SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: Commission File Number:
SEPTEMBER 30, 2000 1-15731
---------------------- -----------------------
EVEREST RE GROUP, LTD.
------------------------------
(Exact name of Registrant as specified in its charter)
BERMUDA NOT APPLICABLE
------------------------ ----------------------------
(State or other juris- (IRS Employer Identification
diction of incorporation Number)
or organization)
C/O ABG FINANCIAL & MANAGEMENT SERVICES, INC.
PARKER HOUSE
WILDEY BUSINESS PARK, WILDEY ROAD
ST. MICHAEL, BARBADOS
(246) 436-6287
(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 the filing
requirements for at least the past 90 days.
YES X NO
------- -------
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 November 7, 2000
----- ----------------------------
COMMON SHARES, $.01 PAR VALUE 45,847,852
<PAGE>
EVEREST RE GROUP, LTD.
INDEX TO FORM 10-Q
PART I
FINANCIAL INFORMATION
---------------------
PAGE
----
ITEM 1. FINANCIAL STATEMENTS
--------------------
Consolidated Balance Sheets at September 30, 2000
(unaudited) and December 31, 1999 3
Consolidated Statements of Operations and Comprehensive
Income for the three months and nine months ended
September 30, 2000 and 1999 (unaudited) 4
Consolidated Statements of Changes in Shareholders' Equity
for the three months and nine months ended September 30,
2000 and 1999 (unaudited) 5
Consolidated Statements of Cash Flows for the three months
and nine months ended September 30, 2000 and 1999
(unaudited) 6
Notes to Consolidated Interim Financial Statements (unaudited) 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS 17
-------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 28
----------------------------------------------------------
PART II
OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS 29
-----------------
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 29
-----------------------------------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES None
-------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None
---------------------------------------------------
ITEM 5. OTHER INFORMATION None
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 29
--------------------------------
<PAGE>
Part I - Item 1
EVEREST RE GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value per share)
<TABLE>
<CAPTION>
September 30, December 31,
------------- ------------
2000 1999
------------- ------------
<S> <C> <C>
ASSETS: (unaudited)
Fixed maturities - available
for sale, at market value
(amortized cost: 2000,
$4,789,772; 1999, $3,940,625) $ 4,806,405 $ 3,885,278
Equity securities, at market
value (cost: 2000, $24,021;
1999, $50,224) 41,737 90,693
Short-term investments 118,210 73,558
Other invested assets 29,542 27,482
Cash 66,326 62,227
------------- ------------
Total investments and cash 5,062,220 4,139,238
Accrued investment income 82,590 64,898
Premiums receivable 358,577 294,941
Reinsurance receivables 468,389 742,513
Funds held by reinsureds 168,376 157,237
Deferred acquisition costs 97,806 82,713
Prepaid reinsurance premiums 44,623 9,582
Deferred tax asset 193,253 188,326
Other assets 32,850 24,854
------------- ------------
TOTAL ASSETS $ 6,508,684 $ 5,704,302
============= ============
LIABILITIES:
Reserve for losses and
adjustment expenses $ 3,780,914 $ 3,646,992
Unearned premium reserve 384,120 308,563
Funds held under reinsurance
treaties 91,054 178,520
Losses in the course of
payment 64,143 67,065
Contingent commissions 23,848 58,169
Other net payable to
reinsurers 51,998 13,217
Current federal income taxes (11,511) (4,475)
8.5% Senior notes due
3/15/2005 249,597 -
8.75% Senior notes due
3/15/2010 198,986 -
Revolving credit agreement
borrowings 137,000 59,000
Accrued interest on debt and
borrowings 2,278 106
Other liabilities 65,428 49,663
------------- ------------
Total liabilities 5,037,855 4,376,820
------------- -------------
SHAREHOLDERS' EQUITY:
Preferred shares, par value:
$0.01; 50 million shares
authorized; no shares
issued and outstanding - -
Common shares, par value:
$0.01; 200 million shares
authorized; 45.8 million
shares issued in 2000 and
50.9 million shares
issued in 1999 458 509
Additional paid-in capital 253,525 390,912
Unearned compensation (187) (109)
Accumulated other
comprehensive income, net
of deferred income taxes
of $6.6 million in 2000
and deferred income taxes
benefit of $9.1 million
in 1999 15,422 (16,701)
Retained earnings 1,201,666 1,074,941
Treasury shares, at cost;
0.0 million shares in 2000
and 4.4 million shares
in 1999 (55) (122,070)
------------- ------------
Total shareholders' equity 1,470,829 1,327,482
------------- ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 6,508,684 $ 5,704,302
============= ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
EVEREST RE GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -------------------------
2000 1999 2000 1999
--------- --------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Premiums earned $ 291,191 $ 285,480 $ 843,155 $ 795,034
Net investment
income 78,897 62,232 218,353 188,882
Net realized
capital (loss) (90) (7,686) (459) (17,139)
Other income 605 1,860 1,045 258
--------- --------- ---------- ----------
Total revenues 370,603 341,886 1,062,094 967,035
--------- --------- ---------- ----------
CLAIMS AND EXPENSES:
Incurred loss and
loss adjustment
expenses 219,953 203,199 650,011 568,920
Commission, brokerage,
taxes and fees 65,863 78,143 177,793 214,384
Other underwriting
expenses 12,826 12,089 37,542 36,073
Interest expense on
senior notes 9,831 - 21,173 -
Interest expense on
credit facility 2,100 452 5,451 736
--------- --------- ---------- ----------
Total claims and
expenses 310,573 293,883 891,970 820,113
--------- --------- ---------- ----------
INCOME BEFORE TAXES 60,030 48,003 170,124 146,922
Income tax 12,343 8,794 35,150 28,406
--------- --------- ---------- ----------
NET INCOME $ 47,687 $ 39,209 $ 134,974 $ 118,516
========= ========= ========== ==========
Other comprehensive
income/(loss), net
of tax 24,619 (57,314) 32,123 (155,835)
--------- --------- ---------- ----------
COMPREHENSIVE INCOME/
(LOSS) $ 72,306 $ (18,105) $ 167,097 $ (37,319)
========= ========= ========== ==========
PER SHARE DATA:
Average shares
outstanding (000's) 45,834 48,618 45,848 49,029
Net income per
common share - basic $ 1.04 $ 0.81 $ 2.94 $ 2.42
========= ========= ========== ==========
Average diluted
shares outstanding
(000's) 46,414 48,796 46,181 49,236
Net income per common
share - diluted $ 1.03 $ 0.80 $ 2.92 $ 2.41
========= ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
EVEREST RE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C>
COMMON SHARES (SHARES
OUTSTANDING):
Balance, beginning of
period 45,821,341 48,654,228 46,457,817 49,989,204
Issued during the period 26,511 - 38,655 16,800
Treasury shares acquired
during the period - (500,297) (650,400) (1,854,417)
Treasury shares reissued
during the period - 1,200 1,780 3,544
---------- ---------- ---------- ----------
Balance, end of period 45,847,852 48,155,131 45,847,852 48,155,131
========== ========== ========== ==========
COMMON SHARES (PAR VALUE):
Balance, beginning of
period $ 458 $ 509 $ 509 $ 509
Retirement of common shares
during the period - - (51) -
Issued during the period - - - -
---------- ---------- ---------- ----------
Balance, end of period 458 509 458 509
---------- ---------- ---------- ----------
ADDITIONAL PAID IN CAPITAL:
Balance, beginning of
period 252,769 390,891 390,912 390,559
Retirement of treasury
shares during the period - - (138,546) -
Common shares issued
during the period 756 - 1,161 307
Treasury shares reissued
during the period - 11 (2) 36
---------- ---------- ---------- ----------
Balance, end of period 253,525 390,902 253,525 390,902
---------- ---------- ---------- ----------
UNEARNED COMPENSATION:
Balance, beginning of
period (64) (160) (109) (240)
Net increase during the
period (123) 29 (78) 109
---------- ---------- ---------- ----------
Balance, end of period (187) (131) (187) (131)
---------- ---------- ---------- ----------
ACCUMULATED OTHER
COMPREHENSIVE INCOME, NET
OF DEFERRED INCOME TAXES:
Balance, beginning of
period (9,197) 86,997 (16,701) 185,518
Net increase (decrease)
during the period 24,619 (57,314) 32,123 (155,835)
---------- ---------- ---------- ----------
Balance, end of period 15,422 29,683 15,422 29,683
---------- ---------- ---------- ----------
RETAINED EARNINGS:
Balance, beginning of
period 1,156,730 1,001,906 1,074,941 928,500
Net income 47,687 39,209 134,974 118,516
Dividends declared ($0.06
and $0.18 per share in
2000 and 1999) (2,751) (2,920) (8,249) (8,821)
---------- ---------- ---------- ----------
Balance, end of period 1,201,666 1,038,195 1,201,666 1,038,195
---------- ---------- ---------- ----------
TREASURY SHARES AT COST:
Balance, beginning of
period (55) (69,386) (122,070) (25,642)
Retirement of treasury
shares during the period - - 138,399 -
Treasury shares acquired
during the period - (12,011) (16,426) (55,810)
Treasury shares reissued
during the period - 28 42 83
---------- ---------- ---------- ----------
Balance, end of period (55) (81,369) (55) (81,369)
---------- ---------- ---------- ----------
TOTAL SHAREHOLDERS'
EQUITY, END OF PERIOD $1,470,829 $1,377,789 $1,470,829 $1,377,789
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
EVEREST RE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- -----------------------
2000 1999 2000 1999
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING (unaudited)
ACTIVITIES:
Net income $ 47,687 $ 39,209 $ 134,974 $ 118,516
Adjustments to reconcile
net income to net cash
provided by operating
activities net of effects
from the purchase of Mt.
McKinley Insurance Company:
(Increase) in premiums
receivable (22,045) (18,483) (69,207) (35,324)
Decrease in funds
held, net 7,387 46,572 1,419 26,474
(Increase) decrease in
reinsurance receivables (14,400) 14,345 (32,218) 143,046
Decrease (increase) in
deferred tax asset 4,122 (6,959) (360) (16,141)
Increase (decrease) in
reserve for losses and
loss adjustment expense 24,651 (22,781) 8,787 (85,629)
Increase in unearned
premiums 33,185 2,511 78,113 11,159
(Increase) in other assets
and liabilities (52,959) (36,783) (65,552) (46,746)
Non cash compensation
expense (123) 29 (78) 109
Accrual of bond discount/
amortization of bond
premium (2,446) (1,060) (7,557) (3,600)
Amortization of underwriting
discount on senior notes 36 - 76 -
Realized capital losses 90 7,686 459 17,139
--------- --------- ---------- ----------
Net cash provided by
operating activities 25,185 24,286 48,856 129,003
--------- --------- ---------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from fixed
maturities matured/called
- available for sale 61,965 51,294 150,770 174,973
Proceeds from fixed
maturities sold
- available for sale 23,664 321,662 434,801 648,756
Proceeds from equity
securities sold - 26,647 48,267 29,267
Proceeds from other
invested assets sold - 50 - 181
Cost of fixed maturities
acquired - available
for sale (512,133) (386,479) (1,482,316) (924,124)
Cost of equity securities
acquired (1,107) (4,570) (2,930) (5,215)
Cost of other invested
assets acquired (18) (781) (1,576) (2,610)
Net sales (purchases) of
short-term securities 35,645 (4,279) (41,404) (22,994)
Net (decrease) increase
in unsettled securities
transactions (6,313) (9,087) 5,555 4,964
Payment for purchase of
Mt. McKinley Insurance
Company, net of cash
acquired 349,743 - 349,743 -
--------- --------- ---------- ----------
Net cash (used in)
investing activities (48,554) (5,543) (539,090) (96,802)
--------- --------- ---------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Acquisition of treasury
shares net of reissuances - (11,962) (16,533) (55,691)
Common shares issued
during the period 756 (10) 1,110 307
Dividends paid to
shareholders (2,751) (2,920) (8,249) (8,821)
Proceeds from issuance
of senior notes - - 448,507 -
Net borrowing on revolving
credit agreement 31,000 - 78,000 35,000
--------- --------- ---------- ----------
Net cash provided by
(used in) financing
activities 29,005 (14,892) 502,835 (29,205)
--------- --------- ---------- ----------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH (6,147) 797 (8,502) (3,564)
--------- --------- ---------- ----------
Net (decrease) increase
in cash (511) 4,648 4,099 (568)
Cash, beginning of period 66,837 34,110 62,227 39,326
--------- --------- ---------- ----------
Cash, end of period $ 66,326 $ 38,758 $ 66,326 $ 38,758
========= ========= ========== ==========
SUPPLEMENTAL CASH FLOW
INFORMATION CASH
TRANSACTIONS:
Income taxes paid, net $ 16,553 $ 15,989 $ 55,072 $ 49,623
Interest paid $ 21,467 $ - $ 24,377 $ 213
NON-CASH FINANCING
TRANSACTION:
Issuance of common shares $ (123) $ 29 $ (78) $ 109
</TABLE>
In the quarter ended September 30, 2000, the Company purchased all of the
capital stock of Mt. McKinley Insurance Company for $51,800. In conjunction with
the acquisition, the fair value of assets acquired was $679,672 and liabilities
assumed was $627,872.
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
EVEREST RE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
1. GENERAL
On February 24, 2000, a corporate restructuring was completed and Everest Re
Group, Ltd. ("Group") became the new parent holding company of Everest
Reinsurance Holdings, Inc. ("Holdings"), which remains the holding company for
Group's U.S. based operations. The "Company" means Group and its subsidiaries,
except when referring to periods prior to February 24, 2000, when it means
Holdings and its subsidiaries.
The consolidated financial statements of the Company for the three months and
nine months ended September 30, 2000 and 1999 include all adjustments,
consisting of normal recurring accruals, which, in the opinion of management,
are necessary for a fair presentation of the results on an interim basis.
Certain financial information which is normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
has been omitted since it is not required for interim reporting purposes. The
year end consolidated balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally accepted
accounting principles. The results for the three months and nine months ended
September 30, 2000 and 1999 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, 1999, 1998 and 1997 included in the Company's most recent Form 10-K
filing.
2. ACQUISITION OF GIBRALTAR CASUALTY COMPANY
On September 19, 2000, Holdings completed the acquisition of all of the issued
and outstanding capital stock of Gibraltar Casualty Company ("Gibraltar") from
The Prudential Insurance Company of America ("The Prudential") pursuant to a
Stock Purchase Agreement between The Prudential and Holdings dated February 24,
2000 and amended on August 8, 2000 (the "Stock Purchase Agreement"). As a result
of the acquisition, Gibraltar became a wholly owned subsidiary of Holdings and,
immediately following the acquisition, its name was changed to Mt. McKinley
Insurance Company ("Mt. McKinley").
Mt. McKinley, a run-off property and casualty insurer in the United States, has
had a long relationship with Holdings and its principal operating company,
Everest Reinsurance Company ("Everest Re"). Mt. McKinley was formed in 1978 by
Everest Re and wrote direct insurance until 1985, when it was placed in run-off.
In 1991, Mt. McKinley became a subsidiary of The Prudential. Mt. McKinley is
also a reinsurer of Everest Re (all as detailed in filings with the Securities
and Exchange Commission). Under a series of transactions dating to 1986, Mt.
McKinley reinsured several components of Everest Re's business. In particular,
Mt. McKinley provided stop-loss reinsurance protection, in connection with
the Company's October 5, 1995 Initial Public Offering ("IPO"), for any
adverse loss development on Everest Re's June 30, 1995 (December 31,
1994 for catastrophe losses) reserves, with $375.0 million in limits,
of which $89.4 million remains available (the "Stop Loss Agreement").
The Stop Loss Agreement and other reinsurance contracts between
Mt. McKinley and Everest Re remain in effect following the
7
<PAGE>
EVEREST RE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
acquisition. However, these contracts have become transactions with affiliates
with the financial impact eliminated through inter-company accounts.
3. CONTINGENCIES
The Company continues to receive claims under expired contracts which assert
alleged injuries and/or damages relating to or resulting from toxic torts, toxic
waste and other hazardous substances, such as asbestos. The Company's asbestos
claims typically involve potential liability for bodily injury from exposure to
asbestos or for property damage resulting from asbestos or products containing
asbestos. The Company's environmental claims typically involve potential
liability for (a) the mitigation or remediation of environmental contamination
or (b) bodily injury or property damages caused by the release of hazardous
substances into the land, air or water.
The Company's reserves include an estimate of the Company's ultimate liability
for asbestos and environmental claims for which ultimate value cannot be
estimated using traditional reserving techniques. There are significant
uncertainties in estimating the amount of the Company's potential losses from
asbestos and environmental claims. Among the complications are: (a) potentially
long waiting periods between exposure and manifestation of any bodily injury or
property damage; (b) difficulty in identifying sources of asbestos or
environmental contamination; (c) difficulty in properly allocating
responsibility and/or liability for asbestos or environmental damage; (d)
changes in underlying laws and judicial interpretation of those laws; (e)
potential for an asbestos or environmental claim to involve many insurance
providers over many policy periods; (f) long reporting delays, both from
insureds to insurance companies and ceding companies to reinsurers; (g)
historical data concerning asbestos and environmental losses, which is more
limited than historical information on other types of casualty claims; (h)
questions concerning interpretation and application of insurance and reinsurance
coverage; and (i) uncertainty regarding the number and identity of insureds with
potential asbestos or environmental exposure.
Although these complications have become less severe in recent years, management
believes that these factors continue to render reserves for asbestos and
environmental losses significantly less subject to traditional actuarial methods
than are reserves on other types of losses. Given these uncertainties,
management believes that no meaningful range for such ultimate losses can be
established. The Company establishes reserves to the extent that, in the
judgement of management, the facts and prevailing law reflect an exposure for
the Company or its ceding companies. In connection with the acquisition of Mt.
McKinley, which has significant exposure to asbestos and environmental claims,
Prudential Property and Casualty Insurance Company ("Prupac"), a subsidiary
of The Prudential, provided reinsurance to Mt. McKinley covering 80%
($160.0 million) of the first $200.0 million of any adverse development
of Mt. McKinley's reserves as of September 19, 2000 and The Prudential
guaranteed Prupac's obligations to Mt. McKinley. Due to the uncertainties
discussed above, the ultimate losses may vary materially
8
<PAGE>
EVEREST RE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
from current loss reserves and, depending on coverage under the Company's
various reinsurance arrangements, could have a material adverse effect on the
Company's future financial condition, results of operations and cash flows.
The following table shows the development of prior year asbestos and
environmental reserves on both a gross and net of retrocessional basis for the
three months and nine months ended September 30, 2000 and 1999:
<TABLE>
<CAPTION>
(dollar amounts in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
----------------------------------------------------
<S> <C> <C> <C> <C>
Gross basis:
Beginning of period reserves $ 580,268 $ 639,493 $ 614,236 $ 660,793
Incurred losses - 469 - 3,054
Paid losses (1) 153,035 (13,116) 119,067 (37,001)
-----------------------------------------------------
End of period reserves $ 733,303 $ 626,846 $ 733,303 $ 626,846
====================================================
Net basis:
Beginning of period reserves $ 344,904 $ 373,013 $ 365,069 $ 263,542
Incurred losses - - - -
Paid losses (1) (2) 305,877 (6,014) 285,712 103,457
----------------------------------------------------
End of period reserves $ 650,781 $ 366,999 $ 650,781 $ 366,999
====================================================
</TABLE>
(1) Paid losses for the three months and nine months ended September 30, 2000
were reduced by $161.4 million gross and $310.8 million net, respectively,
reflecting the incoming reserves at the acquisition of Mt. McKinley,
together with the impact of eliminating consolidation entries with respect
to inter-company reinsurance pre-dating the acquisition.
(2) $0.0 million and $118.8 million were ceded as paid losses under the Stop
Loss Agreement in the three months and nine months ended September 30,
1999, respectively.
At September 30, 2000, the gross reserves for asbestos and environmental losses
were comprised of $114.1 million representing case reserves reported by ceding
companies, $77.7 million representing additional case reserves established by
the Company on assumed reinsurance claims, $125.3 million representing case
reserves established by the Company on direct excess insurance claims, including
Mt. McKinley, and $416.2 million representing incurred but not reported ("IBNR")
reserves.
9
<PAGE>
EVEREST RE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
The Company is involved from time to time in ordinary routine litigation and
arbitration proceedings incidental to its business. The Company does not believe
that there are any other material pending legal proceedings to which it or any
of its subsidiaries or their properties are subject.
The Prudential sells annuities which are purchased by property and casualty
insurance companies to settle certain types of claim liabilities. In 1993 and
prior years, the Company, for a fee, accepted the claim payment obligation of
these property and casualty insurers, and, concurrently, became the owner of the
annuity or assignee of the annuity proceeds. In these circumstances, the Company
would be liable if The Prudential were unable to make the annuity payments. The
estimated cost to replace all such annuities for which the Company was
contingently liable at September 30, 2000 was $141.9 million.
The Company has purchased annuities from an unaffiliated life insurance company
to settle certain claim liabilities of the Company. Should the life insurance
company become unable to make the annuity payments, the Company would be liable
for those claim liabilities. The estimated cost to replace such annuities at
September 30, 2000 was $12.4 million.
10
<PAGE>
EVEREST RE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
4. EARNINGS PER SHARE
Net income per common share has been computed as follows:
<TABLE>
<CAPTION>
(shares and dollar amounts
in thousands except per
share amounts) Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-------------------------------------------------
<S> <C> <C> <C> <C>
Net income (numerator) $ 47,687 $ 39,209 $ 134,974 $ 118,516
=================================================
Weighted average common and
effect of dilutive shares
used in the computation of
net income per share:
Average shares outstanding -
basic(denominator) 45,834 48,618 45,848 49,029
Effect of dilutive shares 580 178 333 207
-------------------------------------------------
Average shares outstanding -
diluted (denominator) 46,414 48,796 46,181 49,236
Net income per common share:
Basic $ 1.04 $ 0.81 $ 2.94 $ 2.42
Diluted $ 1.03 $ 0.80 $ 2.92 $ 2.41
</TABLE>
As of September 30, 1999, options to purchase 1,123,000 shares of common stock
were outstanding but were not included in the computation of diluted earnings
per share for the three month and nine month period ended on such date, because
the options' exercise price was greater than the average market price of the
common shares during the period. As of September 30, 2000, all outstanding
options were included in the computation of diluted earnings per share for the
three month and nine month period ended on such date, because the average market
price of the common shares during the period was greater than the options'
exercise price.
11
<PAGE>
EVEREST RE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
5. OTHER COMPREHENSIVE INCOME
The Company's other comprehensive income / (loss) is comprised as follows:
<TABLE>
<CAPTION>
(dollar amounts in thousands) Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
------------------------------------------------
<S> <C> <C> <C> <C>
Net unrealized appreciation
(depreciation) of investments,
net of deferred income taxes $ 25,360 ($ 57,306) $ 33,061 ($ 159,718)
Currency translation
adjustments, net of deferred
income taxes (741) (8) (938) 3,883
------------------------------------------------
Other comprehensive
income/(loss), net of deferred
income taxes $ 24,619 ($ 57,314) $ 32,123 ($ 155,835)
================================================
</TABLE>
6. CREDIT LINE
On December 21, 1999, Holdings entered into a three-year senior revolving credit
facility with a syndicate of lenders (the "Credit Facility"). First Union
National Bank is the administrative agent for the Credit Facility. The Credit
Facility will be used for liquidity and general corporate purposes and to
refinance existing debt under Holdings' prior credit facility, which has been
terminated. The Credit Facility provides for the borrowing of up to $150.0
million with interest at a rate selected by the Company equal to either (i) the
Base Rate (as defined below) or (ii) an adjusted London InterBank Offered Rate
("LIBOR") plus a margin. The Base Rate is the higher of the rate of interest
established by First Union National Bank from time to time as its prime rate or
the Federal Funds rate plus 0.5% per annum. The amount of margin and the fees
payable for the Credit Facility depend upon Holdings' senior unsecured debt
rating. The Company has guaranteed all of Holdings' obligations under the Credit
Facility.
The Credit Facility requires Group to maintain a debt to capital ratio of not
greater than 0.35 to 1, Holdings to maintain a minimum interest coverage ratio
of 2.5 to 1 and Everest Reinsurance Company ("Everest Re") to maintain its
statutory surplus at $850.0 million plus 25% of future aggregate net income and
25% of future aggregate capital contributions. The Company was in compliance
with all covenants under the facility at September 30, 2000 as well as for the
three months and nine months ended September 30, 2000.
12
<PAGE>
EVEREST RE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
As of September 30, 2000 and 1999, Holdings had outstanding credit line
borrowings of $137.0 million and $35.0 million, respectively. Interest expense
incurred in connection with these borrowings was $2.1 million and $0.5 million
for the three months ended September 30, 2000 and 1999, respectively, and $5.5
million and $0.7 million for the nine months ended September 30, 2000 and 1999,
respectively.
7. SENIOR NOTES
During the first quarter of 2000, Holdings completed a public offering of $200.0
million principal amount of 8.75% senior notes due March 15, 2010 and $250.0
million principal amount of 8.5% senior notes due March 15, 2005. Holdings
distributed $400.0 million of these proceeds to Group of which $250.0 million
was used by Group to capitalize Everest Reinsurance (Bermuda), Ltd.
Interest expense incurred in connection with these senior notes was $9.8 million
and $21.2 million for the three months and nine months ended September 30, 2000,
respectively.
8. SEGMENT REPORTING
The Company, through its subsidiaries, operates in six segments: U.S. Broker
Treaty, U.S. Direct Treaty Reinsurance and Insurance, U.S. Facultative, Marine,
Aviation and Surety, International and Bermuda. The U.S. Broker Treaty operation
writes property, casualty and accident and health reinsurance through
reinsurance brokers within the United States. The U.S. Direct Treaty Reinsurance
and Insurance operation writes property, casualty and accident and health
reinsurance directly with ceding companies and primary property and casualty
insurance through agency relationships and program administrators within the
United States. The U.S. Facultative operation writes property, casualty and
specialty business through brokers and directly with ceding companies within the
United States. The Marine, Aviation and Surety operation writes marine, aviation
and surety business within the United States and worldwide. The International
operation writes reinsurance through the Company's branches in Belgium, London,
Canada, Hong Kong and Singapore, in addition to foreign "home-office" business.
The U.S. Facultative, Marine, Aviation and Surety and International operations
write business through brokers and directly with ceding companies. The Bermuda
operation has not yet begun writing business; therefore, there are no
underwriting results for this segment in the current period disclosures.
13
<PAGE>
EVEREST RE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
These segments are managed in a carefully coordinated fashion with strong
elements of central control, including with respect to capital, investments and
support operations. As a result, management monitors and evaluates the financial
performance of these operating segments principally based upon their
underwriting gain or loss ("underwriting results"). Underwriting results include
earned premium less incurred loss and loss adjustment expenses, commission and
brokerage expenses and other underwriting expenses.
The following tables present the relevant underwriting results for the operating
segments for the three months and nine months ended September 30, 2000 and 1999,
with all dollar values presented in thousands.
<TABLE>
<CAPTION>
U.S. BROKER TREATY
-------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-----------------------------------------------
<S> <C> <C> <C> <C>
Earned premiums $ 98,144 $ 109,075 $ 307,862 $ 286,958
Incurred losses and loss
adjustment expenses 69,063 80,700 243,074 224,580
Commission and brokerage 22,268 31,157 45,539 75,429
Other underwriting expenses 2,577 2,281 7,457 7,045
-----------------------------------------------
Underwriting gain/(loss) $ 4,236 ($ 5,063) $ 11,792 ($ 20,096)
===============================================
</TABLE>
<TABLE>
<CAPTION>
U.S. DIRECT TREATY REINSURANCE AND INSURANCE
-------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-----------------------------------------------
<S> <C> <C> <C> <C>
Earned premiums $ 72,625 $ 50,280 $ 188,874 $ 138,502
Incurred losses and loss
adjustment expenses 48,811 37,986 125,596 100,208
Commission and brokerage 15,895 14,298 45,583 38,885
Other underwriting expenses 3,019 3,480 9,670 9,409
-----------------------------------------------
Underwriting gain/(loss) $ 4,900 ($ 5,484) $ 8,025 ($ 10,000)
===============================================
</TABLE>
14
<PAGE>
EVEREST RE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
<TABLE>
<CAPTION>
U.S. FACULTATIVE
-------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-----------------------------------------------
<S> <C> <C> <C> <C>
Earned premiums $ 16,536 $ 17,809 $ 51,632 $ 52,753
Incurred losses and loss
adjustment expenses 10,226 11,610 33,965 31,948
Commission and brokerage 1,535 3,613 8,725 11,195
Other underwriting expenses 1,563 1,540 4,555 4,666
-----------------------------------------------
Underwriting gain $ 3,212 $ 1,046 $ 4,387 $ 4,944
===============================================
</TABLE>
<TABLE>
<CAPTION>
MARINE, AVIATION AND SURETY
-------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-----------------------------------------------
<S> <C> <C> <C> <C>
Earned premiums $ 28,263 $ 36,657 $ 78,024 $ 97,196
Incurred losses and loss
adjustment expenses 26,659 23,332 68,958 63,936
Commission and brokerage 5,845 10,575 22,740 30,105
Other underwriting expenses 1,035 903 2,938 2,747
-----------------------------------------------
Underwriting gain/(loss) ($ 5,276) $ 1,847 ($ 16,612) $ 408
===============================================
</TABLE>
<TABLE>
<CAPTION>
INTERNATIONAL
-------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
-----------------------------------------------
<S> <C> <C> <C> <C>
Earned premiums $ 75,623 $ 71,656 $ 216,763 $ 219,624
Incurred losses and loss
adjustment expenses 65,194 49,570 178,418 148,248
Commission and brokerage 20,320 18,499 55,206 58,770
Other underwriting expenses 3,897 3,437 10,743 10,987
-----------------------------------------------
Underwriting gain/(loss) ($ 13,788) $ 150 ($ 27,604) $ 1,619
===============================================
</TABLE>
15
<PAGE>
EVEREST RE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
The following table reconciles the underwriting results for the operating
segments to income before tax as reported in the consolidated statements of
operations and comprehensive income, with all dollar values presented in
thousands:
<TABLE>
<CAPTION>
--------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
--------------------------------------------------
<S> <C> <C> <C> <C>
Underwriting (loss) ($ 6,716) ($ 7,504) ($ 20,012) ($ 23,125)
Net investment income 78,897 62,232 218,353 188,882
Realized (loss) (90) (7,686) (459) (17,139)
Corporate operations 735 447 2,179 1,218
Interest expense 11,931 452 26,624 736
Other income 605 1,860 1,045 258
--------------------------------------------------
Income before taxes $ 60,030 $ 48,003 $ 170,124 $ 146,922
==================================================
</TABLE>
The Company writes premium in the United States and selected international
markets. The revenues, net income and identifiable assets of any individual
non-U.S. country in which the Company has written business are, in each case,
less than 10% of the Company's consolidated results.
9. FUTURE APPLICATION OF ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities". This statement requires all derivatives to be
recognized as either assets or liabilities in the statement of financial
position and to be measured at fair value. This statement shall be effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000. In June
2000, the Financial Accounting Standards Board amended SFAS No. 133 with SFAS
No. 138, which facilitates the implementation of SFAS No. 133. Management
believes that these statements will not have a material impact on the financial
position of the Company.
10. RELATED-PARTY TRANSACTIONS
During the normal course of business, the Company, through its affiliates,
engages in arms-length reinsurance and brokerage and commission business
transactions with companies controlled by or affiliated with its outside
directors. Such transactions, individually and in the aggregate, are immaterial
to the Company's financial condition, results of operations and cash flows.
16
<PAGE>
PART I - ITEM 2
EVEREST RE GROUP, LTD.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
RESTRUCTURING
On February 24, 2000, a corporate restructuring was completed and Everest Re
Group, Ltd. ("Group") became the new parent holding company of Everest
Reinsurance Holdings, Inc. ("Holdings"), which remains the holding company for
Group's U.S. based operations. The "Company" means Group and its subsidiaries,
except when referring to periods prior to February 24, 2000, when it means
Holdings and its subsidiaries.
ACQUISITION OF GIBRALTAR CASUALTY COMPANY
On September 19, 2000, Holdings completed the acquisition of all of the issued
and outstanding capital stock of Gibraltar Casualty Company ("Gibraltar") from
The Prudential Insurance Company of America ("The Prudential") pursuant to a
Stock Purchase Agreement between The Prudential and Holdings dated February 24,
2000 and amended on August 8, 2000 (the "Stock Purchase Agreement"). As a result
of the acquisition, Gibraltar became a wholly owned subsidiary of Holdings and,
immediately following the acquisition, its name was changed to Mt. McKinley
Insurance Company ("Mt. McKinley"). In connection with the acquisition of Mt.
McKinley, which has significant exposure to asbestos and environmental claims,
Prudential Property and Casualty Insurance Company ("Prupac"), a subsidiary of
The Prudential, provided reinsurance to Mt. McKinley covering 80% ($160.0
million) of the first $200.0 million of any adverse development of Mt.
McKinley's reserves as of September 19, 2000 and The Prudential guaranteed
Prupac's obligations to Mt. McKinley.
Mt. McKinley, a run-off property and casualty insurer in the United States, has
had a long relationship with Holdings and its principal operating company,
Everest Reinsurance Company ("Everest Re"). Mt. McKinley was formed in 1978 by
Everest Re and wrote direct insurance until 1985, when it was placed in run-off.
In 1991, Mt. McKinley became a subsidiary of The Prudential. Mt. McKinley is
also a reinsurer of Everest Re (all as detailed in filings with the Securities
and Exchange Commission). Under a series of transactions dating to 1986, Mt.
McKinley reinsured several components of Everest Re's business. In particular,
Mt. McKinley provided stop-loss reinsurance protection, in connection with the
Company's October 5, 1995 IPO, for any adverse loss development on Everest Re's
June 30, 1995 (December 31, 1994 for catastrophe losses) reserves, with $375.0
million in limits, of which $89.4 million remains available (the "Stop Loss
Agreement"). The Stop Loss Agreement and other reinsurance contracts between Mt.
McKinley and Everest Re remain in effect following the acquisition. However,
these contracts have become transactions with affiliates with the financial
impact eliminated through inter-company accounts.
17
<PAGE>
INDUSTRY CONDITIONS
Since 1987, a number of factors, including the emergence of significant
reinsurance capacity from the Bermuda and rejuvenated Lloyd's markets, higher
retentions by primary insurance companies and consolidation and increased
capital levels in the insurance industry, have caused increasingly competitive
global market conditions across most lines of business and have influenced the
softening of prices and contract terms in the market place. Recently, market
conditions, including industry-wide results of operations, have led to modest
premium rate increases and modest improvements in contract terms in many lines
of insurance and reinsurance. Although the Company is encouraged by these
improvements in market conditions, the Company cannot predict with any
reasonable certainty if, when or to what extent market conditions as a whole
will change.
SEGMENT INFORMATION
The Company, through its subsidiaries, operates in six segments: U.S. Broker
Treaty, U.S. Direct Treaty Reinsurance and Insurance, U.S. Facultative, Marine,
Aviation and Surety, International and Bermuda. The U.S. Broker Treaty operation
writes property, casualty and accident and health reinsurance through
reinsurance brokers within the United States. The U.S. Direct Treaty Reinsurance
and Insurance operation writes property, casualty and accident and health
reinsurance directly with ceding companies and primary property and casualty
insurance through agency relationships and program administrators within the
United States. The U.S. Facultative operation writes property, casualty and
specialty business through brokers and directly with ceding companies within the
United States. The Marine, Aviation and Surety operation writes marine, aviation
and surety business within the United States and worldwide. The International
operation writes reinsurance through the Company's branches in Belgium, London,
Canada, Hong Kong and Singapore, in addition to foreign "home-office" business.
The U.S. Facultative, Marine, Aviation and Surety and International operations
write business through brokers and directly with ceding companies. The Bermuda
operation has not yet begun writing business; therefore, there are no
underwriting results for this segment in the current period disclosures.
These segments are managed in a carefully coordinated fashion with strong
elements of central control, including with respect to capital, investments and
support operations. As a result, management monitors and evaluates the financial
performance of these operating segments principally based upon their
underwriting results.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
PREMIUMS. Gross premiums written increased 18.7% to $355.6 million in the three
months ended September 30, 2000 from $299.5 million in the three months ended
September 30, 1999 as the Company took advantage of selected growth
opportunities, while continuing to generally maintain a disciplined underwriting
approach. Premium growth areas included a 147.5% ($70.9 million) increase in the
U.S. Direct Treaty Reinsurance and Insurance operation, mainly attributable to
growth in accident and health reinsurance and primary insurance writings and an
11.6% ($8.7 million) increase in the International operation, mainly
attributable to growth in North and South America and the markets served from
18
<PAGE>
the Company's London office. These increases were partially offset by a 16.3%
($5.8 million) decrease in the Marine, Aviation and Surety operation, reflecting
the continued highly competitive current market conditions faced by this
operation, a 14.2% ($17.4 million) decrease in the U.S. Broker Treaty operation
reflecting production variability and a 2.1% ($0.4 million) decrease in the U.S.
Facultative operation. The Company continued to decline business that did not
meet its objectives regarding underwriting profitability.
Ceded premiums increased to $53.5 million in the three months ended September
30, 2000 from $9.2 million in the three months ended September 30, 1999. This
increase was principally attributable to the higher utilization of contract
specific retrocessions in the U.S. Direct Reinsurance and Insurance and U.S.
Broker Treaty operations, including a new workers compensation program in the
U.S. Direct Reinsurance and Insurance operation, which contributed $22.0 million
to the increase. In addition, adjustment premiums of $7.0 million were ceded in
2000 relating to claims made under the 1999 accident year aggregate excess of
loss element of the Company's corporate retrocessional program.
Net premiums written increased by 4.0% to $302.0 million in the three months
ended September 30, 2000 from $290.4 million in the three months ended September
30, 1999. This increase was consistent with the increase in gross premiums
written, partially offset by the increase in ceded premiums.
PREMIUM REVENUES. Net premiums earned increased by 2.0% to $291.2 million in the
three months ended September 30, 2000 from $285.5 million in the three months
ended September 30, 1999. Contributing to this increase was a 44.4% ($22.3
million) increase in the U.S. Direct Treaty Reinsurance and Insurance operation
and a 5.5% ($4.0 million) increase in the International operation. These
increases were partially offset by a 22.9% ($36.7 million) decrease in the
Marine, Aviation and Surety operation, a 10.0% ($10.9 million) decrease in the
U.S. Broker Treaty operation and a 7.1% ($1.3 million) decrease in the U.S.
Facultative operation. All of these changes reflect period to period changes in
net written premiums and business mix together with normal variability in
earnings patterns.
EXPENSES. Incurred loss and loss adjustment expenses ("LAE") increased by 8.2%
to $220.0 million in the three months ended September 30, 2000 from $203.2
million in the three months ended September 30, 1999. The increase in incurred
losses and LAE was principally attributable to the increase in net premiums
earned together with modest strengthening of prior period reserves in select
areas. This increase was partially offset by losses ceded under the Company's
corporate retrocessional program and also reflects the impact of changes in the
Company's mix of business. Incurred losses and LAE include catastrophe losses,
which include the impact of both current period events, and favorable and
unfavorable development on prior period events and are net of reinsurance.
Catastrophe losses, net of contract specific cessions but before cessions under
the corporate retrocessional program, in the three months ended September 30,
2000 were $4.4 million, mainly reflecting modest net adverse development on 1999
catastrophe events, compared to net catastrophe losses of $7.6 million in the
three months ended September 30, 1999. Net incurred losses and LAE for the three
months ended September 30, 2000 reflected ceded losses and LAE of $35.7 million,
including $15.6 million ceded under the 1999 accident year aggregate excess of
loss component of the Company's corporate retrocessional program. Ceded losses
and LAE in the three months ended September 30, 1999 were $8.0 million with no
cessions under the accident year aggregate excess of loss component of the
Company's corporate retrocessional program.
19
<PAGE>
Contributing to the increase in incurred losses and LAE in the three months
ended September 30, 2000 from the three months ended September 30, 1999 were a
31.5% ($15.6 million) increase in the International operation principally
reflecting modest reserve strengthening for select prior period exposures and a
28.5% ($10.8 million) increase in the Direct Treaty Reinsurance and Insurance
operation principally reflecting increased premium volume. Incurred losses and
LAE increased by 14.4% ($3.3 million) in the Marine, Aviation and Surety
operation reflecting modest reserve strengthening for prior period aviation
exposures. These increases were partially offset by a 14.4% ($11.6 million)
decrease in the U.S. Broker Treaty operation reflecting decreased premium volume
and more favorable loss experience and an 11.9% ($1.4 million) decrease in the
U.S. Facultative operation. Incurred losses and LAE for each operation were also
impacted by variability relating to changes in the level of premium volume and
mix of business by class and type.
The Company's loss and LAE ratio ("loss ratio"), which is calculated by dividing
incurred losses and LAE by premiums earned, increased by 4.3 percentage points
to 75.5% for the three months ended September 30, 2000 from 71.2% for the three
months ended September 30, 1999 reflecting the incurred losses and LAE discussed
above. The Marine, Aviation and Surety and International operations' loss ratios
increased to 94.3% and 86.2% for the three months ended September 30, 2000 from
63.6% and 69.2% for the three months ended September 30, 1999, respectively. The
U.S. Broker Treaty, U.S. Direct Treaty Reinsurance and Insurance and U.S.
Facultative operations' loss ratios decreased to 70.4%, 67.2% and 61.8% for the
three months ended September 30, 2000 from 74.0%, 75.5% and 65.2% for the three
months ended September 30, 1999, respectively. The loss ratios for all
operations were impacted by the factors noted above.
Underwriting expenses decreased by 12.8% to $78.7 million in the three months
ended September 30, 2000 from $90.2 million in the three months ended September
30, 1999. Commission, brokerage, taxes and fees decreased by $12.3 million.
Other underwriting expenses increased by $0.7 million. Contributing to these
underwriting expense decreases were a 40.1% ($4.6 million) decrease in the
Marine, Aviation and Surety operation, a 39.9% ($2.1 million) decrease in the
U.S. Facultative operation and a 25.7% ($8.6 million) decrease in the U.S.
Broker Treaty operation. These decreases were partially offset by a 10.4% ($2.3
million) increase in the International operation and a 6.4% ($1.1 million)
increase in the U.S. Direct Treaty Reinsurance and Insurance operation. The
changes for each operation's expenses principally resulted from changes in
commission expenses related to changes in premium volume and business mix by
class and type and, in some cases, the underwriting performance of the
underlying business. The Company's expense ratio, which is calculated by
dividing underwriting expenses by premiums earned, was 27.0% for the three
months ended September 30, 2000 compared to 31.6% for the three months ended
September 30, 1999.
The Company's combined ratio, which is the sum of the loss and expense ratios,
decreased to 102.6% in the three months ended September 30, 2000 compared to
102.8% in the three months ended September 30, 1999. The U.S. Broker Treaty,
U.S. Direct Treaty Reinsurance and Insurance and U.S. Facultative operations'
combined ratios decreased to 95.7%, 93.3% and 80.6% for the three months ended
September 30, 2000 from 104.6%, 110.9% and 94.1% for the three months ended
September 30, 1999, respectively. The Marine, Aviation and Surety and
International operations' combined ratios increased to 118.7% and 118.2% for the
three months ended September 30, 2000 from 95.0% and 99.8% for the three months
ended September 30, 1999, respectively. These changes reflect the loss and
expense ratio variability noted above.
20
<PAGE>
Interest expense for the three months ended September 30, 2000 was $11.9 million
compared to $0.5 million for the three months ended September 30, 1999. Interest
expense for the three months ended September 30, 2000 reflects $9.8 million
relating to Holdings' issuance of senior notes and $2.1 million relating to
Holdings' borrowings under it's revolving credit facility. Interest expense for
the three months ended September 30, 1999 reflects $0.5 million relating to
Holdings' borrowings under its revolving credit facility.
Other income for the three months ended September 30, 2000 was $0.6 million
compared to $1.9 million for the three months ended September 30, 1999. The
change in other income for the respective periods was principally attributable
to the impact of fluctuations in foreign currency exchange rates.
INVESTMENT RESULTS. Net investment income increased 26.8% to $78.9 million in
the three months ended September 30, 2000 from $62.2 million in the three months
ended September 30, 1999, principally reflecting the effect of investing the
$123.3 million of cash flow from operations in the twelve months ended September
30, 2000 as well as the investment of the $450.0 million in proceeds from
Holdings' issuance of senior notes. The annualized pre-tax yield on average cash
and invested assets increased to 6.5% in the three months ended September 30,
2000 from the 6.1% yield in the three months ended September 30, 1999,
reflecting changes in investment market conditions coupled with the investment
of the proceeds of Holdings' issuance of senior notes during the three months
ended March 31, 2000 and normal portfolio management activities. The imbedded
pre-tax yield on cash and invested assets at September 30, 2000 was 6.9%
compared with 6.2% at December 31, 1999, reflecting the additional funds
invested over the intervening period, as well as the continued emphasis on
enhancing investment yields through changes in asset mix, all in the context of
changes in investment market conditions.
Net realized capital losses were $0.1 million in the three months ended
September 30, 2000, reflecting realized capital losses on the Company's
investments of $0.2 million, partially offset by $0.1 million of realized
capital gains, compared to net realized capital losses of $7.7 million in the
three months ended September 30, 1999. The net realized capital losses in the
three months ended September 30, 1999 reflected realized capital losses of $16.9
million, partially offset by $9.2 million of realized capital gains. The
realized capital losses in the three months ended September 30, 2000 and 1999
arose mainly from activity in the Company's fixed maturity portfolio. The
realized capital gains in the three months ended September 30, 2000 and 1999
arose mainly from activity in the Company's equity portfolio.
INCOME TAXES. The Company recognized income tax expense of $12.3 million in the
three months ended September 30, 2000 compared to $8.8 million in the three
months ended September 30, 1999 principally reflecting increased net investment
income and decreased realized capital losses.
NET INCOME. Net income was $47.7 million in the three months ended September 30,
2000 compared to $39.2 million in the three months ended September 30, 1999.
This increase generally reflects the improved underwriting and investment
results, partially offset by increased interest and income tax expense.
21
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
PREMIUMS. Gross premiums written increased 17.9% to $986.0 million in the nine
months ended September 30, 2000 from $836.6 million in the nine months ended
September 30, 1999 as the Company took advantage of selected growth
opportunities, while continuing to generally maintain a disciplined underwriting
approach. Premium growth areas included an 84.8% ($123.5 million) increase in
the U.S. Direct Treaty Reinsurance and Insurance operation, mainly attributable
to growth in accident and health reinsurance and primary insurance writings, a
10.5% ($32.8 million) increase in the U.S. Broker Treaty operation, attributable
to growth across both property and casualty lines, a 2.8% ($6.4 million)
increase in the International operation and a 2.4% ($1.3 million) increase in
the U.S. Facultative operation. These increases were partially offset by a 15.1%
($14.6 million) decrease in the Marine, Aviation and Surety operation reflecting
the continued highly competitive current market conditions faced by this
operation. The Company continued to decline business that did not meet its
objectives regarding underwriting profitability.
Ceded premiums increased to $101.3 million in the nine months ended September
30, 2000 from $32.3 million in the nine months ended September 30, 1999. This
increase was principally attributable to the higher utilization of contract
specific retrocessions in the U.S. Direct Reinsurance and Insurance and U.S.
Broker Treaty operations, including a new workers compensation program in the
U.S. Direct Reinsurance and Insurance operation, which contributed $22.0 million
to the increase. In addition, adjustment premiums of $18.6 million were ceded in
2000 relating to claims made under the 1999 accident year aggregate excess of
loss element of the Company's corporate retrocessional program.
Net premiums written increased by 10.0% to $884.7 million in the nine months
ended September 30, 2000 from $804.3 million in the nine months ended September
30, 1999. This increase was consistent with the increase in gross premiums
written, partially offset by the increase in ceded premiums.
PREMIUM REVENUES. Net premiums earned increased by 6.1% to $843.2 million in the
nine months ended September 30, 2000 from $795.0 million in the nine months
ended September 30, 1999. Contributing to this increase was a 36.4% ($50.4
million) increase in the U.S. Direct Treaty Reinsurance and Insurance operation
and a 7.3% ($20.9 million) increase in the U.S. Broker Treaty operation. These
increases were partially offset by a 19.7% ($19.2 million) decrease in the
Marine, Aviation and Surety operation, a 2.1% ($1.1 million) decrease in the
U.S. Facultative operation and a 1.3% ($2.9 million) decrease in the
International operation. All of these changes reflect period to period changes
in net written premiums and business mix together with normal variability in
earnings patterns.
EXPENSES. Incurred loss and LAE increased by 14.3% to $650.0 million in the nine
months ended September 30, 2000 from $568.9 million in the nine months ended
September 30, 1999. The increase in incurred losses and LAE was principally
attributable to the increase in net premiums earned together with modest
strengthening of prior period reserves in select areas, including on a
multi-year reinsurance treaty where such losses within the current experience
band were accompanied by correspondingly lower commissions. This increase was
partially offset by losses ceded under the Company's corporate retrocessional
program and the impact of changes in the Company's mix of business. Incurred
losses and LAE include catastrophe losses, which include the impact of both
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current period events and favorable and unfavorable development on prior period
events and are net of reinsurance. Catastrophe losses, net of contract specific
cessions but before cessions under the corporate retrocessional program, in the
nine months ended September 30, 2000 were $13.6 million, mainly reflecting
modest net adverse development on 1999 catastrophe events, compared to net
catastrophe losses of $25.3 million in the nine months ended September 30, 1999.
Net incurred losses and LAE for the nine months ended September 30, 2000
reflected ceded losses and LAE of $93.0 million, including $39.1 million ceded
under the 1999 accident year aggregate excess of loss component of the corporate
retrocessional program. Ceded losses and LAE in the nine months ended September
30, 1999 were $27.1 million, with no cessions under the accident year aggregate
excess of loss component of the corporate retrocessional program.
Contributing to the increase in incurred losses and LAE in the nine months ended
September 30, 2000 compared to the nine months ended September 30, 1999 were a
25.3% ($25.4 million) increase in the U.S. Direct Treaty Reinsurance and
Insurance operation, principally as a result of increased premium volume, a
20.4% ($30.2 million) increase in the International operation mainly due to
reserve strengthening related to prior period exposures, including 1999 accident
year catastrophe losses, an 8.2% ($18.5 million) increase in the U.S. Broker
Treaty operation, attributable to the increased premium volume as well as the
loss reserve strengthening on the multi-year reinsurance treaty noted above, a
7.9% ($5.0 million) increase in the Marine, Aviation and Surety operation,
principally reflecting reserve strengthening relating to prior period aviation
exposures, and a 6.3% ($2.0 million) increase in the U.S. Facultative operation.
Incurred losses and LAE for each operation were also impacted by variability
relating to changes in the level of premium volume and mix of business by class
and type.
The Company's loss ratio increased by 5.5 percentage points to 77.1% for the
nine months ended September 30, 2000 from 71.6% for the nine months ended
September 30, 1999 reflecting the incurred losses and LAE discussed above. The
U.S. Broker Treaty, International, Marine, Aviation and Surety and U.S.
Facultative operations' loss ratios increased to 79.0%, 82.3%, 88.4% and 65.8%
for the nine months ended September 30, 2000 from 78.3%, 67.5%, 65.8% and 60.6%
for the nine months ended September 30, 1999, respectively. The U.S. Direct
Treaty Reinsurance and Insurance operations' loss ratio decreased to 66.5% for
the nine months ended September 30, 2000 from 72.4% for the nine months ended
September 30, 1999. The loss ratios for all operations are impacted by the
factors noted above.
Underwriting expenses decreased by 14.0% to $215.3 million in the nine months
ended September 30, 2000 from $250.5 million in the nine months ended September
30, 1999. Commission, brokerage, taxes and fees decreased by $36.6 million,
principally reflecting the Company's reassessment of the expected losses on a
multi-year reinsurance treaty noted above that led to a $29.4 million decrease
in contingent commissions with a corresponding increase to losses, partially
offset by the increases in premiums written and also reflecting changes in the
mix of business. Other underwriting expenses increased by $1.5 million.
Contributing to the underwriting expense decrease were a 35.7% ($29.5 million)
decrease in the U.S. Broker Treaty operation, which included the impact of the
contingent commission adjustment noted above, a 21.8% ($7.2 million) decrease in
the Marine, Aviation and Surety operation, a 16.3% ($2.6 million) decrease in
the U.S. Facultative operation and a 5.5% ($3.8 million) decrease in the
International operation. These decreases were partially offset by a 14.4% ($7.0
million) increase in the U.S. Direct Treaty Reinsurance and Insurance operation.
Except as noted, the changes for each operation's expenses principally resulted
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from changes in commission expenses related to changes in premium volume and
business mix by class and type and, in some cases, the underwriting performance
of the underlying business. The Company's expense ratio was 25.6% for the nine
months ended September 30, 2000 compared to 31.5% for the nine months ended
September 30, 1999.
The Company's combined ratio decreased to 102.6% in the nine months ended
September 30, 2000 compared to 103.1% in the nine months ended September 30,
1999. The U.S. Broker Treaty and U.S. Direct Treaty Reinsurance and Insurance
operations' combined ratios decreased to 96.2% and 95.8%, respectively, for the
nine months ended September 30, 2000 from 107.0% and 107.2%, respectively, for
the nine months ended September 30, 1999. The International, Marine, Aviation
and Surety and U.S. Facultative operations' combined ratios increased to 112.7%,
121.3% and 91.5%, respectively, for the nine months ended September 30, 2000
from 99.3%, 99.6% and 90.6%, respectively, for the nine months ended September
30, 1999. These changes reflect the loss and expense ratio variability noted
above.
Interest expense for the nine months ended September 30, 2000 was $26.6 million
compared to $0.7 million for the nine months ended September 30, 1999. Interest
expense for the nine months ended September 30, 2000 reflects $21.2 million
relating to Holdings' issuance of senior notes and $5.4 million relating to
Holdings' borrowing under it's revolving credit facility. Interest expense for
the nine months ended September 30, 1999 reflects $0.7 million relating to
Holdings' borrowings under its revolving credit facility.
Other income for the nine months ended September 30, 2000 was $1.0 million
compared to $0.3 million for the nine months ended September 30, 1999. The
change in other income for the respective periods was principally attributable
to the impact of fluctuations in foreign currency exchange rates.
INVESTMENT RESULTS. Net investment income increased 15.6% to $218.4 million in
the nine months ended September 30, 2000 from $188.9 million in the nine months
ended September 30, 1999, principally reflecting the effect of investing the
$123.3 million of cash flow from operations in the twelve months ended September
30, 2000 as well as the investment of the $450.0 million in proceeds from
Holdings' issuance of senior notes. The annualized pre-tax yield on average cash
and invested assets increased to 6.3% in the nine months ended September 30,
2000 from the 6.2% yield in the nine months ended September 30, 1999, reflecting
changes in investment market conditions coupled with the investment of the
proceeds of Holdings' issuance of senior notes late in the period ended March
31, 2000. The imbedded pre-tax yield of cash and invested assets at September
30, 2000 was 6.9% compared with 6.2% at December 31, 1999, reflecting the
additional funds invested over the intervening period, as well as the continued
emphasis on enhancing investment yields through changes in asset mix, all in the
context of changes in investment market conditions.
Net realized capital losses were $0.5 million in the nine months ended September
30, 2000, reflecting realized capital losses on the Company's investments of
$23.9 million, partially offset by $23.4 million of realized capital gains,
compared to net realized capital losses of $17.1 million in the nine months
ended September 30, 1999. The net realized capital losses in the nine months
ended September 30, 1999 reflected realized capital losses of $28.2 million,
partially offset by $11.1 million of realized capital gains. The realized
capital losses in the nine months ended September 30, 2000 and 1999 arose mainly
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from activity in the Company's fixed maturity portfolio. The realized capital
gains in the nine months ended September 30, 2000 and 1999 arose mainly from
activity in the Company's equity portfolio.
INCOME TAXES. The Company recognized income tax expense of $35.2 million in the
nine months ended September 30, 2000 compared to $28.4 million in the nine
months ended September 30, 1999 with the increase mainly attributable to
increased net investment income and decreased realized capital losses.
NET INCOME. Net income was $135.0 million in the nine months ended September 30,
2000 compared to $118.5 million in the nine months ended September 30, 1999.
This increase generally reflects the decreases in net realized capital losses,
together with the improved underwriting and investment results, partially offset
by increased interest and income tax expense.
FINANCIAL CONDITION
INVESTED ASSETS. Aggregate invested assets, including cash and short-term
investments, were $5,062.2 million at September 30, 2000 and $4,139.2 million at
December 31, 1999. The increase in invested assets between December 31, 1999 and
September 30, 2000 resulted primarily from Holdings' issuance of senior notes
totaling $450.0 million, the proceeds of which have been invested, $349.7
million of new cash from the acquisition of Mt. McKinley, $78.0 million in
credit facility borrowings, $47.0 million in net unrealized appreciation of the
Company's fixed maturity investments and $48.9 million in cash flows from
operations generated during the nine months ended September 30, 2000. This
increase was partially offset by a $49.0 million decrease in the Company's
equity portfolio and $16.4 million in share repurchases.
LIQUIDITY. The Company's liquidity requirements are met on both a short- and
long-term basis by funds provided by premiums collected, investment income,
collected reinsurance receivables balances and from the sale and maturity of
investments together with the availability of funds under the Company's
revolving credit facility. The Company's net cash flows from operating
activities were $48.9 million and $129.0 million in the nine months ended
September 30, 2000 and 1999, respectively. These cash flows were impacted by
recoveries under the Company's Stop Loss Agreement with Mt. McKinley, which,
prior to Mt. McKinley's acquisition, contributed $9.5 million and $79.0 million
of such net cash flows in the nine months ended September 30, 2000 and 1999,
respectively. These cash flows were also impacted by net catastrophe loss
payments of $38.5 million and $24.2 million in the nine months ended September
30, 2000 and 1999, respectively, and by net income taxes paid of $55.1 million
and $50.0 million for the nine months ended September 30, 2000 and 1999,
respectively. Management believes that net cash flows from operating activities,
after consideration of the factors noted above, are generally consistent with
expectations given changes in the Company's mix of business over the past few
years toward products with shorter loss development and payout periods and
normal variability in the payout of loss reserves.
Proceeds from sales, calls and maturities and investment asset acquisitions were
$639.4 million and $1,528.2 million, respectively, in the nine months ended
September 30, 2000, compared to $858.1 million and $954.9 million, respectively,
in the nine months ended September 30, 1999. Additionally, the cash flow
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activity in the nine months ended September 30, 2000 included $349.7 million of
new cash resulting from the acquisition of Mt. McKinley and $450.0 million in
proceeds from Holdings' offering of senior notes as well as the impact of normal
portfolio management activity aimed at enhancing the Company's portfolio. The
Company's current investment strategy seeks to maximize after-tax income through
a high quality, diversified, duration sensitive, taxable bond and tax-exempt
municipal bond portfolio, while maintaining an adequate level of liquidity.
On December 21, 1999, Holdings entered into a three-year senior revolving credit
facility with a syndicate of lenders (the "Credit Facility"), which replaced its
prior credit facility which had been extended in June 1999 and increased from
$50.0 million to $75.0 million on November 9, 1999. First Union National Bank is
the administrative agent for the Credit Facility. The Credit Facility will be
used for liquidity and general corporate purposes and to refinance existing debt
under Holdings' prior credit facility, which has been terminated. The Credit
Facility provides for the borrowing of up to $150.0 million with interest at a
rate selected by Holdings equal to either (i) the Base Rate (as defined below)
or (ii) an adjusted London InterBank Offered Rate ("LIBOR") plus a margin. The
Base Rate is the higher of the rate of interest established by First Union
National Bank from time to time as its prime rate or the Federal Funds rate plus
0.5% per annum. The amount of margin and the fees payable for the Credit
Facility depend upon Holdings' senior unsecured debt rating. The Company has
guaranteed all of Holdings' obligations under the Credit Facility.
The Credit Facility requires the Company to maintain a debt to capital ratio of
not greater than 0.35 to 1, Holdings to maintain a minimum interest coverage
ratio of 2.5 to 1 and Everest Re to maintain its statutory surplus at $850.0
million plus 25% of future aggregate net income and 25% of future aggregate
capital contributions. The Company was in compliance with these requirements at
September 30, 2000 as well as for the three months and nine months ended
September 30, 2000.
At September 30, 2000 and 1999, Holdings had outstanding borrowings under the
Credit Facility of $137.0 million and $35.0 million, respectively. Interest
expense incurred in connection with these borrowings was $2.1 million and $0.5
million for the three months ended September 30, 2000 and 1999, respectively,
and $5.5 million and $0.7 million for the nine months ended September 30, 2000
and 1999, respectively.
During the first quarter of 2000, Holdings completed a public offering of $200.0
million principal amount of 8.75% senior notes due March 15, 2010 and $250.0
million principal amount of 8.5% senior notes due March 15, 2005. Holdings
distributed $400.0 million of these proceeds to Group of which $250.0 million
was used by Group to capitalize Everest Reinsurance (Bermuda), Ltd. Interest
expense incurred in connection with these senior notes was $9.8 million and
$21.2 million for the three months and nine months ended September 30, 2000,
respectively.
SHAREHOLDERS' EQUITY. The Company's shareholders' equity increased to $1,470.8
million as of September 30, 2000, from $1,327.5 million as of December 31, 1999,
principally reflecting net income of $135.0 million for the nine months ended
September 30, 2000, partially offset by $16.4 million in treasury shares
acquired in the nine months ended September 30, 2000. Dividends of $8.2 million
were declared and paid by the Company in the nine months ended September 30,
2000. During the nine months ended September 30, 2000, the Company repurchased
0.650 million of its common shares at an average price of $25.24 per share with
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all such repurchases occurring in the three months ended March 31, 2000, raising
the total repurchases under the Company's authorized repurchase program to 4.720
million shares at an average price of $27.60 per share with a total repurchase
expenditure to date of $130.4 million. At September 30, 2000, 2.180 million
shares remained under the existing repurchase authorization. As part of the
Company's restructuring, the treasury shares held by the Company prior to
February 24, 2000 were retired, resulting in a reduction to treasury shares with
a corresponding reduction of paid-in capital and common shares.
MARKET SENSITIVE INSTRUMENTS. The Company's risks associated with market
sensitive instruments have not changed materially since the period ended
December 31, 1999.
SAFE HARBOR DISCLOSURE. In connection with the "safe harbor" provisions of the
Private Securities Litigation Reform Act of 1995 (the "Act"), the Company in its
Form 10-K for the fiscal year ended December 31, 1999 set forth cautionary
statements identifying important factors, among others, that could cause its
actual results to differ materially from those which might be projected,
forecasted or estimated in its forward-looking statements, as defined in the
Act, made by or on behalf of the Company in press releases, written statements
or documents filed with the Securities and Exchange Commission, or in its
communications and discussions with investors and analysts in the normal course
of business through meetings, phone calls and conference calls. These cautionary
statements supplement other factors contained in this report which could cause
the Company's actual results to differ materially from those which might be
projected, forecasted or estimated in its forward-looking statements.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the Company's results to differ materially from
such forward-looking statements. Such forward-looking statements may include,
but are not limited to, projections of premium revenue, investment income, other
revenue, losses, expenses, earnings (including earnings per share), cash flows,
and common shareholders' equity (including book value per share), plans for
future operations, investments, financing needs, capital plans, dividends, plans
relating to products or services of the Company, and estimates concerning the
effects of litigation or other disputes, as well as assumptions for any of the
foregoing and are generally expressed with words such as "believes,"
"estimates," "expects," "anticipates," "plans," "projects," "forecasts,"
"goals," "could have," "may have" and similar expressions. The Company
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
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PART I - ITEM 3
EVEREST RE GROUP, LTD.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
MARKET RISK INSTRUMENTS. The Company's risks associated with market
sensitive instruments have not changed materially since the period ended
December 31, 1999.
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EVEREST RE GROUP, LTD.
OTHER INFORMATION
Part II - ITEM 1. LEGAL PROCEEDINGS
The Company is involved from time to time in ordinary routine litigation and
arbitration proceedings incidental to its business. The Company does not believe
that there are any other material pending legal proceedings to which it or any
of its subsidiaries or their properties are subject.
Part II - ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
c) Information required by Item 701 of Regulation S-K:
(a) On July 1, 2000, 1,364 common shares of the Company were
distributed and, on October 2, 2000, 924 common shares of
the Company were distributed.
(b) The securities were distributed to the Company's four non-
employee directors.
(c) The securities were issued as compensation to the non-
employee directors for services rendered to the Company.
(d) Exemption from registration was claimed pursuant to Section
4(2) of the Securities Act of 1933. There was no public
offering and the participants in the transactions were the
Company and its non-employee directors.
(e) Not applicable.
Part II - ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit Index:
Exhibit No. Description Location
----------- ----------- --------
11.1 Statement regarding computation
of per-share earnings Filed herewith
27 Financial Data Schedule Filed herewith
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b) A report on Form 8-K dated September 19, 2000 was filed on
October 3, 2000 reporting the acquisition of Gibraltar Casualty
Company by Everest Reinsurance Holdings, Inc. The financial
statements and pro forma financial information required to be
filed with this Form 8-K will be filed by amendment no later
than 60 days after the date that the initial report on Form 8-K
was required to be filed.
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.
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EVEREST RE GROUP, LTD.
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 Re Group, Ltd.
(Registrant)
/S/ STEPHEN L. LIMAURO
---------------------------------
Stephen L. Limauro
Duly Authorized Officer and Principal
Accounting Officer
Executive Vice President and Chief
Financial Officer
Dated: November 7, 2000
