10-K 1 holdings10k2017.htm HOLDINGS 10-K 2017
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2017

Commission file number 1-14527

EVEREST REINSURANCE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction
of incorporation or organization)
 
22-3263609
(I.R.S Employer
Identification No.)
 
477 Martinsville Road
Post Office Box 830
Liberty Corner, New Jersey 07938-0830
(908) 604-3000

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

Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
 
Name of Each Exchange on Which Registered 
4.868% Senior Notes Due 2044
 
NYSE 
6.60% Long Term Notes Due 2067
 
NYSE 

Securities registered pursuant to Section 12(g) of the Act:


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes
X
 
No
 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes
   
No
X

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes
X
 
No
 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes
X
 
No
 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  [   ]

Yes
X
 
No
 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer,"  "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer
   
Accelerated filer
 
Non-accelerated filer
X
 
Smaller reporting company
 
(Do not check if smaller reporting company)
 
Emerging  growth company
 

Indicate by check mark if the registrant is an emerging growth company and has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange act.

Yes
   
No
X

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)

Yes
   
No
X

The aggregate market value on June 30, 2017, the last business day of the registrant's most recently completed second quarter, of the voting stock held by non-affiliates of the registrant was zero.

At March 15, 2018, the number of shares outstanding of the registrant common shares was 1,000, all of which are owned by Everest Underwriting Group (Ireland) Limited, a wholly-owned direct subsidiary of Everest Re Group, Ltd.

The Registrant meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format permitted by General Instruction I of Form 10-K.

EVEREST REINSURANCE HOLDINGS, INC.

Table of Contents
FORM 10-K


 
Page
 
PART I
     
Item 1.
Business
1
Item 1A.
Risk Factors
7
Item 1B.
Unresolved Staff Comments
13
Item 2.
Properties
13
Item 3.
Legal Proceedings
13
Item 4.
Mine Safety Disclosures
14
     
     
PART II
     
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
14
Item 6.
Selected Financial Data
14
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
15
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
29
Item 8.
Financial Statements and Supplementary Data
31
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
 
31
Item 9A.
Controls and Procedures
31
Item 9B.
Other Information
32
     
PART III
     
Item 10.
Directors, Executive Officers and Corporate Governance
32
Item 11.
Executive Compensation
32
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
32
Item 13.
Certain Relationships and Related Transactions, and Director Independence
33
Item 14.
Principal Accountant Fees and Services
33
     
     
PART IV
     
Item 15.
Exhibits and Financial Statement Schedules
34

PART I

Unless otherwise indicated, all financial data in this document have been prepared using accounting principles generally accepted in the United States of America ("GAAP").  As used in this document, "Holdings" means Everest Reinsurance Holdings, Inc., a Delaware company and direct subsidiary of Everest Underwriting Group (Ireland) Limited ("Holdings Ireland"); "Group" means Everest Re Group, Ltd. (Holdings Ireland's parent); "Bermuda Re" means Everest Reinsurance (Bermuda), Ltd., a subsidiary of Group; "Everest Re" means Everest Reinsurance Company and its subsidiaries, a subsidiary of Holdings (unless the context otherwise requires); and the "Company", "we", "us", and "our" means Holdings and its subsidiaries (unless the context otherwise requires).

ITEM 1. BUSINESS

The Company.
Holdings, a Delaware corporation, is a wholly-owned subsidiary of Holdings Ireland.  On December 30, 2008, Group contributed Holdings to its recently established Irish holding company, Holdings Ireland.  Holdings Ireland is a direct subsidiary of Group and serves as a holding company for the U.S. reinsurance and insurance subsidiaries.  Group is a Bermuda holding company whose common shares are publicly traded in the U.S. on the New York Stock Exchange under the symbol "RE".  Group files an annual report on Form 10-K with the Securities and Exchange Commission (the "SEC") with respect to its consolidated operations, including Holdings.

The Company's principal business, conducted through its operating segments, is the underwriting of reinsurance and insurance in the U.S. and international markets. The Company had gross written premiums, in 2017, of $5.8 billion, with approximately 68% representing reinsurance and 32% representing insurance.  Stockholder's equity at December 31, 2017 was $5.4 billion. The Company underwrites reinsurance both through brokers and directly with ceding companies, giving it the flexibility to pursue business based on the ceding company's preferred reinsurance purchasing method.  The Company underwrites insurance through brokers, surplus lines brokers and general agent relationships.  Holdings' active operating subsidiaries are each rated A+ ("Superior") by A.M. Best Company ("A.M. Best"), a leading provider of insurer ratings that assigns financial strength ratings to insurance companies based on their ability to meet their obligations to policyholders.

Following is a summary of the Company's operating subsidiaries:

·
Everest Re, a Delaware insurance company and a direct subsidiary of Holdings, is a licensed property and casualty insurer and/or reinsurer in all states, the District of Columbia, Puerto Rico and Guam and is authorized to conduct reinsurance business in Canada, Singapore and Brazil. Everest Re underwrites property and casualty reinsurance for insurance and reinsurance companies in the U.S. and international markets.  Everest Re has engaged in reinsurance transactions with Bermuda Re, Everest International Reinsurance, Ltd. ("Everest International"), Mt. Logan Re, Ltd. ("Mt. Logan Re") and Everest Insurance Company of Canada ("Everest Canada"), which are affiliated companies, primarily driven by enterprise risk and capital management considerations under which business is transacted at market rates and terms.  At December 31, 2017 Everest Re had statutory surplus of $3.4 billion.

·
Everest National Insurance Company ("Everest National"), a Delaware insurance company and a direct subsidiary of Everest Re, is licensed in 50 states and the District of Columbia and is authorized to write property and casualty insurance on an admitted basis in the jurisdictions in which it is licensed. The majority of Everest National's business is reinsured by its parent, Everest Re.

1

 
·
Everest Indemnity Insurance Company ("Everest Indemnity"), a Delaware insurance company and a direct subsidiary of Everest Re, writes excess and surplus lines insurance business in the U.S. on a non-admitted basis. Excess and surplus lines insurance is specialty property and liability coverage that an insurer not licensed to write insurance in a particular jurisdiction is permitted to provide to insureds when the specific specialty coverage is unavailable from admitted insurers.  Everest Indemnity is licensed in Delaware and is eligible to write business on a non-admitted basis in all other states, the District of Columbia and Puerto Rico.  The majority of Everest Indemnity's business is reinsured by its parent, Everest Re.

·
Everest Security Insurance Company ("Everest Security"), a Georgia insurance company and a direct subsidiary of Everest Re, writes property and casualty insurance on an admitted basis in Georgia and Alabama.  The majority of Everest Security's business is reinsured by its parent, Everest Re.

·
Everest Denali Insurance Company ("Everest Denali"), a Delaware insurance company and a direct subsidiary of Everest Re, is licensed to write property and casualty insurance in 46 states and the District of Columbia.

·
Everest Premier Insurance Company ("Everest Premier"), a Delaware insurance company and a direct subsidiary of Everest Re, is licensed to write property and casualty insurance in 46 states and the District of Columbia.

·
Everest International Assurance, Ltd. ("Everest Assurance"), a Bermuda company and a direct subsidiary of Holdings is registered in Bermuda as a Class 3A general business insurer and as a Class C long-term insurer.  Everest Assurance has made a one-time election under section 953(d) of the U.S. Internal Revenue Code to be a U.S. income tax paying "Controlled Foreign Corporation."  By making this election, Everest Assurance will be authorized to write life reinsurance and casualty reinsurance in both Bermuda and the U.S.

·
Mt. McKinley Insurance Company ("Mt. McKinley"), a Delaware insurance company and a direct subsidiary of Holdings, was acquired by Holdings in September 2000 from The Prudential Insurance Company of America ("The Prudential").  In 1985, Mt. McKinley ceased writing new and renewal insurance and commenced a run-off operation to service claims arising from its previously written business.  Effective September 19, 2000, Mt. McKinley and Bermuda Re entered into a loss portfolio transfer reinsurance agreement, whereby Mt. McKinley transferred, for arm's length consideration, all of its net insurance exposures and reserves to Bermuda Re.  Effective July 13, 2015, the Company sold all of the outstanding shares of capital stock in Mt. McKinley to Clearwater Insurance Company.  The operating results of Mt. McKinley through July 13, 2015 are included within the Company's financial statements.

·
Heartland Crop Insurance Company ("Heartland"), a Kansas based managing general agent and a direct subsidiary of Holdings, was acquired on January 2, 2011.  Heartland specializes in crop insurance, which is written mainly through Everest National.  Effective August 24, 2016, the Company sold Heartland to CGB Diversified Services, Inc. ("CGB").  The operating results of Heartland for the period owned are included within the Company's financial statements.

Reinsurance Industry Overview.
Reinsurance is an arrangement in which an insurance company, the reinsurer, agrees to indemnify another insurance or reinsurance company, the ceding company, against all or a portion of the insurance risks underwritten by the ceding company under one or more insurance contracts.  Reinsurance can provide a ceding company with several benefits, including a reduction in its net liability on individual risks or classes of risks, catastrophe protection from large and/or multiple losses and/or a reduction in operating leverage as measured by the ratio of net premiums and reserves to capital.  Reinsurance also provides a ceding company with additional underwriting capacity by permitting it to accept larger risks and write more business than would be acceptable relative to the ceding company's financial resources.  Reinsurance does not discharge the ceding company from its liability to policyholders; rather, it reimburses the ceding company for covered losses.
2

There are two basic types of reinsurance arrangements: treaty and facultative.  Treaty reinsurance obligates the ceding company to cede and the reinsurer to assume a specified portion of a type or category of risks insured by the ceding company.  Treaty reinsurers do not separately evaluate each of the individual risks assumed under their treaties, instead, the reinsurer relies upon the pricing and underwriting decisions made by the ceding company.  In facultative reinsurance, the ceding company cedes and the reinsurer assumes all or part of the risk under a single insurance contract.  Facultative reinsurance is negotiated separately for each insurance contract that is reinsured.  Facultative reinsurance, when purchased by ceding companies, usually is intended to cover individual risks not covered by their reinsurance treaties because of the dollar limits involved or because the risk is unusual.

Both treaty and facultative reinsurance can be written on either a pro rata basis or an excess of loss basis.  Under pro rata reinsurance, the ceding company and the reinsurer share the premiums as well as the losses and expenses in an agreed proportion.  Under excess of loss reinsurance, the reinsurer indemnifies the ceding company against all or a specified portion of losses and expenses in excess of a specified dollar amount, known as the ceding company's retention or reinsurer's attachment point, generally subject to a negotiated reinsurance contract limit.

In pro rata reinsurance, the reinsurer generally pays the ceding company a ceding commission.  The ceding commission generally is based on the ceding company's cost of acquiring the business being reinsured (commissions, premium taxes, assessments and miscellaneous administrative expense and may contain profit sharing provisions, whereby the ceding commission is adjusted based on loss experience).  Premiums paid by the ceding company to a reinsurer for excess of loss reinsurance are not directly proportional to the premiums that the ceding company receives because the reinsurer does not assume a proportionate risk.  There is usually no ceding commission on excess of loss reinsurance.

Reinsurers may purchase reinsurance to cover their own risk exposure.  Reinsurance of a reinsurer's business is called a retrocession.  Reinsurance companies cede risks under retrocessional agreements to other reinsurers, known as retrocessionaires, for reasons similar to those that cause insurers to purchase reinsurance:  to reduce net liability on individual or classes of risks, protect against catastrophic losses, stabilize financial ratios and obtain additional underwriting capacity.

Reinsurance can be written through intermediaries, generally professional reinsurance brokers, or directly with ceding companies.  From a ceding company's perspective, the broker and the direct distribution channels have advantages and disadvantages.  A ceding company's decision to select one distribution channel over the other will be influenced by its perception of such advantages and disadvantages relative to the reinsurance coverage being placed.

Business Strategy.
The Company's business strategy is to sustain its leadership position within targeted reinsurance and insurance markets, provide effective management throughout the property and casualty underwriting cycle and thereby achieve an attractive return for its stockholder.  The Company's underwriting strategies seek to capitalize on its i) financial strength and capacity, ii) global franchise, iii) stable and experienced management team, iv) diversified product and distribution offerings, v) underwriting expertise and disciplined approach, vi) efficient and low-cost operating structure and vii) effective enterprise risk management practices.

The Company offers treaty and facultative reinsurance and admitted and non-admitted insurance. The Company's products include the full range of property and casualty reinsurance and insurance coverages, including marine, aviation, surety, errors and omissions liability ("E&O"), directors' and officers' liability ("D&O"), medical malpractice, other specialty lines, accident and health ("A&H") and workers' compensation.

3

The Company's underwriting strategies emphasizes underwriting profitability over premium volume.  Key elements of this strategy include careful risk selection, appropriate pricing through strict underwriting discipline and adjustment of the Company's business mix in response to changing market conditions.  The Company focuses on reinsuring companies that effectively manage the underwriting cycle through proper analysis and pricing of underlying risks and whose underwriting guidelines and performance are compatible with its objectives.

The Company's underwriting strategies emphasize flexibility and responsiveness to changing market conditions.  The Company believes that its existing strengths, including its broad underwriting expertise, global presence, strong financial ratings and substantial capital, facilitate adjustments to its mix of business geographically, by line of business and by type of coverage, allowing it to participate in those market opportunities that provide the greatest potential for underwriting profitability.  The Company's insurance operations complement these strategies by accessing business that is not available on a reinsurance basis.  The Company carefully monitors its mix of business across all operations to avoid unacceptable geographic or other risk concentrations.

Commencing 2015, the Company initiated a strategic build out of its insurance platform through the investment in key leadership hires which in turn has brought significant underwriting talent and stronger direction in achieving its insurance program strategic goals of increased premium volume and improved underwriting results. Recent growth is coming from highly diversified areas including newly launched lines of business, as well as, product and geographic expansion in existing lines of business. The Company is building a world-class insurance platform capable of offering products across lines and geographies, complementing its leading global reinsurance franchise.

Capital Transactions.
The Company's business operations are in part dependent on its financial strength and financial strength ratings, and the market's perception of its financial strength.  The Company's stockholder's equity was $5,412.7 million and $5,298.6 million at December 31, 2017 and 2016, respectively. The Company possesses significant financial flexibility with access to the debt markets and, through its ultimate parent, equity markets, as a result of its perceived financial strength, as evidenced by the financial strength ratings as assigned by independent rating agencies.  The Company's capital position remains strong, commensurate with its financial ratings and the Company has ample liquidity to meet its financial obligations for the foreseeable future.

4

Financial Strength Ratings.
The following table shows the current financial strength ratings of the Company's operating subsidiaries as reported by A.M. Best, Standard & Poor's Financial Services, LLC ("Standard & Poor's") and Moody's Investors Services, Inc. ("Moody's").  These ratings are based upon factors of concern to policyholders and should not be considered an indication of the degree or lack of risk involved in a direct or indirect equity investment in an insurance or reinsurance company.

All of the below-mentioned ratings are continually monitored and revised, if necessary, by each of the rating agencies.  The ratings presented in the following table were in effect as of January 30, 2018.

The Company believes that its ratings are important as they provide the Company's customers and its investors with an independent assessment of the Company's financial strength using a rating scale that provides for relative comparisons.  Strong financial ratings are particularly important for reinsurance companies.  Ceding companies must rely on their reinsurers to pay covered losses well into the future.  As a result, a highly rated reinsurer is generally preferred.


Operating Subsidiary:
 
A.M. Best
 
Standard & Poor's
 
Moody's
             
Everest Re
 
A+ (Superior)
 
A+ (Strong)
 
A1 (upper-medium)
Everest National
 
A+ (Superior)
 
A+ (Strong)
 
Not Rated
Everest Indemnity
 
A+ (Superior)
 
A+ (Strong)
 
Not Rated
Everest Security
 
A+ (Superior)
 
Not Rated
 
Not Rated
Everest International Assurance, Ltd.
A+ (Superior)
 
A (Strong)
 
Not Rated
Everest Denali
 
A+ (Superior)
 
Not Rated
 
Not Rated
Everest Premier
 
A+ (Superior)
 
Not Rated
 
Not Rated


A.M. Best states that the "A+" ("Superior") rating is assigned to those companies which, in its opinion, have a superior ability to meet their ongoing insurance policy and contract obligations based on A.M. Best's comprehensive quantitative and qualitative evaluation of a company's balance sheet strength, operating performance and business profile.  A.M. Best affirmed these ratings on February 10, 2017. Standard & Poor's states that the "A+"/"A" ratings are assigned to those insurance companies which, in its opinion, have strong financial security characteristics with respect to their ability to pay under its insurance policies and contracts in accordance with their terms.  Standard & Poor's affirmed these ratings on July 13, 2017.  Moody's states that an "A1" rating is assigned to companies that, in their opinion, offer upper-medium grade security and are subject to low credit risk.  Moody's affirmed these ratings on September 19, 2017.

Subsidiaries other than Everest Re may not be rated by some or any rating agencies because such ratings are not considered essential by the individual subsidiary's customers or because of the limited nature of the subsidiary's operations or because the subsidiaries are newly established and have not yet been rated by the agencies.

Debt Ratings.
The following table shows the debt ratings by A.M. Best, Standard & Poor's and Moody's of the Holdings' senior notes due June 1, 2044 and long term notes due May 1, 2067 both of which are considered investment grade.  Debt ratings are the rating agencies' current assessment of the credit worthiness of an obligor with respect to a specific obligation.


 
A.M. Best
 
 
Standard & Poor's
 
 
Moody's
Senior Notes
 
a-
(Strong)
   
A-
(Strong)
   
Baa1
(Medium Grade)
Long Term Notes
 
bbb
(Adequate)
   
BBB
(Adequate)
   
Baa2
(Medium Grade)


A debt rating of "a-" is assigned by A.M. Best where the issuer, in A.M. Best's opinion, has a strong ability to meet the terms of the obligation.  A.M. Best assigns a debt rating in the "bbb" range where the issuer, in A.M. Best's opinion, has adequate ability to meet the terms of the obligation but notes that the issue is more susceptible to changes in economic or other conditions.  Standard & Poor's assigns a debt rating in the "A" range to issuers that have strong capacity to meet its financial commitments but is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligors in
5

higher-rated categories.  A debt rating in the "BBB" range is assigned by Standard & Poor's where the obligation exhibits adequate protection parameters although adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.  According to Moody's, a debt rating of "Baa" is assigned to issues that are considered medium-grade obligations and subject to moderate credit risk and as such may possess certain speculative characteristics.

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

The Company competes in the U.S. and international reinsurance and insurance markets with numerous global competitors. Our competitors include independent reinsurance and insurance companies, subsidiaries or affiliates of established worldwide insurance companies, reinsurance departments of certain insurance companies, domestic and international underwriting operations, including underwriting syndicates at Lloyd's of London and certain government sponsored risk transfer vehicles.  Some of these competitors have greater financial resources than the Company does and have established long term and continuing business relationships, which can be a significant competitive advantage.  In addition, the lack of strong barriers to entry into the reinsurance business and recently, the securitization of reinsurance and insurance risks through capital markets provide additional sources of potential reinsurance and insurance capacity and competition.

Worldwide insurance and reinsurance market conditions continued to be very competitive, particularly in the property catastrophe and casualty reinsurance lines of business.  Generally, there was ample insurance and reinsurance capacity relative to demand, as well as, additional capital from the capital markets through insurance linked financial instruments.  These financial instruments such as side cars, catastrophe bonds and collateralized reinsurance funds, provide capital markets with access to insurance and reinsurance risk exposure.  The capital markets demand for these products is being primarily driven by the current low interest rate environment and the desire to achieve greater risk diversification and potentially higher returns on their investments.  This increased competition is generally having a negative impact on rates, terms and conditions; however, the impact varies widely by market and coverage.

Rates tend to fluctuate by specific region and products, particularly areas recently impacted by large catastrophic events.  There was an unprecedented series of catastrophes in the third quarter of 2017 with Hurricanes Harvey, Irma and Maria, as well as a significant earthquake in Mexico City.  Additional catastrophe events occurred in the fourth quarter of 2017 with the wild fires in California and Hurricanes Nate and Ophelia.  The total industry losses for all of these events could exceed $100 billion.  This is the second consecutive year with higher than average catastrophe losses. During 2016, catastrophe losses included the Fort McMurray Canadian wildfire, Hurricane Matthew which affected a large area of the Caribbean and southeastern United States, storms and an earthquake in Ecuador.  There are industry reports that the catastrophe losses for 2016 reached their highest level in four years and the United States experienced the most loss events since 1980 and the highest total losses since 2012.  While the future impact on market conditions from these catastrophes cannot be determined at this time, there was some firming in the markets impacted by the 2016 catastrophes and as catastrophe losses increased in 2017, there is a growing industry consensus that there will be a general firming of the (re)insurance markets resulting in rate increases, not only for catastrophe exposures, but also potentially for most other lines of business.
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Commencing in 2015, the Company initiated a strategic build out of its insurance platform through the investment in key leadership hires which in turn has brought significant underwriting talent and stronger direction in achieving its insurance program strategic goals of increased premium volume and improved underwriting results.  Recent growth is coming from highly diversified areas including newly launched lines of business, as well as, product and geographic expansion in existing lines of business.  The Company is building a world-class insurance platform capable of offering products across lines and geographies, complementing our leading global reinsurance franchise.

Overall, the Company believes that given our size, strong ratings, distribution system, reputation, expertise and capital market vehicle activity the current marketplace conditions provide profit opportunities.  The Company continues to employ its strategy of targeting business that offers the greatest profit potential, while maintaining balance and diversification in our overall portfolio.

Employees.
As of February 1, 2018, the Company employed 902 persons.  Management believes that employee relations are good.  None of the Company's employees are subject to collective bargaining agreements, and the Company is not aware of any current efforts to implement such agreements.

Available Information.
The Company's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports are available free of charge through the Company's internet website at http://www.everestregroup.com as soon as reasonably practicable after such reports are electronically filed with the SEC.


ITEM 1A.             RISK FACTORS

In addition to the other information provided in this report, the following risk factors should be considered when evaluating an investment in our securities.  If the circumstances contemplated by the individual risk factors materialize, our business, financial condition and results of operations could be materially and adversely affected and our ability to service our debt, our debt ratings and our ability to issue new debt could decline significantly.

RISKS RELATING TO OUR BUSINESS

Fluctuations in the financial markets could result in investment losses.

Prolonged and severe disruptions in the overall public debt and equity markets, such as occurred during 2008, could result in significant realized and unrealized losses in our investment portfolio.  Although financial markets have significantly improved since 2008, they could deteriorate in the future.  There could also be disruption in individual market sectors, such as occurred in the energy sector in recent years.  Such declines in the financial markets could result in significant realized and unrealized losses on investments and could have a material adverse impact on our results of operations, equity, business and insurer financial strength and debt ratings.

7


Our results could be adversely affected by catastrophic events.

We are exposed to unpredictable catastrophic events, including weather-related and other natural catastrophes, as well as acts of terrorism.  Any material reduction in our operating results caused by the occurrence of one or more catastrophes could inhibit our ability to pay dividends or to meet our interest and principal payment obligations.  By way of illustration, during the past five calendar years, pre-tax catastrophe losses, net of reinsurance, were as follows:


Calendar year:
 Pre-tax catastrophe losses
(Dollars in millions)
     
2017
 
$
941.4
 
2016
   
109.2
 
2015
   
31.9
 
2014
   
18.2
 
2013
   
76.6
 


Our losses from future catastrophic events could exceed our projections.

We use projections of possible losses from future catastrophic events of varying types and magnitudes as a strategic underwriting tool.  We use these loss projections to estimate our potential catastrophe losses in certain geographic areas and decide on the placement of retrocessional coverage or other actions to limit the extent of potential losses in a given geographic area.  These loss projections are approximations, reliant on a mix of quantitative and qualitative processes, and actual losses may exceed the projections by a material amount, resulting in a material adverse effect on our financial condition and results of operations.

If our loss reserves are inadequate to meet our actual losses, our net income would be reduced or we could incur a loss.

We are required to maintain reserves to cover our estimated ultimate liability of losses and loss adjustment expenses ("LAE") for both reported and unreported claims incurred.  These reserves are only estimates of what we believe the settlement and administration of claims will cost based on facts and circumstances known to us.  In setting reserves for our reinsurance liabilities, we rely on claim data supplied by our ceding companies and brokers and we employ actuarial and statistical projections.  The information received from our ceding companies is not always timely or accurate, which can contribute to inaccuracies in our loss projections.  Because of the uncertainties that surround our estimates of loss and LAE reserves, we cannot be certain that ultimate losses and LAE payments will not exceed our estimates.  If our reserves are deficient, we would be required to increase loss reserves in the period in which such deficiencies are identified which would cause a charge to our earnings and a reduction of capital.  By way of illustration, during the past five calendar years, the reserve re-estimation process resulted in an increase to our pre-tax net income all years:


Calendar year:
   Effect on pre-tax net income
(Dollars in millions)
        
2017
 
$
117.7
 
 increase
2016
   
91.7
 
 increase
2015
   
6.5
 
 increase
2014
   
39.2
 
 decrease
2013
   
44.6
 
 decrease


The difficulty in estimating our reserves is significantly more challenging as it relates to reserving for potential asbestos and environmental ("A&E") liabilities.  At December 31, 2017, 4.8% of our gross reserves were comprised of A&E reserves.  A&E liabilities are especially hard to estimate for many reasons, including the long delays between exposure and manifestation of any bodily injury or property damage, difficulty in identifying the source of the asbestos or environmental contamination, long reporting delays and difficulty in properly allocating liability for the asbestos or environmental damage.  Legal tactics and judicial and legislative developments affecting the scope of insurers' liability, which can be difficult to predict, also contribute to uncertainties in estimating reserves for A&E liabilities.
 
8

The failure to accurately assess underwriting risk and establish adequate premium rates could reduce our net income or result in a net loss.

Our success depends on our ability to accurately assess the risks associated with the businesses on which the risk is retained.  If we fail to accurately assess the risks we retain, we may fail to establish adequate premium rates to cover our losses and LAE.  This could reduce our net income and even result in a net loss.

In addition, losses may arise from events or exposures that are not anticipated when the coverage is priced.  In addition to unanticipated events, we also face the unanticipated expansion of our exposures, particularly in long-tail liability lines.  An example of this is the expansion over time of the scope of insurers' legal liability within the mass tort arena, particularly for A&E exposures discussed above.

Decreases in pricing for property and casualty reinsurance and insurance could reduce our net income.

The worldwide reinsurance and insurance businesses are highly competitive, as well as cyclical by product and market.  These cycles, as well as other factors that influence aggregate supply and demand for property and casualty insurance and reinsurance products, are outside of our control.  The supply of (re)insurance is driven by prevailing prices and levels of capacity that may fluctuate in response to a number of factors including large catastrophic losses and investment returns being realized in the insurance industry. Demand for (re)insurance is influenced by underwriting results of insurers and insureds, including catastrophe losses, and prevailing general economic conditions. If any of these factors were to result in a decline in the demand for (re)insurance or an overall increase in (re)insurance capacity, our net income could decrease.

If rating agencies downgrade the ratings of our insurance subsidiaries, future prospects for growth and profitability could be significantly and adversely affected.

Our active insurance company subsidiaries currently hold financial strength ratings assigned by third-party rating agencies which assess and rate the claims paying ability and financial strength of insurers and reinsurers. Our active subsidiaries carry an "A+" ("Superior") rating from A.M. Best. Everest Re, Everest National and Everest Indemnity hold an "A+" ("Strong") rating from Standard & Poor's and Everest Assurance holds an "A" ("Strong") rating from this same agency.  Everest Re holds an "A1" ("upper-medium grade") rating from Moody's.  Financial strength ratings are used by client companies and agents and brokers that place the business as an important means of assessing the financial strength and quality of reinsurers. A downgrade or withdrawal of any of these ratings might adversely affect our ability to market our insurance products and could have a material and adverse effect on future prospects for growth and profitability.

Consistent with market practice, much of our treaty reinsurance business allows the ceding company to terminate the contract or seek collateralization of our obligations in the event of a rating downgrade below a certain threshold.  The termination provision would generally be triggered if a rating fell below A.M. Best's A- rating level, which is three levels below Everest Re's current rating of A+. To a lesser extent, Everest Re also has modest exposure to reinsurance contracts that contain provisions for obligatory funding of outstanding liabilities in the event of a rating agency downgrade.  Those provisions would also generally be triggered if Everest Re's rating fell below A.M. Best's A- rating level.

The failure of our insureds, intermediaries and reinsurers to satisfy their obligations to us could reduce our income.

In accordance with industry practice, we have uncollateralized receivables from insureds, agents and brokers and/or rely on agents and brokers to process our payments.  We may not be able to collect amounts due from insureds, agents and brokers, resulting in a reduction to net income.

We are subject to credit risk of reinsurers in connection with retrocessional arrangements because the transfer of risk to a reinsurer does not relieve us of our liability to the insured. In addition, reinsurers may be unwilling to pay us even though they are able to do so.  The failure of one or more of our reinsurers to honor their obligations to us in a timely fashion would impact our cash flow and reduce our net income and could cause us to incur a significant loss.
 
9


If we are unable or choose not to purchase reinsurance and transfer risk to the reinsurance markets, our net income could be reduced or we could incur a net loss in the event of unusual loss experience.

We are generally less reliant on the purchase of reinsurance than many of our competitors, in part because of our strategic emphasis on underwriting discipline and management of the cycles inherent in our business.  We try to separate our risk taking process from our risk mitigation process in order to avoid developing too great a reliance on reinsurance.  Historically, we generally purchased reinsurance from other third parties only when we expect a net benefit.  With the expansion of the capital markets into insurance linked financial instruments, we increased our use of capital market products for catastrophe reinsurance starting in 2014.  In addition, some of our quota share contracts with larger retrocessions were increased during 2014.  The percentage of business that we reinsure may vary considerably from year to year, depending on our view of the relationship between cost and expected benefit for the contract period.

We have entered into affiliated whole account quota share reinsurance agreements for 2002 through 2017 with Bermuda Re but we have decided not to renew the quota share reinsurance agreement with Bermuda Re as of December 31, 2017.  We believe that the terms, conditions and pricing of the quota share agreements reflect arm's length market conditions.  These affiliated reinsurance arrangements allow us to more effectively leverage our capital, expertise, distribution platform and market presence than our stand alone capital position would otherwise allow.


Percentage of ceded written premiums to gross written premiums
 
2017
 
2016
 
2015
 
2014
 
2013
                     
Unaffiliated
 
14.6%
 
13.6%
 
8.2%
 
9.3%
 
5.0%
Affiliated
 
38.4%
 
45.9%
 
49.9%
 
48.2%
 
47.3%


If we are unable to purchase affiliated or unaffiliated reinsurance in the future, we may have to reduce our premium volume and we may be more exposed to reductions in net income from large losses.

Our industry is highly competitive and we may not be able to compete successfully in the future.

Our industry is highly competitive and subject to pricing cycles that can be pronounced. We compete globally in the United States, international reinsurance and insurance markets with numerous competitors.  Our competitors include independent reinsurance and insurance companies, subsidiaries or affiliates of established worldwide insurance companies, reinsurance departments of certain insurance companies and domestic and international underwriting operations, including underwriting syndicates at Lloyd's of London.

According to Standard & Poor's, Group ranks among the top ten global reinsurance groups, where  more than 70% of the market share is concentrated.  The worldwide net premium written by the Top 40 global reinsurance groups, for both life and non-life business, was estimated to be $201 billion in 2016 according to data compiled by Standard & Poor's.  The leaders in this market are Swiss Re, Munich Re, Hannover Rueck SE, Berkshire Hathaway Re, SCOR SE, RGA and syndicates at Lloyd's of London.  Some of these competitors have greater financial resources than we do and have established long term and continuing business relationships throughout the industry, which can be a significant competitive advantage.  In addition, the lack of strong barriers to entry into the reinsurance business and the entry of alternative capital market products and vehicles provide additional sources of reinsurance and insurance capacity and increased competition.

We are dependent on our key personnel.

Our success has been, and will continue to be, dependent on our ability to retain the services of our existing key executive officers and to attract and retain additional qualified personnel in the future.  The loss of the services of any key executive officer or the inability to hire and retain other highly qualified personnel in the future could adversely affect our ability to conduct business.  Generally, we consider key executive officers to be those individuals who have the greatest influence in setting overall policy and controlling operations: Chairman, President and Chief Executive Officer, Dominic J. Addesso (age 64), Executive Vice President and Chief Financial Officer, Craig Howie (age 54), Executive Vice President and Chief Executive Officer Reinsurance Division, John P. Doucette (age 52), Executive Vice President, General Counsel, Chief Compliance Officer and Secretary Sanjoy Mukherjee (age 51) and Executive Vice President, President and
10


Chief Executive Officer of the Everest Insurance® Division, Jonathan Zaffino (age 45).  Through Group and its affiliates, we have employment contracts with Mr. Addesso, Mr. Howie, Mr. Doucette, Mr. Mukherjee and Mr. Zaffino, which have been filed with the SEC and provide for terms of employment ending on December 31, 2019 for Mr. Addesso, April 1, 2019 for Mr. Howie, June 1, 2019 for Mr. Doucette, January 1, 2020 for Mr. Mukherjee and September 6, 2020 for Mr. Zaffino.

Our investment values and investment income could decline because they are exposed to interest rate, credit and market risks.

A significant portion of our investment portfolio consists of fixed income securities and smaller portions consist of equity securities and other investments.  Both the fair market value of our invested assets and associated investment income fluctuate depending on general economic and market conditions.  For example, the fair market value of our predominant fixed income portfolio generally increases or decreases inversely to fluctuations in interest rates.  The market value of our fixed income securities could also decrease as a result of a downturn in the business cycle that causes the credit quality of such securities to deteriorate.  The net investment income that we realize from future investments in fixed income securities will generally increase or decrease with interest rates.

Interest rate fluctuations also can cause net investment income from fixed income investments that carry prepayment risk, such as mortgage-backed and other asset-backed securities, to differ from the income anticipated from those securities at the time of purchase.  In addition, if issuers of individual investments are unable to meet their obligations, investment income will be reduced and realized capital losses may arise.

The majority of our fixed income securities are classified as available for sale and temporary changes in the market value of these investments are reflected as changes to our stockholder's equity.  Our actively managed equity security portfolios are fair valued and any changes in fair value are reflected as net realized capital gains or losses.  As a result, a decline in the value of our securities reduces our capital or could cause us to incur a loss.

We have invested a portion of our investment portfolio in equity securities. The value of these assets fluctuates with changes in the markets. In times of economic weakness, the fair value of these assets may decline, and may negatively impact net income.  We also invest in non-traditional investments which have different risk characteristics than traditional fixed income and equity securities. These alternative investments are comprised primarily of private equity limited partnerships.  The changes in value and investment income/(loss) for these partnerships may be more volatile than over-the-counter securities.

The following table quantifies the portion of our investment portfolio that consists of fixed income securities, equity securities and investments that carry prepayment risk.


   
At
       
(Dollars in millions)
 
December 31, 2017
   
% of Total
 
Mortgage-backed securities
           
Commercial
 
$
51.7
     
0.6
%
Agency residential
   
113.3
     
1.3
%
Non-agency residential
   
0.1
     
0.0
%
Other asset-backed
   
138.0
     
1.5
%
Total asset-backed
   
303.1
     
3.4
%
Other fixed income
   
4,668.8
     
52.4
%
Total fixed income, at market value
   
4,971.9
     
55.8
%
Equity securities, at fair value
   
822.4
     
9.2
%
Other invested assets, at market value
   
838.7
     
9.4
%
Other invested assets, at fair value
   
1,807.5
     
20.3
%
Cash and short-term investments
   
471.0
     
5.3
%
Total investments and cash
 
$
8,911.5
     
100.0
%

11


We may experience foreign currency exchange losses that reduce our net income and capital levels.

Through our international operations, we conduct business in a variety of foreign (non-U.S.) currencies, principally the Canadian dollar and the Singapore dollar. Assets, liabilities, revenues and expenses denominated in foreign currencies are exposed to changes in currency exchange rates. Our reporting currency is the U.S. dollar, and exchange rate fluctuations, especially relative to the U.S. dollar, may materially impact our results and financial position.  In 2017, we wrote approximately 15.3% of our coverages in non-U.S. currencies; as of December 31, 2017, we maintained approximately 10.5% of our investment portfolio in investments denominated in non-U.S. currencies. During 2017, 2016 and 2015, the impact on our quarterly pre-tax net income from exchange rate fluctuations ranged from a loss of $12.3 million to a gain of $15.4 million.

We are subject to cybersecurity risks that could negatively impact our business operations.

We are dependent upon our information technology platform, including our processing systems, data and electronic transmissions in our business operations.  Security breaches could expose us to the loss or misuse of our information, litigation and potential liability.  In addition, cyber incidents that impact the availability, reliability, speed, accuracy or other proper functioning of these systems could have a significant negative impact on our operations and possibly our results.  An incident could also result in a violation of applicable privacy and other laws, damage our reputation, cause a loss of customers or give rise to monetary fines and other penalties, which could be significant.  Management is not aware of a cybersecurity incident that has had a material impact on our operations.

RISKS RELATING TO REGULATION

Insurance laws and regulations restrict our ability to operate and any failure to comply with those laws and regulations could have a material adverse effect on our business.

We are subject to extensive and increasing regulation under U.S., state and foreign insurance laws.  These laws limit the amount of dividends that can be paid to us by our operating subsidiaries, impose restrictions on the amount and type of investments that we can hold, prescribe solvency, accounting and internal control standards that must be met and maintained and require us to maintain reserves.  These laws also require disclosure of material inter-affiliate transactions and require prior approval of "extraordinary" transactions.  Such "extraordinary" transactions include declaring dividends from operating subsidiaries that exceed statutory thresholds.  These laws also generally require approval of changes of control of insurance companies.  The application of these laws could affect our liquidity and ability to pay dividends, interest and other payments on securities, as applicable, and could restrict our ability to expand our business operations through acquisitions of new insurance subsidiaries.  We may not have or maintain all required licenses and approvals or fully comply with the wide variety of applicable laws and regulations or the relevant authority's interpretation of the laws and regulations.  If we do not have the requisite licenses and approvals or do not comply with applicable regulatory requirements, the insurance regulatory authorities could preclude or temporarily suspend us from carrying on some or all of our activities or monetarily penalize us.  These types of actions could have a material adverse effect on our business.  To date, no material fine, penalty or restriction has been imposed on us for failure to comply with any insurance law or regulation.

As a result of the previous dislocation of the financial markets, Congress and the previous Presidential administration in the United States implemented changes in the way the financial services industry is regulated.  Some of these changes are also impacting the insurance industry. For example, the United States Department of Treasury established the Federal Insurance Office with the authority to monitor all aspects of the insurance sector, monitor the extent to which traditionally underserved communities and consumers have access to affordable non-health insurance products, to represent the United States on prudential aspects of international insurance matters, to assist with administration of the Terrorism Risk Insurance Program and to advise on important national and international insurance matters.  In addition, several European regulatory bodies are in process of updating existing or developing new capital adequacy directives for insurers and reinsurers.  The future impact of such initiatives or new initiatives from the incoming Presidential administration, if any, on our operation, net income (loss) or financial condition cannot be determined at this time.
12


RISK RELATING TO OUR SECURITIES

Because of our holding company structure, our ability to pay dividends, interest and principal is dependent on our receipt of dividends, loan payments and other funds from our subsidiaries.

We are a holding company, whose most significant asset consists of the stock of our operating subsidiaries.  As a result, our ability to pay dividends, interest or other payments on our securities in the future will depend on the earnings and cash flows of the operating subsidiaries and the ability of the subsidiaries to pay dividends or to advance or repay funds to us.  This ability is subject to general economic, financial, competitive, regulatory and other factors beyond our control. Payment of dividends and advances and repayments from some of the operating subsidiaries are regulated by U.S., state and foreign insurance laws and regulatory restrictions, including minimum solvency and liquidity thresholds.  Accordingly, the operating subsidiaries may not be able to pay dividends or advance or repay funds to us in the future, which could prevent us from paying dividends, interest or other payments on our securities.

RISK RELATING TO TAXATION

If U.S. tax law changes, our net income may be impacted.

The recently enacted Tax Cut and Jobs Act ("TCJA") includes a provision for additional taxes on reinsurance transactions with affiliates in foreign jurisdictions.  Such affiliated reinsurance transactions are now subject to a Base Erosion and Anti-abuse Tax ("BEAT") of 5% in 2018, 10% from 2019 to 2025 and 12.5% thereafter.  In addition, it is anticipated that new regulations will be issued with respect to the BEAT.  These new regulations may further limit the ability of the Company to execute alternative capital balancing transactions with unrelated parties.  This would further impact our net income and effective tax rate.


ITEM 1B.              UNRESOLVED STAFF COMMENTS

None.


ITEM 2. PROPERTIES

Everest Re's corporate offices are located in approximately 230,500 square feet of leased office space in Liberty Corner, New Jersey.  The Company's other eighteen locations occupy a total of approximately 168,876 square feet, all of which are leased.  Management believes that the above described office space is adequate for its current and anticipated needs.


ITEM 3. LEGAL PROCEEDINGS

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

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


13


ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.


PART II

ITEM 5.
            MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
            PURCHASES OF EQUITY SECURITIES

Market Information and Holder of Common Stock.
As of December 31, 2017, all of the Company's common stock was owned by Holdings Ireland and was not publicly traded.

Dividend History and Restrictions.
The Company did not pay any dividends in 2017, 2016 and 2015.  The declaration and payment of future dividends, if any, by the Company will be at the discretion of the Board of Directors and will depend upon many factors, including the Company's earnings, financial condition, business needs and growth objectives, capital and surplus requirements of its operating subsidiaries, regulatory restrictions, rating agency considerations and other factors.  As an insurance holding company, the Company is dependent on dividends and other permitted payments from its subsidiaries to pay cash dividends to its stockholder.  The payment of dividends to Holdings by Everest Re is subject to limitations imposed by Delaware law.  Generally, Everest Re may only pay dividends out of its statutory earned surplus, which was $3,391.9 million at December 31, 2017, and only after it has given 10 days prior notice to the Delaware Insurance Commissioner.  During this 10-day period, the Commissioner may, by order, limit or disallow the payment of ordinary dividends if the Commissioner finds the insurer to be presently or potentially in financial distress.  Further, the maximum amount of dividends that may be paid without the prior approval of the Delaware Insurance Commissioner in any twelve month period is the greater of (1) 10% of an insurer's statutory surplus as of the end of the prior calendar year or (2) the insurer's statutory net income, not including realized capital gains, for the prior calendar year.  The maximum amount that is available for the payment of dividends by Everest Re in 2017 without prior regulatory approval is $339.2 million.

Recent Sales of Unregistered Securities.

None.


ITEM 6. SELECTED FINANCIAL DATA

Information for Item 6 is not required pursuant to General Instruction I(2) of Form 10-K.


14


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following is a discussion and analysis of our results of operations and financial condition.  It should be read in conjunction with the Consolidated Financial Statements and accompanying notes thereto presented under ITEM 8, "Financial Statements and Supplementary Data".

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

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

Worldwide insurance and reinsurance market conditions continued to be very competitive, particularly in the property catastrophe and casualty reinsurance lines of business.  Generally, there was ample insurance and reinsurance capacity relative to demand, as well as, additional capital from the capital markets through insurance linked financial instruments.  These financial instruments such as side cars, catastrophe bonds and collateralized reinsurance funds, provide capital markets with access to insurance and reinsurance risk exposure.  The capital markets demand for these products is being primarily driven by the current low interest rate environment and the desire to achieve greater risk diversification and potentially higher returns on their investments.  This increased competition is generally having a negative impact on rates, terms and conditions; however, the impact varies widely by market and coverage.

Rates tend to fluctuate by specific region and products, particularly areas recently impacted by large catastrophic events.  There was an unprecedented series of catastrophes in the third quarter of 2017 with Hurricanes Harvey, Irma and Maria, as well as a significant earthquake in Mexico City.  Additional catastrophe events occurred in the fourth quarter of 2017 with the wildfires in California and Hurricanes Nate and Ophelia.  The total industry losses for all of these events could exceed $100 billion.  This is the second consecutive year with higher than average catastrophe losses. During 2016, catastrophe losses included the Fort McMurray Canadian wildfire, Hurricane Matthew which affected a large area of the Caribbean and southeastern United States, storms and an earthquake in Ecuador.  There are industry reports that the catastrophe losses for 2016 reached their highest level in four years and the United States experienced the most loss events since 1980 and the highest total losses since 2012.  While the future impact on market conditions from these catastrophes cannot be determined at this time, there was some firming in the markets impacted by the 2016 catastrophes and as catastrophe losses increased in 2017, there is a growing industry consensus that there will be a general firming of the (re)insurance markets resulting in rate increases, not only for catastrophe exposures, but also potentially for most other lines of business.

15


Commencing in 2015, we initiated a strategic build out of our insurance platform through the investment in key leadership hires which in turn has brought significant underwriting talent and stronger direction in achieving our insurance program strategic goals of increased premium volume and improved underwriting results.  Recent growth is coming from highly diversified areas including newly launched lines of business, as well as, product and geographic expansion in existing lines of business.  We are building a world-class insurance platform capable of offering products across lines and geographies, complementing our leading global reinsurance franchise.

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

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


   
Years Ended December 31,
   
Percentage Increase/(Decrease)
 
(Dollars in millions)
 
2017
   
2016
   
2015
     
2017/2016
     
2016/2015
 
Gross written premiums
 
$
5,788.5
   
$
5,063.7
   
$
4,995.6
     
14.3
%
   
1.4
%
Net written premiums
   
2,723.8
     
2,048.1
     
2,093.3
     
33.0
%
   
-2.2
%
                                         
REVENUES:
                                       
Premiums earned
 
$
1,949.6
   
$
2,094.0
   
$
2,143.8
     
-6.9
%
   
-2.3
%
Net investment income
   
286.3
     
264.8
     
273.3
     
8.1
%
   
-3.1
%
Net realized capital gains (losses)
   
161.6
     
(28.9
)
   
50.3
   
NM 
   
-157.5
%
Other income (expense)
   
23.8
     
(10.5
)
   
29.3
   
NM 
   
-136.0
%
Total revenues
   
2,421.2
     
2,319.4
     
2,496.6
     
4.4
%
   
-7.1
%
                                         
CLAIMS AND EXPENSES:
                                       
Incurred losses and loss adjustment expenses
   
2,039.8
     
1,350.3
     
1,319.6
     
51.1
%
   
2.3
%
Commission, brokerage, taxes and fees
   
210.9
     
281.4
     
312.3
     
-25.1
%
   
-9.9
%
Other underwriting expenses
   
254.9
     
245.0
     
214.8
     
4.0
%
   
14.0
%
Corporate expense
   
7.4
     
8.3
     
7.2
     
-10.7
%
   
15.3
%
Interest, fee and bond issue cost amortization expense
   
31.2
     
35.4
     
35.4
     
-12.0
%
   
0.0
%
Total claims and expenses
   
2,544.1
     
1,920.4
     
1,889.3
     
32.5
%
   
1.6
%
                                         
INCOME (LOSS) BEFORE TAXES
   
(123.0
)
   
399.0
     
607.3
     
-130.8
%
   
-34.3
%
Income tax expense (benefit)
   
(201.2
)
   
97.3
     
194.9
   
NM 
   
-50.1
%
NET INCOME (LOSS)
 
$
78.2
   
$
301.6
   
$
412.4
     
-74.1
%
   
-26.9
%
                                         
RATIOS:
                         
Point Change
 
Loss ratio
   
104.6
%
   
64.5
%
   
61.6
%
   
40.1
     
2.9
 
Commission and brokerage ratio
   
10.8
%
   
13.4
%
   
14.6
%
   
(2.6
)
   
(1.2
)
Other underwriting expense ratio
   
13.1
%
   
11.7
%
   
9.9
%
   
1.4
     
1.8
 
Combined ratio
   
128.5
%
   
89.6
%
   
86.1
%
   
38.9
     
3.5
 
                                         
                                         
   
At December 31,
   
Percentage Increase/ (Decrease)
 
(Dollars in millions)
   
2017
     
2016
     
2015
     
2017/2016
     
2016/2015
 
Balance sheet data:
                                       
Total investments and cash
 
$
8,911.5
   
$
9,842.7
   
$
9,516.3
     
-9.5
%
   
3.4
%
Total assets
   
17,888.5
     
17,083.4
     
16,689.0
     
4.2
%
   
2.4
%
Loss and loss adjustment expense reserves
   
9,343.0
     
8,331.3
     
7,940.7
     
12.1
%
   
4.9
%
Total debt
   
633.4
     
633.2
     
633.0
     
0.0
%
   
0.0
%
Total liabilities
   
12,475.8
     
11,784.9
     
11,730.6
     
5.1
%
   
0.5
%
Stockholder's equity
   
5,412.7
     
5,298.6
     
4,958.3
     
2.2
%
   
6.9
%
                                         
(Some amounts may not reconcile due to rounding)
                                       
(NM, not meaningful)
                                       


16


Revenues.
Premiums.  Gross written premiums increased by 14.3% to $5,788.5 million in 2017, compared to $5,063.7 million in 2016, reflecting a $537.7 million, or 15.8%, increase in our reinsurance business and a $187.1 million, or 11.2%, increase in our insurance business.  The increase in reinsurance premiums was mainly due to the new crop reinsurance transactions, increases in treaty property and financial lines of business and the influx of reinstatement premiums related to multiple catastrophe events in the third quarter.  The rise in insurance premiums was primarily due to increases in many lines of business, including property, retail casualty and accident and health, partially offset by the impact of the sale of Heartland.  Net written premiums increased by 33.0% to $2,723.8 million in 2017, compared to $2,048.1 million in 2016.  The difference between the change in gross written premiums compared to the change in net written premiums is primarily due to the impact of changes in affiliated quota share contracts, particularly the non-renewal of the quota share agreement between Everest Re and Bermuda Re as of December 31, 2017, which resulted in a $799.0 million increase to net written premiums in 2017. Premiums earned decreased by 6.9% to $1,949.6 million in 2017, compared to $2,094.0 million in 2016.  The change in premiums earned relative to net written premiums is partially due to the impact of the non-renewal of the quota share contract between Everest Re and Bermuda Re and is also the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

Gross written premiums increased by 1.4% to $5,063.7 million in 2016, compared to $4,995.6 million in 2015, reflecting, a $195.0 million, or 13.2%, increase in our insurance business, partially offset by a $127.0 million, or 3.6%, decrease in our reinsurance business.  The rise in insurance premiums was primarily due to increases in most lines of business, as we have focused on expanding the insurance operations.  The decline in reinsurance premiums was mainly due to a decrease in treaty property business, a decline in international premiums related to quota share agreements and a negative impact of $42.9 million from the year over year movement in foreign exchange rates.  Net written premiums decreased by 2.2% to $2,048.1 million in 2016, compared to $2,093.3 million in 2015.  The decline in net written premiums compared to the increase in gross written premiums is primarily due to a higher level of reinsurance purchased on the insurance business.  Premiums earned decreased by 2.3% to $2,094.0 million in 2016, compared to $2,143.8 million in 2015.  The change in premiums earned is consistent with the change in net written premiums.

Net Investment Income.  Net investment income increased 8.1% to $286.3 million in 2017 compared with net investment income of $264.8 million in 2016.  Net pre-tax investment income as a percentage of average invested assets was 3.2% in 2017, compared to 2.8% in 2016.  The increases in income and yield in 2017 were primarily the result of higher income from our limited partnerships and higher income from the growing fixed income portfolio, partially offset by lower dividend income from our equity portfolio.

Net investment income decreased by 3.1% to $264.8 million in 2016 compared with net investment income of $273.3 million in 2015.  Net pre-tax investment income as a percentage of average invested assets was 2.8% in 2016 compared to 3.1% in 2015.  The decline in income and yield in 2016 compared to the prior year was primarily the result of dividends from affiliated investments.  In December 2015, the Company exchanged its investment in Parent's shares to convertible preferred stock of Everest Preferred International Holdings, Ltd. ("Preferred Holdings"), another affiliated entity.  Dividends from the convertible preferred stock in 2016 were $31.0 million compared to $38.9 million of dividends received from the Parent's shares in 2015.  In addition, there were lower reinvestment rates for the fixed income portfolios and lower dividends from equity securities, partially offset by higher income from our limited partnerships.

Net Realized Capital Gains (Losses).  Net realized capital gains were $161.6 million in 2017, net realized capital losses were $28.9 million in 2016 and net realized capital gains were $50.3 million in 2015.  The net realized capital gains of $161.6 million were comprised of $158.5 million of gains from fair value re-measurements on equity securities and other invested assets and $9.1 million of gains from sales on our fixed maturity and equity portfolio, partially offset by $6.1 million of other-than-temporary impairments.  The net realized losses of $28.9 million in 2016 were comprised of a realized capital loss of $28.0 million from the sale of our Heartland subsidiary, $25.7 million of other-than-temporary impairments and $21.1 million of losses from sales on our fixed maturity and equity securities, partially offset by $45.9 million of gains from fair value re-measurements on fixed maturity securities, equity securities and other invested assets. The $50.3 million of net realized capital gains in 2015 were comprised of a $94.7 million gain on the sale of a subsidiary and $44.1 million of net gains from sales on our fixed maturity and equity securities, partially
17


offset by $78.8 million of other-than-temporary impairments and $9.6 million of losses from fair value re-measurements on equity securities and other invested assets.

Other Income (Expense).  We recorded other income of $23.8 million in 2017, other expense of $10.5 million in 2016 and other income of $29.3 million in 2015.  The changes were primarily the result of fluctuations in foreign currency exchange rates.

Claims and Expenses.
Incurred Losses and Loss Adjustment Expenses.  The following table presents our incurred losses and loss adjustment expenses ("LAE") for the periods indicated.


   
Years Ended December 31,
   
Current
   
Ratio %/
 
Prior
   
Ratio %/
 
Total
   
Ratio %/
(Dollars in millions)
 
Year
   
Pt Change
 
Years
   
Pt Change
 
Incurred
   
Pt Change
2017
                                                 
Attritional (a)
 
$
1,200.6
     
61.5
%
   
$
(102.3
)
   
-5.2
%
   
$
1,098.4
     
56.3
%
 
Catastrophes
   
956.9
     
49.1
%
 
   
(15.5
)
   
-0.8
%
 
   
941.4
     
48.3
%
 
Total
 
$
2,157.5
     
110.6
%
 
 
$
(117.7
)
   
-6.0
%
 
 
$
2,039.8
     
104.6
%
 
                                                                
2016
                                                             
Attritional (a)
 
$
1,287.2
     
61.5
%
   
$
(46.1
)
   
-2.2
%
   
$
1,241.1
     
59.3
%
 
Catastrophes
   
154.8
     
7.4
%
 
   
(45.6
)
   
-2.2
%
 
   
109.2
     
5.2
%
 
Total
 
$
1,442.0
     
68.9
%
 
 
$
(91.7
)
   
-4.4
%
 
 
$
1,350.3
     
64.5
%
 
                                                                
2015
                                                             
Attritional (a)
 
$
1,282.9
     
59.8
%
   
$
4.7
     
0.3
%
   
$
1,287.6
     
60.1
%
 
Catastrophes
   
43.1
     
2.0
%
 
   
(11.2
)
   
-0.5
%
 
   
31.9
     
1.5
%
 
Total
 
$
1,326.0
     
61.8
%
 
 
$
(6.5
)
   
-0.2
%
 
 
$
1,319.6
     
61.6
%
 
                                                                
Variance 2017/2016
                                                             
Attritional (a)
 
$
(86.6
)
   
-
 
pts
 
$
(56.2
)
   
(3.0
)
pts
 
$
(142.7
)
   
(3.0
)
pts
Catastrophes
   
802.1
     
41.7
 
pts
   
30.1
     
1.4
 
pts
   
832.2
     
43.1
 
pts
Total
 
$
715.5
     
41.7
 
pts
 
$
(26.1
)
   
(1.6
)
pts
 
$
689.5
     
40.1
 
pts
                                                                
Variance 2016/2015
                                                             
Attritional (a)
 
$
4.3
     
1.7
 
pts
 
$
(50.8
)
   
(2.5
)
pts
 
$
(46.5
)
   
(0.8
)
pts
Catastrophes
   
111.7
     
5.4
 
pts
   
(34.4
)
   
(1.7
)
pts
   
77.3
     
3.7
 
pts
Total
 
$
116.0
     
7.1
 
pts
 
$
(85.2
)
   
(4.2
)
pts
 
$
30.7
     
2.9
 
pts
                                                                
(a) Attritional losses exclude catastrophe losses.
                                                      
(Some amounts may not reconcile due to rounding.)
                                                      


Incurred losses and LAE increased by 51.1% to $2,039.8 million in 2017 compared to $1,350.3 million in 2016, primarily due to an increase of $802.1 million in current year catastrophe losses and less favorable development of $30.1 million on prior year catastrophe losses in 2017 compared to 2016.  These increases were partially offset by a decrease of $86.6 million of current year attritional losses, mainly due to the impact of the decline in premiums earned and an additional $56.2 million of favorable development on prior years attritional losses in 2017 compared to 2016.  The $102.3 million of favorable development on prior years attritional losses in 2017 was mainly comprised of $68.8 million of favorable development on reinsurance business related to property and short tail business in the United States, partially offset by $25.2 million of adverse development on A&E reserves and $33.5 million of favorable development on insurance business, mainly related to workers compensation business.  The current year catastrophe losses of $956.9 million in 2017 related to Hurricane Irma ($333.7 million), Hurricane Maria ($268.1 million), Hurricane Harvey ($235.8 million), the Northern California wildfires ($75.3 million), the South Africa Knysna fires ($9.6 million), the Mexico City earthquake ($9.3 million), Cyclone Debbie in Australia ($8.5 million), the Peru storms ($7.1 million), the 2017 US Midwest storms ($5.0 million) and the Southern California wildfires ($4.4 million). Current year catastrophe losses of $154.8 million in 2016 were related to Hurricane Matthew ($62.3 million), the Fort McMurray Canada wildfire ($26.6 million), the 2016 U.S. Storms ($25.7 million), the Ecuador earthquake ($11.6 million), the 2016 Taiwan earthquake ($7.5 million), the Tennessee wildfire ($7.3 million), the New Zealand earthquake ($6.9 million) and Hurricane Hermine ($6.8 million).

Incurred losses and LAE increased by 2.3% to $1,350.3 million in 2016 compared to $1,319.6 million in 2015, primarily due to an increase of $111.7 million in current year catastrophe losses, partially offset by higher favorable prior years attritional development of $50.8 million and higher favorable prior years
18


catastrophe development of $34.4 million in 2016 compared to 2015.  The $46.1 million of favorable prior years attritional loss development in 2016 was comprised of $142.6 million of favorable development in the reinsurance segments, partially offset by $96.5 million in the insurance segment.  The favorable development in the reinsurance segments is primarily due to property and short-tail business in the U.S., as well as, property business in Canada, Latin America, the Middle East and Africa, partially offset by $45.7 million of adverse development on A&E.  Part of the favorable development in the reinsurance segments related to the 2015 loss from the explosion at the Chinese port of Tianjin.  In 2015, this loss was originally estimated to be $21.6 million.  At December 31, 2016, this loss was projected to be $6.3 million resulting in $15.3 million of favorable development.  The adverse development in the insurance segment is primarily attributable to run-off construction liability and umbrella program business.  The $45.6 million of prior years' catastrophe development mainly related to the 2015 Chile earthquake, the 2011 Japan earthquake and the 2015 U.S. storms.  The current year catastrophe losses of $154.8 million in 2016 are outlined above.  Current year catastrophe losses were $43.1 million in 2015 and related to the 2015 Chilean earthquake ($17.4 million), Northern Chile storms ($9.6 million), the 2015 US Storms ($8.1 million) and the New South Wales storms ($8.0 million).

Commission, Brokerage, Taxes and Fees.  Commission, brokerage, taxes and fees decreased by 25.1% to $210.9 million in 2017 compared to $281.4 million in 2016.  The decrease was primarily due to the impact of the decrease in premiums earned, the impact of higher reinstatement premiums in 2017 and the impact of changes in affiliated quota share contracts.

Commission, brokerage, taxes and fees decreased by 9.9% to $281.4 million in 2016 compared to $312.3 million in 2015.  This change was primarily due to the impact of the decrease in premiums earned, the impact of affiliated quota share agreements and the changes in the mix of business.

Other Underwriting Expenses.  Other underwriting expenses were $254.9 million, $245.0 million and $214.8 million in 2017, 2016 and 2015, respectively.  The increase in other underwriting expenses between the years was mainly due to costs incurred related to the expansion of the insurance business.

Corporate Expenses.  Corporate expenses, which are general operating expenses that are not allocated to segments, have remained consistent at $7.4 million, $8.3 million and $7.2 million for the years ended December 31, 2017, 2016 and 2015, respectively.

Interest, Fees and Bond Issue Cost Amortization Expense.  Interest, fees and other bond amortization expense were $31.2 million, $35.4 million and 35.4 million in 2017, 2016 and 2015, respectively.  The decreases in expense for 2017 was primarily due to the conversion of the long term subordinated notes from a fixed rate of 6.6% to a floating rate, which is reset quarterly per the note agreement.  The floating rate was 3.8% as of December 31, 2017.

Income Tax Expense (Benefit).  We had an income tax benefit of $201.2 million in 2017, which includes $123.1 million of tax benefit related to the enactment of the TCJA, and income tax expense of $97.3 million and $194.9 million for December 31, 2016, and 2015, respectively.  Variations in taxes generally result from changes in the relative levels of pre-tax income, including the impact of catastrophe losses and net capital gains (losses) as well as changes in tax exempt investment income and creditable foreign taxes.  The change in income tax expense (benefit) for 2017 compared to 2016 was primarily due to the significant catastrophe losses incurred in 2017.

The TCJA, which was enacted on December 22, 2017, caused the Company to record income tax benefit of $123.1 million in 2017.  This income tax provision reflects the lower 21% tax expense/(benefit) to be realized by the Company under the TCJA upon the reversal of the temporary differences in its deferred tax inventory account versus the 35% tax expense/(benefit) that had been expected before the TCJA.  In 2018, the Company expects to record adjustments to the amount of tax benefit it recorded in 2017 with respect to the TCJA as estimated amounts are finalized.  The adjustments are not expected to be significant to the Company's results.

19

Net Income (Loss).
Our net income was $78.2 million, $301.6 million and $412.4 million in 2017, 2016 and 2015, respectively.  The changes were primarily driven by the financial component fluctuations explained above.

Ratios.
Our combined ratio increased by 38.9 points to 128.5% in 2017, compared to 89.6% in 2016.  The loss ratio components increased 40.1 points in 2017 over the same period last year.  The changes were mainly due to the increases in current year catastrophe losses.  The commission and brokerage ratio components decreased to 10.8% in 2017 from 13.4% in 2016.  The decrease reflects changes in the mix of business, the impact of affiliated quota share contracts and the impact from reinstatement premiums.  The other underwriting expense ratios increased to 13.1% in 2017 from 11.7% in 2016. The increase in 2017 was due to costs associated with the continued expansion of the insurance business, partially offset by lower variable compensation costs.

Our combined ratio increased by 3.5 points to 89.6% in 2016 compared to 86.1% in 2015.  The loss ratio component increased 2.9 points in 2016 over the same period last year. The change was mainly due to the increase in current year catastrophes in 2016 compared to 2015, partially offset by more favorable development on prior years attritional losses and prior years catastrophe losses year over year.  The commission and brokerage ratio components decreased 1.2 points to 13.4% in 2016 from 14.6% in 2015 due to the impact of affiliated quota share agreements and changes in the mix of business.  The other underwriting expense ratio components increased 1.8 points in 2016 over the same period last year due to the increased focus on the expansion of the insurance business.

Stockholder's Equity.
Stockholder's equity increased by $114.2 million to $5,412.7 million at December 31, 2017 from $5,298.6 million at December 31, 2016, principally as a result of $78.2 million of net income, $37.4 million of net foreign currency translation adjustments, $6.5 million of net benefit plan obligation adjustments and $0.3 million of share-based compensation transactions, partially offset by $8.2 million of net unrealized depreciation on investments, net of tax.

Stockholder's equity increased by $340.3 million to $5,298.6 million at December 31, 2016 from $4,958.3 million at December 31, 2015, principally as a result of $301.6 million of net income, $25.4 million of net unrealized appreciation on investments, net of tax, $12.8 million of share-based compensation transactions and $2.8 million of net foreign currency translation adjustments, partially offset by $2.4 million of net benefit plan obligation adjustments.

Consolidated Investment Results

Net Investment Income.
Net investment income increased by 8.1% to $286.3 million in 2017 compared to $264.8 million in 2016. The increase in 2017 were primarily due to an increase in limited partnership income and higher income from the growing fixed income portfolio, partially offset by lower dividend income from our equity portfolio.

Net investment income decreased by 3.1% to $264.8 million in 2016 compared to $273.3 million in 2015, primarily due to dividends from affiliated investments.  In December 2015, the Company exchanged its investment in Parent's shares to convertible preferred stock of Preferred Holdings, another affiliated entity.  Dividends from the convertible preferred stock in 2016 were $31.0 million compared to $38.9 million of dividends received from the Parent's shares in 2015.  In addition, there were lower reinvestment rates for the fixed income portfolios and lower dividends from equity securities, partially offset by higher income from our limited partnerships.

20

The following table shows the components of net investment income for the periods indicated:


   
Years Ended December 31,
 
(Dollars in millions)
 
2017
   
2016
   
2015
 
Fixed maturities
 
$
193.7
   
$
182.1
   
$
188.3
 
Equity securities
   
25.9
     
32.3
     
34.4
 
Short-term investments and cash
   
2.9
     
1.2
     
1.0
 
Other invested assets
                       
Limited partnerships
   
36.6
     
25.2
     
19.6
 
Dividends from Parent's shares
   
-
     
-
     
38.9
 
Dividends from preferred shares of affiliate
   
31.0
     
31.0
     
-
 
Other
   
6.7
     
1.0
     
1.8
 
Gross investment income before adjustments
   
296.8
     
272.9
     
284.0
 
Funds held interest income (expense)
   
5.0
     
6.1
     
5.6
 
Interest income from Parent
   
4.3
     
4.3
     
4.3
 
Gross investment income
   
306.0
     
283.3
     
293.9
 
Investment expenses
   
(19.8
)
   
(18.5
)
   
(20.6
)
Net investment income
 
$
286.3
   
$
264.8
   
$
273.3
 
                         
(Some amounts may not reconcile due to rounding.)
                       


The following table shows a comparison of various investment yields for the periods indicated:


 
2017
2016
2015
Imbedded pre-tax yield of cash and invested assets at December 31
3.4%
2.9%
2.9%
Imbedded after-tax yield of cash and invested assets at December 31
2.7%
2.0%
2.1%
       
Annualized pre-tax yield on average cash and invested assets
3.2%
2.8%
3.1%
Annualized after-tax yield on average cash and invested assets
2.2%
2.0%
2.2%


21

Net Realized Capital Gains (Losses).
The following table presents the composition of our net realized capital gains (losses) for the periods indicated:


   
Years Ended December 31,
     2017/2016     2016/2015
(Dollars in millions)
 
2017
   
2016
   
2015
   
Variance
   
Variance
 
Gains (losses) from sales:
                                 
Fixed maturity securities, market value
                                 
Gains
 
$
31.3
   
$
18.6
   
$
10.9
   
$
12.7
   
$
7.7
 
Losses
   
(28.9
)
   
(25.6
)
   
(47.2
)
   
(3.3
)
   
21.6
 
Total
   
2.5
     
(7.0
)
   
(36.3
)
   
9.5
     
29.3
 
                                         
Fixed maturity securities, fair value
                                       
Gains
   
-
     
0.3
     
-
     
(0.3
)
   
0.3
 
Losses
   
-
     
(1.9
)
   
-
     
1.9
     
(1.9
)
Total
   
-
     
(1.6
)
   
-
     
1.6
     
(1.6
)
                                         
Equity securities, fair value
                                       
Gains
   
23.2
     
16.2
     
26.1
     
7.0
     
(9.9
)
Losses
   
(16.7
)
   
(28.8
)
   
(34.1
)
   
12.1
     
5.3
 
Total
   
6.6
     
(12.6
)
   
(8.0
)
   
19.2
     
(4.6
)
                                         
Other invested assets, fair value
                                       
Gains on exchange
   
0.1
     
-
     
88.4
     
0.1
     
(88.4
)
Losses
   
-
     
-
     
-
     
-
     
-
 
Total
   
0.1
     
-
     
88.4
     
0.1
     
(88.4
)
                                         
Total net realized gains (losses) from sales
                                       
Gains
   
54.6
     
35.1
     
125.4
     
19.5
     
(90.3
)
Losses
   
(45.6
)
   
(56.3
)
   
(81.3
)
   
10.7
     
25.0
 
Total
   
9.1
     
(21.1
)
   
44.1
     
30.2
     
(65.3
)
                                         
Gain (loss) on sale of subsidiary:
   
-
     
(28.0
)
   
94.7
     
28.0
     
(122.7
)
                                         
Other than temporary impairments:
   
(6.1
)
   
(25.7
)
   
(78.8
)
   
19.6
     
53.1
 
                                         
Gains (losses) from fair value adjustments:
                                       
Fixed maturities, fair value
   
-
     
1.4
     
-
     
(1.4
)
   
1.4
 
Equity securities, fair value
   
117.7
     
51.1
     
(39.1
)
   
66.6
     
90.2
 
Other invested assets, fair value
   
40.8
     
(6.6
)
   
29.5
     
47.4
     
(36.1
)
Total
   
158.5
     
45.9
     
(9.6
)
   
112.6
     
55.5
 
                                         
Total net realized gains (losses)
 
$
161.6
   
$
(28.9
)
 
$
50.3
   
$
190.5
   
$
(79.2
)
                                         
(Some amounts may not reconcile due to rounding.)
                                       


Net realized capital gains were $161.6 million in 2017, net realized capital losses were $28.9 million in 2016, and net realized capital gains were $50.3 million in 2015.  In 2017, we recorded $158.5 million of gains from fair value re-measurements on equity securities and other invested assets and $9.1 million of gains from sales on our fixed maturity and equity securities, partially offset by $6.1 million of other-than-temporary impairments.  In 2016, we recorded a realized capital loss of $28.0 million from the sale of our Heartland subsidiary, $25.7 million of other-than-temporary impairments and $21.1 million of net realized capital losses from sales of fixed maturity and equity securities, partially offset by $45.9 million of net realized capital gains due to fair value re-measurements on fixed maturity securities, equity securities and other invested assets.  In 2015, we recorded a $94.7 million gain on the sale of a subsidiary and $44.1 million of net realized capital gains from sales of fixed maturity and equity securities, partially offset by $78.8 million of other-than-temporary impairments and $9.6 million of net realized capital losses due to fair value re-measurements on equity securities and other invested assets.  The fixed maturity and equity sales related primarily to adjusting the portfolios for overall market changes and individual credit shifts.

22

Segment Results.
The U.S. Reinsurance operation writes property and casualty reinsurance and specialty lines of business, including Marine, Aviation, Surety and A&H business, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies primarily within the U.S.  The International operation writes non-U.S. property and casualty reinsurance through Everest Re's branches in Canada, Singapore and through offices in Brazil, Miami and New Jersey.  The Insurance operation writes property and casualty insurance directly, through brokers, surplus lines brokers and general agents mainly within the U.S.

These segments are managed independently, but conform with corporate guidelines with respect to pricing, risk management, control of aggregate catastrophe exposures, capital, investments and support operations.  Management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting results.

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 premiums earned.

Our loss and LAE reserves are management's best estimate of our ultimate liability for unpaid claims.  We re-evaluate our estimates on an ongoing basis, including all prior period reserves, taking into consideration all available information and, in particular, recently reported loss claim experience and trends related to prior periods.  Such re-evaluations are recorded in incurred losses in the period in which the re-evaluation is made.

The following discusses the underwriting results for each of our segments for the periods indicated:

U.S. Reinsurance.
The following table presents the underwriting results and ratios for the U.S. Reinsurance segment for the periods indicated.


    Years Ended December 31,   2017/2016        2016/2015    
(Dollars in millions)
 
2017
   
2016
   
2015
   
Variance
   
% Change
   
Variance
   
% Change
 
Gross written premiums
 
$
2,593.1
   
$
2,125.8
   
$
2,147.9
   
$
467.3
     
22.0
%
 
$
(22.1
)
   
-1.0
%
Net written premiums
   
1,135.6
     
930.2
     
899.9
     
205.4
     
22.1
%
   
30.3
     
3.4
%
                                                         
Premiums earned
 
$
858.2
   
$
990.1
   
$
951.5
   
$
(131.9
)
   
-13.3
%
 
$
38.6
     
4.1
%
Incurred losses and LAE
   
912.1
     
554.1
     
413.3
     
358.0
     
64.6
%
   
140.8
     
34.1
%
Commission and brokerage
   
160.3
     
189.5
     
199.0
     
(29.2
)
   
-15.4
%
   
(9.5
)
   
-4.8
%
Other underwriting expenses
   
55.9
     
54.1
     
50.1
     
1.8
     
3.3
%
   
4.0
     
8.0
%
Underwriting gain (loss)
 
$
(270.2
)
 
$
192.4
   
$
289.1
   
$
(462.5
)
   
-240.5
%
 
$
(96.7
)
   
-33.4
%
                                                         
                                   
Point Chg
           
Point Chg
 
Loss ratio
   
106.3
%
   
56.0
%
   
43.4
%
           
50.3
             
12.6
 
Commission and brokerage ratio
   
18.7
%
   
19.1
%
   
20.9
%
           
(0.4
)
           
(1.8
)
Other underwriting expense ratio
   
6.5
%
   
5.5
%
   
5.3
%
           
1.0
             
0.2
 
Combined ratio
   
131.5
%
   
80.6
%
   
69.6
%
           
50.9
             
11.0
 
                                                         
(Some amounts may not reconcile due to rounding)
                                                       


Premiums.  Gross written premiums increased by 22.0% to $2,593.1 million in 2017 from $2,125.8 million in 2016, primarily due to an increase in the new crop reinsurance business, an increase in treaty property business, the influx of reinstatement premiums due to the catastrophe losses and an increase in mortgage business.  Net written premiums increased by 22.1% to $1,135.6 million in 2017 compared to $930.2 million in 2016, partially due to the changes in affiliated quota agreements including the non-renewal of the quota share agreement between Everest Re and Bermuda Re. Premiums earned decreased 13.3% to $858.2 million in 2017 compared to $990.1 million in 2016.  The change in premiums earned relative to net written premiums is partially due to the impact of the non-renewal of the quota share contract between
23

Everest Re and Bermuda Re and is also the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

Gross written premiums decreased by 1.0% to $2,125.8 million in 2016 from $2,147.9 million in 2015, primarily due to a decrease in treaty property business, partially offset by an increase in treaty casualty business.  Net written premiums increased by 3.4% to $930.2 million in 2016 compared to $899.9 million in 2015. The difference between the change in gross written premiums compared to the change in net written premiums is primarily due to the assumption of the crop business due to the sale of Heartland and a concurrent new crop reinsurance contract. Premiums earned increased 4.1% to $990.1 million in 2016 compared to $951.5 million in 2015.  The change in premiums earned relative to net written premiums is primarily the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

Incurred Losses and LAE.  The following table presents the incurred losses and LAE for the U.S. Reinsurance segment for the periods indicated.


   
Years Ended December 31,
   
Current
   
Ratio %/
 
Prior
   
Ratio %/
 
Total
   
Ratio %/
(Dollars in millions)
 
Year
   
Pt Change
 
Years
   
Pt Change
 
Incurred
   
Pt Change
2017
                                                 
Attritional
 
$
522.3
     
61.0
%
   
$
(80.4
)
   
-9.4
%
   
$
441.9
     
51.6
%
 
Catastrophes
   
485.2
     
56.5
%
 
   
(15.1
)
   
-1.8
%
 
   
470.2
     
54.7
%
 
Total segment
 
$
1,007.5
     
117.5
%
 
 
$
(95.5
)
   
-11.2
%
 
 
$
912.1
     
106.3
%
 
                                                                
2016
                                                             
Attritional
 
$
555.5
     
56.1
%
   
$
(49.0
)
   
-4.9
%
   
$
506.5
     
51.2
%
 
Catastrophes
   
67.0
     
6.8
%
 
   
(19.5
)
   
-2.0
%
 
   
47.6
     
4.8
%
 
Total segment
 
$
622.5
     
62.9
%
 
 
$
(68.5
)
   
-6.9
%
 
 
$
554.1
     
56.0
%
 
                                                                
2015
                                                             
Attritional
 
$
473.5
     
49.8
%
   
$
(63.7
)
   
-6.8
%
   
$
409.8
     
43.0
%
 
Catastrophes
   
8.4
     
0.9
%
 
   
(4.9
)
   
-0.5
%
 
   
3.5
     
0.4
%
 
Total segment
 
$
481.9
     
50.7
%
 
 
$
(68.6
)
   
-7.2
%
 
 
$
413.3
     
43.4
%
 
                                                                
Variance 2017/2016
                                                             
Attritional
 
$
(33.2
)
   
4.9
 
pts
 
$
(31.4
)
   
(4.5
)
pts
 
$
(64.6
)
   
0.4
 
pts
Catastrophes
   
418.2
     
49.7
 
pts
   
4.4
     
0.2
 
pts
   
422.6
     
49.9
 
pts
Total segment
 
$
385.0
     
54.6
 
pts
 
$
(27.0
)
   
(4.3
)
pts
 
$
358.0
     
50.3
 
pts
                                                                
Variance 2016/2015
                                                             
Attritional
 
$
82.0
     
6.3
 
pts
 
$
14.7
     
1.9
 
pts
 
$
96.7
     
8.2
 
pts
Catastrophes
   
58.6
     
5.9
 
pts
   
(14.6
)
   
(1.5
)
pts
   
44.1
     
4.4
 
pts
Total segment
 
$
140.6
     
12.2
 
pts
 
$
0.1
     
0.3
 
pts
 
$
140.8
     
12.6
 
pts
                                                                
(Some amounts may not reconcile due to rounding.)
                                                      


Incurred losses increased by 64.6% to $912.1 million in 2017 compared to $554.1 million in 2016, primarily due to an increase of $418.2 million in current year catastrophe losses, partially offset by $31.4 million of more favorable development on prior years attritional losses in 2017 compared to 2016.  The $80.4 million of favorable development on prior years attritional losses in 2017 was mainly related to property and short-tail business, partially offset by $25.2 million of adverse development on A&E reserves. The current year catastrophe losses of $485.2 million in 2017 related to Hurricane Irma ($200.5 million), Hurricane Harvey ($185.4 million), the Northern California wildfires ($73.6 million), Hurricane Maria ($20.8 million), the Southern California wildfires ($3.6 million) and the 2017 US Midwest storms ($2.6 million).  The current year catastrophe losses of $67.0 million in 2016 related to Hurricane Matthew ($43.1 million), the 2016 U.S. Storms ($10.2 million), the Tennessee wildfire ($7.3 million) and Hurricane Hermine ($6.7 million).

Incurred losses increased by 34.1% to $554.1 million in 2016 compared to $413.3 million in 2015, primarily due to an increase of $82.0 million in current year attritional losses, resulting mainly from the impact of the increase in premiums earned and impact of the new crop reinsurance contract effective upon the sale of Heartland, and an increase of $58.6 million in current year catastrophe losses.  The $49.0 million of favorable prior years attritional loss development in 2016 is primarily due to U.S. property and marine business, partially offset by $47.1 million of adverse development on A&E reserves.  There was also an
24

increase in favorable development of $14.6 million on prior years catastrophe losses in 2016 compared to 2015.  The $19.5 million of favorable development on prior years catastrophes in 2016 mainly related to the 2011 Japan earthquake ($10.3 million), the 2015 U.S. storms ($5.8 million) and the 2013 U.S. storms ($4.8 million).  The current year catastrophe losses of $67.0 million in 2016 are outlined above.  The $8.4 million of current year catastrophe losses in 2015 were mainly due to the 2015 US Storms ($8.2 million).

Segment Expenses.  Commission and brokerage decreased by 15.4% to $160.3 million in 2017 compared to $189.5  million in 2016.  The decrease is mainly due to the impact of the influx of reinstatement premiums in 2017, the impact of affiliated quota share contracts and changes in the mix of business.  Segment other underwriting expenses increased slightly to $55.9 million in 2017 from $54.1 million in 2016.

Commission and brokerage decreased by 4.8% to $189.5 million in 2016 compared to $199.0 million in 2015.  The decrease is mainly due to the impact of the new crop reinsurance contract effective upon the sale of Heartland, the impact of affiliated quota share contracts and changes in the mix of business. Segment other underwriting expenses increased to $54.1 million in 2016 from $50.1 million in 2015. The increase was primarily due to the impact of changes in the mix of business and higher compensation costs.

International.
The following table presents the underwriting results and ratios for the International segment for the periods indicated.


     Years Ended December 31,   2017/2016   2016/2015
(Dollars in millions)
 
2017
   
2016
   
2015
   
Variance
   
% Change
   
Variance
   
% Change
 
Gross written premiums
 
$
1,339.5
   
$
1,269.1
   
$
1,374.0
   
$
70.4
     
5.5
%
 
$
(104.9
)
   
-7.6
%
Net written premiums
   
615.4
     
497.6
     
562.7
     
117.8
     
23.7
%
   
(65.1
)
   
-11.6
%
                                                         
Premiums earned
 
$
502.3
   
$
510.9
   
$
581.2
   
$
(8.6
)
   
-1.7
%
 
$
(70.3
)
   
-12.1
%
Incurred losses and LAE
   
622.8
     
207.6
     
394.8
     
415.2
     
200.0
%
   
(187.2
)
   
-47.4
%
Commission and brokerage
   
101.9
     
111.5
     
121.2
     
(9.6
)
   
-8.6
%
   
(9.6
)
   
-8.0
%
Other underwriting expenses
   
36.3
     
34.3
     
34.3
     
2.0
     
5.9
%
   
-
     
0.0
%
Underwriting gain (loss)
 
$
(258.7
)
 
$
157.5
   
$
30.9
   
$
(416.2
)
 
NM 
 
$
126.5
   
NM 
                                                         
                                   
Point Chg
           
Point Chg
 
Loss ratio
   
124.0
%
   
40.6
%
   
67.9
%
           
83.4
             
(27.3
)
Commission and brokerage ratio
   
20.3
%
   
21.8
%
   
20.8
%
           
(1.5
)
           
1.0
 
Other underwriting expense ratio
   
7.2
%
   
6.8
%
   
6.0
%
           
0.4
             
0.8
 
Combined ratio
   
151.5
%
   
69.2
%
   
94.7
%
           
82.3
             
(25.5
)
                                                         
(Some amounts may not reconcile due to rounding)
                                                       
(NM, not meaningful)
                                                       

Premiums.  Gross written premiums increased by 5.5% to $1,339.5 million in 2017 compared to $1,269.1 million in 2016, primarily due to increases in Middle East, African and Asian business and the positive impact of $22.0 million from the movement of foreign exchange rates, partially offset by a decline in Latin American business.  Net written premiums increased by 23.7% to $615.4 million in 2017 compared to $497.6 million in 2016.  The difference between the change in gross written premiums compared to the change in net written premiums is primarily due to varying utilization of reinsurance related to quota share contracts, including the impact of the non-renewal of the quota share contract between Everest Re and Bermuda Re.  Premiums earned decreased 1.7% to $502.3 million in 2017 compared to $510.9 million in 2016.  The change in premiums earned relative to net written premiums is partially due to the impact of the non-renewal of the quota share contract between Everest Re and Bermuda Re and is also the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

Gross written premiums decreased by 7.6% to $1,269.1 million in 2016 compared to $1,374.0 million in 2015, primarily due to declines in Latin American, Middle East and Asian business and the negative impact of $40.7 million from the movement of foreign exchange rates.  Net written premiums decreased by 11.6%
25

to $497.6 million in 2016 compared to $562.7 million in 2015.  The difference between the change in gross written premiums compared to the change in net written premiums is primarily due to varying utilization of reinsurance related to the quota share contracts.  Premiums earned decreased 12.1% to $510.9 million in 2016 compared to $581.2 million in 2015.  The change in premiums earned relative to net written premiums is primarily the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

Incurred Losses and LAE.  The following table presents the incurred losses and LAE for the International segment for the periods indicated.


   
Years Ended December 31,
   
Current
   
Ratio %/
 
Prior
   
Ratio %/
 
Total
   
Ratio %/
(Dollars in millions)
 
Year
   
Pt Change
 
Years
   
Pt Change
 
Incurred
   
Pt Change
2017
                                                 
Attritional
 
$
255.0
     
50.8
%
   
$
11.6
     
2.3
%
   
$
266.6
     
53.1
%
 
Catastrophes
   
357.2
     
71.1
%
 
   
(1.0
)
   
-0.2
%
 
   
356.2
     
70.9
%
 
Total segment
 
$
612.2
     
121.9
%
 
 
$
10.6
     
2.1
%
 
 
$
622.8
     
124.0
%
 
                                                                
2016
                                                             
Attritional
 
$
261.5
     
51.2
%
   
$
(93.6
)
   
-18.3
%
   
$
167.9
     
32.8
%
 
Catastrophes
   
65.5
     
12.8
%
 
   
(25.8
)
   
-5.1
%
 
   
39.7
     
7.8
%
 
Total segment
 
$
327.0
     
64.0
%
 
 
$
(119.4
)
   
-23.4
%
 
 
$
207.6
     
40.6
%
 
                                                                
2015
                                                             
Attritional
 
$
378.1
     
65.1
%
   
$
(11.4
)
   
-2.1
%
   
$
366.7
     
63.0
%
 
Catastrophes
   
34.7
     
6.0
%
 
   
(6.6
)
   
-1.1
%
 
   
28.1
     
4.9
%
 
Total segment
 
$
412.8
     
71.1
%
 
 
$
(18.0
)
   
-3.2
%
 
 
$
394.8
     
67.9
%
 
                                                                
Variance 2017/2016
                                                             
Attritional
 
$
(6.5
)
   
(0.4
)
pts
 
$
105.2
     
20.6
 
pts
 
$
98.7
     
20.3
 
pts
Catastrophes
   
291.7
     
58.3
 
pts
   
24.8
     
4.9
 
pts
   
316.5
     
63.1
 
pts
Total segment
 
$
285.2
     
57.9
 
pts
 
$
130.0
     
25.5
 
pts
 
$
415.2
     
83.4
 
pts
                                                                
Variance 2016/2015
                                                             
Attritional
 
$
(116.6
)
   
(13.9
)
pts
 
$
(82.2
)
   
(16.2
)
pts
 
$
(198.8
)
   
(30.2
)
pts
Catastrophes
   
30.8
     
6.8
 
pts
   
(19.2
)
   
(4.0
)
pts
   
11.6
     
2.9
 
pts
Total segment
 
$
(85.8
)
   
(7.1
)
pts
 
$
(101.4
)
   
(20.2
)
pts
 
$
(187.2
)
   
(27.3
)
pts
                                                                
(Some amounts may not reconcile due to rounding.)
                                                      


Incurred losses and LAE increased by 200.0% to $622.8 million in 2017 compared to $207.6 million in 2016, primarily due to an increase of $291.7 million in current catastrophe losses, favorable development of $105.2 million on prior years attritional losses and $24.8 million on prior years catastrophe losses. The current year catastrophe losses of $357.2 million in 2017 related to Hurricane Maria ($238.6 million), Hurricane Irma ($79.2 million), the Mexico City earthquake ($10.2 million), the South Africa Knysna fires ($9.9 million), Cyclone Debbie in Australia ($8.4 million), the Peru storms ($7.4 million) and Hurricane Harvey ($3.4 million). The $65.5 million of current year catastrophe losses in 2016 were due to the Fort McMurray Canada wildfire ($24.9 million), Hurricane Matthew ($13.7 million), the Ecuador earthquake ($11.8 million), the 2016 Taiwan earthquake ($7.6 million) and the New Zealand earthquake ($6.9 million).

Incurred losses and LAE decreased by 47.4% to $207.6 million in 2016 compared to $394.8 million in 2015, primarily due to a decrease in current year attritional losses of $116.6 million, more favorable development on prior year attritional losses of $82.2 million and more favorable development of prior year catastrophe losses of $19.2 million, partially offset by an increase of $30.8 million in current year catastrophe losses.  The decrease in attritional losses related to lower losses on Canadian, Latin American, Middle Eastern and African business in 2016 and the impact of the decrease in premiums earned.  The $93.6 million of favorable development on prior years attritional losses was mainly related to property business.  The $65.5 million of current year catastrophe losses in 2016 are outlined aboveThe $34.7 million of current year catastrophe losses in 2015 were due to the 2015 Chilean earthquake ($17.4 million), Northern Chile storms ($9.6 million) and the New South Wales storms ($7.8 million).

26

Segment Expenses.  Commission and brokerage decreased 8.6% to $101.9 million in 2017 compared to $111.5 million in 2016.  The decrease was due to the impact of the decrease in premiums earned, the impact of affiliated quota share agreements and the changes in the mix of business. Segment other underwriting expenses increased slightly to $36.3 million in 2017 compared to $34.3 million in 2016.

Commission and brokerage decreased 8.0% to $111.5 million in 2016 compared to $121.2 million in 2015.  The year over year decrease was mainly due to the impact of the decrease in premiums earned.  Segment other underwriting expenses remained the same at $34.3 million in 2016 and 2015.

Insurance.
The following table presents the underwriting results and ratios for the Insurance segment for the periods indicated.


   
Years Ended December 31,
  2017/2016   2016/2015
(Dollars in millions)
 
2017
   
2016
   
2015
   
Variance
   
% Change
   
Variance
   
% Change
 
Gross written premiums
 
$
1,855.9
   
$
1,668.8
   
$
1,473.8
   
$
187.1
     
11.2
%
 
$
195.0
     
13.2
%
Net written premiums
   
972.8
     
620.3
     
630.7
     
352.5
     
56.8
%
   
(10.4
)
   
-1.6
%
                                                         
Premiums earned
 
$
589.1
   
$
593.1
   
$
611.1
   
$
(4.0
)
   
-0.7
%
 
$
(18.0
)
   
-2.9
%
Incurred losses and LAE
   
504.9
     
588.6
     
511.5
     
(83.7
)
   
-14.2
%
   
77.1
     
15.1
%
Commission and brokerage
   
(51.3
)
   
(19.6
)
   
(7.8
)
   
(31.7
)
   
162.0
%
   
(11.8
)
   
150.6
%
Other underwriting expenses
   
162.7
     
156.6
     
130.4
     
6.1
     
3.9
%
   
26.2
     
20.1
%
Underwriting gain (loss)
 
$