Fitch Affirms Everest Re’s Ratings; Outlook Stable

November 17, 2011

Fitch Ratings has affirmed the ratings of Everest Re Group, Ltd.’s debt-issuing holding company, Everest Reinsurance Holdings, Inc. and its subsidiaries. “Everest’s debt ratings are only one notch lower than the operating companies’ Insurer Financial Strength (IFS) ratings, which reflects Bermuda’s moderate regulatory environment and limited payment restrictions,” Fitch noted. The outlook for the ratings is stable.

The ratings reflect Everest’s “high quality balance sheet and financial flexibility, historical track record of favorable operating performance, strong franchise and competitive position in chosen markets, and diversified underwriting portfolio in primary insurance and reinsurance markets,” Fitch explained.

On the negative side the rating agency cited “the company’s recent reductions in underwriting profitability reflecting in part the effect of earnings volatility from catastrophe losses, the poor pricing environment, and lingering exposure to asbestos-related claims. A continuing trend of significant catastrophe losses coupled with an inability to replenish capital and unfavorable underwriting performance would add downward pressure on Everest’s ratings.”

The report also noted that Everest’s ratings “have been affirmed despite high catastrophe losses experienced during the first three quarters of 2011. The company’s third quarter earnings were positive with a combined ratio of 95.6 percent compared to 95.9 percent for the same period in 2010. Through nine months 2011, Everest reported deterioration in its operating performance due to high catastrophe losses and modest unfavorable reserve development offset by improved underwriting results and investment performance. The combined ratio was 114.6 percent, including $920 million, or 30 points, of net pretax catastrophe losses, compared to 104.2 percent through nine months 2010. Fitch notes that year-to-date catastrophe losses as a percentage of shareholders’ equity amounted to roughly 15 percent, which is less than the peer average.”

Fitch added, however that it “believes that Everest continues to maintain a solid, high-quality balance sheet with minimal leverage risk and ample financial flexibility,” and that it “believes Everest’s operating leverage and financial leverage ratios are reasonable for the rating category. The company’s net premiums written to equity and total debt to capital ratios were 0.66 times (x) and 11.8 percent at Sept. 30, 2011, respectively. Favorably, the company reduced financial leverage during the past two years with a tender offer of its subordinated notes and repayment of maturing senior debt. Shareholders’ equity decreased 3 percent through nine months 2011 due primarily to a year-to-date $122 million net loss and $162 million of share repurchases and dividends.

“At this time, Everest has resumed modest share repurchases after having stopped in order to replenish and preserve capital and liquidity. During the third quarter of 2011, the company repurchased $46.6 million of shares bringing the total for the year to roughly $84 million which Fitch notes is less than the peer average. Fitch’s current ratings incorporate expectations that Everest will manage any future share repurchases in such a way that they, along with the company’s then-current earnings and capital formation rate, are commensurate with the company’s rating levels.”

Fitch said it believes that Everest’s “asbestos survival ratio (a measure of reserve adequacy) has been historically low relative to peers and industry averages, and therefore, Fitch expects some volatility with the company’s asbestos reserves. However, Fitch also notes that Everest’s gross asbestos reserves have consistently been decreasing as a percentage of total reserves as claims are settled and the exposure runs off, reducing the risk for material reserve charges.

“Key rating triggers that may lead to a downgrade include a sustained deterioration in operating performance such that the combined ratio is consistently over 100 percent and earnings volatility increases, a significant reduction in stockholders’ equity that is not recovered in the near term, and financial leverage consistently over 30 percent.

“Key rating triggers that may lead to an upgrade include materially increased capitalization, enhanced underwriting profitability, and consistently favorable operating performance relative to peers. Given Everest’s current profile and very strong ratings, a near-term upgrade is unlikely.

Fitch summarized the ratings affirmed for the affected companies as follows:
Everest Reinsurance Holdings, Inc.
— Issuer Default Rating (IDR) at ‘A+’;
— 5.4 percent senior notes due 2014 at ‘A’;
— 6.60 percent junior subordinated debenture due 2037 at ‘BBB+’.

Everest Re Capital Trust II
— 6.2 percent trust preferred securities due 2034 at ‘BBB+’.
Everest Reinsurance Company;
Everest National Insurance Company;
Everest Indemnity Insurance Company;
Everest Security Insurance Company;
Everest Reinsurance Company (Ireland), Limited;
Everest Reinsurance (Bermuda) Ltd.

— IFS at ‘AA-‘.

Source: Fitch Ratings

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