holdings10q1q15.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED:
March 31, 2015
 
Commission file number:
1-14527

EVEREST REINSURANCE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
22-3263609
(State or other jurisdiction of
incorporation or organization)
 
 
(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)

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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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)
   

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

YES
   
NO
X

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

   
Number of Shares Outstanding
Class
 
At May 1, 2015
Common Shares, $0.01 par value
   1,000

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

 
 

 
EVEREST REINSURANCE HOLDINGS, INC.

Table of Contents
Form 10-Q


Page
PART I

FINANCIAL INFORMATION

         
Item 1.
 
Financial Statements
 
         
   
Consolidated Balance Sheets at March 31, 2015 (unaudited) and
 
     
December 31, 2014
1
       
   
Consolidated Statements of Operations and Comprehensive Income (Loss) for the
 
     
three months ended March 31, 2015 and 2014 (unaudited)
2
         
   
Consolidated Statements of Changes in Stockholder’s Equity for the three
 
     
months ended March 31, 2015 and 2014 (unaudited)
3
         
   
Consolidated Statements of Cash Flows for the three months ended
 
     
March 31, 2015 and 2014 (unaudited)
4
         
   
Notes to Consolidated Interim Financial Statements (unaudited)
5
         
Item 2.
 
Management’s Discussion and Analysis of Financial Condition and
 
     
Results of Operation
26
       
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
38
         
Item 4.
 
Controls and Procedures
38
         

PART II

OTHER INFORMATION

         
Item 1.
 
Legal Proceedings
39
         
Item 1A.
 
Risk Factors
39
       
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
39
       
Item 3.
 
Defaults Upon Senior Securities
39
       
Item 4.
 
Mine Safety Disclosures
39
       
Item 5.
 
Other Information
39
       
Item 6.
 
Exhibits
40

 
 

 
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS

 
   
March 31,
   
 December 31,
 
(Dollars in thousands, except par value per share)
 
2015
   
2014
 
   
(unaudited)
       
ASSETS:
           
Fixed maturities - available for sale, at market value
  $ 5,226,919     $ 5,293,411  
     (amortized cost: 2015, $5,108,085; 2014, $5,235,523)
               
Fixed maturities - available for sale, at fair value
    363       1,509  
Equity securities - available for sale, at market value (cost: 2015, $15; 2014, $15)
    16       16  
Equity securities - available for sale, at fair value
    1,350,070       1,299,037  
Short-term investments
    559,947       564,364  
Other invested assets (cost: 2015, $440,616; 2014, $435,010)
    440,616       435,010  
Other invested assets, at fair value
    1,691,275       1,655,311  
Cash
    267,487       323,975  
         Total investments and cash
    9,536,693       9,572,633  
Note receivable - affiliated
    250,000       250,000  
Accrued investment income
    47,856       45,386  
Premiums receivable
    1,161,029       1,086,203  
Reinsurance receivables - unaffiliated
    690,641       659,303  
Reinsurance receivables - affiliated
    3,386,137       3,372,715  
Funds held by reinsureds
    192,108       182,159  
Deferred acquisition costs
    94,703       109,262  
Prepaid reinsurance premiums
    791,245       809,083  
Other assets
    257,876       235,576  
TOTAL ASSETS
  $ 16,408,288     $ 16,322,320  
                 
LIABILITIES:
               
Reserve for losses and loss adjustment expenses
  $ 7,805,030     $ 7,843,856  
Unearned premium reserve
    1,408,321       1,442,122  
Funds held under reinsurance treaties
    107,444       101,743  
Losses in the course of payment
    237,919       178,521  
Commission reserves
    66,461       63,110  
Other net payable to reinsurers
    972,196       1,028,549  
4.868% Senior notes due 6/1/2044
    400,000       400,000  
6.6% Long term notes due 5/1/2067
    238,365       238,364  
Accrued interest on debt and borrowings
    12,341       3,537  
Income taxes
    81,928       46,835  
Unsettled securities payable
    27,206       41,092  
Other liabilities
    350,540       361,874  
         Total liabilities
    11,707,751       11,749,603  
                 
Commitments and Contingencies (Note 6)
               
                 
STOCKHOLDER'S EQUITY:
               
Common stock, par value: $0.01; 3,000 shares authorized;
               
     1,000 shares issued and outstanding (2015 and 2014)
    -       -  
Additional paid-in capital
    366,258       362,293  
Accumulated other comprehensive income (loss), net of deferred income tax expense
               
     (benefit) of $6,693 at 2015 and $2,434 at 2014
    12,430       4,519  
Retained earnings
    4,321,849       4,205,905  
         Total stockholder's equity
    4,700,537       4,572,717  
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY
  $ 16,408,288     $ 16,322,320  
                 
The accompanying notes are an integral part of the consolidated financial statements.
               

 
1

 
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)

 
   
Three Months Ended
   
March 31,
(Dollars in thousands)
 
2015
 
2014
   
(unaudited)
REVENUES:
           
Premiums earned
  $ 521,062     $ 470,445  
Net investment income
    72,581       63,787  
Net realized capital gains (losses):
               
Other-than-temporary impairments on fixed maturity securities
    (24,121 )     -  
Other-than-temporary impairments on fixed maturity securities
               
transferred to other comprehensive income (loss)
    -       -  
Other net realized capital gains (losses)
    45,417       (4,050 )
Total net realized capital gains (losses)
    21,296       (4,050 )
Other income (expense)
    15,833       (3,055 )
Total revenues
    630,772       527,127  
                 
CLAIMS AND EXPENSES:
               
Incurred losses and loss adjustment expenses
    308,880       278,046  
Commission, brokerage, taxes and fees
    96,531       76,094  
Other underwriting expenses
    48,543       39,251  
Corporate expenses
    1,609       1,302  
Interest, fee and bond issue cost amortization expense
    8,859       7,436  
Total claims and expenses
    464,422       402,129  
                 
INCOME (LOSS) BEFORE TAXES
    166,350       124,998  
Income tax expense (benefit)
    50,406       38,532  
                 
NET INCOME (LOSS)
  $ 115,944     $ 86,466  
                 
Other comprehensive income (loss), net of tax :
               
Unrealized appreciation (depreciation) ("URA(D)") on securities arising during the period
    15,950       20,797  
Less: reclassification adjustment for realized losses (gains) included in net income (loss)
    23,665       1,298  
Total URA(D) on securities arising during the period
    39,615       22,095  
                 
Foreign currency translation adjustments
    (33,308 )     (7,836 )
                 
Benefit plan actuarial net gain (loss) for the period
    -       -  
Reclassification adjustment for amortization of net (gain) loss included in net income (loss)
    1,604       771  
Total benefit plan net gain (loss) for the period
    1,604       771  
Total other comprehensive income (loss), net of tax
    7,911       15,030  
                 
COMPREHENSIVE INCOME (LOSS)
  $ 123,855     $ 101,496  
                 
The accompanying notes are an integral part of the consolidated financial statements.
               

 
2

 
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDER’S EQUITY

 
   
Three Months Ended
   
March 31,
(Dollars in thousands, except share amounts)
 
2015
 
2014
   
(unaudited)
COMMON STOCK (shares outstanding):
           
Balance, beginning of period
    1,000       1,000  
Balance, end of period
    1,000       1,000  
                 
ADDITIONAL PAID-IN CAPITAL:
               
Balance, beginning of period
  $ 362,293     $ 351,051  
Share-based compensation plans
    3,965       3,394  
Balance, end of period
    366,258       354,445  
                 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
               
NET OF DEFERRED INCOME TAXES:
               
Balance, beginning of period
    4,519       87,648  
Net increase (decrease) during the period
    7,911       15,030  
Balance, end of period
    12,430       102,678  
                 
RETAINED EARNINGS:
               
Balance, beginning of period
    4,205,905       3,751,779  
Net income (loss)
    115,944       86,466  
Balance, end of period
    4,321,849       3,838,245  
                 
TOTAL STOCKHOLDER'S EQUITY, END OF PERIOD
  $ 4,700,537     $ 4,295,368  
                 
The accompanying notes are an integral part of the consolidated financial statements.
               

 
3

 
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
 

   
Three Months Ended
   
March 31,
(Dollars in thousands)
 
2015
 
2014
   
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income (loss)
  $ 115,944     $ 86,466  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Decrease (increase) in premiums receivable
    (78,969 )     12,611  
Decrease (increase) in funds held by reinsureds, net
    (4,707 )     2,877  
Decrease (increase) in reinsurance receivables
    (68,311 )     (279,364 )
Decrease (increase) in income taxes
    31,408       24,447  
Decrease (increase) in prepaid reinsurance premiums
    15,016       (47,040 )
Increase (decrease) in reserve for losses and loss adjustment expenses
    20,927       (58,410 )
Increase (decrease) in unearned premiums
    (28,224 )     76,126  
Increase (decrease) in other net payable to reinsurers
    (52,400 )     130,527  
Increase (decrease) in losses in course of payment
    60,419       101,869  
Change in equity adjustments in limited partnerships
    (7,173 )     3,143  
Distribution of limited partnership income
    7,369       5,824  
Change in other assets and liabilities, net
    35,494       (16,618 )
Non-cash compensation expense
    1,946       1,729  
Amortization of bond premium (accrual of bond discount)
    4,955       6,004  
Amortization of underwriting discount on senior notes
    1       14  
Net realized capital (gains) losses
    (21,296 )     4,050  
Net cash provided by (used in) operating activities
    32,399       54,255  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from fixed maturities matured/called - available for sale, at market value
    188,815       207,534  
Proceeds from fixed maturities matured/called - available for sale, at fair value
    -       875  
Proceeds from fixed maturities sold - available for sale, at market value
    112,846       149,578  
Proceeds from fixed maturities sold - available for sale, at fair value
    1,236       20,763  
Proceeds from equity securities sold - available for sale, at fair value
    133,960       176,116  
Distributions from other invested assets
    10,797       9,828  
Cost of fixed maturities acquired - available for sale, at market value
    (293,848 )     (689,205 )
Cost of fixed maturities acquired - available for sale, at fair value
    -       (1,309 )
Cost of equity securities acquired - available for sale, at fair value
    (164,112 )     (77,427 )
Cost of other invested assets acquired
    (16,600 )     (4,961 )
Net change in short-term investments
    (860 )     113,571  
Net change in unsettled securities transactions
    (31,296 )     (8,812 )
Net cash provided by (used in) investing activities
    (59,062 )     (103,449 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Tax benefit from share-based compensation
    2,020       1,665  
Net cash provided by (used in) financing activities
    2,020       1,665  
                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
    (31,845 )     3,987  
                 
Net increase (decrease) in cash
    (56,488 )     (43,542 )
Cash, beginning of period
    323,975       316,807  
Cash, end of period
  $ 267,487     $ 273,265  
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Income taxes paid (recovered)
  $ 18,077     $ 12,474  
Interest paid
    -       42  
                 
The accompanying notes are an integral part of the consolidated financial statements.
               

 
4

 
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the Three Months Ended March 31, 2015 and 2014

1.       GENERAL

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); “Mt. Logan Re” means Mt. Logan Re Ltd., a subsidiary of Group; and the “Company” means Holdings and its subsidiaries.

2.       BASIS OF PRESENTATION

The unaudited consolidated financial statements of the Company for the three months ended March 31, 2015 and 2014 include all adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair statement of the results on an interim basis.  Certain financial information, which is normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), has been omitted since it is not required for interim reporting purposes. The December 31, 2014 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.  The results for the three months ended March 31, 2015 and 2014 are not necessarily indicative of the results for a full year.  These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, 2014, 2013 and 2012 included in the Company’s most recent Form 10-K filing.

All intercompany accounts and transactions have been eliminated.

Application of Recently Issued Accounting Standard Changes

No accounting standards or guidance have been issued recently that would have a material impact on the Company’s financial statements or financial reporting process.

 
5

 
3.       INVESTMENTS

The amortized cost, market value and gross unrealized appreciation and depreciation of available for sale, fixed maturity, equity security investments, carried at market value and other-than-temporary impairments (“OTTI”) in accumulated other comprehensive income (“AOCI”) are as follows for the periods indicated:

   
At March 31, 2015
   
Amortized
   
Unrealized
   
Unrealized
   
Market
   
OTTI in AOCI
 
(Dollars in thousands)
 
Cost
   
Appreciation
   
Depreciation
   
Value
   
(a)
 
Fixed maturity securities
                             
U.S. Treasury securities and obligations of
                             
U.S. government agencies and corporations
  $ 174,065     $ 3,541     $ (83 )   $ 177,523     $ -  
Obligations of U.S. states and political subdivisions
    750,672       39,084       (914 )     788,842       -  
Corporate securities
    1,941,982       53,670       (24,416 )     1,971,236       -  
Asset-backed securities
    115,357       826       (96 )     116,087       -  
Mortgage-backed securities
                                       
Commercial
    55,527       2,752       -       58,279       -  
Agency residential
    568,152       8,658       (1,449 )     575,361       -  
Non-agency residential
    240       37       -       277       -  
Foreign government securities
    459,079       30,882       (7,684 )     482,277       -  
Foreign corporate securities
    1,043,011       41,601       (27,575 )     1,057,037       -  
Total fixed maturity securities
  $ 5,108,085     $ 181,051     $ (62,217 )   $ 5,226,919     $ -  
Equity securities
  $ 15     $ 1     $ -     $ 16     $ -  


   
At December 31, 2014
   
Amortized
   
Unrealized
   
Unrealized
   
Market
   
OTTI in AOCI
 
(Dollars in thousands)
 
Cost
   
Appreciation
   
Depreciation
   
Value
   
(a)
 
Fixed maturity securities
                             
U.S. Treasury securities and obligations of
                             
U.S. government agencies and corporations
  $ 135,724     $ 1,416     $ (304 )   $ 136,836     $ -  
Obligations of U.S. states and political subdivisions
    783,129       41,969       (626 )     824,472       -  
Corporate securities
    1,992,200       39,954       (53,219 )     1,978,935       (9,735 )
Asset-backed securities
    94,470       727       (374 )     94,823       -  
Mortgage-backed securities
                                       
Commercial
    57,027       2,292       (51 )     59,268       -  
Agency residential
    596,140       6,697       (4,720 )     598,117       -  
Non-agency residential
    271       44       -       315       -  
Foreign government securities
    515,016       27,415       (5,344 )     537,087       -  
Foreign corporate securities
    1,061,546       27,832       (25,820 )     1,063,558       -  
Total fixed maturity securities
  $ 5,235,523     $ 148,346     $ (90,458 )   $ 5,293,411     $ (9,735 )
Equity securities
  $ 15     $ 1     $ -     $ 16     $ -  

(a)   Represents the amount of OTTI recognized in AOCI.  Amount includes unrealized gains and losses on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date.
 

 
6

 
The amortized cost and market value of fixed maturity securities are shown in the following table by contractual maturity. Mortgage-backed securities are generally more likely to be prepaid than other fixed maturity securities. As the stated maturity of such securities may not be indicative of actual maturities, the totals for mortgage-backed and asset-backed securities are shown separately.

   
At March 31, 2015
   
At December 31, 2014
 
   
Amortized
   
Market
   
Amortized
   
Market
 
(Dollars in thousands)
 
Cost
   
Value
   
Cost
   
Value
 
Fixed maturity securities – available for sale
                       
    Due in one year or less
  $ 353,025     $ 352,544     $ 385,721     $ 384,022  
    Due after one year through five years
    2,447,447       2,468,119       2,387,533       2,369,917  
    Due after five years through ten years
    921,195       943,216       1,025,221       1,029,077  
    Due after ten years
    647,142       713,036       689,140       757,872  
Asset-backed securities
    115,357       116,087       94,470       94,823  
Mortgage-backed securities
                               
Commercial
    55,527       58,279       57,027       59,268  
Agency residential
    568,152       575,361       596,140       598,117  
Non-agency residential
    240       277       271       315  
Total fixed maturity securities
  $ 5,108,085     $ 5,226,919     $ 5,235,523     $ 5,293,411  


The changes in net unrealized appreciation (depreciation) for the Company’s investments are derived from the following sources for the periods as indicated:

   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2015
   
2014
 
Increase (decrease) during the period between the market value and cost
           
of investments carried at market value, and deferred taxes thereon:
           
Fixed maturity securities
  $ 51,211     $ 33,993  
Fixed maturity securities, other-than-temporary impairment
    9,735       -  
Change in unrealized  appreciation (depreciation), pre-tax
    60,946       33,993  
Deferred tax benefit (expense)
    (17,924 )     (11,898 )
Deferred tax benefit (expense), other-than-temporary impairment
    (3,407 )     -  
Change in unrealized appreciation (depreciation),
               
net of deferred taxes, included in stockholder's equity
  $ 39,615     $ 22,095  


The Company frequently reviews all of its fixed maturity, available for sale securities for declines in market value and focuses its attention on securities whose fair value has fallen below 80% of their amortized cost at the time of review.  The Company then assesses whether the decline in value is temporary or other-than-temporary.  In making its assessment, the Company evaluates the current market and interest rate environment as well as specific issuer information.  Generally, a change in a security’s value caused by a change in the market, interest rate or foreign exchange environment does not constitute an other-than-temporary impairment, but rather a temporary decline in market value.  Temporary declines in market value are recorded as unrealized losses in accumulated other comprehensive income (loss).  If the Company determines that the decline is other-than-temporary and the Company does not have the intent to sell the security; and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis, the carrying value of the investment is written down to fair value.  The fair value adjustment that is credit or foreign exchange related is recorded in net realized capital gains (losses) in the Company’s consolidated statements of operations and comprehensive income (loss). The fair value adjustment that is non-credit related is recorded as a component of other comprehensive income (loss), net of tax, and is included in accumulated other comprehensive income (loss) in the Company’s consolidated balance sheets.  The Company’s assessments are based on the issuers current and expected future financial position, timeliness with respect to interest and/or principal payments, speed of repayments and any applicable credit enhancements or breakeven constant default rates on mortgage-backed and asset-backed securities, as well as relevant information provided by rating agencies, investment advisors and analysts.

 
7

 
The majority of the Company’s equity securities available for sale at market value are primarily comprised of mutual fund investments whose underlying securities consist of fixed maturity securities.  When a fund’s value reflects an unrealized loss, the Company assesses whether the decline in value is temporary or other-than-temporary.  In making its assessment, the Company considers the composition of its portfolios and their related markets, reports received from the portfolio managers and discussions with portfolio managers.  If the Company determines that the declines are temporary and it has the ability and intent to continue to hold the investments, then the declines are recorded as unrealized losses in accumulated other comprehensive income (loss).  If declines are deemed to be other-than-temporary, then the carrying value of the investment is written down to fair value and recorded in net realized capital gains (losses) in the Company’s consolidated statements of operations and comprehensive income (loss).

Retrospective adjustments are employed to recalculate the values of asset-backed securities. All of the Company’s asset-backed and mortgage-backed securities have a pass-through structure. Each acquisition lot is reviewed to recalculate the effective yield. The recalculated effective yield is used to derive a book value as if the new yield were applied at the time of acquisition. Outstanding principal factors from the time of acquisition to the adjustment date are used to calculate the prepayment history for all applicable securities. Conditional prepayment rates, computed with life to date factor histories and weighted average maturities, are used in the calculation of projected prepayments for pass-through security types.

The tables below display the aggregate market value and gross unrealized depreciation of fixed maturity and equity securities, by security type and contractual maturity, in each case subdivided according to length of time that individual securities had been in a continuous unrealized loss position for the periods indicated:

   
Duration of Unrealized Loss at March 31, 2015 By Security Type
 
   
Less than 12 months
   
Greater than 12 months
   
Total
 
         
Gross
         
Gross
         
Gross
 
         
Unrealized
         
Unrealized
         
Unrealized
 
(Dollars in thousands)
 
Market Value
   
Depreciation
   
Market Value
   
Depreciation
   
Market Value
   
Depreciation
 
Fixed maturity securities - available for sale
                                   
U.S. Treasury securities and obligations of
                                   
U.S. government agencies and corporations
  $ 200     $ (1 )   $ 2,043     $ (82 )   $ 2,243     $ (83 )
Obligations of U.S. states and political subdivisions
    26,973       (579 )     18,171       (335 )     45,144       (914 )
Corporate securities
    362,527       (22,140 )     153,423       (2,276 )     515,950       (24,416 )
Asset-backed securities
    43,245       (96 )     -       -       43,245       (96 )
Mortgage-backed securities
                                               
Commercial
    -       -       -       -       -       -  
Agency residential
    10,595       (33 )     192,684       (1,416 )     203,279       (1,449 )
Non-agency residential
    -       -       -       -       -       -  
Foreign government securities
    60,663       (3,273 )     46,741       (4,411 )     107,404       (7,684 )
Foreign corporate securities
    133,917       (25,626 )     47,221       (1,949 )     181,138       (27,575 )
Total fixed maturity securities
  $ 638,120     $ (51,748 )   $ 460,283     $ (10,469 )   $ 1,098,403     $ (62,217 )
Equity securities
    -       -       -       -       -       -  
Total
  $ 638,120     $ (51,748 )   $ 460,283     $ (10,469 )   $ 1,098,403     $ (62,217 )


   
Duration of Unrealized Loss at March 31, 2015 By Maturity
 
   
Less than 12 months
   
Greater than 12 months
   
Total
 
         
Gross
         
Gross
         
Gross
 
         
Unrealized
         
Unrealized
         
Unrealized
 
(Dollars in thousands)
 
Market Value
   
Depreciation
   
Market Value
   
Depreciation
   
Market Value
   
Depreciation
 
Fixed maturity securities
                                   
Due in one year or less
  $ 19,187     $ (1,716 )   $ 24,224     $ (2,820 )   $ 43,411     $ (4,536 )
Due in one year through five years
    307,725       (40,128 )     165,952       (4,376 )     473,677       (44,504 )
Due in five years through ten years
    222,882       (9,192 )     56,606       (1,070 )     279,488       (10,262 )
Due after ten years
    34,486       (583 )     20,817       (787 )     55,303       (1,370 )
Asset-backed securities
    43,245       (96 )     -       -       43,245       (96 )
Mortgage-backed securities
    10,595       (33 )     192,684       (1,416 )     203,279       (1,449 )
Total fixed maturity securities
  $ 638,120     $ (51,748 )   $ 460,283     $ (10,469 )   $ 1,098,403     $ (62,217 )

 
8

 
The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at March 31, 2015 were $1,098,403 thousand and $62,217 thousand, respectively.  The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at March 31, 2015, did not exceed 0.5% of the overall market value of the Company’s fixed maturity securities.  In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector.  The $51,748 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were primarily comprised of foreign and domestic corporate securities and foreign government securities.  The majority of these unrealized losses are attributable to unrealized losses in the energy sector, $36,644 thousand, as falling oil prices disrupted the market values for this sector, particularly for oil exploration, production and servicing companies and unrealized foreign exchange losses, $13,713 thousand, as the U.S. dollar has strengthened against other currencies. The $10,469 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to foreign government securities, domestic and foreign corporate securities and agency residential mortgage-backed securities.  Of these unrealized losses, $9,180 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.  The Company did not have any sub-prime or alt-A loans with gross unrealized depreciation at March 31, 2015.  In all instances, there were no projected cash flow shortfalls to recover the full book value of the investments and the related interest obligations.  The mortgage-backed securities still have excess credit coverage and are current on interest and principal payments.

The Company, given the size of its investment portfolio and capital position, does not have the intent to sell these securities; and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis.  In addition, all securities currently in an unrealized loss position are current with respect to principal and interest payments.

The tables below display the aggregate market value and gross unrealized depreciation of fixed maturity and equity securities, by security type and contractual maturity, in each case subdivided according to length of time that individual securities had been in a continuous unrealized loss position for the periods indicated:

   
Duration of Unrealized Loss at December 31, 2014 By Security Type
 
   
Less than 12 months
   
Greater than 12 months
   
Total
 
         
Gross
         
Gross
         
Gross
 
         
Unrealized
         
Unrealized
         
Unrealized
 
(Dollars in thousands)
 
Market Value
   
Depreciation
   
Market Value
   
Depreciation
   
Market Value
   
Depreciation
 
Fixed maturity securities - available for sale
                                   
U.S. Treasury securities and obligations of
                                   
U.S. government agencies and corporations
  $ 13,187     $ (20 )   $ 26,897     $ (284 )   $ 40,084     $ (304 )
Obligations of U.S. states and political subdivisions
    20,428       (242 )     18,199       (384 )     38,627       (626 )
Corporate securities
    830,928       (48,891 )     171,207       (4,328 )     1,002,135       (53,219 )
Asset-backed securities
    62,451       (374 )     -       -       62,451       (374 )
Mortgage-backed securities
                                               
Commercial
    11,742       (51 )     -       -       11,742       (51 )
Agency residential
    24,230       (59 )     267,824       (4,661 )     292,054       (4,720 )
Non-agency residential
    -       -       -       -       -       -  
Foreign government securities
    45,521       (913 )     53,086       (4,431 )     98,607       (5,344 )
Foreign corporate securities
    228,733       (21,704 )     117,713       (4,116 )     346,446       (25,820 )
Total fixed maturity securities
  $ 1,237,220     $ (72,254 )   $ 654,926     $ (18,204 )   $ 1,892,146     $ (90,458 )
Equity securities
    -       -       -       -       -       -  
Total
  $ 1,237,220     $ (72,254 )   $ 654,926     $ (18,204 )   $ 1,892,146     $ (90,458 )

 
9

 
 
   
Duration of Unrealized Loss at December 31, 2014 By Maturity
 
   
Less than 12 months
   
Greater than 12 months
   
Total
 
         
Gross
         
Gross
         
Gross
 
         
Unrealized
         
Unrealized
         
Unrealized
 
(Dollars in thousands)
 
Market Value
   
Depreciation
   
Market Value
   
Depreciation
   
Market Value
   
Depreciation
 
Fixed maturity securities
                                   
Due in one year or less
  $ 12,858     $ (550 )   $ 53,528     $ (4,224 )   $ 66,386     $ (4,774 )
Due in one year through five years
    622,137       (51,262 )     243,192       (6,306 )     865,329       (57,568 )
Due in five years through ten years
    467,187       (18,958 )     66,630       (2,018 )     533,817       (20,976 )
Due after ten years
    36,615       (1,000 )     23,752       (995 )     60,367       (1,995 )
Asset-backed securities
    62,451       (374 )     -       -       62,451       (374 )
Mortgage-backed securities
    35,972       (110 )     267,824       (4,661 )     303,796       (4,771 )
Total fixed maturity securities
  $ 1,237,220     $ (72,254 )   $ 654,926     $ (18,204 )   $ 1,892,146     $ (90,458 )


The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2014 were $1,892,146 thousand and $90,458 thousand, respectively.  The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at December 31, 2014, did not exceed 0.3% of the overall market value of the Company’s fixed maturity securities.  In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector.  The $72,254 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were primarily comprised of domestic and foreign corporate securities.  The majority of these unrealized losses are attributable to unrealized losses in the energy sector, $53,772 thousand, as falling oil prices disrupted the market values for this sector, particularly for oil exploration, production and servicing companies during the fourth quarter of 2014 and unrealized foreign exchange losses, $7,298 thousand, as the U.S. dollar has strengthened against other currencies. The $18,204 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to agency residential mortgage-backed securities, foreign and domestic corporate securities and foreign government securities.  Of these unrealized losses, $16,680 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.  The Company did not have any sub-prime or alt-A loans with gross unrealized depreciation at December 31, 2014.  In all instances, there were no projected cash flow shortfalls to recover the full book value of the investments and the related interest obligations.  The mortgage-backed securities still have excess credit coverage and are current on interest and principal payments.

Other invested assets, at fair value, are comprised of common shares of the Company’s ultimate parent, Group.  At March 31, 2015, the Company held 9,719,971 shares of Group representing 18.0% of the total outstanding shares.

The components of net investment income are presented in the table below for the periods indicated:

   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2015
   
2014
 
Fixed maturities
  $ 47,972     $ 51,079  
Equity securities
    8,742       8,937  
Short-term investments and cash
    164       186  
Other invested assets
               
Limited partnerships
    7,379       (3,087 )
Dividends from Parent's shares
    9,234       7,290  
Other
    625       2,021  
Gross investment income before adjustments
    74,116       66,426  
Funds held interest income (expense)
    2,521       2,109  
Interest income from Parent
    1,075       -  
Gross investment income
    77,712       68,535  
Investment expenses
    (5,131 )     (4,748 )
Net investment income
  $ 72,581     $ 63,787  

 
10

 
The Company records results from limited partnership investments on the equity method of accounting with changes in value reported through net investment income. Due to the timing of receiving financial information from these partnerships, the results are generally reported on a one month or quarter lag.  If the Company determines there has been a significant decline in value of a limited partnership during this lag period, a loss will be recorded in the period in which the Company identifies the decline.

The Company had contractual commitments to invest up to an additional $237,637 thousand in limited partnerships at March 31, 2015.  These commitments will be funded when called in accordance with the partnership agreements, which have investment periods that expire, unless extended, through 2020.

The components of net realized capital gains (losses) are presented in the table below for the periods indicated:

   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2015
   
2014
 
Fixed maturity securities, market value:
           
Other-than-temporary impairments
  $ (24,121 )   $ -  
Gains (losses) from sales
    (11,518 )     (1,997 )
Fixed maturity securities, fair value:
               
Gains (losses) from sales
    28       940  
Gains (losses) from fair value adjustments
    62       -  
Equity securities, fair value:
               
Gains (losses) from sales
    (65 )     (1,336 )
Gains (losses) from fair value adjustments
    20,946       25,753  
Other invested assets, fair value:
               
Gains (losses) from fair value adjustments
    35,964       (27,410 )
Short-term investment gains (losses)
    -       -  
Total net realized capital gains (losses)
  $ 21,296     $ (4,050 )


The Company recorded as net realized capital gains (losses) in the consolidated statements of operations and comprehensive income (loss) both fair value re-measurements and write-downs in the value of securities deemed to be impaired on an other-than-temporary basis as displayed in the table above.  The Company had no other-than-temporary impaired securities where the impairment had both a credit and non-credit component.

The proceeds and split between gross gains and losses, from sales of fixed maturity and equity securities, are presented in the table below for the periods indicated:

   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2015
   
2014
 
Proceeds from sales of fixed maturity securities
  $ 114,082     $ 170,341  
Gross gains from sales
    2,542       2,475  
Gross losses from sales
    (14,032 )     (3,532 )
                 
Proceeds from sales of equity securities
  $ 133,960     $ 176,116  
Gross gains from sales
    5,142       6,588  
Gross losses from sales
    (5,207 )     (7,924 )

 
11

 
4.       FAIR VALUE

The Company’s fixed maturity and equity securities are primarily managed by third party investment asset managers.  The investment asset managers obtain prices from nationally recognized pricing services.   These services seek to utilize market data and observations in their evaluation process.  They use pricing applications that vary by asset class and incorporate available market information and when fixed maturity securities do not trade on a daily basis the services will apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing.  In addition, they use model processes, such as the Option Adjusted Spread model to develop prepayment and interest rate scenarios for securities that have prepayment features.

In limited instances where prices are not provided by pricing services or in rare instances when a manager may not agree with the pricing service, price quotes on a non-binding basis are obtained from investment brokers.  The investment asset managers do not make any changes to prices received from either the pricing services or the investment brokers.  In addition, the investment asset managers have procedures in place to review the reasonableness of the prices from the service providers and may request verification of the prices.  In addition, the Company continually performs analytical reviews of price changes and tests the prices on a random basis to an independent pricing source.   No material variances were noted during these price validation procedures.  In limited situations, where financial markets are inactive or illiquid, the Company may use its own assumptions about future cash flows and risk-adjusted discount rates to determine fair value.  Due to the unavailability of prices for one private placement security, the Company valued the security at $6,125 thousand at March 31, 2015 and made no such adjustments at December 31, 2014.

The Company internally manages a small public equity portfolio which had a fair value at March 31, 2015 and December 31, 2014 of $103,866 thousand and $96,890 thousand, respectively, and all prices were obtained from publically published sources.

Equity securities in U.S. denominated currency are categorized as Level 1, Quoted Prices in Active Markets for Identical Assets, since the securities are actively traded on an exchange and prices are based on quoted prices from the exchange.  Equity securities traded on foreign exchanges are categorized as Level 2 due to potential foreign exchange adjustments to fair or market value.

Fixed maturity securities are generally categorized as Level 2, Significant Other Observable Inputs, since a particular security may not have traded but the pricing services are able to use valuation models with observable market inputs such as interest rate yield curves and prices for similar fixed maturity securities in terms of issuer, maturity and seniority. Valuations that are derived from techniques in which one or more of the significant inputs are unobservable (including assumptions about risk) are categorized as Level 3, Significant Unobservable Inputs.  These securities include broker priced securities.

As of March 31, 2015 and December 31, 2014, all Level 3 fixed maturity securities, except the one security priced by the Company, were priced using single non-binding broker quotes since prices for these securities were not provided by normal pricing service companies.  The single broker quotes are provided by market makers or broker-dealers who are recognized as market participants in the markets in which they are providing the quotes.  The prices received from brokers are reviewed for reasonableness by the third party asset managers and the Company.

Other invested assets, at fair value, are categorized as Level 1, Quoted Prices in Active Markets for Identical Assets, since the securities are shares of the Company’s parent, which are actively traded on an exchange and the price is based on a quoted price.

 
12

 
The following table presents the fair value measurement levels for all assets, which the Company has recorded at fair value (fair and market value) as of the period indicated:

         
Fair Value Measurement Using:
 
         
Quoted Prices
             
         
in Active
   
Significant
       
         
Markets for
   
Other
   
Significant
 
         
Identical
   
Observable
   
Unobservable
 
         
Assets
   
Inputs
   
Inputs
 
(Dollars in thousands)
 
March 31, 2015
 
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets:
                       
Fixed maturities, market value
                       
U.S. Treasury securities and obligations of
                       
U.S. government agencies and corporations
  $ 177,523     $ -     $ 177,523     $ -  
Obligations of U.S. States and political subdivisions
    788,842       -       788,842       -  
Corporate securities
    1,971,236       -       1,968,583       2,653  
Asset-backed securities
    116,087       -       116,087       -  
Mortgage-backed securities
                               
Commercial
    58,279       -       58,279       -  
Agency residential
    575,361       -       575,361       -  
Non-agency residential
    277       -       277       -  
Foreign government securities
    482,277       -       482,277       -  
Foreign corporate securities
    1,057,037       -       1,050,912       6,125  
Total fixed maturities, market value
    5,226,919       -       5,218,141       8,778  
                                 
Fixed maturities, fair value
    363       -       363       -  
Equity securities, market value
    16       16       -       -  
Equity securities, fair value
    1,350,070       1,236,565       113,505       -  
Other invested assets, fair value
    1,691,275       1,691,275       -       -  


There were no transfers between Level 1 and Level 2 for the three months ended March 31, 2015.

The following table presents the fair value measurement levels for all assets, which the Company has recorded at fair value (fair and market value) as of the period indicated:

         
Fair Value Measurement Using:
 
         
Quoted Prices
             
         
in Active
   
Significant
       
         
Markets for
   
Other
   
Significant
 
         
Identical
   
Observable
   
Unobservable
 
         
Assets
   
Inputs
   
Inputs
 
(Dollars in thousands)
 
December 31, 2014
 
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets:
                       
Fixed maturities, market value
                       
U.S. Treasury securities and obligations of
                       
U.S. government agencies and corporations
  $ 136,836     $ -     $ 136,836     $ -  
Obligations of U.S. States and political subdivisions
    824,472       -       824,472       -  
Corporate securities
    1,978,935       -       1,978,935       -  
Asset-backed securities
    94,823       -       94,823       -  
Mortgage-backed securities
                               
Commercial
    59,268       -       50,671       8,597  
Agency residential
    598,117       -       598,117       -  
Non-agency residential
    315       -       315       -  
Foreign government securities
    537,087       -       537,087       -  
Foreign corporate securities
    1,063,558       -       1,056,392       7,166  
Total fixed maturities, market value
    5,293,411       -       5,277,648       15,763  
                                 
Fixed maturities, fair value
    1,509       -       1,509       -  
Equity securities, market value
    16       16       -       -  
Equity securities, fair value
    1,299,037       1,188,613       110,424       -  
Other invested assets, fair value
    1,655,311       1,655,311       -       -  

 
13

 
The following table presents the activity under Level 3, fair value measurements using significant unobservable inputs by asset type, for the periods indicated:

   
Three Months Ended March 31, 2015
   
Three Months Ended March 31, 2014
 
   
Corporate
         
Foreign
         
Asset-backed
   
Foreign
   
Non-agency
       
(Dollars in thousands)
 
Securities
   
CMBS
   
Corporate
   
Total
   
Securities
   
Corporate
   
RMBS
   
Total
 
Beginning balance
  $ -     $ 8,597     $ 7,166     $ 15,763     $ 3,533     $ 481     $ 4     $ 4,018  
Total gains or (losses) (realized/unrealized)
                                                               
Included in earnings
    2       -       57       59       18       1       1       20  
Included in other comprehensive income (loss)
    1       -       (1,098 )     (1,097 )     65       -       -       65  
Purchases, issuances and settlements
    1,940       -       -       1,940       (572 )     (9 )     (1 )     (582 )
Transfers in and/or (out) of Level 3
    710       (8,597 )     -       (7,887 )     -       -       -       -  
Ending balance
  $ 2,653     $ -     $ 6,125     $ 8,778     $ 3,044     $ 473     $ 4     $ 3,521  
                                                                 
The amount of total gains or losses for the period
                                                               
included in earnings (or changes in net assets)
                                                               
 attributable to the change in unrealized gains
                                                               
or losses relating to assets still held at the
                                                               
reporting date
  $ -     $ -     $ -     $ -     $ -     $ -     $ -     $ -  
                                                                 
(Some amounts may not reconcile due to rounding.)
                                                               

The net transfers from level 3, fair value measurements using significant unobservable inputs, of $7,887 thousand of investments for the three months ended March 31, 2015, primarily relate to securities that were priced using single non-binding broker quotes and were subsequently priced using a recognized pricing service and were then classified as level 2.  There were no transfers from level 3, fair value measurements using significant unobservable inputs, for the three months ended March 31, 2014.

5.       CAPITAL TRANSACTIONS

On July 9, 2014, the Company renewed its shelf registration statement on Form S-3ASR with the Securities and Exchange Commission (the “SEC”), as a Well Known Seasoned Issuer.  This shelf registration statement can be used by Group to register common shares, preferred shares, debt securities, warrants, share purchase contracts and share purchase units; by Holdings to register debt securities and by Everest Re Capital Trust III (“Capital Trust III”) to register trust preferred securities.

6.       CONTINGENCIES

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.

The Company has entered into separate annuity agreements with The Prudential Insurance of America (“The Prudential”) and an additional unaffiliated life insurance company in which the Company has either purchased annuity contracts or become the assignee of annuity proceeds that are meant to settle claim payment obligations in the future. In both instances, the Company would become contingently liable if either The Prudential or the unaffiliated life insurance company were unable to make payments related to the respective annuity contact.

 
14

 
The table below presents the estimated cost to replace all such annuities for which the Company was contingently liable for the periods indicated:

   
At March 31,
   
At December 31,
 
(Dollars in thousands)
 
2015
   
2014
 
The Prudential
  $ 142,618     $ 142,653  
Unaffiliated life insurance company
    31,158       31,964  


7.       OTHER COMPREHENSIVE INCOME (LOSS)

The following table presents the components of comprehensive income (loss) in the consolidated statements of operations and comprehensive income (loss) for the periods indicated:

   
Three Months Ended March 31, 2015
   
Three Months Ended March 31, 2014
 
(Dollars in thousands)
 
Before Tax
   
Tax Effect
   
Net of Tax
   
Before Tax
   
Tax Effect
   
Net of Tax
 
Unrealized appreciation (depreciation) ("URA(D)") on securities - temporary
  $ 15,572     $ (5,950 )   $ 9,622     $ 31,996     $ (11,199 )   $ 20,797  
URA(D) on securities - OTTI
    9,735       (3,407 )     6,328       -       -       -  
Reclassification of net realized losses (gains) included in net income (loss)
    35,639       (11,974 )     23,665       1,997       (699 )     1,298  
Foreign currency translation adjustments
    (51,243 )     17,935       (33,308 )     (12,055 )     4,219       (7,836 )
Reclassification of amortization of net gain (loss) included in net income (loss)
    2,467       (863 )     1,604       1,186       (415 )     771  
Total other comprehensive income (loss)
  $ 12,170     $ (4,259 )   $ 7,911     $ 23,124     $ (8,094 )   $ 15,030  
                                                 
(Some amounts may not reconcile due to rounding)
                                               


The following table presents details of the amounts reclassified from AOCI for the periods indicated:

   
Three Months Ended
     
   
March 31,
   
Affected line item within the statements of
AOCI component
 
2015
   
2014
   
operations and comprehensive income (loss)
(Dollars in thousands)
               
URA(D) on securities
  $ 35,639     $ 1,997    
Other net realized capital gains (losses)
      (11,974 )     (699 )  
Income tax expense (benefit)
    $ 23,665     $ 1,298    
Net income (loss)
                     
Benefit plan net gain (loss)
  $ 2,467     $ 1,186    
Other underwriting expenses
      (863 )     (415 )  
Income tax expense (benefit)
    $ 1,604     $ 771    
Net income (loss)
                     
(Some amounts may not reconcile due to rounding)
                   

 
15

 
The following table presents the components of accumulated other comprehensive income (loss), net of tax, in the consolidated balance sheets for the periods indicated:

   
Three Months Ended
   
Twelve Months Ended
 
   
March 31,
   
December 31,
 
(Dollars in thousands)
 
2015
   
2014
 
             
Beginning balance of URA (D) on securities
  $ 37,628     $ 55,457  
Current period change in URA (D) of investments - temporary
    33,287       (11,501 )
Current period change in URA (D) of investments - non-credit OTTI
    6,328       (6,328 )
Ending balance of URA (D) on securities
    77,243       37,628  
                 
Beginning balance of foreign currency translation adjustments
    41,877       71,087  
Current period change in foreign currency translation adjustments
    (33,308 )     (29,210 )
Ending balance of foreign currency translation adjustments
    8,569       41,877  
                 
Beginning balance of benefit plan net gain (loss)
    (74,986 )     (38,896 )
Current period change in benefit plan net gain (loss)
    1,604       (36,090 )
Ending balance of benefit plan net gain (loss)
    (73,382 )     (74,986 )
                 
Ending balance of accumulated other comprehensive income (loss)
  $ 12,430     $ 4,519  


8.       CREDIT FACILITY - EXPIRED

Effective August 15, 2011, the Company entered into a three year, $150,000 thousand unsecured revolving credit facility, referred to as the “Holdings Credit Facility”, which expired on August 15, 2014.  The Company decided not to renew the Holdings Credit Facility at expiration.

9.       REINSURANCE AND TRUST AGREEMENTS

A subsidiary of the Company, Everest Re, has established a trust agreement, which effectively uses Everest Re’s investments as collateral, as security for assumed losses payable to a non-affiliated ceding company.  At March 31, 2015, the total amount on deposit in the trust account was $258,324 thousand.

On April 24, 2014, the Company entered into two collateralized reinsurance agreements with Kilimanjaro Re Limited (“Kilimanjaro”), a Bermuda based special purpose reinsurer, to provide the Company with catastrophe reinsurance coverage.  These agreements are multi-year reinsurance contracts which cover specified named storm and earthquake events.  The first agreement provides up to $250,000 thousand of reinsurance coverage from named storms in specified states of the Southeastern United States.  The second agreement provides up to $200,000 thousand of reinsurance coverage from named storms in specified states of the Southeast, Mid-Atlantic and Northeast regions of the United States and Puerto Rico as well as reinsurance coverage from earthquakes in specified states of the Southeast, Mid-Atlantic, Northeast and West regions of the United States, Puerto Rico and British Columbia.

On November 18, 2014, the Company entered into a collateralized reinsurance agreement with Kilimanjaro Re to provide the Company with catastrophe reinsurance coverage.  This agreement is a multi-year reinsurance contract which covers specified earthquake events.  The agreement provides up to $500,000 thousand of reinsurance coverage from earthquakes in the United States, Puerto Rico and Canada.

Kilimanjaro has financed the various property catastrophe reinsurance coverage by issuing catastrophe bonds to unrelated, external investors. On April, 24, 2014, Kilimanjaro issued $450,000 thousand of variable rate notes (“Series 2014-1 Notes”).  On November 18, 2014, Kilimanjaro issued $500,000 thousand of variable rate notes (“Series 2014-2 Notes”). The proceeds from the issuance of the Series 2014-1 Notes and the Series 2014-2 Notes are held in reinsurance trust throughout the duration of the applicable reinsurance agreements and invested solely in US government money market funds with a rating of at least “AAAm” by Standard & Poor’s.

 
16

 
10.       SENIOR NOTES

The table below displays Holdings’ outstanding senior notes.  Market value is based on quoted market prices, but due to limited trading activity, these senior notes are considered Level 2 in the fair value hierarchy.

               
March 31, 2015
   
December 31, 2014
 
               
Consolidated Balance
         
Consolidated Balance
       
(Dollars in thousands)
Date Issued
 
Date Due
 
Principal Amounts
   
Sheet Amount
   
Market Value
   
Sheet Amount
   
Market Value
 
4.868% Senior notes
06/05/2014
 
06/01/2044
  $ 400,000     $ 400,000     $ 418,876     $ 400,000     $ 404,892  
5.40% Senior notes
10/12/2004
 
10/15/2014
    250,000       -       -       -       -  


On June 5, 2014, Holdings issued $400,000 thousand of 30 year senior notes at 4.868%, which will mature on June 1, 2044. Interest will be paid semi-annually on June 1 and December 1 of each year.  The proceeds from the issuance have been used in part to pay off the $250,000 thousand of 5.40% senior notes which matured on October 15, 2014.

Interest expense incurred in connection with these senior notes is as follows for the periods indicated:

   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2015
   
2014
 
Interest expense incurred
  $ 4,868     $ 3,388  


11.       LONG TERM SUBORDINATED NOTES

The table below displays Holdings’ outstanding fixed to floating rate long term subordinated notes.  Market value is based on quoted market prices, but due to limited trading activity, these subordinated notes are considered Level 2 in the fair value hierarchy.

         
Maturity Date
 
March 31, 2015
   
December 31, 2014
 
     
Original
         
Consolidated Balance
         
Consolidated Balance
       
(Dollars in thousands)
Date Issued
 
Principal Amount
 
Scheduled
 
Final
 
Sheet Amount
   
Market Value
   
Sheet Amount
   
Market Value
 
6.6% Long term subordinated notes
04/26/2007
  $ 400,000  
05/15/2037
 
05/01/2067
  $ 238,365     $ 239,227     $ 238,364     $ 246,312  


During the fixed rate interest period from May 3, 2007 through May 14, 2017, interest will be at the annual rate of 6.6%, payable semi-annually in arrears on November 15 and May 15 of each year, commencing on November 15, 2007, subject to Holdings’ right to defer interest on one or more occasions for up to ten consecutive years.  During the floating rate interest period from May 15, 2017 through maturity, interest will be based on the 3 month LIBOR plus 238.5 basis points, reset quarterly, payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year, subject to Holdings’ right to defer interest on one or more occasions for up to ten consecutive years.  Deferred interest will accumulate interest at the applicable rate compounded semi-annually for periods prior to May 15, 2017, and compounded quarterly for periods from and including May 15, 2017.

Holdings can redeem the long term subordinated notes prior to May 15, 2017, in whole but not in part at the applicable redemption price, which will equal the greater of (a) 100% of the principal amount being redeemed and (b) the present value of the principal payment on May 15, 2017 and scheduled payments of interest that would have accrued from the redemption date to May 15, 2017 on the long term subordinated notes being redeemed, discounted to the redemption date on a semi-annual basis at a discount rate equal to the treasury rate plus an applicable spread of either 0.25% or 0.50%, in each case plus accrued and unpaid interest.  Holdings may redeem the long term subordinated notes on or after May 15, 2017, in whole or in part at 100% of the principal amount plus accrued and unpaid interest; however, redemption on or after the scheduled maturity date and prior to May 1, 2047 is subject to a replacement capital covenant.  This covenant is for the benefit of certain senior note holders and it mandates that Holdings receive proceeds from the sale of another subordinated debt issue, of at least similar size, before it may redeem the subordinated notes.  Effective upon the maturity of the Company’s 5.40% senior notes on October 15, 2014,

 
17

 
the Company’s 4.868% senior notes, due on June 1, 2044, have become the Company’s long term indebtedness that ranks senior to the long term subordinated notes.

On March 19, 2009, Group announced the commencement of a cash tender offer for any and all of the 6.60% fixed to floating rate long term subordinated notes.  Upon expiration of the tender offer, the Company had reduced its outstanding debt by $161,441 thousand.

Interest expense incurred in connection with these long term subordinated notes is as follows for the periods indicated:

   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2015
   
2014
 
Interest expense incurred
  $ 3,937     $ 3,937  


12.       SEGMENT REPORTING

The U.S. Reinsurance operation writes property and casualty reinsurance and specialty lines of business, including Marine, Aviation, Surety and Accident and Health (“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 and through general agents, brokers and surplus lines brokers within the U.S. and Canada.

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.  Underwriting results are measured 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.

The Company does not maintain separate balance sheet data for its operating segments.  Accordingly, the Company does not review and evaluate the financial results of its operating segments based upon balance sheet data.

 
18

 
The following tables present the underwriting results for the operating segments for the period indicated:

   
Three Months Ended
 
U.S. Reinsurance
 
March 31,
 
(Dollars in thousands)
 
2015
   
2014
 
Gross written premiums
  $ 562,647     $ 530,301  
Net written premiums
    240,694       251,521  
                 
Premiums earned
  $ 255,412     $ 218,191  
Incurred losses and LAE
    111,455       115,984  
Commission and brokerage
    58,364       40,136  
Other underwriting expenses
    11,529       9,482  
Underwriting gain (loss)
  $ 74,064     $ 52,589  


   
Three Months Ended
 
International
 
March 31,
 
(Dollars in thousands)
 
2015
   
2014
 
Gross written premiums
  $ 333,615     $ 328,878  
Net written premiums
    121,681       141,457  
                 
Premiums earned
  $ 140,699     $ 145,004  
Incurred losses and LAE
    101,445       83,575  
Commission and brokerage
    33,999       29,169  
Other underwriting expenses
    8,115       7,837  
Underwriting gain (loss)
  $ (2,860 )   $ 24,423  


   
Three Months Ended
 
Insurance
 
March 31,
 
(Dollars in thousands)
 
2015
   
2014
 
Gross written premiums
  $ 330,501     $ 225,276  
Net written premiums
    146,052       106,726  
                 
Premiums earned
  $ 124,951     $ 107,250  
Incurred losses and LAE
    95,980       78,487  
Commission and brokerage
    4,168       6,789  
Other underwriting expenses
    28,899       21,932  
Underwriting gain (loss)
  $ (4,096 )   $ 42  


The following table reconciles the underwriting results for the operating segments to income (loss) before taxes as reported in the consolidated statements of operations and comprehensive income (loss) for the periods indicated:

   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2015
   
2014
 
Underwriting gain (loss)
  $ 67,108     $ 77,054  
Net investment income
    72,581       63,787  
Net realized capital gains (losses)
    21,296       (4,050 )
Corporate expense
    (1,609 )     (1,302 )
Interest, fee and bond issue cost amortization expense
    (8,859 )     (7,436 )
Other income (expense)
    15,833       (3,055 )
Income (loss) before taxes
  $ 166,350     $ 124,998  

 
19

 
The Company produces business in the U.S. and internationally.  The net income deriving from assets residing in the individual foreign countries in which the Company writes business are not identifiable in the Company’s financial records.  Based on gross written premium, the table below presents the largest country, other than the U.S., in which the Company writes business, for the periods indicated:

   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2015
   
2014
 
Canada
  $ 23,512     $ 37,659  


No other country represented more than 5% of the Company’s revenues.

13.       RELATED-PARTY TRANSACTIONS

Parent

Group entered into a $250,000 thousand long term promissory note agreement with Holdings as of December 31, 2014. The note will mature on December 31, 2023 and has an interest rate of 1.72% that will be paid annually, on December 15th of each year. This transaction is presented as a Note Receivable – Affiliated in the Consolidated Balance Sheets of Holdings.

Group’s Board of Directors approved an amended share repurchase program authorizing Group and/or its subsidiary Holdings to purchase Group’s common shares through open market transactions, privately negotiated transactions or both.  The table below represents the amendments to the share repurchase program for the common shares approved for repurchase.

   
 Common Shares
   
 Authorized for
Amendment Date
 
 Repurchase
(Dollars in thousands)
   
     
09/21/2004
 
 5,000,000
07/21/2008
 
 5,000,000
02/24/2010
 
 5,000,000
02/22/2012
 
 5,000,000
05/15/2013
 
 5,000,000
11/19/2014
 
 5,000,000
   
 30,000,000

 
20

 
As of March 31, 2015, Holdings held 9,719,971 common shares of Group, which it had purchased in the open market between February 1, 2007 and March 8, 2011.  The table below represents the total purchase price for these common shares purchased.

(Dollars in thousands)
     
Total purchase price
  $ 835,371  

Holdings reports these purchases as other invested assets, fair value, in the consolidated balance sheets with changes in fair value re-measurement recorded in net realized capital gains (losses) in the consolidated statements of operations and comprehensive income (loss).  The following table presents the dividends received on these common shares that are reported as net investment income in the consolidated statements of operations and comprehensive income (loss) for the period indicated.

   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2015
   
2014
 
Dividends received
  $ 9,234     $ 7,290  


Affiliated Companies

Everest Global Services, Inc. (“Global Services”), an affiliate of Holdings, provides centralized management and home office services, through a management agreement, to Holdings and other affiliated companies within Holdings’ consolidated structure.  Services provided by Everest Global include executive managerial services, legal services, actuarial services, accounting services, information technology services and others.

The following table presents the expenses incurred by Holdings from services provided by Everest Global for the periods indicated.

   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2015
   
2014
 
Expenses incurred
  $ 18,363     $ 15,843  

 
21

 
Affiliates

The table below represents affiliated quota share reinsurance agreements ("whole account quota share") for all new and renewal business for the indicated coverage period:
 
(Dollars in thousands)
                                 
       
Percent
   
Assuming
     
Single
     
Aggregate
   
Coverage Period
 
Ceding Company
 
Ceded
   
Company
 
Type of Business
 
Occurrence Limit
     
Limit
   
                                   
01/01/2002-12/31/2002
 
Everest Re
    20.0 %  
Bermuda Re
 
property / casualty business
  $ -       $ -    
                                         
01/01/2003-12/31/2003
 
Everest Re
    25.0 %  
Bermuda Re
 
property / casualty business
    -         -    
                                         
01/01/2004-12/31/2005
 
Everest Re
    22.5 %  
Bermuda Re
 
property / casualty business
    -         -    
    Everest Re     2.5 %   Everest International   property / casualty business     -         -    
                                         
01/01/2006-12/31/2006
 
Everest Re
    18.0 %  
Bermuda Re
 
property business
    125,000   (1)     -    
    Everest Re     2.0 %   Everest International   property business     -         -    
                                         
01/01/2006-12/31/2007
 
Everest Re
    31.5 %  
Bermuda Re
 
casualty business
    -         -    
    Everest Re     3.5 %   Everest International   casualty business     -         -    
                                         
01/01/2007-12/31/2007
 
Everest Re
    22.5 %  
Bermuda Re
 
property business
    130,000   (1)     -    
    Everest Re     2.5 %   Everest International   property business     -         -    
                                         
01/01/2008-12/31/2008
 
Everest Re
    36.0 %  
Bermuda Re
 
property / casualty business
    130,000   (1)     275,000   (2)
    Everest Re     4.0 %   Everest International   property / casualty business     -         -    
                                         
01/01/2009-12/31/2009
 
Everest Re
    36.0 %  
Bermuda Re
 
property / casualty business
    150,000   (1)     325,000   (2)
    Everest Re     8.0 %   Everest International   property / casualty business     -         -    
                                         
01/01/2010-12/31/2010
 
Everest Re
    44.0 %  
Bermuda Re
 
property / casualty business
    150,000         325,000    
                                         
01/01/2011-12/31/2011
 
Everest Re
    50.0 %  
Bermuda Re
 
property / casualty business
    150,000         300,000    
                                         
01/01/2012-12/31/2014
 
Everest Re
    50.0 %  
Bermuda Re
 
property / casualty business
    100,000         200,000    
                                         
01/01/2015   Everest Re     50.0 %   Bermuda Re   property / casualty business     162,500         325,000    
                                         
01/01/2003-12/31/2006
 
Everest Re- Canadian Branch
    50.0 %  
Bermuda Re
 
property business
    -         -    
01/01/2007-12/31/2009
 
Everest Re- Canadian Branch
    60.0 %  
Bermuda Re
 
property business
    -         -    
01/01/2010-12/31/2010
 
Everest Re- Canadian Branch
    60.0 %  
Bermuda Re
 
property business
    350,000   (3)     -    
01/01/2011-12/31/2011
 
Everest Re- Canadian Branch
    60.0 %  
Bermuda Re
 
property business
    350,000   (3)     -    
01/01/2012-12/31/2012
 
Everest Re- Canadian Branch
    75.0 %  
Bermuda Re
 
property / casualty business
    206,250   (3)     412,500   (3)
01/01/2013-12/31/2013
 
Everest Re- Canadian Branch
    75.0 %  
Bermuda Re
 
property / casualty business
    150,000   (3)     412,500   (3)
01/01/2014    Everest Re- Canadian Branch     75.0 %   Bermuda Re   property / casualty business      262,500   (3)     412,500   (3)
 
01/01/2012
 
Everest Canada
    80.0 %  
Everest Re- Canadian Branch
 
property business
    -         -    
 
(1)
  The single occurance limit is applied before the loss cessions to either Bermuda Re or Everest International.                          
(2)
  The aggregate limit is applied before the loss cessions to either Bermuda Re or Everest International.                          
(3)
  Amounts shown are Canadian dollars.                          

 
22

 
For premiums earned and losses incurred for the period January 1, 2002 through December 31, 2002, Everest Re, Everest National Insurance Company and Everest Security Insurance Company entered into an Excess of Loss Reinsurance Agreement with Bermuda Re, covering workers’ compensation losses occurring on and after January 1, 2002, as respect to new, renewal and in force policies effective on that date through December 31, 2002.  This agreement was commuted as of September 30, 2013.  The table below represents Bermuda Re's liability limits for any losses per one occurrence.

   
Liability Limits
 
(Dollars in thousands)
 
Exceeding
   
Not to Exceed
 
Losses per one occurrence
  $ 100,000     $ 150,000  


The table below represents loss portfolio transfer reinsurance agreements whereby net insurance exposures and reserves were transferred to an affiliate.

(Dollars in thousands)
               
                 
Effective
 
Transferring
 
Assuming
 
% of Business or
 
Covered Period
Date
 
Company
 
Company
 
Amount of Transfer
 
of Transfer
                 
09/19/2000
 
Mt. McKinley
 
Bermuda Re
    100%  
All years
10/01/2001
 
Everest Re  (Belgium Branch)
 
Bermuda Re
    100%  
All years
10/01/2008
 
Everest Re
 
Bermuda Re
  $ 747,022  
01/01/2002-12/31/2007


The following tables summarize the premiums and losses ceded by the Company to Bermuda Re and Everest International, respectively, and premiums and losses assumed by the Company from Everest Canada for the periods indicated:

   
Three Months Ended
 
Bermuda Re
 
March 31,
 
(Dollars in thousands)
 
2015
   
2014
 
Ceded written premiums
  $ 539,033     $ 518,017  
Ceded earned premiums
    554,051       479,813  
Ceded losses and LAE (a)
    295,131       238,501  


   
Three Months Ended
 
Everest International
 
March 31,
 
(Dollars in thousands)
 
2015
   
2014
 
Ceded written premiums
  $ (2 )   $ (115 )
Ceded earned premiums
    41       (74 )
Ceded losses and LAE
    (822 )     1,884  


   
Three Months Ended
 
Everest Canada
 
March 31,
 
(Dollars in thousands)
 
2015
   
2014
 
Assumed written premiums
  $ 6,664     $ 4,010  
Assumed earned premiums
    8,699       4,688  
Assumed losses and LAE
    4,729       3,292  

(a)    Ceded losses and LAE include the Mt. McKinley loss portfolio transfer that constitutes losses ceded under retroactive reinsurance and therefore, in accordance with FASB guidance, a deferred gain on retroactive reinsurance is reflected in other expenses on the consolidated statements of operations and comprehensive income (loss).

Everest Re sold net assets of its UK branch to Bermuda Re and provided Bermuda Re with a reserve indemnity agreement allowing for indemnity payments of up to 90% of ₤25.0 million of the excess of 2002 and prior reserves, provided that any recognition of profit from the reserves for 2002 and prior underwriting years is taken into account.

 
23

 
Effective February 27, 2013, Group established a new subsidiary, Mt. Logan Re, which is a Class 3 insurer based in Bermuda.  Effective July 1, 2013, Mt. Logan Re established separate segregated accounts for its business activity, which will invest in a diversified set of catastrophe exposures.

The following table summarizes the premiums and losses that are ceded by the Company to Mt. Logan Re and assumed by the Company from Mt. Logan Re.

   
Three Months Ended
 
Mt. Logan Re
 
March 31,
 
(Dollars in thousands)
 
2015
   
2014
 
Ceded written premiums
  $ 61,670     $ 28,366  
Ceded earned premiums
    38,683       17,837  
Ceded losses and LAE
    8,314       5,143  
                 
Assumed written premiums
    3,984       9,919  
Assumed earned premiums
    3,984       2,106  
Assumed losses and LAE
    -       -  


14.       RETIREMENT BENEFITS

The Company maintains both qualified and non-qualified defined benefit pension plans and a retiree health plan for its U.S. employees employed prior to April 1, 2010.

Net periodic benefit cost for U.S. employees included the following components for the periods indicated:

Pension Benefits
 
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2015
   
2014
 
Service cost
  $ 2,940     $ 2,460  
Interest cost
    2,457       2,542  
Expected return on plan assets
    (2,903 )     (2,823 )
Amortization of prior service cost
    5       13  
Amortization of net (income) loss
    2,251       1,091  
Net periodic benefit cost
  $ 4,750     $ 3,283  


Other Benefits
 
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2015
   
2014
 
Service cost
  $ 401     $ 407  
Interest cost
    263       342  
Amortization of net (income) loss
    211       82  
Net periodic benefit cost
  $ 875     $ 831  

The Company did not make any contributions to the qualified pension benefit plan for the three months ended March 31, 2015 and 2014.

15.       INCOME TAXES

The Company is domiciled in the United States and has subsidiaries domiciled within the United States with significant branches in Canada and Singapore.  The Company’s non-U.S. branches are subject to income taxation at varying rates in their respective domiciles.

 
24

 
For interim reporting periods, the company is generally required to use the annualized effective tax rate (“AETR”) method, as prescribed by ASC 740-270, Interim Reporting, to calculate its income tax provision.  Under this method, the AETR is applied to the interim year-to-date pre-tax income to determine the income tax expense or benefit for the year-to-date period.  The income tax expense or benefit for a quarter represents the difference between the year-to-date income tax expense or benefit for the current year-to-date period less such amount for the immediately preceding year-to-date period.  Management considers the impact of all known events in its estimation of the Company’s annual pre-tax income and AETR.

16.       SUBSEQUENT EVENTS
 
On April 23, 2015, the Company entered into an agreement to sell all of the outstanding shares of capital stock of Mt. McKinley Insurance Company (“Mt. McKinley”), a Delaware domiciled insurance company and wholly-owned subsidiary of the Company to Clearwater Insurance Company, a Delaware domiciled insurance company.  The purchase price shall be paid in cash and based on the statutory book value of Mt. McKinley as of the closing date, which is expected to be approximately $20,000 thousand. The Company expects to recognize a realized gain of approximately $61,000 thousand on the sale of Mt. McKinley.

The transaction is subject to receipt of insurance regulatory approvals and satisfaction of other customary closing conditions.
 
The transaction meets the criteria for Held for Sale accounting.  In accordance with the guidance, the table below details the approximate assets and liabilities associated with the business classified as Held for Sale. 
 
       
(Dollars in thousands)
     
Investments and cash
  $ 17,000  
Reinsurance recoverables
    146,000  
Deferred tax asset
    35,000  
Other assets
    1,000  
Total assets held for sale
  $ 199,000  
         
Reserve for losses and loss adjustment expenses
  $ 142,000  
Deferred gain on retroactive reinsurance
    97,000  
Other liabilities
    1,000  
Total liabilities held for sale
  $ 240,000  
         
Net liabilities held for sale
  $ (41,000 )
 
 
25

 
ITEM 2.        MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

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, high rates and strong profits followed by periods of abundant capacity, low 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 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 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.  During the second and third quarters of 2013, Canada experienced historic flooding in Alberta and Toronto, which resulted in higher catastrophe rates in these areas during 2014.  Although there were flooding and wind storm events in Europe and Asia in the latter part of 2013, the overall 2013 catastrophe losses for the industry were lower than average.  This lower level of losses, combined with increased competition resulted in downward pressure on rates in certain geographical areas during 2014.  Catastrophe results during 2014 and the first quarter of 2015 were also generally benign, which could have a negative impact on worldwide regional catastrophe markets for the balance of 2015.

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.

 
26

 
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:
 
   
Three Months Ended
 
Percentage
   
March 31,
 
Increase/
(Dollars in millions)
 
2015
 
2014
 
(Decrease)
Gross written premiums
  $ 1,226.8     $ 1,084.5       13.1 %
Net written premiums
    508.4       499.7       1.7 %
                         
REVENUES:
                       
Premiums earned
  $ 521.1     $ 470.4       10.8 %
Net investment income
    72.6       63.8       13.8 %
Net realized capital gains (losses)
    21.3       (4.1 )  
NM 
Other income (expense)
    15.8       (3.1 )  
NM 
Total revenues
    630.8       527.1       19.7 %
                         
CLAIMS AND EXPENSES:
                       
Incurred losses and loss adjustment expenses
    308.9       278.0       11.1 %
Commission, brokerage, taxes and fees
    96.5       76.1       26.9 %
Other underwriting expenses
    48.5       39.3       23.7 %
Corporate expense
    1.6       1.3       23.6 %
Interest, fee and bond issue cost amortization expense
    8.9       7.4       19.1 %
Total claims and expenses
    464.4       402.1       15.5 %
                         
INCOME (LOSS) BEFORE TAXES
    166.4       125.0       33.1 %
Income tax expense (benefit)
    50.4       38.5       30.8 %
NET INCOME (LOSS)
    115.9       86.5       34.1 %
                         
RATIOS:
                 
Point Change
Loss ratio
    59.3 %     59.1 %     0.2  
Commission and brokerage ratio
    18.5 %     16.2 %     2.3  
Other underwriting expense ratio
    9.3 %     8.3 %     1.0  
Combined ratio
    87.1 %     83.6 %     3.5  
                         
                         
   
At
 
At
 
Percentage
   
March 31,
 
December 31,
 
Increase/
(Dollars in millions)
    2015     2014  
(Decrease)
Balance sheet data:
                       
Total investments and cash
  $ 9,536.7     $ 9,572.6       -0.4 %
Total assets
    16,408.3       16,322.3       0.5 %
Loss and loss adjustment expense reserves
    7,805.0       7,843.9       -0.5 %
Total debt
    638.4       638.4       0.0 %
Total liabilities
    11,707.8       11,749.6       -0.4 %
Stockholder's equity
    4,700.5       4,572.7       2.8 %
                         
(NM, not meaningful)
                       
(Some amounts may not reconcile due to rounding)
                       
 

Revenues.
Premiums.  Gross written premiums increased by 13.1% to $1,226.8 million for the three months ended March 31, 2015, compared to $1,084.5 million for the three months ended March 31, 2014, reflecting a $105.2 million, or 46.7%, increase in our insurance business and a $37.1 million, or 4.3%, increase in our reinsurance business.  The rise in insurance premiums was primarily due to increases in crop and workers’ compensation business as well as eight other business units.  The rise in reinsurance premiums was primarily due to an increase in treaty property and catastrophe business, partially offset by approximately $14.7 million negative impact from the year over year movement in exchange rates.  Net written premiums increased by 1.7% to $508.4 million for the three months ended March 31, 2015, compared to $499.7
 
 
27

 
million for the three months ended March 31, 2014.  The variance between the increase in gross written premiums compared to the increase in net written premiums is primarily due to a higher utilization of reinsurance for the crop business and for the quota share contracts, which increased due to the changes in the mix of business.  Premiums earned increased by 10.8% to $521.1 million for the three months ended March 31, 2015, compared to $470.4 million for the three months ended March 31, 2014.  The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

Net Investment Income.  Net investment income increased by 13.8% to $72.6 million for the three months ended March 31, 2015, compared with net investment income of $63.8 million for the three months ended March 31, 2014.  Net pre-tax investment income, as a percentage of average invested assets, was 3.5% for the three months ended March 31, 2015, compared to 3.0% for the three months ended March 31, 2014. The increase in income and yield for the three months ended March 31, 2015 compared to the three months ended March 31, 2014 was primarily the result of an increase in our limited partnership income and an increase in dividends from shares held of the parent.

Net Realized Capital Gains (Losses). Net realized capital gains were $21.3 million for the three months ended March 31, 2015, and net realized capital losses were $4.1 million for the three months ended March 31, 2014.  The $21.3 million was comprised of $57.0 million of gains from fair value re-measurements on fixed maturity securities, equity securities and other invested assets, partially offset by $24.1 million of other-than-temporary impairments and $11.6 million of losses from sales on our fixed maturity and equity securities.  The net realized capital losses of $4.1 million for the three months ended March 31, 2014 were the result of $2.4 million of net realized capital losses from sales on our fixed maturity and equity securities and $1.7 million of losses from fair value re-measurements.

Other Income (Expense).  We recorded other income of $15.8 million for the three months ended March 31, 2015 and other expense of $3.1 million for the three months ended March 31, 2014.  The changes were primarily the result of fluctuations in foreign currency exchange rates for the corresponding periods.

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.
 
   
Three Months Ended March 31,
   
Current
 
Ratio %/
 
Prior
 
Ratio %/
 
Total
 
Ratio %/
(Dollars in millions)
 
Year
 
Pt Change
 
Years
 
Pt Change
 
Incurred
 
Pt Change
2015
                                         
Attritional (a)
  $ 312.8       60.1 %     $ (1.7 )     -0.4 %     $ 311.1       59.7 %  
Catastrophes
    -       0.0 %       (2.2 )     -0.4 %       (2.2 )     -0.4 %  
Total
  $ 312.8       60.1 %     $ (3.9 )     -0.8 %     $ 308.9       59.3 %  
                                                       
2014
                                                     
Attritional (a)
  $ 281.3       59.8 %     $ (0.6 )     -0.1 %     $ 280.7       59.7 %  
Catastrophes
    -       0.0 %       (2.7 )     -0.6 %       (2.7 )     -0.6 %  
Total
  $ 281.3       59.8 %     $ (3.3 )     -0.7 %     $ 278.0       59.1 %  
                                                       
Variance 2015/2014
                                                     
Attritional (a)
  $ 31.5       0.3  
pts
  $ (1.1 )     (0.3 )
pts
  $ 30.4       -  
pts
Catastrophes
    -       -  
pts
    0.5       0.2  
pts
    0.5       0.2  
pts
Total
  $ 31.5       0.3  
pts
  $ (0.6 )     (0.1 )
pts
  $ 30.9       0.2  
pts
                                                       
(a) Attritional losses exclude catastrophe losses.
                                               
(Some amounts may not reconcile due to rounding.)
                                               


Incurred losses and LAE increased by 11.1% to $308.9 million for the three months ended March 31, 2015 compared to $278.0 million for the three months ended March 31, 2014, primarily due to increases in current year attritional losses of $31.5 million resulting primarily from the impact of the increase in

 
28

 
premiums earned.  There were no current year catastrophe losses for the three months ended March 31, 2015 and 2014.

Commission, Brokerage, Taxes and Fees.  Commission, brokerage, taxes and fees increased by 26.9% to $96.5 million for the three months ended March 31, 2015 compared to $76.1 million for the three months ended March 31, 2014.  These changes were primarily due to the impact of the increase in premiums earned, higher contingent commissions and changes in the mix of business.

Other Underwriting Expenses.  Other underwriting expenses were $48.5 million and $39.3 million for the three months ended March 31, 2015 and 2014, respectively.  The increase in other underwriting expenses was mainly due to the impact of the increase in premiums earned.

Corporate Expenses.  Corporate expenses, which are general operating expenses that are not allocated to segments, were comparable at $1.6 million and $1.3 million for the three months ended March 31, 2015 and 2014, respectively.

Interest, Fees and Bond Issue Cost Amortization Expense.  Interest, fees and other bond amortization expense was $8.9 million and $7.4 million for the three months ended March 31, 2015 and 2014, respectively.  The increase was primarily due to the issuance of $400.0 million of senior notes in June, 2014, partially offset by the maturity of $250.0 million of senior notes on October 15, 2014.

Income Tax Expense (Benefit).  Income tax expense was $50.4 million and $38.5 million for the three months ended March 31, 2015 and 2014, respectively.  Income tax expense is primarily a function of the geographic location of the Company’s pre-tax income and the statutory tax rates in those jurisdictions, as affected by tax-exempt investment income.  Variations in the income tax expense generally result from changes in the relative levels of pre-tax income, including the impact of catastrophe losses and net capital gains (losses), among jurisdictions with different tax rates.  The increase in income tax expense for the three months ended March 31, 2015 compared to the three months ended March 31, 2014 was primarily due to higher net realized capital gains.

Net Income (Loss).
Our net income was $115.9 million and $86.5 million for the three months ended March 31, 2015 and 2014, respectively.  The changes were primarily driven by the financial component fluctuations explained above.

Ratios.
Our combined ratio increased by 3.5 points to 87.1% for the three months ended March 31, 2015, compared to 83.6% for the three months ended March 31, 2014.  The loss ratio component increased slightly by 0.2 points for the three months ended March 31, 2015, over the same period last year.  The commission and brokerage ratio components increased 2.3 points for the three months ended March 31, 2015, over the same period last year, primarily due to higher contingent commissions and changes in the mix of business.  The other underwriting expense ratio components increased 1.0 point for the three months ended March 31, 2015, over the same period last year.

Stockholder's Equity.
Stockholders’ equity increased by $127.8 million to $4,700.5 million at March 31, 2015 from $4,572.7 million at December 31, 2014, principally as a result of $115.9 million of net income, $39.6 million of net unrealized appreciation on investments, net of tax, $4.0 million of share-based compensation transactions and $1.6 million of net benefit plan obligation adjustments, partially offset by $33.3 million of net foreign currency translation adjustments.

 
29

 
Consolidated Investment Results

Net Investment Income.
Net investment income increased 13.8% to $72.6 million for the three months ended March 31, 2015 compared to $63.8 million for the three months ended March 31, 2014, primarily due to an increase in income from our limited partnership investments and an increase in dividends from parent’s shares.

The following table shows the components of net investment income for the periods indicated:
 
   
Three Months Ended
 
   
March 31,
 
(Dollars in millions)
 
2015
   
2014
 
Fixed maturities
  $ 48.0     $ 51.1  
Equity securities
    8.7       8.9  
Short-term investments and cash
    0.2       0.2  
Other invested assets
               
Limited partnerships
    7.4       (3.1 )
Dividends from Parent's shares
    9.2       7.3  
Other
    0.6       2.0  
Gross investment income before adjustments
    74.1       66.4  
Funds held interest income (expense)
    2.5       2.1  
Interest income from Parent
    1.1       -  
Gross investment income
    77.7       68.5  
Investment expenses
    (5.1 )     (4.7 )
Net investment income
  $ 72.6     $ 63.8  
                 
(Some amounts may not reconcile due to rounding.)
               


The following tables show a comparison of various investment yields for the periods indicated:
 
 
At
 
At
 
March 31.
 
December 31,
 
2015
 
2014
Imbedded pre-tax yield of cash and invested assets at December 31
3.1%
 
3.1%
Imbedded after-tax yield of cash and invested assets at December 31
2.2%
 
2.2%

 
 
Three Months Ended
 
March 31.
 
2015
 
2014
Annualized pre-tax yield on average cash and invested assets
3.5%
 
3.0%
Annualized after-tax yield on average cash and invested assets
2.5%
 
2.2%

 
30

 
Net Realized Capital Gains (Losses).
The following table presents the composition of our net realized capital gains (losses) for the periods indicated:
 
   
Three Months Ended March 31,
(Dollars in millions)
 
2015
 
2014
 
Variance
Gains (losses) from sales:
                 
Fixed maturity securities, market value
                 
Gains
  $ 2.5     $ 1.3     $ 1.2  
Losses
    (14.0 )     (3.3 )     (10.7 )
Total
    (11.5 )     (2.0 )     (9.5 )
                         
Fixed maturity securities, fair value
                       
Gains
    -       1.2       (1.2 )
Losses
    -       (0.3 )     0.3  
Total
    -       0.9       (0.9 )
                         
Equity securities, fair value
                       
Gains
    5.1       6.6       (1.5 )
Losses
    (5.2 )     (7.9 )     2.7  
Total
    (0.1 )     (1.3 )     1.2  
                         
Total net realized gains (losses) from sales
                       
Gains
    7.7       9.1       (1.4 )
Losses
    (19.2 )     (11.5 )     (7.7 )
Total
    (11.6 )     (2.4 )     (9.2 )
                         
Other than temporary impairments:
    (24.1 )     -       (24.1 )
                         
Gains (losses) from fair value adjustments:
                       
Fixed maturities, fair value
    0.1       -       0.1  
Equity securities, fair value
    20.9       25.8       (4.9 )
Other invested assets, fair value
    36.0       (27.4 )     63.4  
Total
    57.0       (1.7 )     58.7  
                         
Total net realized gains (losses)
  $ 21.3     $ (4.1 )   $ 25.4  
                         
(Some amounts may not reconcile due to rounding)
                       


Net realized capital gains were $21.3 million for the three months ended March 31, 2015, and net realized capital losses were $4.1 million for the three months ended March 31, 2014.  For the three months ended March 31, 2015, we recorded $57.0 million of net realized capital gains due to fair value re-measurements on fixed maturity securities, equity securities and other invested assets, partially offset by $24.1 million of other-than-temporary impairments and $11.6 million of net realized capital losses from sales of fixed maturity and equity securities. The fixed maturity and equity sales for the three months ended March 31, 2015 related primarily to adjusting the portfolios for overall market changes and individual credit shifts.  For the three months ended March 31, 2014, we recorded $2.4 million of net realized capital losses from sales on our fixed maturity and equity securities and $1.7 million of losses from fair value re-measurements.

 
31

 
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 and through general agents, brokers and surplus lines brokers within the U.S and Canada.

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 our 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.
 
   
Three Months Ended March 31,
 
(Dollars in millions)
 
2015
   
2014
   
Variance
   
% Change
 
Gross written premiums
  $ 562.6     $ 530.3     $ 32.3       6.1 %
Net written premiums
    240.7       251.5       (10.8 )     -4.3 %
                                 
Premiums earned
  $ 255.4     $ 218.2     $ 37.2       17.1 %
Incurred losses and LAE
    111.5       116.0       (4.5 )     -3.9 %
Commission and brokerage
    58.4       40.1       18.2       45.4 %
Other underwriting expenses
    11.5       9.5       2.0       21.6 %
Underwriting gain (loss)
  $ 74.1     $ 52.6     $ 21.5       40.8 %
                                 
                           
Point Chg
 
Loss ratio
    43.6 %     53.2 %             (9.6 )
Commission and brokerage ratio
    22.9 %     18.4 %             4.5  
Other underwriting expense ratio
    4.5 %     4.3 %             0.2  
Combined ratio
    71.0 %     75.9 %             (4.9 )
                                 
(Some amounts may not reconcile due to rounding)
                               


Premiums. Gross written premiums increased by 6.1% to $562.6 million for the three months ended March 31, 2015 from $530.3 million for the three months ended March 31, 2014, primarily due to an increase in treaty property and catastrophe business, partially offset by a decline in treaty casualty business.  Net written premiums decreased by 4.3% to $240.7 million for the three months ended March 31, 2015 compared to $251.5 million for the three months ended March 31, 2014.  The variance between the increase in gross written premiums compared to the decrease in net written premiums is primarily due to a higher utilization of reinsurance related to quota share contracts. Premiums earned increased 17.1% to $255.4 million for the

 
32

 
three months ended March 31, 2015 compared to $218.2 million for the three months ended March 31, 2014.  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.
 
   
Three Months Ended March 31,
   
Current
 
Ratio %/
 
Prior
 
Ratio %/
 
Total
 
Ratio %/
(Dollars in millions)
 
Year
 
Pt Change
 
Years
 
Pt Change
 
Incurred
 
Pt Change
2015
                                         
Attritional
  $ 117.5       46.0 %     $ (3.6 )     -1.5 %     $ 113.9       44.5 %  
Catastrophes
    -       0.0 %       (2.4 )     -0.9 %       (2.4 )     -0.9 %  
Total segment
  $ 117.5       46.0 %     $ (6.0 )     -2.5 %     $ 111.5       43.6 %  
                                                       
2014
                                                     
Attritional
  $ 120.6       55.3 %     $ (3.2 )     -1.5 %     $ 117.4       53.8 %  
Catastrophes
    -       0.0 %       (1.4 )     -0.6 %       (1.4 )     -0.6 %  
Total segment
  $ 120.6       55.3 %     $ (4.6 )     -2.1 %     $ 116.0       53.2 %  
                                                       
Variance 2015/2014
                                                     
Attritional
  $ (3.1 )     (9.3 )
pts
  $ (0.4 )     -  
pts
  $ (3.5 )     (9.3 )
pts
Catastrophes
    -       -  
pts
    (1.0 )     (0.3 )
pts
    (1.0 )     (0.3 )
pts
Total segment
  $ (3.1 )     (9.3 )
pts
  $ (1.4 )     (0.4 )
pts
  $ (4.5 )     (9.6 )
pts
                                                       
(Some amounts may not reconcile due to rounding.)
                                               


Incurred losses decreased by 3.9% to $111.5 million for the three months ended March 31, 2015 compared to $116.0 million for the three months ended March 31, 2014, primarily due to a decrease in losses on treaty casualty business and the impact of changes in affiliated quota share agreements, partially offset by the impact of the increase in earned premiums.  There were no current year catastrophe losses for the three months ended March 31, 2015 and 2014.

Segment Expenses.  Commission and brokerage increased by 45.4% to $58.4 million for the three months ended March 31, 2015 compared to $40.1 million for the three months ended March 31, 2014.  This variance was due to the impact of the increase in premiums earned, higher contingent commissions and changes in the mix of business.  Segment other underwriting expenses increased to $11.5 million for the three months ended March 31, 2015 from $9.5 million for the three months ended March 31, 2014 due primarily to the impact of the increase in premiums earned.

 
33

 
International.
The following table presents the underwriting results and ratios for the International segment for the periods indicated.
 
   
Three Months Ended March 31,
 
(Dollars in millions)
 
2015
   
2014
   
Variance
   
% Change
 
Gross written premiums
  $ 333.6     $ 328.9     $ 4.7       1.4 %
Net written premiums
    121.7       141.5       (19.8 )     -14.0 %
                                 
Premiums earned
  $ 140.7     $ 145.0     $ (4.3 )     -3.0 %
Incurred losses and LAE
    101.4       83.6       17.9       21.4 %
Commission and brokerage
    34.0       29.2       4.8       16.6 %
Other underwriting expenses
    8.1       7.8       0.3       3.5 %
Underwriting gain (loss)
  $ (2.9 )   $ 24.4     $ (27.3 )     -111.7 %
                                 
                           
Point Chg
 
Loss ratio
    72.1 %     57.6 %             14.5  
Commission and brokerage ratio
    24.2 %     20.1 %             4.1  
Other underwriting expense ratio
    5.7 %     5.5 %             0.2  
Combined ratio
    102.0 %     83.2 %             18.8  
                                 
(Some amounts may not reconcile due to rounding)
                               


Premiums. Gross written premiums increased by 1.4% to $333.6 million for the three months ended March 31, 2015 compared to $328.9 million for the three months ended March 31, 2014, primarily due to new quota share contracts, partially offset by the negative impact of approximately $12.4 million from the movement of foreign exchange rates.  Net written premiums decreased by 14.0% to $121.7 million for the three months ended March 31, 2015 compared to $141.5 million for the three months ended March 31, 2015.  The variance of the change in gross written premiums compared to the change in net written premiums is due to a higher utilization of reinsurance related to the new quota share contracts.  Premiums earned decreased 3.0% to $140.7 million for the three months ended March 31, 2015 compared to $145.0 million for the three months ended March 31, 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.
 
   
Three Months Ended March 31,
   
Current
 
Ratio %/
 
Prior
 
Ratio %/
 
Total
 
Ratio %/
(Dollars in millions)
 
Year
 
Pt Change
 
Years
 
Pt Change
 
Incurred
 
Pt Change
2015
                                         
Attritional
  $ 99.7       70.9 %     $ 1.6       1.1 %     $ 101.3       72.0 %  
Catastrophes
    -       0.0 %       0.2       0.1 %       0.2       0.1 %  
Total segment
  $ 99.7       70.9 %     $ 1.7       1.2 %     $ 101.4       72.1 %  
                                                       
2014
                                                     
Attritional
  $ 84.7       58.4 %     $ 0.2       0.2 %     $ 85.0       58.6 %  
Catastrophes
    -       0.0 %       (1.4 )     -1.0 %       (1.4 )     -1.0 %  
Total segment
  $ 84.7       58.4 %     $ (1.1 )     -0.8 %     $ 83.6       57.6 %  
                                                       
Variance 2015/2014
                                                     
Attritional
  $ 15.0       12.5  
pts
  $ 1.4       0.9  
pts
  $ 16.3       13.4  
pts
Catastrophes
    -       -  
pts
    1.6       1.1  
pts
    1.6       1.1  
pts
Total segment
  $ 15.0       12.5  
pts
  $ 2.8       2.0  
pts
  $ 17.9       14.5  
pts
                                                       
(Some amounts may not reconcile due to rounding.)
                                               

 
34

 
Incurred losses and LAE increased by 21.4% to $101.4 million for the three months ended March 31, 2015 compared to $83.6 million for the three months ended March 31, 2014, due to the increase in current year attritional losses of $15.0 million. The increase in attritional losses was primarily due to higher losses in the Middle East, Africa and Latin America. There were no current year catastrophe losses for the three months ended March 31, 2015 and 2014.

Segment Expenses. Commission and brokerage increased 16.6% to $34.0 million for the three months ended March 31, 2015 compared to $29.2 million for the three months ended March 31, 2014.  The increase was primarily due to the impact of changes in affiliated quota share agreements and the impact of changes in the mix of business.  Segment other underwriting expenses slightly increased to $8.1 million for the three months ended March 31, 2015 compared to $7.8 million for the three months ended March 31, 2014.

Insurance.
The following table presents the underwriting results and ratios for the Insurance segment for the periods indicated.
 
   
Three Months Ended March 31,
 
(Dollars in millions)
 
2015
   
2014
   
Variance
   
% Change
 
Gross written premiums
  $ 330.5     $ 225.3     $ 105.2       46.7 %
Net written premiums
    146.1       106.7       39.3       36.8 %
                                 
Premiums earned
  $ 125.0     $ 107.3     $ 17.7       16.5 %
Incurred losses and LAE
    96.0       78.5       17.5       22.3 %
Commission and brokerage
    4.2       6.8       (2.6 )     -38.6 %
Other underwriting expenses
    28.9       21.9       7.0       31.8 %
Underwriting gain (loss)
  $ (4.1 )   $ -     $ (4.1 )  
NM 
                                 
                           
Point Chg
 
Loss ratio
    76.8 %     73.2 %             3.6  
Commission and brokerage ratio
    3.3 %     6.3 %             (3.0 )
Other underwriting expense ratio
    23.2 %     20.5 %             2.7  
Combined ratio
    103.3 %     100.0 %             3.3  
                                 
(NM, not meaningful)
                               
(Some amounts may not reconcile due to rounding)
                               


Premiums.  Gross written premiums increased by 46.7% to $330.5 million for the three months ended March 31, 2015 compared to $225.3 million for the three months ended March 31, 2014.  This increase was primarily driven by an increase in crop and workers’ compensation business as well as eight other business units. Net written premiums increased by 36.8% to $146.1 million for the three months ended March 31, 2015 compared to $106.7 million for the three months ended March 31, 2014, which is consistent with the change in gross written premiums.  Premiums earned increased 16.5% to $125.0 million for the three months ended March 31, 2015 compared to $107.3 million for the three months ended March 31, 2014.  The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

 
35

 
Incurred Losses and LAE. The following table presents the incurred losses and LAE for the Insurance segment for the periods indicated.
 
   
Three Months Ended March 31,
   
Current
 
Ratio %/
 
Prior
 
Ratio %/
 
Total
 
Ratio %/
(Dollars in millions)
 
Year
 
Pt Change
 
Years
 
Pt Change
 
Incurred
 
Pt Change
2015
                                         
Attritional
  $ 95.6       76.5 %     $ 0.4       0.3 %     $ 96.0       76.8 %  
Catastrophes
    -       0.0 %       -       0.0 %       -       0.0 %  
Total segment
  $ 95.6       76.5 %     $ 0.4       0.3 %     $ 96.0       76.8 %  
                                                       
2014
                                                     
Attritional
  $ 76.0       70.8 %     $ 2.4       2.3 %     $ 78.4       73.1 %  
Catastrophes
    -       0.0 %       0.1       0.1 %       0.1       0.1 %  
Total segment
  $ 76.0       70.8 %     $ 2.5       2.4 %     $ 78.5       73.2 %  
                                                       
Variance 2015/2014
                                                     
Attritional
  $ 19.6       5.7  
pts
  $ (2.0 )     (2.0 )
pts
  $ 17.6       3.7  
pts
Catastrophes
    -       -  
pts
    (0.1 )     (0.1 )
pts
    (0.1 )     (0.1 )
pts
Total segment
  $ 19.6       5.7  
pts
  $ (2.1 )     (2.1 )
pts
  $ 17.5       3.6  
pts
                                                       
(Some amounts may not reconcile due to rounding.)
                                               


Incurred losses and LAE increased by 22.3% to $96.0 million for the three months ended March 31, 2015 compared to $78.5 million for the three months ended March 31, 2014, mainly due to an increase of $19.6 million in current year attritional losses.  This rise was primarily related to the impact of the increase in premiums earned.  There were no current year catastrophe losses for the three months ended March 31, 2015 and 2014.

Segment Expenses. Commission and brokerage decreased 38.6% to $4.2 million for the three months ended March 31, 2015 compared to $6.8 million for the three months ended March 31, 2014.  This increase was primarily due to the impact of changes in affiliated quota share agreements and the impact of changes in the mix of business, partially offset by the impact of the increase in premiums earned.  Segment other underwriting expenses increased to $28.9 million for the three months ended March 31, 2015 compared to $21.9 million for the three months ended March 31, 2014 primarily due to the impact of the increase in premiums earned.

Market Sensitive Instruments.
The SEC’s Financial Reporting Release #48 requires registrants to clarify and expand upon the existing financial statement disclosure requirements for derivative financial instruments, derivative commodity instruments and other financial instruments (collectively, “market sensitive instruments”).  We do not generally enter into market sensitive instruments for trading purposes.

Our current investment strategy seeks to maximize after-tax income through a high quality, diversified, taxable and tax-preferenced fixed maturity portfolio, while maintaining an adequate level of liquidity.  Our mix of taxable and tax-preferenced investments is adjusted periodically, consistent with our current and projected operating results, market conditions and our tax position.  The fixed maturity securities in the investment portfolio are comprised of non-trading available for sale securities.  Additionally, we have invested in equity securities.

The overall investment strategy considers the scope of present and anticipated Company operations.  In particular, estimates of the financial impact resulting from non-investment asset and liability transactions, together with our capital structure and other factors, are used to develop a net liability analysis.  This analysis includes estimated payout characteristics for which our investments provide liquidity.  This analysis is considered in the development of specific investment strategies for asset allocation, duration and credit quality.  The change in overall market sensitive risk exposure principally reflects the asset changes that took place during the period.

 
36

 
Interest Rate Risk.  Our $9.5 billion investment portfolio, at March 31, 2015, is principally comprised of fixed maturity securities, which are generally subject to interest rate risk and some foreign currency exchange rate risk, and some equity securities, which are subject to price fluctuations and some foreign exchange rate risk.  The overall economic impact of the foreign exchange risks on the investment portfolio is partially mitigated by changes in the dollar value of foreign currency denominated liabilities and their associated income statement impact.

Interest rate risk is the potential change in value of the fixed maturity securities portfolio, including short-term investments, from a change in market interest rates.  In a declining interest rate environment, it includes prepayment risk on the $633.9 million of mortgage-backed securities in the $5,227.3 million fixed maturity portfolio.  Prepayment risk results from potential accelerated principal payments that shorten the average life and thus the expected yield of the security.

The table below displays the potential impact of market value fluctuations and after-tax unrealized appreciation on our fixed maturity portfolio (including $559.9 million of short-term investments) for the period indicated based on upward and downward parallel and immediate 100 and 200 basis point shifts in interest rates.  For legal entities with a U.S. dollar functional currency, this modeling was performed on each security individually.  To generate appropriate price estimates for mortgage-backed securities, changes in prepayment expectations under different interest rate environments were taken into account.  For legal entities with non-U.S. dollar functional currency, the effective duration of the involved portfolio of securities was used as a proxy for the market value change under the various interest rate change scenarios.
 
   
Impact of Interest Rate Shift in Basis Points
   
At March 31, 2015
(Dollars in millions)
   -200    -100    0    100    200
Total Market/Fair Value
  $ 6,077.5     $ 5,933.6     $ 5,787.2     $ 5,634.7     $ 5,477.6  
Market/Fair Value Change from Base (%)
    5.0 %     2.5 %     0.0 %     -2.6 %     -5.3 %
Change in Unrealized Appreciation
                                       
After-tax from Base ($)
  $ 188.7     $ 95.1     $ -     $ (99.1 )   $ (201.2 )


We had $7,805.0 million and $7,843.9 million of gross reserves for losses and LAE as of March 31, 2015 and December 31, 2014, respectively.  These amounts are recorded at their nominal value, as opposed to present value, which would reflect a discount adjustment to reflect the time value of money.  Since losses are paid out over a period of time, the present value of the reserves is less than the nominal value.  As interest rates rise, the present value of the reserves decreases and, conversely, as interest rates decline, the present value increases.  These movements are the opposite of the interest rate impacts on the fair value of investments.  While the difference between present value and nominal value is not reflected in our financial statements, our financial results will include investment income over time from the investment portfolio until the claims are paid.  Our loss and loss reserve obligations have an expected duration that is reasonably consistent with our fixed income portfolio.

Equity Risk.  Equity risk is the potential change in fair and/or market value of the common stock and preferred stock portfolios arising from changing prices.  Our equity investments consist of a diversified portfolio of individual securities.  The primary objective of the equity portfolio is to obtain greater total return relative to bonds over time through market appreciation and income.

The table below displays the impact on fair/market value and after-tax change in fair/market value of a 10% and 20% change in equity prices up and down for the periods indicated.
 
   
Impact of Percentage Change in Equity Fair/Market Values
 
   
At March 31, 2015
 
(Dollars in millions)
   -20%    -10%    0%    10%    20%
Fair/Market Value of the Equity Portfolio
  $ 1,080.1     $ 1,215.1     $ 1,350.1     $ 1,485.1     $ 1,620.1  
After-tax Change in Fair/Market Value
    (175.5 )     (87.8 )     -       87.8       175.5  

 
37

 
Foreign Exchange Risk.  Foreign currency risk is the potential change in value, income and cash flow arising from adverse changes in foreign currency exchange rates.  Each of our non-U.S. (“foreign”) operations maintains capital in the currency of the country of its geographic location consistent with local regulatory guidelines.  Each foreign operation may conduct business in its local currency, as well as the currency of other countries in which it operates.  The primary foreign currency exposures for these foreign operations are the Singapore and Canadian Dollars.  We mitigate foreign exchange exposure by generally matching the currency and duration of our assets to our corresponding operating liabilities.  In accordance with FASB guidance, we translate the assets, liabilities and income of non-U.S. dollar functional currency legal entities to the U.S. dollar.  This translation amount is reported as a component of other comprehensive income.  As of March 31, 2015, there has been no material change in exposure to foreign exchange rates as compared to December 31, 2014.

SAFE HARBOR DISCLOSURE
This report contains forward-looking statements within the meaning of the U.S. federal securities laws.  We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in the federal securities laws.  In some cases, these statements can be identified by the use of forward-looking words such as “may”, “will”, “should”, “could”, “anticipate”, “estimate”, “expect”, “plan”, “believe”, “predict”, “potential” and “intend”.  Forward-looking statements contained in this report include information regarding our reserves for losses and LAE, the adequacy of our provision for uncollectible balances, estimates of our catastrophe exposure, the effects of catastrophic events on our financial statements and the ability of our subsidiaries to pay dividends.  Forward-looking statements only reflect our expectations and are not guarantees of performance.  These statements involve risks, uncertainties and assumptions.  Actual events or results may differ materially from our expectations.  Important factors that could cause our actual events or results to be materially different from our expectations include those discussed under the caption ITEM 1A, “Risk Factors” in the Company’s most recent 10-K filing.  We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

ITEM 3.        QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk Instruments.  See “Market Sensitive Instruments” in PART I – ITEM 2.


ITEM 4.        CONTROLS AND PROCEDURES

As of the end of the period covered by this report, our management carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)).  Based on their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.  Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.  Based on that evaluation, there has been no such change during the quarter covered by this report.

 
38

 
PART II

ITEM 1.        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.


ITEM 1A.      RISK FACTORS

No material changes.


ITEM 2.        UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.


ITEM 3.        DEFAULTS UPON SENIOR SECURITIES

None.


ITEM 4.        MINE SAFETY DISCLOSURES

Not applicable.


ITEM 5.        OTHER INFORMATION

None.

 
39

 
ITEM 6.        EXHIBITS

Exhibit Index:
   
     
Exhibit No.
Description
 
     
   31.1
Section 302 Certification of Dominic J. Addesso
 
     
   31.2
Section 302 Certification of Craig Howie
 
     
   32.1
Section 906 Certification of Dominic J. Addesso and Craig Howie
 
     
   101.INS
XBRL Instance Document
 
     
   101.SCH
XBRL Taxonomy Extension Schema
 
     
   101.CAL
XBRL Taxonomy Extension Calculation Linkbase
 
     
   101.DEF
XBRL Taxonomy Extension Definition Linkbase
 
     
   101.LAB
XBRL Taxonomy Extension Labels Linkbase
 
     
   101.PRE
XBRL Taxonomy Extension Presentation Linkbase
 
     

 
40

 
Everest Reinsurance Holdings, Inc.

Signatures



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
Everest Reinsurance Holdings, Inc.
 
(Registrant)
 
     
     
 
/S/ CRAIG HOWIE
 
 
Craig Howie
 
 
Executive Vice President and
 
   Chief Financial Officer
 
     
 
(Duly Authorized Officer and Principal Financial Officer)


Dated: May 15, 2015