Everest Re’s corporate offices are located in approximately 230,500 square feet of leased office space in Liberty Corner, New Jersey. Bermuda Re’s corporate offices are located in approximately 3,600 total square feet of leased office space in Hamilton, Bermuda. The Company’s other thirteen locations occupy a total of approximately 106,900 square feet, all of which are leased. Management believes that the above-described office space is adequate for its current and anticipated needs.
Based on weighted average basic common shares outstanding of 56.6 million, 60.7 million, 61.7 million, 63.1 million and 64.7 million for 2010, 2009, 2008, 2007 and 2006, respectively.
In previous years, corporate expenses were included as part of the other underwriting expenses and the other underwriting expense ratio. Prior years have been adjusted to reflect the change.
Commission, Brokerage, Taxes and Fees. Commission, brokerage, taxes and fees increased by $3.5 million, or 0.4%, for the year ended December 31, 2010 compared to the same period in 2009. The change was primarily the result of an increase in premiums earned, as the commission ratio, year over year, was comparable.
Other Underwriting Expenses. Other underwriting expenses, which have remained stable in relation to premium volume, were $166.3 million, $167.2 million and $148.5 million in 2010, 2009 and 2008, respectively.
Interest, Fees and Bond Issue Cost Amortization Expense. Interest, fees and other bond amortization expense was $55.8 million and $72.1 million in 2010 and 2009, respectively. The decrease was primarily due to the combination of the repurchase of debt in March 2009 and the maturing of debt in 2010.
Interest, fees and other bond amortization was $72.1 million and $79.2 million in 2009 and 2008, respectively. The decrease, period over period, was primarily due to the partial repurchase of our long term subordinated notes in March 2009.
Income Tax Expense (Benefit). We had income tax benefit of $19.5 million in 2010, an income tax expense of $132.3 million in 2009 and an income tax benefit of $64.8 million in 2008. Our income tax is primarily a function of the statutory tax rates and corresponding pre-tax income in the jurisdictions where we operate, coupled with the impact from tax-preferenced investment income. The taxes for 2010 included a $48.9 million benefit resulting from a favorable Internal Revenue Service (“IRS”) audit settlement. Absent these types of unusual items, variations in our effective tax rate generally result from changes in the relative levels of pre-tax income among jurisdictions with different tax rates.
Our net income was $610.8 million and $807.0 million in 2010 and 2009, respectively. The decrease was primarily driven by a few large catastrophe losses in 2010 compared to no similar catastrophe events in 2009, partially offset by an increase in net realized capital gains and a reduction in income taxes, in addition to the other components discussed above.
Our combined ratio decreased by 6.1 points to 89.1% in 2009 compared to 95.2% in 2008. The loss ratio component decreased 5.0 points in 2009 compared to the same period last year, principally due to the significant decrease in catastrophe losses. The commission and brokerage ratio component decreased by 1.4 points in 2009 compared to the same period last year, due to mix of business, while the other
Net investment income increased by 19.3% to $653.5 million in 2010 compared to $547.8 million in 2009, primarily due to an increase in income from our limited partnership investments and increased dividend income from equities due to our expanded equity portfolio.
Net realized capital gains were $101.9 million in 2010 compared to net realized capital losses of $2.3 million and $695.8 million in 2009 and 2008, respectively. In 2010, we recorded $70.4 million of gains due to fair value re-measurements on fixed maturity and equity securities, $34.5 million of net realized capital gains from sales of fixed maturity and equity securities, partially offset by $3.0 million of other-than-temporary impairments on fixed maturity securities. The gains on the sales of fixed maturity securities included selling securities in foreign currencies, which will reduce our exposure to currency fluctuations in the future. The losses included the impact of selling part of our municipal bond portfolio in the latter part of the year as credit concerns arose in this market sector. We will be able to carry these realized losses back for income tax purposes to offset previously realized gains. This carry back availability expired at the end of 2010. In 2009, we recorded $29.3 million of net realized capital losses from sales of fixed maturity and equity securities and $13.2 million of other-than-temporary impairments on fixed maturity securities, partially offset by $40.2 million of gains due to fair value re-measurements on fixed maturity and equity securities. In 2008, we recorded $276.0 million in losses due to fair value re-measurements primarily on equity securities as a result of the global financial markets credit crisis, $243.3 million of losses from sales of our equity portfolio and $176.5 million of other-than-temporary impairments on our available for sale fixed maturity securities.
Segment Expenses. Commission and brokerage expenses increased by 4.6% to $284.6 million in 2010 compared to $272.2 million in 2009, primarily due to a shift in the mix of business across lines with different commission rates. Segment other underwriting expenses in 2010 decreased slightly to $33.9 million from $36.2 million in 2009.
Commission and brokerage expenses decreased by 0.4% to $272.2 million in 2009 compared to $273.3 million in 2008, primarily due to the change in the mix and type of business written. Segment other underwriting expenses for 2009 increased to $36.2 million from $32.2 million for 2008, due to growth in the overall infrastructure.
Gross written premiums increased by 9.2% to $842.6 million in 2009 compared to $771.8 million for 2008. Most of the new premium was derived from our entry into the financial institution D&O and E&O market and additional property insurance written in Florida, where rates to exposure remained attractive. Net written premiums increased by 6.4% to $656.2 million in 2009 compared to $617.0 million in 2008, as the increase in gross written premiums was partially offset by the increase in ceded written premiums. Premiums earned decreased 4.9% to $671.1 million in 2009 compared to $705.5 million in 2008. The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.
Commission and brokerage increased 15.7% to $267.1 million in 2009 compared to $230.9 million in 2008. The increase was primarily due to the growth in premiums earned in conjunction with the blend of business mix. Segment other underwriting expenses in 2009 increased to $23.1 million compared to $19.8 million in 2008, consistent with growth in business.
Segment Expenses. Commission and brokerage decreased 10.9% to $171.1 million in 2010 compared to $192.1 million in 2009. The decrease was due to a combination of lower premiums earned, an increased mix of lower commission business and higher reinstatement premiums, which do not have corresponding commission expense. Segment other underwriting expenses increased to $26.4 million in 2010 compared to $24.6 million in 2009. The increase was primarily the result of expanded operations in Ireland.
Our reserves include an estimate of our ultimate liability for A&E claims. Our A&E liabilities emanate from Mt. McKinley’s direct insurance business and Everest Re’s assumed reinsurance business. There are significant uncertainties surrounding our estimates of our potential losses from A&E claims. Among the uncertainties are: (a) potentially long waiting periods between exposure and manifestation of any bodily injury or property damage; (b) difficulty in identifying sources of asbestos or environmental contamination; (c) difficulty in properly allocating responsibility and/or liability for asbestos or environmental damage; (d) changes in underlying laws and judicial interpretation of those laws; (e) the potential for an asbestos or environmental claim to involve many insurance providers over many policy periods; (f) questions concerning
The following table displays the estimated components of earned but not reported premiums by segment for the periods indicated.
Investment Valuation. Our fixed income investments are classified for accounting purposes as available for sale and are carried at market value or fair value in our consolidated balance sheets. Our equity securities are also held as available for sale and are carried at market or fair value. Most securities we own are traded on national exchanges where market values are readily available. Some of our commercial mortgage-backed securities (“CMBS”) are valued using cash flow models and risk-adjusted discount rates. We hold some privately placed securities, less than 0.05% of the portfolio, that are either valued by brokers or an investment advisor. At December 31, 2010 and 2009, our investment portfolio included $567.9 million and $504.3 million, respectively, of limited partnership investments whose values are reported pursuant to the equity method of accounting. We carry these investments at values provided by the managements of the
For the portion needed to satisfy global outstanding liabilities, we generally invest in taxable and tax-preferenced fixed income securities with an average credit quality of Aa2, as rated by Moody’s. For the U.S. portion of this portfolio, our mix of taxable and tax-preferenced investments is adjusted periodically, consistent with our current and projected U.S. operating results, market conditions and our tax position. This global fixed maturity securities portfolio is externally managed by an independent, professional investment manager using portfolio guidelines approved by us.
The pre-tax equivalent total return for the bond portfolio was approximately 5.7%, 10.1% and 1.0%, respectively, for 2010, 2009 and 2008. The pre-tax equivalent return adjusts the yield on tax-exempt bonds to the fully taxable equivalent.
Loss and LAE Reserves. Gross loss and LAE reserves totaled $9,340.2 million at December 31, 2010 and $8,937.9 million at December 31, 2009.
At December 31, 2010, the gross reserves for A&E losses were comprised of $135.4 million representing case reserves reported by ceding companies, $116.1 million representing additional case reserves established by us on assumed reinsurance claims, $38.9 million representing case reserves established by us on direct excess insurance claims, including Mt. McKinley, and $264.4 million representing IBNR reserves.
Our shareholders’ equity increased to $6,101.7 million as of December 31, 2009 from $4,960.4 million as of December 31, 2008. This increase was the result of $807.0 million in net income, unrealized appreciation on investments, net of tax, of $529.9 million, $83.8 million of foreign currency translation adjustments and $22.5 million of share-based compensation transactions, partially offset by the repurchase of 2.4 common shares for $190.6 million and $116.9 million of shareholder dividends.
On December 17, 2008, we renewed our shelf registration statement on Form S-3ASR with the Securities and Exchange Commission (“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.
The Group Credit Facility requires Group to maintain a debt to capital ratio of not greater than 0.35 to 1 and to maintain a minimum net worth. Minimum net worth is an amount equal to the sum of $3,575.4 million plus 25% of consolidated net income for each of Group’s fiscal quarters, for which statements are available ending on or after January 1, 2007 and for which consolidated net income is positive, plus 25% of any increase in consolidated net worth during such period attributable to the issuance of ordinary and preferred shares, which at December 31, 2010, was $4,226.2 million. As of December 31, 2010, the Company was in compliance with all Group Credit Facility covenants.
Effective August 23, 2006, Holdings entered into a five year, $150.0 million senior revolving credit facility with a syndicate of lenders referred to as the “Holdings Credit Facility”. Citibank N.A. is the administrative agent for the Holdings Credit Facility. The Holdings Credit Facility may be used for liquidity and general corporate purposes. The Holdings Credit Facility provides for the borrowing of up to $150.0 million with interest at a rate selected by Holdings equal to either, (1) the Base Rate (as defined below) or (2) a periodic fixed rate equal to the Eurodollar Rate plus an applicable margin. The Base Rate means a fluctuating interest rate per annum in effect from time to time to be equal to the higher of (a) the rate of interest publicly announced by Citibank as its prime rate or (b) 0.5% per annum above the Federal Funds Rate, in each case plus the applicable margin. The amount of margin and the fees payable for the Holdings Credit Facility depends upon Holdings’ senior unsecured debt rating.
We believe that our greatest worldwide 1 in 100 year exposure to a single catastrophic event is to a hurricane affecting the U.S. southeast coast, where we estimate we have a gross PML exposure of $941 million. See also table under ITEM 1, “Business - Risk Management of Underwriting and Retrocession Arrangements”.
If such a single catastrophe loss were to occur, management estimates that the economic loss to us would be approximately $640 million. The estimate involves multiple variables, including which Everest entity would experience the loss, and as a result there can be no assurance that this amount would not be exceeded.
For the period from July 1, 2010 to July 1, 2011, we have catastrophe loss reinsurance in place of 75% of $100 million in excess of $250 million, excluding the territories of the U.S., Japan, Europe and Caribbean wind. See ITEM 1, “Business - Risk Management of Underwriting and Retrocession Arrangements” for further details.
During 2010, 2009 and 2008, we declared and paid shareholder dividends of $108.5 million, $116.9 million and $118.6 million, respectively. As an insurance holding company, we are partially dependent on dividends and other permitted payments from our subsidiaries to pay cash dividends to our shareholders. The payment of dividends to Group by Holdings Ireland is subject to Irish corporate and regulatory restrictions; the payment of dividends to Holdings Ireland by Holdings and to Holdings by Everest Re is subject to Delaware regulatory restrictions; and the payment of dividends to Group by Bermuda Re is subject to Bermuda insurance regulatory restrictions. Management expects that, absent extraordinary catastrophe losses, such restrictions should not affect Everest Re’s ability to declare and pay dividends sufficient to support Holdings’ general corporate needs and that Holdings Ireland and Bermuda Re will have the ability to declare and pay dividends sufficient to support Group’s general corporate needs. For the years ended December 31, 2010, 2009 and 2008, Everest Re paid dividends to Holdings of $590.0 million, $60.0 million and $285.0 million, respectively. For the years ended December 31, 2010, 2009 and 2008, Bermuda Re paid dividends to Group of $215.0 million, $245.0 million and $120.0 million, respectively. See ITEM 1, “Business - Regulatory Matters - Dividends” and ITEM 8, “Financial Statements and Supplementary Data” - Note 15 of Notes to Consolidated Financial Statements.
Interim Disclosures About Fair Value of Financial Instruments. In April 2009, the FASB revised the authoritative guidance for disclosures about fair value of financial instruments. This new guidance requires quarterly disclosures on the qualitative and quantitative information about the fair value of all financial instruments including methods and significant assumptions used to estimate fair value during the period. These disclosures were previously only done annually. The Company adopted this disclosure beginning with the second quarter of 2009 and included it in the Notes to Consolidated Interim Financial Statements.
Revisions to Earnings per Share Calculation. In June 2008, the FASB revised the authoritative guidance for earnings per share for determining whether instruments granted in share-based payment transactions are participating securities. This new guidance requires unvested share-based payment awards that contain non-forfeitable rights to dividends be considered as a separate class of common stock and included in the earnings per share calculation using the two-class method. The Company’s restricted share awards meet this definition and are therefore included in the basic earnings per share calculation.
Additional Disclosures for Derivative Instruments. In March 2008, the FASB issued authoritative guidance for derivative instruments and hedging activities, which requires enhanced disclosures on derivative instruments and hedged items. On January 1, 2009, the Company adopted the additional disclosure for the equity index put options. No comparative information for periods prior to the effective date was required. This guidance had no impact on how the Company records its derivatives.
Interest rate risk is the potential change in value of the fixed maturity securities portfolio, including short-term investments, from a change in market interest rates. In a declining interest rate environment, it includes prepayment risk on the $2,506.2 million of mortgage-backed securities in the $12,631.0 million fixed maturity portfolio. Prepayment risk results from potential accelerated principal payments that shorten the average life and thus the expected yield of the security.
The tables below display the impact on fair/market value and after-tax change in fair/market value of a 10% and 20% change in equity prices up and down for the period indicated.
Foreign Currency Risk. Foreign currency risk is the potential change in value, income and cash flow arising from adverse changes in foreign currency exchange rates. Each of our non-U.S./Bermuda (“foreign”) operations maintains capital in the currency of the country of its geographic location consistent with local regulatory guidelines. Each foreign operation may conduct business in its local currency, as well as the currency of other countries in which it operates. The primary foreign currency exposures for these foreign operations are the Canadian Dollar, the British Pound Sterling and the Euro. We mitigate foreign exchange exposure by generally matching the currency and duration of our assets to our corresponding operating liabilities. In accordance with FASB guidance, we translate the assets, liabilities and income of non-U.S. dollar functional currency legal entities to the U.S. dollar. This translation amount is reported as a component of other comprehensive income. As of December 31, 2010 there has been no material change in exposure to foreign exchange rates as compared to December, 31, 2009.
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 December 31, 2010 S&P 500 index value, we estimate 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 37%. The theoretical maximum payouts under the equity index put option contracts would occur if on each of the exercise dates the S&P 500 index value were zero. At December 31, 2010, the present value of these theoretical maximum payouts using a 6% discount factor was $269.2 million.