<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): September 19, 2000
Everest Reinsurance Holdings, Inc.
--------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
Delaware 1-13816 22-3263609
----------------------------- --------------------- -----------------------
(State or Other Jurisdiction (Commission (I.R.S. Employer
of Incorporation) File Number) Identification No.)
477 Martinsville Road
P.O. Box 830
Liberty Corner, NJ 07938-0830
---------------------------------------- -------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: 908-604-3000
Not Applicable
--------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
Item 7. Financial Statements and Exhibits
(a) Financial Statements of Businesses Acquired
Audited financial statements of Gibraltar Casualty Company as of
December 31, 1999 and 1998 and for the years then ended (with Report of
Independent Accountants thereon) and unaudited interim financial statements
as of June 30, 2000 and 1999 and for the six months then ended.
(b) Pro Forma Financial Information
Unaudited pro forma condensed consolidated financial statements of Everest
Reinsurance Holdings, Inc. and subsidiaries giving effect to the
acquisition of Mt. McKinley Insurance Company (f\k\a Gibraltar Casualty
Company), including the unaudited pro forma balance sheet as of June 30,
2000 and the statements of income for the six months ended June 30, 2000
and the year ended December 31, 1999.
(c) Exhibits
23(b) Consent of Independent Public Accountants
<PAGE>
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.
Dated: December 4, 2000
EVEREST REINSURANCE HOLDINGS, INC.
By: /s/ Stephen L. Limauro
---------------------------------
Name: Stephen L. Limauro
Title: Executive Vice President and
Chief Financial Officer
3
<PAGE>
Report of Independent Accountants
To the Board of Directors of
Gibraltar Casualty Company
In our opinion, the accompanying balance sheets and the related statements of
operations, of changes in stockholder's deficit and of cash flows present
fairly, in all material respects, the financial position of Gibraltar Casualty
Company (the "Company") at December 31, 1999 and 1998, and the results of its
operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States, which require
that we plan and perform the audits 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
April 21, 2000
except as to Note 1, which is as of May 22, 2000
<PAGE>
GIBRALTAR CASUALTY COMPANY
BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
------ ---- ----
<S> <C> <C>
Fixed Maturities
Available for sale, at fair value (amortized cost $285,362,536 and $267,913,184) $ 279,040,939 $ 276,015,678
Short-term investments 37,881,851 135,516,932
-------------- --------------
Total investments 316,922,790 411,532,610
Cash 2,078,020 2,422,163
Funds held by reinsured 171,550,351 84,629,695
Investment income due and accrued 8,365,178 7,489,640
Reinsurance recoverable on paid and unpaid losses 125,632,759 128,738,547
Federal income tax receivable from parent 45,485,120 28,734,476
Deferred federal income taxes 13,490,314 28,402,851
Receivable from affiliate - 40,000,000
Accounts receivable 10,130,892 4,324,225
-------------- --------------
Total assets $ 693,655,424 $ 736,274,207
============== ==============
LIABILITIES AND STOCKHOLDER'S DEFICIT
-------------------------------------
Unpaid losses and loss adjustment expenses $ 636,890,180 $ 673,750,088
Long term debt 329,000,000 329,000,000
Interest payable 58,714,418 42,579,000
Reinsurance claims payable 2,258,669 5,959,070
Payable to parent 896,537 470,879
Other liabilities 2,283,031 553,334
-------------- --------------
Total liabilities 1,030,042,835 1,052,312,371
-------------- --------------
STOCKHOLDER'S DEFICIT
---------------------
Common stock, par value $5,000;
2,000 authorized, issued and outstanding shares 10,000,000 10,000,000
Paid-in capital 222,418,131 158,250,000
Accumulated other comprehensive (loss) income (4,109,040) 5,266,619
Accumulated deficit (564,696,502) (489,554,783)
-------------- --------------
Total stockholder's deficit (336,387,411) (316,038,164)
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT $ 693,655,424 $ 736,274,207
============== ==============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
GIBRALTAR CASUALTY COMPANY
STATEMENTS OF OPERATIONS
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
REVENUES:
Net investment income $ 30,961,562 $ 19,820,933
Realized investment (losses) gains, net (1,979,563) 489,910
------------ ------------
Total Revenues 28,981,999 20,310,843
------------ ------------
EXPENSES:
Losses and loss adjustment expenses incurred 96,303,982 91,020,225
Interest expense 13,800,000 9,991,000
Underwriting expenses 506,639 330,603
Other expense 3,158,257 5,049,130
------------ ------------
Total Expenses 113,768,878 106,390,958
------------ ------------
LOSS FROM OPERATIONS BEFORE INCOME TAX (84,786,879) (86,080,115)
Federal income tax benefit (9,645,160) (27,393,044)
------------ -------------
NET LOSS $(75,141,719) $(58,687,071)
============ ============
Other comprehensive income, net of tax
Unrealized (loss) gains on securities:
Unrealized holding (losses) gains arising during period (4,109,040) 5,266,619
Less: reclassification adjustment for (loss) gain included in net income (68,316) 427,987
------------ ------------
Other comprehensive (loss) income (4,177,356) 5,694,606
------------ ------------
TOTAL COMPREHENSIVE LOSS $(79,319,075) $(52,992,465)
============ ============
</TABLE>
See accompanying notes to financial statements.
<PAGE>
GIBRALTAR CASUALTY COMPANY
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $ (75,141,719) $ (58,687,071)
Adjustments to reconcile net loss to cash flows from operating activities:
Amortization of investments 427,201 858,032
Realized investment losses (gains), net 1,979,563 (489,910)
Change in assets and liabilities:
Funds held by reinsureds (86,920,656) 111,036,915
Investment income due and accrued (875,538) (1,172,187)
Reinsurance recoverable on paid and unpaid losses 3,105,788 (5,982,911)
Federal income tax receivable (16,750,644) 1,652,350
Deferred federal income tax 19,960,970 353,819
Accounts receivable (5,806,667) 3,442,695
Unpaid losses and loss adjustment expenses (36,859,908) (10,383,912)
Reinsurance claims payable (3,700,401) 24,828,997
Payable to parent 425,658 (55,759)
Interest payable 16,135,418 9,991,000
Other liabilities 1,729,697 (297,284)
------------- -------------
Cash flows from operating activities (182,291,238) 75,094,774
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of fixed maturities, available for sale 48,295,711 73,809,126
Proceeds from the sale of equity securities 48,336,389 -
Payments for the purchase of fixed maturities, available for sale (66,490,681) (76,866,742)
Proceeds (purchases) of short-term investments, net 97,637,164 (107,817,683)
------------- -------------
Cash flows from investing activities 127,778,583 (110,875,299)
------------- -------------
CASH FLOW FROM FINANCING ACTIVITIES:
Capital contribution 14,168,512 -
Issuance of surplus debentures 40,000,000 35,000,000
------------- -------------
Cash flows from financing activities 54,168,512 35,000,000
------------- -------------
NET (DECREASE) IN CASH (344,143) (780,525)
CASH, BEGINNING OF THE YEAR 2,422,163 3,202,688
------------- -------------
CASH, END OF THE YEAR $ 2,078,020 $ 2,422,163
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Federal income taxes recovered from parent $ 12,855,485 $ 29,399,214
------------- -------------
</TABLE>
See accompanying notes to financial statements.
<PAGE>
GIBRALTAR CASUALTY COMPANY
STATEMENTS OF CHANGES IN STOCKHOLDER'S DEFICIT
Years Ended December 31, 1999 and 1998
1999 1998
------------- -------------
COMMON STOCK:
Balance, beginning of year $ 10,000,000 $ 10,000,000
Issued during year - -
------------- -------------
Balance, end of year 10,000,000 10,000,000
ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of year 158,250,000 158,250,000
Contribution during the year 64,168,131 -
------------- -------------
Balance, end of year 222,418,131 158,250,000
ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME:
Balance, beginning of year 5,266,619 2,500,455
Net (decrease) increase during the year (9,375,659) 2,766,164
------------- -------------
Balance, end of year (4,109,040) 5,266,619
ACCUMULATED DEFICIT:
Balance, beginning of year (489,554,783) (430,867,712)
Net loss (75,141,719) (58,687,071)
------------- -------------
Balance, end of year (564,696,502) (489,554,783)
------------- -------------
STOCKHOLDER'S DEFICIT, END OF YEAR $(336,387,411) $(316,038,164)
============= =============
See accompanying notes to financial statements
<PAGE>
GIBRALTAR CASUALTY COMPANY
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
------------
Gibraltar Casualty Company (the "Company"), was incorporated on May 18,
1978 under the laws of the State of Delaware and a direct wholly-owned
subsidiary of The Prudential Insurance Company of America. ("Prudential").
The Company is a direct excess and surplus lines insurance company. As a
result of significant underwriting losses the Company discontinued writing
new and renewal business in 1985. Management has no plans to reactivate the
Company.
In order to fund operations and meet regulatory capital and surplus
requirements promulgated by the State of Delaware Department of Insurance,
the Company entered into a surplus maintenance agreement with PRUCO, Inc.
("PRUCO"), a wholly-owned subsidiary of Prudential, on December 18, 1991.
Under the agreement, PRUCO agrees to maintain the Company's regulatory
capital and surplus at a minimum level of $15,000,000. In connection with
this surplus maintenance agreement, the Company has issued $329,000,000 in
surplus debentures to PRUCO. Under statutory accounting principles ("SAP")
prescribed by the State of Delaware Insurance Department, surplus
debentures are reported as a component of capital and surplus and repayment
of principal and interest requires advance approval from the Delaware
Insurance Commissioner. During 1999, Prudential contributed capital to the
Company of $64,168,131, of which $49,999,619 was made in the form of equity
securities.
On February 24, 2000 Prudential entered into a stock purchase agreement
with Everest Reinsurance Holding, Inc. ("Everest Re"), to sell 100% of the
Company's outstanding capital stock. The transaction was approved by the
Board of Directors of both companies and is expected to be completed in the
second quarter of 2000, subject to approval by state regulators and other
customary closing conditions. Proceeds from the sale will consist of
$51,800,000 in cash. In connection with the sale, Prudential will provide
Everest Re an indemnification covering 80% of the first $200,000,000 of any
adverse loss development of Gibraltar's reserves at closing. Additionally,
Prudential has agreed to indemnify Everest Re for $8,500,000 of potential
uncollectible reinsurance.
Effective May 22, 2000, PRUCO converted $329,000,000 of the surplus
debentures to contributed capital and forgave $56,379,000 in interest
payable related to the surplus debentures issued by the Company (see
Note 8A).
<PAGE>
GIBRALTAR CASUALTY COMPANY
NOTES TO FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
A. Basis of Presentation
---------------------
The financial statements are presented in conformity with Generally
Accepted Accounting Principles ("GAAP").
Written approval was received from the State of Delaware Department of
Insurance exempting the Company from Risk Based Capital requirements.
B. Use of Estimates
----------------
The preparation of financial statements in conformity with GAAP
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.
C. Investments
-----------
Fixed maturities, are classified as "available for sale" and carried
at estimated fair value which is based on quoted market prices or
estimates from independent pricing services. The amortized cost of
fixed maturities are written down to estimated fair value when
considered impaired and the decline in value is considered to be other
than temporary. Unrealized gains and losses on fixed maturities
"available for sale", net of income tax, are included in a separate
component of equity, "Accumulated other comprehensive income".
Realized gains and losses on the sale of fixed maturities are
determined by the specific identification method.
Short-term investments, including highly liquid debt instruments
purchased with an original maturity of twelve months or less, are
carried at amortized cost, which approximates fair value.
Cash, includes cash on hand, amounts due from banks, and money market
instruments.
D. Reinsurance Recoverable on Paid and Unpaid Losses
-------------------------------------------------
Reinsurance recoverables are estimated by applying the recovery and
collection terms specified under individual reinsurance contracts to
paid and unpaid losses and loss adjustment expenses. The amounts
ultimately collected may be more or less than such estimates. Any
adjustments of these amounts subsequently collected are reflected in
income as they occur. The Company periodically reviews the financial
condition of its reinsurers and amounts recoverable therefrom,
recording an allowance when necessary for uncollectible reinsurance.
<PAGE>
GIBRALTAR CASUALTY COMPANY
NOTES TO FINANCIAL STATEMENTS
Reinsurance agreements that do not transfer significant risk to the
reinsurer are accounted for using the deposit method.
E. Unpaid Losses and Loss Adjustment Expenses
------------------------------------------
The liability for unpaid losses and loss adjustment expenses ("LAE")
represents management's best estimate of the ultimate net losses to be
paid in the settlement of claims and is based on individual case loss
estimates and reports received from insureds and ceding companies,
which are periodically reviewed and updated. A provision is included
for losses and loss adjustment expenses incurred but not reported
("IBNR") based on past experience. Any adjustments to losses and loss
adjustment expense reserves established in prior years are reflected
in earnings in the period the adjustment is identified. Such
liabilities are based on estimates, and while management believes that
the amount is adequate, the ultimate liability may be in excess of or
less than the amount provided. Unpaid losses and loss adjustment
expenses of $636,890,180 and $673,750,088 at December 31, 1999, and
1998, respectively are reported net of receivables for salvage and
subrogation.
F. Income Taxes
------------
The Company is a member of a group of affiliated companies which join
in filing a consolidated federal tax return. The Internal Revenue Code
limits the amount of non-life insurance losses that may offset life
insurance company taxable income.
Pursuant to the tax allocation agreements, total federal tax expense
is determined on a separate company basis. Members with taxable income
incur an amount in lieu of the separate return basis federal tax.
Members with a loss for tax purposes recognize a current benefit in
proportion to the amount of their losses utilized in computing
consolidated taxable income. Intra-company tax balances are settled
annually.
Deferred income taxes are generally recognized, based on enacted
rates, when assets and liabilities have different values for financial
statement and tax reporting purposes. A valuation allowance is
recorded to reduce a deferred tax asset to that portion that is
expected to more likely than not be realized.
<PAGE>
GIBRALTAR CASUALTY COMPANY
NOTES TO FINANCIAL STATEMENTS
3. INVESTMENTS
-----------
A. Fixed Maturities
----------------
The following tables provide additional information relating to fixed
maturities as of December 31:
<TABLE>
<CAPTION>
===================================================================================================================
1999
-------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. treasury securities $ 6,527,080 $20,727 $ 76,192 $ 6,471,615
Debt securities issued by states, territories
and possessions 7,072,785 0 199,810 6,872,975
Public utilities 36,302,221 0 1,064,376 35,237,845
Corporate securities 212,313,076 63,753 4,091,912 208,284,917
Mortgage-backed securities 23,147,374 0 973,787 22,173,587
-------------------------------------------------------------------------------------------------------------------
Total fixed maturities available for sale $285,362,536 $84,480 $6,406,077 $279,040,939
===================================================================================================================
===================================================================================================================
1998
-------------------------------------------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------------------------------------------------------------------------------------------------------------
U.S. treasury securities $ 6,568,932 $ 456,135 $ 0 $ 7,025,067
Debt securities issued by states, territories
and possessions 10,509,175 370,970 0 10,880,145
Public utilities 38,821,537 1,317,053 0 40,138,590
Corporate securities 189,732,895 5,726,652 71,514 195,388,033
Mortgage-backed securities 22,280,645 304,149 951 22,583,843
-------------------------------------------------------------------------------------------------------------------
Total fixed maturities available for sale $267,913,184 $8,174,959 $72,465 $276,015,678
===================================================================================================================
</TABLE>
The amortized cost and estimated fair value of fixed maturities available
for sale at December 31, 1999, by contractual maturities, are shown below.
Expected maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
<TABLE>
<CAPTION>
=================================================================================
1999
---------------------------------------------------------------------------------
Amortized Cost Fair Value
---------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 36,010,203 $ 35,916,370
Due after one year through five years 154,958,731 152,631,007
Due after five years through ten years 71,180,543 68,251,265
Due after ten years 65,685 68,710
Mortgage-backed securities 23,147,374 22,173,587
---------------------------------------------------------------------------------
Total $285,362,536 $279,040,939
=================================================================================
</TABLE>
<PAGE>
GIBRALTAR CASUALTY COMPANY
NOTES TO FINANCIAL STATEMENTS
Net investment income for the years ended December 31, arose from the
following sources:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Net investment income:
Fixed maturities $ 4,253,680 $17,260,518
Short-term investments 18,031,137 4,789,818
Funds held by reinsureds 9,137,336 (1,967,261)
----------- -----------
Gross Investment income 31,422,153 20,083,075
Investment expenses 460,591 262,142
----------- -----------
Net investment income $30,961,562 $19,820,933
=========== ===========
</TABLE>
Proceeds from the sale of available for sale fixed maturities during
1999 and 1998 were $3,710,880 and $27,504,442 respectively. Proceeds
from the maturity of available for sale fixed maturities during 1999
and 1998 were $44,584,831 and $46,304,684 respectively. Gross losses
were $318,416 during 1999 and gross gains realized during 1998 were
$489,910.
B. Special Deposits
----------------
Securities with a fair value amount of $1,421,505 and $1,528,480 at
December 31, 1999 and 1998, respectively, were on deposit with various
state or governmental insurance departments in compliance with
insurance laws.
4. FEDERAL INCOME TAXES
--------------------
The components of federal income taxes for the years ended December 31,
were as follows:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Current tax benefit $(29,606,128) $(27,746,863)
Deferred tax expense 19,960,968 353,819
------------ ------------
Total federal income tax benefit $ (9,645,160) $(27,393,044)
============ ============
</TABLE>
<PAGE>
GIBRALTAR CASUALTY COMPANY
NOTES TO FINANCIAL STATEMENTS
The Company's federal income tax benefit for the years ended December 31,
differs from the amount computed by applying the expected federal income
tax rate of 35% to income from operations before income taxes for the
following reasons:
<TABLE>
<CAPTION>
1999 1998
------------ -------------
<S> <C> <C>
Expected federal income tax benefit $(29,675,408) $(30,128,040)
Tax realized on common stock contribution 14,750,642 -
Non deductible interest 4,830,000 3,496,850
Provision to return adjustments 449,606 895,650
Citadel adjustment - (1,657,504)
------------ ------------
Total federal income tax benefit $ (9,645,160) $(27,393,044)
============ ============
</TABLE>
Deferred tax assets and liabilities at December 31, resulted from the items
listed in the table below:
1999 1998
----------- -----------
Deferred tax assets
Loss reserve discounting $ 8,732,087 $29,666,996
Reserve for uncollectible reinsurance 2,946,759 1,797,959
Unrealized investment loss 2,212,559 -
Other 2,230 (100)
----------- -----------
Total deferred tax assets 13,893,635 31,464,855
Deferred tax liabilities
Accrual for bond discount 403,321 226,131
Unrealized investment gains - 2,835,873
----------- -----------
Total deferred tax liabilities 403,321 3,062,004
----------- -----------
Deferred federal income taxes, net $13,490,314 $28,402,851
=========== ===========
The Internal Revenue Service (the "Service") has completed examinations of
the consolidated federal income tax return through 1992. The Service has
begun their examination of the years 1993 through 1995.
<PAGE>
GIBRALTAR CASUALTY COMPANY
NOTES TO FINANCIAL STATEMENTS
5. REINSURANCE
-----------
Reinsurance provides greater diversification of business and limits the
potential maximum net loss arising from large claims. The ceding of
reinsurance does not discharge the Company from its primary legal liability
to a policyholder. Ceded balances would represent a liability to the
Company in the event the reinsurers were unable to meet their obligations
to the Company under the terms of reinsurance agreements.
A. Commutation of Reinsurance Ceded
--------------------------------
In 1988 and 1990, the Company entered into two aggregate excess of
loss reinsurance agreements with Citadel Reinsurance Company, Ltd.
("Citadel"), which were further amended in 1991. Citadel indemnified
the Company for all losses incurred in excess of its loss reserves as
of June 30, 1988, subject to aggregate limits totaling $229,271,000.
The full limits of the agreements were exhausted as of December 31,
1994. These reinsurance agreements did not transfer a significant
amount of risk; accordingly, they were accounted for using the deposit
method. Effective July 1, 1998, the Company commuted the agreement,
receiving cash from Citadel of $46,757,110 and decreasing funds held
on deposit with reinsurance company of $58,080,000. The Company
recorded interest expense of $11,323,000 in connection with this
commutation.
B. Reinsurance Assumed
-------------------
The Company provides reinsurance to Everest Reinsurance Company
("Everest Re"), formerly known as Prudential Reinsurance Company,
under various agreements. In 1995, in connection with Everest Re's
initial public offering, Gibraltar entered into the Stop Loss
Agreement with Everest Re. Subject to the terms and conditions of the
Stop Loss Agreement, the Company will reinsure Everest Re for up to
$375,000,000 of the first $400,000,000 of any adverse development
incurred. The Company has reported incurred losses of $320,000,000 of
which $278,366,612 were paid as of December 31, 1999.
C. Reinsurance Recoverable
-----------------------
The Company provided allowances for uncollectible reinsurance balances
based on management's assessment of the collectibility of the
outstanding balances. Such allowances were $8,419,313 and $5,260,451
as of December 31, 1999 and 1998, respectively.
Reinsurance recoverable on unpaid losses were $120,467,981 and
$114,628,437 at December 31, 1999 and 1998, respectively. Reinsurance
recoverables on paid losses were $13,584,091 and $19,370,561 at
December 31, 1999 and 1998 respectively.
<PAGE>
GIBRALTAR CASUALTY COMPANY
NOTES TO FINANCIAL STATEMENTS
The following amounts are reflected in the respective balances for ceded
reinsurance for the years ended December 31:
1999 1998
------------ ------------
Losses and loss adjustment expenses incurred
Direct and assumed $114,141,816 $125,961,502
Ceded (17,837,834) (34,941,277)
------------ ------------
Losses and loss adjustment expenses
incurred, net of reinsurance $ 96,303,982 $ 91,020,225
============ ============
6. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSE
-----------------------------------------
Activity in the liability for unpaid losses and loss adjustment expenses is
summarized as follows:
1999 1998
------------ ------------
Balance at January 1 $673,750,088 $684,134,002
Less Reinsurance Recoverables 114,628,437 120,768,092
------------ ------------
Net Balance at January 1 559,121,651 563,365,910
Incurred related to:
Prior Year 96,303,982 91,020,225
------------ ------------
Total paid 96,303,982 91,020,225
Paid related to:
Prior Year 139,003,434 95,264,484
------------ ------------
Total paid 139,003,434 95,264,484
Net Balance at December 31 516,422,199 559,121,651
Plus Reinsurance Recoverables: 120,467,981 114,628,437
------------ ------------
Balance at December 31 $636,890,180 $673,750,088
============ ============
As a result of changes in estimates of insured events in prior years, the
provision of losses and loss adjustment expenses (net of reinsurance
recoveries of $17,837,834 and $34,941,277 in 1999 and 1998 respectively)
increased by $96,303,982 and $91,020,225 in 1999 and 1998, respectively,
due to increased loss development and reserve strengthening for asbestos
claims.
7. ASBESTOS & ENVIRONMENTAL (POLLUTION) RESERVES
---------------------------------------------
The Company has exposure to asbestos and environmental losses through its
writing of direct excess general liability policies during the 1970s and
1980s, as well as through business assumed from Everest Re. The Company has
established case basis and bulk reserves for asbestos and environmental
claims based on management judgment, giving consideration to actuarial
projections of the Company's estimated ultimate liabilities. The actuarial
projections included analyses based on market share, aggregate loss
development factor and policy limits-based modeling techniques.
<PAGE>
GIBRALTAR CASUALTY COMPANY
NOTES TO FINANCIAL STATEMENTS
-----------------------
Asbestos Reserves
-----------------------
--------------------
Gross of Reinsurance
--------------------
<TABLE>
<CAPTION>
=========================================================================
1999 1998
-------------------------------------------------------------------------
<S> <C> <C>
Beginning Reserves $297,030,702 $189,189,394
Incurred Losses & LAE 109,359,812 160,791,706
Paid Losses & LAE 135,330,744 52,950,398
-------------------------------------------------------------------------
Ending Reserves $271,059,770 $297,030,702
=========================================================================
</TABLE>
------------------
Net of Reinsurance
------------------
<TABLE>
<CAPTION>
=========================================================================
1999 1998
-------------------------------------------------------------------------
<S> <C> <C>
Beginning Reserves $261,507,400 $117,876,932
Incurred Losses & LAE 94,953,660 164,695,947
Paid Losses & LAE 132,398,487 21,065,479
-------------------------------------------------------------------------
Ending Reserves $224,062,573 $261,507,400
=========================================================================
</TABLE>
----------------------
Environmental Reserves
----------------------
--------------------
Gross of Reinsurance
--------------------
<TABLE>
<CAPTION>
=========================================================================
1999 1998
-------------------------------------------------------------------------
<S> <C> <C>
Beginning Reserves $140,140,120 $169,670,896
Incurred Losses & LAE (10,413,401) (10,935,673)
Paid Losses & LAE 5,560,987 18,595,103
-------------------------------------------------------------------------
Ending Reserves $124,165,732 $140,140,120
=========================================================================
</TABLE>
------------------
Net of Reinsurance
------------------
<TABLE>
<CAPTION>
=========================================================================
1999 1998
-------------------------------------------------------------------------
<S> <C> <C>
Beginning Reserves $109,902,892 $113,448,779
Incurred Losses & LAE (4,205,550) (4,305,459)
Paid Losses & LAE 2,589,258 (759,572)
-------------------------------------------------------------------------
Ending Reserves $103,108,084 $109,902,892
=========================================================================
</TABLE>
<PAGE>
GIBRALTAR CASUALTY COMPANY
NOTES TO FINANCIAL STATEMENTS
8. RELATED PARTY TRANSACTIONS
--------------------------
A. Long Term Debt
--------------
The Company has surplus debentures outstanding at December 31, 1999 as
follows:
<TABLE>
<CAPTION>
Issue Date Interest Rate Principal Interest Payable
---------- ------------- --------- ----------------
<S> <C> <C> <C>
04-19-93 3.75% $ 15,000,000 $ 3,750,000
10-13-93 3.75% $ 15,000,000 $ 3,469,000
12-30-93 3.75% $ 70,000,000 $15,750,000
06-24-94 3.75% $ 20,000,000 $ 4,125,000
09-28-94 3.75% $ 30,000,000 $ 5,906,000
12-29-94 3.75% $ 74,000,000 $13,875,000
06-30-95 3.75% $ 30,000,000 $ 5,063,000
11-16-98 5.70% $ 35,000,000 $ 2,161,000
12-31-98 5.70% $ 40,000,000 $ 2,280,000
------------ -----------
$329,000,000 $56,379,000
</TABLE>
These notes have no stated maturity date. Interest and principal
payments can be made only if approved by the Delaware Insurance
Commissioner.
B. The Company has a service agreement with its parent, Prudential. Under
this agreement, Prudential will furnish services of its officers and
employees and provide supplies, use of equipment, office space and
make payments to third parties for general expenses, state and local
taxes. Prudential also provides investment management and accounting
services. Total amounts incurred for such services for the twelve
months ended December 31, 1999 and 1998 were $3,294,584 and $2,144,981
respectively.
C. The Company obtained approval on November 12, 1996 to enter into a
loan agreement with an affiliate, Prudential Funding Corporation ("Pru
Funding"), to borrow up to a maximum of $75,000,000. Effective
November 21, 1996, Pru Funding agreed to lend funds as needed to
enable the Company to finance current working capital requirements up
to the maximum approved by the Board. To date, there have been no
loans made under this agreement.
<PAGE>
GIBRALTAR CASUALTY COMPANY
NOTES TO FINANCIAL STATEMENTS
9. DIVIDEND RESTRICTIONS
---------------------
Under Delaware Law, the Company cannot pay any cash dividend except out of
surplus funds derived from net operating profits on its business without
prior approval from the insurance commissioner. Under Delaware Law, a stock
dividend may be paid out of any available surplus funds.
10. CONTINGENCIES
-------------
Various lawsuits against the Company have arisen in the course of the
Company's business. In certain of these matters, large and/or indeterminate
amounts are sought.
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 liability or potential
liability for bodily injury from exposure to asbestos or liability for
property damage resulting from asbestos or products containing asbestos.
The Company's environmental claims typically involve potential liability
for (i) the prevention or remediation of environmental contamination or
(ii) bodily injury or property damage caused by the release of hazardous
substances into the land, air or water.
The Company's reserves include an estimate of the Company's ultimate
liability for asbestos and environmental claims for which ultimate value
cannot be estimated using traditional reserving techniques. There are
significant uncertainties in estimating the amount of the Company's
potential losses from asbestos and environmental claims. Among the
complications are: (i) potentially long waiting periods between exposure
and manifestation of any bodily injury or property damage; (ii) difficulty
in identifying sources of asbestos or environmental contamination; (iii)
difficulty in properly allocating responsibility and/or liability for
asbestos or environmental damage; (iv) changes in underlying laws and
judicial interpretation of those laws; (v) potential for an asbestos or
environmental claim to involve many insurance providers over many policy
periods; (vi) long reporting delays, both from insureds to insurance
companies and ceding companies to reinsurers; (vii) limited historical data
concerning asbestos and environmental losses; (viii) questions concerning
interpretation and application of insurance and reinsurance coverage and
(ix) uncertainty regarding the number and identity of insureds with
potential asbestos or environmental exposure.
Management believes that these issues are not likely to be resolved in the
near future. Given these uncertainties, it is possible that the ultimate
costs for these asbestos and environmental claims could vary materially
from currently established reserves. The
<PAGE>
GIBRALTAR CASUALTY COMPANY
NOTES TO FINANCIAL STATEMENTS
Company establishes reserves to the extent that, in the judgment of
management, the facts and prevailing law reflect an exposure for the
Company or its ceding company.
11. GAAP TO SAP RECONCILIATION
--------------------------
The following is a reconciliation of net loss and stockholder's deficit
using GAAP to net loss and capital and surplus under SAP as of December 31:
-------------------------------------------------------------------------------
1999 1998
-------------------------------------------------------------------------------
Net loss - GAAP $ (75,141,719) $ (58,687,071)
Interest expense on surplus debentures 13,800,000 9,991,000
Interest expense net of interest income on 0 8,069,502
funds held on deposit with reinsurance company
Deferred federal income taxes, net 19,960,968 353,819
Loss from Citadel reinsurance commutation 0 (36,587,853)
-------------------------------------------------------------------------------
Net loss - SAP $ (41,380,751) $ (76,860,603)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
1999 1998
-------------------------------------------------------------------------------
Stockholder's deficit - GAAP $(336,387,411) $(316,038,164)
Surplus debentures 329,000,000 329,000,000
Interest payable on surplus debentures 56,379,000 42,579,000
Deferred federal income taxes, net (11,277,758) (31,238,725)
Net unrealized investment gains, net of tax 4,109,040 (5,266,619)
Provision for reinsurance (1,202,570) (3,503,751)
-------------------------------------------------------------------------------
Capital and surplus - SAP $ 40,620,301 $ 15,531,741
-------------------------------------------------------------------------------
<PAGE>
GIBRALTAR CASUALTY COMPANY
BALANCE SHEETS
June 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands, except par value per share) 2000 1999
----- ----
<S> <C> <C>
ASSETS
------
Fixed Maturities
Available for sale, at fair value (amortized cost $267,807,206 and $266,552,375) $ 261,412 $ 265,652
Short-term investments 125,036 94,084
----------- ----------
Total investments 386,448 359,736
Cash 2,635 2,517
Funds held by reinsured 108,937 168,390
Investment income due and accrued 8,913 7,163
Reinsurance recoverable on paid and unpaid losses 125,212 113,826
Federal income tax receivable from parent - 25,759
Deferred federal income taxes 12,940 30,190
Accounts receivable 8,671 7,293
----------- ----------
TOTAL ASSETS $ 653,756 $ 714,874
=========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
------------------------------------
Unpaid losses and loss adjustment expenses $ 588,616 $ 629,485
Long term debt - 329,000
Reinsurance claims payable 12,327 25,654
Payable to parent 908 -
Interest payable - 50,647
Other liabilities 64 7,918
----------- ----------
Total liabilities 601,915 1,042,704
----------- ----------
STOCKHOLDER'S EQUITY
--------------------
Common stock, par value $5,000;
2,000 authorized, issued and outstanding shares 10,000 10,000
Paid-in capital 607,914 222,418
Accumulated other comprehensive loss (4,157) (586)
Accumulated deficit (561,916) (559,662)
----------- ----------
Total stockholder's equity 51,841 (327,830)
----------- ----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 653,756 $ 714,874
=========== ==========
</TABLE>
<PAGE>
GIBRALTAR CASUALTY COMPANY
STATEMENTS OF OPERATIONS
Six Months Ended June 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands) 2000 1999
---- ----
<S> <C> <C>
REVENUES:
Net investment income $ 16,520 $ 14,817
Realized investment losses, net (358) (1,979)
----------- ---------
Total revenues 16,162 12,838
----------- ---------
EXPENSES:
Losses and loss adjustment expenses incurred $ 5,580 $ 82,539
Interest expense - 8,068
Underwriting expenses 70 233
Other (income)/expense (99) 1,053
----------- ---------
Total expenses 5,551 91,893
----------- ---------
INCOME/(LOSS) FROM OPERATIONS BEFORE INCOME TAX 10,611 (79,055)
Income tax expense/(benefit) 3,831 (8,947)
----------- ---------
NET INCOME/(LOSS) $ 6,780 $ (70,108)
=========== =========
</TABLE>
<PAGE>
GIBRALTAR CASUALTY COMPANY
STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
(Dollars in thousands) 2000 1999
----- ----
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income/(loss) $ 6,780 $ (70,108)
Adjustments to reconcile net income to cash flows from operating activities:
Amortization of investments (94) 219
Realized investment losses, net 358 1,979
Change in assets and liabilities:
Funds held by reinsureds 62,613 (83,760)
Investment income due and accrued (548) 327
Reinsurance recoverable on paid and unpaid losses 421 20,173
Federal income tax receivable 45,485 2,975
Deferred federal income tax 576 1,838
Receivable from affliate - 40,000
Accounts receivable 1,460 (2,970)
Unpaid losses and loss adjustment expenses (52,274) (44,265)
Reinsurance claims payable 10,068 19,695
Payable to parent 11 (471)
Interest payable (58,714) 8,068
Other liabilities (2,218) 1,633
------------------------------------------
Net cash provided by (used in) operating activities 13,924 (104,667)
------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale/maturity of fixed maturities, available for sale 31,862 25,100
Proceeds from the sale of equity securities - 48,336
Payments for the purchase of fixed maturities, available for sale (14,762) (24,334)
Payments for the purchase of equity securities - (50,000)
Proceeds (purchases) of short-term investments, net (86,963) 41,492
------------------------------------------
Net cash (used in) provided by investing activities (69,863) 40,594
------------------------------------------
CASH FLOW FROM FINANCING ACTIVITIES:
Capital contribution 56,496 64,168
------------------------------------------
Net cash provided by financing activities 56,496 64,168
------------------------------------------
NET INCREASE IN CASH 557 95
CASH, BEGINNING OF THE YEAR 2,078 2,422
------------------------------------------
CASH, END OF PERIOD $ 2,635 $ 2,517
==========================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Long Term Debt forgiven by Parent $ 329,000 $ -
==========================================
</TABLE>
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated financial statements of
Everest Reinsurance Holdings, Inc. and subsidiaries (the "Company") give effect
to the acquisition of Mt. McKinley Insurance Company ("Mt. McKinley") (f\k\a
Gibraltar Casualty Company ("Gibraltar")) using the purchase method of
accounting.
The unaudited pro forma condensed consolidated balance sheet has been prepared
as if the acquisition of Mt. McKinley had been consummated on June 30, 2000. The
unaudited pro forma condensed consolidated statements of income have been
prepared as if the acquisition had been consummated on January 1, 2000 and
January 1, 1999, respectively.
The unaudited pro forma condensed consolidated financial statements are
presented for illustrative purposes only and are not necessarily indicative of
the operating results or financial positions that would have occurred had the
acquisition been consummated at the dates indicated, nor are they necessarily
indicative of the future operating results or financial position of the
consolidated companies.
The unaudited pro forma condensed consolidated financial statements, including
footnotes, should be read in conjunction with: the Company's Current Report on
Form 8-K for an event dated September 19, 2000; the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1999; the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30, 2000; Gibraltar's
audited financial statements as of December 31, 1999 and for the year then ended
and Gibraltar's unaudited interim financial statements as of June 30, 2000
and for the six months ended June 30, 1999.
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
June 30, 2000
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Pro Forma Company
Historical Adjustments Pro Forma
----------------------------------------------------
Company Gibraltar Debit Credit Consolidated
---------------------------------------------------- -------------
<S> <C> <C> <C> <C>
ASSETS:
Total investments and cash $ 4,248,434 $ 389,083 $ 51,800 $ 4,585,717
Insurance and reinsurance balances receivable 1,383,942 234,149 535,248 1,082,843
Other assets 282,887 30,524 11,727 301,684
----------- ---------- ----------------------- ------------
TOTAL ASSETS $ 5,915,263 $ 653,756 $ - $ 598,775 $ 5,970,244
=========== ========== ======================= ============
LIABILITIES:
Reserve for losses and adjustment expenses $ 3,945,912 $ 600,943 $ 535,248 $ 4,011,607
Unearned premium reserve 351,673 - 351,673
Indebtness 554,547 - 554,547
Other liabilities 62,279 972 11,727 51,524
----------- ---------- ----------------------- ------------
Total liabilities 4,914,411 601,915 546,975 4,969,351
----------- ---------- ----------------------- ------------
Total stockholders' equity 1,000,852 51,841 51,800 1,000,893
----------- ---------- ----------------------- ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,915,263 $ 653,756 $ 598,775 $ - $ 5,970,244
=========== ========== ======================= ============
</TABLE>
(1) - Cash decreased due to purchase of Gibraltar
(2) - To record inter-company transactions
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Six Months Ended June 30, 2000
(unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Company
Historical Adjustments Pro Forma
------------------------- ------------------
Company Gibraltar Debit Credit Consolidated
--------- ---------- ------------------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Net premiums earned $ 551,964 $ - $ 551,964
Net investment income 130,750 16,520 147,270
Net realized capital (loss) (321) (358) (679)
Other income 440 99 539
--------- -------- ---------
Total revenues 682,833 16,261 699,094
--------- -------- ---------
CLAIMS AND EXPENSES:
Incurred loss and loss adjustment expenses 430,058 5,580 435,638
Commission, brokerage, taxes and fees 111,930 - 111,930
Other underwriting expenses 24,242 70 24,312
Other expense 14,693 - 14,693
--------- -------- ---------
Total claims and expenses 580,923 5,650 586,573
--------- -------- ---------
INCOME BEFORE TAXES 101,910 10,611 112,521
Income tax 21,319 3,831 25,150
--------- -------- ---------
NET INCOME $ 80,591 $ 6,780 $ 87,371
========= ======== =========
</TABLE>
<PAGE>
EVEREST REINSURANCE HOLDINGS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 1999
(unaudited)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Company
Historical Adjustments Pro Forma
------------------------- ---------------------------
Company Gibraltar Debit Credit Consolidated
--------- ------------- --------------------------- --------------
<S> <C> <C> <C> <C>
REVENUES:
Net premiums earned $ 1,071,451 $ - $1,071,451
Net investment income 252,999 30,962 283,961
Net realized capital (loss) (16,760) (1,980) (18,740)
Total revenues ----------- ----------- -----------
1,307,690 28,982 1,336,672
CLAIMS AND EXPENSES:
Incurred loss and loss adjustment expenses 771,570 96,304 867,874
Commission, brokerage, taxes and fees 285,957 - 285,957
Other underwriting expenses 48,263 507 48,770
Other expense 5,318 16,958 22,276
-------------- ----------- ----------
Total claims and expenses 1,111,108 113,769 1,224,877
-------------- ----------- ----------
INCOME BEFORE TAXES 196,582 (84,787) 111,795
Income tax expense/(benefit) 38,521 (9,645) 28,876
-------------- ----------- ----------
NET INCOME/(LOSS) $ 158,061 $ (75,142) $ 82,919
============== =========== ==========
Weighted average shares--basic 48,509 48,509
Weighted average shares--diluted 48,686 48,686
Earnings per share--basic $ 3.26 $ 1.71
Earnings per share--diluted $ 3.25 $ 1.70
</TABLE>
