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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Quarter Ended March 31, 1997.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
Commission File Number 1-12800
EXECUTIVE RISK INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1388171
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
82 Hopmeadow Street
Simsbury, Connecticut 06070
(Address of principal executive offices) (Zip Code)
(860) 408-2000
(Registrant's telephone number, including area code)
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 .
--- ---
As of May 8, 1997, there were 9,341,358 shares of Executive Risk Inc.
Common Stock, $0.01 par value, outstanding, net of treasury shares.
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EXECUTIVE RISK INC.
TABLE OF CONTENTS
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PART I - FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Independent Accountants' Review Report............................................... 2
Consolidated Balance Sheets -
March 31, 1997 and December 31, 1996................................................. 3
Consolidated Statements of Income -
Three Months Ended March 31, 1997 and 1996........................................... 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1997 and 1996........................................... 5
Notes to Consolidated Financial Statements........................................... 6 -7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ 7-10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................... 10
Signatures.............................................................................. 11
Exhibit 15 - Independent Accountants' Acknowledgment Letter............................. 12
</TABLE>
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. This Form 10-Q, the Company's Annual Report on
Form 10-K, its Annual Report to Stockholders, any subsequent Form 10-Q, any
Current Report on Form 8-K or any other oral or written statements of, by or on
behalf of the Company may include forward-looking statements which reflect the
Company's current views with respect to future events and financial performance.
The forward-looking statements are subject to uncertainties and other factors
that could cause actual results to differ materially from such statements. These
include, but are not limited to, uncertainties and other factors relating to or
inherent in cyclical industry conditions, government and regulatory policies,
the reserving process, the legal and competitive environments in which the
Company operates, international operations, and interest rate fluctuations. The
words "believe," "expect," "anticipate," "project" and similar expressions
identify forward-looking statements. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of their
dates. The Company undertakes no obligation to publicly update or revise any
forward looking statement, whether as a result of new information, future events
or otherwise.
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ITEM 1. FINANCIAL STATEMENTS
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Stockholders and Board of Directors
Executive Risk Inc.
We have reviewed the accompanying consolidated balance sheet of Executive Risk
Inc. and its subsidiaries as of March 31, 1997, and the related consolidated
statements of income and cash flows for the three-month period ended March 31,
1997 and 1996. These consolidated financial statements are the responsibility of
the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
consolidated financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements referred to above
for them to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Executive Risk Inc. and
subsidiaries as of December 31, 1996, and the related consolidated statements of
income, stockholders' equity and cash flows for the year then ended (not
presented herein) and in our report dated February 7, 1997, we expressed an
unqualified opinion on those consolidated financial statements.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
May 2, 1997
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EXECUTIVE RISK INC.
CONSOLIDATED BALANCE SHEETS
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(Unaudited)
March 31, December 31,
(In thousands, except share data) 1997 1996
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ASSETS
Fixed maturities available for sale, at fair value
(amortized cost: 1997 - $656,701 and 1996 - $610,589) $ 664,303 $ 628,564
Equity securities available for sale, at fair value
(cost: 1997 - $29,391 and 1996 - $27,820) 41,556 37,705
Cash and short-term investments, at cost which approximates market 70,671 24,706
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TOTAL CASH AND INVESTED ASSETS 776,530 690,975
Premiums receivable 24,321 26,757
Reinsurance recoverables 96,068 77,724
Accrued investment income 10,578 10,126
Investment in UPEX 1,136 1,087
Deferred acquisition costs 24,905 22,696
Prepaid reinsurance premiums 67,939 66,088
Deferred income taxes 29,416 26,269
Other assets 24,284 19,525
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TOTAL ASSETS $ 1,055,177 $ 941,247
===========================
LIABILITIES
Loss and loss adjustment expenses $ 499,316 $ 457,063
Unearned premiums 210,697 205,348
Note payable to bank 70,000
Ceded balances payable 18,702 26,402
Accrued expenses and other liabilities 54,282 37,659
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TOTAL LIABILITIES 782,997 796,472
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED
SECURITIES OF EXECUTIVE RISK CAPITAL TRUST 125,000
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STOCKHOLDERS' EQUITY
Common Stock, $.01 par value; authorized - 52,500,000 shares; issued - 1997 -
10,443,878 shares and 1996 - 10,439,628 shares;
outstanding - 1997 - 9,329,457 shares and 1996 - 9,325,207 shares 105 104
Additional paid-in capital 93,615 93,651
Unrealized gains on investments, net of tax 12,845 18,382
Currency translation adjustments (436) (186)
Retained earnings 73,611 65,384
Cost of shares in treasury, at cost:
1997 and 1996 - 1,114,421 shares (32,560) (32,560)
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TOTAL STOCKHOLDERS' EQUITY 147,180 144,775
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TOTAL LIABILITIES, PREFERRED SECURITIES OF EXECUTIVE RISK
CAPITAL TRUST AND STOCKHOLDERS' EQUITY $ 1,055,177 $ 941,247
===========================
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
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EXECUTIVE RISK INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
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Three Months Ended March 31,
(In thousands, except per share data) 1997 1996
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REVENUES
Gross premiums written $ 83,035 $ 57,682
Premiums ceded (33,298) (18,831)
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Net premiums written 49,737 38,851
Change in unearned premiums (3,508) (4,938)
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NET PREMIUMS EARNED 46,229 33,913
Net investment income 10,105 7,375
Net realized capital gains 1,006 954
Other income 146 92
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TOTAL REVENUES 57,486 42,334
EXPENSES
Loss and loss adjustment expenses 31,321 22,894
Policy acquisition costs 7,481 6,744
General and administrative expenses 5,539 3,168
Long-term incentive compensation 187
Interest expense 1,419 578
Minority interest in Executive Risk Capital Trust 1,626
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TOTAL EXPENSES 47,386 33,571
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INCOME BEFORE INCOME TAXES 10,100 8,763
INCOME TAX EXPENSE (BENEFIT)
Current 2,277 1,735
Deferred (591) (197)
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1,686 1,538
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NET INCOME $ 8,414 $ 7,225
=========================
Earnings per common and common equivalent share $ 0.83 $ 0.60
Weighted average shares outstanding 10,166 12,028
Earnings per common share - assuming full dilution $ 0.83 $ 0.60
Weighted average shares outstanding - assuming full dilution 10,197 12,061
Dividends declared per common share $ 0.02 $ 0.02
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
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EXECUTIVE RISK INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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Three Months March 31,
(In thousands) 1997 1996
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OPERATING ACTIVITIES
Net income $ 8,414 $ 7,225
Adjustments to reconcile net income to net cash provided by operating
activities:
Amortization and depreciation 515 389
Share of income of UPEX (146) (92)
Deferred income taxes (591) (197)
Amortization of bond premium 363 444
Net realized gains on investments (1,006) (954)
Stock based compensation plans 1,090 791
Amortization of loan arrangement fees 910
Other 2,143 (819)
Change in:
Premiums receivable, net of ceded balances payable (5,264) (905)
Accrued investment income (452) 1,289
Deferred acquisition costs (2,209) (3,928)
Loss and loss adjustment expenses, net of reinsurance recoverables 23,909 18,117
Unearned premiums, net of prepaid reinsurance premiums 3,498 4,938
Accrued expenses and other liabilities (3,699) (1,506)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 27,475 24,792
INVESTING ACTIVITIES
Proceeds from sales of fixed maturities available for sale 60,893 24,414
Proceeds from sales of equity securities available for sale 1,144
Proceeds from maturities of investment securities 10,897 7,758
Purchase of investment securities (106,222) (16,165)
Net capital expenditures (1,843) (796)
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NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (35,131) 15,211
FINANCING ACTIVITIES
Proceeds from exercise of options 58 105
Cost of repurchase of Common Stock (75,025)
Placement fees and other (1,250)
Repayment of note payable to bank (70,000) (25,000)
Note payable to bank 70,000
Proceeds from Capital Securities offering 125,000
Dividends paid on Common Stock (187) (230)
-----------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 53,621 (30,150)
-----------------------
NET INCREASE IN CASH AND SHORT-TERM INVESTMENTS 45,965 9,853
Cash and short-term investments at beginning of period 24,706 20,244
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CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD $ 70,671 $ 30,097
=======================
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
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EXECUTIVE RISK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying unaudited interim consolidated financial
statements of Executive Risk Inc. (the "Company" or "ERI") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and notes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting solely of normal
recurring accruals) considered necessary for a fair presentation of the
financial position, results of operations and cash flows for the interim periods
have been included. Operating results for any interim period are not necessarily
indicative of results that may be expected for the full year. These consolidated
financial statements should be read in conjunction with the audited consolidated
financial statements and related notes contained in the Company's Annual Report
to Shareholders incorporated by reference in the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1996.
Certain prior year amounts have been reclassified to conform with 1997
presentation.
NOTE 2 - REDEEMABLE PREFERRED STOCKS
On February 5, 1997, the Company formed Executive Risk Capital Trust (the
"Trust"), a Delaware statutory business trust, the common securities of which
are owned by the Company. The Trust sold 125,000 8.675% Series A Capital
Securities ($1,000 per Capital Security) (the "Capital Securities") to certain
institutional accredited investors pursuant to SEC Rule 144A. The Trust used the
$125 million of proceeds received from the sale of the Capital Securities to
purchase Junior Subordinated Debentures (the "Debentures") from the Company. The
Company utilized the $123.5 million of net proceeds as follows: $70 million to
repay the amount outstanding under the term loan portion of a senior credit
facility arranged through The Chase Manhattan Bank, $45 million to make a
surplus contribution to Executive Risk Indemnity Inc. and $8.5 million for
general corporate purposes. Beginning April 22, 1997, the Capital Securities
became exchangeable for fully registered Series B Capital Securities, which are
not subject to restrictions on transfer.
Holders of the Capital Securities will be entitled to receive cumulative cash
distributions, accumulating from the date of original issuance and payable
semi-annually in arrears on February 1 and August 1 of each year at an annual
rate of 8.675%. Interest on the Debentures, and hence distributions on the
Capital Securities, may be deferred to the extent set forth in the applicable
instrument. The Capital Securities are subject to mandatory redemption on
February 1,2027, at a redemption price equal to the principal amount of, plus
accrued but unpaid distributions on, the Debentures.
The Capital Securities are also prepayable in certain other specified
circumstances at a prepayment price which includes a make-whole premium and in
certain other cases without a make-whole premium. Payments of distributions and
other amounts due on the Capital Securities have been guaranteed by the Company
to the extent set forth in the applicable guarantee instrument.
NOTE 3 - RELATIONSHIP WITH AETNA CASUALTY AND SURETY COMPANY
On February 13, 1997, the Company and Aetna Casualty and Surety Company
("Aetna") entered into a series of agreements whereby the Company released Aetna
from its contractual obligation to issue Directors and Officers liability
insurance ("D&O") exclusively through Executive Risk Management Associates
("ERMA") until December 31, 1999, and Aetna may therefore begin to compete with
the Company on D&O sooner than it otherwise could have. In exchange, Aetna has
agreed that, effective January 1, 1997, Aetna is no longer a 12.5% quota share
reinsurer of the Company's direct D&O
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EXECUTIVE RISK INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997
(UNAUDITED)
NOTE 3 - RELATIONSHIP WITH AETNA CASUALTY AND SURETY COMPANY, CONTINUED
business. Additionally, effective January 1, 1997, the Company assumes 100% of
the D&O written by ERMA on Aetna policies as compared to 50% in 1996 and prior
years. Due to these changes, in 1997 the Company pays less in ceded premiums,
and generally retains more risk, than if it had continued the prior reinsurance
agreements with Aetna.
NOTE 4 - NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), which
is required to be adopted on December 31, 1997. At that time, the Company will
be required to change the method currently used to compute earnings per share
("EPS") and to restate all prior periods. SFAS 128 replaces primary EPS with
basic EPS. Basic EPS is calculated as net income available to common
stockholders divided by the weighted average number of common shares outstanding
during the period. The dilutive effect of stock options and contingent shares is
excluded from basic EPS. The impact of SFAS 128 is expected to result in basic
earnings per share for the first quarter ended March 31, 1997 and March 31, 1996
of $0.90 and $0.64 per share, respectively. Under SFAS 128, fully diluted EPS is
replaced with diluted EPS. The impact of SFAS 128 on the calculation of diluted
EPS for these quarters is not expected to be material.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Management's discussion and analysis of financial condition and results of
operations compares certain financial results for the three months ended March
31, 1997 with the corresponding period for 1996. The results of Executive Risk
Inc. (the "Company" or "ERI") include the consolidated results of Executive Risk
Management Associates ("ERMA"), Executive Re Inc. ("Executive Re"), and
Executive Re's insurance subsidiaries, Executive Risk Indemnity Inc. ("ERII"),
Executive Risk Specialty Insurance Company ("ERSIC"), and Executive Risk, N.V.,
a Dutch insurance company incorporated in the Netherlands under the ownership of
Executive Re. In addition, the Company's results include Executive Risk Capital
Trust, a Delaware statutory business trust (the "Trust"), and the Company's 50%
interest in UAP Executive Partners ("UPEX"), a French underwriting agency which
is a joint venture between the Company and Union des Assurances de Paris --
Incendie-Accidents. This interest is reported using the equity method of
accounting.
Results of Operations
The Company's net income for the first quarter of 1997 was $8.4 million, or
$0.83 per share on a fully diluted basis, as compared to $7.2 million, or $0.60
per share on a fully diluted basis, earned in the first quarter of 1996. The
Company's operating earnings, calculated as net income before realized capital
gains or losses, net of tax, were $7.8 million, or $0.76 per share on a fully
diluted basis, for the quarter ended March 31, 1997 and $6.6 million, or $0.55
per share on a fully diluted basis, for the quarter ended March 31, 1996.
Gross premiums written increased by $25.3 million, or 44%, to $83.0 million in
the first quarter of 1997 from $57.7 million in the first quarter of 1996. The
increase was due to growth in sales in all of the Company's key lines of
business, including domestic and international directors and officers liability
insurance ("D&O") and miscellaneous professional liability errors and omissions
insurance ("E&O").
Ceded premiums increased $14.5 million, or 77%, to $33.3 million in the first
quarter of 1997 from $18.8 million in the first quarter of 1996. The rise in
ceded premiums was due principally to increased cessions
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on E&O and certain D&O products as a result of higher writings, partially offset
by a reduction in cessions to The Aetna Casualty and Surety Company ("Aetna").
Pursuant to a restructuring of the Company's relationship with Aetna entered
into on February 13, 1997, effective January 1, 1997, Aetna is no longer a 12.5%
quota share reinsurer of the Company's direct D&O business.
As a result of the foregoing, net premiums written increased $10.8 million, or
28%, to $49.7 million for the quarter ended March 31, 1997 from $38.9 million
for the quarter ended March 31, 1996. Over the same periods, net premiums earned
increased to $46.2 million from $33.9 million.
Net investment income increased by $2.7 million, or 37%, to $10.1 million for
the quarter ended March 31, 1997 from $7.4 million for the quarter ended March
31, 1996. This increase resulted principally from growth in invested assets,
measured on an amortized cost basis, from $509.9 million at March 31, 1996 to
$756.8 million at March 31, 1997, as well as an increase in nominal yields. The
nominal portfolio yield of the fixed maturity portfolio at March 31, 1997 was
6.24%, compared to 6.04% at March 31, 1996. The tax equivalent yields on the
fixed maturity portfolio were 7.95% and 8.22% for these periods, respectively.
The Company's net realized capital gains were $1.0 million in both the first
quarter of 1997 and the first quarter of 1996. In 1997, net capital gains were
realized principally from the sale of fixed maturities and equity mutual fund
distributions.
Loss and loss adjustment expenses ("LAE") increased by $8.4 million, or 37%,
from $22.9 million in the first quarter of 1996 to $31.3 million in the
comparable period of 1997 due to higher premiums earned. The Company's loss
ratio was 67.8% in the first quarter of 1997 as compared to 67.5% in the first
quarter of 1996. In connection with the Company's normal reserving review, which
includes a reevaluation of the adequacy of reserve levels for prior years'
claims, the Company reduced its unpaid loss and LAE reserves for prior report
years by $1.9 million, or $0.12 per share on a fully diluted basis, in the first
quarter of 1997. In the first quarter of 1996, the Company reduced its unpaid
loss and LAE reserves for prior report years by $1.5 million, or $0.08 per share
on a fully diluted basis. There can be no assurance that reserve adequacy
reevaluations will produce similar reserve reductions and net income increases
in future quarters.
Policy acquisition costs increased by $0.8 million, or 11%, to $7.5 million for
the quarter ended March 31, 1997 from $6.7 million for the quarter ended March
31, 1996. The Company's ratio of policy acquisition costs to net premiums earned
decreased from 19.9% in the first quarter of 1996 to 16.2% in the first quarter
of 1997. The decrease in the policy acquisition cost ratio was primarily
attributable to higher ceding commissions earned on the Company's reinsurance
programs.
General and administrative ("G&A") expenses increased $2.3 million, or 75%, to
$5.5 million in the first quarter of 1997 from $3.2 million in the first quarter
of 1996 due largely to increased compensation, benefits and related overhead
costs associated with the growth in premium volume. The ratio of G&A costs to
premiums earned increased from 9.3% in the first quarter of 1996 to 11.9% in the
first quarter of 1997.
The GAAP combined ratio decreased to 95.9% in the first quarter of 1997 from
96.7% in the first quarter of 1996. The decrease of 0.8 percentage points was
attributable to the decrease in the policy acquisition cost ratio partially
offset by increases in the G&A and loss ratios as discussed above. A combined
ratio below 100% indicates profitable underwriting prior to the consideration of
investment income, capital gains and interest expense. A company with a combined
ratio exceeding 100% can still be profitable in that period due to such factors
as investment income and capital gains realized during that period.
Interest expense of $1.4 million for the first quarter of 1997 and $0.6 million
for the first quarter of 1996 was attributable principally to the outstanding
balances under the Company's bank credit agreement. The outstanding balances
were $25 million from January 1, 1996 through March 26, 1996 and $70 million
from March 26, 1996 through February 5, 1997. On February 5, 1997, in connection
with a capital securities offering by the Trust, the Company repaid the $70
million outstanding under the term loan portion of a senior credit facility (the
"Senior Credit Facility") arranged through The Chase Manhattan Bank ("Chase").
In addition, interest expense for the first quarter of 1997 includes $0.9
million of loan arrangement fees paid to Chase in 1996 which were fully
amortized in connection with the repayment of the senior credit facility. See
"Liquidity and Capital Resources."
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Minority interest in the Trust is attributable to distributions payable on the
preferred securities of the Trust. See "Liquidity and Capital Resources."
Liquidity and Capital Resources
ERI is a holding company, the principal asset of which is equity in its
subsidiaries. ERI's cash flows depend primarily on dividends and other payments
from its subsidiaries. ERI's sources of funds consist primarily of premiums
received by the insurance subsidiaries, revenues received by ERMA under
insurance agency arrangements, investment income and proceeds from sales and
redemptions of investments. Funds are used primarily to pay claims and operating
expenses, to purchase investments, and to pay interest and principal under the
terms of the Company's indebtedness for borrowed money.
Cash flows from operating activities were $27.5 million for the quarter ended
March 31, 1997 and $24.8 million for the quarter ended March 31, 1996. The
increase in operating cash flows resulted from an increase in net premiums
received resulting from higher net premiums written partially offset by higher
losses and G&A expenses paid. Rising loss payments are expected of a maturing
professional liability underwriter.
The Company believes that it has sufficient liquidity to meet its anticipated
insurance obligations as well as its operating and capital expenditure needs.
The Company's investment strategy emphasizes quality, liquidity and
diversification. With respect to liquidity, the Company considers liability
durations, specifically loss reserves, when determining investment maturities.
Average investment duration of the fixed maturity portfolio at March 31, 1997
and December 31, 1996 was 4.9 and 4.6 years, respectively, as compared to an
expected loss reserve duration of 5.0 to 5.5 years. The Company's short-term
investment pool was $70.7 million (9.1% of the total investment portfolio) at
March 31, 1997 and $24.7 million (3.6%) at December 31, 1996. The short-term
investment pool has increased in order to fund fixed maturity purchases
anticipated to settle early in the second quarter of 1997 as well as expected
near-term operating cash outflow needs.
The Company's entire investment portfolio is classified as available for sale
under the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," and is
reported at fair value, with the resulting unrealized gains or losses included
as a separate component of stockholders' equity until realized. Due to a rise in
interest rates, the market value of the portfolio at March 31, 1997 was 101% of
amortized cost versus 103% of amortized cost at December 31, 1996. At March 31,
1997 and December 31, 1996, stockholders' equity was increased by $4.9 million
and $11.9 million, respectively, to record the Company's fixed maturity
investment portfolio at fair value. At March 31, 1997, the Company owned no
derivative instruments, except for certain mortgage and other asset backed
securities and two equity collars as described below.
On March 10, 1997, the Company and J.P. Morgan Securities Inc. ("J.P. Morgan")
entered into two agreements providing for so-called "costless collars" on the
Company's equity mutual fund holdings in order to reduce the Company's exposure
to future market fluctuations. The first collar has a range of 90.00% to 112.88%
of the Standard and Poor's ("S&P") 500 index on a notional value of $22.5
million. The second collar has a range of 90.00% to 108.48% of a custom index on
a notional value of $9.5 million. This custom index combines 50% of the S&P
Midcap index and 50% of the Russell 2000 index. The terms of the collars provide
that the Company will receive payment from J.P. Morgan should the collar indices
decline beyond the low points of the respective ranges indicated above, and the
Company will make payments to J.P. Morgan should the indices appreciate beyond
the high points of the ranges. At any level within the collar indices, the
collars will expire with no cash to be received or paid by the Company. The
collars mature on December 31, 1997. The fair value of the collars is not
recognized in the financial statements.
On February 5, 1997, the Company formed the Trust, the common securities of
which are owned by the Company. The Trust sold 125,000 8.675% Series A Capital
Securities ($1,000 per Capital Security) (the "Capital Securities") to certain
institutional accredited investors pursuant to SEC Rule 144A. The Trust used the
$125 million of proceeds received from the sale of the Capital Securities to
purchase Junior Subordinated Debentures (the "Debentures") from the Company. The
Company utilized the $123.5 million of net proceeds as follows: $70 million to
repay the amount outstanding under the term loan portion of the Senior Credit
Facility, $45 million to make a surplus contribution to ERII and $8.5 million
for general corporate purposes. Beginning
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April 22, 1997, the Capital Securities became exchangeable for fully registered
Series B Capital Securities, which are not subject to restrictions on transfer.
Holders of the Capital Securities will be entitled to receive cumulative cash
distributions, accumulating from the date of original issuance and payable
semi-annually in arrears on February 1 and August 1 of each year at an annual
rate of 8.675%. Interest on the Debentures, and hence distributions on the
Capital Securities, may be deferred to the extent set forth in the applicable
instrument. The Capital Securities are subject to mandatory redemption on
February 1, 2027, at a redemption price equal to the principal amount of, plus
accrued but unpaid distributions on, the Debentures.
The Capital Securities are also prepayable in certain other specified
circumstances at a prepayment price which includes a make-whole premium and in
certain other cases without a make-whole premium. Payments of distributions and
other amounts due on the Capital Securities have been guaranteed by the Company
to the extent set forth in the applicable guarantee instrument.
On February 18, 1997, the Company declared its first quarter dividend on the
Company's Common Stock of $.02 per share, which was paid on March 31, 1997 to
stockholders of record as of March 15, 1997. Such dividends totaled $0.2
million.
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBIT INDEX
Exhibit No. Description Page
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15 Independent Accountant's Acknowledgment Letter 12
27 Financial Data Schedule 13
b) REPORTS ON FORM 8-K
On February 18, 1997, the Company filed a Current Report on Form 8-K,
which discussed the restructuring of its underwriting and reinsurance
relationships with Aetna. Casualty and Surety Company.
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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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
s/ Robert H. Kullas Vice Chairman, Chief Operating Officer and May 13, 1997
- -------------------- Director
Robert H. Kullas
s/ Robert V. Deutsch Executive Vice President, Chief Financial Officer, May 13, 1997
- -------------------- Chief Actuary, Treasurer and Assistant Secretary
Robert V. Deutsch (Principal Financial and Accounting Officer)
</TABLE>
11
<PAGE> 1
EXHIBIT 15
Acknowledgment Letter
To the Stockholders and Board of Directors
Executive Risk Inc.
We are aware of the incorporation by reference in the Registration Statement
(Form S-8 No. 33-78414) pertaining to the Executive Risk Inc. Nonqualified Stock
Option Plan, Executive Risk Inc. Employee Incentive Nonqualified Stock Option
Plan, Executive Risk Inc. IPO Stock Compensation Plan, Executive Risk Inc.
Nonemployee Directors Stock Option Plan, and Option Agreements for Outside
Directors of Executive Re Inc. of our report dated May 2, 1997 relating to the
unaudited consolidated interim financial statements of Executive Risk Inc. which
are included in its Form 10-Q for the quarter ended March 31, 1997.
Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a part
of the registration statement prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
May 2, 1997
12
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Company's first quarter 10-Q and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 664,303
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 41,556
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 705,859
<CASH> 70,671
<RECOVER-REINSURE> 1,785
<DEFERRED-ACQUISITION> 24,905
<TOTAL-ASSETS> 1,055,177
<POLICY-LOSSES> 499,316
<UNEARNED-PREMIUMS> 210,697
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
125,000
0
<COMMON> 105
<OTHER-SE> 147,075
<TOTAL-LIABILITY-AND-EQUITY> 1,055,177
46,229
<INVESTMENT-INCOME> 10,105
<INVESTMENT-GAINS> 1,006
<OTHER-INCOME> 146
<BENEFITS> 31,321
<UNDERWRITING-AMORTIZATION> 7,481
<UNDERWRITING-OTHER> 8,584
<INCOME-PRETAX> 10,100
<INCOME-TAX> 1,686
<INCOME-CONTINUING> 8,414
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,414
<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0.83
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
