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:
MARCH 31, 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 May 5, 1998
----- ----------------------------
COMMON STOCK, $.01 PAR VALUE 50,485,551
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
INDEX TO FORM 10-Q
PART I
FINANCIAL INFORMATION
---------------------
PAGE
ITEM 1. FINANCIAL STATEMENTS ----
--------------------
Consolidated Balance Sheets at March 31, 1998
(unaudited) and December 31, 1997 3
Consolidated Statements of Operations for the
three months ended March 31, 1998 and 1997
(unaudited) 4
Consolidated Statements of Changes in
Stockholders' Equity for the three months ended
March 31, 1998 and 1997 (unaudited) 5
Consolidated Statements of Cash Flows for the
three months ended March 31, 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 12
-----------------------------------
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 None
-------
ITEM 5. OTHER INFORMATION None
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
--------------------------------
<PAGE>
PART I - ITEM 1
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value per share)
<TABLE>
<CAPTION>
March 31, December 31,
--------------- ---------------
ASSETS: 1998 1997
--------------- ---------------
(unaudited)
<S> <C> <C>
Fixed maturities - available for
sale, at market value (amortized
cost: 1998, $3,768,393; 1997,
$3,658,370) $ 3,973,775 $ 3,866,860
Equity securities, at market value
(cost: 1998, $120,912; 1997,
$120,510) 178,205 158,784
Short-term investments 104,927 75,244
Other invested assets 9,270 10,848
Cash 38,684 51,578
--------------- ---------------
Total investments and cash 4,304,861 4,163,314
Accrued investment income 61,615 60,424
Premiums receivable 264,705 256,191
Reinsurance receivables 688,100 692,473
Funds held by reinsureds 189,341 186,454
Deferred acquisition costs 81,460 82,332
Prepaid reinsurance premiums 8,493 8,980
Deferred tax asset 69,726 74,434
Other assets 17,383 13,418
--------------- ---------------
TOTAL ASSETS $ 5,685,684 $ 5,538,020
=============== ===============
LIABILITIES:
Reserve for losses and adjustment
expenses $ 3,478,340 $ 3,437,818
Unearned premium reserve 338,522 337,383
Funds held under reinsurance treaties 199,149 190,639
Losses in the course of payment 47,144 55,969
Contingent commissions 98,662 100,027
Other net payable to reinsurers 9,208 13,231
Current federal income taxes 19,532 13,567
Other liabilities 138,848 81,903
--------------- ---------------
Total liabilities 4,329,405 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;
50.8 million shares issued 508 508
Additional paid-in capital 389,928 389,876
Unearned compensation (436) (514)
Accumulated other comprehensive
income, net of deferred income
taxes 163,683 152,319
Retained earnings 810,657 773,380
Treasury stock, at cost; 0.3 million
shares (8,061) (8,086)
--------------- ---------------
Total stockholders' equity 1,356,279 1,307,483
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 5,685,684 $ 5,538,020
=============== ===============
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
March 31,
---------------------------------
1998 1997
------------ ------------
(unaudited)
<S> <C> <C>
REVENUES:
Premiums earned $ 241,336 $ 230,443
Net investment income 60,013 54,042
Net realized capital loss (17) (199)
Other income 1,546 3,234
------------ ------------
Total revenues 302,878 287,520
------------ ------------
CLAIMS AND EXPENSES:
Incurred loss and loss adjustment expenses 178,592 166,841
Commission, brokerage, taxes and fees 60,437 62,015
Other underwriting expenses 11,824 12,739
------------ ------------
Total claims and expenses 250,853 241,595
------------ ------------
INCOME BEFORE TAXES 52,025 45,925
Income tax 12,224 11,461
------------ ------------
NET INCOME $ 39,801 $ 34,464
============ ============
Other comprehensive income/(loss), net of tax 11,364 (45,844)
------------ ------------
COMPREHENSIVE INCOME/(LOSS) $ 51,165 $ (11,380)
============ ============
PER SHARE DATA:
Average shares outstanding (000's) 50,481 50,490
Net income per common share - basic $ 0.79 $ 0.68
============ ============
Average diluted shares outstanding (000's) 50,800 50,725
Net income per common share - diluted $ 0.78 $ 0.68
============ ============
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
March 31,
----------------------------------
1998 1997
------------- ------------
(unaudited)
<S> <C> <C>
COMMON STOCK (SHARES OUTSTANDING):
Balance, beginning of period 50,479,271 50,490,273
Issued during the period 2,000 400
Treasury stock reissued during period 1,055 -
------------- ------------
Balance, end of period 50,482,326 50,490,673
============= ============
COMMON STOCK (PAR VALUE):
Balance, beginning of period $ 508 $ 508
Issued during the period - -
------------- ------------
Balance, end of period 508 508
------------- ------------
ADDITIONAL PAID IN CAPITAL:
Balance, beginning of period 389,876 389,196
Common stock issued during the period 33 6
Treasury stock reissued during period 19 -
------------- ------------
Balance, end of period 389,928 389,202
------------- ------------
UNEARNED COMPENSATION:
Balance, beginning of period (514) (374)
Net increase during the period 78 50
------------- ------------
Balance, end of period (436) (324)
------------- ------------
ACCUMULATED OTHER COMPREHENSIVE INCOME,
NET OF DEFERRED INCOME TAXES:
Balance, beginning of period 152,319 77,412
Net increase (decrease) during the period 11,364 (45,844)
------------- ------------
Balance, end of period 163,683 31,568
------------- ------------
RETAINED EARNINGS:
Balance, beginning of period 773,380 626,501
Net income 39,801 34,464
Dividends declared ($0.05 per share
in 1998 and $0.04 per share in 1997) (2,524) (2,020)
------------- ------------
Balance, end of period 810,657 658,945
------------- ------------
TREASURY STOCK AT COST:
Balance, beginning of period (8,086) (7,220)
Treasury stock reissued during period 25 -
------------- ------------
Balance, end of period (8,061) (7,220)
------------- ------------
TOTAL STOCKHOLDERS' EQUITY, END OF PERIOD $ 1,356,279 $ 1,072,679
============= ============
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
March 31,
-----------------------------
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES: (unaudited)
<S> <C> <C>
Net income $ 39,801 $ 34,464
Adjustments to reconcile net income to
net cash provided by operating
activities:
(Increase) in premiums receivable (8,672) (28,549)
Decrease in funds held by reinsureds,
net 5,231 16,776
Decrease in reinsurance receivables 4,486 19,104
(Increase) in deferred tax asset (1,955) (3,905)
Increase in reserve for losses and loss
adjustment expenses 41,021 34,812
Increase in unearned premiums 1,036 6,730
(Increase) decrease in other assets and
liabilities (10,813) 6,760
Non cash compensation expense 78 50
Accrual of bond discount/amortization
of bond premium (73) (347)
Realized capital losses 17 199
------------ ------------
Net cash provided by operating activities 70,157 86,094
------------ ------------
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 29,983 60,394
Proceeds from fixed maturities sold -
available for sale 53,159 133,562
Proceeds from equity securities sold 2,660 10,379
Proceeds from other invested assets sold 1,314 -
Cost of fixed maturities acquired - available
for sale (192,560) (285,674)
Cost of equity securities acquired (1,409) (13,326)
Cost of other invested assets acquired (295) (1,495)
Net (purchases) of short-term securities (32,070) (1,611)
Net increase in unsettled securities
transactions 28,892 11,379
------------ ------------
Net cash used in investing activities (110,326) (84,237)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock 44 -
Common stock issued during the period 33 6
Dividends paid to stockholders (2,524) (2,020)
Net increase in collateral for loaned
securities 27,898 -
------------ ------------
Net cash provided by (used in) financing
activities 25,451 (2,014)
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 1,824 (7,155)
------------ ------------
Net (decrease) in cash (12,894) (7,312)
Cash, beginning of period 51,578 52,595
------------ ------------
Cash, end of period $ 38,684 $ 45,283
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
CASH TRANSACTIONS:
Income taxes paid, net $ 7,744 $ 19,211
NON-CASH FINANCING TRANSACTION:
Issuance of common stock in connection
with public offering $ 78 $ 50
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 ENDED MARCH 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
1. GENERAL
The consolidated financial statements of Everest Reinsurance Holdings, Inc. (the
"Company") for the three months ended March 31, 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 ended March 31,
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 ENDED MARCH 31, 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 $375.0 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 ended March 31, 1998 and 1997:
Three Months Ended
March 31,
1998 1997
---------- -----------
Gross Basis:
Beginning of period reserves $ 446,132 $ 423,336
Incurred losses 27,895 11,198
Paid losses (4,361) (5,849)
---------- -----------
End of period reserves $ 469,666 $ 428,685
========== ===========
Net Basis:
Beginning of period reserves $ 212,376 $ 199,557
Incurred losses 2,222 -
Paid losses 17,779 2,328
---------- -----------
End of period reserves $ 232,377 $ 201,885
========== ===========
8
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
At March 31, 1998, the gross reserves for asbestos and environmental losses were
comprised of $125,122 representing case reserves reported by ceding companies,
$50,426 representing additional case reserves established by the Company on
assumed reinsurance claims, $45,405 representing case reserves established by
the Company on direct excess insurance claims and $248,713 representing 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 March 31, 1998 was $140,127.
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 March 31, 1998 was $10,167.
9
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS ENDED MARCH 31, 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):
Three Months Ended
March 31,
1998 1997
-------- --------
Net income (numerator) $ 39,801 $ 34,464
======== ========
Weighted average common and effect of
dilutive shares used in the computation
of net income per share:
Average shares outstanding-basic
(denominator) 50,481 50,490
Effect of dilutive shares 319 235
-------- --------
Average shares outstanding-diluted
(denominator) 50,800 50,725
Net income per common share:
Basic $ 0.79 $ 0.68
Diluted 0.78 0.68
Options to purchase 340,750 shares of common stock were outstanding as of March
31, 1998, but were not included in the computation of diluted earnings per share
for the three month period ended on that date, because the options' exercise
price was greater than the average market price of the common shares during the
period. All options outstanding as of March 31, 1997 were included in the
computation of diluted earnings per share for the three month period ended on
that date.
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 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
10
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
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:
Three Months Ended
March 31,
1998 1997
---------- ----------
Net unrealized appreciation (depreciation) of
investments, net of deferred income taxes $ 10,342 $ (41,532)
Cumulative translation adjustments, net of
deferred income taxes 1,022 (4,312)
---------- ----------
Other comprehensive income/(loss), net
of deferred income taxes $ 11,364 $ (45,844)
========== ==========
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.
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 which relates to 1986 reserve
strengthening. Management believes that the Company has adequate provisions for
tax contingencies and, as a result, this decision will not materially impact the
Company's financial statements.
11
<PAGE>
PART I - ITEM 2
EVEREST REINSURANCE HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
PREMIUMS. Gross premiums written increased 2.8% to $253.0 million in the
three months ended March 31, 1998 from $246.0 million in the three months ended
March 31, 1997, as the Company continued to maintain a cautious approach to the
increasingly competitive market conditions. Factors contributing to this
increase included a 40.5% increase (to $80.5 million) in U.S. broker treaty
operations, primarily attributable to the expansion of lines of business where
the Company's participation has historically been limited and a 17.1% increase
(to $53.1 million) in U.S. direct treaty reinsurance and insurance operations,
largely attributable to growth in primary insurance written through Everest
National. The increases were partially offset by a 26.3% decrease (to $15.7
million) in U.S. facultative operations, a 20.0% decrease (to $29.3 million) in
marine, aviation and surety premiums and a 12.9% decrease (to $74.3 million) in
international operations reflecting the competitive conditions in these markets.
Ceded premiums decreased 15.4% to $10.3 million in the three months ended
March 31, 1998 from $12.2 million in the three months ended March 31, 1997. This
decrease was principally attributable to reduced common account retrocessions by
ceding sources.
Net premiums written increased by 3.8% to $242.7 million in the three months
ended March 31, 1998 from $233.8 million in the three months ended March 31,
1997 reflecting the increases in gross premiums written and the decreases in
ceded premiums.
REVENUES. Net premiums earned increased by 4.7% to $241.3 million in the
three months ended March 31, 1998 from $230.4 million in the three months ended
March 31, 1997, generally consistent with the growth in net premiums written
over the preceding year.
Net investment income increased 11.0% to $60.0 million in the three months
ended March 31, 1998 from $54.0 million in the three months ended March 31,
1997, reflecting principally the effect of investing the $360.5 million of cash
flow in the twelve months ended March 31, 1998. The annualized pre-tax yield on
average cash and invested assets of 6.0% in the three months ended March 31,
1998 decreased from the 6.1% yield in the three months ended March 31, 1997
reflecting the lower interest rate environment and an increasing orientation to
tax-preferenced fixed maturity instruments.
Net realized capital gains/losses were $0.0 million in the three months ended
March 31, 1998, reflecting realized capital gains on the Company's common stock
investments of $1.6 million which were offset by $1.6 million of realized
capital losses on the Company's fixed maturity investments, compared to losses
of $0.2 million in the three months ended March 31, 1997. The net realized
capital loss in the three months ended March 31, 1997 reflected realized capital
12
<PAGE>
gains on the Company's common stock investments of $0.4 million which were more
than offset by $0.6 million of realized capital losses on the Company's fixed
maturity investments. During both periods, the Company continued to seek
enhanced yield on its fixed maturity investment portfolio.
EXPENSES. Incurred losses and loss adjustment expenses ("LAE") increased by
7.0% to $178.6 million in the three months ended March 31, 1998 from $166.8
million in the three months ended March 31, 1997. Catastrophe losses in the
three months ended March 31, 1998 were $6.0 million compared with $0.0 million
in the three months ended March 31, 1997. The Company's loss and LAE ratio
increased by 1.6 percentage points to 74.0% in the three months ended March 31,
1998 from 72.4% in the three months ended March 31, 1997 principally as a result
of higher catastrophe losses and changes in the Company's mix of business
towards certain reinsurance treaties with higher expected losses and lower
ceding commissions. Net incurred losses and LAE for the three months ended March
31, 1998 reflected ceded losses and LAE of $33.8 million, including $20.0
million ceded under the Stop Loss Agreement, compared to ceded losses and LAE of
$12.3 million, including $5.3 million ceded under the Stop Loss Agreement, in
the three months ended March 31, 1997.
Underwriting expenses decreased by 3.3% to $72.3 million in the three months
ended March 31, 1998 from $74.8 million in the three months ended March 31,
1997. Commission, brokerage, taxes and fees decreased by $1.6 million,
principally relating to the impact of the above mentioned changes in the
business mix. Other underwriting expenses for the three months ended March 31,
1998 decreased by $0.9 million to $11.8 million from the three months ended
March 31, 1997 reflecting the impact of the Company's continuing expense
reduction initiatives. The Company's expense ratio decreased by 2.5 percentage
points to 29.9% in the three months ended March 31, 1998 from 32.4% in the three
months ended March 31, 1997.
The Company's combined ratio decreased to 103.9% in the three months ended
March 31, 1998 from 104.8% in the three months ended March 31, 1997.
INCOME TAXES. The Company recognized income tax expense of $12.2 million in
the three months ended March 31, 1998 compared to $11.5 million in the three
months ended March 31, 1997 as pretax income in the three months ended March 31,
1998 increased to $52.0 million from $45.9 million in the three months ended
March 31, 1997, the impact of which was partially offset by an increase in
tax-preferenced investment income.
NET INCOME. Net income was $39.8 million in the three months ended March 31,
1998 compared to $34.5 million in the three months ended March 31, 1997. This
mainly reflected improved underwriting results and higher investment income,
partially offset by increased taxes.
FINANCIAL CONDITION
INVESTED ASSETS. Aggregate invested assets, including cash and short-term
investments, were $4,304.9 million at March 31, 1998 and $4,163.3 million at
December 31, 1997. The increase in invested assets between December 31, 1997 and
March 31, 1998 resulted primarily from cash flow from operations of $70.2 mil-
lion generated during the three months ended March 31, 1998, a $28.9 million in-
crease in unsettled investment security transactions, a $27.9 million increase
13
<PAGE>
in collateral for loaned securities and a $15.9 million increase in unrealized
appreciation of the Company's investment portfolio.
STOCKHOLDERS' EQUITY. Holdings' stockholders' equity increased to $1,356.3
million as of March 31,1998, from $1,307.5 million as of December 31, 1997
principally reflecting net income of $39.8 million for the three months ended
March 31, 1998 and a $10.3 million increase in net unrealized appreciation on
investments, net of deferred income taxes. Dividends of $2.5 million were
declared and paid by Holdings in the three months ended March 31, 1998.
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 January 1, 1998, 1,055 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 fourth
quarter of 1997.
(d) Exemption from registration was claimed pursuant to Section 4(2)
of the Securities Act of 1933. There was no public offering and
the participants in the transactions were the Company and its
non-employee directors.
(e) Not applicable.
Part II - ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit Index:
Exhibit No. Description Location
----------- ----------- --------
11.1 Statement regarding computation
of per-share earnings Filed
herewith
27.1 Financial Data Schedule (for the period
ended March 31, 1998) Filed
herewith
15
<PAGE>
27.2 Financial Data Schedules (for the periods
ended March 31, 1997, June 30, 1997 and
September 30, 1997, each restated for
SFAS No. 128) Filed
herewith
27.3 Financial Data Schedules (for the periods
ended June 30, 1996, September 30, 1996
and December 31, 1996, each restated for
SFAS No. 128) Filed
herewith
(b) Reports on Form 8-K:
There were no reports filed on Form 8-K for the three months ended
March 31, 1998.
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/ Stephen L. Limauro
----------------------
Stephen L. Limauro
Duly Authorized Officer, Vice President
and Comptroller
Dated: May 5, 1998
<PAGE>
Exhibit 11.1
EVEREST REINSURANCE HOLDINGS, INC.
COMPUTATION OF EARNINGS PER SHARE
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------- ---------------- ------------
<S> <C> <C> <C>
MARCH 31, 1998
- --------------
BASIC EPS
Income available to common stockholders $ 39,801 50,481,362 $ 0.79
============
EFFECT OF DILUTIVE SECURITIES
Options outstanding 317,730
Options exercised 536
----------------
DILUTED EPS
Income available to common stockholders
and assumed conversions $ 39,801 50,799,628 $ 0.78
============
MARCH 31, 1997
- --------------
BASIC EPS
Income available to common stockholders $ 34,464 50,490,384 $ 0.68
============
EFFECT OF DILUTIVE SECURITIES
Options outstanding 232,784
Options exercised 120
Options cancelled 1,298
----------------
DILUTED EPS
Income available to common stockholders
and assumed conversions $ 34,464 50,724,586 $ 0.68
============
</TABLE>
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 3,973,775
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 178,205
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 4,266,177
<CASH> 38,684
<RECOVER-REINSURE> 688,100
<DEFERRED-ACQUISITION> 81,460
<TOTAL-ASSETS> 5,685,684
<POLICY-LOSSES> 3,478,340
<UNEARNED-PREMIUMS> 338,522
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 508
<OTHER-SE> 1,355,771
<TOTAL-LIABILITY-AND-EQUITY> 5,685,684
241,336
<INVESTMENT-INCOME> 60,013
<INVESTMENT-GAINS> (17)
<OTHER-INCOME> 1,546
<BENEFITS> 178,592
<UNDERWRITING-AMORTIZATION> 882
<UNDERWRITING-OTHER> 71,379
<INCOME-PRETAX> 52,025
<INCOME-TAX> 12,224
<INCOME-CONTINUING> 39,801
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,801
<EPS-PRIMARY> 0.79
<EPS-DILUTED> 0.78
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<DEBT-HELD-FOR-SALE> 3,285,285 3,592,042 3,718,365
<DEBT-CARRYING-VALUE> 78,974 0 0
<DEBT-MARKET-VALUE> 85,508 0 0
<EQUITIES> 161,585 153,849 169,537
<MORTGAGE> 0 0 0
<REAL-ESTATE> 0 0 0
<TOTAL-INVEST> 3,592,589 3,841,589 3,929,651
<CASH> 45,283 37,980 62,299
<RECOVER-REINSURE> 730,089 673,789 672,527
<DEFERRED-ACQUISITION> 80,316 79,323 82,121
<TOTAL-ASSETS> 5,088,187 5,248,887 5,369,003
<POLICY-LOSSES> 3,265,220 3,305,266 3,367,522
<UNEARNED-PREMIUMS> 359,830 357,352 360,029
<POLICY-OTHER> 0 0 0
<POLICY-HOLDER-FUNDS> 0 0 0
<NOTES-PAYABLE> 0 0 0
0 0 0
0 0 0
<COMMON> 508 508 508
<OTHER-SE> 1,072,171 1,164,719 1,246,411
<TOTAL-LIABILITY-AND-EQUITY> 5,088,187 5,248,887 5,369,003
230,443 477,958 749,478
<INVESTMENT-INCOME> 54,042 111,410 169,327
<INVESTMENT-GAINS> (199) 13,211 15,933
<OTHER-INCOME> 3,234 4,007 3,577
<BENEFITS> 166,841 347,032 551,266
<UNDERWRITING-AMORTIZATION> 3,295 4,268 1,143
<UNDERWRITING-OTHER> 71,459 148,723 228,525
<INCOME-PRETAX> 45,925 106,563 157,381
<INCOME-TAX> 11,461 27,761 40,147
<INCOME-CONTINUING> 34,464 78,802 117,234
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 34,464 78,802 117,234
<EPS-PRIMARY> 0.68 1.56 2.32
<EPS-DILUTED> 0.68 1.55 2.31
<RESERVE-OPEN> 0 0 0
<PROVISION-CURRENT> 0 0 0
<PROVISION-PRIOR> 0 0 0
<PAYMENTS-CURRENT> 0 0 0
<PAYMENTS-PRIOR> 0 0 0
<RESERVE-CLOSE> 0 0 0
<CUMULATIVE-DEFICIENCY> 0 0 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 6-MOS 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 SEP-30-1996 DEC-31-1996
<DEBT-HELD-FOR-SALE> 2,885,762 3,068,611 3,281,972
<DEBT-CARRYING-VALUE> 82,026 83,987 80,522
<DEBT-MARKET-VALUE> 92,288 91,988 88,374
<EQUITIES> 132,275 131,371 147,280
<MORTGAGE> 0 0 0
<REAL-ESTATE> 0 0 0
<TOTAL-INVEST> 3,229,931 3,405,389 3,572,010
<CASH> 55,416 50,104 52,595
<RECOVER-REINSURE> 725,525 715,768 749,062
<DEFERRED-ACQUISITION> 79,435 84,526 84,123
<TOTAL-ASSETS> 4,763,556 4,925,098 5,047,767
<POLICY-LOSSES> 3,056,620 3,081,757 3,246,858
<UNEARNED-PREMIUMS> 322,584 353,682 355,908
<POLICY-OTHER> 0 0 0
<POLICY-HOLDER-FUNDS> 0 0 0
<NOTES-PAYABLE> 0 0 0
0 0 0
0 0 0
<COMMON> 508 508 508
<OTHER-SE> 972,280 1,014,083 1,085,515
<TOTAL-LIABILITY-AND-EQUITY> 4,763,556 4,925,098 5,047,767
429,075 674,416 973,611
<INVESTMENT-INCOME> 91,029 140,496 191,901
<INVESTMENT-GAINS> 7,484 979 5,695
<OTHER-INCOME> 243 230 (1,867)
<BENEFITS> 316,555 496,411 716,033
<UNDERWRITING-AMORTIZATION> 437 (4,659) (3,987)
<UNDERWRITING-OTHER> 137,759 222,007 313,455
<INCOME-PRETAX> 73,080 102,362 143,839
<INCOME-TAX> 16,590 22,653 31,812
<INCOME-CONTINUING> 56,490 79,709 112,027
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 56,490 79,709 112,027
<EPS-PRIMARY> 1.12 1.58 2.22
<EPS-DILUTED> 1.11 1.57 2.21
<RESERVE-OPEN> 0 0 2,268,464
<PROVISION-CURRENT> 0 0 745,594
<PROVISION-PRIOR> 0 0 (29,561)
<PAYMENTS-CURRENT> 0 0 213,832
<PAYMENTS-PRIOR> 0 0 270,447
<RESERVE-CLOSE> 0 0 2,500,218
<CUMULATIVE-DEFICIENCY> 0 0 29,561
</TABLE>
