The components of underwriting gain (loss) are highly correlated to the level of premium volume. The amount of net written premiums reflects gross written premiums less ceded premiums. Premiums ceded were $46.9 million (3.8% of gross written premiums) and $49.9 million (5.0% of gross written premiums) for the three months ended March 31, 2004 and 2003, respectively. Ceded premiums relate primarily to specific reinsurance purchased by the U.S. Insurance operation.
Premiums earned increased to $1,055.1 million from $744.9 million for the three months ended March 31, 2004 compared to the three months ended March 31, 2003. The change reflects period-to-period changes in net written premiums and business mix together with normal variability in earning patterns. Business mix changes occur not only as the Company shifts emphasis between products, lines of business, distribution channels and markets but also as individual contracts renew or non-renew, almost always with changes in coverage, structure, prices and/or terms, and as new contracts are accepted with coverages, structures, prices and/or terms different from those of expiring contracts.
Incurred losses and LAE increased primarily as a result of the increased premium volume. Premiums earned increased 41.6% and incurred losses and LAE increased by 38.6% reflecting that part of the premium increase represented improvement in pricing, terms and conditions, as opposed to an increase in exposures. Partially offsetting the impact of improved pricing was the effect of prior year loss reserve strengthening. The increase in incurred losses and LAE relating to prior period reserve strengthening was $45.9 million and $38.9 million for the three months ended March 31, 2004 and 2003, respectively.
Commission, brokerage and tax expense also increased as a result of the increasing premium volume as these expenses generally vary in direct proportion to premium. However, the percentage increase was generally less than the percentage increase in premium volume, reflecting both changes in the Company’s business mix and the attractive market conditions, which tend to provide the Company a relatively greater ability to exert downward pressure on commission and brokerage rates.
Net investment income increased to $100.9 million from $93.5 million for the three months ended March 31, 2004 compared to the three months ended March 31, 2003, which correlates reasonably with the increase in premium volume. Premiums are generally collected over the first 12 to 15 months of the reinsurance contract, while related losses are typically paid out over numerous years. This tends to increase cash flow from operations when premiums are increasing. The Company’s cash flow from operations was $399.6 million and $327.7 million for the three months ended March 31, 2004 and 2003, respectively. Coupled with common stock offerings and the issuance of junior subordinated debt securities, this facilitated the growth in the Company’s total investments and cash to $10,182.3 million as of March 31, 2004 from $9,321.3 million at December 31, 2003. The impact on net investment income resulting from the growth in the investment portfolio was partially offset by an overall decline in interest rates during this same time period.
Net realized capital losses of $34.9 million and $13.2 million for the three months ended March 31, 2004 and 2003, respectively, were primarily the result of write-downs in the value of securities deemed to be impaired on an other than temporary basis, partially offset by realized gains.
The Company generated an income tax expense of $20.3 million and $16.4 million for the three months ended March 31, 2004 and 2003, respectively, generally reflecting improved underwriting and investment income results, partially offset by the benefit from net realized capital losses.
The increase in net income to $126.1 million and $94.4 million for the three months ended March 31, 2004 and 2003, respectively, generally reflects improved underwriting and investment results, partially offset by increased income taxes.
The Company’s shareholders’ equity increased to $3,364.6 million as of March 31, 2004 from $3,164.9 million as of December 31, 2003. This increase is primarily due to net income for the period and an increase in unrealized appreciation on the Company’s investments.
Segment Information
The Company, through its subsidiaries, operates in five segments: U.S. Reinsurance, U.S. Insurance, Specialty Underwriting, International and Bermuda. The U.S. Reinsurance operation writes property and casualty reinsurance, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies within the U.S. The U.S. Insurance operation writes property and casualty insurance primarily through general agent relationships and surplus lines brokers within the U.S. The Specialty Underwriting operation writes A&H, marine, aviation and surety business within the U.S. and worldwide through brokers and directly with ceding companies. The International operation writes property and casualty reinsurance through the Company’s branches in Canada and Singapore, in addition to foreign business written through the Company’s Miami and New Jersey offices. The Bermuda operation provides reinsurance and insurance to worldwide property and casualty markets and reinsurance to life insurers through brokers and directly with ceding companies from its Bermuda office and reinsurance to the United Kingdom and European markets, through brokers, from its UK branch.
These segments are managed in a carefully coordinated fashion with strong elements of central control, including with respect to capital, investments and support operations. As a result, management monitors and evaluates the financial performance of these operating segments principally based upon their underwriting results. Underwriting results include earned premium less losses and LAE incurred, commission and brokerage expenses and other underwriting expenses. The Company utilizes inter-affiliate reinsurance but such reinsurance does not impact segment results because business is generally reported within the segment in which the business was first produced.
Effective January 1, 2004, Everest Re sold its United Kingdom branch to Bermuda Re, a Bermuda insurance company and a direct subsidiary of Group. Business for this branch was previously included in the International segment and is now included in the Bermuda segment. In accordance with FAS 131, the Company restated the International and Bermuda segments for the three months ended March 31, 2003 to conform with the March 31, 2004 segment reporting due to the sale.
Premiums. Gross written premiums increased 22.3% to $1,224.9 million in the three months ended March 31, 2004 from $1,001.8 million in the three months ended March 31, 2003, as the Company took advantage of the generally attractive rates, terms and conditions available in its markets, including selected growth opportunities, while continuing to maintain a disciplined underwriting approach.
22
Premium growth areas included an 84.3% ($106.7 million) increase in the Bermuda operations, reflecting an emphasis on traditional business classes in Bermuda and the UK and particularly attractive market conditions in Europe. The International operation grew 63.7% ($57.5 million), primarily due to a $41.6 million increase in international business written through the Miami and New Jersey offices representing primarily Latin American business and an $8.2 million increase to Canadian business. The U.S. Insurance operation grew 13.8% ($43.0 million), principally as a result of a $46.7 million increase in program business outside of the workers’ compensation class, partially offset by a $3.7 million decrease in workers’ compensation business. The U.S. Reinsurance operation grew 7.5% ($25.5 million), principally related to a $99.0 million increase in treaty casualty business, partially offset by a $52.6 million decrease in treaty property business and a $20.2 million decrease in facultative business. The Specialty Underwriting operation decreased 7.4% ($9.7 million), resulting primarily from a $9.3 million decrease in A&H business and a $1.5 million decrease in marine and aviation, partially offset by an increase in surety business of $1.1 million.
Ceded premiums decreased slightly to $46.9 million for the three months ended March 31, 2004 from $49.9 million for the three months ended March 31, 2003.
Net written premiums increased by 23.7% to $1,178.0 million for the three months ended March 31, 2004 from $951.9 million for the three months ended March 31, 2003, reflecting the increase in gross written premiums, combined with the decrease in ceded premiums.
Premium Revenues. Net premiums earned increased by 41.6% to $1,055.1 million in the three months ended March 31, 2004 from $744.9 million in the three months ended March 31, 2003. Contributing to this increase was an 116.5% ($114.8 million) increase in the Bermuda operations, an 84.0% ($65.1 million) increase in the International operation, a 38.7% ($101.2 million) increase in the U.S. Reinsurance operation and a 19.4% ($35.5 million) increase in the U.S. Insurance operation, partially offset by a 5.2% ($6.4 million) decrease in the Specialty Underwriting operation. All of these changes reflect period-to-period changes in net written premiums and business mix, together with normal variability in earning patterns. Business mix changes occur not only as the Company shifts emphasis between products, lines of business, distribution channels and markets, but also as individual contracts renew or non-renew, almost always with changes in coverage, structure, prices and/or terms, and as new contracts are accepted with coverages, structures, prices and/or terms different from those of expiring contracts. As premium reporting, earnings, loss and commission characteristics derive from the provisions of individual contracts, the continuous turnover of individual contracts, arising from both strategic shifts and day to day underwriting, can and does introduce appreciable background variability in various underwriting line items.
Expenses. Incurred losses and LAE increased by 38.6% to $711.5 million in the three months ended March 31, 2004 from $513.5 million in the three months ended March 31, 2003. The increase in incurred losses and LAE was principally attributable to the increase in net premiums earned, the impact of changes in the Company’s mix of business and reserve adjustments for prior period losses.
Net prior period reserve adjustments for the three months ended March 31, 2004 was $45.9 million. For the three months ended March 31, 2003, net prior period reserve adjustments were $38.9 million. The reserve adjustments for the three months ended March 31, 2004 included asbestos and environmental (“A&E”) adjustments of $63.2 million, which exposures date prior to the Company’s initial public offering in 1995. Other pre-1995 exposures, primarily casualty reinsurance, experienced $37.7 million of favorable loss adjustments. Other net loss adjustments relating to post 1995 exposures amounted to $20.4 million for the quarter. For the three months ended March 31, 2003, reserve adjustments included $11.4 million related to A&E and $27.5 million on other lines of business with principally all of the non-A&E adjustments relating to the post 1995 period.
23
The U.S. Reinsurance segment accounted for $13.0 million and $21.0 million of the net prior period reserve adjustments for the three months ended March 31, 2004 and 2003, respectively. Asbestos exposures accounted for $4.2 million and $8.5 million for the three months ended March 31, 2004 and 2003, respectively, with the remainder attributable principally to two business classes, professional liability and general casualty.
The U.S. Insurance segment reflected $11.6 million of net prior period reserve adjustments for the three months ended March 31, 2004 and no net prior period reserve adjustments for the three months ended March 31, 2003. The March 31, 2004 prior period reserve adjustments were principally due to non-workers’ compensation programs and related to accident years 2000 through 2002.
The International segment had no appreciable net prior period reserve adjustments for the three months ended March 31, 2004 and 2003, respectively.
The Specialty Underwriting segment had no appreciable prior period reserve adjustments for the three months ended March 31, 2004 and had prior period reserve adjustments of $15.0 million for the three months ended March 31, 2003 principally related to the surety line of business.
The Bermuda segment reflected $21.3 million of net prior period reserve adjustments for the three months ended March 31, 2004 and $2.9 million of development for the three months ended March 31, 2003. The development for the first quarter of 2004 is the result of $59.0 million of asbestos reserve development partially offset by $37.7 million of favorable development on other pre-1995 exposures. The $2.9 million development for 2003 also related to the asbestos exposures. All of the development related to exposures were assumed through the September 19, 2000 loss portfolio transfer from Mt. McKinley Insurance Company (“Mt. McKinley”).
Incurred losses and LAE include catastrophe losses, which include the impact of both current period events and favorable and unfavorable development on prior period events, and are net of reinsurance. Catastrophe losses are net of specific reinsurance, but before recoveries under corporate level reinsurance and potential incurred but not reported (“IBNR”) reserve offset. A catastrophe is a property event with expected reported losses of at least $5.0 million before corporate level reinsurance and taxes. Catastrophe losses, net of contract specific cessions, were $13.3 million in the three months ended March 31, 2004, relating principally to two industrial risk losses experienced by the Bermuda operation compared to $0.1 million in the three months ended March 31, 2003.
Incurred losses and LAE for the three months ended March 31, 2004 reflected ceded losses and LAE of $40.5 million compared to ceded losses and LAE for the three months ended March 31, 2003 of $10.4 million. The increase in ceded losses is primarily the result of fluctuations in losses ceded under the specific reinsurance coverages purchased by the U.S. Insurance operation.
The segment components of the increase in incurred losses and LAE for the three months ended March 31, 2004 from the three months ended March 31, 2003 were a 136.0% ($89.7 million) increase in the Bermuda operation, a 75.3% ($31.0 million) increase in the International operation, a 41.0% ($72.8 million) increase in the U.S. Reinsurance operation and a 22.7% ($29.4 million) increase in the U.S Insurance operation, all partially offset by a 25.2% ($24.9 million) decrease in the Specialty Underwriting operation. These changes reflect variability in premiums earned, changes in the loss expectation assumptions for business written and the increase in catastrophe losses and the net prior period reserve development discussed above. Incurred losses and LAE for each operation were also impacted by variability relating to changes in the mix of business by class and type.
24
The Company’s loss ratio, which is calculated by dividing incurred losses and LAE by net premiums earned, decreased by 1.5 percentage points to 67.4% in the three months ended March 31, 2004 from 68.9% in the three months ended March 31, 2003, reflecting the impact of the changes in premiums earned and incurred losses and LAE discussed above, as well as changes in business mix.
The following table shows the loss ratios for each of the Company’s operating segments for the three months ended March 31, 2004 and 2003. The loss ratios for all operations were impacted by the factors noted above.
| | |
|---|
| Segment Loss Ratios |
|
| Segment | | | | 20 | 04 | | 20 | 03 |
|
| U.S. Reinsurance | | | | 69 | .0% | | 68 | .0% |
| U.S. Insurance | | | | 72 | .9% | | 71 | .0% |
| Specialty Underwriting | | | | 62 | .7% | | 79 | .4% |
| International | | | | 50 | .6% | | 53 | .2% |
| Bermuda | | | | 72 | .9% | | 66 | .9% |
Segment underwriting expenses increased by 36.2% to $246.7 million in the three months ended March 31, 2004 from $181.1 million in the three months ended March 31, 2003. Commission, brokerage, taxes and fees increased by $60.0 million, principally reflecting increases in premium volume and changes in the mix of business. Segment other underwriting expenses increased by $5.6 million as the Company expanded operations to support its increased business volume. Contributing to the segment underwriting expense increases were an 123.0% ($22.7 million) increase in the Bermuda operation, a 96.5% ($15.9 million) increase in the International operation, a 58.0% ($38.1 million) increase in the U.S. Reinsurance operation, which were partially offset by a 24.0% ($10.6 million) decrease in the U.S. Insurance operation and an 1.4% ($0.5 million) decrease in the Specialty Underwriting operation. The changes for each operation’s expenses principally resulted from changes in commission expenses related to changes in premium volume and business mix by class and type and, in some cases, changes in the use of specific reinsurance, as well as the underwriting performance of the underlying business. The Company’s expense ratio, which is calculated by dividing underwriting expenses by net premiums earned, was 23.4% for the three months ended March 31, 2004 compared to 24.6% for the three months ended March 31, 2003.
The Company’s combined ratio, which is the sum of the loss and expense ratios, decreased by 2.7 percentage points to 90.8% in the three months ended March 31, 2004 compared to 93.5% in the three months ended March 31, 2003.
25
The following table shows the combined ratios for each of the Company’s operating segments for the three months ended March 31, 2004 and 2003. The combined ratios for all operations were impacted by the loss and expense ratio variability noted above.
| | |
|---|
| Segment Combined Ratios |
|
| Segment | | | | 20 | 04 | | 20 | 03 |
|
| U.S. Reinsurance | | | | 97 | .6% | | 93 | .0% |
| U.S. Insurance | | | | 88 | .3% | | 95 | .1% |
| Specialty Underwriting | | | | 93 | .1% | | 108 | .7% |
| International | | | | 73 | .4% | | 74 | .5% |
| Bermuda | | | | 92 | .2% | | 85 | .6% |
Investment Results.Net investment income increased 7.9% to $100.9 million for the three months ended March 31, 2004 from $93.5 million for the three months ended March 31, 2003, principally reflecting the effects of investing $1,725.8 million of cash flow from operations for the twelve months ended March 31, 2004, as well as $320.0 of net proceeds from the issuance of junior subordinated debt securities in March 2004 and $316.8 million of net proceeds from the issuance of Group’s common shares in April 2003, all partially offset by the effects of the lower interest rate environment.
The following table shows a comparison of various investment yields for the periods indicated:
| | |
|---|
| | | | | 20 | 04 | | 20 | 03 |
|
| Imbedded pre-tax yield of cash and invested assets at | | |
| March 31, 2004 and December 31, 2003 | | | | 4 | .6% | | 4 | .8% |
| Imbedded after-tax yield of cash and invested assets at | | |
| March 31, 2004 and December 31, 2003 | | | | 4 | .0% | | 4 | .1% |
| Annualized pre-tax yield on average cash and invested | | |
| assets for the three months ended March 31, 2004 and 2003 | | | | 4 | .3% | | 5 | .3% |
| Annualized after-tax yield on average cash and invested | | |
| assets for the three months ended March 31, 2004 and 2003 | | | | 3 | .8% | | 4 | .5% |
Net realized capital losses were $34.9 million for the there months ended March 31, 2004, reflecting realized capital losses on the Company’s investments of $65.4 million, which included $65.0 million related to the write-downs in the value of interest only strips deemed to be impaired on an other than temporary basis in accordance with EITF 99-20, partially offset by $30.4 million of realized capital gains. Net realized capital losses were $13.2 million in the three months ended March 31, 2003, reflecting realized capital losses on the Company’s investments of $27.9 million, which included $21.2 million relating to write-downs in the value of securities deemed to be impaired on an other than temporary basis, partially offset by $14.7 million of realized capital gains.
The Company has two credit default swaps, which it no longer writes, and five specialized equity put options in its product portfolio. These products meet the definition of a derivative under FAS 133. Net derivative expenses from these derivative transactions for the three months ending March 31, 2004 and 2003 were $3.8 million and $2.7 million, respectively, which principally reflects changes in fair value of the specialized equity put options.
Other income for the three months ended March 31, 2004 was $1.5 million compared to other expense of $1.1 million for the three months ended March 31, 2003. The change in other income for the three months ended March 31, 2004 was primarily due to variability in the impact of foreign exchange.
26
Interest expense for the three months ended March 31, 2004 and 2003 was $14.5 million and $14.3 million, respectively. Interest expense for the three months ended March 31, 2004 included $9.7 million relating to the senior notes, $4.4 million relating to the junior subordinated debt securities and $0.3 million relating to borrowings under the Credit Facility. Interest expense for the three months ended March 31, 2003 included $9.7 million relating to the senior notes, $4.2 million relating to the junior subordinated debt securities and $0.4 million relating to borrowings under the Credit Facility.
Income Taxes. The Company recognized income tax expense of $20.3 million in the three months ended March 31, 2004 compared to $16.4 million in the three months ended March 31, 2003.The increase in taxes generally reflects the improved underwriting and investment income results, partially offset by the tax benefit of the realized capital losses.
Net Income. Net income was $126.1 million for the three months ended March 31, 2004 compared to net income of $94.4 million for the three months ended March 31, 2003, reflecting improved underwriting and investment income results, partially offset by increased income taxes.
FINANCIAL CONDITION
Cash and Invested Assets. Aggregate invested assets, including cash and short-term investments, were $10,182.3 million at March 31, 2004 and $9,321.3 million at December 31, 2003. The increase in cash and invested assets on March 31, 2004 resulted primarily from $399.6 million in cash flows from operations, $320.0 million from net proceeds of the issuance of junior subordinated debt securities and $79.1 million in net pre-tax unrealized appreciation of the Company’s investments. Gross pre-tax unrealized appreciation and depreciation across the Company’s investment portfolio were $483.0 million and $26.1 million, respectively, at March 31, 2004 compared to gross pre-tax unrealized appreciation and depreciation at December 31, 2003 of $421.4 million and $43.7 million, respectively.
The Company’s current investment strategy generally seeks to maximize after-tax income through a high quality, diversified, taxable and tax-preferenced fixed maturity portfolio, while maintaining an adequate level of liquidity. The Company’s mix of taxable and tax-preferenced investments is adjusted continuously, consistent with its current and projected operating results, market conditions and tax position. The fixed maturities in the investment portfolio are comprised of non-trading available for sale securities. Commencing with the second quarter of 2003, the Company invested in interest only strips. These fixed maturity securities give the holder the right to receive interest payments at a stated coupon rate on an underlying pool of mortgages. The interest payments on the outstanding mortgages are guaranteed by entities generally rated AAA. The ultimate cash flow from these investments is primarily dependent upon the average life of the mortgage pool. Generally, as market interest rates and, more specifically, market mortgage rates decline, mortgagees tend to refinance which will decrease the average life of a mortgage pool and decrease expected cash flows. Conversely, as market interest rates and, more specifically, market mortgage rates rise, repayments will slow and the ultimate cash flows will tend to rise. Accordingly, the market value of these investments tends to increase as general interest rates rise and decline as general interest rates fall. These movements are generally counter to the impact of interest rate movements on the Company’s other fixed income investments. The market value of the interest only strips was $ 266.2 million at March 31, 2004. Additionally, the Company invests in equity securities, which it believes will enhance the risk-adjusted total return of the investment portfolio.
27
The tables below briefly summarize the characteristics of the investment portfolio at March 31, 2004 and December 31, 2003.
| | |
|---|
| | | As of | | | As of | | |
| | | March 31, 2004 | | | December 31, 2003 |
|
|
| Fixed maturities | | | 89 | .7% | | | 93 | .6% |
| Equity securities | | | 2 | .6% | | | 1 | .7% |
| Short-term investments | | | 5 | .7% | | | 1 | .6% |
| Other invested assets | | | 1 | .0% | | | 1 | .1% |
| Cash | | | 1 | .0% | | | 2 | .0% |
|
|
| Total investments and cash | | | 100 | .0% | | | 100 | .0% |
|
|
| | |
|---|
| | | As of | | | | As of |
| | | March 31, 2004 | | | | December 31, 2003 |
|
|
| Fixed income portfolio duration | | | 3.9 years | | | | 4.2 years |
| Fixed income composite credit quality | | | Aa2 | | | | Aa2 |
| Imbedded end of period yield, pre-tax | | | 4.6 % | | | | 4.8% | |
| Imbedded end of period yield, after-tax | | | 4.0 % | | | | 4.1% | |
The increase in short-term investment is due principally to the issuance of $320 million of junior subordinated debt securities on March 29, 2004.
The Company, because of its income orientation, considers total return, the combination of income yield and capital appreciation/depreciation, to be less relevant as a measure of performance than may be the case for investment portfolios managed with alternative strategies. The following table provides a comparison of the Company’s total return by asset class to broadly accepted industry benchmarks.
| | |
|---|
| | | Quarter Ended | | | | Year Ended | |
| | | | March 31, 2004 | | | | December 31, 2003 |
|
|
| Fixed income portfolio total return | | | 1.6 % | | | | 6.2% | |
| Lehman bond aggregate | | | 2.7 % | | | | 4.1% | |
| Common equity portfolio total return | | | 3.6 % | | | | 17.0% | |
| S & P 500 | | | 1.7 % | | | | 28.7% | |
Loss and LAE Reserves. Gross loss and LAE reserves totaled $6,694.4 million at March 31, 2004 and $6,361.2 million at December 31, 2003. The increase during the three months ended March 31, 2004 is primarily attributable to increased premiums earned, net prior period reserve adjustments in select areas and normal variability in claim settlements.
Reinsurance receivables totaled $1,259.8 million at March 31, 2004 and $1,284.1 million at December 31, 2003. At March 31, 2004, $480.7 million, or 38.2% was receivable from subsidiaries of London Reinsurance Group (London Life). These receivables are effectively secured by a combination of letters of credit and funds held arrangements under which the Company has retained the premium payments due the retrocessionaire, recognized liabilities for such amounts and reduced such liabilities as payments are due from the retrocessionaire. In addition, $160.0 million, or 12.7% was receivable from Prudential Property and Casualty Insurance Company of Indiana (“Prupac”), whose obligations are guaranteed by The Prudential, $111.3 million, or 8.8% was receivable from Transatlantic Reinsurance Company, and $100.0 million, or 7.9% was receivable from Continental Insurance Company, which is partially secured by funds held arrangements. No other retrocessionaire accounted for more than 5% of the Company’s receivables.
28
Loss and LAE reserves net of reinsurance recoverables (“net loss and LAE reserves”) totaled $5,467.3 million at March 31, 2004 and $5,100.1 million at December 31, 2003. The following table summarizes net outstanding loss and LAE reserves by segment and A&E reserves, which are managed on a combined basis, at March 31, 2004 and December 31, 2003.
| | |
|---|
| | | Net Loss Reserves By Segment |
| | | As Reported | As Reported |
| (Dollars in millions) | | | March 31, 2004 | December 31, 2003 |
|
|
| Net Reserves By Segment | | |
| | | | | | | | | |
| U.S. Reinsurance | | | $ | 2,338 | .5 | $ | 2,250 | .1 |
| U.S. Insurance | | | | 892 | .4 | | 806 | .7 |
| Specialty Underwriting | | | | 300 | .1 | | 280 | .6 |
| International | | | | 461 | .7 | | 437 | .0 |
| Bermuda | | | | 899 | .4 | | 791 | .3 |
|
|
| Total Net Segment Reserves | | | | 4,892 | .1 | | 4,565 | .7 |
| A&E (All Segments) | | | | 575 | .2 | | 534 | .4 |
|
|
| Total Net Reserves | | | $ | 5,467 | .3 | $ | 5,100 | .1 |
|
|
The increases by segment generally reflect the increases in earned premium, changes in business mix and the impact of reserve recalculations together with the claim settlement activity. The increases for A&E reflect the impact of reserve re-evaluations and claim settlement activity.
The Company re-evaluates its loss and LAE reserves on an ongoing basis, including re-estimates of prior period reserves, taking into consideration all available information and, in particular, newly reported loss and claim experience. The effect of such re-evaluations impacts incurred losses for the current period. While there can be no assurance that reserves for, and losses from, claim obligations will not increase in the future, management believes that the Company’s existing reserves and reserving methodologies lessen the probability that any such increase would have a material adverse effect on the Company’s financial condition, results of operations or cash flows. In this context, the Company notes that over the past 10 years, its past calendar year operations have been affected variably by effects from prior period reserve re-estimates with such effects ranging from a favorable $35.4 million, representing 1.2% of the net prior period reserves for the year in which the adjustment was made, to an unfavorable ($256.9) million, representing 6.6% of the net prior period reserves for the year in which the adjustment was made. The Company’s Annual Report on Form 10-K for the year ending December 31, 2003 discusses the Company’s past experience more fully in Part 1, Item 1, “Changes in Historical Reserves.”
Asbestos and Environmental Reserves. The Company continues to receive claims under expired contracts, asserting alleged injuries and/or damages relating to or resulting from environmental pollution and hazardous substances, including asbestos. The Company’s asbestos claims typically involve potential liability for bodily injury from exposure to asbestos or for property damage resulting from asbestos or products containing asbestos. The Company’s environmental claims typically involve potential liability for (a) the mitigation or remediation of environmental contamination or (b) bodily injury or property damages caused by the release of hazardous substances into the land, air or water.
29
The Company’s reserves include an estimate of the Company’s ultimate liability for A&E claims for which ultimate value cannot be estimated using traditional reserving techniques. There are significant uncertainties in estimating the amount of the Company’s potential losses from A&E claims. Among the uncertainties are: (a) potentially long waiting periods between exposure and manifestation of any bodily injury or property damage; (b) difficulty in identifying sources of asbestos or environmental contamination; (c) difficulty in properly allocating responsibility and/or liability for asbestos or environmental damage; (d) changes in underlying laws and judicial interpretation of those laws; (e) potential for an asbestos or environmental claim to involve many insurance providers over many policy periods; (f) long reporting delays, both from insureds to insurance companies and from ceding companies to reinsurers; (g) historical data on A&E losses, which is more limited and variable than historical information on other types of casualty claims; (h) questions concerning interpretation and application of insurance and reinsurance coverage; and (i) uncertainty regarding the number and identity of insureds with potential asbestos or environmental exposure.
With respect to asbestos claims in particular, several additional factors have emerged in recent years that further compound the difficulty in estimating the Company’s liability. These developments include: (a) continued growth in the number of claims filed, in part reflecting a much more aggressive plaintiff bar; (b) a disproportionate percentage of claims filed by individuals with no functional injury from asbestos claims with little to no financial value but that have increasingly been considered in jury verdicts and settlements; (c) the growth in the number and significance of bankruptcy filings by companies as a result of asbestos claims (including, more recently, bankruptcy filings in which companies attempt to resolve their asbestos liabilities in a manner that is prejudicial to insurers and forecloses insurers from the negotiation of bankruptcy plans); (d) the growth in claim filings against defendants formerly regarded as “peripheral”; (e) the concentration of claims in a small number of states that favor plaintiffs; (f) the growth in the number of claims that might impact the general liability portion of insurance policies rather than the product liability portion; (g) responses in which specific courts have adopted measures to ameliorate the worst procedural abuses; (h) an increase in settlement values being paid to asbestos claimants; and (i) the potential that the U.S. Congress or state legislatures may adopt legislation to address the asbestos litigation issue.
Management believes that these uncertainties and factors continue to render reserves for A&E losses significantly less subject to traditional actuarial analysis than reserves for other types of losses. Given these uncertainties, management believes that no meaningful range for such ultimate losses can be established. The Company establishes reserves to the extent that, in the judgment of management, the facts and prevailing law reflect an exposure for the Company or its ceding companies.
In connection with the acquisition of Mt. McKinley, which has significant exposure to A&E claims, Prupac, a subsidiary of The Prudential, provided reinsurance to Mt. McKinley covering 80% ($160.0 million) of the first $200.0 million of any adverse development of Mt. McKinley’s reserves as of September 19, 2000 and The Prudential guaranteed Prupac’s obligations to Mt. McKinley. Cessions under this reinsurance agreement exhausted the limit available under the contract at December 31, 2003. Due to the uncertainties discussed above, the ultimate losses may vary materially from current loss reserves and could have a material adverse effect on the Company’s future financial condition, results of operations and cash flows.
30
The following table shows the development of prior year A&E reserves on both a gross and net of retrocessional basis for the three months ended March 31, 2004 and 2003:
| | |
|---|
| | | Three Months Ended | | | | | |
| | | March 31, |
| (Dollars in thousands) | | | | 2004 | | | 2003 | |
|
|
|
| Gross basis: | | |
| Beginning of period reserves | | | $ | 765,257 | | $ | 667,922 | |
| Incurred losses | | | | 66,000 | | | 17,673 | |
| Paid losses | | | | (25,408 | ) | | (18,635 | ) |
|
|
|
| End of period reserves | | | $ | 805,849 | | $ | 666,960 | |
|
|
|
| Net basis: | | |
| Beginning of period reserves | | | $ | 534,369 | | $ | 527,462 | |
| Incurred losses | | | | 63,197 | | | 11,360 | |
| Paid losses | | | | (22,382 | ) | | (17,358 | ) |
|
|
|
| End of period reserves | | | $ | 575,184 | | $ | 521,464 | |
|
|
|
At March 31, 2004, the gross reserves for A&E losses were comprised of $137.2 million representing case reserves reported by ceding companies, $113.9 million representing additional case reserves established by the Company on assumed reinsurance claims, $335.8 million representing case reserves established by the Company on direct excess insurance claims, including Mt. McKinley, and $218.9 million representing IBNR reserves.
Industry analysts have developed a measurement, known as the survival ratio, to compare the A&E reserves among companies with such liabilities. The survival ratio is typically calculated by dividing a company’s current net reserves by the three year average of paid losses, and therefore measures the number of years that it would take to exhaust the current reserves based on historical payment patterns. Using this measurement, the Company’s net three year A&E survival ratio was 9.5 years at March 31, 2004. Adjusting these ratios for the effect of the reinsurance ceded under the reinsurance agreement with Prupac, the measures rise to the equivalent of 12.1 years at March 31, 2004. The cession of $160.0 million to the stop loss reinsurance provided by Prupac in connection with the acquisition of Mt. McKinley results in unpaid proceeds that are not reflected in past net payments and effectively extend the funding available for future net payments. Because the survival ratio was developed as a comparative measure of reserve strength and not of absolute reserve adequacy, the Company considers, but does not rely on, the survival ratio when evaluating its reserves.
The Company’s net three year survival ratio on its asbestos exposures only, was 10.6 years for the period ended March 31, 2004. This three year survival ratio, when adjusted for the effect of the reinsurance ceded under the stop loss cover from Prupac, was 14.2 years and, when adjusted for structured settlements, which are fully funded by reserves, and the stop loss protection from Prupac, was 26.4 years.
31
Shareholders’ Equity. The Company’s shareholders’ equity increased to $3,364.6 million as of March 31, 2004 from $3,164.9 million as of December 31, 2003, principally reflecting net income of $126.1 million for the three months ending March 31, 2004 and an increase of $69.6 million of net after tax unrealized appreciation on the Company’s investments, partially offset by a $2.7 million increase in net after-tax currency translation adjustments and $5.6 million of shareholder dividends.
LIQUIDITY AND CAPITAL RESOURCES
Capital. The Company’s business operations are in part dependent on the Company’s financial strength, and the market’s perception thereof, as measured by shareholders’ equity, which was $3,364.6 million and $3,164.9 million at March 31, 2004 and December 31, 2003, respectively. The Company has flexibility with respect to capitalization as the result of its perceived financial strength, including its financial strength ratings as assigned by independent rating agencies, and its access to the debt and equity markets. The Company continuously monitors its capital and financial position, as well as investment and security market conditions, both in general and with respect to the Company’s securities, and responds accordingly.
The Company filed a shelf registration statement on Form S-3 with the SEC that provides for the issuance of up to $975 million of securities. Generally, under this shelf registration statement, Group is authorized to issue common shares, preferred shares, debt securities, warrants and hybrid securities, Holdings is authorized to issue debt securities and Capital Trust II and Capital Trust III are authorized to issue trust preferred securities. The registration statement was declared effective by the SEC on December 22, 2003.
| | o | | On March 29, 2004, Capital Trust II, an unconsolidated affiliate, issued trust preferred securities resulting in a takedown from the shelf registration statement of $320 million, leaving a remaining balance on the registration statement at March 31, 2004 of $655 million. In conjunction with the issuance of Capital Trust II’s trust preferred securities, Holdings issued $329.9 million of 6.20% junior subordinated debt securities due March 29, 2034 to Capital Trust II. Part of the proceeds from the junior subordinated debt securities issuance was used for capital contributions to Holdings’ operating subsidiaries. |
On July 30, 2002, the Company filed a shelf registration statement on Form S-3 with the SEC providing for the issuance of up to $475.0 million of securities. Generally, under this shelf registration statement, Group was authorized to issue common shares, preferred shares, debt securities, warrants and hybrid securities, Holdings was authorized to issue debt securities and Capital Trust was authorized to issue trust preferred securities. This shelf registration statement became effective on September 26, 2002. The following securities were issued pursuant to that registration statement.
| | o | | On November 14, 2002, Capital Trust, an unconsolidated affiliate, issued trust preferred securities resulting in a takedown from the shelf registration statement of $210 million. In conjunction with the issuance of Capital Trust’s trust preferred securities, Holdings issued $216.5 million of 7.85% junior subordinated debt securities due November 15, 2032 to Capital Trust. The proceeds from the junior subordinated debt securities issuance were primarily used for capital contributions to Holdings’ operating subsidiaries. |
| | o | | On April 23, 2003, the Company expanded the size of the remaining shelf registration to $318 million by filing a Post-Effective Amendment under Rule 462(b) of the Securities Act of 1933, as amended, and General Instruction IV of Form S-3 promulgated there under. On the same date, the Company issued 4,480,135 of its common shares at a price of $70.75 per share, which resulted in $317.0 million in proceeds, before expenses of approximately $0.2 million. This transaction effectively exhausted the September 26, 2002 shelf registration. |
32
Liquidity. The Company’s current investment strategy generally seeks to maximize after-tax income through a high quality, diversified, taxable bond and tax-preferenced fixed maturity portfolio, while maintaining an adequate level of liquidity. The Company’s mix of taxable and tax-preferenced investments is adjusted continuously, consistent with the Company’s current and projected operating results, market conditions and tax position. Additionally, the Company invests in equity securities, which it believes will enhance the risk-adjusted total return of the investment portfolio.
The Company’s liquidity requirements are met on both a short and long-term basis by funds provided by premiums collected, investment income, collected reinsurance receivable balances and the sale and maturity of investments, together with the availability of funds under the Company’s Credit Facility. The Company’s net cash flows from operating activities were $399.6 million and $327.7 million for the three months ended March 31, 2004 and 2003, respectively. The Company’s net cash flows from operations increased primarily due to the growth in business coupled with favorable underwriting results. Additionally, these cash flows included net tax payments of $19.5 million and $5.5 million for the three months ended March 31, 2004 and 2003 respectively; catastrophe loss payments of $6.0 million and $20.0 million in the three months ended March 31, 2004 and 2003, respectively; and net derivative settlement payments of $0.0 million and $3.6 million for the three months ended March 31, 2004 and 2003, respectively.
Management believes that net cash flows from operating activities are generally consistent with expectations given the Company’s increase in premium volume and investment portfolio. Premiums are generally collected over the policy period, which is typically one year. However, claims related to the policies will be paid out over numerous years. This is particularly true for casualty business. The Company is not able to predict how long this premium growth trend and corresponding positive cash flow impact will be sustained.
In addition to its net cash flows from operating activities, the Company’s investment portfolio, through normal portfolio activities, provides substantial additional liquidity. Proceeds from sales, calls and maturities, as contrasted with cost of investment assets acquired, were $784.4 million and $1,596.4 million, respectively, for the three months ended March 31, 2004, compared to $662.8 million and $1,039.6 million, respectively, for the three months ended March 31, 2003.
Effective October 10, 2003, Holdings entered into a new three year, $150.0 million senior revolving credit facility with a syndicate of lenders, replacing its December 21, 1999 senior revolving credit facility. Both the October 10, 2003 and December 21, 1999 senior revolving credit agreements, which have similar terms, are referred to as the “Credit Facility”. Wachovia Bank is the administrative agent for the Credit Facility. The Credit Facility is used for liquidity and general corporate purposes. The Credit Facility provides for the borrowing of up to $150.0 million with interest at a rate selected by Holdings equal to either (1) the Base Rate (as defined below) or (2) an adjusted LIBOR plus a margin. The Base Rate is the higher of the rate of interest established by Wachovia Bank from time to time as its prime rate or the Federal Funds rate plus 0.5% per annum. The amount of margin and the fees payable for the Credit Facility depend upon Holdings’ senior unsecured debt rating.
33
The Credit Facility requires Holdings to maintain a debt to capital ratio of not greater than 0.35 to 1 and a minimum interest coverage ratio of 2.5 to 1 and requires Everest Re to maintain its statutory surplus at $1.0 billion plus 25% of aggregate net income and capital contributions earned or received after January 1, 2003. As of March 31, 2004, the Company was in compliance with these covenants.
During the three months ended March 31, 2004, Holdings made no payments on and had no additional borrowings under the Credit Facility. As of March 31, 2004 and 2003, Holdings had outstanding Credit Facility borrowings of $70.0 million. Interest expense incurred in connection with these borrowings was $0.3 million and $0.4 million for the three months ended March 31, 2004 and 2003, respectively.
The Company has arrangements available for the issuance of letters of credit, which letters are generally collateralized by the Company’s cash or investments and which are generally used to collateralize reinsurance assumed by Bermuda Re from jurisdictions where collateralization is generally required for the ceding company to receive credit for such reinsurance recoverables from its principal regulator. Bermuda Re and Everest International Reinsurance, Ltd. also used trust arrangements to provide collateralization to ceding companies, including affiliates. The Company generally avoids providing collateral except where required for ceding companies to receive credit from their regulators. At March 31, 2004, $248.8 million of letters of credit were issued and outstanding under these arrangements and substantially all were related to Bermuda Re. Furthermore, at March 31, 2004, $251.8 million of assets were deposited in trust accounts, primarily on behalf of Bermuda Re, as security for reinsurance recoverables of certain non-affiliated ceding companies.
Market Sensitive Instruments. The SEC’s Financial Reporting Release #48 requires registrants to clarify and expand upon the existing financial statement disclosure requirements for derivative financial instruments, derivative commodity instruments and other financial instruments (collectively, “market sensitive instruments”). The Company does not generally enter into market sensitive instruments for trading purposes.
The Company’s current investment strategy seeks to maximize after-tax income through a high quality, diversified, taxable and tax-preferenced fixed maturity portfolio, while maintaining an adequate level of liquidity. The Company’s mix of taxable and tax-preferenced investments is adjusted continuously, consistent with its current and projected operating results, market conditions and the Company’s tax position. The fixed maturities in the investment portfolio are comprised of non-trading available for sale securities. Additionally, the Company invests in equity securities, which it believes will enhance the risk-adjusted total return of the investment portfolio. The Company has also engaged in a small number of credit default swaps and specialized equity options.
The overall investment strategy considers the scope of present and anticipated Company operations. In particular, estimates of the financial impact resulting from non-investment asset and liability transactions, together with the Company’s capital structure and other factors, are used to develop a net liability analysis. This analysis includes estimated payout characteristics for which the investments of the Company provide liquidity. This analysis is considered in the development of specific investment strategies for asset allocation, duration and credit quality. The change in overall market sensitive risk exposure principally reflects the asset changes that took place during the year, including the acquisition of interest only strips in which market value increases as interest rates rise and decreases as interest rates fall. The addition of these securities to the portfolio mitigates the impact of potential interest rate shifts on the overall portfolio.
34
The Company’s $10.2 billion investment portfolio is principally comprised of fixed maturity securities, which are subject to interest rate risk and foreign currency rate risk, and equity securities, which are subject to equity price risk. The impact of these risks on the investment portfolio is generally mitigated by changes in the value of operating assets and liabilities and their associated income statement impact.
Interest rate risk is the potential change in value of the fixed maturity portfolio, including short-term investments, due to change in market interest rates. In a declining interest rate environment, it includes prepayment risk on the $1,489.1 million of mortgage-backed securities in the $9,128.8 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 the fixed maturity portfolio as of March 31, 2004 based on parallel 200 basis point shifts in interest rates up and down in 100 basis point increments. For legal entities with a U.S. dollar functional currency, this modeling was performed on each security individually. To generate appropriate price estimates on mortgage-backed securities, changes in prepayment expectations under different interest rate environments were taken into account. For legal entities with a non-U.S. dollar functional currency, the effective duration of the involved portfolio of securities was used as a proxy for the market value change under the various interest rate change scenarios. All amounts are in U.S. dollars and are presented in millions.
| | | | | |
|---|
| As of March 31, 2004 |
| Interest Rate Shift in Basis Points |
|
|
|
|
|
|
| | | | -200 | | -100 | | 0 | | 100 | | 200 |
|
|
|
|
|
|
| Total Market Value | | | $ | 10,697 | .3 | $ | 10,181 | .9 | $ | 9,708 | .4 | $ | 9,298 | .3 | $ | 8,814 | .6 |
| Market Value Change from Base (%) | | | | 10 | .2% | | 4 | .9% | | 0 | .0% | | -4 | .2% | | -9 | .2% |
| Change in Unrealized Appreciation | | |
| After-tax from Base ($) | | | $ | 739 | .7 | $ | 352 | .6 | $ | -- | | $ | (303 | .7) | $ | (666 | .6) |
Foreign currency rate risk is the potential change in value, income and cash flow arising from adverse changes in foreign currency exchange rates. Each of the Company’s foreign operations maintains capital in the currency of the country of its geographic location consistent with local regulatory guidelines. Generally, the Company prefers to maintain the capital of its foreign operations in U.S. dollar assets, although this varies by regulatory jurisdiction in accordance with market needs. Each foreign operation may conduct business in its local currency, as well as the currency of other countries in which it operates. The primary foreign currency exposures for these foreign operations are the Canadian Dollar, the British Pound Sterling and the Euro. The Company mitigates foreign exchange exposure by a general matching of the currency and duration of its assets to its corresponding operating liabilities. In accordance with Financial Accounting Standards Board Statement No. 52, the Company translates 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 March 31, 2004, there has been no material change in exposure to foreign exchange rates as compared to December 31, 2003.
35
Equity risk is the potential change in market value of the common stock and preferred stock portfolios arising from changing equity prices. The Company invests in high quality common and preferred stocks that are traded on the major exchanges in the U.S. and in funds investing in such securities. The primary objective in managing the equity portfolio is to provide long-term capital growth through market appreciation and income.
| | | | | |
|---|
| As of March 31, 2004 |
| Change in Equity Values in Percent |
|
|
|
|
|
|
| | | | -20% | | -10% | | 0% | | 10% | | 20% |
|
|
|
|
|
|
| Market Value of the Equity Portfolio | | | $ | 214 | .9 | $ | 241 | .8 | $ | 268 | .7 | $ | 295 | .5 | $ | 322 | .4 |
| | | |
| After-tax Change in Unrealized Appreciation | | | $ | (34 | .9) | $ | (17 | .5) | $ | -- | | $ | 17 | .5 | $ | 34 | .9 |
| | | | | |
Although not considered material in the context of the Company’s aggregate exposure to market sensitive instruments, the Company has issued five specialized equity put options based on the Standard & Poor’s 500 (“S&P 500”) index that are market sensitive and sufficiently unique to warrant supplemental disclosure.
During 2001, the Company sold five specialized equity put options based on the S&P 500 index for total consideration, net of commission, of $16.9 million. These contracts each have a single exercise date, with maturities ranging from 18 to 30 years and strike prices ranging from $1,141.21 to $1,540.63. No amounts will be payable under these contracts if the S&P 500 index is at or above the strike price on the exercise dates. If the S&P 500 index is lower than the strike price on the applicable exercise date, the amount due will vary proportionately with the percentage the index is below the strike price. Based on historical index volatilities and trends and the March 31, 2004 index value, the Company estimates the probability for each contract of the S&P index being below the strike price on the exercise date is less than 6.0%. The theoretical maximum payouts under the contracts would occur if on each of the exercise dates the S&P 500 index value were zero.
As these specialized equity put options are derivatives within the framework of FAS 133, the Company is required to report the fair value of these instruments in its balance sheet and record any changes to fair value in its statement of operations. The Company has recorded fair values for its obligations on these specialized equity put options at March 31, 2004 and December 31, 2003 of $20.3 million and $16.5 million, respectively; however, the Company does not believe that the ultimate settlement of these transactions is likely to require a payment that would exceed the initial consideration received or any payment at all.
As there is no active market for these instruments, the determination of their fair value is based on an industry accepted option-pricing model, which requires estimates and assumptions, including those regarding volatility and expected rates of return.
The table below estimates the impact of potential movements in interest rates and the S&P 500 index, which are the principal factors affecting fair value of these instruments, looking forward from the fair value at March 31, 2004. These are estimates and there can be no assurances regarding future market performance. The asymmetrical results of the interest rate and S&P 500 index shifts reflect that the liability cannot fall below zero whereas it can increase to its theoretical maximum.
36
| | | | | |
|---|
| As of March 31, 2004 |
| S & P 500 Index Put Options Obligation – Sensitivity Analysis |
| (Dollars in millions) |
|
| Interest Rate Shift in Basis Points: | | | -100 | -50 | 0 | 50 | 100 |
|
| Total Market Value | | | $ | 32 | .2 | $ | 25 | .6 | $ | 20 | .3 | $ | 16 | .0 | $ | 12 | .5 |
| Market Value Change from Base (%) | | | | -58 | .7% | | -26 | .3% | | 0 | .0% | | 21 | .2% | | 38 | .3% |
| |
| S & P Index Shift in Points: | | | -200 | -100 | 0 | 100 | 200 |
|
| Total Market Value | | | $ | 27 | .8 | $ | 23 | .7 | $ | 20 | .3 | $ | 17 | .5 | $ | 15 | .1 |
| Market Value Change from Base (%) | | | | -37 | .1% | | -16 | .7% | | 0 | .0% | | 13 | .9% | | 25 | .4% |
| | |
| Combined Interest Rate / S & P Index Shift: | | | -100/-200 | -50/-100 | 0/0 | 50/100 | 100/200 |
|
| Total Market Value | | | $ | 42 | .7 | $ | 29 | .7 | $ | 20 | .3 | $ | 13 | .7 | $ | 9 | .0 |
| Market Value Change from Base (%) | | | | -110 | .3% | | -46 | .2% | | 0 | .0% | | 32 | .7% | | 55 | .4% |
Safe Harbor Disclosure. This report contains forward-looking statements within the meaning of the U.S. federal securities laws. The Company intends these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in the federal securities laws. In some cases, these statements can be identified by the use of forward-looking words such as “may”, “will”, “should”, “could”, “anticipate”, “estimate”, “expect”, “plan”, “believe”, “predict”, “potential” and “intend”. Forward-looking statements contained in this report include information regarding the Company’s reserves for losses and LAE, the adequacy of the Company’s provision for uncollectible balances, estimates of the Company’s catastrophe exposure, the effects of catastrophic events on the Company’s financial statements, the ability of Everest Re, Holdings and Bermuda Re to pay dividends and the settlement costs of the Company’s specialized equity put options. Forward-looking statements only reflect the Company’s expectations and are not guarantees of performance. These statements involve risks, uncertainties and assumptions. Actual events or results may differ materially from the Company’s expectations. Important factors that could cause the Company’s actual results to be materially different from its expectations include the uncertainties that surround the estimating of reserves for losses and LAE, those discussed in Note 4 of Notes to Consolidated Financial Statements (unaudited) included in this report and the risks described under the caption “Risk Factors” in the Company’s most recent Annual Report on Form 10-K, Part II, Item 7. The Company undertakes no obligation to update or revise publicly any forward looking statements, whether as a result of new information, future events or otherwise.
37
Part I — Item 3
EVEREST RE GROUP, LTD.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Market Risk Instruments. See "Liquidity and Capital Resources - Market Sensitive Instruments" in Part I - Item 2.
38
Part I – Item 4
EVEREST RE GROUP, LTD.
CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company’s management carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s 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 believe that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission’s rules and forms. The Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the Company’s 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, the Company’s internal control over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this report.
39
EVEREST RE GROUP, LTD.
Other Information
Part II – Item 1. Legal Proceedings
In the ordinary course of business, the Company is involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine the Company’s rights and obligations under insurance and reinsurance agreements and other more general contracts. In some disputes, the Company seeks to enforce its rights under an agreement or to collect funds owing to it. In other disputes, the Company is resisting attempts by others to collect funds or enforce alleged rights. Such disputes are resolved through formal and informal means, including litigation and arbitration.
In all such matters, the Company believes that its positions are legally and commercially reasonable. The Company also regularly evaluates those positions and, where appropriate, establishes or adjusts insurance reserves to reflect its evaluation. The Company’s aggregate reserves take into account the possibility that the Company may not ultimately prevail in each and every disputed matter. The Company believes its aggregate reserves reduce the potential that an adverse resolution of one or more of these matters, at any point in time, would have a material impact on the Company’s financial condition or results of operations. However, there can be no assurance that adverse resolutions of such matters in any one period or in the aggregate will not result in a material adverse effect on the Company’s results of operations.
Part II - Item 2. Changes In Securities, Use of Proceeds and Issuer Purchases of Equity Securities
None.
Part II – Item 3. Defaults Upon Senior Securities
None.
Part II - Item 4. Submission of Matters to a Vote of Security Holders
None.
Part II – Item 5. Other Information
None.
40
Part II - Item 6. Exhibits and Reports on Form 8-K
a) Exhibit Index:
Exhibit No. Description
| | 10.1 | | Amendment of Employment Agreement by and among Everest Reinsurance (Bermuda), Ltd. and Peter Bennett, dated May 5, 2004. |
| | 11.1 | | Statement regarding computation of per share earnings |
| | 31.1 | | Section 302 Certification of Joseph V. Taranto |
| | 31.2 | | Section 302 Certification of Stephen L. Limauro |
| | 32.1 | | Section 906 Certification of Joseph V. Taranto and Stephen L. Limauro |
b) A report on Form 8-K was furnished on February 2, 2004, under Item 12, relating to the Company’s February 2, 2004 press release setting forth its fourth quarter and full year 2003 earnings.
41
Everest Re Group, Ltd.
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 Re Group, Ltd. |
| | (Registrant) |
| | |
| | |
| | /S/ STEPHEN L. LIMAURO |
| | |
| | Stephen L. Limauro |
| | Executive Vice President and |
| | Chief Financial Officer |
| | |
| | (Duly Authorized Officer and Principal |
| | Financial Officer) |
Dated: May 10, 2004
