EVEREST INTERNATIONAL REINSURANCE, LTD. (a wholly owned subsidiary of Everest Re Group, Ltd.) GAAP Financial Statements For the Years Ended December

Transcription

1 EVEREST INTERNATIONAL REINSURANCE, LTD. (a wholly owned subsidiary of Everest Re Group, Ltd.) GAAP Financial Statements For the 2012 and 2011

2 Independent Auditor's Report To the Board of Directors and Shareholder of Everest International Reinsurance, Ltd.: We have audited the accompanying financial statements of Everest International Reinsurance, Ltd., which comprise the balance sheets as of December 31, 2012 and December 31, 2011, and the related statements of operations and comprehensive income (loss), of changes in shareholder s equity, and of cash flows for the years then ended. Management's Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibility Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidencee we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Everest International Reinsurance, Ltd. at December 31, 2012 and December 31, 2011, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. April 16, 2013 PricewaterhouseCoopers LLP, PricewaterhouseCoopers Center, 300 Madison Avenue, New York, NY T: (646) , F: (646) ,

3 EVEREST INTERNATIONAL REINSURANCE, LTD. BALANCE SHEETS December 31, ASSETS: Fixed maturities available for sale, at market value $ 830,019 $ 802,043 (amortized cost: 2012, $792,427; 2011, $788,940) Other invested assets (cost: 2012, $6,714; 2011, $4,233) 6,714 4,233 Shortterm investments 27,904 13,439 Cash 44,092 30,357 Total investments and cash 908, ,072 Accrued investment income 8,196 9,227 Premiums receivable 21,800 21,518 Reinsurance receivables 76,259 89,108 Funds held by reinsureds 19,547 31,349 Deferred acquisition costs 7,080 7,712 Prepaid reinsurance premiums 3,588 2,937 Other assets TOTAL ASSETS $ 1,045,222 $ 1,011,945 LIABILITIES: Reserve for losses and loss adjustment expenses $ 552,187 $ 543,114 Unearned premium reserve 42,740 40,993 Funds held under reinsurance treaties 688 7,580 Losses in course of payment 12,179 8,242 Other net premiums payable 364 4,050 Other liabilities 8,451 4,886 Total liabilities 616, ,865 Commitments and Contingencies (Note 10) SHAREHOLDER'S EQUITY: Common shares, par value: $1.00; 1,064,000 issued and outstanding (2012 and 2011) 1,064 1,064 Additional paidin capital 280, ,509 Accumulated other comprehensive income (loss) 37,592 13,104 Retained earnings 109, ,403 Total shareholder's equity 428, ,080 TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY $ 1,045,222 $ 1,011,945 The accompanying notes are an integral part of the financial statements.

4 EVEREST INTERNATIONAL REINSURANCE, LTD. STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) REVENUES: Premiums earned $ 183,929 $ 207,693 Net investment income 26,916 28,435 Net realized capital gains (losses): Otherthantemporary impairments on fixed maturity securities (358) (224) Otherthantemporary impairments on fixed maturity securities transferred to other comprehensive income (loss) Other net realized capital gains (losses) (2,298) 139 Total net realized capital gains (losses) (2,656) (85) Other income (expense) (8,346) 5,838 Total revenues 199, ,881 CLAIMS AND EXPENSES: Incurred losses and loss adjustment expenses 108, ,325 Commission, brokerage, taxes and fees 49,154 48,622 Other underwriting expenses Total claims and expenses 158, ,568 INCOME (LOSS) BEFORE TAXES 41,066 39,313 Income tax expense (benefit) NET INCOME (LOSS) $ 41,045 $ 39,282 Other comprehensive income (loss), net of tax : Unrealized appreciation (depreciation) ("URA(D)") on securities arising during the period 21,832 9,238 Less: reclassification adjustment for realized losses (gains) included in net income (loss) 2, Total URA(D) on securities arising during the period 24,488 9,323 Total other comprehensive income (loss), net of tax 24,488 9,323 COMPREHENSIVE INCOME (LOSS) $ 65,533 $ 48,605

5 EVEREST INTERNATIONAL REINSURANCE, LTD. STATEMENTS OF CHANGES IN SHAREHOLDER S EQUITY (Dollars in thousands, except share amounts) COMMON SHARES (shares outstanding): Balance, beginning of period 1,064,000 1,064,000 Balance, end of period 1,064,000 1,064,000 COMMON SHARES (par value): Balance, beginning of period $ 1,064 $ 1,064 Balance, end of period 1,064 1,064 ADDITIONAL PAIDIN CAPITAL: Balance, beginning of period 280, ,509 Balance, end of period 280, ,509 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS): Balance, beginning of period 13,104 3,781 Net increase (decrease) during the period 24,488 9,323 Balance, end of period 37,592 13,104 RETAINED EARNINGS: Balance, beginning of period 108,403 69,121 Net income (loss) 41,045 39,282 Dividends paid (40,000) Balance, end of period 109, ,403 TOTAL SHAREHOLDER'S EQUITY, END OF PERIOD $ 428,613 $ 403,080 The accompanying notes are an integral part of the financial statements.

6 EVEREST INTERNATIONAL REINSURANCE, LTD. STATEMENTS OF CASH FLOWS CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) 41,045 $ 39,282 Adjustments to reconcile net income to net cash provided by operating activities: Decrease (increase) in premiums receivable (282) 21,954 Decrease (increase) in funds held by reinsureds, net 4,910 26,349 Decrease (increase) in reinsurance receivables 12,849 31,243 Increase (decrease) in reserve for losses and loss adjustment expenses 9,073 (11,270) Increase (decrease) in unearned premiums 1,747 (9,177) Increase (decrease) in other net payable to reinsurers (3,686) (10,774) Increase (decrease) in losses in course of payment 3,937 (6,333) Change in equity adjustments in limited partnerships (290) (180) Change in other assets and liabilities, net 4,576 7,105 Amortization of bond premium (accrual of bond discount) 5,443 4,454 Net realized capital (gains) losses 2, Net cash provided by (used in) operating activities 81,978 92,738 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from fixed maturities matured/called available for sale, at market value 115,245 91,312 Proceeds from fixed maturities sold available for sale, at market value 38,905 11,498 Cost of fixed maturities acquired available for sale, at market value (165,738) (211,060) Cost of other invested assets acquired (2,191) (19) Net change in shortterm investments (14,464) 5,461 Net change in unsettled securities transactions 5 Net cash provided by (used in) investing activities (28,243) (102,803) CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid to shareholders (40,000) Net cash provided by (used in) financing activities (40,000) EFFECT OF EXCHANGE RATE CHANGES ON CASH Net increase (decrease) in cash 13,735 (10,065) Cash, beginning of period 30,357 40,422 Cash, end of period $ 44,092 $ 30,357 The accompanying notes are an integral part of the financial statements.

7 NOTES TO FINANCIAL STATEMENTS 2012 and SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A. Business and Basis of Presentation. Everest International Reinsurance, Ltd. (the Company or Everest International ), a Bermuda insurance company and direct wholly owned subsidiary of Everest Re Group, Ltd. ( Group ) has been registered as a Class 4 general insurer and longterm insurer (effective December 16, 2008). However, the Company s longterm insurer license expired on March 31, 2012 and was not renewed. The Company s operations include the reinsuring of property and casualty products. Currently, this business is the result of quota share reinsurance agreements with three affiliates: (1) Everest Reinsurance Company ( Everest Re ), (2) Everest Reinsurance (Bermuda), Ltd. ( Bermuda Re ) and (3) Everest Reinsurance Company (Ireland) Limited ( Ireland Re ). The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ( GAAP ). All amounts are reported in U.S. dollars. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities (and disclosure of contingent assets and liabilities) at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Ultimate actual results could differ, possibly materially, from those estimates. B. Investments. Fixed maturity security investments available for sale, at market value, reflect unrealized appreciation and depreciation, as a result of temporary changes in market value during the period, in shareholder s equity, in accumulated other comprehensive income (loss) in the balance sheets. The Company records changes in fair value for its fixed maturities available for sale, at market value through shareholders equity, net of taxes in accumulated other comprehensive income (loss) since cash flows from these investments will be primarily used to settle its reserve for losses and loss adjustment expense liabilities. The Company anticipates holding these investments for an extended period as the cash flow from interest and maturities will fund the projected payout of these liabilities. Interest income on all fixed maturities are included as part of net investment income in the comprehensive income (loss). Unrealized losses on fixed maturities, which are deemed otherthantemporary and related to the credit quality of a security, are charged to net income (loss) as net realized capital losses. Shortterm investments are stated at cost, which approximates market value. Realized gains or losses on sales of investments are determined on the basis of identified cost. For nonpublicly traded securities, market prices are determined through the use of pricing models that evaluate securities relative to the U.S. Treasury yield curve, taking into account the issue type, credit quality, and cash flow characteristics of each security. For publicly traded securities, market value is based on quoted market prices or valuation models that use observable market inputs. When a sector of the financial markets is inactive or illiquid, the Company may use its own assumptions about future cash flows and riskadjusted discount rates to determine fair value. Retrospective adjustments are employed to recalculate the values of assetbacked securities. Each acquisition lot is reviewed to recalculate the effective yield. The recalculated effective yield is used to derive a book value as if the new yield were applied at the time of acquisition. Outstanding principal factors from the time of acquisition to the adjustment date are used to calculate the prepayment history for all applicable securities. Conditional prepayment rates, computed with life to date factor histories and weighted average maturities, are used to effect the calculation of projected and prepayments for passthrough security types. The other invested asset is a limited partnership investment, which is accounted for under the equity method of accounting and recorded on a quarterly lag. 1

8 C. Deferred Acquisition Costs. Acquisition costs, consisting principally of reinsurance commissions incurred at the time a contract is written, are deferred and amortized over the period in which the related premiums are earned. Deferred acquisition costs are limited to their estimated realizable value based on the related unearned premiums, anticipated claims and claim expenses and anticipated investment income. Deferred acquisition costs amortized to income are presented in the table below for the periods indicated. Deferred acquisition costs $ 49,154 $ 48,622 D. Reserve for Losses and Loss Adjustment Expenses. The reserve for losses and loss adjustment expenses ( LAE ) is based on reports received from ceding companies. A provision is included for losses and LAE incurred but not reported ( IBNR ) based on past experience. The reserves are reviewed periodically and any changes in estimates are reflected in earnings in the period the adjustment is made. The Company s loss and LAE reserves represent management s best estimate of the ultimate liability. Loss and LAE reserves are presented gross of reinsurance receivables and incurred losses and LAE are presented net of reinsurance. Accruals for commissions are established for reinsurance contracts that provide for the stated commission percentage to increase or decrease based on the loss experience of the contract. Changes in estimates for such arrangements are recorded as commission expense. Commission accruals for contracts with adjustable features are estimated based on expected loss and LAE. E. Premium Revenues. Written premiums are earned ratably over the periods of the related reinsurance contracts. Unearned premium reserves are established relative to the unexpired contract period. Such reserves are established based upon reports received from ceding companies or estimated using pro rata methods based on statistical data. Reinstatement premiums represent additional premium received on reinsurance coverages, most prevalently catastrophe related, when limits have been depleted under the original reinsurance contract and additional coverage is granted. Written and earned premiums and the related costs, which have not yet been reported to the Company, are estimated and accrued. Premiums are net of ceded reinsurance. F. Prepaid Reinsurance Premiums. Prepaid reinsurance premiums represent unearned premium reserves ceded to other reinsurers. G. Income Taxes. Under the current Bermuda law, no income or capital gains taxes are imposed on the Company. The Minister of Finance of Bermuda has also assured the Company that, pursuant to the Exempted Undertakings Tax Protection Amendment Act of 2011, they will be exempt until 2035 from any such taxes imposed in the future. H. Foreign Currency. Gains and losses resulting from foreign currency transactions, other than debt securities available for sale, are recorded through the statements of operations and comprehensive income (loss) in other income (expense). Gains and losses resulting from changes in the foreign currency exchange rates on debt securities, available for sale at market value, are recorded in the balance sheets in accumulated other comprehensive income (loss) as unrealized appreciation (depreciation) and any losses which are deemed otherthantemporary are changed to net income (loss) as net realized capital loss. 2

9 I. Application of Recently Issued Accounting Standard Changes. Presentation of Comprehensive Income. In June 2011, FASB issued amendments to existing guidance to provide two alternatives for the presentation of comprehensive income. Components of net income and comprehensive income can either be presented within a single, continuous financial statement or be presented in two separate but consecutive financial statements. The Company has chosen to present the components of net income and comprehensive income in a single, continuous financial statement. The guidance is effective for reporting periods beginning after December 15, The Company implemented this guidance as of January 1, Common Fair Value Measurement. In May 2011, FASB issued amendments to existing guidance to achieve common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards. The amendments change wording used to describe many GAAP fair value measurement requirements and disclosures. FASB does not intend for the amendments to cause a change in application of fair value accounting guidance. The guidance is effective for reporting periods beginning after December 15, The Company implemented this guidance prospectively as of January 1, Treatment of Insurance Contract Acquisition Costs. In October 2010, the FASB issued authoritative guidance for the accounting for costs associated with acquiring or renewing insurance contracts. The guidance identifies the incremental direct costs of contract acquisition and costs directly related to acquisition activities that should be capitalized. This guidance is effective for reporting periods beginning after December 15, The Company adopted this guidance as of January 1, 2012 and there was no impact to the Company s financial statements upon adoption. Improving Disclosures About Fair Value Measurements. In January 2010, the FASB amended the authoritative guidance for disclosures on fair value measurements. Effective for interim and annual reporting periods beginning after December 15, 2009, the guidance requires a new separate disclosure for: significant transfers in and out of Level 1 and 2 and the reasons for the transfers; and provided clarification on existing disclosures to include: fair value measurement disclosures by class of assets and liabilities and disclosure on valuation techniques and inputs used to measure fair value that fall in either Level 2 or Level 3. The Company implemented this guidance effective January 1, Effective for interim and annual reporting periods beginning after December 15, 2010, the guidance requires another new separate disclosure in regards to Level 3 fair value measurements in that, the period activity will present separately information about purchases, sales, issuances and settlements. Comparative disclosures shall be required only for periods ending after initial adoption. The Company implemented this guidance beginning with the third quarter of

10 2. INVESTMENTS The amortized cost, market value and gross unrealized appreciation and depreciation of available for sale, fixed maturity security investments, carried at market value, are as follows for the periods indicated: At December 31, 2012 Amortized Unrealized Unrealized Market (Dollars in thousands) Cost Appreciation Depreciation Value Fixed maturity securities U.S. Treasury securities and obligations of U.S. government agencies and corporations $ $ $ $ U.S. corporate securities 212,582 12,712 (24) 225,270 Assetbacked securities 16, ,285 Mortgagebacked securities Commercial 13, (23) 14,472 Agency residential 196,421 4,342 (505) 200,258 Nonagency residential 1, (8) 1,032 Foreign government securities 163,275 12,310 (1,904) 173,681 Foreign corporate securities 188,426 10,624 (1,029) 198,021 Total fixed maturity securities $ 792,427 $ 41,085 $ (3,493) $ 830,019 At December 31, 2011 Amortized Unrealized Unrealized Market (Dollars in thousands) Cost Appreciation Depreciation Value Fixed maturity securities U.S. Treasury securities and obligations of U.S. government agencies and corporations $ $ $ $ U.S. corporate securities 182,629 11,214 (623) 193,220 Assetbacked securities 15, (8) 15,906 Mortgagebacked securities Commercial 17, (696) 17,029 Agency residential 178,807 5,542 (253) 184,096 Nonagency residential 2, (14) 2,169 Foreign government securities 181,371 5,816 (4,942) 182,245 Foreign corporate securities 211,577 3,284 (7,483) 207,378 Total fixed maturity securities $ 788,940 $ 27,122 $ (14,019) $ 802,043 The $173,681 thousand of foreign government securities at December 31, 2012 included $161,058 thousand of European sovereign securities. Approximately 71.7%, 19.1% and 7.8% of European sovereign securities represented securities held in the governments of the United Kingdom, France and the Netherlands, respectively. No other countries represented more than 5% of the European sovereign securities. The Company held no sovereign securities of Portugal, Italy, Ireland, Greece or Spain at December 31, In accordance with FASB guidance, the Company reclassified the noncredit portion of otherthantemporary impairments from retained earnings into accumulated other comprehensive income (loss), on April 1, The table below presents the pretax cumulative unrealized appreciation (depreciation) on those corporate securities, for the periods indicated: At December 31, Pretax cumulative unrealized appreciation (depreciation) $ 242 $ 184 4

11 The amortized cost and market value of fixed maturity securities are shown in the following table by contractual maturity. Mortgagebacked securities are generally more likely to be prepaid than other fixed maturity securities. As the stated maturity of such securities may not be indicative of actual maturities, the total for mortgagebacked and assetbacked securities are shown separately. At December 31, 2012 At December 31, 2011 Amortized Market Amortized Market (Dollars in thousands) Cost Value Cost Value Fixed maturity securities available for sale Due in one year or less $ 67,299 $ 68,190 $ 57,068 $ 53,308 Due after one year through five years 358, , , ,053 Due after five years through ten years 100, , , ,556 Due after ten years 38,148 47,234 38,434 42,926 Assetbacked securities 16,821 17,285 15,384 15,906 Mortgagebacked securities Commercial 13,891 14,473 17,012 17,029 Agency residential 196, , , ,096 Nonagency residential 1,011 1,032 2,160 2,169 Total fixed maturity securities $ 792,427 $ 830,019 $ 788,940 $ 802,043 The changes in net unrealized appreciation (depreciation) for the Company s investments are derived from the following sources for the periods indicated: Increase (decrease) during the period between the market value and cost of investments carried at market value: Fixed maturity securities $ 24,430 $ 9,317 Fixed maturity securities, otherthantemporary impairment 58 6 Change in unrealized appreciation (depreciation), included in shareholders equity $ 24,488 $ 9,323 The Company frequently reviews all of its fixed maturity, available for sale securities for declines in market value and focuses its attention on securities whose fair value has fallen below 80% of their amortized cost at the time of review. The Company then assesses whether the decline in value is temporary or otherthantemporary. In making its assessment, the Company evaluates the current market and interest rate environment as well as specific issuer information. Generally, a change in a security s value caused by a change in the market, interest rate or foreign exchange environment does not constitute an otherthantemporary impairment, but rather a temporary decline in market value. Temporary declines in market value are recorded as unrealized losses in accumulated other comprehensive income (loss). If the Company determines that the decline is otherthantemporary and the Company does not have the intent to sell the security; and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis, the carrying value of the investment is written down to fair value. The fair value adjustment that is credit or foreign exchange related is recorded in net realized capital gains (losses) in the Company s statements of operations and comprehensive income (loss). The fair value adjustment that is noncredit related is recorded as a component of other comprehensive income (loss) and is included in accumulated other comprehensive income (loss) in the Company s balance sheets. The Company s assessments are based on the issuers current and expected future financial position, timeliness with respect to interest and/or principal payments, speed of repayments and any applicable credit enhancements or breakeven constant default rates on mortgagebacked and assetbacked securities, as well as relevant information provided by rating agencies, investment advisors and analysts. 5

12 Retrospective adjustments are employed to recalculate the values of assetbacked securities. All of the Company s assetbacked and mortgagebacked securities have a passthrough structure. Each acquisition lot is reviewed to recalculate the effective yield. The recalculated effective yield is used to derive a book value as if the new yield were applied at the time of acquisition. Outstanding principal factors from the time of acquisition to the adjustment date are used to calculate the prepayment history for all applicable securities. Conditional prepayment rates, computed with life to date factor histories and weighted average maturities, are used in the calculation of projected and prepayments for passthrough security types. The tables below display the aggregate market value and gross unrealized depreciation of fixed maturity securities, by security type and contractual maturity, in each case subdivided according to length of time that individual securities had been in a continuous unrealized loss position for the periods indicated: Duration of Unrealized Loss at December 31, 2012 By Security Type Less than 12 months Greater than 12 months Total Gross Gross Gross Unrealized Unrealized Unrealized (Dollars in thousands) Market Value Depreciation Market Value Depreciation Market Value Depreciation Fixed maturity securities available for sale U.S. Treasury securities and obligations of U.S. government agencies and corporations $ $ $ $ $ $ U.S. corporate securities 8,099 (21) 1,816 (3) 9,915 (24) Assetbacked securities Mortgagebacked securities Commercial 3,483 (23) 3,483 (23) Agency residential 56,866 (426) 5,540 (79) 62,406 (505) Nonagency residential 330 (8) 330 (8) Foreign government securities 31,975 (1,904) 31,975 (1,904) Foreign corporate securities 27,764 (1,029) 27,764 (1,029) Total fixed maturity securities $ 64,965 $ (447) $ 70,908 $ (3,046) $ 135,873 $ (3,493) Duration of Unrealized Loss at December 31, 2012 By Maturity Less than 12 months Greater than 12 months Total Gross Gross Gross Unrealized Unrealized Unrealized (Dollars in thousands) Market Value Depreciation Market Value Depreciation Market Value Depreciation Fixed maturity securities Due in one year or less $ 100 $ $ 7,034 $ (697) $ 7,134 $ (697) Due in one year through five years 6,343 (7) 40,269 (1,935) 46,612 (1,942) Due in five years through ten years 517 (1) 12,354 (218) 12,871 (219) Due after ten years 1,139 (13) 1,898 (86) 3,037 (99) Assetbacked securities Mortgagebacked securities 56,866 (426) 9,353 (110) 66,219 (536) Total fixed maturity securities $ 64,965 $ (447) $ 70,908 $ (3,046) $ 135,873 $ (3,493) The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2012 were $135,873 thousand and $3,493 thousand, respectively. There were no unrealized losses on a single issuer that exceeded 0.3% of the market value of the fixed maturity securities at December 31, In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector. The $447 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of agency residential mortgagebacked securities. All of these unrealized losses were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The $3,046 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for more than one year were primarily comprised of foreign government securities and foreign corporate securities. Of these unrealized losses, $3,023 thousand related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The noninvestment grade securities with unrealized losses are mainly comprised of commercial mortgagebacked securities. The gross unrealized depreciation greater than 12 months for mortgagebacked securities included $8 thousand related to alta loans. In all instances, there were no 6

13 projected cash flow shortfalls to recover the full book value of the investments and the related interest obligations. The mortgagebacked securities still have excess credit coverage and are current on interest and principal payments. Unrealized losses at December 31, 2012 are comparable with unrealized losses at December 31, The Company, given the size of its investment portfolio and capital position, does not have the intent to sell these securities; and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis. In addition, all securities currently in an unrealized loss position are current with respect to principal and interest payments. The tables below display the aggregate market value and gross unrealized depreciation of fixed maturity securities, by security type and contractual maturity, in each case subdivided according to length of time that individual securities had been in a continuous unrealized loss position for the period indicated: Duration of Unrealized Loss at December 31, 2011 By Security Type Less than 12 months Greater than 12 months Total Gross Gross Gross Unrealized Unrealized Unrealized (Dollars in thousands) Market Value Depreciation Market Value Depreciation Market Value Depreciation Fixed maturity securities available for sale U.S. Treasury securities and obligations of U.S. government agencies and corporations $ $ $ $ $ $ U.S. Corporate securities 10,886 (337) 3,487 (286) 14,373 (623) Assetbacked securities 2,008 (7) 1,395 (1) 3,403 (8) Mortgagebacked securities Commercial 2,813 (696) 2,813 (696) Agency residential 19,824 (207) 4,996 (46) 24,820 (253) Nonagency residential 220 (2) 370 (12) 590 (14) Foreign government securities 18,797 (509) 76,019 (4,433) 94,816 (4,942) Foreign corporate securities 37,317 (1,313) 80,431 (6,170) 117,748 (7,483) Total fixed maturity securities $ 89,052 $ (2,375) $ 169,511 $ (11,644) $ 258,563 $ (14,019) Duration of Unrealized Loss at December 31, 2011 By Maturity Less than 12 months Greater than 12 months Total Gross Gross Gross Unrealized Unrealized Unrealized (Dollars in thousands) Market Value Depreciation Market Value Depreciation Market Value Depreciation Fixed maturity securities Due in one year or less $ 2,617 $ (80) $ 34,950 $ (3,918) $ 37,567 $ (3,998) Due in one year through five years 45,827 (1,543) 69,520 (4,121) 115,347 (5,664) Due in five years through ten years 17,965 (525) 50,122 (2,221) 68,087 (2,746) Due after ten years 591 (11) 5,345 (629) 5,936 (640) Assetbacked securities 2,008 (7) 1,395 (1) 3,403 (8) Mortgagebacked securities 20,044 (209) 8,179 (754) 28,223 (963) Total fixed maturity securities $ 89,052 $ (2,375) $ 169,511 $ (11,644) $ 258,563 $ (14,019) The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2011 were $258,563 thousand and $14,019 thousand, respectively. There were no unrealized losses on a single issuer that exceeded 0.5% of the market value of the fixed maturity securities at December 31, In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector. The $2,375 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of corporate securities and government securities. Of these unrealized losses, $2,365 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The $11,644 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to corporate securities and government securities. Of these unrealized losses, $10,728 thousand related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The noninvestment grade securities with unrealized losses are mainly comprised of corporate and commercial mortgagebacked 7

14 securities. The gross unrealized depreciation greater than 12 months for mortgagebacked securities included $12 thousand related to alta loans. In all instances, there were no projected cash flow shortfalls to recover the full book value of the investments and the related interest obligations. The mortgagebacked securities still have excess credit coverage and are current on interest and principal payments. The components of net investment income are presented in the table below for the periods indicated: Fixed maturity securities $ 27,090 $ 28,613 Shortterm investments and cash 2 12 Other invested assets Limited partnership Total gross investment income 27,382 28,806 Interest debited (credited) and other investment expense (466) (371) Total net investment income $ 26,916 $ 28,435 The Company reports results from its limited partnership investment on the equity method of accounting with changes in value reported through net investment income. Due to the timing of receiving financial information from this partnership, the results are generally reported on a quarter lag. If the Company determines there has been a significant decline in value of the limited partnership during this lag period, a loss will be recorded in the period in which the Company identifies the decline. The Company had contractual commitments to invest up to an additional $4,168 thousand in limited partnerships at December 31, These commitments will be funded when called in accordance with the partnership agreements, which have investment periods that expire, unless extended, through Following the investment periods, these capital commitments may be called by the partnerships for followon investments, management fees and operating expenses. The components of net realized capital gains (losses) are presented in the table below for the periods indicated: Fixed maturity securities, market value: Otherthantemporary impairments $ (358) $ (224) Gains (losses) from sales (2,298) 138 Shortterm investments gain (loss) 1 Total net realized capital gains (losses) $ (2,656) $ (85) Included in net realized capital gains (losses) for 2012 and 2011 was $358 thousand and $224 thousand, respectively, of writedowns in the value of securities deemed to be impaired on an otherthantemporary basis in the table above. The Company had no otherthantemporary impaired securities where the impairment had both a credit and noncredit component. The proceeds and split between gross gains and losses, from sales of fixed maturity securities, are presented in the table below for the periods indicated: Proceeds from sales of fixed maturity securities $ 38,905 $ 11,498 Gross gains from sales 1,168 1,227 Gross losses from sales (3,466) (1,089) 8

15 3. RESERVE FOR LOSSES AND LAE Reserves for losses and LAE. Activity in the reserve for losses and LAE is summarized for the periods indicated: At December 31, Gross reserves at January 1 $ 543,114 $ 554,384 Less reinsurance recoverables (88,105) (116,232) Net reserves at January 1 455, ,152 Incurred related to: Current year 116, ,165 Prior years (7,416) (2,840) Total incurred losses and LAE 108, ,325 Paid related to: Current year 15,606 19,440 Prior years 79, ,202 Total paid losses and LAE 95, ,642 Foreign exchange/translation adjustment 9,001 (3,826) Net reserves at December , ,009 Plus reinsurance recoverables 75,006 88,105 Gross reserves at December 31 $ 552,187 $ 543,114 Prior years reserves decreased by $7,416 thousand and by $2,840 thousand for the years ended December 31, 2012 and 2011, respectively. The decreases for 2012 and 2011 were due to loss development under the affiliated quota share agreements. 4. FAIR VALUE The Company s fixed maturity securities are primarily managed by third party investment asset managers. The investment asset managers obtain prices from nationally recognized pricing services. These services seek to utilize market data and observations in their evaluation process. They use pricing applications that vary by asset class and incorporate available market information and when fixed maturity securities do not trade on a daily basis the services will apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. In addition, they use model processes, such as the Option Adjusted Spread model to develop prepayment and interest rate scenarios for securities that have prepayment features. In limited instances where prices are not provided by pricing services or in rare instances when a manager may not agree with the pricing service, price quotes on a nonbinding basis are obtained from investment brokers. The investment asset managers do not make any changes to prices received from either the pricing services or the investment brokers. In addition, the investment asset managers have procedures in place to review the reasonableness of the prices from the service providers and may request verification of the prices. In addition, the Company continually performs analytical reviews of price changes and tests the prices on a random basis to an independent pricing source. No material variances were noted during these price validation procedures. In limited situations, where financial markets are inactive or illiquid, the Company may use its own assumptions about future cash flows and riskadjusted discount rates to determine fair value. The Company made no such adjustments at December 31, 2012 and

16 Fixed maturity securities are generally categorized as Level 2, Significant Other Observable Inputs, since a particular security may not have traded but the pricing services are able to use valuation models with observable market inputs such as interest rate yield curves and prices for similar fixed maturity securities in terms of issuer, maturity and seniority. Valuations that are derived from techniques in which one or more of the significant inputs are unobservable (including assumptions about risk) are categorized as Level 3, Significant Unobservable Inputs. These securities include broker priced securities. At December 31, 2012, all Level 3 fixed maturity securities, were priced using single nonbinding broker quotes since prices for these securities were not provided by normal pricing service companies. The single broker quotes are provided by market makers or brokerdealers who are recognized as market participants in the markets in which they are providing the quotes. The prices received from brokers are reviewed for reasonableness by the third party asset managers and the Company. The following tables present the fair value measurement levels for all assets, which the Company has recorded at fair value (fair and market values) as of the periods indicated: Fair Value Measurement Using: Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Assets Inputs Inputs (Dollars in thousands) December 31, 2012 (Level 1) (Level 2) (Level 3) Assets: Fixed maturities, market value U.S. Treasury securities and obligations of U.S. government agencies and corporations $ $ $ $ U.S. corporate securities 225, ,270 Assetbacked securities 17,285 17,285 Mortgagebacked securities Commercial 14,473 14,473 Agency residential 200, ,814 5,444 Nonagency residential 1,032 1,032 Foreign government securities 173, ,680 Foreign corporate securities 198, ,021 Total fixed maturities, market value $ 830,019 $ $ 824,575 $ 5,444 There were no transfers between Level 1 and Level 2 for the twelve months ended December 31,

17 Fair Value Measurement Using: Quoted Prices in Active Significant Markets for Other Significant Identical Observable Unobservable Assets Inputs Inputs (Dollars in thousands) December 31, 2011 (Level 1) (Level 2) (Level 3) Assets: Fixed maturities, market value U.S. Treasury securities and obligations of U.S. government agencies and corporations $ $ $ $ U.S. corporate securities 193, ,220 Assetbacked securities 15,906 15,906 Mortgagebacked securities Commercial 17,029 17,029 Agency residential 184, ,096 Nonagency residential 2,169 2,169 Foreign government securities 182, ,245 Foreign corporate securities 207, ,378 Total fixed maturities, market value $ 802,043 $ $ 802,043 $ The following table presents the activity under Level 3, fair value measurements using significant unobservable inputs by asset type, for the periods indicated: Agency Agency (Dollars in thousands) RMBS RMBS Beginning balance $ $ Total gains or (losses) (realized/unrealized) Included in earnings (or changes in net assets) (1) Included in other comprehensive income (loss) (30) Purchases, issuances and settlements 5,475 Transfers in and/or (out) of Level 3 Ending balance $ 5,444 $ The amount of total gains or losses for the period included in earnings (or changes in net assets) attributable to the change in unrealized gains or losses relating to assets still held at the reporting date $ $ (Some amounts may not reconcile due to rounding.) 5. CREDIT FACILITY Effective June 22, 2012, Group, Bermuda Re and Everest International entered into a four year, $800,000 thousand senior credit facility with a syndicate of lenders, which amended and restated in its entirety the July 27, 2007, five year, $850,000 thousand senior credit facility. Both the June 22, 2012 and July 27, 2007 senior credit facilities, which have similar terms, are referred to as the Group Credit Facility. Wells Fargo Corporation ( Wells Fargo Bank ) is the administrative agent for the Group Credit Facility, which consists of two tranches. Tranche one provides up to $200,000 thousand of unsecured revolving credit for liquidity and general corporate purposes, and for the issuance of unsecured standby letters of credit. The interest on the revolving loans shall, at Group s option, be either (1) the Base Rate (as defined below) or (2) an adjusted London Interbank Offered Rate ( LIBOR ) plus a margin. The Base Rate is the higher of (a) the prime commercial lending rate established by Wells Fargo Bank, (b) the Federal Funds Rate plus 0.5% per annum or (c) the one month LIBOR Rate plus 1.0% per annum. The amount of margin and the fees payable for the Group Credit Facility depends on Group s senior unsecured debt rating. Tranche two exclusively provides up 11

18 to $600,000 thousand for the issuance of standby letters of credit on a collateralized basis. The Group Credit Facility requires Group to maintain a debt to capital ratio of not greater than 0.35 to 1 and to maintain a minimum net worth. Minimum net worth is an amount equal to the sum of $4,249,963 thousand plus 25% of consolidated net income for each of Group s fiscal quarters, for which statements are available ending on or after January 1, 2012 and for which consolidated net income is positive, plus 25% of any increase in consolidated net worth during such period attributable to the issuance of ordinary and preferred shares, which at December 31, 2012, was $4,470,565 thousand. As of December 31, 2012, the Company was in compliance with all Group Credit Facility covenants. At December 31, 2012 and 2011, the Company had no outstanding letters of credit under tranche one and tranche two of the Group Credit Facility. 6. INCOME TAXES Under Bermuda law, no income or capital gains taxes are imposed on Group and its Bermuda subsidiaries. The Minister of Finance of Bermuda has assured Group and its Bermuda subsidiaries that, pursuant to The Exempted Undertakings Tax Protection Amendment Act of 2011, it will be exempt until 2035 from imposition of any such taxes. The provision for income taxes in the statement of operations and comprehensive income (loss) has been determined by reference to the applicable tax laws of jurisdictions in which the income of Everest International Reinsurance, Ltd. is subject to tax. It reflects the permanent differences between financial and taxable income. The significant components of the provision are as follows for the periods indicated: Current foreign tax expense (benefit) $ 21 $ 31 Total income tax expense (benefit) $ 21 $ 31 The weighted average expected tax provision has been calculated using the pretax income (loss) in each jurisdiction multiplied by that jurisdiction s applicable statutory tax rate. Reconciliation of the difference between the provision for income taxes and the expected tax provision at the weighted average tax rate for the periods indicated is provided below: Expected tax provision at applicable statutory rates $ $ Withholding taxes Total income tax provision $ 21 $ REINSURANCE The Company engages in reinsurance transactions with Everest Re, Bermuda Re and Ireland Re, primarily driven by enterprise risk and capital management considerations under which business is assumed or ceded at market rates and terms. All of the Company s business is derived from interaffiliate reinsurance agreements. All of the Company s retrocessions are with an affiliate. 12

19 Premiums written and earned and incurred losses and LAE are comprised of the following for the periods indicated: Written premiums: Assumed $ 186,939 $ 205,500 Ceded (1,914) (2,407) Net written premiums $ 185,025 $ 203,093 Premiums earned: Assumed $ 185,191 $ 214,677 Ceded (1,262) (6,984) Net premiums earned $ 183,929 $ 207,693 Incurred losses and LAE: Assumed $ 111,149 $ 150,822 Ceded (2,441) 2,503 Net incurred losses and LAE $ 108,708 $ 153,325 The table below represents affiliated quota share reinsurance agreements ("whole account quota share") for all new and renewal business for the indicated coverage period: (Dollars and euros in thousands) Percent Assuming Single Aggregate Coverage Period Ceding Company Ceded Company Type of Business Occurrence Limit Limit 01/01/200412/31/2005 Everest Re 2.5% Everest International property / casualty business 01/01/200612/31/2006 Everest Re 2.0% Everest International property business 12,500 01/01/200612/31/2007 Everest Re 3.5% Everest International casualty business 01/01/200712/31/2007 Everest Re 2.5% Everest International property business 13,000 01/01/200812/31/2008 Everest Re 4.0% Everest International property / casualty business 13,000 27,500 01/01/200912/31/2009 Everest Re 8.0% Everest International property / casualty business 27,300 59,100 01/01/200912/31/2009 Everest International 100.0% Ireland Re property / casualty business 01/01/200412/31/2005 Bermuda Re U.K. Branch 25.0% Everest International property / casualty business 01/01/200612/31/2008 Bermuda Re U.K. Branch 30.0% Everest International property business 120,000 01/01/200912/31/2009 Bermuda Re U.K. Branch 50.0% Everest International property business 100,000 01/01/201012/31/2011 Bermuda Re U.K. Branch 50.0% Everest International property / casualty business 80,000 01/01/201212/31/2012 Bermuda Re U.K. Branch 50.0% Everest International property / casualty business 70,000 01/01/2013 Bermuda Re U.K. Branch 59.5% Everest International property business 41,650 01/01/2011 Ireland Re 50.0% Everest International property / casualty business 37,500 13

20 The following table summarizes the premiums and losses assumed and ceded by the Company from and to its affiliates for the periods indicated: Everest Re, Bermuda Re and Ireland Re Assumed written premiums $ 186,939 $ 205,500 Assumed earned premiums 185, ,677 Assumed losses and LAE 111, ,822 Ireland Re Ceded written premiums $ 1,914 $ 2,407 Ceded earned premiums 1,262 6,984 Ceded losses and LAE 2,441 (2,503) 8. COMPREHENSIVE INCOME (LOSS) The following table presents the components of comprehensive income (loss) in the statements of operations for the periods indicated: Net income (loss) $ 41,045 $ 39,282 Other comprehensive income (loss), before tax: Unrealized appreciation (depreciation) ("URA(D)") on securities arising during the period URA(D) of investments temporary 21,774 9,232 URA(D) of investments noncredit OTTI 58 6 URA(D) on securities arising during the period 21,832 9,238 Less: reclassification adjustment for realized losses (gains) included in net income (loss) 2, Total URA(D) on securities arising during the period 24,488 9,323 Total other comprehensive income (loss), before tax 24,488 9,323 Comprehensive income (loss) $ 65,533 $ 48,605 The following table presents the components of accumulated other comprehensive income (loss), net of tax, in the balance sheets for the periods indicated: Beginning balance of URA (D) on securities $ 13,104 $ 3,781 Current period change in URA (D) of investments temporary 24,430 9,317 Current period change in URA (D) of investments noncredit OTTI 58 6 Ending balance of URA (D) on securities $ 37,592 $ 13, DIVIDEND RESTRICTIONS AND STATUTORY FINANCIAL INFORMATION Dividend Restrictions. Under Bermuda law, Everest International is prohibited from declaring or making payment of a dividend if it fails to meet its minimum solvency margin or minimum liquidity ratio. Prior approval of the Bermuda Monetary Authority is required if Everest International s dividend payments would reduce its prior yearend total statutory capital and surplus by 25% or more. 14