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, 1998 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 November 5, 1998
----- ----------------------------
COMMON STOCK, $.01 PAR VALUE 50,072,410
<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,
1998 (unaudited) and December 31, 1997 3
Consolidated Statements of Operations for the
three months and nine months ended September 30,
1998 and 1997 (unaudited) 4
Consolidated Statements of Changes in Stockholders'
Equity for the three months and nine months ended
September 30, 1998 and 1997 (unaudited) 5
Consolidated Statements of Cash Flows for the three
months and nine months ended September 30, 1998 and
1997 (unaudited) 6
Notes to Consolidated Interim Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS 13
-----------------------------------
PART II
OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS 21
-----------------
ITEM 2. CHANGES IN SECURITIES 21
---------------------
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 21
--------------------------------
<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: 1998 1997
-------------- -------------
(unaudited)
<S> <C> <C>
Fixed maturities - available
for sale, at market value
(amortized cost: 1998,
$3,830,366; 1997, $3,658,370) $ 4,114,027 $ 3,866,860
Equity securities, at market
value (cost: 1998, $123,339;
1997, $120,510) 154,272 158,784
Short-term investments 103,128 75,244
Other invested assets 5,215 10,848
Cash 73,545 51,578
-------------- -------------
Total investments and cash 4,450,187 4,163,314
Accrued investment income 62,595 60,424
Premiums receivable 305,033 256,191
Reinsurance receivables 640,426 692,473
Funds held by reinsureds 194,708 186,454
Deferred acquisition costs 78,666 82,332
Prepaid reinsurance premiums 7,691 8,980
Deferred tax asset 54,217 74,434
Other assets 18,387 13,418
-------------- -------------
TOTAL ASSETS $ 5,811,910 $ 5,538,020
============== =============
LIABILITIES:
Reserve for losses and
adjustment expenses $ 3,491,659 $ 3,437,818
Unearned premium reserve 320,107 337,383
Funds held under
reinsurance treaties 202,310 190,639
Losses in the course of
payment 81,338 55,969
Contingent commissions 104,298 100,027
Other net payable to
reinsurers 12,790 13,231
Current federal income
taxes 7,708 13,567
Other liabilities 133,149 81,903
-------------- -------------
Total liabilities 4,353,359 4,230,537
-------------- -------------
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; 50.9 million
shares issued in 1998 and
50.8 million shares issued
in 1997 509 508
Additional paid-in capital 390,544 389,876
Unearned compensation (285) (514)
Accumulated other
comprehensive income, net
of deferred income taxes 192,820 152,319
Retained earnings 891,278 773,380
Treasury stock, at cost;
0.6 million shares in
1998 and 0.3 million
shares in 1997 (16,315) (8,086)
-------------- -------------
Total stockholders'
equity 1,458,551 1,307,483
-------------- -------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 5,811,910 $ 5,538,020
============== =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ----------- ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Premiums earned $ 265,241 $ 271,520 $ 771,303 $ 749,478
Net investment income 60,667 57,917 183,205 169,327
Net realized capital
gain 989 2,722 3,495 15,933
Other income/(loss) 468 (430) 2,663 3,577
------------ ----------- ------------ ------------
Total revenues 327,365 331,729 960,666 938,315
------------ ----------- ------------ ------------
CLAIMS AND EXPENSES:
Incurred loss and loss
adjustment expenses 189,904 204,234 564,048 551,266
Commission, brokerage,
taxes and fees 71,815 64,061 197,720 191,951
Other underwriting
expenses 12,014 12,616 36,231 37,717
------------ ----------- ------------ ------------
Total claims and
expenses 273,733 280,911 797,999 780,934
------------ ----------- ------------ ------------
INCOME BEFORE TAXES 53,632 50,818 162,667 157,381
Income tax 11,506 12,386 37,196 40,147
------------ ----------- ------------ ------------
NET INCOME $ 42,126 $ 38,432 $ 125,471 $ 117,234
============ =========== ============ ============
Other comprehensive
income, net of tax 27,094 45,112 40,501 50,153
------------ ----------- ------------ ------------
COMPREHENSIVE INCOME $ 69,220 $ 83,544 $ 165,972 $ 167,387
============ =========== ============ ============
PER SHARE DATA:
Average shares
outstanding (000's) 50,465 50,466 50,475 50,475
Net income per
common share - basic $ 0.83 $ 0.76 $ 2.49 $ 2.32
============ =========== ============ ============
Average diluted
shares outstanding
(000's) 50,748 50,791 50,782 50,751
Net income per
common share -
diluted $ 0.83 $ 0.76 $ 2.47 $ 2.31
============ =========== ============ ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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,
---------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ----------- ------------
(unaudited)
<S> <C> <C> <C> <C>
COMMON STOCK (shares
outstanding):
Balance, beginning
of period 50,477,228 50,465,552 50,479,271 50,490,273
Issued during the
period 30,436 17,400 34,436 21,200
Treasury stock
acquired during
period (221,200) (6,400) (229,660) (36,396)
Treasury stock
reissued during
period 1,040 1,125 3,457 2,600
------------ ------------ ----------- ------------
Balance, end of
period 50,287,504 50,477,677 50,287,504 50,477,677
============ ============ =========== ============
COMMON STOCK (par
value):
Balance, beginning
of period $ 508 $ 508 $ 508 $ 508
Issued during the
period 1 - 1 -
------------ ------------ ----------- ------------
Balance, end of
period 509 508 509 508
------------ ------------ ----------- ------------
ADDITIONAL PAID
IN CAPITAL:
Balance, beginning
of period 389,985 389,268 389,876 389,196
Common stock issued
during the period 543 549 610 612
Treasury stock
reissued during
period 16 17 58 26
------------ ------------ ----------- ------------
Balance, end of
period 390,544 389,834 390,544 389,834
------------ ------------ ----------- ------------
UNEARNED
COMPENSATION:
Balance, beginning
of period (335) (274) (514) (374)
Net increase
(decrease) during
the period 50 (318) 229 (218)
------------ ------------ ----------- ------------
Balance, end of
period (285) (592) (285) (592)
------------ ------------ ----------- ------------
ACCUMULATED OTHER
COMPREHENSIVE
INCOME, NET OF
DEFERRED INCOME
TAXES:
Balance, beginning
of period 165,726 82,453 152,319 77,412
Net increase during
the period 27,094 45,112 40,501 50,153
------------ ------------ ----------- ------------
Balance, end of
period 192,820 127,565 192,820 127,565
------------ ------------ ----------- ------------
RETAINED EARNINGS:
Balance, beginning
of period 851,677 701,265 773,380 626,501
Net income 42,126 38,432 125,471 117,234
Dividends declared
($0.05 and $0.15 per
share in 1998 and
$0.04 and $0.12 per
share in 1997) (2,525) (2,019) (7,573) (6,057)
------------ ------------ ----------- ------------
Balance, end of
period 891,278 737,678 891,278 737,678
------------ ------------ ----------- ------------
TREASURY STOCK AT
COST:
Balance, beginning
of period (8,170) (7,993) (8,086) (7,220)
Treasury stock
acquired during
period (8,170) (107) (8,311) (915)
Treasury stock
reissued during
period 25 26 82 61
------------ ------------ ----------- ------------
Balance, end of
period (16,315) (8,074) (16,315) (8,074)
------------ ------------ ----------- ------------
TOTAL STOCKHOLDERS'
EQUITY, END OF
PERIOD $ 1,458,551 $ 1,246,919 $ 1,458,551 $ 1,246,919
============ ============ =========== ============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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,
---------------------------- ----------------------------
1998 1997 1998 1997
----------- ------------ ------------ ------------
CASH FLOWS FROM
OPERATING ACTIVITIES: (unaudited)
<S> <C> <C> <C> <C>
Net income $ 42,126 $ 38,432 $ 125,471 $ 117,234
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
(Increase) in premiums
receivable (21,462) (30,325) (47,771) (51,116)
(Increase) decrease in
funds held by
reinsureds, net (3,078) (5,646) 4,595 7,572
Decrease in reinsurance
receivables 29,940 1,034 51,685 76,536
(Increase) decrease in
deferred tax asset 7,535 13,538 (1,650) 5,645
Increase in reserve for
losses and loss
adjustment expenses 3,678 68,261 53,166 128,945
Increase (decrease) in
unearned premiums (9,770) 4,430 (17,126) 5,603
(Increase) decrease in
other assets and
liabilities 17,332 (12,360) 23,448 8,200
Non cash compensation
expense 50 (318) 229 (218)
Accrual of bond discount/
amortization of bond
premium (378) 136 (670) (579)
Realized capital (gains) (989) (2,722) (3,495) (15,933)
----------- ------------ ------------ ------------
Net cash provided by
operating activities 64,984 74,460 187,882 281,889
----------- ------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from fixed
maturities matured/called
- held to maturity - - - 2,155
Proceeds from fixed
maturities matured/called
- available for sale 38,289 (97,702) 108,915 105,449
Proceeds from fixed
maturities sold -
available for sale 30,724 256,270 348,395 843,334
Proceeds from equity
securities sold 11,213 9,609 18,200 57,234
Proceeds from other
invested assets sold 834 - 7,505 1,082
Cost of fixed maturities
acquired - available
for sale (104,224) (229,464) (635,323) (1,253,926)
Cost of equity securities
acquired (11,006) (13,968) (19,193) (37,209)
Cost of other invested
assets acquired (868) (655) (1,313) -
Net (purchases) sales of
short-term securities (4,615) 55,145 (28,203) 20,205
Net increase (decrease)
in unsettled securities
transactions (7,977) (22,117) (704) 5,626
----------- ------------ ------------ ------------
Net cash used in
investing activities (47,630) (42,882) (201,721) (256,050)
----------- ------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Acquisition of treasury
stock net of reissuances (8,129) (64) (8,171) (828)
Common stock issued during
the period 543 549 610 612
Dividends paid to
stockholders (2,525) (2,019) (7,573) (6,057)
Net increase in collateral
for loaned securities 13,376 - 45,129 -
----------- ------------ ------------ ------------
Net cash provided by
(used in) financing
activities 3,265 (1,534) 29,995 (6,273)
----------- ------------ ------------ ------------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH 4,583 (5,725) 5,811 (9,862)
----------- ------------ ------------ ------------
Net increase in cash 25,202 24,319 21,967 9,704
Cash, beginning of period 48,343 37,980 51,578 52,595
----------- ------------ ------------ ------------
Cash, end of period $ 73,545 $ 62,299 $ 73,545 $ 62,299
=========== ============ ============ ============
SUPPLEMENTAL CASH FLOW
INFORMATION
Cash transactions:
Income taxes paid, net $ 11,309 $ 6,390 $ 45,003 $ 43,799
Non-cash financing
transaction:
Issuance of common stock $ 50 $ (318) $ 229 $ (218)
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(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, 1998 and
1997 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, 1998 and 1997 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, 1997, 1996 and 1995.
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, 1998 AND 1997
(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 $375,000 of the first $400,000 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, 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------------------ ------------------------
<S> <C> <C> <C> <C>
Gross Basis:
Beginning of period
reserves $ 466,568 $ 426,594 $ 446,132 $ 423,336
Incurred losses 522 11,361 37,242 40,023
Paid losses (8,995) (7,988) (25,279) (33,392)
--------- --------- --------- ---------
End of period
reserves $ 458,095 $ 429,967 $ 458,095 $ 429,967
========= ========= ========= =========
Net Basis:
Beginning of period
reserves $ 252,892 $ 203,420 $ 212,376 $ 199,557
Incurred losses - 807 2,222 1,268
Paid losses (4,785) 5,766 33,509 9,168
--------- --------- --------- ---------
End of period
reserves $ 248,107 $ 209,993 $ 248,107 $ 209,993
========= ========= ========= =========
</TABLE>
8
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
At September 30, 1998, the gross reserves for asbestos and environmental losses
were comprised of $141,139 representing case reserves reported by ceding
companies, $58,140 representing additional case reserves established by the
Company on assumed reinsurance claims, $44,966 representing case reserves
established by the Company on direct excess insurance claims and $213,850
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, 1998 was $139,176.
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, 1998 was $10,576.
9
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
3. EARNINGS PER SHARE
Net income per common share has been computed as follows (Shares in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---------------------- ----------------------
<S> <C> <C> <C> <C>
Net income (numerator) $ 42,126 $ 38,432 $ 125,471 $ 117,234
========= ========= ========= =========
Weighted average common
and effect of dilutive
shares used in the
computation of net
income per share:
Average shares
outstanding
-basic (denominator) 50,465 50,466 50,475 50,475
Effect of dilutive
shares 283 325 307 276
--------- --------- --------- ---------
Average shares
outstanding
-diluted
(denominator) 50,748 50,791 50,782 50,751
Net income per common
share:
Basic $ 0.83 $ 0.76 $ 2.49 $ 2.32
Diluted 0.83 0.76 2.47 2.31
</TABLE>
As of September 30, 1998 and 1997 options to purchase 745,000 and 337,750 shares
of common stock, respectively, were outstanding but were not included in the
computation of diluted earnings per share for the three month and nine month
periods ended on such dates, because the options' exercise price was greater
than the average market price of the common shares during the period.
4. CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income". This statement
requires an enterprise to present items of other comprehensive income in a
financial statement and to disclose accumulated balances of other comprehensive
income in the equity section of a financial statement. The additional
required presentation has been provided in the interim consolidated
10
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
financial statements for the current period as well as earlier periods. The
Company's components of other comprehensive income include unrealized gains and
losses on investments and foreign currency translation adjustments. As those
items were previously presented as direct charges or credits to the Company's
stockholders' equity, the only impact of adopting this standard is to reflect an
additional presentation of those items.
The Company's other comprehensive income is comprised as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---------------------- ----------------------
<S> <C> <C> <C> <C>
Net unrealized appreciation
(depreciation) of
investments, net of
deferred income taxes $ 29,355 $ 45,959 $ 44,089 $ 55,542
Cumulative translation
adjustments, net of
deferred income taxes (2,261) (847) (3,588) (5,389)
--------- --------- --------- ---------
Other comprehensive
income/(loss), net of
deferred income taxes $ 27,094 $ 45,112 $ 40,501 $ 50,153
========= ========= ========= =========
</TABLE>
5. NEW ACCOUNTING STANDARDS
In February 1998, the Financial Accounting Standards Board issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits". This
statement revises employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of those plans.
The statement standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair value of plan assets
that will facilitate financial analysis and eliminates certain disclosures. This
statement is effective for fiscal years beginning after December 15, 1997. When
adopted, the additional required disclosures will be provided for earlier
periods.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This statement
requires all derivatives to be recognized as either assets or liabilities in the
statement of financial position and to be measured at fair value. This statement
is effective for all fiscal quarters and fiscal years beginning after June 15,
1999. Management believes that the statement will not have a material impact on
the financial position of the Company.
11
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
6. INCOME TAXES
On April 21, 1998, the Supreme Court issued its decision in Atlantic Mutual v.
Commissioner, upholding the Internal Revenue Service's position regarding the
computation of the fresh start benefit relating to 1986 reserve strengthening.
Pursuant to the Separation Agreement with The Prudential, the Company has paid
The Prudential $10,445 representing tax and interest in resolution of the
matter. The Company had adequate provisions for this tax contingency and, as a
result, this item has not materially impacted the Company's financial position.
7. CREDIT LINE
In May 1998, First Union National Bank granted a 364 day extension to the
Company's $50,000 revolving line of credit. All of the terms and conditions of
the original credit facility remain in full force and effect without amendment
except that the maturity date as extended is now June 12, 1999.
12
<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, 1998 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1997
PREMIUMS. Gross premiums written decreased 4.7% to $272.4 million in the
three months ended September 30, 1998 from $285.8 million in the three months
ended September 30, 1997 as the Company continued to maintain a cautious
approach to increasingly competitive market conditions. Factors contributing to
this decrease include a 14.1% decrease (to $32.9 million) in marine, aviation
and surety operations, a 13.5% decrease (to $32.2 million) in U.S. direct treaty
reinsurance and insurance operations, a 5.6% decrease (to $91.4 million) in
international operations and a 1.8% decrease (to $20.5 million) in U.S.
facultative operations reflecting the highly competitive conditions in these
markets. These losses were partially offset by a 3.1% increase (to $95.4
million) in U.S. broker treaty operations, attributable to growth in accident
and health and non-standard auto business.
Ceded premiums increased to $14.4 million in the three months ended September
30, 1998 from $9.9 million in the three months ended September 30, 1997. This
increase was principally attributable to reinstatement premiums on corporate
catastrophe reinsurance protections and increases in the Company's contract
specific retrocessions.
Net premiums written decreased by 6.5% to $258.0 million in the three months
ended September, 1998 from $275.9 million in the three months ended September
30, 1997 consistent with the decrease in gross premiums written and the increase
in ceded premiums.
REVENUES. Net premiums earned decreased by 2.3% to $265.2 million in the
three months ended September 30, 1998 from $271.5 million in the three months
ended September 30, 1997, generally consistent with the decrease in net premiums
written and changes in the Company's mix of business during the preceding twelve
months.
Net investment income increased 4.7% to $60.7 million in the three months
ended September 30, 1998 from $57.9 million in the three months ended September
30, 1997, principally reflecting the effect of investing the $282.4 million of
cash flow from operations in the twelve months ended September 30, 1998. The
annualized pre-tax yield on average cash and invested assets decreased to 5.9%
in the three months ended September 30, 1998, from the 6.2% yield in the three
months ended September 30, 1997, reflecting an increasing orientation to tax
preferenced fixed maturity investments and a generally lower interest rate
environment.
Net realized capital gains were $1.0 million in the three months ended
September 30, 1998, reflecting realized capital gains on the Company's
investments of $1.6 million which were partially offset by $0.6 million
of realized capital losses, compared to net realized capital gains
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of $2.7 million in the three months ended September 30, 1997. The net realized
capital gains in the three months ended September 30, 1997 reflected realized
capital gains of $3.6 million which were partially offset by $0.9 million of
realized capital losses. The realized capital gains in both periods mainly arose
from activity in the Company's portfolio of equity securities. The realized
capital losses in the three months ended September 30, 1998 mainly arose from
activity in the Company's portfolio of equity securities, whereas the realized
capital losses in the three months ended September 30, 1997 mainly arose from
activity in the Company's fixed maturities portfolio.
EXPENSES. Incurred losses and loss adjustment expenses ("LAE") decreased by
7.0% to $189.9 million in the three months ended September 30, 1998 from $204.2
million in the three months ended September 30, 1997. Catastrophe losses include
the impact of both current period events and favorable and unfavorable loss
development on prior period events and are net of reinsurance. Catastrophe
losses in the three months ended September 30, 1998 were $10.1 million compared
with $6.0 million in the three months ended September 30, 1997. The Company's
loss and LAE ratio decreased by 3.6 percentage points to 71.6% in the three
months ended September 30, 1998 from 75.2% in the three months ended September
30, 1997, principally as a result of changes in the Company's mix of business,
including the impact of certain reinsurance treaties with lower expected losses
and higher ceding commissions partially offset by an increase in catastrophe
losses. Net incurred losses and LAE for the three months ended September 30,
1998 reflected ceded losses and LAE of $4.4 million, including recoveries on
corporate catastrophe reinsurance protections partially offset by an $8.1
million reduction in losses ceded under the Stop Loss Agreement, compared to
ceded losses and LAE of $20.5 million in the three months ended September 30,
1997, including $11.1 million ceded under the Stop Loss Agreement.
Underwriting expenses increased by 9.3% to $83.8 million in the three months
ended September 30, 1998 from $76.7 million in the three months ended September
30, 1997. Commission, brokerage, taxes and fees increased by $7.8 million,
principally relating to the impact of the previously noted changes in the
business mix. Other underwriting expenses decreased by $0.6 million. The Company
had 380 employees at September 30, 1998 including 25 employees in the agency
operations acquired on June 30, 1998, compared to 381 employees at September 30,
1997. The Company's expense ratio was 31.6% in the three months ended September
30, 1998 compared to 28.2% in the three months ended September 30, 1997.
The Company's combined ratio decreased to 103.2% in the three months ended
September 30, 1998 compared to 103.5% in the three months ended September 30,
1997.
INCOME TAXES. The Company recognized income tax expense of $11.5 million in
the three months ended September 30, 1998 compared to $12.4 million in the three
months ended September 30, 1997. The principal cause of this change was the
decrease in net realized capital gains.
NET INCOME. Net income was $42.1 million in the three months ended September
30, 1998 compared to $38.4 million in the three months ended September 30, 1997.
This mainly reflected the improvement in underwriting results and an increase in
net investment income offset by a decrease in net realized capital gains.
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RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997
PREMIUMS. Gross premiums written increased 1.0% to $792.9 million in the nine
months ended September 30, 1998 from $785.0 million in the nine months ended
September 30, 1997 as the Company continued to maintain a cautious approach to
increasingly competitive market conditions. Factors contributing to this
increase included a 28.6% increase (to $274.1 million) in U.S. broker treaty
operations, principally attributable to growth in accident and health,
non-standard auto and workers compensation business and a 6.4% increase (to
$133.0 million) in U.S. direct treaty reinsurance and insurance operations,
attributable to assumed portfolio reinsurance transactions. These gains were
partially offset by a 20.2% decrease (to $92.5 million) in marine, aviation and
surety operations, a 12.1% decrease (to $237.6 million) in international
operations and a 8.1% decrease (to $55.8 million) in U.S. facultative operations
reflecting the highly competitive conditions in these markets.
Ceded premiums increased to $36.7 million in the nine months ended September
30, 1998 from $29.2 million in the nine months ended September 30, 1997. This
increase was principally attributable to an increase in the Company's contract
specific retrocessions.
Net premiums written increased by 0.1% to $756.3 million in the nine months
ended September 30, 1998 from $755.8 million in the nine months ended September
30, 1997 reflecting the growth in gross premiums written and partially offset by
the increase in ceded premiums.
REVENUES. Net premiums earned increased by 2.9% to $771.3 million in the nine
months ended September 30, 1998 from $749.5 million in the nine months ended
September 30, 1997, primarily due to changes in the Company's mix of business
and generally consistent with the growth in net premiums written during the
preceding twelve months.
Net investment income increased 8.2% to $183.2 million in the nine months
ended September 30, 1998 from $169.3 million in the nine months ended September
30, 1997, reflecting the effect of investing the $282.4 million of cash flow
from operations in the twelve months ended September 30, 1998. The annualized
pre-tax yield on average cash and invested assets decreased to 6.1% in the nine
months ended September 30, 1998, from the 6.2% in the nine months ended
September 30, 1997, reflecting a continuing orientation to tax preferenced fixed
maturity investments and the generally lower interest rate environment.
Net realized capital gains were $3.5 million in the nine months ended
September 30, 1998, reflecting realized capital gains on the Company's
investments of $8.3 million which were partially offset by $4.8 million of
realized capital losses, compared to net realized capital gains of $15.9 million
in the nine months ended September 30, 1997, The net realized capital gains in
the nine months ended September 30, 1997 reflected realized capital gains of
$24.4 million which were partially offset by $8.5 million of realized capital
losses. The realized capital gains in both periods mainly arose from activity in
the Company's portfolio of equity securities, including, in 1997, a $14.0
million realized capital gain on the sale of the Company's investment in the
common stock of Corporacion MAPFRE S.A. ("MAPFRE"), an insurance group in Spain,
15
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whereas the realized capital losses in both periods mainly arose from activity
in the Company's fixed maturities portfolio.
EXPENSES. Incurred losses and LAE increased by 2.3% to $564.0 million in the
nine months ended September 30, 1998 from $551.3 million in the nine months
ended September 30, 1997. Catastrophe losses in the nine months ended September
30, 1998 were $17.1 million compared with $6.0 million in the nine months ended
September 30, 1997. The Company's loss and LAE ratio decreased by 0.5 percentage
points to 73.1% for the nine months ended September 30, 1998 from 73.6% in the
nine months ended September 30, 1997, principally as a result of changes in the
Company's mix of business, partially offset by higher catastrophe losses. Net
incurred losses and LAE for the nine months ended September 30, 1998 reflected
ceded losses and LAE of $39.6 million, including $11.9 million ceded under the
Stop Loss Agreement, compared to ceded losses and LAE of $52.8 million in the
nine months ended September 30, 1997, including $25.0 million ceded under the
Stop Loss Agreement.
Underwriting expenses increased by 1.9% to $234.0 million in the nine months
ended September 30, 1998 from $229.7 million in the nine months ended September
30, 1997. Commission, brokerage, taxes and fees increased by $5.8 million,
principally reflecting changes in the Company's business mix. Other underwriting
expenses decreased by $1.5 million, reflecting the impact of the Company's
continuing expense reduction initiatives. The Company's expense ratio was 30.3%
in the nine months ended September 30, 1998 compared to 30.6% in the nine months
ended September 30, 1997.
The Company's combined ratio decreased to 103.5% in the nine months ended
September 30, 1998 from 104.2% in the nine months ended September 30, 1997.
INCOME TAXES. The Company recognized income tax expense of $37.2 million in
the nine months ended September 30, 1998 compared to $40.1 million in the nine
months ended September 30, 1997. The principal cause of this change was the
change in the relationship of tax exempt income to pre-tax income resulting from
the continuing orientation to tax preferenced fixed maturity investments and the
decrease in capital gains.
NET INCOME. Net income was $125.5 million in the nine months ended September
30, 1998 compared to $117.2 million in the nine months ended September 30, 1997.
This improvement mainly reflected improved underwriting results and an increase
in investment income partially offset by a decrease in realized capital gains.
FINANCIAL CONDITION
INVESTED ASSETS. Aggregate invested assets, including cash and short-term
investments, were $4,411.0 million at September 30, 1998 and $4,163.3 million at
December 31, 1997. The increase in invested assets between December 31, 1997 and
September 30, 1998 resulted primarily from cash flow from operations of $187.9
million generated during the nine months ended September 30, 1998, a $45.1
million increase in collateral for loaned securities and an increase of $71.3
million in net appreciation on investments.
LIQUIDITY. The Company's liquidity requirements are met on
both a short- and long-term basis by funds provided by
premiums collected, investment income and collected reinsurance
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receivables balances, and from the sale and maturity of investments. The
Company's net cash flows from operating activities were $187.9 million and
$281.9 million in the nine months ended September 30, 1998 and 1997,
respectively. Recoveries under the Company's Stop Loss Agreement with Gibraltar
contributed $40.0 million and $88.7 million of such net cash flows in the nine
months ended September 30, 1998 and 1997, respectively. Through September 30,
1998 cessions under the Stop Loss Agreement have aggregated $197.2 million with
remaining limits available of $177.8 million as respects the next $197.6 million
of adverse development.
Proceeds and applications from sales and acquisitions of investment assets
were $483.0 million and $684.7 million, respectively, in the nine months ended
September 30, 1998, compared to $1,035.1 million and $1,291.1 million,
respectively, in the nine months ended September 30, 1997 reflecting reduced
disposition and reinvestment activity. The Company's current investment strategy
seeks to maximize after-tax income through a high quality, diversified, duration
sensitive, taxable bond and tax-exempt municipal bond portfolio, while
maintaining an adequate level of liquidity.
In May 1998, the Company renewed its 364 day revolving line of credit with
First Union National Bank. This credit facility, which will be used for
liquidity and general corporate purposes, provides for the borrowing of up to
$50 million. There have been no borrowings under this facility. The credit
facility agreement continues to require 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.
STOCKHOLDERS' EQUITY. The Company's stockholders' equity increased to
$1,458.6 million as of September 30, 1998, from $1,307.5 million as of December
31, 1997 principally reflecting net income of $125.5 million for the nine months
ended September 30, 1998 and an increase of $44.1 million in unrealized
appreciation on investments, net of deferred taxes. Dividends of $7.6 million
were declared and paid by the Company in the nine months ended September 30,
1998. During the third quarter, the Company repurchased 221,200 shares of its
stock at an average price of $36.89 per share.
YEAR 2000 ISSUES. Many computers, software programs and microprocessors
embedded in certain equipment (collectively, "systems") were designed to
accommodate only two-digit date fields to represent a given year (e.g., "98"
represents 1998). It is possible that such systems will not be able to
accurately process data containing information relating to dates before, during
or after the year 2000. It is also possible that such systems could fail
entirely, although in many instances the consequences of a system not being
"year 2000 compliant" are unknown. The "year 2000 issue" has the potential to
affect the Company through (i) the disruption of the processing of business and
general corporate transactions, both at the Company and between the Company and
other business entities with which it interacts, and (ii) claims which may be
brought asserting that costs associated with the issue may be covered under
insurance or reinsurance contracts in which the Company participates.
READINESS. The Company has been actively engaged in a project to mitigate
the potential effects of the year 2000 issue. For each segment of
its internal computer processing environment (mainframe, midrange and PC
equipment), the Company has a multi-phase plan that involves (a) the
identification and assessment of year 2000 compliance, (b) the design
and development of remedies (including the replacement of non-compliant
systems if needed), (c) testing of year 2000 readiness and (d) the
implementation of fully integrated year 2000-compliant processing.
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The assessment phase is complete, and many of the Company's systems are already
year 2000-compliant. For those that are not yet compliant, steps are being
taken to upgrade or replace them. With the exception of one non-critical
application, which will be replaced in the third quarter of 1999, all
processing/reporting systems are currently planned to be compliant by March 31,
1999. Testing has been ongoing and will continue as the remaining systems
are brought into compliance.
Although the Company has devoted significant efforts to assessing and upgrading
its systems, most of the Company's computerized systems have been developed and
maintained by third-party vendors, and the Company is thus dependent in large
part on the efforts of those vendors. In many cases the involved systems have
already been made compliant. In other cases the Company continues to communicate
with the vendors regarding their plans for making the involved systems
compliant. On the basis of those communications, the Company believes that those
vendors have a critical business need to make their products compliant and are
exercising their best efforts to make their products fully compliant.
In addition to addressing hardware/software information technology ("IT"), the
Company has also been assessing year 2000 issues with respect to non-IT systems
such as telephones and various building services which may rely on embedded
microprocessors. Although failure of non-IT systems such as telephone service
could disrupt the Company's business, the Company's communications with the
relevant vendors have not identified any significant year 2000 problems.
The Company's plan also addresses potential year 2000 issues related to the
processing of transactions with its external business contacts, including
business partners (e.g., ceding companies) and service providers (e.g., banks).
The Company has actively surveyed its significant business partners and service
providers concerning their compliance status. The information received to date
has not identified any significant barriers to year 2000 compliance, and the
Company believes that these entities will be sufficiently compliant that the
year 2000 issue will not cause material disruption to the Company's business.
COSTS. The Company's historical and expected future costs to make its systems
year 2000 compliant are not material. The total expected out-of-pocket costs of
the year 2000 effort are approximately $0.6 million, of which approximately
$0.2 million had been incurred as of September 30, 1998.
RISKS. The Company does not rely on computer-dependent transactions to the same
extent as many other businesses. However, in the event that the Company's
internal processing environment could not be made year 2000-compliant, or in the
event that significant business partners or service providers or other business
entities experienced serious year 2000 problems, the Company could experience
disruption in its business. Such disruption could conceivably take several
forms: (a) having to compile information and process transactions manually, (b)
if compliance problems persisted, impairing the Company's ability to receive
premiums from and make claim payments to its ceding companies, (c) impairing the
Company's ability to obtain information about its investments or (d) impairing
the value of the Company's fixed maturity and equity investments, if the
entities underlying those investments themselves have substantial year 2000
costs, liabilities or disruptions. Any or all of the types of possible
disruptions in such a "worst case scenario" could materially increase
the cost of doing business, could impair the Company's ability to make
required regulatory filings and could materially affect the Company's
18
<PAGE>
results of operations, liquidity or financial condition. However, based
upon current information, the Company does not expect such scenarios to occur
and does not expect material disruption to its business.
CONTINGENCY PLANS. Although it has considered various scenarios concerning the
possible effects of the year 2000 issue, the Company does not yet have formal
contingency plans relating to either its internal processing environment or its
external business contacts. As it completes the upgrading and testing of
non-compliant systems and continues to monitor the status of its important
external contacts into early 1999, the Company will develop contingency plans as
necessary for mission-critical systems and relationships.
POTENTIAL CLAIMS EXPOSURE. It is possible that individuals or entities which
experience business disruption, increased costs or other problems associated
with the year 2000 issue may assert claims against their own insurance carrier
to recover such costs or against other entities for damages, which entities may
in turn assert that such potential damages are covered by insurance. It is not
yet possible to determine whether any such claims will be made against insurers,
whether such claims will be held to have merit or whether any such claims may be
made against insurance or reinsurance contracts in which the Company
participates. With respect to prospective business, the Company works with
brokers and ceding companies to attempt to determine whether prospective or
existing business written carries potential year 2000 exposures. If the ceding
company, in the Company's opinion, is adequately underwriting the exposures, the
Company may not exclude such exposures from its contracts. If the ceding company
is not adequately addressing the issue, the Company will attempt to exclude
those exposures from its contracts or non-renew those contracts. There can be no
assurance, however, that such business will be completely free of potential
exposure to claims related to the year 2000 issue.
EURO CONVERSION. On January 1, 1999 eleven of the fifteen member countries
of the European Union (the "participating countries") are scheduled to establish
fixed conversion rates between their existing sovereign currencies (the "legacy
currencies") and the Euro. The participating countries have agreed to adopt the
Euro as their common legal currency, to issue sovereign debt exclusively in the
Euro and to redenominate outstanding sovereign debt. Between January 1, 1999 and
January 1, 2002 (the "transition period") the legacy currencies are scheduled to
remain legal tender in the participating countries. During the transition
period, public and private parties may pay for goods and services using either
the Euro or the participating country's legacy currency. European Union
regulations, among other matters, specify how legacy currencies convert to
Euros. Beginning January 1, 2002, new Euro-denominated bills and coins will be
issued and by July 1, 2002, the participating countries' legacy currencies will
no longer be legal tender for any transactions. The Company has operations in
Belgium and the United Kingdom, both members of the European Union; Belgium is
scheduled to be a participating country on January 1, 1999.
The nature of the Company's reinsurance business and its investments is
such that the Company does not expect the impact of the Euro conversion
to be material to the Company's business, operations or financial condition.
Although systems which support the Company's United Kingdom and
Belgian operations require modifications to enable conversion of legacy
currency historical data and to accommodate conversions in accordance with
European Union requirements, which modifications the system vendor is
investigating, a failure of the vendor to modify the system is not
expected to be material to the Company's business, operations or
19
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financial condition. The Company has not yet determined when it will convert
the functional currency for its Belgian operation to the Euro.
20
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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, 1998, 1,040 common shares of the Company (previously
held as treasury shares) were distributed.
(b) The securities were distributed to the Company's four non-employee
directors.
(c) The securities were issued as compensation to the non-employee
directors for services rendered to the Company during the
second quarter of 1998.
(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
- ----------- ----------- --------
4.1 Rights Agreement, dated as of September 24, Incorporated herein
between Everest Reinsurance Holdings, Inc. by reference to
and First Chicago Trust Company of New York, Exhibit 4.1 to the
as Rights Agent. The Rights Agreement Form 8-K filed on
includes as exhibits thereto the form of September 28, 1998
Certificate of Designation specifying the
terms of the Preferred Shares and the form
of Right Certificate. Pursuant to the Rights
Agreement, printed Right Certificates will
not be mailed until as soon as practicable
after the earlier of (i) the tenth day after
public announcement that a person or group
has acquired, or obtained the right to
acquire, beneficial ownership of 15% or more
of the outstanding shares of Common Stock or
(ii) the tenth business day after the
commencement of, or the announcement of an
intention to commence, a tender or exchange
offer the onsummation of which would result
in the beneficial ownership by a person or
group of 15% or more of the outstanding
shares of Common Stock
21
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*10.24 Senior Executive Change of Control Plan Filed herewith
11.1 Statement regarding computation of per-share
earnings Filed herewith
21.1 Subsidiaries of the Registrant Filed herewith
27 Financial Data Schedule Filed herewith
- ------------------
*Management contract or compensatory plan or arrangement.
b) Reports on Form 8-K:
A report on Form 8-K dated September 28, 1998 was filed on September 28,
1998 reporting that the Company declared a dividend of one preferred
share purchase right for each outstanding share of common stock of the
Company.
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.
22
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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/ Stephen L. Limauro
--------------------------
Stephen L. Limauro
Duly Authorized Officer, Vice President
and Comptroller
Dated: November 9, 1998
EXHIBIT 10.24
EVEREST REINSURANCE HOLDINGS, INC.
SENIOR EXECUTIVE CHANGE OF CONTROL PLAN
---------------------------------------
I. PURPOSE
-------
The purpose of this Plan is to encourage eligible key senior executives
of Everest Reinsurance Holdings, Inc. ("Holdings") and its subsidiaries
(hereinafter Holdings and its subsidiaries, the "Company") to continue
their employment with the Company by establishing a program governing
the circumstances under which certain benefits will be provided in the
event there is a material change in control of Holdings and/or Everest
Reinsurance Company ("Ev Re").
II. ELIGIBILITY
-----------
Senior executives of the Company who receive written notice from the
Compensation Committee of the Board of Directors of Holdings (the
"Committee") that they have been selected for coverage under the Plan
and the level of coverage provided shall thereafter be eligible for the
benefits to be provided under the Plan in the event that a "Material
Change" (as defined herein) takes place at any time that they are
Participants in the Plan and for a period of two years after a Material
Change takes place. Participation in the Plan shall cease upon any of
the following events: (i) the Participants' employment with the Company
terminates under circumstances not following a Material Change; (ii)
the Plan terminates in accordance with Article VIII hereof; and
(iii) the Participant receives thirty (30) days written notice
from the Committee that he or she is no longer eligible
to participate in the Plan, provided, however, that such written
notice shall not be effective (a) for a period of two years
<PAGE>
after a Material Change and (b) during any period of time when the
Board of Directors of Holdings or the Committee is aware of any
circumstance which could reasonably be expected to result in a Material
Change.
III. CHANGE OF CONTROL BENEFITS
--------------------------
A. If within two years of a Material Change: (i) a Participant
terminates his or her employment with the Company for "Good
Reason" (as defined herein), or (ii) the Company terminates
Participant's employment for any reason other than for "Due
Cause" (as defined herein): (a) all of Participant's outstanding
stock options granted under Holdings stock incentive plans shall
vest immediately, be automatically exercisable and remain
exercisable for three months following the termination of
employment, notwithstanding any provisions to the contrary in
the applicable award agreement(s) between a Participant and
Holdings; (b) all restrictions on Participant's restricted
stock awarded under Holdings stock incentive plans shall
terminate and lapse immediately notwithstanding any provisions
to the contrary in the applicable award agreement(s) between a
Participant and Holdings; (c) Participant shall continue to be
covered under the Company's medical and dental insurance plans
for a period of two years from the date of termination to the
same extent and under the same terms and conditions as active
employees of the Company; (d) Participant shall receive Special
Retirement Benefits (as defined herein) as determined by
the Committee and (e) Participant shall receive a "Cash
Payment" (as defined herein) as determined by the
Committee, which Cash Payment shall be payable by the
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<PAGE>
Company to the Participant, in two substantially equal annual
installments with the first installment paid on or before the
thirtieth day following Participant's termination and the second
installment paid on the next anniversary date of the first
installment payment, unless the Participant elects to receive
one discounted "Lump Sum Payment" (as defined herein), which
election must be made in writing and received by the Committee
prior to a Material Change.
B. If the value of the benefits Participant would receive pursuant
to Section III of the Plan (the "Change of Control Benefits"),
combined with all other benefits Participant receives under
other benefit plans, programs or compensation arrangements
provided by Holdings or Ev Re, would cause the Participant to
receive a "Parachute Payment" (as defined herein), the Company
shall provide Participant with written notice that Participant's
receipt of benefits hereunder and otherwise would result in
Participant receiving a Parachute Payment. Such written notice
shall specify the value of each benefit hereunder and the
value of other benefits provided by Holdings or Ev Re,
together with the method or methods used by the Company in
calculating each such value. Upon receipt of such notice,
Participant shall, within ten days, advise the Company in
writing of the specific benefits Participant elects to have
reduced by an amount necessary to reduce the value of the
Change of Control Benefits to an amount that is one dollar
less than the amount which would cause the value of the
Change of Control Benefits to constitute a Parachute Payment,
and the Change of Control Benefits shall be reduced
accordingly. If the Company does not receive notice
3
<PAGE>
from the Participant within this ten day period, the Company
shall automatically reduce the Cash Payment portion of the
Change of Control Benefits.
IV. DEFINITIONS
-----------
A. Cash Payment means, as determined by the Committee in its
absolute discretion, an amount equal to 2 or 2.99 or any
number between 2 and 2.99 multiplied by the average of the
Participant's salary and annual incentive bonus for the three
most recent taxable years (or such shorter period as may be
applicable) ending prior to Participant's termination of
employment.
B. Due Cause means (a) repeated and gross negligence in
fulfillment of, or repeated failure of Participant to fulfill,
his or her material obligations as an employee of the Company,
in either event after written notice thereof, (b) material
willful misconduct by Participant in respect of his or her
obligations as an employee of the Company, (c) conviction of
any felony, or any crime of moral turpitude by a Participant
or, (d) a material breach in trust committed in willful or
reckless disregard of the interests of the Company or Holdings
or undertaken for personal gain by a Participant.
C. Good Reason means (i) a materially adverse change in the nature
or status of participant's position or responsibilities with
the Company; (ii) a reduction by the Company in Participant's
base salary or benefits; or (iii) relocation of the
4
<PAGE>
Participant's office location by more than 1 1/2 hours travel
time by automobile from the Participant's current office
location.
D. Lump Sum Payment means the amount equal to the present value
of the Cash Payment, discounting the Cash Payment at the one
year U.S. Treasury Bill rate.
E. Material Change is defined as the occurrence of any of the
following events:
(i) A tender offer or exchange offer is made whereby the
effect of such offer is to take over and control the
affairs of Holdings or Ev Re, and such offer is
consummated for the ownership of securities of
Holdings or Ev Re representing twenty-five percent
(25%) or more of the combined voting power of
Holdings' or Ev Re's then outstanding voting
securities.
(ii) Holdings or Ev Re is merged or consolidated with
another corporation and, as a result of such merger
or consolidation, less than seventy-five percent
(75%) of the outstanding voting securities of the
surviving or resulting corporation shall then be
owned in the aggregate by the former stockholders of
Holdings or Ev Re other than affiliates within the
meaning of the Securities Exchange Act of 1934, as
amended ("Exchange Act").
(iii) Holdings or Ev Re transfers substantially all of its
assets to another corporation or entity that is not a
wholly owned subsidiary of Holdings or Ev Re.
5
<PAGE>
(iv) Any person (as such term is used in Sections 3(a) (9)
and 13 (d) (3) of the Exchange Act) is or becomes the
beneficial owner, directly or indirectly, of
securities of Holdings or Ev Re representing
twenty-five (25%) or more of the combined voting
power of Holdings' or Ev Re's then outstanding
securities, and the effect of such ownership is to
take over and control the affairs of Holdings or Ev
Re.
(v) As the result of a tender offer, merger,
consolidation, sale of assets, or contested election,
or any combination of such transactions, the persons
who were members of the Holdings' Board of Directors
or Ev Re's Board of Directors immediately before this
transaction, cease to constitute at least a majority
thereof.
F. Parachute Payment shall have the meaning set forth in Section
280G of the Internal Revenue Code.
G. "Participant" means an individual eligible to receive benefits
under the Plan pursuant to Section II of the Plan.
H. "Plan" means the Everest Reinsurance Holdings, Inc. Senior
Executive Change of Control Plan.
6
<PAGE>
I. "Special Retirement Benefits" means the additional retirement
benefits necessary (if any) so that the total retirement
benefits a Participant receives will equal the retirement
benefits he or she would have received had he or she continued
in the employ of the Company for two years or such greater
number of years as determined by the Committee in its absolute
discretion for each Participant following his or her termination
(or until his or her normal retirement date, whichever is
earlier) (herein referred to as "Additional Years of Service").
Special Retirement Benefits will include all ancillary benefits,
such as early retirement and survivor rights and benefits
available at retirement, as well as benefits (if any) under
the Everest Reinsurance Retirement Plan and any supplemental
retirement plans adopted by the Company, or any successor or
substitute plan or plans ("the Plans"). If a Participant's
credited service with the Company plus the Additional Years of
Service would result in vested benefits and/or eligibility for
ancillary benefits or additional benefits under the Plans, the
amount payable to the Participant or his or her beneficiaries
shall equal the excess of the amount specified in paragraph (i)
over that in paragraph (ii) below:
(i) the total retirement benefits that would be paid to
Participant or his or her beneficiaries, if the
Additional Years of Service (or the period to his or
her normal retirement date, if less) following his or
her termination are added to his or her credited
service under the Plans and his or her final average
compensation is the same as his or her actual average
compensation, including the Cash Payment as
compensation for services rendered to the Company in
the year of his or her termination;
7
<PAGE>
(ii) the total retirement benefits payable to Participant
or his or her beneficiaries under the Plans.
All Special Retirement Benefits are provided on an
unfunded basis and are not intended to meet the
qualification requirements of Section 401 of the
Internal Revenue Code. All Special Retirement
Benefits shall b e payable solely from the general
assets of the Company and shall be paid at the same
times as retirement benefits under the Plans are
payable, in accordance with the payment terms of such
Plans.
IV. GENERAL PROVISIONS
------------------
A. The Plan shall be unfunded and payments under this
Plan shall be paid from the general assets of the
Company. Neither the Company, the Committee nor
Holdings' Board of Directors shall be deemed to be a
trustee of any amounts to be paid under the Plan.
B. Payments under this Plan shall be subject to
withholding and deductions by the Company in
accordance with applicable law or regulations.
C. Nothing contained herein shall give any Participant
the right to be retained in the employment of the
Company or any successor, or affect the Company's
right to dismiss any Participant at will.
8
<PAGE>
D. This Plan is not a term or condition of any
individual's employment and no Participant shall have
any legal right to payments hereunder except to the
extent all conditions relating to the receipt of such
payments have been satisfied.
E. Nothing contained herein shall give Participant any
right to any employee benefit upon termination of
employment with the Company, except as specifically
provided herein, required by law or provided by the
terms of another employee benefit plan document
relating to the treatment of former employees
generally. Pursuant to the terms of the Everest
Reinsurance Company Severance Plan for United States
Employees a Participant who receives benefits under
this Plan shall not be eligible for benefits under
such Severance Plan.
F. No person having a benefit under this Plan may
assign, transfer or in any other way alienate the
benefit, nor shall any benefit under this Plan be
subject to garnishment, attachment, execution or levy
of any kind. If a Participant dies while any amount
is still payable pursuant to the Plan, all such
amounts, unless otherwise provided herein, shall be
paid in accordance with the terms of the Plan to the
Participant's designee or if there is no such
designee, to the Participant's estate.
9
<PAGE>
G. In the event a Participant must initiate litigation
to obtain or enforce any right or benefit to which he
or she is entitled to under this Plan, the Company
agrees to reimburse Participant for all legal fees and
expenses reasonably incurred by him or her, provided,
however, that a Participant agrees to repay all legal
fees and expenses paid to him or her by the Company in
the event that it is determined by a judgment of a
court of competent jurisdiction that the Company has
established that, under all the facts and
circumstances, there was no reasonable basis for
Participant's litigation. The Company agrees to pay
as incurred, to the fullest extent permitted by law,
all legal fees and expenses which a Participant may
reasonably incur as a result of any contest (regardless
of the outcome thereof) by the Company or third parties
of the validity or enforceability of, or liability
under, any provision of this Plan. In addition, the
Company agrees to pay pre-judgment interest on any
money judgment obtained by Participant and to pay
interest on any delayed payment calculated at the
prime rate of interest as published in the Wall Street
Journal in effect from time to time, from the date
that payment to the Participant should have been
made in accordance with the provisions of this Plan.
10
<PAGE>
H. In no event shall a Participant be obligated to seek
other employment or take any other action by way of
mitigation of the amounts payable to him or her under
this Plan.
VI. ADMINISTRATION
--------------
This Plan shall be administered by the Committee.
VII. APPLICABLE LAW
--------------
This Plan and all action taken under it shall be governed
as to validity, construction, interpretation and administration
by the laws of the State of Delaware and applicable federal law.
VIII. AMENDMENT OR TERMINATION
------------------------
The Board of Directors of Holdings or the Committee may amend,
suspend or terminate the Plan or any portion thereof at any
time, provided, however, that (i) for a period of two years
after a Material Change and (ii) during any period of time when
the Board of Directors of Holdings or the Committee is aware of
any circumstance which could reasonably be expected to result in
a Material Change, no amendment, suspension or termination may
be adopted or effected that would adversely impact the rights
under the Plan of any Participant who may become eligible for
benefits as a result of a Material Change. Termination of this
Plan shall not relieve Holdings or the Company from their
respective obligations to Participants under this Plan relating
to a Material Change which occurs prior to such termination.
11
<PAGE>
X. EFFECTIVE DATE
--------------
The Plan shall become effective upon September 24, 1998.
XI. BINDING ON SUCCESSORS
---------------------
Holdings shall take all necessary actions to insure that any
successor, whether direct or indirect, by operation of law, by
purchase, merger, consolidation, liquidation or otherwise, to
substantially all of the business and/or assets of Holdings or
Ev Re (sometimes referred to herein as the "successor/acquiror")
expressly assumes the obligations of Holdings under this Plan.
If Holdings does not make this Plan binding upon any
successor/acquiror, Holdings shall reserve such amounts as
are necessary to meet the obligations hereunder, from Holdings'
general assets or from amounts otherwise realized or derived
in connection with the transaction in which the
successor/acquiror succeeds to control of Holdings or Ev Re.
12
Exhibit 11.1
EVEREST REINSURANCE HOLDINGS, INC.
COMPUTATION OF EARNINGS PER SHARE
For The Three and Nine Months Ended September 30, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ----------------------------
1998 1997 1998 1997
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Net Income (Numerator) $ 42,126 $ 38,432 $ 125,471 $ 117,234
============ ============= ============ =============
Weighted average common and
effect of dilutive shares
used in the computation of
net income per share:
Average shares outstanding
- basic (denominator) 50,464,704 50,466,457 50,475,261 50,475,356
Effect of dilutive shares:
Options outstanding 280,717 316,247 302,857 271,794
Options exercised 2,388 1,657 985 882
Options cancelled - 6,827 3,070 3,131
------------ ------------- ------------ -------------
Average share outstanding
- diluted (denominator) 50,747,809 50,791,188 50,782,173 50,751,163
Net Income per common share:
Basic $ 0.83 $ 0.76 $ 2.49 $ 2.32
Diluted 0.83 0.76 2.47 2.31
</TABLE>
Exhibit 21.1
SUBSIDIARIES OF HOLDINGS
The following is a list of Everest Reinsurance Holdings, Inc. subsidiaries:
Everest Reinsurance Company,
a Delaware corporation
Everest Indemnity Insurance Company,
a Delaware corporation
Everest Insurance Company of Canada,
a Canada corporation
Everest MGA, Inc.,
a Texas corporation
Everest National Insurance Company,
an Arizona corporation
Everest Re Holdings, Ltd.,
a Bermuda corporation
Everest Re Ltd,
a United Kingdom corporation
Everest Southeast, Inc.,
an Alabama corporation
Mt. McKinley Managers, L.L.C.,
a New Jersey limited liability company
WorkCare Southeast of Georgia, Inc.,
a Georgia corporation.
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 4,114,027
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 154,272
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 4,376,642
<CASH> 73,545
<RECOVER-REINSURE> 640,426
<DEFERRED-ACQUISITION> 78,666
<TOTAL-ASSETS> 5,811,910
<POLICY-LOSSES> 3,491,659
<UNEARNED-PREMIUMS> 320,107
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 509
<OTHER-SE> 1,458,042
<TOTAL-LIABILITY-AND-EQUITY> 5,811,910
771,303
<INVESTMENT-INCOME> 183,205
<INVESTMENT-GAINS> 3,495
<OTHER-INCOME> 2,663
<BENEFITS> 564,048
<UNDERWRITING-AMORTIZATION> 3,459
<UNDERWRITING-OTHER> 230,492
<INCOME-PRETAX> 162,667
<INCOME-TAX> 37,196
<INCOME-CONTINUING> 125,471
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 125,471
<EPS-PRIMARY> 2.49
<EPS-DILUTED> 2.47
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
