UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q | |||
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED: | Commission file number: | ||||
June 30, 2006 | 1-14527 | ||||
EVEREST REINSURANCE HOLDINGS, INC. | |||||
(Exact name of registrant as specified in its charter) | |||||
Delaware | 22-3263609 | ||||
(State or other jurisdiction of | (I.R.S. Employer | ||||
incorporation or organization) | Identification No.) | ||||
477 Martinsville Road | |||||
PO Box HM 845 | |||||
Liberty Corner, New Jersey 07938 | |||||
(908) 604-3000 | |||||
(Address, including zip code, and telephone number, including area code, | |||||
of registrant's principal executive office) | |||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject such the filing requirements for the past 90 days.
YES X | NO |
Indicate by check mark whether the registrant is large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer___ Accelerated filer___ Non-accelerated filer X
Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Exchange Act).
YES | NO X |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
Number of Shares Outstanding | |||||
Class | at August 01, 2006 | ||||
Common Stock, $.01 par value | 1,000 |
EVEREST REINSURANCE HOLDINGS, INC.
Index To Form 10-Q
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements | Page | ||||
Consolidated Balance Sheets at June 30, 2006 (unaudited) | |||||
and December 31, 2005 | 3 | ||||
Consolidated Statements of Operations and Comprehensive Income | |||||
for the three and six months ended June 30, 2006 and 2005 (unaudited) | 4 | ||||
Consolidated Statements of Changes in Shareholders’ Equity for the | |||||
three and six months ended June 30, 2006 and 2005 (unaudited) | 5 | ||||
Consolidated Statements of Cash Flows for the three and six months ended | |||||
June 30, 2006 and 2005 (unaudited) | 6 | ||||
Notes to Consolidated Interim Financial Statements (unaudited) | 7 | ||||
Item 2. Management’s Discussion and Analysis of Financial Condition | |||||
and Results of Operation | 20 | ||||
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 41 | ||||
Item 4. Controls and Procedures | 42 | ||||
PART II | |||||
OTHER INFORMATION | |||||
Item 1. Legal Proceedings | 43 | ||||
Item 1A. Risk Factors | 43 | ||||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 43 | ||||
Item 3. Defaults Upon Senior Securities | 43 | ||||
Item 4. Submission of Matters to a Vote of Security Holders | 43 | ||||
Item 5. Other Information | 43 | ||||
Item 6. Exhibits | 44 |
EVEREST REINSURANCE HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS | ||||||||
(Dollars in thousands, except par value per share) | June 30, 2006 | December 31, 2005 | ||||||
(unaudited) | ||||||||
ASSETS: | ||||||||
Fixed maturities - available for sale, at market value | ||||||||
(amortized cost: 2006, $5,972,443; 2005, $5,850,541) | $ | 6,017,881 | $ | 6,036,693 | ||||
Equity securities, at market value (cost: 2006, $910,973; 2005, $859,425) | 1,118,867 | 1,023,784 | ||||||
Short-term investments | 507,934 | 513,913 | ||||||
Other invested assets (cost: 2006, $242,332; 2005, $215,364) | 243,860 | 216,791 | ||||||
Cash | 84,716 | 66,194 | ||||||
Total investments and cash | 7,973,258 | 7,857,375 | ||||||
Accrued investment income | 87,044 | 82,561 | ||||||
Premiums receivable | 974,718 | 1,053,994 | ||||||
Reinsurance receivables - unaffiliated | 911,379 | 988,725 | ||||||
Reinsurance receivables - affiliated | 1,619,022 | 1,537,355 | ||||||
Funds held by reinsureds | 131,311 | 130,041 | ||||||
Deferred acquisition costs | 218,327 | 202,226 | ||||||
Prepaid reinsurance premiums | 394,379 | 398,583 | ||||||
Deferred tax asset | 294,241 | 261,216 | ||||||
Current federal income tax receivalbe | 44 | 73,256 | ||||||
Other assets | 111,123 | 115,193 | ||||||
TOTAL ASSETS | $ | 12,714,846 | $ | 12,700,525 | ||||
LIABILITIES: | ||||||||
Reserve for losses and loss adjustment expenses | $ | 7,586,127 | $ | 7,729,171 | ||||
Unearned premium reserve | 1,382,262 | 1,387,876 | ||||||
Funds held under reinsurance treaties | 178,315 | 263,165 | ||||||
Contingent commissions | 13,154 | 20,158 | ||||||
Other net payable to reinsurers | 454,104 | 315,676 | ||||||
8.75% Senior notes due 3/15/2010 | 199,502 | 199,446 | ||||||
5.4% Senior notes due 10/15/2014 | 249,635 | 249,617 | ||||||
Junior subordinated debt securities payable | 546,393 | 546,393 | ||||||
Accrued interest on debt and borrowings | 10,041 | 10,041 | ||||||
Other liabilities | 190,728 | 188,280 | ||||||
Total liabilities | 10,810,261 | 10,909,823 | ||||||
Commitments & Contingencies (Note 4) | ||||||||
STOCKHOLDER'S EQUITY: | ||||||||
Common stock, par value: $0.01; 3,000 shares authorized; | ||||||||
1,000 shares issued (2006 and 2005) | - | - | ||||||
Additional paid-in capital | 296,391 | 292,281 | ||||||
Accumulated other comprehensive income, net of deferred income | ||||||||
taxes of $102.9 million at 2006 and $132.6 million at 2005 | 191,171 | 246,285 | ||||||
Retained earnings | 1,417,023 | 1,252,136 | ||||||
Total stockholder's equity | 1,904,585 | 1,790,702 | ||||||
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY | $ | 12,714,846 | $ | 12,700,525 | ||||
The accompanying notes are an integral part of the consolidated financial statements. |
3
EVEREST REINSURANCE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME | ||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(Dollars in thousands) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
REVENUES: | ||||||||||||||||
Premiums earned | $ | 501,488 | $ | 668,325 | $ | 1,105,166 | $ | 1,287,331 | ||||||||
Net investment income | 91,922 | 89,070 | 175,827 | 174,992 | ||||||||||||
Net realized capital gains | 2,204 | 18,203 | 11,224 | 19,688 | ||||||||||||
Other income (expense) | 7,013 | 5,500 | (6,034 | ) | 1,833 | |||||||||||
Total revenues | 602,627 | 781,098 | 1,286,183 | 1,483,844 | ||||||||||||
CLAIMS AND EXPENSES: | ||||||||||||||||
Incurred losses and loss adjustment expenses | 307,334 | 429,323 | 772,845 | 863,452 | ||||||||||||
Commission, brokerage, taxes and fees | 95,567 | 154,034 | 220,046 | 271,184 | ||||||||||||
Other underwriting expenses | 24,736 | 24,839 | 45,138 | 49,764 | ||||||||||||
Interest expense on senior notes | 7,787 | 7,709 | 15,573 | 19,944 | ||||||||||||
Interest expense on junior subordinated debt | 9,362 | 9,362 | 18,724 | 18,724 | ||||||||||||
Amortization of bond issue costs | 234 | 235 | 469 | 550 | ||||||||||||
Interest and fee expense on credit facility | 47 | 47 | 94 | 94 | ||||||||||||
Total claims and expenses | 445,067 | 625,549 | 1,072,889 | 1,223,712 | ||||||||||||
INCOME BEFORE TAXES | 157,560 | 155,549 | 213,294 | 260,132 | ||||||||||||
Income tax expense | 36,178 | 36,624 | 48,407 | 54,294 | ||||||||||||
NET INCOME | $ | 121,382 | $ | 118,925 | $ | 164,887 | $ | 205,838 | ||||||||
Other comprehensive (loss) income, net of tax | (61,914 | ) | 79,952 | (55,114 | ) | 12,110 | ||||||||||
COMPREHENSIVE INCOME | $ | 59,468 | $ | 198,877 | $ | 109,773 | $ | 217,948 | ||||||||
The accompanying notes are an integral part of the consolidated financial statements. |
4
EVEREST REINSURANCE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY | ||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(Dollars in thousands, except share amounts) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
COMMON STOCK (shares outstanding): | ||||||||||||||||
Balance, beginning of period | 1,000 | 1,000 | 1,000 | 1,000 | ||||||||||||
Balance, end of period | 1,000 | 1,000 | 1,000 | 1,000 | ||||||||||||
ADDITIONAL PAID IN CAPITAL: | ||||||||||||||||
Balance, beginning of period | $ | 296,199 | $ | 274,532 | $ | 292,281 | $ | 271,652 | ||||||||
Tax benefit from stock options exercised | 192 | 460 | 4,110 | 3,290 | ||||||||||||
Dividend from parent | - | 49 | - | 99 | ||||||||||||
Balance, end of period | 296,391 | 275,041 | 296,391 | 275,041 | ||||||||||||
ACCUMULATED OTHER COMPREHENSIVE INCOME, | ||||||||||||||||
NET OF DEFERRED INCOME TAXES: | ||||||||||||||||
Balance, beginning of period | 253,085 | 179,818 | 246,285 | 247,660 | ||||||||||||
Net (decrease) increase during the period | (61,914 | ) | 79,952 | (55,114 | ) | 12,110 | ||||||||||
Balance, end of period | 191,171 | 259,770 | 191,171 | 259,770 | ||||||||||||
RETAINED EARNINGS: | ||||||||||||||||
Balance, beginning of period | 1,295,641 | 1,334,343 | 1,252,136 | 1,247,430 | ||||||||||||
Net income | 121,382 | 118,925 | 164,887 | 205,838 | ||||||||||||
Balance, end of period | 1,417,023 | 1,453,268 | 1,417,023 | 1,453,268 | ||||||||||||
TREASURY SHARES AT COST: | ||||||||||||||||
Balance, beginning of period | - | (22,950 | ) | - | (22,950 | ) | ||||||||||
Balance, end of period | - | (22,950 | ) | - | (22,950 | ) | ||||||||||
TOTAL STOCKHOLDER'S EQUITY, END OF PERIOD | $ | 1,904,585 | $ | 1,965,129 | $ | 1,904,585 | $ | 1,965,129 | ||||||||
The accompanying notes are an integral part of the consolidated financial statements. |
5
EVEREST REINSURANCE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(Dollars in thousands) | 2006 | 2005 | 2006 | 2005 | ||||||||||||
(unaudited) | (unaudited) | |||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||||||
Net income | $ | 121,382 | $ | 118,925 | $ | 164,887 | $ | 205,838 | ||||||||
Adjustments to reconcile net income to net cash provided by | ||||||||||||||||
operating activities: | ||||||||||||||||
Decrease (increase) in premiums receivable | 86,276 | (86,635 | ) | 82,283 | (69,891 | ) | ||||||||||
Increase in funds held by reinsureds, net | (19,586 | ) | (30,687 | ) | (87,084 | ) | (62,792 | ) | ||||||||
Decrease in reinsurance receivables | 1,552 | 273,557 | 3,815 | 181,081 | ||||||||||||
Decrease (increase) in deferred tax asset | 3,963 | 3,001 | (3,283 | ) | (12,131 | ) | ||||||||||
(Decrese) increase in reserve for losses and loss adjustment expenses | (175,976 | ) | 103,822 | (166,349 | ) | 186,883 | ||||||||||
(Decrease) increase in unearned premiums | (19,119 | ) | (7,449 | ) | (8,739 | ) | 18,840 | |||||||||
Decrease (increase) in other assets and liabilities, net | 78,645 | (187,540 | ) | 176,365 | (119,712 | ) | ||||||||||
Amortization of bond premium/(accrual of bond discount) | 2,630 | (1,987 | ) | 5,752 | (908 | ) | ||||||||||
Amortization of underwriting discount on senior notes | 37 | 33 | 73 | 91 | ||||||||||||
Realized capital gains | (2,204 | ) | (18,203 | ) | (11,224 | ) | (19,688 | ) | ||||||||
Net cash provided by operating activities | 77,600 | 166,837 | 156,496 | 307,611 | ||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||||||
Proceeds from fixed maturities matured/called - available for sale | 108,465 | 92,100 | 208,573 | 136,595 | ||||||||||||
Proceeds from fixed maturities sold - available for sale | 386 | 638,512 | 40,862 | 725,686 | ||||||||||||
Proceeds from equity securities sold | 66,597 | 9,410 | 93,582 | 9,410 | ||||||||||||
Proceeds from other invested assets sold | 20,821 | 21,358 | 24,087 | 21,642 | ||||||||||||
Cost of fixed maturities acquired - available for sale | (26,323 | ) | (596,640 | ) | (349,619 | ) | (727,822 | ) | ||||||||
Cost of equity securities acquired | (94,976 | ) | (206,449 | ) | (120,045 | ) | (359,507 | ) | ||||||||
Cost of other invested assets acquired | (23,642 | ) | (67,761 | ) | (52,076 | ) | (73,151 | ) | ||||||||
Net (purchase) sales of short-term securities | (115,398 | ) | (52,996 | ) | 7,665 | 224,557 | ||||||||||
Net increase (decrease) in unsettled securities transactions | 8,371 | (26,053 | ) | (1,256 | ) | (5,926 | ) | |||||||||
Net cash used in investing activities | (55,699 | ) | (188,519 | ) | (148,227 | ) | (48,516 | ) | ||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||||||
Tax benefit from stock options exercised | 192 | 460 | 4,110 | 3,290 | ||||||||||||
Dividend from parent | - | 49 | - | 99 | ||||||||||||
Repayment of senior notes | - | - | - | (250,000 | ) | |||||||||||
Net cash provided by (used in) financing activities | 192 | 509 | 4,110 | (246,611 | ) | |||||||||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH | 798 | (1,083 | ) | 6,143 | (3,869 | ) | ||||||||||
Net increase (decrease) in cash | 22,891 | (22,256 | ) | 18,522 | 8,615 | |||||||||||
Cash, beginning of period | 61,825 | 84,758 | 66,194 | 53,887 | ||||||||||||
Cash, end of period | $ | 84,716 | $ | 62,502 | $ | 84,716 | $ | 62,502 | ||||||||
SUPPLEMENTAL CASH FLOW INFORMATION: | ||||||||||||||||
Cash transactions: | ||||||||||||||||
Income taxes paid, net | $ | 24,640 | $ | 69,155 | $ | (27,799 | ) | $ | 105,937 | |||||||
Interest paid | $ | 16,160 | $ | 16,272 | $ | 34,319 | $ | 45,056 | ||||||||
Non-cash financing transaction: | ||||||||||||||||
Non-cash tax benefit from stock options exercised | $ | 192 | $ | 460 | $ | 4,110 | $ | 3,290 | ||||||||
The accompanying notes are an integral part of the consolidated financial statements. |
6
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Six Months Ended June 30, 2006 and 2005
1. General
As used in this document, “Holdings” means Everest Reinsurance Holdings, Inc.; “Group” means Everest Re Group, Ltd. (Holdings’ parent); “Bermuda Re” means Everest Reinsurance (Bermuda), Ltd., a subsidiary of Group; “Everest Re” means Everest Reinsurance Company, a subsidiary of Holdings, and its subsidiaries (unless the context otherwise requires); and the “Company” means Holdings and its subsidiaries.
The unaudited consolidated financial statements of the Company for the three and six months ended June 30, 2006 and 2005 include all adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair statement of the results on an interim basis. Certain financial information, which is normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), has been omitted since it is not required for interim reporting purposes. The year end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The results for the three and six months ended June 30, 2006 and 2005 are not necessarily indicative of the results for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, 2005, 2004 and 2003 included in the Company’s most recent Form 10-K filing.
2. New Accounting Pronouncements
In November 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” (“FAS 115-1”), which is effective for reporting periods beginning after December 15, 2005. FAS 115-1 addresses the determination as to when an investment is considered impaired, whether the impairment is other than temporary and the measurement of an impairment loss. FAS 115-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses not recognized as other-than-temporary impairments. The Company adopted FAS 115-1 prospectively effective January 1, 2006. The Company believes that the unrealized losses in its investment portfolio are temporary in nature.
On July 14, 2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (“FIN 48”), which is effective for fiscal years beginning after December 15, 2006. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes” (“FAS 109”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company will adopt FIN 48 on January 1, 2007. The Company is unable to determine the impact on its financial statements at this time, although it does not believe the impact will be material.
3. Capital Transactions
On December 1, 2005, Group and Holdings, under the new registration and offering revisions to the Securities Act of 1933, filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission (“SEC”), as a Well Known Seasoned Issuer. 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
7
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
(continued)
For the Three and Six Months Ended June 30, 2006 and 2005
debt securities and Everest Re Capital Trust III (“Capital Trust III”) is authorized to issue trust preferred securities.
o | On December 1, 2005, Group issued 2,298,000 of its common shares at a price of $102.89 per share, which resulted in $236.4 million of proceeds before expenses of approximately $0.3 million and Holdings sold Group shares it acquired in 2002 at a price of $102.89 per share, which resulted in $46.5 million of proceeds, before expenses of approximately $0.3 million. |
On June 27, 2003, Group and Holdings filed a shelf registration statement on Form S-3 with the SEC, providing for the issuance of up to $975.0 million of securities. Generally, under this shelf registration statement, Group was authorized to issue common shares, preferred shares, debt securities, warrants and hybrid securities, Holdings was authorized to issue debt securities and Everest Re Capital Trust II (“Capital Trust II”) and Capital Trust III were authorized to issue trust preferred securities. This shelf registration statement became effective on December 22, 2003 and was exhausted with the October 6, 2005 transaction described below. The following securities were issued pursuant to that registration statement.
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 $320.0 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 15, 2014. The net proceeds were used to retire existing debt of the Company, which was due and retired on March 15, 2005. |
o | On October 6, 2005, Group expanded the size of the remaining shelf registration to $486.0 million by filing 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, Group entered into an agreement to issue 5,200,000 of its common shares at a price of $91.50 per share, which resulted in $475.8 million in proceeds received on October 12, 2005, before expenses of approximately $0.3 million. This transaction effectively exhausted the December 22, 2003 shelf registration. |
4. Contingencies
In the ordinary course of business, the Company is involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine the Company’s rights and obligations under insurance, reinsurance and other contractual agreements. In some disputes, the Company seeks to enforce its rights under an agreement or to collect funds owing to it. In other matters, the Company is resisting attempts by others to collect funds or enforce alleged rights. These disputes arise from time to time and as they arise are addressed, and ultimately resolved, through both informal and formal means, including negotiated resolution, arbitration and litigation. In all such matters, the Company believes that its positions are legally and commercially reasonable. While the final outcome of these matters cannot be predicted with certainty, the Company does not believe that any of these matters, when finally resolved, will have a material adverse effect on the Company’s financial position or liquidity. However, an adverse resolution of one or more of these items in
8
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
(continued)
For the Three and Six Months Ended June 30, 2006 and 2005
any one quarter or fiscal year could have a material adverse effect on the Company’s results of operations in that period.
The Company does not believe that there are any material pending legal proceedings to which it or any of its subsidiaries is a party or of which any of their properties are the subject.
The Company continues to receive claims under expired contracts, both insurance and reinsurance, asserting alleged injuries and/or damages relating to or resulting from environmental pollution and hazardous substances, including asbestos (i.e. asbestos and environmental (“A&E”)). 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.
As of June 30, 2006, approximately 8% of the Company’s gross reserves are 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’s bar and including claims against defendants who may only have a “peripheral” condition to asbestos; (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 insurers and forecloses insurers from the negotiation of asbestos related bankruptcy reorganization plans); (d) the concentration of claims in a small number of states that favor plaintiffs; (e) the growth in the number of claims that might impact the general liability portion of insurance policies rather than the product liability portion; (f) measures adopted by specific courts to ameliorate the worst procedural abuses; (g) an increase in settlement values being paid to asbestos claimants, especially those with cancer or functional impairment; (h) legislation in some states to address asbestos litigation issues; and (i) the potential that other states or the U.S. Congress may adopt legislation on asbestos litigation.
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.
9
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
(continued)
For the Three and Six Months Ended June 30, 2006 and 2005
Given these uncertainties, management believes that no meaningful range for such ultimate losses can be established particularly for asbestos. Further, A&E reserves may be subject to more variability than non-A&E reserves and such variation could have a material adverse effect on the Company’s financial condition, results of operations and/or cash flows. 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.
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 | Six Months Ended | |||||||||||||
June 30, | June 30, | |||||||||||||
(Dollars in thousands) | 2006 | 2005 | 2006 | 2005 | ||||||||||
Gross basis: | ||||||||||||||
Beginning of period reserves | $ | 639,635 | $ | 724,825 | $ | 649,460 | $ | 728,325 | ||||||
Incurred losses | 6,400 | - | 16,400 | 18,000 | ||||||||||
Paid losses | (26,156 | ) | (23,069 | ) | (45,981 | ) | (44,569 | ) | ||||||
End of period reserves | $ | 619,879 | $ | 701,756 | $ | 619,879 | $ | 701,756 | ||||||
Net basis: | ||||||||||||||
Beginning of period reserves | $ | 301,034 | $ | 297,460 | $ | 311,552 | $ | 303,335 | ||||||
Incurred losses | 640 | 5,202 | 1,246 | 5,902 | ||||||||||
Paid losses | (3,413 | ) | (4,531 | ) | (14,537 | ) | (11,106 | ) | ||||||
End of period reserves | $ | 298,261 | $ | 298,131 | $ | 298,261 | $ | 298,131 | ||||||
The Company’s gross A&E liabilities stem from Mt.McKinley Insurance Company’s (“Mt. McKinley”) direct excess insurance business and Everest Re’s assumed business. At June 30, 2006, the gross reserves for A&E losses were comprised of $137.8 million representing case reserves reported by ceding companies, $157.3 million representing additional case reserves established by the Company on assumed reinsurance claims, $221.4 million representing case reserves established by the Company on direct excess insurance claims including Mt. McKinley, and $103.4 million representing incurred but not reported reserves (“IBNR”). Approximately 87.5%, or $542.5 million, of gross A&E reserves relate to asbestos, of which $303.9 million was for assumed business and $238.6 million was for direct excess business.
The Company’s net A&E liabilities reflect credit for reinsurance from Mt. McKinley as an affiliate reinsurer of Everest Re. Under a series of transactions dating to 1986, Mt. McKinley reinsured several components of Everest Re’s business. In particular, Mt. McKinley provided stop loss protection, in connection with the Company’s October 5, 1995 initial public offering, for any adverse loss development on Everest Re’s June 30, 1995 (December 31, 1994 for catastrophe losses) reserves, with $375.0 million in limits, of which $11.3 million remains available (the “Stop Loss Agreement”). The Stop Loss Agreement and other reinsurance contracts between Mt. McKinley and Everest Re remain in effect following the Company’s acquisition of Mt. McKinley. However, these contracts became transactions with affiliates effective on the date of the Mt. McKinley acquisition. Effective September 19, 2000, Mt. McKinley and Bermuda Re entered into a loss portfolio transfer reinsurance agreement, whereby Mt. McKinley transferred, for what management believes to be arm’s-length consideration, all of its net reinsurance exposures and reserves to Bermuda Re.
10
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
(continued)
For the Three and Six Months Ended June 30, 2006 and 2005
In connection with the acquisition of Mt. McKinley, which has significant exposure to A&E claims, LM Property and Casualty Insurance Company (“LM”) provided reinsurance to Mt. McKinley covering 80% ($160.0 million) of the first $200.0 million of any adverse development of Mt. McKinley’s reserves as of September 19, 2000 and The Prudential Insurance Company of America (“The Prudential”) guaranteed LM’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 toward achieving reasonable negotiated settlements that limit Mt. McKinley’s liability to a given policyholder to a sum certain. In 2004 and 2005 and thus far in 2006, the Company concluded such settlements or reached agreement in principle with 14 of its high profile policyholders. The Company has currently identified 8 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.
Due to the uncertainties discussed above, the ultimate losses may vary materially from current loss reserves and, depending on coverage under the Company’s various reinsurance arrangements, could have a material adverse effect on the Company’s future financial condition, results of operations and/or cash flows.
In 1993 and prior, the Company had a business arrangement with The Prudential wherein, for a fee, the Company accepted settled claim payment obligations of certain property and casualty insurers, and, concurrently, became the owner of the annuity or assignee of the annuity proceeds funded by the property and casualty insurers specifically to fulfill these fully settled obligations. In these circumstances, the Company would be liable if The Prudential, which has an A+ (Superior) financial strength rating from A.M. Best Company (“A.M. Best”), were unable to make the annuity payments. The estimated cost to replace all such annuities for which the Company was contingently liable at June 30, 2006 was $153.4 million.
Prior to its 1995 initial public offering, the Company purchased annuities from an unaffiliated life insurance company with an A+ (Superior) financial strength rating from A.M. Best to settle certain claim liabilities of the company. Should the life insurance company become unable to make the annuity payments, the company would be liable for those claim liabilities. The estimated cost to replace such annuities at June 30, 2006 was $19.4 million.
11
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
(continued)
For the Three and Six Months Ended June 30, 2006 and 2005
5. Other Comprehensive (Loss) Income
The following table presents the components of other comprehensive (loss) income for the periods indicated:
Three Months Ended | Six Months Ended | |||||||||||||
June 30, | June 30, | |||||||||||||
(Dollars in thousands) | 2006 | 2005 | 2006 | 2005 | ||||||||||
Net unrealized (depreciation) | ||||||||||||||
appreciation of investments, | ||||||||||||||
net of deferred income taxes | $ | (66,630 | ) | $ | 83,380 | $ | (63,101 | ) | $ | 17,261 | ||||
Currency translation adjustments, | ||||||||||||||
net of deferred income taxes | 4,716 | (3,428 | ) | 7,987 | (2,998 | ) | ||||||||
Additional minimum pension liability | - | - | - | (2,153 | ) | |||||||||
Other comprehensive (loss) income, | ||||||||||||||
net of deferred income taxes | $ | (61,914 | ) | $ | 79,952 | $ | (55,114 | ) | $ | 12,110 | ||||
6. Trust Agreements
A subsidiary of the Company, Everest Re, has established a trust agreement as security for assumed losses payable for a non-affiliated ceding company, which effectively uses Everest Re’s investments as collateral. At June 30, 2006, the total amount on deposit in the trust account was $20.6 million.
7. Senior Notes
On October 12, 2004, Holdings completed a public offering of $250.0 million principal amount of 5.40% senior notes due October 15, 2014. On March 14, 2000, Holdings completed public offerings of $200.0 million principal amount of 8.75% senior notes due March 15, 2010 and $250.0 million principal amount of 8.50% senior notes due and retired on March 15, 2005.
Interest expense incurred in connection with these senior notes was $7.8 million and $7.7 million for the three months ended June 30, 2006 and 2005, respectively, and $15.6 million and $19.9 million for the six months ended June 30, 2006 and 2005, respectively. Market value, which is based on quoted market price at June 30, 2006 and December 31, 2005, was $232.8 million and $250.9 million, respectively, for the 5.40% senior notes and $216.8 million and $226.2 million, respectively, for the 8.75% senior notes.
8. Junior Subordinated Debt Securities Payable
On March 29, 2004, Holdings issued $329.9 million of 6.20% junior subordinated debt securities due March 29, 2034 to Capital Trust II. Holdings can redeem the junior subordinated debt securities before their maturity at 100% of their principal amount plus accrued interest as of the date of redemption, in whole or in part, on one or more occasions at any time on or after March 30, 2009; or at any time, in whole, but not in part, within 90 days of the occurrence and continuation of specific events.
On November 14, 2002, Holdings issued $216.5 million of 7.85% junior subordinated debt securities due November 15, 2032 to Everest Re Capital Trust (“Capital Trust”). Holdings can redeem the junior subordinated debt securities before their maturity at 100% of their principal amount plus accrued interest as of the date of
12
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
(continued)
For the Three and Six Months Ended June 30, 2006 and 2005
redemption, in whole or in part, on one or more occasions at any time on or after November 14, 2007; or at any time, in whole, but not in part, within 90 days of the occurrence and continuation of specific events.
Fair value, which is primarily based on quoted market price of the related trust preferred securities at June 30, 2006 and December 31, 2005, was $282.9 million and $293.5 million, respectively, for the 6.20% junior subordinated debt securities and $219.4 million and $220.5 million, respectively, for the 7.85% junior subordinated debt securities.
Interest expense incurred in connection with these junior subordinated notes was $9.4 million for the three months ended June 30, 2006 and 2005, and $18.7 million for the six months ended June 30, 2006 and 2005.
Capital Trust and Capital Trust II are wholly owned finance subsidiaries of the Company.
Holdings considers that the mechanisms and obligations relating to the trust preferred securities, taken together, constitute a full and unconditional guarantee by Holdings of Capital Trust and Capital Trust II’s payment obligations with respect to their respective trust preferred securities.
Capital Trust and Capital Trust II will redeem all of the outstanding trust preferred securities when the junior subordinated debt securities are paid at maturity on November 15, 2032 and March 29, 2034, respectively. The Company may elect to redeem the junior subordinated debt securities, in whole or in part, at any time on or after November 14, 2007 and March 30, 2009, respectively. If such an early redemption occurs, the outstanding trust preferred securities would also be proportionately redeemed.
There are certain regulatory and contractual restrictions on the ability of the Company’s operating subsidiaries to transfer funds to the Company in the form of cash dividends, loans or advances. The insurance laws of the State of Delaware, where the Company’s direct insurance subsidiaries are domiciled, require regulatory approval before those subsidiaries can pay dividends or make loans or advances to the Company that exceed certain statutory thresholds. In addition, the terms of Holdings’ Credit Facility (discussed in Note 9) require Everest Re, the Company’s principal insurance subsidiary, to maintain a certain statutory surplus level as measured at the end of each fiscal year. At December 31, 2005, $2,112.0 million of the $2,724.9 million in net assets of the Company’s consolidated subsidiaries were subject to the foregoing regulatory restrictions.
9. Credit Line
Effective October 10, 2003, Holdings entered into a three year, $150.0 million senior revolving credit facility with a syndicate of lenders, replacing the December 21, 1999, three year senior revolving credit facility, which expired on December 19, 2003. Both the October 10, 2003 and December 21, 1999 senior revolving credit agreements, which have similar terms, are referred to as the “Holdings Credit Facility”. Wachovia Bank is the administrative agent for the Holdings Credit Facility. The Holdings Credit Facility is used for liquidity and general corporate purposes. The Holdings Credit Facility provides for the borrowing of up to $150.0 million with interest at a rate selected by Holdings equal to either, (1) the Base Rate (as defined below) or (2) 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, in each case plus 0.5% per annum. The amount of margin and the fees payable for the Holdings Credit Facility depends upon Holdings senior unsecured debt rating.
13
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
(continued)
For the Three and Six Months Ended June 30, 2006 and 2005
The Holdings Credit Facility requires Holdings to maintain a debt to capital ratio of not greater than 0.35 to 1, Holdings to maintain a minimum interest coverage ratio of 2.5 to 1 and Everest Re to maintain its statutory surplus at $1.0 billion plus 25% of future aggregate net income and 25% of future aggregate capital contributions after December 31, 2002. As of June 30, 2006, the Company was in compliance with these covenants.
For the three and six months ended June 30, 2006 and 2005, there were no outstanding borrowings under the Holdings Credit Facility.
Interest expense and fees incurred in connection with the Holdings Credit Facility were $0.05 million and $0.1 million for the three and six months ended June 30, 2006 and 2005, respectively.
10. Segment Reporting
The Company, through its subsidiaries, operates in four segments: U.S. Reinsurance, U.S. Insurance, Specialty Underwriting and International. The U.S. Reinsurance operation writes property and casualty reinsurance, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies within the U.S. The U.S. Insurance operation writes property and casualty insurance primarily through general agent relationships and surplus lines brokers within the U.S. The Specialty Underwriting operation writes accident and health (“A&H”), marine, aviation and surety business within the U.S. and worldwide through brokers and directly with ceding companies. The International operation writes property and casualty reinsurance through Everest Re’s branches in Canada and Singapore, in addition to foreign business written through Everest Re’s Miami and New Jersey offices.
These segments are managed in a carefully coordinated fashion with strong elements of central control with respect to pricing, risk management, monitoring aggregate exposures to catastrophe events, capital, investments and support operations. Management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting results. Underwriting results include earned premium less losses and loss adjustment expenses (“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, commission and brokerage and other underwriting expenses by earned premium.
The Company does not maintain separate balance sheet data for its operating segments. Accordingly, the Company does not review and evaluate the financial results of its operating segments based upon balance sheet data.
14
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
(continued)
For the Three and Six Months Ended June 30, 2006 and 2005
The following tables present the relevant underwriting results for the operating segments for the periods indicated:
U.S. Reinsurance | ||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||
June 30, | June 30, | |||||||||||||
(Dollars in thousands) | 2006 | 2005 | 2006 | 2005 | ||||||||||
Gross written premiums | $ | 262,018 | $ | 376,568 | $ | 656,415 | $ | 726,368 | ||||||
Net written premiums | 193,529 | 283,163 | 489,215 | 551,937 | ||||||||||
Premiums earned | $ | 206,600 | $ | 326,855 | $ | 496,317 | $ | 592,154 | ||||||
Incurred losses and loss | ||||||||||||||
adjustment expenses | 136,869 | 228,391 | 355,357 | 420,369 | ||||||||||
Commission and brokerage | 46,941 | 82,066 | 114,338 | 139,503 | ||||||||||
Other underwriting expenses | 6,366 | 6,351 | 11,142 | 12,064 | ||||||||||
Underwriting gain | $ | 16,424 | $ | 10,047 | $ | 15,480 | $ | 20,218 | ||||||
U.S. Insurance | ||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||
June 30, | June 30, | |||||||||||||
(Dollars in thousands) | 2006 | 2005 | 2006 | 2005 | ||||||||||
Gross written premiums | $ | 195,390 | $ | 270,780 | $ | 413,396 | $ | 545,108 | ||||||
Net written premiums | 115,924 | 181,455 | 272,245 | 381,227 | ||||||||||
Premiums earned | $ | 127,886 | $ | 133,890 | $ | 268,863 | $ | 308,129 | ||||||
Incurred losses and loss | ||||||||||||||
adjustment expenses | 87,726 | 97,888 | 193,709 | 222,606 | ||||||||||
Commission and brokerage | 10,390 | 23,644 | 28,927 | 46,205 | ||||||||||
Other underwriting expenses | 11,389 | 12,184 | 22,094 | 24,813 | ||||||||||
Underwriting gain | $ | 18,381 | $ | 174 | $ | 24,133 | $ | 14,505 | ||||||
Specialty Underwriting | ||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||
June 30, | June 30, | |||||||||||||
(Dollars in thousands) | 2006 | 2005 | 2006 | 2005 | ||||||||||
Gross written premiums | $ | 53,087 | $ | 92,986 | $ | 117,113 | $ | 195,977 | ||||||
Net written premiums | 35,579 | 65,593 | 83,906 | 140,159 | ||||||||||
Premiums earned | $ | 35,620 | $ | 66,424 | $ | 87,354 | $ | 139,802 | ||||||
Incurred losses and loss | ||||||||||||||
adjustment expenses | 8,064 | 39,024 | 65,122 | 88,878 | ||||||||||
Commission and brokerage | 8,277 | 15,729 | 22,391 | 33,494 | ||||||||||
Other underwriting expenses | 1,637 | 1,716 | 2,942 | 3,355 | ||||||||||
Underwriting gain (loss) | $ | 17,642 | $ | 9,955 | $ | (3,101 | ) | $ | 14,075 | |||||
15
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
(continued)
For the Three and Six Months Ended June 30, 2006 and 2005
International | ||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||
June 30, | June 30, | |||||||||||||
(Dollars in thousands) | 2006 | 2005 | 2006 | 2005 | ||||||||||
Gross written premiums | $ | 179,835 | $ | 199,805 | $ | 355,357 | $ | 352,170 | ||||||
Net written premiums | 131,190 | 145,380 | 257,106 | 250,908 | ||||||||||
Premiums earned | $ | 131,382 | $ | 141,156 | $ | 252,632 | $ | 247,246 | ||||||
Incurred losses and loss | ||||||||||||||
adjustment expenses | 74,675 | 64,020 | 158,657 | 131,599 | ||||||||||
Commission and brokerage | 29,959 | 32,595 | 54,390 | 51,982 | ||||||||||
Other underwriting expenses | 3,685 | 3,030 | 6,363 | 6,017 | ||||||||||
Underwriting gain | $ | 23,063 | $ | 41,511 | $ | 33,222 | $ | 57,648 | ||||||
The following table reconciles the underwriting results for the operating segments to income before tax as reported in the consolidated statements of operations and comprehensive income for the periods indicated:
Three Months Ended | Six Months Ended | |||||||||||||
June 30, | June 30, | |||||||||||||
(Dollars in thousands) | 2006 | 2005 | 2006 | 2005 | ||||||||||
Underwriting gain | $ | 75,510 | $ | 61,687 | $ | 69,734 | $ | 106,446 | ||||||
Net investment income | 91,922 | 89,070 | 175,827 | 174,992 | ||||||||||
Net realized capital gains | 2,204 | 18,203 | 11,224 | 19,688 | ||||||||||
Corporate expense | (1,659 | ) | (1,558 | ) | (2,597 | ) | (3,515 | ) | ||||||
Interest, fee and bond issue cost amortization expense | (17,430 | ) | (17,353 | ) | (34,860 | ) | (39,312 | ) | ||||||
Other income (expense) | 7,013 | 5,500 | (6,034 | ) | 1,833 | |||||||||
Income before taxes | $ | 157,560 | $ | 155,549 | $ | 213,294 | $ | 260,132 | ||||||
The Company produces business in its U.S. and international operations. The net income and assets of the individual foreign countries in which the Company writes business are not identifiable in the Company’s financial records. Other than the U.S., no other country represented more than 5% of the Company’s revenues.
11. Investments — Interest Only Strips
The Company from time to time invests in interest only strips of mortgage-backed securities (“interest only strips”) in response to movement in, and levels of, capital market interest rates. These securities give the holder the right to receive interest payments at a stated coupon rate on an underlying pool of mortgages. The interest payments on the outstanding mortgages are guaranteed by entities generally rated AAA. The ultimate cash flow from these investments is primarily dependent upon the average life of the mortgage pool. Generally, as 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, 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
16
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
(continued)
For the Three and Six Months Ended June 30, 2006 and 2005
the Company’s other fixed income investments. The Company held no interest only strips investments at June 30, 2006. The market value of the interest only strips at June 30, 2005 was $68.4 million.
The Company accounts for its investment in interest only strips in accordance with Emerging Issues Task Force Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets” (“EITF 99-20”). EITF 99-20 sets forth the rules for recognizing interest income on all credit-sensitive mortgage and asset-backed securities and certain prepayment-sensitive securities, including agency interest only strips, whether purchased or retained in securitization, as well as the rules for determining when these securities must be written down to fair value because of impairment. EITF 99-20 requires decreases in the valuation of residual interests in securitizations to be recorded as a reduction to the carrying value of the residual interests through a charge to earnings, rather than an unrealized loss in stockholders’ equity, when any portion of the decline in fair value is attributable to, as defined by EITF 99-20, an impairment loss. The Company recorded a pre-tax and after-tax realized capital loss due to impairments of $4.1 million and $2.7 million, respectively, for the three and six months ended June 30, 2005.
12. Related-Party Transactions
During the normal course of business, the Company, through its affiliates, engages in reinsurance and brokerage and commission business transactions, which management believes to be at arm’s length, with companies controlled by or affiliated with certain of its outside directors. Such transactions, individually and in the aggregate, are not material to the Company’s financial condition, results of operations and cash flows.
The Company engages in reinsurance transactions with Bermuda Re and Everest International under which business is ceded for what management believes to be arm’s length consideration. These transactions include:
o | Effective September 19, 2000, Mt. McKinley and Bermuda Re entered into a loss portfolio transfer reinsurance agreement, whereby Mt. McKinley transferred all of its net insurance exposures and reserves to Bermuda Re. |
o | Effective October 1, 2001, Everest Re and Bermuda Re entered into a loss portfolio reinsurance agreement, whereby Everest Re transferred all of its Belgium branch net insurance exposures and reserves to Bermuda Re and subsequently closed its Belgium branch. |
o | For premiums earned and losses incurred for the period January 1, 2002 through December 31, 2002, Everest Re, Everest National Insurance Company and Everest Security Insurance Company entered into an Excess of Loss Reinsurance Agreement with Bermuda Re, covering workers’ compensation losses occurring on and after January 1, 2002, as respects new, renewal and in force policies effective on that date through December 31, 2002. Bermuda Re is liable for any loss exceeding $100,000 per occurrence, with its liability not to exceed $150,000 per occurrence. |
o | Effective January 1, 2002 for the 2002 underwriting year, Everest Re ceded 20% of its net retained liability to Bermuda Re through a quota share reinsurance agreement (“whole account quota share”). |
o | Effective January 1, 2003, Everest Re and Bermuda Re amended the whole account quota share, through which Everest Re previously ceded 20% of its business to Bermuda Re so that effective January 1, 2003 |
17
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
(continued)
For the Three and Six Months Ended June 30, 2006 and 2005
Everest Re ceded 25% to Bermuda Re of the net retained liability on all new and renewal policies underwritten during the term of this agreement. |
o | Effective January 1, 2003, Everest Re entered into a whole account quota share with Bermuda Re, whereby Everest Re’s Canadian branch cedes to Bermuda Re 50% of its net retained liability on all new and renewal property business. |
o | Effective January 1, 2004, Everest Re and Bermuda Re amended the whole account quota share through which Everest Re previously ceded 25% of its business to Bermuda Re so that effective January 1, 2004 Everest Re cedes 22.5% to Bermuda Re and 2.5% to Everest International of the net retained liability on all new and renewal covered business written during the term of this agreement. This amendment remained in effect through December 31, 2005. |
o | Effective January 1, 2006, Everest Re, Bermuda Re and Everest International amended the whole account quota share so that for all new and renewal business recorded on or after January 1, 2006, Everest Re cedes 31.5% and 3.5% of its casualty business to Bermuda Re and Everest International, respectively, and Everest Re will cede 18.0% and 2.0% of its property business to Bermuda Re and Everest International, respectively. However, in no event shall the loss cessions to Bermuda Re and Everest International relating to any one occurrence on the property business exceed $125.0 million (20% of $625.0 million). |
The following table summarizes the premiums and losses ceded by the Company to Bermuda Re and Everest International, respectively, for the periods indicated:
Bermuda Re | ||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||
June 30, | June 30, | |||||||||||||
(Dollars in thousands) | 2006 | 2005 | 2006 | 2005 | ||||||||||
Ceded written premiums | $ | 169,985 | $ | 208,101 | $ | 345,155 | $ | 379,647 | ||||||
Ceded earned premiums | 157,228 | 224,534 | 342,117 | 396,773 | ||||||||||
Ceded losses and LAE | 94,400 | 139,076 | 195,511 | 235,139 |
Everest International | ||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||
June 30, | June 30, | |||||||||||||
(Dollars in thousands) | 2006 | 2005 | 2006 | 2005 | ||||||||||
Ceded written premiums | $ | 13,649 | $ | 20,930 | $ | 32,435 | $ | 44,451 | ||||||
Ceded earned premiums | 11,390 | 19,391 | 30,450 | 40,919 | ||||||||||
Ceded losses and LAE | 7,100 | 11,734 | 18,525 | 23,442 |
(a) Ceded losses and LAE include the Mt. McKinley loss portfolio transfer that constitutes losses ceded under retroactive reinsurance and therefore, in accordance with FAS 113, “Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts,” a deferred gain on retroactive reinsurance is reflected in other expenses on the consolidated statement of operations and comprehensive income.
18
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
(continued)
For the Three and Six Months Ended June 30, 2006 and 2005
Effective January 1, 2004, Everest Re sold the net assets of its UK branch to Bermuda Re. In connection with the sale, Everest Re provided Bermuda Re with a reserve indemnity agreement allowing for indemnity payments of up to 90% of £25.0 million in the event December 31, 2002 losses and LAE reserves develop adversely. The limit available under this agreement was fully exhausted at December 31, 2004.
13. Income Taxes
The Company uses a projected annual effective tax rate in accordance with FAS 109 to calculate its quarterly tax expense. Under this methodology, when an interim quarter’s pre-tax income (loss) varies significantly from a full year’s income projection, the tax impact resulting from the income (loss) variance is effectively spread between the impacted quarter and the remaining quarters of the year, except for discreet items impacting an individual quarter.
19
PART I — Item 2.
EVEREST REINSURANCE HOLDINGS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
RESULTS OF OPERATIONS
Industry Conditions
The worldwide reinsurance and insurance businesses are highly competitive, yet cyclical by product and market. Competition in the types of reinsurance and insurance business that the Company underwrites is based on many factors, including the perceived overall financial strength of the reinsurer or insurer, ratings of the reinsurer or insurer by A.M. Best Company and/or Standard & Poor’s, underwriting expertise, the jurisdictions where the reinsurer or insurer is licensed or otherwise authorized, capacity and coverages offered, premiums charged, other terms and conditions of the reinsurance and insurance business offered, services offered, speed of claims payment and reputation and experience in lines written. These factors operate at the individual market participant level to varying degrees, as applicable to the specific participant’s circumstances. They also operate in aggregate across the reinsurance industry more generally, contributing, in combination with background economic conditions and variations in the reinsurance buying practices of insurance companies (by participant and in the aggregate), to cyclical movements in reinsurance rates, terms and conditions and ultimately reinsurance industry aggregate financial results.
The Company competes in the U.S. and international reinsurance and insurance markets with numerous global competitors. The Company’s competitors include independent reinsurance and insurance companies, subsidiaries or affiliates of established worldwide insurance companies, reinsurance departments of certain insurance companies and domestic and international underwriting operations, including underwriting syndicates at Lloyd’s. Some of these competitors have greater financial resources than the Company and have established long-term and continuing business relationships throughout the industry, which can be a significant competitive advantage. In addition, the lack of strong barriers to entry into the reinsurance business and the potential for securitization of reinsurance and insurance risks through capital markets provide additional sources of potential reinsurance and insurance capacity and competition.
Reinsurance pricing was generally flat to down during much of 2005, expect for specific lines affected by the 2004 Florida hurricane activity, principally as a result of the relatively strong profitability achieved by many reinsurers and the attendant build-up of capital, following hard market conditions that had developed from 2001-2004. However, 2005 proved to be the worst year in the history of the industry in terms of insured catastrophe losses, led by Hurricanes Katrina, Rita and Wilma, which adversely impacted the 2005 financial results of a most industry participants.
Thusfar in 2006, the Company has observed strong price increases, and more restricted limits, in those property lines and regions that were most affected by the catastrophe events of 2005. Reinsurance capacity in these areas was, and continues to be, constrained, particularly for catastrophe covers including southeastern U.S. exposures and in the retrocession and energy lines. The record catastrophe losses of 2005 have also generally led to modest strengthening for U.S. property lines that include little or no substantive catastrophe exposure and price stabilization in most casualty insurance and reinsurance markets. There have been exceptions, and among those affecting the Company were the medical stop loss and directors & officers (“D&O”) reinsurance classes, as well as the California workers’ compensation insurance line, all of which continued to exhibit softening market conditions.
20
Focusing on U.S. property reinsurance, market conditions have tightened and many cedants have not been fully successful in placing their reinsurance program. In addition, many cedants have had to raise retention levels and/or reduce catastrophe limit purchases, seeking to mitigate the impact of strong reinsurance pricing and more restrictive coverage offerings. Many insurers are also adjusting limits and coverages, and increasing prices, on the insurance coverages they offer to their customers. Together, these trends are resulting in insurance companies generally retaining more risk exposure, and hence potential future earnings volatility, than they would prefer. This dynamic, which has occured by cedant company, but which aggregates across the industry, is reflective of a fundamental disequilibrium between reinsurance supply and demand that the Company believes will not likely be resolved until 2007. The significant changes in rates, terms and conditions seen for the mid-year renewal business reinforced this view as reinsurers seemingly reassessed their risk appetites in a way that, in the aggregate, had them seeking improved risk to exposure metrics. Moreover, this outcome seems to only partially reflect (i) revisions to the industry’s catastrophe loss projection models which are indicating significantly higher loss potentials, and consequently higher pricing requirements and (ii) rating agency actions that have raised the required capital levels for many catastrophe exposed companies and expanded the scrutiny directed at those companies with excessive retained catastrophe exposures.
In light of its 2005 catastrophe experience, the Company reexamined its risk management practices, concluded that its risk management framework operated generally as intended and made modest adjustments to its property operations. Thusfar in 2006, the Company has further refined these operations effectively taking advantage of much improved U.S. property catastrophe pricing to (i) alter the mix of its writings to emphasize most profitable forms, classes, lines, customers and territories (ii) reduce aggregate catastrophe exposed limits and (iii) enhance portfolio balance and diversification characteristics.
Overall, the Company believes that current marketplace conditions continue to offer solid opportunities for the Company given its strong ratings, distribution system, reputation and expertise. The Company continues to employ its opportunistic strategy of targeting those segments offering the best profit potential, while maintaining balance and diversification in its overall portfolio.
21
Financial Summary
The Company’s management monitors and evaluates overall Company performance based upon financial results. The following table displays a summary of the consolidated net income, ratios and stockholder’s equity for the periods indicated:
Three Months Ended June 30, | Percentage Increase/ | Six Months Ended June 30, | Percentage Increase/ | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | 2006 | 2005 | (Decrease) | 2006 | 2005 | (Decrease) | ||||||||||||||
Gross written premiums | $ | 690,330 | $ | 940,139 | -26.6% | $ | 1,542,281 | $ | 1,819,623 | -15.2% | ||||||||||
Net written premiums | 476,222 | 675,591 | -29.5% | 1,102,472 | 1,324,231 | -16.7% | ||||||||||||||
REVENUES: | ||||||||||||||||||||
Premiums earned | $ | 501,488 | $ | 668,325 | -25.0% | $ | 1,105,166 | $ | 1,287,331 | -14.2% | ||||||||||
Net investment income | 91,922 | 89,070 | 3.2% | 175,827 | 174,992 | 0.5% | ||||||||||||||
Net realized capital gains | 2,204 | 18,203 | -87.9 | 11,224 | 19,688 | -43.0 | ||||||||||||||
Other income (expense) | 7,013 | 5,500 | 27.5% | (6,034 | ) | 1,833 | NM | |||||||||||||
Total revenues | 602,627 | 781,098 | -22.8% | 1,286,183 | 1,483,844 | -13.3% | ||||||||||||||
CLAIMS AND EXPENSES: | ||||||||||||||||||||
Incurred losses and loss adjustment expenses | 307,334 | 429,323 | -28.4% | 772,845 | 863,452 | -10.5% | ||||||||||||||
Commission, brokerage, taxes and fees | 95,567 | 154,034 | -38.0% | 220,046 | 271,184 | -18.9% | ||||||||||||||
Other underwriting expenses | 24,736 | 24,839 | -0.4% | 45,138 | 49,764 | -9.3% | ||||||||||||||
Interest, fee and bond issue | ||||||||||||||||||||
cost amortization expense | 17,430 | 17,353 | 0.4% | 34,860 | 39,312 | -11.3% | ||||||||||||||
Total claims and expenses | 445,067 | 625,549 | -28.9% | 1,072,889 | 1,223,712 | -12.3% | ||||||||||||||
INCOME BEFORE TAXES | 157,560 | 155,549 | 1.3% | 213,294 | 260,132 | -18.0% | ||||||||||||||
Income tax expense | 36,178 | 36,624 | -1.2% | 48,407 | 54,294 | -10.8% | ||||||||||||||
NET INCOME | $ | 121,382 | $ | 118,925 | 2.1% | $ | 164,887 | $ | 205,838 | -19.9% | ||||||||||
RATIOS: | Point Change | Point Change | ||||||||||||||||||
Loss ratio | 61.3% | 64.2% | (2.9 | ) | 69.9% | 67.1% | 2.8 | |||||||||||||
Commission and brokerage ratio | 19.1% | 23.0% | (3.9 | ) | 19.9% | 21.1% | (1.2 | ) | ||||||||||||
Other underwriting expense ratio | 4.9% | 3.8% | 1.1 | 4.1% | 3.8% | 0.3 | ||||||||||||||
Combined ratio | 85.3% | 91.0% | (5.7 | ) | 93.9% | 92.0% | 1.9 | |||||||||||||
(Dollar in millions) | As of, June 30, 2006 | As of, December 31, 2005 | ||||||||||||||||||
Stockholder's equity | $ | 1,904.6 | $ | 1,790.7 | 6.4% | |||||||||||||||
(NM, not meaningful) |
22
Overall, the Company’s second quarter and first half of 2006 results were solid with net income of $121 million and $165 million, respectively. Premium volume declined during the three and six months of 2006 compared to the same periods for 2005 as the Company continued its disciplined underwriting and risk management approaches. In particular, the Company re-engineered its U.S. property reinsurance portfolio, which it believes positions the Company optimally for future profitability.
The Company’s net income for the second quarter of 2006 increased by 2% while the first half of 2006 results declined 20% compared to the same periods of 2005. For the second quarter, net income growth reflected greater gains from underwriting and increased investment income, partially offset by lower realized capital gains. For the first six months, net income declined due to lower gains from underwriting and realized capital gains, partially offset by an increase in investment income.
The Company’s stockholder’s equity increased by $0.1 billion from year end 2005 to $1.9 billion at June 30, 2006, principally due to net income generated during the first half of 2006, partially offset by unrealized capital losses, mainly related to the Company’s fixed-income securities, the value of which was affected by a rise in interest rates.
Revenues. Net written and earned premiums decreased by 30% and 25%, respectively, during the second quarter of 2006 compared to 2005. These decreases reflected a 36% decrease in net written premiums and a 4% decrease in earned premiums, respectively, for the U.S. Insurance segment and a 27% and 30% decline in net written and earned premiums, respectively, for the worldwide reinsurance segments in the aggregate. Net written and earned premiums decreased by 17% and 14%, respectively, for the six months ended June 30, 2006 compared to 2005 reflecting a 29% and 13% decline in net written and earned premiums, respectively, for the U.S. Insurance segment and a 12% and 15% decline in net written and earned premiums, respectively, for the worldwide reinsurance segments in the aggregate. For the second quarter and first half of 2006, the U.S. Insurance segment net written and earned premiums declined mainly reflecting (i) continued weakness in the California workers’ compensation writings due to competitive market conditions and (ii) a reduction in credit business from an auto loan program, which is in runoff. The decline for the worldwide reinsurance segments in the aggregate for the net written premiums reflected multiple segment level factors including a significant return premium for a cancelled Florida property quota share contract within U.S. Reinsurance and, generally in all segments, continued orientation to a disciplined underwriting approach emphasizing potential profitability rather than volume.
Net investment income increased 3% and 1% for the second quarter and first half of 2006, respectively, compared to the same periods for 2005, reflecting continued year-over-year growth in invested assets from positive cash flow from operations, despite significant catastrophe loss payouts related to the 2005 and 2004 hurricanes. The average investment portfolio yields through June 30, 2006 were 4.5% pre-tax and 3.6% after-tax, and remained stable compared to the prior year.
Net realized capital gains were modest in relation to the Company’s invested asset base, with variability mainly reflecting normal portfolio management activities.
Expenses. The Company’s incurred losses and loss adjustment expenses (“LAE”) decreased 28% and 11% for the second quarter and first half of 2006, respectively, compared to the same periods for 2005, primarily due to lower earned premiums and more favorable current and prior years incurred losses and LAE excluding catastrophes and asbestos and environmental (“A&E”) (“attritional losses”), partially offset by increased prior years reserve development on catastrophe losses.
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The Company’s second quarter 2006 loss ratio improved by 2.9 points reflecting an improved current year attritional loss ratio principally due to strong premium rate increases in the property classes of business. Included in the Company’s second quarter 2006 loss ratio was prior years adverse reserve development of 15 points, effectively reflecting prior years catastrophe reserve development (principally from the 2005 Hurricane Wilma). The Company’s first half 2006 loss ratio of 69.9% deteriorated by 2.8 points reflecting higher prior years catastrophe reserve development, principally from 2005 Hurricanes Katrina, Rita, and Wilma, partially offset by strong premium rate increases in the property classes of business coupled with an improved current year attritional loss ratio.
Commission, brokerage and tax expenses for the second quarter and first half of 2006 declined by 38% and 19%, respectively, generally due to reduced premium volume. The Company’s commission and brokerage ratio improved by 3.9 and 1.2 points for the second quarter of 2006 over 2005 and the first half of 2006 over 2005, respectively, primarily due to the business mix. Other underwriting expenses for the second quarter and first half of 2006 increased by 1% and less than 1%, respectively, compared to the same periods for 2005.
The Company’s effective income tax rate for both the second quarter and first six months of 2006 was 23%. The effective income tax rate for the second quarter and first six months of 2005 was 23% and 21%, respectively.
Segment Information
The Company, through its subsidiaries, operates in four segments: U.S. Reinsurance, U.S. Insurance, Specialty Underwriting and International. The U.S. Reinsurance operation writes property and casualty reinsurance, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies within the U.S. The U.S. Insurance operation writes property and casualty insurance primarily through general agent relationships and surplus lines brokers within the U.S. The Specialty Underwriting operation writes accident and health (“A&H”), marine, aviation and surety business within the U.S. and worldwide through brokers and directly with ceding companies. The International operation writes property and casualty reinsurance through Everest Re’s branches in Canada and Singapore, in addition to foreign business written through Everest Re’s Miami and New Jersey offices.
These segments are managed in a carefully coordinated fashion with strong elements of central control with respect to pricing, risk management, monitoring aggregate exposures to catastrophic events, capital, investments and support operations. Management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting results. Underwriting results include earned premium less losses and LAE incurred, commission and brokerage expenses and other underwriting expenses and are 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.
24
The following tables present the relevant underwriting results for the operating segments for the periods indicated:
U.S. Reinsurance | ||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||
June 30, | June 30, | |||||||||||||
(Dollars in thousands) | 2006 | 2005 | 2006 | 2005 | ||||||||||
Gross written premiums | $ | 262,018 | $ | 376,568 | $ | 656,415 | $ | 726,368 | ||||||
Net written premiums | 193,529 | 283,163 | 489,215 | 551,937 | ||||||||||
Premiums earned | $ | 206,600 | $ | 326,855 | $ | 496,317 | $ | 592,154 | ||||||
Incurred losses and loss | ||||||||||||||
adjustment expenses | 136,869 | 228,391 | 355,357 | 420,369 | ||||||||||
Commission and brokerage | 46,941 | 82,066 | 114,338 | 139,503 | ||||||||||
Other underwriting expenses | 6,366 | 6,351 | 11,142 | 12,064 | ||||||||||
Underwriting gain | $ | 16,424 | $ | 10,047 | $ | 15,480 | $ | 20,218 | ||||||
U.S. Insurance | ||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||
June 30, | June 30, | |||||||||||||
(Dollars in thousands) | 2006 | 2005 | 2006 | 2005 | ||||||||||
Gross written premiums | $ | 195,390 | $ | 270,780 | $ | 413,396 | $ | 545,108 | ||||||
Net written premiums | 115,924 | 181,455 | 272,245 | 381,227 | ||||||||||
Premiums earned | $ | 127,886 | $ | 133,890 | $ | 268,863 | $ | 308,129 | ||||||
Incurred losses and loss | ||||||||||||||
adjustment expenses | 87,726 | 97,888 | 193,709 | 222,606 | ||||||||||
Commission and brokerage | 10,390 | 23,644 | 28,927 | 46,205 | ||||||||||
Other underwriting expenses | 11,389 | 12,184 | 22,094 | 24,813 | ||||||||||
Underwriting gain | $ | 18,381 | $ | 174 | $ | 24,133 | $ | 14,505 | ||||||
Specialty Underwriting | ||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||
June 30, | June 30, | |||||||||||||
(Dollars in thousands) | 2006 | 2005 | 2006 | 2005 | ||||||||||
Gross written premiums | $ | 53,087 | $ | 92,986 | $ | 117,113 | $ | 195,977 | ||||||
Net written premiums | 35,579 | 65,593 | 83,906 | 140,159 | ||||||||||
Premiums earned | $ | 35,620 | $ | 66,424 | $ | 87,354 | $ | 139,802 | ||||||
Incurred losses and loss | ||||||||||||||
adjustment expenses | 8,064 | 39,024 | 65,122 | 88,878 | ||||||||||
Commission and brokerage | 8,277 | 15,729 | 22,391 | 33,494 | ||||||||||
Other underwriting expenses | 1,637 | 1,716 | 2,942 | 3,355 | ||||||||||
Underwriting gain (loss) | $ | 17,642 | $ | 9,955 | $ | (3,101 | ) | $ | 14,075 | |||||
25
International | ||||||||||||||
Three Months Ended | Six Months Ended | |||||||||||||
June 30, | June 30, | |||||||||||||
(Dollars in thousands) | 2006 | 2005 | 2006 | 2005 | ||||||||||
Gross written premiums | $ | 179,835 | $ | 199,805 | $ | 355,357 | $ | 352,170 | ||||||
Net written premiums | 131,190 | 145,380 | 257,106 | 250,908 | ||||||||||
Premiums earned | $ | 131,382 | $ | 141,156 | $ | 252,632 | $ | 247,246 | ||||||
Incurred losses and loss | ||||||||||||||
adjustment expenses | 74,675 | 64,020 | 158,657 | 131,599 | ||||||||||
Commission and brokerage | 29,959 | 32,595 | 54,390 | 51,982 | ||||||||||
Other underwriting expenses | 3,685 | 3,030 | 6,363 | 6,017 | ||||||||||
Underwriting gain | $ | 23,063 | $ | 41,511 | $ | 33,222 | $ | 57,648 | ||||||
The following table reconciles the underwriting results for the operating segments to income before tax as reported in the consolidated statements of operations and comprehensive income for the periods indicated:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in thousands) | 2006 | 2005 | 2006 | 2005 | ||||||||||
Underwriting gain | $ | 75,510 | $ | 61,687 | $ | 69,734 | $ | 106,446 | ||||||
Net investment income | 91,922 | 89,070 | 175,827 | 174,992 | ||||||||||
Net realized capital gains | 2,204 | 18,203 | 11,224 | 19,688 | ||||||||||
Corporate expense | (1,659 | ) | (1,558 | ) | (2,597 | ) | (3,515 | ) | ||||||
Interest, fee and bond issue cost amortization expense | (17,430 | ) | (17,353 | ) | (34,860 | ) | (39,312 | ) | ||||||
Other income (expense) | 7,013 | 5,500 | (6,034 | ) | 1,833 | |||||||||
Income before taxes | $ | 157,560 | $ | 155,549 | $ | 213,294 | $ | 260,132 | ||||||
Three Months Ended June 30, 2006 compared to Three Months Ended June 30, 2005
Premiums Written.Gross written premiums decreased 26.6% to $690.3 million for the three months ended June 30, 2006 from $940.1 million for the three months ended June 30, 2005. Contributing to the decrease in gross written premiums was a 42.9% ($39.9 million) decrease in the Specialty Underwriting operation, resulting primarily from a $15.3 million decrease in A&H business as pricing for this business continues to be difficult, a $13.0 million decrease in marine and aviation business and an $11.5 million decrease in surety business; a 30.4% ($114.6 million) decrease in the U.S. Reinsurance operation, principally reflecting a $62.2 million decrease in treaty casualty business and a $53.6 million decrease in treaty property business, partially offset by a $7.5 million increase in facultative business; a 27.8% ($75.4 million) decrease in the U.S. Insurance operation, mainly reflecting continued retrenchment in the California workers’ compensation and credit business, and a 10.0% ($20.0 million) decrease in the International operation, primarily due to a $16.3 million decrease in Asian business and a $12.4 million decrease in international business written through the Miami and New Jersey offices, representing primarily Latin American business, partially offset by an $8.8 million increase in Canadian business.
Ceded premiums decreased to $214.1 million for the three months ended June 30, 2006 from $264.5 million for the three months ended June 30, 2005. Ceded premiums relate primarily to quota share reinsurance agreements between Everest Re and, Bermuda Re and Everest International.
26
Net written premiums decreased by 29.5% to $476.2 million for the three months ended June 30, 2006 from $675.6 million for the three months ended June 30, 2005, reflecting the $249.8 million decrease in gross written premiums combined with the $50.4 million decrease in ceded premiums.
Premium Revenues.Net premiums earned decreased by 25.0% to $501.5 million for the three months ended June 30, 2006 from $668.3 million for the three months ended June 30, 2005. Contributing to this decrease was a 46.4% ($30.8 million) decrease in the Specialty Underwriting operation, a 36.8% ($120.3 million) decrease in the U.S. Reinsurance operation, a 6.9% ($9.8 million) decrease in the International operation and a 4.5% ($6.0 million) decrease in the U.S. Insurance 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. Changes in estimates related to the reporting patterns of ceding companies also affect premiums earned.
Expenses
Incurred Losses and LAE. Incurred losses and LAE represent the Company’s estimates, which are subject to considerable uncertainty due to the timing, complexity and nature of the underlying ceding company exposures. These estimates reflect management’s best judgment based on all available information, but ultimate losses could differ, perhaps materially. The change in incurred losses and LAE, period over period also reflects variability in premiums earned and changes in the loss expectation assumptions for business written, net prior period reserve development, as well as catastrophe losses. Incurred losses and LAE are also impacted by changes in the pricing of the underlying business, as well as variability relating to changes in the mix of business by class and type.
The Company’s loss and LAE reserves reflect estimates of ultimate claim liability. Such estimates are re-evaluated on an ongoing basis, including re-estimates of prior period reserves, taking into consideration all available information and, in particular, newly reported loss and claim experience. The effect of such re-evaluations impacts incurred losses for the current period. 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.
27
The following table shows the components of the Company’s incurred loss and LAE for the three months ended as indicated:
June 30, 2006 | June 30, 2005 | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||
All Segments | |||||||||||||||||||||||
Attritional (a) | $ | 226.9 | $ | 4.8 | $ | 231.6 | $ | 406.6 | $ | (7.5 | ) | $ | 399.1 | ||||||||||
Catastrophes | 4.3 | 70.7 | 75.1 | - | 25.0 | 25.0 | |||||||||||||||||
A&E | - | 0.6 | 0.6 | - | 5.2 | 5.2 | |||||||||||||||||
Total All segment | $ | 231.2 | $ | 76.1 | $ | 307.3 | $ | 406.6 | $ | 22.7 | $ | 429.3 | |||||||||||
Loss Ratio | 46.1 | % | 15.2 | % | 61.3 | % | 60.8 | % | 3.4 | % | 64.2 | % | |||||||||||
(a) Attritional losses exclude catastrophe and A&E losses. | |||||||||||||||||||||||
(Some amounts may not reconcile due to rounding.) |
The Company’s incurred losses and LAE decreased 28.4% to $307.3 million for the three months ended June 30, 2006 from $429.3 million for the three months ended June 30, 2005, reflective of lower earned premiums and more favorable current year attritional losses, partially offset by increased prior years reserve development on catastrophe losses.
The Company’s loss ratio, which is calculated by dividing incurred losses and LAE by current year net premiums earned, improved by 2.9 points to 61.3% over the comparable 2005 period, reflective of an improved current year attritional loss ratio and strong premium rate increases in the property classes of business. Included in the Company’s second quarter loss ratio was prior years reserve development of 15.0 points, primarily due to prior years catastrophe reserve development from 2005 Hurricane Wilma, that was more than offset by favorable current year attritional reserve development related to claims emergence trends within property and other short-tailed lines of business.
The following table shows the U.S. Reinsurance segment components of incurred loss and LAE for the three months ended as indicated:
June 30, 2006 | June 30, 2005 | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||
U.S. Reinsurance | |||||||||||||||||||||||
Attritional | $ | 73.3 | $ | (3.9 | ) | $ | 69.5 | $ | 200.3 | $ | 5.5 | $ | 205.7 | ||||||||||
Catastrophes | - | 66.8 | 66.8 | - | 17.5 | 17.5 | |||||||||||||||||
A&E | - | 0.6 | 0.6 | - | 5.2 | 5.2 | |||||||||||||||||
Total segment | $ | 73.3 | $ | 63.5 | $ | 136.9 | $ | 200.3 | $ | 28.1 | $ | 228.4 | |||||||||||
Loss Ratio | 35.5 | % | 30.8 | % | 66.2 | % | 61.3 | % | 8.6 | % | 69.9 | % | |||||||||||
(Some amounts may not reconcile due to rounding.) |
The U.S. Reinsurance segment’s incurred losses and LAE decreased 40.1%, or $91.5 million, for the three months ended June 30, 2006 as compared to the same period in 2005, mainly reflecting reduced earned premiums principally within the treaty property and treaty casualty units. The segment’s loss ratio improved by 3.7 points over the comparable 2005 period reflective of a decrease in current and prior years attritional losses, partially
28
offset by catastrophe losses, principally due to reserve strengthening for the 2005 Hurricanes Katrina, Rita, and Wilma. The segment’s attritional loss ratio improvement reflects the combination of improved current year pricing principally on the property business and favorable prior years reserve adjustments, principally the treaty property lines of business.
The following table shows the U.S. Insurance segment components of incurred loss and LAE for the three months ended as indicated:
June 30, 2006 | June 30, 2005 | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||
U.S. Insurance | |||||||||||||||||||||||
Attritional | $ | 78.1 | $ | 9.5 | $ | 87.6 | $ | 91.8 | $ | 6.1 | $ | 97.9 | |||||||||||
Catastrophes | - | 0.2 | 0.2 | - | - | - | |||||||||||||||||
Total segment | $ | 78.1 | $ | 9.6 | $ | 87.7 | $ | 91.8 | $ | 6.1 | $ | 97.9 | |||||||||||
Loss Ratio | 61.1 | % | 7.5 | % | 68.6 | % | 68.6 | % | 4.6 | % | 73.1 | % | |||||||||||
(Some amounts may not reconcile due to rounding.) |
The U.S. Insurance segment’s incurred losses and LAE decreased 10.4%, or $10.2 million, for the three months ended June 30, 2006 as compared to the same period in 2005, mainly reflecting reduced earned premiums, principally related to the retrenchment in the California workers’ compensation and credit program. The segments’s loss ratio improved 4.5 points over the comparable 2005 period, primarily due to an improved current year attritional loss ratio.
The following table shows the Specialty Underwriting segment components of incurred loss and LAE for the three months ended as indicated:
June 30, 2006 | June 30, 2005 | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||
Specialty Underwriting | |||||||||||||||||||||||
Attritional | $ | 16.5 | $ | (9.7 | ) | $ | 6.8 | $ | 33.3 | $ | 0.8 | $ | 34.1 | ||||||||||
Catastrophes | - | 1.3 | 1.3 | - | 4.9 | 4.9 | |||||||||||||||||
Total segment | $ | 16.5 | $ | (8.4 | ) | $ | 8.1 | $ | 33.3 | $ | 5.7 | $ | 39.0 | ||||||||||
Loss Ratio | 46.2 | % | -23.6 | % | 22.6 | % | 50.2 | % | 8.5 | % | 58.7 | % | |||||||||||
(Some amounts may not reconcile due to rounding.) |
The Specialty Underwriting segment’s incurred losses and LAE decreased 79.3%, or $31.0 million, for the three months ended June 30, 2006 as compared to the same period in 2005, mainly reflecting a reduction in earned premiums across all classes of business as well as favorable prior years reserve adjustments principally for the marine, aviation, and A&H lines of business. The segment’s loss ratio improved 36.1 points over the comparable 2005 period, primarily due to more favorable current and prior years overall loss development.
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The following table shows the International segment components of incurred loss and LAE for the three months ended as indicated:
June 30, 2006 | June 30, 2005 | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||
International | |||||||||||||||||||||||
Attritional | $ | 59.0 | $ | 8.8 | $ | 67.8 | $ | 81.2 | $ | (19.9 | ) | $ | 61.4 | ||||||||||
Catastrophes | 4.3 | 2.5 | 6.8 | - | 2.7 | 2.7 | |||||||||||||||||
Total segment | $ | 63.3 | $ | 11.4 | $ | 74.7 | $ | 81.2 | $ | (17.2 | ) | $ | 64.0 | ||||||||||
Loss Ratio | 48.2 | % | 8.7 | % | 56.8 | % | 57.5 | % | -12.2 | % | 45.4 | % | |||||||||||
(Some amounts may not reconcile due to rounding.) |
The International segment’s incurred losses and LAE increased 16.6%, or $10.7 million, for the three months ended June 30, 2006 as compared to the same period in 2005. The segment’s loss ratio deteriorated by 11.4 points over the comparable 2005 period, reflective of unfavorable prior years attritional reserve adjustments in Canada and international, partially offset by improved current year attritional losses from price increases in the property classes.
Underwriting Expenses. The Company’s expense ratio, which is calculated by dividing underwriting expenses by net premiums earned, was 24.0% for the three months ended June 30, 2006 compared to 26.8% for the three months ended June 30, 2005.
The following table shows the expense ratios for each of the Company’s operating segments for the three months ended June 30, 2006 and 2005.
Segment Expense Ratios | ||||||||||||
Segment | 2006 | 2005 | ||||||||||
U.S. Reinsurance | 25 | .8% | 27 | .0% | ||||||||
U.S. Insurance | 17 | .0% | 26 | .8% | ||||||||
Specialty Underwriting | 27 | .8% | 26 | .3% | ||||||||
International | 25 | .6% | 25 | .2% |
Segment underwriting expenses decreased by 33.1% to $118.6 million for the three months ended June 30, 2006 from $177.3 million for the three months ended June 30, 2005. Commission, brokerage, taxes and fees decreased by $58.5 million, principally reflecting decreases in premium volume, changes in the mix and distribution channels of business. Segment other underwriting expenses for the three months ended June 30, 2006 were $23.1 million compared to $23.3 million for the same period of 2005. Contributing to the decreases in segment underwriting expenses was a 43.2% ($7.5 million) decrease in the Specialty Underwriting operation, a 39.7% ($35.1 million) decrease in the U.S. Reinsurance operation, a 39.2% ($14.0 million) decrease in the U.S. Insurance operation and a 5.6% ($1.9 million) decrease in the International 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.
The Company’s combined ratio, which is the sum of the loss and expense ratios, improved by 5.7 percentage points to 85.3% in the three months ended June 30, 2006 compared to 91.0% in the three months ended June 30,
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2005, primarily due to a decrease in current year attritional losses and lower commissions, partially offset by increased catastrophe losses.
The following table shows the combined ratios for each of the Company’s operating segments for the three months ended June 30, 2006 and 2005. The combined ratios for all operations were impacted by the loss and expense ratio variability noted above.
Segment Combined Ratios | ||||||||||||
Segment | 2006 | 2005 | ||||||||||
U.S. Reinsurance | 92 | .1% | 96 | .9% | ||||||||
U.S. Insurance | 85 | .6% | 99 | .9% | ||||||||
Specialty Underwriting | 50 | .5% | 85 | .0% | ||||||||
International | 82 | .4% | 70 | .6% |
Investment Results.Net investment income increased 3.2% to $91.9 million for the three months ended June 30, 2006 from $89.1 million for the three months ended June 30, 2005, primarily reflecting the growth in investable assets to $8.0 billion at June 30, 2006 as compared to $7.6 billion at June 30, 2005.
The following table shows the components of net investment income for the three months ended as indicated:
(Dollars in thousands) | 2006 | 2005 | ||||||
---|---|---|---|---|---|---|---|---|
Fixed maturities | $ | 76,447 | $ | 82,142 | ||||
Equity securities | 2,904 | 2,178 | ||||||
Short-term investments | 5,896 | 1,833 | ||||||
Other income | 11,349 | 8,615 | ||||||
Total gross investment income | 96,596 | 94,768 | ||||||
Interest credited and other expense | (4,674 | ) | (5,698 | ) | ||||
Total investment expenses | $ | 91,922 | $ | 89,070 | ||||
The following table shows a comparison of various investment yields for the periods indicated:
2006 | 2005 | |||||||||||
Imbedded pre-tax yield of cash and invested assets at June 30 and December 31 | 4 | .5% | 4 | .5% | ||||||||
Imbedded after-tax yield of cash and invested assets at June 30 and December 31 | 3 | .6% | 3 | .6% | ||||||||
Annualized pre-tax yield on average cash and invested assets for the three months ended June 30 | 4 | .8% | 5 | .0% | ||||||||
Annualized after-tax yield on average cash and invested assets for the three months ended June 30 | 3 | .8% | 4 | .0% |
Net realized capital gains were $2.2 million for the three months ended June 30, 2006, which reflected gains of $5.1 million on the sale of equity securities, partially offset by $2.9 million of realized losses. Net realized capital gains were $18.2 million for the three months ended June 30, 2005, which reflected realized capital gains of $23.6 million, partially offset by $5.4 million of realized capital losses, which included $4.1 million related to write-downs in the value of interest only strips of mortgage-backed securities (“interest only strips”) deemed to
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be impaired on an other than temporary basis in accordance with Emerging Issues Task Force No. 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets” (“EITF 99-20”).
Corporate, Non-allocated Expenses. Corporate underwriting expenses not allocated to segments was $1.7 million and $1.6 million for both the three and six months ended June 30, 2006 and June 30, 2005, respectively.
Interest, fees and bond issue cost amortization expense for the three months ended June 30, 2006 and 2005 were each $17.4 million. Interest, fees and bond issue cost amortization expense for the three months ended June 30, 2006 included $7.8 million related to the senior notes, $9.4 million related to the junior subordinated debt securities, $0.2 million related to the bond issue cost amortization and $0.05 million related to the credit line under the Company’s revolving credit facility. Interest, fees and bond issue cost amortization expense for the three months ended June 30, 2005 included $7.7 million related to the senior notes, $9.4 million related to the junior subordinated debt securities, $0.2 million related to the bond issue cost amortization and $0.05 million related to borrowings under the Company’s revolving credit facility.
Other income for the three months ended June 30, 2006 was $7.0 million compared to $5.5 million for the three months ended June 30, 2005. The change in other income for the three months ended June 30, 2006 was primarily due to a decrease in deferred gains on a retroactive reinsurance agreement with a non-consolidating affiliate.
Income Taxes.The Company’s income tax expense is primarily a function of its statutory tax rate, the level of its pre-tax income and the impact from tax preferenced investment income. The Company recognized income tax expense of $36.2 million for the three months ended June 30, 2006 compared to $36.6 million for the three months ended June 30, 2005.
Net Income.Net income was $121.4 million for the three months ended June 30, 2006 compared to net income of $118.9 million for the three months ended June 30, 2005.
Six Months Ended June 30, 2006 compared to Six Months Ended June 30, 2005
Premiums Written. Gross written premiums decreased 15.2% to $1,542.3 million for the six months ended June 30, 2006 from $1,819.6 million for the three months ended June 30, 2005. Contributing to the decrease in gross written premiums was a 40.2% ($78.9 million) decrease in the Specialty Underwriting operation, resulting primarily from a $48.9 million decrease in A&H business, as pricing for this business continues to be difficult, a $19.3 million decrease in marine and aviation business, and a $10.8 million decrease in surety business; a 24.2% ($131.7 million) decrease in the U.S. Insurance operation, mainly reflecting continued retrenchment in the California workers’ compensation and credit business and a 9.6% ($70.0 million) decrease in the U.S. Reinsurance operation, principally reflecting a $77.7 million decrease in treaty casualty business and a $1.5 million decrease in treaty property business, partially offset by a $9.4 million increase in facultative business. The International operation increased 0.9% ($3.2 million), primarily due to a $12.4 million increase in Canadian business, and a $4.8 million increase in international business written through the Miami and New Jersey offices, representing primarily Latin American business, partially offset by a $13.3 million decrease in Asian business.
Ceded premiums decreased to $439.8 million for the six months ended June 30, 2006 from $495.4 million for the six months ended June 30, 2005. Ceded premiums relate primarily to quota share reinsurance agreements between Everest Re and, Bermuda Re and Everest International.
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Net written premiums decreased by 16.7% to $1,102.5 million for the six months ended June 30, 2006 from $1,324.2 million for the six months ended June 30, 2005, reflecting a $277.3 million decrease in gross written premiums combined with a $55.6 million decrease in ceded premiums.
Premium Revenues.Net premiums earned decreased by 14.2% to $1,105.2 million for the six months ended June 30, 2006 from $1,287.3 million for the six months ended June 30, 2005. Contributing to this decrease was a 37.5% ($52.4 million) decrease in the Specialty Underwriting operation, a 16.2% ($95.8 million) decrease in the U.S. Reinsurance operation and a 12.7% ($39.3 million) decrease in the U.S. Insurance operation, partially offset by a 2.2% ($5.4 million) increase in the International operation. All of these changes reflect period to period changes in net written premiums and business mix, together with normal variability in earnings patterns. Business mix changes occur not only as the Company shifts emphasis between products, lines of business, distribution channels and markets, but also as individual contracts renew or non-renew, almost always with changes in coverage, structure, prices and/or terms, and as new contracts are accepted 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. Changes in estimates related to the reporting patterns of ceding companies also affect premiums earned.
Expenses
Incurred Losses and LAE. Incurred losses and LAE represent the Company’s estimates, which are subject to considerable uncertainty due to the timing, complexity and nature of the underlying ceding company exposures. These estimates reflect management’s best judgment based on all available information, but ultimate losses could differ, perhaps materially. The change in incurred losses and LAE, period over period also reflects variability in premiums earned and changes in the loss expectation assumptions for business written, net prior period reserve development, as well as catastrophe losses. Incurred losses and LAE are also impacted by changes in the pricing of the underlying business, as well as variability relating to changes in the mix of business by class and type.
The Company’s loss and LAE reserves reflect estimates of ultimate claim liability. Such estimates are re-evaluated on an ongoing basis, including re-estimates of prior period reserves, taking into consideration all available information and, in particular, newly reported loss and claim experience. The effect of such re-evaluations impacts incurred losses for the current period. 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.
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The following table shows the components of the Company’s incurred loss and LAE for the six months ended as indicated:
June 30, 2006 | June 30, 2005 | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||
All Segments | |||||||||||||||||||||||
Attritional (a) | $ | 637.8 | $ | 8.8 | $ | 646.6 | $ | 821.6 | $ | 1.5 | $ | 823.2 | |||||||||||
Catastrophes | 4.3 | 120.6 | 125.0 | - | 34.4 | 34.4 | |||||||||||||||||
A&E | - | 1.2 | 1.2 | - | 5.9 | 5.9 | |||||||||||||||||
Total All Segments | $ | 642.1 | $ | 130.7 | $ | 772.8 | $ | 821.6 | $ | 41.8 | $ | 863.5 | |||||||||||
Loss Ratio | 58.1 | % | 11.8 | % | 69.9 | % | 63.8 | % | 3.2 | % | 67.1 | % | |||||||||||
(a) Attritional losses exclude catastrophe and A&E losses. (Some amounts may not reconcile due to rounding.) |
The Company’s incurred losses and LAE decreased 10.5% to $772.8 million for the six months ended June 30, 2006 from $863.5 million for the six months ended June 30, 2005, reflective of lower earned premiums, partially offset by increased prior years reserve development on catastrophe losses.
The Company’s loss ratio, which is calculated by dividing incurred losses and LAE by current year net premiums earned, deteriorated by 2.8 points to 69.9% over the comparable 2005 period, reflective of increased prior years reserve development on catastrophe losses, partially offset by an improved current year attritional loss ratio principally due to strong premium rate increases in the property classes of business. Included in the six months ended June 30, 2006 loss ratio was prior years reserve development of 11.8 points, primarily due to prior years catastrophe reserve development, principally from the 2005 Hurricanes Katrina, Rita and Wilma, and by prior years unfavorable attritional reserve development.
The following table shows the U.S. Reinsurance segment components of incurred loss and LAE for the six months ended as indicated:
June 30, 2006 | June 30, 2005 | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||
U.S. Reinsurance | |||||||||||||||||||||||
Attritional | $ | 250.0 | $ | 21.9 | $ | 271.9 | $ | 377.8 | $ | 18.2 | $ | 396.1 | |||||||||||
Catastrophes | - | 82.2 | 82.2 | - | 18.4 | 18.4 | |||||||||||||||||
A&E | - | 1.2 | 1.2 | - | 5.9 | 5.9 | |||||||||||||||||
Total segment | $ | 250.0 | $ | 105.4 | $ | 355.4 | $ | 377.8 | $ | 42.6 | $ | 420.4 | |||||||||||
Loss Ratio | 50.4 | % | 21.2 | % | 71.6 | % | 63.8 | % | 7.2 | % | 71.0 | % | |||||||||||
(Some amounts may not reconcile due to rounding.) |
The U.S. Reinsurance segment’s incurred losses and LAE decreased 15.5%, or $65.0 million, for the six months ended June 30, 2006 as compared to the same period in 2005, mainly reflecting reduced earned premiums principally within the treaty property and treaty casualty units. The segment’s loss ratio deteriorated by 0.6 points over the comparable 2005 period, reflective of an increase in catastrophe losses, partially offset by an improvement in the current year attritional loss ratio. Catastrophe losses increased principally due to reserve
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strengthening for the 2005 Hurricanes Katrina, Rita, and Wilma. The segment’s attritional loss ratio improvement generally reflects improved current year pricing, principally on the property business.
The following table shows the U.S. Insurance segment components of incurred loss and LAE for the six months ended as indicated:
June 30, 2006 | June 30, 2005 | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||
U.S. Insurance | |||||||||||||||||||||||
Attritional | $ | 205.3 | $ | (12.1 | ) | $ | 193.2 | $ | 220.1 | $ | 2.5 | $ | 222.6 | ||||||||||
Catastrophes | - | 0.5 | 0.5 | - | - | - | |||||||||||||||||
Total segment | $ | 205.3 | $ | (11.6 | ) | $ | 193.7 | $ | 220.1 | $ | 2.5 | $ | 222.6 | ||||||||||
Loss Ratio | 76.4 | % | -4.3 | % | 72.0 | % | 71.4 | % | 0.8 | % | 72.2 | % | |||||||||||
(Some amounts may not reconcile due to rounding.) |
The U.S. Insurance segment’s incurred losses and LAE decreased 13.0%, or $28.9 million, for the six months ended June 30, 2006 as compared to the same period in 2005, mainly reflecting reduced earned premiums. The segment’s loss ratio improved 0.2 points over the comparable 2005 period due to favorable prior years reserve adjustments mostly for the California workers’ compensation business resulting from benefit reform, partially offset by an increased current year attritional loss ratio reflective of higher loss ratios established for new programs.
The following table shows the Specialty Underwriting segment components of incurred loss and LAE for the six months ended as indicated:
June 30, 2006 | June 30, 2005 | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||
Specialty Underwriting | |||||||||||||||||||||||
Attritional | $ | 53.7 | $ | (13.2 | ) | $ | 40.5 | $ | 81.5 | $ | 0.8 | $ | 82.3 | ||||||||||
Catastrophes | - | 24.6 | 24.6 | - | 6.6 | 6.6 | |||||||||||||||||
Total segment | $ | 53.7 | $ | 11.4 | $ | 65.1 | $ | 81.5 | $ | 7.3 | $ | 88.9 | |||||||||||
Loss Ratio | 61.5 | % | 13.1 | % | 74.5 | % | 58.3 | % | 5.2 | % | 63.6 | % | |||||||||||
(Some amounts may not reconcile due to rounding.) |
The Specialty Underwriting segment’s incurred losses and LAE decreased 26.7%, or $23.8 million, for the six months ended June 30, 2006 as compared to the same period in 2005, mainly reflecting a reduction in earned premiums across all classes of business. The segment’s loss ratio deteriorated by 10.9 points over the comparable 2005 period due to increased catastrophe loss development, principally for the 2005 Hurricane Katrina, partially offset by favorable prior years attritional losses.
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The following table shows the International segment components of incurred loss and LAE for the six months ended as indicated:
June 30, 2006 | June 30, 2005 | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
(Dollars in millions) | Current Year | Prior Years | Total Incurred | Current Year | Prior Years | Total Incurred | |||||||||||||||||
International | |||||||||||||||||||||||
Attritional | $ | 128.9 | $ | 12.2 | $ | 141.0 | $ | 142.1 | $ | (19.9 | ) | $ | 122.2 | ||||||||||
Catastrophes | 4.3 | 13.3 | 17.6 | - | 9.4 | 9.4 | |||||||||||||||||
Total segment | $ | 133.2 | $ | 25.5 | $ | 158.7 | $ | 142.1 | $ | (10.5 | ) | $ | 131.6 | ||||||||||
Loss Ratio | 52.7 | % | 10.1 | % | 62.8 | % | 57.5 | % | -4.3 | % | 53.2 | % | |||||||||||
(Some amounts may not reconcile due to rounding.) |
The International segment’s incurred losses and LAE increased 20.6%, or $27.1 million, for the six months ended June 30, 2006 as compared to the same period in 2005, mainly reflecting 10.1 points of unfavorable prior years reserve adjustments, principally due to attritional losses and development of catastrophes. The segment’s loss ratio deteriorated by 9.6 points over the comparable 2005 period, primarily reflective of less favorable prior years attritional reserve adjustments in Canada and international, partially offset by an improved current year attritional loss ratio from price increases in the property classes.
Underwriting Expenses. The Company’s expense ratio, which is calculated by dividing underwriting expenses by net premiums earned, was 24.0% for the six months ended June 30, 2006 compared to 24.9% for the six months ended June 30, 2005.
The following table shows the expense ratios for each of the Company’s operating segments for the six months ended June 30, 2006 and 2005.
Segment Expense Ratios | ||||||||||||
Segment | 2006 | 2005 | ||||||||||
U.S. Reinsurance | 25 | .3% | 25 | .6% | ||||||||
U.S. Insurance | 19 | .0% | 23 | .0% | ||||||||
Specialty Underwriting | 29 | .0% | 26 | .3% | ||||||||
International | 24 | .0% | 23 | .5% |
Segment underwriting expenses decreased by 17.3% to $262.6 million for the six months ended June 30, 2006 compared to $317.4 million for the six months ended June 30, 2005. Commission, brokerage, taxes and fees decreased by $51.1 million, principally reflecting changes in premium volume and changes in the mix and distribution channels of business. Segment other underwriting expenses decreased by $3.7 million. Contributing to the decrease was a 31.3% ($11.5 million) decrease in the Specialty Underwriting operation, a 28.2% ($20.0 million) decrease in the U.S. Insurance operation and a 17.2% ($26.1 million) decrease in the U.S. Reinsurance operation, partially offset by a 4.7% ($2.8 million) increase in the International 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.
The Company’s combined ratio, which is the sum of the loss and expense ratios, increased by 1.9 percentage points to 93.9% for the six months ended June 30, 2006 compared to 92.0% for the six months ended June 30, 2005, primarily due to the increase resulting from prior years attritional and catastrophe loss development, partially offset by a decrease in expenses.
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The following table shows the combined ratios for each of the Company’s operating segments for the six months ended June 30, 2006 and 2005. The combined ratios for all operations were impacted by the loss and expense ratio variability noted above.
Segment Combined Ratios | ||||||||||||
Segment | 2006 | 2005 | ||||||||||
U.S. Reinsurance | 96 | .9% | 96 | .6% | ||||||||
U.S. Insurance | 91 | .0% | 95 | .3% | ||||||||
Specialty Underwriting | 103 | .5% | 89 | .9% | ||||||||
International | 86 | .8% | 76 | .7% |
Investment Results.Net investment income increased 0.5% to $175.8 million for the six months ended June 30, 2006 from $175.0 million for the six months ended June 30, 2005, principally reflecting the effects of the increase of investable assets to $8.0 billion at June 30, 2006 as compared to $7.6 billion at June 30, 2005.
The following table shows the components of net investment income for the six months ended as indicated:
(Dollars in thousands) | 2006 | 2005 | ||||||
---|---|---|---|---|---|---|---|---|
Fixed maturities | $ | 151,351 | $ | 160,921 | ||||
Equity securities | 5,709 | 4,500 | ||||||
Short-term investments | 9,978 | 4,376 | ||||||
Other income | 18,085 | 18,181 | ||||||
Total gross investment income | 185,123 | 187,978 | ||||||
Interest credited and other expense | (9,296 | ) | (12,986 | ) | ||||
Total investment income | $ | 175,827 | $ | 174,992 | ||||
The following table shows a comparison of various investment yields for the periods indicated:
2006 | 2005 | |||||||||||
Imbedded pre-tax yield of cash and invested assets at June 30 and December 31 | 4 | .5% | 4 | .5% | ||||||||
Imbedded after-tax yield of cash and invested assets at June 30 and December 31 | 3 | .6% | 3 | .6% | ||||||||
Annualized pre-tax yield on average cash and invested assets for the six months ended June 30 | 4 | .6% | 4 | .9% | ||||||||
Annualized after-tax yield on average cash and invested assets for the six months ended June 30 | 3 | .7% | 3 | .9% |
Net realized capital gains were $11.2 million for the six months ended June 30, 2006, which reflected gains of $10.0 million on the sale of equity securities and $4.3 million on the sale of fixed maturities, partially offset by $2.8 million of realized capital losses. Net realized capital gains were $19.7 million for the six months ended June 30, 2005, which reflected realized capital gains of $28.6 million, partially offset by $8.9 million of realized capital losses, which include $4.1 million related to 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.
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Corporate, Non-allocated Expenses. Corporate underwriting expenses not allocated to segments for both the six months ended June 30, 2006 and June 30, 2005 were $2.6 million and $3.5 million respectively.
Interest, fees and bond issue cost amortization expense for the six months ended June 30, 2006 and 2005 were $34.9 million and $39.3 million, respectively. Interest, fees and bond issue cost amortization expense for the six months ended June 30, 2006 included $15.6 million related to the senior notes, $18.7 million related to the junior subordinated debt securities, $0.5 million related to the bond issue cost amortization and $0.1 million relating to the credit line under the Company’s revolving credit facility. Interest, fees and bond issue cost amortization expense for the six months ended June 30, 2005 included $19.9 million related to the senior notes, $18.7 million related to the junior subordinated debt securities, $0.6 million related to the bond issue cost amortization and $0.1 million related to credit line under the Company’s revolving credit facility. Interest expense on senior notes decreased due to the retirement on March 15, 2005, of the 8.5% senior notes issued on March 14, 2000.
Other expense for the six months ended June 30, 2006 was $6.0 million compared to other income of $1.8 million for the six months ended June 30, 2005. This change in other income and expense for the six months ended June 30, 2006 was primarily due to a decrease in deferred gains on a retroactive reinsurance agreement with an unconsolidated affiliate.
Income Taxes.The Company’s income tax expense is primarily a function of its statutory tax rate, the level of its pre-tax income and the impact from tax preferenced investment income. The Company recognized an income tax expense of $48.4 million for the six months ended June 30, 2006 compared to $54.3 million in the six months ended June 30, 2005.
Net Income.Net income was $164.9 million for the six months ended June 30, 2006 compared to net income of $205.8 million for the six months ended June 30, 2005.
Market Sensitive Instruments.The Securities and Exchange Commission 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 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.
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The Company’s $8.0 billion investment portfolio at June 30, 2006 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 $482.4 million of mortgage-backed securities in the $6,017.9 million fixed maturity portfolio. Prepayment risk results from potential accelerated principal payments that shorten the average life and thus the expected yield of the security.
The table below displays the potential impact of market value fluctuations and after-tax unrealized appreciation on the Company’s fixed maturity portfolio (including $508.0 million of short-term investments) as of June 30, 2006 based on parallel and immediate 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 June 30, 2006 Interest Rate Shift in Basis Points | |||||||||||||||||
-200 | -100 | 0 | 100 | 200 | |||||||||||||
Total Market Value | $ | 7,221.8 | $ | 6,881.7 | $ | 6,525.8 | $ | 6,135.1 | $ | 5,741.4 | |||||||
Market Value Change from Base (%) | 10.7 | % | 5.5 | % | 0.0 | % | -6.0 | % | -12.0 | % | |||||||
Change in Unrealized Appreciation | |||||||||||||||||
After-tax from Base ($) | $ | 452.4 | $ | 231.4 | $ | - | $ | (254.0 | ) | $ | (510.0 | ) |
The Company had $7,586.1 million and $7,729.2 million of reserves for loss and LAE as of June 30, 2006 and December 31, 2005, respectively. 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’s financial results will include investment income over time from the investment portfolio until the claims are paid. The Company’s loss and loss reserve obligations have an expected duration that is reasonably consistent with the Company’s fixed income portfolio. The existence of such obligations, and the variable differential between ultimate and fair value, which in theory applies equally to invested assets and insurance liability, provides substantial mitigation of the economic effects of interest rate variability even though such mitigation is not reflected in the Company’s financial statements.
Equity risk is the potential change in market value of the common stock and preferred stock portfolios arising from changing equity prices. The Company’s equity investments are mainly exchange traded and mutual funds, which invest principally in high quality common and preferred stocks that are traded on the major exchanges in the U.S. The primary objective in managing the equity portfolio is to provide long-term capital growth through market appreciation and income.
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The table below displays the impact on market value and after-tax unrealized appreciation of a 20% change in equity prices up and down in 10% increments for the period indicated. The growth in exposure is primarily due to the growth in the equity portfolio. All amounts are in U.S. dollars and are presented in millions.
As of June 30, 2006 Change in Equity Values in Percent | |||||||||||||||||
-20% | -10% | 0% | 10% | 20% | |||||||||||||
Market Value of the Equity Portfolio | $ | 895.1 | $ | 1,007.0 | $ | 1,118.9 | $ | 1,230.8 | $ | 1,342.6 | |||||||
After-tax Change in Unrealized Appreciation | $ | (145.5 | ) | $ | (72.7 | ) | $ | - | $ | 72.7 | $ | 145.5 |
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. (“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 June 30, 2006 there has been no material change in exposure to foreign exchange rates as compared to December 31, 2005.
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, including reserves for A&E claims, the adequacy of the Company’s provision for uncollectible balances, estimates of the Company’s catastrophe exposure, and the effects of catastrophic events, including the most recent hurricanes, on the Company’s financial statements and the ability of the Company’s subsidiaries to pay dividends. 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 events or results to be materially different from the Company’s expectations include the uncertainties that surround the estimating of reserves for losses and LAE, those discussed in Note 4 of Notes to Consolidated Financial Statements (unaudited) included in this report and the risks described under the caption “Risk Factors” in the Company’s most recent Annual Report on Form 10-K, Part I, Item 1A. 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 REINSURANCE HOLDINGS, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Market Risk Instruments. See "Market Sensitive Instruments" in PART I - Item 2.
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PART I – Item 4.
EVEREST REINSURANCE HOLDINGS, INC.
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 concluded 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 REINSURANCE HOLDINGS, INC.
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, reinsurance and other contractual agreements. In some disputes, the Company seeks to enforce its rights under an agreement or to collect funds owing to it. In other matters, the Company is resisting attempts by others to collect funds or enforce alleged rights. These disputes arise from time to time and as they arise are addressed, and ultimately resolved, through both informal and formal means, including negotiated resolution, arbitration and litigation. In all such matters, the Company believes that its positions are legally and commercially reasonable. While the final outcome of these matters cannot be predicted with certainty, the Company does not believe that any of these matters, when finally resolved, will have a material adverse effect on the Company’s financial position or liquidity. However, an adverse resolution of one or more of these items in any one quarter or fiscal year could have a material adverse effect on the Company’s results of operations in that period.
In May 2005, the Company received and responded to a subpoena from the SEC seeking information regarding certain loss mitigation insurance products. Group, the Company’s parent, has stated that the Company will fully cooperate with this and any future inquiries and that the Company does not believe that it has engaged in any improper business practices with respect to loss mitigation insurance products.
The Company’s insurance subsidiaries have also received and have responded to broadly distributed information requests by state regulators including among others, from Delaware and Georgia.
PART II – Item 1A. Risk Factors
No material changes.
PART II - Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
PART II – Item 3. Defaults Upon Senior Securities
None.
PART II – Item 4. Submission of Matters tp a Vote of Security Holders
None.
PART II – Item 5. Other Information
None.
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PART II – Item 6. Exhibits
Exhibit Index: |
Exhibit No. | Description |
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 |
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Everest Reinsurance Holdings, Inc.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Everest Reinsurance Holdings, Inc. | ||
| (Registrant) |
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| Stephen L. Limauro |
Executive Vice President and
| Chief Financial Officer |
(Duly Authorized Officer and Principal Financial Officer)
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