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 based upon their underwriting gain or loss or underwriting results. Underwriting results include earned premium less losses and LAE incurred, commission and brokerage expenses and other underwriting expenses and are analyzed using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which, respectively divide incurred losses, commissions and brokerage and other underwriting expenses by earned premium. The Company utilizes inter-affiliate reinsurance, but such reinsurance generally does not impact segment results, as 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. Due to the sale and in accordance with Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“FAS 131”), the Company restated the International and Bermuda segments for the three and nine months ended September 30, 2003 to conform to the three and nine months ended September 30, 2004 segment reporting.
Adjusting to these market conditions, the U.S. Reinsurance operation decreased 32.1% ($171.4 million), principally reflecting a $128.8 million decrease in treaty casualty business, a $19.4 million decrease in treaty property business and a $13.7 million decrease in facultative business. Partially offsetting these decreases were areas where the Company continued to grow. The International operation saw a 53.0% ($71.4 million) increase, primarily due to a $49.9 million increase in international business written through the Miami and New Jersey offices, representing primarily Latin American business and a $19.4 million increase in Asian business. The Bermuda operation grew 18.6% ($42.0 million), reflecting an emphasis on treaty business in Bermuda and the UK coupled with attractive market conditions in Europe, partially offset by a decline in individual risk business in Bermuda. The U.S. Insurance operation grew 14.3% ($31.6 million), principally as a result of a $53.3 million increase in program business outside of the workers’ compensation class partially offset by a $21.7 million decrease in workers’ compensation business. The Specialty Underwriting operation increased 3.1% ($3.9 million), resulting primarily from a $10.6 million increase in marine and aviation business and a $5.1 million increase in surety business, partially offset by an $11.8 million decrease in A&H business, reflective of softening in pricing of this business class.
Ceded premiums decreased to $37.4 million for the three months ended September 30, 2004 from $55.9 million for the three months ended September 30, 2003. Ceded premiums generally relate to specific reinsurance purchased by the U.S. Insurance operation and fluctuate based upon the level of premiums written subject to the applicable reinsurance programs.
Net written premiums decreased to $1,179.7 million for the three months ended September 30, 2004, a decrease of 0.3% from $1,183.7 million for the three months ended September 30, 2003, reflecting a decrease in gross written premiums partially offset by a decrease in ceded premiums.
Premium Revenues. Net premiums earned increased by 8.9% to $1,139.9 million in the three months ended September 30, 2004 from $1,046.4 million in the three months ended September 30, 2003. Contributing to this increase was a 61.9% ($73.6 million) increase in the International operation, a 41.2% ($70.1 million) increase in the Bermuda operation, a 14.2% ($30.5 million) increase in the U.S. Insurance operation and a 3.3% ($3.9 million) increase in the Specialty Underwriting operation, partially offset by a 19.9% ($84.5 million) decrease in the U.S. Reinsurance 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 30.4% to $962.6 million in the three months ended September 30, 2004 from $738.3 million in the three months ended September 30, 2003. The increase in incurred losses and LAE was principally attributable to the increase in estimated catastrophe losses due to property catastrophe events including hurricanes Charley, Frances, Ivan and Jeanne, the increase in net premiums earned, the impact of changes in the Company’s mix of business, and reserve adjustments for prior period losses.
The Company’s loss and LAE reserves reflect estimates of ultimate claim liability. Such estimates are reevaluated 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 reevaluations impacts incurred losses for the current period. The Company notes that its analytical methods and processes operate at multiple levels including individual contracts, groupings of like contracts, classes and lines of business, internal business units, segments, legal entities, and in the aggregate. The complexities of the Company’s businesses and operations require analyses and adjustments, both qualitative and quantitative, at these various levels. Additionally, the attribution of reserves, change in reserves and incurred losses, between accident year and underwriting year requires adjustments and allocations, both qualitative and quantitative, at these various levels. All of these processes, methods and practices appropriately balance actuarial science, business expertise and management judgment in a manner intended to assure the accuracy, precision and consistency of the Company’s reserving practices, which are fundamental to the Company’s operation. The Company notes, however, that the underlying reserves remain estimates, which are subject to variation, and that the relative degree of variability is generally least when reserves are considered in the aggregate and generally increases as the focus shifts to more granular data levels.
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Incurred losses and LAE for the three months ended September 30, 2004 reflected ceded losses and LAE of $27.8 million compared to ceded losses and LAE for the three months ended September 30, 2003 of $56.7 million. The decrease 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 reduction in ceded losses generally corresponds with the decrease in ceded earned premiums.
Incurred losses and LAE include catastrophe losses, which include the impact of both current period events and favorable and adverse development on prior period events, and are net of reinsurance. Individual catastrophe losses are reported net of specific reinsurance, but before recoveries under corporate level reinsurance and potential incurred but not reported (“IBNR”) reserve offsets. 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 $220.2 million in the three months ended September 30, 2004, principally due to $255 million of estimated aggregate losses from hurricanes Charley, Frances, Ivan, and Jeanne and Pacific typhoon activity, partially offset by a $31.0 million reserve reduction related to the World Trade Center events. Catastrophe losses, net of contract specific cessions were $9.2 million in the three months ended September 30, 2003, which related principally to hurricanes Fabian and Isabel.
Net adverse prior period reserve adjustments for the three months ended September 30, 2004 were $8.3 million compared to $61.2 million for the three months ended September 30, 2003. The adverse reserve adjustments for the three months ended September 30, 2004 included asbestos and environmental (“A&E”) adjustments of $18.0 million, partially offset by net favorable non-A&E adjustments of $9.7 million. For the three months ended September 30, 2003, adverse reserve adjustments included A&E adjustments of $15.0 million, and net non-A&E adjustments, primarily on casualty business, of $46.2 million.
The U.S. Reinsurance segment accounted for $24.7 million of favorable net prior period reserve adjustments for the three months ended September 30, 2004 and $31.9 million of net adverse prior period reserve adjustments for the three months ended September 30, 2003. Asbestos exposures accounted for $1.2 million and $5.2 million for the three months ended September 30, 2004 and 2003, respectively. The favorable development for the three months ended September 30, 2004 was principally due to a $34.3 million in reserve reduction related to the catastrophe losses from the World Trade Center events. The non-A&E adverse development for the three months ended September 30, 2003 principally reflected adjustments to the professional liability and casualty business classes.
The U.S. Insurance segment reflected $3.1 million and $8.3 million of net adverse prior period reserve adjustments for the three months ended September 30, 2004 and September 30, 2003, respectively, reflecting minor reserve adjustments.
The Specialty Underwriting segment had $2.8 million and $3.0 million of net adverse prior period reserve adjustments for the three months ended September 30, 2004 and 2003, respectively, principally related to catastrophe loss development on the marine and aviation classes of business in 2004 and loss development on the surety class of business in 2003.
The International segment had $1.3 million of favorable net prior period reserve adjustments for the three months ended September 30, 2004 and net adverse prior period reserve adjustments of $5.0 million for the three months ended September 30, 2003.
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The Bermuda segment reflected $28.6 million and $13.0 million of net adverse prior period reserve adjustments for the three months ended September 30, 2004 and 2003, respectively. The adverse development in the three months ended September 30, 2004 is primarily due to $16.8 million of asbestos reserve development, with most of this development related to exposures assumed through the September 19, 2000 loss portfolio transfer from Mt. McKinley Insurance Company (“Mt. McKinley”). Non-asbestos reserves assumed through this portfolio transfer were $13.6 million. Asbestos exposures accounted for $9.8 million in adverse reserve adjustments for the three months ended September 30, 2003.
The segment components of the increase in incurred losses and LAE for the three months ended September 30, 2004 over the three months ended September 30, 2003 were a 115.1% ($74.7 million) increase in the International operation, a 72.7% ($85.8 million) increase in the Bermuda operation, a 20.1% ($15.3 million) increase in the Specialty Underwriting operation, a 13.0% ($41.6 million) increase in the U.S. Reinsurance operation and a 4.3% ($6.9 million) increase in the U.S. Insurance operation. These changes reflect variability in premiums earned, changes in the loss expectation assumptions for business written and the net prior period reserve development and catastrophe losses 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.
The Company’s loss and LAE ratio (“loss ratio”), which is calculated by dividing incurred losses and LAE by net premiums earned, increased by 13.8 percentage points to 84.4% in the three months ended September 30, 2004 from 70.6% in the three months ended September 30, 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 September 30, 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 | | | | 106 | .5% | | 75 | .5% |
| U.S. Insurance | | | | 67 | .8% | | 74 | .2% |
| Specialty Underwriting | | | | 74 | .6% | | 64 | .1% |
| International | | | | 72 | .6% | | 54 | .6% |
| Bermuda | | | | 84 | .9% | | 69 | .4% |
Segment underwriting expenses increased by 6.5% to $270.2 million in the three months ended September 30, 2004 from $253.7 million in the three months ended September 30, 2003. Commission, brokerage, taxes and fees increased by $15.5 million, principally reflecting increases in premiums earned and changes in the mix of business. Segment other underwriting expenses increased by $1.0 million, reflecting the overall growth in business operations. Contributing to the segment underwriting expense increases were a 70.5% ($21.5 million) increase in the International operation, a 19.3% ($8.3 million) increase in the U.S. Insurance operation, a 16.5% ($5.7 million) increase in the Bermuda operation, and a 13.2% ($4.4 million) increase in the Specialty Underwriting operation, which were partially offset by a 20.8% ($23.4 million) decrease in the U.S. Reinsurance 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
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ratio, which is calculated by dividing underwriting expenses by net premiums earned, was 24.1% for the three months ended September 30, 2004 compared to 24.4% for the three months ended September 30, 2003.
The Company’s combined ratio, which is the sum of the loss and expense ratios, increased by 13.5 percentage points to 108.5% in the three months ended September 30, 2004 compared to 95.0% in the three months ended September 30, 2003.
The following table shows the combined ratios for each of the Company’s operating segments for the three months ended September 30, 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 | | | | 132 | .7% | | 102 | .0% |
| U.S. Insurance | | | | 88 | .6% | | 94 | .1% |
| Specialty Underwriting | | | | 105 | .2% | | 92 | .1% |
| International | | | | 99 | .6% | | 80 | .2% |
| Bermuda | | | | 101 | .8% | | 89 | .9% |
Investment Results. Net investment income increased 23.3% to $123.8 million for the three months ended September 30, 2004 from $100.4 million for the three months ended September 30, 2003, principally reflecting the effects of investing $1,771.2 million of cash flow from operations for the twelve months ended September 30, 2004, as well as $320.0 of net proceeds from the issuance of junior subordinated debt securities in March 2004 all partially offset by the effects of the lower interest rate environment. Additionally, $5.0 million included in 2004 net investment income is an atypical increase in the carrying value of a limited partnership investment.
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 | | |
| September 30, 2004 and 2003 | | | | 4 | .7% | | 4 | .8% |
| Imbedded after-tax yield of cash and invested assets at | | |
| September 30, 2004 and 2003 | | | | 4 | .0% | | 4 | .2% |
| Annualized pre-tax yield on average cash and invested | | |
| assets for the three months ended September 30, 2004 and 2003 | | | | 4 | .8% | | 4 | .9% |
| Annualized after-tax yield on average cash and invested | | |
| assets for the three months ended September 30, 2004 and 2003 | | | | 4 | .0% | | 4 | .2% |
Net realized capital gains were $10.1 million for the three months ended September 30, 2004, reflecting realized capital gains on the Company’s investments of $11.3 million, resulting primarily from the early liquidation of an investment portfolio trust, partially offset by $1.2 million of realized capital losses. Net realized capital losses of $30.1 million in the three months ended September 30, 2003 reflected $44.5 million of realized capital losses, which included $3.4 million relating to write-downs in the value of securities deemed to be impaired on an other than temporary basis, and $40.1 million related to the impairment on interest only strips in accordance with EITF 99-20, partially offset by realized capital gains on the Company’s investments of $14.4 million, which included $6.6 million of realized capital gains on interest only strips.
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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 Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”). Net derivative expense from these derivative transactions for the three months ended September 30, 2004 was $6.6 million and net derivative income for the three months ended September 30, 2003 was $3.8 million, which reflects changes in fair value of the specialized equity put options.
Other expense for the three months ended September 30, 2004 and 2003 was $3.6 million and $0.4 million, respectively. The change in other expense for the three months ended September 30, 2004 was primarily due to a volume related increase in bad debt reserves for insurance premiums receivable and the variability in the impact of foreign currency exchange.
Interest expense for the three months ended September 30, 2004 and 2003 was $19.4 million and $14.3 million, respectively. Interest expense for the three months ended September 30, 2004 included $9.7 million relating to the senior notes, $9.4 million relating to the junior subordinated debt securities and $0.3 million relating to borrowings under the senior revolving credit agreements (“Credit Facility”). Interest expense for the three months ended September 30, 2003 included $9.7 million relating to the senior notes, $4.2 million relating to the junior subordinated debt securities and $0.3 million relating to borrowings under the Credit Facility. The increase in interest expense for the junior subordinated debt securities is due to the additional issuance of $320 million of debt securities in March 2004.
Income Taxes. The Company’s income tax (benefit) expense is primarily a function of the statutory tax rates and corresponding net income in the jurisdictions where the Company operates, coupled with the impact from tax preferenced investment income. Variations between years generally reflect changes in the relative levels of pre-tax income between jurisdictions with different tax rates. Additionally, in conjunction with the transfer of the Company’s UK Branch to Bermuda Re, there were various tax issues giving rise to net tax expenses and benefits which in the aggregate served to moderate the variability between years. The Company recognized an income tax benefit of $3.7 million in the three months ended September 30, 2004 compared to income tax expense of $11.7 million in the three months ended September 30, 2003.The decrease in taxes generally reflects the impact of the third quarter catastrophe losses on the underwriting results, partially offset by additional taxable net investment income and taxable realized capital gains.
Net Income. Net income was $11.5 million for the three months ended September 30, 2004 compared to net income of $100.3 million for the three months ended September 30, 2003, reflecting a decrease in underwriting results due to the third quarter 2004 catastrophe losses, partially offset by an improvement in investment income and realized capital gains, and decreased income taxes.
Nine Months Ended September 30, 2004 compared to Nine Months Ended September 30, 2003
Premiums. Gross written premiums increased 6.6% to $3,527.7 million in the nine months ended September 30, 2004 from $3,310.2 million in the nine months ended September 30, 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.
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Premium growth areas included a 59.4% ($190.9 million) increase in the International operations, primarily due to a $133.0 million increase in international business written through the Miami and New Jersey offices, representing primarily Latin American business, a $38.7 million increase in Asian business and a $16.6 million increase in Canadian business. The Bermuda operation grew 31.8% ($167.8 million), reflecting an emphasis on traditional business classes in Bermuda and the UK and particularly attractive market conditions in Europe. The U.S. Insurance operation grew 13.6% ($110.2 million), principally as a result of a $166.0 million increase in program business other than workers’ compensation, partially offset by a $55.8 million decrease in workers’ compensation business. The Specialty Underwriting operation decreased 10.5% ($41.2 million), resulting primarily from a $62.1 million decrease in A&H business, partially offset by an increase in marine and aviation business of $11.1 million and an increase in surety business of $9.8 million. The U.S. Reinsurance operation decreased 16.7% ($210.1 million), principally relating to an $81.0 million decrease in treaty casualty business, a $57.9 decrease in treaty property business and a $56.5 million decrease in facultative business.
Ceded premiums decreased to $119.1 million for the nine months ended September 30, 2004 from $186.1 million for the nine months ended September 30, 2003. Ceded premiums generally relate to specific reinsurance purchased by the U.S. Insurance operation and fluctuate based upon the level of premiums written in the applicable programs.
Net written premiums increased by 9.1% to $3,408.6 million for the nine months ended September 30, 2004 from $3,124.1 million for the nine months ended September 30, 2003, reflecting the increase in gross written premiums, combined with the decrease in ceded premiums.
Premium Revenues. Net premiums earned increased by 21.0% to $3,199.2 million in the nine months ended September 30, 2004 from $2,643.2 million in the nine months ended September 30, 2003. Contributing to this increase were a 72.4% ($275.4 million) increase in the Bermuda operation, a 69.9% ($198.2 million) increase in the International operation, a 15.1% ($91.1 million) increase in the U.S. Insurance operation and a 2.9% ($28.9 million) increase in the U.S. Reinsurance operation, partially offset by a 9.9% ($37.6 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 27.9% to $2,349.6 million in the nine months ended September 30, 2004 from $1,836.8 million in the nine months ended September 30, 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, the provision for estimated catastrophe losses from hurricanes Charley, Frances, Ivan and Jeanne and Pacific typhoons, and reserve adjustments for prior period losses.
33
The Company’s loss and LAE reserves reflect estimates of ultimate claim liability. Such estimates are reevaluated 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 reevaluations impacts incurred losses for the current period. The Company notes that its analytical methods and processes operate at multiple levels including individual contracts, groupings of like contracts, classes and lines of business, internal business units, segments, legal entities, and in the aggregate. The complexities of the Company’s business and operations require analyses and adjustments, both qualitative and quantitative, at these various levels. Additionally, the attribution of reserves, changes in reserves and incurred losses, between accident year and underwriting year requires adjustments and allocations, both qualitative and quantitative, at these various levels. All of these processes, methods and practices appropriately balance actuarial science, business expertise and management judgment in a manner intended to assure the accuracy, precision and consistency of the Company’s reserving practices, which are fundamental to the Company’s operation. The Company notes however, that the underlying reserves remain estimates, which are subject to variation, and that the relative degree of variability is generally least when reserves are considered in the aggregate and generally increases as the focus shifts to more granular data levels.
Incurred losses and LAE for the nine months ended September 30, 2004 reflected ceded losses and LAE of $109.9 million compared to ceded losses and LAE for the nine months ended September 30, 2003 of $136.2 million. The decrease in ceded losses is primarily the result of fluctuations in losses ceded under the specific reinsurance coverages purchased by the U.S. Insurance operation, together with the absence in 2004 of cessions under the corporate level aggregate covers.
Incurred losses and LAE include catastrophe losses, which include the impact of both current period events and favorable and adverse development on prior period events, and are net of reinsurance. Individual catastrophe losses are reported net of specific reinsurance, but before recoveries under corporate level reinsurance and potential IBNR reserve offsets. 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 $232.2 million in the nine months ended September 30, 2004, relating principally to aggregate estimated losses of $255 million from hurricanes Charley, Frances, Ivan and Jeanne and Pacific typhoons, which were partially offset by $31.0 million of reserve reductions related to the World Trade Center events compared to $37.1 million in the nine months ended September 30, 2003 relating principally to May 2003 tornado and hailstorm events and hurricanes Fabian and Isabel.
Net adverse prior period reserve adjustments for the nine months ended September 30, 2004 were $121.8 million compared to $131.8 million for the nine months ended September 30, 2003. The adverse reserve adjustments for the nine months ended September 30, 2004 included A&E adjustments of $129.4 million, and net adverse non-A&E adjustments of approximately $23.4 million relating primarily to casualty reinsurance and favorable development of $31.0 million relating to the reduction of reserves for the World Trade Center events. For the nine months ended September 30, 2003, adverse reserve adjustments included $26.3 million related to A&E and $105.5 million on other lines of business, with principally all of the non-A&E adjustments relating to casualty reinsurance and insurance.
The U.S. Reinsurance segment accounted for $5.1 million of favorable prior period reserve adjustments for the nine months ended September 30, 2004, which included $34.8 million of favorable development due to the reserve reduction related to the catastrophe losses from the
34
World Trade Center events and net adverse prior period reserve adjustments of $79.6 million for the nine months ended September 30, 2003. Asbestos exposures accounted for $8.4 million and $13.6 million of adverse reserve adjustments for the nine months ended September 30, 2004 and 2003, respectively, with the remainder principally attributable to professional liability and casualty business classes.
The U.S. Insurance segment reflected $21.2 million and $8.3 million of net adverse prior period reserve adjustments for the nine months ended September 30, 2004 and September 30, 2003, respectively. The September 30, 2004 adverse prior period reserve adjustments were principally due to casualty classes relating to accident years 2000 through 2002.
The Specialty Underwriting segment had $7.5 million of favorable prior period reserve adjustments for the nine months ended September 30, 2004, principally related to favorable net prior period reserve adjustments in the marine, aviation and A&H business lines and net adverse prior period reserve adjustments of $18.0 million for the nine months ended September 30, 2003, principally related to the surety line of business.
The International segment had $1.0 million of favorable net prior period reserve adjustments for the nine months ended September 30, 2004 and net adverse prior period reserve adjustments of $10.0 million for the nine months ended September 30, 2003.
The Bermuda segment reflected $114.2 million of net adverse prior period reserve adjustments for the nine months ended September 30, 2004 and $15.9 million of net adverse prior reserve adjustments for the nine months ended September 30, 2003. The development in the nine months ended September 30, 2004 is primarily the result of $121.0 million of asbestos reserve development. For the nine months ended September 30, 2003, reserve adjustments included $12.7 million related to A&E exposures. All of the development related to asbestos exposures that were assumed through the September 19, 2000 loss portfolio transfer from Mt. McKinley.
The segment components of the increase in incurred losses and LAE for the nine months ended September 30, 2004 from the nine months ended September 30, 2003 were an 106.8% ($271.8 million) increase in the Bermuda operation, a 83.1% ($130.0 million) increase in the International operation, an 13.3% ($57.6 million) increase in the U.S. Insurance operation and a 12.7% ($92.9 million) increase in the U.S. Reinsurance operation, all partially offset by a 15.2% ($39.4 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 net prior period reserve development and catastrophe losses 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.
The Company’s loss ratio, which is calculated by dividing incurred losses and LAE by net premiums earned, increased by 3.9 percentage points to 73.4% in the nine months ended September 30, 2004 from 69.5% in the nine months ended September 30, 2003, reflecting the impact of the changes in premiums earned and incurred losses and LAE discussed above, as well as changes in business mix.
35
The following table shows the loss ratios for each of the Company’s operating segments for the nine months ended September 30, 2004 and 2003. The loss ratios for all operations were impacted by the factors noted above.
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| | | | | | | | | |
| Segment Loss Ratios |
|
|
|
| Segment | | | | 20 | 04 | | 20 | 03 |
|
|
|
| U.S. Reinsurance | | | | 80 | .5% | | 73 | .6% |
| U.S. Insurance | | | | 70 | .8% | | 71 | .9% |
| Specialty Underwriting | | | | 64 | .2% | | 68 | .2% |
| International | | | | 59 | .5% | | 55 | .2% |
| Bermuda | | | | 80 | .2% | | 66 | .9% |
Segment underwriting expenses increased by 14.5% to $756.3 million in the nine months ended September 30, 2004 from $660.3 million in the nine months ended September 30, 2003. Commission, brokerage, taxes and fees increased by $86.0 million, principally reflecting increases in premium volume and changes in the mix of business. Segment other underwriting expenses increased by $10.0 million as the Company continues to expand operations to support its increased business volume. Contributing to the segment underwriting expense increases were an 72.7% ($51.6 million) increase in the International operation, a 57.8% ($47.5 million) increase in the Bermuda operation and a 5.0% ($13.1 million) increase in the U.S. Reinsurance operation, which were all partially offset by a 7.1% ($9.6 million) decrease in the U.S. Insurance operation and a 6.1% ($6.7 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 23.9% for the nine months ended September 30, 2004 compared to 25.2% for the nine months ended September 30, 2003.
The Company’s combined ratio, which is the sum of the loss and expense ratios, increased by 2.6 percentage points to 97.3% for the nine months ended September 30, 2004 compared to 94.7% in the nine months ended September 30, 2003.
The following table shows the combined ratios for each of the Company’s operating segments for the nine months ended September 30, 2004 and 2003. The combined ratios for all operations were impacted by the loss and expense ratio variability noted above.
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| | | | | | | | | |
| Segment Combined Ratios |
|
|
|
| Segment | | | | 20 | 04 | | 20 | 03 |
|
|
|
| U.S. Reinsurance | | | | 107 | .6% | | 100 | .1% |
| U.S. Insurance | | | | 88 | .9% | | 94 | .3% |
| Specialty Underwriting | | | | 93 | .9% | | 96 | .7% |
| International | | | | 84 | .9% | | 80 | .2% |
| Bermuda | | | | 100 | .0% | | 88 | .5% |
Investment Results. Net investment income increased 22.1% to $361.5 million for the nine months ended September 30, 2004 from $296.1 million for the nine months ended September 30, 2003, principally reflecting the effects of investing $1,771.2 million of cash flow from operations for the twelve months ended September 30, 2004, as well as $320.0 of net proceeds from the issuance of junior subordinated debt securities in March 2004, all partially offset by the effects
36
of the lower interest rate environment. The increase also reflected $29.7 million representing an atypical increase in the carrying value of a limited partnership investment.
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 | | |
| September 30, 2004 and December 31, 2003 | | | | 4 | .7% | | 4 | .8% |
| Imbedded after-tax yield of cash and invested assets at | | |
| September 30, 2004 and December 31, 2003 | | | | 4 | .0% | | 4 | .1% |
| Annualized pre-tax yield on average cash and invested | | |
| assets for the nine months ended September 30, 2004 and 2003 | | | | 4 | .9% | | 5 | .1% |
| Annualized after-tax yield on average cash and invested | | |
| assets for the nine months ended September 30, 2004 and 2003 | | | | 4 | .1% | | 4 | .4% |
Net realized capital gains were $91.9 million for the nine months ended September 30, 2004, reflecting realized capital gains on the Company’s investments of $161.2 million including $118.2 million on the sale of interest only strip investments, partially offset by $69.3 million of realized capital losses, 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, prior to liquidation of the interest only strip portfolio during the second quarter of 2004. Net realized capital losses were $41.5 million in the nine months ended September 30, 2003, reflecting realized capital losses on the Company’s investments of $75.9 million, which included $24.6 million relating to write-downs in the value of securities deemed to be impaired on an other than temporary basis, partially offset by $34.4 million of realized capital gains, which included $6.6 million realized capital gains on the interest only strip investments.
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 expense from these derivative transactions for the nine months ended September 30, 2004 was $6.0 million and net derivative income from these derivative transactions for the nine months ended September 30, 2003 was $2.4 million, with both periods principally reflecting changes in fair value for the specialized equity put options.
Other expense for the nine months ended September 30, 2004 was $0.2 million compared to other expense of $6.0 million for the nine months ended September 30, 2003. The change in other expense for the nine months ended September 30, 2004 was primarily due to variability in the impact of foreign exchange, partially offset by a volume related increase in bad debt reserves on insurance premiums receivable.
Interest expense for the nine months ended September 30, 2004 and 2003 was $53.2 million and $43.0 million, respectively. Interest expense for the nine months ended September 30, 2004 included $29.2 million relating to the senior notes, $23.0 million relating to the junior subordinated debt securities and $1.0 million relating to borrowings under the Credit Facility. Interest expense for the nine months ended September 30, 2003 included $29.2 million relating to the senior notes, $12.7 million relating to the junior subordinated debt securities and $1.0 million relating to borrowings under the Credit Facility. The increase in interest expense for the junior subordinated debt securities was due to the additional issuance of $320 million of debt securities in March 2004.
37
Income Taxes. The Company’s income tax expense is primarily a function of the statutory tax rates and corresponding net income in the jurisdictions where the Company operates, coupled with the impact from tax preferenced investment income. Variations between years generally reflect changes in the relative levels of pre-tax income between jurisdictions with different tax rates. Additionally, in conjunction with the transfer of the Company’s UK Branch to Bermuda Re, there were various tax issues giving rise to net tax expenses and benefits which in the aggregate served to moderate the variability between years. The Company recognized income tax expense of $78.6 million in the nine months ended September 30, 2004 compared to $43.7 million in the nine months ended September 30, 2003.The increase in taxes generally reflects the impact of improved net investment income and realized capital gains, partially offset by a decrease in underwriting related to increased catastrophe losses.
Net Income. Net income was $401.5 million for the nine months ended September 30, 2004 compared to net income of $304.2 million for the nine months ended September 30, 2003, reflecting improved investment income and realized capital gains results, partially offset by a decrease in underwriting results and increased income taxes.
FINANCIAL CONDITION
Cash and Invested Assets. Aggregate invested assets, including cash and short-term investments, were $11,027.4 million at September 30, 2004 and $9,321.3 million at December 31, 2003. This increase in cash and invested assets resulted primarily from $1,290.6 million in cash flows from operations, $320.0 million from net proceeds of the issuance of junior subordinated debt securities and $91.9 million of realized capital gains, partially offset by $53.5 million in net pre-tax unrealized depreciation of the Company’s investments, primarily reflecting the recent rise in interest rates. Gross pre-tax unrealized appreciation and depreciation across the Company’s investment portfolio were $369.9 million and $45.6 million, respectively, at September 30, 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 the Company’s current and projected operating results, market conditions and the Company’s tax position. The fixed maturities in the investment portfolio are comprised of 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.
Commencing with the second quarter of 2003 and through the second quarter of 2004, the Company had investments in interest only strips. These investments were aimed at mitigating potential decreases in unrealized appreciation on the Company’s fixed income portfolio during a period where management judged that there was extraordinary potential for an increase on general interest rates. 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
38
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 Company liquidated its interest only strip investment portfolio in the second quarter of 2004 at which point management concluded the extraordinary potential increases in general interest rates had subsided to a more normal level.
The tables below summarize the characteristics of the Company’s investment portfolio for the periods indicated:
| | |
|---|
| | As of | | As of | |
| | September 30, 2004 | | December 31, 2003 | |
|
|
| Fixed maturities | 88.3% | | 93.6% | |
| Equity securities | 4.1% | | 1.7% | |
| Short-term investments | 4.8% | | 1.6% | |
| Other invested assets | 1.2% | | 1.1% | |
| Cash | 1.6% | | 2.0% | |
|
|
| Total investments and cash | 100.0% | | 100.0% | |
|
|
| | |
|---|
| | | As of | | | | As of |
| | | September 30, 2004 | | | | December 31, 2003 |
|
|
| Fixed income portfolio duration | | | 5.4 years | | | | 4.2 years |
| Fixed income composite credit quality | | | Aa2 | | | | Aa2 |
| Imbedded end of period yield, pre-tax | | | 4.7% | | | | 4.8% | |
| Imbedded end of period yield, after-tax | | | 4.0% | | | | 4.1% | |
The increase in short-term investments is due principally to temporary increases in target liquidity levels due to the current low level interest rate environment, coupled with maintaining liquidity levels for the maturing $250 million of senior notes due in March 2005. The increase in equity securities reflects a modest reweighting of the Company’s target asset mix.
The Company, because of its income orientation, generally 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 | |
| | | | September 30, 2004 | | | | December 31, 2003 |
|
|
| Fixed income portfolio total return | | | 4.0% | | | | 6.2% | |
| Lehman bond aggregate | | | 3.4% | | | | 4.1% | |
| Common equity portfolio total return | | | 3.4% | | | | 17.0% | |
| S & P 500 | | | 1.5% | | | | 28.7% | |
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Reinsurance Receivables. Reinsurance receivables totaled $1,246.8 million at September 30, 2004 and $1,284.1 million at December 31, 2003. At September 30, 2004, $448.7 million, or 36.0%, 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 12.8%, was receivable from Prudential Property and Casualty Insurance Company of Indiana (“Prupac”), whose obligations are guaranteed by The Prudential Insurance Company of America (“The Prudential”), $129.3 million, or 10.4%, was receivable from Transatlantic Reinsurance Company, and $100.0 million, or 8.0%, 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.
Loss and LAE Reserves. Gross loss and LAE reserves totaled $7,517.5 million at September 30, 2004 and $6,361.2 million at December 31, 2003. The increase during the nine months ended September 30, 2004 is primarily attributable to increased premiums earned, net prior period reserve adjustments in select areas, increase in catastrophe losses and normal variability in claim settlements.
Effective January 1, 2004, Everest Re sold its United Kingdom branch to Bermuda Re. Business for this branch was previously included in the International segment and is now included in the Bermuda segment. Due to the sale and in accordance with FAS 131, the Company restated the International and Bermuda segments at December 31, 2003.
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The following tables summarize gross outstanding loss and LAE reserves, segregated into case reserves and IBNR reserves, which are managed on a combined basis, for the periods indicated.
| | | |
|---|
| Gross Reserves By Segment | | | | | | | | | | | |
| | | As of September 30, 2004 | |
| | | | Case | | IBNR | | Total | |
| (Dollars in thousands) | | | Reserves | | Reserves | | Reserves | |
|
|
| U.S. Reinsurance | | | $ | 1,286,510 | | $ | 2,190,415 | | $ | 3,476,925 | |
| U.S. Insurance | | | | 571,651 | | | 760,810 | | | 1,332,461 | |
| Specialty Underwriting | | | | 207,884 | | | 127,573 | | | 335,457 | |
| International | | | | 359,157 | | | 322,696 | | | 681,853 | |
| Bermuda | | | | 381,756 | | | 490,766 | | | 872,522 | |
|
|
| Total excluding A&E | | | | 2,806,958 | | | 3,892,260 | | | 6,699,218 | |
| A&E | | | | 614,985 | | | 203,269 | | | 818,254 | |
|
|
| Total including A&E | | | $ | 3,421,943 | | $ | 4,095,529 | | $ | 7,517,472 | |
|
|
| | | | | | | | | | | | |
| | | As of December 31, 2003 | |
| | | | Case | | IBNR | | Total | |
| (Dollars in thousands) | | | Reserves | | Reserves | | Reserves | |
|
|
| U.S. Reinsurance | | | $ | 1,271,956 | | $ | 1,835,902 | | $ | 3,107,858 | |
| U.S. Insurance | | | | 445,802 | | | 620,895 | | | 1,066,697 | |
| Specialty Underwriting | | | | 228,572 | | | 80,839 | | | 309,411 | |
| International | | | | 353,686 | | | 149,717 | | | 503,403 | |
| Bermuda | | | | 256,059 | | | 352,559 | | | 608,618 | |
|
|
| Total excluding A&E | | | | 2,556,075 | | | 3,039,912 | | | 5,595,987 | |
| A&E | | | | 483,433 | | | 281,824 | | | 765,257 | |
|
|
| Total including A&E | | | $ | 3,039,508 | | $ | 3,321,736 | | $ | 6,361,244 | |
|
|
The increases by segment generally reflect increases in earned premium, changes in business mix and the impact of reserve recalculations together with claim settlement activity. The increases for A&E reflect the impact of reserve re-evaluations and claim settlement activity.
The Company’s loss and LAE reserves reflect estimates of ultimate claim liability. Such estimates are reevaluated 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 reevaluations impacts incurred losses for the current period. The Company notes that its analytical methods and processes operate at multiple levels including individual contracts, groupings of like contracts, classes and lines of business, internal business units, segments, legal entities, and in the aggregate. The complexities of the Company’s business and operations require analyses and adjustments, both qualitative and quantitative, at these various levels. Additionally, the attribution of reserves, change in reserves and incurred losses, between accident year and underwriting year requires adjustments and allocations, both qualitative and quantitative, at these various levels. All of these processes, methods and practices appropriately balance actuarial science, business expertise and management judgment in a manner intended to assure the accuracy, precision and consistency of the Company’s reserving practices, which are fundamental to the Company’s operation. The Company notes however, that the underlying reserves remain estimates, which are subject to variation, and that
41
the relative degree of variability is generally least when reserves are considered in the aggregate and generally increases as the focus shifts to more granular data levels.
There can be no assurance that reserves for, and losses from, claim obligations will not increase in the future. However, 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 ended December 31, 2003 discusses the Company’s past experience more fully in Part I, Item 1, “Changes in Historical Reserves”.
Asbestos and Environmental Reserves. The Company continues to receive claims under expired contracts, both insurance and reinsurance, 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.
The Company’s reserves include an estimate of the Company’s ultimate liability for A&E claims. This estimate is made based on judgmental assessment of the underlying exposures as the result of (1) long and variable reporting delays, both from insureds to insurance companies and from ceding companies to reinsurers; (2) historical data, which is more limited and variable on A&E losses than historical information on other types of casualty claims; and (3) unique aspects of A&E exposures for which ultimate value cannot be estimated using traditional reserving techniques. 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) the potential for an asbestos or environmental claim to involve many insurance providers over many policy periods; (f) questions concerning interpretation and application of insurance and reinsurance coverage; and (g) uncertainty regarding the number and identity of insureds with potential asbestos or environmental exposure.
With respect to asbestos claims in particular, several additional factors have emerged in recent years that further compound the difficulty in estimating the Company’s liability. These developments include: (a) continued growth in the number of claims filed, in part reflecting a much more aggressive plaintiff bar and including claims against defendants formerly regarded as “peripheral”; (b) a disproportionate percentage of claims filed by individuals with no functional injury, which should have 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
42
insurers and forecloses insurers from the negotiation of bankruptcy plans); (d) the concentration of claims in a small number of states that favor plaintiffs; (e) the growth in the number of claims that might impact the general liability portion of insurance policies rather than the product liability portion; (g) measures adopted by specific courts to ameliorate the worst procedural abuses; (h) an increase in settlement values being paid to asbestos claimants, especially those with cancer or functional impairment; (i) legislation in some states to address asbestos litigation issues; and (j) the potential that other states or the U.S. Congress may adopt legislation on asbestos litigation.
Management believes that these uncertainties and factors continue to render reserves for A&E and particularly asbestos losses significantly less subject to traditional actuarial analysis than reserves for other types of losses. Given these uncertainties, management believes that no meaningful range for such ultimate losses can be established. The Company establishes reserves to the extent that, in the judgment of management, the facts and prevailing law reflect an exposure for the Company or its ceding companies.
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.
With respect to Mt. McKinley, where the Company has a direct relationship with policyholders, the Company’s aggressive litigation posture and the uncertainties inherent in the asbestos coverage and bankruptcy litigation have provided an opportunity to actively engage in settlement negotiations with a number of those policyholders who have potentially significant asbestos liabilities. Those discussions are oriented towards achieving reasonable negotiated settlements that limit Mt. McKinley’s liability to a given policyholder to a sum certain. Thus far in 2004, the Company has concluded such settlements or reached agreement in principle with several of its high profile policyholders. The Company has currently identified 21 policyholders based on their past claim activity and/or potential future liabilities as “High Profile Policyholders” and its settlement efforts are generally directed at such policyholders, in part because their exposures have developed to the point where both the policyholder and the Company have sufficient information to be motivated to settle. The Company believes that this active approach will ultimately result in a more cost-effective liquidation of Mt. McKinley’s liabilities than a passive approach, although it may also introduce additional variability in Mt. McKinley’s losses and cash flows as reserves are adjusted to reflect the development of negotiations and, ultimately, potentially accelerated settlements.
There is less potential for similar settlements with respect to the Company’s reinsurance asbestos claims. Ceding companies, with their direct obligation to insureds and overall responsibility for claim settlements, are not consistently aggressive in developing claim settlement information and conveying this information to reinsurers, which can introduce significant and perhaps inappropriate delays in the reporting of asbestos claims/exposures to reinsurers. These delays not only extend the timing of reinsurance claim settlements, but also restrict the information available to estimate the reinsurers’ ultimate exposure.
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Due to the uncertainties discussed above, 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 could have a material adverse effect on the Company’s financial condition, results of operations and/or cash flows.
The following table summarizes incurred losses with respect to A&E on both a gross and net of retrocessional basis for the periods indicated:
| | | | |
|---|
| | | | Three Months Ended | | Nine Months Ended |
| | | | September 30, | | September 30, |
| (Dollars in thousands) | | | | 2004 | | | 2003 | | | 2004 | | | 2003 | |
|
|
|
|
|
| Gross basis: | | |
| Beginning of period reserves | | | $ | 829,899 | | $ | 646,159 | | $ | 765,257 | | $ | 667,922 | |
| Incurred losses | | | | 20,000 | | | 56,323 | | | 139,300 | | | 73,996 | |
| Paid losses | | | | (31,645 | ) | | (9,702 | ) | | (86,303 | ) | | (49,138 | ) |
|
|
|
|
|
| End of period reserves | | | $ | 818,254 | | $ | 692,780 | | $ | 818,254 | | $ | 692,780 | |
|
|
|
|
|
| Net basis: | | |
| Beginning of period reserves | | | $ | 598,532 | | $ | 503,220 | | $ | 534,369 | | $ | 527,462 | |
| Incurred losses | | | | 18,028 | | | 14,960 | | | 129,422 | | | 26,319 | |
| Paid losses | | | | (29,104 | ) | | (9,015 | ) | | (76,335 | ) | | (44,616 | ) |
|
|
|
|
|
| End of period reserves | | | $ | 587,456 | | $ | 509,165 | | $ | 587,456 | | $ | 509,165 | |
|
|
|
|
|
At September 30, 2004, the gross reserves for A&E losses were comprised of $146.9 million representing case reserves reported by ceding companies, $141.3 million representing additional case reserves established by the Company on assumed reinsurance claims, $326.8 million representing case reserves established by the Company on direct excess insurance claims, including Mt. McKinley, and $203.3 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 8.5 years at September 30, 2004. Adjusting for the effect of the reinsurance ceded under the reinsurance agreement with Prupac, this ratio rises to the equivalent of 10.8 years at September 30, 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. In particular, the Company notes that loss payout variability, which can be material, due in part to the Company’s orientation to negotiated settlements, particularly on its Mt. McKinley exposures, significantly impairs the credibility/utility of this measure as an analytical tool.
The Company’s net three year survival ratio on its asbestos exposures only was 9.4 years for the period ended September 30, 2004. This three year survival ratio, when adjusted for the effect of the reinsurance ceded under the stop loss cover from Prupac, was 12.5 years and, when adjusted for coverage in place and structured settlements, which are either fully funded by reserves or
44
subject to financial terms that substantially limit the potential variability in the liability, and the stop loss protection from Prupac, was 25.7 years.
Shareholders’ Equity. The Company’s shareholders’ equity increased to $3,533.8 million as of September 30, 2004 from $3,164.9 million as of December 31, 2003, principally reflecting net income of $401.5 million for the nine months ended September 30, 2004 and additional capital of $24.0 million resulting from stock option exercises, partially offset by a decrease of $35.4 million of net after-tax unrealized appreciation on the Company’s investments, a $2.0 million decrease in net after-tax currency translation adjustments and $16.8 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 $3,533.8 million and $3,164.9 million at September 30, 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.
From time to time the Company has used open market share repurchases to effectively adjust its capital position. It made no such purchases in 2003 or through September 30, 2004. In September 2004, the Company’s existing authorization to purchase up to 1.7 million shares was amended to authorize the repurchase of up to 5 million shares. The Company notes, outside of its open market repurchase program that it has repurchased 4,800 shares in 2004 from employees in connection with restricted share vestings where individual employees chose to discharge withholding tax liabilities on vesting shares through the surrendering of a portion of such shares.
The Company has a shelf registration statement on Form S-3 on file with the Securities and Exchange Commission (“SEC”), which was declared effective by the SEC on December 22, 2003, 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 Everest Re Capital Trust II (“Capital Trust II”) and Everest Re Capital Trust III (“Capital Trust III”) are authorized to issue trust preferred securities. The following securities have been issued pursuant to that registration statement, which at October 7, 2004 has a remaining balance of $405.0 million.
| | 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. 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. |
| | o | On October 6, 2004, Holdings completed a public offering of $250.0 million principal amount of 5.40% senior notes due October 6, 2014, pursuant to its currently effective shelf |
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| | | registration statement. The net proceeds will be utilized to retire existing debt at Holdings, which is coming due in March 2005, and for other general corporate purposes. |
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 Everest Re Capital Trust (“Capital Trust”) was authorized to issue trust preferred securities. This shelf registration statement became effective on September 26, 2002 and was effectively exhausted with the April 23, 2003 transaction described below. 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. |
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 generally met from positive cash flow from operations. Positive cash flow results from reinsurance and insurance premiums being collected prior to disbursements for claims, which disbursements generally take place over an extended period after the collection of premiums, sometimes a period of many years. Collected premiums are generally invested, prior to their use in such disbursements, and investment income provides funding for loss payments. The Company’s net cash flows from operating activities were $1,290.6 million and $1,173.1 millionfor the nine months ended September 30, 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 $97.9 million and $47.1 million for the nine months ended September 30, 2004 and 2003, respectively; catastrophe loss payments of $40.3 million and $66.9 million in the nine months ended September 30, 2004 and 2003, respectively; and a $46.8 million payment on a terminated annuity reinsurance arrangement for the nine months ended September 30, 2004.
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In periods for which disbursements for claims and benefits, policy acquisition costs and other operating expenses exceed premium inflows, cash flow from insurance operations would be negative. The effect on cash flow from operations would be partially offset by cash flow from investment income. Additionally, cash flow from investment maturities, both short term investments and longer term maturities mitigate the impact on total cash flow.
As the exact timing of the payment of claims and benefits cannot be predicted with certainty, the Company maintains portfolios of long term invested assets with varying maturities, along with short-term investments that are intended to provide adequate cash for payment of claims. At September 30, 2004 and December 31, 2003 the Company held cash and short-term investments of $705.1 million and $336.7 million, respectively. In addition to these cash and short-term investments at December 31, 2003, the Company had $4.0 billion, at fair value, of available for sale fixed maturity securities maturing within five years and an additional $5.7 billion, which mature at future periods. These securities, in conjunction with the short-term investments and positive cash flow from operations, provide adequate sources of liquidity for the expected payment of losses in the near future. The Company does not anticipate selling securities or using available credit facilities to pay losses and LAE but has the ability to do so. Management expects the trend of positive cash flow from operations should persist absent substantive deterioration in market conditions.
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 London InterBank Offered Rate (“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.
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 September 30, 2004, the Company was in compliance with these covenants.
During the nine months ended September 30, 2004, Holdings made no payments on and had no additional borrowings under the Credit Facility. As of September 30, 2004 and 2003, Holdings had outstanding Credit Facility borrowings of $70.0 million. Interest expense incurred in connection with these borrowings was $1.0 million for each of the nine months ended September 30, 2004 and 2003.
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
47
Company generally avoids providing collateral except where required for ceding companies to receive credit from their regulators. At September 30, 2004, $259.8 million of letters of credit were issued and outstanding under these arrangements and substantially all were related to Bermuda Re. Furthermore, at September 30, 2004, $191.1 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 period.
The Company’s $11.0 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 $1,509.3 million of mortgage-backed securities in the $9,733.3 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.
48
The table below displays the potential impact of market value fluctuations and after-tax unrealized appreciation on the Company’s fixed maturity portfolio as of September 30, 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 September 30, 2004 |
| Interest Rate Shift in Basis Points |
|
|
|
|
|
|
| | | | -200 | | -100 | | 0 | | 100 | | 200 |
|
|
|
|
|
|
| Total Market Value | | | $ | 11,508 | .8 | $ | 10,884 | .3 | $ | 10,259 | .5 | $ | 9,643 | .9 | $ | 9,065 | .4 |
| Market Value Change from Base (%) | | | | 12.2 | % | | 6.1 | % | | 0.0 | % | | -6.0 | % | | -11.6 | % |
| Change in Unrealized Appreciation | | |
| After-tax from Base ($) | | | $ | 930 | .0 | $ | 463 | .9 | $ | | - | $ | (456 | .5) | $ | (886 | .8) |
The Company had $7,517.5 million and $6,391.2 million of reserves for losses and adjustment expenses as of September 30, 2004 and December 31, 2003. These amounts are recorded at their nominal or estimated ultimate payment amount, as opposed to fair 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 fair value of the reserves is less than the nominal value. As interest rates rise, the fair value of the reserves decreases and conversely, if interest rates decline, the fair value will increase. These movements are the opposite of the interest rate impacts on the fair value of investments since reserves are future obligations. While the difference between fair value and nominal value is not reflected in the Company’s financial statements, the Company’ financial results will benefit over time as income is earned on the investment portfolio until the claims are paid. The Company’s loss and loss reserve obligations have an expected duration reasonably consistent with the Company’s fixed income portfolio, and total approximately 73% of such assets. The existence of such obligations, and the variable differential between ultimate and fair value, provides substantial mitigation of the economic effects of interest rate variability even though such mitigation is not reflected in the Company’s financial statements.
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 non-U.S./Bermuda (“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 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
49
September 30, 2004, there has been no material change in exposure to foreign exchange rates as compared to December 31, 2003.
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 September 30, 2004 |
| Change in Equity Values in Percent |
|
| | | -20% | | | -10% | | | 0% | | 10% | | | 20% | |
|
| Market Value of the Equity Portfolio | $ | 364.2 | | $ | 409.8 | | $ | 455.3 | $ | 500.8 | | $ | 546.4 | |
| |
| After-tax Change in Unrealized | | |
| Appreciation | $ | (59.2 | ) | $ | (29.6 | ) | $ | - | $ | 29.6 | | $ | 59.2 | |
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 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 commissions, 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 by which the index is below the strike price. Based on historical index volatilities and trends and the September 30, 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 to be less than 9.9%. 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 reports 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 September 30, 2004 and December 31, 2003 of $22.5 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.
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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 September 30, 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.
| | | | | |
|---|
| As of September 30, 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 | | $34.8 | | | $28.1 | | | $22.5 | | | $18.0 | | | $14.3 | |
| Market Value Change from Base (%) | | -54.8 | % | | -24.7 | % | | 0.0 | % | | 20.2 | % | | 36.6 | % |
| |
| S & P Index Shift in Points: | | -200 | | | -100 | | | 0 | | | 100 | | | 200 | |
|
| Total Market Value | | $30.5 | | | $26.1 | | | $22.5 | | | $19.5 | | | $17.0 | |
| Market Value Change from Base (%) | | -35.3 | % | | -16.0 | % | | 0.0 | % | | 13.3 | % | | 24.5 | % |
| |
| Combined Interest Rate / S & P Index Shift: | | -100/-200 | | | -50/-100 | | | 0/0 | | | 50/100 | | | 100/200 | |
|
| Total Market Value | | $45.7 | | | $32.3 | | | $22.5 | | | $15.5 | | | $10.5 | |
| Market Value Change from Base (%) | | -103.0 | % | | -43.5 | % | | 0.0 | % | | 31.3 | % | | 53.5 | % |
| |
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 5 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.
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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.
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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.
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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.
54
Part II – Item 2. Changes In Securities, Use of Proceeds and Issuer Purchases of Equity Securities
| | |
|---|
|
| Issuer Purchases of Equity Securities | |
|
| | | (a) | | (b) | | (c) | | (d) | |
|
| Period | | Total
Number of Shares
(or Units)
Purchased | | Average
Price
Paid per
Share
(or Unit) | | Total
Number of Shares
(or Units)
Purchased as Part
of Publicly
Announced Plans
or Programs | | Maximum
Number (or
Approximate
Dollar
Value) of
Shares (or
Units) that
May Yet Be
Purchased
Under the
Plans or
Programs (2) | |
|
| July 1 – 31 | | 0 | | N/A | | 0 | | 1,730,000 | |
|
| August 1 – 31 | | 0 | | N/A | | 0 | | 1,730,000 | |
|
September 1 – 30
(1) | | 4,800 | | $ 74.12 | | 0 | | 5,000,000 | |
|
| Total | | 4,800 | | $ 74.12 | | 0 | | 5,000,000 | |
|
1) The 4,800 shares were withheld as payment for taxes on restricted shares that became unrestricted in the quarter.
(2) On January 21, 2000, the Company’s board of directors approved a share repurchase program authorizing the Company and/or its subsidiary Holdings to purchase up to an aggregate of 2,200,000 of the Company’s common shares through open market transactions. On September 21, 2004, the Company’s board of directors approved an amended share repurchase program authorizing the Company and/or its subsidiary Holdings to purchase up to an aggregate of 5,000,000 of the Company’s common shares through open market transactions, privately negotiated transactions or both. | |
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.
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Part II – Item 6. Exhibits and Reports on Form 8-K
| | 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 |
| | A report on Form 8-K was furnished on July 19, 2004, under Item 12, relating to the Company’s July 19, 2004 news release setting forth its second quarter 2004 earnings. |
| | A report on Form 8-K was furnished on August 20, 2004, under Item 9, relating to the Company’s August 20, 2004 news release announcing its estimate of losses from hurricane Charley. |
| | A report on Form 8-K was furnished on September 21, 2004, under Item 7.01, relating to the Company’s September 21, 2004 news release announcing its amended share repurchase program. |
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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: November 9, 2004
