UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q | |||||||||||||||
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QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||||||||||||
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FOR THE QUARTERLY PERIOD ENDED: June 30, 2008 |
| Commission file number: 1-14527 | |||||||||||||
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EVEREST REINSURANCE HOLDINGS, INC. (Exact name of registrant as specified in its charter) | |||||||||||||||
Delaware |
| 22-3263609 | |||||||||||||
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) | |||||||||||||
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477 Martinsville Road Post Office Box 830 Liberty Corner, New Jersey 07938-0830 (908) 604-3000 | |||||||||||||||
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(Address, including zip code, and telephone number, including area code, of registrant’s principal executive office) | |||||||||||||||
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | |||||||||||||||
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| NO |
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
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Large Accelerated Filer |
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Non-accelerated filer | X | Smaller reporting company |
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(Do not check if smaller reporting company) | |||||||||||||||
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) | |||||||||||||||
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Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: | ||||||||
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Class |
| Number of Shares Outstanding at August 1, 2008 | ||||||
Common Stock, $.01 par value |
| 1,000
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The Registrant meets the conditions set forth in General Instruction H (1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format permitted by General Instruction H of Form 10-Q. |
EVEREST REINSURANCE HOLDINGS, INC. | |||||||
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Index To Form 10-Q
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PART I | |||||||
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FINANCIAL INFORMATION | |||||||
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Item 1. |
| Financial Statements |
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| Consolidated Balance Sheets at June 30, 2008 (unaudited) and December 31, 2007 | 1 | ||||
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| Consolidated Statements of Operations and Comprehensive (Loss) Income |
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| for the three and six months ended June 30, 2008 and 2007 (unaudited) | 2 | |||
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| Consolidated Statements of Changes in Stockholder’s Equity for the |
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| three and six months ended June 30, 2008 and 2007 (unaudited) | 3 | |||
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| Consolidated Statements of Cash Flows for the three and six months |
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| ended June 30, 2008 and 2007 (unaudited) | 4 | |||
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| Notes to Consolidated Interim Financial Statements (unaudited) | 5 | ||||
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Item 2. |
| Management’s Discussion and Analysis of Financial Condition and Results of Operation | 17 | ||||
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Item 3. |
| Quantitative and Qualitative Disclosures About Market Risk | 37 | ||||
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Item 4. |
| Controls and Procedures | 37 | ||||
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PART II | |||||||
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OTHER INFORMATION | |||||||
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Item 1. |
| Legal Proceedings | 38 | ||||
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Item 1A. |
| Risk Factors | 38 | ||||
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Item 2. |
| Unregistered Sales of Equity Securities and Use of Proceeds | 38 | ||||
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Item 3. |
| Defaults Upon Senior Securities | 38 | ||||
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Item 4. |
| Submission of Matters to a Vote of Security Holders | 38 | ||||
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Item 5. |
| Other Information | 39 | ||||
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Item 6. |
| Exhibits | 39 | ||||
PART I |
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ITEM 1. FINANCIAL STATEMENTS |
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EVEREST REINSURANCE HOLDINGS, INC. |
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CONSOLIDATED BALANCE SHEETS |
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| June 30, |
| December 31, |
(Dollars in thousands, except par value per share) |
| 2008 |
| 2007 |
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ASSETS: |
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Fixed maturities - available for sale, at market value |
| $ 6,783,466 |
| $ 5,998,157 |
(amortized cost: 2008, $6,735,025; 2007, $5,830,676) |
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Equity securities - available for sale, at market value (cost: 2008, $9,897; 2007, $9,897) |
| 9,897 |
| 9,897 |
Equity securities - available for sale, at fair value |
| 551,592 |
| 815,372 |
Short-term investments |
| 436,689 |
| 1,327,391 |
Other invested assets (cost: 2008, $463,440; 2007, $439,285) |
| 465,007 |
| 441,742 |
Other invested assets, at fair value |
| 307,529 |
| 253,791 |
Cash |
| 103,901 |
| 146,447 |
Total investments and cash |
| 8,658,081 |
| 8,992,797 |
Accrued investment income |
| 88,200 |
| 86,129 |
Premiums receivable |
| 750,737 |
| 800,211 |
Reinsurance receivables - unaffiliated |
| 630,908 |
| 644,693 |
Reinsurance receivables - affiliated |
| 1,785,392 |
| 1,698,454 |
Funds held by reinsureds |
| 143,622 |
| 132,443 |
Deferred acquisition costs |
| 204,037 |
| 234,719 |
Prepaid reinsurance premiums |
| 425,021 |
| 433,271 |
Deferred tax asset |
| 412,840 |
| 279,302 |
Federal income tax recoverable |
| 66,017 |
| 88,330 |
Other assets |
| 243,901 |
| 153,180 |
TOTAL ASSETS |
| $ 13,408,756 |
| $ 13,543,529 |
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LIABILITIES: |
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Reserve for losses and adjustment expenses |
| $ 7,491,141 |
| $ 7,538,704 |
Unearned premium reserve |
| 1,224,880 |
| 1,368,096 |
Funds held under reinsurance treaties |
| 127,112 |
| 117,404 |
Losses in the course of payment |
| 51,723 |
| 50,047 |
Commission reserves |
| 44,802 |
| 47,953 |
Other net payable to reinsurers |
| 417,369 |
| 374,929 |
8.75% Senior notes due 3/15/2010 |
| 199,751 |
| 199,685 |
5.4% Senior notes due 10/15/2014 |
| 249,708 |
| 249,689 |
6.6% Long term notes due 05/01/2067 |
| 399,641 |
| 399,639 |
Junior subordinated debt securities payable |
| 329,897 |
| 329,897 |
Accrued interest on debt and borrowings |
| 11,217 |
| 11,217 |
Other liabilities |
| 350,823 |
| 288,770 |
Total liabilities |
| 10,898,064 |
| 10,976,030 |
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Commitments and Contingencies (Note 5) |
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STOCKHOLDER'S EQUITY: |
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Common stock, par value: $0.01; 3,000 shares authorized; |
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1,000 shares issued and outstanding (2008 and 2007) |
| - |
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Additional paid-in capital |
| 312,924 |
| 310,206 |
Accumulated other comprehensive income, net of deferred income taxes of |
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$46.0 million at 2008 and $87.9 million at 2007 |
| 85,459 |
| 163,276 |
Retained earnings |
| 2,112,309 |
| 2,094,017 |
Total stockholder's equity |
| 2,510,692 |
| 2,567,499 |
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY |
| $ 13,408,756 |
| $ 13,543,529 |
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The accompanying notes are an integral part of the consolidated financial statements. |
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1
EVEREST REINSURANCE HOLDINGS, INC. |
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CONSOLIDATED STATEMENTS OF OPERATIONS |
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AND COMPREHENSIVE (LOSS) INCOME |
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| Three Months Ended |
| Six Months Ended | ||||
| June 30, |
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(Dollars in thousands) | 2008 |
| 2007 |
| 2008 |
| 2007 |
| (unaudited) |
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REVENUES: |
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Premiums earned | $ 471,414 |
| $ 565,426 |
| $ 971,444 |
| $ 1,135,264 |
Net investment income | 106,981 |
| 106,852 |
| 194,958 |
| 202,786 |
Net realized capital (losses) gains | (50,795) |
| 89,585 |
| (152,695) |
| 123,459 |
Other expense | (2,717) |
| (13,277) |
| (23,990) |
| (14,440) |
Total revenues | 524,883 |
| 748,586 |
| 989,717 |
| 1,447,069 |
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CLAIMS AND EXPENSES: |
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Incurred losses and loss adjustment expenses | 359,112 |
| 315,332 |
| 668,817 |
| 641,347 |
Commission, brokerage, taxes and fees | 111,563 |
| 121,927 |
| 221,454 |
| 235,902 |
Other underwriting expenses | 30,752 |
| 27,114 |
| 63,025 |
| 51,861 |
Interest, fee and bond issue cost amortization expense | 19,746 |
| 24,192 |
| 39,488 |
| 41,605 |
Total claims and expenses | 521,173 |
| 488,565 |
| 992,784 |
| 970,715 |
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INCOME (LOSS) BEFORE TAXES | 3,710 |
| 260,021 |
| (3,067) |
| 476,354 |
Income tax (benefit) expense | (9,942) |
| 74,830 |
| (21,359) |
| 131,845 |
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NET INCOME | $ 13,652 |
| $ 185,191 |
| $ 18,292 |
| $ 344,509 |
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Other comprehensive loss, net of tax | (58,135) |
| (47,086) |
| (77,817) |
| (50,234) |
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COMPREHENSIVE (LOSS) INCOME | $ (44,483) |
| $ 138,105 |
| $ (59,525) |
| $ 294,275 |
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The accompanying notes are an integral part of the consolidated financial statements. |
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2
EVEREST REINSURANCE HOLDINGS, INC. |
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CONSOLIDATED STATEMENTS OF |
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CHANGES IN STOCKHOLDER'S EQUITY |
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| Three Months Ended |
| Six Months Ended | ||||
| June 30, |
| June 30, | ||||
(Dollars in thousands, except share amounts) | 2008 |
| 2007 |
| 2008 |
| 2007 |
| (unaudited) |
| (unaudited) | ||||
COMMON STOCK (shares outstanding): |
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Balance, beginning of period | 1,000 |
| 1,000 |
| 1,000 |
| 1,000 |
Balance, end of period | 1,000 |
| 1,000 |
| 1,000 |
| 1,000 |
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ADDITIONAL PAID-IN CAPITAL: |
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Balance, beginning of period | $ 311,489 |
| $ 301,373 |
| $ 310,206 |
| $ 300,764 |
Share-based compensation plans | 1,435 |
| 3,212 |
| 2,718 |
| 3,821 |
Balance, end of period | 312,924 |
| 304,585 |
| 312,924 |
| 304,585 |
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ACCUMULATED OTHER COMPREHENSIVE INCOME, |
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NET OF DEFERRED INCOME TAXES: |
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Balance, beginning of period | 143,594 |
| 124,646 |
| 163,276 |
| 332,578 |
Cumulative effect to adopt FAS No. 159, net of tax | - |
| - |
| - |
| (204,784) |
Net decrease during the period | (58,135) |
| (47,086) |
| (77,817) |
| (50,234) |
Balance, end of period | 85,459 |
| 77,560 |
| 85,459 |
| 77,560 |
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RETAINED EARNINGS: |
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Balance, beginning of period | 2,098,657 |
| 1,949,144 |
| 2,094,017 |
| 1,585,042 |
Cumulative effect to adopt FAS No. 159, net of tax | - |
| - |
| - |
| 204,784 |
Net income | 13,652 |
| 185,191 |
| 18,292 |
| 344,509 |
Balance, end of period | 2,112,309 |
| 2,134,335 |
| 2,112,309 |
| 2,134,335 |
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TOTAL STOCKHOLDER'S EQUITY, END OF PERIOD | $ 2,510,692 |
| $ 2,516,480 |
| $ 2,510,692 |
| $ 2,516,480 |
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The accompanying notes are an integral part of the consolidated financial statements. |
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3
EVEREST REINSURANCE HOLDINGS, INC. |
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CONSOLIDATED STATEMENTS OF CASH FLOWS |
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| Three Months Ended |
| Six Months Ended | ||||
| June 30, |
| June 30, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2008 |
| 2007 |
| (unaudited) |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income | $ 13,652 |
| $ 185,191 |
| $ 18,292 |
| $ 344,509 |
Adjustments to reconcile net income to net cash provided by operating activities: |
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Decrease in premiums receivable | 2,038 |
| 21,997 |
| 49,337 |
| 51,492 |
Decrease (increase) in funds held by reinsureds, net | 1,424 |
| 13,805 |
| (1,016) |
| 16,227 |
Increase in reinsurance receivables | (126,206) |
| (28,528) |
| (70,611) |
| (87,778) |
(Increase) decrease in deferred tax asset | (30,956) |
| 5,642 |
| (91,637) |
| 22,128 |
Decrease in reserve for losses and loss adjustment expenses | (17,046) |
| (32,438) |
| (40,300) |
| (159,415) |
Decrease in unearned premiums | (62,346) |
| (93,203) |
| (142,005) |
| (106,561) |
Change in other assets and liabilities, net | 3,832 |
| (31,938) |
| 51,838 |
| 37,689 |
Non-cash compensation expense | 1,427 |
| - |
| 2,633 |
| - |
Amortization of bond premium/(accrual of bond discount) | 2,593 |
| (1,935) |
| 2,668 |
| (2,015) |
Amortization of underwriting discount on senior notes | 45 |
| 41 |
| 88 |
| 80 |
Net realized capital losses (gains) | 50,795 |
| (89,585) |
| 152,695 |
| (123,459) |
Net cash used in operating activities | (160,748) |
| (50,951) |
| (68,018) |
| (7,103) |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Proceeds from fixed maturities matured/called - available for sale, at market value | 94,255 |
| 182,237 |
| 263,662 |
| 347,120 |
Proceeds from fixed maturities sold - available for sale, at market value | 71,435 |
| 6,822 |
| 86,146 |
| 11,947 |
Proceeds from equity securities sold - available for sale, at market value | - |
| 506,501 |
| - |
| 672,560 |
Proceeds from equity securities sold - available for sale, at fair value | 33 |
| - |
| 229,055 |
| - |
Distributions from other invested assets | 1,036 |
| 3,933 |
| 11,211 |
| 23,732 |
Cost of fixed maturities acquired - available for sale, at market value | (846,454) |
| (91,092) |
| (1,279,528) |
| (133,118) |
Cost of equity securities acquired - available for sale, at fair value | (6) |
| (102,453) |
| (40,964) |
| (231,912) |
Cost of other invested assets acquired | (11,762) |
| (58,404) |
| (20,104) |
| (90,493) |
Cost of other invested assets acquired, at fair value | (24,901) |
| - |
| (125,738) |
| (200,080) |
Net change in short-term securities | 918,172 |
| (747,504) |
| 885,455 |
| (822,285) |
Net change in unsettled securities transactions | (54,372) |
| (22,450) |
| (5,710) |
| (4,490) |
Net cash provided by (used in) investing activities | 147,436 |
| (322,410) |
| 3,485 |
| (427,019) |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Tax benefit from share-based compensation | 8 |
| 3,212 |
| 85 |
| 3,821 |
Net proceeds from issuance of long term notes | - |
| 395,637 |
| - |
| 395,637 |
Net cash provided by financing activities | 8 |
| 398,849 |
| 85 |
| 399,458 |
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EFFECT OF EXCHANGE RATE CHANGES ON CASH | 3,561 |
| (7,325) |
| 21,902 |
| (6,551) |
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Net (decrease) increase in cash | (9,743) |
| 18,163 |
| (42,546) |
| (41,215) |
Cash, beginning of period | 113,644 |
| 77,157 |
| 146,447 |
| 136,535 |
Cash, end of period | $ 103,901 |
| $ 95,320 |
| $ 103,901 |
| $ 95,320 |
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SUPPLEMENTAL CASH FLOW INFORMATION: |
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Cash transactions: |
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Income taxes paid, net | $ 53,523 |
| $ 120,955 |
| $ 58,345 |
| $ 134,784 |
Interest paid | $ 25,087 |
| $ 16,138 |
| $ 38,974 |
| $ 34,277 |
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Non-cash financing transactions: |
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Non-cash tax benefit from share-based compensation | $ 8 |
| $ 3,212 |
| $ 85 |
| $ 3,821 |
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The accompanying notes are an integral part of the consolidated financial statements. |
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4
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Six Months Ended June 30, 2008 and 2007
1. General
As used in this document, “Holdings” means Everest Reinsurance Holdings, Inc.; “Group” means Everest Re Group, Ltd. (Holdings’ parent); “Bermuda Re” means Everest Reinsurance (Bermuda), Ltd., a subsidiary of Group; “Everest Re” means Everest Reinsurance Company, a subsidiary of Holdings, and its subsidiaries (unless the context otherwise requires); and the “Company” means Holdings and its subsidiaries.
The unaudited consolidated financial statements of the Company for the three and six months ended June 30, 2008 and 2007 include all adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair statement of the results on an interim basis. Certain financial information, which is normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), has been omitted since it is not required for interim reporting purposes. The year end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The results for the three and six months ended June 30, 2008 and 2007 are not necessarily indicative of the results for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, 2007, 2006 and 2005 included in the Company’s most recent Form 10-K filing.
2. New Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standards (“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 objective 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 affect 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 impact of a January 1, 2009 adoption should be immaterial.
3. Fair Value
Effective January 1, 2007, the Company adopted and implemented FAS 159 for its actively managed equity securities and equity shares of its parent. In conjunction with the Company implementing a more active management strategy for these securities, 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 $204.8 million cumulative-effect adjustment to retained earnings, net of $110.3 million of tax. The Company records fair value re-measurement as net realized capital gains or losses in the consolidated statements of operations and comprehensive income. The Company recorded $46.9 million and $136.1 million in net realized capital losses due to fair value re-measurement on the equity securities and other invested assets at fair value for the three and six months ended June 30, 2008, respectively. The Company recorded $96.2 million and $129.0 million in net realized capital gains due to fair value re-measurement on the equity securities and other invested assets at fair value for the three and six months ended June 30, 2007, respectively.
The following table presents 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) |
| June 30, 2008 |
| (Level 1) |
| (Level 2) |
| (Level 3) |
Assets: |
|
|
|
|
|
|
|
|
Fixed maturities |
| $ 6,783,466 |
| $ - |
| $ 6,766,334 |
| $ 17,132 |
Equity securities, fair value |
| 551,592 |
| 543,669 |
| 7,923 |
| - |
Equity securities, market value |
| 9,897 |
| - |
| 9,897 |
| - |
Other invested assets, fair value |
| 307,529 |
| 307,529 |
| - |
| - |
|
|
|
| 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 |
| $ 5,998,157 |
| $ - |
| $ 5,919,448 |
| $ 78,709 |
Equity securities, fair value |
| 815,372 |
| 801,611 |
| 13,761 |
| - |
Equity securities, market value |
| 9,897 |
| - |
| 9,897 |
| - |
Other invested assets, fair value |
| 253,791 |
| 253,791 |
| - |
| - |
The following table presents the fixed maturity investments for which fair value was measured under level 3 for the periods indicated:
| Fair Value | ||
| Measurements Using: | ||
| 2008 |
| 2007 |
| Significant |
| Significant |
| Unobservable |
| Unobservable |
| Inputs |
| Inputs |
(Dollars in thousands) | (Level 3) |
| (Level 3) |
Assets: |
|
|
|
Beginning balance at January 1 | $ 78,709 |
| $ 24,024 |
Total gains or (losses) (realized/unrealized) |
|
|
|
Included in earnings (or changes in net assets) | (2,314) |
| 55 |
Included in other comprehensive income | (588) |
| (379) |
Purchases, issuances and settlements | (5,204) |
| (342) |
Transfers in and/or (out) of Level 3 | (53,471) |
| (2,107) |
Ending balance at June 30 | $ 17,132 |
| $ 21,251 |
|
|
|
|
The amount of total losses for the period included in earnings |
|
|
|
(or changes in net assets) attributable to the change in unrealized |
|
|
|
gains (losses) relating to assets still held at the reporting date | $ (4,061) |
| $ - |
The fixed maturities valued under level 3 were valued by investment brokers for which the Company believes reflects fair value, but was unable to verify that inputs to the valuation model were observable.
4. Capital Transactions
On December 1, 2005, Group and Holdings filed a shelf registration statement on Form S-3ASR with the Securities and Exchange Commission (“SEC”), as a Well Known Seasoned Issuer. This shelf registration statement was used by Group to register common shares, preferred shares, debt securities, warrants, share purchase contracts and share purchase units; by Holdings to register debt securities and by Everest Re Capital Trust III (“Capital Trust III”) to register trust preferred securities.
| • | 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. The net proceeds from the offering were used to redeem all of the outstanding 7.85% junior subordinated debt securities on November 15, 2007 and for general corporate purposes. |
5. 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 are ultimately resolved through both informal and formal means, including negotiated resolution, arbitration and litigation. In all such matters, the Company believes that its positions are legally and commercially reasonable. 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.
The Company does not believe that there are any material pending legal proceedings to which it or any of its subsidiaries is a party or of which any of their properties are the subject.
The Company continues to receive claims under expired insurance and reinsurance contracts asserting injuries and/or damages relating to or resulting from environmental pollution and hazardous substances, including asbestos. Environmental claims typically assert 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 reserves include an estimate of the Company’s ultimate liability for asbestos and environmental (“A&E”) claims. As of June 30, 2008, approximately 12% of the Company’s gross reserves were an estimate of the Company’s ultimate liability for A&E claims. The Company’s A&E liabilities emanate from Mt. McKinley Insurance Company’s (“Mt. McKinley”), a direct subsidiary of the Company, direct insurance business and Everest Re’s assumed reinsurance business. All of the contracts of insurance and reinsurance under which the Company has received claims during the past three years, expired more than 20 years ago. There are significant uncertainties surrounding the Company’s reserves for its A&E losses.
The following table summarizes incurred losses with respect to A&E on both a gross and net of retrocessional basis for the periods indicated:
|
| Three Months Ended |
| Six Months Ended | ||||
|
| June 30, |
| June 30, | ||||
(Dollars in thousands) |
| 2008 |
| 2007 |
| 2008 |
| 2007 |
Gross basis: |
|
|
|
|
|
|
|
|
Beginning of period reserves |
| $ 901,040 |
| $ 632,239 |
| $ 922,843 |
| $ 650,134 |
Incurred losses |
| - |
| 40,000 |
| - |
| 40,000 |
Paid losses |
| (30,042) |
| (34,351) |
| (51,845) |
| (52,246) |
End of period reserves |
| $ 870,998 |
| $ 637,888 |
| $ 870,998 |
| $ 637,888 |
|
|
|
|
|
|
|
|
|
Net basis: |
|
|
|
|
|
|
|
|
Beginning of period reserves |
| $ 524,063 |
| $ 303,985 |
| $ 537,549 |
| $ 313,308 |
Incurred losses |
| - |
| 16,475 |
| - |
| 16,475 |
Paid losses |
| (10,547) |
| (14,364) |
| (24,033) |
| (23,687) |
End of period reserves |
| $ 513,516 |
| $ 306,096 |
| $ 513,516 |
| $ 306,096 |
At June 30, 2008, the gross reserves for A&E losses were comprised of $147.4 million representing case reserves reported by ceding companies, $150.4 million representing additional case reserves established by the Company on assumed reinsurance claims, $163.3 million representing case reserves established by the Company on direct excess insurance claims, including Mt. McKinley and $409.9 million representing incurred but not reported (“IBNR”) reserves.
With respect to asbestos only, at June 30, 2008, the Company had gross asbestos loss reserves of $816.4 million, or 93.7%, of total A&E reserves, of which $563.8 million was for assumed business and $252.6 million was for direct business.
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. 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.
Due to the uncertainties, 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, depending on coverage under the Company’s various reinsurance arrangements, could have a material adverse effect on the Company’s future financial condition, results of operations and cash flows.
In 1993 and prior, the Company had a business arrangement with The Prudential Insurance Company of America (“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”), was unable to make the annuity payments. At June 30, 2008, the estimated cost to replace all such annuities for which the Company was contingently liable was $151.8 million.
Prior to its 1995 initial public offering, the Company had 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. At June 30, 2008, the estimated cost to replace such annuities was $22.2 million.
6. Other Comprehensive Loss
The following table presents the components of other comprehensive loss for the periods indicated:
|
| Three Months Ended |
| Six Months Ended | ||||
|
| June 30, |
| June 30, | ||||
(Dollars in thousands) |
| 2008 |
| 2007 |
| 2008 |
| 2007 |
Net unrealized depreciation of |
|
|
|
|
|
|
|
|
investments, net of deferred income taxes | $ (52,308) |
| $ (57,181) |
| $ (77,956) |
| $ (60,117) | |
Currency translation adjustments, |
|
|
|
|
|
|
|
|
net of deferred income taxes |
| (6,461) |
| 10,095 |
| (495) |
| 9,883 |
Pension adjustment |
| 634 |
| - |
| 634 |
| - |
Other comprehensive loss, |
|
|
|
|
|
|
|
|
net of deferred income taxes |
| $ (58,135) |
| $ (47,086) |
| $ (77,817) |
| $ (50,234) |
7. Letters of Credit
The Company has an arrangement available for the issuance of letters of credit, which letters are generally collateralized by the Company’s cash and investments. The Citibank Holdings Credit Facility involves a syndicate of lenders (see Note 12), with Citibank acting as administrative agent. At June 30, 2008 and December 31, 2007, letters of credit for $17.2 million with a date of expiry of December 31, 2008 were issued and outstanding. The letters of credit collateralize reinsurance obligations of the Company’s non-U.S. operations.
8. Trust Agreements
A subsidiary of the Company, Everest Re, has established a trust agreement, which effectively uses Everest Re’s investments as collateral, as security for assumed losses payable to a non-affiliated ceding company. At June 30, 2008, the total amount on deposit in the trust account was $22.0 million.
9. 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 offering of $200.0 million principal amount of 8.75% senior notes due March 15, 2010.
Interest expense incurred in connection with these senior notes was $7.8 million for the three months ended June 30, 2008 and 2007 and $15.6 million for the six months ended June 30, 2008 and 2007. Market value, which is based on quoted market price at June 30, 2008 and December 31, 2007, was $220.8 million and $235.3 million, respectively, for the 5.40% senior notes and $208.0 million and $215.9 million, respectively, for the 8.75% senior notes.
10. 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 London Interbank Offered Rate (“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 $6.6 million and $13.2 million for the three and six months ended June 30, 2008, respectively, and $4.3 million for the three and six months ended June 30, 2007. Market value, which is based on quoted market price at June 30, 2008 and December 31, 2007, was $288.0 million and $349.8 million for the 6.6% long term subordinated notes.
11. 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 may redeem the junior subordinated debt securities before their maturity at 100% of their principal amount plus accrued interest as of the date of 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 redeemed all of the junior subordinated debt securities at 100% of their principal amount plus accrued interest on November 15, 2007.
Fair value, which is primarily based on quoted market price of the related trust preferred securities, at June 30, 2008 and December 31, 2007, was $248.2 million and $250.8 million, respectively, for the 6.20% junior subordinated debt securities.
Interest expense incurred in connection with these junior subordinated notes was $5.1 million and $9.4 million for the three months ended June 30, 2008 and 2007, respectively, and $10.2 million and $18.7 million for the six months ended June 30, 2008 and 2007, respectively.
Capital Trust II is a wholly owned finance subsidiary 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 II’s payment obligations with respect to the trust preferred securities.
Capital Trust II will redeem all of the outstanding trust preferred securities when the junior subordinated debt securities are paid at maturity on March 29, 2034. The Company may elect to redeem the junior subordinated debt securities, in whole or in part, at any time on or after March 30, 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 the Company’s operating subsidiaries to transfer funds to the Company in the form of cash dividends, loans or advances. The insurance laws of the State of Delaware, where the Company’s direct insurance subsidiaries are domiciled, require regulatory approval before those subsidiaries can pay dividends or make loans or advances to the Company that exceed certain statutory thresholds. In addition, the terms of the Holdings Credit Facility (discussed in Note 12) require Everest Re, the Company’s principal insurance subsidiary, to maintain a certain statutory surplus level as measured at the end of each fiscal year. At December 31, 2007, $2,595.1 million of the $3,248.5 million in net assets of the Company’s consolidated subsidiaries were subject to the foregoing regulatory restrictions.
12. Credit Line
Effective August 23, 2006, Holdings entered into a new five year, $150.0 million senior revolving credit facility with a syndicate of lenders, referred to as the “Holdings Credit Facility”. Citibank N.A. is the administrative agent for the Holdings Credit Facility. The Holdings Credit Facility is 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. As of June 30, 2008, Holdings was in compliance with all Holdings Credit Facility covenants.
At June 30, 2008 and December 31, 2007, there were outstanding letters of credit of $17.2 million under the Holdings Credit Facility.
Costs incurred in connection with the Holdings Credit Facility were $34,370 and $26,542 for the three months ended June 30, 2008 and 2007 and $60,161 and $53,083 for the six months ended June 30, 2008 and 2007, respectively.
13. Segment Results
The Company, through its subsidiaries, operates in four segments: U.S. Reinsurance, U.S. Insurance, Specialty Underwriting and International. 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 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 Miami and New Jersey.
These segments are managed in a coordinated fashion with respect to pricing, risk management, control of aggregate catastrophe exposures, capital, investments and support operations. Management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting results.
Underwriting results include earned premium less losses and loss adjustment expenses ("LAE") incurred, commission and brokerage expenses and other underwriting expenses. Underwriting results are measured using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which, respectively, divide incurred losses, commissions and brokerage and other underwriting expenses by premiums earned.
The Company does not maintain separate balance sheet data for its operating segments. Accordingly, the Company does not review and evaluate the financial results of its operating segments based upon balance sheet data.
The following tables present the underwriting results for the operating segments for the periods indicated:
U.S. Reinsurance | Three Months Ended |
| Six Months Ended | ||||
| June 30, |
| June 30, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2008 |
| 2007 |
Gross written premiums | $ 200,348 |
| $ 271,670 |
| $ 434,067 |
| $ 626,022 |
Net written premiums | 131,096 |
| 202,995 |
| 278,515 |
| 463,976 |
|
|
|
|
|
|
|
|
Premiums earned | $ 161,891 |
| $ 238,970 |
| $ 360,007 |
| $ 502,155 |
Incurred losses and LAE | 84,230 |
| 80,436 |
| 205,279 |
| 167,318 |
Commission and brokerage | 45,549 |
| 61,142 |
| 98,289 |
| 115,789 |
Other underwriting expenses | 6,887 |
| 7,321 |
| 15,660 |
| 13,812 |
Underwriting gain | $ 25,225 |
| $ 90,071 |
| $ 40,779 |
| $ 205,236 |
U.S. Insurance | Three Months Ended |
| Six Months Ended | ||||
| June 30, |
| June 30, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2008 |
| 2007 |
Gross written premiums | $ 190,977 |
| $ 161,637 |
| $ 401,437 |
| $ 379,010 |
Net written premiums | 104,182 |
| 94,492 |
| 214,352 |
| 234,075 |
|
|
|
|
|
|
|
|
Premiums earned | $ 121,114 |
| $ 121,580 |
| $ 264,210 |
| $ 262,145 |
Incurred losses and LAE | 161,680 |
| 84,084 |
| 257,579 |
| 225,113 |
Commission and brokerage | 22,892 |
| 17,149 |
| 43,640 |
| 38,322 |
Other underwriting expenses | 15,900 |
| 12,013 |
| 30,242 |
| 24,378 |
Underwriting (loss) gain | $ (79,358) |
| $ 8,334 |
| $ (67,251) |
| $ (25,668) |
Specialty Underwriting | Three Months Ended |
| Six Months Ended | ||||
| June 30, |
| June 30, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2008 |
| 2007 |
Gross written premiums | $ 84,202 |
| $ 76,377 |
| $ 139,113 |
| $ 131,058 |
Net written premiums | 57,302 |
| 55,602 |
| 94,223 |
| 92,052 |
|
|
|
|
|
|
|
|
Premiums earned | $ 55,451 |
| $ 56,346 |
| $ 91,001 |
| $ 94,960 |
Incurred losses and LAE | 25,917 |
| 36,935 |
| 44,132 |
| 66,778 |
Commission and brokerage | 11,781 |
| 9,371 |
| 21,758 |
| 18,675 |
Other underwriting expenses | 1,834 |
| 1,775 |
| 4,245 |
| 3,364 |
Underwriting gain | $ 15,919 |
| $ 8,265 |
| $ 20,866 |
| $ 6,143 |
International | Three Months Ended |
| Six Months Ended | ||||
| June 30, |
| June 30, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2008 |
| 2007 |
Gross written premiums | $ 218,984 |
| $ 202,626 |
| $ 405,362 |
| $ 375,970 |
Net written premiums | 133,164 |
| 142,762 |
| 249,450 |
| 264,034 |
|
|
|
|
|
|
|
|
Premiums earned | $ 132,958 |
| $ 148,530 |
| $ 256,226 |
| $ 276,004 |
Incurred losses and LAE | 87,285 |
| 113,877 |
| 161,827 |
| 182,138 |
Commission and brokerage | 31,341 |
| 34,265 |
| 57,767 |
| 63,116 |
Other underwriting expenses | 4,747 |
| 4,332 |
| 9,801 |
| 8,050 |
Underwriting gain (loss) | $ 9,585 |
| $ (3,944) |
| $ 26,831 |
| $ 22,700 |
The following table reconciles the underwriting results for the operating segments to income before taxes as reported in the consolidated statements of operations and comprehensive loss for the periods indicated:
| Three Months Ended |
| Six Months Ended | ||||
| June 30, |
| June 30, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2008 |
| 2007 |
Underwriting results | $ (28,629) |
| $ 102,726 |
| $ 21,225 |
| $ 208,411 |
Net investment income | 106,981 |
| 106,852 |
| 194,958 |
| 202,786 |
Net realized capital (losses) gains | (50,795) |
| 89,585 |
| (152,695) |
| 123,459 |
Corporate expense | (1,384) |
| (1,673) |
| (3,077) |
| (2,257) |
Interest expense | (19,746) |
| (24,192) |
| (39,488) |
| (41,605) |
Other expense | (2,717) |
| (13,277) |
| (23,990) |
| (14,440) |
Income (loss) before taxes | $ 3,710 |
| $ 260,021 |
| $ (3,067) |
| $ 476,354 |
The Company produces business in the U.S. 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, other than the U.S., no other country represented more than 5% of the Company’s revenues.
14. Related-Party Transactions
During the normal course of business, the Company, through its affiliates, engages in reinsurance and brokerage and commission business transactions 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.
The Company engages in reinsurance transactions with Bermuda Re and Everest International Reinsurance, Ltd. (“Everest International”), affiliates, primarily driven by enterprise risk and capital management considerations, under which business is ceded at market rates and terms. These transactions include:
| • | Effective September 19, 2000, Mt. McKinley and Bermuda Re entered into a loss portfolio transfer reinsurance agreement, whereby Mt. McKinley transferred all of its net insurance exposures and reserves to Bermuda Re. |
| • | Effective October 1, 2001, Everest Re and Bermuda Re entered into a loss portfolio reinsurance agreement, whereby Everest Re transferred all of its Belgium branch net insurance exposures and reserves to Bermuda Re. |
| • | For premiums earned and losses incurred for the period January 1, 2002 through December 31, 2002, Everest Re, Everest National Insurance Company and Everest Security Insurance Company entered into an Excess of Loss Reinsurance Agreement with Bermuda Re, covering workers’ compensation losses occurring on and after January 1, 2002, as respects new, renewal and in force policies effective on that date through December 31, 2002. Bermuda Re is liable for any loss exceeding $100,000 per occurrence, with its liability not to exceed $150,000 per occurrence. |
| • | Effective January 1, 2002 for the 2002 underwriting year, Everest Re ceded 20.0% of its net retained liability to Bermuda Re through a quota share reinsurance agreement (“whole account quota share”). |
| • | Effective January 1, 2003, Everest Re and Bermuda Re amended the whole account quota share, through which Everest Re previously ceded 20.0% of its business to Bermuda Re so that effective January 1, 2003 Everest Re ceded 25.0% to Bermuda Re of the net retained liability on all new and renewal policies underwritten during the term of this agreement. This amendment remained in effect through December 31, 2003. |
| • | Effective January 1, 2003, Everest Re entered into a whole account quota share with Bermuda Re, whereby Everest Re’s Canadian branch ceded to Bermuda Re 50.0% of its net retained liability on all new and renewal property business. This remained in effect through December 31, 2006. |
| • | Effective January 1, 2004, Everest Re and Bermuda Re amended the whole account quota share through which Everest Re previously ceded 25.0% of its business to Bermuda Re so that effective January 1, 2004 Everest Re ceded 22.5% to Bermuda Re and 2.5% to Everest International of the net retained liability on all new and renewal covered business written during the term of this agreement. This amendment remained in effect through December 31, 2005. |
| • | Effective January 1, 2006, Everest Re, Bermuda Re and Everest International amended the whole account quota share so that for all new and renewal business recorded on or after January 1, 2006, Everest Re ceded 31.5% and 3.5% of its casualty business to Bermuda Re and Everest International, respectively, and Everest Re ceded 18.0% and 2.0% of its property business to Bermuda Re and Everest International, respectively. However, in no event shall the loss cessions to Bermuda Re and Everest International relating to any one occurrence on the property business exceed $125.0 million. The property portion of this amendment remained in effect through December 31, 2006. The casualty portion remained in effect through December 31, 2007. |
| • | Effective January 1, 2007, Everest Re and Bermuda Re amended the whole account quota share so that for all new and renewal business recorded on or after January 1, 2007, Everest Re cedes 60.0% of its Canadian branch property business to Bermuda Re. |
| • | Effective January 1, 2007, Everest Re, Bermuda Re and Everest International amended the whole account quota share so that for all new and renewal property business recorded on or after January 1, 2007, Everest Re ceded 22.5% and 2.5% to Bermuda Re and Everest International, respectively. However, in no event shall the loss cessions to Bermuda Re and Everest International relating to any one occurrence on the property business exceed $130.0 million. This amendment remained in effect through December 31, 2007. |
| • | Effective January 1, 2008, Everest Re, Bermuda Re and Everest International entered into a whole account quota share whereby, for all new and renewal casualty and property business recorded on or after January 1, 2008, Everest Re cedes 36.0% and 4.0% to Bermuda Re and Everest International, respectively. However, in no event shall the loss cessions to Bermuda Re and Everest International relating to any one catastrophe occurrence on the property business exceed $130.0 million or in the aggregate for each underwriting year for all property catastrophes exceed $275.0 million. |
The following table summarizes the premiums and losses ceded by the Company to Bermuda Re and Everest International, respectively, for the periods indicated:
Bermuda Re | Three Months Ended |
| Six Months Ended | ||||
| June 30, |
| June 30, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2008 |
| 2007 |
Ceded written premiums | $ 206,681 |
| $ 180,840 |
| $ 420,820 |
| $ 374,890 |
Ceded earned premiums | 218,156 |
| 193,069 |
| 424,114 |
| 384,011 |
Ceded losses and LAE (a) | 114,534 |
| 146,790 |
| 210,935 |
| 249,082 |
|
|
|
|
|
|
|
|
Everest International | Three Months Ended |
| Six Months Ended | ||||
| June 30, |
| June 30, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2008 |
| 2007 |
Ceded written premiums | $ 21,516 |
| $ 18,746 |
| $ 43,700 |
| $ 39,323 |
Ceded earned premiums | 22,623 |
| 19,889 |
| 43,778 |
| 40,279 |
Ceded losses and LAE | 11,709 |
| 12,315 |
| 22,256 |
| 23,185 |
(a) Ceded losses and LAE include the Mt. McKinley loss portfolio transfer that constitutes losses ceded under retroactive reinsurance and therefore, in accordance with FAS 113, “Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts,” a deferred gain on retroactive reinsurance is reflected in other expenses on the consolidated statement of operations and comprehensive income.
Everest Re sold net assets of its UK branch to Bermuda Re and provided Bermuda Re with a reserve indemnity agreement allowing for indemnity payments of up to 90% of £25.0 million of the excess of 2002 and prior reserves, provided that any recognition of profit from the reserves for 2002 and prior underwriting years is taken into account. The limit available under this agreement was fully exhausted at December 31, 2004.
15. Income Taxes
The Company uses a projected annual effective tax rate in accordance with FASB Statement No. 109, “Accounting for Income Taxes” (“FAS 109”), to calculate its quarterly tax expense. Under this methodology, when an interim quarter’s pre-tax income (loss) varies significantly from a full year’s income (loss) projection, the tax impact resulting from the income (loss) variance is effectively spread between the impacted quarter and the remaining quarters of the year, except for discreet items impacting an individual quarter.
The Company recognizes accrued interest related to unrecognized tax benefits and penalties in income taxes. For the three and six months ended June 30, 2008, the Company accrued and recognized approximately $0.4 million and $0.8 million, respectively, in interest and penalties.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Industry Conditions.
The worldwide reinsurance and insurance businesses are highly competitive, as well as cyclical by product and market. As 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 we underwrite is based on many factors, including the perceived overall financial strength of the reinsurer or insurer, ratings of the reinsurer or insurer by A.M. Best Company and/or Standard & Poor’s Rating Services, underwriting expertise, the jurisdictions where the reinsurer or insurer is licensed or otherwise authorized, capacity and coverages offered, premiums charged, other terms and conditions of the reinsurance and insurance business offered, services offered, speed of claims payment and reputation and experience in lines written. Furthermore, the market impact from these competitive factors related to reinsurance and insurance is generally not consistent across lines of business, domestic and international geographical areas and distribution channels.
We compete in the U.S. and international reinsurance and insurance markets with numerous global competitors. Our competitors include independent reinsurance and insurance companies, subsidiaries or affiliates of established worldwide insurance companies, reinsurance departments of certain insurance companies and domestic and international underwriting operations, including underwriting syndicates at Lloyd’s. Some of these competitors have greater financial resources than we do and have established long term and continuing business relationships, which can be a significant competitive advantage. In addition, the lack of strong barriers to entry into the reinsurance business and the potential for securitization of reinsurance and insurance risks through capital markets provide additional sources of potential reinsurance and insurance capacity and competition.
We continued to see increased competition during the second quarter of 2008 with generally lower rates, higher commissions and demands by cedants for improved terms and conditions. The extent of the increased competition and its effect on rates, terms and conditions varied widely by market and coverage but was most prevalent in the U.S. reinsurance markets. In addition to demanding lower rates and improved terms, ceding companies are retaining 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. We have also experienced reduced quota share premiums, particularly on catastrophe exposed business, due to increased purchases of common account covers by ceding companies, which reduces the premiums subject to the quota share contract. There was also increased competition in the U.S. insurance market, particularly in the workers’ compensation and contractor coverages; however, given the specialty nature of our business, we believe the impact on our business to be less pronounced than on the market generally.
Rate decreases in the international markets have generally been less pronounced than the in U.S. markets and we have grown our business in the Middle East, Latin America and 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. International results have also benefited from the weaker U.S. dollar since the foreign currencies convert to higher dollar amounts resulting in favorable year over year premium comparisons.
We are unable to predict the impact on future market conditions from increased competition and legislative initiatives. In addition to these market forces, reinsurers continue to reassess their risk appetites and rebalance their property portfolios to obtain a greater spread of risk against the backdrop of: (i) recent
17
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 and capital requirements for many catastrophe exposed companies.
Overall, we believe that current marketplace conditions offer profit opportunities for us given our strong ratings, distribution system, reputation and expertise. We continue to employ our strategy of targeting business that offers the greatest profit potential, while maintaining balance and diversification in our overall portfolio.
18
Financial Summary.
We monitor and evaluate our overall performance based upon financial results. The following table displays a summary of the consolidated net income, ratios and stockholder’s equity for the periods indicated:
| Three Months Ended | Percentage |
| Six Months Ended | Percentage | ||||||
| June 30, |
| Increase/ |
| June 30, |
| Increase/ | ||||
(Dollars in millions) | 2008 |
| 2007 |
| (Decrease) |
| 2008 |
| 2007 |
| (Decrease) |
Gross written premiums | $ 694.5 |
| $ 712.3 |
| -2.5% |
| $ 1,380.0 |
| $ 1,512.1 |
| -8.7% |
Net written premiums | 425.7 |
| 495.9 |
| -14.1% |
| 836.5 |
| 1,054.1 |
| -20.6% |
|
|
|
|
|
|
|
|
|
|
|
|
REVENUES: |
|
|
|
|
|
|
|
|
|
|
|
Premiums earned | $ 471.4 |
| $ 565.4 |
| -16.6% |
| $ 971.4 |
| $ 1,135.3 |
| -14.4% |
Net investment income | 107.0 |
| 106.9 |
| 0.1% |
| 195.0 |
| 202.8 |
| -3.9% |
Net realized capital (losses) gains | (50.8) |
| 89.6 |
| -156.7% |
| (152.7) |
| 123.5 |
| -223.7% |
Other expense | (2.7) |
| (13.3) |
| -79.5% |
| (24.0) |
| (14.4) |
| 66.2% |
Total revenues | 524.9 |
| 748.6 |
| -29.9% |
| 989.7 |
| 1,447.1 |
| -31.6% |
|
|
|
|
|
|
|
|
|
|
|
|
CLAIMS AND EXPENSES: |
|
|
|
|
|
|
|
|
|
|
|
Incurred losses and loss adjustment expenses | 359.1 |
| 315.3 |
| 13.9% |
| 668.8 |
| 641.3 |
| 4.3% |
Commission, brokerage, taxes and fees | 111.6 |
| 121.9 |
| -8.5% |
| 221.5 |
| 235.9 |
| -6.1% |
Other underwriting expenses | 30.8 |
| 27.1 |
| 13.4% |
| 63.0 |
| 51.9 |
| 21.5% |
Interest expense | 19.7 |
| 24.2 |
| -18.4% |
| 39.5 |
| 41.6 |
| -5.1% |
Total claims and expenses | 521.2 |
| 488.6 |
| 6.7% |
| 992.8 |
| 970.7 |
| 2.3% |
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE TAXES | 3.7 |
| 260.0 |
| -98.6% |
| (3.1) |
| 476.4 |
| -100.6% |
Income tax (benefit) expense | (9.9) |
| 74.8 |
| -113.3% |
| (21.4) |
| 131.8 |
| -116.2% |
NET INCOME | $ 13.7 |
| $ 185.2 |
| -92.6% |
| $ 18.3 |
| $ 344.5 |
| -94.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Point |
|
|
|
|
| Point |
RATIOS: |
|
|
|
| Change |
|
|
|
|
| Change |
Loss ratio | 76.2% |
| 55.8% |
| 20.4 |
| 68.8% |
| 56.5% |
| 12.3 |
Commission and brokerage ratio | 23.7% |
| 21.6% |
| 2.1 |
| 22.8% |
| 20.8% |
| 2.0 |
Other underwriting expense ratio | 6.5% |
| 4.7% |
| 1.8 |
| 6.5% |
| 4.5% |
| 2.0 |
Combined ratio | 106.4% |
| 82.1% |
| 24.3 |
| 98.1% |
| 81.8% |
| 16.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| At |
| At |
| Percentage |
(Dollars in millions) |
|
|
|
|
|
| June 30, |
| December 31, |
| Increase/ |
Balance sheet data: |
|
|
|
|
|
| 2008 |
| 2007 |
| (Decrease) |
Total investments and cash |
|
|
|
|
|
| $ 8,658.1 |
| $ 8,992.8 |
| -3.7% |
Total assets |
|
|
|
|
|
| 13,408.8 |
| 13,543.5 |
| -1.0% |
Reserve for losses and loss adjustment expenses |
|
|
|
|
| 7,491.1 |
| 7,538.7 |
| -0.6% | |
Total debt |
|
|
|
|
|
| 1,179.0 |
| 1,178.9 |
| 0.0% |
Total liabilities |
|
|
|
|
|
| 10,898.1 |
| 10,976.0 |
| -0.7% |
Stockholder's equity |
|
|
|
|
|
| 2,510.7 |
| 2,567.5 |
| -2.2% |
|
|
|
|
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding) |
|
|
|
|
|
|
|
|
|
|
|
19
Revenues.
Premiums. Gross written premiums decreased by $17.8 million, or 2.5%, for the three months ended June 30, 2008 compared to the three months ended June 30, 2007, reflecting a decline of $47.1 million in the reinsurance business, partially offset by a $29.3 million increase in the U.S. insurance business. Gross written premiums decreased by $132.1 million, or 8.7%, for the six months ended June 30, 2008 compared to the six months ended June 30, 2007, reflecting a decline of $154.5 million in the reinsurance business, partially offset by a $22.4 million increase in the U.S. insurance business. The decrease in reinsurance is primarily attributable to continued competitive conditions in both the property and casualty sectors of the market, especially in the U.S., combined with our intention to write only that business which we expect to produce acceptable returns.
Net written premiums decreased by $70.1 million, or 14.1%, for the three months ended June 30, 2008 compared to the three months ended June 30, 2007 and by $217.6 million, or 20.6%, for the six months ended June 30, 2008 compared to the six months ended June 30, 2007, primarily due to the decrease in gross written premiums and an increase in written premiums ceded to third parties and affiliates. Correspondingly, net premiums earned decreased by $94.0 million, or 16.6%, for the three months ended June 30, 2008 compared to the three months ended June 30, 2007 and by $163.8 million, or 14.4%, for the six months ended June 30, 2008 compared to the six months ended June 30, 2007.
Net Investment Income. Net investment income was relatively unchanged for the three months ended June 30, 2008 compared to the three months ended June 30, 2007. The annualized pre-tax investment portfolio yield for the three months ended June 30, 2008 was 4.9% compared to 5.1% for the three months ended June 30, 2007.
Net investment income decreased by 3.9% for the six months ended June 30, 2008 compared to the six months ended June 30, 2007, primarily due to decreased income from our limited partnership investments, particularly from those partnerships which invested in public equity securities, and lower short-term interest rates. The annualized pre-tax investment portfolio yield for the six months ended June 30, 2008 was 4.6% compared to 4.8% for the six months ended June 30, 2007.
Net Realized Capital (Losses) Gains. Net realized capital losses were $50.8 million for the three months ended June 30, 2008 compared to net realized capital gains of $89.6 million for the three months ended June 30, 2007. Net realized capital losses were $152.7 million for the six months ended June 30, 2008 compared to net realized capital gains of $123.5 million for the six months ended June 30, 2007. The $140.4 million and $276.2 million variances for the three and six months, respectively, were primarily the result of declines in the market values of our worldwide equity portfolio. We report changes in the fair values of our public equity portfolios as realized gains or losses per FAS 159, irrespective or whether or not the securities have been sold.
Other Expense. We recorded $2.7 million and $13.3 million of other expense for the three months ended June 30, 2008 and 2007, respectively and $24.0 million and $14.4 million of other expense for the six months ended June 30, 2008 and 2007, respectively. The changes, period over period, were primarily due to changes in foreign currency exchange rates and deferrals on retroactive reinsurance agreements with affiliates.
20
Claims and Expenses.
Incurred Losses and Loss Adjustment Expenses. The following table presents our incurred losses and loss adjustment expenses (“LAE”) for all segments for the periods indicated.
| Three Months Ended June 30, |
|
|
|
| ||||||
| 2008 |
| 2007 |
| Variance | ||||||
| Current | Prior | Total |
| Current | Prior | Total |
| Current | Prior | Total |
(Dollars in millions) | Year | Years | Incurred |
| Year | Years | Incurred |
| Year | Years | Incurred |
Attritional (a) | $ 291.2 | $ 55.1 | $ 346.3 |
| $ 302.5 | $ (38.0) | $ 264.5 |
| $ (11.3) | $ 93.1 | $ 81.8 |
Catastrophes | 12.0 | 0.8 | 12.8 |
| 33.2 | 1.1 | 34.4 |
| (21.2) | (0.3) | (21.6) |
A&E | - | - | - |
| - | 16.5 | 16.5 |
| - | (16.5) | (16.5) |
Total segment | $ 303.2 | $ 55.9 | $ 359.1 |
| $ 335.7 | $ (20.3) | $ 315.3 |
| $ (32.5) | $ 76.2 | $ 43.8 |
Loss ratio | 64.3% | 11.9% | 76.2% |
| 59.4% | -3.6% | 55.8% |
| 4.9 | 15.5 | 20.4 |
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, |
|
|
|
| ||||||
| 2008 |
| 2007 |
| Variance | ||||||
| Current | Prior | Total |
| Current | Prior | Total |
| Current | Prior | Total |
(Dollars in millions) | Year | Years | Incurred |
| Year | Years | Incurred |
| Year | Years | Incurred |
Attritional (a) | $ 583.1 | $ 60.6 | $ 643.6 |
| $ 607.5 | $ (21.4) | $ 586.0 |
| $ (24.4) | $ 82.0 | $ 57.6 |
Catastrophes | 16.8 | 8.4 | 25.2 |
| 37.5 | 1.4 | 38.8 |
| (20.7) | 7.0 | (13.6) |
A&E | - | - | - |
| - | 16.5 | 16.5 |
| - | (16.5) | (16.5) |
Total segment | $ 599.9 | $ 69.0 | $ 668.8 |
| $ 644.9 | $ (3.6) | $ 641.3 |
| $ (45.0) | $ 72.6 | $ 27.6 |
Loss ratio | 61.8% | 7.1% | 68.8% |
| 56.8% | -0.3% | 56.5% |
| 5.0 | 7.4 | 12.4 |
|
|
|
|
|
|
|
|
|
|
|
|
(a) Attritional losses exclude catastrophe and A&E losses. |
|
|
|
|
|
|
|
| |||
(Some amounts may not reconcile due to rounding.) |
|
|
|
|
|
|
|
|
Incurred losses and LAE increased by $43.8 million, or 13.9%, for the three months ended June 30, 2008 compared to the same period in 2007. Increased prior years’ adverse reserve development driven by a $70.0 million reserve strengthening for an auto loan credit program which is in run-off, accounted for most of the increase. This factor was partially offset by lower premium volume, reduced catastrophe losses and the absence in 2008 of any A&E prior years’ reserves strengthening.
Incurred losses and LAE increased by $27.5 million, or 4.3%, for the six months ended June 30, 2008 compared to the same period in 2007. Prior years’ reserve strengthening for an auto loan credit program in run-off of $85.3 million accounted for most of the increase, which was partially offset by lower premium volume and the absence in 2008 of any prior years’ reserve strengthening for A&E.
Commission, Brokerage, Taxes and Fees. Commission, brokerage, taxes and fees decreased by $10.4 million, or 8.5%, for the three months ended June 30, 2008 compared to the three months ended June 30, 2007 and by $14.4 million, or 6.1%, for the six months ended June 30, 2008 compared to the six months ended June 30, 2007. The decrease in net earned premiums was the principal driver in this directly variable expense, with some offset due to increased commission rates as a result of competitive market conditions, certain contract terms and higher commissions on new insurance programs.
Other Underwriting Expenses. Other underwriting expenses for the three months ended June 30, 2008 increased by $3.6 million, or 13.4%, compared to the three months ended June 30, 2007 and other
21
underwriting expenses for the six months ended June 30, 2008 increased by $11.2 million, or 21.5%, compared to the six months ended June 30, 2007. These increases were principally due to higher compensation and benefits expense and increased staff count, primarily in the U.S. Insurance segment. Included in other underwriting expenses were corporate expenses, which are expenses that are not allocated to segments, of $1.4 million and $1.7 million for the three months ended June 30, 2008 and 2007, respectively, and $3.1 million and $2.3 million for the six months ended June 30, 2008 and 2007, respectively.
Interest Expense. Interest expense was $19.7 million and $24.2 million for the three months ended June 30, 2008 and 2007, respectively, and $39.5 million and $41.6 million for the six months ended June 30, 2008 and 2007, respectively. These decreases were primarily due to the acceleration of issue cost amortization for the retired junior subordinated debt securities in 2007, with no such expense in 2008.
Income Tax (Benefit) Expense. Our income tax was a benefit of $9.9 million and $21.4 million for the three and six months ended June 30, 2008, respectively, compared to an income tax expense of $74.8 million and $131.8 million for the three and six months ended June 30, 2007, respectively. The tax benefit in 2008 compared to tax expense in 2007 was principally due to lower pre-tax net income resulting from net realized capital losses in 2008 compared to net realized capital gains in 2007 and a higher loss ratio in 2008. Our income tax benefit /expense is primarily a function of the statutory tax rate, coupled with the impact from tax-preferenced investment income.
Net Income.
Net income was significantly lower at $13.7 million for the three months ended June 30, 2008 compared to $185.2 million for the three months ended June 30, 2007and $18.3 million for the six months ended June 30, 2008 compared to $344.5 million for the six months ended June 30, 2007. The decreases were primarily the result of lower earnings from our insurance and reinsurance underwriting operations period over period and after-tax net realized capital losses in the 2008 periods compared to after-tax net realized capital gains in 2007.
Ratios.
Our combined ratio increased by 24.3 points to 106.4% for the three months ended June 30, 2008 compared to 82.1% for the three months ended June 30, 2007 and by 16.3 points to 98.1% for the six months ended June 30, 2008 compared to 81.8% for the six months ended June 30, 2007. The loss ratio component increase 20.4 points for the three month comparison and 12.3 points for the six month comparison, principally due to the increase in prior years’ adverse loss development, partially offset by a decrease in current year catastrophe losses. The commission and brokerage ratio component increased 2.1 points for the three month comparison and 2.0 points for the six month comparison due to competitive market conditions. The other underwriting expense ratio component increased by 1.8 points for the three month comparison and 2.0 points for the six month comparison primarily due to increased compensation costs associated with increased staff and the allocation of certain corporate charges to segments starting in the fourth quarter of 2007, which had been previously retained in corporate expense.
Stockholder's Equity.
Stockholder's equity decreased by $56.8 million to $2,510.7 million at June 30, 2008 from $2,567.5 million at December 31, 2007, principally due to $78.0 million of unrealized depreciation, net of tax, on investments, partially offset by net income of $18.3 million for the six months ended June 30, 2008.
22
Consolidated Investment Results
Net Investment Income.
Net investment income was relatively unchanged at $107.0 million for the three months ended June 30, 2008 compared to $106.9 million for the three months ended June 30, 2007. Net investment income decreased 3.9% to $195.0 million for the six months ended June 30, 2008 from $202.8 million for the six months ended June 30, 2007, primarily due to decreased income from our limited partnership investments, particularly from those partnerships which invested in public equity securities, and lower short-term interest rates.
The following table shows the components of net investment income for the periods indicated:
| Three Months Ended |
| Six Months Ended | ||||
| June 30, |
| June 30, | ||||
(Dollars in millions) | 2008 |
| 2007 |
| 2008 |
| 2007 |
Fixed maturities | $ 77.9 |
| $ 75.8 |
| $ 152.0 |
| $ 151.0 |
Equity securities | 1.7 |
| 1.8 |
| 3.4 |
| 4.6 |
Short-term investments and cash | 6.6 |
| 13.3 |
| 19.5 |
| 22.9 |
Other invested assets |
|
|
|
|
|
|
|
Limited partnerships | 21.3 |
| 16.5 |
| 19.7 |
| 24.8 |
Other | 1.9 |
| 1.2 |
| 4.6 |
| 2.9 |
Total gross investment income | 109.4 |
| 108.6 |
| 199.2 |
| 206.2 |
Interest credited and other expense | (2.4) |
| (1.7) |
| (4.2) |
| (3.4) |
Total net investment income | $ 107.0 |
| $ 106.9 |
| $ 195.0 |
| $ 202.8 |
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
|
|
|
|
|
|
The following tables show a comparison of various investment yields for the periods indicated:
| At |
| At |
| June 30, |
| December 31, |
| 2008 |
| 2007 |
Imbedded pre-tax yield of cash and invested assets | 4.5% |
| 4.6% |
Imbedded after-tax yield of cash and invested assets | 3.6% |
| 3.6% |
|
| Three Months Ended |
| Six Months Ended | ||||
|
| June 30, |
| June 30, | ||||
|
| 2008 |
| 2007 |
| 2008 |
| 2007 |
Annualized pre-tax yield on average cash and invested assets | 4.9% |
| 5.1% |
| 4.6% |
| 4.8% | |
Annualized after-tax yield on average cash and invested assets | 3.8% |
| 3.9% |
| 3.6% |
| 3.8% |
23
Net Realized Capital (Losses) Gains.
The following table presents the composition of our net realized capital (losses) gains for the periods indicated:
| Three Months Ended June 30, |
| Six Months Ended June 30, | ||||||||||||
(Dollars in millions) | 2008 |
| 2007 |
| Variance |
| % Change |
| 2008 |
| 2007 |
| Variance |
| % Change |
(Losses) gains from sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains | $ 0.2 |
| $ 0.4 |
| $ (0.2) |
| -50.0% |
| $ 1.1 |
| $ 1.0 |
| $ 0.1 |
| 10.0% |
Losses | (4.1) |
| - |
| (4.1) |
| NM |
| (6.1) |
| - |
| (6.1) |
| NM |
Total | (3.9) |
| 0.4 |
| (4.3) |
| NM |
| (5.0) |
| 1.0 |
| (6.0) |
| NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities, fair value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains | - |
| 0.5 |
| (0.5) |
| -100.0% |
| 2.1 |
| 2.6 |
| (0.5) |
| -19.2% |
Losses | - |
| (7.4) |
| 7.4 |
| -100.0% |
| (13.7) |
| (9.1) |
| (4.6) |
| 50.5% |
Total | - |
| (6.9) |
| 6.9 |
| -100.0% |
| (11.6) |
| (6.5) |
| (5.1) |
| 78.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized (losses) gains from sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains | 0.2 |
| 0.9 |
| (0.7) |
| -77.8% |
| 3.2 |
| 3.6 |
| (0.4) |
| -11.1% |
Losses | (4.1) |
| (7.4) |
| 3.3 |
| -44.6% |
| (19.8) |
| (9.1) |
| (10.7) |
| 117.6% |
Total | (3.9) |
| (6.6) |
| 2.7 |
| -40.9% |
| (16.6) |
| (5.5) |
| (11.1) |
| 201.8% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Losses) gains from fair value adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities, fair value | (9.0) |
| 70.0 |
| (79.0) |
| -112.9% |
| (64.1) |
| 101.0 |
| (165.1) |
| -163.5% |
Other invested assets, fair value | (37.9) |
| 26.2 |
| (64.1) |
| -244.7% |
| (72.0) |
| 28.0 |
| (100.0) |
| -357.1% |
Total | (46.9) |
| 96.2 |
| (143.1) |
| -148.8% |
| (136.1) |
| 129.0 |
| (265.1) |
| -205.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net realized (losses) gains | $ (50.8) |
| $ 89.6 |
| $ (140.4) |
| -156.7% |
| $ (152.7) |
| $ 123.5 |
| $ (276.2) |
| -223.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(NM, not meaningful) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and six months ended June 30, 2008, we recorded $46.9 million and $136.1 million of net realized capital losses, respectively, on our equity securities and other invested assets at fair value due to fair value re-measurements. For the three and six months ended June 30, 2007, we recorded $96.2 million and $129.0 million of net realized capital gains, respectively, on our equity securities and other invested assets at fair value due to fair value re-measurements.
24
Segment Results.
Through our subsidiaries, we operate in four segments: U.S. Reinsurance, U.S. Insurance, Specialty Underwriting and International. 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 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 Miami and New Jersey.
These segments are managed in a coordinated fashion with respect to pricing, risk management, control of aggregate catastrophe exposures, capital, investments and support operations. Management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting results.
Underwriting results include earned premium less losses and LAE incurred, commission and brokerage expenses and other underwriting expenses. We measure our underwriting results using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which respectively, divide incurred losses, commissions and brokerage and other underwriting expenses by earned premiums.
Our loss and LAE reserves represent our best estimate of our ultimate liability for unpaid claims. We re-evaluate our estimates on an ongoing basis, including all prior period reserves, taking into consideration all available information and, in particular, recently reported loss claim experience and trends related to prior periods. Such re-evaluations are recorded in incurred losses in the period in which the re-evaluation is made.
25
The following discusses the underwriting results for each of our segments for the periods indicated:
U.S. Reinsurance.
The following table presents the underwriting results and ratios for the U.S. Reinsurance segment for the periods indicated.
| Three Months Ended June 30, |
| Six Months Ended June 30, | ||||||||||
(Dollars in millions) | 2008 |
| 2007 |
| Variance | % Change |
| 2008 |
| 2007 |
| Variance | % Change |
Gross written premiums | $ 200.3 |
| $ 271.7 |
| $ (71.4) | -26.3% |
| $ 434.1 |
| $ 626.0 |
| $ (191.9) | -30.7% |
Net written premiums | 131.1 |
| 203.0 |
| (71.9) | -35.4% |
| 278.5 |
| 464.0 |
| (185.5) | -40.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned | $ 161.9 |
| $ 239.0 |
| $ (77.1) | -32.3% |
| $ 360.0 |
| $ 502.2 |
| $ (142.2) | -28.3% |
Incurred losses and LAE | 84.2 |
| 80.4 |
| 3.8 | 4.7% |
| 205.3 |
| 167.3 |
| 38.0 | 22.7% |
Commission and brokerage | 45.5 |
| 61.1 |
| (15.6) | -25.5% |
| 98.3 |
| 115.8 |
| (17.5) | -15.1% |
Other underwriting expenses | 6.9 |
| 7.3 |
| (0.4) | -5.5% |
| 15.6 |
| 13.8 |
| 1.8 | 13.0% |
Underwriting gain | $ 25.2 |
| $ 90.1 |
| $ (64.9) | -72.0% |
| $ 40.8 |
| $ 205.2 |
| $ (164.4) | -80.1% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Point Chg |
|
|
|
|
|
| Point Chg |
Loss ratio | 52.0% |
| 33.7% |
|
| 18.3 |
| 57.0% |
| 33.3% |
|
| 23.7 |
Commission and brokerage ratio | 28.1% |
| 25.6% |
|
| 2.5 |
| 27.3% |
| 23.1% |
|
| 4.2 |
Other underwriting expense ratio | 4.3% |
| 3.0% |
|
| 1.3 |
| 4.4% |
| 2.7% |
|
| 1.7 |
Combined ratio | 84.4% |
| 62.3% |
|
| 22.1 |
| 88.7% |
| 59.1% |
|
| 29.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
|
|
|
|
|
|
|
|
|
|
Premiums. Gross written premiums decreased by 26.3% to $200.3 million for the three months ended June 30, 2008 from $271.7 million for the three months ended June 30, 2007, primarily due to a $46.4 million (28.5%) decrease in treaty property volume, a $13.7 million (35.8%) decrease in facultative volume and an $11.0 million (15.7%) decrease in treaty casualty volume. Property premiums were lower due to increased common account reinsurance protections on some Florida business and non-renewal of several agreements. The treaty casualty market remains highly competitive with lower rates, demands for higher ceding commissions, relaxed terms and higher retention levels by ceding companies resulting in their retaining a greater proportion of gross premiums. Net written premiums decreased by 35.4% to $131.1 million for the three months ended June 30, 2008 compared to $203.0 million for the three months ended June 30, 2007, primarily due to the decrease in gross written premium and increased quota share cessions with affiliates. Net premiums earned decreased by 32.3% to $161.9 million for the three months ended June 30, 2008 compared to $239.0 million for the three months ended June 30, 2007, in line with the change in net written premiums.
Gross written premiums decreased by 30.7% to $434.1 million for the six months ended June 30, 2008 from $626.0 million for the six months ended June 30, 2007, primarily due to a $111.9 million (30.6%) decrease in treaty property volume, a $43.9 million (25.5%) decrease in treaty casualty volume and a $35.9 million (41.0%) decrease in facultative volume. Net written premiums decreased by 40.0% to $278.5 million for the six months ended June 30, 2008 compared to $464.0 million for the six months ended June 30, 2007. Net premiums earned decreased by 28.3% to $360.0 million for the six months ended June 30, 2008 compared to $502.2 million for the six months ended June 30, 2007. Variances for the six months were driven by the same factors as for the three month periods as discussed above.
26
Incurred Losses and LAE. The following table presents the incurred losses and LAE for the U.S. Reinsurance segment for the periods indicated.
| Three Months Ended June 30, |
|
|
|
| ||||||
| 2008 |
| 2007 |
| Variance | ||||||
| Current | Prior | Total |
| Current | Prior | Total |
| Current | Prior | Total |
(Dollars in millions) | Year | Years | Incurred |
| Year | Years | Incurred |
| Year | Years | Incurred |
Attritional | $ 76.3 | $ 0.1 | $ 76.4 |
| $ 99.4 | $ (29.0) | $ 70.5 |
| $ (23.1) | $ 29.1 | $ 5.9 |
Catastrophes | 6.0 | 1.9 | 7.9 |
| - | (6.5) | (6.5) |
| 6.0 | 8.4 | 14.4 |
A&E | - | - | - |
| - | 16.5 | 16.5 |
| - | (16.5) | (16.5) |
Total segment | $ 82.3 | $ 2.0 | $ 84.2 |
| $ 99.4 | $ (19.0) | $ 80.4 |
| $ (17.1) | $ 21.0 | $ 3.8 |
Loss ratio | 50.8% | 1.2% | 52.0% |
| 41.6% | -8.0% | 33.7% |
| 9.2 | 9.2 | 18.3 |
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, |
|
|
|
| ||||||
| 2008 |
| 2007 |
| Variance | ||||||
| Current | Prior | Total |
| Current | Prior | Total |
| Current | Prior | Total |
(Dollars in millions) | Year | Years | Incurred |
| Year | Years | Incurred |
| Year | Years | Incurred |
Attritional | $ 188.8 | $ 4.5 | $ 193.3 |
| $ 213.5 | $ (48.5) | $ 164.9 |
| $ (24.7) | $ 53.0 | $ 28.4 |
Catastrophes | 6.0 | 6.0 | 12.0 |
| - | (14.1) | (14.1) |
| 6.0 | 20.1 | 26.1 |
A&E | - | - | - |
| - | 16.5 | 16.5 |
| - | (16.5) | (16.5) |
Total segment | $ 194.8 | $ 10.5 | $ 205.3 |
| $ 213.5 | $ (46.2) | $ 167.3 |
| $ (18.7) | $ 56.7 | $ 38.0 |
Loss ratio | 54.1% | 2.9% | 57.0% |
| 42.5% | -9.2% | 33.3% |
| 11.6 | 12.1 | 23.7 |
|
|
|
|
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
|
|
|
|
|
|
|
Incurred losses and LAE increased by 4.7% to $84.2 million for the three months ended June 30, 2008 from $80.4 million for the three months ended June 30, 2007. Incurred losses were 18.3 points higher for the three months ended June 30, 2008 compared to the three months ended June 30, 2007. Development on prior years’ attritional reserves was slightly adverse in the second quarter of 2008 compared to $29.0 million favorable in the second quarter of 2007, which contributed 12.2 points to the increase. In addition, catastrophe losses, period over period, for both the current year and prior years’ losses increased 7.6 points, as we incurred losses on May 2008 U.S. tornadoes and strengthened reserves for 2005 hurricanes. Current year attritional losses were 5.5 points higher in the second quarter of 2008 compared to the second quarter of 2007. Partially offsetting the above was 6.9 points due to no reserve adjustments for A&E losses for the 2008 quarter as compared to the same period in 2007, which experienced adverse development.
Incurred losses and LAE increased by 22.7% to $205.3 million for the six months ended June 30, 2008 from $167.3 million for the six months ended June 30, 2007. Incurred losses were 23.7 points higher for the six months ended June 30, 2008 compared to the six months ended June 30, 2007. Of the 23.7 points, 10.9 points were due to unfavorable reserve development on prior years’ attritional losses compared with favorable development in 2007, 9.9 points due to increased current year attritional losses and 6.1 points due to current and prior years’ catastrophe losses, partially offset by a 3.3 point decrease due to no reserve adjustments in 2008 for A&E losses, which experienced adverse development in 2007.
Segment Expenses. Commission and brokerage expenses decreased by 25.5% to $45.5 million for the three months ended June 30, 2008 from $61.1 million for the three months ended June 30, 2007 and by 15.1% to $98.3 million for the six months ended June 30, 2008 from $115.8 million for the six months
27
ended June 30, 2007, primarily due to the decrease in net earned premium volume and the changes in the business mix, partially offset by higher commission rates due to a more competitive market.
Segment other underwriting expenses for the three months ended June 30, 2008 decreased slightly to $6.9 million from $7.3 million for the three months ended June 30, 2007. For the six months ended June 30, 2008, segment other underwriting expenses increased to $15.6 million from $13.8 million for the six months ended June 30, 2007, primarily due to the allocation of certain corporate charges to segments starting in the fourth quarter of 2007, 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.
| Three Months Ended June 30, |
| Six Months Ended June 30, | ||||||||||
(Dollars in millions) | 2008 |
| 2007 |
| Variance | % Change |
| 2008 |
| 2007 |
| Variance | % Change |
Gross written premiums | $ 191.0 |
| $ 161.6 |
| $ 29.4 | 18.2% |
| $ 401.4 |
| $ 379.0 |
| $ 22.4 | 5.9% |
Net written premiums | 104.2 |
| 94.5 |
| 9.7 | 10.3% |
| 214.4 |
| 234.1 |
| (19.7) | -8.4% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned | $ 121.1 |
| $ 121.6 |
| $ (0.5) | -0.4% |
| $ 264.2 |
| $ 262.1 |
| $ 2.1 | 0.8% |
Incurred losses and LAE | 161.7 |
| 84.1 |
| 77.6 | 92.3% |
| 257.6 |
| 225.1 |
| 32.5 | 14.4% |
Commission and brokerage | 22.9 |
| 17.1 |
| 5.8 | 33.9% |
| 43.6 |
| 38.3 |
| 5.3 | 13.8% |
Other underwriting expenses | 15.9 |
| 12.0 |
| 3.9 | 32.5% |
| 30.2 |
| 24.4 |
| 5.8 | 23.8% |
Underwriting (loss) gain | $ (79.4) |
| $ 8.3 |
| $ (87.7) | NM |
| $ (67.3) |
| $ (25.7) |
| $ (41.6) | 161.9% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Point Chg |
|
|
|
|
|
| Point Chg |
Loss ratio | 133.5% |
| 69.2% |
|
| 64.3 |
| 97.5% |
| 85.9% |
|
| 11.6 |
Commission and brokerage ratio | 18.9% |
| 14.1% |
|
| 4.8 |
| 16.5% |
| 14.6% |
|
| 1.9 |
Other underwriting expense ratio | 13.1% |
| 9.8% |
|
| 3.3 |
| 11.5% |
| 9.3% |
|
| 2.2 |
Combined ratio | 165.5% |
| 93.1% |
|
| 72.4 |
| 125.5% |
| 109.8% |
|
| 15.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(NM, not meaningful) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
|
|
|
|
|
|
|
|
|
|
Premiums. Gross written premiums increased by 18.2% to $191.0 million for the three months ended June 30, 2008 from $161.6 million for the three months ended June 30, 2007. Our newer programs, most notably the Brownstone program, plus growth in the CV Starr program, more than offset declines in our more mature programs, principally the workers’ compensation and contractors business. Net written premiums increased by 10.3% to $104.2 million for the three months ended June 30, 2008 compared to $94.5 million for the three months ended June 30, 2007. The net written premium increase was less than the increase in gross written premiums primarily due to increased reinsurance cessions on select larger new programs and increased quota share cessions to affiliates. Net premiums earned decreased slightly to $121.1 million for the three months ended June 30, 2008 from $121.6 million for the three months ended June 30, 2007. 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 reflected at the initiation of the coverage period.
Gross written premiums increased by 5.9% to $401.4 million for the six months ended June 30, 2008 from $379.0 million for the six months ended June 30, 2007. Net written premiums decreased by 8.4% to $214.4 million for the six months ended June 30, 2008 compared to $234.1 million for the six months ended June 30, 2007. Net premiums earned increased slightly to $264.2 million for the six months ended
28
June 30, 2008 from $262.1 million for the six months ended June 30, 2007. Variances for the six months were driven by the same factors as for the three month periods as discussed above.
Incurred Losses and LAE. The following table presents the incurred losses and LAE for the U.S. Insurance segment for the periods indicated.
| Three Months Ended June 30, |
|
|
|
| ||||||
| 2008 |
| 2007 |
| Variance | ||||||
| Current | Prior | Total |
| Current | Prior | Total |
| Current | Prior | Total |
(Dollars in millions) | Year | Years | Incurred |
| Year | Years | Incurred |
| Year | Years | Incurred |
Attritional | $ 91.6 | $ 70.3 | $ 161.9 |
| $ 93.2 | $ (8.9) | $ 84.3 |
| $ (1.6) | $ 79.2 | $ 77.6 |
Catastrophes | - | (0.2) | (0.2) |
| - | (0.2) | (0.2) |
| - | - | - |
Total segment | $ 91.6 | $ 70.1 | $ 161.7 |
| $ 93.2 | $ (9.1) | $ 84.1 |
| $ (1.6) | $ 79.2 | $ 77.6 |
Loss ratio | 75.7% | 57.8% | 133.5% |
| 76.7% | -7.5% | 69.2% |
| (1.0) | 65.3 | 64.3 |
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, |
|
|
|
| ||||||
| 2008 |
| 2007 |
| Variance | ||||||
| Current | Prior | Total |
| Current | Prior | Total |
| Current | Prior | Total |
(Dollars in millions) | Year | Years | Incurred |
| Year | Years | Incurred |
| Year | Years | Incurred |
Attritional | $ 181.1 | $ 76.7 | $ 257.8 |
| $ 190.6 | $ 34.8 | $ 225.4 |
| $ (9.5) | $ 41.9 | $ 32.4 |
Catastrophes | - | (0.2) | (0.2) |
| - | (0.3) | (0.3) |
| - | 0.1 | 0.1 |
Total segment | $ 181.1 | $ 76.5 | $ 257.6 |
| $ 190.6 | $ 34.5 | $ 225.1 |
| $ (9.5) | $ 42.0 | $ 32.5 |
Loss ratio | 68.5% | 29.0% | 97.5% |
| 72.7% | 13.2% | 85.9% |
| (4.2) | 15.8 | 11.6 |
|
|
|
|
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
|
|
|
|
|
|
|
Incurred losses and LAE increased by 92.3% to $161.7 million for the three months ended June 30, 2008 from $84.1 million for the three months ended June 30, 2007, as the segment loss ratio increased by 64.3 points to 133.5%. The increase of 64.3 points included 57.8 points, $70.0 million, of unfavorable development on prior years’ losses on an auto loan credit insurance program, which is in run-off. The recent deterioration in general economic conditions and its apparent adverse impact on loan performance nationally, particularly sub-prime loan performance, has resulted in unfavorable increases in loan default rates and claim amounts. We have recently commuted our remaining liability on this program with the largest policyholder, representing approximately one third of the remaining loss exposure. Therefore, given the magnitude of our current reserves, the maturity of the remaining insured portfolio and the reduced principal exposure, we believe future adverse loss development related to this program should not be material.
Incurred losses and LAE increased by 14.4% to $257.6 million for the six months ended June 30, 2008 from $225.1 million for the six months ended June 30, 2007, as the segment loss ratio increased by 11.6 points to 97.5%. The increase is principally due to the increased adverse reserve development in 2008 compared to 2007. For the six months ended June 30, 2008, we strengthened reserves for an auto loan credit insurance program by $25.6 million more than for the six months ended June 30, 2007.
Segment Expenses.Commission and brokerage expenses increased by 33.9% to $22.9 million for the three months ended June 30, 2008 from $17.1 million for the three months ended June 30, 2007 and by 13.8% to $43.6 million for the six months ended June 30, 2008 from $38.3 million for the six months ended June 30, 2007, principally due to higher commission rates on new programs. Segment other underwriting
29
expenses for the three months ended June 30, 2008 increased to $15.9 million as compared to $12.0 million for the three months ended June 30, 2007 and for the six months ended June 30, 2008, increased to $30.2 million as compared to $24.2 million for the six months ended June 30, 2007. These increases were due to increased compensation costs associated with increased staff and the allocation of certain corporate charges to segments starting in the fourth quarter of 2007, which had been previously retained in corporate expenses.
Specialty Underwriting.
The following table presents the underwriting results and ratios for the Specialty Underwriting segment for the periods indicated.
| Three Months Ended June 30, |
| Six Months Ended June 30, | ||||||||||
(Dollars in millions) | 2008 |
| 2007 |
| Variance | % Change |
| 2008 |
| 2007 |
| Variance | % Change |
Gross written premiums | $ 84.2 |
| $ 76.4 |
| $ 7.8 | 10.2% |
| $ 139.1 |
| $ 131.1 |
| $ 8.0 | 6.1% |
Net written premiums | 57.3 |
| 55.6 |
| 1.7 | 3.1% |
| 94.2 |
| 92.1 |
| 2.1 | 2.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned | $ 55.5 |
| $ 56.3 |
| $ (0.8) | -1.4% |
| $ 91.0 |
| $ 95.0 |
| $ (4.0) | -4.2% |
Incurred losses and LAE | 25.9 |
| 36.9 |
| (11.0) | -29.8% |
| 44.1 |
| 66.8 |
| (22.7) | -34.0% |
Commission and brokerage | 11.8 |
| 9.4 |
| 2.4 | 25.5% |
| 21.8 |
| 18.7 |
| 3.1 | 16.6% |
Other underwriting expenses | 1.8 |
| 1.8 |
| - | 0.0% |
| 4.2 |
| 3.4 |
| 0.8 | 23.5% |
Underwriting gain | $ 15.9 |
| $ 8.3 |
| $ 7.6 | 91.6% |
| $ 20.9 |
| $ 6.1 |
| $ 14.8 | 242.6% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Point Chg |
|
|
|
|
|
| Point Chg |
Loss ratio | 46.7% |
| 65.6% |
|
| (18.9) |
| 48.5% |
| 70.3% |
|
| (21.8) |
Commission and brokerage ratio | 21.2% |
| 16.6% |
|
| 4.6 |
| 23.9% |
| 19.7% |
|
| 4.2 |
Other underwriting expense ratio | 3.4% |
| 3.1% |
|
| 0.3 |
| 4.7% |
| 3.5% |
|
| 1.2 |
Combined ratio | 71.3% |
| 85.3% |
|
| (14.0) |
| 77.1% |
| 93.5% |
|
| (16.4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(NM, not meaningful) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
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|
|
Premiums. Gross written premiums increased by 10.2% to $84.2 million for the three months ended June 30, 2008 from $76.4 million for the three months ended June 30, 2007, primarily due to a $21.0 million (70.4%) increase in marine premiums, principally due to two new accounts, partially offset by a $10.3 million (86.5%) decrease in aviation premiums and $3.1 million (11.6%) decrease in A&H premiums. Net written premiums increased by 3.1% to $57.3 million for the three months ended June 30, 2008 compared to $55.6 million for the three months ended June 30, 2007, primarily due to the increase in gross written premiums, partially offset by an increase in the quota share cessions to affiliates. Net premiums earned decreased by 1.4% to $55.5 million for the three months ended June 30, 2008 compared to $56.3 million for the same period in 2007. 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 reflected at the initiation of the coverage period.
Gross written premiums increased by 6.1% to $139.1 million for the six months ended June 30, 2008 from $131.1 million for the six months ended June 30, 2007, primarily due to a $25.1 million (58.0%) increase in marine premiums and a $1.9 million (11.0%) increase in surety premiums, partially offset by a decrease of $13.6 million (67.5%) in aviation premiums and a $5.4 million (10.8%) decrease in A&H premiums. Net written premiums increased by 2.3% to $94.2 million for the six months ended June 30, 2008 compared to $92.1 million for the six months ended June 30, 2007. Net premiums earned decreased by 4.2% to $91.0 million for the six months ended June 30, 2008 compared to $95.0 million for the same period in 2007.
30
The reasons for the variances, period over period, for the six months ended June 30, 2008 and 2007, were the same as those discussed for the three months ended June 30, 2008 and 2007.
Incurred Losses and LAE. The following table presents the incurred losses and LAE for the Specialty Underwriting segment for the periods indicated.
| Three Months Ended June 30, |
|
|
|
| ||||||
| 2008 |
| 2007 |
| Variance | ||||||
| Current | Prior | Total |
| Current | Prior | Total |
| Current | Prior | Total |
(Dollars in millions) | Year | Years | Incurred |
| Year | Years | Incurred |
| Year | Years | Incurred |
Attritional | $ 45.1 | $ (19.2) | $ 25.9 |
| $ 30.5 | $ 0.3 | $ 30.9 |
| $ 14.6 | $ (19.5) | $ (5.0) |
Catastrophes | - | - | - |
| - | 6.1 | 6.1 |
| - | (6.1) | (6.1) |
Total segment | $ 45.1 | $ (19.2) | $ 25.9 |
| $ 30.5 | $ 6.4 | $ 36.9 |
| $ 14.6 | $ (25.6) | $ (11.0) |
Loss ratio | 81.4% | -34.7% | 46.7% |
| 54.2% | 11.3% | 65.6% |
| 27.2 | (46.0) | (18.9) |
|
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|
|
| Six Months Ended June 30, |
|
|
|
| ||||||
| 2008 |
| 2007 |
| Variance | ||||||
| Current | Prior | Total |
| Current | Prior | Total |
| Current | Prior | Total |
(Dollars in millions) | Year | Years | Incurred |
| Year | Years | Incurred |
| Year | Years | Incurred |
Attritional | $ 65.0 | $ (22.2) | $ 42.7 |
| $ 53.8 | $ 0.3 | $ 54.1 |
| $ 11.2 | $ (22.5) | $ (11.4) |
Catastrophes | - | 1.4 | 1.4 |
| - | 12.7 | 12.7 |
| - | (11.3) | (11.3) |
Total segment | $ 65.0 | $ (20.8) | $ 44.1 |
| $ 53.8 | $ 13.0 | $ 66.8 |
| $ 11.2 | $ (33.8) | $ (22.7) |
Loss ratio | 71.4% | -22.9% | 48.5% |
| 56.6% | 13.7% | 70.3% |
| 14.8 | (36.6) | (21.8) |
|
|
|
|
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
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|
Incurred losses and LAE decreased by 29.8% to $25.9 million for the three months ended June 30, 2008 compared to $36.9 million for the three months ended June 30, 2007 and by 34.0% to $44.1 million for the six months ended June 30, 2008 compared to $66.8 million for the six months ended June 30, 2007. Overall, the loss ratio was lower by 18.9 points for the second quarter of 2008 and by 21.8 points for the six months ended June 30, 2008 compared to the same period in 2007. These variances were the result of favorable development on prior years’ attritional loss reserves for both the three months and the six months of 35.3 points and 24.8 points, respectively, as favorable development on aviation, surety and A&H was partially offset by unfavorable development on marine reserves, for the six months ended June 30, 2008. In addition, development of both the three and six months prior years’ catastrophe losses decreased to relatively insignificant levels for the 2008 periods, which contributed 10.7 points and 11.8 points, respectively, to the decrease.
Segment Expenses. Commission and brokerage increased by 25.5% to $11.8 million for the three months ended June 30, 2008 from $9.4 million for the three months ended June 30, 2007 and by 16.6% to $21.8 million for the six months ended June 30, 2008 from $18.7 million for the six months ended June 30, 2007 as increased competition has driven commission rates higher.
Segment other underwriting expenses remained unchanged at $1.8 million for the three months ended June 30, 2008 and 2007. Segment other underwriting expenses increased to $4.2 million for the six months ended June 30, 2008 from $3.4 million for the six months ended June 30, 2007, primarily due to the allocation of certain corporate charges to segments, which had been previously retained in corporate expenses.
31
International.
The following table presents the underwriting results and ratios for the International segment for the periods indicated.
| Three Months Ended June 30, |
| Six Months Ended June 30, | ||||||||||
(Dollars in millions) | 2008 |
| 2007 |
| Variance | % Change |
| 2008 |
| 2007 |
| Variance | % Change |
Gross written premiums | $ 219.0 |
| $ 202.6 |
| $ 16.4 | 8.1% |
| $ 405.4 |
| $ 376.0 |
| $ 29.4 | 7.8% |
Net written premiums | 133.2 |
| 142.8 |
| (9.6) | -6.7% |
| 249.5 |
| 264.0 |
| (14.5) | -5.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned | $ 133.0 |
| $ 148.5 |
| $ (15.5) | -10.4% |
| $ 256.2 |
| $ 276.0 |
| $ (19.8) | -7.2% |
Incurred losses and LAE | 87.3 |
| 113.9 |
| (26.6) | -23.4% |
| 161.8 |
| 182.1 |
| (20.3) | -11.1% |
Commission and brokerage | 31.3 |
| 34.3 |
| (3.0) | -8.7% |
| 57.8 |
| 63.1 |
| (5.3) | -8.4% |
Other underwriting expenses | 4.7 |
| 4.3 |
| 0.4 | 9.3% |
| 9.8 |
| 8.1 |
| 1.7 | 21.0% |
Underwriting gain (loss) | $ 9.6 |
| $ (3.9) |
| $ 13.5 | NM |
| $ 26.8 |
| $ 22.7 |
| $ 4.1 | 18.1% |
|
|
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|
|
|
|
|
|
|
|
|
|
| Point Chg |
|
|
|
|
|
| Point Chg |
Loss ratio | 65.6% |
| 76.7% |
|
| (11.1) |
| 63.2% |
| 66.0% |
|
| (2.8) |
Commission and brokerage ratio | 23.6% |
| 23.1% |
|
| 0.5 |
| 22.5% |
| 22.9% |
|
| (0.4) |
Other underwriting expense ratio | 3.6% |
| 2.9% |
|
| 0.7 |
| 3.8% |
| 2.9% |
|
| 0.9 |
Combined ratio | 92.8% |
| 102.7% |
|
| (9.9) |
| 89.5% |
| 91.8% |
|
| (2.3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(NM, not meaningful) |
|
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|
|
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
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|
|
Premiums.Gross written premiums increased by 8.1% to $219.0 million for the three months ended June 30, 2008 from $202.6 million for the three months ended June 30, 2007 and by 7.8% to $405.4 million for the six months ended June 30, 2008 from $376.0 million for the six months ended June 30, 2007. Approximately $1 million and $13 million of these increases were due to currency movement for the three and six month periods ended June 30, 2008 compared to the periods ended June 30, 2007, respectively. In addition, we wrote new business in Latin America and the Middle East and experienced some growth from existing business in Asia, in local currency terms. However, premiums from our Canadian business were down somewhat as we continue to see our Canadian cedants retain more risk and corresponding premium.
Net written premiums decreased by 6.7% to $133.2 million for the three months ended June 30, 2008 compared to $142.8 million for the three months ended June 30, 2007 and by 5.5% to $249.5 million for the six months ended June 30, 2008 compared to $264.0 million for the six months ended June 30, 2007, primarily due to increased quota share cessions to affiliates. Net premiums earned decreased by 10.4% to $133.0 million for the three months ended June 30, 2008 compared to $148.5 million for the same period in 2007 and by 7.2% to $256.2 million for the six months ended June 30, 2008 compared to $276.0 million for the same period in 2007. 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 reflected at the initiation of the coverage period.
32
Incurred Losses and LAE. The following table presents the incurred losses and LAE for the International segment for the periods indicated.
| Three Months Ended June 30, |
|
|
|
| ||||||
| 2008 |
| 2007 |
| Variance | ||||||
| Current | Prior | Total |
| Current | Prior | Total |
| Current | Prior | Total |
(Dollars in millions) | Year | Years | Incurred |
| Year | Years | Incurred |
| Year | Years | Incurred |
Attritional | $ 78.2 | $ 4.0 | $ 82.2 |
| $ 79.3 | $ (0.4) | $ 78.8 |
| $ (1.1) | $ 4.4 | $ 3.4 |
Catastrophes | 6.0 | (0.9) | 5.1 |
| 33.2 | 1.8 | 35.0 |
| (27.2) | (2.7) | (29.9) |
Total segment | $ 84.2 | $ 3.1 | $ 87.3 |
| $ 112.5 | $ 1.4 | $ 113.9 |
| $ (28.3) | $ 1.7 | $ (26.6) |
Loss ratio | 63.3% | 2.3% | 65.6% |
| 75.7% | 0.9% | 76.7% |
| (12.4) | 1.4 | (11.1) |
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, |
|
|
|
| ||||||
| 2008 |
| 2007 |
| Variance | ||||||
| Current | Prior | Total |
| Current | Prior | Total |
| Current | Prior | Total |
(Dollars in millions) | Year | Years | Incurred |
| Year | Years | Incurred |
| Year | Years | Incurred |
Attritional | $ 148.3 | $ 1.5 | $ 149.8 |
| $ 149.6 | $ (8.0) | $ 141.5 |
| $ (1.3) | $ 9.5 | $ 8.3 |
Catastrophes | 10.8 | 1.2 | 12.0 |
| 37.5 | 3.1 | 40.6 |
| (26.7) | (1.9) | (28.6) |
Total segment | $ 159.1 | $ 2.7 | $ 161.8 |
| $ 187.0 | $ (4.9) | $ 182.1 |
| $ (27.9) | $ 7.6 | $ (20.3) |
Loss ratio | 62.1% | 1.1% | 63.2% |
| 67.8% | -1.8% | 66.0% |
| (5.7) | 2.9 | (2.8) |
|
|
|
|
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
|
|
|
|
|
|
|
Incurred losses and LAE decreased by 23.4% to $87.3 million for the three months ended June 30, 2008 compared to $113.9 million for the same period in 2007 and by 11.1% to $161.8 million for the six months ended June 30, 2008 compared to $182.1 million for the same period in 2007. The segment loss ratio decreased by 11.1 points and 2.8 points for the three and six month periods ended June 30, 2008 compared to the same periods in 2007, respectively. The principal driver of the favorable variances was lower current year catastrophe losses in 2008 compared to 2007 for both the three and six month periods. The principal current year catastrophe loss in 2008 was the snowstorm in China, while the largest 2007 catastrophe losses included the winds and floods in New South Wales and floods in Jakarta.
Segment Expenses. Commission and brokerage expense decreased by 8.7% to $31.3 million for the three months ended June 30, 2008 from $34.3 million for the three months ended June 30, 2007 and by 8.4% to $57.8 million for the six months ended June 30, 2008 from $63.1 million for the six months ended June 30, 2007, which were in line with the decrease in premiums earned.
Segment other underwriting expenses for the three months ended June 30, 2008 increased to $4.7 million compared to $4.3 million for the three months ended June 30, 2007 and to $9.8 million compared to $8.1 million for the six months ended June 30, 2007, primarily due to the allocation of certain corporate charges to segments, which had been previously retained in corporate expenses.
Market Sensitive Instruments.
The Securities and Exchange Commission’s (“SEC”) Financial Reporting Release #48 requires registrants to clarify and expand upon the existing financial statement disclosure requirements for derivative financial instruments, derivative commodity instruments and other financial instruments (collectively, “market sensitive instruments”). We do not generally enter into market sensitive instruments for trading purposes.
33
Our investment strategy seeks to maximize after-tax income through a high quality, diversified, taxable and tax-preferenced fixed maturity portfolio, while maintaining an adequate level of liquidity. Our mix of taxable and tax-preferenced investments is adjusted continuously, consistent with our current and projected operating results, market conditions and our tax position. The fixed maturities in the investment portfolio are comprised of non-trading available for sale securities. Additionally, we invest in equity securities, which we believe will enhance the risk-adjusted total return of the investment portfolio.
Our overall investment strategy considers the scope of present and anticipated Company operations. In particular, estimates of the financial impact from non-investment asset and liability transactions, together with our capital structure and other factors, are used to develop a net liability analysis. This analysis includes estimated payout characteristics for which our investments provide liquidity. This analysis is considered in the development of specific investment strategies for asset allocation, duration and credit quality. The change in overall market sensitive risk exposure principally reflects the asset changes that took place during the period.
Interest Rate Risk. Our $8.7 billion investment portfolio at June 30, 2008 is principally comprised of fixed maturity securities, which are generally subject to interest rate risk and some foreign currency exchange rate risk, and equity securities which are subject to price fluctuations and some foreign exchange rate risk. The impact of the foreign exchange risks on the investment portfolio is largely 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 $673.1 million of mortgage-backed securities. Prepayment risk results from potential accelerated principal payments that shorten the average life and thus the expected yield of the security.
The table below displays the potential impact of market value fluctuations and after-tax unrealized appreciation on our fixed maturity portfolio (including $436.7 million of short-term investments) as of June 30, 2008 based on upward and downward parallel and immediate 100 and 200 basis point shifts in interest rates. For legal entities with a U.S. dollar functional currency, this modeling was performed on each security individually. To generate appropriate price estimates on mortgage-backed securities, changes in prepayment expectations under different interest rate environments were taken into account. For legal entities with a non-U.S. dollar functional currency, the effective duration of the involved portfolio of securities was used as a proxy for the market value change under the various interest rate change scenarios.
| Impact of Interest Rate Shift in Basis Points |
| ||||||||
| At June 30, 2008 |
| ||||||||
(Dollars in millions) | -200 |
| -100 |
| 0 |
| 100 |
| 200 |
|
Total Market Value | $ 7,964.7 |
| $ 7,612.3 |
| $ 7,220.2 |
| $ 6,780.4 |
| $ 6,353.1 |
|
Market Value Change from Base (%) | 10.3 | % | 5.4 | % | 0.0 | % | -6.1 | % | -12.0 | % |
Change in Unrealized Appreciation |
|
|
|
|
|
|
|
|
|
|
After-tax from Base ($) | $ 484.0 |
| $ 254.9 |
| $ - |
| $ (285.9) |
| $ (563.6) |
|
We had $7,491.1 million and $7,538.7 million of gross reserves for losses and LAE as of June 30, 2008 and December 31, 2007, respectively. These amounts are recorded at their nominal value, as opposed to present value, which would reflect a discount adjustment to reflect the time value of money. Since losses are paid out over a period of time, the present value of the reserves is less than the nominal value. As interest rates rise, the present value of the reserves decreases and, conversely, as interest rates decline, the
34
present value increases. These movements are the opposite of the interest rate impacts on the fair value of investments. While the difference between present value and nominal value is not reflected in our financial statements, our financial results will include investment income over time from the investment portfolio until the claims are paid. Our fixed income portfolio has an expected duration that is reasonably consistent with our loss and loss reserve obligations.
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. Our equity investments consist 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 major exchanges. The primary objective of the equity portfolio is to obtain greater total return relative to bonds over time through market appreciation and dividend income.
The table below displays the impact on the fair value and the after-tax change in fair value of a 10% and 20% change in equity prices up and down for the period indicated. All amounts are in U.S. dollars and are presented in millions.
| Impact of Percentage Change in Equity Values | ||||
| At June 30, 2008 | ||||
(Dollars in millions) | -20% | -10% | 0% | 10% | 20% |
Fair Value of the Equity Portfolio | $ 449.2 | $ 505.3 | $ 561.5 | $ 617.6 | $ 673.8 |
After-tax Change in Fair Value | $ (71.7) | $ (35.9) | $ - | $ 35.9 | $ 71.7 |
Foreign Currency Risk. Foreign currency risk is the potential change in value, income and cash flow arising from adverse changes in foreign currency exchange rates. Each of our non-U.S. (“foreign”) operations maintains capital in the currency of the country of its geographic location consistent with local regulatory guidelines. Generally, we prefer to maintain the capital of our 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 our foreign operations are the Canadian Dollar, the British Pound Sterling and the Euro. We mitigate foreign exchange exposure by generally matching the currency and duration of our assets to our corresponding operating liabilities. In accordance with FAS No. 52 “Foreign Currency Translation”, we translate the assets, liabilities and income of non-U.S. dollar functional currency legal entities to the U.S. dollar. This translation amount is reported as a component of other comprehensive income. As of June 30, 2008 there has been no material change in exposure to foreign exchange rates as compared to December 31, 2007.
Safe Harbor Disclosure.
This report contains forward-looking statements within the meaning of the U.S. federal securities laws. We intend these forward-looking statements to be covered by the safe harbor provisions for forward looking-statements in the federal securities laws. In some cases, these statements can be identified by the use of forward-looking words such as “may”, “will”, “should”, “could”, “anticipate”, “estimate”, “expect”, “plan”, “believe”, “predict”, “potential” and “intend”. Forward-looking statements contained in this report include information regarding our reserves for losses and LAE, the adequacy of our provision for uncollectible balances, estimates of our catastrophe exposure, the effects of catastrophic events on our financial statements and the ability of our subsidiaries to pay dividends. Forward-looking statements only reflect our expectations and are not guarantees of performance. These statements involve risks, uncertainties and assumptions. Actual events or results may differ materially from our expectations. Important factors that could cause our actual events or results to be materially different from our expectations include the
35
uncertainties that surround the estimating of reserves for losses and LAE, those discussed in Note 5 of Notes to Consolidated Financial Statements (unaudited) included in this report and the risks described under the caption “Risk Factors” in our most recently filed Annual Report on Form 10-K, PART I, ITEM 1A. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
36
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Instruments. See “Market Sensitive Instruments” in PART I – ITEM 2.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures.
As of the end of the period covered by this report, our management carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on their evaluation and solely because of our failure to file the required Management’s Annual Report on Internal Control over Financial Reporting in our Annual Report on Form 10-K when it was filed on March 31, 2008, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this quarterly report. We remedied this failure by amending our Annual Report on Form 10-K to provide the required report of management.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls will prevent or detect all errors. A control system, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, have been detected. These inherent limitations include the realities that disclosure requirements may be misinterpreted and judgments in decision-making may be inexact.
Changes in Internal Control over Financial Reporting.
As required by Rule 13a-15(d) under the Exchange Act, our management, with the participation of the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this report.
PART II
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, we are involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine our rights and obligations under insurance, reinsurance and other contractual agreements. In some disputes, we seek to enforce our rights under an agreement or to collect funds owing to us. In other matters, we are resisting attempts by others to collect funds or enforce alleged rights. These disputes arise from time to time and are ultimately resolved through both informal and formal means, including negotiated resolution, arbitration and litigation. In all such matters, we believe that our positions are legally and commercially reasonable. While the final outcome of these matters cannot be predicted with certainty, we do not believe that any of these matters, when finally resolved, will have a material adverse effect on our 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 our results of operations in that period.
In May 2005, we received and responded to a subpoena from the SEC seeking information regarding certain loss mitigation insurance products. Group, our parent, has stated that we will fully cooperate with this and any future inquiries and that we do not believe that it has engaged in any improper business practices with respect to loss mitigation insurance products.
Our insurance subsidiaries have also received and have responded to broadly distributed information requests by state regulators including among others, from Delaware and Georgia.
ITEM 1A. RISK FACTORS
No material changes.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibit Index:
Exhibit No. | Description |
31.1 | Section 302 Certification of Joseph V. Taranto |
31.2 | Section 302 Certification of Craig Eisenacher |
32.1 | Section 906 Certification of Joseph V. Taranto and Craig Eisenacher |
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Everest Reinsurance Holdings, Inc. | |||||||||
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Signatures | |||||||||
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report | |||||||||
to be signed on its behalf by the undersigned thereunto duly authorized. | |||||||||
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| Everest Reinsurance Holdings, Inc. |
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| (Registrant) |
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| /S/ CRAIG EISENACHER |
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| Craig Eisenacher |
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| Executive Vice President and |
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| Chief Financial Officer |
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| (Duly Authorized Officer and Principal Financial Officer)
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Dated: August 14, 2008
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