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 |
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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 |
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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).
YES |
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NO |
X |
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
|
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Number of Shares Outstanding |
Class |
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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 |
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Consolidated Balance Sheets at September 30, 2008 (unaudited) and |
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December 31, 2007 |
1 |
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Consolidated Statements of Operations and Comprehensive (Loss) Income for |
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the three and nine months ended September 30, 2008 and 2007 (unaudited) |
2 |
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Consolidated Statements of Changes in Shareholders’ Equity for the three |
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and nine months ended September 30, 2008 and 2007 (unaudited) |
3 |
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Consolidated Statements of Cash Flows for the three and nine months |
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ended September 30, 2008 and 2007 (unaudited) |
4 |
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Notes to Consolidated Interim Financial Statements (unaudited) |
5 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and |
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Results of Operation |
22 |
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Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
51 |
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Item 4. |
Controls and Procedures |
51 |
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PART II
OTHER INFORMATION
Item 1. |
Legal Proceedings |
51 |
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Item 1A. |
Risk Factors |
51 |
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Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
52 |
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Item 3. |
Defaults Upon Senior Securities |
52 |
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Item 4. |
Submission of Matters to a Vote of Security Holders |
52 |
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Item 5. |
Other Information |
52 |
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Item 6. |
Exhibits |
53 |
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PART I |
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ITEM 1. FINANCIAL STATEMENTS |
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EVEREST RE GROUP, LTD. |
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CONSOLIDATED BALANCE SHEETS |
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|
|
|
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 |
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|
|
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 |
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Commitments and contingencies (Note 7) |
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SHAREHOLDERS' EQUITY: |
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Preferred shares, par value: $0.01; 50 million shares authorized; |
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no shares issued and outstanding |
- |
|
- |
Common shares, par value: $0.01; 200 million shares authorized; (2008) 65.6 million and |
|
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(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 |
|
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$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. |
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1
EVEREST RE GROUP, LTD. |
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CONSOLIDATED STATEMENTS OF OPERATIONS |
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AND COMPREHENSIVE (LOSS) INCOME |
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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(Dollars in thousands, except per share amounts) |
2008 |
|
2007 |
|
2008 |
|
2007 |
|
(unaudited) |
|
(unaudited) |
||||
REVENUES: |
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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 |
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2,804,798 |
|
3,673,062 |
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CLAIMS AND EXPENSES: |
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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 |
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2,650,791 |
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(LOSS) INCOME BEFORE TAXES |
(282,171) |
|
311,486 |
|
(28,550) |
|
1,022,271 |
Income tax (benefit) expense |
(49,044) |
|
64,899 |
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(26,383) |
|
195,234 |
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NET (LOSS) INCOME |
$ (233,127) |
|
$ 246,587 |
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$ (2,167) |
|
$ 827,037 |
Other comprehensive (loss) income, net of tax |
(248,664) |
|
90,660 |
|
(421,714) |
|
(19,238) |
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COMPREHENSIVE (LOSS) INCOME |
$ (481,791) |
|
$ 337,247 |
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$ (423,881) |
|
$ 807,799 |
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PER SHARE DATA: |
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Average shares outstanding (000's) |
61,396 |
|
62,751 |
|
61,809 |
|
63,269 |
Net (loss) income per common share - basic |
$ (3.80) |
|
$ 3.93 |
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$ (0.04) |
|
$ 13.07 |
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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 |
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2
EVEREST RE GROUP, LTD. |
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CONSOLIDATED STATEMENTS OF |
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CHANGES IN SHAREHOLDERS' EQUITY |
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Three Months Ended |
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Nine Months Ended |
||||
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September 30, |
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September 30, |
||||
(Dollars in thousands, except share amounts) |
2008 |
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2007 |
|
2008 |
|
2007 |
|
(unaudited) |
|
(unaudited) |
||||
COMMON SHARES (shares outstanding): |
|
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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 |
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COMMON SHARES (par value): |
|
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Balance, beginning of period |
$ 655 |
|
$ 653 |
|
$ 654 |
|
$ 650 |
Issued during the period, net |
1 |
|
- |
|
2 |
|
3 |
Balance, end of period |
656 |
|
653 |
|
656 |
|
653 |
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ADDITIONAL PAID-IN CAPITAL: |
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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 |
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1,798,770 |
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ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME, |
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NET OF DEFERRED INCOME TAXES: |
|
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|
|
|
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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 |
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RETAINED EARNINGS: |
|
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|
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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 |
|
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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 |
|
|
|
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TREASURY SHARES AT COST: |
|
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|
|
|
|
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) |
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|
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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 |
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3
EVEREST RE GROUP, LTD. |
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CONSOLIDATED STATEMENTS OF CASH FLOWS |
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Three Months Ended |
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Nine Months Ended |
||||
|
September 30, |
|
September 30, |
||||
(Dollars in thousands) |
2008 |
|
2007 |
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2008 |
|
2007 |
|
(unaudited) |
|
(unaudited) |
||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
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|
|
|
|
Net (loss) income |
$ (233,127) |
|
$ 246,587 |
|
$ (2,167) |
|
$ 827,037 |
Adjustments to reconcile net income to net cash provided by |
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operating activities: |
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|
|
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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 |
|
|
|
|
|
|
|
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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) |
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 |
19
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.