Best Affirms Everest Re Subs ‘A+’ Rating

June 3, 2004

A.M. Best Co. announced that it has affirmed the financial strength rating of “A+” (Superior) of the Bermuda-based Everest Re Group’s reinsurance and insurance subsidiaries. Best also affirmed all debt ratings of Everest Re Group, Ltd. and has extended the same financial strength rating to a formerly unrated Bermuda operating subsidiary, Everest International Reinsurance Ltd. The outlook for all of the ratings is stable.

“These ratings reflect Everest Re’s favorable earnings trends, strong risk-adjusted capital position, excellent financial flexibility and well-established global reinsurance franchise,” said Best. “In 2003, Everest Re generated a return on equity of 18.1 percent, which was driven by a solid level of investment earnings and a moderate underwriting gain. This favorable trend has continued in the first quarter of 2004, with the group generating a combined ratio of 90.8 percent and net income of $126 million.”

Best also noted: “The “group’s risk-adjusted capital position has been enhanced through its ability to successfully raise capital over the last two years through the issuance of common stock and trust preferred securities. As a result, shareholders’ equity has increased to almost $3.4 billion as of March 31, 2004, with total capital being in excess of $4.3 billion. Everest Re’s financial leverage ratios are commensurate with its ratings, and A.M. Best expects the group to maintain its level of debt and preferred capital at no greater than 30 percent, with its fixed charge coverage being in the high single-digit range.”

As offsetting factors best cited “Everest Re’s elevated operating leverage position, which makes the group’s capitalization more susceptible to potential deterioration. Operating leverage is measured by the multiple of Everest Re’s net written premiums and net loss reserves to total capital. The premium leverage component of this measure has been elevated in recent years as a result of growth in both Everest Re’s reinsurance and primary books of business, with the latter largely comprised of workers’ compensation business in California.” The rating agency expects that the “group’s premium leverage will begin to decline as its premium volume flattens, dictated by a moderation in overall market conditions, and as the group continues to generate capital through earnings.”

The company has a strong reserve position with a large long-tailed loss reserve base, comprised of over $5 billion in net loss reserves including $575 million of asbestos and environmental (A&E) reserves. “Reserve leverage has been exacerbated by $400 million in net prior year reserve strengthening performed in 2002 and 2003,” said Best. “During this period, the group has exhausted stop loss and adverse development reinsurance protections, which were previously available to protect it from slippage in its reserve position”

Best concluded that “Everest Re continues to benefit from a stable, seasoned management team, which has successfully deployed its low cost operating structure to profitably distribute its reinsurance and insurance products globally through a large network of insurance and reinsurance intermediaries.” As a result Best said it “believes Everest Re has positioned itself to generate superior returns over the mid term.”

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