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:
JUNE 30, 2001 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)
477 MARTINSVILLE ROAD
POST OFFICE BOX 830
LIBERTY CORNER, NEW JERSEY 07938-0830
(908) 640-3000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive office)
- --------------------------------------------------------------------------------
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 August 9, 2001
----- ----------------------------
Common Stock, $.01 par value 1,000
The registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this form with the reduced disclosure
format permitted by General Instruction H of Form 10-Q.
EVEREST REINSURANCE HOLDINGS, INC.
INDEX TO FORM 10-Q
PART I
FINANCIAL INFORMATION
---------------------
Page
ITEM 1. FINANCIAL STATEMENTS ----
--------------------
Consolidated Balance Sheets at June 30, 2001 (unaudited)
and December 31, 2000 3
Consolidated Statements of Operations and Comprehensive
Income for the three and six months ended June 30, 2001
and 2000 (unaudited) 4
Consolidated Statements of Changes in Stockholder's Equity
for the three and six months ended June 30, 2001 and
2000 (unaudited) 5
Consolidated Statements of Cash Flows for the three and six
months ended June 30, 2001 and 2000 (unaudited) 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS 17
-------------------------
PART II
OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS 27
-----------------
ITEM 5. OTHER INFORMATION None
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 27
--------------------------------
PART I - ITEM 1
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value per share)
June 30, December 31,
------------ ------------
2001 2000
------------ ------------
ASSETS: (unaudited)
Fixed maturities - available for
sale, at market value (amortized
cost: 2001, $3,961,149; 2000,
$3,793,279) $ 4,077,722 $ 3,879,335
Equity securities, at market value
(cost: 2001, $26,708; 2000, $22,395) 27,192 36,634
Short-term investments 197,248 271,216
Other invested assets 31,239 29,211
Cash 15,665 68,397
------------ ------------
Total investments and cash 4,349,066 4,284,793
Accrued investment income 65,770 64,508
Premiums receivable 433,866 393,229
Reinsurance receivables 1,049,839 996,689
Funds held by reinsureds 161,433 161,350
Deferred acquisition costs 117,190 92,478
Prepaid reinsurance premiums 64,148 58,196
Deferred tax asset 200,909 174,451
Other assets 64,649 37,622
------------ ------------
TOTAL ASSETS $ 6,506,870 $ 6,263,316
============ ============
LIABILITIES:
Reserve for losses and adjustment
expenses $ 3,835,334 $ 3,785,747
Unearned premium reserve 490,650 401,148
Funds held under reinsurance treaties 129,946 110,464
Losses in the course of payment 102,034 101,995
Contingent commissions 5,803 9,380
Other net payable to reinsurers 66,365 60,332
Current federal income taxes (11,369) (8,210)
8.5% Senior notes due 3/15/2005 249,654 249,615
8.75% Senior notes due 3/15/2010 199,040 199,004
Revolving credit agreement borrowings 134,000 235,000
Interest accrued on debt and borrowings 11,446 12,212
Other liabilities 157,459 56,142
------------ ------------
Total liabilities 5,370,362 5,212,829
------------ ------------
STOCKHOLDER'S EQUITY:
Common stock, par value: $0.01; 200
million shares authorized; 1,000
shares issued in 2001 and 2000 - -
Additional paid-in capital 257,928 255,359
Accumulated other comprehensive income,
net of deferred income taxes of $35.9
million in 2001 and $30.4 million
in 2000 66,846 56,747
Retained earnings 811,734 738,381
------------ ------------
Total stockholder's equity 1,136,508 1,050,487
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDER'S
EQUITY $ 6,506,870 $ 6,263,316
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
3
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2001 2000 2001 2000
--------- --------- --------- ---------
(unaudited) (unaudited)
REVENUES:
Premiums earned $ 391,085 $ 285,780 $ 719,077 $ 551,964
Net investment income 68,747 66,941 136,109 130,750
Net realized capital gain (loss) 4,084 (8,185) (705) (321)
Other income (expense) 816 (370) 1,462 440
--------- --------- --------- ---------
Total revenues 464,732 344,166 855,943 682,833
--------- --------- --------- ---------
CLAIMS AND EXPENSES:
Incurred loss and loss
adjustment expenses 290,244 233,669 532,692 430,058
Commission, brokerage, taxes
and fees 96,826 46,272 178,679 111,930
Other underwriting expenses 14,250 12,734 26,248 24,242
Interest expense on senior
notes 9,726 9,722 19,450 11,342
Interest expense on credit
facility 1,819 1,888 4,516 3,351
--------- --------- --------- ---------
Total claims and expenses 412,865 304,285 761,585 580,923
--------- --------- --------- ---------
INCOME BEFORE TAXES 51,867 39,881 94,358 101,910
Income tax 12,105 8,340 21,005 21,319
--------- --------- --------- ---------
NET INCOME $ 39,762 $ 31,541 $ 73,353 $ 80,591
========= ========= ========= =========
Other comprehensive (loss)
income, net of tax (20,708) (6,035) 10,099 8,899
--------- --------- --------- ---------
COMPREHENSIVE INCOME $ 19,054 $ 25,506 $ 83,452 $ 89,490
========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
4
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDER'S EQUITY
(Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(unaudited) (unaudited)
COMMON STOCK (shares outstanding):
Balance, beginning of period 1,000 1,000 1,000 46,457,817
Issued during the period - - - 8,500
Treasury stock acquired during
the period - - - (650,400)
Treasury stock reissued during
the period - - - 1,780
Common stock retired during the
period - - - (45,817,697)
Issued during the period - - - 1,000
---------- ---------- ---------- ----------
Balance, end of period 1,000 1,000 1,000 1,000
========== ========== ========== ==========
COMMON STOCK (par value):
Balance, beginning of period $ - $ - $ - $ 509
Common stock retired during
the period - - - (509)
---------- ---------- ---------- ----------
Balance, end of period - - - -
---------- ---------- ---------- ----------
ADDITIONAL PAID IN CAPITAL:
Balance, beginning of period 256,305 252,979 255,359 390,912
Retirement of treasury stock
during the period - - - (138,546)
Common stock issued during the
period 1,623 - 2,569 157
Treasury stock reissued during
the period - - - (2)
Contribution from subsidiary - 198 - 198
Common stock retired during the
period - - - 458
---------- ---------- ---------- ----------
Balance, end of period 257,928 253,177 257,928 253,177
---------- ---------- ---------- ----------
UNEARNED COMPENSATION:
Balance, beginning of period - - - (109)
Net increase during the period - - - 109
---------- ---------- ---------- ----------
Balance, end of period - - - -
---------- ---------- ---------- ----------
ACCUMULATED OTHER COMPREHENSIVE
INCOME, NET OF DEFERRED INCOME
TAXES:
Balance, beginning of period 87,554 (1,767) 56,747 (16,701)
Net (decrease) increase during
the period (20,708) (6,035) 10,099 8,899
---------- ---------- ---------- ----------
Balance, end of period 66,846 (7,802) 66,846 (7,802)
---------- ---------- ---------- ----------
RETAINED EARNINGS:
Balance, beginning of period 771,972 723,914 738,381 1,074,941
Net income 39,762 31,541 73,353 80,591
Restructure adjustments - 22 - (55)
Dividends paid to parent - - - (400,000)
---------- ---------- ---------- ----------
Balance, end of period 811,734 755,477 811,734 755,477
---------- ---------- ---------- ----------
TREASURY STOCK AT COST:
Balance, beginning of period - - - (122,070)
Treasury stock retired during
the period - - - 138,454
Treasury stock acquired during
the period - - - (16,426)
Treasury stock reissued during
the period - - - 42
---------- ---------- ---------- ----------
Balance, end of period - - - -
---------- ---------- ---------- ----------
TOTAL STOCKHOLDER'S EQUITY,
END OF PERIOD $1,136,508 $1,000,852 $1,136,508 $1,000,852
========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
5
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
CASH FLOWS FROM OPERATING
ACTIVITIES: (unaudited) (unaudited)
Net income $ 39,762 $ 31,541 $ 73,353 $ 80,591
Adjustments to reconcile net
income to net cash provided by
operating activities:
(Increase) in premiums receivable (26,133) (17,269) (43,725) (47,162)
Increase (decrease) in funds held, net 21,969 7,920 17,928 (5,968)
(Increase) in reinsurance receivables (47,045) (26,843) (54,440) (18,146)
(Decrease) in deferred tax asset (35,023) (1,711) (33,302) (4,482)
Increase (decrease) in reserve for
losses and loss adjustment expenses 72,304 (2,213) 70,795 (15,864)
Increase in unearned premiums 28,000 14,653 90,472 44,928
Decrease (increase) in other assets
and liabilities 10,066 (13,316) (27,548) (7,189)
Non cash compensation expense - - - 109
Accrual of bond discount/amortization
of bond premium (1,434) (2,076) (2,532) (3,583)
Amortization of underwriting discount
on senior notes 37 34 75 40
Restructure adjustment - 23 - (55)
Realized capital (gains) losses (4,084) 8,185 705 321
---------- ---------- ---------- ----------
Net cash provided by (used in)
operating activities 58,419 (1,072) 91,781 23,540
---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from fixed maturities
matured/called - available for sale 82,303 58,159 127,287 87,615
Proceeds from fixed maturities sold
- available for sale 189,145 313,447 211,139 411,137
Proceeds from equity securities sold 28,949 4,917 28,949 47,580
Proceeds from other invested assets
sold 15 - 23 -
Cost of fixed maturities acquired
- available for sale (308,492) (379,238) (533,141) (625,678)
Cost of equity securities acquired (20,027) (13) (20,027) (1,191)
Cost of other invested assets acquired (446) (28) (508) (1,558)
Net (purchases) sales of short-term
securities (138,288) (643) 75,363 (26,349)
Net increase in unsettled securities
transactions 57,560 13,949 72,059 11,868
---------- ---------- ---------- ----------
Net cash (used in) provided by
investing activities (109,281) 10,550 (38,856) (96,576)
---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Acquisition of treasury stock net of
reissuances - - - (16,478)
Common stock issued during the period 1,623 - 2,569 106
Dividends paid to stockholders - - - (400,000)
Proceeds from issuance of senior notes - - - 448,507
Borrowing on revolving credit agreement 2,000 - 22,000 47,000
Repayments on revolving credit agreement - - (123,000) -
Contribution from subsidiary - 198 - 198
---------- ---------- ---------- ----------
Net cash provided by (used in)
financing activities 3,623 198 (98,431) 79,333
---------- ---------- ---------- ----------
EFFECT OF EXCHANGE RATE CHANGES
ON CASH (2,636) (2,212) (7,226) (2,355)
---------- ---------- ---------- ----------
Net (decrease) increase in cash (49,875) 7,464 (52,732) 3,942
Cash, beginning of period 65,540 58,705 68,397 62,227
---------- ---------- ---------- ----------
Cash, end of period $ 15,665 $ 66,169 $ 15,665 $ 66,169
========== ========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash transactions:
Income taxes paid, net $ 49,416 $ 32,026 $ 51,769 $ 37,016
Interest paid $ 1,911 $ 1,987 $ 24,657 $ 2,910
Non-cash financing transaction:
Issuance of common stock $ - $ - $ - $ -
The accompanying notes are an integral part of the consolidated financial
statements.
6
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
1. GENERAL
On February 24, 2000, a corporate restructuring was completed and Everest Re
Group, Ltd. ("Group") became the new parent holding company of Everest
Reinsurance Holdings, Inc. (the "Company"), which remains the holding company
for Group's U.S. based operations. The Company is filing this report as a result
of its public issuance of debt securities on March 14, 2000.
The consolidated financial statements of the Company for the three and six
months ended June 30, 2001 and 2000 include all adjustments, consisting of
normal recurring accruals, which, in the opinion of management, are necessary
for a fair presentation of the results on an interim basis. Certain financial
information, which is normally included in annual financial statements prepared
in accordance with generally accepted accounting principles in the United States
of America, has been omitted since it is not required for interim reporting
purposes. The year-end consolidated balance sheet data was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles in the United States of America. The results for
the three and six months ended June 30, 2001 and 2000 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, 2000, 1999 and 1998 included in the
Company's most recent Form 10-K filing.
2. ACQUISITIONS
On September 19, 2000, the Company completed the acquisition of all of the
issued and outstanding capital stock of Gibraltar Casualty Company ("Gibraltar")
from The Prudential Insurance Company of America ("The Prudential") pursuant to
a Stock Purchase Agreement between The Prudential and the Company dated February
24, 2000 and amended on August 8, 2000 (the "Stock Purchase Agreement"). As a
result of the acquisition, Gibraltar became a wholly owned subsidiary of the
Company and, immediately following the acquisition, its name was changed to Mt.
McKinley Insurance Company ("Mt. McKinley").
Mt. McKinley, a run-off property and casualty insurer in the United States, has
had a long relationship with the Company and its principal operating company,
Everest Reinsurance Company ("Everest Re"). Mt. McKinley was formed in 1978 by
Everest Re and wrote direct insurance until 1985, when it was placed in run-off.
In 1991, Mt. McKinley became a subsidiary of The Prudential. Mt. McKinley is
also a reinsurer of Everest Re. Under a series of transactions dating to 1986,
Mt. McKinley reinsured several components of Everest Re's business. In
particular, Mt. McKinley provided stop-loss reinsurance protection, in
connection with the Company's October 5, 1995 Initial Public Offering, for any
adverse loss development on Everest Re's June 30, 1995 (December 31, 1994 for
catastrophe losses) reserves, with $375.0 million in limits, of which $89.4
million was available (the "Stop Loss Agreement") at the acquisition date. The
Stop Loss Agreement and other reinsurance contracts between Mt. McKinley and
Everest Re remain in effect following the acquisition. However, these contracts
7
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
have become transactions with affiliates with the financial impact eliminated in
consolidation.
Effective September 19, 2000, Mt. McKinley and Everest Reinsurance (Bermuda),
Ltd. ("Bermuda Re") entered into a loss portfolio transfer reinsurance
agreement, whereby Mt. McKinley transferred, for arm's-length consideration, all
of its net insurance exposures and reserves, including allocated and unallocated
loss adjustment expenses, to Bermuda Re.
Also during 2000, the Company completed an additional acquisition, Southeastern
Security Insurance Company, a United States property and casualty company whose
primary business is non-standard automobile insurance.
3. 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 (a) the mitigation or remediation of environmental contamination
or (b) 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: (a) potentially
long waiting periods between exposure and manifestation of any bodily injury or
property damage; (b) difficulty in identifying sources of asbestos or
environmental contamination; (c) difficulty in properly allocating
responsibility and/or liability for asbestos or environmental damage; (d)
changes in underlying laws and judicial interpretation of those laws; (e)
potential for an asbestos or environmental claim to involve many insurance
providers over many policy periods; (f) long reporting delays, both from
insureds to insurance companies and ceding companies to reinsurers; (g)
historical data concerning asbestos and environmental losses, which is more
limited than historical information on other types of casualty claims; (h)
questions concerning interpretation and application of insurance and reinsurance
coverage; and (i) uncertainty regarding the number and identity of insureds with
potential asbestos or environmental exposure.
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
8
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
extent that, in the judgement of management, the facts and prevailing law
reflect an exposure for the Company or its ceding companies. In connection with
the acquisition of Mt. McKinley, which has significant exposure to asbestos and
environmental claims, Prudential Property and Casualty Insurance Company
("Prupac"), a subsidiary of The Prudential, provided reinsurance to Mt. McKinley
covering 80% ($160.0 million) of the first $200.0 million of any adverse
development of Mt. McKinley's reserves as of September 19, 2000 and The
Prudential guaranteed Prupac's obligations to Mt. McKinley. Through June 30,
2001, cessions under this reinsurance agreement have reduced the available
remaining limits to $145.8 million net of coinsurance. Due to the uncertainties
discussed above, the ultimate losses may vary materially from current loss
reserves and, depending on coverage under the Company's various reinsurance
arrangements, could have a material adverse effect on the Company's future
financial condition, results of operations and cash flows.
The following table shows the development of prior year asbestos and
environmental reserves on both a gross and net of retrocessional basis for the
three and six months ended June 30, 2001 and 2000:
(dollar amounts in thousands) Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
----------------------- -----------------------
Gross basis:
Beginning of period reserves (1) $ 690,659 $ 598,046 $ 693,704 $ 614,236
Incurred losses 5,000 - 17,110 -
Paid losses (21,732) (17,778) (36,887) (33,968)
---------- ---------- ---------- ----------
End of period reserves $ 673,927 $ 580,268 $ 673,927 $ 580,268
========== ========== ========== ==========
Net basis:
Beginning of period reserves $ 310,413 $ 357,085 $ 317,196 $ 365,069
Incurred losses - - - -
Paid losses (11,655) (12,181) (18,438) (20,165)
---------- ---------- ---------- ----------
End of period reserves $ 298,758 $ 344,904 $ 298,758 $ 344,904
========== ========== ========== ==========
(1) The January 1, 2001 beginning of period reserves include Mt. McKinley's
reserves from the 2000 acquisition transaction.
At June 30, 2001, the gross reserves for asbestos and environmental losses
were comprised of $110.3 million representing case reserves reported by
ceding companies, $63.9 million representing additional case reserves
established by the Company on assumed reinsurance claims, $160.1 million
representing case reserves established by the Company on direct excess
9
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
insurance claims, including Mt. McKinley, and $339.6 million representing
incurred but not reported ("IBNR") reserves.
The Company is involved from time to time in ordinary routine litigation and
arbitration proceedings incidental to its business. The Company does not believe
that there are any other material pending legal proceedings to which it or any
of its subsidiaries or their properties are subject.
The Prudential sells annuities which are purchased by property and casualty
insurance companies to settle certain types of claim liabilities. In 1993 and
prior years, the Company, for a fee, accepted the claim payment obligation of
these property and casualty insurers, 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 June 30, 2001 was $140.7 million.
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
for those claim liabilities. The estimated cost to replace such annuities at
June 30, 2001 was $13.2 million.
10
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
4. OTHER COMPREHENSIVE INCOME
The Company's other comprehensive income is comprised as follows:
(dollar amounts in thousands) Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
------------------------ ------------------------
Net unrealized appreciation
of investments, net of
deferred income taxes ($ 22,577) ($ 6,681) $ 10,915 $ 9,093
Currency translation
adjustments, net of deferred
income taxes 1,869 646 (816) (194)
---------- ---------- ---------- ----------
Other comprehensive
income, net of deferred
income taxes ($ 20,708) ($ 6,035) $ 10,099 $ 8,899
========== ========== ========== ==========
5. CREDIT LINE
On December 21, 1999, the Company entered into a three-year senior revolving
credit facility with a syndicate of lenders (the "Credit Facility"). First Union
National Bank is the administrative agent for the Credit Facility. The Credit
Facility is used for liquidity and general corporate purposes and replaced a
prior credit facility, which has been terminated. The Credit Facility provides
for the borrowing of up to $150.0 million with interest at a rate selected by
the Company equal to either (i) the Base Rate (as defined below) or (ii) an
adjusted London InterBank Offered Rate ("LIBOR") plus a margin. The Base Rate is
the higher of the rate of interest established by First Union National Bank from
time to time as its prime rate or the Federal Funds rate plus 0.5% per annum. On
December 18, 2000, the Credit Facility was amended to extend the borrowing limit
to $235.0 million for a period of 120 days. This 120-day period expired during
the three months ended March 31, 2001 and the limit reverted back to $150.0
million. The amount of margin and the fees payable for the Credit Facility
depends upon the Company's senior unsecured debt rating. Group has guaranteed
all of the Company's obligations under the Credit Facility.
The Credit Facility requires Group to maintain a debt to capital ratio of not
greater than 0.35 to 1, the Company to maintain a minimum interest coverage
ratio of 2.5 to 1 and Everest Re to maintain its statutory surplus at $850.0
million plus 25% of aggregate net income and 25% of aggregate capital
contributions earned or received after December 31, 1999. The Company was
11
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
in compliance with all covenants under the facility at June 30, 2001 and 2000 as
well as for the three and six months ended June 30, 2001 and 2000.
During the three and six months ended June 30, 2001, the Company made payments
on the Credit Facility of $0.0 million and $123.0 million, respectively, and
borrowings of $2.0 million and $22 .0 million, respectively. As of June 30, 2001
and 2000, the Company had outstanding Credit Facility borrowings of $134.0
million and $106.0 million, respectively. Interest expense incurred in
connection with these borrowings was $1.8 million and $1.9 million for the three
months ended June 30, 2001 and 2000, respectively, and $4.5 million and $3.4
million for the six months ended June 30, 2001 and 2000, respectively.
6. SENIOR NOTES
During the first quarter of 2000, the Company completed a public offering of
$200.0 million principal amount of 8.75% senior notes due March 15, 2010 and
$250.0 million principal amount of 8.5% senior notes due March 15, 2005. During
the first quarter of 2000, the Company distributed $400.0 million of these
proceeds to Group of which $250.0 million was used by Group to capitalize
Bermuda Re.
Interest expense incurred in connection with these senior notes was $9.7 million
for the three months ended June 30, 2001 and 2000 and $19.5 million and $11.3
million for the six months ended June 30, 2001 and 2000, respectively.
7. SEGMENT REPORTING
During the quarter ended December 31, 2000, the Company's management realigned
its operating segments to better reflect the way that management monitors and
evaluates the Company's financial performance. The Company has restated all
information for prior years to conform to the new segment structure. The
Company, through its subsidiaries, operates in four segments: U.S. Reinsurance,
U.S. Insurance, Specialty Reinsurance and International Reinsurance. The U.S.
Reinsurance operation writes property and casualty treaty reinsurance through
reinsurance brokers as well as directly with ceding companies within the United
States, in addition to property, casualty and specialty facultative reinsurance
through brokers and directly with ceding companies within the United States. The
U.S. Insurance operation writes property and casualty insurance primarily
through general agent relationships and surplus lines brokers within the United
States. The Specialty Reinsurance operation writes accident and health, marine,
aviation and surety business within the United States and worldwide through
brokers and directly with ceding companies. The International Reinsurance
operation writes property and casualty reinsurance through the Company's
branches in Belgium, London, Canada, and Singapore, in addition to foreign
"home-office" business.
12
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
These segments are managed in a carefully coordinated fashion with strong
elements of central control, including with respect to capital, investments and
support operations. As a result, management monitors and evaluates the financial
performance of these operating segments principally based upon their
underwriting gain or loss ("underwriting results"). Underwriting results include
earned premium less incurred loss and loss adjustment expenses, commission and
brokerage expenses and other underwriting expenses.
The following tables present the relevant underwriting results for the operating
segments for the three and six months ended June 30, 2001 and 2000, with all
dollar values presented in thousands.
U.S. REINSURANCE
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
------------------------------------------------
Earned premiums $ 140,256 $ 109,754 $ 249,366 $ 229,027
Incurred losses and loss
adjustment expenses 109,734 93,934 185,095 177,933
Commission and brokerage 37,322 1,282 63,852 26,842
Other underwriting expenses 4,094 4,075 7,334 8,077
--------- --------- --------- ---------
Underwriting (loss) gain ($ 10,894) $ 10,463 ($ 6,915) $ 16,175
========= ========= ========= =========
U.S. INSURANCE
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
---------------------- ----------------------
Earned premiums $ 68,357 $ 20,456 $ 120,498 $ 38,959
Incurred losses and loss
adjustment expenses 49,065 13,423 86,264 24,685
Commission and brokerage 13,990 4,480 27,528 10,809
Other underwriting expenses 3,952 2,774 7,917 5,486
--------- --------- --------- ---------
Underwriting gain (loss) $ 1,350 ($ 221) ($ 1,211) ($ 2,021)
========= ========= ========= =========
13
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
SPECIALTY REINSURANCE
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
---------------------- ----------------------
Earned premiums $ 99,070 $ 80,615 $ 192,808 $ 142,826
Incurred losses and loss
adjustment expenses 73,547 69,537 148,096 114,163
Commission and brokerage 23,630 21,424 47,565 39,393
Other underwriting expenses 1,578 1,535 2,950 2,863
--------- --------- --------- ---------
Underwriting gain (loss) $ 315 ($ 11,881) ($ 5,803) ($ 13,593)
========= ========= ========= =========
INTERNATIONAL REINSURANCE
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
---------------------- ----------------------
Earned premiums $ 83,401 $ 74,955 $ 156,404 $ 141,152
Incurred losses and loss
adjustment expenses 57,897 56,775 113,236 113,277
Commission and brokerage 21,884 19,086 39,734 34,886
Other underwriting expenses 3,446 3,460 6,613 6,846
--------- --------- --------- ---------
Underwriting gain (loss) $ 174 ($ 4,366) ($ 3,179) ($ 13,857)
========= ========= ========= =========
The following table reconciles the underwriting results for the operating
segments to income before tax as reported in the consolidated statements of
operations and comprehensive income, with all dollar values presented in
thousands:
------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2001 2000 2001 2000
---------------------- ----------------------
Underwriting (loss) ($ 9,055) ($ 6,005) ($ 17,108) ($ 13,296)
Net investment income 68,747 66,941 136,109 130,750
Realized gain (loss) 4,084 (8,185) (705) (321)
Corporate operations 1,180 890 1,434 970
Interest expense 11,545 11,610 23,966 14,693
Other income (expense) 816 (370) 1,462 440
--------- --------- --------- ---------
Income before taxes $ 51,867 $ 39,881 $ 94,358 $ 101,910
========= ========= ========= =========
14
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
The Company writes premium in the United States and international markets. The
revenues, net income and identifiable assets of the individual foreign countries
in which the Company writes business are not material.
8. NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). In June 1999, the FASB issued
Statement of Financial Accounting Standards No. 137, "Deferral of the Effective
Date of FASB Statement No. 133" ("FAS 137"), which allowed entities that had not
adopted FAS 133 to defer its effective date to all fiscal quarters of all fiscal
years beginning after June 15, 2000. In June 2000, the FASB issued Statement of
Financial Accounting Standards No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB Statement No.
133," which amended the accounting and reporting standards of FAS 133. FAS 133
established accounting and reporting standards for derivative instruments. It
requires that an entity recognize all derivatives as either assets or
liabilities in the consolidated balance sheet and measure those instruments at
fair value. The Company adopted the deferral provisions of FAS 137, effective
January 1, 2000 and adopted FAS 133, as amended, effective January 1, 2001.
The Company continually seeks to expand its products portfolio and certain of
its products have been determined to meet the definition of a derivative under
FAS 133. These products consist of credit default swaps and specialized equity
options, all of which have characteristics which allow the transactions to be
analyzed using approaches consistent with those used in the Company's
reinsurance transactions. The Company has previously recorded the derivatives at
their fair value in earlier financial statements, but chose to delay the
adoption of FAS 133. As such, the adoption of FAS 133 has not caused a
cumulative-effect-type adjustment. The fair value of these products are included
as part of other liabilities and the corresponding mark to market adjustment is
included as part of other expense and not shown separately due to their
immaterial nature.
In June 2001, the FASB issued FAS 142, "Goodwill and Other Intangible Assets".
FAS 142 establishes new accounting and reporting standards for acquired goodwill
and other intangible assets. It requires that an entity determine if the
goodwill or other intangible asset has an indefinite useful life or a finite
useful life. Those with indefinite useful lives will not be subject to
amortization and must be tested annually for impairment. Those with finite
useful lives will be subject to amortization and must be tested annually for
impairment. This statement is effective for all fiscal quarters of all fiscal
years beginning after December 15, 2001. Management believes that implementation
of this statement will not have a material impact on the financial position of
the Company.
15
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
9. RELATED-PARTY TRANSACTIONS
During the normal course of business, the Company, through its affiliates,
engages in arms-length reinsurance and brokerage and commission business
transactions with companies controlled by or affiliated with its outside
directors. Such transactions, individually and in the aggregate, are immaterial
to the Company's financial condition, results of operations and cash flows.
The Company engages in business transactions with Group and Bermuda Re. During
the first quarter of 2000, the Company distributed $400.0 million to Group to
facilitate the completion of the corporate restructuring. In addition, effective
September 19, 2000, Mt. McKinley and Bermuda Re entered into a loss portfolio
transfer reinsurance agreement, whereby Mt. McKinley transferred, for
arm's-length consideration, all of its net insurance exposures and reserves,
including allocated and unallocated loss adjustment expenses to Bermuda Re.
16
PART I - ITEM 2
EVEREST REINSURANCE HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
RESTRUCTURING
On February 24, 2000, a corporate restructuring was completed and Everest Re
Group, Ltd. ("Group") became the new parent holding company of Everest
Reinsurance Holdings, Inc. (the "Company"), which remains the holding company
for Group's U.S. based operations. The Company is filing this report as a result
of its public issuance of debt securities on March 14, 2000.
ACQUISITIONS
On September 19, 2000, the Company completed the acquisition of all of the
issued and outstanding capital stock of Gibraltar Casualty Company ("Gibraltar")
from The Prudential Insurance Company of America ("The Prudential") pursuant to
a Stock Purchase Agreement between The Prudential and the Company dated February
24, 2000 and amended on August 8, 2000 (the "Stock Purchase Agreement"). As a
result of the acquisition, Gibraltar became a wholly owned subsidiary of the
Company and, immediately following the acquisition, its name was changed to Mt.
McKinley Insurance Company ("Mt. McKinley"). In connection with the acquisition
of Mt. McKinley, which has significant exposure to asbestos and environmental
claims, Prudential Property and Casualty Insurance Company ("Prupac"), a
subsidiary of The Prudential, provided reinsurance to Mt. McKinley covering 80%
($160.0 million) of the first $200.0 million of any adverse development of Mt.
McKinley's reserves as of September 19, 2000 and The Prudential guaranteed
Prupac's obligations to Mt. McKinley.
Mt. McKinley, a run-off property and casualty insurer in the United States, has
had a long relationship with the Company and its principal operating company,
Everest Reinsurance Company ("Everest Re"). Mt. McKinley was formed in 1978 by
Everest Re and wrote direct insurance until 1985, when it was placed in run-off.
In 1991, Mt. McKinley became a subsidiary of The Prudential. Mt. McKinley is
also a reinsurer of Everest Re. Under a series of transactions dating to 1986,
Mt. McKinley reinsured several components of Everest Re's business. In
particular, Mt. McKinley provided stop-loss reinsurance protection, in
connection with the Company's October 5, 1995 Initial Public Offering, for any
adverse loss development on Everest Re's June 30, 1995 (December 31, 1994 for
catastrophe losses) reserves, with $375.0 million in limits, of which $89.4
million was available (the "Stop Loss Agreement") at the acquisition date. The
Stop Loss Agreement and other reinsurance contracts between Mt. McKinley and
Everest Re remain in effect following the acquisition. However, these contracts
have become transactions with affiliates with the financial impact eliminated in
consolidation.
17
Effective September 19, 2000, Mt. McKinley and Everest Reinsurance (Bermuda),
Ltd. ("Bermuda Re") entered into a loss portfolio transfer reinsurance
agreement, whereby Mt. McKinley transferred, for arm's-length consideration, all
of its net insurance exposures and reserves, including allocated and unallocated
loss adjustment expenses, to Bermuda Re.
Also during 2000, the Company completed an additional acquisition, Southeastern
Security Insurance Company ("SSIC"), a United States property and casualty
company whose primary business is non-standard automobile insurance.
INDUSTRY CONDITIONS
Since late 1999, market conditions, including unfavorable industry-wide results
of operations, have led to modest premium rate increases as well as modest
improvements in contract terms in a number of lines of reinsurance and
insurance. These changes reflect a reversal of the trend from 1987 through 1999
toward increasingly competitive global market conditions across most lines of
business as reflected by decreasing prices and broadening contract terms. The
earlier trend resulted from a number of factors, including the emergence of
significant reinsurance capacity in Bermuda, a rejuvenated Lloyd's market and
consolidation and increased capital levels in the insurance industry. Many of
these same factors continue to operate. As a result, although the Company
continues to be encouraged by the recent improvements, the Company cannot
predict with any reasonable certainty whether and to what extent these
improvements will persist.
SEGMENT INFORMATION
During the quarter ended December 31, 2000, the Company's management realigned
its operating segments to better reflect the way that management monitors and
evaluates the Company's financial performance. The Company has restated all
information for prior years to conform to the new segment structure. The
Company, through its subsidiaries, operates in four segments: U.S. Reinsurance,
U.S. Insurance, Specialty Reinsurance and International Reinsurance. The U.S.
Reinsurance operation writes property and casualty treaty reinsurance through
reinsurance brokers as well as directly with ceding companies within the United
States, in addition to property, casualty and specialty facultative reinsurance
through brokers and directly with ceding companies within the United States. The
U.S. Insurance operation writes property and casualty insurance primarily
through general agent relationships and surplus lines brokers within the United
States. The Specialty Reinsurance operation writes accident and health, marine,
aviation and surety business within the United States and worldwide through
brokers and directly with ceding companies. The International Reinsurance
operation writes property and casualty reinsurance through the Company's
branches in Belgium, London, Canada, and Singapore, in addition to foreign
"home-office" business.
These segments are managed in a carefully coordinated fashion with strong
elements of central control, including with respect to capital, investments and
support operations. As a result, management monitors and evaluates the financial
performance of these operating segments principally based upon their
underwriting results.
18
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
PREMIUMS. Gross premiums written increased 47.9% to $482.6 million in the three
months ended June 30, 2001 from $326.2 million in the three months ended June
30, 2000 as the Company took advantage of selected growth opportunities, while
continuing to maintain a disciplined underwriting approach. Premium growth areas
included a 231.7% ($87.0 million) increase in the U.S. Insurance operation,
principally attributable to growth in workers' compensation insurance, a 32.5%
($40.6 million) increase in the U.S. Reinsurance operation, primarily reflecting
improved market conditions, a 26.3% ($21.7 million) increase in the Specialty
Reinsurance operation, principally attributable to growth in medical stop loss
business, a component of A&H writings, and an 8.8% ($7.1 million) increase in
the International Reinsurance operation, mainly attributable to growth in Latin
America. The Company continued to decline business that did not meet its
objectives regarding underwriting profitability.
Ceded premiums increased to $65.8 million in the three months ended June 30,
2001 from $31.1 million in the three months ended June 30, 2000. This increase
was principally attributable to the higher utilization of contract specific
retrocessions in the U.S. Insurance operation, including a 100% ceded program,
first written in the third quarter of 2000, which contributed $19.3 million to
the increase. The ceded premiums for the three months ended June 30, 2001 and
2000 included adjustment premiums of $15.4 million and $11.7 million,
respectively, relating to claims made under the 1999 accident year aggregate
excess of loss element of the Company's corporate retrocessional program.
Net premiums written increased by 41.2% to $416.7 million in the three months
ended June 30, 2001 from $295.1 million in the three months ended June 30, 2000.
This increase was consistent with the increase in gross premiums written,
partially offset by the increase in ceded premiums.
PREMIUM REVENUES. Net premiums earned increased by 36.8% to $391.1 million in
the three months ended June 30, 2001 from $285.8 million in the three months
ended June 30, 2000. Contributing to this increase was a 234.2% ($47.9 million)
increase in the U.S. Insurance operation, a 27.8% ($30.5 million) increase in
the U.S. Reinsurance operation, a 22.9% ($18.5 million) increase in the
Specialty Reinsurance operation and an 11.3% ($8.4 million) increase in the
International Reinsurance operation. All of these changes reflect period to
period changes in net written premiums and business mix together with normal
variability in earnings patterns. Business mix changes occur not only as the
Company shifts emphasis between products, lines of business, distribution
channels and markets but also as individual contracts renew or non-renew, almost
always with changes in coverage, structure, prices and/or terms, and as new
contracts are accepted with coverages, structures, prices and/or terms different
from those of expiring contracts. As premium reporting and earnings and loss and
commission characteristics derive from the provisions of individual contracts,
the continuous turnover of individual contracts, arising from both strategic
shifts and day to day underwriting, can and does introduce appreciable
background variability in various underwriting line items.
EXPENSES. Incurred loss and loss adjustment expenses ("LAE") increased by 24.2%
to $290.2 million in the three months ended June 30, 2001 from $233.7 million in
the three months ended June 30, 2000. The increase in incurred losses and LAE
was principally attributable to the increase in net premiums earned and also
reflects the impact of changes in the Company's mix of business. Incurred losses
and LAE include catastrophe losses, which include the impact of both current
period events, and favorable and unfavorable development on prior period events
19
and are net of reinsurance. Catastrophe losses, net of contract specific
cessions but before cessions under the corporate retrocessional program, were
$13.9 million in the three months ended June 30, 2001 and related principally to
the tropical storm Alison loss event compared to net catastrophe losses of $6.2
million in the three months ended June 30, 2000. Incurred losses and LAE for the
three months ended June 30, 2001 reflected ceded losses and LAE of $77.1 million
compared to ceded losses and LAE in the three months ended June 30, 2000 of
$40.5 million, with the increase principally attributable to the higher
utilization of contract specific retrocessions in the U.S. Insurance operation.
The ceded losses and LAE for the three months ended June 30, 2001 and 2000
reflect $29.0 million and $23.5 million, respectively, of losses ceded under the
1999 accident year aggregate excess of loss component of the Company's corporate
retrocessional program.
Contributing to the increase in incurred losses and LAE in the three months
ended June 30, 2001 from the three months ended June 30, 2000 were a 265.5%
($35.6 million) increase in the U.S. Insurance operation principally reflecting
increased premium volume coupled with changes in this segment's specific
reinsurance programs, an 16.8% ($15.8 million) increase in the U.S. Reinsurance
operation, principally reflecting losses in connection with tropical storm
Alison, a 5.8% ($4.0 million) increase in the Specialty Reinsurance operation
principally attributable to increased premium volume in A&H and a 2.0% ($1.1
million) increase in the International Reinsurance operation. Incurred losses
and LAE for each operation were also impacted by variability relating to changes
in the level of premium volume and mix of business by class and type.
The Company's loss and LAE ratio ("loss ratio"), which is calculated by dividing
incurred losses and LAE by premiums earned, decreased by 7.6 percentage points
to 74.2% in the three months ended June 30, 2001 from 81.8% in the three months
ended June 30, 2000 reflecting the incurred losses and LAE discussed above. The
following table shows the loss ratios for each of the Company's operating
segments for the three months ended June 30, 2001 and 2000. The loss ratios for
all operations were impacted by the factors noted above.
OPERATING SEGMENT LOSS RATIOS
- --------------------------------------------------------------------------------
Segment 2001 2000
- --------------------------------------------------------------------------------
U.S. Reinsurance 78.2% 85.5%
U.S. Insurance 71.8% 65.6%
Specialty Reinsurance 74.2% 86.3%
International Reinsurance 69.4% 75.7%
Underwriting expenses increased by 88.3% to $111.1 million in the three months
ended June 30, 2001 from $59.0 million in the three months ended June 30, 2000.
Commission, brokerage, taxes and fees increased by $50.6 million, principally
reflecting increases in premium volume and changes in the mix of business. In
addition, in 2000, the Company's reassessment of the expected losses on a
multi-year reinsurance treaty led to a $32.2 million decrease in contingent
commissions with a corresponding increase to losses. Other underwriting expenses
increased by $1.5 million. Contributing to these underwriting expense increases
were a 673.1% ($36.1 million) increase in the U.S. Reinsurance operation,
principally relating to the impact in 2000 of the contingent commission
adjustment noted above, a 147.3% ($10.7 million) increase in the U.S. Insurance
operation, mainly relating to increased premium volume, a 12.3% ($2.8 million)
20
increase in the International Reinsurance operation and a 9.8% ($2.2 million)
increase in the Specialty Reinsurance operation. The changes for each
operation's expenses principally resulted from changes in commission expenses
related to changes in premium volume and business mix by class and type and, in
some cases, changes in the use of specific reinsurance and the underwriting
performance of the underlying business. The Company's expense ratio, which is
calculated by dividing underwriting expenses by premiums earned, was 28.4% for
the three months ended June 30, 2001 compared to 20.6% for the three months
ended June 30, 2000.
The Company's combined ratio, which is the sum of the loss and expense ratios,
increased by 0.2 percentage points to 102.6% in the three months ended June 30,
2001 compared to 102.4% in the three months ended June 30, 2000. The following
table shows the combined ratios for each of the Company's operating segments for
the three months ended June 30, 2001 and 2000. The combined ratios for all
operations were impacted by the loss and expense ratio variability noted above.
OPERATING SEGMENT COMBINED RATIOS
- --------------------------------------------------------------------------------
Segment 2001 2000
- --------------------------------------------------------------------------------
U.S. Reinsurance 107.8% 90.4%
U.S. Insurance 98.0% 101.1%
Specialty Reinsurance 99.7% 114.7%
International Reinsurance 99.8% 105.8%
Interest expense for the three months ended June 30, 2001 was $11.5 million
compared to $11.6 million for the three months ended June 30, 2000. Interest
expense for the three months ended June 30, 2001 reflects $9.7 million relating
to the Company's issuance of senior notes and $1.8 million relating to the
Company's borrowings under it's revolving credit facility. Interest expense for
the three months ended June 30, 2000 reflects $9.7 million relating to the
Company's issuance of senior notes and $1.9 million relating to the Company's
borrowings under its revolving credit facility.
Other income for the three months ended June 30, 2001 was $0.8 million compared
to other expense of $0.4 million for the three months ended June 30, 2000.
Significant contributors to other income for the three months ended June 30,
2001 were foreign exchange gains as well as financing fees, offset by the
amortization of deferred expenses relating to the Company's issuance of senior
notes in 2000. Other expense for the three months ended June 30, 2000
principally included foreign exchange losses. The foreign exchange gains and
losses for both periods are attributable to fluctuations in foreign currency
exchange rates.
INVESTMENT RESULTS. Net investment income increased 2.7% to $68.7 million in the
three months ended June 30, 2001 from $66.9 million in the three months ended
June 30, 2000, principally reflecting the effect of investing the $82.2 million
of cash flow from operations in the twelve months ended June 30, 2001. The
following table shows a comparison of various investment yields as of June 30,
2001 and December 31, 2000, respectively, and for the periods ended June 30,
2001 and 2000, respectively.
21
2001 2000
-------------------
Imbedded pre-tax yield of cash and invested
assets at June 30, 2001 and December 31, 2000 6.6% 6.7%
Imbedded after-tax yield of cash and invested
assets at June 30, 2001 and December 31, 2000 5.0% 5.0%
Annualized pre-tax yield on average cash and
invested assets for the three months ended June 30,
2001 and 2000 6.6% 6.3%
Annualized after-tax yield on average cash and
invested assets for the three months ended June 30,
2001 and 2000 4.9% 4.7%
Net realized capital gains were $4.1 million in the three months ended June 30,
2001, reflecting realized capital gains on the Company's investments of $20.3
million, partially offset by $16.2 million of realized capital losses, compared
to net realized capital losses of $8.2 million in the three months ended June
30, 2000. The net realized capital losses in the three months ended June 30,
2000 reflected realized capital losses of $12.1 million, partially offset by
$3.9 million of realized capital gains. The realized capital losses in the three
months ended June 30, 2001 and 2000 arose mainly from activity in the Company's
U.S. fixed maturity portfolio. The realized capital gains in the three months
ended June 30, 2001 and 2000 arose mainly from activity in the Company's equity
portfolio.
INCOME TAXES. The Company incurred income tax expense of $12.1 million in the
three months ended June 30, 2001 compared to $8.3 million in the three months
ended June 30, 2000 principally reflecting the realized capital gains in the
three months ended June 30, 2001 compared to the realized capital losses in the
three months ended June 30, 2000. In addition, the relationship of tax-exempt
income to pre-tax income declined due to shifts in the Company's investment mix.
NET INCOME. Net income was $39.8 million in the three months ended June 30, 2001
compared to $31.5 million in the three months ended June 30, 2000. This increase
generally reflects the improved investment results, as well as the realized
capital gains in the three months ended June 30, 2001.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
PREMIUMS. Gross premiums written increased 43.0% to $901.5 million in the six
months ended June 30, 2001 from $630.5 million in the six months ended June 30,
2000 as the Company took advantage of selected growth opportunities, while
continuing to maintain a disciplined underwriting approach. Premium growth areas
included a 234.5% ($176.5 million) increase in the U.S. Insurance operation,
principally attributable to growth in workers' compensation insurance, a 37.2%
($54.0 million) increase in the Specialty Reinsurance operation, principally
attributable to growth in medical stop loss business, a component of A&H
writings, a 10.8% ($28.0 million) increase in the U.S. Reinsurance operation,
primarily reflecting improved market conditions, and an 8.2% ($12.5 million)
increase in the International Reinsurance operation, mainly attributable to
22
growth in Latin America. The Company continued to decline business that did not
meet its objectives regarding underwriting profitability.
Ceded premiums increased to $97.9 million in the six months ended June 30, 2001
from $47.8 million in the six months ended June 30, 2000. This increase was
principally attributable to the higher utilization of contract specific
retrocessions in the U.S. Insurance operation, including a 100% ceded program,
first written in the third quarter of 2000, which contributed $29.9 million to
the increase. The ceded premiums for the six months ended June 30, 2001 and 2000
included adjustment premiums of $15.4 million and $11.7 million, respectively,
relating to claims made under the 1999 accident year aggregate excess of loss
element of the Company's corporate retrocessional program.
Net premiums written increased by 37.9% to $803.6 million in the six months
ended June 30, 2001 from $582.7 million in the six months ended June 30, 2000.
This increase was consistent with the increase in gross premiums written,
partially offset by the increase in ceded premiums.
PREMIUM REVENUES. Net premiums earned increased by 30.3% to $719.1 million in
the six months ended June 30, 2001 from $552.0 million in the six months ended
June 30, 2000. Contributing to this increase was a 209.3% ($81.5 million)
increase in the U.S. Insurance operation, a 35.0% ($50.0 million) increase in
the Specialty Reinsurance operation, a 10.8% ($15.3 million) increase in the
International Reinsurance operation and an 8.9% ($20.3 million) increase in the
U.S. Reinsurance operation. All of these changes reflect period to period
changes in net written premiums and business mix together with normal
variability in earnings patterns.
EXPENSES. Incurred loss and loss adjustment expenses ("LAE") increased by 23.9%
to $532.7 million in the six months ended June 30, 2001 from $430.1 million in
the six months ended June 30, 2000. The increase in incurred losses and LAE was
principally attributable to the increase in net premiums earned and also
reflects the impact of changes in the Company's mix of business. Incurred losses
and LAE include catastrophe losses, which include the impact of both current
period events, and favorable and unfavorable development on prior period events
and are net of reinsurance. Catastrophe losses, net of contract specific
cessions but before cessions under the corporate retrocessional program, were
$28.7 million in the six months ended June 30, 2001 and related principally to
the tropical storm Alison, Petrobras Oil Rig and El Salvador earthquake loss
events compared to net catastrophe losses of $9.2 million in the six months
ended June 30, 2000. Incurred losses and LAE for the six months ended June 30,
2001 reflected ceded losses and LAE of $109.7 million compared to ceded losses
and LAE in the six months ended June 30, 2000 of $57.3 million, with the
increase principally attributable to the higher utilization of contract specific
retrocessions in the U.S. Insurance operation. The ceded losses and LAE for the
six months ended June 30, 2001 and 2000 reflect $29.0 million and $23.5 million,
respectively, of losses ceded under the 1999 accident year aggregate excess of
loss component of the Company's corporate retrocessional program.
Contributing to the increase in incurred losses and LAE in the six months ended
June 30, 2001 from the six months ended June 30, 2000 were a 249.5% ($61.6
million) increase in the U.S. Insurance operation principally reflecting
increased premium volume coupled with changes in this segments specific
reinsurance programs, a 29.7% ($33.9 million) increase in the Specialty
Reinsurance operation principally attributable to increased premium volume in
A&H business together with catastrophe losses relating to the Petrobras Oil Rig
event, and a 4.0% ($7.2 million) increase in the U.S. Reinsurance operation,
23
principally reflecting losses in connection with tropical storm Alison. Incurred
losses and LAE for each operation were also impacted by variability relating to
changes in the level of premium volume and mix of business by class and type.
The Company's loss and LAE ratio ("loss ratio"), which is calculated by dividing
incurred losses and LAE by premiums earned, deceased by 3.8 percentage points to
74.1% in the six months ended June 30, 2001 from 77.9% in the six months ended
June 30, 200 reflecting the incurred losses and LAE discussed above. The
following table shows the loss ratios for each of the Company's operating
segments for the six months ended June 30, 2001 and 2000. The loss ratios for
all operations were impacted by the factors noted above.
OPERATING SEGMENT LOSS RATIOS
- --------------------------------------------------------------------------------
Segment 2001 2000
- --------------------------------------------------------------------------------
U.S. Reinsurance 74.2% 77.7%
U.S. Insurance 71.6% 63.4%
Specialty Reinsurance 76.8% 79.9%
International Reinsurance 72.4% 80.3%
Underwriting expenses increased by 50.4% to $204.9 million in the six months
ended June 30, 2001 from $136.2 million in the six months ended June 30, 2000.
Commission, brokerage, taxes and fees increased by $66.7 million, principally
reflecting increases in premium volume and changes in the mix of business. In
addition, in 2000, the Company's reassessment of the expected losses on a
multi-year reinsurance treaty led to a $32.2 million decrease in contingent
commissions with a corresponding increase to losses. Other underwriting expenses
increased by $2.0 million. Contributing to these underwriting expense increases
were a 117.5% ($19.2 million) increase in the U.S. Insurance operation, mainly
relating to the increased premium volume, a 103.9% ($36.3 million) increase in
the U.S. Reinsurance operation, which included the impact of the contingent
commission adjustment noted above, a 19.5% ($8.3 million) increase in the
Specialty Reinsurance operation, and an 11.1% ($4.6 million) increase in the
International Reinsurance operation. The changes for each operation's expenses
principally resulted from changes in commission expenses related to changes in
premium volume and business mix by class and type and, in some cases, changes in
the use of specific reinsurance and the underwriting performance of the
underlying business. The Company's expense ratio, which is calculated by
dividing underwriting expenses by premiums earned, was 28.5% for the six months
ended June 30, 2001 compared to 24.7% for the six months ended June 30, 2000.
The Company's combined ratio, which is the sum of the loss and expense ratios,
was 102.6% in the six months ended June 30, 2001 and 2000. The following table
shows the combined ratios for each of the Company's operating segments for the
six months ended June 30, 2001 and 2000. The combined ratios for all operations
were impacted by the loss and expense ratio variability noted above.
24
OPERATING SEGMENT COMBINED RATIOS
- --------------------------------------------------------------------------------
Segment 2001 2000
- --------------------------------------------------------------------------------
U.S. Reinsurance 102.8% 92.9%
U.S. Insurance 101.0% 105.2%
Specialty Reinsurance 103.0% 109.5%
International Reinsurance 102.0% 109.8%
Interest expense for the six months ended June 30, 2001 was $24.0 million
compared to $14.7 million for the six months ended June 30, 2000. Interest
expense for the six months ended June 30, 2001 reflects $19.5 million relating
to the Company's issuance of senior notes and $4.5 million relating to the
Company's borrowings under it's revolving credit facility. Interest expense for
the six months ended June 30, 2000 reflects $11.3 million relating to the
Company's issuance of senior notes and $3.4 million relating to the Company's
borrowings under its revolving credit facility.
Other income for the six months ended June 30, 2001 was $1.5 million compared to
$0.4 million for the six months ended June 30, 2000. Significant contributors to
other income for the six months ended June 30, 2001 were foreign exchange gains
as well as financing fees, offset by the amortization of deferred expenses
relating to the Company's issuance of senior notes in 2000. Other income for the
six months ended June 30, 2000 principally included foreign exchange gains and
financing fees. The foreign exchange gains for both periods are attributable to
fluctuations in foreign currency exchange rates.
INVESTMENT RESULTS. Net investment income increased 4.1% to $136.1 million in
the six months ended June 30, 2001 from $130.8 million in the six months ended
June 30, 2000, principally reflecting the effect of investing the $82.2 million
of cash flow from operations in the twelve months ended June 30, 2001 and the
investment in the second quarter of 2000 of the $450.0 million in proceeds from
the Company's issuance of senior notes. The following table shows a comparison
of various investment yields as of June 30, 2001 and December 31, 2000,
respectively, and for the periods ended June 30, 2001 and 2000, respectively.
2001 2000
-------------------
Imbedded pre-tax yield of cash and invested
assets at June 30, 2001 and December 31, 2000 6.6% 6.7%
Imbedded after-tax yield of cash and invested
assets at June 30, 2001 and December 31, 2000 5.0% 5.0%
Annualized pre-tax yield on average cash and
invested assets for the six months ended June 30,
2001 and 2000 6.5% 6.2%
Annualized after-tax yield on average cash and
invested assets for the six months ended June 30,
2001 and 2000 4.8% 4.7%
Net realized capital losses were $0.7 million in the six months ended June 30,
2001, reflecting realized capital losses on the Company's investments of $21.3
million, partially offset by $20.6 million of realized capital gains, compared
to net realized capital losses of $0.3 million in the six months ended June 30,
25
2000. The net realized capital losses in the six months ended June 30, 2000
reflected realized capital losses of $19.7 million, partially offset by $19.4
million of realized capital gains. The realized capital losses in the six months
ended June 30, 2001 and 2000 arose mainly from activity in the Company's U.S.
fixed maturity portfolio. The realized capital gains in the six months ended
June 30, 2001and 2000 arose mainly from activity in the Company's equity
portfolio.
INCOME TAXES. The Company incurred income tax expense of $21.0 million in the
six months ended June 30, 2001 compared to $21.3 million in the six months ended
June 30, 2000, reflecting the increase in realized capital losses in 2001. In
addition, the relationship of tax-exempt income to pre-tax income declined due
to shifts in the Company's investment mix.
NET INCOME. Net income was $73.4 million in the six months ended June 30, 2001
compared to $80.6 million in the six months ended June 30, 2000. This decrease
generally reflects increased interest expense, partially offset by improved
investment results.
MARKET SENSITIVE INSTRUMENTS. The Company's risks associated with market
sensitive instruments have not changed materially since the period ended
December 31, 2000.
SAFE HARBOR DISCLOSURE. 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, 2000 set forth cautionary
statements identifying important factors, among others, that could cause its
actual results to differ materially from those which might be projected,
forecasted or estimated in its forward-looking statements, as defined in the
Act, made by or on behalf of the Company in press releases, written statements
or documents filed with the Securities and Exchange Commission, or in its
communications and discussions with investors and analysts in the normal course
of business through meetings, phone calls and conference calls. These cautionary
statements supplement other factors contained in this report which could cause
the Company's actual results to differ materially from those which might be
projected, forecasted or estimated in its forward-looking statements.
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,
and common shareholders' equity (including book value per share), plans for
future operations, 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. 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.
26
EVEREST REINSURANCE HOLDINGS, INC.
OTHER INFORMATION
PART II - ITEM 1. LEGAL PROCEEDINGS
The Company is involved from time to time in ordinary routine litigation and
arbitration proceedings incidental to its business. The Company does not believe
that there are any other material pending legal proceedings to which it or any
of its subsidiaries or their properties are subject.
PART II - ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) No additional exhibits are required to be furnished by Item 601 of
Regulation S-K.
b) There were no reports on Form 8-K filed during the three-month period
ending June 30, 2001.
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.
27
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)
/S/ STEPHEN L. LIMAURO
-----------------------------------------
Stephen L. Limauro
Duly Authorized Officer, Senior Vice President
and Chief Financial Officer
Dated: August 9, 2001