S&P Affirms Everest Reinsurance Holdings Ratings

October 7, 2004

Standard & Poor’s Ratings Services announced that it has assigned its “A-” debt rating on U.S.-based Everest Reinsurance Holdings Inc.’s $250 million senior unsecured note issuance. S&P also said it has affirmed its “A-” counterparty credit and senior debt and “BBB” preferred stock ratings on Everest Reinsurance Holdings Inc., and its “A-” counterparty credit rating on its ultimate parent, Bermuda-based Everest Re Group Ltd.

In addition S&P affirmed its “AA-” counterparty credit and financial strength ratings on the group’s operating subsidiaries Everest Reinsurance Co. (Everest Re), Everest National Insurance Co., and Everest Reinsurance (Bermuda) Ltd.

The outlook on all of these ratings is stable.

“The ratings are based on the group’s (collectively referred to as Everest), very strong (and substantially better than industry peers) operating performance, strong business position as the second-largest U.S. and 12th-largest global reinsurer based on 2003 net premiums written, conservative investment strategy, very strong capital adequacy, and strong financial flexibility,” said the bulletin.

“These positive factors are partially mitigated by Everest’s aggressive premium growth in the past three years and its reduced reinsurance program, both of which could increase earnings volatility in coming years,” it added.

S&P noted: “Everest Reinsurance Holdings Inc. intends to use the proceeds from its sale of the notes to retire (in 2005) about $250 million in outstanding 8.50 percent Senior Notes due March 15, 2005, and for general corporate purposes.

“Since 1996 (Everest’s first full year after the IPO), the group has reported consistently strong operating results, comparing favorably with its peers both in terms of combined ratio (average of 102.8 percent for 1999-2003) and ROR (average of 12.5 percent for the same period). Following a strong 2003, with a combined ratio of 95 percent and an ROR of 12.8 percent, Everest’s operating results improved further in the first six months of 2004, with the group posting a combined ratio of 91 percent and an ROR of 17 percent.”

S&P noted the following additional considerations for the ratings:
— Everest Re’s position as the second-largest U.S. and 12th-largest global reinsurer based on net reinsurance premiums written of $3.4 billion at the end of 2003. “Although treaty and facultative reinsurance remain the group’s main lines of business, constituting 77 percent of gross premium volume in 2003, Everest has a material primary book of business that generated $1.1 billion in additional gross premium in 2003.”
— Conservative investment strategy with the bulk of its portfolio invested in investment-grade fixed-income securities.
— Capital adequacy of 166 percent as of December 2003, incorporating the March 2004 trust preferred issuance, is considered very strong and well supportive of the rating.
– Strong financial flexibility, “with total debt plus preferreds-to-total capital remaining supportive of the rating at 24 percent as of June 30, 2004, and fixed-charge coverage at an extremely strong 15x. Operating cash flows, reflecting increasing premium volume of profitably written business, has markedly improved to $1.7 billion for calendar year 2003, as compared with $736 million and $406 million in calendar year 2002 and 2001, respectively.”
– Concerns about aggressive premium growth from 2001 through 2003 that “could add additional volatility to the group’s operating results over the medium term. Premium growth of 35 percent in 2001, 52 percent in 2002, and 61 percent in 2003 is extremely strong, and in some cases reflects premiums from new lines of business.
– “In 2002, the group decided not to renew its corporate aggregate excess-of-loss coverage and its workers’ compensation reinsurance program, which Standard & Poor’s believes could increase the volatility of the group’s earnings. This concern is partially offset by improving premium rate conditions in Everest’s market segments and the expectation that the group’s earnings (outside of a major catastrophe event) will be very strong through 2005.

S&P said it expects “that the continuation of very strong earnings in combination with markedly reduced premium growth will result in the organic strengthening of capital adequacy through the retention of earnings. Including the third-quarter 2004 hurricane catastrophe loss activity [See following article] that is expected to be largely offset by third-quarter results, the combined ratio is expected to be 96 percent-98 percent for full-year 2004. Financial leverage, as measured by total debt plus preferreds-to-total capital, is expected to remain within the rating range at about 25 percent-27 percent with fixed-charge coverage of 8x-10x.”

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