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, 1998 1-13816
- --------------------- ----------------------
EVEREST REINSURANCE HOLDINGS, INC.
----------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 22-3263609
- ------------------------ ----------------------------
(State or other juris- (IRS Employer Identification
diction of incorporation Number)
or organization)
WESTGATE CORPORATE CENTER
LIBERTY CORNER, NEW JERSEY 07938-0830
-------------------------------------
(908) 604-3000
-------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Number of Shares Outstanding
CLASS at August 4, 1998
----- ----------------------------
COMMON STOCK, $.01 PAR VALUE 50,503,704
EVEREST REINSURANCE HOLDINGS, INC.
INDEX TO FORM 10-Q
PART I
FINANCIAL INFORMATION
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PAGE
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ITEM 1. FINANCIAL STATEMENTS
--------------------
Consolidated Balance Sheets at June 30, 1998 (unaudited)
and December 31, 1997 3
Consolidated Statements of Operations for the three months and
six months ended June 30, 1998 and 1997 (unaudited) 4
Consolidated Statements of Changes in Stockholders' Equity for
the three months and six months ended June 30, 1998 and 1997
(unaudited) 5
Consolidated Statements of Cash Flows for the three months
and six months ended June 30, 1998 and 1997 (unaudited) 6
Notes to Consolidated Interim Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS 13
-------------------------
PART II
OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS 17
-----------------
ITEM 2. CHANGES IN SECURITIES 17
---------------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES None
-------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 17
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ITEM 5. OTHER INFORMATION None
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
--------------------------------
Part I - Item 1
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value per share)
June 30, December 31,
--------------- ---------------
ASSETS: 1998 1997
--------------- ---------------
(unaudited)
Fixed maturities - available
for sale, at market value
(amortized cost: 1998,
$3,798,109; 1997, $3,658,370) $ 4,013,446 $ 3,866,860
Equity securities, at market
value (cost: 1998, $123,324;
1997, $120,510) 177,418 158,784
Short-term investments 99,074 75,244
Other invested assets 5,180 10,848
Cash 48,343 51,578
--------------- ---------------
Total investments and cash 4,343,461 4,163,314
Accrued investment income 61,732 60,424
Premiums receivable 282,431 256,191
Reinsurance receivables 670,601 692,473
Funds held by reinsureds 190,412 186,454
Deferred acquisition costs 78,422 82,332
Prepaid reinsurance premiums 9,410 8,980
Deferred tax asset 76,399 74,434
Other assets 19,542 13,418
--------------- ---------------
TOTAL ASSETS $ 5,732,410 $ 5,538,020
=============== ===============
LIABILITIES:
Reserve for losses and
adjustment expenses $ 3,486,060 $ 3,437,818
Unearned premium reserve 329,643 337,383
Funds held under reinsurance
treaties 202,241 190,639
Losses in the course of payment 62,503 55,969
Contingent commissions 99,612 100,027
Other net payable to reinsurers 11,395 13,231
Current federal income taxes 15,078 13,567
Other liabilities 126,487 81,903
--------------- ---------------
Total liabilities 4,333,019 4,230,537
--------------- ---------------
STOCKHOLDERS' EQUITY:
Preferred stock, par value:
$0.01; 50 million shares
authorized; no shares issued
and outstanding - -
Common stock, par value:
$0.01; 200 million shares
authorized; 50.8 million
shares issued 508 508
Additional paid-in capital 389,985 389,876
Unearned compensation (335) (514)
Accumulated other
comprehensive income, net of
deferred income taxes 165,726 152,319
Retained earnings 851,677 773,380
Treasury stock, at cost; 0.3
million shares (8,170) (8,086)
--------------- ---------------
Total stockholders' equity 1,399,391 1,307,483
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 5,732,410 $ 5,538,020
=============== ===============
The accompanying notes are an integral part of the consolidated financial
statements.
3
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(unaudited)
REVENUES:
Premiums earned $ 264,726 $ 247,515 $ 506,062 $ 477,958
Net investment income 62,525 57,368 122,538 111,410
Net realized capital gain 2,523 13,410 2,506 13,211
Other income 649 773 2,195 4,007
------------ ------------ ------------ ------------
Total revenues 330,423 319,066 633,301 606,586
------------ ------------ ------------ ------------
CLAIMS AND EXPENSES:
Incurred loss and loss
adjustment expenses 195,552 180,191 374,144 347,032
Commission, brokerage,
taxes and fees 65,468 65,875 125,905 127,890
Other underwriting
expenses 12,393 12,362 24,217 25,101
------------ ------------ ------------ ------------
Total claims and expenses 273,413 258,428 524,266 500,023
------------ ------------ ------------ ------------
INCOME BEFORE TAXES 57,010 60,638 109,035 106,563
Income tax 13,466 16,300 25,690 27,761
------------ ------------ ------------ ------------
NET INCOME $ 43,544 $ 44,338 $ 83,345 $ 78,802
============ ============ ============ ============
Other comprehensive
income, net of tax 2,043 50,885 13,407 5,041
------------ ------------ ------------ ------------
COMPREHENSIVE INCOME $ 45,587 $ 95,223 $ 96,752 $ 83,843
============ ============ ============ ============
PER SHARE DATA:
Average shares
outstanding (000's) 50,480 50,469 50,481 50,480
Net income per common
share - basic $ 0.86 $ 0.88 $ 1.65 $ 1.56
============ ============ ============ ============
Average diluted shares
outstanding (000's) 50,799 50,738 50,799 50,731
Net income per common
share - diluted $ 0.86 $ 0.87 $ 1.64 $ 1.55
============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
4
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(unaudited)
COMMON STOCK (shares
outstanding):
Balance, beginning of
period 50,482,326 50,490,673 50,479,271 50,490,273
Issued during the period 2,000 3,400 4,000 3,800
Treasury stock acquired
during period (8,460) (29,996) (8,460) (29,996)
Treasury stock reissued
during period 1,362 1,475 2,417 1,475
------------ ------------ ------------ ------------
Balance, end of period 50,477,228 50,465,552 50,477,228 50,465,552
============ ============ ============ ============
COMMON STOCK (par value):
Balance, beginning of
period $ 508 $ 508 $ 508 $ 508
Issued during the period - - - -
------------ ------------ ------------ ------------
Balance, end of period 508 508 508 508
------------ ------------ ------------ ------------
ADDITIONAL PAID IN
CAPITAL:
Balance, beginning of
period 389,928 389,202 389,876 389,196
Common stock issued
during the period 34 57 67 63
Treasury stock reissued
during period 23 9 42 9
------------ ------------ ------------ ------------
Balance, end of period 389,985 389,268 389,985 389,268
------------ ------------ ------------ ------------
UNEARNED COMPENSATION:
Balance, beginning of
period (436) (324) (514) (374)
Net increase during the
period 101 50 179 100
------------ ------------ ------------ ------------
Balance, end of period (335) (274) (335) (274)
------------ ------------ ------------ ------------
ACCUMULATED OTHER
COMPREHENSIVE INCOME,
NET OF DEFERRED INCOME
TAXES:
Balance, beginning
of period 163,683 31,568 152,319 77,412
Net increase during the
period 2,043 50,885 13,407 5,041
------------ ------------ ------------ ------------
Balance, end of period 165,726 82,453 165,726 82,453
------------ ------------ ------------ ------------
RETAINED EARNINGS:
Balance, beginning
of period 810,657 658,945 773,380 626,501
Net income 43,544 44,338 83,345 78,802
Dividends declared
($0.05 and $0.10 per
share in 1998 and
$0.04 and $0.08 per
share in 1997) (2,524) (2,018) (5,048) (4,038)
------------ ------------ ------------ ------------
Balance, end of period 851,677 701,265 851,677 701,265
------------ ------------ ------------ ------------
TREASURY STOCK AT COST:
Balance, beginning of
period (8,061) (7,220) (8,086) (7,220)
Treasury stock acquired
during period (141) (808) (141) (808)
Treasury stock reissued
during period 32 35 57 35
------------ ------------ ------------ ------------
Balance, end of period (8,170) (7,993) (8,170) (7,993)
------------ ------------ ------------ ------------
TOTAL STOCKHOLDERS'
EQUITY, END OF PERIOD $ 1,399,391 $ 1,165,227 $ 1,399,391 $ 1,165,227
============ ============ ============ ============
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,
--------------------------- ---------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
(unaudited)
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income $ 43,544 $ 44,338 $ 83,345 $ 78,802
Adjustments to
reconcile net income
to net cash provided
by operating activities:
(Increase) decrease in
premiums receivable (17,637) 7,758 (26,309) (20,791)
(Increase) decrease in
funds held by
reinsureds, net 2,442 (3,558) 7,673 13,218
Decrease in reinsurance
receivables 17,259 56,398 21,745 75,502
(Increase) in deferred
tax asset (7,230) (3,988) (9,185) (7,893)
Increase in reserve for
losses and loss
adjustment expenses 8,467 25,872 49,488 60,684
Increase (decrease) in
unearned premiums (8,392) (5,557) (7,356) 1,173
Decrease in other assets
and liabilities 16,929 13,800 6,116 20,560
Non cash compensation
expense 101 50 179 100
Accrual of bond
discount/amortization
of bond premium (219) (368) (292) (715)
Realized capital gains (2,523) (13,410) (2,506) (13,211)
------------ ----------- ------------ ------------
Net cash provided by
operating activities 52,741 121,335 122,898 207,429
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from fixed
maturities matured/called
- held to maturity - - - 2,155
Proceeds from fixed
maturities matured/called
- available for sale 40,643 142,757 70,626 203,151
Proceeds from fixed
maturities sold -
available for sale 264,512 453,502 317,671 587,064
Proceeds from equity
securities sold 4,327 37,246 6,987 47,625
Proceeds from other
invested assets sold 5,357 - 6,671 -
Cost of fixed maturities
acquired - available
for sale (338,539) (738,788) (531,099) (1,024,462)
Cost of equity securities
acquired (6,778) (9,915) (8,187) (23,241)
Cost of other invested
assets acquired (150) (31,708) (445) (33,203)
Net (purchases) sales of
short-term securities 8,482 1,611 (23,588) -
Net increase (decrease)
in unsettled securities
transactions (21,619) 16,364 7,273 27,743
------------ ------------ ------------ ------------
Net cash used in
investing activities (43,765) (128,931) (154,091) (213,168)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Purchase of treasury stock (86) (764) (42) (764)
Common stock issued during
the period 34 57 67 63
Dividends paid to
stockholders (2,524) (2,018) (5,048) (4,038)
Net increase in collateral
for loaned securities 3,855 - 31,753 -
------------ ------------ ------------ ------------
Net cash provided by (used
in) financing activities 1,279 (2,725) 26,730 (4,739)
------------ ------------ ------------ ------------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH (596) 3,018 1,228 (4,137)
------------ ------------ ------------ ------------
Net increase (decrease)
in cash 9,659 (7,303) (3,235) (14,615)
Cash, beginning of period 38,684 45,283 51,578 52,595
------------ ------------ ------------ ------------
Cash, end of period $ 48,343 $ 37,980 $ 48,343 $ 37,980
============ ============ ============ ============
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash transactions:
Income taxes paid, net $ 25,950 $ 18,198 $ 33,694 $ 37,409
Non-cash financing
transaction:
Issuance of common stock
in connection with public
offering $ 101 $ 50 $ 179 $ 100
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 MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
1. GENERAL
The consolidated financial statements of Everest Reinsurance Holdings Inc. (the
"Company") for the three months and six months ended June 30, 1998 and 1997
include all adjustments, consisting of normal recurring accruals, which, in the
opinion of management, are necessary for a fair presentation of results on an
interim basis. Certain financial information which is normally included in
annual financial statements prepared in accordance with generally accepted
accounting principles has been omitted since it is not required for interim
reporting purposes. The year end condensed balance sheet data was derived from
audited financial statements, but does not include all disclosures required by
generally accepted accounting principles. The results for the three months and
six months ended June 30, 1998 and 1997 are not necessarily indicative of the
results for a full year. These financial statements should be read in
conjunction with the audited consolidated financial statements and notes thereto
for the years ended December 31, 1997, 1996 and 1995.
2. CONTINGENCIES
The Company continues to receive claims under expired contracts which assert
alleged injuries and/or damages relating to or resulting from toxic torts, toxic
waste and other hazardous substances, such as asbestos. The Company's asbestos
claims typically involve potential liability for bodily injury from exposure to
asbestos or for property damage resulting from asbestos or products containing
asbestos. The Company's environmental claims typically involve potential
liability for (i) the mitigation or remediation of environmental contamination
or (ii) bodily injury or property damages caused by the release of hazardous
substances into the land, air or water.
The Company's reserves include an estimate of the Company's ultimate liability
for asbestos and environmental claims for which ultimate value cannot be
estimated using traditional reserving techniques. There are significant
uncertainties in estimating the amount of the Company's potential losses from
asbestos and environmental claims. Among the complications are: (i) potentially
long waiting periods between exposure and manifestation of any bodily injury or
property damage; (ii) difficulty in identifying sources of asbestos or
environmental contamination; (iii) difficulty in properly allocating
responsibility and/or liability for asbestos or environmental damage; (iv)
changes in underlying laws and judicial interpretation of those laws; (v)
potential for an asbestos or environmental claim to involve many insurance
providers over many policy periods; (vi) long reporting delays, both from
insureds to insurance companies and ceding companies to reinsurers; (vii)
limited historical data concerning asbestos and environmental losses; (viii)
questions concerning interpretation and application of insurance and reinsurance
coverage; and (ix) uncertainty regarding the number and identity of insureds
with potential asbestos or environmental exposure.
7
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
Management believes that these issues are not likely to be resolved in the near
future. The Company establishes reserves to the extent that, in the judgment of
management, the facts and prevailing law reflect an exposure for the Company or
its ceding company. In connection with its initial public offering in October
1995, the Company purchased an aggregate stop loss retrocession agreement (the
"Stop Loss Agreement") from Gibraltar Casualty Company ("Gibraltar"), an
affiliate of the Company's former parent, The Prudential Insurance Company of
America ("The Prudential"). This coverage protects the Company's consolidated
earnings against up to $375,000 of the first $400,000 of adverse development, if
any, on the Company's consolidated reserves for losses, allocated loss
adjustment expenses and uncollectible reinsurance at June 30, 1995 (December 31,
1994 for catastrophe losses). Due to the uncertainties discussed above, the
ultimate losses may vary materially from current loss reserves and, if coverage
under the Stop Loss Agreement is exhausted, could have a material adverse effect
on the Company's future financial condition, results of operations and cash
flows.
The following table shows the development of prior year asbestos and
environmental reserves on both a gross and net of retrocessional basis for the
three months and six months ended June 30, 1998 and 1997:
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
-------------------------- --------------------------
Gross Basis:
Beginning of
period reserves $ 469,666 $ 428,685 $ 446,132 $ 423,336
Incurred losses 8,825 17,463 36,720 28,662
Paid losses (11,923) (19,554) (16,284) (25,404)
----------- ----------- ----------- -----------
End of period
reserves $ 466,568 $ 426,594 $ 466,568 $ 426,594
=========== =========== =========== ===========
Net Basis:
Beginning of
period reserves $ 232,377 $ 201,885 $ 212,376 $ 199,557
Incurred losses - 461 2,222 461
Paid losses 20,515 1,074 38,294 3,402
----------- ----------- ----------- -----------
End of period
reserves $ 252,892 $ 203,420 $ 252,892 $ 203,420
=========== =========== =========== ===========
8
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
At June 30, 1998, the gross reserves for asbestos and environmental losses were
comprised of $131,823 representing case reserves reported by ceding companies,
$60,596 representing additional case reserves established by the Company on
assumed reinsurance claims, $43,366 representing case reserves established by
the Company on direct excess insurance claims and $230,783 representing incurred
but not reported ("IBNR") reserves. To the extent loss reserves on assumed
reinsurance need to be increased and were not ceded to unaffiliated reinsurers
under existing reinsurance agreements, the Company would be entitled to certain
reimbursements under the Stop Loss Agreement. To the extent loss reserves on
direct excess insurance policies needed to be increased and were not ceded to
unaffiliated reinsurers under existing reinsurance agreements, the Company would
be entitled to 100% protection from Gibraltar under a retrocessional agreement
in place since 1986. While there can be no assurance that reserves for and
losses from these claims would not increase in the future, management believes
that the Company's existing reserves and ceded reinsurance arrangements,
including reimbursements available under the Stop Loss Agreement, lessen the
probability that such increases, if any, would have a material adverse effect on
the Company's financial condition, results of operations or cash flows.
The Company is also named in various legal proceedings incidental to its normal
business activities. In the opinion of management, none of these proceedings is
likely to have a material adverse effect upon the financial condition, results
of operations or cash flows of the Company.
The Prudential sells annuities which are purchased by property and casualty
insurance companies to settle certain types of claim liabilities. In 1993 and
prior, the Company, for a fee, accepted the claim payment obligation of the
property and casualty insurer, and, concurrently, became the owner of the
annuity or assignee of the annuity proceeds. In these circumstances, the Company
would be liable if The Prudential were unable to make the annuity payments. The
estimated cost to replace all such annuities for which the Company was
contingently liable at June 30, 1998 was $141,941.
The Company has purchased annuities from an unaffiliated life insurance company
to settle certain claim liabilities of the Company. Should the life insurance
company become unable to make the annuity payments, the Company would be liable.
The estimated cost to replace such annuities at June 30, 1998 was $10,369.
9
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
3. EARNINGS PER SHARE
Net income per common share has been computed as follows (Shares in thousands,
except per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------------------- -------------------
Net income (numerator) $ 43,544 $ 44,338 $ 83,345 $ 78,802
======== ======== ======== ========
Weighted average common
and effect of dilutive
shares used in the
computation of net
income per share:
Average shares
outstanding
-basic (denominator) 50,480 50,469 50,481 50,480
Effect of dilutive
shares 319 269 318 251
-------- -------- -------- --------
Average shares
outstanding
-diluted (denominator) 50,799 50,738 50,799 50,731
Net income per common share:
Basic $ 0.86 $ 0.88 $ 1.65 $ 1.56
Diluted 0.86 0.87 1.64 1.55
As of June 30, 1998 and 1997 options to purchase 337,750 and 1,500 shares of
common stock, respectively, were outstanding but were not included in the
computation of diluted earnings per share for the three month and six month
periods ended on such dates, because the options' exercise price was greater
than the average market price of the common shares during the period.
4. CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income". This statement
requires an enterprise to present items of other comprehensive income in a
financial statement and to disclose accumulated balances of other comprehensive
income in the equity section of a financial statement. The additional
required presentation has been provided in the interim consolidated
10
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
financial statements for the current period as well as earlier periods. The
Company's components of other comprehensive income include unrealized gains and
losses on investments and foreign currency translation adjustments. As those
items were previously presented as direct charges or credits to the Company's
stockholders' equity, the only impact of adopting this standard is to reflect an
additional presentation of those items.
The Company's other comprehensive income is comprised as follows:
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---------------------- ----------------------
Net unrealized appreciation
(depreciation) of
investments, net of
deferred income taxes $ 4,392 $ 51,115 $ 14,734 $ 9,583
Cumulative translation
adjustments, net of
deferred income taxes (2,349) (230) (1,327) (4,542)
--------- --------- --------- ---------
Other comprehensive
income/(loss), net of
deferred income taxes $ 2,043 $ 50,885 $ 13,407 $ 5,041
========= ========= ========= =========
5. NEW ACCOUNTING STANDARDS
In February 1998, the Financial Accounting Standards Board issued SFAS No. 132,
"Employers' Disclosures about Pensions and Other Postretirement Benefits". This
statement revises employers' disclosures about pension and other postretirement
benefit plans. It does not change the measurement or recognition of those plans.
The statement standardizes the disclosure requirements for pensions and other
postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair value of plan assets
that will facilitate financial analysis and eliminates certain disclosures. This
statement is effective for fiscal years beginning after December 15, 1997. When
adopted, the additional required disclosures will be provided for earlier
periods.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". This statement
requires all derivatives to be recognized as either assets or liabilities in the
statement of financial position and to be measured at fair value. This statement
is effective for all fiscal quarters and fiscal years beginning after June 15,
1999. The Company's management is currently analyzing the impact of this
statement.
11
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(DOLLARS IN THOUSANDS)
6. INCOME TAXES
On April 21, 1998, the Supreme Court issued its decision in ATLANTIC MUTUAL V.
COMMISSIONER, upholding the Internal Revenue Service's position regarding the
computation of the fresh start benefit relating to 1986 reserve strengthening.
Pursuant to the Separation Agreement with The Prudential, the Company has paid
The Prudential $10,445 representing tax and interest in resolution of the
matter. The Company had adequate provisions for this tax contingency and, as a
result, this item has not materially impacted the Company's financial
position.
7. CREDIT LINE
In May 1998, First Union National Bank granted a 364 day extension to the
Company's $50,000 revolving line of credit. All of the terms and conditions of
the original credit facility remain in full force and effect without amendment
except that the maturity date as extended is now June 12, 1999.
12
PART I - ITEM 2
EVEREST REINSURANCE HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
PREMIUMS. Gross premiums written increased 5.6% to $267.5 million in the
three months ended June 30, 1998 from $253.2 million in the three months ended
June 30, 1997 as the Company continued to maintain a cautious approach to
increasingly competitive market conditions. Factors contributing to this
increase include a 55.0% increase (to $98.2 million) in U.S. broker treaty
operations, attributable to growth in accident and health business, non-
standard auto and workers compensation business, and incoming portfolio
reinsurance transactions, a 12.4% increase (to $47.7 million) in U.S. direct
treaty reinsurance and insurance operations, attributable to incoming portfolio
reinsurance transactions, and a 5.7% increase (to $19.6 million) in U.S.
facultative operations, partially offset by a 26.2% decrease (to $30.2 million)
in marine, aviation and surety operations and a 18.4% decrease (to $71.8
million) in international operations reflecting the highly competitive
conditions in these markets.
Ceded premiums increased to $11.9 million in the three months ended June 30,
1998 from $7.2 million in the three months ended June 30, 1997. This increase
was principally attributable to an increase in the Company's contract specific
retrocessions.
Net premiums written increased by 3.9% to $255.6 million in the three months
ended June, 1998 from $246.1 million in the three months ended June 30, 1997
consistent with the growth in gross premiums written partially offset by the
increase in ceded premiums.
REVENUES. Net premiums earned increased by 7.0% to $264.7 million in the
three months ended June 30, 1998 from $247.5 million in the three months ended
June 30, 1997, generally consistent with the growth in net premiums written and
changes in the Company's mix of business during the preceding twelve months.
Net investment income increased 9.0% to $62.5 million in the three months
ended June 30, 1998 from $57.4 million in the three months ended June 30, 1997,
principally reflecting the effect of investing the $291.9 million of cash flow
from operations in the twelve months ended June 30, 1998. The annualized pre-tax
yield on average cash and invested assets decreased to 6.2% in the three months
ended June 30, 1998, from the 6.3% yield in the three months ended June 30,
1997, reflecting an increasing orientation to tax preferenced fixed maturity
investments and the lower interest rate environment.
Net realized capital gains were $2.5 million in the three months ended June
30, 1998, reflecting realized capital gains on the Company's investments of $5.1
million which were offset by $2.6 million of realized capital losses, compared
to net realized capital gains of $13.4 million in the three months ended June
30, 1997. The net realized capital gains in the three months ended June
13
30, 1997 reflected realized capital gains of $18.0 million which were offset by
$4.6 million of realized capital losses. The realized capital gains in both
periods mainly arose from activity in the Company's portfolio of equity
securities, including, in 1997, a $14.0 million realized capital gain on the
sale of the Company's investment in the common stock of Corporacion MAPFRE S.A.
("MAPFRE"), an insurance group in Spain, whereas the realized capital losses for
both periods mainly arose from activity in the Company's fixed maturities
portfolio.
EXPENSES. Incurred losses and loss adjustment expenses ("LAE") increased by
8.5% to $195.6 million in the three months ended June 30, 1998 from $180.2
million in the three months ended June 30, 1997. The Company's loss and LAE
ratio increased by 1.1 percentage points to 73.9% in the three months ended June
30, 1998 from 72.8% in the three months ended June 30, 1997, principally as a
result of changes in the Company's mix of business. Net incurred losses and LAE
for the three months ended June 30, 1998 reflected ceded losses and LAE of $1.4
million, including $0.0 million ceded under the Stop Loss Agreement, compared to
ceded losses and LAE of $20.0 million in the three months ended June 30, 1997,
including $8.6 million ceded under the Stop Loss Agreement.
Underwriting expenses decreased by 0.5% to $77.9 million in the three months
ended June 30, 1998 from $78.2 million in the three months ended June 30, 1997.
Commission and brokerage expenses decreased by $0.4 million, principally
relating to changes in the Company's business mix. Other underwriting expenses
were unchanged at $12.4 million. The Company had 379 employees at June 30, 1998
including 27 employees in the agency operations acquired on June 30, 1998,
compared to 396 employees at June 30, 1997. The Company's expense ratio was
29.4% in the three months ended June 30, 1998 compared to 31.6% in the three
months ended June 30, 1997.
The Company's combined ratio decreased to 103.3% in the three months ended
June 30, 1998 compared to 104.4% in the three months ended June 30, 1997.
INCOME TAXES. The Company recognized income tax expense of $13.5 million in
the three months ended June 30, 1998 compared to $16.3 million in the three
months ended June 30, 1997. The principal cause of this change was the decrease
in net realized capital gains.
NET INCOME. Net income was $43.5 million in the three months ended June 30,
1998 compared to $44.3 million in the three months ended June 30, 1997. This
mainly reflected the improvement in underwriting results and an increase in net
investment income offset by a decrease in net realized capital gains.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
PREMIUMS. Gross premiums written increased 4.3% to $520.5 million in
the six months ended June 30, 1998 from $499.2 million in the six months
ended June 30, 1997 as the Company continued to maintain a cautious
approach to increasingly competitive market conditions. Factors contributing
to this increase included a 48.1% increase (to $178.7 million) in
U.S. broker treaty operations, principally attributable to growth in
accident and health, non-standard auto and workers compensation
business and incoming portfolio reinsurance transactions and a 14.8%
14
increase (to $100.8 million) in U.S. direct treaty reinsurance and insurance
operations, attributable to incoming portfolio reinsurance transactions. These
gains were partially offset by a 23.3% decrease (to $59.5 million) in marine,
aviation and surety operations, a 15.7% decrease (to $146.1 million) in
international operations and a 11.4% decrease (to $35.3 million) in U.S.
facultative operations reflecting the highly competitive conditions in these
markets.
Ceded premiums increased to $22.2 million in the six months ended June 30,
1998 from $19.4 million in the six months ended June 30, 1997. This increase was
principally attributable to an increase in the Company's contract specific
retrocessions.
Net premiums written increased by 3.8% to $498.3 million in the six months
ended June 30, 1998 from $479.9 million in the six months ended June 30, 1997
reflecting the growth in gross premiums written and partially offset by the
increases in ceded premiums.
REVENUES. Net premiums earned increased by 5.9% to $506.1 million in the six
months ended June 30, 1998 from $478.0 million in the six months ended June 30,
1997, generally consistent with the growth in net premiums written and changes
in the Company's mix of business during the preceding twelve months.
Net investment income increased 10.0% to $122.5 million in the six months
ended June 30, 1998 from $111.4 million in the six months ended June 30, 1997,
reflecting the effect of investing the $291.9 million of cash flow from
operations in the twelve months ended June 30, 1998. The annualized pre-tax
yield on average cash and invested assets was stable at 6.1% for the six
months ended both June 30, 1998 and June 30, 1997.
Net realized capital gains were $2.5 million in the six months ended June 30,
1998, reflecting realized capital gains on the Company's investments of $6.7
million which were offset by $4.2 million of realized capital losses, compared
to net realized capital gains of $13.2 million in the six months ended June
30, 1997. The net realized capital gains in the six months ended June 30, 1997
reflected realized capital gains of $20.8 million which were offset by $7.6
million of realized capital losses. The realized capital gains in both periods
mainly arose from activity in the Company's portfolio of equity securities,
including, in 1997, a $14.0 million realized capital gain on the sale of the
Company's investment in the common stock of MAPFRE, whereas the realized capital
losses in both periods mainly arose from activity in the Company's fixed
maturities portfolio.
EXPENSES. Incurred losses and LAE increased by 7.8% to $374.1 million in the
six months ended June 30, 1998 from $347.0 million in the six months ended June
30, 1997. Catastrophe losses in the six months ended June 30, 1998 were $7.0
million compared with $0.0 million in the six months ended June 30, 1997. The
Company's loss and LAE ratio increased by 1.3 percentage points to 73.9% for the
six months ended June 30, 1998 from 72.6% in the six months ended June 30, 1997,
principally as a result of higher catastrophe losses and changes in the
Company's mix of business towards certain reinsurance treaties with higher
expected losses and lower ceding commissions. Net incurred losses and LAE for
the six months ended June 30, 1998 reflected ceded losses and LAE of $35.2
million, including $20.0 million ceded under the Stop Loss Agreement, a
significant amount of which was not settled until July 1998, compared to ceded
losses and LAE of $32.3 million in the six months ended June 30, 1997,
including $13.9 million ceded under the Stop Loss Agreement.
15
Underwriting expenses decreased by 1.9% to $150.1 million in the six months
ended June 30, 1998 from $153.0 million in the six months ended June 30, 1997.
Commission and brokerage expenses decreased by $2.0 million, principally
reflecting changes in the Company's business mix. Other underwriting expenses
decreased by $0.9 million, reflecting the impact of the Company's continuing
expense reduction initiatives. The Company's expense ratio was 29.7% in the six
months ended June 30, 1998 compared to 32.0% in the six months ended June 30,
1997.
The Company's combined ratio decreased to 103.6% in the six months ended
June 30, 1998 from 104.6% in the six months ended June 30, 1997.
INCOME TAXES. The Company recognized income tax expense of $25.7 million in
the six months ended June 30, 1998 compared to $27.8 million in the six months
ended June 30, 1997. The principal cause of this change was the decrease in
capital gains.
NET INCOME. Net income was $83.3 million in the six months ended June 30,
1998 compared to $78.8 million in the six months ended June 30, 1997. This
improvement mainly reflected improved underwriting results and an increase in
investment income partially offset by a decrease in realized capital gains.
FINANCIAL CONDITION
INVESTED ASSETS. Aggregate invested assets, including cash and short-term
investments, were $4,343.5 million at June 30, 1998 and $4,163.3 million at
December 31, 1997. The increase in invested assets between December 31, 1997 and
June 30, 1998 resulted primarily from cash flow from operations of $122.9
million generated during the six months ended June 30, 1998, a $31.8 million
increase in collateral for loaned securities and an increase of $25.2 million in
net appreciation on investments.
STOCKHOLDERS' EQUITY. Holdings' stockholders' equity increased to $1,399.4
million as of June 30, 1998, from $1,307.5 million as of December 31, 1997
principally reflecting net income of $83.3 million for the six months ended June
30, 1998 and an increase of $14.7 million in unrealized appreciation on
investments, net of deferred taxes. Dividends of $5.0 million were declared and
paid by Holdings in the six months ended June 30, 1998.
16
EVEREST REINSURANCE HOLDINGS, INC.
OTHER INFORMATION
Part II - ITEM 1. LEGAL PROCEEDINGS
The Company is subject to litigation and arbitration in the normal course of its
business. Management does not believe that any such pending litigation or
arbitration will have a material adverse effect on the Company's results of
operations, financial condition and cash flows.
Part II - ITEM 2. CHANGES IN SECURITIES
c) Information required by Item 701 of Regulation S-K:
(a) On April 1, 1998, 1,225 common shares of the Company
(previously held as treasury shares) were distributed. On May
20, 1998, 137 common shares of the Company (previously held as
treasury shares) were distributed.
(b) The securities were distributed to the Company's five non-
employee directors and one former non-employee director.
(c) The securities were issued as compensation to the non-employee
directors for services rendered to the Company during the
first quarter of 1998 and for one such director for services
rendered to the Company through May 19, 1998.
(d) Exemption from registration was claimed pursuant to Section
4(2) of the Securities Act of 1933. There was no public
offering and the participants in the transactions were the
Company and its non-employee directors.
(e) Not applicable.
Part II - ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
a) The Annual Meeting was held on May 19, 1998.
b) Kenneth J. Duffy and Joseph V. Taranto were elected at the Annual
Meeting as Directors of the Company for a term expiring in 2001. The
term of office of the following Directors continued after the meeting:
Martin Abrahams, John R. Dunne, Thomas J. Gallagher and William F.
Galtney, Jr.
17
c) The following matter was voted on at the Annual Meeting:
(1) The following Directors were elected:
Votes Votes
For Withheld
----- ---------
Kenneth J. Duffy 45,621,536 473,087
Joseph V. Taranto 44,948,748 1,145,875
Part II - ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit Index:
Exhibit No. Description Location
----------- ----------- --------
*10.21 Employment Agreement Filed herewith
with Joseph V. Taranto
executed on July 15, 1998.
*10.22 Change of Control Agreement Filed herewith
with Joseph V. Taranto
effective July 15, 1998.
10.23 Credit Line Extension dated Filed herewith
May 20, 1998 between
Everest Reinsurance Holdings,
Inc. and First Union National
Bank.
11.1 Statement regarding
computation of per-share
earnings Filed herewith
27 Financial Data Schedule Filed herewith
- ----------------------
*Management contract or compensatory plan or arrangement.
b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the three month period
ending June 30, 1998.
18
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.
19
EVEREST REINSURANCE HOLDINGS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Everest Reinsurance Holdings, Inc.
(Registrant)
- By: /s/ STEPHEN L. LIMAURO
----------------------
Stephen L. Limauro
Duly Authorized Officer, Vice
President and Comptroller
Dated: August 6, 1998