EVEREST GROUP, LTD. - Quarter Report: 2010 June (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:
JUNE 30, 2010
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Commission file number:
1-15731
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EVEREST RE GROUP, LTD.
(Exact name of registrant as specified in its charter)
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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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
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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).
YES
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NO
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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.
Large accelerated filer
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X
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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(Do not check if smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES
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NO
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X
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Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Number of Shares Outstanding
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Class
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At August 1, 2010
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Common Shares, $0.01 par value
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56,242,019 |
EVEREST RE GROUP, LTD
Form 10-Q
Page
PART I
FINANCIAL INFORMATION
Item 1.
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Financial Statements
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1
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2
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3
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4
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5
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Item 2.
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27
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Item 3.
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56
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Item 4.
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56
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PART II
OTHER INFORMATION
Item 1.
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56
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Item 1A.
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56
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Item 2.
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57
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Item 3.
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57
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Item 4.
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57
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Item 5.
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57
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Item 6.
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58
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PART I
ITEM 1. FINANCIAL STATEMENTS
EVEREST RE GROUP, LTD.
June 30,
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December 31,
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|||||||
(Dollars in thousands, except par value per share)
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2010
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2009
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(unaudited)
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ASSETS:
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Fixed maturities - available for sale, at market value
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$ | 13,499,102 | $ | 13,005,949 | ||||
(amortized cost: 2010, $12,955,574; 2009, $12,614,742)
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Fixed maturities - available for sale, at fair value
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66,351 | 50,528 | ||||||
Equity securities - available for sale, at market value (cost: 2010, $12,574; 2009, $13,970)
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15,173 | 16,301 | ||||||
Equity securities - available for sale, at fair value
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367,093 | 380,025 | ||||||
Short-term investments
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381,931 | 673,131 | ||||||
Other invested assets (cost: 2010, $581,392; 2009, $546,158)
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581,013 | 545,284 | ||||||
Cash
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191,453 | 247,598 | ||||||
Total investments and cash
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15,102,116 | 14,918,816 | ||||||
Accrued investment income
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154,372 | 158,886 | ||||||
Premiums receivable
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968,205 | 978,847 | ||||||
Reinsurance receivables
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652,912 | 636,375 | ||||||
Funds held by reinsureds
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377,968 | 379,864 | ||||||
Deferred acquisition costs
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370,832 | 362,346 | ||||||
Prepaid reinsurance premiums
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118,285 | 108,029 | ||||||
Deferred tax asset
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170,225 | 174,170 | ||||||
Federal income taxes recoverable
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95,890 | 144,903 | ||||||
Other assets
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196,071 | 139,076 | ||||||
TOTAL ASSETS
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$ | 18,206,876 | $ | 18,001,312 | ||||
LIABILITIES:
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Reserve for losses and loss adjustment expenses
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$ | 9,237,813 | $ | 8,937,858 | ||||
Future policy benefit reserve
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63,968 | 64,536 | ||||||
Unearned premium reserve
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1,420,099 | 1,415,402 | ||||||
Funds held under reinsurance treaties
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95,104 | 91,893 | ||||||
Losses in the course of payment
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28,705 | 39,766 | ||||||
Commission reserves
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42,425 | 55,579 | ||||||
Other net payable to reinsurers
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50,822 | 53,014 | ||||||
Revolving credit borrowings
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133,000 | - | ||||||
8.75% Senior notes due 3/15/2010
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- | 199,970 | ||||||
5.4% Senior notes due 10/15/2014
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249,790 | 249,769 | ||||||
6.6% Long term notes due 5/1/2067
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238,349 | 238,348 | ||||||
Junior subordinated debt securities payable
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329,897 | 329,897 | ||||||
Accrued interest on debt and borrowings
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4,892 | 9,885 | ||||||
Equity index put option liability
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76,599 | 57,349 | ||||||
Other liabilities
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199,814 | 156,324 | ||||||
Total liabilities
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12,171,277 | 11,899,590 | ||||||
Commitments and contingencies (Note 8)
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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
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- | - | ||||||
Common shares, par value: $0.01; 200 million shares authorized; (2010) 66.0 million
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and (2009) 65.8 million issued
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660 | 658 | ||||||
Additional paid-in capital
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1,853,158 | 1,845,181 | ||||||
Accumulated other comprehensive income (loss), net of deferred income tax expense
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(benefit) of $107.4 million at 2010 and $101.0 million at 2009
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366,866 | 272,038 | ||||||
Treasury shares, at cost; 9.8 million shares (2010) and 6.5 million shares (2009)
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(830,037 | ) | (582,926 | ) | ||||
Retained earnings (deficit)
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4,644,952 | 4,566,771 | ||||||
Total shareholders' equity
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6,035,599 | 6,101,722 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
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$ | 18,206,876 | $ | 18,001,312 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
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EVEREST RE GROUP, LTD.
Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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(Dollars in thousands, except per share amounts)
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2010
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2009
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2010
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2009
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(unaudited)
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(unaudited)
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REVENUES:
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Premiums earned
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$ | 989,899 | $ | 956,908 | $ | 1,917,201 | $ | 1,889,198 | ||||||||
Net investment income
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165,731 | 167,209 | 327,230 | 235,963 | ||||||||||||
Net realized capital gains (losses):
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Other-than-temporary impairments on fixed maturity securities
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- | (4,936 | ) | - | (13,210 | ) | ||||||||||
Other-than-temporary impairments on fixed maturity securities
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transferred to other comprehensive income (loss)
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- | - | - | - | ||||||||||||
Other net realized capital gains (losses)
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(41,693 | ) | 28,398 | 31,025 | (28,465 | ) | ||||||||||
Total net realized capital gains (losses)
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(41,693 | ) | 23,462 | 31,025 | (41,675 | ) | ||||||||||
Realized gain on debt repurchase
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- | - | - | 78,271 | ||||||||||||
Net derivative gain (loss)
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(22,304 | ) | 21,351 | (19,250 | ) | 1,648 | ||||||||||
Other income (expense)
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7,798 | 2,389 | 13,137 | (2,791 | ) | |||||||||||
Total revenues
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1,099,431 | 1,171,319 | 2,269,343 | 2,160,614 | ||||||||||||
CLAIMS AND EXPENSES:
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Incurred losses and loss adjustment expenses
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643,948 | 566,785 | 1,550,804 | 1,136,690 | ||||||||||||
Commission, brokerage, taxes and fees
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236,493 | 229,214 | 449,155 | 455,252 | ||||||||||||
Other underwriting expenses
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41,747 | 40,970 | 80,691 | 77,325 | ||||||||||||
Corporate expenses
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3,887 | 4,367 | 8,462 | 8,147 | ||||||||||||
Interest, fees and bond issue cost amortization expense
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13,016 | 17,116 | 29,658 | 37,258 | ||||||||||||
Total claims and expenses
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939,091 | 858,452 | 2,118,770 | 1,714,672 | ||||||||||||
INCOME (LOSS) BEFORE TAXES
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160,340 | 312,867 | 150,573 | 445,942 | ||||||||||||
Income tax expense (benefit)
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3,667 | 40,279 | 16,552 | 64,798 | ||||||||||||
NET INCOME (LOSS)
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$ | 156,673 | $ | 272,588 | $ | 134,021 | $ | 381,144 | ||||||||
Other comprehensive income (loss), net of tax
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65,889 | 308,064 | 94,828 | 305,279 | ||||||||||||
COMPREHENSIVE INCOME (LOSS)
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$ | 222,562 | $ | 580,652 | $ | 228,849 | $ | 686,423 | ||||||||
EARNINGS PER COMMON SHARE:
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Basic
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$ | 2.70 | $ | 4.44 | $ | 2.29 | $ | 6.21 | ||||||||
Diluted
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2.70 | 4.43 | 2.28 | 6.19 | ||||||||||||
Dividends declared
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0.48 | 0.48 | 0.96 | 0.96 | ||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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EVEREST RE GROUP, LTD.
Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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(Dollars in thousands, except per share amounts)
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2010
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2009
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2010
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2009
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(unaudited)
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(unaudited)
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COMMON SHARES (shares outstanding):
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Balance, beginning of period
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58,922,474 | 61,542,089 | 59,317,741 | 61,414,027 | ||||||||||||
Issued during the period, net
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37 | 18,755 | 167,076 | 146,817 | ||||||||||||
Treasury shares acquired
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(2,680,492 | ) | (707,900 | ) | (3,242,798 | ) | (707,900 | ) | ||||||||
Balance, end of period
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56,242,019 | 60,852,944 | 56,242,019 | 60,852,944 | ||||||||||||
COMMON SHARES (par value):
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Balance, beginning of period
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$ | 660 | $ | 657 | $ | 658 | $ | 656 | ||||||||
Issued during the period, net
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- | - | 2 | 1 | ||||||||||||
Balance, end of period
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660 | 657 | 660 | 657 | ||||||||||||
ADDITIONAL PAID-IN CAPITAL:
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Balance, beginning of period
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1,849,441 | 1,827,819 | 1,845,181 | 1,824,552 | ||||||||||||
Share-based compensation plans
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3,717 | 3,876 | 7,977 | 7,106 | ||||||||||||
Other
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- | - | - | 37 | ||||||||||||
Balance, end of period
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1,853,158 | 1,831,695 | 1,853,158 | 1,831,695 | ||||||||||||
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
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NET OF DEFERRED INCOME TAXES:
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Balance, beginning of period
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300,977 | (294,636 | ) | 272,038 | (291,851 | ) | ||||||||||
Cumulative adjustment of initial adoption(1), net of tax
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- | (57,312 | ) | - | (57,312 | ) | ||||||||||
Net increase (decrease) during the period
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65,889 | 308,064 | 94,828 | 305,279 | ||||||||||||
Balance, end of period
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366,866 | (43,884 | ) | 366,866 | (43,884 | ) | ||||||||||
RETAINED EARNINGS (DEFICIT):
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Balance, beginning of period
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4,515,835 | 3,898,343 | 4,566,771 | 3,819,327 | ||||||||||||
Cumulative adjustment of initial adoption(1), net of tax
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- | 57,312 | - | 57,312 | ||||||||||||
Net income (loss)
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156,673 | 272,588 | 134,021 | 381,144 | ||||||||||||
Dividends declared ($0.48 per quarter and $0.96 year-to-date
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per share in 2010 and 2009)
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(27,556 | ) | (29,549 | ) | (55,840 | ) | (59,089 | ) | ||||||||
Balance, end of period
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4,644,952 | 4,198,694 | 4,644,952 | 4,198,694 | ||||||||||||
TREASURY SHARES AT COST:
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Balance, beginning of period
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(629,958 | ) | (392,329 | ) | (582,926 | ) | (392,329 | ) | ||||||||
Purchase of treasury shares
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(200,079 | ) | (49,418 | ) | (247,111 | ) | (49,418 | ) | ||||||||
Balance, end of period
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(830,037 | ) | (441,747 | ) | (830,037 | ) | (441,747 | ) | ||||||||
TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD
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$ | 6,035,599 | $ | 5,545,415 | $ | 6,035,599 | $ | 5,545,415 | ||||||||
(1) The cumulative adjustment to accumulated other comprehensive income (loss), net of deferred income taxes, and retained earnings (deficit), represents the effect of initially
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adopting new guidance for other-than-temporary impairments of debt securities.
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The accompanying notes are an integral part of the consolidated financial statements.
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EVEREST RE GROUP, LTD.
Three Months Ended
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Six Months Ended
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June 30,
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June 30,
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(Dollars in thousands)
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2010
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2009
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2010
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2009
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(unaudited)
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(unaudited)
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net income (loss)
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$ | 156,673 | $ | 272,588 | $ | 134,021 | $ | 381,144 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities:
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Decrease (increase) in premiums receivable
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2,624 | (44,864 | ) | (5,135 | ) | (59,343 | ) | |||||||||
Decrease (increase) in funds held by reinsureds, net
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(11,156 | ) | (21,004 | ) | (13,585 | ) | (30,785 | ) | ||||||||
Decrease (increase) in reinsurance receivables
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(29,147 | ) | 75,952 | (62,291 | ) | 43,815 | ||||||||||
Decrease (increase) in deferred tax asset
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(11,853 | ) | 9,228 | (5,064 | ) | 54,218 | ||||||||||
Increase (decrease) in reserve for losses and loss adjustment expenses
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30,445 | (181,592 | ) | 449,390 | (179,158 | ) | ||||||||||
Increase (decrease) in future policy benefit reserve
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(434 | ) | (2,013 | ) | (569 | ) | 1,148 | |||||||||
Increase (decrease) in unearned premiums
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(28,341 | ) | (22,387 | ) | 13,257 | 10,465 | ||||||||||
Change in equity adjustments in limited partnerships
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(16,091 | ) | (19,809 | ) | (32,255 | ) | 53,476 | |||||||||
Change in other assets and liabilities, net
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73,043 | 52,725 | 17,576 | 31,812 | ||||||||||||
Non-cash compensation expense
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3,589 | 3,620 | 7,130 | 6,756 | ||||||||||||
Amortization of bond premium (accrual of bond discount)
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10,454 | 4,391 | 21,339 | 6,881 | ||||||||||||
Amortization of underwriting discount on senior notes
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11 | 48 | 53 | 94 | ||||||||||||
Realized gain on debt repurchase
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- | - | - | (78,271 | ) | |||||||||||
Net realized capital (gains) losses
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41,693 | (23,462 | ) | (31,025 | ) | 41,675 | ||||||||||
Net cash provided by (used in) operating activities
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221,510 | 103,421 | 492,842 | 283,927 | ||||||||||||
CASH FLOWS FROM INVESTING ACTIVITIES:
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Proceeds from fixed maturities matured/called - available for sale, at market value
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369,775 | 318,283 | 783,165 | 560,413 | ||||||||||||
Proceeds from fixed maturities matured/called - available for sale, at fair value
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- | - | - | 5,570 | ||||||||||||
Proceeds from fixed maturities sold - available for sale, at market value
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238,940 | 48,701 | 723,462 | 129,658 | ||||||||||||
Proceeds from fixed maturities sold - available for sale, at fair value
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6,115 | 4,510 | 8,612 | 8,002 | ||||||||||||
Proceeds from equity securities sold - available for sale, at market value
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712 | 34 | 712 | 1,076 | ||||||||||||
Proceeds from equity securities sold - available for sale, at fair value
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51,400 | 10,591 | 72,742 | 12,239 | ||||||||||||
Distributions from other invested assets
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19,630 | 10,647 | 30,360 | 23,311 | ||||||||||||
Cost of fixed maturities acquired - available for sale, at market value
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(938,124 | ) | (550,863 | ) | (1,961,623 | ) | (1,363,243 | ) | ||||||||
Cost of fixed maturities acquired - available for sale, at fair value
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(9,486 | ) | (3,244 | ) | (23,680 | ) | (16,553 | ) | ||||||||
Cost of equity securities acquired - available for sale, at market value
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(1,426 | ) | - | (1,426 | ) | - | ||||||||||
Cost of equity securities acquired - available for sale, at fair value
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(38,095 | ) | (10,320 | ) | (80,417 | ) | (19,299 | ) | ||||||||
Cost of other invested assets acquired
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(10,034 | ) | (18,503 | ) | (37,078 | ) | (24,742 | ) | ||||||||
Net change in short-term investments
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209,878 | 78,140 | 291,897 | 791,062 | ||||||||||||
Net change in unsettled securities transactions
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(58,493 | ) | 49,629 | (11,195 | ) | 53,328 | ||||||||||
Net cash provided by (used in) investing activities
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(159,208 | ) | (62,395 | ) | (204,469 | ) | 160,822 | |||||||||
CASH FLOWS FROM FINANCING ACTIVITIES:
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Common shares issued during the period, net
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128 | 256 | 849 | 388 | ||||||||||||
Purchase of treasury shares
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(200,079 | ) | (49,418 | ) | (247,111 | ) | (49,418 | ) | ||||||||
Revolving credit borrowings
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133,000 | - | 133,000 | - | ||||||||||||
Net cost of debt repurchase
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- | - | - | (83,026 | ) | |||||||||||
Net cost of senior notes maturing
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- | - | (200,000 | ) | - | |||||||||||
Dividends paid to shareholders
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(27,556 | ) | (29,549 | ) | (55,840 | ) | (59,089 | ) | ||||||||
Net cash provided by (used in) financing activities
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(94,507 | ) | (78,711 | ) | (369,102 | ) | (191,145 | ) | ||||||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH
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9,499 | 42,737 | 24,584 | 13,002 | ||||||||||||
Net increase (decrease) in cash
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(22,706 | ) | 5,052 | (56,145 | ) | 266,606 | ||||||||||
Cash, beginning of period
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214,159 | 467,248 | 247,598 | 205,694 | ||||||||||||
Cash, end of period
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$ | 191,453 | $ | 472,300 | $ | 191,453 | $ | 472,300 | ||||||||
SUPPLEMENTAL CASH FLOW INFORMATION
|
||||||||||||||||
Cash transactions:
|
||||||||||||||||
Income taxes paid (recovered)
|
$ | (48,597 | ) | $ | 40,644 | $ | (35,838 | ) | $ | 67,779 | ||||||
Interest paid
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20,160 | 19,806 | 34,361 | 38,124 | ||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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For the Three and Six Months Ended June 30, 2010 and 2009
1. GENERAL
Everest Re Group, Ltd. (“Group”), a Bermuda company, through its subsidiaries, principally provides reinsurance and insurance in the U.S., Bermuda and international markets. As used in this document, “Company” means Group and its subsidiaries. On December 30, 2008, Group contributed Everest Reinsurance Holdings, Inc. and its subsidiaries (“Holdings”) to its recently established Irish holding company, Everest Underwriting Group (Ireland), Limited (“Holdings Ireland”).
2. BASIS OF PRESENTATION
The unaudited consolidated financial statements of the Company for the three and six months ended June 30, 2010 and 2009 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 December 31, 2009 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The results for the three and six months ended June 30, 2010 and 2009 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, 2009, 2008 and 2007 included in the Company’s most recent Form 10-K filing.
All intercompany accounts and transactions have been eliminated.
Certain reclassifications and format changes have been made to prior years’ amounts to conform to the 2010 presentation.
Financial Accounting Standards Board Accounting Codification
Financial Accounting Standards Board Launched Accounting Codification. In June 2009, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance establishing the FASB Accounting Standards CodificationTM (“Codification”) as the single source of authoritative U.S. GAAP recognized by the FASB to be applied by non-governmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification supersedes all existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC accounting literature not included in the Codification will become non-authoritative.
Following the Codification, the FASB will no longer issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, the FASB will issue Accounting Standards Updates, which will serve to update the Codification, provide background information about the guidance and provide the basis for conclusions on the changes to the Codification.
GAAP is not intended to be changed as a result of the FASB’s Codification, but it will change the way the guidance is organized and presented. As a result, these changes will have a significant impact on how companies reference GAAP in their financial statements and in the accounting policies for financial statements issued for interim and annual periods ending after September 15, 2009. The Company’s adoption of this guidance impacts the way the Company references U.S. GAAP accounting standards in the financial statements and Notes to Consolidated Financial Statements.
Application of Recently Issued Accounting Standard Changes
Subsequent Events. In May 2009, the FASB issued authoritative guidance for subsequent events, which was later modified in February 2010, that addresses the accounting for and disclosure of subsequent events not addressed in other applicable U.S. GAAP. The Company implemented the new disclosure requirement beginning with the second quarter of 2009 and included it in the Notes to Consolidated Interim Financial Statements.
Improving Disclosures About Fair Value Measurements. In January 2010, the FASB amended the authoritative guidance for disclosures on fair value measurements. Effective for interim and annual reporting periods beginning after December 15, 2009, the guidance requires a new separate disclosure for: significant transfers in and out of Level 1 and 2 and the reasons for the transfers; and provided clarification on existing disclosures to include: fair value measurement disclosures by class of assets and liabilities and disclosure on valuation techniques and inputs used to measure fair value that fall in either Level 2 or Level 3. Effective for interim and annual reporting periods beginning after December 15, 2010, the guidance requires another new separate disclosure in regards to Level 3 fair value measurements in that, the period activity will present separately information about purchases, sales, issuances and settlements. Comparative disclosures shall be required only for periods ending after initial adoption. The Company implemented the first part of this guidance effective January 1, 2010.
Interim Disclosures About Fair Value of Financial Instruments. In April 2009, the FASB revised the authoritative guidance for disclosures about fair value of financial instruments. This new guidance requires quarterly disclosures on the qualitative and quantitative information about the fair value of all financial instruments including methods and significant assumptions used to estimate fair value during the period. These disclosures were previously only done annually. The Company adopted this disclosure beginning with the second quarter of 2009 and included it in the Notes to Consolidated Interim Financial Statements.
Other-Than-Temporary Impairments on Investment Securities. In April 2009, the FASB revised the authoritative guidance for the recognition and presentation of other-than-temporary impairments. This new guidance amends the recognition guidance for other-than-temporary impairments of debt securities and expands the financial statement disclosures for other-than-temporary impairments on debt and equity securities. For available for sale debt securities that the Company has no intent to sell and more likely than not will not be required to sell prior to recovery, only the credit loss component of the impairment would be recognized in earnings, while the rest of the fair value loss would be recognized in accumulated other comprehensive income. The Company adopted this guidance effective April 1, 2009. Upon adoption the Company recognized a cumulative-effect adjustment increase in retained earnings (deficit) and decrease in accumulated other comprehensive income (loss) of $57.3 million, net of $8.3 million of tax.
Measurement of Fair Value in Inactive Markets. In April 2009, the FASB revised the authoritative guidance for fair value measurements and disclosures, which reaffirms that fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. It also reaffirms the need to use judgment in determining if a formerly active market has become inactive and in determining fair values when the market has become inactive. There was no impact to the Company’s financial statements upon adoption.
3. INVESTMENTS
The amortized cost, market value and gross unrealized appreciation and depreciation of available for sale, fixed maturity and equity security investments, carried at market value, are as follows for the periods indicated:
At June 30, 2010
|
||||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|||||||||||||
(Dollars in thousands)
|
Cost
|
Appreciation
|
Depreciation
|
Value
|
||||||||||||
Fixed maturity securities - available for sale
|
||||||||||||||||
U.S. Treasury securities and obligations of
|
||||||||||||||||
U.S. government agencies and corporations
|
$ | 382,529 | $ | 23,033 | $ | (89 | ) | $ | 405,473 | |||||||
Obligations of U.S. states and political subdivisions
|
3,469,450 | 181,595 | (17,016 | ) | 3,634,029 | |||||||||||
Corporate securities
|
2,875,998 | 164,601 | (19,657 | ) | 3,020,942 | |||||||||||
Asset-backed securities
|
277,060 | 8,955 | (3,049 | ) | 282,966 | |||||||||||
Mortgage-backed securities
|
||||||||||||||||
Commercial
|
475,259 | 17,195 | (20,984 | ) | 471,470 | |||||||||||
Agency residential
|
2,347,896 | 106,641 | (571 | ) | 2,453,966 | |||||||||||
Non-agency residential
|
162,333 | 1,753 | (5,197 | ) | 158,889 | |||||||||||
Foreign government securities
|
1,508,822 | 83,584 | (22,818 | ) | 1,569,588 | |||||||||||
Foreign corporate securities
|
1,456,227 | 70,473 | (24,921 | ) | 1,501,779 | |||||||||||
Total fixed maturity securities
|
$ | 12,955,574 | $ | 657,830 | $ | (114,302 | ) | $ | 13,499,102 | |||||||
Equity securities
|
$ | 12,574 | $ | 2,602 | $ | (3 | ) | $ | 15,173 |
At December 31, 2009
|
||||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|||||||||||||
(Dollars in thousands)
|
Cost
|
Appreciation
|
Depreciation
|
Value
|
||||||||||||
Fixed maturity securities - available for sale
|
||||||||||||||||
U.S. Treasury securities and obligations of
|
||||||||||||||||
U.S. government agencies and corporations
|
$ | 339,839 | $ | 17,879 | $ | (3,565 | ) | $ | 354,153 | |||||||
Obligations of U.S. states and political subdivisions
|
3,694,267 | 183,848 | (24,256 | ) | 3,853,859 | |||||||||||
Corporate securities
|
2,421,875 | 107,749 | (32,963 | ) | 2,496,661 | |||||||||||
Asset-backed securities
|
310,429 | 7,713 | (4,413 | ) | 313,729 | |||||||||||
Mortgage-backed securities
|
||||||||||||||||
Commercial
|
475,204 | 5,172 | (37,758 | ) | 442,618 | |||||||||||
Agency residential
|
2,310,826 | 61,481 | (3,863 | ) | 2,368,444 | |||||||||||
Non-agency residential
|
177,500 | 238 | (17,117 | ) | 160,621 | |||||||||||
Foreign government securities
|
1,507,385 | 100,243 | (16,875 | ) | 1,590,753 | |||||||||||
Foreign corporate securities
|
1,377,417 | 72,442 | (24,748 | ) | 1,425,111 | |||||||||||
Total fixed maturity securities
|
$ | 12,614,742 | $ | 556,765 | $ | (165,558 | ) | $ | 13,005,949 | |||||||
Equity securities
|
$ | 13,970 | $ | 2,333 | $ | (2 | ) | $ | 16,301 |
In accordance with FASB guidance, the Company reclassified the non-credit portion of other-than-temporary impairments from retained earnings (deficit) into accumulated other comprehensive income (loss), on April 1, 2009. At June 30, 2010, the pre-tax cumulative unrealized depreciation on these corporate securities had improved, with the remaining unrealized depreciation at $3.2 thousand compared to $6.1 million at December 31, 2009.
The amortized cost and market value of fixed maturity securities are shown in the following table by contractual maturity. Mortgage-backed securities are generally more likely to be prepaid than other fixed maturity securities. As the stated maturity of such securities may not be indicative of actual maturities, the totals for mortgage-backed and asset-backed securities are shown separately.
At June 30, 2010
|
At December 31, 2009
|
|||||||||||||||
Amortized
|
Market
|
Amortized
|
Market
|
|||||||||||||
(Dollars in thousands)
|
Cost
|
Value
|
Cost
|
Value
|
||||||||||||
Fixed maturity securities – available for sale
|
||||||||||||||||
Due in one year or less
|
$ | 626,717 | $ | 637,761 | $ | 621,706 | $ | 652,483 | ||||||||
Due after one year through five years
|
3,590,646 | 3,747,860 | 3,017,731 | 3,151,819 | ||||||||||||
Due after five years through ten years
|
2,569,986 | 2,712,264 | 2,530,830 | 2,634,709 | ||||||||||||
Due after ten years
|
2,905,677 | 3,033,926 | 3,170,516 | 3,281,526 | ||||||||||||
Asset-backed securities
|
277,060 | 282,966 | 310,429 | 313,729 | ||||||||||||
Mortgage-backed securities
|
||||||||||||||||
Commercial
|
475,259 | 471,470 | 475,204 | 442,618 | ||||||||||||
Agency residential
|
2,347,896 | 2,453,966 | 2,310,826 | 2,368,444 | ||||||||||||
Non-agency residential
|
162,333 | 158,889 | 177,500 | 160,621 | ||||||||||||
Total fixed maturity securities
|
$ | 12,955,574 | $ | 13,499,102 | $ | 12,614,742 | $ | 13,005,949 |
The changes in net unrealized appreciation (depreciation) for the Company’s investments are derived from the following sources for the periods indicated:
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
June 30,
|
June 30,
|
|||||||||||||||
(Dollars in thousands)
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Increase (decrease) during the period between the market value and cost
|
||||||||||||||||
of investments carried at market value, and deferred taxes thereon:
|
||||||||||||||||
Fixed maturity securities
|
$ | 129,039 | $ | 197,599 | $ | 146,237 | $ | 271,759 | ||||||||
Fixed maturity securities, cumulative other-than-temporary impairment adjustment
|
33 | (65,658 | ) | 6,085 | (65,658 | ) | ||||||||||
Equity securities
|
(32 | ) | 139 | 268 | (105 | ) | ||||||||||
Other invested assets
|
(19 | ) | 3,868 | 495 | 2,227 | |||||||||||
Change in unrealized appreciation (depreciation), pre-tax
|
129,021 | 135,948 | 153,085 | 208,223 | ||||||||||||
Deferred tax benefit (expense)
|
(15,934 | ) | (16,359 | ) | (4,358 | ) | (41,686 | ) | ||||||||
Deferred tax benefit (expense), cumulative other-than-temporary impairment adjustment
|
164 | 8,346 | (904 | ) | 8,346 | |||||||||||
Change in unrealized appreciation (depreciation),
|
||||||||||||||||
net of deferred taxes, included in shareholders’ equity
|
$ | 113,251 | $ | 127,935 | $ | 147,823 | $ | 174,883 |
The Company frequently reviews its fixed maturity securities investment portfolio for declines in market value and focuses its attention on securities whose fair value has fallen below 80% of their amortized value at the time of review. The Company then assesses whether the decline in value is temporary or other-than-temporary. In making its assessment, the Company evaluates the current market and interest rate environment as well as specific issuer information. Generally, a change in a security’s value caused by a change in the market or interest rate environment does not constitute an other-than-temporary impairment, but rather a temporary decline in market value. Temporary declines in market value are recorded as unrealized losses in accumulated other comprehensive income (loss). If the Company determines that the decline is other-than-temporary and the Company does not have the intent to sell the security; and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis, the carrying value of the investment is written down to fair value. The fair value adjustment that is credit related is recorded in net realized capital gains (losses) in the Company’s consolidated statements of operations and comprehensive income (loss). The fair value adjustment that is non-credit related is recorded as a component of other comprehensive income (loss), net of tax, and is included in accumulated other comprehensive income (loss) in the Company’s consolidated balance sheets. The Company’s assessments are based on the issuers current and expected future financial position, timeliness with respect to interest and/or principal payments, speed of repayments and any applicable credit enhancements or breakeven constant default rates on mortgage-backed and asset-backed securities, as well as relevant information provided by rating agencies, investment advisors and analysts.
Retrospective adjustments are employed to recalculate the values of asset-backed securities. All of the Company’s asset-backed and mortgage-backed securities have a pass-through structure. Each acquisition lot is reviewed to recalculate the effective yield. The recalculated effective yield is used to derive a book value as if the new yield were applied at the time of acquisition. Outstanding principal factors from the time of acquisition to the adjustment date are used to calculate the prepayment history for all applicable securities. Conditional prepayment rates, computed with life to date factor histories and weighted average maturities, are used in the calculation of projected and prepayments for pass-through security types.
The tables below display the aggregate market value and gross unrealized depreciation of fixed maturity and equity securities, by security type and contractual maturity, in each case subdivided according to length of time that individual securities had been in a continuous unrealized loss position for the periods indicated:
Duration of Unrealized Loss at June 30, 2010 By Security Type
|
||||||||||||||||||||||||
Less than 12 months
|
Greater than 12 months
|
Total
|
||||||||||||||||||||||
Gross
|
Gross
|
Gross
|
||||||||||||||||||||||
Unrealized
|
Unrealized
|
Unrealized
|
||||||||||||||||||||||
(Dollars in thousands)
|
Market Value
|
Depreciation
|
Market Value
|
Depreciation
|
Market Value
|
Depreciation
|
||||||||||||||||||
Fixed maturity securities - available for sale
|
||||||||||||||||||||||||
U.S. Treasury securities and obligations of
|
||||||||||||||||||||||||
U.S. government agencies and corporations
|
$ | - | $ | - | $ | 3,398 | $ | (89 | ) | $ | 3,398 | $ | (89 | ) | ||||||||||
Obligations of U.S. states and political subdivisions
|
5,008 | (28 | ) | 362,675 | (16,988 | ) | 367,683 | (17,016 | ) | |||||||||||||||
Corporate securities
|
272,409 | (6,379 | ) | 174,227 | (13,278 | ) | 446,636 | (19,657 | ) | |||||||||||||||
Asset-backed securities
|
2,601 | (3 | ) | 16,748 | (3,046 | ) | 19,349 | (3,049 | ) | |||||||||||||||
Mortgage-backed securities
|
||||||||||||||||||||||||
Commercial
|
- | - | 81,331 | (20,984 | ) | 81,331 | (20,984 | ) | ||||||||||||||||
Agency residential
|
95,220 | (344 | ) | 672 | (227 | ) | 95,892 | (571 | ) | |||||||||||||||
Non-agency residential
|
- | - | 57,715 | (5,197 | ) | 57,715 | (5,197 | ) | ||||||||||||||||
Foreign government securities
|
170,280 | (6,458 | ) | 150,503 | (16,360 | ) | 320,783 | (22,818 | ) | |||||||||||||||
Foreign corporate securities
|
172,419 | (4,762 | ) | 177,007 | (20,159 | ) | 349,426 | (24,921 | ) | |||||||||||||||
Total fixed maturity securities
|
$ | 717,937 | $ | (17,974 | ) | $ | 1,024,276 | $ | (96,328 | ) | $ | 1,742,213 | $ | (114,302 | ) | |||||||||
Equity securities
|
12 | (3 | ) | - | - | 12 | (3 | ) | ||||||||||||||||
Total
|
$ | 717,949 | $ | (17,977 | ) | $ | 1,024,276 | $ | (96,328 | ) | $ | 1,742,225 | $ | (114,305 | ) |
Duration of Unrealized Loss at June 30, 2010 By Maturity
|
||||||||||||||||||||||||
Less than 12 months
|
Greater than 12 months
|
Total
|
||||||||||||||||||||||
Gross
|
Gross
|
Gross
|
||||||||||||||||||||||
Unrealized
|
Unrealized
|
Unrealized
|
||||||||||||||||||||||
(Dollars in thousands)
|
Market Value
|
Depreciation
|
Market Value
|
Depreciation
|
Market Value
|
Depreciation
|
||||||||||||||||||
Fixed maturity securities
|
||||||||||||||||||||||||
Due in one year or less
|
$ | 57,680 | $ | (1,664 | ) | $ | 52,120 | $ | (5,000 | ) | $ | 109,800 | $ | (6,664 | ) | |||||||||
Due in one year through five years
|
247,136 | (5,992 | ) | 192,851 | (15,340 | ) | 439,987 | (21,332 | ) | |||||||||||||||
Due in five years through ten years
|
279,725 | (8,372 | ) | 145,914 | (16,560 | ) | 425,639 | (24,932 | ) | |||||||||||||||
Due after ten years
|
35,575 | (1,599 | ) | 476,925 | (29,974 | ) | 512,500 | (31,573 | ) | |||||||||||||||
Asset-backed securities
|
2,601 | (3 | ) | 16,748 | (3,046 | ) | 19,349 | (3,049 | ) | |||||||||||||||
Mortgage-backed securities
|
95,220 | (344 | ) | 139,718 | (26,408 | ) | 234,938 | (26,752 | ) | |||||||||||||||
Total fixed maturity securities
|
$ | 717,937 | $ | (17,974 | ) | $ | 1,024,276 | $ | (96,328 | ) | $ | 1,742,213 | $ | (114,302 | ) |
The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at June 30, 2010 were $1,742.2 million and $114.3 million, respectively. There were no unrealized losses on a single security that exceeded 0.05% of the market value of the fixed maturity securities at June 30, 2010. In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector. The $18.0 million of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of highly rated domestic and foreign government and corporate securities. Of these unrealized losses, $12.3 million were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The $96.3 million of unrealized losses related to fixed maturity and equity securities in an unrealized loss position for more than one year related primarily to highly rated domestic and foreign government, municipal, corporate and asset-backed and mortgage-backed securities. Of these unrealized losses, $69.2 million related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The non-investment grade securities with unrealized losses were mainly comprised of corporate and commercial mortgage-backed securities. The gross unrealized depreciation greater than 12 months for mortgage-backed securities included $2.9 million related to sub-prime and alt-A loans. In all instances, there were no projected cash flow shortfalls to recover the full book value of the investments and the related interest obligations. The mortgage-backed securities still have excess credit coverage and are current on interest and principal payments. Unrealized losses have decreased since December 31, 2009, as a result of improved conditions in the overall financial market resulting from increased liquidity and lower interest rates.
The Company, given the size of its investment portfolio and capital position, does not have the intent to sell these securities; and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis. In addition, all securities currently in an unrealized loss position are current with respect to principal and interest payments.
The tables below display the aggregate market value and gross unrealized depreciation of fixed maturity and equity securities, by security type and contractual maturity, in each case subdivided according to length of time that individual securities had been in a continuous unrealized loss position for the period indicated:
Duration of Unrealized Loss at December 31, 2009 By Security Type
|
||||||||||||||||||||||||
Less than 12 months
|
Greater than 12 months
|
Total
|
||||||||||||||||||||||
Gross
|
Gross
|
Gross
|
||||||||||||||||||||||
Unrealized
|
Unrealized
|
Unrealized
|
||||||||||||||||||||||
(Dollars in thousands)
|
Market Value
|
Depreciation
|
Market Value
|
Depreciation
|
Market Value
|
Depreciation
|
||||||||||||||||||
Fixed maturity securities - available for sale
|
||||||||||||||||||||||||
U.S. Treasury securities and obligations of
|
||||||||||||||||||||||||
U.S. government agencies and corporations
|
$ | 155,007 | $ | (3,444 | ) | $ | 1,375 | $ | (121 | ) | $ | 156,382 | $ | (3,565 | ) | |||||||||
Obligations of U.S. states and political subdivisions
|
559 | (4 | ) | 452,018 | (24,252 | ) | 452,577 | (24,256 | ) | |||||||||||||||
Corporate securities
|
170,323 | (2,539 | ) | 357,442 | (30,424 | ) | 527,765 | (32,963 | ) | |||||||||||||||
Asset-backed securities
|
12,514 | (87 | ) | 47,273 | (4,326 | ) | 59,787 | (4,413 | ) | |||||||||||||||
Mortgage-backed securities
|
||||||||||||||||||||||||
Commercial
|
8,411 | (135 | ) | 294,163 | (37,623 | ) | 302,574 | (37,758 | ) | |||||||||||||||
Agency residential
|
591,372 | (3,541 | ) | 6,216 | (322 | ) | 597,588 | (3,863 | ) | |||||||||||||||
Non-agency residential
|
- | (1 | ) | 153,698 | (17,116 | ) | 153,698 | (17,117 | ) | |||||||||||||||
Foreign government securities
|
215,048 | (3,737 | ) | 154,225 | (13,138 | ) | 369,273 | (16,875 | ) | |||||||||||||||
Foreign corporate securities
|
299,769 | (7,356 | ) | 179,550 | (17,392 | ) | 479,319 | (24,748 | ) | |||||||||||||||
Total fixed maturity securities
|
$ | 1,453,003 | $ | (20,844 | ) | $ | 1,645,960 | $ | (144,714 | ) | $ | 3,098,963 | $ | (165,558 | ) | |||||||||
Equity securities
|
13 | (2 | ) | - | - | 13 | (2 | ) | ||||||||||||||||
Total
|
$ | 1,453,016 | $ | (20,846 | ) | $ | 1,645,960 | $ | (144,714 | ) | $ | 3,098,976 | $ | (165,560 | ) |
Duration of Unrealized Loss at December 31, 2009 By Maturity
|
||||||||||||||||||||||||
Less than 12 months
|
Greater than 12 months
|
Total
|
||||||||||||||||||||||
Gross
|
Gross
|
Gross
|
||||||||||||||||||||||
Unrealized
|
Unrealized
|
Unrealized
|
||||||||||||||||||||||
(Dollars in thousands)
|
Market Value
|
Depreciation
|
Market Value
|
Depreciation
|
Market Value
|
Depreciation
|
||||||||||||||||||
Fixed maturity securities
|
||||||||||||||||||||||||
Due in one year or less
|
$ | 5,777 | $ | (1 | ) | $ | 74,211 | $ | (5,504 | ) | $ | 79,988 | $ | (5,505 | ) | |||||||||
Due in one year through five years
|
423,782 | (6,120 | ) | 268,321 | (19,861 | ) | 692,103 | (25,981 | ) | |||||||||||||||
Due in five years through ten years
|
315,853 | (6,094 | ) | 198,398 | (14,972 | ) | 514,251 | (21,066 | ) | |||||||||||||||
Due after ten years
|
95,294 | (4,865 | ) | 603,680 | (44,990 | ) | 698,974 | (49,855 | ) | |||||||||||||||
Asset-backed securities
|
12,514 | (87 | ) | 47,273 | (4,326 | ) | 59,787 | (4,413 | ) | |||||||||||||||
Mortgage-backed securities
|
599,783 | (3,677 | ) | 454,077 | (55,061 | ) | 1,053,860 | (58,738 | ) | |||||||||||||||
Total fixed maturity securities
|
$ | 1,453,003 | $ | (20,844 | ) | $ | 1,645,960 | $ | (144,714 | ) | $ | 3,098,963 | $ | (165,558 | ) |
The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2009 were $3,099.0 million and $165.6 million, respectively. There were no unrealized losses on a single security that exceeded 0.07% of the market value of the fixed maturity securities at December 31, 2009. In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector. The $20.8 million of unrealized losses related to fixed maturity and equity securities that have been in an unrealized loss position for less than one year were generally comprised of highly rated government, corporate and mortgage-backed securities. Of these unrealized losses, $20.7 million were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The $144.7 million of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to highly rated government, municipal, corporate and mortgage-backed securities. Of these unrealized losses, $111.3 million related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The non-investment grade securities with unrealized losses are mainly comprised of corporate and commercial mortgage-backed securities. The gross unrealized depreciation greater than 12 months for mortgage-backed securities included $3.7 million related to sub-prime and alt-A loans. In all instances, there were no projected cash flow shortfalls to recover the full book value of the investments and the related interest obligations. The mortgage-backed securities still had excess credit coverage and were current on interest and principal payments. Unrealized losses decreased since December 31, 2008, as a result of improved conditions in the overall financial market resulting from increased liquidity and lower interest rates.
The components of net investment income are presented in the table below for the periods indicated:
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
June 30,
|
June 30,
|
|||||||||||||||
(Dollars in thousands)
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
Fixed maturity securities
|
$ | 149,017 | $ | 144,333 | $ | 294,216 | $ | 288,955 | ||||||||
Equity securities
|
2,856 | 730 | 5,379 | 1,426 | ||||||||||||
Short-term investments and cash
|
(82 | ) | 1,682 | (390 | ) | 5,243 | ||||||||||
Other invested assets
|
||||||||||||||||
Limited partnerships
|
15,611 | 20,267 | 31,509 | (52,679 | ) | |||||||||||
Other
|
330 | 261 | 702 | 1,035 | ||||||||||||
Total gross investment income
|
167,732 | 167,273 | 331,416 | 243,980 | ||||||||||||
Interest debited (credited) and other expense
|
(2,001 | ) | (64 | ) | (4,186 | ) | (8,017 | ) | ||||||||
Total net investment income
|
$ | 165,731 | $ | 167,209 | $ | 327,230 | $ | 235,963 |
The Company records results from limited partnership investments on the equity method of accounting with changes in value reported through net investment income. Due to the timing of receiving financial information from these partnerships, the results are generally reported on a one month or quarter lag. If the Company determines there has been a significant decline in value of a limited partnership during this lag period, a loss will be recorded in the period in which the Company indentifies the decline.
The Company had contractual commitments to invest up to an additional $184.6 million in limited partnerships at June 30, 2010. These commitments will be funded when called in accordance with the partnership agreements, which have investment periods that expire, unless extended, through 2014.
The components of net realized capital gains (losses) are presented in the table below for the periods indicated:
Three Months Ended
|
Six Months Ended
|
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June 30,
|
June 30,
|
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(Dollars in thousands)
|
2010
|
2009
|
2010
|
2009
|
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Fixed maturity securities, market value:
|
||||||||||||||||
Other-than-temporary impairments
|
$ | - | $ | (4,936 | ) | $ | - | $ | (13,210 | ) | ||||||
Gains (losses) from sales
|
(2,249 | ) | 3,313 | 50,757 | (36,281 | ) | ||||||||||
Fixed maturity securities, fair value:
|
||||||||||||||||
Gains (losses) from sales
|
190 | 133 | 273 |