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, 2002 1-13816
- --------------------- -----------------------
EVEREST REINSURANCE HOLDINGS, INC.
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 22-3263609
- ------------------------ ----------------------------
(State or other juris- (IRS Employer Identification
diction of incorporation Number)
or organization)
477 MARTINSVILLE ROAD
POST OFFICE BOX 830
LIBERTY CORNER, NEW JERSEY 07938-0830
(908) 604-3000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive office)
- --------------------------------------------------------------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days.
YES X NO
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Number of Shares Outstanding
Class at August 13, 2002
----- ----------------------------
Common Stock, $.01 par value 1,000
The registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this form with the reduced disclosure
format permitted by General Instruction H of Form 10-Q.
EVEREST REINSURANCE HOLDINGS, INC.
INDEX TO FORM 10-Q
PART I
FINANCIAL INFORMATION
---------------------
PAGE
ITEM 1. FINANCIAL STATEMENTS ----
--------------------
Consolidated Balance Sheets at June 30, 2002 (unaudited)
and December 31, 2001 3
Consolidated Statements of Operations and Comprehensive Income
for the three months and six months ended June 30,
2002 and 2001(unaudited) 4
Consolidated Statements of Changes in Stockholders' Equity for
the three months and six months ended June 30, 2002
and 2001 (unaudited) 5
Consolidated Statements of Cash Flows for the three months and six
months ended June 30, 2002 and 2001 (unaudited) 6
Notes to Consolidated Interim Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
OF FINANCIAL CONDITION AND RESULTS OF OPERATION 15
-----------------------------------------------
PART II
OTHER INFORMATION
-----------------
ITEM 1. LEGAL PROCEEDINGS 25
-----------------
ITEM 5. OTHER INFORMATION None
-----------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 25
--------------------------------
Part I - Item 1
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value per share)
June 30, December 31,
-------------- -------------
2002 2001
-------------- -------------
ASSETS: (unaudited)
Fixed maturities - available for sale, at market value
(amortized cost: 2002, $4,122,353; 2001, $4,051,833) $ 4,243,924 $ 4,186,923
Equity securities, at market value
(cost: 2002, $56,439; 2001, $66,412) 52,753 67,453
Short-term investments 176,704 115,850
Other invested assets 31,638 32,039
Cash 116,297 67,509
-------------- -------------
Total investments and cash 4,621,316 4,469,774
Accrued investment income 64,875 64,972
Premiums receivable 553,339 454,548
Reinsurance receivables 1,547,059 1,471,357
Funds held by reinsureds 129,416 149,710
Deferred acquisition costs 134,950 114,948
Prepaid reinsurance premiums 89,858 48,100
Deferred tax asset 193,584 178,476
Other assets 81,736 60,496
-------------- -------------
TOTAL ASSETS $ 7,416,133 $ 7,012,381
============== =============
LIABILITIES:
Reserve for losses and adjustment expenses $ 4,428,187 $ 4,274,335
Unearned premium reserve 639,747 473,308
Funds held under reinsurance treaties 322,577 308,811
Losses in the course of payment 49,101 83,360
Contingent commissions 4,300 3,345
Other net payable to reinsurers 79,674 132,252
Current federal income taxes (812) (30,365)
8.5% Senior notes due 3/15/2005 249,736 249,694
8.75% Senior notes due 3/15/2010 199,117 199,077
Revolving credit agreement borrowings 105,000 105,000
Interest accrued on debt and borrowings 11,910 11,944
Other liabilities 156,182 90,211
-------------- -------------
Total liabilities 6,244,719 5,900,972
-------------- -------------
STOCKHOLDER'S EQUITY:
Common stock, par value: $0.01; 200 million shares authorized;
1,000 shares issued in 2002 and 2001 - -
Additional paid-in capital 259,411 258,775
Accumulated other comprehensive income, net of
deferred income taxes of $35.7 million in 2002 and $40.8
million in 2001 66,509 76,003
Retained earnings 845,494 776,631
-------------- -------------
Total stockholder's equity 1,171,414 1,111,409
-------------- -------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 7,416,133 $ 7,012,381
============== =============
The accompanying notes are an integral part of the consolidated financial
statements.
3
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ---------------------------
2002 2001 2002 2001
------------- ----------- ----------- -----------
(unaudited) (unaudited)
REVENUES:
Premiums earned $ 451,607 $ 389,382 $ 909,725 $ 717,374
Net investment income 65,472 68,747 130,271 136,109
Net realized capital (loss) gain (39,909) 4,084 (38,870) (705)
Net derivative (expense) - - (250) -
Other (expense) income (6,059) 816 (4,481) 1,462
------------- ----------- ----------- -----------
Total revenues 471,111 463,029 996,395 854,240
------------- ----------- ----------- -----------
CLAIMS AND EXPENSES:
Incurred loss and loss adjustment expenses 312,437 288,541 638,150 530,989
Commission, brokerage, taxes and fees 110,748 96,826 225,235 178,679
Other underwriting expenses 15,898 14,250 29,399 26,248
Interest expense on senior notes 9,728 9,726 19,456 19,450
Interest expense on credit facility 853 1,819 1,762 4,516
------------- ----------- ----------- -----------
Total claims and expenses 449,664 411,162 914,002 759,882
------------- ----------- ----------- -----------
INCOME BEFORE TAXES 21,447 51,867 82,393 94,358
Income tax (benefit) expense (1,101) 12,105 13,530 21,005
------------- ----------- ----------- -----------
NET INCOME $ 22,548 $ 39,762 $ 68,863 $ 73,353
============= =========== =========== ===========
Other comprehensive income (loss), net of tax 34,885 (20,708) (9,494) 10,099
------------- ----------- ----------- -----------
COMPREHENSIVE INCOME $ 57,433 $ 19,054 $ 59,369 $ 83,452
============= =========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
4
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDER'S EQUITY
(Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
2002 2001 2002 2001
------------ ------------ ------------ -----------
(unaudited) (unaudited)
COMMON STOCK (shares outstanding):
Balance, beginning of period 1,000 1,000 1,000 1,000
Issued during the period - - - -
------------ ------------ ----------- -----------
Balance, end of period 1,000 1,000 1,000 1,000
============ ============ =========== ===========
COMMON STOCK (par value):
Balance, beginning of period $ - $ - $ - $ -
Common stock retired during the period - - - -
------------ ------------ ----------- -----------
Balance, end of period - - - -
------------ ------------ ----------- -----------
ADDITIONAL PAID IN CAPITAL:
Balance, beginning of period 259,024 256,305 258,775 255,359
Common stock issued during the period 387 1,623 636 2,569
------------ ------------ ----------- -----------
Balance, end of period 259,411 257,928 259,411 257,928
------------ ------------ ----------- -----------
ACCUMULATED OTHER COMPREHENSIVE INCOME,
NET OF DEFERRED INCOME TAXES:
Balance, beginning of period 31,624 87,554 76,003 56,747
Net increase (decrease) during the period 34,885 (20,708) (9,494) 10,099
------------ ------------ ----------- -----------
Balance, end of period 66,509 66,846 66,509 66,846
------------ ------------ ----------- -----------
RETAINED EARNINGS:
Balance, beginning of period 822,946 771,972 776,631 738,381
Net income 22,548 39,762 68,863 73,353
------------ ------------ ----------- -----------
Balance, end of period 845,494 811,734 845,494 811,734
------------ ------------ ----------- -----------
TOTAL STOCKHOLDER'S EQUITY, END OF PERIOD $ 1,171,414 $ 1,136,508 $ 1,171,414 $ 1,136,508
============ ============ =========== ============
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,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 22,548 $ 39,762 $ 68,863 $ 73,353
Adjustments to reconcile net income to net cash
provided by operating activities:
(Increase) in premiums receivable (37,317) (26,133) (97,861) (43,725)
Increase in funds held, net 11,420 21,969 32,833 17,928
(Increase) in reinsurance receivables (36,866) (47,045) (68,559) (54,440)
(Increase) in deferred tax asset (35,131) (35,023) (9,974) (33,302)
Increase in reserve for losses and loss adjustment
expenses 73,795 72,304 138,658 70,795
Increase in unearned premiums 87,737 28,000 165,468 90,472
(Increase) decrease in other assets and liabilities (20,542) 10,066 (144,092) (27,548)
Accrual of bond discount/amortization of bond premium (2,372) (1,434) (4,163) (2,532)
Amortization of underwriting discount on senior notes 41 37 82 75
Realized capital losses (gains) 39,909 (4,084) 38,870 705
----------- ----------- ----------- -----------
Net cash provided by operating activities 103,222 58,419 120,125 91,781
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from fixed maturities matured/called
- available for sale 86,270 82,303 184,573 127,287
Proceeds from fixed maturities sold - available for sale 264,761 189,145 452,630 211,139
Proceeds from equity securities sold 14,570 28,949 19,940 28,949
Proceeds from other invested assets sold 3 15 3,060 23
Cost of fixed maturities acquired - available for sale (514,406) (308,492) (732,884) (533,141)
Cost of equity securities acquired (71) (20,027) (9,298) (20,027)
Cost of other invested assets acquired (1,648) (446) (1,839) (508)
Net (purchases) sales of short-term securities (1,207) (138,288) (60,583) 75,363
Net increase in unsettled securities transactions 70,970 57,560 67,653 72,059
----------- ----------- ----------- -----------
Net cash (used in) investing activities (80,758) (109,281) (76,748) (38,856)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Common stock issued during the period 387 1,623 636 2,569
Borrowing on revolving credit agreement - 2,000 20,000 22,000
Repayments on revolving credit agreement - - (20,000) (123,000)
----------- ----------- ----------- -----------
Net cash provided by (used in) financing activities 387 3,623 636 (98,431)
----------- ----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 8,426 (2,636) 4,775 (7,226)
----------- ----------- ----------- -----------
Net increase (decrease) in cash 31,277 (49,875) 48,788 (52,732)
Cash, beginning of period 85,020 65,540 67,509 68,397
----------- ----------- ----------- -----------
Cash, end of period $ 116,297 $ 15,665 $ 116,297 $ 15,665
=========== =========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
CASH TRANSACTIONS:
Income taxes paid, net $ 10,709 $ 49,416 $ (6,695) $ 51,769
Interest paid $ 871 $ 1,987 $ 21,170 $ 24,657
The accompanying notes are an integral part of the consolidated financial
statements.
6
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
1. GENERAL
As used in this document, "Holdings" means Everest Reinsurance Holdings, Inc.,
"Group" means Everest Re Group, Ltd., "Bermuda Re" means Everest Reinsurance
(Bermuda), Ltd., "Everest Re" means Everest Reinsurance Company and the
"Company" means Everest Reinsurance Holdings, Inc. and its subsidiaries.
The consolidated financial statements of the Company for the three and six
months ended June 30, 2002 and 2001 include all adjustments, consisting of
normal recurring accruals, which, in the opinion of management, are necessary
for a fair presentation of the results on an interim basis. Certain financial
information, which is normally included in annual financial statements prepared
in accordance with generally accepted accounting principles in the United States
of America, has been omitted since it is not required for interim reporting
purposes. The year-end consolidated balance sheet data was derived from audited
financial statements, but does not include all disclosures required by generally
accepted accounting principles in the United States of America. The results for
the three and six months ended June 30, 2002 and 2001 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, 2001, 2000 and 1999 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, which is more
limited than historical information on other types of casualty claims; (h)
questions concerning interpretation and application of insurance and reinsurance
coverage; and (i) uncertainty regarding the number and identity of insureds with
potential asbestos or environmental exposure.
7
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
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 the acquisition of Mt.
McKinley Insurance Company ("Mt. McKinley"), which has significant exposure to
asbestos and environmental claims, Prudential Property and Casualty Insurance
Company ("Prupac"), a subsidiary of The Prudential Insurance Company of America
("The Prudential"), provided reinsurance to Mt. McKinley covering 80.0% ($160
million) of the first $200 million of any adverse development of Mt. McKinley's
reserves as of September 19, 2000 and The Prudential guaranteed Prupac's
obligations to Mt. McKinley. Through June 30, 2002, cessions under this
reinsurance agreement have reduced the available remaining limits to $126.4
million net of coinsurance. Effective September 19, 2000, Mt. McKinley and
Bermuda Re entered into a loss portfolio transfer reinsurance agreement, whereby
Mt. McKinley transferred, for what management believes to be arm's-length
consideration, all of its net insurance exposures and reserves, including
allocated and unallocated loss adjustment expenses to Bermuda Re. Due to the
uncertainties discussed above, the ultimate losses may vary materially from
current loss reserves and, depending on coverage under the Company's various
reinsurance arrangements, could have a material adverse effect on the Company's
future financial condition, results of operations and cash flows.
The following table shows the development of prior year asbestos and
environmental reserves on both a gross and net of retrocessional basis for the
three and six months ended June 30, 2002 and 2001:
(dollar amounts in thousands) Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
-------------------------------------------------------------
Gross basis:
Beginning of period reserves $ 631,778 $ 690,659 $ 644,390 $ 693,704
Incurred losses 20,000 5,000 30,000 17,110
Paid losses (12,676) (21,732) (35,288) (36,887)
-------------------------------------------------------------
End of period reserves $ 639,102 $ 673,927 $ 639,102 $ 673,927
=============================================================
Net basis:
Beginning of period reserves $ 265,145 $ 310,413 $ 276,169 $ 317,196
Incurred losses 1,257 - 1,885 -
Paid losses (3,800) (11,655) (15,452) (18,438)
-------------------------------------------------------------
End of period reserves $ 262,602 $ 298,758 $ 262,602 $ 298,758
=============================================================
8
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
At June 30, 2002, the gross reserves for asbestos and environmental losses were
comprised of $109.5 million representing case reserves reported by ceding
companies, $52.1 million representing additional case reserves established by
the Company on assumed reinsurance claims, $144.8 million representing case
reserves established by the Company on direct excess insurance claims, including
Mt. McKinley, and $332.7 million representing incurred but not reported ("IBNR")
reserves.
The Company is involved from time to time in ordinary routine litigation and
arbitration proceedings incidental to its business. The Company does not believe
that there are any other material pending legal proceedings to which it or any
of its subsidiaries or their properties are subject.
The Prudential sells annuities which are purchased by property and casualty
insurance companies to settle certain types of claim liabilities. In 1993 and
prior years, the Company, for a fee, accepted the claim payment obligation of
these property and casualty insurers, and, concurrently, became the owner of the
annuity or assignee of the annuity proceeds. In these circumstances, the Company
would be liable if The Prudential were unable to make the annuity payments. The
estimated cost to replace all such annuities for which the Company was
contingently liable at June 30, 2002 was $148.7 million.
The Company has purchased annuities from an unaffiliated life insurance company
with an A+ (superior) rating from A.M. Best 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, 2002 was $14.2 million.
3. OTHER COMPREHENSIVE INCOME
The Company's other comprehensive income is comprised as follows:
(dollar amounts in thousands) Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
-------------------------------------------------------------
Net unrealized appreciation
(depreciation) of investments, net of
deferred income taxes $ 31,873 ($ 22,577) ($ 11,832) $ 10,915
Currency translation adjustments, net
of deferred income taxes
3,012 1,869 2,338 (816)
-------------------------------------------------------------
Other comprehensive income (loss),
net of deferred income taxes
$ 34,885 ($ 20,708) ($ 9,494) $ 10,099
=============================================================
9
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
4. CREDIT LINE
On December 21, 1999, the Company entered into a three-year senior revolving
credit facility with a syndicate of lenders (the "Credit Facility"). First Union
National Bank is the administrative agent for the Credit Facility. The Credit
Facility is used for liquidity and general corporate purposes. The Credit
Facility provides for the borrowing of up to $150.0 million with interest at a
rate selected by the Company equal to either (i) the Base Rate (as defined
below) or (ii) an adjusted London InterBank Offered Rate ("LIBOR") plus a
margin. The Base Rate is the higher of the rate of interest established by First
Union National Bank from time to time as its prime rate or the Federal Funds
rate plus 0.5% per annum. On December 18, 2000, the Credit Facility was amended
to extend the borrowing limit to $235.0 million for a period of 120 days. This
120-day period expired during the three months ended June 30, 2001, after which
the limit reverted to $150.0 million. The amount of margin and the fees payable
for the Credit Facility depends upon the Company's senior unsecured debt rating.
Group has guaranteed the Company's obligations under the Credit Facility.
The Credit Facility requires Group to maintain a debt to capital ratio of not
greater than 0.35 to 1, the Company to maintain a minimum interest coverage
ratio of 2.5 to 1 and Everest Re to maintain its statutory surplus at $850.0
million plus 25% of aggregate net income and 25% of aggregate capital
contributions.
During the three and six months ended June 30, 2002, the Company made payments
on the Credit Facility of $0.0 million and $20.0 million, respectively, compared
to the $0.0 million and $123.0 million for the three and six months ended June
30, 2001. During the three and six months ended June 30, 2002 the Company made
borrowings of $0.0 million and $20.0 million, respectively, compared to the $2.0
million and $22.0 million for the three and six months ended June 30, 2001. As
of June 30, 2002 and 2001, the Company had outstanding Credit Facility
borrowings of $105.0 million and $134.0 million, respectively. Interest expense
incurred in connection with these borrowings was $0.9 million and $1.8 million
for the three months ended June 30, 2002 and 2001, respectively, and $1.7
million and $4.5 million for the six months ended June 30, 2002 and 2001,
respectively.
5. SENIOR NOTES
During the first quarter of 2000, the Company completed a public offering of
$200.0 million principal amount of 8.75% senior notes due March 15, 2010 and
$250.0 million principal amount of 8.5% senior notes due March 15, 2005.
Interest expense incurred in connection with these senior notes was $9.7 million
for the three months ended June 30, 2002 and 2001, and $19.5 million for the six
months ended June 30, 2002 and 2001.
10
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
6. SEGMENT REPORTING
The Company, through its subsidiaries, operates in four segments: U.S.
Reinsurance, U.S. Insurance, Specialty Reinsurance and International
Reinsurance. The U.S. Reinsurance operation writes property and casualty treaty
reinsurance through reinsurance brokers as well as directly with ceding
companies within the United States, in addition to property, casualty and
specialty facultative reinsurance through brokers and directly with ceding
companies within the United States. The U.S. Insurance operation writes property
and casualty insurance primarily through general agent relationships and surplus
lines brokers within the United States. The Specialty Reinsurance operation
writes accident and health, marine, aviation and surety business within the
United States and worldwide through brokers and directly with ceding companies.
The International Reinsurance operation writes property and casualty reinsurance
through the Company's branches in London, Canada, and Singapore, in addition to
foreign "home-office" business.
These segments are managed in a carefully coordinated fashion with strong
elements of central control, including with respect to capital, investments and
support operations. As a result, management monitors and evaluates the financial
performance of these operating segments principally based upon their
underwriting gain or loss ("underwriting results"). The Company utilizes
inter-affiliate reinsurance and such reinsurance does not impact segment results
as business is reported in the unit responsible for the business as initially
written with third parties, generally within the segment in which the business
was first produced. Underwriting results include earned premium less incurred
loss and loss adjustment expenses, commission and brokerage expenses and other
underwriting expenses.
The following tables present the relevant underwriting results for the operating
segments for the three and six months ended June 30, 2002 and 2001, with all
dollar values presented in thousands.
U.S. REINSURANCE
- --------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
------------------------------------------------------------
Earned premiums $ 132,021 $ 138,553 $ 304,647 $ 247,663
Incurred losses and loss
adjustment expenses 92,430 108,031 214,143 183,392
Commission and brokerage 35,075 37,322 79,921 63,852
Other underwriting expenses 5,087 4,094 9,259 7,334
------------------------------------------------------------
Underwriting (loss) gain ($ 571) ($ 10,894) $ 1,324 ($ 6,915)
============================================================
11
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
U.S. INSURANCE
- --------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
------------------------------------------------------------
Earned premiums $ 111,132 $ 68,357 $ 206,496 $ 120,498
Incurred losses and loss
adjustment expenses 74,520 49,065 142,475 86,264
Commission and brokerage 25,785 13,990 48,027 27,528
Other underwriting expenses 6,187 3,952 10,927 7,917
------------------------------------------------------------
Underwriting gain (loss) $ 4,640 $ 1,350 $ 5,067 ($ 1,211)
============================================================
SPECIALTY REINSURANCE
- --------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
------------------------------------------------------------
Earned premiums $ 110,206 $ 99,070 $ 218,547 $ 192,808
Incurred losses and loss
adjustment expenses 84,432 73,547 166,598 148,096
Commission and brokerage 31,712 23,630 63,331 47,565
Other underwriting expenses 1,526 1,578 2,892 2,950
------------------------------------------------------------
Underwriting (loss) gain ($ 7,464) $ 315 ($ 14,274) ($ 5,803)
============================================================
INTERNATIONAL REINSURANCE
- -------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
-----------------------------------------------------------
Earned premiums $ 98,248 $ 83,401 $ 180,035 $ 156,404
Incurred losses and loss
adjustment expenses 61,055 57,897 114,934 113,236
Commission and brokerage 18,176 21,884 33,956 39,734
Other underwriting expenses 3,312 3,446 6,321 6,613
-----------------------------------------------------------
Underwriting gain (loss) $ 15,705 $ 174 $ 24,824 ($ 3,179)
===========================================================
12
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
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,
2002 2001 2002 2001
--------------------------------------------------------------------
Underwriting gain (loss) $ 12,310 ($ 9,055) $ 16,941 ($ 17,108)
Net investment income 65,472 68,747 130,271 136,109
Realized (loss) gain (39,909) 4,084 (38,870) (705)
Net derivative (expense) - - (250) -
Corporate expenses 214 (1,180) - (1,434)
Interest expense (10,581) (11,545) (21,218) (23,966)
Other (expense) income (6,059) 816 (4,481) 1,462
--------------------------------------------------------------------
Income before taxes $ 21,447 $ 51,867 $ 82,393 $ 94,358
====================================================================
The Company writes premium in the United States and international markets. The
revenues, net income and identifiable assets of the individual foreign countries
in which the Company writes business are not material to the Company's financial
condition, results of operations and cash flows.
7. DERIVATIVES
The Company has in its product portfolio a credit default swap contract, which
it no longer offers. This contract meets the definition of a derivative under
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"). The Company's position in this contract is
unhedged and is accounted for as a derivative in accordance with FAS 133.
Accordingly, this contract is carried at fair value with changes in fair value
recorded in the statement of operations.
8. NEW ACCOUNTING PRONOUNCEMENT
In June 2001, the Financial Accounting Standards Board ("FASB") issued FAS 142,
"Goodwill and Other Intangible Assets". FAS 142 established new accounting and
reporting standards for acquired goodwill and other intangible assets. It
requires that an entity determine if the goodwill or other intangible asset has
an indefinite useful life or a finite useful life. Those with indefinite useful
lives are not subject to amortization and must be tested annually for
impairment. Those with finite useful lives are subject to amortization and must
be tested annually for impairment.
13
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(continued)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
This statement is effective for all fiscal quarters of all fiscal years
beginning after December 15, 2001. The Company adopted FAS 142 on January 1,
2002. The implementation of this statement has not had a material impact on the
financial position, results of operations or cash flows of the Company.
9. RELATED-PARTY TRANSACTIONS
During the normal course of business, the Company, through its affiliates,
engages in what management believes to be arm's-length reinsurance and brokerage
and commission business transactions with companies controlled by or affiliated
with its outside directors. Such transactions, individually and in the
aggregate, are immaterial to the Company's financial condition, results of
operations and cash flows.
The Company engages in business transactions with Group and Bermuda Re.
Effective January 1, 2002, Everest Re and Bermuda Re entered into a Quota Share
Reinsurance Agreement, for what management believes to be arm's-length
consideration, whereby Everest Re cedes 20% of the net retained liability on all
new and renewal policies written during the term of this agreement. Effective
January 1, 2002, Everest Re, Everest National Insurance Company and Everest
Security Insurance Company entered into an Excess of Loss Reinsurance Agreement
with Bermuda Re, for what management believes to be arm's-length consideration,
covering workers' compensation losses occurring on and after January 1, 2002, as
respects new, renewal and in force policies effective on that date. Bermuda Re
is liable for any loss exceeding $100,000 per occurrence, with its liability not
to exceed $150,000 per occurrence. Effective October 1, 2001, Everest Re and
Bermuda Re entered into a loss portfolio reinsurance agreement, whereby Everest
Re transferred all of it's Belgium Branch net insurance exposures and reserves
to Bermuda Re for what management believes to be arm's-length consideration and
subsequently closed its Belgium Branch. Effective September 19, 2000, Mt.
McKinley and Bermuda Re entered into a loss portfolio transfer reinsurance
agreement, whereby Mt. McKinley transferred, for what management believes to be
arm's-length consideration, all of its net insurance exposures and reserves to
Bermuda Re.
12. SUBSEQUENT EVENTS
A. Between July 1, 2002 and August 6, 2002, the Company repurchased 450,000
shares of Group's common stock at an average price of $50.86 per share.
B. On July 30, 2002, the Company filed a shelf registration statement on Form
S-3 with the Securities and Exchange Commission, which provides for the
issuance of up to $475.0 million of securities. Generally, under this shelf
registration statement, Group may issue common shares, preferred shares,
debt, warrants and hybrid securities, Holdings may issue debt securities
and warrants and Everest Re Capital Trust may issue trust preferred
securities. This shelf registration statement, once effective, will replace
the existing common equity shelf registration statement of Group.
14
Part I - Item 2
EVEREST REINSURANCE HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FINANCIAL STATEMENT CERTIFICATION
Pursuant to Section 21(a)(1) of the Securities Exchange Act of 1934 No. 4-460,
the Staff of the Securities and Exchange Commission has issued an Order
requiring the principal executive officer and the principal accounting officer
of certain companies to issue sworn statements certifying that the financial
statements are materially truthful and complete. Although the Company is not
among those companies required to submit such statements, the Company intends to
voluntarily file such certifications on Form 8-K on or before August 14, 2002.
INDUSTRY CONDITIONS
The worldwide reinsurance and insurance businesses are highly competitive yet
cyclical by product and market. The terrorist attacks on September 11, 2001
resulted in losses which reduced industry capacity and were of sufficient
magnitude to cause most individual companies to reassess their capital position,
tolerance for risk, exposure control mechanisms and the pricing terms and
conditions at which they are willing to take on risk. The gradual and variable
improving trend that had been apparent through 2000 and earlier in 2001 firmed
significantly. This firming generally took the form of immediate and significant
upward pressure on prices, more restrictive terms and conditions and a reduction
of coverage limits and capacity availability. Such pressures were widespread
with variability depending on the product and markets involved, but mainly
depending on the characteristics of the underlying risk exposures. The magnitude
of the changes was sufficient to create temporary disequilibrium in some markets
as individual buyers and sellers adapted to changes in both their internal and
market dynamics. Thusfar in 2002, our markets have generally continued to firm.
These changes reflect a reversal of the general trend from 1987 through 1999
toward increasingly competitive global market conditions across most lines of
business as reflected by decreasing prices and broadening contract terms. The
earlier trend resulted from a number of factors, including the emergence of
significant reinsurance capacity in Bermuda, changes in the Lloyds market,
consolidation and increased capital levels in the insurance and reinsurance
industries, as well as the emergence of new reinsurance and financial products
addressing traditional exposures in alternative fashions. Many of these factors
continue to exist and may be amplified as the result of market changes since the
September 11th attacks. As a result, although the Company is encouraged by the
recent improvements, and more generally, current market conditions, the Company
cannot predict with any reasonable certainty whether and to what extent these
improvements will persist.
15
SEGMENT INFORMATION
The Company, through its subsidiaries, operates in four segments: U.S.
Reinsurance, U.S. Insurance, Specialty Reinsurance and International
Reinsurance. The U.S. Reinsurance operation writes property and casualty treaty
reinsurance through reinsurance brokers as well as directly with ceding
companies within the United States, in addition to property, casualty and
specialty facultative reinsurance through brokers and directly with ceding
companies within the United States. The U.S. Insurance operation writes property
and casualty insurance primarily through general agent relationships and surplus
lines brokers within the United States. The Specialty Reinsurance operation
writes accident and health, marine, aviation and surety business within the
United States and worldwide through brokers and directly with ceding companies.
The International Reinsurance operation writes property and casualty reinsurance
through the Company's branches in London, Canada, and Singapore, in addition to
foreign "home-office" business.
These segments are managed in a carefully coordinated fashion with strong
elements of central control, including with respect to capital, investments and
support operations. As a result, management monitors and evaluates the financial
performance of these operating segments principally based upon their
underwriting results. The Company utilizes inter-affiliate reinsurance and such
reinsurance does not impact segment results as business is reported in the unit
responsible for the business as initially written with third parties, generally
within the segment in which the business was first produced.
THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
PREMIUMS. Gross premiums written increased 30.3% to $622.0 million in the three
months ended June 30, 2002 from $480.9 million in the three months ended June
30, 2001 as the Company took advantage of selected growth opportunities, while
continuing to maintain a disciplined underwriting approach. Premium growth areas
included a 78.0% ($97.1 million) increase in the U.S. Insurance operation,
principally attributable to growth in workers' compensation insurance, a 42.7%
($37.9 million) increase in the International Reinsurance operation, mainly
attributable to growth in the London, Canada and Latin American markets and a
15.3% ($15.9 million) increase in the Specialty Reinsurance operation,
principally attributable to growth in medical stop loss business, a component of
A&H writings. These increases were partially offset by a 6.0% ($9.7 million)
decrease in the U.S. Reinsurance operation principally attributable to the
non-renewal of business during 2001 and early 2002. The Company continued to
decline business that did not meet its objectives regarding underwriting
profitability.
Ceded premiums increased to $107.3 million in the three months ended June 30,
2002 from $65.8 million in the three months ended June 30, 2001. This increase
was principally attributable to $64.6 million of ceded premiums relating to a
Quota Share Reinsurance Agreement between Everest Re and Bermuda Re, whereby
Everest Re cedes 20% of its net retained liability on all new and renewal
policies written during the term of this agreement, and an Excess of Loss
Agreement between Everest Re, Everest National Insurance Company and Everest
Security Insurance Company and Bermuda Re, whereby Bermuda Re assumes liability
for primary insurance workers' compensation losses exceeding $100,000 per
occurrence, with its liability not to exceed $150,000 per occurrence. Ceded
premiums for the three months ended June 30, 2001 included $15.4 million in
adjustment premiums relating to claims made under the 1999 accident year
aggregate excess of loss element of the Company's corporate retrocessional
program.
16
Net premiums written increased by 25.1% to $519.4 million in the three months
ended June 30, 2002 from $415.0 million in the three months ended June 30, 2001.
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 16.0% to $451.6 million in
the three months ended June 30, 2002 from $389.4 million in the three months
ended June 30, 2001. Contributing to this increase was an 62.6% ($42.8 million)
increase in the U.S. Insurance operation, a 17.8% ($14.8 million) increase in
the International Reinsurance operation and a 11.2% ($11.1 million) increase in
the Specialty Reinsurance operation. These increases were partially offset by a
4.7% ($6.5 million) decrease in the U.S. Reinsurance operation. All of these
changes reflect period to period changes in net written premiums and business
mix together with normal variability in earnings patterns. Business mix changes
occur not only as the Company shifts emphasis between products, lines of
business, distribution channels and markets but also as individual contracts
renew or non-renew, almost always with changes in coverage, structure, prices
and/or terms, and as new contracts are accepted with coverages, structures,
prices and/or terms different from those of expiring contracts. As premium
reporting and earnings and loss and commission characteristics derive from the
provisions of individual contracts, the continuous turnover of individual
contracts, arising from both strategic shifts and day to day underwriting, can
and does introduce appreciable background variability in various underwriting
line items.
EXPENSES. Incurred loss and loss adjustment expenses ("LAE") increased by 8.3%
to $312.4 million in the three months ended June 30, 2002 from $288.5 million in
the three months ended June 30, 2001. The increase in incurred losses and LAE
was principally attributable to the increase in net premiums earned and also
reflects the impact of changes in the Company's mix of business. Incurred losses
and LAE include catastrophe losses, which include the impact of both current
period events and favorable and unfavorable development on prior period events,
and are net of reinsurance. A catastrophe is an event that causes a pre-tax loss
on property exposures of at least $5.0 million and has an event date of January
1, 1988 or later. Catastrophe losses, net of contract specific cessions but
before cessions under the corporate retrocessional program, were $0.3 million in
the three months ended June 30, 2002 compared to net catastrophe losses of $13.9
million in the three months ended June 30, 2001. Incurred losses and LAE for the
three months ended June 30, 2002 reflected ceded losses and LAE of $72.8 million
compared to ceded losses and LAE in the three months ended June 30, 2001 of
$77.1 million. The ceded losses and LAE for the three months ended June 30, 2001
included $29.0 million of losses ceded under the 1999 accident year aggregate
excess of loss component of the Company's corporate retrocessional program.
Ceded losses and LAE in the three months ended June 30, 2002 include $36.1
million of ceded losses relating to the reinsurance transactions noted earlier
between the Company and Bermuda Re.
Contributing to the increase in incurred losses and LAE in the three months
ended June 30, 2002 from the three months ended June 30, 2001 were an 51.9%
($25.5 million) increase in the U.S. Insurance operation principally reflecting
increased premium volume coupled with changes in this segments specific
reinsurance programs, a 14.8% ($10.9 million) increase in the Specialty
Reinsurance operation principally attributable to increased premium volume in
A&H business and a 5.5% ($3.2 million) increase in the International Reinsurance
operation. These increases were partially offset by a 14.5% ($15.6 million)
decrease in the U.S. Reinsurance operation, principally reflecting lower
catastrophe losses. Incurred losses and LAE for each operation were also
17
impacted by variability relating to changes in the level of premium volume and
mix of business by class and type.
The Company's loss and LAE ratio ("loss ratio"), which is calculated by dividing
incurred losses and LAE by premiums earned, decreased by 4.9 percentage points
to 69.2% in the three months ended June 30, 2002 from 74.1% in the three months
ended June 30, 2001 reflecting the incurred losses and LAE discussed above. The
following table shows the loss ratios for each of the Company's operating
segments for the three months ended June 30, 2002 and 2001. The loss ratios for
all operations were impacted by the factors noted above.
Operating Segment Loss Ratios
- --------------------------------------------------------------------------------------------
Segment 2002 2001
- --------------------------------------------------------------------------------------------
U.S. Reinsurance 70.0% 78.0%
U.S. Insurance 67.1% 71.8%
Specialty Reinsurance 76.6% 74.2%
International Reinsurance 62.1% 69.4%
Underwriting expenses increased by 14.0% to $126.6 million in the three months
ended June 30, 2002 from $111.1 million in the three months ended June 30, 2001.
Commission, brokerage, taxes and fees increased by $13.9 million, principally
reflecting increases in premium volume and changes in the mix of business. Other
underwriting expenses increased by $1.6 million as the Company expanded its
operations to support its increased business volume. Contributing to these
underwriting expense increases were 78.2% ($14.0 million) increase in the U.S.
Insurance operation and a 31.9% ($8.0 million) increase in the Specialty
Reinsurance operation. These increases were partially offset by a 15.2% ($3.8
million) decrease in the International Reinsurance operation and a 3.0% ($1.3
million) decrease in the U.S. Reinsurance operation. The changes for each
operation's expenses principally resulted from changes in commission expenses
related to changes in premium volume and business mix by class and type and, in
some cases, changes in the use of specific reinsurance, including with Bermuda
Re, and the underwriting performance of the underlying business. The Company's
expense ratio, which is calculated by dividing underwriting expenses by premiums
earned, was 28.0% for the three months ended June 30, 2002 compared to 28.5% for
the three months ended June 30, 2001.
The Company's combined ratio, which is the sum of the loss and expense ratios,
decreased by 5.4 percentage points to 97.2% in the three months ended June 30,
2002 compared to 102.6% in the three months ended June 30, 2001. The following
table shows the combined ratios for each of the Company's operating segments for
the three months ended June 30, 2002 and 2001. The combined ratios for all
operations were impacted by the loss and expense ratio variability noted above.
Operating Segment Combined Ratios
- --------------------------------------------------------------------------------------------
Segment 2002 2001
- --------------------------------------------------------------------------------------------
U.S. Reinsurance 100.4% 107.9%
U.S. Insurance 95.8% 98.0%
Specialty Reinsurance 106.8% 99.7%
International Reinsurance 84.0% 99.8%
18
INVESTMENT RESULTS. Net investment income decreased 4.8% to $65.5 million in the
three months ended June 30, 2002 from $68.7 million in the three months ended
June 30, 2001, principally reflecting the effects of the lower interest rate
environment, partially offset by the effect of investing the $332.1 million of
cash flow from operations in the twelve months ended June 30, 2002. The
following table shows a comparison of various investment yields as of June 30,
2002 and December 31, 2001, respectively, and for the periods ended June 30,
2002 and 2001, respectively.
2002 2001
------------------------
Imbedded pre-tax yield of cash and invested
assets at June 30, 2002 and December 31, 2001 5.8% 6.0%
Imbedded after-tax yield of cash and invested
assets at June 30, 2002 and December 31, 2001 4.5% 4.6%
Annualized pre-tax yield on average cash and
invested assets for the three months ended June 30,
2002 and 2001 5.9% 6.6%
Annualized after-tax yield on average cash and
invested assets for the three months ended June 30,
2002 and 2001 4.6% 4.9%
Net realized capital loss was $39.9 million in the three months ended June 30,
2002, reflecting realized capital losses on the Company's investments of $55.1
million which included $53.0 million relating to write-downs in the value of
securities, of which $25.7 million was for WorldCom, deemed to be impaired on an
other than temporary basis, partially offset by $15.2 million of realized
capital losses, compared to net realized capital gains of $4.1 million in the
three months ended June 30, 2001. The net realized capital losses in the three
months ended June 30, 2001 reflected realized capital losses of $16.2 million,
partially offset by $20.3 million of realized capital gains which included $12.0
million relating to write-downs in the value of securities deemed to be impaired
on an other than temporary basis.
Interest expense for the three months ended June 30, 2002 was $10.6 million
compared to $11.5 million for the three months ended June 30, 2001. Interest
expense for the three months ended June 30, 2002 reflects $9.7 million relating
to the Company's issuance of senior notes and $0.9 million relating to the
Company's borrowings under it's revolving credit facility. Interest expense for
the three months ended June 30, 2001 reflects $9.7 million relating to the
Company's issuance of senior notes and $1.8 million relating to the Company's
borrowings under its revolving credit facility.
Other expense for the three months ended June 30, 2002 was $6.1 million compared
to other income of $0.8 million for the three months ended June 30, 2001.
Significant contributors to other expense for the three months ended June 30,
2002 were foreign exchange losses, normal provision for uncollectible audit
premium in the U.S. Insurance operation, increase in other liabilities related
to deferred recognition of reinsurance recoveries under retroactive reinsurance
between the Company and Bermuda Re and the amortization of deferred expenses
relating to the Company's issuance of senior notes in 2000. Other income for the
three months ended June 30, 2001 principally included foreign exchange gains and
fee income. The foreign exchange gains for both periods are attributable to
fluctuations in foreign currency exchange rates.
19
INCOME TAXES. The Company recognized income tax benefit of $1.1 million in the
three months ended June 30, 2002 compared to income tax expense of $12.1 million
in the three months ended June 30, 2001. The income tax benefit in 2002 reflects
improved underwriting results offset by decreased investment results and
increased taxable realized capital losses.
NET INCOME. Net income was $22.5 million in the three months ended June 30, 2002
compared to $39.8 million in the three months ended June 30, 2001. This decrease
generally reflects the increased realized capital losses and decreased
investment results, partially offset by improved underwriting results and
decreased interest expense.
SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
PREMIUMS. Gross premiums written increased 35.3% to $1,217.5 million in the six
months ended June 30, 2002 from $899.8 million in the six months ended June 30,
2001 as the Company took advantage of selected growth opportunities, while
continuing to maintain a disciplined underwriting approach. Premium growth areas
included a 67.0% ($168.7 million) increase in the U.S. Insurance operation,
principally attributable to growth in workers' compensation insurance, a 36.9%
($60.6 million) increase in the International Reinsurance operation, mainly
attributable to growth in the London, Canada and Latin American markets, a 18.8%
($37.5 million) increase in the Specialty Reinsurance operation, principally
attributable to growth in medical stop loss business, a component of A&H
writings and a 17.9% ($51.1 million) increase in the U.S. Reinsurance operation
primarily reflecting growth across property and casualty lines. The Company
continued to decline business that did not meet its objectives regarding
underwriting profitability.
Ceded premiums increased to $184.1 million in the six months ended June 30, 2002
from $97.9 million in the six months ended June 30, 2001. This increase was
principally attributable to $114.1 million of ceded premiums relating to a Quota
Share Reinsurance Agreement between Everest Re and Bermuda Re, whereby Everest
Re cedes 20% of its net retained liability on all new and renewal policies
written during the term of this agreement, and an Excess of Loss Agreement
between Everest Re, Everest National Insurance Company and Everest Security
Insurance Company and Bermuda Re, whereby Bermuda Re assumes liability for
primary insurance workers' compensation losses exceeding $100,000 per
occurrence, with its liability not to exceed $150,000 per occurrence. Ceded
premiums for the three months ended June 30, 2001 included $15.4 million in
adjustment premiums 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 28.9% to $1,033.5 million in the six months
ended June 30, 2002 from $801.9 million in the six months ended June 30, 2001.
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 26.8% to $909.7 million in
the six months ended June 30, 2002 from $717.4 million in the six months ended
June 30, 2001. Contributing to this increase was an 71.4% ($86.0 million)
increase in the U.S. Insurance operation, a 23.0% ($57.0 million) increase in
the U.S. Reinsurance operation, a 15.1% ($23.6 million) increase in the
International Reinsurance operation and a 13.3% ($25.7 million) increase in the
Specialty Reinsurance operation. All of these changes reflect period to period
changes in net written premiums and business mix together with normal
variability in earnings patterns.
20
EXPENSES. Incurred loss and LAE increased by 20.2% to $638.2 million in the six
months ended June 30, 2002 from $531.0 million in the six months ended June 30,
2001. The increase in incurred losses and LAE was principally attributable to
the increase in net premiums earned and also reflects the impact of changes in
the Company's mix of business. Incurred losses and LAE include catastrophe
losses, which include the impact of both current period events, and favorable
and unfavorable development on prior period events and are net of reinsurance. A
catastrophe is an event that causes a pre-tax loss on property exposures of at
least $5.0 million and has an event date of January 1, 1988 or later.
Catastrophe losses, net of contract specific cessions but before cessions under
the corporate retrocessional program, were $1.6 million in the six months ended
June 30, 2002 compared to net catastrophe losses of $28.7 million in the six
months ended June 30, 2001. Incurred losses and LAE for the six months ended
June 30, 2002 reflected ceded losses and LAE of $133.3 million compared to ceded
losses and LAE in the six months ended June 30, 2001 of $109.7 million, with the
increase principally attributable to $60.1 million of ceded losses and LAE in
the six months ended June 30, 2002 relating to the reinsurance transactions
between the Company and Bermuda Re noted earlier. The ceded losses and LAE for
the three months ended June 30, 2001 included $29.0 million of losses ceded
under the 1999 accident year aggregate excess of loss component of the Company's
corporate retrocessional program.
Contributing to the increase in incurred losses and LAE in the six months ended
June 30, 2002 from the six months ended June 30, 2001 were an 65.2% ($56.2
million) increase in the U.S. Insurance operation principally reflecting
increased premium volume coupled with changes in this segments specific
reinsurance programs, a 16.8% ($30.8 million) increase in the U.S. Reinsurance
operation and a 12.5% ($18.5 million) increase in the Specialty Reinsurance
operation, both principally attributable to increased premium volume and a 1.5%
($1.7 million) increase in the International Reinsurance operation. Incurred
losses and LAE for each operation were also impacted by variability relating to
changes in the level of premium volume and mix of business by class and type.
The Company's loss ratio, decreased by 3.9 percentage points to 70.1% in the six
months ended June 30, 2002 from 74.0% in the six months ended June 30, 2001
reflecting the incurred losses and LAE discussed above. The following table
shows the loss ratios for each of the Company's operating segments for the six
months ended June 30, 2002 and 2001. The loss ratios for all operations were
impacted by the factors noted above.
Operating Segment Loss Ratios
- --------------------------------------------------------------------------------------------
Segment 2002 2001
- --------------------------------------------------------------------------------------------
U.S. Reinsurance 70.3% 74.0%
U.S. Insurance 69.0% 71.6%
Specialty Reinsurance 76.2% 76.8%
International Reinsurance 63.8% 72.4%
Underwriting expenses increased by 24.3% to $254.6 million in the six months
ended June 30, 2002 from $204.9 million in the six months ended June 30, 2001.
Commission, brokerage, taxes and fees increased by $46.6 million, principally
reflecting increases in premium volume and changes in the mix of business. Other
underwriting expenses increased by $3.2 million as the Company expanded its
operations to support its increased business volume. Contributing to these
underwriting expense increases were a 66.3% ($23.5 million) increase in the U.S.
21
Insurance operation, a 31.1% ($15.7 million) increase in the Specialty
Reinsurance operation and a 25.3% ($18.0 million) increase in the U.S.
Reinsurance operation. These increases were partially offset by a 13.1% ($6.1
million) decrease in the International Reinsurance operation. The changes for
each operation's expenses principally resulted from changes in commission
expenses related to changes in premium volume and business mix by class and type
and, in some cases, changes in the use of specific reinsurance and the
underwriting performance of the underlying business. The Company's expense ratio
was 28.0% for the six months ended June 30, 2002 compared to 28.6% for the six
months ended June 30, 2001.
The Company's combined ratio decreased by 4.5 percentage points to 98.2% in the
six months ended June 30, 2002 compared to 102.6% in the six months ended June
30, 2001. The following table shows the combined ratios for each of the
Company's operating segments for the three months ended June 30, 2002 and 2001.
The combined ratios for all operations were impacted by the loss and expense
ratio variability noted above.
Operating Segment Combined Ratios
- --------------------------------------------------------------------------------------------
Segment 2002 2001
- --------------------------------------------------------------------------------------------
U.S. Reinsurance 99.6% 102.8%
U.S. Insurance 97.5% 101.0%
Specialty Reinsurance 106.5% 103.0%
International Reinsurance 86.2% 102.0%
INVESTMENT RESULTS. Net investment income decreased 4.3% to $130.3 million in
the six months ended June 30, 2002 from $136.1 million in the six months ended
June 30, 2001, principally reflecting the effects of the lower interest rate
environment, partially offset by the effect of investing the $332.1 million of
cash flow from operations in the twelve months ended June 30, 2002. The
following table shows a comparison of various investment yields as of June 30,
2002 and December 31, 2001, respectively, and for the periods ended June 30,
2002 and 2001, respectively.
2002 2001
------------------------
Imbedded pre-tax yield of cash and invested
assets at June 30, 2002 and December 31, 2001 5.8% 6.0%
Imbedded after-tax yield of cash and invested
assets at June 30, 2002 and December 31, 2001 4.5% 4.6%
Annualized pre-tax yield on average cash and
invested assets for the six months ended June 30,
2002 and 2001 5.9% 6.5%
Annualized after-tax yield on average cash and
invested assets for the six months ended June 30,
2002 and 2001 4.5% 4.8%
Net realized capital losses were $38.9 million in the six months ended June 30,
2002, reflecting realized capital losses on the Company's investments of $61.4
million, which included $56.8 million relating to write-downs in the value of
securities, of which $25.7 million related to WorldCom, deemed to be impaired on
an other than temporary basis, partially offset by $22.5 million of realized
capital gains, compared to net realized capital losses of $0.7 million in the
22
six months ended June 30, 2001. The net realized capital losses in the six
months ended June 30, 2001 reflected realized capital losses of $21.3 million,
which included $16.7 million relating to write-downs in the value of securities
deemed to be impaired on an other than temporary basis, partially offset by
$20.6 million of realized capital gains.
Interest expense for the six months ended June 30, 2002 was $21.2 million
compared to $24.0 million for the six months ended June 30, 2001. Interest
expense for the six months ended June 30, 2002 reflects $19.5 million relating
to the Company's issuance of senior notes and $1.8 million relating to the
Company's borrowings under it's revolving credit facility. Interest expense for
the six months ended June 30, 2001 reflects $19.5 million relating to the
Company's issuance of senior notes and $4.5 million relating to the Company's
borrowings under its revolving credit facility.
Other expenses for the six months ended June 30, 2002 was $4.5 million compared
to other income of $1.5 million for the six months ended June 30, 2001.
Significant contributors to other expense for the six months ended June 30, 2002
were foreign exchange losses, normal provision for uncollectible audit premium
in the U.S. Insurance, increase in other liabilities related to deferred
recongition of reinsurance recoveries under retroactive reinsurance between the
Company and Bermuda Re and the amortization of deferred expenses relating to the
Company's issuance of senior notes in 2000, partially offset by fee income.
Other income for the six months ended June 30, 2001 principally included foreign
exchange gains and fee income. The foreign exchange gains and losses for both
periods are attributable to fluctuations in foreign currency exchange rates.
INCOME TAXES. The Company recognized income tax expense of $13.5 million in the
six months ended June 30, 2002 compared to $21.0 million in the six months ended
June 30, 2001 principally reflecting improved underwriting results partially
offset by decreased investment results and increased taxable realized capital
losses.
NET INCOME. Net income was $68.9 million in the six months ended June 30, 2002
compared to $73.4 million in the six months ended June 30, 2001. This decrease
generally reflects the increased realized capital losses and decreased
investment results, partially offset by improved underwriting results and
decreased interest expense.
MARKET SENSITIVE INSTRUMENTS. The Company's risks associated with market
sensitive instruments have not changed materially since the period ended
December 31, 2001.
SAFE HARBOR DISCLOSURE. This report contains forward-looking statements within
the meaning of the U.S. federal securities laws. The Company intends these
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements in the federal securities laws. In some cases, these
statements can be identified by the use of forward-looking words such as "may",
"will", "should", "could", "anticipate", "estimate", "expect", "plan",
"believe", "predict", "potential" and "intend". Forward-looking statements
contained in this report include information regarding the Company's reserves
for losses and LAE, including estimates of the Company's catastrophe exposure.
Forward-looking statements only reflect the Company's expectations and are not
guarantees of performance. These statements involve risks, uncertainties and
assumptions. Actual events or results may differ materially from the Company's
expectations. Important factors that could cause the Company's actual results to
be materially different from its expectations include the uncertainties that
surround the estimating of reserves for losses and LAE, those discussed in Note
2 to the Financial Statements included in this report and the risks described
under the caption "Risk Factors" in the Company's most recent Report on Form
23
10-K. The Company undertakes no obligation to update or revise publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise.
24
EVEREST REINSURANCE HOLDINGS, INC.
OTHER INFORMATION
Part II - ITEM 1. LEGAL PROCEEDINGS
The Company is involved from time to time in ordinary routine litigation and
arbitration proceedings incidental to its business. The Company does not believe
that there are any other material pending legal proceedings to which it or any
of its subsidiaries or their properties are subject.
Part II - ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit Index:
Exhibit No. Description Location
---------- ----------- --------
99.1 CEO and CFO certification of Form 10-Q Filed herewith
b) There were no reports on Form 8-K filed during the six-month period ending
June 30, 2002.
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.
25
EVEREST REINSURANCE HOLDINGS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Everest Reinsurance Holdings, Inc.
(Registrant)
/S/ STEPHEN L. LIMAURO
--------------------------------
Stephen L. Limauro
Executive Vice President and Chief
Financial Officer
(Duly Authorized Officer,
Executive Vice President and Chief
Financial Officer)
Dated: August 13, 2002