EVEREST GROUP, LTD. - Annual Report: 2009 (Form 10-K)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the
fiscal year ended December 31, 2009
Commission
file number 1-15731
EVEREST
RE GROUP, LTD.
(Exact
name of registrant as specified in its charter)
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Bermuda
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98-0365432
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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45 Reid
Street
PO Box HM
845
Hamilton
HM DX, Bermuda
441-295-0006
(Address,
including zip code, and telephone number, including area code, of registrant’s
principal executive office)
Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each Class
Common
Shares, $.01 par value per share
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Name of Each Exchange on Which
Registered
New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
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YES
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X
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NO
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Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
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YES
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NO
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X
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Indicate
by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
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YES
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X
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NO
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Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
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YES
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NO
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Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company" in Rule 12b-2 of the
Exchange Act.
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Large
accelerated filer
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X
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Accelerated
filer
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Non-accelerated
filer
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Smaller
reporting company
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|||
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(Do
not check if smaller reporting company)
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||||
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
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YES
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NO
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X
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The
aggregate market value on June 30, 2009, the last business day of the
registrant’s most recently completed second quarter, of the voting shares held
by non-affiliates of the registrant was $4,355.2 million.
At
February 1, 2010, the number of shares outstanding of the registrant’s common
shares was 59,317,741.
DOCUMENTS
INCORPORATED BY REFERENCE
Certain
information required by Items 10, 11, 12, 13 and 14 of Form 10-K is incorporated
by reference into Part III hereof from the registrant’s proxy statement for the
2010 Annual General Meeting of Shareholders, which will be filed with the
Securities and Exchange Commission within 120 days of the close of the
registrant’s fiscal year ended December 31, 2009.
EVEREST
RE GROUP, LTD
FORM
10-K
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Page
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PART
I
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Item
1.
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1
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Item
1A.
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29
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Item
1B.
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41
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Item
2.
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41
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Item
3.
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41
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Item
4.
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41
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PART
II
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Item
5.
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| Purchases of Equity Securities |
41
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Item
6.
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44
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Item
7.
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| Operations |
45
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Item
7A.
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87
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Item
8.
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87
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Item
9.
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| Disclosure |
87
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Item
9A.
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87
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Item
9B.
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87
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PART
III
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Item
10.
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88
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Item
11.
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88
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Item
12.
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| Shareholder Matters |
88
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Item
13.
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88
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Item
14.
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88
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PART
IV
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Item
15.
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88
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PART
I
Unless
otherwise indicated, all financial data in this document have been prepared
using accounting principles generally accepted in the United States of America
(“GAAP”). As used in this document, “Group” means Everest Re Group,
Ltd.; “Holdings Ireland” means Everest Underwriting Group (Ireland) Limited;
“Ireland Re” means Everest Reinsurance Company (Ireland), Limited; “Holdings”
means Everest Reinsurance Holdings, Inc.; “Everest Re” means Everest Reinsurance
Company and its subsidiaries (unless the context otherwise requires); and the
“Company”, “we”, “us”, and “our” means Everest Re Group, Ltd. and its
subsidiaries, except when referring to periods prior to February 24, 2000, when
it means Holdings and its subsidiaries.
The
Company.
Group, a
Bermuda company, was established in 1999 as a wholly-owned subsidiary of
Holdings. On February 24, 2000, a corporate restructuring was
completed and Group became the new parent holding company of
Holdings. Holdings continues to be the holding company for the
Company’s U.S. based operations. Holders of shares of common stock of
Holdings automatically became holders of the same number of common shares of
Group. Prior to the restructuring, Group had no significant assets or
capitalization and had not engaged in any business or prior activities other
than in connection with the restructuring.
In
connection with the February 24, 2000 restructuring, Group established a
Bermuda-based reinsurance subsidiary, Everest Reinsurance (Bermuda), Ltd.
(“Bermuda Re”), which commenced business in the second half of
2000. Group also formed Everest Global Services, Inc., a Delaware
subsidiary, to perform administrative functions for Group and its U.S. based and
non-U.S. based subsidiaries.
On
December 30, 2008, Group contributed Holdings to its recently established Irish
holding company, Holdings Ireland. Holdings Ireland is a direct
subsidiary of Group and was established to serve as a holding company for the
U.S. and Irish reinsurance and insurance subsidiaries.
Holdings,
a Delaware corporation, was established in 1993 to serve as the parent holding
company of Everest Re, a Delaware property and casualty reinsurer formed in
1973. Until October 6, 1995, Holdings was an indirect wholly-owned
subsidiary of The Prudential Insurance Company of America (“The
Prudential”). On October 6, 1995, The Prudential sold its entire
interest in Holdings in an initial public offering.
The
Company’s principal business, conducted through its operating segments, is the
underwriting of reinsurance and insurance in the U.S., Bermuda and international
markets. The Company had gross written premiums, in 2009, of $4.1
billion with approximately 80.0% representing reinsurance and 20.0% representing
insurance. Shareholders’ equity at December 31, 2009 was $6.1
billion. The Company underwrites reinsurance both through brokers and
directly with ceding companies, giving it the flexibility to pursue business
based on the ceding company’s preferred reinsurance purchasing
method. The Company underwrites insurance principally through general
agent relationships, brokers and surplus lines brokers. Group’s
active operating subsidiaries, excluding Mt. McKinley Insurance Company (“Mt.
McKinley”), which is in run-off, are each rated A+ (“Superior”) by A.M. Best
Company (“A.M. Best”), a leading provider of insurer ratings that assigns
financial strength ratings to insurance companies based on their ability to meet
their obligations to policyholders.
Following
is a summary of the Company’s principal operating subsidiaries:
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·
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Bermuda
Re, a Bermuda insurance company and a direct subsidiary of Group, is
registered in Bermuda as a Class 4 insurer and long-term insurer and is
authorized to write property and casualty and life and annuity
business. Bermuda Re commenced business in the second half of
2000. Bermuda Re’s UK branch writes property and casualty
reinsurance to the United Kingdom and European markets. At
December 31, 2009, Bermuda Re had shareholder’s equity of $2.7
billion.
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·
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Everest
International Reinsurance, Ltd. (“Everest International”), a Bermuda
insurance company and a direct subsidiary of Group, is registered in
Bermuda as a Class 4 insurer and long term insurer and is authorized to
write property and casualty business and life and annuity
business. Through 2009, all of Everest International’s business
has been inter-affiliate quota share reinsurance assumed from Everest Re
and the UK branch of Bermuda Re. At December 31, 2009, Everest
International had shareholder’s equity of $366.8
million.
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·
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Everest
Re, a Delaware insurance company and a direct subsidiary of Holdings, is a
licensed property and casualty insurer and/or reinsurer in all states, the
District of Columbia and Puerto Rico and is authorized to conduct
reinsurance business in Canada, Singapore and Brazil. Everest
Re underwrites property and casualty reinsurance for insurance and
reinsurance companies in the U.S. and international markets. At
December 31, 2009, Everest Re had statutory surplus of $2.8
billion.
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·
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Everest
National Insurance Company (“Everest National”), a Delaware insurance
company and a direct subsidiary of Everest Re, is licensed in 47 states
and the District of Columbia and is authorized to write property and
casualty insurance on an admitted basis in the jurisdictions in which it
is licensed. The majority of Everest National’s business is
reinsured by its parent, Everest
Re.
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·
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Everest
Indemnity Insurance Company (“Everest Indemnity”), a Delaware insurance
company and a direct subsidiary of Everest Re, writes excess and surplus
lines insurance business in the U.S. on a non-admitted
basis. Excess and surplus lines insurance is specialty property
and liability coverage that an insurer not licensed to write insurance in
a particular jurisdiction is permitted to provide to insureds when the
specific specialty coverage is unavailable from admitted
insurers. Everest Indemnity is licensed in Delaware and is
eligible to write business on a non-admitted basis in all other states,
the District of Columbia and Puerto Rico. The majority of
Everest Indemnity’s business is reinsured by its parent, Everest
Re.
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·
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Everest
Security Insurance Company (“Everest Security”), a Georgia insurance
company and a direct subsidiary of Everest Re, writes property and
casualty insurance on an admitted basis in Georgia and
Alabama. The majority of Everest Security’s business is
reinsured by its parent, Everest
Re.
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·
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Mt.
McKinley, a Delaware insurance company and a direct subsidiary of
Holdings, was acquired by Holdings in September 2000 from The
Prudential. In 1985, Mt. McKinley ceased writing new and
renewal insurance and commenced a run-off operation to service claims
arising from its previously written business. Effective
September 19, 2000, Mt. McKinley and Bermuda Re entered into a loss
portfolio transfer reinsurance agreement, whereby Mt. McKinley
transferred, for arm’s-length consideration, all of its net insurance
exposures and reserves to Bermuda
Re.
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Reinsurance
Industry Overview.
Reinsurance
is an arrangement in which an insurance company, the reinsurer, agrees to
indemnify another insurance or reinsurance company, the ceding company, against
all or a portion of the insurance risks underwritten by the ceding company under
one or more insurance contracts. Reinsurance can provide a ceding
company with several benefits, including a reduction in its net liability on
individual risks or classes of risks, catastrophe protection from large and/or
multiple losses and/or a reduction in operating leverage as measured by the
ratio of net premiums and reserves to capital. Reinsurance also
provides a ceding company with additional underwriting capacity by permitting it
to accept larger risks and write more business than would be acceptable relative
to the ceding company’s financial resources. Reinsurance does not
discharge the ceding company from its liability to policyholders; rather, it
reimburses the ceding company for covered losses.
There are
two basic types of reinsurance arrangements: treaty and
facultative. Treaty reinsurance obligates the ceding company to cede
and the reinsurer to assume a specified portion of a type or category of risks
insured by the ceding company. Treaty reinsurers do not separately
evaluate each of the individual risks assumed under their treaties, instead, the
reinsurer relies upon the pricing and underwriting decisions made by the ceding
company. In facultative reinsurance, the ceding company cedes and the
reinsurer assumes all or part of the risk under a single insurance contract.
Facultative reinsurance is negotiated separately for each insurance contract
that is reinsured. Facultative reinsurance, when purchased by ceding
companies,
usually
is intended to cover individual risks not covered by their reinsurance treaties
because of the dollar limits involved or because the risk is
unusual.
Both
treaty and facultative reinsurance can be written on either a pro rata basis or
an excess of loss basis. Under pro rata reinsurance, the ceding
company and the reinsurer share the premiums as well as the losses and expenses
in an agreed proportion. Under excess of loss reinsurance, the
reinsurer indemnifies the ceding company against all or a specified portion of
losses and expenses in excess of a specified dollar amount, known as the ceding
company's retention or reinsurer's attachment point, generally subject to a
negotiated reinsurance contract limit.
In pro
rata reinsurance, the reinsurer generally pays the ceding company a ceding
commission. The ceding commission generally is based on the ceding
company’s cost of acquiring the business being reinsured (commissions, premium
taxes, assessments and miscellaneous administrative expense and may contain
profit sharing provisions, whereby the ceding commission is adjusted based on
loss experience). Premiums paid by the ceding company to a reinsurer
for excess of loss reinsurance are not directly proportional to the premiums
that the ceding company receives because the reinsurer does not assume a
proportionate risk. There is usually no ceding commission on excess
of loss reinsurance.
Reinsurers
may purchase reinsurance to cover their own risk exposure. Reinsurance of a
reinsurer's business is called a retrocession. Reinsurance companies
cede risks under retrocessional agreements to other reinsurers, known as
retrocessionaires, for reasons similar to those that cause insurers to purchase
reinsurance: to reduce net liability on individual or classes of risks, protect
against catastrophic losses, stabilize financial ratios and obtain additional
underwriting capacity.
Reinsurance
can be written through intermediaries, generally professional reinsurance
brokers, or directly with ceding companies. From a ceding company's
perspective, the broker and the direct distribution channels have advantages and
disadvantages. A ceding company's decision to select one distribution
channel over the other will be influenced by its perception of such advantages
and disadvantages relative to the reinsurance coverage being
placed.
Business
Strategy.
The
Company’s business strategy is to sustain its leadership position within
targeted reinsurance and insurance markets, provide effective management
throughout the property and casualty underwriting cycle and thereby achieve an
attractive return for its shareholders. The Company’s underwriting
strategies seek to capitalize on its i) financial strength and capacity, ii)
global franchise, iii) stable and experienced management team, iv) diversified
product and distribution offerings, v) underwriting expertise and disciplined
approach, vi) efficient and low-cost operating structure and vii) effective
enterprise risk management practices.
The
Company offers treaty and facultative reinsurance and admitted and non-admitted
insurance. The Company’s products include the full range of property and
casualty reinsurance and insurance coverages, including marine, aviation,
surety, errors and omissions liability (“E&O”), directors’ and officers’
liability (“D&O”), medical malpractice, other specialty lines, accident and
health (“A&H”) and workers’ compensation.
The
Company’s underwriting strategies emphasizes underwriting profitability over
premium volume. Key elements of this strategy include careful risk
selection, appropriate pricing through strict underwriting discipline and
adjustment of the Company’s business mix in response to changing market
conditions. The Company focuses on reinsuring companies that
effectively manage the underwriting cycle through proper analysis and pricing of
underlying risks and whose underwriting guidelines and performance are
compatible with its objectives.
The
Company’s underwriting strategies emphasizes flexibility and responsiveness to
changing market conditions, such as increased demand or favorable pricing
trends. The Company believes that its existing strengths, including
its broad underwriting expertise, global presence, strong financial ratings and
substantial capital, facilitate adjustments to its mix of business
geographically, by line of business and by type of coverage, allowing it to
participate in those market opportunities that provide the greatest potential
for underwriting profitability. The Company’s insurance operations
complement these strategies by accessing business that is not available on a
reinsurance basis. The Company carefully monitors its mix of business
across all operations to avoid unacceptable geographic or other risk
concentrations.
Marketing.
The
Company writes business on a worldwide basis for many different customers and
lines of business, thereby obtaining a broad spread of risk. The
Company is not substantially dependent on any single customer, small group of
customers, line of business or geographic area. For the 2009 calendar
year, no single customer (ceding company or insured) generated more than 5.1% of
the Company’s gross written premiums. The Company believes that a
reduction of business from any one customer would not have a material adverse
effect on its future financial condition or results of operations.
Approximately
68%, 11% and 21% of the Company’s 2009 gross written premiums were written in
the broker reinsurance, direct reinsurance and insurance markets,
respectively.
The
broker reinsurance market consists of several substantial national and
international brokers and a number of smaller specialized
brokers. Brokers do not have the authority to bind the Company with
respect to reinsurance agreements, nor does the Company commit in advance to
accept any portion of a broker’s submitted business. Reinsurance
business from any ceding company, whether new or renewal, is subject to
acceptance by the Company. Brokerage fees are generally paid by
reinsurers. The Company’s ten largest brokers accounted for an
aggregate of approximately 62% of gross written premiums in 2009. The
largest broker, Aon Benfield Re, accounts for approximately 22% of gross written
premiums. The second largest broker, Marsh and McLennan, accounted
for approximately 17% of gross written premiums. The Company believes
that a reduction of business assumed from any one broker would not have a
material adverse effect on the Company.
The
direct reinsurance market remains an important distribution channel for
reinsurance business written by the Company. Direct placement of
reinsurance enables the Company to access clients who prefer to place their
reinsurance directly with reinsurers based upon the reinsurer’s in-depth
understanding of the ceding company’s needs.
The
Company’s insurance business is written principally through general agents,
brokers and surplus lines brokers. In 2009, C.V. Starr & Company
accounted for approximately 6% of the Company’s gross written
premium. No other single general agent generated more than 5% of the
Company’s gross written premiums.
The
Company continually evaluates each business relationship, including the
underwriting expertise and experience brought to bear through the involved
distribution channel, performs analyses to evaluate financial security, monitors
performance and adjusts underwriting decisions accordingly.
Segment
Results.
The
Company, through its subsidiaries, operates in five segments: U.S.
Reinsurance, U.S. Insurance, Specialty Underwriting, International and
Bermuda. The U.S. Reinsurance operation writes property and casualty
reinsurance, on both a treaty and facultative basis, through reinsurance
brokers, as well as directly with ceding companies within the
U.S. The U.S. Insurance operation writes property and casualty
insurance primarily through general agents, brokers and surplus lines brokers
within the U.S. The Specialty Underwriting operation writes A&H,
marine, aviation and surety business within the U.S. and worldwide through
brokers and directly with ceding companies. The International
operation writes non-U.S. property and casualty reinsurance through Everest Re’s
branches in Canada and Singapore and offices in Miami and New Jersey. The
Bermuda operation provides reinsurance and insurance to worldwide property and
casualty markets and reinsurance to life insurers through brokers and directly
with ceding companies from its Bermuda office and reinsurance to the United
Kingdom and European markets through its UK branch.
These
segments are managed independently, but conform with corporate guidelines with
respect to pricing, risk management, control of aggregate catastrophe exposures,
capital, investments and support operations. Management generally
monitors and evaluates the financial performance of these operating segments
based upon their underwriting results.
Underwriting
results include earned premium less losses and loss adjustment expenses (“LAE”)
incurred, commission and brokerage expenses and other underwriting
expenses. Underwriting results are measured using ratios, in
particular loss, commission and brokerage and other underwriting expense ratios,
which, respectively, divide incurred losses, commissions and brokerage and other
underwriting expenses by premiums earned. The Company utilizes
inter-affiliate reinsurance, although such reinsurance does not materially
impact segment results, as business is generally reported within the segment in
which the business was first produced. For selected financial
information regarding these segments, see ITEM 8, “Financial Statements and
Supplementary Data” - Note 20 of Notes to Consolidated Financial
Statements and ITEM 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operation - Segment Results”.
Underwriting
Operations.
The
following five year table presents the distribution of the Company’s gross
written premiums by its segments: U.S. Reinsurance, U.S. Insurance,
Specialty Underwriting, International and Bermuda. The premiums for
each segment are further split between property and casualty business and, for
reinsurance business, between pro rata or excess of loss business:
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Gross
Written Premiums by Segment
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Years
Ended December 31,
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(Dollars
in millions)
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2009
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2008
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2007
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2006
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2005
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U.S.
Reinsurance
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Property
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Pro
Rata
(1)
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$ | 478.6 | 11.6 | % | $ | 332.9 | 9.1 | % | $ | 455.9 | 11.2 | % | $ | 379.7 | 9.5 | % | $ | 414.0 | 10.1 | % | ||||||||||||||||||||
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Excess
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287.2 | 7.0 | % | 320.9 | 8.7 | % | 332.2 | 8.1 | % | 303.2 | 7.6 | % | 236.9 | 5.8 | % | |||||||||||||||||||||||||
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Casualty
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Pro
Rata (1)
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175.8 | 4.3 | % | 67.4 | 1.8 | % | 216.5 | 5.3 | % | 446.7 | 11.2 | % | 529.4 | 12.9 | % | |||||||||||||||||||||||||
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Excess
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230.7 | 5.6 | % | 236.7 | 6.4 | % | 189.0 | 4.6 | % | 207.1 | 5.2 | % | 205.9 | 5.0 | % | |||||||||||||||||||||||||
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Total
(2)
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1,172.3 | 28.4 | % | 957.9 | 26.0 | % | 1,193.5 | 29.3 | % | 1,336.7 | 33.4 | % | 1,386.2 | 33.8 | % | |||||||||||||||||||||||||
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U.S.
Insurance
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||||||||||||||||||||||||||||||||||||||||
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Property
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Pro
Rata
(1)
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112.6 | 2.7 | % | 29.8 | 0.8 | % | 85.6 | 2.1 | % | 40.6 | 1.0 | % | 196.9 | 4.8 | % | |||||||||||||||||||||||||
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Excess
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- | 0.0 | % | - | 0.0 | % | - | 0.0 | % | - | 0.0 | % | - | 0.0 | % | |||||||||||||||||||||||||
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Casualty
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Pro
Rata (1)
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729.9 | 17.7 | % | 742.0 | 20.2 | % | 800.0 | 19.6 | % | 825.7 | 20.6 | % | 735.6 | 17.9 | % | |||||||||||||||||||||||||
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Excess
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- | 0.0 | % | - | 0.0 | % | - | 0.0 | % | - | 0.0 | % | - | 0.0 | % | |||||||||||||||||||||||||
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Total
(2)
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842.6 | 20.4 | % | 771.8 | 21.0 | % | 885.6 | 21.7 | % | 866.3 | 21.7 | % | 932.5 | 22.7 | % | |||||||||||||||||||||||||
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Specialty
Underwriting
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||||||||||||||||||||||||||||||||||||||||
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Property
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||||||||||||||||||||||||||||||||||||||||
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Pro
Rata
(1)
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169.6 | 4.1 | % | 218.9 | 6.0 | % | 190.2 | 4.7 | % | 179.3 | 4.5 | % | 206.1 | 5.0 | % | |||||||||||||||||||||||||
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Excess
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43.3 | 1.0 | % | 29.7 | 0.8 | % | 51.1 | 1.3 | % | 37.5 | 0.9 | % | 65.2 | 1.6 | % | |||||||||||||||||||||||||
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Casualty
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||||||||||||||||||||||||||||||||||||||||
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Pro
Rata (1)
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18.5 | 0.4 | % | 8.1 | 0.2 | % | 23.6 | 0.6 | % | 28.5 | 0.7 | % | 30.7 | 0.7 | % | |||||||||||||||||||||||||
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Excess
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3.3 | 0.1 | % | 3.7 | 0.1 | % | 5.1 | 0.1 | % | 5.9 | 0.1 | % | 12.6 | 0.3 | % | |||||||||||||||||||||||||
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Total
(2)
|
234.8 | 5.7 | % | 260.4 | 7.1 | % | 270.1 | 6.6 | % | 251.2 | 6.3 | % | 314.6 | 7.6 | % | |||||||||||||||||||||||||
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Total
U.S.
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||||||||||||||||||||||||||||||||||||||||
|
Property
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||||||||||||||||||||||||||||||||||||||||
|
Pro
Rata
(1)
|
760.9 | 18.4 | % | 581.6 | 15.8 | % | 731.7 | 17.9 | % | 599.6 | 15.0 | % | 817.0 | 19.9 | % | |||||||||||||||||||||||||
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Excess
|
330.5 | 8.0 | % | 350.6 | 9.5 | % | 383.3 | 9.4 | % | 340.7 | 8.5 | % | 302.1 | 7.4 | % | |||||||||||||||||||||||||
|
Casualty
|
||||||||||||||||||||||||||||||||||||||||
|
Pro
Rata (1)
|
924.3 | 22.4 | % | 817.5 | 22.2 | % | 1,040.1 | 25.5 | % | 1,300.9 | 32.5 | % | 1,295.7 | 31.5 | % | |||||||||||||||||||||||||
|
Excess
|
234.0 | 5.7 | % | 240.3 | 6.5 | % | 194.1 | 4.8 | % | 213.0 | 5.3 | % | 218.5 | 5.3 | % | |||||||||||||||||||||||||
|
Total
(2)
|
2,249.6 | 54.5 | % | 1,990.1 | 54.1 | % | 2,349.2 | 57.6 | % | 2,454.2 | 61.3 | % | 2,633.3 | 64.1 | % | |||||||||||||||||||||||||
|
International
|
||||||||||||||||||||||||||||||||||||||||
|
Property
|
||||||||||||||||||||||||||||||||||||||||
|
Pro
Rata
(1)
|
670.2 | 16.2 | % | 535.3 | 14.6 | % | 451.6 | 11.1 | % | 415.4 | 10.4 | % | 421.4 | 10.3 | % | |||||||||||||||||||||||||
|
Excess
|
241.9 | 5.9 | % | 228.3 | 6.2 | % | 212.9 | 5.2 | % | 195.6 | 4.9 | % | 160.4 | 3.9 | % | |||||||||||||||||||||||||
|
Casualty
|
||||||||||||||||||||||||||||||||||||||||
|
Pro
Rata (1)
|
94.0 | 2.3 | % | 71.6 | 1.9 | % | 68.3 | 1.7 | % | 53.9 | 1.3 | % | 66.4 | 1.6 | % | |||||||||||||||||||||||||
|
Excess
|
78.4 | 1.9 | % | 69.4 | 1.9 | % | 73.1 | 1.8 | % | 66.8 | 1.7 | % | 58.4 | 1.4 | % | |||||||||||||||||||||||||
|
Total
(2)
|
1,084.5 | 26.3 | % | 904.7 | 24.6 | % | 805.9 | 19.8 | % | 731.7 | 18.3 | % | 706.6 | 17.2 | % | |||||||||||||||||||||||||
|
Bermuda
|
||||||||||||||||||||||||||||||||||||||||
|
Property
|
||||||||||||||||||||||||||||||||||||||||
|
Pro
Rata
(1)
|
291.1 | 7.1 | % | 305.7 | 8.3 | % | 282.2 | 6.9 | % | 312.3 | 7.8 | % | 322.9 | 7.8 | % | |||||||||||||||||||||||||
|
Excess
|
180.4 | 4.4 | % | 164.2 | 4.5 | % | 201.6 | 4.9 | % | 174.3 | 4.4 | % | 151.8 | 3.7 | % | |||||||||||||||||||||||||
|
Casualty
|
||||||||||||||||||||||||||||||||||||||||
|
Pro
Rata (1)
|
185.6 | 4.5 | % | 178.8 | 4.9 | % | 326.1 | 8.0 | % | 230.7 | 5.8 | % | 208.8 | 5.1 | % | |||||||||||||||||||||||||
|
Excess
|
137.8 | 3.3 | % | 134.7 | 3.7 | % | 112.5 | 2.8 | % | 97.7 | 2.4 | % | 85.2 | 2.1 | % | |||||||||||||||||||||||||
|
Total
(2)
|
794.8 | 19.3 | % | 783.4 | 21.4 | % | 922.5 | 22.7 | % | 815.0 | 20.4 | % | 768.7 | 18.7 | % | |||||||||||||||||||||||||
|
Total
Company
|
||||||||||||||||||||||||||||||||||||||||
|
Property
|
||||||||||||||||||||||||||||||||||||||||
|
Pro
Rata
(1)
|
1,722.2 | 41.7 | % | 1,422.6 | 38.7 | % | 1,465.6 | 35.9 | % | 1,327.3 | 33.2 | % | 1,561.3 | 38.0 | % | |||||||||||||||||||||||||
|
Excess
|
752.7 | 18.2 | % | 743.2 | 20.2 | % | 797.8 | 19.6 | % | 710.6 | 17.8 | % | 614.3 | 15.0 | % | |||||||||||||||||||||||||
|
Casualty
|
||||||||||||||||||||||||||||||||||||||||
|
Pro
Rata (1)
|
1,203.9 | 29.2 | % | 1,067.9 | 29.0 | % | 1,434.5 | 35.2 | % | 1,585.5 | 39.6 | % | 1,570.9 | 38.2 | % | |||||||||||||||||||||||||
|
Excess
|
450.2 | 10.9 | % | 444.4 | 12.1 | % | 379.7 | 9.3 | % | 377.5 | 9.4 | % | 362.1 | 8.8 | % | |||||||||||||||||||||||||
|
Total
(2)
|
$ | 4,129.0 | 100.0 | % | $ | 3,678.1 | 100.0 | % | $ | 4,077.6 | 100.0 | % | $ | 4,000.9 | 100.0 | % | $ | 4,108.6 | 100.0 | % | ||||||||||||||||||||
|
(1) For
purposes of the presentation above, pro rata includes all insurance and
reinsurance attaching to the first dollar of loss incurred by the ceding
company.
|
||||||||||||||||||||||||||||||||||||||||
|
(2) Certain
totals and subtotals may not reconcile due to rounding.
|
||||||||||||||||||||||||||||||||||||||||
U.S. Reinsurance
Segment. The Company’s U.S. Reinsurance segment writes
property and casualty reinsurance, both treaty and facultative, through
reinsurance brokers as well as directly with ceding companies within the
U.S. The Company targets certain brokers and, through the broker
market, specialty companies and small to medium sized standard lines
companies. The Company also targets companies that place their
business predominantly in the direct market, including small to medium sized
regional ceding companies, and seeks to develop long-term relationships with
those companies. In addition, the U.S. Reinsurance segment writes
portions of reinsurance programs for large, national insurance
companies.
In 2009,
$709.7 million of gross written premiums were attributable to U.S. treaty
property business, of which 67.4% was written on a pro rata basis and 32.6% was
written on an excess of loss basis. Included in gross written
premiums for U.S. treaty property business was $84.6 million related to the new
crop hail line of business. The Company’s property underwriters
utilize sophisticated underwriting methods to analyze and price property
business. The Company manages its exposures to catastrophe and other large
losses by limiting exposures on individual contracts and limiting aggregate
exposures to catastrophes in any particular zone and across contiguous
zones.
U.S.
treaty casualty business accounted for $364.8 million of gross written premiums
in 2009, of which 48.2% was written on a pro rata basis and 51.8% was written on
an excess of loss basis. The treaty casualty business consists of
professional liability, D&O liability, workers’ compensation, excess and
surplus lines and other liability coverages. As a result of the
complex technical nature of most of these risks, the Company’s casualty
underwriters tend to specialize by line of business and work closely with the
Company’s pricing actuaries.
The
Company’s facultative unit conducts business both through brokers and directly
with ceding companies, and consists of four underwriting units representing
property, casualty, specialty and national brokerage lines of
business. Business is written from a facultative headquarters office
in New York and satellite offices in Boston, Chicago and Oakland. In
2009, $40.2 million, $41.7 million and $15.9 million of gross written premiums
were attributable to the property, casualty and national brokerage lines of
business, respectively.
In 2009,
93.7%, 5.5% and 0.8% of the U.S. Reinsurance segment’s gross written premiums
were written in the broker reinsurance, direct reinsurance and insurance
markets, respectively.
U.S. Insurance
Segment. In
2009, the Company’s U.S. Insurance segment wrote $842.6 million of gross written
premiums, of which 86.6% was casualty and 13.4% was property. Of the
total business written, Everest National wrote $649.5 million and Everest Re
wrote $43.4 million, principally targeting commercial property and casualty
business written through general agents with program
administrators. Workers’ compensation business accounted for $263.6
million, or 31.3%, of the total business written, including $204.8 million, or
77.7%, of workers’ compensation business written in
California. Everest Indemnity wrote $128.6 million, principally
excess and surplus lines insurance business written through surplus lines
brokers. Everest Security wrote $21.1 million, principally
non-standard auto insurance written through retail agents. With
respect to insurance written through general agents and surplus lines brokers,
the Company supplements the initial underwriting process with periodic claims,
underwriting and operational reviews and ongoing monitoring.
Specialty Underwriting
Segment. The Company’s Specialty Underwriting segment writes
A&H, marine, aviation and surety reinsurance. The A&H unit
primarily focuses on health reinsurance of traditional indemnity plans,
self-insured health plans, accident coverages and specialty medical
plans. The marine and aviation unit focuses on ceding companies with
a particular expertise in marine and aviation business. The marine
and aviation business is written primarily through brokers and contains a
significant international component written primarily through the London market.
Surety business consists mainly of reinsurance of contract surety
bonds.
In 2009,
gross written premiums of the A&H unit totaled $84.1 million, primarily
written through brokers.
The
marine and aviation unit’s 2009 gross written premiums totaled $107.8 million,
substantially all of which was written on a treaty basis and sourced through
reinsurance brokers. Of the marine and aviation gross written
premiums in 2009, marine treaties represented 79.8% and consisted mainly of hull
and cargo coverage. In 2009, the marine unit’s premiums were written
55.0% on a pro rata basis and 45.0% on an excess of loss basis. Of
the marine and aviation gross written premiums in 2009, aviation premiums
accounted for 20.2% and included reinsurance of airline and general aviation
risks. In 2009, the aviation unit's premiums were written 84.9% on a
pro rata basis and 15.1% on an excess of loss basis.
In 2009,
gross written premiums of the surety unit totaled $42.9 million, 99.3% of which
was written on a pro rata basis. Most of the portfolio is reinsurance
of contract surety bonds written directly with ceding companies, with the
remainder being trade credit reinsurance, mostly in international
markets.
International
Segment. The Company’s International segment focuses on
opportunities in the international reinsurance markets. The Company
targets several international markets, including: Canada, with a branch in
Toronto; Asia, with a branch in Singapore; and Latin America, Africa and the
Middle East, which business is serviced from Everest Re’s Miami and New Jersey
offices. The Company also writes from New Jersey “home-foreign”
business, which provides reinsurance on the international portfolios of U.S.
insurers. Of the Company’s 2009 international gross written premiums,
84.1% represented property business, while 15.9% represented casualty
business. As with its U.S. operations, the Company’s International
segment focuses on financially sound companies that have strong management and
underwriting discipline and expertise. Of the Company’s international
business, 70.3% was written through brokers, with 29.7% written directly with
ceding companies.
Gross
written premiums of the Company’s Canadian branch totaled $162.7 million in 2009
and consisted of 29.6% of pro rata property business, 28.6% of excess property
business, 9.5% of pro rata casualty business and 32.3% of excess casualty
business. Of the Canadian gross written premiums, 79.7% consisted of
treaty reinsurance, while 20.3% was facultative reinsurance.
The
Company’s Singapore branch covers the Asian markets and accounted for $222.0
million of gross written premiums in 2009 and consisted of 61.5% of pro rata
property business, 31.7% of excess property business, 5.1% of pro rata casualty
business and 1.7% of excess casualty business.
International
business written out of Everest Re’s Miami and New Jersey offices accounted for
$699.6 million of gross written premiums in 2009 and consisted of 69.4% of pro
rata treaty property business, 9.6% of pro rata treaty casualty business, 14.3%
of excess treaty property business, 3.0% of excess treaty casualty business and
3.7% of facultative property and casualty business. Of this
international business, 64.0% was sourced from Latin America, 21.3% was sourced
from the Middle East, 8.2% was sourced from Africa and 6.0% was home-foreign
business.
Bermuda
Segment. The Company’s Bermuda segment writes property and
casualty insurance and reinsurance through Bermuda Re and property and casualty
reinsurance through its UK branch. In 2009, Bermuda Re had gross
written premiums of $290.4 million, virtually all of which was treaty
reinsurance.
In 2009,
the UK branch of Bermuda Re wrote $504.4 million of gross treaty reinsurance
premium consisting of 41.7% of pro rata property business, 22.6% of excess
property business, 14.5% of pro rata casualty business and 21.1% of excess
casualty business.
Geographic
Areas. The Company conducts its business in Bermuda, the U.S.
and a number of foreign countries. For select financial information
about geographic areas, see ITEM 8, “Financial Statements and Supplementary
Data” - Note 20 of Notes to the Consolidated Financial
Statements. Risks attendant to the foreign operations of the Company
parallel those attendant to the U.S. operations of the Company, with the primary
exception of foreign exchange risks. For more information about the
risks, see ITEM 7, “Management’s Discussion and Analysis of Financial Condition
and Results of Operations – Safe Harbor Disclosure”.
Underwriting.
One of
the Company’s strategies is to "lead" as many of the reinsurance treaties it
underwrites as possible. The Company leads on approximately
two-thirds of its treaty reinsurance business as measured by
premium. The lead reinsurer on a treaty generally accepts one of the
largest percentage shares of the treaty and is in the strongest position to
negotiate price, terms and conditions. Management believes this
strategy enables it to obtain more favorable terms and conditions on the
treaties on which it participates. When the Company does not lead the
treaty, it may still suggest changes to any aspect of the treaty. The
Company may decline to participate on a treaty based upon its assessment of all
relevant factors.
The
Company’s treaty underwriting process involves a team approach among the
Company’s underwriters, actuaries and claim staff. Treaties are
reviewed for compliance with the Company’s general underwriting standards and
most larger treaties are subjected to detailed actuarial
analysis. The actuarial models used in such analyses are tailored in
each case to the subject exposures and loss experience. The Company
does not separately evaluate each of the individual risks assumed under its
treaties. The Company does, however, evaluate the underwriting
guidelines of its ceding companies to determine their adequacy prior to entering
into a treaty. The Company may also conduct underwriting, operational
and claim audits at the offices of ceding companies to monitor adherence to
underwriting guidelines. Underwriting audits focus on the quality of
the underwriting staff, pricing and risk selection and rate monitoring over
time. Claim audits may be performed in order to evaluate the client’s
claims handling abilities and practices.
The
Company’s facultative underwriters operate within guidelines specifying
acceptable types of risks, limits and maximum risk
exposures. Specified classes of large premium U.S. risks are referred
to Everest Re’s New York facultative headquarters for specific review before
premium quotations are given to clients. In addition, the Company’s
guidelines require certain types of risks to be submitted for review because of
their aggregate limits, complexity or volatility, regardless of premium amount
on the underlying contract. Non-U.S. risks exhibiting similar
characteristics are reviewed by senior managers within the involved
operations.
The
Company’s insurance operations principally write casualty coverages for
homogeneous risks through select program managers. These programs are
evaluated based upon actuarial analysis and the program manager’s
capabilities. The Company’s rates, forms and underwriting guidelines
are tailored to specific risk types. The Company’s underwriting,
actuarial, claim and financial functions work closely with its program managers
to establish appropriate underwriting and processing guidelines as well as
appropriate performance monitoring mechanisms.
Risk
Management of Underwriting and Retrocession Arrangements
Underwriting Risk and
Accumulation Controls. Each segment and
business unit manages its underwriting risk in accordance with established
guidelines. These guidelines place dollar limits on the amount of business that
can be written based on a variety of factors, including ceding company profile,
line of business, geographic location and risk hazards. In each case, the
guidelines permit limited exceptions, which must be authorized by the Company’s
senior management. Management regularly reviews and revises these guidelines in
response to changes in business unit market conditions, risk versus reward
analyses and the Company’s enterprise and underwriting risk management
processes.
The
operating results and financial condition of the Company can be adversely
affected by catastrophe and other large losses. The Company manages its exposure
to catastrophes and other large losses by:
|
·
|
selective
underwriting practices;
|
|
·
|
diversifying
its risk portfolio by geographic area and by types and classes of
business;
|
|
·
|
limiting
its aggregate catastrophe loss exposure in any particular geographic zone
and contiguous zones;
|
|
·
|
purchasing
reinsurance and/or retrocessional protection to the extent that such
coverage can be secured cost-effectively. See “Reinsurance and
Retrocession Arrangements”.
|
Like
other insurance and reinsurance companies, the Company is exposed to multiple
insured losses arising out of a single occurrence, whether a natural event, such
as a hurricane or an earthquake, or other catastrophe, such as an explosion at a
major factory. A large catastrophic event can be expected to generate
insured losses to multiple reinsurance treaties, facultative certificates and
across lines of business.
The
Company focuses on potential losses that could result from any single event or
series of events as part of its evaluation and monitoring of its aggregate
exposures to catastrophic events. Accordingly, the Company employs various
techniques to estimate the amount of loss it could sustain from any single
catastrophic event in various geographic areas. These techniques range from
deterministic approaches, such as tracking aggregate limits exposed in
catastrophe-prone zones and applying historic damage factors, to modeled
approaches that attempt to scientifically measure catastrophe loss exposure
using sophisticated Monte Carlo simulation techniques that forecast frequency
and severity of expected losses on a probabilistic basis.
No single
computer model or group of models is currently capable of projecting the amount
and probability of loss in all global geographic regions in which the Company
conducts business. In addition, the form, quality and granularity of
underwriting exposure data furnished by ceding companies is not uniformly
compatible with the data requirements for the Company’s licensed models, which
adds to the inherent imprecision in the potential loss projections. Further, the
results from multiple models and analytical methods must be combined and
interpolated to estimate potential losses by and across business
units. Also, while most models have been updated to better
incorporate factors that contributed to unprecedented industry storm losses in
2004 and 2005, such as flood, storm surge and demand surge, catastrophe model
projections are inherently imprecise. In addition, uncertainties with
respect to future climatic patterns and cycles add to the already significant
uncertainty of loss projections from models using historic long term frequency
and severity data.
Nevertheless,
when combined with traditional risk management techniques and sound underwriting
judgment, catastrophe models are a useful tool for underwriters to price
catastrophe exposed risks and for providing management with quantitative
analyses with which to monitor and manage catastrophic risk exposures by zone
and across zones for individual and multiple events.
Projected
catastrophe losses are generally summarized in terms of the probable maximum
loss (“PML”). The Company defines PML as its anticipated loss, taking
into account contract terms and limits, caused by a single catastrophe affecting
a broad contiguous geographic area, such as that caused by a hurricane or
earthquake. The PML will vary depending upon the modeled simulated
losses and the make-up of the in force book of business. The
projected severity levels are described in terms of “return periods”, such as
“100-year events” and “250-year events”. For example, a 100-year PML
is the estimated loss from a single event which has a 1% probability of being
exceeded in a twelve month period. Conversely, it corresponds to a
99% probability that the loss from a single event will fall below the indicated
PML. It is important to note that PMLs are
estimates. Modeled events are hypothetical events produced by a
stochastic model. As a result, there can be no assurance that any
actual event will align with the modeled event or that actual losses from events
similar to the modeled events will not vary materially from the modeled event
PML.
From an
enterprise risk management perspective, management sets limits on the levels of
catastrophe loss exposure the Company may underwrite. The limits are
revised periodically based on a variety of factors, including but not limited to
the Company’s financial resources and expected earnings and risk/reward analyses
of the business being underwritten.
Management
estimated that the projected economic loss from its largest 100-year event in a
given zone does not exceed 10% of its projected 2010 shareholders’
equity. Economic loss is the gross PML reduced by estimated
reinstatement premiums to renew coverage and income taxes. The impact
of income taxes on the PML depends on the distribution of the losses by
corporate entity, which is also affected by inter-affiliate
reinsurance. Management also monitors and controls its largest PMLs
at multiple points along the loss distribution curve, such as loss amounts at
the 20, 50, 100, 250, 500 and 1,000 year return periods. This process
enables management to identify and control exposure accumulations and to
integrate such exposures into enterprise risk, underwriting and capital
management decisions.
The
Company’s catastrophe loss projections, segmented by risk zones, are updated
quarterly and reviewed as part of a formal risk management review process. The
table below reflects the Company’s gross PMLs at various return times for its
top three zones/perils (as ranked by the largest 1 in 100 year events) based on
loss projection data as of January 1, 2010:
|
Return
Periods (in years)
|
1
in 20
|
1
in 50
|
1
in 100
|
1
in 250
|
1
in 500
|
1
in 1,000
|
||||||||||||||||||
|
Exceeding
Probability
|
5.0% | 2.0% | 1.0% | 0.4% | 0.2% | 0.1% | ||||||||||||||||||
|
(Dollars
in millions)
|
||||||||||||||||||||||||
|
Zone/Area,
Peril
|
||||||||||||||||||||||||
|
Southeast
U.S., Wind
|
$ | 283 | $ | 579 | $ | 864 | $ | 1,178 | $ | 1,344 | $ | 1,483 | ||||||||||||
|
Japan,
Earthquake
|
71 | 401 | 581 | 720 | 796 | 845 | ||||||||||||||||||
|
California,
Earthquake
|
89 | 256 | 553 | 721 | 874 | 1,008 | ||||||||||||||||||
The
projected economic losses for the top three zones/perils scheduled above are as
follows:
|
Return
Periods (in years)
|
1
in 100
|
1
in 250
|
1
in 500
|
1
in 1,000
|
||||||||||||
|
Exceeding
Probability
|
1.0% | 0.4% | 0.2% | 0.1% | ||||||||||||
|
(Dollars
in millions)
|
||||||||||||||||
|
Zone/Area,
Peril
|
||||||||||||||||
|
Southeast
U.S., Wind
|
$ | 541 | $ | 763 | $ | 857 | $ | 954 | ||||||||
|
Japan,
Earthquake
|
414 | 503 | 552 | 582 | ||||||||||||
|
California,
Earthquake
|
393 | 476 | 596 | 680 | ||||||||||||
While the
Company considers purchasing corporate level retrocessional protection by
evaluating the underlying exposures in comparison to the availability of
cost-effective protection, there was no such retrocessional coverage in place at
January 1, 2010. The Company continues to evaluate the availability
and cost of various retrocessional products and loss mitigation approaches in
the marketplace.
The
Company believes that its methods of monitoring, analyzing and managing
catastrophe exposures provide a credible risk management framework, which are
integrated with its enterprise risk management, underwriting and capital
management plans. However, there is much uncertainty and imprecision
inherent in the catastrophe models and the catastrophe loss estimation process
generally. As a result, there can be no assurance that the Company
will not experience losses from individual events that exceed the PML or other
return period projections, perhaps by a material amount. Nor can
there be assurance that the Company will not experience events impacting
multiple zones, or multiple severe events that could, in the aggregate, exceed
the Company’s PML expectations by a significant amount.
Terrorism Risk. The
Company does not have significant exposure to losses from terrorism
risk. While the Company writes some reinsurance contracts covering
events of terrorism, the Company’s risk management philosophy is to limit the
amount of coverage provided and specifically not provide terrorism coverage for
properties or in areas that may be considered a target for
terrorists. Although providing terrorism coverage on reinsurance
contracts is negotiable, most insurance policies mandate inclusion of terrorism
coverage. As a result, the Company is exposed to losses from
terrorism on its U.S. insurance book of business, particularly its workers’
compensation and property policies. However, the Company generally
does not insure large corporations or corporate locations that represent large
concentrations of risk.
As a
result of its limited exposure, the Company does not believe the U.S. Terrorism
Risk Insurance Act of 2002 that was signed into law November 2002 and amended in
December 2005 and December 2007 has had or will have a significant impact on its
operations.
Reinsurance and Retrocession
Arrangements. The Company does not
typically purchase significant retrocessional coverage for specific reinsurance
business written, but it will do so when management deems it to be prudent
and/or cost-effective to reinsure a portion of the risks being
assumed. The Company participates in “common account” retrocessional
arrangements for certain reinsurance treaties whereby a ceding company purchases
reinsurance for the benefit of itself and its reinsurers under one or more of
its reinsurance treaties. Common account retrocessional arrangements
reduce the effect of individual or aggregate losses to all participating
companies, including the ceding company, with respect to the involved
treaties.
The
Company typically considers the purchase of reinsurance to cover insurance
program exposures written by the U.S. Insurance segment. The type of
reinsurance coverage considered is dependent upon individual risk exposures,
individual program exposures, aggregate exposures by line of business, overall
segment and corporate wide exposures and the cost effectiveness of available
reinsurance. The majority of reinsurance placed is with captives of
its general agents. This arrangement is a mechanism designed to
enable general agents to share in the operating results of the placed
business. Facultative reinsurance will typically be considered for
large individual exposures and quota share reinsurance will generally be
considered for entire programs of business.
The
Company also considers purchasing corporate level retrocessional protection
covering the potential accumulation of exposures. Such consideration
includes balancing the underlying exposures against the availability of
cost-effective retrocessional protection.
All of
the Company’s reinsurance and retrocessional agreements transfer significant
reinsurance risk and therefore, are accounted for as reinsurance in accordance
with the Financial Accounting Standards Board (“FASB”) guidance.
At
December 31, 2009, the Company had $636.4 million in reinsurance receivables
with respect to losses ceded. Of this amount, $131.4 million, or
20.6%, was receivable from Transatlantic Reinsurance Company (“Transatlantic”);
$100.0 million, or 15.7%, was receivable from Continental Insurance Company
(“Continental”); $87.6 million, or 13.8% was receivable from C.V. Starr
(Bermuda) (“C.V. Starr”); $53.4 million, or 8.4%, was receivable from Munich
Reinsurance Company (“Munich Re”); $49.1 million, or 7.7%, was receivable from
Berkley Insurance Company (“Berkley”) and $32.9 million, or 5.2%, was receivable
from ACE Property and Casualty Insurance Company (“ACE”). The
receivable from Continental Insurance Company is collateralized by a funds held
arrangement under which we have retained the premiums earned by the
retrocessionaire to secure obligations of the retrocessionaire, recorded them as
a liability, credited interest on the balances at a stated contractual rate and
reduced the liability account as payments become due. As of December
31, 2009, such funds had reduced the Company’s net exposure to Continental to
$13.4 million. In addition, the Company has $31.9 million receivable
from Founders Insurance Company Limited (“Founders”), for which the Company has
recorded a full provision for uncollectibility. No other
retrocessionaire accounted for more than 5% of the Company’s receivables.
Although management carefully selects its reinsurers, the Company is subject to
credit risk with respect to its reinsurance because the ceding of risk to
reinsurers does not relieve the Company of its liability to insureds or ceding
companies. See ITEM 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Financial
Condition”.
Claims.
Reinsurance
claims are managed by the Company’s professional claims staff whose
responsibilities include reviewing initial loss reports and coverage issues,
monitoring claims handling activities of ceding companies, establishing and
adjusting proper case reserves and approving payment of claims. In
addition to claims assessment, processing and payment, the claims staff
selectively conducts comprehensive claim audits of both specific claims and
overall claim procedures at the offices of selected ceding
companies. Insurance claims, except those relating to Mt. McKinley’s
business, are generally handled by third party claims service providers who have
limited authority and are subject to oversight by the Company’s professional
claims staff.
The
Company intensively manages its asbestos and environmental (“A&E”) exposures
through dedicated, centrally managed claim staffs for Mt. McKinley and Everest
Re. Both are staffed with experienced claim and legal professionals who
specialize in the handling of such exposures. These units actively
manage each individual insured and reinsured account, responding to claim
developments with evaluations of the involved exposures and adjustment of
reserves as appropriate. Specific or general claim developments that
may have material implications for the Company are regularly communicated to
senior management, actuarial, legal and financial areas. Senior
management and claim management personnel meet at least quarterly to review the
Company’s overall reserve positions and make changes, if
appropriate. The Company continually reviews its internal processing,
communications and analytics, seeking to enhance the management of its A&E
exposures, in particular in regard to changes in asbestos claims and
litigation.
Reserves
for Unpaid Property and Casualty Losses and LAE.
Significant
periods of time may elapse between the occurrence of an insured loss, the
reporting of the loss to the insurer and the reinsurer and the payment of that
loss by the insurer and subsequent payments to the insurer by the
reinsurer. To recognize liabilities for unpaid losses and LAE,
insurers and reinsurers establish reserves, which are balance sheet liabilities
representing estimates of future amounts needed to pay reported and unreported
claims and related expenses for losses that have already
occurred. Actual losses and LAE paid may deviate, perhaps
substantially, from such reserves. To the extent reserves prove to be
insufficient to cover actual losses and LAE after taking into account available
reinsurance coverage, the Company would have to recognize such reserve
shortfalls and incur a charge to earnings, which could be material in the period
such recognition takes place. See ITEM 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations — Loss and LAE
Reserves”.
As part
of the reserving process, insurers and reinsurers evaluate historical data and
trends and make judgments as to the impact of various factors such as
legislative and judicial developments that may affect future claim amounts,
changes in social and political attitudes that may increase loss exposures and
inflationary and general economic trends. While the reserving process is
difficult and subjective for insurance companies, the inherent uncertainties of
estimating such reserves are even greater for the reinsurer, due primarily to
the longer time between the date of an occurrence and the reporting of any
attendant claims to the reinsurer, the diversity of development patterns among
different types of reinsurance treaties or facultative contracts, the necessary
reliance on the ceding companies for information regarding reported claims and
differing reserving practices among ceding companies. In addition, trends that
have affected development of liabilities in the past may not necessarily occur
or affect liability development in the same manner or to the same degree in the
future. As a result, actual losses and LAE may deviate, perhaps
substantially, from estimates of reserves reflected in the Company's
consolidated financial statements.
Like many
other property and casualty insurance and reinsurance companies, the Company has
experienced adverse loss development for prior accident years, which has led to
increases in losses and LAE reserves and corresponding charges to income in the
periods in which the adjustments were made. There can be no assurance
that adverse development from prior years will not continue in the future or
that such adverse development will not have a material adverse effect on net
income.
Changes
in Historical Reserves.
The
following table shows changes in historical loss reserves for the Company for
1999 and subsequent years. The table is presented on a GAAP basis
except that the Company’s loss reserves for its Canadian branch operations are
presented in Canadian dollars, the impact of which is not
material. The top line of the table shows the estimated reserves for
unpaid losses and LAE recorded at each year end date. The upper
(paid) portion of the table presents the related cumulative amounts paid through
each subsequent year end. The lower (liability re-estimated) portion
shows the re-estimated amount of the original reserves as of the end of each
succeeding year. The reserve estimates have been revised as more
information became known about the actual claims for which the reserves were
carried. The cumulative (deficiency)/redundancy line represents the
cumulative change in estimates since the initial reserve was
established. It is equal to the initial reserve less the latest
estimate of the ultimate liability.
Since the
Company has international operations, some of its loss reserves are established
in foreign currencies and converted to U.S. dollars for financial
reporting. Changes in conversion rates from period to period impact
the U.S. dollar value of carried reserves and correspondingly, the cumulative
deficiency line of the table. However, unlike other reserve
development that affects net income, the impact of currency translation is a
component of other comprehensive income. To differentiate these two
reserve development components, the translation impacts for each calendar year
are reflected in the table of Effects on Pre-tax Income Resulting from Reserve
Re-estimates.
Each
amount other than the original reserves in the top half of the table below
includes the effects of all changes in amounts for prior periods. For example,
if a loss settled in 2002 for $100,000, was first reserved in 1999 at $60,000
and remained unchanged until settlement, the $40,000 deficiency (actual loss
minus original estimate) would affect the cumulative deficiency for each of the
years in 1999 through 2001. Conditions and trends that have affected
development of the ultimate liability in the past are not indicative of future
developments. Accordingly, it is not appropriate to extrapolate
future redundancies or deficiencies based on this table.
|
Ten
Year GAAP Loss Development Table Presented Net of Reinsurance with
Supplemental Gross Data (1) (2) (3)
|
||||||||||||||||||||||||||||||||||||||||||||
|
(Dollars
in millions)
|
1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | |||||||||||||||||||||||||||||||||
|
Net
Reserves for unpaid
|
||||||||||||||||||||||||||||||||||||||||||||
|
loss
and LAE
|
$ | 2,977.4 | $ | 3,364.9 | $ | 3,472.5 | $ | 3,895.8 | $ | 5,158.4 | $ | 6,766.9 | $ | 8,175.4 | $ | 8,078.9 | $ | 8,324.7 | $ | 8,214.7 | $ | 8,315.9 | ||||||||||||||||||||||
|
Paid
(cumulative) as of:
|
||||||||||||||||||||||||||||||||||||||||||||
|
One
year later
|
673.4 | 718.1 | 892.7 | 902.6 | 1,141.7 | 1,553.1 | 2,116.9 | 1,915.4 | 1,816.4 | 1,997.2 | ||||||||||||||||||||||||||||||||||
|
Two
years later
|
1,159.1 | 1,264.2 | 1,517.9 | 1,641.7 | 1,932.6 | 2,412.3 | 3,447.8 | 3,192.8 | 3,182.2 | |||||||||||||||||||||||||||||||||||
|
Three
years later
|
1,548.3 | 1,637.5 | 2,033.5 | 2,176.8 | 2,404.6 | 3,181.4 | 4,485.2 | 4,246.3 | ||||||||||||||||||||||||||||||||||||
|
Four
years later
|
1,737.8 | 2,076.0 | 2,413.1 | 2,485.2 | 2,928.5 | 3,854.8 | 5,306.5 | |||||||||||||||||||||||||||||||||||||
|
Five
years later
|
1,787.2 | 2,286.4 | 2,612.3 | 2,836.6 | 3,451.1 | 4,459.5 | ||||||||||||||||||||||||||||||||||||||
|
Six
years later
|
1,856.0 | 2,482.5 | 2,867.9 | 3,241.5 | 3,948.3 | |||||||||||||||||||||||||||||||||||||||
|
Seven
years later
|
2,017.5 | 2,705.9 | 3,172.2 | 3,670.5 | ||||||||||||||||||||||||||||||||||||||||
|
Eight
years later
|
2,141.0 | 2,998.5 | 3,537.5 | |||||||||||||||||||||||||||||||||||||||||
|
Nine
years later
|
2,260.8 | 3,211.5 | ||||||||||||||||||||||||||||||||||||||||||
|
Ten
years later
|
2,478.8 | |||||||||||||||||||||||||||||||||||||||||||
|
Net
Liability re-estimated
|
||||||||||||||||||||||||||||||||||||||||||||
|
as
of:
|
||||||||||||||||||||||||||||||||||||||||||||
|
One
year later
|
2,985.2 | 3,364.9 | 3,612.6 | 4,152.7 | 5,470.4 | 6,633.7 | 8,419.8 | 8,356.7 | 8,112.9 | 8,461.9 | ||||||||||||||||||||||||||||||||||
|
Two
years later
|
2,977.2 | 3,484.6 | 3,901.8 | 4,635.0 | 5,407.1 | 6,740.5 | 8,609.2 | 8,186.3 | 8,307.6 | |||||||||||||||||||||||||||||||||||
|
Three
years later
|
3,070.5 | 3,688.6 | 4,400.0 | 4,705.3 | 5,654.5 | 7,059.9 | 8,489.7 | 8,398.7 | ||||||||||||||||||||||||||||||||||||
|
Four
years later
|
3,202.6 | 4,210.3 | 4,516.7 | 5,062.5 | 6,073.1 | 6,996.7 | 8,683.8 | |||||||||||||||||||||||||||||||||||||
|
Five
years later
|
3,430.3 | 4,216.5 | 4,814.0 | 5,507.1 | 6,093.4 | 7,162.2 | ||||||||||||||||||||||||||||||||||||||
|
Six
years later
|
3,338.1 | 4,379.3 | 5,240.2 | 5,544.9 | 6,227.0 | |||||||||||||||||||||||||||||||||||||||
|
Seven
years later
|
3,356.7 | 4,773.4 | 5,257.5 | 5,623.8 | ||||||||||||||||||||||||||||||||||||||||
|
Eight
years later
|
3,597.6 | 4,768.1 | 5,295.4 | |||||||||||||||||||||||||||||||||||||||||
|
Nine
years later
|
3,575.7 | 4,761.4 | ||||||||||||||||||||||||||||||||||||||||||
|
Ten
years later
|
3,595.0 | |||||||||||||||||||||||||||||||||||||||||||
|
Cumulative
(deficiency)/redundancy
|
$ | (617.6 | ) | $ | (1,396.5 | ) | $ | (1,822.9 | ) | $ | (1,728.1 | ) | $ | (1,068.6 | ) | $ | (395.3 | ) | $ | (508.4 | ) | $ | (319.8 | ) | $ | 17.1 | $ | (247.2 | ) | |||||||||||||||
|
Gross
liability-
|
||||||||||||||||||||||||||||||||||||||||||||
|
end
of year
|
$ | 3,705.2 | $ | 3,853.7 | $ | 4,356.0 | $ | 4,985.8 | $ | 6,424.7 | $ | 7,886.6 | $ | 9,175.1 | $ | 8,888.0 | $ | 9,032.2 | $ | 8,905.9 | $ | 8,957.4 | ||||||||||||||||||||||
|
Reinsurance
receivable
|
727.8 | 488.8 | 883.5 | 1,090.0 | 1,266.3 | 1,119.6 | 999.7 | 809.1 | 707.4 | 691.2 | 641.5 | |||||||||||||||||||||||||||||||||
|
Net
liability-end of year
|
$ | 2,977.4 | $ | 3,364.9 | $ | 3,472.5 | $ | 3,895.8 | $ | 5,158.4 | $ | 6,766.9 | $ | 8,175.4 | $ | 8,078.9 | $ | 8,324.7 | $ | 8,214.7 | $ | 8,315.9 | ||||||||||||||||||||||
|
Gross
re-estimated liability
|
||||||||||||||||||||||||||||||||||||||||||||
|
at
December 31, 2009
|
$ | 4,971.8 | $ | 6,041.5 | $ | 6,743.7 | $ | 7,046.9 | $ | 7,630.1 | $ | 8,346.5 | $ | 9,764.1 | $ | 9,199.6 | $ | 8,984.3 | $ | 9,138.1 | ||||||||||||||||||||||||
|
Re-estimated
receivable
|
||||||||||||||||||||||||||||||||||||||||||||
|
at
December 31, 2009
|
1,376.8 | 1,280.0 | 1,448.3 | 1,423.1 | 1,403.1 | 1,184.3 | 1,080.3 | 800.9 | 676.7 | 676.3 | ||||||||||||||||||||||||||||||||||
|
Net
re-estimated liability
|
||||||||||||||||||||||||||||||||||||||||||||
|
at
December 31, 2009
|
$ | 3,595.0 | $ | 4,761.4 | $ | 5,295.4 | $ | 5,623.8 | $ | 6,227.0 | $ | 7,162.2 | $ | 8,683.8 | $ | 8,398.7 | $ | 8,307.6 | $ | 8,461.9 | ||||||||||||||||||||||||
|
Gross
cumulative
|
||||||||||||||||||||||||||||||||||||||||||||
|
(deficiency)/redundancy
|
$ | (1,266.6 | ) | $ | (2,187.8 | ) | $ | (2,387.7 | ) | $ | (2,061.2 | ) | $ | (1,205.4 | ) | $ | (459.9 | ) | $ | (589.0 | ) | $ | (311.6 | ) | $ | 47.9 | $ | (232.3 | ) | |||||||||||||||
|
(1) Includes
$480.9 million relating to Mt. McKinley at December 31, 2000, principally
reflecting $491.1 million of Mt. McKinley reserves at the acquisition
date.
|
||||||||||||||||||||||||||||||||||||||||||||
|
(2) The
Canadian Branch reserves are reflected in Canadian
dollars.
|
||||||||||||||||||||||||||||||||||||||||||||
|
(3) Some
amounts may not reconcile due to rounding.
|
||||||||||||||||||||||||||||||||||||||||||||
Every
year in the above table, except 2007, reflects a cumulative deficiency, also
referred to as adverse development, with the largest indicated cumulative
deficiency in 2001. Three classes of business were the principal
contributors to those deficiencies: 1) the run-off of asbestos claims for both
direct and reinsurance business has significantly contributed to the cumulative
deficiencies for all years presented except 2007; 2) professional liability
reinsurance, general casualty reinsurance and workers’ compensation insurance
contributed to the deficiencies for years 1999 through 2003; and 3) property
catastrophe adverse development contributed to the deficiency for
2005.
In 2007,
the Company completed a detailed study of its asbestos experience and its
cedants’ asbestos exposures and also considered industry trends. The
Company’s Claims Department undertook a contract by contract analysis of its
direct business and projected those findings to its assumed reinsurance
business. The Company’s actuaries utilized nine methodologies to
project its potential ultimate liabilities including projections based on
internal data and assessments, extrapolations of non-public and publicly
available data for the Company’s cedants and benchmarking against industry data
and experience. As a result of the study, the Company increased its
gross reinsurance asbestos reserves by $250.0 million and increased its gross
direct asbestos reserves by $75.0 million. These reserve increases,
as well as adverse development on asbestos in prior years, have a significant
impact on the cumulative deficiencies. Subsequent to the study, the
Company’s loss activity has been in line with expectations per the reserves
established at December 31, 2007. The Company’s A&E reserves
represent management’s best estimate of the ultimate liability, however, there
can be no assurance that ultimate loss payments will not exceed such reserves,
perhaps by a significant amount. No additional gross reserve
strengthening was made in 2009 and 2008.
In the
professional liability reinsurance class, the late 1990s and early 2000s saw a
proliferation of claims relating to bankruptcies and other corporate, financial
and/or management improprieties. This resulted in an increase in the
frequency and severity of claims under the professional liability policies
reinsured by the Company. In the general casualty area, the Company
has experienced claim frequency and severity greater than expected in the
Company’s pricing and reserving assumptions, particularly for accident years
1999 and 2000.
In the
workers’ compensation insurance class, the majority of which was written in
California, the Company has experienced adverse development primarily for
accident years 2001 and 2002 due to higher than expected claim frequency and
severity. As a result of significant growth in this book of business
in a challenging business environment, the Company’s writings in this class were
subject to more relative variability than in some of its established and/or
stable lines of business. Although cumulative results through 2009
continue to be quite profitable for this book of business, there was some
deterioration in claim frequency and severity related to accident years 2001 and
2002.
The
adverse development on the 2008 outstanding reserves was primarily attributable
to foreign exchange rate movements resulting in an increase in the U.S. dollar
reserves. In addition, the Company experienced adverse development on
liability exposures for sub-prime for accident years 2006-2008 and contractors
liability exposures for accident years 2001-2005. The contractor
liability exposures are currently in run-off. The Company also
experienced adverse development on property lines but was offset by favorable
development on other casualty lines.
The
Company’s loss and LAE reserves represent management’s best estimate of the
ultimate liability. While there can be no assurance that these
reserves will not need to be increased in the future, management believes that
the Company’s existing reserves and reserving methodologies reduce the
likelihood that any such increases would have a material adverse effect on the
Company’s financial condition, results of operations or cash
flows. These statements regarding the Company’s loss reserves are
forward looking statements within the meaning of the U.S. federal securities
laws and are intended to be covered by the safe harbor provisions contained
therein. See ITEM 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Safe Harbor
Disclosure”.
The
following table is derived from the Ten Year GAAP Loss Development Table above
and summarizes the effect of reserve re-estimates, net of reinsurance, on
calendar year operations by accident year for the same ten year period ended
December 31, 2009. Each column represents the amount of net reserve
re-estimates made in the indicated calendar year and shows the accident years to
which the re-estimates are applicable. The amounts in the total
accident year column on the far right represent the cumulative reserve
re-estimates for the indicated accident years.
Since the
Company has operations in many countries, part of the Company’s loss and LAE
reserves are in foreign currencies and translated to U.S. dollars for each
reporting period. Fluctuations in the exchange rates for the
currencies, period over period, affect the U.S. dollar amount of outstanding
reserves. The translation adjustment line at the bottom of the table
eliminates the impact of the exchange fluctuations from the reserve
re-estimates.
|
Effects
on Pre-tax Income Resulting from Reserves Re-estimates
|
|||||||||||||||||||||||||||||||||||||||||||
|
Cumulative
|
|||||||||||||||||||||||||||||||||||||||||||
|
Re-estimates
|
|||||||||||||||||||||||||||||||||||||||||||
|
for
Each
|
|||||||||||||||||||||||||||||||||||||||||||
|
(Dollars
in millions)
|
2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 |
Accident
Year
|
||||||||||||||||||||||||||||||||
|
Accident
Years
|
|||||||||||||||||||||||||||||||||||||||||||