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, 2000 1-15731
- --------------------- ----------------------
EVEREST RE GROUP, LTD.
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(Exact name of Registrant as specified in its charter)
BERMUDA Not Applicable
- ------------------------ ----------------------------
(State or other juris- (IRS Employer Identification
diction of incorporation Number)
or organization)
C/O ABG FINANCIAL & MANAGEMENT SERVICES, INC.
PARKER HOUSE
WILDEY BUSINESS PARK, WILDEY ROAD
ST. MICHAEL, BARBADOS
(246) 436-6287
(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 Excha, e 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 8, 2000
----- ----------------------------
Common Shares, $.01 par value 45,822,705
EVEREST RE GROUP, LTD.
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, 2000 (unaudited)
and December 31, 1999 3
Consolidated Statements of Operations and Comprehensive Income
for the three months and six months ended June 30, 2000
and 1999 (unaudited) 4
Consolidated Statements of Changes in Shareholders' Equity for
the three months and six months ended June 30, 2000 and 1999
(unaudited) 5
Consolidated Statements of Cash Flows for the three months
and six months ended June 30, 2000 and 1999 (unaudited) 6
Notes to Consolidated Interim Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS 17
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 27
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PART II
OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS 28
-----------------
ITEM 2. CHANGES IN SECURITIES 28
---------------------
ITEM 3. DEFAULTS UPON SENIOR SECURITIES None
-------------------------------
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 28
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ITEM 5. OTHER INFORMATION None
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 29
--------------------------------
Part I - Item 1
EVEREST RE GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value per share)
June 30, December 31,
------------ ------------
2000 1999
------------ ------------
ASSETS: (unaudited)
Fixed maturities - available for
sale, at market value (amortized
cost: 2000, $4,373,542; 1999,
$3,940,625) $ 4,352,341 $ 3,885,278
Equity securities, at market value
(cost: 2000, $22,980; 1999, $50,224) 41,918 90,693
Short-term investments 153,384 73,558
Other invested assets 28,666 27,482
Cash 66,837 62,227
------------ ------------
Total investments and cash 4,643,146 4,139,238
Accrued investment income 69,460 64,898
Premiums receivable 338,716 294,941
Reinsurance receivables 759,224 742,513
Funds held by reinsureds 170,238 157,237
Deferred acquisition costs 93,396 82,713
Prepaid reinsurance premiums 22,040 9,582
Deferred tax asset 188,013 188,326
Other assets 30,951 24,854
------------ ------------
TOTAL ASSETS $ 6,315,184 $ 5,704,302
============ ============
LIABILITIES:
Reserve for losses and adjustment
expenses $ 3,605,768 $ 3,646,992
Unearned premium reserve 351,673 308,563
Funds held under reinsurance treaties 187,392 178,520
Losses in the course of payment 100,051 67,065
Contingent commissions 25,445 58,169
Other net payable to reinsurers 27,256 13,217
Current federal income taxes (14,894) (4,475)
8.5% Senior notes due 3/15/2005 249,578 -
8.75% Senior notes due 3/15/2010 198,969 -
Revolving credit agreement borrowings 106,000 59,000
Accrued interest on debt and borrowings 11,849 106
Other liabilities 65,453 49,663
------------ ------------
Total liabilities 4,914,540 4,376,820
SHAREHOLDERS' EQUITY:
Preferred shares, par value: $0.01;
50 million shares authorized; no
shares issued and outstanding - -
Common shares, par value: $0.01;
200 million shares authorized;
45.8 million shares issued in 2000
and 50.9 million shares issued in 1999 458 509
Additional paid-in capital 252,769 390,912
Unearned compensation (64) (109)
Accumulated other comprehensive income,
net of deferred income taxes benefit
of $4.3 million in 2000 and deferred
income taxes benefit of $9.1 million
in 1999 (9,194) (16,701)
Retained earnings 1,156,730 1,074,941
Treasury shares, at cost; 0.0 million
shares in 2000 and 4.4 million shares
in 1999 (55) (122,070)
------------ ------------
Total shareholders' equity 1,400,644 1,327,482
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $ 6,315,184 $ 5,704,302
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
3
EVEREST RE GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(unaudited)
REVENUES:
Premiums earned $ 285,780 $ 275,419 $ 551,964 $ 509,554
Net investment income 74,426 64,570 139,456 126,650
Net realized capital (loss) (8,188) (7,267) (369) (9,453)
Other income/(expense) (370) (1,700) 440 (1,603)
---------- ---------- ---------- ----------
Total revenues 351,648 331,022 691,491 625,148
---------- ---------- ---------- ----------
CLAIMS AND EXPENSES:
Incurred loss and loss
adjustment expenses 233,669 196,852 430,058 365,721
Commission, brokerage,
taxes and fees 46,272 74,590 111,930 136,241
Other underwriting expenses 13,028 12,457 24,704 23,984
Interest expense on
senior notes 9,722 - 11,342 -
Interest expense on
credit facility 1,888 283 3,351 283
---------- ---------- ---------- ----------
Total claims and expenses 304,579 284,182 581,385 526,229
---------- ---------- ---------- ----------
INCOME BEFORE TAXES 47,069 46,840 110,106 98,919
Income tax 8,340 8,775 22,819 19,612
---------- ---------- ---------- ----------
NET INCOME $ 38,729 $ 38,065 $ 87,287 $ 79,307
========== ========== ========== ==========
Other comprehensive income/
(loss), net of tax (8,697) (68,671) 7,507 (98,521)
---------- ---------- ---------- ----------
COMPREHENSIVE INCOME/(LOSS) $ 30,032 $ (30,606) $ 94,794 $ (19,214)
========== ========== ========== ==========
PER SHARE DATA:
Average shares outstanding
(000's) 45,820 48,679 45,854 49,238
Net income per common share
- basic $ 0.85 $ 0.78 $ 1.90 $ 1.61
========== ========== ========== ==========
Average diluted shares
outstanding (000's) 46,125 48,897 46,065 49,459
Net income per common
share - diluted $ 0.84 $ 0.78 $ 1.89 $ 1.60
========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
4
EVEREST RE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(unaudited)
COMMON SHARES (shares
outstanding):
Balance, beginning of
period 45,817,697 49,006,740 46,457,817 49,989,204
Issued during the period 3,644 - 12,144 16,800
Treasury shares acquired
during the period - (353,800) (650,400) (1,354,120)
Treasury shares reissued
during the period - 1,288 1,780 2,344
------------ ------------ ------------ ------------
Balance, end of period 45,821,341 48,654,228 45,821,341 48,654,228
============ ============ ============ ============
COMMON SHARES (par value):
Balance, beginning of
period $ 458 $ 509 $ 509 $ 509
Retirement of common
shares during the period - - (51) -
Issued during the period - - - -
------------ ------------ ------------ ------------
Balance, end of period 458 509 458 509
------------ ------------ ------------ ------------
ADDITIONAL PAID IN CAPITAL:
Balance, beginning of period 252,521 390,881 390,912 390,559
Retirement of treasury
shares during the period - - (138,546) -
Common shares issued
during the period 248 - 405 307
Treasury shares reissued
during the period - 10 (2) 25
------------ ------------ ------------ ------------
Balance, end of period 252,769 390,891 252,769 390,891
------------ ------------ ------------ ------------
UNEARNED COMPENSATION:
Balance, beginning of
period (86) (200) (109) (240)
Net increase during
the period 22 40 45 80
------------ ------------ ------------ ------------
Balance, end of period (64) (160) (64) (160)
------------ ------------ ------------ ------------
ACCUMULATED OTHER
COMPREHENSIVE INCOME,
NET OF DEFERRED
INCOME TAXES:
Balance, beginning of
period (497) 155,668 (16,701) 185,518
Net increase (decrease)
during the period (8,697) (68,671) 7,507 (98,521)
------------ ------------ ------------ ------------
Balance, end of period (9,194) 86,997 (9,194) 86,997
------------ ------------ ------------ ------------
RETAINED EARNINGS:
Balance, beginning of
period 1,120,750 966,737 1,074,941 928,500
Net income 38,729 38,065 87,287 79,307
Dividends declared
($0.06 and $0.12 per
share in 2000 and
1999) (2,749) (2,896) (5,498) (5,901)
------------ ------------ ------------ ------------
Balance, end of period 1,156,730 1,001,906 1,156,730 1,001,906
------------ ------------ ------------ ------------
TREASURY SHARES AT COST:
Balance, beginning of
period (55) (58,344) (122,070) (25,642)
Retirement of treasury
shares during the period - - 138,399 -
Treasury shares acquired
during the period - (11,072) (16,426) (43,799)
Treasury shares reissued
during the period - 30 42 55
------------ ------------ ------------ ------------
Balance, end of period (55) (69,386) (55) (69,386)
------------ ------------ ------------ ------------
TOTAL SHAREHOLDERS' EQUITY,
END OF PERIOD $ 1,400,644 $ 1,410,757 $ 1,400,644 $ 1,410,757
============ ============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
5
EVEREST RE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
CASH FLOWS FROM OPERATING
ACTIVITIES: (unaudited)
Net income $ 38,729 $ 38,065 $ 87,287 $ 79,307
Adjustments to reconcile
net income to net cash
provided by operating
activities:
(Increase) decrease in
premiums receivable (17,269) 9,411 (47,162) (16,841)
Decrease (Increase) in
funds held, net 7,920 (23,492) (5,968) (20,098)
(Increase) decrease in
reinsurance receivables (26,515) 43,063 (17,818) 128,701
(Increase) in deferred
tax asset (1,726) (2,110) (4,482) (9,182)
(Decrease) in reserve for
losses and loss adjustment
expenses (2,213) (41,487) (15,864) (62,848)
Increase (decrease) in
unearned premiums 14,653 (1,343) 44,928 8,648
(Increase) in other assets
and liabilities (14,056) (32,190) (12,593) (9,963)
Non cash compensation
expense 22 40 45 80
Accrual of bond discount/
amortization of bond premium (2,903) (1,228) (5,111) (2,540)
Amortization of underwriting
discount on senior notes 34 - 40 -
Realized capital losses 8,188 7,267 369 9,453
------------ ------------ ------------ ------------
Net cash provided by (used in)
operating activities 4,864 (4,004) 23,671 104,717
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from fixed maturities
matured/called - available
for sale 59,349 50,048 88,805 123,679
Proceeds from fixed maturities
sold - available for sale 313,447 250,976 411,137 327,094
Proceeds from equity securities
sold 5,604 2,620 48,267 2,620
Proceeds from other invested
assets sold - 131 - 131
Cost of fixed maturities
acquired - available for sale (379,238) (299,940) (970,183) (537,645)
Cost of equity securities
acquired (700) (645) (1,823) (645)
Cost of other invested assets
acquired (28) (67) (1,558) (1,829)
Net sales (purchases) of
short-term securities 37,663 (22,653) (77,049) (18,715)
Net (decrease) increase in
unsettled securities
transactions (36,434) (6,023) 11,868 14,051
------------ ------------ ------------ ------------
Net cash (used in) investing
activities (337) (25,553) (490,536) (91,259)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Acquisition of treasury shares
net of reissuances - (11,042) (16,533) (43,729)
Common shares issued during
the period 248 10 354 317
Dividends paid to shareholders (2,749) (2,896) (5,498) (5,901)
Proceeds from issuance of
senior notes - - 448,507 -
Net borrowing on revolving
credit agreement - 35,000 47,000 35,000
------------ ------------ ------------ ------------
Net cash (used in) provided
by financing activities (2,501) 21,072 473,830 (14,313)
------------ ------------ ------------ ------------
EFFECT OF EXCHANGE RATE
CHANGES ON CASH (2,211) (1,980) (2,355) (4,361)
------------ ------------ ------------ ------------
Net (decrease) increase
in cash (185) (10,465) 4,610 (5,216)
Cash, beginning of period 67,022 44,575 62,227 39,326
------------ ------------ ------------ ------------
Cash, end of period $ 66,837 $ 34,110 $ 66,837 $ 34,110
============ ============ ============ ============
SUPPLEMENTAL CASH FLOW
INFORMATION
Cash transactions:
Income taxes paid, net $ 32,105 $ 28,839 $ 38,519 $ 33,634
Interest paid $ 1,987 $ 213 $ 2,910 $ 213
Non-cash financing
transaction:
Issuance of common shares $ 22 $ 40 $ 45 $ 80
The accompanying notes are an integral part of the consolidated financial
statements.
6
EVEREST RE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
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. ("Holdings"), which remains the holding company for
Group's U.S. based operations. The "Company" means Group and its subsidiaries,
except when referring to periods prior to February 24, 2000, when it means
Holdings and its subsidiaries.
The consolidated financial statements of the Company for the three months and
six months ended June 30, 2000 and 1999 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 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. The results for the three months and six months ended June 30, 2000
and 1999 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, 1999,
1998 and 1997 included in the Company's most recent Form 10-K filing.
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 (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,
7
EVEREST RE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
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) certainty regarding the number and identity of
insureds with potential asbestos or environmental exposure.
Although these complications have become less severe in recent years, management
believes that these factors continue to render reserves for asbestos and
environmental losses significantly less subject to traditional actuarial methods
than are reserves on other types of losses. Given these uncertainties,
management believes that no meaningful range for such ultimate losses can be
established. The Company establishes reserves to the extent that, in the
judgement of management, the facts and prevailing law reflect an exposure for
the Company or its ceding companies. 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 $375.0 million of the
first $400.0 million of adverse development, if any, on the Company's
consolidated reserves for losses, allocated loss adjustment expenses and
uncollectible reinsurance at June 30, 1995 (December 31, 1994 for catastrophe
losses). Through June 30, 2000, cessions under the Stop Loss Agreement have
aggregated $285.6 million with available remaining limits net of coinsurance of
$89.4 million. Due to the uncertainties discussed above, the ultimate losses may
vary materially from current loss reserves and, if coverage under the Stop Loss
Agreement is exhausted, could have a material adverse effect on the Company's
future financial condition, results of operations and cash flows.
8
EVEREST RE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
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, 2000 and 1999:
(dollar amounts in thousands) Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
--------- --------- --------- ---------
Gross basis:
Beginning of period reserves $ 598,046 $ 654,417 $ 614,236 $ 660,793
Incurred losses - 985 - 2,586
Paid losses (17,778) (15,909) (33,968) (23,886)
--------- --------- --------- ---------
End of period reserves $ 580,268 $ 639,493 $ 580,268 $ 639,493
========= ========= ========= =========
Net basis:
Beginning of period reserves $ 357,085 $ 379,828 $ 365,069 $ 263,542
Incurred losses (1) - - - -
Paid losses (2) (12,181) (6,815) (20,165) 109,471
--------- --------- --------- ---------
End of period reserves $ 344,904 $ 373,013 $ 344,904 $ 373,013
========= ========= ========= =========
(1) No losses were ceded in the three months and six months ended June 30, 2000
or in the three months and six months ended June 30, 1999 under the
incurred loss reimbursement feature of the Stop Loss Agreement.
(2) No losses were ceded in the three months and six months ended June 30, 2000
and $0.0 million and $118.8 million were ceded as paid losses under the
Stop Loss Agreement in the three months and six months ended June 30, 1999,
respectively.
At June 30, 2000, the gross reserves for asbestos and environmental losses were
comprised of $120.4 million representing case reserves reported by ceding
companies, $78.1 million representing additional case reserves established by
the Company on assumed reinsurance claims, $51.1 million representing case
reserves established by the Company on direct excess insurance claims and $330.6
million 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 partial reimbursements consistent with the terms of
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
9
EVEREST RE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
100% protection from Gibraltar under a retrocessional agreement that has been in
place since 1986. While there can be no assurance that reserves for and losses
from these claims will 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.
On February 24, 2000, Holdings announced an agreement with The Prudential to
acquire all of the issued and outstanding shares of Gibraltar for approximately
$52.0 million. Closing of the acquisition will be subject to the satisfaction of
customary closing conditions and the receipt of regulatory approvals.
Upon the closing of the acquisition, the Company's current reinsurance contracts
with Gibraltar, including the Stop Loss Agreement, will remain in effect.
However, these contracts will become transactions with affiliates with the
financial impact eliminated through inter-company accounts. The Prudential's
guarantee of Gibraltar's obligations to the Company will be.
In connection with the acquisition a subsidiary of The Prudential will provide
reinsurance to Gibraltar covering 80% of the first $200.0 million of any adverse
development in Gibraltar's reserves and The Prudential will guarantee the
subsidiary's obligations to Gibraltar.
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, 2000 was $141.7 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, 2000 was $12.4 million.
10
EVEREST RE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
3. EARNINGS PER SHARE
Net income per common share has been computed as follows:
(shares and dollar amounts in
thousands except per share
amounts)
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---------------------------------------------
Net income (numerator) $ 38,729 $ 38,065 $ 87,287 $ 79,307
=============================================
Weighted average common and
effect of dilutive shares
used in the computation of
net income per share:
Average shares outstanding -
basic (denominator) 45,820 48,679 45,854 49,238
Effect of dilutive shares 305 218 211 221
---------------------------------------------
Average shares outstanding -
diluted (denominator) 46,125 48,897 46,065 49,459
Net income per common share:
Basic $ 0.85 $ 0.78 $ 1.90 $ 1.61
Diluted $ 0.84 $ 0.78 $ 1.89 $ 1.60
As of June 30, 2000 and 1999, options to purchase 734,000 and 736,200 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.
11
EVEREST RE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
4. OTHER COMPREHENSIVE INCOME
The Company's other comprehensive income / (loss) is comprised as follows:
(dollar amounts in thousands) Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
------------------------------------------------
Net unrealized appreciation
(depreciation) of investments,
net of deferred income taxes ($ 9,343) ($ 71,248) $ 7,701 ($102,412)
Currency translation
adjustments, net of deferred
income taxes 646 2,577 (194) 3,891
------------------------------------------------
Other comprehensive
income/(loss), net of deferred
income taxes ($ 8,697) ($ 68,671) $ 7,507 ($ 98,521)
================================================
5. CREDIT LINE
On December 21, 1999, the Company's subsidiary, Holdings, 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 will be used for liquidity and general
corporate purposes and to refinance existing debt under Holdings' 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.
The amount of margin and the fees payable for the Credit Facility depend upon
Holdings' senior unsecured debt rating. The Company has guaranteed all of
Holdings' 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, Holdings to maintain a minimum interest coverage ratio
of 2.5 to 1 and Everest Reinsurance Company ("Everest Re") to maintain its
statutory surplus at $850.0 million plus 25% of future aggregate net income and
25% of future aggregate capital contributions. The Company was in compliance
with these requirements at June 30, 2000 as well as for the three months and six
months ended June 30, 2000.
12
EVEREST RE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
As of June 30, 2000 and 1999, Holdings had outstanding credit line borrowings of
$106.0 million and $35.0 million, respectively. Interest expense incurred in
connection with these borrowings was $3.4 million and $0.3 million for the six
months ended June 30, 2000 and 1999, respectively.
6. SENIOR NOTES
During the first quarter of 2000, Holdings 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. Holdings
distributed $400.0 million of these proceeds to the Company of which $250.0
million was used by the Company to capitalize Everest Reinsurance (Bermuda),
Ltd.
Interest expense incurred in connection with these senior notes was $11.3
million for the six months ended June 30, 2000.
7. SEGMENT REPORTING
The Company, through its subsidiaries, operates in six segments: U.S. Broker
Treaty, U.S. Direct Treaty Reinsurance and Insurance, U.S. Facultative, Marine,
Aviation and Surety, International and Bermuda. The U.S. Broker Treaty operation
writes property, casualty and accident and health reinsurance through
reinsurance brokers within the United States. The U.S. Direct Treaty Reinsurance
and Insurance operation writes property, casualty and accident and health
reinsurance directly with ceding companies and primary property and casualty
insurance through agency relationships and program administrators within the
United States. The U.S. Facultative operation writes property, casualty and
specialty business through brokers and directly with ceding companies within the
United States. The Marine, Aviation and Surety operation writes marine, aviation
and surety business within the United States and worldwide. The International
operation writes reinsurance through the Company's branches in Belgium, London,
Canada, Hong Kong and Singapore, in addition to foreign "home-office" business.
The U.S. Facultative, Marine, Aviation and Surety and International operations
write business through brokers and directly with ceding companies. The Bermuda
operation has not yet begun writing business; therefore, there are no
underwriting results for this segment in the current period disclosures.
13
EVEREST RE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
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 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 months and six months ended June 30, 2000 and 1999, with
all dollar values presented in thousands.
U.S. BROKER TREATY
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-------------------------------------------------
Earned premiums $ 103,655 $ 102,558 $ 209,718 $ 177,883
Incurred losses and loss
adjustment expenses 96,709 75,751 174,011 143,880
Commission and brokerage 1,223 24,392 23,271 44,272
Other underwriting expenses 2,536 2,528 4,880 4,764
-------------------------------------------------
Underwriting gain/(loss) $ 3,187 ($ 113) $ 7,556 ($ 15,033)
=================================================
U.S. DIRECT TREATY REINSURANCE AND INSURANCE
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-------------------------------------------------
Earned premiums $ 63,464 $ 52,192 $ 116,249 $ 88,222
Incurred losses and loss
adjustment expenses 43,090 37,147 76,785 62,222
Commission and brokerage 14,137 14,514 29,688 24,587
Other underwriting expenses 3,370 3,729 6,651 5,929
-------------------------------------------------
Underwriting gain/(loss) $ 2,867 ($ 3,198) $ 3,125 ($ 4,516)
=================================================
14
EVEREST RE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
U.S. FACULTATIVE
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-------------------------------------------------
Earned premiums $ 18,247 $ 15,915 $ 35,096 $ 34,944
Incurred losses and loss
adjustment expenses 12,698 9,051 23,739 20,338
Commission and brokerage 3,711 3,384 7,190 7,582
Other underwriting expenses 1,491 1,633 2,992 3,126
-------------------------------------------------
Underwriting gain/(loss) $ 347 $ 1,847 $ 1,175 $ 3,898
=================================================
MARINE, AVIATION AND SURETY
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-------------------------------------------------
Earned premiums $ 25,473 $ 29,168 $ 49,761 $ 60,539
Incurred losses and loss
adjustment expenses 24,447 20,314 42,299 40,604
Commission and brokerage 8,117 10,181 16,895 19,530
Other underwriting expenses 987 975 1,903 1,844
-------------------------------------------------
Underwriting gain/(loss) ($ 8,078) ($ 2,302) ($ 11,336) ($ 1,439)
=================================================
INTERNATIONAL
- --------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
-------------------------------------------------
Earned premiums $ 74,941 $ 75,588 $ 141,140 $ 147,968
Incurred losses and loss
adjustment expenses 56,722 54,590 113,224 98,678
Commission and brokerage 19,087 22,120 34,886 40,271
Other underwriting expenses 3,460 3,991 6,846 7,550
-------------------------------------------------
Underwriting gain/(loss) ($ 4,328) ($ 5,113) ($ 13,816) $ 1,469
=================================================
15
EVEREST RE GROUP, LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
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,
2000 1999 2000 1999
-------------------------------------------------
Underwriting gain (loss) ($ 6,005) ($ 8,879) ($ 13,296) ($ 15,621)
Net investment income 74,426 64,570 139,456 126,650
Realized gain (loss) (8,188) (7,267) (369) (9,453)
Corporate expenses 1,184 (399) 1,432 771
Interest expense 11,610 283 14,693 283
Other income (expense) (370) (1,700) 440 (1,603)
-------------------------------------------------
Income before taxes $ 47,069 $ 46,840 $ 110,106 $ 98,919
=================================================
The Company writes premium in the United States and selected international
markets. The revenues, net income and identifiable assets of any individual
non-U.S. country in which the Company writes business are, in each case, less
than 10% of the Company's consolidated results.
8. FUTURE APPLICATION OF ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities". This statement requires all derivatives to be
recognized as either assets or liabilities in the statement of financial
position and to be measured at fair value. This statement shall be effective for
all fiscal quarters of all fiscal years beginning after June 15, 2000. In June
2000, the Financial Accounting Standards Board amended SFAS No. 133 with SFAS
No. 138, which facilitates the implementation of SFAS No. 133. Management
believes that these statements will not have a material impact on the financial
position of the Company.
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 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.
16
PART I - ITEM 2
EVEREST RE GROUP, LTD.
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. ("Holdings"), which remains the holding company for
Group's U.S. based operations. The "Company" means Group and its subsidiaries,
except when referring to periods prior to February 24, 2000, when it means
Holdings and its subsidiaries.
INDUSTRY CONDITIONS
Since 1987, a number of factors, including the emergence of significant
reinsurance capacity from the Bermuda and rejuvenated Lloyd's markets, higher
retentions by primary insurance companies and consolidation and increased
capital levels in the insurance industry, have caused increasingly competitive
global market conditions across most lines of business and have influenced the
softening of prices and contract terms in the current market place. Recently,
market conditions, including industry-wide results of operations, have led to
modest premium rate increases in some lines of insurance and reinsurance.
Although the Company is encouraged by these improvements in some market
conditions, the Company cannot predict with any reasonable certainty if, when or
to what extent market conditions as a whole will change.
SEGMENT INFORMATION
The Company, through its subsidiaries, operates in six segments: U.S. Broker
Treaty, U.S. Direct Treaty Reinsurance and Insurance, U.S. Facultative, Marine,
Aviation and Surety, International and Bermuda. The U.S. Broker Treaty operation
writes property, casualty and accident and health reinsurance through
reinsurance brokers within the United States. The U.S. Direct Treaty Reinsurance
and Insurance operation writes property, casualty and accident and health
reinsurance directly with ceding companies and primary property and casualty
insurance through agency relationships and program administrators within the
United States. The U.S. Facultative operation writes property, casualty and
specialty business through brokers and directly with ceding companies within the
United States. The Marine, Aviation and Surety operation writes marine, aviation
and surety business within the United States and worldwide. The International
operation writes reinsurance through the Company's branches in Belgium, London,
Canada, Hong Kong and Singapore, in addition to foreign "home-office" business.
The U.S. Facultative, Marine, Aviation and Surety and International operations
write business through brokers and directly with ceding companies. The Bermuda
operation has not yet begun writing business; therefore, there are no
underwriting results for this segment in the current period disclosures.
17
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 based upon their underwriting results.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
PREMIUMS. Gross premiums written increased 15.2% to $326.2 million in the three
months ended June 30, 2000 from $283.2 million in the three months ended June
30, 1999 as the Company took advantage of selected growth opportunities, while
continuing to generally maintain a disciplined underwriting approach. Premium
growth areas included a 53.6% ($27.9 million) increase in the U.S. Direct Treaty
Reinsurance and Insurance operation, mainly attributable to growth in accident
and health reinsurance and primary insurance writings, a 33.4% ($5.3 million)
increase in the U.S. Facultative operation, attributable to growth across all
lines coupled with reporting variability, a 7.8% ($8.5 million) increase in the
U.S. Broker Treaty operation, attributable to growth across its property and
casualty lines and a 6.7% ($5.1 million) increase in the International
operation. These increases were partially offset by a 12.0% ($3.7 million)
decrease in the Marine, Aviation and Surety operation, reflecting the continued
highly competitive current market conditions faced by this operation. The
Company continued to decline business that did not meet its objectives regarding
underwriting profitability.
Ceded premiums increased to $31.1 million in the three months ended June 30,
2000 from $11.8 million in the three months ended June 30, 1999. This increase
was principally attributable to adjustment premiums of $11.7 million ceded in
2000 relating to claims made under the 1999 accident year aggregate excess of
loss element of the Company's corporate retrocessional program, together with
the higher utilization of contract specific retrocessions in the U.S. Broker
Treaty and U.S. Direct Reinsurance and Insurance operations.
Net premiums written increased by 8.7% to $295.1 million in the three months
ended June 30, 2000 from $271.4 million in the three months ended June 30, 1999.
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 3.4% to $285.8 million in the
three months ended June 31, 2000 from $275.4 million in the three months ended
June 30, 1999. Contributing to this increase was a 21.6% ($11.3 million)
increase in the U.S. Direct Treaty Reinsurance and Insurance operation, a 14.7%
($2.3 million) increase in the U.S. Facultative operation and a 1.1% ($1.1
million) increase in the U.S. Broker Treaty operation. These increases were
partially offset by a 12.7% ($3.7 million) decrease in the Marine, Aviation and
Surety operation and a 0.9% ($0.6 million) decrease in the International
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 18.7%
to $233.7 million in the three months ended June 30, 2000 from $196.9 million in
the three months ended June 30, 1999. The increase in incurred losses and LAE
was principally attributable to the increase in net premiums earned together
with strengthening of prior period reserves in select areas, including on a
multi-year reinsurance treaty where such losses within the current experience
band were accompanied by correspondingly lower commissions. This increase was
18
partially offset by losses ceded under the Company's corporate retrocessional
program and 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, in the
three months ended June 30, 2000 were $6.2 million, mainly reflecting modest net
adverse development on 1999 catastrophe events, compared to net catastrophe
losses of $6.2 million in the three months ended June 30, 1999. Net incurred
losses and LAE for the three months ended June 30, 2000 reflected ceded losses
and LAE of $40.5 million, including $23.5 million ceded under the 1999 accident
year aggregate excess of loss component of the Company's corporate
retrocessional program and $0.0 million ceded under the Stop Loss Agreement.
Ceded losses and LAE in the three months ended June 30, 1999 were $8.9 million
with no cessions under the Stop Loss Agreement or the 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, 2000 from the three months ended June 30, 1999 were a 40.3% ($3.6
million) increase in the U.S. Facultative operation mainly attributable to
increased premium volume, a 27.7% ($21.0 million) increase in the U.S. Broker
Treaty operation attributable to the increased premium volume as well as the
loss reserve strengthening on the multi-year reinsurance treaty noted above, an
20.3% ($4.1 million) increase in the Marine, Aviation and Surety operation,
principally reflecting reserve strengthening relating to prior period aviation
exposures, a 16.0% ($5.9 million) increase in the U.S. Direct Treaty Reinsurance
and Insurance operation, principally as a result of increased premium volume and
a 3.9% ($2.1 million) increase in the International operation due to reserve
strengthening relating to prior period exposures, including 1999 accident year
catastrophe losses. 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, increased by 10.3 percentage points
to 81.8% for the three months ended June 30, 2000 from 71.5% for the three
months ended June 30, 1999 reflecting the incurred losses and LAE discussed
above. The Marine, Aviation and Surety, U.S. Broker Treaty, U.S. Facultative and
International operations' loss ratios increased to 96.0%, 93.3%, 69.6% and 75.7%
for the three months ended June 30, 2000 from 69.6%, 73.9%, 56.9% and 72.2% for
the three months ended June 30, 1999, respectively. The U.S. Direct Treaty
Reinsurance and Insurance operations' loss ratio decreased to 67.9% for the
three months ended June 30, 2000 from 71.2% for the three months ended June 30,
1999. The loss ratios for all operations are impacted by the factors noted
above.
Underwriting expenses decreased by 31.9% to $59.3 million in the three months
ended June 30, 2000 from $87.0 million in the three months ended June 30, 1999.
Commission, brokerage, taxes and fees decreased by $28.3 million, principally
reflecting the Company's reassessment of the expected losses on a multi-year
reinsurance treaty noted above that led to a $32.3 million decrease in
contingent commissions with a corresponding increase to losses, partially offset
by the increases in premiums written and changes in the business mix. Other
underwriting expenses increased by $0.6 million. Contributing to these
underwriting expense decreases were an 86.0% ($23.2 million) decrease in the
U.S. Broker Treaty operation, which included the impact of the contingent
commission adjustment noted above, an 18.4% ($2.1 million) decrease in the
Marine, Aviation and Surety operation, a 13.6% ($3.6 million) decrease in the
19
International operation and a 4.0% ($0.8 million) decrease in the U.S. Direct
Treaty Reinsurance and Insurance operation. These decreases were partially
offset by a 3.7% ($0.2 million) increase in the U.S. Facultative operation.
Except as noted, 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. The Company's expense ratio, which is calculated
by dividing underwriting expenses by premiums earned, was 20.8% for the three
months ended June 30, 2000 compared to 31.6% for the three months ended June 30,
1999.
The Company's combined ratio, which is the sum of the loss and expense ratios,
decreased to 102.5% in the three months ended June 30, 2000 compared to 103.1%
in the three months ended June 30, 1999. The U.S. Broker Treaty, International
and U.S. Direct Treaty Reinsurance and Insurance operations' combined ratios
decreased to 96.9%, 105.8% and 95.5%, respectively, for the three months ended
June 30, 2000 from 100.1%, 106.8% and 106.1%, respectively, for the three months
ended June 30, 1999. The Marine, Aviation and Surety and U.S. Facultative
operations' combined ratios increased to 131.7% and 98.1%, respectively, for the
three months ended June 30, 2000 from 107.9% and 88.4%, respectively, for the
three months ended June 30, 1999. These changes reflect the loss and expense
ratio variability noted above.
Interest expense for the three months ended June 30, 2000 was $11.6 million
compared to $0.3 million for the three months ended June 30, 1999. Interest
expense for the three months ended June 30, 2000 reflects $9.7 million relating
to Holdings' issuance of senior notes and $1.9 million relating to Holdings'
borrowing under it's revolving credit facility. Interest expense for the three
months ended June 30, 1999 reflects $0.3 million relating to Holdings' borrowing
under its revolving credit facility.
Other expense for the three months ended June 30, 2000 was $0.4 million compared
to $1.7 million for the three months ended June 30, 1999. The change in other
expense for the respective periods was principally attributable to the impact of
fluctuations in foreign currency exchange rates.
INVESTMENTS. Net investment income increased 15.3% to $74.4 million in the three
months ended June 30, 2000 from $64.6 million in the three months ended June 30,
1999, principally reflecting the effect of investing the $122.4 million of cash
flow from operations in the twelve months ended June 30, 2000 as well as the
investment of the $450.0 million in proceeds from Holdings' debt issuance. The
annualized pre-tax yield on average cash and invested assets increased to 6.4%
in the three months ended June 30, 2000 from the 6.3% yield in the three months
ended June 30, 1999, reflecting changes in investment market conditions coupled
with the investment of the proceeds of Holdings' debt issuance during the three
months ended March 31, 2000. The imbedded pre-tax yield of cash and invested
assets at June 30, 2000 was 6.6% compared with 6.2% at December 31, 1999,
reflecting the additional funds invested over the intervening period, as well as
the continued emphasis on enhancing investment yields through changes in asset
mix, all in the context of changes in investment market conditions.
Net realized capital losses were $8.2 million in the three months ended June 30,
200, reflecting realized capital losses on the Company's investments of $12.1
million, partially offset by $3.9 million of realized capital gains, compared to
net realized capital losses of $7.3 million in the three months ended June 30,
1999. The net realized capital losses in the three months ended June 30, 1999
reflected realized capital losses of $8.5 million, partially offset by $1.2
million of realized capital gains. The realized capital losses in the three
20
months ended June 30, 2000 and 1999 arose mainly from activity in the Company's
fixed maturity portfolio. The realized capital gains in the three months ended
June 30, 2000 and 1999 arose mainly from activity in the Company's equity
portfolio.
INCOME TAXES. The Company recognized income tax expense of $8.3 million in the
three months ended June 30, 2000 compared to $8.8 million in the three months
ended June 30, 1999.
NET INCOME. Net income was $38.7 million in the three months ended June 30, 2000
compared to $38.1 million in the three months ended June 30, 1999. This increase
generally reflects the improved underwriting and investment results, partially
offset by increased interest expense.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
PREMIUMS. Gross premiums written increased 17.4% to $630.5 million in the six
months ended June 30, 2000 from $537.1 million in the six months ended June 30,
1999 as the Company took advantage of selected growth opportunities, while
continuing to generally maintain a disciplined underwriting approach. Premium
growth areas included a 53.9% ($52.6 million) increase in the U.S. Direct Treaty
Reinsurance and Insurance operation, mainly attributable to growth in accident
and health reinsurance and primary insurance writings, a 26.4% ($50.2 million)
increase in the U.S. Broker Treaty operation, attributable to growth across its
property and casualty lines and a 4.9% ($1.7 million) increase in the U.S.
Facultative operation. These increases were partially offset by a 14.4% ($8.8
million) decrease in the Marine, Aviation and Surety operation and a 1.5% ($2.3
million) decrease in the International operation reflecting the continued highly
competitive current market conditions faced by these operations. The Company
continued to decline business that did not meet its objectives regarding
underwriting profitability.
Ceded premiums increased to $47.8 million in the six months ended June 30, 2000
from $23.1 million in the six months ended June 30, 1999. This increase was
principally attributable to the higher utilization of contract specific
retrocessions in the U.S. Broker Treaty and U.S. Direct Reinsurance and
Insurance operations, together with adjustment premiums of $11.7 million ceded
in 2000 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 13.4% to $582.7 million in the six months
ended June 30, 2000 from $513.9 million in the six months ended June 30, 1999.
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 8.3% to $552.0 million in the
six months ended June 31, 2000 from $509.6 million in the six months ended June
30, 1999. Contributing to this increase was a 31.8% ($28.0 million) increase in
the U.S. Direct Treaty Reinsurance and Insurance operation, a 17.9% ($31.8
million) increase in the U.S. Broker Treaty operation and a 0.4% ($0.2 million)
increase in the U.S. Facultative operation. These increases were partially
offset by a 17.8% ($10.8 million) decrease in the Marine, Aviation and Surety
operation and a 4.6% ($6.8 million) decrease in the International operation. All
of these changes reflect period to period changes in net written premiums and
business mix together with normal variability in earnings patterns.
21
EXPENSES. Incurred loss and LAE increased by 17.6% to $430.1 million in the six
months ended June 30, 2000 from $365.7 million in the six months ended June 30,
1999. The increase in incurred losses and LAE was principally attributable to
the increase in net premiums earned together with strengthening of prior period
reserves in select areas, including on a multi-year reinsurance treaty where
such losses within the current experience band were accompanied by
correspondingly lower commissions. This increase was partially offset by losses
ceded under the Company's corporate retrocessional program and 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, in the six months ended
June 30, 2000 were $9.2 million, mainly reflecting modest net adverse
development on 1999 catastrophe events, compared to net catastrophe losses of
$17.6 million in the six months ended June 30, 1999. Net incurred losses and LAE
for the six months ended June 30, 2000 reflected ceded losses and LAE of $57.3
million, including $23.5 million ceded under the 1999 accident year aggregate
excess of loss component of the corporate retrocessional program and $0.0
million ceded under the Stop Loss Agreement. Ceded losses and LAE in the six
months ended June 30, 1999 were $19.2 million, with no cessions under the Stop
Loss Agreement or the accident year aggregate excess of loss component of the
corporate retrocessional program.
Contributing to the increase in incurred losses and LAE in the six months ended
June 30, 2000 compared to the six months ended June 30, 1999 were a 23.4% ($14.6
million) increase in the U.S. Direct Treaty Reinsurance and Insurance operation,
principally as a result of increased premium volume, a 20.9% ($30.1 million)
increase in U.S. Broker Treaty operation, attributable to the increased premium
volume as well as the loss reserve strengthening on the multi-year reinsurance
treaty noted above, a 16.7% ($3.4 million) increase in the U.S. Facultative
operation, a 14.7% ($14.5 million) increase in the International operation due
to reserve strengthening related to prior period exposures, including 1999
accident year catastrophe losses, partially offset by the decreased premium
volume, and a 4.2% ($1.7 million) increase in the Marine, Aviation and Surety
operation, principally reflecting reserve strengthening relating to prior period
aviation exposures, partially offset by the decreased premium volume. 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 ratio increased by 6.1 percentage points to 77.9% for the six
months ended June 30, 2000 from 71.8% for the six months ended June 30, 1999
reflecting the incurred losses and LAE discussed above. The U.S. Broker Treaty,
International, Marine, Aviation and Surety and U.S. Facultative operations' loss
ratios increased to 83.0%, 80.2%, 85.0% and 67.6% for the six months ended June
30, 2000 from 80.9%, 66.7%, 67.1% and 58.2% for the six months ended June 30,
1999, respectively. The U.S. Direct Treaty Reinsurance and Insurance operations'
loss ratio decreased to 66.1% for the six months ended June 30, 2000 from 70.5%
for the six months ended June 30, 1999. The loss ratios for all operations are
impacted by the factors noted above.
Underwriting expenses decreased by 14.7% to $136.6 million in the six months
ended June 30, 2000 from $160.2 million in the six months ended June 30, 1999.
Commission, brokerage, taxes and fees decreased by $24.3 million, principally
reflecting the Company's reassessment of the expected losses on a multi-year
reinsurance treaty noted above that led to a $32.3 million decrease in
contingent commissions with a corresponding increase to losses, partially offset
by the increases in premiums written and changes in the mix of business. Other
22
underwriting expenses increased by $0.7 million. Contributing to the
underwriting expense decrease were a 42.6% ($20.9 million) decrease in the U.S.
Broker Treaty operation, which included the impact of the contingent commission
adjustment noted above, a 12.7% ($6.1 million) decrease in the International
operation, a 12.1% ($2.6 million) decrease in the Marine, Aviation and Surety
operation and a 4.9% ($0.5 million) decrease in the U.S. Facultative operation.
These decreases were partially offset by a 19.1% ($5.8 million) increase in the
U.S. Direct Treaty Reinsurance and Insurance operation. Except as noted, 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. The Company's expense ratio was 24.8% for the six months ended
June 30, 2000 compared to 31.4% for the six months ended June 30, 1999.
The Company's combined ratio decreased to 102.7% in the six months ended June
30, 2000 compared to 103.2% in the six months ended June 30, 1999. The U.S.
Broker Treaty and U.S. Direct Treaty Reinsurance and Insurance operations'
combined ratios decreased to 96.4% and 97.3%, respectively, for the six months
ended June 30, 2000 from 108.5% and 105.1%, respectively, for the six months
ended June 30, 1999. The International, Marine, Aviation and Surety and U.S.
Facultative operations' combined ratios increased to 109.8%, 122.8% and 96.7%,
respectively, for the six months ended June 30, 2000 from 99.0%, 102.4% and
88.8%, respectively, for the six months ended June 30, 1999. These changes
reflect the loss and expense ratio variability noted above.
Interest expense for the six months ended June 30, 2000 was $14.7 million
compared to $0.3 million for the six months ended June 30, 1999. Interest
expense for the six months ended June 30, 2000 reflects $11.3 million relating
to Holdings' issuance of senior notes and $3.4 million relating to Holdings'
borrowing under it's revolving credit facility. Interest expense for the six
months ended June 30, 1999 reflects $0.3 million relating to Holdings' borrowing
under its revolving credit facility.
Other income for the six months ended June 30, 2000 was $0.4 million compared to
other expenses of $1.6 million for the six months ended June 30, 1999. The
change in other income and expense for the respective periods was principally
attributable to the impact of fluctuations in foreign currency exchange rates.
INVESTMENTS. Net investment income increased 10.1% to $139.5 million in the six
months ended June 30, 2000 from $126.7 million in the six months ended June 30,
1999, principally reflecting the effect of investing the $122.4 million of cash
flow from operations in the twelve months ended June 30, 2000 as well as the
investment of the $450.0 million in proceeds from Holdings' debt issuance. The
annualized pre-tax yield on average cash and invested assets increased to 6.3%
in the six months ended June 30, 2000 from the 6.2% yield in the six months
ended June 30, 1999, reflecting changes in investment market conditions coupled
with the investment of the proceeds of Holdings' debt issuance late in the
period ended March 31, 2000. The imbedded pre-tax yield of cash and invested
assets at June 30, 2000 was 6.6% compared with 6.2% at December 31, 1999,
reflecting the additional funds invested over the intervening period, as well as
the continued emphasis on enhancing investment yields through changes in asset
mix, all in the context of changes in investment market conditions.
Net realized capital losses were $0.4 million in the six months ended June 30,
200, reflecting realized capital losses on the Company's investments of $19.7
million, partially offset by $19.3 million of realized capital gains, compared
to net realized capital losses of $9.5 million in the six months ended June 30,
23
1999. The net realized capital losses in the six months ended June 30, 1999
reflected realized capital losses of $10.9 million, partially offset by $1.4
million of realized capital gains. The realized capital losses in the six months
ended June 30, 2000 and 1999 arose mainly from activity in the Company's fixed
maturity portfolio. The realized capital gains in the six months ended June 30,
2000 and 1999 arose mainly from activity in the Company's equity portfolio.
INCOME TAXES. The Company recognized income tax expense of $22.8 million in the
six months ended June 30, 2000 compared to $19.6 million in the six months ended
June 30, 1999.
NET INCOME. Net income was $87.3 million in the six months ended June 30, 2000
compared to $79.3 million in the six months ended June 30, 1999. This increase
generally reflects the decreases in net realized capital losses, together with
the improved underwriting and investment results, partially offset by increased
interest expense.
FINANCIAL CONDITION
INVESTED ASSETS. Aggregate invested assets, including cash and short-term
investments, were $4,643.1 million at June 30, 2000 and $4,139.2 million at
December 31, 1999. The increase in invested assets between December 31, 1999 and
June 30, 2000 resulted primarily from Holdings' issuance of senior notes
totaling $450.0 million, the proceeds of which have been invested, $47.0 million
in credit facility borrowings, $34.1 million in net unrealized appreciation of
the Company's fixed maturity investments and $23.7 million in cash flows from
operations generated during the six months ended June 30, 2000. This increase
was partially offset by $21.6 million in net unrealized depreciation of the
Company's equity portfolio and $16.4 million in share repurchases.
LIQUIDITY. The Company's liquidity requirements are met on both a short- and
long-term basis by funds provided by premiums collected, investment income,
collected reinsurance receivables balances and from the sale and maturity of
investments together with the availability of funds under the Company's
revolving credit facility. The Company's net cash flows from operating
activities were $23.7 million and $104.7 million in the six months ended June
30, 2000 and 1999, respectively. These cash flows were impacted by recoveries
under the Company's Stop Loss Agreement with Gibraltar, which contributed $9.5
million and $79.0 million of such net cash flows in the six months ended June
30, 2000 and 1999, respectively. Through June 30, 2000, cessions under the Stop
Loss Agreement have aggregated $285.6 million with available remaining limits
net of coinsurance of $89.4 million. These cash flows were also impacted by net
catastrophe loss payments of $30.2 million and $20.5 million in the six months
ended June 30, 2000 and 1999, respectively, net loss payments on asbestos and
environmental exposures of $20.2 million and $9.3 million for the six months
ended June 30, 2000 and 1999, respectively, and by net income taxes paid of
$38.5 million and $33.3 million for the six months ended June 30, 2000 and 1999,
respectively. Management believes that net cash flows from operating activities,
after consideration of the factors noted above, are generally consistent with
expectations given changes in the Company's mix of business over the past few
years toward products with shorter loss development and payout periods and
normal variability in the payout of loss reserves.
24
On February 24, 2000, Holdings announced an agreement with The Prudential to
acquire all of the issued and outstanding shares of Gibraltar for approximately
$52.0 million. Closing of the acquisition will be subject to the satisfaction of
customary closing conditions and the receipt of regulatory approvals.
Upon the closing of the acquisition, the Company's current reinsurance contracts
with Gibraltar, including the Stop Loss Agreement, will remain in effect.
However, these contracts will become transactions with affiliates with the
financial impact eliminated through inter-company accounts. The Prudential's
guarantee of Gibraltar's obligations to the Company will be terminated.
In connection with the acquisition a subsidiary of The Prudential will provide
reinsurance to Gibraltar covering 80% of the first $200.0 million of any adverse
development in Gibraltar's reserves and The Prudential will guarantee the
subsidiary's obligations to Gibraltar.
Proceeds from sales, calls and maturities and investment asset acquisitions were
$560.1 million and $1,050.6 million, respectively, in the six months ended June
30, 2000, compared to $467.6 million and $558.9 million, respectively, in the
six months ended June 30, 1999. The activity in the six months ended June 30,
2000 generally reflected normal portfolio management activity aimed at enhancing
the Company's portfolio yield along with investment asset acquisitions made
utilizing the proceeds from Holdings' debt issuance. The Company's current
investment strategy seeks to maximize after-tax income through a high quality,
diversified, duration sensitive, taxable bond and tax-exempt municipal bond
portfolio, while maintaining an adequate level of liquidity.
On December 21, 1999, Holdings entered into a three-year senior revolving credit
facility with a syndicate of lenders (the "Credit Facility"), which replaced its
prior credit facility which had been extended in June 1999 and increased from
$50.0 million to $75.0 million on November 9, 1999. First Union National Bank is
the administrative agent for the Credit Facility. The Credit Facility will be
used for liquidity and general corporate purposes and to refinance existing debt
under Holdings' 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 Holdings 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. The amount of margin and the fees payable for the Credit
Facility depend upon Holdings' senior unsecured debt rating. The Company has
guaranteed all of Holdings' obligations under the Credit Facility.
The Credit Facility requires the Company to maintain a debt to capital ratio of
not greater than 0.35 to 1, Holdings 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 future aggregate net income and 25% of future aggregate
capital contributions. The Company was in compliance with these requirements at
June 30, 2000 as well as for the three months and six months ended June 30,
2000.
At June 30, 2000 and 1999, Holdings had outstanding borrowings under the Credit
Facility of $106.0 million and $35.0 million, respectively. Interest expense
incurred in connection with these borrowings was $3.4 million and $0.3 million
for the periods ended June 30, 2000 and 1999, respectively.
25
During the first quarter of 2000, Holdings 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. Holdings
distributed $400.0 million of these proceeds to the Company of which $250.0
million was used by the Company to capitalize Everest Reinsurance (Bermuda),
Ltd. Interest expense incurred in connection with these senior notes was $11.3
million for the six months ended June 30, 2000.
SHAREHOLDERS' EQUITY. The Company's shareholders' equity increased to $1,400.6
million as of June 30, 2000, from $1,327.5 million as of December 31, 1999,
principally reflecting net income of $87.3 million for the six months ended June
30, 2000, partially offset by $16.4 million in treasury shares acquired in the
six months ended June 30, 2000. Dividends of $5.5 million were declared and paid
by the Company in the six months ended June 30, 2000. During the six months
ended June 30, 2000, the Company repurchased 0.650 million of its common shares
at an average price of $25.24 per share with all such repurchases occurring in
the three months ended March 31, 2000, raising the total repurchases under the
Company's authorized repurchase program to 4.720 million shares at an average
price of $27.60 per share with a total repurchase expenditure to date of $130.4
million. At June 30, 2000, 2.180 million shares remained under the existing
repurchase authorization. As part of the Company's restructuring, the treasury
shares held by the Company prior to February 24, 2000 were retired, resulting in
a reduction to treasury shares with a corresponding reduction of paid-in capital
and common shares.
MARKET SENSITIVE INSTRUMENTS. The Company's risks associated with market
sensitive instruments have not changed materially since the period ended
December 31, 1999.
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, 1999 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
PART I - ITEM 3
EVEREST RE GROUP, LTD.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
MARKET RISK INSTRUMENTS. The Company's risks associated with market
sensitive instruments have not changed materially since the period ended
December 31, 1999.
27
EVEREST RE GROUP, LTD.
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 2. CHANGES IN SECURITIES
c) Information required by Item 701 of Regulation S-K:
(a) On May 23, 2000, 1,444 common shares of the Company were
distributed.
(b) The securities were distributed to the Company's four non-employee
directors.
(c) The securities were issued as compensation to the non-employee
directors for services rendered to the Company.
(d) Exemption from registration was claimed pursuant to Section 4(2)
of the Securities Act of 1933. There was no public offerng
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 General Meeting of Shareholders was held on May 23, 2000.
b) Martin Abrahams and John R. Dunne were elected at the meeting as
Directors of the Company for a term expiring in 2003. The term of
office of the following Directors continued after the meeting: William
F. Galtney, Jr., Thomas J. Gallagher, and Joseph V. Taranto.
c) (1) The following Directors were elected:
Votes Votes
For Withheld
----- --------
Martin Abrahams 41,224,249 691,216
John R. Dunne 41,224,129 691,336
28
(2) The Board of Directors was authorized by the shareholders to
elect or appoint additional Directors up to such maximum
number as may be established from time to time in accordance
with the Company's bye-laws. The holders of 24,946,006 shares
voted in favor of the authorization; the holders of 16,793,327
shares voted against authorization; the holders of 176,132
shares abstained. There were no broker non-votes.
(3) The appointment of PricewaterhouseCoopers as the Company's
independent auditors for the year ending December 31, 2000 was
approved and the Board of Directors was authorized to set the
fees for the independent auditors. The holders of 41,782,404
shares voted in favor of the appointment; the holders of
116,140 shares voted against the appointment; the holders of
16,921 shares abstained. There were no broker non-votes.
Part II - ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit Index:
Exhibit No. Description Location
---------- ----------- --------
10.1 Amendment No. 1 to Stock Purchase
Agreement between The Prudential
Insurance Company of America and
Everest Reinsurance Holdings, Inc.
for the sale of common stock of
Gibraltar Casualty Company dated
August 8, 2000 Filed herewith
11.1 Statement regarding computation
of per-share earnings Filed herewith
27 Financial Data Schedule Filed herewith
b) There were no reports on Form 8-K filed during the three-month period ending
June 30, 2000.
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.
29
EVEREST RE GROUP, LTD.
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 Re Group, Ltd.
(Registrant)
/S/ Stephen L. Limauro
--------------------------------
Stephen L. Limauro
Duly Authorized Officer and Principal
Accounting Officer
Senior Vice President
and Chief Financial Officer
Dated: August 8, 2000