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:
JUNE 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 August 1, 1997
----- ----------------------------
COMMON STOCK, $.01 PAR VALUE 50,467,077
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
INDEX TO FORM 10-Q
PART I
FINANCIAL INFORMATION
---------------------
PAGE
----
ITEM 1. FINANCIAL STATEMENTS
--------------------
Consolidated Balance Sheets at June 30, 1997 (unaudited)
and December 31, 1996 3
Consolidated Statements of Operations for the three months
and six months ended June 30, 1997 and 1996 (unaudited) 4
Consolidated Statements of Changes in Stockholders' Equity
for the three months and six months ended June 30, 1997
and 1996 (unaudited) 5
Consolidated Statements of Cash Flows for the three months
and six months ended June 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 11
-------------------------
PART II
OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS 15
-----------------
ITEM 2. CHANGES IN SECURITIES 15
---------------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES None
-------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
---------------------------------------------------
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>
June 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, $3,488,505; 1996,
$3,194,246) 3,592,042 3,281,972
Equity securities, at market value
(cost: 1997, $123,002; 1996,
$115,367) 153,849 147,280
Short-term investments 84,685 49,486
Other invested assets 11,013 12,750
Cash 37,980 52,595
----------- -----------
Total investments and cash 3,879,569 3,624,605
Accrued investment income 54,630 50,211
Premiums receivable 238,589 218,087
Reinsurance receivables 673,789 749,062
Funds held by reinsureds 175,038 173,386
Deferred acquisition costs 79,323 84,123
Prepaid reinsurance premiums 6,921 5,265
Deferred tax asset 127,565 124,664
Other assets 13,463 9,949
----------- -----------
TOTAL ASSETS $ 5,248,887 $ 5,039,352
=========== ===========
LIABILITIES:
Reserve for losses and loss
adjustment expenses $ 3,305,266 $ 3,246,858
Unearned premium reserve 357,352 355,908
Funds held under reinsurance treaties 193,311 177,921
Losses in the course of payment 48,651 24,343
Contingent commissions 87,283 83,279
Other net payable to reinsurers 10,333 8,779
Current federal income taxes 21,441 25,879
Other liabilities 60,023 30,362
----------- -----------
Total liabilities 4,083,660 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 389,268 389,196
Unearned compensation (274) (374)
Net unrealized appreciation of
investments, net of deferred
income taxes 87,349 77,766
Cumulative foreign currency
translation adjustment, net of
deferred income taxes (4,896) (354)
Retained earnings 701,265 626,501
Treasury stock, at cost; 0.3 million
shares (7,993) (7,220)
----------- -----------
Total stockholders' equity 1,165,227 1,086,023
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 5,248,887 $ 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 Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1997 1996 1997 1996
------------ ----------- ----------- -----------
(unaudited)
REVENUES:
<S> <C> <C> <C> <C>
Premiums earned $ 247,515 $ 218,806 $ 477,958 $ 429,075
Net investment income 57,304 46,261 111,346 91,029
Net realized capital
gain/(loss) 13,410 3,672 13,211 7,484
Other income/(loss) 837 619 4,071 243
------------ ----------- ----------- -----------
319,066 269,358 606,586 527,831
------------ ----------- ----------- -----------
CLAIMS AND EXPENSES:
Incurred loss and loss
adjustment expenses 180,191 161,430 347,032 316,555
Commission and brokerage
expenses 64,961 55,806 126,006 110,285
Other underwriting
expenses 13,276 14,040 26,985 27,911
------------ ----------- ----------- -----------
258,428 231,276 500,023 454,751
------------ ----------- ----------- -----------
INCOME BEFORE TAXES 60,638 38,082 106,563 73,080
Income tax 16,300 9,343 27,761 16,590
------------ ----------- ----------- -----------
NET INCOME $ 44,338 $ 28,739 $ 78,802 $ 56,490
============ =========== =========== ===========
PER SHARE DATA:
Average shares
outstanding (000's) 50,469 50,497 50,480 50,645
Net income per share $ 0.88 $ 0.57 $ 1.56 $ 1.12
============ =========== =========== ===========
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 Six Months Ended
June 30, June 30,
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- ------------
(unaudited)
<S> <C> <C> <C> <C>
COMMON STOCK (shares
outstanding):
Balance, beginning of
period 50,490,673 50,792,869 50,490,273 50,792,869
Issued during the period 3,400 - 3,800 -
Treasury stock acquired
during period (29,996) (306,231) (29,996) (306,231)
Treasury stock reissued
during period 1,475 - 1,475 -
----------- ----------- ----------- ------------
Balance net of treasury
stock, end of period 50,465,552 50,486,638 50,465,552 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 389,202 387,349 389,196 387,349
Contributions during the
period - 1,783 - 1,783
Common stock issued during
the period 57 - 63 -
Treasury stock reissued
during the period 9 - 9 -
----------- ----------- ----------- ------------
Balance, end of period 389,268 389,132 389,268 389,132
----------- ----------- ----------- ------------
UNEARNED COMPENSATION:
Balance, beginning of period (324) (602) (374) (692)
Net decrease during the
period 50 89 100 179
----------- ----------- ----------- ------------
Balance, end of period (274) (513) (274) (513)
----------- ----------- ----------- ------------
NET UNREALIZED APPRECIATION
(DEPRECIATION) OF INVESTMENTS,
NET OF DEFERRED INCOME TAXES:
Balance, beginning of period 36,234 41,718 77,766 83,726
Net increase (decrease) during
the period 51,115 (16,055) 9,583 (58,063)
----------- ----------- ----------- ------------
Balance, end of period 87,349 25,663 87,349 25,663
----------- ----------- ----------- ------------
CUMULATIVE TRANSLATION
ADJUSTMENTS, NET OF
DEFERRED INCOME TAXES:
Balance, beginning of
period (4,666) (9,355) (354) (7,838)
Net increase (decrease)
during the period (230) 576 (4,542) (941)
----------- ----------- ----------- ------------
Balance, end of period (4,896) (8,779) (4,896) (8,779)
----------- ----------- ----------- ------------
RETAINED EARNINGS:
Balance, beginning of period 658,945 546,768 626,501 520,541
Net income 44,338 28,739 78,802 56,490
Dividends declared ($0.04
and $0.08 per share in 1997
and $0.03 and $0.06 per
share in 1996) (2,018) (1,514) (4,038) (3,038)
----------- ----------- ----------- ------------
Balance, end of period 701,265 573,993 701,265 573,993
----------- ----------- ----------- ------------
TREASURY STOCK AT COST:
Balance, beginning of period (7,220) - (7,220) -
Treasury stock acquired
during period (808) (7,216) (808) (7,216)
Treasury stock reissued
during period 35 - 35 -
----------- ----------- ----------- ------------
Balance, end of period (7,993) (7,216) (7,993) (7,216)
----------- ----------- ----------- ------------
TOTAL STOCKHOLDERS' EQUITY,
END OF PERIOD $ 1,165,227 $ 972,788 $ 1,165,227 $ 972,788
=========== =========== =========== ============
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 June 30, Six Months Ended June 30,
----------------------------- ---------------------------
1997 1996 1997 1996
----------------------------- ---------------------------
CASH FLOWS FROM OPERATING
ACTIVITIES: (unaudited)
<S> <C> <C> <C> <C>
Net income $ 44,338 $ 28,739 $ 78,802 $ 56,490
Adjustments to reconcile
net income to net cash
provided by operating
activities:
(Increase) decrease in
premiums receivable 7,758 (5,096) (20,791) (6,578)
(Increase) decrease in
funds held by reinsureds,
net (3,558) 1,043 13,218 25,570
(Increase) decrease in
reinsurance receivables 56,398 19,948 75,502 (13,500)
(Increase) in deferred tax
asset (3,988) (865) (7,893) (3,970)
Increase in reserve for
losses and loss adjustment
expenses 25,872 24,851 60,684 96,604
Increase (decrease) in
unearned premiums (5,557) 19,908 1,173 29,307
(Increase) decrease in other
assets and liabilities 13,800 (18,215) 20,560 (12,895)
Non cash compensation expense 50 89 100 179
Accrual of bond discount/
amortization of bond premium (368) 323 (715) 1,079
Realized capital (gains) losses (13,410) (3,672) (13,211) (7,484)
------------ ----------- ----------- -----------
Net cash provided by operating
activities 121,335 67,053 207,429 164,802
------------ ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from fixed maturities
matured/called - held to maturity - 5,851 2,155 10,244
Proceeds from fixed maturities
matured/called - available for sale 142,757 41,911 203,151 60,731
Proceeds from fixed maturities
sold - available for sale 453,502 174,223 744,764 273,414
Proceeds from equity securities sold 53,141 31,677 63,520 63,395
Cost of fixed maturities acquired -
held to maturity - - - (25)
Cost of fixed maturities acquired -
available for sale (738,788) (264,354) (1,182,162) (436,089)
Cost of equity securities acquired (25,810) (23,707) (39,136) (53,878)
Cost of other invested assets acquired (31,708) (2,709) (33,203) (2,901)
Net (purchases) sales of short-term
securities 1,611 (12,720) - (45,648)
Net increase (decrease) in unsettled
securities transactions 16,364 63 27,743 (1,151)
Net (decrease) in collateral for
loaned securities - (21,674) - (19,897)
------------ ----------- ---------- -----------
Net cash (used in) investing
activities (128,931) (71,439) (213,168) (151,805)
------------ ----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (764) (7,216) (764) (7,216)
Contributions during the period - 1,783 - 1,783
Common stock issued during the period 57 - 63 -
Dividends paid to stockholders (2,018) (1,514) (4,038) (3,038)
------------ ----------- ---------- -----------
Net cash (used in) financing
activities (2,725) (6,947) (4,739) (8,471)
------------ ----------- ---------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH: 3,018 1,132 (4,137) (22)
------------ ----------- ---------- -----------
Net increase (decrease) in cash (7,303) (10,201) (14,615) 4,504
Cash, beginning of period 45,283 65,617 52,595 50,912
------------ ----------- ---------- -----------
Cash, end of period $ 37,980 $ 55,416 $ 37,980 $ 55,416
============ =========== ========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash transactions:
Income taxes paid, net $ 18,198 $ 17,463 $ 37,409 $ 29,321
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 SIX MONTHS ENDED JUNE 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 six months ended June 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
six months ended June 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 SIX MONTHS ENDED JUNE 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 six months ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
-------------------------- -----------------------
Gross Basis:
<S> <C> <C> <C> <C>
Beginning of period
reserves $428,685 $424,888 $423,336 $428,495
Incurred losses 17,463 9,004 28,662 12,721
Paid losses ( 19,554) ( 15,062) ( 25,404) ( 22,386)
--------- -------- --------- ---------
End of period
reserves $426,594 $418,830 $426,594 $418,830
========= ======== ======== ========
Net Basis:
Beginning of period
reserves $201,885 $197,541 $200,989 $197,668
Incurred losses 461 - 461 -
Paid losses 1,074 ( 33) 1,970 ( 160)
-------- -------- -------- --------
End of period
reserves $203,420 $197,508 $203,420 $197,508
======== ======== ======== ========
</TABLE>
8
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(DOLLARS IN THOUSANDS)
At June 30, 1997, the gross reserves for asbestos and environmental losses was
comprised of $106,652 representing case reserves reported by ceding companies,
$58,552 representing additional case reserves established by the Company on
assumed reinsurance claims, $51,748 representing case reserves established by
the Company on direct excess insurance claims and $209,642 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 June 30, 1997 was $138,165.
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 June 30, 1997 was $9,578.
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 SIX MONTHS ENDED JUNE 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 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, 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 income tax liability resulting from the October
1995 grant of common stock under the Company's 1995 Stock Incentive Plan.
10
<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 JUNE 30, 1997 COMPARED TO THREE MONTHS ENDED JUNE 30, 1996
PREMIUMS. Gross premiums written increased 2.4% to $253.2 million in the
three months ended June 30, 1997 from $247.4 million in the three months ended
June 30, 1996. Factors contributing to this increase include a 19.4% increase
(to $42.4 million) in U.S. direct treaty reinsurance and insurance operations,
attributable to growth in primary insurance written through Everest National,
and a 10.6% increase (to $40.9 million) in marine, aviation and surety
operations, partially offset by a 19.3% decrease (to $18.5 million) in U.S.
facultative operations.
Ceded premiums decreased to $7.2 million in the three months ended June 30,
1997 from $11.5 million in the three months ended June 30, 1996. This decrease
was principally attributable to reduced common account retrocessions by ceding
sources and a reduction in the Company's contract specific retrocessions.
Net premiums written increased by 4.3% to $246.1 million in the three months
ended June, 1997 from $235.9 million in the three months ended June 30, 1996
consistent with the growth in gross premiums written and reductions in ceded
premiums.
REVENUES. Net premiums earned increased by 13.1% to $247.5 million in the
three months ended June 30, 1997 from $218.8 million in the three months ended
June 30, 1996, generally consistent with the growth in net premiums written over
the preceding twelve months.
Net investment income increased 23.9% to $57.3 million in the three months
ended June 30, 1997 from $46.3 million in the three months ended June 30, 1996,
principally reflecting both the effect of investing the $456.6 million of cash
flow from operations in the twelve months ended June 30, 1997 and higher yields
earned on the investment portfolio. The annualized pre-tax yield on average cash
and invested assets improved to 6.3 % in the three months ended June 30, 1997,
from the 5.7% yield in the three months ended June 30, 1996.
Net realized capital gains were $13.4 million in the three months ended June
30, 1997, compared to $3.7 million in the three months ended June 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 S.A.
("MAPFRE"), an insurance group in Spain.
EXPENSES. Incurred losses and loss adjustment expenses ("LAE") increased
by 11.6% to $180.2 million in the three months ended June 30, 1997 from
$161.4 million in the three months ended June 30, 1996. The Company's
loss and LAE ratio decreased by 1.0 percentage point to 72.8% in the three
months ended June 30, 1997 from 73.8% in the three months ended June 30,
11
<PAGE>
1996, principally as a result of changes in the Company's mix of business. Net
incurred losses and LAE for the three months ended June 30, 1997 reflected ceded
losses and LAE of $20.0 million, including $8.6 million ceded under the Stop
Loss Agreement, compared to ceded losses and LAE of $17.0 million in the three
months ended June 30, 1996, including $10.6 million ceded under the Stop Loss
Agreement.
Underwriting expenses increased by 12.0% to $78.2 million in the three months
ended June 30, 1997 from $69.8 million in the three months ended June 30, 1996.
Commission and brokerage expenses increased by $9.2 million, principally
relating to earned premium growth. Other underwriting expenses decreased by $0.8
million, reflecting the impact of the Company's continuing expense reduction
initiatives. The Company had 396 employees at June 30, 1997 compared to 421
employees at June 30, 1996. The Company's expense ratio was 31.6% in the three
months ended June 30, 1997 compared to 31.9% in the three months ended June 30,
1996.
The Company's combined ratio decreased to 104.4% in the three months ended
June 30, 1997 compared to 105.7% in the three months ended June 30, 1996.
INCOME TAXES. The Company recognized income tax expense of $16.3 million in
the three months ended June 30, 1997 compared to $9.3 million in the three
months ended June 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 $44.3 million in the three months ended June 30,
1997 compared to $28.7 million in the three months ended June 30, 1996. This
mainly reflected improved underwriting results and higher investment income and
capital gains.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
PREMIUMS. Gross premiums written increased 4.6% to $499.2 million in the six
months ended June 30, 1997 from $477.4 million in the six months ended June 30,
1996. Factors contributing to this increase included a 21.0% increase (to $87.8
million) in U.S. direct treaty reinsurance and insurance operations,
attributable to growth in primary insurance written through Everest National, a
9.8% increase (to $39.9 million) in U.S. facultative operations, reflecting
growth in property and specialty casualty business, a 5.5% increase (to $77.6
million) in marine, aviation and surety operations, mainly driven by growth in
marine and aviation writings, and a 3.8% increase (to $173.4 million) in
international operations, driven by modest growth in most areas of the world.
These gains were partially offset by a 5.7% decrease (to $120.7 million) in U.S.
broker treaty operations, principally attributable to maintaining underwriting
standards in the face of a difficult competitive environment.
Ceded premiums decreased to $19.4 million in the six months ended June 30,
1997 from $22.7 million in the six months ended June 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.
12
<PAGE>
Net premiums written increased by 5.5% to $479.9 million in the six months
ended June 30, 1997 from $454.7 million in the six months ended June 30,
1996 reflecting the growth in gross premiums written and reductions in
ceded premiums.
REVENUES. Net premiums earned increased by 11.4% to $478.0 million in the six
months ended June 30, 1997 from $429.1 million in the six months ended June 30,
1996, generally consistent with the growth in net premiums written over the
preceding year.
Net investment income increased 22.3% to $111.3 million in the six months
ended June 30, 1997 from $91.0 million in the six months ended June 30, 1996,
reflecting both the effect of investing the $456.6 million of cash flow from
operations in the twelve months ended June 30, 1997 and higher yields earned on
the investment portfolio. The annualized pre-tax yield on average cash and
invested assets improved to 6.1 % in the six months ended June 30, 1997 from
5.7% in the six months ended June 30, 1996.
Net realized capital gains were $13.2 million in the six months ended June
30, 1997, compared to $7.5 million in the six months ended June 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 MAPFRE.
EXPENSES. Incurred losses and LAE increased by 9.6% to $347.0 million in the
six months ended June 30, 1997 from $316.6 million in the six months ended June
30, 1996. The Company's loss and LAE ratio decreased by 1.2 percentage points to
72.6% for the six months ended June 30, 1997 from 73.8% in the six months ended
June 30, 1996, attributable principally to changes in the Company's business
mix. Net incurred losses and LAE for the six months ended June 30, 1997
reflected ceded losses and LAE of $32.3 million, including $13.9 million ceded
under the Stop Loss Agreement, compared to ceded losses and LAE of $69.4 million
in the six months ended June 30, 1996, including $29.5 million ceded under the
Stop Loss Agreement.
Underwriting expenses increased by 10.7% to $153.0 million in the six months
ended June 30, 1997 from $138.2 million in the six months ended June 30, 1996.
Commission and brokerage expenses increased by $15.7 million, principally
reflecting the higher level of earned premiums. Other underwriting expenses
decreased by $0.9 million, reflecting the impact of the Company's continuing
expense reduction initiatives. The Company's expense ratio was 32.0% in the six
months ended June 30, 1997 compared to 32.2% in the six months ended June 30,
1996.
The Company's combined ratio decreased to 104.6% in the six months ended
June 30, 1997 from 106.0% in the six months ended June 30, 1996.
INCOME TAXES. The Company recognized income tax expense of $27.8 million in
the six months ended June 30, 1997 compared to $16.6 million in the six months
ended June 30, 1996. The principal cause of this change was the increase in
capital gains and other pre-tax income.
NET INCOME. Net income was $78.8 million in the six months ended June 30,
1997 compared to $56.5 million in the six months ended June 30, 1996. This
improvement mainly reflected improved underwriting results and higher investment
income and capital gains.
13
<PAGE>
FINANCIAL CONDITION
INVESTED ASSETS. Aggregate invested assets, including cash and short-term
investments, were $3,879.6 million at June 30, 1997 and $3,624.6 million at
December 31, 1996. The increase in invested assets between December 31, 1996 and
June 30, 1997 resulted primarily from cash flow from operations of $207.4
million generated during the six months ended June 30, 1997 coupled with an
increase of $28.0 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 $1,165.2
million as of June 30, 1997, from $1,086.0 million as of December 31, 1996
principally reflecting net income of $78.8 million for the six months ended June
30, 1997 and an increase of $9.6 million in unrealized appreciation on
investments, net of deferred taxes. Dividends of $4.0 million were declared and
paid by Holdings in the six months ended June 30, 1997.
14
<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 April 1, 1997, 1475 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 first
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The Annual Meeting was held on May 22, 1997.
b) Martin Abrahams, John R. Dunne and Robert P. Jacobson were elected at
the Annual Meeting as Directors of the Company for a term expiring in
2000. The term of office of the following Directors continued after
the meeting: Kenneth J. Duffy, Thomas J. Gallagher, William F.
Galtney, Jr., Robert A. Mulderig and Joseph V. Taranto.
15
<PAGE>
c) The following matter was voted on at the Annual Meeting:
(1) The following Directors were elected:
Votes Votes
For Withheld
--- --------
Martin Abrahams 43,519,582 934,047
John R. Dunne 43,519,582 934,047
Robert P. Jacobson 43,517,712 935,917
Part II - ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit Index:
Exhibit No. Description Location
----------- ----------- --------
10.19 Credit agreement between Everest Incorporated herein
Reinsurance Holdings, Inc. and by reference to
First Union National Bank dated Exhibit 10.19 to
June 16, 1997 providing for a the Form 8-K
$50 million revolving credit filed on June 24,
facility. 1997.
11.1 Statement regarding computation
of per-share earnings Filed herewith
27 Financial Data Schedule Filed herewith
(b) Reports on Form 8-K:
A report on Form 8-K, dated June 18, 1997, was filed on June 24, 1997
reporting that the Company finalized a $50 million revolving credit
facility with First Union National Bank.
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.
16
<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,
Chief Financial Officer and Comptroller
Dated: August 4, 1997
<PAGE>
Exhibit 11.1
EVEREST REINSURANCE HOLDINGS, INC.
COMPUTATION OF EARNINGS PER SHARE
TREASURY STOCK METHOD
JUNE 30, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Primary Fully Diluted
Earnings Earnings
Per Share Per Share
-------------- --------------
<S> <C> <C>
Net income $ 78,802
Weighted average common shares
outstanding 50,479,879
Earnings per share based on
weighted average of common shares $ 1.56
==============
Dilutive effect of stock options 249,480 292,617
Dilutive effect of options exercised 495 532
Dilutive effect of options cancelled 1,284 1,434
Average number of common shares
outstanding 50,479,879 50,479,879
Average number of common and common
equivalent shares outstanding 50,731,138 50,774,462
Net income $ 78,802 $ 78,802
Earnings per share $ 1.55 $ 1.55
============= =============
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 3,592,042
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 153,849
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 3,841,589
<CASH> 37,980
<RECOVER-REINSURE> 673,789
<DEFERRED-ACQUISITION> 79,323
<TOTAL-ASSETS> 5,248,887
<POLICY-LOSSES> 3,305,266
<UNEARNED-PREMIUMS> 357,352
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 508
<OTHER-SE> 1,164,719
<TOTAL-LIABILITY-AND-EQUITY> 5,248,887
477,958
<INVESTMENT-INCOME> 111,346
<INVESTMENT-GAINS> 13,211
<OTHER-INCOME> 4,071
<BENEFITS> 347,032
<UNDERWRITING-AMORTIZATION> (4,268)
<UNDERWRITING-OTHER> 148,723
<INCOME-PRETAX> 106,563
<INCOME-TAX> 27,761
<INCOME-CONTINUING> 78,802
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 78,802
<EPS-PRIMARY> 1.56
<EPS-DILUTED> 0
<RESERVE-OPEN> 3,246,858
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 3,305,266
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
