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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998 Commission file number 1-13816
EVEREST REINSURANCE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3263609
(State or other jurisdiction) (I.R.S. Employer
of incorporation or organization) Identification No.)
477 MARTINSVILLE ROAD
POST OFFICE BOX 830
LIBERTY CORNER, NEW JERSEY 07938-0830
(908) 604-3000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive office)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, $.01 par value per share New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
The aggregate market value on March 9, 1999 of the voting stock held by
non-affiliates of the registrant was $1,685 million.
At March 9, 1999, the number of shares outstanding of the registrant's
common stock was 49,656,940.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Items 10, 11, 12, and 13 of Form 10-K
is incorporated by reference into Part III hereof from the registrant's proxy
statement for the 1999 Annual Meeting, which will be filed with the Securities
and Exchange Commission within 120 days of the close of the registrant's fiscal
year ended December 31, 1998.
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<PAGE>
TABLE OF CONTENTS
ITEM PAGE
- ---- ----
PART I
1. Business ........................................................... 1
2. Properties ......................................................... 23
3. Legal Proceedings .................................................. 23
4. Submission of Matters to a Vote of Security Holders ................ 23
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters ............................................... 23
6. Selected Financial Data ............................................ 24
7. Management's Discussion and Analysis of Financial
Condition and Results of Operation ................................ 26
7A. Quantitative and Qualitative Disclosures About
Market Risk ....................................................... 38
8. Financial Statements and Supplementary Data ........................ 38
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ............................... 38
PART III
10. Directors and Executive Officers of the Registrant ................. 39
11. Executive Compensation ............................................. 39
12. Security Ownership of Certain Beneficial Owners
and Management .................................................... 39
13. Certain Relationships and Related Transactions ..................... 39
PART IV
14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K ............................................... 39
<PAGE>
PART I
UNLESS OTHERWISE INDICATED, (I) ALL FINANCIAL DATA IN THIS DOCUMENT HAVE BEEN
PREPARED USING GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP"), AND (II) ALL
STATUTORY FINANCIAL DATA REFERRED TO IN THIS DOCUMENT REFER TO STATUTORY
FINANCIAL DATA OF EVEREST RE. AS USED IN THIS DOCUMENT, "EVEREST RE" MEANS
EVEREST REINSURANCE COMPANY (FORMERLY PRUDENTIAL REINSURANCE COMPANY) AND ITS
SUBSIDIARIES (UNLESS THE CONTEXT OTHERWISE REQUIRES); "HOLDINGS" MEANS EVEREST
REINSURANCE HOLDINGS, INC. (FORMERLY PRUDENTIAL REINSURANCE HOLDINGS, INC.); AND
THE "COMPANY" MEANS HOLDINGS AND ITS SUBSIDIARIES.
ITEM 1. BUSINESS
THE COMPANY
Everest Reinsurance Holdings, Inc., a Delaware corporation, was established in
1993 to serve as the parent holding company of Everest Reinsurance Company
(formed in 1973), a property and casualty reinsurer. Until October 6, 1995, the
Company was an indirect wholly-owned subsidiary of The Prudential Insurance
Company of America ("The Prudential"). On October 6, 1995, The Prudential sold
its entire interest in Holdings' shares of common stock in an initial public
offering (the "IPO").
Holdings, through its wholly-owned subsidiary, Everest Re, underwrites property
and casualty reinsurance on a treaty and facultative basis for insurance and
reinsurance companies in the United States and selected international markets.
Everest Re writes reinsurance both through brokers and directly with ceding
insurance companies, giving it the flexibility to pursue business regardless of
the ceding company's preferred reinsurance purchasing method. Everest Re and its
subsidiaries also write primary insurance. The Company had gross premiums
written in 1998 of $1,045.9 million and stockholders' equity at December 31,
1998 of $1,479.2 million and Everest Re had statutory surplus at December 31,
1998 of $1,059.4 million. Based on industry data at December 31, 1998 published
by the Reinsurance Association of America ("RAA"), Everest Re is the sixth
largest reinsurance company in the United States, ranked by statutory surplus
and is rated "A+" ("Superior") by A.M. Best, an independent insurance industry
rating organization which rates insurance companies on factors of concern to
policyholders.
Everest Re has four direct subsidiaries: Everest Re Holdings, Ltd. ("Everest
Ltd.") Everest National Insurance Company ("Everest National", formerly
Prudential National Insurance Company), Everest Insurance Company of Canada
("Everest Canada") and Everest Indemnity Insurance Company ("Everest
Indemnity"). Everest Ltd., a Bermuda company, was formed by Everest Re in 1998.
Following its formation, Everest Re contributed to Everest Ltd. its ownership of
Everest Re Ltd., a United Kingdom company which was previously authorized to
engage in the reinsurance business in the United Kingdom and, prior to January
1, 1997, which reinsured risks worldwide. In 1996, Everest Re obtained
authorization to engage in the reinsurance business in the United Kingdom, and
the operations of Everest Re Ltd. were converted to branch operations of Everest
Re, effective January 1, 1997. The assets of Everest Re Ltd. have been
transferred to Everest Ltd. and Everest Re Ltd. is in the process of being
dissolved. Everest National, an Arizona insurance company, is licensed in 42
states and the District of Columbia and writes primary insurance on an admitted
basis. On December 31, 1996, Everest Re acquired Everest Canada (formerly
OTIP/RAEO Insurance Company Inc.) from a subsidiary of The Prudential. All
liabilities incurred before the acquisition date, including insurance
obligations under expired and in-force business, were assumed by Prudential of
America General Insurance Company (Canada), a subsidiary of The Prudential which
was subsequently sold to Liberty Mutual Insurance Company, whereupon it was
renamed Liberty Insurance Company of Canada. Everest Canada is federally
licensed to write primary insurance under the Insurance Companies Act of Canada
and licensed in all Canadian provinces and territories. In 1997, Everest Re
formed Everest Indemnity, a Delaware insurance company, to engage in the excess
and surplus lines insurance business in the United States. Everest Indemnity is
licensed in Delaware and is eligible to write business in 37 states and the
District of Columbia on a non-admitted basis.
In 1997, Holdings formed Mt. McKinley Managers, L.L.C. ("Mt. McKinley"), a New
Jersey limited liability company, which is licensed as an insurance producer,
including surplus lines authority, in New Jersey. In 1998, the Company acquired
the assets of certain insurance agency operations in Alabama, Georgia and Texas,
which previously produced business for Everest Re and Everest National. The
continuing insurance agency operations are now carried on by subsidiaries of Mt.
McKinley, WorkCare Southeast, Inc., an Alabama insurance agency and WorkCare
Southeast of Georgia, Inc., a Georgia insurance agency. Pursuant to an agreement
with Everest National, the WorkCare companies produce business for Everest
National.
REINSURANCE INDUSTRY OVERVIEW
Reinsurance is an arrangement in which an insurance company, the reinsurer,
agrees to indemnify another insurance company, the ceding company, against all
or a portion of the insurance risks underwritten by the ceding company under one
or more insurance contracts. Reinsurance can provide a ceding company with
several benefits, including a reduction in net liability on individual risks,
catastrophe protection from large or multiple losses and assistance in
maintaining acceptable financial ratios. Reinsurance also provides a ceding
company with additional underwriting capacity by permitting it to accept larger
risks and write more business than would be possible without a concomitant
increase in capital and surplus. Reinsurance, however, does not discharge the
ceding company from its liability to policyholders.
<PAGE>
There are two basic types of reinsurance arrangements: treaty and facultative
reinsurance. In treaty reinsurance, the ceding company is obligated to cede and
the reinsurer is obligated to assume a specified portion of a type or category
of risks insured by the ceding company. Treaty reinsurers, including Everest Re,
do not separately evaluate each of the individual risks assumed under their
treaties and, consequently, after a review of the ceding company's underwriting
practices, are largely dependent on the original risk underwriting decisions
made by the ceding company. Such dependence subjects reinsurers in general,
including Everest Re, to the possibility that the ceding companies have not
adequately evaluated the risks to be reinsured and, therefore, that the premiums
ceded in connection therewith may not adequately compensate the reinsurer for
the risk assumed. The reinsurer's evaluation of the ceding company's risk
management and underwriting practices, therefore, will usually impact the
pricing of the treaty. In facultative reinsurance, the ceding company cedes and
the reinsurer assumes all or part of the risk under a single insurance contract.
Facultative reinsurance is negotiated separately for each insurance contract
that is reinsured. Facultative reinsurance normally is purchased by ceding
companies for individual risks not covered by their reinsurance treaties, for
amounts in excess of the dollar limits of their reinsurance treaties and for
unusual risks. Underwriting expenses and, in particular, personnel costs, are
higher on facultative business because each risk is individually underwritten
and administered. The ability to separately evaluate each risk reinsured,
however, increases the probability that the reinsurer can price the contract to
more accurately reflect the risks involved.
Both treaty and facultative reinsurance can be written on either a pro rata
basis or an excess of loss basis. With respect to pro rata reinsurance, the
ceding company and the reinsurer share the premiums as well as the losses and
expenses in an agreed proportion. In the case of reinsurance written on an
excess of loss basis, the reinsurer indemnifies the ceding company against all
or a specified portion of losses and expenses in excess of a specified dollar
amount, known as the ceding company's retention or reinsurer's attachment point,
generally subject to a negotiated reinsurance contract limit.
Premiums payable by the ceding company to a reinsurer for excess of loss
reinsurance are not directly proportional to the premiums that the ceding
company receives because the reinsurer does not assume a proportionate risk. In
contrast, premiums that the ceding company pays to the reinsurer for pro rata
reinsurance are proportional to the premiums that the ceding company receives,
consistent with the proportional sharing of risk. In addition, in pro rata
reinsurance the reinsurer generally pays the ceding company a ceding commission.
The ceding commission generally is based on the ceding company's cost of
acquiring the business being reinsured (commissions, premium taxes, assessments
and miscellaneous administrative expense) and also may include a profit factor
for producing the business.
Reinsurers typically purchase reinsurance to cover their own risk exposure.
Reinsurance of a reinsurer's business is called a retrocession. Reinsurance
companies cede risks under retrocessional agreements to other reinsurers, known
as retrocessionaires, for reasons similar to those that cause primary insurers
to purchase reinsurance: to reduce net liability on individual risks, protect
against catastrophic losses, stabilize financial ratios and obtain additional
underwriting capacity.
Reinsurance can be written through professional reinsurance brokers or directly
for ceding companies. From a ceding company's perspective, both the broker
market and the direct market have advantages and disadvantages. A ceding
company's decision to select one market over the other will be influenced by its
perception of such advantages and disadvantages relative to the reinsurance
coverage being placed.
BUSINESS STRATEGY
The Company's business strategies include effective management of the
underwriting cycle, management of catastrophe exposures and retrocessional costs
and expense control. The underwriting strategies seek to capitalize on the
Company's staff expertise and its flexibility to offer multiple products through
multiple production sources in a cost efficient manner. Efforts to control
expenses and to operate in a more cost efficient manner are a continuing focus
of the Company.
The Company's products include the full range of property and casualty
coverages, including marine, aviation, surety, errors & omissions liability
("E&O"), directors' & officers' liability ("D&O"), medical malpractice, other
specialty lines, accident and health, workers compensation, non-standard auto
and loss portfolios. The Company's distribution channels include both the direct
and broker reinsurance markets, international and domestic markets, reinsurance,
both treaty and facultative, and insurance, both admitted and non-admitted.
The Company's underwriting strategy emphasizes underwriting profitability rather
than premium volume, writing specialized risks and integration of underwriting
expertise across all underwriting units. Key elements of this strategy are
prudent risk selection, appropriate pricing through strict underwriting
discipline and adjusting the Company's business mix to respond to changing
market conditions. Management intends to focus on reinsuring companies that
effectively manage the underwriting cycle through proper analysis and pricing of
underlying risks and whose underwriting guidelines and performance are
compatible with the Company's profitability objectives.
2
<PAGE>
The Company's underwriting strategy also emphasizes flexibility and
responsiveness to changing market conditions, such as increased demand or
favorable pricing trends. Management believes that Everest Re's existing
strengths, including its broad underwriting expertise, international presence
and substantial capital, facilitate adjustments to its mix of business
geographically, by line of business and by type of coverage, allowing it to
capitalize on those market opportunities that provide the greatest potential for
underwriting profitability. The Company's primary insurance infrastructure
further facilitates this strategy by allowing the Company to develop business
that requires the Company to issue primary insurance policies. The Company will
also continue to carefully monitor its mix of business to avoid inappropriate
concentrations of geographic or other risk.
The Company's underwriting guidelines seek to limit the accumulation of known
risks in exposed areas, to require that business which is exposed to catastrophe
losses be written with greater geographic spread and to maintain a
cost-effective retrocession program. The Company's underwriting guidelines also
seek to better reflect the relationship between premiums and risk assumed while
maintaining the Company's probable maximum loss at appropriate levels.
SEGMENT INFORMATION
The Company, through its subsidiaries, operates as a single segment focusing on
the coverage of property and casualty risks using an approach which emphasizes
central control and coordination of critical business elements. The Company's
product is distributed globally through multiple markets and distribution
channels including insurance and reinsurance, originated on a broker, direct and
program manager basis, accepting primary, proportional and excess layers, treaty
and facultative arrangements, covering virtually all lines of business. The
management approach of the Company is to focus on the enterprise's overall
profitability as opposed to an analysis of the stand alone profitability results
of any unit.
MARKETING
The Company writes its business on a worldwide basis for many different
customers and for many lines of property and casualty business. Its products
provide a broad array of coverages. The Company is not materially dependent on
any single customer, small group of customers, line of business or geographical
area. For the 1998 calendar year, no single customer generated more than 4.6% of
the Company's gross premiums written. The Company does not believe that the
reduction of business assumed from any one customer will have a materially
adverse effect on its future financial condition or results of operations due to
the Company's competitive position in the market place and the continuing
availability of other sources of business.
Approximately 68.5% and 31.5% of Everest Re's 1998 gross premiums written were
written in the broker and direct markets, respectively. Everest Re's ability to
write reinsurance both through brokers and directly with ceding companies gives
it the flexibility to pursue business regardless of the ceding company's
preferred reinsurance purchasing method.
The reinsurance broker market consists of several substantial national and
international brokers and a number of smaller specialized brokers. Brokers do
not have the authority to bind Everest Re with respect to reinsurance
agreements, nor does Everest Re commit in advance to accept any portion of the
business that brokers submit to it. Reinsurance business from any ceding
company, whether new or renewal, is subject to acceptance by Everest Re.
Brokerage fees generally are paid by reinsurers. The Company's largest ten
brokers accounted for an aggregate of approximately 51.8% of gross premiums
written in 1998 with the two largest brokers accounting for approximately 17.0%
and 8.3%, respectively, of gross premiums written. The Company does not believe
that the reduction of business assumed from any one broker will have a
materially adverse effect on the Company due to its competitive position in the
market place, relationships with ceding companies and the continuing
availability of other sources of business.
The direct market remains an important distribution system for reinsurance
business written by Everest Re and primary insurance written through Everest
National and Everest Indemnity in the United States and Everest Canada in
Canada. Direct placement of reinsurance enables Everest Re to access clients who
prefer to place their reinsurance directly with their reinsurers based upon the
reinsurer's in-depth understanding of the ceding company's needs. The Company's
primary insurance business is written principally through general agency
relationships. The Company evaluates each business relationship, including the
underwriting expertise and experience of each distribution channel selected,
performs an analysis to evaluate financial security and monitors performance.
UNDERWRITING OPERATIONS
The following table presents the distribution of Everest Re's gross premiums
written by its U.S. broker treaty, U.S. direct treaty reinsurance and insurance,
marine, aviation and surety, U.S. facultative and international operations for
the years ended December 31, 1998, 1997, 1996, 1995 and 1994, classified
according to whether such premium is derived from property or casualty business
and whether it represents pro rata or excess of loss business:
3
<PAGE>
<TABLE>
<CAPTION>
GROSS PREMIUMS WRITTEN BY UNDERWRITING UNIT
YEARS ENDED DECEMBER 31,
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1998 1997 1996 1995 1994
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(Dollars In Millions) $ % $ % $ % $ % $ %
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Broker Treaty
Property
Pro Rata(1) $ 59.0 5.6% $ 62.8 5.8% $ 45.4 4.4% $ 51.7 5.4% $ 59.7 6.3%
Excess 41.3 3.9 53.3 5.0 60.4 5.8 59.0 6.2 53.9 5.7
Casualty
Pro Rata(1) 110.9 10.6 84.6 7.9 63.4 6.1 18.5 1.9 29.6 3.1
Excess 149.0 14.2 124.3 11.6 137.5 13.2 122.6 12.9 113.5 11.9
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Total(2) 360.2 34.4 325.0 30.2 306.8 29.4 251.8 26.5 256.6 26.9
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U.S. Direct Treaty
Reinsurance and
Insurance
Property
Pro Rata(1) 4.6 0.4 11.7 1.1 12.6 1.2 3.3 0.3 5.4 0.6
Excess 1.4 0.1 4.4 0.4 8.9 0.9 9.1 1.0 12.5 1.3
Casualty
Pro Rata(1) 148.6 14.2 128.0 11.9 114.5 11.0 99.8 10.5 83.2 8.7
Excess 14.6 1.4 14.3 1.3 12.5 1.2 10.0 1.1 38.6 4.0
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Total(2) 169.2 16.2 158.4 14.7 148.6 14.2 122.2 12.9 139.7 14.7
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Marine, Aviation
and Surety
Property
Pro Rata(1) 62.5 6.0 92.9 8.6 94.6 9.1 89.2 9.4 74.1 7.8
Excess 15.6 1.5 16.9 1.6 17.8 1.7 18.7 2.0 16.8 1.8
Casualty
Pro Rata(1) 39.3 3.8 45.4 4.2 43.1 4.1 53.0 5.6 66.0 6.9
Excess 3.0 0.3 6.4 0.6 5.6 0.5 6.0 0.6 4.8 0.5
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Total(2) 120.4 11.5 161.6 15.0 161.1 15.4 166.9 17.6 161.7 17.0
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U.S. Facultative
Property
Pro Rata(1) - - - - - - - - - -
Excess 22.5 2.2 29.0 2.7 26.9 2.6 22.3 2.3 27.4 2.9
Casualty
Pro Rata(1) - - - - - - - - - -
Excess 49.0 4.7 53.4 5.0 61.8 5.9 46.6 4.9 39.3 4.1
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Total(2) 71.5 6.8 82.4 7.7 88.7 8.5 68.8 7.2 66.7 7.0
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Total U.S.
Property
Pro Rata(1) 126.1 12.1 167.4 15.6 152.6 14.6 144.2 15.2 139.2 14.6
Excess 80.8 7.7 103.6 9.6 114.0 10.9 109.1 11.5 110.6 11.6
Casualty
Pro Rata(1) 298.8 28.6 258.0 24.0 221.1 21.2 171.3 18.0 178.8 18.8
Excess 215.6 20.6 198.4 18.5 217.6 20.8 185.2 19.5 196.1 20.6
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Total(2) 721.3 69.0 727.4 67.7 705.2 67.5 609.7 64.2 624.7 65.5
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International
Property
Pro Rata(1) 141.9 13.6 144.2 13.4 124.2 11.9 136.2 14.3 147.0 15.4
Excess 45.7 4.4 62.9 5.9 79.8 7.6 84.9 8.9 89.2 9.4
Casualty
Pro Rata(1) 93.4 8.9 99.2 9.2 90.5 8.7 66.4 7.0 49.6 5.2
Excess 43.6 4.2 41.3 3.8 44.4 4.3 52.3 5.5 42.7 4.5
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Total(2) 324.6 31.1 347.6 32.4 338.8 32.5 339.8 35.8 328.5 34.5
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Total Company
Property
Pro Rata(1) 268.0 25.6 311.6 29.0 276.7 26.5 280.4 29.5 286.2 30.0
Excess 126.5 12.1 166.5 15.5 193.8 18.6 194.0 20.4 199.8 21.0
Casualty
Pro Rata(1) 392.2 37.5 357.2 33.2 311.6 29.8 237.6 25.0 228.4 24.0
Excess 259.2 24.8 239.7 22.3 261.9 25.1 237.5 25.0 238.8 25.1
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Total(2) $ 1,045.9 100.0% $ 1,075.0 100.0% $ 1,044.0 100.0% $ 949.5 100.0% $ 953.2 100.0%
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</TABLE>
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(1) For purposes of the presentation above, pro rata reinsurance means
reinsurance attaching to the first dollar of loss incurred by the ceding
company.
(2) Certain totals and subtotals may not reconcile due to rounding.
4
<PAGE>
U.S. BROKER TREATY OPERATIONS. Everest Re's U.S. broker treaty operations write
property, accident and health and casualty reinsurance through reinsurance
brokers. The Company targets certain brokers and, through the broker market,
specialty companies and small to medium sized standard lines companies. The U.S.
broker treaty operations also write portions of reinsurance programs for larger,
national insurance companies.
In 1998, $100.3 million of gross premiums written were attributable to domestic
property business (which in 1998 and 1997 included accident and health
business), of which 41.2% was written on an excess of loss basis and 58.8% was
written on a pro rata basis. This unit utilizes sophisticated underwriting
methods which management believes are necessary to analyze and price property
business, particularly that segment of the property market which has catastrophe
exposure. Accident and health underwriting utilizes both third party and
proprietary actuarial pricing techniques.
Domestic casualty business accounted for $259.9 million of gross premiums
written in 1998, of which 57.3% was written on an excess of loss basis and 42.7%
was written on a pro rata basis. The treaty casualty portfolio consists
principally of professional liability, directors' & officers' liability,
workers' compensation, excess and surplus lines, and other liability coverages.
As a result of the complex technical nature of most of these risks, the
Company's casualty underwriters tend to specialize by line of business and work
closely with the Company's pricing actuaries.
DIRECT TREATY REINSURANCE AND INSURANCE OPERATIONS. The Company's direct treaty
reinsurance operation writes a full line of property and casualty business. In
1998, direct treaty business accounted for $90.6 million of gross premiums
written, of which 17.7% was written on an excess of loss basis and 82.3% was
written on a pro rata basis. The U.S. direct treaty underwriters target
companies which place their business predominantly in the direct market,
including small to medium sized regional ceding companies, and seek to develop
long-term relationships with such companies. A broad array of coverages are
offered.
In 1998, the Company's domestic insurance operation consisted of $78.6 million
of gross premiums written primarily through Everest National, which is licensed
in 42 states and the District of Columbia to write primary insurance. Everest
National targets commercial property and casualty business written through
agency relationships with program administrators. With respect to primary
insurance written through such agents, the Company supplements the initial
underwriting process with periodic claims and underwriting reviews.
MARINE, AVIATION AND SURETY OPERATIONS. The Company's marine and aviation unit
focuses on ceding companies with a particular expertise in marine and aviation
business. The marine and aviation business is written primarily through brokers
and contains a significant international component written primarily in the
London market. Surety business underwritten by the Company consists mainly of
reinsurance of contract surety bonds.
Gross premiums written by the marine and aviation unit in 1998 totaled $68.6
million, substantially all of which was written on a treaty basis and 66.7% of
which was sourced through reinsurance brokers. Marine treaties represented 38.3%
of marine and aviation gross premiums written in 1998 and consisted of hull and
liability coverage. Approximately 82.5% of the marine unit premiums in 1998 were
written on a pro rata basis and 17.5% as excess of loss. Aviation premiums
accounted for 61.7% of marine and aviation gross premiums written in 1998 and
included reinsurance for airlines, general aviation and satellites.
Approximately 92.9% of the aviation unit's premiums in 1998 were written on a
pro rata basis and 7.1% as excess of loss.
In 1998, gross premiums written by the surety unit totaled $51.8 million.
Approximately 78.9% of the surety unit premiums in 1998 were written on a pro
rata basis and 21.1% on an excess of loss basis. Most of the portfolio is
reinsurance of contract surety bonds written directly with ceding companies,
with the remainder being credit reinsurance, mostly in international markets.
The unit's strategy is to maintain long-term relationships with major surety and
fidelity writers and to continue to expand its international business.
FACULTATIVE OPERATIONS. The Company's U.S. facultative unit conducts business
both through brokers and directly with ceding companies. The U.S. facultative
operations consist of three underwriting units representing property, casualty
and specialty lines of business. Business is written from a facultative
headquarters office in New York and satellite offices in Chicago and San
Francisco. In 1998, $22.0 million, $25.2 million, and $24.3 million of gross
premiums written were attributable to property, general casualty and specialty
lines of business, respectively.
5
<PAGE>
INTERNATIONAL. Everest Re's international operations are designed to enable it
to capitalize on the growth opportunities in the international reinsurance
market. The Company targets several international markets, including: Europe and
the London market, which are serviced by branch operations in London and
Brussels and a representative office in Moscow; Canada, with branch operations
in Toronto; Asia and Australia, with branch operations in Hong Kong and
Singapore; and Latin America, Africa and the Middle East, which business is
serviced from Everest Re's New Jersey headquarters and Miami office. The Company
also writes "home-foreign" business, which provides reinsurance on the
international portfolios of U.S. insurers, from its headquarters in New Jersey.
Approximately 57.8% of the gross premiums written by the Company's international
underwriters in 1998 represented property business, while the balance
represented casualty business. As with its U.S. operations, Everest Re's
international operations focus on financially sound companies that have strong
management and underwriting discipline and expertise. Approximately 67.0% of the
Company's international business was written through brokers, with the remainder
written directly with ceding companies.
In 1998, Everest Re's gross premiums written by its London and Brussels
operations totaled $148.5 million and consisted of pro rata property (31.0%),
excess property (21.1%), pro rata casualty (35.9%) and excess casualty (12.0%).
Substantially all of the London and Brussels premiums consisted of treaty
reinsurance. The Brussels office focuses on the continental European reinsurance
markets, while the London office covers international business written through
the London market. Gross premiums written in 1998 from the Brussels and London
offices totaled $69.3 million and $79.2 million, respectively.
Gross premiums written by Everest Re's Canadian operation totaled $53.9 million
in 1998 and consisted of pro rata property (5.0%), excess property (2.7%), pro
rata multi-line (47.1%), excess casualty (35.7%) and primary insurance written
by Everest Canada (9.5%). Approximately 67.6% of the Canadian premiums consisted
of treaty reinsurance while 22.9% was facultative reinsurance and 9.5% was
primary insurance.
Everest Re's Hong Kong and Singapore offices cover the Asian and Australian
markets and accounted for $33.0 million of gross written premiums in 1998. This
business consisted of pro rata property (86.1%), excess property (8.7%) and pro
rata and excess casualty (5.2%).
International business written out of Everest Re's New Jersey and Miami offices
accounted for $89.2 million of Everest Re's 1998 gross premiums written and
consisted of pro rata treaty property (68.2%), pro rata treaty casualty (13.3%),
excess treaty property (10.4%), excess treaty casualty (2.0%) and excess
facultative property and casualty (6.1%). Of this international business 52.9%
was sourced from Latin America, 23.7% was sourced from the Middle East, 2.3% was
sourced from Europe, 5.6% was sourced from Africa, 1.0% was sourced from Asia
and 14.5% was "home-foreign" business.
GEOGRAPHIC AREAS
The Company conducts its business both in the United States, its country of
domicile, and in a number of foreign countries. For select financial information
about geographic areas, see Note 13 of Notes to the Consolidated Financial
Statements. Risks attendant to the foreign operations of the Company parallel
those attendant to the United States operations of the Company, with the primary
exception of foreign exchange risks. See ITEM 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Safe Harbor
Disclosure".
UNDERWRITING PROCESS
Everest Re offers ceding companies full service capability, including actuarial,
claims, accounting and systems support, either directly or through the broker
community. Everest Re's capacity for both casualty and property risks allows it
to underwrite entire contracts or major portions thereof that might otherwise
need to be syndicated among several reinsurers. Everest Re's strategy is to act
as "lead" reinsurer in many of the reinsurance treaties it underwrites. The lead
reinsurer on a treaty generally accepts one of the largest percentage shares of
the treaty and is in a stronger position to negotiate price, terms and
conditions than is a reinsurer which takes a smaller position. Management
believes this strategy enables it to influence more effectively the terms and
conditions of the treaties on which it participates. When Everest Re does not
lead the treaty, it may still suggest changes to any aspect of the treaty.
Everest Re may decline to participate in a treaty based upon its assessment of
all relevant factors.
Everest Re's treaty underwriting process emphasizes a team approach among
Everest Re's underwriters, actuaries and claims staff. Treaties are reviewed for
compliance with Everest Re's general underwriting standards and certain larger
treaties are evaluated in part based upon actuarial analyses conducted by
Everest Re. The actuarial models used in such analyses are tailored in
each case to the exposures and experience underlying the specific treaty and
the loss experience for the risks covered by such treaties. Everest Re
does not separately evaluate each of the individual risks assumed under
6
<PAGE>
its treaties. Everest Re does, however, generally evaluate the underwriting
guidelines of its ceding companies to determine their adequacy prior to entering
into a treaty. Everest Re, when appropriate, also conducts underwriting audits
at the offices of ceding companies to ensure that the ceding companies operate
within such guidelines. Underwriting audits focus on the quality of the
underwriting staff, the selection and pricing of risks and the capability of
monitoring price levels over time. Claim audits, when appropriate, are performed
in order to evaluate the client's claims handling abilities and practices.
Everest Re's domestic facultative underwriters operate within guidelines
specifying acceptable types of risks, limits and maximum risk exposures.
Specified classes of risks and large premium risks are referred to the Company's
New York facultative headquarters for specific review before premium quotations
are given to clients. In addition, Everest Re's guidelines require certain types
of risks to be submitted for review because of their aggregate limits,
complexity or volatility regardless of premium amount or size of the insured on
the underlying contract.
Everest National and Everest Canada write property, casualty and professional
liability coverages for homogeneous risks through select program managers. These
commercial programs are evaluated based upon actuarial analysis and the program
manager's capabilities. The Company's rates, forms and underwriting guidelines
are tailored to specific risk types.
RISK MANAGEMENT AND RETROCESSION ARRANGEMENTS
Everest Re manages its risk of loss through a combination of aggregate exposure
limits, underwriting guidelines that take into account risks, prices and
coverage, and retrocessional arrangements.
Everest Re is exposed to multiple insured losses arising out of a single
occurrence, whether a natural event such as a hurricane or an earthquake, or
other catastrophe, such as a riot or an explosion at a major factory. Any such
catastrophic event could generate insured losses in one or many of Everest Re's
treaties or lines of business. Everest Re employs various techniques, including
licensed software modeling, to assess its accumulated exposure to property
catastrophe losses and summarizes that exposure in terms of the probable maximum
loss ("PML"). The Company defines PML as its anticipated maximum loss, taking
into account contract limits, caused by a single catastrophe affecting a broad
contiguous geographic area, such as that caused by a hurricane or earthquake of
such a magnitude that it is expected to occur once in every 100 years.
Management estimates that the Company's greatest catastrophe exposure worldwide
from any single event is to hurricanes and earthquakes in the coastal regions of
the United States, where Everest Re estimates it has a PML exposure, before
reinsurance, of approximately $170 million in each such region based on its
current book of business. Similarly, management estimates that the largest
current PML exposure, before reinsurance, outside the United States is
approximately $86 million. There can be no assurance that Everest Re will not
experience losses from one or more catastrophic events that exceed, perhaps by a
substantial amount, its estimated PML.
Underwriting guidelines have been established for each business unit. These
guidelines place dollar limits on the amount of business that can be written
based on a variety of factors, including ceding company, line of business,
geographical location and risk hazards. In each case, those guidelines permit
limited exceptions, which must be authorized by the Company's senior management.
Everest Re does not typically retrocede individual risks, but does, from time to
time, purchase retrocessional protections where the underwriter deems it to be
prudent to reinsure a portion of the specific risk being assumed. Everest Re
also participates in "common account" retrocessional arrangements for certain
reinsurance treaties. Common account reinsurance arrangements are arrangements
whereby the ceding company purchases a cover for the benefit of the ceding
company and its reinsurers on a reinsurance treaty. Common account
retrocessional arrangements reduce the effect of individual or aggregate losses
to all participating companies with respect to a reinsurance treaty, including
the ceding company.
During 1998, Everest Re had purchased a three-layer property facultative
retrocession program which provided $18 million of coverage in excess of $2
million of retained losses per facultative certificate. For 1999, this program
was modified and renewed and provides $16.6 million part of $18 million of
coverage in excess of $2 million of retained losses per facultative certificate.
During 1998, Everest Re purchased three retrocessional workers' compensation
excess of loss treaties which collectively provide $115 million of coverage
in excess of $5 million of retained losses on accidental death and
dismemberment claims resulting from a catastrophe loss. These retrocessional
workers compensation treaties were renewed for 1999. During 1998, the
Company also purchased a workers' compensation reinsurance program which
7
<PAGE>
provided for statutory limits coverage in excess of $250,000 per occurrence on
the Company's primary workers' compensation insurance business. For 1999, this
program was renewed and provides for statutory limits coverage in excess of
$75,000 per occurrence.
For 1999, the Company also purchases reinsurance covering certain primary
insurance programs written by the Company, including an 85.0% quota share of
primary California non-standard automobile business written by the Company. For
the period October 1, 1998 through October 1, 1999, the Company purchased a 50%
quota share of $1 million net retained liability and $4 million excess $1
million of automatic property facultative protection covering Texas property and
casualty program business.
The Company also purchases catastrophe retrocessions covering the potential
accumulation of all property exposures that may be involved in the same
catastrophe, such as an earthquake or hurricane. During 1998, the Company's
worldwide catastrophe retrocession program provided coverage of 75.0% of $112.5
million of losses in excess of a $25 million attachment point, net of inuring
retrocessions, incurred on a per catastrophe and aggregate basis. The worldwide
catastrophe retrocession program was cancelled by the retrocessionaire effective
December 31, 1998.
For the period from May 15, 1998 through May 15, 1999, the Company's catastrophe
retrocession program also provides coverage of 70.0% of $20.0 million per
occurrence in excess of $10.0 million in losses incurred by the Company outside
of the United States. And for the period from May 23, 1998 through May 23, 1999,
the Company's catastrophe retrocession program provides coverage of 87.5% of
$20.0 million per occurrence in excess of $30.0 million in losses incurred by
the Company outside of the United States.
The Company also purchases a corporate level retrocession covering the potential
accumulation of all exposures. During 1998, the Company purchased an accident
year aggregate excess of loss retrocession agreement which provided up to $100.0
million of limit if Everest Re's statutory basis loss ratio exceeded 79.0% for
the 1998 accident year. For 1999, the Company purchased an accident year
aggregate excess of loss protection which provides up to $175.0 million of
coverage if Everest Re's statutory basis accident year loss ratio exceeds a
certain threshold and responds on an aggregate basis with respect to both
property and casualty losses, including those arising from catastrophies. The
attachment point is net of inuring retrocessions and includes adjustable premium
provisions which effectively cause the Company to offset, on a pre-tax income
basis, up to 52.5% of such ceded losses, depending upon the character of the
underlying losses, through additional premiums. The maximum recovery is $175.0
million before giving effect to a maximum adjustable premium of $86.3 million.
Although the catastrophe and aggregate excess of loss retrocessions have terms
which provide for additional premiums to be paid to the retrocessionaire in the
event that losses are ceded, all aspects of the Company's retrocessional program
have been structured to permit these agreements to be accounted for as
reinsurance under Statement of Financial Accounting Standards ("SFAS") No. 113.
If a single catastrophe were to occur in the United States that resulted in
$170.0 million of gross losses and allocated loss adjustment expenses ("ALAE")
in 1999, an amount equivalent to Everest Re's PML, management estimates that the
effect, including additional premiums and retained losses and ALAE, on the
Company's income before taxes would be $93 million. This pre-tax net loss
estimate assumes that Everest Re's aggregate losses and ALAE for 1999 would
exceed the threshold loss ratio requirement in the aggregate excess of loss
cover by $170.0 million.
In addition, Everest Re continues to have coverage under an aggregate stop loss
retrocession agreement (the "Stop Loss Agreement") purchased from Gibraltar
Casualty Company ("Gibraltar"), an affiliate of The Prudential, in 1995. See
"Stop Loss Agreement".
As of December 31, 1998, Everest Re had retrocessional arrangements with 432
retrocessionaires, and it carried as an asset $982.0 million in reinsurance
receivables with respect to losses ceded to retrocessionaires, which, except for
$142.0 million which is due from Gibraltar in the first quarter of 1999 under
the terms of the Stop Loss Agreement, will not be due to Everest Re until
Everest Re makes payment on the underlying claims. Of this amount, $563.3
million, or 57.4%, was receivable from Gibraltar, including the $142.0 million
due under the Stop Loss Agreement ($266.5 million, net of collateral held and
liability balances for which Everest Re has a contractual right of offset). An
additional $150.0 million, or 15.3%, was receivable from Continental Insurance
Company ("Continental"). No other retrocessionaire accounted for more than $25.0
million of Everest Re's receivables.
None of the reinsurance receivables from Gibraltar was in dispute or more
than 90 days in arrears, with the exception of $63.0 million and $39.7
million items, which Gibraltar has disputed. The $63.0 million disputed
amount, which is part of the $142.0 million due from Gibraltar in the
first quarter, has been disputed pursuant to the Stop Loss Agreement
8
<PAGE>
and, in accordance with the terms of the Stop Loss Agreement, Gibraltar has
secured the disputed amount. Gibraltar paid the $79.0 million remaining balance
of the $142.0 million amount to Everest Re in the first quarter of 1999.
Gibraltar has also disputed Everest Re's level of reserves previously ceded to
and paid by Gibraltar under the Stop Loss Agreement and claims a refund of $91.7
million. Should Everest Re and Gibraltar not resolve these disputes, pursuant to
the terms of the Stop Loss Agreement, each will appoint an independent examiner
to review the disputed amounts and to determine the appropriate amount of
cessions to Gibraltar, and Everest Re will secure the $91.7 million amount. If
the examination process does not resolve the disputes, the Stop Loss Agreement
provides for resolution through arbitration. In the event the cessions to
Gibraltar were determined to be excessive, Everest Re would reduce the cession
to Gibraltar by such excess, refund previous payments made by Gibraltar, if
applicable, and the unused portion of the limits of the Stop Loss Agreement
would be restored. Also, Everest Re would consider the independent examiners'
findings in its ongoing determination of appropriate reserve levels, which may
lead to a corresponding reduction in Everest Re's gross reserves, and net
reserves to the extent of the coinsurance under the Stop Loss Agreement. In the
event the cessions are not determined to be excessive, Gibraltar would be
obligated to pay the disputed amount. Accordingly, if the disputes are resolved
in Gibraltar's favor, any adverse effect on the Company's financial condition
and results of operations would likely be limited to a reduction in cash flows
from operations with a corresponding impact on investment income.
The $39.7 million has been disputed pursuant to the Direct Excess Retrocession
(defined below - see "Relationships with Gibraltar") primarily reflecting
reserve increases for asbestos losses ceded by the Company in 1998. Gibraltar is
disputing the level of reserves established by the Company for such losses, but
Gibraltar is not disputing its responsibility to pay the ultimate losses in
accordance with the terms of the Direct Excess Retrocession. Management does not
expect that this dispute will have a material adverse effect on the Company's
future financial condition, results of operations or cash flows.
Everest Re's arrangement with Continental is managed on a funds held basis,
which means that Everest Re has not released premium payments to the
retrocessionaire but rather retains such payments to secure obligations of the
retrocessionaire, records them as a liability and reduces the liability account
as payments become due. As of December 31, 1998, such funds had reduced Everest
Re's net exposure to Continental to $90.4 million.
No assurance can be given that the Company will be able to obtain retrocessional
coverage similar to that currently in place in the future. Although management
carefully selects its retrocessionaires, the Company is subject to credit risk
with respect to its retrocessions because the ceding of risk to
retrocessionaires does not relieve the reinsurer of its liability to ceding
companies.
RELATIONSHIPS WITH GIBRALTAR
During its early years, Everest Re also wrote some direct insurance. In 1978,
Everest Re expanded its direct insurance operation by forming Gibraltar as a
subsidiary. In 1985, Gibraltar and Everest Re ceased writing new and renewal
direct insurance, and Gibraltar was put into run-off.
While Gibraltar actively wrote direct insurance, it was able to reinsure certain
business through Everest Re's management underwriting facility ("MUF"). Begun in
1977, MUF was a reinsurance arrangement pursuant to which Everest Re ceded
certain business to a number of insurance and reinsurance companies (the "MUF
Participants"), many of them domiciled outside the United States. Gibraltar
ceded its MUF-qualifying business first to Everest Re, which then immediately
and entirely retroceded it to the MUF Participants. As a result of these
cessions to Everest Re, Everest Re became, and remains, a reinsurer of Gibraltar
with respect to the Gibraltar MUF cessions. As of December 31, 1998, Gibraltar's
reinsurance receivables from Everest Re totaled $169.6 million. MUF became
inactive with respect to new business in 1991.
Following the 1985 decision to put Gibraltar in runoff, Everest Re and Gibraltar
entered into the following agreements pursuant to which Gibraltar became, and
remains, a reinsurer of Everest Re (the "Gibraltar Contracts"):
o In 1986, Gibraltar reinsured all insurance obligations of Everest
Re pursuant to certain insurance contracts written by Everest Re's
former direct excess insurance operations, which ceased writing
business in 1985 (the "Ceded Direct Insurance") (the "Direct
Excess Retrocession").
o In 1989, Gibraltar reinsured Everest Re's medical malpractice and
other professional liability reinsurance written in 1988 and prior
years (the "Professional Liability Retrocession").
o During 1985 through 1990, Gibraltar and Everest Re commuted the
obligations of a number of MUF Participants. In exchange for a
cash payment from each commuted MUF Participant, Gibraltar assumed
the obligations of such MUF Participant. The commuted business
included assumed reinsurance originally retroceded to MUF
Participants by Everest Re and direct insurance ceded by Everest
Re and Gibraltar.
9
<PAGE>
In 1991, Everest Re distributed the stock of Gibraltar to PRUCO, Inc., a direct,
wholly-owned subsidiary of The Prudential ("PRUCO"). Simultaneously, PRUCO and
Gibraltar entered into a surplus maintenance agreement pursuant to which PRUCO
agreed to purchase such amount of surplus notes as may be necessary to maintain
Gibraltar's statutory surplus at no less than $15 million at all times. PRUCO
shortly thereafter distributed the stock of Gibraltar to The Prudential.
The Direct Excess Retrocession can be terminated by either Gibraltar or Everest
Re upon 90 days' notice, whereas the Professional Liability Retrocession can
only be terminated by Everest Re. A total of $165.2 million of the Gibraltar
receivables is attributable to the Direct Excess Retrocession. If the Direct
Excess Retrocession is terminated, all outstanding claims, including incurred
but not reported losses ("IBNR"), will be commuted with the value of such
claims, which may not exceed Everest Re's then outstanding loss reserves with
respect thereto, to be mutually agreed upon or, if no agreement can be reached,
determined by an actuary or appraiser mutually appointed. At the time of the
IPO, the parties agreed that if Gibraltar terminates the Direct Excess
Retrocession and the parties cannot agree on the value of the claims to be
commuted, Everest Re's chief actuary will determine such value. Gibraltar could
arbitrate the actuary's determination. If the Direct Excess Retrocession were to
be so terminated and Everest Re's ultimate losses on the Ceded Direct Insurance
were to exceed the commutation amount, the resulting reserve increases would
constitute adverse development eligible for coverage under the Stop Loss
Agreement (described below), subject to the applicable limits thereof.
STOP LOSS AGREEMENT
On October 5, 1995, Everest Re and Gibraltar entered into an aggregate stop loss
retrocession agreement (the "Stop Loss Agreement"). The Stop Loss Agreement is
intended to mitigate the impact on the Company's future earnings that could
result from the adverse development, if any, of Everest Re's consolidated
reserves for losses, allocated LAE and uncollectible reinsurance as of June 30,
1995, including IBNR; provided, that adverse development, if any, of such
reserves relating to catastrophes (as defined in the Stop Loss Agreement) will
only be covered to the extent that the catastrophe event to which such reserves
relate occurred prior to January 1, 1995. Such adverse development is referred
to herein as "Adverse Development". For a description of the Stop Loss
Agreement, see Note 7 of Notes to Consolidated Financial Statements.
STANDBY CAPITAL CONTRIBUTION AGREEMENT AND PRUCO INDEMNITY
On October 6, 1995, Holdings agreed, pursuant to a Standby Capital Contribution
Agreement (the "Capital Contribution Agreement"), to make certain capital
contributions ("Capital Contributions") to Everest Re in respect of all or a
portion of the $375.0 million of Adverse Development experienced by Everest Re
that is not ceded in accordance with the terms of the Stop Loss Agreement to
Gibraltar. And, on October 6, 1995, PRUCO agreed to make payments ("Indemnity
Payments") to Holdings, pursuant to an Indemnity Agreement (the "PRUCO
Indemnity"), in an amount equal to the Capital Contributions.
PRUDENTIAL GUARANTEES
On October 6, 1995, The Prudential guaranteed (i) up to $775.0 million of
Gibraltar's obligations to Everest Re, and (ii) PRUCO's obligation to make the
Indemnity Payments (the "Prudential Guarantees"). The Prudential agreed, subject
to the terms and conditions thereof, to guarantee Gibraltar's (i) payment
obligations with respect to the Stop Loss Agreement, subject to maximum
aggregate payments of $375.0 million, and (ii) payment obligations under the
Gibraltar Contracts, subject to maximum aggregate payments of $400.0 million.
The maximum aggregate payments under the Prudential Guarantee of Gibraltar's
obligations will be reduced in certain circumstances to take account of payments
made and collateral provided in respect of the guaranteed obligations.
As of December 31, 1998, based on publicly available information, The Prudential
had GAAP basis total assets of $279.4 billion and GAAP based equity of $20.4
billion.
CLAIMS
Claims are managed by the Company's professional claims staff whose
responsibilities include reviewing initial loss reports and coverage issues,
monitoring claims handling activities of ceding companies, establishing and
adjusting proper case reserves and approving payment of claims. In addition to
claims assessment, processing and payment, the claims staff selectively conducts
comprehensive claims audits of both specific claims and overall claims
procedures at the offices of selected ceding companies. In most instances,
primary insurance claims are handled by third party claims services providers
who have limited authorities and are subject to oversight by the Company's
professional claims staff.
10
<PAGE>
RESERVES FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Significant periods of time may elapse between the occurrence of an insured
loss, the reporting of the loss to the ceding company and the reinsurer and the
ceding company's payment of that loss and subsequent payments to the ceding
company by the reinsurer. To recognize liabilities for unpaid losses and loss
adjustment expenses ("LAE"), insurers and reinsurers establish reserves, which
are balance sheet liabilities representing estimates of future amounts needed to
pay reported and unreported claims and related expenses on losses that have
already occurred. Actual losses and LAE paid may deviate, perhaps substantially,
from such reserves. To the extent reserves prove to be insufficient to cover
actual losses and LAE after taking into account available retrocessional
coverage, including the reinsurance provided through the Stop Loss Agreement,
Everest Re would have to augment such reserves and incur a charge to earnings
which could be material in the period such augmentation takes place. See ITEM 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Loss and LAE Reserves".
While the reserving process is difficult and subjective for the ceding
companies, the inherent uncertainties of estimating such reserves are even
greater for the reinsurer, due primarily to the longer time between the date of
an occurrence and the reporting of any attendant claims to the reinsurer, the
diversity of development patterns among different types of reinsurance treaties
or facultative contracts, the necessary reliance on the ceding companies for
information regarding reported claims and differing reserving practices among
ceding companies. In addition, trends that have affected development of
liabilities in the past may not necessarily occur or affect liability
development to the same degree in the future. Thus, actual losses and LAE may
deviate, perhaps substantially, from estimates of reserves reflected in the
Company's consolidated financial statements.
Like many other property and casualty insurance and reinsurance companies,
Everest Re has experienced adverse loss development for prior accident years,
which has led to adjustments in losses and LAE reserves. The increase in net
reserves for prior accident years reduced net income for the periods in which
the adjustments were made. There can be no assurance that adverse development
from prior years will not continue in the future or that such adverse
development will not have a material adverse effect on net income. Adverse
Development will be reinsured under the Stop Loss Agreement, up to the maximum
limits thereunder and subject to the other terms and conditions thereof. See
"Relationships with Gibraltar" and "Stop Loss Agreement".
CHANGES IN HISTORICAL RESERVES
The following table shows changes in historical loss reserves for Everest Re for
1988 and subsequent years. The top line of each table shows the estimated
reserves for unpaid losses and LAE recorded at each year end date. Each amount
in the top line represents the estimated amount of future payments for losses
and LAE on claims occurring in that year and in all prior years. The upper
(paid) portion of the table presents the cumulative amounts paid through each
subsequent year on those claims for which reserves were carried as of each
specific year end. The lower (liability re-estimated) portion shows the
re-estimated amount of the previously recorded reserves based on experience as
of the end of each succeeding year. The estimate changes as more information
becomes known about the actual claims for which the initial reserves were
carried. The cumulative redundancy/deficiency line represents the cumulative
change in estimates since the initial reserve was established. It is equal to
the latest liability re-estimated amount less the initial reserve.
Each amount other than the original reserves in the top half of the table below
includes the effects of all changes in amounts for prior periods. For example,
if a loss settled in 1995 for $100,000 was first reserved in 1991 at $60,000 and
remained unchanged until settlement, the $40,000 deficiency (actual loss minus
original estimate) would be included in the cumulative redundancy (deficiency)
in each of the years in the period 1991 through 1994 shown below. Conditions and
trends that have affected development of liability in the past may not
necessarily occur in the future. Accordingly, it may not be appropriate to
extrapolate future redundancies or deficiencies based on this table.
11
<PAGE>
<TABLE>
<CAPTION>
TEN YEAR STATUTORY LOSS DEVELOPMENT TABLE PRESENTED NET OF REINSURANCE
WITH SUPPLEMENTAL GROSS DATA (1)
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------------------------------------------
(Dollars in millions) 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Reserves for unpaid
loss and LAE $1,775.8 $1,766.7 $1,891.9 $1,752.9 $1,854.7 $1,934.2 $2,104.2 $2,316.0 $2,551.6 $2,810.0 $2,953.5
Paid (cumulative)
as of:
One year later 299.1 321.9 597.1 333.3 461.5 403.5 359.5 270.4 331.2 450.8
Two years later 522.3 829.5 785.9 550.4 740.1 627.7 638.0 502.8 619.2
Three years later 984.3 966.3 933.1 758.3 897.0 820.5 828.0 682.0
Four years later 1,096.1 1,078.2 1,096.9 868.1 1,036.0 953.0 983.6
Five years later 1,189.5 1,209.0 1,176.9 970.0 1,141.0 1,071.5
Six years later 1,308.9 1,276.3 1,257.3 1,052.9 1,232.7
Seven years later 1,367.9 1,346.6 1,329.8 1,130.3
Eight years later 1,430.7 1,407.9 1,395.6
Nine years later 1,489.0 1,462.1
Ten years later 1,539.1
Liability re-
estimated as of:
One year later 1,794.6 1,835.4 1,866.3 1,737.8 1,929.2 2,008.5 2,120.8 2,286.5 2,548.4 2,836.1
Two years later 1,813.2 1,834.3 1,872.8 1,775.7 1,988.9 2,015.4 2,233.7 2,264.5 2,575.9
Three years later 1,805.6 1,849.5 1,907.5 1,843.3 2,010.0 2,119.0 2,271.2 2,285.1
Four years later 1,867.6 1,913.6 1,976.5 1,855.7 2,111.9 2,164.5 2,452.3
Five years later 1,934.5 1,982.3 1,984.3 1,955.1 2,155.3 2,344.9
Six years later 2,007.6 1,984.1 2,080.0 1,995.8 2,332.3
Seven years later 2,008.0 2,089.4 2,123.2 2,178.0
Eight years later 2,122.6 2,135.9 2,307.8
Nine years later 2,167.6 2,310.8
Ten years later 2,339.3
Cumulative
redundancy/
(deficiency) $ (563.5) $ (544.1) $ (415.9) $ (425.1) $ (477.6) $ (410.7) $ (348.1) $ 30.9 $ (24.3) $ (26.1)
==================================================================================================
Gross liability-
end of year $2,752.7 $3,016.9 $3,298.2 $3,498.7 $3,869.2
Reinsurance
receivable 648.5 700.9 746.6 688.7 915.7
------------------------------------------------
Net liability-
end of year 2,104.2 2,316.0 2,551.6 2,810.0 2,953.5
-------------------------------------- ========
Gross re-estimated
liability at
December 31, 1998 3,412.5 3,553.0 3,702.8 3,811.2
Re-estimated
receivable at
December 31, 1998 960.2 1,267.9 1,126.9 975.1
--------------------------------------
Net re-estimated
liability at
December 31, 1998 2,452.3 2,285.1 2,575.9 2,836.1
--------------------------------------
Gross cumulative
redundancy/
(deficiency) $ (659.8) $ (536.1) $ (404.6) $ (312.5)
======================================
</TABLE>
- ----------
(1) Includes Gibraltar data through September 30, 1991
12
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For years prior to 1988, management believes that two factors had the most
significant impact on loss development. First, through the mid-1980's, a number
of industry and external factors, such as the propensity of courts to award
large damage awards in liability cases, combined to increase loss frequency and
severity to unexpectedly high levels. Second, contracts written prior to 1986
contained coverage terms which, for Everest Re and the industry in general, have
been interpreted by courts to provide coverage for asbestos and environmental
exposures not contemplated by either the pricing or the initial reserving of the
contracts. Legal developments during the mid-1980's necessitated additional
reserving for such exposures on both a case and IBNR basis. Incurred losses with
respect to asbestos and environmental claims, net of reinsurance, were $15.4
million, $3.5 million, $0, $0 and $40.5 million in 1998, 1997, 1996, 1995 and
1994, respectively. Substantially all of these losses related to pre-1986
exposures. The absence of net incurred losses in 1996 and 1995 is attributable
to coverage under the Company's Stop Loss Agreement. The net incurred losses in
1998 and 1997 reflect coinsurance under the Stop Loss Agreement.
To the extent loss reserves on assumed reinsurance need to be increased, Everest
Re would be entitled to certain payments under the Stop Loss Agreement. See
"Stop Loss Agreement" and Note 7 of Notes to Consolidated Financial Statements.
Additionally, Holdings may be required to make payments under the Capital
Contribution Agreement for which it would be entitled to indemnification under
the PRUCO Indemnity. See "Standby Capital Contribution Agreement and PRUCO
Indemnity". To the extent loss reserves on the Ceded Direct Insurance need to be
increased and subject to the terms of the Gibraltar Contracts, Everest Re will
be entitled to 100% protection from Gibraltar under the Gibraltar Contracts,
which reinsurance obligations are guaranteed by The Prudential subject to the
terms and conditions of the applicable Prudential Guarantee. See "Relationships
with Gibraltar" and "Prudential Guarantees". Management believes that adequate
provision has been made for Everest Re's loss and LAE reserves regardless of the
availability of any such payments under the Stop Loss Agreement, the PRUCO
Indemnity, and the Prudential Guarantees. Additionally, while there can be no
assurance that reserves for and losses from these claims will not increase in
the future, management believes that Everest Re's existing reserves and
retrocessional arrangements and payments available under the Stop Loss
Agreement, the PRUCO Indemnity and the Prudential Guarantees lessen the
probability that such increases would have a material adverse effect on the
Company's financial condition, results of operations or cash flows.
The Ten Year Statutory Loss Development Table includes Gibraltar data until
September 30, 1991, at which time Everest Re distributed the stock of Gibraltar
to PRUCO. Thus the 1988-1990 "Reserves for unpaid loss and LAE" includes the
Gibraltar liability. Similarly, the "Paid (cumulative) as of" and "Liability
re-estimated as of" data include Gibraltar experience until September 30, 1991.
At the time of the distribution of Gibraltar, Gibraltar still had $288.5 million
of reserves outstanding. To more accurately reflect reserve development, the
Gibraltar reserves were removed from the reserves for unpaid losses and LAE line
for periods after 1991 and the $288.5 million was treated as a paid loss. The
amount so treated as paid in 1991 was $288.5 for each of the years 1988 through
1990. The following table identifies the cumulative reserve
redundancy/(deficiency) relating to Gibraltar only, Everest Re excluding
Gibraltar and the consolidated group.
<TABLE>
<CAPTION>
CUMULATIVE RESERVE REDUNDANCY/(DEFICIENCY) ATTRIBUTABLE TO GIBRALTAR
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
(Dollars in millions) 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Everest Re excluding
Gibraltar $ (433.6) $ (446.0) $ (385.9) $ (425.1) $ (477.6) $ (410.7) $ (348.1) $ 30.9 $ (24.3) $ (26.1)
Gibraltar (129.9) (98.1) (30.0) - - - - - - -
--------------------------------------------------------------------------------------------------
Consolidated $ (563.5) $ (544.1) $ (415.9) $ (425.1) $ (477.6) $ (410.7) $ (348.1) $ 30.9 $ (24.3) $ (26.1)
==================================================================================================
</TABLE>
The following table is derived from the Ten Year Statutory Loss Development
Table above and summarizes the effect of reserve re-estimates, net of
reinsurance, on calendar year operations for the same ten year period ended
December 31, 1998. Each column represents the amount of reserve re-estimates
made in the indicated calendar year and shows the accident years to which the
re-estimates are applicable. The amounts in the total accident year column on
the far right represent the cumulative reserve re-estimates for the indicated
accident years.
13
<PAGE>
<TABLE>
<CAPTION>
EFFECT OF RESERVE REESTIMATES ON CALENDAR YEAR OPERATIONS
CUMULATIVE
CALENDAR YEAR ENDED DECEMBER 31, RE-ESTIMATES FOR
(Dollars in ------------------------------------------------------------------------------------------------- EACH ACCIDENT
millions) 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 YEAR
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Accident
Years
1988 & prior $ (18.7) $ (18.6) $ 7.6 $ (62.0) $ (66.9) $ (73.0) $ (0.4) $ (114.5) $ (45.1) $ (171.7) $ (563.3)
1989 (50.1) (6.5) 46.8 2.8 4.4 (1.4) 9.2 (1.5) (3.2) 0.5
1990 24.5 8.7 29.4 (0.4) (6.0) 9.7 3.3 (9.7) 59.5
1991 21.6 (3.2) 1.4 (4.6) (3.8) 2.5 2.4 16.3
1992 (36.6) 7.9 (8.7) (2.5) (2.7) 5.2 (37.4)
1993 (14.6) 14.2 (1.7) (2.1) (3.4) (7.6)
1994 (9.8) (9.2) 8.0 (0.7) (11.7)
1995 142.4 59.6 160.4 362.4
1996 (18.8) (6.8) (25.6)
1997 1.4 1.4
Total calendar
year effect $ (18.7) $ (68.7) $ 25.6 $ 15.1 $ (74.5) $ (74.3) $ (16.7) $ 29.6 $ 3.2 $ (26.1) $ (205.5)
</TABLE>
As illustrated by this table, the factors which caused the deficiencies shown in
the Ten Year Statutory Loss Development Table relate almost entirely to accident
years prior to 1989 principally reflecting the impact of asbestos and
environmental exposures discussed above. The significant favorable development
experienced for the 1995 accident year is due to recoveries under the Stop Loss
Agreement. This contract, because of the 1995 inception date, is attributed to
the 1995 accident year. Aggregate historical development excluding the impact of
these two unusual items is not material.
The following table presents a reconciliation of beginning and ending reserve
balances for the years indicated on a GAAP basis:
<TABLE>
<CAPTION>
RECONCILIATION OF RESERVES FOR LOSSES AND LAE
YEARS ENDED DECEMBER 31,
---------------------------------------
(Dollars in millions) 1998 1997 1996
---------------------------------------
<S> <C> <C> <C>
Reserves at beginning
of period $ 3,437.8 $ 3,246.9 $ 2,969.3
---------------------------------------
Incurred related to:
Current year 752.3 768.6 745.6
Prior years 26.1 (3.2) (29.6)
---------------------------------------
Total incurred
losses 778.4 765.4 716.0
---------------------------------------
Paid related to:
Current year 192.4 185.3 213.9
Prior years 450.8 331.2 270.4
---------------------------------------
Total paid losses 643.2 516.5 484.3
---------------------------------------
Change in reinsurance
receivables on unpaid
losses and LAE 227.0 (58.0) 45.9
---------------------------------------
Reserves at end of
period $ 3,800.0 $ 3,437.8 $ 3,246.9
=======================================
</TABLE>
14
<PAGE>
The reconciliation of reserves on a GAAP basis to reserves reported on a
statutory basis for each of the three years in the period ended December 31,
1998 is shown below:
RECONCILIATION OF RESERVES FOR LOSSES AND LAE
FROM STATUTORY BASIS TO GAAP BASIS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
(Dollars In Millions) 1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
Statutory reserves-net (1) $ 2,922.9 $ 2,778.5 $ 2,313.0
Statutory retroactive
reinsurance reserves 29.8 31.4 15.4
Financing arrangement - - (10.3)
--------------------------------------------
Subtotal 2,952.7 2,809.9 2,318.1
Foreign subsidiary
reserves (1) 0.8 0.1 233.5
--------------------------------------------
Subtotal-net reserves
as shown in loss
development schedule 2,953.5 2,810.0 2,551.6
Reinsurance receivable
on unpaid losses 915.7 688.7 746.6
--------------------------------------------
Subtotal-gross reserves
as shown in loss
development schedule 3,869.2 3,498.7 3,298.2
Foreign translation effect
of Canadian reserves (2) (69.2) (60.9) (51.3)
--------------------------------------------
Reserves on a GAAP basis $ 3,800.0 $ 3,437.8 $ 3,246.9
============================================
</TABLE>
- --------------------
(1) On January 1, 1997 the insurance operations of Everest Re Ltd. were
converted to branches of Everest Re. For 1998 and 1997, the net reserves
for the branches are included in statutory net reserves, and for 1996 the
Everest Re Ltd. reserves are shown as foreign subsidiary reserves. For 1998
and 1997, the foreign subsidiary reserve amounts represent the reserves for
Everest Canada.
(2) Pursuant to statutory accounting conventions, reserves with respect to the
Canadian Branch are reflected in Canadian dollars.
RESERVES FOR ASBESTOS AND ENVIRONMENTAL LOSSES AND LOSS ADJUSTMENT EXPENSES
Everest Re's reserves include an estimate of Everest Re'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 Everest Re's potential losses from asbestos and
environmental claims. See ITEM 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Asbestos and Environmental
Exposures" and Note 11 of Notes to Consolidated Financial Statements.
The following table summarizes the composition of Everest Re's total reserves
for asbestos and environmental losses, gross and net of reinsurance for the
years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
(Dollars In Millions) 1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
Case reserves reported by
ceding companies $ 137.5 $ 125.9 $ 101.2
Additional reserves
established by Everest Re
(assumed reinsurance) 67.9 52.0 50.1
Case reserves established
by Everest Re (Ceded
Direct Insurance) 40.9 45.8 52.8
IBNR reserves 414.5 222.4 219.2
--------------------------------------------
Gross reserves 660.8 446.1 423.3
Reinsurance receivable (397.3) (233.7) (223.7)
--------------------------------------------
Net reserves $ 263.5 $ 212.4 $ 199.6
============================================
</TABLE>
Everest Re's asbestos and environmental claims are managed by an experienced
staff consisting of eight people. This claims unit works closely with members of
Everest Re's in-house legal staff on legal developments. The claims unit also
meets with the management of primary insurance companies to understand their
asbestos and environmental exposures and reserving practices.
15
<PAGE>
Additional losses, the type or magnitude of which cannot be foreseen by the
Company, or the reinsurance and insurance industry generally, may emerge in the
future. Such future emergence, to the extent not covered by existing
retrocessional contracts, including the Stop Loss Agreement, could have material
adverse effects on the Company's future financial condition, results of
operations and cash flows.
INVESTMENTS
Everest Re's overall financial strength and results of operations are, in part,
dependent on the quality and performance of its investment portfolio. Net
investment income and net realized capital gains (losses) on Everest Re's
invested assets constituted 18.6%, 18.8% and 16.9% of the Company's revenues for
the years ending December 31, 1998, 1997 and 1996, respectively. The Company's
cash and invested assets totalled $4,325.8 million at December 31, 1998 of which
93.7% were cash or investment grade fixed maturities.
Everest Re's current investment strategy seeks to maximize after-tax income
through a high quality, diversified, taxable bond and tax-exempt fixed maturity
portfolio, while maintaining an adequate level of liquidity. Everest Re's mix of
taxable and tax-preferenced investments is adjusted continuously, consistent
with Everest Re's current and projected operating results, market conditions and
tax position. Additionally, Everest Re invests in marketable equity securities
which it believes will enhance the risk-adjusted total return of the investment
portfolio.
The Investment Committee of Everest Re's Board of Directors is responsible for
establishing investment policy and guidelines and, together with senior
management, for overseeing their execution. Everest Re's investment portfolio is
in compliance with the insurance laws of the state of Delaware, its domiciliary
state, and of other jurisdictions in which it is regulated. These laws prescribe
the kind, quality and concentration of investments which may be made by
insurance companies. In general, these laws permit investments, within specified
limits and subject to certain qualifications, in government obligations,
corporate bonds, preferred and common stocks, real estate mortgages and real
estate. An independent investment advisor is utilized to manage the Company's
investment portfolio within the established guidelines and is required to report
activities on a current basis and to meet with the Company periodically to
review and discuss the portfolio structure, securities selection and performance
results.
Everest Re's investment guidelines include a current duration guideline of five
to six years. The duration of an investment is based on the maturity of the
security but also reflects the payment of interest and the possibility of early
prepayment of such security. This investment duration guideline is established
and periodically revised by management considering economic and business factors
including Everest Re's average duration of potential liabilities which, at
December 31, 1998, was approximately five years based on the estimated payouts
of underwriting liabilities using standard duration calculations.
Approximately 7.7% of the Company's consolidated reserves for losses and LAE and
unearned premiums represents estimated amounts payable in foreign currencies.
For each currency in which the Company has established substantial reserves, the
Company seeks to maintain invested assets denominated in such currency in an
amount comparable to the estimated liabilities which are denominated in such
currency.
As of December 31, 1998, 96.5% of Everest Re's total investments and cash were
comprised of fixed maturity investments or cash and 97.0% of Everest Re's fixed
maturities consisted of investment grade securities. The average maturity of
fixed maturities was 8.7 years at December 31, 1998, and their overall duration
was 5.7 years. As of December 31, 1998, Everest Re did not have any material
holdings of issuers who management believes are experiencing cash flow
difficulty to an extent that the ability of the obligor to meet debt service
payments is threatened or any investments in commercial real estate or direct
commercial mortgages. Also, investments in derivative products (i.e., products
which include features such as futures, forwards, swaps, options and other
investments with similar characteristics) are generally prohibited, without the
prior approval of Everest Re's Investment Committee. At December 31, 1998, the
Company had no investments in derivative products.
As of December 31, 1998, the common stock portfolio was $146.3 million at market
value, comprising 3.4% of total investments and cash and is managed with a
growth and income orientation consisting primarily of investments in dividend
paying mid and large capitalization companies.
16
<PAGE>
The following table reflects investment results for Everest Re for each of the
five years in the period ended December 31, 1998:
<TABLE>
<CAPTION>
PRE-TAX
PRE-TAX REALIZED NET
AVERAGE INVESTMENT EFFECTIVE CAPITAL GAINS
Years Ended December 31, INVESTMENTS(1) INCOME(2) YIELD (LOSSES)
(Dollars in millions) ----------------------------------------------------------
<S> <C> <C> <C> <C>
1998 $ 4,243.3 $ 244.9 5.77% $ (0.8)
1997 3,888.9 228.5 5.88 15.9
1996 3,416.4 191.9 5.62 5.7
1995 2,894.9 166.0 5.73 33.8
1994 2,620.9 143.6 5.48 (10.5)
</TABLE>
- -----------------
(1) Average of the beginning and ending carrying values of investments and
cash, less net funds held and non-interest bearing cash. Bonds, common
stock and redeemable and non-redeemable preferred stocks are carried at
market value.
(2) After investment expenses, excluding realized net capital gains (losses).
The following table summarizes fixed maturities as of December 31, 1998 and
1997:
<TABLE>
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED MARKET
(Dollars In Millions) COST APPRECIATION DEPRECIATION VALUE
-------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 1998:
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 152.0 $ 7.6 $ - $ 159.6
Obligations of states and
political subdivisions 1,982.5 134.4 0.5 2,116.4
Corporate Securities 839.9 46.5 5.7 880.7
Mortgage-backed securities 388.8 20.2 0.1 408.9
Foreign government securities 241.3 29.8 - 271.1
Foreign corporate securities 246.6 17.5 0.2 263.9
-------------------------------------------------------
Total $ 3,851.1 $ 256.0 $ 6.5 $ 4,100.6
=======================================================
December 31, 1997:
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 144.1 $ 3.1 $ 0.1 $ 147.1
Obligations of states and
political subdivisions 1,610.2 112.2 0.3 1,722.1
Corporate Securities 893.9 39.2 - 933.1
Mortgage-backed securities 521.0 20.5 - 541.5
Foreign government securities 232.8 20.6 0.1 253.3
Foreign corporate securities 256.4 13.4 - 269.8
-------------------------------------------------------
Total $ 3,658.4 $ 209.0 $ 0.5 $ 3,866.9
=======================================================
</TABLE>
17
<PAGE>
The following table presents the credit quality distribution by the National
Association of Insurance Commissioners ("NAIC") rating of Everest Re's fixed
maturities as of December 31, 1998:
<TABLE>
<CAPTION>
NAIC PERCENT OF
RATING(1) STANDARD AND POOR'S EQUIVALENT DESCRIPTION AMOUNT TOTAL
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1 AAA/AA/A $ 3,562.8 86.9%
2 BBB 415.6 10.1
3 BB 122.2 3.0
4 B - -
5 CCC/CC/C - -
6 CI/D - -
------------------------
Total $ 4,100.6 100.0%
========================
</TABLE>
- ------------
(1) The Securities Valuation Office of the NAIC maintains a security valuation
system that assigns a numerical rating to securities. The numerical
ratings generally correspond to S & P's classifications, as indicated,
although S & P has not necessarily rated the securities indicated. Rating
categories 1 and 2 are considered investment grade and categories 3
through 6 are considered non-investment grade.
The following table summarizes fixed maturities by contractual maturity as of
December 31, 1998:
<TABLE>
<CAPTION>
PERCENT OF
AMOUNT TOTAL
-----------------------------
<S> <C> <C>
Maturity category:
Less than one year $ 75.6 1.8%
Due after 1-5 years 477.7 11.7
Due after 5-10 years 1,534.3 37.4
Due after 10 years 1,604.0 39.1
-----------------------------
Subtotal 3,691.6 90.0
Mortgage-backed securities (1) 409.0 10.0
-----------------------------
Total (2) $ 4,100.6 100.0%
=============================
</TABLE>
- ------------
(1) Mortgage-backed securities generally are more likely to be prepaid than
other fixed maturities. Therefore, contractual maturities are excluded
from this table since they may not be indicative of actual maturities.
(2) Certain totals may not reconcile due to rounding.
YEAR 2000 ISSUES
Like many other companies, the Company faces potential business disruption and
costs and possible claims under reinsurance contracts and insurance policies
associated with the possible inability of many computer systems to accurately
process data containing information about the year 2000 or later. For a
discussion of these issues, see Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations - Year 2000 Readiness Disclosures.
RATINGS
Everest Re currently has a rating of "A+" ("Superior") from A.M. Best, an
independent insurance industry rating organization which rates companies on
factors of concern to policyholders. A.M. Best states that the "A+" ("Superior")
rating is assigned to those companies which, in its opinion, have, on balance,
achieved superior financial strength, operating performance and market profile
when compared to the standards established by A.M. Best and have demonstrated a
very strong ability to meet their ongoing obligations to policyholders. The "A+"
("Superior") rating is the second highest of fifteen ratings assigned by A.M.
Best, which range from "A++" (Superior) to "F" (In liquidation). Additionally,
A.M. Best has eleven classifications within the "Not Assigned" category.
18
<PAGE>
Everest Re currently has a claims-paying ability rating of "AA-" (Very Strong)
from Standard & Poor's, an independent rating organization which rates an
insurance company's financial capacity to meet the obligations of its insurance
policies in accordance with their terms. Standard & Poor's states that the "AA-"
rating is assigned to those companies which, in its opinion, offer excellent
financial security and whose capacity to meet policyholder obligations is strong
under a variety of economic and underwriting conditions. The "AA-" rating is the
fourth highest of nineteen ratings assigned by Standard & Poor's, which range
from "AAA" (Superior) to "R" (Regulatory Action). Ratings from AA to B may be
modified by the use of a plus or minus sign to show relative standing of the
insurer within those rating categories.
Everest Re currently has an insurance financial strength rating of "A2" (Good)
from Moody's which rating as of February 18, 1999 is under review for possible
upgrade. Moody's states that insurance companies rated "A" offer good financial
security. However, elements may be present which suggest a susceptibility to
impairment sometime in the future. Moody's rating gradations are shown through
the use of nine distinct symbols, each symbol representing a group of ratings in
which the financial security is broadly the same. The "A2" (Good) rating is the
sixth highest of ratings assigned by Moody's, which range from "Aaa"
(Exceptional) to "C" (Lowest). Moody's further distinguishes the ranking of an
insurer within its generic rating classification from Aa to B with 1, 2 and 3
("1" being the highest).
A.M. Best's, Standard & Poor's and Moody's ratings are based upon factors of
concern to policyholders and should not be considered an indication of the
degree or lack of risk involved in an equity investment in an insurance company.
Each of these rating agencies reviews its ratings periodically, and there can be
no assurance that Everest Re's ratings will be maintained in the future.
COMPETITION
The worldwide property and casualty reinsurance business is highly competitive,
characterized by severe price competition and expanding terms and conditions
over the last several years. Similar conditions also exist in the primary
insurance market. Competition with respect to the types of reinsurance in which
Everest Re is engaged is based on many factors, including the perceived overall
financial strength of the reinsurer, A.M. Best's and/or Standard & Poor's rating
of the reinsurer, underwriting expertise, the jurisdictions where the reinsurer
is licensed or otherwise authorized, premiums charged, other terms and
conditions of the reinsurance offered, services offered, speed of claims payment
and reputation and experience in lines written. Everest Re competes for its
business in the United States and international reinsurance markets with
numerous international and domestic reinsurance companies, some of which have
greater financial resources than Everest Re.
Everest Re's competitors include independent reinsurance companies, subsidiaries
or affiliates of established worldwide insurance companies, reinsurance
departments of certain primary insurance companies and domestic and
international underwriting operations, including underwriting syndicates in
Lloyd's of London. Some of these competitors have greater financial resources
than Everest Re, have been operating for longer than Everest Re, and have
established long-term and continuing business relationships throughout the
industry, which can be a significant competitive advantage. Although most U.S.
reinsurance companies operate in the broker market, most of Everest Re's largest
competitors work directly with ceding companies, competing with brokers.
Management believes that Everest Re's major competitors are large U.S. and
foreign reinsurance companies.
Since 1987, the industry has experienced increased global competition. During
this period, the demand for reinsurance by primary insurers has been adversely
affected by several factors, including consolidation of primary insurers,
increased primary insurer capital levels and continued access to capital markets
and increases in primary insurer's net retention levels. These factors have
precluded reinsurance rate improvement and resulted in generally low rates of
reinsurance premium growth, if any.
Other factors affecting the capacity of reinsurance companies to offer
reinsurance and which factors contributed to the increased global competition
since 1987, include consolidation of reinsurance companies, new reinsurance
companies, including several well-capitalized Bermuda-based companies which
operate within a tax-advantaged jurisdiction and generally greater capital
levels maintained by reinsurance companies resulting from earnings growth,
investment gains, mergers and other factors (including a relatively low level of
catastrophic events). In addition, Lloyd's of London relaxed its requirement
that syndicate members have unlimited liability for losses and allows limited
liability investors to join syndicates, thereby increasing the reinsurance
capacity at Lloyd's. In 1996, Lloyd's implemented its reconstruction and renewal
plan in an attempt to separate 1992 and prior years losses from the current
market participants and to provide a more secure market going forward, thereby
enhancing its competitive position. And, the potential for securitization of
insurance and reinsurance risks through the capital markets provide an
additional source of insurance and reinsurance capacity.
19
<PAGE>
Management believes that the factors noted above which affect the demand for and
supply of reinsurance have resulted in increasingly competitive market
conditions and have influenced the continuing pressure on insurance and
reinsurance rates and the expansion of contract terms in the current market
place. The Company may, in the future, face additional competition from other
well-capitalized companies or from market participants that may devote more of
their capital to the reinsurance business or from the capital markets entry into
insurance and reinsurance investment products. The Company also believes that
the insurance and reinsurance industries, including reinsurance brokers, will
continue to undergo further consolidation and that reinsurers will need
significant size, financial strength and service capabilities to compete
effectively.
EMPLOYEES
As of March 2, 1999, Everest Re employed 386 persons, including 24 persons in
the WorkCare agency operations, which were acquired in 1998. Management believes
that its employee relations are good. None of Everest Re's employees are subject
to collective bargaining agreements, and the Company is not aware of any current
efforts to implement such agreements at Everest Re.
INFORMATION RELATING TO DOMESTIC AND FOREIGN OPERATIONS
Financial information relating to geographic areas of operation set forth in
Note 13 of Notes to Consolidated Financial Statements of the Company is
incorporated herein by reference.
REGULATORY MATTERS
The Company is subject to regulation under the insurance statutes of various
jurisdictions, including Delaware, the domiciliary state of Everest Re and
Everest Indemnity, Arizona, the domiciliary state of Everest National, and
Canada, the domiciliary jurisdiction of Everest Canada.
INSURANCE HOLDING COMPANY REGULATION. Insurance holding company laws and
regulations generally require the holding company to register with the relevant
state regulatory authorities and file certain reports which include current
information concerning the capital structure, ownership, management, financial
condition and general business operations of the insurance holding company and
its subsidiaries licensed in the state. State regulators also require prior
notice or regulatory approval of changes in control of an insurer or its holding
company and of certain material inter-affiliate transactions within the holding
company structure. See "-Dividends by Everest Re".
Under the Delaware and Arizona Codes and regulations thereunder, no person,
corporation or other entity may acquire a controlling interest in the Company,
unless such person, corporation or entity has obtained the prior approval of the
Delaware and Arizona Insurance Commissioners for such acquisition. For the
purposes of the Delaware and Arizona Codes, any person acquiring, directly or
indirectly, 10% or more of the voting securities of an insurance company is
presumed to have acquired "control" of such company. To obtain the approval of
any such change in control, the proposed acquirer must file an application with
the Delaware and Arizona Insurance Commissioners. This application requires the
acquirer to disclose its background, financial condition, the financial
condition of its affiliates, the source and amount of funds by which it will
effect the acquisition, the criteria used in determining the nature and amount
of consideration to be paid for the acquisition, proposed changes in the
management and operations of the insurance company and any other related
matters.
The Insurance Companies Act of Canada also requires prior approval by the
Minister of Finance of anyone acquiring a significant interest in an authorized
Canadian insurance company. In addition, the Company is subject to regulation by
the insurance regulators of other states and foreign jurisdictions in which it
does business. Certain of these states and foreign jurisdictions impose
regulations regulating the ability of any person to acquire control of an
insurance company without appropriate regulatory approval similar to those
described above.
DIVIDENDS BY EVEREST RE. Because the operations of the Company are conducted
through Everest Re and its subsidiaries, the Company is dependent upon dividends
and other permissible payments from Everest Re to meet its obligations and to
pay dividends in the future should Holdings' Board of Directors decide to do so.
The payment of dividends to Holdings by Everest Re is subject to limitations
imposed by Delaware law.
20
<PAGE>
Under the Delaware Code, before a Delaware domiciled insurer may pay any
dividend it must give 10 days prior notice to the Delaware Insurance
Commissioner. During this 10-day period, the Commissioner may, by order, limit
or disallow the payment of ordinary dividends if the Commissioner finds the
insurer to be presently or potentially in financial distress. A Delaware
domiciled insurer may only pay cash dividends from the portion of its available
and accumulated surplus funds derived from realized net operating profits and
realized capital gains. Additionally, a Delaware domiciled insurer may not pay
any "extraordinary" dividend or distribution until (i) 30 days after the
Delaware Insurance Commissioner has received notice of a declaration thereof and
has not within such period disapproved such a payment or (ii) the Delaware
Insurance Commissioner has approved such payment within the 30-day period. Under
the Delaware Code, an "extraordinary" dividend of a property and casualty
insurer is a dividend the amount of which, together with all other dividends and
distributions made in the preceding 12 months, exceeds the greater of (i) 10% of
an insurer's statutory surplus as of the end of the prior calendar year or (ii)
the insurer's statutory net income, not including realized capital gains, for
the prior calendar year. Under this definition, the maximum amount that will be
available for the payment of dividends by Everest Re in 1999 without triggering
the requirement for prior approval of regulatory authorities in connection with
an extraordinary dividend is $179.2 million. As of December 31, 1998, Everest
Re's accumulated statutory surplus from realized net operating profits and
realized gains was $686.5 million.
INSURANCE REGULATION. U.S. domestic property and casualty insurers, including
reinsurers, are subject to regulation by their state of domicile and by those
states in which they are licensed. The rates and policy terms of reinsurance
agreements generally are not subject to regulation by any governmental
authority. This contrasts with primary insurance policies and agreements, the
rates and policy terms of which are generally regulated closely by state
insurance departments.
Everest Re is subject primarily to regulation and supervision that relate to
licensing requirements, solvency requirements, investment requirements,
restrictions on the size of risks which may be insured, deposit of securities
for the benefit of ceding companies and/or policyholders, accounting
requirements, periodic examinations of financial condition and affairs, the form
and content of financial statements that must be filed with regulators and the
level of minimum reserves necessary to cover unearned premiums, losses and other
purposes. In general, such regulation is designed to protect ceding insurers
and, ultimately, their policyholders, rather than stockholders. The operations
of Everest Re's foreign branch offices in Canada, Hong Kong, Singapore and the
United Kingdom are subject to regulation by the insurance regulatory officials
of those jurisdictions. Management believes that the Company is in material
compliance with applicable laws and regulations pertaining to its business and
operations.
Everest Canada, Everest Indemnity and Everest National are subject to similar
regulation and, in addition, Everest National must comply with substantial
regulatory requirements in each state where it does business. These additional
requirements include, but are not limited to, rate and policy form requirements,
requirements with regard to licensing, agent appointments, participation in
residual markets and claims handling procedures. These regulations are primarily
designed for the protection of policyholders.
LICENSES. Ordinarily, in the United States, a primary insurer will only enter
into reinsurance agreements if it can obtain credit for the reinsurance on its
statutory financial statements. Credit is usually granted when the reinsurer is
licensed or accredited in a state where the primary insurer is domiciled. In
addition, many states permit credit for reinsurance ceded to a reinsurer that is
domiciled and licensed in another state. Such a reinsurer must meet certain
financial requirements and, in some instances, the domiciliary state of such a
reinsurer must have substantially similar reinsurance credit law requirements as
the domiciliary state of the primary insurer or if credit for reinsurance is not
available, the primary insurer may reduce its liabilities on its statutory
financial statements if it is provided with collateral to secure the reinsurer's
obligations.
Everest Re is a licensed property/casualty insurer and/or reinsurer in all
states and the District of Columbia with the exception of Nevada and Wyoming. In
New Hampshire and Puerto Rico, Everest Re is licensed for reinsurance only.
21
<PAGE>
Everest Re is licensed as a property/casualty reinsurer in Canada. It is also
authorized to conduct reinsurance business in the United Kingdom, Hong Kong and
Singapore and to maintain a representative office in Moscow. Everest Re can also
write reinsurance in other foreign countries. Because some jurisdictions require
a reinsurer to register in order to be an acceptable market for local insurers,
Everest Re is registered as a foreign insurer and/or reinsurer in the following
countries: Argentina, Bolivia, Chile, Colombia, Ecuador, El Salvador, Guatemala,
Mexico, Peru, Venezuela and the Philippines. Everest National is licensed in 42
states and the District of Columbia. Everest Indemnity is licensed in Delaware
and is eligible to write insurance on a surplus lines basis in 37 states and the
District of Columbia. Everest Canada is federally licensed under the Insurance
Companies Act of Canada and licensed in all Canadian provinces and territories.
PERIODIC EXAMINATIONS. Everest Re, Everest National and Everest Indemnity are
subject to examination of their affairs by the insurance departments of the
states in which they are licensed, authorized or accredited. Delaware and
Arizona, the domiciliary states of Everest Re and Everest Indemnity, and Everest
National, respectively, usually conduct examinations of domestic companies every
3 years and may do so at such other times as are deemed advisable by the
respective insurance commissioner. Everest Re's and Everest National's last
examination reports were as of December 31, 1994. Neither report contained any
material recommendations. Everest Indemnity's last examination report was
conducted upon its organization in 1997. This report did not contain any
material recommendations. Delaware and Arizona are currently conducting routine
examinations of Everest Re and Everest Indemnity and Everest National,
respectively.
NAIC RISK-BASED CAPITAL REQUIREMENTS. The NAIC has instituted a formula to
measure the amount of capital appropriate for a property and casualty insurance
company to support its overall business operations in light of its size and risk
profile. The major categories of a company's risk profile are its asset risk,
credit risk, and underwriting risk. The new standards are an effort by the NAIC
to prevent insolvencies, to ward off other financial difficulties of insurance
companies, and to establish uniform regulatory standards among state insurance
departments.
Under the approved formula, a company's statutory surplus is compared to its
risk based capital (RBC). If this ratio is above a minimum threshold, no action
is necessary. Below this threshold are four distinct action levels at which a
regulator can intervene with increasing degrees of authority over a domestic
insurer as the ratio of surplus to RBC decreases. The mildest intervention
requires the company to submit a plan of appropriate corrective actions. The
most severe action requires the company to be rehabilitated or liquidated.
Based upon Everest Re's, Everest National's and Everest Indemnity's financial
positions at December 31, 1998, Everest Re, Everest National and Everest
Indemnity exceed the minimum thresholds. Various proposals to change the RBC
formula arise from time to time. The Company is unable to predict whether any
such proposal will be adopted, the form in which any such proposals would be
adopted or the effect, if any, the adoption of any such proposal or change in
the RBC calculations would have on the Company.
LEGISLATIVE AND REGULATORY PROPOSALS. Various regulatory and legislative changes
have from time to time been proposed that could affect reinsurers and insurers.
Among the proposals that have in the past been or are at present being
considered are the possible introduction of federal regulation in addition to,
or in lieu of, the current system of state regulation of insurers, Superfund
re-authorization, modernization of financial services regulation, product
liability and tort reform, state and federal involvement in insuring
catastrophes, limitations on the ability of primary insurance carriers to effect
premium rate increases or to cancel or not renew existing policies,
modifications to investment limitations, creation of interstate compacts for
multi-state insurer receivership proceedings or multi-state insurance regulation
and the codification of Statutory Accounting Principles. The Company is unable
to predict whether any of these proposals will be adopted, the form in which any
such proposals would be adopted, or the impact, if any, such adoption would have
on the Company.
22
<PAGE>
ITEM 2. PROPERTIES
Everest Re's corporate offices are located in Liberty Corner, New Jersey, and
occupy approximately 112,000 square feet of office space under a sublease with
The Prudential that expires on November 29, 2003. In January, 1999, Everest Re
entered into an agreement to sub-sublease, for the remaining term of Everest
Re's sub-lease, approximately 27,000 square feet of space in Everest Re's
corporate headquarters. Everest Re's other ten office locations occupy a total
of approximately 56,600 square feet, all of which are leased. Management
believes that the above described office space is adequate for its current and
anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in 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. However, no assurance can be
given as to the decisions that may be rendered by the courts or arbitration
panels in any of such litigation and arbitration matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. (A) MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
Since October 3, 1995, the common stock of Holdings has been traded on the New
York Stock Exchange under the symbol "RE". Quarterly high and low market prices
of Holdings' common stock in 1998 and 1997 were as follows:
<TABLE>
High Low
------------------------
<S> <C> <C>
First Quarter 1998: 41.6250 35.2500
Second Quarter 1998: 45.2500 36.1250
Third Quarter 1998: 43.5000 34.1875
Fourth Quarter 1998: 38.9375 28.7500
First Quarter 1997: 32.7500 26.0000
Second Quarter 1997: 40.2500 26.7500
Third Quarter 1997: 41.1250 34.5000
Fourth Quarter 1997: 43.0000 33.0000
</TABLE>
NUMBER OF HOLDERS OF COMMON STOCK
The number of record holders of common stock as of March 1, 1999 was 110. That
number excludes the beneficial owners of shares held in "street" names or held
through participants in depositories, such as The Depository Trust Company.
DIVIDEND HISTORY AND RESTRICTIONS
In 1995, the Board of Directors of the Company established a policy of declaring
regular quarterly cash dividends. The first such dividend was $0.03 per share,
declared and paid in the fourth quarter of 1995. The Company declared and paid
its regular quarterly cash dividend of $0.03 per share for each quarter of 1996,
$0.04 per share for each quarter of 1997 and $0.05 per share for each quarter of
1998. On February 23, 1999, the Board of Directors raised the quarterly dividend
to $0.06 per share and declared a dividend, payable on or before March 26, 1999
to shareholders of record on March 8, 1999.
23
<PAGE>
The declaration and payment of future dividends, if any, by the Company will be
at the discretion of the Board of Directors and will depend upon many factors,
including the Company's earnings, financial condition and business needs,
capital and surplus requirements of the Company's operating subsidiaries,
regulatory considerations and other factors, and the ability of Everest Re to
pay dividends to the Company.
As an insurance holding company, the Company depends on payments from Everest Re
to pay cash dividends to stockholders. The payment of dividends by Everest Re is
subject to certain limitations imposed by the Delaware Code. See "Regulatory
Matters -- Dividends by Everest Re" and Note 10A of Notes to Consolidated
Financial Statements.
RECENT SALES OF UNREGISTERED SECURITIES
Information required by Item 701 of Regulation S-K:
(a) On October 1, 1998, 1,080 common shares of the Company and on
January 1, 1999, 1,056 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 third and
fourth quarters 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.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated GAAP financial data of the Company as of and
for the years ended December 31, 1998, 1997, 1996, 1995 and 1994 were derived
from the consolidated financial statements of the Company, which were audited by
PricewaterhouseCoopers LLP (1998, 1997 and 1996) and by other independent
auditors (1995 - 1994). The statutory data have been derived from statutory
financial statements of Everest Re filed with the Delaware Insurance Department.
Such statutory financial statements are prepared in accordance with Statutory
Accounting Principals ("SAP"), which differ from GAAP. The statutory financial
statements are unconsolidated and reflect the net assets of Everest Re's
subsidiaries, Everest Ltd., Everest National, Everest Canada and Everest
Indemnity on the equity method. The following financial data should be read in
conjunction with the Consolidated Financial Statements and accompanying notes.
The supplemental information for 1995 excludes the effects of an IPO-related
premium charge of $140.0 million ($91.0 million after taxes) for the Stop Loss
Agreement and an IPO-related compensation expense charge of $13.3 million ($8.7
million after taxes) principally for stock awards to the Company's Chief
Executive Officer. Such supplemental information is presented to facilitate an
understanding of the impact on the Company's results of operations of these
non-recurring charges, but should not, however, be considered as an alternative
to the respective amounts determined in accordance with GAAP as an indicator of
the Company's operating performance.
24
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
(Dollars in millions, except 1998 1997 1996 1995 1994
per share amounts) ---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Gross premiums written $ 1,045.9 $ 1,075.0 $ 1,044.0 $ 949.5 $ 953.2
Net premiums written 1,016.6 1,031.1 1,030.5 783.2 863.2
Net premiums earned 1,068.0 1,049.8 973.6 753.3 853.3
Net investment income 244.9 228.5 191.9 166.0 143.6
Net realized capital
gains (losses)(1) (0.8) 15.9 5.7 33.8 (10.5)
Total revenue 1,315.2 1,299.2 1,169.3 948.9 982.8
Losses and LAE incurred
(including catastrophes) 778.4 765.4 716.0 674.7 720.8
Total catastrophe losses(2) 30.6 8.6 7.1 31.4 81.9
Commission, brokerage,
taxes and fees 274.6 274.8 254.6 227.4 197.9
Other underwriting expenses 49.6 51.7 54.9 60.0 68.3
Compensation related to
public offering - - - 13.3 -
Restructuring and early
retirement costs - - - - 7.8
Total expenses(3) 1,102.5 1,091.9 1,025.5 975.4 994.8
Income (loss) before
taxes(3) 212.7 207.3 143.8 (26.6) (12.0)
Income tax (benefit) 47.5 52.3 31.8 (27.3) (22.6)
Net income (3) $ 165.2 $ 155.0 $ 112.0 $ 0.7 $ 10.7
=========================================================
Net income per basic
share (4) $ 3.28 $ 3.07 $ 2.22 $ 0.01 $ 0.21
=========================================================
Net income per diluted
share (5) $ 3.26 $ 3.05 $ 2.21 $ 0.01 $ 0.21
=========================================================
Dividends paid per share $ 0.20 $ 0.16 $ 0.12 $ 0.14 $ 0.15
=========================================================
CERTAIN GAAP FINANCIAL RATIOS:
Loss and LAE ratio(6) 72.9% 72.9% 73.5% 89.6% 84.5%
Underwriting expense
ratio(7) 30.3 31.1 31.8 39.9 31.2
---------------------------------------------------------
Combined ratio 103.2% 104.0% 105.3% 129.5% 115.7%
=========================================================
CERTAIN SAP DATA(8):
Ratio of net premiums
written to surplus(9) 1.0x 1.4x 1.2x 1.0x 1.2x
Statutory surplus $ 1,059.4 $ 908.8 $ 772.7 $ 686.9 $ 600.7
Loss and LAE ratio(10) 72.2% 75.7% 71.2% 92.2% 85.8%
Underwriting expense
ratio(11) 31.1 25.6 31.7 38.9 32.6
---------------------------------------------------------
Combined ratio 103.3% 101.3% 102.9% 131.1% 118.4%
=========================================================
BALANCE SHEET DATA (AT
END OF PERIOD):
Total investments and cash $ 4,325.8 $ 4,163.3 $ 3,624.6 $ 3,238.3 $ 2,573.2
Total assets 5,996.7 5,538.0 5,047.8 4,647.8 4,040.6
Loss and LAE reserves 3,800.0 3,437.8 3,246.9 2,969.3 2,706.4
Total liabilities 4,517.5 4,230.5 3,961.7 3,664.2 3,299.6
Stockholders' equity(12) 1,479.2 1,307.5 1,086.0 983.6 741.0
Book value per share(13) 29.59 25.90 21.51 19.36 14.82
SUPPLEMENTAL INFORMATION,
EXCLUDING IPO-RELATED
CHARGES:
Net premiums written $ 923.2
Net premiums earned 893.3
Income before taxes 126.8
Net income $ 100.4
=========
Net income per basic and
diluted share $ 2.00
=========
Supplemental GAAP financial
ratios:
Loss and LAE ratio 75.5%
Underwriting expense ratio 32.2
---------
Combined ratio 107.7%
=========
Supplemental SAP data:
Ratio of net premiums
written to surplus 1.2x
Loss and LAE ratio 75.5%
Underwriting expense ratio 32.0
---------
Combined ratio 107.5%
=========
</TABLE>
25
<PAGE>
- ------------
(1) After-tax operating income (loss), before after-tax net realized capital
gains or losses, was $165.7 million (or $3.29 per basic share and $3.27
per diluted share), $144.6 million (or $2.86 per basic and $2.85 per
diluted share), $108.3 million (or $2.14 per basic and diluted share),
($21.2) million (or ($0.42) per basic and diluted share) and $17.5
million (or $0.35 per basic and diluted share) for the years ended
December 31, 1998, 1997, 1996, 1995 and 1994, respectively. Supplemental
after-tax operating income, before net realized gains and excluding
IPO-related charges was, $78.4 million (or $1.56 per basic and diluted
share) for the year ended December 31, 1995.
(2) Catastrophe losses are net of reinsurance. A catastrophe is defined, for
purposes of the Selected Consolidated Financial Data, as an event that
causes a pre-tax loss before reinsurance of at least $5.0 million and
has an event date of January 1, 1988 or later.
(3) Some amounts may not reconcile due to rounding.
(4) Based on weighted average basic shares outstanding of 50.4 million, 50.5
million, 50.6 million, 50.2 million and 50.0 million for 1998, 1997,
1996, 1995 and 1994, respectively.
(5) Based on weighted average diluted shares outstanding of 50.7 million,
50.8 million, 50.7 million, 50.2 million and 50.0 million for 1998,
1997, 1996, 1995 and 1994, respectively.
(6) GAAP losses and LAE incurred as a percentage of GAAP net premiums earned.
(7) GAAP underwriting expenses as a percentage of GAAP net premiums earned.
Including restructuring and early retirement costs, incurred in the
fourth quarter of 1994, the Company's GAAP underwriting expense ratio in
1994 was 32.1%.
(8) Statutory results are on a Everest Re legal entity basis; consequently,
investments in subsidiary operations are accounted for on an equity
basis. Effective January 1, 1997, the reinsurance operations of Everest
Re Ltd. were transferred to Everest Re on a portfolio basis. Excluding
the impact of the portfolio transaction, the 1997 ratio of net written
premiums to surplus, the 1997 loss and LAE ratio, the 1997 underwriting
expense ratio and the 1997 combined ratio were 1.1 x, 70.5%, 32.2% and
102.7%, respectively.
(9) Statutory net premiums written as a percentage of period-end surplus.
(10) Statutory losses and LAE incurred as a percentage of SAP net premiums
earned.
(11) Statutory underwriting expenses as a percentage of SAP net premiums
written.
(12) Excluding net unrealized appreciation (depreciation) of investments,
stockholders' equity was $1,281.6 million, $1,147.1 million, $1,008.3
million, $899.9 million and $799.1 million as of December 31, 1998,
1997, 1996, 1995 and 1994, respectively.
(13) Based on 50.0 million shares outstanding for December 31, 1998, 50.5
million shares outstanding for December 31, 1997 and 1996, 50.8 million
shares outstanding for December 31, 1995, and 50.0 million shares
outstanding for December 31, 1994.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
INDUSTRY CONDITIONS. Since 1987, a number of factors, including the emergence of
significant reinsurance capacity from the Bermuda and rejuvenated Lloyds'
markets, higher retentions by primary insurance companies and consolidation and
increased capital levels in the insurance industry, have caused increasingly
competitive global market conditions across most lines of business and have
influenced the softening of prices and contract terms in the current market
place. The Company cannot predict with any reasonable certainty, if, when or to
what extent market conditions as a whole will change. See "Business-Competition"
for a further discussion.
SEGMENT INFORMATION
The Company, through its subsidiaries, operates as a single segment focusing on
the coverage of property and casualty risks using an approach which emphasizes
central control and coordination of critical business elements.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
The following discussion and analysis is focused on a comparison of 1998 results
of operations to 1997 results of operations.
PREMIUMS. Gross premiums written decreased 2.7% to $1,045.9 million in 1998 from
$1,075.0 million in 1997 as the Company maintained a disciplined underwriting
approach in the face of increasingly competitive market conditions. Premium
growth areas included a 10.8% ($35.2 million) increase in U.S. broker treaty
premiums, largely attributable to growth in non-standard auto, accident and
health and workers compensation lines where the Company's relatively recent
entry to these lines has provided growth opportunities and a 6.8% ($10.8
million) increase in U.S. direct treaty reinsurance and insurance due mainly to
portfolio reinsurance transactions. These increases were offset by a 25.5%
($41.2 million) decrease in marine, aviation, and surety premiums, a 13.2%
($10.9 million) decrease in facultative premiums and a 6.6% ($23.0 million)
decrease in international premiums reflecting highly competitive current market
conditions. The Company continued to decline business that did not meet the
Company's objectives regarding underwriting profitability.
Ceded premiums decreased by 33.2% to $29.3 million in 1998 from $43.8 million in
1997, principally as a result of a $32.3 million return premium in 1998 relating
to a restructuring of the Company's catastrophe retrocessional protection. The
impact of this transaction was partially offset by increases in ceded premiums
in 1998 over 1997 attributable to increased utilization of contract specific
retrocessions, including common account protections, and reinstatement premiums
on corporate catastrophe reinsurance protections.
26
<PAGE>
Net premiums written decreased by 1.4% to $1,016.6 million in 1998 from $1,031.1
million in 1997, reflecting the decreases in international, marine, aviation and
surety and facultative gross written premiums, partially offset by growth in
U.S. broker and U.S. direct treaty reinsurance and insurance premiums and the
decrease in ceded premiums.
REVENUES. Net premiums earned increased by 1.7% to $1,068.0 million in 1998 from
$1,049.8 million in 1997, with the increase attributable to premium earnings
patterns coupled with the decrease in premiums written.
Pre-tax investment income increased 7.2% to $244.9 million in 1998 from $228.5
million in 1997, principally reflecting the effect of investing the $183.3
million of cash flow from operating activities in 1998. The Company's pre-tax
yield on average cash and invested assets decreased to 5.8% in 1998 from 5.9% in
1997 reflecting an increase in tax preferenced investments and a lower interest
rate environment. After-tax investment income increased 9.9% to $190.8 million
in 1998 from $173.5 million in 1997 reflecting growth in the Company's tax
preferenced investment holdings. The Company's after-tax yield on average cash
and invested assets was 4.5% in 1998, the same yield as in 1997.
Net realized capital losses were $0.8 million in 1998 reflecting normal
portfolio management activity compared to a net realized capital gain of $15.9
million in 1997, mainly arising from a $14.0 million gain on the sale of the
Company's remaining investment in the common stock of Corporacion MAPFRE, a
publicly traded Spanish insurer.
EXPENSES. Incurred losses and loss adjustment expenses ("LAE") increased by 1.7%
to $778.4 million in 1998 from $765.4 million in 1997. The Company's loss and
LAE ratio was 72.9% for 1998 and 1997. Excluding the impact of catastrophes and
the one-time return premium of $32.3 million, the Company's loss and LAE ratio
increased by 0.1 percentage points to 72.2% in 1998 as compared to 72.1% in
1997. Net catastrophe losses for 1998 were $30.6 million mainly arising from
Hurricanes Georges and Mitch, Canadian Ice Storm losses and a major fire
impacting a facultative coverage partially offset by favorable development on
prior period catastrophes compared to net catastrophe losses of $8.6 million for
1997. Catastrophe losses include the impact of both current period events and
favorable and unfavorable development on prior period events and are net of
reinsurance. The underlying loss ratio increase was attributable to changes to
the Company's business mix consistent with its underwriting strategy together
with the impact of $17.1 million in incurred losses relating to the coinsurance
provisions of the Aggregate Excess of Loss Reinsurance coverage ("Stop Loss
Agreement") acquired from Gibraltar Casualty Company ("Gibraltar"), an affiliate
of the Prudential Insurance Company of America ("The Prudential"), the Company's
former parent, at the time of the Company's initial public offering in 1995.
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 LAE and uncollectible
reinsurance at June 30, 1995 (December 31, 1994 for catastrophe losses).
Incurred losses and LAE for 1998 reflected ceded losses and LAE of $357.4
million. Ceded losses and LAE included $153.9 million net ceded under the Stop
Loss Agreement, $33.5 million net ceded to Gibraltar pursuant to a 1986 quota
share reinsurance ("Direct Excess Retrocession") through which Gibraltar assumed
100% of the liabilities related to Everest Re's former direct excess insurance
operations which ceased writing business in 1985, and $102.4 million ceded under
the Company's management underwriting facility ("MUF"), a reinsurance
arrangement begun in 1977 pursuant to which Everest Re ceded certain business
written prior to 1992 to a number of insurance and reinsurance companies which,
as the result of commutations, also includes Gibraltar.
Gibraltar has disputed $63.0 million ceded under the Stop Loss Agreement in 1998
and pursuant to the terms of the Stop Loss Agreement, Gibraltar has secured the
disputed amount. Gibraltar has also disputed Everest Re's level of reserves
previously ceded to and paid by Gibraltar under the Stop Loss Agreement and
claims a refund of $91.7 million. Should Everest Re and Gibraltar not resolve
these disputes, pursuant to the terms of the Stop Loss Agreement, each will
appoint an independent examiner to review the disputed amounts and to determine
the appropriate amount of cessions to Gibraltar, and Everest Re will secure the
$91.7 million amount. If the examination process does not resolve the disputes,
the Stop Loss Agreement provides for resolution through arbitration. In the
event the cessions to Gibraltar were determined to be excessive, Everest Re
would reduce the cession to Gibraltar by such excess, refund previous payments
made by Gibraltar, if applicable, and the unused portion of the limits of the
Stop Loss Agreement would be restored. Also, Everest Re would consider the
independent examiners' findings in its ongoing determination of appropriate
reserve levels, which may lead to a corresponding reduction in Everest Re's
gross reserves, and net reserves to the extent of the coinsurance under the Stop
Loss Agreement. In the event the cessions are not determined to be excessive,
Gibraltar would be obligated to pay the disputed amount. Accordingly, if the
disputes are resolved in Gibraltar's favor, any adverse effect on the Company's
financial condition and results of operations would likely be limited to a
reduction in cash flows from operations with a corresponding impact on
investment income.
27
<PAGE>
Gibraltar has disputed $39.7 million ceded under the Direct Excess Retrocession
primarily reflecting reserve increases for asbestos losses ceded by the Company
in 1998. Gibraltar is disputing the level of reserves established by the Company
for such losses, but Gibraltar is not disputing its responsibility to pay the
ultimate losses in accordance with the terms of the Direct Excess Retrocession.
Management does not expect that this dispute will have a material adverse effect
on the Company's future financial condition, results of operations or cash
flows.
The ceded losses and LAE for 1998 principally reflect a $214.9 million increase
in gross reserves with respect to asbestos exposures which the Company judged to
be necessary based on continuing reported and paid loss emergence, particularly
with respect to secondary defendants, internal and third party statistical
analysis, and its assessment of potential ultimate liabilities, $25.7 million of
non-asbestos related losses ceded under the Stop Loss Agreement and $23.1
million ceded under various catastrophe retrocessions. The 1998 ceded losses and
LAE compares to ceded losses and LAE of $109.6 million in 1997, including $45.0
million ceded under the Stop Loss Agreement. See "Financial Condition" below for
a further discussion.
Underwriting expenses decreased by 0.7% to $324.1 million in 1998 from $326.5
million in 1997. Commission, brokerage, taxes and fees decreased by $0.2 million
attributable to decreases in written premium and changes in the Company's
business mix. Other underwriting expenses decreased by $2.1 million, as the
Company's cost reduction initiatives continued to provide benefits over the
course of 1998 and 1997. The benefits more than offset the impact of salary and
other expense increases that were generally in line with inflation. The
Company's expense ratio decreased by 0.8 percentage points to 30.3% in 1998 from
31.1% in 1997 as a result of the increase in premiums earned and the decrease in
underwriting expenses.
The Company's combined ratio decreased by 0.8 percentage points to 103.2% in
1998 from 104.0% in 1997 reflecting the lower expense ratio, increased earned
premium and loss ratio factors described above.
INCOME TAXES. The Company had income tax expense of $47.5 million in 1998
compared to $52.3 million in 1997, with the decrease resulting from the
relationship of tax exempt income to pre-tax income as the Company increased the
tax preferenced element of investment income at a rate greater than the increase
in pre-tax income as a result of growth in the Company's tax preferenced
investment holdings.
NET INCOME. Net income was $165.2 million in 1998 compared to $155.0 million in
1997. This improvement mainly reflects higher earned premium, higher investment
income, and lower income taxes partially offset by a decrease in net capital
gains and an increase in net incurred losses.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
The following discussion and analysis is focused on a comparison of 1997 results
of operations to 1996 results of operations.
PREMIUMS. Gross premiums written increased 3.0% to $1,075.0 million in 1997 from
$1,044.0 million in 1996, as the Company maintained a cautious approach to the
increasingly competitive market conditions. Factors contributing to this
increase included a 5.9% ($18.2 million) increase in U.S. broker treaty
premiums, largely attributable to product line expansion, a 6.6% ($9.8 million)
increase in U.S. direct treaty reinsurance and insurance due to the growth in
primary insurance written through Everest National, a 2.6% ($8.8 million)
increase in international premiums, and a 0.3% ($0.5 million) increase in
marine, aviation, and surety premiums. These increases were partially offset by
a 7.2% ($6.4 million) decrease in facultative premiums.
Ceded premiums increased by 224.7% to $43.8 million in 1997 from $13.5 million
in 1996, principally as a result of a return premium in 1996 under the Company's
catastrophe retrocessional protection, coupled with increased retrocessional
protections for international catastrophe exposures and increases in the
Company's contract specific retrocessions in 1997.
Net premiums written increased by 0.1% to $1,031.1 million in 1997 from $1,030.5
million in 1996, reflecting the growth in U.S. broker, U.S. direct treaty
reinsurance and insurance, international and marine, aviation and surety gross
written premiums offset by the decrease in facultative gross premiums written
and the increase in ceded premiums.
REVENUES. Net premiums earned increased by 7.8% to $1,049.8 million in 1997 from
$973.6 million in 1996, with the increase attributable to premium earnings
patterns coupled with a decrease in the rate of written premium growth.
Net investment income increased 19.1% to $228.5 million in 1997 from $191.9
million in 1996, reflecting the effect of investing the $376.4 million of cash
flow from operating activities in 1997 and the increase in the Company's pre-tax
yield on average cash and invested assets to 5.9% in 1997 from 5.6% in 1996.
28
<PAGE>
Net realized capital gains increased 179.5% to $15.9 million in 1997 from $5.7
million in 1996, with the gains in both periods mainly arising from activity in
the Company's portfolio of equity securities, including, in 1997, a $14.0
million gain on the sale of the Company's remaining investment in the common
stock of Corporacion MAPFRE, a publicly traded Spanish insurer.
EXPENSES. Incurred losses and loss adjustment expenses ("LAE") increased by 6.9%
to $765.4 million in 1997 from $716.0 million in 1996. The Company's loss and
LAE ratio decreased by 0.6 percentage points to 72.9% in 1997 from 73.5% in
1996. This improvement was attributable principally to changes in the Company's
business mix consistent with the Company's underwriting strategy together with
modest and comparable catastrophe losses in both years. Net incurred losses and
LAE for 1997 reflected ceded losses and LAE of $109.6 million, including $45.0
million ceded under the Stop Loss Agreement, compared to ceded losses and LAE of
$206.0 million in 1996, including $116.5 million ceded under the Stop Loss
Agreement.
Underwriting expenses increased by 5.5% to $326.5 million in 1997 from $309.5
million in 1996. Commission, brokerage, taxes and fees increased by $20.2
million attributable primarily to increases in written premium and changes in
the Company's business mix. Other underwriting expenses decreased by $3.2
million, as the impact of the continued reductions in the number of employees
over the course of 1996 and 1997 together with other cost reduction initiatives
more than offset the impact of salary and other expense increases that were
generally in line with inflation. The Company's expense ratio decreased by 0.7
points to 31.1% in 1997 from 31.8% in 1996 as the increase of premiums earned
more than offset the increases in underwriting expenses.
The Company's combined ratio decreased by 1.3 points to 104.0% in 1997 from
105.3% in 1996, reflecting the lower loss ratio and increased premiums.
INCOME TAXES. The Company had income tax expense of $52.3 million in 1997
compared to $31.8 million in 1996, with the difference substantially
attributable to the improvement in pre-tax income to $207.3 million in 1997 from
$143.8 million in 1996.
NET INCOME. Net income was $155.0 million in 1997 compared to $112.0 million in
1996. This improvement mainly reflects higher premiums earned, higher investment
income, higher capital gains and a lower combined ratio, offset by higher income
taxes.
FINANCIAL CONDITION
CASH AND INVESTED ASSETS. Aggregate invested assets, including cash and
short-term investments, were $4,325.8 million at December 31, 1998, $4,163.3
million at December 31, 1997 and $3,624.6 million at December 31, 1996. The
change in invested assets resulted primarily from cash flows from operations
generated during the period together with net realized and unrealized gains and
losses on investments.
LOSS AND LAE RESERVES
GENERAL. Gross loss and LAE reserves totaled $3,800.0 million at December 31,
1998, $3,437.8 million at December 31, 1997 and $3,246.9 million at December 31,
1996. The increases were mainly due to reserve increases on pre-1986 accident
years for asbestos and environmental exposures, most of which were ceded under
various retrocessional arrangements resulting in offsetting increases to
reinsurance receivables, together with continued growth in the Company's book of
business. Reinsurance receivables totaled $982.0 million at December 31, 1998,
$692.5 million at December 31, 1997 and $749.1 million at December 31, 1996. At
December 31, 1998, $563.3 million or 57.4% of the total was receivable from
Gibraltar including $142.0 million which is contractually due in the first
quarter of 1999, subject to resolution of the dispute noted above (See - "Year
Ended December 31, 1998 Compared to Year Ended December 31, 1997" above), $154.8
million which is collateralized by funds held by the Company or offsetting
liabilities and $266.5 million which is subject to the terms and conditions of
The Prudential's guarantee of Gibraltar's payment obligations to the Company.
Additionally, $150.0 million or $15.3% is receivable from Continental Insurance
Company which is secured by a funds held arrangement wherein the Company has
retained the premium payments due the retrocessionaire, recognized a liability
for such amounts and reduces such liability as payments are due from the
retrocessionaire. No other retrocessionaire accounted for more than $25.0
million of the Company's receivable.
Everest Re maintains reserves to cover its estimated ultimate liability
for losses and LAE with respect to reported and unreported claims.
Because reserves are estimates of ultimate losses and LAE, management
monitors reserve adequacy over time, evaluating new information as it
becomes known and adjusting reserves, as necessary. Management considers
many factors when setting reserves, including: (i) current legal interpretations
of coverage and liability; (ii) economic conditions; (iii) internal
actuarial methodologies which analyze Everest Re's experience with similar
cases, information from ceding companies and historical trends, such as
reserving patterns, loss payments, pending levels of unpaid claims
29
<PAGE>
and product mix; and (iv) the uncertainties discussed below regarding reserve
requirements for asbestos and environmental claims. Based on these
considerations, management believes that adequate provision has been made for
Everest Re's loss and LAE reserves. Actual losses and LAE ultimately paid may
deviate, perhaps substantially, from such reserves.
ASBESTOS AND ENVIRONMENTAL EXPOSURES. Everest Re's asbestos claims typically
involve liability or potential liability for bodily injury from exposure to
asbestos or liability for property damage resulting from asbestos or asbestos
containing materials. Everest Re's environmental claims typically involve
potential liability for the mitigation or remediation of environmental
contamination or bodily injury or property damages caused by the release of
hazardous substances into the land, air or water. In addition to the previously
described general uncertainties inherent in estimating reserves, there are
significant additional uncertainties in estimating the amount of Everest Re's
potential losses from asbestos and environmental claims. Among the complications
impacting the estimation of such losses 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) historical data concerning asbestos
and environmental losses, which is more limited than historical information on
other types of casualty claims; (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. Although these complications have become less severe in
recent years, management believes that these factors continue to render reserves
for asbestos and environmental losses significantly less subject to traditional
actuarial methods than are reserves on other types of losses. Given these
uncertainties, management believes that no meaningful range for such ultimate
losses can be established. Everest Re establishes reserves to the extent that,
in the judgment of management, the facts and prevailing law reflect an exposure
for Everest Re or its ceding company. Due to the uncertainties discussed above,
the ultimate losses may vary materially from current loss reserves and, if
coverage under the Stop Loss Agreement were exhausted, could have a material
adverse effect on the Company's future financial condition, results of
operations and cash flows.
The table below summarizes reserves and claim activity for asbestos and
environmental claims, on both a gross and net of ceded reinsurance basis, for
the periods indicated:
<TABLE>
ASBESTOS AND
ENVIRONMENTAL RESERVES
YEARS ENDED DECEMBER 31,
---------------------------------
(Dollars in millions) 1998 1997 1996
---------------------------------
<S> <C> <C> <C>
Gross Basis:
Beginning of period reserves $ 446.1 $ 423.3 $ 428.5
---------------------------------
Incurred losses and LAE:
Reported losses 57.6 80.5 36.7
Change in IBNR 192.0 3.2 (6.7)
---------------------------------
Total 249.6 83.7 30.0
Paid losses (34.9) (60.9) (35.2)
---------------------------------
End of period reserves $ 660.8 $ 446.1 $ 423.3
=================================
Net Basis:
Beginning of period reserves $ 212.4 $ 199.6 $ 186.0
---------------------------------
Incurred losses and LAE:
Reported losses (1) (105.9) (18.3) (4.4)
Change in IBNR 121.3 21.8 4.4
---------------------------------
Total 15.4 3.5 0.0
Paid losses (2) 35.7 9.3 13.6
---------------------------------
End of period reserves $ 263.5 $ 212.4 $ 199.6
=================================
</TABLE>
- ----------
(1) Net of $138.5 million in 1998, $41.2 million in 1997 and $24.2 million in
1996 ceded under the incurred loss reimbursement feature of the Stop Loss
Agreement.
(2) Net of $39.7 million in 1998, $22.6 million in 1997 and $34.5 million in
1996 ceded as paid losses under the Stop Loss Agreement.
30
<PAGE>
The $397.3 million of reinsurance receivables with respect to asbestos and
environmental reserves as of December 31, 1998 was attributable principally to
three retrocessional arrangements: (i) $168.6 million was ceded to various
insurance and reinsurance companies, including Gibraltar, in connection with
their participation in MUF; (ii) $118.8 million was ceded to Gibraltar under the
Company's Stop Loss Agreement which is contractually due to the Company in the
first quarter of 1999, subject to resolution of the dispute noted above; and
(iii) $96.5 million resulting from the Company's former direct excess insurance
operations, which ceased writing business in 1985 and which has been 100% ceded
to Gibraltar since 1986, a portion of which is subject to resolution of the
dispute noted above. See - "Year Ended December 31, 1998 Compared to Year Ended
December 31, 1997" above.
STOP LOSS AGREEMENT AND PRUDENTIAL GUARANTEES. To the extent reserves as of June
30, 1995 (December 31, 1994 for catastrophe losses) for losses, allocated LAE
and uncollectible reinsurance experience adverse development ("Adverse
Development"), Everest Re is entitled, at the time reserves are increased, to
payments under the Stop Loss Agreement, subject to the limit and other terms
thereof. Gibraltar's obligations to make payments to Everest Re under the Stop
Loss Agreement are guaranteed by The Prudential. Management expects that the
general effect of the Stop Loss Agreement will be to protect the Company's
consolidated earnings against up to $375.0 million of the first $400.0 million
of Adverse Development. There can be no assurance, however, that the Company's
net liability for such Adverse Development will be limited to $25.0 million.
With respect to liquidity, the incurred loss reimbursement features of these
agreements provide the Company with cash on or prior to the time it is required
to make payment on account of such Adverse Development. Through December 31,
1998, Adverse Development ceded under the Stop Loss Agreement have aggregated
$339.2 million with remaining limits available of $35.8 million (net of
coinsurance) as respects the next $39.8 million of Adverse Development. See -
"Year Ended December 31, 1998 Compared to Year Ended December 31, 1997" - above.
The Prudential has guaranteed all of Gibraltar's payment obligations under the
Stop Loss Agreement and up to $400.0 million of Gibraltar's net obligations
under all other reinsurance agreements between Gibraltar and Everest Re, $128.3
million of which has been discharged by loss payments made to the Company
subsequent to June 30, 1995. At December 31, 1998, Gibraltar's net obligations
under such other reinsurance agreements consisted of the following balances:
<TABLE>
<S> <C>
Reinsurance receivables from Gibraltar $ 421.3
Reserve for losses and loss adjustment expenses assumed
from Gibraltar (164.2)
Losses in the course of payment assumed from Gibraltar (5.4)
Funds held by Everest Re under reinsurance treaties with
Gibraltar (127.2)
--------
Net obligations of Gibraltar $ 124.5
========
</TABLE>
STOCKHOLDERS' EQUITY. Holdings' stockholders' equity increased to $1,479.2
million as of December 31, 1998 from $1,307.5 million as of December 31, 1997
principally reflecting a $155.1 million increase in retained earnings for the
year and an increase of $37.2 million in unrealized appreciation of investments.
Stockholders' equity as of December 31, 1997 increased to $1,307.5 million from
$1,086.0 million as of December 31, 1996 principally reflecting an increase of
$146.9 million in retained earnings and an increase of $82.6 million in
unrealized appreciation of investments. Dividends of $10.1 million, $8.1 million
and $6.1 million were declared and paid by Holdings in 1998, 1997 and 1996,
respectively.
Holdings' stockholders' equity of $1,479.2 million exceeded Everest Re's
statutory-basis surplus of $1,059.4 million by $419.8 million at December 31,
1998. The primary differences between GAAP and SAP as they relate to the Company
are: (i) the deferral of acquisition costs under GAAP, which are immediately
expensed under SAP; (ii) the provision for deferred taxes on temporary tax
differences under GAAP, which are excluded under SAP; and (iii) the carrying at
market value of fixed maturities available for sale under GAAP, as compared to
at amortized cost under SAP.
LIQUIDITY AND CAPITAL RESOURCES
EVEREST RE. Everest Re's liquidity requirements are met on both a short-term and
long-term basis by funds provided by premiums collected, investment income and
collected reinsurance receivables balances, and from the sale and maturity of
investments. Everest Re's net cash flows from operating activities were $183.3
million, $376.4 million and $414.0 million, in 1998, 1997 and 1996,
respectively. The decreases from 1997 and 1996 in cash provided by operating
activities were principally a result of increases in net paid losses, reflecting
maturation of the Company's loss reserves, combined with the changes in the
Company's mix of business and modest, if any, growth in gross written premium,
all of which may affect growth in cash flow from operations in subsequent
periods, offset by improved profitability. Recoveries under the Company's Stop
Loss Agreement with Gibraltar contributed $31.9 million, $99.8 million and $53.4
million of such net cash flows in 1998, 1997 and 1996 respectively.
31
<PAGE>
Proceeds and applications from sales and acquisitions of investment assets were
$634.2 million and $755.3 million, respectively, in 1998 principally reflecting
reduced portfolio turnover as the result of the tax implications of capital gain
realization, compared to $1,077.0 million and $1,482.8 million, respectively, in
1997 and $1,632.9 million and $2,014.9 million, respectively, in 1996. Everest
Re'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.
EXPOSURE TO CATASTROPHES. As with other reinsurers, Everest Re's operating
results and financial condition can be adversely affected by volatile and
unpredictable natural and other disasters, such as hurricanes, windstorms,
earthquakes, floods, fires and explosions. Although Everest Re attempts to limit
its exposure to acceptable levels, it is possible that an actual catastrophic
event or multiple catastrophic events could have a material adverse effect on
the financial condition, results of operations and cash flows of the Company.
Everest Re employs various techniques, including licensed software modeling, to
assess its accumulated exposure to property catastrophe losses and summarizes
that exposure in terms of the probable maximum loss ("PML"). The company defines
PML as its anticipated maximum loss, taking into account contract limits, caused
by a single catastrophe affecting a broad contiguous geographic area, such as
that caused by a hurricane or earthquake of such a magnitude that it is expected
to occur once in every 100 years. Management estimates that the Company's
greatest catastrophe exposure worldwide from any single event is to hurricanes
and earthquakes in the coastal regions of the United States, where Everest Re
estimates it has a PML exposure, before reinsurance, of approximately $170.0
million in each such region based on its current book of business. Similarly,
management estimates that the largest current PML exposure, before reinsurance,
outside the United States is approximately $86.0 million. There can be no
assurance that Everest Re will not experience losses from one or more
catastrophic events that exceed, perhaps by a substantial amount, its estimated
PML.
The Company maintains a corporate-level retrocessional protection program, above
and beyond retrocessions purchased with respect to specific assumed coverage, to
mitigate the potential impact of catastrophe losses. Prior to the December 31,
1998 cancellation of significant elements of this program, the attachment point
of this program was $25.0 million per catastrophe in the United States and $10.0
million per catastrophe outside the United States. During 1998, $23.1 million
was ceded under the corporate level retrocession program as a result of
catastrophes occurring outside the United States. Effective January 1, 1999 the
Company has purchased an accident year aggregate excess of loss protection which
provides up to $175.0 million of coverage if Everest Re's statutory basis
accident year loss ratio exceeds a certain threshold and responds on an
aggregate basis with respect to both property and casualty losses, including
those arising from catastrophes. The attachment point is net of inuring
retrocessions and includes adjustable premium provisions which effectively cause
the Company to offset, on a pre-tax income basis, up to 52.5% of such ceded
losses, depending upon the character of the underlying losses, through
additional premiums. The maximum recovery is $175.0 million before giving effect
to a maximum adjustable premium of $86.3 million. Retrocessions inuring to the
benefit of this program, for the period from May 15, 1998 through May 15, 1999,
include a catastrophe retrocession which provides coverage of 70.0% of $20.0
million per occurrence in excess of $10.0 million in losses incurred by the
Company outside of the United States, and for the period from May 23, 1998
through May 23, 1999, include a catastrophe retrocession which provides coverage
of 87.5% of $20.0 million per occurrence in excess of $30.0 million in losses
incurred by the Company outside of the United States. All aspects of the
retrocession program have been structured to permit the program to be accounted
for as reinsurance under SFAS No. 113.
If a single catastrophe were to occur in the United States that resulted in
$170.0 million of gross losses and allocated loss adjustment expenses ("ALAE")
in 1999 (an amount equivalent to Everest Re's PML), management estimates that
the effect (including additional premiums and retained losses and ALAE) on the
Company's income before taxes would be $93.0 million. This pre-tax net loss
estimate assumes that Everest Re's aggregate losses and ALAE for 1999 would
exceed the threshold loss ratio requirement in the aggregate excess of loss
cover by $170.0 million.
HOLDINGS. Holdings is a holding company whose only material asset is the capital
stock of Everest Re. Holdings' cash flow will consist primarily of dividends and
other permissible payments from Everest Re. Holdings depends upon such payments
for funds for general corporate purposes and for the payment of any dividends on
its common stock.
In May 1998, the Company renewed its 364 day revolving line of credit
with First Union National Bank originally entered into in June 1997. 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 in 1998 or 1997. The credit facility agreement
continues to require that Everest Re maintains 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. The Company may
32
<PAGE>
choose an interest rate on borrowings equal to either (i) the Base Rate (as
defined below), (ii) an adjusted London InterBank Offered Rate ("LIBOR") plus a
margin (the "Margin") or (iii) a Money Market Rate, which is a daily uncommitted
advised rate. The Base Rate is the higher of the rate of interest established by
the bank from time to time as its reference rate in making loans or the Federal
Funds rate plus 0.5% per annum. The amount of the Margin and the commitment fee
payable to the bank for the credit facility depend upon the insurance strength
or claims paying ability ratings of Everest Re.
The payment of dividends to Holdings by Everest Re is subject to limitations
imposed by the Delaware Insurance Code. Based upon these restrictions, the
maximum amount that will be available for payment of dividends to Holdings by
Everest Re in 1999 without the prior approval of regulatory authorities is
$179.2 million. Everest Re's future cash flow available to Holdings may be
influenced by a variety of factors, including changes in the property and
casualty reinsurance market, Everest Re's financial results, insurance
regulatory changes and changes in general economic conditions. The availability
of such cash flow to Holdings could also be influenced by, among other things,
changes in the limitations imposed by the Delaware Insurance Code on the payment
of dividends by Everest Re. Holdings expects that, absent significant
catastrophe losses, such restrictions should not affect Everest Re's ability to
declare and pay dividends sufficient to support Holdings' current dividend
policy.
During 1998, 1997 and 1996 Holdings declared and paid dividends of $10.1
million, $8.1 million and $6.1 million, respectively.
On March 21, 1996 the Holdings' Board of Directors approved a stock repurchase
plan authorizing the repurchase of an aggregate amount of 2.5 million shares of
common stock from time to time in open market transactions. During 1998, the
first year in which purchases were made under this authorization, 516,900 shares
were repurchased at an average price of $33.68 per share.
In September 1998, Holdings adopted a shareholder rights plan ("Plan"). To
implement the Plan, the Company declared a dividend of one preferred share
purchase right ("Right") for each outstanding share of common stock. Pursuant to
the Plan, the Rights can only be exercised in certain situations involving a
potential change in control of the Company. For more information see Exhibit
4.1.
INCOME TAXES
On April 21, 1998, the Supreme Court issued its decision in Atlantic Mutual
Insurance Company v. Commissioner, upholding the Internal Revenue Service's
position regarding the computation of the fresh start benefit relating to 1986
reserve strengthening. Pursuant to a separation agreement entered into with The
Prudential, its former parent at the time of the Company's initial public
offering in 1995, the Company paid The Prudential $10.4 million 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.
MARKET SENSITIVE INSTRUMENTS
The Securities and Exchange Commission Financial Reporting Release #48 requires
registrants to clarify and expand upon the existing financial statement
disclosure requirements for derivative financial instruments, derivative
commodity instruments, and other financial instruments (collectively, "market
sensitive instruments").
Everest Re's current investment strategy does not provide for investments in
derivative financial instruments or derivative commodity instruments. The
Company's current investment strategy seeks to maximize after-tax income through
a high quality, diversified, taxable and tax-exempt fixed maturity portfolio,
while maintaining an adequate level of liquidity. Everest Re's mix of taxable
and tax-preferenced investments are adjusted continuously, consistent with
Everest Re's current and projected operating results, market conditions, and tax
position. The fixed maturities in the investment portfolio are comprised of
non-trading available for sale securities. Additionally, Everest Re invests in
marketable equity securities, which it believes will enhance the risk-adjusted
total return of the investment portfolio.
The overall strategy considers the scope of present and anticipated Company
operations. In particular, estimates of the financial impact resulting from
non-investment asset and liability transactions, together with the Company's
capital structure and other factors, are used to develop a net liability
analysis. This analysis includes estimated payout characteristics for which the
investments of the Company provide liquidity. This analysis is considered in the
development of specific investment strategies for asset allocation, duration,
and credit quality.
33
<PAGE>
The $4.3 billion investment portfolio is comprised of fixed maturity securities
that are subject to interest rate risk and foreign currency rate risk, and
equity securities that are subject to equity price risk. The impact of these
risks in the investment portfolio is generally mitigated by changes in the value
of operating assets and liabilities and their associated income statement
impact.
Interest rate risk is the potential change in value of the fixed maturity
portfolio due to change in market interest rates. Further, it includes
prepayment risk in a declining interest rate environment on the $408.9 million
of the $4.1 billion fixed maturity portfolio, which consists of mortgage-backed
securities. Prepayment risk results from accelerated principal payments that
shorten the average life and thus, the expected yield of the security.
The table below displays the potential impact of market value fluctuations and
after-tax unrealized appreciation on the fixed maturity portfolio as of December
31, 1998 based on parallel 200 basis point shifts in interest rates up and down
in 100 basis point increments. For legal entities with a US dollar functional
currency, this modeling was performed on each security individually. To generate
appropriate price estimates on mortgage-backed securities, changes in prepayment
expectations under different interest rate environments are taken into account.
For legal entities with a non-US dollar functional currency, the effective
duration of the involved portfolio of securities was used as a proxy for the
market value change under the various interest rate change scenarios.
All amounts are in millions of US$.
<TABLE>
<CAPTION>
Interest Rate Shift in Basis Points
-200 -100 0 100 200
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Market Value $ 4,638.4 $ 4,381.9 $ 4,135.4 $ 3,892.0 $ 3,653.8
Market Value Change from Base (%)
12.2% 6.0% 0.0% (5.9%) (11.7%)
Change in Unrealized Appreciation
After-tax from Base ($)
$ 326.9 $ 160.2 $ 0 $ (158.2) $ (313.0)
</TABLE>
Foreign currency rate risk is the potential change in value, income, and cash
flow arising from adverse changes in foreign currency exchange rates. The
Company's foreign operations each maintain capital in the currency of the
country of its geographic location consistent with local regulatory guidance.
Generally, the Company prefers to maintain the capital of its foreign operations
in US dollar assets although this varies by regulatory jurisdiction in
accordance with market needs. Each foreign operation may conduct business in its
local currency as well as the currency of other countries in which it operates.
The primary foreign currency exposures are the Canadian Dollar, the Belgian
Franc, the British Pound Sterling, the German Deutschmark, and the French Franc
for these foreign operations. The Company mitigates foreign exchange exposure by
a general matching of the currency and duration of its assets to its
corresponding operating liabilities. In accordance with FAS 52, the Company
translates the assets, liabilities, and income of non-US dollar functional
currency legal entities to the US dollar. This translation amount is reported as
a component of other comprehensive income. The primary functional foreign
currency exposures are the Canadian Dollar, the British Pound Sterling and the
Belgian Franc for these foreign operations.
The table below displays the potential impact of a parallel 20% increase and
decrease in foreign exchange rates on the valuation of invested assets subject
to foreign currency exposure in 10% increments as of December 31, 1998. This
analysis includes the after-tax impact of translation from transactional
currency to functional currency as well as the after-tax impact of translation
from functional currency to the US dollar reporting currency. All amounts are in
millions of US$.
<TABLE>
<CAPTION>
Change in Foreign Exchange Rates in Percent
-20% -10% 0% 10% 20%
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total After-tax Foreign
Exchange Exposure ($ 31.0) ($ 17.5) $ 0 $ 20.4 $ 42.8
</TABLE>
Equity risk is the potential change in market value of the common stock and
preferred stock portfolios arising from changing equity prices. The Company
invests in predominately high quality preferred and common stocks that are
traded on the major exchanges in the United States. The primary objective in
managing the $146.3 million equity portfolio is to provide long-term capital
growth through market appreciation and income.
34
<PAGE>
The table below displays the impact on market value and after-tax unrealized
appreciation of a 20% change in equity prices up and down in 10% increments as
of December 31, 1998. All amounts are in millions of US$.
<TABLE>
<CAPTION>
Change in Equity Values in Percent
-20% -10% 0% 10% 20%
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Market Value of the
Equity Portfolio $ 117.0 $ 131.6 $ 146.3 $ 160.9 $ 175.5
After-tax Change in
Unrealized Appreciation (19.0) (9.5) 0 9.5 19.0
</TABLE>
YEAR 2000 READINESS DISCLOSURES
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 personal computer
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. 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 June 30, 1999. Testing has indicated that virtually all
mission-critical mainframe hardware and software is compliant, and that the few
software applications that are non-compliant can be made compliant by June 30,
1999; additional testing of remaining systems will continue as those 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 inquiries of the relevant
vendors have not identified any material 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.
35
<PAGE>
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 $
0.3 million had been incurred as of December 31, 1998. These figures include
only expenses specifically related to Year 2000 compliance and do not include
the cost of hardware or software acquisitions made in the normal course of
business.
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 bond 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 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 throughout 1999, the Company will develop contingency plans as
necessary for mission-critical systems and relationships.
POTENTIAL CLAIMS EXPOSURE. It appears probable 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. While it appears probable that some such claims will be made against
insurers, it is not yet possible to determine 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") established 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 became 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 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 financial condition. The Company has not yet determined when it
will convert the functional currency for its Belgian operation to the Euro.
36
<PAGE>
SAFE HARBOR DISCLOSURE
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995 (the "Act"), the Company sets forth below
cautionary statements identifying important factors, among others, that in some
cases have affected and that could cause its actual results to differ materially
from those which might be projected, forecasted, or estimated in its
forward-looking statements, as defined in the Act, made by or on behalf of the
Company in press releases, written statements or documents filed with the
Securities and Exchange Commission, or in its communications and discussions
with investors and analysts in the normal course of business through meetings,
phone calls and conference calls. These cautionary statements supplement other
factors contained in this report which could cause the Company's actual results
to differ materially from those which might be projected, forecasted or
estimated in its forward-looking statements.
Such forward-looking statements may include, but are not limited to, projections
of premium revenue, investment income, other revenue, losses, expenses, earnings
(including earnings per share), cash flows, plans for future operations, common
stockholders' equity (including book value per share), investments, financing
needs, capital plans, dividends, plans relating to products or services of the
Company, and estimates concerning the effects of litigation or other disputes,
as well as assumptions for any of the foregoing and are generally expressed with
words such as "believes," "estimates," "expects," "anticipates," "plans,"
"projects," "forecasts," "goals," "could have," "may have" and similar
expressions. Undue reliance on any forward-looking statements should be avoided.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause the Company's results to differ materially from
such forward-looking statements. Such risks, uncertainties and other factors
include, but are not limited to, the following:
1) Changes in the level of competition in the domestic and international
reinsurance or primary insurance markets that adversely affect the
volume or profitability of the Company's reinsurance or insurance
business. These changes include, but are not limited to, the
intensification of price and contract terms competition, the entry of
new competitors, consolidation in the reinsurance and insurance
industry and the development of new products by new and existing
competitors;
2) Changes in the demand for reinsurance and insurance products of the
type offered by the Company and its ceding insurer customers;
3) The ability of the Company to execute its strategies;
4) Catastrophe losses in the Company's domestic or international
reinsurance or insurance business;
5) Adverse development on claim and claim expense liabilities related to
business written in prior years, including, but not limited to,
evolving case law and its effect on environmental and other latent
injury claims, changing government regulations, newly identified
toxins, newly reported claims, new theories of liability, or new
insurance and reinsurance contract interpretations, to the extent that
such adverse development exceeds the limits available under or is not
covered by the Stop Loss Agreement;
6) Greater than expected loss ratios on reinsurance or insurance written
by the Company;
7) Changes in inflation that affect the profitability of the Company's
current reinsurance and insurance businesses or the adequacy of its
claim and claim expense liabilities;
8) Changes in the Company's retrocessional arrangements;
9) Lower than estimated retrocessional or reinsurance recoveries on
losses, including, but not limited to, losses due to a decline in the
creditworthiness of the Company's retrocessionaires or reinsurers;
10) Changes in the reinsurance/retrocessional market impacting the
Company's ability to cede risks above its desired level of retention.
11) Changes in interest rates, increases in which cause a reduction in the
market value of the Company's fixed income investment portfolio, and
its common stockholders' equity, and decreases in which cause a
reduction of income earned on new cash flow from operations as well as
on the reinvestment of the proceeds from sales, calls or maturities of
existing investments;
12) Decline in the value of the Company's common equity investments;
37
<PAGE>
13) Changes in the composition of the Company's investment portfolio;
14) Gains or losses related to changes in foreign currency exchange rates;
15) Changes in the role of reinsurance brokers and the relationship of the
Company with such brokers;
16) Impact of Year 2000 computer hardware, software and microprocessors
embedded in certain equipment issues on the Company's operations and
potential for Year 2000 claims under reinsurance and insurance
contracts written by the Company;
17) Impact of the Euro on the Company's operations or financial condition;
18) Adverse results in litigation matters, including, but not limited to,
litigation related to environmental, asbestos and other potential mass
tort claims;
19) Changes in the Company's capital needs;
20) Changes in the Company's ratings;
21) The impact of current and future regulatory environments, generally,
and on the ability of the Company's subsidiaries to enter and exit
reinsurance or insurance markets; and
22) Changes in the commission or brokerage levels that competitors are
willing to offer to ceding companies, brokers or agents.
In addition to the factors outlined above that are directly related to the
Company's businesses, the Company is also subject to general business risks,
including, but not limited to, adverse state, federal or foreign legislation and
regulation, adverse publicity or news coverage, changes in general economic
factors, and the loss of key employees.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Market Sensitive Instruments" in Item 7.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules listed in the accompanying Index to
Financial Statements and Schedules on page F-1 are filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
38
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to "Election of Directors", "Information Concerning Nominees"
and "Information Concerning Continuing Directors and Executive Officers" in the
Company's proxy statement for the 1999 Annual Meeting of Stockholders, which
will be filed with the Commission within 120 days of the close of the Company's
fiscal year ended December 31, 1998 (the "Proxy Statement"), and which are
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to "Directors' Compensation" and "Compensation of Executive
Officers" in the Proxy Statement, which is incorporated herein by reference,
except that the Compensation Committee Report and the Performance Graph are not
so incorporated.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to "Common Stock Ownership by Directors and Executive
Officers" and "Principal Holders of Common Stock" in the Proxy Statement, which
are incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to "Certain Transactions with Directors" in the Proxy
Statement, which is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND SCHEDULES
The financial statements and schedules listed in the accompanying Index to
Financial Statements and Schedules on page F-1 are filed as part of this report.
EXHIBITS
The exhibits listed on the accompanying Index to Exhibits on page E-1 are filed
as part of this report.
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of 1998.
39
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) 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 ON MARCH 22, 1999.
EVEREST REINSURANCE HOLDINGS, INC.
By: /s/ JOSEPH V. TARANTO
----------------------------
JOSEPH V. TARANTO
(CHAIRMAN AND CHIEF EXECUTIVE OFFICER)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT
HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND
IN THE CAPACITIES AND ON THE DATES INDICATED.
/s/ JOSEPH V. TARANTO Chairman and Chief March 22, 1999
- ---------------------------- Executive Officer
JOSEPH V. TARANTO and Director
/s/ STEPHEN L. LIMAURO Vice President and March 22, 1999
- ---------------------------- Comptroller (also
STEPHEN L. LIMAURO principal financial officer)
/s/ MARTIN ABRAHAMS Director March 22, 1999
- ----------------------------
MARTIN ABRAHAMS
/s/ KENNETH J. DUFFY Director March 22, 1999
- ----------------------------
KENNETH J. DUFFY
/s/ JOHN R. DUNNE Director March 22, 1999
- ----------------------------
JOHN R. DUNNE
/s/ THOMAS J. GALLAGHER Director March 22, 1999
- ----------------------------
THOMAS J. GALLAGHER
/s/ WILLIAM F. GALTNEY, JR. Director March 22, 1999
- ----------------------------
WILLIAM F. GALTNEY, JR.
40
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
PAGES
-----
EVEREST REINSURANCE HOLDINGS, INC.
Report of Independent Accountants on Financial
Statements and Schedules...................................... F-2
Consolidated Balance Sheets at December 31, 1998 and 1997...... F-3
Consolidated Statements of Operations for the years
ended December 31, 1998, 1997 and 1996........................ F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1998, 1997 and 1996.......... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996.............................. F-6
Notes to Consolidated Financial Statements..................... F-7
SCHEDULES
I Summary of Investments Other Than Investments in Related
Parties at December 31, 1998.................................. S-1
II Condensed Financial Information of Registrant:
Balance Sheets as of December 31, 1998 and 1997............. S-2
Statements of Operations for the Years Ended
December 31, 1998, 1997 and 1996........................... S-3
Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996........................... S-4
III Supplementary Insurance Information as of December 31, 1998
and 1997 and for the years ended December 31, 1998,
1997 and 1996................................................. S-5
IV Reinsurance for the years ended December 31, 1998, 1997
and 1996...................................................... S-6
Schedules other than those listed above are omitted for the reason that they are
not applicable or the information is otherwise contained in the Financial
Statements.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Everest Reinsurance Holdings, Inc.
In our opinion, the consolidated financial statements listed in the index on
page F-1 of this Form 10-K present fairly, in all material respects, the
financial position of Everest Reinsurance Holdings, Inc. and its subsidiaries at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedules listed in the index on page F-1 of
this Form 10-K present fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedules are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
New York, New York
February 17, 1999
Except for Note 14, as to which the date is
March 11, 1999
F-2
<PAGE>
<TABLE>
<CAPTION>
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------------
(Dollars in thousands, except
par value per share) 1998 1997
-----------------------------------
<S> <C> <C>
ASSETS:
Fixed maturities - available
for sale, at market value
(amortized cost: 1998,
$3,851,051; 1997, $3,658,370) $ 4,100,575 $ 3,866,860
Equity securities, at market
value (cost: 1998, $91,787;
1997, $120,510) 146,274 158,784
Short-term investments 34,846 75,244
Other invested assets 4,736 10,848
Cash 39,326 51,578
-----------------------------------
Total investments and cash 4,325,757 4,163,314
Accrued investment income 64,220 60,424
Premiums receivable 261,488 256,191
Reinsurance receivables 981,959 692,473
Funds held by reinsureds 200,302 186,454
Deferred acquisition costs 70,753 82,332
Prepaid reinsurance premiums 8,592 8,980
Deferred tax asset 62,237 74,434
Other assets 21,420 13,418
-----------------------------------
TOTAL ASSETS $ 5,996,728 $ 5,538,020
===================================
LIABILITIES:
Reserve for losses and
adjustment expenses $ 3,800,041 $ 3,437,818
Unearned premium reserve 284,640 337,383
Funds held under reinsurance
treaties 195,169 190,639
Losses in the course of
payment 64,630 55,969
Contingent commissions 111,344 100,027
Other net payable to
reinsurers 18,731 13,231
Current federal income taxes (581) 13,567
Other liabilities 43,550 81,903
-----------------------------------
Total liabilities 4,517,524 4,230,537
-----------------------------------
Commitments and contingencies
(Note 11)
STOCKHOLDERS' EQUITY:
Preferred stock, par value:
$0.01; 50 million shares
authorized; no shares issued
and outstanding (Includes 0.2
million shares of Series A
Junior Preferred Stock) - -
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 390,559 389,876
Unearned compensation (240) (514)
Accumulated other comprehensive
income, net of deferred income
taxes ($99.8 million in 1998 and
$81.9 million in 1997) 185,518 152,319
Retained earnings 928,500 773,380
Treasury stock, at cost; 0.9
million shares in 1998 and
0.3 million shares in 1997 (25,642) (8,086)
-----------------------------------
Total stockholders' equity 1,479,204 1,307,483
-----------------------------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 5,996,728 $ 5,538,020
===================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
-------------------------------------------
(Dollars in thousands,
except per share amounts) 1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
REVENUES:
Premiums earned $ 1,068,010 $ 1,049,847 $ 973,611
Net investment income 244,909 228,546 191,901
Net realized capital
gain/(loss) (765) 15,916 5,695
Other income/(loss) 3,046 4,880 (1,867)
-------------------------------------------
1,315,200 1,299,189 1,169,340
-------------------------------------------
CLAIMS AND EXPENSES:
Incurred losses and
loss adjustment
expenses 778,404 765,421 716,033
Commission, brokerage,
taxes and fees 274,559 274,796 254,598
Other underwriting
expenses 49,561 51,672 54,870
-------------------------------------------
1,102,524 1,091,889 1,025,501
-------------------------------------------
INCOME BEFORE TAXES 212,676 207,300 143,839
Income tax 47,479 52,345 31,812
-------------------------------------------
NET INCOME $ 165,197 $ 154,955 $ 112,027
===========================================
Other comprehensive
income, net of tax 33,199 74,907 1,524
-------------------------------------------
COMPREHENSIVE INCOME $ 198,396 $ 229,862 $ 113,551
===========================================
PER SHARE DATA:
Average shares
outstanding (000's) 50,374 50,476 50,567
Net income per
common share - basic $ 3.28 $ 3.07 $ 2.22
===========================================
Average diluted
shares outstanding
(000's) 50,665 50,765 50,711
Net income per
common share -
diluted $ 3.26 $ 3.05 $ 2.21
===========================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31,
---------------------------------------------------
(Dollars in thousands,
except per share amounts) 1998 1997 1996
---------------------------------------------------
<S> <C> <C> <C>
COMMON STOCK (SHARES
OUTSTANDING):
Balance, beginning of
period 50,479,271 50,490,273 50,792,869
Issued during the period 34,436 22,600 3,800
Treasury stock acquired
during period (529,040) (37,287) (306,396)
Treasury stock reissued
during period 4,537 3,685 -
---------------------------------------------------
Balance, end of period 49,989,204 50,479,271 50,490,273
===================================================
COMMON STOCK (PAR VALUE):
Balance, beginning of
period $ 508 $ 508 $ 508
Issued during the period 1 - -
---------------------------------------------------
Balance, end of period 509 508 508
---------------------------------------------------
ADDITIONAL PAID IN CAPITAL:
Balance, beginning of
period 389,876 389,196 387,349
Contributions during the
period - - 1,783
Common stock issued during
the period 610 636 64
Treasury stock reissued
during period 73 44 -
---------------------------------------------------
Balance, end of period 390,559 389,876 389,196
---------------------------------------------------
UNEARNED COMPENSATION:
Balance, beginning of
period (514) (374) (692)
Net increase (decrease)
during the period 274 (140) 318
---------------------------------------------------
Balance, end of period (240) (514) (374)
---------------------------------------------------
ACCUMULATED OTHER
COMPREHENSIVE INCOME, NET
OF DEFERRED INCOME TAXES:
Balance, beginning of
period 152,319 77,412 75,888
Net increase during the
period 33,199 74,907 1,524
---------------------------------------------------
Balance, end of period 185,518 152,319 77,412
---------------------------------------------------
RETAINED EARNINGS:
Balance, beginning of
period 773,380 626,501 520,541
Net income 165,197 154,955 112,027
Dividends declared ( $0.20
per share in 1998, $0.16
per share in 1997 and
$0.12 per share in 1996) (10,077) (8,076) (6,067)
---------------------------------------------------
Balance, end of period 928,500 773,380 626,501
---------------------------------------------------
TREASURY STOCK AT COST:
Balance, beginning of
period (8,086) (7,220) -
Treasury stock acquired
during period (17,663) (953) (7,220)
Treasury stock reissued
during period 107 87 -
---------------------------------------------------
Balance, end of period (25,642) (8,086) (7,220)
---------------------------------------------------
TOTAL STOCKHOLDERS'
EQUITY, END OF PERIOD $ 1,479,204 $ 1,307,483 $ 1,086,023
===================================================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------------------------------
(Dollars in thousands) 1998 1997 1996
------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 165,197 $ 154,955 $ 112,027
Adjustments to reconcile
net income to net cash
provided by operating
activities:
(Increase) decrease in
premiums receivable (4,466) (30,867) 38,285
(Increase) in funds held
by reinsureds, net (7,766) (1,065) (21,606)
(Increase) decrease in
reinsurance receivables (289,908) 56,544 (37,084)
(Increase) decrease in
deferred tax asset (2,532) 10,451 (13,065)
Increase in reserve for
losses and loss adjustment
expenses 359,178 202,191 281,590
Increase (decrease) in
unearned premiums (52,757) (16,970) 60,293
(Increase) decrease in
other assets and liabilities 16,949 17,706 (1,064)
Non cash compensation expense 274 (140) 318
Accrual of bond discount/
amortization of bond premium (1,617) (500) (46)
Realized capital (gains)
losses 765 (15,916) (5,695)
------------------------------------------------
Net cash provided by
operating activities 183,317 376,389 413,953
------------------------------------------------
CASH FLOWS FROM INVESTING
ACTIVITIES :
Proceeds from fixed maturities
matured/called - held to
maturity - 2,155 20,582
Proceeds from fixed maturities
matured/called - available
for sale 162,514 132,231 143,114
Proceeds from fixed maturities
sold - available for sale 373,327 880,189 1,281,882
Proceeds from equity securities
sold 50,508 59,494 160,429
Proceeds from other invested
assets sold 7,605 1,368 -
Cost of fixed maturities
acquired - held to maturity - - (17,378)
Cost of fixed maturities
acquired - available for sale (731,500) (1,413,516) (1,836,274)
Cost of equity securities
acquired (22,350) (45,825) (150,861)
Cost of other invested assets
acquired (935) - (7,184)
Net (purchases) sales of
short-term securities 40,273 (23,422) 26,890
Net increase (decrease) in
unsettled securities
transactions (499) 1,533 (3,166)
------------------------------------------------
Net cash (used in)
investing activities (121,057) (405,793) (381,966)
------------------------------------------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Acquisition of treasury
stock net of reissuances (17,498) (822) (7,220)
Contributions during the
period - - 1,783
Common stock issued during
the period 625 636 64
Dividends paid to
stockholders (10,077) (8,076) (6,067)
Net increase (decrease) in
collateral for loaned
securities (47,119) 47,119 (19,897)
------------------------------------------------
Net cash provided by
(used in) financing
activities (74,069) 38,857 (31,337)
------------------------------------------------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH (443) (10,470) 1,033
------------------------------------------------
Net increase (decrease)
in cash (12,252) (1,017) 1,683
Cash, beginning of period 51,578 52,595 50,912
------------------------------------------------
Cash, end of period $ 39,326 $ 51,578 $ 52,595
================================================
SUPPLEMENTAL CASH FLOW
INFORMATION CASH
TRANSACTIONS:
Income taxes paid, net $ 65,659 $ 53,645 $ 38,055
NON-CASH FINANCING
TRANSACTION:
Issuance of common stock $ 274 $ (140) $ 318
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
For purposes of footnote presentation, all dollar values, except per share
amounts, are presented in thousands.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BUSINESS AND BASIS OF PRESENTATION
Everest Reinsurance Holdings, Inc. ("Holdings") (formerly known as Prudential
Reinsurance Holdings, Inc.), is a holding company incorporated in the state of
Delaware. Prior to an initial public offering ("IPO") of all 50 million shares
outstanding on October 6, 1995, Holdings was a direct wholly owned subsidiary of
PRUCO, Inc. ("PRUCO"), which is wholly owned by The Prudential Insurance Company
of America ("The Prudential"). The stock of Everest Reinsurance Company
("Everest Re") (formerly known as Prudential Reinsurance Company) was
contributed by PRUCO to Holdings effective December 31, 1993. The contribution
has been accounted for at historical cost in a manner similar to the pooling of
interests method of accounting as the entities were under common control.
Everest Re's principal business is reinsuring property and casualty risks of
domestic and foreign insurance companies under excess and pro rata reinsurance
contracts.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities (and disclosure of
contingent assets and liabilities) at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The consolidated financial statements include the domestic and foreign
subsidiaries of Everest Re: Everest National Insurance Company ("Everest
National") (formerly known as Prudential National Insurance Company), Everest
Indemnity Insurance Company ("Everest Indemnity"), Everest Re Holdings, Ltd.
("Everest Ltd."), a Bermuda domiciled successor company of Everest Re Ltd. (the
assets of which funded Everest Ltd. and which was formerly known as Everest
Reinsurance Ltd. and Le Rocher Reinsurance Ltd.) and Everest Insurance Company
of Canada ("Everest Canada") (formerly known as OTIP/RAEO Insurance Company,
Inc.), which was acquired from The Prudential for $3,700 on December 31, 1996.
They also include Mt. McKinley Managers, L.L.C. ("Mt. McKinley") which was
formed by Holdings and Everest National in 1997 as an insurance producer and
which acquired in 1998 the assets of certain agency operations in Alabama and
Georgia which now operate as Workcare Southeast, Inc. ("Workcare Southeast") and
Workcare Southeast of Georgia, Inc. ("Workcare Georgia"). Everest National also
acquired an agency operation in Texas, Workcare, Inc. The acquisition price of
these three agency operations was $2,900 and the transaction occurred on July 1,
1998. These acquisitions have been accounted for by the purchase method. Had
these acquisitions occurred at the beginning of 1996, they would have had no
material effect on the Company's results of operations. All material
intercompany balances and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the 1996 financial statements to
conform to the 1997 and 1998 presentation.
B. INVESTMENTS
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
requires that a company segment its fixed maturity investment portfolio between
held to maturity (carried at amortized cost), available for sale (carried at
market value, with unrealized appreciation or depreciation, net of applicable
deferred income taxes, reflected as a separate component of stockholders'
equity) and trading (carried at market value with unrealized appreciation or
depreciation reflected in income). Investments that are available for sale are
expected to be held for an indefinite period but may be sold depending on tax
position, interest rates and other considerations. Short-term investments are
stated at cost, which approximates market value. Equity securities are carried
at market value with unrealized appreciation or depreciation of equity
securities, net of applicable deferred income tax, credited or charged directly
to stockholders' equity. Realized gains or losses on sale of investments are
determined on the basis of identified cost. With respect to securities which are
not publicly traded, market value has been determined based on pricing models.
For publicly traded securities, market value is based on quoted market prices.
Cash includes cash and bank time deposits with original maturities of ninety
days or under.
F-7
<PAGE>
C. UNCOLLECTIBLE REINSURANCE BALANCES
The Company provides reserves for uncollectible reinsurance balances based on
management's assessment of the collectibility of the outstanding balances. Such
reserves were $25,102 and $14,399 at December 31, 1998 and December 31, 1997,
respectively (see also Note 7).
D. DEFERRED ACQUISITION COSTS
Acquisition costs, consisting principally of commissions and brokerage expenses
and certain premium taxes and fees associated with the Company's primary
insurance business incurred at the time a contract or policy is issued, are
deferred and amortized over the period in which the related premiums are earned,
generally one year. Deferred policy acquisition costs are limited to their
estimated realizable value based on the related unearned premiums, anticipated
claims and claim expenses and anticipated investment income. Deferred
acquisition costs amortized to income were $269,160, $270,605 and $252,928 in
1998, 1997 and 1996, respectively.
E. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVE
The reserve for unpaid losses and loss adjustment expenses is based on
individual case estimates and reports received from ceding companies. A
provision is included for losses and loss adjustment expenses incurred but not
reported ("IBNR") based on past experience. A provision is also included for
certain potential liabilities relating to asbestos and environmental exposures,
which liabilities cannot be estimated with traditional reserving techniques (see
also Note 11). The reserves are reviewed continually and any changes in
estimates are reflected in earnings in the period the adjustment is made.
Management believes that adequate provision has been made for the Company's loss
and loss adjustment expenses. Loss and loss adjustment expense reserves are
presented gross of reinsurance receivables and incurred losses and loss
adjustment expenses are presented net of ceded reinsurance. Accruals for
contingent commission liabilities are estimated based on carried loss and loss
adjustment expense reserves.
F. PREMIUM REVENUES
Premiums written are earned ratably over the periods of the related insurance
and reinsurance contracts or policies. Unearned premium reserves are established
to cover the remainder of the unexpired contract period. Such reserves are
established based upon reports received from ceding companies or computed using
pro rata methods based on statistical data. Written and earned premiums, and the
related costs, which have not yet been reported to the Company are estimated and
accrued. Premiums are net of retrocessions (ceded reinsurance).
G. INCOME TAXES
The Company and its subsidiaries file their own federal tax returns and
calculate their current tax provisions accordingly. Deferred income taxes have
been recorded to recognize the tax effect of temporary differences between the
financial reporting and income tax bases of assets and liabilities. Prior to the
IPO, the Company was a member of a group of affiliated companies which joined in
filing a consolidated federal tax return. Current tax liabilities were
determined for individual companies based upon their separate return basis
taxable income. Members with taxable income incurred an amount in lieu of the
separate return basis federal tax. Members with a loss for tax purposes
recognized a current benefit in proportion to the amount of their losses
utilized in computing consolidated taxable income.
H. FOREIGN CURRENCY TRANSLATION
Assets and liabilities relating to foreign operations are translated into U.S.
dollars at the exchange rates in effect at the balance sheet date; revenues and
expenses are translated into U.S. dollars using average exchange rates. Gains
and losses resulting from translating foreign currency financial statements, net
of deferred income taxes, are excluded from income and accumulated in
stockholders' equity.
I. EARNINGS PER SHARE
SFAS No. 128 requires an enterprise to present basic and diluted earnings per
share on the income statement. Basic earnings per share is calculated by
dividing net income by the weighted average number of common shares outstanding.
Diluted earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity.
F-8
<PAGE>
Net income per common share has been computed below in accordance with SFAS No.
128, based upon weighted average common and dilutive shares outstanding.
<TABLE>
1998 1997 1996
------------------------------------------
<S> <C> <C> <C>
Net income (numerator) $ 165,197 $ 154,955 $ 112,027
==========================================
Weighted average common
and effect of dilutive
shares used in the
computation of net
income per share:
Average shares
outstanding - basic
(denominator) 50,374 50,476 50,567
Effect of dilutive
shares 291 289 144
------------------------------------------
Average shares
outstanding - diluted
(denominator) 50,665 50,765 50,711
==========================================
Net income per common
share:
Basic $ 3.28 $ 3.07 $ 2.22
Diluted 3.26 3.05 2.21
</TABLE>
Options to purchase 738,600, 337,750 and 20,000 shares of common stock at prices
ranging from $37.41 to $39.16, $39.16 and $26.63, per share were outstanding at
the end of 1998, 1997 and 1996, respectively, but were not included in the
computation of earnings per diluted share for the respective years, because the
options' exercise price was greater than the average market price of the common
shares at the end of such years. The options, which expire between September 26,
2007 and September 25, 2008, September 26, 2007 and November 18, 2006,
respectively, were still outstanding at the end of 1998 with the exception of
26,400 shares which were not included in the computation at the end of 1997.
J. SEGMENTATION
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of
an Enterprise and Related Information". This statement establishes standards for
the way a public enterprise reports information about its operating segments in
its financial statements. The Company, through its subsidiaries, operates as a
single segment focusing on the coverage of property and casualty risks which
emphasizes central control and coordination of critical business elements. The
Company's product is distributed globally through multiple markets and
distribution channels including insurance and reinsurance, originated on a
broker, direct and program manager basis, accepting primary, proportional and
excess layers, treaty and facultative arrangements, covering virtually all lines
of business. The management approach of the Company is to focus on the
enterprise's overall profitability as opposed to an analysis of the stand alone
profitability results of any unit.
K. FUTURE APPLICATION OF ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("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.
F-9
<PAGE>
2. INVESTMENTS
The amortized cost, market value, and gross unrealized appreciation and
depreciation of fixed maturity investments are presented in the tables below:
<TABLE>
Amortized Unrealized Unrealized Market
Cost Appreciation Depreciation Value
----------------------------------------------------------
<S> <C> <C> <C> <C>
As of December 31, 1998
Fixed maturities - available
for sale
U.S. Treasury securities and
obligations of U.S.
government agencies and
corporations $ 151,976 $ 7,644 $ 4 $ 159,616
Obligations of states and
political subdivisions 1,982,490 134,411 470 2,116,431
Corporate securities 839,892 46,444 5,682 880,654
Mortgage-backed securities 388,843 20,171 68 408,946
Foreign government securities 241,310 29,744 - 271,054
Foreign corporate securities 246,540 17,547 213 263,874
----------------------------------------------------------
TOTAL $ 3,851,051 $ 255,961 $ 6,437 $ 4,100,575
==========================================================
As of December 31, 1997
Fixed maturities - available
for sale
U.S. Treasury securities and
obligations of U.S.
government agencies and
corporations $ 144,079 $ 3,076 $ 86 $ 147,069
Obligations of states and
political subdivisions 1,610,190 112,211 293 1,722,108
Corporate securities 893,885 39,189 16 933,058
Mortgage-backed securities 521,048 20,504 2 541,550
Foreign government securities 232,815 20,540 57 253,298
Foreign corporate securities 256,353 13,426 2 269,777
----------------------------------------------------------
TOTAL $ 3,658,370 $ 208,946 $ 456 $ 3,866,860
==========================================================
</TABLE>
During 1997, the Company transferred all of the fixed maturity securities in its
held-to-maturity classification (with an amortized cost of $78,974 and market
value of $85,508) to the available-for-sale classification to enhance
management's flexibility with respect to future portfolio management. The net
financial statement impact at the time of the transfer was a $4,247 increase in
net after-tax unrealized appreciation of investments.
The amortized cost and market value of fixed maturities are shown in the
following table by contractual maturity. Actual maturities may differ from
contractual maturities because securities may be called or prepaid with or
without call or prepayment penalties. Mortgage-backed securities generally
are more likely to be prepaid than other fixed maturites. As the stated maturity
of such securities may not be indicative of actual maturities, the total for
mortgage-backed securities is shown separately.
<TABLE>
December 31, 1998
----------------------------
Amortized Market
Cost Value
----------------------------
<S> <C> <C>
Fixed maturities - available for sale
Due in one year or less $ 75,137 $ 75,594
Due after one year through five years 452,953 477,709
Due after five years through ten years 1,423,395 1,534,307
Due after ten years 1,510,724 1,604,019
Mortgage-backed securities 388,842 408,946
----------------------------
TOTAL $ 3,851,051 $ 4,100,575
============================
</TABLE>
F-10
<PAGE>
Proceeds from sales of fixed maturity investments during 1998, 1997 and 1996
were $373,327, $880,189 and $1,281,882, respectively. Gross gains of $6,328,
$6,766 and $9,146, and gross losses of $6,615, $9,439 and $20,952 were realized
on those sales during 1998, 1997 and 1996, respectively.
The cost, market value and gross unrealized appreciation and depreciation of
investments in equity securities is presented in the table below:
<TABLE>
December 31,
---------------------------
1998 1997
---------------------------
<S> <C> <C>
Cost $ 91,787 $ 120,510
Unrealized appreciation 54,748 39,162
Unrealized depreciation (261) (888)
---------------------------
Market value $ 146,274 $ 158,784
===========================
</TABLE>
The changes in net unrealized gains (losses) of investments of the Company
(including unrealized gains and losses on fixed maturities not reflected in
stockholders' equity) are derived from the following sources:
<TABLE>
Years Ended December 31,
----------------------------------
1998 1997 1996
----------------------------------
<S> <C> <C> <C>
Increase (decrease) during
the period between the market
value and cost of investments
carried at market value,
and deferred tax thereon:
Equity securities $ 16,212 $ 6,361 $ 5,897
Fixed maturities 41,034 120,764 (14,440)
Other invested assets - - -
Deferred taxes (20,036) (44,494) 2,583
----------------------------------
Increase (decrease) in unrealized
appreciation, net of deferred
taxes, included in stockholders'
equity 37,210 82,631 (5,960)
Increase (decrease) during the
period between the market value
and cost of fixed maturities
carried at amortized cost - (7,852) (4,288)
----------------------------------
TOTAL $ 37,210 $ 74,779 $(10,248)
==================================
</TABLE>
The components of net investment income are presented in the table below:
<TABLE>
Years Ended December 31,
-------------------------------------
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Fixed maturities $ 249,382 $ 232,779 $ 198,947
Equity securities 4,601 4,473 2,835
Short-term securities 2,849 3,435 5,357
Other interest income 3,273 2,582 1,450
-------------------------------------
Total gross investment income 260,105 243,269 208,589
-------------------------------------
Interest on funds held 11,983 11,173 12,294
Other investment expenses 3,213 3,550 4,394
-------------------------------------
Total investment expenses 15,196 14,723 16,688
-------------------------------------
Total net investment income $ 244,909 $ 228,546 $ 191,901
=====================================
</TABLE>
F-11
<PAGE>
The components of realized capital gains (losses) are presented in the table
below:
<TABLE>
Years Ended December 31,
-------------------------------------
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Fixed maturities $ (287) $ (2,673) $ (11,805)
Equity securities (455) 18,572 17,443
Short-term investments (23) 17 57
-------------------------------------
TOTAL $ (765) $ 15,916 $ 5,695
=====================================
</TABLE>
Securities with a carrying value amount of $280,245 at December 31, 1998 were on
deposit with various state or governmental insurance departments in compliance
with insurance laws. The Company had no investments in derivative financial
instruments for the years ended December 31, 1998, 1997 and 1996.
3. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity in the reserve for losses and loss adjustment expenses is summarized as
follows:
<TABLE>
Years Ended December 31,
-------------------------------------------
1998 1997 1996
-------------------------------------------
<S> <C> <C> <C>
Reserves at January 1 $ 3,437,818 $ 3,246,858 $ 2,969,341
Less reinsurance recoverables 688,694 746,640 700,877
-------------------------------------------
Net balance at January 1 2,749,124 2,500,218 2,268,464
-------------------------------------------
Incurred related to:
Current year 752,349 768,597 745,594
Prior years 26,055 (3,176) (29,561)
-------------------------------------------
Total incurred losses and
loss adjustment expenses 778,404 765,421 716,033
-------------------------------------------
Paid related to:
Current year 192,404 185,310 213,832
Prior years 450,824 331,205 270,447
-------------------------------------------
Total paid losses and loss
adjustment expenses 643,228 516,515 484,279
-------------------------------------------
Net balance at December 31 2,884,300 2,749,124 2,500,218
Plus reinsurance recoverables 915,741 688,694 746,640
-------------------------------------------
Balance at December 31 $ 3,800,041 $ 3,437,818 $ 3,246,858
===========================================
</TABLE>
4. CREDIT LINE
In May 1998, the Company renewed its 364 day revolving line of credit with First
Union National Bank originally entered into in June 1997. 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 in 1998 or 1997. The credit facility agreement continues to require
that Everest Re maintains 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. The Company may choose an interest rate on borrowings
equal to either (i) the Base Rate (as defined below), (ii) an adjusted London
Interbank Offered Rate ("LIBOR") plus a margin (the "Margin") or (iii) a Money
Market Rate, which is a daily uncommitted advised rate. The Base Rate is the
higher of the rate of interest established by the bank from time to time as its
reference rate in making loans or the Federal Funds rate plus 0.5% per annum.
The amount of the Margin and the commitment fee payable to the bank for the
credit facility depend upon the insurance strength or claims paying ability
ratings of Everest Re.
F-12
<PAGE>
5. OPERATING LEASE AGREEMENTS
The future minimum rental commitments, exclusive of cost escalation clauses, for
all of the Company's operating leases with remaining non-cancelable terms in
excess of one year are as follows:
<TABLE>
(in thousands)
<S> <C>
1999 $ 3,892
2000 4,093
2001 4,076
2002 3,664
2003 3,046
Thereafter 731
--------------
Total payments 19,502
Sublease rental income 3,025
--------------
Net Commitments $ 16,477
==============
</TABLE>
All of these leases, the expiration terms of which range from 1999 to 2008, are
for the rental of office space. Rental expense, net of sublease rental income,
was $5,313, $4,903 and $5,334 for 1998, 1997 and 1996, respectively.
6. INCOME TAXES
The components of income taxes for the periods presented are as follows:
<TABLE>
Years Ended December 31,
----------------------------------
1998 1997 1996
----------------------------------
<S> <C> <C> <C>
Current tax:
U.S. $ 44,341 $ 18,892 $ 24,363
Foreign 8,854 23,000 20,735
----------------------------------
Total current tax 53,195 41,892 45,098
Total deferred U.S. tax (benefit) (5,716) 10,453 (13,286)
----------------------------------
Total income tax $ 47,479 $ 52,345 $ 31,812
==================================
</TABLE>
A reconciliation of the U.S. Federal income tax rate to the Company's effective
tax rate is as follows:
<TABLE>
Years Ended December 31,
-------------------------------------
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
Federal income tax rate 35.0% 35.0% 35.0%
Increase (reduction) in
taxes resulting from:
Tax exempt income (14.8) (12.1) (15.1)
Other, net 2.1 2.4 2.2
-------------------------------------
Effective tax rate 22.3% 25.3% 22.1%
=====================================
</TABLE>
F-13
<PAGE>
Deferred income taxes reflect the tax effect of the temporary differences
between the value of assets and liabilities for financial statement purposes and
such values as measured by the tax laws and regulations. The principal items
making up the net deferred income tax asset are as follows:
<TABLE>
December 31,
--------------------------
1998 1997
--------------------------
<S> <C> <C>
Deferred tax assets:
Reserve for losses and
loss adjustment expenses $ 164,894 $ 155,666
Unearned premium reserve 19,323 22,988
Foreign currency translation 6,637 4,480
Net operating loss
carryforward 1,401 1,222
Other assets 6,505 8,866
--------------------------
Total deferred tax assets 198,760 193,222
Deferred tax liabilities:
Deferred acquisition costs 24,764 28,816
Net unrealized appreciation
of investments 106,404 86,368
Other liabilities 5,355 3,604
--------------------------
Total deferred tax liabilities 136,523 118,788
--------------------------
Net deferred tax assets $ 62,237 $ 74,434
==========================
</TABLE>
Holdings has total net operating loss carryforwards of $4,002 which expire
during years 2001-2014. Management believes that it is more likely than not that
the Company will realize the benefits of its net deferred tax assets and,
accordingly, no valuation allowance has been recorded for the periods presented.
Everest Re has not provided for U.S. Federal income or foreign withholding taxes
on $9,393 of pre-1987 undistributed earnings of non-U.S. subsidiaries, because
such earnings are intended to be retained by the foreign subsidiaries
indefinitely. If these earnings were distributed, foreign tax credits are
available under current law to reduce or eliminate any resulting income tax
liability.
On April 21, 1998, the Supreme Court issued its decision in ATLANTIC MUTUAL
INSURANCE COMPANY V. COMMISSIONER, upholding the Internal Revenue Service's
position regarding the computation of the fresh start benefit relating to 1986
reserve strengthening. Pursuant to a separation agreement entered into with The
Prudential, its former parent at the time of the Company's initial public
offering in 1995, the Company 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. RETROCESSIONS
The Company utilizes retrocessional (reinsurance) agreements to reduce its
exposure to large claims and catastrophic loss occurrences. These agreements
provide for recovery from retrocessionaires of a portion of losses and loss
expenses under certain circumstances without relieving the insurer of its
obligation to the policyholder. Losses and loss adjustment expenses incurred and
earned premiums are after deduction for retrocessions. In the event
retrocessionaires were unable to meet their obligations under retrocession
agreements, the Company would not be able to realize the full value of the
reinsurance recoverable balances. The Company may hold partial collateral,
including letters of credit, under these agreements and has never suffered a
significant loss because of a retrocessionaire's default. (see Note 1(C) and the
following paragraph).
Effective October 5, 1995, Everest Re entered into a stop loss agreement (the
"Stop Loss Agreement") with Gibraltar Casualty Company ("Gibraltar"). This
agreement, for a premium of $140,000, provides protection against 100% of the
first $150,000 of adverse development, if any, and 90% of the next $250,000 of
adverse development, if any, of Everest Re's consolidated reserves for losses
and uncollectible reinsurance as of June 30, 1995, including allocated loss
adjustment expense and incurred but not reported losses, provided that adverse
development, if any, relating to catastrophes will be covered only to the extent
that the catastrophe event occurred prior to January 1, 1995. All such adverse
development is referred to herein as "Adverse Development". Payments will be
made to Everest Re under the Stop Loss Agreement as Adverse Development is
incurred by Everest Re. Coverage under the Stop Loss Agreement terminates on
F-14
<PAGE>
December 31, 2007, or earlier if coverage is exhausted. Through December 31,
1998 and 1997, cessions under the Stop Loss Agreement have aggregated $339,179
and $185,231, respectively, yielding remaining limits, net of coinsurance, of
$35,821 and $189,769 at December 31, 1998 and 1997, respectively.
The Prudential has, subject to the terms and conditions of the guarantee,
guaranteed all of Gibraltar's payment obligations under the Stop Loss Agreement
and up to $400,000 of Gibraltar's net payment obligations under all other
reinsurance agreements between Gibraltar and Everest Re, $128,275 of which has
been discharged by loss payments made to the Company subsequent to June 30,
1995. At December 31, 1998, Gibraltar's net obligations under such other
reinsurance agreements consisted of the following balances:
<TABLE>
<S> <C>
Reinsurance receivables from Gibraltar $ 421,278
Reserve for losses and loss adjustment
expenses assumed from Gibraltar (164,204)
Losses in the course of payment assumed
from Gibraltar (5,382)
Funds held by Everest Re under reinsurance
treaties with Gibraltar (127,183)
---------
Net obligations of Gibraltar $ 124,509
=========
</TABLE>
Gibraltar has disputed $63,000 ceded under the Stop Loss Agreement and, in
accordance with the terms of the Stop Loss Agreement, Gibraltar has
secured the disputed amount. Gibraltar has also disputed Everest Re's level
of reserves previously ceded to and paid by Gibraltar under the Stop Loss
Agreement and claims a refund of $91,700. Should Everest Re and Gibraltar not
resolve these disputes, pursuant to the terms of the Stop Loss Agreement, each
will appoint an independent examiner to review the disputed amounts and to
determine the appropriate amount of cessions to Gibraltar, and Everest Re
will secure the $91,700 amount. If the examination process does not resolve the
disputes, the Stop Loss Agreement provides for resolution through arbitration.
In the event the cessions to Gibraltar were determined to be
excessive, Everest Re would reduce the cession to Gibraltar by such excess,
refund previous payments made by Gibraltar, if applicable, and the unused
portion of the limits of the Stop Loss Agreement would be restored. Also,
Everest Re would consider the independent examiners' findings in its ongoing
determination of appropriate reserve levels, which may lead to a corresponding
reduction in Everest Re's gross reserves, and net reserves to the extent of the
coinsurance under the Stop Loss Agreement. In the event the cessions are not
determined to be excessive, Gibraltar would be obligated to pay the disputed
amount. Accordingly, if the disputes are resolved in Gibraltar's favor, any
adverse effect on the Company's financial condition and results of operations
would likely be limited to a reduction in cash flows from operations with a
corresponding impact on investment income.
Gibraltar has disputed $39,714 ceded under a 1986 quota share reinsurance
("Direct Excess Retrocession") through which Gibraltar assumed 100% of the
liabilities related to Everest Re's former direct excess insurance operations
which ceased writing business in 1985. Gibraltar is disputing the level of
reserves established by the Company primarily reflecting reserves for asbestos
losses, but Gibraltar is not disputing its responsibility to pay the ultimate
losses in accordance with the terms of the Direct Excess Retrocession.
Management does not expect that this dispute will have a material adverse effect
on the Company's future financial condition, results of operations or cash
flows.
Written and earned premiums are comprised of the following:
<TABLE>
Years Ended December 31,
---------------------------------------------
1998 1997 1996
---------------------------------------------
<S> <C> <C> <C>
Written premium:
Direct $ 78,976 $ 75,653 $ 59,691
Assumed 966,914 999,316 984,340
Retroceded (29,291) (43,827) (13,497)
---------------------------------------------
Net written premium $ 1,016,599 $ 1,031,142 $ 1,030,534
=============================================
Earned premium
Direct $ 75,017 $ 77,784 $ 37,963
Assumed 1,022,611 1,012,168 945,698
Retroceded (29,618) (40,105) (10,050)
---------------------------------------------
Net earned premium $ 1,068,010 $ 1,049,847 $ 973,611
=============================================
</TABLE>
The amounts deducted from losses and loss adjustment expenses incurred for
retrocessional recoveries were $357,366, $109,574 and $206,032 for the years
ended December 31, 1998, 1997 and 1996, respectively.
F-15
<PAGE>
8. COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income", in 1998
which requires an enterprise to present items of other comprehensive income in a
financial statement and to display accumulated balances of other comprehensive
income in the equity section of a financial statement.
The components of comprehensive income for the periods ending December 31, 1998,
1997 and 1996 are shown in the following table:
<TABLE>
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Net Income $ 165,197 $ 154,955 $ 112,027
-----------------------------------------
Other comprehensive income,
before tax:
Foreign currency translation
adjustments (6,304) (11,891) 11,287
Unrealized gains on securites:
Unrealized gains arising
during period 58,012 111,209 (14,238)
Less: reclassification
adjustment for realized
(gains) losses included
in net income 765 (15,916) (5,695)
-----------------------------------------
Other comprehensive income,
before tax 50,943 115,234 2,744
-----------------------------------------
Income tax expense (benefit)
related to items of other
comprehensive income:
Tax expense (benefit) from
foreign currency translation (2,292) (4,167) 3,803
Tax expense (benefit) from
holding gains arising during
period 20,304 38,923 (4,576)
Tax expense (benefit) from
gains included in net income (268) 5,571 1,993
-----------------------------------------
Income tax expense (benefit)
related to items of other
comprehensive income: 17,744 40,327 1,220
Other comprehensive income,
net of tax 33,199 74,907 1,524
-----------------------------------------
Comprehensive Income $ 198,396 $ 229,862 $ 113,551
=========================================
</TABLE>
The following table shows the components of the change in accumulated other
comprehensive income for the years ending December 31, 1998 and 1997.
<TABLE>
1998 1997
----------------------------------------------------
<S> <C> <C> <C> <C>
Beginning balance of accumulated
other comprehensive income $ 152,319 $ 77,412
--------- ---------
Beginning balance of foreign
currency translation adjustments $ (8,078) $ (354)
Current period change in foreign
currency translation adjustmens (4,012) (4,012) (7,724) (7,724)
----------------------------------------------------
Ending balance of foreign currency
translation adjustments (12,090) (8,078)
-------- --------
Beginning balance of unrealized
gains on securities 160,397 77,766
Current period change in unrealized
gains on securities 37,211 37,211 82,631 82,631
----------------------------------------------------
Ending balance of unrealized gains
on securities 197,608 160,397
-------- --------
Current period change in accumulated
other comprehensive income 33,199 74,907
--------- ---------
Ending balance of accumulated other
comprehensive income $ 185,518 $ 152,319
========= =========
</TABLE>
F-16
<PAGE>
9. EMPLOYEE BENEFIT PLANS
The Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits," in 1998 which revises employers' disclosures
with respect to pension and other postretirement benefit plans. The Company
maintains both a qualified and non-qualified defined benefit pension plan for
its U.S. employees. Generally, the Company computes the benefits based on
average earnings over a period prescribed by the plans and credited length of
service. The Company has not been required to fund contributions to its
qualified defined benefit pension plan for the years ended December 31, 1998 and
1997 because the Company's qualified plan was subject to the full funding
limitation under the Internal Revenue Service guidelines. The Company's
non-qualified defined benefit pension plan, established in 1998, provides
compensating pension benefits for participants whose benefits have been
curtailed under the qualified plan due to Internal Revenue Code limitations.
Pension expense for the Company's plans for the years ended December 31, 1998,
1997 and 1996 were $1,565, $770 and $901, respectively.
The following table summarizes the status of these plans:
<TABLE>
Years Ended December 31,
------------------------
1998 1997
------------------------
<S> <C> <C>
Change in projected benefit obligation:
Benefit obligation at beginning of year $ 17,115 $ 15,131
Service cost 1,089 1,063
Interest cost 1,178 1,030
Change in accumulated benefit obligation 954 -
Affect of future salary increases 1,286 -
Actuarial gain (228) (900)
Change in discount rate 869 834
Benefits paid (168) (43)
-----------------------
Benefit obligation at end of year 22,095 17,115
-----------------------
Change in plan assets:
Fair value of plan assets at beginning
of year 17,389 14,610
Actual return on plan assets 911 2,822
Benefits paid (168) (43)
-----------------------
Fair value of plan assets at end of year 18,132 17,389
-----------------------
Funded status (3,963) 274
Unrecognized prior service cost 1,328 -
Unrecognized net loss or (gain) (913) (2,257)
-----------------------
(Accrued) pension cost $ (3,548) $(1,983)
=======================
</TABLE>
Plan assets are comprised of shares in investment trusts with approximately
64% and 36% of the underlying assets consisting of equity securities and fixed
maturities, respectively.
Net periodic pension cost included the following components:
<TABLE>
Years Ended December 31,
--------------------------------------
1998 1997 1996
--------------------------------------
<S> <C> <C> <C>
Service cost $ 2,001 $ 1,063 $ 1,102
Interest cost 1,178 1,031 948
Actual return on assets (1,560) (2,824) (1,841)
Amortization of net gain
from earlier periods (54) (10) -
Net asset gain during
period deferred for
later recognition - 1,510 692
--------------------------------------
Net periodic pension cost $ 1,565 $ 770 $ 901
======================================
</TABLE>
The weighted average discount rates used to determine the actuarial present
value of the projected benefit obligation for 1998, 1997 and 1996 are 6.75%,
7.00% and 7.25%, respectively. The rate of compensation increase used to
determine the actuarial present value of the projected benefit obligation for
1998, 1997 and 1996 is 4.50%. The expected long-term rate of return on plan
assets for 1998, 1997 and 1996 is 9.0%.
F-17
<PAGE>
The Company also maintains both qualified and non-qualified defined contribution
plans ("Savings Plan" and "Non-Qualified Savings Plan", respectively) covering
U.S. employees. Under the plans, the Company contributes up to a maximum 3% of
the participants compensation based on the contribution percentage of the
employee. The Non-Qualified Savings Plan provides compensating savings plan
benefits for participants whose benefits have been curtailed under the Savings
Plan due to Internal Revenue Code limitations. The Company's incurred expenses
related to these plans are $488, $489 and $466 for 1998, 1997 and 1996,
respectively.
In addition, the Company maintains several defined contribution pension plans
covering non-U.S. employees. Each branch office (Canada, London, Belgium, Hong
Kong and Singapore) maintains a separate plan for the non-U.S. employees working
in that location. The Company contributes various amounts based on salary, age,
and/or years of service. The contributions as a percentage of salary for the
branch offices range from 2% to 12%. The contributions are generally used to
purchase pension benefits from local insurance providers. The Company's incurred
expenses related to these plans are $348, $650 and $414 for 1998, 1997 and 1996,
respectively.
During 1998, the Company adopted a Senior Executive Change of Control
Plan and entered into a change of control agreement with the Chief Executive
Officer, which will provide benefits to certain officers in the event of a
change in control of the Company.
10. DIVIDEND RESTRICTIONS AND STATUTORY FINANCIAL INFORMATION
A. DIVIDEND RESTRICTIONS
Delaware law provides that an insurance company which is either an insurance
holding company or a member of an insurance holding system and is domiciled in
the state shall not pay dividends without giving prior notice to the Insurance
Commissioner of Delaware and may not pay dividends without the approval of the
Insurance Commissioner if the value of the proposed dividend, together with all
other dividends and distributions made in the preceding twelve months, exceeds
the greater of (1) 10% of statutory surplus or (2) net income, not including
realized capital gains, each as reported in the prior year's statutory annual
statement. In addition, no dividend may be paid in excess of unassigned earned
surplus. At December 31, 1998, Everest Re had $179,176 available for payment of
dividends in 1999 without prior regulatory approval.
B. STATUTORY FINANCIAL INFORMATION
Everest Re prepares its statutory financial statements in accordance with
accounting practices prescribed or permitted by the National Association of
Insurance Commissioners ("NAIC") and the Delaware Insurance Department.
Prescribed statutory accounting practices are set forth in a variety of
publications of the NAIC, as well as state laws, regulations, and general
administrative rules. The capital and statutory surplus of Everest Re was
$1,059,429 and $908,766 at December 31, 1998 and 1997, respectively. The
statutory net income of Everest Re was $176,672, $193,057 and $88,517 for the
years ended December 31, 1998, 1997 and 1996, respectively.
11. CONTINGENCIES
Everest Re 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. Everest Re's asbestos
claims typically involve liability or potential liability for bodily injury from
exposure to asbestos or for property damage resulting from asbestos or products
containing asbestos. Everest Re'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.
Everest Re's reserves include an estimate of Everest Re'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 Everest Re'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) historical data concerning asbestos
and environmental losses, which is more limited than historical
F-18
<PAGE>
information on other types of casualty claims; (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.
Although these complications have become less severe in recent years, management
believes that these factors continue to render reserves for asbestos and
environmental losses significantly less subject to traditional actuarial methods
than are reserves on other types of losses. Given these uncertainties,
management believes that no meaningful range for such ultimate losses can be
established. Everest Re establishes reserves to the extent that, in the judgment
of management, the facts and prevailing law reflect an exposure for Everest Re
or its ceding company. 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 (see
Note 7).
The following table shows the development of prior year asbestos and
environmental reserves on both a gross and net of retrocessional basis for the
years ended:
<TABLE>
1998 1997 1996
-----------------------------------------
<S> <C> <C> <C>
Gross basis
Beginning of reserves $ 446,132 $ 423,336 $ 428,495
Incurred losses 249,597 83,724 30,028
Paid losses (34,936) (60,928) (35,187)
-----------------------------------------
End of period reserves $ 660,793 $ 446,132 $ 423,336
=========================================
Net basis
Beginning of reserves $ 212,376 $ 199,557 $ 185,981
Incurred losses (1) 15,385 3,490 -
Paid losses (2) 35,781 9,329 13,576
-----------------------------------------
End of period reserves $ 263,542 $ 212,376 $ 199,557
=========================================
</TABLE>
- ---------------------
(1) Net of $138,467, $41,178 and $24,196 ceded in 1998, 1997 and 1996,
respectively, under the incurred loss reimbursement feature of the Stop Loss
Agreement.
(2) Net of $39,667, $22,610 and $34,451 ceded paid losses in 1998, 1997 and
1996, respectively, under the Stop Loss Agreement.
At December 31, 1998, the gross reserves for asbestos and environmental losses
were comprised of $137,560 representing case reserves reported by ceding
companies, $67,863 representing additional case reserves established by Everest
Re on assumed reinsurance claims, $40,905 representing case reserves established
by Everest Re on direct excess insurance claims and $414,465 representing IBNR
reserves.
To the extent loss reserves for claims incurred on June 30, 1995 (December 31,
1994 for catastrophe losses) or prior on assumed reinsurance needed to be
increased, and were not ceded to unaffiliated reinsurers under existing
reinsurance agreements, Everest Re would be entitled to certain reimbursements
under the Stop Loss Agreement (see Note 7). 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, Everest Re would
be entitled to 100% protection under a 100% quota share retrocession entered
into with Gibraltar in 1986. While there can be no assurance that reserves for
and losses from these claims would not increase in the future, management
believes that Everest Re's existing reserves and ceded reinsurance arrangements
and reimbursements available under the Stop Loss Agreement lessen the
probability that such increases, if any, would have a material effect on Everest
Re's financial condition, results of operations or cash flows.
Everest Re is also named in various legal proceedings incidental to its normal
business activities. In the opinion of Everest Re, none of these proceedings
would have a material adverse effect upon the financial condition, results of
operations or cash flows of Everest Re.
The Prudential sells annuities which are purchased by property and casualty
insurance companies to settle certain types of claim liabilities. In 1993 and
prior, Everest Re, 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, Everest Re
would be liable if The Prudential were unable to make the annuity payments. The
estimated cost to replace all such annuities for which Everest Re was
contingently liable at December 31, 1998 and 1997 was $143,204 and $140,478,
respectively.
F-19
<PAGE>
Everest Re has purchased annuities from an unaffiliated life insurance company
to settle certain claim liabilities of Everest Re. Should the life insurance
company become unable to make the annuity payments, Everest Re would be liable.
The estimated cost to replace such annuities at December 31, 1998 and 1997 was
$10,790 and $9,968, respectively.
12. STOCK BASED COMPENSATION PLANS
The Company has in place its 1995 Stock Incentive Plan for key employees (the
`1995 Employee Plan") and its 1995 Stock Option Plan for Non-Employee Directors
(the "1995 Director Plan") and applies APB Opinion 25 and related
interpretations in accounting for these plans. Accordingly, no compensation
expense has been recognized in the accompanying financial statements in respect
of stock options granted under these plans.
Under the 1995 Employee Plan, a total of 3,949,000 shares of common stock have
been authorized to be granted as stock options, stock awards or restricted stock
awards to officers and key employees of the Company. At December 31, 1998, there
were 1,800,051 remaining shares available to be granted. Under the 1995 Director
Plan, a total of 50,000 shares of common stock have been authorized to be
granted as stock options to non-employee directors of the Company. At December
31, 1998, there were 38,145 remaining shares available to be granted. Options
granted under the 1995 Employee Plan vest at 20% per year over five years and
options granted under the 1995 Director Plan vest at 50% per year over two
years. All options are exercisable at fair market value of the stock at the date
of grant and expire ten years after the date of grant. Restricted stock granted
under the 1995 Employee Plan vests, beginning one year after the date of grant,
in equal annual installments over five years.
A summary of the status of the Company's stock options as of December 31,
1998, 1997 and 1996 and changes during the years then ended is presented
below:
<TABLE>
1998 1997 1996
----------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning of year 999,020 $ 26.39 732,570 $ 19.72 459,700 $ 16.93
Granted 429,750 37.57 339,250 39.13 286,270 24.10
Exercised 34,436 17.74 11,100 16.75 3,800 16.75
Forfeited 87,235 25.58 61,700 19.00 9,600 18.25
--------- --------- ---------
Outstanding, end of
year 1,307,099 $ 30.35 999,020 $ 26.39 $ 19.72
========= =========
Options exercisable at
year-end 365,189 215,313 91,496
========= ========= =========
Weighted-average fair
value of options
granted during the
year $ 17.21 $ 18.37 $ 11.55
============== ============== ==============
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
Options
Options Outstanding Exercisable
--------------------------------------------------------------------------------------
Weighted-
Number Average Weighted- Number Weighted-
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$16.75 to $20.94 324,600 6.5 $ 17.01 196,400 $ 17.01
$22.56 to $26.63 242,399 7.6 24.13 104,939 24.07
$33.00 to $39.16 740,100 9.3 38.23 63,850 39.13
----------- -------------------------------------------------
1,307,099 8.3 $ 30.35 365,189 $ 22.90
=========== =================================================
</TABLE>
Since its 1995 initial public offering, the Company has issued to certain key
employees of the Company 58,100 restricted shares of stock. Upon issuance of
restricted shares, unearned compensation is charged to stockholders' equity
for the cost of the restricted stock and is amortized over the vesting
period. The amount of earned compensation recognized as expense with
respect to restricted stock awards was $99, $203 and $318 for 1998,
1997 and 1996, respectively. In 1998, 10,460 restricted shares were
forfeited, while 6,400 restricted shares were forfeited in 1997. The
F-20
<PAGE>
Company acquired 1,680 shares and 30,887 shares of its common stock at a cost of
$58 and $846 in 1998 and 1997 respectively, and, pursuant to the 1995 Employee
Plan, 306,396 shares of the common stock at a cost of $7,220 in 1996, primarily
from the Chief Executive Officer, to fund required withholding taxes arising
from a prior period stock award. Also, the Company recorded contributions to
paid in capital representing the tax benefits attributable to the difference
between the amount of compensation expense deductible for tax purposes with
respect to the stock awards and the amount of such compensation expense
reflected in the Company's financial statements.
Had the compensation cost for the Company's stock based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
1998 1997 1996
-------------------------------------
<S> <C> <C> <C> <C>
Net Income As reported $ 165,197 $ 154,955 $ 112,027
Pro forma $ 162,768 $ 153,492 $ 110,850
Earnings per share - basic As reported $ 3.28 $ 3.07 $ 2.22
Pro forma $ 3.23 $ 3.04 $ 2.19
Earnings per share - diluted As reported $ 3.26 $ 3.05 $ 2.21
Pro forma $ 3.21 $ 3.02 $ 2.19
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions: (i) dividend
yields ranging from 0.5% to 0.7%, (ii) expected volatility ranging from 32.86%
to 34.79%, (iii) risk-free interest rates ranging from a low of 4.71% to a high
of 7.01%, and (iv) expected life of 7.5 years.
In addition to the 1995 Employee Plan and 1995 Director Plan, the Company
transferred 4,537 and 3,685 shares of treasury stock having an aggregate value
of $179 and $131 to its non-employee directors as compensation for their service
as directors in 1998 and 1997, respectively.
13. GEOGRAPHIC INFORMATION
Everest Re's principal business is reinsuring property and casualty risks of
domestic and foreign insurance companies. The following table provides summary
financial information by geographic region for the periods disclosed.
<TABLE>
Years Ended December 31,
---------------------------------------------
1998 1997 1996
---------------------------------------------
<S> <C> <C> <C>
Premiums earned:
Domestic $ 737,384 $ 696,645 $ 655,097
International 330,626 353,202 318,514
---------------------------------------------
Total premiums earned $ 1,068,010 $ 1,049,847 $ 973,611
=============================================
Net income (loss):
Domestic $ 170,434 $ 115,728 $ 70,978
International (5,237) 39,227 41,049
---------------------------------------------
Total net income $ 165,197 $ 154,955 $ 112,027
=============================================
December 31,
----------------------------
1998 1997
----------------------------
Total identifiable assets:
Domestic $ 5,173,103 $ 4,714,134
International 823,625 823,886
----------------------------
Total identifiable assets $ 5,996,728 $ 5,538,020
============================
</TABLE>
The basis for "International" is the geographic area of the Company's internal
marketing units.
Approximately 17.0%, 19.3% and 15.9% of the Company's gross premiums written
in 1998, 1997 and 1996, respectively, were sourced through one intermediary.
F-21
<PAGE>
14. SUBSEQUENT EVENTS
On February 9, 1999 and March 11, 1999, Gibraltar disputed $39,714 and $154,700
with respect to cessions under the Direct Excess Retrocession and the Stop Loss
Agreement, respectively. Management is pursuing contractual dispute resolution
mechanisms with respect to these disputes. (See Note 7)
15. UNAUDITED QUARTERLY FINANCIAL DATA
Summarized quarterly financial data were as follows:
<TABLE>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
---------------------------------------------------
<S> <C> <C> <C> <C>
1998 OPERATING DATA:
Gross written premium $ 253,011 $ 267,452 $ 272,408 $ 253,019
Net written premium 242,694 255,599 257,985 260,321
Earned premium 241,336 264,726 265,242 296,707
Net investment income 60,013 62,525 60,667 61,704
Net realized capital gain (loss) (17) 2,523 989 (4,260)
Incurred losses and LAE 178,592 195,552 189,905 214,355
Underwriting expenses 72,261 77,861 83,830 90,168
Underwriting loss (9,517) (8,687) (8,493) (7,816)
Net income (loss) $ 39,801 $ 43,544 $ 42,125 $ 39,728
===================================================
Weighted average basic shares
outstanding (000's) 50,481 50,480 50,465 50,075
Net income per common
share - basic $ 0.79 $ 0.86 $ 0.83 $ 0.79
Weighted average diluted shares
outstanding (000's) 50,800 50,799 50,748 50,317
Net income per common
share - diluted $ 0.78 $ 0.86 $ 0.83 $ 0.79
1997 OPERATING DATA:
Gross written premium $ 246,011 $ 253,233 $ 285,796 $ 289,928
Net written premium 233,811 246,072 275,915 275,344
Earned premium 230,443 247,515 271,520 300,368
Net investment income 54,042 57,368 57,917 59,219
Net realized capital gain (loss) (199) 13,410 2,722 (17)
Incurred losses and LAE 166,841 180,191 204,234 214,155
Underwriting expenses 74,754 78,237 76,677 96,799
Underwriting loss (11,152) (10,913) (9,391) (10,586)
Net income (loss) $ 34,464 $ 44,338 $ 38,432 $ 37,721
===================================================
Weighted average basic shares
outstanding (000's) 50,490 50,469 50,466 50,479
Net income per common
share - basic $ 0.68 $ 0.88 $ 0.76 $ 0.75
Weighted average diluted shares
outstanding (000's) 50,725 50,738 50,791 50,807
Net income per common
share - diluted $ 0.68 $ 0.87 $ 0.76 $ 0.74
</TABLE>
F-22
<PAGE>
<TABLE>
<CAPTION>
EVEREST REINSURANCE HOLDINGS, INC.
SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1998
COLUMN A COLUMN B COLUMN C COLUMN D
- --------------------------------------------------------------------------------
Amount
Shown in
Market Balance
(Dollars in thousands) Cost Value Sheet
--------------------------------------------
<S> <C> <C> <C>
Fixed maturities-available for
sale Bonds:
U.S. Government and government
agencies $ 151,976 $ 159,616 $ 159,616
State, municipalities and
political subdivisions 1,982,490 2,116,431 2,116,431
Foreign government securities 241,310 271,054 271,054
Foreign corporate securities 246,540 263,874 263,874
Public Utilities 63,120 67,490 67,490
All other corporate bonds 766,800 802,739 802,739
Mortgage pass-through
securities 388,843 408,946 408,946
Redeemable preferred stock 9,972 10,425 10,425
--------------------------------------------
Total fixed maturities-available
for sale 3,851,051 4,100,575 4,100,575
Equity securities 91,787 146,274 146,274
Short-term investments 34,846 34,846 34,846
Other invested assets 4,736 4,736 4,736
Cash 39,326 39,326 39,326
--------------------------------------------
Total investments and cash $ 4,021,746 $ 4,325,757 $ 4,325,757
============================================
</TABLE>
S-1
<PAGE>
<TABLE>
<CAPTION>
EVEREST REINSURANCE HOLDINGS, INC.
SCHEDULE II -
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED BALANCE SHEET
December 31,
--------------------------------------
(Dollars in thousands, except
par value per share) 1998 1997
--------------------------------------
<S> <C> <C>
ASSETS
Cash - -
Investment in subsidiaries, at
equity in the underlying net
assets $ 1,460,084 $ 1,301,913
Receivable from affliate 18,884 5,731
Current tax receivable - -
Deferred tax asset 1,904 1,688
--------------------------------------
Total assets $ 1,480,872 $ 1,309,332
======================================
LIABILITIES
Other liabilities $ 1,668 $ 1,849
--------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock, par value:
$0.01; 50 million shares
authorized; no shares issued
and outstanding (Includes 0.2
million shares of Series A
Junior Preferred Stock) - -
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
Paid-in capital 390,559 389,876
Unearned compensation (240) (514)
Accumulated other comprehensive
income, net of deferred taxes
($99.8 million in 1998 and $81.9
million in 1997) 185,518 152,319
Treasury stock, at cost; 0.9
million shares in 1998 and
0.3 million shares in 1997 (25,642) (8,086)
Retained earnings 928,500 773,380
--------------------------------------
Total stockholders' equity 1,479,204 1,307,483
--------------------------------------
Total liabilities and
stockholders' equity $ 1,480,872 $ 1,309,332
======================================
</TABLE>
See notes to consolidated financial statements.
S-2
<PAGE>
<TABLE>
<CAPTION>
EVEREST REINSURANCE HOLDINGS, INC.
SCHEDULE II -
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED STATEMENT OF OPERATIONS
For Years Ended December 31,
-------------------------------------------------
(Dollars in thousands) 1998 1997 1996
-------------------------------------------------
<S> <C> <C> <C>
REVENUES
Dividends received from
subsidiary $ 43,125 $ 9,270 $ 17,924
Net Investment Income 521 241 55
Equity in undistributed
net income of subsidiary 122,197 146,970 95,242
-------------------------------------------------
Total revenues 165,843 156,481 113,221
-------------------------------------------------
EXPENSES
Other expenses 862 1,184 1,807
-------------------------------------------------
Income before taxes 164,981 155,297 111,414
Income tax (benefit) (216) 342 (613)
-------------------------------------------------
Net income $ 165,197 $ 154,955 $ 112,027
=================================================
</TABLE>
See notes to consolidated financial statements.
S-3
<PAGE>
<TABLE>
<CAPTION>
EVEREST REINSURANCE HOLDINGS, INC.
SCHEDULE II -
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED STATEMENT OF CASH FLOWS
For Years Ended December 31,
---------------------------------------------
(Dollars in thousands) 1998 1997 1996
---------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $ 165,197 $ 154,955 $ 112,027
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Equity in undistributed
(earnings) loss of
subsidiaries (122,197) (146,970) (95,242)
(Decrease) in other
liabilities (181) (296) (364)
Decrease (increase) in
current tax receivable - 2,918 (972)
Decrease (increase) in
deferred tax asset (216) - -
(Increase) in receivable
from affliates (13,154) (2,300) (3,431)
Non-cash compensation 273 203 407
---------------------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 29,722 8,510 12,425
CASH FLOWS FROM INVESTING
ACTIVITIES
Additional investment in
subsidiaries (2,772) (248) -
CASH FLOWS FROM FINANCING
ACTIVITIES
Acquisition of treasury
stock net of reissuances (17,498) (822) (7,220)
Common stock issued during
the period 625 636 420
Dividends paid to
stockholders (10,077) (8,076) (6,067)
---------------------------------------------
Net cash (used in)
financing activities (26,950) (8,262) (12,867)
Net (decrease) in cash - - (442)
Cash, begining of period - - 442
---------------------------------------------
Cash, end of period $ - $ - $ -
=============================================
SUPPLEMENTAL CASH FLOW
INFORMATION
NON-CASH OPERATING
TRANSACTION:
Dividends received from
subsidiary in the form
of forgiveness of
liabilities $ 967 $ 1,536 $ 1,767
</TABLE>
See notes to consolidated financial statements.
S-4
<PAGE>
<TABLE>
<CAPTION>
EVEREST REINSURANCE HOLDINGS, INC.
SCHEDULE III -
SUPPLEMENTARY INSURANCE INFORMATION
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
- ------------------------------------------------------------------------------------------------------------------------------------
RESERVE FOR INCURRED AMORTIZATION
DEFERRED LOSSES AND UNEARNED NET LOSS AND LOSS OF DEFERRED OTHER
GEOGRAPHIC ACQUISITION LOSS ADJUSTMENT PREMIUM EARNED INVESTMENT ADJUSTMENT ACQUISITION OPERATING WRITTEN
AREA COSTS EXPENSES RESERVES PREMIUM INCOME EXPENSES COSTS EXPENSES PREMIUM
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1998
Domestic $ 50,476 $3,242,579 $ 217,982 $ 737,384 $ 194,607 $ 497,113 $ 182,918 $ 38,287 $ 713,022
International 20,277 557,462 66,658 330,626 50,302 281,291 86,242 16,673 303,577
------------------------------------------------------------------------------------------------------------------
Total $ 70,753 $3,800,041 $ 284,640 $1,068,010 $ 244,909 $ 778,404 $ 269,160 $ 54,960 $1,016,599
==================================================================================================================
December 31, 1997
Domestic $ 56,747 $2,914,616 $ 244,335 $ 696,645 $ 175,053 $ 514,021 $ 185,885 $ 38,267 $ 695,211
International 25,585 523,202 93,048 353,202 53,493 251,400 84,720 17,596 335,931
------------------------------------------------------------------------------------------------------------------
Total $ 82,332 $3,437,818 $ 337,383 $1,049,847 $ 228,546 $ 765,421 $ 270,605 $ 55,863 $1,031,142
==================================================================================================================
December 31, 1996
Domestic $ 655,097 $ 143,301 $ 508,247 $ 175,241 $ 43,738 $ 694,053
International 318,514 48,600 207,786 77,687 12,802 336,481
------------------------------------------------------------------------
Total $ 973,611 $ 191,901 $ 716,033 $ 252,928 $ 56,540 $1,030,534
========================================================================
</TABLE>
S-5
<PAGE>
<TABLE>
<CAPTION>
EVEREST REINSURANCE HOLDINGS, INC.
SCHEDULE IV - REINSURANCE
Column A Column B Column C Column D Column E Column F
- --------------------------------------------------------------------------------------------------------
GROSS CEDED TO ASSUMED FROM NET ASSUMED TO
(Dollars in thousands) AMOUNT OTHER COMPANIES OTHER COMPANIES AMOUNT NET
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DECEMBER 31, 1998
Total property and
liability insurance
earned premium $ 75,017 $ 29,618 $ 1,022,611 $ 1,068,010 95.7%
DECEMBER 31, 1997
Total property and
liability insurance
earned premium $ 77,784 $ 40,105 $ 1,012,168 $ 1,049,847 96.4%
DECEMBER 31, 1996
Total property and
liability insurance
earned premium $ 37,963 $ 10,050 $ 945,698 $ 973,611 97.1%
</TABLE>
S-6
<PAGE>
INDEX TO EXHIBITS
EXHIBIT NO.
- -----------
3.1 Certificate of Incorporation of Everest Reinsurance Holdings,
Inc., incorporated herein by reference to Exhibit 4.1 to the
Registration Statement on Form S-8 (No. 333-05771)
3.2 By-Laws (as amended and restated) of Everest Reinsurance Holdings,
Inc., incorporated herein by reference to Exhibit 3.2 to the Annual
Report on Form 10-K for the year ended December 31, 1997 (the "1997
10-K")
4.1 Rights Agreement, dated as of September 24, 1998, between Everest
Reinsurance Holdings, Inc. and First Chicago Trust Company of New
York, as Rights Agent. The Rights Agreement includes as exhibits
thereto the form of 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 consummation of which would result in the beneficial
ownership by a person or group of 15% or more of the outstanding
shares of Common Stock. The Rights Agreement is incorporated
herein by reference to Exhibit 4.1 to the Form 8-K filed on
September 28, 1998
*10.1 Everest Reinsurance Holdings, Inc. Annual Incentive Plan effective
January 1, 1999, filed herewith
10.2 Stop Loss Agreement entered into between Everest Reinsurance
Company and Gibraltar Casualty Company, incorporated herein by
reference to Exhibit 10.6 to the Registration Statement on Form S-1
(No. 33-71652)
10.3 Everest Reinsurance Holdings, Inc. Amended 1995 Stock Incentive
Plan, incorporated herein by reference to Exhibit 10.3 to the
Annual Report on Form 10-K for the year ended December 31, 1995
(the "1995 10-K")
*10.4 Everest Reinsurance Holdings, Inc. Amended Annual Incentive
Plan, incorporated herein by reference to Exhibit 10.4 to the 1995
10-K
10.5 Sublease, effective as of February 1, 1997 between The Prudential
Insurance Company of America and Everest Reinsurance Company,
incorporated herein by reference to Exhibit 10.5 to the 1996 10-K
*10.6 Everest Reinsurance Holdings, Inc. 1995 Stock Option Plan for
Non-Employee Directors, incorporated herein by reference to Exhibit
4.3 to the Registration Statement on Form S-8 (No. 333-05771)
*10.7 Amended and Restated Employment Agreement between Everest
Reinsurance Company and Joseph V. Taranto, incorporated herein by
reference to Exhibit 10.50 to the Registration Statement on Form
S-1 (No. 33-71652)
*10.8 Resolution adopted by the Compensation Committee of Everest
Reinsurance Holdings, Inc. on February 24, 1997 establishing
a Chief Executive Officer's Bonus Plan incorporated herein by
reference to Exhibit 10.8 to the 1997 10-K
10.9 Standby Capital Contribution Agreement between Everest Reinsurance
Holdings, Inc. and Everest Reinsurance Company, incorporated herein
by reference to Exhibit 10.69 to the Registration Statement on Form
S-1 (No. 33-71652)
10.10 Indemnification Agreement between PRUCO, Inc. and Everest
Reinsurance Holdings, Inc., incorporated herein by reference to
Exhibit 10.70 to the Registration Statement on Form S-1 (No.
33-71652)
10.11 Guarantee made by The Prudential Insurance Company of America in
favor of Everest Reinsurance Company, incorporated herein by
reference to Exhibit 10.71 to the Registration Statement on Form
S-1 (No. 33-71652)
10.12 Guarantee made by The Prudential Insurance Company of America in
favor of Everest Reinsurance Holdings, Inc., incorporated herein by
reference to Exhibit 10.72 to the Registration Statement on Form
S-1 (No. 33-71652)
10.13 1995 Service Contract between Everest Reinsurance Company and
Gibraltar Casualty Company, incorporated herein by reference to
Exhibit 10.73 to the Registration Statement on Form S-1 (No.
33-71652)
E-1
<PAGE>
10.14 Separation Agreement among The Prudential Insurance Company of
America, Gibraltar Casualty Company, Everest Reinsurance Company,
PRUCO, Inc., and Everest Reinsurance Holdings, Inc., incorporated
herein by reference to Exhibit 10.2 to the Registration Statement
on Form S-1 (No. 33-71652)
*10.15 Form of Non-Qualified Stock Option Award Agreement to be entered
into between Everest Reinsurance Holdings, Inc. and participants
in the 1995 Stock Incentive Plan, incorporated herein by reference
to Exhibit 10.15 to the 1995 10-K
*10.16 Form of Restricted Stock Agreement to be entered into between
Everest Reinsurance Holdings, Inc. and participants in the 1995
Stock Incentive Plan, incorporated herein by reference to Exhibit
10.16 to the 1995 10-K
*10.17 Form of Stock Option Agreement (Version 1) to be entered into
between Everest Reinsurance Holdings, Inc. and participants in the
1995 Stock Option Plan for Non-Employee Directors, incorporated
herein by reference to Exhibit 10.17 to the 1995 10-K
*10.18 Form of Stock Option Agreement (Version 2) to be entered into
between Everest Reinsurance Holdings, Inc. and participants in
the 1995 Stock Option Plan for Non-Employee Directors, incorporated
herein by reference to Exhibit 10.18 to the 1995 10-K
10.19 Credit agreement between Everest Reinsurance Holdings, Inc. and
First Union National Bank dated June 16, 1997 providing for a $50
million revolving credit facility, incorporated herein by reference
to Exhibit 10.19 to the Form 8-K filed on June 24, 1997
*10.20 Deferred Compensation Plan, as amended, for certain United
States employees of Everest Reinsurance Holdings, Inc. and its
participating subsidiaries filed herewith.
*10.21 Employment Agreement with Joseph V. Taranto executed on July 15,
1998, incorporated herein by reference to Exhibit 10.21 to the
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998
(the "second quarter 1998 10-Q")
*10.22 Change of Control Agreement with Joseph V. Taranto effective
July 15, 1998, incorporated herein by reference to Exhibit 10.22 to
the second quarter 1998 10-Q
10.23 Credit Line Extension dated May 20, 1998 between Everest
Reinsurance Holdings, Inc. and First Union National Bank,
incorporated herein by reference to Exhibit 10.23 to the second
quarter 1998 10-Q
*10.24 Senior Executive Change of Control Plan, incorporated herein by
reference to Exhibit 10.24 to the Quarterly Report on Form 10-Q for
the quarter ended September 30, 1998
11.1 Statement regarding computation of per share earnings filed
herewith
21.1 Subsidiaries of the registrant filed herewith
23.1 Consent of PricewaterhouseCoopers LLP filed herewith
27.1 Financial Data Schedule filed herewith
- --------------------------
* Management contract or compensatory plan or arrangement.
E-2
<PAGE>
EXHIBIT 10.1
ADOPTED BY BOARD OF DIRECTORS DECEMBER 10, 1998 (EFFECTIVE JANUARY 1, 1999)
EVEREST REINSURANCE HOLDINGS, INC.
ANNUAL INCENTIVE PLAN
1. PURPOSE
-------
The purpose of the Everest Reinsurance Holdings, Inc. Annual Incentive
Plan (the "Plan") is to provide incentive for employees who are in a position to
contribute materially to the success of the Company and its Subsidiaries; to
reward their accomplishments; to motivate future accomplishments; and to aid in
attracting and retaining employees of the caliber necessary for the continued
success of the Company and its Subsidiaries.
2. DEFINITIONS
-----------
The following terms as used herein shall have the meaning specified:
(a) Amount Available" means the maximum aggregate amount that may be
awarded for any year as determined in accordance with paragraph 3.
(b) "Award" means an incentive bonus paid pursuant to the Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Cause" means (i) a felony conviction of a Participant; (ii) the
commission by a Participant of an act of fraud or embezzlement against the
Company and/or a Subsidiary; (iii) willful misconduct or gross negligence
materially detrimental to the Company and/or a Subsidiary; (iv) the
Participant's continued failure to implement reasonable requests or directions
arising from actions of the Board after thirty (30) days written notice to the
Participant; (v) the Participant's wrongful dissemination or use of confidential
or proprietary information; (vi) the intentional and habitual neglect by the
Participant of his or her duties to the Company and/or a Subsidiary; (vii) any
other reasons consistent with the Company's and/or a Subsidiary's policies and
procedures regarding dismissals as they are adopted and implemented from time to
time.
(e) "Committee" means the Compensation Committee of the Board.
(f) "Company" means Everest Reinsurance Holdings, Inc. or any successor
corporation.
(g) "Employee" means employees of the Company and its Subsidiaries.
(h) "Participant" means an Employee selected by the
Committee to participate in the Plan. If an Employee
is governed by an individual employment agreement, such an Employee
<PAGE>
may be a Participant in the Plan to the extent the terms of such
agreement do not supersede this Plan.
(i) "Performance Goals" means any financial, statistical or other
measures selected by the Committee to measure Company and/or Subsidiary
performance.
(j) "Subsidiary" means any corporation in which the Company, directly
or indirectly, controls 50% or more of the total combined voting power of all
classes of such corporation's stock.
3. AWARDS
------
(a) Persons eligible for Awards shall consist of Employees who hold
positions of significant responsibility and/or whose performance or potential
contribution, in the judgment of the Committee, will contribute materially to
the success of the Company and/or its Subsidiaries.
(b) The Committee shall have absolute discretion to determine the
Employees who are eligible to receive Awards under the Plan for any year and to
determine the amount of such Awards based on such criteria and factors as the
Committee in its sole discretion may determine. Recommendations as to the
Employees who are to receive Awards under the Plan for any year and the amount
of such Awards shall be made to the Committee by the Chief Executive Officer of
the Company. The fact that an Employee is eligible for an Award shall not mean,
however, that such Employee will necessarily receive or be entitled to receive
an Award. The fact that an Employee received an Award in any given year does not
mean that the Employee will receive or be entitled to receive an Award in any
subsequent year.
(c) As to any year, no Awards may be paid except out of the Amount
Available for such year. The Amount Available will be determined annually by the
Committee based upon Performance Goals established by the Committee within
ninety (90) days of the beginning of each year for which the Performance Goals
are being established. The Committee shall have the authority at any time to
make adjustments to the Performance Goals which the Committee deems necessary or
desirable. Nothing contained herein shall require the Committee to establish any
Amount Available for any year in which the Committee in its sole discretion
determines that no Awards will be made pursuant to this Plan.
(d) As soon as practicable following each year while the Plan is in
effect, the Committee shall determine the extent to which the Performance Goals
for the year were achieved, the Amount Available and the Awards payable to each
Participant. Awards will be paid to each Participant in cash following such
determination by the Committee and no later than ninety (90) days following the
close of the year with respect to which the Awards are made, unless a
Participant has elected to defer all or a portion of such payment pursuant to
the Company's or a Subsidiary's Deferred Compensation Plan, in which event,
payment of the amount deferred will be made in accordance with the terms of the
Deferred Compensation Plan.
2
<PAGE>
(e) No Award will be paid to any Participant who is not an employee of
the Company on the last day of the year, except that if during the last eight
(8) months of the year, the Participant retires, dies, or is involuntarily
terminated other than for Cause, the Participant or his estate may be awarded a
prorated Award as and to the extent determined by the Committee in its sole
discretion. If a Participant is on disability for more than four (4) months of
the year, the Participant will be entitled to a prorated Award. Participants who
resign voluntarily after the end of the year, but before Award payments are
actually made, will be eligible for an Award as and to the extent determined by
the Committee in its sole discretion. The provisions of this subparagraph are
subject to the terms of any written agreement between a Participant and the
Company.
4. ADMINISTRATION
--------------
(a) The Plan shall be administered by the Committee. The Committee
shall have all discretion and authority necessary or appropriate to administer
the Plan and to interpret the provisions of the Plan. Any determination,
decision or action of the Committee in connection with the construction,
interpretation, administration or application of the Plan shall be final,
conclusive and binding upon all persons.
(b) With the exception of actions and determinations relating to the
Chief Executive Officer and the four most highly compensated officers, the
Committee may delegate to the officers or employees of the Company and/or a
Subsidiary the authority to execute and deliver such instruments and documents,
to do all such acts and things, and to take all such other steps deemed
necessary, advisable or convenient for the effective administration of the Plan
in accordance with its terms and purpose; provided, however, all Awards will be
subject to the final approval of the Committee.
(c) Neither the Company, its Subsidiaries, nor any member of the Board
or of the Committee, nor any other person participating in any determination of
any question under the Plan, or in the interpretation, administration or
application of the Plan, shall have any liability to any party for any good
faith action taken or not taken under the Plan.
5. MISCELLANEOUS
-------------
(a) NONASSIGNABILITY. No Award shall be assignable or transferable
(including pursuant to a pledge or security interest) other than by will or by
laws of descent and distribution.
(b) WITHHOLDING TAXES. Whenever payments under the Plan are to be made,
the Company and/or the Subsidiary shall withhold therefrom an amount sufficient
to satisfy any applicable governmental withholding tax requirements related
thereto.
(c) AMENDMENT OR TERMINATION OF THE PLAN. The Committee may at any time
and without notice to any Employee suspend, discontinue, revise, amend or
terminate the Plan.
3
<PAGE>
(d) NON-UNIFORM DETERMINATIONS. The Committee's determinations under
the Plan need not be uniform and may be made by it selectively among persons who
receive, or are eligible to receive, Awards under the Plan, whether or not such
persons are similarly situated. Without limiting the generality of the
foregoing, the Committee shall be entitled, among other things, to make
non-uniform and selective determinations and to establish non-uniform and
selective Performance Goals.
(e) OTHER PAYMENTS OR AWARDS. Nothing contained in the Plan shall be
deemed in any way to limit or restrict the Company, its Subsidiaries, or the
Committee from making any award or payment to any person under any other plan,
arrangement or understanding, whether now existing or hereafter in effect.
(f) PAYMENTS TO OTHER PERSONS. If payments are legally required to be
made to any person other than the person to whom any amount is available under
the Plan, payments shall be made accordingly. Any such payment shall be a
complete discharge of the liability of the Company, its Subsidiaries, and the
Committee.
(g) UNFUNDED PLAN. A Participant shall have no interest in any fund or
specified asset of the Company or a Subsidiary. Nothing contained in the Plan,
and no action taken pursuant to its provisions, shall create or be construed to
create a trust of any kind, or a fiduciary relationship between the Company or
its Subsidiaries and any Participant, beneficiary, legal representative or any
other person. To the extent that any person acquires a right to receive payments
from the Company and its Subsidiaries under the Plan, such right shall be no
greater than the right of an unsecured general creditor of the Company and its
Subsidiaries. All payments to be made hereunder shall be paid from the general
funds of the Company and its Subsidiaries and no special or separate fund shall
be established and no segregation of assets shall be made to assure payment of
such amounts. The Plan is not intended to be an employee benefit plan subject to
the Employee Retirement Income Security Act of 1974, as amended.
(h) NO RIGHT TO EMPLOYMENT. Nothing contained in this Plan shall confer
upon any Participant any right to continue in the employ or other service of the
Company or a Subsidiary, or constitute any contract or limit in any way the
right of the Company or a Subsidiary to change such person's compensation or
other benefits or to terminate the employment or other service of such person
with or without cause.
(i) INVALIDITY. If any term or provision contained herein shall to any
extent be invalid or unenforceable, such term or provision shall be reformed so
that it is valid, and such invalidity or unenforceability shall not affect any
other provision or part hereof.
(k) APPLICABLE LAW. The Plan shall be governed by the laws of the State
of Delaware as determined without regard to the conflict of law principles
thereof.
(l) SUCCESSORS. The obligations of the Company and its Subsidiaries
under this Plan shall be binding upon any organization that shall succeed to all
or substantially all of the Company's or a Subsidiary's assets.
4
<PAGE>
EXHIBIT 10.20
Adopted: December 10, 1997
Amended: December 10, 1998
- --------------------------------------------------------------------------------
DEFERRED COMPENSATION PLAN
FOR UNITED STATES EMPLOYEES
- --------------------------------------------------------------------------------
For Certain United States Employees of Everest Reinsurance Holdings, Inc.
and its participating subsidiaries
- --------------------------------------------------------------------------------
PURPOSE The Deferred Compensation Plan ("Plan") permits
deferral of all or part of the cash bonuses
awarded under any bonus plan or incentive
compensation plan to a specified date or
occurrence.
ELIGIBLE U.S. Employees of Everest Reinsurance Holdings,
PARTICIPANTS Inc. and its participating subsidiaries at Vice
President through Chief Executive Officer rank
who have a minimum annual salary of $150,000
in 1997 and each year thereafter increasing the
minimum salary by 3% of the previous year's
threshold amount.
ELIGIBLE All cash bonuses awarded to Eligible
COMPENSATION Participants of the Plan under any bonus plan or
incentive compensation plan may be deferred in
whole or in part in accordance with the terms of
this Deferred Compensation Plan.
PERIOD OF Compensation as described above may be deferred
DEFERRAL until a specified date, retirement, January 1 of
the year following retirement, or such dates as
may apply if death, permanent disability,
extreme hardship or termination of employment
occurs. ALL PAYMENTS MUST BEGIN NO LATER THAN
THE PARTICIPANT'S ATTAINMENT OF AGE 70 1/2.
AMOUNT OF The entire incentive payment, or any 10%
DEFERRAL multiple thereof, may be deferred.
1
<PAGE>
ELECTION 1. The election shall be made by completing a
Deferred Compensation Election Form. For
bonuses which may be awarded in 1998, this
form must be completed and returned by
December 31, 1997. For bonuses which may
be awarded in 1999 and subsequent years,
this form must be completed and returned
by December 31st of the year preceding
the year in which the services will be
performed. If an Election Form is not
returned by the deadline for any given
year, it will be assumed that there is no
desire to participate in the Deferred
Compensation Plan for that particular year
and no follow-up will be made.
2. When such elections are made, the
participant must elect:
a. A payment date. Participants may
elect a different payment date for
each year that they participate in
the Plan. The payment date options
are:
o Retirement,
o January 1 of the year following
retirement, or
o any future specified date.
b. A distribution option for payments
made at the elected date:
o a single sum,
o 12 quarterly installments, or
o 20 quarterly installments.
c. A distribution option in case of
termination of employment:
o a single sum payable at
termination, or
o 12 quarterly installments
beginning January 1 of the year
following termination.
3. The election to defer compensation shall
be irrevocable, subject to the hardship
provisions as outlined in Payment Section
2 below.
2
<PAGE>
DEFERRED 1. A record shall be established for each
COMPENSATION eligible individual who elects to defer
ACCOUNTS compensation.
2. The amount elected for deferral will be
credited on the date the funds would
otherwise have been paid.
3. The amounts deferred will accrue interest,
beginning with the date of deferral until
such time as payment is made.
4. Interest on amounts deferred will be
credited at a rate each year equal to the
rates established for the fixed rate fund
under the Everest Reinsurance Employee
Savings Plan (ERESP).
PAYMENT 1. Payment will begin on the specified date or
the occurrence the participant selected for
each year's deferred funds but not later
than attainment of age 70 1/2. The form of
payment(s) will be made according to the
option(s) selected for each year's deferred
funds. Regardless of the option elected,
payment will be made in a single sum if
death occurs.
a. Payments are subject to such deductions
as may be required in accordance with
federal and state tax regulations.
b. Should permanent disability occur,
payment(s) in the elected form will begin
immediately. If monthly installments have
already started, payments will continue
for the remainder of the elected
installment period.
Note: The participant shall be deemed
to be permanently disabled if he
or she would qualify for benefits
under the Company's applicable
Long-Term Disability Benefits
Plan.
3
<PAGE>
PAYMENT CONT'D. c. Should death occur when monthly
installments have already started, the
balance of the participant's deferred
compensation account shall immediately
become due and payable in one single sum.
d. Should termination occur when monthly
installments have already started,
payments will continue for the
remainder of the elected installment
period.
2. Only in case of extreme hardship may
contributions to the Plan be discontinued
and/or payment of the amounts already
deferred be advanced.
a. If contributions are to be discontinued
or payment advanced, the amount involved
cannot exceed the funds required to
satisfy the financial consequences of the
hardship.
b. FOR PURPOSES OF THIS PLAN, EXTREME
HARDSHIP SHALL MEAN ANY UNFORESEEABLE
AND EXTRAORDINARY OCCURRENCE OR EVENT,
SUCH AS ILLNESS, ACCIDENT OR FAMILY
PROBLEMS RESULTING IN A PARTICIPANT'S
FINANCIAL NEED THAT CANNOT BE MET FROM
OTHER ASSETS OR NORMAL SOURCES OF INCOME.
ASSIGNMENT No rights under the Plan shall be transferable.
EMPLOYEE The following items apply to deferred amounts
BENEFITS that normally generate benefits:
Retirement benefits attributable to compensation
that has been deferred shall be provided on a
non-qualified basis.
4
<PAGE>
BENEFICIARY A participant may designate an individual, a
DESIGNATIONS trustee or his or her estate as beneficiary. A
participant may change his or her beneficiary at
any time. The request must be in writing and in
a form approved by the Company. It will
take effect only when it is received in the
compensation administration area of the
corporate Human Resources Department. Any
previous beneficiary's interest will end as of
the date the request is received even if the
participant is not living when the request
is received. If a participant fails to
designate a beneficiary or if the designated
beneficiary does not survive the participant,
payment will be made to the participant's
estate.
ADMINISTRATION The Plan shall be administered by the members
of Everest Reinsurance Company's Employee
Benefits Committee. This committee will have
responsibility for its interpretation and,
subject to its provisions, authority to make
all determinations necessary or desirable for
its operation.
TERMINATION The Board of Directors may terminate the Plan at
AND AMENDMENT any time so that no further amounts shall be
credited to Deferred Compensation Accounts or
may, from time to time, amend the Plan,
provided, however, no such amendment or
termination shall impair any rights which have
accrued under the Plan.
5
<PAGE>
Exhibit 11.1
<TABLE>
<CAPTION>
EVEREST REINSURANCE HOLDINGS, INC.
COMPUTATION OF EARNINGS PER SHARE For The
Years Ended December 31, 1998, 1997 and 1996
(Dollars in thousands)
Years Ended December 31,
------------------------------------------------
1998 1997 1996
------------------------------------------------
<S> <C> <C> <C>
Net Income (Numerator) $ 165,197 $ 154,955 $ 112,027
================================================
Weighted average common
and effect of dilutive
shares used in the
computation of net
income per share:
Average shares
outstanding - basic
(denominator) 50,374,329 50,476,330 50,566,566
Effect of dilutive
shares:
Options outstanding 287,298 285,685 143,855
Options exercised 739 676 167
Options cancelled 2,632 2,476 247
------------------------------------------------
Average share
outstanding - diluted
(denominator) 50,664,998 50,765,167 50,710,835
Net Income per common
share:
Basic $ 3.28 $ 3.07 $ 2.22
Diluted 3.26 3.05 2.21
</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 National Insurance Company,
an Arizona corporation
Everest Re Holdings, Ltd.,
a Bermuda corporation
Everest Re Ltd.,
a United Kingdom corporation
Mt. McKinley Managers, L.L.C.,
a New Jersey limited liability company
WorkCare, Inc.,
a Texas corporation
WorkCare Southeast, Inc.,
an Alabama corporation
WorkCare Southeast of Georgia, Inc.,
a Georgia corporation
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Everest Reinsurance Holdings, Inc. on Forms S-8 (File No. 333-1972 and File No.
333-05771) of our report dated February 17, 1999 except for Note 14, as to which
the date is March 11, 1999, on our audit of the consolidated financial
statements and financial statement schedules of Everest Reinsurance Holdings,
Inc. as of December 31, 1998 and 1997 and for each of the three years in the
period ended December 31, 1998, which report is included in this Annual Report
on Form 10-K.
PricewaterhouseCoopers LLP
New York, New York
March 23, 1999
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
EVEREST REINSURANCE HOLDINGS, INC. FINANCIAL DATA SCHEDULE
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EVEREST
REINSURANCE HOLDINGS, INC.'S FORM 10-K FOR THE PERIOD ENDED DECEMBER 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 4,100,575
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 146,274
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 4,286,431
<CASH> 39,326
<RECOVER-REINSURE> 981,959
<DEFERRED-ACQUISITION> 70,753
<TOTAL-ASSETS> 5,996,728
<POLICY-LOSSES> 3,800,041
<UNEARNED-PREMIUMS> 284,640
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 509
<OTHER-SE> 1,478,695
<TOTAL-LIABILITY-AND-EQUITY> 5,996,728
1,068,010
<INVESTMENT-INCOME> 244,909
<INVESTMENT-GAINS> (765)
<OTHER-INCOME> 3,046
<BENEFITS> 778,404
<UNDERWRITING-AMORTIZATION> 11,410
<UNDERWRITING-OTHER> 312,710
<INCOME-PRETAX> 212,676
<INCOME-TAX> 47,479
<INCOME-CONTINUING> 165,197
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 165,197
<EPS-PRIMARY> 3.28
<EPS-DILUTED> 3.26
<RESERVE-OPEN> 2,749,124
<PROVISION-CURRENT> 752,349
<PROVISION-PRIOR> 26,055
<PAYMENTS-CURRENT> 192,404
<PAYMENTS-PRIOR> 450,824
<RESERVE-CLOSE> 2,884,300
<CUMULATIVE-DEFICIENCY> (26,055)
</TABLE>
