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, 1997 1-13816
- ---------------------- -----------------------
EVEREST REINSURANCE HOLDINGS, INC.
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 22-3263609
- ------------------------ ----------------------------
(State or other juris- (IRS Employer Identification
diction of incorporation Number)
or organization)
WESTGATE CORPORATE CENTER
LIBERTY CORNER, NEW JERSEY 07938-0830
-------------------------------------
(908) 604-3000
--------------
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 October 30, 1997
----- ----------------------------
COMMON STOCK, $.01 PAR VALUE 50,480,162
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
INDEX TO FORM 10-Q
PART I
FINANCIAL INFORMATION
---------------------
PAGE
ITEM 1. FINANCIAL STATEMENTS ----
--------------------
Consolidated Balance Sheets at September 30, 1997 (unaudited)
and December 31, 1996 3
Consolidated Statements of Operations for the three months
and nine months ended September 30, 1997 and 1996 (unaudited) 4
Consolidated Statements of Changes in Stockholders' Equity for
the three months and nine months ended September 30, 1997
and 1996 (unaudited) 5
Consolidated Statements of Cash Flows for the three months and
nine months ended September 30, 1997 and 1996 (unaudited) 6
Notes to Consolidated Interim Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS 12
-------------------------
PART II
OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS 16
-----------------
ITEM 2. CHANGES IN SECURITIES 16
---------------------
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 16
--------------------------------
<PAGE>
PART I - ITEM 1
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value per share)
<TABLE>
<CAPTION>
September 30, December 31,
-----------------------------
ASSETS: 1997 1996
------------- -----------
(unaudited)
<S> <C> <C>
Fixed maturities - held to maturity, at amortized cost
(market value: 1997, $0; 1996, $88,374) $ -- $ 80,522
Fixed maturities - available for sale, at market value
(amortized cost: 1997, $3,552,680; 1996, $3,194,246) 3,718,365 3,281,972
Equity securities, at market value (cost: 1997, $130,142;
1996, $115,367) 169,537 147,280
Short-term investments 30,615 49,486
Other invested assets 11,134 12,750
Cash 62,299 52,595
------------- -----------
Total investments and cash 3,991,950 3,624,605
Accrued investment income 56,842 50,211
Premiums receivable 267,796 218,087
Reinsurance receivables 672,527 749,062
Funds held by reinsureds 180,150 173,386
Deferred acquisition costs 82,121 84,123
Prepaid reinsurance premiums 6,886 5,265
Deferred tax asset 92,019 124,664
Other assets 18,712 9,949
------------- -----------
TOTAL ASSETS $ 5,369,003 $ 5,039,352
============= ===========
LIABILITIES:
Reserve for losses and loss
adjustment expenses $ 3,367,522 $ 3,246,858
Unearned premium reserve 360,029 355,908
Funds held under reinsurance treaties 192,927 177,921
Losses in the course of payment 46,044 24,343
Contingent commissions 88,089 83,279
Other net payable to reinsurers 9,838 8,779
Current federal income taxes 15,757 25,879
Other liabilities 41,878 30,362
------------- -----------
Total liabilities 4,122,084 3,953,329
------------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, par value: $0.01; 50 million shares
authorized; no shares issued and outstanding -- --
Common stock, par value: $0.01; 200 million shares
authorized; 50.8 million shares issued 508 508
Paid-in capital 389,834 389,196
Unearned compensation (592) (374)
Net unrealized appreciation of investments, net of
deferred income taxes 133,308 77,766
Cumulative foreign currency translation adjustment, net of
deferred income taxes (5,743) (354)
Retained earnings 737,678 626,501
Treasury stock, at cost; 0.3 million shares (8,074) (7,220)
------------- -----------
Total stockholders' equity 1,246,919 1,086,023
------------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,369,003 $ 5,039,352
============= ===========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
3
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
1997 1996 1997 1996
--------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Premiums earned $ 271,520 $ 245,341 $ 749,478 $ 674,416
Net investment income 57,883 49,467 169,229 140,496
Net realized capital gain/(loss) 2,722 (6,505) 15,933 979
Other income/(loss) (396) (13) 3,675 230
--------- --------- --------- ---------
331,729 288,290 938,315 816,121
--------- --------- --------- ---------
CLAIMS AND EXPENSES:
Incurred loss and loss adjustment expenses 204,234 179,856 551,266 496,411
Commission and brokerage expenses 63,116 65,402 189,122 175,687
Other underwriting expenses 13,561 13,750 40,546 41,661
--------- --------- --------- ---------
280,911 259,008 780,934 713,759
--------- --------- --------- ---------
INCOME BEFORE TAXES 50,818 29,282 157,381 102,362
Income tax 12,386 6,063 40,147 22,653
--------- --------- --------- ---------
NET INCOME $ 38,432 $ 23,219 $ 117,234 $ 79,709
========= ========= ========= =========
PER SHARE DATA:
Average shares outstanding (000's) 50,466 50,487 50,475 50,592
Net income per share $ 0.76 $ 0.46 $ 2.32 $ 1.58
========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
4
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1997 1996 1997 1996
------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
COMMON STOCK (SHARES OUTSTANDING):
Balance, beginning of period 50,465,552 50,486,638 50,490,273 50,792,869
Issued during the period 17,400 -- 21,200 --
Treasury stock acquired during period (6,400) -- (36,396) (306,231)
Treasury stock reissued during period 1,125 -- 2,600 --
------------ ------------ ------------ ------------
Balance net of treasury stock, end of period 50,477,677 50,486,638 50,477,677 50,486,638
============ ============ ============ ============
COMMON STOCK (PAR VALUE):
Balance, beginning of period $ 508 $ 508 $ 508 $ 508
Issued during the period -- -- -- --
------------ ------------ ------------ ------------
Balance, end of period 508 508 508 508
------------ ------------ ------------ ------------
ADDITIONAL PAID IN CAPITAL:
Balance, beginning of period 389,268 389,132 389,196 387,349
Contributions during the period -- -- -- 1,783
Common stock issued during the period 549 -- 612 --
Treasury stock reissued during the period 17 -- 26 --
------------ ------------ ------------ ------------
Balance, end of period 389,834 389,132 389,834 389,132
------------ ------------ ------------ ------------
UNEARNED COMPENSATION:
Balance, beginning of period (274) (513) (374) (692)
Net (increase) decrease during the period (318) 89 (218) 268
------------ ------------ ------------ ------------
Balance, end of period (592) (424) (592) (424)
------------ ------------ ------------ ------------
NET UNREALIZED APPRECIATION(DEPRECIATION) OF
INVESTMENTS, NET OF DEFERRED INCOME TAXES:
Balance, beginning of period 87,349 25,663 77,766 83,726
Net increase (decrease) during the period 45,959 19,054 55,542 (39,009)
------------ ------------ ------------ ------------
Balance, end of period 133,308 44,717 133,308 44,717
------------ ------------ ------------ ------------
CUMULATIVE TRANSLATION ADJUSTMENTS,
NET OF DEFERRED INCOME TAXES:
Balance, beginning of period (4,896) (8,779) (354) (7,838)
Net increase (decrease) during the period (847) 956 (5,389) 15
------------ ------------ ------------ ------------
Balance, end of period (5,743) (7,823) (5,743) (7,823)
------------ ------------ ------------ ------------
RETAINED EARNINGS:
Balance, beginning of period 701,265 573,993 626,501 520,541
Net income 38,432 23,219 117,234 79,709
Dividends declared ($0.04 and $0.12 per share in 1997
and $0.03 and $0.09 per share in 1996) (2,019) (1,515) (6,057) (4,553)
------------ ------------ ------------ ------------
Balance, end of period 737,678 595,697 737,678 595,697
------------ ------------ ------------ ------------
TREASURY STOCK AT COST:
Balance, beginning of period (7,993) (7,216) (7,220) --
Treasury stock acquired during period (107) -- (915) (7,216)
Treasury stock reissued during period 26 -- 61 --
------------ ------------ ------------ ------------
Balance, end of period (8,074) (7,216) (8,074) (7,216)
------------ ------------ ------------ ------------
TOTAL STOCKHOLDERS' EQUITY, END OF PERIOD $ 1,246,919 $ 1,014,591 $ 1,246,919 $ 1,014,591
============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
5
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1997 1996 1997 1996
-------------------------- --------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: (unaudited)
<S> <C> <C> <C> <C>
Net income $ 38,432 $ 23,219 $ 117,234 $ 79,709
Adjustments to reconcile net income to net cash
provided by operating activities:
(Increase) decrease in premiums receivable (30,325) 28,424 (51,116) 21,846
(Increase) decrease in funds held by reinsureds, net (5,646) (2,748) 7,572 22,822
(Increase) decrease in reinsurance receivables 1,034 9,728 76,536 (3,772)
(Increase) decrease in deferred tax asset 13,538 598 5,645 (3,372)
Increase in reserve for losses and loss adjustment
expenses 68,261 24,740 128,945 121,344
Increase in unearned premiums 4,430 30,925 5,603 60,232
(Increase) decrease in other assets and liabilities (12,360) 320 8,200 (12,575)
Non cash compensation expense (318) 89 (218) 268
Accrual of bond discount/amortization of bond premium 136 (1,384) (579) (305)
Realized capital (gains) losses (2,722) 6,505 (15,933) (979)
----------- ----------- ----------- -----------
Net cash provided by operating activities 74,460 120,416 281,889 285,218
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from fixed maturities matured/called - held to
maturity -- 239 2,155 10,483
Proceeds from fixed maturities matured/called - available
for sale (97,702) 44,690 105,449 105,421
Proceeds from fixed maturities sold - available for sale 256,270 718,983 1,001,034 992,397
Proceeds from equity securities sold 9,609 86,817 73,129 150,212
Cost of fixed maturities acquired - held to maturity -- -- -- (25)
Cost of fixed maturities acquired - available for sale (229,464) (922,241) (1,411,626) (1,358,330)
Cost of equity securities acquired (13,968) (87,159) (53,104) (141,037)
Net (purchases) sales of other invested assets acquired (655) (1,425) 1,082 (4,326)
Net (purchases) sales of short-term securities 55,145 10,239 20,205 (35,409)
Net increase (decrease) in unsettled securities transactions (22,117) 27,683 5,626 26,532
Net (decrease) in collateral for loaned securities -- -- -- (19,897)
----------- ----------- ----------- -----------
Net cash (used in) investing activities (42,882) (122,174) (256,050) (273,979)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (64) -- (828) (7,216)
Contributions during the period -- -- -- 1,783
Common stock issued during the period 549 -- 612 --
Dividends paid to stockholders (2,019) (1,515) (6,057) (4,553)
----------- ----------- ----------- -----------
Net cash (used in) financing activities (1,534) (1,515) (6,273) (9,986)
----------- ----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH: (5,725) (2,039) (9,862) (2,061)
----------- ----------- ----------- -----------
Net increase (decrease) in cash 24,319 (5,312) 9,704 (808)
Cash, beginning of period 37,980 55,416 52,595 50,912
----------- ----------- ----------- -----------
Cash, end of period $ 62,299 $ 50,104 $ 62,299 $ 50,104
=========== =========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
CASH TRANSACTIONS:
Income taxes paid, net $ 6,390 $ 14,202 $ 43,799 $ 43,523
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
6
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(DOLLARS IN THOUSANDS)
1. GENERAL
The consolidated financial statements of Everest Reinsurance Holdings Inc. (the
"Company") for the three months and nine months ended September 30, 1997 and
1996 include all adjustments, consisting of normal recurring accruals, which, in
the opinion of management, are necessary for a fair presentation of 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 condensed 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, 1997 and 1996 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, 1996, 1995 and 1994.
2. 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 (i) the mitigation or remediation of environmental contamination
or (ii) 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: (i) potentially
long waiting periods between exposure and manifestation of any bodily injury or
property damage; (ii) difficulty in identifying sources of asbestos or
environmental contamination; (iii) difficulty in properly allocating
responsibility and/or liability for asbestos or environmental damage; (iv)
changes in underlying laws and judicial interpretation of those laws; (v)
potential for an asbestos or environmental claim to involve many insurance
providers over many policy periods; (vi) long reporting delays, both from
insureds to insurance companies and ceding companies to reinsurers; (vii)
limited historical data concerning asbestos and environmental losses; (viii)
questions concerning interpretation and application of insurance and reinsurance
coverage; and (ix) uncertainty regarding the number and identity of insureds
with potential asbestos or environmental exposure.
7
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(DOLLARS IN THOUSANDS)
Management believes that these issues are not likely to be resolved in the near
future. The Company establishes reserves to the extent that, in the judgment of
management, the facts and prevailing law reflect an exposure for the Company or
its ceding company. In connection with its initial public offering in October
1995, the Company purchased an aggregate stop loss retrocession agreement (the
"Stop Loss Agreement") from Gibraltar Casualty Company ("Gibraltar"), an
affiliate of the Company's former parent, The Prudential Insurance Company of
America ("The Prudential"). This coverage protects the Company's consolidated
earnings against up to $375.0 million of the first $400.0 million of adverse
development, if any, on the Company's consolidated reserves for losses,
allocated loss adjustment expenses and uncollectible reinsurance at June 30,
1995 (December 31, 1994 for catastrophe losses). Due to the uncertainties
discussed above, the ultimate losses may vary materially from current loss
reserves and, if coverage under the Stop Loss Agreement is exhausted, 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, 1997 and 1996:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
----------------------- -----------------------
Gross Basis:
<S> <C> <C> <C> <C>
Beginning of period
reserves $ 426,594 $ 418,830 $ 423,336 $ 428,495
Incurred losses 11,361 15,637 40,023 28,359
Paid losses (7,988) (9,786) (33,392) (32,173)
--------- --------- --------- ---------
End of period
reserves $ 429,967 $ 424,681 $ 429,967 $ 424,681
========= ========= ========= =========
Net Basis:
Beginning of period
reserves $ 203,420 $ 197,508 $ 200,989 $ 197,668
Incurred losses 807 - 1,268 -
Paid losses 5,766 5,241 7,736 5,081
--------- --------- --------- ---------
End of period
reserves $ 209,993 $ 202,749 $ 209,993 $ 202,749
========= ========= ========= =========
</TABLE>
8
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(DOLLARS IN THOUSANDS)
At September 30, 1997, the gross reserves for asbestos and environmental losses
were comprised of $120,347 representing case reserves reported by ceding
companies, $51,051 representing additional case reserves established by the
Company on assumed reinsurance claims, $50,721 representing case reserves
established by the Company on direct excess insurance claims and $207,848
representing incurred but not reported ("IBNR") reserves. To the extent loss
reserves on assumed reinsurance need to be increased and were not ceded to
unaffiliated reinsurers under existing reinsurance agreements, the Company would
be entitled to certain reimbursements under the Stop Loss Agreement. To the
extent loss reserves on direct excess insurance policies needed to be increased
and were not ceded to unaffiliated reinsurers under existing reinsurance
agreements, the Company would be entitled to 100% protection from Gibraltar
under a retrocessional agreement in place since 1986. While there can be no
assurance that reserves for and losses from these claims would not increase in
the future, management believes that the Company's existing reserves and ceded
reinsurance arrangements, including reimbursements available under the Stop Loss
Agreement, lessen the probability that such increases, if any, would have a
material adverse effect on the Company's financial condition, results of
operations or cash flows.
The Company is also named in various legal proceedings incidental to its normal
business activities. In the opinion of management, none of these proceedings is
likely to have a material adverse effect upon the financial condition, results
of operations or cash flows of the Company.
The Prudential sells annuities which are purchased by property and casualty
insurance companies to settle certain types of claim liabilities. In 1993 and
prior, the Company, for a fee, accepted the claim payment obligation of the
property and casualty insurer, 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, 1997 was $138,716.
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.
The estimated cost to replace such annuities at September 30, 1997 was $9,770.
3. INVESTMENTS
In the second quarter, the Company transferred all of the fixed maturity
securities in its held-to-maturity classification (with an amortized cost of
$79.0 million and market value of $85.5 million) to the available-for-sale
classification to enhance management's flexibility with respect to future
portfolio management. The net financial statement impact of the transfer was a
$4.2 million increase in net after-tax unrealized appreciation of investments.
9
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(DOLLARS IN THOUSANDS)
4. CREDIT LINE
On June 16, 1997, the Company finalized a 364 day revolving line of credit with
First Union National Bank. This facility, which will be used for liquidity and
general corporate purposes, provides for the borrowing of up to $50 million with
interest at a rate selected by the Company equal to either (i) the Base Rate (as
defined below), (ii) an adjusted London InterBank Offered Rate ("LIBOR") plus a
margin (the "Margin") or (iii) a Money Market Rate, which is a daily uncommitted
advised rate. The Base Rate is the higher of the rate of interest established by
the bank from time to time as its reference rate in making loans or the Federal
Funds rate plus 0.5% per annum. The amount of the Margin and the commitment fee
payable to the bank for the Credit Facility depend upon the insurance strength
or claims paying ability ratings of Everest Reinsurance Company ("Everest Re"),
a subsidiary of the Company. The Credit Facility agreement requires that Everest
Re maintain statutory surplus of not less than $575 million and that the Company
not allow its ratio of certain debt to capital to be greater than a specified
amount.
5. NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS
128 establishes new standards for computing and presenting earnings per share
("EPS"), including replacing primary EPS, as defined by APB Opinion No. 15, with
basic EPS, requiring dual presentation of basic and diluted EPS on the face of
the statement of operations for all entities with complex capital structures and
requiring certain disclosures. SFAS 128 is effective for financial statements
issued for periods ending after December 15, 1997 and requires restatement of
all prior period EPS data presented.
The Company has calculated basic and diluted EPS, as defined by SFAS 128, and
determined that such amounts do not differ materially from primary EPS amounts
historically presented in the Company's statements of operations.
6. CAPITAL
On April 1, 1997, the Company transferred a total of 1,475 shares of treasury
stock having an aggregate value of $44, and on July 1, 1997, the Company
transferred a total of 1,125 shares of treasury stock having an aggregate value
of $44, to its non-employee directors as compensation for their service as
directors.
On April 15, 1997, the Company acquired 29,996 shares of its
common stock at a cost of $808 from the Company's Chief
Executive Officer to fund the Chief Executive Officer's remaining
10
<PAGE>
income tax liability resulting from the October 1995 grant of common stock
under the Company's 1995 Stock Incentive Plan.
On September 26, 1997, the Company, pursuant to its 1995 Stock Incentive Plan,
issued 11,500 restricted shares of stock to key employees. Upon issuance of
restricted shares, unearned compensation is charged to stockholder's equity and
amortized over the vesting period. Also, during the quarter ended September 30,
1997, the Company acquired 6,400 forfeited restricted shares.
11
<PAGE>
PART I - ITEM 2
EVEREST REINSURANCE HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1996
PREMIUMS. Gross premiums written increased 1.2% to $285.8 million in the
three months ended September 30, 1997 from $282.4 million in the three months
ended September 30, 1996, as competitive market conditions continued to limit
acceptable growth opportunities. Factors contributing to this increase include a
14.1% increase (to $92.5 million) in U.S. broker treaty operations, largely
attributable to an incoming portfolio reinsurance transaction, a 10.4% increase
(to $37.2 million) in U.S. direct treaty reinsurance and insurance operations,
primarily attributable to growth in primary insurance written through Everest
National, and a 0.2% increase (to $96.9 million) in international operations,
partially offset by a 16.6% decrease (to $38.4 million) in marine, aviation and
surety operations, and a 16.4% decrease (to $20.8 million) in U.S. facultative
operations.
Ceded premiums increased to $9.9 million in the three months ended September
30, 1997 from $7.4 million in the three months ended September 30, 1996. This
increase was principally attributable to increased retrocessional protections
for international catastrophe exposures and increases in the Company's contract
specific retrocessions.
Net premiums written increased by 0.3% to $275.9 million in the three months
ended September, 1997 from $275.0 million in the three months ended September
30, 1996 consistent with the growth in gross premiums written and ceded
premiums.
REVENUES. Net premiums earned increased by 10.7% to $271.5 million in the
three months ended September 30, 1997 from $245.3 million in the three months
ended September 30, 1996, as the increase attributable to growth in net premiums
written over the preceding twelve months was enhanced by the incoming portfolio
reinsurance transaction, the premium for which was fully earned in the period.
Net investment income increased 17.0% to $57.9 million in the three months
ended September 30, 1997 from $49.5 million in the three months ended September
30, 1996, principally reflecting both the effect of investing the $410.6 million
of cash flow from operations in the twelve months ended September 30, 1997 and
higher yields earned from extending the duration of the investment portfolio.
The annualized pre-tax yield on average cash and invested assets improved to
6.2% in the three months ended September 30, 1997, from the 6.0% yield in the
three months ended September 30, 1996.
Net realized capital gains were $2.7 million in the three
months ended September 30, 1997, compared to net realized capital
losses of $6.5 million in the three months ended September 30,
12
<PAGE>
1996, with the gains in the three months ended September 30, 1997 mainly arising
from activity in the Company's portfolio of equity securities and the capital
losses in the three months ended September 30, 1996 resulting from the sale of
fixed maturities more than offsetting the capital gains realized on the sale
of equity securities.
EXPENSES. Incurred losses and loss adjustment expenses ("LAE") increased by
13.6 % to $204.2 million in the three months ended September 30, 1997 from
$179.9 million in the three months ended September 30, 1996. The Company's loss
and LAE ratio increased by 1.9 percentage points to 75.2% in the three months
ended September 30, 1997 from 73.3% in the three months ended September 30,
1996, as the impact of the incoming portfolio reinsurance transaction noted
earlier more than offset the favorable impact of other changes in the Company's
mix of business. Net incurred losses and LAE for the three months ended
September 30, 1997 reflected ceded losses and LAE of $20.5 million, including
$11.1 million ceded under the Stop Loss Agreement, compared to ceded losses and
LAE of $18.5 million in the three months ended September 30, 1996, including
$12.3 million ceded under the Stop Loss Agreement.
Underwriting expenses decreased by 3.1% to $76.7 million in the three months
ended September 30, 1997 from $79.2 million in the three months ended September
30, 1996. Commission and brokerage expenses decreased by $2.3 million,
principally relating to changes in the Company's mix of business, including the
absence of commissions on the portfolio reinsurance transaction. Other
underwriting expenses decreased by $0.2 million, reflecting the impact of the
Company's continuing expense reduction initiatives. The Company had 381
employees at September 30, 1997 compared to 409 employees at September 30, 1996.
The Company's expense ratio was 28.3% in the three months ended September 30,
1997 compared to 32.3% in the three months ended September 30, 1996.
The Company's combined ratio decreased to 103.5% in the three months
ended September 30, 1997 compared to 105.6% in the three months ended September
30, 1996.
INCOME TAXES. The Company recognized income tax expense of $12.4 million in
the three months ended September 30, 1997 compared to $6.1 million in the three
months ended September 30, 1996. The principal cause of this change was the
increase in realized capital gains and other pre-tax income.
NET INCOME. Net income was $38.4 million in the three months ended September
30, 1997 compared to $23.2 million in the three months ended September 30, 1996.
This mainly reflected improved underwriting results and higher investment income
and capital gains.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1996
PREMIUMS. Gross premiums written increased 3.3% to $785.0 million in the
nine months ended September 30, 1997 from $759.8 million in the nine months
ended September 30, 1996. Factors contributing to this increase included
a 17.6% increase (to $125.0 million) in U.S. direct treaty reinsurance
and insurance operations, attributable to growth in primary insurance written
13
<PAGE>
through Everest National, a 2.5% increase (to $270.3 million) in international
operations, driven by modest growth in most areas of the world, and a 2.0%
increase (to $213.2 million) in U.S. broker treaty operations. These gains were
partially offset by a 3.0% decrease (to $115.9 million) in marine, aviation and
surety operations and a 0.9% decrease (to $60.7 million) in U.S. facultative
operations.
Ceded premiums decreased to $29.2 million in the nine months ended September
30, 1997 from $30.1 million in the nine months ended September 30, 1996. This
decrease was principally attributable to reduced common account retrocessions by
ceding sources and changes in the Company's utilization of contract specific
retrocessions.
Net premiums written increased by 3.6 % to $755.8 million in the nine months
ended September 30, 1997 from $729.7 million in the nine months ended September
30, 1996 reflecting the growth in gross premiums written and reductions in ceded
premiums.
REVENUES. Net premiums earned increased by 11.1% to $749.5 million in the
nine months ended September 30, 1997 from $674.4 million in the nine months
ended September 30, 1996, generally consistent with the growth in net premiums
written including the incoming portfolio reinsurance transaction recorded during
the third quarter of 1997.
Net investment income increased 20.5% to $169.2 million in the nine months
ended September 30, 1997 from $140.5 million in the nine months ended September
30, 1996, reflecting both the effect of investing the $410.6 million of cash
flow from operations in the twelve months ended September 30, 1997 and higher
yields earned from extending the duration of the investment portfolio. The
annualized pre-tax yield on average cash and invested assets improved to 6.2% in
the nine months ended September 30, 1997 from 5.8% in the nine months ended
September 30, 1996.
Net realized capital gains were $15.9 million in the nine months ended
September 30, 1997, compared to $1.0 million in the nine months ended September
30, 1996 with the gains in both periods mainly arising from activity in the
Company's portfolio of equity securities, including, in 1997, a $14.0 million
gain on the sale of the Company's investment in the common stock of Corporacion
MAPFRE, a publicly traded Spanish insurer.
EXPENSES. Incurred losses and LAE increased by 11.1% to $551.3 million in the
nine months ended September 30, 1997 from $496.4 million in the nine months
ended September 30, 1996. The Company's loss and LAE ratio was 73.6% for the
nine months ended September 30, 1997 unchanged from the nine months ended
September 30, 1996, as the impact of the portfolio reinsurance transaction
offset the favorable impact of other changes in the Company's mix of business.
Net incurred losses and LAE for the nine months ended September 30, 1997
reflected ceded losses and LAE of $52.8 million, including $25.0 million ceded
under the Stop Loss Agreement, compared to ceded losses and LAE of $87.9 million
in the nine months ended September 30, 1996, including $41.8 million ceded under
the Stop Loss Agreement.
Underwriting expenses increased by 5.7% to $229.7 million in the nine
months ended September 30, 1997 from $217.3 million in the nine months ended
September 30, 1996. Commission and brokerage expenses increased by $13.4
million, principally reflecting the higher level of earned premiums. Other
underwriting expenses decreased by $1.1 million, reflecting the impact of
the Company's continuing expense reduction initiatives. The Company's expense
14
<PAGE>
ratio was 30.6% in the nine months ended September 30, 1997 compared to 32.3%
in the nine months ended September 30, 1996.
The Company's combined ratio decreased to 104.2% in the nine months ended
September 30, 1997 from 105.8% in the nine months ended September 30, 1996.
INCOME TAXES. The Company recognized income tax expense of $40.1 million in
the nine months ended September 30, 1997 compared to $22.7 million in the nine
months ended September 30, 1996. The principal cause of this change was the
increase in capital gains and other pre-tax income.
NET INCOME. Net income was $117.2 million in the nine months ended September
30, 1997 compared to $79.7 million in the nine months ended September 30, 1996.
This improvement mainly reflected improved underwriting results and higher
investment income and capital gains.
FINANCIAL CONDITION
INVESTED ASSETS. Aggregate invested assets, including cash and short-term
investments, were $3,992.0 million at September 30, 1997 and $3,624.6 million at
December 31, 1996. The increase in invested assets between December 31, 1996 and
September 30, 1997 resulted primarily from cash flow from operations of $281.9
million generated during the nine months ended September 30, 1997 coupled with
an increase of $101.4 million in net appreciation on investments.
CREDIT LINE. On June 16, 1997, the Company finalized a 364 day revolving line
of credit with First Union National Bank which will be used for liquidity and
general corporate purposes. For additional information regarding this Credit
Facility, see Note 4 to the Consolidated Financial Statements (Unaudited).
STOCKHOLDERS' EQUITY. Holdings' stockholders' equity increased to $1,246.9
million as of September 30, 1997, from $1,086.0 million as of December 31, 1996
principally reflecting net income of $117.2 million for the nine months ended
September 30, 1997 and an increase of $55.5 million in unrealized appreciation
on investments, net of deferred taxes. Dividends of $6.1 million were declared
and paid by Holdings in the nine months ended September 30, 1997.
15
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
OTHER INFORMATION
Part II - ITEM 1. LEGAL PROCEEDINGS
The Company is subject to litigation and arbitration in the normal course of its
business. Management does not believe that any such pending litigation or
arbitration will have a material adverse effect on the Company's results of
operations, financial condition and cash flows.
Part II - ITEM 2. CHANGES IN SECURITIES
(c) Information required by Item 701 of Regulation S-K:
(a) On July 1, 1997, 1,125 common shares of the Company (previously
held as treasury shares) were distributed.
(b) The securities were distributed to the Company's five non-
employee directors.
(c) The securities were issued as compensation to the non-employee
directors for services rendered to the Company during the second
quarter of 1997.
(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
16
<PAGE>
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K for the three months ended
September 30, 1997.
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.
17
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Everest Reinsurance Holdings, Inc.
(Registrant)
- By: /s/ Robert P. Jacobson
-------------------------------------
Robert P. Jacobson
Duly Authorized Officer, Senior Vice President
and Chief Financial Officer
Dated: October 30, 1997
<PAGE>
Exhibit 11.1
EVEREST REINSURANCE HOLDINGS, INC.
COMPUTATION OF EARNINGS PER SHARE
TREASURY STOCK METHOD
SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRIMARY FULLY DILUTED
EARNINGS EARNINGS
PER SHARE PER SHARE
----------- -------------
<S> <C> <C>
Net income $ 117,234
Weighted average common shares outstanding 50,475,356
Earnings per share based on weighted average
of common shares $ 2.32
===========
Dilutive effect of stock options 271,794 307,296
Dilutive effect of options exercised 882 909
Dilutive effect of options cancelled 3,131 3,306
Average number of common shares outstanding 50,475,356 50,475,356
Average number of common and common
equivalent shares outstanding 50,751,163 50,786,867
Net income $ 117,234 $ 117,234
Earnings per share $ 2.31 $ 2.31
=========== =============
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 3,718,365
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 169,537
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 3,929,651
<CASH> 62,299
<RECOVER-REINSURE> 672,527
<DEFERRED-ACQUISITION> 82,121
<TOTAL-ASSETS> 5,369,003
<POLICY-LOSSES> 3,367,522
<UNEARNED-PREMIUMS> 360,029
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 508
<OTHER-SE> 1,246,411
<TOTAL-LIABILITY-AND-EQUITY> 5,369,003
749,478
<INVESTMENT-INCOME> 169,229
<INVESTMENT-GAINS> 15,933
<OTHER-INCOME> 3,675
<BENEFITS> 551,266
<UNDERWRITING-AMORTIZATION> (1,143)
<UNDERWRITING-OTHER> 228,525
<INCOME-PRETAX> 157,381
<INCOME-TAX> 40,147
<INCOME-CONTINUING> 117,234
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 117,234
<EPS-PRIMARY> 2.32
<EPS-DILUTED> 0
<RESERVE-OPEN> 3,246,858
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 3,367,522
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
