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EVEREST GROUP, LTD. - Quarter Report: 2008 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED:

SEPTEMBER 30, 2008

 

Commission file number:

1-15731

 

EVEREST RE GROUP, LTD.

(Exact name of registrant as specified in its charter)

Bermuda

 

98-0365432

(State or other jurisdiction of

incorporation or organization)

 

 

(I.R.S. Employer

Identification No.)

Wessex House – 2nd Floor

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)

 

 

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.

                                                 

                                                                   YES  

   X  

 

NO

      

                                       

Indicate by check mark whether the registrant is a large accelerated filer, and accelerated filer, or 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. (Check one):

 

Large accelerated filer

X

 

Accelerated filer

 

 

Non-accelerated filer

 

 

 

Smaller reporting company

 

(Do not check if smaller reporting company

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

                                                                   YES  

        

 

NO

    X  

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

 

 

Number of Shares Outstanding

Class

 

At November 1, 2008

Common Shares, $0.01 par value

 

61,413,527

 

 

                                                                                      EVEREST RE GROUP, LTD

 

                                                                                            Index To Form 10-Q

 

 

 

Page

                                                                                                      PART I

 

                                                                                    FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets at September 30, 2008 (unaudited) and

 

 

December 31, 2007

1

 

 

 

 

Consolidated Statements of Operations and Comprehensive (Loss) Income for

 

 

the three and nine months ended September 30, 2008 and 2007 (unaudited)

2

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the three

 

 

and nine months ended September 30, 2008 and 2007 (unaudited)

3

 

 

 

 

Consolidated Statements of Cash Flows for the three and nine months

 

 

ended September 30, 2008 and 2007 (unaudited)

4

 

 

 

 

Notes to Consolidated Interim Financial Statements (unaudited)

5

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and

 

 

Results of Operation

22

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

51

 

 

 

Item 4.

Controls and Procedures

51

 

 

 

 

                                                                                                     PART II

 

                                                                                       OTHER INFORMATION

 

Item 1.

Legal Proceedings

51

 

 

 

Item 1A.

Risk Factors

51

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

52

 

 

 

Item 3.

Defaults Upon Senior Securities

52

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

52

 

 

 

Item 5.

Other Information

52

 

 

 

Item 6.

Exhibits

53

 

 

 

 




PART I

 

 

 

 

 

 

 

ITEM 1. FINANCIAL STATEMENTS

 

 

 

 

 

 

 

EVEREST RE GROUP, LTD.

 

 

 

CONSOLIDATED BALANCE SHEETS

 

 

 

 

 

 

 

 

September 30,

 

December 31,

(Dollars in thousands, except par value per share)

2008

 

2007

 

(unaudited)

 

 

ASSETS:

 

 

 

Fixed maturities - available for sale, at market value

$      10,950,334

 

$      10,245,585

  (amortized cost: 2008, $11,289,996; 2007, $10,116,353)

 

 

 

Fixed maturities - available for sale, at fair value

11,197

 

-

Equity securities - available for sale, at market value (cost: 2008, $24,339; 2007, $24,378)   

25,148

 

24,694

Equity securities - available for sale, at fair value

905,108

 

1,535,263

Short-term investments

1,201,725

 

2,225,708

Other invested assets (cost: 2008, $803,102; 2007, $651,898)

802,437

 

654,355

Cash

223,630

 

250,567

   Total investments and cash

14,119,579

 

14,936,172

Accrued investment income

147,539

 

145,056

Premiums receivable

951,566

 

989,921

Reinsurance receivables

645,483

 

666,164

Funds held by reinsureds

365,392

 

342,615

Deferred acquisition costs

375,435

 

399,563

Prepaid reinsurance premiums

72,022

 

88,239

Deferred tax asset

380,727

 

227,825

Federal income taxes recoverable

55,597

 

47,368

Other assets

257,047

 

156,559

TOTAL ASSETS

$      17,370,387

 

$      17,999,482

 

 

 

 

LIABILITIES:

 

 

 

Reserve for losses and loss adjustment expenses

$        9,247,610

 

$        9,040,606

Future policy benefit reserve

66,893

 

78,417

Unearned premium reserve

1,417,542

 

1,567,098

Funds held under reinsurance treaties

81,295

 

75,601

Losses in the course of payment

35,191

 

63,366

Commission reserves

43,878

 

48,753

Other net payable to reinsurers

50,110

 

68,494

8.75% Senior notes due 3/15/2010

199,786

 

199,685

5.4% Senior notes due 10/15/2014

249,718

 

249,689

6.6% Long term notes due 5/1/2067

399,642

 

399,639

Junior subordinated debt securities payable

329,897

 

329,897

Accrued interest on debt and borrowings

16,817

 

11,217

Other liabilities

195,432

 

182,250

   Total liabilities

12,333,811

 

12,314,712

 

 

 

 

Commitments and contingencies (Note 7)

 

 

 

 

 

 

 

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; (2008) 65.6 million and         

 

 

 

  (2007) 65.4 million issued and outstanding

656

 

654

Additional paid-in capital

1,821,406

 

1,805,844

Accumulated other comprehensive (loss) income, net of deferred income tax benefit of

 

 

 

  $34.1 million at 2008 and expense of $87.2 million at 2007

(258,559)

 

163,155

Treasury shares, at cost; (2008) 4.2 million shares and (2007) 2.5 million shares

(392,328)

 

(241,584)

Retained earnings

3,865,401

 

3,956,701

   Total shareholders' equity

5,036,576

 

5,684,770

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$      17,370,387

 

$      17,999,482

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 


 

1




EVEREST RE GROUP, LTD.

 

 

 

 

 

 

 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

 

 

 

 

AND COMPREHENSIVE (LOSS) INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(Dollars in thousands, except per share amounts)

2008

 

2007

 

2008

 

2007

 

(unaudited)

 

(unaudited)

REVENUES:

 

 

 

 

 

 

 

Premiums earned

$       931,859

 

$      997,055

 

$    2,785,927

 

$   3,001,104

Net investment income

164,478

 

172,802

 

490,527

 

508,291

Net realized capital (losses) gains

(293,365)

 

18,579

 

(461,314)

 

151,245

Net derivative income (expense)

14,943

 

(1,564)

 

13,228

 

1,663

Other (expense) income

(8,243)

 

15,138

 

(23,570)

 

10,759

Total revenues

809,672

 

1,202,010

 

2,804,798

 

3,673,062

 

 

 

 

 

 

 

 

CLAIMS AND EXPENSES:

 

 

 

 

 

 

 

Incurred losses and loss adjustment expenses

813,668

 

583,240

 

1,963,760

 

1,768,122

Commission, brokerage, taxes and fees

218,045

 

240,135

 

689,905

 

700,213

Other underwriting expenses

40,335

 

40,316

 

120,307

 

113,917

Interest, fees and bond issue cost amortization expense                        

19,795

 

26,833

 

59,376

 

68,539

Total claims and expenses

1,091,843

 

890,524

 

2,833,348

 

2,650,791

 

 

 

 

 

 

 

 

(LOSS) INCOME BEFORE TAXES

(282,171)

 

311,486

 

(28,550)

 

1,022,271

Income tax (benefit) expense

(49,044)

 

64,899

 

(26,383)

 

195,234

 

 

 

 

 

 

 

 

NET (LOSS) INCOME

$     (233,127)

 

$      246,587

 

$        (2,167)

 

$      827,037

Other comprehensive (loss) income, net of tax

(248,664)

 

90,660

 

(421,714)

 

(19,238)

 

 

 

 

 

 

 

 

COMPREHENSIVE (LOSS) INCOME

$     (481,791)

 

$      337,247

 

$    (423,881)

 

$      807,799

 

 

 

 

 

 

 

 

PER SHARE DATA:

 

 

 

 

 

 

 

Average shares outstanding (000's)

61,396

 

62,751

 

61,809

 

63,269

Net (loss) income per common share - basic

$           (3.80)

 

$            3.93

 

$          (0.04)

 

$          13.07

 

 

 

 

 

 

 

 

Average diluted shares outstanding (000's)

61,396

 

63,268

 

61,809

 

63,798

Net (loss) income per common share - diluted

$           (3.80)

 

$            3.90

 

$          (0.04)

 

$          12.96

 

The accompanying notes are an integral part of the consolidated financial statements

 

 

 

 

 

 

 



2




EVEREST RE GROUP, LTD.

 

 

 

 

 

 

 

CONSOLIDATED STATEMENTS OF

 

 

 

 

 

 

 

CHANGES IN SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(Dollars in thousands, except share amounts)

2008

 

2007

 

2008

 

2007

 

(unaudited)

 

(unaudited)

COMMON SHARES (shares outstanding):

 

 

 

 

 

 

 

Balance, beginning of period

61,643,803

 

63,198,640

 

62,863,845

 

65,043,976

Issued during the period, net

66,278

 

45,745

 

176,536

 

299,409

Treasury shares acquired

(302,000)

 

(417,100)

 

(1,632,300)

 

(2,516,100)

Balance, end of period

61,408,081

 

62,827,285

 

61,408,081

 

62,827,285

 

 

 

 

 

 

 

 

COMMON SHARES (par value):

 

 

 

 

 

 

 

Balance, beginning of period

$             655

 

$             653

 

$             654

 

$             650

Issued during the period, net

1

 

-

 

2

 

3

Balance, end of period

656

 

653

 

656

 

653

 

 

 

 

 

 

 

 

ADDITIONAL PAID-IN CAPITAL:

 

 

 

 

 

 

 

Balance, beginning of period

1,816,174

 

1,791,220

 

1,805,844

 

1,770,496

Share-based compensation plans

5,195

 

7,494

 

15,431

 

28,125

Other

37

 

56

 

131

 

149

Balance, end of period

1,821,406

 

1,798,770

 

1,821,406

 

1,798,770

 

 

 

 

 

 

 

 

ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME,           

 

 

 

 

 

 

 

NET OF DEFERRED INCOME TAXES:

 

 

 

 

 

 

 

Balance, beginning of period

(9,895)

 

(12,170)

 

163,155

 

348,543

Cumulative effect to adopt FAS No. 159, net of tax

-

 

-

 

-

 

(250,815)

Net (decrease) increase during the period

(248,664)

 

90,660

 

(421,714)

 

(19,238)

Balance, end of period

(258,559)

 

78,490

 

(258,559)

 

78,490

 

 

 

 

 

 

 

 

RETAINED EARNINGS:

 

 

 

 

 

 

 

Balance, beginning of period

4,127,991

 

3,758,302

 

3,956,701

 

2,987,998

Cumulative effect to adopt FAS No. 159, net of tax

-

 

-

 

-

 

250,815

Net (loss) income

(233,127)

 

246,587

 

(2,167)

 

827,037

Dividends declared ($0.48 per quarter and $1.44

 

 

 

 

 

 

 

  year-to-date per share in 2008 and 2007)

(29,463)

 

(30,038)

 

(89,133)

 

(90,999)

Balance, end of period

3,865,401

 

3,974,851

 

3,865,401

 

3,974,851

 

 

 

 

 

 

 

 

TREASURY SHARES AT COST:

 

 

 

 

 

 

 

Balance, beginning of period

(367,322)

 

(200,080)

 

(241,584)

 

-

Purchase of treasury shares

(25,006)

 

(40,340)

 

(150,744)

 

(240,420)

Balance, end of period

(392,328)

 

(240,420)

 

(392,328)

 

(240,420)

 

 

 

 

 

 

 

 

TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD

$   5,036,576

 

$   5,612,344

 

$   5,036,576

 

$   5,612,344

 

The accompanying notes are an integral part of the consolidated financial statements

 

 

 

 

 

 

 



3




EVEREST RE GROUP, LTD.

 

 

 

 

 

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(Dollars in thousands)

2008

 

2007

 

2008

 

2007

 

(unaudited)

 

(unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net (loss) income

$     (233,127)

 

$      246,587

 

$       (2,167)

 

$        827,037

Adjustments to reconcile net income to net cash provided by

 

 

 

 

 

 

 

  operating activities:

 

 

 

 

 

 

 

    Decrease in premiums receivable

9,685

 

100,732

 

23,195

 

149,022

    Increase in funds held by reinsureds, net

(7,133)

 

(12,225)

 

(33,500)

 

(11,244)

    (Increase) decrease in reinsurance receivables

(25,938)

 

33,163

 

(12,877)

 

87,661

    Decrease (increase) in deferred tax asset

59,187

 

57,588

 

(31,615)

 

83,993

    Increase (decrease) in reserve for losses and loss adjustment expenses

291,530

 

28,469

 

357,606

 

(105,541)

    Decrease in future policy benefit reserve

(3,972)

 

(4,631)

 

(11,524)

 

(12,056)

    Increase (decrease) in unearned premiums

17,019

 

48,788

 

(137,396)

 

(62,559)

    Change in equity adjustments in limited partnerships

21,051

 

(12,433)

 

5,453

 

(41,704)

    Change in other assets and liabilities, net

(54,159)

 

(109,869)

 

(33,827)

 

(151,587)

    Non-cash compensation expense

2,941

 

4,218

 

13,511

 

13,505

    Amortization of bond premium/(accrual of bond discount)

4,905

 

(5,887)

 

9,381

 

(6,713)

    Amortization of underwriting discount on senior notes

45

 

42

 

133

 

122

    Net realized capital losses (gains)

293,365

 

(18,579)

 

461,314

 

(151,245)

Net cash provided by operating activities

375,399

 

355,963

 

607,687

 

618,691

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from fixed maturities matured/called - available for sale, at market value         

154,577

 

384,354

 

701,138

 

1,001,549

Proceeds from fixed maturities sold - available for sale, at market value

95,500

 

52,087

 

225,447

 

256,122

Proceeds from equity securities sold - available for sale, at fair value

345,063

 

143,606

 

674,297

 

1,462,167

Distributions from other invested assets

52,045

 

25,080

 

65,926

 

52,463

Cost of fixed maturities acquired - available for sale, at market value

(582,558)

 

(472,811)

 

(2,435,862)

 

(728,298)

Cost of fixed maturities acquired - available for sale, at fair value

(11,444)

 

-

 

(11,444)

 

-

Cost of equity securities acquired - available for sale, at market value

(16)

 

-

 

(456)

 

-

Cost of equity securities acquired - available for sale, at fair value

(181,408)

 

(169,080)

 

(330,789)

 

(1,307,488)

Cost of other invested assets acquired

(176,333)

 

(29,307)

 

(224,432)

 

(149,072)

Net change in short-term securities

55,779

 

(209,356)

 

1,019,830

 

(1,312,446)

Net change in unsettled securities transactions

(52,820)

 

7,493

 

(58,562)

 

3,081

Net cash used in investing activities

(301,615)

 

(267,934)

 

(374,907)

 

(721,922)

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Common shares issued during the period, net

2,292

 

3,332

 

2,053

 

14,772

Purchase of treasury shares

(25,006)

 

(40,340)

 

(150,744)

 

(240,420)

Net proceeds from issuance of long term notes

-

 

-

 

-

 

395,637

Dividends paid to shareholders

(29,463)

 

(30,038)

 

(89,133)

 

(90,999)

Net cash (used in) provided by financing activities

(52,177)

 

(67,046)

 

(237,824)

 

78,990

 

 

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

(23,855)

 

(2,711)

 

(21,893)

 

(19,565)

 

 

 

 

 

 

 

 

Net (decrease) increase in cash

(2,248)

 

18,272

 

(26,937)

 

(43,806)

Cash, beginning of period

225,878

 

187,790

 

250,567

 

249,868

Cash, end of period

$        223,630

 

$      206,062

 

$      223,630

 

$        206,062

 

 

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION

 

 

 

 

 

 

 

Cash transactions:

 

 

 

 

 

 

 

  Income taxes (recovered) paid

$        (97,418)

 

$       107,438

 

$           3,286

 

$         267,744

  Interest paid

$           13,937

$         18,489

$         53,004

$           52,867

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

 

 

 

 

4


NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

 

For the Three and Nine Months Ended September 30, 2008 and 2007

 

1. General

 

As used in this document, “Group” means Everest Re Group, Ltd.; “Holdings” means Everest Reinsurance Holdings, Inc.; “Everest Re” means Everest Reinsurance Company and its subsidiaries (unless the context otherwise requires); and the “Company” means Everest Re Group, Ltd. and its subsidiaries.

 

The unaudited consolidated financial statements of the Company for the three and nine months ended September 30, 2008 and 2007 include all adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair statement of the results on an interim basis. Certain financial information, which is normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), has been omitted since it is not required for interim reporting purposes. The year end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The results for the three and nine months ended September 30, 2008 and 2007 are not necessarily indicative of the results for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, 2007, 2006 and 2005 included in the Company’s most recent Form 10-K filing.

 

2. New Accounting Pronouncements

 

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Financial Accounting Standards (“FAS”) No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment to FASB Statement No. 115” (“FAS 159”). FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company adopted FAS 159 as of January 1, 2007.

 

In March 2008, the FASB issued FAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities - an amendment of FASB Statement No. 133” (“FAS 161”). FAS 161 requires entities to provide additional disclosures on derivative and hedging activities regarding their effect on financial position, financial performance and cash flows. This statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The impact of a January 1, 2009 adoption should be immaterial.

 

In October 2008, the FASB issued FASB Staff Position FAS 157-3 “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active” (“FAS 157-3”). FAS 157-3 clarifies the application of FAS No. 157 “Fair Value Measurements” (“FAS 157”), in a market that is not active. This FASB Staff Position is effective upon issuance. The Company does not have any assets for which the market is deemed not active as of September 30, 2008.

 

5

 


 

3. Investments

 

The amortized cost, market value and gross unrealized appreciation and depreciation of available for sale, market value fixed maturity and equity security investments are as follows for the periods indicated:


 

 

At September 30, 2008

 

 

 

Net Unrealized

 

 

 

Amortized

 

Appreciation/

 

Market

(Dollars in thousands)

Cost

 

(Depreciation)

 

Value

Fixed maturities-available for sale

 

 

 

 

 

  U.S. treasury securities and obligations of

 

 

 

 

 

     U.S. government agencies and corporations

$             257,642

 

$                 10,252

 

$             267,894

  Obligations of U.S. states and political subdivisions       

3,869,241

 

(80,519)

 

3,788,722

  Corporate securities

2,805,053

 

(199,085)

 

2,605,968

  Mortgage-backed securities

2,053,908

 

(72,305)

 

1,981,603

  Foreign government securities

1,200,084

 

18,724

 

1,218,808

  Foreign corporate securities

1,104,068

 

(16,729)

 

1,087,339

Total fixed maturities

$        11,289,996

 

$             (339,662)

 

$        10,950,334

Equity securities

$               24,339

 

$                       809

 

$               25,148



 

 

At December 30, 2007

 

 

 

Net Unrealized

 

 

 

Amortized

 

Appreciation/

 

Market

(Dollars in thousands)

Cost

 

(Depreciation)

 

Value

Fixed maturities-available for sale

 

 

 

 

 

  U.S. treasury securities and obligations of

 

 

 

 

 

     U.S. government agencies and corporations

$             224,563

 

$                   7,058

 

$             231,621

  Obligations of U.S. states and political subdivisions      

3,512,694

 

135,835

 

3,648,529

  Corporate securities

2,557,801

 

(22,195)

 

2,535,606

  Mortgage-backed securities

1,636,537

 

(9,301)

 

1,627,236

  Foreign government securities

1,122,993

 

18,627

 

1,141,620

  Foreign corporate securities

1,061,765

 

(792)

 

1,060,973

Total fixed maturities

$        10,116,353

 

$               129,232

 

$        10,245,585

Equity securities

$               24,378

 

$                      316

 

$               24,694

 

The changes in net unrealized gains (losses) for the Company’s investments are derived from the following sources for the periods indicated:

 

 

 

Nine Months Ended

 

 

September 30,

(Dollars in thousands)

2008

 

2007

(Decrease) increase during the period between the market value and cost             

 

 

 

   of investments carried at market value, and deferred taxes theron:

 

 

 

     Fixed maturities

$           (468,894)

 

$            (61,642)

     Equity securities

494

 

157

     Other invested assets

(3,122)

 

766

     Change in unrealized depreciation, pre-tax

(471,522)

 

(60,719)

     Deferred taxes

116,078

 

17,588

Change in unrealized depreciation, net of deferred taxes,

 

 

 

   included in shareholders' equity

$           (355,444)

 

$            (43,131)


 

6

 


 

The Company frequently reviews its 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 and the Company’s ability and intent to hold to recovery. 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, the carrying value of the investment is written down to fair value and a realized loss is recorded in the Company’s consolidated statements of operations and comprehensive income (loss). 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 on asset-backed securities, as well as relevant information provided by rating agencies, investment advisors and analysts.

 

The components of net realized capital (losses) gains are presented in the table below for the periods indicated:

 

 

Nine Months Ended

 

September 30,

(Dollars in thousands)

2008

 

2007

Fixed maturities, market value:

 

 

 

   Other-than-temporary impairments

$          (159,935)

 

$              (2,869)

   Losses from sales

(14,517)

 

(5,916)

Fixed maturities, fair value:

 

 

 

   Losses from fair value adjustments

(247)

 

-

Equity securities, fair value:

 

 

 

   (Losses) gains from sales

(21,089)

 

23,570

   (Losses) gains from fair value adjustments                                                                  

(265,558)

 

136,443

Other invested assets

-

 

13

Short-term investments

32

 

4

Total

$          (461,314)

 

$             151,245

 

Proceeds from sales of fixed maturity investments, market value, for the nine months ended September 30, 2008 and 2007 were $225.4 million and $256.1 million, respectively. Gross gains of $2.0 million and $2.3 million and gross losses of $16.5 million and $8.2 million were realized on those fixed maturity sales for the nine months ended September 30, 2008 and 2007, respectively. Proceeds from sales of equity security investments, fair value, for the nine months ended September 30, 2008 and 2007 were $674.3 million and $1,462.2 million, respectively. Gross gains of $21.0 million and $42.5 million and gross losses of $42.1 million and $18.9 million were realized on those equity sales for the nine months ended September 30, 2008 and 2007, respectively.

 

Included in net realized capital (losses) gains for the nine months ended September 30, 2008 and 2007 was $159.9 million and $2.9 million, respectively, for write-downs in the value of securities deemed to be impaired on an other-than-temporary basis.

 

7

 




4. Fair Value

Effective January 1, 2007, the Company adopted and implemented FAS 159 for its actively managed equity securities. The Company implemented a more active management strategy for these securities and FAS 159 provides guidance on accounting and presentation of these investments in the Company’s consolidated financial statements. Upon adoption of FAS 159, the Company recognized a $250.8 million positive cumulative-effect adjustment to retained earnings, net of $110.3 million of tax. The Company records fair value re-measurements as net realized capital gains or losses in the consolidated statements of operations and comprehensive income. The Company recorded $0.2 million in net realized capital losses due to fair value re-measurement on fixed maturities at fair value for the three and nine months ended September 30, 2008, and $115.6 million and $265.6 million in net realized capital losses due to fair value re-measurement on equity securities at fair value for the three and nine months ended September 30, 2008. The Company recorded $26.6 million and $136.4 million in net realized capital gains due to fair value re-measurements on equity securities for the three and nine months ended September 30, 2007, respectively.

 

The Company’s fixed maturities and equity securities are managed by third party investment asset managers and market and fair values for these securities are obtained from third party pricing services retained by the investment asset managers. In limited instances where prices are not provided by the pricing services, price quotes on a non-binding basis are obtained from investment brokers. The investment asset managers have procedures in place to review the reasonableness of the prices from the service providers and may obtain additional price quotes for verification. In addition, the Company tests the prices on a random basis to an independent pricing source. The Company has not made any adjustments to the prices obtained from these third party sources.

 

Fixed maturities are 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 maturities in terms of issuer, maturity and seniority. Fixed maturities priced by brokers are categorized as Level 3, Significant Unobservable Inputs, since the exact method of valuation is not available.

 

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 seven equity put options, which are outstanding. These products meet the definition of a derivative under FAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“FAS 133”). The Company’s position in these contracts is unhedged and is accounted for as a derivative in accordance with FAS 133. Accordingly, these contracts are carried at fair value and are recorded in “Other liabilities” in the consolidated balance sheets and changes in fair value are recorded in the consolidated statements of operations and comprehensive income. The Company recorded net derivative income of $14.9 million and $13.2 million for the three and nine months ended September 30, 2008, respectively. The Company recorded net derivative expense of $1.6 million and net derivative income of $1.7 million for the three and nine months ended September 30, 2007, respectively.

 

8

 


 

The fair value was calculated using an industry accepted option pricing model, Black-Scholes, which used the following assumptions:

 

 

At September 30, 2008

 

 

 

Contract

 

Contracts

 

based on

 

based on

 

FTSE 100

 

S & P 500 Index

 

Index

Equity index

1,164.7

 

             4,902.5

Interest rate

6.98% to 8.18%

 

7.71%

Time to maturity                                                                                              

8.7 to 22.5 yrs

 

11.8 yrs

Volatility

24.2% to 25.1%

 

32.1%

 

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)

September 30, 2008

 

(Level 1)

 

(Level 2)

 

(Level 3)

Assets:

 

 

 

 

 

 

 

   Fixed maturities, market value

$              10,950,334

 

$                       -

 

$       10,926,042

 

$               24,292

   Fixed maturities, fair value

11,197

 

-

 

11,197

 

-

   Equity securities, market value            

25,148

 

15,251

 

9,897

 

-

   Equity securities, fair value

905,108

 

782,115

 

122,993

 

-

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

   Equity put options

$                     26,425

 

$                       -

 

$                        -

 

$               26,425

 

 

 

 

Fair Value Measurement Using:

 

 

 

Quoted Prices

 

 

 

 

 

 

 

in Active

 

Significant

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

Assets

 

Inputs

 

Inputs

(Dollars in thousands)

December 31, 2007

 

(Level 1)

 

(Level 2)

 

(Level 3)

Assets:

 

 

 

 

 

 

 

   Fixed maturities, market value

$              10,245,585

 

$                       -

 

$          9,977,607

 

$             267,978

   Equity securities, market value            

24,694

 

14,797

 

9,897

 

-

   Equity securities, fair value

1,535,263

 

1,361,789

 

173,474

 

-

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

   Equity put options

$                     39,653

 

$                       -

 

$                         -

 

$               39,653


 

9

 


 

The following tables present the fixed maturity investments for which fair value was measured under Level 3, fair value measurements using significant unobservable inputs, for the periods indicated:

 

 

Nine Months Ended

 

September 30,

(Dollars in thousands)

2008

 

2007

Assets:

 

 

 

Beginning balance at January 1

$            267,978

 

$            166,753

  Total gains or (losses) (realized/unrealized)

 

 

 

     Included in earnings (or changes in net assets)

(2,632)

 

(756)

     Included in other comprehensive income

(1,561)

 

(928)

  Purchases, issuances and settlements

212

 

2,288

  Transfers in and/or (out) of Level 3

(239,705)

 

(69,166)

Ending balance at September 30

$              24,292

 

$              98,191

 

 

 

 

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

$             (2,759)

 

$                   694

 

 

 

 

 

 

 

 

 

Three Months Ended

 

September 30,

(Dollars in thousands)

2008

 

2007

Assets:

 

 

 

Beginning balance at July 1

$              25,648

 

$              21,706

  Total gains or (losses) (realized/unrealized)

 

 

 

     Included in earnings (or changes in net assets)

(318)

 

(811)

     Included in other comprehensive income

(974)

 

(549)

  Purchases, issuances and settlements

(113)

 

2,630

  Transfers in and/or (out) of Level 3

49

 

75,215

Ending balance at September 30

$              24,292

 

$              98,191

 

 

 

 

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

$               3,741

 

$                   694


 

10

 



The following tables present the equity index put options for which fair value was measured under Level 3, fair value measurements using significant unobservable inputs, for the periods indicated:

 

Nine Months Ended

 

September 30,

 

2008

 

2007

(Dollars in thousands)

 

 

 

Liabilities:

 

 

 

Beginning balance at January 1

$             39,653

 

$             37,529

  Total (gains) or losses (realized/unrealized)

 

 

 

     Included in earnings (or changes in net assets)

(13,228)

 

(1,471)

     Included in other comprehensive income

-

 

-

  Purchases, issuances and settlements

-

 

-

  Transfers in and/or (out) of Level 3

-

 

-

Ending balance at September 30

$             26,425

 

$             36,058

 

 

 

 

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   

$                       -

 

$                       -

 

 

 

 

 

 

 

 

 

Three Months Ended

 

September 30,

 

2008

 

2007

(Dollars in thousands)

 

 

 

Liabilities:

 

 

 

Beginning balance at July 1

$             41,368

 

$             34,377

  Total (gains) or losses (realized/unrealized)

 

 

 

     Included in earnings (or changes in net assets)

(14,943)

 

1,681

     Included in other comprehensive income

-

 

-

  Purchases, issuances and settlements

-

 

-

  Transfers in and/or (out) of Level 3

-

 

-

Ending balance at September 30

$             26,425

 

$             36,058

 

 

 

 

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

$                       -

 

$                       -


 

11

 


 

5. Capital Transactions

 

On December 1, 2005, the Company filed a shelf registration statement on Form S-3ASR with the Securities and Exchange Commission (“SEC”), as a Well Known Seasoned Issuer. This shelf registration statement was 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. The Company intends to file a new shelf registration statement on or about December 1, 2008 to replace the one filed on December 1, 2005.

 

 

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. The net proceeds from the offering were used to redeem all of the outstanding 7.85% junior subordinated debt securities on November 15, 2007 and for general corporate purposes.

 

6. Earnings Per Common Share

 

Net (loss) income per common share has been computed below, based upon weighted average common and diluted shares outstanding.

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(Dollars in thousands, except per share amounts)

2008

 

2007

 

2008

 

2007

Net (loss) income (numerator)

$   (233,127)

 

$   246,587

 

$      (2,167)

 

$    827,037

Weighted average common and effect of dilutive shares

 

 

 

 

 

 

 

   used in the computation of net income per share:

 

 

 

 

 

 

 

      Weighted average shares outstanding - basic (denominator)

61,396

 

62,751

 

61,809

 

63,269

       Effect of dilutive shares

247

 

517

 

355

 

529

         Weighted average shares outstanding - diluted (denominator)

61,643

 

63,268

 

62,164

 

63,798

         Weighted average common equivalent shares when anti-dilutive              

61,396

 

-

 

61,809

 

-

Net (loss) income per common share:

 

 

 

 

 

 

 

   Basic

$         (3.80)

 

$         3.93

 

$        (0.04)

 

$        13.07

   Diluted

$         (3.80)

 

$         3.90

 

$        (0.04)

 

$        12.96

 

Options to purchase 987,806 and 982,200 common shares for the three and nine months ended September 30, 2008, respectively, at prices ranging from $82.49 to $99.98 were outstanding but were not included in the computation of earnings per diluted share as the options’ exercise price was greater than the average market price of the common shares for the relevant periods. Options to purchase 4,000 common shares for the three and nine months ended September 30, 2007 at a price of $106.275 were outstanding but were not included in the computation of earnings per diluted share as the options’ exercise price was greater than the average market price of the common shares for the relevant periods. All outstanding options expire on or between April 1, 2009 and September 17, 2018.

 

7. 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

 

12



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 Insurance Company of America ("The Prudential") wherein, for a fee, the Company accepted settled claim payment obligations of certain property and casualty insurers, and, concurrently, became the owner of the annuity or assignee of the annuity proceeds funded by the property and casualty insurers specifically to fulfill these fully settled obligations. In these circumstances, the Company would be liable if The Prudential, which has an A+ (Superior) financial strength rating from A.M. Best Company (“A.M. Best”), was unable to make the annuity payments. At September 30, 2008, the estimated cost to replace all such annuities for which the Company was contingently liable was $152.1 million.

 

Prior to its 1995 initial public offering, the Company had purchased annuities from an unaffiliated life insurance company with an A+ (Superior) financial strength rating from A.M. Best to settle certain claim liabilities of the company. Should the life insurance company become unable to make the annuity payments, the Company would be liable for those claim liabilities. At September 30, 2008, the estimated cost to replace such annuities was $22.7 million.

 

8. Other Comprehensive (Loss) Income

 

The following table presents the components of other comprehensive (loss) income for the periods indicated:

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(Dollars in thousands)

2008

 

2007

 

2008

 

2007

Unrealized (losses) gains on securities

$    (255,862)

 

$      98,404

 

$   (471,522)

 

$    (60,720)

Tax (benefit) expense

(65,404)

 

22,047

 

(116,078)

 

(17,589)

Net unrealized (losses) gains on securities

(190,458)

 

76,357

 

(355,444)

 

(43,131)

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

(63,820)

 

18,106

 

(72,785)

 

33,017

Tax (benefit) expense

(5,414)

 

3,803

 

(5,681)

 

9,124

Net foreign currency translation adjustments

(58,406)

 

14,303

 

(67,104)

 

23,893

 

 

 

 

 

 

 

 

Pension adjustment

308

 

-

 

1,283

 

-

Tax expense

108

 

-

 

449

 

-

Net pension adjustment

200

 

-

 

834

 

-

 

 

 

 

 

 

 

 

Other comprehensive (loss) income, net of deferred taxes           

$    (248,664)

 

$      90,660

 

$   (421,714)

 

$    (19,238)

 

13

 


 

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. On November 6, 2007 the Citibank bilateral letter of credit agreement was decreased by $50.0 million to $300.0 million. All other terms of this agreement remain the same. The Company’s other facility, the Wachovia Group Credit Facility, involves a syndicate of lenders (see Note 14 of the Group Credit Facility), with Wachovia acting as administrative agent. The Citibank Holdings Credit Facility involves a syndicate of lenders (see Note 14 of the Holdings Credit Facility), with Citibank acting as administrative agent. At September 30, 2008 and December 31, 2007, letters of credit for $479.3 million and $491.1 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 September 30, 2008.

 

(Dollars in thousands)

 

 

 

 

 

 

Bank

 

Commitment

 

In Use

 

Date of Expiry

Citibank-Bilateral Letter of Credit Agreement

 

$        300,000

 

$     26,001

 

12/31/2008

 

 

 

 

42,281

 

03/08/2009

 

 

 

 

30,000

 

12/31/2011

 

 

 

 

45,276

 

12/31/2012

  Total Citibank Bilateral Agreement

$        300,000

 

$   143,558

 

 

 

 

 

 

 

 

 

Citibank Holdings Credit Facility

 

$        150,000

 

$     17,204

 

12/31/2008

Total Citibank Holdings Credit Facility

$        150,000

 

$     17,204

 

 

 

 

 

 

 

 

 

Wachovia Group Credit Facility

Tranche One

$        350,000

 

$     41,512

 

12/31/2008

 

Tranche Two        

500,000

 

276,979

 

12/31/2008

  Total Wachovia Group Credit Facility

$        850,000

 

$   318,491

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  Total Letters of Credit

 

$     1,300,000

 

$   479,253

 

 

 

10. Trust Agreements

 

Certain subsidiaries of Group, principally Everest Reinsurance (Bermuda), Ltd. (“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 September 30, 2008, the total amount on deposit in trust accounts was $94.5 million.

 

11. 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 $7.8 million for the three months ended September 30, 2008 and 2007 and $23.4 million for the nine months ended September 30, 2008 and 2007. Market value, which is based on quoted market price at September 30, 2008 and December 31,

 

14

 


 

2007, was $237.6 million and $235.3 million, respectively, for the 5.40% senior notes and $207.1 million and $215.9 million, respectively, for the 8.75% senior notes.

 

12. 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 London Interbank Offered Rate (“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.

 

Interest expense incurred in connection with these long term notes was $6.6 million for the three months ended September 30, 2008 and 2007 and $19.8 million and $10.9 million for the nine months ended September 30, 2008 and 2007, respectively. Market value, which is based on quoted market price at September 30, 2008 and December 31, 2007, was $272.0 million and $349.8 million, respectively, for the 6.6% long term subordinated notes.

 

13. 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.

 

15

 


 

Fair value, which is primarily based on quoted market price of the related trust preferred securities, at September 30, 2008 and December 31, 2007 was $186.0 million and $250.8 million, respectively, for the 6.20% junior subordinated debt securities.

 

Interest expense incurred in connection with these junior subordinated notes was $5.1 million and $9.4 million for the three months ended September 30, 2008 and 2007, respectively, and $15.3 million and $28.1 million for the nine months ended September 30, 2008 and 2007, respectively.

 

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 the 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 14) 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, 2007, $2,595.1 million of the $3,248.5 million in net assets of Holdings’ consolidated subsidiaries were subject to the foregoing regulatory restrictions.

 

14. Credit Line

 

Effective July 27, 2007, Group, Bermuda Re and Everest International Reinsurance, Ltd. (“Everest International”) entered into a new five year, $850.0 million senior credit facility with a syndicate of lenders, replacing the December 8, 2004, senior credit facilities, which would have expired on December 8, 2007. Both the July 27, 2007 and December 8, 2004 senior credit facilities are referred to as the “Group Credit Facility”. 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 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

 

16

 


 

shares, which at September 30, 2008, was $3,842.9 million. As of September 30, 2008, the Company was in compliance with all Group Credit Facility covenants.

 

At September 30, 2008 and December 31, 2007, there were outstanding letters of credit of $41.5 million and $22.0 million, respectively, under tranche one of the Group Credit Facility. At September 30, 2008 and December 31, 2007, there were outstanding standby letters of credit of $277.0 million and $288.0 million, respectively, under tranche two of the Group Credit Facility.

 

Effective August 23, 2006, Holdings entered into a new 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 September 30, 2008, was $1,775.2 million. As of September 30, 2008, Holdings was in compliance with all Holdings Credit Facility covenants.

 

At September 30, 2008 and December 31, 2007, there were outstanding letters of credit of $17.2 million under the Holdings Credit Facility.

 

Costs incurred in connection with the Group Credit Facility and the Holdings Credit Facility were $0.3 million and $0.2 million for the three months ended September 30, 2008 and 2007, respectively, and $1.0 million and $0.8 million for the nine months ended September 30, 2008 and 2007, respectively.

 

15. 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 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 in a coordinated fashion with respect to pricing, risk management, control of aggregate catastrophe exposures, capital, investments and support operations. Management generally

 

17

 



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.

 

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

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(Dollars in thousands)

2008

 

2007

 

2008

 

2007

Gross written premiums

$        280,467

 

$      327,483

 

$      714,534

 

$       953,505

Net written premiums

277,243

 

327,051

 

705,195

 

947,526

                            

 

 

 

 

 

 

 

Premiums earned

$        265,473

 

$      317,741

 

$       792,841

 

$       985,275

Incurred losses and LAE

363,313

 

167,254

 

656,911

 

399,798

Commission and brokerage

55,857

 

81,158

 

206,224

 

238,760

Other underwriting expenses                

7,840

 

7,279

 

23,500

 

21,093

Underwriting (loss) gain

$     (161,537)

 

$        62,050

 

$      (93,794)

 

$       325,624

 

U.S. Insurance

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(Dollars in thousands)

2008

 

2007

 

2008

 

2007

Gross written premiums

$        194,021

 

$       228,207

 

$       595,458

 

$       607,217

Net written premiums

160,250

 

210,725

 

490,738

 

553,502

                              

 

 

 

 

 

 

 

Premiums earned

$        168,421

 

$       184,422

 

$       544,134

 

$       555,475

Incurred losses and LAE

115,606

 

128,397

 

443,050

 

433,116

Commission and brokerage

35,368

 

33,851

 

110,087

 

102,487

Other underwriting expenses                 

16,876

 

15,242

 

47,118

 

39,621

Underwriting gain (loss)

$               571

 

$           6,932

 

$      (56,121)

 

$      (19,749)

 
18




Specialty Underwriting

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(Dollars in thousands)

2008

 

2007

 

2008

 

2007

Gross written premiums

$           54,828

 

$         70,508

 

$       193,941

 

$       201,566

Net written premiums

53,274

 

69,422

 

190,551

 

198,550

                           

 

 

 

 

 

 

 

Premiums earned                    

$           55,305

 

$         67,126

 

$       186,445

 

$       199,968

Incurred losses and LAE

54,165

 

39,618

 

124,052

 

135,367

Commission and brokerage

16,122

 

17,273

 

52,162

 

48,545

Other underwriting expenses                

1,937

 

1,718

 

6,182

 

5,082

Underwriting (loss) gain

$        (16,919)

 

$           8,517

 

$           4,049

 

$         10,974

 

International

Three Months Ended

Nine Months Ended

 

September 30,

 

September 30,

(Dollars in thousands)

2008

 

2007

 

2008

 

2007

Gross written premiums

$        248,821

 

$        213,635

 

$       654,183

 

$       589,605

Net written premiums

248,797

 

213,570

 

653,984

 

590,068

                                 

 

 

 

 

 

 

 

Premiums earned

$        230,107

 

$        203,080

 

$       635,065

 

$       591,733

Incurred losses and LAE

133,943

 

125,286

 

376,950

 

383,429

Commission and brokerage                  

58,899

 

48,622

 

161,019

 

145,211

Other underwriting expenses

4,691

 

4,144

 

14,492

 

12,194

Underwriting gain

$          32,574

 

$          25,028

 

$         82,604

 

$         50,899

 

Bermuda

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(Dollars in thousands)

2008

 

2007

 

2008

 

2007

Gross written premiums

$        221,030

 

$        234,840

 

$       623,876

 

$       675,010

Net written premiums

221,033

 

234,761

 

623,548

 

674,296

                            

 

 

 

 

 

 

 

Premiums earned

$        212,553

 

$        224,686

 

$       627,442

 

$       668,653

Incurred losses and LAE

146,641

 

122,685

 

362,797

 

416,412

Commission and brokerage

51,799

 

59,231

 

160,413

 

165,210

Other underwriting expenses              

5,734

 

5,088

 

18,348

 

14,275

Underwriting gain

$            8,379

 

$          37,682

 

$         85,884

 

$         72,756

 

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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 for the periods indicated:

 

 

Three Months Ended

 

Nine Months Ended

                                     

September 30,

 

September 30,

(Dollars in thousands)

2008

 

2007

 

2008

 

2007

Underwriting results

$    (136,932)

 

$      140,209

 

$        22,622

 

$      440,504

Net investment income

164,478

 

172,802

 

490,527

 

508,291

Net realized capital (losses) gains          

(293,365)

 

18,579

 

(461,314)

 

151,245

Net derivative income (expense)

14,943

 

(1,564)

 

13,228

 

1,663

Corporate expenses

(3,257)

 

(6,845)

 

(10,667)

 

(21,652)

Interest expense

(19,795)

 

(26,833)

 

(59,376)

 

(68,539)

Other (expense) income

(8,243)

 

15,138

 

(23,570)

 

10,759

(Loss) income before taxes

$    (282,171)

 

$      311,486

 

$     (28,550)

 

$   1,022,271

 

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 written premium, the largest country, other than the U.S., in which the Company writes business, is the United Kingdom, with $124.9 million and $325.0 million of written premium for the three and nine months ended September 30, 2008, respectively. No other country represented more than 5% of the Company’s revenues.