Everest Re’s corporate offices are located in approximately 172,500 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 fifteen locations occupy a total of approximately 84,200 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 shares outstanding of 63.1 million, 64.7 million, 57.6 million, 55.9 million and 54.0 million for 2007, 2006, 2005, 2004 and 2003, respectively.
Based on weighted average diluted shares outstanding of 63.6 million, 65.3 million, 57.6 million, 56.8 million and 55.0 million for 2007, 2006, 2005, 2004 and 2003, respectively.
In 2007, we observed increased competition with generally lower rates, higher commissions and demands by cedants for improved terms and conditions. The extent of the increased competition and its effect on rates, terms and conditions varied widely by market and coverage types. One of the lesser impacted markets was worldwide property catastrophe retrocessional coverage. Reinsurance capacity in certain areas including southeastern U.S. exposures and energy lines continued to be constrained. In January 2007, the state of Florida passed legislation that increased coverage provided by the Florida Hurricane Catastrophe Fund, thus potentially reducing the amount of reinsurance that Florida companies needed to purchase from the private reinsurance market. In addition, the legislature broadened the mandate of the state sponsored homeowners’ insurance company to render it a fully competitive market participant. Although we are unable to predict the impact on future market conditions from the increased competition and legislative developments, we believe that our clients wrote profitable business in Florida during 2007 and will continue to purchase both quota share and catastrophe coverage, although at likely lower volumes. The balance of the U.S. and international property lines experienced mostly modest price declines but we believe they were adequately priced during the year.
Premiums. Gross written premiums increased by $76.7 million, or 1.9%, in 2007 compared to 2006, reflecting growth of $57.4 million in the worldwide reinsurance business and a $19.3 million increase in the U.S. Insurance business. The increase in worldwide reinsurance is primarily attributable to the strengthening of other currencies against the U.S. dollar. Premiums written in strengthening currencies convert to more U.S. dollars resulting in comparatively higher reported premiums. Net written premiums increased $43.7 million, or 1.1%, in 2007 compared to 2006, slightly less than the growth in gross written premiums due to the change in the mix of our program business and the resulting change in reinsurance. Net premiums earned increased $144.3 million, or 3.7%, in 2007 compared to 2006. The greater percentage increase in net premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are reflected at the initiation of the coverage period.
Gross written premiums decreased by $107.7 million, or 2.6% in 2006 compared to 2005, as we repositioned our U.S. property reinsurance portfolio resulting in improved pricing, but lower premium volume; other factors were the run-off of the insurance credit program business and a reduction in treaty casualty writings in response to market softening in many U.S. casualty reinsurance classes. Net written premiums also decreased by $96.3 million, or 2.4% in 2006 compared to 2005, in line with the percentage reduction in gross written premiums. Net premiums earned declined by $109.9 million, or 2.8% in 2006 compared to 2005.
Net Investment Income. Net investment income increased 8.4% in 2007 compared to 2006, primarily due to the growth in invested assets. The growth in invested assets was principally driven by $854.4 million of operating cash flows and appreciation in portfolio assets. The average pre-tax investment portfolio yield for 2007 was 4.9% compared to the average investment portfolio yield of 4.8% for 2006.
Net Realized Capital Gains. Net realized capital gains were $86.3 million, $35.1 million and $90.3 million for 2007, 2006 and 2005, respectively. The increase in 2007 is primarily attributable to our adoption on January 1, 2007, of FAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment to FASB statement No. 115” (“FAS 159”) for our actively managed equity security investment portfolio. In 2007, we recorded $76.6 million of net realized capital gains due to fair value re-measurements.
Other Income (Expense). For 2007 and 2006, we recorded other income of $18.0 million and $0.1 million, respectively, and for 2005 other expense of $11.1 million. The fluctuations in net other income (expense) were primarily due to the fluctuations in foreign currency exchange rates.
Incurred losses and LAE decreased by $1,289.9 million, or 34.6% in 2006 compared to 2005, due to significantly reduced current year catastrophe losses and a reduction in current and prior years attritional losses, partially offset by increased prior years reserve development on catastrophe and A&E losses. Catastrophe losses, net of contract specific cessions, were $1,485.7 million in 2005, related principally to aggregate estimated losses from Hurricanes Katrina, Rita and Wilma.
Commission, brokerage, and tax expenses decreased $31.5 million, or 3.5% in 2006 compared to 2005, generally in line with the decrease in premiums earned of 2.8%.
million for 2006. The decrease was primarily due to the allocation of share-based compensation expense in 2007 to segments.
Net income increased significantly to $840.8 million in 2006 compared to a net loss of $218.7 million for 2005. This earnings improvement reflected the favorable effect of a benign U.S. hurricane season relative to unprecedented Company and industry hurricane losses experienced in 2005, as well as favorable underlying underwriting fundamentals.
Our combined ratio increased by 1.9 points to 91.6% in 2007 compared to 89.7% in 2006, principally driven by the 1.2 point increase in the commission and brokerage ratio, followed by the 0.5 point increase in the loss ratio and the 0.2 point increase in the other underwriting expense ratio.
Net investment income increased 20.4% to $629.4 million in 2006 from $522.8 million in 2005, primarily reflecting the growth in invested assets to $14.0 billion at December 31, 2006 from $13.0 billion at December 31, 2005. In addition, growth in limited partnership income of $43.2 million contributed to the increase.
The following table presents the composition of our net realized capital gains for the periods indicated:
Effective January 1, 2007, we adopted and implemented FAS 159 for our actively managed equity securities. As such, we recorded $76.6 million of net realized gains from fair value re-measurements in our consolidated statements of operations and comprehensive income for 2007.
Through our subsidiaries, we operate in five segments: U.S. Reinsurance, U.S. Insurance, Specialty Underwriting, International and Bermuda. The U.S. Reinsurance operation writes property and casualty reinsurance, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies within the U.S. The U.S. Insurance operation writes property and casualty insurance primarily through general agents and surplus lines brokers within the U.S. The Specialty Underwriting operation writes A&H, marine, aviation and surety business within the U.S. and worldwide through brokers and directly with ceding companies. The International operation writes non-U.S. property and casualty reinsurance through Everest Re’s branches in Canada and Singapore and offices in Miami and New Jersey. The Bermuda operation provides insurance and reinsurance to worldwide property and casualty markets and reinsurance to the United Kingdom and European markets through its UK branch.
Underwriting results include earned premium less losses and 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 earned premium. We utilize inter-affiliate reinsurance, although such reinsurance does not materially impact segment results, as business is generally reported within the segment in which the business was first produced.
The following discusses the underwriting results for each of our segments for the periods indicated:
Incurred losses and LAE decreased 42.5% to $851.2 million for 2006 compared to $1,479.6 million for 2005, primarily due to significantly reduced catastrophe losses, principally within the treaty property unit and decreased earned premiums. The segment loss ratio improved by 39.6 points for 2006 compared to 2005. The factors driving this change were a favorable 35.8 point decrease in catastrophe losses and a 5.1 point decrease in the attritional loss ratio.
Segment Expenses.Commission and brokerage expenses increased by 9.8% to $327.2 million for 2007 from $298.1 million in 2006, principally due to an $18.9 million increase in contingent commissions and somewhat higher base ceding commissions, generally. Segment other underwriting expenses for 2007 increased to $33.3 million from $24.9 million for 2006, principally due to the allocation of certain corporate charges to segments, which had been previously retained in corporate expenses.
Incurred losses and LAE increased by 7.0% to $556.4 million for 2007 from $519.9 million for 2006 as the segment loss ratio increased by 7.3% to 75.6%. From a ratio perspective, the swing in prior years’ development from favorable in 2006 to adverse in 2007 resulted in 14.0 points of increase.
Segment Expenses.Commission and brokerage increased by 10.6% to $136.2 million for 2007 from $123.1 million in 2006, principally due to an increase in regular commission on new programs and profit commissions. Segment other underwriting expenses for 2007 increased to $58.2 million as compared to $48.9 million for 2006, primarily due to increased compensation costs associated with increased staff and the allocation of certain corporate charges to segments, which had been previously retained in corporate expenses.
Incurred losses and LAE increased 5.7% to $173.3 million for 2007 compared to $163.9 million for 2006, generally proportional to the increase in net earned premiums. The loss ratio for the current accident year was slightly lower in 2007 compared to 2006. We experienced 10.2 points of adverse development in 2007 compared to 9.3 points in 2006. Catastrophe loss development, principally within the marine business related to Hurricane Katrina, was the driver of the overall development in both 2007 and 2006.
Segment Expenses.Commission and brokerage increased 1.0% to $68.5 million in 2007 from $67.8 million in 2006 due primarily to premium growth. Segment other underwriting expenses increased 28.8% to $8.5 million for 2007 from $6.6 million for 2006, primarily due to the allocation of certain corporate charges to segments, which had been previously retained in corporate expenses.
Commission and brokerage decreased 14.9% to $67.8 million in 2006 from $79.7 million in 2005, primarily due to the decrease in writings. Segment other underwriting expenses decreased 2.9% to $6.6 million for 2006 from $6.8 million for 2005.
Incurred losses and LAE decreased 33.4% to $382.8 million for 2006 compared to $574.7 million for 2005. The segment loss ratio decreased by 30.9 points, principally due to reduced current year catastrophe losses in Canada, Asia and International. The catastrophe losses for 2005 included the impact from Hurricanes Katrina, Rita and Wilma.
Premiums.Gross written premiums increased 13.2% to $922.5 million for 2007 compared to $814.9 million for 2006. Premiums written from the Bermuda office increased $61.0 million, or 22.9%, and premiums written from the UK office increased $47.3 million, or 8.6%. The increase in the Bermuda office premiums was driven by growth in worldwide treaty casualty reinsurance business and approximately half of the increase from the UK office was driven by the Pound Sterling currency strengthening against the U.S. dollar during 2007. Net written premiums increased 13.0% to $922.3 million for 2007 compared to $816.2 million for 2006, commensurate with the increase in gross written premiums. Net premiums earned increased 7.9% to $912.9 million for 2007 compared to $846.4 million for 2006. The change in net premiums earned relative to the net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are reflected at the initiation of the coverage period.
Gross written premiums increased 6.0% to $814.9 million for 2006 compared to $768.7 million for 2005. Premiums written from the UK office increased $72.4 million, or 15.2%, and premiums written from the Bermuda office decreased $26.5 million, or 9.0%. Contributing to the growth was a slight increase in both the worldwide casualty and property business. Net written premiums increased 6.2% to $816.2 million for 2006 compared to $768.8 million for 2005, as the result of the increase in gross written premiums. Net premiums earned increased 11.5% to $846.4 million for 2006 compared to $759.1 million for 2005.
Incurred losses and LAE increased 18.3% to $611.2 million for 2007 compared to $516.6 million for 2006. The segment loss ratio for Bermuda increased 6.0 points, reflecting a 5.7 point increase in catastrophe losses and a 3.9 point increase for A&E losses, partially offset by a 3.8 point decrease for attritional losses. The current year catastrophe losses include winter storm Kyrill and the June and July, 2007 London floods. The increase in A&E losses was due to the strengthening of asbestos reserves, principally for the direct business.
The following is a summary of the critical accounting policies related to accounting estimates that (1) require management to make assumptions about highly uncertain matters and (2) could materially impact the consolidated financial statements if management made different assumptions.
We believe it is more difficult to accurately estimate loss reserves for reinsurance liabilities than for insurance liabilities. At December 31, 2007 we had reinsurance reserves of $6,841.5 million and insurance loss reserves of $2,199.1 million, of which $585.3 million and $273.6 million, respectively, were loss reserves for A&E liabilities. A detailed discussion of additional considerations related to A&E exposures follows later in this section.
Given the inherent variability in our loss reserves, we have developed an estimated range of possible gross reserve levels. A table of ranges by segment, accompanied by commentary on potential and historical variability, is included in “Financial Condition - Loss and LAE Reserves”. The ranges are statistically developed using the exposure groups used in the reserve estimation process and aggregated to the segment level. For each exposure group, our actuaries calculate a range for each accident year based principally on two variables. The first is the historical changes in losses and LAE incurred but not reported (“IBNR”) for each accident year over time; the second is volatility of each accident year’s held reserves related to estimated ultimate losses, also over time. Both are measured at various ages from the end of the accident year through the final payout of the year’s losses. Ranges are developed for the exposure groups using statistical methods to adjust for diversification; the ranges for the exposure groups are aggregated to the segment level, likewise, with an adjustment for diversification. Our estimates of our reserve variability may not be comparable to those of other companies because there are no consistently applied actuarial or accounting standards governing such presentations. Our recorded reserves reflect our best point estimate of our liabilities and our actuarial methodologies focus on developing such point estimates, we calculate the ranges subsequently, based on the historical variability of such reserves.
release of hazardous substances into the land, air or water. Asbestos claims typically assert liability for bodily injury from exposure to asbestos or for property damage resulting from asbestos or products containing asbestos.
With respect to asbestos claims in particular, several additional factors have emerged in recent years that further compound the difficulty in estimating our liability. These developments include: (a) the significant growth over a short period of time in the number of claims filed, in part reflecting a much more aggressive plaintiff bar and including claims against defendants who may only have a “peripheral” connection to asbestos; (b) a disproportionate percentage of claims filed by individuals with no functional injury, which should have little to no financial value but that have increasingly been considered in jury verdicts and settlements; (c) the growth in the number and significance of bankruptcy filings by companies as a result of asbestos claims (including, more recently, bankruptcy filings in which companies attempt to resolve their asbestos liabilities in a manner that is prejudicial to insurers and forecloses insurers from participating in the negotiation of asbestos related bankruptcy reorganization plans); (d) the concentration of claims in a small number of states that favor plaintiffs; (e) the growth in the number of claims where coverage is sought under the general liability portion of insurance policies rather than the product liability portion; (f) measures adopted by specific courts to ameliorate the worst procedural abuses; (g) an increase in settlement values being paid to asbestos claimants, especially those with cancer or functional impairment; (h) legislation in some states to address asbestos litigation issues; and (i) the potential that other states or the U.S. Congress may adopt legislation on asbestos litigation. Anecdotal evidence suggests that new claims filing rates have decreased, that new filings of asbestos-driven bankruptcies have decreased and that various procedural and legislative reforms are beginning to diminish the potential ultimate liability for asbestos losses.
In connection with the acquisition of Mt. McKinley, which has significant exposure to A&E claims, LM provided reinsurance to Mt. McKinley covering 80% ($160.0 million) of the first $200.0 million of any adverse development of Mt. McKinley’s reserves as of September 19, 2000 and The Prudential guaranteed LM’s obligations to Mt. McKinley. Coverage under this reinsurance agreement was exhausted as of December 31, 2003.
concluded settlements or reached agreement in principle with 16 of our high profile policyholders. We currently have identified 7 policyholders based on their past claim activity and/or potential future liabilities as “high profile policyholders” and we attempt to negotiate with such policyholders, in part because their exposures have developed to the point where we and the policyholder have sufficient information to be motivated to settle. We believe that this active approach will ultimately result in a more cost-effective liquidation of Mt. McKinley’s liabilities than a passive approach, although it may also introduce additional variability in Mt. McKinley’s losses and cash flows as reserves are adjusted to reflect the developments in litigation, negotiations and, ultimately, potential settlements.
Due to the uncertainties discussed above, the ultimate losses attributable to A&E, and particularly asbestos, may be subject to more variability than are non-A&E reserves and such variation could have a material adverse effect on our financial condition, results of operations and/or cash flows. See also Notes 1 and 3 of Notes to the Consolidated Financial Statements.
Reinsurance Receivables. We have purchased reinsurance to reduce our exposure to adverse claim experience, large claims and catastrophic loss occurrences. Our ceded reinsurance provides for recovery from reinsurers of a portion of losses and loss expenses under certain circumstances. Such reinsurance does not relieve us of our obligation to our policyholders. In the event our reinsurers are unable to meet their obligations under these agreements or are able to successfully challenge losses ceded by us under the contracts, we will not be able to realize the full value of the reinsurance receivable balance. To minimize exposure from uncollectible reinsurance receivables, we have a reinsurance security committee that evaluates the financial strength of each reinsurer prior to our entering into a reinsurance arrangement. In some cases, we may hold full or partial collateral for the receivable, including letters of credit, trust assets and cash. Additionally, creditworthy foreign reinsurers of business written in the U.S. are generally required to secure their obligations. We have established reserves for uncollectible balances based on our assessment of the collectibility of the outstanding balances. As of December 31, 2007 and 2006, the reserve for uncollectible balances was $173.0 million and $87.0 million, respectively. Management believes that adequate provision has been made for our uncollectible balances. Actual uncollectible amounts may vary, perhaps substantially, from such reserves, impacting income in the period in which the change in reserves is made. See also Note 1 of Notes to the Consolidated Financial Statements and “Financial Condition - Reinsurance Receivables” below.
Investment Valuation. Our fixed income investments are classified for accounting purposes as available for sale and are carried at market value in our consolidated balance sheets. Our actively managed equity securities are also held as available for sale and are carried at fair value at December 31, 2007, due to the adoption of FAS 159 effective January 1, 2007. In prior periods our equity securities were carried at market value; however, there is no practical distinction between fair value and market value for our securities since all are actively traded. Most securities we own are traded on national exchanges where market values are readily available. We hold some privately placed securities, less than 0.5% of the portfolio that are either valued by brokers or an investment advisor. At December 31, 2007 and 2006, our investment portfolio included $623.6 million and $442.5 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 limited partnerships and due to inherent reporting lags, the carrying values are based on values as of dates from one month to one quarter prior to our financial statement date. In 2005, we owned interest only strips that were accounted for in accordance with EITF 99-20, which sets forth the rules for determining when these securities must be written down to fair value due to impairment.
Over the past few years, we have reallocated our shareholders’ equity investment portfolio to include 1) publicly traded equity securities, primarily individual equity securities intended to emulate the performance of specific exchange traded funds or equity indexes or exchange traded funds, and 2) private equity limited partnership investments. The objective of this portfolio diversification is to enhance the risk-adjusted total return of the investment portfolio by allocating a prudent portion of the portfolio to higher return asset classes. We have limited our allocation to these asset classes because of 1) the potential for volatility in their values and 2) the impact of these investments on regulatory and rating agency capital adequacy models. At December 31, 2007, the market value of investments in equity and limited partnership securities approximated 38% of shareholders’ equity.
Loss and LAE Reserves. Gross loss and LAE reserves totaled $9,040.6 million at December 31, 2007 and $8,840.1 million at December 31, 2006. The increase in 2007 was primarily attributable to an increase in our asbestos reserves, partially offset by favorable reserve development and the payout during 2007 of catastrophe reserves held as of December 31, 2006.
We have included ranges for loss reserve estimates determined by our actuaries, which have been developed through a combination of objective and subjective criteria. Our presentation of this information may not be directly comparable to similar presentations of other companies as there are no consistently applied actuarial or accounting standards governing such presentations. Our recorded reserves are an aggregation of our best point estimates for approximately 200 reserve groups and reflect our best point estimate of our liabilities. Our actuarial methodologies develop point estimates rather than ranges and the ranges are developed subsequently based upon historical and prospective variability measures.
The following table below represents the reserve levels and ranges for each of our business segments for the period indicated:
Depending on the specific segment, the range derived for the loss reserves, excluding reserves for A&E exposures, ranges from minus 9.4% to minus 16.3% for the low range and from plus 9.4% to plus 16.3% for the high range. Both the higher and lower ranges are associated with the Specialty Underwriting segment. The size of the range is dependent upon the level of confidence associated with the outcome. Within each range, management’s best estimate of loss reserves is based upon the point estimatederived by our actuaries in detailed reserve studies. Such ranges are necessarily subjective due to the lack of generally accepted actuarial standards with respect to their development. For the above presentation, management has assumed what it believes is a reasonable confidence level but notes that there can be no assurance that our claim obligations will not vary outside of these ranges.
may emerge in the future. Such future emergence, to the extent not covered by existing retrocessional contracts, could have material adverse effects on our future financial condition, results of operations and cash flows.
Mt. McKinley began writing small amounts of A&E exposed insurance in 1975 and increased the volume of its writings in 1978. These writings ceased in 1984, giving Mt. McKinley an approximate 10-year window of potential A&E exposure, which is appreciably shorter than is the case for many companies with significant A&E exposure. Additionally, due to changes in and standardization of policy forms, it is rare for policies in the 1970s and 1980s to have been issued without aggregate limits on the product liability coverage; policies issued in earlier decades were generally more likely to lack aggregate limits.
Asbestos and Environmental Exposures. The following table summarizes incurred losses and outstanding loss reserves with respect to A&E reserves on both a gross and net of retrocessions basis for the periods indicated:
trends. Our Claims Department undertook a contract by contract analysis of its direct business and projected those findings to its assumed reinsurance business. Our actuaries utilized nine methodologies to project our potential ultimate liabilities including projections based on internal data and assessments, extrapolations of non-public and publicly available data for our cedants and benchmarking against industry data and experience. As a result of this study and claims notifications and additional information received from cedants and insureds, we increased our gross reinsurance asbestos reserves by $250.0 million and increased our gross direct asbestos reserves by $75.0 million in the fourth quarter of 2007. This $325.0 million of gross reserve strengthening was the primary driver of the $405.0 million of gross incurred asbestos losses for the year ended December 31, 2007. Given our recent study and loss trends for these exposures, we believe our reserves at December 31, 2007 make adequate provisions for our asbestos losses. Nevertheless, given historical experience associated with asbestos claims, we cannot provide assurances that our current reserves are adequate and it is possible that our ultimate losses may exceed our estimate by a material amount.
On December 1, 2005, we issued 2,298,000 of our common shares at a price of $102.89 per share, which resulted in $236.4 million of proceeds before expenses and Holdings sold Group shares it acquired in 2002 at a price of $102.89 per share, which resulted in $46.5 million of proceeds before expenses. Expenses incurred for this transaction were approximately $0.3 million.
Over the past few years, we have reallocated our shareholders’ equity investment portfolio to include 1) publicly traded equity securities and 2) private equity limited partnership investments. The objective of this portfolio diversification is to enhance the risk-adjusted total return of the investment portfolio by allocating a prudent portion of the portfolio to higher return asset classes. We have limited our allocation to these asset classes because 1) the potential for volatility in their values and 2) the impact of these investments on regulatory and rating agency capital adequacy models. At December 31, 2007, the market value of investments in equity and limited partnership securities approximated 38% of shareholders’ equity.
Our liquidity requirements are generally met from positive cash flow from operations. Positive cash flow results from reinsurance and insurance premiums being collected prior to disbursements for claims, which disbursements generally take place over an extended period after the collection of premiums, sometimes a period of many years. Collected premiums are generally invested, prior to their use in such disbursements, and
investment income provides additional funding for loss payments. Our net cash flows from operating activities were $854.4 million, $636.3 million and $1,070.6 million for the years ended December 31, 2007, 2006 and 2005, respectively. Additionally, these cash flows reflected net tax payments of $282.6 million, $46.6 million and $110.9 million for the years ended December 31, 2007, 2006 and 2005, respectively; net catastrophe loss payments of $443.1 million, $896.5 million and $459.7 million for the years ended December 31, 2007, 2006 and 2005, respectively; and net A&E payments of $71.6 million, $45.5 million and $137.7 million for the years ended December 31, 2007, 2006 and 2005, respectively. The increase in net cash flows from operations in 2007 compared with 2006 was primarily due to lower claim payments on catastrophes, partially offset by increased tax payments. Correspondingly, the decrease in net cash flows from operations in 2006 compared with 2005 was primarily due to higher claim payments on catastrophes combined with lower premium volume.
At December 31, 2007, $22.0 million and $287.9 million were used under tranche one and tranche two of the Group Credit Facility, respectively. At December 31, 2006, $185.4 million was used under tranche two of the Group Credit Facility.
At December 31, 2007, $17.2 million was used under the Holdings Credit Facility. At December 31, 2006, there were no borrowings under the Holdings Credit Facility.
No single universal model is currently capable of projecting the amount and probability of loss in all global geographic regions in which we conduct business. In addition, the form, quality and granularity of underwriting
Projected catastrophe losses are generally summarized in terms of the PML. We define PML as anticipated loss, taking into account contract terms and limits, caused by a single catastrophe affecting a broad contiguous geographic area, such as that caused by a hurricane or earthquake. The PML will vary depending upon the severity of modeled simulated losses and the make-up of the in force book of business. The projected severity levels are described in terms of “return periods”, such as “100-year events” and “250-year events”. For example, a 100-year PML corresponds to the estimated loss from a single event which has a 1% probability of being exceeded in a twelve month period. Conversely, it corresponds to a 99% probability that the loss from a single event will fall below the indicated PML. It is important to notes that PMLs are estimates. Modeled events are hypothetical events produced by a stochastic model. As a result, there can be no assurance that any actual event will align with the modeled event or that actual losses from events similar to the modeled events will not vary materially from the modeled event PML.
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 $888 million. See also table under “Risk Management and Retrocession Arrangements”.
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 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, 2007, 2006 and 2005, Everest Re paid dividends to Holdings of $245.0 million, $100.0 million and $75.0 million, respectively. For the years ended December 31, 2007, 2006 and 2005, Bermuda Re paid dividends to Group of $0.0 million, $60.0 million and $45.0 million, respectively. See ITEM 1, “Business - Regulatory Matters - Dividends” and Note 16 of Notes to Consolidated Financial Statements.
In September 2006, the FASB issued FAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (“FAS 158”), which is effective for employers with publicly traded equity securities as of the end of the fiscal year ending after December 15, 2006. FAS 158 requires an employer to (a) recognize in its financial statements an asset for a plan’s over funded status or a liability for a plan’s under funded status, (b) measure a plan’s assets and its obligations that determine its funded status as of the end of the employer’s fiscal year and (c) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur as other comprehensive income. The Company adopted FAS 158 for the reporting period ended December 31, 2006.
In February 2007, the FASB issued FAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities - including an amendment to FASB Statement No. 115” (“FAS 159”), which is effective for employers with publicly traded equity securities as of the end of the fiscal year ending after November 15, 2007. FAS 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company adopted FAS 159 as of January 1, 2007.
Interest rate risk is the potential change in value of the fixed maturity portfolio, including short-term investments, from a change in market interest rates. In a declining interest rate environment, it includes prepayment risk on the $1,627.2 million of mortgage-backed securities in the $10,245.6 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 market value and after-tax unrealized appreciation of a 10% and 20% change in equity prices up and down for the periods indicated.
varies by regulatory jurisdiction in accordance with market needs. 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 Financial Accounting Standards Board Statement No. 52, “Foreign Currency Translation”, 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, 2007 there has been no material change in exposure to foreign exchange rates as compared to December 31, 2006.
Although not considered material in the context of our aggregate exposure to market sensitive instruments, we have issued six equity index put options based on the S&P 500 index and one equity index put option based on the FTSE 100 index, that are market sensitive and sufficiently unique to warrant supplemental disclosure.
We sold one equity index put option based on the FTSE 100 index for total consideration, net of commissions, of $6.7 million. This contract has an exercise date of July 2020 and a strike price of £5,989.75. No amount will be payable under this 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 applicable 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 December 31, 2007 index value, we estimate the probability that the FTSE 100 index contract will fall below the strike price on the exercise date to be less than 9.7%. The theoretical
The tables below estimate the impact of potential movements in interest rates and the equity indices, which are the principal factors affecting fair value of these instruments, looking forward from the fair value for the periods indicated. These are estimates and there can be no assurance regarding future market performance. The asymmetrical results of the interest rate and S&P 500 and FTSE 100 indices shift reflect that the liability cannot fall below zero whereas it can increase to its theoretical maximum.