Credit Opinion: Everest Re Group, Ltd.

Transcription

1 Credit Opinion: Everest Re Group, Ltd. Global Credit Research - 22 Oct 2012 Bermuda Ratings Category Rating Outlook Everest Reinsurance (Bermuda), Ltd. Rating Outlook Insurance Financial Strength Everest Reinsurance Company Rating Outlook Insurance Financial Strength Everest Reinsurance Holdings, Inc. Rating Outlook BACKED Senior Unsecured Junior Subordinate Moody's Rating NEG NEG Aa3 NEG Aa3 NEG A3 Baa1 (hyb) Contacts Analyst Phone Kevin Lee/New York City James Eck/New York City Stanislas Rouyer/New York City Key Indicators Everest Re Group, Ltd.[1] 2Q2012 1Q Total Assets ($ Mil.) $ 18,903 $ 19,165 $ 18,894 $ 18,384 $ 18,001 $ 16,847 $ 17,999 Shareholders' Equity ($ Mil.) $ 6,417 $ 6,331 $ 6,071 $ 6,284 $ 6,102 $ 4,960 $ 5,685 Net Income ($ Mil.) $ 215 $ 305 $ (80) $ 611 $ 807 $ (19) $ 839 Gross Premiums Written ($ Mil.) $ 909 $ 1,046 $ 4,286 $ 4,201 $ 4,129 $ 3,678 $ 4,078 Net Premiums Written ($ Mil.) $ 857 $ 1,015 $ 4,109 $ 3,946 $ 3,930 $ 3,505 $ 3,919 High Risk Assets % Shareholders' Equity [2] 52.9% 54.4% 58.0% 38.6% 20.9% 19.9% 39.0% Reinsurance Recoverables % Shareholders' 10.5% 10.3% 11.0% 13.0% 12.2% 14.8% 13.3% Equity Goodwill & Intangibles % Shareholders' Equity 4.4% 5.8% 6.2% 6.1% 5.9% 7.2% 7.0% Gross Underwriting Leverage 2.3x 2.4x 2.5x 2.2x 2.2x 2.6x 2.4x Return on Capital (1 yr.) 3.0% 4.3% -1.1% 8.6% 12.2% -0.3% 12.9% Sharpe Ratio of ROC (5 yr.) 95.5% 95.5% 95.5% 160.4% Adv/(Fav) Dev. % Beg. Reserves (1 yr.) 0.0% 0.0% 0.0% -0.4% 1.6% 0.4% 2.6% Adjusted Financial Leverage [3] 11.3% 11.4% 11.8% 11.4% 13.4% 17.5% 15.3% Total Leverage [4] 13.2% 13.4% 13.9% 13.4% 15.3% 20.4% 18.0% Earnings Coverage (1 yr.) [5] 14.1x 19.8x -2.9x 10.7x 13.3x 0.0x 11.8x

2 [1] US GAAP [2] High-risk assets include equities, other/alternative investments and non-investment grade bonds. [3] Debt includes debt equivalents for operating lease commitments. 25% equity credit for 6.60% long term notes and 6.20% junior sub debt. [4] Does not give credit for hybrid securities or operating debt. [5] EBIT coverage includes a portion of operating lease commitments as fixed charges. Opinion SUMMARY RATING RATIONALE Everest Re Group, Ltd. (NYSE: RE) is a Bermuda holding company whose subsidiaries write non-life insurance and reinsurance worldwide. The ultimate parent owns an Irish holding company (Everest Underwriting Group (Ireland) Limited, "Holdings Ireland"), which in turn owns a US holding company (Everest Reinsurance Holdings, Inc., "Holdings US"). Holdings US is the obligor for all of the group's debt securities, none of which are guaranteed by the ultimate parent. But practically there is strong incentive for the parent to support this debt because Holdings US and its subsidiaries account for about half of the group's net assets and represent a significant component of the group's franchise. At June 2012, Holdings US had $818.2mn of debt securities outstanding: 1) $249.9mn 5.40% senior notes due 10/15/2014; 2) $238.4mn 6.60% long term notes due 5/1/2067 (25% equity credit); 3) $329.9mn 6.20% junior sub debt due 3/29/2034 (25% equity credit). On a consolidated basis, Everest Re Group has very manageable debt leverage and one of the lowest debt-tocapital ratios in the reinsurance industry (at June 2012). The A3 senior debt rating of Holdings US is based on our expectation of ample credit support and dividend capacity from its principal operating subsidiary, Everest Reinsurance Company ("Everest Re"), as well as implicit support from the principal Bermuda operating company, Everest Reinsurance (Bermuda) Limited ("Bermuda Re"). Currently there is sufficient unrestricted dividend capacity from both these operating companies (and enough headroom in bank covenants) to repay all of the group's debt. The Aa3 insurance financial strength ratings of Everest Re and Bermuda Re are based on their established presence in the global reinsurance market, a track record of profitability and a history of prudent cycle and capital management. Everest was one of the first reinsurers to reduce its US casualty exposure when prices started to weaken in 2003/2004. This is one reason why we think reserve adequacy is reasonable. These strengths are tempered by meaningful catastrophe exposure. As the 2005 hurricanes revealed, catastrophe losses have the potential to impact multiple operating segments (e.g., US clients, non-us clients with US exposures, marine/offshore energy exposures). We think the subsequent risk controls put in place will make a repeat of losses of such proportion less likely. But significant participation on quota share property treaties means that some volatility in results is to be expected. Legacy asbestos liabilities remain a rating consideration but have become less of a pressure point. Since its last detailed study in 2007, the company has not experienced significant claims activity -- consistent with the insurance industry. Inactive dockets and other judicial and legislative reforms appear to have muted new claims activity but the long-term efficacy and durability of these reforms remains to be seen. The rating outlook is negative due to earnings volatility and increased exposure to higher-volatility assets which may not be consistent with Everest's high rating. Larger, more diversified reinsurers like Munich Re and Swiss Re have fared better in years with record catastrophe losses. Also, `Aa'-rated property-casualty insurers like Progressive, Travelers, Chubb and ACE have reported less volatility than Everest. Credit Strengths - A well-respected veteran of the global reinsurance market; - Very manageable debt leverage, very good fixed charge coverage and ample dividend capacity from various operating companies; - History of prudent cycle and capital management; - Our stress test suggests that Everest would likely remain well-positioned commercially even after an extreme scenario;

3 Credit Challenges - Increase in catastrophe exposure as a result of a shift from casualty to property lines since 2003; - Multi-jurisdictional nature of clients can limit the extent of diversification, particularly in retrocession business (e.g., non-us client can still be exposed to US perils); - Difficult to establish a durable competitive advantage in the US insurance segment; - General weakening of industry reserve adequacy increases uncertainty around adequacy of reinsurance reserves; - No foreseeable closure to legacy asbestos issues; Rating Outlook The outlook for the ratings is negative. In January 2012, the outlook was changed to negative from stable due to earnings volatility and increased exposure to higher-volatility assets. What to Watch For: - US crop insurance losses from the 2012 droughts. - Potential adverse loss development from 2011 cat events, positive or negative direct accident year loss ratios for US workers' compensation: This business is running at a -22% underwriting margin on a calendar year basis (per 2011 IEE direct exhibits). But recent double-digit price increases in California should start to improve profitability. - CEO transition: Dominic Addesso, former CFO and current President, will succeed current CEO Joe Taranto in Emerging markets: Everest is one of the largest reinsurers in Latin America. As emerging markets continue to grow faster than other economies, we could see Everest's market share and cat PMLs potentially grow with them. What Could Change the Rating - Up Given the ratings carry a negative outlook, an upgrade is unlikely. But the following factors could return the outlook to stable: - Successful steps to reduce future earnings volatility; - Reduction of equities, below-investment grade securities and alternative investments to levels more in line with previous years; - Sustained return on capital above 10%; - Adjusted financial leverage remaining below 15%; - Gross underwriting leverage below 2.3x. What Could Change the Rating - Down In addition to not achieving the thresholds above, the following factors could lead to a downgrade: - EBIT fixed charge coverage below 9x in consecutive years; - Decline in shareholders' equity by more than 10% over rolling 12 month period (due to share buybacks, losses, etc.); - Adverse loss reserve development in excess of 5% of carried reserves. Notching Considerations Moody's rates the A3 senior debt of Holdings US at three notches below the Aa3 insurance financial strength rating

4 of its principal US operating company, Everest Re. This is consistent with Moody's typical notching practices for US insurance holding company structures. The provisional (P)A3 senior debt shelf rating for the Bermuda-based ultimate parent is rated three notches below the Aa3 financial strength rating of its principal operating subsidiary, Bermuda Re. This is wider notching than the customary two notches for Bermuda insurance holding company structures because over 45% of the group's capital resides outside of Bermuda (principally the US) where dividend rules are more restrictive than those in Bermuda. Recent Results and Developments For the first six months of 2012, Everest reported gross premiums written of $1,955.5mn, net income of $519.3mn and total shareholders' equity of $6,417.4mn as of June In Jan 2011, Everest acquired Heartland Crop Insurance, Inc. ("Heartland"), a managing general agent, for $55mn plus the agreed upon value of the net assets of the agency, with an additional contingency of up to $13.5mn based on future performance. Heartland is one of the largest underwriters of US crop insurance. DETAILED RATING CONSIDERATIONS Moody's rates the two principal operating subsidiaries -- Everest Reinsurance (Bermuda) Limited and Everest Reinsurance Company -- Aa3 for insurance financial strength. This is consistent with the adjusted rating in Moody's rating scorecard (see last page). Insurance Financial Strength Rating The key factors that influence the rating and outlook are: Factor 1 - Market Position, Brand and Distribution: Aa Everest is among the 15 largest reinsurers in the world and the second largest reinsurer in Bermuda (after PartnerRe) based on reinsurance premiums. The company also writes primary insurance to access business that is not available on a reinsurance basis. Everest is a veteran in the global reinsurance market. The beginnings of Everest date back to 1973 when Prudential Reinsurance Company ("Pru Re"; went public in 1995 as Everest Re) was established as a subsidiary of the Prudential Insurance Company of America. Over the years, Everest/Pru Re developed strong brand recognition, built some longstanding client relationships and earned the credibility to lead negotiations on many of its syndicated transactions. A significant portion of the reinsurance business is transacted with clients who have been doing business with Everest for more than a decade. Everest is a widely accepted counterparty for not only property lines but also for casualty exposures where the longer tail makes clients more sensitive to credit quality. In this respect, Everest has few peers (notably Gen Re, Hannover Re, Lloyd's, Munich Re, PartnerRe, Swiss Re, Transatlantic Re). Unlike the major European reinsurers, however, Everest writes reinsurance predominantly through brokers (approximately 65%, 12% and 23% of 2011 GPW were written in the broker reinsurance, direct reinsurance and insurance markets, respectively). The broker channel allows Everest to reduce fixed costs (c.4.4% fixed underwriting expense ratio; c.27.6% total underwriting expense ratio ) but it has the effect of increasing market transparency and therefore the level of competition. Brokers can also steer ceding companies away from traditional reinsurance to alternatives such as catastrophe bonds or captives. Moreover, the major European reinsurers can deal directly with clients and offer greater resources, including alternatives to traditional reinsurance and risk consulting services. The company's underwriting strategy emphasizes flexibility and responsiveness to changing market conditions, such as increased demand or favorable pricing trends. This is best illustrated by entry into medical stop-loss reinsurance and California workers' compensation insurance in the early part of the decade and the retrocession property catastrophe market in Everest operates in four business segments. The Specialty Reinsurance segment is no longer reported separately as of 2Q2011: US Reinsurance (31% 2011 GPW; 72% property / 28% casualty ): This segment consists of property and casualty

5 reinsurance for US insurers, written on US paper and predominantly on a treaty basis. Everest targets certain brokers who have relationships with specialty insurers and small/medium standard insurers. It participates on reinsurance programs for large, national insurers but its preference is for regional insurers who place a high value on reinsurance and relationships and share similar underwriting philosophies with Everest. International Reinsurance (29% of 2011 GPW; 83% property / 17% casualty): This segment targets reinsurance outside the US, including the international portfolios of US insurers. Territories include Canada, Asia, Latin America, Africa and the Middle East. In some locations, Everest has been a familiar fixture for many years; for example some of its Asian clients still refer to the company as Pru Re. Everest is one of the five largest reinsurers in Latin America, accounting for the third biggest share of Everest's reinsurance premiums next to the US and Europe. Generally international business attracts plenty of competition because reinsurers expect emerging markets to grow and also see this business as a means of diversification outside the US. Everest differentiates itself from smaller and less established reinsurers by providing significant capital relief to insurers through quota share agreements. Bermuda Reinsurance (17% of 2011 GPW; 52% property / 48% casualty): This segment writes property and casualty re/insurance through the principal Bermuda operating company, which includes its UK branch as well as through the Ireland operating company. The majority of this business is European reinsurance. This is home turf for the major European reinsurers and the London market.. US Insurance (23% of 2011 GPW; 35% property / 65% casualty): This segment principally targets US casualty insurance, underwritten through general agents via program administrators. This market is very competitive. Competitors include excess and surplus lines insurers and standard insurers looking to expand their appetite. Insurers include large national carriers as well as small insurers who leverage significant reinsurance support. We think it will be difficult for Everest to create a durable competitive advantage in this segment, although some pockets of business could be opportunistically attractive at various points in the cycle. For example, the acquisition of Heartland has helped Everest gain a foothold in the crop insurance market, which has a limited number of competitors. Factor 2 - Product Risk and Diversification: A Everest writes a diversified portfolio but generally the major European reinsurers are better diversified. Everest focuses exclusively on non-life re/insurance. In contrast, Munich Re, Swiss Re and Hannover Re sell a wider range of products, including life reinsurance, which allowed them to turn a profit in 2005 despite Hurricane Katrina. Nonetheless, Everest has diversified its portfolio strategically by class (64% property / 36% casualty incl. insurance). As the US hard market started to fade (2003/2004), it strategically reduced its exposure to US casualty reinsurance (9% in 2011 vs. 30% in 2003). This is one reason why we think reserve risk is manageable (putting asbestos aside). The shift away from US casualty has meant that the proportion of property/short-tail business has increased (64% in 2011 vs. 44% in 2003). This was clear from Hurricane Katrina losses which pushed the company to its first net loss since going public in Thereafter the company tightened its risk management and raised equity to take advantage of the subsequent hard market, making a significant play in property cat retrocession business and the Florida property cat market which has continued to this day (with less retrocession business than in 2006/2007). Everest has also strategically expanded outside the US (e.g., International segment GPW = 29% in 2011 vs. 12% in 2003). (2011 reinsurance only GPW = 43% US, 18% Europe, 15% Latin America, 9% Asia/Australia, 7% Middle East/Africa, 6% Canada, 2% Worldwide). However, catastrophe losses can touch multiple segments. For example, Hurricane Katrina impacted the US Reinsurance segment through US clients, the International segment through non-us clients with US exposures, the Bermuda segment through European clients with US exposures and the Specialty segment through marine/offshore energy exposures (cf. combined ratios in the Profitability discussion). Some of the key risks in each segment are: US Reinsurance: Within US property cat, the notable items we monitor are the aggregates for Florida and for retrocession capacity exposed to US cat. Everest provides quota share capacity in the Florida property market which has historically wrestled with rate adequacy for homeowners insurance. Retrocession business is notoriously difficult to model. Within US casualty reinsurance, the top concern is exposure to large national carriers because their underlying risks tend to be less homogeneous than those of regional carriers.

6 International Reinsurance: This segment is predominantly property/property cat reinsurance. Competition can be less disciplined because reinsurers may be drawn to some of the non-peak cat zones for the sake of diversification (e.g., Chile, New Zealand, Japan). Retrocession exposure can be material, as illustrated by the 2010 Chile earthquake losses. Currency exchange is a risk as claims are paid in foreign currency but cat aggregates are monitored in USD. Bermuda Reinsurance: More than half of this segment is property/property cat reinsurance for European clients. Data quality in Europe tends to be weaker than that in the US but it could also be argued that variability between actual vs. modeled losses has been less dramatic. US Insurance: Underwriting had largely been delegated to select number of managing general agents although more recently the company has been developing direct distribution channels. Under the MGA business model, Everest supplements the initial underwriting process with periodic reviews and monitoring but delegating the pen to others carries risks. About 1/4 of business is workers' compensation insurance, largely in California; high unemployment in California has generally extended the duration of claim cases which in turn has increased medical utilization and costs, pressuring reserve adequacy. Everest has been working to drive rate increases in this market to mitigate this pressure. Factor 3 - Asset Quality: Aa We think the investment portfolio has sufficient safety and liquidity to support Everest's current underwriting appetite. For example, at Dec 2011, the allocation to cash, short-term investments and Treasuries would be sufficient to meet gross claims from a 250-year US southeast modeled hurricane event ($1,129mn gross PML at Dec 2011 ). That said, the proportion of high-risk invested assets is near the high end for its rating category. Our stress tests on the investment portfolio indicate stress losses of c.$0.7bn, which would have a moderate impact to capital. Stress losses are largely linked to high-risk assets (equities + other invested assets + noninvestment grade bonds + theoretical maximum payouts for seven equity index put option contracts). High-risk assets represent 52.9% of shareholders' equity (excluding put option notionals) at June 2012, rising significantly in 4Q 2010 due to allocation to equities. On the fixed income side, duration has remained steady for the past year. The modified duration of the fixed income portfolio is 2.9 years (June 2012), which is consistent with the duration of loss reserves (c.3.6 years at June 2012). According to the company's sensitivity analysis on the fixed income portfolio, a 200 bp upward parallel shift in interest rates would reduce the market value of bonds (after-tax) by $643mn (June 2012). The impact of foreign exchange risks on the investment portfolio is partially mitigated by changes in the dollar value of foreign currency denominated liabilities and their associated income statement impact. CASH-MARKET INVESTMENTS : At June 2012, cash and invested assets consist of: cash and cash equivalents (2.5%), short-term investments (5.9%), US Treasuries (1.9%), US agency (0.2%), non-us fixed maturities (26.5%), municipal (9%), agency MBS (13.3%), non-agency RMBS and Alt-A (0.1%), CMBS (2.0%), ABS (1.2%), corporate (24%), equities (9.6%), other investments (3.7%). About 7.8% of fixed income securities are rated below investment grade or non-rated -- mainly high-yield corporate bonds. The average credit quality of the fixed income portfolio is Aa3 (June 2012). DERIVATIVES : Everest sold seven equity index put option contracts in 2001 and Six contracts are tied to the S&P 500 index with strike prices ranging from $1, to $1, and single exercise dates between June 2017 and March 2031 (European options). At June 2012, the present value of theoretical maximum payouts using a 6% discount factor was $293.8mn (assuming S&P index falls to zero at each of the exercise dates). One contract is tied to the FTSE 100 with a strike price of GBP 5, and a single exercise date of July At June 2012, the present value of the theoretical maximum payout using a 6% discount factor and current exchange rate was $32.3mn (assuming FTSE 100 falls to zero at the exercise date). The fair value of all these equity index put options is a liability of $79.9mn (June 2012), recorded under the line item "Equity index put option liability" on the balance sheet. NON-INVESTED ASSETS:

7 A small bad debt provision has been set up for premiums receivable due from policyholders or reinsurance clients and reinsurance recoverable ($21.6mn at Dec 2011 ) but we don't expect material write-downs. There is a small amount of goodwill ($35mn) and intangible assets ($27mn). Factor 4 - Capital Adequacy: Aa We are comfortable with Everest's capital adequacy at its current rating level. Gross underwriting leverage is generally on par with or better than peers after controlling for mix of business (2.5x at June 2012 = sum of trailing 12 month gross premiums plus gross reserves divided by total equity minus 10% of high-risk assets). Our view is supported by a track record of prudent cycle management and capital management. Since 1995, the company has generally grown capital in line with or faster than premiums. Confronted with a soft market and low stock valuations, the company has been repurchasing shares more aggressively of late -- along with the rest of the industry. Our expectation is that the company will maintain its traditionally measured approach to returning capital. Our stress tests indicate Everest would likely still be well positioned in the aftermath of a severe downside scenario and remain one of the largest reinsurers in Bermuda. Our scenario assumes annual aggregate modeled catastrophe losses for a 250-year return period (undisclosed), a 5% net reserve charge ($0.46bn) and stress investment losses (c.$0.7bn). In evaluating risk capital, we have concentrated on three main risks: - Under-pricing or under-reserving: We believe reported reserves as of Dec 2011 are reasonable (cf. Reserve Adequacy discussion). - Catastrophes: Exposure to natural and man-made catastrophes is meaningful but not outsized, we think (see scorecard metrics). The 2005 hurricanes cost Everest about $1.5 billion pre-tax, far more than a year's earnings. We think the subsequent risk controls put in place will make a repeat of losses of such proportion less likely. The Company's catastrophe loss projection, net of reinstatement premiums and taxes, for a 1-in-1000 year event (.1% probability) equates to 16% of GAAP equity, as disclosed at the end of Everest controls its cat exposure using Board-approved risk limits (not public), although these limits have moved around periodically. - Poor investment performance: Our stress case investment losses would have a moderate impact to capital (cf. Asset Quality discussion). Factor 5 - Profitability: A Everest has turned an operating profit every year since 1995 except for 2005 and 2011 (aside: 2008 net income was impacted by other-than-temporary impairments on investments, sale of equity securities at a loss and fair value re-measurements of equity investments which flow through the income statement as net realized capital gains/losses). From , it produced an average pretax operating return on revenue of c.12% (c.14% from ), outperforming notable peers including Transatlantic, Swiss Re, Munich Re and Hannover Re. This is partly because Everest did not grow aggressively during the soft market and therefore was able to sidestep the worst (but not all) of the industry's under-reserving problems. Compared to `Aa'-rated property-casualty insurers like Progressive Insurance, Travelers Insurance, Chubb and ACE Limited, however, Everest has reported more volatility. This is a main reason for the negative outlook on Everest's ratings. Larger, more diversified competitors like Munich Re and Swiss Re have performed better in years with record catastrophes like 2005 and 2011., This is partly because in recent years Everest's insurance segment has been a drag on performance rather than a diversifying income stream. Combined ratios and the related points of (favorable)/unfavorable prior years' reserve development were : - Total Segments: 89.0% (H1 2012, 0.0pts), 118.5% (2011, 0.1pts) - Australian floods, Cyclone Yasi, New Zealand quake, Japan quake, Thai floods 102.8% (2010, -0.8 pts), 89.1% (2009, 3.3 pts),

8 95.2% (2008, 0.9 pts) - Hurricane Ike, 91.3% (2007, 5.2 pts) - A&E reserve charge 89.7% (2006, 3.5 pts), 120.3% (2005, -0.7 pts) -- Hurricane Katrina. - US Reinsurance: 94.3% (H1 2012, -0.4pts), 106.7% (2011, 3.9 pts), 93.4% (2010, 5.3pts), 81.4% (2009, 1.9 pts), 105.1% (2008, 7.0 pts) -- Hurricane Ike, 83.1% (2007, 9.5 pts) - A&E charge, 91.7% (2006, 12.4 pts), 133.3% (2005, 1.5 pts) -- Hurricane Katrina. - International Reinsurance: 75.3% (H1 2012, 0.1 pts), 137.5% (2011, -9.1 pts) - Australian floods, Cyclone Yasi, New Zealand quake, Japan quake, Thai floods 117% (2010, -5 pts), 85.8% (2009, 2.2 pts), 85.3% (2008, -4.5 pts), 89.6% (2007, -1.1 pts), 80.2% (2006, -1.8 pts), 110.4% (2005, -7.2 pts) - Hurricane Katrina. - Bermuda Reinsurance: 92.8% (H1 2012, 0.7 pts), 112.6% (2011, 0.5 pts) - - Australian floods, Cyclone Yasi, New Zealand quake, Japan quake, Thai floods 88.8% (2010, pts) 89.3% (2009, 2.5 pts) 81.5% (2008, -8.1 pts) 94.5% (2007, 3.2 pts) 88.3% (2006, 4.2 pts) 133.7% (2005, 5.0 pts) - Hurricane Katrina. - US Insurance: 98.6% (H1 2012, -0.1 pts), 113.6% (2011, 7.5 pts),

9 113.4% (2010, 5.7 pts) 109.9% (2009, 8.8 pts) 107.9% (2008, 9.8 pts) 102.0% (2007, 5.1 pts) 90.8% (2006, -8.9 pts) 86.9% (2005, -2.4 pts) Factor 6 - Reserve Adequacy: A Putting asbestos and environmental (A&E) reserves aside, we believe Everest's core reserve position is reasonable (+/- 5%). General weakening of industry reserve adequacy has increased uncertainty around reinsurance reserves. However, the tail on the business written by Everest in recent years has gotten shorter. As casualty rates started to weaken in 2003/2004, Everest reduced US casualty reinsurance and shifted toward property/short-tail lines (64% short-tail in 2011 vs. 44% short-tail in 2003). Importantly, despite the shift, IBNR as a percent of total reserves has stayed nearly constant since 2003 (52% in 2011 and 54% in 2003 ex A&E reserves). Reserve adequacy in the insurance segment is an area to watch closely. This segment is mostly long-tail lines. For California workers' comp, lean economic times have caused injured workers to return to the workforce more slowly - increasing claim costs. For business underwritten by MGAs, controls and information flows are key. Legacy A&E liabilities remain a rating consideration but have become less of a pressure point. Net A&E reserves represent 4.7% of total loss reserves or 7.3% of shareholders' equity (at June 2012). In 2007, Everest undertook a detailed study of its asbestos exposure and subsequently increased its gross reinsurance asbestos reserves by $250mn and gross direct asbestos reserves by $75mn. Subsequent to the study, they have not experienced significant claims activity related to asbestos. This is consistent with what the insurance industry has experienced in the last two years; inactive dockets and other judicial and legislative reforms appear to have muted new claims activity. However, the long-term efficacy and durability of these reforms remains to be seen. Factor 7 - Financial Flexibility: Aa Everest has one of the lowest debt-to-capital ratios amongst peers, which is one reason why it is one of the highest rated reinsurers in our universe. With a consolidated adjusted debt-to-capital ratio of 11.3% (June 2012), the company has ample borrowing capacity and good financial flexibility. EBIT coverage of fixed charges is good (-2.9x in 2011, 10.7x in 2010; 13.3x in 2009; -0.0x in 2008 due principally to fair value investment losses; 11.8x in 2007 and average 6.6x for ). Unrestricted dividend capacity is ample for debt service and currently exceeds total debt outstanding. For 2011, Everest Re (US) can pay up to $232mn in dividends to Holdings US without prior regulatory approval and Bermuda Re can pay up to $684mn (25% of prior year end statutory capital and surplus) in dividends to the ultimate parent with written notice to Bermuda regulators. There is also ample headroom in the covenants of the Holdings US credit facility (see Financial Covenants below). All debt securities are issued out of Holdings US. None of the debt securities are guaranteed by the ultimate parent. Practically, however, there is strong incentive for the parent to support this debt because Holdings US and its subsidiaries account for about half of the group's net assets and represent a significant component of the group's franchise. The earliest debt maturity is in Oct Everest has access to additional liquidity through two credit facilities: 1) Everest Re Group, Bermuda Re and Everest International are parties to a five-year, $800mn credit facility (effective 22 June 2012; Tranche 1 - $200mn for unsecured borrowings and unsecured letters of credit; Tranche 2 - $600mn for secured letters of credit - $437mn outstanding as of June 2012); 2) Holdings US is party to a three-year, $150mn credit facility which can be used for unsecured borrowings and letters of credit (effective 15 Aug 2011; $5mn LOCs outstanding at June 2012).

10 Financial Covenants Everest was in compliance with all financial covenants as of June The Bermuda Re/Everest International credit facility requires the consolidated Everest Re Group to maintain a debt-to-capital ratio of no greater than 35% and a minimum net worth of $4,388mn (as of Jun 2012). The Holdings US credit facility requires Holdings US to maintain a debt-to-capital ratio of no greater than 35% and Everest Re (US) to maintain minimum statutory surplus of $1,965mn at Jun 2012 (vs. $2,322mn reported surplus at Dec 2011). Neither facility contains material adverse change clauses or rating triggers. Rating Factors Everest Re Group, Ltd.[1] Financial Strength Rating Scorecard Aaa Aa A Baa Ba B Caa Score Adjusted Score Business Profile A Aa Market Position, Brand and Distribution (20%) A Aa Relative Market Share Ratio X Direct Premiums % GPW Business & Geographic Diversification (15%) A A Business & Geographic Diversification X Financial Profile A Aa Asset Quality (10%) Aa Aa High Risk Assets % Shareholders' Equity 58.0% Reinsurance Recoverables % 11.0% Shareholders' Equity Goodwill & Intangibles % Shareholders' 6.2% Equity Capital Adequacy (20%) A Aa Gross Underwriting Leverage 2.5x Gross Natural Catastrophe Exposure X Net Natural Catastrophe Exposure X Profitability (10%) Baa A Return on Capital (5 yr. avg) 6.4% Sharpe Ratio of ROC (5 yr. avg) 95.5% Reserve Adequacy (10%) A A Adv./(Fav.) Loss Dev. % Beg. Reserves (7 0.8% yr. avg.) Financial Flexibility (15%) Aa Aa Adjusted Financial Leverage 11.8% Total Leverage 13.9% Earnings Coverage (5 yr. avg.) 6.6x Operating Environment (0%) Aaa - A Aaa - A Aggregate Profile A1 Aa3

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