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EVEREST GROUP, LTD. - Quarter Report: 2014 June (Form 10-Q)

group10q2q14.htm
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, 2014
 
Commission file number:
1-15731

EVEREST RE GROUP, LTD.
(Exact name of registrant as specified in its charter)
 
Bermuda
 
98-0365432
(State or other jurisdiction of
incorporation or organization)
 
 
(I.R.S. Employer
Identification No.)
Wessex House – 2nd Floor
45 Reid Street
PO Box HM 845
Hamilton HM DX, Bermuda
441-295-0006

(Address, including zip code, and telephone number, including area code,
of registrant’s principal executive office)

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
YES
X
 
NO
 
 
Indicate by check mark whether the registrant 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
X
 
NO
 
 
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
X
 
Accelerated filer
 
 
Non-accelerated filer
   
 
Smaller reporting company
 
(Do not check if smaller reporting company)
   
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
YES
 
 
NO
 X
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
   
Number of Shares Outstanding
Class
 
At August 1, 2014
Common Shares, $0.01 par value
  45,471,636

 
 

 
 
EVEREST RE GROUP, LTD

Table of Contents
Form 10-Q


Page
PART I

FINANCIAL INFORMATION

Item 1.
Financial Statements
 
     
 
Consolidated Balance Sheets June 30, 2014 (unaudited)
 
 
and December 31, 2013
1
     
 
Consolidated Statements of Operations and Comprehensive Income (Loss) for the
 
 
three and six months ended June 30, 2014 and 2013 (unaudited)
2
     
 
Consolidated Statements of Changes in Shareholders’ Equity for the three and
 
 
six months ended June 30, 2014 and 2013 (unaudited)
3
     
 
Consolidated Statements of Cash Flows for the three and six months ended
 
 
June 30, 2014 and 2013 (unaudited)
4
     
 
Notes to Consolidated Interim Financial Statements (unaudited)
5
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and
 
 
Results of Operation
30
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
57
     
Item 4.
Controls and Procedures
57
     

PART II

OTHER INFORMATION

Item 1.
Legal Proceedings
57
     
Item 1A.
Risk Factors
58
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
58
     
Item 3.
Defaults Upon Senior Securities
58
     
Item 4.
Mine Safety Disclosures
58
     
Item 5.
Other Information
58
     
Item 6.
Exhibits
59
     

 
 

 

PART I

ITEM 1.  FINANCIAL STATEMENTS

EVEREST RE GROUP, LTD.
CONSOLIDATED BALANCE SHEETS


   
June 30,
 
December 31,
(Dollars and share amounts in thousands, except par value per share)
 
2014
 
2013
   
(unaudited)
     
ASSETS:
           
Fixed maturities - available for sale, at market value
  $ 13,577,366     $ 12,636,907  
    (amortized cost: 2014, $13,173,675; 2013, $12,391,164)
               
Fixed maturities - available for sale, at fair value
    -       19,388  
Equity securities - available for sale, at market value (cost: 2014, $149,024; 2013, $148,342)
    151,377       144,081  
Equity securities - available for sale, at fair value
    1,424,792       1,462,079  
Short-term investments
    1,636,937       1,214,199  
Other invested assets (cost: 2014, $509,396; 2013, $508,447)
    509,396       508,447  
Cash
    341,570       611,382  
       Total investments and cash
    17,641,438       16,596,483  
Accrued investment income
    120,559       119,058  
Premiums receivable
    1,551,615       1,453,114  
Reinsurance receivables
    685,643       540,883  
Funds held by reinsureds
    226,845       228,000  
Deferred acquisition costs
    368,117       363,721  
Prepaid reinsurance premiums
    150,206       81,779  
Income taxes
    141,887       178,334  
Other assets
    305,334       246,664  
TOTAL ASSETS
  $ 21,191,644     $ 19,808,036  
                 
LIABILITIES:
               
Reserve for losses and loss adjustment expenses
  $ 9,704,463     $ 9,673,240  
Future policy benefit reserve
    58,368       59,512  
Unearned premium reserve
    1,677,971       1,579,945  
Funds held under reinsurance treaties
    3,337       2,692  
Commission reserves
    54,073       66,160  
Other net payable to reinsurers
    217,041       116,387  
Losses in course of payment
    494,640       332,631  
4.868% Senior notes due 6/1/2044
    400,000       -  
5.4% Senior notes due 10/15/2014
    249,984       249,958  
6.6% Long term notes due 5/1/2067
    238,362       238,361  
Accrued interest on debt and borrowings
    6,133       4,781  
Equity index put option liability
    33,309       35,423  
Unsettled securities payable
    88,463       53,867  
Other liabilities
    266,724       333,425  
       Total liabilities
    13,492,868       12,746,382  
                 
NONCONTROLLING INTERESTS:
               
Redeemable noncontrolling interests - Mt. Logan Re
    375,908       93,378  
                 
Commitments and contingencies (Note 9)
               
                 
SHAREHOLDERS' EQUITY:
               
Preferred shares, par value: $0.01; 50,000 shares authorized;
               
    no shares issued and outstanding
    -       -  
Common shares, par value: $0.01; 200,000 shares authorized; (2014) 68,280
               
    and (2013) 67,965 outstanding before treasury shares
    683       680  
Additional paid-in capital
    2,052,682       2,029,774  
Accumulated other comprehensive income (loss), net of deferred income tax expense
               
    (benefit) of $79,020 at 2014 and $57,661 at 2013
    299,304       157,728  
Treasury shares, at cost; 22,589 shares (2014) and 20,422 shares (2013)
    (2,310,824 )     (1,985,873 )
Retained earnings
    7,281,023       6,765,967  
       Total shareholders' equity attributable to Everest Re Group
    7,322,868       6,968,276  
TOTAL LIABILITIES, NONCONTROLLING INTERESTS  AND SHAREHOLDERS' EQUITY
  $ 21,191,644     $ 19,808,036  
                 
The accompanying notes are an integral part of the consolidated financial statements.
               

 
1

 

EVEREST RE GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)

 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands, except per share amounts)
 
2014
   
2013
   
2014
   
2013
 
   
(unaudited)
   
(unaudited)
 
REVENUES:
                       
Premiums earned
  $ 1,272,317     $ 1,151,533     $ 2,416,807     $ 2,240,292  
Net investment income
    131,224       148,729       254,381       294,510  
Net realized capital gains (losses):
                               
Other-than-temporary impairments on fixed maturity securities
    (389 )     -       (389 )     (191 )
Other-than-temporary impairments on fixed maturity securities
                               
transferred to other comprehensive income (loss)
    -       -       -       -  
Other net realized capital gains (losses)
    59,405       33,905       80,531       160,831  
Total net realized capital gains (losses)
    59,016       33,905       80,142       160,640  
Net derivative gain (loss)
    3,774       12,081       2,113       27,366  
Other income (expense)
    (13,871 )     8,295       (17,167 )     (592 )
Total revenues
    1,452,460       1,354,543       2,736,276       2,722,216  
                                 
CLAIMS AND EXPENSES:
                               
Incurred losses and loss adjustment expenses
    735,697       711,590       1,355,106       1,304,234  
Commission, brokerage, taxes and fees
    283,687       242,067       529,689       475,113  
Other underwriting expenses
    58,414       54,901       109,052       107,847  
Corporate expenses
    3,899       6,168       8,844       11,885  
Interest, fees and bond issue cost amortization expense
    8,978       17,362       16,546       30,843  
Total claims and expenses
    1,090,675       1,032,088       2,019,237       1,929,922  
                                 
INCOME (LOSS) BEFORE TAXES
    361,785       322,455       717,039       792,294  
Income tax expense (benefit)
    63,860       46,813       117,092       132,309  
                                 
NET INCOME (LOSS)
  $ 297,925     $ 275,642     $ 599,947     $ 659,985  
Net (income) loss attributable to noncontrolling interests
    (7,741 )     -       (15,830 )     -  
NET INCOME (LOSS) ATTRIBUTABLE TO EVEREST RE GROUP
  $ 290,184     $ 275,642     $ 584,117     $ 659,985  
                                 
Other comprehensive income (loss), net of tax:
                               
Unrealized appreciation (depreciation) ("URA(D)") on securities arising during the period
    85,921       (272,540 )     139,392       (319,342 )
Reclassification adjustment for realized losses (gains) included in net income (loss)
    2,169       (1,828 )     4,043       (5,919 )
Total URA(D) on securities arising during the period
    88,090       (274,368 )     143,435       (325,261 )
                                 
Foreign currency translation adjustments
    (763 )     13,751       (3,400 )     (7,315 )
                                 
Benefit plan actuarial net gain (loss) for the period
    -       -       -       -  
Reclassification adjustment for amortization of net (gain) loss included in net income (loss)
    770       1,345       1,541       2,691  
Total benefit plan net gain (loss) for the period
    770       1,345       1,541       2,691  
Total other comprehensive income (loss), net of tax
    88,097       (259,272 )     141,576       (329,885 )
Other comprehensive (income) loss attributable to noncontrolling interests
    -       -       -       -  
Total other comprehensive income (loss), net of tax attributable to Everest Re Group
    88,097       (259,272 )     141,576       (329,885 )
                                 
COMPREHENSIVE INCOME (LOSS)
  $ 378,281     $ 16,370     $ 725,693     $ 330,100  
                                 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO EVEREST RE GROUP:
                               
Basic
  $ 6.32     $ 5.60     $ 12.58     $ 13.19  
Diluted
    6.26       5.56       12.46       13.09  
Dividends declared
    0.75       0.48       1.50       0.96  
                                 
The accompanying notes are an integral part of the consolidated financial statements.
                               

 
2

 
 
EVEREST RE GROUP, LTD.
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS’ EQUITY

 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands, except share and dividends per share amounts)
 
2014
   
2013
   
2014
   
2013
 
   
(unaudited)
   
(unaudited)
 
COMMON SHARES (shares outstanding):
                       
Balance, beginning of period
    46,057,039       49,965,812       47,543,132       51,417,962  
Issued during the period, net
    109,068       208,935       315,139       707,092  
Treasury shares acquired
    (475,092 )     (1,586,707 )     (2,167,256 )     (3,537,014 )
Balance, end of period
    45,691,015       48,588,040       45,691,015       48,588,040  
                                 
COMMON SHARES (par value):
                               
Balance, beginning of period
  $ 682     $ 676     $ 680     $ 671  
Issued during the period, net
    1       2       3       7  
Balance, end of period
    683       678       683       678  
                                 
ADDITIONAL PAID-IN CAPITAL:
                               
Balance, beginning of period
    2,036,320       1,978,966       2,029,774       1,946,439  
Share-based compensation plans
    16,362       24,200       22,908       56,727  
Balance, end of period
    2,052,682       2,003,166       2,052,682       2,003,166  
                                 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
                               
NET OF DEFERRED INCOME TAXES:
                               
Balance, beginning of period
    211,207       466,436       157,728       537,049  
Net increase (decrease) during the period
    88,097       (259,272 )     141,576       (329,885 )
Balance, end of period
    299,304       207,164       299,304       207,164  
                                 
RETAINED EARNINGS:
                               
Balance, beginning of period
    7,025,158       5,973,378       6,765,967       5,613,266  
Net income (loss) attributable to Everest Re Group
    290,184       275,642       584,117       659,985  
Dividends declared ($0.75 per share in second quarter 2014 and $1.50 year-to-date
                               
 per share in 2014 and $0.48 per share in second quarter 2013 and $0.96
                               
year-to-date per share in 2013)
    (34,319 )     (23,315 )     (69,061 )     (47,546 )
Balance, end of period
    7,281,023       6,225,705       7,281,023       6,225,705  
                                 
TREASURY SHARES AT COST:
                               
Balance, beginning of period
    (2,235,856 )     (1,602,590 )     (1,985,873 )     (1,363,958 )
Purchase of treasury shares
    (74,968 )     (211,323 )     (324,951 )     (449,955 )
Balance, end of period
    (2,310,824 )     (1,813,913 )     (2,310,824 )     (1,813,913 )
                                 
TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD
  $ 7,322,868     $ 6,622,800     $ 7,322,868     $ 6,622,800  
                                 
The accompanying notes are an integral part of the consolidated financial statements.
                               

 
3

 
 
EVEREST RE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS

 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands)
 
2014
   
2013
   
2014
   
2013
 
   
(unaudited)
   
(unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                       
Net income (loss)
  $ 297,925     $ 275,642     $ 599,947     $ 659,985  
Adjustments to reconcile net income to net cash provided by operating activities:
                               
Decrease (increase) in premiums receivable
    (123,360 )     (167,239 )     (97,827 )     (220,306 )
Decrease (increase) in funds held by reinsureds, net
    (1,251 )     (16,828 )     2,148       (12,244 )
Decrease (increase) in reinsurance receivables
    (22,179 )     26,758       (137,077 )     (65,978 )
Decrease (increase) in income taxes
    (19,160 )     (7,498 )     15,257       56,729  
Decrease (increase) in prepaid reinsurance premiums
    (70,705 )     (10,354 )     (68,346 )     (6,908 )
Increase (decrease) in reserve for losses and loss adjustment expenses
    64,403       (47,200 )     8,055       (175,142 )
Increase (decrease) in future policy benefit reserve
    279       229       (1,144 )     (567 )
Increase (decrease) in unearned premiums
    16,787       72,212       96,803       126,535  
Increase (decrease) in other net payable to reinsurers
    99,370       25,577       100,546       29,765  
Increase (decrease) in losses in course of payment
    54,987       81,362       161,990       230,135  
Change in equity adjustments in limited partnerships
    (5,513 )     (18,994 )     (3,200 )     (36,350 )
Distribution of limited partnership income
    4,830       9,409       13,430       43,095  
Change in other assets and liabilities, net
    (32,913 )     (31,052 )     (56,872 )     (74,866 )
Non-cash compensation expense
    5,341       4,551       9,768       10,165  
Amortization of bond premium (accrual of bond discount)
    13,496       16,900       27,068       35,507  
Amortization of underwriting discount on senior notes
    14       14       28       27  
Net realized capital (gains) losses
    (59,016 )     (33,905 )     (80,142 )     (160,640 )
Net cash provided by (used in) operating activities
    223,335       179,584       590,432       438,942  
                                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                               
Proceeds from fixed maturities matured/called - available for sale, at market value
    556,764       706,674       1,047,509       1,318,718  
Proceeds from fixed maturities matured/called - available for sale, at fair value
    -       4,213       875       7,213  
Proceeds from fixed maturities sold - available for sale, at market value
    277,767       376,688       606,476       631,184  
Proceeds from fixed maturities sold - available for sale, at fair value
    -       13,678       20,763       17,342  
Proceeds from equity securities sold - available for sale, at market value
    8,138       44,194       8,672       45,423  
Proceeds from equity securities sold - available for sale, at fair value
    126,294       252,594       304,892       358,769  
Distributions from other invested assets
    5,443       24,437       22,520       74,453  
Cost of fixed maturities acquired - available for sale, at market value
    (1,295,283 )     (1,105,870 )     (2,458,723 )     (2,122,159 )
Cost of fixed maturities acquired - available for sale, at fair value
    -       (1,411 )     (1,309 )     (2,706 )
Cost of equity securities acquired - available for sale, at market value
    (2,073 )     (51,921 )     (10,619 )     (53,487 )
Cost of equity securities acquired - available for sale, at fair value
    (90,985 )     (121,327 )     (183,314 )     (243,944 )
Cost of other invested assets acquired
    (29,427 )     (4,617 )     (34,388 )     (11,301 )
Net change in short-term investments
    (270,962 )     53,629       (423,677 )     132,136  
Net change in unsettled securities transactions
    19,069       64,135       20,633       55,668  
Net cash provided by (used in) investing activities
    (695,255 )     255,096       (1,079,690 )     207,309  
                                 
CASH FLOWS FROM FINANCING ACTIVITIES:
                               
Common shares issued during the period, net
    11,022       19,651       13,143       46,569  
Purchase of treasury shares
    (74,968 )     (211,323 )     (324,951 )     (449,955 )
Revolving credit borrowings
    -       40,000       -       40,000  
Net cost of junior subordinated debt securities redemption
    -       (329,897 )     -       (329,897 )
Net proceeds from issuance of senior notes
    400,000       -       400,000       -  
Third party investment in redeemable noncontrolling interest
    53,000       -       123,700       -  
Subscription advances for third party redeemable noncontrolling interest
    77,500       -       77,500       -  
Dividends paid to shareholders
    (34,319 )     (23,315 )     (69,061 )     (47,546 )
Net cash provided by (used in) financing activities
    432,235       (504,884 )     220,331       (740,829 )
                                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
    (4,149 )     (14,796 )     (885 )     (3,336 )
                                 
Net increase (decrease) in cash
    (43,834 )     (85,000 )     (269,812 )     (97,914 )
Cash, beginning of period
    385,404       524,136       611,382       537,050  
Cash, end of period
  $ 341,570     $ 439,136     $ 341,570     $ 439,136  
                                 
SUPPLEMENTAL CASH FLOW INFORMATION:
                               
Income taxes paid (recovered)
  $ 80,981     $ 47,550     $ 97,241     $ 66,738  
Interest paid
    14,844       17,280       15,018       23,281  
                                 
The accompanying notes are an integral part of the consolidated financial statements.
                               

 
4

 

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Six Months Ended June 30, 2014 and 2013

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.

Effective February 27, 2013, the Company established a new subsidiary, Mt. Logan Re Ltd. (“Mt. Logan Re”) and effective July 1, 2013, Mt. Logan Re established separate segregated accounts and issued non-voting redeemable preferred shares to capitalize the segregated accounts.  Accordingly, the financial position and operating results for Mt. Logan Re are consolidated with the Company and the non-controlling interests in Mt. Logan Re’s operating results and equity are presented as separate captions in the Company’s financial statements.

2.   BASIS OF PRESENTATION

The unaudited consolidated financial statements of the Company for the three and six months ended June 30, 2014 and 2013 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, 2013 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, 2014 and 2013 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, 2013, 2012 and 2011 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 2014 presentation.  One reclassification relates to a correction in the manner in which the Company reports distributions received from limited partnership investments in the consolidated Statements of Cash Flows.  Prior to the fourth quarter of 2013, the Company incorrectly reflected all distributions as cash flows from investing activities in its Consolidated Statements of Cash Flows.  Starting with the fourth quarter of 2013, cash distributions from the limited partnerships that represent net investment income are reflected as cash flows from operating activities and distributions that represent the return of capital contributions are reflected as cash flows from investing activities.  For the three and six months ended June 30, 2013, $9,409 thousand and $43,095 thousand, respectively, have been reclassified from “Distributions from other invested assets” included in cash flows  from investing activities to “Distribution of limited partnership income” included in cash flows from operations.  The Company has determined that this error is not material to the financial statements of any prior period.

Application of Recently Issued Accounting Standard Changes.

Presentation of Comprehensive Income. In June 2011, FASB issued amendments to existing guidance to provide two alternatives for the presentation of comprehensive income. Components of net income and comprehensive income can either be presented within a single, continuous financial statement or be presented in two separate but consecutive financial statements.  The Company has chosen to present the components of net income and comprehensive income in a single, continuous financial statement.  The guidance is effective for reporting periods beginning after December 15, 2011.  The Company implemented this guidance as of January 1, 2012.  In February, 2013, the FASB issued an additional amendment for the presentation of amounts reclassified out of accumulated other comprehensive income by component.  The Company implemented the proposed guidance as of January 1, 2013.

 
5

 
 
Treatment of Insurance Contract Acquisition Costs. In October 2010, the FASB issued authoritative guidance for the accounting for costs associated with acquiring or renewing insurance contracts.  The guidance identifies the incremental direct costs of contract acquisition and costs directly related to acquisition activities that should be capitalized.  This guidance is effective for reporting periods beginning after December 15, 2011.  The Company implemented this guidance as of January 1, 2012 and determined that $13,492 thousand of previously deferrable acquisition costs would be expensed, including $10,876 thousand and $2,616 thousand expensed in the years ended December 31, 2012 and 2013, respectively.  No additional expense will be incurred related to this guidance implementation in future periods.

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, 2014
 
   
Amortized
   
Unrealized
   
Unrealized
   
Market
 
(Dollars in thousands)
 
Cost
   
Appreciation
   
Depreciation
   
Value
 
Fixed maturity securities
                       
U.S. Treasury securities and obligations of
                       
U.S. government agencies and corporations
  $ 521,496     $ 3,711     $ (930 )   $ 524,277  
Obligations of U.S. states and political subdivisions
    881,697       44,770       (2,050 )     924,417  
Corporate securities
    4,531,862       175,499       (14,021 )     4,693,340  
Asset-backed securities
    265,436       3,383       (91 )     268,728  
Mortgage-backed securities
                               
Commercial
    222,204       15,166       (681 )     236,689  
Agency residential
    2,103,439       43,127       (15,815 )     2,130,751  
Non-agency residential
    3,894       296       (157 )     4,033  
Foreign government securities
    1,629,068       76,302       (13,176 )     1,692,194  
Foreign corporate securities
    3,014,579       108,724       (20,366 )     3,102,937  
Total fixed maturity securities
  $ 13,173,675     $ 470,978     $ (67,287 )   $ 13,577,366  
Equity securities
  $ 149,024     $ 5,319     $ (2,966 )   $ 151,377  
 
   
At December 31, 2013
 
   
Amortized
   
Unrealized
   
Unrealized
   
Market
 
(Dollars in thousands)
 
Cost
   
Appreciation
   
Depreciation
   
Value
 
Fixed maturity securities
                       
U.S. Treasury securities and obligations of
                       
U.S. government agencies and corporations
  $ 160,013     $ 2,690     $ (1,678 )   $ 161,025  
Obligations of U.S. states and political subdivisions
    970,735       40,815       (9,022 )     1,002,528  
Corporate securities
    3,950,887       155,619       (27,090 )     4,079,416  
Asset-backed securities
    169,980       3,485       (422 )     173,043  
Mortgage-backed securities
                               
Commercial
    254,765       16,683       (1,007 )     270,441  
Agency residential
    2,294,719       34,509       (50,175 )     2,279,053  
Non-agency residential
    4,816       229       (226 )     4,819  
Foreign government securities
    1,740,337       69,779       (29,347 )     1,780,769  
Foreign corporate securities
    2,844,912       86,529       (45,628 )     2,885,813  
Total fixed maturity securities
  $ 12,391,164     $ 410,338     $ (164,595 )   $ 12,636,907  
Equity securities
  $ 148,342     $ 4,336     $ (8,597 )   $ 144,081  
 
The $1,692,194 thousand of foreign government securities at June 30, 2014 included $734,053 thousand of European sovereign securities.  Approximately 57.5%, 19.0% and 5.9% of European sovereign securities represented securities held in the governments of the United Kingdom, France and the Netherlands, respectively.  No other countries represented more than 5% of the European sovereign securities.  The Company held no sovereign securities of Portugal, Italy, Ireland, Greece or Spain at June 30, 2014.

 
6

 

In accordance with FASB guidance, the Company reclassified the non-credit portion of other-than-temporary impairments from retained earnings into accumulated other comprehensive income (loss), on April 1, 2009.  The table below presents the pre-tax cumulative unrealized appreciation (depreciation) on those corporate securities, for the periods indicated:
 
(Dollars in thousands)
 
At June 30, 2014
   
At December 31, 2013
 
Pre-tax cumulative unrealized appreciation (depreciation)
  $ 3,250     $ 3,169  


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, 2014
   
At December 31, 2013
 
   
Amortized
   
Market
   
Amortized
   
Market
 
(Dollars in thousands)
 
Cost
   
Value
   
Cost
   
Value
 
Fixed maturity securities – available for sale:
                       
    Due in one year or less
  $ 1,270,385     $ 1,279,390     $ 1,059,052     $ 1,067,799  
    Due after one year through five years
    6,063,017       6,240,153       5,565,112       5,740,662  
    Due after five years through ten years
    2,289,958       2,362,018       2,081,908       2,101,234  
    Due after ten years
    955,342       1,055,604       960,812       999,856  
Asset-backed securities
    265,436       268,728       169,980       173,043  
Mortgage-backed securities:
                               
Commercial
    222,204       236,689       254,765       270,441  
Agency residential
    2,103,439       2,130,751       2,294,719       2,279,053  
Non-agency residential
    3,894       4,033       4,816       4,819  
Total fixed maturity securities
  $ 13,173,675     $ 13,577,366     $ 12,391,164     $ 12,636,907  


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)
 
2014
   
2013
   
2014
   
2013
 
Increase (decrease) during the period between the market value and cost
                   
of investments carried at market value, and deferred taxes thereon:
                       
Fixed maturity securities
  $ 93,403     $ (311,674 )   $ 157,869     $ (359,621 )
Fixed maturity securities, other-than-temporary impairment
    5       (1,144 )     81       (1,372 )
Equity securities
    4,531       (12,058 )     6,614       (14,075 )
Other invested assets
    -       -       -       -  
Change in unrealized appreciation (depreciation), pre-tax
    97,939       (324,876 )     164,564       (375,068 )
Deferred tax benefit (expense)
    (9,849 )     50,402       (21,129 )     49,667  
Deferred tax benefit (expense), other-than-temporary impairment
    -       106       -       140  
Change in unrealized appreciation (depreciation),
                               
net of deferred taxes, included in shareholders’ equity
  $ 88,090     $ (274,368 )   $ 143,435     $ (325,261 )
 
The Company frequently reviews all of its fixed maturity, available for sale securities for declines in market value and focuses its attention on securities whose fair value has fallen below 80% of their amortized cost 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, interest rate or foreign exchange 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 or foreign exchange 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

 
7

 

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.

The majority of the Company’s equity securities available for sale at market value are primarily comprised of mutual fund investments whose underlying securities consist of fixed maturity securities.  When a fund’s value reflects an unrealized loss, the Company assesses whether the decline in value is temporary or other-than-temporary.  In making its assessment, the Company considers the composition of its portfolios and their related markets, reports received from the portfolio managers and discussions with portfolio managers.  If the Company determines that the declines are temporary and it has the ability and intent to continue to hold the investments, then the declines are recorded as unrealized losses in accumulated other comprehensive income (loss).  If declines are deemed to be other-than-temporary, then the carrying value of the investment is written down to fair value and recorded in net realized capital gains (losses) in the Company’s consolidated statements of operations and comprehensive income (loss).

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 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, 2014 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
  $ 143,260     $ (193 )   $ 28,622     $ (737 )   $ 171,882     $ (930 )
Obligations of U.S. states and political subdivisions
    -       -       92,739       (2,050 )     92,739       (2,050 )
Corporate securities
    497,454       (5,184 )     375,934       (8,837 )     873,388       (14,021 )
Asset-backed securities
    17,510       (8 )     112       (83 )     17,622       (91 )
Mortgage-backed securities
                                               
Commercial
    22       -       11,466       (681 )     11,488       (681 )
Agency residential
    206,344       (730 )     727,344       (15,085 )     933,688       (15,815 )
Non-agency residential
    -       -       1,659       (157 )     1,659       (157 )
Foreign government securities
    74,204       (2,662 )     229,593       (10,514 )     303,797       (13,176 )
Foreign corporate securities
    231,278       (6,024 )     419,731       (14,342 )     651,009       (20,366 )
Total fixed maturity securities
  $ 1,170,072     $ (14,801 )   $ 1,887,200     $ (52,486 )   $ 3,057,272     $ (67,287 )
Equity securities
    15       -       123,541       (2,966 )     123,556       (2,966 )
Total
  $ 1,170,087     $ (14,801 )   $ 2,010,741     $ (55,452 )   $ 3,180,828     $ (70,253 )

 
8

 

   
Duration of Unrealized Loss at June 30, 2014 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
  $ 72,606     $ (3,776 )   $ 61,122     $ (5,888 )   $ 133,728     $ (9,664 )
Due in one year through five years
    604,549       (7,848 )     632,014       (16,155 )     1,236,563       (24,003 )
Due in five years through ten years
    263,090       (2,316 )     301,212       (8,544 )     564,302       (10,860 )
Due after ten years
    5,951       (123 )     152,271       (5,893 )     158,222       (6,016 )
Asset-backed securities
    17,510       (8 )     112       (83 )     17,622       (91 )
Mortgage-backed securities
    206,366       (730 )     740,469       (15,923 )     946,835       (16,653 )
Total fixed maturity securities
  $ 1,170,072     $ (14,801 )   $ 1,887,200     $ (52,486 )   $ 3,057,272     $ (67,287 )
 
The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at June 30, 2014 were $3,180,828 thousand and $70,253 thousand, respectively.  The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at June 30, 2014, did not exceed 0.5% of the overall market value of the Company’s fixed maturity securities.  In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector.  The $14,801 thousand 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 foreign and domestic corporate securities, foreign government securities and agency residential mortgage-backed securities.  Of these unrealized losses, $12,169 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The $52,486 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to agency residential mortgage-backed securities, domestic and foreign corporate securities, foreign government securities and municipal securities.  Of these unrealized losses, $50,302 thousand related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.  The gross unrealized depreciation for mortgage-backed securities included $199 thousand 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.

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.

 
9

 
 
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 December 31, 2013 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
  $ 74,847     $ (1,033 )   $ 8,751     $ (645 )   $ 83,598     $ (1,678 )
Obligations of U.S. states and political subdivisions
    92,760       (4,852 )     39,689       (4,170 )     132,449       (9,022 )
Corporate securities
    959,396       (22,331 )     75,946       (4,759 )     1,035,342       (27,090 )
Asset-backed securities
    5,494       (6 )     1,128       (416 )     6,622       (422 )
Mortgage-backed securities
                                               
Commercial
    51       -       11,353       (1,007 )     11,404       (1,007 )
Agency residential
    1,220,845       (40,420 )     264,640       (9,755 )     1,485,485       (50,175 )
Non-agency residential
    1,758       (22 )     1,541       (204 )     3,299       (226 )
Foreign government securities
    409,252       (20,350 )     85,029       (8,997 )     494,281       (29,347 )
Foreign corporate securities
    872,907       (34,819 )     151,748       (10,809 )     1,024,655       (45,628 )
Total fixed maturity securities
  $ 3,637,310     $ (123,833 )   $ 639,825     $ (40,762 )   $ 4,277,135     $ (164,595 )
Equity securities
    127,030       (8,597 )     -       -       127,030       (8,597 )
Total
  $ 3,764,340     $ (132,430 )   $ 639,825     $ (40,762 )   $ 4,404,165     $ (173,192 )

 
   
Duration of Unrealized Loss at December 31, 2013 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
  $ 143,098     $ (3,503 )   $ 46,691     $ (5,330 )   $ 189,789     $ (8,833 )
Due in one year through five years
    1,125,680       (25,365 )     204,779       (11,279 )     1,330,459       (36,644 )
Due in five years through ten years
    810,969       (35,169 )     48,064       (3,844 )     859,033       (39,013 )
Due after ten years
    329,415       (19,348 )     61,629       (8,927 )     391,044       (28,275 )
Asset-backed securities
    5,494       (6 )     1,128       (416 )     6,622       (422 )
Mortgage-backed securities
    1,222,654       (40,442 )     277,534       (10,966 )     1,500,188       (51,408 )
Total fixed maturity securities
  $ 3,637,310     $ (123,833 )   $ 639,825     $ (40,762 )   $ 4,277,135     $ (164,595 )

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2013 were $4,404,165 thousand and $173,192 thousand, respectively.  The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at December 31, 2013, did not exceed 0.4% of the overall market value of the Company’s fixed maturity securities.  In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector.  The $123,833 thousand 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 domestic and foreign corporate securities, foreign government securities and agency residential mortgage-backed securities.  Of these unrealized losses, $112,658 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The $40,762 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to domestic and foreign corporate securities, foreign government securities, municipal securities and agency residential mortgage-backed securities.  Of these unrealized losses, $38,964 thousand related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.  The gross unrealized depreciation for mortgage-backed securities included $273 thousand 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.

 
10

 

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)
 
2014
   
2013
   
2014
   
2013
 
Fixed maturities
  $ 117,562     $ 120,253     $ 233,815     $ 241,010  
Equity securities
    13,566       12,795       25,025       22,536  
Short-term investments and cash
    577       176       907       480  
Other invested assets
                               
Limited partnerships
    6,226       19,585       3,968       37,068  
Other
    330       1,935       2,351       4,256  
Gross investment income before adjustments
    138,261       154,744       266,066       305,350  
Funds held interest income (expense)
    2,041       1,847       5,058       6,276  
Future policy benefit reserve income (expense)
    (141 )     (621 )     (444 )     (1,152 )
Gross investment income
    140,161       155,970       270,680       310,474  
Investment expenses
    (8,937 )     (7,241 )     (16,299 )     (15,964 )
Net investment income
  $ 131,224     $ 148,729     $ 254,381     $ 294,510  
                                 
(Some amounts may not reconcile due to rounding.)
                               
 
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 identifies the decline.

The Company had contractual commitments to invest up to an additional $214,891 thousand in limited partnerships at June 30, 2014.  These commitments will be funded when called in accordance with the partnership agreements, which have investment periods that expire, unless extended, through 2017.

The components of net realized capital gains (losses) are presented in the table below for the periods indicated:
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands)
 
2014
   
2013
   
2014
   
2013
 
Fixed maturity securities, market value:
                       
Other-than-temporary impairments
  $ (389 )   $ -     $ (389 )   $ (191 )
Gains (losses) from sales
    (1,695 )     (304 )     (3,643 )     4,573  
Fixed maturity securities, fair value:
                               
Gains (losses) from sales
    -       148       940       90  
Gains (losses) from fair value adjustments
    -       (1,665 )     -       (1,581 )
Equity securities, market value:
                               
Gains (losses) from sales
    (566 )     2,418       (1,054 )     2,651  
Equity securities, fair value:
                               
Gains (losses) from sales
    1,365       16,033       (50 )     24,052  
Gains (losses) from fair value adjustments
    60,305       17,275       84,340       131,032  
Short-term investments gain (loss)
    (4 )     -       (2 )     14  
Total net realized capital gains (losses)
  $ 59,016     $ 33,905     $ 80,142     $ 160,640  
 
The Company recorded as net realized capital gains (losses) in the consolidated statements of operations and comprehensive income (loss) both fair value re-measurements and write-downs in the value of securities deemed to be impaired on an other-than-temporary basis as displayed in the table above.  The Company had no other-than-temporary impaired securities where the impairment had both a credit and non-credit component.

 
11

 

The proceeds and split between gross gains and losses, from sales of fixed maturity and equity securities, are presented in the table below for the periods indicated:
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands)
 
2014
   
2013
   
2014
   
2013
 
Proceeds from sales of fixed maturity securities
  $ 277,767     $ 390,366     $ 627,239     $ 648,526  
Gross gains from sales
    8,071       11,208       16,007       18,921  
Gross losses from sales
    (9,766 )     (11,364 )     (18,710 )     (14,258 )
                                 
Proceeds from sales of equity securities
  $ 134,432     $ 296,788     $ 313,564     $ 404,192  
Gross gains from sales
    3,882       23,401       10,502       32,503  
Gross losses from sales
    (3,083 )     (4,950 )     (11,606 )     (5,800 )
 
4.   DERIVATIVES

The Company sold seven equity index put option contracts, based on two indices, in 2001 and 2005, which remain outstanding.  The Company sold these equity index put options as insurance products with the intent of achieving a profit.  These equity index put option contracts meet the definition of a derivative under FASB guidance and the Company’s position in these equity index put option contracts is unhedged.  Accordingly, these equity index put option contracts are carried at fair value in the consolidated balance sheets with changes in fair value recorded in the consolidated statements of operations and comprehensive income (loss).

The Company sold six equity index put option contracts, based on the Standard & Poor’s 500 (“S&P 500”) index, for total consideration, net of commissions, of $22,530 thousand.  At June 30, 2014, fair value for these equity index put option contracts was $26,936 thousand.  These equity index put option contracts each have a single exercise date, with maturities ranging from 12 to 30 years and strike prices ranging from $1,141.21 to $1,540.63.  No amounts will be payable under these equity index put option contracts if the S&P 500 index is at, or above, the strike prices on the exercise dates, which fall between June 2017 and March 2031.  If the S&P 500 index is lower than the strike price on the applicable exercise date, the amount due would vary proportionately with the percentage by which the index is below the strike price.  Based on historical index volatilities and trends and the June 30, 2014 S&P 500 index value, the Company estimates the probability that each equity index put option contract of the S&P 500 index falling below the strike price on the exercise date to be less than 22%.  The theoretical maximum payouts under these six equity index put option contracts would occur if on each of the exercise dates the S&P 500 index value were zero.  At June 30, 2014, the present value of these theoretical maximum payouts using a 3% discount factor was $413,800 thousand.  Conversely, if the contracts had all expired on June 30, 2014, with the S&P index at $1,960.23, there would have been no settlement amount.

The Company sold one equity index put option contract based on the FTSE 100 index for total consideration, net of commissions, of $6,706 thousand.  At June 30, 2014, fair value for this equity index put option contract was $6,374 thousand.  This equity index put option contract has an exercise date of July 2020 and a strike price of ₤5,989.75.  No amount will be payable under this equity index put option contract if the FTSE 100 index is at, or above, the strike price on the exercise date.  If the FTSE 100 index is lower than the strike price on the exercise date, the amount due will vary proportionately with the percentage by which the index is below the strike price.  Based on historical index volatilities and trends and the June 30, 2014 FTSE 100 index value, the Company estimates the probability that the equity index put option contract of the FTSE 100 index will fall below the strike price on the exercise date to be less than 39%.  The theoretical maximum payout under the equity index put option contract would occur if on the exercise date the FTSE 100 index value was zero.  At June 30, 2014, the present value of the theoretical maximum payout using a 3% discount factor and current exchange rate was $46,621 thousand.  Conversely, if the contract had expired on June 30, 2014, with the FTSE index at ₤6,743.90, there would have been no settlement amount.

 
12

 

The fair value of the equity index put options can be found in the Company’s consolidated balance sheets as follows:
 
(Dollars in thousands)
               
Derivatives not designated as
 
Location of fair value
 
At
   
At
 
hedging instruments
 
in balance sheets
 
June 30, 2014
   
December 31, 2013
 
                 
Equity index put option contracts
 
Equity index put option liability
  $ 33,309     $ 35,423  
Total
      $ 33,309     $ 35,423  
 
The change in fair value of the equity index put option contracts can be found in the Company’s statement of operations and comprehensive income (loss) as follows:
 
(Dollars in thousands)
     
For the Three Months Ended
   
For the Six Months Ended
 
Derivatives not designated as
 
Location of gain (loss) in statements of
 
June 30,
   
June 30,
 
hedging instruments
 
operations and comprehensive income (loss)
 
2014
   
2013
   
2014
   
2013
 
                             
Equity index put option contracts
 
Net derivative gain (loss)
  $ 3,774     $ 12,081     $ 2,113     $ 27,366  
Total
      $ 3,774     $ 12,081     $ 2,113     $ 27,366  
 
The Company’s equity index put option contracts contain provisions that require collateralization of the fair value, as calculated by the counterparty, above a specified threshold, which is based on the Company’s financial strength ratings (Moody’s Investors Service, Inc.) and/or debt ratings (Standard & Poor’s Ratings Services).  The aggregate fair value of all derivative instruments with credit-risk-related contingent features that were in a liability position on June 30, 2014, was $33,309 thousand for which the Company had posted collateral with a market value of $18,133 thousand.  If on June 30, 2014, the Company’s ratings were such that the collateral threshold was zero, the Company’s collateral requirement would increase by $55,000 thousand.

5.   FAIR VALUE

The Company’s fixed maturity and equity securities are primarily managed by third party investment asset managers.  The investment asset managers obtain prices from nationally recognized pricing services.   These services seek to utilize market data and observations in their evaluation process.  They use pricing applications that vary by asset class and incorporate available market information and when fixed maturity securities do not trade on a daily basis the services will apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing.  In addition, they use model processes, such as the Option Adjusted Spread model to develop prepayment and interest rate scenarios for securities that have prepayment features.

In limited instances where prices are not provided by pricing services or in rare instances when a manager may not agree with the pricing service, price quotes on a non-binding basis are obtained from investment brokers.  The investment asset managers do not make any changes to prices received from either the pricing services or the investment brokers.  In addition, the investment asset managers have procedures in place to review the reasonableness of the prices from the service providers and may request verification of the prices.  In addition, the Company continually performs analytical reviews of price changes and tests the prices on a random basis to an independent pricing source.  No material variances were noted during these price validation procedures.  In limited situations, where financial markets are inactive or illiquid, the Company may use its own assumptions about future cash flows and risk-adjusted discount rates to determine fair value.  The Company made no such adjustments at June 30, 2014 and December 31, 2013.

The Company internally manages a small public equity portfolio which had a fair value at June 30, 2014 and December 31, 2013 of $186,171 thousand and $174,628 thousand, respectively, and all prices were obtained from publically published sources.

 
13

 

Equity securities in U.S. denominated currency are categorized as Level 1, Quoted Prices in Active Markets for Identical Assets, since the securities are actively traded on an exchange and prices are based on quoted prices from the exchange.  Equity securities traded on foreign exchanges are categorized as Level 2 due to potential foreign exchange adjustments to fair or market value.

Fixed maturity securities are generally categorized as Level 2, Significant Other Observable Inputs, since a particular security may not have traded but the pricing services are able to use valuation models with observable market inputs such as interest rate yield curves and prices for similar fixed maturity securities in terms of issuer, maturity and seniority.  Valuations that are derived from techniques in which one or more of the significant inputs are unobservable (including assumptions about risk) are categorized as Level 3, Significant Unobservable Inputs.  These securities include broker priced securities and the Company’s equity index put option contracts.

As of June 30, 2014 and December 31, 2013, all Level 3 fixed maturity securities, were priced using single non-binding broker quotes since prices for these securities were not provided by normal pricing service companies.  The single broker quotes are provided by market makers or broker-dealers who are recognized as market participants in the markets in which they are providing the quotes.  The prices received from brokers are reviewed for reasonableness by the third party asset managers and the Company.

The Company sold seven equity index put option contracts which meet the definition of a derivative.  The Company’s position in these contracts is unhedged.  The Company records the change in fair value of equity index put option contracts in its consolidated statements of operations and comprehensive income (loss).

The fair value was calculated using an industry accepted option pricing model, Black-Scholes, which used the following assumptions:
 
 
At June 30, 2014
     
Contract
 
Contracts
 
based on
 
based on
 
FTSE 100
 
S & P 500 Index
 
Index
Equity index
 1,960.2
   
 6,743.9
Interest rate
1.14% to 3.57%
   
2.33%
Time to maturity
2.9 to 16.8 yrs
   
6.1 yrs
Volatility
20.6% to 24.9%
   
22.8%

 
14

 

The following table presents the fair value measurement levels for all assets and liabilities, which the Company has recorded at fair value (fair and market value) as of the periods indicated:
 
         
Fair Value Measurement Using:
 
         
Quoted Prices
             
         
in Active
   
Significant
       
         
Markets for
   
Other
   
Significant
 
         
Identical
   
Observable
   
Unobservable
 
         
Assets
   
Inputs
   
Inputs
 
(Dollars in thousands)
 
June 30, 2014
 
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets:
                       
Fixed maturities, market value
                       
U.S. Treasury securities and obligations of
                       
U.S. government agencies and corporations
  $ 524,277     $ -     $ 524,277     $ -  
Obligations of U.S. States and political subdivisions
    924,417       -       924,417       -  
Corporate securities
    4,693,340       -       4,693,340       -  
Asset-backed securities
    268,728       -       265,728       3,000  
Mortgage-backed securities
                               
Commercial
    236,689       -       236,689       -  
Agency residential
    2,130,751       -       2,130,751       -  
Non-agency residential
    4,033       -       3,774       259  
Foreign government securities
    1,692,194       -       1,692,194       -  
Foreign corporate securities
    3,102,937       -       3,102,937       -  
Total fixed maturities, market value
    13,577,366       -       13,574,107       3,259  
                                 
Fixed maturities, fair value
    -       -       -       -  
Equity securities, market value
    151,377       133,693       17,684       -  
Equity securities, fair value
    1,424,792       1,302,956       121,836       -  
                                 
Liabilities:
                               
Equity index put option contracts
  $ 33,309     $ -     $ -     $ 33,309  

There were no transfers between Level 1 and Level 2 for the six months ended June 30, 2014.

 
15

 

The following table presents the fair value measurement levels for all assets and liabilities, which the Company has recorded at fair value (fair and market value) as of the periods indicated:
 
         
Fair Value Measurement Using:
 
         
Quoted Prices
             
         
in Active
   
Significant
       
         
Markets for
   
Other
   
Significant
 
         
Identical
   
Observable
   
Unobservable
 
         
Assets
   
Inputs
   
Inputs
 
(Dollars in thousands)
 
December 31, 2013
 
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets:
                       
Fixed maturities, market value
                       
U.S. Treasury securities and obligations of
                       
U.S. government agencies and corporations
  $ 161,025     $ -     $ 161,025     $ -  
Obligations of U.S. States and political subdivisions
    1,002,528       -       1,002,528       -  
Corporate securities
    4,079,416       -       4,079,416       -  
Asset-backed securities
    173,043       -       167,744       5,299  
Mortgage-backed securities
                               
Commercial
    270,441       -       270,441       -  
Agency residential
    2,279,053       -       2,279,053       -  
Non-agency residential
    4,819       -       4,472       347  
Foreign government securities
    1,780,769       -       1,780,769       -  
Foreign corporate securities
    2,885,813       -       2,885,332       481  
Total fixed maturities, market value
    12,636,907       -       12,630,780       6,127  
                                 
Fixed maturities, fair value
    19,388       -       19,388       -  
Equity securities, market value
    144,081       127,030       17,051       -  
Equity securities, fair value
    1,462,079       1,342,278       119,801       -  
                                 
Liabilities:
                               
Equity index put option contracts
  $ 35,423     $ -     $ -     $ 35,423  

 
16

 

The following tables present the activity under Level 3, fair value measurements using significant unobservable inputs by asset type, for the periods indicated:
 
   
Three Months Ended June 30, 2014
   
Six Months Ended June 30, 2014
 
   
Asset-backed
   
Foreign
   
Non-agency
         
Asset-backed
   
Foreign
   
Non-agency
       
(Dollars in thousands)
 
Securities
   
Corporate
   
RMBS
   
Total
   
Securities
   
Corporate
   
RMBS
   
Total
 
Beginning balance
  $ 3,672     $ 473     $ 264     $ 4,409     $ 5,299     $ 481     $ 347     $ 6,127  
Total gains or (losses) (realized/unrealized)
                                                               
Included in earnings
    38       17       4       59       56       18       142       216  
Included in other comprehensive income (loss)
    42       (20 )     (3 )     19       75       (20 )     (24 )     31  
Purchases, issuances and settlements
    (752 )     (470 )     (6 )     (1,228 )     (1,494 )     (479 )     (206 )     (2,179 )
Transfers in and/or (out) of Level 3
    -       -       -       -       (936 )     -       -       (936 )
Ending balance
  $ 3,000     $ -     $ 259     $ 3,259     $ 3,000     $ -     $ 259     $ 3,259  
                                                                 
The amount of total gains or losses for the period included
                                                               
in earnings (or changes in net assets) attributable to the
                                                               
change in unrealized gains or losses relating to assets
                                                               
still held at the reporting date
  $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
                                                                 
(Some amounts may not reconcile due to rounding.)
                                                               

 
   
Three Months Ended June 30, 2013
 
Six Months Ended June 30, 2013
    
Asset-backed
 
Foreign
 
Foreign
 
Non-agency
     
Asset-backed
 
Foreign
 
Foreign
 
Non-agency
 
Agency
   
(Dollars in thousands)
 
Securities
 
Corporate
 
Government
 
RMBS
 
Total
 
Securities
 
Corporate
 
Government
 
RMBS
 
RMBS
 
Total
Beginning balance
  $ 4,686     $ 2,279     $ -     $ 407     $ 7,372     $ 4,849     $ 11,913     $ -     $ 426     $ 34,842     $ 52,030  
Total gains or (losses) (realized/unrealized)
                                                                                       
Included in earnings
    115       (735 )     (112 )     34       (698 )     16       (735 )     (112 )     91       -       (740 )
Included in other comprehensive income (loss)
    (171 )     (520 )     (179 )     (34 )     (904 )     (361 )     (643 )     (179 )     (27 )     -       (1,210 )
Purchases, issuances and settlements
    (146 )     3,872       516       (133 )     4,109       (20 )
 
  4,615       516       (216 )     -       4,895  
Transfers in and/or (out) of Level 3
    1,533       6,680       2,389       506       11,108       1,533       (3,574 )     2,389       506       (34,842 )     (33,988 )
Ending balance
  $ 6,017     $ 11,576     $ 2,614     $ 780     $ 20,987     $ 6,017     $ 11,576     $ 2,614     $ 780     $ -     $ 20,987  
                                                                                         
The amount of total gains or losses for the period included
                                                                                       
in earnings (or changes in net assets) attributable to the
                                                                                       
change in unrealized gains or losses relating to assets
                                                                                       
still held at the reporting date
  $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
                                                                                         
(Some amounts may not reconcile due to rounding.)
                                                                                       

The transfers from level 3, fair value measurements using significant unobservable inputs, of $936 thousand and $33,988 thousand of investments for the six months ended June 30, 2014 and June 30, 2013, respectively, primarily relate to securities that were priced using single non-binding broker quotes as of December 31, 2013 and December 31, 2012, respectively.  The securities were subsequently priced using a recognized pricing service as of June 30, 2014 and 2013, and were classified as level 2 as of those dates.

 
17

 

The following table presents the activity under Level 3, fair value measurements using significant unobservable inputs for equity index put option contracts, for the periods indicated:
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands)
 
2014
   
2013
   
2014
   
2013
 
Liabilities:
                       
Balance, beginning of period
  $ 37,083     $ 64,181     $ 35,423     $ 79,467  
Total (gains) or losses (realized/unrealized)
                               
Included in earnings
    (3,774 )     (12,081 )     (2,113 )     (27,366 )
Included in other comprehensive income (loss)
    -       -       -       -  
Purchases, issuances and settlements
    -       -       -       -  
Transfers in and/or (out) of Level 3
    -       -       -       -  
Balance, end of period
  $ 33,309     $ 52,101     $ 33,309     $ 52,101  
                                 
The amount of total gains or losses for the period included in earnings
                               
(or changes in net assets) attributable to the change in unrealized
                               
gains or losses relating to liabilities still held at the reporting date
  $ -     $ -     $ -     $ -  
                                 
(Some amounts may not reconcile due to rounding.)
                               
 
6.   REDEEMABLE NONCONTROLLING INTEREST – MT. LOGAN RE

Mt. Logan Re is a Class 3 insurer registered in Bermuda effective February 27, 2013 under The Segregated Accounts Companies Act 2000 and 100% of the voting common shares are owned by Group.  Separate segregated accounts have been established effective July 1, 2013 and non-voting, redeemable preferred shares have been issued to capitalize the segregated accounts.  Each segregated account will invest in a diversified set of catastrophe exposures, diversified by risk/peril and across different geographic regions globally.  The financial statements for Mt. Logan Re are consolidated with the Company with adjustments reflected for the third party noncontrolling interests reflected as separate captions in the Company’s financial statements.

The following table presents the activity for redeemable noncontrolling interests in the consolidated balance sheets for the periods indicated:
 
   
At June 30,
   
At December 31,
 
(Dollars in thousands)
 
2014
   
2013
 
Redeemable noncontrolling interests - Mt. Logan Re, beginning of period
  $ 93,378     $ -  
Unaffiliated third party investments during period
    266,700       87,500  
Net income (loss) attributable to noncontrolling interests
    15,830       5,878  
Redeemable noncontrolling interests - Mt. Logan Re, end of period
  $ 375,908     $ 93,378  
                 
(Some amounts may not reconcile due to rounding.)
               
 
In addition, the Company has invested $50,000 thousand in the segregated accounts from inception to date.

The Company expects its participation level in the segregated funds to fluctuate over time.

7.   CAPITAL TRANSACTIONS

On July 9, 2014, the Company renewed its shelf registration statement on Form S-3ASR with the Securities and Exchange Commission (the “SEC”), as a Well Known Seasoned Issuer.  This shelf registration statement can be used by Group to register common shares, preferred shares, debt securities, warrants, share purchase contracts and share purchase units; by Holdings to register debt securities and by Everest Re Capital Trust III (“Capital Trust III”) to register trust preferred securities.

 
18

 

8.   EARNINGS PER COMMON SHARE

Basic earnings per share are calculated by dividing net income by the weighted average number of common shares outstanding.  Diluted earnings per share reflect the potential dilution that would occur if options granted under various share-based compensation plans were exercised resulting in the issuance of common shares that would participate in the earnings of the entity.

Net income (loss) attributable to Everest Re Group per common share has been computed as per below, based upon weighted average common basic and dilutive shares outstanding.
 
     
Three Months Ended
   
Six Months Ended
 
     
June 30,
   
June 30,
 
(Dollars in thousands, except per share amounts)
 
2014
   
2013
   
2014
   
2013
 
Net income (loss) attributable to Everest Re Group per share:
                       
 
Numerator
                       
 
Net income (loss) attributable to Everest Re Group
  $ 290,184     $ 275,642     $ 584,117     $ 659,985  
 
Less:  dividends declared-common shares and nonvested common shares
    (34,319 )     (23,315 )     (69,061 )     (47,546 )
 
Undistributed earnings
    255,865       252,327       515,056       612,439  
 
Percentage allocated to common shareholders (1)
    98.9 %     99.1 %     99.0 %     99.1 %
        253,146       249,979       509,853       607,138  
 
Add:  dividends declared-common shareholders
    33,971       23,107       68,362       47,126  
 
Numerator for basic and diluted earnings per common share
  $ 287,117     $ 273,086     $ 578,215     $ 654,264  
                                   
 
Denominator
                               
 
Denominator for basic earnings per weighted-average common shares
    45,441       48,762       45,957       49,588  
 
Effect of dilutive securities:
                               
 
Options
    423       385       431       399  
 
Denominator for diluted earnings per adjusted weighted-average common shares
    45,864       49,147       46,388       49,987  
                                   
 
Per common share net income (loss)
                               
 
Basic
  $ 6.32     $ 5.60     $ 12.58     $ 13.19  
 
Diluted
  $ 6.26     $ 5.56     $ 12.46     $ 13.09  
                                   
(1)
Basic weighted-average common shares outstanding
    45,441       48,762       45,957       49,588  
 
Basic weighted-average common shares outstanding and nonvested common shares expected to vest
    45,929       49,220       46,426       50,021  
 
Percentage allocated to common shareholders
    98.9 %     99.1 %     99.0 %     99.1 %
                                   
(Some amounts may not reconcile due to rounding.)
                               


The table below presents the options to purchase common shares that were outstanding, but were not included in the computation of earnings per diluted share as they were anti-dilutive, for the periods indicated:
 
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Anti-dilutive options
 -
 
 -
 
 -
 
 454

All outstanding options expire on or between September 21, 2014 and September 19, 2022.

 
19

 

9.   CONTINGENCIES

In the ordinary course of business, the Company is involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine the Company’s rights and obligations under insurance and reinsurance agreements.  In some disputes, the Company seeks to enforce its rights under an agreement or to collect funds owing to it.  In other matters, the Company is resisting attempts by others to collect funds or enforce alleged rights.  These disputes arise from time to time and are ultimately resolved through both informal and formal means, including negotiated resolution, arbitration and litigation.  In all such matters, the Company believes that its positions are legally and commercially reasonable.  The Company considers the statuses of these proceedings when determining its reserves for unpaid loss and loss adjustment expenses.

Aside from litigation and arbitrations related to these insurance and reinsurance agreements, the Company is not a party to any other material litigation or arbitration.

In 1993 and prior, the Company had a business arrangement with The Prudential Insurance Company of America (“The Prudential”) wherein, for a fee, the Company accepted settled claim payment obligations of certain property and casualty insurers, and, concurrently, became the owner of the annuity or assignee of the annuity proceeds funded by the property and casualty insurers specifically to fulfill these fully settled obligations.  In these circumstances, the Company would be liable if The Prudential, which has an A+ (Superior) financial strength rating from A.M. Best Company (“A.M. Best”), was unable to make the annuity payments.  The table below presents the estimated cost to replace all such annuities for which the Company was contingently liable for the periods indicated:
 
(Dollars in thousands)
 
At June 30, 2014
   
At December 31, 2013
 
    $ 144,022     $ 144,734  

Prior to its 1995 initial public offering, the Company purchased annuities from an unaffiliated life insurance company with an A+ (Superior) financial strength rating from A.M. Best to settle certain claim liabilities of the company.  Should the life insurance company become unable to make the annuity payments, the Company would be liable for those claim liabilities.  The table below presents the estimated cost to replace all such annuities for which the Company was contingently liable for the periods indicated:
 
(Dollars in thousands)
 
At June 30, 2014
   
At December 31, 2013
 
    $ 30,724     $ 30,664  

 
20

 

10.  OTHER COMPREHENSIVE INCOME (LOSS)

The following tables present the components of comprehensive income (loss) in the consolidated statements of operations for the periods indicated:
 
   
Three Months Ended June 30, 2014
   
Six Months Ended June 30, 2014
 
(Dollars in thousands)
 
Before Tax
   
Tax Effect
   
Net of Tax
   
Before Tax
   
Tax Effect
   
Net of Tax
 
Unrealized appreciation (depreciation) ("URA(D)") on securities - temporary
  $ 95,284     $ (9,368 )   $ 85,916     $ 159,397     $ (20,086 )   $ 139,311  
URA(D) on securities - OTTI
    5       -       5       81       -       81  
Reclassification of net realized losses (gains) included in net income (loss)
    2,650       (481 )     2,169       5,086       (1,043 )     4,043  
Foreign currency translation adjustments
    2,856       (3,619 )     (763 )     (4,000 )     600       (3,400 )
Benefit plan actuarial net gain (loss)
    -       -       -       -       -       -  
Reclassification of benefit plan liability amortization included in net income (loss)
    1,185       (415 )     770       2,371       (830 )     1,541  
Total other comprehensive income (loss)
  $ 101,980     $ (13,883 )   $ 88,097     $ 162,935     $ (21,359 )   $ 141,576  
 
   
Three Months Ended June 30, 2013
   
Six Months Ended June 30, 2013
 
(Dollars in thousands)
 
Before Tax
   
Tax Effect
   
Net of Tax
   
Before Tax
   
Tax Effect
   
Net of Tax
 
Unrealized appreciation (depreciation) ("URA(D)") on securities - temporary
  $ (321,618 )   $ 50,116     $ (271,502 )   $ (366,663 )   $ 48,553     $ (318,110 )
URA(D) on securities - OTTI
    (1,144 )     106       (1,038 )     (1,372 )     140       (1,232 )
Reclassification of net realized losses (gains) included in net income (loss)
    (2,114 )     286       (1,828 )     (7,033 )     1,114       (5,919 )
Foreign currency translation adjustments
    13,950       (199 )     13,751       (11,206 )     3,891       (7,315 )
Benefit plan actuarial net gain (loss)
    -       -       -       -       -       -  
Reclassification of benefit plan liability amortization included in net income (loss)
    2,070       (725 )     1,345       4,140       (1,449 )     2,691  
Total other comprehensive income (loss)
  $ (308,856 )   $ 49,584     $ (259,272 )   $ (382,134 )   $ 52,249     $ (329,885 )


The following table presents details of the amounts reclassified from accumulated other comprehensive income (“AOCI”) for the periods indicated:
 
   
Three months ended
   
Six months ended
     
   
June 30,
   
June 30,
   
Affected line item within the statements of
AOCI component
 
2014
   
2013
   
2014
   
2013
   
operations and comprehensive income (loss)
(Dollars in thousands)
                           
URA(D) on securities
  $ 2,650     $ (2,114 )   $ 5,086     $ (7,033 )  
Other net realized capital gains (losses)
      (481 )     286       (1,043 )     1,114    
Income tax expense (benefit)
    $ 2,169     $ (1,828 )   $ 4,043     $ (5,919 )  
Net income (loss)
                                     
Benefit plan net gain (loss)
  $ 1,185     $ 2,070     $ 2,371     $ 4,140    
Other underwriting expenses
      (415 )     (725 )     (830 )     (1,449 )  
Income tax expense (benefit)
    $ 770     $ 1,345     $ 1,541     $ 2,691    
Net income (loss)

 
21

 

The following table presents the components of accumulated other comprehensive income (loss), net of tax, in the consolidated balance sheets for the periods indicated:
 
   
At June 30,
   
At December 31,
 
(Dollars in thousands)
 
2014
   
2013
 
Beginning balance of URA (D) on securities
  $ 201,154     $ 603,928  
Current period change in URA (D) of investments - temporary
    143,354       (401,335 )
Current period change in URA (D) of investments - non-credit OTTI
    81       (1,439 )
Ending balance of URA (D) on securities
    344,589       201,154  
                 
Beginning balance of foreign currency translation adjustments
    (4,530 )     (4,368 )
Current period change in foreign currency translation adjustments
    (3,400 )     (162 )
Ending balance of foreign currency translation adjustments
    (7,930 )     (4,530 )
                 
Beginning balance of benefit plan net gain (loss)
    (38,896 )     (62,511 )
Current period change in benefit plan net gain (loss)
    1,541       23,615  
Ending balance of benefit plan net gain (loss)
    (37,355 )     (38,896 )
                 
Ending balance of accumulated other comprehensive income (loss)
  $ 299,304     $ 157,728  
                 
(Some amounts may not reconcile due to rounding.)
               

11.  CREDIT FACILITIES

The Company has three credit facilities for a total commitment of up to $1,250,000 thousand, providing for the issuance of letters of credit and/or unsecured revolving credit lines. The following table presents the costs incurred in connection with the three credit facilities for the periods indicated:
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands)
 
2014
   
2013
   
2014
   
2013
 
Credit facility fees incurred
  $ 221     $ 280     $ 395     $ 477  

The terms and outstanding amounts for each facility are discussed below:

Group Credit Facility

Effective June 22, 2012, Group, Bermuda Re and Everest International entered into a four year, $800,000 thousand senior credit facility with a syndicate of lenders, which amended and restated in its entirety the July 27, 2007, five year, $850,000 thousand senior credit facility.  Both the June 22, 2012 and July 27, 2007 senior credit facilities, which have similar terms, are referred to as the “Group Credit Facility”.  Wells Fargo Corporation (“Wells Fargo Bank”) is the administrative agent for the Group Credit Facility, which consists of two tranches.  Tranche one provides up to $200,000 thousand of unsecured revolving credit for liquidity and general corporate purposes, and for the issuance of unsecured standby letters of credit.  The interest on the revolving loans shall, at the Company’s option, be either (1) the Base Rate (as defined below) or (2) an adjusted London Interbank Offered Rate (“LIBOR”) plus a margin.  The Base Rate is the higher of (a) the prime commercial lending rate established by Wells Fargo Bank, (b) the Federal Funds Rate plus 0.5% per annum or (c) the one month LIBOR Rate plus 1.0% per annum. The amount of margin and the fees payable for the Group Credit Facility depends on Group’s senior unsecured debt rating.  Tranche two exclusively provides up to $600,000 thousand for the issuance of standby letters of credit on a collateralized basis.

The Group Credit Facility requires Group to maintain a debt to capital ratio of not greater than 0.35 to 1 and to maintain a minimum net worth.  Minimum net worth is an amount equal to the sum of $4,249,963 thousand plus 25% of consolidated net income for each of Group’s fiscal quarters, for which statements are available ending on or after January 1, 2012 and for which consolidated net income is positive, plus 25% of any increase in consolidated net worth during such period attributable to the issuance of ordinary and preferred shares, which at June 30, 2014, was $4,958,004 thousand.  As of June 30, 2014, the Company was in compliance with all Group Credit Facility covenants.

 
22

 

The following table summarizes the outstanding letters of credit and/or borrowings for the periods indicated:
 
(Dollars in thousands)
   
At June 30, 2014
 
At December 31, 2013
Bank
   
Commitment
   
In Use
 
Date of Expiry
 
Commitment
   
In Use
 
Date of Expiry
Wells Fargo Bank Group Credit Facility
Tranche One
  $ 200,000     $ -       $ 200,000     $ -    
 
Tranche Two
    600,000       500,410  
12/31/2014
    600,000       502,059  
12/31/2014
Total Wells Fargo Bank Group Credit Facility
  $ 800,000     $ 500,410       $ 800,000     $ 502,059    

Holdings Credit Facility

Effective August 15, 2011, the Company entered into a three year, $150,000 thousand unsecured revolving credit facility with a syndicate of lenders, referred to as the “Holdings Credit Facility”.  Citibank N.A. is the administrative agent for the Holdings Credit Facility.  The Holdings Credit Facility may be used for liquidity and general corporate purposes.  The Holdings Credit Facility provides for the borrowing of up to $150,000 thousand with interest at a rate selected by Holdings equal to either, (1) the Base Rate (as defined below) or (2) a periodic fixed rate equal to the Eurodollar Rate plus an applicable margin.  The Base Rate means a fluctuating interest rate per annum in effect from time to time to be equal to the higher of (a) the rate of interest publicly announced by Citibank as its base rate, (b) 0.5% per annum above the Federal Funds Rate or (c) 1% above the one month London Interbank Offered Rate (“LIBOR”), in each case plus the applicable margin.  The amount of margin and the fees payable for the Holdings Credit Facility depends upon Holdings’ senior unsecured debt rating.

The Holdings Credit Facility requires Holdings to maintain a debt to capital ratio of not greater than 0.35 to 1 and Everest Re to maintain its statutory surplus at $1,875,000 thousand plus 25% of future aggregate net income and 25% of future aggregate capital contributions after December 31, 2010, which at June 30, 2014, was $2,178,952 thousand.  As of June 30, 2014, Holdings was in compliance with all Holdings Credit Facility covenants.

There are certain regulatory and contractual restrictions on the ability of Holdings’ operating subsidiaries to transfer funds to Holdings in the form of cash dividends, loans or advances.  The insurance laws of the State of Delaware, where Holdings’ direct insurance subsidiaries are domiciled, require regulatory approval before those subsidiaries can pay dividends or make loans or advances to Holdings that exceed certain statutory thresholds.  At December 31, 2013, $2,294,461 thousand of the $3,136,782 thousand in net assets of Holdings’ consolidated subsidiaries were subject to the foregoing regulatory restrictions.

The following table summarizes outstanding letters of credit and/or borrowings for the periods indicated:
 
(Dollars in thousands)
 
At June 30, 2014
 
At December 31, 2013
Bank
 
Commitment
   
In Use
 
Date of Loan
Maturity/Expiry Date
 
Commitment
   
In Use
 
Date of Loan
Maturity/Expiry Date
Citibank Holdings Credit Facility
  $ 150,000     $ -         $ 150,000     $ -      
Total revolving credit borrowings
            -                   -      
Total letters of credit
            851    
12/31/2014
            851    
12/31/2014
                                         
Total Citibank Holdings Credit Facility
  $ 150,000     $ 851         $ 150,000     $ 851      

The Company has notified the syndicate of lenders that it will not be renewing this facility at expiration.

Bermuda Re Letter of Credit Facility

Bermuda Re has a $300,000 thousand letter of credit issuance facility with Citibank N.A. referred to as the “Bermuda Re Letter of Credit Facility”, which commitment is reconfirmed annually with updated fees.  The Bermuda Re Letter of Credit Facility provides for the issuance of up to $300,000 thousand of secured letters of credit to collateralize reinsurance obligations as a non-admitted reinsurer.  The interest on drawn letters of credit shall be (A) 0.35% per annum of the principal amount of issued standard letters of credit (expiry of 15 months or less) and (B) 0.45% per annum of the principal amount of issued extended tenor letters of credit (expiry maximum of up to 60 months).  The commitment fee on undrawn credit shall be 0.15% per annum.

 
23

 

The following table summarizes the outstanding letters of credit for the periods indicated:
 
(Dollars in thousands)
 
At June 30, 2014
 
At December 31, 2013
Bank
 
Commitment
   
In Use
 
Date of Expiry
 
Commitment
   
In Use
 
Date of Expiry
Citibank Bilateral Letter of Credit Agreement
  $ 300,000     $ 3,672  
11/24/2014
  $ 300,000     $ 119  
8/30/2014
              71,608  
12/31/2014
            3,672  
11/24/2014
              84  
8/30/2015
            79,336  
12/31/2014
              4,273  
12/31/2015
            1,045  
12/31/2015
              2,797  
4/30/2018
            22,800  
12/31/2017
              153,148  
6/30/2018
            129,147  
3/30/2018
Total Citibank Bilateral Agreement
  $ 300,000     $ 235,582       $ 300,000     $ 236,119    

12.  REINSURANCE AND TRUST AGREEMENTS

Certain subsidiaries of Group have established trust agreements, which effectively use the Company’s investments as collateral, as security for assumed losses payable to certain non-affiliated ceding companies.  At June 30, 2014, the total amount on deposit in trust accounts was $284,552 thousand.

On April 24, 2014, the Company entered into two collateralized reinsurance agreements with Kilimanjaro Re Limited (“Kilimanjaro”), a Bermuda based special purpose reinsurer, to provide the Company with catastrophe reinsurance coverage.  These agreements are multi-year reinsurance contracts which cover specified named storm and earthquake events.  The first agreement provides up to $250,000 thousand of reinsurance coverage from named storms in specified states of the Southeastern United States.  The second agreement provides up to $200,000 thousand of reinsurance coverage from named storms in specified states of the Southeast, Mid-Atlantic and Northeast regions of the United States and Puerto Rico as well as reinsurance coverage from earthquakes in specified states of the Southeast, Mid-Atlantic, Northeast and West regions of the United States, Puerto Rico and British Columbia.

Kilimanjaro has financed the property catastrophe reinsurance coverage by issuing $450,000 thousand of catastrophe bonds to unrelated, external investors. The proceeds from the catastrophe bond issuance will be held in a reinsurance trust throughout the duration of the reinsurance agreements and invested solely in US government money market funds with a rating of at least “AAAm” by Standard & Poor’s at the time of the bond issuance.

13.  SENIOR NOTES

The table below displays Holdings’ outstanding senior notes.  Market value is based on quoted market prices, but due to limited trading activity, these senior notes are considered Level 2 in the fair value hierarchy.
 
               
June 30, 2014
   
December 31, 2013
 
               
Consolidated Balance
         
Consolidated Balance
       
(Dollars in thousands)
Date Issued
 
Date Due
 
Principal Amounts
   
Sheet Amount
   
Market Value
   
Sheet Amount
   
Market Value
 
5.40% Senior notes
10/12/2004
 
10/15/2014
  $ 250,000     $ 249,984     $ 253,920     $ 249,958     $ 259,130  
4.868% Senior notes
06/05/2014
 
06/01/2044
    400,000       400,000       400,112       -       -  
 
On June 5, 2014, Holdings issued $400,000 thousand of 30 year senior notes at 4.868%, which will mature on June 1, 2044.  Capitalized costs of approximately $4,300 thousand related to the issuance of the senior notes will be expensed over the 30 year life of the notes.  Interest will be paid semi-annually on June 1 and December 1 of each year.

Interest expense incurred in connection with these senior notes is as follows for the periods indicated:
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands)
 
2014
   
2013
   
2014
   
2013
 
Interest expense incurred
  $ 4,741     $ 3,388     $ 8,129     $ 6,775  

 
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14.  LONG TERM SUBORDINATED NOTES

The table below displays Holdings’ outstanding fixed to floating rate long term subordinated notes.  Market value is based on quoted market prices, but due to limited trading activity, these subordinated notes are considered Level 2 in the fair value hierarchy.
 
           
Maturity Date
 
June 30, 2014
   
December 31, 2013
 
     
Original
           
Consolidated Balance
         
Consolidated Balance
       
(Dollars in thousands)
Date Issued
 
Principal Amount
   
Scheduled
 
Final
 
Sheet Amount
   
Market Value
   
Sheet Amount
   
Market Value
 
6.6% Long term subordinated notes
04/26/2007
  $ 400,000    
05/15/2037
 
05/01/2067
  $ 238,362     $ 251,083     $ 238,361     $ 233,292  

During the fixed rate interest period from May 3, 2007 through May 14, 2017, interest will be at the annual rate of 6.6%, payable semi-annually in arrears on November 15 and May 15 of each year, commencing on November 15, 2007, subject to Holdings’ right to defer interest on one or more occasions for up to ten consecutive years.  During the floating rate interest period from May 15, 2017 through maturity, interest will be based on the 3 month LIBOR plus 238.5 basis points, reset quarterly, payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year, subject to Holdings’ right to defer interest on one or more occasions for up to ten consecutive years.  Deferred interest will accumulate interest at the applicable rate compounded semi-annually for periods prior to May 15, 2017, and compounded quarterly for periods from and including May 15, 2017.

Holdings can redeem the long term subordinated notes prior to May 15, 2017, in whole but not in part at the applicable redemption price, which will equal the greater of (a) 100% of the principal amount being redeemed and (b) the present value of the principal payment on May 15, 2017 and scheduled payments of interest that would have accrued from the redemption date to May 15, 2017 on the long term subordinated notes being redeemed, discounted to the redemption date on a semi-annual basis at a discount rate equal to the treasury rate plus an applicable spread of either 0.25% or 0.50%, in each case plus accrued and unpaid interest.  Holdings may redeem the long term subordinated notes on or after May 15, 2017, in whole or in part at 100% of the principal amount plus accrued and unpaid interest; however, redemption on or after the scheduled maturity date and prior to May 1, 2047 is subject to a replacement capital covenant.  This covenant is for the benefit of certain senior note holders and it mandates that Holdings receive proceeds from the sale of another subordinated debt issue, of at least similar size, before it may redeem the subordinated notes.

On March 19, 2009, Group announced the commencement of a cash tender offer for any and all of the 6.60% fixed to floating rate long term subordinated notes.  Upon expiration of the tender offer, the Company had reduced its outstanding debt by $161,441 thousand.

Interest expense incurred in connection with these long term subordinated notes is as follows for the periods indicated:
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands)
 
2014
   
2013
   
2014
   
2013
 
Interest expense incurred
  $ 3,937     $ 3,937     $ 7,874     $ 7,874  

 
25

 

15.  JUNIOR SUBORDINATED DEBT SECURITIES PAYABLE

In accordance with the provisions of the junior subordinated debt securities which were issued on March 29, 2004, Holdings elected to redeem the $329,897 thousand of 6.2% junior subordinated debt securities outstanding on May 24, 2013.  As a result of the early redemption, the Company incurred pre-tax expense of $7,282 thousand related to the immediate amortization of the remaining capitalized issuance costs on the trust preferred securities.

Interest expense incurred in connection with these junior subordinated debt securities is as follows for the periods indicated:
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands)
 
2014
   
2013
   
2014
   
2013
 
Interest expense incurred
  $ -     $ 3,068     $ -     $ 8,181  

Holdings considered the mechanisms and obligations relating to the trust preferred securities, taken together, constituted a full and unconditional guarantee by Holdings of Capital Trust II’s payment obligations with respect to their trust preferred securities.

16.  SEGMENT REPORTING

The U.S. Reinsurance operation writes property and casualty reinsurance and specialty lines of business, including Marine, Aviation, Surety and Accident and Health (“A&H”) business, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies primarily within the U.S.  The International operation writes non-U.S. property and casualty reinsurance through Everest Re’s branches in Canada and Singapore and through offices in Brazil, Miami and New Jersey. The Bermuda operation provides reinsurance and insurance to worldwide property and casualty markets through brokers and directly with ceding companies from its Bermuda office and reinsurance to the United Kingdom and European markets through its UK branch and Ireland Re.  The Insurance operation writes property and casualty insurance, including medical stop loss insurance, directly and through general agents, brokers and surplus lines brokers within the U.S. and Canada.  The Mt. Logan Re segment represents business written for the segregated accounts of Mt. Logan Re, which were formed on July 1, 2013.  The Mt. Logan Re business represents a diversified set of catastrophe exposures, diversified by risk/peril and across different geographical regions globally.

These segments, with the exception of Mt. Logan Re, 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.  The Mt. Logan Re segment is managed independently and seeks to write a diverse portfolio of catastrophe risks for each segregated account to achieve desired risk and return criteria.

Underwriting results include earned premium less losses and loss adjustment expenses (“LAE”) incurred, commission and brokerage expenses and other underwriting expenses.  We measure our underwriting results using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which, respectively, divide incurred losses, commissions and brokerage and other underwriting expenses by premiums earned.

Mt. Logan Re’s business is sourced through operating subsidiaries of the Company; however, the activity is only reflected in the Mt. Logan Re segment.  For other inter-affiliate reinsurance, business is generally reported within the segment in which the business was first produced, consistent with how the business is managed.

Except for Mt. Logan Re, the Company does not maintain separate balance sheet data for its operating segments.  Accordingly, the Company does not review and evaluate the financial results of its operating segments based upon balance sheet data.

 
26

 

The following tables present the underwriting results for the operating segments for the periods indicated:
 
   
Three Months Ended
   
Six Months Ended
 
U.S. Reinsurance
 
June 30,
   
June 30,
 
(Dollars in thousands)
 
2014
   
2013
   
2014
   
2013
 
Gross written premiums
  $ 437,475     $ 418,367     $ 933,116     $ 853,158  
Net written premiums
    423,279       418,039       921,036       852,678  
                                 
Premiums earned
  $ 489,129     $ 391,364     $ 918,770     $ 783,980  
Incurred losses and LAE
    239,014       237,588       452,469       435,746  
Commission and brokerage
    122,766       85,727       215,734       173,053  
Other underwriting expenses
    11,454       9,994       20,936       20,528  
Underwriting gain (loss)
  $ 115,895     $ 58,055     $ 229,631     $ 154,653  

 
   
Three Months Ended
   
Six Months Ended
 
International
 
June 30,
   
June 30,
 
(Dollars in thousands)
 
2014
   
2013
   
2014
   
2013
 
Gross written premiums
  $ 454,017     $ 348,102     $ 775,259     $ 645,662  
Net written premiums
    315,590       348,069       624,627       642,051  
                                 
Premiums earned
  $ 319,998     $ 326,070     $ 638,379     $ 638,048  
Incurred losses and LAE
    204,433       184,329       367,607       345,528  
Commission and brokerage
    71,599       77,065       142,573       148,509  
Other underwriting expenses
    8,088       7,667       15,925       15,597  
Underwriting gain (loss)
  $ 35,878     $ 57,009     $ 112,274     $ 128,414  

 
   
Three Months Ended
   
Six Months Ended
 
Bermuda
 
June 30,
   
June 30,
 
(Dollars in thousands)
 
2014
   
2013
   
2014
   
2013
 
Gross written premiums
  $ 185,036     $ 177,345     $ 368,451     $ 373,103  
Net written premiums
    176,193       169,689       358,763       365,512  
                                 
Premiums earned
  $ 191,259     $ 184,817     $ 364,945     $ 370,150  
Incurred losses and LAE
    107,133       111,620       201,641       203,616  
Commission and brokerage
    46,839       45,064       92,547       88,715  
Other underwriting expenses
    8,159       8,767       16,445       16,526  
Underwriting gain (loss)
  $ 29,128     $ 19,366     $ 54,312     $ 61,293  

 
   
Three Months Ended
   
Six Months Ended
 
Insurance
 
June 30,
   
June 30,
 
(Dollars in thousands)
 
2014
   
2013
   
2014
   
2013
 
Gross written premiums
  $ 316,481     $ 316,388     $ 547,131     $ 569,069  
Net written premiums
    280,073       276,829       491,741       502,078  
                                 
Premiums earned
  $ 248,283     $ 249,282     $ 451,520     $ 448,114  
Incurred losses and LAE
    175,033       178,053       317,224       319,344  
Commission and brokerage
    39,908       34,211       74,117       64,836  
Other underwriting expenses
    29,128       28,473       52,361       55,196  
Underwriting gain (loss)
  $ 4,214     $ 8,545     $ 7,818     $ 8,738  

 
   
Three Months Ended
   
Six Months Ended
 
Mt. Logan Re
 
June 30,
   
June 30,
 
(Dollars in thousands)
 
2014
   
2013
   
2014
   
2013
 
Gross written premiums
  $ 22,353     $ -     $ 58,829     $ -  
Net written premiums
    22,352       -       48,909       -  
                                 
Premiums earned
  $ 23,648     $ -     $ 43,193     $ -  
Incurred losses and LAE
    10,084       -       16,165       -  
Commission and brokerage
    2,575       -       4,718       -  
Other underwriting expenses
    1,585       -       3,385       -  
Underwriting gain (loss)
  $ 9,404     $ -     $ 18,925     $ -  

 
27

 

The following table reconciles the underwriting results for the operating segments to income before taxes as reported in the consolidated statements of operations and comprehensive income (loss) for the periods indicated:
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands)
 
2014
   
2013
   
2014
   
2013
 
Underwriting gain (loss)
  $ 194,519     $ 142,975     $ 422,960     $ 353,098  
Net investment income
    131,224       148,729       254,381       294,510  
Net realized capital gains (losses)
    59,016       33,905       80,142       160,640  
Net derivative gain (loss)
    3,774       12,081       2,113       27,366  
Corporate expenses
    (3,899 )     (6,168 )     (8,844 )     (11,885 )
Interest, fee and bond issue cost amortization expense
    (8,978 )     (17,362 )     (16,546 )     (30,843 )
Other income (expense)
    (13,871 )     8,295       (17,167 )     (592 )
Income (loss) before taxes
  $ 361,785     $ 322,455     $ 717,039     $ 792,294  
 
The Company produces business in the U.S., Bermuda and internationally.  The net income deriving from and assets residing in the individual foreign countries in which the Company writes business are not identifiable in the Company’s financial records.  Based on gross written premium, the table below presents the largest country, other than the U.S., in which the Company writes business, for the period indicated:
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands)
 
2014
   
2013
   
2014
   
2013
 
United Kingdom
  $ 131,093     $ 119,156     $ 337,876     $ 267,143  

No other country represented more than 5% of the Company’s revenues.

17.  SHARE-BASED COMPENSATION PLANS

For the three months ended June 30, 2014, share-based compensation awards granted were 1,426 restricted shares, granted on May 14, 2014, with a fair value of $157.94 per share.

18.  RETIREMENT BENEFITS

The Company maintains both qualified and non-qualified defined benefit pension plans and a retiree health plan for its U.S. employees employed prior to April 1, 2010.

Net periodic benefit cost for U.S. employees included the following components for the periods indicated:
 
Pension Benefits
 
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands)
 
2014
   
2013
   
2014
   
2013
 
Service cost
  $ 2,461     $ 2,728     $ 4,921     $ 5,457  
Interest cost
    2,541       2,074       5,083       4,148  
Expected return on plan assets
    (2,823 )     (2,121 )     (5,646 )     (4,243 )
Amortization of prior service cost
    12       12       25       25  
Amortization of net (income) loss
    1,092       1,904       2,183       3,808  
Net periodic benefit cost
  $ 3,283     $ 4,597     $ 6,566     $ 9,195  

 
Other Benefits
 
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands)
 
2014
   
2013
   
2014
   
2013
 
Service cost
  $ 407     $ 499     $ 814     $ 998  
Interest cost
    342       277       684       554  
Amortization of net (income) loss
    82       154       164       308  
Net periodic benefit cost
  $ 831     $ 930     $ 1,662     $ 1,860  

The Company did not make any contributions to the qualified pension benefit plan for the three and six months ended June 30, 2014 and 2013.

 
28

 

19.  RELATED-PARTY TRANSACTIONS

During the normal course of business, the Company, through its affiliates, engages in reinsurance and brokerage and commission business transactions with companies controlled by or affiliated with one or more of its outside directors.  Such transactions, individually and in the aggregate, are not material to the Company’s financial condition, results of operations and cash flows.

20.  INCOME TAXES

The Company is domiciled in Bermuda and has significant subsidiaries and/or branches in Canada, Ireland, Singapore, the United Kingdom, and the United States.  The Company’s Bermuda domiciled subsidiaries are exempt from income taxation under Bermuda law until 2035.  Pre-tax income generated by Group’s non-Bermuda subsidiaries and the UK branch of Bermuda is subject to applicable federal, foreign, state and local taxes on corporations.  Company subsidiaries domiciled in the US as well as the Canadian and Singapore branches of Everest Re generate US pre-tax income (loss).   Foreign domiciled subsidiaries, including the UK branch of Bermuda Re, generate non-US pre-tax income (loss).  Fluctuations in US and non-US pre-tax income (loss) primarily result from the impact of catastrophe losses and realized investment gains (losses).

For interim reporting periods, the company is generally required to use the annualized effective tax rate (“AETR”) method, as prescribed by ASC 740-270, Interim Reporting, to calculate its income tax provision.  Under this method, the AETR is applied to the interim year-to-date pre-tax income to determine the income tax expense or benefit for the year-to-date period.  The income tax expense or benefit for a quarter represents the difference between the year-to-date income tax expense or benefit for the current year-to-date period less such amount for the immediately preceding year-to-date period.  Management considers the impact of all known events in its estimation of the Company’s annual pre-tax income and AETR.

21.  SUBSEQUENT EVENTS

The Company has evaluated known recognized and non-recognized subsequent events.  The Company does not have any subsequent events to report.

 
29

 
 
ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Industry Conditions.
The worldwide reinsurance and insurance businesses are highly competitive, as well as cyclical by product and market.  As such, financial results tend to fluctuate with periods of constrained availability, high rates and strong profits followed by periods of abundant capacity, low rates and constrained profitability.  Competition in the types of reinsurance and insurance business that we underwrite is based on many factors, including the perceived overall financial strength of the reinsurer or insurer, ratings of the reinsurer or insurer by A.M. Best and/or Standard & Poor’s, underwriting expertise, the jurisdictions where the reinsurer or insurer is licensed or otherwise authorized, capacity and coverages offered, premiums charged, other terms and conditions of the reinsurance and insurance business offered, services offered, speed of claims payment and reputation and experience in lines written.  Furthermore, the market impact from these competitive factors related to reinsurance and insurance is generally not consistent across lines of business, domestic and international geographical areas and distribution channels.

We compete in the U.S., Bermuda and international reinsurance and insurance markets with numerous global competitors.  Our competitors include independent reinsurance and insurance companies, subsidiaries or affiliates of established worldwide insurance companies, reinsurance departments of certain insurance companies and domestic and international underwriting operations, including underwriting syndicates at Lloyd’s.  Some of these competitors have greater financial resources than we do and have established long term and continuing business relationships, which can be a significant competitive advantage.  In addition, the lack of strong barriers to entry into the reinsurance business and the potential for securitization of reinsurance and insurance risks through capital markets provide additional sources of potential reinsurance and insurance capacity and competition.

Worldwide insurance and reinsurance market conditions continued to be very competitive, particularly in the casualty lines of business.  Generally, there was ample insurance and reinsurance capacity relative to demand.  Competition and its effect on rates, terms and conditions vary widely by market and coverage yet continued to be most prevalent in the U.S. casualty insurance and reinsurance markets and additional capacity from the capital markets is impacting worldwide catastrophe rates.

Catastrophe rates tend to fluctuate by global region, particularly areas recently impacted by large catastrophic events.  During the second and third quarters of 2013, Canada experienced historic flooding in Alberta and Toronto, which has resulted in higher catastrophe rates in these areas.  Although there were flooding and wind storm events in Europe and Asia in the latter part of 2013, the overall 2013 catastrophe losses for the industry were lower than average.  This lower level of losses, combined with increased competition is putting downward pressure on rates in certain geographical areas resulting in lower rates for most catastrophe coverages in the beginning of 2014.

Overall, we believe that current marketplace conditions, particularly for catastrophe coverages, provide profit opportunities for us given our strong ratings, distribution system, reputation and expertise.  We continue to employ our strategy of targeting business that offers the greatest profit potential, while maintaining balance and diversification in our overall portfolio.

 
30

 
 
Financial Summary.
We monitor and evaluate our overall performance based upon financial results.  The following table displays a summary of the consolidated net income (loss), ratios and shareholders’ equity for the periods indicated.


   
Three Months Ended
 
Percentage
 
Six Months Ended
 
Percentage
   
June 30,
 
Increase/
 
June 30,
 
Increase/
(Dollars in millions)
 
2014
 
2013
 
(Decrease)
 
2014
 
2013
 
(Decrease)
Gross written premiums
  $ 1,415.4     $ 1,260.2       12.3 %   $ 2,682.8     $ 2,441.0       9.9 %
Net written premiums
    1,217.5       1,212.6       0.4 %     2,445.1       2,362.3       3.5 %
                                                 
REVENUES:
                                               
Premiums earned
  $ 1,272.3     $ 1,151.5       10.5 %   $ 2,416.8     $ 2,240.3       7.9 %
Net investment income
    131.2       148.7       -11.8 %     254.4       294.5       -13.6 %
Net realized capital gains (losses)
    59.0       33.9       74.1 %     80.1       160.6       -50.1 %
Net derivative gain (loss)
    3.8       12.1       -68.8 %     2.1       27.4       -92.3 %
Other income (expense)
    (13.9 )     8.3    
NM 
    (17.2 )     (0.6 )  
NM 
Total revenues
    1,452.5       1,354.5       7.2 %     2,736.3       2,722.2       0.5 %
                                                 
CLAIMS AND EXPENSES:
                                               
Incurred losses and loss adjustment expenses
    735.7       711.6       3.4 %     1,355.1       1,304.2       3.9 %
Commission, brokerage, taxes and fees
    283.7       242.1       17.2 %     529.7       475.1       11.5 %
Other underwriting expenses
    58.4       54.9       6.4 %     109.1       107.8       1.1 %
Corporate expenses
    3.9       6.2       -36.8 %     8.8       11.9       -25.6 %
Interest, fees and bond issue cost amortization expense
    9.0       17.4       -48.3 %     16.5       30.8       -46.4 %
Total claims and expenses
    1,090.7       1,032.1       5.7 %     2,019.2       1,929.9       4.6 %
                                                 
INCOME (LOSS) BEFORE TAXES
    361.8       322.5       12.2 %     717.0       792.3       -9.5 %
Income tax expense (benefit)
    63.9       46.8       36.4 %     117.1       132.3       -11.5 %
NET INCOME (LOSS)
  $ 297.9     $ 275.6       8.1 %   $ 599.9     $ 660.0       -9.1 %
Net (income) loss attributable to noncontrolling interests
    (7.7 )     -    
NM 
    (15.8 )     -    
NM 
NET INCOME (LOSS) ATTRIBUTABLE TO EVEREST RE GROUP
  $ 290.2     $ 275.6       5.3 %   $ 584.1     $ 660.0       -11.5 %
                                                 
                                                 
                   
Point
                 
Point
RATIOS:
                 
Change
                 
Change
Loss ratio
    57.8 %     61.8 %     (4.0 )     56.1 %     58.2 %     (2.1 )
Commission and brokerage ratio
    22.3 %     21.0 %     1.3       21.9 %     21.2 %     0.7  
Other underwriting expense ratio
    4.6 %     4.8 %     (0.2 )     4.5 %     4.8 %     (0.3 )
Combined ratio
    84.7 %     87.6 %     (2.9 )     82.5 %     84.2 %     (1.7 )
                                                 
                           
At
 
At
 
Percentage
                           
June 30,
 
December 31,
 
Increase/
(Dollars in millions, except per share amounts)
                           2014    2013  
(Decrease)
Balance sheet data:
                                               
Total investments and cash
                          $ 17,641.4     $ 16,596.5       6.3 %
Total assets
                            21,191.6       19,808.0       7.0 %
Loss and loss adjustment expense reserves
                            9,704.5       9,673.2       0.3 %
Total debt
                            888.3       488.3       81.9 %
Total liabilities
                            13,492.9       12,746.4       5.9 %
Redeemable noncontrolling interests - Mt. Logan Re
                            375.9       93.4    
NM 
Shareholders' equity
                            7,322.9       6,968.3       5.1 %
Book value per share
                            160.27       146.57       9.3 %
                                                 
(NM, not meaningful)