UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED:

September

SEPTEMBER 30, 2008

2009

Commission file number:

1-14527


EVEREST REINSURANCE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware22-3263609

EVEREST REINSURANCE HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware

22-3263609

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

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)

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.

YES

X

NO


Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or shorter period that the registrant was required to submit and post such files).

YES

NO


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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)

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.

YES

X

NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

Accelerated filer

Non-accelerated filer

X

Smaller reporting company

(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

YES

NO

X


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

YES		NOX

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class

Number of Shares Outstanding

at

ClassAt November 1, 2008

2009

Common Stock, $.01Shares, $0.01 par value

1,000

The Registrant meets the conditions set forth in General Instruction H (1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format permitted by General Instruction H of Form 10-Q.


The Registrant meets the conditions set forth in General Instruction H (1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format permitted by General Instruction H of Form 10-Q.


EVEREST REINSURANCE HOLDINGS, INC.

Index To

Table of Contents
Form 10-Q

Page

PART I

FINANCIAL INFORMATION

Item 1.

Financial Statements

Consolidated Balance Sheets at September 30, 20082009 (unaudited) and
December 31, 2007

2008

1

Consolidated Statements of Operations and Comprehensive Income (Loss) Income

for

for

the three and nine months ended September 30, 2009 and 2008 and 2007 (unaudited)

2

Consolidated Statements of Changes in Stockholder’s Equity for the

three

three

and nine months ended September 30, 2009 and 2008 and 2007 (unaudited)

3

Consolidated Statements of Cash Flows for the three and nine months

ended September 30, 2009 and 2008 and 2007 (unaudited)

4

Notes to Consolidated Interim Financial Statements (unaudited)

5

Item 2.

Management’s Discussion and Analysis of Financial Condition and
Results of Operation

20

25

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

39

44

Item 4.

Controls and Procedures

39

44

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

40

44

Item 1A.

Risk Factors

40

44

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

40

44

Item 3.

Defaults Upon Senior Securities

40

44

Item 4.

Submission of Matters to a Vote of Security Holders

40

44

Item 5.

Other Information

41

45

Item 6.

Exhibits

41

45


 

PART I

 

 

 

 

 

 

 

 

 


Part I

ITEM  1.  FINANCIAL STATEMENTS


EVEREST REINSURANCE HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS



  September 30, December 31,
(Dollars in thousands, except par value per share) 2009 2008
  (unaudited)   
ASSETS:      
Fixed maturities - available for sale, at market value $6,363,908  $5,511,856 
     (amortized cost: 2009, $6,090,136; 2008, $5,610,483)        
Fixed maturities - available for sale, at fair value  52,815   43,090 
Equity securities - available for sale, at market value (cost: 2009, $15; 2008, $15)  12   16 
Equity securities - available for sale, at fair value  158,456   119,815 
Short-term investments  645,096   918,712 
Other invested assets (cost: 2009, $365,500; 2008, $400,498)  363,205   392,589 
Other invested assets, at fair value  364,841   316,750 
Cash  125,128   92,264 
         Total investments and cash  8,073,461   7,395,092 
Accrued investment income  79,124   82,860 
Premiums receivable  768,273   714,035 
Reinsurance receivables - unaffiliated  606,226   637,890 
Reinsurance receivables - affiliated  2,526,007   2,480,016 
Funds held by reinsureds  158,366   147,287 
Deferred acquisition costs  186,828   192,096 
Prepaid reinsurance premiums  557,751   456,180 
Deferred tax asset  290,211   518,042 
Federal income tax recoverable  13,992   70,299 
Other assets  121,548   172,825 
TOTAL ASSETS $13,381,787  $12,866,622 
         
LIABILITIES:        
Reserve for losses and loss adjustment expenses $7,246,981  $7,419,993 
Unearned premium reserve  1,274,240   1,176,834 
Funds held under reinsurance treaties  155,096   134,698 
Losses in the course of payment  49,051   35,805 
Commission reserves  37,927   45,531 
Other net payable to reinsurers  479,454   378,800 
8.75% Senior notes due 3/15/2010  199,931   199,821 
5.4% Senior notes due 10/15/2014  249,759   249,728 
6.6% Long term notes due 05/01/2067  238,347   399,643 
Junior subordinated debt securities payable  329,897   329,897 
Accrued interest on debt and borrowings  12,821   11,217 
Unsettled securities payable  45,915   1,476 
Other liabilities  231,856   280,211 
         Total liabilities  10,551,275   10,663,654 
         
Commitments and Contingencies (Note 6)        
         
STOCKHOLDER'S EQUITY:        
Common stock, par value: $0.01; 3,000 shares authorized;        
     1,000 shares issued and outstanding (2009 and 2008)  -   - 
Additional paid-in capital  319,887   315,771 
Accumulated other comprehensive income (loss), net of deferred income tax expense of        
     $105.7 million at 2009 and tax benefit of $38.8 million at 2008  197,560   (72,063)
Retained earnings  2,313,065   1,959,260 
         Total stockholder's equity  2,830,512   2,202,968 
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $13,381,787  $12,866,622 
         
The accompanying notes are an integral part of the consolidated financial statements.        



EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)



  Three Months Ended Nine Months Ended
  September 30, September 30,
(Dollars in thousands) 2009 2008 2009 2008
  (unaudited) (unaudited)
REVENUES:            
Premiums earned $438,320  $449,892  $1,337,539  $1,421,336 
Net investment income  65,492   97,305   179,667   292,263 
Net realized capital gains (losses):                
Other-than-temporary impairments on fixed maturity securities  -   (63,793)  (5,510)  (67,854)
Other-than-temporary impairments on fixed maturity securities                
transferred to other comprehensive income  -   -   -   - 
Other net realized capital gains (losses)  101,394   (44,859)  61,661   (193,493)
Total net realized capital gains (losses)  101,394   (108,652)  56,151   (261,347)
Realized gain on debt repurchase  -   -   78,271   - 
Other income (expense)  15,081   7,951   7,801   (16,039)
Total revenues  620,287   446,496   1,659,429   1,436,213 
                 
CLAIMS AND EXPENSES:                
Incurred losses and loss adjustment expenses  241,992   446,996   777,295   1,115,813 
Commission, brokerage, taxes and fees  77,259   73,816   252,401   295,270 
Other underwriting expenses  39,864   32,769   109,226   95,794 
Interest, fee and bond issue cost amortization expense  17,073   19,745   53,779   59,233 
Total claims and expenses  376,188   573,326   1,192,701   1,566,110 
                 
INCOME (LOSS) BEFORE TAXES  244,099   (126,830)  466,728   (129,897)
Income tax expense (benefit)  79,958   (47,931)  128,423   (69,290)
                 
NET INCOME (LOSS) $164,141  $(78,899) $338,305  $(60,607)
                 
Other comprehensive income (loss), net of tax  162,343   (145,996)  285,123   (223,813)
                 
COMPREHENSIVE INCOME (LOSS) $326,484  $(224,895) $623,428  $(284,420)
                 
The accompanying notes are an integral part of the consolidated financial statements.                



EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDER’S EQUITY


  Three Months Ended Nine Months Ended
  September 30, September 30,
(Dollars in thousands, except share amounts) 2009 2008 2009 2008
  (unaudited) (unaudited)
COMMON STOCK (shares outstanding):            
Balance, beginning of period  1,000   1,000   1,000   1,000 
Balance, end of period  1,000   1,000   1,000   1,000 
                 
ADDITIONAL PAID-IN CAPITAL:                
Balance, beginning of period $318,492  $312,924  $315,771  $310,206 
Share-based compensation plans  1,395   1,671   4,116   4,389 
Balance, end of period  319,887   314,595   319,887   314,595 
                 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),                
NET OF DEFERRED INCOME TAXES:                
Balance, beginning of period  35,217   85,459   (72,063)  163,276 
Cumulative adjustment of initial adoption(1), net of tax
  -   -   (15,500)  - 
Net increase (decrease) during the period  162,343   (145,996)  285,123   (223,813)
Balance, end of period  197,560   (60,537)  197,560   (60,537)
                 
RETAINED EARNINGS:                
Balance, beginning of period  2,148,924   2,112,309   1,959,260   2,094,017 
Cumulative adjustment of initial adoption(1), net of tax
  -   -   15,500   - 
Net income (loss)  164,141   (78,899)  338,305   (60,607)
Balance, end of period  2,313,065   2,033,410   2,313,065   2,033,410 
                 
TOTAL STOCKHOLDER'S EQUITY, END OF PERIOD $2,830,512  $2,287,468  $2,830,512  $2,287,468 
                 
(1)   The cumulative adjustment to accumulated other comprehensive income (loss), net of deferred income taxes and retained earnings represents the effect of initially adopting ASC 320-10-65-1
        
       (FASB Staff Position No. FAS 115-2 and FAS 124-2, "Recognition and Presentation of Other-Than-Temporary Impairments").                
                 
The accompanying notes are an integral part of the consolidated financial statements.             



EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS


  Three Months Ended Nine Months Ended
  September 30, September 30,
(Dollars in thousands) 2009 2008 2009 2008
  (unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:            
Net income (loss) $164,141  $(78,899) $338,305  $(60,607)
Adjustments to reconcile net income to net cash provided by operating activities:                
(Increase) decrease in premiums receivable  (1,371)  (3,405)  (51,192)  45,932 
Decrease (increase) in funds held by reinsureds, net  9,624   (221)  9,459   (1,237)
Decrease (increase) in reinsurance receivables  146,809   (48,135)  (6,656)  (118,746)
Decrease (increase) in deferred tax asset  41,994   61,482   74,970   (30,155)
(Decrease) increase in reserve for losses and loss adjustment expenses  (35,920)  194,584   (218,365)  154,284 
Increase (decrease) in unearned premiums  95,297   7,476   91,611   (134,529)
Change in equity adjustments in limited partnerships  4,423   6,167   36,548   (9,095)
Change in other assets and liabilities, net  (161,038)  (79,464)  83,477   (12,364)
Non-cash compensation expense  1,384   1,201   4,091   3,834 
Amortization of bond premium  3,824   3,141   8,802   5,809 
Amortization of underwriting discount on senior notes  48   45   142   133 
Realized gain on debt repurchase  -   -   (78,271)  - 
Net realized capital (gains) losses  (101,394)  108,652   (56,151)  261,347 
Net cash provided by operating activities  167,821   172,624   236,770   104,606 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
Proceeds from fixed maturities matured/called - available for sale, at market value  130,349   106,558   324,432   370,220 
Proceeds from fixed maturities matured/called - available for sale, at fair value  -   -   5,570   - 
Proceeds from fixed maturities sold - available for sale, at market value  34,602   52,180   87,696   138,326 
Proceeds from fixed maturities sold - available for sale, at fair value  4,010   -   12,012   - 
Proceeds from equity securities sold - available for sale, at market value  23,028   -   23,028   - 
Proceeds from equity securities sold - available for sale, at fair value  11,310   151,801   23,535   380,856 
Distributions from other invested assets  4,448   30,035   24,573   41,246 
Cost of fixed maturities acquired - available for sale, at market value  (256,130)  (64,455)  (865,910)  (1,343,983)
Cost of fixed maturities acquired - available for sale, at fair value  (2,548)  (11,444)  (19,101)  (11,444)
Cost of equity securities acquired - available for sale, at fair value  (12,948)  (115,399)  (32,244)  (156,363)
Cost of other invested assets acquired  (9,780)  (35,804)  (26,122)  (55,908)
Cost of other invested assets acquired, at fair value  -   (25,007)  -   (150,745)
Net change in short-term securities  (86,179)  (197,914)  284,738   687,541 
Net change in unsettled securities transactions  18,522   (58,944)  42,856   (64,654)
Net cash used in investing activities  (141,316)  (168,393)  (114,937)  (164,908)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Tax benefit from share-based compensation  11   469   25   554 
Net cost of debt repurchase  -   -   (83,026)  - 
Net cash provided by (used in) financing activities  11   469   (83,001)  554 
                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH  3,411   (8,130)  (5,968)  13,772 
                 
Net increase (decrease) in cash  29,927   (3,430)  32,864   (45,976)
Cash, beginning of period  95,201   103,901   92,264   146,447 
Cash, end of period $125,128  $100,471  $125,128  $100,471 
                 
SUPPLEMENTAL CASH FLOW INFORMATION:                
Cash transactions:                
Income taxes recovered $(18,847) $(107,359) $(2,488) $(49,014)
Interest paid $13,892  $13,887  $51,464  $52,861 
                 
The accompanying notes are an integral part of the consolidated financial statements.                



NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Nine Months Ended September 30,

2009 and 2008


1.  General

As used in this document, “Holdings” means Everest Reinsurance Holdings, Inc., a Delaware Company and direct subsidiary of Everest Underwriting Group (Ireland) Limited (“Holdings Ireland”); “Group” means Everest Re Group, Ltd. (Holdings Ireland’s parent); “Bermuda Re” means Everest Reinsurance (Bermuda), Ltd., a subsidiary of Group; “Everest Re” means Everest Reinsurance Company, a subsidiary of Holdings, and its subsidiaries (unless the context otherwise requires); and the “Company” means Holdings and its subsidiaries.

2. Basis of Presentation

The unaudited consolidated financial statements of the Company for the three and nine months ended September 30, 2009 and 2008 include all adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair statement of the results on an interim basis.  Certain financial information, which is normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), has been omitted since it is not required for interim reporting purposes. The December 31,

(Dollars 2008 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.  The results for the three and nine months ended September 30, 2009 and 2008 are not necessarily indicative of the results for a full year.  These financial statements should be read in thousands, except parconjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, 2008, 2007 and 2006 included in the Company’s most recent Form 10-K filing.


Financial Accounting Standards Board Launched Accounting Codification

The Financial Accounting Standards Board (“FASB”) issued FASB Statement No. 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles”. This guidance establishes the FASB Accounting Standards CodificationTM (“Codification” or “ASC”) as the single source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative.

Following the Codification, the FASB will not issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates, which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification.

GAAP is not intended to be changed as a result of the FASB’s Codification, but it will change the way the guidance is organized and presented. As a result, these changes will have a significant impact on how companies reference GAAP in their financial statements and in the accounting policies for financial statements issued for interim and annual periods ending after September 15, 2009.

Application of Recently Issued Accounting Standard Changes

Measurement of Fair Value in Inactive Markets. ASC 820-10-65-4 (FSP No. FAS 157-4 “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”) reaffirms that fair value per share)                                                                   

2008

2007

(unaudited)

ASSETS:

Fixed maturities -is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. It also reaffirms the need to use judgment in determining if a formerly active market has become inactive and in determining fair values when the market has become inactive. There was no impact to the Company’s financial statements upon adoption.


Other-Than-Temporary Impairments on Investment Securities. ASC 320-10-65-1 (FSP No. FAS 115-2 and FAS 124-2 “Recognition and Presentation of Other-Than-Temporary Impairments”) amends the recognition guidance for other-than-temporary impairments of debt securities and expands the financial statement disclosures for other-than-temporary impairments on debt and equity securities. For available for sale atdebt securities that the Company has no intent to sell and more likely than not will not be required to sell prior to recovery, only the credit loss component of the impairment would be recognized in earnings, while the rest of the fair value loss would be recognized in accumulated other comprehensive income.  The Company adopted ASC 320-10-65-1 guidance effective April 1, 2009.  Upon adoption the Company recognized a $15.5 million cumulative-effect adjustment from retained earnings, net of $8.3 million of tax.

Interim Disclosures about Fair Value of Financial Instruments. ASC 825-10-65-1 (FSP FAS 107-1 and FSP APB 28-1 “Interim Disclosures about Fair Value of Financial Instruments”) requires quarterly disclosures on the qualitative and quantitative information about the fair value of all financial instruments including methods and significant assumptions used to estimate fair value during the period. These disclosures were previously only done annually. The Company included these disclosures in the second quarter 2009 Notes to Consolidated Interim Financial Statements.

Subsequent Events Disclosures. ASC 855-10-50 (FAS 165 “Subsequent Events”) requires a disclosure as to the date through which subsequent events have been evaluated as well as whether that date is the date the financial statements were issued. The Company included this disclosure in its second quarter 2009 Notes to Consolidated Interim Financial Statements.

Future Accounting Standard Changes

Fair Value Disclosures about Pension Plan Assets. ASC 715-20-65-2 (FSP FAS 132(R)-1 “Employers’ Disclosures about Postretirement Benefit Plan Assets”) requires that information about plan assets be disclosed, on an annual basis, based on the fair value disclosure requirements of ASC 820-10. The Company will be required to separate plan assets into the three fair value hierarchy levels and provide a roll forward of the changes in fair value of plan assets classified as Level 3 in the 2009 annual consolidated financial statements. These disclosures have no effect on the Company’s accounting for plan benefits and obligations.



3.  Investments

The amortized cost, market value

$          6,377,606

$          5,998,157

   (amortized cost: 2008, $6,536,379; 2007, $5,830,676)

Fixed maturities - and gross unrealized appreciation and depreciation of available for sale, at fair value

11,197

-

Equity securities - available for sale,fixed maturity and equity security investments, carried at market value, (cost:are as follows for the periods indicated:

  At September 30, 2009 
  Amortized  Unrealized  Unrealized  Market 
(Dollars in thousands) Cost  Appreciation  Depreciation  Value 
Fixed maturity securities  - available for sale            
U.S. Treasury securities and obligations of            
U.S. government agencies and corporations $128,645  $6,000  $(195) $134,450 
Obligations of U.S. states and political subdivisions  3,747,780   231,278   (12,632)  3,966,426 
Corporate securities  605,130   30,468   (19,554)  616,044 
Asset-backed securities  17,646   545   (2,710)  15,481 
Mortgage-backed securities                
Commercial  23,019   4,737   (114)  27,642 
Agency residential  418,666   12,495   (6)  431,155 
Non-agency residential  61,545   773   (11,465)  50,853 
Foreign government securities  595,855   32,203   (3,809)  624,249 
Foreign corporate securities  491,850   18,263   (12,505)  497,608 
Total fixed maturity securities $6,090,136  $336,762  $(62,990) $6,363,908 
Equity securities $15  $-  $(3) $12 
  At December 31, 2008 
  Amortized  Unrealized  Unrealized  Market 
(Dollars in thousands) Cost  Appreciation  Depreciation  Value 
Fixed maturity securities  - 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  482,533   18,404   (64,620)  436,317 
Asset-backed securities  13,795   7   (4,441)  9,361 
Mortgage-backed securities                
Commercial  6,516   -   (1,067)  5,449 
Agency residential  170,299   4,838   (33)  175,104 
Non-agency residential  54,816   -   (18,252)  36,564 
Foreign government securities  467,935   32,538   (7,776)  492,697 
Foreign corporate securities  428,059   6,602   (29,247)  405,414 
Total fixed maturity securities $5,610,483  $191,730  $(290,357) $5,511,856 
Equity securities $15  $1  $-  $16 
In accordance with ASC 320-10-65-1, the Company reclassified previously other-than-temporary impairments from retained earnings into accumulated other comprehensive income. The pre-tax amount of this reclassification was $23.8 million, all of which were corporate securities. At September 30, 2009, the cumulative unrealized depreciation on these securities had improved and the remaining unrealized depreciation for the corporate securities was $3.3 million.


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 totals for mortgage-backed and asset-backed securities are shown separately.
  At September 30, 2009 
  Amortized  Market 
(Dollars in thousands) Cost  Value 
Fixed maturity securities – available for sale      
Due in one year or less $326,465  $326,275 
Due after one year through five years  1,155,583   1,200,003 
Due after five years through ten years  1,268,070   1,347,261 
Due after ten years  2,819,142   2,965,238 
Asset-backed securities  17,646   15,481 
Mortgage-backed securities        
Commercial  23,019   27,642 
Agency residential  418,666   431,155 
Non-agency residential  61,545   50,853 
Total fixed maturity securities $6,090,136  $6,363,908 
The changes in net unrealized appreciation (depreciation) for the Company’s investments are derived from the following sources for the periods as indicated:
  Three Months Ended Nine Months Ended
  September 30, September 30,
(Dollars in thousands) 2009 2008 2009 2008
Increase (decrease) during the period between the market value and cost            
of investments carried at market value, and deferred taxes thereon:            
Fixed maturity securities $229,219  $(207,213) $396,245  $(326,254)
Fixed maturity securities ASC 320-10-65-1 adjustment  -   -   (23,846)  - 
Equity securities  -   -   (4)  - 
Other invested assets  3,387   (2,232)  5,614   (3,122)
Change in unrealized  appreciation (depreciation), pre-tax  232,606   (209,445)  378,009   (329,376)
Deferred tax (expense) benefit  (81,412)  73,306   (140,649)  115,281 
Deferred tax benefit ASC 320-10-65-1 adjustment  -   -   8,346   - 
Change in unrealized appreciation (depreciation),                
net of deferred taxes, included in stockholder's equity $151,194  $(136,139) $245,706  $(214,095)
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.  In making its assessment, the Company evaluates the current market and interest rate environment as well as specific issuer information.  Generally, a change in a security’s value caused by a change in the market or interest rate environment does not constitute an other-than-temporary impairment, but rather a temporary decline in market value.  Temporary declines in market value are recorded as unrealized losses in accumulated other comprehensive income.  If the Company determines that the decline is other-than-temporary and the Company does not have the intent to sell the security; and it is more likely than not the Company will not have to sell the security before recovery of its cost basis, the carrying value of the investment is written down to fair value.  The fair value adjustment that is credit related is recorded in net realized capital gains (losses) in the Company’s consolidated statements of operations and comprehensive income. The fair value adjustment that is non-credit related is recorded as a component of other comprehensive income, net of tax, and is included in accumulated other comprehensive income in the Company’s consolidated balance sheets.  The Company’s assessments are based on the issuers 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 mortgage-backed and asset-backed securities, as well as relevant information provided by rating agencies, investment advisors and analysts.

Retrospective adjustments are employed to recalculate the values of asset-backed securities. All of the Company’s asset-backed and mortgage-backed securities have a pass-through structure. 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 in the calculation of projected and prepayments for pass-through security types.

The tables below display the aggregate market value and gross unrealized depreciation of fixed maturity securities, by security type and maturity type, in each case subdivided according to the length of time that individual securities had been in a continuous unrealized loss position for the periods indicated:
  Duration by security type of unrealized loss at September 30, 2009 
  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 - available for sale                  
U.S. Treasury securities and obligations of                  
U.S. government agencies and corporations $4,695  $(195) $-  $-  $4,695  $(195)
Obligations of U.S. states and political subdivisions  15,698   (736)  254,791   (11,896)  270,489   (12,632)
Corporate securities  59,952   (4,180)  127,849   (15,374)  187,801   (19,554)
Asset-backed securities  2,558   (200)  5,235   (2,510)  7,793   (2,710)
Mortgage-backed securities                        
Commercial  -   -   3,274   (114)  3,274   (114)
Agency residential  3,680   (6)  308   -   3,988   (6)
Non-agency residential  1,381   (26)  42,732   (11,439)  44,113   (11,465)
Foreign government securities  55,494   (3,406)  32,621   (403)  88,115   (3,809)
Foreign corporate securities  135,975   (9,059)  33,373   (3,446)  169,348   (12,505)
Total fixed maturity securities $279,433  $(17,808) $500,183  $(45,182) $779,616  $(62,990)

  Duration by maturity of unrealized loss at September 30, 2009 
  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 $73,180  $(7,110) $3,690  $(57) $76,870  $(7,167)
Due in one year through five years  116,675   (7,361)  59,867   (2,139)  176,542   (9,500)
Due in five years through ten years  49,142   (1,249)  52,462   (2,551)  101,604   (3,800)
Due after ten years  32,817   (1,856)  332,615   (26,372)  365,432   (28,228)
Asset-backed securities  2,558   (200)  5,235   (2,510)  7,793   (2,710)
Mortgage-backed securities  5,061   (32)  46,314   (11,553)  51,375   (11,585)
Total fixed maturity securities $279,433  $(17,808) $500,183  $(45,182) $779,616  $(62,990)


The aggregate market value and gross unrealized losses related to investments in an unrealized loss position as of September 30, 2009 were $779.6 million and $63.0 million, respectively.  There were no unrealized losses on a single security that exceeded 0.18% of the market value of the fixed maturity securities at September 30, 2009.  In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector.  The $17.8 million of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of highly rated government, municipal, corporate and mortgage-backed securities.  Of these unrealized losses, $13.9 million were related to securities that were rated investment grade or better by at least one nationally recognized statistical rating organization.  The $45.2 million of unrealized losses


related to securities in an unrealized loss position for more than one year also related primarily to highly rated municipal, corporate and mortgage-backed securities.  Of these unrealized losses, $34.3 million related to securities that were rated investment grade or better by at least one nationally recognized statistical rating organization.  The non-investment grade securities with unrealized losses are mainly comprised of non-credit other-than-temporary impaired securities and non-agency residential mortgage-backed securities.  In all instances, there were no projected cash flow shortfalls to recover the full book value of the investments and the related interest obligations.  The mortgage-backed securities still have excess credit coverage and are current on interest and principal payments.  Unrealized losses have decreased since year end as a result of improved conditions in the overall financial market resulting from increased liquidity and lower interest rates.

The Company, given the size of its investment portfolio and capital position, does not have the intent to sell these securities; and it is more likely than not the Company will not have to sell the security before recovery of its cost basis.  In addition, all securities currently in an unrealized loss position are current with respect to principal and interest payments.

The tables below display the aggregate market value and gross unrealized depreciation of fixed maturity securities, by security type and maturity type in each case subdivided according to the length of time that individual securities had been in a continuous unrealized loss position for the period indicated:
  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 - available for sale                  
U.S. Treasury securities and obligations of                  
U.S. government agencies and corporations $-  $-  $-  $-  $- ��$- 
Obligations of U.S. states and political subdivisions  1,471,807   (146,292)  176,555   (18,629)  1,648,362   (164,921)
Corporate securities  189,385   (42,278)  97,407   (22,342)  286,792   (64,620)
Asset-backed securities  4,230   (62)  3,983   (4,379)  8,213   (4,441)
Mortgage-backed securities                        
Commercial  2,474   (450)  2,974   (617)  5,448   (1,067)
Agency residential  3,291   (29)  466   (4)  3,757   (33)
Non-agency residential  -   -   36,171   (18,252)  36,171   (18,252)
Foreign government securities  79,063   (7,715)  2,759   (61)  81,822   (7,776)
Foreign corporate securities  167,132   (13,702)  67,537   (15,545)  234,669   (29,247)
Total fixed maturity securities $1,917,382  $(210,528) $387,852  $(79,829) $2,305,234  $(290,357)

  Duration by maturity of unrealized loss at December 31, 2008 
  Less than 12 months  Greater than 12 months  Total 
     Gross     Gross     Gross 
     Unrealized     Unrealized     Unrealized 
(Dollars in thousands) Market Value  Depreciation  Market Value  Depreciation  Market Value  Depreciation 
Fixed maturity securities                  
Due in one year or less $87,124  $(8,412) $22,024  $(1,516) $109,148  $(9,928)
Due in one year through five years  198,004   (10,813)  52,705   (5,676)  250,709   (16,489)
Due in five years through ten years  145,943   (10,767)  85,396   (17,662)  231,339   (28,429)
Due after ten years  1,476,316   (179,995)  184,133   (31,723)  1,660,449   (211,718)
Asset-backed securities  4,230   (62)  3,983   (4,379)  8,213   (4,441)
Mortgage-backed securities  5,765   (479)  39,611   (18,873)  45,376   (19,352)
Total fixed maturity securities $1,917,382  $(210,528) $387,852  $(79,829) $2,305,234  $(290,357)
The aggregate market value and gross unrealized losses related to investments in an unrealized loss position as of December 31, 2008 $9,897; 2007, $9,897)

9,897

9,897

Equitywere $2,305.2 million and $290.4 million, respectively.  There were no unrealized losses on a single security that exceeded 0.35% of the market value of the fixed maturity securities - availableat December 31, 2008.  In addition, there was no significant concentration of unrealized losses in


any one market sector.  The $210.5 million of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for sale,less than one year were generally comprised of highly rated municipal, corporate and mortgage-backed securities with the losses primarily the result of widening credit spreads from the financial markets crisis during the latter part of the year.  Of these unrealized losses, $206.9 million were related to securities that were rated investment grade or better by at least one nationally recognized statistical rating organization.  The $79.8 million of unrealized losses related to securities in an unrealized loss position for more than one year also related primarily to highly rated municipal, corporate and mortgage-backed securities and were also the result of widening credit spreads during the latter part of the year.  Of these unrealized losses, $65.2 million related to securities that were rated investment grade or better by at 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 components of net investment income are presented in the table below for the periods indicated:
  Three Months Ended Nine Months Ended
  September 30, September 30,
(Dollars in thousands) 2009 2008 2009 2008
Fixed maturity securities $70,965  $81,112  $212,903  $233,098 
Equity securities  758   1,793   2,182   4,905 
Short-term investments and cash  277   4,309   3,331   23,773 
Other invested assets                
Limited partnerships  (4,423)  10,148   (36,548)  29,856 
Other  664   2,272   5,693   7,242 
Total gross investment income  68,241   99,634   187,561   298,874 
Interest credited and other expense  (2,749)  (2,329)  (7,894)  (6,611)
Total net investment income $65,492  $97,305  $179,667  $292,263 


The Company reports results from limited partnership investments on the equity basis of accounting with changes in value reported through net investment income. Due to the timing of receiving financial information from these partnerships, the results are generally reported on a one month or quarter lag.  If the Company determines there has been a significant decline in value of a limited partnership during this lag period, a loss will be recorded in the period in which the Company indentifies the decline.

The Company had contractual commitments to invest up to an additional $145.6 million in limited partnerships at September 30, 2009.  These commitments will be funded when called in accordance with the partnership agreements, which have investment periods that expire, unless extended, through 2014.



The components of net realized capital gains (losses) are presented in the table below for the periods indicated:
  Three Months Ended Nine Months Ended
  September 30, September 30,
(Dollars in thousands) 2009 2008 2009 2008
Fixed maturity securities, market value:            
Other-than-temporary impairments $-  $(63,793) $(5,510) $(67,854)
Losses from sales  (4,131)  (12,172)  (32,612)  (13,086)
Fixed maturity securities, fair value:                
Gain from sales  172   -   401   - 
Gains (losses) from fair value adjustments  5,837   (247)  7,805   (247)
Equity securities, market value:                
Gains from sales  8,041   -   8,041   - 
Equity securities, fair value:                
Gains (losses) from sales  1,299   (1,061)  6,483   (12,630)
Gains (losses) from fair value adjustments  23,075   (58,817)  23,448   (122,938)
Other invested assets, fair value:                
Gains (losses) from fair value adjustments  67,103   27,438   48,091   (44,562)
Short-term investment (losses) gains  (2)  -   4   (30)
Total net realized capital gains (losses) $101,394  $(108,652) $56,151  $(261,347)


Proceeds from the sales of fixed maturity securities for the three months ended September 30, 2009 and 2008 were $38.6 million and $52.2 million, respectively.  Gross gains of $2.3 million and $0.0 million and gross losses of $6.2 million and $12.2 million were realized on those fixed maturity securities sales for the three months ended September 30, 2009 and 2008, respectively.  Proceeds from sales of equity securities for the three months ended September 30, 2009 and 2008 were $34.3 million and $151.8 million, respectively.  Gross gains of $9.4 million and $3.8 million and gross losses of $0.0 million and $4.8 million were realized on those equity sales for the three months ended September 30, 2009 and 2008, respectively.

Proceeds from sales of fixed maturity securities for the nine months ended September 30, 2009 and 2008 were $99.7 million and $138.3 million, respectively.  Gross gains of $4.6 million and $1.1 million and gross losses of $36.8 million and $14.2 million were realized on those fixed maturity securities sales for the nine months ended September 30, 2009 and 2008, respectively.  Proceeds from sales of equity securities for the nine months ended September 30, 2009 and 2008 were $46.6 million and $380.9 million, respectively.  Gross gains of $15.3 million and $5.9 million and gross losses of $0.7 million and $18.6 million were realized on those equity sales for the nine months ended September 30, 2009 and 2008, respectively.

Included in net realized capital gains (losses) was $5.5 million for the nine months ended September 30, 2009 and $63.8 million and $67.9 million for the three and nine months ended September 30, 2008, respectively, of write-downs in the value of securities deemed to be impaired on an other-than-temporary basis.  There were no write-downs in the value of securities deemed to be impaired on an other-than-temporary basis for the three months ended September 30, 2009.

At September 30, 2009 the Company had no other-than-temporary impaired securities where the impairment had both a credit and non-credit component.



4.  Fair Value

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 $96.0 million and $79.3 million in net realized capital gains due to fair value re-measurements on fixed maturity securities, equity securities and other invested assets, at fair value,

455,312

815,372

Short-term investments

630,715

1,327,391

Other for the three and nine months ended September 30, 2009, respectively.  The Company recorded $31.6 million and $167.7 million in net realized capital losses due to fair value re-measurements on fixed maturity securities, equity securities and other invested assets, (cost:at fair value, for the three and nine months ended September 30, 2008, $463,042; 2007, $439,285)

462,377

441,742

respectively.


The Company’s fixed maturity and equity securities are managed by third party investment asset managers.  The investment asset managers obtain prices from nationally recognized pricing services.   These services seek to utilize market data and observations in their evaluation process.  They use pricing applications that vary by asset class and incorporate available market information and when fixed maturity securities do not trade on a daily basis the services will apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing.  In addition, they use model processes, such as the Option Adjusted Spread model to develop prepayment and interest rate scenarios for securities that have prepayment features.

In limited instances where prices are not provided by pricing services or in rare instances when a manager may not agree with the pricing service, price quotes on a non-binding basis are obtained from investment brokers.  The investment asset managers do not make any changes to prices received from either the pricing services or the investment brokers.  In addition, the investment asset managers have procedures in place to review the reasonableness of the prices from the service providers and may request verification of the prices.  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.  The Company made no such adjustments at September 30, 2009.

Fixed maturity securities are generally 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 maturity securities 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,

359,973

253,791

Cash

100,471

146,447

     Total 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) September 30, 2009  (Level 1)  (Level 2)  (Level 3) 
Assets:            
Fixed maturities, market value $6,363,908  $-  $6,351,181  $12,727 
Fixed maturities, fair value  52,815   -   52,815   - 
Equity securities, market value  12   12   -   - 
Equity securities, fair value  158,456   157,459   997   - 
Other invested assets, fair value  364,841   364,841   -   - 

     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   -   - 


The following table presents the activity under Level 3, fair value measurements using significant unobservable inputs for fixed maturity investments, for the periods indicated:
  Three Months Ended Nine Months Ended
  September 30, September 30,
(Dollars in thousands) 2009 2008 2009 2008
Assets:            
Balance, beginning of period $11,807  $17,132  $10,967  $78,709 
Total gains or (losses) (realized/unrealized)                
Included in earnings (or changes in net assets)  46   (316)  42   (2,630)
Included in other comprehensive income  1,136   (812)  1,692   (1,400)
Purchases, issuances and settlements  (113)  (114)  (192)  (5,318)
Transfers in and/or (out) of Level 3  (149)  36   218   (53,435)
Balance, end of period $12,727  $15,926  $12,727  $15,926 
                 
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 $-  $1,302  $(131) $(2,759)




5.  Capital Transactions

On December 17, 2008, Group and cash

8,407,548

8,992,797

Accrued investment income

85,954

86,129

Premiums receivable

753,392

800,211

Reinsurance receivables - unaffiliated

626,419

644,693

Reinsurance receivables - affiliated

1,828,888

1,698,454

Funds heldHoldings renewed their shelf registration statement on Form S-3ASR with the SEC, as a Well Known Seasoned Issuer.  This shelf registration statement can be used by reinsureds

147,641

132,443

Deferred acquisition costs

205,560

234,719

PrepaidGroup to register common shares, preferred shares, debt securities, warrants, share purchase contracts and share purchase units; by Holdings to register debt securities and by Everest Re Capital Trust III (“Capital Trust III”) to register trust preferred securities.


6.  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 premiums

458,042

433,271

Deferred tax asset

429,970

279,302

Federal income tax recoverable

82,498

88,330

Other assets

   254,408

153,180

TOTAL ASSETS

$        13,280,320

$        13,543,529 

LIABILITIES:

Reserveand other contractual agreements.  In some disputes, the Company seeks to enforce its rights under an agreement or to collect funds owing to it.  In other matters, the Company is resisting attempts by others to collect funds or enforce alleged rights. These disputes arise from time to time and are ultimately resolved through both informal and formal means, including negotiated resolution, arbitration and litigation.  In all such matters, the Company believes that its positions are legally and commercially reasonable.  While the final outcome of these matters cannot be predicted with certainty, the Company does not believe that any of these matters, when finally resolved, will have a material adverse effect on the Company’s financial position or liquidity.  However, an adverse resolution of one or more of these items in any one quarter or fiscal year could have a material adverse effect on the Company’s results of operations in that period.


The Company does not believe that there are any material pending legal proceedings to which it or any of its subsidiaries is a party or of which any of their properties are the subject.

The Company continues to receive claims under expired insurance and reinsurance contracts asserting injuries and/or damages relating to or resulting from environmental pollution and hazardous substances, including asbestos.  Environmental claims typically assert liability for (a) the mitigation or remediation of environmental contamination or (b) bodily injury or property damage caused by the release of hazardous substances into the land, air or water.  Asbestos claims typically assert liability for bodily injury from exposure to asbestos or for property damage resulting from asbestos or products containing asbestos.

The Company’s reserves include an estimate of the Company’s ultimate liability for asbestos and environmental (“A&E”) claims.  As of September 30, 2009, approximately 9% of the Company’s gross reserves were an estimate of the Company’s ultimate liability for A&E claims.  The Company’s A&E liabilities emanate from Mt. McKinley Insurance Company’s (“Mt. McKinley”), a direct subsidiary of the Company, direct insurance business and Everest Re’s assumed reinsurance business.  All of the contracts of insurance and reinsurance under which the Company has received claims during the past three years, expired more than 20 years ago.  There are significant uncertainties surrounding the Company’s reserves for its A&E losses.



A&E exposures represent a separate exposure group for monitoring and evaluating reserve adequacy. The following table summarizes incurred losses with respect to A&E on both a gross and adjustment expenses

$         7,662,470   

$         7,538,704 

Unearned premium reserve

1,229,695

1,368,096

Funds held undernet of retrocessional basis for the periods indicated:

  Three Months Ended Nine Months Ended
  September 30, September 30,
(Dollars in thousands) 2009 2008 2009 2008
Gross basis:            
Beginning of period reserves $704,507  $870,998  $786,842  $922,843 
Incurred losses  -   -   -   - 
Paid losses  (52,170)  (16,895)  (134,505)  (68,740)
End of period reserves $652,337  $854,103  $652,337  $854,103 
                 
Net basis:                
Beginning of period reserves $455,379  $513,516  $485,296  $537,549 
Incurred losses  -   -   -   - 
Paid losses  (13,527)  (8,724)  (43,444)  (32,757)
End of period reserves $441,852  $504,792  $441,852  $504,792 


At September 30, 2009, the gross reserves for A&E losses were comprised of $141.3 million representing case reserves reported by ceding companies, $152.1 million representing additional case reserves established by the Company on assumed reinsurance treaties

131,265

117,404

Lossesclaims, $66.5 million representing case reserves established by the Company on direct excess insurance claims, including Mt. McKinley and $292.4 million representing incurred but not reported (“IBNR”) reserves.


With respect to asbestos only, at September 30, 2009, the Company had gross asbestos loss reserves of $618.7 million, or 94.8%, of total A&E reserves, of which $486.4 million was for assumed business and $132.3 million was for direct business.

Management believes that these uncertainties and factors continue to render reserves for A&E and particularly asbestos losses significantly less subject to traditional actuarial analysis than reserves for other types of losses.  The Company establishes reserves to the extent that, in the coursejudgment of management, the facts and prevailing law reflect an exposure for the Company or its ceding companies.

Due to the uncertainties, the ultimate losses attributable to A&E, and particularly asbestos, may be subject to more variability than are non-A&E reserves and such variation, depending on coverage under the Company’s various reinsurance arrangements, could have a material adverse effect on the Company’s future financial condition, results of operations and cash flows.

In 1993 and prior, the Company had a business arrangement with The Prudential Insurance Company of America (“The Prudential”) wherein, for a fee, the Company accepted settled claim payment

24,874

50,047

Commission reserves

43,252

47,953

obligations of certain property and casualty insurers, and, concurrently, became the owner of the annuity or assignee of the annuity proceeds funded by the property and casualty insurers specifically to fulfill these fully settled obligations.  In these circumstances, the Company would be liable if The Prudential, which has an A+ (Superior) financial strength rating from A.M. Best Company (“A.M. Best”), was unable to make the annuity payments.  At September 30, 2009 and December 31, 2008, the estimated cost to replace all such annuities for which the Company was contingently liable was $151.8 million and $152.1 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.  At September 30, 2009 and December 31, 2008, the estimated cost to replace such annuities was $24.1 million and $23.1 million, respectively.



7.  Other Comprehensive Income (Loss)

The following table presents the components of other comprehensive income (loss) in the consolidated statements of operations and comprehensive income (loss) for the periods indicated:
  Three Months Ended Nine Months Ended
  September 30, September 30,
(Dollars in thousands) 2009 2008 2009 2008
Unrealized appreciation (depreciation) ("URA(D)") of investments (1)
            
URA(D) of investments $232,607  $(209,446) $401,856  $(329,376)
Tax (expense) benefit  (81,413)  73,307   (140,650)  115,281 
URA(D), net of tax  151,194   (136,139)  261,206   (214,095)
                 
Foreign currency translation adjustments  16,204   (15,469)  33,281   (16,231)
Tax (expense) benefit  (5,672)  5,412   (11,649)  5,679 
Net foreign currency translation adjustments  10,532   (10,057)  21,632   (10,552)
                 
Pension adjustment  949   308   2,849   1,283 
Tax expense  (332)  (108)  (564)  (449)
Net pension adjustment  617   200   2,285   834 
                 
Other comprehensive income (loss), net of deferred taxes $162,343  $(145,996) $285,123  $(223,813)

(1) The following are the components of URA(D) of investments:          
               
    Three Months Ended Nine Months Ended
    September 30, September 30,
  (Dollars in thousands)  2009  2008  2009  2008
  URA(D) of investments - temporary $228,966  $(209,446) $388,791  $(329,376)
  Tax expense  (80,138)  (73,307)  (136,077)  (115,281)
  Net URA(D) of investments - temporary $148,828  $(136,139) $252,714  $(214,095)
                   
  URA(D) of investments - credit OTTI $(415) $-  $3,411  $- 
  Tax benefit (expense)  145   -   (1,194)  - 
  Net URA(D) of investments - credit OTTI $(270) $-  $2,217  $- 
                   
  URA(D) of investments - non-credit OTTI $4,056  $-  $9,654  $- 
  Tax expense  (1,420)  -   (3,379)  - 
  Net URA(D) of investments - non-credit OTTI $2,636  $-  $6,275  $- 


The following table presents the components of accumulated other comprehensive income (loss), net of tax, in the consolidated balance sheets for the periods indicated:

  September 30, December 31,
(Dollars in thousands) 2009 2008
Unrealized appreciation (depreciation) on investments, net of deferred taxes      
Temporary $176,405  $(69,248)
Credit, other-than-temporary impairments  2,217   - 
Non-credit, other-than-temporary impairments  (2,164)  - 
Total unrealized appreciation (depreciation) on investments, net of deferred taxes  176,458   (69,248)
Foreign currency translation adjustments, net of deferred taxes  50,538   28,906 
Pension adjustments, net of deferred taxes  (29,436)  (31,721)
Accumulated other comprehensive income (loss) $197,560  $(72,063)



8.  Credit Line

Effective August 23, 2006, Holdings entered into a five year, $150.0 million senior revolving credit facility with a syndicate of lenders, referred to as the “Holdings Credit Facility”.  Citibank N.A. is the administrative agent for the Holdings Credit Facility.  The Holdings Credit Facility may be used for liquidity and general corporate purposes.  The Holdings Credit Facility provides for the borrowing of up to $150.0 million with interest at a rate selected by Holdings equal to either, (1) the Base Rate (as defined below) or (2) a periodic fixed rate equal to the Eurodollar Rate plus an applicable margin.  The Base Rate means a fluctuating interest rate per annum in effect from time to time to be equal to the higher of (a) the rate of interest publicly announced by Citibank as its prime rate or (b) 0.5% per annum above the Federal Funds Rate, in each case plus the applicable margin.  The amount of margin and the fees payable for the Holdings Credit Facility depends upon Holdings’ senior unsecured debt rating.

The Holdings Credit Facility requires Holdings to maintain a debt to capital ratio of not greater than 0.35 to 1 and Everest Re to maintain its statutory surplus at $1.5 billion plus 25% of future aggregate net income and 25% of future aggregate capital contributions after December 31, 2005, which at September 30, 2009, was $1,889.9 million.  As of September 30, 2009, Holdings was in compliance with all Holdings Credit Facility covenants.

At September 30, 2009 and December 31, 2008, there were outstanding letters of credit of $28.0 million under the Holdings Credit Facility.

Costs incurred in connection with the Holdings Credit Facility were $166,083 and $106,158 for the nine months ended September 30, 2009 and 2008, respectively.

9.  Letters of Credit

The Citibank Holdings Credit Facility involves a syndicate of lenders (see Note 8), with Citibank acting as administrative agent.  At September 30, 2009 and December 31, 2008, letters of credit for $28.0 million were issued and outstanding.  The following table summarizes the Company’s letters of credit at September 30, 2009.
(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 reinsurers

403,476

374,929

8.75%a non-affiliated ceding company.  At September 30, 2009, the total amount on deposit in the trust account was $24.0 million.


11.  Senior Notes

On October 12, 2004, Holdings completed a public offering of $250.0 million principal amount of 5.40% senior notes due 3/15/2010

199,786

199,685

5.4% SeniorOctober 15, 2014.  On March 14, 2000, Holdings completed a public offering of $200.0 million principal amount of 8.75% senior notes due 10/15/2014

249,718

249,689

March 15, 2010.


Interest expense incurred in connection with these senior notes was $7.8 million for the three months ended September 30, 2009 and 2008, and $23.4 million for the nine months ended September 30, 2009 and 2008.  Market value, which is based on quoted market price at September 30, 2009 and December 31, 2008, was $247.8 million and $186.2 million, respectively, for the 5.40% senior notes and $206.3 million and $156.8 million, respectively, for the 8.75% senior notes.


12.  Long Term Subordinated Notes

On April 26, 2007, Holdings completed a public offering of $400.0 million principal amount of 6.6% Longfixed 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.

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. Upon expiration of the tender offer, the Company had reduced its outstanding debt by $161.4 million, which resulted in a pre-tax gain on debt repurchase of $78.3 million.

Interest expense incurred in connection with these long term notes due 05/01/2067

399,642

399,639

was $3.9 million and $6.6 million for the three months ended September 30, 2009 and 2008, respectively, and $14.4 million and $19.8 million for the nine months ended September 30, 2009 and 2008, respectively. Market value, which is based on quoted market prices at September 30, 2009 and December 31, 2008, was $163.4 million on outstanding 6.6% long term subordinated notes of $238.6 million and $168.0 million on outstanding 6.6% long term subordinated notes of $399.6 million, respectively.


13. Junior Subordinated Debt Securities Payable

On March 29, 2004, Holdings issued $329.9 million of 6.20% junior subordinated debt securities payable

329,897

329,897

Accrueddue March 29, 2034 to Everest Re Capital Trust II (“Capital Trust II”).  Holdings may redeem the junior subordinated debt securities before their maturity at 100% of their principal amount plus accrued interest as of the date of redemption. The securities may be redeemed in whole or in part, on one or more occasions at any time on or after March 30, 2009; or at any time, in whole, but not in part, within 90 days of the occurrence and continuation of a determination that the Trust may become subject to tax or the Investment Company Act.


Fair value, which is primarily based on quoted market price of the related trust preferred securities, at September 30, 2009 and December 31, 2008, was $296.9 million and $222.2 million, respectively, for the 6.20% junior subordinated debt and borrowings

16,817

11,217

Other liabilities

301,960

288,770

     Total liabilities

10,992,852

10,976,030

Commitments and Contingencies (Note 6)

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

314,595

310,206

Accumulated other comprehensive (loss) income, net of deferred income tax benefit of

   $32.6securities.


Interest expense incurred in connection with these junior subordinated notes was $5.1 million atfor the three months ended September 30, 2009 and 2008, and expense$15.3 million for the nine months ended September 30, 2009 and 2008.

(60,537)

163,276

Retained earnings

2,033,410

2,094,017

     Total stockholder's equity

           2,287,468

           2,567,499

TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY

$       13,280,320

$       13,543,529 

The accompanying notes are an integral partContents

Capital Trust II is a wholly owned finance subsidiary of Holdings.

Holdings considers that the mechanisms and obligations relating to the trust preferred securities, taken together, constitute a full and unconditional guarantee by Holdings of Capital Trust II’s payment obligations with respect to the trust preferred securities.

Capital Trust II will redeem all of the outstanding trust preferred securities when the junior subordinated debt securities are paid at maturity on March 29, 2034.  The Company may elect to redeem the junior subordinated debt securities, in whole or in part, at any time on or after March 30, 2009.  If such an early redemption occurs, the outstanding trust preferred securities would also be proportionately redeemed.

There are certain regulatory and contractual restrictions on the ability of the Company’s operating subsidiaries to transfer funds to the Company in the form of cash dividends, loans or advances.  The insurance laws of the State of Delaware, where the Company’s direct insurance subsidiaries are domiciled, require regulatory approval before those subsidiaries can pay dividends or make loans or advances to the Company that exceed certain statutory thresholds.  In addition, the terms of the Holdings Credit Facility (discussed in Note 8) 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, 2008, $1,745.6 million of the $2,735.2 million in net assets of the Company’s consolidated subsidiaries were subject to the foregoing regulatory restrictions.

14.  Segment Results

The Company, through its subsidiaries, operates in four segments:  U.S. Reinsurance, U.S. Insurance, Specialty Underwriting and International.  The U.S. Reinsurance operation writes property and casualty reinsurance, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies within the U.S.  The U.S. Insurance operation writes property and casualty insurance primarily through general agents and surplus lines brokers within the U.S.  The Specialty Underwriting operation writes accident and health (“A&H”), marine, aviation and surety business within the U.S. and worldwide through brokers and directly with ceding companies.  The International operation writes non-U.S. property and casualty reinsurance through Everest Re’s branches in Canada and Singapore and offices in Miami and New Jersey.

These segments are managed in a coordinated fashion with respect to pricing, risk management, control of aggregate catastrophe exposures, capital, investments and support operations.  Management generally monitors and evaluates the financial statements.

performance of these operating segments based upon their underwriting results.

Underwriting results include earned premium less losses and loss adjustment expenses ("LAE") incurred, commission and brokerage expenses and other underwriting expenses.  Underwriting results are measured using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which, respectively, divide incurred losses, commissions and brokerage and other underwriting expenses by premiums earned.

The Company does not maintain separate balance sheet data for its operating segments.  Accordingly, the Company does not review and evaluate the financial results of its operating segments based upon balance sheet data.


20

The following tables present the underwriting results for the operating segments for the periods indicated:
  Three Months Ended Nine Months Ended
U.S. Reinsurance September 30, September 30,
(Dollars in thousands) 2009 2008 2009 2008
Gross written premiums $345,567  $280,467  $876,049  $714,534 
Net written premiums  191,666   146,467   487,849   424,982 
                 
Premiums earned $162,037  $167,468  $489,067  $527,475 
Incurred losses and LAE  56,158   240,734   232,262   446,013 
Commission and brokerage  21,397   27,473   90,525   125,762 
Other underwriting expenses  9,665   7,840   25,250   23,500 
Underwriting gain (loss) $74,817  $(108,579) $141,030  $(67,800)

  Three Months Ended Nine Months Ended
U.S. Insurance September 30, September 30,
(Dollars in thousands) 2009 2008 2009 2008
Gross written premiums $230,491  $194,021  $648,719  $595,458 
Net written premiums  76,400   98,597   301,910   312,949 
                 
Premiums earned $89,237  $107,822  $306,860  $372,032 
Incurred losses and LAE  71,423   78,386   210,329   335,965 
Commission and brokerage  10,512   4,798   32,379   48,438 
Other underwriting expenses  19,982   16,876   56,415   47,118 
Underwriting (loss) gain $(12,680) $7,762  $7,737  $(59,489)

  Three Months Ended Nine Months Ended
Specialty Underwriting September 30, September 30,
(Dollars in thousands) 2009 2008 2009 2008
Gross written premiums $67,615  $54,828  $183,726  $193,941 
Net written premiums  38,259   34,564   102,990   128,787 
                 
Premiums earned $39,182  $35,317  $108,513  $126,318 
Incurred losses and LAE  25,197   37,615   73,740   81,747 
Commission and brokerage  10,510   8,660   29,435   30,418 
Other underwriting expenses  2,383   1,937   6,227   6,182 
Underwriting gain (loss) $1,092  $(12,895) $(889) $7,971 

  Three Months Ended Nine Months Ended
International September 30, September 30,
(Dollars in thousands) 2009 2008 2009 2008
Gross written premiums $272,603  $248,821  $797,606  $654,183 
Net written premiums  146,330   144,810   435,650   394,260 
                 
Premiums earned $147,864  $139,285  $433,099  $395,511 
Incurred losses and LAE  89,214   90,261   260,964   252,088 
Commission and brokerage  34,840   32,885   100,062   90,652 
Other underwriting expenses  6,159   4,691   16,463   14,492 
Underwriting gain $17,651  $11,448  $55,610  $38,279 

21

The following table reconciles the underwriting results for the operating segments to income before taxes as reported in the consolidated statements of operations and comprehensive income (loss) for the periods indicated:

  Three Months Ended Nine Months Ended
  September 30, September 30,
(Dollars in thousands) 2009 2008 2009 2008
Underwriting gain (loss) $80,880  $(102,264) $203,488  $(81,039)
Net investment income  65,492   97,305   179,667   292,263 
Net realized capital gains (losses)  101,394   (108,652)  56,151   (261,347)
Realized gain on debt repurchase  -   -   78,271   - 
Corporate expense  (1,675)  (1,425)  (4,871)  (4,502)
Interest, fee and bond issue cost amortization expense  (17,073)  (19,745)  (53,779)  (59,233)
Other income (expense)  15,081   7,951   7,801   (16,039)
Income (loss) before taxes $244,099  $(126,830) $466,728  $(129,897)
The Company produces business in the U.S. and internationally.  The net income deriving from and assets residing in the individual foreign countries in which the Company writes business are not identifiable in the Company’s financial records.  Based on gross written premium, other than the U.S., no other country represented more than 5% of the Company’s revenues.

15.  Related-Party Transactions

During the normal course of business, the Company, through its affiliates, engages in reinsurance and brokerage and commission business transactions with companies controlled by or affiliated with one or more of its outside directors.  Such transactions, individually and in the aggregate, are not material to the Company’s financial condition, results of operations and cash flows.

The Company engages in reinsurance transactions with Bermuda Re and Everest International Reinsurance, Ltd. (“Everest International”), affiliates, primarily driven by enterprise risk and capital management consideration, under which business is ceded at market rates and terms.  These transactions include:

·  Effective September 19, 2000, Mt. McKinley and Bermuda Re entered into a loss portfolio transfer reinsurance agreement, whereby Mt. McKinley transferred all of its net insurance exposures and reserves to Bermuda Re.

·  Effective October 1, 2001, Everest Re and Bermuda Re entered into a loss portfolio reinsurance agreement, whereby Everest Re transferred all of its Belgium branch net insurance exposures and reserves to Bermuda Re.

·  For premiums earned and losses incurred for the period January 1, 2002 through December 31, 2002, Everest Re, Everest National Insurance Company and Everest Security Insurance Company entered into an Excess of Loss Reinsurance Agreement with Bermuda Re, covering workers’ compensation losses occurring on and after January 1, 2002, as respects new, renewal and in force policies effective on that date through December 31, 2002.  Bermuda Re is liable for any loss exceeding $100,000 per occurrence, with its liability not to exceed $150,000 per occurrence.

EVEREST REINSURANCE HOLDINGS, INC.

 

 

 

 

 

 

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

 

 

 

 

AND COMPREHENSIVE (LOSS) INCOME

 

 

 

 

 

 

 

                                                                                              

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(Dollars in thousands)

2008

 

2007

 

2008

 

2007

 

(unaudited)

 

(unaudited)

REVENUES:

 

 

 

 

 

 

 

Premiums earned

$            449,892

 

$           561,150

 

$       1,421,336

 

$     1,696,414

Net investment income

97,305

 

105,023

 

292,263

 

307,809

Net realized capital (losses) gains

(108,652)

 

22,121

 

(261,347)

 

145,580

Other income (expense)

7,951

 

(24)

 

(16,039)

 

(14,464)

Total revenues

446,496

 

688,270

 

1,436,213

 

2,135,339

 

 

 

 

 

 

 

 

CLAIMS AND EXPENSES:

 

 

 

 

 

 

 

Incurred losses and loss adjustment expenses

446,996

 

344,769

 

1,115,813

 

986,116

Commission, brokerage, taxes and fees

73,816

 

114,550

 

295,270

 

350,452

Other underwriting expenses

32,769

 

29,396

 

95,794

 

81,257

Interest, fee and bond issue cost amortization expense

19,745

 

26,484

 

59,233

 

68,089

Total claims and expenses

573,326

 

515,199

 

1,566,110

 

1,485,914

 

 

 

 

 

 

 

 

(LOSS) INCOME BEFORE TAXES

(126,830)

 

173,071

 

(129,897)

 

649,425

Income tax (benefit) expense

(47,931)

 

62,502

 

(69,290)

 

194,347

 

 

 

 

 

 

 

 

NET (LOSS) INCOME

$           (78,899)

 

$           110,569

 

$         (60,607)

 

$        455,078

 

 

 

 

 

 

 

 

Other comprehensive (loss) income, net of tax

(145,996)

 

37,535

 

(223,813)

 

(12,699)

 

 

 

 

 

 

 

 

COMPREHENSIVE (LOSS) INCOME

$         (224,895)

 

$           148,104

 

$       (284,420)

 

$        442,379

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

 

 

 

·  Effective January 1, 2002 for the 2002 underwriting year, Everest Re ceded 20.0% of its net retained liability to Bermuda Re through a quota share reinsurance agreement (“whole account quota share”).

·  Effective January 1, 2003, Everest Re and Bermuda Re amended the whole account quota share, through which Everest Re previously ceded 20.0% of its business to Bermuda Re so that effective January 1, 2003 Everest Re ceded 25.0% to Bermuda Re of the net retained liability on all new and renewal policies underwritten during the term of this agreement.  This amendment remained in effect through December 31, 2003.

22

·  Effective January 1, 2003, Everest Re entered into a whole account quota share with Bermuda Re, whereby Everest Re’s Canadian branch ceded to Bermuda Re 50.0% of its net retained liability on all new and renewal property business.  This remained in effect through December 31, 2006.

2
·  Effective January 1, 2004, Everest Re and Bermuda Re amended the whole account quota share through which Everest Re previously ceded 25.0% of its business to Bermuda Re so that effective January 1, 2004 Everest Re ceded 22.5% to Bermuda Re and 2.5% to Everest International of the net retained liability on all new and renewal covered business written during the term of this agreement.  This amendment remained in effect through December 31, 2005.


EVEREST REINSURANCE HOLDINGS, INC.

 

 

 

 

 

 

 

CONSOLIDATED STATEMENTS OF

 

 

 

 

 

 

 

CHANGES IN STOCKHOLDER'S EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

                                                                                                                    

September 30,

 

September 30,

(Dollars in thousands, except share amounts)

2008

 

2007

 

2008

 

2007

 

(unaudited)

 

(unaudited)

COMMON STOCK (shares outstanding):

 

 

 

 

 

 

 

Balance, beginning of period

1,000

 

1,000

 

1,000

 

1,000

Balance, end of period

1,000

 

1,000

 

1,000

 

1,000

                                                                                                            

 

 

 

 

 

 

 

ADDITIONAL PAID-IN CAPITAL:

 

 

 

 

 

 

 

Balance, beginning of period

$           312,924

 

$         304,585

 

$        310,206

 

$       300,764

Share-based compensation plans

1,671

 

1,548

 

4,389

 

5,369

Balance, end of period

314,595

 

306,133

 

314,595

 

306,133

                                                                                                     

 

 

 

 

 

 

 

  ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME,                                             

 

 

 

 

 

 

 

NET OF DEFERRED INCOME TAXES:

 

 

 

 

 

 

 

Balance, beginning of period

85,459

 

77,560

 

163,276

 

332,578

Cumulative effect to adopt FAS No. 159, net of tax

-

 

-

 

-

 

(204,784)

Net (decrease) increase during the period

(145,996)

 

37,535

 

(223,813)

 

(12,699)

Balance, end of period

(60,537)

 

115,095

 

(60,537)

 

115,095

 

 

 

 

 

 

 

 

RETAINED EARNINGS:

 

 

 

 

 

 

 

Balance, beginning of period

2,112,309

 

2,134,335

 

2,094,017

 

1,585,042

Cumulative effect to adopt FAS No. 159, net of tax

-

 

-

 

-

 

204,784

Net (loss) income

(78,899)

 

110,569

 

(60,607)

 

455,078

Balance, end of period

2,033,410

 

2,244,904

 

2,033,410

 

2,244,904

 

 

 

 

 

 

 

 

TOTAL STOCKHOLDER'S EQUITY, END OF PERIOD

$        2,287,468

 

$      2,666,132

 

$     2,287,468

 

$    2,666,132

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

 

 

 



EVEREST REINSURANCE HOLDINGS, INC.

 

 

 

 

 

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                                                                                  

Three Months Ended

 

Nine Months Ended

                                                                                   

September 30,

 

September 30,

(Dollars in thousands)

2008

 

2007

 

2008

 

2007

                                                                                                                                            

(unaudited)

 

(unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net (loss) income

$         (78,899)

 

$         110,569

 

$         (60,607)

 

$         455,078

Adjustments to reconcile net income to net cash provided by operating activities:                                     

 

 

 

 

 

 

 

   (Increase) decrease in premiums receivable

(3,405)

 

112,056

 

45,932

 

163,548

   (Increase) decrease in funds held by reinsureds, net

(221)

 

(10,589)

 

(1,237)

 

5,638

   (Increase) decrease in reinsurance receivables

(48,135)

 

92,835

 

(118,746)

 

5,057

   Decrease (increase) in deferred tax asset

61,482

 

56,023

 

(30,155)

 

78,151

   Increase (decrease) in reserve for losses and loss adjustment expenses          

194,584

 

(16,211)

 

154,284

 

(175,626)

   Increase (decrease) in unearned premiums

7,476

 

38,654

 

(134,529)

 

(67,907)

   Change in equity adjustments in limited partnerships

6,167

 

(4,810)

 

(9,095)

 

(25,821)

   Change in other assets and liabilities, net

(79,464)

 

(263,913)

 

(12,364)

 

(205,213)

   Non-cash compensation expense

1,201

 

-

 

3,834

 

-

   Amortization of bond premium/(accrual of bond discount)

3,141

 

(4,341)

 

5,809

 

(6,356)

   Amortization of underwriting discount on senior notes

45

 

42

 

133

 

122

   Net realized capital losses (gains)

108,652

 

(22,121)

 

261,347

 

(145,580)

Net cash provided by operating activities

172,624

 

88,194

 

104,606

 

81,091

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from fixed maturities matured/called - available for sale, at market value

106,558

 

254,125

 

370,220

 

601,245

Proceeds from fixed maturities sold - available for sale, at market value

52,180

 

26,281

 

138,326

 

38,228

Proceeds from equity securities sold - available for sale, at fair value

151,801

 

71,324

 

380,856

 

743,884

Distributions from other invested assets

30,035

 

20,613

 

41,246

 

44,345

Cost of fixed maturities acquired - available for sale, at market value

(64,455)

 

(181,355)

 

(1,343,983)

 

(314,473)

Cost of fixed maturities acquired - available for sale, at fair value

(11,444)

 

-

 

(11,444)

 

-

Cost of equity securities acquired - available for sale, at fair value

(115,399)

 

(78,913)

 

(156,363)

 

(310,825)

Cost of other invested assets acquired

(35,804)

 

(15,548)

 

(55,908)

 

(106,041)

Cost of other invested assets acquired, at fair value

(25,007)

 

(40,340)

 

(150,745)

 

(240,420)

Net change in short-term securities

(197,914)

 

(142,639)

 

687,541

 

(964,924)

Net change in unsettled securities transactions

(58,944)

 

4,947

 

(64,654)

 

457

Net cash used in investing activities

(168,393)

 

(81,505)

 

(164,908)

 

(508,524)

 

                       

 

                      

 

                      

 

                      

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Tax benefit from share-based compensation

469

 

1,548

 

554

 

5,369

Net proceeds from issuance of long term notes

-

 

-

 

-

 

395,637

Net cash provided by financing activities

469

 

1,548

 

554

 

401,006

 

 

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

(8,130)

 

4,119

 

13,772

 

(2,432)

 

 

 

   

 

 

 

 

Net (decrease) increase in cash

(3,430)

 

12,356

 

(45,976)

 

(28,859)

Cash, beginning of period

103,901

 

95,320

 

146,447

 

136,535

Cash, end of period

$           100,471

 

$         107,676

 

$          100,471

 

$           107,676

 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

 

 

Cash transactions:

 

 

 

 

 

 

 

   Income taxes (recoverable) paid, net

$         (107,359)

 

$          113,026

 

$          (49,014)

 

$           247,810

   Interest paid

$              13,887

 

$            18,139

 

$             52,861

 

$             52,416

 

 

 

 

 

 

 

 

Non-cash financing transactions:

 

 

 

 

 

 

 

   Non-cash tax benefit from share-based compensation

$                   469

 

$              1,548

 

$                  554

 

$              5,369

 

 

 

 

 

 

 

 

                                                                                                              

 

 

 

 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

 

 

 

 

·  Effective January 1, 2006, Everest Re, Bermuda Re and Everest International amended the whole account quota share so that for all new and renewal business recorded on or after January 1, 2006, Everest Re ceded 31.5% and 3.5% of its casualty business to Bermuda Re and Everest International, respectively, and Everest Re ceded 18.0% and 2.0% of its property business to Bermuda Re and Everest International, respectively. However, in no event shall the loss cessions to Bermuda Re and Everest International relating to any one occurrence on the property business exceed $125.0 million.  The property portion of this amendment remained in effect through December 31, 2006.  The casualty portion remained in effect through December 31, 2007.

4
·  Effective January 1, 2007, Everest Re and Bermuda Re amended the whole account quota share so that for all new and renewal business recorded on or after January 1, 2007, Everest Re cedes 60.0% of its Canadian branch property business to Bermuda Re.

·  Effective January 1, 2007, Everest Re, Bermuda Re and Everest International amended the whole account quota share so that for all new and renewal property business recorded on or after January 1, 2007, Everest Re ceded 22.5% and 2.5% to Bermuda Re and Everest International, respectively.  However, in no event shall the loss cessions to Bermuda Re and Everest International relating to any one occurrence on the property business exceed $130.0 million.  This amendment remained in effect through December 31, 2007.

·  Effective January 1, 2008, Everest Re, Bermuda Re and Everest International amended the 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.

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Nine Months Ended September 30, 2008 and 2007

1. General

As used in this document, “Holdings” means Everest Reinsurance Holdings, Inc.; “Group” means Everest Re Group, Ltd. (Holdings’ parent); “Bermuda Re” means Everest Reinsurance (Bermuda), Ltd., a subsidiary of Group; “Everest Re” means Everest Reinsurance Company, a subsidiary of Holdings, and its subsidiaries (unless the context otherwise requires); and the “Company” means Holdings and its subsidiaries.

The unaudited consolidated financial statements of the Company for the three and nine months ended September 30, 2008 and 2007 include all adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair statement of the results on an interim basis. Certain financial information, which is normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), has been omitted since it is not required for interim reporting purposes. The year end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The results for the three and nine months ended September 30, 2008 and 2007 are not necessarily indicative of the results for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, 2007, 2006 and 2005 included in the Company’s most recent Form 10-K filing.

2. New Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standards (“FAS”) No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment to FASB Statement No. 115” (“FAS 159”). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company adopted FAS 159 as of January 1, 2007.

In March 2008, the FASB issued FAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133” (“FAS 161”). FAS 161 requires entities to provide additional disclosures on derivative and hedging activities regarding their 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 impact of a January 1, 2009 adoption should be immaterial.

In October 2008, the FASB 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 is effective upon issuance. The Company does not have any assets for which the market is deemed not active as of September 30, 2008.

·  Effective January 1, 2009, Everest Re, Bermuda Re and Everest International amended the 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.


23

The following tables summarize the premiums and losses ceded by the Company to Bermuda Re and Everest International, respectively, for the periods indicated:


  Three Months Ended Nine Months Ended
Bermuda Re September 30, September 30,
(Dollars in thousands) 2009 2008 2009 2008
Ceded written premiums $323,098  $285,039  $879,163  $705,859 
Ceded earned premiums  286,537   243,685   835,673   667,799 
Ceded losses and LAE (a)  196,630   198,505   529,229   409,440 

  Three Months Ended Nine Months Ended
Everest International September 30, September 30,
(Dollars in thousands) 2009 2008 2009 2008
Ceded written premiums $68,937  $30,098  $152,819  $73,798 
Ceded earned premiums  49,381   25,739   121,664   69,517 
Ceded losses and LAE  27,070   21,506   63,625   43,762 
(a) Ceded losses and LAE include the Mt. McKinley loss portfolio transfer that constitutes losses ceded under retroactive reinsurance and therefore, in accordance with ASC 944-20 (FAS 113, “Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts”), a deferred gain on retroactive reinsurance is reflected in other expenses on the consolidated statement of operations and comprehensive income.

Everest Re sold net assets of its UK branch to Bermuda Re and provided Bermuda Re with a reserve indemnity agreement allowing for indemnity payments of up to 90% of ₤25.0 million of the excess of 2002 and prior reserves, provided that any recognition of profit from the reserves for 2002 and prior underwriting years is taken into account.  The limit available under this agreement was fully exhausted at December 31, 2004.

16. Income Taxes

The Company uses a projected annual effective tax rate in accordance with ASC 740-10-05 (FAS 109, “Accounting for Income Taxes”), to calculate its quarterly tax expense.  Under this methodology, when an interim quarter’s pre-tax income (loss) varies significantly from a full year’s income (loss) projection, the tax impact resulting from the income (loss) variance is effectively spread between the impacted quarter and the remaining quarters of the year, except for discreet items impacting an individual quarter.

The Company recognizes accrued interest related to unrecognized tax benefits and penalties in income taxes.  For the three and nine months ended September 30, 2009, the Company expensed approximately $1.3 million and $3.9 million, respectively, in interest and penalties.

17. Subsequent Events

The Company has evaluated known recognized and nonrecognized subsequent events through November 16, 2009, the date the financial statements were issued.  The Company does not have any subsequent events to report.

24

3. Investments

The amortized cost, market value and gross unrealized appreciation and depreciation of available for sale, market value fixed maturity and equity security investments are as follows for the periods indicated:

 

At September 30, 2008

 

 

 

Net Unrealized

 

 

 

Amortized

 

Appreciation/

 

Market

(Dollars in thousands)

Cost

 

(Depreciation)

 

Value

Fixed maturities-available for sale

 

 

 

 

 

  U.S. treasury securities and obligations of

 

 

 

 

 

     U.S. government agencies and corporations

$          126,584

 

$                4,994

 

$           131,578

  Obligations of U.S. states and political subdivisions                   

3,869,241

 

 (80,519)

 

3,788,722

  Corporate securities

850,464

 

 (72,260)

 

778,204

  Mortgage-backed securities

672,155

 

 (26,646)

 

645,509

  Foreign government securities

476,416

 

15,387

 

491,803

  Foreign corporate securities

541,519

 

271

 

541,790

Total fixed maturities

$       6,536,379

 

$          (158,773)

 

$        6,377,606

Equity securities

$              9,897

 

$                        -

 

$               9,897

 

At December 31, 2007

 

 

 

Net Unrealized

 

 

 

Amortized

 

Appreciation/

 

Market

(Dollars in thousands)

Cost

 

(Depreciation)

 

Value

Fixed maturities-available for sale

 

 

 

 

 

  U.S. treasury securities and obligations of

 

 

 

 

 

     U.S. government agencies and corporations

$            92,932

 

$                 3,568

 

$             96,500

  Obligations of U.S. states and political subdivisions                   

3,512,695

 

135,834

 

3,648,529

  Corporate securities

741,380

 

1,910

 

743,290

  Mortgage-backed securities

566,041

 

(1,019)

 

565,022

  Foreign government securities

416,715

 

19,802

 

436,517

  Foreign corporate securities

500,913

 

7,386

 

508,299

Total fixed maturities

$       5,830,676

 

$             167,481

 

$        5,998,157

Equity securities

$              9,897

 

$                         -

 

$               9,897

The changes in net unrealized gains (losses) for the Company’s investments are derived from the following sources for the periods as indicated:

 

 

Nine Months Ended

 

 

September 30,

(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

$     (326,254)

 

$    (46,372)

     Other invested assets

(3,122)

 

766

     Change in unrealized depreciation, pre-tax

(329,376)

 

(45,606)

     Deferred taxes

115,281

 

15,962

Change in unrealized depreciation, net of deferred taxes,

 

 

 

  included in stockholder's equity

$     (214,095)

 

$    (29,644)


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. 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 recovery. Generally, a change in a security’s value caused by a change in the market or interest rate environment does not constitute an other- than-temporary impairment, but rather a temporary decline in market value. Temporary declines in market value are recorded as unrealized losses in accumulated other comprehensive income. If the Company determines that the decline is other-than-temporary, the carrying value of the investment is written down to fair value and a realized loss is recorded in the Company’s consolidated statements of operations and comprehensive income (loss). The Company’s assessments are based on the issuers current and expected future financial position, timeliness with respect to interest and/or principal payments, speed of repayments on asset-backed securities, as well as relevant information provided by rating agencies, investment advisors and analysts.

The components of net realized capital (losses) gains are presented in the table below for the periods indicated:

 

Nine Months Ended

 

September 30,

(Dollars in thousands)

2008

 

2007

Fixed maturities, market value:

 

 

 

   Other-than-temporary impairments

$         (67,854)

 

$            (1,215)

   Losses from sales

(13,086)

 

(936)

Fixed maturities, fair value:

 

 

 

   Losses from fair value adjustments

(247)

 

-

Equity securities, fair value:

 

 

 

   (Losses) gains from sales

(12,630)

 

(8,921)

   (Losses) gains from fair value adjustments                                                    

(122,938)

 

119,693

Other invested assets, fair value:

 

 

 

   (Losses) gains from fair value adjustments

(44,562)

 

36,955

Short-term investments

(30)

 

4

Total

$        (261,347)

 

$          145,580

Proceeds from sales of fixed maturity investments, market value, for the nine months ended September 30, 2008 and 2007 were $138.3 million and $38.2 million, respectively. Gross gains of $1.1 million and $1.0 million and gross losses of $14.2 million and $1.9 million were realized on those fixed maturity sales for the nine months ended September 30, 2008 and 2007, respectively. Proceeds from sales of equity security investments, fair value, for the nine months ended September 30, 2008 and 2007 were $380.9 million and $743.9 million, respectively. Gross gains of $5.9 million and $2.8 million and gross losses of $18.5 million and $11.7 million were realized on those equity sales for the nine months ended September 30, 2008 and 2007, respectively.

Included in net realized capital (losses) gains for the nine months ended September 30, 2008 and 2007 was $67.9 million and $1.2 million, respectively, for write-downs in the value of securities deemed to be impaired on an other-than-temporary basis.


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 provides 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. The Company recorded $0.2 million in net realized capital losses due to fair value re-measurement on fixed maturities at fair value for the three and nine months ended September 30, 2008. The net realized capital losses due to fair value re-measurement were $58.8 million and $122.9 million on the equity securities at fair value for the three and nine months ended September 30, 2008, respectively. The net realized capital gains due to fair value re-measurement were $27.4 million and the net realized capital losses due to fair value re-measurement were $44.6 million on other invested assets at fair value for the three and nine months ended September 30, 2008, respectively. The Company recorded $18.7 million and $119.7 million in net realized capital gains due to fair value re-measurement on the equity securities at fair value for the three and nine months ended September 30, 2007, respectively. The net realized capital gains due to fair value re-measurement were $9.0 million and $37.0 million on other invested assets at fair value for the three and nine months ended September 30, 2007, respectively.

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. The Company has not made any adjustments to the prices obtained from these third party sources.

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. Fixed maturities priced by brokers are categorized as Level 3, Significant Unobservable Inputs, since the exact method of valuation is not available.

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 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)

 

September 30, 2008

 

(Level 1)

 

(Level 2)

 

(Level 3)

Assets:

 

 

 

 

 

 

 

 

   Fixed maturities, market value

 

$                 6,377,606

 

$                        -

 

$        6,361,680

 

$              15,926

   Fixed maturities, fair value

 

11,197

 

-

 

11,197

 

-

   Equity securities, market value

 

9,897

 

-

 

9,897

 

-

   Equity securities, fair value

 

455,312

 

441,540

 

13,772

 

-

   Other invested assets, fair value                             

 

359,973

 

359,973

 

-

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

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, market value

 

9,897

 

-

 

9,897

 

-

   Equity securities, fair value

 

815,372

 

801,611

 

13,761

 

-

   Other invested assets, fair value

 

253,791

 

253,791

 

-

 

-


The following tables present the fixed maturity investments for which fair value was measured under Level 3, fair value measurements using significant unobservable inputs, for the periods indicated:

 

Nine Months Ended

 

September 30,

(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)

(2,630)

 

(636)

     Included in other comprehensive income

(1,400)

 

(940)

  Purchases, issuances and settlements

(5,318)

 

1,067

  Transfers in and/or (out) of Level 3

(53,435)

 

9,920

Ending balance at September 30

$           15,926

 

$           33,435

 

 

 

 

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

$           (2,759)

 

$                694

 

Three Months Ended

 

September 30,

(Dollars in thousands)

2008

 

2007

Assets:

 

 

 

Beginning balance at July 1

$            17,132

 

$            21,251

  Total gains or (losses) (realized/unrealized)                                                           

 

 

 

     Included in earnings (or changes in net assets)

(316)

 

(691)

     Included in other comprehensive income

(812)

 

(561)

  Purchases, issuances and settlements

(114)

 

1,409

  Transfers in and/or (out) of Level 3

36

 

12,027

Ending balance at September 30

$            15,926

 

$             33,435

 

 

 

 

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

$              1,302

 

$                  694

5. Capital Transactions

On December 1, 2005, Group and Holdings filed a shelf registration statement on Form S-3ASR with the Securities and Exchange Commission (“SEC”), as a Well Known Seasoned Issuer. This shelf registration statement was used by Group to register common shares, preferred shares, debt securities, warrants, share purchase contracts and share purchase units; by Holdings to register debt securities and by Everest Re Capital Trust III (“Capital Trust III”) to register trust preferred securities. Group intends to file a new shelf registration statement on or about December 1, 2008 to replace the one filed on December 1, 2005.

On April 26, 2007, Holdings completed a public offering of $400.0 million principal amount of 6.6% fixed to floating rate long term subordinated notes with a scheduled maturity date of May 15, 2037 and a final maturity date of May 1, 2067. The net proceeds from the offering were used to redeem all of the outstanding 7.85% junior subordinated debt securities on November 15, 2007 and for general corporate purposes.


6. Contingencies

In the ordinary course of business, the Company is involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine the Company’s rights and obligations under insurance, reinsurance and other contractual agreements. In some disputes, the Company seeks to enforce its rights under an agreement or to collect funds owing to it. In other matters, the Company is resisting attempts by others to collect funds or enforce alleged rights. These disputes arise from time to time and are ultimately resolved through both informal and formal means, including negotiated resolution, arbitration and litigation. In all such matters, the Company believes that its positions are legally and commercially reasonable. While the final outcome of these matters cannot be predicted with certainty, the Company does not believe that any of these matters, when finally resolved, will have a material adverse effect on the Company’s financial position or liquidity. However, an adverse resolution of one or more of these items in any one quarter or fiscal year could have a material adverse effect on the Company’s results of operations in that period.

The Company does not believe that there are any material pending legal proceedings to which it or any of its subsidiaries is a party or of which any of their properties are the subject.

The Company continues to receive claims under expired insurance and reinsurance contracts asserting injuries and/or damages relating to or resulting from environmental pollution and hazardous substances, including asbestos. Environmental claims typically assert liability for (a) the mitigation or remediation of environmental contamination or (b) bodily injury or property damage caused by the release of hazardous substances into the land, air or water. Asbestos claims typically assert liability for bodily injury from exposure to asbestos or for property damage resulting from asbestos or products containing asbestos.

The Company’s reserves include an estimate of the Company’s ultimate liability for asbestos and environmental (“A&E”) claims. As of September 30, 2008, approximately 11% of the Company’s gross reserves were an estimate of the Company’s ultimate liability for A&E claims. The Company’s A&E liabilities emanate from Mt. McKinley Insurance Company’s (“Mt. McKinley”), a direct subsidiary of the Company, direct insurance business and Everest Re’s assumed reinsurance business. All of the contracts of insurance and reinsurance under which the Company has received claims during the past three years, expired more than 20 years ago. There are significant uncertainties surrounding the Company’s reserves for its A&E losses.

The following table summarizes incurred losses with respect to A&E on both a gross and net of retrocessional basis for the periods indicated:

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

(Dollars in thousands)

 

2008

 

2007

 

2008

 

2007

Gross basis:

 

 

 

 

 

 

 

 

Beginning of period reserves                            

 

$       870,998

 

$       637,888

 

$       922,843

 

$      650,134

Incurred losses

 

-

 

40,000

 

-

 

80,000

Paid losses

 

(16,895)

 

(25,696)

 

(68,740)

 

(77,942)

End of period reserves

 

$       854,103

 

$       652,192

 

$       854,103

 

$      652,192

 

 

 

 

 

 

 

 

 

Net basis:

 

 

 

 

 

 

 

 

Beginning of period reserves

 

$       513,516

 

$       306,096

 

$       537,549

 

$      313,308

Incurred losses

 

-

 

32,155

 

-

 

48,630

Paid losses

 

(8,724)

 

(10,160)

 

(32,757)

 

(33,847)

End of period reserves

 

$       504,792

 

$       328,091

 

$       504,792

 

$      328,091


At September 30, 2008, the gross reserves for A&E losses were comprised of $149.3 million representing case reserves reported by ceding companies, $146.1 million representing additional case reserves established by the Company on assumed reinsurance claims, $171.9 million representing case reserves established by the Company on direct excess insurance claims, including Mt. McKinley and $386.8 million representing incurred but not reported (“IBNR”) reserves.

With respect to asbestos only, at September 30, 2008, the Company had gross asbestos loss reserves of $800.7 million, or 93.7%, of total A&E reserves, of which $554.5 million was for assumed business and $246.2 million was for direct business.

Management believes that these uncertainties and factors continue to render reserves for A&E and particularly asbestos losses significantly less subject to traditional actuarial analysis than reserves for other types of losses. The Company establishes reserves to the extent that, in the judgment of management, the facts and prevailing law reflect an exposure for the Company or its ceding companies.

Due to the uncertainties, the ultimate losses attributable to A&E, and particularly asbestos, may be subject to more variability than are non-A&E reserves and such variation, depending on coverage under the Company’s various reinsurance arrangements, could have a material adverse effect on the Company’s future financial condition, results of operations and cash flows.

In 1993 and prior, the Company had a business arrangement with The Prudential Insurance Company of America (“The Prudential”) wherein, for a fee, the Company accepted settled claim payment obligations of certain property and casualty insurers, and, concurrently, became the owner of the annuity or assignee of the annuity proceeds funded by the property and casualty insurers specifically to fulfill these fully settled obligations. In these circumstances, the Company would be liable if The Prudential, which has an A+ (Superior) financial strength rating from A.M. Best Company (“A.M. Best”), was unable to make the annuity payments. At September 30, 2008, the estimated cost to replace all such annuities for which the Company was contingently liable was $152.1 million.

Prior to its 1995 initial public offering, the Company had purchased annuities from an unaffiliated life insurance company with an A+ (Superior) financial strength rating from A.M. Best to settle certain claim liabilities of the company. Should the life insurance company become unable to make the annuity payments, the Company would be liable for those claim liabilities. At September 30, 2008, the estimated cost to replace such annuities was $22.7 million.


7. Other Comprehensive (Loss) Income

The following table presents the components of other comprehensive (loss) income for the periods indicated:

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

(Dollars in thousands)

 

2008

 

2007

 

2008

 

2007

Unrealized (losses) gains on securities

 

$    (209,446)

 

$         46,882

 

$    (329,376)

 

$     (45,606)

Tax (benefit) expense

 

(73,307)

 

16,409

 

(115,281)

 

(15,962)

Net unrealized (losses) gains on securities

 

(136,139)

 

30,473

 

(214,095)

 

(29,644)

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments                   

 

(15,469)

 

10,866

 

(16,231)

 

26,070

Tax (benefit) expense

 

(5,412)

 

3,804

 

(5,679)

 

9,125

Net foreign currency translation adjustments

(10,057)

 

7,062

 

(10,552)

 

16,945

 

 

 

 

 

 

 

 

 

Pension adjustment

 

308

 

-

 

1,283

 

-

Tax expense

 

108

 

-

 

449

 

-

Net pension adjustment

 

200

 

-

 

834

 

-

 

 

 

 

 

 

 

 

 

Other comprehensive (loss) income, net of deferred taxes

$     (145,996)  

$         37,535  

$     (223,813)  

$      (12,699)  

8. Letters of Credit

The Company has an arrangement available for the issuance of letters of credit, which letters are generally collateralized by the Company’s cash and investments. The Citibank Holdings Credit Facility involves a syndicate of lenders (see Note 13), with Citibank acting as administrative agent. At September 30, 2008 and December 31, 2007, letters of credit for $17.2 million with a date of expiry of December 31, 2008 were issued and outstanding. The letters of credit collateralize reinsurance obligations of the Company’s non-U.S. operations.

9. Trust Agreements

A subsidiary of the Company, Everest Re, has established a trust agreement, which effectively uses Everest Re’s investments as collateral, as security for assumed losses payable to a non-affiliated ceding company. At September 30, 2008, the total amount on deposit in the trust account was $19.8 million.

10. Senior Notes

On October 12, 2004, Holdings completed a public offering of $250.0 million principal amount of 5.40% senior notes due October 15, 2014. On March 14, 2000, Holdings completed a public offering of $200.0 million principal amount of 8.75% senior notes due March 15, 2010.

Interest expense incurred in connection with these senior notes was $7.8 million for both the three months ended September 30, 2008 and 2007 and $23.4 million for both the nine months ended September 30, 2008 and 2007. Market value, which is based on quoted market price at September 30, 2008 and December 31, 2007, was $237.6 million and $235.3 million, respectively, for the 5.40% senior notes and $207.1 million and $215.9 million, respectively, for the 8.75% senior notes.


11. Long Term Subordinated Notes

On April 26, 2007, Holdings completed a public offering of $400.0 million principal amount of 6.6% fixed to floating rate long term subordinated notes with a scheduled maturity date of May 15, 2037 and a final maturity date of May 1, 2067. During the fixed rate interest period from May 3, 2007 through May 14, 2017, interest will be at the annual rate of 6.6%, payable semi-annually in arrears on November 15 and May 15 of each year, commencing on November 15, 2007, subject to Holdings’ right to defer interest on one or more occasions for up to ten consecutive years. During the floating rate interest period from May 15, 2017 through maturity, interest will be based on the 3 month London Interbank Offered Rate (“LIBOR”) plus 238.5 basis points, reset quarterly, payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year, subject to Holdings’ right to defer interest on one or more occasions for up to ten consecutive years. Deferred interest will accumulate interest at the applicable rate compounded semi-annually for periods prior to May 15, 2017, and compounded quarterly for periods from and including May 15, 2017.

Holdings can redeem the long term subordinated notes prior to May 15, 2017, in whole but not in part at the applicable redemption price, which will equal the greater of (a) 100% of the principal amount being redeemed and (b) the present value of the principal payment on May 15, 2017 and scheduled payments of interest that would have accrued from the redemption date to May 15, 2017 on the long term subordinated notes being redeemed, discounted to the redemption date on a semi-annual basis at a discount rate equal to the treasury rate plus an applicable spread of either 0.25% or 0.50%, in each case plus accrued and unpaid interest. Holdings may redeem the long term subordinated notes on or after May 15, 2017, in whole or in part at 100% of the principal amount plus accrued and unpaid interest; however, redemption on or after the scheduled maturity date and prior to May 1, 2047 is subject to a replacement capital covenant. This covenant is for the benefit of certain senior note holders and it mandates that Holdings receive proceeds from the sale of another subordinated debt issue, of at least similar size, before it may redeem the subordinated notes.

Interest expense incurred in connection with these long term notes was $6.6 million and $19.8 million for the three and nine months ended September 30, 2008, respectively, and $6.6 million and $10.9 million, respectively, for the three and nine months ended September 30, 2007. Market value, which is based on quoted market price at September 30, 2008 and December 31, 2007, was $272.0 million and $349.8 million, respectively, for the 6.6% long term subordinated notes.

12. Junior Subordinated Debt Securities Payable

On March 29, 2004, Holdings issued $329.9 million of 6.20% junior subordinated debt securities due March 29, 2034 to Everest Re Capital Trust II (“Capital Trust II”). Holdings may redeem the junior subordinated debt securities before their maturity at 100% of their principal amount plus accrued interest as of the date of redemption. The securities may be redeemed in whole or in part, on one or more occasions at any time on or after March 30, 2009; or at any time, in whole, but not in part, within 90 days of the occurrence and continuation of a determination that the Trust may become subject to tax or the Investment Company Act.

On November 14, 2002, Holdings issued $216.5 million of 7.85% junior subordinated debt securities due November 15, 2032 to Everest Re Capital Trust (“Capital Trust”). Holdings redeemed all of the junior subordinated debt securities at 100% of their principal amount plus accrued interest on November 15, 2007.

Fair value, which is primarily based on quoted market price of the related trust preferred securities, at September 30, 2008 and December 31, 2007, was $186.0 million and $250.8 million, respectively, for the 6.20% junior subordinated debt securities.

Interest expense incurred in connection with these junior subordinated notes was $5.1 million and $9.4 million for the three months ended September 30, 2008 and 2007, respectively, and $15.3 million and $28.1 million for the nine months ended September 30, 2008 and 2007, respectively.


Capital Trust II is a wholly owned finance subsidiary of Holdings. Capital Trust was dissolved upon the completion of the redemption of the trust preferred securities on November 15, 2007.

Holdings considers that the mechanisms and obligations relating to the trust preferred securities, taken together, constitute a full and unconditional guarantee by Holdings of Capital Trust II’s payment obligations with respect to the trust preferred securities.

Capital Trust II will redeem all of the outstanding trust preferred securities when the junior subordinated debt securities are paid at maturity on March 29, 2034. The Company may elect to redeem the junior subordinated debt securities, in whole or in part, at any time on or after March 30, 2009. If such an early redemption occurs, the outstanding trust preferred securities would also be proportionately redeemed.

There are certain regulatory and contractual restrictions on the ability of the Company’s operating subsidiaries to transfer funds to the Company in the form of cash dividends, loans or advances. The insurance laws of the State of Delaware, where the Company’s direct insurance subsidiaries are domiciled, require regulatory approval before those subsidiaries can pay dividends or make loans or advances to the Company that exceed certain statutory thresholds. In addition, the terms of the Holdings Credit Facility (discussed in Note 13) require Everest Re, the Company’s principal insurance subsidiary, to maintain a certain statutory surplus level as measured at the end of each fiscal year. At December 31, 2007, $2,595.1 million of the $3,248.5 million in net assets of the Company’s consolidated subsidiaries were subject to the foregoing regulatory restrictions.

13. Credit Line

Effective August 23, 2006, Holdings entered into a new five year, $150.0 million senior revolving credit facility with a syndicate of lenders, referred to as the “Holdings Credit Facility”. Citibank N.A. is the administrative agent for the Holdings Credit Facility. The Holdings Credit Facility may be used for liquidity and general corporate purposes. The Holdings Credit Facility provides for the borrowing of up to $150.0 million with interest at a rate selected by Holdings equal to either, (1) the Base Rate (as defined below) or (2) a periodic fixed rate equal to the Eurodollar Rate plus an applicable margin. The Base Rate means a fluctuating interest rate per annum in effect from time to time to be equal to the higher of (a) the rate of interest publicly announced by Citibank as its prime rate or (b) 0.5% per annum above the Federal Funds Rate, in each case plus the applicable margin. The amount of margin and the fees payable for the Holdings Credit Facility depends upon Holdings’ senior unsecured debt rating.

The Holdings Credit Facility requires Holdings to maintain a debt to capital ratio of not greater than 0.35 to 1 and Everest Re to maintain its statutory surplus at $1.5 billion plus 25% of future aggregate net income and 25% of future aggregate capital contributions after December 31, 2005, which at September 30, 2008, was $1,775.2 million. As of September 30, 2008, Holdings was in compliance with all Holdings Credit Facility covenants.

At September 30, 2008 and at December 31, 2007, there were outstanding letters of credit of $17.2 million under the Holdings Credit Facility.

Costs incurred in connection with the Holdings Credit Facility were $34,747 and $26,542 for the three months ended September 30, 2008 and 2007, respectively, and $94,908 and $79,625 for the nine months ended September 30, 2008 and 2007, respectively.

14. Segment Results

The Company, through its subsidiaries, operates in four segments: U.S. Reinsurance, U.S. Insurance, Specialty Underwriting and International. The U.S. Reinsurance operation writes property and casualty reinsurance, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies within the U.S. The U.S. Insurance operation writes property and casualty insurance primarily through general agents and surplus lines brokers within the U.S. The Specialty Underwriting operation writes accident and health (“A&H”), marine, aviation and surety business within the U.S. and


worldwide through brokers and directly with ceding companies. The International operation writes non-U.S. property and casualty reinsurance through Everest Re’s branches in Canada and Singapore and offices in Miami and New Jersey.

These segments are managed in a coordinated fashion with respect to pricing, risk management, control of aggregate catastrophe exposures, capital, investments and support operations. Management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting results.

Underwriting results include earned premium less losses and loss adjustment expenses ("LAE") incurred, commission and brokerage expenses and other underwriting expenses. Underwriting results are measured using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which, respectively, divide incurred losses, commissions and brokerage and other underwriting expenses by premiums earned.

The Company does not maintain separate balance sheet data for its operating segments. Accordingly, the Company does not review and evaluate the financial results of its operating segments based upon balance sheet data.

The following tables present the underwriting results for the operating segments for the periods indicated:

U.S. Reinsurance

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(Dollars in thousands)

2008

 

2007

 

2008

 

2007

Gross written premiums

$       280,467

 

$      327,483

 

$     714,534

 

$     953,505

Net written premiums

146,467

 

233,083

 

424,982

 

697,059

 

 

 

 

 

 

 

 

Premiums earned

$       167,468

 

$      231,411

 

$     527,475

 

$     733,566

Incurred losses and LAE

240,734

 

127,121

 

446,013

 

294,439

Commission and brokerage

27,473

 

53,830

 

125,762

 

169,619

Other underwriting expenses                         

7,840

 

7,280

 

23,500

 

21,092

Underwriting (loss) gain

$    (108,579)

 

$        43,180

 

$    (67,800)

 

$     248,416

U.S. Insurance

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(Dollars in thousands)

2008

 

2007

 

2008

 

2007

Gross written premiums

$      194,021

 

$      228,207

 

$      595,458

 

$      607,217

Net written premiums

98,597

 

180,172

 

312,949

 

414,247

 

 

 

 

 

 

 

 

Premiums earned

$      107,822

 

$      139,602

 

$      372,032

 

$      401,747

Incurred losses and LAE

78,386

 

98,980

 

335,965

 

324,093

Commission and brokerage

4,798

 

20,698

 

48,438

 

59,020

Other underwriting expenses                         

16,876

 

15,243

 

47,118

 

39,621

Underwriting gain (loss)

$          7,762

 

$          4,681

 

$     (59,489)

 

$     (20,987)


Specialty Underwriting

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(Dollars in thousands)

2008

 

2007

 

2008

 

2007

Gross written premiums

$         54,828

 

$        70,508

 

$      193,941

 

$      201,566

Net written premiums

34,564

 

49,539

 

128,787

 

141,591

 

 

 

 

 

 

 

 

Premiums earned

$         35,317

 

$        48,171

 

$      126,318

 

$      143,131

Incurred losses and LAE

37,615

 

28,302

 

81,747

 

95,080

Commission and brokerage

8,660

 

10,687

 

30,418

 

29,362

Other underwriting expenses                         

1,937

 

1,718

 

6,182

 

5,082

Underwriting (loss) gain

$      (12,895)

 

$          7,464

 

$          7,971

 

$        13,607

International

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(Dollars in thousands)

2008

 

2007

 

2008

 

2007

Gross written premiums

$      248,821

 

$       213,635

 

$      654,183

 

$      589,605

Net written premiums

144,810

 

139,959

 

394,260

 

403,993

 

 

 

 

 

 

 

 

Premiums earned

$      139,285

 

$       141,966

 

$      395,511

 

$      417,970

Incurred losses and LAE

90,261

 

90,366

 

252,088

 

272,504

Commission and brokerage

32,885

 

29,335

 

90,652

 

92,451

Other underwriting expenses                         

4,691

 

4,144

 

14,492

 

12,194

Underwriting gain

$        11,448

 

$         18,121

 

$        38,279

 

$        40,821

The following table reconciles the underwriting results for the operating segments to income before taxes as reported in the consolidated statements of operations and comprehensive loss for the periods indicated:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(Dollars in thousands)

2008

 

2007

 

2008

 

2007

Underwriting results

$    (102,264)

 

$         73,446

 

$       (81,039)

 

$      281,857

Net investment income

97,305

 

105,023

 

292,263

 

307,809

Net realized capital (losses) gains                 

(108,652)

 

22,121

 

(261,347)

 

145,580

Corporate expense

(1,425)

 

(1,011)

 

(4,502)

 

(3,268)

Interest expense

(19,745)

 

(26,484)

 

(59,233)

 

(68,089)

Other income (expense)

7,951

 

(24)

 

(16,039)

 

(14,464)

(Loss) income before taxes

$    (126,830)

 

$       173,071

 

$     (129,897)

 

$      649,425

The Company produces business in the U.S. and internationally. The net income deriving from and assets residing in the individual foreign countries in which the Company writes business are not identifiable in the Company’s financial records. Based on written premium, other than the U.S., no other country represented more than 5% of the Company’s revenues.

15. Related-Party Transactions

During the normal course of business, the Company, through its affiliates, engages in reinsurance and brokerage and commission business transactions with companies controlled by or affiliated with one or more of its outside directors. Such transactions, individually and in the aggregate, are not material to the Company’s financial condition, results of operations and cash flows.


The Company engages in reinsurance transactions with Bermuda Re and Everest International Reinsurance, Ltd. (“Everest International”), affiliates, primarily driven by enterprise risk and capital management considerations, under which business is ceded at market rates and terms. These transactions include:

Effective September 19, 2000, Mt. McKinley and Bermuda Re entered into a loss portfolio transfer reinsurance agreement, whereby Mt. McKinley transferred all of its net insurance exposures and reserves to Bermuda Re.

Effective October 1, 2001, Everest Re and Bermuda Re entered into a loss portfolio reinsurance agreement, whereby Everest Re transferred all of its Belgium branch net insurance exposures and reserves to Bermuda Re.

For premiums earned and losses incurred for the period January 1, 2002 through December 31, 2002, Everest Re, Everest National Insurance Company and Everest Security Insurance Company entered into an Excess of Loss Reinsurance Agreement with Bermuda Re, covering workers’ compensation losses occurring on and after January 1, 2002, as respects new, renewal and in force policies effective on that date through December 31, 2002. Bermuda Re is liable for any loss exceeding $100,000 per occurrence, with its liability not to exceed $150,000 per occurrence.

Effective January 1, 2002 for the 2002 underwriting year, Everest Re ceded 20.0% of its net retained liability to Bermuda Re through a quota share reinsurance agreement (“whole account quota share”).

Effective January 1, 2003, Everest Re and Bermuda Re amended the whole account quota share, through which Everest Re previously ceded 20.0% of its business to Bermuda Re so that effective January 1, 2003 Everest Re ceded 25.0% to Bermuda Re of the net retained liability on all new and renewal policies underwritten during the term of this agreement. This amendment remained in effect through December 31, 2003.

Effective January 1, 2003, Everest Re entered into a whole account quota share with Bermuda Re, whereby Everest Re’s Canadian branch ceded to Bermuda Re 50.0% of its net retained liability on all new and renewal property business. This remained in effect through December 31, 2006.

Effective January 1, 2004, Everest Re and Bermuda Re amended the whole account quota share through which Everest Re previously ceded 25.0% of its business to Bermuda Re so that effective January 1, 2004 Everest Re ceded 22.5% to Bermuda Re and 2.5% to Everest International of the net retained liability on all new and renewal covered business written during the term of this agreement. This amendment remained in effect through December 31, 2005.

Effective January 1, 2006, Everest Re, Bermuda Re and Everest International amended the whole account quota share so that for all new and renewal business recorded on or after January 1, 2006, Everest Re ceded 31.5% and 3.5% of its casualty business to Bermuda Re and Everest International, respectively, and Everest Re ceded 18.0% and 2.0% of its property business to Bermuda Re and Everest International, respectively. However, in no event shall the loss cessions to Bermuda Re and Everest International relating to any one occurrence on the property business exceed $125.0 million. The property portion of this amendment remained in effect through December 31, 2006. The casualty portion remained in effect through December 31, 2007.

Effective January 1, 2007, Everest Re and Bermuda Re amended the whole account quota share so that for all new and renewal business recorded on or after January 1, 2007, Everest Re cedes 60.0% of its Canadian branch property business to Bermuda Re.

 


Effective January 1, 2007, Everest Re, Bermuda Re and Everest International amended the whole account quota share so that for all new and renewal property business recorded on or after January 1, 2007, Everest Re ceded 22.5% and 2.5% to Bermuda Re and Everest International, respectively. However, in no event shall the loss cessions to Bermuda Re and Everest International relating to any one occurrence on the property business exceed $130.0 million. This amendment remained in effect through December 31, 2007.

Effective January 1, 2008, Everest Re, Bermuda Re and Everest International entered into a whole account quota share whereby, for all new and renewal casualty and property business recorded on or after January 1, 2008, Everest Re 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.

The following table summarizes the premiums and losses ceded by the Company to Bermuda Re and Everest International, respectively, for the periods indicated:

Bermuda Re

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(Dollars in thousands)

2008

 

2007

 

2008

 

2007

Ceded written premiums

$        285,039

 

$       198,129

 

$     705,859

 

$     573,019

Ceded earned premiums

243,685

 

191,678

 

667,799

 

575,689

Ceded losses and LAE (a)                                  

198,505

 

110,573

 

409,440

 

359,655

 

 

 

 

 

 

 

 

Everest International

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(Dollars in thousands)

2008

 

2007

 

2008

 

2007

Ceded written premiums

$          30,098

 

$         19,951

 

$       73,798

 

$       59,274

Ceded earned premiums

25,739

 

19,605

 

69,517

 

59,884

Ceded losses and LAE

21,506

 

11,084

 

43,762

 

34,269

(a) Ceded losses and LAE include the Mt. McKinley loss portfolio transfer that constitutes losses ceded under retroactive reinsurance and therefore, in accordance with FAS 113, “Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts,” a deferred gain on retroactive reinsurance is reflected in other expenses on the consolidated statement of operations and comprehensive income.

Everest Re sold net assets of its UK branch to Bermuda Re and provided Bermuda Re with a reserve indemnity agreement allowing for indemnity payments of up to 90% of £25.0 million of the excess of 2002 and prior reserves, provided that any recognition of profit from the reserves for 2002 and prior underwriting years is taken into account. The limit available under this agreement was fully exhausted at December 31, 2004.

16. Income Taxes

The Company uses a projected annual effective tax rate in accordance with FASB Statement No. 109, “Accounting for Income Taxes” (“FAS 109”), to calculate its quarterly tax expense. Under this methodology, when an interim quarter’s pre-tax income (loss) varies significantly from a full year’s income (loss) projection, the tax impact resulting from the income (loss) variance is effectively spread between the impacted quarter and the remaining quarters of the year, except for discreet items impacting an individual quarter.

The Company recognizes accrued interest related to unrecognized tax benefits and penalties in income taxes. For the three and nine months ended September 30, 2008, the Company expensed approximately $1.0 million and $1.8 million, respectively, in interest and penalties.

19

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Industry Conditions.

The worldwide reinsurance and insurance businesses are highly competitive, as well as cyclical by product and market.  As a result,such, financial results tend to fluctuate with periods of constrained availability, high rates and strong profits followed by periods of abundant capacity, low rates and constrained profitability.  Competition in the types of reinsurance and insurance business that we underwrite is based on many factors, including the perceived overall financial strength of the reinsurer or insurer, ratings of the reinsurer or insurer by A.M. Best Company and/or Standard & Poor’s Rating Services, underwriting expertise, the jurisdictions where the reinsurer or insurer is licensed or otherwise authorized, capacity and coverages offered, premiums charged, other terms and conditions of the reinsurance and insurance business offered, services offered, speed of claims payment and reputation and experience in lines written. Furthermore, the market impact from these competitive factors related to reinsurance and insurance is generally not consistent across lines of business, domestic and international geographical areas and distribution channels.


We compete in the U.S. and international reinsurance and insurance markets with numerous global competitors.  Our competitors include independent reinsurance and insurance companies, subsidiaries or affiliates of established worldwide insurance companies, reinsurance departments of certain insurance companies and domestic and international underwriting operations, including underwriting syndicates at Lloyd’s.  Some of these competitors have greater financial resources than we do and have established long term and continuing business relationships, which can be a significant competitive advantage.  In addition, the lack of strong barriers to entry into the reinsurance business and the potential for securitization of reinsurance and insurance risks through capital markets provide additional sources of potential reinsurance and insurance capacity and competition.

During


Starting in the latter part of 2007, throughout 2008 and into 2008,2009, there has been a significant slowdown in the global economy, precipitated primarilywhich has negatively impacted the financial resources of the industry.  Excessive availability and use of credit, particularly by individuals, led to increased defaults on sub-prime mortgages in the U.S. and elsewhere, falling house pricesvalues for houses and many commodities and contracting consumer spending.  The significant increase in default rates negatively impacted the value of mortgage backedasset-backed securities held by both foreign and domestic institutions.  The defaults have leadled to a corresponding increase in foreclosures, which have driven down housing values, resulting in additional losses on the asset-backed securities.  During the third quarter and into the fourth quarterquarters of 2008, the credit markets deteriorated dramatically, evidenced by widening credit spreads and dramatically reduced availability of credit.  Many financial institutions, including some insurance entities, experienced liquidity crises due to immediate demands for funds for withdrawals or collateral, combined with falling asset values and their inability to sell assets to meet the increased demands.  As a result, several financial institutions have failed or been acquired at distressed prices, while others have received loans from the U.S. government to continue operations.  The liquidity crisis significantly increased the spreads on fixed maturities and, at the same time, had a dramatic and negative impact on the stock markets around the world.  The combination of losses on securities from failed or impaired companies combined with the decline in values of fixed maturitiesmaturity and equity securities has resulted in a significant declinedeclines in the capital bases of most insurance and reinsurance companies. ItWhile there has been improvement in the financial markets during 2009, it is too early to predict whatthe timing and extent of impact the capital deterioration from declines in portfolio investment values, underwriting losses and company work-outssubsequent partial recovery will have on market conditions. There is an expectation that these events will result in increased rates for insurance and reinsurance in certain segments of the market although there is limited evidence of increases at this point.

conditions.


Worldwide insurance and reinsurance market conditions continued to be very competitive in the quarter.competitive.  Generally, there was ample insurance and reinsurance capacity relative to demand.  We noted, however, that in many markets and lines, the rates of decline have slowed, pricing in some segments was relatively flat and

20

there was upward movement in some others. The extent of competitionothers, particularly property catastrophe coverage.  Competition and its effect on rates, terms and conditions variesvary widely by market and coverage andyet continues to be most prevalent in the U.S. casualty insurance and reinsurance markets. In 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 premiums subject to the quota share contract. The U.S. insurance markets in which we participate remainwere extremely competitive as well, particularly in the workers’ compensation, public entity and contractor

sectors.  While our growth in existing programs has slowed, given the specialty nature of our business and our underwriting discipline, we believe the impact on the profitability of our business towill be less pronounced than on the market generally.

Rate decreases in the international markets have generally been less pronounced than in the U.S., In addition, we continue to opportunistically add new programs and we have seen some increases, particularly for catastrophe exposed business. We have grown ourlines of business in the Middle East, Latin Americato enhance growth and Asia. We are expanding our international reach by opening a new office in Brazil to capitalize on the recently expanded opportunity for professional reinsurers in that market and on the economic growth expected for Brazil in the future. The international markets have also benefited somewhat from the weaker U.S. dollar compared to a year ago since the foreign currencies convert to higher dollar amounts resulting in favorable year over year premium comparisons.

profitability.


The reinsurance industry has experienced a period of falling rates and volume. Profit opportunities have become generally less available over time; howevervolume, particularly in the unfavorable trends appear to have abated somewhat.casualty lines of business.  We are now seeing smaller rate declines, pockets of stability and some increases in some markets and for some coverages.  As a result of very significant investment and catastrophe losses incurred by both primary insurers and reinsurers over the past nine months,year, but principally in the most recent quarter,last nine months of 2008, industry-wide capital has declined and 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 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 in the industry has been wrung out of the industry,depleted and the stage is set for firmer markets.


Rates in the international markets have generally been more adequate than in the U.S., and we have seen some increases, particularly for catastrophe exposed business.  We have grown our business in the Middle East, Latin America and Asia.  We are expanding our international reach with the opening of a new office in Brazil to capitalize on the recently expanded opportunity for professional reinsurers in that market and on the economic growth expected for Brazil in the future.

The 2009 renewals rates, particularly for property catastrophe and retrocessional covers and in international markets, were generally firmer compared to a year ago.

Overall, we believe that current marketplace conditions offer profit opportunities for us given our strong ratings, distribution system, reputation and expertise.  We continue to employ our strategy of targeting business that offers the greatest profit potential, while maintaining balance and diversification in our overall portfolio.

21

Financial Summary.

We monitor and evaluate our overall performance based upon financial results.  The following table displays a summary of the consolidated net income (loss) income,, ratios and stockholder’s equity for the periods indicated:

 

        Three Months Ended

Percentage

 

             Nine Months Ended

Percentage

 

September 30,

 

Increase/

 

September 30,

 

Increase/

(Dollars in millions)

2008

 

2007

 

(Decrease)

 

2008

 

2007

 

(Decrease)

Gross written premiums

$            778.1

 

$          839.8

 

-7.3%

 

$           2,158.1

 

$           2,351.9

 

-8.2%

Net written premiums

424.4

 

602.8

 

-29.6%

 

1,261.0

 

1,656.9

 

-23.9%

 

 

 

 

 

 

 

 

 

 

 

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

Premiums earned

$            449.9

 

$          561.2

 

-19.8%

 

$           1,421.3

 

$           1,696.4

 

-16.2%

Net investment income

97.3

 

105.0

 

-7.3%

 

292.3

 

307.8

 

-5.1%

Net realized capital (losses) gains

(108.7)

 

22.1

 

NM

 

(261.3)

 

145.6

 

-279.5%

Other income (expense)

8.0

 

-

 

NM

 

(16.0)

 

(14.5)

 

10.9%

Total revenues

446.5

 

688.3

 

-35.1%

 

1,436.2

 

2,135.3

 

-32.7%

 

 

 

 

 

 

 

 

 

 

 

 

CLAIMS AND EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

Incurred losses and loss adjustment expenses

447.0

 

344.8

 

29.7%

 

1,115.8

 

986.1

 

13.2%

Commission, brokerage, taxes and fees

73.8

 

114.6

 

-35.6%

 

295.3

 

350.5

 

-15.7%

Other underwriting expenses

32.8

 

29.4

 

11.5%

 

95.8

 

81.3

 

17.9%

Interest, fees and bond issue cost amortization expense

19.7

 

26.5

 

-25.4%

 

59.2

 

68.1

 

-13.0%

Total claims and expenses

573.3

 

515.2

 

11.3%

 

1,566.1

 

1,485.9

 

5.4%

 

 

 

 

 

 

 

 

 

 

 

 

(LOSS) INCOME BEFORE TAXES

(126.8)

 

173.1

 

-173.3%

 

(129.9)

 

649.4

 

-120.0%

Income tax (benefit) expense

(47.9)

 

62.5

 

-176.7%

 

(69.3)

 

194.3

 

-135.7%

NET (LOSS) INCOME

$           (78.9)

 

$          110.6

 

-171.4%

 

$             (60.6)

 

$              455.1

 

-113.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Point

 

 

 

 

 

Point

RATIOS:

 

 

 

 

Change

 

 

 

 

 

Change

Loss ratio

99.4%

 

61.4%

 

38.0

 

78.5%

 

58.1%

 

20.4

Commission and brokerage ratio

16.4%

 

20.4%

 

(4.0)

 

20.8%

 

20.7%

 

0.1

Other underwriting expense ratio

7.2%

 

5.3%

 

1.9

 

6.7%

 

4.8%

 

1.9

Combined ratio

123.0%

 

87.1%

 

35.9

 

106.0%

 

83.6%

 

22.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At

 

At

 

Percentage

(Dollars in millions)

 

 

 

 

 

 

September 30,

 

December 31,

 

Increase/

Balance sheet data:

 

 

 

 

 

 

2008

 

2007

 

(Decrease)

Total investments and cash

 

 

 

 

 

 

$           8,407.5

 

$           8,992.8

 

-6.5%

Total assets

 

 

 

 

 

 

13,280.3

 

13,543.5

 

-1.9%

Reserve for losses and loss adjustment expenses

 

 

 

 

 

 

7,662.5

 

7,538.7

 

1.6%

Total debt

 

 

 

 

 

 

1,179.0

 

1,178.9

 

0.0%

Total liabilities

 

 

 

 

 

 

10,992.9

 

10,976.0

 

0.2%

Stockholder's equity

 

 

 

 

 

 

2,287.5

 

2,567.5

 

-10.9%

 

 

 

 

 

 

 

 

 

 

 

 

(NM, not meaningful)

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding)

 

 

 

 

 

 

 

 

 

 

 

22

  Three Months Ended Percentage Nine Months Ended Percentage
  September 30, Increase/ September 30, Increase/
(Dollars in millions) 2009 2008 (Decrease) 2009 2008 (Decrease)
Gross written premiums $916.3  $778.1   17.8% $2,506.1  $2,158.1   16.1%
Net written premiums  452.7   424.4   6.6%  1,328.4   1,261.0   5.3%
                         
REVENUES:                        
Premiums earned $438.3  $449.9   -2.6% $1,337.5  $1,421.3   -5.9%
Net investment income  65.5   97.3   -32.7%  179.7   292.3   -38.5%
Net realized capital gains (losses)  101.4   (108.7)  -193.3%  56.2   (261.3)  -121.5%
Gain on tender of debt  -   -   -   78.3   -   - 
Other income (expense)  15.1   8.0   89.6%  7.8   (16.0)  -148.6%
Total revenues  620.3   446.5   38.9%  1,659.4   1,436.2   15.5%
                         
CLAIMS AND EXPENSES:                        
Incurred losses and loss adjustment expenses  242.0   447.0   -45.9%  777.3   1,115.8   -30.3%
Commission, brokerage, taxes and fees  77.3   73.8   4.7%  252.4   295.3   -14.5%
Other underwriting expenses  39.9   32.8   21.7%  109.2   95.8   14.0%
Interest, fee and bond issue cost amortization expense  17.1   19.7   -13.5%  53.8   59.2   -9.2%
Total claims and expenses  376.2   573.3   -34.4%  1,192.7   1,566.1   -23.8%
                         
INCOME (LOSS) BEFORE TAXES  244.1   (126.8) NM   466.7   (129.9) NM 
Income tax expense (benefit)  80.0   (47.9) NM   128.4   (69.3) NM 
NET INCOME (LOSS) $164.1  $(78.9) NM  $338.3  $(60.6) NM 
                         
          Point         Point
RATIOS:         Change         Change
Loss ratio  55.2%  99.4%  (44.2)  58.1%  78.5%  (20.4)
Commission and brokerage ratio  17.6%  16.4%  1.2   18.9%  20.8%  (1.9)
Other underwriting expense ratio  9.1%  7.2%  1.9   8.2%  6.7%  1.5 
Combined ratio  81.9%  123.0%  (41.1)  85.2%  106.0%  (20.8)
                         
                         
              At At Percentage
              September 30, December 31, Increase/
(Dollars in millions)              2009   2008  (Decrease)
Balance sheet data:                        
Total investments and cash             $8,073.5  $7,395.1   9.2%
Total assets              13,381.8   12,866.6   4.0%
Loss and loss adjustment expense reserves              7,247.0   7,420.0   -2.3%
Total debt              1,017.9   1,179.1   -13.7%
Total liabilities              10,551.3   10,663.7   -1.1%
Stockholder's equity              2,830.5   2,203.0   28.5%
                         
(NM, not meaningful)                        
(Some amounts may not reconcile due to rounding)                        

Revenues.
Revenues.

Premiums.Gross written premiums decreasedincreased by $61.7$138.1 million, or 7.3%17.8%, for the three months ended September 30, 20082009 compared to the three months ended September 30, 2007,2008, reflecting declinesan increase of $34.2 million in our U.S. insurance business and $27.5$101.7 million in our reinsurance business and $36.5 million in our insurance business.  Gross written premiums decreasedincreased by $193.8$348.0 million, or 8.2%16.1%, for the nine months ended September 30, 20082009 compared to the nine months ended September 30, 2007,2008, reflecting declinesan increase of $182.0$294.7 million in our reinsurance business and $11.8$53.3 million in our U.S. insurance business. The decline in ourincreased reinsurance business was

primarily attributable to continued competitive conditionsincreased rates on property business, in both the propertyinternational and casualty sectors of the market, especiallyU.S. markets, new crop hail quota share treaty business, expanded participation on renewal contracts and new writings as ceding companies continue to favor reinsurers such as Everest, with strong financial ratings. The increase in insurance premiums were primarily in the U.S., partially offset by strong renewalsfinancial institutions directors and higher rates in some international markets. Insurance segment premiums were also lower, as conditions for workers’ compensation, public equityofficers (“D&O”) and contractors business have become increasingly competitive, which has reduced the volumeerrors and omissions (“E&O”) lines of business, that meets our underwriting and pricing criteria.

which are new offerings for us, as well as additional written property insurance premiums in Florida where rates to exposure remain attractive.


Net written premiums decreasedincreased by $178.3$28.2 million, or 29.6%6.6%, for the three months ended September 30, 20082009 compared to the three months ended September 30, 20072008, and by $395.9$67.4 million, or 23.9%5.3%, for the nine months ended September 30, 20082009 compared to the nine months ended September 30, 2007,2008. The increases in net written premiums are primarily due to the increase in gross written premiums, ceded andpartially offset by the decreaseincrease in gross written premiums. Ceded premiums increased due to increased cessions tounder the affiliated quota shares. Correspondingly, net premiumsshare agreement.  Premiums earned decreased by $111.3$11.6 million, or 19.8%2.6%, for the three months ended September 30, 20082009 compared to the three months ended September 30, 20072008, and by $275.1$83.8 million, or 16.2%5.9%, for the nine months ended September 30, 20082009 compared to the nine months ended September 30, 2007.

2008.  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 on the initiation of coverage.


Net Investment Income.Net investment income decreased by 7.3%32.7% for the three months ended September 30, 2009, compared to $97.3 millionthe three months ended September 30, 2008 and by 38.5% for the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008, due primarily to losses from our limited partnership investments that principally invest in public and non-public securities, both equity and debt, which report to us on a quarter lag, a reduction in invested assets resulting from the October 1, 2008 loss portfolio transfer agreement with Everest Reinsurance (Bermuda), Ltd. (“Bermuda Re”) and lower yields for new long and short term fixed maturity investments.  As a result, net pre-tax investment income, as a percentage of average invested assets, was 3.4% for the three months ended September 30, 2009 compared to 4.6% for the three months ended September 30, 2008 compared to $105.0 million for the three months ended September 30, 2007, primarily due to lower rates on short-term bonds. The annualized pre-tax investment portfolio yield for the three months ended September 30, 2008 was 4.6% compared to 4.9% for the three months ended September 30, 2007.

Net investment income decreased by 5.1% to $292.3 millionand 3.1% for the nine months ended September 30, 20082009 compared to $307.8 million4.5% for the nine months ended September 30, 2007, primarily due to lower short-term interest rates2008.

Net Realized Capital Gains (Losses).  Net realized capital gains were $101.4 million and a decrease in income from our limited partnership investments, particularly from those partnerships which invest in public equity securities. The annualized pre-tax investment portfolio yield$56.2 million for the three and nine months ended September 30, 2008 was 4.5% compared to 4.9% for the nine months ended September 30, 2007.

Net Realized Capital (Losses) Gains.2009, respectively.  Net realized capital losses were $108.7 million and $261.3 million for the three and nine months ended September 30, 2008, respectively.  NetThe realized capital gains and losses reflected for each period were $22.1primarily a function of changes in sales, fair value re-measurements and other-than-temporary impairments. The largest changes were the result of the fair value re-measurements of our investment in an affiliated entity’s shares and public equity securities portfolio.  During 2008, our public equity securities portfolio was much larger and with the equity markets declining rapidly, fair value re-measurements resulted in realized losses.  Conversely in 2009, the equity markets improved resulting in fair value re-measurement gains. In addition, other-than-temporary impairments on fixed income securities, decreased period over period due to the improving financial markets.

Realized Gain on Debt Repurchase.  On March 19, 2009, we 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. Upon expiration of the tender offer, we had reduced our outstanding debt by $161.4 million, which resulted in a pre-tax gain on debt repurchase of $78.3 million.

Other Income (Expense).  We recorded other income of $15.1 million and $145.6$7.8 million for the three and nine months ended September 30, 2007,2009, respectively. The capital losses for the three and nine monthsWe recorded other income of 2008 were primarily the result of the credit crisis impacting the global financial markets, which reduced the values of equity and fixed income securities. Our investment portfolios at fair value declined $31.6$8.0 million and $167.7other expense of $16.0 million for the three and nine months ended September 30, 2008, respectively. We report changes in fair values as realized capital gains or losses in accordance with 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”), irrespective or whether or not the securities have been sold. We reported realized capital losses from other-than-temporary impairments on our fixed income portfolio of $63.8 million and $67.9 million for the three and nine months ended September 30, 2008, respectively. All of these losses resulted from other-than-temporary impairments to the values of specific fixed income securities. We report other-than-temporary impairments as realized capital losses in accordance with FAS No. 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FAS 115-1”).

23

Other Income (Expense). We recorded $8.0 million of other income and $0.02 million of other expense for the three months ended September 30, 2008 and 2007, respectively and $16.0 million and $14.5 million of other expense for the nine months ended September 30, 2008 and 2007, respectively. These amountsThe variances were primarily due to fluctuations in foreign currency exchange rates and decreasedthe deferrals on retroactive reinsurance agreements with affiliates.affiliates and changes in foreign currency exchange rates for the corresponding periods.

Claims and Expenses.

Incurred Losses and Loss Adjustment Expenses.The following table presentstables present our incurred losses and loss adjustment expenses (“LAE”) for all segments for the periods indicated.

 

Three Months Ended September 30,

 

 

 

 

 

2008

 

2007

 

Variance

 

Current

Prior

Total

 

Current

Prior

Total

 

Current

Prior

Total

(Dollars in millions)

Year

Years

Incurred

 

Year

Years

Incurred

 

Year

Years

Incurred

Attritional (a)

$       301.7

$      (12.2)

$        289.5

 

$      314.7

$     (18.1)

$     296.6

 

$     (13.0)

$        5.9

$       (7.1)

Catastrophes

151.5

6.0

157.5

 

10.7

5.4

16.1

 

140.8

0.6

141.5

A&E

-

-

-

 

-

32.2

32.2

 

-

(32.2)

(32.2)

Total all segments

$      453.2

$        (6.2)

$        447.0

 

$      325.4

$        19.4

$     344.8

 

$      127.8

$     (25.6)

$      102.2

Loss ratio

100.7%

  -1.4%

99.4%

 

58.0%

3.5%

61.4%

 

42.7

(4.9)

38.0

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

2008

 

2007

 

Variance

 

Current

Prior

Total

 

Current

Prior

Total

 

Current

Prior

Total

(Dollars in millions)

Year

Years

Incurred

 

Year

Years

Incurred

 

Year

Years

Incurred

Attritional (a)

$       870.3

$      62.9

$        933.1

 

$      922.1

$     (39.5)

$     882.6

 

$     (51.9)

$     102.4

$        50.5

Catastrophes

168.3

14.4

182.7

 

48.2

6.7

54.9

 

120.1

7.7

127.8

A&E

-

-

-

 

-

48.6

48.6

 

-

(48.6)

(48.6)

Total all segments                               

$    1,038.6

$      77.2

$     1,115.8

 

$      970.3

$        15.8

$     986.1

 

$        68.3

$       61.4

$      129.7

Loss ratio

73.1%

5.4%

78.5%

 

57.2%

0.9%

58.1%

 

15.9

4.5

20.4

 

 

 

 

 

 

 

 

 

 

 

 

(a) Attritional losses exclude catastrophe and A&E losses.

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

 

 

 



  Three Months Ended September 30,
 CurrentRatio%/ Prior Ratio%/ Total Ratio%/
(Dollars in millions)YearPt Change Years Pt Change Incurred Pt Change
2009                
Attritional (a)$ 246.756.3%  $ (19.1) -4.4%  $ 227.6 51.9% 
Catastrophes  11.22.6%    3.2 0.7%    14.4 3.3% 
A&E  -0.0%    - 0.0%    - 0.0% 
Total segment$ 257.958.8%  $ (15.9) -3.6%  $ 242.0 55.2% 
                 
2008                
Attritional (a)$ 301.767.1%  $ (12.2) -2.7%  $ 289.5 64.4% 
Catastrophes  151.533.7%    6.0 1.3%    157.5 35.0% 
A&E  -0.0%    - 0.0%    - 0.0% 
Total segment$ 453.2100.7%  $ (6.2) -1.4%  $ 447.0 99.4% 
                 
Variance 2009/2008                
Attritional (a)$ (55.0) (10.8)pts $ (6.9)  (1.6)pts $ (61.9)  (12.4)pts
Catastrophes  (140.3) (31.1)pts   (2.8)  (0.6)pts   (143.1)  (31.7)pts
A&E  - -pts   -  -pts   -  -pts
Total segment$ (195.3) (41.9)pts $ (9.7)  (2.2)pts $ (205.0)  (44.2)pts
  Nine Months Ended September 30,
 CurrentRatio%/ Prior Ratio%/ Total Ratio%/
(Dollars in millions)YearPt Change Years Pt Change Incurred Pt Change
2009                
Attritional (a)$ 789.059.0%  $ (36.0) -2.7%  $ 753.0 56.3% 
Catastrophes  20.31.5%    4.0 0.3%    24.3 1.8% 
A&E  -0.0%    - 0.0%    - 0.0% 
Total segment$ 809.360.5%  $ (32.0) -2.4%  $ 777.3 58.1% 
                 
2008                
Attritional (a)$ 870.361.2%  $ 62.9 4.4%  $ 933.1 65.7% 
Catastrophes  168.311.8%    14.4 1.0%    182.7 12.9% 
A&E  -0.0%    - 0.0%    - 0.0% 
Total segment$ 1,038.673.1%  $ 77.2 5.4%  $ 1,115.8 78.5% 
                 
Variance 2009/2008                
Attritional (a)$ (81.3) (2.2)pts $ (98.8)  (7.1)pts $ (180.2)  (9.4)pts
Catastrophes  (148.0) (10.3)pts   (10.4)  (0.7)pts   (158.4)  (11.0)pts
A&E  - -pts   -  -pts   -  -pts
Total segment$ (229.3) (12.6)pts $ (109.2)  (7.8)pts $ (338.5)  (20.4)pts
                 
(a) Attritional losses exclude catastrophe and A&E losses.              
(Some amounts may not reconcile due to rounding.)              
Incurred losses and LAE were higherlower by $102.2$205.0 million, or 29.7%45.9%, for the three months ended September 30, 20082009 compared to the same period in 2007. The increase was2008. Catastrophe losses, at $14.4 million for the three months ended September 30, 2009, were $143.1 million lower than the same period in 2008, primarily due to $141.5 million greater catastrophe losses, principally from Hurricanes Gustav and Ike, partially offset by the absence in 20082009, of any asbestoslarge catastrophe losses.  Attritional losses incurred decreased $61.9 million (12.4 points) for the third quarter, period over period, due to mix of business and environmental (“A&E”) prior years’ reserves strengthening.

premiums earned, in conjunction with affiliated cessions.


Incurred losses and LAE were higherlower by $129.7$338.5 million, or 13.2%30.3%, for the nine months ended September 30, 20082009 compared to the same period in 2007.2008.  The increaseprimary contributor to the decrease was the result of the reduction in current year catastrophe losses of $148.0 million. The variance in the prior years’ attritional losses was primarily due to greater catastrophe lossesthe absence, in the 2008 period, principally from Hurricanes Gustav and Ike and the China snowstorm. We experienced $62.92009, of $85.3 million of unfavorable reserve development in prior years’ attritional reserves during the nine months ended September 30, 2008 compared to $39.5 million of favorable development during the 2007 period. The unfavorable development during 2008 was predominantly caused by higher than expected lossesstrengthening on an expired auto loan credit insurance program.

24


Commission, Brokerage, Taxes and Fees.Commission, brokerage, taxes and fees decreasedincreased by $40.7$3.4 million, or by 35.6%4.7%, for the three months ended September 30, 20082009 compared to the three months ended September 30, 2007same period in 2008, and decreased by $55.2$42.9 million, or by 15.7%14.5%, for the nine months ended September 30, 20082009 compared to the nine months ended September 30, 2007. Thissame period in 2008.  The change in this directly variable expense was influenced by the decline in net earned premiums, higher commissions due to new insurance programs, business mix and changes in ceding commission rates onthe mix of business and increased cessions under the affiliated quota share agreement.

Our commission and brokerage ratio was impacted by reinsurance premiums. Catastrophe reinsurance provides coverage for one event; however, some contracts require or permit the restoration of exhausted limits in consideration of an additional premium payment known as a reinstatement premium. In general, there are no commissions or brokerage paid on reinstatement premiums. Our commission and brokerage ratio includes a 0.8 point decrease due to reinstatement premiums for the quarter ended September 30, 2008. All other periods were minimally impacted.


Other Underwriting Expenses.Other underwriting expenses were $39.9 million compared to $32.8 million for the three months ended September 30, 2009 and 2008, increased by $3.4respectively, and $109.2 million or 11.5%, compared to the three months ended September 30, 2007 and other underwriting expenses$95.8 million for the nine months ended September 30, 2009 and 2008, increased by $14.5 million, or 17.9%, compared to the nine months ended September 30, 2007.respectively. These increases were principally duethe result of expansion as we continue to higher compensation and benefits expense and increased staff count, primarily in the U.S. Insurance segment. Included ingrow our books of business.  In addition, other underwriting expenses wereincluded corporate expenses, which are expenses that are not allocated to segments, of $1.4$1.7 million and $1.0$1.4 million for the three months ended September 30, 20082009 and 2007,2008, respectively, and $4.5$4.9 million and $3.3$4.5 million for the nine months ended September 30, 2009 and 2008, and 2007, respectively.


Interest, Fees and Bond Issue Cost Amortization Expense.Interest and other expense was $19.7$17.1 million and $26.5$19.7 million for the three months ended September 30, 20082009 and 2007,2008, respectively, and $59.2$53.8 million and $68.1$59.2 million for the nine months ended September 30, 2009 and 2008, and 2007, respectively.  These decreases wereThe decrease, period over period, was primarily due to the accelerationpartial repurchase of issue cost amortizationour long term subordinated notes in March 2009.

Income Tax Expense (Benefit). We had an income tax expense of $80.0 million and interest expense in 2007$128.4 million for the junior subordinated debt securities retired in November, 2007, with no such expense in 2008.

Income Tax (Benefit) Expense.Ourthree and nine months ended September 30, 2009, respectively, and an income tax was a benefit of $47.9 million and $69.3 million for the three and nine months ended September 30, 2008, respectively.  The period over period variances were primarily due to the increase in pre-tax net income in 2009 versus pre-tax net losses in 2008.  Our income tax expense was $62.5 million and $194.3 million for the three and nine months ended September 30, 2007, respectively. We received an income tax benefit in the 2008 periods because we had taxable losses as a result of Hurricanes Gustav and Ike and net realized capital losses. In contrast, we had taxable income in the 2007 periods. Our income tax benefit/expense is primarily a function of the statutory tax rate coupled with the impact from tax-preferenced investment income.


Net Income (Loss) Income.

We incurred.

Our net lossesincome was $164.1 million and $338.3 million for the three and nine months ended September 30, 2009, respectively, compared to a net loss of $78.9 million and $60.6 million for the three and nine months ended September 30, 2008, comparedrespectively. These changes were the result of the items discussed above.

Ratios.
Our combined ratio decreased by 41.1 points to net income of $110.6 million and $455.1 million81.9% for the three and nine months ended September 30, 2007. The loss for the 2008 periods was primarily caused by after-tax net realized capital losses and catastrophe losses. We had after-tax net realized capital gains and light catastrophe losses in the 2007 periods.

Ratios.

Our combined ratio increased by 35.9 points2009 compared to 123.0% for the three months ended September 30, 2008, comparedand decreased by 20.8 points to 87.1%85.2% for the threenine months ended September 30, 2007 and by 22.4 points2009 compared to 106.0% for the nine months ended September 30, 2008 compared to 83.6%2008.   The loss ratio component decreased 44.2 points and 20.4 points for the three and nine months ended September 30, 2007. The loss ratio increased 38.0 points for2009, respectively, compared to the three month comparison and 20.4 points for the nine

25

month comparison,same periods last year, principally due to the increasedsignificant decrease in catastrophe losses and adverse reserve development in the 2008 period, partially offset by the absence in 2008 of any A&E loss development.losses. The commission and brokerage ratio component increased by 1.2 points and decreased 4.0by 1.9 points for the three month comparisonand nine months ended September 30, 2009, respectively, compared to the same periods last year, due to mix of business and increased 0.1 points forcessions under the nine month comparison. Theaffiliated quota share agreement, while the other underwriting expense ratio component increased by 1.9 points and 1.5 points for the three and nine month comparison primarily duemonths ended September 30, 2009, respectively, compared to increased compensation costs associated with increased staff.

the same periods last year.


Stockholder's Equity.

Stockholder's equity declinedincreased by $280.0$627.5 million to $2,287.5$2,830.5 million at September 30, 20082009 from $2,567.5$2,203.0 million at December 31, 2007 due to $214.12008, principally as a result of $338.3 million of net income, $261.2 million of unrealized depreciation,appreciation on investments, net of tax, on investments, a net loss$21.6 million of $60.6 millionforeign currency translation adjustments and a loss on foreign exchange translation of $10.6 million, partially offset by $4.4$4.1 million of share-based compensation transactions. The increase in unrealized depreciation is due to the current financial market liquidity crisis that has resulted in significantly increased credit spreads and concomitantly lower corporate and municipal security values. The market values for our fixed maturities are received from third party vendors and no mitigating adjustments have been made to the values for the illiquid market conditions.


Consolidated Investment Results


Net Investment Income.

Net investment income decreased 7.3%32.7% to $65.5 million for the three months ended September 30, 2009 from $97.3 million for the three months ended September 30, 2008, comparedand decreased to $105.0$179.7 million for the threenine months ended September 30, 2007, primarily due to lower short-term interest rates.

Net investment income decreased 5.1% to2009 from $292.3 million for the nine months ended September 30, 2008 from $307.8 million for the nine months ended September 30, 2007,2008.  These decreases were primarily due to lower short-term interest rates and decreased incomelosses from our limited partnership investments particularly from those partnerships whichthat  principally invest in public and non-public securities, both equity securities.

and debt, which reported to us on a quarter lag, a reduction in invested assets resulting from the October 1, 2008 loss portfolio transfer agreement with Bermuda Re and lower yields for new long and short term fixed maturity investments.


The following table shows the components of net investment income for the periods indicated:

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(Dollars in millions)

2008

 

2007

 

2008

 

2007

Fixed maturities

$           81.1

 

$          71.7

 

$        233.1

 

$        222.7

Equity securities

2.0

 

2.2

 

5.4

 

6.8

Short-term investments and cash                                         

4.3

 

20.9

 

23.8

 

43.8

Other invested assets

 

 

 

 

 

 

 

 Limited partnerships

10.2

 

9.2

 

29.9

 

34.0

 Other

2.2

 

1.4

 

6.8

 

4.3

Total gross investment income

99.8

 

105.5

 

299.0

 

311.7

Interest credited and other expense

(2.4)

 

(0.5)

 

(6.6)

 

(3.9)

Total net investment income

$           97.3

 

$        105.0

 

$        292.3

 

$        307.8

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

 

26

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
(Dollars in millions) 2009  2008  2009  2008 
Fixed maturity securities $71.0  $81.1  $212.9  $233.1 
Equity securities  0.8   1.8   2.2   4.9 
Short-term investments and cash  0.3   4.3   3.3   23.8 
Other invested assets                
Limited partnerships  (4.4)  10.2   (36.5)  29.9 
Other  0.7   2.4   5.7   7.2 
Total gross investment income  68.2   99.8   187.6   299.0 
Interest credited and other expense  (2.8)  (2.4)  (7.9)  (6.6)
Total net investment income $65.5  $97.3  $179.7  $292.3 
(Some amounts may not reconcile due to rounding)                

The following tables show a comparison of various investment yields for the periods indicated:

 

At

 

At

 

September 30,

 

December 31,

 

2008

 

2007

Imbedded pre-tax yield of cash and invested assets

4.5%

 

4.6%

Imbedded after-tax yield of cash and invested assets

3.6%

 

3.6%

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

 

 

2008

 

2007

 

2008

 

2007

Annualized pre-tax yield on average cash and invested assets

4.6%

 

4.9%

 

4.5%

 

4.9%

Annualized after-tax yield on average cash and invested assets

3.6%

 

3.8%

 

3.6%

 

3.9%

 At September 30, At December 31,
 2009 2008
Imbedded pre-tax yield of cash and invested assets3.8% 4.3%
Imbedded after-tax yield of cash and invested assets3.1% 3.5%

 Three Months Ended Nine Months Ended
 September 30, September 30,
 20092008 20092008
Annualized pre-tax yield on average cash and invested assets3.4%4.6% 3.1%4.5%
Annualized after-tax yield on average cash and invested assets2.9%3.6% 2.7%3.6%

Net Realized Capital Gains (Losses) Gains.

.

The following table presents the composition of our net realized capital gains (losses) gains for the periods indicated:

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(Dollars in millions)

2008

 

2007

 

Variance

 

% Change

 

2008

 

2007

 

Variance

 

% Change

(Losses) gains from sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities, market value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains

$            -

 

$            -

 

$              -

 

NM

 

$        1.1

 

$        1.0

 

$          0.1

 

10.0%

Losses

(12.2)

 

(1.9)

 

(10.3)

 

NM

 

(14.2)

 

(1.9)

 

(12.3)

 

NM

Total

(12.2)

 

(1.9)

 

(10.3)

 

NM

 

(13.1)

 

(0.9)

 

(12.2)

 

NM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities, fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains

3.8

 

0.2

 

3.6

 

NM

 

5.9

 

2.8

 

3.1

 

110.7%

Losses

(4.8)

 

(2.7)

 

(2.1)

 

77.8%

 

(18.5)

 

(11.7)

 

(6.8)

 

58.1%

Total

(1.0)

 

(2.5)

 

1.5

 

-60.0%

 

(12.6)

 

(8.9)

 

(3.7)

 

41.6%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net realized capital (losses) gains from sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains

3.8

 

0.2

 

3.6

 

NM

 

7.0

 

3.8

 

3.2

 

84.2%

Losses

(17.0)

 

(4.6)

 

(12.4)

 

NM

 

(32.7)

 

(13.6)

 

(19.1)

 

140.4%

Total

(13.2)

 

(4.4)

 

(8.8)

 

200.0%

 

(25.7)

 

(9.8)

 

(15.9)

 

162.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other-than-temporary impairments

(63.8)

 

(1.2)

 

(62.6) 

 

NM

 

(67.9)

 

(1.2)

 

(66.7)

 

NM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Losses) gains from fair value adjustments:           

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities, fair value

(0.2)

 

-

 

(0.2)

 

NM

 

(0.2)

 

-

 

(0.2)

 

NM

Equity securities, fair value

(58.8)

 

18.7

 

(77.5)

 

NM

 

(122.9)

 

119.7

 

(242.6)

 

-202.7%

Other invested assets, fair value

27.4

 

9.0

 

18.4

 

204.4%

 

(44.6)

 

37.0

 

(81.6)

 

-220.5%

Total

(31.6)

 

27.7

 

(59.3)

 

-214.1%

 

(167.7)

 

156.6

 

(324.3)

 

-207.1%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net realized capital (losses) gains

$  (108.6)

 

$      22.1

 

$    (130.7)

 

NM

 

$   (261.3)

 

$    145.6

 

$   (406.9)

 

NM

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(NM, not meaningful)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27

  Three Months Ended  Nine Months Ended 
  September 30,  September 30, 
(Dollars in millions) 2009  2008  Variance  2009  2008  Variance 
Gains (losses) from sales:                  
Fixed maturity, market value                  
Gains $2.0  $-  $2.0  $4.0  $1.1  $2.9 
Losses  (6.1)  (12.2)  6.1   (36.6)  (14.2)  (22.4)
Total  (4.1)  (12.2)  8.1   (32.6)  (13.1)  (19.5)
                         
Fixed maturity securities, fair value                        
Gains  0.3   -   0.3   0.6   -   0.6 
Losses  (0.1)  -   (0.1)  (0.1)  -   (0.1)
Total  0.2   -   0.2   0.4   -   0.5 
                         
Equity securities, market value                        
Gains  8.0   -   8.0   8.0   -   8.0 
Losses  -   -   -   -   -   - 
Total  8.0   -   8.0   8.0   -   8.0 
                         
Equity securities, fair value                        
Gains  1.3   3.8   (2.5)  7.2   5.9   1.3 
Losses  -   (4.8)  4.8   (0.7)  (18.5)  17.8 
Total  1.3   (1.0)  2.3   6.5   (12.6)  19.1 
                         
Total net realized gains (losses) from sales                        
Gains  11.6   3.8   7.8   19.8   7.0   12.8 
Losses  (6.3)  (17.0)  10.7   (37.5)  (32.7)  (4.8)
Total  5.4   (13.2)  18.6   (17.7)  (25.7)  8.0 
                         
Other than temporary impairments:  -   (63.8)  63.8   (5.5)  (67.9)  62.4 
                         
Gains (losses) from fair value adjustments:                        
Fixed maturities, fair value  5.8   (0.2)  6.0   7.8   (0.2)  8.0 
Equity securities, fair value  23.1   (58.8)  81.9   23.4   (122.9)  146.3 
Other invested assets, fair value  67.1   27.4   39.7   48.1   (44.6)  92.7 
Total  96.0   (31.6)  127.6   79.3   (167.7)  247.0 
                         
Total net realized gains (losses) $101.4  $(108.7) $210.0  $56.2  $(261.3) $317.5 
                         
(Some amounts may not reconcile due to rounding)                        

We reported $101.4 million net realized capital gains and $108.7 million net realized capital losses for the three months ended September 30, 2009 and 2008, respectively. We recorded $0.2$96.0 million in net realized capital gains and $31.6 million in net realized capital losses due to fair value re-measurement on fixed maturitiesre-measurements for the three months ended September 30, 2009 and 2008, respectively. This improvement in fair value was primarily due to the healthier financial markets. In addition, we did not record any other-than-temporary impairments for the three months ended September 30, 2009 compared to the $63.8 million recorded for the three months ended September 30, 2008.

We reported $56.2 million net realized capital gains and $261.3 million net realized capital losses for the nine months ended September 30, 2008. The2009 and 2008, respectively. We recorded $79.3 million in net realized capital gains and $167.7 million in net realized capital losses due to fair value re-measurements were $58.8 million and $122.9 million on the equity securities at fair value for the three and nine

months ended September 30, 2009 and 2008, respectively. We had net realized capital gainsOnce again, this improvement in fair value was primarily due to fair value re-measurements of $27.4 million and net realized capital losses due to fair value re-measurements of $44.6 million on other invested assets at fair value for the three and nine months ended September 30, 2008, respectively.improved financial markets. We recorded $18.7 million and $119.7 million in net realized capital gains due to fair value re-measurement on the equity securities at fair value for the three and nine months ended September 30, 2007, respectively. The net realized capital gains due to fair value re-measurement were $9.0 million and $37.0 million on other invested assets at fair value for the three and nine months ended September 30, 2007, respectively. In addition, we recorded other-than-temporary impairments of $63.8$5.5 million and $67.9 million for the three and nine months ended September 30, 3008, respectively, as compared to $1.2 million for the three2009 and nine months ended September 30, 3007. The increase in unrealized depreciation is due to the current financial market liquidity crisis that has resulted in significantly increased credit spreads and concomitantly lower corporate and municipal security values. The market values from our fixed maturities are received from third party vendors and no mitigating adjustments have been made to the values for the illiquid market conditions.

2008, respectively.


Segment Results.

Through our subsidiaries, we operate in four segments: U.S. Reinsurance, U.S. Insurance, Specialty Underwriting and International.  The U.S. Reinsurance operation writes property and casualty reinsurance, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies within the U.S.  The U.S. Insurance operation writes property and casualty insurance primarily through general agents and surplus lines brokers within the U.S.  The Specialty Underwriting operation writes accident and health (“A&H”), marine, aviation and surety business within the U.S. and worldwide through brokers and directly with ceding companies.  The International operation writes non-U.S. property and casualty reinsurance through Everest Re’sReinsurance Company’s (“Everest Re”) branches in Canada and Singapore and offices in Miami and New Jersey.


These segments are managed in a coordinated fashion with respect to pricing, risk management, control of aggregate catastrophe exposures, capital, investments and support operations.  Management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting results.


Underwriting results include earned premium less losses and LAE incurred, commission and brokerage expenses and other underwriting expenses.  We measure our underwriting results using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which respectively, divide incurred losses, commissions and brokerage and other underwriting expenses by earned premiums.

premiums earned.


Our loss and LAE reserves representare our best estimate of our ultimate liability for unpaid claims.  We re-evaluate our estimates on an ongoing basis, including all prior period reserves, taking into consideration all available information and, in particular, recently reported loss claim experience and trends related to prior periods.  Such re-evaluations are recorded in incurred losses in the period in which the re-evaluation is made.

28

 
The following discusses the underwriting results for each of our segments for the periods indicated:


U.S. Reinsurance.

The following table presents the underwriting results and ratios for the U.S. Reinsurance segment for the periods indicated.

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(Dollars in millions)

2008

 

2007

 

Variance

% Change

 

2008

 

2007

 

Variance

% Change

Gross written premiums

$      280.5

 

$     327.5

 

$     (47.0)

-14.4%

 

$     714.5

 

$     953.5

 

$    (239.0)

-25.1%

Net written premiums

146.5

 

233.1

 

(86.6)

-37.2%

 

425.0

 

697.1

 

(272.1)

-39.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums earned

$      167.5

 

$     231.4

 

$     (63.9)

-27.6%

 

$     527.5

 

$     733.6

 

$    (206.1)

-28.1%

Incurred losses and LAE

240.7

 

127.1

 

113.6

89.4%

 

446.0

 

294.4

 

151.6

51.5%

Commission and brokerage

27.5

 

53.8

 

(26.4)

-49.0%

 

125.8

 

169.6

 

(43.9)

-25.9%

Other underwriting expenses

7.8

 

7.3

 

0.6

7.7%

 

23.5

 

21.1

 

2.4

11.4%

Underwriting (loss) gain

$    (108.6)

 

$       43.2

 

$   (151.8)

NM

 

$    (67.8)

 

$     248.4

 

$    (316.2)

-127.3%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Point Chg

 

 

 

 

 

 

Point Chg

Loss ratio

143.7%

 

54.9%

 

 

88.8

 

84.6%

 

40.1%

 

 

44.5

Commission and brokerage ratio

16.4%

 

23.3%

 

 

(6.9)

 

23.8%

 

23.1%

 

 

0.7

Other underwriting expense ratio         

4.7%

 

3.1%

 

 

1.6

 

4.5%

 

2.9%

 

 

1.6

Combined ratio

164.8%

 

81.3%

 

 

83.5

 

112.9%

 

66.1%

 

 

46.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(NM, not meaningful)

 

 

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

 

 

 

 

 

 

  Three Months Ended September 30,  Nine Months Ended September 30, 
(Dollars in millions) 2009  2008  Variance  % Change  2009  2008  Variance  % Change 
Gross written premiums $345.6  $280.5  $65.1   23.2% $876.0  $714.5  $161.5   22.6%
Net written premiums  191.7   146.5   45.2   30.9%  487.8   425.0   62.9   14.8%
                                 
Premiums earned $162.0  $167.5  $(5.4)  -3.2% $489.1  $527.5  $(38.4)  -7.3%
Incurred losses and LAE  56.2   240.7   (184.6)  -76.7%  232.3   446.0   (213.8)  -47.9%
Commission and brokerage  21.4   27.5   (6.1)  -22.1%  90.5   125.8   (35.2)  -28.0%
Other underwriting expenses  9.7   7.8   1.8   23.3%  25.3   23.5   1.8   7.4%
Underwriting gain (loss) $74.8  $(108.6) $183.4   -168.9% $141.0  $(67.8) $208.8  NM 
                                 
              Point Chg              Point Chg 
Loss ratio  34.7%  143.7%      (109.0)  47.5%  84.6%      (37.1)
Commission and brokerage ratio  13.2%  16.4%      (3.2)  18.5%  23.8%      (5.3)
Other underwriting expense ratio  5.9%  4.7%      1.2   5.2%  4.5%      0.7 
Combined ratio  53.8%  164.8%      (111.0)  71.2%  112.9%      (41.7)
                                 
(NM, not meaningful)                                
(Some amounts may not reconcile due to rounding)                             
Premiums. Gross written premiums decreasedincreased by 14.4%23.2% to $345.6 million for the three months ended September 30, 2009 from $280.5 million for the three months ended September 30, 2008, primarily due to $26.8 million from $327.5several new crop hail quota share treaties, a $20.9 million (28.6%) increase in treaty casualty volume, a $13.4 million (7.0%) increase in treaty property volume and a $4.0 million (22.7%) increase in facultative volume. Our treaty casualty premiums were higher as we are writing more quota share business, which in part, is driven by the capital concerns of our ceding company customers looking for broader reinsurance support. The crop hail business is a new 2009 line of business for us and we anticipate similar volume in the remaining quarter of 2009. Net written premiums increased by 30.9% to $191.7 million for the three months ended September 30, 2007, primarily due to a $28.9 million (13.2%) decrease in treaty property volume, a $14.5 million (45.4%) decrease in facultative volume and a $3.6 million (4.7%) decrease in treaty casualty volume. Although renewal results were generally favorable, property premiums were lower due to increased common account reinsurance protections, particularly on one Florida quota share account and two quota share non-renewals. Facultative volume decreased due to ceding companies retaining a greater portion of gross premiums. Our treaty casualty premium was lower than last year’s third quarter as we have reduced this book to a group of core accounts in response to the softer market conditions. Net written premiums decreased by 37.2%2009 compared to $146.5 million for the three months ended September 30, 2008, comparedprimarily due to $233.1the increase in gross written premiums. Premiums earned decreased by 3.2% to $162.0 million for the three months ended September 30, 2007, primarily due to the decrease in gross written premium and increased quota share cessions to affiliates. Net premiums earned decreased by 27.6%2009 compared to $167.5 million for the three months ended September 30, 2008 compared2008. The change in premiums earned relative to $231.4net written premiums is primarily the result of timing; premiums, for proportionate contracts, are earned ratably over the coverage period whereas written premiums are recorded on the initiation of the coverage period. In addition, part of the variance was due to the impact of changes in the affiliated quota share agreement.

Gross written premiums increased by 22.6% to $876.0 million for the threenine months ended September 30, 2007, in line with the change in net written premiums.

Gross written premiums decreased by 25.1% to2009 from $714.5 million for the nine months ended September 30, 2008, primarily due to $68.5 million from $953.5the new crop hail quota share treaties, a $59.8 million (29.7%) increase in treaty casualty volume, a $31.0 million (7.0%) increase in treaty property volume and a $2.2 million (3.2%) increase in facultative volume. Net written premiums increased by 14.8% to $487.8 million for the nine months ended September 30, 2007, primarily due to a $140.8 million (24.1%) decrease in treaty property volume, a $50.4 million (42.2%) decrease in facultative volume and a $47.6 million (19.1%) decrease in treaty casualty volume. Net written premiums decreased by 39.0%2009 compared to $425.0 million for the nine months ended September 30, 2008, comparedprimarily due to $697.1the increase in gross written premiums combined with increased cessions under the affiliated quota share agreement. Premiums earned decreased by 7.3% to $489.1 million for the nine months ended September 30, 2007. Net premiums earned decreased by 28.1%2009 compared to $527.5 million for the nine months ended September 30, 2008 compared to $733.6 million for the nine months ended September 30, 2007.2008. Variances for the nine months were driven by similar factors as those discussed above forreflective of the three months.

change in premium volume, timing and cessions under the affiliated quota share reinsurance agreement.

Incurred Losses and LAE.The following tables present the incurred losses and LAE for the U.S. Reinsurance segment for the periods indicated.

 

Three Months Ended September 30,

 

 

 

 

 

2008

 

2007

 

Variance

 

Current

Prior

Total

 

Current

Prior

Total

 

Current

Prior

Total

(Dollars in millions)

Year

Years

Incurred

 

Year

Years

Incurred

 

Year

Years

Incurred

Attritional

$       96.9

$        4.9

$    101.8

 

$   112.7

$   (21.5)

$      91.2

 

$   (15.9)

$      26.4

$       10.6

Catastrophes

133.4

5.6

138.9

 

0.1

3.7

3.7

 

133.3

1.9

135.2

A&E

-

-

-

 

-

32.2

32.2

 

-

(32.2)

(32.2)

Total segment

$     230.3

$      10.5

$    240.7

 

$   112.8

$     14.4

$    127.1

 

$   117.4

$     (3.8)

$     113.6

Loss ratio

137.5%

6.3%

143.7%

 

48.7%

6.2%

54.9%

 

88.8

0.1

88.8

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

2008

 

2007

 

Variance

 

Current

Prior

Total

 

Current

Prior

Total

 

Current

Prior

Total

(Dollars in millions)                      

Year

Years

Incurred

 

Year

Years

Incurred

 

Year

Years

Incurred

Attritional

$     285.6

$        9.5

$    295.1

 

$   326.2

$   (70.0)

$    256.2

 

$ (40.6)

$      79.5

$       38.9

Catastrophes

139.4

11.6

150.9

 

0.1

(10.4)

(10.4)

 

139.3

22.0

161.3

A&E

-

-

-

 

-

48.6

48.6

 

-

(48.6)

(48.6)

Total segment

$     425.0

$      21.0

$    446.0

 

$   326.2

$   (31.8)

$    294.4

 

$   98.8

$      52.8

$     151.6

Loss ratio

80.6%

4.0%

84.6%

 

44.5%

-4.3%

40.1%

 

36.1

8.3

44.5

 

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

 

 

 

  Three Months Ended September 30,
 CurrentRatio%/ Prior Ratio%/ Total Ratio%/
(Dollars in millions)YearPt Change Years Pt Change Incurred Pt Change
2009                
Attritional$ 72.744.9%  $ (18.4) -11.4%  $ 54.3 33.5% 
Catastrophes  -0.0%    1.8 1.1%    1.8 1.1% 
A&E  -0.0%    - 0.0%    - 0.0% 
Total segment$ 72.744.9%  $ (16.6) -10.2%  $ 56.2 34.7% 
                 
2008                
Attritional$ 96.957.8%  $ 4.9 2.9%  $ 101.8 60.8% 
Catastrophes  133.479.7%    5.6 3.3%    138.9 83.0% 
A&E  -0.0%    - 0.0%    - 0.0% 
Total segment$ 230.3137.5%  $ 10.5 6.3%  $ 240.7 143.7% 
                 
Variance 2009/2008                
Attritional$ (24.1) (13.0)pts $ (23.3)  (14.3)pts $ (47.5)  (27.3)pts
Catastrophes  (133.4) (79.7)pts   (3.7)  (2.2)pts   (137.1)  (81.8)pts
A&E  - -pts   -  -pts   -  -pts
Total segment$ (157.5) (92.6)pts $ (27.1)  (16.5)pts $ (184.6)  (109.0)pts
  Nine Months Ended September 30,
 CurrentRatio%/ Prior Ratio%/ Total Ratio%/
(Dollars in millions)YearPt Change Years Pt Change Incurred Pt Change
2009                
Attritional$ 250.251.2%  $ (18.1) -3.7%  $ 232.1 47.5% 
Catastrophes  -0.0%    0.1 0.0%    0.1 0.0% 
A&E  -0.0%    - 0.0%    - 0.0% 
Total segment$ 250.251.2%  $ (18.0) -3.7%  $ 232.3 47.5% 
                 
2008                
Attritional$ 285.654.2%  $ 9.5 1.8%  $ 295.1 55.9% 
Catastrophes  139.426.4%    11.6 2.2%    150.9 28.6% 
A&E  -0.0%    - 0.0%    - 0.0% 
Total segment$ 425.080.6%  $ 21.0 4.0%  $ 446.0 84.6% 
                 
Variance 2009/2008                
Attritional$ (35.4) (3.0)pts $ (27.6)  (5.5)pts $ (62.9)  (8.5)pts
Catastrophes  (139.4) (26.4)pts   (11.4)  (2.2)pts   (150.8)  (28.6)pts
A&E  - -pts   -  -pts   -  -pts
Total segment$ (174.8) (29.4)pts $ (39.0)  (7.7)pts $ (213.8)  (37.1)pts
                 
(Some amounts may not reconcile due to rounding.)              
Incurred losses were higher by $113.6$184.6 million (88.8(109.0 points) lower for the three months ended September 30, 20082009 compared to the three months ended September 30, 2007,2008, primarily as a result of a $133.4 million (79.7 points) decrease due to losses from Hurricanes Gustav and Ike, partially offset by the absence of current year catastrophe losses in the third quarter of 2009 compared to the same period in 2008. In addition, prior years’ reserves developed favorably in 2009 by $16.6 million, primarily treaty casualty, compared to unfavorable development in 2008 of A&E loss development.

$10.5 million, primarily treaty property.


Incurred losses were $151.6$213.8 million higher(37.1 points) lower at $232.3 million for the nine months ended September 30, 20082009 compared to the nine months ended September 30, 2007,2008, primarily due to losses from Hurricanes Gustav and Ike. We also experienced slightly unfavorable reserve development on prior years’ attritional losses for 2008 compared to favorable development in 2007. These were partially offset by a 6.6 point$139.4 million (26.4 points) decrease due to noabsence of current year catastrophe losses in 2009 and $39.0 million (7.7 points) favorable variance, period over period, of prior years’ reserve adjustments in 2008 for A&E losses, which experienced adverse development in 2007.

development.


Segment Expenses.Commission and brokerage expenses decreased by 49.0%22.1% to $21.4 million for the three months ended September 30, 2009 from $27.5 million for the three months ended September 30, 2008 from $53.82008. Commission and brokerage expenses decreased 28.0% to $90.5 million for the threenine months ended September 30, 2007. Most of the decline results2009 from lower earned premiums, down 28%, in the third quarter of 2008. As well, we recorded $20.7 million of reinstatement premiums in the quarter on which no commission is paid and there was a reduction in commissions paid on the intercompany quota share.

Commission and brokerage expenses declined by 25.9% to $125.8 million for the nine months ended September 30, 2008 from $169.6 million for2008. These decreases were primarily due to the nine months ended September 30, 2007, generallyfluctuation in linepremiums earned in conjunction with the net premiums earned.

change in the mix and type of business written and the increased cessions under the affiliated quota share agreement.  Segment other

underwriting expenses for the three months ended September 30, 2008 increased slightly towere $9.7 million and $7.8 million from $7.3 million for the three months ended September 30, 2007. For the nine months ended September 30,2009 and 2008, segmentrespectively. Segment other underwriting expenses increased to $23.5 million from $21.1 million


for the nine months ended September 30, 2007, primarily due to the allocation of certain corporate charges to segments starting in the fourth quarter of 2007, which had been previously retained in corporate expenses.

2009 and 2008 were $25.3 million and $23.5 million, respectively.


U.S. Insurance.

The following table presents the underwriting results and ratios for the U.S. Insurance segment for the periods indicated.

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(Dollars in millions)

2008

 

2007

 

Variance

% Change

 

2008

 

2007

 

Variance

% Change

Gross written premiums

$    194.0

 

$    228.2

 

$     (34.2)

-15.0%

 

$     595.5

 

$     607.2

 

$      (11.8)

-1.9%

Net written premiums

98.6

 

180.2

 

(81.6)

-45.3%

 

312.9

 

414.2

 

(101.3)

-24.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums earned

$    107.8

 

$    139.6

 

$     (31.8)

-22.8%

 

$     372.0

 

$     401.7

 

$      (29.7)

-7.4%

Incurred losses and LAE

78.4

 

99.0

 

(20.6)

-20.8%

 

336.0

 

324.1

 

11.9

3.7%

Commission and brokerage

4.8

 

20.7

 

(15.9)

-76.8%

 

48.4

 

59.0

 

(10.6)

-17.9%

Other underwriting expenses

16.9

 

15.2

 

1.6

10.7%

 

47.1

 

39.6

 

7.5

18.9%

Underwriting gain (loss)

$        7.8

 

$        4.7

 

$         3.1

65.8%

 

$    (59.5)

 

$    (21.0)

 

$      (38.5)

183.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Point Chg

 

 

 

 

 

 

Point Chg

Loss ratio

72.7%

 

70.9%

 

 

1.8

 

90.3%

 

80.7%

 

 

9.6

Commission and brokerage ratio         

4.4%

 

14.8%

 

 

(10.4)

 

13.0%

 

14.7%

 

 

(1.7)

Other underwriting expense ratio

15.7%

 

10.9%

 

 

4.8

 

12.7%

 

9.8%

 

 

2.9

Combined ratio

92.8%

 

96.6%

 

 

(3.8)

 

116.0%

 

105.2%

 

 

10.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

 

 

 

 

 

 

  Three Months Ended September 30,  Nine Months Ended September 30, 
(Dollars in millions) 2009  2008  Variance  % Change  2009  2008  Variance  % Change 
Gross written premiums $230.5  $194.0  $36.5   18.8% $648.7  $595.5  $53.3   8.9%
Net written premiums  76.4   98.6   (22.2)  -22.5%  301.9   312.9   (11.0)  -3.5%
                                 
Premiums earned $89.2  $107.8  $(18.6)  -17.2% $306.9  $372.0  $(65.2)  -17.5%
Incurred losses and LAE  71.4   78.4   (7.0)  -8.9%  210.3   336.0   (125.6)  -37.4%
Commission and brokerage  10.5   4.8   5.7   119.1%  32.4   48.4   (16.1)  -33.2%
Other underwriting expenses  20.0   16.9   3.1   18.4%  56.4   47.1   9.3   19.7%
Underwriting (loss) gain $(12.7) $7.8  $(20.4) NM  $7.7  $(59.5) $67.2   -113.0%
                                 
              Point Chg              Point Chg 
Loss ratio  80.0%  72.7%      7.3   68.5%  90.3%      (21.8)
Commission and brokerage ratio  11.8%  4.4%      7.4   10.6%  13.0%      (2.4)
Other underwriting expense ratio  22.4%  15.7%      6.7   18.4%  12.7%      5.7 
Combined ratio  114.2%  92.8%      21.4   97.5%  116.0%      (18.5)
                                 
(NM, not meaningful)                                
(Some amounts may not reconcile due to rounding)                             
Premiums.Gross written premiums decreasedincreased by 15.0%18.8% to $230.5 million for the three months ended September 30, 2009 from $194.0 million for the three months ended September 30, 20082008. Most of the new premium was derived from $228.2our entry into the financial institution D&O and E&O market and additional property insurance written in Florida, where rates to exposure remain attractive.  Net written premiums decreased by 22.5% to $76.4 million for the three months ended September 30, 2007. Conditions for workers’ compensation, contractors and public equity 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 shortfall2009 compared to last year’s third quarter was from our C.V. Starr program, where we have lost some public entity business because we did not match market pricing and terms, which we deemed to be inadequate. Net written premiums decreased by 45.3% to $98.6 million for the three months ended September 30, 2008 compared2008. The change in net written premiums was primarily due to $180.2the increase in gross written premiums, partially offset by the change in reinsurance cessions. Premiums earned decreased 17.2% to $89.2 million for the three months ended September 30, 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. Net premiums earned decreased by 22.8% to2009 from $107.8 million for the three months ended September 30, 2008 from $139.62008.

Gross written premiums increased by 8.9% to $648.7 million for the threenine months ended September 30, 2007.2009 from $595.5 million for the nine months ended September 30, 2008. Net written premiums decreased by 3.5% to $301.9 million for the nine months ended September 30, 2009 compared to $312.9 million for the nine months ended September 30, 2008. Premiums earned decreased 17.5% to $306.9 million for the nine months ended September 30, 2009 from $372.0 million for the nine months ended September 30, 2008.  The change in net premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are reflectedrecorded at the initiation of the coverage period.

Gross written premiums decreased by 1.9%period, in addition to $595.5 million for the nine months ended September 30, 2008 from $607.2 million forimpact of the nine months ended September 30, 2007. Net written premiums decreased by 24.5% to $312.9 million for the nine months ended September 30, 2008 compared to $414.2 million for the nine months ended September 30, 2007. Net premiums earned decreased by 7.4% to $372.0 million for the nine months ended September 30, 2008 from $401.7 million for the nine months ended September 30, 2007. Variances for the nine months were driven by the factors enumerated above for the three months.

affiliated quota share agreement.

Incurred Losses and LAE.The following tables present the incurred losses and LAE for the U.S. Insurance segment for the periods indicated.

 

Three Months Ended September 30,

 

 

 

 

 

2008

 

2007

 

Variance

 

Current

Prior

Total

 

Current

Prior

Total

 

Current

Prior

Total

(Dollars in millions)

Year

Years

Incurred

 

Year

Years

Incurred

 

Year

Years

Incurred

Attritional

$       80.7

$      (2.4)

$       78.4

 

$       99.4

$      (0.4)

$          99.0

 

$     (18.6)

$       (2.0)

$     (20.6)

Catastrophes

-

-

-

 

-

-

-

 

-

-

-

Total segment

$       80.7

$      (2.4)

$       78.4

 

$       99.4

$      (0.4)

$          99.0

 

$     (18.6)

$       (2.0)

$     (20.6)

Loss ratio

74.9%

-2.2%

72.7%

 

71.2%

-0.3%

70.9%

 

3.7

(1.9)

1.8

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

2008

 

2007

 

Variance

 

Current

Prior

Total

 

Current

Prior

Total

 

Current

Prior

Total

(Dollars in millions)                      

Year

Years

Incurred

 

Year

Years

Incurred

 

Year

Years

Incurred

Attritional

$     261.8

$      74.4

$     336.2

 

$     290.0

$       34.4

$        324.4

 

$     (28.2)

$       39.9

$        11.8

Catastrophes

-

(0.2)

(0.2)

 

-

(0.3)

(0.3)

 

-

0.1

0.1

Total segment

$     261.8

$      74.2

$     336.0

 

$     290.0

$       34.1

$        324.1

 

$     (28.2)

$       40.1

$        11.9

Loss ratio

70.4%

19.9%

90.3%

 

72.2%

8.5%

80.7%

 

(1.8)

11.4

9.6

 

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

 

 

 

  Three Months Ended September 30,
 CurrentRatio%/ Prior Ratio%/ Total Ratio%/
(Dollars in millions)YearPt Change Years Pt Change Incurred Pt Change
2009                
Attritional$ 71.480.0%  $ 0.1 0.1%  $ 71.4 80.0% 
Catastrophes  -0.0%    - 0.0%    - 0.0% 
Total segment$ 71.480.0%  $ 0.1 0.1%  $ 71.4 80.0% 
                 
2008                
Attritional$ 80.774.9%  $ (2.4) -2.2%  $ 78.4 72.7% 
Catastrophes  -0.0%    - 0.0%    - 0.0% 
Total segment$ 80.774.9%  $ (2.4) -2.2%  $ 78.4 72.7% 
                 
Variance 2009/2008                
Attritional$ (9.4) 5.1pts $ 2.4  2.3pts $ (7.0)  7.3pts
Catastrophes  - -pts   -  -pts   -  -pts
Total segment$ (9.4) 5.1pts $ 2.4  2.3pts $ (7.0)  7.3pts

  Nine Months Ended September 30,
 CurrentRatio%/ Prior Ratio%/ Total Ratio%/
(Dollars in millions)YearPt Change Years Pt Change Incurred Pt Change
2009                
Attritional$ 226.873.9%  $ (16.4) -5.4%  $ 210.3 68.5% 
Catastrophes  -0.0%    - 0.0%    - 0.0% 
Total segment$ 226.873.9%  $ (16.4) -5.4%  $ 210.3 68.5% 
                 
2008                
Attritional$ 261.870.4%  $ 74.4 20.0%  $ 336.2 90.4% 
Catastrophes  -0.0%    (0.2) -0.1%    (0.2) -0.1% 
Total segment$ 261.870.4%  $ 74.2 19.9%  $ 336.0 90.3% 
                 
Variance 2009/2008                
Attritional$ (35.1) 3.5pts $ (90.8)  (25.3)pts $ (125.8)  (21.8)pts
Catastrophes  - -pts   0.2  0.1pts   0.2  0.1pts
Total segment$ (35.1) 3.5pts $ (90.6)  (25.3)pts $ (125.6)  (21.8)pts
                 
(Some amounts may not reconcile due to rounding.)              
Incurred losses and LAE decreased by 20.8%8.9% to $71.4 million for the three months ended September 30, 2009 from $78.4 million for the three months ended September 30, 2008, from $99.0primarily driven by the $9.4 million decrease in current year attritional losses, principally as a result of the 17.2% decrease in premiums earned.
Incurred losses and LAE decreased by 37.4% to $210.3 million for the threenine months ended September 30, 2007, slightly less than the decrease in net earned premium, as the segment loss ratio increased by 1.8 points to 72.7%.

Despite lower net premiums earned, incurred losses and LAE increased by 3.7% to2009 from $336.0 million for the nine months ended September 30, 2008, from $324.1primarily driven by the 17.5% decrease in premiums earned and the absence, in 2009, of $85.3 million of prior years’ attritional loss development on an auto loan credit program.

Segment Expenses. Commission and brokerage expenses increased to $10.5 million for the ninethree months ended September 30, 2007, as the segment loss ratio increased by 9.6 points to 90.3%. For the nine months ended September 30, 2008, we strengthened our reserves for an auto loan credit insurance program by $85.3 million and by $59.7 million in the 2007 period. This increase accounts for most of the increase in the loss ratio. The deterioration in general economic conditions has had an adverse impact on personal loan performance, particularly sub-prime loan performance resulting in unforeseen increases in loan default rates and claim amounts. 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 adverse loss development related to this program will not be material.

Segment Expenses.Commission and brokerage expenses decreased by 76.8% to2009 from $4.8 million for the three months ended September 30, 2008 from $20.72008. Commission and brokerage expenses decreased by 33.2% to $32.4 million for the threenine months ended September 30, 2007 and by 17.9% to2009 from $48.4 million for the nine months ended September 30, 2008. These variances were primarily due to the decrease in premiums earned, changes in the mix of business written and the impact from internal quota share agreements whereby other underwriting expenses were ceded through commission and brokerage expense.  Segment other underwriting expenses were $20.0 million and $16.9 million for the three months ended September 30, 2009 and 2008, from $59.0respectively. Segment other underwriting expenses were $56.4 million and $47.1 million for the nine months ended September 30, 2007. The decline in commissions, particularly for the2009 and 2008, quarter, related to decreased premium volume and a true-up in ceded commissions under the affiliated quota share agreement.

Segment other underwriting expenses for the three months ended September 30, 2008 increased to $16.9 million compared to $15.2 million for the three months ended September 30, 2007 and for the nine months


ended September 30, 2008, increased to $47.1 million compared to $39.6 million for the nine months ended September 30, 2007.respectively. These increases were primarily due to increased compensation costs associated with increased staff and the allocationcosts.


Specialty Underwriting.

The following table presents the underwriting results and ratios for the Specialty Underwriting segment for the periods indicated.

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(Dollars in millions)

2008

 

2007

 

Variance

% Change

 

2008

 

2007

 

Variance

% Change

Gross written premiums

$       54.8

 

$      70.5

 

$     (15.7)

-22.2%

 

$    193.9

 

$    201.6

 

$       (7.6)

-3.8%

Net written premiums

34.6

 

49.5

 

(15.0)

-30.2%

 

128.8

 

141.6

 

(12.8)

-9.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums earned

$       35.3

 

$      48.2

 

$     (12.9)

-26.7%

 

$    126.3

 

$    143.1

 

$     (16.8)

-11.7%

Incurred losses and LAE

37.6

 

28.3

 

9.3

32.9%

 

81.7

 

95.1

 

(13.3)

-14.0%

Commission and brokerage

8.7

 

10.7

 

(2.0)

-19.0%

 

30.4

 

29.4

 

1.1

3.6%

Other underwriting expenses

1.9

 

1.7

 

0.2

12.7%

 

6.2

 

5.1

 

1.1

21.6%

Underwriting (loss) gain

$    (12.9)

 

$        7.5

 

$     (20.4)

-272.8%

 

$        8.0

 

$      13.6

 

$       (5.6)

-41.4%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Point Chg

 

 

 

 

 

 

Point Chg

Loss ratio

106.5%

 

58.8%

 

 

47.7

 

64.7%

 

66.4%

 

 

(1.7)

Commission and brokerage ratio

24.5%

 

22.2%

 

 

2.3

 

24.1%

 

20.5%

 

 

3.6

Other underwriting expense ratio         

5.5%

 

3.5%

 

 

2.0

 

4.9%

 

3.6%

 

 

1.3

Combined ratio

136.5%

 

84.5%

 

 

52.0

 

93.7%

 

90.5%

 

 

3.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(NM, not meaningful)

 

 

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

 

 

 

 

 

 

  Three Months Ended September 30,  Nine Months Ended September 30, 
(Dollars in millions) 2009  2008  Variance  % Change  2009  2008  Variance  % Change 
Gross written premiums $67.6  $54.8  $12.8   23.3% $183.7  $193.9  $(10.2)  -5.3%
Net written premiums  38.3   34.6   3.7   10.7%  103.0   128.8   (25.8)  -20.0%
                                 
Premiums earned $39.2  $35.3  $3.9   10.9% $108.5  $126.3  $(17.8)  -14.1%
Incurred losses and LAE  25.2   37.6   (12.4)  -33.0%  73.7   81.7   (8.0)  -9.8%
Commission and brokerage  10.5   8.7   1.9   21.4%  29.4   30.4   (1.0)  -3.2%
Other underwriting expenses  2.4   1.9   0.4   23.0%  6.2   6.2   -   0.7%
Underwriting gain (loss) $1.1  $(12.9) $14.0   -108.5% $(0.9) $8.0  $(8.9)  -111.2%
                                 
              Point Chg              Point Chg 
Loss ratio  64.3%  106.5%      (42.2)  68.0%  64.7%      3.3 
Commission and brokerage ratio  26.8%  24.5%      2.3   27.1%  24.1%      3.0 
Other underwriting expense ratio  6.1%  5.5%      0.6   5.7%  4.9%      0.8 
Combined ratio  97.2%  136.5%      (39.3)  100.8%  93.7%      7.1 
                                 
(NM, not meaningful)                                
(Some amounts may not reconcile due to rounding)                             
Premiums. Gross written premiums decreasedincreased by 22.2%23.3% to $67.6 million for the three months ended September 30, 2009 from $54.8 million for the three months ended September 30, 2008, from $70.5primarily due to a $9.0 million increase in aviation premiums and a $7.6 million increase in A&H premiums, partially offset by a $4.0 million decrease in surety premiums.  Net written premiums increased by 10.7% to $38.3 million for the three months ended September 30, 2007, primarily due to an $8.4 million (38.5%) decrease in A&H premiums, a $7.6 million (22.2%) decrease in marine premiums and a $2.2 million (126.8%) decrease in aviation premiums, partially offset by a $2.5 million (19.9%) increase in surety premiums. Net written premiums decreased by 30.2%2009 compared to $34.6 million for the three months ended September 30, 2008, comparedas a result of the increase in the aviation and A&H lines.  Premiums earned increased by 10.9% to $49.5$39.2 million for the three months ended September 30, 2007, primarily due to the decrease in gross written premiums combined with the increase in quota share cessions to affiliates. Net premiums earned decreased by 26.7%2009 compared to $35.3 million for the three months ended September 30, 2008, comparedin line with the change in net written premiums.

Gross written premiums decreased by 5.3% to $48.2$183.7 million for the same periodnine months ended September 30, 2009 from $193.9 million for the nine months ended September 30, 2008, primarily due to a $24.1 million decrease in 2007.marine premiums, partially offset by a $9.5 million increase in aviation premiums and a $3.6 million increase in A&H premiums.  Net written premiums decreased by 20.0% to $103.0 million for the nine months ended September 30, 2009 compared to $128.8 million for the nine months ended September 30, 2008, as a result of the decrease in gross writings and increased cessions under the affiliated quota share agreement.  Premiums earned decreased to $108.5 million for the nine months ended September 30, 2009 from $126.3 million for the nine months ended September 30, 2008. The change in net premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are reflectedrecorded at the initiation of the coverage period.

Gross written premiums decreased by 3.8% to $193.9 million for the nine months ended September 30, 2008 from $201.6 million for the nine months ended September 30, 2007, primarily due to a decrease


of the variances for the nine months ended September 30, 2008 and 2007 were similar to those set forth above for the three months ended September 30, 2008 and 2007.

Incurred Losses and LAE.The following tables present the incurred losses and LAE for the Specialty Underwriting segment for the periods indicated.

 

Three Months Ended September 30,

 

 

 

 

 

2008

 

2007

 

Variance

 

Current

Prior

Total

 

Current

Prior

Total

 

Current

Prior

Total

(Dollars in millions)

Year

Years

Incurred

 

Year

Years

Incurred

 

Year

Years

Incurred

Attritional

$       24.6

$             -

$      24.6

 

$     25.1

$       1.1

$      26.1

 

$     (0.5)

$     (1.1)

$     (1.5)

Catastrophes

10.5

2.5

13.0

 

-

2.2

2.2

 

10.5

0.3

10.8

Total segment

$       35.1

$         2.5

$      37.6

 

$     25.1

$       3.2

$      28.3

 

$      10.0

$     (0.7)

$        9.3

Loss ratio

99.5%

7.0%

106.5%

 

52.0%

6.7%

58.8%

 

47.5

0.3

47.7

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

2008

 

2007

 

Variance

 

Current

Prior

Total

 

Current

Prior

Total

 

Current

Prior

Total

(Dollars in millions)                      

Year

Years

Incurred

 

Year

Years

Incurred

 

Year

Years

Incurred

Attritional

$       75.1

$       (7.7)

$      67.4

 

$     78.8

$       1.4

$      80.2

 

$     (3.7)

$     (9.1)

$   (12.8)

Catastrophes

10.5

3.9

14.4

 

-

14.8

14.8

 

10.5

(11.0)

(0.5)

Total segment

$       85.6

$       (3.9)

$      81.7

 

$     78.8

$     16.2

$      95.1

 

$        6.8

$   (20.1)

$   (13.3)

Loss ratio

67.8%

-3.1%

64.7%

 

55.1%

11.3%

66.4%

 

12.7

(14.4)

(1.7)

 

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

 

 

 

  Three Months Ended September 30,
 CurrentRatio%/ Prior Ratio%/ Total Ratio%/
(Dollars in millions)YearPt Change Years Pt Change Incurred Pt Change
2009                
Attritional$ 26.266.8%  $ (0.2) -0.4%  $ 26.0 66.4% 
Catastrophes  -0.0%    (0.8) -2.1%    (0.8) -2.1% 
Total segment$ 26.266.8%  $ (1.0) -2.5%  $ 25.2 64.3% 
                 
2008                
Attritional$ 24.669.8%  $ - 0.0%  $ 24.6 69.8% 
Catastrophes  10.529.7%    2.5 7.0%    13.0 36.7% 
Total segment$ 35.199.5%  $ 2.5 7.0%  $ 37.6 106.5% 
                 
Variance 2009/2008                
Attritional$ 1.5 (3.0)pts $ (0.2)  (0.4)pts $ 1.4  (3.4)pts
Catastrophes  (10.5) (29.7)pts   (3.3)  (9.1)pts   (13.8)  (38.8)pts
Total segment$ (9.0) (32.7)pts $ (3.4)  (9.5)pts $ (12.4)  (42.2)pts
  Nine Months Ended September 30,
 CurrentRatio%/ Prior Ratio%/ Total Ratio%/
(Dollars in millions)YearPt Change Years Pt Change Incurred Pt Change
2009                
Attritional$ 77.070.9%  $ (6.0) -5.5%  $ 71.0 65.4% 
Catastrophes  -0.0%    2.8 2.6%    2.8 2.6% 
Total segment$ 77.070.9%  $ (3.2) -3.0%  $ 73.7 68.0% 
                 
2008                
Attritional$ 75.159.5%  $ (7.7) -6.1%  $ 67.4 53.4% 
Catastrophes  10.58.3%    3.9 3.1%    14.4 11.4% 
Total segment$ 85.667.8%  $ (3.9) -3.1%  $ 81.7 64.7% 
                 
Variance 2009/2008                
Attritional$ 1.8 11.5pts $ 1.7  0.6pts $ 3.6  12.0pts
Catastrophes  (10.5) (8.3)pts   (1.1)  (0.5)pts   (11.6)  (8.8)pts
Total segment$ (8.7) 3.1pts $ 0.7  0.1pts $ (8.0)  3.3pts
                 
(Some amounts may not reconcile due to rounding.)              
Incurred losses and LAE increaseddecreased by 33.0% to $25.2 million for the three months ended September 30, 2009 compared to $37.6 million for the three months ended September 30, 2008, comparedprincipally as a result of favorable variances in current and prior years’ catastrophe losses in 2009 in comparison to $28.32008.

Incurred losses and LAE decreased by 9.8% to $73.7 million for the threenine months ended September 30, 2007. Overall, the loss ratio was higher by 47.7 points for the third quarter of 20082009 compared to the third quarter of 2007. The increase for the three months was primarily the result of Hurricanes Gustav and Ike losses, which accounted for 29.7 points of the 47.7 point increase. Approximately 18 points of the increase was due to higher attritional losses in the current period as loss experience was less favorable than in the prior year’s third quarter.

Incurred losses and LAE decreased to $81.7 million for the nine months ended September 30, 2008, comparedprimarily as a result of decreased catastrophe losses in 2009 in comparison to $95.12008.


Segment Expenses.  Commission and brokerage expenses increased to $10.5 million for the ninethree months ended September 30, 2007. The loss ratio was 1.7 points lower for the nine months ended September 30, 2008 compared to the same period in 2007. The attritional loss ratio was 2.7 points lower in the 2008 period, while the catastrophe loss ratio was 1.0 point higher for the same period.

Segment Expenses.Commission and brokerage decreased by 19.0% to2009 from $8.7 million for the three months ended September 30, 2008 from $10.72008. Commission and brokerage expenses decreased to $29.4 million for the threenine months ended September 30, 2007 and increased by 3.6% to2009 from $30.4 million for the nine months ended September 30, 2008. These fluctuations are primarily the result of fluctuations in premiums earned and the increase in the affiliated quota share agreement. Segment other underwriting expenses were $2.4 million and $1.9 million for the three months ended September 30, 2009 and 2008, from $29.4respectively.  Segment other underwriting expenses were $6.2 million for the nine months ended September 30, 2007. These changes were primarily due to the combined impacts2009 and 2008.


39
Table of higher commission rates due to a more competitive market, decreases in net earned premium volume and fluctuations resulting from cessions under quota shares with affiliates.Contents

Segment other underwriting expenses were $1.9 million and $1.7 million for the three months ended September 30, 2008 and 2007, respectively. Segment other underwriting expenses were $6.2 million for


the nine months ended September 30, 2008 and $5.1 million for the nine months ended September, 2007. These increases were primarily due to the allocation of certain corporate charges to segments, which had been previously retained in corporate expenses.

International.

The following table presents the underwriting results and ratios for the International segment for the periods indicated.

 

Three Months Ended September 30,

 

Nine Months Ended September 30,

(Dollars in millions)

2008

 

2007

 

Variance

% Change

 

2008

 

2007

 

Variance

% Change

Gross written premiums

$     248.8

 

$    213.6

 

$       35.2

16.5%

 

$    654.2

 

$    589.6

 

$       64.6

11.0%

Net written premiums

144.8

 

140.0

 

4.9

3.5%

 

394.3

 

404.0

 

(9.7)

-2.4%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums earned

$     139.3

 

$    142.0

 

$      (2.7)

-1.9%

 

$    395.5

 

$    418.0

 

$    (22.5)

-5.4%

Incurred losses and LAE

90.3

 

90.4

 

(0.1)

-0.1%

 

252.1

 

272.5

 

(20.4)

-7.5%

Commission and brokerage

32.9

 

29.3

 

3.6

12.1%

 

90.7

 

92.5

 

(1.8)

-1.9%

Other underwriting expenses

4.7

 

4.1

 

0.5

13.2%

 

14.5

 

12.2

 

2.3

18.8%

Underwriting gain

$       11.4

 

$      18.1

 

$      (6.7)

-36.8%

 

$      38.3

 

$      40.8

 

$      (2.5)

-6.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Point Chg

 

 

 

 

 

 

Point Chg

Loss ratio

64.8%

 

63.7%

 

 

1.1

 

63.7%

 

65.2%

 

 

(1.5)

Commission and brokerage ratio         

23.6%

 

20.7%

 

 

2.9

 

22.9%

 

22.1%

 

 

0.8

Other underwriting expense ratio

3.4%

 

2.8%

 

 

0.6

 

3.7%

 

2.9%

 

 

0.8

Combined ratio

91.8%

 

87.2%

 

 

4.6

 

90.3%

 

90.2%

 

 

0.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(NM, not meaningful)

 

 

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

 

 

 

 

 

 

  Three Months Ended September 30,  Nine Months Ended September 30, 
(Dollars in millions) 2009  2008  Variance  % Change  2009  2008  Variance  % Change 
Gross written premiums $272.6  $248.8  $23.8   9.6% $797.6  $654.2  $143.4   21.9%
Net written premiums  146.3   144.8   1.5   1.0%  435.7   394.3   41.4   10.5%
                                 
Premiums earned $147.9  $139.3  $8.6   6.2% $433.1  $395.5  $37.6   9.5%
Incurred losses and LAE  89.2   90.3   (1.0)  -1.2%  261.0   252.1   8.9   3.5%
Commission and brokerage  34.8   32.9   2.0   5.9%  100.1   90.7   9.4   10.4%
Other underwriting expenses  6.2   4.7   1.5   31.3%  16.5   14.5   2.0   13.6%
Underwriting gain $17.7  $11.4  $6.2   54.2% $55.6  $38.3  $17.3   45.3%
                                 
              Point Chg              Point Chg 
Loss ratio  60.3%  64.8%      (4.5)  60.3%  63.7%      (3.4)
Commission and brokerage ratio  23.6%  23.6%      -   23.1%  22.9%      0.2 
Other underwriting expense ratio  4.2%  3.4%      0.8   3.8%  3.7%      0.1 
Combined ratio  88.1%  91.8%      (3.7)  87.2%  90.3%      (3.1)
                                 
(NM, not meaningful)                                
(Some amounts may not reconcile due to rounding)                             
Premiums. Gross written premiums increased by $35.29.6% to $272.6 million tofor the three months ended September 30, 2009 from $248.8 million for the three months ended September 30, 2008 from $213.62008. As a result of our strong financial strength ratings, we continue to see increased participations on treaties in most regions, new business writings and preferential signings, including preferential terms and conditions. In addition, rates, in some markets, also contributed to the increased written premiums. Premiums written through the Brazil, Miami and New Jersey offices increased by $11.1 million (7.0%), through the Asian branch by $7.4 million (13.8%) and through the Canadian branch by $5.3 million (14.0%).  Net written premiums increased by 1.0% to $146.3 million for the three months ended September 30, 2007 and by $64.6 million to $654.2 million for the nine months ended September 30, 2008 from $589.6 million for the nine months ended September 30, 2007. Approximately $8 million and $22 million of the increases for the three and nine month periods ended September 30, 20082009 compared to September 30, 2007, respectively, were due to currency movement. We obtained some renewal increases in the quarter and saw higher rates in some markets. Our long-term relationships and solid financial strength ratings are definite advantages in the international markets as we have been offered several opportunities recently, to replace reinsurers with less solid financial strength ratings. In addition, we have obtained some preferential signings including preferential terms and conditions.

Net written premiums increased by 3.5% to $144.8 million for the three months ended September 30, 2008, comparedprimarily due to $140.0the increase in gross written premiums, which were partially offset by increased cessions under the affiliated quota share agreement.  Premiums earned increased by 6.2% to $147.9 million for the three months ended September 30, 2007 and decreased by 2.4% to $394.3 million for the nine months ended September 30, 20082009 compared to $404.0 million for the nine months ended September 30, 2007, primarily due to the increase in quota share cessions with affiliates. Net premiums earned decreased by 1.9% to $139.3 million for the three months ended September 30, 2008 compared to $142.0 million for the same period in 2007 and by 5.4% to $395.5 million for the nine months ended September 30, 2008 compared to $418.0 million for the same period in 2007.2008.  The change in net premiums earned relative to net written premiums is the result of timing; premiums are earned ratablynotably over the coverage period whereas written premiums are reflectedrecorded at the initiation of the coverage period.


Gross written premiums increased by 21.9% to $797.6 million for the nine months ended September 30, 2009 from $654.2 million for the nine months ended September 30, 2008. Premiums written through the Brazil, Miami and New Jersey offices increased by $112.5 million (27.3%) and through the Asian branch by $31.9 million (24.5%), while premiums written through the Canadian branch decreased by $1.0 million (0.9%).  Net written premiums increased by 10.5% to $435.7 million for the nine months ended September 30, 2009 compared to $394.3 million for the nine months ended September 30, 2008.  Premiums earned increased by 9.5% to $433.1 million for the nine months ended September 30, 2009 compared to $395.5 million for the nine months ended September 30, 2008, in line with the increase in net written premiums.  Variance explanations for the nine months were similar to factors discussed above for the three months.

Incurred Losses and LAE.The following tables present the incurred losses and LAE for the International segment for the periods indicated.

 

Three Months Ended September 30,

 

 

 

 

 

2008

 

2007

 

Variance

 

Current

Prior

Total

 

Current

Prior

Total

 

Current

Prior

Total

(Dollars in millions)

Year

Years

Incurred

 

Year

Years

Incurred

 

Year

Years

Incurred

Attritional

$      99.4

$    (14.8)

$       84.7

 

$      77.6

$       2.7

$       80.3

 

$      21.9

$   (17.5)

$         4.4

Catastrophes

7.6

(2.0)

5.6

 

10.6

(0.5)

10.1

 

(3.0)

(1.5)

(4.5)

Total segment

$    107.0

$    (16.8)

$       90.3

 

$      88.2

$       2.2

$       90.4

 

$      18.9

$   (19.0)

$      (0.1)

Loss ratio

76.9%

-12.0%

64.8%

 

62.1%

1.5%

63.7%

 

14.8

(13.6)

1.1

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30,

 

 

 

 

 

2008

 

2007

 

Variance

 

Current

Prior

Total

 

Current

Prior

Total

 

Current

Prior

Total

(Dollars in millions)                      

Year

Years

Incurred

 

Year

Years

Incurred

 

Year

Years

Incurred

Attritional

$    247.7

$    (13.2)

$     234.5

 

$    227.1

$     (5.3)

$     221.8

 

$      20.6

$     (7.9)

$      12.7

Catastrophes

18.4

(0.8)

17.6

 

48.1

2.6

50.7

 

(29.7)

(3.5)

(33.1)

Total segment

$    266.1

$    (14.1)

$     252.1

 

$    275.2

$     (2.7)

$     272.5

 

$      (9.1)

$   (11.4)

$    (20.4)

Loss ratio

67.3%

-3.6%

63.7%

 

65.8%

-0.6%

65.2%

 

1.5

(3.0)

(1.5)

 

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

 

 

 

  Three Months Ended September 30,
 CurrentRatio%/ Prior Ratio%/ Total Ratio%/
(Dollars in millions)YearPt Change Years Pt Change Incurred Pt Change
2009                
Attritional$ 76.451.7%  $ (0.6) -0.4%  $ 75.8 51.3% 
Catastrophes  11.27.6%    2.1 1.5%    13.4 9.0% 
Total segment$ 87.759.3%  $ 1.5 1.0%  $ 89.2 60.3% 
                 
2008                
Attritional$ 99.471.4%  $ (14.8) -10.6%  $ 84.7 60.8% 
Catastrophes  7.65.5%    (2.0) -1.5%    5.6 4.0% 
Total segment$ 107.076.9%  $ (16.8) -12.0%  $ 90.3 64.8% 
                 
Variance 2009/2008                
Attritional$ (23.0) (19.7)pts $ 14.2  10.2pts $ (8.8)  (9.5)pts
Catastrophes  3.6 2.1pts   4.2  2.9pts   7.8  5.0pts
Total segment$ (19.4) (17.6)pts $ 18.3  13.0pts $ (1.0)  (4.5)pts
  Nine Months Ended September 30,
 CurrentRatio%/ Prior Ratio%/ Total Ratio%/
(Dollars in millions)YearPt Change Years Pt Change Incurred Pt Change
2009                
Attritional$ 235.054.3%  $ 4.5 1.1%  $ 239.5 55.3% 
Catastrophes  20.34.7%    1.1 0.3%    21.4 5.0% 
Total segment$ 255.358.9%  $ 5.7 1.3%  $ 261.0 60.3% 
                 
2008                
Attritional$ 247.762.6%  $ (13.2) -3.3%  $ 234.5 59.3% 
Catastrophes  18.44.7%    (0.8) -0.2%    17.6 4.5% 
Total segment$ 266.167.3%  $ (14.1) -3.6%  $ 252.1 63.7% 
                 
Variance 2009/2008                
Attritional$ (12.7) (8.4)pts $ 17.8  4.4pts $ 5.0  (4.0)pts
Catastrophes  1.9 0.0pts   2.0  0.5pts   3.8  0.5pts
Total segment$ (10.8) (8.4)pts $ 19.7  4.9pts $ 8.9  (3.4)pts
                 
(Some amounts may not reconcile due to rounding.)              
Incurred losses and LAE decreased slightlyby 1.2% to $89.2 million for the three months ended September 30, 2009 compared to $90.3 million for the three months ended September 30, 20082008.  The segment loss ratio decreased by 4.5 points for the three months ended September 30, 2009 compared to $90.4the three months ended September 30, 2008, primarily due to the decreased third quarter 2009 attritional losses (9.5 points), partially offset by the increased catastrophe losses (5.0 points).

Incurred losses and LAE increased by 3.5% to $261.0 million for the same period in 2007 and decreased by 7.5%nine months ended September 30, 2009 compared to $252.1 million for the nine months ended September 30, 2008, comparedprimarily as a result of the increase in premium earned.

Segment Expenses.  Commission and brokerage expenses increased 5.9% to $272.5$34.8 million for the same period in 2007. The segment loss ratio increased by 1.1 points and decreased 1.5 points for the three and nine months ended September 30, 2008 compared to the three and nine months ended September 30, 2007, respectively. The decreases were due to lower current year catastrophe losses in 2008 compared to 2007 for both the three and nine month periods. The 2008 current year catastrophe losses included the snowstorm in China and Hurricanes Gustav and Ike, while the 2007 catastrophe losses included the New South Wales storm and Jakarta floods.

Segment Expenses.Commission and brokerage expense increased by 12.1% to2009 from $32.9 million for the three months ended September 30, 2008 from $29.32008. Commission and brokerage expenses increased 10.4% to $100.1 million for the threenine months ended September 30, 2007 and decreased by 1.9% to2009 from $90.7 million for the nine months ended September 30, 2008.  These changes are primarily the result of the change in earned premium and the blend of business mix. Segment other underwriting expenses were $6.2 million and $4.7 million for the three months ended September 30, 2009 and 2008, from $92.5respectively.  Segment other underwriting expenses were $16.5 million and $14.5 million for the nine months ended September 30, 2007. These changes were primarily due to the combined impacts2009 and 2008, respectively.

41
Table of higher commission rates due to a more competitive market, decreases in net earned premium volume and fluctuations resulting from cessions under quota shares with affiliates.Contents

Segment other underwriting expenses for the three months ended September 30, 2008 increased to $4.7 million compared to $4.1 million for the three months ended September 30, 2007 and for the nine months ended September 30, 2008 to $14.5 million compared to $12.2 million for the nine months ended September 30, 2007, primarily due to the allocation of certain corporate charges to segments, which had been previously retained in corporate expenses.


Market Sensitive Instruments.

The Securities and Exchange Commission’s (“SEC”) Financial Reporting Release #48 requires registrants to clarify and expand upon the existing financial statement disclosure requirements for derivative financial instruments, derivative commodity instruments and other financial instruments (collectively, “market sensitive instruments”).  We do not generally enter into market sensitive instruments for trading purposes.


Our current investment strategy seeks to maximize after-tax income through a high quality, diversified, taxable and tax-preferenced fixed maturity portfolio, while maintaining an adequate level of liquidity.  Our mix of taxable and tax-preferenced investments is adjusted continuously,periodically, consistent with our current and projected operating results, market conditions and our tax position.  The fixed maturitiesmaturity securities in the investment portfolio are comprised of non-trading available for sale securities.  Additionally, we investhave invested in equity securities, which we believe will enhance the risk-adjusted total return of the investment portfolio.

securities.


Our overall investment strategy considers the scope of present and anticipated Company operations.  In particular, estimates of the financial impact from non-investment asset and liability transactions, together with our capital structure and other factors, are used to develop a net liability analysis.  This analysis includes estimated payout characteristics for which our investments provide liquidity.  This analysis is considered in the development of specific investment strategies for asset allocation, duration and credit quality.  The change in overall market sensitive risk exposure principally reflects the asset changes that took place during the period.


Interest Rate Risk. Our $8.4$8.1 billion investment portfolio at September 30, 20082009 was principally comprised of approximately 75% fixed maturity securities, which are generally subject to interest rate risk and some foreign currency exchange rate risk, and 15%some equity securities, which are subject to price fluctuations and some foreign exchange rate risk.  Approximately 10% of the portfolio was represented by cash and short-term investments. The impact of the foreign exchange riskrisks on the investment portfolio was largelyis partially mitigated by changes in the dollar value of foreign currency denominated liabilities and their associated income statement impact.


Interest rate risk is the potential change in value of the fixed maturity securities portfolio, including short-term investments, from a change in market interest rates.  In a declining interest rate environment, it includes prepayment risk on the $645.5$509.7 million of mortgage-backed securities in the $6.4 billion$6,416.7 million fixed maturity securities portfolio.  Prepayment risk results from potential accelerated principal payments that shorten the average life and thus the expected yield of the security.


The table below displays the potential impact of market value fluctuations and after-tax unrealized appreciation on our fixed maturity securities portfolio (including $630.7$645.1 million of short-term investments) for the period indicated based on upward and downward parallel and immediate 100 and 200 basis point shifts in interest rates.  For legal entities with a U.S. dollar functional currency, this modeling was performed on each security individually.  To generate appropriate price estimates on mortgage-backed securities, changes in prepayment expectations under different interest rate environments were taken into account.  For legal entities with a non-U.S. dollar functional currency, the effective duration of the involved portfolio of securities was used as a proxy for the market value change under the various interest rate change scenarios.

 

Impact of Interest Rate Shift in Basis Points

 

 

At September 30, 2008

 

(Dollars in millions)

-200

 

-100

 

0

 

100

 

200

 

Total Market/Fair Value

$    7,792.9

 

$    7,419.9

 

$    7,019.5

 

$    6,577.2

 

$    6,181.1

 

Market/Fair Value Change from Base (%)                     

11.0

%

5.7

%

0.0

%

-6.3

%

-11.9

%

Change in Unrealized Appreciation

 

 

 

 

 

 

 

 

 

 

After-tax from Base ($)

$       502.7

 

$       260.3

 

$              -

 

$    (287.5)

 

$    (545.0)

 

  Impact of Interest Rate Shift in Basis Points 
  At September 30, 2009 
(Dollars in millions)  -200  -100  0  100  200
Total Market/Fair Value $7,665.3  $7,380.6  $7,061.8  $6,697.5  $6,353.4 
Market/Fair Value Change from Base (%)  8.5%  4.5%  0.0%  -5.2%  -10.0%
Change in Unrealized Appreciation                    
After-tax from Base ($) $392.3  $207.2  $-  $(236.8) $(460.5)
We had $7,662.5$7,247.0 million and $7,538.7$7,420.0 million of gross reserves for losses and LAE as of September 30, 20082009 and December 31, 2007,2008, respectively.  These amounts are recorded at their nominal value, as opposed to present value, which would reflect a discount adjustment to reflect the time value of money.  Since losses are paid out over a period of time, the present value of the reserves is less than the nominal
value.  As interest rates rise, the present value of the reserves decreases and, conversely, as interest rates decline, the present value increases.  These movements are the opposite of the interest rate impacts on the fair value of investments.  While the difference between present value and nominal value is not reflected in our financial statements, our financial results will include investment income over time from the investment portfolio until the claims are paid.  Our fixed income portfolio has an expected duration that is reasonably consistent with our loss and loss reserve obligations.


Equity Risk.Equity risk is the potential change in fair and/or market value of the common stock and preferred stock portfolios arising from changing equity prices.  Our equity investments consist of a diversified portfolio of individual securities and exchange traded and mutual funds, which invest principally in high quality common and preferred stocks that are traded on major exchanges.  The primary objective of the equity portfolio iswas to obtain greater total return relative to bonds over time through market appreciation and dividend income.


The table below displays the impact on the fair/market value and the after-tax change in fair/market value of a 10% and 20% change in equity prices up and down for the period indicated. All amounts are in U.S. dollars and are presented in millions.

 

Impact of Percentage Change in Equity Fair/Market Values

 

At September 30, 2008

(Dollars in millions)                                                        

-20%

-10%

0%

10%

20%

Fair/Market Value of the Equity Portfolio              

$          372.2

$         418.7

$        465.2

$        511.7

$      558.3

After-tax Change in Fair/Market Value                    

$          (59.2)

$         (29.6)

$                -

$          29.6

$        59.2


  Impact of Percentage Change in Equity Fair/Market Values
  At September 30, 2009
(Dollars in millions)  -20% -10% 0% 10%  20%
Fair/Market Value of the Equity Portfolio $126.8  $142.6  $158.5  $174.3  $190.2 
After-tax Change in Fair/Market Value $(20.6) $(10.3) $-  $10.3  $20.6 

Foreign Currency Risk.Foreign currency risk is the potential change in value, income and cash flow arising from adverse changes in foreign currency exchange rates.  Each of our non-U.S. (“foreign”) operations maintains capital in the currency of the country of its geographic location consistent with local regulatory guidelines.  Generally, we prefer to maintain the capital of our operations in U.S. dollar assets, although this varies by regulatory jurisdiction in accordance with market needs.  Each foreign operation may conduct business in its local currency, as well as the currency of other countries in which it operates.  The primary foreign currency exposures for our foreign operations are the Canadian Dollar, the British Pound Sterling and the Euro.  We mitigate foreign exchange exposure by generally matching the currency and duration of our assets to our corresponding operating liabilities.  In accordance with FASASC 830 (Financial Accounting Standards No. 52 “Foreign Currency Translation”), we translate the assets, liabilities and income of non-U.S. dollar functional currency legal entities to the U.S. dollar.  This translation amount is reported as a component of other comprehensive income.  As of September 30, 20082009 there has been no material change in exposure to foreign exchange rates as compared to December 31, 2007.2008.


Safe Harbor Disclosure.

This report contains forward-looking statements within the meaning of the U.S. federal securities laws.  We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in the federal securities laws.  In some cases, these statements can be identified by the use of forward-looking words such as “may”, “will”, “should”, “could”, “anticipate”, “estimate”, “expect”, “plan”, “believe”, “predict”, “potential” and “intend”.  Forward-looking statements contained in this report include information regarding our reserves for losses and LAE, the adequacy of our provision for uncollectible balances, estimates of our catastrophe exposure, the effects of catastrophic events on our financial statements and the ability of our subsidiaries to pay dividends.  Forward-looking statements only reflect our expectations and are not guarantees of performance.  These statements involve risks, uncertainties and assumptions.  Actual events or results may differ materially from our expectations.  Important factors that could cause our actual events or results to be materially different from our expectations include the uncertainties that surround the impact on our financial statements and liquidity resulting from changes in the global economy and credit markets, the estimating of reserves for losses and LAE, those discussed in Note 6 of Notes to Consolidated Financial Statements (unaudited) included in this report and the risks described under the caption “Risk Factors” in our most recently filed Annual Report on Form 10-K, PART I, ITEM 1A. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Market Risk Instruments.See “Market Sensitive Instruments” in PART I – ITEM 2.



ITEM 4.  CONTROLS AND PROCEDURES


As of the end of the period covered by this report, our management carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to


materially affect, our internal control over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this report.




PART II


ITEM 1.  LEGAL PROCEEDINGS


In the ordinary course of business, we are involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine our rights and obligations under insurance, reinsurance and other contractual agreements.  In some disputes, we seek to enforce our rights under an agreement or to collect funds owing to us. In other matters, we are resisting attempts by others to collect funds or enforce alleged rights. These disputes arise from time to time and are ultimately resolved through both informal and formal means, including negotiated resolution, arbitration and litigation.  In all such matters, we believe that our positions are legally and commercially reasonable.reasonable, and we vigorously seek to preserve, enforce and defend our legal rights under various agreements.  While the final outcome of these matters cannot be predicted with certainty, we do not believe that any of these matters, when finally resolved, will have a material adverse effect on our financial position or liquidity. However, an adverse resolution of one or more of these items in any one quarter or fiscal year could have a material adverse effect on our results of operations in that period.

In May 2005, we received and responded to a subpoena from the SEC seeking information regarding certain loss mitigation insurance products. Group, our parent, has stated that we will fully cooperate with this and any future inquiries and that we do not believe that we have engaged in any improper business practices with respect to loss mitigation insurance products.

Our insurance subsidiaries have also received and have responded to broadly distributed information requests by state regulators including among others, from Delaware and Georgia.



ITEM 1A.  RISK FACTORS


No material changes.



ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


None.



ITEM 3.  DEFAULTS UPON SENIOR SECURITIES


None.



ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.


None.


ITEM 5.  OTHER INFORMATION


None.



ITEM 6.  EXHIBITS


Exhibit Index:


Exhibit No.                      Description

31.1                                  Section 302 Certification of Joseph V. Taranto

31.2                                  Section 302 Certification of Dominic J. Addesso

32.1                                  Section 906 Certification of Joseph V. Taranto and Dominic J. Addesso




Exhibit No.

Description

31.1                                

Section 302 Certification of Joseph V. Taranto

31.2                                

Section 302 Certification of Craig Eisenacher

32.1                                

Section 906 Certification of Joseph V. Taranto and Craig Eisenacher

41

Everest Reinsurance Holdings, Inc.

Signatures

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this

report to be signed on its behalf by the undersigned thereunto duly authorized.

Everest Reinsurance Holdings, Inc.

(Registrant)

/S/ CRAIG EISENACHER

DOMINIC J. ADDESSO

Craig Eisenacher

Dominic J. Addesso

Executive Vice President and

Chief Financial Officer

(Duly Authorized Officer and Principal Financial Officer)

Dated: November 14, 2008

16, 2009