EVEREST RE GROUP LTD
10-Ks and 10-Qs
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
fiscal year ended December 31, 2009
Commission
file number 1-15731
EVEREST
RE GROUP, LTD.
(Exact
name of registrant as specified in its charter)
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Bermuda
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98-0365432
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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45 Reid
Street
PO Box HM
845
Hamilton
HM DX, Bermuda
441-295-0006
(Address,
including zip code, and telephone number, including area code, of registrant’s
principal executive office)
Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each Class
Common
Shares, $.01 par value per share
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Name of Each Exchange on Which
Registered
New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act
.
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YES
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X
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NO
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Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
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YES
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NO
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X
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Indicate
by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
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YES
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X
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NO
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Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
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YES
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NO
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Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company" in Rule 12b-2 of the
Exchange Act.
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Large
accelerated filer
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X
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Accelerated
filer
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Non-accelerated
filer
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Smaller
reporting company
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(Do
not check if smaller reporting company)
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||||
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
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YES
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NO
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X
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The
aggregate market value on June 30, 2009, the last business day of the
registrant’s most recently completed second quarter, of the voting shares held
by non-affiliates of the registrant was $4,355.2 million.
At
February 1, 2010, the number of shares outstanding of the registrant’s common
shares was 59,317,741.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain
information required by Items 10, 11, 12, 13 and 14 of Form 10-K is incorporated
by reference into Part III hereof from the registrant’s proxy statement for the
2010 Annual General Meeting of Shareholders, which will be filed with the
Securities and Exchange Commission within 120 days of the close of the
registrant’s fiscal year ended December 31, 2009.
EVEREST
RE GROUP, LTD
FORM
10-K
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Page
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PART
I
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Item
1.
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1
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Item
1A.
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29
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Item
1B.
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41
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Item
2.
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41
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Item
3.
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41
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Item
4.
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41
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PART
II
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Item
5.
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| Purchases of Equity Securities |
41
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Item
6.
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44
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Item
7.
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| Operations |
45
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Item
7A.
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87
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Item
8.
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87
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Item
9.
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| Disclosure |
87
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Item
9A.
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87
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Item
9B.
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87
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PART
III
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Item
10.
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88
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Item
11.
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88
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Item
12.
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| Shareholder Matters |
88
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Item
13.
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88
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Item
14.
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88
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PART
IV
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Item
15.
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88
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Unless
otherwise indicated, all financial data in this document have been prepared
using accounting principles generally accepted in the United States of America
(“GAAP”). As used in this document, “Group” means Everest Re Group,
Ltd.; “Holdings Ireland” means Everest Underwriting Group (Ireland) Limited;
“Ireland Re” means Everest Reinsurance Company (Ireland), Limited; “Holdings”
means Everest Reinsurance Holdings, Inc.; “Everest Re” means Everest Reinsurance
Company and its subsidiaries (unless the context otherwise requires); and the
“Company”, “we”, “us”, and “our” means Everest Re Group, Ltd. and its
subsidiaries, except when referring to periods prior to February 24, 2000, when
it means Holdings and its subsidiaries.
The
Company.
Group, a
Bermuda company, was established in 1999 as a wholly-owned subsidiary of
Holdings. On February 24, 2000, a corporate restructuring was
completed and Group became the new parent holding company of
Holdings. Holdings continues to be the holding company for the
Company’s U.S. based operations. Holders of shares of common stock of
Holdings automatically became holders of the same number of common shares of
Group. Prior to the restructuring, Group had no significant assets or
capitalization and had not engaged in any business or prior activities other
than in connection with the restructuring.
In
connection with the February 24, 2000 restructuring, Group established a
Bermuda-based reinsurance subsidiary, Everest Reinsurance (Bermuda), Ltd.
(“Bermuda Re”), which commenced business in the second half of
2000. Group also formed Everest Global Services, Inc., a Delaware
subsidiary, to perform administrative functions for Group and its U.S. based and
non-U.S. based subsidiaries.
On
December 30, 2008, Group contributed Holdings to its recently established Irish
holding company, Holdings Ireland. Holdings Ireland is a direct
subsidiary of Group and was established to serve as a holding company for the
U.S. and Irish reinsurance and insurance subsidiaries.
Holdings,
a Delaware corporation, was established in 1993 to serve as the parent holding
company of Everest Re, a Delaware property and casualty reinsurer formed in
1973. Until October 6, 1995, Holdings was an indirect wholly-owned
subsidiary of The Prudential Insurance Company of America (“The
Prudential”). On October 6, 1995, The Prudential sold its entire
interest in Holdings in an initial public offering.
The
Company’s principal business, conducted through its operating segments, is the
underwriting of reinsurance and insurance in the U.S., Bermuda and international
markets. The Company had gross written premiums, in 2009, of $4.1
billion with approximately 80.0% representing reinsurance and 20.0% representing
insurance. Shareholders’ equity at December 31, 2009 was $6.1
billion. The Company underwrites reinsurance both through brokers and
directly with ceding companies, giving it the flexibility to pursue business
based on the ceding company’s preferred reinsurance purchasing
method. The Company underwrites insurance principally through general
agent relationships, brokers and surplus lines brokers. Group’s
active operating subsidiaries, excluding Mt. McKinley Insurance Company (“Mt.
McKinley”), which is in run-off, are each rated A+ (“Superior”) by A.M. Best
Company (“A.M. Best”), a leading provider of insurer ratings that assigns
financial strength ratings to insurance companies based on their ability to meet
their obligations to policyholders.
Following
is a summary of the Company’s principal operating subsidiaries:
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·
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Bermuda
Re, a Bermuda insurance company and a direct subsidiary of Group, is
registered in Bermuda as a Class 4 insurer and long-term insurer and is
authorized to write property and casualty and life and annuity
business. Bermuda Re commenced business in the second half of
2000. Bermuda Re’s UK branch writes property and casualty
reinsurance to the United Kingdom and European markets. At
December 31, 2009, Bermuda Re had shareholder’s equity of $2.7
billion.
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·
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Everest
International Reinsurance, Ltd. (“Everest International”), a Bermuda
insurance company and a direct subsidiary of Group, is registered in
Bermuda as a Class 4 insurer and long term insurer and is authorized to
write property and casualty business and life and annuity
business. Through 2009, all of Everest International’s business
has been inter-affiliate quota share reinsurance assumed from Everest Re
and the UK branch of Bermuda Re. At December 31, 2009, Everest
International had shareholder’s equity of $366.8
million.
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·
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Everest
Re, a Delaware insurance company and a direct subsidiary of Holdings, is a
licensed property and casualty insurer and/or reinsurer in all states, the
District of Columbia and Puerto Rico and is authorized to conduct
reinsurance business in Canada, Singapore and Brazil. Everest
Re underwrites property and casualty reinsurance for insurance and
reinsurance companies in the U.S. and international markets. At
December 31, 2009, Everest Re had statutory surplus of $2.8
billion.
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·
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Everest
National Insurance Company (“Everest National”), a Delaware insurance
company and a direct subsidiary of Everest Re, is licensed in 47 states
and the District of Columbia and is authorized to write property and
casualty insurance on an admitted basis in the jurisdictions in which it
is licensed. The majority of Everest National’s business is
reinsured by its parent, Everest
Re.
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·
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Everest
Indemnity Insurance Company (“Everest Indemnity”), a Delaware insurance
company and a direct subsidiary of Everest Re, writes excess and surplus
lines insurance business in the U.S. on a non-admitted
basis. Excess and surplus lines insurance is specialty property
and liability coverage that an insurer not licensed to write insurance in
a particular jurisdiction is permitted to provide to insureds when the
specific specialty coverage is unavailable from admitted
insurers. Everest Indemnity is licensed in Delaware and is
eligible to write business on a non-admitted basis in all other states,
the District of Columbia and Puerto Rico. The majority of
Everest Indemnity’s business is reinsured by its parent, Everest
Re.
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·
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Everest
Security Insurance Company (“Everest Security”), a Georgia insurance
company and a direct subsidiary of Everest Re, writes property and
casualty insurance on an admitted basis in Georgia and
Alabama. The majority of Everest Security’s business is
reinsured by its parent, Everest
Re.
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·
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Mt.
McKinley, a Delaware insurance company and a direct subsidiary of
Holdings, was acquired by Holdings in September 2000 from The
Prudential. In 1985, Mt. McKinley ceased writing new and
renewal insurance and commenced a run-off operation to service claims
arising from its previously written business. Effective
September 19, 2000, Mt. McKinley and Bermuda Re entered into a loss
portfolio transfer reinsurance agreement, whereby Mt. McKinley
transferred, for arm’s-length consideration, all of its net insurance
exposures and reserves to Bermuda
Re.
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Reinsurance
Industry Overview.
Reinsurance
is an arrangement in which an insurance company, the reinsurer, agrees to
indemnify another insurance or reinsurance company, the ceding company, against
all or a portion of the insurance risks underwritten by the ceding company under
one or more insurance contracts. Reinsurance can provide a ceding
company with several benefits, including a reduction in its net liability on
individual risks or classes of risks, catastrophe protection from large and/or
multiple losses and/or a reduction in operating leverage as measured by the
ratio of net premiums and reserves to capital. Reinsurance also
provides a ceding company with additional underwriting capacity by permitting it
to accept larger risks and write more business than would be acceptable relative
to the ceding company’s financial resources. Reinsurance does not
discharge the ceding company from its liability to policyholders; rather, it
reimburses the ceding company for covered losses.
There are
two basic types of reinsurance arrangements: treaty and
facultative. Treaty reinsurance obligates the ceding company to cede
and the reinsurer to assume a specified portion of a type or category of risks
insured by the ceding company. Treaty reinsurers do not separately
evaluate each of the individual risks assumed under their treaties, instead, the
reinsurer relies upon the pricing and underwriting decisions made by the ceding
company. In facultative reinsurance, the ceding company cedes and the
reinsurer assumes all or part of the risk under a single insurance contract.
Facultative reinsurance is negotiated separately for each insurance contract
that is reinsured. Facultative reinsurance, when purchased by ceding
companies,
usually
is intended to cover individual risks not covered by their reinsurance treaties
because of the dollar limits involved or because the risk is
unusual.
Both
treaty and facultative reinsurance can be written on either a pro rata basis or
an excess of loss basis. Under pro rata reinsurance, the ceding
company and the reinsurer share the premiums as well as the losses and expenses
in an agreed proportion. Under excess of loss reinsurance, the
reinsurer indemnifies the ceding company against all or a specified portion of
losses and expenses in excess of a specified dollar amount, known as the ceding
company's retention or reinsurer's attachment point, generally subject to a
negotiated reinsurance contract limit.
In pro
rata reinsurance, the reinsurer generally pays the ceding company a ceding
commission. The ceding commission generally is based on the ceding
company’s cost of acquiring the business being reinsured (commissions, premium
taxes, assessments and miscellaneous administrative expense and may contain
profit sharing provisions, whereby the ceding commission is adjusted based on
loss experience). Premiums paid by the ceding company to a reinsurer
for excess of loss reinsurance are not directly proportional to the premiums
that the ceding company receives because the reinsurer does not assume a
proportionate risk. There is usually no ceding commission on excess
of loss reinsurance.
Reinsurers
may purchase reinsurance to cover their own risk exposure. Reinsurance of a
reinsurer's business is called a retrocession. Reinsurance companies
cede risks under retrocessional agreements to other reinsurers, known as
retrocessionaires, for reasons similar to those that cause insurers to purchase
reinsurance: to reduce net liability on individual or classes of risks, protect
against catastrophic losses, stabilize financial ratios and obtain additional
underwriting capacity.
Reinsurance
can be written through intermediaries, generally professional reinsurance
brokers, or directly with ceding companies. From a ceding company's
perspective, the broker and the direct distribution channels have advantages and
disadvantages. A ceding company's decision to select one distribution
channel over the other will be influenced by its perception of such advantages
and disadvantages relative to the reinsurance coverage being
placed.
Business
Strategy.
The
Company’s business strategy is to sustain its leadership position within
targeted reinsurance and insurance markets, provide effective management
throughout the property and casualty underwriting cycle and thereby achieve an
attractive return for its shareholders. The Company’s underwriting
strategies seek to capitalize on its i) financial strength and capacity, ii)
global franchise, iii) stable and experienced management team, iv) diversified
product and distribution offerings, v) underwriting expertise and disciplined
approach, vi) efficient and low-cost operating structure and vii) effective
enterprise risk management practices.
The
Company offers treaty and facultative reinsurance and admitted and non-admitted
insurance. The Company’s products include the full range of property and
casualty reinsurance and insurance coverages, including marine, aviation,
surety, errors and omissions liability (“E&O”), directors’ and officers’
liability (“D&O”), medical malpractice, other specialty lines, accident and
health (“A&H”) and workers’ compensation.
The
Company’s underwriting strategies emphasizes underwriting profitability over
premium volume. Key elements of this strategy include careful risk
selection, appropriate pricing through strict underwriting discipline and
adjustment of the Company’s business mix in response to changing market
conditions. The Company focuses on reinsuring companies that
effectively manage the underwriting cycle through proper analysis and pricing of
underlying risks and whose underwriting guidelines and performance are
compatible with its objectives.
The
Company’s underwriting strategies emphasizes flexibility and responsiveness to
changing market conditions, such as increased demand or favorable pricing
trends. The Company believes that its existing strengths, including
its broad underwriting expertise, global presence, strong financial ratings and
substantial capital, facilitate adjustments to its mix of business
geographically, by line of business and by type of coverage, allowing it to
participate in those market opportunities that provide the greatest potential
for underwriting profitability. The Company’s insurance operations
complement these strategies by accessing business that is not available on a
reinsurance basis. The Company carefully monitors its mix of business
across all operations to avoid unacceptable geographic or other risk
concentrations.
Marketing.
The
Company writes business on a worldwide basis for many different customers and
lines of business, thereby obtaining a broad spread of risk. The
Company is not substantially dependent on any single customer, small group of
customers, line of business or geographic area. For the 2009 calendar
year, no single customer (ceding company or insured) generated more than 5.1% of
the Company’s gross written premiums. The Company believes that a
reduction of business from any one customer would not have a material adverse
effect on its future financial condition or results of operations.
Approximately
68%, 11% and 21% of the Company’s 2009 gross written premiums were written in
the broker reinsurance, direct reinsurance and insurance markets,
respectively.
The
broker reinsurance market consists of several substantial national and
international brokers and a number of smaller specialized
brokers. Brokers do not have the authority to bind the Company with
respect to reinsurance agreements, nor does the Company commit in advance to
accept any portion of a broker’s submitted business. Reinsurance
business from any ceding company, whether new or renewal, is subject to
acceptance by the Company. Brokerage fees are generally paid by
reinsurers. The Company’s ten largest brokers accounted for an
aggregate of approximately 62% of gross written premiums in 2009. The
largest broker, Aon Benfield Re, accounts for approximately 22% of gross written
premiums. The second largest broker, Marsh and McLennan, accounted
for approximately 17% of gross written premiums. The Company believes
that a reduction of business assumed from any one broker would not have a
material adverse effect on the Company.
The
direct reinsurance market remains an important distribution channel for
reinsurance business written by the Company. Direct placement of
reinsurance enables the Company to access clients who prefer to place their
reinsurance directly with reinsurers based upon the reinsurer’s in-depth
understanding of the ceding company’s needs.
The
Company’s insurance business is written principally through general agents,
brokers and surplus lines brokers. In 2009, C.V. Starr & Company
accounted for approximately 6% of the Company’s gross written
premium. No other single general agent generated more than 5% of the
Company’s gross written premiums.
The
Company continually evaluates each business relationship, including the
underwriting expertise and experience brought to bear through the involved
distribution channel, performs analyses to evaluate financial security, monitors
performance and adjusts underwriting decisions accordingly.
Segment
Results.
The
Company, through its subsidiaries, operates in five segments: U.S.
Reinsurance, U.S. Insurance, Specialty Underwriting, International and
Bermuda. The U.S. Reinsurance operation writes property and casualty
reinsurance, on both a treaty and facultative basis, through reinsurance
brokers, as well as directly with ceding companies within the
U.S. The U.S. Insurance operation writes property and casualty
insurance primarily through general agents, brokers and surplus lines brokers
within the U.S. The Specialty Underwriting operation writes A&H,
marine, aviation and surety business within the U.S. and worldwide through
brokers and directly with ceding companies. The International
operation writes non-U.S. property and casualty reinsurance through Everest Re’s
branches in Canada and Singapore and offices in Miami and New Jersey. The
Bermuda operation provides reinsurance and insurance to worldwide property and
casualty markets and reinsurance to life insurers through brokers and directly
with ceding companies from its Bermuda office and reinsurance to the United
Kingdom and European markets through its UK branch.
These
segments are managed independently, but conform with corporate guidelines with
respect to pricing, risk management, control of aggregate catastrophe exposures,
capital, investments and support operations. Management generally
monitors and evaluates the financial performance of these operating segments
based upon their underwriting results.
Underwriting
results include earned premium less losses and loss adjustment expenses (“LAE”)
incurred, commission and brokerage expenses and other underwriting
expenses. Underwriting results are measured using ratios, in
particular loss, commission and brokerage and other underwriting expense ratios,
which, respectively, divide incurred losses, commissions and brokerage and other
underwriting expenses by premiums earned. The Company utilizes
inter-affiliate reinsurance, although such reinsurance does not materially
impact segment results, as business is generally reported within the segment in
which the business was first produced. For selected financial
information regarding these segments, see ITEM 8, “Financial Statements and
Supplementary Data” - Note 20 of Notes to Consolidated Financial
Statements and ITEM 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operation - Segment Results”.
Underwriting
Operations.
The
following five year table presents the distribution of the Company’s gross
written premiums by its segments: U.S. Reinsurance, U.S. Insurance,
Specialty Underwriting, International and Bermuda. The premiums for
each segment are further split between property and casualty business and, for
reinsurance business, between pro rata or excess of loss business:
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Gross
Written Premiums by Segment
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Years
Ended December 31,
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(Dollars
in millions)
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2009
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2008
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2007
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2006
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2005
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U.S.
Reinsurance
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Property
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Pro
Rata
(1)
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$ | 478.6 | 11.6 | % | $ | 332.9 | 9.1 | % | $ | 455.9 | 11.2 | % | $ | 379.7 | 9.5 | % | $ | 414.0 | 10.1 | % | ||||||||||||||||||||
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Excess
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287.2 | 7.0 | % | 320.9 | 8.7 | % | 332.2 | 8.1 | % | 303.2 | 7.6 | % | 236.9 | 5.8 | % | |||||||||||||||||||||||||
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Casualty
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Pro
Rata
(1)
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175.8 | 4.3 | % | 67.4 | 1.8 | % | 216.5 | 5.3 | % | 446.7 | 11.2 | % | 529.4 | 12.9 | % | |||||||||||||||||||||||||
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Excess
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230.7 | 5.6 | % | 236.7 | 6.4 | % | 189.0 | 4.6 | % | 207.1 | 5.2 | % | 205.9 | 5.0 | % | |||||||||||||||||||||||||
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Total
(2)
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1,172.3 | 28.4 | % | 957.9 | 26.0 | % | 1,193.5 | 29.3 | % | 1,336.7 | 33.4 | % | 1,386.2 | 33.8 | % | |||||||||||||||||||||||||
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U.S.
Insurance
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||||||||||||||||||||||||||||||||||||||||
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Property
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Pro
Rata
(1)
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112.6 | 2.7 | % | 29.8 | 0.8 | % | 85.6 | 2.1 | % | 40.6 | 1.0 | % | 196.9 | 4.8 | % | |||||||||||||||||||||||||
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Excess
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- | 0.0 | % | - | 0.0 | % | - | 0.0 | % | - | 0.0 | % | - | 0.0 | % | |||||||||||||||||||||||||
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Casualty
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Pro
Rata
(1)
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729.9 | 17.7 | % | 742.0 | 20.2 | % | 800.0 | 19.6 | % | 825.7 | 20.6 | % | 735.6 | 17.9 | % | |||||||||||||||||||||||||
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Excess
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- | 0.0 | % | - | 0.0 | % | - | 0.0 | % | - | 0.0 | % | - | 0.0 | % | |||||||||||||||||||||||||
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Total
(2)
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842.6 | 20.4 | % | 771.8 | 21.0 | % | 885.6 | 21.7 | % | 866.3 | 21.7 | % | 932.5 | 22.7 | % | |||||||||||||||||||||||||
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Specialty
Underwriting
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||||||||||||||||||||||||||||||||||||||||
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Property
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||||||||||||||||||||||||||||||||||||||||
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Pro
Rata
(1)
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169.6 | 4.1 | % | 218.9 | 6.0 | % | 190.2 | 4.7 | % | 179.3 | 4.5 | % | 206.1 | 5.0 | % | |||||||||||||||||||||||||
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Excess
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43.3 | 1.0 | % | 29.7 | 0.8 | % | 51.1 | 1.3 | % | 37.5 | 0.9 | % | 65.2 | 1.6 | % | |||||||||||||||||||||||||
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Casualty
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||||||||||||||||||||||||||||||||||||||||
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Pro
Rata
(1)
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18.5 | 0.4 | % | 8.1 | 0.2 | % | 23.6 | 0.6 | % | 28.5 | 0.7 | % | 30.7 | 0.7 | % | |||||||||||||||||||||||||
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Excess
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3.3 | 0.1 | % | 3.7 | 0.1 | % | 5.1 | 0.1 | % | 5.9 | 0.1 | % | 12.6 | 0.3 | % | |||||||||||||||||||||||||
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Total
(2)
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234.8 | 5.7 | % | 260.4 | 7.1 | % | 270.1 | 6.6 | % | 251.2 | 6.3 | % | 314.6 | 7.6 | % | |||||||||||||||||||||||||
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Total
U.S.
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||||||||||||||||||||||||||||||||||||||||
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Property
|
||||||||||||||||||||||||||||||||||||||||
|
Pro
Rata
(1)
|
760.9 | 18.4 | % | 581.6 | 15.8 | % | 731.7 | 17.9 | % | 599.6 | 15.0 | % | 817.0 | 19.9 | % | |||||||||||||||||||||||||
|
Excess
|
330.5 | 8.0 | % | 350.6 | 9.5 | % | 383.3 | 9.4 | % | 340.7 | 8.5 | % | 302.1 | 7.4 | % | |||||||||||||||||||||||||
|
Casualty
|
||||||||||||||||||||||||||||||||||||||||
|
Pro
Rata
(1)
|
924.3 | 22.4 | % | 817.5 | 22.2 | % | 1,040.1 | 25.5 | % | 1,300.9 | 32.5 | % | 1,295.7 | 31.5 | % | |||||||||||||||||||||||||
|
Excess
|
234.0 | 5.7 | % | 240.3 | 6.5 | % | 194.1 | 4.8 | % | 213.0 | 5.3 | % | 218.5 | 5.3 | % | |||||||||||||||||||||||||
|
Total
(2)
|
2,249.6 | 54.5 | % | 1,990.1 | 54.1 | % | 2,349.2 | 57.6 | % | 2,454.2 | 61.3 | % | 2,633.3 | 64.1 | % | |||||||||||||||||||||||||
|
International
|
||||||||||||||||||||||||||||||||||||||||
|
Property
|
||||||||||||||||||||||||||||||||||||||||
|
Pro
Rata
(1)
|
670.2 | 16.2 | % | 535.3 | 14.6 | % | 451.6 | 11.1 | % | 415.4 | 10.4 | % | 421.4 | 10.3 | % | |||||||||||||||||||||||||
|
Excess
|
241.9 | 5.9 | % | 228.3 | 6.2 | % | 212.9 | 5.2 | % | 195.6 | 4.9 | % | 160.4 | 3.9 | % | |||||||||||||||||||||||||
|
Casualty
|
||||||||||||||||||||||||||||||||||||||||
|
Pro
Rata
(1)
|
94.0 | 2.3 | % | 71.6 | 1.9 | % | 68.3 | 1.7 | % | 53.9 | 1.3 | % | 66.4 | 1.6 | % | |||||||||||||||||||||||||
|
Excess
|
78.4 | 1.9 | % | 69.4 | 1.9 | % | 73.1 | 1.8 | % | 66.8 | 1.7 | % | 58.4 | 1.4 | % | |||||||||||||||||||||||||
|
Total
(2)
|
1,084.5 | 26.3 | % | 904.7 | 24.6 | % | 805.9 | 19.8 | % | 731.7 | 18.3 | % | 706.6 | 17.2 | % | |||||||||||||||||||||||||
|
Bermuda
|
||||||||||||||||||||||||||||||||||||||||
|
Property
|
||||||||||||||||||||||||||||||||||||||||
|
Pro
Rata
(1)
|
291.1 | 7.1 | % | 305.7 | 8.3 | % | 282.2 | 6.9 | % | 312.3 | 7.8 | % | 322.9 | 7.8 | % | |||||||||||||||||||||||||
|
Excess
|
180.4 | 4.4 | % | 164.2 | 4.5 | % | 201.6 | 4.9 | % | 174.3 | 4.4 | % | 151.8 | 3.7 | % | |||||||||||||||||||||||||
|
Casualty
|
||||||||||||||||||||||||||||||||||||||||
|
Pro
Rata
(1)
|
185.6 | 4.5 | % | 178.8 | 4.9 | % | 326.1 | 8.0 | % | 230.7 | 5.8 | % | 208.8 | 5.1 | % | |||||||||||||||||||||||||
|
Excess
|
137.8 | 3.3 | % | 134.7 | 3.7 | % | 112.5 | 2.8 | % | 97.7 | 2.4 | % | 85.2 | 2.1 | % | |||||||||||||||||||||||||
|
Total
(2)
|
794.8 | 19.3 | % | 783.4 | 21.4 | % | 922.5 | 22.7 | % | 815.0 | 20.4 | % | 768.7 | 18.7 | % | |||||||||||||||||||||||||
|
Total
Company
|
||||||||||||||||||||||||||||||||||||||||
|
Property
|
||||||||||||||||||||||||||||||||||||||||
|
Pro
Rata
(1)
|
1,722.2 | 41.7 | % | 1,422.6 | 38.7 | % | 1,465.6 | 35.9 | % | 1,327.3 | 33.2 | % | 1,561.3 | 38.0 | % | |||||||||||||||||||||||||
|
Excess
|
752.7 | 18.2 | % | 743.2 | 20.2 | % | 797.8 | 19.6 | % | 710.6 | 17.8 | % | 614.3 | 15.0 | % | |||||||||||||||||||||||||
|
Casualty
|
||||||||||||||||||||||||||||||||||||||||
|
Pro
Rata
(1)
|
1,203.9 | 29.2 | % | 1,067.9 | 29.0 | % | 1,434.5 | 35.2 | % | 1,585.5 | 39.6 | % | 1,570.9 | 38.2 | % | |||||||||||||||||||||||||
|
Excess
|
450.2 | 10.9 | % | 444.4 | 12.1 | % | 379.7 | 9.3 | % | 377.5 | 9.4 | % | 362.1 | 8.8 | % | |||||||||||||||||||||||||
|
Total
(2)
|
$ | 4,129.0 | 100.0 | % | $ | 3,678.1 | 100.0 | % | $ | 4,077.6 | 100.0 | % | $ | 4,000.9 | 100.0 | % | $ | 4,108.6 | 100.0 | % | ||||||||||||||||||||
|
(1) For
purposes of the presentation above, pro rata includes all insurance and
reinsurance attaching to the first dollar of loss incurred by the ceding
company.
|
||||||||||||||||||||||||||||||||||||||||
|
(2) Certain
totals and subtotals may not reconcile due to rounding.
|
||||||||||||||||||||||||||||||||||||||||
U.S. Reinsurance
Segment.
The Company’s U.S. Reinsurance segment writes
property and casualty reinsurance, both treaty and facultative, through
reinsurance brokers as well as directly with ceding companies within the
U.S. The Company targets certain brokers and, through the broker
market, specialty companies and small to medium sized standard lines
companies. The Company also targets companies that place their
business predominantly in the direct market, including small to medium sized
regional ceding companies, and seeks to develop long-term relationships with
those companies. In addition, the U.S. Reinsurance segment writes
portions of reinsurance programs for large, national insurance
companies.
In 2009,
$709.7 million of gross written premiums were attributable to U.S. treaty
property business, of which 67.4% was written on a pro rata basis and 32.6% was
written on an excess of loss basis. Included in gross written
premiums for U.S. treaty property business was $84.6 million related to the new
crop hail line of business. The Company’s property underwriters
utilize sophisticated underwriting methods to analyze and price property
business. The Company manages its exposures to catastrophe and other large
losses by limiting exposures on individual contracts and limiting aggregate
exposures to catastrophes in any particular zone and across contiguous
zones.
U.S.
treaty casualty business accounted for $364.8 million of gross written premiums
in 2009, of which 48.2% was written on a pro rata basis and 51.8% was written on
an excess of loss basis. The treaty casualty business consists of
professional liability, D&O liability, workers’ compensation, excess and
surplus lines and other liability coverages. As a result of the
complex technical nature of most of these risks, the Company’s casualty
underwriters tend to specialize by line of business and work closely with the
Company’s pricing actuaries.
The
Company’s facultative unit conducts business both through brokers and directly
with ceding companies, and consists of four underwriting units representing
property, casualty, specialty and national brokerage lines of
business. Business is written from a facultative headquarters office
in New York and satellite offices in Boston, Chicago and Oakland. In
2009, $40.2 million, $41.7 million and $15.9 million of gross written premiums
were attributable to the property, casualty and national brokerage lines of
business, respectively.
In 2009,
93.7%, 5.5% and 0.8% of the U.S. Reinsurance segment’s gross written premiums
were written in the broker reinsurance, direct reinsurance and insurance
markets, respectively.
U.S. Insurance
Segment.
In
2009, the Company’s U.S. Insurance segment wrote $842.6 million of gross written
premiums, of which 86.6% was casualty and 13.4% was property. Of the
total business written, Everest National wrote $649.5 million and Everest Re
wrote $43.4 million, principally targeting commercial property and casualty
business written through general agents with program
administrators. Workers’ compensation business accounted for $263.6
million, or 31.3%, of the total business written, including $204.8 million, or
77.7%, of workers’ compensation business written in
California. Everest Indemnity wrote $128.6 million, principally
excess and surplus lines insurance business written through surplus lines
brokers. Everest Security wrote $21.1 million, principally
non-standard auto insurance written through retail agents. With
respect to insurance written through general agents and surplus lines brokers,
the Company supplements the initial underwriting process with periodic claims,
underwriting and operational reviews and ongoing monitoring.
Specialty Underwriting
Segment.
The Company’s Specialty Underwriting segment writes
A&H, marine, aviation and surety reinsurance. The A&H unit
primarily focuses on health reinsurance of traditional indemnity plans,
self-insured health plans, accident coverages and specialty medical
plans. The marine and aviation unit focuses on ceding companies with
a particular expertise in marine and aviation business. The marine
and aviation business is written primarily through brokers and contains a
significant international component written primarily through the London market.
Surety business consists mainly of reinsurance of contract surety
bonds.
In 2009,
gross written premiums of the A&H unit totaled $84.1 million, primarily
written through brokers.
The
marine and aviation unit’s 2009 gross written premiums totaled $107.8 million,
substantially all of which was written on a treaty basis and sourced through
reinsurance brokers. Of the marine and aviation gross written
premiums in 2009, marine treaties represented 79.8% and consisted mainly of hull
and cargo coverage. In 2009, the marine unit’s premiums were written
55.0% on a pro rata basis and 45.0% on an excess of loss basis. Of
the marine and aviation gross written premiums in 2009, aviation premiums
accounted for 20.2% and included reinsurance of airline and general aviation
risks. In 2009, the aviation unit's premiums were written 84.9% on a
pro rata basis and 15.1% on an excess of loss basis.
In 2009,
gross written premiums of the surety unit totaled $42.9 million, 99.3% of which
was written on a pro rata basis. Most of the portfolio is reinsurance
of contract surety bonds written directly with ceding companies, with the
remainder being trade credit reinsurance, mostly in international
markets.
International
Segment.
The Company’s International segment focuses on
opportunities in the international reinsurance markets. The Company
targets several international markets, including: Canada, with a branch in
Toronto; Asia, with a branch in Singapore; and Latin America, Africa and the
Middle East, which business is serviced from Everest Re’s Miami and New Jersey
offices. The Company also writes from New Jersey “home-foreign”
business, which provides reinsurance on the international portfolios of U.S.
insurers. Of the Company’s 2009 international gross written premiums,
84.1% represented property business, while 15.9% represented casualty
business. As with its U.S. operations, the Company’s International
segment focuses on financially sound companies that have strong management and
underwriting discipline and expertise. Of the Company’s international
business, 70.3% was written through brokers, with 29.7% written directly with
ceding companies.
Gross
written premiums of the Company’s Canadian branch totaled $162.7 million in 2009
and consisted of 29.6% of pro rata property business, 28.6% of excess property
business, 9.5% of pro rata casualty business and 32.3% of excess casualty
business. Of the Canadian gross written premiums, 79.7% consisted of
treaty reinsurance, while 20.3% was facultative reinsurance.
The
Company’s Singapore branch covers the Asian markets and accounted for $222.0
million of gross written premiums in 2009 and consisted of 61.5% of pro rata
property business, 31.7% of excess property business, 5.1% of pro rata casualty
business and 1.7% of excess casualty business.
International
business written out of Everest Re’s Miami and New Jersey offices accounted for
$699.6 million of gross written premiums in 2009 and consisted of 69.4% of pro
rata treaty property business, 9.6% of pro rata treaty casualty business, 14.3%
of excess treaty property business, 3.0% of excess treaty casualty business and
3.7% of facultative property and casualty business. Of this
international business, 64.0% was sourced from Latin America, 21.3% was sourced
from the Middle East, 8.2% was sourced from Africa and 6.0% was home-foreign
business.
Bermuda
Segment.
The Company’s Bermuda segment writes property and
casualty insurance and reinsurance through Bermuda Re and property and casualty
reinsurance through its UK branch. In 2009, Bermuda Re had gross
written premiums of $290.4 million, virtually all of which was treaty
reinsurance.
In 2009,
the UK branch of Bermuda Re wrote $504.4 million of gross treaty reinsurance
premium consisting of 41.7% of pro rata property business, 22.6% of excess
property business, 14.5% of pro rata casualty business and 21.1% of excess
casualty business.
Geographic
Areas.
The Company conducts its business in Bermuda, the U.S.
and a number of foreign countries. For select financial information
about geographic areas, see ITEM 8, “Financial Statements and Supplementary
Data” - Note 20 of Notes to the Consolidated Financial
Statements. Risks attendant to the foreign operations of the Company
parallel those attendant to the U.S. operations of the Company, with the primary
exception of foreign exchange risks. For more information about the
risks, see ITEM 7, “Management’s Discussion and Analysis of Financial Condition
and Results of Operations – Safe Harbor Disclosure”.
Underwriting.
One of
the Company’s strategies is to "lead" as many of the reinsurance treaties it
underwrites as possible. The Company leads on approximately
two-thirds of its treaty reinsurance business as measured by
premium. The lead reinsurer on a treaty generally accepts one of the
largest percentage shares of the treaty and is in the strongest position to
negotiate price, terms and conditions. Management believes this
strategy enables it to obtain more favorable terms and conditions on the
treaties on which it participates. When the Company does not lead the
treaty, it may still suggest changes to any aspect of the treaty. The
Company may decline to participate on a treaty based upon its assessment of all
relevant factors.
The
Company’s treaty underwriting process involves a team approach among the
Company’s underwriters, actuaries and claim staff. Treaties are
reviewed for compliance with the Company’s general underwriting standards and
most larger treaties are subjected to detailed actuarial
analysis. The actuarial models used in such analyses are tailored in
each case to the subject exposures and loss experience. The Company
does not separately evaluate each of the individual risks assumed under its
treaties. The Company does, however, evaluate the underwriting
guidelines of its ceding companies to determine their adequacy prior to entering
into a treaty. The Company may also conduct underwriting, operational
and claim audits at the offices of ceding companies to monitor adherence to
underwriting guidelines. Underwriting audits focus on the quality of
the underwriting staff, pricing and risk selection and rate monitoring over
time. Claim audits may be performed in order to evaluate the client’s
claims handling abilities and practices.
The
Company’s facultative underwriters operate within guidelines specifying
acceptable types of risks, limits and maximum risk
exposures. Specified classes of large premium U.S. risks are referred
to Everest Re’s New York facultative headquarters for specific review before
premium quotations are given to clients. In addition, the Company’s
guidelines require certain types of risks to be submitted for review because of
their aggregate limits, complexity or volatility, regardless of premium amount
on the underlying contract. Non-U.S. risks exhibiting similar
characteristics are reviewed by senior managers within the involved
operations.
The
Company’s insurance operations principally write casualty coverages for
homogeneous risks through select program managers. These programs are
evaluated based upon actuarial analysis and the program manager’s
capabilities. The Company’s rates, forms and underwriting guidelines
are tailored to specific risk types. The Company’s underwriting,
actuarial, claim and financial functions work closely with its program managers
to establish appropriate underwriting and processing guidelines as well as
appropriate performance monitoring mechanisms.
Risk
Management of Underwriting and Retrocession Arrangements
Underwriting Risk and
Accumulation Controls.
Each segment and
business unit manages its underwriting risk in accordance with established
guidelines. These guidelines place dollar limits on the amount of business that
can be written based on a variety of factors, including ceding company profile,
line of business, geographic location and risk hazards. In each case, the
guidelines permit limited exceptions, which must be authorized by the Company’s
senior management. Management regularly reviews and revises these guidelines in
response to changes in business unit market conditions, risk versus reward
analyses and the Company’s enterprise and underwriting risk management
processes.
The
operating results and financial condition of the Company can be adversely
affected by catastrophe and other large losses. The Company manages its exposure
to catastrophes and other large losses by:
|
·
|
selective
underwriting practices;
|
|
·
|
diversifying
its risk portfolio by geographic area and by types and classes of
business;
|
|
·
|
limiting
its aggregate catastrophe loss exposure in any particular geographic zone
and contiguous zones;
|
|
·
|
purchasing
reinsurance and/or retrocessional protection to the extent that such
coverage can be secured cost-effectively. See “Reinsurance and
Retrocession Arrangements”.
|
Like
other insurance and reinsurance companies, the Company is exposed to multiple
insured losses arising out of a single occurrence, whether a natural event, such
as a hurricane or an earthquake, or other catastrophe, such as an explosion at a
major factory. A large catastrophic event can be expected to generate
insured losses to multiple reinsurance treaties, facultative certificates and
across lines of business.
The
Company focuses on potential losses that could result from any single event or
series of events as part of its evaluation and monitoring of its aggregate
exposures to catastrophic events. Accordingly, the Company employs various
techniques to estimate the amount of loss it could sustain from any single
catastrophic event in various geographic areas. These techniques range from
deterministic approaches, such as tracking aggregate limits exposed in
catastrophe-prone zones and applying historic damage factors, to modeled
approaches that attempt to scientifically measure catastrophe loss exposure
using sophisticated Monte Carlo simulation techniques that forecast frequency
and severity of expected losses on a probabilistic basis.
No single
computer model or group of models is currently capable of projecting the amount
and probability of loss in all global geographic regions in which the Company
conducts business. In addition, the form, quality and granularity of
underwriting exposure data furnished by ceding companies is not uniformly
compatible with the data requirements for the Company’s licensed models, which
adds to the inherent imprecision in the potential loss projections. Further, the
results from multiple models and analytical methods must be combined and
interpolated to estimate potential losses by and across business
units. Also, while most models have been updated to better
incorporate factors that contributed to unprecedented industry storm losses in
2004 and 2005, such as flood, storm surge and demand surge, catastrophe model
projections are inherently imprecise. In addition, uncertainties with
respect to future climatic patterns and cycles add to the already significant
uncertainty of loss projections from models using historic long term frequency
and severity data.
Nevertheless,
when combined with traditional risk management techniques and sound underwriting
judgment, catastrophe models are a useful tool for underwriters to price
catastrophe exposed risks and for providing management with quantitative
analyses with which to monitor and manage catastrophic risk exposures by zone
and across zones for individual and multiple events.
Projected
catastrophe losses are generally summarized in terms of the probable maximum
loss (“PML”). The Company defines PML as its anticipated loss, taking
into account contract terms and limits, caused by a single catastrophe affecting
a broad contiguous geographic area, such as that caused by a hurricane or
earthquake. The PML will vary depending upon the modeled simulated
losses and the make-up of the in force book of business. The
projected severity levels are described in terms of “return periods”, such as
“100-year events” and “250-year events”. For example, a 100-year PML
is the estimated loss from a single event which has a 1% probability of being
exceeded in a twelve month period. Conversely, it corresponds to a
99% probability that the loss from a single event will fall below the indicated
PML. It is important to note that PMLs are
estimates. Modeled events are hypothetical events produced by a
stochastic model. As a result, there can be no assurance that any
actual event will align with the modeled event or that actual losses from events
similar to the modeled events will not vary materially from the modeled event
PML.
From an
enterprise risk management perspective, management sets limits on the levels of
catastrophe loss exposure the Company may underwrite. The limits are
revised periodically based on a variety of factors, including but not limited to
the Company’s financial resources and expected earnings and risk/reward analyses
of the business being underwritten.
Management
estimated that the projected economic loss from its largest 100-year event in a
given zone does not exceed 10% of its projected 2010 shareholders’
equity. Economic loss is the gross PML reduced by estimated
reinstatement premiums to renew coverage and income taxes. The impact
of income taxes on the PML depends on the distribution of the losses by
corporate entity, which is also affected by inter-affiliate
reinsurance. Management also monitors and controls its largest PMLs
at multiple points along the loss distribution curve, such as loss amounts at
the 20, 50, 100, 250, 500 and 1,000 year return periods. This process
enables management to identify and control exposure accumulations and to
integrate such exposures into enterprise risk, underwriting and capital
management decisions.
The
Company’s catastrophe loss projections, segmented by risk zones, are updated
quarterly and reviewed as part of a formal risk management review process. The
table below reflects the Company’s gross PMLs at various return times for its
top three zones/perils (as ranked by the largest 1 in 100 year events) based on
loss projection data as of January 1, 2010:
|
Return
Periods (in years)
|
1
in 20
|
1
in 50
|
1
in 100
|
1
in 250
|
1
in 500
|
1
in 1,000
|
||||||||||||||||||
|
Exceeding
Probability
|
5.0% | 2.0% | 1.0% | 0.4% | 0.2% | 0.1% | ||||||||||||||||||
|
(Dollars
in millions)
|
||||||||||||||||||||||||
|
Zone/Area,
Peril
|
||||||||||||||||||||||||
|
Southeast
U.S., Wind
|
$ | 283 | $ | 579 | $ | 864 | $ | 1,178 | $ | 1,344 | $ | 1,483 | ||||||||||||
|
Japan,
Earthquake
|
71 | 401 | 581 | 720 | 796 | 845 | ||||||||||||||||||
|
California,
Earthquake
|
89 | 256 | 553 | 721 | 874 | 1,008 | ||||||||||||||||||
The
projected economic losses for the top three zones/perils scheduled above are as
follows:
|
Return
Periods (in years)
|
1
in 100
|
1
in 250
|
1
in 500
|
1
in 1,000
|
||||||||||||
|
Exceeding
Probability
|
1.0% | 0.4% | 0.2% | 0.1% | ||||||||||||
|
(Dollars
in millions)
|
||||||||||||||||
|
Zone/Area,
Peril
|
||||||||||||||||
|
Southeast
U.S., Wind
|
$ | 541 | $ | 763 | $ | 857 | $ | 954 | ||||||||
|
Japan,
Earthquake
|
414 | 503 | 552 | 582 | ||||||||||||
|
California,
Earthquake
|
393 | 476 | 596 | 680 | ||||||||||||
While the
Company considers purchasing corporate level retrocessional protection by
evaluating the underlying exposures in comparison to the availability of
cost-effective protection, there was no such retrocessional coverage in place at
January 1, 2010. The Company continues to evaluate the availability
and cost of various retrocessional products and loss mitigation approaches in
the marketplace.
The
Company believes that its methods of monitoring, analyzing and managing
catastrophe exposures provide a credible risk management framework, which are
integrated with its enterprise risk management, underwriting and capital
management plans. However, there is much uncertainty and imprecision
inherent in the catastrophe models and the catastrophe loss estimation process
generally. As a result, there can be no assurance that the Company
will not experience losses from individual events that exceed the PML or other
return period projections, perhaps by a material amount. Nor can
there be assurance that the Company will not experience events impacting
multiple zones, or multiple severe events that could, in the aggregate, exceed
the Company’s PML expectations by a significant amount.
Terrorism Risk.
The
Company does not have significant exposure to losses from terrorism
risk. While the Company writes some reinsurance contracts covering
events of terrorism, the Company’s risk management philosophy is to limit the
amount of coverage provided and specifically not provide terrorism coverage for
properties or in areas that may be considered a target for
terrorists. Although providing terrorism coverage on reinsurance
contracts is negotiable, most insurance policies mandate inclusion of terrorism
coverage. As a result, the Company is exposed to losses from
terrorism on its U.S. insurance book of business, particularly its workers’
compensation and property policies. However, the Company generally
does not insure large corporations or corporate locations that represent large
concentrations of risk.
As a
result of its limited exposure, the Company does not believe the U.S. Terrorism
Risk Insurance Act of 2002 that was signed into law November 2002 and amended in
December 2005 and December 2007 has had or will have a significant impact on its
operations.
Reinsurance and Retrocession
Arrangements.
The Company does not
typically purchase significant retrocessional coverage for specific reinsurance
business written, but it will do so when management deems it to be prudent
and/or cost-effective to reinsure a portion of the risks being
assumed. The Company participates in “common account” retrocessional
arrangements for certain reinsurance treaties whereby a ceding company purchases
reinsurance for the benefit of itself and its reinsurers under one or more of
its reinsurance treaties. Common account retrocessional arrangements
reduce the effect of individual or aggregate losses to all participating
companies, including the ceding company, with respect to the involved
treaties.
The
Company typically considers the purchase of reinsurance to cover insurance
program exposures written by the U.S. Insurance segment. The type of
reinsurance coverage considered is dependent upon individual risk exposures,
individual program exposures, aggregate exposures by line of business, overall
segment and corporate wide exposures and the cost effectiveness of available
reinsurance. The majority of reinsurance placed is with captives of
its general agents. This arrangement is a mechanism designed to
enable general agents to share in the operating results of the placed
business. Facultative reinsurance will typically be considered for
large individual exposures and quota share reinsurance will generally be
considered for entire programs of business.
The
Company also considers purchasing corporate level retrocessional protection
covering the potential accumulation of exposures. Such consideration
includes balancing the underlying exposures against the availability of
cost-effective retrocessional protection.
All of
the Company’s reinsurance and retrocessional agreements transfer significant
reinsurance risk and therefore, are accounted for as reinsurance in accordance
with the Financial Accounting Standards Board (“FASB”) guidance.
At
December 31, 2009, the Company had $636.4 million in reinsurance receivables
with respect to losses ceded. Of this amount, $131.4 million, or
20.6%, was receivable from Transatlantic Reinsurance Company (“Transatlantic”);
$100.0 million, or 15.7%, was receivable from Continental Insurance Company
(“Continental”); $87.6 million, or 13.8% was receivable from C.V. Starr
(Bermuda) (“C.V. Starr”); $53.4 million, or 8.4%, was receivable from Munich
Reinsurance Company (“Munich Re”); $49.1 million, or 7.7%, was receivable from
Berkley Insurance Company (“Berkley”) and $32.9 million, or 5.2%, was receivable
from ACE Property and Casualty Insurance Company (“ACE”). The
receivable from Continental Insurance Company is collateralized by a funds held
arrangement under which we have retained the premiums earned by the
retrocessionaire to secure obligations of the retrocessionaire, recorded them as
a liability, credited interest on the balances at a stated contractual rate and
reduced the liability account as payments become due. As of December
31, 2009, such funds had reduced the Company’s net exposure to Continental to
$13.4 million. In addition, the Company has $31.9 million receivable
from Founders Insurance Company Limited (“Founders”), for which the Company has
recorded a full provision for uncollectibility. No other
retrocessionaire accounted for more than 5% of the Company’s receivables.
Although management carefully selects its reinsurers, the Company is subject to
credit risk with respect to its reinsurance because the ceding of risk to
reinsurers does not relieve the Company of its liability to insureds or ceding
companies. See ITEM 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Financial
Condition”.
Claims.
Reinsurance
claims are managed by the Company’s professional claims staff whose
responsibilities include reviewing initial loss reports and coverage issues,
monitoring claims handling activities of ceding companies, establishing and
adjusting proper case reserves and approving payment of claims. In
addition to claims assessment, processing and payment, the claims staff
selectively conducts comprehensive claim audits of both specific claims and
overall claim procedures at the offices of selected ceding
companies. Insurance claims, except those relating to Mt. McKinley’s
business, are generally handled by third party claims service providers who have
limited authority and are subject to oversight by the Company’s professional
claims staff.
The
Company intensively manages its asbestos and environmental (“A&E”) exposures
through dedicated, centrally managed claim staffs for Mt. McKinley and Everest
Re. Both are staffed with experienced claim and legal professionals who
specialize in the handling of such exposures. These units actively
manage each individual insured and reinsured account, responding to claim
developments with evaluations of the involved exposures and adjustment of
reserves as appropriate. Specific or general claim developments that
may have material implications for the Company are regularly communicated to
senior management, actuarial, legal and financial areas. Senior
management and claim management personnel meet at least quarterly to review the
Company’s overall reserve positions and make changes, if
appropriate. The Company continually reviews its internal processing,
communications and analytics, seeking to enhance the management of its A&E
exposures, in particular in regard to changes in asbestos claims and
litigation.
Reserves
for Unpaid Property and Casualty Losses and LAE.
Significant
periods of time may elapse between the occurrence of an insured loss, the
reporting of the loss to the insurer and the reinsurer and the payment of that
loss by the insurer and subsequent payments to the insurer by the
reinsurer. To recognize liabilities for unpaid losses and LAE,
insurers and reinsurers establish reserves, which are balance sheet liabilities
representing estimates of future amounts needed to pay reported and unreported
claims and related expenses for losses that have already
occurred. Actual losses and LAE paid may deviate, perhaps
substantially, from such reserves. To the extent reserves prove to be
insufficient to cover actual losses and LAE after taking into account available
reinsurance coverage, the Company would have to recognize such reserve
shortfalls and incur a charge to earnings, which could be material in the period
such recognition takes place. See ITEM 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations — Loss and LAE
Reserves”.
As part
of the reserving process, insurers and reinsurers evaluate historical data and
trends and make judgments as to the impact of various factors such as
legislative and judicial developments that may affect future claim amounts,
changes in social and political attitudes that may increase loss exposures and
inflationary and general economic trends. While the reserving process is
difficult and subjective for insurance companies, the inherent uncertainties of
estimating such reserves are even greater for the reinsurer, due primarily to
the longer time between the date of an occurrence and the reporting of any
attendant claims to the reinsurer, the diversity of development patterns among
different types of reinsurance treaties or facultative contracts, the necessary
reliance on the ceding companies for information regarding reported claims and
differing reserving practices among ceding companies. In addition, trends that
have affected development of liabilities in the past may not necessarily occur
or affect liability development in the same manner or to the same degree in the
future. As a result, actual losses and LAE may deviate, perhaps
substantially, from estimates of reserves reflected in the Company's
consolidated financial statements.
Like many
other property and casualty insurance and reinsurance companies, the Company has
experienced adverse loss development for prior accident years, which has led to
increases in losses and LAE reserves and corresponding charges to income in the
periods in which the adjustments were made. There can be no assurance
that adverse development from prior years will not continue in the future or
that such adverse development will not have a material adverse effect on net
income.
Changes
in Historical Reserves.
The
following table shows changes in historical loss reserves for the Company for
1999 and subsequent years. The table is presented on a GAAP basis
except that the Company’s loss reserves for its Canadian branch operations are
presented in Canadian dollars, the impact of which is not
material. The top line of the table shows the estimated reserves for
unpaid losses and LAE recorded at each year end date. The upper
(paid) portion of the table presents the related cumulative amounts paid through
each subsequent year end. The lower (liability re-estimated) portion
shows the re-estimated amount of the original reserves as of the end of each
succeeding year. The reserve estimates have been revised as more
information became known about the actual claims for which the reserves were
carried. The cumulative (deficiency)/redundancy line represents the
cumulative change in estimates since the initial reserve was
established. It is equal to the initial reserve less the latest
estimate of the ultimate liability.
Since the
Company has international operations, some of its loss reserves are established
in foreign currencies and converted to U.S. dollars for financial
reporting. Changes in conversion rates from period to period impact
the U.S. dollar value of carried reserves and correspondingly, the cumulative
deficiency line of the table. However, unlike other reserve
development that affects net income, the impact of currency translation is a
component of other comprehensive income. To differentiate these two
reserve development components, the translation impacts for each calendar year
are reflected in the table of Effects on Pre-tax Income Resulting from Reserve
Re-estimates.
Each
amount other than the original reserves in the top half of the table below
includes the effects of all changes in amounts for prior periods. For example,
if a loss settled in 2002 for $100,000, was first reserved in 1999 at $60,000
and remained unchanged until settlement, the $40,000 deficiency (actual loss
minus original estimate) would affect the cumulative deficiency for each of the
years in 1999 through 2001. Conditions and trends that have affected
development of the ultimate liability in the past are not indicative of future
developments. Accordingly, it is not appropriate to extrapolate
future redundancies or deficiencies based on this table.
|
Ten
Year GAAP Loss Development Table Presented Net of Reinsurance with
Supplemental Gross Data (1) (2) (3)
|
||||||||||||||||||||||||||||||||||||||||||||
|
(Dollars
in millions)
|
1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | |||||||||||||||||||||||||||||||||
|
Net
Reserves for unpaid
|
||||||||||||||||||||||||||||||||||||||||||||
|
loss
and LAE
|
$ | 2,977.4 | $ | 3,364.9 | $ | 3,472.5 | $ | 3,895.8 | $ | 5,158.4 | $ | 6,766.9 | $ | 8,175.4 | $ | 8,078.9 | $ | 8,324.7 | $ | 8,214.7 | $ | 8,315.9 | ||||||||||||||||||||||
|
Paid
(cumulative) as of:
|
||||||||||||||||||||||||||||||||||||||||||||
|
One
year later
|
673.4 | 718.1 | 892.7 | 902.6 | 1,141.7 | 1,553.1 | 2,116.9 | 1,915.4 | 1,816.4 | 1,997.2 | ||||||||||||||||||||||||||||||||||
|
Two
years later
|
1,159.1 | 1,264.2 | 1,517.9 | 1,641.7 | 1,932.6 | 2,412.3 | 3,447.8 | 3,192.8 | 3,182.2 | |||||||||||||||||||||||||||||||||||
|
Three
years later
|
1,548.3 | 1,637.5 | 2,033.5 | 2,176.8 | 2,404.6 | 3,181.4 | 4,485.2 | 4,246.3 | ||||||||||||||||||||||||||||||||||||
|
Four
years later
|
1,737.8 | 2,076.0 | 2,413.1 | 2,485.2 | 2,928.5 | 3,854.8 | 5,306.5 | |||||||||||||||||||||||||||||||||||||
|
Five
years later
|
1,787.2 | 2,286.4 | 2,612.3 | 2,836.6 | 3,451.1 | 4,459.5 | ||||||||||||||||||||||||||||||||||||||
|
Six
years later
|
1,856.0 | 2,482.5 | 2,867.9 | 3,241.5 | 3,948.3 | |||||||||||||||||||||||||||||||||||||||
|
Seven
years later
|
2,017.5 | 2,705.9 | 3,172.2 | 3,670.5 | ||||||||||||||||||||||||||||||||||||||||
|
Eight
years later
|
2,141.0 | 2,998.5 | 3,537.5 | |||||||||||||||||||||||||||||||||||||||||
|
Nine
years later
|
2,260.8 | 3,211.5 | ||||||||||||||||||||||||||||||||||||||||||
|
Ten
years later
|
2,478.8 | |||||||||||||||||||||||||||||||||||||||||||
|
Net
Liability re-estimated
|
||||||||||||||||||||||||||||||||||||||||||||
|
as
of:
|
||||||||||||||||||||||||||||||||||||||||||||
|
One
year later
|
2,985.2 | 3,364.9 | 3,612.6 | 4,152.7 | 5,470.4 | 6,633.7 | 8,419.8 | 8,356.7 | 8,112.9 | 8,461.9 | ||||||||||||||||||||||||||||||||||
|
Two
years later
|
2,977.2 | 3,484.6 | 3,901.8 | 4,635.0 | 5,407.1 | 6,740.5 | 8,609.2 | 8,186.3 | 8,307.6 | |||||||||||||||||||||||||||||||||||
|
Three
years later
|
3,070.5 | 3,688.6 | 4,400.0 | 4,705.3 | 5,654.5 | 7,059.9 | 8,489.7 | 8,398.7 | ||||||||||||||||||||||||||||||||||||
|
Four
years later
|
3,202.6 | 4,210.3 | 4,516.7 | 5,062.5 | 6,073.1 | 6,996.7 | 8,683.8 | |||||||||||||||||||||||||||||||||||||
|
Five
years later
|
3,430.3 | 4,216.5 | 4,814.0 | 5,507.1 | 6,093.4 | 7,162.2 | ||||||||||||||||||||||||||||||||||||||
|
Six
years later
|
3,338.1 | 4,379.3 | 5,240.2 | 5,544.9 | 6,227.0 | |||||||||||||||||||||||||||||||||||||||
|
Seven
years later
|
3,356.7 | 4,773.4 | 5,257.5 | 5,623.8 | ||||||||||||||||||||||||||||||||||||||||
|
Eight
years later
|
3,597.6 | 4,768.1 | 5,295.4 | |||||||||||||||||||||||||||||||||||||||||
|
Nine
years later
|
3,575.7 | 4,761.4 | ||||||||||||||||||||||||||||||||||||||||||
|
Ten
years later
|
3,595.0 | |||||||||||||||||||||||||||||||||||||||||||
|
Cumulative
(deficiency)/redundancy
|
$ | (617.6 | ) | $ | (1,396.5 | ) | $ | (1,822.9 | ) | $ | (1,728.1 | ) | $ | (1,068.6 | ) | $ | (395.3 | ) | $ | (508.4 | ) | $ | (319.8 | ) | $ | 17.1 | $ | (247.2 | ) | |||||||||||||||
|
Gross
liability-
|
||||||||||||||||||||||||||||||||||||||||||||
|
end
of year
|
$ | 3,705.2 | $ | 3,853.7 | $ | 4,356.0 | $ | 4,985.8 | $ | 6,424.7 | $ | 7,886.6 | $ | 9,175.1 | $ | 8,888.0 | $ | 9,032.2 | $ | 8,905.9 | $ | 8,957.4 | ||||||||||||||||||||||
|
Reinsurance
receivable
|
727.8 | 488.8 | 883.5 | 1,090.0 | 1,266.3 | 1,119.6 | 999.7 | 809.1 | 707.4 | 691.2 | 641.5 | |||||||||||||||||||||||||||||||||
|
Net
liability-end of year
|
$ | 2,977.4 | $ | 3,364.9 | $ | 3,472.5 | $ | 3,895.8 | $ | 5,158.4 | $ | 6,766.9 | $ | 8,175.4 | $ | 8,078.9 | $ | 8,324.7 | $ | 8,214.7 | $ | 8,315.9 | ||||||||||||||||||||||
|
Gross
re-estimated liability
|
||||||||||||||||||||||||||||||||||||||||||||
|
at
December 31, 2009
|
$ | 4,971.8 | $ | 6,041.5 | $ | 6,743.7 | $ | 7,046.9 | $ | 7,630.1 | $ | 8,346.5 | $ | 9,764.1 | $ | 9,199.6 | $ | 8,984.3 | $ | 9,138.1 | ||||||||||||||||||||||||
|
Re-estimated
receivable
|
||||||||||||||||||||||||||||||||||||||||||||
|
at
December 31, 2009
|
1,376.8 | 1,280.0 | 1,448.3 | 1,423.1 | 1,403.1 | 1,184.3 | 1,080.3 | 800.9 | 676.7 | 676.3 | ||||||||||||||||||||||||||||||||||
|
Net
re-estimated liability
|
||||||||||||||||||||||||||||||||||||||||||||
|
at
December 31, 2009
|
$ | 3,595.0 | $ | 4,761.4 | $ | 5,295.4 | $ | 5,623.8 | $ | 6,227.0 | $ | 7,162.2 | $ | 8,683.8 | $ | 8,398.7 | $ | 8,307.6 | $ | 8,461.9 | ||||||||||||||||||||||||
|
Gross
cumulative
|
||||||||||||||||||||||||||||||||||||||||||||
|
(deficiency)/redundancy
|
$ | (1,266.6 | ) | $ | (2,187.8 | ) | $ | (2,387.7 | ) | $ | (2,061.2 | ) | $ | (1,205.4 | ) | $ | (459.9 | ) | $ | (589.0 | ) | $ | (311.6 | ) | $ | 47.9 | $ | (232.3 | ) | |||||||||||||||
|
(1) Includes
$480.9 million relating to Mt. McKinley at December 31, 2000, principally
reflecting $491.1 million of Mt. McKinley reserves at the acquisition
date.
|
||||||||||||||||||||||||||||||||||||||||||||
|
(2) The
Canadian Branch reserves are reflected in Canadian
dollars.
|
||||||||||||||||||||||||||||||||||||||||||||
|
(3) Some
amounts may not reconcile due to rounding.
|
||||||||||||||||||||||||||||||||||||||||||||
Every
year in the above table, except 2007, reflects a cumulative deficiency, also
referred to as adverse development, with the largest indicated cumulative
deficiency in 2001. Three classes of business were the principal
contributors to those deficiencies: 1) the run-off of asbestos claims for both
direct and reinsurance business has significantly contributed to the cumulative
deficiencies for all years presented except 2007; 2) professional liability
reinsurance, general casualty reinsurance and workers’ compensation insurance
contributed to the deficiencies for years 1999 through 2003; and 3) property
catastrophe adverse development contributed to the deficiency for
2005.
In 2007,
the Company completed a detailed study of its asbestos experience and its
cedants’ asbestos exposures and also considered industry trends. The
Company’s Claims Department undertook a contract by contract analysis of its
direct business and projected those findings to its assumed reinsurance
business. The Company’s actuaries utilized nine methodologies to
project its potential ultimate liabilities including projections based on
internal data and assessments, extrapolations of non-public and publicly
available data for the Company’s cedants and benchmarking against industry data
and experience. As a result of the study, the Company increased its
gross reinsurance asbestos reserves by $250.0 million and increased its gross
direct asbestos reserves by $75.0 million. These reserve increases,
as well as adverse development on asbestos in prior years, have a significant
impact on the cumulative deficiencies. Subsequent to the study, the
Company’s loss activity has been in line with expectations per the reserves
established at December 31, 2007. The Company’s A&E reserves
represent management’s best estimate of the ultimate liability, however, there
can be no assurance that ultimate loss payments will not exceed such reserves,
perhaps by a significant amount. No additional gross reserve
strengthening was made in 2009 and 2008.
In the
professional liability reinsurance class, the late 1990s and early 2000s saw a
proliferation of claims relating to bankruptcies and other corporate, financial
and/or management improprieties. This resulted in an increase in the
frequency and severity of claims under the professional liability policies
reinsured by the Company. In the general casualty area, the Company
has experienced claim frequency and severity greater than expected in the
Company’s pricing and reserving assumptions, particularly for accident years
1999 and 2000.
In the
workers’ compensation insurance class, the majority of which was written in
California, the Company has experienced adverse development primarily for
accident years 2001 and 2002 due to higher than expected claim frequency and
severity. As a result of significant growth in this book of business
in a challenging business environment, the Company’s writings in this class were
subject to more relative variability than in some of its established and/or
stable lines of business. Although cumulative results through 2009
continue to be quite profitable for this book of business, there was some
deterioration in claim frequency and severity related to accident years 2001 and
2002.
The
adverse development on the 2008 outstanding reserves was primarily attributable
to foreign exchange rate movements resulting in an increase in the U.S. dollar
reserves. In addition, the Company experienced adverse development on
liability exposures for sub-prime for accident years 2006-2008 and contractors
liability exposures for accident years 2001-2005. The contractor
liability exposures are currently in run-off. The Company also
experienced adverse development on property lines but was offset by favorable
development on other casualty lines.
The
Company’s loss and LAE reserves represent management’s best estimate of the
ultimate liability. While there can be no assurance that these
reserves will not need to be increased in the future, management believes that
the Company’s existing reserves and reserving methodologies reduce the
likelihood that any such increases would have a material adverse effect on the
Company’s financial condition, results of operations or cash
flows. These statements regarding the Company’s loss reserves are
forward looking statements within the meaning of the U.S. federal securities
laws and are intended to be covered by the safe harbor provisions contained
therein. See ITEM 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Safe Harbor
Disclosure”.
The
following table is derived from the Ten Year GAAP Loss Development Table above
and summarizes the effect of reserve re-estimates, net of reinsurance, on
calendar year operations by accident year for the same ten year period ended
December 31, 2009. Each column represents the amount of net reserve
re-estimates made in the indicated calendar year and shows the accident years to
which the re-estimates are applicable. The amounts in the total
accident year column on the far right represent the cumulative reserve
re-estimates for the indicated accident years.
Since the
Company has operations in many countries, part of the Company’s loss and LAE
reserves are in foreign currencies and translated to U.S. dollars for each
reporting period. Fluctuations in the exchange rates for the
currencies, period over period, affect the U.S. dollar amount of outstanding
reserves. The translation adjustment line at the bottom of the table
eliminates the impact of the exchange fluctuations from the reserve
re-estimates.
|
Effects
on Pre-tax Income Resulting from Reserves Re-estimates
|
|||||||||||||||||||||||||||||||||||||||||||
|
Cumulative
|
|||||||||||||||||||||||||||||||||||||||||||
|
Re-estimates
|
|||||||||||||||||||||||||||||||||||||||||||
|
for
Each
|
|||||||||||||||||||||||||||||||||||||||||||
|
(Dollars
in millions)
|
2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 |
Accident
Year
|
||||||||||||||||||||||||||||||||
|
Accident
Years
|
|||||||||||||||||||||||||||||||||||||||||||
|
1999
and prior
|
$ | (7.8 | ) | $ | 8.0 | $ | (93.3 | ) | $ | (132.2 | ) | $ | (227.6 | ) | $ | 92.2 | $ | (18.6 | ) | $ | (240.9 | ) | $ | 21.9 | $ | (19.3 | ) | $ | (617.6 | ) | |||||||||||||
|
2000
|
(7.9 | ) | (26.4 | ) | (71.9 | ) | (294.1 | ) | (98.3 | ) | (144.2 | ) | (153.2 | ) | (16.6 | ) | 25.9 | (786.7 | ) | ||||||||||||||||||||||||
|
2001
|
(20.4 | ) | (85.2 | ) | 23.5 | (110.6 | ) | (134.4 | ) | (32.1 | ) | (22.7 | ) | (44.5 | ) | (426.3 | ) | ||||||||||||||||||||||||||
|
2002
|
32.3 | 15.9 | 46.4 | (60.0 | ) | (18.4 | ) | (20.5 | ) | (41.1 | ) | (45.3 | ) | ||||||||||||||||||||||||||||||
|
2003
|
170.3 | 133.7 | 109.7 | 26.0 | 17.5 | (54.5 | ) | 402.7 | |||||||||||||||||||||||||||||||||||
|
2004
|
69.9 | 140.7 | 99.2 | 83.5 | (32.1 | ) | 361.1 | ||||||||||||||||||||||||||||||||||||
|
2005
|
(137.6 | ) | 130.1 | 56.3 | (28.6 | ) | 20.2 | ||||||||||||||||||||||||||||||||||||
|
2006
|
(88.4 | ) | 50.9 | (18.3 | ) | (55.9 | ) | ||||||||||||||||||||||||||||||||||||
|
2007
|
41.5 | 17.6 | 59.1 | ||||||||||||||||||||||||||||||||||||||||
|
2008
|
(52.5 | ) | (52.5 | ) | |||||||||||||||||||||||||||||||||||||||
|
Total
calendar year effect
|
$ | (7.8 | ) | $ | - | $ | (140.1 | ) | $ | (256.9 | ) | $ | (312.0 | ) | $ | 133.3 | $ | (244.4 | ) | $ | (277.8 | ) | $ | 211.8 | $ | (247.2 | ) | ||||||||||||||||
|
Canada
(1)
|
4.9 | 7.4 | (1.4 | ) | (26.6 | ) | (16.3 | ) | (6.6 | ) | (0.5 | ) | (49.6 | ) | 63.7 | (39.4 | ) | ||||||||||||||||||||||||||
|
Translation
adjustment
|
(26.9 | ) | (17.7 | ) | 38.4 | 86.7 | 78.9 | (100.3 | ) | 109.3 | 120.9 | (310.4 | ) | 157.8 | |||||||||||||||||||||||||||||
|
Re-estimate
of net reserve after translation adjustment
|
$ | (29.8 | ) | $ | (10.3 | ) | $ | (103.1 | ) | $ | (196.8 | ) | $ | (249.4 | ) | $ | 26.4 | $ | (135.6 | ) | $ | (206.5 | ) | $ | (34.9 | ) | $ | (128.8 | ) | ||||||||||||||
|
(Some
amounts may not reconcile due to rounding.)
|
|||||||||||||||||||||||||||||||||||||||||||
|
(1)
|
This
adjustment converts Canadian dollars to U.S.
dollars.
|
The
reserve development by accident year reflected in the above table was generally
the result of the same factors described above that caused the deficiencies
shown in the Ten Year GAAP Loss Development Table. The unfavorable development
experienced in the 1999 and prior and 2000 accident years relates principally to
the previously discussed asbestos development. Other business areas
contributing to adverse development were casualty reinsurance, including
professional liability classes and workers’ compensation insurance, where, in
retrospect, the Company’s initial estimates of losses were underestimated
principally as the result of unanticipated variability in the underlying
exposures. The favorable development for accident years 2003 through
2004 relates primarily to favorable experience with respect to property
reinsurance business. In addition, casualty reinsurance has reflected
favorable development for accident years 2003 to 2006. The
unfavorable development experienced in the 2006 accident year was principally
due to reserve increases for one credit insurance program, which is in
run-off.
The
Company’s loss reserving methodologies continuously monitor the emergence of
loss and loss development trends, seeking, on a timely basis, to both adjust
reserves for the impact of trend shifts and to factor the impact of such shifts
into the Company’s underwriting and pricing on a prospective basis.
The
following table presents a reconciliation of beginning and ending reserve
balances for the periods indicated on a GAAP basis:
|
Years
Ended December 31,
|
||||||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Gross
reserves at beginning of period
|
$ | 8,840.7 | $ | 9,040.6 | $ | 8,840.1 | ||||||
|
Incurred
related to:
|
||||||||||||
|
Current
year
|
2,245.3 | 2,404.1 | 2,341.6 | |||||||||
|
Prior
years
|
128.8 | 34.9 | 206.5 | |||||||||
|
Total
incurred losses
|
2,374.1 | 2,439.0 | 2,548.1 | |||||||||
|
Paid
related to:
|
||||||||||||
|
Current
year
|
388.2 | 495.1 | 452.2 | |||||||||
|
Prior
years
|
1,997.2 | 1,816.4 | 1,915.4 | |||||||||
|
Total
paid losses
|
2,385.4 | 2,311.5 | 2,367.6 | |||||||||
|
Foreign
exchange/translation adjustment
|
157.8 | (310.4 | ) | 120.9 | ||||||||
|
Change
in reinsurance receivables on unpaid losses and LAE
|
(49.2 | ) | (17.0 | ) | (100.9 | ) | ||||||
|
Gross
reserves at end of period
|
$ | 8,937.9 | $ | 8,840.7 | $ | 9,040.6 | ||||||
|
(Some
amounts may not reconcile due to rounding.)
|
||||||||||||
Prior
years’ reserves increased by $128.8 million, $34.9 million and $206.5 million
for the years ended December 31, 2009, 2008 and 2007,
respectively. The increase for 2009 was attributable to a $59.0
million increase in the insurance business, primarily contractors’ liability
exposure, and $69.8 million in the reinsurance business, in both domestic and
international, as a result of increased reserves on sub-prime exposures and
property, partially offset by favorable development in casualty.
The
increase for 2008 was primarily due to $85.3 million of reserve development for
a run-off auto loan credit insurance program and a $32.6 million adverse
arbitration decision; partially offset by net favorable development on the
remainder of the Company’s reserves.
The 2007
prior years’ reserves increase of $206.5 million was attributable to $387.5
million of adverse development on A&E reserves, partially offset by
favorable development on attritional (non-catastrophe, non-A&E)
reserves. The increase in the A&E reserves was primarily due to
an extensive in-house study conducted by the Company’s actuarial and claim
units.
Reserves
for Asbestos and Environmental Losses and LAE.
At
December 31, 2009, the Company’s gross reserves for A&E claims represented
7.1% of its total reserves. The Company’s A&E liabilities stem
from Mt. McKinley’s direct insurance business and Everest Re’s assumed
reinsurance business. There are significant uncertainties in
estimating the amount of the Company’s potential losses from A&E claims and
ultimate values cannot be estimated using traditional reserving
techniques. See ITEM 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Asbestos and Environmental
Exposures” and Item 8, “Financial Statements and Supplementary Data” - Note 3 of
Notes to Consolidated Financial Statements.
Mt.
McKinley’s book of direct A&E exposed insurance policies is relatively small
and homogenous. It arises from a limited period, from 1978 to
1984. The book was principally excess liability, thereby limiting
exposure analysis to a limited number of policies and forms. As a
result of this focused structure, the Company believes that it is able to
comprehensively analyze its exposures, allowing it to identify, analyze and
actively monitor those claims which have unusual exposure, including policies on
which it may be exposed to pay expenses in addition to policy limits or on which
non-products coverage may be contended.
The
Company endeavors to actively engage with every insured account posing
significant potential asbestos exposure to Mt. McKinley. Such
engagement can take the form of pursuing a final settlement, negotiation,
litigation, or the monitoring of claim activity under Settlement in Place
(“SIP”) agreements. SIP agreements generally condition an insurer’s
payment upon the actual claim experience of the insured and may have annual
payment caps or other measures to control the insurer’s payments. The
Company’s Mt. McKinley operation is currently managing eight SIP agreements,
three of which were executed prior to the acquisition of Mt. McKinley in
2000. The Company’s preference with respect to coverage settlements
is to execute settlements that call for a fixed schedule of payments, because
such settlements eliminate future uncertainty.
The
Company has significantly enhanced its classification of insureds by exposure
characteristics over time, as well as its analysis by insured for those it
considers to be more exposed or active. Those insureds identified as
relatively less exposed or active are subject to less rigorous, but still active
management, with an emphasis on monitoring those characteristics, which may
indicate an increasing exposure or levels of activity. The Company
continually focuses on further enhancement of the detailed estimation processes
used to evaluate potential exposure of policyholders, including those that may
not have reported significant A&E losses.
Everest
Re’s book of assumed A&E reinsurance is relatively concentrated within a
limited number of contracts and for a limited period, from 1977 to
1984. Because the book of business is relatively concentrated and the
Company has been managing the A&E exposures for many years, its claim staff
is familiar with the ceding companies that have generated most of these
liabilities in the past and which are therefore most likely to generate future
liabilities. The Company’s claim staff has developed familiarity both
with the nature of the business written by its ceding companies and the claims
handling and reserving practices of those companies. This level of
familiarity enhances the quality of the Company’s analysis of its exposure
through those companies. As a result, the Company believes that it
can identify those claims on which it has unusual exposure, such as non-products
asbestos claims, for concentrated attention. However, in setting
reserves for its reinsurance liabilities, the Company relies on claims data
supplied, both formally and informally by its ceding companies and
brokers. This furnished information is not always timely or accurate
and can impact the accuracy and timeliness of the Company’s ultimate loss
projections.
The
following table summarizes the composition of the Company’s total reserves for
A&E losses, gross and net of reinsurance, for the periods
indicated:
|
Years
Ended December 31,
|
||||||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Case
reserves reported by ceding companies
|
$ | 141.5 | $ | 161.0 | $ | 144.5 | ||||||
|
Additional
case reserves established by the Company (assumed
reinsurance)
(1)
|
150.2 | 139.7 | 147.1 | |||||||||
|
Case
reserves established by the Company (direct insurance)
|
63.0 | 133.8 | 148.2 | |||||||||
|
Incurred
but not reported reserves
|
283.9 | 352.3 | 483.0 | |||||||||
|
Gross
reserves
|
638.7 | 786.8 | 922.8 | |||||||||
|
Reinsurance
receivable
|
(25.6 | ) | (37.7 | ) | (95.4 | ) | ||||||
|
Net
reserves
|
$ | 613.1 | $ | 749.1 | $ | 827.4 | ||||||
|
______________
|
||||||||||||
|
(1)
|
Additional
reserves are case specific reserves established by the Company in excess
of those reported by the ceding company, based on the Company’s assessment
of the covered loss.
|
(Some
amounts may not reconcile due to rounding.)
Additional
losses, including those relating to latent injuries and other exposures, which
are as yet unrecognized, the type or magnitude of which cannot be foreseen by
either the Company or the industry, may emerge in the future. Such future
emergence could have material adverse effects on the Company’s future financial
condition, results of operations and cash flows.
Future
Policy Benefit Reserves.
The
Company wrote a limited amount of life and annuity reinsurance in its Bermuda
segment. Future policy benefit liabilities for annuities are reported
at the accumulated fund balance of these contracts. Reserves for
those liabilities include mortality provisions with respect to life and annuity
claims, both reported and unreported. Actual experience in a
particular period may be worse than assumed experience and, consequently,
may adversely affect the Company’s operating results for that period. See ITEM
8, “Financial Statements and Supplementary Data” - Note 1F of Notes to
Consolidated Financial Statements.
Activity
in the reserve for future policy benefits is summarized for the periods
indicated:
|
At
December 31,
|
||||||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Balance
at beginning of year
|
$ | 66.2 | $ | 78.4 | $ | 101.0 | ||||||
|
Liabilities
assumed
|
0.3 | 0.2 | 0.2 | |||||||||
|
Adjustments
to reserves
|
8.8 | 6.5 | 2.4 | |||||||||
|
Benefits
paid in the current year
|
(10.8 | ) | (19.0 | ) | (25.2 | ) | ||||||
|
Balance
at end of year
|
$ | 64.5 | $ | 66.2 | $ | 78.4 | ||||||
|
(Some
amounts may not reconcile due to rounding.)
|
||||||||||||
Investments.
The board
of directors of each of the Company’s operating subsidiaries is responsible for
establishing investment policy and guidelines and, together with senior
management, for overseeing their execution.
The
Company’s principal investment objectives are to ensure funds are available to
meet its insurance and reinsurance obligations and to maximize after-tax
investment income while maintaining a high quality diversified investment
portfolio. Considering these objectives, the Company views its
investment portfolio as having two components; 1) the investments needed to
satisfy outstanding liabilities and 2) investments funded by the Company’s
shareholders’ equity.
For
outstanding liabilities, the Company invests in taxable and tax-preferenced
fixed income securities with an average credit quality of Aa2, as rated by
Moody’s Investors Service, Inc. (“Moody’s”). The Company’s mix of
taxable and tax-preferenced investments is adjusted periodically, consistent
with the Company’s current and projected operating results, market conditions
and the Company’s tax position. This fixed maturity portfolio is
externally managed by an independent, professional investment manager using
portfolio guidelines approved by the Company.
Over the
past few years, the Company has allocated a portion of its investment portfolio
to include: 1) publicly traded equity securities and 2) private equity limited
partnership investments. The objective of this portfolio
diversification is to enhance the risk-adjusted total return of the investment
portfolio by allocating a prudent portion of the portfolio to higher return
asset classes. The Company limits its allocation to these asset
classes because of 1) the potential for volatility in their values and 2) the
impact of these investments on regulatory and rating agency capital adequacy
models. The Company adjusts its allocation to these investments based
upon market conditions. As a result of the dramatic slowdown in the
global economy and the liquidity crisis affecting the financial markets, the
Company significantly reduced its exposure to public equities during the fourth
quarter of 2008 and has increased its exposure to equities in the latter part of
2009 as financial markets improved. At December 31, 2009, the
market or fair value of investments in equity and limited partnership securities
approximated 15% of shareholders’ equity, a decrease of 1 point from 16% of
shareholders’ equity at December 31, 2008.
The
duration of an investment is based on the maturity of the security but also
reflects the payment of interest and the possibility of early
prepayments. The Company’s fixed income investment guidelines include
a general duration guideline. This investment duration guideline is
established and periodically revised by management, which considers economic and
business factors, as well as the Company’s average duration of potential
liabilities, which, at December 31, 2009, is estimated at approximately 4.1
years, based on the estimated payouts of underwriting liabilities using standard
duration calculations.
The
duration of the fixed income portfolio at December 31, 2009 was 3.8 years, down
slightly from 4.1 years at prior year end. The Company shortened the
duration of its portfolio in response to very low available yields, particularly
on securities with longer maturities. As a result, the Company has
focused on purchasing high quality, shorter duration investments and investments
with floating rate yields. These investments will be less subject to
decline in market value if interest rates rise in the future, as forecasted by
most investment analysts.
For each
currency in which the Company has established substantial loss and LAE reserves,
the Company seeks to maintain invested assets denominated in such currency in an
amount approximately equal to the estimated
liabilities. Approximately 27% of the Company’s consolidated reserves
for losses and LAE and unearned premiums represent amounts payable in foreign
currencies.
The
turmoil in the financial markets and decline in the global economy resulted in a
reduction in the Company’s net investment income to $547.8 million in 2009
compared with $565.9 million and $682.4 million for the years ended December 31,
2008 and 2007, respectively. The decline was primarily attributable
to lower yields available for new money and short-term
investments. In addition, the limited partnership investments
continue to have losses, although not as large in 2009 as compared to
2008.
In
addition to the reductions in investment income, the economic and financial
market declines resulted in net realized capital losses for 2009 of $2.3
million. These net realized capital losses resulted from $29.3
million of losses from sales of securities, and $13.2 million from
other-than-temporary impairments, partially offset by $40.2 million from fair
value adjustments. The Company recognized realized losses of $695.8
million for the year ended December 31, 2008. These net realized
capital losses resulted from the fair value re-measurement adjustments and
realized losses on the Company’s equity securities portfolio of $508.2 million,
other-than-temporary impairment losses from the Company’s fixed maturity
portfolio of $176.5 million and realized capital losses and fair value
re-measurement adjustments from fixed maturity investments of $11.1
million. In contrast, the Company recognized realized gains of $86.3
million for the year ended December 31, 2007.
The
Company’s cash and invested assets totaled $14.9 billion at December 31, 2009,
which consisted of 93.7% fixed maturities and cash, of which 97.6% were
investment grade; 2.7% equity securities and 3.6% other invested assets. The
average maturity of fixed maturity securities was 6.9 years at December 31,
2009, and their overall duration was 3.8 years.
As of
December 31, 2009, the Company did not have any direct investments in commercial
real estate or direct commercial mortgages or any material holdings of
derivative investments (other than equity index put option contracts as
discussed in ITEM 8, “Financial Statements and Supplementary Data” - Note 4 of
Notes to Consolidated Financial Statements) or securities of issuers that are
experiencing cash flow difficulty to an extent that the Company’s management
believes could threaten the issuer’s ability to meet debt service payments,
except where other-than-temporary impairments have been recognized.
The
Company’s investment portfolio includes structured commercial mortgage-backed
securities (“CMBS”) with a book value of $475.2 million and a market value of
$442.6 million. CMBS securities comprising more than 80% of the
December 31, 2009 market value, are rated AAA by Standard & Poor’s Financial
Services LLC (“Standard & Poor’s”). Furthermore, securities
comprising more than 97% of the market value are rated investment grade by
Standard & Poor’s.
At
December 31, 2009, the Company’s fixed maturity portfolio included $5.9 million
in book value of asset-backed securities with sub-prime mortgage loan exposure
and the market value of these investments was $4.6 million. Sub-prime
mortgage loans generally represent loans made to borrowers with limited or
blemished credit records.
The
following table reflects investment results for the Company for the periods
indicated:
|
December
31,
|
||||||||||||||||||||
|
Pre-tax
|
Pre-tax
|
|||||||||||||||||||
|
Pre-tax
|
Pre-tax
|
Realized
Net
|
Unrealized
Net
|
|||||||||||||||||
|
Average
|
Investment
|
Effective
|
Capital
(Losses)
|
Capital
Gains
|
||||||||||||||||
|
(Dollars
in millions)
|
Investments
(1)
|
Income
(2)
|
Yield
|
Gains
(3)
|
(Losses)
|
|||||||||||||||
|
2009
|
$ | 14,472.8 | $ | 547.8 | 3.79 | % | $ | (2.3 | ) | $ | 636.7 | |||||||||
|
2008
|
14,411.8 | 565.9 | 3.93 | % | (695.8 | ) | (310.4 | ) | ||||||||||||
|
2007
|
14,491.7 | 682.4 | 4.71 | % | 86.3 | 21.4 | ||||||||||||||
|
2006
|
13,446.5 | 629.4 | 4.68 | % | 35.1 | 131.7 | ||||||||||||||
|
2005
|
12,067.8 | 522.8 | 4.33 | % | 90.3 | (77.8 | ) | |||||||||||||
|
(1) Average
of the beginning and ending carrying values of investments and cash, less
net funds held, future policy benefit reserve, and
|
||||||||||||||||||||
|
non-interest
bearing cash. Bonds, common stock and redeemable and non-redeemable
preferred stocks are carried at market value.
|
||||||||||||||||||||
|
Common
stock which are actively managed are carried at fair
value.
|
||||||||||||||||||||
|
(2) After
investment expenses, excluding realized net capital gains
(losses).
|
||||||||||||||||||||
|
(3) Included
in 2009, 2008 and 2007, are fair value re-measurements of $40.2 million,
($276.0) million and $76.6 million, respectively.
|
||||||||||||||||||||
|
(Some
amounts may not reconcile due to rounding.)
|
||||||||||||||||||||
The
amortized cost, market value and gross unrealized appreciation and depreciation
of available for sale, fixed maturity and equity security investments, carried
at market value, are as follows for the periods indicated:
|
At
December 31, 2009
|
||||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|||||||||||||
|
(Dollars
in millions)
|
Cost
|
Appreciation
|
Depreciation
|
Value
|
||||||||||||
|
Fixed
maturity securities - available for sale
|
||||||||||||||||
|
U.S.
Treasury securities and obligations of
|
||||||||||||||||
|
U.S.
government agencies and corporations
|
$ | 339.8 | $ | 17.9 | $ | (3.5 | ) | $ | 354.2 | |||||||
|
Obligations
of U.S. states and political subdivisions
|
3,694.3 | 183.8 | (24.3 | ) | 3,853.8 | |||||||||||
|
Corporate
securities
|
2,421.9 | 107.8 | (33.0 | ) | 2,496.7 | |||||||||||
|
Asset-backed
securities
|
310.4 | 7.7 | (4.4 | ) | 313.7 | |||||||||||
|
Mortgage-backed
securities
|
||||||||||||||||
|
Commercial
|
475.2 | 5.2 | (37.8 | ) | 442.6 | |||||||||||
|
Agency
residential
|
2,310.8 | 61.5 | (3.9 | ) | 2,368.4 | |||||||||||
|
Non-agency
residential
|
177.5 | 0.2 | (17.1 | ) | 160.6 | |||||||||||
|
Foreign
government securities
|
1,507.4 | 100.3 | (16.9 | ) | 1,590.8 | |||||||||||
|
Foreign
corporate securities
|
1,377.4 | 72.4 | (24.7 | ) | 1,425.1 | |||||||||||
|
Total
fixed maturity securities
|
$ | 12,614.7 | $ | 556.8 | $ | (165.6 | ) | $ | 13,005.9 | |||||||
|
Equity
securities
|
$ | 14.0 | $ | 2.3 | $ | - | $ | 16.3 | ||||||||
|
(Some
amounts may not reconcile due to rounding.)
|
||||||||||||||||
|
At
December 31, 2008
|
||||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|||||||||||||
|
(Dollars
in millions)
|
Cost
|
Appreciation
|
Depreciation
|
Value
|
||||||||||||
|
Fixed
maturity securities - available for sale
|
||||||||||||||||
|
U.S.
Treasury securities and obligations of
|
||||||||||||||||
|
U.S.
government agencies and corporations
|
$ | 354.2 | $ | 55.2 | $ | (0.7 | ) | $ | 408.7 | |||||||
|
Obligations
of U.S. states and political subdivisions
|
3,846.7 | 113.8 | (164.9 | ) | 3,795.6 | |||||||||||
|
Corporate
securities
|
2,409.0 | 60.9 | (198.5 | ) | 2,271.4 | |||||||||||
|
Asset-backed
securities
|
281.8 | 0.7 | (29.2 | ) | 253.2 | |||||||||||
|
Mortgage-backed
securities
|
||||||||||||||||
|
Commercial
|
440.8 | - | (90.1 | ) | 350.7 | |||||||||||
|
Agency
residential
|
1,334.1 | 26.3 | (0.5 | ) | 1,359.9 | |||||||||||
|
Non-agency
residential
|
213.5 | - | (45.7 | ) | 167.8 | |||||||||||
|
Foreign
government securities
|
1,087.7 | 118.0 | (23.6 | ) | 1,182.1 | |||||||||||
|
Foreign
corporate securities
|
964.3 | 56.8 | (51.0 | ) | 970.0 | |||||||||||
|
Total
fixed maturity securities
|
$ | 10,932.1 | $ | 431.7 | $ | (604.2 | ) | $ | 10,759.6 | |||||||
|
Equity
securities
|
$ | 14.9 | $ | 2.0 | $ | - | $ | 16.9 | ||||||||
|
(Some
amounts may not reconcile due to rounding.)
|
||||||||||||||||
The
following table represents the credit quality distribution of the Company’s
fixed maturities for the periods indicated:
|
At
December 31,
|
||||||||||||||||||
|
2009
|
2008
|
|||||||||||||||||
|
(Dollars
in millions)
|
Market | Percent of | Market | Percent of | ||||||||||||||
|
Rating
Agency Credit Quality Distribution:
|
Value | Total | Value | Total | ||||||||||||||
|
AAA
|
$ | 5,715.0 | 43.9 | % | $ | 4,554.9 | 42.3 | % | ||||||||||
|
AA
|
2,736.6 | 21.0 | % | 2,591.8 | 24.1 | % | ||||||||||||
| A | 2,807.0 | 21.6 | % | 2,259.3 | 21.0 | % | ||||||||||||
|
BBB
|
1,450.0 | 11.2 | % | 1,201.7 | 11.2 | % | ||||||||||||
|
BB
|
103.2 | 0.8 | % | 85.2 | 0.8 | % | ||||||||||||
| B | 88.0 | 0.7 | % | 43.2 | 0.4 | % | ||||||||||||
|
Other
|
106.2 | 0.8 | % | 23.5 | 0.2 | % | ||||||||||||
|
Total
|
$ | 13,005.9 | 100.0 | % | $ | 10,759.6 | 100.0 | % | ||||||||||
|
(Some
amounts may not reconcile due to rounding.)
|
||||||||||||||||||
The
following table summarizes fixed maturities by contractual maturity for the
periods indicated:
|
At
December 31,
|
||||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
Market
|
Percent
of
|
Market
|
Percent
of
|
|||||||||||||
|
(Dollars
in millions)
|
Value
|
Total
|
Value
|
Total
|
||||||||||||
|
Fixed
maturity securities - available for sale
|
||||||||||||||||
|
Due
in one year or less
|
$ | 652.5 | 5.0 | % | $ | 606.4 | 5.6 | % | ||||||||
|
Due
after one year through five years
|
3,151.8 | 24.2 | % | 2,484.7 | 23.1 | % | ||||||||||
|
Due
after five years through ten years
|
2,634.7 | 20.3 | % | 2,271.2 | 21.1 | % | ||||||||||
|
Due
after ten years
|
3,281.6 | 25.2 | % | 3,265.6 | 30.4 | % | ||||||||||
|
Asset-backed
securities
|
313.7 | 2.4 | % | 253.2 | 2.4 | % | ||||||||||
|
Mortgage-backed
securities
|
2,971.6 | 22.8 | % | 1,878.4 | 17.5 | % | ||||||||||
|
Total
fixed maturity securities
|
$ | 13,005.9 | 100.0 | % | $ | 10,759.6 | 100.0 | % | ||||||||
|
(Some
amounts may not reconcile due to rounding.)
|
||||||||||||||||
Financial
Strength Ratings.
The
following table shows the current financial strength ratings of the Company’s
operating subsidiaries as reported by A.M. Best, Standard & Poor’s and
Moody’s. These ratings are based upon factors of concern to
policyholders and should not be considered an indication of the degree or lack
of risk involved in a direct or indirect equity investment in an insurance or
reinsurance company.
All of
the below-mentioned ratings are continually monitored and revised, if necessary,
by each of the rating agencies. The ratings presented in the
following table were in effect as of February 28, 2010.
The
Company believes that its ratings, in general, are important to its operations
because they provide the Company’s customers and investors with an independent
assessment of the Company’s underlying financial strength using a scale that
provides for relative comparisons. Strong financial ratings are
particularly important for reinsurance companies. Ceding companies
must rely on their reinsurers to pay covered losses well into the
future. As a result, a highly rated reinsurer is generally
preferred.
|
Operating
Subsidiary:
|
A.M.
Best
|
Standard
& Poor's
|
Moody's
|
|||
|
Everest
Re
|
A+
(Superior)
|
A+
(Strong)
|
Aa3
(Excellent)
|
|||
|
Bermuda
Re
|
A+
(Superior)
|
A+
(Strong)
|
Aa3
(Excellent)
|
|||
|
Ireland
Re
|
A+
(Superior)
|
A+
(Strong)
|
Not
Rated
|
|||
|
Everest
International
|
A+
(Superior)
|
Not
Rated
|
Not
Rated
|
|||
|
Everest
National
|
A+
(Superior)
|
A+
(Strong)
|
Not
Rated
|
|||
|
Everest
Indemnity
|
A+
(Superior)
|
Not
Rated
|
Not
Rated
|
|||
|
Everest
Security
|
A+
(Superior)
|
Not
Rated
|
Not
Rated
|
|||
|
Mt.
McKinley
|
Not
Rated
|
Not
Rated
|
Not
Rated
|
A.M. Best
states that the “A+” (“Superior”) rating is assigned to those companies which,
in its opinion, have a superior ability to meet their ongoing obligations to
policyholders based on A.M. Best’s comprehensive quantitative and qualitative
evaluation of a company’s balance sheet strength, operating performance and
business profile. Standard & Poor’s states that the “A+” rating
is assigned to those insurance companies which, in its opinion, have strong
financial security characteristics with respect to their ability to pay under
its insurance policies and contracts in accordance with their
terms. Moody’s states that insurance companies rated “Aa” offer
excellent financial security. Together with the Aaa rated companies,
Aa rated companies constitute what are generally known as high-grade companies,
with Aa rated companies generally having somewhat larger long-term
risks.
Subsidiaries
other than Everest Re and Bermuda Re may not be rated by some or any rating
agencies because such ratings are not considered essential by the individual
subsidiary’s customers or because of the limited nature of the subsidiary’s
operations. In particular, Mt. McKinley is not rated because it is in
run-off status.
The
following table shows the debt ratings by A.M. Best, Standard & Poor’s and
Moody’s of the Holdings’ senior notes due March 15, 2010 and October 15, 2014
and long term notes due May 1, 2067 and Everest Re Capital Trust II’s (“Capital
Trust II”) trust preferred securities due March 29, 2034, all of which are
considered investment grade. Debt ratings are the rating agencies’
current assessment of the credit worthiness of an obligor with respect to a
specific obligation.
|
A.M.
Best
|
Standard
& Poor's
|
Moody's
|
||||||
|
Senior
Notes
|
a-
|
(Strong)
|
BBB+
|
(Adequate)
|
A3
|
(Good)
|
||
|
Trust
Preferred Securities
|
bbb+
|
(Adequate)
|
BBB-
|
(Adequate)
|
Baa1
|
(Adequate)
|
||
|
Long
Term Notes
|
bbb
|
(Adequate)
|
BBB-
|
(Adequate)
|
Baa1
|
(Adequate)
|
||
A debt
rating of “a-” is assigned by A.M. Best where the issuer, in A.M. Best’s
opinion, has a strong ability to meet the terms of the
obligation. A.M. Best assigns a debt rating in the “bbb” range where
the issuer, in A.M. Best’s opinion, has adequate ability to meet the terms of
the obligation. Standard & Poor’s assigns a debt
rating in
the “BBB” range to issuers that exhibit adequate protection parameters although
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation. According to Moody’s, a debt rating of “A3” is assigned
to issues that are considered upper-medium-grade obligations and subject to low
credit risk. Obligations rated “Baa1” are subject to moderate credit
risk and are considered medium-grade and as such may possess certain speculative
characteristics.
Competition.
The
worldwide reinsurance and insurance businesses are highly competitive, as well
as cyclical by product and market. As such, financial results tend to
fluctuate with periods of constrained availability, high rates and strong
profits followed by periods of abundant capacity, low rates and constrained
profitability. Competition in the types of reinsurance and insurance
business that we underwrite is based on many factors, including the perceived
overall financial strength of the reinsurer or insurer, ratings of the reinsurer
or insurer by A.M. Best and/or Standard & Poor’s, underwriting expertise,
the jurisdictions where the reinsurer or insurer is licensed or otherwise
authorized, capacity and coverages offered, premiums charged, other terms and
conditions of the reinsurance and insurance business offered, services offered,
speed of claims payment and reputation and experience in lines written.
Furthermore, the market impact from these competitive factors related to
reinsurance and insurance is generally not consistent across lines of business,
domestic and international geographical areas and distribution
channels.
We
compete in the U.S., Bermuda and international reinsurance and insurance markets
with numerous global competitors. Our competitors include independent
reinsurance and insurance companies, subsidiaries or affiliates of established
worldwide insurance companies, reinsurance departments of certain insurance
companies and domestic and international underwriting operations, including
underwriting syndicates at Lloyd’s. Some of these competitors have
greater financial resources than we do and have established long term and
continuing business relationships, which can be a significant competitive
advantage. In addition, the lack of strong barriers to entry into the
reinsurance business and the potential for securitization of reinsurance and
insurance risks through capital markets provide additional sources of potential
reinsurance and insurance capacity and competition.
Starting
in the latter part of 2007, throughout 2008 and into 2009, there has been a
significant slowdown in the global economy, which has negatively impacted the
financial resources of the industry. Excessive availability and use
of credit, particularly by individuals, led to increased defaults on sub-prime
mortgages in the U.S. and elsewhere, falling values for houses and many
commodities and contracting consumer spending. The significant
increase in default rates negatively impacted the value of asset-backed
securities held by both foreign and domestic institutions. The
defaults have led to a corresponding increase in foreclosures, which have driven
down housing values, resulting in additional losses on asset-backed
securities. During the third and fourth quarters of 2008, credit
markets deteriorated dramatically, evidenced by widening credit spreads and
dramatically reduced availability of credit. Many financial
institutions, including some insurance entities, experienced liquidity crises
due to immediate demands for funds for withdrawals or collateral, combined with
falling asset values and their inability to sell assets to meet the increased
demands. As a result, several financial institutions have failed or
been acquired at distressed prices, while others have received loans from the
U.S. government to continue operations. The liquidity crisis
significantly increased the spreads on fixed maturity securities and, at the
same time, had a dramatic and negative impact on the stock markets around the
world. The combination of losses on securities from failed or
impaired companies combined with the decline in values of fixed maturity and
equity securities resulted in significant declines in the capital bases of most
insurance and reinsurance companies. While there was significant
improvement in the financial markets during 2009, it is too early to predict the
timing and extent of impact the capital deterioration and subsequent partial
recovery will have on insurance and reinsurance market conditions.
Worldwide
insurance and reinsurance market conditions continued to be very
competitive. Generally, there was ample insurance and reinsurance
capacity relative to demand. We noted, however, that in many markets
and lines during 2009, the rates of decline have slowed, pricing in some
segments was relatively flat and there was upward movement in some others,
particularly property catastrophe coverage. Competition and its
effect on rates, terms and conditions vary widely by market and coverage yet
continues to be most prevalent in the U.S. casualty insurance and reinsurance
markets. The U.S. insurance markets in which we participate were
extremely competitive as well, particularly in the workers’ compensation, public
entity and contractor sectors.
The
reinsurance industry has experienced a period of falling rates and volume,
particularly in the casualty lines of business. Profit opportunities
have become generally less available over time; however, the unfavorable trends
appear to have abated somewhat. We are now seeing smaller rate
declines, pockets of stability and some increases in some markets and for some
coverages. Both the primary insurers and reinsurers incurred very
significant investment and catastrophe losses during 2008 resulting in capital
depletion and increased rating agency scrutiny. Conversely in 2009,
the financial markets partially rebounded and catastrophe losses were low,
resulting in improved industry capital levels. It is too early to
gauge the market impacts from these capital accumulations.
Rates in
the international markets have generally been more adequate than in the U.S.,
and we have seen some increases, particularly for catastrophe exposed
business. We have grown our business in the Middle East, Latin
America and Asia. We are expanding our international reach with the
opening of a new office in Brazil to capitalize on the recently expanded
opportunity for professional reinsurers in that market and on the economic
growth expected for Brazil in the future.
The 2009
renewal rates, particularly for property catastrophe and retrocessional covers
and in international markets, were generally firmer compared to a year
ago.
Overall,
we believe that current marketplace conditions offer profit opportunities for us
given our strong ratings, distribution system, reputation and
expertise. We continue to employ our strategy of targeting business
that offers the greatest profit potential, while maintaining balance and
diversification in our overall portfolio.
Employees.
As of
February 1, 2010, the Company employed 863 persons. Management
believes that employee relations are good. None of the Company’s
employees are subject to collective bargaining agreements, and the Company is
not aware of any current efforts to implement such agreements.
Regulatory
Matters.
The
Company and its insurance subsidiaries are subject to regulation under the
insurance statutes of the various jurisdictions in which they conduct business,
including essentially all states of the U.S., Canada, Singapore, Brazil
(licensed in 2008), the United Kingdom, Ireland and Bermuda. These
regulations vary from jurisdiction to jurisdiction and are generally designed to
protect ceding insurance companies and policyholders by regulating the Company’s
conduct of business, financial integrity and ability to meet its
obligations. Many of these regulations require reporting of
information designed to allow insurance regulators to closely monitor the
Company’s performance.
Insurance Holding Company
Regulation.
Under applicable U.S. laws and regulations, no
person, corporation or other entity may acquire a controlling interest in the
Company, unless such person, corporation or entity has obtained the prior
approval for such acquisition from the insurance commissioners of Delaware and
the other states in which the Company’s insurance subsidiaries are domiciled or
deemed domiciled, currently California and Georgia. Under these laws,
“control” is presumed when any person acquires, directly or indirectly, 10% or
more of the voting securities of an insurance company. To obtain the
approval of any change in control, the proposed acquirer must file an
application with the relevant insurance commissioner disclosing, among other
things, the background of the acquirer and that of its directors and officers,
the acquirer’s financial condition and its proposed changes in the management
and operations of the insurance company. U.S. state regulators also
require prior notice or regulatory approval of material inter-affiliate
transactions within the holding company structure.
The
Insurance Companies Act of Canada requires prior approval by the Minister of
Finance of anyone acquiring a significant interest in an insurance company
authorized to do business in Canada. In addition, the Company is
subject to regulation by the insurance regulators of other states and foreign
jurisdictions in which it is authorized to do business. Certain of
these states and foreign jurisdictions impose regulations regulating the ability
of any person to acquire control of an insurance company authorized to do
business in that jurisdiction without appropriate regulatory approval similar to
those described above.
Dividends.
Under Bermuda law,
Group is prohibited from declaring or paying a dividend if such payment would
reduce the realizable value of its assets to an amount less than the aggregate
value of its liabilities and its issued share capital and share premium
(additional paid-in capital) accounts. Group’s ability to pay
dividends and its operating expenses is partially dependent upon dividends from
its subsidiaries. The payment of dividends by insurance subsidiaries
is limited under Bermuda law as well as the laws of the various U.S. states in
which Group’s insurance and reinsurance subsidiaries are domiciled or deemed
domiciled. The limitations are generally based upon net income and
compliance with applicable policyholders’ surplus or minimum solvency and
liquidity requirements as determined in accordance with the relevant statutory
accounting practices. Under Irish corporate and regulatory law,
Holdings Ireland and its subsidiaries are limited as to the dividends they can
pay based on retained earnings and net income (loss) and/or capital and minimum
solvency requirements. As Holdings has outstanding debt obligations,
it is dependent upon dividends and other permissible payments from its operating
subsidiaries to enable it to meet its debt and operating expense obligations and
to pay dividends.
Under
Bermuda law, Bermuda Re and Everest International are unable to declare or make
payment of a dividend if they fail to meet their minimum solvency margin or
minimum liquidity ratio. As long term insurers, Bermuda Re and
Everest International are also unable to declare or pay a dividend to anyone who
is not a policyholder unless, after payment of the dividend, the value of the
assets in their long term business fund, as certified by their approved actuary,
exceeds their liabilities for long term business by at least the $250,000
minimum solvency margin. Prior approval of the Bermuda Monetary
Authority is required if Bermuda Re’s or Everest International’s dividend
payments would reduce their prior year end total statutory capital by 15.0% or
more. At December 31, 2009, Bermuda Re and Everest International
exceeded their solvency and liquidity requirements by a significant
margin.
The
payment of dividends to Holdings by Everest Re is subject to limitations imposed
by Delaware law. Generally, Everest Re may only pay dividends out of
its statutory earned surplus, which was $2,789.7 million at December 31, 2009,
and only after it has given 10 days prior notice to the Delaware Insurance
Commissioner. During this 10-day period, the Commissioner may, by
order, limit or disallow the payment of ordinary dividends if the Commissioner
finds the insurer to be presently or potentially in financial
distress. Further, the maximum amount of dividends that may be paid
without the prior approval of the Delaware Insurance Commissioner in any twelve
month period is the greater of (1) 10% of the insurer’s statutory surplus as of
the end of the prior calendar year or (2) the insurer’s statutory net income,
not including realized capital gains, for the prior calendar
year. Accordingly, the maximum amount that will be available for the
payment of dividends by Everest Re in 2010 without triggering the requirement
for prior approval of regulatory authorities in connection with a dividend is
$456.6 million.
Insurance Regulation.
Neither
Bermuda Re nor Everest
International is admitted to do business in any jurisdiction in the
U.S. Both conduct their insurance business from their offices in
Bermuda, and in the case of Bermuda Re, its branch in the UK. In
Bermuda, Bermuda Re and Everest International are regulated by the Insurance Act
1978 (as amended) and related regulations (the “Act”). The Act
establishes solvency and liquidity standards and auditing and reporting
requirements and subjects Bermuda Re and Everest International to the
supervision, investigation and intervention powers of the Bermuda Monetary
Authority. Under the Act, Bermuda Re and Everest International, as
Class 4 insurers, are each required to maintain a principal office in Bermuda,
to maintain a minimum of $100 million in statutory capital and surplus, to have
an independent auditor approved by the Bermuda Monetary Authority conduct an
annual audit and report on their respective statutory and U.S. GAAP financial
statements and filings and to have an appointed loss reserve specialist (also
approved by the Bermuda Monetary Authority) review and report on their
respective loss reserves annually.
Bermuda
Re and Everest International are also registered under the Act as long term
insurers and are thereby authorized to write life and annuity
business. As long term insurers, Bermuda Re and Everest International
are required to maintain $250,000 in statutory capital separate from their Class
4 minimum statutory capital and surplus, to maintain long term business funds,
to separately account for this business and to have an approved actuary prepare
a certificate concerning their long term business assets and liabilities to be
filed annually. Bermuda Re’s operations in the United Kingdom and
worldwide are subject to regulation by the Financial Services Authority (the
“FSA”). The FSA imposes solvency, capital adequacy, audit, financial
reporting and other regulatory requirements on insurers transacting business in
the United Kingdom. Bermuda Re presently meets or exceeds all of the
FSA’s solvency and capital requirements.
U.S.
domestic property and casualty insurers, including reinsurers, are subject to
regulation by their state of domicile and by those states in which they are
licensed. The regulation of reinsurers is typically focused on
financial condition, investments, management and operation. The rates
and policy terms of reinsurance agreements are generally not subject to direct
regulation by any governmental authority.
The
operations of Everest Re’s foreign branch offices in Canada and Singapore are
subject to regulation by the insurance regulatory officials of those
jurisdictions. Management believes that the Company is in compliance
with applicable laws and regulations pertaining to its business and
operations.
Everest
Indemnity, Everest National, Everest Security and Mt. McKinley are subject to
regulations similar to the U.S. regulations applicable to Everest
Re. In addition, Everest National and Everest Security must comply
with substantial regulatory requirements in each state where they conduct
business. These additional requirements include, but are not limited
to, rate and policy form requirements, requirements with regard to licensing,
agent appointments, participation in residual markets and claim handling
procedures. These regulations are primarily designed for the
protection of policyholders.
Licenses.
Everest Re is a
licensed property and casualty insurer and/or reinsurer in all states, the
District of Columbia and Puerto Rico. In New Hampshire and Puerto
Rico, Everest Re is licensed for reinsurance only. Such licensing
enables U.S. domestic ceding company clients to take credit for uncollateralized
reinsurance receivables from Everest Re in their statutory financial
statements.
Everest
Re is licensed as a property and casualty reinsurer in Canada. It is also
authorized to conduct reinsurance business in Singapore and
Brazil. Everest Re can also write reinsurance in other foreign
countries. Because some jurisdictions require a reinsurer to register in order
to be an acceptable market for local insurers, Everest Re is registered as a
foreign insurer and/or reinsurer in the following countries: Argentina, Bolivia,
Chile, Colombia, Ecuador, El Salvador, Guatemala, Honduras, Mexico, Peru,
Venezuela and the Philippines. Everest National is licensed in 47 states and the
District of Columbia. Everest Indemnity is licensed in Delaware and
is eligible to write insurance on a surplus lines basis in 49 states, the
District of Columbia and Puerto Rico. Everest Security is licensed in
Georgia and Alabama. Mt. McKinley is licensed in Delaware and
California. Bermuda Re and Everest International are registered as
Class 4 and long term insurers in Bermuda. Bermuda Re is also an
authorized reinsurer in the U.K.
Periodic
Examinations.
Everest Re, Everest
National, Everest Indemnity, Everest Security and Mt. McKinley are subject to
periodic financial examination (usually every three years) of their affairs by
the insurance departments of the states in which they are licensed, authorized
or accredited. Everest Re’s, Everest National’s, Everest Security’s,
Everest Indemnity’s and Mt. McKinley’s last examination reports were as of
December 31, 2006. None of these reports contained any material
findings or recommendations. In addition, U.S. insurance companies
are subject to examinations by the various state insurance departments where
they are licensed concerning compliance with applicable conduct of business
regulations.
NAIC Risk-Based Capital
Requirements.
The U.S. National Association of Insurance
Commissioners (“NAIC”) has developed a formula to measure the amount of capital
appropriate for a property and casualty insurance company to support its overall
business operations in light of its size and risk profile. The major
categories of a company’s risk profile are its asset risk, credit risk, and
underwriting risk. The standards are an effort by the NAIC to prevent
insolvencies, to ward off other financial difficulties of insurance companies
and to establish uniform regulatory standards among state insurance
departments.
Under the
approved formula, a company’s statutory surplus is compared to its risk based
capital (“RBC”). If this ratio is above a minimum threshold, no
action is necessary. Below this threshold are four distinct action
levels at which an insurer’s domiciliary state regulator can intervene with
increasing degrees of authority over an insurer as the ratio of surplus to RBC
decreases. The mildest intervention requires an insurer to submit a
plan of appropriate corrective actions. The most severe action
requires an insurer to be rehabilitated or liquidated.
Based on
their financial positions at December 31, 2009, Everest Re, Everest National,
Everest Indemnity and Everest Security significantly exceed the minimum
thresholds. Since Mt. McKinley ceased writing new and renewal
insurance in 1985, its domiciliary regulator, the Delaware Insurance
Commissioner, has exempted Mt. McKinley from complying with RBC
requirements.
Various
proposals to change the RBC formula arise from time to time. The
Company is unable to predict whether any such proposal will be adopted, the form
in which any such proposals would be adopted or the effect, if any, the adoption
of any such proposal or change in the RBC calculations would have on the
Company.
Tax
Matters.
The
following summary of the taxation of the Company is based on current
law. There can be no assurance that legislative, judicial, or
administrative changes will not be enacted that materially affect this
summary.
Bermuda.
Under Bermuda law, no
income, withholding or capital gains taxes are imposed upon Group and its
Bermuda subsidiaries. Group and its Bermuda subsidiaries have
received an undertaking from the Minister of Finance in Bermuda that, in the
event of any taxes being imposed, Group and its Bermuda subsidiaries will be
exempt from taxation in Bermuda until March 2016. Non-Bermuda
branches of Bermuda subsidiaries are subject to local taxes in the jurisdictions
in which they operate.
United
States.
Group’s U.S. subsidiaries conduct business in and are
subject to taxation in the U.S. Non-U.S. branches of U.S.
subsidiaries are subject to local taxation in the jurisdictions in which they
operate. Should the U.S. subsidiaries distribute current or
accumulated earnings and profits in the form of dividends or otherwise, the
Company would be subject to withholding taxes. Group and its Bermuda
subsidiaries believe that they have operated and will continue to operate their
businesses in a manner that will not cause them to generate income treated as
effectively connected with the conduct of a trade or business within the
U.S. On this basis, Group does not expect that it and its Bermuda
subsidiaries will be required to pay U.S. corporate income taxes other than
withholding taxes on certain investment income and premium excise
taxes. If Group or its Bermuda subsidiaries were to become subject to
U.S. income tax, there could be a material adverse effect on the Company’s
financial condition, results of operations and cash flows.
United
Kingdom.
Bermuda Re’s UK branch conducts business in the UK
and is subject to taxation in the UK. Bermuda Re believes that it has
operated and will continue to operate its Bermuda operation in a manner which
will not cause them to be subject to UK taxation. If Bermuda Re’s
Bermuda operations were to become subject to UK income tax, there could be a
material adverse impact on the Company’s financial condition, results of
operations and cash flow.
Ireland.
Holdings
Ireland and Ireland Re conduct business in Ireland and are subject to taxation
in Ireland.
Available
Information.
The
Company’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current
Reports on Form 8-K, proxy statements and amendments to those reports are
available free of charge through the Company’s internet website at
http://www.everestre.com as soon as reasonably practicable after such reports
are electronically filed with the Securities and Exchange Commission (the
“SEC”).
In
addition to the other information provided in this report, the following risk
factors should be considered when evaluating an investment in our
securities. If the circumstances contemplated by the individual risk
factors materialize, our business, financial condition and results of operations
could be materially and adversely affected and the trading price of our common
shares could decline significantly.
RISKS
RELATING TO OUR BUSINESS
Fluctuations
in the financial markets could result in investment losses.
Prolonged
and severe disruptions in the public debt and equity markets, such as occurred
during 2008, could result in significant realized and unrealized losses in our
investment portfolio. For the year ended December 31, 2008, we incurred $695.8
million of realized and $310.4 million of unrealized investment
losses. Although financial markets significantly improved during
2009, they could deteriorate in the future and again result in substantial
realized and unrealized losses, which could have a material adverse impact on
our results of operations, equity, business and insurer financial strength and
debt ratings.
Our
results could be adversely affected by catastrophic events.
We are
exposed to unpredictable catastrophic events, including weather-related and
other natural catastrophes, as well as acts of terrorism. Any
material reduction in our operating results caused by the occurrence of one or
more catastrophes could inhibit our ability to pay dividends or to meet our
interest and principal payment obligations. We define a catastrophe
as an event that causes a loss on property exposures before reinsurance of at
least $5.0 million, before corporate level reinsurance and taxes. By
way of illustration, during the past five calendar years, pre-tax catastrophe
losses, net of contract specific reinsurance but before cessions under corporate
reinsurance programs, were as follows:
|
Calendar
year:
|
Pre-tax
catastrophe losses
|
|||
|
(Dollars
in millions)
|
||||
|
2009
|
$ | 67.4 | ||
|
2008
|
364.3 | |||
|
2007
|
160.0 | |||
|
2006
|
287.9 | |||
|
2005
|
1,485.7 | |||
Our
losses from future catastrophic events could exceed our
projections.
We use
projections of possible losses from future catastrophic events of varying types
and magnitudes as a strategic underwriting tool. We use these loss
projections to estimate our potential catastrophe losses in certain geographic
areas and decide on the purchase of retrocessional coverage or other actions to
limit the extent of potential losses in a given geographic
area. These loss projections are approximations, reliant on a mix of
quantitative and qualitative processes, and actual losses may exceed the
projections by a material amount, resulting in a material adverse effect on our
financial condition and results of operations.
If
our loss reserves are inadequate to meet our actual losses, net income would be
reduced or we could incur a loss.
We are
required to maintain reserves to cover our estimated ultimate liability of
losses and LAE for both reported and unreported claims
incurred. These reserves are only estimates of what we believe the
settlement and administration of claims will cost based on facts and
circumstances known to us. In setting reserves for our reinsurance
liabilities, we rely on claim data supplied by our ceding companies and brokers
and we employ actuarial and statistical projections. The information
received from our ceding companies is not always timely or accurate, which can
contribute to inaccuracies in our loss projections. Because of the
uncertainties that surround our estimates of loss and LAE reserves, we cannot be
certain that ultimate loss and LAE payments will not exceed our
estimates. If our reserves are deficient, we would be required to
increase loss reserves in the period in which such deficiencies are identified
which would cause a charge to our earnings and a reduction of
capital. By way of illustration, during the past five calendar years,
the reserve re-estimation process resulted in a decrease to our pre-tax net
income in four of the years:
|
Calendar
year:
|
Effect
on pre-tax net income
|
||||
|
(Dollars
in millions)
|
|||||
|
2009
|
$ | 128.8 |
decrease
|
||
|
2008
|
34.9 |
decrease
|
|||
|
2007
|
206.5 |
decrease
|
|||
|
2006
|
135.6 |
decrease
|
|||
|
2005
|
26.4 |
increase
|
|||
See ITEM
1, “Business - Changes in Historical Reserves,” which provides a more
detailed chart showing the effect of reserve re-estimates on calendar year
operating results for the past ten years.
The
difficulty in estimating our reserves is significantly more challenging as it
relates to reserving for potential A&E liabilities. At year-end 2009, 7.1%
of our gross reserves were comprised of A&E reserves. A&E liabilities
are especially hard to estimate for many reasons, including the long delays
between exposure and manifestation of any bodily injury or property damage,
difficulty in identifying the source of the asbestos or environmental
contamination, long reporting delays and difficulty in properly allocating
liability for the asbestos or environmental damage. Legal tactics and
judicial and legislative developments affecting the scope of insurers’
liability, which can be difficult to predict, also contribute to uncertainties
in estimating reserves for A&E liabilities.
The
failure to accurately assess underwriting risk and establish adequate premium
rates could reduce our net income or result in a net loss.
Our
success depends on our ability to accurately assess the risks associated with
the businesses on which the risk is retained. If we fail to
accurately assess the risks we retain, we may fail to establish adequate premium
rates to cover our losses and LAE. This could reduce our net income
and even result in a net loss.
In
addition, losses may arise from events or exposures that are not anticipated
when the coverage is priced. An example of an unanticipated event is
the terrorist attacks on September 11, 2001. Neither the magnitude of
loss on a single line of business nor the combined impact on several lines of
business from an act of terrorism on such a large scale was contemplated when we
priced our coverages. In addition to unanticipated events, we also
face the unanticipated expansion of our exposures, particularly in long-tail
liability lines. An example of this is the expansion over time of the
scope of insurers’ legal liability within the mass tort arena, particularly for
A&E exposures discussed above.
Decreases
in pricing for property and casualty reinsurance and insurance could reduce our
net income.
The
worldwide reinsurance and insurance businesses are highly competitive, as well
as cyclical by product and market. These cycles, as well as other
factors that influence aggregate supply and demand for property and casualty
insurance and reinsurance products, are outside of our control. The
supply of (re)insurance is driven by prevailing prices and levels of capacity
that may fluctuate in response to a number of factors including large
catastrophic losses and investment returns being realized in the insurance
industry. Demand for (re)insurance is influenced by underwriting results of
insurers and insureds, including catastrophe losses, and prevailing general
economic conditions. If any of these factors were to result in a decline in the
demand for (re)insurance or an overall increase in (re)insurance capacity, our
net income could decrease.
If
rating agencies downgrade the ratings of our insurance subsidiaries, future
prospects for growth and profitability could be significantly and adversely
affected.
Our
active insurance company subsidiaries currently hold financial strength ratings
assigned by third-party rating agencies which assess and rate the claims paying
ability and financial strength of insurers and reinsurers. Our active
subsidiaries carry an “A+” (“Superior”) rating from A.M. Best. Everest Re,
Bermuda Re and Everest National hold an “A+” (“Strong”) rating from Standard
& Poor’s. Everest Re and Bermuda Re hold an “Aa3” (“Excellent”) rating from
Moody’s. Financial strength ratings are used by client companies and
agents and brokers that place the business as an important means of assessing
the financial strength and quality of reinsurers. A downgrade or withdrawal of
any of these ratings might adversely affect our ability to market our insurance
products and could have a material and adverse effect on future prospects for
growth and profitability.
On March
13, 2009, Everest Re’s, Bermuda Re’s and Everest National’s ratings were
downgraded one level by Standard & Poor’s to “A+”. However, we cannot assure
that a further downgrade will not occur in the future if we do not continue to
meet the evolving criteria expected of our current rating. In that regard,
several of the rating agencies are in the process of modifying their approaches
to evaluating catastrophic risk relative to their capital and risk management
requirements. Therefore, we cannot predict the outcome of this reassessment or
its potential impact upon our ratings.
Consistent
with market practice, much of our treaty reinsurance business allows the ceding
company to terminate the contract or seek collateralization of our obligations
in the event of a rating downgrade below a certain threshold. The
termination provision would generally be triggered if a rating fell below A.M.
Best’s A- rating level, which is three levels below Everest Re’s current rating
of A+. To a lesser extent, Everest Re also has modest exposure to reinsurance
contracts that contain provisions for obligatory funding of outstanding
liabilities in the event of a rating agency downgrade. That provision
would also generally be triggered if Everest Re’s rating fell below A.M. Best’s
A- rating level.
The
failure of our insureds, intermediaries and reinsurers to satisfy their
obligations to us could reduce our net income.
In
accordance with industry practice, we have uncollateralized receivables from
insureds, agents and brokers and/or rely on agents and brokers to process our
payments. We may not be able to collect amounts due from insureds,
agents and brokers, resulting in a reduction to net income.
We are
also subject to the credit risk of reinsurers in connection with retrocessional
arrangements because the transfer of risk to a reinsurer does not relieve us of
our liability to the insured. In addition, reinsurers may be unwilling to pay us
even though they are able to do so. The failure of one or more of our
reinsurers to honor their obligations to us in a timely fashion would impact our
cash flow and reduce our net income and could cause us to incur a significant
loss.
If
we are unable or choose not to purchase reinsurance and transfer risk to
reinsurers, our net income could be reduced or we could incur a net loss in the
event of unusual loss experience.
We are
generally less reliant on the purchase of reinsurance than many of our
competitors, in part because of our strategic emphasis on underwriting
discipline and management of the cycles inherent in our business. We
try to separate our risk taking process from our risk mitigation process in
order to avoid developing too great a reliance on reinsurance. The
bulk of these cessions are to captives of program managers, who thereby share in
the results of the business they produce. We otherwise generally
purchase reinsurance from other third parties only when we expect a net
benefit. The percentage of business that we reinsure to other than
captives of program managers, may vary considerably from year to year, depending
on our view of the relationship between cost and expected benefit for the
contract period.
|
2009
|
2008
|
2007
|
2006
|
2005
|
|
|
Percentage
of ceded written premiums to gross written premiums
|
4.8%
|
4.7%
|
3.9%
|
3.1%
|
3.3%
|
Changes
in the availability and cost of reinsurance, which are subject to market
conditions that are outside of our control, have reduced to some extent our
ability to use reinsurance to tailor the risks we assume on a contract or
program basis or to mitigate or balance exposures across our reinsurance
operations. Because we have purchased minimal reinsurance in recent
years, our net income could be reduced following a large unreinsured event or
adverse overall claims experience.
Our
industry is highly competitive and we may not be able to compete successfully in
the future.
Our
industry is highly competitive and subject to pricing cycles that can be
pronounced. We compete globally in the U.S., Bermuda and international
reinsurance and insurance markets with numerous competitors. Our
competitors include independent reinsurance and insurance companies,
subsidiaries or affiliates of established worldwide insurance companies,
reinsurance departments of certain insurance companies and domestic and
international underwriting operations, including underwriting syndicates at
Lloyd’s.
According
to Standard & Poor’s, we rank among the top ten global reinsurance groups,
in which two-thirds of the market share is concentrated. The
worldwide premium available to the reinsurance market, for both life and
non-life business, was estimated to be $160 billion in 2008 according to data
compiled by the International Association of Insurance
Supervisors. The top twenty groups in our industry represent close to
80% of these revenues. The leaders in this market are Munich
Reinsurance Company, Swiss Re, Berkshire Hathaway Inc., Hannover
Ruckversicherung AG, SCOR and syndicates at Lloyd’s. Some of these
competitors have greater financial resources than we do 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.
We
are dependent on our key personnel.
Our
success has been, and will continue to be, dependent on the ability to retain
the services of existing key executive officers and to attract and retain
additional qualified personnel in the future. The loss of the
services of any key executive officer or the inability to hire and retain other
highly qualified personnel in the future could adversely affect our ability to
conduct business. Generally, we consider key executive officers to be
those individuals who have the greatest influence in setting overall policy and
controlling operations: Chairman and Chief Executive Officer, Joseph V. Taranto
(age 60), President and Chief Operating Officer, Ralph E. Jones, III (age 53),
and Executive Vice President and Chief Financial Officer, Dominic J. Addesso
(age 56). We currently have employment contracts with Mr. Taranto and
Mr. Addesso. Mr. Taranto’s contract was filed with the SEC and
provides for terms of employment ending on December 31, 2010. Mr.
Addesso’s contract was filed with the SEC and provides for terms of employment
ending on May 7, 2010.
Special
considerations apply to our Bermuda operations. Under Bermuda law,
non-Bermudians, other than spouses of Bermudians and individuals holding
permanent resident certificates, are not permitted to engage in any gainful
occupation in Bermuda without a work permit issued by the Bermuda
government. A work permit is only granted or extended if the employer
can show that, after a proper public advertisement, no Bermudian, spouse of a
Bermudian or individual holding a permanent resident certificate is available
who meets the minimum standards for the position. The Bermuda
government places a six-year term limit on individuals with work permits,
subject to specified exemptions for persons deemed to be key employees of
businesses with a significant physical presence in
Bermuda. Currently, all seven of our Bermuda-based professional
employees who require work permits have been granted permits by the Bermuda
government that expire at various times between September 2010 and May
2012. This includes Mark de Saram, the chief executive officer of our
Bermuda reinsurance operation. In the event his work permit were not
renewed, we could lose his services, thereby adversely affecting our ability to
conduct our business in Bermuda until we were able to replace him with an
individual in Bermuda who did not require a work permit or who was granted the
permit. The Company has an employment contract with Mr. de Saram,
which was filed with the SEC and most recently amended on October 16, 2008, to
extend Mr. de Saram’s term of employment to November 1, 2010.
Our
investment values and investment income could decline because they are exposed
to interest rate, credit, and market risks.
A
significant portion of our investment portfolio consists of fixed income
securities and smaller portions consist of equity securities and other
investments. Both the fair market value of our invested assets and
associated investment income fluctuate depending on general economic and market
conditions. For example, the fair market value of our predominant
fixed income portfolio generally increases or decreases inversely to
fluctuations in interest rates. The market value of our fixed income
securities could also decrease as a result of a downturn in the business cycle,
such as the downturn we are currently experiencing, that causes the credit
quality of such securities to deteriorate. The net investment income
that we realize from future investments in fixed income securities will
generally increase or decrease with interest rates.
Interest
rate fluctuations also can cause net investment income from fixed income
investments that carry prepayment risk, such as mortgage-backed and other
asset-backed securities, to differ from the income anticipated from those
securities at the time of purchase. In addition, if issuers of
individual investments are unable to meet their obligations, investment income
will be reduced and realized capital losses may arise.
The
majority of our fixed income securities are classified as available for sale and
temporary changes in the market value of these investments are reflected as
changes to our shareholders’ equity. Our actively managed equity
security portfolio is fair valued and any changes in fair value are reflected as
net realized capital gains or losses. As a result, a decline in the
value of the securities in our portfolio reduces our capital or could cause us
to incur a loss.
We have
invested a portion of our investment portfolio in equity securities. The value
of these assets fluctuate with changes in the markets. In times of economic
weakness, the fair value of these assets may decline, and may negatively impact
net income. We also invest in non-traditional investments which have
different risk characteristics than traditional fixed income and equity
securities. These alternative investments are comprised primarily of private
equity limited partnerships. The changes in value and investment
income (loss) for these partnerships are more volatile than over-the-counter
securities.
The
following table quantifies the portion of our investment portfolio that consists
of fixed income securities, equity securities and asset-backed investments that
carry prepayment risk.
|
At
|
||||||||
|
(Dollars
in millions)
|
December
31, 2009
|
%
of Total
|
||||||
|
Mortgage-backed
securities:
|
||||||||
|
Commercial
|
$ | 442.6 | 2.9 | % | ||||
|
Agency
residential
|
2,368.4 | 15.9 | % | |||||
|
Non-agency
residential
|
160.6 | 1.1 | % | |||||
|
Other
asset-backed
|
313.7 | 2.1 | % | |||||
|
Total
asset-backed
|
3,285.3 | 22.0 | % | |||||
|
Other
fixed income
|
9,720.6 | 65.2 | % | |||||
|
Total
fixed income, at market value
|
13,005.9 | 87.2 | % | |||||
|
Fixed
maturities, at fair value
|
50.5 | 0.3 | % | |||||
|
Equity
securities, at market value
|
16.3 | 0.1 | % | |||||
|
Equity
securities, at fair value
|
380.0 | 2.5 | % | |||||
|
Other
invested assets
|
545.3 | 3.7 | % | |||||
|
Cash
and short-term investments
|
920.7 | 6.2 | % | |||||
|
Total
investments and cash
|
$ | 14,918.8 | 100.0 | % | ||||
|
(Some
amounts may not reconcile due to rounding.)
|
||||||||
We
may experience foreign currency exchange losses that reduce our net income and
capital levels.
Through
our Bermuda and international operations, we conduct business in a variety of
foreign (non-U.S.) currencies, principally the Euro, the British pound, the
Canadian dollar, and the Singapore dollar. Assets, liabilities, revenues and
expenses denominated in foreign currencies are exposed to changes in currency
exchange rates. Our functional currency is the U.S. dollar, and exchange rate
fluctuations relative to the U.S. dollar may materially impact our results and
financial position. In 2009, we wrote approximately 29.3% of our reinsurance
coverages in non-U.S. currencies; as of December 31, 2009, we maintained
approximately 17.9% of our investment portfolio in investments denominated in
non-U.S. currencies. During 2009, 2008 and 2007, the impact on our
quarterly pre-tax net income from exchange rate fluctuations ranged from a loss
of $13.3 million to a gain of $13.1 million.
RISKS
RELATING TO REGULATION
Insurance
laws and regulations restrict our ability to operate and any failure to comply
with those laws and regulations could have a material adverse effect on our
business.
We are
subject to extensive and increasing regulation under U.S., state and foreign
insurance laws. These laws limit the amount of dividends that can be
paid to us by our operating subsidiaries, impose restrictions on the amount and
type of investments that we can hold, prescribe solvency, accounting and
internal control standards that must be met and maintained and require us to
maintain reserves. These laws also require disclosure of material
inter-affiliate transactions and require prior approval of “extraordinary”
transactions. Such “extraordinary” transactions include declaring
dividends from operating subsidiaries that exceed statutory
thresholds. These laws also generally require approval of changes of
control of insurance companies. The application of these laws could
affect our liquidity and ability to pay dividends, interest and other payments
on securities, as applicable, and could restrict our ability to expand business
operations through acquisitions of new insurance subsidiaries. We may
not have or maintain all required licenses and approvals or fully comply with
the wide variety of applicable laws and regulations or the relevant authority’s
interpretation of the laws and regulations. If we do not have the
requisite licenses and approvals or do not comply with applicable regulatory
requirements, the insurance regulatory authorities could preclude or temporarily
suspend us from carrying on some or all of our activities or monetarily penalize
us. These types of actions could have a material adverse effect on
our business. To date, no material fine, penalty or restriction has
been imposed on us for failure to comply with any insurance law or
regulation.
As a
result of the recent dislocation of the financial markets, Congress and the
Presidential administration in the United States, are contemplating changes in
the way the financial services industry is regulated. It is possible
that insurance regulation will be drawn into this process, and that federal
regulatory initiatives in the insurance industry could emerge. The
future impact of such initiatives, if any, on our operation, net income or
financial condition cannot be determined at this time.
Regulatory
challenges in the United States could adversely affect the ability of Bermuda Re
to conduct business.
Bermuda
Re does not intend to be licensed or admitted as an insurer or reinsurer in any
U.S. jurisdiction. Under current law, Bermuda Re generally will be
permitted to reinsure U.S. risks from its office in Bermuda without obtaining
those licenses. However, the insurance and reinsurance regulatory
framework is subject to periodic legislative review and revision. In
the past, there have been congressional and other initiatives in the United
States regarding increased supervision and regulation of the insurance industry,
including proposals to supervise and regulate reinsurers domiciled outside the
United States. If Bermuda Re were to become subject to any insurance
laws of the United States or any U.S. state at any time in the future, it might
be required to post deposits or maintain minimum surplus levels and might be
prohibited from engaging in lines of business or from writing some types of
policies. Complying with those laws could have a material adverse
effect on our ability to conduct business in Bermuda and international
markets.
Bermuda
Re may need to be licensed or admitted in additional jurisdictions to develop
its business.
As
Bermuda Re’s business develops, it will monitor the need to obtain licenses in
jurisdictions other than Bermuda and the U.K., where it has an authorized
branch, in order to comply with applicable law or to be able to engage in
additional insurance-related activities. In addition, Bermuda Re may
be at a competitive disadvantage in jurisdictions where it is not licensed or
does not enjoy an exemption from licensing relative to competitors that are so
licensed or exempt from licensing. Bermuda Re may not be able to
obtain any additional licenses that it determines are necessary or
desirable. Furthermore, the process of obtaining those licenses is
often costly and may take a long time.
Bermuda
Re’s ability to write reinsurance may be severely limited if it is unable to
arrange for security to back its reinsurance.
Many
jurisdictions do not permit insurance companies to take credit for reinsurance
obtained from unlicensed or non-admitted insurers on their statutory financial
statements without appropriate security. Bermuda Re’s reinsurance
clients typically require it to post a letter of credit or enter into other
security arrangements. If Bermuda Re is unable to obtain or maintain
a letter of credit facility on commercially acceptable terms or is unable to
arrange for other types or security, its ability to operate its business may be
severely limited. If Bermuda Re defaults on any letter of credit that
it obtains, it may be required to prematurely liquidate a substantial portion of
its investment portfolio and other assets pledged as collateral.
RISKS
RELATING TO GROUP’S SECURITIES
Because
of our holding company structure, our ability to pay dividends, interest and
principal is dependent on our receipt of dividends, loan payments and other
funds from our subsidiaries.
Group and
Holdings are holding companies, each of whose most significant assets consists
of the stock of their operating subsidiaries. As a result, each of
Group’s and Holdings’ ability to pay dividends, interest or other payments on
its securities in the future will depend on the earnings and cash flows of the
operating subsidiaries and the ability of the subsidiaries to pay dividends or
to advance or repay funds to it. This ability is subject to general
economic, financial, competitive, regulatory and other factors beyond our
control. Payment of dividends and advances and repayments from some
of the operating subsidiaries are regulated by U.S., state and foreign insurance
laws and regulatory restrictions, including minimum solvency and liquidity
thresholds. Accordingly, the operating subsidiaries may not be able
to pay dividends or advance or repay funds to Group and Holdings in the future,
which could prevent us from paying dividends, interest or other payments on our
securities.
Provisions
in Group’s bye-laws could have an anti-takeover effect, which could diminish the
value of its common shares.
Group’s
bye-laws contain provisions that may entrench directors and make it more
difficult for shareholders to replace directors even if the shareholders
consider it beneficial to do so. In addition, these provisions could
delay or prevent a change of control that a shareholder might consider
favorable. The effect of these provisions could be to prevent a
shareholder from receiving the benefit from any premium over the market price of
our common shares offered by a bidder in a potential takeover. Even
in the absence of an attempt to effect a change in management or a takeover
attempt, these provisions may adversely affect the prevailing market price of
our common shares if they are viewed as discouraging takeover attempts in the
future.
For
example, Group’s bye-laws contain the following provisions that could have an
anti-takeover effect:
|
·
|
election
of directors is staggered, meaning that the members of only one of three
classes of directors are selected each
year;
|
|
·
|
shareholders
have limited ability to remove
directors;
|
|
·
|
the
total voting power of any shareholder owning more than 9.9% of the common
shares will be reduced to 9.9% of the total voting power of the common
shares;
|
|
·
|
the
board of directors may decline to register any transfer of common shares
if it has reason to believe that the transfer would result
in:
|
i) any
person that is not an investment company beneficially owning more than 5.0% of
any class of the issued and outstanding share capital of Group,
ii) any
person holding controlled shares in excess of 9.9% of any class of the issued
and outstanding share capital of Group, or
iii) any
adverse tax, regulatory or legal consequences to Group, any of its subsidiaries
or any of its shareholders;
|
·
|
Group
also has the option to redeem or purchase all or part of a shareholder’s
common shares to the extent the board of directors determines it is
necessary or advisable to avoid or cure any adverse or potential adverse
consequences if:
|
i) any
person that is not an investment company beneficially owns more than 5.0% of any
class of the issued and outstanding share capital of Group,
|
|
ii) any
person holds controlled shares in excess of 9.9% of any class of the issued and
outstanding share capital of Group, or
|
|
iii)
share ownership by any person may result in adverse tax, regulatory or legal
consequences to Group, any of its subsidiaries or any other
shareholder.
The Board
of Directors has indicated that it will apply these bye-law provisions in such
manner that “passive institutional investors” will be treated similarly to
investment companies. For this purpose, “passive institutional
investors” include all persons who are eligible, pursuant to Rule 13d-1(b)(1)
under the U.S. Securities Exchange Act of 1934, to file a short-form statement
on Schedule 13G, other than an insurance company or any parent holding company
or control person of an insurance company.
Applicable
insurance laws may also have an anti-takeover effect.
Before a
person can acquire control of a U.S. insurance company, prior written approval
must be obtained from the insurance commissioner of the state where that
insurance company is domiciled. Prior to granting approval of an
application to acquire control of a domestic insurance company, a state
insurance commissioner will consider such factors as the financial strength of
the applicant, the integrity and competence of the applicant’s board of
directors and executive officers, the acquiror’s plans for the future operations
of the insurance company and any anti-competitive results that may arise from
the consummation of the acquisition of control. Because any person
who acquired control of Group would thereby acquire indirect control of its
insurance company subsidiaries in the U.S., the insurance change of control laws
of Delaware, California and Georgia would apply to such a
transaction. This could have the effect of delaying or even
preventing such a change of control.
Investors
in Group may have more difficulty in protecting their interests than investors
in a U.S. corporation.
The
Companies Act 1981 of Bermuda (the “Companies Act”), differs in material
respects from the laws applicable to U.S. corporations and their
shareholders. The following is a summary of material differences
between the Companies Act, as modified in some instances by provisions of
Group’s bye-laws, and Delaware corporate law that could make it more difficult
for investors in Group to protect their interests than investors in a U.S.
corporation. Because the following statements are summaries, they do
not address all aspects of Bermuda law that may be relevant to Group and its
shareholders.
Alternate
Directors.
Group’s bye-laws provide, as permitted by Bermuda
law, that each director may appoint an alternate director, who shall have the
power to attend and vote at any meeting of the board of directors or committee
at which that director is not personally present and to sign written consents in
place of that director. Delaware law does not provide for alternate
directors.
Committees of the Board of
Directors.
Group’s bye-laws provide, as permitted by Bermuda
law, that the board of directors may delegate any of its powers to committees
that the board appoints, and those committees may consist partly or entirely of
non-directors. Delaware law allows the board of directors of a
corporation to delegate many of its powers to committees, but those committees
may consist only of directors.
Interested
Directors.
Bermuda law and Group’s bye-laws provide that if a
director has a personal interest in a transaction to which the company is also a
party and if the director discloses the nature of this personal interest at the
first opportunity, either at a meeting of directors or in writing to the
directors, then the company will not be able to declare the transaction void
solely due to the existence of that personal interest and the director will not
be liable to the company for any profit realized from the
transaction. In addition, after a director has made the declaration
of interest referred to above, he or she is allowed to be counted for purposes
of determining whether a quorum is present and to vote on a transaction in which
he or she has an interest, unless disqualified from doing so by the chairman of
the relevant board meeting. Under Delaware law, an interested
director could be held liable for a transaction in which that director derived
an improper personal benefit. Additionally, under Delaware law, a
corporation may be able to declare a transaction with an interested director to
be void unless one of the following conditions is fulfilled:
|
·
|
the
material facts as to the interested director’s relationship or interests
are disclosed or are known to the board of directors and the board in good
faith authorizes the transaction by the affirmative vote of a majority of
the disinterested directors;
|
|
·
|
the
material facts are disclosed or are known to the shareholders entitled to
vote on the transaction and the transaction is specifically approved in
good faith by the holders of a majority of the voting shares;
or
|
|
·
|
the
transaction is fair to the corporation as of the time it is authorized,
approved or ratified.
|
Transactions with
Significant Shareholders.
As a Bermuda company, Group may
enter into business transactions with its significant shareholders, including
asset sales, in which a significant shareholder receives, or could receive, a
financial benefit that is greater than that received, or to be received, by
other shareholders with prior approval from Group’s board of directors but
without obtaining prior approval from the shareholders. In the case
of an amalgamation, in which two or more companies join together and continue as
a single company, a resolution of shareholders approved by a majority of at
least 75% of the votes cast is required in addition to the approval of the board
of directors, except in the case of an amalgamation with and between
wholly-owned subsidiaries. If Group was a Delaware corporation, any
business combination with an interested shareholder (which, for this purpose,
would include mergers and asset sales of greater than 10% of Group’s assets that
would otherwise be considered transactions in the ordinary course of business)
within a period of three years from the time the person became an interested
shareholder would require prior approval from shareholders holding at least 66
2/3% of Group’s outstanding common shares not owned by the interested
shareholder, unless the transaction qualified for one of the exemptions in the
relevant Delaware statute or Group opted out of the statute. For
purposes of the Delaware statute, an “interested shareholder” is generally
defined as a person who together with that person’s affiliates and associates
owns, or within the previous three years did own, 15% or more of a corporation’s
outstanding voting shares.
Takeovers.
Under
Bermuda law, if an acquiror makes an offer for shares of a company and, within
four months of the offer, the holders of not less than 90% of the shares that
are the subject of the offer tender their shares, the acquiror may give the
nontendering shareholders notice requiring them to transfer their shares on the
terms of the offer. Within one month of receiving the notice,
dissenting shareholders may apply to the court objecting to the
transfer. The burden is on the dissenting shareholders to show that
the court should exercise its discretion to enjoin the transfer. The
court will be unlikely to do this unless there is evidence of fraud or bad faith
or collusion between the acquiror and the tendering shareholders aimed at
unfairly forcing out minority shareholders. Under another provision
of Bermuda law, the holders of 95% of the shares of a company (the “acquiring
shareholders”) may give notice to the remaining shareholders requiring them to
sell their shares on the terms described in the notice. Within one
month of receiving the notice, dissenting shareholders may apply to the court
for an appraisal of their shares. Within one month of the court’s
appraisal, the acquiring shareholders are entitled either to acquire all shares
involved at the price fixed by the court or cancel the notice given to the
remaining shareholders. If shares were acquired under the notice at a
price below the court’s appraisal price, the acquiring shareholders must either
pay the difference in price or cancel the notice and return the shares thus
acquired to the shareholder, who must then refund the purchase
price. There are no comparable provisions under Delaware
law.
Inspection of Corporate
Records.
Members of the general public have the right to
inspect the public documents of Group available at the office of the Registrar
of Companies and Group’s registered office, both in Bermuda. These
documents include the memorandum of association, which describes Group’s
permitted purposes and powers, any amendments to the memorandum of association
and documents relating to any increase or reduction in Group’s authorized share
capital. Shareholders of Group have the additional right to inspect Group’s
bye-laws, minutes of general meetings of shareholders and audited financial
statements that must be presented to the annual general meeting of
shareholders. The register of shareholders of Group also is open to
inspection by shareholders without charge, and to members of the public for a
fee. Group is required to maintain its share register at its
registered office in Bermuda. Group also maintains a branch register
in the offices of its transfer agent in the U.S., which is open for public
inspection as required under the Companies Act. Group is required to
keep at its registered office a register of its directors and officers that is
open for inspection by members of the public without charge. However,
Bermuda law does not provide a general right for shareholders to inspect or
obtain copies of any other corporate records. Under Delaware law, any
shareholder may inspect or obtain copies of a corporation’s shareholder list and
its other books and records for any purpose reasonably related to that person’s
interest as a shareholder.
Shareholder’s
Suits.
The rights of shareholders under Bermuda law are not as
extensive as the rights of shareholders under legislation or judicial precedent
in many U.S. jurisdictions. Class actions and derivative actions are
generally not available to shareholders under the laws of
Bermuda. However, the Bermuda courts ordinarily would be expected to
follow English case law precedent, which would permit a shareholder to bring an
action in the name of Group to remedy a wrong done to Group where the act
complained of is alleged to be beyond the corporate power of Group or illegal or
would result in the violation of Group’s
memorandum
of association or bye-laws. Furthermore, the court would give
consideration to acts that are alleged to constitute a fraud against the
minority shareholders or where an act requires the approval of a greater
percentage of Group’s shareholders than actually approved it. The
winning party in an action of this type generally would be able to recover a
portion of attorneys’ fees incurred in connection with the action. Under
Delaware law, class actions and derivative actions generally are available to
stockholders for breach of fiduciary duty, corporate waste and actions not taken
in accordance with applicable law. In these types of actions, the
court has discretion to permit the winning party to recover its attorneys’
fees.
Limitation of Liability of
Directors and Officers.
Group’s bye-laws provide that Group
and its shareholders waive all claims or rights of action that they might have,
individually or in the right of the Company, against any director or officer for
any act or failure to act in the performance of that director’s or officer’s
duties. However, this waiver does not apply to claims or rights of
action that arise out of fraud or dishonesty. This waiver may have
the effect of barring claims arising under U.S. federal securities laws. Under
Delaware law, a corporation may include in its certificate of incorporation
provisions limiting the personal liability of its directors to the corporation
or its stockholders for monetary damages for many types of breach of fiduciary
duty. However, these provisions may not limit liability for any
breach of the duty of loyalty, acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, the authorization
of unlawful dividends, stock repurchases or stock redemptions, or any
transaction from which a director derived an improper personal
benefit. Moreover, Delaware provisions would not be likely to bar
claims arising under U.S. federal securities laws.
Indemnification of Directors
and Officers.
Group’s bye-laws provide that Group shall
indemnify its directors or officers to the full extent permitted by law against
all actions, costs, charges, liabilities, loss, damage or expense incurred or
suffered by them by reason of any act done, concurred in or omitted in the
conduct of Group’s business or in the discharge of their
duties. Under Bermuda law, this indemnification may not extend to any
matter involving fraud or dishonesty of which a director or officer may be
guilty in relation to the company, as determined in a final judgment or decree
not subject to appeal. Under Delaware law, a corporation may
indemnify a director or officer who becomes a party to an action, suit or
proceeding because of his position as a director or officer if (1) the director
or officer acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation and (2) if the action or
proceeding involves a criminal offense, the director or officer had no
reasonable cause to believe his or her conduct was unlawful.
Enforcement of Civil
Liabilities.
Group is organized under the laws of Bermuda.
Some of our directors and officers may reside outside the U.S. A
substantial portion of our assets are or may be located in jurisdictions outside
the U.S. A person may not be able to effect service of process within
the U.S. on directors and officers of Group and those experts who reside outside
the U.S. A person also may not be able to recover against them or
Group on judgments of U.S. courts or to obtain original judgments against them
or Group in Bermuda courts, including judgments predicated upon civil liability
provisions of the U.S. federal securities laws.
Dividends.
Bermuda
law does not allow a company to declare or pay a dividend, or make a
distribution out of contributed surplus, if there are reasonable grounds for
believing that a company, after the payment is made, would be unable to pay its
liabilities as they become due, or that the realizable value of a company’s
assets would be less, as a result of the payment, than the aggregate of its
liabilities and its issued share capital and share premium
accounts. The share capital account represents the aggregate par
value of issued shares, and the share premium account represents the aggregate
amount paid for issued shares over and above their par value. Under
Delaware law, subject to any restrictions contained in a company’s certificate
of incorporation, a company may pay dividends out of the surplus or, if there is
no surplus, out of net profits for the fiscal year in which the dividend is
declared and/or the preceding fiscal year. Surplus is the amount by
which the net assets of a corporation exceed its stated capital. Delaware law
also provides that dividends may not be paid out of net profits at any time when
stated capital is less than the capital represented by the outstanding stock of
all classes having a preference upon the distribution of assets.
RISKS
RELATING TO TAXATION
If
U.S. tax law changes, our net income may be reduced.
In the
last few years, some members of Congress have expressed concern about U.S.
corporations that move their place of incorporation to low-tax
jurisdictions. Also, some members of Congress have expressed concern
over a competitive advantage that foreign-controlled insurers and reinsurers may
have over U.S. controlled insurers and reinsurers due to the purchase of
reinsurance by U.S. insurers from affiliates operating in some foreign
jurisdictions, including Bermuda. It is possible that future
legislation that would be disadvantageous to our Bermuda insurance subsidiaries
could be enacted. If any such legislation were enacted, the U.S. tax
burden on our Bermuda operations, or on some business ceded from our licensed
U.S. insurance subsidiaries to some offshore reinsurers, could be
increased. This would reduce our net income.
Group
and/or Bermuda Re may be subject to U.S. corporate income tax, which would
reduce our net income.
Bermuda Re.
The income of Bermuda Re
is a significant portion of our worldwide income from operations. We
have established guidelines for the conduct of our operations that are designed
to ensure that Bermuda Re is not engaged in the conduct of a trade or business
in the U.S. Based on its compliance with those guidelines, we believe
that Bermuda Re should not be required to pay U.S. corporate income tax, other
than withholding tax on U.S. source dividend and interest
income. However, if the Internal Revenue Service (“IRS”) were to
successfully contend that Bermuda Re was engaged in a trade or business in the
U.S., Bermuda Re would be required to pay U.S. corporate income tax on any
income that is subject to the taxing jurisdiction of the U.S., and possibly the
U.S. branch profits tax. Even if the IRS were to successfully contend
that Bermuda Re was engaged in a U.S. trade or business, we believe that the
U.S.-Bermuda tax treaty would preclude the IRS from taxing Bermuda Re’s income
except to the extent that its income were attributable to a permanent
establishment maintained by that subsidiary. We do not believe that
Bermuda Re has a permanent establishment in the U.S. If the IRS were
to successfully contend that Bermuda Re did have income attributable to a
permanent establishment in the U.S., Bermuda Re would be subject to U.S. tax on
that income.
Group.
We conduct our
operations in a manner designed to minimize our U.S. tax exposure.
Based on our compliance
with guidelines designed to ensure that we generate only immaterial amounts, if
any, of income that is subject to the taxing jurisdiction of the U.S., we
believe that we should be required to pay only immaterial amounts, if any, of
U.S. corporate income tax, other than withholding tax on U.S. source dividend
and interest income. However, if the IRS successfully contended that
we had material amounts of income that is subject to the taxing jurisdiction of
the U.S., we would be required to pay U.S. corporate income tax on that income,
and possibly the U.S. branch profits tax and the imposition of such tax would
reduce our net income.
If
Bermuda Re became subject to U.S. income tax on its income or if we became
subject to U.S. income tax, our income could also be subject to the U.S. branch
profits tax. In that event, Group and Bermuda Re would be subject to taxation at
a higher combined effective rate than if they were organized as U.S.
corporations. The combined effect of the 35% U.S. corporate income
tax rate and the 30% branch profits tax rate is a net tax rate of
54.5%. The imposition of these taxes would reduce our net
income.
Group and/or Bermuda Re may become subject to Bermuda
tax, which would reduce our net income.
Group and
Bermuda Re are not subject to income or capital gains taxes in
Bermuda. Both companies have received an assurance from the Bermuda
Minister of Finance under The Exempted Undertakings Tax Protection Act 1966 of
Bermuda to the effect that if any legislation is enacted in Bermuda that imposes
any tax computed on profits or income, or computed on any capital asset, gain or
appreciation, or any tax in the nature of estate duty or inheritance tax, then
that tax will not apply to us or to any of our operations or our shares,
debentures or other obligations until March 28, 2016. This assurance
does not prevent the application of any of those taxes to persons ordinarily
resident in Bermuda and does not prevent the imposition of any tax payable in
accordance with the provisions of The Land Tax Act 1967 of Bermuda or otherwise
payable in relation to any land leased to Group or Bermuda Re. There
are currently no procedures
for extending these assurances. As a result, Group and
Bermuda Re could be subject to taxes in Bermuda after March 28, 2016, which
would reduce our net income.
Our
net income will be reduced if U.S. excise and withholding taxes are
increased.
Bermuda
Re is subject to an excise tax on reinsurance and insurance premiums with
respect to risks located in the U.S. In addition, Bermuda Re may be
subject to withholding tax on dividend and interest income from U.S.
sources. These taxes could increase and other taxes could be imposed
in the future on Bermuda Re’s business, which would reduce our net
income.
None.
Everest
Re’s corporate offices are located in approximately 230,500 square feet of
leased office space in Liberty Corner, New Jersey. Bermuda Re’s
corporate offices are located in approximately 3,600 total square feet of leased
office space in Hamilton, Bermuda. The Company’s other sixteen
locations occupy a total of approximately 96,300 square feet, all of which are
leased. Management believes that the above-described office space is
adequate for its current and anticipated needs.
In the
ordinary course of business, the Company is involved in lawsuits, arbitrations
and other formal and informal dispute resolution procedures, the outcomes of
which will determine the Company’s rights and obligations under insurance,
reinsurance and other contractual agreements. In some disputes, the
Company seeks to enforce its rights under an agreement or to collect funds owing
to it. In other matters, the Company is resisting attempts by others
to collect funds or enforce alleged rights. These disputes arise from time to
time and are ultimately resolved through both informal and formal means,
including negotiated resolution, arbitration and litigation. In
all such matters, the Company believes that its positions are legally and
commercially reasonable. While the final outcome of these matters
cannot be predicted with certainty, the Company does not believe that any of
these matters, when finally resolved, will have a materially 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 materially adverse effect on the Company’s results of operations in that
period.
Market
Information.
The
common shares of Group trade on the New York Stock Exchange under the symbol,
“RE”. The quarterly high and low market prices of Group’s common
shares for the periods indicated were:
|
2009
|
2008
|
|||||||||||||||
|
High
|
Low
|
High
|
Low
|
|||||||||||||
|
First
Quarter
|
$ | 76.54 | $ | 58.69 | $ | 105.04 | $ | 87.02 | ||||||||
|
Second
Quarter
|
75.54 | 66.36 | 96.69 | 79.71 | ||||||||||||
|
Third
Quarter
|
88.99 | 70.00 | 95.00 | 74.69 | ||||||||||||
|
Fourth
Quarter
|
92.49 | 83.09 | 82.08 | 60.75 | ||||||||||||
Number
of Holders of Common Shares.
The
number of record holders of common shares as of February 1, 2010 was
67. That number does not include the beneficial owners of shares held
in “street” name or held through participants in depositories, such as The
Depository Trust Company.
Dividend
History and Restrictions.
In 1995,
the Board of Directors of the Company established a policy of declaring regular
quarterly cash dividends and has paid a regular quarterly dividend in each
quarter since the fourth quarter of 1995. The Company declared and
paid its regular quarterly cash dividend of $0.48 per share for each of the four
quarters of 2009 and 2008. The Company’s Board of Directors declared
a dividend of $0.48 per share, payable on or before March 24, 2010 to
shareholders of record on March 10, 2010.
The
declaration and payment of future dividends, if any, by the Company will be at
the discretion of the Board of Directors and will depend upon many factors,
including the Company’s earnings, financial condition, business needs and growth
objectives, capital and surplus requirements of its operating subsidiaries,
regulatory restrictions, rating agency considerations and other
factors. As an insurance holding company, the Company is partially
dependent on dividends and other permitted payments from its subsidiaries to pay
cash dividends to its shareholders. The payment of dividends to Group
by Holdings and to Holdings by Everest Re is subject to Delaware regulatory
restrictions and the payment of dividends to Group by Bermuda Re is subject to
Bermuda insurance regulatory restrictions. See “Regulatory Matters –
Dividends” and ITEM 8, “Financial Statements and Supplementary Data” - Note 16
of Notes to Consolidated Financial Statements.
Purchases
of Equity Securities by the Issuer and Affiliated Purchasers
|
Issuer
Purchases of Equity Securities
|
||||||||||||||||
|
(a)
|
(b)
|
(c)
|
(d)
|
|||||||||||||
|
Maximum
Number (or
|
||||||||||||||||
|
Total
Number of
|
Approximate
Dollar
|
|||||||||||||||
|
Shares
(or Units)
|
Value)
of Shares (or
|
|||||||||||||||
|
Purchased
as Part
|
Units)
that May Yet
|
|||||||||||||||
|
Total
Number of
|
of
Publicly
|
Be
Purchased Under
|
||||||||||||||
|
Shares
(or Units)
|
Average
Price Paid
|
Announced
Plans or
|
the
Plans or
|
|||||||||||||
|
Period
|
Purchased
|
per
Share (or Unit)
|
Programs
|
Programs
(1)
|
||||||||||||
|
October
1 - 31, 2009
|
0 | $ | - | 0 | 4,634,199 | |||||||||||
|
November
1 - 30, 2009
|
570,630 | $ | 87.6170 | 570,630 | 4,063,569 | |||||||||||
|
December
1 - 31, 2009
|
593,006 | $ | 84.4931 | 593,006 | 3,470,563 | |||||||||||
|
Total
|
1,163,636 | $ | 86.0250 | 1,163,636 | 3,470,563 | |||||||||||
(1) On
September 21, 2004, the Company’s board of directors approved an amended share
repurchase program authorizing the Company and/or its subsidiary Holdings to
purchase up to an aggregate of 5,000,000 of the Company’s common shares through
open market transactions, privately negotiated transactions or
both. On July 21, 2008, the Company’s executive committee of the
board of directors approved an amendment to the September 21, 2004 share
repurchase program authorizing the Company and/or its subsidiary Holdings to
purchase up to an aggregate of 10,000,000 of the Company’s common shares
(recognizing that the number of shares authorized for repurchase has been
reduced by those shares that have already been purchased) in open market
transactions, privately negotiated transactions or both. On February
24, 2010, the Company’s executive committee of the board of directors approved
an amendment to the September 21, 2004, share repurchase program and the July
21, 2008, amendment authorizing the Company and/or its subsidiary Holdings to
purchase up to an aggregate of 15,000,000 of the Company’s common shares
(recognizing that the number of shares authorized for repurchase has been
reduced by those shares that have already been purchased) in open market
transactions, privately negotiated transactions or both.
Recent
Sales of Unregistered Securities.
None.
Performance
Graph.
The
following Performance Graph compares cumulative total shareholder returns on the
Common Shares (assuming reinvestment of dividends) from December 31, 2004
through December 31, 2009, with the cumulative total return of the Standard
& Poor’s 500 Index and the Standard & Poor’s Insurance (Property and
Casualty) Index.
|
Cumulative
Total Return
|
||||||||||||||||||||||||
| 12/04 | 12/05 | 12/06 | 12/07 | 12/08 | 12/09 | |||||||||||||||||||
|
Everest
Re Group, Ltd.
|
100.00 | 112.58 | 110.75 | 115.48 | 89.69 | 103.60 | ||||||||||||||||||
|
S&P
500
|
100.00 | 104.91 | 121.48 | 128.16 | 80.74 | 102.11 | ||||||||||||||||||
|
S&P
Property & Casualty Insurance
|
100.00 | 115.11 | 129.93 | 111.79 | 78.91 | 88.65 | ||||||||||||||||||
|
*$100
invested on 12/31/04 in stock or index, including reinvestment of
dividends. Fiscal year ending December 31.
|
||||||||||||||||||||||||
|
Copyright©
2010 S&P, a division of The McGraw-Hill Companies Inc. All rights
reserved.
|
||||||||||||||||||||||||
The
following selected consolidated GAAP financial data of the Company as of and for
the years ended December 31, 2009, 2008, 2007, 2006 and 2005 were derived from
the audited consolidated financial statements of the Company. The
following financial data should be read in conjunction with the Consolidated
Financial Statements and accompanying notes.
|
Years
Ended December 31,
|
||||||||||||||||||||
|
(Dollars
in millions, except per share amounts)
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Operating
data:
|
||||||||||||||||||||
|
Gross
written premiums
|
$ | 4,129.0 | $ | 3,678.1 | $ | 4,077.6 | $ | 4,000.9 | $ | 4,108.6 | ||||||||||
|
Net
written premiums
|
3,929.8 | 3,505.2 | 3,919.4 | 3,875.7 | 3,972.0 | |||||||||||||||
|
Premiums
earned
|
3,894.1 | 3,694.3 | 3,997.5 | 3,853.2 | 3,963.1 | |||||||||||||||
|
Net
investment income
|
547.8 | 565.9 | 682.4 | 629.4 | 522.8 | |||||||||||||||
|
Realized
gain on debt repurchase
|
78.3 | - | - | - | - | |||||||||||||||
|
Net
realized capital (losses) gains
|
(2.3 | ) | (695.8 | ) | 86.3 | 35.1 | 90.3 | |||||||||||||
|
Incurred
losses and loss adjustment
|
||||||||||||||||||||
|
expenses
(including catastrophes)
|
2,374.1 | 2,439.0 | 2,548.1 | 2,434.4 | 3,724.3 | |||||||||||||||
|
Net
catastrophe losses
(1)
|
65.2 | 307.2 | 126.5 | 283.0 | 1,403.9 | |||||||||||||||
|
Commission,
brokerage, taxes and fees
|
928.3 | 930.7 | 961.8 | 883.3 | 914.8 | |||||||||||||||
|
Other
underwriting expenses
|
184.8 | 162.3 | 152.6 | 138.0 | 129.8 | |||||||||||||||
|
Interest,
fees and bond issue cost
|
||||||||||||||||||||
|
amortization
expense
|
72.1 | 79.2 | 91.6 | 69.9 | 74.4 | |||||||||||||||
|
Income
(loss) before taxes
|
939.3 | (83.6 | ) | 1,028.0 | 991.8 | (280.9 | ) | |||||||||||||
|
Income
tax expense (benefit)
|
132.3 | (64.8 | ) | 188.7 | 150.9 | (62.3 | ) | |||||||||||||
|
Net
income (loss)
(2)
|
807.0 | (18.8 | ) | 839.3 | 840.8 | (218.7 | ) | |||||||||||||
|
EARNINGS
(LOSS) PER COMMON SHARE:
|
||||||||||||||||||||
|
Basic
(3)
|
$ | 13.26 | $ | (0.30 | ) | $ | 13.25 | $ | 12.95 | $ | (3.78 | ) | ||||||||
|
Diluted
(4)
|
$ | 13.22 | $ | (0.30 | ) | $ | 13.15 | $ | 12.84 | $ | (3.78 | ) | ||||||||
|
Dividends
declared
|
$ | 1.92 | $ | 1.92 | $ | 1.92 | $ | 0.60 | $ | 0.44 | ||||||||||
|
Certain
GAAP financial ratios:
(5)
|
||||||||||||||||||||
|
Loss
ratio
|
61.0 | % | 66.0 | % | 63.7 | % | 63.2 | % | 94.0 | % | ||||||||||
|
Other
underwriting expense ratio
|
28.6 | % | 29.6 | % | 27.9 | % | 26.5 | % | 26.3 | % | ||||||||||
|
Combined
ratio
(2)
|
89.6 | % | 95.6 | % | 91.6 | % | 89.7 | % | 120.3 | % | ||||||||||
|
Balance
sheet data (at end of period):
|
||||||||||||||||||||
|
Total
investments and cash
|
$ | 14,918.8 | $ | 13,714.3 | $ | 14,936.2 | $ | 13,957.1 | $ | 12,970.8 | ||||||||||
|
Total
assets
|
18,001.3 | 16,846.6 | 17,999.5 | 17,107.6 | 16,474.5 | |||||||||||||||
|
Loss
and LAE reserves
|
8,937.9 | 8,840.7 | 9,040.6 | 8,840.1 | 9,126.7 | |||||||||||||||
|
Total
debt
|
1,018.0 | 1,179.1 | 1,178.9 | 995.6 | 995.5 | |||||||||||||||
|
Total
liabilities
|
11,899.6 | 11,886.2 | 12,314.7 | 11,999.9 | 12,334.8 | |||||||||||||||
|
Shareholders'
equity
|
6,101.7 | 4,960.4 | 5,684.8 | 5,107.7 | 4,139.7 | |||||||||||||||
|
Book
value per share
(6)
|
102.87 | 80.77 | 90.43 | 78.53 | 64.04 | |||||||||||||||
|
___________________
|
||||||||||||||||||||
|
(1)
|
Catastrophe
losses are presented net of reinsurance and reinstatement
premiums. A catastrophe is defined, for purposes of the
consolidated Selected Financial Data, as an event that caused a loss on
property exposures before reinsurance of at least $5.0 million before
corporate level reinsurance and taxes. Catastrophe insurance
provides coverage for one event. When limits are exhausted,
some contractual arrangements provide for the availability of additional
coverage upon the payment of additional premium. This
additional premium is referred to as reinstatement
premium.
|
|
(2)
|
Some
amounts may not reconcile due to
rounding.
|
|
(3)
|
Based
on weighted average basic common shares outstanding of 60.7 million, 61.7
million, 63.1 million, 64.7 million and 57.6 million for 2009, 2008, 2007,
2006 and 2005, respectively.
|
|
(4)
|
Based
on weighted average diluted common shares outstanding of 60.8 million,
62.0 million, 63.6 million, 65.3 million and 58.5 million for 2009, 2008,
2007, 2006 and 2005, respectively.
|
|
(5)
|
Loss
ratio is the GAAP losses and LAE incurred as a percentage of GAAP net
premiums earned. Underwriting expense ratio is the GAAP
commissions, brokerage, taxes, fees and other underwriting expenses as a
percentage of GAAP net premiums earned. Combined ratio is the
sum of the loss ratio and underwriting expense
ratio.
|
|
(6)
|
Based
on 59.3 million, 61.4 million, 62.9 million, 65.0 million and 64.6 million
common shares outstanding for December 31, 2009, 2008, 2007, 2006 and
2005, respectively.
|
The
following is a discussion and analysis of our results of operations and
financial condition. It should be read in conjunction with the
Consolidated Financial Statements and accompanying notes thereto presented under
ITEM 8, “Financial Statements and Supplementary Data”.
Industry
Conditions.
The
worldwide reinsurance and insurance businesses are highly competitive, as well
as cyclical by product and market. As such, financial results tend to
fluctuate with periods of constrained availability, high rates and strong
profits followed by periods of abundant capacity, low rates and constrained
profitability. Competition in the types of reinsurance and insurance
business that we underwrite is based on many factors, including the perceived
overall financial strength of the reinsurer or insurer, ratings of the reinsurer
or insurer by A.M. Best and/or Standard & Poor’s, underwriting expertise,
the jurisdictions where the reinsurer or insurer is licensed or otherwise
authorized, capacity and coverages offered, premiums charged, other terms and
conditions of the reinsurance and insurance business offered, services offered,
speed of claims payment and reputation and experience in lines written.
Furthermore, the market impact from these competitive factors related to
reinsurance and insurance is generally not consistent across lines of business,
domestic and international geographical areas and distribution
channels.
We
compete in the U.S., Bermuda and international reinsurance and insurance markets
with numerous global competitors. Our competitors include independent
reinsurance and insurance companies, subsidiaries or affiliates of established
worldwide insurance companies, reinsurance departments of certain insurance
companies and domestic and international underwriting operations, including
underwriting syndicates at Lloyd’s. Some of these competitors have
greater financial resources than we do and have established long term and
continuing business relationships, which can be a significant competitive
advantage. In addition, the lack of strong barriers to entry into the
reinsurance business and the potential for securitization of reinsurance and
insurance risks through capital markets provide additional sources of potential
reinsurance and insurance capacity and competition.
Starting
in the latter part of 2007, throughout 2008 and 2009, there has been a
significant slowdown in the global economy, which has negatively impacted the
financial resources of the industry. Excessive availability and use
of credit, particularly by individuals, led to increased defaults on sub-prime
mortgages in the U.S. and elsewhere, falling values for houses and many
commodities and contracting consumer spending. The significant
increase in default rates negatively impacted the value of asset-backed
securities held by both foreign and domestic institutions. The
defaults have led to a corresponding increase in foreclosures, which have driven
down housing values, resulting in additional losses on asset-backed
securities. During the third and fourth quarters of 2008, credit
markets deteriorated dramatically, evidenced by widening credit spreads and
dramatically reduced availability of credit. Many financial
institutions, including some insurance entities, experienced liquidity crises
due to immediate demands for funds for withdrawals or collateral, combined with
falling asset values and their inability to sell assets to meet the increased
demands. As a result, several financial institutions have failed or
been acquired at distressed prices, while others have received loans from the
U.S. government to continue operations. The liquidity crisis
significantly increased the spreads on fixed maturity securities and, at the
same time, had a dramatic and negative impact on the stock markets around the
world. The combination of losses on securities from failed or
impaired companies combined with the decline in values of fixed maturity and
equity securities resulted in significant declines in the capital bases of most
insurance and reinsurance companies. While there was significant
improvement in the financial markets during 2009, it is too early to predict the
timing and extent of impact the capital deterioration and subsequent partial
recovery will have on insurance and reinsurance market
conditions.
Worldwide
insurance and reinsurance market conditions continued to be very
competitive. Generally, there was ample insurance and reinsurance
capacity relative to demand. We noted, however, that in many markets
and lines during 2009, the rates of decline have slowed, pricing in some
segments was relatively flat and there was upward movement in some others,
particularly property catastrophe coverage. Competition and its
effect on rates, terms and conditions vary widely by market and coverage yet
continues to be most prevalent in the U.S. casualty insurance and reinsurance
markets. The U.S. insurance markets in which we participate were
extremely competitive as well, particularly in the workers’ compensation, public
entity and contractor sectors.
The
reinsurance industry has experienced a period of falling rates and volume,
particularly in the casualty lines of business. Profit opportunities
have become generally less available over time; however the unfavorable trends
appear to have abated somewhat. We are now seeing smaller rate
declines, pockets of stability and some increases in some markets and for some
coverages. Both the primary insurers and reinsurers incurred very
significant investment and catastrophe losses during 2008 resulting in capital
depletion and increased rating agency scrutiny. Conversely in 2009,
the financial markets partially rebounded and catastrophe losses were low
resulting in improved industry capital levels. It is too early to
gauge the market impacts from these capital accumulations.
Rates in
the international markets have generally been more adequate than in the U.S.,
and we have seen some increases, particularly for catastrophe exposed
business. We have grown our business in the Middle East, Latin
America and Asia. We are expanding our international reach with the
opening of a new office in Brazil to capitalize on the recently expanded
opportunity for professional reinsurers in that market and on the economic
growth expected for Brazil in the future.
The 2009
renewal rates, particularly for property catastrophes and retrocessional covers
and in international markets, were generally firmer compared to a year
ago.
Overall,
we believe that current marketplace conditions offer profit opportunities for us
given our strong ratings, distribution system, reputation and
expertise. We continue to employ our strategy of targeting business
that offers the greatest profit potential, while maintaining balance and
diversification in our overall portfolio.
Financial
Summary.
We
monitor and evaluate our overall performance based upon financial
results. The following table displays a summary of the consolidated
net income (loss), ratios and shareholders’ equity for the periods
indicated.
|
Years
Ended December 31,
|
Percentage
Increase/(Decrease)
|
|||||||||||||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
2009/2008 | 2008/2007 | |||||||||||||||
|
Gross
written premiums
|
$ | 4,129.0 | $ | 3,678.1 | $ | 4,077.6 | 12.3 | % | -9.8 | % | ||||||||||
|
Net
written premiums
|
3,929.8 | 3,505.2 | 3,919.4 | 12.1 | % | -10.6 | % | |||||||||||||
|
REVENUES:
|
||||||||||||||||||||
|
Premiums
earned
|
$ | 3,894.1 | $ | 3,694.3 | $ | 3,997.5 | 5.4 | % | -7.6 | % | ||||||||||
|
Net
investment income
|
547.8 | 565.9 | 682.4 | -3.2 | % | -17.1 | % | |||||||||||||
|
Net
realized capital (losses) gains
|
(2.3 | ) | (695.8 | ) | 86.3 | -99.7 | % |
NM
|
||||||||||||
|
Realized
gain on debt repurchase
|
78.3 | - | - |
NM
|
NA
|
|||||||||||||||
|
Net
derivative gain (loss)
|
3.2 | (20.9 | ) | (2.1 | ) | -115.3 | % |
NM
|
||||||||||||
|
Other
(expense) income
|
(22.5 | ) | (15.9 | ) | 18.0 | 41.6 | % | -188.2 | % | |||||||||||
|
Total
revenues
|
4,498.6 | 3,527.6 | 4,782.0 | 27.5 | % | -26.2 | % | |||||||||||||
|
CLAIMS
AND EXPENSES:
|
||||||||||||||||||||
|
Incurred
losses and loss adjustment expenses
|
2,374.1 | 2,439.0 | 2,548.1 | -2.7 | % | -4.3 | % | |||||||||||||
|
Commission,
brokerage, taxes and fees
|
928.3 | 930.7 | 961.8 | -0.3 | % | -3.2 | % | |||||||||||||
|
Other
underwriting expenses
|
184.8 | 162.3 | 152.6 | 13.8 | % | 6.4 | % | |||||||||||||
|
Interest,
fees and bond issue cost amortization expense
|
72.1 | 79.2 | 91.6 | -9.0 | % | -13.5 | % | |||||||||||||
|
Total
claims and expenses
|
3,559.3 | 3,611.2 | 3,754.1 | -1.4 | % | -3.8 | % | |||||||||||||
|
INCOME
(LOSS) BEFORE TAXES
|
939.3 | (83.6 | ) | 1,028.0 |
NM
|
-108.1 | % | |||||||||||||
|
Income
tax expense (benefit)
|
132.3 | (64.8 | ) | 188.7 |
NM
|
-134.4 | % | |||||||||||||
|
NET
INCOME (LOSS)
|
$ | 807.0 | $ | (18.8 | ) | $ | 839.3 |
NM
|
-102.2 | % | ||||||||||
|
RATIOS:
|
Point
Change
|
|||||||||||||||||||
|
Loss
ratio
|
61.0 | % | 66.0 | % | 63.7 | % | (5.0 | ) | 2.3 | |||||||||||
|
Commission
and brokerage ratio
|
23.8 | % | 25.2 | % | 24.1 | % | (1.4 | ) | 1.1 | |||||||||||
|
Other
underwriting expense ratio
|
4.8 | % | 4.4 | % | 3.8 | % | 0.4 | 0.6 | ||||||||||||
|
Combined
ratio
|
89.6 | % | 95.6 | % | 91.6 | % | (6.0 | ) | 4.0 | |||||||||||
|
At
December 31,
|
Percentage
Increase/(Decrease)
|
|||||||||||||||||||
|
(Dollars
in millions, except per share amounts)
|
2009 | 2008 | 2007 | 2009/2008 | 2008/2007 | |||||||||||||||
|
Balance
sheet data:
|
||||||||||||||||||||
|
Total
investments and cash
|
$ | 14,918.8 | $ | 13,714.3 | $ | 14,936.2 | 8.8 | % | -8.2 | % | ||||||||||
|
Total
assets
|
18,001.3 | 16,846.6 | 17,999.5 | 6.9 | % | -6.4 | % | |||||||||||||
|
Loss
and loss adjustment expense reserves
|
8,937.9 | 8,840.7 | 9,040.6 | 1.1 | % | -2.2 | % | |||||||||||||
|
Total
debt
|
1,018.0 | 1,179.1 | 1,178.9 | -13.7 | % | 0.0 | % | |||||||||||||
|
Total
liabilities
|
11,899.6 | 11,886.2 | 12,314.7 | 0.1 | % | -3.5 | % | |||||||||||||
|
Shareholders'
equity
|
6,101.7 | 4,960.4 | 5,684.8 | 23.0 | % | -12.7 | % | |||||||||||||
|
Book
value per share
|
102.87 | 80.77 | 90.43 | |||||||||||||||||
|
(NM,
not meaningful)
|
||||||||||||||||||||
|
(NA,
not applicable)
|
||||||||||||||||||||
|
(Some
amounts may not reconcile due to rounding.)
|
||||||||||||||||||||
Revenues.
Premiums.
Gross
written premiums increased by $450.8 million, or 12.3%, in 2009 compared to
2008, reflecting an increase of $380.1 million in our reinsurance business and
$70.8 million in our insurance business. The increased reinsurance
business was primarily attributable to increased rates on
property
business,
in both the international and U.S. markets, new crop hail quota share treaty
business, expanded participation on renewal contracts and new writings as ceding
companies continued to favor reinsurers, such as Everest, with strong financial
ratings. The increase in insurance premiums were primarily in the
workers’ compensation and financial institution D&O and E&O lines of
business, which were new offerings for us in 2009. Net written
premiums increased $424.5 million, or 12.1%, in 2009 compared to 2008. The
increases in net written premiums are primarily due to the increase in gross
written premiums. Premiums earned increased $199.8 million, or 5.4%,
in 2009 compared to 2008, reflective of the higher net written premiums. The
change in net premiums earned relative to net written premiums is the result of
timing; premiums are earned ratably over the coverage period, whereas written
premiums are recorded at the initiation of the coverage period.
Gross
written premiums decreased by $399.4 million, or 9.8%, in 2008 compared to 2007,
reflecting a decline of $285.6 million in our reinsurance business and $113.8
million in our U.S. insurance business. The decline in our
reinsurance business was primarily attributable to continued competitive
conditions in both the property and casualty sectors of the market, especially
in the U.S., partially offset by strong renewals and higher rates in
international markets. Insurance segment premiums were also lower, as
conditions for workers’ compensation, public entity and contractors business
became increasingly competitive, which reduced the volume of business that met
our underwriting and pricing criteria. Net written premiums decreased
$414.2 million, or 10.6%, in 2008 compared to 2007, primarily due to the
decrease in gross written premiums and an increase in written premiums ceded,
most of which was in the U.S. insurance segment. Correspondingly,
premiums earned decreased $303.2 million, or 7.6%, in 2008 compared to
2007. The lesser percentage decrease in net premiums earned relative
to net written premiums is the result of timing; premiums are earned ratably
over the coverage period whereas written premiums are reflected at the
initiation of the coverage period.
Net Investment
Income.
Net investment income decreased by 3.2% in 2009, compared to
2008, due primarily to lower yields on new money, partially offset by a decrease
in losses from our limited partnership investments that invest in public and
non-public securities, both equity and debt. As a result, net pre-tax
investment income, as a percentage of average invested assets, was 3.8% for 2009
compared to 4.0% for 2008.
Net
investment income decreased by 17.1% in 2008 compared to 2007, primarily due to
net investment losses from our limited partnership investments, particularly
those which were principally invested in public equities, and lower rates on
short and long term bonds. Pre-tax investment income as a percentage
of average invested assets was 4.0% for 2008 compared to 4.9% for
2007.
Net Realized Capital
(Losses) Gains.
Net realized capital losses were $2.3 million
and $695.8 million in 2009 and 2008, respectively, while 2007 had net realized
capital gains of $86.3 million. In 2009, we recorded $29.3 million of
net realized capital losses from sales and $13.2 million in other-than-temporary
impairments on our available for sale fixed maturity securities, partially
offset by $40.2 million gain in fair value re-measurements. The net
realized capital losses in 2008 were primarily the result of the credit crisis
impacting the global financial markets, which drove down the values of equity
and fixed income securities. As such, our equity security portfolio
decreased $277.5 million as a result of fair value adjustments and our fixed
maturities decreased $176.5 million due to other-than-temporary
impairments. In addition, we recognized $243.3 million of net
realized capital losses, principally from the sale of equity securities we owned
as we realigned our investment portfolios. The net realized gains in
2007 consisted of $76.6 million in fair value re-measurements of equity
securities and $18.1 million from sales of equity securities and fixed maturity
securities, partially offset by $8.4 million of other-than-temporary impairments
of the fixed maturity securities.
Realized Gain on Debt
Repurchase.
On March 19, 2009, we announced the commencement
of a cash tender offer for any and all of the 6.60% fixed to floating rate long
term subordinated notes due 2067. Upon expiration of the tender
offer, we had reduced our outstanding debt by $161.4 million, which resulted in
a pre-tax gain on debt repurchase of $78.3 million.
Net Derivative Gain
(Loss).
In 2005 and prior, we sold seven equity index put option
contracts, which are outstanding. These contracts meet the definition
of a derivative in accordance with FASB guidance and as such, are fair valued
each quarter with the change recorded as net derivative gain or loss in the
consolidated statements of operations and comprehensive income
(loss). As a result of these adjustments in value, we recognized net
derivative gain of $3.2 million in 2009 and net derivative loss of $20.9 million
and $2.1 million in 2008 and 2007, respectively. The change in the fair value of
these equity index put option contracts is indicative of the change in the
financial markets over the same periods.
Other (Expense)
Income.
We recorded other expense of $22.5 million and $15.9 million in
2009 and 2008, respectively, and other income of $18.0 million in
2007. The changes were primarily the result of fluctuations in
foreign currency exchange rates for the corresponding periods.
Claims
and Expenses.
Incurred Losses and
LAE.
The following table presents our incurred losses and LAE
for the periods indicated.
|
Years
Ended December 31,
|
|||||||||||||||||||||||||||
|
Current
|
Ratio %/ |
Prior
|
Ratio %/ |
Total
|
Ratio
%/
|
||||||||||||||||||||||
|
(Dollars
in millions)
|
Year
|
Pt
Change
|
Years
|
Pt
Change
|
Incurred
|
Pt
Change
|
|||||||||||||||||||||
|
2009
|
|||||||||||||||||||||||||||
|
Attritional
(a)
|
$ | 2,181.4 | 56.0 | % | $ | 124.8 | 3.2 | % | $ | 2,306.2 | 59.2 | % | |||||||||||||||
|
Catastrophes
|
63.8 | 1.6 | % | 3.6 | 0.1 | % | 67.4 | 1.7 | % | ||||||||||||||||||
|
A&E
|
- | 0.0 | % | 0.4 | 0.0 | % | 0.4 | 0.0 | % | ||||||||||||||||||
|
Total
segment
|
$ | 2,245.2 | 57.7 | % | $ | 128.8 | 3.3 | % | $ | 2,374.1 | 61.0 | % | |||||||||||||||
|
2008
|
|||||||||||||||||||||||||||
|
Attritional
(a)
|
$ | 2,050.3 | 55.5 | % | $ | 24.4 | 0.7 | % | $ | 2,074.7 | 56.2 | % | |||||||||||||||
|
Catastrophes
|
353.8 | 9.6 | % | 10.5 | 0.3 | % | 364.3 | 9.9 | % | ||||||||||||||||||
|
A&E
|
- | 0.0 | % | - | 0.0 | % | - | 0.0 | % | ||||||||||||||||||
|
Total
segment
|
$ | 2,404.1 | 65.1 | % | $ | 34.9 | 0.9 | % | $ | 2,439.0 | 66.0 | % | |||||||||||||||
|
2007
|
|||||||||||||||||||||||||||
|
Attritional
(a)
|
$ | 2,189.3 | 54.8 | % | $ | (188.7 | ) | -4.7 | % | $ | 2,000.6 | 50.0 | % | ||||||||||||||
|
Catastrophes
|
152.3 | 3.8 | % | 7.7 | 0.2 | % | 160.0 | 4.0 | % | ||||||||||||||||||
|
A&E
|
- | 0.0 | % | 387.5 | 9.7 | % | 387.5 | 9.7 | % | ||||||||||||||||||
|
Total
segment
|
$ | 2,341.6 | 58.6 | % | $ | 206.5 | 5.2 | % | $ | 2,548.1 | 63.7 | % | |||||||||||||||
|
Variance 2009/2008
|
|||||||||||||||||||||||||||
|
Attritional
(a)
|
$ | 131.1 | 0.5 |
pts
|
$ | 100.4 | 2.5 |
pts
|
$ | 231.5 | 3.0 |
pts
|
|||||||||||||||
|
Catastrophes
|
(290.0 | ) | (8.0 | ) |
pts
|
(6.8 | ) | (0.2 | ) |
pts
|
(296.8 | ) | (8.2 | ) |
pts
|
||||||||||||
|
A&E
|
- | - |
pts
|
0.4 | - |
pts
|
0.4 | - |
pts
|
||||||||||||||||||
|
Total
segment
|
$ | (158.9 | ) | (7.4 | ) |
pts
|
$ | 94.0 | 2.4 |
pts
|
$ | (64.9 | ) | (5.0 | ) |
pts
|
|||||||||||
|
Variance 2008/2007
|
|||||||||||||||||||||||||||
|
Attritional
(a)
|
$ | (139.0 | ) | 0.7 |
pts
|
$ | 213.1 | 5.4 |
pts
|
$ | 74.1 | 6.1 |
pts
|
||||||||||||||
|
Catastrophes
|
201.5 | 5.8 |
pts
|
2.7 | 0.1 |
pts
|
204.3 | 5.9 |
pts
|
||||||||||||||||||
|
A&E
|
- | - |
pts
|
(387.5 | ) | (9.7 | ) |
pts
|
(387.5 | ) | (9.7 | ) |
pts
|
||||||||||||||
|
Total
segment
|
$ | 62.5 | 6.5 |
pts
|
$ | (171.7 | ) | (4.3 | ) |
pts
|
$ | (109.2 | ) | 2.3 |
pts
|
||||||||||||
|
(a) Attritional
losses exclude catastrophe and A&E losses.
|
|||||||||||||||||||||||||||
| (Some amounts may not reconcile due to rounding.) | |||||||||||||||||||||||||||
Incurred
losses and LAE were lower by $64.9 million, or 2.7%, in 2009 compared to
2008. The absence, in 2009, of any large catastrophe losses as
experienced in 2008, reduced the loss ratio 8.0 points, or $290.0 million,
period over period. Partially offsetting the reduction in catastrophe
losses was the increase in both current and prior years’ attritional
losses. The $131.1 million increase in current year attritional
losses was principally due to the increase in earned premium from 2008 to
2009. The $100.4 million increase in prior years’ attritional losses
was primarily due to increased reserves for exposure related to sub-prime and
contractors’ liability.
Incurred
losses and LAE were lower by $109.2 million, or 4.3%, in 2008 compared to
2007. Attritional losses were lower than in 2007, largely the result
of lower net earned premiums. The current year attritional loss ratio
crept up by 0.7 points compared to 2007, the result of softer rates in the U.S.
Reinsurance segment mitigated somewhat by improved loss ratios in the other
segments, particularly, International.
We
experienced $24.4 million of adverse reserve development on our attritional
reserves in 2008 compared to $188.7 million of favorable reserve development in
2007. The adverse development in 2008 was the result of $85.3 million
of development on loss reserves for a run-off auto loan credit insurance program
and a $32.6 million adverse arbitration decision. These items more
than offset approximately $93.5 million of favorable development on the
remainder of our attritional reserves.
Catastrophe
losses, at $364.3 million, were $204.3 million higher than in 2007, driven by
Hurricanes Gustav and Ike and a major snowstorm in China. While 2008
ranks as one of the costliest years on record for insured natural catastrophe
losses, our losses were generally in line with our modeled expected annual
aggregate catastrophe losses as developed through our enterprise risk and
catastrophe exposure management processes.
We
strengthened our asbestos reserves by $387.5 million in 2007, and had no gross
development in 2009 or 2008 as loss activity was in line with expected as per
the reserves established at December 31, 2007.
Commission, Brokerage, Taxes
and Fees.
Commission, brokerage, taxes and fees decreased by $2.4
million, or 0.3%, in 2009 compared to the same period in 2008. The
change in this directly variable expense was influenced by reduction in
contingent commissions and changes in the mix of business.
Commission,
brokerage, taxes and fees decreased by $31.1 million, or 3.2%, in 2008 compared
to 2007. This directly variable expense was influenced by the decline
in net earned premiums, partially offset by higher commission rates on new
insurance programs, higher contingent commissions and higher ceding commissions
on some reinsurance treaties due to more competitive market conditions, as well
as business mix.
Other Underwriting
Expenses.
Other underwriting expenses were $184.8 million and $162.3
million in 2009 and 2008, respectively. The increase was primarily
due to the increase in staff and staff related expenses as we continue to grow
our direct book of business. In addition, other underwriting expenses
include corporate expenses, which are expenses that are not allocated to
segments, of $17.6 million and $13.8 million for 2009 and 2008,
respectively.
Other
underwriting expenses were $162.3 million and $152.6 million in 2008 and 2007,
respectively. The increase was primarily due to higher compensation
and benefits expense resulting from increased staff, primarily in the U.S.
Insurance segment. Included in other underwriting expenses were
corporate expenses of $13.8 million and $13.1 million in 2008 and 2007,
respectively.
Interest, Fees and Bond
Issue Cost Amortization Expense.
Interest and other expense was $72.1
million and $79.2 million in 2009 and 2008, respectively. The
decrease, period over period, was primarily due to the partial repurchase of our
long term subordinated notes in March 2009.
Interest
and other expense was $79.2 million and $91.6 million in 2008 and 2007,
respectively. The decrease was primarily due to the acceleration of
amortization of the bond issue costs for the junior subordinated debt securities
which were retired in November, 2007, with no such expense in
2008. In addition, the interest reduction on the retired junior
subordinated notes was partially offset by the interest on the new long term
notes.
Income Tax Expense
(Benefit).
We had income tax expense of $132.3 million in 2009 compared
to an income tax benefit of $64.8 million 2008. The period over
period increases were primarily due to the increase in pre-tax net income in
2009 versus pre-tax net losses in 2008. We had an income tax expense
of $188.7 million in 2007, primarily due to income from operations and net
realized gains for the period. Our income tax is primarily a function
of the statutory tax rates and corresponding pre-tax income in the jurisdictions
where we operate, coupled with the impact from tax-preferenced investment
income. Variations in our effective tax rate generally result from
changes in the relative levels of pre-tax income among jurisdictions with
different tax rates.
Net
Income (Loss).
Our net
income was $807.0 million, in 2009, compared to a net loss of $18.8 million, in
2008. This increase was primarily driven by smaller after-tax net
realized capital losses and fewer catastrophe losses in 2009 compared to
2008.
Our net
loss was $18.8 million in 2008 compared to a net income of $839.3 million in
2007. This decrease was primarily driven by after-tax net realized
capital losses and increased catastrophe losses in 2008 compared to after-tax
net realized capital gains and fewer catastrophe losses in 2007.
Ratios.
Our
combined ratio decreased by 6.0 points to 89.6% in 2009 compared to 95.6% in
2008. The loss ratio component decreased 5.0 points in 2009
compared to the same period last year, principally due to the significant
decrease in catastrophe losses. The commission and brokerage ratio component
decreased by 1.4 points in 2009 compared to the same period last year, due to
mix of business, while the other underwriting expense ratio component increased
by 0.4 points in 2009 compared to the same period last year.
Our
combined ratio increased by 4.0 points to 95.6% in 2008 compared to 91.6% in
2007. The loss ratio component increased 2.3 points in 2008,
principally due to the increase in current year catastrophe losses and
attritional prior years’ reserve development, partially offset by the absence of
development on A&E reserves in 2008. The commission and brokerage
ratio component increased by 1.1 points in 2008 due to the increased commission
rates on new insurance programs and higher contingent
commissions. The other underwriting expense ratio component increased
by 0.6 points in 2008.
Shareholders’
Equity.
Shareholders’
equity increased by $1,141.4 million to $6,101.7 million at December 31, 2009
from $4,960.4 million at December 31, 2008, principally as a result of $807.0
million of net income, $529.9 million of unrealized appreciation on investments,
net of tax, $83.8 million of foreign currency translation adjustments and
share-based compensation transactions of $22.5 million, partially offset by 2.4
million common share repurchases for $190.6 million and $116.9 million of
shareholder dividends.
Shareholders’
equity decreased by $724.4 million to $4,960.4 million at December 31, 2008 from
$5,684.8 million at December 31, 2007, principally as a result of $236.6 million
of unrealized depreciation, net of tax, on investments, $193.3 million of
foreign currency translation adjustments, the repurchase of 1.6 million common
shares for $150.7 million, $118.6 million of shareholder dividends, pension
adjustments, net of tax, of $25.2 million and a net loss of $18.8 million,
partially offset by share-based compensation transactions of $20.0
million. The increase in unrealized depreciation was due to the
current financial market liquidity crisis that resulted in significantly
increased credit spreads and dramatic decreases in corporate and municipal
security values.
Consolidated
Investment Results
Net
Investment Income.
Net
investment income decreased 3.2% to $547.8 million in 2009 from $565.9 million
in 2008, primarily due to lower yields on new money, partially offset by a
decrease in losses from our limited partnership investments that invest in
public and non-public securities, both equity and debt.
Net
investment income decreased 17.1% to $565.9 million in 2008 from $682.4 million
in 2007, primarily due to losses incurred on our limited partnership
investments, particularly those that invested in public equity securities, in
2008 compared to limited partnership investment income in 2007.
The
following table shows the components of net investment income for the periods
indicated.
|
Years
Ended December 31,
|
||||||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Fixed
maturities
|
$ | 570.8 | $ | 543.4 | $ | 496.6 | ||||||
|
Equity
securities
|
3.6 | 19.9 | 24.7 | |||||||||
|
Short-term
investments and cash
|
6.0 | 52.1 | 109.1 | |||||||||
|
Other
invested assets
|
||||||||||||
|
Limited
partnerships
|
(19.0 | ) | (42.2 | ) | 59.2 | |||||||
|
Other
|
0.1 | 2.3 | 3.1 | |||||||||
|
Total
gross investment income
|
561.4 | 575.5 | 692.7 | |||||||||
|
Interest
credited and other expense
|
(13.6 | ) | (9.6 | ) | (10.3 | ) | ||||||
|
Total
net investment income
|
$ | 547.8 | $ | 565.9 | $ | 682.4 | ||||||
| . | ||||||||||||
|
(Some
amounts may not reconcile due to rounding.)
|
||||||||||||
The
following table shows a comparison of various investment yields for the periods
indicated.
|
2009
|
2008
|
2007
|
|||
|
Imbedded
pre-tax yield of cash and invested assets at December 31
|
4.1%
|
4.5%
|
4.7%
|
||
|
Imbedded
after-tax yield of cash and invested assets at December 31
|
3.6%
|
4.0%
|
3.9%
|
||
|
Annualized
pre-tax yield on average cash and invested assets
|
3.8%
|
4.0%
|
4.9%
|
||
|
Annualized
after-tax yield on average cash and invested assets
|
3.5%
|
3.4%
|
4.1%
|
Because
of our historical income orientation, we have generally managed our investments
to maximize reportable income. The following table provides a
comparison of our total return by asset class relative to broadly accepted
industry benchmarks for the periods indicated:
|
2009
|
2008
|
2007
|
|||
|
Fixed
income portfolio total return
|
9.4%
|
0.3%
|
5.0%
|
||
|
Barclay's
Capital - U.S. aggregate index
|
5.9%
|
5.2%
|
7.0%
|
||
|
Common
equity portfolio total return
|
28.9%
|
-40.9%
|
9.2%
|
||
|
S&P
500 index
|
26.5%
|
-37.0%
|
5.5%
|
||
|
Other
invested asset portfolio total return
|
-1.8%
|
-7.4%
|
13.5%
|
The
pre-tax equivalent total return for the bond portfolio was approximately 10.1%,
1.0% and 5.7%, respectively, in 2009, 2008 and 2007. The pre-tax
equivalent return adjusts the yield on tax-exempt bonds to the fully taxable
equivalent.
Net
Realized Capital (Losses) Gains.
The
following table presents the composition of our net realized capital (losses)
gains for the periods indicated.
|
Years
Ended December 31,
|
2009/2008 | 2008/2007 | ||||||||||||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
Variance
|
Variance
|
|||||||||||||||
|
(Losses) gains from sales:
|
||||||||||||||||||||
|
Fixed
maturity securities, market value
|
||||||||||||||||||||
|
Gains
|
$ | 19.7 | $ | 14.5 | $ | 2.6 | $ | 5.2 | $ | 11.9 | ||||||||||
|
Losses
|
(65.4 | ) | (27.2 | ) | (8.5 | ) | (38.2 | ) | (18.7 | ) | ||||||||||
|
Total
|
(45.7 | ) | (12.6 | ) | (5.9 | ) | (33.1 | ) | (6.7 | ) | ||||||||||
|
Fixed
maturity securities, fair value
|
||||||||||||||||||||
|
Gains
|
0.8 | 0.1 | - | 0.7 | 0.1 | |||||||||||||||
|
Losses
|
(0.2 | ) | - | - | (0.2 | ) | - | |||||||||||||
|
Total
|
0.7 | 0.1 | - | 0.6 | 0.1 | |||||||||||||||
|
Equity
securities, market value
|
||||||||||||||||||||
|
Gains
|
8.1 | - | - | 8.1 | - | |||||||||||||||
|
Losses
|
- | - | - | - | - | |||||||||||||||
|
Total
|
8.1 | - | - | 8.1 | - | |||||||||||||||
|
Equity
securities, fair value
|
||||||||||||||||||||
|
Gains
|
8.4 | 23.4 | 45.9 | (15.0 | ) | (22.5 | ) | |||||||||||||
|
Losses
|
(0.9 | ) | (254.1 | ) | (22.0 | ) | 253.2 | (232.1 | ) | |||||||||||
|
Total
|
7.5 | (230.6 | ) | 24.0 | 238.1 | (254.6 | ) | |||||||||||||
|
Total
net realized capital (losses) gains from sales
|
||||||||||||||||||||
|
Gains
|
37.0 | 38.0 | 48.5 | (1.0 | ) | (10.5 | ) | |||||||||||||
|
Losses
|
(66.5 | ) | (281.3 | ) | (30.4 | ) | 214.8 | (250.9 | ) | |||||||||||
|
Total
|
(29.4 | ) | (243.3 | ) | 18.1 | 213.9 | (261.4 | ) | ||||||||||||
|
Other-than-temporary
impairments:
|
(13.2 | ) | (176.5 | ) | (8.4 | ) | 163.3 | (168.1 | ) | |||||||||||
|
Gains (losses) from fair value
adjustments:
|
||||||||||||||||||||
|
Fixed
maturities, fair value
|
9.3 | 1.5 | - | 7.8 | 1.5 | |||||||||||||||
|
Equity
securities, fair value
|
30.9 | (277.5 | ) | 76.6 | 308.4 | (354.1 | ) | |||||||||||||
|
Total
|
40.2 | (276.0 | ) | 76.6 | 316.2 | (352.6 | ) | |||||||||||||
|
Total
net realized capital (losses) gains
|
$ | (2.3 | ) | $ | (695.8 | ) | $ | 86.3 | $ | 693.5 | $ | (782.1 | ) | |||||||
|
(Some
amounts may not reconcile due to rounding.)
|
||||||||||||||||||||
Net
realized capital losses were $2.3 million and $695.8 million in 2009 and 2008,
respectively, compared to $86.3 million of net realized capital gains in 2007.
In 2009, we recorded $29.3 million of net realized capital losses from sales and
$13.2 million in other-than-temporary impairments on our available for sale
fixed maturity securities, partially offset by $40.2 million gain in fair value
re-measurements. In contrast, in 2008, we recorded $276.0 million in losses due
to fair value re-measurements primarily on equity securities as a result of the
global financial markets credit crisis, $243.3 million of losses from sales of
our equity portfolio and $176.5 million of other-than-temporary impairments on
our available for sale fixed maturity securities. In 2007, net
realized capital gains were $76.6 million of fair value re-measurements, net
realized capital gains from sales of $18.1 million and other-than-temporary
impairments of $8.4 million.
Segment
Results.
Through
our subsidiaries, we operate in five segments: U.S. Reinsurance, U.S.
Insurance, Specialty Underwriting, International and Bermuda. The
U.S. Reinsurance operation writes property and casualty reinsurance, on both a
treaty and facultative basis, through reinsurance brokers, as well as directly
with ceding companies within the U.S. The U.S. Insurance operation
writes property and casualty insurance primarily through general agents, brokers
and surplus lines brokers within the U.S. The Specialty Underwriting
operation writes A&H, marine, aviation and surety business within the U.S.
and worldwide through brokers and directly with ceding companies. The
International operation writes non-U.S. property and casualty reinsurance
through Everest Re branches in Canada and Singapore and offices in Miami and New
Jersey. The Bermuda operation provides reinsurance and insurance to
worldwide property and casualty markets and reinsurance to life insurers through
brokers and directly with ceding companies from its Bermuda office and
reinsurance to the United Kingdom and European markets through its UK
branch.
These
segments are managed independently, but conform with corporate guidelines with
respect to pricing, risk management, control of aggregate catastrophe exposures,
capital, investments and support operations. Management generally
monitors and evaluates the financial performance of these operating segments
based upon their underwriting results.
Underwriting
results include earned premium less losses and LAE incurred, commission and
brokerage expenses and other underwriting expenses. We measure our
underwriting results using ratios, in particular loss, commission and brokerage
and other underwriting expense ratios, which respectively, divide incurred
losses, commissions and brokerage and other underwriting expenses by premiums
earned. We utilize inter-affiliate reinsurance, although such
reinsurance does not materially impact segment results, as business is generally
reported within the segment in which the business was first
produced.
Our loss
and LAE reserves are our best estimate of our ultimate liability for unpaid
claims. We re-evaluate our estimates on an ongoing basis, including all prior
period reserves, taking into consideration all available information and, in
particular, recently reported loss claim experience and trends related to prior
periods. Such re-evaluations are recorded in incurred losses in the period in
which re-evaluation is made.
The
following discusses the underwriting results for each of our segments for the
periods indicated.
U.S.
Reinsurance.
The
following table presents the underwriting results and ratios for the U.S.
Reinsurance segment for the periods indicated.
|
Years
Ended December 31,
|
2009/2008 | 2008/2007 | ||||||||||||||||||||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
Variance
|
%
Change
|
Variance
|
%
Change
|
|||||||||||||||||||||
|
Gross
written premiums
|
$ | 1,172.3 | $ | 957.9 | $ | 1,193.5 | $ | 214.4 | 22.4 | % | $ | (235.6 | ) | -19.7 | % | |||||||||||||
|
Net
written premiums
|
1,167.2 | 948.8 | 1,183.1 | 218.4 | 23.0 | % | (234.3 | ) | -19.8 | % | ||||||||||||||||||
|
Premiums
earned
|
$ | 1,150.3 | $ | 1,050.3 | $ | 1,282.9 | $ | 100.0 | 9.5 | % | $ | (232.5 | ) | -18.1 | % | |||||||||||||
|
Incurred
losses and LAE
|
574.8 | 798.2 | 705.4 | (223.4 | ) | -28.0 | % | 92.8 | 13.1 | % | ||||||||||||||||||
|
Commission
and brokerage
|
272.2 | 273.3 | 327.2 | (1.2 | ) | -0.4 | % | (53.9 | ) | -16.5 | % | |||||||||||||||||
|
Other
underwriting expenses
|
36.2 | 32.2 | 33.3 | 4.0 | 12.4 | % | (1.1 | ) | -3.3 | % | ||||||||||||||||||
|
Underwriting
gain (loss)
|
$ | 267.2 | $ | (53.3 | ) | $ | 217.0 | $ | 320.6 |
NM
|
$ | (270.3 | ) | -124.6 | % | |||||||||||||
|
Point
Chg
|
Point
Chg
|
|||||||||||||||||||||||||||
|
Loss
ratio
|
50.0 | % | 76.0 | % | 55.0 | % | (26.0 | ) | 21.0 | |||||||||||||||||||
|
Commission
and brokerage ratio
|
23.7 | % | 26.0 | % | 25.5 | % | (2.3 | ) | 0.5 | |||||||||||||||||||
|
Other
underwriting expense ratio
|
3.1 | % | 3.1 | % | 2.6 | % | - | 0.5 | ||||||||||||||||||||
|
Combined
ratio
|
76.8 | % | 105.1 | % | 83.1 | % | (28.3 | ) | 22.0 | |||||||||||||||||||
|
(NM,
not meaningful)
|
||||||||||||||||||||||||||||
|
(Some
amounts may not reconcile due to rounding.)
|
||||||||||||||||||||||||||||
Premiums.
Gross written premiums
increased by 22.4% to $1,172.3 million in 2009 from $957.9 million in 2008,
primarily due to $103.9 million (40.0%) increase in U.S. treaty casualty volume,
$84.6 million from the new crop hail quota share treaties, a $15.8 million
(2.6%) increase in treaty property volume and a $10.5 million (12.0%) increase
in facultative volume. Our treaty casualty premiums were higher as we wrote more
quota share business as a replacement for more business written on an excess of
loss basis. Net written premiums increased 23.0% to $1,167.2 million
in 2009 compared to $948.8 million in 2008, relatively in line with the increase
in gross written premiums. Premiums earned increased 9.5% to $1,150.3
million in 2009 compared to $1,050.3 million in 2008. The change in
premiums earned relative to net written premiums is the result of timing;
premiums, for proportionate contracts, are earned ratably over the coverage
period whereas written premiums are recorded at the initiation of the coverage
period.
Gross
written premiums decreased by 19.7% to $957.9 million in 2008 from $1,193.5
million in 2007, primarily due to a $104.9 million (14.7%) decrease in treaty
property volume, a $71.7 million (21.6%) decrease in treaty casualty volume and
a $57.9 million (39.9%) decrease in facultative volume. Property premiums were
lower due to increased common account reinsurance protections, particularly on
one Florida quota share account and two quota share non-renewals. Our
treaty casualty premium was lower than last year as we reduced this book to a
group of core accounts in response to the softer market
conditions. Facultative volume decreased due to ceding companies
retaining a greater portion of gross premiums and a marketplace that remains
competitive. Net written premiums decreased 19.8% to $948.8 million
in 2008 compared to $1,183.1 million in 2007, primarily due to the decrease in
gross written premiums. Net premiums earned correspondingly decreased
18.1% to $1,050.3 million in 2008 compared to $1,282.9 million in 2007,
consistent with the change in net written premiums.
Incurred Losses and
LAE.
The
following table presents the incurred losses and LAE for the U.S. Reinsurance
segment for the periods indicated.
|
Years
Ended December 31,
|
|||||||||||||||||||||||||||
|
Current
|
Ratio
%/
|
Prior
|
Ratio
%/
|
Total
|
Ratio
%/
|
||||||||||||||||||||||
|
(Dollars
in millions)
|
Year
|
Pt
Change
|
Years
|
Pt
Change
|
Incurred
|
Pt
Change
|
|||||||||||||||||||||
|
2009
|
|||||||||||||||||||||||||||
|
Attritional
|
$ | 550.8 | 47.9 | % | $ | 30.6 | 2.7 | % | $ | 581.4 | 50.5 | % | |||||||||||||||
|
Catastrophes
|
- | 0.0 | % | (7.1 | ) | -0.6 | % | (7.1 | ) | -0.6 | % | ||||||||||||||||
|
A&E
|
- | 0.0 | % | 0.4 | 0.0 | % | 0.4 | 0.0 | % | ||||||||||||||||||
|
Total
segment
|
$ | 550.8 | 47.9 | % | $ | 23.9 | 2.1 | % | $ | 574.8 | 50.0 | % | |||||||||||||||
|
2008
|
|||||||||||||||||||||||||||
|
Attritional
|
$ | 471.3 | 44.9 | % | $ | 52.9 | 5.0 | % | $ | 524.2 | 49.9 | % | |||||||||||||||
|
Catastrophes
|
253.5 | 24.1 | % | 20.4 | 1.9 | % | 273.9 | 26.1 | % | ||||||||||||||||||
|
A&E
|
- | 0.0 | % | - | 0.0 | % | - | 0.0 | % | ||||||||||||||||||
|
Total
segment
|
$ | 724.9 | 69.0 | % | $ | 73.3 | 7.0 | % | $ | 798.2 | 76.0 | % | |||||||||||||||
|
2007
|
|||||||||||||||||||||||||||
|
Attritional
|
$ | 583.9 | 45.5 | % | $ | (139.9 | ) | -10.9 | % | $ | 443.9 | 34.6 | % | ||||||||||||||
|
Catastrophes
|
0.1 | 0.0 | % | (5.0 | ) | -0.4 | % | (4.9 | ) | -0.4 | % | ||||||||||||||||
|
A&E
|
- | 0.0 | % | 266.4 | 20.8 | % | 266.4 | 20.8 | % | ||||||||||||||||||
|
Total
segment
|
$ | 584.0 | 45.5 | % | $ | 121.4 | 9.5 | % | $ | 705.4 | 55.0 | % | |||||||||||||||
|
Variance 2009/2008
|
|||||||||||||||||||||||||||
|
Attritional
|
$ | 79.5 | 3.0 |
pts
|
$ | (22.3 | ) | (2.3 | ) |
pts
|
$ | 57.2 | 0.6 |
pts
|
|||||||||||||
|
Catastrophes
|
(253.5 | ) | (24.1 | ) |
pts
|
(27.5 | ) | (2.5 | ) |
pts
|
(281.0 | ) | (26.7 | ) |
pts
|
||||||||||||
|
A&E
|
- | - |
pts
|
0.4 | - |
pts
|
0.4 | - |
pts
|
||||||||||||||||||
|
Total
segment
|
$ | (174.0 | ) | (21.1 | ) |
pts
|
$ | (49.4 | ) | (4.9 | ) |
pts
|
$ | (223.4 | ) | (26.0 | ) |
pts
|
|||||||||
|
Variance 2008/2007
|
|||||||||||||||||||||||||||
|
Attritional
|
$ | (112.5 | ) | (0.6 | ) |
pts
|
$ | 192.8 | 15.9 |
pts
|
$ | 80.3 | 15.3 |
pts
|
|||||||||||||
|
Catastrophes
|
253.4 | 24.1 |
pts
|
25.4 | 2.3 |
pts
|
278.8 | 26.5 |
pts
|
||||||||||||||||||
|
A&E
|
- | - |
pts
|
(266.4 | ) | (20.8 | ) |
pts
|
(266.4 | ) | (20.8 | ) |
pts
|
||||||||||||||
|
Total
segment
|
$ | 140.9 | 23.5 |
pts
|
$ | (48.1 | ) | (2.5 | ) |
pts
|
$ | 92.8 | 21.0 |
pts
|
|||||||||||||
| (Some amounts may not reconcile due to rounding.) | |||||||||||||||||||||||||||
Incurred
losses were $223.4 million (26.0 points) lower at $574.8 million in 2009
compared to $798.2 million in 2008, primarily as a result of the $281.0 million
(26.7 points) decrease in catastrophe losses due to the absence of current year
catastrophes in 2009. The prior years’ reserve development in 2009
primarily relates to sub-prime liability exposures.
Incurred
losses were $92.8 million (21.0 points) higher in 2008 compared to 2007,
primarily due to catastrophe losses from Hurricanes Gustav and Ike and
unfavorable reserve development on prior years’ losses, including $32.6 million
for an unfavorable arbitration decision relating to a 2001 retrocessional
cover. We had no reserve adjustments in 2008 for A&E losses,
which experienced $266.4 million adverse development in 2007.
Segment
Expenses.
Commission and brokerage expenses decreased by 0.4%
to $272.2 million in 2009 compared to $273.3 million in 2008, primarily due to
the change in the mix and type of business written. Segment other
underwriting expenses for 2009 increased to $36.2 million from $32.2 million in
for 2008, due to growth in the overall infrastructure.
Commission
and brokerage expenses decreased by 16.5% to $273.3 million for 2008 from $327.2
million in 2007, generally in line with the 18.1% decrease in net earned
premiums. Segment other underwriting expenses for 2008 decreased
slightly to $32.2 million from $33.3 million for 2007.
U.S.
Insurance.
The
following table presents the underwriting results and ratios for the U.S.
Insurance segment for the periods indicated.
| Years Ended December 31, | 2009/2008 | 2008/2007 | ||||||||||||||||||||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
Variance
|
%
Change
|
Variance
|
%
Change
|
|||||||||||||||||||||
|
Gross
written premiums
|
$ | 842.6 | $ | 771.8 | $ | 885.6 | $ | 70.8 | 9.2 | % | $ | (113.8 | ) | -12.9 | % | |||||||||||||
|
Net
written premiums
|
656.2 | 617.0 | 744.3 | 39.2 | 6.4 | % | (127.3 | ) | -17.1 | % | ||||||||||||||||||
|
Premiums
earned
|
$ | 671.1 | $ | 705.5 | $ | 735.9 | $ | (34.4 | ) | -4.9 | % | $ | (30.4 | ) | -4.1 | % | ||||||||||||
|
Incurred
losses and LAE
|
538.6 | 549.9 | 556.4 | (11.2 | ) | -2.0 | % | (6.5 | ) | -1.2 | % | |||||||||||||||||
|
Commission
and brokerage
|
124.4 | 146.7 | 136.2 | (22.3 | ) | -15.2 | % | 10.5 | 7.7 | % | ||||||||||||||||||
|
Other
underwriting expenses
|
74.6 | 64.3 | 58.2 | 10.3 | 16.0 | % | 6.1 | 10.5 | % | |||||||||||||||||||
|
Underwriting
loss
|
$ | (66.5 | ) | $ | (55.4 | ) | $ | (14.9 | ) | $ | (11.1 | ) | 20.1 | % | $ | (40.5 | ) | NM | ||||||||||
|
Point
Chg
|
Point
Chg
|
|||||||||||||||||||||||||||
|
Loss
ratio
|
80.3 | % | 77.9 | % | 75.6 | % | 2.4 | 2.3 | ||||||||||||||||||||
|
Commission
and brokerage ratio
|
18.5 | % | 20.8 | % | 18.5 | % | (2.3 | ) | 2.3 | |||||||||||||||||||
|
Other
underwriting expense ratio
|
11.1 | % | 9.2 | % | 7.9 | % | 1.9 | 1.3 | ||||||||||||||||||||
|
Combined
ratio
|
109.9 | % | 107.9 | % | 102.0 | % | 2.0 | 5.9 | ||||||||||||||||||||
|
(NM,
not meaningful)
|
||||||||||||||||||||||||||||
|
(Some
amounts may not reconcile due to rounding.)
|
||||||||||||||||||||||||||||
Premiums.
Gross written premiums
increased by 9.2% to $842.6 million in 2009 compared to $771.8 million for
2008. Most of the new premium was derived from our entry into the
financial institution D&O and E&O market and additional property
insurance written in Florida, where rates to exposure remain
attractive. Net written premiums increased by 6.4% to $656.2 million
in 2009 compared to $617.0 million in 2008, as the increase in gross written
premiums was partially offset by the increase in ceded written
premiums. Premiums earned decreased 4.9% to $671.1 million in 2009
compared to $705.5 million in 2008. The change in premiums earned
relative to net written premiums is the result of timing; premiums are earned
ratably over the coverage period whereas written premiums are recorded at the
initiation of the coverage period.
Gross
written premiums decreased by 12.9% to $771.8 million in 2008 compared to $885.6
million in 2007. Conditions for workers’ compensation, contractors and public
entity business have gotten increasingly competitive, which reduced the volume
of business that met our underwriting and pricing criteria. A little
less than half of the shortfall compared to last year was from the C.V. Starr
program, where we lost public entity accounts because we did not match market
pricing and terms. In addition, the $76.3 million of gross written
premium we assumed on a new program in 2007 did not recur in
2008. Net written premiums decreased by 17.1% to $617.0 million in
2008 compared to $744.3 million in 2007. The decrease in net written
premiums was larger than the decline in gross written premiums primarily due to
increased reinsurance cessions. Net premiums earned decreased 4.1% to
$705.5 million in 2008 compared to $735.9 million in 2007, as a result of
timing.
Incurred Losses and
LAE.
The
following table presents the incurred losses and LAE for the U.S. Insurance
segment for the periods indicated.
|
Years
Ended December 31,
|
|||||||||||||||||||||||||||
|
Current
|
Ratio
%/
|
Prior
|
Ratio
%/
|
Total
|
Ratio
%/
|
||||||||||||||||||||||
|
(Dollars
in millions)
|
Year
|
Pt
Change
|
Years
|
Pt
Change
|
Incurred
|
Pt
Change
|
|||||||||||||||||||||
|
2009
|
|||||||||||||||||||||||||||
|
Attritional
|
$ | 479.6 | 71.5 | % | $ | 59.0 | 8.8 | % | $ | 538.6 | 80.3 | % | |||||||||||||||
|
Catastrophes
|
- | 0.0 | % | - | 0.0 | % | - | 0.0 | % | ||||||||||||||||||
|
Total
segment
|
$ | 479.6 | 71.5 | % | $ | 59.0 | 8.8 | % | $ | 538.6 | 80.3 | % | |||||||||||||||
|
2008
|
|||||||||||||||||||||||||||
|
Attritional
|
$ | 481.0 | 68.2 | % | $ | 69.1 | 9.8 | % | $ | 550.1 | 78.0 | % | |||||||||||||||
|
Catastrophes
|
- | 0.0 | % | (0.3 | ) | 0.0 | % | (0.3 | ) | 0.0 | % | ||||||||||||||||
|
Total
segment
|
$ | 481.0 | 68.2 | % | $ | 68.8 | 9.8 | % | $ | 549.9 | 77.9 | % | |||||||||||||||
|
2007
|
|||||||||||||||||||||||||||
|
Attritional
|
$ | 518.5 | 70.5 | % | $ | 38.3 | 5.2 | % | $ | 556.8 | 75.7 | % | |||||||||||||||
|
Catastrophes
|
- | 0.0 | % | (0.4 | ) | -0.1 | % | (0.4 | ) | -0.1 | % | ||||||||||||||||
|
Total
segment
|
$ | 518.5 | 70.5 | % | $ | 37.9 | 5.1 | % | $ | 556.4 | 75.6 | % | |||||||||||||||
|
Variance 2009/2008
|
|||||||||||||||||||||||||||
|
Attritional
|
$ | (1.4 | ) | 3.3 |
pts
|
$ | (10.1 | ) | (1.0 | ) |
pts
|
$ | (11.5 | ) | 2.3 |
pts
|
|||||||||||
|
Catastrophes
|
- | - |
pts
|
0.3 | - |
pts
|
0.3 | - |
pts
|
||||||||||||||||||
|
Total
segment
|
$ | (1.4 | ) | 3.3 |
pts
|
$ | (9.8 | ) | (1.0 | ) |
pts
|
$ | (11.2 | ) | 2.4 |
pts
|
|||||||||||
|
Variance 2008/2007
|
|||||||||||||||||||||||||||
|
Attritional
|
$ | (37.5 | ) | (2.3 | ) |
pts
|
$ | 30.8 | 4.6 |
pts
|
$ | (6.7 | ) | 2.3 |
pts
|
||||||||||||
|
Catastrophes
|
- | - |
pts
|
0.2 | - |
pts
|
0.2 | - |
pts
|
||||||||||||||||||
|
Total
segment
|
$ | (37.5 | ) | (2.3 | ) |
pts
|
$ | 31.0 | 4.7 |
pts
|
$ | (6.5 | ) | 2.3 |
pts
|
||||||||||||
|
(Some
amounts may not reconcile due to rounding.)
|
|||||||||||||||||||||||||||
Incurred
losses and LAE decreased by 2.0% to $538.6 million in 2009 compared to $549.9
million in 2008. This decrease was due to the decrease in net earned
premiums, partially offset by the increase in the loss ratio, period over
period. Prior years’ attritional losses were $10.1 million less
unfavorable in 2009 compared to 2008. The 2009 unfavorable
development of $59.0 million was primarily the result of reserve strengthening
on contractors’ liability programs, package policy business and workers’
compensation business. The 2008 unfavorable development of $69.1
million was primarily the result of $85.3 million reserve strengthening for an
auto loan credit insurance program, partially offset by $16.2 million in
favorable prior years’ reserve development.
Incurred
losses and LAE decreased by 1.2% to $549.9 million in 2008 compared to $556.4
million in 2007 driven by the 4.1% decrease in net earned premium and a 2.3
point reduction in the current year loss ratio. In 2008, we
strengthened reserves for an auto loan credit insurance program by $85.3 million
as the deterioration in general economic conditions adversely impacted loan
performance resulting in unforeseen increases in loan default rates and claim
amounts. We had strengthened the reserves for this program by $64.7
million in 2007. We commuted our remaining liability on this program
with the largest policyholder representing approximately one third of the
remaining loss exposure. Given the magnitude of our current reserves,
the maturity of the remaining insured portfolio and the reduced principal
exposure, we believe future loss development, if any, related to this program
will not be material. Other than as related to this run-off program,
the segment experienced favorable reserve development in both 2008 and
2007.
Segment
Expenses.
Commission and brokerage
decreased by 15.2% to $124.4 million in 2009 compared to $146.7 million in
2008. The decrease was primarily due to the change in the mix of
business written and the reinsurance purchased on the business
written. Segment other underwriting expenses in 2009 increased to
$74.6 million compared to $64.3 million in 2008. The increase was primarily due
to increased costs associated with the expanded infrastructure.
Commission
and brokerage increased by 7.7% to $146.7 million in 2008 compared to $136.2
million in 2007, principally due to higher commissions on two new
programs. Segment other underwriting expenses in 2008 increased to
$64.3 million compared to $58.2 million in 2007, primarily due to increased
compensation costs associated with increased staff.
Specialty
Underwriting.
The
following table presents the underwriting results and ratios for the Specialty
Underwriting segment for the periods indicated.
| Years Ended December 31, | 2009/2008 | 2008/2007 | ||||||||||||||||||||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
Variance
|
%
Change
|
Variance
|
%
Change
|
|||||||||||||||||||||
|
Gross
written premiums
|
$ | 234.8 | $ | 260.4 | $ | 270.1 | $ | (25.6 | ) | -9.8 | % | $ | (9.7 | ) | -3.6 | % | ||||||||||||
|
Net
written premiums
|
230.0 | 254.2 | 263.8 | (24.3 | ) | -9.5 | % | (9.6 | ) | -3.6 | % | |||||||||||||||||
|
Premiums
earned
|
$ | 234.5 | $ | 251.8 | $ | 262.0 | $ | (17.2 | ) | -6.8 | % | $ | (10.2 | ) | -3.9 | % | ||||||||||||
|
Incurred
losses and LAE
|
163.4 | 165.9 | 173.3 | (2.5 | ) | -1.5 | % | (7.4 | ) | -4.3 | % | |||||||||||||||||
|
Commission
and brokerage
|
72.6 | 70.8 | 68.5 | 1.7 | 2.5 | % | 2.3 | 3.4 | % | |||||||||||||||||||
|
Other
underwriting expenses
|
8.7 | 8.1 | 8.5 | 0.7 | 8.2 | % | (0.4 | ) | -4.8 | % | ||||||||||||||||||
|
Underwriting
(loss) gain
|
$ | (10.1 | ) | $ | 7.0 | $ | 11.7 | $ | (17.2 | ) | -244.1 | % | $ | (4.7 | ) | -40.0 | % | |||||||||||
|
Point
Chg
|
Point
Chg
|
|||||||||||||||||||||||||||
|
Loss
ratio
|
69.7 | % | 65.9 | % | 66.1 | % | 3.8 | (0.2 | ) | |||||||||||||||||||
|
Commission
and brokerage ratio
|
30.9 | % | 28.1 | % | 26.2 | % | 2.8 | 1.9 | ||||||||||||||||||||
|
Other
underwriting expense ratio
|
3.7 | % | 3.2 | % | 3.2 | % | 0.5 | - | ||||||||||||||||||||
|
Combined
ratio
|
104.3 | % | 97.2 | % | 95.5 | % | 7.1 | 1.7 | ||||||||||||||||||||
|
(Some
amounts may not reconcile due to rounding.)
|
||||||||||||||||||||||||||||
Premiums.
Gross written premiums
decreased by 9.8% to $234.8 million in 2009 compared to $260.4 million for 2008,
primarily due to a $33.7 million decrease in marine premiums and a $5.9 million
decrease in surety premiums, partially offset by a $10.0 million increase in
aviation premiums and a $2.7 million increase in A&H
premiums. Net written premiums decreased 9.5% to $230.0 million in
2009 compared to $254.2 million in 2008, in line with the decrease in gross
writings. Premiums earned decreased 6.8% to $234.5 million in 2009
compared to $251.8 million in 2008. The change in premiums earned
relative to net written premiums is the result of timing; premiums are earned
ratably over the coverage period whereas written premiums are recorded at the
initiation of the coverage period.
Gross
written premiums decreased by 3.6% to $260.4 million in 2008 compared to $270.1
million in 2007. Aviation premiums decreased by $16.9 million (58.9%)
owing to very competitive market conditions. A&H premiums
decreased by $15.4 million (16.1%) largely due to decreased premiums under
certain quota share contracts where the ceding companies have culled their books
to improve their loss experience. Marine premiums increased by $19.8
million (19.8%) due to higher premiums on our quota share covers and improved
rates across the book. Surety premiums increased by $2.8 million or
6.1%. Net written premiums decreased 3.6% to $254.2 million in 2008
compared to $263.8 million in 2007, as a result of the decrease in gross written
premiums. Net premiums earned decreased 3.9% to $251.8 million in
2008 compared to $262.0 million in 2007, in line with the change in net written
premiums.
Incurred Losses and
LAE.
The following table presents the incurred losses and LAE
for the Specialty Underwriting segment for the periods indicated.
|
Years
Ended December 31,
|
|||||||||||||||||||||||||||
|
Current
|
Ratio
%/
|
Prior
|
Ratio
%/
|
Total
|
Ratio
%/
|
||||||||||||||||||||||
|
(Dollars
in millions)
|
Year
|
Pt
Change
|
Years
|
Pt
Change
|
Incurred
|
Pt
Change
|
|||||||||||||||||||||
|
2009
|
|||||||||||||||||||||||||||
|
Attritional
|
$ | 160.0 | 68.2 | % | $ | (3.6 | ) | -1.5 | % | $ | 156.4 | 66.7 | % | ||||||||||||||
|
Catastrophes
|
- | 0.0 | % | 7.0 | 3.0 | % | 7.0 | 3.0 | % | ||||||||||||||||||
|
Total
segment
|
$ | 160.0 | 68.2 | % | $ | 3.4 | 1.4 | % | $ | 163.4 | 69.7 | % | |||||||||||||||
|
2008
|
|||||||||||||||||||||||||||
|
Attritional
|
$ | 150.8 | 59.9 | % | $ | (7.5 | ) | -3.0 | % | $ | 143.3 | 56.9 | % | ||||||||||||||
|
Catastrophes
|
17.5 | 7.0 | % | 5.1 | 2.0 | % | 22.6 | 9.0 | % | ||||||||||||||||||
|
Total
segment
|
$ | 168.3 | 66.9 | % | $ | (2.5 | ) | -1.0 | % | $ | 165.9 | 65.9 | % | ||||||||||||||
|
2007
|
|||||||||||||||||||||||||||
|
Attritional
|
$ | 146.2 | 55.8 | % | $ | 3.3 | 1.2 | % | $ | 149.4 | 57.0 | % | |||||||||||||||
|
Catastrophes
|
0.4 | 0.2 | % | 23.5 | 9.0 | % | 23.9 | 9.1 | % | ||||||||||||||||||
|
Total
segment
|
$ | 146.6 | 55.9 | % | $ | 26.7 | 10.2 | % | $ | 173.3 | 66.1 | % | |||||||||||||||
|
Variance 2009/2008
|
|||||||||||||||||||||||||||
|
Attritional
|
$ | 9.2 | 8.3 |
pts
|
$ | 3.9 | 1.5 |
pts
|
$ | 13.1 | 9.8 |
pts
|
|||||||||||||||
|
Catastrophes
|
(17.5 | ) | (7.0 | ) |
pts
|
1.9 | 1.0 |
pts
|
(15.6 | ) | (6.0 | ) |
pts
|
||||||||||||||
|
Total
segment
|
$ | (8.3 | ) | 1.3 |
pts
|
$ | 5.8 | 2.4 |
pts
|
$ | (2.5 | ) | 3.8 |
pts
|
|||||||||||||
|
Variance 2008/2007
|
|||||||||||||||||||||||||||
|
Attritional
|
$ | 4.7 | 4.1 |
pts
|
$ | (10.8 | ) | (4.2 | ) |
pts
|
$ | (6.1 | ) | (0.1 | ) |
pts
|
|||||||||||
|
Catastrophes
|
17.1 | 6.8 |
pts
|
(18.4 | ) | (6.9 | ) |
pts
|
(1.3 | ) | (0.1 | ) |
pts
|
||||||||||||||
|
Total
segment
|
$ | 21.8 | 11.0 |
pts
|
$ | (29.2 | ) | (11.2 | ) |
pts
|
$ | (7.4 | ) | (0.2 | ) |
pts
|
|||||||||||
|
(Some
amounts may not reconcile due to rounding.)
|
|||||||||||||||||||||||||||
Incurred
losses and LAE decreased by 1.5% to $163.4 million for 2009 compared to $165.9
million in 2008, primarily as a result of a decrease in catastrophe losses on
the marine book of business, period over period. Partially offsetting
this decrease were the proportionally higher current year attritional losses on
the marine business in addition to less favorable reserve development on prior
years’ attritional losses on most of the Specialty Underwriting
lines.
Incurred
losses and LAE decreased by 4.3% to $165.9 million in 2008 compared to $173.3
million in 2007, as both attritional losses and catastrophe losses were similar
for the two periods. The bulk of the 2008 catastrophe losses emanated
from Hurricanes Gustav and Ike, while the 2007 losses were primarily caused by
late reported marine losses from Hurricane Rita.
Segment
Expenses.
Commission and brokerage
increased 2.5% to $72.6 million in 2009 compared to $70.8 million in 2008 as
commissions increased on the A&H business. Segment other
underwriting expenses for 2009 increased slightly to $8.7 million compared to
$8.1 million for 2008.
Commission
and brokerage increased 3.4% to $70.8 million in 2008 compared to $68.5 million
in 2007 due primarily to the combined impacts of an increase in proportional
premiums written, which generate higher ceding commissions, on the marine
business and an increase in contingent commission on the aviation
business. Segment other underwriting expenses decreased slightly to
$8.1 million in 2008 as compared to $8.5 million in 2008.
International.
The
following table presents the underwriting results and ratios for the
International segment for the periods indicated.
| Years Ended December 31, | 2009/2008 | 2008/2007 | ||||||||||||||||||||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
Variance
|
%
Change
|
Variance
|
%
Change
|
|||||||||||||||||||||
|
Gross
written premiums
|
$ | 1,084.5 | $ | 904.7 | $ | 805.9 | $ | 179.8 | 19.9 | % | $ | 98.8 | 12.3 | % | ||||||||||||||
|
Net
written premiums
|
1,081.3 | 902.1 | 806.0 | 179.2 | 19.9 | % | 96.2 | 11.9 | % | |||||||||||||||||||
|
Premiums
earned
|
$ | 1,053.5 | $ | 885.5 | $ | 803.8 | $ | 168.1 | 19.0 | % | $ | 81.6 | 10.2 | % | ||||||||||||||
|
Incurred
losses and LAE
|
613.3 | 504.8 | 501.9 | 108.4 | 21.5 | % | 2.9 | 0.6 | % | |||||||||||||||||||
|
Commission
and brokerage
|
267.1 | 230.9 | 199.5 | 36.2 | 15.7 | % | 31.5 | 15.8 | % | |||||||||||||||||||
|
Other
underwriting expenses
|
23.1 | 19.8 | 18.6 | 3.3 | 16.7 | % | 1.1 | 6.2 | % | |||||||||||||||||||
|
Underwriting
gain
|
$ | 150.1 | $ | 129.9 | $ | 83.8 | $ | 20.1 | 15.5 | % | $ | 46.1 | 55.0 | % | ||||||||||||||
|
Point
Chg
|
Point
Chg
|
|||||||||||||||||||||||||||
|
Loss
ratio
|
58.2 | % | 57.0 | % | 62.4 | % | 1.2 | (5.4 | ) | |||||||||||||||||||
|
Commission
and brokerage ratio
|
25.4 | % | 26.1 | % | 24.8 | % | (0.7 | ) | 1.3 | |||||||||||||||||||
|
Other
underwriting expense ratio
|
2.2 | % | 2.2 | % | 2.4 | % | - | (0.2 | ) | |||||||||||||||||||
|
Combined
ratio
|
85.8 | % | 85.3 | % | 89.6 | % | 0.5 | (4.3 | ) | |||||||||||||||||||
|
(Some
amounts may not reconcile due to rounding.)
|
||||||||||||||||||||||||||||
Premiums.
Gross written premiums
increased by 19.9% to $1,084.5 million in 2009 compared to $904.7 million in
2008. As a result of our strong financial strength ratings, we
continue to see increased participations on treaties in most regions, new
business writings and preferential signings, including preferential terms and
conditions. In addition, rates, in some markets, also contributed to
the increased written premiums. Premiums written through the Brazil,
Miami and New Jersey offices increased by $122.9 million (21.3%), the Asian
branch increased by $32.4 million (17.1%) and the Canadian branch premiums
increased by $24.5 million (17.7%). Net written premiums increased by
19.9% to $1,081.3 million in 2009 compared to $902.1 million in 2008,
principally as a result of the increase in gross written
premiums. Premiums earned increased 19.0% to $1,053.5 million in 2009
compared to $885.5 million in 2008, consistent with the increase in net written
premiums.
Gross
written premiums increased by 12.3% to $904.7 million in 2008 compared to $805.9
million in 2007. Due to the strong financial strength ratings in
2008, we obtained increased participations on treaties in most
regions. As well, we benefited from new business writings as some
insurers sought to increase the financial strength ratings of their reinsurance
panels. In addition, we obtained some preferential signings including
preferential terms and conditions, and benefited from higher rates in some
markets. Premiums written through the Miami and New Jersey offices
increased by $106.0 million (22.5%); the Asian branch increased by $24.2 million
(14.6%), while premiums for the Canadian branch decreased by $31.8 million
(18.7%). Net written premiums increased by 11.9% to $902.1 million in
2008 compared to $806.0 million in 2007, principally as a result of the increase
in gross written premiums. Net premiums earned increased 10.2% to
$885.5 million in 2008 compared to $803.8 million in 2007, generally consistent
with the increase in net written premiums.
Incurred Losses and
LAE.
The
following table presents the incurred losses and LAE for the International
segment for the periods indicated.
|
Years
Ended December 31,
|
|||||||||||||||||||||||||||
|
Current
|
Ratio
%/
|
Prior
|
Ratio
%/
|
Total
|
Ratio
%/
|
||||||||||||||||||||||
|
(Dollars
in millions)
|
Year
|
Pt
Change
|
Years
|
Pt
Change
|
Incurred
|
Pt
Change
|
|||||||||||||||||||||
|
2009
|
|||||||||||||||||||||||||||
|
Attritional
|
$ | 546.7 | 51.9 | % | $ | 19.4 | 1.8 | % | $ | 566.0 | 53.7 | % | |||||||||||||||
|
Catastrophes
|
43.4 | 4.1 | % | 3.8 | 0.4 | % | 47.2 | 4.5 | % | ||||||||||||||||||
|
Total
segment
|
$ | 590.1 | 56.0 | % | $ | 23.2 | 2.2 | % | $ | 613.3 | 58.2 | % | |||||||||||||||
|
2008
|
|||||||||||||||||||||||||||
|
Attritional
|
$ | 501.4 | 56.6 | % | $ | (33.5 | ) | -3.8 | % | $ | 467.9 | 52.8 | % | ||||||||||||||
|
Catastrophes
|
43.5 | 4.9 | % | (6.7 | ) | -0.8 | % | 36.9 | 4.2 | % | |||||||||||||||||
|
Total
segment
|
$ | 544.9 | 61.5 | % | $ | (40.1 | ) | -4.5 | % | $ | 504.8 | 57.0 | % | ||||||||||||||
|
2007
|
|||||||||||||||||||||||||||
|
Attritional
|
$ | 435.6 | 54.2 | % | $ | (10.9 | ) | -1.4 | % | $ | 424.7 | 52.8 | % | ||||||||||||||
|
Catastrophes
|
75.4 | 9.4 | % | 1.8 | 0.2 | % | 77.2 | 9.6 | % | ||||||||||||||||||
|
Total
segment
|
$ | 511.0 | 63.6 | % | $ | (9.1 | ) | -1.1 | % | $ | 501.9 | 62.4 | % | ||||||||||||||
|
Variance 2009/2008
|
|||||||||||||||||||||||||||
|
Attritional
|
$ | 45.3 | (4.7 | ) |
pts
|
$ | 52.8 | 5.6 |
pts
|
$ | 98.1 | 0.9 |
pts
|
||||||||||||||
|
Catastrophes
|
(0.1 | ) | (0.8 | ) |
pts
|
10.5 | 1.2 |
pts
|
10.3 | 0.3 |
pts
|
||||||||||||||||
|
Total
segment
|
$ | 45.2 | (5.5 | ) |
pts
|
$ | 63.3 | 6.7 |
pts
|
$ | 108.4 | 1.2 |
pts
|
||||||||||||||
|
Variance 2008/2007
|
|||||||||||||||||||||||||||
|
Attritional
|
$ | 65.8 | 2.4 |
pts
|
$ | (22.5 | ) | (2.4 | ) |
pts
|
$ | 43.3 | - |
pts
|
|||||||||||||
|
Catastrophes
|
(31.9 | ) | (4.5 | ) |
pts
|
(8.4 | ) | (1.0 | ) |
pts
|
(40.4 | ) | (5.5 | ) |
pts
|
||||||||||||
|
Total
segment
|
$ | 33.9 | (2.1 | ) |
pts
|
$ | (31.0 | ) | (3.4 | ) |
pts
|
$ | 2.9 | (5.4 | ) |
pts
|
|||||||||||
|
(Some
amounts may not reconcile due to rounding.)
|
|||||||||||||||||||||||||||
Incurred
losses and LAE increased 21.5% to $613.3 million in 2009 compared to $504.8
million in 2008. The increase was primarily due to reserve
strengthening of prior years’ non-catastrophe attritional losses in 2009 of
$19.4 million compared to 2008’s favorable prior years’ non-catastrophe
attritional development of $33.5 million. Current year attritional
losses were higher primarily due to the increase in earned
premiums. Current year catastrophe losses were flat year over
year.
Incurred
losses and LAE increased slightly 0.6% to $504.8 million in 2008 compared to
$501.9 million in 2007. The segment loss ratio decreased by 5.4
points in 2008 compared to 2007 due to lower current year catastrophe losses in
2008 compared to 2007. The 2008 current year catastrophe losses
included a large snowstorm in China and Hurricanes Gustav and Ike. In
addition, increased favorable development on prior years’ reserves period over
period contributed to the lower loss ratio.
Segment
Expenses.
Commission and brokerage
increased 15.7% to $267.1 million in 2009 compared to $230.9 million in
2008. The increase was primarily due to the growth in premiums earned
in conjunction with the blend of business mix. Segment other
underwriting expenses in 2009 increased to $23.1 million compared to $19.8
million in 2008, consistent with growth in business.
Commission
and brokerage increased 15.8% to $230.9 million for 2008 from $199.5 million in
2007. The increase was principally due to the growth in premiums
earned. In addition, the commission and brokerage ratio increased
largely due to increased contingent commissions emanating from the profitable
results. Segment other underwriting expenses in 2008 increased to $19.8 million
compared to $18.6 million in 2007.
Bermuda.
The
following table presents the underwriting results and ratios for the Bermuda
segment for the periods indicated.
| Years Ended December 31, | 2009/2008 | 2008/2007 | ||||||||||||||||||||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
Variance
|
%
Change
|
Variance
|
%
Change
|
|||||||||||||||||||||
|
Gross
written premiums
|
$ | 794.8 | $ | 783.4 | $ | 922.5 | $ | 11.5 | 1.5 | % | $ | (139.1 | ) | -15.1 | % | |||||||||||||
|
Net
written premiums
|
795.1 | 783.1 | 922.3 | 12.0 | 1.5 | % | (139.2 | ) | -15.1 | % | ||||||||||||||||||
|
Premiums
earned
|
$ | 784.6 | $ | 801.2 | $ | 912.9 | $ | (16.6 | ) | -2.1 | % | $ | (111.7 | ) | -12.2 | % | ||||||||||||
|
Incurred
losses and LAE
|
484.0 | 420.3 | 611.2 | 63.8 | 15.2 | % | (190.9 | ) | -31.2 | % | ||||||||||||||||||
|
Commission
and brokerage
|
192.1 | 208.9 | 230.4 | (16.8 | ) | -8.0 | % | (21.5 | ) | -9.3 | % | |||||||||||||||||
|
Other
underwriting expenses
|
24.6 | 24.2 | 20.9 | 0.4 | 1.5 | % | 3.3 | 15.6 | % | |||||||||||||||||||
|
Underwriting
gain
|
$ | 83.9 | $ | 147.8 | $ | 50.4 | $ | (64.0 | ) | -43.3 | % | $ | 97.5 | 193.4 | % | |||||||||||||
|
Point
Chg
|
Point
Chg
|
|||||||||||||||||||||||||||
|
Loss
ratio
|
61.7 | % | 52.5 | % | 67.0 | % | 9.2 | (14.5 | ) | |||||||||||||||||||
|
Commission
and brokerage ratio
|
24.5 | % | 26.1 | % | 25.2 | % | (1.6 | ) | 0.9 | |||||||||||||||||||
|
Other
underwriting expense ratio
|
3.1 | % | 2.9 | % | 2.3 | % | 0.2 | 0.6 | ||||||||||||||||||||
|
Combined
ratio
|
89.3 | % | 81.5 | % | 94.5 | % | 7.8 | (13.0 | ) | |||||||||||||||||||
|
(Some
amounts may not reconcile due to rounding.)
|
||||||||||||||||||||||||||||
Premiums.
Gross written premiums
increased 1.5% to $794.8 million in 2009 compared to $783.4 million in
2008. The Bermuda home office gross written premium increased $33.0
million, or 12.8%. Premiums written out of the UK branch decreased
$21.3 million, or 4.1%, as a result of the change in foreign exchange rates
period over period. Excluding the impact of the foreign exchange, the
branch premiums were up approximately 15.7%. Net written premiums
also increased 1.5% to $795.1 million in 2009 compared to $783.1 million in
2008. Premiums earned decreased 2.1% to $784.6 million in 2009
compared to $801.2 million in 2008. The change in premiums earned
relative to net written premiums is the result of timing; premiums are earned
ratably over the coverage period whereas written premiums are recorded at the
initiation of the coverage period.
Gross
written premiums decreased 15.1% to $783.4 million in 2008 compared to $922.5
million in 2007. The Bermuda home office premiums decreased in 2008 compared to
2007 by $69.7 million, principally due to a discontinued account and conversion
of a large casualty quota share to excess of loss coverage. The U.K.
branch premiums also decreased by $69.1 million due to the non-renewal of two
casualty proportional contracts. Net written premiums decreased 15.1%
to $783.1 million in 2008 compared to $922.3 million in 2007. Premiums earned
decreased 12.2% to $801.2 million in 2008 compared to $912.9 million in 2007,
commensurate with the decrease in gross written premiums.
Incurred Losses and
LAE.
The following table presents the incurred losses and LAE
for the Bermuda segment for the periods indicated.
|
Years
Ended December 31,
|
|||||||||||||||||||||||||||
|
Current
|
Ratio
%/
|
Prior
|
Ratio
%/
|
Total
|
Ratio
%/
|
||||||||||||||||||||||
|
(Dollars
in millions)
|
Year
|
Pt
Change
|
Years
|
Pt
Change
|
Incurred
|
Pt
Change
|
|||||||||||||||||||||
|
2009
|
|||||||||||||||||||||||||||
|
Attritional
|
$ | 444.3 | 56.6 | % | $ | 19.4 | 2.5 | % | $ | 463.7 | 59.1 | % | |||||||||||||||
|
Catastrophes
|
20.4 | 2.6 | % | (0.1 | ) | 0.0 | % | 20.3 | 2.6 | % | |||||||||||||||||
|
A&E
|
- | 0.0 | % | - | 0.0 | % | - | 0.0 | % | ||||||||||||||||||
|
Total
segment
|
$ | 464.7 | 59.2 | % | $ | 19.4 | 2.5 | % | $ | 484.0 | 61.7 | % | |||||||||||||||
|
2008
|
|||||||||||||||||||||||||||
|
Attritional
|
$ | 445.7 | 55.6 | % | $ | (56.6 | ) | -7.1 | % | $ | 389.1 | 48.6 | % | ||||||||||||||
|
Catastrophes
|
39.3 | 4.9 | % | (8.1 | ) | -1.0 | % | 31.2 | 3.9 | % | |||||||||||||||||
|
A&E
|
- | 0.0 | % | - | 0.0 | % | - | 0.0 | % | ||||||||||||||||||
|
Total
segment
|
$ | 485.0 | 60.5 | % | $ | (64.7 | ) | -8.1 | % | $ | 420.3 | 52.5 | % | ||||||||||||||
|
2007
|
|||||||||||||||||||||||||||
|
Attritional
|
$ | 505.2 | 55.3 | % | $ | (79.4 | ) | -8.7 | % | $ | 425.8 | 46.6 | % | ||||||||||||||
|
Catastrophes
|
76.3 | 8.4 | % | (12.1 | ) | -1.3 | % | 64.2 | 7.0 | % | |||||||||||||||||
|
A&E
|
- | 0.0 | % | 121.2 | 13.3 | % | 121.2 | 13.3 | % | ||||||||||||||||||
|
Total
segment
|
$ | 581.6 | 63.7 | % | $ | 29.6 | 3.2 | % | $ | 611.2 | 67.0 | % | |||||||||||||||
|
Variance 2009/2008
|
|||||||||||||||||||||||||||
|
Attritional
|
$ | (1.4 | ) | 1.0 |
pts
|
$ | 76.0 | 9.6 |
pts
|
$ | 74.6 | 10.5 |
pts
|
||||||||||||||
|
Catastrophes
|
(18.9 | ) | (2.3 | ) |
pts
|
8.0 | 1.0 |
pts
|
(10.8 | ) | (1.3 | ) |
pts
|
||||||||||||||
|
A&E
|
- | - |
pts
|
- | - |
pts
|
- | - |
pts
|
||||||||||||||||||
|
Total
segment
|
$ | (20.3 | ) | (1.3 | ) |
pts
|
$ | 84.1 | 10.6 |
pts
|
$ | 63.8 | 9.2 |
pts
|
|||||||||||||
|
Variance 2008/2007
|
|||||||||||||||||||||||||||
|
Attritional
|
$ | (59.5 | ) | 0.3 |
pts
|
$ | 22.8 | 1.6 |
pts
|
$ | (36.7 | ) | 1.9 |
pts
|
|||||||||||||
|
Catastrophes
|
(37.1 | ) | (3.5 | ) |
pts
|
4.0 | 0.3 |
pts
|
(33.1 | ) | (3.2 | ) |
pts
|
||||||||||||||
|
A&E
|
- | - |
pts
|
(121.2 | ) | (13.3 | ) |
pts
|
(121.2 | ) | (13.3 | ) |
pts
|
||||||||||||||
|
Total
segment
|
$ | (96.6 | ) | (3.2 | ) |
pts
|
$ | (94.3 | ) | (11.3 | ) |
pts
|
$ | (190.9 | ) | (14.5 | ) |
pts
|
|||||||||
|
(Some
amounts may not reconcile due to rounding.)
|
|||||||||||||||||||||||||||
Incurred
losses and LAE increased 15.2% to $484.0 million in 2009 compared to $420.3
million in 2008. The increase was primarily due to the change in
prior years’ attritional reserve development to unfavorable development of $19.4
million in 2009 from favorable development of $56.6 million in 2008, principally
generated by the UK branch business. A portion of this change, $39.3
million, is strengthening of reserves on our sub-prime
exposure. Partially offsetting the increase was a $10.8 million
reduction in catastrophes, period over period.
Incurred
losses and LAE decreased 31.2% to $420.3 million in 2008 compared to $611.2
million in 2007. The principal driver of the decrease was the absence
of development on A&E loss reserves in 2008, which reduced the segment loss
ratio by 13.3 points.
Segment
Expenses.
Commission and brokerage
decreased 8.0% to $192.1 million in 2009 as compared to $208.9 million in
2008. The variance was principally the result of lower earned
premiums and changes in the mix of business. Segment other
underwriting expenses in 2009 increased slightly to $24.6 million compared to
$24.2 million in 2008.
Commission
and brokerage decreased 9.3% to $208.9 million in 2008 as compared to $230.4
million in 2007, principally the result of a decline in premiums earned and the
change in the mix of business. Segment other underwriting expenses in
2008 increased to $24.2 million compared to $20.9 million in 2007, primarily due
to a general increase in operations to support the business.
Critical
Accounting Policies
The
following is a summary of the critical accounting policies related to accounting
estimates that (1) require management to make assumptions about highly uncertain
matters and (2) could materially impact the consolidated financial statements if
management made different assumptions.
Loss and LAE
Reserves.
Our most critical accounting policy is the
determination of our loss and LAE reserves. We maintain reserves
equal to our estimated ultimate liability for losses and LAE for reported and
unreported claims for our insurance and reinsurance
businesses. Because reserves are based on estimates of ultimate
losses and LAE by underwriting or accident year, we use a variety of statistical
and actuarial techniques to monitor reserve adequacy over time, evaluate new
information as it becomes known and adjust reserves whenever an adjustment
appears warranted. We consider many factors when setting reserves
including: (1) our exposure base and projected ultimate premiums
earned; (2) our expected loss ratios by product and class of business, which are
developed collaboratively by underwriters and actuaries; (3) actuarial
methodologies which analyze our loss reporting and payment experience, reports
from ceding companies and historical trends, such as reserving patterns, loss
payments and product mix; (4) current legal interpretations of coverage and
liability; (5) economic conditions; and (6) uncertainties discussed below
regarding our liability for A&E claims. Our insurance and reinsurance loss
and LAE reserves represent our best estimate of our ultimate liability. Actual
losses and LAE ultimately paid may deviate, perhaps substantially, from such
reserves. Our net income will be impacted in a period in which the
change in estimated ultimate losses and LAE is recorded. See also
ITEM 8, “Financial Statements and Supplementary Data” - Note 1 of Notes to the
Consolidated Financial Statements.
It is
more difficult to accurately estimate loss reserves for reinsurance liabilities
than for insurance liabilities. At December 31, 2009, we had
reinsurance reserves of $6,754.8 million and insurance loss reserves of $2,183.1
million, of which $502.6 million and $136.1 million, respectively, were loss
reserves for A&E liabilities. A detailed discussion of additional
considerations related to A&E exposures follows later in this
section.
The
detailed data required to evaluate ultimate losses for our insurance business is
accumulated from our underwriting and claim systems. Reserving for
reinsurance requires evaluation of loss information received from ceding
companies. Ceding companies report losses to us in many forms
dependent on the type of contract and the agreed or contractual reporting
requirements. Generally, proportional/quota share contracts require the
submission of a monthly/quarterly account, which includes premium and loss
activity for the period with corresponding reserves as established by the ceding
company. This information is recorded into our records. For certain proportional
contracts, we may require a detailed loss report for claims that exceed a
certain dollar threshold or relate to a particular type of
loss. Excess of loss and facultative contracts generally require
individual loss reporting with precautionary notices provided when a loss
reaches a significant percentage of the attachment point of the contract or when
certain causes of loss or types of injury occur. Our experienced
claims staff handles individual loss reports and supporting claim
information. Based on our evaluation of a claim, we may establish
additional case reserves (ACRs) in addition to the case reserves reported by the
ceding company. To ensure ceding companies are submitting required
and accurate data, the Underwriting, Claim, Reinsurance Accounting and Internal
Audit departments of the Company perform various reviews of our ceding
companies, particularly larger ceding companies, including on-site
audits.
We sort
both our reinsurance and insurance reserves into exposure groupings for
actuarial analysis. We assign our business to exposure groupings so
that the underlying exposures have reasonably homogeneous loss development
characteristics and are large enough to facilitate credible estimation of
ultimate losses. We periodically review our exposure groupings and we
may change our grouping over time as our business changes. We
currently use over 200 exposure groupings to develop our reserve
estimates. One of the key selection characteristics for the exposure
groupings is the historical duration of the claims settlement
process. Business in which claims are reported and settled relatively
quickly are commonly referred to as short tail lines, principally property
lines. On the other hand, casualty claims tend to take longer to be
reported and settled and casualty lines are generally referred to as long tail
lines. Our estimates of ultimate losses for shorter tail lines, with
the exception of loss estimates for large catastrophic events, generally exhibit
less volatility than those for the longer tail lines.
We use
similar actuarial methodologies, such as expected loss ratio, chain ladder
reserving methods and Borhuetter Ferguson, supplemented by judgment where
appropriate, to estimate our ultimate losses and LAE for each exposure group.
Although we use similar actuarial methodologies for both short tail and long
tail lines, the faster reporting of experience for the short tail lines allows
us to have greater confidence in our estimates of ultimate losses for short tail
lines at an earlier stage than for long tail lines. As a result, we
utilize, as well, exposure-based methods to estimate our ultimate losses for
longer tail lines, especially for immature accident years. For both
short and long tail lines, we supplement these general approaches with
analytically based judgments. We cannot estimate losses from
widespread catastrophic events, such as hurricanes, using traditional actuarial
methods. We estimate losses for these types of events based on
information derived from catastrophe models, quantitative and qualitative
exposure analyses, reports and communications from ceding companies and
development patterns for historically similar events. Due to the
inherent uncertainty in estimating such losses, these estimates are subject to
variability, which increases with the severity and complexity of the underlying
event.
Our key
actuarial assumptions contain no explicit provisions for reserve uncertainty nor
do we supplement the actuarially determined reserves for
uncertainty.
Our
carried reserves at each reporting date are our best estimate of ultimate unpaid
losses and LAE at that date. We complete detailed reserve studies for
each exposure group annually for our reinsurance operations and quarterly for
our insurance operations. The completed annual reinsurance reserve
studies are “rolled forward” for each accounting period until the subsequent
reserve study is completed. The roll-forward process involves
comparing actual reported losses to expected losses based on the most recent
reserve study. We analyze significant variances between actual and
expected losses and post adjustments to our reserves as warranted.
Given the
inherent variability in our loss reserves, we have developed an estimated range
of possible gross reserve levels. A table of ranges by segment,
accompanied by commentary on potential and historical variability, is included
in “Financial Condition - Loss and LAE Reserves”. The ranges are
statistically developed using the exposure groups used in the reserve estimation
process and aggregated to the segment level. For each exposure group,
our actuaries calculate a range for each accident year based principally on two
variables. The first is the historical changes in losses and LAE
incurred but not reported (“IBNR”) for each accident year over time; the second
is volatility of each accident year’s held reserves related to estimated
ultimate losses, also over time. Both are measured at various ages
from the end of the accident year through the final payout of the year’s
losses. Ranges are developed for the exposure groups using
statistical methods to adjust for diversification; the ranges for the exposure
groups are aggregated to the segment level, likewise, with an adjustment for
diversification. Our estimates of our reserve variability may not be
comparable to those of other companies because there are no consistently applied
actuarial or accounting standards governing such presentations. Our
recorded reserves reflect our best point estimate of our liabilities and our
actuarial methodologies focus on developing such point estimates. We
calculate the ranges subsequently, based on the historical variability of such
reserves.
Asbestos and Environmental
Exposures.
We continue to receive claims under expired
insurance and reinsurance contracts, asserting injuries and/or damages relating
to or resulting from environmental pollution and hazardous substances, including
asbestos. Environmental claims typically assert liability for (a) the
mitigation or remediation of environmental contamination or (b) bodily injury or
property damage caused by the release of hazardous substances into the land, air
or water. Asbestos claims typically assert liability for bodily
injury from exposure to asbestos or for property damage resulting from asbestos
or products containing asbestos.
Our
reserves include an estimate of our ultimate liability for A&E
claims. Our A&E liabilities emanate from Mt. McKinley’s direct
insurance business and Everest Re’s assumed reinsurance
business. There are significant uncertainties surrounding our
estimates of our 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 our
liability. These developments include: (a) a changing mix of claim
types represented in new filings, with the relative percentage of claims by
individuals with no functional impairment first increasing then decreasing over
the past several years; (b) the growth in the number of claims where coverage is
sought under the general liability portion of insurance policies rather than the
product liability portion; (c) an increase in settlement values being paid to
asbestos claimants, especially those with cancer or functional impairment; (d)
the slow development of asbestos bankruptcy cases, as a result of which many of
the critical legal issues arising in those cases are still unresolved at the
appellate level; (e) measures adopted by specific courts to ameliorate the worst
procedural abuses; (f) legislation in some states to address asbestos litigation
issues; and (g) the potential that other states or the U.S. Congress may adopt
legislation on asbestos litigation. Anecdotal evidence suggests that
new claims filing rates have decreased, that new filings of asbestos-driven
bankruptcies have decreased and that various procedural and legislative reforms
are beginning to diminish the potential ultimate liability for asbestos
losses.
We
believe that these uncertainties 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. We
establish reserves to the extent that, in the judgment of management, the facts
and prevailing law reflect an exposure for us or our ceding
companies.
We have
direct relationships with Mt. McKinley policyholders and we attempt to uphold
our contractual rights and assert valid defenses to coverage where
appropriate. The uncertainties inherent in asbestos coverage and
bankruptcy litigations have provided us the opportunity to engage in settlement
negotiations with a number of policyholders who have potentially significant
asbestos liabilities. Those discussions are aimed at achieving reasonable
negotiated settlements that limit Mt. McKinley’s liability to a given
policyholder to a sum certain. Because of the risks and uncertainties
inherent in litigation, we cannot be certain that this approach will lead to a
negotiated settlement in the range expected by us in each or every
instance. Between 2004 and 2009, we concluded settlements or reached
agreement in principle with 22 of our high profile policyholders. We
continue the approach of attempting to negotiate with such policyholders that
may have significant asbestos liabilities, in part because their exposures have
developed to the point where we and the policyholder have sufficient information
to be motivated to settle. We believe 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 developments in litigation, negotiations and, ultimately, potential
settlements.
There is
little potential for similar settlements of our reinsurance asbestos claims
where we have no direct relationships with the insureds. Our ceding
companies have the direct obligation to insureds and are responsible for their
own claim settlements. They are not consistently prompt in developing
and providing claim settlement information to their reinsurers, which can
introduce inconsistencies and significant delays in the reporting of asbestos
claims/exposures to reinsurers, including us. These delays not only
extend the timing of reinsurance claim settlements, but also limit the available
information from which reinsurers, including us, estimate their ultimate
exposure. See the discussion below under the heading “Financial
Condition – Loss and LAE Reserves”.
Due to
the uncertainties discussed above, the ultimate losses attributable to A&E,
and particularly asbestos, may be subject to more variability than are
non-A&E reserves and such variation could have a material adverse effect on
our financial condition, results of operations and/or cash flows. See
also ITEM 8, “Financial Statements and Supplementary Data” - Notes 1
and 3 of Notes to the Consolidated Financial Statements.
Reinsurance
Receivables.
We have purchased reinsurance to reduce our
exposure to adverse claim experience, large claims and catastrophic loss
occurrences. Our ceded reinsurance provides for recovery from
reinsurers of a portion of losses and loss expenses under certain
circumstances. Such reinsurance does not relieve us of our obligation
to our policyholders. In the event our reinsurers are unable to meet
their obligations under these agreements or are able to successfully challenge
losses ceded by us under the contracts, we will not be able to realize the full
value of the reinsurance receivable balance. To minimize exposure
from uncollectible reinsurance receivables, we have a reinsurance security
committee that evaluates the financial strength of each reinsurer prior to our
entering into a reinsurance arrangement. In some cases, we may hold
full or partial collateral for the receivable, including letters of credit,
trust assets and cash. Additionally, creditworthy foreign reinsurers
of business written in the U.S. are generally required to secure their
obligations. We have established reserves for uncollectible balances
based on our assessment of the collectibility of the outstanding balances. As of
December 31, 2009 and 2008, the reserve for uncollectible balances was $51.6
million and $247.9 million, respectively. Actual uncollectible
amounts may vary, perhaps substantially, from such reserves, impacting income in
the period in which the change in reserves is made. See also ITEM 8, “Financial
Statements and Supplementary Data” - Note 13 of Notes to the
Consolidated Financial Statements and “Financial Condition – Reinsurance
Receivables” below.
Premiums Written and
Earned.
Premiums written by us are earned ratably over the
coverage periods of the related insurance and reinsurance
contracts. We establish unearned premium reserves to cover the
unexpired portion of each contract. Such reserves are computed using
pro rata methods based on statistical data received from ceding
companies. Premiums earned, and the related costs, which have not yet
been reported to us, are estimated and accrued. Because of the
inherent lag in the reporting of written and earned premiums by our ceding
companies, we use standard accepted actuarial methodologies to estimate earned
but not reported premium at each financial reporting date. These earned but not
reported premiums are combined with reported earned premiums to comprise our
total premiums earned for determination of our incurred losses and loss and LAE
reserves. Commission expense and incurred losses related to the
change in earned but not reported premium are included in current period company
and segment financial results. See also ITEM 8, “Financial Statements
and Supplementary Data” - Note 1 of Notes to the Consolidated
Financial Statements.
The
following table displays the estimated components of earned but not reported
premiums by segment for the periods indicated.
|
At
December 31,
|
||||||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
|||||||||
|
U.S.
Reinsurance
|
$ | 308.4 | $ | 289.2 | $ | 405.3 | ||||||
|
U.S.
Insurance
|
12.1 | 13.9 | 13.7 | |||||||||
|
Specialty
Underwriting
|
64.9 | 82.2 | 82.8 | |||||||||
|
International
|
216.7 | 181.0 | 178.5 | |||||||||
|
Bermuda
|
187.3 | 185.1 | 202.2 | |||||||||
|
Total
|
$ | 789.5 | $ | 751.3 | $ | 882.5 | ||||||
|
(Some
amounts may not reconcile due to rounding.)
|
||||||||||||
Investment
Valuation.
Our fixed income investments are classified for
accounting purposes as available for sale and are carried at market value or
fair value in our consolidated balance sheets. Our equity securities
are also held as available for sale and are carried at market or fair
value. Most securities we own are traded on national exchanges where
market values are readily available. Some of our commercial
mortgage-backed securities (“CMBS”) are valued using cash flow models and
risk-adjusted discount rates. We hold some privately placed
securities, less than 0.2% of the portfolio, that are either valued by brokers
or an investment advisor. At December 31, 2009 and 2008, our
investment portfolio included $504.3 million and $644.8 million, respectively,
of limited partnership investments whose values are reported pursuant to the
equity method of accounting. We carry these investments at values
provided by the managements of the limited partnerships and due to inherent
reporting lags, the carrying values are based on values with “as of” dates from
one month to one quarter prior to our financial statement date.
At
December 31, 2009, we had net unrealized gains, net of tax, of $309.3 million
compared to net unrealized losses, net of tax, of $163.4 million at December 31,
2008. Gains and losses from market fluctuations for investments held
at market value are reflected as comprehensive income in the consolidated
balance sheets. Gains and losses from market fluctuations for
investments held at fair value are reflected as net realized capital gains and
losses in the consolidated statements of operations and comprehensive income
(loss) in accordance with FASB guidance. Market value declines for
the fixed income portfolio, which are considered credit other-than-temporary
impairments, are reflected in our consolidated statements of operations and
comprehensive income (loss), as realized capital losses. We consider
many factors when determining whether a market value decline is
other-than-temporary, including: (1) we have no intent to sell and,
more likely than not, will not be required to sell prior to recovery, (2) the
length of time the market value has been below book value, (3) the credit
strength of the issuer, (4) the issuer’s market sector, (5) the length of time
to maturity and (6) for asset-backed securities, increases in prepayments,
credit enhancements and underlying default rates. If management’s
assessments change in the future, we may ultimately record a realized loss after
management originally concluded that the decline in value was
temporary. See also ITEM 8, “Financial Statements and Supplementary
Data” - Note 1 of Notes to the Consolidated Financial Statements.
FINANCIAL
CONDITION
Cash and Invested
Assets.
Aggregate invested assets, including cash and
short-term investments, were $14,918.8 million at December 31, 2009, an increase
of $1,204.5 million compared to $13,714.3 million at December 31,
2008. This increase was primarily the result of $784.7 million of
cash flows from operations, $636.7 million of unrealized appreciation and $211.6
million in foreign exchange gains on our portfolio securities, partially offset
by the repurchase of common shares of $190.6 million, $116.9 million paid out in
dividends to shareholders and $83.0 million in debt repurchase.
Our
principal investment objectives are to ensure funds are available to meet our
insurance and reinsurance obligations and to maximize after-tax investment
income while maintaining a high quality diversified investment
portfolio. Considering these objectives, we view our investment
portfolio as having two components: 1) the investments needed to satisfy
outstanding liabilities and 2) investments funded by our shareholders’
equity.
For the
portion needed to satisfy outstanding liabilities, we invest in taxable and
tax-preferenced fixed income securities with an average credit quality of Aa2,
as rated by Moody’s. Our mix of taxable and tax-preferenced
investments is adjusted periodically, consistent with our current and projected
operating results, market conditions and our tax position. This fixed
maturity portfolio is externally managed by an independent, professional
investment manager using portfolio guidelines approved by us.
Over the
past few years, we have allocated our equity investment portfolio to
include: 1) publicly traded equity securities and 2) private equity
limited partnership investments. The objective of this portfolio
diversification is to enhance the risk-adjusted total return of the investment
portfolio by allocating a prudent portion of the portfolio to higher return
asset classes. We limit our allocation to these asset classes because
of 1) the potential for volatility in their values and 2) the impact of these
investments on regulatory and rating agency capital adequacy
models. We adjust our allocation to these investments based upon
market conditions. As a result of the dramatic slowdown in the global
economy and the liquidity crisis affecting the financial markets, we
significantly reduced our exposure to public equities during the fourth quarter
of 2008 and have increased our exposure to equities in the latter part of 2009
as financial markets improved. At December 31, 2009, the market value
of investments in equity and limited partnership securities, carried at both
market and fair value, approximated 15% of shareholders’ equity, a decrease of 1
point from 16% of shareholders’ equity at December 31, 2008.
The
Company’s limited partnership investments are comprised of limited partnerships
that invest in public equities and limited partnerships that invest in private
equities. Generally, the public equity limited partnerships are
reported on a one month lag while the private equity partnerships are included
in the financials on a quarter lag. All of the limited partnerships
are required to report using fair value accounting in accordance with FASB
guidance. We receive annual audited financial statements for all of
the limited partnerships and for the quarterly reports; the Company staff
performs reviews of the financial reports for any unusual changes in carrying
value. If the Company becomes aware of a significant decline in value
during the lag reporting period, the loss will be recorded in the period in
which the Company identifies the decline.
The
tables below summarize the composition and characteristics of our investment
portfolio as of the dates indicated.
|
At
December 31,
|
||||||||||||||||
|
2009
|
2008
|
|||||||||||||||
|
Fixed
maturities, market value
|
$ | 13,005.9 | 87.2 | % | $ | 10,759.6 | 78.5 | % | ||||||||
|
Fixed
maturities, fair value
|
50.5 | 0.3 | % | 43.1 | 0.3 | % | ||||||||||
|
Equity
securities, market value
|
16.3 | 0.1 | % | 16.9 | 0.1 | % | ||||||||||
|
Equity
securities, fair value
|
380.0 | 2.5 | % | 119.8 | 0.9 | % | ||||||||||
|
Short-term
investments
|
673.1 | 4.5 | % | 1,889.8 | 13.8 | % | ||||||||||
|
Other
invested assets
|
545.3 | 3.7 | % | 679.4 | 4.9 | % | ||||||||||
|
Cash
|
247.6 | 1.7 | % | 205.7 | 1.5 | % | ||||||||||
|
Total
investments and cash
|
$ | 14,918.8 | 100.0 | % | $ | 13,714.3 | 100.0 | % | ||||||||
|
(Some
amounts may not reconcile due to rounding.)
|
||||||||||||||||
|
At
December 31,
|
|||
|
2009
|
2008
|
||
|
Fixed
income portfolio duration (years)
|
3.8
|
4.1
|
|
|
Fixed
income composite credit quality
|
Aa2
|
Aa2
|
|
|
Imbedded
end of period yield, pre-tax
|
4.1%
|
4.5%
|
|
|
Imbedded
end of period yield, after-tax
|
3.6%
|
4.0%
|
|
The
following table provides a comparison of our total return by asset class
relative to broadly accepted industry benchmarks for the periods
indicated.
|
2009
|
2008
|
2007
|
|||
|
Fixed
income portfolio total return
|
9.4%
|
0.3%
|
5.0%
|
||
|
Barclay's
Capital - U.S. aggregate index
|
5.9%
|
5.2%
|
7.0%
|
||
|
Common
equity portfolio total return
|
28.9%
|
-40.9%
|
9.2%
|
||
|
S&P
500 index
|
26.5%
|
-37.0%
|
5.5%
|
||
|
Other
invested asset portfolio total return
|
-1.8%
|
-7.4%
|
13.5%
|
The
pre-tax equivalent total return for the bond portfolio was approximately 10.1%,
1.0% and 5.7%, respectively, for 2009, 2008 and 2007. The pre-tax
equivalent return adjusts the yield on tax-exempt bonds to the fully taxable
equivalent.
Reinsurance
Receivables.
Reinsurance receivables for both paid and unpaid
losses totaled $636.4 million and $657.2 million at December 31, 2009 and 2008,
respectively. At December 31, 2009, $131.4 million, or 20.6%, was
receivable from Transatlantic; $100.0 million, or 15.7%, was receivable from
Continental; $87.6 million, or 13.8% was receivable from C.V. Starr; $53.4
million, or 8.4%, was receivable from Munich Re; $49.1 million, or 7.7%, was
receivable from Berkley and $32.9 million, or 5.2%, was receivable from
ACE. The receivable from Continental is collateralized by a funds
held arrangement under which we have retained the premiums earned by the
retrocessionaire to secure obligations of the retrocessionaire,
recorded
them as a
liability, credited interest on the balances at a stated contractual rate and
reduced the liability account as payments become due. In addition,
$31.9 million was receivable from Founders, for which the Company has recorded a
full provision for uncollectibility. No other retrocessionaire
accounted for more than 5% of our receivables.
Loss and LAE
Reserves.
Gross loss and LAE
reserves totaled $8,937.9 million at December 31, 2009 and $8,840.7 million at
December 31, 2008.
The
following tables summarize gross outstanding loss and LAE reserves by segment,
classified by case reserves and IBNR reserves, for the periods
indicated.
|
At
December 31, 2009
|
||||||||||||||||
|
Case
|
IBNR
|
Total
|
%
of
|
|||||||||||||
|
(Dollars
in millions)
|
Reserves
|
Reserves
|
Reserves
|
Total
|
||||||||||||
|
U.S.
Reinsurance
|
$ | 1,382.0 | $ | 1,652.3 | $ | 3,034.3 | 34.0 | % | ||||||||
|
U.S.
Insurance
|
716.2 | 1,157.1 | 1,873.4 | 21.0 | % | |||||||||||
|
Specialty
Underwriting
|
238.5 | 175.8 | 414.4 | 4.6 | % | |||||||||||
|
International
|
752.1 | 545.7 | 1,297.7 | 14.5 | % | |||||||||||
|
Bermuda
|
718.8 | 960.5 | 1,679.4 | 18.8 | % | |||||||||||
|
Total
excluding A&E
|
3,807.7 | 4,491.5 | 8,299.2 | 92.9 | % | |||||||||||
|
A&E
|
354.7 | 283.9 | 638.7 | 7.1 | % | |||||||||||
|
Total
including A&E
|
$ | 4,162.4 | $ | 4,775.4 | $ | 8,937.9 | 100.0 | % | ||||||||
|
(Some
amounts may not reconcile due to rounding.)
|
||||||||||||||||
|
At
December 31, 2008
|
||||||||||||||||
|
Case
|
IBNR
|
Total
|
%
of
|
|||||||||||||
|
(Dollars
in millions)
|
Reserves
|
Reserves
|
Reserves
|
Total
|
||||||||||||
|
U.S.
Reinsurance
|
$ | 1,384.7 | $ | 1,884.1 | $ | 3,268.8 | 37.0 | % | ||||||||
|
U.S.
Insurance
|
589.1 | 1,217.8 | 1,806.9 | 20.4 | % | |||||||||||
|
Specialty
Underwriting
|
260.8 | 163.4 | 424.2 | 4.8 | % | |||||||||||
|
International
|
664.3 | 427.3 | 1,091.6 | 12.3 | % | |||||||||||
|
Bermuda
|
634.9 | 827.4 | 1,462.3 | 16.5 | % | |||||||||||
|
Total
excluding A&E
|
3,533.7 | 4,520.1 | 8,053.8 | 91.1 | % | |||||||||||
|
A&E
|
434.5 | 352.3 | 786.8 | 8.9 | % | |||||||||||
|
Total
including A&E
|
$ | 3,968.2 | $ | 4,872.4 | $ | 8,840.7 | 100.0 | % | ||||||||
|
(Some
amounts may not reconcile due to rounding.)
|
||||||||||||||||
Changes
in premiums earned and business mix, reserve re-estimations, catastrophe losses
and changes in catastrophe loss reserves and claim settlement activity all
impact loss and LAE reserves by segment and in total.
Our loss
and LAE reserves represent our best estimate of our ultimate liability for
unpaid claims. We continuously re-evaluate our reserves, including
re-estimates of prior period reserves, taking into consideration all available
information and, in particular, newly reported loss and claim
experience. Changes in reserves resulting from such re-evaluations
are reflected in incurred losses in the period when the re-evaluation is
made. Our 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. In order to set appropriate reserves, we make qualitative
and quantitative analyses and judgments at these various
levels. Additionally, the attribution of reserves, changes in
reserves and incurred losses among accident years requires qualitative and
quantitative adjustments and allocations at these various levels. We
utilize actuarial science, business expertise and management judgment in a
manner intended to assure the accuracy and consistency of our reserving
practices. Nevertheless, our reserves are estimates, which are
subject to variation, which may be significant.
There can
be no assurance that reserves for, and losses from, claim obligations will not
increase in the future, possibly by a material amount. However, we
believe that our existing reserves and reserving methodologies lessen the
probability that any such increase would have a material adverse effect on our
financial condition, results of operations or cash flows. In this
context, we note that over the past 10 years, our calendar year operations have
been affected by effects from prior period reserve re-estimates, ranging from a
favorable $26.4 million in 2005, representing 0.5% of the net prior period
reserves for the year in which the adjustment was made, to an unfavorable $249.4
million in 2004, representing 3.7% of the net prior period reserves for the year
in which the adjustment was made.
We have
included ranges for loss reserve estimates determined by our actuaries, which
have been developed through a combination of objective and subjective
criteria. Our presentation of this information may not be directly
comparable to similar presentations of other companies as there are no
consistently applied actuarial or accounting standards governing such
presentations. Our recorded reserves are an aggregation of our best
point estimates for approximately 200 reserve groups and reflect our best point
estimate of our liabilities. Our actuarial methodologies develop point estimates
rather than ranges and the ranges are developed subsequently based upon
historical and prospective variability measures.
The
following table below represents the reserve levels and ranges for each of our
business segments for the period indicated.
|
Outstanding
Reserves and Ranges By Segment (1)
|
||||||||||||||||||||
|
At
December 31, 2009
|
||||||||||||||||||||
|
As
|
Low
|
Low
|
High
|
High
|
||||||||||||||||
|
(Dollars
in millions)
|
Reported
|
Range
% (2)
|
Range
(2)
|
Range
% (2)
|
Range
(2)
|
|||||||||||||||
|
Gross
Reserves By Segment
|
||||||||||||||||||||
|
U.S.
Reinsurance
|
$ | 3,034.3 | -14.2 | % | $ | 2,603.2 | 14.2 | % | $ | 3,465.5 | ||||||||||
|
U.S.
Insurance
|
1,873.4 | -21.5 | % | 1,471.1 | 21.5 | % | 2,275.6 | |||||||||||||
|
Specialty
Underwriting
|
414.4 | -15.6 | % | 349.8 | 15.6 | % | 478.9 | |||||||||||||
|
International
|
1,297.7 | -10.6 | % | 1,160.2 | 10.6 | % | 1,435.2 | |||||||||||||
|
Bermuda
|
1,679.4 | -8.5 | % | 1,535.8 | 8.5 | % | 1,822.9 | |||||||||||||
|
Total
Gross Reserves
|
||||||||||||||||||||
|
(excluding
A&E)
|
8,299.2 | -10.7 | % | 7,411.6 | 10.7 | % | 9,186.8 | |||||||||||||
|
A&E
(All Segments)
|
638.7 | -13.7 | % | 551.2 | 13.7 | % | 726.2 | |||||||||||||
|
Total
Gross Reserves
|
$ | 8,937.9 | -10.4 | % | 8,005.4 | 10.4 | % | 9,870.3 | ||||||||||||
|
(Some
amounts may not reconcile due to rounding.)
|
||||||||||||||||||||
______________________________________
|
(1)
|
There
can be no assurance that reserves will not ultimately exceed the indicated
ranges requiring additional income statement
expense.
|
|
(2)
|
Although
totals are displayed for both the low and high range amounts, it should be
noted that statistically the range of the total is not equal to the sum of
the ranges of the segments.
|
Depending
on the specific segment, the range derived for the loss reserves, excluding
reserves for A&E exposures, ranges from minus 8.5% to minus 21.5% for the
low range and from plus 8.5% to plus 21.5% for the high range. Both
the higher and lower ranges are associated with the U.S. Insurance
segment. The size of the range is dependent upon the level of
confidence associated with the outcome. Within each range, our best
estimate of loss reserves is based upon the point estimate
derived by our actuaries
in detailed reserve studies. Such ranges are necessarily subjective
due to the lack of generally accepted actuarial standards with respect to their
development. For the above presentation, we have assumed what we
believe is a reasonable confidence level but note that there can be no assurance
that our claim obligations will not vary outside of these ranges.
Additional
losses, including those relating to latent injuries, and other exposures, which
are as yet unrecognized, the type or magnitude of which cannot be foreseen by us
or the reinsurance and insurance industry generally, may emerge in the
future. Such future emergence, to the extent not covered by existing
retrocessional contracts, could have material adverse effects on our future
financial condition, results of operations and cash flows.
We have
exposure to insured A&E losses through our Mt. McKinley operation and
reinsured A&E losses and through Everest Re. In each case, our
management and analyses of our exposures take into account a number of features
of our business that differentiate our exposures from many other insurers and
reinsurers that have significant A&E exposures.
Mt.
McKinley began writing small amounts of A&E exposed insurance in 1975 and
increased the volume of its writings in 1978. These writings ceased
in 1984, giving Mt. McKinley an approximate 10-year window of potential A&E
exposure, which is appreciably shorter than is the case for many companies with
significant A&E exposure. Additionally, due to changes in and
standardization of policy forms, it is rare for policies in the 1970s and 1980s
to have been issued without aggregate limits on the product liability
coverage. Policies issued in earlier decades were generally more
likely to lack aggregate limits.
The vast
majority of Mt. McKinley’s A&E exposed insurance policies are excess
casualty policies, with aggregate coverage limits. Mt. McKinley’s
attachment points vary but generally are excess of millions, often tens of
millions, of dollars of underlying coverage. The excess nature of
most of Mt. McKinley’s policies also offers insulation against “non-product”
claims (for example, claims arising under general liability
coverage). Although under some circumstances an excess policy could
be exposed to non-product claims, such claims generally pose more of a risk to
primary policies because non-product claims are generally less likely to
aggregate since each non-product claim is a separate loss; whereas for product
claims, all claims related to a given product “aggregate” as one
loss. Environmental claims arise under general liability coverage,
and generally do not aggregate. Thus, these claims tend to create
exposure for primary policies to a greater extent than excess
policies.
Everest
Re was formed in 1973 but was not fully engaged in underwriting casualty
business, under which A&E exposures generally arise, until 1974, and it
effectively eliminated A&E exposures beginning in 1984 through contract
exclusions. Therefore, Everest Re has an approximate 11-year window
of A&E exposure, much shorter than that of many long established reinsurance
companies. In the earlier years of its existence, Everest Re mainly
wrote property business, which generally is not exposed to asbestos
claims. Everest Re reinsured both primary and excess
policies. However, its claim experience indicates that the majority
of its exposure was on excess policies, similar to those directly written by Mt.
McKinley.
Asbestos and Environmental
Exposures.
A&E exposures represent a separate exposure
group for monitoring and evaluating reserve adequacy. The following
table summarizes incurred losses and outstanding loss reserves with respect to
A&E reserves on both a gross and net of retrocessions basis for the periods
indicated.
|
At
December 31,
|
||||||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Gross
Basis:
|
||||||||||||
|
Beginning
of period reserves
|
$ | 786.8 | $ | 922.8 | $ | 650.1 | ||||||
|
Incurred
losses and LAE:
|
||||||||||||
|
Reported
losses
|
53.4 | 130.7 | 70.8 | |||||||||
|
Change
in IBNR
|
(53.4 | ) | (130.7 | ) | 334.2 | |||||||
|
Total
incurred losses and LAE
|
- | - | 405.0 | |||||||||
|
Paid
losses
|
(148.2 | ) | (136.0 | ) | (132.3 | ) | ||||||
|
End
of period reserves
|
$ | 638.7 | $ | 786.8 | $ | 922.8 | ||||||
|
Net
Basis:
|
||||||||||||
|
Beginning
of period reserves
|
$ | 749.1 | $ | 827.4 | $ | 511.4 | ||||||
|
Incurred
losses and LAE:
|
||||||||||||
|
Reported
losses
|
64.4 | 120.0 | 69.9 | |||||||||
|
Change
in IBNR
|
(63.9 | ) | (120.0 | ) | 317.6 | |||||||
|
Total
incurred losses and LAE
|
0.4 | - | 387.5 | |||||||||
|
Paid
losses
|
(136.4 | ) | (78.3 | ) | (71.6 | ) | ||||||
|
End
of period reserves
|
$ | 613.1 | $ | 749.1 | $ | 827.4 | ||||||
|
(Some
amounts may not reconcile due to rounding.)
|
||||||||||||
At
December 31, 2009, the gross reserves for A&E losses were comprised of
$141.5 million representing case reserves reported by ceding companies, $150.2
million representing additional case reserves established by us on assumed
reinsurance claims, $63.0 million representing case reserves established by us
on direct excess insurance claims, including Mt. McKinley, and $283.9 million
representing IBNR reserves.
With
respect to asbestos only, at December 31, 2009, we had gross asbestos loss
reserves of $608.8 million, or 95.3%, of total A&E reserves, of which $477.9
million was for assumed business and $130.9 million was for direct
business.
The
following tables summarize reserve and claim activity on a gross and net of
ceded reinsurance basis for our reinsurance and direct asbestos
exposures.
|
Asbestos - Reinsurance
|
At
December 31,
|
|||||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Gross
Basis:
|
||||||||||||
|
Beginning
of period reserves
|
$ | 533.2 | $ | 585.3 | $ | 320.5 | ||||||
|
Incurred
losses and LAE:
|
||||||||||||
|
Reported
losses
|
45.4 | 71.3 | 39.2 | |||||||||
|
Change
in IBNR
|
(45.4 | ) | (71.3 | ) | 265.8 | |||||||
|
Total
incurred losses and LAE
|
- | - | 305.0 | |||||||||
|
Paid
losses
|
(55.3 | ) | (52.2 | ) | (40.2 | ) | ||||||
|
End
of period reserves
|
$ | 477.9 | $ | 533.2 | $ | 585.3 | ||||||
|
Net
Basis:
|
||||||||||||
|
Beginning
of period reserves
|
$ | 508.2 | $ | 557.4 | $ | 302.0 | ||||||
|
Incurred
losses and LAE:
|
||||||||||||
|
Reported
losses
|
42.9 | 66.2 | 40.4 | |||||||||
|
Change
in IBNR
|
(43.0 | ) | (66.2 | ) | 255.6 | |||||||
|
Total
incurred losses and LAE
|
(0.1 | ) | - | 296.0 | ||||||||
|
Paid
losses
|
(49.9 | ) | (49.1 | ) | (40.6 | ) | ||||||
|
End
of period reserves
|
$ | 458.2 | $ | 508.2 | $ | 557.4 | ||||||
|
Asbestos - Direct
|
At
December 31,
|
|||||||||||
|
(Dollars
in millions)
|
2009
|
2008
|
2007
|
|||||||||
|
Gross
Basis:
|
||||||||||||
|
Beginning
of period reserves
|
$ | 200.9 | $ | 273.6 | $ | 260.5 | ||||||
|
Incurred
losses and LAE:
|
||||||||||||
|
Reported
losses
|
8.5 | 51.6 | 23.2 | |||||||||
|
Change
in IBNR
|
(8.5 | ) | (51.6 | ) | 76.8 | |||||||
|
Total
incurred losses and LAE
|
- | - | 100.0 | |||||||||
|
Paid
losses
|
(70.1 | ) | (72.7 | ) | (86.9 | ) | ||||||
|
End
of period reserves
|
$ | 130.8 | $ | 200.9 | $ | 273.6 | ||||||
|
Net
Basis:
|
||||||||||||
|
Beginning
of period reserves
|
$ | 187.3 | $ | 205.9 | $ | 140.4 | ||||||
|
Incurred
losses and LAE:
|
||||||||||||
|
Reported
losses
|
7.5 | 46.6 | 21.8 | |||||||||
|
Change
in IBNR
|
(7.1 | ) | (46.6 | ) | 69.8 | |||||||
|
Total
incurred losses and LAE
|
0.4 | - | 91.6 | |||||||||
|
Paid
losses
|
(64.7 | ) | (18.6 | ) | (26.1 | ) | ||||||
|
End
of period reserves
|
$ | 123.1 | $ | 187.3 | $ | 205.9 | ||||||
|
(Some
amounts may not reconcile due to rounding.)
|
||||||||||||
Ultimate
loss projections for A&E liabilities cannot be accomplished using standard
actuarial techniques. In 2007, we completed a detailed study of our
asbestos experience and our cedants’ asbestos exposures and also considered
industry trends. Our Claims Department undertook a contract by
contract analysis of our direct business and projected those findings to our
assumed reinsurance business. Our actuaries utilized nine
methodologies to project our potential ultimate liabilities including
projections based on internal data and assessments, extrapolations of non-public
and publicly available data for our cedants and benchmarking against industry
data and experience. As a result of the study, we increased our gross
reinsurance asbestos reserves by $250.0 million and our gross direct asbestos
reserves by $75.0 million. Subsequent to the study, we have not experienced
significant claims activity related to asbestos. We believe that our
A&E reserves represent our best estimate of the ultimate liability, however,
there can be no assurance that ultimate loss payments will not exceed such
reserves, perhaps by a significant amount. No additional gross reserve
strengthening was made in 2008 and 2009.
Industry
analysts use the “survival ratio” to compare the A&E reserves among
companies with such liabilities. The survival ratio is typically
calculated by dividing a company’s current net reserves by the three year
average of annual paid losses. Hence, the survival ratio equals the
number of years that it would take to exhaust the current reserves if future
loss payments were to continue at historical levels. Using this
measurement, our net three year asbestos survival ratio was 7 years at December
31, 2009. These metrics can be skewed by individual large settlements
occurring in the prior three years and therefore, may not be indicative of the
timing of future payments.
Because
the survival ratio was developed as a comparative measure of reserve strength
and does not indicate absolute reserve adequacy, we consider, but do not rely
on, the survival ratio when evaluating our reserves. In particular,
we note that year to year loss payment variability can be
material. This is due, in part, to our orientation to negotiated
settlements, particularly on our Mt. McKinley exposures, which significantly
reduces the credibility and utility of this measure as an analytical
tool. During 2009, we made asbestos net claim payments of $63.5
million to Mt McKinley high profile claimants where the claim was either closed
or a settlement had been reached. Such payments, which are
non-repetitive, distort downward our three year survival ratio for 2009 and will
continue to do so for 2010 and 2011. Adjusting for such settlements,
recognizing that total settlements are generally considered fully reserved to an
agreed settlement, we consider that our adjusted asbestos survival ratio for net
unsettled claims is 9 years, which is better than prevailing industry
norms.
Shareholders’
Equity.
Our shareholders’ equity increased to $6,101.7 million
as of December 31, 2009 from $4,960.4 million as of December 31,
2008. This increase was the result of $807.0 million in net income,
unrealized appreciation on investments, net of tax, of $529.9 million, $83.8
million of foreign currency translation adjustment and $22.5 million of
share-based compensation transactions, partially offset by the repurchase of 2.4
million common shares for $190.6 million and $116.9 million of shareholder
dividends.
Our
shareholders’ equity decreased to $4,960.4 million as of December 31, 2008 from
$5,684.8 million as of December 31, 2007. This decrease was the
result of unrealized depreciation on investments, net of tax, of $236.6 million,
$193.3 million of foreign currency translation adjustments, the repurchase of
1.6 million common shares for $150.7 million, $118.6 million of shareholder
dividends and a net loss of $18.8 million, partially offset by $18.7 million of
share-based compensation transactions.
LIQUIDITY
AND CAPITAL RESOURCES
Capital
Our business
operations are in part dependent on our financial strength and financial
strength ratings, and the market’s perception of our financial strength, as
measured by shareholders’ equity, which was $6,101.7 million at December 31,
2009 and $4,960.4 million at December 31, 2008. On March 13, 2009,
Everest Re and Everest National, wholly owned indirect subsidiaries of the
Company, received notification of a one level ratings downgrade by Standard
& Poor’s. We continue to possess significant financial
flexibility and access to the debt and equity markets as a result of our
perceived financial strength, as evidenced by the financial strength ratings as
assigned by independent rating agencies. During the last six months
of 2008 and into 2009, the capital markets were illiquid in reaction to the
deepening credit crisis which led to bank and other financial institution
failures and effective failures. Credit spreads widened
and
the
equity markets declined significantly during this period making access to the
capital markets, for even highly rated companies, difficult and
costly. Our capital position remains strong, commensurate with our
financial ratings. We have ample liquidity to meet our financial
obligations for the foreseeable future. Therefore, we have no
foreseeable need to enter the capital markets in the near term.
From time
to time, we have used open market share repurchases to adjust our capital
position and enhance long term expected returns to our
shareholders. On July 21, 2008, our existing authorization to
purchase up to 5 million of our shares was amended to authorize the purchase of
up to 10 million shares. On February 24, 2010, our existing
authorization to purchase up to 10 million of our shares was amended to
authorize the purchase of up to 15 million shares. As of December 31,
2009, we had repurchased 6.5 million shares under this
authorization.
On
December 17, 2008, we renewed our shelf registration statement on Form S-3ASR
with the SEC, as a Well Known Seasoned Issuer. This shelf
registration statement can be used by Group to register common shares, preferred
shares, debt securities, warrants, share purchase contracts and share purchase
units; by Holdings to register debt securities and by Everest Re Capital Trust
III (“Capital Trust III”) to register trust preferred securities.
Liquidity.
Our
principal investment objectives are to ensure funds are available to meet our
insurance and reinsurance obligations and to maximize after-tax investment
income while maintaining a high quality diversified investment
portfolio. Considering these objectives, we view our investment
portfolio as having two components: 1) the investments needed to satisfy
outstanding liabilities and 2) investments funded by our shareholders’
equity.
For the
portion needed to satisfy outstanding liabilities, we invest in taxable and
tax-preferenced fixed income securities with an average credit quality of Aa2,
as rated by Moody’s. Our mix of taxable and tax-preferenced
investments is adjusted periodically, consistent with our current and projected
operating results, market conditions and our tax position. This fixed
maturity securities portfolio is externally managed by an independent,
professional investment manager using portfolio guidelines approved by
us.
Over the
past few years, we have allocated our equity portfolio to include: 1) publicly
traded equity securities and 2) private equity limited partnership
investments. The objective of this portfolio diversification is to
enhance the risk-adjusted total return of the investment portfolio by allocating
a prudent portion of the portfolio to higher return asset classes. We
limit our allocation to these asset classes because of 1) the potential for
volatility in their values and 2) the impact of these investments on regulatory
and rating agency capital adequacy models. We adjust our allocation
to these investments based upon market conditions. As a result of the
dramatic slowdown in the global economy and the liquidity crisis affecting the
financial markets, we significantly reduced our exposure to public equities
during the fourth quarter of 2008 and have increased our exposure to equities in
the latter part of 2009 as financial markets improved. At December
31, 2009, the market value of investments in equity and limited partnership
securities, carried at both market and fair value, approximated 15% of
shareholders’ equity.
Our
liquidity requirements are generally met from positive cash flow from
operations. Positive cash flow results from reinsurance and insurance
premiums being collected prior to disbursements for claims, which disbursements
generally take place over an extended period after the collection of premiums,
sometimes a period of many years. Collected premiums are generally
invested, prior to their use in such disbursements, and investment income
provides additional funding for loss payments. Our net cash flows
from operating activities were $784.7 million, $663.0 million and $854.4 million
for the years ended December 31, 2009, 2008 and 2007,
respectively. Additionally, these cash flows reflected net tax
payments of $111.8 million, $11.0 million and $282.6 million for the years ended
December 31, 2009, 2008 and 2007, respectively; net catastrophe loss payments of
$235.3 million, $290.5 million and $443.1 million for the years ended December
31, 2009, 2008 and 2007, respectively; and net A&E payments of $136.4
million, $78.3 million and $71.6 million for the years ended December 31, 2009,
2008 and 2007, respectively.
If
disbursements for claims and benefits, policy acquisition costs and other
operating expenses were to exceed premium inflows, cash flow from insurance
operations would be negative. The effect on cash flow from insurance
operations would be partially offset by cash flow from investment
income. Additionally, cash
inflows from investment maturities and dispositions, both
short-term investments and longer term maturities are available to supplement
other operating cash flows.
As the
timing of payments for claims and benefits cannot be predicted with certainty,
we maintain portfolios of long term invested assets with varying maturities,
along with short-term investments that provide additional liquidity for payment
of claims. At December 31, 2009 and 2008, we held cash and short-term
investments of $920.7 million and $2,095.5 million, respectively. All
of our short-term investments are readily marketable and can be converted to
cash. In addition to these cash and short-term investments, at
December 31, 2009, we had $652.5 million of available for sale fixed maturity
securities maturing within one year or less, $3,151.8 million maturing within
one to five years and $5,916.3 million maturing after five years. Our
$396.3 million of equity securities are comprised primarily of publicly traded
securities that can be easily liquidated. We believe that these fixed maturity
and equity securities, in conjunction with the short-term investments and
positive cash flow from operations, provide ample sources of liquidity for the
expected payment of losses in the near future. We do not anticipate
selling securities or using available credit facilities to pay losses and LAE
but have the ability to do so. Sales of securities might result in
realized capital gains or losses. At December 31, 2009 we had $392.7 million of
net pre-tax unrealized appreciation, comprised of $559.1 million of pre-tax
unrealized appreciation and $166.4 million of pre-tax unrealized
depreciation.
Management
expects annual positive cash flow from operations, which in general reflects the
strength of overall pricing, to persist over the near term, absent any unusual
catastrophe activity. In the intermediate and long term, our cash
flow from operations will be impacted to the extent by which competitive
pressures affect overall pricing in our markets and by which our premium
receipts are impacted from our strategy of emphasizing underwriting
profitability over premium volume.
Effective
July 27, 2007, Group, Bermuda Re and Everest International entered into a five
year, $850.0 million senior credit facility with a syndicate of lenders referred
to as the “Group Credit Facility”. Wachovia Bank, a subsidiary of
Wells Fargo Corporation (“Wachovia Bank”) is the administrative agent for the
Group Credit Facility, which consists of two tranches. Tranche one
provides up to $350.0 million of unsecured revolving credit for liquidity and
general corporate purposes, and for the issuance of unsecured standby letters of
credit. The interest on the revolving loans shall, at the Company’s
option, be 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 (a) the prime commercial lending rate established by Wachovia Bank or
(b) the Federal Funds Rate plus 0.5% per annum. The amount of margin and the
fees payable for the Group Credit Facility depends on Group’s senior unsecured
debt rating. Tranche two exclusively provides up to $500.0 million
for the issuance of standby letters of credit on a collateralized
basis.
The Group
Credit Facility requires Group to maintain a debt to capital ratio of not
greater than 0.35 to 1 and to maintain a minimum net worth. Minimum
net worth is an amount equal to the sum of $3,575.4 million plus 25% of
consolidated net income for each of Group’s fiscal quarters, for which
statements are available ending on or after January 1, 2007 and for which
consolidated net income is positive, plus 25% of any increase in consolidated
net worth during such period attributable to the issuance of ordinary and
preferred shares, which at December 31, 2009, was $4,063.4
million. As of December 31, 2009, the Company was in compliance with
all Group Credit Facility covenants.
At
December 31, 2009, the Group Credit Facility had no outstanding letters of
credit under tranche one and $386.5 million outstanding letters of credit under
tranche two. At December 31, 2008, the Group Credit Facility had no
outstanding letters of credit under tranche one and $411.9 million under tranche
two.
Effective
August 23, 2006, Holdings entered into a five year, $150.0 million senior
revolving credit facility with a syndicate of lenders referred to as the
“Holdings Credit Facility”. Citibank N.A. is the administrative agent
for the Holdings Credit Facility. The Holdings Credit Facility may be
used for liquidity and general corporate purposes. The Holdings
Credit Facility provides for the borrowing of up to $150.0 million with interest
at a rate selected by Holdings equal to either, (1) the Base Rate (as defined
below) or (2) a periodic fixed rate equal to the Eurodollar Rate plus an
applicable margin. The Base Rate means a fluctuating interest rate
per annum in effect from time to time to be equal to the higher of (a) the rate
of interest publicly announced by Citibank as its prime rate or (b) 0.5% per
annum above the Federal Funds Rate, in each case
plus the applicable margin. The amount of margin and
the fees payable for the Holdings Credit Facility depends upon Holdings’ senior
unsecured debt rating.
The
Holdings Credit Facility requires Holdings to maintain a debt to capital ratio
of not greater than 0.35 to 1 and Everest Re to maintain its statutory surplus
at $1.5 billion plus 25% of future aggregate net income and 25% of future
aggregate capital contributions after December 31, 2005, which at December 2009,
was $1,933.2 million. As of December 31, 2009, Holdings was in
compliance with all Holdings Credit Facility covenants.
At
December 31, 2009 and 2008, the Holdings Credit Facility had outstanding letters
of credit of $28.0 million.
Costs
incurred in connection with the Group Credit Facility and the Holdings Credit
Facility were $1.5 million and $1.3 million for December 31, 2009 and 2008,
respectively.
Exposure to
Catastrophes.
Like other insurance and reinsurance companies,
we are exposed to multiple insured losses arising out of a single occurrence,
whether a natural event, such as a hurricane or an earthquake, or other
catastrophe, such as an explosion at a major factory. A large catastrophic event
can be expected to generate insured losses to multiple reinsurance treaties,
facultative certificates and across lines of business.
We focus
on potential losses that could result from any single event, or series of events
as part of our evaluation and monitoring of our aggregate exposures to
catastrophic events. Accordingly, we employ various techniques to estimate the
amount of loss we could sustain from any single catastrophic event in various
geographic areas. These techniques range from deterministic approaches, such as
tracking aggregate limits exposed in catastrophe-prone zones and applying
historic damage factors, to modeled approaches that attempt to scientifically
measure catastrophe loss exposure using sophisticated Monte Carlo simulation
techniques that forecast frequency and severity of expected losses on a
probabilistic basis.
No single
universal model or group of models is currently capable of projecting the amount
and probability of loss in all global geographic regions in which we conduct
business. In addition, the form, quality and granularity of underwriting
exposure data furnished by ceding companies is not uniformly compatible with the
data requirements for our licensed models, which adds to the inherent
imprecision in the potential loss projections. Further, the results from
multiple models and analytical methods must be combined and interpolated to
estimate potential losses by and across business units. Also, while
most models have been updated to better incorporate factors that contributed to
unprecedented industry storm losses in 2004 and 2005, such as flood, storm surge
and demand surge, catastrophe model projections are inherently
imprecise. In addition, uncertainties with respect to future climatic
patterns and cycles add to the already significant uncertainty of loss
projections from models using historic long term frequency and severity
data.
Nevertheless,
when combined with traditional risk management techniques and sound underwriting
judgment, catastrophe models are a useful tool for underwriters to price
catastrophe exposed risks and for providing management with quantitative
analyses with which to monitor and manage catastrophic risk exposures by zone
and across zones for individual and multiple events.
Projected
catastrophe losses are generally summarized in terms of the PML. We
define PML as our anticipated loss, taking into account contract terms and
limits, caused by a single catastrophe affecting a broad contiguous geographic
area, such as that caused by a hurricane or earthquake. The PML will
vary depending upon the modeled simulated losses and the make-up of the in force
book of business. The projected severity levels are described in
terms of “return periods”, such as “100-year events” and “250-year events”. For
example, a 100-year PML is the estimated loss from a single event which has a 1%
probability of being exceeded in a twelve month period. Conversely,
it corresponds to a 99% probability that the loss from a single event will fall
below the indicated PML. It is important to note that PMLs are
estimates. Modeled events are hypothetical events produced by a
stochastic model. As a result, there can be no assurance that any
actual event will align with the modeled event or that actual losses from events
similar to the modeled events will not vary materially from the modeled event
PML.
From an
enterprise risk management perspective, management sets limits on the levels of
catastrophe loss exposure we may underwrite. The limits are revised
periodically based on a variety of factors, including but not limited to our
financial resources and expected earnings and risk/reward analyses of the
business being underwritten.
Management
estimated that the projected economic loss from its largest 100-year event in a
given zone does not exceed 10% of its projected 2010 shareholders’
equity. Economic loss is the gross PML reduced by estimated
reinstatement premiums to renew coverage and income taxes. The impact
of income taxes on the PML depends on the distribution of the losses by
corporate entity, which is also affected by inter-affiliate reinsurance.
Management also monitors and controls its largest PMLs at multiple points along
the loss distribution curve, such as loss amounts at the 20, 50, 100, 250, 500
and 1,000 year return periods. This process enables management to
identify and control exposure accumulations and to integrate such exposures into
enterprise risk, underwriting and capital management decisions.
Our
catastrophe loss projections, segmented by risk zones, are updated quarterly and
reviewed as part of a formal risk management review process.
We
believe that our greatest worldwide 1 in 100 year exposure to a single
catastrophic event is to a hurricane affecting the U.S. southeast coast, where
we estimate we have a gross PML exposure of $864 million. See also
table under ITEM 1, “Business - Risk Management of Underwriting and Retrocession
Arrangements”.
If such a
single catastrophe loss were to occur, management estimates that the economic
loss to us would be approximately $541 million. The estimate involves
multiple variables, including which Everest entity would experience the loss,
and as a result there can be no assurance that this amount would not be
exceeded.
We may
purchase reinsurance to cover specific business written or the potential
accumulation or aggregation of exposures across some or all of our
operations. Reinsurance purchasing decisions consider both the
potential coverage and market conditions including the pricing, terms,
conditions and availability of coverage, with the aim of securing cost effective
protection. The amount of reinsurance purchased has varied over time,
reflecting our view of our exposures and the cost of reinsurance.
We have
not recently purchased corporate retrocessional protection and have generally
de-emphasized the purchase of specific reinsurance by our underwriters,
reflecting our view that our exposures, in the context of our capital, financial
position and current market pricing, do not warrant reinsurance purchases at
current price levels. See ITEM 1, “Business - Risk Management of
Underwriting and Retrocession Arrangements” for further details.
Contractual
Obligations.
The following table shows our contractual
obligations for the period indicated.
|
Payments
due by period
|
||||||||||||||||||||
|
Less
than
|
More
than
|
|||||||||||||||||||
|
(Dollars
in millions)
|
Total
|
1
year
|
1-3
years
|
3-5
years
|
5
years
|
|||||||||||||||
|
8.75%
Senior notes
|
$ | 200.0 | $ | 200.0 | $ | - | $ | - | $ | - | ||||||||||
|
5.40%
Senior notes
|
250.0 | - | - | 250.0 | - | |||||||||||||||
|
Junior
subordinated debt
|
329.9 | - | - | - | 329.9 | |||||||||||||||
|
6.6%
Long term notes
|
238.6 | - | - | - | 238.6 | |||||||||||||||
|
Interest
expense
(1)
|
1,462.9 | 57.8 | 98.2 | 98.2 | 1,208.7 | |||||||||||||||
|
Employee
benefit plans
|
36.7 | 9.0 | 5.4 | 7.3 | 15.0 | |||||||||||||||
|
Operating
lease agreements
|
96.9 | 9.9 | 18.4 | 18.3 | 50.3 | |||||||||||||||
|
Gross
reserve for losses and LAE
(2)
|
8,937.9 | 1,822.0 | 3,328.9 | 1,099.0 | 2,688.0 | |||||||||||||||
|
Total
|
$ | 11,552.9 | $ | 2,098.7 | $ | 3,450.9 | $ | 1,472.8 | $ | 4,530.5 | ||||||||||
|
(Some
amounts may not reconcile due to rounding.)
|
||||||||||||||||||||
_________________________________
|
(1)
|
Interest
expense on 6.6% long term notes is assumed to be fixed through contractual
term.
|
|
(2)
|
Loss
and LAE reserves represent our best estimate of losses from claim and
related settlement costs. Both the amounts and timing of such
payments are estimates, and the inherent variability of resolving claims
as well as changes in market conditions make the timing of cash flows
uncertain. Therefore, the ultimate amount and timing of loss
and LAE payments could differ from our
estimates.
|
The
contractual obligations for senior notes, long term notes and junior
subordinated debt are the responsibility of Holdings. We have
sufficient cash flow, liquidity, investments and access to capital markets to
satisfy these obligations. Holdings generally depends upon dividends
from Everest Re, its operating insurance subsidiary for its funding, capital
contributions from Group or access to the capital markets. Our
various operating insurance and reinsurance subsidiaries have sufficient cash
flow, liquidity and investments to settle outstanding reserves for losses and
LAE. Management believes that we, and each of our entities, have
sufficient financial resources or ready access thereto, to meet all
obligations.
On March
15, 2010, Holdings’ $200.0 million principal amount of 8.75% senior notes will
mature. We anticipate paying off the debt on the due date with current liquidity
as opposed to refinancing.
Dividends.
During
2009, 2008 and 2007, we declared and paid shareholder dividends of $116.9
million, $118.6 million and $121.4 million, respectively. As an
insurance holding company, we are partially dependent on dividends and other
permitted payments from our subsidiaries to pay cash dividends to our
shareholders. The payment of dividends to Group by Holdings Ireland
is subject to Irish corporate and regulatory restrictions; the payment of
dividends to Holdings Ireland by Holdings and to Holdings by Everest Re is
subject to Delaware regulatory restrictions; and the payment of dividends to
Group by Bermuda Re is subject to Bermuda insurance regulatory
restrictions. Management expects that, absent extraordinary
catastrophe losses, such restrictions should not affect Everest Re’s ability to
declare and pay dividends sufficient to support Holdings’ general corporate
needs and that Holdings Ireland and Bermuda Re will have the ability to declare
and pay dividends sufficient to support Group’s general corporate
needs. For the years ended December 31, 2009, 2008 and 2007, Everest
Re paid dividends to Holdings of $60.0 million, $285.0 million and $245.0
million, respectively. For the years ended December 31, 2009, 2008
and 2007, Bermuda Re paid dividends to Group of $245.0 million, $120.0 million
and $0.0 million, respectively. See ITEM 1, “Business – Regulatory
Matters – Dividends” and ITEM 8, “Financial Statements and Supplementary Data” -
Note 16 of Notes to Consolidated Financial Statements.
Application
of Recently Issued Accounting Guidance.
Financial Accounting Standards Board
Launched Accounting Codification.
In June 2009, the FASB
issued authoritative guidance establishing the FASB Accounting Standards
Codification
TM
(“Codification”) as the single source of authoritative U.S. GAAP recognized by
the FASB to be applied by non-governmental entities. Rules and interpretive
releases of the SEC under authority of federal securities laws are also sources
of authoritative GAAP for SEC registrants. The Codification supersedes all
existing non-SEC accounting and reporting standards. All other
non-grandfathered, non-SEC accounting literature not included in the
Codification will become non-authoritative.
Following
the Codification, the FASB will no longer issue new standards in the form of
Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts.
Instead, the FASB will issue Accounting Standards Updates, which will serve to
update the Codification, provide background information about the guidance and
provide the basis for conclusions on the changes to the
Codification.
GAAP is
not intended to be changed as a result of the FASB’s Codification, but it will
change the way the guidance is organized and presented. As a result, these
changes will have a significant impact on how companies reference GAAP in their
financial statements and in the accounting policies for financial statements
issued for interim and annual periods ending after September 15, 2009. The
Company’s adoption of this guidance impacts the way the Company references U.S.
GAAP accounting standards in the financial statements and Notes to Consolidated
Financial Statements.
Subsequent Events.
In May
2009, the FASB issued authoritative guidance for subsequent events, which was
later modified in February 2010, that addresses the accounting for and
disclosure of subsequent events not addressed in other applicable U.S. GAAP.
The Company implemented the new disclosure requirement beginning with the
second quarter of 2009 and included it in the Notes to Consolidated Interim
Financial Statements.
Interim Disclosures About Fair Value
of Financial Instruments.
In April 2009, the FASB revised the
authoritative guidance for disclosures about fair value of financial
instruments. This new guidance requires quarterly disclosures on the qualitative
and quantitative information about the fair value of all financial instruments
including methods and significant assumptions used to estimate fair value during
the period. These disclosures were previously only done annually. The Company
adopted this disclosure beginning with the second quarter of 2009 and included
it in the Notes to Consolidated Interim Financial Statements.
Other-Than-Temporary Impairments on
Investment Securities.
In April 2009, the FASB
revised the authoritative guidance for the recognition and presentation of
other-than-temporary impairments. This new guidance amends the recognition
guidance for other-than-temporary impairments of debt securities and expands the
financial statement disclosures for other-than-temporary impairments on debt and
equity securities. For available for sale debt securities that the Company has
no intent to sell and more likely than not will not be required to sell prior to
recovery, only the credit loss component of the impairment would be recognized
in earnings, while the rest of the fair value loss would be recognized in
accumulated other comprehensive income. The Company adopted this
guidance effective April 1, 2009. Upon adoption the Company
recognized a cumulative-effect adjustment increase in retained earnings and
decrease in accumulated other comprehensive income (loss) of $57.3 million, net
of $8.3 million of tax.
Measurement of Fair Value in
Inactive Markets.
In April 2009, the FASB revised the
authoritative guidance for fair value measurements and disclosures, which
reaffirms that fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date under current market conditions. It also
reaffirms the need to use judgment in determining if a formerly active market
has become inactive and in determining fair values when the market has become
inactive. There was no impact to the Company’s financial statements upon
adoption.
Fair Value Disclosures about Pension
Plan Assets.
In December 2008, the FASB revised the authoritative
guidance for employers’ disclosures about pension plan assets. This new guidance
requires additional disclosures about the components of plan assets, investment
strategies for plan assets and significant concentrations of risk within plan
assets. The Company, in conjunction with fair value measurement of plan assets,
will separate plan assets into the three fair value hierarchy levels and provide
a roll forward of the changes in fair value of plan assets classified as Level 3
in the current 2009 annual consolidated financial statements. These disclosures
have no effect on the Company’s accounting for plan benefits and
obligations.
Revisions to Earnings per Share
Calculation.
In June 2008, the FASB revised the authoritative
guidance for earnings per share for determining whether instruments granted in
share-based payment transactions are participating securities. This new guidance
requires unvested share-based payment awards that contain non-forfeitable rights
to dividends be considered as a separate class of common stock and included in
the earnings per share calculation using the two-class method. The Company’s
restricted share awards meet this definition and are therefore included in the
basic earnings per share calculation. All prior period earnings per share data
presented have been adjusted retrospectively.
Additional Disclosures for
Derivative Instruments.
In March 2008, the FASB issued
authoritative guidance for derivative instruments and hedging activities, which
requires enhanced disclosures on derivative instruments and hedged items. On
January 1, 2009, the Company adopted the additional disclosure for the equity
index put options. No comparative information for periods prior to the effective
date was required. This guidance had no impact on how the Company records its
derivatives.
Market
Sensitive Instruments.
The SEC’s
Financial Reporting Release #48 requires registrants to clarify and expand upon
the existing financial statement disclosure requirements for derivative
financial instruments, derivative commodity instruments and other financial
instruments (collectively, “market sensitive instruments”). We do not generally
enter into market sensitive instruments for trading purposes.
Our
current investment strategy seeks to maximize after-tax income through a high
quality, diversified, taxable and tax-preferenced fixed maturity portfolio,
while maintaining an adequate level of liquidity. Our mix of taxable
and tax-preferenced investments is adjusted periodically, consistent with our
current and projected operating results, market conditions and our tax
position. The fixed maturity securities in the investment portfolio
are comprised of non-trading available for sale
securities. Additionally, we have invested in equity
securities. We have also written a small number of equity index put
option contracts.
The
overall investment strategy considers the scope of present and anticipated
Company operations. In particular, estimates of the financial impact
resulting from non-investment asset and liability transactions, together with
our capital structure and other factors, are used to develop a net liability
analysis. This analysis includes estimated payout characteristics for
which our investments provide liquidity. This analysis is considered
in the development of specific investment strategies for asset allocation,
duration and credit quality. The change in overall market sensitive
risk exposure principally reflects the asset changes that took place during the
period.
Interest Rate
Risk.
Our $14.9 billion investment portfolio at December 31,
2009 is principally comprised of fixed maturity securities, which are generally
subject to interest rate risk and some foreign currency exchange rate risk, and
some equity securities, which are subject to price fluctuations and some foreign
exchange rate risk. The impact of the foreign exchange risks on the
investment portfolio is partially mitigated by changes in the dollar value of
foreign currency denominated liabilities and their associated income statement
impact.
Interest
rate risk is the potential change in value of the fixed maturity portfolio,
including short-term investments, from a change in market interest
rates. In a declining interest rate environment, it includes
prepayment risk on the $2,971.7 million of mortgage-backed securities in the
$13,056.5 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
tables below display the potential impact of market value fluctuations and
after-tax unrealized appreciation on our fixed maturity portfolio (including
$673.1 million of short-term investments) for the period indicated based on
upward and downward parallel and immediate 100 and 200 basis point shifts in
interest rates. For legal entities with a U.S. dollar functional
currency, this modeling was performed on each security
individually. To generate appropriate price estimates on
mortgage-backed securities, changes in prepayment expectations under different
interest rate environments were taken into account. For legal
entities with a non-U.S. dollar functional currency, the effective duration of
the involved portfolio of securities was used as a proxy for the market value
change under the various interest rate change scenarios.
|
Impact
of Interest Rate Shift in Basis Points
|
||||||||||||||||||||
|
At
December 31, 2009
|
||||||||||||||||||||
| -200 | -100 | 0 | 100 | 200 | ||||||||||||||||
|
(Dollars
in millions)
|
||||||||||||||||||||
|
Total
Market/Fair Value
|
$ | 14,804.7 | $ | 14,296.2 | $ | 13,729.6 | $ | 13,120.0 | $ | 12,520.6 | ||||||||||
|
Market/Fair
Value Change from Base (%)
|
7.8 | % | 4.1 | % | 0.0 | % | -4.4 | % | -8.8 | % | ||||||||||
|
Change
in Unrealized Appreciation
|
||||||||||||||||||||
|
After-tax
from Base ($)
|
$ | 826.1 | $ | 434.7 | $ | - | $ | (468.4 | ) | $ | (932.0 | ) | ||||||||
|
Impact
of Interest Rate Shift in Basis Points
|
||||||||||||||||||||
|
At
December 31, 2008
|
||||||||||||||||||||
| -200 | -100 | 0 | 100 | 200 | ||||||||||||||||
|
(Dollars
in millions)
|
||||||||||||||||||||
|
Total
Market/Fair Value
|
$ | 13,836.0 | $ | 13,277.1 | $ | 12,692.5 | $ | 12,088.1 | $ | 11,507.2 | ||||||||||
|
Market/Fair
Value Change from Base (%)
|
9.0 | % | 4.6 | % | 0.0 | % | -4.8 | % | -9.3 | % | ||||||||||
|
Change
in Unrealized Appreciation
|
||||||||||||||||||||
|
After-tax
from Base ($)
|
$ | 857.0 | $ | 436.9 | $ | - | $ | (453.6 | ) | $ | (893.9 | ) | ||||||||
We had
$8,937.9 million and $8,840.7 million of gross reserves for losses and LAE as of
December 31, 2009 and 2008, respectively. These amounts are recorded
at their nominal value, as opposed to present value, which would reflect a
discount adjustment to reflect the time value of money. Since losses
are paid out over a period of time, the present value of the reserves is less
than the nominal value. As interest rates rise, the present value of
the reserves decreases and, conversely, as interest rates decline, the present
value increases. These movements are the opposite of the interest
rate impacts on the fair value of investments. While the difference
between present value and nominal value is not reflected in our financial
statements, our financial results will include investment income over time from
the investment portfolio until the claims are paid. Our loss and loss
reserve obligations have an expected duration of approximately 4.1 years, which
is reasonably consistent with our fixed income portfolio. If we were
to discount our loss and LAE reserves, net of $0.6 billion of reinsurance
receivables on unpaid losses, the discount would be approximately $1.5 billion
resulting in a discounted reserve balance of approximately $6.8 billion,
representing approximately 49.7% of the market value of the fixed maturity
investment portfolio funds.
Equity
Risk.
Equity risk is the potential change in fair and/or
market value of the common stock and preferred stock portfolios arising from
changing equity prices. Our equity investments consist of a
diversified portfolio of individual securities and mutual funds, which invest
principally in high quality common and preferred stocks that are traded on the
major exchanges. The primary objective of the equity portfolio is to
obtain greater total return relative to bonds over time through market
appreciation and income.
The
tables below display the impact on fair/market value and after-tax change in
fair/market value of a 10% and 20% change in equity prices up and down for the
period indicated.
|
Impact
of Percentage Change in Equity Fair/Market Values
|
||||||||||||||||||||
|
At
December 31, 2009
|
||||||||||||||||||||
|
(Dollars
in millions)
|
-20% | -10% | 0% | 10% | 20% | |||||||||||||||
|
Fair/Market
Value of the Equity Portfolio
|
$ | 317.1 | $ | 356.7 | $ | 396.3 | $ | 436.0 | $ | 475.6 | ||||||||||
|
After-tax
Change in Fair/Market Value
|
(51.8 | ) | (25.9 | ) | - | 25.9 | 51.8 | |||||||||||||
|
Impact
of Percentage Change in Equity Fair/Market Values
|
||||||||||||||||||||
|
At
December 31, 2008
|
||||||||||||||||||||
|
(Dollars
in millions)
|
-20% | -10% | 0% | 10% | 20% | |||||||||||||||
|
Fair/Market
Value of the Equity Portfolio
|
$ | 109.4 | $ | 123.1 | $ | 136.7 | $ | 150.4 | $ | 164.1 | ||||||||||
|
After-tax
Change in Fair/Market Value
|
(18.0 | ) | (9.0 | ) | - | 9.0 | 18.0 | |||||||||||||
Foreign Currency
Risk.
Foreign currency risk is the potential change in value,
income and cash flow arising from adverse changes in foreign currency exchange
rates. Each of our non-U.S./Bermuda (“foreign”) operations maintains
capital in the currency of the country of its geographic location consistent
with local regulatory guidelines. Generally, we prefer to maintain
the capital of our operations in U.S. dollar assets, although this varies by
regulatory jurisdiction in accordance with market needs. Each foreign
operation may conduct business in its local currency, as well as the currency of
other countries in which it operates. The primary foreign currency
exposures for these foreign operations are the Canadian Dollar, the British
Pound Sterling and the Euro. We mitigate foreign exchange exposure by
generally matching the currency and duration of our assets to our corresponding
operating liabilities. In accordance with FASB guidance, we translate
the assets, liabilities and income of non-U.S. dollar functional currency legal
entities to the U.S. dollar. This translation amount is reported as a
component of other comprehensive income. As of December 31, 2009
there has been no material change in exposure to foreign exchange rates as
compared to December, 31, 2008.
The
tables below display the potential impact of a parallel and immediate 10% and
20% increase and decrease in foreign exchange rates on the valuation of invested
assets subject to foreign currency exposure for the periods
indicated. This analysis includes the after-tax impact of translation
from transactional currency to functional currency as well as the after-tax
impact of translation from functional currency to the U.S. dollar reporting
currency.
|
Change
in Foreign Exchange Rates in Percent
|
||||||||||||||||||||
|
At
December 31, 2009
|
||||||||||||||||||||
|
(Dollars
in millions)
|
-20% | -10% | 0% | 10% | 20% | |||||||||||||||
|
Total
After-tax Foreign Exchange Exposure
|
$ | (122.1 | ) | $ | (75.6 | ) | $ | - | $ | 96.6 | $ | 209.1 | ||||||||
|
Change
in Foreign Exchange Rates in Percent
|
||||||||||||||||||||
|
At
December 31, 2008
|
||||||||||||||||||||
|
(Dollars
in millions)
|
-20% | -10% | 0% | 10% | 20% | |||||||||||||||
|
Total
After-tax Foreign Exchange Exposure
|
$ | (71.1 | ) | $ | (47.9 | ) | $ | - | $ | 65.9 | $ | 145.3 | ||||||||
Equity Index Put Option
Contracts.
Although not considered material in the context of
our aggregate exposure to market sensitive instruments, we have issued six
equity index put option contracts based on the Standard & Poor’s 500
(“S&P 500”) index and one equity index put option contract based on the FTSE
100 index, that are market sensitive and sufficiently unique to warrant
supplemental disclosure.
We sold
six equity index put option contracts based on the S&P 500 index, for total
consideration, net of commissions, of $22.5 million. At December 31,
2009, fair value for these equity index put option contracts was $51.2
million. These equity index put option contracts each have a single
exercise date, with maturities ranging from 12 to 30 years and strike prices
ranging from $1,141.21 to $1,540.63. No amounts will be payable under
these equity index put option contracts if the S&P 500 index is at or above
the strike prices on the exercise dates, which fall between June 2017 and March
2031. If the S&P 500 index is lower than the strike price on the
applicable exercise date, the amount due would vary proportionately with the
percentage by which the index is below the strike price. Based on
historical index volatilities and trends and the December 31, 2009 index value,
we estimate the probability for each equity index put option contract, of the
S&P 500 index falling below the strike price on the exercise date, to be
less than 36%. The theoretical maximum payouts under the equity index
put option contracts would occur if on each of the exercise dates the S&P
500 index value were zero. At December 31, 2009, the present value of
these theoretical maximum payouts using a 6% discount factor was $254.0
million.
We sold
one equity index put option contract, based on the FTSE 100 index, for total
consideration, net of commissions, of $6.7 million. At December 31,
2009, fair value for this equity index put option contract was $6.1
million. This equity index put option contract has an exercise date
of July 2020 and a strike price of ₤5,989.75. No amount will be
payable under this equity index put option contract if the FTSE 100 index is at
or above the strike price on the exercise date. If the FTSE 100 index
is lower than the strike price on the exercise date, the amount due will vary
proportionately with the percentage by which the index is below the strike
price. Based on historical index volatilities and trends and the
December 31, 2009 index value, we estimate the probability, that this FTSE 100
equity index put option contract will fall below the strike price on the
exercise date, to be less than 32%. The theoretical maximum payout
under the equity index put option contract would occur if on the exercise date
the FTSE 100 index value was zero. At December 31, 2009, the present
value of the theoretical maximum payout using a 6% discount factor and current
exchange rate was $28.4 million.
Because
the equity index put option contracts meet the definition of a derivative, we
report the fair value of these instruments in our consolidated balance sheets as
a liability and record any changes to fair value in our consolidated statements
of operations and comprehensive income as net derivative expense or
income. Our financial statements reflect fair values for our
obligations on these equity index put option contracts at December 31, 2009 and
2008, of $57.3 million and $60.6 million, respectively; however, we do not
believe that the ultimate settlement of these transactions is likely to require
a payment that would exceed the initial consideration received, or any payment
at all.
As there
is no active market for these instruments, the determination of their fair value
is based on an industry accepted option pricing model, which requires estimates
and assumptions, including those regarding volatility and expected rates of
return.
The
tables below display the impact of potential movements in interest rates and the
equity indices, which are the principal factors affecting fair value of these
instruments, looking forward from the fair value for the period
indicated. As these are estimates, there can be no assurance
regarding future market performance. The asymmetrical results of the
interest rate and S&P 500 and FTSE 100 indices shift reflect that the
liability cannot fall below zero whereas it can increase to its theoretical
maximum.
|
Equity
Indices Put Options Obligation – Sensitivity Analysis
|
||||||||||||||||||||
|
(Dollars
in millions)
|
At
December 31, 2009
|
|||||||||||||||||||
|
Interest
Rate Shift in Basis Points:
|
-200 | -100 | 0 | 100 | 200 | |||||||||||||||
|
Total
Fair Value
|
$ | 98.8 | $ | 75.4 | $ | 57.3 | $ | 43.3 | $ | 32.6 | ||||||||||
|
Fair
Value Change from Base (%)
|
-72.2 | % | -31.5 | % | 0.0 | % | 24.5 | % | 43.2 | % | ||||||||||
|
Equity
Indices Shift in Points (S&P 500/FTSE 100):
|
-500/-2000 | -250/-1000 | 0 | 250/1000 | 500/2000 | |||||||||||||||
|
Total
Fair Value
|
$ | 116.1 | $ | 80.6 | $ | 57.3 | $ | 41.6 | $ | 30.8 | ||||||||||
|
Fair
Value Change from Base (%)
|
-102.5 | % | -40.6 | % | 0.0 | % | 27.5 | % | 46.2 | % | ||||||||||
|
Combined
Interest Rate /
|
-200/ | -100/ | 100/ | 200/ | ||||||||||||||||
|
Equity
Indices Shift (S&P 500/FTSE 100):
|
-500/-2000 | -250/-1000 | 0/0 | 250/1000 | 500/2000 | |||||||||||||||
|
Total
Fair Value
|
$ | 178.1 | $ | 103.2 | $ | 57.3 | $ | 30.6 | $ | 15.9 | ||||||||||
|
Fair
Value Change from Base (%)
|
-210.5 | % | -80.0 | % | 0.0 | % | 46.6 | % | 72.3 | % | ||||||||||
|
Equity
Indices Put Options Obligation – Sensitivity Analysis
|
||||||||||||||||||||
|
(Dollars
in millions)
|
At
December 31, 2008
|
|||||||||||||||||||
|
Interest
Rate Shift in Basis Points:
|
-200 | -100 | 0 | 100 | 200 | |||||||||||||||
|
Total
Fair Value
|
$ | 105.5 | $ | 80.2 | $ | 60.6 | $ | 45.4 | $ | 33.8 | ||||||||||
|
Fair
Value Change from Base (%)
|
-74.2 | % | -32.4 | % | 0.0 | % | 25.0 | % | 44.1 | % | ||||||||||
|
Equity
Indices Shift in Points (S&P 500/FTSE 100):
|
-500/-2000 | -250/-1000 | 0 | 250/1000 | 500/2000 | |||||||||||||||
|
Total
Fair Value
|
$ | 134.5 | $ | 89.0 | $ | 60.6 | $ | 42.3 | $ | 30.4 | ||||||||||
|
Fair
Value Change from Base (%)
|
-122.0 | % | -47.0 | % | 0.0 | % | 30.1 | % | 49.8 | % | ||||||||||
|
Combined
Interest Rate /
|
-200/ | -100/ | 100/ | 200/ | ||||||||||||||||
|
Equity
Indices Shift (S&P 500/FTSE 100):
|
-500/-2000 | -250/-1000 | 0/0 | 250/1000 | 500/2000 | |||||||||||||||
|
Total
Fair Value
|
$ | 202.5 | $ | 113.9 | $ | 60.6 | $ | 30.8 | $ | 15.1 | ||||||||||
|
Fair
Value Change from Base (%)
|
-234.4 | % | -88.0 | % | 0.0 | % | 49.2 | % | 75.1 | % | ||||||||||
Safe
Harbor Disclosure.
This
report contains forward-looking statements within the meaning of the U.S.
federal securities laws. We intend these forward-looking statements
to be covered by the safe harbor provisions for forward-looking statements in
the federal securities laws. In some cases, these statements can be
identified by the use of forward-looking words such as “may”, “will”, “should”,
“could”, “anticipate”, “estimate”, “expect”, “plan”, “believe”, “predict”,
“potential” and “intend”. Forward-looking statements contained in
this report include information regarding our reserves for losses and LAE, the
adequacy of our provision for uncollectible balances, estimates of our
catastrophe exposure, the effects of catastrophic events on our financial
statements, the ability of Everest Re, Holdings, Holdings Ireland and Bermuda Re
to pay dividends and the settlement costs of our specialized equity index put
option contracts. Forward-looking statements only reflect our
expectations and are not guarantees of performance. These statements
involve risks, uncertainties and assumptions. Actual events or
results may differ materially from our expectations. Important factors that
could cause our actual events or results to be materially different from our
expectations include those discussed under the caption ITEM 1A, “Risk
Factors”. We undertake no obligation to update or revise publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
See
“Market Sensitive Instruments” in ITEM 7.
The
financial statements and schedules listed in the accompanying Index to Financial
Statements and Schedules on page F-1 are filed as part of this
report.
None.
Disclosure
Controls and Procedures.
As
required by Rule 13a-15(b) of the Securities Exchange Act of 1934 (the “Exchange
Act”), our management, including our Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Exchange
Act). Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures
were effective as of the end of the period covered by this annual
report.
Management’s
Report on Internal Control Over Financial Reporting.
Our
management is responsible for establishing and maintaining adequate internal
controls over financial reporting. Our internal control over
financial reporting is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of our financial
statements for external purposes in accordance with generally accepted
accounting principles.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management
has assessed the effectiveness of our internal control over financial reporting
as of December 31, 2009. In making this assessment, we used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in
Internal
Control – Integrated Framework
. Based on our assessment we
concluded that, as of December 31, 2009, our internal control over financial
reporting is effective based on those criteria.
The
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2009, has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report, which
appears herein.
Changes
in Internal Control over Financial Reporting.
As
required by Rule 13a-15(d) of the Exchange Act, our management, including our
Chief Executive Officer and Chief Financial Officer, has evaluated our internal
control over financial reporting to determine whether any changes occurred
during the fourth fiscal quarter covered by this annual report that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting. Based on that evaluation, there has
been no such change during the fourth quarter.
None.
Reference
is made to the sections captioned “Information Concerning Nominees”,
“Information Concerning Continuing Directors and Executive Officers”, “Audit
Committee”, “Nominating and Governance Committee”, “Code of Ethics for CEO and
Senior Financial Officers” and “Section 16(a) Beneficial Ownership Reporting
Compliance” in our proxy statement for the 2010 Annual General Meeting of
Shareholders, which will be filed with the Commission within 120 days of the
close of our fiscal year ended December 31, 2009 (the “Proxy Statement”), which
sections are incorporated herein by reference.
Reference
is made to the sections captioned “Directors’ Compensation” and “Compensation of
Executive Officers” in the Proxy Statement, which are incorporated herein by
reference.
Reference
is made to the sections captioned “Common Share Ownership by Directors and
Executive Officers”, “Principal Beneficial Owners of Common Shares” and
“Securities Authorized for Issuance Under Equity Compensation Plans” in the
Proxy Statement, which are incorporated herein by reference.
Reference
is made to the section captioned “Certain Transactions with Directors” in the
Proxy Statement, which is incorporated herein by reference.
Reference
is made to the section captioned “Audit Committee Report” in the Proxy
Statement, which is incorporated herein by reference.
Financial
Statements and Schedules.
The
financial statements and schedules listed in the accompanying Index to Financial
Statements and Schedules on page F-1 are filed as part of this
report.
Exhibits.
The
exhibits listed on the accompanying Index to Exhibits on page E-1 are filed as
part of this report except that the certifications in Exhibit 32 are being
furnished to the SEC, rather than filed with the SEC, as permitted under
applicable SEC rules.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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 on March 1, 2010.
|
EVEREST
RE GROUP, LTD.
|
|||
|
By:
|
/S/
JOSEPH V. TARANTO
|
||
|
Joseph
V. Taranto
(Chairman
and Chief Executive Officer)
|
|||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
|
|
/S/
JOSEPH V. TARANTO
|
Chairman
and Chief Executive Officer and
Director
(Principal Executive Officer)
|
March
1, 2010
|
|
|
Joseph
V. Taranto
|
|||
|
/S/
RALPH E. JONES, III
|
President
and Chief Operating Officer
|
March
1, 2010
|
|
|
Ralph
E. Jones, III
|
|||
|
/S/
DOMINIC J. ADDESSO
|
Executive
Vice President and Chief Financial Officer
|
March
1, 2010
|
|
|
Dominic
J. Addesso
|
|||
|
/S/
KEITH T. SHOEMAKER
|
Comptroller
(Principal Accounting Officer)
|
March
1, 2010
|
|
|
Keith
T. Shoemaker
|
|||
|
/S/
MARTIN ABRAHAMS
|
Director
|
March
1, 2010
|
|
|
Martin
Abrahams
|
|||
|
/S/
KENNETH J. DUFFY
|
Director
|
March
1, 2010
|
|
|
Kenneth
J. Duffy
|
|||
|
/S/
JOHN R. DUNNE
|
Director
|
March
1, 2010
|
|
|
John
R. Dunne
|
|||
|
/S/
WILLIAM F. GALTNEY, JR.
|
Director
|
March
1, 2010
|
|
|
William
F. Galtney, Jr.
|
|||
|
/S/
JOHN A. WEBER
|
Director
|
March
1, 2010
|
|
|
John
A. Weber
|
|||
|
INDEX
TO EXHIBITS
|
||
|
Exhibit No.
|
||
|
2.1
|
Agreement
and Plan of Merger among Everest Reinsurance Holdings, Inc., Everest Re
Group, Ltd. and Everest Re Merger Corporation, incorporated herein by
reference to Exhibit 2.1 to the Registration Statement on Form S-4 (No.
333-87361)
|
|
|
3.1
|
Memorandum
of Association of Everest Re Group, Ltd., incorporated herein by reference
to Exhibit 3.1 to the Registration Statement on Form S-4 (No.
333-87361)
|
|
|
3.2
|
Bye-Laws
of Everest Re Group, Ltd., incorporated herein by reference to Exhibit 3.2
to the Everest Re Group, Ltd. Annual Report on Form 10-K for the year
ended December 31, 2008 (the “2008 10-K”)
|
|
|
4.1
|
Specimen
Everest Re Group, Ltd. common share certificate, incorporated herein by
reference to Exhibit 4.1 of the Registration Statement on Form S-4 (No.
333-87361)
|
|
|
4.2
|
Indenture,
dated March 14, 2000, between Everest Reinsurance Holdings, Inc. and The
Chase Manhattan Bank (now known as JPMorgan Chase Bank), as Trustee,
incorporated herein by reference to Exhibit 4.1 to Everest Reinsurance
Holdings, Inc. Form 8-K filed on March 15, 2000
|
|
|
4.3
|
First
Supplemental Indenture relating to the 8.5% Senior Notes due March 15,
2005, dated March 14, 2000, between Everest Reinsurance Holdings, Inc. and
The Chase Manhattan Bank, as Trustee, incorporated herein by reference to
Exhibit 4.2 to Everest Reinsurance Holdings, Inc. Form 8-K filed on March
15, 2000
|
|
|
4.4
|
Second
Supplemental Indenture relating to the 8.75% Senior Notes due March 15,
2010, dated March 14, 2000, between Everest Reinsurance Holdings, Inc. and
The Chase Manhattan Bank, as Trustee, incorporated herein by reference to
Exhibit 4.3 to the Everest Reinsurance Holdings, Inc. Form 8-K filed on
March 15, 2000
|
|
|
4.5
|
Junior
Subordinated Indenture, dated November 14, 2002, between Everest
Reinsurance Holdings, Inc. and JPMorgan Chase Bank as Trustee,
incorporated herein by reference to Exhibit 4.5 to the Registration
Statement on Form S-3 (No. 333-106595)
|
|
|
4.6
|
First
Supplemental Indenture relating to Holdings 7.85% Junior Subordinated Debt
Securities due November 15, 2032, dated as of November 14, 2002, among
Holdings, Group and JPMorgan Chase Bank, as Trustee, incorporated herein
by reference to Exhibit 10.2 to Everest Re Group, Ltd. Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003 (the “second quarter 2003
10-Q”)
|
|
|
4.7
|
Amended
and Restated Trust Agreement of Everest Re Capital Trust, dated as of
November 14, 2002, incorporated herein by reference to Exhibit 10.1 to the
second quarter 2003 10-Q
|
|
|
4.8
|
Guarantee
Agreement, dated as of November 14, 2002, between Holdings and JPMorgan
Chase Bank, incorporated herein by reference to Exhibit 10.3 to the second
quarter 2003 10-Q
|
|
|
4.9
|
Expense
Agreement, dated as of November 14, 2002, between Holdings and Everest Re
Capital Trust, incorporated herein by reference to Exhibit 10.4 to the
second quarter 2003 10-Q
|
|
|
4.10
|
Second
Supplemental Indenture relating to Holdings 6.20% Junior Subordinated Debt
Securities due March 29, 2034, dated as of March 29, 2004, among Holdings,
Group and JPMorgan Chase Bank, as Trustee, incorporated herein by
reference to Exhibit 4.1 to Everest Reinsurance Holdings, Inc. Form 8-K
filed on March 30, 2004 (the “March 30, 2004 8-K”)
|
|
|
4.11
|
Amended
and Restated Trust Agreement of Everest Re Capital Trust II, dated as of
March 29, 2004, incorporated herein by reference to Exhibit 4.2 to the
March 30, 2004 8-K
|
|
|
4.12
|
Guarantee
Agreement, dated as of March 29, 2004, between Holdings and JPMorgan Chase
Bank, incorporated herein by reference to Exhibit 4.3 to the March 30,
2004 8-K
|
|
|
4.13
|
Expense
Agreement, dated as of March 29, 2004, between Holdings and Everest Re
Capital Trust, incorporated herein by reference to Exhibit 4.4 to the
March 30, 2004 8-K
|
|
|
4.14
|
Third
Supplemental Indenture relating to Holdings 5.40% Senior Notes due October
15, 2014, dated as of October 12, 2004, among Holdings and JPMorgan Chase
Bank, as Trustee, incorporated herein by reference to Exhibit 4.1 to
Everest Reinsurance Holdings, Inc. Form 8-K filed on October 12,
2004
|
|
| * |
10.1
|
Everest
Re Group, Ltd. Annual Incentive Plan effective January 1, 1999,
incorporated herein by reference to Exhibit 10.1 to Everest Reinsurance
Holdings, Inc. Annual Report on Form 10-K for the year ended December 31,
1998 (the “1998 10-K”)
|
| * |
10.2
|
Everest
Re Group, Ltd. Amended 1995 Stock Incentive Plan, incorporated herein by
reference to Exhibit 10.3 to Everest Reinsurance Holdings, Inc. Annual
Report on Form 10-K for the year ended December 31, 1995 (the “1995
10-K”)
|
| * |
10.3
|
Everest
Re Group, Ltd. 1995 Stock Option Plan for Non-Employee Directors,
incorporated herein by reference to Exhibit 4.3 to the Registration
Statement on Form S-8 (No. 333-05771)
|
| * |
10.4
|
Resolution
adopted by Board of Directors of Everest Reinsurance Holdings, Inc. on
April 1, 1999 awarding stock options to outside Directors, incorporated
herein by reference to Exhibit 10.25 to Everest Reinsurance Holdings, Inc.
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999 (the
“second quarter 1999 10-Q”)
|
| * |
10.5
|
Resolution
adopted by the Board of Directors of Everest Reinsurance Holdings, Inc. on
February 23, 2000 awarding stock options to outside Directors,
incorporated herein by reference to Exhibit 10.8 to Everest Reinsurance
Holdings, Inc. Annual Report on Form 10-K for the year ended December 31,
1999 (the “1999 10-K”)
|
| * |
10.6
|
Form
of Non-Qualified Stock Option Award Agreement to be entered into between
Everest Re Group, Ltd. and participants in the 1995 Stock Incentive Plan,
incorporated herein by reference to Exhibit 10.15 to the 1995
10-K
|
| * |
10.7
|
Form
of Restricted Stock Agreement to be entered into between Everest Re Group,
Ltd. and participants in the 1995 Stock Incentive Plan, incorporated
herein by reference to Exhibit 10.16 to the 1995 10-K
|
| * |
10.8
|
Form
of Stock Option Agreement (Version 1) to be entered into between Everest
Re Group, Ltd. and participants in the 1995 Stock Option Plan for
Non-Employee Directors, incorporated herein by reference to Exhibit 10.17
to the 1995 10-K
|
| * |
10.9
|
Form
of Stock Option Agreement (Version 2) to be entered into between Everest
Re Group, Ltd. and participants in the 1995 Stock Option Plan for
Non-Employee Directors, incorporated herein by reference to Exhibit 10.18
to the 1995 10-K
|
| * |
10.10
|
Form
of Stock Option Agreement for Non-Employee Directors, incorporated herein
by reference to Exhibit 10.34 to the 1999 10-K
|
| * |
10.11
|
Deferred
Compensation Plan, as amended, for certain U.S. employees of Everest Re
Group, Ltd. and its participating subsidiaries incorporated herein by
reference to Exhibit 10.20 to the 1998 10-K
|
| * |
10.12
|
Senior
Executive Change of Control Plan, incorporated herein by reference to
Exhibit 10.24 to Everest Reinsurance Holdings, Inc. Quarterly Report on
Form 10-Q for the quarter ended September 30, 1998
|
| * |
10.13
|
Executive
Performance Annual Incentive Plan adopted by shareholders on May 20, 1999,
incorporated herein by reference to Exhibit 10.26 to the second quarter
1999 10-Q
|
| * |
10.14
|
Employment
Agreement with Joseph V. Taranto executed on July 15, 1998, incorporated
herein by reference to Exhibit 10.21 to Everest Reinsurance Holdings, Inc.
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998 (the
“second quarter 1998 10-Q”)
|
| * |
10.15
|
Amendment
of Employment Agreement by and among Everest Reinsurance Company, Everest
Reinsurance Holdings, Inc., Everest Re Group, Ltd. and Joseph V. Taranto
dated February 15, 2000, incorporated herein by reference to Exhibit 10.29
to the 1999 10-K
|
| * |
10.16
|
Change
of Control Agreement with Joseph V. Taranto effective July 15, 1998,
incorporated herein by reference to Exhibit 10.22 to the second quarter
1998 10-Q
|
| * |
10.17
|
Amendment
of Change of Control Agreement by and among Everest Reinsurance Company,
Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd. and Joseph V.
Taranto dated February 15, 2000, incorporated herein by reference to
Exhibit 10.30 to the 1999 10-K
|
|
10.18
|
Stock
Purchase Agreement between The Prudential Insurance Company of America and
Everest Reinsurance Holdings, Inc. for the sale of common stock of
Gibraltar Casualty Company dated February 24, 2000, incorporated herein by
reference to Exhibit 10.32 to the 1999 10-K
|
|
|
10.19
|
Amendment
No. 1 to Stock Purchase Agreement between The Prudential Insurance Company
of America and Everest Reinsurance Holdings, Inc. for the sale of common
stock of Gibraltar Casualty Company dated August 8, 2000, incorporated
herein by reference to Exhibit 10.1 to the Everest Re Group, Ltd.
Quarterly Report on Form 10-Q for the quarter ended June 30,
2000
|
|
|
10.20
|
Proportional
Excess of Loss Reinsurance Agreement entered into between Gibraltar
Casualty Company and Prudential Property and Casualty Insurance Company,
incorporated herein by reference to Exhibit 10.24 to Everest Re Group,
Ltd. Annual Report on Form 10-K for the year ended December 31, 2000 (the
“2000 10-K”)
|
|
|
10.21
|
Guarantee
Agreement made by The Prudential Insurance Company of America in favor of
Gibraltar Casualty Company, incorporated herein by reference to Exhibit
10.25 to the 2000 10-K
|
|
|
10.22
|
Lease,
effective December 26, 2000 between OTR, an Ohio general partnership, and
Everest Reinsurance Company, incorporated herein by reference to Exhibit
10.26 to the 2000 10-K
|
|
| * |
10.23
|
Amendment
of Employment Agreement by and among Everest Reinsurance Company, Everest
Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global
Services, Inc. and Joseph V. Taranto, dated March 30, 2001, incorporated
herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Report on
Form 10-Q for the quarter ended March 31, 2001 (the “first quarter 2001
10-Q”)
|
| * |
10.24
|
Amendment
of Employment Agreement by and among Everest Reinsurance Company, Everest
Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global
Services, Inc. and Joseph V. Taranto, dated April 20, 2001, incorporated
herein by reference to Exhibit 10.2 to the first quarter 2001
10-Q
|
| * |
10.25
|
Amendment
of Change of Control Agreement by and among Everest Reinsurance Company,
Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global
Services, Inc. and Joseph V. Taranto, dated March 30, 2001, incorporated
herein by reference to Exhibit 10.3 to the first quarter 2001
10-Q
|
| * |
10.26
|
Resolution
adopted by the Board of Directors of Everest Re Group, Ltd. on September
20, 2001 awarding stock options to outside Directors, incorporated herein
by reference to Exhibit 10.30 to Everest Re Group, Ltd. Report on Form
10-K for the year ended December 31, 2001 (the “2001
10-K”)
|
| * |
10.27
|
Everest
Re Group, Ltd. 2002 Stock Incentive Plan, incorporated herein by reference
to Exhibit 4.1 to the Registration Statement on Form S-8 (No.
333-97049)
|
| * |
10.28
|
Amendment
of Employment Agreement by and among Everest Reinsurance Company, Everest
Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global
Services, Inc. and Joseph V. Taranto, dated April 18, 2003, incorporated
herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K
filed on April 21, 2003
|
| * |
10.29
|
Everest
Re Group, Ltd. 2003 Non-Employee Director Equity Compensation Plan,
incorporated herein by reference to Exhibit 4.1 to the Registration
Statement on Form S-8 (No. 333-105483)
|
|
10.30
|
Tax
Assurance from the Bermuda Minister of Finance, dated September 20, 1999,
incorporated herein by reference to Exhibit 10.5 to Everest Re Group, Ltd.
Quarterly Report on Form 10-Q for the quarter ended June 30, 2003 (the
“second quarter 2003 10-Q”)
|
|
| * |
10.31
|
Employment
Agreement between Everest Reinsurance (Bermuda), Ltd. and Mark S. de
Saram, dated October 14, 2004, incorporated herein by reference to Exhibit
10.1 to Everest Re Group, Ltd. Form 8-K filed on October 14,
2004
|
| * |
10.32
|
Amendment
to Employment Agreement between Everest Reinsurance (Bermuda), Ltd. and
Mark S. de Saram, dated December 8, 2004, incorporated herein by reference
to Exhibit 10.2 to Everest Re Group, Ltd. Form 8-K filed on December 14,
2004
|
|
10.33
|
Credit
Agreement dated as of December 8, 2004 among Everest Re Group, Ltd.,
Everest Reinsurance (Bermuda), Ltd., Everest International Reinsurance,
Ltd., certain Lenders party thereto and Wachovia Bank, N.A., as
Administrative Agent, incorporated herein by reference to Exhibit 10.1 to
Everest Re Group, Ltd. Form 8-K filed on December 14,
2004
|
|
| * |
10.34
|
Description
of non-employee director compensation arrangements, incorporated herein by
reference to Exhibit 10.46 to Everest Re Group, Ltd., Report on Form 10-K
for the year ended December 31, 2005
|
|
*
|
10.35
|
Form
of Non-Qualified Stock Option Award Agreement under the Everest Re Group,
Ltd. 2003 Non-Employee Director Equity Compensation Plan, incorporated
herein by reference to Exhibit 10.47 to Everest Re Group, Ltd., Report on
Form 10-K for the year ended December 31, 2004
|
|
*
|
10.36
|
Amendment
of Everest Re Group, Ltd. 2003 Non-Employee Director Equity Compensation
Plan adopted by shareholders at the annual general meeting on May 25,
2005, incorporated herein by reference to Appendix B to the 2005 Proxy
Statement filed on April 14, 2005
|
|
*
|
10.37
|
Amendment
of Executive Performance Annual Incentive Plan adopted by shareholders at
the annual general meeting on May 25, 2005, incorporated herein by
reference to Appendix C to the 2005 Proxy Statement filed on April 14,
2005
|
|
*
|
10.38
|
Amendment
of Employment Agreement by and among Everest Reinsurance Company, Everest
Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global
Services, Inc. and Joseph V. Taranto, dated August 31, 2005, incorporated
by reference to Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K filed on
August 31, 2005
|
|
*
|
10.39
|
Form
of Restricted Stock Award Agreement under the Everest Re Group, Ltd. 2003
Non-Employee Director Equity Compensation Plan, incorporated by reference
to Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K filed on September 22,
2005
|
|
*
|
10.40
|
Amendment
of Everest Re Group, Ltd. 2002 Stock Incentive Plan adopted by
shareholders at the annual general meeting on May 23, 2006, incorporated
herein by reference to Appendix B to the 2006 Proxy Statement filed on
April 12, 2006
|
|
10.41
|
Credit
Agreement, dated August 23, 2006, between Everest Reinsurance Holdings,
Inc., the lenders named therein and Citibank, National Association, as
administrative agent, providing for a $150.0 million five year revolving
credit facility, incorporated herein by reference to Exhibit 10.1 to
Everest Re Group, Ltd. Quarterly Report on Form 10-Q for the quarter ended
September 30, 2006. This new agreement replaces the October 10,
2003 three year senior revolving credit facility which expired on October
10, 2006
|
|
|
*
|
10.42
|
Amendment
to Employment Agreement between Everest Reinsurance (Bermuda), Ltd. and
Mark S. de Saram, dated October 31, 2006, incorporated herein by reference
to Exhibit 10.2 to Everest Re Group, Ltd. Form 8-K filed on November 3,
2006
|
|
*
|
10.43
|
Employment
Agreement by and among Everest Reinsurance Company, Everest Reinsurance
Holdings, Inc., Everest Re Group, Ltd., Everest Global Services, Inc. and
Craig E. Eisenacher, dated December 18, 2006, incorporated herein by
reference to Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K filed on
December 5, 2006
|
|
*
|
10.44
|
Amendment
to Employment Agreement by and among Everest Reinsurance Company, Everest
Reinsurance Holdings, Inc. and Joseph V. Taranto, dated April 5, 2007,
incorporated herein by reference to Exhibit 10.1 to Everest Re Group, Ltd.
Form 8-K filed on April 5, 2007
|
|
10.45
|
Credit
Agreement, dated July 27, 2007, between Everest Reinsurance (Bermuda),
Ltd. and Everest International Reinsurance, Ltd., certain lenders party
thereto and Wachovia Bank, N.A. as administrative agent, incorporated
herein by reference to Exhibit 10.1 Form 8-K filed on July 27,
2007
|
|
|
*
|
10.46
|
Amendment
to Change of Control Agreement by and among Everest Reinsurance Company,
Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global
Services and Joseph Taranto, dated April 5, 2007, incorporated herein by
reference to Exhibit 10.2 to Everest Re Group, Ltd. Form 8-K filed on
April 5, 2007
|
| * |
10.47
|
Amendment
to Employment Agreement between Everest Reinsurance (Bermuda), Ltd. and
Mark S. deSaram, dated October 16, 2008, incorporated herein by reference
to Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K filed on October 20,
2008
|
| * |
10.48
|
Employment
Agreement between Everest Global Services, Inc. and Ralph E. Jones III,
dated November 21, 2008, incorporated herein by reference to Exhibit 10.1
to Everest Re Group, Ltd. Form 8-K filed on December 4, 2008
|
| * |
10.49
|
Amendment
to Change of Control Agreement by and among Everest Reinsurance Company,
Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd., Everest Global
Services, Inc. and Joseph V. Taranto, dated January 1, 2009, incorporated
herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K
filed on January 2, 2009
|
|
10.50
|
Completion
of Tender Offer relating to Everest Reinsurance Holdings, Inc. 6.60% Fixed
to Floating Rate Long Term Subordinated Notes (LoTS
SM
)
dated March 19, 2009, incorporated herein by reference to Exhibit 99.1 to
Everest Re Group, Ltd. Form 8-K filed on March 31, 2009
|
|
| * |
10.51
|
Amendment
of Employment Agreement by and among Everest Global Services, Inc. and
Craig Eisenacher, dated May 4, 2009, incorporated herein by reference to
Exhibit 10.2 to Everest Re Group, Ltd. Report on Form 10-Q for the quarter
ended June 30, 2009 (the “second quarter 2009 10-Q”)
|
| * |
10.52
|
Employment
Agreement between Everest Global Services, Inc., Everest Reinsurance
Holdings Inc., Everest Reinsurance Company, Everest Re Group, Ltd. and
Dominic J. Addesso, dated May 6, 2009, incorporated herein by reference to
Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K filed on May 8,
2009
|
| * |
10.53
|
Everest
Re Group, Ltd. 2009 Stock Option and Restricted Stock Plan for
Non-Employee Directors incorporated herein by reference to Exhibit 10.1 to
Everest Re Group, Ltd. second quarter 2009 10-Q
|
| * |
10.54
|
Amendment
of Employment Agreement by and among Everest Reinsurance Company, Everest
Reinsurance Holdings, Inc., Everest Global Services, Inc., Everest Re
Group, Ltd. and Joseph V. Taranto, dated September 25, 2009, incorporated
herein by reference to Exhibit 10.1 to Everest Re Group, Ltd. Form 8-K
filed on October 1, 2009
|
|
21.1
|
Subsidiaries
of the registrant, filed herewith
|
|
|
23.1
|
Consent
of PricewaterhouseCoopers LLP, filed herewith
|
|
|
31.1
|
Section
302 Certification of Joseph V. Taranto, filed herewith
|
|
|
31.2
|
Section
302 Certification of Dominic J. Addesso, filed herewith
|
|
|
32.1
|
Section
906 Certification of Joseph V. Taranto and Dominic J. Addesso, furnished
herewith
|
|
|
* Management
contract or compensatory plan or
arrangement.
|
||
E-6
|
EVEREST
RE GROUP, LTD.
|
|||||
|
Pages
|
|||||
|
F-2
|
|||||
|
F-4
|
|||||
|
F-5
|
|||||
|
F-6
|
|||||
|
F-7
|
|||||
|
F-8
|
|||||
|
Schedules
|
|||||
|
I
|
S-1
|
||||
|
II
|
Condensed
Financial Information of Registrant:
|
||||
|
S-2
|
|||||
|
S-3
|
|||||
|
S-4
|
|||||
|
III
|
|||||
|
S-5
|
|||||
|
IV
|
S-6
|
||||
|
Schedules
other than those listed above are omitted for the reason that they are not
applicable or the information is otherwise contained in the Financial
Statements.
|
|||||
To the
Board of Directors and Shareholders
of
Everest Re Group, Ltd.:
In our
opinion, the consolidated financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Everest Re
Group, Ltd. and its subsidiaries (the “Company”) at December 31, 2009 and 2008,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2009 in conformity with accounting
principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedules listed in the
accompanying index
present
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. Also
in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based on
criteria established in
Internal Control - Integrated
Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible
for these financial statements and financial statement schedules, for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in Management's Report on Internal Control over Financial Reporting
appearing under Item 9A. Our responsibility is to express opinions on
these financial statements, on the financial statement schedules, and on the
Company's internal control over financial reporting based on our integrated
audits. We conducted our audits in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audits also included
performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our
opinions.
As
discussed in Note 1 to the consolidated financial statements, the Company
changed the manner in which it accounts for other-than-temporary impairments of
debt securities in 2009.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers
LLP
New York,
New York
March 1,
2010
|
EVEREST
RE GROUP, LTD.
|
||||||||
|
December
31,
|
||||||||
|
(Dollars
in thousands, except par value per share)
|
2009
|
2008
|
||||||
|
ASSETS:
|
||||||||
|
Fixed
maturities - available for sale, at market value
|
$ | 13,005,949 | $ | 10,759,612 | ||||
|
(amortized
cost: 2009, $12,614,742; 2008, $10,932,076)
|
||||||||
|
Fixed
maturities - available for sale, at fair value
|
50,528 | 43,090 | ||||||
|
Equity
securities - available for sale, at market value (cost: 2009, $13,970;
2008, $14,915)
|
16,301 | 16,900 | ||||||
|
Equity
securities - available for sale, at fair value
|
380,025 | 119,829 | ||||||
|
Short-term
investments
|
673,131 | 1,889,799 | ||||||
|
Other
invested assets (cost: 2009, $546,158; 2008, $687,265)
|
545,284 | 679,356 | ||||||
|
Cash
|
247,598 | 205,694 | ||||||
|
Total
investments and cash
|
14,918,816 | 13,714,280 | ||||||
|
Accrued
investment income
|
158,886 | 149,215 | ||||||
|
Premiums
receivable
|
978,847 | 908,110 | ||||||
|
Reinsurance
receivables
|
636,375 | 657,169 | ||||||
|
Funds
held by reinsureds
|
379,864 | 331,817 | ||||||
|
Deferred
acquisition costs
|
362,346 | 354,992 | ||||||
|
Prepaid
reinsurance premiums
|
108,029 | 79,379 | ||||||
|
Deferred
tax asset
|
174,170 | 442,367 | ||||||
|
Federal
income taxes recoverable
|
144,903 | 32,295 | ||||||
|
Other
assets
|
139,076 | 176,966 | ||||||
|
TOTAL
ASSETS
|
$ | 18,001,312 | $ | 16,846,590 | ||||
|
LIABILITIES:
|
||||||||
|
Reserve
for losses and loss adjustment expenses
|
$ | 8,937,858 | $ | 8,840,660 | ||||
|
Future
policy benefit reserve
|
64,536 | 66,172 | ||||||
|
Unearned
premium reserve
|
1,415,402 | 1,335,511 | ||||||
|
Funds
held under reinsurance treaties
|
91,893 | 83,431 | ||||||
|
Losses
in the course of payment
|
39,766 | 45,654 | ||||||
|
Commission
reserves
|
55,579 | 52,460 | ||||||
|
Other
net payable to reinsurers
|
53,014 | 51,138 | ||||||
|
8.75%
Senior notes due 3/15/2010
|
199,970 | 199,821 | ||||||
|
5.4%
Senior notes due 10/15/2014
|
249,769 | 249,728 | ||||||
|
6.6%
Long term notes due 5/1/2067
|
238,348 | 399,643 | ||||||
|
Junior
subordinated debt securities payable
|
329,897 | 329,897 | ||||||
|
Accrued
interest on debt and borrowings
|
9,885 | 11,217 | ||||||
|
Equity
index put option liability
|
57,349 | 60,552 | ||||||
|
Other
liabilities
|
156,324 | 160,351 | ||||||
|
Total
liabilities
|
11,899,590 | 11,886,235 | ||||||
|
Commitments
and contingencies (Note 17)
|
||||||||
|
SHAREHOLDERS'
EQUITY:
|
||||||||
|
Preferred
shares, par value: $0.01; 50 million shares authorized;
|
||||||||
|
no
shares issued and outstanding
|
- | - | ||||||
|
Common
shares, par value: $0.01; 200 million shares authorized; (2009) 65.8
million and
|
||||||||
|
(2008)
65.6 million issued
|
658 | 656 | ||||||
|
Additional
paid-in capital
|
1,845,181 | 1,824,552 | ||||||
|
Accumulated
other comprehensive income (loss), net of deferred income tax
expense
|
||||||||
|
of
$101.0 million at 2009 and tax benefit of $16.5 million at
2008
|
272,038 | (291,851 | ) | |||||
|
Treasury
shares, at cost; 6.5 million shares (2009) and 4.2 million shares
(2008)
|
(582,926 | ) | (392,329 | ) | ||||
|
Retained
earnings
|
4,566,771 | 3,819,327 | ||||||
|
Total
shareholders' equity
|
6,101,722 | 4,960,355 | ||||||
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
$ | 18,001,312 | $ | 16,846,590 | ||||
|
The
accompanying notes are an integral part of the consolidated financial
statements.
|
||||||||
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
||||||||||||
|
Years
Ended December 31,
|
||||||||||||
|
(Dollars
in thousands, except per share amounts)
|
2009
|
2008
|
2007
|
|||||||||
|
REVENUES:
|
||||||||||||
|
Premiums
earned
|
$ | 3,894,098 | $ | 3,694,301 | $ | 3,997,498 | ||||||
|
Net
investment income
|
547,793 | 565,887 | 682,392 | |||||||||
|
Net
realized capital (losses) gains:
|
||||||||||||
|
Other-than-temporary
impairments on fixed maturity securities
|
(13,210 | ) | (176,470 | ) | (8,407 | ) | ||||||
|
Other-than-temporary
impairments on fixed maturity securities
|
||||||||||||
|
transferred
to other comprehensive income
|
- | - | - | |||||||||
|
Other
net realized capital gains (losses)
|
10,898 | (519,360 | ) | 94,690 | ||||||||
|
Total
net realized capital (losses) gains
|
(2,312 | ) | (695,830 | ) | 86,283 | |||||||
|
Realized
gain on debt repurchase
|
78,271 | - | - | |||||||||
|
Net
derivative gain (loss)
|
3,204 | (20,900 | ) | (2,124 | ) | |||||||
|
Other
(expense) income
|
(22,476 | ) | (15,879 | ) | 17,998 | |||||||
|
Total
revenues
|
4,498,578 | 3,527,579 | 4,782,047 | |||||||||
|
CLAIMS
AND EXPENSES:
|
||||||||||||
|
Incurred
losses and loss adjustment expenses
|
2,374,058 | 2,438,972 | 2,548,138 | |||||||||
|
Commission,
brokerage, taxes and fees
|
928,333 | 930,694 | 961,788 | |||||||||
|
Other
underwriting expenses
|
184,785 | 162,349 | 152,604 | |||||||||
|
Interest,
fees and bond issue cost amortization expense
|
72,081 | 79,171 | 91,561 | |||||||||
|
Total
claims and expenses
|
3,559,257 | 3,611,186 | 3,754,091 | |||||||||
|
INCOME
(LOSS) BEFORE TAXES
|
939,321 | (83,607 | ) | 1,027,956 | ||||||||
|
Income
tax expense (benefit)
|
132,332 | (64,849 | ) | 188,681 | ||||||||
|
NET
INCOME (LOSS)
|
$ | 806,989 | $ | (18,758 | ) | $ | 839,275 | |||||
|
Other
comprehensive income (loss), net of tax
|
621,201 | (455,006 | ) | 65,427 | ||||||||
|
COMPREHENSIVE
INCOME (LOSS)
|
$ | 1,428,190 | $ | (473,764 | ) | $ | 904,702 | |||||
|
EARNINGS
(LOSS) PER COMMON SHARE:
|
||||||||||||
|
Basic
|
$ | 13.26 | $ | (0.30 | ) | $ | 13.25 | |||||
|
Diluted
|
$ | 13.22 | $ | (0.30 | ) | $ | 13.15 | |||||
|
Dividends
declared
|
$ | 1.92 | $ | 1.92 | $ | 1.92 | ||||||
|
The
accompanying notes are an integral part of the consolidated financial
statements.
|
||||||||||||
|
CONSOLIDATED
STATEMENTS OF
|
||||||||||||
|
Years
Ended December 31,
|
||||||||||||
|
(Dollars
in thousands, except per share amounts)
|
2009
|
2008
|
2007
|
|||||||||
|
COMMON
SHARES (shares outstanding):
|
||||||||||||
|
Balance,
beginning of period
|
61,414,027 | 62,863,845 | 65,043,976 | |||||||||
|
Issued
during the period, net
|
266,981 | 182,482 | 347,669 | |||||||||
|
Treasury
shares acquired
|
(2,363,267 | ) | (1,632,300 | ) | (2,527,800 | ) | ||||||
|
Balance,
end of period
|
59,317,741 | 61,414,027 | 62,863,845 | |||||||||
|
COMMON
SHARES (par value):
|
||||||||||||
|
Balance,
beginning of period
|
$ | 656 | $ | 654 | $ | 650 | ||||||
|
Issued
during the period, net
|
2 | 2 | 4 | |||||||||
|
Balance,
end of period
|
658 | 656 | 654 | |||||||||
|
ADDITIONAL
PAID-IN CAPITAL:
|
||||||||||||
|
Balance,
beginning of period
|
1,824,552 | 1,805,844 | 1,770,496 | |||||||||
|
Share-based
compensation plans
|
20,592 | 18,540 | 35,142 | |||||||||
|
Other
|
37 | 168 | 206 | |||||||||
|
Balance,
end of period
|
1,845,181 | 1,824,552 | 1,805,844 | |||||||||
|
ACCUMULATED
OTHER COMPREHENSIVE INCOME (LOSS),
|
||||||||||||
|
NET
OF DEFERRED INCOME TAXES:
|
||||||||||||
|
Balance,
beginning of period
|
(291,851 | ) | 163,155 | 348,543 | ||||||||
|
Cumulative
adjustment of initial adoption
(1)
,
net of tax
|
(57,312 | ) | - | - | ||||||||
|
Cumulative
adjustment of initial adoption
(2)
,
net of tax
|
- | - | (250,815 | ) | ||||||||
|
Net
increase (decrease) during the period
|
621,201 | (455,006 | ) | 65,427 | ||||||||
|
Balance,
end of period
|
272,038 | (291,851 | ) | 163,155 | ||||||||
|
RETAINED
EARNINGS:
|
||||||||||||
|
Balance,
beginning of period
|
3,819,327 | 3,956,701 | 2,987,998 | |||||||||
|
Cumulative
adjustment of initial adoption
(1)
,
net of tax
|
57,312 | - | - | |||||||||
|
Cumulative
adjustment of initial adoption
(2)
,
net of tax
|
- | - | 250,815 | |||||||||
|
Net
income (loss)
|
806,989 | (18,758 | ) | 839,275 | ||||||||
|
Dividends
declared ($1.92 per share in 2009, 2008 and 2007)
|
(116,857 | ) | (118,616 | ) | (121,387 | ) | ||||||
|
Balance,
end of period
|
4,566,771 | 3,819,327 | 3,956,701 | |||||||||
|
TREASURY
SHARES AT COST:
|
||||||||||||
|
Balance,
beginning of period
|
(392,329 | ) | (241,584 | ) | - | |||||||
|
Purchase
of treasury shares
|
(190,597 | ) | (150,745 | ) | (241,584 | ) | ||||||
|
Balance,
end of period
|
(582,926 | ) | (392,329 | ) | (241,584 | ) | ||||||
|
TOTAL
SHAREHOLDERS' EQUITY, END OF PERIOD
|
$ | 6,101,722 | $ | 4,960,355 | $ | 5,684,770 | ||||||
|
(1)
The
cumulative adjustment to accumulated other comprehensive income (loss) and
retained earnings, net of deferred income taxes, represents the effect of
initially
|
||||||||||||
|
adopting
new guidance for other-than-temporary impairments of debt
securities
|
||||||||||||
|
(2)
The
cumulative adjustment to accumulated other comprehensive income (loss) and
retained earnings, net of deferred income taxes, represents the effect of
initially
|
||||||||||||
|
adopting
new guidance for fair value option for financial assets.
|
||||||||||||
|
The
accompanying notes are an integral part of the consolidated financial
statements.
|
||||||||||||
|
Years
Ended December 31,
|
||||||||||||
|
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||||||
|
Net
income (loss)
|
$ | 806,989 | $ | (18,758 | ) | $ | 839,275 | |||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||||
|
(Increase)
decrease in premiums receivable
|
(52,966 | ) | 36,119 | 155,552 | ||||||||
|
Increase
in funds held by reinsureds, net
|
(25,271 | ) | (26,826 | ) | (48,944 | ) | ||||||
|
Decrease
(increase) in reinsurance receivables
|
54,674 | (82,241 | ) | 126,328 | ||||||||
|
Decrease
(increase) in deferred tax asset
|
147,071 | (110,848 | ) | (30,279 | ) | |||||||
|
(Decrease)
increase in reserve for losses and loss adjustment
expenses
|
(66,177 | ) | 220,324 | 96,627 | ||||||||
|
Decrease
in future policy benefit reserve
|
(1,636 | ) | (12,244 | ) | (22,545 | ) | ||||||
|
Increase
(decrease) in unearned premiums
|
64,892 | (199,673 | ) | (57,617 | ) | |||||||
|
Change
in equity adjustments in limited partnerships
|
20,575 | 100,812 | (45,101 | ) | ||||||||
|
Change
in other assets and liabilities, net
|
(133,165 | ) | 28,760 | (81,271 | ) | |||||||
|
Non-cash
compensation expense
|
13,347 | 16,305 | 17,119 | |||||||||
|
Amortization
of bond premium/(accrual of bond discount)
|
32,172 | 15,256 | (8,594 | ) | ||||||||
|
Amortization
of underwriting discount on senior notes
|
192 | 179 | 164 | |||||||||
|
Realized
gain on debt repurchase
|
(78,271 | ) | - | - | ||||||||
|
Net
realized capital losses (gains)
|
2,312 | 695,830 | (86,283 | ) | ||||||||
|
Net
cash provided by operating activities
|
784,738 | 662,995 | 854,431 | |||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||||||
|
Proceeds
from fixed maturities matured/called - available for sale, at market
value
|
1,203,548 | 968,789 | 1,248,811 | |||||||||
|
Proceeds
from fixed maturities matured/called - available for sale, at fair
value
|
15,358 | 1,900 | - | |||||||||
|
Proceeds
from fixed maturities sold - available for sale, at market
value
|
311,273 | 279,526 | 275,557 | |||||||||
|
Proceeds
from fixed maturities sold - available for sale, at fair
value
|
14,777 | - | - | |||||||||
|
Proceeds
from equity securities sold - available for sale, at market
value
|
24,159 | - | - | |||||||||
|
Proceeds
from equity securities sold - available for sale, at fair
value
|
43,496 | 1,439,844 | 1,547,135 | |||||||||
|
Distributions
from other invested assets
|
182,952 | 121,009 | 58,682 | |||||||||
|
Cost
of fixed maturities acquired - available for sale, at market
value
|
(3,051,012 | ) | (2,691,857 | ) | (1,338,865 | ) | ||||||
|
Cost
of fixed maturities acquired - available for sale, at fair
value
|
(27,555 | ) | (43,414 | ) | - | |||||||
|
Cost
of equity securities acquired - available for sale, at market
value
|
- | (1,038 | ) | - | ||||||||
|
Cost
of equity securities acquired - available for sale, at fair
value
|
(265,275 | ) | (532,584 | ) | (1,391,450 | ) | ||||||
|
Cost
of other invested assets acquired
|
(62,554 | ) | (247,349 | ) | (195,448 | ) | ||||||
|
Net
change in short-term investments
|
1,228,032 | 311,322 | (852,659 | ) | ||||||||
|
Net
change in unsettled securities transactions
|
10,445 | 3,828 | (4,779 | ) | ||||||||
|
Net
cash used in investing activities
|
(372,356 | ) | (390,024 | ) | (653,016 | ) | ||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
||||||||||||
|
Common
shares issued during the period, net
|
7,284 | 2,405 | 18,233 | |||||||||
|
Purchase
of treasury shares
|
(190,597 | ) | (150,745 | ) | (241,584 | ) | ||||||
|
Net
proceeds from redemption of junior subordinated debt
securities
|
- | - | (216,496 | ) | ||||||||
|
Net
proceeds from issuance of long term notes
|
- | - | 395,637 | |||||||||
|
Net
cost of debt repurchase
|
(83,026 | ) | - | - | ||||||||
|
Dividends
paid to shareholders
|
(116,857 | ) | (118,616 | ) | (121,387 | ) | ||||||
|
Net
cash used in financing activities
|
(383,196 | ) | (266,956 | ) | (165,597 | ) | ||||||
|
EFFECT
OF EXCHANGE RATE CHANGES ON CASH
|
12,718 | (50,888 | ) | (35,119 | ) | |||||||
|
Net
increase (decrease) in cash
|
41,904 | (44,873 | ) | 699 | ||||||||
|
Cash,
beginning of period
|
205,694 | 250,567 | 249,868 | |||||||||
|
Cash,
end of period
|
$ | 247,598 | $ | 205,694 | $ | 250,567 | ||||||
|
SUPPLEMENTAL
CASH FLOW INFORMATION
|
||||||||||||
|
Cash
transactions:
|
||||||||||||
|
Income
taxes paid
|
$ | 111,831 | $ | 10,955 | $ | 282,568 | ||||||
|
Interest
paid
|
$ | 72,454 | $ | 78,140 | $ | 83,138 | ||||||
|
The
accompanying notes are an integral part of the consolidated financial
statements.
|
||||||||||||
Years
Ended December 31, 2009, 2008 and 2007
1. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
A. Business
and Basis of Presentation.
Everest
Re Group, Ltd. (“Group”), a Bermuda company, through its subsidiaries,
principally provides reinsurance and insurance in the U.S., Bermuda and
international markets. As used in this document, “Company” means
Group and its subsidiaries. On December 30, 2008, Group contributed
Everest Reinsurance Holdings, Inc. and its subsidiaries (“Holdings”) to its
recently established Irish holding company, Everest Underwriting Group
(Ireland), Limited (“Holdings Ireland”).
The
accompanying consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in the United States of America
(“GAAP”). The statements include all of the following domestic and
foreign direct and indirect subsidiaries of Group: Everest
International Reinsurance, Ltd. (“Everest International”), Everest International
Holdings, Ltd., Everest Global Services, Inc. (“Global Services”), Everest
Reinsurance (Bermuda), Ltd. (“Bermuda Re”), Everest Re Advisors, Ltd., Everest
Advisors (Ireland) Ltd., Everest Advisors (UK), Ltd., Holdings Ireland, Everest
Reinsurance Holdings, Inc. (“Holdings”), Mt. McKinley Insurance Company (“Mt.
McKinley”), Mt. McKinley Managers, L.L.C., Workcare Southeast, Inc., Workcare
Southeast of Georgia, Inc., Everest Reinsurance Company (“Everest Re”), Everest
National Insurance Company (“Everest National”), Everest Reinsurance Company
Ltda. (Brazil), Mt. Whitney Securities, Inc., Everest Insurance Company of
Canada (“Everest Canada”), Everest Indemnity Insurance Company (“Everest
Indemnity”) and Everest Security Insurance Company (“Everest
Security”). All amounts are reported in U.S. dollars.
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities (and disclosure of contingent assets and liabilities) at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Ultimate actual results could differ,
possibly materially, from those estimates.
All
intercompany accounts and transactions have been eliminated.
Certain
reclassifications and format changes have been made to prior years’ amounts to
conform to the 2009 presentation.
B. Investments.
Fixed
maturity and market value equity security investments are all classified as
available for sale. Unrealized appreciation and depreciation, as a
result of temporary changes in market value during the period, are reflected in
shareholders’ equity, net of income taxes in “accumulated other comprehensive
income” in the consolidated balance sheets. Equity securities carried
at fair value reflect fair value re-measurements as net realized capital gains
and losses in the consolidated statements of operations and comprehensive
income. Unrealized losses on fixed maturities, which are deemed
other-than-temporary, are charged to net income as net realized capital
losses. Short-term investments are stated at cost, which approximates
market value. Realized gains or losses on sales of investments are
determined on the basis of identified cost. For non-publicly traded
securities, market prices are determined through the use of pricing models that
evaluate securities relative to the U.S. Treasury yield curve, taking into
account the issue type, credit quality and cash flow characteristics of each
security. For publicly traded securities, market value is based on
quoted market prices or valuation models that use observable market
inputs. When a sector of the financial markets is inactive or
illiquid, the Company may use its own assumptions about future cash flows and
risk-adjusted discount rates to determine fair value. Retrospective
adjustments are employed to recalculate the values of asset-backed
securities. Each acquisition lot is reviewed to recalculate the
effective yield. The recalculated effective yield is used to derive a
book value as if the new yield were applied at the time of
acquisition. Outstanding principal factors from the time of
acquisition to the adjustment date are used to calculate the prepayment history
for all applicable securities. Conditional prepayment rates, computed
with life to date factor histories and weighted average maturities, are used to
effect the
calculation
of projected and prepayments for pass-through security types. Other
invested assets include limited partnerships, rabbi trusts and an affiliated
entity. Limited partnerships and the affiliated entity are accounted
for under the equity method of accounting, which can be recorded on a monthly or
quarterly lag.
C. Uncollectible
Receivable Balances.
The
Company provides reserves for uncollectible reinsurance recoverable and premium
receivable balances based on management’s assessment of the collectibility of
the outstanding balances. Such reserves were $66.0 million and $264.1
million at December 31, 2009 and 2008, respectively.
D. Deferred
Acquisition Costs.
Acquisition
costs, consisting principally of commissions and brokerage expenses and certain
premium taxes and fees incurred at the time a contract or policy is issued and
that vary with and are directly related to the Company’s reinsurance and
insurance business, are deferred and amortized over the period in which the
related premiums are earned, which is generally one year. Deferred
acquisition costs are limited to their estimated realizable value by line of
business based on the related unearned premiums, anticipated claims and claim
expenses and anticipated investment income. Deferred acquisition
costs amortized to income were $928.3 million, $930.7 million and $961.8 million
in 2009, 2008 and 2007, respectively.
The
present value of in force annuity business is included in deferred acquisition
costs. This value is amortized over the expected life of the business
from the time of acquisition. The amortization each year is a
function of the gross profits each year in relation to the total gross profits
expected over the life of the business, discounted at an assumed net credited
rate.
E. Reserve
for Losses and Loss Adjustment Expenses.
The
reserve for losses and loss adjustment expenses (“LAE”) is based on individual
case estimates and reports received from ceding companies. A
provision is included for losses and LAE incurred but not reported (“IBNR”)
based on past experience. A provision is also included for certain
potential liabilities relating to asbestos and environmental (“A&E”)
exposures, which liabilities cannot be estimated using traditional reserving
techniques. See also Note 3. The reserves are reviewed
periodically and any changes in estimates are reflected in earnings in the
period the adjustment is made. The Company’s loss and LAE reserves
represent management’s best estimate of the ultimate liability. Loss
and LAE reserves are presented gross of reinsurance receivables and incurred
losses and LAE are presented net of reinsurance.
Accruals
for commissions are established for reinsurance contracts that provide for the
stated commission percentage to increase or decrease based on the loss
experience of the contract. Changes in estimates for such
arrangements are recorded as commission expense. Commission accruals
for contracts with adjustable features are estimated based on expected loss and
LAE.
F. Future
Policy Benefit Reserve.
Liabilities
for future policy benefits on annuity policies are carried at their accumulated
values. Reserves for policy benefits include mortality claims in the
process of settlement and IBNR claims. Actual experience in a
particular period may fluctuate from expected results.
G. Premium
Revenues.
Written
premiums are earned ratably over the periods of the related insurance and
reinsurance contracts. Unearned premium reserves are established
relative to the unexpired contract period. Such reserves are
established based upon reports received from ceding companies or estimated using
pro rata methods based on statistical data. Reinstatement premiums
represent additional premium received on reinsurance coverages, most prevalently
catastrophe related, when limits have been depleted under the original
reinsurance contract and additional coverage is granted. Written and
earned premiums and the related costs, which have not yet been reported to the
Company, are estimated and accrued. Premiums are net of ceded
reinsurance.
Payout
annuity premiums are recognized as revenue over the premium-paying period of the
policies.
H. Income
Taxes.
Holdings
and its wholly-owned subsidiaries file a consolidated U.S. federal income tax
return. Foreign branches of subsidiaries file local tax returns as
required. Group and subsidiaries not included in Holdings’
consolidated tax return file separate company U.S. federal income tax returns as
required. Holdings Ireland files an Irish income tax
return. The UK branch of Bermuda Re files a UK income tax
return. Deferred income taxes have been recorded to recognize the tax
effect of temporary differences between the financial reporting and income tax
bases of assets and liabilities, which arise because of differences between GAAP
and income tax accounting rules.
I. Foreign
Currency.
Assets
and liabilities relating to foreign operations are translated into U.S. dollars
at the exchange rates in effect at the balance sheet date; revenues and expenses
are translated into U.S. dollars using average exchange rates in effect during
the reporting period. Gains and losses resulting from translating
foreign currency financial statements, net of deferred income taxes, are
excluded from net income and accumulated in shareholders’
equity. Gains and losses resulting from foreign currency
transactions, other than debt securities available for sale, are recorded
through the consolidated statements of operations and comprehensive income
(loss) in other income (expense). Gains and losses resulting from
changes in the foreign currency exchange rates on debt securities, available for
sale at market value, are recorded in the consolidated balance sheets in
accumulated other comprehensive income (loss) as unrealized appreciation
(depreciation).
J. Earnings
Per Common Share.
Basic
earnings per share are calculated by dividing net income by the weighted average
number of common shares outstanding. Diluted earnings per share
reflect the potential dilution that would occur if options granted under various
share-based compensation plans were exercised resulting in the issuance of
common shares that would participate in the earnings of the entity.
Net
income (loss) per common share has been computed as per below, based upon
weighted average common basic and dilutive shares outstanding.
|
Years
Ended December 31,
|
|||||||||||||
|
(
Dollars in thousands,
except per share amounts)
|
2009
|
2008
|
2007
|
||||||||||
|
Net
income (loss) per share:
|
|||||||||||||
|
Numerator
|
|||||||||||||
|
Net
income (loss)
|
$ | 806,989 | $ | (18,758 | ) | $ | 839,275 | ||||||
|
Less: dividends
declared-common shares and nonvested common shares
|
(116,856 | ) | (118,617 | ) | (121,386 | ) | |||||||
|
Undistributed
earnings
|
690,133 | (137,375 | ) | 717,889 | |||||||||
|
Percentage
allocated to common shareholders
(1)
|
99.7 | % | 99.7 | % | 99.7 | % | |||||||
| 687,729 | (137,013 | ) | 715,413 | ||||||||||
|
Add: dividends
declared-common shareholders
|
116,477 | 118,282 | 120,949 | ||||||||||
|
Numerator
for basic and diluted earnings per common share
|
$ | 804,207 | $ | (18,731 | ) | $ | 836,362 | ||||||
|
Denominator
|
|||||||||||||
|
Denominator
for basic earnings per weighted-average common shares
|
60,661 | 61,674 | 63,118 | ||||||||||
|
Effect
of dilutive securities:
|
|||||||||||||
|
Options
|
187 | 281 | 465 | ||||||||||
|
Denominator
for diluted earnings per adjusted weighted-average common
shares
|
60,847 | 61,955 | 63,583 | ||||||||||
|
Per
common share net income (loss)
|
|||||||||||||
|
Basic
|
$ | 13.26 | $ | (0.30 | ) | $ | 13.25 | ||||||
|
Diluted
|
$ | 13.22 | $ | (0.30 | ) | $ | 13.15 | ||||||
|
(1)
|
Basic
weighted-average common shares outstanding
|
60,661 | 61,674 | 63,118 | |||||||||
|
Basic
weighted-average common shares outstanding and nonvested common shares
expected to vest
|
60,873 | 61,837 | 63,337 | ||||||||||
|
Percentage
allocated to common shareholders
|
99.7 | % | 99.7 | % | 99.7 | % | |||||||
|
(Some
amounts may not reconcile due to rounding.)
|
|||||||||||||
Options
to purchase 1,613,450 and 983,000 common shares at December 31, 2009 and 2008,
respectively, were outstanding but not included in the computation of
earnings per diluted share as they were anti-dilutive. There
were no anti-dilutive common shares outstanding at December 31,
2007. All outstanding options expire on or between February 23, 2010
and September 16, 2019.
K. Segmentation.
The
Company, through its subsidiaries, operates in five segments: U.S.
Reinsurance, U.S. Insurance, Specialty Underwriting, International and
Bermuda. See also Note 20.
L. Derivatives.
The
Company sold seven equity index put option contracts, based on two indices, in
2001 and 2005, which are outstanding. The Company sold these equity index put
options as insurance products with the intent of achieving a
profit. These equity index put option contracts meet the definition
of a derivative. The Company’s position in these equity index put option
contracts is unhedged and accounted for as derivatives. Accordingly,
these equity index put option contracts are carried at fair value in the
consolidated balance sheets, with changes in fair value recorded in the
consolidated statements of operations and comprehensive income
(loss).
The fair
value of the equity index put options can be found in the Company’s consolidated
balance sheets as follows:
|
(Dollars
in thousands)
|
Fair
Value
|
|||||||||
|
Derivatives
not designated as
|
Location
of fair value
|
At
|
At
|
|||||||
|
hedging
instruments
|
in
balance sheet
|
December
31, 2009
|
December
31, 2008
|
|||||||
|
Equity
index put option contracts
|
Equity
index put option liability
|
$ | 57,349 | $ | 60,552 | |||||
|
Total
|
$ | 57,349 | $ | 60,552 | ||||||
The change in fair value of the equity index put option contracts can be found in the Company’s statement of operations and comprehensive income (loss) as follows:
|
Amount
of gain/(loss) recognized
|
||||||||||||||
|
(Dollars
in thousands)
|
in
income on derivatives
|
|||||||||||||
|
For
the Years Ended
|
||||||||||||||
|
Derivatives
not designated as
|
Location
of gain (loss) recognized
|
December
31,
|
||||||||||||
|
hedging
instruments
|
in
income of derivative
|
2009
|
2008
|
2007
|
||||||||||
|
Equity
index put option contracts
|
Net
derivative gain (loss)
|
$ | 3,204 | $ | (20,900 | ) | $ | (2,124 | ) | |||||
|
Total
|
$ | 3,204 | $ | (20,900 | ) | $ | (2,124 | ) | ||||||
M. Deposit
Assets and Liabilities.
In the
normal course of its operations, the Company may enter into contracts that do
not meet risk transfer provisions. Such contracts are accounted for
using the deposit accounting method and are included in other liabilities in the
Company’s consolidated balance sheets. For such contracts, the
Company originally records deposit liabilities for an amount equivalent to the
assets received. Actuarial studies are used to estimate the final
liabilities under such contracts with any change reflected in the consolidated
statements of operations and comprehensive income (loss).
N. Share-Based
Compensation.
Share-based
compensation option or restricted share awards are fair valued at the grant date
and expensed over the vesting period of the award. The tax benefit on
the recorded expense is deferred until the time the award is exercised or vests
(becomes unrestricted). See Note 18.
O. Policyholder
Dividends.
The
Company issues certain insurance policies with dividend payment
features. These policyholders share in the operating results of their
respective policies in the form of dividends declared. Dividends to
policyholders are accrued during the period in which the related premiums are
earned and are determined based on the terms of the individual
policies.
P. Application
of Recently Issued Accounting Standard Changes.
Financial Accounting Standards Board
Launched Accounting Codification.
In June 2009, the Financial
Accounting Standards Board (“FASB”) issued authoritative guidance establishing
the FASB Accounting Standards Codification
TM
(“Codification”) as the single source of authoritative U.S. GAAP recognized by
the FASB to be applied by non-governmental entities. Rules and interpretive
releases of the Securities and Exchange Commission (“SEC”) under authority of
federal securities laws are also sources of authoritative GAAP for SEC
registrants. The Codification supersedes all existing non-SEC accounting and
reporting standards. All other non-grandfathered, non-SEC accounting literature
not included in the Codification will become non-authoritative.
Following
the Codification, the FASB will no longer issue new standards in the form of
Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts.
Instead, the FASB will issue Accounting Standards Updates, which will serve to
update the Codification, provide background information about the guidance and
provide the basis for conclusions on the changes to the
Codification.
GAAP is
not intended to be changed as a result of the FASB’s Codification, but it will
change the way the guidance is organized and presented. As a result, these
changes will have a significant impact on how companies reference GAAP in their
financial statements and in the accounting policies for financial statements
issued for interim and annual periods ending after September 15, 2009. The
Company’s adoption of this guidance impacts the way the Company references U.S.
GAAP accounting standards in the financial statements and Notes to Consolidated
Financial Statements.
Subsequent Events.
In May
2009, the FASB issued authoritative guidance for subsequent events, which was
later modified in February 2010, that addresses the accounting for and
disclosure of subsequent events not addressed in other applicable U.S.
GAAP. The Company implemented the new disclosure requirement beginning
with the second quarter of 2009 and included it in the Notes to Consolidated
Interim Financial Statements.
Interim Disclosures About Fair Value
of Financial Instruments.
In April 2009, the FASB revised the
authoritative guidance for disclosures about fair value of financial
instruments. This new guidance requires quarterly disclosures on the qualitative
and quantitative information about the fair value of all financial instruments
including methods and significant assumptions used to estimate fair value during
the period. These disclosures were previously only done annually. The Company
adopted this disclosure beginning with the second quarter of 2009 and included
it in the Notes to Consolidated Interim Financial Statements.
Other-Than-Temporary Impairments on
Investment Securities.
In April 2009, the FASB
revised the authoritative guidance for the recognition and presentation of
other-than-temporary impairments. This new guidance amends the recognition
guidance for other-than-temporary impairments of debt securities and expands the
financial statement disclosures for other-than-temporary impairments on debt and
equity securities. For available for sale debt securities that the Company has
no intent to sell and more likely than not will not be required to sell prior to
recovery, only the credit loss component of the impairment would be recognized
in earnings, while the rest of the fair value loss would be recognized in
accumulated other comprehensive income. The Company adopted this
guidance effective April 1, 2009. Upon adoption the Company
recognized a cumulative-effect adjustment increase in retained earnings and
decrease in accumulated other comprehensive income (loss) of $57.3 million, net
of $8.3 million of tax.
Measurement of Fair Value in
Inactive Markets.
In April 2009, the FASB revised the
authoritative guidance for fair value measurements and disclosures, which
reaffirms that fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market
participants at the measurement date under current market conditions. It also
reaffirms the need to use judgment in determining if a formerly active market
has become inactive and in determining fair values when the market has become
inactive. There was no impact to the Company’s financial statements upon
adoption.
Fair Value Disclosures about Pension
Plan Assets.
In December 2008, the FASB revised the authoritative
guidance for employers’ disclosures about pension plan assets. This new guidance
requires additional disclosures about the components of plan assets, investment
strategies for plan assets and significant concentrations of risk within plan
assets. The Company, in conjunction with fair value measurement of plan assets,
will separate plan assets into the three fair value hierarchy levels and provide
a roll forward of the changes in fair value of plan assets classified as Level 3
in the current 2009 annual consolidated financial statements. These disclosures
have no effect on the Company’s accounting for plan benefits and
obligations.
Revisions to Earnings per Share
Calculation.
In June 2008, the FASB revised the authoritative
guidance for earnings per share for determining whether instruments granted in
share-based payment transactions are participating securities. This new guidance
requires unvested share-based payment awards that contain non-forfeitable rights
to dividends be considered as a separate class of common stock and included in
the earnings per share calculation using the two-class method. The Company’s
restricted share awards meet this definition and are therefore included in the
basic earnings per share calculation. All prior period earnings per share data
presented have been adjusted retrospectively.
Additional Disclosures for
Derivative Instruments.
In March 2008, the FASB issued
authoritative guidance for derivative instruments and hedging activities, which
requires enhanced disclosures on derivative instruments and hedged items. On
January 1, 2009, the Company adopted the additional disclosure for the equity
index put options. No comparative information for periods prior to the effective
date was required. This guidance had no impact on how the Company records its
derivatives.
2. INVESTMENTS
The
amortized cost, market value and gross unrealized appreciation and depreciation
of available for sale, fixed maturity and equity security investments, carried
at market value, are as follows for the periods indicated:
|
At
December 31, 2009
|
||||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|||||||||||||
|
(Dollars
in thousands)
|
Cost
|
Appreciation
|
Depreciation
|
Value
|
||||||||||||
|
Fixed
maturity securities - available for sale
|
||||||||||||||||
|
U.S.
Treasury securities and obligations of
|
||||||||||||||||
|
U.S.
government agencies and corporations
|
$ | 339,839 | $ | 17,879 | $ | (3,565 | ) | $ | 354,153 | |||||||
|
Obligations
of U.S. states and political subdivisions
|
3,694,267 | 183,848 | (24,256 | ) | 3,853,859 | |||||||||||
|
Corporate
securities
|
2,421,875 | 107,749 | (32,963 | ) | 2,496,661 | |||||||||||
|
Asset-backed
securities
|
310,429 | 7,713 | (4,413 | ) | 313,729 | |||||||||||
|
Mortgage-backed
securities
|
||||||||||||||||
|
Commercial
|
475,204 | 5,172 | (37,758 | ) | 442,618 | |||||||||||
|
Agency
residential
|
2,310,826 | 61,481 | (3,863 | ) | 2,368,444 | |||||||||||
|
Non-agency
residential
|
177,500 | 238 | (17,117 | ) | 160,621 | |||||||||||
|
Foreign
government securities
|
1,507,385 | 100,243 | (16,875 | ) | 1,590,753 | |||||||||||
|
Foreign
corporate securities
|
1,377,417 | 72,442 | (24,748 | ) | 1,425,111 | |||||||||||
|
Total
fixed maturity securities
|
$ | 12,614,742 | $ | 556,765 | $ | (165,558 | ) | $ | 13,005,949 | |||||||
|
Equity
securities
|
$ | 13,970 | $ | 2,333 | $ | (2 | ) | $ | 16,301 | |||||||
|
At
December 31, 2008
|
||||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|||||||||||||
|
(Dollars
in thousands)
|
Cost
|
Appreciation
|
Depreciation
|
Value
|
||||||||||||
|
Fixed
maturity securities - available for sale
|
||||||||||||||||
|
U.S.
Treasury securities and obligations of
|
||||||||||||||||
|
U.S.
government agencies and corporations
|
$ | 354,195 | $ | 55,186 | $ | (663 | ) | $ | 408,718 | |||||||
|
Obligations
of U.S. states and political subdivisions
|
3,846,754 | 113,885 | (164,921 | ) | 3,795,718 | |||||||||||
|
Corporate
securities
|
2,408,978 | 60,898 | (198,479 | ) | 2,271,397 | |||||||||||
|
Asset-backed
securities
|
281,808 | 654 | (29,213 | ) | 253,249 | |||||||||||
|
Mortgage-backed
securities
|
||||||||||||||||
|
Commercial
|
440,833 | - | (90,108 | ) | 350,725 | |||||||||||
|
Agency
residential
|
1,334,042 | 26,331 | (502 | ) | 1,359,871 | |||||||||||
|
Non-agency
residential
|
213,484 | - | (45,688 | ) | 167,796 | |||||||||||
|
Foreign
government securities
|
1,087,731 | 117,973 | (23,598 | ) | 1,182,106 | |||||||||||
|
Foreign
corporate securities
|
964,251 | 56,813 | (51,032 | ) | 970,032 | |||||||||||
|
Total
fixed maturity securities
|
$ | 10,932,076 | $ | 431,740 | $ | (604,204 | ) | $ | 10,759,612 | |||||||
|
Equity
securities
|
$ | 14,915 | $ | 1,985 | $ | - | $ | 16,900 | ||||||||
In
accordance with FASB guidance, the Company reclassified the previously recorded
cumulative-effect of the non-credit portion of other-than-temporary impairments
from retained earnings into accumulated other comprehensive
income. The pre-tax amount of the reclassification was $65.7 million,
with $65.4 million related to corporate securities and $0.3 million related to
foreign corporate securities. At December 31, 2009, the cumulative
unrealized depreciation on these securities had improved, with the remaining
unrealized depreciation for the corporate securities at $6.1 million, while the
foreign corporate securities were in an unrealized appreciation position at
December 31, 2009.
The
amortized cost and market value of fixed maturity securities are shown in the
following table by contractual maturity. Mortgage-backed securities
are generally more likely to be prepaid than other fixed maturity securities. As
the stated maturity of such securities may not be indicative of actual
maturities, the totals for mortgage-backed and asset-backed securities are shown
separately.
|
At
December 31, 2009
|
At
December 31, 2008
|
|||||||||||||||
|
Amortized
|
Market
|
Amortized
|
Market
|
|||||||||||||
|
(Dollars
in thousands)
|
Cost
|
Value
|
Cost
|
Value
|
||||||||||||
|
Fixed
maturity securities – available for sale
|
||||||||||||||||
|
Due
in one year or less
|
$ | 621,706 | $ | 652,483 | $ | 612,286 | $ | 606,397 | ||||||||
|
Due
after one year through five years
|
3,017,731 | 3,151,819 | 2,421,955 | 2,484,744 | ||||||||||||
|
Due
after five years through ten years
|
2,530,830 | 2,634,709 | 2,256,953 | 2,271,245 | ||||||||||||
|
Due
after ten years
|
3,170,516 | 3,281,526 | 3,370,715 | 3,265,585 | ||||||||||||
|
Asset-backed
securities
|
310,429 | 313,729 | 281,808 | 253,249 | ||||||||||||
|
Mortgage-backed
securities
|
||||||||||||||||
|
Commercial
|
475,204 | 442,618 | 440,833 | 350,725 | ||||||||||||
|
Agency
residential
|
2,310,826 | 2,368,444 | 1,334,042 | 1,359,871 | ||||||||||||
|
Non-agency
residential
|
177,500 | 160,621 | 213,484 | 167,796 | ||||||||||||
|
Total
fixed maturity securities
|
$ | 12,614,742 | $ | 13,005,949 | $ | 10,932,076 | $ | 10,759,612 | ||||||||
The
changes in net unrealized appreciation (depreciation) for the Company’s
investments are derived from the following sources for the periods
indicated:
|
Years
Ended December 31,
|
||||||||
|
(Dollars in
thousands)
|
2009
|
2008
|
||||||
|
Increase
(decrease) during the period between the market value and
cost
|
||||||||
|
of
investments carried at market value, and deferred taxes
thereon:
|
||||||||
|
Fixed
maturity securities
|
$ | 629,328 | $ | (301,694 | ) | |||
|
Fixed
maturity securities, cumulative other-than-temporary impairment
adjustment
|
(65,658 | ) | - | |||||
|
Equity
securities
|
346 | 1,669 | ||||||
|
Other
invested assets
|
7,035 | (10,366 | ) | |||||
|
Change
in unrealized appreciation (depreciation), pre-tax
|
571,051 | (310,391 | ) | |||||
|
Deferred
tax (expense) benefit
|
(106,764 | ) | 73,812 | |||||
|
Deferred
tax benefit, cumulative other-than-temporary impairment
adjustment
|
8,346 | - | ||||||
|
Change
in unrealized appreciation (depreciation),
|
||||||||
|
net
of deferred taxes, included in shareholders’ equity
|
$ | 472,633 | $ | (236,579 | ) | |||
The
Company frequently reviews its fixed maturity securities investment portfolio
for declines in market value and focuses its attention on securities whose fair
value has fallen below 80% of their amortized value at the time of
review. The Company then assesses whether the decline in value is
temporary or other-than-temporary. In making its assessment, the
Company evaluates the current market and interest rate environment as well as
specific issuer information. Generally, a change in a security’s
value caused by a change in the market or interest rate environment does not
constitute an other-than-temporary impairment, but rather a temporary decline in
market value. Temporary declines in market value are recorded as
unrealized losses in accumulated other comprehensive income. If the
Company determines that the decline is other-than-temporary and the Company does
not have the intent to sell the security; and it is more likely than not that
the Company will not have to sell the security before recovery of its cost
basis, the carrying value of the investment is written down to fair
value. The fair value adjustment that is credit related is recorded
in net realized capital gains (losses) in the Company’s consolidated statements
of operations and comprehensive income. The fair value adjustment
that is non-credit related is recorded as a component of other comprehensive
income, net of tax, and is included in accumulated other comprehensive income in
the Company’s consolidated balance sheets. The Company’s assessments
are based on the issuers current and expected future financial position,
timeliness with respect to interest and/or principal payments, speed of
repayments and any applicable credit enhancements or breakeven constant default
rates on mortgage-backed and asset-backed securities, as well as relevant
information provided by rating agencies, investment advisors and
analysts.
Retrospective
adjustments are employed to recalculate the values of asset-backed securities.
All of the Company’s asset-backed and mortgage-backed securities have a
pass-through structure. Each acquisition lot is reviewed to recalculate the
effective yield. The recalculated effective yield is used to derive a book value
as if the new yield were applied at the time of acquisition. Outstanding
principal factors from the time of acquisition to the adjustment date are used
to calculate the prepayment history for all applicable securities. Conditional
prepayment rates, computed with life to date factor histories and weighted
average maturities, are used in the calculation of projected and prepayments for
pass-through security types.
The
tables below display the aggregate market value and gross unrealized
depreciation of fixed maturity and equity securities, by security type and
contractual maturity, in each case subdivided according to length of time that
individual securities had been in a continuous unrealized loss position for the
periods indicated:
|
Duration
by security type of unrealized loss at December 31, 2009
|
||||||||||||||||||||||||
|
Less
than 12 months
|
Greater
than 12 months
|
Total
|
||||||||||||||||||||||
|
Gross
|
Gross
|
Gross
|
||||||||||||||||||||||
|
Unrealized
|
Unrealized
|
Unrealized
|
||||||||||||||||||||||
|
(Dollars
in thousands)
|
Market
Value
|
Depreciation
|
Market
Value
|
Depreciation
|
Market
Value
|
Depreciation
|
||||||||||||||||||
|
Fixed
maturity securities - available for sale
|
||||||||||||||||||||||||
|
U.S.
Treasury securities and obligations of
|
||||||||||||||||||||||||
|
U.S.
government agencies and corporations
|
$ | 155,007 | $ | (3,444 | ) | $ | 1,375 | $ | (121 | ) | $ | 156,382 | $ | (3,565 | ) | |||||||||
|
Obligations
of U.S. states and political subdivisions
|
559 | (4 | ) | 452,018 | (24,252 | ) | 452,577 | (24,256 | ) | |||||||||||||||
|
Corporate
securities
|
170,323 | (2,539 | ) | 357,442 | (30,424 | ) | 527,765 | (32,963 | ) | |||||||||||||||
|
Asset-backed
securities
|
12,514 | (87 | ) | 47,273 | (4,326 | ) | 59,787 | (4,413 | ) | |||||||||||||||
|
Mortgage-backed
securities
|
||||||||||||||||||||||||
|
Commercial
|
8,411 | (135 | ) | 294,163 | (37,623 | ) | 302,574 | (37,758 | ) | |||||||||||||||
|
Agency
residential
|
591,372 | (3,541 | ) | 6,216 | (322 | ) | 597,588 | (3,863 | ) | |||||||||||||||
|
Non-agency
residential
|
- | (1 | ) | 153,698 | (17,116 | ) | 153,698 | (17,117 | ) | |||||||||||||||
|
Foreign
government securities
|
215,048 | (3,737 | ) | 154,225 | (13,138 | ) | 369,273 | (16,875 | ) | |||||||||||||||
|
Foreign
corporate securities
|
299,769 | (7,356 | ) | 179,550 | (17,392 | ) | 479,319 | (24,748 | ) | |||||||||||||||
|
Total
fixed maturity securities
|
1,453,003 | (20,844 | ) | 1,645,960 | (144,714 | ) | 3,098,963 | (165,558 | ) | |||||||||||||||
|
Equity
securities
|
13 | (2 | ) | - | - | 13 | (2 | ) | ||||||||||||||||
|
Total
|
$ | 1,453,016 | $ | (20,846 | ) | $ | 1,645,960 | $ | (144,714 | ) | $ | 3,098,976 | $ | (165,560 | ) | |||||||||
|
Duration
by maturity of unrealized loss at December 31, 2009
|
||||||||||||||||||||||||
|
Less
than 12 months
|
Greater
than 12 months
|
Total
|
||||||||||||||||||||||
|
Gross
|
Gross
|
Gross
|
||||||||||||||||||||||
|
Unrealized
|
Unrealized
|
Unrealized
|
||||||||||||||||||||||
|
(Dollars
in thousands)
|
Market
Value
|
Depreciation
|
Market
Value
|
Depreciation
|
Market
Value
|
Depreciation
|
||||||||||||||||||
|
Fixed
maturity securities
|
||||||||||||||||||||||||
|
Due
in one year or less
|
$ | 5,777 | $ | (1 | ) | $ | 74,211 | $ | (5,504 | ) | $ | 79,988 | $ | (5,505 | ) | |||||||||
|
Due
in one year through five years
|
423,782 | (6,120 | ) | 268,321 | (19,861 | ) | 692,103 | (25,981 | ) | |||||||||||||||
|
Due
in five years through ten years
|
315,853 | (6,094 | ) | 198,398 | (14,972 | ) | 514,251 | (21,066 | ) | |||||||||||||||
|
Due
after ten years
|
95,294 | (4,865 | ) | 603,680 | (44,990 | ) | 698,974 | (49,855 | ) | |||||||||||||||
|
Asset-backed
securities
|
12,514 | (87 | ) | 47,273 | (4,326 | ) | 59,787 | (4,413 | ) | |||||||||||||||
|
Mortgage-backed
securities
|
599,783 | (3,677 | ) | 454,077 | (55,061 | ) | 1,053,860 | (58,738 | ) | |||||||||||||||
|
Total
fixed maturity securities
|
$ | 1,453,003 | $ | (20,844 | ) | $ | 1,645,960 | $ | (144,714 | ) | $ | 3,098,963 | $ | (165,558 | ) | |||||||||
|
Equity
securities
|
$ | 13 | $ | (2 | ) | $ | - | $ | - | $ | 13 | $ | (2 | ) | ||||||||||
The
aggregate market value and gross unrealized losses related to investments in an
unrealized loss position at December 31, 2009 were $3,099.0 million and $165.6
million, respectively. There were no unrealized losses on a single
security that exceeded 0.07% of the market value of the fixed maturity
securities at December 31, 2009. In addition, as indicated on the
above table, there was no significant concentration of unrealized losses in any
one market sector. The $20.8 million of unrealized losses related to
fixed maturity and equity securities that have been in an unrealized loss
position for less than one year were generally comprised of highly rated
government, corporate and mortgage-backed securities. Of these
unrealized losses, $20.7 million were related to securities that were rated
investment grade or better by at least one nationally recognized statistical
rating organization. The $144.7 million of unrealized losses related
to fixed maturity securities in an unrealized loss position for more than one
year also related primarily to highly rated government, municipal, corporate and
mortgage-backed securities. Of these unrealized losses, $111.3
million related to securities that were rated investment grade or better by at
least one nationally recognized statistical rating organization. The
non-investment grade securities with unrealized losses are mainly comprised of
corporate and commercial mortgage-backed securities. The gross
unrealized depreciation greater than 12 months for mortgage-backed securities
included only $3.7 million related to sub-prime and alt-A loans. In
all instances, there were no projected cash flow shortfalls to recover the full
book value of the investments and the related interest
obligations. The mortgage-backed securities still have excess credit
coverage and are current on interest and principal
payments. Unrealized losses have
decreased
since December 31, 2008, as a result of improved conditions in the overall
financial market resulting from increased liquidity and lower interest
rates.
The
Company, given the size of its investment portfolio and capital position, does
not have the intent to sell these securities; and it is more likely than not
that the Company will not have to sell the security before recovery of its cost
basis. In addition, all securities currently in an unrealized loss
position are current with respect to principal and interest
payments.
The
tables below display the aggregate market value and gross unrealized
depreciation of fixed maturity securities, by security type and contractual
maturity, in each case subdivided according to the length of time that
individual securities had been in a continuous unrealized loss position for the
period indicated:
|
Duration
by security type of unrealized loss at December 31, 2008
|
||||||||||||||||||||||||
|
Less
than 12 months
|
Greater
than 12 months
|
Total
|
||||||||||||||||||||||
|
Gross
|
Gross
|
Gross
|
||||||||||||||||||||||
|
Unrealized
|
Unrealized
|
Unrealized
|
||||||||||||||||||||||
|
(Dollars
in thousands)
|
Market
Value
|
Depreciation
|
Market
Value
|
Depreciation
|
Market
Value
|
Depreciation
|
||||||||||||||||||
|
Fixed
maturity securities - available for sale
|
||||||||||||||||||||||||
|
U.S.
Treasury securities and obligations of
|
||||||||||||||||||||||||
|
U.S.
government agencies and corporations
|
$ | 5,686 | $ | (663 | ) | $ | - | $ | - | $ | 5,686 | $ | (663 | ) | ||||||||||
|
Obligations
of U.S. states and political subdivisions
|
1,471,807 | (146,293 | ) | 176,555 | (18,628 | ) | 1,648,362 | (164,921 | ) | |||||||||||||||
|
Corporate
securities
|
746,163 | (98,335 | ) | 781,367 | (100,144 | ) | 1,527,530 | (198,479 | ) | |||||||||||||||
|
Asset-backed
securities
|
114,873 | (9,251 | ) | 92,593 | (19,962 | ) | 207,466 | (29,213 | ) | |||||||||||||||
|
Mortgage-backed
securities
|
||||||||||||||||||||||||
|
Commercial
|
171,692 | (36,451 | ) | 179,033 | (53,657 | ) | 350,725 | (90,108 | ) | |||||||||||||||
|
Agency
residential
|
32,407 | (394 | ) | 22,182 | (108 | ) | 54,589 | (502 | ) | |||||||||||||||
|
Non-agency
residential
|
65,523 | (16,565 | ) | 101,879 | (29,123 | ) | 167,402 | (45,688 | ) | |||||||||||||||
|
Foreign
government securities
|
139,077 | (18,613 | ) | 27,164 | (4,985 | ) | 166,241 | (23,598 | ) | |||||||||||||||
|
Foreign
corporate securities
|
246,915 | (26,174 | ) | 186,916 | (24,858 | ) | 433,831 | (51,032 | ) | |||||||||||||||
|
Total
fixed maturity securities
|
$ | 2,994,143 | $ | (352,739 | ) | $ | 1,567,689 | $ | (251,465 | ) | $ | 4,561,832 | $ | (604,204 | ) | |||||||||
|
Duration
by maturity of unrealized loss at December 31, 2008
|
||||||||||||||||||||||||
|
Less
than 12 months
|
Greater
than 12 months
|
Total
|
||||||||||||||||||||||
|
Gross
|
Gross
|
Gross
|
||||||||||||||||||||||
|
Unrealized
|
Unrealized
|
Unrealized
|
||||||||||||||||||||||
|
(Dollars
in thousands)
|
Market
Value
|
Depreciation
|
Market
Value
|
Depreciation
|
Market
Value
|
Depreciation
|
||||||||||||||||||
|
Fixed
maturity securities
|
||||||||||||||||||||||||
|
Due
in one year or less
|
$ | 116,392 | $ | (9,948 | ) | $ | 137,344 | $ | (6,636 | ) | $ | 253,736 | $ | (16,584 | ) | |||||||||
|
Due
in one year through five years
|
531,986 | (38,797 | ) | 385,620 | (36,183 | ) | 917,606 | (74,980 | ) | |||||||||||||||
|
Due
in five years through ten years
|
428,670 | (46,694 | ) | 348,062 | (49,378 | ) | 776,732 | (96,072 | ) | |||||||||||||||
|
Due
after ten years
|
1,532,600 | (194,639 | ) | 300,976 | (56,418 | ) | 1,833,576 | (251,057 | ) | |||||||||||||||
|
Asset-backed
securities
|
114,873 | (9,251 | ) | 92,593 | (19,962 | ) | 207,466 | (29,213 | ) | |||||||||||||||
|
Mortgage-backed
securities
|
269,622 | (53,410 | ) | 303,094 | (82,888 | ) | 572,716 | (136,298 | ) | |||||||||||||||
|
Total
fixed maturity securities
|
$ | 2,994,143 | $ | (352,739 | ) | $ | 1,567,689 | $ | (251,465 | ) | $ | 4,561,832 | $ | (604,204 | ) | |||||||||
The
aggregate market value and gross unrealized losses related to investments in an
unrealized loss position as of December 31, 2008 were $4,561.8 million and
$604.2 million, respectively. There were no unrealized losses on a
single security that exceeded 0.25% of the market value of the fixed maturity
securities at December 31, 2008. In addition, there was no
significant concentration of unrealized losses in any one market
sector. The $352.7 million of unrealized losses related to fixed
maturity securities that have been in an unrealized loss position for less than
one year were generally comprised of highly rated government, municipal,
corporate and mortgage-backed securities with the losses primarily the result of
widening credit spreads from the financial markets crisis during the latter part
of the year. Of these unrealized losses, $346.6 million were related
to securities that were rated investment grade or better by at least one
nationally recognized statistical rating organization. The $251.5
million of unrealized losses related to fixed maturity securities in an
unrealized loss position for more than one year also related primarily to highly
rated government, municipal, corporate and mortgage-backed securities and were
also the result of widening credit spreads during the latter part of the
year. Of these unrealized losses, $224.5 million related to
securities that were rated investment grade or better by at least one nationally
recognized statistical rating
organization. The
gross unrealized depreciation greater than 12 months for mortgage-backed
securities included only $4.7 million related to sub-prime and alt-A
loans.
The
components of net investment income are presented in the table below for the
periods indicated:
|
Years
Ended December 31,
|
||||||||||||
|
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Fixed
maturity securities
|
$ | 570,798 | $ | 543,425 | $ | 496,599 | ||||||
|
Equity
securities
|
3,574 | 19,946 | 24,709 | |||||||||
|
Short-term
investments and cash
|
5,965 | 52,088 | 109,050 | |||||||||
|
Other
invested assets
|
||||||||||||
|
Limited
partnerships
|
(19,022 | ) | (42,231 | ) | 59,216 | |||||||
|
Other
|
74 | 2,280 | 3,094 | |||||||||
|
Total
gross investment income
|
561,389 | 575,508 | 692,668 | |||||||||
|
Interest
credited and other expense
|
(13,596 | ) | (9,621 | ) | (10,276 | ) | ||||||
|
Total
net investment income
|
$ | 547,793 | $ | 565,887 | $ | 682,392 | ||||||
The
Company reports results from limited partnership investments on the equity basis
of accounting with changes in value reported through net investment
income. Due to the timing of receiving financial information from
these partnerships, the results are generally reported on a one month or quarter
lag. If the Company determines there has been a significant decline
in value of a limited partnership during this lag period, a loss will be
recorded in the period in which the Company indentifies the
decline.
The
Company had contractual commitments to invest up to an additional $219.3 million
in limited partnerships at December 31, 2009. These commitments will
be funded when called in accordance with the partnership agreements, which have
investment periods that expire, unless extended, through 2014.
The
components of net realized capital (losses) gains are presented in the table
below for the periods indicated:
|
Years
Ended December 31,
|
||||||||||||
|
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Fixed
maturity securities, market value:
|
||||||||||||
|
Other-than-temporary
impairments
|
$ | (13,210 | ) | $ | (176,470 | ) | $ | (8,407 | ) | |||
|
Losses
from sales
|
(45,666 | ) | (12,630 | ) | (5,902 | ) | ||||||
|
Fixed
maturity securities, fair value:
|
||||||||||||
|
Gains
from sales
|
682 | 102 | - | |||||||||
|
Gains
from fair value adjustments
|
9,337 | 1,473 | - | |||||||||
|
Equity
securities, market value:
|
||||||||||||
|
Gains
from sales
|
8,087 | - | - | |||||||||
|
Equity
securities, fair value:
|
||||||||||||
|
Gains
(losses) from sales
|
7,510 | (230,648 | ) | 23,952 | ||||||||
|
Gains
(losses) from fair value adjustments
|
30,908 | (277,526 | ) | 76,622 | ||||||||
|
Other
invested assets gains
|
- | - | 13 | |||||||||
|
Short-term
investments gain (loss)
|
40 | (131 | ) | 5 | ||||||||
|
Total
net realized capital (losses) gains
|
$ | (2,312 | ) | $ | (695,830 | ) | $ | 86,283 | ||||
Proceeds
from sales of fixed maturity securities during 2009, 2008 and 2007 were $326.1
million, $279.5 million and $275.6 million, respectively. Gross gains
of $20.6 million, $14.5 million and $2.6 million and gross losses of $65.6
million, $27.2 million and $8.5 million were realized on those fixed maturity
securities sales during 2009, 2008 and 2007, respectively. Proceeds
from sales of equity securities during 2009, 2008 and 2007 were $67.7 million,
$1,439.8 million and $1,547.1 million, respectively. Gross gains of
$16.5 million, $23.4 million and $45.9 million and gross losses of $0.9 million,
$254.1 million and $22.0 million were realized on those equity sales during
2009, 2008 and 2007, respectively.
Included
in net realized capital (losses) gains for 2009, 2008 and 2007 was $13.2
million, $176.5 million and $8.4 million, respectively, of write-downs in the
value of securities deemed to be impaired on an other-than-temporary
basis.
At
December 31, 2009, the Company had no other-than-temporary impaired securities
where the impairment had both a credit and non-credit component.
Securities
with a carrying value amount of $1,326.5 million at December 31, 2009 were on
deposit with various state or governmental insurance departments in compliance
with insurance laws.
3. RESERVE
FOR LOSSES, LAE AND FUTURE POLICY BENEFIT RESERVE
Reserves
for losses and LAE.
Activity
in the reserve for losses and LAE is summarized for the periods
indicated:
|
At
December 31,
|
||||||||||||
|
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Gross
reserves at January 1
|
$ | 8,840,660 | $ | 9,040,606 | $ | 8,840,140 | ||||||
|
Less
reinsurance recoverables
|
(690,509 | ) | (707,523 | ) | (808,517 | ) | ||||||
|
Net
reserves at January 1
|
8,150,151 | 8,333,083 | 8,031,623 | |||||||||
|
Incurred
related to:
|
||||||||||||
|
Current
year
|
2,245,220 | 2,404,100 | 2,341,595 | |||||||||
|
Prior
years
|
128,838 | 34,872 | 206,543 | |||||||||
|
Total
incurred losses and LAE
|
2,374,058 | 2,438,972 | 2,548,138 | |||||||||
|
Paid
related to:
|
||||||||||||
|
Current
year
|
388,172 | 495,028 | 452,209 | |||||||||
|
Prior
years
|
1,997,216 | 1,816,427 | 1,915,358 | |||||||||
|
Total
paid losses and LAE
|
2,385,388 | 2,311,455 | 2,367,567 | |||||||||
|
Foreign
exchange/translation adjustment
|
157,768 | (310,449 | ) | 120,889 | ||||||||
|
Net
reserves at December 31
|
8,296,589 | 8,150,151 | 8,333,083 | |||||||||
|
Plus
reinsurance recoverables
|
641,269 | 690,509 | 707,523 | |||||||||
|
Gross
reserves at December 31
|
$ | 8,937,858 | $ | 8,840,660 | $ | 9,040,606 | ||||||
Prior
years’ reserves increased by $128.8 million, $34.9 million and $206.5 million
for the years ended December 31, 2009, 2008 and 2007,
respectively. The increase for 2009 was attributable to a $59.0
million increase in the insurance business, primarily contractor liability
exposures and $69.8 million in the reinsurance business, in both domestic and
international, as a result of losses from sub-prime exposures and property,
partially offset by favorable development on other casualty lines.
The 2008
prior years’ reserves increase of $34.9 million was attributable to $85.3
million of reserve development for a run-off auto loan credit insurance program
and a $32.6 million adverse arbitration decision; partially offset by net
favorable development on the remainder of the Company’s reserves.
The 2007
prior years’ reserves increase of $206.5 million was attributable to $387.5
million of adverse development on A&E reserves, partially offset by
favorable development on attritional (non-catastrophe, non-A&E)
reserves. The increase in the A&E reserves was primarily due to
an extensive in-house study by the Company’s actuarial and claim
units.
Reinsurance
Receivables.
Reinsurance receivables for both paid and unpaid
losses totaled $636.4 million and $657.2 million at December 31, 2009 and 2008,
respectively. At December 31, 2009, $131.4 million, or 20.6%, was
receivable from Transatlantic Reinsurance Company; $100.0 million, or 15.7%, was
receivable from Continental Insurance Company; $87.6 million, or 13.8% was
receivable from C.V. Starr (Bermuda); $53.4 million, or 8.4%, was receivable
from Munich Reinsurance Company; $49.1 million, or 7.7%, was receivable from
Berkley Insurance Company and $32.9 million, or 5.2%, was receivable from ACE
Property and Casualty Insurance Company. The receivable from
Continental Insurance Company is collateralized by a funds held arrangement
under which we have retained the premiums earned by the retrocessionaire to
secure obligations of the retrocessionaire, recorded them as a liability,
credited interest on the balances at a stated contractual rate and reduced the
liability account as payments become due. In addition, $31.9 million
was receivable from Founders Insurance Company Limited, for which the Company
has recorded a full provision for uncollectibility. No other
retrocessionaire accounted for more than 5% of our receivables.
The
Company continues to receive claims under expired insurance and reinsurance
contracts asserting injuries and/or damages relating to or resulting from
environmental pollution and hazardous substances, including
asbestos. Environmental claims typically assert liability for (a) the
mitigation or remediation of environmental contamination or (b) bodily injury or
property damage caused by the release of hazardous substances into the land, air
or water. Asbestos claims typically assert liability for bodily
injury from exposure to asbestos or for property damage resulting from asbestos
or products containing asbestos.
The
Company’s reserves include an estimate of the Company’s ultimate liability for
A&E claims. The Company’s A&E liabilities emanate from Mt.
McKinley’s direct insurance business and Everest Re’s assumed reinsurance
business. All of the contracts of insurance and reinsurance under
which the Company has received claims during the past three years expired more
than 20 years ago. There are significant uncertainties surrounding
the Company’s reserves for its A&E losses.
A&E
exposures represent a separate exposure group for monitoring and evaluating
reserve adequacy. The following table summarizes incurred losses with
respect to A&E reserves on both a gross and net of reinsurance basis for the
periods indicated:
|
At
December 31,
|
||||||||||||
|
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Gross
basis:
|
||||||||||||
|
Beginning
of period reserves
|
$ | 786,843 | $ | 922,843 | $ | 650,134 | ||||||
|
Incurred
losses
|
- | - | 405,000 | |||||||||
|
Paid
losses
|
(148,169 | ) | (136,000 | ) | (132,291 | ) | ||||||
|
End
of period reserves
|
$ | 638,674 | $ | 786,843 | $ | 922,843 | ||||||
|
Net
basis:
|
||||||||||||
|
Beginning
of period reserves
|
$ | 749,070 | $ | 827,384 | $ | 511,412 | ||||||
|
Incurred
losses
|
429 | - | 387,534 | |||||||||
|
Paid
losses
|
(136,378 | ) | (78,314 | ) | (71,562 | ) | ||||||
|
End
of period reserves
|
$ | 613,121 | $ | 749,070 | $ | 827,384 | ||||||
At
December 31, 2009, the gross reserves for A&E losses were comprised of
$141.5 million representing case reserves reported by ceding companies, $150.2
million representing additional case reserves established by the Company on
assumed reinsurance claims, $63.0 million representing case reserves established
by the Company on direct excess insurance claims, including Mt. McKinley, and
$283.9 million representing IBNR reserves.
With
respect to asbestos only, at December 31, 2009, the Company had gross asbestos
loss reserves of $608.8 million, or 95.3%, of total A&E reserves, of which
$477.9 million was for assumed business and $130.9 million was for direct
business.
In 2007,
the Company completed a detailed study of its experience and its cedants’
exposures and also considered industry trends. The Company’s Claims
Department undertook a contract by contract analysis of its direct business and
projected those findings to its assumed reinsurance business. The
Company’s actuaries utilized nine methodologies to project potential ultimate
liabilities including projections based on internal data and assessments,
extrapolations of non-public and publicly available data for the Company’s
cedants and benchmarking against industry data and experience. As a
result of the study, the Company made changes to gross asbestos
reserves. The Company has not experienced significant claims activity
related to environmental exposures other than asbestos. The Company’s
A&E reserves represent management’s best estimate of the ultimate liability,
however, there can be no assurance that ultimate loss payments will not exceed
such reserves, perhaps by a significant amount. No additional gross
reserve strengthening was made in 2008 and 2009.
Future
Policy Benefit Reserve.
Activity
in the reserve for future policy benefits is summarized for the periods
indicated:
|
At
December 31,
|
||||||||||||
|
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Balance
at beginning of year
|
$ | 66,172 | $ | 78,417 | $ | 100,962 | ||||||
|
Liabilities
assumed
|
324 | 190 | 168 | |||||||||
|
Adjustments
to reserves
|
8,835 | 6,546 | 2,414 | |||||||||
|
Benefits
paid in the current year
|
(10,795 | ) | (18,981 | ) | (25,127 | ) | ||||||
|
Balance
at end of year
|
$ | 64,536 | $ | 66,172 | $ | 78,417 | ||||||
4. FAIR
VALUE
The
Company records fair value re-measurements as net realized capital gains or
losses in the consolidated statements of operations and comprehensive income
(loss). The Company recorded $40.2 million in net realized capital
gains and $276.0 million in net realized capital losses due to fair value
re-measurements on fixed maturity securities and equity securities at fair value
for the years ended December 31, 2009 and 2008, respectively.
The
Company’s fixed maturity and equity securities are managed by third party
investment asset managers. The investment asset managers obtain
prices from nationally recognized pricing services. These
services seek to utilize market data and observations in their evaluation
process. They use pricing applications that vary by asset class and
incorporate available market information and when fixed maturity securities do
not trade on a daily basis the services will apply available information through
processes such as benchmark curves, benchmarking of like securities, sector
groupings and matrix pricing. In addition, they use model processes,
such as the Option Adjusted Spread model to develop prepayment and interest rate
scenarios for securities that have prepayment features.
In
limited instances where prices are not provided by pricing services or in rare
instances when a manager may not agree with the pricing service, price quotes on
a non-binding basis are obtained from investment brokers. The
investment asset managers do not make any changes to prices received from either
the pricing services or the investment brokers. In addition, the
investment asset managers have procedures in place to review the reasonableness
of the prices from the service providers and may request verification of the
prices. In addition, the Company tests the prices on a random basis
to an independent pricing source. In limited situations, where
financial markets are inactive or illiquid, the Company may use its own
assumptions about future cash flows and risk-adjusted discount rates to
determine fair value. The Company made no such adjustments at
December 31, 2009.
Fixed
maturity securities are generally categorized as Level 2, Significant Other
Observable Inputs, since a particular security may not have traded but the
pricing services are able to use valuation models with observable market inputs
such as interest rate yield curves and prices for similar fixed maturity
securities in terms of issuer, maturity and seniority. Valuations
that are derived from techniques in which one or more of the significant inputs
are unobservable (including assumptions about risk) are categorized as Level 3,
Significant Unobservable Inputs. These securities include broker
priced securities and valuation of less
liquid
securities such as commercial mortgage-backed securities and the Company’s
equity index put options.
Equity
securities in U.S. denominated currency are categorized as Level 1, Quoted
Prices in Active Markets for Identical Assets, since the securities are actively
traded on an exchange and prices are based on quoted prices from the
exchange. Equity securities traded on foreign exchanges are
categorized as Level 2 due to potential foreign exchange adjustments to fair or
market value.
The
Company sold six equity index put option contracts, based on the Standard &
Poor’s 500 (“S&P 500”) index, for total consideration, net of commissions,
of $22.5 million. At December 31, 2009, fair value for these equity
index put option contracts was $51.2 million. These equity index put
option contracts each have a single exercise date, with maturities ranging from
12 to 30 years and strike prices ranging from $1,141.21 to
$1,540.63. No amounts will be payable under these equity index put
option contracts if the S&P 500 index is at, or above, the strike prices on
the exercise dates, which fall between June 2017 and March 2031. If
the S&P 500 index is lower than the strike price on the applicable exercise
date, the amount due would vary proportionately with the percentage by which the
index is below the strike price. Based on historical index
volatilities and trends and the December 31, 2009 S&P 500 index value, the
Company estimates the probability that each equity index put option contract of
the S&P 500 index falling below the strike price on the exercise date to be
less than 36%. The theoretical maximum payouts under the equity index
put option contracts would occur if on each of the exercise dates the S&P
500 index value were zero. At December 31, 2009, the present value of
these theoretical maximum payouts using a 6% discount factor was $254.0
million.
The
Company sold one equity index put option contract based on the FTSE 100 index
for total consideration, net of commissions, of $6.7 million. At
December 31, 2009, fair value for this equity index put option contract was $6.1
million. This equity index put option contract has an exercise date
of July 2020 and a strike price of ₤5,989.75. No amount will be
payable under this equity index put option contract if the FTSE 100 index is at,
or above, the strike price on the exercise date. If the FTSE 100
index is lower than the strike price on the exercise date, the amount due will
vary proportionately with the percentage by which the index is below the strike
price. Based on historical index volatilities and trends and the
December 31, 2009 FTSE 100 index value, the Company estimates the probability
that the FTSE 100 index equity index put option contract will fall below the
strike price on the exercise date to be less than 32%. The
theoretical maximum payout under the contract would occur if on the exercise
date the FTSE 100 index value was zero. At December 31, 2009, the
present value of the theoretical maximum payout using a 6% discount factor and
current exchange rate was $28.4 million.
These
equity index put option contracts meet the definition of a
derivative. The Company’s position in these contracts is
unhedged. The Company recorded a change in fair value of $3.2 million
gain, $20.9 million loss and $2.1 million loss for the twelve months ended
December 31, 2009, 2008 and 2007, respectively, in the consolidated statements
of operations and comprehensive income (loss).
The
Company’s equity index put option contracts (derivatives) contain provisions
that require collateralization of the fair value, as calculated by the
counterparty, above a specified threshold, which is based on the Company’s
financial strength ratings (Moody’s Investors Service, Inc.) and/or debt ratings
(Standard & Poor’s Financial Services LLC). The aggregate fair value of all
derivative instruments with credit-risk-related contingent features that were in
a liability position on December 31, 2009, was $57.3 million for which the
Company had posted collateral with a market value of $49.7
million. If on December 31, 2009, the Company’s ratings were such
that the collateral threshold was zero, the Company would be required to post an
additional $55.0 million, which is an approximation of the counterparties’ fair
value calculation.
The fair
value was calculated using an industry accepted option pricing model,
Black-Scholes, which used the following assumptions:
|
At
December 31, 2009
|
|||
|
Contract
|
|||
|
Contracts
|
based
on
|
||
|
based
on
|
FTSE
100
|
||
|
S
& P 500 Index
|
Index
|
||
|
Equity
index
|
1,115.1
|
5,412.9
|
|
|
Interest
rate
|
4.32%
to 5.45%
|
5.01%
|
|
|
Time
to maturity
|
7.4
to 21.3 yrs
|
10.6
yrs
|
|
|
Volatility
|
22.6%
to 24.8%
|
26.1%
|
|
The
following tables present the fair value measurement levels for all assets and
liabilities, which the Company has recorded at fair value as of the periods
indicated:
|
Fair
Value Measurement Using:
|
||||||||||||||||
|
Quoted
Prices
|
||||||||||||||||
|
in
Active
|
Significant
|
|||||||||||||||
|
Markets
for
|
Other
|
Significant
|
||||||||||||||
|
Identical
|
Observable
|
Unobservable
|
||||||||||||||
|
Assets
|
Inputs
|
Inputs
|
||||||||||||||
|
(Dollars
in thousands)
|
December
31, 2009
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
||||||||||||
|
Assets:
|
||||||||||||||||
|
Fixed
maturities, market value
|
||||||||||||||||
|
U.S.
Treasury securities and obligations of
|
||||||||||||||||
|
U.S.
government agencies and corporations
|
$ | 354,153 | $ | - | $ | 354,153 | $ | - | ||||||||
|
Obligations
of U.S. States and political subdivisions
|
3,853,859 | - | 3,853,859 | - | ||||||||||||
|
Corporate
securities
|
2,496,661 | - | 2,486,761 | 9,900 | ||||||||||||
|
Asset-backed
securities
|
313,729 | - | 307,460 | 6,269 | ||||||||||||
|
Mortgage-backed
securities
|
||||||||||||||||
|
Commercial
|
442,618 | - | 442,618 | - | ||||||||||||
|
Agency
residential
|
2,368,444 | - | 2,368,444 | - | ||||||||||||
|
Non-agency
residential
|
160,621 | - | 159,227 | 1,394 | ||||||||||||
|
Foreign
government securities
|
1,590,753 | - | 1,590,753 | - | ||||||||||||
|
Foreign
corporate securities
|
1,425,111 | - | 1,425,111 | - | ||||||||||||
|
Total
fixed maturities, market value
|
13,005,949 | - | 12,988,386 | 17,563 | ||||||||||||
|
Fixed
maturities, fair value
|
50,528 | - | 50,528 | - | ||||||||||||
|
Equity
securities, market value
|
16,301 | 16,301 | - | - | ||||||||||||
|
Equity
securities, fair value
|
380,025 | 379,058 | 967 | - | ||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Equity
index put option contracts
|
$ | 57,349 | $ | - | $ | - | $ | 57,349 | ||||||||
|
Fair
Value Measurement Using:
|
||||||||||||||||
|
Quoted
Prices
|
||||||||||||||||
|
in
Active
|
Significant
|
|||||||||||||||
|
Markets
for
|
Other
|
Significant
|
||||||||||||||
|
Identical
|
Observable
|
Unobservable
|
||||||||||||||
|
Assets
|
Inputs
|
Inputs
|
||||||||||||||
|
(Dollars
in thousands)
|
December
31, 2008
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
||||||||||||
|
Assets:
|
||||||||||||||||
|
Fixed
maturities, market value
|
||||||||||||||||
|
U.S.
Treasury securities and obligations of
|
||||||||||||||||
|
U.S.
government agencies and corporations
|
$ | 408,718 | $ | - | $ | 408,718 | $ | - | ||||||||
|
Obligations
of U.S. States and political subdivisions
|
3,795,718 | - | 3,795,718 | - | ||||||||||||
|
Corporate
securities
|
2,271,398 | - | 2,248,705 | 22,693 | ||||||||||||
|
Asset-backed
securities
|
253,249 | - | 249,840 | 3,409 | ||||||||||||
|
Mortgage-backed
securities
|
||||||||||||||||
|
Commercial
|
350,725 | - | 84,977 | 265,748 | ||||||||||||
|
Agency
residential
|
1,359,871 | - | 1,359,871 | - | ||||||||||||
|
Non-agency
residential
|
167,796 | - | 166,039 | 1,757 | ||||||||||||
|
Foreign
government securities
|
1,182,105 | - | 1,182,105 | - | ||||||||||||
|
Foreign
corporate securities
|
970,032 | - | 970,032 | - | ||||||||||||
|
Total
fixed maturities, market value
|
10,759,612 | - | 10,466,005 | 293,607 | ||||||||||||
|
Fixed
maturities, fair value
|
43,090 | - | 43,090 | - | ||||||||||||
|
Equity
securities, market value
|
16,900 | 16,900 | - | - | ||||||||||||
|
Equity
securities, fair value
|
119,829 | 119,104 | 725 | - | ||||||||||||
|
Liabilities:
|
||||||||||||||||
|
Equity
index put option contracts
|
$ | 60,552 | $ | - | $ | - | $ | 60,552 | ||||||||
The
following table presents the activity under Level 3, fair value measurements
using significant unobservable inputs for fixed maturity investments, for the
periods indicated:
|
Years
Ended December 31,
|
||||||||
|
(Dollars
in thousands)
|
2009
|
2008
|
||||||
|
Assets:
|
||||||||
|
Balance,
beginning of period
|
$ | 293,607 | $ | 267,978 | ||||
|
Total
gains or (losses) (realized/unrealized)
|
||||||||
|
Included
in earnings (or changes in net assets)
|
(295 | ) | (1,362 | ) | ||||
|
Included
in other comprehensive income
|
3,031 | (17,324 | ) | |||||
|
Purchases,
issuances and settlements
|
(705 | ) | 67,025 | |||||
|
Transfers
in and/or (out) of Level 3
|
(278,075 | ) | (22,710 | ) | ||||
|
Balance,
end of period
|
$ | 17,563 | $ | 293,607 | ||||
|
The
amount of total gains or losses for the period included in
earnings
|
||||||||
|
(or
changes in net assets) attributable to the change in
unrealized
|
||||||||
|
gains
or losses relating to assets still held at the reporting
date
|
$ | (743 | ) | $ | (1,585 | ) | ||
The
significant transfer out of Level 3 for the year ended December 31, 2009, was
attributable to the inactive and illiquid financial markets at the end of 2008,
requiring securities as of December 31, 2008, to be valued using unobservable
market inputs. With the markets stabilizing in 2009, most securities
are now valued using observable inputs.
The
following table presents the activity under Level 3, fair value measurements
using significant unobservable inputs for the equity index put option contracts,
for the periods indicated:
|
Years
Ended December 31,
|
||||||||
|
(Dollars
in thousands)
|
2009
|
2008
|
||||||
|
Liabilities:
|
||||||||
|
Balance,
beginning of period
|
$ | 60,552 | $ | 39,653 | ||||
|
Total
(gains) or losses (realized/unrealized)
|
||||||||
|
Included
in earnings (or changes in net assets)
|
(3,204 | ) | 20,900 | |||||
|
Included
in other comprehensive income
|
- | - | ||||||
|
Purchases,
issuances and settlements
|
- | - | ||||||
|
Transfers
in and/or (out) of Level 3
|
- | - | ||||||
|
Balance,
end of period
|
$ | 57,349 | $ | 60,552 | ||||
|
The
amount of total gains or losses for the period included in
earnings
|
||||||||
|
(or
changes in net assets) attributable to the change in
unrealized
|
||||||||
|
gains
or losses relating to liabilities still held at the reporting
date
|
$ | - | $ | - | ||||
|
(Some
amounts may not reconcile due to rounding.)
|
||||||||
5. CREDIT
LINE
Effective
July 27, 2007, Group, Bermuda Re and Everest International entered into a five
year, $850.0 million senior credit facility with a syndicate of lenders referred
to as the “Group Credit Facility”. Wachovia Bank, a subsidiary of
Wells Fargo Corporation (“Wachovia Bank”) is the administrative agent for the
Group Credit Facility, which consists of two tranches. Tranche one
provides up to $350.0 million of unsecured revolving credit for liquidity and
general corporate purposes, and for the issuance of unsecured standby letters of
credit. The interest on the revolving loans shall, at the Company’s
option, be 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 (a) the prime commercial lending rate established by Wachovia Bank or
(b) the Federal Funds Rate plus 0.5% per annum. The amount of margin and the
fees payable for the Group Credit Facility depends on Group’s senior unsecured
debt rating. Tranche two exclusively provides up to $500.0 million
for the issuance of standby letters of credit on a collateralized
basis.
The Group
Credit Facility requires Group to maintain a debt to capital ratio of not
greater than 0.35 to 1 and to maintain a minimum net worth. Minimum
net worth is an amount equal to the sum of $3,575.4 million plus 25% of
consolidated net income for each of Group’s fiscal quarters, for which
statements are available ending on or after January 1, 2007 and for which
consolidated net income is positive, plus 25% of any increase in consolidated
net worth during such period attributable to the issuance of ordinary and
preferred shares, which at December 31, 2009, was $4,063.4
million. As of December 31, 2009, the Company was in compliance with
all Group Credit Facility covenants.
At
December 31, 2009, the Group Credit Facility had no outstanding letters of
credit under tranche one and $386.5 million outstanding letters of credit under
tranche two. At December 31, 2008, the Group Credit Facility had no
outstanding letters of credit under tranche one and $411.9 million under tranche
two.
Effective
August 23, 2006, Holdings entered into a five year, $150.0 million senior
revolving credit facility with a syndicate of lenders referred to as the
“Holdings Credit Facility”. Citibank N.A. is the administrative agent
for the Holdings Credit Facility. The Holdings Credit Facility may be
used for liquidity and general corporate purposes. The Holdings
Credit Facility provides for the borrowing of up to $150.0 million with interest
at a rate selected by Holdings equal to either, (1) the Base Rate (as defined
below) or (2) a periodic fixed rate equal to the Eurodollar Rate plus an
applicable margin. The Base Rate means a fluctuating interest rate
per annum in effect from time to time to be equal to the higher of (a) the rate
of interest publicly announced by Citibank as its prime rate or (b) 0.5% per
annum above the Federal Funds Rate, in each case plus the applicable
margin. The amount of margin and the fees payable for the Holdings
Credit Facility depends upon Holdings’ senior unsecured debt
rating.
The
Holdings Credit Facility requires Holdings to maintain a debt to capital ratio
of not greater than 0.35 to 1 and Everest Re to maintain its statutory surplus
at $1.5 billion plus 25% of future aggregate net income and 25% of future
aggregate capital contributions after December 31, 2005, which at December 31,
2009, was $1,933.2 million. As of December 31, 2009, Holdings was in
compliance with all Holdings Credit Facility covenants.
At
December 31, 2009 and 2008, the Holdings Credit Facility had outstanding letters
of credit of $28.0 million.
Costs
incurred in connection with the Group Credit Facility and the Holdings Credit
Facility were $1.5 million, $1.3 million and $1.4 million for the years ended
2009, 2008 and 2007, respectively.
6. SENIOR
NOTES
On
October 12, 2004, Holdings completed a public offering of $250.0 million
principal amount of 5.40% senior notes due October 15, 2014. On March
14, 2000, Holdings completed a public offering of $200.0 million principal
amount of 8.75% senior notes due March 15, 2010.
Interest
expense incurred in connection with these senior notes was $31.2 million for the
years ended December 31, 2009, 2008 and 2007. Market value, which is
based on quoted market price at December 31, 2009 and 2008, was $256.1 million
and $186.2 million, respectively, for the 5.40% senior notes and $200.0 million
and $156.8 million, respectively, for the 8.75% senior notes.
7. LONG
TERM SUBORDINATED NOTES
On April
26, 2007, Holdings completed a public offering of $400.0 million principal
amount of 6.6% fixed to floating rate long term subordinated notes with a
scheduled maturity date of May 15, 2037 and a final maturity date of May 1,
2067. During the fixed rate interest period from May 3, 2007 through May 14,
2017, interest will be at the annual rate of 6.6%, payable semi-annually in
arrears on November 15 and May 15 of each year, commencing on November 15, 2007,
subject to Holdings’ right to defer interest on one or more occasions for up to
ten consecutive years. During the floating rate interest period from
May 15, 2017 through maturity, interest will be based on the 3 month LIBOR plus
238.5 basis points, reset quarterly, payable quarterly in arrears on February
15, May 15, August 15 and November 15 of each year, subject to Holdings’ right
to defer interest on one or more occasions for up to ten consecutive
years. Deferred interest will accumulate interest at the applicable
rate compounded semi-annually for periods prior to May 15, 2017, and compounded
quarterly for periods from and including May 15, 2017.
Holdings
can redeem the long term subordinated notes prior to May 15, 2017, in whole but
not in part at the applicable redemption price, which will equal the greater of
(a) 100% of the principal amount being redeemed and (b) the present value of the
principal payment on May 15, 2017 and scheduled payments of interest that would
have accrued from the redemption date to May 15, 2017 on the long term
subordinated notes being redeemed, discounted to the redemption date on a
semi-annual basis at a discount rate equal to the treasury rate plus an
applicable spread of either 0.25% or 0.50%, in each case plus accrued and unpaid
interest. Holdings may redeem the long term subordinated notes on or
after May 15, 2017, in whole or in part at 100% of the principal amount plus
accrued and unpaid interest; however, redemption on or after the scheduled
maturity date and prior to May 1, 2047 is subject to a replacement capital
covenant. This covenant is for the benefit of certain senior note
holders and it mandates that Holdings receive proceeds from the sale of another
subordinated debt issue, of at least similar size, before it may redeem the
subordinated notes.
On March
19, 2009, Group announced the commencement of a cash tender offer for any and
all of the 6.60% fixed to floating rate long term subordinated
notes. Upon expiration of the tender offer, the Company had reduced
its outstanding debt by $161.4 million, which resulted in a pre-tax gain on debt
repurchase of $78.3 million.
Interest
expense incurred in connection with these long term notes was $18.3 million,
$26.4 million and $17.4 million for the years ended December 31, 2009, 2008 and
2007, respectively. Market value, which is based on quoted market
prices at December 31, 2009 and 2008, was $176.5 million on outstanding 6.6%
long term subordinated notes of $238.6 million and $168.0 million on outstanding
6.6% long term subordinated notes of $399.6 million, respectively.
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 Everest Re Capital Trust II (“Capital Trust
II”). Holdings may redeem the junior subordinated debt securities
before their maturity at 100% of their principal amount plus accrued interest as
of the date of redemption. The securities may be redeemed, in whole
or in part, on one or more occasions at any time on or after March 30, 2009; or
at any time, in whole, but not in part, within 90 days of the occurrence and
continuation of a determination that the Trust may become subject to tax or the
Investment Company Act.
On
November 14, 2002, Holdings issued $216.5 million of 7.85% junior subordinated
debt securities due November 15, 2032 to Everest Re Capital Trust (“Capital
Trust”). Holdings redeemed all of the junior subordinated debt
securities at 100% of their principal amount plus accrued interest on November
15, 2007.
Fair
value, which is primarily based on the quoted market price of the related trust
preferred securities at December 31, 2009 and 2008, was $272.6 million and
$222.2 million, respectively, for the 6.20% junior subordinated debt
securities.
Interest
expense incurred in connection with these junior subordinated notes was $20.5
million for the years ended December 31, 2009 and 2008, and $35.3 million for
the year ended December 31, 2007.
Capital
Trust II is a wholly owned finance subsidiary of Holdings. Capital
Trust was dissolved upon the completion of the redemption of the trust preferred
securities on November 15, 2007.
Holdings
considers that the mechanisms and obligations relating to the trust preferred
securities, taken together, constitute a full and unconditional guarantee by
Holdings of Capital Trust II’s payment obligations with respect to their trust
preferred securities.
Capital
Trust II will redeem all of the outstanding trust preferred securities when the
junior subordinated debt securities are paid at maturity on March 29,
2034. The Company may elect to redeem the junior subordinated debt
securities, in whole or in part, at any time on or after March 30,
2009. If such an early redemption occurs, the outstanding trust
preferred securities would also be proportionately redeemed.
There are
certain regulatory and contractual restrictions on the ability of Holdings’
operating subsidiaries to transfer funds to Holdings in the form of cash
dividends, loans or advances. The insurance laws of the State of
Delaware, where Holdings’ direct insurance subsidiaries are domiciled, require
regulatory approval before those subsidiaries can pay dividends or make loans or
advances to Holdings that exceed certain statutory thresholds. In
addition, the terms of Holdings Credit Facility (discussed in Note 5) require
Everest Re, Holdings’ principal insurance subsidiary, to maintain a certain
statutory surplus level as measured at the end of each fiscal
year. At December 31, 2009, $2,352.0 million of the $3,271.1 million
in net assets of Holdings’ consolidated subsidiaries were subject to the
foregoing regulatory restrictions.
9. LETTERS
OF CREDIT
The
Company has arrangements available for the issuance of letters of credit, which
letters are generally collateralized by the Company’s cash and
investments. The Company’s agreement with Citibank is a bilateral
letter of credit agreement only. The Company’s other facility, the
Wachovia Group Credit Facility, involves a syndicate of lenders (see Note 5 of
the Group Credit Facility), with Wachovia acting as administrative
agent. The Citibank Holdings Credit Facility involves a syndicate of
lenders (see Note 5 of the Holdings Credit Facility), with Citibank acting as
administrative agent. At December 31, 2009 and 2008, letters of
credit for $633.7 million and $589.0 million, respectively, were issued and
outstanding. The letters of credit collateralize reinsurance
obligations of the Company’s non-U.S. operations. The following table
summarizes the Company’s letters of credit as of December 31, 2009.
|
(Dollars
in thousands)
|
||||||||||
|
Bank
|
Commitment
|
In
Use
|
Date
of Expiry
|
|||||||
|
Citibank
Bilateral Letter of Credit Agreement
|
$ | 300,000 | $ | 2,291 |
11/24/2010
|
|||||
| 74,744 |
12/31/2010
|
|||||||||
| 37,735 |
1/31/2011
|
|||||||||
| 25,432 |
6/30/2013
|
|||||||||
| 37,089 |
12/31/2013
|
|||||||||
| 11,984 |
9/30/2014
|
|||||||||
| 29,896 |
12/31/2014
|
|||||||||
|
Total
Citibank Bilateral Agreement
|
$ | 300,000 | $ | 219,171 | ||||||
|
Citibank
Holdings Credit Facility
|
$ | 150,000 | $ | 27,959 |
12/31/2010
|
|||||
|
Total
Citibank Holdings Credit Facility
|
$ | 150,000 | $ | 27,959 | ||||||
|
Wachovia
Group Credit Facility
|
Tranche
One
|
$ | 350,000 | $ | - | |||||
|
Tranche
Two
|
500,000 | 386,548 |
12/31/2010
|
|||||||
|
Total
Wachovia Group Credit Facility
|
$ | 850,000 | $ | 386,548 | ||||||
|
Total
Letters of Credit
|
$ | 1,300,000 | $ | 633,678 | ||||||
10. TRUST
AGREEMENTS
Certain
subsidiaries of Group, principally Bermuda Re, a Bermuda insurance company and
direct subsidiary of Group, have established trust agreements, which effectively
use the Company’s investments as collateral, as security for assumed losses
payable to certain non-affiliated ceding companies. At December 31,
2009, the total amount on deposit in trust accounts was $95.9
million.
11. OPERATING
LEASE AGREEMENTS
The
future minimum rental commitments, exclusive of cost escalation clauses, at
December 31, 2009, for all of the Company’s operating leases with remaining
non-cancelable terms in excess of one year are as follows:
|
(Dollars
in thousands)
|
||||
|
2010
|
$ | 9,897 | ||
|
2011
|
7,959 | |||
|
2012
|
10,449 | |||
|
2013
|
9,978 | |||
|
2014
|
8,353 | |||
|
Thereafter
|
50,297 | |||
|
Net
commitments
|
$ | 96,933 | ||
All of
these leases, the expiration terms of which range from 2010 to 2020, are for the
rental of office space. Rental expense was $11.8 million, $11.1
million and $9.9 million for the years ended December 31, 2009, 2008 and 2007,
respectively.
12. INCOME
TAXES
Under
Bermuda law, no income or capital gains taxes are imposed on Group and its
Bermuda subsidiaries. The Minister of Finance of Bermuda has assured
Group and its Bermuda subsidiaries that, pursuant to The Exempted Undertakings
Tax Protection Act of 1966, they will be exempt until 2016 from imposition of
any such taxes.
All the
income of Group’s non-Bermuda subsidiaries is subject to the applicable federal,
foreign, state and local taxes on corporations. Additionally, the
income of foreign branches of the Company’s insurance operating companies, in
particular the UK branch of Bermuda Re, is subject to various income
taxes. The provision for income taxes in the consolidated statements
of operations and comprehensive income (loss) has been determined in accordance
with the individual income of each entity and the respective applicable tax
laws. The provision reflects the permanent differences between
financial and taxable income relevant to each entity. The significant
components of the provision are as follows for the periods
indicated:
|
Years
Ended December 31,
|
||||||||||||
|
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Current
tax:
|
||||||||||||
|
U.S.
|
$ | (35,739 | ) | $ | (58,534 | ) | $ | 147,271 | ||||
|
Foreign
|
39,220 | 58,550 | 73,094 | |||||||||
|
Total
current tax
|
3,481 | 16 | 220,365 | |||||||||
|
Total
deferred U.S. tax expense (benefit)
|
128,851 | (64,865 | ) | (31,684 | ) | |||||||
|
Total
income tax expense (benefit)
|
$ | 132,332 | $ | (64,849 | ) | $ | 188,681 | |||||
The
weighted average expected tax provision has been calculated using the pre-tax
income (loss) in each jurisdiction multiplied by that jurisdiction’s applicable
statutory tax rate. Reconciliation of the difference between the
provision for income taxes and the expected tax provision at the weighted
average tax rate for the periods indicated is provided below:
|
Years
Ended December 31,
|
||||||||||||
|
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Expected
tax provision at applicable statutory rates
|
$ | 176,358 | $ | (21,854 | ) | $ | 230,288 | |||||
|
Increase
(decrease) in taxes resulting from:
|
||||||||||||
|
Tax
exempt income
|
(60,378 | ) | (61,840 | ) | (60,973 | ) | ||||||
|
Dividend
received deduction
|
(1,409 | ) | (2,762 | ) | (4,283 | ) | ||||||
|
Proration
|
9,139 | 9,437 | 9,775 | |||||||||
|
Other
|
8,622 | 12,170 | 13,874 | |||||||||
|
Total
income tax provision
|
$ | 132,332 | $ | (64,849 | ) | $ | 188,681 | |||||
Deferred
income taxes reflect the tax effect of the temporary differences between the
value of assets and liabilities for financial statement purposes and such values
as measured by the U.S. tax laws and regulations. The principal items
making up the net deferred income tax asset are as follows for the periods
indicated:
|
At
December 31,
|
||||||||
|
(Dollars
in thousands)
|
2009
|
2008
|
||||||
|
Deferred
tax assets:
|
||||||||
|
Reserve
for losses and LAE
|
$ | 166,943 | $ | 194,910 | ||||
|
Unearned
premium reserve
|
47,266 | 50,727 | ||||||
|
Investment
impairments
|
5,670 | 26,997 | ||||||
|
Net
unrealized depreciation of investments
|
- | 62,248 | ||||||
|
Fair
value adjustments
|
- | 5,244 | ||||||
|
Deferred
compensation
|
14,850 | 15,737 | ||||||
|
AMT
Credits
|
10,561 | 10,561 | ||||||
|
Foreign
tax credits
|
46,472 | 38,353 | ||||||
|
Uncollectible
reinsurance
|
16,175 | 84,898 | ||||||
|
Minimum
pension
|
13,068 | 17,080 | ||||||
|
Other
assets
|
40,750 | 39,380 | ||||||
|
Total
deferred tax assets
|
361,755 | 546,135 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Deferred
acquisition costs
|
63,531 | 67,069 | ||||||
|
Investment
discount
|
3,174 | 8,653 | ||||||
|
Net
unrealized appreciation of investments
|
49,279 | - | ||||||
|
Fair
value adjustments
|
12,231 | - | ||||||
|
Foreign
currency translation
|
29,696 | 15,565 | ||||||
|
Gain
on tender of debt
|
27,395 | - | ||||||
|
Other
liabilities
|
2,279 | 12,481 | ||||||
|
Total
deferred tax liabilities
|
187,585 | 103,768 | ||||||
|
Net
deferred tax assets
|
$ | 174,170 | $ | 442,367 | ||||
A
reconciliation of the beginning and ending amount of unrecognized tax benefits,
for the periods indicated, is as follows:
|
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Balance
at January 1
|
$ | 34,366 | $ | 29,132 | $ | 13,800 | ||||||
|
Additions
based on tax positions related to the current year
|
6,997 | 5,234 | 4,423 | |||||||||
|
Additions
for tax positions of prior years
|
- | - | 10,909 | |||||||||
|
Reductions
for tax positions of prior years
|
- | - | - | |||||||||
|
Settlements
with taxing authorities
|
(12,353 | ) | - | - | ||||||||
|
Lapses
of applicable statutes of limitations
|
- | - | - | |||||||||
|
Balance
at December 31
|
$ | 29,010 | $ | 34,366 | $ | 29,132 | ||||||
The
entire amount of the unrecognized tax benefits would affect the effective tax
rate if recognized.
In 2007,
the Internal Revenue Service (“IRS”) completed its examination of the Company’s
consolidated U.S. income tax returns for 2003 and 2004 and issued an examination
report proposing various adjustments. The Company has submitted a
formal protest including requests for affirmative adjustments and believes that
it has a strong chance of prevailing on the issues involved. With few
exceptions, the Company no longer is subject to U.S. federal, state and local or
foreign income tax examinations by tax authorities for years before 2007 other
than 2003 and 2004.
The
Company recognizes accrued interest related to unrecognized tax benefits and
penalties in income taxes. During the years ended December 31, 2009,
2008 and 2007, the Company accrued and recognized approximately $1.6 million,
$2.5 million and $6.0 million, respectively, in interest and
penalties.
The
Company is not aware of any positions for which it is reasonably possible that
the total amounts of unrecognized tax benefits will significantly increase or
decrease within twelve months of the reporting date unless the formal protest to
the IRS for 2003 and 2004 is finally resolved. It is not possible to
estimate the change that would be required as a result of such
resolution.
For U.S.
income tax purposes the Company has foreign tax credit carryforwards of $46.5
million that begin to expire in 2017. In addition, for U.S. income
tax purposes the Company has $10.6 million of Alternative Minimum Tax credits
that do not expire. Management believes that it is more likely than
not that the Company will realize the benefits of its net deferred tax assets
and, accordingly, no valuation allowance has been recorded for the periods
presented.
Tax
benefits of $1.3 million and $1.8 million related to share-based compensation
deductions for 2009 and 2008, respectively, are reflected in additional paid-in
capital in the shareholders’ equity section of the consolidated balance
sheets.
13. REINSURANCE
The
Company utilizes reinsurance agreements to reduce its exposure to large claims
and catastrophic loss occurrences. These agreements provide for
recovery from reinsurers of a portion of losses and LAE under certain
circumstances without relieving the ceding company of its obligations to the
policyholders. Losses and LAE incurred and premiums earned are
reported after deduction for reinsurance. In the event that one or
more of the reinsurers were unable to meet their obligations under these
reinsurance agreements, the Company would not realize the full value of the
reinsurance recoverable balances. The Company may hold partial
collateral, including letters of credit and funds held, under these
agreements. See also Note 1C.
Premiums
written and earned and incurred losses and LAE are comprised of the following
for the periods indicated:
|
Years
Ended December 31,
|
||||||||||||
|
(Dollars
in
thousands
)
|
2009
|
2008
|
2007
|
|||||||||
|
Written
premiums:
|
||||||||||||
|
Direct
|
$ | 824,366 | $ | 778,597 | $ | 851,347 | ||||||
|
Assumed
|
3,304,589 | 2,899,541 | 3,226,223 | |||||||||
|
Ceded
|
(199,194 | ) | (172,925 | ) | (158,129 | ) | ||||||
|
Net
written premiums
|
$ | 3,929,761 | $ | 3,505,213 | $ | 3,919,441 | ||||||
|
Premiums
earned:
|
||||||||||||
|
Direct
|
$ | 808,793 | $ | 844,365 | $ | 922,005 | ||||||
|
Assumed
|
3,255,849 | 3,031,721 | 3,213,140 | |||||||||
|
Ceded
|
(170,544 | ) | (181,785 | ) | (137,647 | ) | ||||||
|
Net
premiums earned
|
$ | 3,894,098 | $ | 3,694,301 | $ | 3,997,498 | ||||||
|
Incurred
losses and LAE:
|
||||||||||||
|
Direct
|
$ | 655,263 | $ | 658,201 | $ | 793,436 | ||||||
|
Assumed
|
1,829,371 | 1,856,821 | 1,869,394 | |||||||||
|
Ceded
|
(110,576 | ) | (76,050 | ) | (114,692 | ) | ||||||
|
Net
incurred losses and LAE
|
$ | 2,374,058 | $ | 2,438,972 | $ | 2,548,138 | ||||||
The
amounts deducted from losses and LAE incurred for net reinsurance recoveries
were $110.6 million, $76.0 million and $114.7 million for the years ended
December 31, 2009, 2008 and 2007, respectively, see also Note 3.
14. OTHER
COMPREHENSIVE INCOME (LOSS)
The
following table presents the components of comprehensive income (loss) in the
consolidated statements of operations for the periods indicated:
|
Years
Ended December 31,
|
||||||||||||
|
(
Dollars
in
thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Net
income (loss)
|
$ | 806,989 | $ | (18,758 | ) | $ | 839,275 | |||||
|
Other
comprehensive income (loss), before tax:
|
||||||||||||
|
Unrealized
appreciation (depreciation) ("URA(D)") on securities arising during the
period
|
||||||||||||
|
URA
(
D) of
investments - temporary
|
550,356 | (499,622 | ) | 7,065 | ||||||||
|
URA(D)
of investments - non-credit OTTI
|
35,563 | - | - | |||||||||
|
URA(D)
on securities arising during the period
|
585,919 | (499,622 | ) | 7,065 | ||||||||
|
Less: reclassification
adjustment for realized losses (gains) included in net income
(loss)
|
50,789 | 189,231 | 14,292 | |||||||||
|
Total
URA(D) on securities arising during the period
|
636,708 | (310,391 | ) | 21,357 | ||||||||
|
Foreign
currency translation adjustments
|
98,931 | (209,667 | ) | 49,132 | ||||||||
|
Pension
adjustments
|
11,466 | (38,715 | ) | 17,443 | ||||||||
|
Total
other comprehensive income (loss), before tax
|
747,105 | (558,773 | ) | 87,932 | ||||||||
|
Income
tax (expense) benefit related to items of other comprehensive income
(loss):
|
||||||||||||
|
Tax
(expense) benefit on URA(D) arising during the period
|
||||||||||||
|
Tax
(expense) benefit on URA(D) of investments - temporary
|
(91,259 | ) | 104,410 | 1,653 | ||||||||
|
Tax
(expense) benefit on URA(D) of investments - non-credit
OTTI
|
(3,830 | ) | - | - | ||||||||
|
Tax
(expense) benefit on URA(D) on securities arising during the
period
|
(95,089 | ) | 104,410 | 1,653 | ||||||||
|
Tax
reclassification due to realized losses (gains) included in net income
(loss)
|
(11,674 | ) | (30,598 | ) | (1,831 | ) | ||||||
|
Total
tax (expense) benefit from URA(D) arising during the
period
|
(106,763 | ) | 73,812 | (178 | ) | |||||||
|
Tax
(expense) benefit from foreign currency translation
|
(15,128 | ) | 16,405 | (16,222 | ) | |||||||
|
Tax
(expense) benefit on pension
|
(4,013 | ) | 13,550 | (6,105 | ) | |||||||
|
Total
income tax (expense) benefit related to items of other comprehensive
income (loss):
|
(125,904 | ) | 103,767 | (22,505 | ) | |||||||
|
Other
comprehensive income (loss), net of tax
|
621,201 | (455,006 | ) | 65,427 | ||||||||
|
Comprehensive
income (loss)
|
$ | 1,428,190 | $ | (473,764 | ) | $ | 904,702 | |||||
The
following table presents the components of accumulated other comprehensive
income (loss), net of tax, in the consolidated balance sheets for the periods
indicated:
|
Years
Ended December 31,
|
||||||||
|
(Dollars
in thousands)
|
2009
|
2008
|
||||||
|
Beginning
balance of URA (D) on securities
|
$ | (163,359 | ) | $ | 73,220 | |||
|
Current
period change in URA (D) of investments - temporary
|
478,007 | (236,579 | ) | |||||
|
Current
period change in URA (D) of investments - non-credit OTTI
|
(5,374 | ) | - | |||||
|
Ending
balance of URA (D) on securities
|
309,274 | (163,359 | ) | |||||
|
Beginning
balance of foreign currency translation adjustments
|
(96,771 | ) | 96,491 | |||||
|
Current
period change in foreign currency translation adjustments
|
83,803 | (193,262 | ) | |||||
|
Ending
balance of foreign currency translation adjustments
|
(12,968 | ) | (96,771 | ) | ||||
|
Beginning
balance of pension
|
(31,721 | ) | (6,556 | ) | ||||
|
Current
period change in pension
|
7,453 | (25,165 | ) | |||||
|
Ending
balance of pension
|
(24,268 | ) | (31,721 | ) | ||||
|
Ending
balance of accumulated other comprehensive income (loss)
|
$ | 272,038 | $ | (291,851 | ) | |||
15. EMPLOYEE
BENEFIT PLANS
Defined
Benefit Pension Plans.
The
Company maintains both qualified and non-qualified defined benefit pension plans
for its U.S. employees. Generally, the Company computes the benefits
based on average earnings over a period prescribed by the plans and credited
length of service. The Company’s non-qualified defined benefit
pension plan, affected in October 1995, provides compensating pension benefits
for participants whose benefits have been curtailed under the qualified plan due
to Internal Revenue Code limitations.
Although
not required to make contributions under IRS regulations, the Company
contributed $5.2 million and $20.6 million to the qualified plan in 2009 and
2008, respectively. Pension expense for the Company’s plans for the
years ended December 31, 2009, 2008 and 2007 was $10.8 million, $5.9 million and
$6.4 million, respectively.
The
following table summarizes the status of these defined benefit plans for U.S.
employees for the periods indicated:
|
Years
Ended December 31,
|
||||||||
|
(Dollars in
thousands)
|
2009
|
2008
|
||||||
|
Change
in
projected
benefit obligation:
|
||||||||
|
Benefit
obligation at beginning of year
|
$ | 102,907 | $ | 90,645 | ||||
|
Service
cost
|
6,015 | 5,174 | ||||||
|
Interest
cost
|
6,385 | 5,916 | ||||||
|
Actuarial
loss
|
6,808 | 5,650 | ||||||
|
Benefits
paid
|
(3,949 | ) | (4,478 | ) | ||||
|
Projected
benefit obligation at end of year
|
118,166 | 102,907 | ||||||
|
Change
in plan assets:
|
||||||||
|
Fair
value of plan assets at beginning of year
|
75,798 | 82,963 | ||||||
|
Actual
return on plan assets
|
21,113 | (26,391 | ) | |||||
|
Actual
contributions during the year
|
7,851 | 23,843 | ||||||
|
Administrative
expenses paid
|
(85 | ) | (139 | ) | ||||
|
Benefits
paid
|
(3,949 | ) | (4,478 | ) | ||||
|
Fair
value of plan assets at end of year
|
100,728 | 75,798 | ||||||
|
Funded
status at end of year
|
$ | (17,438 | ) | $ | (27,109 | ) | ||
Amounts
recognized in the consolidated balance sheets for the periods
indicated:
|
At
December 31,
|
||||||||
|
(Dollars
in thousands)
|
2009
|
2008
|
||||||
|
Other
assets (due beyond one year)
|
$ | 8,394 | $ | - | ||||
|
Other
liabilities (due within one year)
|
(8,679 | ) | (6,077 | ) | ||||
|
Other
liabilities (due beyond one year)
|
(17,153 | ) | (21,032 | ) | ||||
|
Net
amount recognized in the consolidated balance sheets
|
$ | (17,438 | ) | $ | (27,109 | ) | ||
Amounts
not yet reflected in net periodic benefit cost and included in accumulated other
comprehensive loss for the periods indicated:
|
At
December 31,
|
||||||||
|
(Dollars
in thousands)
|
2009
|
2008
|
||||||
|
Prior
service cost
|
$ | (266 | ) | $ | (315 | ) | ||
|
Accumulated
loss
|
(33,708 | ) | (46,252 | ) | ||||
|
Accumulated
other comprehensive loss
|
$ | (33,974 | ) | $ | (46,567 | ) | ||
Other
changes in other comprehensive loss for the periods indicated are as
follows:
|
Years
Ended December 31,
|
||||||||
|
(Dollars
in thousands)
|
2009
|
2008
|
||||||
|
Other
comprehensive loss at December 31, prior year
|
$ | (46,567 | ) | $ | (9,240 | ) | ||
|
Net
gain (loss) arising during period
|
8,076 | (38,763 | ) | |||||
|
Recognition
of amortizations in net periodic benefit cost:
|
||||||||
|
Prior
service cost
|
49 | 51 | ||||||
|
Actuarial
loss
|
4,468 | 1,385 | ||||||
|
Other
comprehensive loss at December 31, current year
|
$ | (33,974 | ) | $ | (46,567 | ) | ||
Net
periodic benefit cost for U.S. employees included the following components for
the periods indicated:
|
Years
Ended December 31,
|
||||||||||||
|
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Service
cost
|
$ | 6,015 | $ | 5,174 | $ | 5,096 | ||||||
|
Interest
cost
|
6,385 | 5,916 | 5,263 | |||||||||
|
Expected
return on assets
|
(6,145 | ) | (6,583 | ) | (5,538 | ) | ||||||
|
Amortization
of actuarial loss from earlier periods
|
3,663 | 601 | 1,425 | |||||||||
|
Amortization
of unrecognized prior service cost
|
49 | 51 | 126 | |||||||||
|
Settlement
|
805 | 784 | - | |||||||||
|
Net
periodic benefit cost
|
$ | 10,772 | $ | 5,943 | $ | 6,372 | ||||||
|
Other
changes recognized in other comprehensive income:
|
||||||||||||
|
Other
comprehensive income attributable to change from prior
year
|
(12,593 | ) | 37,327 | |||||||||
|
Total
recognized in net periodic benefit cost and other
|
||||||||||||
|
comprehensive
income
|
$ | (1,821 | ) | $ | 43,270 | |||||||
The
estimated transition obligation, actuarial loss and prior service cost that will
be amortized from accumulated other comprehensive income into net periodic
benefit cost over the next year are $0.0 million, $2.0 million and $0.0 million,
respectively.
The
weighted average discount rates used to determine net periodic benefit cost for
2009, 2008 and 2007 were 6.25%, 6.55% and 5.94%, respectively. The
rate of compensation increase used to determine the net periodic benefit cost
for 2009, 2008 and 2007 was 4.0%, 4.5% and 4.5%, respectively. The
expected long-term rate of return on plan assets for 2009, 2008 and 2007 was
8.0%, and was based on expected portfolio returns and allocations.
The
weighted average discount rates used to determine the actuarial present value of
the projected benefit obligation for year end 2009, 2008 and 2007 were 6.10%,
6.25% and 6.55%, respectively.
The
following table summarizes the accumulated benefit obligation for the periods
indicated:
|
Years
Ended December 31,
|
||||||||
|
(Dollars
in thousands)
|
2009
|
2008
|
||||||
|
Qualified
Plan
|
$ | 73,969 | $ | 63,663 | ||||
|
Non-qualified
Plan
|
21,898 | 20,171 | ||||||
|
Total
|
$ | 95,867 | $ | 83,834 | ||||
The
following table displays the plans with projected benefit obligations in excess
of plan assets for the periods indicated:
|
At
December 31,
|
||||||||
|
(Dollars in
thousands)
|
2009
|
2008
|
||||||
|
Qualified
Plan
|
||||||||
|
Projected
benefit obligation
|
NA
|
$ | 79,574 | |||||
|
Fair
value of plan assets
|
NA
|
75,798 | ||||||
|
Non-qualified
Plan
|
||||||||
|
Projected
benefit obligation
|
$ | 25,831 | $ | 23,333 | ||||
|
Fair
value of plan assets
|
- | - | ||||||
The
following table displays the plans with accumulated benefit obligations in
excess of plan assets for the periods indicated:
|
At
December 31,
|
||||||||
|
(Dollars
in thousands)
|
2009
|
2008
|
||||||
|
Qualified
Plan
|
||||||||
|
Accumulated
benefit obligation
|
NA
|
NA
|
||||||
|
Fair
value of plan assets
|
NA
|
NA
|
||||||
|
Non-qualified
Plan
|
||||||||
|
Accumulated
benefit obligation
|
$ | 21,898 | $ | 20,171 | ||||
|
Fair
value of plan assets
|
- | - | ||||||
The
following table displays the expected benefit payments in the periods
indicated:
|
(Dollars
in thousands)
|
||||
|
2010
|
$ | 10,629 | ||
|
2011
|
4,311 | |||
|
2012
|
5,246 | |||
|
2013
|
5,607 | |||
|
2014
|
7,176 | |||
|
Next
5 years
|
37,659 | |||
Plan
assets consist of shares in investment trusts with approximately 59%, 33% and 8%
of the underlying assets consisting of equity securities, fixed maturities and
cash, respectively. The Company manages the qualified plan
investments for U.S. employees. The assets in the plan consist of
debt and equity mutual funds. Due to the long term nature of the
plan, the target asset allocation has historically been 70% equities and 30%
bonds.
The
following table presents the fair value measurement levels for the qualified
plan assets at fair value for the periods indicated:
|
Fair
Value Measurement Using:
|
||||||||||||||||
|
Quoted
Prices
|
||||||||||||||||
|
in
Active
|
Significant
|
|||||||||||||||
|
Markets
for
|
Other
|
Significant
|
||||||||||||||
|
Identical
|
Observable
|
Unobservable
|
||||||||||||||
|
Assets
|
Inputs
|
Inputs
|
||||||||||||||
|
(Dollars
in thousands)
|
December
31, 2009
|
(Level
1)
|
(Level
2)
|
(Level
3)
|
||||||||||||
|
Assets:
|
||||||||||||||||
|
Cash
|
$ | 36 | $ | 36 | $ | - | $ | - | ||||||||
|
Short-term
investments, which approximates fair value (a)
|
7,436 | 7,436 | - | - | ||||||||||||
|
Mutual
funds, fair value
|
||||||||||||||||
|
Fixed
income (b)
|
33,566 | 33,566 | - | - | ||||||||||||
|
Equities
(c)
|
53,126 | 53,126 | - | - | ||||||||||||
|
Multi-strategy
equity fund, fair value (d)
|
6,564 | - | - | 6,564 | ||||||||||||
|
Total
|
$ | 100,728 | $ | 94,164 | $ | - | $ | 6,564 | ||||||||
|
(a)
|
This
category includes high quality, short-term money market instruments, which
are issued and payable in U.S.
dollars.
|
|
(b)
|
This
category includes three fixed income funds, which invest in investment
grade securities of corporations, governments and government agencies with
approximately half in U.S. securities and half in international
securities.
|
|
(c)
|
This
category includes eight funds, which invest in small, mid and multi-cap
equity securities including common stocks, securities convertible into
common stock and securities with common stock characteristics, such as
rights and warrants, with approximately two-thirds in U.S. equities and
one-third in international
equities.
|
|
(d)
|
This
category consists of a fund of U.S. and international equity funds and may
include currency hedges for the foreign funds. The underlying equity funds
are valued at their net asset
value.
|
The
following table presents the activity under Level 3, fair value measurements
using significant unobservable inputs for fixed maturity investments, for the
period indicated:
|
Year
Ended
|
||||
|
(Dollars
in thousands)
|
December
31, 2009
|
|||
|
Assets:
|
||||
|
Balance,
beginning of period
|
$ | - | ||
|
Actual
return on plan assets:
|
||||
|
Relating
to assets still held at the reporting date
|
564 | |||
|
Relating
to assets sold during the period
|
- | |||
|
Purchases,
issuances and settlements
|
6,000 | |||
|
Transfers
in and/or (out) of Level 3
|
- | |||
|
Balance,
end of period
|
$ | 6,564 | ||
The
Company does not expect to make any contributions to the qualified plan in
2010.
Defined
Contribution Plans.
The
Company also maintains both qualified and non-qualified defined contribution
plans (“Savings Plan” and “Non-Qualified Savings Plan”, respectively) covering
U.S. employees. Under the plans, the Company contributes up to a
maximum 3% of the participants’ compensation based on the contribution
percentage of the employee. The Non-Qualified Savings Plan provides
compensating savings plan benefits for participants whose benefits have been
curtailed under the Savings Plan due to Internal Revenue Code
limitations. The Company’s incurred expenses related to these plans
were $1.6 million, $1.4 million and $1.2 million in 2009, 2008 and 2007,
respectively.
In
addition, the Company maintains several defined contribution pension plans
covering non-U.S. employees. Each non-U.S. office (Brazil, Canada,
London, Belgium, Singapore, Ireland and Bermuda) maintains a separate plan for
the non-U.S. employees working in that location. The Company
contributes various amounts based on salary, age and/or years of
service. The contributions as a percentage of salary for the branch
offices range from 3.1% to 13.3%. The contributions are generally
used to purchase pension benefits from local insurance providers. The
Company’s incurred expenses related to these plans were $0.8 million, $0.7
million and $0.7 million for 2009, 2008 and 2007, respectively.
Post-Retirement
Plan.
The
Company sponsors the Retiree Health Plan. This plan provides
healthcare benefits for eligible retired employees (and their eligible
dependants), who have elected coverage. The Company currently
anticipates that most covered employees will become eligible for these benefits
if they retire while working for the Company. The cost of these
benefits is shared with the retiree. The Company accrues the
post-retirement benefit expense during the period of the employee’s
service.
A
healthcare inflation rate for pre-Medicare claims of 9% in 2009 was assumed to
decrease gradually to 5% in 2018 and then remain at that level. A
healthcare inflation rate for post-Medicare claims of 7% in 2009 was assumed to
decrease gradually to 5% in 2018 then remain at that level.
Effective
December 31, 2009, the healthcare inflation rate for pre-Medicare claims is 8.1%
in 2010, decreasing gradually to 4.5% in 2027. The healthcare
inflation rate for post-Medicare claims is 6.4% in 2010, decreasing gradually to
4.5% in 2027.
Changes
in the assumed healthcare cost trend can have a significant effect on the
amounts reported for the healthcare plans. A one percent change in
the rate would have the following effects on:
|
Percentage
|
Percentage
|
|||||||
|
Point
Increase
|
Point
Decrease
|
|||||||
|
(Dollars
in thousands)
|
($
Impact)
|
($
Impact)
|
||||||
|
a.
Effect on total service and interest cost components
|
$ | 358 | $ | (281 | ) | |||
|
b.
Effect on accumulated post-retirement benefit obligation
|
2,734 | (2,195 | ) | |||||
Benefit
expense for this plan for the years ended December 31, 2009, 2008 and 2007 was
$1.8 million, $1.4 million and $1.2 million, respectively.
The
following table summarizes the status of this plan for the periods
indicated:
|
At
December 31,
|
||||||||
|
(Dollars
in thousands)
|
2009
|
2008
|
||||||
|
Change
in projected benefit obligation:
|
||||||||
|
Benefit
obligation at beginning of year
|
$ | 12,356 | $ | 9,832 | ||||
|
Service
cost
|
902 | 732 | ||||||
|
Interest
cost
|
780 | 664 | ||||||
|
Actuarial
loss
|
1,213 | 1,401 | ||||||
|
Benefits
paid
|
(332 | ) | (273 | ) | ||||
|
Benefit
obligation at end of year
|
14,919 | 12,356 | ||||||
|
Change
in plan assets:
|
||||||||
|
Fair
value of plan assets at beginning of year
|
- | - | ||||||
|
Employer
contributions
|
332 | 273 | ||||||
|
Benefits
paid
|
(332 | ) | (273 | ) | ||||
|
Fair
value of plan assets at end of year
|
- | - | ||||||
|
Funded
status at end of year
|
$ | (14,919 | ) | $ | (12,356 | ) | ||
Amounts
recognized in the consolidated balance sheets for the periods
indicated:
|
At
December 31,
|
||||||||
|
(Dollars
in thousands)
|
2009
|
2008
|
||||||
|
Other
liabilities (due within one year)
|
$ | (323 | ) | $ | (219 | ) | ||
|
Other
liabilities (due beyond one year)
|
(14,596 | ) | (12,137 | ) | ||||
|
Net
amount recognized in the consolidated balance sheets
|
$ | (14,919 | ) | $ | (12,356 | ) | ||
Amounts
not yet reflected in net periodic benefit cost and included in accumulated other
comprehensive loss for the periods indicated:
|
At
December 31,
|
||||||||
|
(Dollars in
thousands)
|
2009
|
2008
|
||||||
|
Accumulated
loss
|
$ | (3,361 | ) | $ | (2,234 | ) | ||
|
Accumulated
other comprehensive loss
|
$ | (3,361 | ) | $ | (2,234 | ) | ||
Other
changes in other comprehensive loss for the periods indicated are as
follows:
|
Years
Ended December 31,
|
||||||||
|
(Dollars in
thousands)
|
2009
|
2008
|
||||||
|
Other
comprehensive loss at December 31, prior year
|
$ | (2,234 | ) | $ | (848 | ) | ||
|
Net
loss arising during period
|
(1,213 | ) | (1,401 | ) | ||||
|
Recognition
of amortizations in net periodic benefit cost:
|
||||||||
|
Actuarial
loss
|
86 | 15 | ||||||
|
Other
comprehensive loss at December 31, current year
|
$ | (3,361 | ) | $ | (2,234 | ) | ||
Net
periodic benefit cost included the following components for the periods
indicated:
|
Years
Ended December 31,
|
||||||||||||
|
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Service
cost
|
$ | 902 | $ | 732 | $ | 663 | ||||||
|
Interest
cost
|
780 | 664 | 536 | |||||||||
|
Net
loss recognition
|
87 | 15 | 18 | |||||||||
|
Net
periodic cost
|
$ | 1,769 | $ | 1,411 | $ | 1,217 | ||||||
|
Other
changes recognized in other comprehensive income:
|
||||||||||||
|
Other
comprehensive gain attributable to change from prior year
|
1,127 | 1,386 | ||||||||||
|
Total
recognized in net periodic benefit cost and
|
||||||||||||
|
other
comprehensive income
|
$ | 2,896 | $ | 2,797 | ||||||||
The
estimated transition obligation, actuarial loss and prior service cost that will
be amortized from accumulated other comprehensive income into net periodic
benefit cost over the next fiscal year are $0.0 thousand, $131.1 thousand and
$0.0 thousand, respectively.
The
weighted average discount rates used to determine net periodic benefit cost for
2009, 2008 and 2007 were 6.25%, 6.55% and 5.94%, respectively.
The
weighted average discount rates used to determine the actuarial present value of
the projected benefit obligation at year end 2009, 2008 and 2007 were 6.10%,
6.25% and 6.55%, respectively.
The
following table summarizes the benefit obligation for the post-retirement plan
for the periods indicated:
|
Years
Ended December 31,
|
||||||||
|
(Dollars
in thousands)
|
2009
|
2008
|
||||||
|
Post-retirement
Plan
|
$ | 14,919 | $ | 12,356 | ||||
The
following table displays the expected benefit payments in the years
indicated:
|
(Dollars
in thousands)
|
||||
|
2010
|
$ | 323 | ||
|
2011
|
389 | |||
|
2012
|
458 | |||
|
2013
|
548 | |||
|
2014
|
643 | |||
|
Next
5 years
|
5,030 | |||
16. DIVIDEND
RESTRICTIONS AND STATUTORY FINANCIAL INFORMATION
Dividend
Restrictions.
Under
Bermuda law, Group is prohibited from declaring or paying a dividend if such
payment would reduce the realizable value of its assets to an amount less than
the aggregate value of its liabilities and its issued share capital and share
premium (additional paid-in capital) accounts. Group’s ability to pay
dividends and its operating expenses is dependent upon dividends from its
subsidiaries. The payment of such dividends by insurer subsidiaries
is limited under Bermuda law and the laws of the various U.S. states in which
Group’s insurance and reinsurance subsidiaries are domiciled or deemed
domiciled. The limitations are generally based upon net income and
compliance with applicable policyholders’ surplus or minimum solvency margin and
liquidity ratio requirements as determined in accordance with the relevant
statutory accounting practices.
Under
Bermuda law, Bermuda Re and Everest International are prohibited from declaring
or making payment of a dividend if they fail to meet their minimum solvency
margin or minimum liquidity ratio. As long term insurers, Bermuda Re
and Everest International are also unable to declare or pay a dividend to anyone
who is not a policyholder unless, after payment of the dividend, the value of
the assets in their long term business fund, as certified by their approved
actuary, exceeds their liabilities for long term business by at least the
$250,000 minimum solvency margin. Prior approval of the Bermuda
Monetary Authority is required if Bermuda Re’s or Everest International’s
dividend payments would reduce their prior year-end total statutory capital by
15% or more.
Under
Irish corporate and regulatory law, Holdings Ireland and its subsidiaries are
limited as to the dividends they can pay based on retained earnings and net
income (loss) and/or capital and minimum solvency requirements.
Delaware
law provides that an insurance company which is a member of an insurance holding
company system and is domiciled in the state shall not pay dividends without
giving prior notice to the Insurance Commissioner of Delaware and may not pay
dividends without the approval of the Insurance Commissioner if the value of the
proposed dividend, together with all other dividends and distributions made in
the preceding twelve months, exceeds the greater of (1) 10% of statutory surplus
or (2) net income, not including realized capital gains, each as reported in the
prior year’s statutory annual statement. In addition, no dividend may
be paid in excess of unassigned earned surplus. At December 31, 2009,
Everest Re has $456.6 million available for payment of dividends in 2010 without
the need for prior regulatory approval.
Statutory
Financial Information.
Everest
Re prepares its statutory financial statements in accordance with accounting
practices prescribed or permitted by the National Association of Insurance
Commissioners (“NAIC”) and the Delaware Insurance
Department. Prescribed statutory accounting practices are set forth
in the NAIC Accounting Practices and Procedures Manual. The capital
and statutory surplus of Everest Re was $2,789.7 million and $2,342.4 million at
December 31, 2009 and 2008, respectively. The statutory net income of
Everest Re was $442.7 million, $74.4 million and $673.1 million for the years
ended December 31, 2009, 2008 and 2007, respectively.
Bermuda
Re prepares its statutory financial statements in conformity with the accounting
principles set forth in Bermuda in The Insurance Act 1978, amendments thereto
and related regulations. The statutory capital and surplus of Bermuda
Re was $2,572.5 million and $2,181.6 million at December 31, 2009 and 2008,
respectively. The statutory net income of Bermuda Re was $441.7
million, $42.3 million and $419.3 million for the years ended December 31, 2009,
2008 and 2007, respectively.
17. CONTINGENCIES
In the
ordinary course of business, the Company is involved in lawsuits, arbitrations
and other formal and informal dispute resolution procedures, the outcomes of
which will determine the Company’s rights and obligations under insurance,
reinsurance and other contractual agreements. In some disputes, the
Company seeks to enforce its rights under an agreement or to collect funds owing
to it. In other matters, the Company is resisting attempts by others
to collect funds or enforce alleged rights. These disputes arise from
time to time and are ultimately resolved through both informal and formal means,
including negotiated resolution, arbitration and litigation. In all
such matters, the Company believes that its positions are legally and
commercially reasonable. While the final outcome of these matters cannot be
predicted with certainty, the Company does not believe that any of these
matters, when finally resolved, will have a material adverse effect on the
Company’s financial position or liquidity. However, an adverse
resolution of one or more of these items in any one quarter or fiscal year could
have a material adverse effect on the Company’s results of operations in that
period.
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”),
was unable to make the annuity payments. The estimated cost to
replace all such annuities for which the Company was contingently liable at
December 31, 2009 and 2008 was $152.3 million and $152.1 million,
respectively.
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 December
31, 2009 and 2008, was $24.6 million and $23.1 million,
respectively.
18. SHARE-BASED
COMPENSATION PLANS
The
Company has a 2002 Stock Incentive Plan (“2002 Employee Plan”), a 1995 Stock
Incentive Plan (“1995 Employee Plan”), a 2009 Non-Employee Director Stock Option
and Restricted Stock Plan (“2009 Director Plan”), a 2003 Non-Employee Director
Equity Compensation Plan (“2003 Director Plan”) and a 1995 Stock Option Plan for
Non-Employee Directors (“1995 Director Plan”). In addition, the
Company has awarded options to non-employee directors in Board actions in 2001,
2000 and 1999.
Under the
2002 Employee Plan, 4,000,000 common shares have been authorized to be granted
as non-qualified
share options, incentive
share options, share appreciation rights or restricted share and share awards to
officers and key employees of the Company. At December 31, 2009, there were
525,518 remaining shares available to be granted under the 2002 Employee
Plan. Through December 31, 2009, only
non-qualified
share options and restricted share awards had been granted under the 2002
Employee Plan.
The
2002 Employee Plan replaced the 1995 Employee Plan; therefore, no further awards
will be granted under the 1995 Employee Plan. Under the 2009 Director
Plan, 37,439 common shares have been authorized to be granted as share options
or restricted share awards to non-employee directors of the
Company. At December 31, 2009, there were 37,439 remaining shares
available to be granted under the 2009 Director Plan. The 2009
Director Plan replaced the 1995 Director Plan, which expired. Under
the 2003 Director Plan, 500,000 common shares have been authorized to be granted
as share options or share awards to non-employee directors of the
Company. At December 31, 2009 there were 455,000 remaining shares
available to be granted under the 2003 Director Plan.
Board
actions in 2001, 2000 and 1999, which were not approved by shareholders, awarded
options to non-employee directors. The Board actions were designed to
award non-employee directors, whose services are considered essential to the
Company’s continued success, with the option to purchase common shares to
increase their ownership interest in the Company and to align such interests
with those of the shareholders of the Company. Under Board actions in
2001, 2000 and 1999; 40,000, 30,000 and 26,000 common shares, respectively, were
granted as share options to non-employee directors of the Company.
Options
and restricted shares granted under the 2002 Employee Plan and the 1995 Employee
Plan vest at the earliest of 20% per year over five years or upon the expiration
of any applicable employment agreement. Options granted under the
1995 Director Plan vested at 50% per year over two years. Options and
restricted shares granted under the 2003 Director Plan generally vest at 33% per
year over three years, unless an alternate vesting period is authorized by the
Board. Options and restricted shares granted under the 2009 Director Plan will
vest as provided in the award agreement. The 2001, 2000 and 1999 Board actions
vest at 33% per year over three years. All options are exercisable at
fair market value of the stock at the date of grant and expire ten years after
the date of grant.
For share
options and restricted shares granted under the 2002 Employee Plan, the 1995
Employee Plan, the 2009 Director Plan, the 2003 Director Plan and the 1995
Director Plan, share-based compensation expense recognized in the consolidated
statements of operations and comprehensive income (loss) was $13.3 million,
$16.3 million and $17.1 million for the years ended December 31, 2009, 2008 and
2007, respectively. The corresponding income tax benefit recorded in
the consolidated statements of operations and comprehensive income (loss) for
share-based compensation was $4.2 million, $3.6 million and $3.8 million for the
years ended December 31, 2009, 2008 and 2007, respectively.
For the
year ended December 31, 2009, share-based compensation awards granted were
131,700 restricted shares and 654,900 options, granted on February 18, February
23, May 13 and September 16, with a grant exercise price of $71.72, $67.83,
$71.94 and $85.39, per share, respectively, and a per option fair value of
$17.44, $16.58, $18.03 and $22.02, respectively. The fair value per
option was calculated on the date of the grant using the Black-Scholes option
valuation model. The following assumptions were used in calculating
the fair value of the options granted:
|
Years
Ended December 31,
|
|||||
|
2009
|
2008
|
2007
|
|||
|
Weighted-average
volatility
|
27.32%
|
25.90%
|
26.45%
|
||
|
Weighted-average
dividend yield
|
2.00%
|
2.00%
|
1.89%
|
||
|
Weighted-average
expected term
|
6.63
years
|
6.44
years
|
6.42
years
|
||
|
Weighted-average
risk-free rate
|
2.13%
|
3.33%
|
4.68%
|
||
In 2008,
the Company adopted the required FASB accounting guidance that recognizes, as an
increase to additional paid-in capital, a realized income tax benefit from
dividends, charged to retained earnings and paid to employees on equity
classified non-vested equity shares. In addition, the amount
recognized in additional paid-in capital for the realized income tax benefit
from dividends on those awards should be included in the pool of excess tax
benefits available to absorb tax deficiencies on share-based payment
awards. For the years ended December 31, 2009 and 2008, the Company
recognized $99.3 thousand and $39.6 thousand, respectively, of additional
paid-in capital due to tax benefits from dividends on restricted
shares.
A summary
of the option activity under the Company’s shareholder approved and non-approved
plans as of December 31, 2009, 2008 and 2007, and changes during the year then
ended is presented in the following tables:
Compensation plans approved
by shareholders:
|
Weighted-
|
||||||||||||||||
|
Weighted-
|
Average
|
|||||||||||||||
|
Average
|
Remaining
|
Aggregate
|
||||||||||||||
|
(Dollars in
thousands, except per share)
|
Exercise
|
Contractual
|
Intrinsic
|
|||||||||||||
|
Options
|
Shares
|
Price/Share
|
Term
|
Value
|
||||||||||||
|
Outstanding
at January 1, 2009
|
1,967,626 | $ | 80.29 | |||||||||||||
|
Granted
|
654,900 | 72.01 | ||||||||||||||
|
Exercised
|
138,170 | 43.55 | ||||||||||||||
|
Forfeited/Cancelled/Expired
|
65,600 | 91.06 | ||||||||||||||
|
Outstanding
at December 31, 2009
|
2,418,756 | 79.86 | 6.2 | $ | 26,186 | |||||||||||
|
Exercisable
at December 31, 2009
|
1,251,276 | 75.78 | 4.2 | $ | 17,304 | |||||||||||
|
Weighted-
|
||||||||||||||||
|
Weighted-
|
Average
|
|||||||||||||||
|
Average
|
Remaining
|
Aggregate
|
||||||||||||||
|
(Dollars
in thousands, except per share)
|
Exercise
|
Contractual
|
Intrinsic
|
|||||||||||||
|
Options
|
Shares
|
Price/Share
|
Term
|
Value
|
||||||||||||
|
Outstanding
at January 1, 2008
|
1,792,126 | $ | 73.94 | |||||||||||||
|
Granted
|
379,106 | 99.67 | ||||||||||||||
|
Exercised
|
141,300 | 46.07 | ||||||||||||||
|
Forfeited/Cancelled/Expired
|
62,306 | 93.19 | ||||||||||||||
|
Outstanding
at December 31, 2008
|
1,967,626 | 80.29 | 5.9 | $ | 14,072 | |||||||||||
|
Exercisable
at December 31, 2008
|
1,153,826 | 68.55 | 4.3 | $ | 13,927 | |||||||||||
|
Weighted-
|
||||||||||||||||
|
Weighted-
|
Average
|
|||||||||||||||
|
Average
|
Remaining
|
Aggregate
|
||||||||||||||
|
(Dollars
in thousands, except per share)
|
Exercise
|
Contractual
|
Intrinsic
|
|||||||||||||
|
Options
|
Shares
|
Price/Share
|
Term
|
Value
|
||||||||||||
|
Outstanding
at January 1, 2007
|
1,798,736 | $ | 64.79 | |||||||||||||
|
Granted
|
371,550 | 99.09 | ||||||||||||||
|
Exercised
|
308,210 | 48.96 | ||||||||||||||
|
Forfeited/Cancelled/Expired
|
69,950 | 82.24 | ||||||||||||||
|
Outstanding
at December 31, 2007
|
1,792,126 | 73.94 | 6.0 | $ | 46,981 | |||||||||||
|
Exercisable
at December 31, 2007
|
1,074,406 | 61.81 | 4.5 | $ | 41,204 | |||||||||||
Compensation plans not
approved by shareholders:
|
Weighted-
|
||||||||||||||||
|
Weighted-
|
Average
|
|||||||||||||||
|
Average
|
Remaining
|
Aggregate
|
||||||||||||||
|
(Dollars
in thousands, except per share)
|
Exercise
|
Contractual
|
Intrinsic
|
|||||||||||||
|
Options
|
Shares
|
Price/Share
|
Term
|
Value
|
||||||||||||
|
Outstanding
at January 1, 2009
|
83,000 | $ | 37.09 | |||||||||||||
|
Granted
|
- | - | ||||||||||||||
|
Exercised
|
45,500 | 31.83 | ||||||||||||||
|
Forfeited/Cancelled/Expired
|
- | - | ||||||||||||||
|
Outstanding
at December 31, 2009
|
37,500 | 43.48 | 1.4 | $ | 1,592 | |||||||||||
|
Exercisable
at December 31, 2009
|
37,500 | 43.48 | 1.4 | $ | 1,592 | |||||||||||
|
Weighted-
|
||||||||||||||||
|
Weighted-
|
Average
|
|||||||||||||||
|
Average
|
Remaining
|
Aggregate
|
||||||||||||||
|
(Dollars
in thousands, except per share)
|
Exercise
|
Contractual
|
Intrinsic
|
|||||||||||||
|
Options
|
Shares
|
Price/Share
|
Term
|
Value
|
||||||||||||
|
Outstanding
at January 1, 2008
|
89,500 | $ | 36.62 | |||||||||||||
|
Granted
|
- | - | ||||||||||||||
|
Exercised
|
6,500 | 30.63 | ||||||||||||||
|
Forfeited/Cancelled/Expired
|
- | - | ||||||||||||||
|
Outstanding
at December 31, 2008
|
83,000 | 37.09 | 1.8 | $ | 3,286 | |||||||||||
|
Exercisable
at December 31, 2008
|
83,000 | 37.09 | 1.8 | $ | 3,286 | |||||||||||
|
Weighted-
|
||||||||||||||||
|
Weighted-
|
Average
|
|||||||||||||||
|
Average
|
Remaining
|
Aggregate
|
||||||||||||||
|
(Dollars
in thousands, except per share)
|
Exercise
|
Contractual
|
Intrinsic
|
|||||||||||||
|
Options
|
Shares
|
Price/Share
|
Term
|
Value
|
||||||||||||
|
Outstanding
at January 1, 2007
|
89,500 | $ | 36.62 | |||||||||||||
|
Granted
|
- | - | ||||||||||||||
|
Exercised
|
- | - | ||||||||||||||
|
Forfeited/Cancelled/Expired
|
- | - | ||||||||||||||
|
Outstanding
at December 31, 2007
|
89,500 | 36.62 | 2.7 | $ | 5,686 | |||||||||||
|
Exercisable
at December 31, 2007
|
89,500 | 36.62 | 2.7 | $ | 5,686 | |||||||||||
The
weighted-average grant-date fair value of options granted during the years 2009,
2008 and 2007 was $17.54, $25.42 and $29.05 per share,
respectively. The aggregate intrinsic value (market price less
exercise price) of options exercised during the years ended December 31, 2009,
2008 and 2007 was $7.5 million, $6.4 million and $17.0 million,
respectively. The cash received from the exercised share options for
the year ended December 31, 2009 was $7.5 million. The tax benefit
realized from the options exercised for the year ended December 31, 2009 was
$1.7 million.
The
following table summarizes information about share options outstanding for the
period indicated:
|
At
December 31, 2009
|
||||||||||||||||||||||
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||||||||
|
Weighted-
|
||||||||||||||||||||||
|
Average
|
Weighted-
|
Weighted-
|
||||||||||||||||||||
|
Number
|
Remaining
|
Average
|
Number
|
Average
|
||||||||||||||||||
|
Range
of
|
Outstanding
|
Contractual
|
Exercise
|
Exercisable
|
Exercise
|
|||||||||||||||||
|
Exercise
Prices
|
at
12/31/09
|
Life
|
Price
|
at
12/31/09
|
Price
|
|||||||||||||||||
| $ | 21.2550 - $31.8825 | 17,800 | 0.1 | $ | 25.34 | 17,800 | $ | 25.34 | ||||||||||||||
| $ | 31.8826 - $42.5100 | - | 0.0 | - | - | - | ||||||||||||||||
| $ | 42.5101 - $53.1375 | 100,000 | 1.7 | 48.01 | 100,000 | 48.01 | ||||||||||||||||
| $ | 53.1376 - $63.7650 | 181,400 | 2.7 | 55.60 | 181,400 | 55.60 | ||||||||||||||||
| $ | 63.7651 - $74.3925 | 1,207,856 | 6.3 | 71.52 | 584,456 | 71.33 | ||||||||||||||||
| $ | 74.3926 - $85.0200 | - | 0.0 | - | - | - | ||||||||||||||||
| $ | 85.0201 - $95.6475 | 264,400 | 5.9 | 94.66 | 196,900 | 95.26 | ||||||||||||||||
| $ | 95.6476 - $106.2750 | 684,800 | 7.6 | 99.36 | 208,220 | 99.23 | ||||||||||||||||
| 2,456,256 | 6.1 | 79.30 | 1,288,776 | 74.84 | ||||||||||||||||||
The
following table summarizes the status of the Company’s non-vested shares and
changes for the periods indicated:
|
Years
Ended December 31,
|
|||||||||||||||||||||||||
|
2009
|
2008
|
2007
|
|||||||||||||||||||||||
|
Weighted-
|
Weighted-
|
Weighted-
|
|||||||||||||||||||||||
|
Average
|
Average
|
Average
|
|||||||||||||||||||||||
|
Grant
Date
|
Grant
Date
|
Grant
Date
|
|||||||||||||||||||||||
|
Restricted (non-vested)
Shares
|
Shares
|
Fair
Value
|
Shares
|
Fair
Value
|
Shares
|
Fair
Value
|
|||||||||||||||||||
|
Outstanding
at January 1,
|
139,662 | $ | 96.39 | 188,590 | $ | 92.85 | 179,300 | $ | 87.66 | ||||||||||||||||
|
Granted
|
131,700 | 73.25 | 113,182 | 96.94 | 79,500 | 99.02 | |||||||||||||||||||
|
Vested
|
39,216 | 95.83 | 150,810 | 92.33 | 49,510 | 84.97 | |||||||||||||||||||
|
Forfeited
|
31,700 | 89.06 | 11,300 | 97.01 | 20,700 | 90.43 | |||||||||||||||||||
|
Outstanding
at December 31,
|
200,446 | 82.45 | 139,662 | 96.39 | 188,590 | 92.85 | |||||||||||||||||||
As of
December 31, 2009, there was $12.9 million of total unrecognized compensation
cost related to non-vested share-based compensation expense. That
cost is expected to be recognized over a weighted-average period of 3.5
years. The total fair value of shares vested during the years ended
December 31, 2009, 2008 and 2007, was $3.8 million, $13.9 million and $4.2
million, respectively. The tax benefit realized from the shares
vested for the year ended December 31, 2009 was $0.6 million. In
addition, the Company recorded an increase in paid-in capital of $0.1 million
due to dividends paid on non-vested shares for the year ended December 31,
2009.
In
addition to the 2002 Employee Plan, the 1995 Employee Plan, the 2009 Director
Plan, the 2003 Director Plan and the 1995 Director Plan, Group issued 488 common
shares in 2009, 1,893 common shares in 2008 and 1,991 common shares in 2007 to
the Company’s non-employee directors as compensation for their service as
directors. These issuances had aggregate values of approximately
$37,400, $168,000 and $206,000, respectively.
Since its
1995 initial public offering, the Company has issued to certain key employees of
the Company 626,882 restricted common shares, of which 83,660 restricted shares
have been cancelled. The Company has issued to non-employee directors of the
Company 32,500 restricted common shares, of which no restricted shares have been
cancelled. The Company acquired 12,489; 69,093 and 21,332 common
shares at a cost of $1.0 million, $6.2 million and $2.2 million in 2009, 2008
and 2007, respectively, from employees who chose to pay required withholding
taxes with shares exercised or restricted shares vested. The Company acquired
1,753 common shares at a cost of $0.1 million in 2009 from employees who chose
to pay the option grant price with shares. The Company acquired 2,935
common shares at a cost of $0.2 million in 2009 from a non-employee director who
chose to pay the option grant price with shares.
19. RELATED-PARTY
TRANSACTIONS
During
the normal course of business, the Company, through its affiliates, engages in
reinsurance and brokerage and commission business transactions with companies
controlled by or affiliated with one or more of its outside
directors. Such transactions, individually and in the aggregate, are
not material to the Company’s financial condition, results of operations and
cash flows.
20. SEGMENT
REPORTING
The
Company, through its subsidiaries, operates in five segments: U.S.
Reinsurance, U.S. Insurance, Specialty Underwriting, International and
Bermuda. The U.S. Reinsurance operation writes property and casualty
reinsurance, on both a treaty and facultative basis, through reinsurance
brokers, as well as directly with ceding companies within the
U.S. The U.S. Insurance operation writes property and casualty
insurance primarily through general agents, brokers and surplus lines brokers
within the U.S. The Specialty Underwriting operation writes accident
and health (“A&H”), marine, aviation and surety business within the U.S. and
worldwide through brokers and directly with ceding companies. The
International operation writes non-U.S. property and casualty reinsurance
through Everest Re’s branches in Canada and Singapore and offices in Miami and
New Jersey. The Bermuda operation provides reinsurance and insurance to
worldwide property and casualty markets and reinsurance to life insurers through
brokers and directly with ceding companies from its Bermuda office and
reinsurance to the United Kingdom and European markets through its UK
branch.
These
segments are managed independently, but conform with corporate guidelines with
respect to pricing, risk management, control of aggregate catastrophe exposures,
capital, investments and support operations. Management generally
monitors and evaluates the financial performance of these operating segments
based upon their underwriting results.
Underwriting
results include earned premium less losses and LAE incurred, commission and
brokerage expenses and other underwriting expenses. Underwriting
results are measured using ratios, in particular loss, commission and brokerage
and other underwriting expense ratios, which, respectively, divide incurred
losses, commissions and brokerage and other underwriting expenses by premiums
earned. The Company utilizes inter-affiliate reinsurance, although
such reinsurance does not materially impact segment results, as business is
generally reported within the segment in which the business was first
produced.
The
Company does not maintain separate balance sheet data for its operating
segments. Accordingly, the Company does not review and evaluate the
financial results of its operating segments based upon balance sheet
data.
The
following tables present the underwriting results for the operating segments for
the periods indicated:
|
U.S. Reinsurance
|
Years
Ended December 31,
|
|||||||||||
|
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Gross
written premiums
|
$ | 1,172,304 | $ | 957,900 | $ | 1,193,523 | ||||||
|
Net
written premiums
|
1,167,222 | 948,798 | 1,183,076 | |||||||||
|
Premiums
earned
|
$ | 1,150,336 | $ | 1,050,340 | $ | 1,282,888 | ||||||
|
Incurred
losses and LAE
|
574,757 | 798,165 | 705,408 | |||||||||
|
Commission
and brokerage
|
272,165 | 273,330 | 327,188 | |||||||||
|
Other
underwriting expenses
|
36,181 | 32,180 | 33,280 | |||||||||
|
Underwriting
gain (loss)
|
$ | 267,233 | $ | (53,335 | ) | $ | 217,012 | |||||
|
U.S. Insurance
|
Years
Ended December 31,
|
|||||||||||
|
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Gross
written premiums
|
$ | 842,564 | $ | 771,798 | $ | 885,604 | ||||||
|
Net
written premiums
|
656,178 | 616,957 | 744,284 | |||||||||
|
Premiums
earned
|
$ | 671,119 | $ | 705,522 | $ | 735,931 | ||||||
|
Incurred
losses and LAE
|
538,626 | 549,854 | 556,375 | |||||||||
|
Commission
and brokerage
|
124,388 | 146,728 | 136,233 | |||||||||
|
Other
underwriting expenses
|
74,627 | 64,324 | 58,216 | |||||||||
|
Underwriting
loss
|
$ | (66,522 | ) | $ | (55,384 | ) | $ | (14,893 | ) | |||
|
Specialty Underwriting
|
Years
Ended December 31,
|
|||||||||||
|
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Gross
written premiums
|
$ | 234,774 | $ | 260,422 | $ | 270,081 | ||||||
|
Net
written premiums
|
229,960 | 254,219 | 263,843 | |||||||||
|
Premiums
earned
|
$ | 234,537 | $ | 251,778 | $ | 261,965 | ||||||
|
Incurred
losses and LAE
|
163,377 | 165,869 | 173,264 | |||||||||
|
Commission
and brokerage
|
72,572 | 70,824 | 68,525 | |||||||||
|
Other
underwriting expenses
|
8,719 | 8,055 | 8,464 | |||||||||
|
Underwriting
(loss) gain
|
$ | (10,131 | ) | $ | 7,030 | $ | 11,712 | |||||
|
International
|
Years
Ended December 31,
|
|||||||||||
|
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Gross
written premiums
|
$ | 1,084,476 | $ | 904,668 | $ | 805,872 | ||||||
|
Net
written premiums
|
1,081,337 | 902,137 | 805,984 | |||||||||
|
Premiums
earned
|
$ | 1,053,538 | $ | 885,456 | $ | 803,830 | ||||||
|
Incurred
losses and LAE
|
613,251 | 504,814 | 501,900 | |||||||||
|
Commission
and brokerage
|
267,121 | 230,920 | 199,460 | |||||||||
|
Other
underwriting expenses
|
23,083 | 19,780 | 18,633 | |||||||||
|
Underwriting
gain
|
$ | 150,083 | $ | 129,942 | $ | 83,837 | ||||||
|
Bermuda
|
Years
Ended December 31,
|
|||||||||||
|
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Gross
written premiums
|
$ | 794,837 | $ | 783,351 | $ | 922,490 | ||||||
|
Net
written premiums
|
795,064 | 783,102 | 922,254 | |||||||||
|
Premiums
earned
|
$ | 784,568 | $ | 801,205 | $ | 912,884 | ||||||
|
Incurred
losses and LAE
|
484,047 | 420,270 | 611,191 | |||||||||
|
Commission
and brokerage
|
192,087 | 208,892 | 230,382 | |||||||||
|
Other
underwriting expenses
|
24,568 | 24,199 | 20,926 | |||||||||
|
Underwriting
gain
|
$ | 83,866 | $ | 147,844 | $ | 50,385 | ||||||
The
following table reconciles the underwriting results for the operating segments
to income before taxes as reported in the consolidated statements of operations
and comprehensive income (loss) for the periods indicated:
|
Years
Ended December 31,
|
||||||||||||
|
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
Underwriting
gain
|
$ | 424,529 | $ | 176,097 | $ | 348,053 | ||||||
|
Net
investment income
|
547,793 | 565,887 | 682,392 | |||||||||
|
Net
realized capital (losses) gains
|
(2,312 | ) | (695,830 | ) | 86,283 | |||||||
|
Realized
gain on debt repurchase
|
78,271 | - | - | |||||||||
|
Net
derivative gain (loss)
|
3,204 | (20,900 | ) | (2,124 | ) | |||||||
|
Corporate
expenses
|
(17,607 | ) | (13,811 | ) | (13,085 | ) | ||||||
|
Interest,
fee and bond issue cost amortization expense
|
(72,081 | ) | (79,171 | ) | (91,561 | ) | ||||||
|
Other
(expense) income
|
(22,476 | ) | (15,879 | ) | 17,998 | |||||||
|
Income
(loss) before taxes
|
$ | 939,321 | $ | (83,607 | ) | $ | 1,027,956 | |||||
The
Company produces business in the U.S., Bermuda and
internationally. The net income deriving from and assets residing in
the individual foreign countries in which the Company writes business are not
identifiable in the Company’s financial records. Based on gross
written premium, the largest country, other than the U.S., in which the Company
writes business, is the United Kingdom, with $497.6 million of gross written
premium for the year ended December 31, 2009. No other country
represented more than 5% of the Company’s revenues.
Approximately
22.4%, 21.2% and 14.7% of the Company’s gross written premiums in 2009, 2008 and
2007, respectively, were sourced through the Company’s largest
intermediary.
21. SUBSEQUENT
EVENTS
On
February 27, 2010, there was a major earthquake offshore of southern Chile and
on February 28, 2010 a major wind storm in Europe. The Company
provides property and casualty reinsurance coverage in Chile and
Europe. Due to the recentness of these events, the Company is unable
to estimate the amount of loss at this time; however, the Company anticipates
that the losses will adversely impact the first quarter 2010 financial
results. The Company will make appropriate disclosure of loss
estimates as the information becomes available. The Company does not
have any other subsequent events to report.
22. UNAUDITED
QUARTERLY FINANCIAL DATA
Summarized
quarterly financial data for the periods indicated:
|
2009
|
||||||||||||||||
|
(Dollars
in thousands, except per share
amounts
)
|
1st
Quarter
|
2nd
Quarter
|
3rd
Quarter
|
4th
Quarter
|
||||||||||||
|
Operating
data:
|
||||||||||||||||
|
Gross
written premiums
|
$ | 997,785 | $ | 973,821 | $ | 1,128,840 | $ | 1,028,509 | ||||||||
|
Net
written premiums
|
970,746 | 926,746 | 1,057,254 | 975,015 | ||||||||||||
|
Premiums
earned
|
932,290 | 956,908 | 975,380 | 1,029,520 | ||||||||||||
|
Net
investment income
|
68,754 | 167,209 | 165,387 | 146,443 | ||||||||||||
|
Net
realized capital losses (gains)
|
(65,137 | ) | 23,462 | 31,063 | 8,300 | |||||||||||
|
Total
claims and underwriting expenses
|
836,078 | 841,336 | 865,441 | 944,321 | ||||||||||||
|
Net
income
|
108,556 | 272,588 | 228,618 | 197,227 | ||||||||||||
|
Earnings
per common share:
|
||||||||||||||||
|
Basic
|
$ | 1.77 | $ | 4.44 | $ | 3.76 | $ | 3.29 | ||||||||
|
Diluted
|
$ | 1.76 | $ | 4.43 | $ | 3.75 | $ | 3.28 | ||||||||
|
2008
|
||||||||||||||||
|
(Dollars
in thousands, except per share amounts)
|
1st
Quarter
|
2nd
Quarter
|
3rd
Quarter
|
4th
Quarter
|
||||||||||||
|
Operating
data:
|
||||||||||||||||
|
Gross
written premiums
|
$ | 877,502 | $ | 905,323 | $ | 999,167 | $ | 896,147 | ||||||||
|
Net
written premiums
|
838,663 | 864,756 | 960,597 | 841,197 | ||||||||||||
|
Premiums
earned
|
911,973 | 942,095 | 931,859 | 908,374 | ||||||||||||
|
Net
investment income
|
150,132 | 175,917 | 164,478 | 75,360 | ||||||||||||
|
Net
realized capital losses
|
(136,383 | ) | (31,566 | ) | (293,365 | ) | (234,516 | ) | ||||||||
|
Total
claims and underwriting expenses
|
812,741 | 889,183 | 1,072,048 | 758,043 | ||||||||||||
|
Net
income (loss)
|
77,933 | 153,027 | (233,127 | ) | (16,591 | ) | ||||||||||
|
Earnings
(loss) per common share:
|
||||||||||||||||
|
Basic
|
$ | 1.24 | $ | 2.48 | $ | (3.79 | ) | $ | (0.27 | ) | ||||||
|
Diluted
|
$ | 1.24 | $ | 2.46 | $ | (3.79 | ) | $ | (0.27 | ) | ||||||
|
OTHER
THAN INVESTMENTS IN RELATED PARTIES
|
||||||||||||
|
December
31, 2009
|
||||||||||||
|
Column
A
|
Column
B
|
Column
C
|
Column
D
|
|||||||||
|
Amount
|
||||||||||||
|
Shown
in
|
||||||||||||
|
Market
|
Balance
|
|||||||||||
|
(Dollars
in thousands)
|
Cost
|
Value
|
Sheet
|
|||||||||
|
Fixed
maturities-available for sale
|
||||||||||||
|
Bonds:
|
||||||||||||
|
U.S.
government and government agencies
|
$ | 339,839 | $ | 354,153 | $ | 354,153 | ||||||
|
State,
municipalities and political subdivisions
|
3,694,267 | 3,853,859 | 3,853,859 | |||||||||
|
Foreign
government securities
|
1,507,385 | 1,590,753 | 1,590,753 | |||||||||
|
Foreign
corporate securities
|
1,377,417 | 1,425,111 | 1,425,111 | |||||||||
|
Public
utilities
|
280,021 | 291,079 | 291,079 | |||||||||
|
All
other corporate bonds
|
2,431,851 | 2,501,732 | 2,501,732 | |||||||||
|
Mortgage-
backed securities:
|
||||||||||||
|
Commercial
|
475,204 | 442,618 | 442,618 | |||||||||
|
Agency
residential
|
2,310,826 | 2,368,444 | 2,368,444 | |||||||||
|
Non-agency
residential
|
177,500 | 160,621 | 160,621 | |||||||||
|
Redeemable
preferred stock
|
20,432 | 17,579 | 17,579 | |||||||||
|
Total
fixed maturities-available for sale
|
12,614,742 | 13,005,949 | 13,005,949 | |||||||||
|
Fixed
maturities-available for sale at fair value
(1)
|
42,769 | 50,528 | 50,528 | |||||||||
|
Equity
securities - available for sale at market value
|
13,970 | 16,301 | 16,301 | |||||||||
|
Equity
securities - available for sale at fair value
(1)
|
365,244 | 380,025 | 380,025 | |||||||||
|
Short-term
investments
|
673,131 | 673,131 | 673,131 | |||||||||
|
Other
invested assets
|
546,158 | 545,284 | 545,284 | |||||||||
|
Cash
|
247,598 | 247,598 | 247,598 | |||||||||
|
Total
investments and cash
|
$ | 14,503,612 | $ | 14,918,816 | $ | 14,918,816 | ||||||
|
(1) Original
cost does not reflect fair value adjustments, which have been realized
through the statements of operations and
|
||||||||||||
|
comprehensive income.
|
||||||||||||
|
SCHEDULE
II — CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
|
||||||||
|
December
31,
|
||||||||
|
(Dollars
in thousands, except par value per share)
|
2009
|
2008
|
||||||
|
ASSETS
|
||||||||
|
Fixed
maturities - available for sale, at market value
|
$ | - | $ | 212,808 | ||||
|
(amortized
cost: 2009, $0; 2008, $225,601)
|
||||||||
|
Short-term
investments
|
77,324 | 72,717 | ||||||
|
Cash
|
246 | 564 | ||||||
|
Investment
in subsidiaries, at equity in the underlying net assets
|
6,021,999 | 4,672,981 | ||||||
|
Accrued
investment income
|
- | 2,136 | ||||||
|
Receivable
from subsidiaries
|
890 | 1,104 | ||||||
|
Other
assets
|
3,359 | 21 | ||||||
|
TOTAL
ASSETS
|
$ | 6,103,818 | $ | 4,962,331 | ||||
|
LIABILITIES
|
||||||||
|
Due
to subsidiaries
|
$ | 1,107 | $ | 571 | ||||
|
Other
liabilities
|
989 | 1,405 | ||||||
|
Total
liabilities
|
2,096 | 1,976 | ||||||
|
SHAREHOLDERS'
EQUITY
|
||||||||
|
Preferred
shares, par value: $0.01; 50 million shares
authorized;
|
||||||||
|
no
shares issued and outstanding
|
- | - | ||||||
|
Common
shares, par value: $0.01; 200 million shares
authorized;
|
||||||||
|
(2009)
65.8 million and (2008) 65.6 million issued
|
658 | 656 | ||||||
|
Additional
paid-in capital
|
1,845,181 | 1,824,552 | ||||||
|
Accumulated
other comprehensive income (loss), net of deferred income
|
||||||||
|
tax
expense of $101.0 million at 2009 and benefit of $16.5 million at
2008
|
272,038 | (291,851 | ) | |||||
|
Treasury
shares, at cost; 6.5 million shares (2009) and 4.2 million shares
(2008)
|
(582,926 | ) | (392,329 | ) | ||||
|
Retained
earnings
|
4,566,771 | 3,819,327 | ||||||
|
Total
shareholders' equity
|
6,101,722 | 4,960,355 | ||||||
|
TOTAL
LIABILITIES AND SHAREHOLDERS' EQUITY
|
$ | 6,103,818 | $ | 4,962,331 | ||||
|
See
notes to consolidated financial statements.
|
||||||||
|
SCHEDULE
II — CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
|
||||||||||||
|
Years
Ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
REVENUES:
|
||||||||||||
|
Net
investment income
|
$ | 2,625 | $ | 13,776 | $ | 16,034 | ||||||
|
Net
realized capital (losses) gains
|
(15,142 | ) | (5,516 | ) | 1,047 | |||||||
|
Other
expense
|
(406 | ) | (303 | ) | (228 | ) | ||||||
|
Net
income (loss) of subsidiaries
|
829,335 | (18,662 | ) | 830,604 | ||||||||
|
Total
revenues
|
816,412 | (10,705 | ) | 847,457 | ||||||||
|
EXPENSES:
|
||||||||||||
|
Other
expenses
|
9,423 | 8,053 | 8,069 | |||||||||
|
Total
expenses
|
9,423 | 8,053 | 8,069 | |||||||||
|
INCOME
(LOSS) BEFORE TAXES
|
806,988 | (18,758 | ) | 839,388 | ||||||||
|
Income
tax expense
|
- | - | 113 | |||||||||
|
NET
INCOME (LOSS)
|
$ | 806,988 | $ | (18,758 | ) | $ | 839,275 | |||||
|
See
notes to consolidated financial statements.
|
||||||||||||
|
SCHEDULE
II — CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
|
||||||||||||
|
Years
Ended December 31,
|
||||||||||||
|
(Dollars
in thousands)
|
2009
|
2008
|
2007
|
|||||||||
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||||||
|
Net
income (loss)
|
$ | 806,988 | $ | (18,758 | ) | $ | 839,275 | |||||
|
Adjustments
to reconcile net income (loss) to net cash provided by operating
activities:
|
||||||||||||
|
Equity
in retained earnings of subsidiaries
|
(829,335 | ) | 18,662 | (830,604 | ) | |||||||
|
Dividends
received from subsidiaries
|
350,000 | 120,000 | - | |||||||||
|
Change
in other assets and liabilities
|
(1,619 | ) | (498 | ) | 961 | |||||||
|
Increase
(decrease) in due to/from affiliates
|
750 | (1,450 | ) | 921 | ||||||||
|
Amortization
of bond premium
|
80 | 458 | 501 | |||||||||
|
Realized
capital losses (gains)
|
15,142 | 5,516 | (1,047 | ) | ||||||||
|
Non-cash
compensation expense
|
641 | 581 | 508 | |||||||||
|
Net
cash provided by operating activities
|
342,647 | 124,511 | 10,515 | |||||||||
|
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||||||
|
Additional
investment in subsidiaries
|
(287,114 | ) | (24,643 | ) | (25,761 | ) | ||||||
|
Proceeds
from fixed maturities matured/called - available for sale, at market
value
|
3,672 | 21,043 | 17,200 | |||||||||
|
Proceeds
from fixed maturities sold - available for sale, at market
value
|
227,298 | 20 | 663 | |||||||||
|
Proceeds
from equity securities sold, available for sale, at fair
value
|
- | - | 227,228 | |||||||||
|
Cost
of fixed maturities acquired - available for sale, at market
value
|
(20,577 | ) | (62,803 | ) | (33,884 | ) | ||||||
|
Cost
of equity securities acquired - available for sale, at market
value
|
- | - | (27,696 | ) | ||||||||
|
Net
change in short-term investments
|
(4,621 | ) | 42,159 | (83,714 | ) | |||||||
|
Net
change in unsettled securities transactions
|
- | - | 35 | |||||||||
|
Net
cash (used in) provided by investing activities
|
(81,342 | ) | (24,224 | ) | 74,071 | |||||||
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||||||
|
Common
shares issued during the period
|
19,990 | 18,116 | 34,856 | |||||||||
|
Purchase
of treasury shares
|
(164,757 | ) | - | - | ||||||||
|
Dividends
paid to shareholders
|
(116,856 | ) | (118,616 | ) | (121,387 | ) | ||||||
|
Net
cash used in financing activities
|
(261,623 | ) | (100,500 | ) | (86,531 | ) | ||||||
|
EFFECT
OF EXCHANGE RATE CHANGES ON CASH
|
- | - | - | |||||||||
|
Net
decrease in cash
|
(318 | ) | (213 | ) | (1,945 | ) | ||||||
|
Cash,
beginning of period
|
564 | 777 | 2,722 | |||||||||
|
Cash,
end of period
|
$ | 246 | $ | 564 | $ | 777 | ||||||
|
Non-cash
transaction:
|
||||||||||||
|
Purchase
of treasury shares by subsidiary
|
$ | 25,840 | $ | 150,745 | $ | 241,584 | ||||||
|
See
notes to consolidated financial statements.
|
||||||||||||
|
Column
A
|
Column
B
|
Column
C
|
Column
D
|
Column
E
|
Column
F
|
Column
G
|
Column
H
|
Column
I
|
Column
J
|
|||||||||||||||||||||||||||
|
Reserve
|
Incurred
|
|||||||||||||||||||||||||||||||||||
|
Geographic
Area
|
for
Losses
|
Loss
and
|
Amortization
|
|||||||||||||||||||||||||||||||||
|
Deferred
|
and
Loss
|
Unearned
|
Net
|
Loss
|
of Deferred
|
Other
|
Net
|
|||||||||||||||||||||||||||||
|
Acquisition
|
Adjustment
|
Premium
|
Premiums
|
Investment
|
Adjustment
|
Acquisition
|
Operating
|
Written
|
||||||||||||||||||||||||||||
|
(
Dollars in
thousands
)
|
Costs
|
Expenses
|
Reserves
|
Earned
|
Income
|
Expenses
|
Costs
|
Expenses
|
Premium
|
|||||||||||||||||||||||||||
|
December
31,
2009
|
||||||||||||||||||||||||||||||||||||
|
Domestic
|
$ | 120,491 | $ | 5,952,679 | $ | 988,901 | $ | 2,055,992 | $ | 224,468 | $ | 1,276,760 | $ | 469,125 | $ | 119,527 | $ | 2,053,360 | ||||||||||||||||||
|
International
|
63,008 | 1,305,798 | 250,419 | 1,053,538 | 37,681 | 613,251 | 267,121 | 23,083 | 1,081,337 | |||||||||||||||||||||||||||
|
Bermuda
|
178,847 | 1,679,381 | 176,082 | 784,568 | 285,644 | 484,047 | 192,087 | 24,568 | 795,064 | |||||||||||||||||||||||||||
|
Total
|
$ | 362,346 | $ | 8,937,858 | $ | 1,415,402 | $ | 3,894,098 | $ | 547,793 | $ | 2,374,058 | $ | 928,333 | $ | 167,178 | $ | 3,929,761 | ||||||||||||||||||
|
December
31, 2008
|
||||||||||||||||||||||||||||||||||||
|
Domestic
|
$ | 137,021 | $ | 6,279,851 | $ | 962,883 | $ | 2,007,640 | $ | 323,421 | $ | 1,513,888 | $ | 490,882 | $ | 104,559 | $ | 1,819,974 | ||||||||||||||||||
|
International
|
55,075 | 1,098,480 | 213,950 | 885,456 | 39,156 | 504,814 | 230,920 | 19,780 | 902,137 | |||||||||||||||||||||||||||
|
Bermuda
|
162,896 | 1,462,329 | 158,678 | 801,205 | 203,310 | 420,270 | 208,892 | 24,199 | 783,102 | |||||||||||||||||||||||||||
|
Total
|
$ | 354,992 | $ | 8,840,660 | $ | 1,335,511 | $ | 3,694,301 | $ | 565,887 | $ | 2,438,972 | $ | 930,694 | $ | 148,538 | $ | 3,505,213 | ||||||||||||||||||
|
December
31, 2007
|
||||||||||||||||||||||||||||||||||||
|
Domestic
|
$ | 182,501 | $ | 6,350,801 | $ | 1,159,409 | $ | 2,280,784 | $ | 367,217 | $ | 1,435,047 | $ | 531,946 | $ | 99,960 | $ | 2,191,203 | ||||||||||||||||||
|
International
|
52,218 | 1,113,641 | 208,687 | 803,830 | 38,946 | 501,900 | 199,460 | 18,633 | 805,984 | |||||||||||||||||||||||||||
|
Bermuda
|
164,844 | 1,576,164 | 199,002 | 912,884 | 276,229 | 611,191 | 230,382 | 20,926 | 922,254 | |||||||||||||||||||||||||||
|
Total
|
$ | 399,563 | $ | 9,040,606 | $ | 1,567,098 | $ | 3,997,498 | $ | 682,392 | $ | 2,548,138 | $ | 961,788 | $ | 139,519 | $ | 3,919,441 | ||||||||||||||||||
|
Column
A
|
Column
B
|
Column
C
|
Column
D
|
Column
E
|
Column
F
|
|||||||||||||||
|
Ceded
to
|
Assumed
|
|||||||||||||||||||
|
Gross
|
Other
|
from
Other
|
Net
|
Assumed
|
||||||||||||||||
|
(Dollars
in thousands)
|
Amount
|
Companies
|
Companies
|
Amount
|
to
Net
|
|||||||||||||||
|
December
31, 2009
|
||||||||||||||||||||
|
Total
property and liability insurance
|
||||||||||||||||||||
|
premiums
earned
|
$ | 808,793 | $ | 170,544 | $ | 3,255,849 | $ | 3,894,098 | 83.6 | % | ||||||||||
|
December
31, 2008
|
||||||||||||||||||||
|
Total
property and liability insurance
|
||||||||||||||||||||
|
premiums
earned
|
$ | 844,365 | $ | 181,785 | $ | 3,031,721 | $ | 3,694,301 | 82.1 | % | ||||||||||
|
December
31, 2007
|
||||||||||||||||||||
|
Total
property and liability insurance
|
||||||||||||||||||||
|
premiums
earned
|
$ | 922,005 | $ | 137,647 | $ | 3,213,140 | $ | 3,997,498 | 80.4 | % | ||||||||||
S-6
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. ReservedPart IIItem 5. Market For Registrant S Common Equity, Related Shareholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Shareholder MatterItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules