| $ - |
| $ - |
| $ 39,653 |
The following tables present the fixed maturity investments for which fair value was measured under Level 3, fair value measurements using significant unobservable inputs, for the periods indicated:
| Years Ended December 31, | ||
(Dollars in thousands) | 2008 |
| 2007 |
Assets: |
|
|
|
Beginning balance at January 1 | $ 267,978 |
| $ 166,753 |
Total gains or (losses) (realized/unrealized) |
|
|
|
Included in earnings (or changes in net assets) | (1,362) |
| (2,681) |
Included in other comprehensive income | (17,324) |
| (84) |
Purchases, issuances and settlements | 67,025 |
| 103,990 |
Transfers in and/or (out) of Level 3 | (22,710) |
| - |
Ending balance at December 31 | $ 293,607 |
| $ 267,978 |
|
|
|
|
The amount of total gains or losses for the period included in earnings |
|
|
|
(or changes in net assets) attributable to the change in unrealized |
|
|
|
gains or losses relating to assets still held at the reporting date | $ (1,585) |
| $ - |
| Years Ended December 31, | ||
| 2008 |
| 2007 |
(Dollars in thousands) |
|
|
|
Liabilities: |
|
|
|
Beginning balance at January 1 | $ 39,653 |
| $ 37,529 |
Total (gains) or losses (realized/unrealized) |
|
|
|
Included in earnings (or changes in net assets) | 20,900 |
| 2,124 |
Included in other comprehensive income | - |
| - |
Purchases, issuances and settlements | - |
| - |
Transfers in and/or (out) of Level 3 | - |
| - |
Ending balance at December 31 | $ 60,552 |
| $ 39,653 |
|
|
|
|
The amount of total gains or losses for the period included in earnings |
|
|
|
(or changes in net assets) attributable to the change in unrealized |
|
|
|
gains or losses relating to liabilities still held at the reporting date | $ 20,900 |
| $ 2,124 |
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
|
|
5. CREDIT LINES
LINE
Effective December 8, 2004,July 27, 2007, Group, Bermuda Re and Everest International entered into a threenew five year, $750.0$850.0 million senior credit facility with a syndicate of lenders, (thereplacing the December 8, 2004, senior credit facilities, which would have expired on December 8, 2007. Both the July 27, 2007 and December 8, 2004 senior credit facilities are referred to as the “Group Credit Facility”). Wachovia Bank, a subsidiary of Wells Fargo Corporation (“Wachovia Bank”) is the administrative agent for the Group Credit Facility. The Group Credit Facility, which consists of two tranches. Tranche one provides up to $250.0$350.0 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, of each of the borrowers, 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 of interest established by Wachovia Bank from time to time as its prime rate or (b) the Federal Funds rate, in each caseRate plus 0.5% per annum. The amount of margin
F-22
and the fees payable for the Group Credit Facility depends on Group’s senior unsecured debt rating. Tranche two exclusively provides up to $500.0 million for the issuance of standby letters of credit on a collateralized basis.
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 amount.worth. Minimum net worth is an amount equal to the sum of (i) $2,898.0$3,575.4 million (base amount) plus (ii) (A) 25% of consolidated net income for each of Group’s fiscal quarters, for which statements are available ending on or after January 1, 2007 and (B) 50%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. The base amount is resetshares, which at the end of each fiscal year to be the greater of 70% of Group’s consolidated net worth as of the last day of the fiscal year and the calculated minimum amount of net worth prior to the last day of the fiscal year.December 31, 2008, was $3,856.5 million. As of December 31, 2006,2008, the Company was in compliance with theseall Group Credit Facility covenants.
For the year ended
At December 31, 2006,2008, there were no outstanding borrowingsletters of credit under tranche one and $411.9 million issued under tranche two of the Group Credit Facility. During the year endedAt December 31, 2006,2007, there was $185.4were outstanding letters of credit of $22.0 million usedand $288.0 million under tranche one and tranche two of the $500.0 million available for tranche two standby letters of credit. See Note 7.Group Credit Facility, respectively.
Effective August 23, 2006, Holdings entered into a new five year, $150.0 million senior revolving credit facility with a syndicate of lenders replacing the October 10, 2003 three year senior revolving credit facility, which expired on October 10, 2006. Both the August 23, 2006 and October 10, 2003 senior revolving credit agreements, which have similar terms, are referred to as the “Holdings Credit Facility”. Citibank N.A. is the administrative agent for the Holdings Credit Facility. The Holdings Credit Facility ismay be used for liquidity and general corporate purposes. The Holdings Credit Facility provides for the borrowing of up to $150.0 million with interest at a rate selected by Holdings equal to either, (1) the Base Rate (as defined below) or (2) a periodic fixed rate equal to the Eurodollar Rate plus an applicable margin. The Base Rate means a fluctuating interest rate per annum in effect from time to time to be equal to the higher of (a) the rate of interest publicly announced by Citibank as its prime rate or (b) 0.5% per annum above the Federal Funds Rate, in each case plus the applicable margin. The amount of margin and the fees payable for the Holdings Credit Facility depends upon Holdings’ senior unsecured debt rating.
The Holdings Credit Facility requires Holdings to maintain a debt to capital ratio of not greater than 0.35 to 1 and Everest Re to maintain its statutory surplus of no less thanat $1.5 billion plus 25% of future aggregate net income and 25% of future aggregate capital contributions after December 31, 2005.2005, which at December 31, 2008, was $1,821.1 million. As of December 31, 2006,2008, Holdings was in compliance with theseall Holdings Credit Facility covenants.
During the years ended
At December 31, 20062008 and 2005,2007, there were no payments made and no incremental borrowings under the Holdings Credit Facility. During the year ended December 31, 2004, there were payments madeoutstanding letters of $70.0credit of $28.0 million and no incremental borrowings under the Holdings Credit Facility. As of December 31, 2006 and 2005, there were no outstanding borrowings$17.2 million, respectively, under the Holdings Credit Facility.
Interest expense and fees
Costs incurred in connection with the Group Credit Facility and the Holdings Credit Facility were $0.4$1.3 million, $0.4$1.4 million and $1.2 million for the years ended December 31, 2006, 20052008, 2007 and 2004,2006, respectively.
F-23
5.6. SENIOR NOTES
On October 12, 2004, Holdings completed a public offering of $250.0 million principal amount of 5.40% senior notes due October 15, 2014. On March 14, 2000, Holdings completed a public offeringsoffering of $200.0 million principal amount of 8.75% senior notes due March 15, 2010 and $250.0 million principal amount of 8.50% senior notes due and retired March 15, 2005.2010.
Interest expense incurred in connection with these senior notes was $31.1$31.2 million, $35.5$31.2 million and $42.0$31.1 million for the years ended December 31, 2006, 20052008, 2007 and 2004,2006, respectively. Market value, which is based on quoted market price at December 31, 20062008 and 20052007, was $248.1$186.2 million and $250.9$235.3 million, respectively, for the 5.40% senior notes and $219.8$156.8 million and $226.2$215.9 million, respectively, for the 8.75% senior notes.
6.
7. LONG TERM SUBORDINATED NOTES
On April 26, 2007, Holdings completed a public offering of $400.0 million principal amount of 6.6% fixed to floating rate long term subordinated notes with a scheduled maturity date of May 15, 2037 and a final maturity date of May 1, 2067. During the fixed rate interest period from May 3, 2007 through May 14, 2017, interest will be at the annual rate of 6.6%, payable semi-annually in arrears on November 15 and May 15 of each year, commencing on November 15, 2007, subject to Holdings’ right to defer interest on one or more occasions for up to ten consecutive years. During the floating rate interest period from May 15, 2017
through maturity, interest will be based on the 3 month LIBOR plus 238.5 basis points, reset quarterly, payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year, subject to Holdings’ right to defer interest on one or more occasions for up to ten consecutive years. Deferred interest will accumulate interest at the applicable rate compounded semi-annually for periods prior to May 15, 2017, and compounded quarterly for periods from and including May 15, 2017.
Holdings can redeem the long term subordinated notes prior to May 15, 2017, in whole but not in part at the applicable redemption price, which will equal the greater of (a) 100% of the principal amount being redeemed and (b) the present value of the principal payment on May 15, 2017 and scheduled payments of interest that would have accrued from the redemption date to May 15, 2017 on the long term subordinated notes being redeemed, discounted to the redemption date on a semi-annual basis at a discount rate equal to the treasury rate plus an applicable spread of either 0.25% or 0.50%, in each case plus accrued and unpaid interest. Holdings may redeem the long term subordinated notes on or after May 15, 2017, in whole or in part at 100% of the principal amount plus accrued and unpaid interest; however, redemption on or after the scheduled maturity date and prior to May 1, 2047 is subject to a replacement capital covenant. This covenant is for the benefit of certain senior note holders and it mandates that Holdings receive proceeds from the sale of another subordinated debt issue, of at least similar size, before it may redeem the subordinated notes.
Interest expense incurred in connection with these long term notes was $26.4 million and $17.4 million for the years ended December 31, 2008 and 2007, respectively. Market value, which is based on quoted market price at December 31, 2008 and 2007, was $168.0 million and $349.8 million, respectively, for the 6.6% long term subordinated notes.
8. JUNIOR SUBORDINATED DEBT SECURITIES PAYABLE
On March 29, 2004, Holdings issued $329.9 million of 6.20% junior subordinated debt securities due March 29, 2034 to Everest Re Capital Trust II (“Capital Trust II”). Holdings canmay redeem the junior subordinated debt securities before their maturity at 100% of their principal amount plus accrued interest as of the date of redemption,redemption. The securities may be redeemed, in whole or in part, on one or more occasions at any time on or after March 30, 2009; or at any time, in whole, but not in part, within 90 days of the occurrence and continuation of a determination that the Trust may become subject to tax or the Investment Company Act.
On November 14, 2002, Holdings issued $216.5 million of 7.85% junior subordinated debt securities due November 15, 2032 to Everest Re Capital Trust (“Capital Trust”). Holdings can redeemredeemed all of the junior subordinated debt securities before their maturity at 100% of their principal amount plus accrued interest as of the date of redemption, in whole or in part, on one or more occasions at any time on or after November 14, 2007; or at any time, in whole, but not in part, within 90 days of the occurrence and continuation of a determination that the Trust may become subject to tax or the Investment Company Act.15, 2007.
Fair value, which is primarily based on the quoted market price of the related trust preferred securities at December 31, 20062008 and 2005,2007, was $316.3$222.2 million and $293.5$250.8 million, respectively, for the 6.20% junior subordinated debt securities and $221.2 million and $220.5 million, respectively, for the 7.85% junior subordinated debt securities.
Interest expense incurred in connection with these junior subordinated notes was $37.4$20.5 million, $37.4$35.3 million and $32.4$37.4 million for the years ended December 31, 2008, 2007 and 2006, 2005 and 2004, respectively.
Capital Trust and Capital Trust II areis a wholly owned finance subsidiariessubsidiary of Holdings. Capital Trust was dissolved upon the completion of the redemption of the trust preferred securities on November 15, 2007.
Holdings considers that the mechanisms and obligations relating to the trust preferred securities, taken together, constitute a full and unconditional guarantee by Holdings of Capital Trust and Capital Trust II’s payment obligations with respect to their respective trust preferred securities.
Capital Trust and
Capital Trust II mustwill redeem all of the outstanding trust preferred securities when the junior subordinated debt securities are paid at maturity on November 15, 2032 and March 29, 2034, respectively.2034. The Company may elect to redeem the junior subordinated debt securities, in whole or in part, at any time on or after November 14, 2007 and March 30, 2009, respectively.2009. If such an early redemption occurs, the outstanding trust preferred securities would also be proportionately redeemed.
There are certain regulatory and contractual restrictions on the ability of Holdings’ operating subsidiaries to transfer funds to Holdings in the form of cash dividends, loans or advances. The insurance laws of the State of Delaware, where Holdings’ direct insurance subsidiaries are domiciled, require regulatory approval before those
F-24
subsidiaries can pay dividends or make loans or advances to Holdings that exceed certain statutory thresholds. In addition, the terms of Holdings’Holdings Credit Facility (discussed in Note 4)5) require Everest Re, Holdings’ principal insurance subsidiary, to maintain a certain statutory surplus level as measured at the end of each fiscal year. At December 31, 2006, $2,451.42008, $1,745.6 million of the $3,102.6$2,735.2 million in net assets of Holdings’ consolidated subsidiaries were subject to the foregoing regulatory restrictions.
7.
9. LETTERS OF CREDIT
The Company has arrangements available for the issuance of letters of credit, which letters are generally collateralized by the Company’s cash and investments. The Company’s agreement with Citibank is a bilateral letter of credit agreement only, whileonly. On November 6, 2007 the Citibank bilateral letter of credit agreement was decreased by $50.0 million to $300.0 million. All other terms of this agreement remain the same. The Company’s other facility, the Wachovia SyndicatedGroup Credit Facility, involves a syndicate of lenders (see Note 4, tranche two5 of the Group Credit Facility), with Wachovia acting as administrative agent. The Citibank Holdings Credit Facility involves a syndicate of lenders (see Note 5 of the Holdings Credit Facility), with Citibank acting as administrative agent. At December 31, 20062008 and 2005,2007, letters of credit for $460.0$589.0 million and $350.6$491.1 million, respectively, were issued and outstanding, generally supportingoutstanding. The letters of credit collateralize reinsurance provided byobligations of the Company’s non-U.S. operations. The following table summarizes the Company’s letters of credit as ofat December 31, 2006.2008.
| (Dollars in thousands) | ||||||||||||
| Bank | Commitment | In Use | Date of Expiry | |||||||||
| Citibank | $ | 350,000 | $ | 11,216 52,052 1,272 210,062 | 08/31/2007 12/31/2007 12/31/2008 12/31/2009 | |||||||
| Total Citibank Agreement | $ | 350,000 | $ | 274,602 | ||||||||
Wachovia Syndicated Facility | Tranche One Tranche Two | $ | 250,000 500,000 | $ | - 13,986 962 48,075 122,383 | - 05/09/2007 11/03/2007 11/13/2007 12/31/2007 | ||||||
| Total Wachovia Syndicated Facility | $ | 750,000 | $ | 185,406 | ||||||||
| Total letters of credit | $ | 1,100,000 | $ | 460,008 | ||||||||
8.
(Dollars in thousands) |
|
|
|
|
|
|
Bank |
| Commitment |
| In Use |
| Date of Expiry |
Citibank Bilateral Letter of Credit Agreement |
| $ 300,000 |
| $ 48,771 |
| 12/31/2009 |
|
|
|
| 34,006 |
| 1/31/2010 |
|
|
|
| 30,000 |
| 12/31/2011 |
|
|
|
| 36,414 |
| 12/31/2012 |
Total Citibank Bilateral Agreement |
| $ 300,000 |
| $ 149,191 |
|
|
|
|
|
|
|
|
|
Citibank Holdings Credit Facility |
| $ 150,000 |
| $ 27,959 |
| 12/31/2009 |
Total Citibank Holdings Credit Facility | $ 150,000 |
| $ 27,959 |
|
| |
|
|
|
|
|
|
|
Wachovia Group Credit Facility | Tranche One | $ 350,000 |
| $ - |
| |
| Tranche Two | 500,000 |
| 411,877 |
| 12/31/2009 |
Total Wachovia Group Credit Facility | $ 850,000 |
| $ 411,877 |
|
| |
|
|
|
|
|
|
|
Total Letters of Credit |
| $ 1,300,000 |
| $ 589,027 |
|
|
10. TRUST AGREEMENTS
Certain reinsurance subsidiaries of Group, principally Bermuda Re, a Bermuda insurance company and direct subsidiary of Group, have established trust agreements, which effectively use the Company’s investments as collateral, as security for assumed losses payable to certain non-affiliated ceding companies, which effectively use their investments as collateral.companies. At December 31, 2006,2008, the total amount on deposit in trust accounts was $135.7$95.4 million.
F-25
9.11. OPERATING LEASE AGREEMENTS
The future minimum rental commitments, exclusive of cost escalation clauses, at December 31, 20062008 for all of the Company’s operating leases with remaining non-cancelable terms in excess of one year are as follows:
| (Dollars in thousands) | |||||
|---|---|---|---|---|---|
| 2007 | $ | 7,736 | |||
| 2008 | 7,600 | ||||
| 2009 | 7,239 | ||||
| 2010 | 7,107 | ||||
| 2011 | 1,332 | ||||
| Thereafter | 1,587 | ||||
| Net commitments | $ | 32,601 | |||
(Dollars in thousands) |
|
2009 | $ 8,602 |
2010 | 9,073 |
2011 | 8,681 |
2012 | 8,515 |
2013 | 7,899 |
Thereafter | 50,793 |
Net commitments | $ 93,563 |
All of these leases, the expiration terms of which range from 20082009 to 2014,2020, are for the rental of office space. Rental expense was $11.1 million, $9.9 million and $8.5 million $7.1 millionfor the years ended December 31, 2008, 2007 and $7.6 million for 2006, 2005 and 2004, respectively.
10.
12. INCOME TAXES
Under Bermuda law, no income or capital gains taxes are imposed on Group and its Bermuda subsidiaries. The Minister of Finance of Bermuda has also assured Group and its Bermuda subsidiaries that, pursuant to The Exempted Undertakings Tax Protection Act of 1966, they will be exempt until 2016 from imposition of any such taxes.
All the income of Group’s U.S. subsidiaries is subject to the applicable federal, foreign, state and local taxes on corporations. Additionally, the income of foreign branches of the Company’s insurance operating companies, in particular the UK branch of Bermuda Re, is subject to various income taxes. The provision for income taxes in the consolidated statements of operations and comprehensive income (loss) has been determined in accordance with the individual income of each entity and the respective applicable tax laws. The provision reflects the permanent differences between financial and taxable income relevant to each entity. The significant components of the provision are as follows:follows for the periods indicated:
| Years Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| Current tax: | |||||||||||
| U.S. | $ | 132,685 | $ | (17,592 | ) | $ | 45,913 | ||||
| Foreign | 43,439 | 25,919 | 50,359 | ||||||||
| Total current tax | 176,124 | 8,327 | 96,272 | ||||||||
| Total deferred U.S. tax benefit | (25,202 | ) | (70,581 | ) | (31,419 | ) | |||||
| Total income tax expense (benefit) | $ | 150,922 | $ | (62,254 | ) | $ | 64,853 | ||||
F-26
| Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
Current tax: |
|
|
|
|
|
U.S. | $ (58,534) |
| $ 147,271 |
| $ 132,685 |
Foreign | 58,550 |
| 73,094 |
| 43,439 |
Total current tax | 16 |
| 220,365 |
| 176,124 |
Total deferred U.S. tax benefit | (64,865) |
| (31,684) |
| (25,202) |
Total income tax (benefit) expense | $ (64,849) |
| $ 188,681 |
| $ 150,922 |
The weighted average expected tax provision has been calculated using the pre-tax income (loss) in each jurisdiction multiplied by that jurisdiction’s applicable statutory tax rate. Reconciliation of the difference between the provision for income taxes and the expected tax provision at the weighted average tax rate for the years ended December 31, 2006 and 2005periods indicated is provided below:
| Years Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2006 | 2005 | ||||||
| Expected tax provision at applicable statutory rates | $ | 197,277 | $ | (10,137 | ) | |||
| Increase (reduction) in taxes resulting from: | ||||||||
| Tax exempt income | (61,350 | ) | (57,935 | ) | ||||
| Dividend received deduction | (3,515 | ) | (3,488 | ) | ||||
| Proration | 9,716 | 9,198 | ||||||
| Other | 8,794 | 108 | ||||||
| Total income tax provision | $ | 150,922 | $ | (62,254 | ) | |||
| Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
Expected tax provision at applicable statutory rates | $ (21,854) |
| $ 230,288 |
| $ 197,277 |
Increase (decrease) in taxes resulting from: |
|
|
|
|
|
Tax exempt income | (61,840) |
| (60,973) |
| (61,350) |
Dividend received deduction | (2,762) |
| (4,283) |
| (3,515) |
Proration | 9,437 |
| 9,775 |
| 9,716 |
Other | 12,170 |
| 13,874 |
| 8,794 |
Total income tax provision | $ (64,849) |
| $ 188,681 |
| $ 150,922 |
Deferred income taxes reflect the tax effect of the temporary differences between the value of assets and liabilities for financial statement purposes and such values as measured by the U.S. tax laws and regulations. The principal items making up the net deferred income tax asset are as follows for the periods indicated:
|
|
| At December 31, | ||
(Dollars in thousands) |
|
| 2008 |
| 2007 |
Deferred tax assets: |
|
|
|
|
|
Reserve for losses and LAE |
|
| $ 194,910 |
| $ 265,022 |
Unearned premium reserve |
|
| 50,727 |
| 65,235 |
Investment impairments |
|
| 26,997 |
| 1,405 |
Net unrealized depreciation of investments |
|
| 62,248 |
| - |
Fair value adjustments |
|
| 5,244 |
| - |
Deferred compensation |
|
| 15,737 |
| 14,920 |
AMT Credits |
|
| 10,561 |
| 28,054 |
Foreign tax credits |
|
| 38,353 |
| 48,510 |
Uncollectible reinsurance |
|
| 84,898 |
| 58,658 |
Minimum pension |
|
| 17,080 |
| 3,531 |
Other assets |
|
| 39,380 |
| 20,867 |
Total deferred tax assets |
|
| 546,135 |
| 506,202 |
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
Deferred acquisition costs |
|
| 67,069 |
| 81,325 |
Investment discount |
|
| 8,653 |
| 5,169 |
Net unrealized appreciation of investments |
|
| - |
| 60,103 |
Fair value adjustments |
|
| - |
| 90,359 |
Foreign currency translation |
|
| 15,565 |
| 31,345 |
Other liabilities |
|
| 12,481 |
| 10,076 |
Total deferred tax liabilities |
|
| 103,768 |
| 278,377 |
|
|
|
|
|
|
Net deferred tax assets |
|
| $ 442,367 |
| $ 227,825 |
The Company adopted the provisions of FIN 48 on January 1, 2007. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| Years Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2006 | 2005 | |||||||||
| Deferred tax assets: | |||||||||||
| Reserve for losses and LAE | $ | 255,328 | $ | 268,029 | |||||||
| Unearned premium reserve | 72,342 | 69,510 | |||||||||
| Impairments | - | 1,688 | |||||||||
| Deferred compensation | 15,631 | 8,778 | |||||||||
| AMT Credits | 35,414 | 35,737 | |||||||||
| Foreign tax credit carryforwards | 64,576 | 43,193 | |||||||||
| Uncollectible reinsurance | 35,306 | 5,693 | |||||||||
| Minimum pension | 9,635 | 1,547 | |||||||||
| Other assets | 19,645 | 12,796 | |||||||||
| Total deferred tax assets | 507,877 | 446,971 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Deferred acquisition costs | 84,123 | 70,766 | |||||||||
| Investments | 5,122 | 5,522 | |||||||||
| Net unrealized appreciation of investments | 173,593 | 125,474 | |||||||||
| Foreign currency translation | 15,123 | 11,981 | |||||||||
| Other liabilities | 9,869 | (1,334 | ) | ||||||||
| Total deferred tax liabilities | 287,830 | 212,409 | |||||||||
| Net deferred tax assets | $ | 220,047 | $ | 234,562 | |||||||
(Dollars in thousands) |
|
| 2008 |
| 2007 |
Balance at January 1 |
|
| $ 29,132 |
| $ 13,800 |
Additions based on tax positions related to the current year |
| 5,234 |
| 4,423 | |
Additions for tax positions of prior years |
|
| - |
| 10,909 |
Reductions for tax positions of prior years |
|
| - |
| - |
Settlements with taxing authorities |
|
| - |
| - |
Lapses of applicable statutes of limitations |
|
| - |
| - |
Balance at December 31 |
|
| $ 34,366 |
| $ 29,132 |
The entire amount of the unrecognized tax benefits would affect the effective tax rate if recognized.
In 2007, the Internal Revenue Service (“IRS”) completed its examination of the Company’s consolidated U.S. income tax returns for 2003 and 2004 and issued an examination report proposing various adjustments. The Company has submitted a formal protest and believes that it has a strong chance of prevailing on the issues involved. With few exceptions, the Company no longer is subject to U.S. federal, state and local or foreign income tax examinations by tax authorities for years before 2003.
The Company recognizes accrued interest related to unrecognized tax benefits and penalties in income taxes. During the years ended December 31, 2008 and 2007, the Company accrued and recognized approximately $2.5 million and $6.0 million, respectively, in interest and penalties.
The Company is not aware of any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within twelve months of the reporting date unless the formal protest to the IRS for 2003 and 2004 is finally resolved. It is not possible to estimate the change that would be required as a result of such resolution.
For U.S. income tax purposes the Company has foreign tax credit carryforwards of $64.6$38.2 million that begin to expire in 2011.2014. In addition, for U.S. income tax purposes the Company has $35.4$10.6 million of Alternative Minimum Tax credits that do not expire. Management believes that it is more likely than not that the Company will realize the benefits of its net deferred tax assets and, accordingly, no valuation allowance has been recorded for the periods presented.
F-27
Tax benefits of $6.1$1.8 million and $5.6$5.2 million related to share-based compensation expense deductions for stock options exercised in 20062008 and 2005,2007, respectively, are reflected in additional paid-in capital in the change in shareholders’ equity in “additional paid-in capital”. In addition, during 2005,section of the Company sold treasury shares resulting in proceeds of $46.5 million compared with a cost basis of $23.0 million. Additional paid-in capital was reduced by $8.2 million of income taxes resulting from this transaction.consolidated balance sheets.
11.
13. REINSURANCE
The Company utilizes reinsurance agreements to reduce its exposure to large claims and catastrophic loss occurrences. These agreements provide for recovery from reinsurers of a portion of losses and LAE under certain circumstances without relieving the ceding company of its obligations to the policyholders. Losses and LAE incurred and premiums earned are reported after deduction for reinsurance. In the event that one or more of the reinsurers were unable to meet their obligations under these reinsurance agreements, the Company would not realize the full value of the reinsurance recoverable balances. The Company may hold partial collateral, including letters of credit and funds held, under these agreements. See also Note 1C.
For years ended December 31, 1999, 2000 and 2001, the Company purchased accident year aggregate excess of loss retrocession coverage that provided up to $175.0 million of coverage for each year. These excess of loss policies provided coverage if Everest Re’s consolidated statutory basis accident year loss ratio exceeded a specified loss ratio attachment point for each year of coverage. The attachment point was net of inuring reinsurance and included adjustable premium provisions that effectively caused the Company to offset, on a pre-tax income basis up to approximately 57% of such ceded losses. The maximum recovery for each year is $175.0 million before giving effect to the adjustable premium. During 2003, the Company ceded $85.0 million of losses, to the 2000 cover, effectively exhausting the maximum limit under the contract. The 2001 and 1999 accident year aggregate excess of loss retrocession coverages were fully exhausted prior to January 1, 2003. The Company did not purchase similar corporate level coverage subsequent to December 31, 2001.
In addition, the Company had coverage under an aggregate excess of loss reinsurance agreement provided by LM in connection with the Company’s acquisition of Mt. McKinley in September 2000. This agreement covers 80% or $160.0 million of the first $200 million of any adverse loss reserve development on the carried reserves of Mt. McKinley at the date of acquisition and reimburses the Company as such losses are paid by the Company. There were $160.0 million of recoverables under this reinsurance at December 31, 2003. The Prudential continues to guarantee LM’s obligation under this agreement.
Premiums written and earned and incurred losses and LAE are comprised of the following:following for the periods indicated:
| Years Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| Written premiums: | |||||||||||
| Direct | $ | 933,488 | $ | 992,322 | $ | 1,293,545 | |||||
| Assumed | 3,067,382 | 3,116,240 | 3,410,589 | ||||||||
| Ceded | (125,156 | ) | (136,521 | ) | (172,646 | ) | |||||
| Net written premiums | $ | 3,875,714 | $ | 3,972,041 | $ | 4,531,488 | |||||
Premiums earned: | |||||||||||
| Direct | $ | 996,196 | $ | 1,059,069 | $ | 1,181,278 | |||||
| Assumed | 2,999,154 | 3,040,393 | 3,430,270 | ||||||||
| Ceded | (142,197 | ) | (136,369 | ) | (186,466 | ) | |||||
| Net premiums earned | $ | 3,853,153 | $ | 3,963,093 | $ | 4,425,082 | |||||
F-28
| Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
Written premiums: |
|
|
|
|
|
Direct | $ 778,597 |
| $ 851,347 |
| $ 933,488 |
Assumed | 2,899,541 |
| 3,226,223 |
| 3,067,382 |
Ceded | (172,925) |
| (158,129) |
| (125,156) |
Net written premiums | $ 3,505,213 |
| $ 3,919,441 |
| $ 3,875,714 |
|
|
|
|
|
|
Premiums earned: |
|
|
|
|
|
Direct | $ 844,365 |
| $ 922,005 |
| $ 996,196 |
Assumed | 3,031,721 |
| 3,213,140 |
| 2,999,154 |
Ceded | (181,785) |
| (137,647) |
| (142,197) |
Net premiums earned | $ 3,694,301 |
| $ 3,997,498 |
| $ 3,853,153 |
|
|
|
|
|
|
Incurred losses and LAE: |
|
|
|
|
|
Direct | $ 658,201 |
| $ 793,436 |
| $ 760,115 |
Assumed | 1,856,821 |
| 1,869,394 |
| 1,783,823 |
Ceded | (76,050) |
| (114,692) |
| (109,518) |
Net incurred losses and LAE | $ 2,438,972 |
| $ 2,548,138 |
| $ 2,434,420 |
The amounts deducted from losses and LAE incurred for net reinsurance recoveries were $109.5$76.0 million, $95.2$114.7 million and $141.0$109.5 million for the years ended December 31, 2008, 2007 and 2006, 2005 and 2004, respectively.respectively, see also Note 3.
As of December 31, 2006, the Company carried as an asset $772.8 million in reinsurance receivables with respect to losses ceded. Of this amount, $169.4 million, or 21.9%, was receivable from Transatlantic, $100.9 million, or 13.1%, was receivable from LM, $100.2 million, or 13.0%, was receivable from Founders, of which $38.3 million is held in a trust, $100.0 million, or 12.9%, was receivable from Continental, $52.5 million, or 6.8%, was receivable from subsidiaries of London Life and $42.7 million, or 5.5%, was receivable from Munich Re. As of December 31, 2005, the Company had $1,048.7 million in reinsurance receivables. Of this amount, $239.8 million, or 22.9%, was receivable from subsidiaries of London Life, $171.5 million, or 16.4%, was receivable from Transatlantic, $160.0 million, or 15.3%, was receivable from LM and $100.0 million, or 9.5%, was receivable from Continental. No other retrocessionaire accounted for more than 5% of the Company’s receivables.
14. COMPREHENSIVE (LOSS) INCOME
The Company’s arrangements with London Life and Continental are managed on a funds held basis, which means thatfollowing table presents the Company has retained the premiums earned by the retrocessionaire to secure obligations of the retrocessionaire, recorded them as a liability, credited interest on the balances at a stated contractual rate and reduced the liability account as payments become due. As of December 31, 2006, such funds had reduced the Company’s net exposure to Continental to $33.2 million. As of December 31, 2005, such funds had reduced the Company’s net exposure to London Life to $115.4 million, effectively 100% of which has been secured by letters of credit, and its exposure to Continental to $38.7 million.
F-29
12. COMPREHENSIVE INCOME (LOSS)The components of comprehensive (loss) income (loss) for the years ended December 31, 2006, 2005 and 2004 are shown in the following table:periods indicated:
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Net income (loss) | $ | 840,828 | $ | (218,667 | ) | $ | 494,858 | ||||
| Other comprehensive income (loss), before tax: | |||||||||||
| Unrealized gains on securities arising during the period | 166,739 | 12,497 | 129,705 | ||||||||
| Less: reclassification adjustment for realized gains | |||||||||||
| included in net income (loss) | (35,067 | ) | (90,284 | ) | (89,614 | ) | |||||
| Foreign currency translation adjustments | 58,908 | (26,026 | ) | 26,610 | |||||||
| Minimum pension adjustment | - | (4,422 | ) | - | |||||||
| Other comprehensive income (loss), before tax | 190,580 | (108,235 | ) | 66,701 | |||||||
| Income tax expense related to items of other comprehensive | |||||||||||
| income (loss): | |||||||||||
| Tax expense from unrealized gains arising during the period | (55,554 | ) | (22,772 | ) | (34,474 | ) | |||||
| Tax benefit from realized gains (losses) included | |||||||||||
| in net income | 12,155 | 22,803 | 20,098 | ||||||||
| Tax expense from foreign currency translation | (4,764 | ) | (935 | ) | (3,665 | ) | |||||
| Tax benefit from minimum pension adjustment | - | 1,548 | - | ||||||||
| Total income tax (expense) benefit related to items of other | |||||||||||
| comprehensive income (loss): | (48,163 | ) | 644 | (18,041 | ) | ||||||
| Other comprehensive income (loss), net of tax | 142,417 | (107,591 | ) | 48,660 | |||||||
| Comprehensive income (loss) | $ | 983,245 | $ | (326,258 | ) | $ | 543,518 | ||||
| Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
|
|
|
|
|
|
Net (loss) income | $ (18,758) |
| $ 839,275 |
| $ 840,828 |
Other comprehensive (loss) income, before tax: |
|
|
|
|
|
Unrealized (losses) gains on securities arising during the period | (499,622) |
| 7,065 |
| 166,739 |
Less: reclassification adjustment for realized losses (gains) |
|
|
|
|
|
included in net (loss) income | 189,231 |
| 14,292 |
| (35,067) |
Foreign currency translation adjustments | (209,667) |
| 49,132 |
| 58,908 |
Pension adjustments | (38,715) |
| 17,443 |
| - |
Other comprehensive (loss) income, before tax | (558,773) |
| 87,932 |
| 190,580 |
|
|
|
|
|
|
Income tax benefit (expense) related to items of other |
|
|
|
|
|
comprehensive (loss) income: |
|
|
|
|
|
Tax benefit (expense) from unrealized losses (gains) arising during the period | 104,410 |
| 1,653 |
| (55,554) |
Tax reclassification due to realized losses (gains) included in net (loss) income | (30,598) |
| (1,831) |
| 12,155 |
Tax benefit (expense) from foreign currency translation | 16,405 |
| (16,222) |
| (4,764) |
Tax benefit (expense) on pension | 13,550 |
| (6,105) |
| - |
Total income tax benefit (expense) related to items of other |
|
|
|
|
|
comprehensive (loss) income: | 103,767 |
| (22,505) |
| (48,163) |
Other comprehensive (loss) income, net of tax | (455,006) |
| 65,427 |
| 142,417 |
Comprehensive (loss) income | $ (473,764) |
| $ 904,702 |
| $ 983,245 |
The following table shows the components of the change in accumulated other comprehensive (loss) income for the years ended December 31, 2006 and 2005.periods indicated:
| (Dollars in thousands) | 2006 | 2005 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Beginning balance of unrealized gains on securities | $ | 214,583 | $ | 292,339 | |||||||
| Current period change in unrealized gains on securities | 88,273 | (77,756 | ) | ||||||||
| Ending balance of unrealized gains on securities | $ | 302,856 | $ | 214,583 | |||||||
| Beginning balance of foreign currency translation adjustments | $ | 9,437 | $ | 36,398 | |||||||
| Current period change in foreign currency translation adjustments | 54,144 | (26,961 | ) | ||||||||
| Ending balance of foreign currency translation adjustments | $ | 63,581 | $ | 9,437 | |||||||
| Beginning balance of minimum pension adjustment | $ | (2,874 | ) | $ | - | ||||||
| Current period change in minimum pension adjustment | - | (2,874 | ) | ||||||||
| Ending balance of minimum pension adjustment | $ | (2,874 | ) | $ | (2,874 | ) | |||||
| Adjustment to initially apply FASB Statement No. 158, net of tax | $ | (15,020 | ) | $ | - | ||||||
| Ending balance of accumulated other comprehensive income | $ | 348,543 | $ | 221,146 | |||||||
F-30
|
|
| Years Ended December 31, | ||
(Dollars in thousands) |
|
| 2008 |
| 2007 |
Beginning balance of unrealized gains on securities |
|
| $ 73,220 |
| $ 302,856 |
Current period change in unrealized gains on securities |
|
| (236,579) |
| 21,179 |
Adjustment to initially apply FAS No. 159, net of tax |
|
| - |
| (250,815) |
Ending balance of unrealized gains on securities |
|
| (163,359) |
| 73,220 |
|
|
|
|
|
|
Beginning balance of foreign currency translation adjustments |
|
| 96,491 |
| 63,581 |
Current period change in foreign currency translation adjustments |
|
| (193,262) |
| 32,910 |
Ending balance of foreign currency translation adjustments |
|
| (96,771) |
| 96,491 |
|
|
|
|
|
|
Beginning balance of pension |
|
| (6,556) |
| (17,894) |
Current period change in pension |
|
| (25,165) |
| 11,338 |
Adjustment to initially apply FAS No. 158, net of tax |
|
| - |
| - |
Ending balance of pension |
|
| (31,721) |
| (6,556) |
|
|
|
|
|
|
Ending balance of accumulated other comprehensive income |
|
| $ (291,851) |
| $ 163,155 |
13.15. EMPLOYEE BENEFIT PLANSA.
Defined Benefit Pension Plans
Plans.
The Company maintains both qualified and non-qualified defined benefit pension plans for its U.S. employees. Generally, the Company computes the benefits based on average earnings over a period prescribed by the plans and credited length of service. The Company’s non-qualified defined benefit pension plan, affected in October 1995, provides compensating pension benefits for participants whose benefits have been curtailed under the qualified plan due to Internal Revenue Code limitations.
Although not required to make contributions under Internal Revenue ServiceIRS regulations, the Company contributed $22.8$20.6 million and $3.9$3.6 million to the qualified plan in 20062008 and 2005,2007, respectively. Pension expense for the Company’s plans for the years ended December 31, 2008, 2007 and 2006 2005was $5.9 million, $6.4 million and 2004 was $9.2 million, $6.9 million and $5.3 million, respectively.
The following table summarizes the status of these defined benefit plans for U.S. employees for years ended December 31 asthe periods indicated:
| (Dollars in thousands) | 2006 | 2005 | ||||||
|---|---|---|---|---|---|---|---|---|
| Change in projected benefit obligation: | ||||||||
| Benefit obligation at beginning of year | $ | 81,269 | $ | 66,164 | ||||
| Service cost | 5,089 | 3,873 | ||||||
| Interest cost | 4,890 | 4,036 | ||||||
| Actuarial loss | 1,977 | 7,749 | ||||||
| Benefits paid | (782 | ) | (553 | ) | ||||
| Projected benefit obligation at end of year | 92,443 | 81,269 | ||||||
| Change in plan assets: | ||||||||
| Fair value of plan assets at beginning of year | 43,609 | 38,172 | ||||||
| Actual return on plan assets | 4,510 | 2,360 | ||||||
| Actual contributions during the year | 22,859 | 3,942 | ||||||
| Administrative expenses paid | (400 | ) | (312 | ) | ||||
| Benefits paid | (782 | ) | (553 | ) | ||||
| Fair value of plan assets at end of year | 69,796 | 43,609 | ||||||
| Funded status at end of year | (22,647 | ) | (37,660 | ) | ||||
| Net amount recognized in the consolidated balance sheets (after FAS 158) | $ | (22,647 | ) | |||||
| Years Ended December 31, | ||
(Dollars in thousands) | 2008 |
| 2007 |
Change in projected benefit obligation: |
|
|
|
Benefit obligation at beginning of year | $ 90,645 |
| $ 92,443 |
Service cost | 5,174 |
| 5,096 |
Interest cost | 5,916 |
| 5,263 |
Actuarial loss (gain) | 5,650 |
| (10,979) |
Benefits paid | (4,478) |
| (1,178) |
Projected benefit obligation at end of year | 102,907 |
| 90,645 |
|
|
|
|
Change in plan assets: |
|
|
|
Fair value of plan assets at beginning of year | 82,963 |
| 69,796 |
Actual return on plan assets | (26,391) |
| 10,550 |
Actual contributions during the year | 23,843 |
| 3,914 |
Administrative expenses paid | (139) |
| (119) |
Benefits paid | (4,478) |
| (1,178) |
Fair value of plan assets at end of year | 75,798 |
| 82,963 |
|
|
|
|
Funded status at end of year | $ (27,109) |
| $ (7,682) |
Amounts recognized in the consolidated balance sheets at December 31:for the periods indicated:
| (Dollars in thousands) | 2006 | ||||
|---|---|---|---|---|---|
| Other assets (due beyond one year) | $ | 1,652 | |||
| Other liabilities (due within one year) | (1,595 | ) | |||
| Other liabilities (due beyond one year) | (22,704 | ) | |||
| Net amount recognized in the consolidated balance sheets | $ | (22,647 | ) | ||
F-31
| At December 31, | ||
(Dollars in thousands) | 2008 |
| 2007 |
Other assets (due beyond one year) | $ - |
| $ 14,133 |
Other liabilities (due within one year) | (6,077) |
| (1,468) |
Other liabilities (due beyond one year) | (21,032) |
| (20,347) |
Net amount recognized in the consolidated balance sheets | $ (27,109) |
| $ (7,682) |
Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income at December 31:for the periods indicated:
| (Dollars in thousands) | 2006 | ||||
|---|---|---|---|---|---|
| Prior service cost | $ | (493 | ) | ||
| Accumulated loss | (26,169 | ) | |||
| Accumulated other comprehensive loss | (26,662 | ) | |||
Change in accumulated other comprehensive income due to application of FAS 158 | |||||
| Additional minimum liability (before FAS 158) | (5,042 | ) | |||
| Intangible asset offset (before FAS 158) | 620 | ||||
| Accumulated other comprehensive income (before FAS 158) | (4,422 | ) | |||
| Net decrease in accumulated other comprehensive income due to FAS 158 | $ | (22,240 | ) | ||
Plan assets consist of shares
| At December 31, | ||
(Dollars in thousands) | 2008 |
| 2007 |
Prior service cost | $ (315) |
| $ (367) |
Accumulated loss | (46,252) |
| (8,873) |
Accumulated other comprehensive loss | $ (46,567) |
| $ (9,240) |
Other changes in investment trusts with approximately 59% and 12% ofother comprehensive income for the underlying assets consisting of equity securities and fixed maturities, respectively, and 29% in cash and cash equivalents due to an employer pension contribution.periods indicated are as follows:
| Years Ended December 31, | ||
(Dollars in thousands) | 2008 |
| 2007 |
Other comprehensive loss at December 31, prior year | $ (9,240) |
| $ (26,662) |
Net (loss) gain arising during period | (38,763) |
| 15,871 |
Recognition of amortizations in net periodic benefit cost: |
|
|
|
Prior service cost | 51 |
| 126 |
Actuarial loss | 1,385 |
| 1,425 |
Other comprehensive loss at December 31, current year | $ (46,567) |
| $ (9,240) |
Net periodic benefit cost for U.S. employees included the following components for years ended December 31 asthe periods indicated:
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Service cost | $ | 5,089 | $ | 3,873 | $ | 3,273 | |||||
| Interest cost | 4,890 | 4,036 | 3,397 | ||||||||
| Expected return on assets | (3,549 | ) | (3,032 | ) | (2,835 | ) | |||||
| Amortization of actuarial loss from earlier periods | 2,633 | 1,923 | 1,357 | ||||||||
| Amortization of unrecognized prior service cost | 127 | 127 | 127 | ||||||||
| Net periodic benefit cost | $ | 9,190 | $ | 6,927 | $ | 5,319 | |||||
| Other changes recognized in other comprehensive income: | |||||||||||
| Other comprehensive loss attributable to change from prior year | 20,120 | ||||||||||
| Total recognized in net periodic benefit cost and other | |||||||||||
| comprehensive income | $ | 29,310 | |||||||||
| Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
Service cost | $ 5,174 |
| $ 5,096 |
| $ 5,089 |
Interest cost | 5,916 |
| 5,263 |
| 4,890 |
Expected return on assets | (6,583) |
| (5,538) |
| (3,549) |
Amortization of actuarial loss from earlier periods | 601 |
| 1,425 |
| 2,633 |
Amortization of unrecognized prior service cost | 51 |
| 126 |
| 127 |
Settlement | 784 |
| - |
| - |
Net periodic benefit cost | $ 5,943 |
| $ 6,372 |
| $ 9,190 |
|
|
|
|
|
|
Other changes recognized in other comprehensive income: |
|
|
|
|
|
Other comprehensive income attributable to change from prior year | 37,327 |
| (17,422) |
|
|
|
|
|
|
|
|
Total recognized in net periodic benefit cost and other |
|
|
|
|
|
comprehensive income | $ 43,270 |
| $ (11,050) |
|
|
The estimated transition obligation, actuarial loss and prior service cost that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next year are $0, $1,868,005$0.0 million, $3.3 million and $126,908,$0.0 million, respectively.
The weighted average discount rates used to determine net periodic benefit cost for 2008 and 2007 were 6.55% and 5.94%, respectively. The rate of compensation increase used to determine the net periodic benefit cost for 2008 and 2007 was 4.5%. The expected long-term rate of return on plan assets for 2008 and 2007 was 8.0% and was based on expected portfolio returns and allocations.
The weighted average discount rates used to determine the actuarial present value of the projected benefit obligation for 2006, 2005year end 2008 and 20042007 were 5.94%, 5.50%6.25% and 5.75%6.55%, respectively. The rate of compensation increase used to determine the actuarial present value of the projected benefit obligation for 2006, 2005 and 2004 was 4.5%. The expected long-term rate of return on plan assets for 2006, 2005 and 2004 was 8.0%, 8.0% and 9.0%, respectively, and was based on portfolio returns and allocations.
F-32
The following table summarizes the accumulated benefit obligation for years ended December 31 asthe periods indicated:
| (Dollars in thousands) | 2006 | 2005 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Qualified Plan | $ | 51,937 | $ | 46,200 | |||||||
| Non-qualified Plan | 15,602 | 14,225 | |||||||||
| Total | $ | 67,539 | $ | 60,425 | |||||||
| Years Ended December 31, | ||
(Dollars in thousands) | 2008 |
| 2007 |
Qualified Plan | $ 63,663 |
| $ 53,693 |
Non-qualified Plan | 20,171 |
| 16,130 |
Total | $ 83,834 |
| $ 69,823 |
The following table displays the plans with projected benefit obligations in excess of plan assets at December 31:for the periods indicated:
| (Dollars in thousands) | 2006 | 2005 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Qualified Plan | |||||||||||
| Projected benefit obligation | $ | - | $ | 60,782 | |||||||
| Fair value of plan assets | - | 43,609 | |||||||||
| Non-qualified Plan | |||||||||||
| Projected benefit obligation | $ | 24,299 | $ | 20,488 | |||||||
| Fair value of plan assets | - | - | |||||||||
| At December 31, | ||
(Dollars in thousands) | 2008 |
| 2007 |
Qualified Plan |
|
|
|
Projected benefit obligation | $ 79,574 |
| NA |
Fair value of plan assets | 75,798 |
| NA |
Non-qualified Plan |
|
|
|
Projected benefit obligation | $ 23,333 |
| $ 21,815 |
Fair value of plan assets | - |
| - |
The following table displays the plans with accumulated benefit obligations in excess of plan assets at December 31:for the periods indicated:
| (Dollars in thousands) | 2006 | 2005 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Qualified Plan | |||||||||||
| Projected benefit obligation | $ | - | $ | 60,782 | |||||||
| Accumulated benefit obligation | - | 46,200 | |||||||||
| Fair value of plan assets | - | 43,609 | |||||||||
| Non-qualified Plan | |||||||||||
| Projected benefit obligation | $ | 24,299 | $ | 20,488 | |||||||
| Accumulated benefit obligation | 15,602 | 14,225 | |||||||||
| Fair value of plan assets | - | - | |||||||||
| At December 31, | ||
(Dollars in thousands) | 2008 |
| 2007 |
Qualified Plan |
|
|
|
Accumulated benefit obligation | NA |
| NA |
Fair value of plan assets | NA |
| NA |
Non-qualified Plan |
|
|
|
Accumulated benefit obligation | $ 20,171 |
| $ 16,130 |
Fair value of plan assets | - |
| - |
The following table displays the expected benefit payments in the yearsperiods indicated:
| (Dollars in thousands) | |||||
|---|---|---|---|---|---|
| 2007 | $ | 2,537 | |||
| 2008 | 2,650 | ||||
| 2009 | 4,862 | ||||
| 2010 | 4,978 | ||||
| 2011 | 5,499 | ||||
| Next 5 years | 35,195 | ||||
(Dollars in thousands) |
|
|
|
2009 |
|
| $ 7,622 |
2010 |
|
| 5,171 |
2011 |
|
| 5,604 |
2012 |
|
| 5,625 |
2013 |
|
| 6,883 |
Next 5 years |
|
| 33,229 |
The asset allocation percentages for the qualified benefit plan, by asset category, at December 31 are as follows:for the periods indicated:
| Asset Category: | 2006 | 2005 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity securities | 59.20 | % | 67.61 | % | |||||||
| Debt securities | 11.50 | % | 31.91 | % | |||||||
| Other | 29.30 | % | 0.48 | % | |||||||
| Total | 100.00 | % | 100.00 | % | |||||||
F-33
| At December 31, | ||
Asset Category: | 2008 |
| 2007 |
Equity securities | 42.36% |
| 64.90% |
Debt securities | 28.84% |
| 29.50% |
Cash and short-term investments | 28.80% |
| 5.60% |
Total | 100.00% |
| 100.00% |
Plan assets consist of shares in investment trusts with approximately 42%, 29% and 29% of the underlying assets consisting of equity securities, fixed maturities and cash, respectively. The Company manages the qualified plan investments for U.S. employees. The assets in the plan consist of debt and equity mutual funds. Due to the long term nature of the plan, the target asset allocation consists ofhas historically been 70% equities and 30% bonds.bonds; however, due to recent market conditions, contributions are being invested in short-term securities.
The Company expects to contribute approximately $4.0$5.1 million in 20072009 to the qualified plan.
B. Defined Contribution Plans
Plans.
The Company also maintains both qualified and non-qualified defined contribution plans (“Savings Plan” and “Non-Qualified Savings Plan”, respectively) covering U.S. employees. Under the plans, the Company contributes up to a maximum 3% of the participants’ compensation based on the contribution percentage of the employee. The Non-Qualified Savings Plan provides compensating savings plan benefits for participants whose benefits have been curtailed under the Savings Plan due to Internal Revenue Code limitations. The Company’s incurred expenses related to these plans were $1.4 million, $1.2 million and $1.0 million in 2008, 2007 and 2006, 2005 and 2004.respectively.
In addition, the Company maintains several defined contribution pension plans covering non-U.S. employees. Each non-U.S. office (Canada, London, Belgium, Singapore and Bermuda) maintains a separate plan for the non-U.S. employees working in that location. The Company contributes various amounts based on salary, age and/or years of service. The contributions as a percentage of salary for the branch offices range from 5%4.9% to 15%9.5%. The contributions are generally used to purchase pension benefits from local insurance providers. The Company’s incurred expenses related to these plans were $0.7 million, $0.7 million and $0.6 million $0.5 millionfor 2008, 2007 and $0.4 million for 2006, 2005 and 2004, respectively.
C. Post-Retirement PlanBeginning January 1, 2002, thePlan.
The Company establishedsponsors the Retiree Health Plan. This plan provides health carehealthcare benefits for eligible retired employees (and their eligible dependants), who have elected coverage. The Company currently anticipates that most covered employees will become eligible for these benefits if they retire while working for the Company. The cost of these benefits is shared with the retiree. The Company accrues the post-retirement benefit expense during the period of the employee’s service.
A health carehealthcare inflation rate for pre-Medicare claims of 10%9% in 20062008 was assumed to decrease to 9% in 2007 and decrease one percentage point annuallygradually to 5% in 20112015 and then remain at that level.
A health carehealthcare inflation rate for post-Medicare claims of 6%7% in 20062008 was assumed to decrease gradually to 5% in 2007 and2015 then remain at that level.
Effective December 31, 2008, the healthcare inflation rate for pre-Medicare claims is 9% in 2009, decreasing gradually to 5% in 2018. The healthcare inflation rate for post-Medicare claims is 7% in 2009, decreasing gradually to 5% in 2018.
Changes in the assumed health carehealthcare cost trend can have a significant effect on the amounts reported for the health carehealthcare plans. A one percent change in the rate would have the following effects on:
| (Dollars in thousands) | Percentage Point Increase ($ Impact) | Percentage Point Decrease ($ Impact) | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| a. Effect on total service and interest cost components | $ | 258 | $ | (199 | ) | ||||||
| b. Effect on accumulated post-retirement benefit obligation | 1,753 | (1,388 | ) | ||||||||
(Dollars in thousands) | Percentage Point Increase ($ Impact) |
| Percentage Point Decrease ($ Impact) |
a. Effect on total service and interest cost components | $ 295 |
| $ (232) |
b. Effect on accumulated post-retirement benefit obligation | 2,341 |
| (1,869) |
Benefit expense for this plan for the years ended December 31, 2008, 2007 and 2006 2005was $1.4 million, $1.2 million and 2004 was $1.1 million, $0.9 million and $0.8 million, respectively.
F-34
The following table summarizes the status of this plan for years ended December 31 asthe periods indicated:
| (Dollars in thousands) | 2006 | 2005 | ||||||
|---|---|---|---|---|---|---|---|---|
| Change in projected benefit obligation: | ||||||||
| Benefit obligation at beginning of year | $ | 8,582 | $ | 7,111 | ||||
| Service cost | 631 | 490 | ||||||
| Interest cost | 464 | 408 | ||||||
| Actuarial (gain) loss | (794 | ) | 607 | |||||
| Benefits paid | (103 | ) | (34 | ) | ||||
| Benefit obligation at end of year | 8,780 | 8,582 | ||||||
Change in plan assets: | ||||||||
| Fair value of plan assets at beginning of year | - | - | ||||||
| Employer contributions | 103 | 34 | ||||||
| Benefits paid | (103 | ) | (34 | ) | ||||
| Fair value of plan assets at end of year | - | - | ||||||
| Funded status at end of year | $ | (8,780 | ) | $ | (8,582 | ) | ||
| At December 31, | ||
(Dollars in thousands) | 2008 |
| 2007 |
Change in projected benefit obligation: |
|
|
|
Benefit obligation at beginning of year | $ 9,832 |
| $ 8,780 |
Service cost | 732 |
| 663 |
Interest cost | 664 |
| 536 |
Actuarial loss (gain) | 1,401 |
| (1) |
Benefits paid | (273) |
| (146) |
Benefit obligation at end of year | 12,356 |
| 9,832 |
|
|
|
|
Change in plan assets: |
|
|
|
Fair value of plan assets at beginning of year | - |
| - |
Employer contributions | 273 |
| 146 |
Benefits paid | (273) |
| (146) |
Fair value of plan assets at end of year | - |
| - |
|
|
|
|
Funded status at end of year | $ (12,356) |
| $ (9,832) |
Amounts recognized in the consolidated balance sheets at December 31:for the periods indicated:
| (Dollars in thousands) | 2006 | ||||
|---|---|---|---|---|---|
| Other liabilities (due within one year) | $ | (117 | ) | ||
| Other liabilities (due beyond one year) | (8,663 | ) | |||
| Net amount recognized in the consolidated balance sheets | $ | (8,780 | ) | ||
| At December 31, | ||
(Dollars in thousands) | 2008 |
| 2007 |
Other liabilities (due within one year) | $ (219) |
| $ (144) |
Other liabilities (due beyond one year) | (12,137) |
| (9,688) |
Net amount recognized in the consolidated balance sheets | $ (12,356) |
| $ (9,832) |
Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income at December 31:for the periods indicated:
| (Dollars in thousands) | 2006 | ||||
|---|---|---|---|---|---|
| Accumulated other comprehensive loss | $ | (867 | ) | ||
| Net decrease in accumulated other comprehensive income due to FAS 158 | $ | (867 | ) | ||
| At December 31, | ||
(Dollars in thousands) | 2008 |
| 2007 |
Accumulated loss | $ (2,234) |
| $ (848) |
Accumulated other comprehensive loss | $ (2,234) |
| $ (848) |
Other changes in other comprehensive income for the periods indicated are as follows:
| Years Ended December 31, | ||
(Dollars in thousands) | 2008 |
| 2007 |
Other comprehensive loss at December 31, prior year | $ (848) |
| $ (867) |
Net loss arising during period | (1,401) |
| 1 |
Recognition of amortizations in net periodic benefit cost: |
|
|
|
Actuarial loss | 15 |
| 18 |
Other comprehensive loss at December 31, current year | $ (2,234) |
| $ (848) |
Net periodic benefit cost included the following components for years ended December 31 asthe periods indicated:
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Service cost | $ | 631 | $ | 490 | $ | 419 | |||||||||||
| Interest cost | 464 | 408 | 363 | ||||||||||||||
| Net loss recognition | 50 | 29 | 17 | ||||||||||||||
| Net periodic cost | $ | 1,145 | $ | 927 | $ | 799 | |||||||||||
| Other changes recognized in other comprehensive income: | |||||||||||||||||
| Other comprehensive loss attributable to change from prior year | 867 | ||||||||||||||||
| Total recognized in net periodic benefit cost and | |||||||||||||||||
| other comprehensive income | $ | 2,012 | |||||||||||||||
F-35
| Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
Service cost | $ 732 |
| $ 663 |
| $ 631 |
Interest cost | 664 |
| 536 |
| 464 |
Net loss recognition | 15 |
| 18 |
| 50 |
Net periodic cost | $ 1,411 |
| $ 1,217 |
| $ 1,145 |
|
|
|
|
|
|
Other changes recognized in other comprehensive income: |
|
|
|
|
|
Other comprehensive gain attributable to change from prior year | 1,386 |
| (19) |
|
|
|
|
|
|
|
|
Total recognized in net periodic benefit cost and |
|
|
|
|
|
other comprehensive income | $ 2,797 |
| $ 1,198 |
|
|
The estimated transition obligation, actuarial loss and prior service cost that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $0, $0$0.0 thousand, $68.7 thousand and $0,$0.0 thousand, respectively.
The weighted average discount rates used to determine net periodic benefit cost for 2008 and 2007 were 6.55% and 5.94%, respectively.
The weighted average discount rates used to determine the actuarial present value of the projected benefit obligation for 2006, 2005at year end 2008 and 20042007 were 5.94%, 5.75%6.25% and 5.50%6.55%, respectively.
The following table summarizes the Benefit Obligationbenefit obligation for the post-retirement plan for the years ended December 31 asperiods indicated:
| (Dollars in thousands) | 2006 | 2005 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Post-retirement Plan | $ | 8,780 | $ | 8,582 | |||||||
| Years Ended December 31, | ||
(Dollars in thousands) | 2008 |
| 2007 |
Post-retirement Plan | $ 12,356 |
| $ 9,832 |
The following table displays the expected benefit payments in the years indicated:
| (Dollars in thousands) | |||||
|---|---|---|---|---|---|
| 2007 | $ | 117 | |||
| 2008 | 140 | ||||
| 2009 | 203 | ||||
| 2010 | 263 | ||||
| 2011 | 328 | ||||
| Next 5 years | 2,731 | ||||
(Dollars in thousands) |
|
|
|
2009 |
|
| $ 219 |
2010 |
|
| 298 |
2011 |
|
| 378 |
2012 |
|
| 453 |
2013 |
|
| 538 |
Next 5 years |
|
| 4,233 |
14.16. DIVIDEND RESTRICTIONS AND STATUTORY FINANCIAL INFORMATIONA.
Dividend Restrictions
Restrictions.
Under Bermuda law, Group is prohibited from declaring or paying a dividend if such payment would reduce the realizable value of its assets to an amount less than the aggregate value of its liabilities and its issued share capital and share premium (additional paid-in capital) accounts. Group’s ability to pay dividends and its operating expenses is dependent upon dividends from its subsidiaries. The payment of such dividends by insurer subsidiaries is limited under Bermuda law and the laws of the various U.S. states in which Group’s insurance and reinsurance subsidiaries are domiciled or deemed domiciled. The limitations are generally based upon net income and compliance with applicable policyholders’ surplus or minimum solvency margin and liquidity ratio requirements as determined in accordance with the relevant statutory accounting practices.
Under Bermuda law, Bermuda Re isand Everest International are prohibited from declaring or making payment of a dividend if it failsthey fail to meet itstheir minimum solvency margin or minimum liquidity ratio. As a long-term insurer,long term insurers, Bermuda Re isand Everest International are also unable to declare or pay a dividend to anyone who is not a policyholder unless, after payment of the dividend, the value of the assets in its long-termtheir long term business fund, as certified by itstheir approved actuary, exceeds itstheir liabilities for long-termlong term business by at least the $250,000 minimum solvency margin. Prior approval of the Bermuda Monetary Authority is required if Bermuda Re’s or Everest International’s dividend payments would reduce itstheir prior year-end total statutory capital by 15.0%15% or more.
Delaware law provides that an insurance company which is a member of an insurance holding company system and is domiciled in the state shall not pay dividends without giving prior notice to the Insurance Commissioner of Delaware and may not pay dividends without the approval of the Insurance Commissioner if the value of the proposed dividend, together with all other dividends and distributions made in the preceding twelve months, exceeds the greater of (1) 10% of statutory surplus or (2) net income, not including realized capital gains, each as reported in the prior year’s statutory annual statement. In addition, no dividend may be paid in excess of
F-36
unassigned earned surplus. At December 31, 2006,2008, Everest Re had $270.4has $315.6 million available for payment of dividends in 20072009 without the need for prior regulatory approval. In addition, Everest Re has $300.0 million available for payment of dividends in 2009 from the extraordinary dividend approval from the Insurance Commissioner of Delaware.
B. Statutory Financial Information
Information.
Everest Re prepares its statutory financial statements in accordance with accounting practices prescribed or permitted by the National Association of Insurance Commissioners (“NAIC”) and the Delaware Insurance Department. Prescribed statutory accounting practices are set forth in the NAIC Accounting Practices and Procedures Manual. The capital and statutory surplus of Everest Re was $2,704.1$2,342.4 million (unaudited) and $2,327.6$2,864.1 million at December 31, 20062008 and 2005,2007, respectively. The statutory net income of Everest Re was $74.4 million, $673.1 million and $298.7 million (unaudited) for the yearyears ended December 31, 2008, 2007 and 2006, the statutory net loss was $26.9 million for the year ended December 31, 2005 and the statutory net income $175.8 million for the year ended December 31, 2004.respectively.
Bermuda Re prepares its statutory financial statements in conformity with the accounting principles set forth in Bermuda in The Insurance Act 1978, amendments thereto and related regulations. The statutory capital and surplus of Bermuda Re was $1,893.9$2,181.6 million (unaudited) and $1,522.5$2,340.4 million at December 31, 20062008 and 2005,2007, respectively. The statutory net income of Bermuda Re was $409.8$42.3 million, (unaudited)$419.3 million and $429.8 million for the yearyears ended December 31, 2008, 2007 and 2006, the statutory net loss was $220.5 million for the year ended December 31, 2005 and the statutory net income was $248.7 million for the year ended December 31, 2004.respectively.
15.
17. CONTINGENCIES
In the ordinary course of business, the Company is involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine the Company’s rights and obligations under insurance, reinsurance and other contractual agreements. In some disputes, the Company seeks to enforce its rights under an agreement or to collect funds owing to it. In other matters, the Company is resisting attempts by others to collect funds or enforce alleged rights. These disputes arise from time to time and as they arise are addressed, and ultimately resolved through both informal and formal means, including negotiated resolution, arbitration and litigation. In all such matters, the Company believes that its positions are legally and commercially reasonable. While the final outcome of these matters cannot be predicted with certainty, the Company does not believe that any of these matters, when finally resolved, will have a material adverse effect on the Company’s financial position or liquidity. However, an adverse resolution of one or more of these items in any one quarter or fiscal year could have a material adverse effect on the Company’s results of operations in that period.
In 1993 and prior, the Company had a business arrangement with The Prudential wherein, for a fee, the Company accepted settled claim payment obligations of certain property and casualty insurers, and, concurrently, became the owner of the annuity or assignee of the annuity proceeds funded by the property and casualty insurers specifically to fulfill these fully settled obligations. In these circumstances, the Company would be liable if The Prudential, which has an A+ (Superior) financial strength rating from A.M. Best Company (“A.M. Best”), werewas unable to make the annuity payments. The estimated cost to replace all such annuities for which the Company was contingently liable at December 31, 20062008 and 20052007, was $150.5$152.1 million and $155.3$150.4 million, respectively.
Prior to its 1995 initial public offering, the Company purchased annuities from an unaffiliated life insurance company with an A+ (Superior) financial strength rating from A.M. Best to settle certain claim liabilities of the Company. Should the life insurance company become unable to make the annuity payments, the Company would be liable for those claim liabilities. The estimated cost to replace such annuities at December 31, 20062008 and 20052007, were $20.2$23.1 million and $18.8$21.7 million, respectively.
F-37
16.18. SHARE-BASED COMPENSATION PLANS
The Company has a 2002 Stock Incentive Plan (“2002 Employee Plan”), a 1995 Stock Incentive Plan (“1995 Employee Plan”), a 2003 Non-Employee Director Equity Compensation Plan (“2003 Director Plan”) and a 1995 Stock Option Plan for Non-Employee Directors (“1995 Director Plan”). In addition, the Company has awarded options to non-employee directors in Board actions in 2001, 2000 and 1999. On January 1, 2002 the Company implemented FAS 123 and related interpretations for these plans and Board actions and on January 1, 2006 the Company implemented FAS 123(R).
Under the 2002 Employee Plan, 4,000,000 common shares have been authorized to be granted as share options, share awards or restricted share awards to officers and key employees of the Company. At December 31, 2006,2008, there were 2,232,3501,304,618 remaining shares available to be granted under the 2002 Employee Plan. The 2002 Employee Plan replaced the 1995 Employee Plan; therefore, no further awards will be granted under the 1995 Employee Plan. Under the 2003 Director Plan, 500,000 common shares have been authorized to be granted as share options or share awards to non-employee directors of the Company. At December 31, 20062008 there were 477,500462,500 remaining shares available to be granted under the 2003 Director Plan. Under the 1995 Director Plan, a total of 50,000 common shares have been authorized to be granted as share options to non-employee directors of the Company. At December 31, 2006,2008, there were 37,439 remaining shares available to be granted under the 1995 Director Plan.
Board actions in 2001, 2000 and 1999, which were not approved by shareholders, awarded options to non-employee directors. The Board actions were designed to award non-employee directors with the option to purchase common shares to increase their ownership interest in the Company of non-employee directors whose services are considered essential to the Company’s continued progress, to align such interests with those of the shareholders of the Company and to provide them with a further incentive to serve as directors
to the Company. Under Board actions in 2001, 2000 and 1999; 40,000, 30,000 and 26,000 common shares have beenwere granted as share options to non-employee directors of the Company.
Options granted under the 2002 Employee Plan and the 1995 Employee Plan vest at the earlier of 20% per year over five years or upon the expiration of any applicable employment agreement, options granted under the 1995 Director Plan vest at 50% per year over two years and options granted under the 2003 Director Plan and the 2001, 2000 and 1999 Board actions vest at 33% per year over three years. All options are exercisable at fair market value of the stock at the date of grant and expire ten years after the date of grant. Restricted shares granted under the 2002 Employee Plan and the 1995 Employee Plan vest at the earliestearlier of 20% per year over five years or upon the expiration of any applicable employment agreement.agreement and restricted shares granted under the 2003 Director Plan vest at 33% per year over three years.
For share options granted, nonvested shares granted and shares issued under the 2002 Employee Plan, the 1995 Employee Plan, the 2003 Director Plan and the 1995 Director Plan, share-based compensation expense recognized in the consolidated statements of operations and comprehensive (loss) income was $15.1$16.3 million for the year ended December 31, 2006.2008. The corresponding income tax benefit recorded in the consolidated statements of operations and comprehensive (loss) income for share-based compensation was $4.1$3.6 million for the year ended December 31, 2006.2008.
F-38
The fair value of each option award iswas estimated on the date of the grant using the Black-Scholes option valuation model. The following assumptions were used in calculating the fair value of the options for the years ended December 31:periods indicated:
| 2006 | 2005 | 2004 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Weighted-average volatility | 27.14% | 27.66% | 28.79% | ||||||||||||||
| Weighted-average dividend yield | 0.95% | 0.88% | 0.86% | ||||||||||||||
| Weighted-average expected term | 6.33 years | 6.70 years | 6.85 years | ||||||||||||||
| Weighted-average risk-free rate | 4.62% | 4.08% | 3.67% | ||||||||||||||
| Weighted-average forfeiture | 11.31% | 10.22% | 10.43% | ||||||||||||||
|
|
| Years Ended December 31, | ||||
|
|
| 2008 |
| 2007 |
| 2006 |
Weighted-average volatility |
|
| 25.90% |
| 26.45% |
| 27.14% |
Weighted-average dividend yield |
|
| 2.00% |
| 1.89% |
| 0.95% |
Weighted-average expected term |
|
| 6.44 years |
| 6.42 years |
| 6.33 years |
Weighted-average risk-free rate |
|
| 3.33% |
| 4.68% |
| 4.62% |
A summary of the option activity under the Company’s shareholder approved and non-approved plans as of December 31, 2006, 20052008, 2007 and 20042006 and changes during the year then ended is presented in the following tables:
Compensation plans approved by shareholders:
| Options | Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term | Aggregate Intrinsic Value ($000) | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Outstanding at January 1, 2006 | 2,236,078 | $ | 61.75 | ||||||||||||||||||||
| Granted | 32,500 | 98.15 | |||||||||||||||||||||
| Exercised | 405,572 | 48.08 | |||||||||||||||||||||
| Forfeited/Cancelled/Expired | 64,270 | 81.23 | |||||||||||||||||||||
| Outstanding at December 31, 2006 | 1,798,736 | 64.79 | 5.8 | $ 59,965 | |||||||||||||||||||
| Exercisable at December 31, 2006 | 1,140,256 | 55.79 | 4.8 | $ 48,261 | |||||||||||||||||||
|
|
|
|
| Weighted- |
|
|
|
|
| Weighted- |
| Average |
|
|
|
|
| Average |
| Remaining |
| Aggregate |
(Dollars in thousands, except per share) |
|
| Exercise |
| Contractual |
| Intrinsic |
Options | Shares |
| Price/Share |
| Term |
| Value |
Outstanding at January 1, 2008 | 1,792,126 |
| $ 73.94 |
|
|
|
|
Granted | 379,106 |
| 99.67 |
|
|
|
|
Exercised | 141,300 |
| 46.07 |
|
|
|
|
Forfeited/Cancelled/Expired | 59,406 |
| 93.48 |
|
|
|
|
Outstanding at December 31, 2008 | 1,970,526 |
| 80.30 |
| 5.9 |
| $ 14,075 |
|
|
|
|
|
|
|
|
Exercisable at December 31, 2008 | 1,156,726 |
| 68.60 |
| 4.3 |
| $ 13,930 |
|
|
|
|
| Weighted- |
|
|
|
|
| Weighted- |
| Average |
|
|
|
|
| Average |
| Remaining |
| Aggregate |
(Dollars in thousands, except per share) |
|
| Exercise |
| Contractual |
| Intrinsic |
Options | Shares |
| Price/Share |
| Term |
| Value |
Outstanding at January 1, 2007 | 1,798,736 |
| $ 64.79 |
|
|
|
|
Granted | 371,550 |
| 99.09 |
|
|
|
|
Exercised | 308,210 |
| 48.96 |
|
|
|
|
Forfeited/Cancelled/Expired | 69,950 |
| 82.24 |
|
|
|
|
Outstanding at December 31, 2007 | 1,792,126 |
| 73.94 |
| 6.0 |
| $ 46,981 |
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007 | 1,074,406 |
| 61.81 |
| 4.5 |
| $ 41,204 |
|
|
|
|
| Weighted- |
|
|
|
|
| Weighted- |
| Average |
|
|
|
|
| Average |
| Remaining |
| Aggregate |
(Dollars in thousands, except per share) |
|
| Exercise |
| Contractual |
| Intrinsic |
Options | Shares |
| Price/Share |
| Term |
| Value |
Outstanding at January 1, 2006 | 2,236,078 |
| $ 61.75 |
|
|
|
|
Granted | 32,500 |
| 98.15 |
|
|
|
|
Exercised | 405,572 |
| 48.08 |
|
|
|
|
Forfeited/Cancelled/Expired | 64,270 |
| 81.23 |
|
|
|
|
Outstanding at December 31, 2006 | 1,798,736 |
| 64.79 |
| 5.8 |
| $ 59,965 |
|
|
|
|
|
|
|
|
Exercisable at December 31, 2006 | 1,140,256 |
| 55.79 |
| 4.8 |
| $ 48,261 |
Options | Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term | Aggregate Intrinsic Value ($000) | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Outstanding at January 1, 2005 | 2,318,534 | $ | 53.82 | ||||||||||||||||||||
| Granted | 323,000 | 95.35 | |||||||||||||||||||||
| Exercised | 379,456 | 41.17 | |||||||||||||||||||||
| Forfeited/Cancelled/Expired | 26,000 | 72.76 | |||||||||||||||||||||
| Outstanding at December 31, 2005 | 2,236,078 | 61.75 | 6.1 | $ 86,319 | |||||||||||||||||||
| Exercisable at December 31, 2005 | 1,170,953 | 49.10 | 4.8 | $ 60,007 | |||||||||||||||||||
F-39
| Options | Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term | Aggregate Intrinsic Value ($000) | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Outstanding at January 1, 2004 | 2,373,409 | $ | 45.41 | ||||||||||||||||||||
| Granted | 435,500 | 74.36 | |||||||||||||||||||||
| Exercised | 461,075 | 29.63 | |||||||||||||||||||||
| Forfeited/Cancelled/Expired | 29,300 | 58.43 | |||||||||||||||||||||
| Outstanding at December 31, 2004 | 2,318,534 | 53.82 | 6.2 | $ 83,717 | |||||||||||||||||||
| Exercisable at December 31, 2004 | 1,156,921 | 43.88 | 4.9 | $ 53,275 | |||||||||||||||||||
Compensation plans not approved by shareholders:
| Options | Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term | Aggregate Intrinsic Value ($000) | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Outstanding at January 1, 2006 | 89,500 | $ | 36.62 | ||||||||||||||||||||
| Granted | - | - | |||||||||||||||||||||
| Exercised | - | - | |||||||||||||||||||||
| Forfeited/Cancelled/Expired | - | - | |||||||||||||||||||||
| Outstanding at December 31, 2006 | 89,500 | 36.62 | 3.7 | $ 5,503 | |||||||||||||||||||
| Exercisable at December 31, 2006 | 89,500 | 36.62 | 3.7 | $ 5,503 | |||||||||||||||||||
| Options | Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term | Aggregate Intrinsic Value ($000) | |||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Outstanding at January 1, 2005 | 96,000 | $ | 36.22 | ||||||||||||||||||||
| Granted | - | - | |||||||||||||||||||||
| Exercised | 6,500 | 30.63 | |||||||||||||||||||||
| Forfeited/Cancelled/Expired | - | - | |||||||||||||||||||||
| Outstanding at December 31, 2005 | 89,500 | 36.62 | 4.7 | $ 5,703 | |||||||||||||||||||
| Exercisable at December 31, 2005 | 89,500 | 36.62 | 4.7 | $ 5,703 | |||||||||||||||||||
F-40
|
|
|
|
| Weighted- |
|
| |||||||||||||||||||||||
|
|
| Weighted- |
| Average |
|
| |||||||||||||||||||||||
|
|
| Average |
| Remaining |
| Aggregate | |||||||||||||||||||||||
(Dollars in thousands, except per share) |
|
| Exercise |
| Contractual |
| Intrinsic | |||||||||||||||||||||||
| Options | Options | Shares | Weighted- Average Exercise Price | Weighted- Average Remaining Contractual Term | Aggregate Intrinsic Value ($000) | Shares |
| Price/Share |
| Term |
| Value | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Outstanding at January 1, 2004 | 96,000 | $ | 36.22 | |||||||||||||||||||||||||||
Outstanding at January 1, 2008 | 89,500 |
| $ 36.62 |
|
|
|
| |||||||||||||||||||||||
| Granted | - | - | - |
| - |
|
|
|
| |||||||||||||||||||||
| Exercised | - | - | 6,500 |
| 30.63 |
|
|
|
| |||||||||||||||||||||
| Forfeited/Cancelled/Expired | - | - | - |
| - |
|
|
|
| |||||||||||||||||||||
Outstanding at December 31, 2008 | 83,000 |
| 37.09 |
| 1.8 |
| $ 3,286 | |||||||||||||||||||||||
|
|
|
|
|
|
| ||||||||||||||||||||||||
| Outstanding at December 31, 2004 | 96,000 | 36.22 | 5.6 | $ 5,156 | ||||||||||||||||||||||||||
| Exercisable at December 31, 2004 | 96,000 | 36.22 | 5.6 | $ 5,156 | ||||||||||||||||||||||||||
Exercisable at December 31, 2008 | 83,000 |
| 37.09 |
| 1.8 |
| $ 3,286 | |||||||||||||||||||||||
|
|
|
|
| Weighted- |
|
|
|
|
| Weighted- |
| Average |
|
|
|
|
| Average |
| Remaining |
| Aggregate |
(Dollars in thousands, except per share) |
|
| Exercise |
| Contractual |
| Intrinsic |
Options | Shares |
| Price/Share |
| Term |
| Value |
Outstanding at January 1, 2007 | 89,500 |
| $ 36.62 |
|
|
|
|
Granted | - |
| - |
|
|
|
|
Exercised | - |
| - |
|
|
|
|
Forfeited/Cancelled/Expired | - |
| - |
|
|
|
|
Outstanding at December 31, 2007 | 89,500 |
| 36.62 |
| 2.7 |
| $ 5,686 |
|
|
|
|
|
|
|
|
Exercisable at December 31, 2007 | 89,500 |
| 36.62 |
| 2.7 |
| $ 5,686 |
|
|
|
|
| Weighted- |
|
|
|
|
| Weighted- |
| Average |
|
|
|
|
| Average |
| Remaining |
| Aggregate |
(Dollars in thousands, except per share) |
|
| Exercise |
| Contractual |
| Intrinsic |
Options | Shares |
| Price/Share |
| Term |
| Value |
Outstanding at January 1, 2006 | 89,500 |
| $ 36.62 |
|
|
|
|
Granted | - |
| - |
|
|
|
|
Exercised | - |
| - |
|
|
|
|
Forfeited/Cancelled/Expired | - |
| - |
|
|
|
|
Outstanding at December 31, 2006 | 89,500 |
| 36.62 |
| 3.7 |
| $ 5,503 |
|
|
|
|
|
|
|
|
Exercisable at December 31, 2006 | 89,500 |
| 36.62 |
| 3.7 |
| $ 5,503 |
The weighted-average grant-date fair value of options granted during the years 2008, 2007 and 2006 2005was $25.42, $29.05 and 2004 was $32.92 $32.34 and $25.47 per share, respectively. The aggregate intrinsic value (market price less exercise price) of options exercised during the years ended December 31, 2008, 2007 and 2006 2005 and 2004 was $20.5$6.4 million, $19.7$17.0 million and $25.4$20.5 million, respectively. The cash received from the exercised share options for the year ended December 31, 20062008 was $19.5$6.7 million. The tax benefit realized from the options exercised for the year ended December 31, 20062008 was $7.1$2.1 million.
The following table summarizes information about share options outstanding at December 31, 2006:for the period indicated:
| Options Outstanding | Options Exercisable | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Range of Exercise Prices | Number Outstanding at 12/31/06 | Weighted- Average Remaining Contractual Life | Weighted- Average Exercise Price | Number Exercisable at 12/31/06 | Weighted- Average Exercise Price | ||||||||||||||||||
| $19.9961 - $29.9940 | 127,700 | 3.1 | $ | 25.34 | 127,700 | $ | 25.34 | ||||||||||||||||
| $29.9941 - $39.9920 | 207,150 | 1.8 | 34.31 | 207,150 | 34.31 | ||||||||||||||||||
| $39.9921 - $49.9900 | 222,050 | 4.7 | 48.01 | 222,050 | 48.01 | ||||||||||||||||||
| $49.9901 - $59.9880 | 276,400 | 5.7 | 55.60 | 192,200 | 55.60 | ||||||||||||||||||
| $59.9881 - $69.9860 | 200,000 | 4.3 | 66.23 | 200,000 | 66.23 | ||||||||||||||||||
| $69.9861 - $79.9840 | 534,736 | 7.2 | 74.03 | 223,756 | 73.86 | ||||||||||||||||||
| $79.9841 - $89.9820 | 5,000 | 8.2 | 87.40 | 1,000 | 87.40 | ||||||||||||||||||
| $89.9821 - $99.9800 | 315,200 | 8.5 | 95.76 | 55,900 | 95.49 | ||||||||||||||||||
| 1,888,236 | 5.7 | 63.46 | 1,229,756 | 54.39 | |||||||||||||||||||
F-41
| At December 31, 2008 | ||||||||
| Options Outstanding |
| Options Exercisable | ||||||
|
|
| Weighted- |
|
|
|
|
|
|
|
|
| Average |
| Weighted- |
|
|
| Weighted- |
| Number |
| Remaining |
| Average |
| Number |
| Average |
Range of | Outstanding |
| Contractual |
| Exercise |
| Exercisable |
| Exercise |
Exercise Prices | at 12/31/08 |
| Life |
| Price |
| at 12/31/08 |
| Price |
$21.2551 - $ 31.8825 | 111,850 |
| 0.9 |
| $ 26.60 |
| 111,850 |
| $ 26.60 |
$31.8826 - $ 42.5100 | - |
| 0.0 |
| - |
| - |
| - |
$42.5101 - $ 53.1375 | 149,000 |
| 2.7 |
| 48.01 |
| 149,000 |
| 48.01 |
$53.1376 - $ 63.7650 | 204,000 |
| 3.7 |
| 55.60 |
| 204,000 |
| 55.60 |
$63.7651 - $ 74.3925 | 605,676 |
| 4.3 |
| 71.43 |
| 543,916 |
| 71.10 |
$74.3926 - $ 85.0200 | - |
| 0.0 |
| - |
| - |
| - |
$85.0201 - $ 95.6475 | 263,800 |
| 6.6 |
| 95.25 |
| 155,200 |
| 95.28 |
$95.6476 - $106.2750 | 719,200 |
| 8.6 |
| 99.36 |
| 75,760 |
| 99.02 |
| 2,053,526 |
| 5.8 |
| 78.56 |
| 1,239,726 |
| 66.49 |
A summary of
The following table summarizes the status of the Company’s nonvested shares and changes duringfor the years ended December 31, 2006, 2005 and 2004 are presented below:periods indicated:
| 2006 | 2005 | 2004 | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Restricted (nonvested) Shares | Shares | Weighted- Average Grant Date Fair Value | Shares | Weighted- Average Grant Date Fair Value | Shares | Weighted- Average Grant Date Fair Value | ||||||||||||||||||||
| Outstanding at January 1, | 217,820 | $ | 86.60 | 103,800 | $ | 73.23 | 77,200 | $ | 72.25 | |||||||||||||||||
| Granted | 15,000 | 91.41 | 138,500 | 94.11 | 43,400 | 74.33 | ||||||||||||||||||||
| Vested | 53,520 | 84.38 | 24,480 | 72.46 | 16,000 | 71.46 | ||||||||||||||||||||
| Forfeited | - | - | - | - | 800 | 73.62 | ||||||||||||||||||||
| Outstanding at December 31, | 179,300 | 87.66 | 217,820 | 86.60 | 103,800 | 73.23 | ||||||||||||||||||||
| Years Ended December 31, | ||||||||||
| 2008 |
| 2007 |
| 2006 | ||||||
|
|
| Weighted- |
|
|
| Weighted- |
|
|
| Weighted- |
|
|
| Average |
|
|
| Average |
|
|
| Average |
|
|
| Grant Date |
|
|
| Grant Date |
|
|
| Grant Date |
Restricted (nonvested) Shares | Shares |
| Fair Value |
| Shares |
| Fair Value |
| Shares |
| Fair Value |
Outstanding at January 1, | 188,590 |
| $ 92.85 |
| 179,300 |
| $ 87.66 |
| 217,820 |
| $ 86.60 |
Granted | 113,182 |
| 96.94 |
| 79,500 |
| 99.02 |
| 15,000 |
| 91.41 |
Vested | 150,810 |
| 92.33 |
| 49,510 |
| 84.97 |
| 53,520 |
| 84.38 |
Forfeited | 11,300 |
| 97.01 |
| 20,700 |
| 90.43 |
| - |
| - |
Outstanding at December 31, | 139,662 |
| 96.39 |
| 188,590 |
| 92.85 |
| 179,300 |
| 87.66 |
As of December 31, 2006,2008, there was $12.0$11.0 million of total unrecognized compensation cost related to nonvested share-based compensation expense. That cost is expected to be recognized over a weighted-average period of 2.13.4 years. The total fair value of shares vested during the years ended December 31, 2008, 2007 and 2006, 2005 and 2004, was $4.5$13.9 million, $1.8$4.2 million and $1.1$4.5 million, respectively. The tax benefit realized from the shares vested for the year ended December 31, 20062008 was $0.7$0.8 million. In addition, the Company recorded an increase in paid-in capital of $0.1 million due to dividends paid on nonvested shares for the year ended December 31, 2008.
In addition to the 2002 Employee Plan, the 1995 Employee Plan, the 2003 Director Plan and the 1995 Director Plan, Group issued 1,893 common shares in 2008, 1,991 common shares in 2007 and 1,661 common shares in 2006 1,962 common shares in 2005 and 2,283 common shares in 2004 to the Company’s non-employee directors as compensation for their service as directors in 2006, 20052008, 2007 and 2004,2006, respectively. These issuances had aggregate values of approximately $168,000, $206,000 and $157,000, $180,000 and $185,000, respectively.
Since its 1995 initial public offering, the Company has issued to certain key employees of the Company 325,000502,682 restricted common shares, of which 19,96051,960 restricted shares have been cancelled. The Company has issued to non-employee directors of the Company 10,00025,000 restricted common shares, of which no
restricted shares have been cancelled. The Company acquired 21,595, 10,64569,093, 21,332 and 5,10021,595 common shares at a cost of $6.2 million, $2.2 million and $2.1 million $1.0 millionin 2008, 2007 and $0.4 million in 2006, 2005 and 2004, respectively, from employees who chose to pay required withholding taxes with shares exercised under the share option grants or restricted shares, which became unrestricted. The Company acquired 328 common shares at a cost of $32,905 in 2005 from non-employee directors who chose to pay the option exercise price with shares.
17.
19. RELATED-PARTY TRANSACTIONS
During the normal course of business, the Company, through its affiliates, engages in reinsurance and brokerage and commission business transactions which management believes to be at arm’s-length, with companies controlled by or affiliated with one or more of its outside directors. Such transactions, individually and in the aggregate, are not material to the Company’s financial condition, results of operations and cash flows.
18.
20. SEGMENT REPORTING
The Company, through its subsidiaries, operates in five segments: U.S. Reinsurance, U.S. Insurance, Specialty Underwriting, International and Bermuda. The U.S. Reinsurance operation writes property and casualty reinsurance, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies within the U.S. The U.S. Insurance operation writes property and casualty insurance primarily through general agents and surplus lines brokers within the U.S. The Specialty Underwriting operation writes accident and health (“A&H”), marine, aviation and surety business within the U.S. and worldwide through
F-42
brokers and directly with ceding companies. The International operation writes non-U.S. property and casualty reinsurance through Everest Re’s branches in Canada and Singapore and offices in addition to foreign business written through Everest Re’s Miami and New Jersey offices.Jersey. The Bermuda operation provides reinsurance and insurance to worldwide property and casualty markets and reinsurance to life insurers through brokers and directly with ceding companies from its Bermuda office and reinsurance to the United Kingdom and European markets through its UK branch.
These segments are managed in a carefully coordinated fashion with strong elements of central control with respect to pricing, risk management, control of aggregate exposures to catastrophe events,exposures, capital, investments and support operations. Management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting results.
Underwriting results include earned premium less losses and LAE incurred, commission and brokerage expenses and other underwriting expenses andexpenses. Underwriting results are analyzedmeasured using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which, respectively, divide incurred losses, commissions and brokerage and other underwriting expenses by earned premium. The Company utilizes inter-affiliate reinsurance, butalthough such reinsurance generally does not materially impact segment results, as business is generally reported within the segment in which the business was first produced.
The Company does not maintain separate balance sheet data for its operating segments. Accordingly, the Company does not review and evaluate the financial results of its operating segments based upon balance sheet data.
The following tables represent the relevant underwriting results for the operating segments for the three years ended December 31:periods indicated:
| U.S. Reinsurance | |||||||||||
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross written premiums | $ | 1,336,728 | $ | 1,386,168 | $ | 1,478,159 | |||||
| Net written premiums | 1,331,677 | 1,383,690 | 1,468,466 | ||||||||
Premiums earned | $ | 1,281,055 | $ | 1,396,133 | $ | 1,473,545 | |||||
| Incurred losses and loss adjustment expenses | 851,172 | 1,479,560 | 1,168,563 | ||||||||
| Commission and brokerage | 298,111 | 358,101 | 373,581 | ||||||||
| Other underwriting expenses | 24,946 | 23,981 | 23,390 | ||||||||
| Underwriting gain (loss) | $ | 106,826 | $ | (465,509 | ) | $ | (91,989 | ) | |||
U.S. Insurance | |||||||||||
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross written premiums | $ | 866,294 | $ | 932,469 | $ | 1,167,808 | |||||
| Net written premiums | 753,324 | 815,316 | 1,019,716 | ||||||||
Premiums earned | $ | 761,685 | $ | 823,015 | $ | 937,576 | |||||
| Incurred losses and loss adjustment expenses | 519,904 | 530,781 | 658,777 | ||||||||
| Commission and brokerage | 123,087 | 132,630 | 130,380 | ||||||||
| Other underwriting expenses | 48,918 | 51,911 | 49,277 | ||||||||
| Underwriting gain | $ | 69,776 | $ | 107,693 | $ | 99,142 | |||||
F-43
| Specialty Underwriting | |||||||||||
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross written premiums | $ | 251,209 | $ | 314,630 | $ | 487,072 | |||||
| Net written premiums | 243,819 | 299,316 | 470,571 | ||||||||
Premiums earned | $ | 244,501 | $ | 301,454 | $ | 459,284 | |||||
| Incurred losses and loss adjustment expenses | 163,925 | 317,917 | 302,010 | ||||||||
| Commission and brokerage | 67,829 | 79,692 | 129,209 | ||||||||
| Other underwriting expenses | 6,559 | 6,756 | 7,068 | ||||||||
| Underwriting gain (loss) | $ | 6,188 | $ | (102,911 | ) | $ | 20,997 | ||||
International | |||||||||||
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross written premiums | $ | 731,745 | $ | 706,584 | $ | 687,657 | |||||
| Net written premiums | 730,717 | 704,870 | 684,390 | ||||||||
Premiums earned | $ | 719,475 | $ | 683,435 | $ | 655,694 | |||||
| Incurred losses and loss adjustment expenses | 382,839 | 574,653 | 419,101 | ||||||||
| Commission and brokerage | 180,541 | 166,968 | 161,106 | ||||||||
| Other underwriting expenses | 13,830 | 12,622 | 11,298 | ||||||||
| Underwriting gain (loss) | $ | 142,265 | $ | (70,808 | ) | $ | 64,189 | ||||
Bermuda | |||||||||||
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross written premiums | $ | 814,894 | $ | 768,711 | $ | 883,439 | |||||
| Net written premiums | 816,177 | 768,849 | 888,345 | ||||||||
Premiums earned | $ | 846,437 | $ | 759,056 | $ | 898,983 | |||||
| Incurred losses and loss adjustment expenses | 516,580 | 821,406 | 742,688 | ||||||||
| Commission and brokerage | 213,686 | 177,456 | 180,900 | ||||||||
| Other underwriting expenses | 17,193 | 16,153 | 13,998 | ||||||||
| Underwriting gain (loss) | $ | 98,978 | $ | (255,959 | ) | $ | (38,603 | ) | |||
U.S. Reinsurance | Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
Gross written premiums | $ 957,900 |
| $ 1,193,523 |
| $ 1,336,728 |
Net written premiums | 948,798 |
| 1,183,076 |
| 1,331,677 |
|
|
|
|
|
|
Premiums earned | $ 1,050,340 |
| $ 1,282,888 |
| $ 1,281,055 |
Incurred losses and LAE | 798,165 |
| 705,408 |
| 851,172 |
Commission and brokerage | 273,330 |
| 327,188 |
| 298,111 |
Other underwriting expenses | 32,180 |
| 33,280 |
| 24,946 |
Underwriting (loss) gain | $ (53,335) |
| $ 217,012 |
| $ 106,826 |
U.S. Insurance | Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
Gross written premiums | $ 771,798 |
| $ 885,604 |
| $ 866,294 |
Net written premiums | 616,957 |
| 744,284 |
| 753,324 |
|
|
|
|
|
|
Premiums earned | $ 705,522 |
| $ 735,931 |
| $ 761,685 |
Incurred losses and LAE | 549,854 |
| 556,375 |
| 519,904 |
Commission and brokerage | 146,728 |
| 136,233 |
| 123,087 |
Other underwriting expenses | 64,324 |
| 58,216 |
| 48,918 |
Underwriting (loss) gain | $ (55,384) |
| $ (14,893) |
| $ 69,776 |
Specialty Underwriting | Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
Gross written premiums | $ 260,422 |
| $ 270,081 |
| $ 251,209 |
Net written premiums | 254,219 |
| 263,843 |
| 243,819 |
|
|
|
|
|
|
Premiums earned | $ 251,778 |
| $ 261,965 |
| $ 244,501 |
Incurred losses and LAE | 165,869 |
| 173,264 |
| 163,925 |
Commission and brokerage | 70,824 |
| 68,525 |
| 67,829 |
Other underwriting expenses | 8,055 |
| 8,464 |
| 6,559 |
Underwriting gain | $ 7,030 |
| $ 11,712 |
| $ 6,188 |
International | Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
Gross written premiums | $ 904,668 |
| $ 805,872 |
| $ 731,745 |
Net written premiums | 902,137 |
| 805,984 |
| 730,717 |
|
|
|
|
|
|
Premiums earned | $ 885,456 |
| $ 803,830 |
| $ 719,475 |
Incurred losses and LAE | 504,814 |
| 501,900 |
| 382,839 |
Commission and brokerage | 230,920 |
| 199,460 |
| 180,541 |
Other underwriting expenses | 19,780 |
| 18,633 |
| 13,830 |
Underwriting gain | $ 129,942 |
| $ 83,837 |
| $ 142,265 |
Bermuda | Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
Gross written premiums | $ 783,351 |
| $ 922,490 |
| $ 814,894 |
Net written premiums | 783,102 |
| 922,254 |
| 816,177 |
|
|
|
|
|
|
Premiums earned | $ 801,205 |
| $ 912,884 |
| $ 846,437 |
Incurred losses and LAE | 420,270 |
| 611,191 |
| 516,580 |
Commission and brokerage | 208,892 |
| 230,382 |
| 213,686 |
Other underwriting expenses | 24,199 |
| 20,926 |
| 17,193 |
Underwriting gain | $ 147,844 |
| $ 50,385 |
| $ 98,978 |
The following table reconciles the underwriting results for the operating segments to income before taxtaxes as reported in the consolidated statements of operations and comprehensive (loss) income for the three years ended December 31:periods indicated:
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Underwriting gain (loss) | $ | 424,033 | $ | (787,494 | ) | $ | 53,736 | ||||
| Net investment income | 629,378 | 522,833 | 495,908 | ||||||||
| Net realized capital gains | 35,067 | 90,284 | 89,614 | ||||||||
| Net derivative expense | (410 | ) | (2,638 | ) | (2,660 | ) | |||||
| Corporate expenses | (26,531 | ) | (18,377 | ) | (9,839 | ) | |||||
| Interest, fee and bond issue cost amortization expense | (69,899 | ) | (74,413 | ) | (76,610 | ) | |||||
| Other income (expense) | 112 | (11,116 | ) | 9,562 | |||||||
| Income (loss) before taxes | $ | 991,750 | $ | (280,921 | ) | $ | 559,711 | ||||
F-44
| Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
Underwriting gain | $ 176,097 |
| $ 348,053 |
| $ 424,033 |
Net investment income | 565,887 |
| 682,392 |
| 629,378 |
Net realized capital (losses) gains | (695,830) |
| 86,283 |
| 35,067 |
Net derivative expense | (20,900) |
| (2,124) |
| (410) |
Corporate expenses | (13,811) |
| (13,085) |
| (26,531) |
Interest, fee and bond issue cost amortization expense | (79,171) |
| (91,561) |
| (69,899) |
Other (expense) income | (15,879) |
| 17,998 |
| 112 |
(Loss) income before taxes | $ (83,607) |
| $ 1,027,956 |
| $ 991,750 |
The Company produces business in the U.S., Bermuda and internationally. The net income deriving from and assets residing in the individual foreign countries in which the Company writes business are not identifiable in the Company’s financial records. Based on written premium, the largest country, other than the U.S., in which the Company writes business, is the United Kingdom, with $358.6$425.8 million of written premium for the year ended December 31, 2006.2008. No other country represented more than 5% of the Company’s revenues.
Approximately 17.2%21.2%, 17.8%14.7% and 16.9%17.2% of the Company’s gross written premiums in 2006, 20052008, 2007 and 20042006, respectively, were sourced through the Company’s largest intermediary.
19.
21. UNAUDITED QUARTERLY FINANCIAL DATA
Summarized quarterly financial data for the years ended were as follows:periods indicated:
| (Dollars in thousands, except per share amounts) | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2006 Operating data: | ||||||||||||||
| Gross written premiums | $ | 1,055,019 | $ | 910,373 | $ | 1,048,161 | $ | 987,317 | ||||||
| Net written premiums | 1,022,338 | 879,973 | 1,024,678 | 948,725 | ||||||||||
Premiums earned | 1,021,790 | 893,332 | 958,343 | 979,688 | ||||||||||
| Net investment income | 145,026 | 153,333 | 147,470 | 183,549 | ||||||||||
| Net realized capital gain | 13,601 | 2,472 | 8,651 | 10,343 | ||||||||||
| Total claims and underwriting expenses | 965,459 | 783,685 | 796,759 | 909,748 | ||||||||||
| Net income | 168,396 | 220,403 | 245,678 | 206,351 | ||||||||||
| Net income per common share - basic | $ | 2.61 | $ | 3.41 | $ | 3.80 | $ | 3.18 | ||||||
| Net income per common share - diluted | $ | 2.57 | $ | 3.38 | $ | 3.76 | $ | 3.15 | ||||||
2005 Operating data: | ||||||||||||||
| Gross written premiums | $ | 1,047,572 | $ | 1,109,322 | $ | 1,080,671 | $ | 870,997 | ||||||
| Net written premiums | 1,011,705 | 1,073,654 | 1,051,543 | 835,139 | ||||||||||
Premiums earned | 1,005,915 | 1,092,500 | 959,409 | 905,269 | ||||||||||
| Net investment income | 132,886 | 137,448 | 117,532 | 134,967 | ||||||||||
| Net realized capital gain | 2,477 | 27,309 | 27,699 | 32,799 | ||||||||||
| Total claims and underwriting expenses | 920,966 | 998,512 | 1,556,931 | 1,292,554 | ||||||||||
| Net income (loss) | 167,095 | 194,180 | (417,745 | ) | (162,197 | ) | ||||||||
| Net income (loss) per common share - basic | $ | 2.98 | $ | 3.45 | $ | (7.41 | ) | $ | (2.63 | ) | ||||
| Net income (loss) per common share - diluted | $ | 2.93 | $ | 3.40 | $ | (7.41 | ) | $ | (2.63 | ) | ||||
F-45
EVEREST RE GROUP, LTD. SCHEDULE I – SUMMARY OF INVESTMENTS – OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 2006 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
Column A | Column B | Column C | Column D | ||||||||
| (Dollars in thousands) | Cost | Market Value | Amount Shown in Balance Sheet | ||||||||
| Fixed maturities-available for sale | |||||||||||
| Bonds: | |||||||||||
| U.S. government and government agencies | $ | 229,241 | $ | 226,680 | $ | 226,680 | |||||
| State, municipalities and political subdivisions | 3,633,188 | 3,792,371 | 3,792,371 | ||||||||
| Foreign government securities | 1,019,826 | 1,028,358 | 1,028,358 | ||||||||
| Foreign corporate securities | 824,819 | 822,489 | 822,489 | ||||||||
| Public utilities | 288,685 | 289,206 | 289,206 | ||||||||
| All other corporate bonds | 2,578,389 | 2,556,284 | 2,556,284 | ||||||||
| Mortgage pass-through securities | 1,626,017 | 1,593,974 | 1,593,974 | ||||||||
| Redeemable preferred stock | 10,000 | 10,488 | 10,488 | ||||||||
| Total fixed maturities-available for sale | 10,210,165 | 10,319,850 | 10,319,850 | ||||||||
| Equity securities | 1,252,595 | 1,613,678 | 1,613,678 | ||||||||
| Short-term investments | 1,306,498 | 1,306,498 | 1,306,498 | ||||||||
| Other invested assets | 466,232 | 467,193 | 467,193 | ||||||||
| Cash | 249,868 | 249,868 | 249,868 | ||||||||
| Total investments and cash | $ | 13,485,358 | $ | 13,957,087 | $ | 13,957,087 | |||||
| 2008 | ||||||
(Dollars in thousands, except per share amounts) | 1st Quarter |
| 2nd Quarter |
| 3rd Quarter |
| 4th Quarter |
|
|
|
|
|
|
|
|
Operating data: |
|
|
|
|
|
|
|
Gross written premiums | $ 877,502 |
| $ 905,323 |
| $ 999,167 |
| $ 896,147 |
Net written premiums | 838,663 |
| 864,756 |
| 960,597 |
| 841,197 |
|
|
|
|
|
|
|
|
Premiums earned | 911,973 |
| 942,095 |
| 931,859 |
| 908,374 |
Net investment income | 150,132 |
| 175,917 |
| 164,478 |
| 75,360 |
Net realized capital losses | (136,383) |
| (31,566) |
| (293,365) |
| (234,516) |
Total claims and underwriting expenses | 812,741 |
| 889,183 |
| 1,072,048 |
| 758,043 |
Net income (loss) | 77,933 |
| 153,027 |
| (233,127) |
| (16,591) |
|
|
|
|
|
|
|
|
Net income (loss) per common share - basic | $ 1.25 |
| $ 2.48 |
| $ (3.80) |
| $ (0.27) |
Net income (loss) per common share - diluted | $ 1.24 |
| $ 2.47 |
| $ (3.80) |
| $ (0.27) |
S-1
EVEREST RE GROUP, LTD. SCHEDULE II – CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT CONDENSED BALANCE SHEETS | ||||||||
|---|---|---|---|---|---|---|---|---|
December 31, | ||||||||
| (Dollars in thousands, except par value per share) | 2006 | 2005 | ||||||
ASSETS | ||||||||
| Fixed maturities - available for sale, at market value | ||||||||
| (amortized cost: 2006, $174,466; 2005, $194,016) | $ | 170,740 | $ | 191,822 | ||||
| Equity securities, at market value (cost: 2006, $179,762; 2005, $0) | 198,336 | - | ||||||
| Short-term investments | 31,160 | 148,828 | ||||||
| Cash | 2,722 | 750 | ||||||
| Investment in subsidiaries, at equity in the underlying net assets | 4,703,474 | 3,797,265 | ||||||
| Accrued investment income | 1,898 | 1,906 | ||||||
| Receivable from affiliates | 728 | 839 | ||||||
| Other assets | 566 | 146 | ||||||
| TOTAL ASSETS | $ | 5,109,624 | $ | 4,141,556 | ||||
| LIABILITIES | ||||||||
| Due to affiliates | $ | 724 | $ | 826 | ||||
| Other liabilities | 1,213 | 1,036 | ||||||
| Total liabilities | 1,937 | 1,862 | ||||||
| SHAREHOLDERS' EQUITY | ||||||||
| Preferred shares, par value: $0.01; 50 million shares authorized; | ||||||||
| no shares issued and outstanding | - | - | ||||||
| Common shares, par value: $0.01; 200 million shares authorized; | ||||||||
| (2006) 65.0 million and (2005) 64.6 million issued | 650 | 646 | ||||||
| Additional paid-in capital | 1,770,496 | 1,731,746 | ||||||
| Accumulated other comprehensive income, net of deferred income | ||||||||
| taxes of $175.0 million at 2006 and $134.9 million at 2005 | 348,543 | 221,146 | ||||||
| Retained earnings | 2,987,998 | 2,186,156 | ||||||
| Total shareholders' equity | 5,107,687 | 4,139,694 | ||||||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 5,109,624 | $ | 4,141,556 | ||||
| See notes to consolidated financial statements | ||||||||
| 2007 | ||||||
(Dollars in thousands, except per share amounts) | 1st Quarter |
| 2nd Quarter |
| 3rd Quarter |
| 4th Quarter |
|
|
|
|
|
|
|
|
Operating data: |
|
|
|
|
|
|
|
Gross written premiums | $ 1,016,767 |
| $ 935,463 |
| $ 1,074,673 |
| $ 1,050,667 |
Net written premiums | 989,877 |
| 918,536 |
| 1,055,529 |
| 955,499 |
|
|
|
|
|
|
|
|
Premiums earned | 1,004,729 |
| 999,320 |
| 997,055 |
| 996,394 |
Net investment income | 155,796 |
| 179,693 |
| 172,802 |
| 174,101 |
Net realized capital gains (losses) | 40,892 |
| 91,774 |
| 18,579 |
| (64,962) |
Total claims and underwriting expenses | 827,483 |
| 891,078 |
| 863,691 |
| 1,080,278 |
Net income | 297,582 |
| 282,868 |
| 246,587 |
| 12,238 |
|
|
|
|
|
|
|
|
Net income per common share - basic | $ 4.64 |
| $ 4.50 |
| $ 3.93 |
| $ 0.20 |
Net income per common share - diluted | $ 4.59 |
| $ 4.45 |
| $ 3.90 |
| $ 0.19 |
S-2
| EVEREST RE GROUP, LTD. SCHEDULE II – CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT CONDENSED STATEMENTS OF OPERATIONS | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
Years Ended December 31, | |||||||||||
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| REVENUES: | |||||||||||
| Net investment income | $ | 15,252 | $ | 11,035 | $ | 33,576 | |||||
| Net realized capital (losses) gains | (2,251 | ) | (21 | ) | 56 | ||||||
| Other (expense) income | (141 | ) | (61 | ) | 915 | ||||||
| Equity in undistributed change in retained earnings of subsidiaries | 845,648 | (215,604 | ) | 470,281 | |||||||
| Total revenues | 858,508 | (204,651 | ) | 504,828 | |||||||
| EXPENSES: | |||||||||||
| Other expenses | 17,680 | 14,019 | 9,970 | ||||||||
| INCOME (LOSS) BEFORE TAXES | 840,828 | (218,670 | ) | 494,858 | |||||||
Income tax benefit | - | (3 | ) | - | |||||||
| NET INCOME (LOSS) | $ | 840,828 | $ | (218,667 | ) | $ | 494,858 | ||||
| See notes to consolidated financial statements | |||||||||||
S-3
EVEREST RE GROUP, LTD. SCHEDULE II – CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT CONDENSED STATEMENTS OF CASHFLOWS | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
Years Ended December 31, | |||||||||||
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net income (loss) | $ | 840,828 | $ | (218,667 | ) | $ | 494,858 | ||||
| Adjustments to reconcile net income (loss) to net cash provided | |||||||||||
| by operating activities: | |||||||||||
| Equity in undistributed change in retained earnings of subsidiaries | (845,648 | ) | 215,604 | (470,281 | ) | ||||||
| Dividends received from subsidiaries(1) | 60,000 | 45,000 | 15,000 | ||||||||
| Increase (decrease) in other liabilities | 177 | (139 | ) | 840 | |||||||
| (Increase) decrease in other assets | (375 | ) | 38 | 528 | |||||||
| Decrease (increase) in receivable from affiliates | 9 | 2,246 | (33 | ) | |||||||
| Amortization of bond premium | 554 | 737 | 658 | ||||||||
| Realized capital losses (gains) | 2,251 | 21 | (56 | ) | |||||||
| Non-cash compensation expense(2) | 15,127 | 8,003 | 4,684 | ||||||||
| Net cash provided by operating activities | 72,923 | 52,843 | 46,198 | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Additional investment in subsidiaries(1) | (10,209 | ) | (609,065 | ) | (36,876 | ) | |||||
| Proceeds from fixed maturities matured/called - available for sale | 19,574 | 15,555 | 16,553 | ||||||||
| Proceeds from fixed maturities sold - available for sale | 81 | - | - | ||||||||
| Proceeds from equity securities sold | 41,846 | - | - | ||||||||
| Cost of fixed maturities acquired - available for sale | (595 | ) | (62,111 | ) | (23,514 | ) | |||||
| Cost of equity securities acquired | (223,939 | ) | - | - | |||||||
| Net sales (purchases) of short-term securities | 117,685 | (145,535 | ) | 1,129 | |||||||
| Net increase in unsettled securities transactions | (35 | ) | - | - | |||||||
| Net cash used in investing activities | (55,592 | ) | (801,156 | ) | (42,708 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Common shares issued during the period(2) | 23,627 | 732,595 | 21,837 | ||||||||
| Sale of treasury shares, net of tax | - | 38,261 | - | ||||||||
| Dividends paid to shareholders | (38,986 | ) | (25,424 | ) | (22,421 | ) | |||||
| Net cash (used in) provided by financing activities | (15,359 | ) | 745,432 | (584 | ) | ||||||
| EFFECT OF EXCHANGE RATE CHANGES ON CASH | - | - | (71 | ) | |||||||
| Net increase (decrease) in cash | 1,972 | (2,881 | ) | 2,835 | |||||||
| Cash, beginning of period | 750 | 3,631 | 796 | ||||||||
| Cash, end of period | $ | 2,722 | $ | 750 | $ | 3,631 | |||||
See notes to consolidated financial statements | |||||||||||
(1)Dividends received from consolidated subsidiaries (i.e., dividend income) have been appropriately classified as operating activity in 2006, with conforming changes for 2005 and 2004, which were previously recorded as an investing activity. | |||||||||||
(2) Restricted share non-compensation expense, while inconsequential for all periods presented, has also been appropriately classified as operating activity in 2006, with conforming changes for 2005 and 2004, which were previously recorded as financing activity. | |||||||||||
S-4
EVEREST RE GROUP, LTD. SCHEDULE III – SUPPLEMENTARY INSURANCE INFORMATION | |||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Column A | Column B | Column C | Column D | Column E | Column F | Column G | Column H | Column I | Column J | ||||||||||||||||||||
| Geographic Area (Dollars in thousands) | Deferred Acquisition Costs | Reserve for Losses and Loss Adjustment Expenses | Unearned Premium Reserves | Premiums Earned | Net Investment Income | Incurred Loss and Loss Adjustment Expenses | Amortization of Deferred Acquisition Costs | Other Operating Expenses | Net Written Premium | ||||||||||||||||||||
| December 31, 2006 | |||||||||||||||||||||||||||||
| Domestic | $ | 189,060 | $ | 5,984,991 | $ | 1,228,509 | $ | 2,287,241 | $ | 338,126 | $ | 1,535,001 | $ | 489,027 | $ | 80,423 | $ | 2,328,820 | |||||||||||
| International | 51,285 | 924,816 | 195,168 | 719,475 | 32,964 | 382,839 | 180,541 | 13,830 | 730,717 | ||||||||||||||||||||
| Bermuda | 147,772 | 1,930,333 | 188,573 | 846,437 | 258,288 | 516,580 | 213,686 | 17,193 | 816,177 | ||||||||||||||||||||
| Total | $ | 388,117 | $ | 8,840,140 | $ | 1,612,250 | $ | 3,853,153 | $ | 629,378 | $ | 2,434,420 | $ | 883,254 | $ | 111,446 | $ | 3,875,714 | |||||||||||
| December 31, 2005 | |||||||||||||||||||||||||||||
| Domestic | $ | 153,603 | $ | 6,196,014 | $ | 1,203,970 | $ | 2,520,602 | $ | 296,197 | $ | 2,328,258 | $ | 570,423 | $ | 82,648 | $ | 2,498,322 | |||||||||||
| International | 48,623 | 1,029,963 | 183,906 | 683,435 | 28,421 | 574,653 | 166,968 | 12,622 | 704,870 | ||||||||||||||||||||
| Bermuda | 150,519 | 1,900,725 | 208,433 | 759,056 | 198,215 | 821,406 | 177,456 | 16,153 | 768,849 | ||||||||||||||||||||
| Total | $ | 352,745 | $ | 9,126,702 | $ | 1,596,309 | $ | 3,963,093 | $ | 522,833 | $ | 3,724,317 | $ | 914,847 | $ | 111,423 | $ | 3,972,041 | |||||||||||
| December 31, 2004 | |||||||||||||||||||||||||||||
| Domestic | $ | 163,600 | $ | 5,379,732 | $ | 1,226,099 | $ | 2,870,405 | $ | 305,546 | $ | 2,129,350 | $ | 633,170 | $ | 79,735 | $ | 2,958,753 | |||||||||||
| International | 40,524 | 819,142 | 161,073 | 655,694 | 23,477 | 419,101 | 161,106 | 11,298 | 684,390 | ||||||||||||||||||||
| Bermuda | 127,785 | 1,637,432 | 208,458 | 898,983 | 166,885 | 742,688 | 180,900 | 13,998 | 888,345 | ||||||||||||||||||||
| Total | $ | 331,909 | $ | 7,836,306 | $ | 1,595,630 | $ | 4,425,082 | $ | 495,908 | $ | 3,291,139 | $ | 975,176 | $ | 105,031 | $ | 4,531,488 | |||||||||||
S-5
EVEREST RE GROUP, LTD. SCHEDULE IV – REINSURANCE | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Column A | Column B | Column C | Column D | Column E | Column F | ||||||||||||
| (Dollars in thousands) | Gross Amount | Ceded to Other Companies | Assumed from Other Companies | Net Amount | Assumed to Net | ||||||||||||
| December 31, 2006 | |||||||||||||||||
| Total property and liability insurance | |||||||||||||||||
| premiums earned | $ | 996,196 | $ | 142,197 | $ | 2,999,154 | $ | 3,853,153 | 77.8 | % | |||||||
December 31, 2005 | |||||||||||||||||
| Total property and liability insurance | |||||||||||||||||
| premiums earned | $ | 1,059,069 | $ | 136,369 | $ | 3,040,393 | $ | 3,963,093 | 76.7 | % | |||||||
December 31, 2004 | |||||||||||||||||
| Total property and liability insurance | |||||||||||||||||
| premiums earned | $ | 1,181,278 | $ | 186,466 | $ | 3,430,270 | $ | 4,425,082 | 77.5 | % | |||||||
SCHEDULE I — SUMMARY OF INVESTMENTS — |
|
|
|
|
|
OTHER THAN INVESTMENTS IN RELATED PARTIES |
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
Column A | Column B |
| Column C |
| Column D |
|
|
|
|
| Amount |
|
|
|
|
| Shown in |
|
|
| Market |
| Balance |
(Dollars in thousands) | Cost |
| Value |
| Sheet |
Fixed maturities-available for sale |
|
|
|
|
|
Bonds: |
|
|
|
|
|
U.S. government and government agencies | $ 354,195 |
| $ 408,718 |
| $ 408,718 |
State, municipalities and political subdivisions | 3,846,754 |
| 3,795,718 |
| 3,795,718 |
Foreign government securities | 1,087,731 |
| 1,182,106 |
| 1,182,106 |
Foreign corporate securities | 964,251 |
| 970,032 |
| 970,032 |
Public utilities | 248,072 |
| 238,532 |
| 238,532 |
All other corporate bonds | 2,347,763 |
| 2,210,332 |
| 2,210,332 |
Mortgage pass-through securities | 1,988,359 |
| 1,878,392 |
| 1,878,392 |
Redeemable preferred stock | 94,951 |
| 75,782 |
| 75,782 |
Total fixed maturities-available for sale | 10,932,076 |
| 10,759,612 |
| 10,759,612 |
Fixed maturities-available for sale at fair value (1) | 41,616 |
| 43,090 |
| 43,090 |
Equity securities - available for sale at market value | 14,915 |
| 16,900 |
| 16,900 |
Equity securities - available for sale at fair value (1) | 135,917 |
| 119,829 |
| 119,829 |
Short-term investments | 1,889,799 |
| 1,889,799 |
| 1,889,799 |
Other invested assets | 687,265 |
| 679,356 |
| 679,356 |
Cash | 205,694 |
| 205,694 |
| 205,694 |
|
|
|
|
|
|
Total investments and cash | $ 13,907,282 |
| $ 13,714,280 |
| $ 13,714,280 |
|
|
|
|
|
|
(1) Original cost does not reflect fair value adjustments, which have been realized through the statements of operations and | |||||
comprehensive income. |
|
|
|
|
|
S-6
SCHEDULE II — CONDENSED FINANCIAL INFORMATION |
|
| |
OF THE REGISTRANT CONDENSED BALANCE SHEETS |
|
|
|
|
|
|
|
|
|
|
|
| December 31, | ||
(Dollars in thousands, except par value per share) | 2008 |
| 2007 |
|
|
|
|
ASSETS |
|
|
|
Fixed maturities - available for sale, at market value | $ 212,808 |
| $ 187,151 |
(amortized cost: 2008, $225,601; 2007, $189,836) |
|
|
|
Short-term investments | 72,717 |
| 114,874 |
Cash | 564 |
| 777 |
Investment in subsidiaries, at equity in the underlying net assets | 4,672,981 |
| 5,382,631 |
Accrued investment income | 2,136 |
| 1,754 |
Receivable from subsidiaries | 1,104 |
| 729 |
Other assets | 21 |
| 8 |
TOTAL ASSETS | $ 4,962,331 |
| $ 5,687,924 |
|
|
|
|
LIABILITIES |
|
|
|
Due to subsidiaries | $ 571 |
| $ 1,645 |
Other liabilities | 1,405 |
| 1,509 |
Total liabilities | 1,976 |
| 3,154 |
|
|
|
|
SHAREHOLDERS' EQUITY |
|
|
|
Preferred shares, par value: $0.01; 50 million shares authorized; |
|
|
|
no shares issued and outstanding | - |
| - |
Common shares, par value: $0.01; 200 million shares authorized; |
|
|
|
(2008) 65.6 million and (2007) 65.4 million issued | 656 |
| 654 |
Additional paid-in capital | 1,824,552 |
| 1,805,844 |
Accumulated other comprehensive (loss) income, net of deferred income |
|
|
|
tax benefit of $16.5 million at 2008 and expense of $87.2 million at 2007 | (291,851) |
| 163,155 |
Treasury shares, at cost; (2008) 4.2 million shares and (2007) 2.5 million shares | (392,329) |
| (241,584) |
Retained earnings | 3,819,327 |
| 3,956,701 |
Total shareholders' equity | 4,960,355 |
| 5,684,770 |
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ 4,962,331 |
| $ 5,687,924 |
|
|
|
|
See notes to consolidated financial statements. |
|
|
|
SCHEDULE II — CONDENSED FINANCIAL INFORMATION OF THE |
|
|
|
|
|
REGISTRANT CONDENSED STATEMENTS OF OPERATIONS |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
|
|
|
|
|
|
REVENUES: |
|
|
|
|
|
Net investment income | $ 13,776 |
| $ 16,034 |
| $ 15,252 |
Net realized capital (losses) gains | (5,516) |
| 1,047 |
| (2,251) |
Other expense | (303) |
| (228) |
| (141) |
Net (loss) income of subsidiaries | (18,662) |
| 830,604 |
| 845,648 |
Total revenues | (10,705) |
| 847,457 |
| 858,508 |
|
|
|
|
|
|
EXPENSES: |
|
|
|
|
|
Other expenses | 8,053 |
| 8,069 |
| 17,680 |
Total expenses | 8,053 |
| 8,069 |
| 17,680 |
|
|
|
|
|
|
(LOSS) INCOME BEFORE TAXES | (18,758) |
| 839,388 |
| 840,828 |
Income tax expense | - |
| 113 |
| - |
|
|
|
|
|
|
NET (LOSS) INCOME | $ (18,758) |
| $ 839,275 |
| $ 840,828 |
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements. |
|
|
|
|
|
SCHEDULE II — CONDENSED FINANCIAL INFORMATION OF THE |
|
|
|
| |
REGISTRANT CONDENSED STATEMENTS OF CASHFLOWS |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
Net (loss) income | $ (18,758) |
| $ 839,275 |
| $ 840,828 |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
|
|
|
|
|
Equity in retained earnings of subsidiaries | 18,662 |
| (830,604) |
| (845,648) |
Dividends received from subsidiaries | 120,000 |
| - |
| 60,000 |
Change in other assets and liabilities | (498) |
| 961 |
| (198) |
(Increase) decrease in due to/from affiliates | (1,450) |
| 921 |
| 9 |
Amortization of bond premium | 458 |
| 501 |
| 554 |
Realized capital losses (gains) | 5,516 |
| (1,047) |
| 2,251 |
Non-cash compensation expense | 581 |
| 508 |
| 15,127 |
Net cash provided by operating activities | 124,511 |
| 10,515 |
| 72,923 |
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
Additional investment in subsidiaries | (24,643) |
| (25,761) |
| (10,209) |
Proceeds from fixed maturities matured/called - available for sale, at market value | 21,043 |
| 17,200 |
| 19,574 |
Proceeds from fixed maturities sold - available for sale, at market value | 20 |
| 663 |
| 81 |
Proceeds from equity securities sold, available for sale, at fair value | - |
| 227,228 |
| 41,846 |
Cost of fixed maturities acquired - available for sale, at market value | (62,803) |
| (33,884) |
| (595) |
Cost of equity securities acquired - available for sale, at market value | - |
| (27,696) |
| (223,939) |
Net change in short-term securities | 42,159 |
| (83,714) |
| 117,685 |
Net change in unsettled securities transactions | - |
| 35 |
| (35) |
Net cash provided by (used in) investing activities | (24,224) |
| 74,071 |
| (55,592) |
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
Common shares issued during the period | 18,116 |
| 34,856 |
| 23,627 |
Dividends paid to shareholders | (118,616) |
| (121,387) |
| (38,986) |
Net cash used in financing activities | (100,500) |
| (86,531) |
| (15,359) |
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH | - |
| - |
| - |
|
|
|
|
|
|
Net (decrease) increase in cash | (213) |
| (1,945) |
| 1,972 |
Cash, beginning of period | 777 |
| 2,722 |
| 750 |
Cash, end of period | $ 564 |
| $ 777 |
| $ 2,722 |
|
|
|
|
|
|
Noncash transaction: |
|
|
|
|
|
Purchase of treasury shares by subsidiary | $ 150,745 |
| $ 241,584 |
| $ - |
|
|
|
|
|
|
See notes to consolidated financial statements. |
|
|
|
|
|
SCHEDULE III — SUPPLEMENTARY INSURANCE INFORMATION |
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| |||
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Column A | Column B | Column C | Column D | Column E | Column F | Column G | Column H | Column I | Column J |
|
| Reserve |
|
|
| Incurred |
|
|
|
Geographic Area |
| for Losses |
|
|
| Loss and | Amortization |
|
|
| Deferred | and Loss | Unearned |
| Net | Loss | of Deferred | Other | Net |
| Acquisition | Adjustment | Premium | Premiums | Investment | Adjustment | Acquisition | Operating | Written |
(Dollars in thousands) | Costs | Expenses | Reserves | Earned | Income | Expenses | Costs | Expenses | Premium |
December 31, 2008 |
|
|
|
|
|
|
|
|
|
Domestic | $ 137,021 | $ 5,870,072 | $ 962,883 | $ 2,007,640 | $ 323,421 | $ 1,513,888 | $ 490,882 | $ 104,559 | $ 1,819,974 |
International | 55,075 | 1,098,480 | 213,950 | 885,456 | 39,156 | 504,814 | 230,920 | 19,780 | 902,137 |
Bermuda | 162,896 | 1,872,108 | 158,678 | 801,205 | 203,310 | 420,270 | 208,892 | 24,199 | 783,102 |
Total | $ 354,992 | $ 8,840,660 | $ 1,335,511 | $ 3,694,301 | $ 565,887 | $ 2,438,972 | $ 930,694 | $ 148,538 | $ 3,505,213 |
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
|
|
|
|
|
|
Domestic | $ 182,501 | $ 5,844,430 | $ 1,159,409 | $ 2,280,784 | $ 367,217 | $ 1,435,047 | $ 531,946 | $ 99,960 | $ 2,191,203 |
International | 52,218 | 1,113,641 | 208,687 | 803,830 | 38,946 | 501,900 | 199,460 | 18,633 | 805,984 |
Bermuda | 164,844 | 2,082,535 | 199,002 | 912,884 | 276,229 | 611,191 | 230,382 | 20,926 | 922,254 |
Total | $ 399,563 | $ 9,040,606 | $ 1,567,098 | $ 3,997,498 | $ 682,392 | $ 2,548,138 | $ 961,788 | $ 139,519 | $ 3,919,441 |
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
|
|
|
|
|
|
|
Domestic | $ 189,060 | $ 5,984,991 | $ 1,228,509 | $ 2,287,241 | $ 338,126 | $ 1,535,001 | $ 489,027 | $ 80,423 | $ 2,328,820 |
International | 51,285 | 924,816 | 195,168 | 719,475 | 32,964 | 382,839 | 180,541 | 13,830 | 730,717 |
Bermuda | 147,772 | 1,930,333 | 188,573 | 846,437 | 258,288 | 516,580 | 213,686 | 17,193 | 816,177 |
Total | $ 388,117 | $ 8,840,140 | $ 1,612,250 | $ 3,853,153 | $ 629,378 | $ 2,434,420 | $ 883,254 | $ 111,446 | $ 3,875,714 |
SCHEDULE IV — REINSURANCE |
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Column A | Column B | Column C | Column D | Column E | Column F |
|
| Ceded to | Assumed |
|
|
| Gross | Other | from Other | Net | Assumed |
(Dollars in thousands) | Amount | Companies | Companies | Amount | to Net |
|
|
|
|
|
|
December 31, 2008 |
|
|
|
|
|
Total property and liability insurance |
|
|
|
|
|
premiums earned | $ 844,365 | $ 181,785 | $ 3,031,721 | $ 3,694,301 | 82.1% |
|
|
|
|
|
|
December 31, 2007 |
|
|
|
|
|
Total property and liability insurance |
|
|
|
|
|
premiums earned | $ 922,005 | $ 137,647 | $ 3,213,140 | $ 3,997,498 | 80.4% |
|
|
|
|
|
|
December 31, 2006 |
|
|
|
|
|
Total property and liability insurance |
|
|
|
|
|
premiums earned | $ 996,196 | $ 142,197 | $ 2,999,154 | $ 3,853,153 | 77.8% |