SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: Commission File Number:
MARCH 31, 1999 1-13816
- ---------------------- -----------------------
EVEREST REINSURANCE HOLDINGS, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 22-3263609
- ------------------------ ----------------------------
(State or other juris- (IRS Employer Identification
diction of incorporation Number)
or organization)
WESTGATE CORPORATE CENTER
LIBERTY CORNER, NEW JERSEY 07938-0830
-------------------------------------
(908) 604-3000
-------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Number of Shares Outstanding
Class at May 10, 1999
----- ----------------------------
COMMON STOCK, $.01 PAR VALUE 48,654,228
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
INDEX TO FORM 10-Q
PART I
FINANCIAL INFORMATION
---------------------
PAGE
----
ITEM 1. FINANCIAL STATEMENTS
--------------------
Consolidated Balance Sheets at March 31, 1999
(unaudited) and December 31, 1998 3
Consolidated Statements of Operations for the
three months ended March 31, 1999 and 1998
(unaudited) 4
Consolidated Statements of Changes in Stockholders'
Equity for the three months ended March 31, 1999
and 1998 (unaudited) 5
Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and 1998 (unaudited) 6
Notes to Consolidated Interim Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
-------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS 13
-----------------------------------
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
---------------------------------------------
MARKET RISKS 20
------------
PART II
OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS 21
-----------------
ITEM 2. CHANGES IN SECURITIES 21
---------------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES None
-------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None
---------------------------------------------------
ITEM 5. OTHER INFORMATION None
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
--------------------------------
<PAGE>
Part I - Item 1
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value per share)
<TABLE>
<CAPTION>
March 31, December 31,
--------------- --------------
1999 1998
--------------- --------------
(unaudited)
<S> <C> <C>
ASSETS:
Fixed maturities - available
for sale, at market value
(amortized cost: 1999,
$3,931,492; 1998, $3,851,051) $ 4,137,860 $ 4,100,575
Equity securities, at market
value (cost: 1999, $91,853;
1998, $91,787) 141,554 146,274
Short-term investments 30,796 34,846
Other invested assets 6,498 4,736
Cash 44,575 39,326
--------------- --------------
Total investments and cash 4,361,283 4,325,757
Accrued investment income 61,942 64,220
Premiums receivable 286,111 261,488
Reinsurance receivables 896,291 981,959
Funds held by reinsureds 189,871 200,302
Deferred acquisition costs 72,111 70,753
Prepaid reinsurance premiums 10,447 8,592
Deferred tax asset 85,391 62,237
Other assets 29,959 21,420
--------------- --------------
TOTAL ASSETS $ 5,993,406 $ 5,996,728
=============== ==============
LIABILITIES:
Reserve for losses and
adjustment expenses $ 3,766,085 $ 3,800,041
Unearned premium reserve 293,743 284,640
Funds held under reinsurance
treaties 189,601 195,169
Losses in the course of
payment 79,106 64,630
Contingent commissions 107,307 111,344
Other net payable to
reinsurers 20,603 18,731
Current federal income
taxes 12,159 (581)
Other liabilities 69,551 43,550
--------------- --------------
Total liabilities 4,538,155 4,517,524
--------------- --------------
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
1999 and 1998 509 509
Additional paid-in capital 390,881 390,559
Unearned compensation (200) (240)
Accumulated other comprehensive
income, net of deferred income
taxes ($83.7 million in 1999
and $99.8 million in 1998) 155,668 185,518
Retained earnings 966,737 928,500
Treasury stock, at cost; 1.9
million shares in 1999 and
0.9 million shares in 1998 (58,344) (25,642)
--------------- --------------
Total stockholders' equity 1,455,251 1,479,204
--------------- --------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 5,993,406 $ 5,996,728
=============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
3
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------------
1999 1998
-------------- --------------
(unaudited)
<S> <C> <C>
REVENUES:
Premiums earned $ 234,135 $ 241,336
Net investment income 62,080 60,013
Net realized capital
gain/(loss) (2,186) (17)
Other income 97 1,546
-------------- --------------
Total revenues 294,126 302,878
-------------- --------------
CLAIMS AND EXPENSES:
Incurred loss and loss
adjustment expenses 168,869 178,592
Commission, brokerage,
taxes and fees 61,651 60,437
Other underwriting expenses 11,527 11,824
-------------- --------------
Total claims and expenses 242,047 250,853
-------------- --------------
INCOME BEFORE TAXES 52,079 52,025
Income tax 10,837 12,224
-------------- --------------
NET INCOME $ 41,242 $ 39,801
============== ==============
Other comprehensive
income/(loss), net of tax (29,850) 11,364
-------------- --------------
COMPREHENSIVE INCOME $ 11,392 $ 51,165
============== ==============
PER SHARE DATA:
Average shares outstanding
(000's) 49,803 50,481
Net income per common share
- basic $ 0.83 $ 0.79
============== ==============
Average diluted shares
outstanding (000's) 50,026 50,800
Net income per common share
- diluted $ 0.82 $ 0.78
============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
4
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------------
1999 1998
-------------- --------------
(unaudited)
<S> <C> <C>
COMMON STOCK (shares
outstanding):
Balance, beginning of period 49,989,204 50,479,271
Issued during the period 16,800 2,000
Treasury stock acquired
during period (1,000,320) -
Treasury stock reissued
during period 1,056 1,055
-------------- --------------
Balance, end of period 49,006,740 50,482,326
============== ==============
COMMON STOCK (par value):
Balance, beginning of period $ 509 $ 508
Issued during the period - -
-------------- --------------
Balance, end of period 509 508
-------------- --------------
ADDITIONAL PAID IN CAPITAL:
Balance, beginning of period 390,559 389,876
Common stock issued during
the period 307 33
Treasury stock reissued
during period 15 19
-------------- --------------
Balance, end of period 390,881 389,928
-------------- --------------
UNEARNED COMPENSATION:
Balance, beginning of period (240) (514)
Net increase (decrease)
during the period 40 78
-------------- --------------
Balance, end of period (200) (436)
-------------- --------------
ACCUMULATED OTHER COMPREHENSIVE
INCOME, NET OF DEFERRED INCOME
TAXES:
Balance, beginning of period 185,518 152,319
Net increase (decrease) during
the period (29,850) 11,364
-------------- --------------
Balance, end of period 155,668 163,683
-------------- --------------
RETAINED EARNINGS:
Balance, beginning of period 928,500 773,380
Net income 41,242 39,801
Dividends declared ($0.06 per
share in 1999 and $0.05 per
share in 1998) (3,005) (2,524)
-------------- --------------
Balance, end of period 966,737 810,657
-------------- --------------
TREASURY STOCK AT COST:
Balance, beginning of period (25,642) (8,086)
Treasury stock acquired
during period (32,727) -
Treasury stock reissued
during period 25 25
-------------- --------------
Balance, end of period (58,344) (8,061)
-------------- --------------
TOTAL STOCKHOLDERS' EQUITY,
END OF PERIOD $ 1,455,251 $ 1,356,279
============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
5
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------------
1999 1998
-------------- --------------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 41,242 $ 39,801
Adjustments to reconcile net
income to net cash provided
by operating activities:
Increase) in premiums
receivable (26,252) (8,672)
Decrease in funds held by
reinsureds, net 3,394 5,231
Decrease in reinsurance
receivables 85,638 4,486
(Increase) in deferred tax
asset (7,072) (1,955)
Increase (decrease) in reserve
for losses and loss adjustment
expenses (21,361) 41,021
Increase in unearned premiums 9,991 1,036
(Increase) decrease in other
assets and liabilities 22,227 (10,813)
Non cash compensation expense 40 78
Accrual of bond discount/
amortization of bond premium (1,312) (73)
Realized capital losses 2,186 17
-------------- --------------
Net cash provided by operating
activities 108,721 70,157
-------------- --------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from fixed maturities
matured/called - available
for sale 73,631 29,983
Proceeds from fixed maturities
sold - available for sale 76,118 53,159
Proceeds from equity securities
sold - 2,660
Proceeds from other invested
assets sold - 1,314
Cost of fixed maturities
acquired - available for sale (237,705) (192,560)
Cost of equity securities
acquired - (1,409)
Cost of other invested assets
acquired (1,762) (295)
Net (purchases) sales of
short-term securities 3,938 (32,070)
Net increase in unsettled
securities transactions 20,074 28,892
-------------- --------------
Net cash used in investing
activities (65,706) (110,326)
-------------- --------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Acquisition of treasury stock
net of reissuances (32,687) 44
Common stock issued during
the period 307 33
Dividends paid to stockholders (3,005) (2,524)
Net increase in collateral for
loaned securities - 27,898
-------------- --------------
Net cash provided by (used in)
financing activities (35,385) 25,451
-------------- --------------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH (2,381) 1,824
-------------- --------------
Net increase (decrease) in cash 5,249 (12,894)
Cash, beginning of period 39,326 51,578
-------------- --------------
Cash, end of period $ 44,575 $ 38,684
============== ==============
SUPPLEMENTAL CASH FLOW
INFORMATION
Cash transactions:
Income taxes paid, net $ 4,795 $ 7,744
Non-cash financing
transaction:
Issuance of common stock $ 40 $ 78
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
6
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
1. GENERAL
The consolidated financial statements of Everest Reinsurance Holdings Inc. (the
"Company") for the three months ended March 31, 1999 and 1998 include all
adjustments, consisting of normal recurring accruals, which, in the opinion of
management, are necessary for a fair presentation of the results of its single
reportable segment on an interim basis. Certain financial information which is
normally included in annual financial statements prepared in accordance with
generally accepted accounting principles has been omitted since it is not
required for interim reporting purposes. The year end condensed balance sheet
data was derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. The results
for the three months ended March 31, 1999 and 1998 are not necessarily
indicative of the results for a full year. These financial statements should be
read in conjunction with the audited consolidated financial statements and notes
thereto for the years ended December 31, 1998, 1997 and 1996.
2. CONTINGENCIES
The Company continues to receive claims under expired contracts which assert
alleged injuries and/or damages relating to or resulting from toxic torts, toxic
waste and other hazardous substances, such as asbestos. The Company's asbestos
claims typically involve potential liability for bodily injury from exposure to
asbestos or for property damage resulting from asbestos or products containing
asbestos. The Company's environmental claims typically involve potential
liability for (i) the mitigation or remediation of environmental contamination
or (ii) bodily injury or property damages caused by the release of hazardous
substances into the land, air or water.
The Company's reserves include an estimate of the Company's ultimate liability
for asbestos and environmental claims for which ultimate value cannot be
estimated using traditional reserving techniques. There are significant
uncertainties in estimating the amount of the Company's potential losses from
asbestos and environmental claims. Among the complications are: (i) potentially
long waiting periods between exposure and manifestation of any bodily injury or
property damage; (ii) difficulty in identifying sources of asbestos or
environmental contamination; (iii) difficulty in properly allocating
responsibility and/or liability for asbestos or environmental damage; (iv)
changes in underlying laws and judicial interpretation of those laws; (v)
potential for an asbestos or environmental claim to involve many insurance
providers over many policy periods; (vi) long reporting delays, both from
insureds to insurance companies and ceding companies to reinsurers; (vii)
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.
7
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
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. The Company establishes reserves to the extent that, in the
judgement of management, the facts and prevailing law reflect an exposure for
the Company or its ceding company. In connection with its initial public
offering in October 1995, the Company purchased an aggregate stop loss
retrocession agreement (the "Stop Loss Agreement") from Gibraltar Casualty
Company ("Gibraltar"), an affiliate of the Company's former parent, The
Prudential Insurance Company of America ("The Prudential"). This coverage
protects the Company's consolidated earnings against up to $375,000 of the first
$400,000 of adverse development, if any, on the Company's consolidated reserves
for losses, allocated loss adjustment expenses and uncollectible reinsurance at
June 30, 1995 (December 31, 1994 for catastrophe losses). Through March 31, 1999
cessions under the Stop Loss Agreement have aggregated $339,179 with
available remaining limits net of coinsurance of $35,821. 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.
8
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
The following table shows the development of prior year asbestos and
environmental reserves on both a gross and net of retrocessional basis for the
three months ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
----------------------------
<S> <C> <C>
Gross Basis:
Beginning of period reserves $ 660,793 $ 446,132
Incurred losses 1,601 27,895
Paid losses (7,977) (4,361)
---------- ----------
End of period reserves $ 654,417 $ 469,666
========== ==========
Net Basis:
Beginning of period reserves $ 263,542 $ 212,376
Incurred losses - 2,222
Paid losses (1) 116,286 17,779
---------- ----------
End of period reserves $ 379,828 $ 232,377
========== ==========
</TABLE>
(1) Net of $0 in 1999 and $20,000 in 1998 ceded under the incurred loss
reimbursement feature of the Stop Loss Agreement.
(2) Net of $118,800 in 1999 and $20,000 in 1998 ceded as paid losses under
the Stop Loss Agreement.
At March 31, 1999, the gross reserves for asbestos and environmental losses were
comprised of $146,233 representing case reserves reported by ceding companies,
$66,552 representing additional case reserves established by the Company on
assumed reinsurance claims, $37,350 representing case reserves established by
the Company on direct excess insurance claims and $404,282 representing incurred
but not reported ("IBNR") reserves.
To the extent loss reserves on assumed reinsurance need to be increased and were
not ceded to unaffiliated reinsurers under existing reinsurance agreements, the
Company would be entitled to certain reimbursements under the Stop Loss
Agreement. To the extent loss reserves on direct excess insurance policies
needed to be increased and were not ceded to unaffiliated reinsurers under
existing reinsurance agreements, the Company would be entitled to 100%
protection from Gibraltar under a retrocessional agreement in place since 1986.
While there can be no assurance that reserves for and losses from these claims
would not increase in the future, management believes that the Company's
existing reserves and ceded reinsurance arrangements, including reimbursements
available under the Stop Loss Agreement, lessen the probability that such
increases, if any, would have a material adverse effect on the Company's
financial condition, results of operations or cash flows.
9
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
During the first quarter of 1999, Gibraltar disputed $63,000 ceded under the
Stop Loss Agreement in the fourth quarter of 1998 and, pursuant to the terms of
the Stop Loss Agreement, Gibraltar has placeed the disputed amount in a trust.
Gibraltar has also disputed the Company's level of reserves previously ceded to
and paid by Gibraltar under the Stop Loss Agreement and claimed a refund of
$91,700. Pursuant to the terms of the Stop Loss Agreement, the Company and
Gibraltar have appointed an independent examiner to review the Company's
reserves underlying the disputed amounts to determine the appropriate amount of
cessions to Gibraltar, and the Company has placed the $91,700 in a trust.
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, the Company 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, the Company would consider the independent examiners'
finding in its ongoing determination of appropriate reserve levels which may
lead to a corresponding reduction in the Company'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 Company is named in various legal proceedings incidental to its normal
business activities. In the opinion of management, none of these proceedings is
likely to have a material adverse effect upon the financial condition, results
of operations or cash flows of the Company.
The Prudential sells annuities which are purchased by property and casualty
insurance companies to settle certain types of claim liabilities. In 1993 and
prior, the Company, for a fee, accepted the claim payment obligation of the
property and casualty insurer, and, concurrently, became the owner of the
annuity or assignee of the annuity proceeds. In these circumstances, the Company
would be liable if The Prudential were unable to make the annuity payments. The
estimated cost to replace all such annuities for which the Company was
contingently liable at March 31, 1999 was $139,182.
The Company has purchased annuities from an unaffiliated life insurance company
to settle certain claim liabilities of the Company. Should the life insurance
company become unable to make the annuity payments, the Company would be liable.
The estimated cost to replace such annuities at March 31, 1999 was $11,006.
10
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
3. EARNINGS PER SHARE
Net income per common share has been computed as follows (Shares in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------------------------------
<S> <C> <C>
Net income (numerator) $ 41,242 $ 39,801
========== ==========
Weighted average common and effect
of dilutive shares used in the
computation of net income per share:
Average shares outstanding
-basic (denominator) 49,803 50,481
Effect of dilutive shares 223 319
---------- ----------
Average shares outstanding
-diluted (denominator) 50,026 50,800
Net income per common share:
Basic $ 0.83 $ 0.79
Diluted 0.82 0.78
</TABLE>
As of March 31, 1999 and 1998 options to purchase 736,500 and 340,750 shares of
common stock, respectively, were outstanding but were not included in the
computation of diluted earnings per share for the three month periods ended on
such dates, because the options' exercise price was greater than the average
market price of the common shares during the period.
11
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
4. OTHER COMPREHENSIVE INCOME
The Company's other comprehensive income / (loss) is comprised as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
-----------------------------
<S> <C> <C>
Net unrealized appreciation
(depreciation) of investments,
net of deferred income taxes ($ 31,164) $ 10,342
Cumulative translation
adjustments, net of
deferred income taxes 1,314 1,022
-------- --------
Other comprehensive
income/(loss), net of
deferred income taxes ($ 29,850) $ 11,364
========= ========
</TABLE>
5. CREDIT LINE
In May 1998, First Union National Bank granted a 364 day extension to the
Company's $50,000 revolving line of credit. All of the terms and conditions of
the original credit facility remain in full force and effect without amendment
except that the maturity date as extended is now June 12, 1999.
6. FUTURE APPLICATION OF ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statements 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.
12
<PAGE>
PART I - ITEM 2
EVEREST REINSURANCE HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
PREMIUMS. Gross premiums written increased 0.3% to $253.9 million in the
three months ended March 31, 1999 from $253.0 million in the three months ended
March 31, 1998 as the Company continued to maintain a cautious approach
to extremely competitive market conditions. Factors contributing to this
increase include an 18.7% increase (to $18.7 million) in U.S. facultative
premiums, primarily in the casualty markets, a 4.1% increase (to $77.4 million)
in international premiums, largely attributable to the Company's London
operation, a 2.7% increase (to $30.1 million) in marine, aviation and surety
premiums and a 2.2% increase (to $82.3 million) in U.S. broker treaty
operations, due mainly to growth in accident and health premiums. These gains
were partially offset by a 14.5% decrease (to $45.4 million) in U.S. direct
treaty reinsurance and insurance premiums as the result of a decrease in the
Company's direct treaty portfolio business.
Ceded premiums increased to $11.4 million in the three months ended March 31,
1999 from $10.3 million in the three months ended March 31, 1998. This increase
was principally attributable to growth in contract specific retrocessions, the
impact of which was partially offset by decreases arising from changes to the
Company's catastrophe retrocessional protections.
Net premiums written decreased by 0.1% to $242.5 million in the three months
ended March 31, 1999 from $242.7 million in the three months ended March 31,
1998 consistent with the increase in gross premiums written and the increase in
ceded premiums.
REVENUES. Net premiums earned decreased by 3.0% to $234.1 million in the
three months ended March 31, 1999 from $241.3 million in the three months ended
March 31, 1998, generally consistent with the decrease in net premiums written
and changes in the Company's mix of business during the preceding twelve months.
Net investment income increased 3.4% to $62.1 million in the three months
ended March 31, 1999 from $60.0 million in the three months ended March 31,
1998, principally reflecting the effect of investing the $221.9 million of cash
flow from operations in the twelve months ended March 31, 1999. The annualized
pre-tax yield on average cash and invested assets was unchanged at 6.0% for both
the three months ended March 31, 1999 and the three months ended March 31, 1998.
Net realized capital losses were $2.2 million in the three months ended
March 31, 1999, reflecting realized capital losses on the Company's investments
of $2.5 million which were partially offset by $0.3 million of realized
capital gains, compared to net realized capital gains/losses of $0.0 million
in the three months ended March 31, 1998. The net realized capital
13
<PAGE>
losses in the three months ended March 31, 1998 reflected realized capital
losses of $1.6 million which were offset by $1.6 million of realized capital
gains. The realized capital losses in both periods arose mainly from activity in
the Company's domestic fixed maturities portfolios. The realized capital gains
in the three months ended March 31, 1999 mainly arose from activity in the
Company's foreign fixed maturities portfolios, whereas the realized capital
gains in the three months ended March 31, 1998 were attributable to the
Company's common stock investments.
EXPENSES. Incurred losses and loss adjustment expenses ("LAE") decreased by
5.4% to $168.9 million in the three months ended March 31, 1999 from $178.6
million in the three months ended March 31, 1998. Catastrophe losses in the
three months ended March 31, 1999 were $11.4 million compared with $6.0 million
in the three months ended March 31, 1998. The catastrophe losses in the three
months ended March 31, 1999 resulted primarily from the Rouge steel plant
explosion and fire. Catastrophe losses include the pre-tax impact of both
current period events and favorable and unfavorable loss development on prior
period events and are net of reinsurance. The Company's loss and LAE ratio
decreased by 1.9 percentage points to 72.1% in the three months ended March 31,
1999 from 74.0% in the three months ended March 31, 1998. The decrease
principally resulted from changes in the Company's mix of business, including
the absence in the three months ended March 31, 1999 of the impact of certain
reinsurance treaties with higher expected losses and lower ceding commissions
which were reflected in the three months ended March 31, 1998, partially offset
by an increase in catastrophe losses in the three months ended March 31, 1999.
Net incurred losses and LAE for the three months ended March 31, 1999 reflected
ceded losses and LAE of $10.3 million with $0.0 million ceded under the Stop
Loss Agreement compared to ceded losses and LAE of $33.8 million in the three
months ended March 31, 1998, including $20.0 million ceded under the Stop Loss
Agreement.
Underwriting expenses increased by 1.3% to $73.2 million in the three months
ended March 31, 1999 from $72.3 million in the three months ended March 31,
1998. Commission, brokerage, taxes and fees increased by $1.2 million,
principally relating to the impact of the previously noted changes in the
business mix. Other underwriting expenses decreased by $0.3 million. The
Company's expense ratio was 31.2% in the three months ended March 31, 1999
compared to 29.9% in the three months ended March 31, 1998 consistent with the
decrease in premiums earned and increases in underwriting expenses.
The Company's combined ratio decreased to 103.4% in the three months ended
March 31, 1999 compared to 103.9% in the three months ended March 31, 1998.
INCOME TAXES. The Company recognized income tax expense of $10.8 million in
the three months ended March 31, 1999 compared to $12.2 million in the three
months ended March 31, 1998. The principal cause of this change was the increase
in net realized capital losses.
NET INCOME. Net income was $41.2 million in the three months ended March 31,
1999 compared to $39.8 million in the three months ended March 31, 1998. This
mainly reflected the improvement in underwriting results and an increase in net
investment income partially offset by an increase in net realized capital
losses.
14
<PAGE>
FINANCIAL CONDITION
INVESTED ASSETS. Aggregate invested assets, including cash and short-term
investments, were $4,361.3 million at March 31, 1999 and $4,325.8 million at
December 31, 1998. The increase in invested assets between December 31, 1998 and
March 31, 1999 resulted primarily from cash flow from operations of $108.7
million generated during the three months ended March 31, 1999 partially offset
by a decrease of $43.1 million in net appreciation on fixed maturity
investments, repurchases of the Company's stock totalling $32.7 million and a
$4.7 million decline in equity investments.
LIQUIDITY. The Company's liquidity requirements are met on both a short-
and long-term basis by funds provided by premiums collected, investment income
and collected reinsurance receivables balances, and from the sale and maturity
of investments. The Company's net cash flows from operating activities were
$108.7 million and $70.2 million in the three months ended March 31, 1999 and
1998, respectively. Recoveries under the Company's Stop Loss Agreement with
Gibraltar contributed $79.0 million and $20.0 million of such net cash flows in
the three months ended March 31, 1999 and 1998, respectively. Through March 31,
1999 cessions under the Stop Loss Agreement have aggregated $339.2 million with
available remaining limits net of coinsurance of $35.8 million. Excluding the
Stop Loss recoveries, management believes the decrease in net cash flows from
operating activities reflects changes in the Company's mix of business and
variability in the payout of loss reserves.
Proceeds and applications from sales and acquisitions of investment assets
were $173.8 million and $239.5 million, respectively, in the three months ended
March 31, 1999, compared to $116.0 million and $226.3 million, respectively, in
the three months ended March 31, 1998 reflecting increased disposition and
reinvestment activity. The Company's current investment strategy seeks to
maximize after-tax income through a high quality, diversified, duration
sensitive, taxable bond and tax-exempt municipal bond portfolio, while
maintaining an adequate level of liquidity.
In May 1998, the Company renewed its 364 day revolving line of credit with
First Union National Bank. This credit facility, which will be used for
liquidity and general corporate purposes, provides for the borrowing of up to
$50 million. There were no outstanding borrowings under this facility at March
31, 1999. The credit facility agreement continues to require that Everest Re
maintain statutory surplus of not less than $575 million and that the Company
not allow its ratio of certain debt to capital to be greater than a specified
amount.
STOCKHOLDERS' EQUITY. The Company's stockholders' equity decreased to
$1,455.3 million as of March 31, 1999, from $1,479.2 million as of December 31,
1998 principally reflecting net income of $41.2 million for the three months
ended March 31, 1999 more than offset by a decrease of $31.2 million in
unrealized appreciation on investments, net of deferred taxes, and an increase
of $32.7 million in treasury stock acquired during the quarter. Dividends of
$3.0 million were declared and paid by the Company in the three months ended
March 31, 1999. During the quarter, the Company repurchased 1.0 million shares
of its stock at an average price of $32.69 per share.
GIBRALTAR CESSION. During the fourth quarter of 1998,
Gibraltar disputed $63.0 million ceded under the Stop
Loss Agreement and, pursuant to the terms of the
15
<PAGE>
Stop Loss Agreement, Gibraltar has placed the disputed amount in a trust.
Gibraltar has also disputed the Company's level of reserves previously ceded to
and paid by Gibraltar under the Stop Loss Agreement and claimed a refund of
$91.7 million. Pursuant to the terms of the Stop Loss Agreement, the Company and
Gibraltar have appointed an independent examiner to review the Company's
reserves underlying the disputed amounts to determine the appropriate amount of
cessions to Gibraltar, and the Company has placed the $91.7 million amount in a
trust.
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, the Company 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, the Company would consider the independent examiners'
finding in its ongoing determination of appropriate reserve levels which may
lead to a corresponding reduction in the Company'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.
MARKET SENSITIVE INSTRUMENTS. The Company's risks associated with market
sensitve instruments have not changed materially since the period ended December
31, 1998.
YEAR 2000 ISSUES. Many computers, software programs and microprocessors
embedded in certain equipment (collectively, "systems") were designed to
accommodate only two-digit date fields to represent a given year (e.g., "98"
represents 1998). It is possible that such systems will not be able to
accurately process data containing information relating to dates before, during
or after the year 2000. It is also possible that such systems could fail
entirely, although in many instances the consequences of a system not being
"year 2000 compliant" are unknown. The "year 2000 issue" has the potential to
affect the Company through (i) the disruption of the processing of business and
general corporate transactions, both at the Company and between the Company and
other business entities with which it interacts, and (ii) claims which may be
brought asserting that costs associated with the issue may be covered under
insurance or reinsurance contracts in which the Company participates.
READINESS. The Company has been actively engaged in a project to mitigate the
potential effects of the year 2000 issue. For each segment of its internal
computer processing environment (mainframe, midrange and PC equipment), the
Company has a multi-phase plan that involves (a) the identification and
assessment of year 2000 compliance, (b) the design and development of remedies
(including the replacement of non-compliant systems if needed), (c) testing of
year 2000 readiness and (d) the implementation of fully integrated year
2000-compliant processing. 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 software systems will continue as those
remaining systems are brought into compliance.
16
<PAGE>
Although the Company has devoted significant efforts to assessing and upgrading
its systems, most of the Company's computerized systems have been developed and
maintained by third-party vendors, and the Company is thus dependent in large
part on the efforts of those vendors. In many cases the involved systems have
already been made compliant. In other cases the Company continues to communicate
with the vendors regarding their plans for making the involved systems
compliant. On the basis of those communications, the Company believes that those
vendors have a critical business need to make their products compliant and are
exercising their best efforts to make their products fully compliant.
In addition to addressing hardware/software information technology ("IT"),
the Company has also been assessing year 2000 issues with respect to non-IT
systems such as telephones and various building services which may rely
on embedded microprocessors. Although failure of non-IT systems such as
telephone service could disrupt the Company's business, the Company's
communications with the relevant vendors have not identified any significant
year 2000 problems.
The Company's plan also addresses potential year 2000 issues related to the
processing of transactions with its external business contacts, including
business partners (e.g., ceding companies) and service providers (e.g., banks).
The Company has actively surveyed its significant business partners and service
providers concerning their compliance status. The information received to date
has not identified any significant barriers to year 2000 compliance, and the
Company believes that these entities will be sufficiently compliant that the
year 2000 issue will not cause material disruption to the Company's business.
COSTS. The Company's historical and expected future costs to make its systems
year 2000 compliant are not material. The total expected out-of-pocket costs of
the year 2000 effort are approximately $0.6 million, of which approximately $0.4
million had been incurred as of March 31, 1999. These figures include only
expenses specifically related to Year 2000 compliance and do no include the cost
of hardware and 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 fixed maturity and equity investments, if the
entities underlying those investments themselves have substantial year 2000
costs, liabilities or disruptions. Any or all of the types of possible
disruptions in such a "worst case scenario" could materially increase the cost
of doing business, could impair the Company's ability to make required
regulatory filings and could materially affect the Company's 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.
17
<PAGE>
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 is possible that individuals or entities which
experience business disruption, increased costs or other problems associated
with the year 2000 issue may assert claims against their own insurance carrier
to recover such costs or against other entities for damages, which entities may
in turn assert that such potential damages are covered by insurance. It is not
yet possible to determine whether any such claims will be made against insurers,
whether such claims will be held to have merit or whether any such claims
may be made against insurance or reinsurance contracts in which the
Company participates. With respect to prospective business, the Company
works with brokers and ceding companies to attempt to determine whether
prospective or existing business written carries potential year 2000 exposures.
If the ceding company, in the Company's opinion, is adequately underwriting the
exposures, the Company may not exclude such exposures from its contracts. If the
ceding company is not adequately addressing the issue, the Company will attempt
to exclude those exposures from its contracts or non-renew those contracts.
There can be no assurance, however, that such business will be completely free
of potential exposure to claims related to the year 2000 issue.
EURO CONVERSION. On January 1, 1999 eleven of the fifteen member countries
of the European Union (the "participating countries") established fixed
conversion rates between their existing sovereign currencies (the "legacy
currencies") and the Euro. The Company has established the necessary procedures
to accept the Euro as a new currency in which it does business. The nature of
the Company's reinsurance business and its investments is such that the impact
of the Euro conversion has not been and is not expected to be material to the
Company's business, operations or financial condition. Although systems which
support the Company's United Kingdom and Belgian operations require
modifications to enable conversion of legacy currency historical data and to
accommodate conversions in accordance with European Union requirements, which
modifications the system vendor is investigating, a failure of the vendor to
modify the system is not expected to be material to the Company's business,
operations or financial condition. 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 Company has not yet determined when it will convert the
functional currency for its Belgian operation to the Euro.
SAFE HARBOR DISCLOSUE. In connection with the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995 (the "Act"), the Company in
its Form 10-K for the fiscal year ended December 31, 1998 set forth 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
18
<PAGE>
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.
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 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.
19
<PAGE>
PART I - ITEM 3
EVEREST REINSURANCE HOLDINGS, INC.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
MARKET RISK INSTRUMENTS. The Company's risks associated with market
sensitive instruments have not changed materially since the period ended
December 31, 1998.
20
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
OTHER INFORMATION
Part II - ITEM 1. LEGAL PROCEEDINGS
The Company is subject to litigation and arbitration in the normal course of its
business. Management does not believe that any such pending litigation or
arbitration will have a material adverse effect on the Company's results of
operations, financial condition and cash flows.
Part II - ITEM 2. CHANGES IN SECURITIES
c) Information required by Item 701 of Regulation S-K:
(a) On January 1, 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
fourth quarter of 1998.
(d) Exemption from registration was claimed pursuant to Section 4(2)
of the Securities Act of 1933. There was no public offering
and the participants in the transactions were the Company and
its non-employee directors.
(e) Not applicable.
Part II - ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit Index:
EXHIBIT NO. DESCRIPTION LOCATION
- ----------- ----------- --------
11.1 Statement regarding computation of
per-share earnings Filed herewith
27 Financial Data Schedule Filed herewith
b) Reports on Form 8-K:
There were no reports filed on Form 8-K for the three months ended
March 31, 1999.
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.
21
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Everest Reinsurance Holdings, Inc.
(Registrant)
- By: /s/ Stephen L. Limauro
------------------------------------
Stephen L. Limauro
Duly Authorized Officer, Senior Vice
President and Comptroller
Dated: May 11, 1999
Exhibit 11.1
EVEREST REINSURANCE HOLDINGS, INC.
COMPUTATION OF EARNINGS PER SHARE For The
Quarter Ended March 31, 1999 and 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
--------------------------------
<S> <C> <C>
Net Income (Numerator) $ 41,242 $ 39,801
============ ============
Weighted average common and effect
of dilutive shares used in the
computation of net income per share:
Average shares outstanding
- basic (denominator) 49,803,083 50,481,362
Effect of dilutive shares:
Options outstanding 222,336 317,730
Options exercised 963 536
------------ ------------
Average share outstanding
- diluted (denominator) 50,026,382 50,799,628
Net Income per common share:
Basic $ 0.83 $ 0.79
Diluted 0.82 0.78
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
EVEREST REINSURANCE HOLDINGS, INC. AND SUBSIDIARIES FINANCIAL DATA SCHEDULE
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EVEREST
REINSURANCE HOLDINGS, INC.'S FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1999 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 4,137,860
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 141,554
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 4,316,708
<CASH> 44,575
<RECOVER-REINSURE> 896,291
<DEFERRED-ACQUISITION> 72,111
<TOTAL-ASSETS> 5,993,406
<POLICY-LOSSES> 3,766,085
<UNEARNED-PREMIUMS> 293,743
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 509
<OTHER-SE> 1,454,742
<TOTAL-LIABILITY-AND-EQUITY> 5,993,406
234,135
<INVESTMENT-INCOME> 62,080
<INVESTMENT-GAINS> (2,186)
<OTHER-INCOME> 97
<BENEFITS> 168,869
<UNDERWRITING-AMORTIZATION> (1,637)
<UNDERWRITING-OTHER> 74,815
<INCOME-PRETAX> 52,079
<INCOME-TAX> 10,837
<INCOME-CONTINUING> 41,242
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,242
<EPS-PRIMARY> 0.83
<EPS-DILUTED> 0.82
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
