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 30, 20102011 | | Commission file number: 1-14527 |
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.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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.
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).
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| | Number of Shares Outstanding |
Class | | At November 1, 20102011 |
Common Shares, $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.
EVEREST REINSURANCE HOLDINGS, INC.
Form 10-Q
Page
PART I
FINANCIAL INFORMATION
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Item 1. | | Financial Statements | |
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Item 2. | | | |
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Item 3. | | | 4642 |
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Item 4. | | | 4642 |
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PART II
OTHER INFORMATION
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Item 1. | | | 4642 |
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Item 1A. | | | 4643 |
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Item 2. | | | 4643 |
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Item 3. | | | 4643 |
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Item 4. | | | 4643 |
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Item 5. | | | 4743 |
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Item 6. | | | 4743 |
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) | | 2011 | | | 2010 | |
| | (unaudited) | | | | |
ASSETS: | | | | | | |
Fixed maturities - available for sale, at market value | | $ | 5,070,084 | | | $ | 5,599,940 | |
(amortized cost: 2011, $4,857,294; 2010, $5,438,359) | | | | | | | | |
Fixed maturities - available for sale, at fair value | | | 120,597 | | | | 180,482 | |
Equity securities - available for sale, at market value (cost: 2011, $15; 2010, $15) | | | 11 | | | | 13 | |
Equity securities - available for sale, at fair value | | | 1,099,456 | | | | 683,454 | |
Short-term investments | | | 535,915 | | | | 516,885 | |
Other invested assets (cost: 2011, $394,153; 2010, $405,401) | | | 394,153 | | | | 406,916 | |
Other invested assets, at fair value | | | 771,571 | | | | 788,142 | |
Cash | | | 265,012 | | | | 118,092 | |
Total investments and cash | | | 8,256,799 | | | | 8,293,924 | |
Accrued investment income | | | 56,977 | | | | 70,874 | |
Premiums receivable | | | 794,523 | | | | 643,257 | |
Reinsurance receivables - unaffiliated | | | 581,986 | | | | 670,168 | |
Reinsurance receivables - affiliated | | | 3,042,544 | | | | 2,708,193 | |
Funds held by reinsureds | | | 176,677 | | | | 171,179 | |
Deferred acquisition costs | | | 172,380 | | | | 184,247 | |
Prepaid reinsurance premiums | | | 600,642 | | | | 629,323 | |
Deferred tax asset | | | 285,675 | | | | 183,924 | |
Federal income taxes recoverable | | | 132,826 | | | | 142,421 | |
Other assets | | | 226,285 | | | | 171,923 | |
TOTAL ASSETS | | $ | 14,327,314 | | | $ | 13,869,433 | |
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LIABILITIES: | | | | | | | | |
Reserve for losses and loss adjustment expenses | | $ | 8,165,262 | | | $ | 7,652,303 | |
Unearned premium reserve | | | 1,216,965 | | | | 1,287,476 | |
Funds held under reinsurance treaties | | | 83,145 | | | | 180,377 | |
Losses in the course of payment | | | 39,766 | | | | 13,089 | |
Commission reserves | | | 32,520 | | | | 37,796 | |
Other net payable to reinsurers | | | 622,445 | | | | 467,486 | |
Revolving credit borrowings | | | - | | | | 50,000 | |
5.4% Senior notes due 10/15/2014 | | | 249,847 | | | | 249,812 | |
6.6% Long term notes due 5/1/2067 | | | 238,353 | | | | 238,351 | |
Junior subordinated debt securities payable | | | 329,897 | | | | 329,897 | |
Accrued interest on debt and borrowings | | | 12,092 | | | | 4,793 | |
Other liabilities | | | 253,632 | | | | 230,312 | |
Total liabilities | | | 11,243,924 | | | | 10,741,692 | |
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Commitments and Contingencies (Note 6) | | | | | | | | |
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STOCKHOLDER'S EQUITY: | | | | | | | | |
Common stock, par value: $0.01; 3,000 shares authorized; | | | | | | | | |
1,000 shares issued and outstanding (2011 and 2010) | | | - | | | | - | |
Additional paid-in capital | | | 332,647 | | | | 327,767 | |
Accumulated other comprehensive income (loss), net of deferred income tax expense | | | | | | | | |
(benefit) of $109,416 at 2011 and $88,289 at 2010 | | | 203,200 | | | | 163,966 | |
Retained earnings | | | 2,547,543 | | | | 2,636,008 | |
Total stockholder's equity | | | 3,083,390 | | | | 3,127,741 | |
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY | | $ | 14,327,314 | | | $ | 13,869,433 | |
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The accompanying notes are an integral part of the consolidated financial statements. | | | | | | | | |
| | September 30, | | December 31, |
(Dollars in thousands, except par value per share) | | 2010 | | 2009 |
| | (unaudited) | | | |
ASSETS: | | | | | | |
Fixed maturities - available for sale, at market value | | $ | 6,368,800 | | | $ | 6,463,168 | |
(amortized cost: 2010, $6,024,830; 2009, $6,255,759) | | | | | | | | |
Fixed maturities - available for sale, at fair value | | | 116,376 | | | | 50,528 | |
Equity securities - available for sale, at market value (cost: 2010, $15; 2009, $15) | | | 12 | | | | 13 | |
Equity securities - available for sale, at fair value | | | 382,279 | | | | 380,025 | |
Short-term investments | | | 304,880 | | | | 261,438 | |
Other invested assets (cost: 2010, $395,027; 2009, $387,200) | | | 394,615 | | | | 386,326 | |
Other invested assets, at fair value | | | 752,533 | | | | 382,639 | |
Cash | | | 92,954 | | | | 107,480 | |
Total investments and cash | | | 8,412,449 | | | | 8,031,617 | |
Accrued investment income | | | 76,368 | | | | 83,705 | |
Premiums receivable | | | 718,307 | | | | 769,744 | |
Reinsurance receivables - unaffiliated | | | 679,066 | | | | 618,081 | |
Reinsurance receivables - affiliated | | | 2,721,300 | | | | 2,492,152 | |
Funds held by reinsureds | | | 168,235 | | | | 156,223 | |
Deferred acquisition costs | | | 194,988 | | | | 183,498 | |
Prepaid reinsurance premiums | | | 646,757 | | | | 562,146 | |
Deferred tax asset | | | 133,607 | | | | 210,493 | |
Federal income taxes recoverable | | | 75,273 | | | | 135,682 | |
Other assets | | | 188,947 | | | | 136,234 | |
TOTAL ASSETS | | $ | 14,015,297 | | | $ | 13,379,575 | |
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LIABILITIES: | | | | | | | | |
Reserve for losses and loss adjustment expenses | | $ | 7,611,614 | | | $ | 7,300,139 | |
Unearned premium reserve | | | 1,350,522 | | | | 1,239,320 | |
Funds held under reinsurance treaties | | | 173,315 | | | | 175,257 | |
Commission reserves | | | 37,712 | | | | 50,897 | |
Other net payable to reinsurers | | | 573,443 | | | | 444,535 | |
Revolving credit borrowings | | | 83,000 | | | | - | |
8.75% Senior notes due 3/15/2010 | | | - | | | | 199,970 | |
5.4% Senior notes due 10/15/2014 | | | 249,801 | | | | 249,769 | |
6.6% Long term notes due 05/01/2067 | | | 238,350 | | | | 238,348 | |
Junior subordinated debt securities payable | | | 329,897 | | | | 329,897 | |
Accrued interest on debt and borrowings | | | 12,129 | | | | 9,885 | |
Other liabilities | | | 248,574 | | | | 282,784 | |
Total liabilities | | | 10,908,357 | | | | 10,520,801 | |
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Commitments and Contingencies (Note 6) | | | | | | | | |
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STOCKHOLDER'S EQUITY: | | | | | | | | |
Common stock, par value: $0.01; 3,000 shares authorized; | | | | | | | | |
1,000 shares issued and outstanding (2010 and 2009) | | | - | | | | - | |
Additional paid-in capital | | | 326,478 | | | | 321,185 | |
Accumulated other comprehensive income (loss), net of deferred income tax expense (benefit) of | | | | | | | | |
$144,977 at 2010 and $89,912 at 2009 | | | 269,241 | | | | 166,978 | |
Retained earnings (deficit) | | | 2,511,221 | | | | 2,370,611 | |
Total stockholder's equity | | | 3,106,940 | | | | 2,858,774 | |
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY | | $ | 14,015,297 | | | $ | 13,379,575 | |
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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 | | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | September 30, | | September 30, | | | September 30, | |
(Dollars in thousands) | | 2010 | | 2009 | | 2010 | | 2009 | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| | (unaudited) | | (unaudited) | | (unaudited) | | | (unaudited) | |
REVENUES: | | | | | | | | | | | | | | | | | | | | | | | | |
Premiums earned | | $ | 465,302 | | | $ | 438,320 | | | $ | 1,322,160 | | | $ | 1,337,539 | | | $ | 442,862 | | | $ | 465,302 | | | $ | 1,354,305 | | | $ | 1,322,160 | |
Net investment income | | | 74,212 | | | | 65,492 | | | | 248,665 | | | | 179,667 | | | | 78,325 | | | | 74,212 | | | | 249,916 | | | | 248,665 | |
Net realized capital gains (losses): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other-than-temporary impairments on fixed maturity securities | | | (2,023 | ) | | | - | | | | (2,023 | ) | | | (5,510 | ) | | | (911 | ) | | | (2,023 | ) | | | (14,522 | ) | | | (2,023 | ) |
Other-than-temporary impairments on fixed maturity securities | | | | | | | | | | | | | | | | | | | | | | | | | �� | | | | | | | |
transferred to other comprehensive income (loss) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Other net realized capital gains (losses) | | | 161,592 | | | | 101,394 | | | | 60,812 | | | | 61,661 | | | | (178,125 | ) | | | 161,592 | | | | (192,222 | ) | | | 60,812 | |
Total net realized capital gains (losses) | | | 159,569 | | | | 101,394 | | | | 58,789 | | | | 56,151 | | | | (179,036 | ) | | | 159,569 | | | | (206,744 | ) | | | 58,789 | |
Realized gain on debt repurchase | | | - | | | | - | | | | - | | | | 78,271 | | |
Other income (expense) | | | (3,617 | ) | | | 15,081 | | | | 10,204 | | | | 7,801 | | | | (8,865 | ) | | | (3,617 | ) | | | (20,401 | ) | | | 10,204 | |
Total revenues | | | 695,466 | | | | 620,287 | | | | 1,639,818 | | | | 1,659,429 | | | | 333,286 | | | | 695,466 | | | | 1,377,076 | | | | 1,639,818 | |
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CLAIMS AND EXPENSES: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Incurred losses and loss adjustment expenses | | | 326,925 | | | | 241,992 | | | | 1,068,678 | | | | 777,295 | | | | 322,099 | | | | 326,925 | | | | 1,187,936 | | | | 1,068,678 | |
Commission, brokerage, taxes and fees | | | 81,455 | | | | 77,259 | | | | 237,493 | | | | 252,401 | | | | 70,842 | | | | 81,455 | | | | 239,659 | | | | 237,493 | |
Other underwriting expenses | | | 37,230 | | | | 38,189 | | | | 105,315 | | | | 104,355 | | | | 42,708 | | | | 37,230 | | | | 120,148 | | | | 105,315 | |
Corporate expenses | | | 1,529 | | | | 1,675 | | | | 5,218 | | | | 4,871 | | | | 1,143 | | | | 1,529 | | | | 3,498 | | | | 5,218 | |
Interest, fee and bond issue cost amortization expense | | | 12,817 | | | | 17,073 | | | | 41,879 | | | | 53,779 | | | | 12,706 | | | | 12,817 | | | | 38,083 | | | | 41,879 | |
Total claims and expenses | | | 459,956 | | | | 376,188 | | | | 1,458,583 | | | | 1,192,701 | | | | 449,498 | | | | 459,956 | | | | 1,589,324 | | | | 1,458,583 | |
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INCOME (LOSS) BEFORE TAXES | | | 235,510 | | | | 244,099 | | | | 181,235 | | | | 466,728 | | | | (116,212 | ) | | | 235,510 | | | | (212,248 | ) | | | 181,235 | |
Income tax expense (benefit) | | | 66,858 | | | | 79,958 | | | | 40,625 | | | | 128,423 | | | | (116,473 | ) | | | 66,858 | | | | (123,783 | ) | | | 40,625 | |
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NET INCOME (LOSS) | | $ | 168,652 | | | $ | 164,141 | | | $ | 140,610 | | | $ | 338,305 | | | $ | 261 | | | $ | 168,652 | | | $ | (88,465 | ) | | $ | 140,610 | |
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Other comprehensive income (loss), net of tax | | | 65,718 | | | | 162,343 | | | | 102,263 | | | | 285,123 | | | | 3,981 | | | | 65,718 | | | | 39,234 | | | | 102,263 | |
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COMPREHENSIVE INCOME (LOSS) | | $ | 234,370 | | | $ | 326,484 | | | $ | 242,873 | | | $ | 623,428 | | | $ | 4,242 | | | $ | 234,370 | | | $ | (49,231 | ) | | $ | 242,873 | |
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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 | | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | September 30, | | September 30, | | | September 30, | |
(Dollars in thousands, except share amounts) | | 2010 | | 2009 | | 2010 | | 2009 | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| | (unaudited) | | (unaudited) | | (unaudited) | | | (unaudited) | |
COMMON STOCK (shares outstanding): | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, beginning of period | | | 1,000 | | | | 1,000 | | | | 1,000 | | | | 1,000 | | | | 1,000 | | | | 1,000 | | | | 1,000 | | | | 1,000 | |
Balance, end of period | | | 1,000 | | | | 1,000 | | | | 1,000 | | | | 1,000 | | | | 1,000 | | | | 1,000 | | | | 1,000 | | | | 1,000 | |
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ADDITIONAL PAID-IN CAPITAL: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, beginning of period | | $ | 324,156 | | | $ | 318,492 | | | $ | 321,185 | | | $ | 315,771 | | | $ | 330,990 | | | $ | 324,156 | | | $ | 327,767 | | | $ | 321,185 | |
Share-based compensation plans | | | 2,322 | | | | 1,395 | | | | 5,293 | | | | 4,116 | | | | 1,657 | | | | 2,322 | | | | 4,880 | | | | 5,293 | |
Balance, end of period | | | 326,478 | | | | 319,887 | | | | 326,478 | | | | 319,887 | | | | 332,647 | | | | 326,478 | | | | 332,647 | | | | 326,478 | |
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ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
NET OF DEFERRED INCOME TAXES: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance, beginning of period | | | 203,523 | | | | 35,217 | | | | 166,978 | | | | (72,063 | ) | | | 199,219 | | | | 203,523 | | | | 163,966 | | | | 166,978 | |
Cumulative adjustment of initial adoption(1), net of tax | | | - | | | | - | | | | - | | | | (15,500 | ) | |
Net increase (decrease) during the period | | | 65,718 | | | | 162,343 | | | | 102,263 | | | | 285,123 | | | | 3,981 | | | | 65,718 | | | | 39,234 | | | | 102,263 | |
Balance, end of period | | | 269,241 | | | | 197,560 | | | | 269,241 | | | | 197,560 | | | | 203,200 | | | | 269,241 | | | | 203,200 | | | | 269,241 | |
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RETAINED EARNINGS (DEFICIT): | | | | | | | | | | | | | | | | | |
RETAINED EARNINGS: | | | | | | | | | | | | | | | | | |
Balance, beginning of period | | | 2,342,569 | | | | 2,148,924 | | | | 2,370,611 | | | | 1,959,260 | | | | 2,547,282 | | | | 2,342,569 | | | | 2,636,008 | | | | 2,370,611 | |
Cumulative adjustment of initial adoption(1), net of tax | | | - | | | | - | | | | - | | | | 15,500 | | |
Net income (loss) | | | 168,652 | | | | 164,141 | | | | 140,610 | | | | 338,305 | | | | 261 | | | | 168,652 | | | | (88,465 | ) | | | 140,610 | |
Balance, end of period | | | 2,511,221 | | | | 2,313,065 | | | | 2,511,221 | | | | 2,313,065 | | | | 2,547,543 | | | | 2,511,221 | | | | 2,547,543 | | | | 2,511,221 | |
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TOTAL STOCKHOLDER'S EQUITY, END OF PERIOD | | $ | 3,106,940 | | | $ | 2,830,512 | | | $ | 3,106,940 | | | $ | 2,830,512 | | | $ | 3,083,390 | | | $ | 3,106,940 | | | $ | 3,083,390 | | | $ | 3,106,940 | |
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(1) The cumulative adjustment to accumulated other comprehensive income (loss), net of deferred income taxes, and retained earnings (deficit), represents the effect of initially | | | | | | |
adopting new guidance for other-than-temporary impairments of debt securities. | | | | | | | | | | | | | | | | | |
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The accompanying notes are an integral part of the consolidated financial statements. | | | | | | | | | | | | | | | | | 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) | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| | (unaudited) | | | (unaudited) | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | |
Net income (loss) | | $ | 261 | | | $ | 168,652 | | | $ | (88,465 | ) | | $ | 140,610 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | |
Decrease (increase) in premiums receivable | | | (21,017 | ) | | | 29,733 | | | | (149,561 | ) | | | 54,616 | |
Decrease (increase) in funds held by reinsureds, net | | | (94,290 | ) | | | 2,829 | | | | (102,102 | ) | | | (13,433 | ) |
Decrease (increase) in reinsurance receivables | | | 112,376 | | | | (71,235 | ) | | | (243,523 | ) | | | (299,032 | ) |
Decrease (increase) in deferred tax asset | | | (137,225 | ) | | | 76,238 | | | | (122,876 | ) | | | 21,823 | |
Decrease (increase) in prepaid reinsurance premiums | | | (33,514 | ) | | | (68,171 | ) | | | 28,649 | | | | (84,363 | ) |
Increase (decrease) in reserve for losses and loss adjustment expenses | | | (96,587 | ) | | | 15,455 | | | | 489,779 | | | | 305,807 | |
Increase (decrease) in unearned premiums | | | 29,928 | | | | 100,938 | | | | (73,434 | ) | | | 108,080 | |
Change in equity adjustments in limited partnerships | | | (12,190 | ) | | | (1,071 | ) | | | (44,544 | ) | | | (19,367 | ) |
Change in other assets and liabilities, net | | | 111,571 | | | | (15,569 | ) | | | 215,035 | | | | 127,052 | |
Non-cash compensation expense | | | 1,584 | | | | 2,273 | | | | 4,638 | | | | 5,153 | |
Amortization of bond premium (accrual of bond discount) | | | (17 | ) | | | 3,579 | | | | 6,897 | | | | 8,196 | |
Amortization of underwriting discount on senior notes | | | 12 | | | | 12 | | | | 36 | | | | 65 | |
Net realized capital (gains) losses | | | 179,036 | | | | (159,569 | ) | | | 206,744 | | | | (58,789 | ) |
Net cash provided by (used in) operating activities | | | 39,928 | | | | 84,094 | | | | 127,273 | | | | 296,418 | |
| | | | | | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | |
Proceeds from fixed maturities matured/called - available for sale, at market value | | | 262,235 | | | | 173,079 | | | | 525,768 | | | | 481,948 | |
Proceeds from fixed maturities matured/called - available for sale, at fair value | | | - | | | | - | | | | 12,775 | | | | - | |
Proceeds from fixed maturities sold - available for sale, at market value | | | 255,913 | | | | 85,667 | | | | 1,042,803 | | | | 457,230 | |
Proceeds from fixed maturities sold - available for sale, at fair value | | | 12,512 | | | | 10,689 | | | | 62,632 | | | | 19,301 | |
Proceeds from equity securities sold - available for sale, at market value | | | - | | | | - | | | | 27,096 | | | | - | |
Proceeds from equity securities sold - available for sale, at fair value | | | 61,080 | | | | 14,899 | | | | 150,776 | | | | 87,641 | |
Distributions from other invested assets | | | 13,487 | | | | 14,148 | | | | 103,262 | | | | 38,028 | |
Cost of fixed maturities acquired - available for sale, at market value | | | (285,414 | ) | | | (138,332 | ) | | | (995,210 | ) | | | (693,908 | ) |
Cost of fixed maturities acquired - available for sale, at fair value | | | (9,801 | ) | | | (56,937 | ) | | | (25,025 | ) | | | (80,618 | ) |
Cost of equity securities acquired - available for sale, at market value | | | - | | | | - | | | | (27,059 | ) | | | - | |
Cost of equity securities acquired - available for sale, at fair value | | | (340,493 | ) | | | (20,938 | ) | | | (679,764 | ) | | | (71,817 | ) |
Cost of other invested assets acquired | | | (2,393 | ) | | | (8,115 | ) | | | (47,471 | ) | | | (26,489 | ) |
Cost of other invested assets acquired, at fair value | | | - | | | | (80,765 | ) | | | (37,611 | ) | | | (327,876 | ) |
Cost of businesses acquired | | | - | | | | - | | | | (63,100 | ) | | | - | |
Net change in short-term investments | | | 29,080 | | | | (52,975 | ) | | | (18,105 | ) | | | (43,054 | ) |
Net change in unsettled securities transactions | | | (14,007 | ) | | | 1,936 | | | | 30,834 | | | | (33,584 | ) |
Net cash provided by (used in) investing activities | | | (17,801 | ) | | | (57,644 | ) | | | 62,601 | | | | (193,198 | ) |
| | | | | | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | |
Tax benefit from share-based compensation | | | 73 | | | | 49 | | | | 242 | | | | 140 | |
Net cost of senior notes maturing | | | - | | | | - | | | | - | | | | (200,000 | ) |
Revolving credit borrowings | | | (40,000 | ) | | | (50,000 | ) | | | (50,000 | ) | | | 83,000 | |
Net cash provided by (used in) financing activities | | | (39,927 | ) | | | (49,951 | ) | | | (49,758 | ) | | | (116,860 | ) |
| | | | | | | | | | | | | | | | |
EFFECT OF EXCHANGE RATE CHANGES ON CASH | | | (5,553 | ) | | | 9,608 | | | | 6,804 | | | | (886 | ) |
| | | | | | | | | | | | | | | | |
Net increase (decrease) in cash | | | (23,353 | ) | | | (13,893 | ) | | | 146,920 | | | | (14,526 | ) |
Cash, beginning of period | | | 288,365 | | | | 106,847 | | | | 118,092 | | | | 107,480 | |
Cash, end of period | | $ | 265,012 | | | $ | 92,954 | | | $ | 265,012 | | | $ | 92,954 | |
| | | | | | | | | | | | | | | | |
SUPPLEMENTAL CASH FLOW INFORMATION: | | | | | | | | | | | | | | | | |
Income taxes paid (recovered) | | $ | 4,149 | | | $ | (3,202 | ) | | $ | (16,616 | ) | | $ | (52,592 | ) |
Interest paid | | | 5,228 | | | | 5,339 | | | | 30,269 | | | | 39,104 | |
| | | | | | | | | | | | | | | | |
Non-cash transaction: | | | | | | | | | | | | | | | | |
Net assets acquired and liabilities assumed from business acquisitions | | | - | | | | - | | | | 19,130 | | | | - | |
| | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of the consolidated financial statements. | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | September 30, | | September 30, |
(Dollars in thousands) | | 2010 | | 2009 | | 2010 | | 2009 |
| | (unaudited) | | (unaudited) |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | | | | |
Net income (loss) | | $ | 168,652 | | | $ | 164,141 | | | $ | 140,610 | | | $ | 338,305 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | | | | | | | |
Decrease (increase) in premiums receivable | | | 29,733 | | | | (1,371 | ) | | | 54,616 | | | | (51,192 | ) |
Decrease (increase) in funds held by reinsureds, net | | | 2,829 | | | | 9,624 | | | | (13,433 | ) | | | 9,459 | |
Decrease (increase) in reinsurance receivables | | | (71,235 | ) | | | 146,809 | | | | (299,032 | ) | | | (6,656 | ) |
Decrease (increase) in deferred tax asset | | | 76,238 | | | | 41,994 | | | | 21,823 | | | | 74,970 | |
Increase (decrease) in reserve for losses and loss adjustment expenses | | | 15,455 | | | | (35,920 | ) | | | 305,807 | | | | (218,365 | ) |
Increase (decrease) in unearned premiums | | | 100,938 | | | | 95,297 | | | | 108,080 | | | | 91,611 | |
Change in equity adjustments in limited partnerships | | | (1,071 | ) | | | 4,423 | | | | (19,367 | ) | | | 36,548 | |
Change in other assets and liabilities, net | | | (83,740 | ) | | | (161,038 | ) | | | 42,689 | | | | 83,477 | |
Non-cash compensation expense | | | 2,273 | | | | 1,384 | | | | 5,153 | | | | 4,091 | |
Amortization of bond premium (accrual of bond discount) | | | 3,579 | | | | 3,824 | | | | 8,196 | | | | 8,802 | |
Amortization of underwriting discount on senior notes | | | 12 | | | | 48 | | | | 65 | | | | 142 | |
Realized gain on debt repurchase | | | - | | | | - | | | | - | | | | (78,271 | ) |
Net realized capital (gains) losses | | | (159,569 | ) | | | (101,394 | ) | | | (58,789 | ) | | | (56,151 | ) |
Net cash provided by (used in) operating activities | | | 84,094 | | | | 167,821 | | | | 296,418 | | | | 236,770 | |
| | | | | | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | | | | | | | | |
Proceeds from fixed maturities matured/called - available for sale, at market value | | | 173,079 | | | | 130,349 | | | | 481,948 | | | | 324,432 | |
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 | | | 85,667 | | | | 34,602 | | | | 457,230 | | | | 87,696 | |
Proceeds from fixed maturities sold - available for sale, at fair value | | | 10,689 | | | | 4,010 | | | | 19,301 | | | | 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 | | | 14,899 | | | | 11,310 | | | | 87,641 | | | | 23,535 | |
Distributions from other invested assets | | | 14,148 | | | | 4,448 | | | | 38,028 | | | | 24,573 | |
Cost of fixed maturities acquired - available for sale, at market value | | | (138,332 | ) | | | (256,130 | ) | | | (693,908 | ) | | | (865,910 | ) |
Cost of fixed maturities acquired - available for sale, at fair value | | | (56,937 | ) | | | (2,548 | ) | | | (80,618 | ) | | | (19,101 | ) |
Cost of equity securities acquired - available for sale, at fair value | | | (20,938 | ) | | | (12,948 | ) | | | (71,817 | ) | | | (32,244 | ) |
Cost of other invested assets acquired | | | (8,115 | ) | | | (9,780 | ) | | | (26,489 | ) | | | (26,122 | ) |
Cost of other invested assets acquired, at fair value | | | (80,765 | ) | | | - | | | | (327,876 | ) | | | - | |
Net change in short-term investments | | | (52,975 | ) | | | (86,179 | ) | | | (43,054 | ) | | | 284,738 | |
Net change in unsettled securities transactions | | | 1,936 | | | | 18,522 | | | | (33,584 | ) | | | 42,856 | |
Net cash provided by (used in) investing activities | | | (57,644 | ) | | | (141,316 | ) | | | (193,198 | ) | | | (114,937 | ) |
| | | | | | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | | | | | | | | |
Tax benefit from share-based compensation | | | 49 | | | | 11 | | | | 140 | | | | 25 | |
Net cost of senior notes maturing | | | - | | | | - | | | | (200,000 | ) | | | - | |
Revolving credit borrowings | | | (50,000 | ) | | | - | | | | 83,000 | | | | - | |
Net cost of debt repurchase | | | - | | | | - | | | | - | | | | (83,026 | ) |
Net cash provided by (used in) financing activities | | | (49,951 | ) | | | 11 | | | | (116,860 | ) | | | (83,001 | ) |
| | | | | | | | | | | | | | | | |
EFFECT OF EXCHANGE RATE CHANGES ON CASH | | | 9,608 | | | | 3,411 | | | | (886 | ) | | | (5,968 | ) |
| | | | | | | | | | | | | | | | |
Net increase (decrease) in cash | | | (13,893 | ) | | | 29,927 | | | | (14,526 | ) | | | 32,864 | |
Cash, beginning of period | | | 106,847 | | | | 95,201 | | | | 107,480 | | | | 92,264 | |
Cash, end of period | | $ | 92,954 | | | $ | 125,128 | | | $ | 92,954 | | | $ | 125,128 | |
| | | | | | | | | | | | | | | | |
SUPPLEMENTAL CASH FLOW INFORMATION: | | | | | | | | | | | | | | | | |
Cash transactions: | | | | | | | | | | | | | | | | |
Income taxes paid (recovered) | | $ | (3,202 | ) | | $ | (18,847 | ) | | $ | (52,592 | ) | | $ | (2,488 | ) |
Interest paid | | | 5,339 | | | | 13,892 | | | | 39,104 | | | | 51,464 | |
| | | | | | | | | | | | | | | | |
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, 20102011 and 20092010
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 and its subsidiaries, a subsidiary of Holdings (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, 20102011 and 20092010 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, 20092010 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, 2011 and 2010 and 2009 a reare 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, 2010, 2009 2008 and 20072008 included in the Company’s most recent Form 10-K filing.
All intercompany accounts and transactions have been eliminated.
Certain reclassifications and format changes have been made to prior years’ amounts to conform to the 20102011 presentation.
Financial Accounting Standards Board Accounting Codification
Financial Accounting Standards Board Launched Accounting Codification. In June 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance establishing the FASB Accounting Standards CodificationTM (“Codification”) as the single source of authoritative U.S. GAAP recognized by the FASB to be applied by non-governmental 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 no n-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative.
Following the Codification, the FASB will no longer 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. The Company’s adoption of this guidance impacts the way the Company references U.S. GAAP accounting standards in the financial statements and Notes to Consolidated Financial Statements.
Application of Recently Issued Accounting Standard Changes
Financial Accounting Standards Board Launched Accounting Codification. In June 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance establishing the FASB Accounting Standards CodificationTM (“Codification”) as the single source of authoritative U.S. GAAP recognized by the FASB to be applied by non-governmental 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 no longer 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. The Company’s adoption of this guidance impacts the way the Company references U.S. GAAP accounting standards in the financial statements and Notes to Consolidated Financial Statements.
Presentation of Comprehensive Income. In June 2011, FASB issued amendments to existing guidance to provide two alternatives for the presentation of comprehensive income. Components of net income and comprehensive income will either be presented within a single, continuous financial statement or be presented in two separate but consecutive financial statements. The guidance is effective for reporting periods beginning after December 15, 2011. The Company will adopt this guidance as of January 1, 2012 and expects to present net income and comprehensive income in a single, continuous financial statement.
Common Fair Value Measurement. In May 2011, FASB issued amendments to existing guidance to achieve common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards. The amendments change wording used to describe many GAAP fair value measurement requirements and disclosures. FASB does not intend for the amendments to cause a change in application of fair value accounting guidance. The guidance is effective for reporting periods beginning after December 15, 2011. The Company will adopt this guidance prospectively as of January 1, 2012.
Treatment of Insurance Contract Acquisition Costs. In October 2010, the FASB issued authoritative guidance for the accounting for costs associated with acquiring or renewing insurance contracts. The guidance identifies the incremental direct costs of contract acquisition and costs directly related to acquisition activities that should be capitalized. This guidance is effective for reporting periods beginning after December 15, 2011. The Company will adopt this guidance as of January 1, 2012. The Company is in the process of determining the effect on its consolidated financial statements.
Subsequent Events. In May 2009, the FASB issued authoritative guidance for subsequent events, which was later modified in February 2010, that addresses the accounting for and disclosure of subsequent events not addressed in other applicable U.S. GAAP. The Company implemented the new disclosure requirement beginning with the second quarter of 2009 and included it in the Notes to Consolidated Interim Financial Statements.
Improving Disclosures About Fair Value Measurements. In January 2010, the FASB amended the authoritative guidance for disclosures on fair value measurements. Effective for interim and annual reporting periods beginning after December 15, 2009, the guidance requires a new separate disclosure for: significant transfers in and out of Level 1 and 2 and the reasons for the transfers; and provided clarification on existing disclosures to include: fair value measurement disclosures by class of assets and liabilities and disclosure on valuation techniques and inputs used to measure fair value that fall in either Level 2 or Level 3. The Company implemented this guidance effective January 1, 2010. Effective for interim and annual reporting periods beginning after December 15, 2010, the guidance requires another new separate disclosure in regards to Level 3 fair value measurements in that, the period activity will present separately information about purchases, sales, issuances and settlements. Comparative disclosures shall be required only for periods ending after initial adoption. The Company implemented the first part of this guidance effective January 1, 2010.
Interim Disclosures About Fair Value of Financial Instruments. In April 2009, the FASB revised the authoritative guidance for disclosures about fair value of financial instruments. This new guidance 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 adopted this disclosure beginning with the secondthird quarter of 2009 and included it in the Notes to Consolidated Interim Financial Statements.2010.
Other-Than-Temporary Impairments on Investment Securities. In April 2009, the FASB revised the authoritative guidance for the recognition and presentation of other-than-temporary impairments. This new guidance 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 debt 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 ot herother comprehensive income.income (loss). The Company adopted this guidance effective April 1, 2009. Upon adoption the Company recognized a cumulative-effect adjustment increase in retained earnings (deficit) and decrease in accumulated other comprehensive income (loss) as follows:
(Dollars in thousands) | | | |
Cumulative-effect adjustment, gross | | $ | 23,846 | |
Tax | | | (8,346 | ) |
Cumulative-effect adjustment, net | | $ | 15,500 | |
Measurement of Fair Value in Inactive Markets. In April 2009, the FASB revised the authoritative guidance for fair value measurements and disclosures, which reaffirms that fair value 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.
3. INVESTMENTS
The amortized cost, market value and gross unrealized appreciation and depreciation of available for sale, fixed maturity and equity security investments, carried at market value, are as follows for the periods indicated:
| | At September 30, 2010 | | | At September 30, 2011 | |
| | Amortized | | | Unrealized | | | Unrealized | | | Market | | | Amortized | | | Unrealized | | | Unrealized | | | Market | |
(Dollars in thousands) | | Cost | | | Appreciation | | | Depreciation | | | Value | | | Cost | | | Appreciation | | | Depreciation | | | Value | |
Fixed maturity securities - available for sale | | | | | | | | | | | | | |
Fixed maturity securities | | | | | | | | | | | | | |
U.S. Treasury securities and obligations of | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. government agencies and corporations | | $ | 151,672 | | | $ | 6,417 | | | $ | (277 | ) | | $ | 157,812 | | | $ | 84,516 | | | $ | 2,120 | | | $ | (857 | ) | | $ | 85,779 | |
Obligations of U.S. states and political subdivisions | | | 3,405,935 | | | | 220,320 | | | | (4,202 | ) | | | 3,622,053 | | | | 1,742,305 | | | | 112,418 | | | | (572 | ) | | | 1,854,151 | |
Corporate securities | | | 708,637 | | | | 51,158 | | | | (7,527 | ) | | | 752,268 | | | | 1,016,890 | | | | 39,715 | | | | (27,996 | ) | | | 1,028,609 | |
Asset-backed securities | | | 25,362 | | | | 546 | | | | (206 | ) | | | 25,702 | | | | 44,251 | | | | 987 | | | | (82 | ) | | | 45,156 | |
Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | | 32,513 | | | | 8,133 | | | | - | | | | 40,646 | | | | 41,829 | | | | 6,926 | | | | (2,030 | ) | | | 46,725 | |
Agency residential | | | 386,496 | | | | 17,406 | | | | (107 | ) | | | 403,795 | | | | 388,896 | | | | 17,957 | | | | (347 | ) | | | 406,506 | |
Non-agency residential | | | 30,047 | | | | 922 | | | | (1,046 | ) | | | 29,923 | | | | 25,779 | | | | 362 | | | | (124 | ) | | | 26,017 | |
Foreign government securities | | | 705,941 | | | | 41,349 | | | | (7,461 | ) | | | 739,829 | | | | 804,875 | | | | 58,999 | | | | (5,115 | ) | | | 858,759 | |
Foreign corporate securities | | | 578,227 | | | | 27,985 | | | | (9,440 | ) | | | 596,772 | | | | 707,953 | | | | 29,573 | | | | (19,144 | ) | | | 718,382 | |
Total fixed maturity securities | | $ | 6,024,830 | | | $ | 374,236 | | | $ | (30,266 | ) | | $ | 6,368,800 | | | $ | 4,857,294 | | | $ | 269,057 | | | $ | (56,267 | ) | | $ | 5,070,084 | |
Equity securities | | $ | 15 | | | $ | - | | | $ | (3 | ) | | $ | 12 | | | $ | 15 | | | $ | - | | | $ | (4 | ) | | $ | 11 | |
| | At December 31, 2009 | | | At December 31, 2010 | |
| | Amortized | | | Unrealized | | | Unrealized | | | Market | | | Amortized | | | Unrealized | | | Unrealized | | | Market | |
(Dollars in thousands) | | Cost | | | Appreciation | | | Depreciation | | | Value | | | Cost | | | Appreciation | | | Depreciation | | | Value | |
Fixed maturity securities - available for sale | | | | | | | | | | | | | |
Fixed maturity securities | | | | | | | | | | | | | |
U.S. Treasury securities and obligations of | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. government agencies and corporations | | $ | 132,348 | | | $ | 3,614 | | | $ | (1,671 | ) | | $ | 134,291 | | | $ | 153,263 | | | $ | 2,450 | | | $ | (5,146 | ) | | $ | 150,567 | |
Obligations of U.S. states and political subdivisions | | | 3,694,267 | | | | 183,848 | | | | (24,256 | ) | | | 3,853,859 | | | | 2,809,514 | | | | 116,920 | | | | (24,929 | ) | | | 2,901,505 | |
Corporate securities | | | 618,507 | | | | 30,298 | | | | (13,424 | ) | | | 635,381 | | | | 688,938 | | | | 42,522 | | | | (9,775 | ) | | | 721,685 | |
Asset-backed securities | | | 16,597 | | | | 460 | | | | (1,909 | ) | | | 15,148 | | | | 19,860 | | | | 705 | | | | (14 | ) | | | 20,551 | |
Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | | 24,213 | | | | 4,956 | | | | (111 | ) | | | 29,058 | | | | 31,887 | | | | 7,618 | | | | - | | | | 39,505 | |
Agency residential | | | 556,032 | | | | 10,366 | | | | (1,691 | ) | | | 564,707 | | | | 355,928 | | | | 13,975 | | | | (212 | ) | | | 369,691 | |
Non-agency residential | | | 61,098 | | | | 916 | | | | (7,055 | ) | | | 54,959 | | | | 29,373 | | | | 912 | | | | (317 | ) | | | 29,968 | |
Foreign government securities | | | 638,204 | | | | 27,700 | | | | (6,687 | ) | | | 659,217 | | | | 731,930 | | | | 32,678 | | | | (15,567 | ) | | | 749,041 | |
Foreign corporate securities | | | 514,493 | | | | 17,184 | | | | (15,129 | ) | | | 516,548 | | | | 617,666 | | | | 20,939 | | | | (21,178 | ) | | | 617,427 | |
Total fixed maturity securities | | $ | 6,255,759 | | | $ | 279,342 | | | $ | (71,933 | ) | | $ | 6,463,168 | | | $ | 5,438,359 | | | $ | 238,719 | | | $ | (77,138 | ) | | $ | 5,599,940 | |
Equity securities | | $ | 15 | | | $ | - | | | $ | (2 | ) | | $ | 13 | | | $ | 15 | | | $ | - | | | $ | (2 | ) | | $ | 13 | |
In accordance with FASB guidance, the Company reclassified the non-credit portion of other-than-temporary impairments from retained earnings (deficit) into accumulated other comprehensive income (loss), on April 1, 2009. The table below presents the pre-tax cumulative unrealized appreciation (depreciation) on those corporate securities, for the periods indicated:
(Dollars in thousands) | | At September 30, 2010 | | At December 31, 2009 | | At September 30, 2011 | | At December 31, 2010 |
Pre-tax cumulative unrealized appreciation (depreciation) | | $ | 927 | | | $ | (2,039 | ) | | $ | 691 | | $ | 823 |
The amortized cost and market value of fixed maturity securities are shown in the following table by contractual maturity. Mortgage-backed securities are generally more likely to be prepaid than other fixed maturity securities. 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, 2010 | | | At December 31, 2009 | | | At September 30, 2011 | | | At December 31, 2010 | |
| | Amortized | | | Market | | | Amortized | | | Market | | | Amortized | | | Market | | | Amortized | | | Market | |
(Dollars in thousands) | | Cost | | | Value | | | Cost | | | Value | | | Cost | | | Value | | | Cost | | | Value | |
Fixed maturity securities – available for sale | | | | | | | | | | | | | | | | | | | | | | | | |
Due in one year or less | | $ | 242,466 | | | $ | 241,645 | | | $ | 334,054 | | | $ | 335,948 | | | $ | 190,497 | | | $ | 188,938 | | | $ | 212,728 | | | $ | 207,739 | |
Due after one year through five years | | | 1,563,006 | | | | 1,632,360 | | | | 1,276,968 | | | | 1,316,918 | | | | 1,959,056 | | | | 2,021,715 | | | | 1,642,227 | | | | 1,681,497 | |
Due after five years through ten years | | | 1,243,788 | | | | 1,337,647 | | | | 1,224,457 | | | | 1,282,470 | | | | 1,023,905 | | | | 1,071,801 | | | | 1,203,497 | | | | 1,253,609 | |
Due after ten years | | | 2,501,152 | | | | 2,657,082 | | | | 2,762,340 | | | | 2,863,960 | | | | 1,183,081 | | | | 1,263,226 | | | | 1,942,859 | | | | 1,997,380 | |
Asset-backed securities | | | 25,362 | | | | 25,702 | | | | 16,597 | | | | 15,148 | | | | 44,251 | | | | 45,156 | | | | 19,860 | | | | 20,551 | |
Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | | 32,513 | | | | 40,646 | | | | 24,213 | | | | 29,058 | | | | 41,829 | | | | 46,725 | | | | 31,887 | | | | 39,505 | |
Agency residential | | | 386,496 | | | | 403,795 | | | | 556,032 | | | | 564,707 | | | | 388,896 | | | | 406,506 | | | | 355,928 | | | | 369,691 | |
Non-agency residential | | | 30,047 | | | | 29,923 | | | | 61,098 | | | | 54,959 | | | | 25,779 | | | | 26,017 | | | | 29,373 | | | | 29,968 | |
Total fixed maturity securities | | $ | 6,024,830 | | | $ | 6,368,800 | | | $ | 6,255,759 | | | $ | 6,463,168 | | | $ | 4,857,294 | | | $ | 5,070,084 | | | $ | 5,438,359 | | | $ | 5,599,940 | |
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 | | | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | | | September 30, | | | September 30, | |
(Dollars in thousands) | | 2010 | | | 2009 | | | 2010 | | | 2009 | | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
Increase (decrease) during the period between the market value and cost | | | | | | | | | | | | | | | | | | | | | | | | |
of investments carried at market value, and deferred taxes thereon: | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed maturity securities | | $ | 83,578 | | | $ | 229,219 | | | $ | 133,595 | | | $ | 396,245 | | | $ | 11,911 | | | $ | 83,578 | | | $ | 51,341 | | | $ | 133,595 | |
Fixed maturity securities, cumulative other-than-temporary impairment adjustment | | | 384 | | | | - | | | | 2,966 | | | | (23,846 | ) | | | (137 | ) | | | 384 | | | | (132 | ) | | | 2,966 | |
Equity securities | | | (1 | ) | | | - | | | | (2 | ) | | | (4 | ) | | | (1 | ) | | | (1 | ) | | | (1 | ) | | | (2 | ) |
Other invested assets | | | (34 | ) | | | 3,387 | | | | 462 | | | | 5,614 | | | | 215 | | | | (34 | ) | | | (1,515 | ) | | | 462 | |
Change in unrealized appreciation (depreciation), pre-tax | | | 83,927 | | | | 232,606 | | | | 137,021 | | | | 378,009 | | | | 11,988 | | | | 83,927 | | | | 49,693 | | | | 137,021 | |
Deferred tax benefit (expense) | | | (29,240 | ) | | | (81,412 | ) | | | (46,919 | ) | | | (140,649 | ) | | | (4,243 | ) | | | (29,240 | ) | | | (17,438 | ) | | | (46,919 | ) |
Deferred tax benefit (expense), cumulative other-than-temporary impairment adjustment | Deferred tax benefit (expense), cumulative other-than-temporary impairment adjustment | | (134 | ) | | | - | | | | (1,038 | ) | | | 8,346 | | | | 48 | | | | (134 | ) | | | 46 | | | | (1,038 | ) |
Change in unrealized appreciation (depreciation), | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
net of deferred taxes, included in stockholder's equity | | $ | 54,553 | | | $ | 151,194 | | | $ | 89,064 | | | $ | 245,706 | | |
net of deferred taxes, included in shareholders’ equity | | | $ | 7,793 | | | $ | 54,553 | | | $ | 32,301 | | | $ | 89,064 | |
The Company frequently reviews its fixed maturity securities investment portfolio for declines in market value and focuses its attention on securities whose fair value has fallen below 80% of their amortized valuecost 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 (loss). 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 that 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 (loss). The fair value adjustment that is non-credit related is recorded as a component of other comprehensive income (loss), net of tax, and is included in accumulated other comprehensive income (loss) 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 b reakeven
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 tablestable below displaydisplays the aggregate market value and gross unrealized depreciation of fixed maturity and equity securities, by security type and contractual maturity, in each case subdivided according to length of time that individual securities had been in a continuous unrealized loss position for the periods indicated:
| | Duration of Unrealized Loss at September 30, 2010 By Security Type | | | Duration of Unrealized Loss at September 30, 2011 By Security Type | |
| | Less than 12 months | | | Greater than 12 months | | | Total | | | Less than 12 months | | | Greater than 12 months | | | Total | |
| | | | | Gross | | | | | | Gross | | | | | | Gross | | | | | | Gross | | | | | | Gross | | | | | | Gross | |
| | | | | Unrealized | | | | | | Unrealized | | | | | | Unrealized | | | | | | Unrealized | | | | | | Unrealized | | | | | | Unrealized | |
(Dollars in thousands) | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | | | 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 | | $ | 4,243 | | | $ | (97 | ) | | $ | 3,467 | | | $ | (180 | ) | | $ | 7,710 | | | $ | (277 | ) | | $ | 14,174 | | | $ | (352 | ) | | $ | 3,460 | | | $ | (505 | ) | | $ | 17,634 | | | $ | (857 | ) |
Obligations of U.S. states and political subdivisions | Obligations of U.S. states and political subdivisions | | 13,461 | | | | (34 | ) | | | 102,649 | | | | (4,168 | ) | | | 116,110 | | | | (4,202 | ) | | | - | | | | - | | | | 7,472 | | | | (572 | ) | | | 7,472 | | | | (572 | ) |
Corporate securities | | | 83,055 | | | | (1,046 | ) | | | 47,949 | | | | (6,481 | ) | | | 131,004 | | | | (7,527 | ) | | | 373,892 | | | | (15,394 | ) | | | 100,497 | | | | (12,602 | ) | | | 474,389 | | | | (27,996 | ) |
Asset-backed securities | | | - | | | | - | | | | 519 | | | | (206 | ) | | | 519 | | | | (206 | ) | | | 9,365 | | | | (35 | ) | | | 809 | | | | (47 | ) | | | 10,174 | | | | (82 | ) |
Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | | | 8,471 | | | | (2,030 | ) | | | - | | | | - | | | | 8,471 | | | | (2,030 | ) |
Agency residential | | | 17,878 | | | | (107 | ) | | | - | | | | - | | | | 17,878 | | | | (107 | ) | | | 57,452 | | | | (313 | ) | | | 8,384 | | | | (34 | ) | | | 65,836 | | | | (347 | ) |
Non-agency residential | | | - | | | | - | | | | 22,747 | | | | (1,046 | ) | | | 22,747 | | | | (1,046 | ) | | | - | | | | - | | | | 21,344 | | | | (124 | ) | | | 21,344 | | | | (124 | ) |
Foreign government securities | | | 74,145 | | | | (2,922 | ) | | | 82,024 | | | | (4,539 | ) | | | 156,169 | | | | (7,461 | ) | | | 18,055 | | | | (310 | ) | | | 77,907 | | | | (4,805 | ) | | | 95,962 | | | | (5,115 | ) |
Foreign corporate securities | | | 57,169 | | | | (1,070 | ) | | | 86,221 | | | | (8,370 | ) | | | 143,390 | | | | (9,440 | ) | | | 118,987 | | | | (5,714 | ) | | | 90,007 | | | | (13,430 | ) | | | 208,994 | | | | (19,144 | ) |
Total fixed maturity securities | | $ | 249,951 | | | $ | (5,276 | ) | | $ | 345,576 | | | $ | (24,990 | ) | | $ | 595,527 | | | $ | (30,266 | ) | | $ | 600,396 | | | $ | (24,148 | ) | | $ | 309,880 | | | $ | (32,119 | ) | | $ | 910,276 | | | $ | (56,267 | ) |
Equity securities | | | - | | | | - | | | | 12 | | | | (3 | ) | | | 12 | | | | (3 | ) | | | - | | | | - | | | | 11 | | | | (4 | ) | | | 11 | | | | (4 | ) |
Total | | $ | 249,951 | | | $ | (5,276 | ) | | $ | 345,588 | | | $ | (24,993 | ) | | $ | 595,539 | | | $ | (30,269 | ) | | $ | 600,396 | | | $ | (24,148 | ) | | $ | 309,891 | | | $ | (32,123 | ) | | $ | 910,287 | | | $ | (56,271 | ) |
| | Duration of Unrealized Loss at September 30, 2010 By Maturity | | | Duration of Unrealized Loss at September 30, 2011 By Maturity | |
| | Less than 12 months | | | Greater than 12 months | | | Total | | | Less than 12 months | | | Greater than 12 months | | | Total | |
| | | | | Gross | | | | | | Gross | | | | | | Gross | | | | | | Gross | | | | | | Gross | | | | | | Gross | |
| | | | | Unrealized | | | | | | Unrealized | | | | | | Unrealized | | | | | | Unrealized | | | | | | Unrealized | | | | | | Unrealized | |
(Dollars in thousands) | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | |
Fixed maturity securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Due in one year or less | | $ | 7,995 | | | $ | (408 | ) | | $ | 48,026 | | | $ | (5,556 | ) | | $ | 56,021 | | | $ | (5,964 | ) | | $ | 12,234 | | | $ | (129 | ) | | $ | 18,447 | | | $ | (5,075 | ) | | $ | 30,681 | | | $ | (5,204 | ) |
Due in one year through five years | | | 132,797 | | | | (2,662 | ) | | | 98,042 | | | | (5,836 | ) | | | 230,839 | | | | (8,498 | ) | | | 205,065 | | | | (8,562 | ) | | | 204,429 | | | | (18,107 | ) | | | 409,494 | | | | (26,669 | ) |
Due in five years through ten years | | | 73,149 | | | | (2,042 | ) | | | 26,831 | | | | (1,921 | ) | | | 99,980 | | | | (3,963 | ) | | | 275,555 | | | | (12,380 | ) | | | 26,392 | | | | (2,368 | ) | | | 301,947 | | | | (14,748 | ) |
Due after ten years | | | 18,132 | | | | (57 | ) | | | 149,411 | | | | (10,425 | ) | | | 167,543 | | | | (10,482 | ) | | | 32,254 | | | | (699 | ) | | | 30,075 | | | | (6,364 | ) | | | 62,329 | | | | (7,063 | ) |
Asset-backed securities | | | - | | | | - | | | | 519 | | | | (206 | ) | | | 519 | | | | (206 | ) | | | 9,365 | | | | (35 | ) | | | 809 | | | | (47 | ) | | | 10,174 | | | | (82 | ) |
Mortgage-backed securities | | | 17,878 | | | | (107 | ) | | | 22,747 | | | | (1,046 | ) | | | 40,625 | | | | (1,153 | ) | | | 65,923 | | | | (2,343 | ) | | | 29,728 | | | | (158 | ) | | | 95,651 | | | | (2,501 | ) |
Total fixed maturity securities | | $ | 249,951 | | | $ | (5,276 | ) | | $ | 345,576 | | | $ | (24,990 | ) | | $ | 595,527 | | | $ | (30,266 | ) | | $ | 600,396 | | | $ | (24,148 | ) | | $ | 309,880 | | | $ | (32,119 | ) | | $ | 910,276 | | | $ | (56,267 | ) |
The aggregate market value and gross unrealized losses related to investments in an unrealized loss position as ofat September 30, 20102011 were $595,539$910,287 thousand and $30,269$56,271 thousand, respectively. There were no unrealized losses on a single securityissuer that exceeded 0.06%0.1% of the market value of the fixed maturity securities at September 30, 2010.2011. In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector. The $5,276$24,148 thousand 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 foreign government and domestic and foreign corporate securities and commercial mortgage-backed securities. Of these unrealized losses, $4,488$10,780 thousand were related to securiti essecurities that were rated investment grade by at least one nationally recognized statistical rating organization. The $24,993 thousandmajority of the unrealized losses related to foreign corporate and foreign government securities are due to currency
exchange rate movements as opposed to market value movements. The non-investment grade securities with unrealized losses were mainly comprised of corporate securities. The $32,119 thousand of unrealized losses related to fixed maturity and equity securities in an unrealized loss position for more than one year related primarily to highly rated domestic and foreign corporate and foreign government securities. Of these unrealized losses, $24,671 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The majority of the unrealized losses related to foreign government and foreign corporate securities are due to currency exchange rate movements as opposed to market value movements. The gross unrealized depreciation greater than 12 months for mortgage-backed securities included $88 thousand related to sub-prime and alt-A loans. In all instances, projected cash flows were sufficient 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 at September 30, 2011 are comparable with unrealized losses at December 31, 2010.
The table below displays the aggregate market value and gross unrealized depreciation of fixed maturity and equity securities, by security type and contractual maturity, in each case subdivided according to length of time that individual securities had been in a continuous unrealized loss position for the periods indicated:
| | Duration of Unrealized Loss at December 31, 2010 By Security Type | |
| | 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 | | $ | 47,985 | | | $ | (1,916 | ) | | $ | 43,264 | | | $ | (3,230 | ) | | $ | 91,249 | | | $ | (5,146 | ) |
Obligations of U.S. states and political subdivisions | | | 336,522 | | | | (9,519 | ) | | | 171,812 | | | | (15,410 | ) | | | 508,334 | | | | (24,929 | ) |
Corporate securities | | | 74,389 | | | | (2,715 | ) | | | 33,109 | | | | (7,060 | ) | | | 107,498 | | | | (9,775 | ) |
Asset-backed securities | | | 3,900 | | | | (14 | ) | | | - | | | | - | | | | 3,900 | | | | (14 | ) |
Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | |
Agency residential | | | 20,867 | | | | (212 | ) | | | - | | | | - | | | | 20,867 | | | | (212 | ) |
Non-agency residential | | | - | | | | - | | | | 22,439 | | | | (317 | ) | | | 22,439 | | | | (317 | ) |
Foreign government securities | | | 92,123 | | | | (3,776 | ) | | | 124,807 | | | | (11,791 | ) | | | 216,930 | | | | (15,567 | ) |
Foreign corporate securities | | | 120,294 | | | | (5,512 | ) | | | 121,304 | | | | (15,666 | ) | | | 241,598 | | | | (21,178 | ) |
Total fixed maturity securities | | $ | 696,080 | | | $ | (23,664 | ) | | $ | 516,735 | | | $ | (53,474 | ) | | $ | 1,212,815 | | | $ | (77,138 | ) |
Equity securities | | | - | | | | - | | | | 13 | | | | (2 | ) | | | 13 | | | | (2 | ) |
Total | | $ | 696,080 | | | $ | (23,664 | ) | | $ | 516,748 | | | $ | (53,476 | ) | | $ | 1,212,828 | | | $ | (77,140 | ) |
| | Duration of Unrealized Loss at December 31, 2010 By Maturity | |
| | 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 | | $ | 5,982 | | | $ | (319 | ) | | $ | 48,233 | | | $ | (8,089 | ) | | $ | 54,215 | | | $ | (8,408 | ) |
Due in one year through five years | | | 186,524 | | | | (9,059 | ) | | | 129,197 | | | | (11,559 | ) | | | 315,721 | | | | (20,618 | ) |
Due in five years through ten years | | | 139,896 | | | | (4,356 | ) | | | 92,692 | | | | (8,215 | ) | | | 232,588 | | | | (12,571 | ) |
Due after ten years | | | 338,911 | | | | (9,704 | ) | | | 224,174 | | | | (25,294 | ) | | | 563,085 | | | | (34,998 | ) |
Asset-backed securities | | | 3,900 | | | | (14 | ) | | | - | | | | - | | | | 3,900 | | | | (14 | ) |
Mortgage-backed securities | | | 20,867 | | | | (212 | ) | | | 22,439 | | | | (317 | ) | | | 43,306 | | | | (529 | ) |
Total fixed maturity securities | | $ | 696,080 | | | $ | (23,664 | ) | | $ | 516,735 | | | $ | (53,474 | ) | | $ | 1,212,815 | | | $ | (77,138 | ) |
The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2010 were $1,212,828 thousand and $77,140 thousand, respectively. There were no unrealized losses on a single issuer that exceeded 0.09% of the market value of the fixed maturity securities at December 31, 2010. In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector. The $23,664 thousand 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 municipal, U.S. government, foreign government and domestic and foreign corporate securities. Of these unrealized losses, $23,424 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The $53,474 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year also related primarily to highly rated U.S. government, domestic and foreign corporate, foreign government and municipal securities. Of these unrealized losses, $19,390$48,165 thousand related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The non-investment grade securities with unrealized losses were mainly comprised of corporate securities. The gross unrealized depreciation greater than 12 months for mortgage-backed securities included $298$32 thousand related to sub-prime and alt-A loans. In all instances, projected cash flows were sufficient to recover the full book value of the investments and the related interest obligations. Unrealized losses have decreased sinc e December 31, 2009, 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 that 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 and equity securities, by security type and contractual maturity, in each case subdivided according to length of time that individual securities had been in a continuous unrealized loss position for the periods indicated:
| | Duration of Unrealized Loss at December 31, 2009 By Security Type | |
| | 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 | | $ | 44,943 | | | $ | (1,671 | ) | | $ | - | | | $ | - | | | $ | 44,943 | | | $ | (1,671 | ) |
Obligations of U.S. states and political subdivisions | | 559 | | | | (4 | ) | | | 452,018 | | | | (24,252 | ) | | | 452,577 | | | | (24,256 | ) |
Corporate securities | | | 45,045 | | | | (1,056 | ) | | | 118,153 | | | | (12,368 | ) | | | 163,198 | | | | (13,424 | ) |
Asset-backed securities | | | 366 | | | | (26 | ) | | | 8,233 | | | | (1,883 | ) | | | 8,599 | | | | (1,909 | ) |
Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | | 959 | | | | (34 | ) | | | 3,312 | | | | (77 | ) | | | 4,271 | | | | (111 | ) |
Agency residential | | | 213,093 | | | | (1,691 | ) | | | - | | | | - | | | | 213,093 | | | | (1,691 | ) |
Non-agency residential | | | 1,272 | | | | (31 | ) | | | 47,202 | | | | (7,024 | ) | | | 48,474 | | | | (7,055 | ) |
Foreign government securities | | | 159,493 | | | | (2,158 | ) | | | 69,109 | | | | (4,529 | ) | | | 228,602 | | | | (6,687 | ) |
Foreign corporate securities | | | 124,325 | | | | (4,205 | ) | | | 98,772 | | | | (10,924 | ) | | | 223,097 | | | | (15,129 | ) |
Total fixed maturity securities | | $ | 590,055 | | | $ | (10,876 | ) | | $ | 796,799 | | | $ | (61,057 | ) | | $ | 1,386,854 | | | $ | (71,933 | ) |
Equity securities | | | 13 | | | | (2 | ) | | | - | | | | - | | | | 13 | | | | (2 | ) |
Total | | $ | 590,068 | | | $ | (10,878 | ) | | $ | 796,799 | | | $ | (61,057 | ) | | $ | 1,386,867 | | | $ | (71,935 | ) |
| | Duration of Unrealized Loss at December 31, 2009 By Maturity | |
| | 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 | | $ | - | | | $ | - | | | $ | 58,010 | | | $ | (4,887 | ) | | $ | 58,010 | | | $ | (4,887 | ) |
Due in one year through five years | | | 192,929 | | | | (2,975 | ) | | | 140,349 | | | | (9,129 | ) | | | 333,278 | | | | (12,104 | ) |
Due in five years through ten years | | | 137,196 | | | | (2,934 | ) | | | 54,279 | | | | (3,401 | ) | | | 191,475 | | | | (6,335 | ) |
Due after ten years | | | 44,240 | | | | (3,185 | ) | | | 485,414 | | | | (34,656 | ) | | | 529,654 | | | | (37,841 | ) |
Asset-backed securities | | | 366 | | | | (26 | ) | | | 8,233 | | | | (1,883 | ) | | | 8,599 | | | | (1,909 | ) |
Mortgage-backed securities | | | 215,324 | | | | (1,756 | ) | | | 50,514 | | | | (7,101 | ) | | | 265,838 | | | | (8,857 | ) |
Total fixed maturity securities | | $ | 590,055 | | | $ | (10,876 | ) | | $ | 796,799 | | | $ | (61,057 | ) | | $ | 1,386,854 | | | $ | (71,933 | ) |
The aggregate market value and gross unrealized losses related to investments in an unrealized loss position as of December 31, 2009 were $1,386,867 thousand and $71,935 thousand, respectively. There were no unrealized losses on a single security that exceeded 0.11% of the market value of the fixed maturity securities at December 31, 2009. In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector. The $10,878 thousand of unrealized losses related to fixed maturity and equity securities that have been in an unrealized loss position for less than one year were generally comprised of highly rated domestic and foreign government and corporate and mortgage-backed securities. Of these unrealized losses, $10,658 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The $61,057 thousand of unrealized losses related to securities in an unrealized loss position for more than one year related primarily to highly rated municipal, domestic and foreign corporate, foreign government and mortgage-backed securities. Of these unrealized losses, $50,505 thousand related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The non-investment grade securities with unrealized losses were mainly comprised of corporate and commercial mortgage-backed securities. The gross unrealized depreciation greater than 12 months for mortgage-backed securities included $73 thousand related to sub-prime and alt-A loans. In all instances, projected cash flows were sufficient to recover the full book value of the investments and the related interest obli gations. The mortgage-backed securities still had excess credit coverage and were current on interest and principal payments.
The components of net investment income are presented in the table below for the periods indicated:
| | Three Months Ended | | | Nine Months Ended | | | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | | | September 30, | | | September 30, | |
(Dollars in thousands) | | 2010 | | | 2009 | | | 2010 | | | 2009 | | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
Fixed maturity securities | | $ | 69,918 | | | $ | 70,965 | | | $ | 219,335 | | | $ | 212,903 | | | $ | 58,248 | | | $ | 69,918 | | | $ | 178,006 | | | $ | 219,335 | |
Equity securities | | | 2,448 | | | | 758 | | | | 7,470 | | | | 2,182 | | | | 8,726 | | | | 2,448 | | | | 20,366 | | | | 7,470 | |
Short-term investments and cash | | | 111 | | | | 277 | | | | 263 | | | | 3,331 | | | | 296 | | | | 111 | | | | 890 | | | | 263 | |
Other invested assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Limited partnerships | | | 1,071 | | | | (4,423 | ) | | | 19,367 | | | | (36,548 | ) | | | 12,399 | | | | 1,071 | | | | 44,753 | | | | 19,367 | |
Dividends from Parent's shares | | | | 4,665 | | | | 4,016 | | | | 13,979 | | | | 9,569 | |
Other | | | 4,199 | | | | 664 | | | | 10,454 | | | | 5,693 | | | | (1,520 | ) | | | 183 | | | | 3,203 | | | | 885 | |
Total gross investment income | | | 77,747 | | | | 68,241 | | | | 256,889 | | | | 187,561 | | | | 82,814 | | | | 77,747 | | | | 261,197 | | | | 256,889 | |
Interest debited (credited) and other expense | | | (3,535 | ) | | | (2,749 | ) | | | (8,224 | ) | | | (7,894 | ) | |
Interest debited (credited) and other investment expense | | | | (4,489 | ) | | | (3,535 | ) | | | (11,281 | ) | | | (8,224 | ) |
Total net investment income | | $ | 74,212 | | | $ | 65,492 | | | $ | 248,665 | | | $ | 179,667 | | | $ | 78,325 | | | $ | 74,212 | | | $ | 249,916 | | | $ | 248,665 | |
The Company records results from limited partnership investments on the equity method 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 $129,690$123,579 thousand in limited partnerships at September 30, 2010.2011. These commitments will be funded when called in accordance with the partnership agreements, which have investment periods that expire, unless extended, through 2014.2016.
The components of net realized capital gains (losses) are presented in the table below for the periods indicated:
| | Three Months Ended | | | Nine Months Ended | | | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | | | September 30, | | | September 30, | |
(Dollars in thousands) | | 2010 | | | 2009 | | | 2010 | | | 2009 | | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
Fixed maturity securities, market value: | | | | | | | | | | | | | | | | | | | | | | | | |
Other-than-temporary impairments | | $ | (2,023 | ) | | $ | - | | | $ | (2,023 | ) | | $ | (5,510 | ) | | $ | (911 | ) | | $ | (2,023 | ) | | $ | (14,522 | ) | | $ | (2,023 | ) |
Gains (losses) from sales | | | (4,654 | ) | | | (4,131 | ) | | | (3,814 | ) | | | (32,612 | ) | | | 2,699 | | | | (4,654 | ) | | | (15,589 | ) | | | (3,814 | ) |
Fixed maturity securities, fair value: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gains (losses) from sales | | | 480 | | | | 172 | | | | 753 | | | | 401 | | | | (16 | ) | | | 480 | | | | (966 | ) | | | 753 | |
Gains (losses) from fair value adjustments | | | 3,297 | | | | 5,837 | | | | 3,779 | | | | 7,805 | | | | (5,014 | ) | | | 3,297 | | | | (8,537 | ) | | | 3,779 | |
Equity securities, market value: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gains (losses) from sales | | | - | | | | 8,041 | | | | - | | | | 8,041 | | | | - | | | | - | | | | 37 | | | | - | |
Equity securities, fair value: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gains (losses) from sales | | | 951 | | | | 1,299 | | | | (48 | ) | | | 6,483 | | | | 637 | | | | 951 | | | | 2,303 | | | | (48 | ) |
Gains (losses) from fair value adjustments | | | 34,912 | | | | 23,075 | | | | 18,126 | | | | 23,448 | | | | (153,395 | ) | | | 34,912 | | | | (115,288 | ) | | | 18,126 | |
Other invested assets, fair value: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gains (losses) from fair value adjustments | | | 126,608 | | | | 67,103 | | | | 42,018 | | | | 48,091 | | | | (23,036 | ) | | | 126,608 | | | | (54,181 | ) | | | 42,018 | |
Short-term investment gains (losses) | | | (2 | ) | | | (2 | ) | | | (2 | ) | | | 4 | | | | - | | | | (2 | ) | | | (1 | ) | | | (2 | ) |
Total net realized capital gains (losses) | | $ | 159,569 | | | $ | 101,394 | | | $ | 58,789 | | | $ | 56,151 | | | $ | (179,036 | ) | | $ | 159,569 | | | $ | (206,744 | ) | | $ | 58,789 | |
The Company recorded as net realized capital gains (losses) in the consolidated statements of operations and comprehensive income (loss) both fair value re-measurements and write-downs in the value of securities deemed to be impaired on an other-than-temporary basis as displayed in the table above. The Company had no other-than-temporary impaired securities where the impairment had both a credit and non-credit component.
The proceeds and split between gross gains and losses, from sales of fixed maturity and equity securities, are presented in the table below for the periods indicated:
| | Three Months Ended | | | Nine Months Ended | | | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | | | September 30, | | | September 30, | |
(Dollars in thousands) | | 2010 | | | 2009 | | | 2010 | | | 2009 | | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
Proceeds from sales of fixed maturity securities | | $ | 96,356 | | | $ | 38,612 | | | $ | 476,531 | | | $ | 99,708 | | | $ | 268,425 | | | $ | 96,356 | | | $ | 1,105,435 | | | $ | 476,531 | |
Gross gains from sales | | | 642 | | | | 2,278 | | | | 7,963 | | | | 4,584 | | | | 11,572 | | | | 642 | | | | 29,154 | | | | 7,963 | |
Gross losses from sales | | | (4,816 | ) | | | (6,237 | ) | | | (11,024 | ) | | | (36,795 | ) | | | (8,889 | ) | | | (4,816 | ) | | | (45,709 | ) | | | (11,024 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proceeds from sales of equity secuities | | $ | 14,899 | | | $ | 34,338 | | | $ | 87,641 | | | $ | 46,563 | | | $ | 61,080 | | | $ | 14,899 | | | $ | 177,872 | | | $ | 87,641 | |
Gross gains from sales | | | 1,033 | | | | 9,368 | | | | 4,616 | | | | 15,255 | | | | 6,022 | | | | 1,033 | | | | 9,124 | | | | 4,616 | |
Gross losses from sales | | | (82 | ) | | | (28 | ) | | | (4,664 | ) | | | (731 | ) | | | (5,385 | ) | | | (82 | ) | | | (6,784 | ) | | | (4,664 | ) |
4. FAIR VALUE
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 rate srates to determine fair value. The Company made no such adjustments at September 30, 2011 and 2010.
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.
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, 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 table presents the fair value measurement levels for all assets, which the Company has recorded at fair value (fair and market value) as of the period indicated:
| | | | | Fair Value Measurement Using: | | | | | | Fair Value Measurement Using: | |
| | | | | Quoted Prices | | | | | | | | | | | | Quoted Prices | | | | | | | |
| | | | | in Active | | | Significant | | | | | | | | | in Active | | | Significant | | | | |
| | | | | Markets for | | | Other | | | Significant | | | | | | Markets for | | | Other | | | Significant | |
| | | | | Identical | | | Observable | | | Unobservable | | | | | | Identical | | | Observable | | | Unobservable | |
| | | | | Assets | | | Inputs | | | Inputs | | | | | | Assets | | | Inputs | | | Inputs | |
(Dollars in thousands) | | September 30, 2010 | | (Level 1) | | | (Level 2) | | | (Level 3) | | | September 30, 2011 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed maturities, market value | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury securities and obligations of | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. government agencies and corporations | | $ | 157,812 | | | $ | - | | | $ | 157,812 | | | $ | - | | | $ | 85,779 | | | $ | - | | | $ | 85,779 | | | $ | - | |
Obligations of U.S. States and political subdivisions | | | 3,622,053 | | | | - | | | | 3,622,053 | | | | - | | | | 1,854,151 | | | | - | | | | 1,854,151 | | | | - | |
Corporate securities | | | 752,268 | | | | - | | | | 745,277 | | | | 6,991 | | | | 1,028,609 | | | | - | | | | 1,028,609 | | | | - | |
Asset-backed securities | | | 25,702 | | | | - | | | | 25,183 | | | | 519 | | | | 45,156 | | | | - | | | | 42,842 | | | | 2,314 | |
Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | | 40,646 | | | | - | | | | 40,646 | | | | - | | | | 46,725 | | | | - | | | | 46,725 | | | | - | |
Agency residential | | | 403,795 | | | | - | | | | 403,795 | | | | - | | | | 406,506 | | | | - | | | | 406,506 | | | | - | |
Non-agency residential | | | 29,923 | | | | - | | | | 29,461 | | | | 462 | | | | 26,017 | | | | - | | | | 26,010 | | | | 7 | |
Foreign government securities | | | 739,829 | | | | - | | | | 739,829 | | | | - | | | | 858,759 | | | | - | | | | 858,759 | | | | - | |
Foreign corporate securities | | | 596,772 | | | | - | | | | 596,772 | | | | - | | | | 718,382 | | | | - | | | | 715,824 | | | | 2,558 | |
Total fixed maturities, market value | | | 6,368,800 | | | | - | | | | 6,360,828 | | | | 7,972 | | | | 5,070,084 | | | | - | | | | 5,065,205 | | | | 4,879 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed maturities, fair value | | | 116,376 | | | | - | | | | 116,376 | | | | - | | | | 120,597 | | | | - | | | | 120,597 | | | | - | |
Equity securities, market value | | | 12 | | | | 12 | | | | - | | | | - | | | | 11 | | | | 11 | | | | - | | | | - | |
Equity securities, fair value | | | 382,279 | | | | 382,279 | | | | - | | | | - | | | | 1,099,456 | | | | 988,707 | | | | 110,749 | | | | - | |
Other invested assets, fair value | | | 752,533 | | | | 752,533 | | | | - | | | | - | | | | 771,571 | | | | 771,571 | | | | - | | | | - | |
There were no significant transfers between Level 1 and Level 2 for the nine months ended September 30, 2010.
There were no significant transfers between Level 1 and Level 2 for the three and nine months ended September 30, 2011.
The following table presents the fair value measurement levels for all assets, which the Company has recorded at fair value (fair and market value) as of the period indicated:
| | | | | Fair Value Measurement Using: | | | | | | Fair Value Measurement Using: | |
| | | | | Quoted Prices | | | | | | | | | | | | Quoted Prices | | | | | | | |
| | | | | in Active | | | Significant | | | | | | | | | in Active | | | Significant | | | | |
| | | | | Markets for | | | Other | | | Significant | | | | | | Markets for | | | Other | | | Significant | |
| | | | | Identical | | | Observable | | | Unobservable | | | | | | Identical | | | Observable | | | Unobservable | |
| | | | | Assets | | | Inputs | | | Inputs | | | | | | Assets | | | Inputs | | | Inputs | |
(Dollars in thousands) | | December 31, 2009 | | (Level 1) | | | (Level 2) | | | (Level 3) | | | December 31, 2010 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed maturities, market value | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury securities and obligations of | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. government agencies and corporations | | $ | 134,291 | | | $ | - | | | $ | 134,291 | | | $ | - | | | $ | 150,567 | | | $ | - | | | $ | 150,567 | | | $ | - | |
Obligations of U.S. States and political subdivisions | | | 3,853,859 | | | | - | | | | 3,853,859 | | | | - | | | | 2,901,505 | | | | - | | | | 2,901,505 | | | | - | |
Corporate securities | | | 635,381 | | | | - | | | | 628,451 | | | | 6,930 | | | | 721,685 | | | | - | | | | 721,685 | | | | - | |
Asset-backed securities | | | 15,148 | | | | - | | | | 8,890 | | | | 6,258 | | | | 20,551 | | | | - | | | | 19,590 | | | | 961 | |
Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | | 29,058 | | | | - | | | | 29,058 | | | | - | | | | 39,505 | | | | - | | | | 39,505 | | | | - | |
Agency residential | | | 564,707 | | | | - | | | | 564,707 | | | | - | | | | 369,691 | | | | - | | | | 369,691 | | | | - | |
Non-agency residential | | | 54,959 | | | | - | | | | 54,533 | | | | 426 | | | | 29,968 | | | | - | | | | 29,510 | | | | 458 | |
Foreign government securities | | | 659,217 | | | | - | | | | 659,217 | | | | - | | | | 749,041 | | | | - | | | | 749,041 | | | | - | |
Foreign corporate securities | | | 516,548 | | | | - | | | | 516,548 | | | | - | | | | 617,427 | | | | - | | | | 613,792 | | | | 3,635 | |
Total fixed maturities, market value | | | 6,463,168 | | | | - | | | | 6,449,554 | | | | 13,614 | | | | 5,599,940 | | | | - | | | | 5,594,886 | | | | 5,054 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed maturities, fair value | | | 50,528 | | | | - | | | | 50,528 | | | | - | | | | 180,482 | | | | - | | | | 180,482 | | | | - | |
Equity securities, market value | | | 13 | | | | 13 | | | | - | | | | - | | | | 13 | | | | 13 | | | | - | | | | - | |
Equity securities, fair value | | | 380,025 | | | | 379,058 | | | | 967 | | | | - | | | | 683,454 | | | | 683,454 | | | | - | | | | - | |
Other invested assets, fair value | | | 382,639 | | | | 382,639 | | | | - | | | | - | | | | 788,142 | | | | 788,142 | | | | - | | | | - | |
The following tables present the activity under Level 3, fair value measurements using significant unobservable inputs by asset type, for the periods indicated:
| | By Asset | | |
| | Three Months Ended September 30, 2010 | | | Nine Months Ended September 30, 2010 | | | Three Months Ended September 30, 2011 | | | Nine Months Ended September 30, 2011 | |
| | Corporate | | Asset-backed | | Non-agency | | | | | Corporate | | Asset-backed | | Non-agency | | | | | Asset-backed | | | Foreign | | | Non-agency | | | | | | Asset-backed | | | Foreign | | | Non-agency | | | | |
(Dollars in thousands) | | Securities | | Securities | | RMBS | | Total | | Securities | | Securities | | RMBS | | Total | | Securities | | | Corporate | | | RMBS | | | Total | | | Securities | | | Corporate | | | RMBS | | | Total | |
Beginning balance | | $ | 6,965 | | | $ | 6,562 | | | $ | 497 | | | $ | 14,024 | | | $ | 6,930 | | | $ | 6,258 | | | $ | 426 | | | $ | 13,614 | | | $ | 2,466 | | | $ | - | | | $ | 381 | | | $ | 2,847 | | | $ | 961 | | | $ | 3,635 | | | $ | 458 | | | $ | 5,054 | |
Total gains or (losses) (realized/unrealized) | Total gains or (losses) (realized/unrealized) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Included in earnings (or changes in net assets) | Included in earnings (or changes in net assets) | | - | | | | (258 | ) | | | 32 | | | | (226 | ) | | | (1 | ) | | | (258 | ) | | | 81 | | | | (178 | ) | | | 16 | | | | (3 | ) | | | (39 | ) | | | (26 | ) | | | 80 | | | | (3 | ) | | | 10 | | | | 87 | |
Included in other comprehensive income (loss) | Included in other comprehensive income (loss) | | 26 | | | | 1,628 | | | | (22 | ) | | | 1,632 | | | | 62 | | | | 1,672 | | | | 70 | | | | 1,804 | | | | (122 | ) | | | (25 | ) | | | 102 | | | | (45 | ) | | | (269 | ) | | | (25 | ) | | | 54 | | | | (240 | ) |
Purchases, issuances and settlements | | | - | | | | (7,413 | ) | | | (45 | ) | | | (7,458 | ) | | | - | | | | (7,153 | ) | | | (115 | ) | | | (7,268 | ) | | | (19 | ) | | | 2,586 | | | | (88 | ) | | | 2,479 | | | | 37 | | | | 2,586 | | | | (166 | ) | | | 2,457 | |
Transfers in and/or (out) of Level 3 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (27 | ) | | | - | | | | (349 | ) | | | (376 | ) | | | 1,505 | | | | (3,635 | ) | | | (349 | ) | | | (2,479 | ) |
Ending balance | | $ | 6,991 | | | $ | 519 | | | $ | 462 | | | $ | 7,972 | | | $ | 6,991 | | | $ | 519 | | | $ | 462 | | | $ | 7,972 | | | $ | 2,314 | | | $ | 2,558 | | | $ | 7 | | | $ | 4,879 | | | $ | 2,314 | | | $ | 2,558 | | | $ | 7 | | | $ | 4,879 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The amount of total gains or losses for the period included | The amount of total gains or losses for the period included | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
in earnings (or changes in net assets) attributable to the | in earnings (or changes in net assets) attributable to the | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
change in unrealized gains or losses relating to assets | change in unrealized gains or losses relating to assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
still held at the reporting date | still held at the reporting date | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding.) | (Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | | | | | | | | (Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | | | |
| | By Asset | | |
| | Three Months Ended September 30, 2009 | | Nine Months Ended September 30, 2009 | | | Three Months Ended September 30, 2010 | | | Nine Months Ended September 30, 2010 | |
| | Corporate | | Asset-backed | | Non-agency | | | | | Corporate | | Asset-backed | | Non-agency | | | | | Corporate | | | Asset-backed | | | Non-agency | | | | | | Corporate | | | Asset-backed | | | Non-agency | | | | |
(Dollars in thousands) | | Securities | | Securities | | RMBS | | Total | | Securities | | Securities | | RMBS | | Total | | Securities | | | Securities | | | RMBS | | | Total | | | Securities | | | Securities | | | RMBS | | | Total | |
Beginning balance | | $ | 6,230 | | | $ | 5,123 | | | $ | 454 | | | $ | 11,807 | | | $ | 7,000 | | | $ | 3,409 | | | $ | 558 | | | $ | 10,967 | | | $ | 6,965 | | | $ | 6,562 | | | $ | 497 | | | $ | 14,024 | | | $ | 6,930 | | | $ | 6,258 | | | $ | 426 | | | $ | 13,614 | |
Total gains or (losses) (realized/unrealized) | Total gains or (losses) (realized/unrealized) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Included in earnings (or changes in net assets) | Included in earnings (or changes in net assets) | | - | | | | - | | | | 46 | | | | 46 | | | | (1 | ) | | | - | | | | 43 | | | | 42 | | | | - | | | | (258 | ) | | | 32 | | | | (226 | ) | | | (1 | ) | | | (258 | ) | | | 81 | | | | (178 | ) |
Included in other comprehensive income (loss) | Included in other comprehensive income (loss) | | 630 | | | | 479 | | | | 27 | | | | 1,136 | | | | (139 | ) | | | 1,826 | | | | 5 | | | | 1,692 | | | | 26 | | | | 1,628 | | | | (22 | ) | | | 1,632 | | | | 62 | | | | 1,672 | | | | 70 | | | | 1,804 | |
Purchases, issuances and settlements | | | - | | | | - | | | | (113 | ) | | | (113 | ) | | | - | | | | - | | | | (192 | ) | | | (192 | ) | | | - | | | | (7,413 | ) | | | (45 | ) | | | (7,458 | ) | | | - | | | | (7,153 | ) | | | (115 | ) | | | (7,268 | ) |
Transfers in and/or (out) of Level 3 | | | - | | | | (149 | ) | | | - | | | | (149 | ) | | | - | | | | 218 | | | | - | | | | 218 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Ending balance | | $ | 6,860 | | | $ | 5,453 | | | $ | 414 | | | $ | 12,727 | | | $ | 6,860 | | | $ | 5,453 | | | $ | 414 | | | $ | 12,727 | | | $ | 6,991 | | | $ | 519 | | | $ | 462 | | | $ | 7,972 | | | $ | 6,991 | | | $ | 519 | | | $ | 462 | | | $ | 7,972 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The amount of total gains or losses for the period included | The amount of total gains or losses for the period included | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
in earnings (or changes in net assets) attributable to the | in earnings (or changes in net assets) attributable to the | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
change in unrealized gains or losses relating to assets | change in unrealized gains or losses relating to assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
still held at the reporting date | still held at the reporting date | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | (73 | ) | | $ | (58 | ) | | $ | (131 | ) | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding.) | (Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | | | | | | | | (Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | | | | | | | |
5. CAPITAL TRANSACTIONS
On December 17, 2008, Group and HoldingsOctober 14, 2011. we renewed theirour shelf registration statement on Form S-3ASR with the SEC, as a Well Known Seasoned Issuer. This shelf registration statement can be 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.
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 contractualreinsurance 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. WhileThe Company considers the final outcom estatuses of these matters cannot be predicted with certainty, the Company does not believe that any of these matters,proceedings 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.determining its reserves for unpaid loss and loss adjustment expenses.
The Company does not believe that there are any material pending legal proceedingsAside from litigation and arbitrations related 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 expiredthese 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, 2010, approximately 8% 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 ofagreements, 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 representis not a separate exposure group for monitoring and evaluating reserve adequacy. The following table summarizes incurred losses with respectparty 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) | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
Gross basis: | | | | | | | | | | | | |
Beginning of period reserves | | $ | 614,135 | | | $ | 704,507 | | | $ | 638,674 | | | $ | 786,842 | |
Incurred losses | | | - | | | | - | | | | - | | | | - | |
Paid losses | | | (36,598 | ) | | | (52,170 | ) | | | (61,137 | ) | | | (134,505 | ) |
End of period reserves | | $ | 577,537 | | | $ | 652,337 | | | $ | 577,537 | | | $ | 652,337 | |
| | | | | | | | | | | | | | | | |
Net basis: | | | | | | | | | | | | | | | | |
Beginning of period reserves | | $ | 412,651 | | | $ | 455,379 | | | $ | 430,421 | | | $ | 485,296 | |
Incurred losses | | | - | | | | - | | | | - | | | | - | |
Paid losses | | | (14,693 | ) | | | (13,527 | ) | | | (32,463 | ) | | | (43,444 | ) |
End of period reserves | | $ | 397,958 | | | $ | 441,852 | | | $ | 397,958 | | | $ | 441,852 | |
At September 30, 2010, the gross reserves for A&E losses were comprised of $131,785 thousand representing case reserves reported by ceding companies, $131,818 thousand representing additional case reserves established by the Company on assumed reinsurance claims, $41,245 thousand representing case reserves established by the Company on direct excess insurance claims, including Mt. McKinley and $272,689 thousand representing IBNR reserves.
With respect to asbestos only, at September 30, 2010, the Company had gross asbestos loss reserves of $551,439 thousand,any other material litigation or 95.5%, of total A&E reserves, of which $445,766 thousand was for assumed business and $105,673 thousand 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. The table below presents the estimated cost to replace all such annuities for which the Company was contingently liable for the periods indicated:
(Dollars in thousands) | | At September 30, 2010 | | At December 31, 2009 |
| | $ | 150,614 | | | $ | 152,340 | |
(Dollars in thousands) | | At September 30, 2011 | | At December 31, 2010 |
| | $ | 142,998 | | $ | 150,560 |
Prior to its 1995 initial public offering, the Company had purchased annuities from an unaffiliated life insurance company with an A+ (Superior) financial strength rating from A.M. Best to settle certain claim liabilities of the company. Should the life insurance company become unable to make the annuity payments, the Company would be liable for those claim liabilities. The table below presents the estimated cost to replace all such annuities for which the Company was contingently liable for the periods indicated:
(Dollars in thousands) | | At September 30, 2010 | | At December 31, 2009 |
| | $ | 26,030 | | | $ | 24,568 | |
(Dollars in thousands) | | At September 30, 2011 | | At December 31, 2010 |
| | $ | 27,094 | | $ | 26,542 |
7. OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents the components of 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) | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
Unrealized appreciation (depreciation) ("URA(D)") on | | | | | | | | | | | | |
securities arising during the period | | | | | | | | | | | | |
URA(D) of investments - temporary | | $ | 83,543 | | | $ | 228,551 | | | $ | 134,055 | | | $ | 392,202 | |
URA(D) of investments - non-credit OTTI | | | 384 | | | | 4,056 | | | | 2,966 | | | | 9,654 | |
Tax benefit (expense) from URA(D) arising during the period | | | (29,374 | ) | | | (81,413 | ) | | | (47,957 | ) | | | (140,650 | ) |
Total URA(D) on securities arising during the period, net of tax | | | 54,553 | | | | 151,194 | | | | 89,064 | | | | 261,206 | |
| | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | | | 16,528 | | | | 16,204 | | | | 18,358 | | | | 33,281 | |
Tax benefit (expense) from foreign currency translation | | | (5,785 | ) | | | (5,672 | ) | | | (6,425 | ) | | | (11,649 | ) |
Net foreign currency translation adjustments | | | 10,743 | | | | 10,532 | | | | 11,933 | | | | 21,632 | |
| | | | | | | | | | | | | | | | |
Pension adjustments | | | 649 | | | | 949 | | | | 1,948 | | | | 2,849 | |
Tax benefit (expense) on pension | | | (227 | ) | | | (332 | ) | | | (682 | ) | | | (564 | ) |
Net pension adjustments | | | 422 | | | | 617 | | | | 1,266 | | | | 2,285 | |
| | | | | | | | | | | | | | | | |
Other comprehensive income (loss), net of tax | | $ | 65,718 | | | $ | 162,343 | | | $ | 102,263 | | | $ | 285,123 | |
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
(Dollars in thousands) | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
Unrealized appreciation (depreciation) ("URA(D)") on | | | | | | | | | | | | |
securities arising during the period | | | | | | | | | | | | |
URA(D) of investments - temporary | | $ | 12,125 | | | $ | 83,543 | | | $ | 49,825 | | | $ | 134,055 | |
URA(D) of investments - non-credit OTTI | | | (137 | ) | | | 384 | | | | (132 | ) | | | 2,966 | |
Tax benefit (expense) from URA(D) arising during the period | | | (4,195 | ) | | | (29,374 | ) | | | (17,392 | ) | | | (47,957 | ) |
Total URA(D) on securities arising during the period, net of tax | | | 7,793 | | | | 54,553 | | | | 32,301 | | | | 89,064 | |
| | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | | | (7,012 | ) | | | 16,528 | | | | 7,224 | | | | 18,358 | |
Tax benefit (expense) from foreign currency translation | | | 2,454 | | | | (5,785 | ) | | | (2,529 | ) | | | (6,425 | ) |
Net foreign currency translation adjustments | | | (4,558 | ) | | | 10,743 | | | | 4,695 | | | | 11,933 | |
| | | | | | | | | | | | | | | | |
Pension adjustments | | | 1,148 | | | | 649 | | | | 3,443 | | | | 1,948 | |
Tax benefit (expense) on pension | | | (402 | ) | | | (227 | ) | | | (1,205 | ) | | | (682 | ) |
Net pension adjustments | | | 746 | | | | 422 | | | | 2,238 | | | | 1,266 | |
| | | | | | | | | | | | | | | | |
Other comprehensive income (loss), net of tax | | $ | 3,981 | | | $ | 65,718 | | | $ | 39,234 | | | $ | 102,263 | |
The following table presents the components of accumulated other comprehensive income (loss), net of tax, in the consolidated balance sheets for the periods indicated:
| | At September 30, | | | At December 31, | | | At September 30, | | | At December 31, | |
(Dollars in thousands) | | 2010 | | | 2009 | | | 2011 | | | 2010 | |
URA(D) on securities, net of deferred taxes | | | | | | | | | | | | |
Temporary | | $ | 222,706 | | | $ | 135,570 | | | $ | 137,861 | | | $ | 105,474 | |
Non-credit, OTTI | | | 603 | | | | (1,325 | ) | | | 449 | | | | 535 | |
Total unrealized appreciation (depreciation) on investments, net of deferred taxes | | | 223,309 | | | | 134,245 | | | | 138,310 | | | | 106,009 | |
Foreign currency translation adjustments, net of deferred taxes | | | 68,934 | | | | 57,001 | | | | 88,735 | | | | 84,040 | |
Pension adjustments, net of deferred taxes | | | (23,002 | ) | | | (24,268 | ) | | | (23,845 | ) | | | (26,083 | ) |
Accumulated other comprehensive income (loss) | | $ | 269,241 | | | $ | 166,978 | | | $ | 203,200 | | | $ | 163,966 | |
8. CREDIT FACILITY
Holdings Credit Facility
Effective August 23, 2006,15, 2011, Holdings entered into a fivenew three year, $150,000 thousand seniorunsecured revolving credit facility with a syndicate of lenders, replacing the August 23, 2006 five year senior revolving credit facility. Both the August 15, 2011 and August 23, 2006 revolving credit agreements, which have similar terms, are referred to as the “Holdings Credit Facility”. Citibank N.A. is the administrative agent for the Holdings Credit Facility. The Holdings Credit Facility may be used for liquidity and general corporate purposes. The Holdings Credit Facility provides for the borrowing of up to $150,000 thousand 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 Citiba nkCitibank as its primebase rate, or (b) 0.5% per annum above the Federal Funds Rate or (c) 1% above the one month LIBOR, 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 Reinsurance Company (“Everest Re”)Re to maintain its statutory surplus at $1,500,000$1,875,000 thousand plus 25% of future aggregate net income and 25% of future aggregate capital contributions after December 31, 2005,2010, which at September 30, 2010,2011, was $1,970,322$1,898,559 thousand. As of September 30, 2010,2011, Holdings was in compliance with all Holdings Credit Facility covenants.
The following table summarizes outstanding letters of credit and/or borrowings for the periods indicated:
(Dollars in thousands) | | At September 30, 2010 | | At December 31, 2009 |
Bank | | Commitment | | | In Use | | Date of Loan | Maturity/Expiry Date | | Commitment | | | In Use | | Date of Loan | Maturity/Expiry Date |
Citibank Holdings Credit Facility | | $ | 150,000 | | | $ | 50,000 | | 9/01/2010 | 10/01/2010 | | $ | 150,000 | | | $ | - | | | |
| | | | | | | 20,000 | | 9/13/2010 | 10/13/2010 | | | | | | | - | | | |
| | | | | | | 13,000 | | 9/15/2010 | 10/15/2010 | | | | | | | - | | | |
Total revolving credit borrowings | | | | | | | 83,000 | | | | | | | | | | - | | | |
Total letters of credit | | | | | | | 16,951 | | | 12/31/2010 | | | | | | | 27,959 | | | 12/31/2010 |
| | | | | | | | | | | | | | | | | | | | |
Total Citibank Holdings Credit Facility | | $ | 150,000 | | | $ | 99,951 | | | | | $ | 150,000 | | | $ | 27,959 | | | |
(Dollars in thousands) | | At September 30, 2011 | | At December 31, 2010 |
Bank | | Commitment | | | In Use | | Date of Loan | Maturity/Expiry Date | | Commitment | | | In Use | | Date of Loan | Maturity/Expiry Date |
Citibank Holdings Credit Facility | | $ | 150,000 | | | $ | - | | | | | $ | 150,000 | | | $ | 50,000 | | 12/16/2010 | 1/18/2011 |
| | | | | | | - | | | | | | | | | | - | | | |
| | | | | | | - | | | | | | | | | | - | | | |
Total revolving credit borrowings | | | | | | | - | | | | | | | | | | 50,000 | | | |
Total letters of credit | | | | | | | 9,527 | | | 12/31/2011 | | | | | | | 9,527 | | | 12/31/2011 |
| | | | | | | | | | | | | | | | | | | | |
Total Citibank Holdings Credit Facility | | $ | 150,000 | | | $ | 9,527 | | | | | $ | 150,000 | | | $ | 59,527 | | | |
The following table presents the costs incurred in connection with the Holdings Credit Facility for the periods indicated:
| | Three Months Ended | | | Nine Months Ended | | | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | | | September 30, | | | September 30, | |
(Dollars in thousands) | | 2010 | | | 2009 | | | 2010 | | | 2009 | | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
Credit facility fees incurred | | $ | 225 | | | $ | 108 | | | $ | 376 | | | $ | 166 | | | $ | 163 | | | $ | 225 | | | $ | 341 | | | $ | 376 | |
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, 2010,2011, the total amount on deposit in the trust account was $26,046$14,341 thousand.
10. SENIOR NOTES
Holdings has completed multiple public offerings. The table below displays Holdings’ outstanding senior notes. Market value is based on quoted market prices.
| | | | | | | | September 30, 2010 | | December 31, 2009 | | | | | | | | September 30, 2011 | | | December 31, 2010 | |
| | | | | | | | Consolidated Balance | | | | | Consolidated Balance | | | | | | | | | | | Consolidated Balance | | | | | | Consolidated Balance | | | | |
(Dollars in thousands) | Date Issued | | Date Due | | Principal Amounts | | Sheet Amount | | Market Value | | Sheet Amount | | Market Value | Date Issued | | Date Due | | Principal Amounts | | | Sheet Amount | | | Market Value | | | Sheet Amount | | | Market Value | |
5.40% Senior notes | 10/12/2004 | | 10/15/2014 | | $ | 250,000 | | | $ | 249,801 | | | $ | 270,000 | | | $ | 249,769 | | | $ | 256,100 | | 10/12/2004 | | 10/15/2014 | | $ | 250,000 | | | $ | 249,847 | | | $ | 261,250 | | | $ | 249,812 | | | $ | 267,500 | |
8.75% Senior notes (matured and paid on March 15, 2010) | 03/14/2000 | | 03/15/2010 | | $ | 200,000 | | | $ | - | | | $ | - | | | $ | 199,970 | | | $ | 200,000 | | 03/14/2000 | | 03/15/2010 | | $ | 200,000 | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Interest expense incurred in connection with these senior notes is as follows for the periods indicated:
| | Three Months Ended | | | Nine Months Ended | | | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | | | September 30, | | | September 30, | |
(Dollars in thousands) | | 2010 | | | 2009 | | | 2010 | | | 2009 | | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
Interest expense incurred | | $ | 3,386 | | | $ | 7,798 | | | $ | 13,833 | | | $ | 23,391 | | | $ | 3,386 | | | $ | 3,386 | | | $ | 10,159 | | | $ | 13,833 | |
11. LONG TERM SUBORDINATED NOTES
The table below displays Holdings’ outstanding fixed to floating rate long term subordinated notes. Market value is based on quoted market prices.
| | | | | Maturity Date | | September 30, 2010 | | December 31, 2009 | | | | | Maturity Date | | September 30, 2011 | | | December 31, 2010 | |
| | | Original | | | | | | Consolidated Balance | | | | | Consolidated Balance | | | | | | Original | | | | | | Consolidated Balance | | | | | | Consolidated Balance | | | | |
(Dollars in thousands) | Date Issued | | Principal Amount | | Scheduled | | Final | | Sheet Amount | | Market Value | | Sheet Amount | | Market Value | Date Issued | | Principal Amount | | Scheduled | | Final | | Sheet Amount | | | Market Value | | | Sheet Amount | | | Market Value | |
6.6% Long term subordinated notes | 04/26/2007 | | $ | 400,000 | | 05/15/2037 | | 05/01/2067 | | $ | 238,350 | | | $ | 220,072 | | | $ | 238,348 | | | $ | 176,534 | | 04/26/2007 | | $ | 400,000 | | 05/15/2037 | | 05/01/2067 | | $ | 238,353 | | | $ | 202,776 | | | $ | 238,351 | | | $ | 227,825 | |
During the fixed rate interest period from May 3, 2007 through May 14, 2017, interest will be at the annual rate of 6.6%, payable semi-annually in arrears on November 15 and May 15 of each year, commencing on November 15, 2007, subject to Holdings’ right to defer interest on one or more occasions for up to ten consecutive years. During the floating rate interest period from May 15, 2017 through maturity, interest will be based on the 3 month LIBOR plus 238.5 basis points, reset quarterly, payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year, subject to Holdings’ right to defer interest on one or more occasions for up to ten consecutive years. Deferred interest will accumulate interest at the applicable rate compounded semi-annually for periods prior to May 15, , 2017, and compounded quarterly for periods from and including May 15, 2017.
Holdings can redeem the long term subordinated notes prior to May 15, 2017, in whole but not in part at the applicable redemption price, which will equal the greater of (a) 100% of the principal amount being redeemed and (b) the present value of the principal payment on May 15, 2017 and scheduled payments of interest that would have accrued from the redemption date to May 15, 2017 on the long term subordinated notes being redeemed, discounted to the redemption date on a semi-annual basis at a discount rate equal to the treasury rate plus an applicable spread of either 0.25% or 0.50%, in each case plus accrued and unpaid interest. Holdings may redeem the long term subordinated notes on or after May 15, 2017, in whole or in part at 100% of the principal amount plus accrued and unpaid interest; however, redemption on or af terafter 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 $161,441 thousand, which resulted in a pre-tax gain on debt repurchase of $78,271 thousand.
Interest expense incurred in connection with these long term subordinated notes is as follows for the periods indicated:
| | Three Months Ended | | | Nine Months Ended | | | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | | | September 30, | | | September 30, | |
(Dollars in thousands) | | 2010 | | | 2009 | | | 2010 | | | 2009 | | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
Interest expense incurred | | $ | 3,937 | | | $ | 3,937 | | | $ | 11,811 | | | $ | 14,385 | | | $ | 3,937 | | | $ | 3,937 | | | $ | 11,811 | | | $ | 11,811 | |
12. JUNIOR SUBORDINATED DEBT SECURITIES PAYABLE
The following table displays Holdings’ outstanding junior subordinated debt securities due to Everest Re Capital Trust II (“Capital Trust II”), a wholly ownedwholly-owned finance subsidiary of Holdings. Fair value is primarily based on the quoted market price of the related trust preferred securities.
| | | | | | | | September 30, 2010 | | December 31, 2009 | | | | | | | | September 30, 2011 | | | December 31, 2010 | |
| | | | | | | | Consolidated Balance | | | | | Consolidated Balance | | | | | | | | | | | Consolidated Balance | | | | | | Consolidated Balance | | | | |
(Dollars in thousands) | Date Issued | | Date Due | | Amount Issued | | Sheet Amount | | Fair Value | | Sheet Amount | | Fair Value | Date Issued | | Date Due | | Amount Issued | | | Sheet Amount | | | Fair Value | | | Sheet Amount | | | Fair Value | |
6.20% Junior subordinated debt securities | 03/29/2004 | | 03/29/2034 | | $ | 329,897 | | | $ | 329,897 | | | $ | 319,913 | | | $ | 329,897 | | | $ | 272,553 | | 03/29/2004 | | 03/29/2034 | | $ | 329,897 | | | $ | 329,897 | | | $ | 327,337 | | | $ | 329,897 | | | $ | 294,825 | |
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.
Interest expense incurred in connection with these junior subordinated debt securities is as follows for the periods indicated:
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
(Dollars in thousands) | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
Interest expense incurred | | $ | 5,113 | | | $ | 5,113 | | | $ | 15,340 | | | $ | 15,340 | |
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
(Dollars in thousands) | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
Interest expense incurred | | $ | 5,113 | | | $ | 5,113 | | | $ | 15,340 | | | $ | 15,340 | |
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 their 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 Holdings’ operating subsidiaries to transfer funds to Holdings in the form of cash dividends, loans or advances. The insurance laws of the State of Delaware, where Holdings’ direct insurance subsidiaries are domiciled, require regulatory approval before those subsidiaries can pay dividends or make loans or advances to Holdings that exceed certain statutory thresholds. In addition, the terms of Holdings Credit Facility (discussed in Note 10)8) require Everest Re, Holdings’ principal insurance subsidiary, to maintain a certain statutory surplus level as measured at the end of each fiscal year. At December 31, 2009, $2,351,9902010, $2,293,643 thousand of the $3,271,079$2,929,526 thousand in net assets of Holdings’ consolidated sub sidiariessubsidiaries were subject to the foregoing regulatory restrictions.
13. SEGMENT REPORTING
During the quarter ended September 30, 2011, the Company realigned its reporting segments to reflect recent changes in the type and volume of business written. The Company through its subsidiaries, operatespreviously reported the results of Marine & Aviation, Surety, Accident and Health (“A&H”) Reinsurance and A&H Primary operations as a separate segment—Specialty Underwriting. The A&H primary business, which is a relatively new line of business for the Company, has increased significantly, representing approximately 2% of premiums earned and is projected to continue to grow. The A&H primary business is better aligned with the Insurance reporting segment based on the similarities of this business with that of those businesses already reflected in four segments:the Insurance segment. The other operating units included in the Specialty Underwriting segment would have encompassed approximately 6% of the Company’s premiums earned and their volume is projected to remain approximately 6%. As a result of the size of these remaining operating units and their similarity to the business reported within U.S. Reinsurance, they have been reclassified to the U.S. Reinsurance U.S. Insurance, Specialty Underwriting and International. segment. There has been no change to the International reporting segment. The Company has restated all segment information for prior years to conform to the new reporting segment structure.
The U.S. Reinsurance operation writes property and casualty reinsurance and specialty lines of business, including Marine, Aviation, Surety and A&H business, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies primarily within the U.S. The U.S. Insurance operation writes property and casualty insurance, primarilyincluding medical stop loss insurance, directly and through general agents, brokers 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.Canada. The International operation writes non-U.S. property and casualty reinsurance through Everest Re’s branches in Canada and Singapore and through offices in Brazil, Miami and New Jersey.
These segments are managed independently, but conform with corporate guidelines 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:
| | Three Months Ended | | | Nine Months Ended | | | Three Months Ended | | | Nine Months Ended | |
U.S. Reinsurance | | September 30, | | | September 30, | | | September 30, | | | September 30, | |
(Dollars in thousands) | | 2010 | | | 2009 | | | 2010 | | | 2009 | | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
Gross written premiums | | $ | 372,358 | | | $ | 345,567 | | | $ | 884,581 | | | $ | 876,049 | | | $ | 360,833 | | | $ | 435,218 | | | $ | 947,155 | | | $ | 1,076,614 | |
Net written premiums | | | 205,125 | | | | 191,666 | | | | 484,049 | | | | 487,849 | �� | | | 167,469 | | | | 238,536 | | | | 486,032 | | | | 591,083 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Premiums earned | | $ | 159,666 | | | $ | 162,037 | | | $ | 449,159 | | | $ | 489,067 | | | $ | 167,530 | | | $ | 195,663 | | | $ | 512,104 | | | $ | 561,958 | |
Incurred losses and LAE | | | 84,320 | | | | 56,158 | | | | 258,774 | | | | 232,262 | | | | 97,197 | | | | 109,059 | | | | 371,638 | | | | 344,047 | |
Commission and brokerage | | | 25,070 | | | | 21,397 | | | | 88,142 | | | | 90,525 | | | | 23,298 | | | | 32,434 | | | | 106,123 | | | | 112,790 | |
Other underwriting expenses | | | 8,933 | | | | 9,665 | | | | 26,116 | | | | 25,250 | | | | 10,843 | | | | 11,076 | | | | 30,621 | | | | 32,617 | |
Underwriting gain (loss) | | $ | 41,343 | | | $ | 74,817 | | | $ | 76,127 | | | $ | 141,030 | | | $ | 36,192 | | | $ | 43,094 | | | $ | 3,722 | | | $ | 72,504 | |
| | Three Months Ended | | | Nine Months Ended | | | Three Months Ended | | | Nine Months Ended | |
U.S. Insurance | | September 30, | | | September 30, | | |
Insurance | | | September 30, | | | September 30, | |
(Dollars in thousands) | | 2010 | | | 2009 | | | 2010 | | | 2009 | | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
Gross written premiums | | $ | 211,632 | | | $ | 230,491 | | | $ | 644,810 | | | $ | 648,719 | | | $ | 236,294 | | | $ | 214,701 | | | $ | 750,283 | | | $ | 650,448 | |
Net written premiums | | | 89,218 | | | | 76,400 | | | | 272,497 | | | | 301,910 | | | | 114,328 | | | | 90,937 | | | | 366,223 | | | | 275,655 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Premiums earned | | $ | 103,971 | | | $ | 89,237 | | | $ | 291,324 | | | $ | 306,860 | | | $ | 124,282 | | | $ | 105,690 | | | $ | 362,212 | | | $ | 294,481 | |
Incurred losses and LAE | | | 98,989 | | | | 71,423 | | | | 243,739 | | | | 210,329 | | | | 120,332 | | | | 99,476 | | | | 302,038 | | | | 245,665 | |
Commission and brokerage | | | 10,432 | | | | 10,512 | | | | 18,171 | | | | 32,379 | | | | 11,858 | | | | 10,732 | | | | 27,781 | | | | 18,694 | |
Other underwriting expenses | | | 19,479 | | | | 19,982 | | | | 52,335 | | | | 56,415 | | | | 24,316 | | | | 19,479 | | | | 68,589 | | | | 52,335 | |
Underwriting gain (loss) | | $ | (24,929 | ) | | $ | (12,680 | ) | | $ | (22,921 | ) | | $ | 7,737 | | | $ | (32,224 | ) | | $ | (23,997 | ) | | $ | (36,196 | ) | | $ | (22,213 | ) |
| | Three Months Ended | | | Nine Months Ended | |
Specialty Underwriting | | September 30, | | | September 30, | |
(Dollars in thousands) | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
Gross written premiums | | $ | 65,929 | | | $ | 67,615 | | | $ | 197,671 | | | $ | 183,726 | |
Net written premiums | | | 35,130 | | | | 38,259 | | | | 110,192 | | | | 102,990 | |
| | | | | | | | | | | | | | | | |
Premiums earned | | $ | 37,716 | | | $ | 39,182 | | | $ | 115,956 | | | $ | 108,513 | |
Incurred losses and LAE | | | 25,226 | | | | 25,197 | | | | 87,199 | | | | 73,740 | |
Commission and brokerage | | | 7,664 | | | | 10,510 | | | | 25,171 | | | | 29,435 | |
Other underwriting expenses | | | 2,143 | | | | 2,383 | | | | 6,501 | | | | 6,227 | |
Underwriting gain (loss) | | $ | 2,683 | | | $ | 1,092 | | | $ | (2,915 | ) | | $ | (889 | ) |
| | Three Months Ended | | | Nine Months Ended | | | Three Months Ended | | | Nine Months Ended | |
International | | September 30, | | | September 30, | | | September 30, | | | September 30, | |
(Dollars in thousands) | | 2010 | | | 2009 | | | 2010 | | | 2009 | | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
Gross written premiums | | $ | 323,741 | | | $ | 272,603 | | | $ | 906,089 | | | $ | 797,606 | | | $ | 326,053 | | | $ | 323,741 | | | $ | 923,649 | | | $ | 906,089 | |
Net written premiums | | | 168,400 | | | | 146,330 | | | | 479,655 | | | | 435,650 | | | | 158,038 | | | | 168,400 | | | | 457,663 | | | | 479,655 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Premiums earned | | $ | 163,949 | | | $ | 147,864 | | | $ | 465,721 | | | $ | 433,099 | | | $ | 151,050 | | | $ | 163,949 | | | $ | 479,989 | | | $ | 465,721 | |
Incurred losses and LAE | | | 118,390 | | | | 89,214 | | | | 478,966 | | | | 260,964 | | | | 104,570 | | | | 118,390 | | | | 514,260 | | | | 478,966 | |
Commission and brokerage | | | 38,289 | | | | 34,840 | | | | 106,009 | | | | 100,062 | | | | 35,686 | | | | 38,289 | | | | 105,755 | | | | 106,009 | |
Other underwriting expenses | | | 6,675 | | | | 6,159 | | | | 20,363 | | | | 16,463 | | | | 7,549 | | | | 6,675 | | | | 20,938 | | | | 20,363 | |
Underwriting gain (loss) | | $ | 595 | | | $ | 17,651 | | | $ | (139,617 | ) | | $ | 55,610 | | | $ | 3,245 | | | $ | 595 | | | $ | (160,964 | ) | | $ | (139,617 | ) |
The following table reconciles the underwriting results for the operating segments to income (loss) before taxes as reported in the consolidated statements of operations and comprehensive income (loss) for the periods indicated:
| | Three Months Ended | | | Nine Months Ended | | | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | | | September 30, | | | September 30, | |
(Dollars in thousands) | | 2010 | | | 2009 | | | 2010 | | | 2009 | | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
Underwriting gain (loss) | | $ | 19,692 | | | $ | 80,880 | | | $ | (89,326 | ) | | $ | 203,488 | | | $ | 7,213 | | | $ | 19,692 | | | $ | (193,438 | ) | | $ | (89,326 | ) |
Net investment income | | | 74,212 | | | | 65,492 | | | | 248,665 | | | | 179,667 | | | | 78,325 | | | | 74,212 | | | | 249,916 | | | | 248,665 | |
Net realized capital gains (losses) | | | 159,569 | | | | 101,394 | | | | 58,789 | | | | 56,151 | | | | (179,036 | ) | | | 159,569 | | | | (206,744 | ) | | | 58,789 | |
Realized gain on debt repurchase | | | - | | | | - | | | | - | | | | 78,271 | | |
Corporate expense | | | (1,529 | ) | | | (1,675 | ) | | | (5,218 | ) | | | (4,871 | ) | | | (1,143 | ) | | | (1,529 | ) | | | (3,498 | ) | | | (5,218 | ) |
Interest, fee and bond issue cost amortization expense | | | (12,817 | ) | | | (17,073 | ) | | | (41,879 | ) | | | (53,779 | ) | | | (12,706 | ) | | | (12,817 | ) | | | (38,083 | ) | | | (41,879 | ) |
Other income (expense) | | | (3,617 | ) | | | 15,081 | | | | 10,204 | | | | 7,801 | | | | (8,865 | ) | | | (3,617 | ) | | | (20,401 | ) | | | 10,204 | |
Income (loss) before taxes | | $ | 235,510 | | | $ | 244,099 | | | $ | 181,235 | | | $ | 466,728 | | | $ | (116,212 | ) | | $ | 235,510 | | | $ | (212,248 | ) | | $ | 181,235 | |
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, the table below presents the largest country, other than the U.S. and Canada, no, in which the Company writes business, for the periods indicated:
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
(Dollars in thousands) | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
Canada | | $ | 73,543 | | | $ | 48,333 | | | $ | 156,727 | | | $ | 133,612 | |
No other country represented more than 5% of the Company’s revenues.revenue.
14. RELATED-PARTY TRANSACTIONS
Parent
Group’s Board of Directors approved an amended share repurchase program authorizing Group and/or its subsidiary Holdings to purchase Group’s common shares through open market transactions, privately negotiated transactions or both. The table below represents the amendments to the share repurchase program for the common shares approved for repurchase.
| | Common Shares |
Amendment Date | | Purchased |
(Dollars in thousands) | | | |
09/21/2004 | | $ | 5,000,000 | |
07/21/2008 | | | 5,000,000 | |
02/24/2010 | | | 5,000,000 | |
| | $ | 15,000,000 | |
| | Common Shares |
| | Authorized for |
Amendment Date | | Repurchase |
09/21/2004 | | 5,000,000 |
07/21/2008 | | 5,000,000 |
02/24/2010 | | 5,000,000 |
| | 15,000,000 |
As of September 30, 2010,2011, Holdings held 8,702,8269,719,971 common shares of Group, which it had purchased in the open market between February 1, 2007 and September 27, 2010.March 8, 2011. The table below represents the total purchase price for these common shares purchased.
(Dollars in thousands) | | | | | | |
Total purchase price | | $ | 746,046 | | | $ | 835,371 | |
Holdings reports these purchases as other invested assets, fair value, in the consolidated balance sheets with changes in fair value re-measurement recorded in net realized capital gains (losses) in the consolidated statements of operations and comprehensive income (loss). The following table presents the dividends received on these common shares that are reported as net investment income in the consolidated statements of operations and comprehensive income (loss) for the period indicated.
| | | Three Months Ended | | | Nine Months Ended | |
| | | September 30, | | | September 30, | |
(Dollars in thousands) | | At September 30, 2010 | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
Dividends received | | $ | 9,569 | | | $ | 4,665 | | | $ | 4,016 | | | $ | 13,979 | | | $ | 9,569 | |
Outside Directors
During the normal course of business, the Company, through its affiliates, engages in insurance 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 operation and cash flows.
Affiliated Companies
Everest Global Services, Inc. (“Everest Global”), an affiliate of Holdings, provides centralized management and home office services, through a management agreement, to Holdings and other affiliated companies within Holdings’ consolidated structure. Services provided by Everest Global include executive managerial services, legal services, actuarial services, accounting services, information technology services and others.
The following table presents the expenses incurred by Holdings from services provided by Everest Global for the periods indicated.
| | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | |
(Dollars in thousands) | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
Expenses incurred | | $ | 16,537 | | | $ | 15,554 | | | $ | 46,984 | | | $ | 47,021 | |
Affiliates
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.
The table below represents affiliated quota share reinsurance agreements ("whole account quota share") for all new and renewal business for the indicated coverage period:
(Dollars in thousands) | | | | | | | | | | | | | | | | | |
| | | | Percent | | | Assuming | | | | Single | | Aggregate |
Coverage Period | | Ceding Company | | Ceded | | | Company | | Type of Business | | Occurrence Limit | | Limit |
| | | | | | | | | | | | | | | | | |
01/01/2002-12/31/2002 | | Everest Re | | | 20.0 | % | | Bermuda Re | | property / casualty business | | $ | - | | | | $ | - | | |
| | | | | | | | | | | | | | | | | | | | |
01/01/2003-12/31/2003 | | Everest Re | | | 25.0 | % | | Bermuda Re | | property / casualty business | | | - | | | | | - | | |
| | | | | | | | | | | | | | | | | | | | |
01/01/2004-12/31/2005 | | Everest Re | | | 22.5 | % | | Bermuda Re | | property / casualty business | | | - | | | | | - | | |
| | Everest Re | | | 2.5 | % | | Everest International | | property / casualty business | | | - | | | | | - | | |
| | | | | | | | | | | | | | | | | | | | |
01/01/2006-12/31/2006 | | Everest Re | | | 18.0 | % | | Bermuda Re | | property business | | | 125,000 | | (1) | | | - | | |
| | Everest Re | | | 2.0 | % | | Everest International | | property business | | | - | | | | | - | | |
| | | | | | | | | | | | | | | | | | | | |
01/01/2006-12/31/2007 | | Everest Re | | | 31.5 | % | | Bermuda Re | | casualty business | | | - | | | | | - | | |
| | Everest Re | | | 3.5 | % | | Everest International | | casualty business | | | - | | | | | - | | |
| | | | | | | | | | | | | | | | | | | | |
01/01/2007-12/31/2007 | | Everest Re | | | 22.5 | % | | Bermuda Re | | property business | | | 130,000 | | (1) | | | - | | |
| | Everest Re | | | 2.5 | % | | Everest International | | property business | | | - | | | | | - | | |
| | | | | | | | | | | | | | | | | | | | |
01/01/2008-12/31/2008 | | Everest Re | | | 36.0 | % | | Bermuda Re | | property / casualty business | | | 130,000 | | (1) | | | 275,000 | | (2) |
| | Everest Re | | | 4.0 | % | | Everest International | | property / casualty business | | | - | | | | | - | | |
| | | | | | | | | | | | | | | | | | | | |
01/01/2009-12/31/2009 | | Everest Re | | | 36.0 | % | | Bermuda Re | | property / casualty business | | | 150,000 | | (1) | | | 325,000 | | (2) |
| | Everest Re | | | 8.0 | % | | Everest International | | property / casualty business | | | - | | | | | - | | |
| | | | | | | | | | | | | | | | | | | | |
01/01/2010 | | Everest Re | | | 44.0 | % | | Bermuda Re | | property / casualty business | | | 150,000 | | | | | 325,000 | | |
| | | | | | | | | | | | | | | | | | | | |
01/01/2003-12/31/2006 | | Everest Re- Canadian Branch | | 50.0 | % | | Bermuda Re | | property business | | | - | | | | | - | | |
01/01/2007-12/31/2009 | | Everest Re- Canadian Branch | | 60.0 | % | | Bermuda Re | | property business | | | - | | | | | - | | |
01/01/2010 | | Everest Re- Canadian Branch | | 60.0 | % | | Bermuda Re | | property business | | | 350,000 | | | | | - | | |
| | | | | | | | | | | | | | | | | | | | |
(1) The single occurance limit is applied before the loss cessions to either Bermuda Re or Everest International. | | |
(2) The aggregate limit is applied before the loss cessions to either Bermuda Re or Everest International. | | |
(Dollars in thousands) | | | | | | | | | | | | | | | | | |
| | | | Percent | | | Assuming | | | | Single | | Aggregate |
Coverage Period | | Ceding Company | | Ceded | | | Company | | Type of Business | | Occurrence Limit | | Limit |
| | | | | | | | | | | | | | | | | |
01/01/2002-12/31/2002 | | Everest Re | | | 20.0 | % | | Bermuda Re | | property / casualty business | | $ | - | | | | $ | - | | |
| | | | | | | | | | | | | | | | | | | | |
01/01/2003-12/31/2003 | | Everest Re | | | 25.0 | % | | Bermuda Re | | property / casualty business | | | - | | | | | - | | |
| | | | | | | | | | | | | | | | | | | | |
01/01/2004-12/31/2005 | | Everest Re | | | 22.5 | % | | Bermuda Re | | property / casualty business | | | - | | | | | - | | |
| | Everest Re | | | 2.5 | % | | Everest International | | property / casualty business | | | - | | | | | - | | |
| | | | | | | | | | | | | | | | | | | | |
01/01/2006-12/31/2006 | | Everest Re | | | 18.0 | % | | Bermuda Re | | property business | | | 125,000 | | (1) | | | - | | |
| | Everest Re | | | 2.0 | % | | Everest International | | property business | | | - | | | | | - | | |
| | | | | | | | | | | | | | | | | | | | |
01/01/2006-12/31/2007 | | Everest Re | | | 31.5 | % | | Bermuda Re | | casualty business | | | - | | | | | - | | |
| | Everest Re | | | 3.5 | % | | Everest International | | casualty business | | | - | | | | | - | | |
| | | | | | | | | | | | | | | | | | | | |
01/01/2007-12/31/2007 | | Everest Re | | | 22.5 | % | | Bermuda Re | | property business | | | 130,000 | | (1) | | | - | | |
| | Everest Re | | | 2.5 | % | | Everest International | | property business | | | - | | | | | - | | |
| | | | | | | | | | | | | | | | | | | | |
01/01/2008-12/31/2008 | | Everest Re | | | 36.0 | % | | Bermuda Re | | property / casualty business | | | 130,000 | | (1) | | | 275,000 | | (2) |
| | Everest Re | | | 4.0 | % | | Everest International | | property / casualty business | | | - | | | | | - | | |
| | | | | | | | | | | | | | | | | | | | |
01/01/2009-12/31/2009 | | Everest Re | | | 36.0 | % | | Bermuda Re | | property / casualty business | | | 150,000 | | (1) | | | 325,000 | | (2) |
| | Everest Re | | | 8.0 | % | | Everest International | | property / casualty business | | | - | | | | | - | | |
| | | | | | | | | | | | | | | | | | | | |
| | Everest Re | | | 44.0 | % | | Bermuda Re | | property / casualty business | | | 150,000 | | | | | 325,000 | �� | |
| | | | | | | | | | | | | | | | | | | | |
01/01/2011 | | Everest Re | | 50.0 | % | | Bermuda Re | | property / casualty business | | | 150,000 | | | | | 300,000 | | |
| | | | | | | | | | | | | | | | | | | |
01/01/2003-12/31/2006 | | Everest Re- Canadian Branch | | 50.0 | % | | Bermuda Re | | property business | | | - | | | | | - | | |
01/01/2007-12/31/2009 | | Everest Re- Canadian Branch | | 60.0 | % | | Bermuda Re | | property business | | | - | | | | | - | | |
| | Everest Re- Canadian Branch | | 60.0 | % | | Bermuda Re | | property business | | | 350,000 | | | | | - | | |
01/01/2011 | | Everest Re- Canadian Branch | | 60.0 | % | | Bermuda Re | | property business | | | 350,000 | | | | | - | | |
| | | | | | | | | | | | | | | | | | | |
(1) The single occurance limit is applied before the loss cessions to either Bermuda Re or Everest International. | | |
(2) The aggregate limit is applied before the loss cessions to either Bermuda Re or Everest International. | | |
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 respect to new, renewal and in force policies effective on that date through December 31, 2002. The table below represents Bermuda Re's liability limits for any losses per one occurrence.
| | Liability Limits | |
(Dollars in thousands) | | Exceeding | | | Not to Exceed | |
Losses per one occurrence | | $ | 100,000 | | | $ | 150,000 | |
The table below represents loss portfolio transfer reinsurance agreements whereby net insurance exposures and reserves were transferred to an affiliate.
(Dollars in thousands) | | | | | | | | |
| | | | | | | | |
Effective | | Transferring | | Assuming | | % of Business or | | Covered Period |
Date | | Company | | Company | | Amount of Transfer | | of Transfer |
| | | | | | | | |
09/19/2000 | | Mt. McKinley | | Bermuda Re | | | 100 | % | All years |
10/01/2001 | | Everest Re (Belgium Branch) | | Bermuda Re | | | 100 | % | All years |
10/01/2008 | | Everest Re | | Bermuda Re | | $ | 747,022 | | 01/01/2002-12/31/2007 |
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) | | 2010 | | | 2009 | | | 2010 | | | 2009 | |
Ceded written premiums | | $ | 400,977 | | | $ | 323,098 | | | $ | 1,046,727 | | | $ | 879,163 | |
Ceded earned premiums | | | 330,525 | | | | 286,537 | | | | 944,755 | | | | 835,673 | |
Ceded losses and LAE (a) | | | 211,862 | | | | 196,630 | | | | 694,938 | | | | 529,229 | |
| | | Three Months Ended | | | Nine Months Ended | |
Bermuda Re | | | September 30, | | | September 30, | |
(Dollars in thousands) | | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
Ceded written premiums | | | $ | 445,601 | | | $ | 400,977 | | | $ | 1,195,023 | | | $ | 1,046,727 | |
Ceded earned premiums | | | | 398,561 | | | | 330,525 | | | | 1,158,961 | | | | 944,755 | |
Ceded losses and LAE(a) | | | | 238,405 | | | | 211,862 | | | | 1,023,482 | | | | 694,938 | |
| | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | Nine Months Ended | | | Three Months Ended | | | Nine Months Ended | |
Everest International | | September 30, | | | September 30, | | | September 30, | | | September 30, | |
(Dollars in thousands) | | 2010 | | | 2009 | | | 2010 | | | 2009 | | | | 2011 | | | | 2010 | | | | 2011 | | | | 2010 | |
Ceded written premiums | | $ | (3,587 | ) | | $ | 68,937 | | | $ | 45,354 | | | $ | 152,819 | | | $ | 31 | | | $ | (3,587 | ) | | $ | 670 | | | $ | 45,354 | |
Ceded earned premiums | | | 17,548 | | | | 49,381 | | | | 92,052 | | | | 121,664 | | | | 2,448 | | | | 17,548 | | | | 16,489 | | | | 92,052 | |
Ceded losses and LAE(a) | | | 15,491 | | | | 27,070 | | | | 79,277 | | | | 63,625 | | |
Ceded losses and LAE | | | | (1,005 | ) | | | 15,491 | | | | 5,908 | | | | 79,277 | |
(a) Ceded losses and LAE include the Mt. McKinley loss portfolio transfer that constitutes losses ceded under retroactive reinsurance and therefore, in accordance with FASB guidance, a deferred gain on retroactive reinsurance is reflected in other expenses on the consolidated statements of operations and comprehensive income (loss).
Everest Re sold net assets of its U.K.UK branch to Bermuda Re and provided Bermuda Re with a reserve indemnity agreement allowing for indemnity payments of up to 90% of ₤25.0 million of the excess of 2002 and prior reserves, provided that any recognition of profit from the reserves for 2002 and prior underwriting years is taken into account. The limit available under this agreement was fully exhausted at December 31, 2004.
15. INCOME TAXES
The Company is domiciled in the United States and has subsidiaries domiciled within the United States with significant branches in Canada and Singapore. The Company’s non-U.S. branches are subject to income taxation at varying rates in their respective domiciles.
For 2010 and the first six months ending June 30 2011, the Company utilized the estimated annual effective tax rate approach for calculating its tax provision for interim periods as prescribed by ASC 740-270, Interim Reporting. Under the estimated annual effective tax rate approach, the estimated annual effective tax rate is applied to the interim year-to-date pre-tax ordinary income to determine the income tax expense or benefit for the year-to-date period, adjusted by the tax impact for discrete items. Due to potential volatility in the estimated annual effective tax rate approach, management has determined that an estimated annual effective tax rate approach is not reliable for the current interim reporting period and is recording taxes using the actual tax rate for the year-to-date results. The tax expense or benefit for a quarter represents the difference between the year-to-date tax expense or benefit for the current year-to-date period less such amount for the immediately preceding year-to-date period. Management considers the impact of all known events in its estimation of the Company’s annual pre-tax income and effective tax rate.
16. ACQUISITIONS
During the first nine months of 2011, the Company made several acquisitions to expand its domestic and Canadian insurance operations. Below are descriptions of the transactions.
On January 2, 2011, the Company acquired the entire business and operations of Heartland Crop Insurance, Inc. (“Heartland”) of Topeka, Kansas for $55,000 thousand in cash, plus contingent payments in future periods based upon achievement of performance targets. Heartland is a managing general agent specializing in crop insurance.
On January 28, 2011, the Company acquired the entire business and operations of Premiere Underwriting Services (“Premiere”) of Toronto, Canada. Premiere is a managing general agent specializing in entertainment and sports and leisure risks. On January 31, 2011, the Company acquired the renewal rights and operations of the financial lines business of Executive Risk Insurance Services, Ltd. (“Executive Risk”) of Toronto, Canada. The financial lines business of Executive Risk mainly underwrites Directors and Officers Liability, Fidelity, and Errors and Omissions Liability.
Overall, the Company recorded $35,068 thousand of goodwill and $26,903 thousand of intangible assets related to these acquisitions. All intangible assets recorded as part of these acquisitions will be amortized on a straight line basis over seven years.
17. SUBSEQUENT EVENTS
There is currently significant flooding in Thailand. Due to the recentness of this event, the Company is unable to estimate the amount of loss at this time. However, the Company anticipates that the flooding will adversely impact fourth quarter financial statements.
15. INCOME TAXES
The Company uses a projected annual effective tax rate to calculate its quarterly tax expense in accordance with FASB guidance. 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 discrete items impacting an individual quarter.
In 2007, the Internal Revenue Service completed its examination of the Company’s consolidated U.S. tax returns for 2003 and 2004 and issued an examination report proposing various adjustments. The Company submitted a formal protest including requests for affirmative adjustments and has been participating in the appeals process. This appeal process may result in recognition of the Company’s related unrecognized tax benefits within the next 12 months, which will positively affect the Company’s results of operations in the period of recognition.
16. SUBSEQUENT EVENTS
The Company has evaluated known recognized and non-recognized subsequent events. The Company does not have any subsequent events to report.
Industry Conditions.
The worldwide reinsurance and insurance businesses are highly competitive, as well as cyclical by product and market. As 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 and/or Standard & Poor’s, underwriting expertise, the jurisdictions where the reinsurer or insurer is licensed or otherwise authorized, capacity and coverages offered, premiums charged, other terms and conditions of the reinsurance and insurance business offered, services offered, speed of claims payment and reputation and experience in lines written. 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 source ssources of potential reinsurance and insurance capacity and competition.
Starting in the latter part of 2007 and continuing into 2010 there has been a significant slowdown in the global economy, which 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 values for houses and many commodities and contracting consumer spending. The significant increase in default rates negatively impacted the value of asset-backed securities held by both foreign and domestic institutions. The defaults have led to a corresponding increase in foreclosures, which have driven down housing values, resulting in additional losses on asset-backed securities. During the third and fourth quarters of 2008, credit markets det eriorated 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 failed or were acquired at distressed prices, while others received loans from the U.S. government to continue operations. The liquidity crisis significantly increased the spreads on fixed maturity securities 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 maturity and equity securities resulted in significant declines in the capital bases of most insurance and reinsurance companies. While ther e was significant improvement in the financial markets during 2009 and into 2010, concerns about interest rates, deflation and sovereign debt levels have hindered financial market recoveries. It is too early to predict the timing and extent of the impact these financial market fluctuations will have on insurance and reinsurance market conditions.
Worldwide insurance and reinsurance market conditions continued to be very competitive, particularly in the casualty lines of business. Generally, there was ample insurance and reinsurance capacity relative to demand. We noted, however, that in many markets and lines during 2009 and into 2010, the rates of decline have slowed, pricing in some segments was relatively flat and there was upward movement in some others, particularly property catastrophe coverage in Latin America and Australia where there have been significant losses. Competition and its effect on rates, terms and conditions vary widely by market and coverage yet continuescontinued to be most prevalent in the U.S. casualty insurance and reinsurance markets. The U.S. insurance markets in which we participate were extremely competitive as well.
Rates2011, the industry experienced significant losses from Australian floods, the New Zealand earthquake, the earthquake and tsunami in Japan and storms in the international marketsU.S. It is too early to determine the impact on market conditions as a result of these events. While there have generally been stable and we have seen somemeaningful rate increases particularly for catastrophe exposed business. We have grown ourcoverages in some global catastrophe prone regions, particularly areas impacted by these losses, whether the magnitude of these losses is sufficient to increase rates and improve market conditions for other lines of business in the Middle East, Latin America and Asia. We are expanding our international reach with our new office in Brazilremains to capitalize on the recently expanded opportunity for professional reinsurers in that market and on the economic growth expected for Brazil in the future.be seen.
Overall, we believe that current marketplace conditions, offer pockets ofparticularly for catastrophe coverages, provide 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.
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), ratios and stockholder’s equity for the periods indicated:
| | Three Months Ended | | Percentage | | Nine Months Ended | | Percentage | | Three Months Ended | | | Percentage | | | Nine Months Ended | | | Percentage | |
| | September 30, | | Increase/ | | September 30, | | Increase/ | | September 30, | | | Increase/ | | | September 30, | | | Increase/ | |
(Dollars in millions) | | 2010 | | | 2009 | | | (Decrease) | | 2010 | | | 2009 | | | (Decrease) | | 2011 | | | 2010 | | | (Decrease) | | | 2011 | | | 2010 | | | (Decrease) | |
Gross written premiums | | $ | 973.7 | | | $ | 916.3 | | | | 6.3 | % | | $ | 2,633.2 | | | $ | 2,506.1 | | | | 5.1 | % | | $ | 923.2 | | | $ | 973.7 | | | | -5.2 | % | | $ | 2,621.1 | | | $ | 2,633.2 | | | | -0.5 | % |
Net written premiums | | | 497.9 | | | | 452.7 | | | | 10.0 | % | | | 1,346.4 | | | | 1,328.4 | | | | 1.4 | % | | | 439.8 | | | | 497.9 | | | | -11.7 | % | | | 1,309.9 | | | | 1,346.4 | | | | -2.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
REVENUES: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Premiums earned | | $ | 465.3 | | | $ | 438.3 | | | | 6.2 | % | | $ | 1,322.2 | | | $ | 1,337.5 | | | | -1.1 | % | | $ | 442.9 | | | $ | 465.3 | | | | -4.8 | % | | $ | 1,354.3 | | | $ | 1,322.2 | | | | 2.4 | % |
Net investment income | | | 74.2 | | | | 65.5 | | | | 13.3 | % | | | 248.7 | | | | 179.7 | | | | 38.4 | % | | | 78.3 | | | | 74.2 | | | | 5.5 | % | | | 249.9 | | | | 248.7 | | | | 0.5 | % |
Net realized capital gains (losses) | | | 159.6 | | | | 101.4 | | | | 57.4 | % | | | 58.8 | | | | 56.2 | | | | 4.7 | % | | | (179.0 | ) | | | 159.6 | | | | -212.2 | % | | | (206.7 | ) | | | 58.8 | | | NM |
Realized gain on debt repurchase | | | - | | | | - | | | NA | | | - | | | | 78.3 | | | NA | |
Other income (expense) | | | (3.6 | ) | | | 15.1 | | | | -124.0 | % | | | 10.2 | | | | 7.8 | | | | 30.8 | % | | | (8.9 | ) | | | (3.6 | ) | | | 145.0 | % | | | (20.4 | ) | | | 10.2 | | | NM |
Total revenues | | | 695.5 | | | | 620.3 | | | | 12.1 | % | | | 1,639.8 | | | | 1,659.4 | | | | -1.2 | % | | | 333.3 | | | | 695.5 | | | | -52.1 | % | | | 1,377.1 | | | | 1,639.8 | | | | -16.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
CLAIMS AND EXPENSES: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Incurred losses and loss adjustment expenses | | | 326.9 | | | | 242.0 | | | | 35.1 | % | | | 1,068.7 | | | | 777.3 | | | | 37.5 | % | | | 322.1 | | | | 326.9 | | | | -1.5 | % | | | 1,187.9 | | | | 1,068.7 | | | | 11.2 | % |
Commission, brokerage, taxes and fees | | | 81.5 | | | | 77.3 | | | | 5.4 | % | | | 237.5 | | | | 252.4 | | | | -5.9 | % | | | 70.8 | | | | 81.5 | | | | -13.0 | % | | | 239.7 | | | | 237.5 | | | | 0.9 | % |
Other underwriting expenses | | | 37.2 | | | | 38.2 | | | | -2.5 | % | | | 105.3 | | | | 104.4 | | | | 0.9 | % | | | 42.7 | | | | 37.2 | | | | 14.7 | % | | | 120.1 | | | | 105.3 | | | | 14.1 | % |
Corporate expense | | | 1.5 | | | | 1.7 | | | | -8.7 | % | | | 5.2 | | | | 4.9 | | | | 7.2 | % | | | 1.1 | | | | 1.5 | | | | -25.2 | % | | | 3.5 | | | | 5.2 | | | | -33.0 | % |
Interest, fee and bond issue cost amortization expense | | | 12.8 | | | | 17.1 | | | | -24.9 | % | | | 41.9 | | | | 53.8 | | | | -22.1 | % | | | 12.7 | | | | 12.8 | | | | -0.9 | % | | | 38.1 | | | | 41.9 | | | | -9.1 | % |
Total claims and expenses | | | 460.0 | | | | 376.3 | | | | 22.3 | % | | | 1,458.6 | | | | 1,192.7 | | | | 22.3 | % | | | 449.5 | | | | 460.0 | | | | -2.3 | % | | | 1,589.3 | | | | 1,458.6 | | | | 9.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
INCOME (LOSS) BEFORE TAXES | | | 235.5 | | | | 244.1 | | | | -3.5 | % | | | 181.2 | | | | 466.7 | | | | -61.2 | % | | | (116.2 | ) | | | 235.5 | | | | -149.3 | % | | | (212.2 | ) | | | 181.2 | | | | -217.1 | % |
Income tax expense (benefit) | | | 66.9 | | | | 80.0 | | | | -16.4 | % | | | 40.6 | | | | 128.4 | | | | -68.4 | % | | | (116.5 | ) | | | 66.9 | | | NM | | | (123.8 | ) | | | 40.6 | | | NM |
NET INCOME (LOSS) | | $ | 168.7 | | | $ | 164.1 | | | | 2.7 | % | | $ | 140.6 | | | $ | 338.3 | | | | -58.4 | % | | $ | 0.3 | | | $ | 168.7 | | | | -99.8 | % | | $ | (88.5 | ) | | $ | 140.6 | | | | -162.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
RATIOS: | | | | | | | | | | Point Change | | | | | | | | | | Point Change | | | | | | | | | | Point Change | | | | | | | | | | | Point Change | |
Loss ratio | | | 70.3 | % | | | 55.2 | % | | | 15.1 | | | | 80.8 | % | | | 58.1 | % | | | 22.7 | | | | 72.7 | % | | | 70.3 | % | | | 2.4 | | | | 87.7 | % | | | 80.8 | % | | | 6.9 | |
Commission and brokerage ratio | | | 17.5 | % | | | 17.6 | % | | | (0.1 | ) | | | 18.0 | % | | | 18.9 | % | | | (0.9 | ) | | | 16.0 | % | | | 17.5 | % | | | (1.5 | ) | | | 17.7 | % | | | 18.0 | % | | | (0.3 | ) |
Other underwriting expense ratio | | | 8.0 | % | | | 8.7 | % | | | (0.7 | ) | | | 8.0 | % | | | 7.8 | % | | | 0.2 | | | | 9.7 | % | | | 8.0 | % | | | 1.7 | | | | 8.9 | % | | | 8.0 | % | | | 0.9 | |
Combined ratio | | | 95.8 | % | | | 81.5 | % | | | 14.3 | | | | 106.8 | % | | | 84.8 | % | | | 22.0 | | | | 98.4 | % | | | 95.8 | % | | | 2.6 | | | | 114.3 | % | | | 106.8 | % | | | 7.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | At | | At | | Percentage | | | | | | | | | | | | | | At | | | At | | | Percentage | |
| | | | | | | | | | | | | | September 30, | | December 31, | | Increase/ | | | | | | | | | | | | | | September 30, | | | December 31, | | | Increase/ | |
(Dollars in millions) | | | | | | | | | | | | | | | 2010 | | | | 2009 | | | (Decrease) | | | | | | | | | | | | | | | 2011 | | | | 2010 | | | (Decrease) | |
Balance sheet data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total investments and cash | | | | | | | | | | | | | | $ | 8,412.4 | | | $ | 8,031.6 | | | | 4.7 | % | | | | | | | | | | | | | | $ | 8,256.8 | | | $ | 8,293.9 | | | | -0.4 | % |
Total assets | | | | | | | | | | | | | | | 14,015.3 | | | | 13,379.6 | | | | 4.8 | % | | | | | | | | | | | | | | | 14,327.3 | | | | 13,869.4 | | | | 3.3 | % |
Loss and loss adjustment expense reserves | | | | | | | | | | | | | | | 7,611.6 | | | | 7,300.1 | | | | 4.3 | % | | | | | | | | | | | | | | | 8,165.3 | | | | 7,652.3 | | | | 6.7 | % |
Total debt | | | | | | | | | | | | | | | 901.0 | | | | 1,018.0 | | | | -11.5 | % | | | | | | | | | | | | | | | 818.1 | | | | 868.1 | | | | -5.8 | % |
Total liabilities | | | | | | | | | | | | | | | 10,908.4 | | | | 10,520.8 | | | | 3.7 | % | | | | | | | | | | | | | | | 11,243.9 | | | | 10,741.7 | | | | 4.7 | % |
Stockholder's equity | | | | | | | | | | | | | | | 3,106.9 | | | | 2,858.8 | | | | 8.7 | % | | | | | | | | | | | | | | | 3,083.4 | | | | 3,127.7 | | | | -1.4 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(NA, not applicable) | | | | | | | | | | | | | | | | | | | | | | | | | |
(NM, not meaningful) | | | | | | | | | | | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenues.
Premiums. Gross written premiums increaseddecreased by $57.4$50.5 million, or 6.3%5.2%, for the three months ended September 30, 20102011 compared to the three months ended September 30, 2009,2010, reflecting an increasea decrease of $76.2$72.1 million in our reinsurance business, partially offset by a decline of $18.9$21.6 million increase in our insurance business. Gross written premiums increaseddecreased by $127.1$12.1 million, or 5.1%0.5%, for the nine months ended September 30, 20102011 compared to the nine months ended September 30, 2009,2010, reflecting an increasea decrease of $131.0$111.9 million in our reinsurance business, partially offset by a decline of $3.9$99.8 million increase in our insurance business. The increase in reinsurance premiums were primarily the result of increased writings in our treaty property and international t reaty lines of business. The decrease in insurance premiums were primarily the result of loss of business on terminated programs, lower premiums on a few of the existing programs and lower audit premium accruals on the workers’ compensation line of business.
business. The year over year increase in insurance premiums was primarily due to the acquisition of Heartland, which provided $122.3 million of new crop insurance business, our recent initiative in primary medical stop loss insurance, which added $44.8 million of premium and improved premium rates on our California workers’ compensation business, partially offset by our reduced participation on a large casualty program. The decrease in reinsurance premiums was due to the continued reduction in U.S. casualty business, the loss of several large crop reinsurance contracts, as well as the planned reduction of catastrophe exposed business in certain territories, partially offset by higher reinstatement premiums resulting from catastrophe losses, year over year.
Net written premiums increaseddecreased by $45.2$58.0 million, or 10.0%11.7%, for the three months ended September 30, 20102011 compared to the three months ended September 30, 2009,2010, and decreased by $18.0$36.5 million, or 1.4%2.7%, for the nine months ended September 30, 20102011 compared to the nine months ended September 30, 2009.2010. The fluctuations in net written premiums in comparisonrelative to the fluctuationschange in gross written premiums were primarily attributabledue to fluctuations in cessionsa combination of a higher percentage of premiums ceded under the affiliated quota share agreements.agreement and a lower level of ceded reinsurance in the Insurance segment due to the planned reduction in one casualty program. Premiums earned increased $27.0decreased $22.4 million, or 6.2%4.8%, for the three months ended September 30, 20102011 compared to the three months ended September 30, 20092010 and decreased by $15.4increased $32.1 million, or 1.1%2.4%, for the nine months ended September 30, 20102011 compared to the nine months ended September 30, 2009.2010. The change in net premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.
Net Investment Income. Net investment income increased $8.7$4.1 million, or 13.3%5.5%, to $78.3 million for the three months ended September 30, 2011 compared with net investment income of $74.2 million for the three months ended September 30, 2010, primarily as a result of netdriven by an $11.3 million increase in investment gainsincome from our limited partnerships of $1.1partnerships. Net investment income increased $1.3 million, comparedor 0.5%, to net investment losses of $4.4$249.9 million for the threenine months ended September 30, 2009. Net2011 compared with net investment income increased $69.0of $248.7 million or 38.4%, for the nine months ended September 30, 2010, primarily as a result of neta $25.4 million increase in investment gainsincome from our limited partnerships. The increases from the limited partnerships were partially offset by effects of $19.4 million compared with net investment losses of $36.5 million for the comparable period in 2009.lower reinvestment rates. Net pre-tax investment income, as a percentage of average invested assets, was 3.9% for the three months ended September 30, 2011 compared to 3.7% for the three months ended September 30, 2010 compared to 3. 4%and was 4.1% for the threenine months ended September 30, 2009 and was2011 compared to 4.2% for the nine months ended September 30, 2010 compared2010. The nine month investment yield is lower primarily due to 3.1% foran increase in the nine months ended September 30, 2009. The variances in these yields were primarily the result of fluctuations in our limited partnership income.average invested asset base.
Net Realized Capital Gains (Losses). Net realized capital losses were $179.0 million and net realized capital gains were $159.6 million for the three months ended September 30, 2011 and 2010, respectively. The $179.0 million was comprised of $181.5 million of losses from fair value re-measurements and $0.9 million of other-than-temporary impairments on our available for sale fixed maturity securities, which was partially offset by $3.3 million of net realized capital gains from sales on our fixed maturity and equity securities. The net realized capital gains of $159.6 million for the three months ended September 30, 2010 were comprisedthe result of $164.8 million fromof gains infrom fair value re-measurements, which werewas partially offset by $3.2 million of net realized capital losses from sales on our fixed maturity and equity securities and $2.0 million of other-than-temporary impairments. Net realized capital gains were $101.4 million for the three months ended September 30, 2009. Of the $101.4 million, $96.0 million was from gains in fair value re-measurements and $5.4 million of net realized capital gains from sales on our fixed maturity and equity securities.
Net realized capital losses were $206.7 million and net realized capital gains were $58.8 million for the nine months ended September 30, 2011 and 2010, respectively. Of the $206.7 million, there were $178.0 million of losses from fair value re-measurements, $14.5 million of other-than-temporary impairments on our available for sale fixed maturity securities and $14.2 million of net realized capital losses from sales on our fixed maturity and equity securities. The net realized capital gains of $58.8 million for the nine months ended September 30, 2010 were comprisedthe result of $63.9 million fromof gains inof fair value re-measurements, which were partially offset by $3.1 million of net realized capital losslosses from sales on our fixed maturity and equity securities and $2.0 million of other-than-temporary impairments. Net realized capital gains were $56.2 million for the nine months ended September 30, 2009 and were comprised of $79.3 million from gains in fair value re-measurements, which were partially offset by $17.7 million net realized capital losses from the sale on our fixed maturity and equity securities and $5.5 million of other-than-temporary impairments.
Realized Gain on Debt Repurchase. On March 19, 2009, we commenced 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 expense of $8.9 million and $20.4 million for the three and nine months ended September 30, 2011, respectively. We recorded other expense of $3.6 million and other income of $10.2 million for the three and nine months ended September 30, 2010, respectively. We recorded other income of $15.1 million and $7.8 million for the three and nine months ended September 30, 2009, respectively. The changes were primarily due to fluctuations in the amortization of deferred gains on retroactive reinsurance agreements with affiliates and fluctuations in currency exchange rates.
changes were primarily the result of fluctuations in foreign currency exchange rates for the corresponding periods.
Claims and Expenses.
Incurred Losses and Loss Adjustment Expenses. The following tables present our incurred losses and loss adjustment expenses (“LAE”) for the periods indicated.
| | Three Months Ended September 30, | | Three Months Ended September 30, |
| | Current | | | Ratio %/ | | Prior | | | Ratio %/ | | Total | | | Ratio %/ | | Current | | | Ratio %/ | | Prior | | | Ratio %/ | | Total | | | Ratio %/ |
(Dollars in millions) | | Year | | | Pt Change | | Years | | | Pt Change | | Incurred | | | Pt Change | | Year | | | Pt Change | | Years | | | Pt Change | | Incurred | | | Pt Change |
2010 | | | | | | | | | | | | | | | | | | | | | | |
Attritional (a) | | $ | 297.6 | | | | 64.0 | % | | | $ | (5.6 | ) | | | -1.2 | % | | | $ | 292.0 | | | | 62.7 | % | | |
Catastrophes (b) | | | 35.5 | | | | 7.6 | % | | | | (0.5 | ) | | | -0.1 | % | | | | 35.0 | | | | 7.5 | % | | |
A&E | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | |
Total | | $ | 333.1 | | | | 71.6 | % | | | $ | (6.2 | ) | | | -1.3 | % | | | $ | 326.9 | | | | 70.3 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2011 | | | | | | | | | | | | | | | | | | | | | | |
Attritional (a) | | $ | 246.7 | | | | 56.3 | % | | | $ | (19.1 | ) | | | -4.4 | % | | | $ | 227.6 | | | | 51.9 | % | | | $ | 244.4 | | | | 55.2 | % | | | $ | 6.6 | | | | 1.5 | % | | | $ | 251.0 | | | | 56.7 | % | |
Catastrophes | | | 11.2 | | | | 2.6 | % | | | | 3.2 | | | | 0.7 | % | | | | 14.4 | | | | 3.3 | % | | | | 70.5 | | | | 15.9 | % | | | | 0.6 | | | | 0.1 | % | | | | 71.1 | | | | 16.0 | % | |
A&E | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | |
Total | | $ | 257.9 | | | | 58.8 | % | | | $ | (15.9 | ) | | | -3.6 | % | | | $ | 242.0 | | | | 55.2 | % | | | $ | 314.9 | | | | 71.1 | % | | | $ | 7.2 | | | | 1.6 | % | | | $ | 322.1 | | | | 72.7 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Variance 2010/2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2010 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional (a) | | $ | 50.9 | | | | 7.7 | | pts | | $ | 13.5 | | | | 3.2 | | pts | | $ | 64.4 | | | | 10.8 | | pts | | $ | 297.6 | | | | 64.0 | % | | | $ | (5.6 | ) | | | -1.2 | % | | | $ | 292.0 | | | | 62.7 | % | |
Catastrophes | | | 24.3 | | | | 5.0 | | pts | | | (3.7 | ) | | | (0.8 | ) | pts | | | 20.6 | | | | 4.2 | | pts | | | 35.5 | | | | 7.6 | % | | | | (0.5 | ) | | | -0.1 | % | | | | 35.0 | | | | 7.5 | % | |
A&E | | | - | | | | - | | pts | | | - | | | | - | | pts | | | - | | | | - | | pts | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | |
Total | | $ | 75.2 | | | | 12.8 | | pts | | $ | 9.7 | | | | 2.3 | | pts | | $ | 84.9 | | | | 15.1 | | pts | | $ | 333.1 | | | | 71.6 | % | | | $ | (6.2 | ) | | | -1.3 | % | | | $ | 326.9 | | | | 70.3 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Variance 2011/2010 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional (a) | | | $ | (53.2 | ) | | | (8.8 | ) | pts | | $ | 12.2 | | | | 2.7 | | pts | | $ | (41.0 | ) | | | (6.0 | ) | pts |
Catastrophes | | | | 35.0 | | | | 8.3 | | pts | | | 1.1 | | | | 0.2 | | pts | | | 36.1 | | | | 8.5 | | pts |
A&E | | | | - | | | | - | | pts | | | - | | | | - | | pts | | | - | | | | - | | pts |
Total | | | $ | (18.2 | ) | | | (0.5 | ) | pts | | $ | 13.4 | | | | 2.9 | | pts | | $ | (4.8 | ) | | | 2.4 | | pts |
| | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| | Current | | | Ratio %/ | | Prior | | | Ratio %/ | | Total | | | Ratio %/ | | Current | | | Ratio %/ | | Prior | | | Ratio %/ | | Total | | | Ratio %/ |
(Dollars in millions) | | Year | | | Pt Change | | Years | | | Pt Change | | Incurred | | | Pt Change | | Year | | | Pt Change | | Years | | | Pt Change | | Incurred | | | Pt Change |
2010 | | | | | | | | | | | | | | | | | | | | | | |
Attritional (a) | | $ | 831.4 | | | | 62.9 | % | | | $ | (5.2 | ) | | | -0.4 | % | | | $ | 826.2 | | | | 62.5 | % | | |
Catastrophes (b) | | | 246.6 | | | | 18.6 | % | | | | (4.1 | ) | | | -0.3 | % | | | | 242.5 | | | | 18.3 | % | | |
A&E | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | |
Total | | $ | 1,077.9 | | | | 81.5 | % | | | $ | (9.3 | ) | | | -0.7 | % | | | $ | 1,068.7 | | | | 80.8 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2011 | | | | | | | | | | | | | | | | | | | | | | |
Attritional (a) | | $ | 789.0 | | | | 59.0 | % | | | $ | (36.0 | ) | | | -2.7 | % | | | $ | 753.0 | | | | 56.3 | % | | | $ | 752.5 | | | | 55.5 | % | | | $ | (11.4 | ) | | | -0.8 | % | | | $ | 741.1 | | | | 54.7 | % | |
Catastrophes | | | 20.3 | | | | 1.5 | % | | | | 4.0 | | | | 0.3 | % | | | | 24.3 | | | | 1.8 | % | | | | 435.5 | | | | 32.2 | % | | | | 11.3 | | | | 0.8 | % | | | | 446.8 | | | | 33.0 | % | |
A&E | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | |
Total | | $ | 809.3 | | | | 60.5 | % | | | $ | (32.0 | ) | | | -2.4 | % | | | $ | 777.3 | | | | 58.1 | % | | | $ | 1,188.0 | | | | 87.7 | % | | | $ | (0.1 | ) | | | 0.0 | % | | | $ | 1,187.9 | | | | 87.7 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Variance 2010/2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2010 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional (a) | | $ | 42.4 | | | | 3.9 | | pts | | $ | 30.8 | | | | 2.3 | | pts | | $ | 73.2 | | | | 6.2 | | pts | | $ | 831.4 | | | | 62.9 | % | | | $ | (5.2 | ) | | | -0.4 | % | | | $ | 826.2 | | | | 62.5 | % | |
Catastrophes | | | 226.3 | | | | 17.1 | | pts | | | (8.1 | ) | | | (0.6 | ) | pts | | | 218.2 | | | | 16.5 | | pts | | | 246.6 | | | | 18.6 | % | | | | (4.1 | ) | | | -0.3 | % | | | | 242.5 | | | | 18.3 | % | |
A&E | | | - | | | | - | | pts | | | - | | | | - | | pts | | | - | | | | - | | pts | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | |
Total | | $ | 268.6 | | | | 21.0 | | pts | | $ | 22.7 | | | | 1.7 | | pts | | $ | 291.4 | | | | 22.7 | | pts | | $ | 1,077.9 | | | | 81.5 | % | | | $ | (9.3 | ) | | | -0.7 | % | | | $ | 1,068.7 | | | | 80.8 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(a) Attritional losses exclude catastrophe and A&E losses. | | | | | | | | | | | | | | | | |
(b) Effective with 2010 reporting period, a catastrophe is a property event with expected reported losses of at least $10.0 million. | | | | | | | | |
All prior periods reflect a catastrophe as a property event with expected reported losses of at least $5.0 million. | | | | | | | |
Variance 2011/2010 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional (a) | | | $ | (78.9 | ) | | | (7.4 | ) | pts | | $ | (6.2 | ) | | | (0.4 | ) | pts | | $ | (85.1 | ) | | | (7.8 | ) | pts |
Catastrophes | | | | 188.9 | | | | 13.6 | | pts | | | 15.4 | | | | 1.1 | | pts | | | 204.3 | | | | 14.7 | | pts |
A&E | | | | - | | | | - | | pts | | | - | | | | - | | pts | | | - | | | | - | | pts |
Total | | | $ | 110.1 | | | | 6.2 | | pts | | $ | 9.2 | | | | 0.7 | | pts | | $ | 119.3 | | | | 6.9 | | pts |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(a) Attritional losses exclude catastrophe and Asbestos and Environmental ("A&E") losses. | | (a) Attritional losses exclude catastrophe and Asbestos and Environmental ("A&E") losses. | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding.) | (Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | (Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | |
Incurred losses and LAE increaseddecreased by $84.9$4.8 million, or 35.1%1.5%, for the three months ended September 30, 20102011 compared to the three months ended September 30, 2009. Of the $84.9 million increase, current2010. Current year attritional losses increased $50.9decreased $53.2 million, or 7.78.8 points, primarily asdue to changes in the resultmix of an increasebusiness, but also due to the impact of the change in premiums earned and higher expected loss ratios.cessions under the affiliated quota share agreement. The $24.3 million, or 5.0 points,decrease in attritional losses was partially offset by the increase in current year catastrophe losses wasof $35.0 million, primarily due to Hurricane Irene and increased loss estimates on the first quarter earthquakes in Japan and New Zealand earthquake and the Canadian hailstorm.Zealand.
Incurred losses and LAE increased by $291.4 million, or 37.5%, for the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. Of the $291.4 million increase, current year catastrophe losses increased $226.3 million, or 17.1 points, period over period, primarily due to the Chilean earthquake, New Zealand earthquake, Australian hailstorms and the Canadian hailstorm.
Incurred losses and LAE increased by $119.3 million, or 11.2%, for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. Catastrophe losses increased $204.3 million (14.7 points), period over period, primarily due to losses from the Japan and New Zealand earthquakes, Australia floods and U.S. storms. Partially offsetting the catastrophe increase was the decrease in attritional losses of $85.1 million, primarily due to changes in the mix of business, but also due to the impact of the change in cessions under the affiliated quota share agreement.
Commission, Brokerage, Taxes and Fees.Commission, brokerage, taxes and fees increaseddecreased by $4.2$10.6 million, or 5.4%13.0%, for the three months ended September 30, 20102011 compared to the same period in 2009.2010. Commission, brokerage, taxes and fees decreasedincreased by $14.9$2.2 million, or 5.9%0.9%, for the nine months ended September 30, 20102011 compared to the same period in 2009. These changes2010. The variances were primarily the result of the changesfluctuations in premiums earned, changes in mix of business and a change in the affiliated quota share agreement. Commissions, as a percentage of earned premium, are down for both the quarter and the year driven by a shift in the mix of business.reinsurance business from proportional to excess of loss, with the latter generally having lower commission rates, as well as a higher level of reinstatement premiums, which are booked without commissions. Also driving the lower commission ratio, period over period, is the change in distribution on the insurance book, with a greater proportion of the business being accessed directly rather than through managing general agents.
Other Underwriting Expenses. Other underwriting expenses were comparable, period over period,$42.7 million and $37.2 million and $38.3 million incurred for the three months ended September 30, 20102011 and 2009,2010, respectively and $105.3$120.1 million and $104.4$105.3 million incurred for the nine months ended September 30, 2011 and 2010, and 2009, respectively. The increases were primarily attributable to expenses of Heartland, which was acquired in January 2011.
Corporate Expenses. Corporate expenses, which are expenses that are not allocated to segments, were comparable at $1.5$1.1 million and $1.7$1.5 million for the three months ended September 30, 20102011 and 2009,2010, respectively, and $5.2$3.5 million and $4.9$5.2 million for the nine months ended September 30, 2011 and 2010, and 2009, respectively. These expenses were previously included as underwriting expenses and therefore included in the other underwriting expense ratio. Effective January 1, 2010, these expenses were removed from the calculation of the other underwriting expense ratio and prior periods were recalculated to conform.
Interest, Fees and Bond Issue Cost Amortization Expense. Interest, fees and other bond amortization expense was $12.8$12.7 million and $17.1$12.8 million for the three months ended September 30, 20102011 and 2009,2010, respectively, and $41.9$38.1 million and $53.8$41.9 million for the nine months ended September 30, 2011 and 2010, and 2009, respectively. These decreases wereThe decrease for the nine month period was primarily due to the combination of the repurchasematuring of debt in March, 2009 and maturing of debt in 2010.
Income Tax Expense (Benefit). We had an income tax benefit of $116.5 million and $123.8 million for the three and nine months ended September 30, 2011, respectively. We had an income tax expense of $66.9 million and $40.6 million for the three and nine months ended September 30, 2010, respectively, and income tax expense of $80.0 million and $128.4 million for the three and nine months ended September 30, 2009, respectively. The period over period variance was primarily due to lower pre-tax income in 2010 versus 2009. Our income tax is primarily a function of the statutory tax raterates coupled with the impact from tax-preferenced investment income. Variations in our effective tax rate generally result from changes in the relative levels of pre-tax income.
Net Income (Loss).
We reported net incomeIn addition, due to the timing and size of $168.7 million and $140.6 millionrealized losses during the third quarter of 2011, we were unable to reliably estimate the annual effective tax rate for 2011 as small changes to the three andassumptions underlying our full year projections produce large changes in the annual effective tax rate. As a result, the tax benefit for the nine months ended September 30, 2010, respectively, compared to net income of $164.1 million and $338.3 million for2011 was calculated on a discrete basis using the three and nine months ended September 30, 2009, respectively. These changes were the result of the items discussed above.
Ratios.
Our combined ratio increased by 14.3 points to 95.8%actual effective tax rate. The tax benefit for the three months ended September 30, 2011 reflects the difference between the year-to-date discrete basis and the annual effective tax rate used through June 30, 2011. In 2010, compared to 81.5%we applied the effective tax rate method for all interim periods.
Net Income (Loss).
Our net income was $0.3 million and $168.7 million for the three months ended September 30, 2009,2011 and increased by 22.0 points to 106.8%2010, respectively. We had a net loss of $88.5 million and a net income of $140.6 million for the nine months ended September 30, 2011 and 2010, compared to 84.8% for the nine months ended September 30, 2009.respectively. The loss ratio component increased 15.1 points and 22.7 points for the three and nine months ended September 30, 2010, respectively, over the same period last year, principally duevariances were primarily driven by higher catastrophe losses in 2011 in addition to the increase in current year catastrophe losses as a result of the Chilean earthquake, New Zealand earthquake, Australian hailstorms and the Canadian hailstorm and also due to an increase in expected current year loss ratios. Both the other underwriting expense ratio component and the commission and brokerage ratio c omponent remained relatively flat over the same periods last year.
Stockholder's Equity.
Stockholder's equity increased by $248.2 million to $3,106.9 million at September 30, 2010 from $2,858.8 million at December 31, 2009, principally as a result of $140.6 million of net income, $89.1 million of unrealized appreciation on investments, net of tax, $11.9 million of foreign currency translation adjustments, $5.3 million of share-based compensation transactions and $1.3 million of pension adjustments.components discussed above.
Ratios.
Our combined ratio increased by 2.6 points to 98.4% for the three months ended September 30, 2011 compared to 95.8% for the same period in 2010, and increased by 7.5 points to 114.3% for the nine months ended September 30, 2011 compared to 106.8% for the same period in 2010. The loss ratio component increased by 2.4 points and by 6.9 points for the three and nine months ended September 30, 2011, respectively, over the same periods last year, primarily driven by increased catastrophe losses. The commission and brokerage expense ratio decreased by 1.5 points to 16.0% for the three months ended September 30, 2011 compared to 17.5% for the three months ended September 30, 2010, and decreased slightly to 17.7% for the nine months ended September 30, 2011 compared to 18.0% for the nine months ended September 30, 2010. The other underwriting expense ratio component increased slightly for both the three and nine months ended September 30, 2011 compared to the same periods last year due to the mix of business, primarily due to the acquisition of Heartland.
Stockholder's Equity.
Stockholder's equity decreased by $44.4 million to $3,083.4 million at September 30, 2011 from $3,127.7 million at December 31, 2010, principally as a result of $88.5 million of net loss, partially offset by $32.3 million of unrealized appreciation on investments, net of tax, $4.9 million of share-based compensation transactions and $4.7 million of foreign currency translation adjustments.
Consolidated Investment Results
Net Investment Income.
Net investment income increased 13.3%5.5% to $78.3 million for the three months ended September 30, 2011 compared to $74.2 million for the three months ended September 30, 2010, comparedand increased 0.5% to $65.5$249.9 million for the threenine months ended September 30, 2009, and increased 38.4%2011 compared to $248.7 million for the nine months ended September 30, 2010 compared to $179.7 million for the nine months ended September 30, 2009. The increase for the three and nine months,2010. These increases, period over period, waswere primarily due to an increase in recorded gainsincome from our equity securities and losseshigher income from our limited partnership investments. The losses for the nine monthsThese increases were partially offset by a decline in income from our fixed maturities, reflective of 2009 included the results of 2008 fourth quarter lossesreducing our municipal bond exposure and declining reinvestment rates. Proceeds from those limited partnerships that invested in non-public securities andreducing this portfolio were on a quarter reporting lag.used to expand our public equity portfolio.
The following table shows the components of net investment income for the periods indicated:
| | Three Months Ended | | | Nine Months Ended | | | Three Months Ended | | | Nine Months Ended | |
| | September 30, | | | September 30, | | | September 30, | | | September 30, | |
(Dollars in millions) | | 2010 | | | 2009 | | | 2010 | | | 2009 | | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
Fixed maturities | | $ | 69.9 | | | $ | 71.0 | | | $ | 219.3 | | | $ | 212.9 | | | $ | 58.2 | | | $ | 69.9 | | | $ | 178.0 | | | $ | 219.3 | |
Equity securities | | | 2.5 | | | | 0.8 | | | | 7.5 | | | | 2.2 | | | | 8.7 | | | | 2.5 | | | | 20.4 | | | | 7.5 | |
Short-term investments and cash | | | 0.1 | | | | 0.3 | | | | 0.3 | | | | 3.3 | | | | 0.3 | | | | 0.1 | | | | 0.9 | | | | 0.3 | |
Other invested assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Limited partnerships | | | 1.1 | | | | (4.4 | ) | | | 19.4 | | | | (36.5 | ) | | | 12.4 | | | | 1.1 | | | | 44.8 | | | | 19.4 | |
Dividends from Parent's shares | | | | 4.7 | | | | 4.0 | | | | 14.0 | | | | 9.6 | |
Other | | | 4.2 | | | | 0.7 | | | | 10.5 | | | | 5.7 | | | | (1.5 | ) | | | 0.2 | | | | 3.2 | | | | 0.9 | |
Total gross investment income | | | 77.7 | | | | 68.2 | | | | 256.9 | | | | 187.6 | | | | 82.8 | | | | 77.7 | | | | 261.2 | | | | 256.9 | |
Interest debited (credited) and other expense | | | (3.5 | ) | | | (2.8 | ) | | | (8.2 | ) | | | (7.9 | ) | | | (4.5 | ) | | | (3.5 | ) | | | (11.3 | ) | | | (8.2 | ) |
Total net investment income | | $ | 74.2 | | | $ | 65.5 | | | $ | 248.7 | | | $ | 179.7 | | | $ | 78.3 | | | $ | 74.2 | | | $ | 249.9 | | | $ | 248.7 | |
(Some amounts may not reconcile due to rounding.) | (Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The following tables show a comparison of various investment yields for the periods indicated:
| At | | At | At | | At |
| September 30, | | December 31, | September 30, | | December 31, |
| 2010 | | 2009 | 2011 | | 2010 |
Imbedded pre-tax yield of cash and invested assets | 3.8% | | 3.7% | 3.5% | | 3.6% |
Imbedded after-tax yield of cash and invested assets | 3.1% | | 3.1% | 2.7% | | 2.8% |
| Three Months Ended | | Nine Months Ended | Three Months Ended | | Nine Months Ended |
| September 30, | | September 30, | September 30, | | September 30, |
| 2010 | | 2009 | | 2010 | | 2009 | 2011 | | 2010 | | 2011 | | 2010 |
Annualized pre-tax yield on average cash and invested assets | 3.7% | | 3.4% | | 4.2% | | 3.1% | 3.9% | | 3.7% | | 4.1% | | 4.2% |
Annualized after-tax yield on average cash and invested assets | 3.0% | | 2.9% | | 3.4% | | 2.7% | 2.9% | | 3.0% | | 3.2% | | 3.4% |
Net Realized Capital Gains (Losses).
The following table presents the composition of our net realized capital gains (losses) for the periods indicated:
| | Three Months Ended September 30, | | | Nine Months Ended September 30, | | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
(Dollars in millions) | | 2010 | | | 2009 | | | Variance | | 2010 | | | 2009 | | | Variance | | 2011 | | | 2010 | | | Variance | | | 2011 | | | 2010 | | | Variance | |
Gains (losses) from sales: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed maturity securities, market value | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gains | | $ | 0.2 | | | $ | 2.0 | | | $ | (1.8 | ) | | $ | 7.2 | | | $ | 4.0 | | | $ | 3.2 | | | $ | 11.4 | | | $ | 0.2 | | | $ | 11.2 | | | $ | 28.2 | | | $ | 7.2 | | | $ | 21.0 | |
Losses | | | (4.8 | ) | | | (6.1 | ) | | | 1.3 | | | | (11.0 | ) | | | (36.6 | ) | | | 25.6 | | | | (8.6 | ) | | | (4.8 | ) | | | (3.8 | ) | | | (43.7 | ) | | | (11.0 | ) | | | (32.7 | ) |
Total | | | (4.6 | ) | | | (4.1 | ) | | | (0.5 | ) | | | (3.8 | ) | | | (32.6 | ) | | | 28.8 | | | | 2.7 | | | | (4.6 | ) | | | 7.3 | | | | (15.6 | ) | | | (3.8 | ) | | | (11.8 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed maturity securities, fair value | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gains | | | 0.5 | | | | 0.3 | | | | 0.2 | | | | 0.8 | | | | 0.6 | | | | 0.2 | | | | 0.2 | | | | 0.5 | | | | (0.3 | ) | | | 1.0 | | | | 0.8 | | | | 0.2 | |
Losses | | | - | | | | (0.1 | ) | | | 0.1 | | | | - | | | | (0.1 | ) | | | 0.1 | | | | (0.3 | ) | | | - | | | | (0.3 | ) | | | (2.0 | ) | | | - | | | | (2.0 | ) |
Total | | | 0.5 | | | | 0.2 | | | | 0.3 | | | | 0.8 | | | | 0.4 | | | | 0.3 | | | | (0.1 | ) | | | 0.5 | | | | (0.6 | ) | | | (1.0 | ) | | | 0.8 | | | | (1.8 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Equity securities, market value | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gains | | | - | | | | 8.0 | | | | (8.0 | ) | | | - | | | | 8.0 | | | | (8.0 | ) | | | - | | | | - | | | | - | | | | 0.2 | | | | - | | | | 0.2 | |
Losses | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (0.2 | ) | | | - | | | | (0.2 | ) |
Total | | | - | | | | 8.0 | | | | (8.0 | ) | | | - | | | | 8.0 | | | | (8.0 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Equity securities, fair value | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gains | | | 1.0 | | | | 1.3 | | | | (0.3 | ) | | | 4.6 | | | | 7.2 | | | | (2.6 | ) | | | 6.0 | | | | 1.0 | | | | 5.0 | | | | 8.9 | | | | 4.6 | | | | 4.3 | |
Losses | | | (0.1 | ) | | | - | | | | (0.1 | ) | | | (4.7 | ) | | | (0.7 | ) | | | (4.0 | ) | | | (5.4 | ) | | | (0.1 | ) | | | (5.3 | ) | | | (6.6 | ) | | | (4.7 | ) | | | (1.9 | ) |
Total | | | 1.0 | | | | 1.3 | | | | (0.3 | ) | | | - | | | | 6.5 | | | | (6.5 | ) | | | 0.6 | | | | 1.0 | | | | (0.4 | ) | | | 2.3 | | | | - | | | | 2.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total net realized gains (losses) from sales | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gains | | | 1.7 | | | | 11.6 | | | | (9.9 | ) | | | 12.6 | | | | 19.8 | | | | (7.2 | ) | | | 17.6 | | | | 1.7 | | | | 15.9 | | | | 38.3 | | | | 12.6 | | | | 25.7 | |
Losses | | | (4.9 | ) | | | (6.3 | ) | | | 1.4 | | | | (15.7 | ) | | | (37.5 | ) | | | 21.8 | | | | (14.3 | ) | | | (4.9 | ) | | | (9.4 | ) | | | (52.5 | ) | | | (15.7 | ) | | | (36.8 | ) |
Total | | | (3.2 | ) | | | 5.4 | | | | (8.6 | ) | | | (3.1 | ) | | | (17.7 | ) | | | 14.6 | | | | 3.3 | | | | (3.2 | ) | | | 6.5 | | | | (14.2 | ) | | | (3.1 | ) | | | (11.1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other-than-temporary impairments: | | | (2.0 | ) | | | - | | | | (2.0 | ) | | | (2.0 | ) | | | (5.5 | ) | | | 3.5 | | | | (0.9 | ) | | | (2.0 | ) | | | 1.1 | | | | (14.5 | ) | | | (2.0 | ) | | | (12.5 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gains (losses) from fair value adjustments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed maturities, fair value | | | 3.3 | | | | 5.8 | | | | (2.5 | ) | | | 3.8 | | | | 7.8 | | | | (4.0 | ) | | | (5.0 | ) | | | 3.3 | | | | (8.3 | ) | | | (8.5 | ) | | | 3.8 | | | | (12.3 | ) |
Equity securities, fair value | | | 34.9 | | | | 23.1 | | | | 11.8 | | | | 18.1 | | | | 23.4 | | | | (5.3 | ) | | | (153.4 | ) | | | 34.9 | | | | (188.3 | ) | | | (115.3 | ) | | | 18.1 | | | | (133.4 | ) |
Other invested assets, fair value | | | 126.6 | | | | 67.1 | | | | 59.5 | | | | 42.0 | | | | 48.1 | | | | (6.1 | ) | | | (23.1 | ) | | | 126.6 | | | | (149.7 | ) | | | (54.2 | ) | | | 42.0 | | | | (96.2 | ) |
Total | | | 164.8 | | | | 96.0 | | | | 68.8 | | | | 63.9 | | | | 79.3 | | | | (15.4 | ) | | | (181.5 | ) | | | 164.8 | | | | (346.3 | ) | | | (178.0 | ) | | | 63.9 | | | | (241.9 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total net realized capital gains (losses) | | $ | 159.6 | | | $ | 101.4 | | | $ | 58.2 | | | $ | 58.8 | | | $ | 56.2 | | | $ | 2.6 | | | $ | (179.0 | ) | | $ | 159.6 | | | $ | (338.6 | ) | | $ | (206.7 | ) | | $ | 58.8 | | | $ | (265.5 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding.) | (Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net realized capital gainslosses were $159.6 million and $101.4$179.0 million for the three months ended September 30, 2011 compared to net realized capital gains of $159.6 million for the three months ended September 30, 2010. For the three months ended September 30, 2011, we recorded $181.5 million of losses due to fair value re-measurements on fixed maturity and equity securities and other invested assets and $0.9 million of other-than-temporary impairments on fixed maturity securities, partially offset by $3.3 million of net realized capital gains from sales of fixed maturity and equity securities. For the three months ended September 30, 2010, and 2009, respectively. Wewe recorded $164.8 million and $96.0 million ofin gains due to fair value re-measurements on fixed maturity and equity securities and other invested assets, andpartially offset by $3.2 million of net realized capital losses and $5.4 million of net realized capital gains from sales of fixed maturity and equity securities and $2.0 million and $0.0 million of other-than-temporary impairments on fixed maturity securities for the three months ended September 30, 2010 and 2009, respectively. The gains from other invested assets at fair value represent the movement in market value from our investment in our parent’s common equity.
Net realized capital gains were $58.8 million and $56.2 million for the nine months ended September 30, 2010 and 2009, respectively. We recorded $63.9 million and $79.3 million of gains due to fair value re-measurements on fixed maturity and equity securities and other invested assets, and $3.1 million and $17.7 million of net realized capital losses from sales of fixed maturity and equity securities and $2.0 million and
other-than-temporary impairments on fixed maturity securities.
$5.5
Net realized capital losses were $206.7 million for the nine months ended September 30, 2011 compared to net realized capital gains of $58.8 million for the nine months ended September 30, 2010. For the nine months ended September 30, 2011, we recorded $178.0 million of losses due to fair value re-measurements on fixed maturity and equity securities and other invested assets, $14.5 million of other-than-temporary impairments on fixed maturity securities forand $14.2 million of net realized capital losses from sales of fixed maturity and equity securities. The net realized losses included the impact of selling part of our municipal bond portfolio as credit concerns arose in this market sector. For the nine months ended September 30, 2010, we recorded $63.9 million in gains due to fair value re-measurements on fixed maturity and 2009, respectively.equity securities and other invested assets, partially offset by $3.1 million of net realized capital losses from sales of fixed maturity and equity securities and $2.0 million of other-than-temporary impairments on fixed maturity securities.
Segment Results.
Through our subsidiaries, we operateDuring the quarter ended September 30, 2011, the Company realigned its reporting segments to reflect recent changes in four segments:the type and volume of business written. The Company previously reported the results of Marine & Aviation, Surety, A&H Reinsurance and A&H Primary operations as a separate segment—Specialty Underwriting. The A&H primary business, which is a relatively new line of business for the Company, has increased significantly, representing approximately 2% of premiums earned and is projected to continue to grow. The A&H primary business is better aligned with the Insurance reporting segment based on the similarities of this business with that of those businesses already reflected in the Insurance segment. The other operating units included in the Specialty Underwriting segment would have encompassed approximately 6% of the Company’s premiums earned and their volume is projected to remain approximately 6%. As a result of the size of these remaining operating units and their similarity to the business reported within U.S. Reinsurance, they have been reclassified to the U.S. Reinsurance U.S. Insurance, Specialty Underwriting and International. segment. There has been no change to the International reporting segment. The Company has restated all segment information for prior years to conform to the new reporting segment structure.
The U.S. Reinsurance operation writes property and casualty reinsurance and specialty lines of business, including Marine, Aviation, Surety and A&H business, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies primarily within the U.S. The U.S. Insurance operation writes property and casualty insurance, primarilyincluding medical stop loss insurance, directly and through general agents, brokers 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.Canada. The International operation writes non-U.S. property and casualty reinsurance through Everest Re’s br anchesbranches in Canada and Singapore and through offices in Brazil, Miami and New Jersey.
These segments are managed independently, but conform with corporate guidelines 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 premiums earned.
Our loss and LAE reserves are 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.
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, | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
(Dollars in millions) | | 2010 | | | 2009 | | | Variance | | % Change | | 2010 | | | 2009 | | | Variance | | % Change | | 2011 | | | 2010 | | | Variance | | | % Change | | | 2011 | | | 2010 | | | Variance | | | % Change | |
Gross written premiums | | $ | 372.4 | | | $ | 345.6 | | | $ | 26.8 | | | | 7.8 | % | | $ | 884.6 | | | $ | 876.0 | | | $ | 8.5 | | | | 1.0 | % | | $ | 360.8 | | | $ | 435.2 | | | $ | (74.4 | ) | | | -17.1 | % | | $ | 947.2 | | | $ | 1,076.6 | | | $ | (129.5 | ) | | | -12.0 | % |
Net written premiums | | | 205.1 | | | | 191.7 | | | | 13.5 | | | | 7.0 | % | | | 484.0 | | | | 487.8 | | | | (3.8 | ) | | | -0.8 | % | | | 167.5 | | | | 238.5 | | | | (71.1 | ) | | | -29.8 | % | | | 486.0 | | | | 591.1 | | | | (105.1 | ) | | | -17.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Premiums earned | | $ | 159.7 | | | $ | 162.0 | | | $ | (2.4 | ) | | | -1.5 | % | | $ | 449.2 | | | $ | 489.1 | | | $ | (39.9 | ) | | | -8.2 | % | | $ | 167.5 | | | $ | 195.7 | | | $ | (28.1 | ) | | | -14.4 | % | | $ | 512.1 | | | $ | 562.0 | | | $ | (49.9 | ) | | | -8.9 | % |
Incurred losses and LAE | | | 84.3 | | | | 56.2 | | | | 28.2 | | | | 50.1 | % | | | 258.8 | | | | 232.3 | | | | 26.5 | | | | 11.4 | % | | | 97.2 | | | | 109.1 | | | | (11.9 | ) | | | -10.9 | % | | | 371.6 | | | | 344.0 | | | | 27.6 | | | | 8.0 | % |
Commission and brokerage | | | 25.1 | | | | 21.4 | | | | 3.7 | | | | 17.2 | % | | | 88.1 | | | | 90.5 | | | | (2.4 | ) | | | -2.6 | % | | | 23.3 | | | | 32.4 | | | | (9.1 | ) | | | -28.2 | % | | | 106.1 | | | | 112.8 | | | | (6.7 | ) | | | -5.9 | % |
Other underwriting expenses | | | 8.9 | | | | 9.7 | | | | (0.7 | ) | | | -7.6 | % | | | 26.1 | | | | 25.3 | | | | 0.9 | | | | 3.4 | % | | | 10.8 | | | | 11.1 | | | | (0.2 | ) | | | -2.1 | % | | | 30.6 | | | | 32.6 | | | | (2.0 | ) | | | -6.1 | % |
Underwriting gain (loss) | | $ | 41.3 | | | $ | 74.8 | | | $ | (33.5 | ) | | | -44.7 | % | | $ | 76.1 | | | $ | 141.0 | | | $ | (64.9 | ) | | | -46.0 | % | | $ | 36.2 | | | $ | 43.1 | | | $ | (6.9 | ) | | | -16.0 | % | | $ | 3.7 | | | $ | 72.5 | | | $ | (68.8 | ) | | | -94.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Point Chg | | | | | | | | | | | | | | Point Chg | | | | | | | | | | | | | | Point Chg | | | | | | | | | | | | | | | Point Chg | |
Loss ratio | | | 52.8 | % | | | 34.7 | % | | | | | | | 18.1 | | | | 57.6 | % | | | 47.5 | % | | | | | | | 10.1 | | | | 58.0 | % | | | 55.7 | % | | | | | | | 2.3 | | | | 72.6 | % | | | 61.2 | % | | | | | | | 11.4 | |
Commission and brokerage ratio | | | 15.7 | % | | | 13.2 | % | | | | | | | 2.5 | | | | 19.6 | % | | | 18.5 | % | | | | | | | 1.1 | | | | 13.9 | % | | | 16.6 | % | | | | | | | (2.7 | ) | | | 20.7 | % | | | 20.1 | % | | | | | | | 0.6 | |
Other underwriting expense ratio | | | 5.6 | % | | | 5.9 | % | | | | | | | (0.3 | ) | | | 5.9 | % | | | 5.2 | % | | | | | | | 0.7 | | | | 6.5 | % | | | 5.7 | % | | | | | | | 0.8 | | | | 6.0 | % | | | 5.8 | % | | | | | | | 0.2 | |
Combined ratio | | | 74.1 | % | | | 53.8 | % | | | | | | | 20.3 | | | | 83.1 | % | | | 71.2 | % | | | | | | | 11.9 | | | | 78.4 | % | | | 78.0 | % | | | | | | | 0.4 | | | | 99.3 | % | | | 87.1 | % | | | | | | | 12.2 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding.) | (Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | | | | | | | | (Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | | | | | | | |
Premiums. Gross written premiums increaseddecreased by 7.8%17.1% to $372.4$360.8 million for the three months ended September 30, 2011 from $435.2 million for the three months ended September 30, 2010, from $345.6primarily due to non-renewed business in treaty property, treaty casualty, accident and health and crop lines of business. Net written premiums decreased 29.8% to $167.5 million for the three months ended September 30, 2009, primarily due2011 compared to a $37.0 million (18.2%) increase in treaty property volume, partially offset by a $5.3 million (19.6%) decrease in the crop hail quota share treaties, $4.2 million (4.5%) decrease in U.S. treaty casualty volume and a $0.7 million (3.1%) decrease in facultative volume. Net written premiums increased by 7.0% to $205.1$238.5 million for the three months ended September 30, 2010, comparedprimarily due to $191.7the decrease in gross written premiums and a higher percentage of premium ceded under the affiliated quota share agreement. Premiums earned decreased 14.4% to $167.5 million for the three months ended September 30, 2009, primarily due2011 compared to the increase in gross written premiums. 0;Premiums earned decreased by 1.5% to $159.7$195.7 million for the three months ended September 30, 2010 compared to $162.0 million for the three months ended September 30, 2009.2010. The change in premiums earned relative to net written premiums is primarily the result of timing on proportional contracts wheretiming; premiums are earned ratably over the coverage period whereas written premiums are recorded onat the initiation of the coverage period.
Gross written premiums increaseddecreased by 1.0%12.0% to $884.6$947.2 million for the nine months ended September 30, 2011 from $1,076.6 million for the nine months ended September 30, 2010, from $876.0primarily due to non-renewed quota share business in treaty property, treaty casualty and crop as well reduced premium for accident and health and marine business, partially offset by a $9.6 million increase in reinstatement premiums due to catastrophe loss activity. Net written premiums decreased 17.8% to $486.0 million for the nine months ended September 30, 2009, primarily due2011 compared to a $64.0 million (13.5%) increase in treaty property volume, partially offset by a $24.4 million (35.7%) decrease in the crop hail quota share treaties, a $17.6 million (24.6%) decrease in facultative volume and a $13.3 million (5.1%) decrease in U.S. treaty casualty volume. Net written premiums decreased slightly by 0.8% to $484.0$591.1 million for the nine months ended September 30, 2010, comparedprimarily due to $487.8the decrease in gross written premiums and a higher percentage of premium ceded under the affiliated quota share agreement. Premiums earned decreased 8.9% to $512.1 million for the nine months ended September 30, 2009. Premiums earned decreased by 8.2%2011 compared to $449.2$562.0 million for the nine months ended September 30, 2010 compared to $489.1 million for the nine months ended September 30, 2009. ;Variances for2010. The change in premiums earned forrelative to net written premiums is the nine months were driven by similar factors as those discussed above forresult of timing; premiums are earned ratably over the three months.coverage period whereas written premiums are recorded at the initiation of the coverage period.
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, | | Three Months Ended September 30, |
| | Current | | | Ratio %/ | | Prior | | | Ratio %/ | | Total | | | Ratio %/ | | Current | | | Ratio %/ | | Prior | | | Ratio %/ | | Total | | | Ratio %/ |
(Dollars in millions) | | Year | | | Pt Change | | Years | | | Pt Change | | Incurred | | | Pt Change | | Year | | | Pt Change | | Years | | | Pt Change | | Incurred | | | Pt Change |
2011 | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | | $ | 82.7 | | | | 49.3 | % | | | $ | (3.5 | ) | | | -2.1 | % | | | $ | 79.2 | | | | 47.2 | % | |
Catastrophes | | | | 16.7 | | | | 10.0 | % | | | | 1.3 | | | | 0.8 | % | | | | 18.0 | | | | 10.8 | % | |
A&E | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | |
Total segment | | | $ | 99.4 | | | | 59.3 | % | | | $ | (2.2 | ) | | | -1.3 | % | | | $ | 97.2 | | | | 58.0 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2010 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | 88.9 | | | | 55.6 | % | | | $ | (1.5 | ) | | | -0.9 | % | | | $ | 87.4 | | | | 54.7 | % | | | $ | 113.5 | | | | 58.0 | % | | | $ | (1.9 | ) | | | -1.0 | % | | | $ | 111.6 | | | | 57.0 | % | |
Catastrophes | | | (2.7 | ) | | | -1.7 | % | | | | (0.3 | ) | | | -0.2 | % | | | | (3.1 | ) | | | -1.9 | % | | | | (2.7 | ) | | | -1.4 | % | | | | 0.1 | | | | 0.1 | % | | | | (2.6 | ) | | | -1.3 | % | |
A&E | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | |
Total segment | | $ | 86.1 | | | | 53.9 | % | | | $ | (1.8 | ) | | | -1.1 | % | | | $ | 84.3 | | | | 52.8 | % | | | $ | 110.8 | | | | 56.6 | % | | | $ | (1.8 | ) | | | -0.9 | % | | | $ | 109.1 | | | | 55.7 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Variance 2011/2010 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | 72.7 | | | | 44.9 | % | | | $ | (18.4 | ) | | | -11.4 | % | | | $ | 54.3 | | | | 33.5 | % | | | $ | (30.8 | ) | | | (8.7 | ) | pts | | $ | (1.6 | ) | | | (1.1 | ) | pts | | $ | (32.4 | ) | | | (9.8 | ) | pts |
Catastrophes | | | - | | | | 0.0 | % | | | | 1.8 | | | | 1.1 | % | | | | 1.8 | | | | 1.1 | % | | | | 19.4 | | | | 11.4 | | pts | | | 1.2 | | | | 0.7 | | pts | | | 20.6 | | | | 12.1 | | pts |
A&E | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | - | | pts | | | - | | | | - | | pts | | | - | | | | - | | pts |
Total segment | | $ | 72.7 | | | | 44.9 | % | | | $ | (16.6 | ) | | | -10.2 | % | | | $ | 56.2 | | | | 34.7 | % | | | $ | (11.4 | ) | | | 2.7 | | pts | | $ | (0.4 | ) | | | (0.4 | ) | pts | | $ | (11.9 | ) | | | 2.3 | | pts |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Variance 2010/2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | 16.2 | | | | 10.7 | | pts | | $ | 16.9 | | | | 10.5 | | pts | | $ | 33.1 | | | | 21.2 | | pts | |
Catastrophes | | | (2.7 | ) | | | (1.7 | ) | pts | | | (2.1 | ) | | | (1.3 | ) | pts | | | (4.9 | ) | | | (3.0 | ) | pts | |
A&E | | | - | | | | - | | pts | | | - | | | | - | | pts | | | - | | | | - | | pts | |
Total segment | | $ | 13.4 | | | | 9.0 | | pts | | $ | 14.8 | | | | 9.1 | | pts | | $ | 28.1 | | | | 18.1 | | pts | |
| | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| | Current | | | Ratio %/ | | Prior | | | Ratio %/ | | Total | | | Ratio %/ | | Current | | | Ratio %/ | | Prior | | | Ratio %/ | | Total | | | Ratio %/ |
(Dollars in millions) | | Year | | | Pt Change | | Years | | | Pt Change | | Incurred | | | Pt Change | | Year | | | Pt Change | | Years | | | Pt Change | | Incurred | | | Pt Change |
2011 | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | | $ | 262.4 | | | | 51.3 | % | | | $ | (4.0 | ) | | | -0.8 | % | | | $ | 258.4 | | | | 50.5 | % | |
Catastrophes | | | | 102.4 | | | | 20.0 | % | | | | 10.9 | | | | 2.1 | % | | | | 113.3 | | | | 22.1 | % | |
A&E | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | |
Total segment | | | $ | 364.8 | | | | 71.3 | % | | | $ | 6.9 | | | | 1.3 | % | | | $ | 371.6 | | | | 72.6 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2010 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | 244.0 | | | | 54.3 | % | | | $ | 4.0 | | | | 0.9 | % | | | $ | 248.1 | | | | 55.2 | % | | | $ | 326.0 | | | | 58.0 | % | | | $ | 4.1 | | | | 0.7 | % | | | $ | 330.1 | | | | 58.7 | % | |
Catastrophes | | | 10.1 | | | | 2.3 | % | | | | 0.6 | | | | 0.1 | % | | | | 10.7 | | | | 2.4 | % | | | | 10.1 | | | | 1.8 | % | | | | 3.8 | | | | 0.7 | % | | | | 13.9 | | | | 2.5 | % | |
A&E | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | |
Total segment | | $ | 254.2 | | | | 56.6 | % | | | $ | 4.6 | | | | 1.0 | % | | | $ | 258.8 | | | | 57.6 | % | | | $ | 336.1 | | | | 59.8 | % | | | $ | 7.9 | | | | 1.4 | % | | | $ | 344.0 | | | | 61.2 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | 250.2 | | | | 51.2 | % | | | $ | (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 | | $ | 250.2 | | | | 51.2 | % | | | $ | (18.0 | ) | | | -3.7 | % | | | $ | 232.3 | | | | 47.5 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Variance 2010/2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Variance 2011/2010 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | (6.2 | ) | | | 3.1 | | pts | | $ | 22.1 | | | | 4.6 | | pts | | $ | 16.0 | | | | 7.7 | | pts | | $ | (63.6 | ) | | | (6.7 | ) | pts | | $ | (8.1 | ) | | | (1.5 | ) | pts | | $ | (71.7 | ) | | | (8.2 | ) | pts |
Catastrophes | | | 10.1 | | | | 2.3 | | pts | | | 0.5 | | | | 0.1 | | pts | | | 10.6 | | | | 2.4 | | pts | | | 92.3 | | | | 18.2 | | pts | | | 7.1 | | | | 1.4 | | pts | | | 99.4 | | | | 19.6 | | pts |
A&E | | | - | | | | - | | pts | | | - | | | | - | | pts | | | - | | | | - | | pts | | | - | | | | - | | pts | | | - | | | | - | | pts | | | - | | | | - | | pts |
Total segment | | $ | 4.0 | | | | 5.4 | | pts | | $ | 22.6 | | | | 4.7 | | pts | | $ | 26.5 | | | | 10.1 | | pts | | $ | 28.7 | | | | 11.5 | | pts | | $ | (1.0 | ) | | | (0.1 | ) | pts | | $ | 27.6 | | | | 11.4 | | pts |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding.) | (Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | | | (Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | | | | | | | | | | |
Incurred losses were $28.1$11.9 million (18.1 points) higherlower at $84.3$97.2 million for the three months ended September 30, 2011 compared to $109.1 million for the three months ended September 30, 2010, compared to $56.2 million for the three months ended September 30, 2009, primarily as a result of the $33.1$30.8 million increase in attritional losses due to the increase(8.7 points) decrease in current year treaty property expected loss ratiosattritional losses, primarily due to a combination of lower earned premiums and a $16.9change in the mix of business. Partially offsetting these decreases, the current year catastrophe losses increased $19.4 million increase in prior years reserve development primarily on treaty casualty business(11.4 points), largely due to more favorableHurricane Irene and the development in 2009, partially offset by a $4.9 million combined decrease in bothon the current year Japan and prior years’ catastrophe losses.New Zealand earthquakes.
Incurred losses were $26.5 million (10.1 points) higher at $258.8 million for the nine months ended September 30, 2010 compared to $232.3 million for the nine months ended September 30, 2009, primarily as a result of the $22.1 million (4.6 points) increase in prior years’ attritional losses, principally due to less favorable development on treaty casualty’s prior years’ losses, and a $10.6 million (2.4 points) increase in catastrophe losses, due to the New Zealand earthquake and Chilean earthquake.
Segment Expenses. Commission and brokerage expenses increased 17.2% to $25.1Incurred losses were $27.6 million (11.4 points) higher at $371.6 million for the threenine months ended September 30, 20102011 compared to $21.4 million for the three months ended September 30, 2009. Commission and brokerage expenses decreased 2.6% to $88.1$344.0 million for the nine months ended September 30, 2010, primarily as a result of the $92.3 million (18.2 points) increase in current year catastrophe losses, largely due to the Japan and New Zealand earthquakes, U.S. Midwest tornadoes and Hurricane Irene, and the $7.1 million (1.4 points) increase in prior year catastrophe losses, largely due to the Chile earthquake. Partially offsetting these increases, the current year attritional losses decreased $63.6 million (6.7 points), primarily due to a shift in the mix of business, with a higher level of catastrophe excess of loss business in the current year, which carries a lower attritional loss ratio, coupled with a significant reduction in pro rata property business, which further reduces the current year attritional loss ratio.
Segment Expenses. Commission and brokerage expenses decreased 28.2% to $23.3 million for the three months ended September 30, 2011 compared to $90.5$32.4 million for the three months ended September 30, 2010. Commission and brokerage expenses decreased 5.9% to $106.1 million for the nine months ended September 30, 2009. The increase2011 compared to $112.8 million for the quarter wasnine months ended September 30, 2010. These variances were primarily due to an increasethe changes in premiums earned and the mix of business with varying commission on a large treaty property transaction and an increase in contingent commissions on treaty casualty business.rates.
Segment other underwriting expenses for the three months ended September 30, 2010 decreased slightly to $8.9 million from $9.7$10.8 million for the three months ended September 30, 2009 and segment2011 compared to $11.1 million for the same period in 2010. Segment other underwriting expenses for the nine months ended September 30, 2010 increased slightlydecreased to $26.1 million from $25.3$30.6 million for the nine months ended September 30, 2009.2011 compared to $32.6 million for the same period in 2010. These variances were due to reduced operating costs for the segment.
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, | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
(Dollars in millions) | | 2010 | | | 2009 | | | Variance | | % Change | | 2010 | | | 2009 | | | Variance | | % Change | | 2011 | | | 2010 | | | Variance | | | % Change | | | 2011 | | | 2010 | | | Variance | | | % Change | |
Gross written premiums | | $ | 211.6 | | | $ | 230.5 | | | $ | (18.9 | ) | | | -8.2 | % | | $ | 644.8 | | | $ | 648.7 | | | $ | (3.9 | ) | | | -0.6 | % | | $ | 236.3 | | | $ | 214.7 | | | $ | 21.6 | | | | 10.1 | % | | $ | 750.3 | | | $ | 650.4 | | | $ | 99.8 | | | | 15.3 | % |
Net written premiums | | | 89.2 | | | | 76.4 | | | | 12.8 | | | | 16.8 | % | | | 272.5 | | | | 301.9 | | | | (29.4 | ) | | | -9.7 | % | | | 114.3 | | | | 90.9 | | | | 23.4 | | | | 25.7 | % | | | 366.2 | | | | 275.7 | | | | 90.6 | | | | 32.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Premiums earned | | $ | 104.0 | | | $ | 89.2 | | | $ | 14.7 | | | | 16.5 | % | | $ | 291.3 | | | $ | 306.9 | | | $ | (15.5 | ) | | | -5.1 | % | | $ | 124.3 | | | $ | 105.7 | | | $ | 18.6 | | | | 17.6 | % | | $ | 362.2 | | | $ | 294.5 | | | $ | 67.7 | | | | 23.0 | % |
Incurred losses and LAE | | | 99.0 | | | | 71.4 | | | | 27.6 | | | | 38.6 | % | | | 243.7 | | | | 210.3 | | | | 33.4 | | | | 15.9 | % | | | 120.3 | | | | 99.5 | | | | 20.9 | | | | 21.0 | % | | | 302.0 | | | | 245.7 | | | | 56.4 | | | | 22.9 | % |
Commission and brokerage | | | 10.4 | | | | 10.5 | | | | (0.1 | ) | | | -0.8 | % | | | 18.2 | | | | 32.4 | | | | (14.2 | ) | | | -43.9 | % | | | 11.9 | | | | 10.7 | | | | 1.1 | | | | 10.5 | % | | | 27.8 | | | | 18.7 | | | | 9.1 | | | | 48.6 | % |
Other underwriting expenses | | | 19.5 | | | | 20.0 | | | | (0.5 | ) | | | -2.5 | % | | | 52.3 | | | | 56.4 | | | | (4.1 | ) | | | -7.2 | % | | | 24.3 | | | | 19.5 | | | | 4.8 | | | | 24.8 | % | | | 68.6 | | | | 52.3 | | | | 16.3 | | | | 31.1 | % |
Underwriting gain (loss) | | $ | (24.9 | ) | | $ | (12.7 | ) | | $ | (12.2 | ) | | | 96.6 | % | | $ | (22.9 | ) | | $ | 7.7 | | | $ | (30.7 | ) | | NM | | $ | (32.2 | ) | | $ | (24.0 | ) | | $ | (8.2 | ) | | | 34.3 | % | | $ | (36.2 | ) | | $ | (22.2 | ) | | $ | (14.0 | ) | | | 62.9 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Point Chg | | | | | | | | | | | | | | Point Chg | | | | | | | | | | | | | | Point Chg | | | | | | | | | | | | | | | Point Chg | |
Loss ratio | | | 95.2 | % | | | 80.0 | % | | | | | | | 15.2 | | | | 83.7 | % | | | 68.5 | % | | | | | | | 15.2 | | | | 96.8 | % | | | 94.1 | % | | | | | | | 2.7 | | | | 83.4 | % | | | 83.4 | % | | | | | | | - | |
Commission and brokerage ratio | | | 10.0 | % | | | 11.8 | % | | | | | | | (1.8 | ) | | | 6.2 | % | | | 10.6 | % | | | | | | | (4.4 | ) | | | 9.5 | % | | | 10.2 | % | | | | | | | (0.7 | ) | | | 7.7 | % | | | 6.3 | % | | | | | | | 1.4 | |
Other underwriting expense ratio | | | 18.8 | % | | | 22.4 | % | | | | | | | (3.6 | ) | | | 18.0 | % | | | 18.4 | % | | | | | | | (0.4 | ) | | | 19.6 | % | | | 18.4 | % | | | | | | | 1.2 | | | | 18.9 | % | | | 17.8 | % | | | | | | | 1.1 | |
Combined ratio | | | 124.0 | % | | | 114.2 | % | | | | | | | 9.8 | | | | 107.9 | % | | | 97.5 | % | | | | | | | 10.4 | | | | 125.9 | % | | | 122.7 | % | | | | | | | 3.2 | | | | 110.0 | % | | | 107.5 | % | | | | | | | 2.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(NM, not meaningful) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding.) | (Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | | | | | | | | (Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | | | | | | | |
Premiums. Gross written premiums decreasedincreased by 8.2%10.1% to $211.6$236.3 million for the three months ended September 30, 20102011 compared to $230.5$214.7 million for the three months ended September 30, 2009, as we continue2010. This increase was due to adjust our bookstrategic portfolio changes with growth in short-tail business, primarily driven by the acquisition of Heartland, which provided $44.8 million of new crop insurance premium in the current quarter and $14.0 million growth in A&H primary business, in response to changing market conditions.partially offset by the planned reduction of a large casualty program. Net written premiums were higher in 2010 primarily dueincreased 25.7% to higher cessions under the affiliated quota share during the third quarter of 2009. Premiums earned increased 16.5% to $104.0$114.3 million for the three months ended September 30, 20102011 compared to $89.2$90.9 million for the same period in 2010 due to higher gross premiums and reduced levels of ceded reinsurance primarily related to the reduced casualty program. Premiums earned increased 17.6% to $124.3 million for the three months ended September 30, 2009, generally2011 compared to $105.7 million for the three months ended September 30, 2010. The change in linepremiums earned is relatively consistent with the increase in net written premiums.premium.
Gross written premiums decreased by 0.6% to $644.8 million for the nine months ended September 30, 2010 compared to $648.7 million for the nine months ended September 30, 2009. Net written premiums decreased by a larger percentage than the decline in gross written premiums due to increased cessions on certain programs. Premiums earned decreased 5.1% to $291.3 million for the nine months ended September 30, 2010 compared to $306.9 million for the nine months ended September 30, 2009 due to the lower net written premiums.
Gross written premiums increased by 15.3% to $750.3 million for the nine months ended September 30, 2011 compared to $650.4 million for the nine months ended September 30, 2010. This increase was due to strategic portfolio changes with growth in short-tail business, primarily driven by the acquisition of Heartland, which provided $122.3 million of new crop insurance premium in 2011 and $44.8 million growth in A&H primary business, partially offset by the reduction of a large casualty program. Net written premiums increased 32.9% to $366.2 million for the nine months ended September 30, 2011 compared to $275.7 million for the same period in 2010 due to higher gross premiums and reduced levels of ceded reinsurance. Premiums earned increased 23.0% to $362.2 million for the nine months ended September 30, 2011 compared to $294.5 million for the nine months ended September 30, 2010. The change in premiums earned is relatively consistent with the increase in net written premium.
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, | | Three Months Ended September 30, |
| | Current | | | Ratio %/ | | Prior | | | Ratio %/ | | Total | | | Ratio %/ | | Current | | | Ratio %/ | | Prior | | | Ratio %/ | | Total | | | Ratio %/ |
(Dollars in millions) | | Year | | | Pt Change | | Years | | | Pt Change | | Incurred | | | Pt Change | | Year | | | Pt Change | | Years | | | Pt Change | | Incurred | | | Pt Change |
2011 | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | | $ | 100.9 | | | | 81.1 | % | | | $ | 18.0 | | | | 14.5 | % | | | $ | 118.9 | | | | 95.6 | % | |
Catastrophes | | | | 1.4 | | | | 1.2 | % | | | | - | | | | 0.0 | % | | | | 1.4 | | | | 1.2 | % | |
Total segment | | | $ | 102.3 | | | | 82.3 | % | | | $ | 18.0 | | | | 14.5 | % | | | $ | 120.3 | | | | 96.8 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2010 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | 89.2 | | | | 85.8 | % | | | $ | 9.8 | | | | 9.4 | % | | | $ | 99.0 | | | | 95.2 | % | | | $ | 89.7 | | | | 84.9 | % | | | $ | 9.8 | | | | 9.2 | % | | | $ | 99.5 | | | | 94.1 | % | |
Catastrophes | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | |
Total segment | | $ | 89.2 | | | | 85.8 | % | | | $ | 9.8 | | | | 9.4 | % | | | $ | 99.0 | | | | 95.2 | % | | | $ | 89.7 | | | | 84.9 | % | | | $ | 9.8 | | | | 9.2 | % | | | $ | 99.5 | | | | 94.1 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Variance 2011/2010 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | 71.4 | | | | 80.0 | % | | | $ | 0.1 | | | | 0.1 | % | | | $ | 71.4 | | | | 80.0 | % | | | $ | 11.2 | | | | (3.8 | ) | pts | | $ | 8.2 | | | | 5.3 | | pts | | $ | 19.4 | | | | 1.5 | | pts |
Catastrophes | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | 1.4 | | | | 1.2 | | pts | | | - | | | | - | | pts | | | 1.4 | | | | 1.2 | | pts |
Total segment | | $ | 71.4 | | | | 80.0 | % | | | $ | 0.1 | | | | 0.1 | % | | | $ | 71.4 | | | | 80.0 | % | | | $ | 12.6 | | | | (2.6 | ) | pts | | $ | 8.2 | | | | 5.3 | | pts | | $ | 20.9 | | | | 2.7 | | pts |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Variance 2010/2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | 17.8 | | | | 5.8 | | pts | | $ | 9.7 | | | | 9.3 | | pts | | $ | 27.6 | | | | 15.2 | | pts | |
Catastrophes | | | - | | | | - | | pts | | | - | | | | - | | pts | | | - | | | | - | | pts | |
Total segment | | $ | 17.8 | | | | 5.8 | | pts | | $ | 9.7 | | | | 9.3 | | pts | | $ | 27.6 | | | | 15.2 | | pts | |
| | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| | Current | | | Ratio %/ | | Prior | | | Ratio %/ | | Total | | | Ratio %/ | | Current | | | Ratio %/ | | Prior | | | Ratio %/ | | Total | | | Ratio %/ |
(Dollars in millions) | | Year | | | Pt Change | | Years | | | Pt Change | | Incurred | | | Pt Change | | Year | | | Pt Change | | Years | | | Pt Change | | Incurred | | | Pt Change |
2011 | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | | $ | 287.9 | | | | 79.4 | % | | | $ | 12.5 | | | | 3.5 | % | | | $ | 300.4 | | | | 82.9 | % | |
Catastrophes | | | | 1.4 | | | | 0.4 | % | | | | 0.2 | | | | 0.1 | % | | | | 1.6 | | | | 0.5 | % | |
Total segment | | | $ | 289.3 | | | | 79.8 | % | | | $ | 12.7 | | | | 3.6 | % | | | $ | 302.0 | | | | 83.4 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2010 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | 234.0 | | | | 80.4 | % | | | $ | 9.7 | | | | 3.3 | % | | | $ | 243.7 | | | | 83.7 | % | | | $ | 235.9 | | | | 80.1 | % | | | $ | 9.7 | | | | 3.3 | % | | | $ | 245.7 | | | | 83.4 | % | |
Catastrophes | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | |
Total segment | | $ | 234.0 | | | | 80.4 | % | | | $ | 9.7 | | | | 3.3 | % | | | $ | 243.7 | | | | 83.7 | % | | | $ | 235.9 | | | | 80.1 | % | | | $ | 9.7 | | | | 3.3 | % | | | $ | 245.7 | | | | 83.4 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | 226.8 | | | | 73.9 | % | | | $ | (16.4 | ) | | | -5.4 | % | | | $ | 210.3 | | | | 68.5 | % | | |
Catastrophes | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | | | - | | | | 0.0 | % | | |
Total segment | | $ | 226.8 | | | | 73.9 | % | | | $ | (16.4 | ) | | | -5.4 | % | | | $ | 210.3 | | | | 68.5 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Variance 2010/2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Variance 2011/2010 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | 7.2 | | | | 6.5 | | pts | | $ | 26.1 | | | | 8.7 | | pts | | $ | 33.4 | | | | 15.2 | | pts | | $ | 52.0 | | | | (0.7 | ) | pts | | $ | 2.8 | | | | 0.2 | | pts | | $ | 54.7 | | | | (0.5 | ) | pts |
Catastrophes | | | - | | | | - | | pts | | | - | | | | - | | pts | | | - | | | | - | | pts | | | 1.4 | | | | 0.4 | | pts | | | 0.2 | | | | 0.1 | | pts | | | 1.6 | | | | 0.5 | | pts |
Total segment | | $ | 7.2 | | | | 6.5 | | pts | | $ | 26.1 | | | | 8.7 | | pts | | $ | 33.4 | | | | 15.2 | | pts | | $ | 53.4 | | | | (0.3 | ) | pts | | $ | 3.0 | | | | 0.3 | | pts | | $ | 56.4 | | | | - | | pts |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding.) | (Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | | (Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | |
Incurred losses and LAE increased by 38.6%$20.9 million, or 21.0%, to $99.0$120.3 million for the three months ended September 30, 20102011 compared to $71.4$99.5 million for the three months ended September 30, 2009. The2010. This increase was primarily due to an increase of $11.2 million (3.8 points) in current year attritional losses primarily due to higher current year attritional reserves, resulting primarily from the increase innet premiums earned and the $9.7 millionan increase in prior years’ losses of $8.2 million (5.3 points) attributable to development on excess casualty and California workers’ compensation reserves.
Incurred losses and LAE increased by 15.9%$56.4 million, or 22.9%, to $243.7$302.0 million for the nine months ended September 30, 20102011 compared to $210.3$245.7 million for the nine months ended September 30, 2009. The2010. This increase was primarily due to the $26.1an increase of $52.0 million increase(0.7 points) in prior years’current year attritional losses primarily due to favorable developmenthigher net premiums earned and an increase in 2009 of prior years’ attritional reserves, specifically netlosses of $3.0 million (0.3 points) primarily attributable to development on excess casualty losses.and California workers’ compensation.
Segment Expenses. Commission and brokerage expenses decreased by 0.8%increased to $10.4$11.9 million for the three months ended September 30, 20102011 compared to $10.5$10.7 million for the three months ended September 30, 2009.2010. Commission and brokerage expenses decreased by 43.9%increased to $18.2$27.8 million for the nine months ended September 30, 20102011 compared to $32.4$18.7 million for the nine months ended September 30, 2009.2010. These decreases areincreases were primarily due to the changesresult of an increase in net premiums earned and changes in conjunction withdistribution and the impactmix of variations in reinsurance ceded, particularly under the affiliated quota share.business.
Segment other underwriting expenses for the three months ended September 30, 2010 decreased2011 increased to $19.5$24.3 million from $20.0$19.5 million for the three months ended September 30, 2009.2010. Segment other underwriting expenses for the nine months ended September 30, 2010 decreased2011 increased to $52.3$68.6 million from $56.4$52.3 million for the nine months ended September 30, 2009.2010. These decreasesincreases were primarily due to the resultexpenses of management’s direct actions to reduce expenses.the newly acquired Heartland.
Specialty Underwriting.International.
The following table presents the underwriting results and ratios for the Specialty UnderwritingInternational segment for the periods indicated.
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | Three Months Ended September 30, | | | Nine Months Ended September 30, | |
(Dollars in millions) | | 2010 | | | 2009 | | | Variance | | % Change | | 2010 | | | 2009 | | | Variance | | % Change | | 2011 | | | 2010 | | | Variance | | | % Change | | | 2011 | | | 2010 | | | Variance | | | % Change | |
Gross written premiums | | $ | 65.9 | | | $ | 67.6 | | | $ | (1.7 | ) | | | -2.5 | % | | $ | 197.7 | | | $ | 183.7 | | | $ | 13.9 | | | | 7.6 | % | | $ | 326.1 | | | $ | 323.7 | | | $ | 2.3 | | | | 0.7 | % | | $ | 923.6 | | | $ | 906.1 | | | $ | 17.6 | | | | 1.9 | % |
Net written premiums | | | 35.1 | | | | 38.3 | | | | (3.1 | ) | | | -8.2 | % | | | 110.2 | | | | 103.0 | | | | 7.2 | | | | 7.0 | % | | | 158.0 | | | | 168.4 | | | | (10.4 | ) | | | -6.2 | % | | | 457.7 | | | | 479.7 | | | | (22.0 | ) | | | -4.6 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Premiums earned | | $ | 37.7 | | | $ | 39.2 | | | $ | (1.5 | ) | | | -3.7 | % | | $ | 116.0 | | | $ | 108.5 | | | $ | 7.4 | | | | 6.9 | % | | $ | 151.1 | | | $ | 163.9 | | | $ | (12.9 | ) | | | -7.9 | % | | $ | 480.0 | | | $ | 465.7 | | | $ | 14.3 | | | | 3.1 | % |
Incurred losses and LAE | | | 25.2 | | | | 25.2 | | | | - | | | | 0.1 | % | | | 87.2 | | | | 73.7 | | | | 13.5 | | | | 18.3 | % | | | 104.6 | | | | 118.4 | | | | (13.8 | ) | | | -11.7 | % | | | 514.3 | | | | 479.0 | | | | 35.3 | | | | 7.4 | % |
Commission and brokerage | | | 7.7 | | | | 10.5 | | | | (2.8 | ) | | | -27.1 | % | | | 25.2 | | | | 29.4 | | | | (4.3 | ) | | | -14.5 | % | | | 35.7 | | | | 38.3 | | | | (2.6 | ) | | | -6.8 | % | | | 105.8 | | | | 106.0 | | | | (0.3 | ) | | | -0.2 | % |
Other underwriting expenses | | | 2.1 | | | | 2.4 | | | | (0.2 | ) | | | -10.1 | % | | | 6.5 | | | | 6.2 | | | | 0.3 | | | | 4.4 | % | | | 7.5 | | | | 6.7 | | | | 0.9 | | | | 13.1 | % | | | 20.9 | | | | 20.4 | | | | 0.6 | | | | 2.8 | % |
Underwriting gain (loss) | | $ | 2.7 | | | $ | 1.1 | | | $ | 1.6 | | | | 145.7 | % | | $ | (2.9 | ) | | $ | (0.9 | ) | | $ | (2.0 | ) | | | 227.9 | % | | $ | 3.2 | | | $ | 0.6 | | | $ | 2.7 | | | NM | | $ | (161.0 | ) | | $ | (139.6 | ) | | $ | (21.3 | ) | | | 15.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Point Chg | | | | | | | | | | | | | | Point Chg | | | | | | | | | | | | | | Point Chg | | | | | | | | | | | | | | | Point Chg | |
Loss ratio | | | 66.9 | % | | | 64.3 | % | | | | | | | 2.6 | | | | 75.2 | % | | | 68.0 | % | | | | | | | 7.2 | | | | 69.2 | % | | | 72.2 | % | | | | | | | (3.0 | ) | | | 107.1 | % | | | 102.8 | % | | | | | | | 4.3 | |
Commission and brokerage ratio | | | 20.3 | % | | | 26.8 | % | | | | | | | (6.5 | ) | | | 21.7 | % | | | 27.1 | % | | | | | | | (5.4 | ) | | | 23.6 | % | | | 23.4 | % | | | | | | | 0.2 | | | | 22.0 | % | | | 22.8 | % | | | | | | | (0.8 | ) |
Other underwriting expense ratio | | | 5.7 | % | | | 6.1 | % | | | | | | | (0.4 | ) | | | 5.6 | % | | | 5.7 | % | | | | | | | (0.1 | ) | | | 5.1 | % | | | 4.0 | % | | | | | | | 1.1 | | | | 4.4 | % | | | 4.4 | % | | | | | | | - | |
Combined ratio | | | 92.9 | % | | | 97.2 | % | | | | | | | (4.3 | ) | | | 102.5 | % | | | 100.8 | % | | | | | | | 1.7 | | | | 97.9 | % | | | 99.6 | % | | | | | | | (1.7 | ) | | | 133.5 | % | | | 130.0 | % | | | | | | | 3.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(NM, not meaningful) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding.) | (Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | | | | | | | | (Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | | | | | | | |
Premiums. Gross written premiums decreasedincreased by 2.5%0.7% to $65.9$326.1 million for the three months ended September 30, 2011 compared to $323.7 million for the three months ended September 30, 2010, compareddue to $67.6an increase in premiums written through Canada, $11.2 million; and Asia, $8.4 million; partially offset by a $17.5 million net decrease in business written in the Latin America, South America, Middle East, and Africa regions. The increases were primarily due to generally higher rate levels on retained business and favorable foreign exchange impact of $11.3 million, partially offset by non-renewed business in certain catastrophe exposed territories that have not responded to the recent elevation in catastrophe loss activity. Net written premiums decreased by 6.2% to $158.0 million for the three months ended September 30, 2009, primarily due2011 compared to a $6.5 million and $5.8 million decrease in marine and aviation business, respectively, partially offset by a $10.2 million increase in A&H business, attributable to travel reinsurance and medical stop loss business. Net written premiums decreased by 8.2% to $35.1$168.4 million for the three months ended September 30, 2010, comparedprincipally as a result of the change in the affiliated quota share agreement. Premiums earned decreased by 7.9% to $38.3$151.1 million for the three months ended September 30, 2009, primarily as a result of the decrease in gross written premiums combined with changes in amounts ceded un der the affiliated quota share. Premiums earned decreased 3.7%2011 compared to $37.7$163.9 million for the three months ended September 30, 2010 compared to $39.2 million for the three months ended September 30, 2009.2010. The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.
Gross written premiums increased by 7.6% to $197.7 million for the nine months ended September 30, 2010 compared to $183.7 million for the nine months ended September 30, 2009, primarily due to an increase in A&H business, attributable to travel reinsurance and medical stop loss business of $29.0 million, partially offset by a net decrease in marine and aviation business of $14.2 million. Correspondingly, net written premiums increased 7.0% to $110.2 million for the nine months ended September 30, 2010 compared to $103.0 million for the nine months ended September 30, 2009. Premiums earned increased 6.9% to $116.0 million for the nine months ended September 30, 2010 compared to $108.5 million for the nine months ended September 30, 2009, relatively consistent with the increase in net written premiums.
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, |
| | Current | | | Ratio %/ | | Prior | | | Ratio %/ | | Total | | | Ratio %/ |
(Dollars in millions) | | Year | | | Pt Change | | Years | | | Pt Change | | Incurred | | | Pt Change |
2010 | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | 25.1 | | | | 66.7 | % | | | $ | (0.4 | ) | | | -1.0 | % | | | $ | 24.8 | | | | 65.6 | % | |
Catastrophes | | | - | | | | 0.0 | % | | | | 0.5 | | | | 1.2 | % | | | | 0.5 | | | | 1.2 | % | |
Total segment | | $ | 25.1 | | | | 66.7 | % | | | $ | 0.1 | | | | 0.2 | % | | | $ | 25.2 | | | | 66.9 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | 26.2 | | | | 66.8 | % | | | $ | (0.2 | ) | | | -0.4 | % | | | $ | 26.0 | | | | 66.4 | % | |
Catastrophes | | | - | | | | 0.0 | % | | | | (0.8 | ) | | | -2.1 | % | | | | (0.8 | ) | | | -2.1 | % | |
Total segment | | $ | 26.2 | | | | 66.8 | % | | | $ | (1.0 | ) | | | -2.5 | % | | | $ | 25.2 | | | | 64.3 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Variance 2010/2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | (1.1 | ) | | | (0.1 | ) | pts | | $ | (0.2 | ) | | | (0.6 | ) | pts | | $ | (1.2 | ) | | | (0.8 | ) | pts |
Catastrophes | | | - | | | | - | | pts | | | 1.3 | | | | 3.3 | | pts | | | 1.3 | | | | 3.3 | | pts |
Total segment | | $ | (1.1 | ) | | | (0.1 | ) | pts | | $ | 1.1 | | | | 2.7 | | pts | | $ | - | | | | 2.6 | | pts |
| | Nine Months Ended September 30, |
| | Current | | | Ratio %/ | | Prior | | | Ratio %/ | | Total | | | Ratio %/ |
(Dollars in millions) | | Year | | | Pt Change | | Years | | | Pt Change | | Incurred | | | Pt Change |
2010 | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | 83.9 | | | | 72.3 | % | | | $ | 0.1 | | | | 0.1 | % | | | $ | 84.0 | | | | 72.4 | % | |
Catastrophes | | | - | | | | 0.0 | % | | | | 3.2 | | | | 2.8 | % | | | | 3.2 | | | | 2.8 | % | |
Total segment | | $ | 83.9 | | | | 72.3 | % | | | $ | 3.3 | | | | 2.8 | % | | | $ | 87.2 | | | | 75.2 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | 77.0 | | | | 70.9 | % | | | $ | (6.0 | ) | | | -5.5 | % | | | $ | 71.0 | | | | 65.4 | % | |
Catastrophes | | | - | | | | 0.0 | % | | | | 2.8 | | | | 2.6 | % | | | | 2.8 | | | | 2.6 | % | |
Total segment | | $ | 77.0 | | | | 70.9 | % | | | $ | (3.2 | ) | | | -3.0 | % | | | $ | 73.7 | | | | 68.0 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Variance 2010/2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | 6.9 | | | | 1.4 | | pts | | $ | 6.1 | | | | 5.6 | | pts | | $ | 13.0 | | | | 7.0 | | pts |
Catastrophes | | | - | | | | - | | pts | | | 0.4 | | | | 0.2 | | pts | | | 0.4 | | | | 0.2 | | pts |
Total segment | | $ | 6.9 | | | | 1.4 | | pts | | $ | 6.5 | | | | 5.8 | | pts | | $ | 13.5 | | | | 7.2 | | pts |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | | | |
Incurred losses and LAE remained flat at $25.2Gross written premiums increased by 1.9% to $923.6 million for the threenine months ended September 30, 2010 and 2009. Incurred losses and LAE increased by 18.3%2011 compared to $87.2$906.1 million for the nine months ended September 30, 2010, compareddue to $73.7a net increase of $9.2 million in premiums written in Canada, $5.3 million in the Latin America, South America, Middle East, and Africa regions and $2.9 million in Asia. The increase in gross written premiums included a net favorable foreign exchange impact of $33.4 million. Growth from increased rate levels, particularly in regions recently affected by catastrophe losses, and from the impact of foreign exchange were partially offset by non-renewed business which did not meet our current pricing targets. Net written premiums decreased by 4.6% to $457.7 million for the nine months ended September 30, 2009. This increase was driven by a $13.0 million (7.0 points) increase in attritional losses, primarily from the A&H business and from losses on the offshore oil rig in the Gulf.
Segment Expenses. Commission and brokerage expenses decreased 27.1% to $7.7 million for the three months ended September 30, 20102011 compared to $10.5 million for the three months ended September 30, 2009. Commission and brokerage expenses decreased 14.5% to $25.2$479.7 million for the nine months ended September 30, 2010, comparedprimarily due to $29.4the change in our affiliated quota share agreement. Premiums earned increased by 3.1% to $480.0 million for the nine months ended September 30, 2009. These decreases were due to the changes in the mix in business and lower contingent commissions on the surety book of business.
Segment other underwriting expenses decreased slightly to $2.1 million for the three months ended September 30, 20102011 compared to $2.4 million for the three months ended September 30, 2009. Segment other underwriting expenses increased slightly to $6.5$465.7 million for the nine months ended September 30, 2010 compared to $6.2 million for the nine months ended September 30, 2009.
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) | | 2010 | | | 2009 | | | Variance | | % Change | | 2010 | | | 2009 | | | Variance | | % Change |
Gross written premiums | | $ | 323.7 | | | $ | 272.6 | | | $ | 51.1 | | | | 18.8 | % | | $ | 906.1 | | | $ | 797.6 | | | $ | 108.5 | | | | 13.6 | % |
Net written premiums | | | 168.4 | | | | 146.3 | | | | 22.1 | | | | 15.1 | % | | | 479.7 | | | | 435.7 | | | | 44.0 | | | | 10.1 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Premiums earned | | $ | 163.9 | | | $ | 147.9 | | | $ | 16.1 | | | | 10.9 | % | | $ | 465.7 | | | $ | 433.1 | | | $ | 32.6 | | | | 7.5 | % |
Incurred losses and LAE | | | 118.4 | | | | 89.2 | | | | 29.2 | | | | 32.7 | % | | | 479.0 | | | | 261.0 | | | | 218.0 | | | | 83.5 | % |
Commission and brokerage | | | 38.3 | | | | 34.8 | | | | 3.4 | | | | 9.9 | % | | | 106.0 | | | | 100.1 | | | | 5.9 | | | | 5.9 | % |
Other underwriting expenses | | | 6.7 | | | | 6.2 | | | | 0.5 | | | | 8.4 | % | | | 20.4 | | | | 16.5 | | | | 3.9 | | | | 23.7 | % |
Underwriting gain (loss) | | $ | 0.6 | | | $ | 17.7 | | | $ | (17.1 | ) | | | -96.6 | % | | $ | (139.6 | ) | | $ | 55.6 | | | $ | (195.2 | ) | | NM |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Point Chg | | | | | | | | | | | | | | Point Chg |
Loss ratio | | | 72.2 | % | | | 60.3 | % | | | | | | | 11.9 | | | | 102.8 | % | | | 60.3 | % | | | | | | | 42.5 | |
Commission and brokerage ratio | | | 23.4 | % | | | 23.6 | % | | | | | | | (0.2 | ) | | | 22.8 | % | | | 23.1 | % | | | | | | | (0.3 | ) |
Other underwriting expense ratio | | | 4.0 | % | | | 4.2 | % | | | | | | | (0.2 | ) | | | 4.4 | % | | | 3.8 | % | | | | | | | 0.6 | |
Combined ratio | | | 99.6 | % | | | 88.1 | % | | | | | | | 11.5 | | | | 130.0 | % | | | 87.2 | % | | | | | | | 42.8 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(NM, not meaningful) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | | | | | | | | | |
Premiums. Gross written premiums increased by 18.8% to $323.7 million for the three months ended September 30, 2010 compared to $272.6 million for the three months ended September 30, 2009, due to continued strong growth in our Brazil, Miami and New Jersey offices, a $42.9 million increase; Canada, a $5.5 million increase; and Asia, a $2.8 million increase. Net written premiums increased by 15.1% to $168.4 million for the three months ended September 30, 2010 compared to $146.3 million for the three months ended September 30, 2009, principally as a result of the increase in gross written premiums. Premiums earned increased by 10.9% to $163.9 million for the three months ended September 30, 2010 compared to $147.9 million for the three months ended September 30, 2009.2010. The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.
Gross written premiums increased by 13.6% to $906.1 million for the nine months ended September 30, 2010 compared to $797.6 million for the nine months ended September 30, 2009, due to continued strong growth in Brazil, Miami and New Jersey offices, a $49.4 million increase; Asia, a $36.6 million increase; and Canada, a $22.6 million increase; the result of a combination of new business, rate increases in select areas and economic and insurance growth in some markets. Also contributing to the increase was $13.4 million in reinstatement premiums from the Chilean earthquake. Net written premiums increased by 10.1% to $479.7 million for the nine months ended September 30, 2010 compared to $435.7 million for the nine months ended September 30, 2009. Premiums earned increased by 7.5% to $465.7 million f or the nine months ended September 30, 2010 compared to $433.1 million for the nine months ended September 30, 2009, as a result of the increase in net written premiums. Variance explanations for net written premiums and premiums earned for the nine months were similar to those 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, | | Three Months Ended September 30, |
| | Current | | | Ratio %/ | | Prior | | | Ratio %/ | | Total | | | Ratio %/ | | Current | | | Ratio %/ | | Prior | | | Ratio %/ | | Total | | | Ratio %/ |
(Dollars in millions) | | Year | | | Pt Change | | Years | | | Pt Change | | Incurred | | | Pt Change | | Year | | | Pt Change | | Years | | | Pt Change | | Incurred | | | Pt Change |
2011 | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | | $ | 60.8 | | | | 40.2 | % | | | $ | (7.9 | ) | | | -5.2 | % | | | $ | 52.9 | | | | 35.0 | % | |
Catastrophes | | | | 52.3 | | | | 34.6 | % | | | | (0.7 | ) | | | -0.4 | % | | | | 51.7 | | | | 34.2 | % | |
Total segment | | | $ | 113.1 | | | | 74.8 | % | | | $ | (8.6 | ) | | | -5.6 | % | | | $ | 104.6 | | | | 69.2 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2010 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | 94.4 | | | | 57.6 | % | | | $ | (13.5 | ) | | | -8.3 | % | | | $ | 80.8 | | | | 49.3 | % | | | $ | 94.4 | | | | 57.6 | % | | | $ | (13.5 | ) | | | -8.3 | % | | | $ | 80.8 | | | | 49.3 | % | |
Catastrophes | | | 38.2 | | | | 23.3 | % | | | | (0.7 | ) | | | -0.4 | % | | | | 37.5 | | | | 22.9 | % | | | | 38.2 | | | | 23.3 | % | | | | (0.7 | ) | | | -0.4 | % | | | | 37.5 | | | | 22.9 | % | |
Total segment | | $ | 132.6 | | | | 80.9 | % | | | $ | (14.2 | ) | | | -8.7 | % | | | $ | 118.4 | | | | 72.2 | % | | | $ | 132.6 | | | | 80.9 | % | | | $ | (14.2 | ) | | | -8.7 | % | | | $ | 118.4 | | | | 72.2 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Variance 2011/2010 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | 76.4 | | | | 51.7 | % | | | $ | (0.6 | ) | | | -0.4 | % | | | $ | 75.8 | | | | 51.3 | % | | | $ | (33.6 | ) | | | (17.4 | ) | pts | | $ | 5.6 | | | | 3.1 | | pts | | $ | (27.9 | ) | | | (14.3 | ) | pts |
Catastrophes | | | 11.2 | | | | 7.6 | % | | | | 2.1 | | | | 1.5 | % | | | | 13.4 | | | | 9.0 | % | | | | 14.1 | | | | 11.3 | | pts | | | - | | | | - | | pts | | | 14.2 | | | | 11.3 | | pts |
Total segment | | $ | 87.7 | | | | 59.3 | % | | | $ | 1.5 | | | | 1.0 | % | | | $ | 89.2 | | | | 60.3 | % | | | $ | (19.5 | ) | | | (6.1 | ) | pts | | $ | 5.6 | | | | 3.1 | | pts | | $ | (13.8 | ) | | | (3.0 | ) | pts |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Variance 2010/2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | 18.0 | | | | 5.9 | | pts | | $ | (12.9 | ) | | | (7.9 | ) | pts | | $ | 5.0 | | | | (2.0 | ) | pts | |
Catastrophes | | | 27.0 | | | | 15.7 | | pts | | | (2.8 | ) | | | (1.9 | ) | pts | | | 24.1 | | | | 13.9 | | pts | |
Total segment | | $ | 44.9 | | | | 21.6 | | pts | | $ | (15.7 | ) | | | (9.7 | ) | pts | | $ | 29.2 | | | | 11.9 | | pts | |
| | Nine Months Ended September 30, | | Nine Months Ended September 30, |
| | Current | | | Ratio %/ | | Prior | | | Ratio %/ | | Total | | | Ratio %/ | | Current | | | Ratio %/ | | Prior | | | Ratio %/ | | Total | | | Ratio %/ |
(Dollars in millions) | | Year | | | Pt Change | | Years | | | Pt Change | | Incurred | | | Pt Change | | Year | | | Pt Change | | Years | | | Pt Change | | Incurred | | | Pt Change |
2011 | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | | $ | 202.3 | | | | 42.1 | % | | | $ | (19.9 | ) | | | -4.1 | % | | | $ | 182.4 | | | | 38.0 | % | |
Catastrophes | | | | 331.7 | | | | 69.1 | % | | | | 0.2 | | | | 0.0 | % | | | | 331.9 | | | | 69.1 | % | |
Total segment | | | $ | 534.0 | | | | 111.2 | % | | | $ | (19.7 | ) | | | -4.1 | % | | | $ | 514.3 | | | | 107.1 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2010 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | 269.4 | | | | 57.8 | % | | | $ | (19.0 | ) | | | -4.1 | % | | | $ | 250.4 | | | | 53.8 | % | | | $ | 269.4 | | | | 57.8 | % | | | $ | (19.0 | ) | | | -4.1 | % | | | $ | 250.4 | | | | 53.8 | % | |
Catastrophes | | | 236.4 | | | | 50.8 | % | | | | (7.9 | ) | | | -1.7 | % | | | | 228.6 | | | | 49.1 | % | | | | 236.4 | | | | 50.8 | % | | | | (7.9 | ) | | | -1.7 | % | | | | 228.6 | | | | 49.1 | % | |
Total segment | | $ | 505.9 | | | | 108.6 | % | | | $ | (26.9 | ) | | | -5.8 | % | | | $ | 479.0 | | | | 102.8 | % | | | $ | 505.9 | | | | 108.6 | % | | | $ | (26.9 | ) | | | -5.8 | % | | | $ | 479.0 | | | | 102.8 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | 235.0 | | | | 54.3 | % | | | $ | 4.5 | | | | 1.1 | % | | | $ | 239.5 | | | | 55.3 | % | | |
Catastrophes | | | 20.3 | | | | 4.7 | % | | | | 1.1 | | | | 0.3 | % | | | | 21.4 | | | | 5.0 | % | | |
Total segment | | $ | 255.3 | | | | 58.9 | % | | | $ | 5.7 | | | | 1.3 | % | | | $ | 261.0 | | | | 60.3 | % | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Variance 2010/2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Variance 2011/2010 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | 34.4 | | | | 3.5 | | pts | | $ | (23.5 | ) | | | (5.2 | ) | pts | | $ | 10.9 | | | | (1.5 | ) | pts | | $ | (67.1 | ) | | | (15.7 | ) | pts | | $ | (0.9 | ) | | | - | | pts | | $ | (68.0 | ) | | | (15.8 | ) | pts |
Catastrophes | | | 216.1 | | | | 46.1 | | pts | | | (9.0 | ) | | | (2.0 | ) | pts | | | 207.2 | | | | 44.1 | | pts | | | 95.3 | | | | 18.3 | | pts | | | 8.1 | | | | 1.7 | | pts | | | 103.3 | | | | 20.0 | | pts |
Total segment | | $ | 250.6 | | | | 49.7 | | pts | | $ | (32.6 | ) | | | (7.1 | ) | pts | | $ | 218.0 | | | | 42.5 | | pts | | $ | 28.1 | | | | 2.6 | | pts | | $ | 7.2 | | | | 1.7 | | pts | | $ | 35.3 | | | | 4.3 | | pts |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding.) | (Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | (Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | |
Incurred losses and LAE increased 32.7%decreased 11.7% to $104.6 million for the three months ended September 30, 2011 compared to $118.4 million for the three months ended September 30, 2010 compared to $89.2 million for the three months ended September 30, 2009.2010. The increasedecrease was principally due to a $27.0$33.6 million increase(17.4 points) decrease in current year attritional losses. Partially offsetting the attritional losses were current year catastrophes losses due to the New Zealand earthquake, Chile earthquake and the Canadian hailstorm. Attritional losses alsowhich increased $14.1 million (11.3 points) primarily due to the increased premiums earned and higher expected loss ratios, which were partially offset by more favorable developmentJapan earthquake.
Incurred losses and LAE increased 83.5%7.4% to $514.3 million for the nine months ended September 30, 2011 compared to $479.0 million for the nine months ended September 30, 20102010. The increase was principally due to a $95.3 million (18.3 points) increase in current year catastrophes (Japan and New Zealand earthquakes, the Australia floods, and the wildfire loss in Alberta, Canada), compared to $261.0 millionthe 2010 reported catastrophe losses (Chile earthquake and Australia hailstorms). The current year attritional loss ratio decreased to 42.1% for the nine months ended September 30, 2009. The increase was principally due to the 2010 large catastrophes of $187.1 million2011 from 57.8% for the Chilean earthquake, $28.0 million for the New Zealand earthquake, $18.0 million for the Australian hailstorms and $3.4 million for the Canadian hailstorm compared to the absence in 2009 of any similar large events. Attritional losses also increasednine months ended September 30, 2010, primarily due to a shift in the increased premiums earned andmix of business with a lower level of quota share business, which generally carries a higher expected loss ratios, which were partially offset by favorable developmentratio, in addition to the impact of prior years’ attritional reserves.changes in the affiliated quota share agreement.
Segment Expenses. Commission and brokerage expenses increased 9.9%decreased 6.8% to $35.7 million for the three months ended September 30, 2011 compared to $38.3 million for the three months ended September 30, 2010 compared2010. Commission and brokerage expenses decreased 0.2% to $34.8$105.8 million for the threenine months ended September 30, 2009. Commission and brokerage expenses increased 5.9%2011 compared to $106.0 million for the nine months ended September 30, 20102010. These variances were due to the changes in premiums and the mix of business.
Segment other underwriting expenses increased to $7.5 million for the three months ended September 30, 2011 compared to $100.1$6.7 million for the three months ended September 30, 2010. Segment other underwriting expenses increased to $20.9 million for the nine months ended September 30, 2009. The increases were primarily in line with the increases in premiums earned.
Segment other underwriting expenses for the three months ended September 30, 2010 were $6.7 million2011 compared to $6.2 million for the three months ended September 30, 2009. Segment other underwriting expenses for the nine months ended September 30, 2010 were $20.4 million compared to $16.5 million for the nine months ended September 30, 2009. These increases were due to growth in the overall infrastructure and consistent with the growth in premiums earned resulting in stable other underwriting expense ratios.2010.
Market Sensitive Instruments.
The Securities and Exchange Commission’s (“SEC”)SEC’s Financial Reporting Release #48 requires registrants to clarify and expand upon the existing financial statement disclosure requirements for derivative financial instruments, derivative commodity instruments and other financial instruments (collectively, “market sensitive instruments”). 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 periodically, consistent with our current and projected operating results, market conditions and our tax position. The fixed maturity securities in the investment portfolio are comprised of non-trading available for sale securities. Additionally, we have invested in equity securities.
The overall investment strategy considers the scope of present and anticipated Company operations. In particular, estimates of the financial impact resulting from non-investment asset and liability transactions, together with 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$8.3 billion investment portfolio, at September 30, 2010,2011, is principally comprised of fixed maturity securities, which are generally subject to interest rate risk and some foreign currency exchange rate risk, and some equity securities, which are subject to price fluctuations.fluctuations and some foreign exchange rate risk. The impact of the foreign exchange risks on the investment portfolio is partially mitigated by changes in the dollar value of foreign currency denominated liabilities and their associated income statement impact.
Interest rate risk is the potential change in value of the fixed maturity securities portfolio, including short-term investments, from a change in market interest rates. In a declining interest rate environment, it includes prepayment risk on the $474.4$479.2 million of mortgage-backed securities in the $6,485.2$5,190.7 million fixed maturity portfolio. Prepayment risk results from potential accelerated principal payments that shorten the average life and thus the expected yield of the security.
The table below displays the potential impact of market value fluctuations and after-tax unrealized appreciation on our fixed maturity securities portfolio (including $304.9$535.9 million of short-term investments) for the periodperiods 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 for mortgage-backed securities, changes in prepayment expectations under different interest rate environments were taken into account. For legal entities with 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 th ethe various interest rate change scenarios.
| | Impact of Interest Rate Shift in Basis Points |
| | At September 30, 2010 |
(Dollars in millions) | | | -200 | | | | -100 | | | | 0 | | | | 100 | | | | 200 | |
Total Market/Fair Value | | $ | 7,310.9 | | | $ | 7,066.6 | | | $ | 6,790.1 | | | $ | 6,464.2 | | | $ | 6,142.7 | |
Market/Fair Value Change from Base (%) | | | 7.7 | % | | | 4.1 | % | | | 0.0 | % | | | -4.8 | % | | | -9.5 | % |
Change in Unrealized Appreciation | | | | | | | | | | | | | | | | | | | | |
After-tax from Base ($) | | $ | 338.5 | | | $ | 179.7 | | | $ | - | | | $ | (211.8 | ) | | $ | (420.8 | ) |
| | Impact of Interest Rate Shift in Basis Points | |
| | At September 30, 2011 | |
(Dollars in millions) | | | -200 | | | | -100 | | | | 0 | | | | 100 | | | | 200 | |
Total Market/Fair Value | | $ | 6,030.8 | | | $ | 5,883.2 | | | $ | 5,726.6 | | | $ | 5,553.3 | | | $ | 5,375.1 | |
Market/Fair Value Change from Base (%) | | | 5.3 | % | | | 2.7 | % | | | 0.0 | % | | | -3.0 | % | | | -6.1 | % |
Change in Unrealized Appreciation | | | | | | | | | | | | | | | | | | | | |
After-tax from Base ($) | | $ | 197.7 | | | $ | 101.8 | | | $ | - | | | $ | (112.6 | ) | | $ | (228.5 | ) |
We had $7,611.6$8,165.3 million and $7,300.1$7,652.3 million of gross reserves for losses and LAE as of September 30, 20102011 and December 31, 2009,2010, 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 loss and loss reserve obligations have an expected duration that is reasonably consistent with our fixed income portfolio.
Equity Risk. Equity risk is the potential change in fair and/or market value of the common stock and preferred stock portfolios arising from changing equity prices. Our equity investments consist of a diversified portfolio of individual securities and mutual funds, which invest principally in high quality common and preferred stocks that are traded on major exchanges. The primary objective of the equity portfolio is to obtain greater total return relative to bonds over time through market appreciation and income.
The table below displays the impact on fair/market value and after-tax change in fair/market value of a 10% and 20% change in equity prices up and down for the periodperiods indicated.
| | Impact of Percentage Change in Equity Fair/Market Values | | Impact of Percentage Change in Equity Fair/Market Values | |
| | At September 30, 2010 | | At September 30, 2011 | |
(Dollars in millions) | | | -20% | | | -10% | | | 0% | | | 10% | | | 20% | | | -20% | | | -10% | | | 0% | | | 10% | | | 20% |
Fair/Market Value of the Equity Portfolio | | $ | 305.8 | | | $ | 344.1 | | | $ | 382.3 | | | $ | 420.5 | | | $ | 458.7 | | | $ | 879.6 | | | $ | 989.5 | | | $ | 1,099.5 | | | $ | 1,209.4 | | | $ | 1,319.4 | |
After-tax Change in Fair/Market Value | | | (49.7 | ) | | | (24.8 | ) | | | - | | | | 24.8 | | | | 49.7 | | | | (142.9 | ) | | | (71.5 | ) | | | - | | | | 71.5 | | | | 142.9 | |
Foreign Exchange Risk. Foreign currency risk is the potential change in value, income and cash flow arising from adverse changes in foreign currency exchange rates. Each of our non-U.S. (“foreign”) operations maintains capital in the currency of the country of its geographic location consistent with local regulatory guidelines. Each foreign operation may conduct business in its local currency, as well as the currency of other countries in which it operates. The primary foreign currency exposures for these foreign operations are the Singapore and Canadian Dollar,Dollars, the British Pound Sterling and the Euro. We mitigate foreign exchange exposure by generally matching the currency and duration of our assets to our corresp ondingcorresponding operating liabilities. In accordance with FASB guidance, 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, 2010,2011, there has been no material change in exposure to foreign exchange rates as compared to December 31, 2009.2010.
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 c atastrophecatastrophe 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 risks described under the caption “Risk Factors” in our most recently filed Annual Report on Form 10-K, Part 1, ITEM 1A. We undertake no obligation to update o ror revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
Market Risk Instruments. See “Market Sensitive Instruments” in PART I – ITEM 2.
ITEM 4. | 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 Of ficerOfficer 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. | ITEM 1. LEGAL PROCEEDINGS |
In the ordinary course of business, we arethe Company is involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine ourthe Company’s rights and obligations under insurance and reinsurance andagreements. In some disputes, the Company seeks to enforce its rights under an agreement or to collect funds owing to it. In other contractual agreements.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, we believethe Company believes that ourits positions are legally and commercially reasonable, and we vigorously seek to preserve, enforce and defend our legal rights under various agreements. Whilereasonable. The Company considers the final outcomestatuses of these matters cannot be predicted with certainty, we do not believe that any of these matters,proceedings when finally resolved, will have a material adverse effect on o ur 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.determining its reserves for unpaid loss and loss adjustment expenses.
NoAside from litigation and arbitrations related to these insurance and reinsurance agreements, the Company is not a party to any other material changes.
None.
None.
litigation or arbitration.
No material changes.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 5. OTHER INFORMATION
None.
Exhibit Index:
Exhibit No. | Description |
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Exhibit No. | Description | |
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31.1 | Section 302 Certification of Joseph V. Taranto | |
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31.2 | Section 302 Certification of Dominic J. Addesso | |
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32.1 | Section 906 Certification of Joseph V. Taranto and Dominic J. Addesso | |
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101.INS | XBRL Instance Document | |
| | |
101.SCH | XBRL Taxonomy Extension Schema | |
| | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase | |
| | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase | |
| | |
101.LAB | XBRL Taxonomy Extension Labels Linkbase | |
| | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase | |
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Everest Reinsurance Holdings, Inc.
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/ DOMINIC J. ADDESSO | |
| | Dominic J. Addesso | |
| | Executive Vice President and | |
| | | Chief Financial Officer | |
| | | | |
| | (Duly Authorized Officer and Principal Financial Officer) |
| | | | |
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Dated: November 15, 201014, 2011 | | | | |