UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C 20549 FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31,
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Commission file number 1-14527 EVEREST REINSURANCE HOLDINGS, INC. (Exact name of registrant as specified in its charter)
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Delaware (State or other jurisdiction of incorporation or organization) |
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477 Martinsville Road Post Office Box 830 Liberty Corner, New Jersey 07938-0830 (908) 604-3000 (Address, including zip code, and telephone number, including area code, of registrant’s principal executive office)
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Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class |
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8.75% Senior Notes Due 2010 |
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5.40% Senior Notes Due 2014 |
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6.20% Trust Preferred Securities of Everest Re |
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Capital Trust II guaranteed by Everest Reinsurance |
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Holdings, Inc. |
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Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the | ||||||||||||||||||||||||||||||||||||||||
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Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. | ||||||||||||||||||||||||||||||||||||||||
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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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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] | ||||||||||||||||||||||||||||
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): | ||||||||||||||||||||||||||||
Large accelerated filer | Accelerated filer | |||||||||||||||||||||||||||
Non-accelerated filer | X | 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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At March 15, | ||||||||||||||||||||||||||||
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The Registrant meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format permitted by General Instruction I of Form 10-K. | ||||||||||||||||||||||||||||
EVEREST REINSURANCE HOLDINGS, INC.
Table of Contents
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PART I | ||
Item 1. | Business | 1 |
Item 1A. | Risk Factors | 7 |
Item 1B. | Unresolved Staff Comments | 13 |
Item 2. | Properties | 13 |
Item 3. | Legal Proceedings | 13 |
Item 4. | Submission of Matters to a Vote of Security Holders | 13 |
PART II | ||
Item 5. | Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities | 13 |
Item 6. | Selected Financial Data | 14 |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operation | 14 |
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 31 |
Item 8. | Financial Statements and Supplementary Data | 33 |
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 34 |
Item 9A. | Controls and Procedures | 34 |
Item 9B. | Other Information | 34 |
PART III | ||
Item 10. | Directors, Executive Officers and Corporate Governance | 34 |
Item 11. | Executive Compensation | 35 |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters | 35 |
Item 13. | Certain Relationships and Related Transactions, and Director Independence | 35 |
Item 14. | Principal Accountant Fees and Services | 35 |
PART IV | ||
Item 15. | Exhibits and Financial Statement Schedules | 36 |
PART I
TABLE OF CONTENTS
Item | Page | |
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PART I | ||
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1. | Business | 1 |
1A. | Risk Factors | 7 |
1B. | Unresolved Staff Comments | 14 |
2. | Properties | 14 |
3. | Legal Proceedings | 14 |
4. | Submission of Matters to a Vote of Security Holders | 15 |
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PART II | ||
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5. | Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities |
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6. | Selected Financial Data | 15 |
7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 16 |
7A. | Quantitative and Qualitative Disclosures About Market Risk | 35 |
8. | Financial Statements and Supplementary Data | 37 |
9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 37 |
9A. | Controls and Procedures | 37 |
9B. | Other Information | 38 |
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PART III | ||
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10. | Directors and Executive Officers of the Registrant | 38 |
11. | Executive Compensation | 38 |
12. | Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters |
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13. | Certain Relationships and Related Transactions | 38 |
14. | Principal Accountant Fees and Services | 38 |
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PART IV | ||
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15. | Exhibits and Financial Statement Schedules | 39 |
PART I
Unless otherwise indicated, all financial data in this document have been prepared using accounting principles generally accepted in the United States of America (“GAAP”). As used in this document, “Holdings” means Everest Reinsurance Holdings, Inc.; “Group” means Everest Re Group, Ltd.; “Holdings Ireland” means Everest Risk Holdings (Ireland), Limited; “Everest Re” means Everest Reinsurance Company and its subsidiaries (unless the context otherwise requires) and the “Company”, “we”, “us”, and “our” means Holdings and its subsidiaries (unless the context otherwise requires).
ITEM 1.Business
BUSINESS
The Company
Company.
Holdings, a Delaware corporation, is a wholly-owned subsidiary of Holdings Ireland. On December 30, 2008, Group whichcontributed Holdings to its recently established Irish holding company, Holdings Ireland. Holdings Ireland is a direct subsidiary of Group and was established to serve as a holding company for the U.S. and Irish reinsurance and insurance subsidiaries. Group is a Bermuda holding company whose common shares are publicly traded in the U.S. on the New York Stock Exchange under the symbol “RE”. Group files an annual report on Form 10-K with the Securities and Exchange Commission (the “SEC”) with respect to its consolidated operations, including Holdings. Holdings became a wholly-owned subsidiary of Group on February 24, 2000 in a corporate restructuring pursuant to which holders of shares of common stock of Holdings automatically became holders of the same number of common shares of Group.
The Company’s principal business, conducted through its operating subsidiaries,segments, is the underwriting of reinsurance and insurance in the U.S. and international markets. The Company had gross written premiums in 20062008 of $3.2$2.9 billion, with approximately 72%73% representing reinsurance and 28%27% representing insurance, and stockholders’insurance. Stockholder’s equity at December 31, 2006 of2008 was $2.2 billion. The Company underwrites reinsurance both through brokers and directly with ceding companies, giving it the flexibility to pursue business based on of the ceding company’s preferred reinsurance purchasing method. The Company underwrites insurance principally through general agent relationships and surplus lines brokers. Holdings’ active operating subsidiaries, excluding Mt. McKinley Insurance Company (“Mt. McKinley”), which is in runoff, are each rated A+ (“Superior”) by A.M. Best Company (“A.M. Best”), a leading provider of insurer ratings that assigns financial strength ratings to insurance companies based on their ability to meet their obligations to policyholders.
Following is a summary of the Company’s operating subsidiaries:
Everest Re, a Delaware insurance company and a direct subsidiary of Holdings, is a licensed property and casualty insurer and/or reinsurer in all states (except Nevada and Wyoming), the District of Columbia and Puerto Rico and is authorized to conduct reinsurance business in Canada, Singapore and Singapore.Brazil. Everest Re underwrites property and casualty reinsurance for insurance and reinsurance companies in the U.S. and international markets. Everest Re engages in reinsurance transactions with Everest Reinsurance (Bermuda), Ltd. (“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 (“the affiliated quota share agreement”). At December 31, 2008 Everest Re had statutory surplus at December 31, 2006 of $2.7$2.3 billion.
Everest National Insurance Company (“Everest National”), a Delaware insurance company and a direct subsidiary of Everest Re, is licensed in 47 states and the District of Columbia and is authorized to write property and casualty insurance on an admitted basis in the jurisdictions in which it is licensed. The majority of Everest National’s business is reinsured by its parent, Everest Re.
Everest Indemnity Insurance Company (“Everest Indemnity”), a Delaware insurance company and a direct subsidiary of Everest Re, writes excess and surplus lines insurance business in the U.S. on a non-admitted basis. Excess and surplus lines insurance is specialty property and liability coverage that an insurer not licensed to write insurance in a particular jurisdiction is permitted to provide to insureds when the specific specialty coverage is unavailable from admitted insurers. Everest Indemnity is licensed in Delaware and is eligible to write business on a non-admitted basis in 49all other states, the District of Columbia and Puerto Rico. The majority of Everest Indemnity’s business is reinsured by its parent, Everest Re.
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Mt. McKinley, a Delaware insurance company and a direct subsidiary of Holdings, was acquired by Holdings in September 2000 from The Prudential Insurance Company of America (“The Prudential”). Mt. McKinley was formed by Everest Re in 1978 to write excess and surplus lines insurance business in the U.S. In 1985, Mt. McKinley ceased writing new and renewal insurance and commenced a run-off operation to service claims arising from its previously written business. In 1991, Mt. McKinley was distributed to its ultimate parent, The Prudential. Effective September 19, 2000, Mt. McKinley and Everest Reinsurance (Bermuda), Ltd. (“Bermuda Re”) entered into a loss portfolio transfer reinsurance agreement, whereby Mt. McKinley transferred, for arm’s length consideration, all of its net insurance exposures and reserves to Bermuda Re.
Reinsurance Industry Overview
Overview.
Reinsurance is an arrangement in which an insurance company, the reinsurer, agrees to indemnify another insurance or reinsurance company, the ceding company, against all or a portion of the insurance risks underwritten by the ceding company under one or more insurance contracts. Reinsurance can provide a ceding company with several benefits, including a reduction in its net liability on individual risks or classes of risks, catastrophe protection from large and/or multiple losses and/or a reduction in operating leverage as measured by the ratio of net premiums and assistance in maintaining acceptable financial ratios.reserves to capital. Reinsurance also provides a ceding company with additional underwriting capacity by permitting it to accept larger risks and write more business than would be possible without a concomitant increase in capital and surplus.acceptable relative to the ceding company’s financial resources. Reinsurance however, does not discharge the ceding company from its liability to policyholders.policyholders; rather, it reimburses the ceding company for covered losses.
There are two basic types of reinsurance arrangements: treaty and facultative reinsurance. In treatyfacultative. Treaty reinsurance obligates the ceding company is obligated to cede and the reinsurer is obligated to assume a specified portion of a type or category of risks insured by the ceding company. Treaty reinsurers do not separately evaluate each of the individual risks assumed under their treatiestreaties: instead, the reinsurer relies upon the pricing and consequently, after a review of the ceding company’s underwriting practices, are largely dependent on the original risk underwriting decisions made by the ceding company. In facultative reinsurance, the ceding company cedes and the reinsurer assumes all or part of the risk under a single insurance contract. Facultative reinsurance is negotiated separately for each insurance contract that is reinsured. Facultative reinsurance, normally iswhen purchased by ceding companies, forusually is intended to cover individual risks not covered by their reinsurance treaties either for amounts in excessbecause of the dollar limits of their reinsurance treatiesinvolved or for unusual risks.because the risk is unusual.
Both treaty and facultative reinsurance can be written on either a pro rata basis or an excess of loss basis. Under pro rata reinsurance, the ceding company and the reinsurer share the premiums as well as the losses and expenses in an agreed proportion. Under excess of loss reinsurance, the reinsurer indemnifies the ceding company against all or a specified portion of losses and expenses in excess of a specified dollar amount, known as the ceding company’s retention or reinsurer’s attachment point, generally subject to a negotiated reinsurance contract limit.
In pro rata reinsurance, the reinsurer generally pays the ceding company a ceding commission. The ceding commission generally is based on the ceding company’s cost of acquiring the business being reinsured (commissions, premium taxes, assessments and miscellaneous administrative expense)expense and may contain profit sharing provisions, whereby the ceding commission is adjusted based on loss experience). Premiums paid by the ceding company to a reinsurer for excess of loss reinsurance are not directly proportional to the
premiums that the ceding company receives because the reinsurer does not assume a proportionate risk. There is usually no ceding commission on excess of loss reinsurance.
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Reinsurers may purchase reinsurance to cover their own risk exposure. Reinsurance of a reinsurer’s business is called a retrocession. Reinsurance companies cede risks under retrocessional agreements to other reinsurers, known as retrocessionaires, for reasons similar to those that cause insurers to purchase reinsurance: to reduce net liability on individual or classes of risks, protect against catastrophic losses, stabilize financial ratios and obtain additional underwriting capacity.
Reinsurance can be written through intermediaries, generally professional reinsurance brokers, or directly with ceding companies. From a ceding company’s perspective, both the broker and the direct distribution channels have advantages and disadvantages. A ceding company’s decision to select one distribution channel over the other will be influenced by its perception of such advantages and disadvantages relative to the reinsurance coverage being placed.
Business Strategy
Strategy.
The Company’s business strategy is to sustain its leadership position within its targettargeted reinsurance and insurance markets, provide effective management throughout the property and casualty underwriting cycle and thereby achieve an attractive return for its stockholder. The Company’s underwriting strategies seek to capitalize on its i) financial strength and capacity;capacity, ii) stable and experienced management team;team, iii) diversified product and distribution offering;offerings, iv) underwriting expertise and disciplined approach;approach, v) efficient and low-cost operating structure and vi) prudenteffective enterprise risk management approach to catastrophe exposures and retrocessional costs.practices.
The Company offers treaty and facultative reinsurance and admitted and non-admitted insurance. The Company’s products include the full range of property and casualty reinsurance and insurance coverages, including marine, aviation, surety, errors and omissions liability (“E&O”), directors’ and officers’ liability (“D&O”), medical malpractice, other specialty lines, accident and health (“A&H”) and workers’ compensation. The Company distributes its products through direct and broker reinsurance channels in U.S. and international markets.
The Company’s underwriting strategy emphasizes underwriting profitability over premium volume. Key elements of this strategy include careful risk selection, appropriate pricing through strict underwriting discipline and adjustment of the Company’s business mix to respondin response to changing market conditions. The Company focuses on reinsuring companies that effectively manage the underwriting cycle through proper analysis and pricing of underlying risks and whose underwriting guidelines and performance are compatible with its objectives.
The Company’s underwriting strategy emphasizes flexibility and responsiveness to changing market conditions, such as increased demand or favorable pricing trends. The Company believes that its existing strengths, including its broad underwriting expertise, U.S. and international presence, strong financial ratings and substantial capital, facilitate adjustments to its mix of business geographically, by line of business and by type of coverage, allowing it to capitalize onparticipate in those market opportunities that provide the greatest potential for underwriting profitability. The Company’s insurance operations complement these strategies by providing access toaccessing business that is not available on a reinsurance basis. The Company carefully monitors its mix of business across all operations to avoid unacceptable geographic or other risk concentrations.
Capital Transactions
Transactions.
The Company’s business operations are in part dependent on the Company’sits financial strength, and the market’s perception thereof, as measured by stockholders’of its strength. The Company’s stockholder’s equity which was $2,218.4$2,203.0 million and $1,790.7$2,567.5 million at December 31, 20062008 and 2005,2007, respectively. The Company haspossesses significant financial flexibility with respectaccess to capitalizationthe debt markets and through its ultimate parent, equity markets, as a result of its perceived financial strength, including itsas evidenced by the financial strength ratings as assigned by independent rating
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agencies, agencies. During the last six months of 2008 and itscontinuing into early 2009, the capital markets have been illiquid in reaction to the deepening credit crisis which has led to bank and other financial institution failures. Credit spreads have significantly widened and the equity markets have declined significantly during this period making access to the debtcapital markets, for even highly rated companies, difficult and throughcostly. The Company’s capital position remains strong, commensurate with its parent, equity markets.financial ratings. The Company continuously monitorshas
ample liquidity to meets its financial obligations for the foreseeable future. Therefore, the Company has no foreseeable need to tap the capital and financial position, as well as investment and security market conditions and responds accordingly.markets in the near term.
On December 1, 2005,17, 2008, Group and Holdings filed arenewed the shelf registration statement on Form S-3S-3ASR with the SEC, as a Well Known Seasoned Issuer under the new registration and offering revisions to the Securities Act of 1933. Generally, under thisIssuer. This shelf registration statement can be used by Group is authorized to issueregister common shares, preferred shares, debt securities, warrants, share purchase contracts and hybrid securities,share purchase units; by Holdings is authorized to issueregister debt securities and by Everest Re Capital Trust III (“Capital Trust III”) is authorized to issueregister trust preferred securities.
On June 27, 2003, Group and Holdings filed a shelf registration statement on Form S-3 with the SEC, providing for the issuance of up to $975.0 million of securities. Generally, under this shelf registration statement, Group was authorized to issue common shares, preferred shares, debt securities, warrants and hybrid securities, Holdings was authorized to issue debt securities and Everest Re Capital Trust II (“Capital Trust II”) and Capital Trust III were authorized to issue trust preferred securities. This shelf registration statement became effective on December 22, 2003 and was exhausted with the October 6, 2005 transaction described below. The following securities were issued pursuant to that registration statement.
On March 14, 2000, the Company completed a public offering of $200.0 million principal amount of 8.75% senior notes due March 15, 2010 and $250.0 million principal amount of 8.50% senior notes due and retired March 15, 2005. During 2000, the net proceeds of these offerings and additional funds were distributed by the Company to Group.Consolidated Financial Statements.
Financial Strength Ratings
Ratings.
The following table shows the current financial strength ratings of the Company’s operating subsidiaries as reported by A.M. Best, Standard & Poor’s RatingRatings Services (“Standard & Poor’s”) and Moody’s Investors Service, Inc. (“Moody’s”). These ratings are based upon factors of concern to policyholders and should not be
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considered an indication of the degree or lack of risk involved in a direct or indirect equity investment in an insurance or reinsurance company.
All of the below-mentionedbelow mentioned ratings are continually monitored and revised, if necessary, by each of the rating agencies. The ratings presented in the following table were in effect on March 13, 2009.
The Company believes that its ratings, in general, have become increasinglyare important to its operations because they provide the Company’s customers and investors with an independent assessment of the Company’s underlying financial strength using a scale that provides for relative comparisons. Strong financial ratings are particularly important for reinsurance companies. Ceding companies must rely on their reinsurers to pay covered losses well into the future. As a result, a highly rated reinsurer is generally preferred.
Operating | Subsidiary: | A.M. Best | Standard & | |||||||||||||||||||
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Everest | A+ (Superior) | A+ (Strong) | Aa3 (Excellent) | |||||||||||||||||||
Everest | A+ (Superior) | A+ (Strong) | Not Rated | |||||||||||||||||||
Everest | A+ (Superior) | Not Rated | Not Rated | |||||||||||||||||||
Everest Security | A+ (Superior) | Not Rated | Not Rated | |||||||||||||||||||
Mt. McKinley | Not Rated | Not Rated | Not Rated | |||||||||||||||||||
* Standard & Poor’s released the Company’s revised ratings on March 13, 2009. S&P lowered the Company’s ratings one level and provided a stable outlook.
A.M. Best states that the “A+” (“Superior”) rating is assigned to those companies which, in its opinion, have a superior ability to meet their ongoing obligations to policyholders based on A.M. Best’s comprehensive quantitative and qualitative evaluation of a company’s balance sheet strength, operating performance and business profile. Standard & Poor’s states that the “AA-“A+” rating is assigned to those insurance companies which, in its opinion, have very strong financial security characteristics with respect to their ability to pay under its insurance policies and contracts in accordance with their terms. As this represents a one notch lower rating from previous ratings, management does not believe that this one notch downgrade will have a materially adverse affect on the Company’s business. Moody’s states that insurance companies rated “Aa” offer excellent financial security. Together with the Aaa rated companies, Aa rated companies constitute what are generally known as high-gradehigh grade companies, with Aa rated companies generally having somewhat larger long-termlong term risks.
Debt Ratings
Ratings.
The following table shows the debt ratings by A.M. Best, Standard & Poor’s and Moody’s of the Company’s senior notes due March 15, 2010 and October 15, 20142014; long term notes due May 1, 2067 and Everest Re Capital Trust II’s (“Capital Trust”) and Capital Trust II’sII”) trust preferred securities due November 15, 2032 and March 29, 2034, respectively, all of which are considered investment grade. Debt ratings are athe rating agencies’ current assessment of the credit worthiness of an obligor with respect to a specific obligation.
A.M. Best | Standard & | Moody’s | ||||||||||||||||||||||||
Senior Notes | a- | (Excellent) | BBB+ | (Adequate) | A3 | (Good security) | ||||||||||||||||||||
Trust Preferred Securities | bbb | (Good) | BBB- | (Adequate) | Baa1 | (Adequate security) | ||||||||||||||||||||
Long Term Notes | bbb+ | (Good) | BBB- | (Adequate) | Baa1 | (Adequate security) | ||||||||||||||||||||
* Standard & Poor’s released the Company’s revised ratings on March 13, 2009. S&P lowered the Company’s ratings one level.
A debt rating of “a” or “a-” is assigned by A.M. Best where the issuer, in A.M. Best’s opinion, has a strong ability to meet the terms of the obligation. A debt rating of “A-” is assigned by Standard & Poor’s where the obligor has a strong capacity to meet its financial commitment on the obligation, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in
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higher rated categories. Standard & Poor’s assigns a debt rating of “BBB” to issues that exhibit adequate protection parameters although adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation. As this represents a one notch lower rating, management does not believe that a one notch downgrade will have a materially adverse impact on the Company’s access to the credit markets. According to Moody’s, a debt rating of “A3” is assigned to issues that are considered upper-medium-grade obligations and subject to low credit risk. Obligations rated “Baa1” are subject to moderate credit risk and are considered medium-grade and as such may possess certain speculative characteristics.
Competition
Competition.
The worldwide reinsurance and insurance businesses are highly competitive;competitive, as well as cyclical by product and market. As a result, financial results tend to fluctuate with periods of constrained availability, high rates and strong profits followed by periods of abundant capacity, low rates and constrained profitability. Competition in the types of reinsurance and insurance business that the Company underwrites is based on many factors, including the perceived overall financial strength of the reinsurer or insurer, ratings of the reinsurer or insurer by A.M. Best and/or Standard & Poor’s, underwriting expertise, the jurisdictions where the reinsurer or insurer is licensed or otherwise authorized, capacity and coverages offered, premiums charged, other terms and conditions of the reinsurance and insurance business offered, services offered, speed of claims payment and reputation and experience in lines written. TheseFurthermore, the market impact from these competitive factors operate at the individual market participant levelrelated to varying degrees, as applicable to the specific participant’s circumstances. They also operate in aggregatereinsurance and insurance is generally not consistent across the reinsurance industry more generally, contributing, in combination with economic conditionslines of business, domestic and variations in the reinsurance buying practices of insurance companies (by participantinternational geographical areas and in the aggregate), to cyclical movements in reinsurance rates, terms and conditions and ultimately reinsurance industry aggregate financial results.distribution channels.
The Company competes in the U.S. and international reinsurance and insurance markets with numerous global competitors. The Company’s competitors include independent reinsurance and insurance companies, subsidiaries or affiliates of established worldwide insurance companies, reinsurance departments of certain insurance companies and domestic and international underwriting operations, including underwriting syndicates at Lloyd’s. Some of these competitors have greater financial resources than the Company does and have established long-termlong term and continuing business relationships, which can be a significant competitive advantage. In addition, the lack of strong barriers to entry into the reinsurance business and the potential for securitization of reinsurance and insurance risks through capital markets provide additional sources of potential reinsurance and insurance capacity and competition.
In 2006,
During the Company observed strong price increases,latter part of 2007 and more restricted limits, in those property lines and regions that were most affected by the catastrophe events of 2005, principally Hurricanes Katrina, Rita and Wilma. Reinsurance capacity in these areas was constrained, particularly for catastrophe reinsurance, which includes southeastern U.S. exposures andthroughout 2008, there has been a significant slowdown in the retrocessionglobal economy. Excessive availability and energy lines. The record catastrophe lossesuse of 2005 have also generallycredit, particularly by individuals, led to modest strengtheningincreased defaults on sub-prime mortgages in the U.S. and elsewhere, falling values for houses and many commodities prices and contracting consumer spending. The significant increase in default rates negatively impacted the value of
mortgage-backed securities held by both foreign and domestic institutions. The defaults have led to a corresponding increase in foreclosures, which have driven down housing values, resulting in additional losses on the asset-backed securities. During the third and fourth quarters of 2008, the credit markets deteriorated dramatically, evidenced by widening credit spreads and dramatically reduced availability of credit. Many financial institutions, including some insurance entities, experienced liquidity crises due to immediate demands for funds for withdrawals or collateral, combined with falling asset values and their inability to sell assets to meet the increased demands. As a result, several financial institutions have failed or been acquired at distressed prices, while others have received loans from the U.S. propertygovernment to continue operations. The liquidity crisis significantly increased the spreads on fixed maturities and, at the same time, had a dramatic and negative impact on the stock markets around the world. The combination of losses on securities from failed or impaired companies combined with the decline in values of fixed maturities and equity securities has resulted in significant declines in the capital bases of most insurance and reinsurance companies. It is too early to predict the timing and extent of impact the capital deterioration will have on insurance and reinsurance market conditions. There is an expectation that these events will ultimately result in increased rates for insurance and reinsurance in certain segments of the market, but there is no assurance that this will be the case.
Worldwide insurance and reinsurance market conditions continued to be very competitive. Generally, there was ample insurance and reinsurance capacity relative to demand. The Company noted, however, that in many markets and lines, thatthe rates of decline have little or no substantive catastrophe exposureslowed, pricing in some segments was relatively flat and price stabilizationthere was upward movement in some others. Competition and its effect on rates, terms and conditions vary widely by market and coverage yet continues to be most prevalent in the U.S. casualty insurance and reinsurance markets. However, certainIn addition to demanding lower rates and improved terms, ceding companies have retained more of their business by reducing quota share percentages, purchasing excess of loss covers in lieu of quota shares, and increasing retentions on excess of loss business. The Company’s quota share premiums have declined, particularly on catastrophe exposed property business, due to slower growth and increased purchases of common account covers by ceding companies, which reduces the premiums subject to the quota share contract. The U.S. insurance markets in which the Company participates, remains extremely competitive as well, particularly in the workers’ compensation, public entity and contractor sectors. While the Company’s U.S. casualty lines continuegrowth has slowed, given the specialty nature of its business and its underwriting discipline, the Company believes the impact on the profitability of its business to exhibit weakerbe less pronounced than on the market conditions led bygenerally.
Rate decreases in the medical stop lossinternational markets have generally been less pronounced than in the U.S., and D&O reinsurance classes, as well as the California workers’ compensation insurance line.Company has seen some increases, particularly for catastrophe exposed business. The Company believeshas grown its business in the Middle East, Latin America and Asia and has expanded its international reach by opening a new office in Brazil to capitalize on the recently expanded opportunity for professional reinsurers in that U.S. casualtymarket and on the economic growth expected for Brazil in the future.
The reinsurance industry has experienced a period of falling rates and volume. Profit opportunities have become generally remains adequately priced;less available over time; however, increased price competition at the insurance company levelunfavorable trends appear to have abated somewhat. The Company is now seeing smaller rate declines, pockets of stability and cedants’ increased appetitesome increases in some markets and for retaining more profitable business net following several years of hard-market conditions, may result in modestly softer reinsurance pricing. The Company’s U.S. insurance operation is less affected by these standard casualty insurance market conditions given its specialty insurance program orientation. Finally, the Company continues to observe generally stable property reinsurance market conditions in most countries outside of the U.S., except for hardening property market conditions in Mexico following Hurricane Wilma, while casualty rates are softening.
U.S. property reinsurance market conditions tightened, particularly within peak catastrophe zones, during 2006. This market hardening was particularly pronounced in third quarter renewals with incrementally higher rate
6
changes and even more restrictive coverage terms than earlier in 2006. As a result, many reinsurance buyers were not able to fully place their reinsurance program and have been forced to raise retention levels and/or reduce catastrophe limit purchases. In turn, insurance companies continue to adjust limits and coverages and increase the premium rates they charge their customers. Together, these trends have generally resulted in insurance companies retaining more property risk exposure and being more prone to potential future earnings volatility than in past years. This trend reflects an imbalance between reinsurance supply and demand.some coverages. As a result of this imbalancevery significant investment and higher rates, additional competition is enteringcatastrophe losses incurred by both primary insurers and reinsurers over the marketpast year, but principally in the form of new companiesthird and alternative risk transfer mechanisms. In January 2007, the Florida legislature enacted insurance reform that increases insurer’s access to the Florida Hurricane Catastrophe Fund, thus potentially reducing the amount of reinsurance purchased from the private reinsurance market. The Company is unable to predict the impact on future market conditions from the increased competitionfourth quarters, industry-wide capital has declined and legislative reform. In addition to these market forces, reinsurers continue to reassess their risk appetites and rebalance their property portfolios to reflect improved price to exposure metrics against the backdrop of: (i) recent revisions to the industry’s catastrophe loss projection models, which are indicating significantly higher loss potentials and consequently higher pricing requirements and (ii) elevated rating agency scrutiny has increased. There is an expectation that given the rate softening that has occurred over the past several quarters, the industry-wide decline in capital combined with volatile and inaccessible capital requirementsmarkets and a looming recession, will lead to a hardening of insurance and reinsurance marketplace rates, terms and conditions. It is too early to gauge the extent of hardening, if any, that will occur; however, it appears that much of the redundant capital has been wrung out of the industry, and the stage is set for many catastrophe exposed companies.firmer markets.
In light of its 2005 catastrophe experience, the Company reexamined its risk management practices, concluded that its control framework operated generally as intended and made appropriate portfolio adjustments to its property reinsurance operations during the first nine months of 2006. This portfolio repositioning, particularly within peak catastrophe zones, including Southeast U.S., Mexico and Gulf of Mexico, has enabled the Company to benefit from these dislocated markets by carefully shifting the mix of its writings toward the most profitable classes, lines, customers and territories and enhancing portfolio balance and diversification.
Overall, the Company believes that current marketplace conditions offer solidprofit opportunities for the Companyit, given its strong ratings, distribution system, reputation and expertise. The Company continues to employ its opportunistic strategy of targeting those segments offeringbusiness that offers the greatest profit potential, while maintaining balance and diversification in its overall portfolio.
Employees
Employees.
As of February 1, 2007,2009, the Company employed 461550 persons. Management believes that employee relations are good. None of the Company’s employees are subject to collective bargaining agreements, and the Company is not aware of any current efforts to implement such agreements.
Available Information
Information.
The Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports are available free of charge through the Company’s internet website at http://www.everestre.com as soon as reasonably practicable after such reports are electronically filed with the SEC.
ITEM 1A.Risk Factors
RISK FACTORS
In addition to the other information provided in this report, the following risk factors should be considered when evaluating the Company.us. If the circumstances contemplated by the individual risk factors materialize, our business, financial condition and results of operations could be materially and adversely affected and the trading price of Group’s common sharesour ability to service our debt, our debt ratings and our ability to issue new debt could decline significantly.
RISKS RELATING TO OUR BUSINESS
Deterioration in the public debt and equity markets could lead to additional investment losses.
The prolonged and severe disruptions in the public debt and equity markets, including among other things, widening of credit spreads, bankruptcies and government intervention in a number of large financial institutions, have resulted in significant realized and unrealized losses in our investment portfolio. For the year ended December 31, 2008, we incurred $489.2 million of realized and $276.5 million of unrealized investment losses. Depending on market conditions, we could incur substantial additional realized and unrealized losses in future periods, which could have a material adverse impact on our results of operations, equity, business and insurer financial strength and debt ratings.
Our results could be adversely affected by catastrophic events.
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We are exposed to unpredictable catastrophic events, including weather-related and other natural catastrophes, as well as acts of terrorism. Any material reduction in our operating results caused by the occurrence of one or more catastrophes could inhibit our ability to pay dividends or to meet our interest and principal payment obligations. We define a catastrophe as an event that causes a pre-tax loss on property exposures before reinsurance of at least $5.0 million, before corporate level reinsurance and taxes. Effective for the third quarter 2005, industrial risk losses have been excluded from catastrophe losses, with prior periods adjusted for comparison purposes. By way of illustration, during the past five calendar years, pre-tax catastrophe losses, net of contract specific reinsurance but before cessions under corporate reinsurance programs, were as follows:
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|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Our losses from future catastrophic events could exceed our projections.
We use projections of possible losses from future catastrophic events of varying types and magnitudes as a strategic underwriting tool. We use these loss projections to estimate our potential catastrophe losses in certain geographic areas and decide on the purchase of retrocessional coverage or other actions to limit the extent of potential losses in a given geographic area. These loss projections are approximations, reliant on a
We focus on potential losses that can be generated by any single event as part of our evaluation and monitoring of our aggregate exposure to catastrophic events. Accordingly, we employ various techniques to estimate the amount of loss we could sustain from any single catastrophic event in various geographical areas. These techniques range from non-modeled deterministic approaches – such as tracking aggregate limits exposed in catastrophe-prone zones and applying historic damage factors – to modeled approaches that scientifically measure catastrophe risks using sophisticated Monte Carlo simulation techniques that provide insights into the frequency and severity of expected losses on a probabilistic basis.
If our loss reserves are inadequate to meet our actual losses, net income would be reduced or we could incur a loss.
We are required to maintain reserves to cover our estimated ultimate liability of losses and loss adjustment expenses (“LAE”) for both reported and unreported claims incurred. These reserves are only estimates of what we believe the settlement and administration of claims will cost based on facts and circumstances known to us. In setting reserves for our reinsurance liabilities, we rely on claim data supplied by our ceding companies and brokers and we employ actuarial and statistical projections. The information received from our ceding companies is not always timely or accurate, which can contribute to inaccuracies in our loss projections. Because of the uncertainties that surround our estimates of loss and LAE reserves, we cannot be certain that ultimate loss and LAE payments will not exceed our estimates. If our reserves are deficient, we would be required to increase loss reserves in the period in which such deficiencies are identified which would cause a charge to our earnings and a reduction of capital. By way of illustration, during the past five calendar years, the reserve re-estimation process resulted in a decrease to our pre-tax net income in four of the years:
8
| Calendar year | Effect on pre-tax net income | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Calendar year: |
| Effect on pre-tax net income | |||||||||||
(Dollars in millions) |
| ||||||||||||
2008 |
| $ | 142.0 | decrease | |||||||||
2007 |
|
| 275.7 | decrease | |||||||||
| 2006 | $ | 67.4 | million decrease |
|
| 67.4 | decrease | ||||||
| 2005 | $ | 67.3 | million increase |
|
| 67.3 | increase | ||||||
| 2004 | $ | 174.2 | million decrease |
|
| 174.2 | decrease | ||||||
| 2003 | $ | 168.3 | million decrease | ||||||||||
| 2002 | $ | 99.6 | million decrease | ||||||||||
The difficulty in estimating our reserves is significantly more challenging as it relatesrelate to reserving for potential asbestos and environmental (“A&E”) liabilities. At year-end 2006, approximately 9%year end 2008, 10.6% of our gross reserves were comprised of A&E reserves. A&E liabilities are especially hard to estimate for many reasons, including the long delays between exposure and manifestation of any bodily injury or property damage, difficulty in identifying the source of the asbestos or environmental contamination, long reporting delays and difficulty in properly allocating liability for the asbestos or environmental damage. Legal tactics and judicial and legislative developments affecting the scope of insurers’ liability, which can be difficult to predict, also contribute to uncertainties in estimating reserves for A&E liabilities.
The failure to accurately assess underwriting risk and establish adequate premium rates could reduce our net income or result in net loss.
Our success depends on our ability to accurately assess the risks associated with the businesses on which the risk is retained. If we fail to accurately assess the risks we retain, we may fail to establish adequate premium rates to cover our losses and LAE. This could reduce our net income and even result in a net loss.
In addition, losses may arise from events or exposures that are not anticipated when the coverage is priced. An example of an unanticipated event is the terrorist attacks on September 11, 2001. Neither the magnitude of loss on a single line of business nor the combined impact on several lines of business from an act of terrorism on such a large scale was contemplated when we priced our coverages. In addition to unanticipated events, we also face the unanticipated expansion of our exposures, particularly in long-tail liability lines. An example of this is the expansion over time of the scope of insurers’ legal liability within the mass tort arena, particularly for A&E exposures discussed above.
Decreases in pricing for property and casualty reinsurance and insurance could reduce our net income.
The worldwide reinsurance and insurance businesses are highly competitive, as well as cyclical by product and market. These cycles, as well as other factors that influence aggregate supply and demand for property and casualty insurance and reinsurance products, are outside of our control. The supply of (re)insurance is driven by prevailing prices and levels of capacity that may fluctuate in response to a number of factors including large catastrophic losses and investment returns being realized in the insurance industry. Demand for (re)insurance is influenced by underwriting results of insurers and insureds, including catastrophe losses, and prevailing general economic conditions. If any of these factors were to result in a decline in the demand for (re)insurance or an overall increase in (re)insurance capacity, our net income could decrease.
If rating agencies downgrade the ratings of our insurance subsidiaries, future prospects for growth and profitability could be significantly and adversely affected.
Our active insurance company subsidiaries currently hold financial strength ratings assigned by third-party rating agencies which assess and rate the claims paying ability and financial strength of insurers and reinsurers. Our active subsidiaries carry an “A+” (“Superior”)” rating from A.M. Best. Everest Re and Everest National hold an “AA–“A+” (“Very Strong”)” rating from Standard & Poor’s. Everest Re holds an “Aa3“Aa3” (“Excellent”)” rating from
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Moody’s. Financial strength ratings are used by client companies and agents and brokers that place the business as an important means of assessing the financial strength and quality of reinsurers. A downgrade or withdrawal of any of these ratings might adversely affect our ability to market our insurance products and could have a material and adverse effect on future prospects for growth and profitability.
During the last five years, no active subsidiary of ours has experienced a financial strength rating downgrade.
On March 13, 2009, Everest Re’s and Everest National’s ratings were downgraded one notch by Standard & Poor’s. However, we cannot assure that a further downgrade will not occur in the future if we do not continue to meet the evolving criteria expected of our current rating. In that regard, several of the rating agencies are in the process of modifying their approaches to evaluating catastrophic risk relative to their capital and risk management requirements. Therefore, we cannot predict the outcome of this reassessment or its potential impact upon our ratings.
Consistent with market practice, much of our treaty reinsurance business allows the ceding company to terminate the contract or seek collateralization of our obligations in the event of a rating downgrade below a certain threshold. The termination provision would generally be triggered only if a rating fell below A.M. Best’s A- rating level, which is three levels below Everest Re’s current rating of A+. To a lesser extent, Everest Re also has modest exposure to reinsurance contracts that contain provisions for obligatory funding of outstanding liabilities in the event of a rating agency downgrade. That provision would also generally be triggered only if Everest Re’s rating fell below A.M. Best’s A- rating level.
The failure of our insureds, intermediaries and reinsurers to satisfy their obligations to us could reduce our net income.
In accordance with industry practice, we have uncollateralized receivables from insureds, agent and brokers and/or rely on agents and brokers to process our payments. We may not be able to collect amounts due from insureds, agents and brokers, resulting in a reduction to net income.
We are also subject to the credit risk of reinsurers in connection with retrocessional arrangements because the transfer of risk to a reinsurer does not relieve us of our liability to the insured. In addition, reinsurers may be unwilling to pay us even though they are able to do so. The failure of one or more of our reinsurers to honor their obligations to us in a timely fashion would impact our cash flow and reduce our net income and could cause us to incur a significant loss.
If we are unable or choose not to purchase reinsurance and transfer risk to reinsurers, our net income could be reduced or we could incur a net loss in the event of an unusual loss experience.
We are generally less reliant on the purchase of reinsurance than many of our competitors, in part because of our strategic emphasis on underwriting discipline and management of the cycles inherent in our business.
We try to separate our risk taking process from our risk mitigation process in order to avoid developing too great of a reliance on reinsurance. Thus, we generally evaluate, underwrite, select and price our products prior to consideration of reinsurance. However, our underwriters generally consider purchasing reinsurance with respect to specific insurance contracts or programs, and our senior management generally considers purchasing reinsurance with respect to potential accumulations of exposures across some or all of our operations, where reinsurance is deemed prudent from a risk mitigation perspective or is expected to have a positive cost/benefit relationship. Because we generally purchase reinsurance only when we expect a net benefit, the percentage of business that we reinsure, as indicated below, may vary considerably from year to year, depending on our view of the relationship between cost and the expected benefit for the contract period.
We have entered into affiliated whole account quota share reinsurance agreements for 2002 through 20062008 and renewed the quota share agreement for 20072009 with Bermuda Re and Everest International Reinsurance, Ltd.
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(“ (“Everest International”). We believe that the terms, conditions and pricing of the quota share agreements reflect arm’s length market conditions. In addition, we entered into a loss portfolio transfer agreement with Bermuda Re on October 1, 2008. These affiliated reinsurance arrangements allow us to more effectively leverage our capital, expertise, distribution platform and market presence to a greater degree than our stand-a-lonestand alone capital position would otherwise allow.
| Percentage of ceded written premiums to gross written premiums | 2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Unaffiliated | 3.9 | % | 4.0 | % | 4.6 | % | 5.2 | % | 6.7 | % | |||||||
| Affiliated | 24.2 | % | 24.2 | % | 18.7 | % | 22.9 | % | 13.8 | % | |||||||
Changes in the availability and cost of unaffiliated reinsurance, which are subject to market conditions that are outside of our control, have thus reduced to some extent our ability to use reinsurance to tailor the risks we assume on a contract or program basis or to mitigate or balance exposures across our reinsurance operations.
Percentage of ceded written premiums to gross written premiums |
| 2008 | 2007 | 2006 | 2005 | 2004 |
|
|
|
|
|
|
|
Unaffiliated |
| 6.0% | 5.0% | 3.9% | 4.0% | 4.6% |
Affiliated |
| 36.2% | 29.4% | 24.2% | 24.2% | 18.7% |
Because we have reduced our levelpurchased limited amounts of reinsurance, purchases in recent years, our net income could be reduced following a large unreinsured event or adverse overall claims experience.
Our affiliated quota share agreements also reflect general reinsurance market terms and conditions and are negotiated on an arms’ length basis. As a result, there can be no assurance that these arrangements will continue beyond 2007.2009. If the quota shares are not renewed, we may have to reduce our premium volume and we may be more exposed to reductions in net income from large losses.
Our industry is highly competitive and we may not be able to compete successfully in the future.
Our industry is highly competitive and subject to pricing cycles that can be pronounced. We compete globally in the U.S. and international reinsurance and insurance markets with numerous 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.
According to Standard & Poor’s, Group and its subsidiarieswe rank among the top ten global reinsurance groups, in which 80%two-thirds of the market share is concentrated. The worldwide premium available to the reinsurance market, for both life and non-life business was estimated to be $190 billion in 2007 according to data compiled by the International Association of Insurance Supervisors. The top twenty groups in our industry represent 95%approximately 75% of the market’sthese revenues. The leaders in this market are Munich Re, Swiss Re, (including Employers Re), Berkshire Hathaway, Hannover Re and syndicates at Lloyd’s. Some of these competitors have greater financial resources than we do and have established long-termlong term and continuing business relationships throughout the industry, which can be a significant competitive advantage. In addition, the lack of strong barriers to entry into the reinsurance business and the potential for securitization of reinsurance and insurance risks through capital markets provide additional sources of potential reinsurance and insurance capacity and competition. We may not be able to compete successfully in the future should there be a significant change to the competitive landscape of our market.
We are dependent on our key personnel.
Our success has been, and will continue to be, dependent on the ability to retain the services of existing key executive officers and to attract and retain additional qualified personnel in the future. The loss of the services of any key executive officer or the inability to hire and retain other highly qualified personnel in the future could adversely affect our ability to conduct business. Generally, we consider key executive officers to be those individuals who have the greatest influence in setting overall policy and controlling operations: Chairman and Chief Executive Officer, Joseph V. Taranto (age 58),60) President and Chief Operating Officer, Thomas J. Gallagher (age 58)60), and Executive Vice President and Chief Financial Officer, Craig Eisenacher (age 59)61). Of those three officers, weWe have an employment contractscontract with Mr. Taranto and Mr. Eisenacher. Mr. Taranto’s contractwhich has been previously filed with the SEC
and was most recently amended on August 31, 2005 to extend
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Mr. Taranto’swhich currently provides for term of employment from March 31, 2006 until March 31, 2008. Mr. Eisenacher’s contact has been previously filed with SECending on December 5, 2006 for a term of employment from December 18, 2006 until December 19, 2008.31, 2009. We are not aware that any of the above three officers are planning to leave Group or retire in the near future. We do not maintain any key employee insurance on any of our employees.
Our investment values and investment income could decline because they are exposed to interest rate, credit, and market risks.
A significant portion of our investment portfolio consists of fixed income securities and smaller portions consist of equity securities and other investments. Both the fair market value of our invested assets and associated investment income fluctuate depending on general economic and market conditions. For example, the fair market value of our predominant fixed income portfolio generally increases or decreases inversely to fluctuations in interest rates. The fair market value of our fixed income securities could also decrease as a result of a downturn in the business cycle, such as the downturn we are currently experiencing, that causes the credit quality of such securities to deteriorate. The net investment income that we realize from future investments in fixed income securities will generally increase or decrease with interest rates.
Interest rate fluctuations also can cause net investment income from fixed income investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, to differ from the income anticipated from those securities at the time of purchase. In addition, if issuers of individual investments are unable to meet their obligations, investment income will be reduced and realized capital losses may arise.
Because all
The majority of our fixed income securities are classified as available for sale and temporary changes in the market value of these investments as well as equities are reflected as changes to our stockholders’stockholder’s equity. Our actively managed equity security portfolio is fair valued and any changes in fair value are reflected as net realized capital gains or losses. As a result, a decline in the value of the securities in our portfolio reduces our capital or could cause us to incur a loss.
We have invested a growing portion of our investment portfolio in common stock or equity-relatedequity securities. The value of these assets fluctuate with equitychanges in the markets. In times of economic weakness, the marketfair value and liquidity of these assets may decline, and may negatively impact net income and capital.income. We also invest in non-traditional investments which have different risk characteristics than traditional fixed income and equity securities. These alternative investments are comprised primarily of private equity limited partnerships. The changes in value and investment income/(loss) for these partnerships are more volatile than over-the-counter securities.
The following table quantifies the portion of our investment portfolio that consists of fixed income securities, equity securities and asset-backed investments that carry prepayment risk.
| (Dollars in thousands) Type of Security | As of December 31, 2006 | % of Total | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Fixed income: | ||||||||||||||
| Mortgage-backed securities | $ | 466,499 | 5.5 | % | ||||||||||
| Other asset-backed | 164,155 | 1.9 | % | |||||||||||
| Total asset-backed | 630,654 | 7.4 | % | |||||||||||
| Other fixed income | 5,506,756 | 65.2 | % | |||||||||||
| Total fixed income | 6,137,410 | 72.6 | % | |||||||||||
| Equity securities | 1,189,341 | 14.1 | % | |||||||||||
| Other invested assets | 330,875 | 3.9 | % | |||||||||||
| Cash and short-term investments | 794,209 | 9.4 | % | |||||||||||
| Total investments and cash | $ | 8,451,835 | 100.0 | % | ||||||||||
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| At |
|
|
(Dollars in millions) | December 31, 2008 |
| % of Total |
Mortgage-backed securities | $ 217.1 |
| 2.9% |
Other asset-backed | 9.4 |
| 0.1% |
Total asset-backed | 226.5 |
| 3.0% |
Other fixed income | 5,285.4 |
| 71.5% |
Total fixed income, at market value | 5,511.9 |
| 74.5% |
Fixed income, at fair value | 43.1 |
| 0.6% |
Equity securities, at fair value | 119.8 |
| 1.6% |
Other invested assets, at market value | 392.6 |
| 5.3% |
Other invested assets, at fair value | 316.8 |
| 4.3% |
Cash and short-term investments | 1,010.9 |
| 13.7% |
Total investments and cash | $ 7,395.1 |
| 100.0% |
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
|
|
We may experience foreign currency exchange losses that reduce our net income and capital levels.
Through our international operations, we conduct business in a variety of foreign (non-U.S.) currencies, principally the Euro, the British pound, the Canadian dollar and the Singapore dollar. Assets, liabilities, revenues and expenses denominated in foreign currencies are exposed to changes in currency exchange rates. Our functional currency is the U.S. dollar, and exchange rate fluctuations relative to the U.S. dollar may materially impact our results and financial position. In 2006,2008, we wrote approximately 18.5%20.9% of our reinsurance coverages in non-U.S. currencies; as of December 31, 2006,2008, we maintained approximately 8%9.9% of our investment portfolio in investments denominated in non-U.S. currencies. During 2006, 20052008, 2007 and 2004,2006, the impact on our quarterly pre-tax net income from exchange rate fluctuations ranged from a loss of $6.9$14.6 million to a gain of $4.6$54.6 million.
In addition to net income impacts, changes in foreign exchange rates resulted in pre-tax translation adjustments through other comprehensive income of $13.6$46.9 million and $2.7$46.3 million for the years ended December 31, 20062008 and 2005,2007, respectively. On a cumulative after-tax basis, translation hashad increased equity by $29.2$28.9 million and $20.4$59.4 million atas of December 31, 20062008 and 2005,2007, respectively.
RISKS RELATING TO REGULATION
Insurance laws and regulations restrict our ability to operate and any failure to comply with those laws and regulations could have a material adverse effect on our business.
We are subject to extensive and increasing regulation under U.S., state and foreign insurance laws. These laws limit the amount of dividends that can be paid to us by our operating subsidiaries, impose restrictions on the amount and type of investments that we can hold, prescribe solvency, accounting and internal control standards that must be met and maintained and require us to maintain reserves. These laws also require disclosure of material inter-affiliate transactions and require prior approval of “extraordinary” transactions. Such “extraordinary” transactions include declaring dividends from operating subsidiaries that exceed statutory thresholds. These laws also generally require approval of changes of control of insurance companies. The application of these laws could affect our liquidity and ability to pay dividends, interest and other payments on securities, as applicable, and could restrict our ability to expand business operations through acquisitions of new insurance subsidiaries. We may not have or maintain all required licenses and approvals or fully comply with the wide variety of applicable laws and regulations or the relevant authority’s interpretation of the laws and regulations. If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, the insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all activities or monetarily penalize us. These types of actions could have a material adverse effect on our business. To date, no material fine, penalty or restriction has been imposed on us for failure to comply with any insurance law or regulation.
Current legal
The extreme dislocation of the financial markets, combined with the new Congress and Presidential administration in the United States, has increased the likelihood of changes in the way the financial services industry is regulated. It is possible that insurance regulation will be drawn into this process, and that federal regulatory activities related toinitiatives in the insurance industry including investigations into contingent commission arrangements and certain finite risk or non-traditional products could affect our business and the industry.
The insurance industry has experienced uncertainty and negative publicity as a result of current litigation, investigations and regulatory activity by various insurance, governmental and enforcement authorities, including the SEC, with regard to certain practices within the insurance industry. These practices include the payment of contingent commissions by insurance companies to insurance brokers and agents, the solicitation and provision of fictitious or inflated quotes and the accounting treatment for finite reinsurance or other non-traditional, loss mitigation insurance and reinsurance products.
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At this time, it appears the effects of these investigations will have more of an impact on specific companies being investigated rather than the industry as a whole, with greater transparency and financial reporting disclosures being required for the entire industry in these areas. In May 2005, the Company received and responded to a subpoena from the SEC seeking information for certain loss mitigation products. The Company has cooperated with the SEC on this matter.emerge. The future impact of such initiatives, if any, on our operation, net income or financial condition can notcannot be determined at this time.
RISK RELATING TO OUR SECURITIES
Because of our holding company structure, our ability to pay dividends, interest and principal is dependent on our receipt of dividends, loan payments and other funds from our subsidiaries.
We are a holding company, whose most significant assets consist of the stock of our operating subsidiaries. As a result, our ability to pay dividends, interest or other payments on our securities in the future will depend on the earnings and cash flows of the operating subsidiaries and the ability of the subsidiaries to pay dividends or to advance or repay funds to us. This ability is subject to general economic, financial, competitive, regulatory and other factors beyond our control. Payment of dividends and advances and repayments from some of the operating subsidiaries are regulated by U.S., state and foreign insurance laws
and regulatory restrictions, including minimum solvency and liquidity thresholds. Accordingly, the operating subsidiaries may not be able to pay dividends or advance or repay funds to us in the future, which could prevent us from paying dividends, interest or other payments on our securities.
ITEM 1B.Unresolved Staff CommentsNone.UNRESOLVED STAFF COMMENTS
None.
ITEM 2.Properties
PROPERTIES
Everest Re’s corporate offices are located in approximately 129,700203,800 square feet of leased office space in Liberty Corner, New Jersey. The Company’s other eleventhirteen locations occupy a total of approximately 70,80076,000 square feet, all of which are leased. Management believes that the above-describedabove described office space is adequate for its current and anticipated needs.
ITEM 3.Legal Proceedings
LEGAL PROCEEDINGS
In the ordinary course of business, the Company is involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine the Company’s rights and obligations under insurance, reinsurance and other contractual agreements. In some disputes, the Company seeks to enforce its rights under an agreement or to collect funds owing to it. In other matters, the Company is resisting attempts by others to collect funds or enforce alleged rights. These disputes arise from time to time and as they arise are addressed and ultimately resolved through both informal and formal means, including negotiated resolution, arbitration and litigation. In all such matters, the Company believes that its positions are legally and commercially reasonable. While the final outcome of these matters cannot be predicted with certainty, the Company does not believe that any of these matters, when finally resolved, will have a materialmaterially adverse effect on the Company’s financial position or liquidity. However, an adverse resolution of one or more of these items in any one quarter or fiscal year could have a materialmaterially adverse effect on the Company’s results of operations in that period.
14
In May 2005, the Company received and responded to a subpoena from the SEC seeking information regarding certain loss mitigation insurance products. Group, the Company’s parent, has stated that the Company will fully cooperate with this and any future inquiries and the Company provided the requested information. The Company does not believe that it has engaged in any improper business practices with respect to loss mitigation insurance products.
The Company’s insurance subsidiaries have also received and have responded to broadly distributed information requests by state regulators including among others, from Delaware and Georgia.
ITEM 4.Submission of Matters to a Vote of Security Holders
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Information for Item 4 is not required pursuant to General Instruction I(2) of Form 10-K.
PART II
ITEM 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity SecuritiesMARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market Information and Holder of Common Stock
Stock.
As of December 31, 2006,2008, all of the Company’s common stock was owned by GroupHoldings Ireland and was not publicly traded.
Dividend History and Restrictions
Restrictions.
In 2008, the Company paid a $10.0 million dividend to Holdings Ireland. The Company did not pay any dividends in 20062007 and 2005. In conjunction with the sale of the UK branch of Everest Re to an affiliate, the Company paid a dividend in 2004 of $26.3 million.2006. The declaration and payment of future dividends, if any, by the Company will be at the discretion of the Board of Directors and will depend upon many factors, including the Company’s earnings, financial condition, business needs and growth objectives, capital and surplus requirements of its operating subsidiaries, regulatory restrictions, rating agency considerations and other factors. As an insurance holding company, the Company is dependent on dividends and other permitted payments from its subsidiaries to pay cash dividends to its stockholder. The payment of dividends to Holdings by Everest Re is subject to limitations imposed by Delaware law. Generally, Everest Re may only pay dividends out of its statutory earned surplus, which was $1.8$1.4 billion at December 31, 2006,2008, and only after it has given 10 days
prior notice to the Delaware Insurance Commissioner. During this 10-day period, the Commissioner may, by order, limit or disallow the payment of ordinary dividends if the Commissioner finds the insurer to be presently or potentially in financial distress. Further, the maximum amount of dividends that may be paid without the prior approval of the Delaware Insurance Commissioner in any twelve month period is the greater of (1) 10% of an insurer’s statutory surplus as of the end of the prior calendar year or (2) the insurer’s statutory net income, not including realized capital gains, for the prior calendar year. Under this definition, theThe maximum amount that will beis available for the payment of dividends by Everest Re in 20072009 without triggering the requirement for prior regulatory approval of regulatory authorities in connection with a dividend is $270.4$315.6 million.
Recent Sales of Unregistered SecuritiesNone.Securities.
None.
ITEM 6.Selected Financial Data
SELECTED FINANCIAL DATA
Information for Item 6 is not required pursuant to General Instruction I(2) of Form 10-K.
15
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following is a discussion and analysis of theour results of operations and financial condition of the Company. This discussion and analysiscondition. It should be read in conjunction with the Consolidated Financial Statements and accompanying notes thereto presented under ITEM 8, “Financial Statements and Supplementary Data”.
INDUSTRY CONDITIONSIndustry Conditions.
The worldwide reinsurance and insurance businesses are highly competitive, as well as cyclical by product and market. As a result, financial results tend to fluctuate with periods of constrained availability, high rates and strong profits followed by periods of abundant capacity, low rates and constrained profitability. Competition in the types of reinsurance and insurance business that the Company underwriteswe underwrite is based on many factors, including the perceived overall financial strength of the reinsurer or insurer, ratings of the reinsurer or insurer by A.M. Best and/or Standard & Poor’s, underwriting expertise, the jurisdictions where the reinsurer or insurer is licensed or otherwise authorized, capacity and coverages offered, premiums charged, other terms and conditions of the reinsurance and insurance business offered, services offered, speed of claims payment and reputation and experience in lines written. TheseFurthermore, the market impact from these competitive factors operate at the individual market participant levelrelated to varying degrees, as applicable to the specific participant’s circumstances. They also operate in aggregatereinsurance and insurance is generally not consistent across the reinsurance industry more generally, contributing, in combination with economic conditionslines of business, domestic and variations in the reinsurance buying practices of insurance companies (by participantinternational geographical areas and in the aggregate), to cyclical movements in reinsurance rates, terms and conditions and ultimately reinsurance industry aggregate financial results.distribution channels.
The Company competes
We compete in the U.S. and international reinsurance and insurance markets with numerous global competitors. The Company’sOur competitors include independent reinsurance and insurance companies, subsidiaries or affiliates of established worldwide insurance companies, reinsurance departments of certain insurance companies and domestic and international underwriting operations, including underwriting syndicates at Lloyd’s. Some of these competitors have greater financial resources than the Companywe do and have established long-termlong term and continuing business relationships, which can be a significant competitive advantage. In addition, the lack of strong barriers to entry into the reinsurance business and the potential for securitization of reinsurance and insurance risks through capital markets provide additional sources of potential reinsurance and insurance capacity and competition.
In 2006,
During the Company observed strong price increases,latter part of 2007 and more restricted limits, in those property lines and regions that were most affected by the catastrophe events of 2005, principally Hurricanes Katrina, Rita and Wilma. Reinsurance capacity in these areas was constrained, particularly for catastrophe reinsurance, which includes southeastern U.S. exposures andthroughout 2008, there has been a significant slowdown in the retrocessionglobal economy. Excessive availability and energy lines. The record catastrophe lossesuse of 2005 have also generallycredit, particularly by individuals, led to modest strengtheningincreased defaults on sub-prime mortgages in the U.S. and elsewhere, falling values for houses and many commodities and contracting consumer spending. The significant increase in default rates negatively impacted the value of asset-backed securities held by both foreign and domestic institutions. The defaults have led to a corresponding increase in foreclosures, which have driven down housing values, resulting in additional losses on the asset-backed securities. During the third and fourth quarters of 2008, the credit markets deteriorated dramatically, evidenced by widening credit spreads and dramatically reduced availability of credit. Many financial institutions, including some insurance entities, experienced liquidity crises due to
immediate demands for funds for withdrawals or collateral, combined with falling asset values and their inability to sell assets to meet the increased demands. As a result, several financial institutions have failed or been acquired at distressed prices, while others have received loans from the U.S. propertygovernment to continue operations. The liquidity crisis significantly increased the spreads on fixed maturities and, at the same time, had a dramatic and negative impact on the stock markets around the world. The combination of losses on securities from failed or impaired companies combined with the decline in values of fixed maturities and equity securities has resulted in significant declines in the capital bases of most insurance and reinsurance companies. It is too early to predict the timing and extent of impact the capital deterioration will have on insurance and reinsurance market conditions. There is an expectation that these events will ultimately result in increased rates for insurance and reinsurance in certain segments of the market, but there is no assurance that this will not be the case.
Worldwide insurance and reinsurance market conditions continued to be very competitive. Generally, there was ample insurance and reinsurance capacity relative to demand. We noted, however, that in many markets and lines, thatthe rates of decline have little or no substantive catastrophe exposureslowed, pricing in some segments was relatively flat and price stabilizationthere was upward movement in some others. Competition and its effect on rates, terms and conditions vary widely by market and coverage yet continues to be most prevalent in the U.S. casualty insurance and reinsurance markets. However, certainIn addition to demanding lower rates and improved terms, ceding companies have retained more of their business by reducing quota share percentages, purchasing excess of loss covers in lieu of quota shares, and increasing retentions on excess of loss business. Our quota share premiums have declined, particularly on catastrophe exposed property business, due to slower growth and increased purchases of common account covers by ceding companies, which reduces the Company’spremiums subject to the quota share contract. The U.S. casualty lines continue to exhibit weaker market conditions led by the medical stop loss and D&O reinsurance classes,insurance markets in which we participate were extremely competitive as well, asparticularly in the California workers’ compensation, insurance line. The Company believes that U.S. casualty reinsurancepublic entity and contractor sectors. While our growth has slowed, given the specialty nature of our business and our underwriting discipline, we believe the impact on the profitability of our business will be less pronounced than on the market generally.
Rates in the international markets have generally remains adequately priced; however, increased price competition at the insurance company level and cedants’ increased appetite for retainingbeen more profitable business net following several years of hard-market conditions, may resultadequate than in modestly softer reinsurance pricing. The Company’s U.S. insurance operation is less affected by these standard casualty insurance market conditions given its specialty insurance program orientation. Finally, the Company continues to observe generally stable property reinsurance market conditions in most countries outside of the U.S., exceptand we have seen some increases, particularly for hardening propertycatastrophe exposed business. 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 conditionsand on the economic growth expected for Brazil in Mexico following Hurricane Wilma, while casualtythe future.
The reinsurance industry has experienced a period of falling rates and volume. Profit opportunities have become generally less available over time; however the unfavorable trends appear to have abated somewhat. We are softening.
U.S. property reinsurance market conditions tightened, particularly within peak catastrophe zones, during 2006. This market hardening was particularly pronouncednow seeing smaller rate declines, pockets of stability and some increases in third quarter renewals with incrementally higher rate changessome markets and even more restrictive coverage terms than earlier in 2006. As a result, many reinsurance buyers
16
were not able to fully place their reinsurance program and have been forced to raise retention levels and/or reduce catastrophe limit purchases. In turn, insurance companies continue to adjust limits and coverages and increase the premium rates they charge their customers. Together, these trends have generally resulted in insurance companies retaining more property risk exposure and being more prone to potential future earnings volatility than in past years. This trend reflects an imbalance between reinsurance supply and demand.for some coverages. As a result of this imbalancevery significant investment and higher rates, additional competition is enteringcatastrophe losses incurred by both primary insurers and reinsurers over the marketpast year, but principally in the form of new companiesmost recent six months, industry-wide capital has declined and alternative risk transfer mechanisms. In January 2007, the Florida legislature enacted insurance reform that increases insurer’s access to the Florida Hurricane Catastrophe Fund, thus potentially reducing the amount of reinsurance purchased from the private reinsurance market. The Company is unable to predict the impact on future market conditions from the increased competition and legislative reform. In addition to these market forces, reinsurers continue to reassess their risk appetites and rebalance their property portfolios to reflect improved price to exposure metrics against the backdrop of: (i) recent revisions to the industry’s catastrophe loss projection models, which are indicating significantly higher loss potentials and consequently higher pricing requirements and (ii) elevated rating agency scrutiny has increased. There is an expectation that given the rate softening that has occurred over the past several quarters, the industry-wide decline in capital combined with volatile and unreceptive markets and a looming recession, will lead to a hardening of insurance and reinsurance marketplace rates, terms and conditions. It is too early to gauge the extent of hardening, if any, that will occur; however, it appears that much of the redundant capital requirementshas been wrung out of the industry, and the stage is set for many catastrophe exposed companies.firmer markets.
In light of its 2005 catastrophe experience, the Company reexamined its risk management practices, concluded that its control framework operated
January 2009, renewal rates, particularly for property catastrophes and retrocessional covers and in international markets were generally as intended and made appropriate portfolio adjustmentsfirmer compared to its property reinsurance operations during the first nine months of 2006. This portfolio repositioning, particularly within peak catastrophe zones, including Southeast U.S., Mexico and Gulf of Mexico, has enabled the Company to benefit from these dislocated markets by carefully shifting the mix of its writings toward the most profitable classes, lines, customers and territories and enhancing portfolio balance and diversification.a year ago.
Overall, the Company believeswe believe that current marketplace conditions offer solidprofit opportunities for the Companyus given itsour strong ratings, distribution system, reputation and expertise. The Company continuesWe continue to employ its opportunisticour strategy of targeting those segments offeringbusiness that offers the greatest profit potential, while maintaining balance and diversification in itsour overall portfolio.
17
FINANCIAL SUMMARYFinancial Summary.The Company’s management monitors
We monitor and evaluatesevaluate our overall Company performance based upon financial results. The following table displays a summary of the consolidated net (loss) income, ratios and stockholder’s equity for the yearsperiods indicated:
| Years Ended December 31, |
| Percentage Increase/(Decrease) | ||||||
(Dollars in millions) | 2008 |
| 2007 |
| 2006 |
| 2008/2007 |
| 2007/2006 |
Gross written premiums | $ 2,894.8 |
| $ 3,155.1 |
| $ 3,186.0 |
| -8.2% |
| -1.0% |
Net written premiums | 1,675.4 |
| 2,072.9 |
| 2,290.3 |
| -19.2% |
| -9.5% |
|
|
|
|
|
|
|
|
|
|
REVENUES: |
|
|
|
|
|
|
|
|
|
Premiums earned | $ 1,881.8 |
| $ 2,178.9 |
| $ 2,247.2 |
| -13.6% |
| -3.0% |
Net investment income | 363.1 |
| 406.6 |
| 372.4 |
| -10.7% |
| 9.2% |
Net realized capital (losses) gains | (489.2) |
| 80.9 |
| 35.0 |
| NM |
| 131.4% |
Other income (expense) | 57.9 |
| (73.6) |
| (40.5) |
| -178.7% |
| 81.6% |
Total revenues | 1,813.6 |
| 2,592.7 |
| 2,614.0 |
| -30.1% |
| -0.8% |
|
|
|
|
|
|
|
|
|
|
CLAIMS AND EXPENSES: |
|
|
|
|
|
|
|
|
|
Incurred losses and loss adjustment expenses | 1,465.6 |
| 1,507.6 |
| 1,557.1 |
| -2.8% |
| -3.2% |
Commission, brokerage, taxes and fees | 398.6 |
| 465.9 |
| 438.5 |
| -14.4% |
| 6.3% |
Other underwriting expenses | 129.9 |
| 123.9 |
| 98.7 |
| 4.8% |
| 25.5% |
Interest, fee and bond issue cost amortization expense | 79.0 |
| 91.1 |
| 69.7 |
| -13.3% |
| 30.7% |
Total claims and expenses | 2,073.1 |
| 2,188.5 |
| 2,164.0 |
| -5.3% |
| 1.1% |
|
|
|
|
|
|
|
|
|
|
(LOSS) INCOME BEFORE TAXES | (259.5) |
| 404.3 |
| 450.0 |
| -164.2% |
| -10.2% |
Income tax (benefit) expense | (134.7) |
| 100.1 |
| 117.1 |
| -234.6% |
| -14.5% |
NET (LOSS) INCOME | $ (124.8) |
| $ 304.2 |
| $ 332.9 |
| -141.0% |
| -8.6% |
|
|
|
|
|
|
|
|
|
|
RATIOS: |
|
|
|
|
|
| Point Change | ||
Loss ratio | 77.9% |
| 69.2% |
| 69.3% |
| 8.7 |
| (0.1) |
Commission and brokerage ratio | 21.2% |
| 21.4% |
| 19.5% |
| (0.2) |
| 1.9 |
Other underwriting expense ratio | 6.9% |
| 5.7% |
| 4.4% |
| 1.2 |
| 1.3 |
Combined ratio | 106.0% |
| 96.3% |
| 93.2% |
| 9.7 |
| 3.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| At December 31, |
| Percentage Increase/(Decrease) | ||||||
(Dollars in millions) | 2008 |
| 2007 |
| 2006 |
| 2008/2007 |
| 2007/2006 |
Balance sheet data: |
|
|
|
|
|
|
|
|
|
Total investments and cash | $ 7,395.1 |
| $ 8,992.8 |
| $ 8,451.8 |
| -17.8% |
| 6.4% |
Total assets | 12,866.6 |
| 13,543.5 |
| 12,888.3 |
| -5.0% |
| 5.1% |
Loss and loss adjustment expense reserves | 7,420.0 |
| 7,538.7 |
| 7,397.3 |
| -1.6% |
| 1.9% |
Total debt | 1,179.1 |
| 1,178.9 |
| 995.6 |
| 0.0% |
| 18.4% |
Total liabilities | 10,663.7 |
| 10,976.0 |
| 10,669.9 |
| -2.8% |
| 2.9% |
Stockholder’s equity | 2,203.0 |
| 2,567.5 |
| 2,218.4 |
| -14.2% |
| 15.7% |
|
|
|
|
|
|
|
|
|
|
(NM, not meaningful) |
|
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding) |
|
|
|
|
|
|
|
|
|
Revenues.
Premiums. Gross written premiums decreased by $260.3 million, or 8.2%, in 2008 compared to 2007, reflecting a decline of $146.5 million in our reinsurance business and $113.8 million in our insurance business. The decline in our reinsurance business was primarily attributable to continued competitive conditions in both the property and casualty sectors of the market, especially in the U.S., partially offset by strong renewals and higher rates in international markets. Insurance segment premiums were also lower, as
| Years Ended December 31, | Percentage Increase/(Decrease) | ||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2006 | 2005 | 2004 | 2006/2005 | 2005/2004 | ||||||||||||||||||
| Gross written premiums | $ | 3,185,975 | $ | 3,339,853 | $ | 3,820,695 | -4.6 | % | -12.6 | % | |||||||||||||
| Net written premiums | 2,290,261 | 2,395,650 | 2,932,718 | -4.4 | % | -18.3 | % | ||||||||||||||||
REVENUES: | |||||||||||||||||||||||
| Premiums earned | $ | 2,247,200 | $ | 2,426,076 | $ | 2,829,151 | -7.4 | % | -14.2 | % | |||||||||||||
| Net investment income | 372,352 | 325,217 | 329,184 | 14.5 | % | -1.2 | % | ||||||||||||||||
| Net realized capital gains | 34,957 | 64,568 | 56,710 | -45.9 | % | 13.9 | % | ||||||||||||||||
| Other (expense) income | (40,542 | ) | 10,344 | (67,881 | ) | N | M | N | M | ||||||||||||||
| Total revenues | 2,613,967 | 2,826,205 | 3,147,164 | -7.5 | % | -10.2 | % | ||||||||||||||||
| CLAIMS AND EXPENSES: | |||||||||||||||||||||||
| Incurred losses and loss adjustment expenses | 1,557,079 | 2,202,820 | 2,172,371 | -29.3 | % | 1.4 | % | ||||||||||||||||
| Commission, brokerage, taxes and fees | 438,505 | 513,394 | 577,499 | -14.6 | % | -11.1 | % | ||||||||||||||||
| Other underwriting expenses | 98,729 | 101,324 | 89,074 | -2.6 | % | 13.8 | % | ||||||||||||||||
| Interest, fee and bond issue cost amortization expense | 69,696 | 74,197 | 76,610 | -6.1 | % | -3.1 | % | ||||||||||||||||
| Total claims and expenses | 2,164,009 | 2,891,735 | 2,915,554 | -25.2 | % | -0.8 | % | ||||||||||||||||
| INCOME (LOSS) BEFORE TAXES | 449,958 | (65,530 | ) | 231,610 | 786.6 | % | -128.3 | % | |||||||||||||||
| Income tax expense (benefit) | 117,052 | (70,236 | ) | 56,137 | 266.7 | % | -225.1 | % | |||||||||||||||
| NET INCOME | $ | 332,906 | $ | 4,706 | $ | 175,473 | N | M | -97.3 | % | |||||||||||||
| RATIOS: | Point Change | Point Change | |||||||||||||||||||||
| Loss ratio | 69.3 | % | 90.8 | % | 76.8 | % | (21.5 | ) | 14.0 | ||||||||||||||
| Commission and brokerage ratio | 19.5 | % | 21.2 | % | 20.4 | % | (1.7 | ) | 0.8 | ||||||||||||||
| Other underwriting expense ratio | 4.4 | % | 4.1 | % | 3.1 | % | 0.3 | 1.0 | |||||||||||||||
| Combined ratio | 93.2 | % | 116.1 | % | 100.3 | % | (22.9 | ) | 15.8 | ||||||||||||||
December 31, | |||||||||||||||||||||||
| (Dollars in millions) | 2006 | 2005 | 2004 | ||||||||||||||||||||
| Stockholder's equity | $ | 2,218.4 | $ | 1,790.7 | $ | 1,743.8 | 23.9 | % | 2.7 | % | |||||||||||||
(NM, not meaningful) | |||||||||||||||||||||||
conditions for workers’ compensation, public equity and contractors business became increasingly competitive, which reduced the volume of business that met our underwriting and pricing criteria. Net written premiums decreased by $397.6 million, or 19.2%, in 2008 compared to 2007. The decrease in gross written premiums in conjunction with the increase in cessions under the affiliated quota share agreement, contributed to the decline. Correspondingly, premiums earned decreased by $297.1 million, or 13.6%, in 2008 compared to 2007.
Gross written premiums decreased by $30.9 million, or 1.0%, in 2007 compared to 2006, reflecting a decline of $50.2 million in our reinsurance business, partially offset by an increase of $19.3 million in our U.S. insurance business. Net written premiums decreased by $217.4 million, or 9.5%, in 2007 compared to 2006, due to the change in the mix of our program business and the resulting change in reinsurance. Premiums earned decreased by $68.3 million, or 3.0%, in 2007 compared to 2006. The decrease is primarily due to the result of timing; premiums are earned ratably over the coverage period whereas net written premiums are reflected at the initiation of the coverage period.
Net Investment Income.Net investment income decreased by 10.7% in 2008 compared to 2007, primarily due to the decrease in short-term investment income from both lower rates and decreased holdings, diminished limited partnership investment income, particularly from limited partnerships which were principally invested in public equities and decreased income from reduced holdings in equity securities. Partially offsetting these decreases was an increase in fixed maturity securities income. Pre-tax investment income as a percentage of average invested assets was 4.5% for 2008 compared to 4.9% for 2007.
Net investment income increased by 9.2% in 2007 compared to 2006, primarily due to the growth in invested assets to $9.0 billion at December 31, 2007 from $8.5 billion at December 31, 2006. The growth in invested assets was principally driven by the $400.0 million of long term note issuance and $151.9 million of operating cash flows, partially offset by the redemption of $216.5 million of junior subordinated debt securities. Pre-tax investment portfolio yield for 2007 was 4.9% compared to 4.8% for 2006.
Net Realized Capital (Losses) Gains. Net realized capital losses were $489.2 million for 2008, while in 2007 and 2006 we had net realized capital gains of $80.9 million and $35.0 million, respectively.
The Company’snet realized capital losses for 2008 were primarily the result of the global declines in the values of equity and fixed income securities. We incurred $193.5 million of net realized capital losses from the sale of fixed maturity and equity securities we owned as we realigned our investment portfolios. Our equity security portfolio decreased $134.9 million and our other invested assets decreased $87.8 million as a result of fair value adjustments. Our fixed maturity securities decreased $74.5 million due to other-than-temporary impairments. We report changes in fair values as realized capital gains or losses in accordance with Statement of 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”), and we report realized capital losses on our fixed income portfolio from other-than-temporary impairments as realized capital losses in accordance with FASB Staff Position (“FSP”) FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairments and Its Application to Certain Investments” (“FAS 115-1”).
Net realized gains in 2007 consisted of $96.6 million in changes in fair value of the equity securities and other invested asset investment portfolios, partially offset by $11.7 million of losses from sales of equity and fixed maturity securities and $4.0 million of other-than-temporary impairments of the fixed maturity securities. Net realized gains in 2006 results were very strong with netthe result of sales from equity securities of $26.6 million and fixed maturity securities of $8.4 million.
Other Income (Expense). We recorded income of $332.9$57.9 million for 2008 and expense of $73.6 million and $40.5 million, for 2007 and 2006, respectively. The fluctuations in net other income (expense) were primarily due to the change in foreign currency exchange rates over the periods and change in deferrals on retroactive reinsurance agreements with affiliates.
Claims and Expenses.
Incurred Losses and LAE. The following table presents our incurred losses and LAE for the periods indicated.
| Years Ended December 31, |
| ||||||||||||
| Current |
| Ratio %/ |
| Prior |
| Ratio %/ |
| Total |
| Ratio %/ | |||
(Dollars in millions) | Year |
| Pt Change |
| Years |
| Pt Change |
| Incurred |
| Pt Change | |||
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional (a) | $ 1,134.8 |
| 60.3% |
|
| $ 128.4 |
| 6.8% |
|
| $ 1,263.1 |
| 67.1% |
|
Catastrophes | 188.7 |
| 10.0% |
|
| 13.7 |
| 0.7% |
|
| 202.4 |
| 10.8% |
|
A&E | - |
| 0.0% |
|
| - |
| 0.0% |
|
| - |
| 0.0% |
|
Total segment | $ 1,323.5 |
| 70.3% |
|
| $ 142.0 |
| 7.5% |
|
| $ 1,465.6 |
| 77.9% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional (a) | $ 1,174.9 |
| 53.9% |
|
| $ (6.9) |
| -0.3% |
|
| $ 1,168.0 |
| 53.6% |
|
Catastrophes | 56.9 |
| 2.6% |
|
| 16.3 |
| 0.8% |
|
| 73.3 |
| 3.4% |
|
A&E | - |
| 0.0% |
|
| 266.4 |
| 12.2% |
|
| 266.4 |
| 12.2% |
|
Total segment | $ 1,231.8 |
| 56.5% |
|
| $ 275.7 |
| 12.7% |
|
| $ 1,507.6 |
| 69.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional (a) | $ 1,477.2 |
| 65.7% |
|
| $ (157.1) |
| -7.0% |
|
| $ 1,320.1 |
| 58.7% |
|
Catastrophes | 12.4 |
| 0.6% |
|
| 197.2 |
| 8.8% |
|
| 209.6 |
| 9.3% |
|
A&E | - |
| 0.0% |
|
| 27.4 |
| 1.2% |
|
| 27.4 |
| 1.2% |
|
Total segment | $ 1,489.7 |
| 66.3% |
|
| $ 67.4 |
| 3.0% |
|
| $ 1,557.1 |
| 69.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance 2008/2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional (a) | $ (40.1) |
| 6.4 | pts |
| $ 135.3 |
| 7.1 | pts |
| $ 95.2 |
| 13.5 | pts |
Catastrophes | 131.8 |
| 7.4 | pts |
| (2.6) |
| (0.0) | pts |
| 129.2 |
| 7.4 | pts |
A&E | - |
| - | pts |
| (266.4) |
| (12.2) | pts |
| (266.4) |
| (12.2) | pts |
Total segment | $ 91.7 |
| 13.8 | pts |
| $ (133.7) |
| (5.1) | pts |
| $ (42.0) |
| 8.7 | pts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance 2007/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional (a) | $ (302.3) |
| (11.8) | pts |
| $ 150.2 |
| 6.7 | pts |
| $ (152.1) |
| (5.1) | pts |
Catastrophes | 44.5 |
| 2.1 | pts |
| (180.9) |
| (8.0) | pts |
| (136.4) |
| (6.0) | pts |
A&E | - |
| - | pts |
| 239.0 |
| 11.0 | pts |
| 239.0 |
| 11.0 | pts |
Total segment | $ (257.8) |
| (9.8) | pts |
| $ 208.3 |
| 9.7 | pts |
| $ (49.5) |
| (0.1) | pts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) Attritional losses exclude catastrophe and A&E losses. |
|
|
|
|
|
|
|
|
| |||||
(Some amounts may not reconcile due to rounding.) |
|
|
|
|
|
|
|
|
|
| ||||
Incurred losses and LAE were lower by $42.0 million, or 2.8%, in 2008 compared to 2007 as increases in attritional prior years and catastrophe losses were more than offset by a reduction in A&E period over period. Prior years’ attritional losses increased $135.3 million, principally as a result of $85.3 million of development on loss reserves for a run-off auto loan credit insurance program.
Catastrophe losses, at $202.4 million, were $129.2 million higher than in 2007, driven by Hurricanes Gustav and Ike and a major snowstorm in China. While 2008 ranks as one of the costliest years on record for insured natural catastrophe losses, our losses were generally in line with our modeled expected annual aggregate catastrophe losses as developed through our enterprise risk and catastrophe exposure management processes.
We strengthened our asbestos reserves by $266.4 million in 2007, and had no development in 2008 as loss activity in 2008 was generally in line with the expected run-off of the reserves established at December 31, 2007.
Incurred losses and LAE decreased by $49.5 million, or 3.2%, in 2007 compared to the same period in 2006. This decrease was primarily due to lower attritional losses of $152.1 million and lower catastrophe losses of $136.4 million, partially offset by an increase of $239.0 million in A&E loss reserve strengthening.
The decrease in catastrophe losses reflects the non-recurrence in 2007 of significant prior years’ development experienced in 2006 on catastrophe loss reserves. The increase in A&E reserves emanated from actions taken in response to an extensive in-house study of our asbestos exposures by our actuarial and claim units.
Commission, Brokerage, Taxes and Fees.Commission, brokerage, taxes and fees decreased by $67.3 million, or 14.4%, in 2008 compared to 2007. This directly variable expense was influenced by the decline in net earned premiums, lower contingent commissions and increased cessions under the affiliated quota share agreement, partially offset by higher commission rates on new insurance programs.
Commission, brokerage and tax expenses increased by $27.4 million, or 6.3%, in 2007 compared to 2006. An increase in ceding commissions due to market conditions and higher commissions on new insurance programs were the principal drivers in this directly variable expense.
Other Underwriting Expenses.Other underwriting expenses for 2008 were $129.9 million compared to $123.9 million for 2007. The increase is primarily due to higher compensation and benefits expense resulting from increased staff, 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 $5.6 million and $5.3 million for 2008 and 2007, respectively.
Other underwriting expenses for 2007 were $123.9 million compared to $98.7 million for 2006. The increase was primarily due to higher compensation and benefits expense resulting from increased staff, primarily in the U.S. Insurance segment. Included in other underwriting expenses were corporate expenses of $5.3 million and $4.5 million for 2007 and 2006, respectively.
Interest, Fees and Bond Issue Cost Amortization Expense. Interest and other expense was $79.0 million and $91.1 million for 2008 and 2007, respectively. The decrease was primarily due to the acceleration of amortization of the bond issue costs for the junior subordinated debt securities which were retired in November, 2007, with no such expense in 2008. In addition, the interest reduction on the retired junior subordinated notes was partially offset by the interest on the new long term notes.
Interest and other expense was $91.1 million and $69.7 million for 2007 and 2006, respectively. The increase was due to the new long term notes we issued in April, 2007 and the acceleration of the amortization of the bond issue costs associated with the November 15, 2007 early retirement of the 7.85% junior subordinated debt securities.
Income Tax (Benefit) Expense. Our income tax was a benefit of $134.7 million for 2008, principally as a result of net realized capital losses due to fair value re-measurements, other-than-temporary impairments and losses on sales of public equity securities. We had income tax expense of $100.1 million and $117.1 million for 2007 and 2006, respectively, primarily due to income from operations and net realized capital gains in both periods. Our income tax benefit/expense is primarily a function of the statutory tax rate reduced by the impact of tax-preferenced investment income.
Net (Loss) Income.
We recorded a net loss of $124.8 million for 2008 compared to net income of $4.7$304.2 million for 2005. This significant earnings improvement reflects the favorable effect of a benign U.S. hurricane season relative to unprecedented Company2007 and industry hurricane$332.9 million for 2006. The decrease was primarily driven by after-tax net realized capital losses experiencedand increased catastrophe losses in 2005, as well as favorable underlying underwriting fundamentals.
Gross written premiums declined for 20062008 compared to 2005 asafter-tax net realized capital gains and fewer catastrophe losses in 2007.
Ratios.
Our combined ratio increased by 9.7 points to 106.0% in 2008 compared to 96.3% in 2007. Most of the Company continued its disciplinedincrease was due to an 8.7 point increase in the 2008 loss ratio compared to 2007. Items affecting this ratio, period over period, were a higher current accident year attritional loss ratio, greater catastrophe losses and higher adverse development on attritional loss reserves, which were partially offset by the non-recurrence in 2008 of any A&E development.
Our combined ratio increased by 3.1 points to 96.3% in 2007 compared to 93.2% in 2006, principally driven by the 1.9 point increase in the commission and brokerage ratio and the 1.3 point increase in the other underwriting expense ratio.
Stockholder’s Equity.
Stockholder’s equity decreased by $364.5 million to $2,203.0 million in 2008 from $2,567.5 million in 2007, due to $179.7 million of unrealized depreciation, net of tax, on our investments, at market value; a net loss of $124.8 million; $30.5 million of foreign currency translation adjustments; $25.2 million pension adjustments and risk management practices. In particular, the Company repositioned its U.S. property reinsurance portfolio resulting$10.0 million of dividends, partially offset by $5.6 million of capital paid-in from share-based compensation transactions. The increase in improved pricing, but lower premium volume. The premium volume decline
18
also reflects much lower premiumsunrealized depreciation is due to the run-off insurancecurrent financial market liquidity crisis that has resulted in significantly increased credit program businessspreads and a cut back in treaty casualty writings in response to market softening in many U.S. casualty reinsurance classes.concomitantly lower corporate and municipal security values.
Investment income increased from the growth of the invested asset base and greater income from limited partnership investments.
The Company’s stockholder’sStockholder’s equity increased by $0.4 billion$349.1 million to $2.2 billion$2,567.5 million in 2007 from $2,218.4 million in 2006, principally attributabledue to the net income generated during the year. This comparesof $304.2 million, $30.1 million of foreign currency translation adjustments, $11.3 million of pension adjustments and $9.4 million of capital paid-in from share-based compensation transactions, partially offset by $6.0 million of unrealized depreciation, net of tax, on our investments at market value.
Consolidated Investment Results
Net Investment Income.
Net investment income decreased 10.7% to an increase of $46.9$363.1 million to $1.8 billion in 2005.
Revenues. Gross and net written premiums declined 4.6% and 4.4%, respectively, for 2006 compared to 2005, while net premiums earned declined 7.4%2008 from $406.6 million in 2006 compared to 2005. The decrease in full year net premiums earned was2007, primarily due to a declinethe decrease in the U.S. insurance segment of 9.8%, reflective of: i) a reductionshort-term investment income from both lower rates and decreased holdings, diminished limited partnerships investment income, particularly from limited partnerships which were principally invested in credit businesspublic equity securities and decreased dividend income from reduced holdings in equity securities. Partially offsetting these decreases was an auto loan insurance program which isincrease in run-off and ii) continued reductions in the California workers’ compensation writings due to competitive market conditions. In addition, net premiums earned for the worldwide reinsurance segments in the aggregate decreased by 6.5% for 2006, reflecting multiple segment level factors, including a significant return premium for a Florida property quota share contract cancelled in 2006, the absence of sizable reinstatement premiums triggered in 2005 from severe catastrophic events, as well as the exercise of continued underwriting disciplines which emphasizes potential profitability over volume.fixed maturity securities income.
Net investment income increased 14.5% for9.2% to $406.6 million in 2007 from $372.4 million in 2006, comparedprimarily due to 2005, reflecting continued year-over-yeara growth in invested assets to $9.0 billion at December 31, 2007 from $8.5 billion at December 31, 2006. The invested asset growth emanated largely from continued positive cash flow from operations and the net proceeds from debt issuance and redemption.
The following table shows the components of net investment income for the periods indicated:
| Years Ended December 31, | ||||
(Dollars in millions) | 2008 |
| 2007 |
| 2006 |
Fixed maturities | $ 313.7 |
| $ 294.7 |
| $ 299.6 |
Equity securities | 6.0 |
| 15.7 |
| 18.6 |
Short-term investments and cash | 28.6 |
| 61.9 |
| 28.4 |
Other invested assets |
|
|
|
|
|
Limited partnerships | 13.2 |
| 35.5 |
| 38.5 |
Other | 9.5 |
| 7.1 |
| 2.9 |
Total gross investment income | 370.9 |
| 414.9 |
| 388.0 |
Interest credited and other expense | (7.8) |
| (8.3) |
| (15.7) |
Total net investment income | $ 363.1 |
| $ 406.6 |
| $ 372.4 |
(Some amounts may not reconcile due to rounding) |
|
|
|
|
|
The following table shows a $31.1 million increase in income from limited partnership investments. The averagecomparison of various investment portfolio yields for 2006 were 4.6% pre-taxthe periods indicated:
| 2008 | 2007 | 2006 |
Imbedded pre-tax yield of cash and invested assets at December 31 | 4.3% | 4.6% | 4.6% |
Imbedded after-tax yield of cash and invested assets at December 31 | 3.5% | 3.6% | 3.7% |
|
|
|
|
Annualized pre-tax yield on average cash and invested assets | 4.5% | 4.9% | 4.8% |
Annualized after-tax yield on average cash and invested assets | 3.6% | 3.9% | 3.8% |
Net Realized Capital (Losses) Gains.
The following table presents the composition of our net realized capital (losses) gains for the periods indicated:
| Years Ended December 31, |
| 2008/2007 |
| 2007/2006 | ||||
(Dollars in millions) | 2008 |
| 2007 |
| 2006 |
| Variance |
| Variance |
(Losses) gains from sales: |
|
|
|
|
|
|
|
|
|
Fixed maturities, market value |
|
|
|
|
|
|
|
|
|
Gains | $ 7.0 |
| $ 1.0 |
| $ 8.4 |
| $ 6.0 |
| $ (7.4) |
Losses | (94.4) |
| (2.0) |
| - |
| (92.4) |
| (2.0) |
Total | (87.4) |
| (1.0) |
| 8.4 |
| (86.4) |
| (9.4) |
|
|
|
|
|
|
|
|
|
|
Equity securities, market value |
|
|
|
|
|
|
|
|
|
Gains | - |
| - |
| 31.2 |
| - |
| (31.2) |
Losses | - |
| - |
| (4.6) |
| - |
| 4.6 |
Total | - |
| - |
| 26.6 |
| - |
| (26.6) |
|
|
|
|
|
|
|
|
|
|
Equity securities, fair value |
|
|
|
|
|
|
|
|
|
Gains | 6.4 |
| 3.0 |
| - |
| 3.4 |
| 3.0 |
Losses | (112.3) |
| (13.7) |
| - |
| (98.6) |
| (13.7) |
Total | (105.9) |
| (10.7) |
| - |
| (95.2) |
| (10.7) |
|
|
|
|
|
|
|
|
|
|
Short-term assets |
|
|
|
|
|
|
|
|
|
Gains | - |
| - |
| - |
| - |
| - |
Losses | (0.2) |
| - |
| - |
| (0.2) |
| - |
Total | (0.2) |
| - |
| - |
| (0.2) |
| - |
|
|
|
|
|
|
|
|
|
|
Total net realized capital (losses) gains from sales |
|
|
|
|
|
|
|
|
|
Gains | 13.4 |
| 4.0 |
| 39.6 |
| 9.4 |
| (35.6) |
Losses | (206.9) |
| (15.7) |
| (4.6) |
| (191.2) |
| (11.1) |
Total | (193.5) |
| (11.7) |
| 35.0 |
| (181.8) |
| (46.7) |
|
|
|
|
|
|
|
|
|
|
Other-than-temporary impairments | (74.5) |
| (4.0) |
| - |
| (70.5) |
| (4.0) |
|
|
|
|
|
|
|
|
|
|
(Losses) gains from fair value adjustments: |
|
|
|
|
|
|
|
|
|
Fixed maturities, fair value | 1.5 |
| - |
| - |
| 1.5 |
| - |
Equity securities, fair value | (134.9) |
| 84.4 |
| - |
| (219.3) |
| 84.4 |
Other invested assets, fair value | (87.8) |
| 12.2 |
| - |
| (100.0) |
| 12.2 |
Total | (221.2) |
| 96.6 |
| - |
| (317.8) |
| 96.6 |
|
|
|
|
|
|
|
|
|
|
Total net realized capital (losses) gains | $ (489.2) |
| $ 80.9 |
| $ 35.0 |
| $ (570.1) |
| $ 45.9 |
|
|
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding) |
|
|
|
|
|
|
|
|
|
We recorded $221.2 million in net realized capital losses due to fair value re-measurements on fixed maturity securities, equity securities and 3.7% after-tax, slightly higher compared to the prior year.
Netother invested assets for 2008 and $96.6 million of net realized capital gains due to fair value re-measurements on equity securities and other invested assets for 2007. In addition, we recorded other-than-temporary impairments of $74.5 million and $4.0 million for 2008 and 2007, respectively. These net realized capital losses were modest in relationattributable to the Company’s invested asset base, mainly reflecting normal portfolio management activities in response to changes in interest ratescurrent financial liquidity crisis and related global economic downturn. Numerous financial corporations have either filed for bankruptcy or received assistance from the U.S. Government. This activity has severely impacted both the equity and credit spreads.markets. Equities are trading at multiyear lows, spreads on fixed maturities are at unprecedented levels and many securities have been downgraded by rating agencies.
Expenses. The Company’s incurred losses and loss adjustment expenses (“LAE”) decreased 29.3% in 2006 compared to 2005, primarily due to the relative absence of current year catastrophe losses.
The Company’s loss ratio improvement of 22 points for 2006 compared to 2005 resulted from a 25 point improvement in the catastrophe loss ratio.Segment Results.
Commission, brokerage, and tax expenses decreased by 14.6% in 2006 from 2005. The 7.4% decline in earned premiums in 2006 compared to 2005 was the principal driver of the decrease in this directly variable expense. Other underwriting expenses for 2006 decreased by 2.6% compared to 2005, primarily due to a decrease in corporate non-allocated expenses.
The Company’s effective income tax rate for 2006 was 26.0% compared with the effective tax rate for 2005 of 107.2%, which was impacted by the large catastrophe losses.
UK Branch Sale. Effective January 1, 2004, Everest Re sold its UK branch to Bermuda Re (“UK Branch Sale”) and in conjunction with the sale, Everest Re provided a reserve indemnity agreement for adverse development on loss and loss adjustment expenses (“LAE”) reserve balances as of December 31, 2002, as well as made sale related adjustments for the 2003 and 2002 quota share cessions. For the year ended December 31, 2004, gross written premiums, net written premiums, premiums earned, incurred losses and LAE, commission, brokerage, taxes and fees and other underwriting expense related to the UK Branch Sale were $0.0 million, $139.8 million, $118.8 million, $118.6 million, $30.9 million and $0.0 million, respectively.
19
The following table reflects the reconciliation from reported to proforma for the year indicated:
| Year Ended December 31, 2004 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | As Reported | UK branch Adjustment | Proforma | ||||||||
| Gross written premiums | $ | 3,820,695 | $ | - | $ | 3,820,695 | |||||
| Net written premiums | 2,932,718 | (139,751 | ) | 2,792,967 | |||||||
REVENUES: | |||||||||||
| Premiums earned | $ | 2,829,151 | $ | (118,815 | ) | $ | 2,710,336 | ||||
| Net investment income | 329,184 | - | 329,184 | ||||||||
| Net realized capital gains | 56,710 | - | 56,710 | ||||||||
| Other expense | (67,881 | ) | - | (67,881 | ) | ||||||
| Total revenues | 3,147,164 | (118,815 | ) | 3,028,349 | |||||||
| CLAIMS AND EXPENSES: | |||||||||||
| Incurred losses and loss adjustment expenses | 2,172,371 | (118,567 | ) | 2,053,804 | |||||||
| Commission, brokerage, taxes and fees | 577,499 | (30,962 | ) | 546,537 | |||||||
| Other underwriting expense | 89,074 | - | 89,074 | ||||||||
| Interest, fee and bond issue cost amortization expense | 76,610 | - | 76,610 | ||||||||
| Total claims and expenses | 2,915,554 | (149,529 | ) | 2,766,025 | |||||||
| INCOME BEFORE TAXES | $ | 231,610 | $ | 30,714 | $ | 262,324 | |||||
In the remainder of this Financial Summary section and the following Segment Information section, all analyses relate to the comparable proforma information, except where indicated.
SEGMENT INFORMATIONThe Company, through itsThrough our subsidiaries, operateswe 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 reinsurance,basis, through reinsurance brokers, as well as directly with ceding companies within the U.S. The U.S. Insurance operation writes property and casualty insurance primarily through general agents and surplus lines brokers within the U.S. The Specialty Underwriting operation writes A&H, marine, aviation and surety business within the U.S. and worldwide through brokers and directly with ceding companies. The International operation writes non-U.S. property and casualty reinsurance through Everest Re’s branches in Canada and Singapore and offices in addition to foreign business written through Everest Re’s Miami and New Jersey offices.Jersey.
These segments are managed in a carefully coordinated fashion with strong elements of central control, with respect to pricing, risk management, control of aggregate catastrophe exposures, to catastrophic events, capital, investments and support operations. Management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting results.
Underwriting results include earned premium less losses and LAE incurred, commission and brokerage expenses and other underwriting expenses and are analyzedexpenses. We measure our underwriting results using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which respectively, divide incurred losses, commissions and brokerage and other underwriting expenses by earned premium. For selected financial information regarding these segments, see Note 16 of Notes to Consolidated Financial Statements.
20
The following tables represent the relevant operating results for the operating segments for the three years ended December 31, 2006, 2005 and 2004:
| U.S. Reinsurance | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| Gross written premiums | $ | 1,336,728 | $ | 1,386,170 | $ | 1,478,159 | |||||
| Net written premiums | 992,819 | 1,055,815 | 1,148,522 | ||||||||
Premiums earned | $ | 978,072 | $ | 1,080,453 | $ | 1,155,317 | |||||
| Incurred losses and loss adjustment expenses | 721,157 | 1,152,427 | 947,467 | ||||||||
| Commission and brokerage | 202,809 | 259,751 | 274,370 | ||||||||
| Other underwriting expenses | 24,947 | 23,980 | 23,390 | ||||||||
| Underwriting gain (loss) | $ | 29,159 | $ | (355,705 | ) | $ | (89,910 | ) | |||
U.S. Insurance | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| Gross written premiums | $ | 866,294 | $ | 932,469 | $ | 1,167,808 | |||||
| Net written premiums | 591,177 | 618,752 | 788,457 | ||||||||
Premiums earned | $ | 573,965 | $ | 636,663 | $ | 726,344 | |||||
| Incurred losses and loss adjustment expenses | 432,232 | 415,379 | 540,734 | ||||||||
| Commission and brokerage | 72,723 | 93,621 | 70,881 | ||||||||
| Other underwriting expenses | 48,918 | 51,726 | 49,286 | ||||||||
| Underwriting gain | $ | 20,092 | $ | 75,937 | $ | 65,443 | |||||
Specialty Underwriting | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| Gross written premiums | $ | 251,209 | $ | 314,630 | $ | 487,072 | |||||
| Net written premiums | 174,431 | 222,526 | 364,256 | ||||||||
Premiums earned | $ | 176,326 | $ | 224,555 | $ | 356,705 | |||||
| Incurred losses and loss adjustment expenses | 125,160 | 225,740 | 249,086 | ||||||||
| Commission and brokerage | 44,851 | 55,564 | 94,680 | ||||||||
| Other underwriting expenses | 6,559 | 6,756 | 7,069 | ||||||||
| Underwriting (loss) gain | $ | (244 | ) | $ | (63,505 | ) | $ | 5,870 | |||
International | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| Gross written premiums | $ | 731,745 | $ | 706,584 | $ | 687,657 | |||||
| Net written premiums | 531,834 | 498,557 | 491,732 | ||||||||
Premiums earned | $ | 518,837 | $ | 484,405 | $ | 471,970 | |||||
| Incurred losses and loss adjustment expenses | 278,530 | 409,274 | 316,517 | ||||||||
| Commission and brokerage | 118,122 | 104,458 | 106,606 | ||||||||
| Other underwriting expenses | 13,830 | 12,621 | 11,298 | ||||||||
| Underwriting gain (loss) | $ | 108,355 | $ | (41,948 | ) | $ | 37,549 | ||||
21
The following table reconciles the underwriting results for the operating segments to income (loss) before tax as reported in the consolidated statements of operations and comprehensive income (loss) for the years ended December 31:
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Underwriting gain (loss) | $ | 157,362 | $ | (385,221 | ) | $ | 18,952 | ||||
| UK Branch Sale and related transactions | - | - | (30,714 | ) | |||||||
| Underwriting gain (loss) | $ | 157,362 | (385,221 | ) | $ | (11,762 | ) | ||||
Net investment income | 372,352 | 325,217 | 329,184 | ||||||||
| Net Realized capital gain | 34,957 | 64,568 | 56,710 | ||||||||
| Corporate (expense) income | (4,475 | ) | (6,241 | ) | 1,969 | ||||||
| Interest, fee and bond issue cost amortization expense | (69,696 | ) | (74,197 | ) | (76,610 | ) | |||||
| Other (expense) income | (40,542 | ) | 10,344 | (67,881 | ) | ||||||
| Income (loss) before taxes | $ | 449,958 | $ | (65,530 | ) | $ | 231,610 | ||||
All the comparative analysis in this Segment Information section relates to the proforma information in the above table except where indicated otherwise.
CONSOLIDATED RESULTS OF OPERATIONSYEAR ENDED DECEMBER 31, 2006 COMPARED TO YEAR ENDED DECEMBER 31, 2005Premiums Written. Gross written premiums decreased 4.6% to $3,186.0 million in 2006 from $3,339.9 million in 2005. The Specialty Underwriting operation decreased 20.2% ($63.4 million), driven by a $53.2 million reduction in A&H premiums, as pricing for this business continues to be difficult and a $23.6 million decrease in marine and aviation premiums, partially offset by a $13.4 million increase in surety premiums. The U.S. Insurance operation decreased 7.1% ($66.2 million), mainly reflecting continued reductions in the California workers’ compensation business and run-off of the credit business. The U.S. Reinsurance operation decreased 3.6% ($49.4 million), principally reflecting a $72.7 million decrease in treaty casualty business, partially offset by a $16.4 million increase in treaty property business and by an $11.6 million increase in facultative business. Partially offsetting these declines was a 3.6% ($25.2 million) increase in the International operation, primarily due to a $47.1 million increase in international business written through the Miami and New Jersey offices, representing primarily Latin American business and by a $22.8 million increase in Canadian business, offset by a $44.1 million decrease in Asian business. The Company endeavors to write only business that meets its profit criteria; generally, increases and decreases in a line of business or region are the result of changes in management’s perceptions of the profit opportunities in the various markets.
Ceded premiums decreased to $895.7 million in 2006 from $944.2 million in 2005, primarily due to the decline in gross written premiums. Ceded premiums relate primarily to quota share reinsurance agreements between Everest Re and Bermuda Re and Everest International.
Net written premiums decreased by 4% to $2,290.3 million in 2006 from $2,395.7 million in 2005, reflecting the $153.9 million decrease in gross written premiums and the $48.5 million decrease in ceded premiums.
Premium Revenues. Net premiums earned decreased by 7.4% to $2,247.2 million in 2006 from $2,426.1 million in 2005. Contributing to this decrease was a 21.5% ($48.2 million) decrease in the Specialty Underwriting operation, a 9.8% ($62.7 million) decrease in the U.S. Insurance operation and a 9.5% ($102.4 million) decrease in the U.S. Reinsurance operation, partially offset by a 7.1% ($34.4 million) increase in the International operation. Additional premiums related to catastrophe business, included in net earned premiums,
22
were $5.1 million and $52.5 million for 2006 and 2005, respectively. These changes reflect period to period changes in net written premiums and business mix, together with normal variability in earnings patterns. Business mix changes occur not only as the Company shifts emphasis between products, lines of business, distribution channels and markets, but also as individual contracts renew or non-renew, almost always with changes in coverage, structure, prices and/or terms and as new contracts are accepted. As premium reporting, earnings, loss and commission characteristics derive from the provisions of individual contracts, the continuous turnover of individual contracts, arising from both strategic shifts and daily underwriting decisions, results in appreciable variability in various underwriting line items. Changes in estimates of the reporting patterns of ceding companies also affect premiums earned.
ExpensesIncurred Losses and LAE. The Company’sOur loss and LAE reserves reflectare our best estimate of our ultimate liability for unpaid claims. We re-evaluate our estimates of ultimate claim liability. Such estimates are regularly re-evaluatedon an ongoing basis, including re-estimates ofall prior period reserves, taking into consideration all available information and, in particular, recently reported lossclaim experience and claim experiencetrends related to prior periods. The effect of suchSuch re-evaluations isare recorded in incurred losses in the period in which the adjustment wasre-evaluation is made.
U.S. Reinsurance.
The following table showspresents the componentsunderwriting results and ratios for the U.S. Reinsurance segment for the periods indicated.
|
| Years Ended December 31, |
| 2008/2007 |
| 2007/2006 | ||||||
(Dollars in millions) |
| 2008 |
| 2007 |
| 2006 |
| Variance | % Change |
| Variance | % Change |
Gross written premiums |
| $ 957.9 |
| $ 1,193.5 |
| $ 1,336.7 |
| $ (235.6) | -19.7% |
| $ (143.2) | -10.7% |
Net written premiums |
| 569.9 |
| 854.8 |
| 992.8 |
| (284.9) | -33.3% |
| (138.0) | -13.9% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
| $ 685.1 |
| $ 939.7 |
| $ 978.1 |
| $ (254.6) | -27.1% |
| $ (38.4) | -3.9% |
Incurred losses and LAE |
| 560.0 |
| 636.9 |
| 721.2 |
| (76.9) | -12.1% |
| (84.3) | -11.7% |
Commission and brokerage |
| 159.7 |
| 230.5 |
| 202.8 |
| (70.9) | -30.7% |
| 27.7 | 13.7% |
Other underwriting expenses |
| 32.2 |
| 33.3 |
| 24.9 |
| (1.1) | -3.3% |
| 8.3 | 33.4% |
Underwriting (loss) gain |
| $ (66.8) |
| $ 39.0 |
| $ 29.2 |
| $ (105.7) | NM |
| $ 9.8 | 33.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Point Chg |
|
| Point Chg |
Loss ratio |
| 81.7% |
| 67.8% |
| 73.7% |
|
| 14.0 |
|
| (5.9) |
Commission and brokerage ratio |
| 23.3% |
| 24.5% |
| 20.7% |
|
| (1.2) |
|
| 3.8 |
Other underwriting expense ratio |
| 4.7% |
| 3.6% |
| 2.6% |
|
| 1.1 |
|
| 1.0 |
Combined ratio |
| 109.7% |
| 95.9% |
| 97.0% |
|
| 13.9 |
|
| (1.1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(NM, not meaningful) |
|
|
|
|
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding) |
|
|
|
|
|
|
|
|
|
| ||
Premiums. Gross written premiums decreased by 19.7% to $957.9 million in 2008 from $1,193.5 million in 2007, primarily due to a $104.9 million (14.7%) decrease in treaty property volume, a $71.7 million (21.6%) decrease in treaty casualty volume and a $57.9 million (39.9%) decrease in facultative volume. Property premiums were lower due to increased common account reinsurance protections, particularly on one Florida quota share account and two quota share non-renewals. Our treaty casualty premium was lower than last year as we reduced this book to a group of core accounts in response to the softer market conditions. Facultative volume decreased due to ceding companies retaining a greater portion of gross premiums and a marketplace that remains competitive. Net written premiums decreased by 33.3% to $569.9 million in 2008 compared to $854.8 million in 2007, primarily due to the decrease in gross written premiums and increased cessions under the affiliated quota share agreement. Correspondingly, premiums earned decreased by 27.1% to $685.1 million for 2008 compared to $939.7 million for 2007, consistent with the change in net written premiums.
Gross written premiums decreased by 10.7% to $1,193.5 million in 2007 from $1,336.7 million in 2006, primarily due to a $202.6 million (37.9%) decrease in treaty casualty volume and a $70.5 million (32.7%) decrease in facultative volume, partially offset by a $126.8 million (21.6%) increase in treaty property volume. The increase in treaty property writings emanated principally from new quota share treaties. The more competitive environment for the U.S. casualty business resulted in reduced opportunities to write this business profitably. Net written premiums decreased by 13.9% to $854.8 million in 2007 compared to $992.8 million in 2006, primarily due to the decrease in gross written premiums. Premiums earned decreased by 3.9% to $939.7 million for 2007 compared to $978.1 million for 2006. The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the Company’scoverage period.
Incurred Losses and LAE. The following table presents the incurred losses and LAE for the U.S. Reinsurance segment for the periods indicated.
| Years Ended December 31, |
| ||||||||||||
| Current |
| Ratio %/ |
| Prior |
| Ratio %/ |
| Total |
| Ratio %/ | |||
(Dollars in millions) | Year |
| Pt Change |
| Years |
| Pt Change |
| Incurred |
| Pt Change | |||
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 346.6 |
| 50.6% |
|
| $ 46.1 |
| 6.7% |
|
| $ 392.7 |
| 57.3% |
|
Catastrophes | 152.1 |
| 22.2% |
|
| 15.2 |
| 2.2% |
|
| 167.3 |
| 24.4% |
|
A&E | - |
| 0.0% |
|
| - |
| 0.0% |
|
| - |
| 0.0% |
|
Total segment | $ 498.7 |
| 72.8% |
|
| $ 61.3 |
| 8.9% |
|
| $ 560.0 |
| 81.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 423.4 |
| 45.1% |
|
| $ (49.5) |
| -5.3% |
|
| $ 374.0 |
| 39.8% |
|
Catastrophes | 0.1 |
| 0.0% |
|
| (3.5) |
| -0.4% |
|
| (3.4) |
| -0.4% |
|
A&E | - |
| 0.0% |
|
| 266.4 |
| 28.4% |
|
| 266.4 |
| 28.3% |
|
Total segment | $ 423.5 |
| 45.1% |
|
| $ 213.4 |
| 22.7% |
|
| $ 636.9 |
| 67.8% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 597.3 |
| 61.1% |
|
| $ (46.9) |
| -4.8% |
|
| $ 550.4 |
| 56.3% |
|
Catastrophes | 7.1 |
| 0.7% |
|
| 136.3 |
| 13.9% |
|
| 143.3 |
| 14.7% |
|
A&E | - |
| 0.0% |
|
| 27.4 |
| 2.8% |
|
| 27.4 |
| 2.8% |
|
Total segment | $ 604.4 |
| 61.8% |
|
| $ 116.8 |
| 11.9% |
|
| $ 721.2 |
| 73.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance 2008/2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ (76.9) |
| 5.5 | pts |
| $ 95.6 |
| 12.0 | pts |
| $ 18.7 |
| 17.5 | pts |
Catastrophes | 152.0 |
| 22.2 | pts |
| 18.7 |
| 2.6 | pts |
| 170.7 |
| 24.8 | pts |
A&E | - |
| - | pts |
| (266.4) |
| (28.4) | pts |
| (266.4) |
| (28.4) | pts |
Total segment | $ 75.2 |
| 27.7 | pts |
| $ (152.1) |
| (13.8) | pts |
| $ (76.9) |
| 14.0 | pts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance 2007/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ (173.9) |
| (16.0) | pts |
| $ (2.6) |
| (0.5) | pts |
| $ (176.4) |
| (16.5) | pts |
Catastrophes | (7.0) |
| (0.7) | pts |
| (139.8) |
| (14.3) | pts |
| (146.8) |
| (15.0) | pts |
A&E | - |
| - | pts |
| 239.0 |
| 25.6 | pts |
| 239.0 |
| 25.6 | pts |
Total segment | $ (180.9) |
| (16.7) | pts |
| $ 96.6 |
| 10.8 | pts |
| $ (84.3) |
| (5.9) | pts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
|
|
|
|
|
|
|
|
| ||||
Incurred losses were lower by $76.9 million in 2008 compared to 2007, primarily due to no reserve adjustments in 2008 for A&E losses, which experienced $266.4 million adverse development in 2007. Partially offsetting the decrease were catastrophe losses, principally from Hurricanes Gustav and Ike and unfavorable reserve development on prior years’ losses for 2008 compared to favorable development in 2007.
Incurred losses were lower by $84.3 million (5.9 points) for 2007 compared to 2006. The current year’s attritional loss ratio improved by 16.0 points due to positive results from increased property quota share business. We experienced $136.3 million of prior years’ catastrophe loss development in 2006 which did not recur in 2007 that improved the loss ratio by 14.3 points. These favorable factors were partially mitigated by a 25.6 point increase in the loss ratio driven by asbestos reserve strengthening.
Segment Expenses. Commission and 2005:brokerage expenses decreased 30.7% to $159.7 million for 2008 from $230.5 million in 2007, generally in line with the decrease in premiums earned. Segment other underwriting expenses for 2008 decreased slightly to $32.2 million from $33.3 million for 2007.
| December 31, 2006 | December 31, 2005 | ||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||||||||||||||
| All Segments | |||||||||||||||||||||||||||||||||||
| Attritional (a) | $ | 1,477 | .2 | $ | (157 | .1) | $ | 1,320 | .1 | $ | 1,514 | .7 | $ | (156 | .3) | $ | 1,358 | .4 | |||||||||||||||||
| Catastrophes | 12 | .4 | 197 | .2 | 209 | .6 | 755 | .4 | 77 | .6 | 833 | .0 | |||||||||||||||||||||||
| A&E | - | 27 | .4 | 27 | .4 | - | 11 | .5 | 11 | .5 | |||||||||||||||||||||||||
| Total All segments | $ | 1,489 | .7 | $ | 67 | .4 | $ | 1,557 | .1 | $ | 2,270 | .1 | $ | (67 | .3) | $ | 2,202 | .8 | |||||||||||||||||
| Loss Ratio | 66.3 | % | 3.0 | % | 69.3 | % | 93.6 | % | -2.8 | % | 90.8 | % | |||||||||||||||||||||||
(a) Attritional losses exclude catastrophe and A&E losses | |||||||||||||||||||||||||||||||||||
| (Some amounts may not reconcile due to rounding.) | |||||||||||||||||||||||||||||||||||
Commission and brokerage expense increased by 13.7% to $230.5 million for 2007 from $202.8 million in 2006, principally driven by an increase in ceding commissions due to market conditions. Segment other underwriting expenses for 2007 increased to $33.3 million from $24.9 million for 2006, principally due to
the allocation of certain corporate charges to segments, which had been previously retained in corporate expenses.
U.S. Insurance.
The Company’sfollowing table presents the underwriting results and ratios for the U.S. Insurance segment for the periods indicated.
|
| Years Ended December 31, |
| 2008/2007 |
| 2007/2006 | ||||||
(Dollars in millions) |
| 2008 |
| 2007 |
| 2006 |
| Variance | % Change |
| Variance | % Change |
Gross written premiums |
| $ 771.8 |
| $ 885.6 |
| $ 866.3 |
| $ (113.8) | -12.9% |
| $ 19.3 | 2.2% |
Net written premiums |
| 398.7 |
| 479.8 |
| 591.2 |
| (81.1) | -16.9% |
| (111.4) | -18.8% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
| $ 482.7 |
| $ 496.2 |
| $ 574.0 |
| $ (13.4) | -2.7% |
| $ (77.8) | -13.6% |
Incurred losses and LAE |
| 422.2 |
| 412.7 |
| 432.2 |
| 9.5 | 2.3% |
| (19.6) | -4.5% |
Commission and brokerage |
| 68.2 |
| 64.3 |
| 72.7 |
| 3.9 | 6.0% |
| (8.4) | -11.5% |
Other underwriting expenses |
| 64.3 |
| 58.2 |
| 48.9 |
| 6.1 | 10.5% |
| 9.3 | 19.0% |
Underwriting (loss) gain |
| $ (72.0) |
| $ (39.1) |
| $ 20.1 |
| $ (32.9) | 84.3% |
| $ (59.2) | NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Point Chg |
|
| Point Chg |
Loss ratio |
| 87.5% |
| 83.2% |
| 75.3% |
|
| 4.3 |
|
| 7.9 |
Commission and brokerage ratio |
| 14.1% |
| 13.0% |
| 12.7% |
|
| 1.1 |
|
| 0.3 |
Other underwriting expense ratio |
| 13.3% |
| 11.7% |
| 8.5% |
|
| 1.6 |
|
| 3.2 |
Combined ratio |
| 114.9% |
| 107.9% |
| 96.5% |
|
| 7.0 |
|
| 11.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(NM, not meaningful) |
|
|
|
|
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding) |
|
|
|
|
|
|
|
|
|
| ||
Premiums. Gross written premiums decreased by 12.9% to $771.8 million for 2008 from $885.6 million for 2007. Conditions for workers’ compensation, contractors and public entity business have gotten increasingly competitive, which has reduced the volume of business that meets our underwriting and pricing criteria. A little less than half of the decline compared to last year was from the C.V. Starr program, where we have lost some public entity business because we did not match market pricing and terms. In addition, the $76.3 million of gross written premium we assumed on a new program in 2007, did not recur in 2008. Net written premiums decreased by 16.9% to $398.7 million for 2008 compared to $479.8 million for 2007. The decrease in net written premiums was larger than the decline in gross written premiums primarily due to increased reinsurance purchases on select larger new programs and an increase in the ceding percentage for 2008 in the affiliated quota share agreement. Premiums earned decreased 2.7% to $482.7 million for 2008 from $496.2 million for 2007. The reduction in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are reflected at the initiation of the coverage period.
Gross written premiums increased by 2.2% to $885.6 million for 2007 from $866.3 million for 2006. The increase was primarily the result of a new program we assumed late in 2007 with approximately $76 million in gross written premium. Absent this new program gross written premiums would have decreased due to the further decline in our workers’ compensation and contractors liability writings in response to increased competition. Net written premiums decreased by 18.8% to $479.8 million for 2007 compared to $591.2 million for 2006, as our retention level decreased. Premiums earned decreased 13.6% to $496.2 million for 2007 from $574.0 million for 2006, generally in line with the decrease in net written premiums.
Incurred Losses and LAE. The following table presents the incurred losses and LAE for the U.S. Insurance segment for the periods indicated.
| Years Ended December 31, |
| ||||||||||||
| Current |
| Ratio %/ |
| Prior |
| Ratio %/ |
| Total |
| Ratio %/ | |||
(Dollars in millions) | Year |
| Pt Change |
| Years |
| Pt Change |
| Incurred |
| Pt Change | |||
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 335.0 |
| 69.4% |
|
| $ 87.4 |
| 18.1% |
|
| $ 422.4 |
| 87.5% |
|
Catastrophes | - |
| 0.0% |
|
| (0.2) |
| 0.0% |
|
| (0.2) |
| 0.0% |
|
Total segment | $ 335.0 |
| 69.4% |
|
| $ 87.2 |
| 18.1% |
|
| $ 422.2 |
| 87.5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 360.6 |
| 72.7% |
|
| $ 52.4 |
| 10.6% |
|
| $ 413.0 |
| 83.2% |
|
Catastrophes | - |
| 0.0% |
|
| (0.3) |
| -0.1% |
|
| (0.3) |
| -0.1% |
|
Total segment | $ 360.6 |
| 72.7% |
|
| $ 52.1 |
| 10.5% |
|
| $ 412.7 |
| 83.2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 480.4 |
| 83.7% |
|
| $ (48.5) |
| -8.5% |
|
| $ 431.9 |
| 75.3% |
|
Catastrophes | - |
| 0.0% |
|
| 0.3 |
| 0.1% |
|
| 0.3 |
| 0.1% |
|
Total segment | $ 480.4 |
| 83.7% |
|
| $ (48.2) |
| -8.4% |
|
| $ 432.2 |
| 75.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance 2008/2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ (25.6) |
| (3.3) | pts |
| $ 35.0 |
| 7.5 | pts |
| $ 9.4 |
| 4.3 | pts |
Catastrophes | - |
| - | pts |
| 0.1 |
| 0.0 | pts |
| 0.1 |
| 0.0 | pts |
Total segment | $ (25.6) |
| (3.3) | pts |
| $ 35.1 |
| 7.6 | pts |
| $ 9.5 |
| 4.3 | pts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance 2007/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ (119.9) |
| (11.0) | pts |
| $ 100.9 |
| 19.0 | pts |
| $ (18.9) |
| 8.0 | pts |
Catastrophes | - |
| - | pts |
| (0.6) |
| (0.1) | pts |
| (0.6) |
| (0.1) | pts |
Total segment | $ (119.9) |
| (11.0) | pts |
| $ 100.3 |
| 18.9 | pts |
| $ (19.6) |
| 7.9 | pts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
|
|
|
|
|
|
|
|
| ||||
Incurred losses and LAE increased by 2.3% to $422.2 million for 2008 from $412.7 million for 2007. In 2008, we strengthened our reserves for an auto loan credit insurance program by $85.3 million as the deterioration in general economic conditions adversely impacted loan performance resulting in unforeseen increases in loan default rates and claim amounts. We had also strengthened the reserves for this program by $64.7 million in 2007. In 2008, we commuted our remaining liability on this program with the largest policyholder representing approximately one third of the remaining loss exposure. Given the magnitude of our current reserves, the maturity of the remaining insured portfolio and the reduced principal exposure, we believe the future loss development, if any, related to this program will not be material. Other than as related to this program, the segment experienced negligible reserve development in 2008 and favorable reserve development in 2007.
Incurred losses and LAE decreased by 29.3%4.5% to $1,557.1$412.7 million for 2007 from $432.2 million for 2006 as the segment loss ratio increased by 7.9 points to 83.2%. From a ratio perspective, the swing in prior years’ development from favorable in 2006 to adverse in 2007 resulted in 18.9 points of increase. The adverse development in 2007 was the result of $64.7 million of adverse reserve run-off on a canceled auto loan credit insurance program, partially offset by favorable development on the remainder of the reserves. The 2007 accident year loss ratio was 72.7%, which was 11.0 points lower than in 2006. The 2006 accident year ratio was negatively impacted by 14.7 points due to the auto loan credit insurance program referenced above.
Segment Expenses. Commission and brokerage expenses increased by 6.0% to $68.2 million for 2008 from $64.3 million in 2007, principally due to higher commissions on two new programs. Segment other underwriting expenses for 2008 increased to $64.3 million as compared to $58.2 million for 2007, primarily due to increased compensation costs associated with increased staff.
Commission and brokerage expenses decreased by 11.5% to $64.3 million for 2007 from $72.7 million in 2006, from $2,202.8in line with the decrease in premiums earned. Segment other underwriting expenses for 2007 increased to $58.2 million in 2005,as compared to $48.9 million for 2006 due to significantly reduced current year catastrophe lossesthe allocation of certain corporate charges to segments, 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.
|
| Years Ended December 31, |
| 2008/2007 |
| 2007/2006 | ||||||
(Dollars in millions) |
| 2008 |
| 2007 |
| 2006 |
| Variance | % Change |
| Variance | % Change |
Gross written premiums |
| $ 260.4 |
| $ 270.1 |
| $ 251.2 |
| $ (9.7) | -3.6% |
| $ 18.9 | 7.5% |
Net written premiums |
| 167.7 |
| 185.4 |
| 174.4 |
| (17.7) | -9.5% |
| 10.9 | 6.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
| $ 168.4 |
| $ 184.9 |
| $ 176.3 |
| $ (16.5) | -8.9% |
| $ 8.6 | 4.9% |
Incurred losses and LAE |
| 116.3 |
| 118.3 |
| 125.2 |
| (2.0) | -1.7% |
| (6.8) | -5.5% |
Commission and brokerage |
| 40.9 |
| 44.3 |
| 44.9 |
| (3.3) | -7.5% |
| (0.6) | -1.3% |
Other underwriting expenses |
| 8.1 |
| 8.5 |
| 6.6 |
| (0.4) | -4.8% |
| 1.9 | 29.0% |
Underwriting gain (loss) |
| $ 3.1 |
| $ 13.8 |
| $ (0.2) |
| $ (10.7) | -77.4% |
| $ 14.1 | NM |
|
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|
| Point Chg |
|
| Point Chg |
Loss ratio |
| 69.0% |
| 64.0% |
| 71.0% |
|
| 5.0 |
|
| (7.0) |
Commission and brokerage ratio |
| 24.3% |
| 23.9% |
| 25.4% |
|
| 0.4 |
|
| (1.5) |
Other underwriting expense ratio |
| 4.8% |
| 4.6% |
| 3.7% |
|
| 0.2 |
|
| 0.9 |
Combined ratio |
| 98.1% |
| 92.5% |
| 100.1% |
|
| 5.6 |
|
| (7.6) |
|
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|
(NM, not meaningful) |
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|
(Some amounts may not reconcile due to rounding) |
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| ||
Premiums. Gross written premiums decreased by 3.6% to $260.4 million for 2008 from $270.1 million for 2007. Aviation premiums were lower by $16.9 million (58.9%) owing to very competitive market conditions and A&H premiums were lower by $15.4 million (16.1%) largely due to lower premiums under certain quota share contracts where the ceding companies have culled their books to improve their loss experience. Partially offsetting these declines were marine premiums, up by $19.8 million (19.8%) due to higher premiums on our quota share covers and improved rates across the book and surety premiums, up $2.8 million or 6.1%. Net written premiums decreased by 9.5% to $167.7 million for 2008 compared to $185.4 million for 2007, as a result of the decrease in gross written premiums combined with the increased cessions under the affiliated quota share agreement. Premiums earned decreased by 8.9% to $168.4 million for 2008 compared to $184.9 million for 2007 as a result of the decline in net written premiums.
Gross written premiums increased by 7.5% to $270.1 million for 2007 from $251.2 million for 2006. This increase was the result of a $36.9 million (58.7%) increase in marine writings and a reduction$12.2 million (14.7%) increase in current year attritional losses,A&H writings, partially offset by a $24.6 million (34.9%) decrease in surety writings and a $5.7 million (16.5%) decrease in aviation writings. The increased prior years reserve development on catastrophemarine premium growth emanated from growth in existing quota share business as well as new quota share contracts. We continued to decrease our aviation and A&E loss reserves. Incurred losses and LAEsurety writings in 2006 reflected ceded losses and LAE of $546.4response to more competitive market conditions. Net written premiums increased by 6.3% to $185.4 million for 2007 compared to ceded losses and LAE in 2005$174.4 million for 2006, as a result of $852.4 million reflecting the declineincrease in gross losses.written premiums. Premiums earned increased by 4.9% to $184.9 million for 2007 compared to $176.3 million for 2006, generally in line with the growth in net written premiums.
The Company’s loss ratio, which is calculated by dividing incurred losses
Incurred Losses and LAE by current year net premiums earned, improved by 21.5 points to 69.3% over the comparable 2005 period, principally due to a 30.5 point improvement on current year catastrophe losses, partially offset by 5.8 points of increased prior years reserve strengthening.
23
LAE.The following table showspresents the U.S. Reinsurance segment components of incurred losses and LAE for 2006 and 2005:the Specialty Underwriting segment for the periods indicated.
| December 31, 2006 | December 31, 2005 | ||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||||||||||||||
| Attritional | $ | 597 | .3 | $ | (46 | .9) | $ | 550 | .4 | $ | 651 | .8 | $ | (41 | .0) | $ | 610 | .8 | |||||||||||||||||
| Catastrophes | 7 | .1 | 136 | .3 | 143 | .3 | 475 | .9 | 54 | .3 | 530 | .2 | |||||||||||||||||||||||
| A&E | - | 27 | .4 | 27 | .4 | - | 11 | .5 | 11 | .5 | |||||||||||||||||||||||||
| Total segment | $ | 604 | .4 | $ | 116 | .8 | $ | 721 | .2 | $ | 1,127 | .7 | $ | 24 | .7 | $ | 1,152 | .4 | |||||||||||||||||
| Loss Ratio | 61.8 | % | 11.9 | % | 73.7 | % | 104.4 | % | 2.3 | % | 106.7 | % | |||||||||||||||||||||||
(Some amounts may not reconcile due to rounding.) | |||||||||||||||||||||||||||||||||||
The U.S. Reinsurance segment’s incurred
| Years Ended December 31, |
| ||||||||||||
| Current |
| Ratio %/ |
| Prior |
| Ratio %/ |
| Total |
| Ratio %/ | |||
(Dollars in millions) | Year |
| Pt Change |
| Years |
| Pt Change |
| Incurred |
| Pt Change | |||
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 103.2 |
| 61.3% |
|
| $ (1.2) |
| -0.7% |
|
| $ 102.0 |
| 60.6% |
|
Catastrophes | 10.5 |
| 6.2% |
|
| 3.8 |
| 2.2% |
|
| 14.3 |
| 8.5% |
|
Total segment | $ 113.7 |
| 67.5% |
|
| $ 2.6 |
| 1.5% |
|
| $ 116.3 |
| 69.0% |
|
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|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 105.3 |
| 57.0% |
|
| $ (4.7) |
| -2.6% |
|
| $ 100.6 |
| 54.4% |
|
Catastrophes | 0.3 |
| 0.2% |
|
| 17.4 |
| 9.4% |
|
| 17.7 |
| 9.6% |
|
Total segment | $ 105.6 |
| 57.1% |
|
| $ 12.7 |
| 6.9% |
|
| $ 118.3 |
| 64.0% |
|
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|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 109.4 |
| 62.1% |
|
| $ (30.1) |
| -17.1% |
|
| $ 79.4 |
| 45.0% |
|
Catastrophes | - |
| 0.0% |
|
| 45.8 |
| 26.0% |
|
| 45.8 |
| 26.0% |
|
Total segment | $ 109.4 |
| 62.1% |
|
| $ 15.7 |
| 8.9% |
|
| $ 125.2 |
| 71.0% |
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
Variance 2008/2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ (2.1) |
| 4.3 | pts |
| $ 3.5 |
| 1.8 | pts |
| $ 1.4 |
| 6.2 | pts |
Catastrophes | 10.2 |
| 6.1 | pts |
| (13.7) |
| (7.2) | pts |
| (3.5) |
| (1.1) | pts |
Total segment | $ 8.1 |
| 10.4 | pts |
| $ (10.1) |
| (5.4) | pts |
| $ (2.0) |
| 5.1 | pts |
|
|
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|
|
|
|
Variance 2007/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ (4.1) |
| (5.1) | pts |
| $ 25.3 |
| 14.5 | pts |
| $ 21.2 |
| 9.4 | pts |
Catastrophes | 0.3 |
| 0.2 | pts |
| (28.4) |
| (16.5) | pts |
| (28.1) |
| (16.4) | pts |
Total segment | $ (3.8) |
| (5.0) | pts |
| $ (3.0) |
| (2.0) | pts |
| $ (6.8) |
| (7.0) | pts |
|
|
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|
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|
|
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|
|
(Some amounts may not reconcile due to rounding.) |
|
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|
| ||||
Incurred losses and LAE decreased 37.4%, or $431.3by 1.7% to $116.3 million for 20062008 compared to 2005,$118.3 million for 2007 primarily due to significantly reducedlower catastrophe losses in 2008 as compared to 2007, partially offset by slightly higher attritional losses in 2008.
Incurred losses and LAE decreased by 5.5% to $118.3 million for 2007 compared to $125.2 million for 2006. The loss ratio for the current accident year catastrophe losses,was lower by 5.0 points in 2007 compared to 2006. We experienced 6.9 points of adverse development in 2007 compared to 8.9 points in 2006. Catastrophe loss development, principally within the treaty property unit,marine business related to the 2005 hurricanes, was the principal driver of the overall development in both 2007 and 2006.
Segment Expenses. Commission and brokerage expenses decreased earned premiums. The segment’s loss ratio improvement of 33.0 points7.5% to $40.9 million in 2008 from 2005 was$44.3 million in 2007 due primarily to the increased cessions under the affiliated quota share agreement. Segment other underwriting expenses decreased slightly to $8.1 million for 2008 from $8.5 million for 2007.
Commission and brokerage expense decreased 1.3% to $44.3 million in 2007 from $44.9 million in 2006, primarily due to the 34.4 point decreasemix of premiums earned. Segment other underwriting expenses increased 29.0% to $8.5 million for 2007 from $6.6 million for 2006, primarily due to the allocation of certain corporate charges to segments, which had been previously retained in catastrophe losses.corporate expenses.
International.
The following table showspresents the U.S. Insurance segment components of incurred lossesunderwriting results and LAEratios for 2006 and 2005:
| December 31, 2006 | December 31, 2005 | ||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||||||||||||||
| Attritional | $ | 480 | .4 | $ | (48 | .5) | $ | 431 | .9 | $ | 433 | .8 | $ | (19 | .5) | $ | 414 | .3 | |||||||||||||||||
| Catastrophes | - | 0 | .3 | 0 | .3 | 1 | .0 | - | 1 | .0 | |||||||||||||||||||||||||
| Total segment | $ | 480 | .4 | $ | (48 | .2) | $ | 432 | .2 | $ | 434 | .8 | $ | (19 | .5) | $ | 415 | .4 | |||||||||||||||||
| Loss Ratio | 83.7 | % | -8.4 | % | 75.3 | % | 68.3 | % | -3.1 | % | 65.2 | % | |||||||||||||||||||||||
(Some amounts may not reconcile due to rounding.) | |||||||||||||||||||||||||||||||||||
The U.S. Insurance segment’s incurred losses and LAE increased 4.0%, or $16.8 million, for 2006 compared to 2005; primarily due to higher current year attritional losses resulting from losses on the run-off credit program, partially offset by decreased losses due to reduced earned premiums, and an increase in favorable prior years reserve development.
24
The following table shows the Specialty Underwriting segment components of incurred losses and LAE for 2006 and 2005:
| December 31, 2006 | December 31, 2005 | ||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||||||||||||||
| Attritional | $ | 109 | .4 | $ | (30 | .1) | $ | 79 | .4 | $ | 140 | .4 | $ | (38 | .6) | $ | 101 | .8 | |||||||||||||||||
| Catastrophes | - | 45 | .8 | 45 | .8 | 110 | .7 | 13 | .2 | 123 | .9 | ||||||||||||||||||||||||
| Total segment | $ | 109 | .4 | $ | 15 | .7 | $ | 125 | .2 | $ | 251 | .1 | $ | (25 | .4) | $ | 225 | .7 | |||||||||||||||||
| Loss Ratio | 62.1 | % | 8.9 | % | 71.0 | % | 111.8 | % | -11.3 | % | 100.5 | % | |||||||||||||||||||||||
(Some amounts may not reconcile due to rounding.) | |||||||||||||||||||||||||||||||||||
The Specialty Underwriting segment’s incurred losses and LAE decreased 44.6%, or $100.6 million, for 2006 as compared to 2005, primarily due to a decrease in current year catastrophe losses and a reduction in earned premiums across all classes of business. Correspondingly, the segment’s loss ratio improved by 29.5 points over 2005.
The following table shows the International segment components of incurred losses and LAE for 2006 and 2005:
| December 31, 2006 | December 31, 2005 | ||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||||||||||||||
| Attritional | $ | 290 | .0 | $ | (31 | .6) | $ | 258 | .4 | $ | 288 | .7 | $ | (57 | .3) | $ | 231 | .4 | |||||||||||||||||
| Catastrophes | 5 | .4 | 14 | .8 | 20 | .2 | 167 | .7 | 10 | .1 | 177 | .8 | |||||||||||||||||||||||
| Total segment | $ | 295 | .4 | $ | (16 | .8) | $ | 278 | .5 | $ | 456 | .4 | $ | (47 | .2) | $ | 409 | .3 | |||||||||||||||||
| Loss Ratio | 56.9 | % | -3.2 | % | 53.7 | % | 94.2 | % | -9.7 | % | 84.5 | % | |||||||||||||||||||||||
(Some amounts may not reconcile due to rounding.) | |||||||||||||||||||||||||||||||||||
The International segment’s incurred losses and LAE decreased 31.9%, or $130.7 million, for 2006 as compared to 2005 reflecting lower catastrophe losses. The segment’s loss ratio improved by 30.8 points from 2005, primarily due to reduced current year catastrophe losses incurred in Canada, Asia and international.
Underwriting Expenses. The Company’s expense ratio, which is calculated by dividing underwriting expenses by net premiums earned, was 23.9% in 2006 compared to 25.3% in 2005.
The following table shows the expense ratios for each of the Company’s operating segments for 2006 and 2005.
| Segment Expense Ratios | ||||||||
|---|---|---|---|---|---|---|---|---|
| Segment | 2006 | 2005 | ||||||
| U.S. Reinsurance | 23.3 | % | 26.2 | % | ||||
| U.S. Insurance | 21.2 | % | 22.9 | % | ||||
| Specialty Underwriting | 29.1 | % | 27.8 | % | ||||
| International | 25.4 | % | 24.2 | % | ||||
25
Segment underwriting expenses decreased by 12.4% to $532.8 million for 2006 from $608.5 million in 2005. Commission, brokerage, taxes and fees decreased by $74.9 million, principally due to decreases in premium volume and changes in the mix of business. Segment other underwriting expenses were $0.1 million for both 2006 and 2005. Contributing to the segment underwriting expense decreases were a 19.7% ($56.0 million) decrease in the U.S. Reinsurance operation, a 17.5% ($10.9 million) decrease in the Specialty Underwriting operation and a 16.3% ($23.7 million) decrease in the U.S. Insurance operation, partially offset by a 12.7% ($14.9 million) increase in the International operation. The changes for each operation’s expenses principally resulted from changes in commission expenses due to changes in premium volume and business mix by class and type and, in some cases, changes in the use of specific reinsurance.
The Company’s combined ratio, which is the sum of the loss and expense ratios, improved by 22.9 percentage points to 93.2% in 2006 as compared to 116.1% in 2005, primarily as a result of lower catastrophe and attritional losses.
The following table shows the combined ratios for each of the Company’s operating segments in 2006 and 2005. The segment combined ratios were impacted by the loss and expense ratio variations noted above.
| Segment Combined Ratios | ||||||||
|---|---|---|---|---|---|---|---|---|
| Segment | 2006 | 2005 | ||||||
| U.S. Reinsurance | 97.0 | % | 132.9 | % | ||||
| U.S. Insurance | 96.5 | % | 88.1 | % | ||||
| Specialty Underwriting | 100.1 | % | 128.3 | % | ||||
| International | 79.1 | % | 108.7 | % | ||||
Investment Results. Net investment income increased 14.5% to $372.4 million in 2006 from $325.2 million in 2005, primarily reflecting the growth in invested assets to $8.5 billion in 2006 from $7.9 billion in 2005 and a $31.1 million increase in investment income from limited partnership investments. Investment income from equity investments in limited partnerships fluctuates from year to year depending on the performance of the individual investments made by the partnerships as well as the movement in the equity markets. Period to period changes in investment income are also impacted by changes in the level and mix of invested assets, prevailing interest rates and price movements in the equity markets.
The following table shows the components of net investment income for the years ended as indicated:periods indicated.
| (Dollars in thousands) | 2006 | 2005 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Fixed maturities | $ | 299,570 | $ | 308,254 | |||||||
| Equity securities | 19,713 | 16,356 | |||||||||
| Short-term investments | 26,828 | 12,325 | |||||||||
| Other investment income | 41,934 | 9,019 | |||||||||
| Total gross investment income | 388,045 | 345,954 | |||||||||
| Interest credited and other expense | (15,693 | ) | (20,737 | ) | |||||||
| Total net investment income | $ | 372,352 | $ | 325,217 | |||||||
26
|
| Years Ended December 31, |
| 2008/2007 |
| 2007/2006 | ||||||
(Dollars in millions) |
| 2008 |
| 2007 |
| 2006 |
| Variance | % Change |
| Variance | % Change |
Gross written premiums |
| $ 904.7 |
| $ 805.9 |
| $ 731.7 |
| $ 98.8 | 12.3% |
| $ 74.1 | 10.1% |
Net written premiums |
| 539.1 |
| 553.0 |
| 531.8 |
| (13.9) | -2.5% |
| 21.1 | 4.0% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums earned |
| $ 545.6 |
| $ 558.2 |
| $ 518.8 |
| $ (12.6) | -2.3% |
| $ 39.3 | 7.6% |
Incurred losses and LAE |
| 367.1 |
| 339.7 |
| 278.5 |
| 27.4 | 8.1% |
| 61.2 | 22.0% |
Commission and brokerage |
| 129.7 |
| 126.7 |
| 118.1 |
| 3.0 | 2.4% |
| 8.6 | 7.3% |
Other underwriting expenses |
| 19.8 |
| 18.6 |
| 13.8 |
| 1.1 | 6.2% |
| 4.8 | 34.7% |
Underwriting gain |
| $ 28.9 |
| $ 73.1 |
| $ 108.4 |
| $ (44.2) | -60.4% |
| $ (35.3) | -32.5% |
|
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|
|
|
| Point Chg |
|
| Point Chg |
Loss ratio |
| 67.3% |
| 60.9% |
| 53.7% |
|
| 6.4 |
|
| 7.2 |
Commission and brokerage ratio |
| 23.8% |
| 22.7% |
| 22.7% |
|
| 1.1 |
|
| 0.0 |
Other underwriting expense ratio |
| 3.6% |
| 3.3% |
| 2.7% |
|
| 0.3 |
|
| 0.6 |
Combined ratio |
| 94.7% |
| 86.9% |
| 79.1% |
|
| 7.8 |
|
| 7.8 |
|
|
|
|
|
|
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|
|
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|
|
(Some amounts may not reconcile due to rounding) |
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| ||
The following table shows a comparison of various investment yields for the years indicated:
| 2006 | 2005 | |||||||
|---|---|---|---|---|---|---|---|---|
| Imbedded pre-tax yield of cash and invested assets at December 31 | 4.6 | % | 4.5 | % | ||||
| Imbedded after-tax yield of cash and invested assets at December 31 | 3.7 | % | 3.6 | % | ||||
Annualized pre-tax yield on average cash and invested assets | 4.8 | % | 4.4 | % | ||||
| Annualized after-tax yield on average cash and invested assets | 3.8 | % | 3.6 | % | ||||
Net realized capital gains of $35.0 million in 2006 emanated from realized capital gains on the Company’s investments of $39.6 million, resulting principally from gains on equity securities of $31.2 million and fixed maturities of $8.4 million, partially offset by $4.6 million of realized losses on equity securities. Net realized capital gains were $64.6 million in 2005, reflecting realized capital gains on the Company’s investments of $75.9 million, resulting principally from gains on fixed maturities of $34.5 million and equity securities of $16.1 million, coupled with $25.3 million of gains from the sale of the Company’s interest only strips of mortgage-backed securities (“interest only strips”) portfolio, partially offset by $11.3 million of realized capital losses, which included $4.1 million related to the write-downs in the value of interest only strips deemed to be impaired on an other than temporary basis in accordance with Emerging Issues Task Force Issue No. 99-20, “Recognition of Interest Income and Impairment of Purchased and Retained Beneficial Interests in Securitized Financial Assets” (“EITF 99-20”).
Corporate, Non-allocated Expenses. Corporate underwriting expenses not allocated to segments were $4.5 million for 2006 and $6.2 million for 2005, which included approximately $1.5 million of non-recurring expenses.
Interest, fees and bond issue cost amortization expense in 2006 and 2005 were $69.7 million and $74.2 million, respectively. Interest, fees and bond issue cost amortization expense in 2006 included $31.1 million related to the senior notes, $37.4 million related to the junior subordinated debt securities, $0.9 million related to the bond issue cost amortization and $0.2 million related to the credit line under the Company’s revolving credit facility. Interest, fees and bond issue cost amortization expense in 2005 included $35.5 million related to senior notes, $37.4 million related to the junior subordinated debt securities, $1.0 million related to the bond issue cost amortization and $0.2 million related to the credit line under the Company’s revolving credit facility. Interest expense on senior notes decreased due to the retirement on March 15, 2005 of the 8.5% senior notes issued on March 14, 2000.
Other expense in 2006 was $40.5 million as compared to other income in 2005 of $10.3 million. The change was primarily due to increased deferrals on retroactive reinsurance agreements with affiliates.
Income Taxes. The Company’s income tax expense is primarily a function of the U.S. statutory tax rates coupled with the impact from tax-preferenced investment income. The Company recorded income tax expense of $117.1 million in 2006 compared to a tax benefit of $70.2 million in 2005. The increased tax expense was primarily due to the significant change in pre-tax income in 2006 compared to the pre-tax loss in 2005.
Net Income. Net income was $332.9 million in 2006 compared to net income of $4.7 million in 2005, primarily caused by much larger catastrophe losses in 2005 than in 2006.
YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004Premiums Written.Premiums. Gross written premiums decreased 12.6%increased by 12.3% to $3,339.9$904.7 million for 2008 from $805.9 million for 2007. We obtained increased participations on treaties in 2005most regions over the course of the past twelve months. As well, we benefited as some insurers sought to further diversify their reinsurance panels by reducing exposures to certain other reinsurers, which created opportunities for us, given our strong financial strength ratings. In addition, we have obtained some preferential signings including preferential terms and conditions and benefited from $3,820.7 millionhigher rates in 2004, reflecting a disciplined underwriting response to modest reinsurance market softening that affected all segments, resulting in an overall premium decline.some markets. Premiums declined 35.4% ($172.4 million) in the
27
Specialty Underwriting operation, primarily due to a $145.4 million decrease in A&H business and a $47.9 million decrease in surety business, partially offset by a $20.9 million increase in marine and aviation business. The U.S. Insurance operation decreased 20.2% ($235.3 million), principally as a result of a $242.6 million decrease in workers’ compensation, resulting primarily from changes in the California workers’ compensation market. The U.S. Reinsurance operation decreased 6.2% ($92.0 million), principally related to a $173.1 million decrease in treaty casualty business and a $29.3 million decrease in facultative business, partially offset by a $118.9 million increase in treaty property business. The International operation increased 2.8% ($18.9 million), resulting primarily from a $75.0 million increase in Asian business, partially offset by a $43.6 million decrease in international business written through the Miami and New Jersey offices representing primarily Latin American business and an $11.3increased by $106.0 million decrease in(22.5%); the Asian branch increased by $24.2 million (14.6%), while premiums for the Canadian business.
Ceded premiumsbranch decreased to $944.2by $31.8 million in 2005 from $1,027.7 million in 2004, principally resulting from the decrease in gross written premiums in the U.S. Insurance operation. Ceded premiums relate primarily to quota share reinsurance agreements between Everest Re and Bermuda Re and Everest International.
(18.7%). Net written premiums decreased by 14.2%2.5% to $2,395.7$539.1 million for 2008 compared to $553.0 million for 2007, primarily due to the increased cessions under the affiliated quota share agreement. Premiums earned decreased by 2.3% to $545.6 million for 2008 compared to $558.2 million for 2007, generally consistent with the decrease in 2005net written premiums.
Gross written premiums increased by 10.1% to $805.9 million for 2007 from $2,793.0$731.7 million for 2006. Approximately half of this increase was attributable to the impact of the weaker U.S. dollar. We write business in 2004, reflectingmany currencies and as these currencies strengthened against the $480.8U.S. dollar, they converted to higher dollar values. Business written through the Miami and New Jersey office increased by $35.0 million decrease(8.0%), business written through the Asian branch increased by $22.3 million (15.6%) and business written through the Canadian branch increased by $17.9 million (11.8%). We have experienced strong fundamental growth in geographic areas where economic growth and demand for reinsurance is strong. Net written premiums increased by 4.0% to $553.0 million for 2007 compared to $531.8 million for 2006, primarily as a result of the increase in gross written premiums and the $83.5premiums. Premiums earned increased by 7.6% to $558.2 million decreasefor 2007 compared to $518.8 million for 2006. The change in ceded premiums.
Premium Revenues. Net premiums earned decreased by 10.5%relative to $2,426.1 million in 2005 from $2,710.3 million in 2004. Contributing to this decrease was a 37.0% ($132.1 million) decrease in the Specialty Underwriting operation, a 12.3% ($89.9 million) decrease in the U.S. Insurance operation and a 6.5% ($74.9 million) decrease in the U.S. Reinsurance operation, partially offset by a 2.6% ($12.4 million) increase in the International operation. Additional premiums, related to catastrophe business included in net earned premiums, were $52.5 million for 2005 of which $40.5 million were due to Hurricanes Katrina and Wilma. Generally, catastrophe reinsurance provides coverage for one event; however, when limits are exhausted some contractual arrangements provide for the availability of additional coverage upon the payment of additional premium. There were no such additional premiums for 2004. All of there changes reflect period to period changes in net written premiums and business mix, together with normal variability in earnings patterns. Business mix changes occur not only asis the Company shifts emphasis between products, linesresult of business, distribution channels and markets, but also as individual contracts renew or non-renew, almost always with changes intiming; premiums are earned ratably over the coverage structure, prices and/or terms, and as new contractsperiod whereas written premiums are accepted with coverages, structures, prices and/or terms different from thosereflected at the initiation of expiring contracts. As premium reporting, earnings, loss and commission characteristics derive from the provisions of individual contracts, the continuous turnover of individual contracts, arising from both strategic shifts and day to day underwriting, results in appreciable background variability in various underwriting line items. Changes in estimates related to the reporting patterns of ceding companies also affect premiums earned.coverage period.
Expenses
Incurred Losses and LAE. The Company’s losses and LAE reserves reflect estimates of ultimate claim liability. Such estimates are regularly re-evaluated including re-estimates of prior period reserves, taking into consideration all available information and in particular, newly reported loss and claim experience. The effect of such re-evaluations impacts incurred losses for the period in which the adjustment was made.
28
The following table showspresents the components of the Company’s incurred losses and LAE for 2005 and 2004:the International segment for the periods indicated.
| December 31, 2005 | December 31, 2004 | ||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||||||||||||||
| All Segments | |||||||||||||||||||||||||||||||||||
| Attritional (a) | $ | 1,514 | .7 | $ | (156 | .3) | $ | 1,358 | .4 | $ | 1,588 | .7 | $ | 198 | .5 | $ | 1,787 | .2 | |||||||||||||||||
| Catastrophes | 755 | .4 | 77 | .6 | 833 | .0 | 290 | .9 | (34 | .6) | 256 | .3 | |||||||||||||||||||||||
| A&E | - | 11 | .5 | 11 | .5 | - | 10 | .3 | 10 | .3 | |||||||||||||||||||||||||
| Total All segments | $ | 2,270 | .1 | $ | (67 | .3) | $ | 2,202 | .8 | $ | 1,879 | .6 | $ | 174 | .2 | $ | 2,053 | .8 | |||||||||||||||||
| Loss Ratio | 93.6 | % | -2.8 | % | 90.8 | % | 69.4 | % | 6.4 | % | 75.8 | % | |||||||||||||||||||||||
(a) Attritional losses exclude catastrophe and A&E losses | |||||||||||||||||||||||||||||||||||
| (Some amounts may not reconcile due to rounding.) | |||||||||||||||||||||||||||||||||||
The Company’s incurred
| Years Ended December 31, |
| ||||||||||||
| Current |
| Ratio %/ |
| Prior |
| Ratio %/ |
| Total |
| Ratio %/ | |||
(Dollars in millions) | Year |
| Pt Change |
| Years |
| Pt Change |
| Incurred |
| Pt Change | |||
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 350.0 |
| 64.2% |
|
| $ (3.9) |
| -0.7% |
|
| $ 346.1 |
| 63.4% |
|
Catastrophes | 26.1 |
| 4.8% |
|
| (5.0) |
| -0.9% |
|
| 21.1 |
| 3.9% |
|
Total segment | $ 376.1 |
| 68.9% |
|
| $ (9.0) |
| -1.6% |
|
| $ 367.1 |
| 67.3% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 285.5 |
| 51.2% |
|
| $ (5.1) |
| -0.9% |
|
| $ 280.4 |
| 50.2% |
|
Catastrophes | 56.6 |
| 10.1% |
|
| 2.7 |
| 0.5% |
|
| 59.3 |
| 10.6% |
|
Total segment | $ 342.1 |
| 61.3% |
|
| $ (2.4) |
| -0.4% |
|
| $ 339.7 |
| 60.9% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 290.0 |
| 55.9% |
|
| $ (31.6) |
| -6.1% |
|
| $ 258.4 |
| 49.8% |
|
Catastrophes | 5.4 |
| 1.0% |
|
| 14.8 |
| 2.9% |
|
| 20.2 |
| 3.9% |
|
Total segment | $ 295.4 |
| 56.9% |
|
| $ (16.8) |
| -3.2% |
|
| $ 278.5 |
| 53.7% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance 2008/2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ 64.5 |
| 13.0 | pts |
| $ 1.2 |
| 0.2 | pts |
| $ 65.7 |
| 13.2 | pts |
Catastrophes | (30.5) |
| (5.3) | pts |
| (7.8) |
| (1.4) | pts |
| (38.2) |
| (6.8) | pts |
Total segment | $ 34.0 |
| 7.7 | pts |
| $ (6.6) |
| (1.2) | pts |
| $ 27.4 |
| 6.4 | pts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variance 2007/2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attritional | $ (4.5) |
| (4.7) | pts |
| $ 26.5 |
| 5.2 | pts |
| $ 22.0 |
| 0.4 | pts |
Catastrophes | 51.2 |
| 9.1 | pts |
| (12.1) |
| (2.4) | pts |
| 39.1 |
| 6.7 | pts |
Total segment | $ 46.7 |
| 4.4 | pts |
| $ 14.4 |
| 2.8 | pts |
| $ 61.2 |
| 7.2 | pts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Some amounts may not reconcile due to rounding.) |
|
|
|
|
|
|
|
|
|
| ||||
Incurred losses and LAE increased by 7.3%8.1% to $2,202.8$367.1 million in 2005 from $2,053.8for 2008 compared to $339.7 million in 2004.for 2007. The increase in incurred losses and LAE was principally attributablesegment loss ratio increased by 6.4 points for 2008 compared to the increase in estimated losses2007, primarily due to property catastrophes,higher attritional losses in 2008 compared to 2007, partially offset by favorable attritional prior years reserve development and the impact of reduced earned premiums. Incurred losses and LAE in 2005 reflected ceded losses and LAE of $852.4 million compared to ceded losses and LAE in 2004 of $789.6 million.lower catastrophe losses.
The Company’s loss ratio, which is calculated by dividing incurred losses and LAE by current year net premiums earned, increased by 15.0 points to 90.8% in 2005 from 75.8% in 2004. This 15.0 point year over year loss ratio deterioration was primarily the result of 25.6 point increase due to catastrophe losses, partially offset by 13.7 point improvement in attritional prior years reserve development.
Incurred losses and LAE include catastrophe losses, which include the impact of both current period events and favorable and unfavorable development on prior years events and are net of reinsurance. Individual catastrophe losses are reported net of specific reinsurance, but before recoveries under corporate level reinsurance and potential incurred but not reported (“IBNR”) loss reserve offsets. The Company defines a catastrophe as a property event with expected reported losses of at least $5.0increased by 22.0% to $339.7 million before corporate level reinsurance and taxes. Effective for the third quarter 2005, industrial risk losses have been excluded from catastrophe losses with prior periods adjusted for comparison purposes. Catastrophe losses, net of contract specific cessions, were $833.0 million in 2005, related principally to aggregate estimated losses driven by Hurricanes Katrina, Rita and Wilma with catastrophe losses of $406.7 million, $74.4 million and $236.0 million, respectively, but also reflected catastrophe losses related to Hurricanes Emily ($14.9 million) and Dennis ($5.3 million), floods in India ($9.9 million) and Calgary ($3.6 million) and storms in Ontario ($4.9 million). The 2005 results also reflect net unfavorable reserve development on 2004 and prior catastrophes of $77.6 million. Catastrophe losses, net of contract specific cessions, were $256.3 million in 2004, related principally to aggregate estimated losses of $290.9 million from Hurricanes Charley, Frances, Ivan and Jeanne, Pacific typhoons, Edmonton hailstorms and the Asian tsunami, which were partially offset by $32.7 million of reserve reductions related to the 2001 World Trade Center losses.
Net favorable prior years reserve adjustments for the year ended December 31, 2005 were $67.3 million2007 compared to net unfavorable prior years reserve adjustments of $174.2 million in 2004. For the year ended December 31, 2005, the favorable reserve adjustments included net favorable attritional reserve adjustments of $156.3 million related primarily to property business classes, partially offset by net unfavorable prior years catastrophe adjustments of $77.6 million related primarily to the 2004 hurricanes and net unfavorable A&E
29
adjustments of $11.5 million. For the year ended December 31, 2004, the unfavorable prior years reserve adjustments included net unfavorable attritional adjustments of $198.5 million related primarily to casualty reinsurance and net unfavorable A&E adjustments of $10.3 million. Partially offsetting the 2004 unfavorable development was $34.6 million of favorable catastrophe development, principally related to the reduction of reserves for the 2001 World Trade Center losses and other catastrophe events. It is important to note that non-A&E accident year reserve development arises from the re-evaluation of accident year results and that such re-evaluations may also impact premiums and commissions attributed by accident year, generally mitigating, in part, the impact of loss development and that such impacts are recorded as part of the overall reserve evaluation process.
Aggregate reserve development related to A&E exposures was $11.5 million and $10.3$278.5 million for the years ended December 31, 2005 and 2004, respectively.2006. The Company has A&E exposure related to contracts written by the Company prior to 1986 and to claim obligations acquired as part of the Mt. McKinley acquisition in September 2000. The reserve strengthening on business written by the Company, net of reinsurance, was $ 11.5 million. Substantially all of the Company’s A&E exposures relate to insurance and reinsurance contacts with coverage periods prior to 1986. Given the uncertainties surrounding the settlement of A&E losses, management is unable to establish a meaningful range for these obligations.
The following table shows the U.S. Reinsurance segment components of incurred losses and LAE for 2005 and 2004:
| December 31, 2005 | December 31, 2004 | ||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||||||||||||||
| Attritional | $ | 651 | .8 | $ | (41 | .0) | $ | 610 | .8 | $ | 630 | .0 | $ | 127 | .9 | $ | 757 | .9 | |||||||||||||||||
| Catastrophes | 475 | .9 | 54 | .3 | 530 | .2 | 214 | .1 | (34 | .8) | 179 | .2 | |||||||||||||||||||||||
| A&E | - | 11 | .5 | 11 | .5 | - | 10 | .3 | 10 | .3 | |||||||||||||||||||||||||
| Total segment | $ | 1,127 | .7 | $ | 24 | .7 | $ | 1,152 | .4 | $ | 844 | .1 | $ | 103 | .4 | $ | 947 | .5 | |||||||||||||||||
| Loss Ratio | 104.4 | % | 2.3 | % | 106.7 | % | 73.1 | % | 8.9 | % | 82.0 | % | |||||||||||||||||||||||
(Some amounts may not reconcile due to rounding.) | |||||||||||||||||||||||||||||||||||
The U.S. Reinsurance segment’s incurred losses and LAE increased 21.6%, or $205.0 million, for 2005 compared to 2004. The segment’s loss ratio increased 24.7 points over 2004 period due to current year catastrophe losses and unfavorable prior years catastrophe reserve development, partially offset by favorable attritional prior years loss development.
The prior years unfavorable loss development for the year ended December 31, 2004 was primarily attributable to a proliferation of claims related to bankruptcies and other financial management improprieties during the late 1990‘s and early 2000. This increased number of claims, combined with larger claims, had significantly increased incurred losses on the professional liability policies. In the general casualty area, the Company continued to experience losses greater than historical trends for accident years 1998 through 2001.
30
The following table shows the U.S. Insurance segment components of incurred losses and LAE for 2005 and 2004:
| December 31, 2005 | December 31, 2004 | ||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||||||||||||||
| Attritional | $ | 433 | .8 | $ | (19 | .5) | $ | 414 | .3 | $ | 486 | .0 | $ | 54 | .0 | $ | 539 | .9 | |||||||||||||||||
| Catastrophes | 1 | .0 | - | 1 | .0 | 0 | .8 | - | 0 | .8 | |||||||||||||||||||||||||
| Total segment | $ | 434 | .8 | $ | (19 | .5) | $ | 415 | .4 | $ | 486 | .8 | $ | 54 | .0 | $ | 540 | .7 | |||||||||||||||||
| Loss Ratio | 68.3 | % | -3.1 | % | 65.2 | % | 67.0 | % | 7.4 | % | 74.4 | % | |||||||||||||||||||||||
(Some amounts may not reconcile due to rounding.) | |||||||||||||||||||||||||||||||||||
The U.S. Insurance segment’s incurred losses and LAE decreased 23.2%, or $125.4 million, for 2005 as compared to 2004. The segment’s loss ratio improved by 9.2 points from 2004 primarily due to favorable prior years adjustments in 2005 principally on the California workers’ compensation for the 2004 accident year as the results of the benefit reform have become clearer, whereas the unfavorable prior years reserve adjustments in 2004 related principally to the casualty classes for accident years 2000 through 2002, where the Company strengthened its reserves for California workers’ compensation insurance. While management believes the cumulative results through 2005 remain quite positive, there was some deterioration in claim frequency and severity related to accident years 2001 and 2002.
The following table shows the Specialty Underwriting segment components of incurred losses and LAE for 2005 and 2004:
| December 31, 2005 | December 31, 2004 | ||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||||||||||||||
| Attritional | $ | 140 | .4 | $ | (38 | .6) | $ | 101 | .8 | $ | 218 | .6 | $ | 16 | .0 | $ | 234 | .6 | |||||||||||||||||
| Catastrophes | 110 | .7 | 13 | .2 | 123 | .9 | 13 | .0 | 1 | .5 | 14 | .5 | |||||||||||||||||||||||
| Total segment | $ | 251 | .1 | $ | (25 | .4) | $ | 225 | .7 | $ | 231 | .6 | $ | 17 | .5 | $ | 249 | .1 | |||||||||||||||||
| Loss Ratio | 111.8 | % | -11.3 | % | 100.5 | % | 64.9 | % | 4.9 | % | 69.8 | % | |||||||||||||||||||||||
(Some amounts may not reconcile due to rounding.) | |||||||||||||||||||||||||||||||||||
The Specialty Underwriting segment’s incurred losses and LAE decreased 9.4%, or $23.3 million, for 2005 as compared to 2004, due to the decrease in attritional losses from reduced earned premiums and favorable prior years reserve development, partially offset by an increase in current year catastrophe losses in 2005 and development of catastrophes from prior years. The segment’s loss ratio increased by 30.77.2 points year over 2004.
31
The following table showsyear, principally due to an increase in the International segment components of incurred losses and LAE for 2005 and 2004:
| December 31, 2005 | December 31, 2004 | ||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||||||||||||||
| Attritional | $ | 288 | .7 | $ | (57 | .3) | $ | 231 | .4 | $ | 254 | .2 | $ | 0 | .6 | $ | 254 | .7 | |||||||||||||||||
| Catastrophes | 167 | .7 | 10 | .1 | 177 | .8 | 63 | .1 | (1 | .3) | 61 | .8 | |||||||||||||||||||||||
| Total segment | $ | 456 | .4 | $ | (47 | .2) | $ | 409 | .3 | $ | 317 | .2 | $ | (0 | .7) | $ | 316 | .5 | |||||||||||||||||
| Loss Ratio | 94.2 | % | -9.7 | % | 84.5 | % | 67.2 | % | -0.1 | % | 67.1 | % | |||||||||||||||||||||||
(Some amounts may not reconcile due to rounding.) | |||||||||||||||||||||||||||||||||||
The International segment’s incurred losses and LAE increased 29.3%, or $92.8 million, for 2005 as compared to 2004. The segment’s loss ratio increased by 17.4 points over 2004 period, primarily reflective of the significant property catastrophe losses in 20052007.
Segment Expenses. Commission and development on prior years’ catastrophes, partially offset by an improvement in attritional prior years reserves on the Canadian, Asian and international business.
Underwriting Expenses. The Company’s expense ratio, which is calculated by dividing underwritingbrokerage expenses by net premiums earned, was 25.3% in 2005 comparedincreased slightly to 23.5% in 2004.
The following table shows the expense ratios$129.7 million for each of the Company’s operating segments for 2005 and 2004.
| Segment Expense Ratios | ||||||||
|---|---|---|---|---|---|---|---|---|
| Segment | 2005 | 2004 | ||||||
| U.S. Reinsurance | 26.2 | % | 25.8 | % | ||||
| U.S. Insurance | 22.9 | % | 16.6 | % | ||||
| Specialty Underwriting | 27.8 | % | 28.6 | % | ||||
| International | 24.2 | % | 24.9 | % | ||||
Segment underwriting expenses decreased by 4.6% to $608.52008 from $126.7 million in 20052007 despite a slight decline in premiums earned. The commission and brokerage ratio increased principally due to increased contingent commissions emanating from $637.6 million in 2004. Commission, brokerage, taxes and fees decreased by $33.1 million, principally reflecting decreases in premium volume and changes in the mix and distribution channel of business.profitable results. Segment other underwriting expenses for 2008 was $19.8 million compared to $18.6 million for 2007.
Commission and brokerage expenses increased by $4.07.3% to $126.7 million as the Company continued to expand operations. Contributing to the segment underwriting expense decreases were a 38.8% ($39.4 million) decreasefor 2007 from $118.1 million in the Specialty Underwriting operation, a 4.7% ($14.0 million) decrease in the U.S. Reinsurance operation and a 0.7% ($0.8 million) decrease in the International operation, partially offset by a 21.0% ($25.2 million) increase in the U.S. Insurance operation. The changes for each operation’s expenses principally resulted from changes in commission expenses related to changes in premium volume and business mix by class and type and in some cases, changes in the use of specific reinsurance, as well as the underwriting performance of the underlying business.
The Company’s combined ratio, which is the sum of the loss and expense ratios, increased by 15.8 points to 116.1% in 2005 as compared to 100.3% in 2004,2006, consistent with the increase principally resulting from elevated catastrophe losses, partially offset by improved prior years development.
32
The following table shows the combined ratios for each of the Company’s operating segments in 2005 and 2004. The segment combined ratios were impacted by the loss and expense ratio variability noted above.
| Segment Combined Ratios | ||||||||
|---|---|---|---|---|---|---|---|---|
| Segment | 2005 | 2004 | ||||||
| U.S. Reinsurance | 132.9 | % | 107.8 | % | ||||
| U.S. Insurance | 88.1 | % | 91.0 | % | ||||
| Specialty Underwriting | 128.3 | % | 98.4 | % | ||||
| International | 108.7 | % | 92.0 | % | ||||
Investment Results. Net investment income decreased 1.2% to $325.2 million in 2005 from $329.2 million in 2004, primarily reflecting lower returns from equity investments in limited partnerships. Investable assets increased by $0.4 billion to $7.9 billion in 2005, principally reflecting the effects of investing cash flow from operations during the year, partially offset by the repayment of $250.0 million of senior debt. Investment income for the limited partnerships for the years ended December 31, 2005 and 2004 was $7.5 million and $36.3 million, respectively.
The following table shows the components of net investment income for the years ended as indicated:
| (Dollars in thousands) | 2005 | 2004 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Fixed maturities | $ | 308,254 | $ | 306,892 | |||||||
| Equity securities | 16,356 | 8,453 | |||||||||
| Short-term investments | 12,325 | 5,314 | |||||||||
| Other investment income | 9,019 | 37,076 | |||||||||
| Total gross investment income | 345,954 | 357,735 | |||||||||
| Interest credited and other expense | (20,737 | ) | (28,551 | ) | |||||||
| Total net investment income | $ | 325,217 | $ | 329,184 | |||||||
The following table shows a comparison of various investment yields for the years indicated:
| 2005 | 2004 | |||||||
|---|---|---|---|---|---|---|---|---|
| Imbedded pre-tax yield of cash and invested assets at December 31 | 4.5 | % | 4.5 | % | ||||
| Imbedded after-tax yield of cash and invested assets at December 31 | 3.6 | % | 3.6 | % | ||||
Annualized pre-tax yield on average cash and invested assets | 4.4 | % | 5.0 | % | ||||
| Annualized after-tax yield on average cash and invested assets | 3.6 | % | 3.9 | % | ||||
The Company’s net realized capital gains were $64.6 million in 2005, which reflected realized capital gains on the Company’s investments of $75.9 million, including $25.3 million on the sale of interest only strips investments, partially offset by $11.3 million of realized capital losses, which included $4.1 million related to the write-downs in the value of interest only strips deemed to be impaired on anpremiums earned. Segment other than temporary basis in accordance with EITF 99-20. Net realized capital gains were $56.7 million in 2004, which reflected realized capital gains on the Company’s investments of $107.4 million, including $77.6 million on the sale of interest only strips investments, partially offset by $50.7 million of realized capital losses, which included $43.9 million related to the write-downs in the value of interest only strips deemed to be impaired on an other than temporary basis in accordance with EITF 99-20.
33
Corporate, Non-allocated Expenses. Corporate underwriting expenses not allocated to segments were $6.2 million for 2005 as compared to corporate income of $2.0 million for 2004, as the Company expanded its infrastructure to support operations and incurred a one time expense of $1.5 million related to the transfer of the UK branch to Bermuda Re.
Interest, fees and bond issue cost amortization expense for 20052007 was $74.2$18.6 million compared to $76.6$13.8 million in 2004. Interest, fees and bond issue cost amortization expense in 2005 included $35.5 million related to the senior notes, $37.4 million related to the junior subordinated debt securities, $1.0 million related to the bond issue cost amortization and $0.2 million related to the credit line under the Company’s revolving credit facility. Interest expense and fees in 2004 included $42.0 million related to senior notes, $32.4 million related to the junior subordinated debt securities, $1.1 million related to the bond issue cost amortization and $1.2 million related to borrowings under the Company’s revolving credit facility. Interest expense on senior notes decreased due to the retirement on March 15, 2005 of the 8.5% senior notes issued on March 14, 2000.
Other income in 2005 was $10.3 million compared to other expense of $67.9 million in 2004. The change in net other income for 2005 from net other expense in 2004 was primarily due to decreased deferrals on retroactive reinsurance agreements with affiliates.
Income Taxes. The Company’s income tax expense is primarily a function of the U.S. statutory tax rate and the impact from tax preferenced investment income. The Company recognized an income tax benefit of $70.2 million in 2005,2006, primarily due to the significant incurred losses relatedallocation of certain corporate charges to catastrophes,segments, which resultedhad been previously retained in a pre-tax loss for the year. The Company recognized an income tax expense of $56.1 million in 2004, primarily due to pre-tax income of $231.6 million and the impact of various tax issues giving rise to net tax expense in conjunction with the transfer of the Company’s UK branch to Bermuda Re.corporate expenses.
Net Income. Net income was $4.7 million in 2005 compared to net income of $175.5 million in 2004, primarily reflecting reduced underwriting profitability due to catastrophe losses, partially offset by favorable prior period reserve development and related tax benefits.
SAFE HARBOR DISCLOSURE
This report contains forward-looking statements within the meaning of the U.S. federal securities laws. The Company intendsWe intend these forward-looking statements to be covered by the safe harbor provisions for forward lookingforward-looking statements in the federal securities laws. In some cases, these statements can be identified by the use of forward-looking words such as “may”, “will”, “should”, “could”, “anticipate”, “estimate”, “expect”, “plan”, “believe”, “predict”, “potential” and “intend”. Forward-looking statements contained in this report include information regarding the Company’sour reserves for losses and LAE, the adequacy of the Company’sour provision for uncollectible balances, estimates of the Company’sour catastrophe exposure, and the effects of catastrophic events on the Company’sour financial statements and the ability of the Company’sour subsidiaries to pay dividends. Forward-looking statements only reflect the Company’sour expectations and are not guarantees of performance. These statements involve risks, uncertainties and assumptions. Actual events or results may differ materially from the Company’sour expectations. Important factors that could cause the Company’sour actual events or results to be materially different from the Company’sour expectations include those discussed under the caption ITEM 1A, “Risk Factors”. The Company undertakesWe undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
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ITEM 7A.Quantitative and Qualitative Disclosures About Market RiskQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Sensitive Instruments
Instruments.
The SEC’s Financial Reporting Release #48 requires registrants to clarify and expand upon the existing financial statement disclosure requirements for derivative financial instruments, derivative commodity instruments and other financial instruments (collectively, “market sensitive instruments”). The Company doesWe do not generally enter intohold market sensitive instruments for trading purposes.
The Company’s
Our current investment strategy seeks to maximize after-tax income through a high quality, diversified, taxable and tax-preferenced fixed maturity portfolio,securities, while maintaining an adequate level of liquidity. The Company’sOur mix of taxable and tax-preferenced investments is adjusted continuously,periodically, consistent with itsour current and projected operating results, market conditions and the Company’sour tax position. The fixed maturities in the investment portfolio are comprised of non-trading available for sale securities. Additionally, the Company investswe have invested in equity securities, which it believes will enhance the risk-adjusted total return of the investment portfolio.securities.
The overall investment strategy considers the scope of present and anticipated Company operations. In particular, estimates of the financial impact resulting from non-investment asset and liability transactions, together with the Company’sour capital structure and other factors, are used to develop a net liability analysis. This analysis includes estimated payout characteristics for which theour investments of the Company provide liquidity. This analysis is considered in the development of specific investment strategies for asset allocation, duration and credit quality. The change in overall market sensitive risk exposure principally reflects the asset changes that took place during the period.
Interest Rate Risk. The Company’s $8.5 Our $7.4 billion investment portfolio at December 31, 20062008 is principally comprised of fixed maturity securities, which are generally subject to interest rate risk and 12.0%of which 15.3% are subjectexposed to foreign currency rate risk,movements, and some equity securities, which are subject to price fluctuations. The impact of the foreign exchange risksmovements on the investment portfolio is generallypartially mitigated by changes in the dollar value of foreign currency denominated liabilities and their associated income statement impact.
Interest rate risk is the potential change in value of the fixed maturity portfolio, including short-term investments, from a change in market interest rates. In a declining interest rate environment, it includes prepayment risk on the $466.5$217.1 million of mortgage-backed securities in the $6,137.4$5,554.9 million fixed maturity portfolio. Prepayment risk results from potential accelerated principal payments that shorten the average life and thus the expected yield of the security.
The tables below display the potential impact of market value fluctuations and after-tax unrealized appreciation on the Company’sour fixed maturity portfolio (including $657.7$918.7 million of short-term investments) as of December 31, 2006 and 2005for the periods indicated based on upward and downward parallel and immediate 100 and 200 basis point shifts in interest rates. For legal entities with a U.S. dollar functional currency, this modeling was performed on each security individually. To generate appropriate price estimates onfor mortgage-backed securities, changes in prepayment expectations under different interest rate environments were taken into account. For legal entities with a non-U.S. dollar functional currency, the effective duration of the involved portfolio of securities was used as a proxy for the market value change under the various interest rate change scenarios. All amounts are in U.S. dollars and are presented in millions.
35
| 2006 Interest Rate Shift in Basis Points | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| -200 | -100 | 0 | 100 | 200 | |||||||||||||
| Total Market Value | $ | 7,432.4 | $ | 7,113.9 | $ | 6,795.1 | $ | 6,436.3 | $ | 6,050.6 | |||||||
| Market Value Change from Base (%) | 9.4 | % | 4.7 | % | 0.0 | % | -5.3 | % | -11.0 | % | |||||||
| Change in Unrealized Appreciation | |||||||||||||||||
| After-tax from Base ($) | $ | 414.3 | $ | 207.2 | $ | - | $ | (233.2 | ) | $ | (483.9 | ) | |||||
2005 Interest Rate Shift in Basis Points | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| -200 | -100 | 0 | 100 | 200 | |||||||||||||
| Total Market Value | $ | 7,236.4 | $ | 6,901.2 | $ | 6,550.6 | $ | 6,165.3 | $ | 5,774.4 | |||||||
| Market Value Change from Base (%) | 10.5 | % | 5.4 | % | 0.0 | % | -5.9 | % | -11.8 | % | |||||||
| Change in Unrealized Appreciation | |||||||||||||||||
| After-tax from Base ($) | $ | 445.8 | $ | 227.9 | $ | - | $ | (250.4 | ) | $ | (504.5 | ) | |||||
| Impact of Interest Rate Shift in Basis Points |
| ||||||||
| At December 31, 2008 |
| ||||||||
(Dollars in millions) | -200 |
| -100 |
| 0 |
| 100 |
| 200 |
|
Total Market/Fair Value | $ 7,209.1 |
| $ 6,855.1 |
| $ 6,473.7 |
| $ 6,083.4 |
| $ 5,720.2 |
|
Market/Fair Value Change from Base (%) | 11.4 | % | 5.9 | % | 0.0 | % | -6.0 | % | -11.6 | % |
Change in Unrealized Appreciation |
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After-tax from Base ($) | $ 478.0 |
| $ 247.9 |
| $ - |
| $ (253.7) |
| $ (489.7) |
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| Impact of Interest Rate Shift in Basis Points |
| ||||||||
| At December 31, 2007 |
| ||||||||
(Dollars in millions) | -200 |
| -100 |
| 0 |
| 100 |
| 200 |
|
Total Market/Fair Value | $ 7,953.6 |
| $ 7,649.8 |
| $ 7,325.5 |
| $ 6,944.8 |
| $ 6,552.6 |
|
Market/Fair Value Change from Base (%) | 8.6 | % | 4.4 | % | 0.0 | % | -5.2 | % | -10.6 | % |
Change in Unrealized Appreciation |
|
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|
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|
|
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After-tax from Base ($) | $ 408.3 |
| $ 210.8 |
| $ - |
| $ (247.5) |
| $ (502.4) |
|
The Company
We had $7,397.3$7,420.0 million and $7,729.2$7,538.7 million of gross reserves for losses and LAE as of December 31, 20062008 and 2005,2007, respectively. These amounts are recorded at their nominal value, as opposed to fairpresent value, which would reflect a discount adjustment to reflect the time value of money. Since losses are paid out over a period of time, the fairpresent value of the reserves is less than the nominal value. As interest rates rise, the fairpresent value of the reserves decreases and, conversely, as interest rates decline, the fairpresent value increases. These movements are the opposite of the interest rate impacts on the fair value of investments. While the difference between fairpresent value and nominal value is not reflected in the Company’sour financial statements, the Company’sour financial results will include investment income over time from the investment portfolio until the claims are paid. The Company’sOur loss and loss reserve obligations have an expected duration that is reasonably consistent with the Company’sour fixed income portfolio.
Equity Risk. Equity risk is the potential change in fair and/or market value of the common stock and preferred stock portfolios arising from changing equity prices. The Company’sOur equity investments are mainly exchange tradedconsist of a diversified portfolio of individual securities and mutual fund,funds, which invest principally in high quality common and preferred stocks that are traded on the major exchanges in the U.S.exchanges. The primary objective in managingof the equity portfolio iswas to provide capital growthobtain greater total return relative to bonds over time through market appreciation and income.
The tables below display the impact on fair/market value and after-tax unrealized appreciationappreciation/(depreciation) of a 10% and 20% change in equity prices up and down as of December 31, 2006 and 2005. The growth in exposure is primarily due tofor the growth in the equity portfolio. All amounts are in U.S. dollars and are presented in millions.periods indicated.
| 2006 Change in Equity Values in Percent | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| -20% | -10% | 0% | 10% | 20% | |||||||||||||
| Market Value of the Equity Portfolio | $ | 951.5 | $ | 1,070.4 | $ | 1,189.3 | $ | 1,308.3 | $ | 1,427.2 | |||||||
| After-tax Change in Unrealized Appreciation | $ | (154.6 | ) | $ | (77.3 | ) | $ | - | $ | 77.3 | $ | 154.6 | |||||
2005 Change in Equity Values in Percent | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| -20% | -10% | 0% | 10% | 20% | |||||||||||||
| Market Value of the Equity Portfolio | $ | 819.0 | $ | 921.4 | $ | 1,023.8 | $ | 1,126.2 | $ | 1,228.5 | |||||||
| After-tax Change in Unrealized Appreciation | $ | (133.1 | ) | $ | (66.5 | ) | $ | - | $ | 66.5 | $ | 133.1 | |||||
36
| Impact of Percentage Change in Equity Fair/Market Values | |||||||||
| At December 31, 2008 | |||||||||
(Dollars in millions) | -20% | -10% | 0% | 10% | 20% | |||||
Fair/Market Value of the Equity Portfolio | $ 95.9 |
| $ 107.8 |
| $ 119.8 |
| $ 131.8 |
| $ 143.8 |
|
After-tax Change in Fair/Market Value | (15.6) |
| (7.8) |
| - |
| 7.8 |
| 15.6 |
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| Impact of Percentage Change in Equity Fair/Market Values | |||||||||
| At December 31, 2007 | |||||||||
(Dollars in millions) | -20% | -10% | 0% | 10% | 20% | |||||
Fair/Market Value of the Equity Portfolio | $ 660.2 |
| $ 742.7 |
| $ 825.3 |
| $ 907.8 |
| $ 990.3 |
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After-tax Change in Fair/Market Value | (106.0) |
| (53.0) |
| - |
| 53.0 |
| 106.0 |
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Foreign Exchange Risk. Foreign currency risk is the potential change in value, income and cash flow arising from adverse changes in foreign currency exchange rates. Each of the Company’sour non-U.S. (“foreign”) operations maintains capital in the currency of the country of its geographic location consistent with local regulatory guidelines. Generally, the Company preferswe prefer to maintain the capital of its foreignour operations in U.S. dollar assets, although this varies by regulatory jurisdiction in accordance with market needs. Each foreign operation may conduct business in its local currency, as well as the currency of other countries in which it operates. The primary foreign currency exposures for these foreign operations are the Canadian Dollar, the British Pound Sterling and the Euro. The Company mitigatesWe mitigate foreign exchange exposure by generally matching the currency and duration of itsour assets to itsour corresponding operating liabilities. In accordance with Financial Accounting Standards Board StatementFAS No. 52, “Foreign Currency Translation”, the Company translateswe translate the assets, liabilities and income of non-U.S. dollar functional currency legal entities to the U.S. dollar. This translation amount is reported as a component of other comprehensive income (loss).income. As of December 31, 2008 there has been no material change in exposure to foreign exchange rates as compared to December 31, 2007.
The tables below display the potential impact of a parallel and immediate 10% and 20% increase and decrease in foreign exchange rates on the valuation of invested assets subject to foreign currency exposure as of December 31, 2006 and 2005.for the periods indicated. This analysis includes the after-tax impact of translation from transactional currency to functional currency as well as the after-tax impact of translation from functional currency to the U.S. dollar reporting currency. All amounts are in U.S. dollars and are presented in millions.
| 2006 Change in Foreign Exchange Rates in Percent | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| -20% | -10% | 0% | 10% | 20% | |||||||||||||
| Total After-tax Foreign Exchange Exposure | $ | (48.1 | ) | $ | (26.6 | ) | $ | - | $ | 30.4 | $ | 63.5 | |||||
2005 Change in Foreign Exchange Rates in Percent | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| -20% | -10% | 0% | 10% | 20% | |||||||||||||
| Total After-tax Foreign Exchange Exposure | $ | (45.4 | ) | $ | (24.6 | ) | $ | - | $ | 27.3 | $ | 56.7 | |||||
| Change in Foreign Exchange Rates in Percent | |||||||||
| At December 31, 2008 |
| ||||||||
(Dollars in millions) | -20% | -10% | 0% | 10% | 20% | |||||
Total After-tax Foreign Exchange Exposure | $ (51.7) |
| $ (29.4) |
| $ - |
| $ 34.6 |
| $ 73.2 |
|
| Change in Foreign Exchange Rates in Percent | |||||||||
| At December 31, 2007 |
| ||||||||
(Dollars in millions) | -20% | -10% | 0% | 10% | 20% | |||||
Total After-tax Foreign Exchange Exposure | $ (61.8) |
| $ (34.1) |
| $ - |
| $ 38.8 |
| $ 81.0 |
|
ITEM 8.Financial Statements and Supplementary Data
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules listed in the accompanying Index to Financial Statements and Schedules on page F-1 are filed as part of this report.
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
ITEM 9.Changes in and Disagreements with Accountants on Accounting and Financial DisclosureNone.DISCLOSURE
None.
ITEM 9A.Controls and ProceduresCONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exchange Act), our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.
Management’s Annual Report on Internal Control Over Financial ReportingNot required
Our management is responsible for fiscal year endedestablishing and maintaining adequate internal controls over financial reporting. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2006.2008. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. Based on our assessment we concluded that, as of December 31, 2008, our internal control over financial reporting is effective based on those criteria.
37
Attestation Report of the Registered Public Accounting Firm
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Changes in Internal Control overOver Financial Reporting
As required by Rule 13a-15(d) of the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated our internal control over financial reporting to determine whether any changes occurred during the fourth fiscal quarter covered by this annual report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there has been no such change during the fourth quarter.
ITEM 9B.Other Information
OTHER INFORMATION
None.
PART III
ITEM 10.Directors and Executive Officers of the Registrant
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information for Item 10 is not required pursuant to General Instruction I(2) of Form 10-K.
ITEM 11.Executive Compensation
EXECUTIVE COMPENSATION
Information for Item 11 is not required pursuant to General Instruction I(2) of Form 10-K.
ITEM 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Information for Item 12 is not required pursuant to General Instruction I(2) of Form 10-K.
ITEM 13.Certain Relationships and Related Transactions
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Information for Item 13 is not required pursuant to General Instruction I(2) of Form 10-K.
ITEM 14.Principal Accountant Fees and ServicesPRINCIPAL ACCOUNTANT FEES AND SERVICES
The PricewaterhouseCoopers LLP (and its worldwide affiliates) fees incurred are as follows for the years ended December 31, 2006 and 2005 are as follows:periods indicated:
| 2006 | 2005 | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (1) | Audit Fees | $ | 1,785,909 | $ | 1,530,313 | ||||||
| (2) | Audit-Related Fees | $ | 69,000 | $ | 66,000 | ||||||
| (3) | Tax Fees | $ | 27,004 | $ | 105,965 | ||||||
| (4) | All Other Fees | $ | 4,602 | $ | 2,130 | ||||||
(Dollars in thousands) | 2008 | 2007 | |
(1) | Audit Fees | $ 1,880.5 | $ 1,866.8 |
(2) | Audit-Related Fees | 75.1 | 102.5 |
(3) | Tax Fees | 32.8 | 164.2 |
(4) | All Other Fees | 5.0 | 5.0 |
Audit fees include the annual audit and quarterly financial statement audit,reviews, subsidiary audits, and procedures required to be performed by the independent auditor to be able to form an opinion on the Company’sour consolidated financial statements. These other procedures include information systems and procedural reviews and testing performed in order to understand and place reliance on the systems of internal control, and consultations relating to the audit or quarterly review. Audit fees may also include statutory audits or financial audits for our subsidiaries or affiliates of the Company and services associated with SEC registration statements, periodic reports and other documents filed with the SEC or other documents issued in connection with securities offerings.
38
Audit-related fees include assurance and related services that are reasonably related to the performance of the audit or review of the Company’sour financial statements, including due diligence services pertaining to potential business acquisitions/dispositions, accounting consultations related to accounting, financial reporting or disclosure matters not classified as “audit services”; assistance with understanding and implementing new accounting and financial reporting guidance from rule making authorities; financial audits of employee benefit plans; agreed-upon or expanded audit procedures related to accounting and/or billing records required to respond to or comply with financial, accounting or regulatory reporting matters and assistance with internal control reporting requirements.
Tax fees include tax compliance, tax planning and tax advice and is granted general pre-approval by Group’s Audit Committee.
All other fees represent an accounting research subscription and software.
PricewaterhouseCoopers LLP used no leased employees on the Company’s audit engagement.
Under its Charter and the “Audit and Non-Audit Services Pre-Approval Policy” (the “Policy”), Group’s Audit Committee or its delegate (one or more of its members) is required to pre-approve the audit and non-audit services performed by the independent auditor. The Policy requires that any service that has not received a general pre-approval or that exceeds pre-approved cost levels or budgeted amounts requires specific approval by Group’s Audit Committee or its delegate. For both specific and general pre-approval, Group’s Audit Committee will consider whether such services are consistent with the SEC’s rules on auditor
independence. Group’s Audit Committee will also consider whether the independent auditor is best positioned to provide the most effective and efficient service and whether the service might enhance the Company’sour ability to manage or control risk or improve audit quality. Group’s Audit Committee is also mindful of the relationship between fees for audit and non-audit services in deciding whether to pre-approve any such services and may determine, for each fiscal year, the appropriate ratio between the total amount of fees for audit, audit-related and tax fees and a total amount of fees for certain permissible non-audit services classified as “All Other Fees” above. All such factors will be considered as a whole and no one factor is determinative. Group’s Audit Committee has considered whether the performance by PricewaterhouseCoopers LLP of the services disclosed below is compatible with maintaining their independence.
No portion of the fees listed in (2) through (4) above was approved by Group’s Audit Committee after the beginning of the engagement pursuant to the waiver of the pre-approval requirement for certain de minimis non-audit services described in section 10A of the Securities Exchange Act of 1934 and applicable regulations.
PART IV
ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Exhibits and Financial Statement Schedules
Exhibits
The exhibits listed on the accompanying Index to Exhibits on page E-1 are filed as part of this report except that the certifications in Exhibit 32 are being furnished to the SEC, rather than filed with the SEC, as permitted under applicable SEC rules.
Financial Statements and Schedules
Schedules.
The financial statements and schedules listed in the accompanying Index to Financial Statements and Schedules on page F-1 are filed as part of this report.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 23, 2007.31, 2009.
| EVEREST REINSURANCE HOLDINGS, INC. |
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| By: | / |
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| Joseph V. Taranto (Chairman and Chief Executive Officer) |
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||
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| Chairman and Chief Executive Officer and Director (Principal Executive Officer) | March | |
Joseph V. Taranto | ||||
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| President and Chief Operating Officer | March | |
Thomas J. Gallagher | ||||
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| Executive Vice President and Chief Financial Officer | March | |
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/S/ KEITH T. SHOEMAKER | Comptroller
| March | ||
Keith T. Shoemaker |
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INDEX TO EXHIBITS | |||
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Exhibit No. | |||
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| 2.1 | Agreement and Plan of Merger among Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd. and Everest Re Merger Corporation, incorporated herein by reference to Exhibit 2.1 to the Registration Statement on Form S-4 (No. 333-87361) | |
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| 3.1 | Certificate of Incorporation of Everest Reinsurance Holdings, Inc., incorporated herein by reference to Exhibit 4.1 to the Registration Statement on Form S-8 (No. 333-05771) | |
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| 3.2 | By-Laws of Everest Reinsurance Holdings, Inc., incorporated herein by reference to Exhibit 3.2 to the Everest Reinsurance Holdings, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 | |
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| 4.1 | Indenture, dated March 14, 2000, between Everest Reinsurance Holdings, Inc. and The Chase Manhattan Bank, as Trustee, incorporated herein by reference to Exhibit 4.1 to Everest Reinsurance Holdings, Inc. Form 8-K filed on March 15, 2000 | |
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| 4.2 | First Supplemental Indenture relating to the 8.5% Senior Notes due March 15, 2005, dated March 14, 2000, between Everest Reinsurance Holdings, Inc. and The Chase Manhattan Bank, as Trustee, incorporated herein by reference to Exhibit 4.2 to Everest Reinsurance Holdings, Inc. Form 8-K filed on March 15, 2000 | |
|
|
| |
| 4.3 | Second Supplemental Indenture relating to the 8.75% Senior Notes due March 15, 2010, dated March 14, 2000, between Everest Reinsurance Holdings, Inc. and The Chase Manhattan Bank, as Trustee, incorporated herein by reference to Exhibit 4.3 to the Everest Reinsurance Holdings, Inc. Form 8-K filed on March 15, 2000 | |
|
|
| |
| 4.4 | Junior Subordinated Indenture, dated November 14, 2002, between Everest Reinsurance Holdings, Inc. and JPMorgan Chase Bank as Trustee, incorporated herein by reference to Exhibit 4.5 to the Registration Statement on Form S-3 (No. 333-106595) | |
|
|
| |
| 4.5 | First Supplemental Indenture relating to Holdings 7.85% Junior Subordinated Debt Securities due November 15, 2032, dated as of November 14, 2002, among Holdings, Group and JPMorgan Chase Bank, as Trustee, incorporated herein by reference to Exhibit 10.2 to Everest Re Group, Ltd. Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (the “second quarter 2003 10-Q”) | |
|
|
| |
| 4.6 | Amended and Restated Trust Agreement of Everest Re Capital Trust, dated as of November 14, 2002, incorporated herein by reference to Exhibit 10.1 to the second quarter 2003 10-Q | |
|
|
| |
| 4.7 | Guarantee Agreement, dated as of November 14, 2002, between Holdings and JPMorgan Chase Bank, incorporated herein by reference to Exhibit 10.3 to the second quarter 2003 10-Q | |
|
|
| |
| 4.8 | Expense Agreement, dated as of November 14, 2002, between Holdings and Everest Re Capital Trust, incorporated herein by reference to Exhibit 10.4 to the second quarter 2003 10-Q | |
| |||
E-1
4.9 | Second Supplemental Indenture relating to Holdings 6.20% Junior Subordinated Debt Securities due March 29, 2034, dated as of March 29, 2004, among Holdings, Group and JPMorgan Chase Bank, as Trustee, incorporated herein by reference to Exhibit 4.1 to Everest Reinsurance Holdings, Inc. Form 8-K filed on March 30, 2004 (the “March 30, 2004 8-K”) | ||
|
|
|
| 4.10 | Amended and Restated Trust Agreement of Everest Re Capital Trust II, dated as of March 29, 2004, incorporated herein by reference to Exhibit 4.2 to the March 30, 2004 8-K | |
|
|
| |
| 4.11 | Guarantee Agreement, dated as of March 29, 2004, between Holdings and JPMorgan Chase Bank, incorporated herein by reference to Exhibit 4.3 to the March 30, 2004 8-K | |
|
|
| |
| 4.12 | Expense Agreement, dated as of March 29, 2004, between Holdings and Everest Re Capital Trust II, incorporated herein by reference to Exhibit 4.4 to the March 30, 2004 8-K | |
|
|
| |
| 4.13 | Third Supplemental Indenture relating to Holdings 5.40% Senior Notes due October 15, 2014, dated as of October 12, 2004, among Holdings and JPMorgan Chase Bank, as Trustee, incorporated herein by reference to Exhibit 4.1 to Everest Reinsurance Holdings, Inc. Form 8-K filed on October 12, 2004 | |
|
|
| |
| *10.1 | Employment Agreement with Joseph V. Taranto executed on July 15, 1998, incorporated herein by reference to Exhibit 10.21 to Everest Reinsurance Holdings, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (the “second quarter 1998 10-Q”) | |
|
|
| |
| *10.2 | Amendment of Employment Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd. and Joseph V. Taranto dated February 15, 2000, incorporated herein by reference to Exhibit 10.29 to Everest Re Group, Ltd. Annual Report on Form 10-K for the year ended December 31, 1999 (the “1999 10-K”) | |
|
|
| |
| *10.3 | Change of Control Agreement with Joseph V. Taranto effective July 15, 1998, incorporated herein by reference to Exhibit 10.22 to the second quarter 1998 10-Q | |
|
|
| |
| *10.4 | Amendment of Change of Control Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd. and Joseph V. Taranto dated February 15, 2000, incorporated herein by reference to Exhibit 10.30 to the 1999 10-K | |
|
|
| |
| 10.5 | Stock Purchase Agreement between The Prudential Insurance Company of America and Everest Reinsurance Holdings, Inc. for the sale of common stock of Gibraltar Casualty Company dated February 24, 2000, incorporated herein by reference to Exhibit 10.32 to the 1999 10-K | |
|
|
| |
| 10.6 | Amendment No. 1 to Stock Purchase Agreement between The Prudential Insurance Company of America and Everest Reinsurance Holdings, Inc. for the sale of common stock of Gibraltar Casualty Company dated August 8, 2000, incorporated herein by reference to Exhibit 10.1 to the Everest Re Group, Ltd. Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 | |
|
|
| |
| 10.7 | Proportional Excess of Loss Reinsurance Agreement entered into between Gibraltar Casualty Company and Prudential Property and Casualty Insurance Company, incorporated herein by reference to Exhibit 10.24 to the 2000 10-K | |
|
|
| |
| 10.8 | Guarantee Agreement made by The Prudential Insurance Company of America in favor of Gibraltar Casualty Company, incorporated herein by reference to Exhibit 10.25 to the 2000 10-K |
E-2
| 10.9 | Lease, effective December 26, 2000 between OTR, an Ohio general partnership, and Everest Reinsurance Company, incorporated herein by reference to Exhibit 10.26 to the 2000 10-K |
|
|
| |
| *10.10 | Amendment of Employment Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global Services, Inc. and Joseph V. Taranto, dated March 30, 2001, incorporated herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Report on Form 10-Q for the quarter ended March 31, 2001 (the “first quarter 2001 10-Q”) | |
|
|
| |
| *10.11 | Amendment of Employment Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global Services, Inc. and Joseph V. Taranto, dated April 20, 2001, incorporated herein by reference to Exhibit 10.2 to the first quarter 2001 10-Q | |
|
|
| |
| *10.12 | Amendment of Change of Control Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global Services, Inc. and Joseph V. Taranto, dated March 30, 2001, incorporated herein by reference to Exhibit 10.3 to the first quarter 2001 10-Q | |
|
|
| |
| *10.13 | Amendment of Employment Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group Ltd., Everest Global Services Inc. and Joseph V. Taranto, dated April 18, 2003, incorporated herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K filed on April 21, 2003 | |
|
|
| |
| *10.14 | Amendment of Employment Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global Services, Inc. and Joseph V. Taranto, dated August 31, 2005, incorporated by reference to Exhibit 10.1 to Everest Re Group, Ltd. From 8-K filed on August 31, 2005 | |
|
|
| |
| 10.15 | Credit Agreement, dated August 23, 2006, between Everest Reinsurance Holdings, Inc., the lenders named therein and Citibank N.A., as administrative agent, providing for $150.0 million five year senior revolving credit facility, incorporated herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Quarterly Report on Form 10-Q for the quarter ended September 30, 2006. This new agreement replaces the October 10, 2003 three year senior revolving credit facility which expired on October 10, 2006 | |
|
|
| |
| *10.16 | Employment Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global Services, Inc. and Craig E. Eisenacher, dated December 18, 2006, incorporated by reference to Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K filed on December 5, 2006 | |
|
|
| |
*10.17 | Amendment to Employment Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc. and Joseph V. Taranto, dated April 5, 2007, incorporated herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K filed on April 5, 2007 | ||
*10.18 | Amendment to Change of Control Agreement by and among Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global Services and Joseph V. Taranto, dated April 5, 2007, incorporated herein by reference to Exhibit 10.2 to Everest Re Group, Ltd. Form 8-K filed on April 5, 2007 | ||
| |||
| 23.1 | Consent of PricewaterhouseCoopers LLP, filed herewith | |
|
|
| |
| 31.1 | Section 302 Certification of Joseph V. Taranto, filed herewith | |
|
|
| |
31.2 | Section 302 Certification of Craig Eisenacher, filed herewith | ||
| |||
32.1 | Section 906 Certification of Joseph V. Taranto and Craig Eisenacher, furnished herewith | ||
| |||
* Management contract or compensatory plan or arrangement. | |||
EVEREST REINSURANCE HOLDINGS, INC.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
| Pages | ||
| |||
Report of Independent Registered Public Accounting Firm | F-2 | ||
|
|
| |
Consolidated Balance Sheets at December 31, | F-3 | ||
|
|
| |
Consolidated Statements of Operations and Comprehensive (Loss) Income for the
|
| ||
Years Ended December 31, 2008, 2007 and 2006 | F-4 | ||
|
|
| |
Consolidated Statements of Changes in Stockholder’s Equity for the Years Ended | |||
December 31, | F-5 | ||
|
|
| |
Consolidated Statements of Cash Flows for the Years Ended | |||
December 31, | F-6 | ||
|
|
| |
Notes to Consolidated Financial Statements | F-7 | ||
|
|
| |
Schedules | |||
|
|
| |
I | Summary of Investments Other Than Investments in Related Parties at | ||
December 31, | S-1 | ||
|
|
| |
II | Condensed Financial Information of Registrant: |
| |
|
|
| |
| Balance Sheets as of December 31, | S-2 | |
|
|
| |
| Statements of Operations for the Years Ended December 31, | S-3 | |
|
|
| |
| Statements of Cash Flows for the Years Ended December 31, | S-4 | |
|
|
| |
III | Supplementary Insurance Information for the Years Ended | ||
December 31, | S-5 | ||
|
|
| |
IV | Reinsurance for the Years Ended December 31, | S-6 | |
| |||
Schedules other than those listed above are omitted for the reason that they are not applicable or the information is otherwise contained in the Financial Statements.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholder
of Everest Reinsurance Holdings, Inc.:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Everest Reinsurance Holdings, Inc. and its subsidiaries (the “Company”) at December 31, 20062008 and 2005,2007, and the results oftheiroperations and theircash flows for each of the three years in the period ended December 31, 20062008 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidatedfinancial statements. These financial statements and financial statement schedules are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated financial statements, the Company adopted SFAS No. 157, “Fair Value Measurements” and SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” in 2007.
PricewaterhouseCoopers LLP
New York, New York
March 20, 200730, 2009
EVEREST REINSURANCE HOLDINGS, INC. |
|
|
|
|
CONSOLIDATED BALANCE SHEETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, | ||
(Dollars in thousands, except par value per share) |
| 2008 |
| 2007 |
|
|
|
|
|
ASSETS: |
|
|
|
|
Fixed maturities - available for sale, at market value |
| $ 5,511,856 |
| $ 5,998,157 |
(amortized cost: 2008, $5,610,483; 2007, $5,830,676) |
|
|
|
|
Fixed maturities - available for sale, at fair value |
| 43,090 |
| - |
Equity securities - available for sale, at market value (cost: 2008, $15; 2007, $0) |
| 16 |
| - |
Equity securities - available for sale, at fair value |
| 119,815 |
| 815,372 |
Short-term investments |
| 918,712 |
| 1,327,391 |
Other invested assets (cost: 2008, $400,498; 2007, $449,182) |
| 392,589 |
| 451,639 |
Other invested assets, at fair value |
| 316,750 |
| 253,791 |
Cash |
| 92,264 |
| 146,447 |
Total investments and cash |
| 7,395,092 |
| 8,992,797 |
Accrued investment income |
| 82,860 |
| 86,129 |
Premiums receivable |
| 714,035 |
| 800,211 |
Reinsurance receivables - unaffiliated |
| 637,890 |
| 644,693 |
Reinsurance receivables - affiliated |
| 2,480,016 |
| 1,698,454 |
Funds held by reinsureds |
| 147,287 |
| 132,443 |
Deferred acquisition costs |
| 192,096 |
| 234,719 |
Prepaid reinsurance premiums |
| 456,180 |
| 433,271 |
Deferred tax asset |
| 518,042 |
| 279,302 |
Federal income tax recoverable |
| 70,299 |
| 88,330 |
Other assets |
| 172,825 |
| 153,180 |
TOTAL ASSETS |
| $ 12,866,622 |
| $ 13,543,529 |
|
|
|
|
|
LIABILITIES: |
|
|
|
|
Reserve for losses and adjustment expenses |
| $ 7,419,993 |
| $ 7,538,704 |
Unearned premium reserve |
| 1,176,834 |
| 1,368,096 |
Funds held under reinsurance treaties |
| 134,698 |
| 117,404 |
Losses in the course of payment |
| 35,805 |
| 50,047 |
Commission reserves |
| 45,531 |
| 47,953 |
Other net payable to reinsurers |
| 378,800 |
| 374,929 |
8.75% Senior notes due 3/15/2010 |
| 199,821 |
| 199,685 |
5.4% Senior notes due 10/15/2014 |
| 249,728 |
| 249,689 |
6.6% Long term notes due 05/01/2067 |
| 399,643 |
| 399,639 |
Junior subordinated debt securities payable |
| 329,897 |
| 329,897 |
Accrued interest on debt and borrowings |
| 11,217 |
| 11,217 |
Other liabilities |
| 281,687 |
| 288,770 |
Total liabilities |
| 10,663,654 |
| 10,976,030 |
|
|
|
|
|
Commitments and Contingencies (Note 17) |
|
|
|
|
|
|
|
|
|
STOCKHOLDER'S EQUITY: |
|
|
|
|
Common stock, par value: $0.01; 3,000 shares authorized; |
|
|
|
|
1,000 shares issued and outstanding (2008 and 2007) |
| - |
| - |
Additional paid-in capital |
| 315,771 |
| 310,206 |
Accumulated other comprehensive (loss) income, net of deferred income tax benefit of |
|
|
|
|
$38.8 million at 2008 and expense of $87.9 million at 2007 |
| (72,063) |
| 163,276 |
Retained earnings |
| 1,959,260 |
| 2,094,017 |
Total stockholder's equity |
| 2,202,968 |
| 2,567,499 |
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY |
| $ 12,866,622 |
| $ 13,543,529 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements. |
|
|
|
|
EVEREST REINSURANCE HOLDINGS, INC. |
|
|
|
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS |
|
|
|
|
|
AND COMPREHENSIVE (LOSS) INCOME |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
|
|
|
|
|
|
REVENUES: |
|
|
|
|
|
Premiums earned | $ 1,881,782 |
| $ 2,178,900 |
| $ 2,247,200 |
Net investment income | 363,053 |
| 406,592 |
| 372,352 |
Net realized capital (losses) gains | (489,186) |
| 80,887 |
| 34,957 |
Other income (expense) | 57,921 |
| (73,641) |
| (40,542) |
Total revenues | 1,813,570 |
| 2,592,738 |
| 2,613,967 |
|
|
|
|
|
|
CLAIMS AND EXPENSES: |
|
|
|
|
|
Incurred losses and loss adjustment expenses | 1,465,560 |
| 1,507,574 |
| 1,557,079 |
Commission, brokerage, taxes and fees | 398,610 |
| 465,912 |
| 438,505 |
Other underwriting expenses | 129,926 |
| 123,916 |
| 98,729 |
Interest, fee and bond issue cost amortization expense | 78,979 |
| 91,059 |
| 69,696 |
Total claims and expenses | 2,073,075 |
| 2,188,461 |
| 2,164,009 |
|
|
|
|
|
|
(LOSS) INCOME BEFORE TAXES | (259,505) |
| 404,277 |
| 449,958 |
Income tax (benefit) expense | (134,748) |
| 100,086 |
| 117,052 |
|
|
|
|
|
|
NET (LOSS) INCOME | $ (124,757) |
| $ 304,191 |
| $ 332,906 |
|
|
|
|
|
|
Other comprehensive (loss) income, net of tax | (235,339) |
| 35,482 |
| 101,313 |
|
|
|
|
|
|
COMPREHENSIVE (LOSS) INCOME | $ (360,096) |
| $ 339,673 |
| $ 434,219 |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements. |
|
|
|
| |
EVEREST REINSURANCE HOLDINGS, INC. |
|
|
|
|
|
CONSOLIDATED STATEMENTS OF |
|
|
|
|
|
CHANGES IN STOCKHOLDER'S EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years Ended December 31, | ||||
(Dollars in thousands, except share amounts) | 2008 |
| 2007 |
| 2006 |
|
|
|
|
|
|
COMMON STOCK (shares outstanding): |
|
|
|
|
|
Balance, beginning of period | 1,000 |
| 1,000 |
| 1,000 |
Balance, end of period | 1,000 |
| 1,000 |
| 1,000 |
|
|
|
|
|
|
ADDITIONAL PAID-IN CAPITAL: |
|
|
|
|
|
Balance, beginning of period | $ 310,206 |
| $ 300,764 |
| $ 292,281 |
Share-based compensation plans | 5,565 |
| 9,442 |
| 8,483 |
Balance, end of period | 315,771 |
| 310,206 |
| 300,764 |
|
|
|
|
|
|
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME, |
|
|
|
|
|
NET OF DEFERRED INCOME TAXES: |
|
|
|
|
|
Balance, beginning of period | 163,276 |
| 332,578 |
| 246,285 |
Cumulative effect to adopt FAS No. 159, net of tax | - |
| (204,784) |
| - |
Adjustment to initially apply FAS no. 158, net of tax | - |
| - |
| (15,020) |
Net (decrease) increase during the period | (235,339) |
| 35,482 |
| 101,313 |
Balance, end of period | (72,063) |
| 163,276 |
| 332,578 |
|
|
|
|
|
|
RETAINED EARNINGS: |
|
|
|
|
|
Balance, beginning of period | 2,094,017 |
| 1,585,042 |
| 1,252,136 |
Cumulative effect to adopt FAS No. 159, net of tax | - |
| 204,784 |
| - |
Net (loss) income | (124,757) |
| 304,191 |
| 332,906 |
Dividends declared | (10,000) |
| - |
| - |
Balance, end of period | 1,959,260 |
| 2,094,017 |
| 1,585,042 |
|
|
|
|
|
|
TOTAL STOCKHOLDER'S EQUITY, END OF PERIOD | $ 2,202,968 |
| $ 2,567,499 |
| $ 2,218,384 |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements. |
|
|
|
|
|
EVEREST REINSURANCE HOLDINGS, INC. |
|
|
|
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
Net (loss) income | $ (124,757) |
| $ 304,191 |
| $ 332,906 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
Decrease in premiums receivable | 82,398 |
| 145,022 |
| 117,936 |
Decrease (increase) in funds held by reinsureds, net | 2,426 |
| 6,808 |
| (155,669) |
(Increase) decrease in reinsurance receivables | (50,349) |
| (63,541) |
| 274,443 |
Increase in deferred tax asset | (112,021) |
| (50,191) |
| (33,460) |
(Decrease) increase in reserve for losses and loss adjustment expenses | (42,354) |
| 66,119 |
| (353,176) |
(Decrease) increase in unearned premiums | (181,240) |
| (66,483) |
| 32,986 |
Change in equity adjustments in limited partnerships | 30,985 |
| (22,726) |
| (38,536) |
Change in other assets and liabilities, net | (65,102) |
| (83,460) |
| 204,332 |
Non-cash compensation expense | 4,983 |
| 4,832 |
| - |
Non-cash loss portfolio transfer transaction | 315 |
| - |
| - |
Amortization of bond premium/(accrual of bond discount) | 9,257 |
| (7,969) |
| 9,873 |
Amortization of underwriting discount on senior notes | 179 |
| 164 |
| 149 |
Net realized capital losses (gains) | 489,186 |
| (80,887) |
| (34,957) |
Net cash provided by operating activities | 43,906 |
| 151,879 |
| 356,827 |
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
Proceeds from fixed maturities matured/called - available for sale, at market value | 486,174 |
| 736,297 |
| 461,341 |
Proceeds from fixed maturities matured/called - available for sale, at fair value | 1,900 |
| - |
| - |
Proceeds from fixed maturities sold - available for sale, at market value | 140,139 |
| 38,504 |
| 45,051 |
Proceeds from equity securities sold - available for sale, at market value | (15) |
| 6,497 |
| 206,522 |
Proceeds from equity securities sold - available for sale, at fair value | 777,250 |
| 760,729 |
| - |
Distributions from other invested assets | 94,082 |
| 48,712 |
| 54,195 |
Cost of fixed maturities acquired - available for sale, at market value | (1,362,282) |
| (585,910) |
| (599,175) |
Cost of fixed maturities acquired - available for sale, at fair value | (43,414) |
| - |
| - |
Cost of equity securities acquired - available for sale, at fair value | (322,530) |
| (329,486) |
| (176,678) |
Cost of other invested assets acquired | (76,384) |
| (135,357) |
| (148,342) |
Cost of other invested assets acquired, at fair value | (150,744) |
| (241,584) |
| - |
Net change in short-term securities | 364,811 |
| (628,453) |
| (143,637) |
Net change in unsettled securities transactions | 7,436 |
| (5,609) |
| (10,706) |
Net cash used in investing activities | (83,577) |
| (335,660) |
| (311,429) |
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
Tax benefit from share-based compensation | 582 |
| 4,610 |
| 8,483 |
Net proceeds from issuance of long term notes | - |
| 395,637 |
| - |
Redemption of junior subordinated debt securities | - |
| (216,496) |
| - |
Dividends paid to stockholder | (10,000) |
| - |
| - |
Net cash (used in) provided by financing activities | (9,418) |
| 183,751 |
| 8,483 |
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH | (5,094) |
| 9,942 |
| 16,460 |
|
|
|
|
|
|
Net (decrease) increase in cash | (54,183) |
| 9,912 |
| 70,341 |
Cash, beginning of period | 146,447 |
| 136,535 |
| 66,194 |
Cash, end of period | $ 92,264 |
| $ 146,447 |
| $ 136,535 |
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION: |
|
|
|
|
|
Cash transactions: |
|
|
|
|
|
Income taxes (recoverable) paid | $ (46,666) |
| $ 250,909 |
| $ 35,460 |
Interest paid | 77,948 |
| 82,635 |
| 68,608 |
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements. |
|
|
|
|
|
F-2
EVEREST REINSURANCE HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS | ||||||||
|---|---|---|---|---|---|---|---|---|
| December 31, | ||||||||
| (Dollars in thousands, except par value per share) | 2006 | 2005 | ||||||
| ASSETS: | ||||||||
| Fixed maturities - available for sale, at market value | ||||||||
| (amortized cost: 2006, $5,959,228; 2005, $5,850,541) | $ | 6,137,410 | $ | 6,036,693 | ||||
| Equity securities, at market value (cost: 2006, $874,289; 2005, $859,425) | 1,189,341 | 1,023,784 | ||||||
| Short-term investments | 657,674 | 513,913 | ||||||
| Other invested assets (cost: 2006, $329,914; 2005, $215,364) | 330,875 | 216,791 | ||||||
| Cash | 136,535 | 66,194 | ||||||
| Total investments and cash | 8,451,835 | 7,857,375 | ||||||
| Accrued investment income | 85,447 | 82,561 | ||||||
| Premiums receivable | 939,625 | 1,053,994 | ||||||
| Reinsurance receivables - unaffiliated | 751,121 | 988,725 | ||||||
| Reinsurance receivables - affiliated | 1,511,856 | 1,537,355 | ||||||
| Funds held by reinsureds | 133,965 | 130,041 | ||||||
| Deferred acquisition costs | 240,346 | 202,226 | ||||||
| Prepaid reinsurance premiums | 391,336 | 398,583 | ||||||
| Deferred tax asset | 248,214 | 261,216 | ||||||
| Current federal income tax receivable | - | 73,256 | ||||||
| Other assets | 134,550 | 115,193 | ||||||
| TOTAL ASSETS | $ | 12,888,295 | $ | 12,700,525 | ||||
| LIABILITIES: | ||||||||
| Reserve for losses and loss adjustment expenses | $ | 7,397,270 | $ | 7,729,171 | ||||
| Unearned premium reserve | 1,423,677 | 1,387,876 | ||||||
| Funds held under reinsurance treaties | 112,658 | 263,165 | ||||||
| Losses in the course of payment | 62,943 | (5,471 | ) | |||||
| Commission reserves | 22,483 | 20,158 | ||||||
| Other net payable to reinsurers | 385,926 | 315,676 | ||||||
| Current federal income taxes payable | 32,010 | - | ||||||
| 8.75% Senior notes due 3/15/2010 | 199,560 | 199,446 | ||||||
| 5.4% Senior notes due 10/15/2014 | 249,652 | 249,617 | ||||||
| Junior subordinated debt securities payable | 546,393 | 546,393 | ||||||
| Accrued interest on debt and borrowings | 10,041 | 10,041 | ||||||
| Other liabilities | 227,298 | 193,751 | ||||||
| Total liabilities | 10,669,911 | 10,909,823 | ||||||
| Commitments and Contingencies (Note 14) | ||||||||
STOCKHOLDER'S EQUITY: | ||||||||
| Common stock, par value: $0.01; 3,000 shares authorized; | ||||||||
| 1,000 shares issued and outstanding (2006 and 2005) | - | - | ||||||
| Additional paid-in capital | 300,764 | 292,281 | ||||||
| Accumulated other comprehensive income, net of deferred income | ||||||||
| taxes of $179.1 million at 2006 and $132.6 million at 2005 | 332,578 | 246,285 | ||||||
| Retained earnings | 1,585,042 | 1,252,136 | ||||||
| Total stockholder's equity | 2,218,384 | 1,790,702 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY | $ | 12,888,295 | $ | 12,700,525 | ||||
| The accompanying notes are an integral part of the consolidated financial statements. | ||||||||
F-3
EVEREST REINSURANCE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Years Ended December 31, | |||||||||||
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| REVENUES: | |||||||||||
| Premiums earned | $ | 2,247,200 | $ | 2,426,076 | $ | 2,829,151 | |||||
| Net investment income | 372,352 | 325,217 | 329,184 | ||||||||
| Net realized capital gains | 34,957 | 64,568 | 56,710 | ||||||||
| Other (expense) income | (40,542 | ) | 10,344 | (67,881 | ) | ||||||
| Total revenues | 2,613,967 | 2,826,205 | 3,147,164 | ||||||||
| CLAIMS AND EXPENSES: | |||||||||||
| Incurred losses and loss adjustment expenses | 1,557,079 | 2,202,820 | 2,172,371 | ||||||||
| Commission, brokerage, taxes and fees | 438,505 | 513,394 | 577,499 | ||||||||
| Other underwriting expenses | 98,729 | 101,324 | 89,074 | ||||||||
| Interest expense on senior notes | 31,149 | 35,514 | 41,954 | ||||||||
| Interest expense on junior subordinated debt | 37,449 | 37,449 | 32,392 | ||||||||
| Amortization of bond issue costs | 938 | 1,019 | 1,071 | ||||||||
| Interest and fee expense on credit facility | 160 | 215 | 1,193 | ||||||||
| Total claims and expenses | 2,164,009 | 2,891,735 | 2,915,554 | ||||||||
| INCOME (LOSS) BEFORE TAXES | 449,958 | (65,530 | ) | 231,610 | |||||||
| Income tax expense (benefit) | 117,052 | (70,236 | ) | 56,137 | |||||||
| NET INCOME | $ | 332,906 | $ | 4,706 | $ | 175,473 | |||||
| Other comprehensive income (loss), net of tax | 101,313 | (1,375 | ) | 39,355 | |||||||
| COMPREHENSIVE INCOME | $ | 434,219 | $ | 3,331 | $ | 214,828 | |||||
| The accompanying notes are an integral part of the consolidated financial statements. | |||||||||||
F-4
EVEREST REINSURANCE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Years Ended December 31, | |||||||||||
| (Dollars in thousands, except stock amounts) | 2006 | 2005 | 2004 | ||||||||
| COMMON STOCK (stock outstanding): | |||||||||||
| Balance, beginning of period | 1,000 | 1,000 | 1,000 | ||||||||
| Issued during the period | - | - | - | ||||||||
| Balance, end of period | 1,000 | 1,000 | 1,000 | ||||||||
| ADDITIONAL PAID-IN CAPITAL: | |||||||||||
| Balance, beginning of period | $ | 292,281 | $ | 271,652 | $ | 263,290 | |||||
| Sale of treasury shares, net of tax | - | 15,312 | - | ||||||||
| Share-based compensation plans | 8,483 | 5,118 | 8,181 | ||||||||
| Other | - | 199 | 181 | ||||||||
| Balance, end of period | 300,764 | 292,281 | 271,652 | ||||||||
| ACCUMULATED OTHER COMPREHENSIVE INCOME, | |||||||||||
| NET OF DEFERRED INCOME TAXES: | |||||||||||
| Balance, beginning of period | 246,285 | 247,660 | 208,305 | ||||||||
| Net increase (decrease) during the period | 101,313 | (1,375 | ) | 39,355 | |||||||
| Adjustment to initially apply FASB Statement No. 158, net of tax | (15,020 | ) | - | - | |||||||
| Balance, end of period | 332,578 | 246,285 | 247,660 | ||||||||
| RETAINED EARNINGS: | |||||||||||
| Balance, beginning of period | 1,252,136 | 1,247,430 | 1,098,219 | ||||||||
| Net income | 332,906 | 4,706 | 175,473 | ||||||||
| Dividends paid | - | - | (26,262 | ) | |||||||
| Balance, end of period | 1,585,042 | 1,252,136 | 1,247,430 | ||||||||
| TREASURY SHARES AT COST: | |||||||||||
| Balance, beginning of period | - | (22,950 | ) | (22,950 | ) | ||||||
| Sale of treasury shares | - | 22,950 | - | ||||||||
| Balance, end of period | - | - | (22,950 | ) | |||||||
TOTAL STOCKHOLDER'S EQUITY, END OF PERIOD | $ | 2,218,384 | $ | 1,790,702 | $ | 1,743,792 | |||||
| The accompanying notes are an integral part of the consolidated financial statements. | |||||||||||
F-5
EVEREST REINSURANCE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Years Ended December 31, | |||||||||||
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net income | $ | 332,906 | $ | 4,706 | $ | 175,473 | |||||
| Adjustments to reconcile net income to net cash provided by | |||||||||||
| operating activities: | |||||||||||
| Decrease (increase) in premiums receivable | 117,936 | 10,898 | (160,533 | ) | |||||||
| Increase in funds held by reinsured, net | (155,669 | ) | (92,470 | ) | (92,946 | ) | |||||
| Decrease (increase) in reinsurance receivables | 274,443 | 20,170 | (152,062 | ) | |||||||
| Increase in deferred tax asset | (33,460 | ) | (79,838 | ) | (46,184 | ) | |||||
| (Decrease) increase in reserve for losses and loss adjustment expenses | (353,176 | ) | 888,552 | 1,065,839 | |||||||
| Increase (decrease) in unearned premiums | 32,986 | (706 | ) | 120,206 | |||||||
| Increase (decrease) in other assets and liabilities | 165,796 | (188,364 | ) | 67,724 | |||||||
| Amortization of bond premium | 9,873 | 3,304 | 604 | ||||||||
| Amortization of underwriting discount on senior notes | 149 | 162 | 204 | ||||||||
| Realized capital gains | (34,957 | ) | (64,568 | ) | (56,710 | ) | |||||
| Net cash provided by operating activities | 356,827 | 501,846 | 921,615 | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES : | |||||||||||
| Proceeds from fixed maturities matured/called - available for sale | 461,341 | 337,516 | 376,294 | ||||||||
| Proceeds from fixed maturities sold - available for sale | 45,051 | 879,097 | 787,001 | ||||||||
| Proceeds from equity securities sold | 206,522 | 205,895 | 17,995 | ||||||||
| Proceeds from other invested assets sold | 54,195 | 43,739 | 554 | ||||||||
| Cost of fixed maturities acquired - available for sale | (599,175 | ) | (1,134,116 | ) | (1,800,271 | ) | |||||
| Cost of equity securities acquired | (176,678 | ) | (480,242 | ) | (437,132 | ) | |||||
| Cost of other invested assets acquired | (148,342 | ) | (144,409 | ) | (28,888 | ) | |||||
| Net (purchases) sales of short-term securities | (143,637 | ) | 5,708 | (403,409 | ) | ||||||
| Net (increase) decrease in unsettled securities transactions | (10,706 | ) | 426 | (19,812 | ) | ||||||
| Proceeds from sale of subsidiary, net of cash disposed | - | - | (2,741 | ) | |||||||
| Net cash used in investing activities | (311,429 | ) | (286,386 | ) | (1,510,409 | ) | |||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Tax benefit from share-based compensation | 8,483 | 5,118 | 8,181 | ||||||||
| Dividends from treasury shares | - | 199 | 181 | ||||||||
| Sale of treasury shares, net of tax | - | 38,261 | - | ||||||||
| (Repayment) proceeds from issuance of senior notes | - | (250,000 | ) | 246,651 | |||||||
| Net proceeds from issuance of junior subordinated notes | - | - | 319,997 | ||||||||
| Repayments on revolving credit agreement | - | - | (70,000 | ) | |||||||
| Net cash provided by (used in) financing activities | 8,483 | (206,422 | ) | 505,010 | |||||||
| EFFECT OF EXCHANGE RATE CHANGES ON CASH | 16,460 | 3,269 | (4,423 | ) | |||||||
| Net increase (decrease) in cash | 70,341 | 12,307 | (88,207 | ) | |||||||
| Cash, beginning of period | 66,194 | 53,887 | 142,094 | ||||||||
| Cash, end of period | $ | 136,535 | $ | 66,194 | $ | 53,887 | |||||
| SUPPLEMENTAL CASH FLOW INFORMATION | |||||||||||
| Cash transactions: | |||||||||||
| Income taxes paid, net | $ | 35,460 | $ | 107,040 | $ | 99,311 | |||||
| Interest paid | $ | 68,608 | $ | 79,401 | $ | 72,605 | |||||
Non-cash financing transaction: | |||||||||||
| Non-cash dividend to parent | $ | - | $ | - | $ | 26,262 | |||||
The accompanying notes are an integral part of the consolidated financial statements. | |||||||||||
F-6
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2006, 20052008, 2007 and 20042006
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Business and Basis of Presentation
Presentation.
Everest Reinsurance Holdings, Inc. (“Holdings”), a Delaware company and direct subsidiary of Everest Risk Holdings (Ireland) Limited (“Holdings Ireland”), which is a direct subsidiary of Everest Re Group, Ltd. (“Group”), through its subsidiaries, principally provides property and casualty reinsurance and insurance in the United States of America and internationally. As used in this document, the “Company” means Holdings and its subsidiaries. On December 30, 2008, Group contributed Everest Reinsurance Holdings, Inc. and its subsidiaries to its recently established Irish holding company, Holdings Ireland.
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The statements include all of the following domestic and foreign direct and indirect subsidiaries of the Company: Everest Reinsurance Company (“Everest Re”), Everest National Insurance Company (“Everest National”), Everest Indemnity Insurance Company (“Everest Indemnity”), Everest Security Insurance Company (“Everest Security”), Everest Insurance Company of Canada (“Everest Canada”), Mt. Whitney Securities, Inc., Everest Reinsurance Company Ltda. (Brazil), Mt. McKinley Managers, L.L.C., Workcare Southeast, Inc., Workcare Southeast of Georgia, Inc. and Mt. McKinley Insurance Company (“Mt. McKinley”). All amounts are reported in U.S. dollars.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities (and disclosure of contingent assets and liabilities) at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. All intercompany accounts and transactions have been eliminated. Ultimate actual results could differ, possibly materially, from those estimates.
Certain reclassifications and format changes have been made to prior years’ amounts to conform to the 2008 presentation.
B. Investments
Investments.
Fixed maturity and market value equity security investments are all classified as available for sale. Unrealized appreciation and depreciation, as a result of temporary changes in market value during the period, are reflected in stockholder’s equity, net of income taxes in “accumulated other comprehensive income”. Equity in the consolidated balance sheets. Fixed maturities, actively managed equity securities and other invested assets, at fair value, are carried at marketfair value with unrealized appreciationfair value re-measurements reflected as net realized capital gains or depreciation, as a resultlosses in the consolidated statements of temporary changes in market value during the period, reflected in stockholder’s equity, net of income taxes in “accumulated otheroperations and comprehensive income”.income. Unrealized losses on fixed maturities, and equity securities, which are deemed other than temporary,other-than-temporary, are charged to net income as net realized capital losses. Short-term investments are stated at cost, which approximates market value. Realized gains or losses on salesales of investments are determined on the basis of identified cost. For non-publicly traded securities, market prices are determined through the use of pricing models that evaluate securities relative to the U.S. Treasury yield curve, taking into account the issue type, credit quality and cash flow characteristics of each security. For publicly traded securities, market value is based on quoted market prices.prices or valuation models that use observable market inputs. When a sector of the financial markets is inactive or illiquid, the Company may use its own assumptions about future cash flows and risk-adjusted discount rates to determine fair value. Retrospective adjustments are employed to recalculate the values of loan-backed and asset-backed securities. Each acquisition lot is reviewed to recalculate the effective yield. The recalculated effective yield is used to derive a book value as if the new yield were applied at the time of acquisition. Outstanding principal factors from the time of acquisition to the adjustment date are used to calculate the prepayment history for all applicable securities. Conditional prepayment rates, computed with life to date factor histories and weighted average maturities, are used to affecteffect the calculation of projected and prepayments for pass-through security types. Other invested assets include limited partnerships, rabbi trusts
and rabbi trusts.an affiliated entity. Limited partnerships and the affiliated entity are valued pursuant toaccounted for under the equity method of accounting, which management believes approximates market value.may be recorded on a monthly or quarterly lag.
F-7
C. Uncollectible Receivable Balances
Balances.
The Company provides reserves for uncollectible premium receivables and reinsurance recoverable balances based on management’s assessment of the collectibility of the outstanding balances. Such reserves were $99.6$263.7 million and $187.8 million at December 31, 2006, of which $62.0 million is due to the credit program,2008 and $38.3 million at December 31, 2005.2007, respectively.
D. Deferred Acquisition Costs
Costs.
Acquisition costs, consisting principally of commissions and brokerage expenses and certain premium taxes and fees that vary with and are directly associated with the Company’s reinsurance and insurance business incurred at the time a contract or policy is issued and that vary with and are directly related to the Company’s reinsurance and insurance business, are deferred and amortized over the period in which the related premiums are earned, generally one year. Deferred acquisition costs are limited to their estimated realizable value by line of business based on the related unearned premiums, anticipated claims and claim expenses and anticipated investment income. Deferred acquisition costs amortized to income were $398.6 million, $465.9 million and $438.5 million $513.4 millionin 2008, 2007 and $577.5 million in 2006, 2005 and 2004, respectively.
E. Reserve for Losses and Loss Adjustment Expenses
Expenses.
The reserve for losses and loss adjustment expenses (“LAE”) is based on individual case estimates and reports received from ceding companies. A provision is included for losses and LAE incurred but not reported (“IBNR”) based on past experience. A provision is also included for certain potential liabilities relating to asbestos and environmental (“A&E”) exposures, which liabilities cannot be estimated withusing traditional reserving techniques. See also Note 3. The reserves are reviewed periodically and any changes in estimates are reflected in earnings in the period the adjustment is made. Management believes that adequate provision has been made forThe Company’s loss and LAE reserves represent management’s best estimate of the Company’s losses and LAE.ultimate liability. Loss and LAE reserves are presented gross of reinsurance receivables and incurred losses and LAE are presented net of ceded reinsurance.
Accruals for commissions are established for reinsurance contracts that provide for the stated commission percentage to increase or decrease based on the loss experience of the contract. Changes in estimates for such arrangements are recorded as commission expense. Accruals are determined through the review of theCommission accruals for contracts that have thesewith adjustable features and are estimated based on expected loss and LAE.
F. Premium Revenues
Revenues.
Written premiums are earned ratably over the periods of the related insurance and reinsurance contracts or policies.contracts. Unearned premium reserves are established relative to cover the remainder of the unexpired contract period. Such reserves are established based upon reports received from ceding companies or estimated using pro rata methods based on statistical data. Reinstatement premiums represent additional premium received on catastrophe reinsurance coverages, most prevalently catastrophe related, when limits have been exhausteddepleted under the original reinsurance contract and additional coverage is granted. Written and earned premiums and the related costs, which have not yet been reported to the Company, are estimated and accrued. Premiums are net of ceded reinsurance.
G. Income Taxes
Taxes.
The Company and its wholly-owned subsidiaries file a consolidated U.S. federal income tax return. Foreign branches of subsidiaries file local tax returns as required. Deferred income taxes have been recorded to recognize the tax effect of temporary differences between the financial reporting and income tax bases of assets and liabilities.liabilities, which arise because of differences between GAAP and income tax accounting rules.
H. Foreign Currency
Currency.
Assets and liabilities relating to foreign operations are translated into U.S. dollars at the exchange rates in effect at the balance sheet date; revenues and expenses are translated into U.S. dollars using average exchange rates.rates in effect during the reporting period. Gains and losses resulting from translating foreign currency financial statements, net of deferred income taxes,
F-8
are excluded from net income and accumulated in stockholder’s equity. Gains and losses resulting from foreign currency transactions, other than debt securities available for sale, are recorded through the statementconsolidated statements of operations.operations and comprehensive income (loss) in other income (expense). Gains and losses resulting from changes in the
foreign currency exchange rates or debt securities, available for sale at market value, are recorded in the consolidated balance sheets in accumulated other comprehensive income (loss) as unrealized appreciation (depreciation).
I. Segmentation
Segmentation.
The Company, through its subsidiaries, operates in four segments: U.S. Reinsurance, U.S. Insurance, Specialty Underwriting and International. See also Note 16.19.
J. Retroactive Reinsurance
Reinsurance.
Premiums on ceded retroactive contracts are earned when written with a corresponding reinsurance recoverable established for the amount of reserves ceded. The initial gain, if applicable, is deferred and amortized into income over an actuarially determined expected payout period. Any future loss is recognized immediately and charged against earnings.
K. Policyholder Dividends
Dividends.
The Company issues certain insurance policies with dividend payment features. These policyholders share in the operating results of their respective policies in the form of dividends declared. Dividends to policyholders are accrued during the period in which the related premiums are earned and are determined based on the terms of the individual policies.
L. Application of New Accounting Standards
Standards.
In November 2005,July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FAS 115-1”), which is effective for reporting periods beginning after December 15, 2005. FAS 115-1 addresses the determination as to when an investment is considered impaired, whether the impairment is other than temporary and the measurement of an impairment loss. FAS 115-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairments and requires certain disclosures about unrealized losses not recognized as other-than-temporary impairments. The Company adopted FAS 115-1 prospectively effective January 1, 2006. The Company believes that all unrealized losses in its investment portfolio are temporary in nature.
In July 2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”), which iswas effective for fiscal years beginning after December 15, 2006. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes” (“FAS 109”). FIN 48 prescribes the financial statement recognition and measurement criteria for the financial statements for tax positions taken or expected to be taken in a tax return. Further, FIN 48 expands the required disclosures associated with uncertain tax positions. The Company will adoptAs a result of the implementation of FIN 48, on January 1, 2007. Thethe Company does not believerecorded no adjustment in the impact of implementing FIN 48 will be material on its consolidated financial statements.liability for unrecognized income tax benefits and no adjustment to beginning retained earnings.
In September 2006, the FASB issued Statement of Financial Accounting Standards (“FAS”) No. 157 “Fair Value Measurements” (“FAS 157”), which is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years.. FAS 157 defines fair value, establishes a framework for measuring fair value consistently in GAAP and expands disclosures about fair value measurements. The Company will adoptadopted FAS 157 onas of January 1, 2008. The Company does not believe the impact of implementing FAS 157 will be material on its consolidated financial statements.2007.
F-9
In September 2006, the FASB issued Statement of Financial Accounting StandardsFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“FAS 158”), which iswas effective for employers with publicly traded equity securities as of the end of the fiscal year ending after December 15, 2006. FAS 158 requires an employer to (a) recognize in its financial statements an asset for a plan’s over funded status or a liability for a plan’s under funded status, (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year and (c) recognize changes in the funded status of a defined benefit postretirementpost-retirement plan in the year in which the changes occur as other comprehensive income. The Company adopted FAS 158 for the reporting period ended December 31, 2006.
In February 2007, the FASB issued FAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment to FASB Statement No. 115” (“FAS 159”). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The impactobjective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company adopted FAS 159 as of January 1, 2007.
In March 2008, the FASB issued FAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133” (“FAS 161”). FAS 161 requires entities to provide additional disclosures on derivative and hedging activities regarding their effect on financial position, financial performance and cash flows. This statement is effective for financial statements issued for fiscal
years and interim periods beginning after November 15, 2008. The Company will adopt FAS 161 on January 1, 2009.
In October 2008, the Company’s consolidated balance sheets atFASB issued FASB Staff Position FAS 157-3 “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active” (“FAS 157-3”). FAS 157-3 clarifies the application of FAS No. 157 “Fair Value Measurements” (“FAS 157”), in a market that is not active. This FASB Staff Position was effective upon issuance.
In December 2008, the FASB issued FASB Staff Position FAS 132(R)-1 “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FAS 132(R)-1”). FAS 132(R)-1 requires additional disclosures about plan assets. Additional disclosures include investment policies and strategies, fair value of each major plan asset category, inputs and valuation techniques used to develop fair value and any significant concentrations of risk. This FASB Staff Position is effective for fiscal years ending after December 15, 2009. The Company will adopt FAS 132(R)-1 for the reporting period ending December 31, 2006 was a $23.1 million pre-tax, or $15.0 million after-tax reduction to accumulated other comprehensive income.2009.
M. Investments – Interest Only StripsDuring 2005 and 2004, the Company invested in interest only strips of mortgage-backed securities (“interest only strips”). These securities give the holder the right to receive interest payments at a stated coupon rate on an underlying pool of mortgages. The interest payments on the outstanding mortgages are guaranteed by entities generally rated AAA. The ultimate cash flow from these investments is primarily dependent upon the average life of the mortgage pool. Generally, as mortgage rates decline, mortgagors are more likely to prepay their mortgage loans which decreases the average life of a mortgage pool and decreases expected cash flows. Conversely, as mortgage rates rise, repayments are more likely to slow and ultimate cash flows will tend to rise. Accordingly, the market value of these investments tends to increase as general interest rates rise and decline as general interest rates fall. These movements are generally counter to the impact of interest rate movements on the Company’s other fixed income investments. The Company held no interest only strips investments at December 31, 2006 and 2005.
The Company accounted for its investment in interest only strips in accordance with Emerging Issues Task Force Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets” (“EITF 99-20”). EITF 99-20 sets forth the rules for recognizing interest income on all credit-sensitive mortgage and asset-backed securities and certain prepayment-sensitive securities, including agency interest only strips, whether purchased or retained in securitization, as well as the rules for determining when these securities must be written down to fair value because of impairment. EITF 99-20 requires decreases in the valuation of residual interests in securitizations to be recorded as a reduction to the carrying value of the residual interests through a charge to earnings, rather than an unrealized loss in stockholders’ equity, when any portion of the decline in fair value is attributable to, as defined by EITF 99-20, an impairment loss. The Company recorded a pre-tax and after-tax realized capital loss due to impairments of $4.1 million and $2.7 million, respectively, for the year ended December 31, 2005 and $43.9 million and $28.5 million, respectively, for the year ended December 31, 2004. As a result of liquidating the interest only strips portfolios, the Company recognized pre-tax and after-tax realized capital gains of $25.3 million and $16.4 million, respectively, for the year ended December 31, 2005 and pre-tax and after-tax realized capital gains of $77.6 million and $50.4 million, respectively, for the year ended December 31, 2004.
F-10
2. INVESTMENTS
The amortized cost, market value, and gross unrealized appreciation and depreciation of available for sale, market value fixed maturity investments and equity securitiessecurity investments are presented inas follows for the tables below:periods indicated:
| (Dollars in thousands) | Amortized Cost | Unrealized Appreciation | Unrealized Depreciation | Market Value | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| As of December 31, 2006 | ||||||||||||||
| Fixed maturities - available for sale | ||||||||||||||
| U.S. Treasury securities and obligations of | ||||||||||||||
| U.S. government agencies and corporations | $ | 85,563 | $ | 467 | $ | (972 | ) | $ | 85,058 | |||||
| Obligations of U.S. states and political subdivisions | 3,633,188 | 164,402 | (5,219 | ) | 3,792,371 | |||||||||
| Corporate securities | 961,679 | 17,061 | (9,733 | ) | 969,007 | |||||||||
| Mortgage-backed securities | 475,140 | 1,605 | (10,246 | ) | 466,499 | |||||||||
| Foreign government securities | 354,153 | 17,441 | (1,447 | ) | 370,147 | |||||||||
| Foreign corporate securities | 449,505 | 10,098 | (5,275 | ) | 454,328 | |||||||||
| Total fixed maturities | $ | 5,959,228 | $ | 211,074 | $ | (32,892 | ) | $ | 6,137,410 | |||||
| Equity securities | $ | 874,289 | $ | 315,052 | $ | - | $ | 1,189,341 | ||||||
As of December 31, 2005 | ||||||||||||||
| Fixed maturities - available for sale | ||||||||||||||
| U.S. Treasury securities and obligations of | ||||||||||||||
| U.S. government agencies and corporations | $ | 71,913 | $ | 34 | $ | (1,115 | ) | $ | 70,832 | |||||
| Obligations of U.S. states and political subdivisions | 3,614,957 | 153,376 | (8,053 | ) | 3,760,280 | |||||||||
| Corporate securities | 894,278 | 23,557 | (12,468 | ) | 905,367 | |||||||||
| Mortgage-backed securities | 477,480 | 2,540 | (10,332 | ) | 469,688 | |||||||||
| Foreign government securities | 357,513 | 22,103 | (958 | ) | 378,658 | |||||||||
| Foreign corporate securities | 434,400 | 21,638 | (4,170 | ) | 451,868 | |||||||||
| Total fixed maturities | $ | 5,850,541 | $ | 223,248 | $ | (37,096 | ) | $ | 6,036,693 | |||||
| Equity securities | $ | 859,425 | $ | 165,344 | $ | (985 | ) | $ | 1,023,784 | |||||
| At December 31, 2008 | ||||||
| Amortized |
| Unrealized |
| Unrealized |
| Market |
(Dollars in thousands) | Cost |
| Appreciation |
| Depreciation |
| Value |
Fixed maturities - available for sale |
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of |
|
|
|
|
|
|
|
U.S. government agencies and corporations | $ 139,776 |
| $ 15,456 |
| $ - |
| $ 155,232 |
Obligations of U.S. states and political subdivisions | 3,846,754 |
| 113,885 |
| (164,921) |
| 3,795,718 |
Corporate securities | 496,328 |
| 18,411 |
| (69,061) |
| 445,678 |
Mortgage-backed securities | 231,631 |
| 4,838 |
| (19,352) |
| 217,117 |
Foreign government securities | 467,935 |
| 32,538 |
| (7,776) |
| 492,697 |
Foreign corporate securities | 428,059 |
| 6,602 |
| (29,247) |
| 405,414 |
Total fixed maturities | $ 5,610,483 |
| $ 191,730 |
| $ (290,357) |
| $ 5,511,856 |
Equity securities | $ 15 |
| $ 1 |
| $ - |
| $ 16 |
|
|
|
|
|
|
|
|
| At December 31, 2007 | ||||||
| Amortized |
| Unrealized |
| Unrealized |
| Market |
(Dollars in thousands) | Cost |
| Appreciation |
| Depreciation |
| Value |
Fixed maturities - available for sale |
|
|
|
|
|
|
|
U.S. Treasury securities and obligations of |
|
|
|
|
|
|
|
U.S. government agencies and corporations | $ 92,932 |
| $ 3,571 |
| $ (3) |
| $ 96,500 |
Obligations of U.S. states and political subdivisions | 3,512,695 |
| 138,374 |
| (2,540) |
| 3,648,529 |
Corporate securities | 741,380 |
| 12,819 |
| (10,909) |
| 743,290 |
Mortgage-backed securities | 566,041 |
| 4,100 |
| (5,119) |
| 565,022 |
Foreign government securities | 416,715 |
| 20,678 |
| (876) |
| 436,517 |
Foreign corporate securities | 500,913 |
| 11,614 |
| (4,228) |
| 508,299 |
Total fixed maturities | $ 5,830,676 |
| $ 191,156 |
| $ (23,675) |
| $ 5,998,157 |
Equity securities | $ - |
| $ - |
| $ - |
| $ - |
The amortized cost and market value of fixed maturities are shown in the following table by contractual maturity. Mortgage-backed securities generally are more likely to be prepaid than other fixed maturities. As the stated maturity of such securities may not be indicative of actual maturities, the total for mortgage-backed securities is shown separately.
| December 31, 2006 | ||||||||
|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | Amortized Cost | Market Value | ||||||
| Fixed maturities – available for sale | ||||||||
| Due in one year or less | $ | 305,369 | $ | 304,456 | ||||
| Due after one year through five years | 1,216,669 | 1,223,108 | ||||||
| Due after five years through ten years | 943,407 | 943,941 | ||||||
| Due after ten years | 3,018,643 | 3,199,406 | ||||||
| Mortgage–backed securities | 475,140 | 466,499 | ||||||
| Total | $ | 5,959,228 | $ | 6,137,410 | ||||
F-11
| At December 31, 2008 | ||
| Amortized |
| Market |
(Dollars in thousands) | Cost |
| Value |
Fixed maturities – available for sale |
|
|
|
Due in one year or less | $ 293,575 |
| $ 286,141 |
Due after one year through five years | 953,239 |
| 978,739 |
Due after five years through ten years | 1,161,265 |
| 1,166,117 |
Due after ten years | 2,970,773 |
| 2,863,742 |
Mortgage-backed securities | 231,631 |
| 217,117 |
Total | $ 5,610,483 |
| $ 5,511,856 |
The changes in net unrealized (losses) gains (losses) offor the Company’s investments of the Company are derived from the following sources:source for the periods indicated:
| Years Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| Increase (decrease) during the period between the market value and | |||||||||||
| cost of investments carried at market value, and deferred taxes thereon: | |||||||||||
| Fixed maturities | $ | (7,970 | ) | $ | (85,858 | ) | $ | (21,620 | ) | ||
| Equity securities | 150,693 | 85,206 | 71,179 | ||||||||
| Other invested assets | (466 | ) | 289 | 520 | |||||||
| Increase (decrease) in unrealized appreciation, pre-tax | 142,257 | (363 | ) | 50,079 | |||||||
| Deferred taxes | (49,790 | ) | 127 | (17,527 | ) | ||||||
| Increase (decrease) in unrealized appreciation, net of deferred | |||||||||||
| taxes, included in stockholder's equity | $ | 92,467 | $ | (236 | ) | $ | 32,552 | ||||
| Years Ended December 31, | ||
(Dollars in thousands) | 2008 |
| 2007 |
Decrease during the period between the market value and cost of |
|
|
|
investments carried at market value, and deferred taxes thereon: |
|
|
|
Fixed maturities | $ (266,108) |
| $ (10,699) |
Other invested assets | (10,366) |
| 1,496 |
Change in unrealized depreciation, pre-tax | (276,474) |
| (9,203) |
Deferred taxes | 96,766 |
| 3,221 |
Change in unrealized depreciation, net of deferred |
|
|
|
taxes, included in stockholder's equity | $ (179,708) |
| $ (5,982) |
The Company frequently reviews its investment portfolio for declines in market value and focuses its attention on securities whose fair value has fallen below 80% of their amortized value at the time of review. The Company then assesses whether the decline in value is temporary or “other than temporary”“other-than-temporary”. In making its assessment, the Company evaluates the current market and interest rate environment as well as specific issuer information and the Company’s ability and intent to hold to maturity.recovery. Generally, a change in a security’s value caused by a change in the market or interest rate environment does not constitute an other-than-temporary impairment, but rather a temporary decline in market value. Temporary declines in market value are recorded as an unrealized losslosses in accumulated other comprehensive income. If the Company determines that the decline is “other than temporary”,other-than-temporary, the carrying value of the investment is written down to fair value and a realized loss is recorded in the Company’s consolidated statements of operations and comprehensive (loss) income. The Company’s assessments are based on the issuer’sissuers current and expected future financial position, timeliness with respect to interest and/or principal payments, speed of repayments and any applicable credit enhancements or breakeven constant default rates on asset-backed securities, as well as relevant information provided by rating agencies, investment advisors and analysts.
The tables below display the aggregate fairmarket value and gross unrealized depreciation of fixed maturity securities, by investment category and maturity category by length of time that individual securities havehad been in a continuous unrealized loss position as of December 31, 2006:for the periods indicated:
| Duration of unrealized loss as of December 31, 2006 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Less than 12 months | Greater than 12 months | Total | ||||||||||||||||||
| (Dollars in thousands) | Fair Value | Gross Unrealized Depreciation | Fair Value | Gross Unrealized Depreciation | Fair Value | Gross Unrealized Depreciation | ||||||||||||||
| Fixed maturity securities | ||||||||||||||||||||
| U.S. government | ||||||||||||||||||||
| agencies and authorities | $ | 9,533 | $ | (26 | ) | $ | 57,477 | $ | (946 | ) | $ | 67,010 | $ | (972 | ) | |||||
| States, municipalities | ||||||||||||||||||||
| and political subdivisions | 94,242 | (363 | ) | 500,006 | (4,856 | ) | 594,248 | (5,219 | ) | |||||||||||
| Foreign governments | 115,190 | (899 | ) | 51,261 | (548 | ) | 166,451 | (1,447 | ) | |||||||||||
| All other corporate | 325,825 | (2,314 | ) | 931,976 | (22,940 | ) | 1,257,801 | (25,254 | ) | |||||||||||
| Total fixed maturities | 544,790 | (3,602 | ) | 1,540,720 | (29,290 | ) | 2,085,510 | (32,892 | ) | |||||||||||
| Equity Securities | - | - | - | - | - | - | ||||||||||||||
| Total | $ | 544,790 | $ | (3,602 | ) | $ | 1,540,720 | $ | (29,290 | ) | $ | 2,085,510 | $ | (32,892 | ) | |||||
F-12
| Duration of unrealized loss as of December 31, 2006 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Less than 12 months | Greater than 12 months | Total | ||||||||||||||||||
| (Dollars in thousands) | Fair Value | Gross Unrealized Depreciation | Fair Value | Gross Unrealized Depreciation | Fair Value | Gross Unrealized Depreciation | ||||||||||||||
| Fixed maturity securities | ||||||||||||||||||||
| Due in 1 year or less | $ | 18,648 | $ | (48 | ) | $ | 214,774 | $ | (1,521 | ) | $ | 233,422 | $ | (1,569 | ) | |||||
| Due after one year through five years | 291,163 | (967 | ) | 487,638 | (8,727 | ) | 778,801 | (9,694 | ) | |||||||||||
| Due after five years through ten years | 101,991 | (1,250 | ) | 404,681 | (7,800 | ) | 506,672 | (9,050 | ) | |||||||||||
| Due after ten years | 73,919 | (1,215 | ) | 64,619 | (1,118 | ) | 138,538 | (2,333 | ) | |||||||||||
| Mortgage-backed securities | 59,069 | (122 | ) | 369,008 | (10,124 | ) | 428,077 | (10,246 | ) | |||||||||||
| Total | $ | 544,790 | $ | (3,602 | ) | $ | 1,540,720 | $ | (29,290 | ) | $ | 2,085,510 | $ | (32,892 | ) | |||||
| Duration by security type of unrealized loss at December 31, 2008 | ||||||||||
| Less than 12 months | Greater than 12 months | Total | ||||||||
|
|
| Gross |
|
|
| Gross |
|
|
| Gross |
|
|
| Unrealized |
|
|
| Unrealized |
|
|
| Unrealized |
(Dollars in thousands) | Market Value |
| Depreciation |
| Market Value |
| Depreciation |
| Market Value |
| Depreciation |
Fixed maturity securities |
|
|
|
|
|
|
|
|
|
|
|
U.S. government |
|
|
|
|
|
|
|
|
|
|
|
agencies and authorities | $ - |
| $ - |
| $ - |
| $ - |
| $ - |
| $ - |
States, municipalities |
|
|
|
|
|
|
|
|
|
|
|
and political subdivisions | 1,471,807 |
| (146,292) |
| 176,555 |
| (18,629) |
| 1,648,362 |
| (164,921) |
Foreign governments | 79,063 |
| (7,715) |
| 2,759 |
| (61) |
| 81,822 |
| (7,776) |
All other corporate | 366,512 |
| (56,521) |
| 208,538 |
| (61,139) |
| 575,050 |
| (117,660) |
Total fixed maturities | $ 1,917,382 |
| $ (210,528) |
| $ 387,852 |
| $ (79,829) |
| $ 2,305,234 |
| $ (290,357) |
| Duration by maturity type of unrealized loss at December 31, 2008 | ||||||||||
| Less than 12 months | Greater than 12 months | Total | ||||||||
|
|
| Gross |
|
|
| Gross |
|
|
| Gross |
|
|
| Unrealized |
|
|
| Unrealized |
|
|
| Unrealized |
(Dollars in thousands) | Market Value |
| Depreciation |
| Market Value |
| Depreciation |
| Market Value |
| Depreciation |
Fixed maturity securities |
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less | $ 87,124 |
| $ (8,412) |
| $ 22,024 |
| $ (1,516) |
| $ 109,148 |
| $ (9,928) |
Due after one year through five years | 199,864 |
| (10,869) |
| 52,880 |
| (5,677) |
| 252,744 |
| (16,546) |
Due after five years through ten years | 145,943 |
| (10,767) |
| 88,806 |
| (21,998) |
| 234,749 |
| (32,765) |
Due after ten years | 1,478,686 |
| (180,001) |
| 184,531 |
| (31,765) |
| 1,663,217 |
| (211,766) |
Mortgage-backed securities | 5,765 |
| (479) |
| 39,611 |
| (18,873) |
| 45,376 |
| (19,352) |
Total | $ 1,917,382 |
| $ (210,528) |
| $ 387,852 |
| $ (79,829) |
| $ 2,305,234 |
| $ (290,357) |
The aggregate fairmarket value and gross unrealized losses related to investments in an unrealized loss position as of December 31, 2006 is $2,085.52008 were $2,305.2 million and $32.9$290.4 million, respectively. There arewere no material concentrationsunrealized losses on a single security that exceeded 0.35% of the market value of the fixed maturity securities at December 31, 2008. In addition, there was no significant concentration of unrealized losses by issuer, security type or industry within the fixed maturity portfolio.in any one market sector. The $3.6$210.5 million of unrealized losses relatingrelated to fixed incomematurity securities that have been in an unrealized loss position for less than one year are generally comprised of highly rated government, municipal, and corporate bonds and aremortgage-backed securities with the losses primarily the result of interest rates being higher than whenwidening credit spreads from the securities were purchased. Allfinancial markets crisis during the latter part of the year. Of these unrealized losses, are$206.9 million were related to securities that arewere rated investment grade or better by aat least one nationally recognized statistical rating organization.
The $29.3$79.8 million of unrealized losses relatingrelated to securities that have been in an unrealized loss position for more thenthan one year are also related primarily comprised ofto highly rated government, municipal, and corporate bonds and aremortgage-backed securities and were also the result of interest rates being higher than whenwidening credit spreads during the securities were purchased.latter part of the year. Of these unrealized losses, $26.9$65.2 million are related to securities that arewere rated investment grade or better by aat least one nationally recognized statistical rating organization. The gross unrealized depreciation greater than 12 months for mortgage-backed securities includes only $0.1 million related to sub-prime and alt-A loans.
The Company, given the size of its investment portfolio and capital position, has the ability and intent to hold these securities until recovery of market value. In addition, all securities currently in an unrealized loss position are current with respect to principal and interest payments.
F-13
The tabletables below displaysdisplay the aggregate fairmarket value and gross unrealized depreciation of fixed maturity securities, by investment category and maturity category by length of time that individual securities havehad been in a continuous unrealized loss position as of December 31, 2005:for the periods indicated:
| Duration of unrealized loss as of December 31, 2005 | ||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Less than 12 months | Greater than 12 months | Total | ||||||||||||||||||
| (Dollars in thousands) | Fair Value | Gross Unrealized Depreciation | Fair Value | Gross Unrealized Depreciation | Fair Value | Gross Unrealized Depreciation | ||||||||||||||
| Fixed maturity securities | ||||||||||||||||||||
| U.S. government | ||||||||||||||||||||
| agencies and authorities | $ | 39,348 | $ | (522 | ) | $ | 24,217 | $ | (593 | ) | $ | 63,565 | $ | (1,115 | ) | |||||
| States, municipalities | ||||||||||||||||||||
| and political subdivisions | 586,115 | (4,007 | ) | 169,256 | (4,046 | ) | 755,371 | (8,053 | ) | |||||||||||
| Foreign governments | 102,453 | (804 | ) | 6,446 | (154 | ) | 108,899 | (958 | ) | |||||||||||
| All other corporate | 690,912 | (12,284 | ) | 399,238 | (14,686 | ) | 1,090,150 | (26,970 | ) | |||||||||||
| Total fixed maturities | 1,418,828 | (17,617 | ) | 599,157 | (19,479 | ) | 2,017,985 | (37,096 | ) | |||||||||||
| Equity securities | 15,623 | (985 | ) | - | - | 15,623 | (985 | ) | ||||||||||||
| Total | $ | 1,434,451 | $ | (18,602 | ) | $ | 599,157 | $ | (19,479 | ) | $ | 2,033,608 | $ | (38,081 | ) | |||||
| Duration by security type of unrealized loss at December 31, 2007 | ||||||||||
| Less than 12 months | Greater than 12 months | Total | ||||||||
|
|
| Gross |
|
|
| Gross |
|
|
| Gross |
|
|
| Unrealized |
|
|
| Unrealized |
|
|
| Unrealized |
(Dollars in thousands) | Market Value |
| Depreciation |
| Market Value |
| Depreciation |
| Market Value |
| Depreciation |
Fixed maturity securities |
|
|
|
|
|
|
|
|
|
|
|
U.S. government |
|
|
|
|
|
|
|
|
|
|
|
agencies and authorities | $ - |
| $ - |
| $ 3,130 |
| $ (3) |
| $ 3,130 |
| $ (3) |
States, municipalities |
|
|
|
|
|
|
|
|
|
|
|
and political subdivisions | 161,999 |
| (1,704) |
| 96,266 |
| (836) |
| 258,265 |
| (2,540) |
Foreign governments | 20,000 |
| (537) |
| 73,612 |
| (339) |
| 93,612 |
| (876) |
All other corporate | 184,824 |
| (3,784) |
| 827,661 |
| (16,472) |
| 1,012,485 |
| (20,256) |
Total fixed maturities | $ 366,823 |
| $ (6,025) |
| $ 1,000,669 |
| $ (17,650) |
| $ 1,367,492 |
| $ (23,675) |
| Duration by maturity type of unrealized loss at December 31, 2007 | ||||||||||
| Less than 12 months | Greater than 12 months | Total | ||||||||
|
|
| Gross |
|
|
| Gross |
|
|
| Gross |
|
|
| Unrealized |
|
|
| Unrealized |
|
|
| Unrealized |
(Dollars in thousands) | Market Value |
| Depreciation |
| Market Value |
| Depreciation |
| Market Value |
| Depreciation |
Fixed maturity securities |
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less | $ 22,635 |
| $ (144) |
| $ 173,595 |
| $ (677) |
| $ 196,230 |
| $ (821) |
Due after one year through five years | 60,036 |
| (1,290) |
| 249,351 |
| (4,145) |
| 309,387 |
| (5,435) |
Due after five years through ten years | 75,133 |
| (1,308) |
| 157,960 |
| (4,990) |
| 233,093 |
| (6,298) |
Due after ten years | 209,006 |
| (3,282) |
| 65,202 |
| (2,720) |
| 274,208 |
| (6,002) |
Mortgage-backed securities | 13 |
| (1) |
| 354,561 |
| (5,118) |
| 354,574 |
| (5,119) |
Total | $ 366,823 |
| $ (6,025) |
| $ 1,000,669 |
| $ (17,650) |
| $ 1,367,492 |
| $ (23,675) |
The aggregate fairmarket value and gross unrealized losses related to investments in an unrealized loss position as of December 31, 20052007 were $2,033.6$1,367.5 million and $38.1$23.7 million, respectively. There were no material concentrations of unrealized losses by issuer, security type or industry within the fixed maturity portfolio. The $17.6$6.0 million of unrealized losses relatingrelated to fixed incomematurity securities that have been in an unrealized loss position for less than one year are generally comprised of highly rated government, municipal and corporate bonds and arethe losses were primarily the result of interest rates being higher than whenwidening credit spreads during the securities were purchased.latter part of the year. Of these unrealized losses, $15.1$4.7 million arewere related to securities that arewere rated investment grade or better by aat least one nationally recognized statistical rating organization.
The $19.5$17.7 million of unrealized losses relatingrelated to securities that have been in an unrealized loss position for more thenthan one year are also related primarily comprised ofto highly rated government, municipal and corporate bonds and arewere the result of interest rates being higher than whenwidening credit spreads during the securities were purchased.latter part of the year. Of these unrealized losses, $16.9$16.7 million are related to securities that arewere rated investment grade or better by aat least one nationally recognized statistical rating organization.
The components of net investment income are representedpresented in the table below:
| Years Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| Fixed maturities | $ | 299,570 | $ | 308,254 | $ | 306,892 | |||||
| Equity securities | 19,713 | 16,356 | 8,453 | ||||||||
| Short-term investments | 26,828 | 12,325 | 5,314 | ||||||||
| Other investment income | 41,934 | 9,019 | 37,076 | ||||||||
| Total gross investment income | 388,045 | 345,954 | 357,735 | ||||||||
| Interest credited and other expense | (15,693 | ) | (20,737 | ) | (28,551 | ) | |||||
| Total net investment income | $ | 372,352 | $ | 325,217 | $ | 329,184 | |||||
Other net investment incomebelow for 2006, 2005 and 2004 primarily includes income earned onthe periods indicated:
| Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
Fixed maturities | $ 313,651 |
| $ 294,707 |
| $ 299,569 |
Equity securities | 5,968 |
| 15,725 |
| 18,589 |
Short-term investments and cash | 28,553 |
| 61,940 |
| 28,413 |
Other investment assets |
|
|
|
|
|
Limited partnerships | 13,191 |
| 35,472 |
| 38,536 |
Other | 9,494 |
| 7,054 |
| 2,938 |
Total gross investment income | 370,857 |
| 414,898 |
| 388,045 |
Interest credited and other expense | (7,804) |
| (8,306) |
| (15,693) |
Total net investment income | $ 363,053 |
| $ 406,592 |
| $ 372,352 |
Some of the limited partnership investments of $38.5 million, $7.5 millioninvest in public equity securities. The Company is a passive investor in these partnerships and $36.3 million, respectively.has less than 10% participation.
F-14
The Company hashad contractual commitments to invest up to an additional $189.1$175.3 million in its limited partnership investmentspartnerships at December 31, 2006.2008. These commitments will be funded as required bywhen called in accordance with the partnership agreements, which have investment periods that expire, no later than 2012.unless extended, through 2014.
The components of net realized capital (losses) gains are representedpresented in the table below:below for the periods indicated:
| Years Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| Fixed maturities | $ | 8,385 | $ | 51,207 | $ | 57,104 | |||||
| Equity securities | 26,574 | 13,361 | (395 | ) | |||||||
| Short-term investments | (2 | ) | - | 1 | |||||||
| Total | $ | 34,957 | $ | 64,568 | $ | 56,710 | |||||
| Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
Fixed maturities, market value: |
|
|
|
|
|
Other-than-temporary impairments | $ (74,500) |
| $ (4,014) |
| $ - |
(Losses) gains from sales | (87,410) |
| (977) |
| 8,385 |
Fixed maturities, fair value: |
|
|
|
|
|
Gains from sales | 102 |
| - |
| - |
Gains from fair value adjustments | 1,473 |
| - |
| - |
Equity securities, market value: |
|
|
|
|
|
Gains from sales | - |
| - |
| 26,574 |
Equity securities, fair value: |
|
|
|
|
|
Losses from sales | (105,931) |
| (10,767) |
| - |
(Losses) gains from fair value adjustments | (134,907) |
| 84,434 |
| - |
Other invested assets, fair value: |
|
|
|
|
|
(Losses) gains from fair value adjustments | (87,786) |
| 12,207 |
| - |
Short-term investments (losses) gains | (227) |
| 4 |
| (2) |
Total net realized capital (losses) gains | $ (489,186) |
| $ 80,887 |
| $ 34,957 |
Proceeds from sales of fixed maturity investments during 2008, 2007 and 2006 2005 and 2004 were $45.1$140.1 million, $879.1$38.5 million and $787.0$45.1 million, respectively. Gross gains of $8.4$7.0 million, $59.8$1.0 million and $107.0$8.4 million and gross losses of $0.0$94.4 million, $4.4$2.0 million and $5.4$0.0 million were realized on those fixed maturity sales during 2006, 20052008, 2007 and 2004,2006, respectively. Proceeds from sales of equity security investments during 2008, 2007 and 2006 2005 and 2004 were $206.5$777.2 million, $205.9$767.2 million and $18.0$206.5 million, respectively. Gross gains of $31.2$6.4 million, $16.1$3.0 million and $0.5$31.2 million and gross losses of $4.6$112.3 million, $2.7$13.8 million and $0.9$4.6 million were realized on those equity sales during 2006, 20052008, 2007 and 2004,2006, respectively.
Net
Included in net realized capital gains included $0.0 million, $4.1for 2008 and 2007 was $74.5 million and $43.9$4.0 million, respectively, for write-downs in the value of securities deemed to be impaired on an other-than-temporary basis. No realized capital losses for 2006, 2005 and 2004, respectively, related to the impairment of interest only strips in accordance with EITF 99-20. In addition, realized capital losses for 2006, 2005 and 2004 included $0.0 million, $0.0 million and $0.5 million, respectively, relateddue to write-downs in the value of securities deemed to be impaired on an other thanother-than- temporary basis.basis were recorded in 2006.
Securities
At December 31, 2008, securities with a carrying value amount of $1,352.8$1,257.4 million at December 31, 2006 were on deposit with various state or governmentalgovernment insurance departments in compliance with insurance laws.
F-15
3. RESERVES FOR LOSSES AND LAE
Reserves for losses and LAE.
Activity in the reserve for losses and LAE is summarized as follows:for the periods indicated:
| Years Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| Gross reserves at January 1 | $ | 7,729,171 | $ | 6,846,904 | $ | 6,227,078 | |||||
| Less reinsurance recoverables | 2,369,925 | 2,286,202 | 2,311,102 | ||||||||
| Net reserves at January 1 | 5,359,246 | 4,560,702 | 3,915,976 | ||||||||
| Incurred related to: | |||||||||||
| Current year | 1,489,659 | 2,270,088 | 1,998,211 | ||||||||
| Prior years | 67,420 | (67,268 | ) | 174,160 | |||||||
| Total incurred losses and LAE | 1,557,079 | 2,202,820 | 2,172,371 | ||||||||
| Paid related to: | |||||||||||
| Current year | 413,452 | 432,523 | 447,825 | ||||||||
| Prior years | 1,299,021 | 968,980 | 635,391 | ||||||||
| Total paid losses and LAE | 1,712,473 | 1,401,503 | 1,083,216 | ||||||||
| Sale of UK branch | - | - | 503,571 | ||||||||
Foreign exchange/translation adjustment | 14,416 | (2,773 | ) | 59,142 | |||||||
| Net reserves at December 31 | 5,218,268 | 5,359,246 | 4,560,702 | ||||||||
| Plus reinsurance recoverables | 2,179,002 | 2,369,925 | 2,286,202 | ||||||||
| Gross reserves at December 31 | $ | 7,397,270 | $ | 7,729,171 | $ | 6,846,904 | |||||
Gross loss
| At December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
Gross reserves at January 1 | $ 7,538,704 |
| $ 7,397,270 |
| $ 7,729,171 |
Less reinsurance recoverables | (2,279,417) |
| (2,179,002) |
| (2,369,925) |
Net reserves at January 1 | 5,259,287 |
| 5,218,268 |
| 5,359,246 |
|
|
|
|
|
|
Incurred related to: |
|
|
|
|
|
Current year | 1,323,520 |
| 1,231,834 |
| 1,489,659 |
Prior years | 142,040 |
| 275,740 |
| 67,420 |
Total incurred losses and LAE | 1,465,560 |
| 1,507,574 |
| 1,557,079 |
|
|
|
|
|
|
Paid related to: |
|
|
|
|
|
Current year | 305,122 |
| 290,474 |
| 413,452 |
Prior years | 1,931,267 |
| 1,242,072 |
| 1,299,021 |
Total paid losses and LAE | 2,236,389 |
| 1,532,546 |
| 1,712,473 |
|
|
|
|
|
|
Foreign exchange/translation adjustment | (114,157) |
| 65,991 |
| 14,416 |
|
|
|
|
|
|
Net reserves at December 31 | 4,374,301 |
| 5,259,287 |
| 5,218,268 |
Plus reinsurance recoverables | 3,045,692 |
| 2,279,417 |
| 2,179,002 |
Gross reserves at December 31 | $ 7,419,993 |
| $ 7,538,704 |
| $ 7,397,270 |
Prior years’ reserves increased by $142.0 million, $275.7 million and LAE reserves were $7,397.3$67.4 million atfor the years ended December 31, 2008, 2007 and 2006, $7,729.2 million at December 31, 2005, and $6,846.9 million at December 31, 2004.respectively. The decrease in 2006increase for 2008 was primarily attributable to lower current year catastrophe losses andthe $85.3 million of reserve development for a decrease in earned premiums. run-off auto loan credit insurance program.
The 2007 prior years’ reserves increase in 2005of $275.7 million was primarily attributable to increased elevated catastrophe loss$266.4 million of adverse development on A&E reserves. The increase in the A&E reserves was primarily due to an extensive in-house study by the Company’s actuarial and claim units.
The increase for 2006 was the result of additional development of the 2005 catastrophes and A&E, which was partially offset by an increase in claim settlements, a decrease in premiums earned and favorable net prior period reserve adjustments.attritional development.
Reinsurance receivables for both paid and unpaid losses totaled $2,263.0$3,117.9 million and $2,343.1 million at December 31, 20062008 and $2,526.1 million at December 31, 2005.2007, respectively. At December 31, 2006, $1,429.32008, $2,366.5 million, or 63.2%75.9%, was receivable from Everest Reinsurance (Bermuda), Ltd. (“Bermuda Re”) and areis collateralized by a combination of letters of credit and trust agreements. In addition, $169.4agreements and $185.4 million, or 7.5%5.9%, was receivable from Transatlantic Reinsurance Company (“Transatlantic”). In addition, $227.3 million was receivable from Founders Insurance Company Limited (“Founders”), for which the Company has recorded a full provision for uncollectibility. No other retrocessionaire accounted for more than 5% of the Company’sreinsurance receivables.
The Company continues to receive claims under expired insurance and reinsurance contracts asserting alleged injuries and/or damages that occurred while the contracts were in force relating to or resulting from environmental pollution and hazardous substances, including asbestos (i.e. asbestos and environmental (“A&E”)). The Company’s asbestosasbestos. Environmental claims typically involve potentialassert liability for (a) the mitigation or remediation of environmental contamination or (b) bodily injury or property damage caused by the release of hazardous substances into the land, air or water. Asbestos claims typically assert liability for bodily injury from exposure to asbestos or for property damage resulting from asbestos or products containing asbestos.
The Company’s environmental claims typically involve potential liability for (a) the mitigation or remediation of environmental contamination or (b) bodily injury or property damages caused by the release of hazardous substances into the land, air or water.
F-16
As of December 31, 2006, approximately 9% of the Company’s gross reserves areinclude an estimate of the Company’s ultimate liability for A&E claims. The Company’s A&E liabilities stememanate from Mt. McKinley’s direct insurance business and Everest Re’s assumed reinsurance business. This estimate is made based on assessmentsAll of the underlying exposures ascontracts of insurance and reinsurance under which the result of (1) long and variable reporting delays, both from insureds to insurance companies and from ceding companies to reinsurers; (2) historical data, which isCompany has received claims during the past three years, expired more limited and variable on A&E losses than historical information on other types of casualty claims; and (3) unique aspects of A&E exposures for which ultimate value cannot be estimated using traditional reserving techniques.20 years ago. There are significant uncertainties in estimating the amount ofsurrounding the Company’s potential losses fromreserves for its A&E claims. Among the uncertainties are: (a) potential passing of many years between exposure and manifestation of any bodily injury or property damage; (b) difficulty in identifying sources of asbestos or environmental contamination; (c) difficulty in properly allocating responsibility and/or liability for asbestos or environmental damage; (d) changes in underlying laws and judicial interpretation of those laws; (e) the potential for an asbestos or environmental claim to involve many insurance providers over many policy periods; (f) questions concerning interpretation and application of insurance and reinsurance coverage; and (g) uncertainty regarding the number and identity of insureds with potential asbestos or environmental exposure.
With respect to asbestos claims in particular, several additional factors have emerged in recent years that further compound the difficulty in estimating the Company’s liability. These developments include: (a) the significant growth over a short period of time in the number of claims filed, in part reflecting a much more aggressive plaintiff bar and including claims against defendants who may only have a “peripheral” connection to asbestos; (b) a disproportionate percentage of claims filed by individuals with no physical injury, which should have little to no financial value but which have increasingly been considered in jury verdicts and settlements; (c) the growth in the number and significance of bankruptcy filings by companies as a result of asbestos claims (including, more recently, bankruptcy filings in which companies attempt to resolve their asbestos liabilities in a manner that is prejudicial to insurers and forecloses insurers from participating in the negotiation of asbestos related bankruptcy reorganization plans); (d) the concentration of claims in a small number of states that favor plaintiffs; (e) the growth in the number of claims that might impact the general liability portion of insurance policies rather than the product liability portion; (f) measures adopted by specific courts to ameliorate the worst procedural abuses; (g) an increase in settlement values being paid to asbestos claimants, especially those with cancer or functional impairment; (h) legislation in some states to address asbestos litigation issues; and (i) the potential that other states or the U.S. Congress may adopt legislation on asbestos litigation. Anecdotal evidence suggests that new claims filing rates have decreased, that new filings of asbestos-driven bankruptcies have decreased and legislative reforms are beginning to diminish the potential ultimate liability for asbestos losses.
Management believes that these uncertainties and factors continue to render reserves for A&E and particularly asbestos losses significantly less subject to traditional actuarial analysis than reserves for other types of losses. Given these uncertainties, management believes that no meaningful range for such ultimate losses can be established particularly for asbestos. Further, A&E reserves may be subject to more variability than non-A&E reserves and such variation could have a material adverse effect on the Company’s financial condition, results of operation and/or cash flow. The Company establishes reserves to the extent that, in the judgment of management, the facts and prevailing law reflect an exposure for the Company or its ceding companies.
F-17
The following table summarizes incurred losses and reserve balances with respect to A&E on both areserves, gross and net of retrocessional basisreinsurance, for the yearsperiods indicated:
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Gross basis | |||||||||||
| Beginning of period reserves | $ | 649,460 | $ | 728,325 | $ | 765,257 | |||||
| Incurred losses | 113,400 | 77,050 | 171,729 | ||||||||
| Paid losses | (112,726 | ) | (155,915 | ) | (208,661 | ) | |||||
| End of period reserves | $ | 650,134 | $ | 649,460 | $ | 728,325 | |||||
| Net basis | |||||||||||
| Beginning of period reserves | $ | 311,552 | $ | 303,335 | $ | 262,990 | |||||
| Incurred losses | 27,388 | 11,451 | 10,310 | ||||||||
| Paid losses | (25,632 | ) | (3,234 | ) | 30,035 | ||||||
| End of period reserves | $ | 313,308 | $ | 311,552 | $ | 303,335 | |||||
| At December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
Gross basis: |
|
|
|
|
|
Beginning of period reserves | $ 922,843 |
| $ 650,134 |
| $ 649,460 |
Incurred losses | - |
| 405,000 |
| 113,400 |
Paid losses | (136,000) |
| (132,291) |
| (112,726) |
End of period reserves | $ 786,843 |
| $ 922,843 |
| $ 650,134 |
|
|
|
|
|
|
Net basis: |
|
|
|
|
|
Beginning of period reserves | $ 537,549 |
| $ 313,308 |
| $ 311,552 |
Incurred losses | - |
| 266,362 |
| 27,388 |
Paid losses | (52,253) |
| (42,121) |
| (25,632) |
End of period reserves | $ 485,296 |
| $ 537,549 |
| $ 313,308 |
At December 31, 2006,2008, the gross reserves for A&E losses were comprised of $135.6$161.0 million representing case reserves reported by ceding companies, $152.1$139.7 million representing additional case reserves established by the Company on assumed reinsurance claims, $213.7$133.8 million representing case reserves established by the Company on direct excess insurance claims, including Mt. McKinley and $148.7$352.3 million representing IBNR reserves. Roughly 89%,
With respect to asbestos only, at December 31, 2008, the Company had gross asbestos loss reserves of $734.1 million, or $581.0 million,93.3% of grosstotal A&E reserves, relate to asbestos of which $320.5$533.2 million was for assumed business and $260.5$200.9 million was for direct excess business.
In 2007, the Company completed a detailed study of its asbestos experience and its cedants’ asbestos exposures and also considered industry trends. The Company’s Claims Department undertook a contract by contract analysis of its direct business and projected those findings to its assumed reinsurance business. The Company’s actuaries utilized nine methodologies to project potential ultimate liabilities including projections based on internal data and assessments, extrapolations of non-public and publicly available data for the Company’s cedants and benchmarking against industry data and experience. As a result of the study, the Company made changes to gross asbestos reserves. The Company has not experienced significant claims activity related to environmental exposures other than asbestos. The Company’s A&E reserves represent management’s best estimate of the ultimate liability, however, there can be no assurance that ultimate loss payments will not exceed such reserves, perhaps by a significant amount. No additional reserve strengthening was made in 2008.
In connection with the acquisition of Mt. McKinley, which has significant exposure to A&E claims, LM Property and Casualty Insurance Company (“LM”) provided reinsurance to Mt. McKinley covering 80% ($160.0 million) of the first $200.0 million of any adverse development of Mt. McKinley’s reserves as of September 19, 2000 and The Prudential guaranteed LM’s obligation to Mt. McKinley. CessionsCoverage under this reinsurance agreement was exhausted the limit available under the contract atas of December 31, 2003.
4. 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. The Company implemented a more active management strategy for these securities and FAS 159 provided guidance on accounting and presentation of these investments in the Company’s consolidated financial statements. Upon adoption of FAS 159, the Company recognized a $204.8 million positive cumulative-effect adjustment to retained earnings, net of $110.3 million of tax.
The Company records fair value re-measurements as net realized capital gains or losses in the consolidated statements of operations and comprehensive income (loss). The Company recorded $221.2 million in net realized capital losses due to fair value re-measurement on fixed maturities, equity securities and other invested assets at fair value for the year ended December 31, 2008. The Company recorded $96.6 million in net realized capital gains due to fair value re-measurement on equity securities and other invested assets at fair value for the year ended December 31, 2007.
The Company’s fixed maturities and equity securities are managed by third party investment asset managers and market and fair values for these securities are obtained from third party pricing services retained by the investment asset managers. In limited instances where prices are not provided by pricing services, price quotes on a non-binding basis are obtained from investment brokers. The investment asset managers have procedures in place to review the reasonableness of the prices from the service providers and may obtain additional price quotes for verification. In addition, the Company tests the prices on a random basis to an independent pricing source. In limited situations, where financial markets are inactive or illiquid, the Company may use its own assumptions about future cash flows and risk-adjusted discount rates to determine fair value.
Fixed maturities are categorized as Level 2, Significant Other Observable Inputs, since a particular security may not have traded but the pricing services are able to use valuation models with observable market inputs such as interest rate yield curves and prices for similar fixed maturities in terms of issuer, maturity and seniority. Valuations that are derived from techniques in which one or more of the significant inputs are unobservable (including assumptions about risk) are categorized as Level 3, Significant Unobservable Inputs. These securities include broker priced securities and valuation of less liquid securities such as commercial mortgage-backed securities.
Equity securities in U.S. denominated currency are categorized as Level 1, Quoted Prices in Active Markets for Identical Assets, since the securities are actively traded on an exchange and prices are based on quoted prices from the exchange. Equity securities traded on foreign exchanges are categorized as Level 2 due to potential foreign exchange adjustments to fair or market value.
Other invested assets, at fair value, are categorized as Level 1, Quoted Prices in Active Markets for Identical Assets, since the securities are shares of the Company’s parent, which are actively traded on an exchange and the price is based on a quoted price.
The following tables present the fair value measurement levels for all assets and liabilities, which the Company has recorded at fair value as of the periods indicated:
|
|
|
| Fair Value Measurement Using: | ||||
|
|
|
| Quoted Prices |
|
|
|
|
|
|
|
| in Active |
| Significant |
|
|
|
|
|
| Markets for |
| Other |
| Significant |
|
|
|
| Identical |
| Observable |
| Unobservable |
|
|
|
| Assets |
| Inputs |
| Inputs |
(Dollars in thousands) |
| December 31, 2008 |
| (Level 1) |
| (Level 2) |
| (Level 3) |
Assets: |
|
|
|
|
|
|
|
|
Fixed maturities, market value |
| $ 5,511,856 |
| $ - |
| $ 5,500,889 |
| $ 10,967 |
Fixed maturities, fair value |
| 43,090 |
| - |
| 43,090 |
| - |
Equity securities, market value |
| 16 |
| 16 |
| - |
| - |
Equity securities, fair value |
| 119,815 |
| 119,092 |
| 723 |
| - |
Other invested assets, fair value |
| 316,750 |
| 316,750 |
| - |
| - |
|
|
|
| Fair Value Measurement Using: | ||||
|
|
|
| Quoted Prices |
|
|
|
|
|
|
|
| in Active |
| Significant |
|
|
|
|
|
| Markets for |
| Other |
| Significant |
|
|
|
| Identical |
| Observable |
| Unobservable |
|
|
|
| Assets |
| Inputs |
| Inputs |
(Dollars in thousands) |
| December 31, 2007 |
| (Level 1) |
| (Level 2) |
| (Level 3) |
Assets: |
|
|
|
|
|
|
|
|
Fixed maturities, market value |
| $ 5,998,157 |
| $ - |
| $ 5,919,448 |
| $ 78,709 |
Equity securities, fair value |
| 815,372 |
| 801,611 |
| 13,761 |
| - |
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, fair value measurements using significant unobservable inputs, for the periods indicated:
| Years Ended December 31, | ||
(Dollars in thousands) | 2008 |
| 2007 |
Assets: |
|
|
|
Beginning balance at January 1 | $ 78,709 |
| $ 24,024 |
Total gains or (losses) (realized/unrealized) |
|
|
|
Included in earnings (or changes in net assets) | (13,550) |
| (2,023) |
Included in other comprehensive income | (3,691) |
| (533) |
Purchases, issuances and settlements | (9,732) |
| 57,241 |
Transfers in and/or (out) of Level 3 | (40,769) |
| - |
Ending balance at December 31 | $ 10,967 |
| $ 78,709 |
|
|
|
|
The amount of total gains or losses for the period included in earnings |
|
| |
(or changes in net assets) attributable to the change in unrealized |
|
|
|
gains or losses relating to assets still held at the reporting date | $ (1,585) |
| $ - |
5. CREDIT LINES
Effective August 23, 2006, Holdings entered into a new five year, $150.0 million senior revolving credit facility with a syndicate of lenders, replacing the October 10, 2003 three year senior revolving credit facility, which expired on October 10, 2006. Both the August 23, 2006 and October 10, 2003 senior revolving credit agreements, which have similar terms, are referred to as the “Holdings Credit Facility”. Citibank N.A. is the administrative agent for the Holdings Credit Facility. The Holdings Credit Facility ismay be used for liquidity and general corporate purposes. The Holdings Credit Facility provides for the borrowing of up to $150.0 million with interest at a rate selected by Holdings equal to either, (1) the Base Rate (as defined below) or (2) a periodic fixed rate equal to the Eurodollar Rate plus an applicable margin. The Base Rate means a fluctuating interest rate per annum in effect from time to time to be equal to the higher of (a) the rate of interest publicly announced by Citibank as its prime rate or (b) 0.5% per annum above the Federal Funds Rate, in each case plus the applicable margin. The amount of margin and the fees payable for the Holdings Credit Facility depends upon Holdings’ senior unsecured debt rating.
The Holdings Credit Facility requires Holdings to maintain a debt to capital ratio of not greater than 0.35 to 1 and Everest Re to maintain its statutory surplus of no less thanat $1.5 billion plus 25% of future aggregate net income and 25% of future aggregate capital contributions after December 31, 2005.2005, which at December 31, 2008 was $1,821.1 million. As of December 31, 2006,2008, Holdings was in compliance with theseall Holdings Credit Facility covenants.
F-18
During the years endedAt December 31, 20062008 and 2005,2007, there were no payments madeoutstanding letters of credit of $28.0 million and no incremental borrowings made$17.2 million, respectively, under the Holdings Credit Facility. During the year ended December 31, 2004 there were payments made of $70.0 million and no incremental borrowings under the Holdings Credit Facility. As of December 31, 2006 and 2005, there were no outstanding borrowings under the Holdings Credit Facility.Facility, respectively.
Interest expense and fees
Costs incurred in connection with the Holdings Credit Facility were $0.2 million, $0.2 million$130.3 thousand, $106.9 thousand and $1.2 million$159.7 thousand for the years ended December 31, 2006, 20052008, 2007 and 2004,2006, respectively.
5.
6. SENIOR NOTES
On October 12, 2004, Holdings completed a public offering of $250.0 million principal amount of 5.40% senior notes due October 15, 2014. On March 14, 2000, Holdings completed a public offeringsoffering of $200.0 million principal amount of 8.75% senior notes due March 15, 2010 and $250.0 million principal amount of 8.50% senior notes due and retired on March 15, 2005.2010.
Interest expense incurred in connection with these senior notes was $31.1$31.2 million, $35.5$31.2 million and $42.0$31.1 million for the years ended December 31, 2006, 20052008, 2007 and 2004,2006, respectively. Market value, which is based on quoted market price at December 31, 20062008 and 20052007, was $248.1$186.2 million and $250.9$235.3 million, respectively, for the 5.40% senior notes and $219.8$156.8 million and $226.2$215.9 million, respectively, for the 8.75% senior notes.
6.
7. LONG TERM SUBORDINATED NOTES
On April 26, 2007, Holdings completed a public offering of $400.0 million principal amount of 6.6% fixed to floating rate long term subordinated notes with a scheduled maturity date of May 15, 2037 and a final maturity date of May 1, 2067. During the fixed rate interest period from May 3, 2007 through May 14, 2017, interest will be at the annual rate of 6.6%, payable semi-annually in arrears on November 15 and May 15 of each year, commencing on November 15, 2007, subject to Holdings’ right to defer interest on one or more occasions for up to ten consecutive years. During the floating rate interest period from May 15, 2017 through maturity, interest will be based on the 3 month 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 $26.4 million and $17.4 million for the years ended December 31, 2008 and 2007, respectively. Market value, which is based on quoted market price at December 31, 2008 and 2007, was $168.0 million and $349.8 million, respectively, for the 6.6% long term subordinated notes.
8. JUNIOR SUBORDINATED DEBT SECURITIES PAYABLE
On March 29, 2004, Holdings issued $329.9 million of 6.20% junior subordinated debt securities due March 29, 2034 to Everest Re Capital Trust II (“Capital Trust II”). Holdings canmay redeem the junior subordinated debt securities before their maturity at 100% of their principal amount plus accrued interest as of the date of redemption,redemption. The securities may be redeemed in whole or in part, on one or more occasions at any time on or after March 30, 2009; or at any time, in whole, but not in part, within 90 days of the occurrence and continuation of a determination that the Trust may become subject to tax or the Investment Company Act.
On November 14, 2002, Holdings issued $216.5 million of 7.85% junior subordinated debt securities due November 15, 2032 to Everest Re Capital Trust (“Capital Trust”). Holdings can redeemredeemed all of the junior subordinated debt securities before their maturity at 100% of their principal amount plus accrued interest as of the date of redemption, in whole or in part, on one or more occasions at any time on or after November 14, 2007; or at any time, in whole, but not in part, within 90 days of the occurrence and continuation of a determination that the Trust may become subject to tax or the Investment Company Act.15, 2007.
Fair value, which is primarily based on the quoted market price of the related trust preferred securities at December 31, 20062008 and 2005,2007, was $316.3$222.2 million and $293.5$250.8 million, respectively, for the 6.20% junior subordinated debt securities and $221.2 million and $220.5 million, respectively, for the 7.85% junior subordinated debt securities.
Interest expense incurred in connection with these junior subordinated notes was $37.4$20.5 million, $37.4$35.3 million and $32.4$37.4 million for the years ended December 31, 2006, 20052008, 2007 and 2004,2006, respectively.
F-19
Capital Trust and Capital Trust II are wholly-ownedis a wholly owned finance subsidiariessubsidiary of Holdings. Capital Trust was dissolved upon the completion of the redemption of the trust preferred securities on November 15, 2007.
Holdings considers that the mechanisms and obligations relating to the trust preferred securities, taken together, constitute a full and unconditional guarantee by Holdings of Capital Trust and Capital Trust II’s payment obligations with respect to their respective trust preferred securities.
Capital Trust and
Capital Trust II mustwill redeem all of the outstanding trust preferred securities when the junior subordinated debt securities are paid at maturity on November 15, 2032 and March 29, 2034, respectively.2034. The Company may elect to redeem the junior subordinated debt securities, in whole or in part, at any time on or after November 14, 2007 and March 30, 2009, respectively.2009. If such an early redemption occurs, the outstanding trust preferred securities would also be proportionately redeemed.
There are certain regulatory and contractual restrictions on the ability of 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 5) 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, 2006, $2,451.42008, $1,745.6 million of the $3,102.6$2,735.2 million in net assets of the Company’s consolidated subsidiaries were subject to the foregoing regulatory restrictions.
7.
9. LETTERS OF CREDIT
The Citibank Holdings Credit Facility involves a syndicate of lenders (see Note 5), with Citibank acting as administrative agent. At December 31, 2008 and 2007, letters of credit for $28.0 million and $17.2 million, respectively, were issued and outstanding. The following table summarizes the Company’s letters of credit at December 31, 2008.
(Dollars in thousands) |
|
|
|
|
|
Bank | Commitment |
| In Use |
| Date of Expiry |
Citibank Holdings Credit Facility | $ 150,000 |
| $ 27,959 |
| 12/31/2009 |
Total Citibank Holdings Credit Facility | $ 150,000 |
| $ 27,959 |
|
|
10. 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, which effectively uses Everest Re’s investments as collateral.company. At December 31, 2006,2008, the total amount on deposit in the trust account was $23.6$19.9 million.
8.
11. OPERATING LEASE AGREEMENTS
The future minimum rental commitments, exclusive of cost escalation clauses, at December 31, 20062008 for all of the Company’s operating leases with remaining non-cancelable terms in excess of one year are as follows:
| (Dollars in thousands) | |||||
|---|---|---|---|---|---|
| 2007 | $ | 7,105 | |||
| 2008 | 7,236 | ||||
| 2009 | 7,101 | ||||
| 2010 | 6,996 | ||||
| 2011 | 1,221 | ||||
| Thereafter | 1,338 | ||||
| Net commitments | $ | 30,997 | |||
(Dollars in thousands) |
|
2009 | $ 7,756 |
2010 | 8,218 |
2011 | 7,826 |
2012 | 7,884 |
2013 | 7,313 |
Thereafter | 49,164 |
Net commitments | $ 88,161 |
All of these leases, the expiration terms of which range from 20082009 to 2014,2020, are for the rental of office space. Rental expense was $9.5 million, $8.9 million and $7.6 million $6.4 millionfor the years ended December 31, 2008, 2007 and $6.7 million for 2006, 2005 and 2004, respectively.
F-20
9.F-21
12. INCOME TAXES
All the income of Holdings’ U.S. subsidiaries is subject to the applicable federal, foreign, state and local taxes on corporations. Additionally, the income of foreign branches of the Company’s insurance operating companies is subject to various income taxes. The provision for income taxes in the consolidated statements of operations and comprehensive income (loss) has been determined in accordance with the individual income of each entity and the respective applicable tax laws. The provision reflects the permanent differences between financial and taxable income relevant to each entity. The significant components of the provision are as follows:follows for the periods indicated:
| Years Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| Current tax: | |||||||||||
| U.S. | $ | 133,103 | $ | (3,494 | ) | $ | 51,063 | ||||
| Foreign | 15,348 | 4,837 | 51,259 | ||||||||
| Total current tax | 148,451 | 1,343 | 102,322 | ||||||||
| Total deferred U.S. tax benefit | (31,399 | ) | (71,579 | ) | (46,185 | ) | |||||
| Total income tax expense (benefit) | $ | 117,052 | $ | (70,236 | ) | $ | 56,137 | ||||
| Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
Current tax: |
|
|
|
|
|
U.S. | $ (48,382) |
| $ 131,021 |
| $ 133,103 |
Foreign | 26,081 |
| 19,899 |
| 15,348 |
Total current tax (benefit) expense | (22,301) |
| 150,920 |
| 148,451 |
Total deferred U.S. tax benefit | (112,447) |
| (50,834) |
| (31,399) |
Total income tax (benefit) expense | $ (134,748) |
| $ 100,086 |
| $ 117,052 |
A reconciliation of the U.S. federal income tax rate to the Company’s effective tax rate is as follows:follows for the periods indicated:
| Years Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2006 | 2005 | 2004 | |||||||||
| Federal income tax rate | 35.0 | % | -35.0 | % | 35.0 | % | |||||
| Increase (reduction) in taxes resulting from: | |||||||||||
| Tax exempt income | -13.6 | % | -88.4 | % | -22.3 | % | |||||
| Dividend received deduction | -0.7 | % | -5.3 | % | -0.9 | % | |||||
| Proration | 2.1 | % | 14.0 | % | 3.5 | % | |||||
| UK Branch Sale | 0.0 | % | 0.0 | % | 6.7 | % | |||||
| Other, net | 3.2 | % | 7.5 | % | 2.2 | % | |||||
| Effective tax rate | 26.0 | % | -107.2 | % | 24.2 | % | |||||
F-21
| Years Ended December 31, | ||||
| 2008 |
| 2007 |
| 2006 |
Federal income tax rate | -35.0% |
| 35.0% |
| 35.0% |
Increase (reduction) in taxes resulting from: |
|
|
|
|
|
Tax exempt income | -23.8% |
| -15.0% |
| -13.6% |
Dividend received deduction | -1.1% |
| -1.1% |
| -0.7% |
Proration | 3.6% |
| 2.4% |
| 2.1% |
Other, net | 4.4% |
| 3.5% |
| 3.2% |
Effective tax rate | -51.9% |
| 24.8% |
| 26.0% |
Deferred income taxes reflect the tax effect of the temporary differences between the value of assets and liabilities for financial statement purposes and such values as measured by the U.S. tax laws and regulations. The principal items making up the net deferred income tax asset are as follows for the periods indicated:
| At December 31, | ||
(Dollars in thousands) | 2008 |
| 2007 |
Deferred tax assets: |
|
|
|
Reserve for losses and LAE | $ 194,910 |
| $ 266,623 |
Unearned premium reserve | 50,727 |
| 65,235 |
Investment impairments | 26,997 |
| 1,405 |
Net unrealized depreciation of investments | 63,245 |
| - |
Fair value adjustments | 31,697 |
| - |
Deferred compensation | 15,088 |
| 14,007 |
Deferred reinsurance | 52,677 |
| 57,479 |
AMT credits | 10,561 |
| 28,054 |
Foreign tax credits | 38,353 |
| 48,510 |
Uncollectible reinsurance | 84,898 |
| 58,658 |
Minimum pension | 17,080 |
| 3,531 |
Other assets | 38,961 |
| 22,189 |
Total deferred tax assets | 625,194 |
| 565,691 |
|
|
|
|
Deferred tax liabilities: |
|
|
|
Deferred acquisition costs | 67,069 |
| 81,325 |
Investment discounts | 8,653 |
| 5,169 |
Net unrealized appreciation of investments | - |
| 60,103 |
Fair value adjustments | - |
| 94,632 |
Foreign currency translation | 16,561 |
| 31,345 |
Other liabilities | 14,869 |
| 13,815 |
Total deferred tax liabilities | 107,152 |
| 286,389 |
|
|
|
|
Net deferred tax assets | $ 518,042 |
| $ 279,302 |
The Company adopted the provisions of FIN 48 on January 1, 2007. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| Years Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2006 | 2005 | ||||||
| Deferred tax assets: | ||||||||
| Reserve for losses and LAE | $ | 255,327 | $ | 268,029 | ||||
| Unearned premium reserve | 72,342 | 69,510 | ||||||
| Impairments | - | 1,688 | ||||||
| Deferred compensation | 14,288 | 8,778 | ||||||
| Deferred reinsurance | 35,895 | 24,689 | ||||||
| AMT Credits | 35,414 | 35,737 | ||||||
| Foreign tax credit carryforwards | 64,576 | 43,193 | ||||||
| Uncollectible reinsurance | 35,306 | 5,693 | ||||||
| Minimum pension | 9,635 | 1,547 | ||||||
| Other assets | 13,256 | 12,795 | ||||||
| Total deferred tax assets | 536,039 | 471,659 | ||||||
| Deferred tax liabilities: | ||||||||
| Deferred acquisition costs | 84,123 | 70,766 | ||||||
| Investments & market discounts | 5,122 | 5,522 | ||||||
| Net unrealized appreciation of investments | 173,593 | 123,178 | ||||||
| Foreign currency translation | 15,123 | 11,981 | ||||||
| Other liabilities | 9,864 | (1,004 | ) | |||||
| Total deferred tax liabilities | 287,825 | 210,443 | ||||||
| Net deferred tax assets | $ | 248,214 | $ | 261,216 | ||||
(Dollars in thousands) | 2008 |
| 2007 |
Balance at January 1 | $ 29,132 |
| $ 13,800 |
Additions based on tax positions related to the current year | 5,234 |
| 4,423 |
Additions for tax positions of prior years | - |
| 10,909 |
Reductions for tax positions of prior years | - |
| - |
Settlements with taxing authorities | - |
| - |
Lapses of applicable statutes of limitations | - |
| - |
Balance at December 31 | $ 34,366 |
| $ 29,132 |
The entire amount of the unrecognized tax benefits would affect the effective tax rate if recognized.
In 2007, the Internal Revenue Service (“IRS”) completed its examination of the Company’s consolidated U.S. income tax returns for 2003 and 2004 and issued an examination report proposing various adjustments. The Company has submitted a formal protest and believes that it has a strong chance of prevailing on the issues involved. With few exceptions, the Company is no longer subject to U.S. federal, state and local or foreign income tax examinations by tax authorities for years before 2003.
The Company recognizes accrued interest related to unrecognized tax benefits and penalties in income taxes. During the years ended December 31, 2008 and 2007, the Company accrued and recognized approximately $2.5 million and $6.0 million, respectively, in interest and penalties.
The Company is not aware of any positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within twelve months of the reporting date unless the formal protest to the IRS for 2003 and 2004 is finally resolved. It is not possible to estimate the change that would be required as a result of such resolution.
For U.S. income tax purposes the Company has foreign tax credit carryforwards of $64.6$38.4 million that begin to expire in 2011.2014. In addition, for U.S. income tax purposes the Company has $35.4$10.6 million of Alternative Minimum Tax credits that do not expire. Management believes that it is more likely than not that the Company will realize the benefits of its net deferred tax assets and accordingly, no valuation allowance has been recorded for the periods presented.
Tax benefits of $5.1$0.6 million and $5.1$1.9 million related to share-based compensation expense deductions for stock options exercised in 20062008 and 2005,2007, respectively, are reflected in the change in stockholder’s equity in “additional paid-in capital”.
10.
13. REINSURANCE
The Company utilizes reinsurance agreements to reduce its exposure to large claims and catastrophic loss occurrences. These agreements provide for recovery from reinsurers of a portion of losses and LAE under certain circumstances without relieving the ceding company of its obligations to the policyholders. Losses and LAE incurred and premiums earned are reported after deduction for reinsurance. In the event that one or more of the reinsurers were unable to meet their obligations under these reinsurance agreements, the Company would not realize the full value of the reinsurance recoverable balances. The Company may hold partial collateral, including letters of credit, trust accounts and funds held, under these agreements. See also Note 1C.
F-22
For years ended December 31, 1999, 2000 and 2001, the Company purchased accident year aggregate excess of loss retrocession coverage that provided up to $175.0 million of coverage for each year. These excess of loss policies provided coverage if Everest Re’s consolidated statutory basis accident year loss ratio exceeded a specified loss ratio attachment point for each year of coverage. The attachment point was net of inuring reinsurance and included adjustable premium provisions that effectively caused the Company to offset, on a pre-tax income basis up to approximately 57% of such ceded losses. The maximum recovery for each year was $175.0 million before giving effect to the adjustable premium. During 2003, the Company ceded $85.0 million of losses to the 2000 cover, effectively exhausting the maximum limit under the contract. The 2001 and 1999 accident year aggregate excess of loss retrocession coverages were fully exhausted prior to January 1, 2003. The Company did not purchase similar corporate level coverage subsequent to December 31, 2001.
In addition, the Company had coverage under an aggregate excess of loss reinsurance agreement provided by LM in connection with the Company’s acquisition of Mt. McKinley in September 2000. This agreement covers 80% or $160.0 million of the first $200.0 million of any adverse loss reserve development on the carried reserves of Mt. McKinley at the date of acquisition and reimburses the Company as such losses are paid by the Company. There were $160.0 million of recoverables under this reinsurance at December 31, 2003. The Prudential continues to guarantee LM’s obligation under this agreement.F-24
Mt. McKinley is a reinsurer of Everest Re. Under a series of transactions dating to 1986, Mt. McKinley reinsured several components of Everest Re’s business. In particular, Mt. McKinley provided stop loss reinsurance protection, in connection with the Company’s October 5, 1995 initial public offering, for any adverse loss development on Everest Re’s June 30, 1995 (December 31, 1994 for catastrophe losses) reserves, with $375.0 million in limits, of which $0.0 million remains available. The Stop Loss Agreement and other reinsurance contracts between Mt. McKinley and Everest Re remain in effect following the acquisition. However, these contracts became transactions with affiliates effective on the date of the Mt. McKinley acquisition, and their financial impact is thereafter eliminated in consolidation. Effective September 19, 2000, Mt. McKinley and Bermuda Re entered into a loss portfolio transfer reinsurance agreement, whereby Mt. McKinley transferred, for what management believes to be arm’s length consideration, all of its net insurance exposures and reserves to Bermuda Re.
Premiums written and earned and incurred losses and LAE are comprised of the following:following for the periods indicated:
| Years Ended December 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| Written premiums: | |||||||||||
| Direct | $ | 900,381 | $ | 955,611 | $ | 1,256,105 | |||||
| Assumed | 2,285,594 | 2,384,242 | 2,564,591 | ||||||||
| Ceded | (895,714 | ) | (944,203 | ) | (887,978 | ) | |||||
| Net written premiums | $ | 2,290,261 | $ | 2,395,650 | $ | 2,932,718 | |||||
| Premiums earned: | |||||||||||
| Direct | $ | 961,133 | $ | 1,019,288 | $ | 1,142,632 | |||||
| Assumed | 2,189,061 | 2,321,256 | 2,557,998 | ||||||||
| Ceded | (902,994 | ) | (914,468 | ) | (871,479 | ) | |||||
| Net premiums earned | $ | 2,247,200 | $ | 2,426,076 | $ | 2,829,151 | |||||
| Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
Written premiums: |
|
|
|
|
|
Direct | $ 778,243 |
| $ 838,406 |
| $ 900,381 |
Assumed | 2,116,545 |
| 2,316,675 |
| 2,285,594 |
Ceded | (1,219,426) |
| (1,082,155) |
| (895,714) |
Net written premiums | $ 1,675,362 |
| $ 2,072,926 |
| $ 2,290,261 |
|
|
|
|
|
|
Premiums earned: |
|
|
|
|
|
Direct | $ 839,251 |
| $ 899,328 |
| $ 961,133 |
Assumed | 2,235,381 |
| 2,322,698 |
| 2,189,061 |
Ceded | (1,192,850) |
| (1,043,126) |
| (902,994) |
Net premiums earned | $ 1,881,782 |
| $ 2,178,900 |
| $ 2,247,200 |
|
|
|
|
|
|
Incurred losses and LAE: |
|
|
|
|
|
Direct | $ 655,964 |
| $ 777,000 |
| $ 704,864 |
Assumed | 1,439,019 |
| 1,427,019 |
| 1,398,659 |
Ceded | (629,423) |
| (696,445) |
| (546,444) |
Net incurred losses and LAE | $ 1,465,560 |
| $ 1,507,574 |
| $ 1,557,079 |
The amounts deducted from losses and LAE incurred for net reinsurance recoveries were $546.4$629.4 million, $852.4$696.4 million and $712.7$546.4 million for the years ended December 31, 2008, 2007 and 2006, 2005 and 2004, respectively. See also Note 3.
F-23
As of December 31, 2006, the Company carried as an asset $2,263.0 million in reinsurance receivables with respect to losses ceded. Of this amount, $1,429.3 million, or 63.2%, was receivable from Bermuda Re and secured through the use of trust agreements and $169.4 million, or 7.5%, was receivable from Transatlantic. As of December 31, 2005, the Company had $2,526.1 million in reinsurance receivables. Of this amount, $1,463.1 million, or 57.9%, was receivable from Bermuda Re and secured through the use of trust agreements and $239.8 million, or 9.5% was receivable from subsidiaries of London Reinsurance Group (“London Life”), $171.5 million, or 6.8%, was receivable from Transatlantic and $160.0 million, or 6.3%, was receivable from LM. No other retrocessionaire accounted for more than 5% of the Company’s receivables.
The Company’s arrangements with London Life were managed on funds held basis which means that the Company had retained the premiums earned by the retrocessionaire to secure obligations of the retrocessionaire, recorded them as a liability, credited interest on the balances at a stated contractual rate and reduced the liability account as payments became due. As of December 31, 2005, such funds had reduced the Company’s net exposure to London Life to $115.4 million, effectively 100% of which had been secured by letters of credit.
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 for arm’s length consideration.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%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%20.0% of its business to Bermuda Re so that effective January 1, 2003 Everest Re ceded 25%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 cedesceded to Bermuda Re 50%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%25.0% of its business to Bermuda Re so that effective January 1, 2004 Everest Re cedesceded 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.
F-24
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 will cedeceded 31.5% and 3.5% of its casualty business to Bermuda Re and Everest International, respectively, and Everest Re will cedeceded 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 million (20%$125.0 million. The property portion of $625 million).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 will cede 60%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 ceded 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. This amendment remained in effect through December 31, 2008.
Effective October 1, 2008, Everest Re and Bermuda Re entered into a loss portfolio transfer reinsurance agreement, whereby Everest Re transferred a percentage of its net loss reserves ($747.0 million) corresponding to all existing open and future liabilities at December 31, 2007, arising from policies, insurance or reinsurance written or renewed by or on behalf of Everest Re during the period of January 1, 2002 through December 31, 2007, classified by Everest Re as casualty.
Effective January 1, 2009, 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, 2009, Everest Re cedes 36% and 8% 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 exceed $150.0 million or in the aggregate for each underwriting year for all occurrences exceed $325.0 million.
The following table summarizes the premiums and losses ceded by the Company to Bermuda Re and Everest International, respectively, for the yearsperiods indicated:
| Bermuda Re | Years Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| Ceded written premiums | $ | 697,795 | $ | 729,482 | $ | 654,332 | |||||
| Ceded earned premiums | 690,677 | 709,373 | 659,375 | ||||||||
| Ceded losses and LAE (a) | 396,538 | 688,162 | 546,554 | ||||||||
Everest International | Years Ended December 31, | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| Ceded written premiums | $ | 72,465 | $ | 79,755 | $ | 58,910 | |||||
| Ceded earned premiums | 69,821 | 70,281 | 40,389 | ||||||||
| Ceded losses and LAE | 39,443 | 66,062 | 30,957 | ||||||||
Bermuda Re | Years Ended December 31, | ||
(Dollars in thousands) | 2008 | 2007 | 2006 |
Ceded written premiums | $ 947,344 | $ 837,129 | $ 697,795 |
Ceded earned premiums | 915,706 | 820,400 | 690,677 |
Ceded losses and LAE (a) | 467,717 | 540,851 | 396,538 |
|
|
|
|
Everest International | Years Ended December 31, | ||
(Dollars in thousands) | 2008 | 2007 | 2006 |
Ceded written premiums | $ 99,633 | $ 86,980 | $ 72,465 |
Ceded earned premiums | 95,835 | 85,162 | 69,821 |
Ceded losses and LAE | 54,380 | 41,318 | 39,443 |
(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 statements of operations and comprehensive income.
Effective January 1, 2004,
Everest Re sold the net assets of its UK branch to Bermuda Re. In connection with the sale, Everest Re and provided Bermuda Re with a reserve indemnity agreement allowing for indemnity payments of up to 90% of £25.0 million inof the event December 31,excess of 2002 losses and LAEprior reserves, develop adversely.provided that any recognition of profit from the reserves for 2002 and prior underwriting years are taken into account. The limit available under this agreement was fully exhausted at December 31, 2004.
F-25
11.F-27
14. COMPREHENSIVE (LOSS) INCOME (LOSS)
The following table presents the components of comprehensive (loss) income for the years ended December 31, 2006, 2005 and 2004 are shown in the following table:periods indicated:
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Net income | $ | 332,906 | $ | 4,706 | $ | 175,473 | |||||
| Other comprehensive income, before tax: | |||||||||||
| Unrealized gains on securities arising during the period | 177,213 | 64,205 | 106,789 | ||||||||
| Less: reclassification adjustment for realized gains | |||||||||||
| included in net income | (34,957 | ) | (64,568 | ) | (56,710 | ) | |||||
| Foreign currency translation adjustments | 13,611 | 2,669 | 10,472 | ||||||||
| Minimum pension adjustment | - | (4,422 | ) | - | |||||||
| Other comprehensive income (loss), before tax | 155,867 | (2,116 | ) | 60,551 | |||||||
| Income tax expense related to items of other comprehensive | |||||||||||
| income (loss): | |||||||||||
| Tax expense from unrealized gains arising during the period | (62,025 | ) | (22,471 | ) | (37,380 | ) | |||||
| Tax benefit from realized gains (losses) included in net income | 12,235 | 22,598 | 19,849 | ||||||||
| Tax expense from foreign currency translation | (4,764 | ) | (934 | ) | (3,665 | ) | |||||
| Tax benefit from minimum pension adjustment | - | 1,548 | - | ||||||||
| Total income tax (expense) benefit related to items of other | |||||||||||
| comprehensive income (loss) | (54,554 | ) | 741 | (21,196 | ) | ||||||
| Other comprehensive income (loss), net of tax | 101,313 | (1,375 | ) | 39,355 | |||||||
| Comprehensive income | $ | 434,219 | $ | 3,331 | $ | 214,828 | |||||
| Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
|
|
|
|
|
|
Net (loss) income | $ (124,757) |
| $ 304,191 |
| $ 332,906 |
Other comprehensive (loss) income, before tax: |
|
|
|
|
|
Unrealized (losses) gains on securities arising during the period | (438,383) |
| (14,194) |
| 177,213 |
Less: reclassification adjustment for realized losses (gains) |
|
|
|
|
|
included in net (loss) income | 161,910 |
| 4,991 |
| (34,957) |
Foreign currency translation adjustments | (46,872) |
| 46,349 |
| 13,611 |
Pension adjustments | (38,714) |
| 17,442 |
| - |
Other comprehensive (loss) income, before tax | (362,059) |
| 54,588 |
| 155,867 |
|
|
|
|
|
|
Income tax benefit (expense) related to items of other comprehensive |
|
|
|
|
|
(loss) income: |
|
|
|
|
|
Tax benefit (expense) from unrealized (losses) gains arising during the period | 153,434 |
| 4,968 |
| (62,025) |
Tax reclassification due to realized (losses) gains included in net (loss) income | (56,669) |
| (1,747) |
| 12,235 |
Tax benefit (expense) from foreign currency translation | 16,405 |
| (16,222) |
| (4,764) |
Tax benefit (expense) on pension | 13,550 |
| (6,105) |
| - |
Total income tax benefit (expense) related to items of other |
|
|
|
|
|
comprehensive (loss) income | 126,720 |
| (19,106) |
| (54,554) |
Other comprehensive (loss) income, net of tax | (235,339) |
| 35,482 |
| 101,313 |
Comprehensive (loss) income | $ (360,096) |
| $ 339,673 |
| $ 434,219 |
The following table showspresents the components of the change in accumulated other comprehensive (loss) income for the years ended December 31, 2006 and 2005.periods indicated:
| (Dollars in thousands) | 2006 | 2005 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Beginning balance of unrealized gains on securities | $ | 228,760 | $ | 228,996 | |||||||
| Current period change in unrealized gains on securities | 92,466 | (236 | ) | ||||||||
| Ending balance of unrealized gains on securities | $ | 321,226 | $ | 228,760 | |||||||
| Beginning balance of foreign currency translation adjustments | $ | 20,399 | $ | 18,664 | |||||||
| Current period change in foreign currency translation adjustments | 8,847 | 1,735 | |||||||||
| Ending balance of foreign currency translation adjustments | $ | 29,246 | $ | 20,399 | |||||||
| Beginning balance of minimum pension adjustment | $ | (2,874 | ) | $ | - | ||||||
| Current period change in minimum pension adjustment | - | (2,874 | ) | ||||||||
| Ending balance of minimum pension adjustment | $ | (2,874 | ) | $ | (2,874 | ) | |||||
| Adjustment to initially apply FASB Statement No. 158, net of tax | $ | (15,020 | ) | $ | - | ||||||
| Ending balance of accumulated other comprehensive income | $ | 332,578 | $ | 246,285 | |||||||
F-26
| Years Ended December 31, | ||
(Dollars in thousands) | 2008 |
| 2007 |
|
|
|
|
Beginning balance of unrealized gains (losses) on securities | $ 110,460 |
| $ 321,226 |
Current period change in unrealized gains (losses) on securities | (179,708) |
| (5,982) |
Adjustment to initially apply FASB Statement No. 159, net of tax | - |
| (204,784) |
Ending balance of unrealized (losses) gains on securities | (69,248) |
| 110,460 |
|
|
|
|
Beginning balance of foreign currency translation adjustments | 59,373 |
| 29,246 |
Current period change in foreign currency translation adjustments | (30,467) |
| 30,127 |
Ending balance of foreign currency translation adjustments | 28,906 |
| 59,373 |
|
|
|
|
Beginning balance of pension | (6,557) |
| (17,894) |
Current period change in pension | (25,164) |
| 11,337 |
Ending balance of pension | (31,721) |
| (6,557) |
|
|
|
|
Ending balance of accumulated other comprehensive (loss) income | $ (72,063) |
| $ 163,276 |
12.15. EMPLOYEE BENEFIT PLANSA.
Defined Benefit Pension Plans
Plans.
The Company maintains both qualified and non-qualified defined benefit pension plans for its U.S. employees. Generally, the Company computes the benefits based on average earnings over a period prescribed by the plans and credited length of service. The Company’s non-qualified defined benefit pension plan, affected in October 1995, provides compensating pension benefits for participants whose benefits have been curtailed under the qualified plan due to Internal Revenue Code limitations.
Although not required to make contributions under Internal Revenue ServiceIRS regulations, the Company contributed $22.8$20.6 million and $3.9$3.6 million to the qualified plan in 20062008 and 2005,2007, respectively. Pension expense for the Company’s plans for the years ended December 31, 2008, 2007 and 2006 2005was $5.9 million, $6.4 million and 2004 was $9.2 million, $6.9 million and $5.3 million, respectively.
The following table summarizes the status of these defined benefit plans for U.S. employees for the years ended December 31:periods indicated:
| (Dollars in thousands) | 2006 | 2005 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Change in projected benefit obligation: | |||||||||||
| Benefit obligation at beginning of year | $ | 81,269 | $ | 66,164 | |||||||
| Service cost | 5,089 | 3,873 | |||||||||
| Interest cost | 4,890 | 4,036 | |||||||||
| Actuarial loss | 1,977 | 7,749 | |||||||||
| Benefits paid | (782 | ) | (553 | ) | |||||||
| Projected benefit obligation at end of year | 92,443 | 81,269 | |||||||||
| Change in plan assets: | |||||||||||
| Fair value of plan assets at beginning of year | 43,609 | 38,172 | |||||||||
| Actual return on plan assets | 4,510 | 2,360 | |||||||||
| Actual contributions during the year | 22,859 | 3,942 | |||||||||
| Administrative expenses paid | (400 | ) | (312 | ) | |||||||
| Benefits paid | (782 | ) | (553 | ) | |||||||
| Fair value of plan assets at end of year | 69,796 | 43,609 | |||||||||
| Funded status at end of year | (22,647 | ) | (37,660 | ) | |||||||
| Net amount recognized in the consolidated balance sheets (after FAS 158) | $ | (22,647 | ) | ||||||||
| Years Ended December 31, | ||
(Dollars in thousands) | 2008 |
| 2007 |
Change in projected benefit obligation: |
|
|
|
Benefit obligation at beginning of year | $ 90,645 |
| $ 92,443 |
Service cost | 5,174 |
| 5,096 |
Interest cost | 5,916 |
| 5,263 |
Actuarial loss (gain) | 5,650 |
| (10,979) |
Benefits paid | (4,478) |
| (1,178) |
Projected benefit obligation at end of year | 102,907 |
| 90,645 |
|
|
|
|
Change in plan assets: |
|
|
|
Fair value of plan assets at beginning of year | 82,963 |
| 69,796 |
Actual return on plan assets | (26,391) |
| 10,550 |
Actual contributions during the year | 23,843 |
| 3,914 |
Administrative expenses paid | (139) |
| (119) |
Benefits paid | (4,478) |
| (1,178) |
Fair value of plan assets at end of year | 75,798 |
| 82,963 |
|
|
|
|
Funded status at end of year | $ (27,109) |
| $ (7,682) |
Amounts recognized in the consolidated balance sheets at December 31:for the periods indicated:
| (Dollars in thousands) | 2006 | ||||
|---|---|---|---|---|---|
| Other assets (due beyond one year) | $ | 1,652 | |||
| Other liabilities (due within one year) | (1,595 | ) | |||
| Other liabilities (due beyond one year) | (22,704 | ) | |||
| Net amount recognized in the consolidated balance sheet | $ | (22,647 | ) | ||
F-27
| At December 31, | ||
(Dollars in thousands) | 2008 |
| 2007 |
Other assets (due beyond one year) | $ - |
| $ 14,133 |
Other liabilities (due within one year) | (6,077) |
| (1,468) |
Other liabilities (due beyond one year) | (21,032) |
| (20,347) |
Net amount recognized in the consolidated balance sheet | $ (27,109) |
| $ (7,682) |
Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income at December 31:for the periods indicated:
| (Dollars in thousands) | 2006 | ||||
|---|---|---|---|---|---|
| Prior service cost | $ | (493 | ) | ||
| Accumulated loss | (26,169 | ) | |||
| Accumulated other comprehensive loss | (26,662 | ) | |||
Change in accumulated other comprehensive income due to application of FAS 158 | |||||
| Additional minimum liaibility (before FAS 158) | (5,042 | ) | |||
| Intangible asset offset (before FAS 158) | 620 | ||||
| Accumulated other comprehensive income (before FAS 158) | (4,422 | ) | |||
| Net decrease in accumulated other comprehensive income due to FAS 158 | $ | (22,240 | ) | ||
Plan assets consist of shares
| At December 31, | ||
(Dollars in thousands) | 2008 |
| 2007 |
Prior service cost | $ (315) |
| $ (367) |
Accumulated loss | (46,252) |
| (8,873) |
Accumulated other comprehensive loss | $ (46,567) |
| $ (9,240) |
Other changes in investment trusts with approximately 59% and 12% ofother comprehensive income for the underlying assets consisting of equity securities and fixed maturities, respectively, and 29%in cash and cash equivalents due to an employer pension contribution.periods indicated are as follows:
| Years Ended December 31, | ||
(Dollars in thousands) | 2008 |
| 2007 |
Other comprehensive loss at December 31, prior year | $ (9,240) |
| $ (26,662) |
Net (loss) gain arising during period | (38,763) |
| 15,871 |
Recognition of amortizations in net periodic benefit cost: |
|
|
|
Prior service cost | 51 |
| 126 |
Actuarial loss | 1,385 |
| 1,425 |
Other comprehensive loss at December 31, current year | $ (46,567) |
| $ (9,240) |
Net periodic benefit cost for U.S. employees included the following components for years ended December 31 asthe periods indicated:
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Service cost | $ | 5,089 | $ | 3,873 | $ | 3,273 | |||||
| Interest cost | 4,890 | 4,036 | 3,397 | ||||||||
| Expected return on assets | (3,549 | ) | (3,032 | ) | (2,835 | ) | |||||
| Amortization of actuarial loss from earlier periods | 2,633 | 1,923 | 1,357 | ||||||||
| Amortization of unrecognized prior service cost | 127 | 127 | 127 | ||||||||
| Net periodic benefit cost | $ | 9,190 | $ | 6,927 | $ | 5,319 | |||||
| Other changes recognized in other comprehensive income: | |||||||||||
| Other comprehensive loss attributable to change from prior year | 20,120 | ||||||||||
| Total recognized in net periodic benefit cost and other | |||||||||||
| comprehensive income | $ | 29,310 | |||||||||
| Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
Service cost | $ 5,174 |
| $ 5,096 |
| $ 5,089 |
Interest cost | 5,916 |
| 5,263 |
| 4,890 |
Expected return on assets | (6,583) |
| (5,538) |
| (3,549) |
Amortization of actuarial loss from earlier periods | 601 |
| 1,425 |
| 2,633 |
Amortization of unrecognized prior service cost | 51 |
| 126 |
| 127 |
Settlement | 784 |
| - |
| - |
Net periodic benefit cost | $ 5,943 |
| $ 6,372 |
| $ 9,190 |
|
|
|
|
|
|
Other changes recognized in other comprehensive income: |
|
|
|
|
|
Other comprehensive income attributable to change from prior year | 37,327 |
| (17,422) |
|
|
|
|
|
|
|
|
Total recognized in net periodic benefit cost and other |
|
|
|
|
|
comprehensive income | $ 43,270 |
| $ (11,050) |
|
|
The estimated transition obligation, actuarial loss and prior service cost that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next year are $0, $1,868,005$0.0 million, $3.3 million and $126,908,$0.0 million, respectively.
The weighted average discount rates used to determine net periodic benefit cost for 2008 and 2007 were 6.55% and 5.94%, respectively. The rate of compensation increase used to determine the net periodic benefit cost for 2008 and 2007 was 4.5%. The expected long-term rate of return on plan assets for 2008 and 2007 was 8.0% and was based on expected portfolio returns and allocations.
The weighted average discount rates used to determine the actuarial present value of the projected benefit obligation for 2006, 2005year end 2008 and 20042007 were 5.94%, 5.50%6.25% and 5.75%6.55%, respectively. The rate of compensation increase used to determine the actuarial present value of the projected benefit obligation for 2006, 2005 and 2004 was 4.5%. The expected long-term rate of return on plan assets for 2006, 2005 and 2004 was 8.0%, 8.0% and 9.0%, respectively, and was based on portfolio returns and allocations.
F-28
The following table summarizes the accumulated benefit obligation for years ended December 31 asthe periods indicated:
| (Dollars in thousands) | 2006 | 2005 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Qualified Plan | $ | 51,937 | $ | 46,200 | |||||||
| Non-qualified Plan | 15,602 | 14,225 | |||||||||
| Total | $ | 67,539 | $ | 60,425 | |||||||
| At December 31, | ||
(Dollars in thousands) | 2008 |
| 2007 |
Qualified Plan | $ 63,663 |
| $ 53,693 |
Non-qualified Plan | 20,171 |
| 16,130 |
Total | $ 83,834 |
| $ 69,823 |
The following table displays the plans with projected benefit obligations in excess of plan assets at December 31:for the periods indicated:
| (Dollars in thousands) | 2006 | 2005 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Qualified Plan | |||||||||||
| Projected benefit obligation | $ | - | $ | 60,782 | |||||||
| Fair value of plan assets | - | 43,609 | |||||||||
| Non-qualified Plan | |||||||||||
| Projected benefit obligation | $ | 24,299 | $ | 20,488 | |||||||
| Fair value of plan assets | - | - | |||||||||
| At December 31, | ||
(Dollars in thousands) | 2008 |
| 2007 |
Qualified Plan |
|
|
|
Projected benefit obligation �� | $ 79,574 |
| NA |
Fair value of plan assets | 75,798 |
| NA |
Non-qualified Plan |
|
|
|
Projected benefit obligation | $ 23,333 |
| $ 21,815 |
Fair value of plan assets | - |
| - |
The following table displays the plans with accumulated benefit obligations in excess of plan assets at December 31:for the periods indicated:
| (Dollars in thousands) | 2006 | 2005 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Qualified Plan | |||||||||||
| Projected benefit obligation | $ | - | $ | 60,782 | |||||||
| Accumulated benefit obligation | - | 46,200 | |||||||||
| Fair value of plan assets | - | 43,609 | |||||||||
| Non-qualified Plan | |||||||||||
| Projected benefit obligation | $ | 24,299 | $ | 20,488 | |||||||
| Accumulated benefit obligation | 15,602 | 14,225 | |||||||||
| Fair value of plan assets | - | - | |||||||||
| At December 31, | ||
(Dollars in thousands) | 2008 |
| 2007 |
Qualified Plan |
|
|
|
Accumulated benefit obligation | NA |
| NA |
Fair value of plan assets | NA |
| NA |
Non-qualified Plan |
|
|
|
Accumulated benefit obligation | $ 20,171 |
| $ 16,130 |
Fair value of plan assets | - |
| - |
The following table displays the expected benefit payments in the yearsperiods indicated:
| (Dollars in thousands) | |||||
|---|---|---|---|---|---|
| 2007 | $ | 2,537 | |||
| 2008 | 2,650 | ||||
| 2009 | 4,862 | ||||
| 2010 | 4,978 | ||||
| 2011 | 5,499 | ||||
| Next 5 years | 35,195 | ||||
F-29
(Dollars in thousands) |
|
2009 | $ 7,622 |
2010 | 5,171 |
2011 | 5,604 |
2012 | 5,625 |
2013 | 6,883 |
Next 5 years | 33,229 |
The asset allocation percentages for the qualified benefit plan, by asset category at December 31 are as follows:for the periods indicated:
| Asset Category: | 2006 | 2005 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Equity securities | 59.20 | % | 67.61 | % | |||||||
| Debt securities | 11.50 | % | 31.91 | % | |||||||
| Other | 29.30 | % | 0.48 | % | |||||||
| Total | 100.00 | % | 100.00 | % | |||||||
| At December 31, | ||
Asset Category: | 2008 |
| 2007 |
Equity securities | 42.36% |
| 64.90% |
Debt securities | 28.84% |
| 29.50% |
Cash and short-term investments | 28.80% |
| 5.60% |
Total | 100.00% |
| 100.00% |
Plan assets consist of shares in investment trusts with approximately 42%, 29% and 29% of the underlying assets consisting of equity securities, fixed maturities and cash, respectively. The Company manages the qualified plan investments for U.S. employees. The assets in the plan consist of debt and equity mutual funds. Due to the long term nature of the plan, the target asset allocation consists ofhas historically been 70% equities and 30% bonds.bonds; however, due to recent market conditions, contributions are being invested in short-term securities.
The Company expects to contribute approximately $4.0$5.1 million in 20072009 to the qualified plan.
B. Defined Contribution Plans
Plans.
The Company also maintains both qualified and non-qualified defined contribution plans (“Savings Plan” and “Non-Qualified Savings Plan”, respectively) covering U.S. employees. Under the plans, the Company contributes up to a maximum 3% of the participants’ compensation based on the contribution percentage of the employee. The Non-Qualified Savings Plan provides compensating savings plan benefits for participants whose benefits have been curtailed under the Savings Plan due to Internal Revenue Code limitations. The Company’s incurred expenses related to these plans were $1.4 million, $1.2 million and $1.0 million in 2008, 2007 and 2006, 2005 and 2004.respectively.
In addition, the Company maintains several defined contribution pension plans covering non-U.S. employees. Each non-U.S. office (Canada and Singapore) maintains a separate plan for the non-U.S. employees working in that location. The Company contributes various amounts based on salary, age and/or years of service. The contributions as a percentage of salary for the branch offices range from 6%7.0% to 9%9.5%. The contributions are generally used to purchase pension benefits from local insurance providers. The Company’s incurred expenses related to these plans were $0.2 million in 2006, 2005for 2008, 2007 and 2004.2006.
C. Post-Retirement PlanBeginning January 1, 2002, thePlan.
The Company establishedsponsors the Retiree Health Plan. This plan provides health carehealthcare benefits for eligible retired employees (and their eligible dependants), who have elected coverage. The Company currently anticipates that most covered employees will become eligible for these benefits if they retire while working for the Company. The cost of these benefits is shared with the retiree. The Company accrues the post-retirement benefit expense during the period of the employee’s service.
A health carehealthcare inflation rate for pre-Medicare claims of 10%9% in 20062008 was assumed to decrease to 9% in 2007 and decrease one percentage point annuallygradually to 5% in 20112015 and then remain at that level.
A health carehealthcare inflation rate for post-Medicare claims of 6%7% in 20062008 was assumed to decrease gradually to 5% in 2007 and2015 then remain at that level.
F-30
Effective December 31, 2008, the healthcare inflation rate for pre-Medicare claims is 9% in 2009, decreasing gradually to 5% in 2018. The healthcare inflation rate for post-Medicare claims is 7% in 2009, decreasing gradually to 5% in 2018.
Changes in the assumed health carehealthcare cost trend can have a significant effect on the amounts reported for the health carehealthcare plans. A one percent change in the rate would have the following effects on:
| (Dollars in thousands) | Percentage Point Increase ($ Impact) | Percentage Point Decrease ($ Impact) | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| a. Effect on total service and interest cost components | $ | 258 | $ | (199 | ) | ||||||
| b. Effect on accumulated post-retirement benefit obligation | 1,753 | (1,388 | ) | ||||||||
| Percentage |
| Percentage |
| Point Increase |
| Point Decrease |
(Dollars in thousands) | ($ Impact) |
| ($ Impact) |
a. Effect on total service and interest cost components | $ 295 |
| $ (232) |
b. Effect on accumulated post-retirement benefit obligation | 2,341 |
| (1,869) |
Benefit expense for this plan for the years ended December 31, 2008, 2007 and 2006 2005was $1.4 million, $1.2 million and 2004 was $1.1 million, $0.9 million and $0.8 million, respectively.
The following table summarizes the status of this plan for the years ended December 31 asperiods indicated:
| (Dollars in thousands) | 2006 | 2005 | ||||||
|---|---|---|---|---|---|---|---|---|
| Change in projected benefit obligation: | ||||||||
| Benefit obligation at beginning of year | $ | 8,582 | $ | 7,111 | ||||
| Service cost | 631 | 490 | ||||||
| Interest cost | 464 | 408 | ||||||
| Actuarial (gain) loss | (794 | ) | 607 | |||||
| Benefits paid | (103 | ) | (34 | ) | ||||
| Benefit obligation at end of year | 8,780 | 8,582 | ||||||
Change in plan assets: | ||||||||
| Fair value of plan assets at beginning of year | - | - | ||||||
| Employer contributions | 103 | 34 | ||||||
| Benefits paid | (103 | ) | (34 | ) | ||||
| Fair value of plan assets at end of year | - | - | ||||||
| Funded status at end of year | $ | (8,780 | ) | $ | (8,582 | ) | ||
| At December 31, | ||
(Dollars in thousands) | 2008 |
| 2007 |
Change in projected benefit obligation: |
|
|
|
Benefit obligation at beginning of year | $ 9,832 |
| $ 8,780 |
Service cost | 732 |
| 663 |
Interest cost | 664 |
| 536 |
Actuarial loss (gain) | 1,401 |
| (1) |
Benefits paid | (273) |
| (146) |
Benefit obligation at end of year | 12,356 |
| 9,832 |
|
|
|
|
Change in plan assets: |
|
|
|
Fair value of plan assets at beginning of year | - |
| - |
Employer contributions | 273 |
| 146 |
Benefits paid | (273) |
| (146) |
Fair value of plan assets at end of year | - |
| - |
|
|
|
|
Funded status at end of year | $ (12,356) |
| $ (9,832) |
Amounts recognized in the consolidated balance sheets as December 31:for the periods indicated:
| (Dollars in thousands) | 2006 | ||||
|---|---|---|---|---|---|
| Other liabilities (due within one year) | $ | (117 | ) | ||
| Other liabilities (due beyond one year) | (8,663 | ) | |||
| Net amount recognized in the consolidated balance sheets | $ | (8,780 | ) | ||
| At December 31, | ||
(Dollars in thousands) | 2008 |
| 2007 |
Other liabilities (due within one year) | $ (219) |
| $ (144) |
Other liabilities (due beyond one year) | (12,137) |
| (9,688) |
Net amount recognized in the consolidated balance sheets | $ (12,356) |
| $ (9,832) |
Amounts not yet reflected in net periodic benefit cost and included in accumulated other comprehensive income at December 31:for the periods indicated:
| (Dollars in thousands) | 2006 | ||||
|---|---|---|---|---|---|
| Accumulated other comprehensive loss | $ | (867 | ) | ||
| Net decrease in accumulated other comprehensive income due to FAS 158 | $ | (867 | ) | ||
F-31
| At December 31, | ||
(Dollars in thousands) | 2008 |
| 2007 |
Accumulated loss | $ (2,234) |
| $ (848) |
Accumulated other comprehensive loss | $ (2,234) |
| $ (848) |
Other changes in other comprehensive income for the periods indicated are as follows:
| Years Ended December 31, | ||
(Dollars in thousands) | 2008 |
| 2007 |
Other comprehensive loss at December 31, prior year | $ (848) |
| $ (867) |
Net loss arising during period | (1,401) |
| 1 |
Recognition of amortizations in net periodic benefit cost: |
|
|
|
Actuarial loss | 15 |
| 18 |
Other comprehensive loss at December 31, current year | $ (2,234) |
| $ (848) |
Net periodic benefit cost included the following components for years ended December 31 asthe periods indicated:
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Service cost | $ | 631 | $ | 490 | $ | 419 | |||||||||||
| Interest cost | 464 | 408 | 363 | ||||||||||||||
| Net loss recognition | 50 | 29 | 17 | ||||||||||||||
| Net periodic cost | 1,145 | $ | 927 | $ | 799 | ||||||||||||
| Other changes recognized in other comprehensive income: | |||||||||||||||||
| Other comprehensive loss attributable to change from prior year | 867 | ||||||||||||||||
| Total recognized in net periodic benefit cost and | |||||||||||||||||
| other comprehensive income | $ | 2,012 | |||||||||||||||
| Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
Service cost | $ 732 |
| $ 663 |
| $ 631 |
Interest cost | 664 |
| 536 |
| 464 |
Net loss recognition | 15 |
| 18 |
| 50 |
Net periodic cost | $ 1,411 |
| $ 1,217 |
| $ 1,145 |
|
|
|
|
|
|
Other changes recognized in other comprehensive income: |
|
|
|
|
|
Other comprehensive gain attributable to change from prior year | 1,386 |
| (19) |
|
|
|
|
|
|
|
|
Total recognized in net periodic benefit cost and |
|
|
|
|
|
other comprehensive income | $ 2,797 |
| $ 1,198 |
|
|
The estimated transition obligation, actuarial loss and prior service cost that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $0, $0$0.0 thousand, $68.7 thousand and $0,$0.0 thousand, respectively.
The weighted average discount rates used to determine net periodic benefit cost for 2008 and 2007 were 6.55% and 5.94%, respectively.
The weighted average discount rates used to determine the actuarial present value of the projected benefit obligation for 2006, 2005at year end 2008 and 20042007 were 5.94%, 5.75%6.25% and 5.50%6.55%, respectively.
The following table summarizes the Benefit Obligationbenefit obligation for the post-retirement plan for the years ended December 31 asperiods indicated:
| (Dollars in thousands) | 2006 | 2005 | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Post-retirement Plan | $ | 8,780 | $ | 8,582 | |||||||
| Years Ended December 31, | ||
(Dollars in thousands) | 2008 |
| 2007 |
Post-retirement Plan | $ 12,356 |
| $ 9,832 |
The following table displays the expected benefit payments in the yearsperiods indicated:
| (Dollars in thousands) | |||||
|---|---|---|---|---|---|
| 2007 | $ | 117 | |||
| 2008 | 140 | ||||
| 2009 | 203 | ||||
| 2010 | 263 | ||||
| 2011 | 328 | ||||
| Next 5 years | 2,731 | ||||
(Dollars in thousands) |
|
2009 | $ 219 |
2010 | 298 |
2011 | 378 |
2012 | 453 |
2013 | 538 |
Next 5 years | 4,233 |
13.16. DIVIDEND RESTRICTIONS AND STATUTORY FINANCIAL INFORMATIONA.
Dividend Restrictions
Restrictions.
Delaware law provides that an insurance company which is a member of an insurance holding company system and is domiciled in the state shall not pay dividends without giving prior notice to the Insurance Commissioner of Delaware and may not pay dividends without the approval of the Insurance Commissioner if the value of the proposed dividend, together with all other dividends and distributions made in the preceding twelve months, exceeds the greater of (1) 10% of statutory surplus or (2) net income, not including realized capital gains, each as reported in the prior year’s statutory annual statement. In addition, no dividend may be paid in excess of unassigned earned surplus. At December 31, 2006,2008, Everest Re had $270.4has $315.6 million available for payment of dividends in 20072009 without the need for prior regulatory approval.
F-32
B. Statutory Financial Information
Information.
Everest Re prepares its statutory financial statements in accordance with accounting practices prescribed or permitted by the National Association of Insurance Commissioners (“NAIC”) and the Delaware Insurance Department. Prescribed statutory accounting practices are set forth in the NAIC Accounting Practices and Procedures Manual. The capital and statutory surplus of Everest Re was $2,704.1$2,342.4 million (unaudited) and $2,327.6$2,864.1 million at December 31, 20062008 and 2005,2007, respectively. The statutory net income of Everest Re was $74.4 million, $673.1 million and $298.7 million (unaudited) for the yearyears ended December 31, 2008, 2007 and 2006, the statutory net loss was $26.9 million for the year ended December 31, 2005 and the statutory net income was $175.8 million for the year ended December 31, 2004.respectively.
14.17. CONTINGENCIES
In the ordinary course of business, the Company is involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine the Company’s rights and obligations under insurance, reinsurance and other contractual agreements. In some disputes, the Company seeks to enforce its rights under an agreement or to collect funds owing to it. In other matters, the Company is resisting attempts by others to collect funds or enforce alleged rights. These disputes arise from time to time and as they arise are addressed, and ultimately resolved through both informal and formal means, including negotiated resolution, arbitration and litigation. In all such matters, the Company believes that its positions are legally and commercially reasonable. While the final outcome of these matters cannot be predicted with certainty, the Company does not believe that any of these matters, when finally resolved, will have a material adverse effect on the Company’s financial position or liquidity. However, an adverse resolution of one or more of these items in any one quarter or fiscal year could have a material adverse effect on the Company’s results of operations in that period.
In 1993 and prior, the Company had a business arrangement with The Prudential wherein, for a fee, the Company accepted settled claim payment obligations of certain property and casualty insurers, and, concurrently, became the owner of the annuity or assignee of the annuity proceeds funded by the property and casualty insurers specifically to fulfill these fully settled obligations. In these circumstances, the Company would be liable if The Prudential, which has an A+ (Superior) financial strength rating from A.M. Best Company (“A.M. Best”), werewas unable to make the annuity payments. The estimated cost to replace all such annuities for which the Company was contingently liable at December 31, 20062008 and 20052007, was $150.5$152.1 million and $155.3$150.4 million, respectively.
Prior to its 1995 initial public offering, the Company 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. The estimated cost to replace such annuities at December 31, 20062008 and 20052007, was $20.2$23.1 million and $18.8$21.7 million, respectively.
15.
18. RELATED-PARTY TRANSACTIONS
During the normal course of business, the Company, through its affiliates, engages in reinsurance and brokerage and commission business transactions, which management believes to be at arm’s length, with companies controlled by or affiliated with one or more of its outside directors. Such transactions, individually and in the aggregate, are not material to the Company’s financial condition, results of operation and cash flow.flows.
The Company engages in reinsurance transactions with Bermuda Re and Everest International under which business is ceded for what management believes to be arm’s length consideration. See also Note 10.13.
F-33
16.
19. SEGMENT REPORTING
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 addition to foreign business written through Everest Re’s Miami and New Jersey offices.Jersey.
These segments are managed in a carefully coordinated fashion with strong elements of central control with respect to pricing, risk management, control of aggregate exposures to catastrophe events,exposures, capital, investments and support operations. Management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting results.
Underwriting results include earned premium less losses and LAE incurred, commission and brokerage expenses and other underwriting expenses andexpenses. Underwriting results are analyzedmeasured using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which respectively, divide incurred losses, commission and brokerage and other underwriting expenses by earned premium.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.
Effective January 1, 2004, Everest Re sold the net assets of its United Kingdom branch to Bermuda Re, a Bermuda insurance company and direct subsidiary of Group, for $77.0 million. In connection with the sale, Everest Re provided Bermuda Re with a reserve indemnity agreement providing for indemnity payments of up to 90% of £25 million in the event December 31, 2002 loss and LAE reserves develop adversely. The impact on the financial statements for the year ended December 31, 2004 was a dividend to Group of $26.3 million as net assets sold exceeded the purchase price, an underwriting gain of $10.9 million due to the sale related transactions of the 2003 and 2002 whole account quota shares with Bermuda Re (discussed in Note 10) and an increase in the current period incurred losses of $41.7 million relating to liability under the reserve indemnity agreement with Bermuda Re, exhausting the limit available under this agreement at December 31, 2004.
U.S. Reinsurance | Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
Gross written premiums | $ 957,900 |
| $ 1,193,524 |
| $ 1,336,728 |
Net written premiums | 569,866 |
| 854,801 |
| 992,819 |
|
|
|
|
|
|
Premiums earned | $ 685,075 |
| $ 939,684 |
| $ 978,072 |
Incurred losses and LAE | 559,985 |
| 636,895 |
| 721,157 |
Commission and brokerage | 159,677 |
| 230,540 |
| 202,809 |
Other underwriting expenses | 32,180 |
| 33,275 |
| 24,947 |
Underwriting (loss) gain | $ (66,767) |
| $ 38,974 |
| $ 29,159 |
U.S. Insurance | Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
Gross written premiums | $ 771,798 |
| $ 885,604 |
| $ 866,294 |
Net written premiums | 398,723 |
| 479,812 |
| 591,177 |
|
|
|
|
|
|
Premiums earned | $ 482,729 |
| $ 496,166 |
| $ 573,965 |
Incurred losses and LAE | 422,183 |
| 412,669 |
| 432,232 |
Commission and brokerage | 68,238 |
| 64,349 |
| 72,723 |
Other underwriting expenses | 64,324 |
| 58,216 |
| 48,918 |
Underwriting (loss) gain | $ (72,016) |
| $ (39,068) |
| $ 20,092 |
The following tables represent the relevant underwriting results for the operating segments for the three years ended December 31:F-36
| U.S. Reinsurance | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| Gross written premiums | $ | 1,336,728 | $ | 1,386,170 | $ | 1,478,159 | |||||
| Net written premiums | 992,819 | 1,055,815 | 1,148,522 | ||||||||
Premiums earned | $ | 978,072 | $ | 1,080,453 | $ | 1,155,317 | |||||
| Incurred losses and loss adjustment expenses | 721,157 | 1,152,427 | 947,467 | ||||||||
| Commission and brokerage | 202,809 | 259,751 | 274,370 | ||||||||
| Other underwriting expenses | 24,947 | 23,980 | 23,390 | ||||||||
| Underwriting gain (loss) | $ | 29,159 | $ | (355,705 | ) | $ | (89,910 | ) | |||
F-34
| U.S. Insurance | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| Gross written premiums | $ | 866,294 | $ | 932,469 | $ | 1,167,808 | |||||
| Net written premiums | 591,177 | 618,752 | 788,457 | ||||||||
Premiums earned | $ | 573,965 | $ | 636,663 | $ | 726,344 | |||||
| Incurred losses and loss adjustment expenses | 432,232 | 415,379 | 540,734 | ||||||||
| Commission and brokerage | 72,723 | 93,621 | 70,881 | ||||||||
| Other underwriting expenses | 48,918 | 51,726 | 49,286 | ||||||||
| Underwriting gain | $ | 20,092 | $ | 75,937 | $ | 65,443 | |||||
Specialty Underwriting | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| Gross written premiums | $ | 251,209 | $ | 314,630 | $ | 487,072 | |||||
| Net written premiums | 174,431 | 222,526 | 364,256 | ||||||||
Premiums earned | $ | 176,326 | $ | 224,555 | $ | 356,705 | |||||
| Incurred losses and loss adjustment expenses | 125,160 | 225,740 | 249,086 | ||||||||
| Commission and brokerage | 44,851 | 55,564 | 94,680 | ||||||||
| Other underwriting expenses | 6,559 | 6,756 | 7,069 | ||||||||
| Underwriting (loss) gain | $ | (244 | ) | $ | (63,505 | ) | $ | 5,870 | |||
International | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| Gross written premiums | $ | 731,745 | $ | 706,584 | $ | 687,657 | |||||
| Net written premiums | 531,834 | 498,557 | 491,732 | ||||||||
Premiums earned | $ | 518,837 | $ | 484,405 | $ | 471,970 | |||||
| Incurred losses and loss adjustment expenses | 278,530 | 409,274 | 316,517 | ||||||||
| Commission and brokerage | 118,122 | 104,458 | 106,606 | ||||||||
| Other underwriting expenses | 13,830 | 12,621 | 11,298 | ||||||||
| Underwriting gain (loss) | $ | 108,355 | $ | (41,948 | ) | $ | 37,549 | ||||
F-35
Specialty Underwriting | Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
Gross written premiums | $ 260,422 |
| $ 270,081 |
| $ 251,209 |
Net written premiums | 167,677 |
| 185,350 |
| 174,431 |
|
|
|
|
|
|
Premiums earned | $ 168,399 |
| $ 184,894 |
| $ 176,326 |
Incurred losses and LAE | 116,277 |
| 118,324 |
| 125,160 |
Commission and brokerage | 40,948 |
| 44,278 |
| 44,851 |
Other underwriting expenses | 8,055 |
| 8,464 |
| 6,559 |
Underwriting gain (loss) | $ 3,119 |
| $ 13,828 |
| $ (244) |
International | Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
Gross written premiums | $ 904,668 |
| $ 805,872 |
| $ 731,745 |
Net written premiums | 539,096 |
| 552,963 |
| 531,834 |
|
|
|
|
|
|
Premiums earned | $ 545,579 |
| $ 558,156 |
| $ 518,837 |
Incurred losses and LAE | 367,115 |
| 339,686 |
| 278,530 |
Commission and brokerage | 129,747 |
| 126,745 |
| 118,122 |
Other underwriting expenses | 19,780 |
| 18,633 |
| 13,830 |
Underwriting gain | $ 28,937 |
| $ 73,092 |
| $ 108,355 |
The following table reconciles the underwriting results for the operating segments to (loss) income (loss) before taxtaxes as reported in the consolidated statements of operations and comprehensive (loss) income for the three years ended December 31:periods indicated:
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| Underwriting gain (loss) | $ | 157,362 | $ | (385,221 | ) | $ | 18,952 | ||||
| UK branch sale and related transactions | - | - | (30,714 | ) | |||||||
| Underwriting gain (loss) | $ | 157,362 | (385,221 | ) | $ | (11,762 | ) | ||||
Net investment income | 372,352 | 325,217 | 329,184 | ||||||||
| Net realized capital gain | 34,957 | 64,568 | 56,710 | ||||||||
| Corporate (expense) income | (4,475 | ) | (6,241 | ) | 1,969 | ||||||
| Interest, fee and bond issue cost amortization expense | (69,696 | ) | (74,197 | ) | (76,610 | ) | |||||
| Other (expense) income | (40,542 | ) | 10,344 | (67,881 | ) | ||||||
| Income (loss) before taxes | $ | 449,958 | $ | (65,530 | ) | $ | 231,610 | ||||
| Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
Underwriting (loss) gain | $ (106,727) |
| $ 86,826 |
| $ 157,362 |
Net investment income | 363,053 |
| 406,592 |
| 372,352 |
Net realized capital (losses) gains | (489,186) |
| 80,887 |
| 34,957 |
Corporate expense | (5,587) |
| (5,328) |
| (4,475) |
Interest, fee and bond issue cost amortization expense | (78,979) |
| (91,059) |
| (69,696) |
Other income (expense) | 57,921 |
| (73,641) |
| (40,542) |
(Loss) income before taxes | $ (259,505) |
| $ 404,277 |
| $ 449,958 |
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. OtherBased on written premium, other than the U.S., no other country represented more than 5% of the Company’s revenues.
Approximately 18.1%21.6%, 18.5%16.1% and 17.5%18.1% of the Company’s gross written premiums in 2006, 20052008, 2007 and 2004,2006, respectively, were sourced through the Company’s largest intermediary.
17.
20. SUBSEQUENT EVENT
On March 19, 2009, Group announced the commencement of a cash tender offer for any and all of the 6.60% Fixed to Floating Rate Long Term Subordinated Notes due 2067, which were issued by the Company, at a price of $500 per $1,000 principal amount plus accrued and unpaid interest. The offer expired at 5:00 p.m., New York City time, on March 26, 2009. Upon expiration, the Company had purchased $161.4 million
face amount of the $400 million debt securities. The Company estimates the pre-tax gain to be $74 million, which will be reflected in the first quarter 2009 results. See also Note 7.
21. UNAUDITED QUARTERLY FINANCIAL DATA
Summarized quarterly financial data for the years indicated were as follows:periods indicated:
| (Dollars in thousands) | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2006 Operating data: | ||||||||||||||
| Gross written premiums | $ | 851,951 | $ | 690,330 | $ | 846,176 | $ | 797,518 | ||||||
| Net written premiums | 626,251 | 476,222 | 621,867 | 565,921 | ||||||||||
Premiums earned | 603,678 | 501,488 | 561,042 | 580,992 | ||||||||||
| Net investment income | 83,905 | 91,922 | 84,744 | 111,781 | ||||||||||
| Net realized capital gain | 9,020 | 2,204 | 9,025 | 14,708 | ||||||||||
| Total claims and underwriting expenses | 610,392 | 427,637 | 458,454 | 597,830 | ||||||||||
| Net income | 43,505 | 121,382 | 114,931 | 53,088 | ||||||||||
2005 Operating data: | ||||||||||||||
| Gross written premiums | $ | 879,484 | $ | 940,139 | $ | 825,264 | $ | 694,966 | ||||||
| Net written premiums | 648,640 | 675,591 | 630,040 | 441,379 | ||||||||||
Premiums earned | 619,006 | 668,325 | 617,750 | 520,995 | ||||||||||
| Net investment income | 85,922 | 89,070 | 67,585 | 82,640 | ||||||||||
| Net realized capital gain | 1,485 | 18,203 | 18,633 | 26,247 | ||||||||||
| Total claims and underwriting expenses | 576,204 | 608,196 | 895,656 | 737,482 | ||||||||||
| Net income (loss) | 86,913 | 118,925 | (173,552 | ) | (27,580 | ) | ||||||||
F-36
| EVEREST REINSURANCE HOLDINGS, INC. SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 2006 | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
Column A | Column B | Column C | Column D | ||||||||
| (Dollars in thousands) | Cost | Market Value | Amount Shown in Balance Sheet | ||||||||
| Fixed maturities-available for sale | |||||||||||
| Bonds: | |||||||||||
| U.S. government and government agencies | $ | 85,563 | $ | 85,058 | $ | 85,058 | |||||
| State, municipalities and political subdivisions | 3,633,188 | 3,792,371 | 3,792,371 | ||||||||
| Foreign government securities | 354,153 | 370,147 | 370,147 | ||||||||
| Foreign corporate securities | 449,505 | 454,328 | 454,328 | ||||||||
| Public utilities | 105,461 | 108,497 | 108,497 | ||||||||
| All other corporate bonds | 846,218 | 850,022 | 850,022 | ||||||||
| Mortgage pass-through securities | 475,140 | 466,499 | 466,499 | ||||||||
| Redeemable preferred stock | 10,000 | 10,488 | 10,488 | ||||||||
| Total fixed maturities-available for sale | 5,959,228 | 6,137,410 | 6,137,410 | ||||||||
| Equity securities | 874,289 | 1,189,341 | 1,189,341 | ||||||||
| Short-term investments | 657,674 | 657,674 | 657,674 | ||||||||
| Other invested assets | 329,914 | 330,875 | 330,875 | ||||||||
| Cash | 136,535 | 136,535 | 136,535 | ||||||||
| Total investments and cash | $ | 7,957,640 | $ | 8,451,835 | $ | 8,451,835 | |||||
| 2008 | |||
(Dollars in thousands) | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter |
|
|
|
|
|
Operating data: |
|
|
|
|
Gross written premiums | $ 685,468 | $ 694,511 | $ 778,137 | $ 736,672 |
Net written premiums | 410,796 | 425,744 | 424,438 | 414,384 |
|
|
|
|
|
Premiums earned | 500,030 | 471,414 | 449,892 | 460,446 |
Net investment income | 87,977 | 106,981 | 97,305 | 70,790 |
Net realized capital losses | (101,900) | (50,795) | (108,652) | (227,839) |
Total claims and underwriting expenses | 451,869 | 501,427 | 553,581 | 487,219 |
Net income (loss) | 4,640 | 13,652 | (78,899) | (64,150) |
|
|
|
|
|
| 2007 | |||
(Dollars in thousands) | 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter |
|
|
|
|
|
Operating data: |
|
|
|
|
Gross written premiums | $ 799,750 | $ 712,310 | $ 839,833 | $ 803,188 |
Net written premiums | 558,286 | 495,851 | 602,753 | 416,036 |
|
|
|
|
|
Premiums earned | 569,838 | 565,426 | 561,150 | 482,486 |
Net investment income | 95,934 | 106,852 | 105,023 | 98,783 |
Net realized capital gains (losses) | 33,874 | 89,585 | 22,121 | (64,693) |
Total claims and underwriting expenses | 464,737 | 464,373 | 488,715 | 679,577 |
Net income (loss) | 159,318 | 185,191 | 110,569 | (150,887) |
SCHEDULE I - SUMMARY OF INVESTMENTS - |
|
|
|
|
|
OTHER THAN INVESTMENTS IN RELATED PARTIES |
|
|
|
|
|
DECEMBER 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
Column A | Column B |
| Column C |
| Column D |
|
|
|
|
| Amount |
|
|
|
|
| Shown in |
|
|
| Market |
| Balance |
(Dollars in thousands) | Cost |
| Value |
| Sheet |
Fixed maturities-available for sale |
|
|
|
|
|
Bonds: |
|
|
|
|
|
U.S. government and government agencies | $ 139,776 |
| $ 155,232 |
| $ 155,232 |
State, municipalities and political subdivisions | 3,846,754 |
| 3,795,718 |
| 3,795,718 |
Foreign government securities | 467,935 |
| 492,697 |
| 492,697 |
Foreign corporate securities | 428,059 |
| 405,414 |
| 405,414 |
Public utilities | 17,484 |
| 16,897 |
| 16,897 |
All other corporate bonds | 384,035 |
| 353,140 |
| 353,140 |
Mortgage pass-through securities | 231,631 |
| 217,117 |
| 217,117 |
Redeemable preferred stock | 94,809 |
| 75,641 |
| 75,641 |
Total fixed maturities-available for sale | 5,610,483 |
| 5,511,856 |
| 5,511,856 |
Fixed maturities - available for sale, at fair value(1) | 41,616 |
| 43,090 |
| 43,090 |
Equity securities - available for sale, at market value | 15 |
| 16 |
| 16 |
Equity securities - available for sale, at fair value(1) | 135,904 |
| 119,815 |
| 119,815 |
Short-term investments | 918,712 |
| 918,712 |
| 918,712 |
Other invested assets | 400,498 |
| 392,589 |
| 392,589 |
Other invested assets, at fair value (1) | 392,329 |
| 316,750 |
| 316,750 |
Cash | 92,264 |
| 92,264 |
| 92,264 |
|
|
|
|
|
|
Total investments and cash | $ 7,591,821 |
| $ 7,395,092 |
| $ 7,395,092 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) Original cost does not reflect fair value adjustments, which have been realized through the statements of operations and comprehensive income. | |||||
EVEREST REINSURANCE HOLDINGS, INC. SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT CONDENSED BALANCE SHEETS | ||||||||
|---|---|---|---|---|---|---|---|---|
| December 31, | ||||||||
| (Dollars in thousands, except par value per share) | 2006 | 2005 | ||||||
ASSETS: | ||||||||
| Equity securities, at market value (cost: 2006 $16,393; 2005 $16,393) | $ | 16,393 | $ | 16,393 | ||||
| Short-term investments | 74,790 | 26,653 | ||||||
| Cash | 360 | 222 | ||||||
| Investment in subsidiaries, at equity in the underlying net assets | 3,102,649 | 2,724,925 | ||||||
| Accrued investment income | 131 | 280 | ||||||
| Deferred tax asset | - | 4,103 | ||||||
| Current federal income tax receivable | 9,410 | 2,360 | ||||||
| Other assets | 20,693 | 22,431 | ||||||
| TOTAL ASSETS | $ | 3,224,426 | $ | 2,797,367 | ||||
| LIABILITIES: | ||||||||
| 8.75% Senor notes due 3/15/2010 | $ | 199,560 | $ | 199,446 | ||||
| 5.4% Senior notes due 10/15/2014 | 249,652 | 249,617 | ||||||
| Junior subordinated debt securities | 546,393 | 546,393 | ||||||
| Accrued interest on debt and borrowings | 10,041 | 10,041 | ||||||
| Due to affiliates | 363 | 1,085 | ||||||
| Other liabilities | 33 | 84 | ||||||
| Total liabilities | 1,006,042 | 1,006,666 | ||||||
| STOCKHOLDER'S EQUITY: | ||||||||
| Common stock, par value: $0.01; 3,000 shares authorized; | ||||||||
| 1,000 shares issued and outstanding (2006 and 2005) | - | - | ||||||
| Additional paid-in capital | 300,764 | 292,281 | ||||||
| Accumulated other comprehensive income, net of deferred income | ||||||||
| taxes of $0.0 million at 2006 and $0.0 million at 2005 | 332,578 | 246,285 | ||||||
| Retained earnings | 1,585,042 | 1,252,135 | ||||||
| Total stockholder's equity | 2,218,384 | 1,790,701 | ||||||
| TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY | $ | 3,224,426 | $ | 2,797,367 | ||||
| See notes to consolidated financial statements | ||||||||
SCHEDULE II - CONDENSED FINANCIAL INFORMATION |
|
|
|
OF THE REGISTRANT CONDENSED BALANCE SHEETS |
|
|
|
|
|
|
|
|
|
|
|
| At December 31, | ||
(Dollars in thousands, except par value per share) | 2008 |
| 2007 |
ASSETS: |
|
|
|
Other invested assets, at market value | $ 12,943 |
| $ 12,941 |
Other invested assets, at fair value | 316,750 |
| 253,791 |
Short-term investments | 271,830 |
| 176,274 |
Cash | 284 |
| 916 |
Investment in subsidiaries, at equity in the underlying net assets | 2,710,192 |
| 3,248,507 |
Accrued investment income | 217 |
| 494 |
Deferred tax asset | 22,093 |
| - |
Current federal income tax receivable | 46,130 |
| 54,240 |
Other assets | 14,397 |
| 16,294 |
TOTAL ASSETS | $ 3,394,836 |
| $ 3,763,457 |
|
|
|
|
LIABILITIES: |
|
|
|
8.75% Senor notes due 3/15/2010 | $ 199,821 |
| $ 199,685 |
5.4% Senior notes due 10/15/2014 | 249,728 |
| 249,689 |
6.6% Long term notes due 5/1/2067 | 399,643 |
| 399,639 |
Junior subordinated debt securities | 329,897 |
| 329,897 |
Accrued interest on debt and borrowings | 11,217 |
| 11,217 |
Due to subsidiaries | 889 |
| 1,351 |
Other liabilities | 673 |
| 4,480 |
Total liabilities | 1,191,868 |
| 1,195,958 |
|
|
|
|
STOCKHOLDER'S EQUITY: |
|
|
|
Common stock, par value: $0.01; 3,000 shares authorized; |
|
|
|
1,000 shares issued and outstanding (2008 and 2007) | - |
| - |
Additional paid-in capital | 315,771 |
| 310,206 |
Accumulated other comprehensive income, net of deferred income |
|
|
|
tax benefit of $0.0 million at 2008 and $0.0 million at 2007 | (72,063) |
| 163,276 |
Retained earnings | 1,959,260 |
| 2,094,017 |
Total stockholder's equity | 2,202,968 |
| 2,567,499 |
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY | $ 3,394,836 |
| $ 3,763,457 |
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements. |
|
|
|
EVEREST REINSURANCE HOLDINGS, INC. SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT CONDENSED STATEMENTS OF OPERATIONS | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
Years Ended December 31, | |||||||||||
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| REVENUES: | |||||||||||
| Net investment income | $ | 2,793 | $ | 4,638 | $ | 29,752 | |||||
| Net realized capital gains | - | 8,106 | 6,466 | ||||||||
| Other expense | (94 | ) | (1,891 | ) | (556 | ) | |||||
| Equity in earnings of subsidiaries | 381,135 | 55,424 | 193,224 | ||||||||
| Total revenues | 383,834 | 66,277 | 228,886 | ||||||||
| EXPENSES: | |||||||||||
| Interest expense | 69,696 | 74,197 | 76,611 | ||||||||
| Other expense | 1,782 | 2,002 | 1,492 | ||||||||
| Total expenses | 71,478 | 76,199 | 78,103 | ||||||||
| INCOME (LOSS) BEFORE TAXES | 312,356 | (9,922 | ) | 150,783 | |||||||
Income tax benefit | (20,550 | ) | (14,628 | ) | (24,690 | ) | |||||
| NET INCOME | $ | 332,906 | $ | 4,706 | $ | 175,473 | |||||
| See notes to consolidated financial statements | |||||||||||
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF THE |
|
|
|
| |
REGISTRANT CONDENSED STATEMENTS OF OPERATIONS |
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
|
|
|
|
|
|
REVENUES: |
|
|
|
|
|
Net investment income | $ 11,863 |
| $ 17,756 |
| $ 2,793 |
Net realized capital (losses) gains | (87,786) |
| 12,207 |
| - |
Other expense | (186) |
| (148) |
| (94) |
Net (loss) income of subsidiaries | (23,542) |
| 345,936 |
| 381,135 |
Total revenues | (99,651) |
| 375,751 |
| 383,834 |
|
|
|
|
|
|
EXPENSES: |
|
|
|
|
|
Interest expense | 78,979 |
| 91,059 |
| 69,696 |
Other expense | 3,219 |
| 3,456 |
| 1,782 |
Total expenses | 82,198 |
| 94,515 |
| 71,478 |
|
|
|
|
|
|
(LOSS) INCOME BEFORE TAXES | (181,849) |
| 281,236 |
| 312,356 |
Income tax benefit | (57,092) |
| (22,955) |
| (20,550) |
|
|
|
|
|
|
NET (LOSS) INCOME | $ (124,757) |
| $ 304,191 |
| $ 332,906 |
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements. | |||||
EVEREST REINSURANCE HOLDINGS, INC. SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT CONDENSED STATEMENTS OF CASH FLOWS | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
Years Ended December 31, | |||||||||||
| (Dollars in thousands) | 2006 | 2005 | 2004 | ||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
| Net income | $ | 332,906 | $ | 4,706 | $ | 175,473 | |||||
| Adjustments to reconcile net income to net cash provided | |||||||||||
| by operating activities: | |||||||||||
| Equity in earnings of subsidiaries | (381,135 | ) | (55,424 | ) | (193,224 | ) | |||||
| Dividends received from subsidiaries(1) | 100,000 | 75,000 | 70,000 | ||||||||
| Decrease in other assets and liabilities | 1,836 | 515 | 1,491 | ||||||||
| (Decrease) increase in accrued interest on debt and borrowings | - | (6,385 | ) | 2,730 | |||||||
| (Increase) decrease in federal income tax recoverable | (7,050 | ) | 11,898 | - | |||||||
| Decrease (increase) in deferred tax asset | 4,103 | (1,839 | ) | (13,567 | ) | ||||||
| Decrease in due to affiliates | (722 | ) | (407 | ) | - | ||||||
| Accrual of bond discount | - | (974 | ) | (807 | ) | ||||||
| Amortization of underwriting discount on senior notes | 149 | 162 | 204 | ||||||||
| Realized capital gains | - | (8,106 | ) | (6,466 | ) | ||||||
| Net cash provided by operating activities | 50,087 | 19,146 | 35,834 | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
| Additional investment in subsidiaries(1) | (1,925 | ) | (175,000 | ) | (140,000 | ) | |||||
| Proceeds (cost) from equity securities sold (acquired) | - | 47,821 | (44,566 | ) | |||||||
| Net (sales) purchases of short-term securities | (48,137 | ) | 318,735 | (321,457 | ) | ||||||
| UK branch sale | - | - | (26,262 | ) | |||||||
| Net cash (used in) provided by investing activities | (50,062 | ) | 191,556 | (532,285 | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
| Dividends from treasury stock | - | 199 | 181 | ||||||||
| Sale of treasury stock | - | 38,261 | - | ||||||||
| Repayments on revolving credit agreement | - | - | (70,000 | ) | |||||||
| (Repayment) issuance of senior notes | - | (250,000 | ) | 246,651 | |||||||
| Issuance of junior subordinated debt securities, net | - | - | 319,997 | ||||||||
| Tax benefit from share-based compensation | 113 | 211 | - | ||||||||
| Net cash provided by (used in) financing activities | 113 | (211,329 | ) | 496,829 | |||||||
| Net increase (decrease) in cash | 138 | (627 | ) | 378 | |||||||
| Cash, beginning of period | 222 | 849 | 471 | ||||||||
| Cash, end of period | $ | 360 | $ | 222 | $ | 849 | |||||
| Non-cash financing transaction: | |||||||||||
| Non-cash contribution from parent | $ | 8,370 | $ | 4,907 | $ | 8,181 | |||||
| Non-cash contribution to subsidiaries | $ | (8,370 | ) | $ | (4,907 | ) | $ | (8,181 | ) | ||
See notes to consolidated financial statements | |||||||||||
(1)Dividends received from consolidated subsidiaries (i.e., dividend income) have been appropriately classified as operating activity in 2006, with conforming changes for 2005 and 2004, which were previously recorded as a financing activity. | |||||||||||
SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF THE |
|
|
|
| |
REGISTRANT CONDENSED STATEMENTS OF CASH FLOWS |
|
|
|
| |
|
|
|
|
|
|
| Years Ended December 31, | ||||
(Dollars in thousands) | 2008 |
| 2007 |
| 2006 |
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
Net (loss) income | $ (124,757) |
| $ 304,191 |
| $ 332,906 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
Equity in retained earnings of subsidiaries | 23,542 |
| (345,936) |
| (381,135) |
Dividends received from subsidiaries | 285,000 |
| 245,000 |
| 100,000 |
Change in other assets and liabilities | 2,657 |
| 5,151 |
| 1,836 |
Increase in accrued interest on debt and borrowings | - |
| 1,176 |
| - |
Decrease (increase) in federal income tax recoverable | 8,110 |
| (44,830) |
| (7,050) |
(Increase) decrease in deferred tax asset | (26,383) |
| 4,290 |
| 4,103 |
(Decrease) increase in due to/from affiliates | (463) |
| 988 |
| (722) |
Accrual of bond discount | - |
| (7,255) |
| - |
Amortization of underwriting discount on senior notes | 179 |
| 164 |
| 149 |
Realized capital losses (gains) | 87,786 |
| (12,207) |
| - |
Net cash provided by operating activities | 255,671 |
| 150,732 |
| 50,087 |
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
Additional investment in subsidiaries | - |
| - |
| (1,925) |
Proceeds from equity securities sold-available for sale, market value | - |
| 6,496 |
| - |
Net change of short-term securities | (95,556) |
| (94,229) |
| (48,137) |
Cost to aquire other invested assets | (150,747) |
| (241,584) |
| - |
Net cash used in investing activities | (246,303) |
| (329,317) |
| (50,062) |
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
Dividends to stockholder | (10,000) | �� | - |
| - |
Redemption of junior subordinated debt securities | - |
| (216,496) |
| - |
Net proceeds from issuance of long term subordinated notes | - |
| 395,637 |
| - |
Tax benefit from share-based compensation | - |
| - |
| 113 |
Net cash (used in) provided by financing activities | (10,000) |
| 179,141 |
| 113 |
|
|
|
|
|
|
Net (decrease) increase in cash | (632) |
| 556 |
| 138 |
Cash, beginning of period | 916 |
| 360 |
| 222 |
Cash, end of period | $ 284 |
| $ 916 |
| $ 360 |
|
|
|
|
|
|
Non-cash financing transaction: |
|
|
|
|
|
Non-cash contribution from parent | $ 5,565 |
| $ 9,442 |
| $ 8,370 |
Non-cash contribution to subsidiaries | $ (5,565) | $ (9,442) | $ (8,370) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements. |
|
|
|
|
|
S-4
EVEREST REINSURANCE HOLDINGS, INC. SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION | |||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Column A | Column B | Column C | Column D | Column E | Column F | Column G | Column H | Column I | Column J | ||||||||||||||||||||
| Geographic Area (Dollars in thousands) | Deferred Acquisition Costs | Reserve for Losses and Loss Adjustment Expenses | Unearned Premium Reserves | Premiums Earned | Net Investment Income | Incurred Loss and Loss Adjustment Expenses | Amortization of Deferred Acquisition Costs | Other Operating Expenses | Net Written Premium | ||||||||||||||||||||
| December 31, 2006 | |||||||||||||||||||||||||||||
| Domestic | $ | 189,060 | $ | 6,430,793 | $ | 1,228,509 | $ | 1,728,363 | $ | 339,388 | $ | 1,278,549 | $ | 320,383 | $ | 84,899 | $ | 1,758,427 | |||||||||||
| International | 51,286 | 966,477 | 195,168 | 518,837 | 32,964 | 278,530 | 118,122 | 13,830 | 531,834 | ||||||||||||||||||||
| Total | $ | 240,346 | $ | 7,397,270 | $ | 1,423,677 | $ | 2,247,200 | $ | 372,352 | $ | 1,557,079 | $ | 438,505 | $ | 98,729 | $ | 2,290,261 | |||||||||||
| December 31, 2005 | |||||||||||||||||||||||||||||
| Domestic | $ | 153,603 | $ | 6,657,546 | $ | 1,203,970 | $ | 1,941,671 | $ | 296,796 | $ | 1,793,546 | $ | 408,936 | $ | 88,703 | $ | 1,897,093 | |||||||||||
| International | 48,623 | 1,071,625 | 183,906 | 484,405 | 28,421 | 409,274 | 104,458 | 12,621 | 498,557 | ||||||||||||||||||||
| Total | $ | 202,226 | $ | 7,729,171 | $ | 1,387,876 | $ | 2,426,076 | $ | 325,217 | $ | 2,202,820 | $ | 513,394 | $ | 101,324 | $ | 2,395,650 | |||||||||||
| December 31, 2004 | |||||||||||||||||||||||||||||
| Domestic | $ | 163,600 | $ | 5,986,100 | $ | 1,226,099 | $ | 2,357,181 | $ | 305,707 | $ | 1,855,854 | $ | 470,893 | $ | 77,776 | $ | 2,440,986 | |||||||||||
| International | 40,524 | 860,804 | 161,073 | 471,970 | 23,477 | 316,517 | 106,606 | 11,298 | 491,732 | ||||||||||||||||||||
| Total | $ | 204,124 | $ | 6,846,904 | $ | 1,387,172 | $ | 2,829,151 | $ | 329,184 | $ | 2,172,371 | $ | 577,499 | $ | 89,074 | $ | 2,932,718 | |||||||||||
S-5
EVEREST REINSURANCE HOLDINGS, INC. SCHEDULE IV - REINSURANCE | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Column A | Column B | Column C | Column D | Column E | Column F | ||||||||||||
| (Dollars in thousands) | Gross Amount | Ceded to Other Companies | Assumed from Other Companies | Net Amount | Assumed to Net | ||||||||||||
| December 31, 2006 | |||||||||||||||||
| Total property and liability | |||||||||||||||||
| insurance premiums earned | $ | 961,133 | $ | 902,994 | $ | 2,189,061 | $ | 2,247,200 | 97.4 | % | |||||||
December 31, 2005 | |||||||||||||||||
| Total property and liability | |||||||||||||||||
| insurance premiums earned | $ | 1,019,288 | $ | 914,468 | $ | 2,321,256 | $ | 2,426,076 | 95.8 | % | |||||||
December 31, 2004 | |||||||||||||||||
| Total property and liability | |||||||||||||||||
| insurance premiums earned | $ | 1,142,632 | $ | 871,479 | $ | 2,557,998 | $ | 2,829,151 | 90.4 | % | |||||||
S-6
EVEREST REINSURANCE HOLDINGS, INC. |
|
|
|
|
|
|
| ||
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Column A | Column B | Column C | Column D | Column E | Column F | Column G | Column H | Column I | Column J |
|
| Reserve |
|
|
| Incurred |
|
|
|
Geographic Area |
| for Losses |
|
|
| Loss and | Amortization |
|
|
| Deferred | and Loss | Unearned |
| Net | Loss | of Deferred | Other | Net |
| Acquisition | Adjustment | Premium | Premiums | Investment | Adjustment | Acquisition | Operating | Written |
(Dollars in thousands) | Costs | Expenses | Reserves | Earned | Income | Expenses | Costs | Expenses | Premium |
December 31, 2008 |
|
|
|
|
|
|
|
|
|
Domestic | $ 137,021 | $ 6,279,851 | $ 962,884 | $ 1,336,203 | $ 323,896 | $ 1,098,445 | $ 268,863 | $ 110,146 | $ 1,136,266 |
International | 55,075 | 1,140,142 | 213,950 | 545,579 | 39,157 | 367,115 | 129,747 | 19,780 | 539,096 |
Total | $ 192,096 | $ 7,419,993 | $ 1,176,834 | $ 1,881,782 | $ 363,053 | $ 1,465,560 | $ 398,610 | $ 129,926 | $ 1,675,362 |
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
|
|
|
|
|
|
|
|
|
Domestic | $ 182,501 | $ 6,383,401 | $ 1,159,409 | $ 1,620,744 | $ 367,646 | $ 1,167,888 | $ 339,167 | $ 105,283 | $ 1,519,963 |
International | 52,218 | 1,155,303 | 208,687 | 558,156 | 38,946 | 339,686 | 126,745 | 18,633 | 552,963 |
Total | $ 234,719 | $ 7,538,704 | $ 1,368,096 | $ 2,178,900 | $ 406,592 | $ 1,507,574 | $ 465,912 | $ 123,916 | $ 2,072,926 |
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
|
|
|
|
|
|
|
Domestic | $ 189,060 | $ 6,430,793 | $ 1,228,509 | $ 1,728,363 | $ 339,388 | $ 1,278,549 | $ 320,383 | $ 84,899 | $ 1,758,427 |
International | 51,286 | 966,477 | 195,168 | 518,837 | 32,964 | 278,530 | 118,122 | 13,830 | 531,834 |
Total | $ 240,346 | $ 7,397,270 | $ 1,423,677 | $ 2,247,200 | $ 372,352 | $ 1,557,079 | $ 438,505 | $ 98,729 | $ 2,290,261 |
SCHEDULE IV - REINSURANCE |
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Column A | Column B | Column C | Column D | Column E | Column F |
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| Ceded to | Assumed |
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| Gross | Other | from Other | Net | Assumed |
(Dollars in thousands) | Amount | Companies | Companies | Amount | to Net |
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December 31, 2008 |
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Total property and liability |
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insurance premiums earned | $ 839,251 | $ 1,192,850 | $ 2,235,381 | $ 1,881,782 | 118.8% |
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December 31, 2007 |
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Total property and liability |
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insurance premiums earned | $ 899,328 | $ 1,043,126 | $ 2,322,698 | $ 2,178,900 | 106.6% |
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December 31, 2006 |
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Total property and liability |
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insurance premiums earned | $ 961,133 | $ 902,994 | $ 2,189,061 | $ 2,247,200 | 97.4% |