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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 COMMISSION FILE # 1-13816
EVEREST REINSURANCE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3263609
(State or other jurisdiction) (I.R.S. Employer
of incorporation or organization) Identification No.)
3 GATEWAY CENTER
NEWARK, NJ 07102
(201) 802-8000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive office)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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COMMON STOCK, $.01 PAR VALUE PER SHARE NEW YORK STOCK EXCHANGE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
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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 such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value on March 3, 1997 of the voting stock held by
non-affiliates of the registrant was $1,584 million.
At March 3, 1997, the number of shares outstanding of the registrant's
common stock was 50,490,273.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Items 10, 11, 12, and 13 of Form 10-K is
incorporated by reference into Part III hereof from the registrant's proxy
statement for the 1997 Annual Meeting, which will be filed with the Securities
and Exchange Commission within 120 days of the close of the registrant's fiscal
year ended December 31, 1996.
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TABLE OF CONTENTS
ITEM PAGE
- - ---- ----
PART I
1. Business ............................................................. 1
2. Properties ........................................................... 23
3. Legal Proceedings .................................................... 23
4. Submission of Matters to a Vote of Security Holders .................. 23
PART II
5. Market for Registrant's Common Equity and Related Stockholder Matters 24
6. Selected Financial Data .............................................. 24
7. Management's Discussion and Analysis of Financial Condition and
Results of Operation ................................................ 27
8. Financial Statements and Supplementary Data .......................... 33
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ................................................ 33
PART III
10. Directors and Executive Officers of the Registrant ................... 33
11. Executive Compensation ............................................... 33
12. Security Ownership of Certain Beneficial Owners and Management ....... 33
13. Certain Relationships and Related Transactions ....................... 34
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ..... 34
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward-looking statements. This Form 10-K, the Company's Annual Report to
Stockholders, any Form 10-Q or any Form 8-K of the Company or any other written
or oral statements made by or on behalf of the Company may include
forward-looking statements which reflect the Company's current views with
respect to future events and financial performance. These forward-looking
statements are subject to certain uncertainties and other factors that could
cause actual results to differ materially from such statements. These
uncertainties and other factors (which are described in more detail elsewhere in
this Form 10-K) include, but are not limited to, uncertainties relating to
general economic conditions and cyclical industry conditions, uncertainties
relating to government and regulatory policies, volatile and unpredictable
developments (including catastrophes), the legal environment, the uncertainties
of the reserving process, the competitive environment in which the Company
operates, the uncertainties inherent in international operations, and interest
rate fluctuations. The words "believe," "expect," "anticipate," "project" and
similar expressions identify forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of their dates. 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.
PART I
UNLESS OTHERWISE INDICATED, (I) ALL FINANCIAL DATA IN THIS DOCUMENT HAVE BEEN
PREPARED USING GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP"), AND (II) ALL
STATUTORY FINANCIAL DATA REFERRED TO IN THIS DOCUMENT REFER TO STATUTORY
FINANCIAL DATA OF EVEREST RE. AS USED IN THIS DOCUMENT, "EVEREST RE" MEANS
EVEREST REINSURANCE COMPANY (FORMERLY PRUDENTIAL REINSURANCE COMPANY) AND ITS
SUBSIDIARIES (UNLESS THE CONTEXT OTHERWISE REQUIRES); "HOLDINGS" MEANS EVEREST
REINSURANCE HOLDINGS, INC. (FORMERLY PRUDENTIAL REINSURANCE HOLDINGS, INC.); AND
THE "COMPANY" MEANS HOLDINGS AND ITS SUBSIDIARIES.
ITEM 1. BUSINESS
THE COMPANY
Everest Reinsurance Holdings, Inc., a Delaware corporation, was established in
1993 to serve as the parent holding company of Everest Reinsurance Company
(formed in 1973), a property and casualty reinsurance operation. Until October
6, 1995, the Company was an indirect wholly-owned subsidiary of The Prudential
Insurance Company of America ("The Prudential"). On October 6, 1995, The
Prudential sold its entire interest in Holdings' shares of common stock in an
initial public offering (the "IPO"), with the result that Holdings' outstanding
common stock became publicly owned.
Holdings, through its wholly-owned subsidiary, Everest Re, underwrites property
and casualty reinsurance on a treaty and facultative basis to insurance and
reinsurance companies in the United States and selected international markets.
Everest Re writes reinsurance both through brokers and directly with ceding
insurance companies, giving it the flexibility to pursue business regardless of
the ceding company's preferred reinsurance purchasing method. The Company had
gross premiums written in 1996 of $1,044.0 million and stockholders' equity at
December 31, 1996 of $1,086.0 million and Everest Re had statutory surplus at
December 31, 1996 of $772.7 million. Based on industry data at December 31, 1996
published by the Reinsurance Association of America ("RAA"), Everest Re is the
seventh largest reinsurance company in the United States, ranked by statutory
surplus and is rated "A" (Excellent) by A.M. Best, an independent insurance
industry rating organization which rates insurance companies on factors of
concern to policyholders.
Everest Re has three subsidiaries: Everest Reinsurance Ltd. ("Everest Ltd.",
formerly Le Rocher Reinsurance Ltd.), Everest National Insurance Company
("Everest National", formerly Prudential National Insurance Company) and Everest
Insurance Company of Canada ("Everest Canada"). Everest Ltd., a United Kingdom
reinsurance company, is authorized to engage in the reinsurance business in the
United Kingdom and, prior to January 1, 1997, it reinsured risks worldwide. In
1996, Everest Re obtained authorization to engage in the reinsurance business in
the United Kingdom, and the operations of Everest Ltd. have been converted to
branch operations of Everest Re, effective January 1, 1997. Everest National, an
Arizona insurance company, is licensed in 38 states and the District of Columbia
and writes primary insurance. On December 31, 1996, Everest Re acquired Everest
Insurance Company of Canada (formerly OTIP/RAEO Insurance Company Inc.) from a
subsidiary of The Prudential. All liabilities incurred before the acquisition
date, including insurance obligations under expired as well as in-force
business, were assumed by Prudential of America General Insurance Company
(Canada), a subsidiary of The Prudential which was subsequently sold to Liberty
Mutual Insurance Company, whereupon it was renamed Liberty Insurance Company of
Canada. Everest Canada is federally licensed to write primary insurance under
the Insurance Companies Act of Canada and provincially licensed in Ontario.
REINSURANCE INDUSTRY OVERVIEW
Reinsurance is an arrangement in which an insurance company, the reinsurer,
agrees to indemnify another insurance company, the ceding company, against all
or a portion of the insurance risks underwritten by the ceding company under one
or more insurance contracts. Reinsurance can provide a ceding company with
several benefits, including a reduction in net liability on individual risks,
catastrophe protection from large or multiple losses and assistance in
maintaining acceptable financial ratios. Reinsurance also provides a ceding
company with additional underwriting capacity by permitting it to accept larger
risks and write more business than would be possible without a concomitant
increase in capital and surplus. Reinsurance, however, does not discharge the
ceding company from its liability to policyholders.
There are two basic types of reinsurance arrangements: treaty and facultative
reinsurance. In treaty reinsurance, the ceding company is obligated to cede and
the reinsurer is obligated to assume a specified portion of a type or category
of risks insured by the ceding company. Treaty reinsurers, including Everest Re,
do not separately evaluate each of the individual risks assumed under their
treaties and, consequently, after a review of the ceding company's underwriting
practices, are largely dependent on the original risk underwriting decisions
made by the ceding company. Such dependence subjects reinsurers in general,
including Everest Re, to the possibility that the ceding companies have not
adequately evaluated the risks to be reinsured and, therefore, that the premiums
ceded in connection therewith may not adequately compensate the reinsurer for
the risk assumed. The reinsurer's evaluation of the ceding company's risk
management and underwriting practices, therefore, will usually impact the
pricing of the treaty. In facultative reinsurance, the ceding company cedes and
the reinsurer assumes all or part of the risk under a single insurance contract.
Facultative reinsurance is negotiated separately for each insurance contract
that is reinsured. Facultative reinsurance normally is purchased by ceding
companies for individual risks not covered by their reinsurance treaties, for
amounts in excess of the dollar limits of their reinsurance treaties and for
unusual risks. Underwriting expenses and, in particular, personnel costs, are
higher on facultative business because each risk is individually underwritten
and administered. The ability to separately evaluate each risk reinsured,
however, increases the probability that the reinsurer can price the contract to
more accurately reflect the risks involved.
Both treaty and facultative reinsurance can be written on either a pro rata
basis or an excess of loss basis. With respect to pro rata reinsurance, the
ceding company and the reinsurer share the premiums as well as the losses and
expenses in an agreed proportion. In the case of reinsurance written on an
excess of loss basis, the reinsurer indemnifies the ceding company against all
or a specified portion of losses and expenses in excess of a specified dollar
amount, known as the ceding company's retention or reinsurer's attachment point,
generally subject to a negotiated reinsurance contract limit.
Premiums payable by the ceding company to a reinsurer for excess of loss
reinsurance are not directly proportional to the premiums that the ceding
company receives because the reinsurer does not assume a proportionate risk. In
contrast, premiums that the ceding company pays to the reinsurer for pro rata
reinsurance are proportional to the premiums that the ceding company receives,
consistent with the proportional sharing of risk. In addition, in pro rata
reinsurance the reinsurer generally pays the ceding company a ceding commission.
The ceding commission generally is based on the ceding company's cost of
acquiring the business being reinsured (commissions, premium taxes, assessments
and miscellaneous administrative expense) and also may include a profit factor
for producing the business.
Reinsurers typically purchase reinsurance to cover their own risk exposure.
Reinsurance of a reinsurer's business is called a retrocession. Reinsurance
companies cede risks under retrocessional agreements to other reinsurers, known
as retrocessionaires, for reasons similar to those that cause primary insurers
to purchase reinsurance: to reduce net liability on individual risks, protect
against catastrophic losses, stabilize financial ratios and obtain additional
underwriting capacity.
Reinsurance can be written through professional reinsurance brokers or directly
for ceding companies. From a ceding company's perspective, both the broker
market and the direct market have advantages and disadvantages. A ceding
company's decision to select one market over the other will be influenced by its
perception of such advantages and disadvantages relative to the reinsurance
coverage being placed.
BUSINESS STRATEGY
Under the direction of Joseph V. Taranto, who joined the Company in October 1994
as Chairman, Chief Executive Officer and President, the Company initiated
actions to increase the Company's profitability and reduce earnings volatility.
These actions included strengthening the Company's management team, reducing
operating expenses, improving management of catastrophe exposures and
implementing a new underwriting strategy. Since 1994, the Company's management
team has pursued and continues to pursue these actions which seek to capitalize
on the Company's staff resources and its flexibility to offer multiple products
through multiple production sources in a cost-efficient manner.
The Company's products include the full range of property and casualty
coverages, including marine, aviation, surety, errors & omissions liability
("E&O"), directors' & officers' liability ("D&O"), medical malpractice and
2
other specialty lines. The Company's distribution sources include both the
direct and broker reinsurance markets, international and domestic markets and
reinsurance, both treaty and facultative, and insurance.
The Company's underwriting strategy emphasizes underwriting profitability rather
than premium volume, writing specialized risks and improving integration of
existing underwriting expertise across all underwriting units. Key elements of
this strategy are prudent risk selection, appropriate pricing through strict
underwriting discipline and adjusting the Company's business mix to respond to
changing market conditions. Management intends to focus on reinsuring companies
that effectively manage the underwriting cycle through proper analysis and
pricing of underlying risks and whose underwriting guidelines and performance
are compatible with the Company's profitability objectives.
The Company's underwriting strategy also emphasizes flexibility and
responsiveness to changing market conditions, such as increased demand or
favorable pricing trends. Management believes that Everest Re's existing
strengths, including its broad underwriting expertise, international presence
and substantial capital, will facilitate adjustments to its mix of business
geographically, by line of business and by type of coverage, allowing it to
capitalize on those market opportunities that provide the greatest potential for
underwriting profitability. The Company's primary insurance infrastructure will
facilitate this strategy by allowing the Company to develop business that
requires the Company to issue primary insurance policies. The Company will also
continue to carefully monitor its mix of business to avoid inappropriate
concentrations of geographic or other risk.
Everest Re has increased its reinsurance of specialty risks, which require a
higher degree of underwriting, actuarial and claims expertise than more standard
risks. This type of reinsurance includes professional liability lines, such as
medical malpractice, D&O and E&O. Management believes that these risks offer a
greater profit potential than standard underwriting risks, which are generally
more subject to competitive pricing. Specialty risks, however, are usually more
difficult to assess than more standard risks and can be subject to higher loss
severity and greater volatility. Management believes that it can successfully
manage these complex risks through disciplined underwriting, appropriate
pricing, actuarial projections, loss monitoring and underwriting and claims
audits of ceding companies. The emphasis on specialty underwriting has built on
the Company's existing expertise in writing such specialty lines as marine,
aviation and surety.
The Company has revised its underwriting guidelines to limit the accumulation of
known risks in exposed areas and to require that business which is exposed to
catastrophe losses be written with greater geographic spread and to implement a
more cost-effective retrocession program. The Company's underwriting guidelines
have also been revised to better reflect the relationship between premiums and
risk assumed while maintaining the Company's probable maximum loss at
appropriate levels.
Efforts to control expenses and to operate in a more cost-efficient manner
continue to be a focus of the Company. These efforts have resulted in a 41%
reduction in employees to 410 at December 31, 1996 from 694 at June 30, 1994,
the restructuring of the Company's facultative operations in 1995 and changes in
certain vendor relationships. These changes were implemented to improve
efficiency and eliminate redundant positions. Additionally, the Company has
begun to implement a plan to improve the cost effectiveness of its information
systems.
MARKETING
The Company writes its business on a worldwide basis for many different
customers and for many lines of property and casualty business. Its products
provide a broad array of coverages. The Company is not materially dependent on
any single customer, small group of customers, line of business or geographical
area. The Company believes the loss of any single customer would not have a
material adverse affect on the Company. Approximately 65.4% and 34.6% of Everest
Re's 1996 gross premiums written were written in the broker and direct market,
respectively. Everest Re's ability to write reinsurance both through brokers and
directly with ceding companies gives it the flexibility to pursue business
regardless of the ceding company's preferred reinsurance purchasing method.
The reinsurance broker market consists of several substantial national
and international brokers and a number of smaller specialized brokers.
Brokers do not have the authority to bind Everest Re with
respect to reinsurance agreements, nor does Everest Re commit in advance
to accept any portion of the business that brokers submit to it.
Reinsurance business from any ceding company, whether new or renewal,
is subject to acceptance by Everest Re. Brokerage fees generally are paid by
reinsurers. The Company's largest ten brokers accounted for an aggregate of
3
approximately 44.7% of gross premiums written in 1996 with the largest broker
accounting for approximately 15.9% of gross premiums written in 1996. The
Company does not believe that the loss of the support of any one broker would
have a material adverse affect on the Company due to the Company's competitive
position in the marketplace and relationships with ceding companies and the
continuing availability of other sources of business.
The direct market remains an important distribution system for Everest Re.
Direct placement enables Everest Re to access clients who prefer building
long-term relationships directly with their reinsurers based upon the
reinsurer's in-depth understanding of the ceding company's needs.
Everest National's primary insurance business is written principally through
general agency relationships. The Company evaluates each business relationship,
based upon the underwriting expertise and experience of each distribution
channel selected, and performs an analysis to evaluate financial security.
UNDERWRITING UNITS
The following table presents the distribution of Everest Re's gross premiums
written by its U.S. broker treaty, U.S. direct treaty reinsurance and insurance,
marine, aviation and surety, U.S. facultative and international operations for
the years ended December 31, 1996, 1995, 1994, 1993 and 1992, classified
according to whether such premium is derived from property or casualty business
and whether it represents pro rata or excess of loss business:
4
GROSS PREMIUMS WRITTEN BY UNDERWRITING UNIT
Years Ended December 31,
-----------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- ------------- ------------- ------------- -------------
$ % $ % $ % $ % $ %
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in millions)
U.S. Broker Treaty
Property
Pro Rata(1) $ 45.4 4.4% $ 51.7 5.4% $ 59.7 6.3% $ 80.3 8.7% $ 96.4 11.5%
Excess 60.4 5.8 59.0 6.2 53.9 5.7 88.8 9.7 67.9 8.1
Casualty
Pro Rata(1) 63.4 6.1 18.5 1.9 29.6 3.1 28.2 3.1 29.4 3.5
Excess 137.5 13.2 122.6 12.9 113.5 11.9 103.7 11.3 98.5 11.8
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
Total(2) 306.8 29.4 251.8 26.5 256.6 26.9 301.0 32.8 292.2 34.9
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
U.S. Direct Treaty
Reinsurance and
Insurance
Property
Pro Rata(1) 12.6 1.2 3.3 0.3 5.4 0.6 17.3 1.9 8.9 1.0
Excess 8.9 0.9 9.1 1.0 12.5 1.3 10.9 1.2 11.4 1.4
Casualty
Pro Rata(1) 114.5 11.0 99.8 10.5 83.2 8.7 56.2 6.1 52.7 6.3
Excess 12.5 1.2 10.0 1.1 38.6 4.0 46.3 5.0 41.9 5.0
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
Total(2) 148.6 14.2 122.2 12.9 139.7 14.7 130.7 14.2 114.9 13.7
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
Marine, Aviation
and Surety
Property
Pro Rata(1) 94.6 9.1 89.2 9.4 74.1 7.8 67.3 7.3 57.5 6.9
Excess 17.8 1.7 18.7 2.0 16.8 1.8 16.3 1.8 17.3 2.1
Casualty
Pro Rata(1) 43.1 4.1 53.0 5.6 66.0 6.9 48.6 5.3 43.7 5.2
Excess 5.6 0.5 6.0 0.6 4.8 0.5 10.5 1.1 7.8 0.9
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
Total(2) 161.1 15.4 166.9 17.6 161.7 17.0 142.7 15.5 126.3 15.1
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
U.S. Facultative
Property
Pro Rata(1) -- -- -- -- -- -- -- -- -- --
Excess 26.9 2.6 22.3 2.3 27.4 2.9 20.9 2.3 14.4 1.7
Casualty
Pro Rata(1) -- -- -- -- -- -- -- -- -- --
Excess 61.8 5.9 46.6 4.9 39.3 4.1 35.0 3.8 35.2 4.2
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
Total(2) 88.7 8.5 68.8 7.2 66.7 7.0 55.9 6.1 49.6 5.9
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
Total U.S.
Property
Pro Rata(1) 152.6 14.6 144.2 15.2 139.2 14.6 164.9 18.0 162.8 19.4
Excess 114.0 10.9 109.1 11.5 110.6 11.6 136.9 14.9 111.0 13.2
Casualty
Pro Rata(1) 221.1 21.2 171.3 18.0 178.8 18.8 133.0 14.5 125.8 15.1
Excess 217.6 20.8 185.2 19.5 196.1 20.6 195.5 21.3 183.4 21.9
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
Total(2) 705.2 67.5 609.7 64.2 624.7 65.5 630.3 68.7 583.0 69.5
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
International
Property
Pro Rata(1) 124.2 11.9 136.2 14.3 147.0 15.4 122.1 13.3 104.5 12.5
Excess 79.8 7.6 84.9 8.9 89.2 9.4 81.5 8.9 80.1 9.6
Casualty
Pro Rata(1) 90.5 8.7 66.4 7.0 49.6 5.2 44.4 4.8 40.6 4.8
Excess 44.4 4.3 52.3 5.5 42.7 4.5 39.8 4.3 29.6 3.5
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
Total(2) 338.8 32.5 339.8 35.8 328.5 34.5 287.8 31.3 254.8 30.4
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
Total Company
Property
Pro Rata(1) 276.7 26.5 280.4 29.5 286.2 30.0 287.0 31.3 267.3 31.9
Excess 193.8 18.6 194.0 20.4 199.8 21.0 218.4 23.8 191.1 22.8
Casualty
Pro Rata(1) 311.6 29.8 237.6 25.0 228.4 24.0 177.4 19.3 166.4 19.9
Excess 261.9 25.1 237.5 25.0 238.8 25.1 235.3 25.6 213.0 25.4
-------- ----- ------ ----- ------ ----- ------ ----- ------ -----
Total(2) $1,044.0 100.0% $949.5 100.0% $953.2 100.0% $918.1 100.0% $837.8 100.0%
======== ===== ====== ===== ====== ===== ====== ===== ====== =====
- - -------------
(1) For purposes of the presentation above, pro rata reinsurance means
reinsurance attaching to the first dollar of loss incurred by the ceding
company.
(2) Certain totals and subtotals may not reconcile due to rounding.
5
U.S. BROKER TREATY OPERATIONS. Everest Re's U.S. broker treaty operations write
both property and casualty reinsurance through reinsurance brokers. The Company
targets certain brokers and, through the broker market, specialty companies and
small to medium sized standard lines companies. The U.S. broker treaty
operations also write portions of reinsurance programs for larger, national
insurance companies. The U.S. broker treaty operations also include a treaty
multi-line unit, which targets small to medium sized ceding companies where the
Company seeks to write a substantial portion of the ceding company's entire
property and casualty reinsurance program.
In 1996, $105.8 million of gross premiums written were attributable to domestic
property business, of which 57.1% was written on an excess of loss basis and
42.9% was written on a pro rata basis. This unit utilizes sophisticated
underwriting methods which management believes are necessary to analyze and
price property business, particularly that segment of the property market which
has catastrophe exposure.
Domestic casualty business accounted for $200.9 million of gross premiums
written in 1996, of which 68.5% was written on an excess of loss basis and 31.5%
was written on a pro rata basis. The treaty casualty portfolio consists
principally of professional liability, directors' & officers' liability,
workers' compensation, excess and surplus lines, and other liability coverages.
As a result of the complex technical nature of most of these risks, the
Company's casualty underwriters tend to specialize by line of business and work
closely with the Company's pricing actuaries.
DIRECT TREATY REINSURANCE AND INSURANCE OPERATIONS. The Company's direct treaty
reinsurance operation writes a full line of property and casualty business. In
1996, direct treaty business accounted for $90.6 million of gross premiums
written, of which 23.2% was written on an excess of loss basis and 76.8% was
written on a pro rata basis. The U.S. direct treaty underwriters target
companies which place their business predominantly in the direct market,
including small to medium sized regional ceding companies, and seek to develop
long-term relationships with such companies. A broad array of coverages are
offered.
The Company's insurance operation consists of $56.8 million of gross premiums
written through Everest National, which is licensed in 38 states and the
District of Columbia to write primary insurance, and $1.2 million, which is
assumed from former affiliates which write business in states in which Everest
National is not licensed. Everest National targets commercial property and
casualty business written through agency relationships with program
administrators. With respect to primary insurance written through such agents,
the Company supplements the initial underwriting process with periodic claims
and underwriting reviews.
MARINE, AVIATION AND SURETY OPERATIONS. The Company's marine and aviation unit
focuses on ceding companies with a particular expertise in marine and aviation
business. The marine and aviation business is written primarily through brokers
and contains a significant international component written primarily in the
London market. Surety business underwritten by the Company consists mainly of
reinsurance of contract surety bonds written directly with ceding companies.
Gross premiums written by the marine and aviation unit in 1996 totaled $100.4
million, substantially all of which was written on a treaty basis and 73.5% of
which was sourced through reinsurance brokers. Marine treaties represented 51.4%
of marine and aviation gross premiums written in 1996 and consisted of hull and
liability coverage. Approximately 79.6% of the marine unit premiums in 1996 were
written on a pro rata basis and 20.4% as excess of loss. Aviation premiums
accounted for 48.6% of marine and aviation gross premiums written in 1996 and
included reinsurance for airlines, general aviation and satellites.
Approximately 88.5% of the aviation unit's premiums in 1996 were written on a
pro rata basis and 11.5% as excess of loss.
In 1996, gross premiums written by the surety unit totaled $60.7 million. Most
of the portfolio is reinsurance of contract surety bonds written directly with
ceding companies, with the remainder being credit reinsurance, mostly in
international markets. The unit's strategy is to maintain long-term
relationships with major surety and fidelity writers and to continue to expand
its international business.
FACULTATIVE OPERATIONS. The Company's U.S. facultative unit conducts business
both through brokers and directly with ceding companies. The U.S.
facultative operations consist of three underwriting units representing
property, casualty and specialty lines of business. Business is
written from a facultative headquarters office in New York and satellite
offices in Chicago and San Francisco. The Company's facultative underwriters
continue to narrow the focus of the types of business solicited to
improve the quality of the Company's facultative portfolio. In 1996, $26.9
6
million, $39.9 million, and $21.9 million of gross premiums written were
attributable to property, general casualty and specialty lines of business,
respectively.
INTERNATIONAL. Everest Re's international operations are designed to enable it
to capitalize on the growth opportunities in the international reinsurance
market. The Company targets several international markets, including: Europe and
the London market, which are serviced by operations in London and Brussels;
Canada, with operations headquartered in Toronto; Asia and Australia, with
operations headquartered in Hong Kong; and Latin America and the Middle East,
which business is serviced from Everest Re's New Jersey headquarters. The
Company also writes "home-foreign" business, which provides reinsurance on the
international portfolios of U.S. insurers, from its headquarters in New Jersey.
Approximately 60.2% of the gross premiums written by the Company's international
underwriters in 1996 represented property business, while the balance
represented casualty business. As with its U.S. operations, Everest Re's
international operations focus on building long-term relationships with
financially sound companies that have strong management and underwriting
discipline and expertise. Approximately 81.8% of the Company's international
business was written through brokers, with the remainder written directly with
ceding companies.
In 1996, Everest Ltd.'s gross premiums written totaled $142.2 million and
consisted of pro rata property (19.3%), excess property (33.4%), pro rata
casualty (33.8%) and excess casualty (13.5%). The Brussels office focuses on the
continental European reinsurance markets, while the London office covers
international business written through the London market. Gross premiums written
in 1996 from the Brussels and London offices totaled $63.2 million and $79.0
million, respectively.
Gross premiums written by Everest Re's Canadian operation totaled $62.9 million
in 1996 and consisted of pro rata property (13.0%), excess property (3.9%), pro
rata multi-line (50.4%) and excess casualty (32.7%). Approximately 77.4% of the
Canadian premiums consisted of treaty reinsurance while 22.6% was facultative
reinsurance.
Everest Re's Hong Kong office covers the Asian and Australian markets and
accounted for $46.1 million of gross written premiums in 1996. This business
consisted of pro rata treaty property (82.2%), excess treaty property (15.7%),
pro rata treaty casualty (0.2%), excess treaty casualty (0.6%) and excess
facultative casualty (1.3%).
International business written out of Everest Re's New Jersey office accounted
for $87.7 million of Everest Re's 1996 gross premiums written and consisted of
pro rata treaty property (57.7%), pro rata treaty casualty (12.1%), excess
treaty property (16.7%), excess treaty casualty (2.4%), excess facultative
property (8.4%) and excess facultative casualty (2.7%). Of this business 46.6%
was sourced from Latin America, 16.6% was sourced from the Middle East and 10.8%
was "home-foreign" business.
UNDERWRITING PROCESS
Everest Re offers ceding companies full service capability, including actuarial,
claims, accounting and systems support, either directly or through the broker
community. Everest Re's capacity for both casualty and property risks allows it
to underwrite entire contracts or major portions thereof that might otherwise
need to be syndicated among several reinsurers. Everest Re's strategy is to act
as "lead" reinsurer in the reinsurance treaties it underwrites. The lead
reinsurer on a treaty generally accepts one of the largest percentage shares of
the treaty and is in a stronger position to negotiate price, terms and
conditions than is a reinsurer which takes a smaller position. Management
believes this strategy enables it to influence more effectively the terms and
conditions of the treaties on which it participates. When Everest Re does not
lead the treaty, it may still suggest changes to any aspect of the treaty.
Everest Re may decline to participate in a treaty based upon its assessment of
all relevant factors.
Everest Re's treaty underwriting process emphasizes a team approach among
Everest Re's underwriters, actuaries and claims staff. Treaties are reviewed for
compliance with Everest Re's general underwriting standards and certain larger
treaties are evaluated in part based upon actuarial analyses conducted by
Everest Re. The actuarial models used in such analyses are tailored in each case
to the exposures and experience underlying the specific treaty and the loss
experience for the risks covered by such treaties. Everest Re does not
separately evaluate each of the individual risks assumed under its treaties.
Everest Re does, however, generally evaluate the underwriting guidelines of its
ceding companies to determine their adequacy prior to entering into a treaty.
Everest Re, when appropriate, also conducts underwriting audits at the offices
of ceding companies to ensure that the ceding companies operate within
7
such guidelines. Underwriting audits focus on the quality of the underwriting
staff, the selection and pricing of risks and the price monitoring system and
the client's claims handling ability and financial stability.
Everest Re's domestic facultative underwriters operate within guidelines
specifying acceptable types of risks, limits and maximum risk exposures.
Specified classes of risks and large premium risks are referred to the Company's
New York facultative headquarters for specific review before premium quotations
are given to clients. In addition, Everest Re's guidelines require certain types
of risks to be submitted for review because of their aggregate limits,
complexity or volatility regardless of premium amount or size of the insured on
the underlying contract.
Everest National writes property, casualty and professional liability coverages
for homogeneous risks through select program managers. Everest National
evaluates these commercial programs based upon actuarial analysis and the
program manager's capabilities. Everest National's rates, forms and underwriting
guidelines are tailored to specific risk types.
RISK MANAGEMENT AND RETROCESSION ARRANGEMENTS
Everest Re manages its risk of loss through a combination of aggregate exposure
limits, underwriting guidelines that take into account risks, prices and
coverage, and retrocessional arrangements.
Everest Re is exposed to multiple insured losses arising out of a single
occurrence, whether a natural event such as a hurricane or an earthquake, or
other catastrophe, such as a riot or an explosion at a major factory. Any such
catastrophic event could generate insured losses in one or many of Everest Re's
treaties or lines of business. Everest Re employs various techniques, including
licensed software modelling, to assess its accumulated exposure to property
catastrophe losses and summarizes that exposure in terms of the probable maximum
loss ("PML"). The Company defines PML as its anticipated maximum loss, taking
into account contract limits, caused by a single catastrophe affecting a broad
contiguous geographic area, such as that caused by a hurricane or earthquake of
such a magnitude that it is expected to occur once in every 100 years.
Management estimates that the Company's greatest catastrophe exposure worldwide
from any single event is to hurricanes and earthquakes in the coastal regions of
the United States, where Everest Re estimates it has a PML exposure, before
reinsurance, of approximately $200 million in each such region based on its
current book of business. Similarly, management estimates that the largest
current PML exposure outside the United States is approximately $112 million.
There can be no assurance that Everest Re will not experience losses from one or
more catastrophic events that exceed, perhaps by a substantial amount, its
estimated PML.
Underwriting guidelines have been established for each business unit. These
guidelines place dollar limits on the amount of business that can be written
based on a variety of factors, including ceding company, line of business,
geographical location and risk hazards. In each case, those guidelines permit
limited exceptions, which must be authorized by the Company's senior management.
Everest Re does not typically retrocede individual risks, but does, from time to
time, purchase retrocessional protections where the underwriter deems it to be
prudent to reinsure a portion of the specific risk being assumed. In addition,
Everest Re has a property facultative retrocession program which allows it to
provide up to $30.5 million of coverage for a single facultative risk, with a
maximum net retention of $12.5 million per risk, and purchases three
retrocessional workers' compensation excess of loss treaties which collectively
provide $115 million of coverage in excess of $5 million of retained losses on
accidental death and dismemberment claims resulting from a catastrophe loss.
The Company also purchases catastrophe retrocessions covering the potential
accumulation of all property exposures that may be involved in the same
catastrophe, such as an earthquake or hurricane. In 1996, the attachment point
of the first layer of the worldwide catastrophe retrocession program was $25.0
million per catastrophe and the Company could have retroceded 70.0% of the next
$75.0 million of losses in excess of the attachment point incurred on a per
catastrophe and aggregate basis. The second layer of the catastrophe
retrocession program provided coverage from June 15, 1995 through June 15,
1996 and, effective January 1, 1996, allowed the cession of 30.0% ($10.0
million) of $33.3 million per occurrence in excess of $60.0 million in losses.
In addition, for the period from May 1, 1996 through May 1, 1997, the Company's
catastrophe retrocession program provides coverage of 51.0% of $15 million per
occurrence in excess of $10 million in losses incurred by the Company outside
8
of the United States. And, in 1996, Everest Re purchased an accident year
aggregate excess of loss retrocession agreement which provided up to $100.0
million of limit if Everest Re's statutory loss ratio had exceeded 81.0% for the
1996 accident year.
Effective January 1, 1997, the worldwide catastrophe retrocession program was
amended to provide coverage in each of the three years, 1997 through 1999,
subject to the retrocessionaire's right to cancel on November 1, 1998. The
attachment point of the catastrophe retrocession program is $25 million per
catastrophe and, in 1997, the Company can retrocede 75.0% of the next $75
million of losses in excess of the attachment point incurred on a per
catastrophe and aggregate basis. Fifty percent of the unused portion of the 1997
year's coverage increases the limit of coverage for 1998 (up to 75.0% of $112.5
million) and 50% of the unused portion of the 1997 and 1998 years' coverage
increases the limit of coverage for 1999 (up to 75.0% of $168.75 million). The
maximum recoverable under the catastrophe retrocession program over the
three-year period is $126.56 million. Also effective January 1, 1997, Everest Re
purchased an accident year aggregate excess of loss retrocession agreement which
provides up to $100 million of protection if Everest Re's statutory loss ratio
exceeds 79.0% for the 1997 accident year.
Although the catastrophe and aggregate excess of loss retrocessions have terms
which provide for additional premiums to be paid to the retrocessionaire in the
event that losses are ceded, all aspects of the Company's retrocessional program
have been structured to permit these agreements to be accounted for as
reinsurance under Statement of Financial Accounting Standards ("SFAS") No. 113.
If a single catastrophe were to occur in the United States that resulted in
$200.0 million of gross losses and allocated loss adjustment expenses ("ALAE")
in 1997 (an amount equivalent to Everest Re's PML), management estimates that
the effect (including additional premiums and retained losses and ALAE) on the
Company's income before taxes would be $118.9 million. This pre-tax net loss
estimate assumes that Everest Re's aggregate losses and ALAE for 1997 would
exceed the 79.0% loss ratio requirement in the aggregate excess of loss cover by
at least $100.0 million.
In addition, Everest Re purchased an aggregate stop loss retrocession agreement
(the "Stop Loss Agreement") from Gibraltar Casualty Company ("Gibraltar"), an
affiliate of The Prudential. See "Stop Loss Agreement".
As of December 31, 1996, Everest Re had retrocessional arrangements with 367
retrocessionaires, and it carried as an asset $749.1 million in reinsurance
receivables with respect to losses ceded to retrocessionaires, substantially all
of which will not be due to Everest Re until Everest Re makes payment on the
underlying claims. Of this amount, $397.0 million, or 53.0%, was receivable from
Gibraltar ($137.9 million, net of collateral held and liability balances for
which Everest Re has a contractual right of offset). An additional $150.0
million, or 20.0%, was receivable from Continental Insurance Company
("Continental"). None of the reinsurance receivables from Gibraltar or
Continental was in dispute or more than 90 days in arrears. Everest Re's
arrangement with Continental is managed on a funds held basis, which means that
Everest Re did not release premium payments to the retrocessionaire but rather
retains such payments to secure obligations of the retrocessionaire, records
them as a liability and reduces the liability account as payments become due. As
of December 31, 1996, such funds had reduced Everest Re's net exposure to
Continental to $99.8 million. No other retrocessionaire accounted for more than
$21.3 million of Everest Re's receivables.
No assurance can be given that Everest Re will be able to obtain retrocessional
coverage similar to that currently in place in the future. Although management
carefully selects its retrocessionaires, Everest Re is subject to credit risk
with respect to its retrocessions because the ceding of risk to
retrocessionaires does not relieve the reinsurer of its liability to ceding
companies.
RELATIONSHIPS WITH GIBRALTAR
During its early years, Everest Re also wrote some direct insurance. In 1978,
Everest Re expanded its direct insurance operation by forming Gibraltar as a
subsidiary. In 1985, Gibraltar and Everest Re ceased writing new and renewal
direct insurance, and Gibraltar was put into run-off.
While Gibraltar actively wrote direct insurance, it was able to reinsure certain
business through Everest Re's management underwriting facility ("MUF"). Begun in
1977, MUF was a reinsurance arrangement pursuant to which Everest Re ceded
certain business to a number of insurance and reinsurance companies (the "MUF
Participants"), many of them domiciled outside the United States. Gibraltar
ceded its MUF-qualifying business first to Everest Re, which then immediately
and entirely retroceded it to the MUF Participants. As a result of these
9
cessions to Everest Re, Everest Re became, and remains, a reinsurer of Gibraltar
with respect to the Gibraltar MUF cessions. As of December 31, 1996, Gibraltar's
reinsurance receivables from Everest Re totaled $143.5 million. MUF became
inactive with respect to new business in 1991.
Following the 1985 decision to put Gibraltar in runoff, Everest Re and Gibraltar
entered into the following agreements pursuant to which Gibraltar became, and
remains, a reinsurer of Everest Re (the "Gibraltar Contracts"):
* In 1986, Gibraltar reinsured all insurance obligations of Everest Re pursuant
to certain insurance contracts written by Everest Re's former direct excess
insurance operations, which ceased writing business in 1985 (the "Ceded
Direct Insurance") (the "Direct Excess Retrocession").
* In 1989, Gibraltar reinsured Everest Re's medical malpractice and other
professional liability reinsurance written in 1988 and prior years (the
"Professional Liability Retrocession").
* During 1985 through 1990, Gibraltar and Everest Re commuted the obligations
of a number of MUF Participants. In exchange for a cash payment from each
commuted MUF Participant, Gibraltar assumed the obligations of such MUF
Participant. The commuted business included assumed reinsurance originally
retroceded to MUF Participants by Everest Re and direct insurance ceded by
Everest Re and Gibraltar.
In 1991, Everest Re distributed the stock of Gibraltar to PRUCO, Inc., a direct,
wholly-owned subsidiary of The Prudential ("PRUCO"). Simultaneously, PRUCO and
Gibraltar entered into a surplus maintenance agreement pursuant to which PRUCO
agreed to purchase such amount of surplus notes as may be necessary to maintain
Gibraltar's statutory surplus at no less than $15 million at all times. PRUCO
shortly thereafter distributed the stock of Gibraltar to The Prudential.
The Direct Excess Retrocession can be terminated by either Gibraltar or Everest
Re upon 90 days' notice, whereas The Professional Liability Retrocession can
only be terminated by Everest Re. A total of $119.6 million of the Gibraltar
receivables is attributable to the Direct Excess Retrocession. If the Direct
Excess Retrocession is terminated, all outstanding claims, including incurred
but not reported losses ("IBNR"), will be commuted with the value of such
claims, which may not exceed Everest Re's then outstanding loss reserves with
respect thereto, to be mutually agreed upon or, if no agreement can be reached,
determined by an actuary or appraiser mutually appointed. At the time of the
IPO, the parties agreed that if Gibraltar terminates the Direct Excess
Retrocession and the parties cannot agree on the value of the claims to be
commuted, Everest Re's chief actuary will determine such value. Gibraltar could
arbitrate the actuary's determination. If the Direct Excess Retrocession were to
be so terminated and Everest Re's ultimate losses on the Ceded Direct Insurance
were to exceed the commutation amount, the resulting reserve increases would
constitute adverse development eligible for coverage under the Stop Loss
Agreement (described below), subject to the applicable limits thereof.
STOP LOSS AGREEMENT
On October 5, 1995, Everest Re and Gibraltar entered into an aggregate stop loss
retrocession agreement (the "Stop Loss Agreement"). The Stop Loss Agreement is
intended to mitigate the impact on the Company's future earnings that could
result from the adverse development, if any, of Everest Re's consolidated
reserves for losses, allocated LAE and uncollectible reinsurance as of June 30,
1995, including IBNR; provided, that adverse development, if any, of such
reserves relating to catastrophes (as defined in the Stop Loss Agreement) will
only be covered to the extent that the catastrophe event to which such reserves
relate occurred prior to January 1, 1995. Such adverse development is referred
to herein as "Adverse Development". For a description of the Stop Loss
Agreement, see Note 5 of Notes to Consolidated Financial Statements. Also See
Note 6F of Notes to the Consolidated Financial Statements.
STANDBY CAPITAL CONTRIBUTION AGREEMENT AND PRUCO INDEMNITY
On October 5, 1995, Holdings agreed, pursuant to a Standby Capital
Contribution Agreement (the "Capital Contribution Agreement"), to
make certain capital contributions ("Capital Contributions") to Everest
Re. And, on October 5, 1995, PRUCO agreed to make payments ("Indemnity
Payments") to Holdings, pursuant to an Indemnity Agreement (the "PRUCO
Indemnity"), in an amount equal to the Capital Contributions. For a
10
description of the Capital Contribution Agreement and the PRUCO Indemnity, see
Note 6A of Notes to the Consolidated Financial Statements.
PRUDENTIAL GUARANTEES
On October 5, 1995, The Prudential guaranteed (i) up to $775.0 million of
Gibraltar's obligations to Everest Re, and (ii) PRUCO's obligation to make the
Indemnity Payments (the "Prudential Guarantees"). The Prudential agreed, subject
to the terms and conditions thereof, to guarantee Gibraltar's payment
obligations with respect to (i) the Stop Loss Agreement, subject to maximum
aggregate payments of $375.0 million, and (ii) payment obligations under the
Gibraltar Contracts, subject to maximum aggregate payments of $400.0 million.
The maximum aggregate payments under the Prudential Guarantee of Gibraltar's
obligations will be reduced in certain circumstances to take account of payments
made and collateral provided in respect of the guaranteed obligations.
As of December 31, 1996, based on publicly available information, The Prudential
had statutory basis total assets of $178.6 billion and statutory surplus of $9.4
billion.
CLAIMS
Claims are managed by the Company's professional claims staff whose
responsibilities include reviewing initial loss reports and coverage issues,
monitoring claims handling activities of ceding companies, establishing and
adjusting proper case reserves and approving payment of claims. In addition to
claims assessment, processing and payment, the claims staff selectively conducts
comprehensive claims audits of both specific claims and overall claims
procedures at the offices of selected ceding companies.
RESERVES FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Significant periods of time may elapse between the occurrence of an insured
loss, the reporting of the loss to the ceding company and the reinsurer and the
ceding company's payment of that loss and subsequent payments to the ceding
company by the reinsurer. To recognize liabilities for unpaid losses and loss
adjustment expenses ("LAE"), insurers and reinsurers establish reserves, which
are balance sheet liabilities representing estimates of future amounts needed to
pay reported and unreported claims and related expenses on losses that have
already occurred. Actual losses and LAE paid may deviate, perhaps substantially,
from such reserves. To the extent reserves prove to be insufficient to cover
actual losses and LAE after taking into account available retrocessional
coverage, including the reinsurance provided through the Stop Loss Agreement,
Everest Re would have to augment such reserves and incur a charge to earnings
which could be material in the period such augmentation takes place. See ITEM 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Loss and LAE Reserves".
While the reserving process is difficult and subjective for the ceding
companies, the inherent uncertainties of estimating such reserves are even
greater for the reinsurer, due primarily to the longer time between the date of
an occurrence and the reporting of any attendant claims to the reinsurer, the
diversity of development patterns among different types of reinsurance treaties
or facultative contracts, the necessary reliance on the ceding companies for
information regarding reported claims and differing reserving practices among
ceding companies. In addition, trends that have affected development of
liabilities in the past may not necessarily occur or affect liability
development to the same degree in the future. Thus, actual losses and LAE may
deviate, perhaps substantially, from estimates of reserves reflected in the
Company's consolidated financial statements.
Like many other property and casualty insurance and reinsurance companies,
Everest Re has experienced adverse loss development for prior accident years,
which has led to adjustments in losses and LAE reserves. The increase in
reserves for prior accident years reduced net income for the periods in which
the adjustments were made. There can be no assurance that adverse development
from prior years will not continue in the future or that such adverse
development will not have a material adverse effect on net income. Adverse
Development will be reinsured under the Stop Loss Agreement, up to the maximum
limits thereunder and subject to the other terms and conditions thereof. See
"Relationships with Gibraltar" and "Stop Loss Agreement".
CHANGES IN HISTORICAL RESERVES
The following table shows changes in statutory historical loss reserves for
Everest Re for 1986 and subsequent years. The top line of each table shows the
estimated reserves for unpaid losses and LAE recorded at each year end date.
11
Each amount in the top line represents the estimated amount of future payments
for losses and LAE on claims occurring in that year and in prior years. The
upper (paid) portion of the table presents the cumulative amounts paid through
each subsequent year on those claims for which reserves were carried as of each
specific year end. The lower (liability re-estimated) portion shows the
re-estimated amount of the previously recorded reserves based on experience as
of the end of each succeeding year. The estimate changes as more information
becomes known about the actual claims for which the initial reserves were
carried. The cumulative redundancy/deficiency line represents the cumulative
change in estimates since the initial reserve was established. It is equal to
the latest liability re-estimated amount less the initial reserve.
Each amount other than the original reserves in the top half of the table below
includes the effects of all changes in amounts for prior periods. For example,
if a loss settled in 1989 for $100,000 was first reserved in 1986 at $60,000 and
remained unchanged until settlement, the $40,000 deficiency (actual loss minus
original estimate) would be included in the cumulative redundancy (deficiency)
in each of the years in the period 1986 through 1988 shown below. Conditions and
trends that have affected development of liability in the past may not
necessarily occur in the future. Accordingly, it may not be appropriate to
extrapolate future redundancies or deficiencies based on this table.
12
TEN YEAR STATUTORY LOSS DEVELOPMENT TABLE PRESENTED NET OF REINSURANCE WITH SUPPLEMENTAL GROSS DATA(1)(2)
Years Ended December 31,
------------------------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
(Dollars in millions) -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Reserves for unpaid
loss and LAE $1,258.0 $1,676.7 $1,775.8 $1,766.7 $1,891.9 $1,752.9 $1,854.7 $1,934.2 $2,104.3 $2,327.7 $2,626.3
Paid (cumulative)
as of:
One year later 115.1 345.7 299.1 321.9 597.1 333.3 461.5 403.5 359.5 282.1
Two years later 307.1 582.3 522.3 829.5 785.9 550.4 740.1 627.7 638.0
Three years later 505.3 757.0 984.3 966.3 933.1 758.3 897.0 820.5
Four years later 655.5 1,189.1 1,096.1 1,078.2 1,096.9 868.1 1,036.0
Five years later 1,068.0 1,278.7 1,189.5 1,209.0 1,176.9 970.0
Six years later 1,142.3 1,358.6 1,308.9 1,276.3 1,257.3
Seven years later 1,212.1 1,478.7 1,367.9 1,346.6
Eight years later 1,312.0 1,532.0 1,430.7
Nine years later 1,367.7 1,591.1
Ten years later 1,424.8
Liability re-estimated
as of:
One year later 1,336.9 1,767.0 1,794.6 1,835.4 1,866.3 1,737.8 1,929.2 2,008.5 2,120.8 2,298.1
Two years later 1,421.3 1,841.5 1,813.2 1,834.3 1,872.8 1,775.7 1,988.9 2,015.4 2,233.7
Three years later 1,563.0 1,839.6 1,805.6 1,849.5 1,907.5 1,843.3 2,010.0 2,119.0
Four years later 1,607.1 1,879.1 1,867.6 1,913.6 1,976.5 1,855.7 2,111.9
Five years later 1,659.8 1,942.2 1,934.5 1,982.3 1,984.3 1,955.1
Six years later 1,714.4 2,029.1 2,007.6 1,984.1 2,080.0
Seven years later 1,819.6 2,118.0 2,008.0 2,089.4
Eight years later 1,910.7 2,125.2 2,122.6
Nine years later 1,926.6 2,243.1
Ten years later 2,037.0
Cumulative redundancy/
(deficiency) $ (779.0) $ (566.4) $ (346.8) $ (322.7) $ (188.1) $ (202.2) $ (257.2) $ (184.8) $ (129.4) $ 29.6
======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Gross liability-end of year $2,476.7 $2,576.0 $2,752.8 $3,016.9 $3,298.2
Reinsurance receivable 622.0 641.8 648.5 689.2 671.9
-------- -------- -------- -------- --------
Net liability-end of year 1,854.7 1,934.2 2,104.3 2,327.7 2,626.3
-------- -------- -------- -------- ========
Gross re-estimated
liability at December 31,
1996 3,058.7 2,988.4 3,019.8 3,184.6
Re-estimated receivable
at December 31, 1996 946.8 869.4 786.1 886.5
-------- -------- -------- --------
Net re-estimated liability
at December 31, 1996 2,111.9 2,119.0 2,233.7 2,298.1
-------- -------- -------- --------
Gross cumulative
redundancy/(deficiency) $ (582.0) $ (412.4) $ (267.0) $ (167.7)
======== ======== ======== ========
- - ----------
(1) Includes Gibraltar data through September 31, 1991
(2) Includes Everest Re Ltd. data which was previously excluded. All prior
period amounts have been restated for this change.
13
For years prior to 1987, management believes that two factors had the most
significant impact on loss development. First, through the mid-1980's, a number
of industry and external factors, such as the propensity of courts to award
large damage awards in liability cases, combined to increase loss frequency and
severity to unexpectedly high levels. Second, contracts written prior to 1986
contained coverage terms which, for Everest Re and the industry in general, have
been interpreted by courts to provide coverage for asbestos and environmental
exposures not contemplated by either the pricing or the initial reserving of the
contracts. Legal developments during the mid-1980's necessitated additional
reserving for such exposures on both a case and IBNR basis. No losses were
incurred net of reinsurance with respect to asbestos and environmental claims in
1996 or 1995. Incurred losses net of reinsurance with respect to asbestos and
environmental claims were $40.5 million, $70.6 million and $35.4 million in
1994, 1993 and 1992, respectively. Substantially all of these losses related to
pre-1986 exposures.
To the extent loss reserves on assumed reinsurance need to be increased, Everest
Re would be entitled to certain payments under the Stop Loss Agreement. See
"Stop Loss Agreement". Additionally, Holdings may be required to make payments
under the Capital Contribution Agreement for which it would be entitled to
indemnification under the PRUCO Indemnity. See "Standby Capital Contribution
Agreement and PRUCO Indemnity". To the extent loss reserves on the Ceded Direct
Insurance need to be increased and subject to the terms of the Gibraltar
Contracts, Everest Re will be entitled to 100% protection from Gibraltar under
the Gibraltar Contracts, which reinsurance obligations are guaranteed by The
Prudential subject to the terms and conditions of the applicable Prudential
Guarantee. See "Relationships with Gibraltar" and "Prudential Guarantees".
Management believes that adequate provision has been made for Everest Re's loss
and LAE reserves regardless of the availability of any such payments under the
Stop Loss Agreement, the PRUCO Indemnity, and the Prudential Guarantees.
Additionally, while there can be no assurance that reserves for and losses from
these claims will not increase in the future, management believes that Everest
Re's existing reserves and retrocessional arrangements and payments available
under the Stop Loss Agreement, the PRUCO Indemnity and the Prudential Guarantees
lessen the probability that such increases would have a material adverse effect
on the Company's financial condition, results of operations or cash flows.
The Ten Year Statutory Loss Development Table includes Gibraltar data until
September 30, 1991 at which time Everest Re distributed the stock of Gibraltar
to PRUCO. Thus the 1986-1990 "Reserves for unpaid loss and LAE" includes the
Gibraltar liability. Similarly, the "Paid (cumulative) as of" and "Liability
re-estimated as of" data include Gibraltar experience until September 30, 1991.
At the time of the distribution of Gibraltar, Gibraltar still had $288.5 million
of reserves outstanding. To more accurately reflect reserve development, the
Gibraltar reserves were removed from the reserves for unpaid losses and LAE line
for periods after 1991 and the $288.5 million was treated as a paid loss. The
amounts so treated as paid in 1991 were $281.1 million and $285.6 million for
the years 1986 and 1987, respectively, and $288.5 for each of the years 1988
through 1990. The following table identifies the cumulative reserve
redundancy/(deficiency) relating to Gibraltar only, Everest Re excluding
Gibraltar and the consolidated group.
CUMULATIVE RESERVE REDUNDANCY/(DEFICIENCY) ATTRIBUTABLE TO GIBRALTAR
Years Ended December 31,
------------------------------------------------------------------------------------------------
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
(Dollars in millions) ------- ------- ------- ------- ------- ------- ------- ------- ------- -----
Everest Re excluding
Gibraltar $(573.1) $(389.8) $(216.9) $(224.6) $(158.1) $(202.2) $(257.2) $(184.8) $(129.4) $29.6
Gibraltar (205.9) (176.6) (129.9) (98.1) (30.0) -- -- -- -- --
------- -------- ------- ------- ------- ------- ------- ------- ------- -----
Consolidated $(779.0) $(566.4) $(346.8) $(322.7) $(188.1) $(202.2) $(257.2) $(184.8) $(129.4) $29.6
======= ======== ======= ======= ======= ======= ======= ======= ======= =====
14
The following table is derived from the Ten Year Statutory Loss Development
Table above and summarizes the effect of reserve re-estimates, net of
reinsurance, on calendar year operations for the same ten year period ended
December 31, 1996. Each column represents the amount of reserve re-estimates
made in the indicated calendar year and shows the accident years to which the
re-estimates are applicable. The amounts in the total accident year column on
the far right represent the cumulative reserve re-estimates for the indicated
accident years.
EFFECT OF RESERVE REESTIMATES ON CALENDAR YEAR OPERATIONS
Cumulative
Re-estimates
Calendar Year Ended December 31, for each
------------------------------------------------------------------------------------------ Accident
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Year
------ ------ ------- ------ ------ ------ ------- ------ ------ ------- ------------
(Dollars in millions)
Accident Years
1986 & prior $(78.9) $(84.4) $(141.8) $(44.1) $(52.7) $(54.6) $(105.2) $(91.0) $(18.9) $(107.4) $(779.0)
1987 (7.0) 68.3 46.1 13.2 (8.5) 18.3 2.1 11.7 (10.4) 133.8
1988 54.8 (20.6) 47.1 1.1 20.0 15.8 6.8 3.3 128.3
1989 (50.1) (6.5) 46.9 2.8 4.4 (1.4) 9.2 5.3
1990 24.5 8.7 29.4 (0.4) (6.0) 9.7 65.9
1991 21.6 (3.2) 1.4 (4.6) (3.8) 11.4
1992 (36.6) 7.9 (8.7) (2.5) (39.9)
1993 (14.5) 14.2 (1.7) (2.0)
1994 (9.8) (9.2) (19.0)
1995 142.4 142.4
Total calendar
year effect $(78.9) $(91.4) $ (18.7) $(68.7) $ 25.6 $ 15.2 $ (74.5) $(74.3) $(16.7) $ 29.6 $(352.8)
As illustrated by this table, the factors which caused the deficiencies shown in
the Ten Year Statutory Loss Development Table relate almost entirely to accident
years prior to 1986. With the exception of the 1992 accident year, which
included Hurricane Andrew, the original reserves established for each accident
year since 1986 have developed either positively or in a manner that is not
materially adverse. Adverse development relating to accident years prior to July
1, 1995 (prior to January 1, 1995 for catastrophe losses) is mitigated by
recoveries under the Stop Loss Agreement. As the Stop Loss Agreement was entered
into in 1995, recoveries thereunder are reflected in the 1995 accident year
rather than in the accident year which included the underlying adverse
development.
The following table presents a reconciliation of beginning and ending reserve
balances for the years indicated on a GAAP basis:
RECONCILIATION OF RESERVES FOR LOSSES AND LAE
Years Ended December 31,
----------------------------------
(Dollars in millions) 1996 1995 1994
-------- -------- --------
Reserves at beginning of period $2,969.3 $2,706.4 $2,540.1
-------- -------- --------
Incurred related to:
Current year 745.6 658.0 646.5
Prior years (29.6) 16.7 74.3
-------- -------- --------
Total incurred losses 716.0 674.7 720.8
-------- -------- --------
Paid related to:
Current year 139.1 92.9 157.7
Prior years 282.1 359.5 403.5
-------- -------- --------
Total paid losses 421.2 452.4 561.2
-------- -------- --------
Change in reinsurance receivables
on unpaid losses and LAE (17.3) 40.6 6.7
-------- -------- --------
Reserves at end of period $3,246.9 $2,969.3 $2,706.4
======== ======== ========
15
The reconciliation of reserves on a GAAP basis to reserves reported on a
statutory basis for each of the three years in the period ended December 31,
1996 is shown below:
RECONCILIATION OF RESERVES FOR LOSSES AND LAE FROM STATUTORY BASIS TO GAAP BASIS
Years Ended December 31,
-------------------------------
(Dollars in millions) 1996 1995 1994
-------- -------- --------
Statutory reserves-net $2,387.7 $2,120.0 $1,934.6
Statutory retroactive reinsurance reserves 15.4 5.4 --
Financing arrangement (10.3) (10.3) (10.3)
-------- -------- --------
Subtotal 2,392.8 2,115.1 1,924.3
Foreign subsidiary reserves 233.5 212.6 180.0
Subtotal-net reserves as shown in loss
development schedule 2,626.3 2,327.7 2,104.3
Reinsurance receivable on unpaid losses 671.9 689.2 648.5
-------- -------- --------
Subtotal-gross reserves as shown in loss
development schedule 3,298.2 3,016.9 2,752.8
-------- -------- --------
Foreign translation effect of Canadian reserves (51.3) (47.6) (46.4)
-------- -------- --------
Reserves on a GAAP basis $3,246.9 $2,969.3 $2,706.4
======== ======== ========
Statutory reserves are presented net of reinsurance receivables on unpaid loss
and LAE for years ended December 31, 1996, 1995 and 1994. The amounts shown as
financing arrangement in 1996, 1995 and 1994 relate to a single treaty which did
not qualify for reinsurance accounting under GAAP.
RESERVES FOR ASBESTOS AND ENVIRONMENTAL LOSSES AND LOSS ADJUSTMENT EXPENSES
Everest Re's reserves include an estimate of Everest Re'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 Everest Re's potential losses from asbestos and
environmental claims. See ITEM 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Asbestos and Environmental
Exposures" and Note 8 of Notes to Consolidated Financial Statements.
The following table summarizes the composition of Everest Re's total reserves
for asbestos and environmental losses, gross and net of reinsurance for the
years ended December 31, 1996, 1995, 1994 and 1993:
Years Ended December 31,
----------------------------
(Dollars in millions) 1996 1995 1994
------- ------- -------
Case reserves reported by ceding companies $ 101.2 $ 108.5 $ 112.9
Additional reserves established by Everest Re
(assumed reinsurance) 50.1 43.8 39.8
Case reserves established by Everest Re
(Ceded Direct Insurance) 52.8 50.3 52.3
IBNR reserves 219.2 225.9 240.6
------- ------- -------
Gross reserves 423.3 428.5 445.5
Reinsurance receivable (222.3) (230.8) (241.9)
------- ------- -------
Net reserves $ 201.0 $ 197.7 $ 203.7
======= ======= =======
Everest Re's asbestos and environmental claims are managed by an experienced
staff consisting of seven people. This claims unit works closely with members of
Everest Re's in-house legal staff on legal developments. The claims unit also
meets with the management of primary insurance companies to understand their
asbestos and environmental exposures and reserving practices.
Additional losses, the type or magnitude of which cannot be foreseen by the
Company, or the reinsurance industry generally, may emerge in the future. Such
future emergence, to the extent not covered by existing retrocessional
16
contracts, including the Stop Loss Agreement, could have material adverse
effects on the Company's future financial condition, results of operations and
cash flows.
INVESTMENTS
Everest Re's overall financial strength and results of operations are, in part,
dependent on the quality and performance of its investment portfolio. Net
investment income and net realized capital gains (losses) on Everest Re's
invested assets constituted 16.9%, 21.1% and 13.5% of the Company's revenues for
the years ending December 31, 1996, 1995 and 1994, respectively. The Company's
cash and invested assets totalled $3,624.6 million at December 31, 1996 of which
95.0% were cash or investment grade fixed maturities.
Everest Re's investment strategy emphasizes maintaining a high quality
investment portfolio while maximizing long-term after-tax investment income.
Everest Re's current investment strategy seeks to maximize after-tax income
through a high quality, diversified, taxable bond and tax-exempt municipal bond
portfolio, while maintaining an adequate level of liquidity. Everest Re's mix of
taxable and tax-preferenced investments is adjusted continuously, consistent
with Everest Re's current and projected operating results, market conditions and
tax position. Additionally, Everest Re invests in marketable equity securities
which it believes will enhance the risk-adjusted total return of the investment
portfolio.
The Investment Committee of Everest Re's Board of Directors is responsible for
establishing investment policy and guidelines and, together with senior
management, for overseeing their execution. Everest Re's investment portfolio is
in compliance with the insurance laws of the state of Delaware, its domiciliary
state, and of other jurisdictions in which it is regulated. These laws prescribe
the kind, quality and concentration of investments which may be made by
insurance companies. In general, these laws permit investments, within specified
limits and subject to certain qualifications, in government obligations,
corporate bonds, preferred and common stocks, real estate mortgages and real
estate. An independent investment advisor is utilized to manage the Company's
investment portfolio within the established guidelines and is required to report
activities on a current basis and to meet with the Company periodically to
review and discuss the portfolio structure, securities selection and performance
results.
Everest Re's investment guidelines include a duration guideline of three to six
years. The duration of an investment is based on the maturity of the security
but also reflects the possibility of early prepayment of such security without a
prepayment penalty. This investment duration guideline is sensitive to Everest
Re's average duration of potential liabilities which, at December 31, 1996, was
approximately five years. Liability duration is determined based on the
estimated payouts of underwriting liabilities using standard duration
calculations.
Approximately 13.2% of the Company's consolidated reserves for losses and LAE
and unearned premiums represents estimated amounts payable in foreign
currencies. For each currency in which the Company has established substantial
reserves, the Company seeks to maintain invested assets denominated in such
currency in an amount approximately equal to the estimated liabilities which are
denominated in such currency.
As of December 31, 1996, 99.4% of Everest Re's fixed maturities consisted of
investment grade securities. The average maturity of fixed maturities was 7.8
years at December 31, 1996, and their overall duration was 5.2 years. As of
December 31, 1996, Everest Re did not have any material holdings of issuers who
management believes are experiencing cash flow difficulty to an extent that the
ability of the obligor to meet debt service payments is threatened. Everest Re's
current investment strategy does not contemplate additional investment in
non-investment grade securities or any investments in commercial real estate or
direct commercial mortgages. Also, investments in derivative products (i.e.,
products which include features such as futures, forwards, swaps, options and
other investments with similar characteristics) are generally prohibited,
without the prior approval of Everest Re's Investment Committee. At December 31,
1996, the Company had no investments in derivative products.
As of December 31, 1996, the common stock portfolio was $147.3 million at market
value, is managed with a growth and income orientation and consisted primarily
of investments in dividend paying mid and large capitalization companies. Also
included in the stock portfolio are strategic minority interests in Corporacion
MAPFRE S.A. ("MAPFRE"), an insurance group in Spain, and three other companies.
These companies accounted for $42.5 million (of which $35.8 million related to
MAPFRE) or 28.8% of Everest Re's total equity investments as of December 31,
1996 and 1.2% of total cash and investments.
17
The following table reflects investment results for Everest Re for each of the
five years in the period ended December 31, 1996:
Pre-Tax
Pre-Tax Realized Net
Average Investment Effective Capital Gains
Investments(1) Income(2) Yield(3) (Losses)
-------------- ---------- --------- -------------
Years Ended December 31,
(Dollars in millions)
1996 $3,416.4 $191.9 5.62% $5.7
1995 2,894.9 166.0 5.73 33.8
1994 2,620.9 143.6 5.48 (10.5)
1993 2,532.2 141.1 5.57 78.8
1992 2,407.2 159.3 6.62 87.5
- - ----------------
(1) Average of the beginning and ending carrying values of investments and
cash, less net funds held and non-interest bearing cash. Common stocks and
nonredeemable preferred stocks are carried at fair market value. Bonds and
redeemable preferred stocks are carried at amortized cost except that,
effective December 31, 1993, bonds and redeemable preferred stock
available for sale are carried at fair market value.
(2) After investment expenses, excluding realized net capital gains (losses).
(3) Pre-tax net investment income for the period divided by average
investments for the same period and annualized for interim periods.
The following table summarizes fixed maturities as of December 31, 1996 and
1995:
Amortized Unrealized Unrealized Market
Cost Appreciation Depreciation Value
(Dollars in millions) --------- ------------ ------------ --------
December 31, 1996:
U.S. Treasury securities and obligations
of U.S. government agencies and
corporations $ 192.6 $ 1.2 $1.4 $ 192.4
Obligations of states and political
subdivisions 1,309.9 56.1 1.0 1,365.0
Corporate Securities 740.0 11.4 0.3 751.1
Mortgage-backed securities 487.1 7.7 2.0 492.8
Foreign debt securities 545.2 24.7 0.9 569.0
-------- ------ ---- --------
Total $3,274.8 $101.1 $5.6 $3,370.3
======== ====== ==== ========
December 31, 1995:
U.S. Treasury securities and obligations
of U.S. government agencies and
corporations $ 101.7 $ 2.4 $0.4 $ 103.7
Obligations of states and political
subdivisions 1,185.4 65.0 0.4 1,250.0
Corporate Securities 773.4 25.0 0.7 797.7
Mortgage-backed securities 355.7 9.9 0.4 365.2
Foreign debt securities 455.5 17.7 3.7 469.5
-------- ------ ---- --------
Total $2,871.8 $120.0 $5.7 $2,986.1
======== ====== ==== ========
18
The following table presents the credit quality distribution by the National
Association of Insurance Commissioners ("NAIC") rating of Everest Re's fixed
maturities as of December 31, 1996:
Held to Available
(Dollars in millions) Maturity For Sale
NAIC (Amortized (Market Percent of
Rating(1) Standard and Poor's Equivalent Description Cost) Value) Total Total
- - --------- ------------------------------------------ ---------- --------- -------- ----------
1 AAA/AA/A $78.3 $2,622.4 $2,700.7 80.3%
2 BBB 1.8 310.3 312.1 9.3
3 BB -- 19.4 19.4 0.6
4 B -- -- -- --
5 CCC/CC/C 0.4 -- 0.4 0.0
6 CI/D -- 1.4 1.4 0.0
Foreign subsidiary investments(2) -- 328.5 328.5 9.8
----- -------- -------- -----
Total(3) $80.5 $3,282.0 $3,362.5 100.0%
===== ======== ======== =====
- - ------------
(1) The Securities Valuation Office of the NAIC maintains a security valuation
system that assigns a numerical rating to securities. The numerical
ratings generally correspond to S & P's classifications, as indicated,
although S & P's has not necessarily rated the securities indicated.
Rating categories 1 and 2 are considered investment grade and categories 3
through 6 are considered non-investment grade.
(2) Foreign subsidiary investments are not subject to NAIC ratings but, in the
opinion of the investment manager, are of high investment grade.
(3) Certain totals may not reconcile due to rounding.
The following table summarizes fixed maturities by contractual maturity as of
December 31, 1996:
Held to Maturity Available For Sale Total Percent of
(Amortized Cost) (Market Value) Balance Sheet Balance Sheet
(Dollars in millions) ---------------- ------------------ ------------- -------------
Maturity category:
Less than one year $10.7 $ 75.7 $ 86.4 2.6%
Due after 1-5 years 26.8 655.1 681.9 20.3%
Due after 5-10 years 7.2 963.1 970.3 28.9%
Due after 10 years 35.8 1,095.3 1,131.1 33.6%
----- -------- -------- -----
Subtotal 80.5 2,789.2 2,869.7 85.3%
Mortgage-backed securities(1) -- 492.8 492.8 14.7%
----- -------- -------- -----
Total(2) $80.5 $3,282.0 $3,362.5 100.0%
===== ======== ======== =====
- - ------------
(1) Mortgage-backed securities generally are more likely to be prepaid than
other fixed maturities. Therefore contractual maturities are excluded
from this table since they may not be indicative of actual maturities.
(2) Certain totals may not reconcile due to rounding.
RATINGS
Everest Re currently has a rating of "A" (Excellent) from A.M. Best, an
independent insurance industry rating organization which rates companies on
factors of concern to policyholders. A.M. Best states that the "A" (Excellent)
rating is assigned to those companies which, in its opinion, have achieved
excellent overall performance when compared to the standards established by A.M.
Best and have demonstrated a strong ability to meet their obligations to
policyholders over a long period of time. The "A" (Excellent) rating is the
third highest of fifteen ratings assigned by A.M. Best, which range from "A++"
(Superior) to "F" (In liquidation). Additionally, A.M. Best has eleven
classifications within the "Not Assigned" category.
Everest Re currently has a claims-paying ability rating of "A+" (Good)
from Standard & Poor's, an independent rating organization which rates an
insurance company's financial capacity to meet the obligations of its
insurance policies in accordance with their terms. Standard & Poor's states that
the "A+" rating is assigned to those companies which, in its opinion, have
secure financial capacity to meet policyholder obligations. The "A+" rating is
19
the fifth highest of eighteen ratings assigned by Standard & Poor's, which range
from "AAA" (Superior) to "R" (Regulatory Action). Ratings from AA to B may be
modified by the use of a plus or minus sign to show relative standing of the
insurer within those rating categories.
Everest Re currently has an insurance financial strength rating of "A2" (Good)
from Moody's. Moody's states that insurance companies rated "A" offer good
financial security. However, elements may be present which suggest a
susceptibility to impairment sometime in the future. Moody's rating gradations
are shown through the use of nine distinct symbols, each symbol representing a
group of ratings in which the financial security is broadly the same. The "A2"
(Good) rating is the sixth highest of ratings assigned by Moody's, which range
from "Aaa" (Exceptional) to "C" (Lowest). Moody's further distinguishes the
ranking of an insurer within its generic rating classification from Aa to B with
1, 2 and 3 ("1" being the highest).
A.M. Best's, Standard & Poor's and Moody's ratings are based upon factors of
concern to policyholders and should not be considered an indication of the
degree or lack of risk involved in an equity investment in an insurance company.
Each of these rating agencies reviews its ratings periodically, and there can be
no assurance that Everest Re's ratings will be maintained in the future.
COMPETITION
The property and casualty reinsurance business is highly competitive.
Competition with respect to the types of reinsurance in which Everest Re is
engaged is based on many factors, including the perceived overall financial
strength of the reinsurer, A.M. Best's and/or Standard & Poor's rating of the
reinsurer, underwriting expertise, the states where the reinsurer is licensed or
otherwise authorized, premiums charged, other terms and conditions of the
reinsurance offered, services offered, speed of claims payment and reputation
and experience in lines written. Everest Re competes for its business in the
United States and international reinsurance markets with numerous international
and domestic reinsurance companies, some of which have greater financial
resources than Everest Re.
Everest Re's competitors include independent reinsurance companies, subsidiaries
or affiliates of established worldwide insurance companies, reinsurance
departments of certain primary insurance companies and domestic and
international underwriting operations. Some of these competitors have greater
financial resources than Everest Re, have been operating for longer than Everest
Re, and have established long-term and continuing business relationships
throughout the industry, which can be a significant competitive advantage.
Although most U.S. reinsurance companies operate in the broker market, most of
Everest Re's largest competitors work directly with ceding companies, competing
with brokers. Management believes that Everest Re's major competitors are large
U.S. and foreign reinsurance companies.
Since 1987, the industry has experienced increased global competition. During
this period, primary insurers retained an increasing portion of their business,
which, together with the competitive market conditions, resulted in excess
reinsurance capacity and generally low rates of premium growth. In the early
1990s, several well-capitalized new Bermuda-based companies have entered the
reinsurance industry, and added significant capacity, particularly in the
catastrophe reinsurance market, and rendered future rate improvement uncertain.
In addition, Lloyd's of London has relaxed its requirement that syndicate
members have unlimited liability for losses and has allowed limited liability
investors to join syndicates, thereby increasing the reinsurance capacity at
Lloyd's. In 1996, Lloyd's has also implemented its reconstruction and renewal
plan in an attempt to separate past losses from the current market participants
and to provide a more secure market going forward.
Management believes that since 1987, a number of factors, including global
competition, the emergence of significant reinsurance capacity from the Bermuda
and rejuvenated Lloyds' markets, higher retentions by primary insurance
companies and consolidation in the insurance industry, have resulted in
increasingly competitive market conditions across most lines of business and
have influenced the softening of prices and contract terms in the current
marketplace.
The Company may, in the future, face additional competition from other
well-capitalized companies or from market participants that may devote more of
their capital to the reinsurance business or from the capital markets entry into
insurance and reinsurance investment products. And, the Company believes that
the insurance and reinsurance industries will continue to undergo further
consolidation, including reinsurance brokers, whose role will become stronger,
and that reinsurers will need significant size and financial strength to compete
effectively.
20
EMPLOYEES
As of March 3, 1997, Everest Re employed 400 persons. Management believes that
its employee relations are good. None of Everest Re's employees are subject to
collective bargaining agreements, and the Company is not aware of any current
efforts to implement such agreements at Everest Re.
INFORMATION RELATING TO DOMESTIC AND FOREIGN OPERATIONS
Financial information relating to industry segments set forth in Note 10 of
Notes to Consolidated Financial Statements of the Company is incorporated herein
by reference.
REGULATORY MATTERS
The Company is subject to regulation under the insurance statutes of various
jurisdictions, including Delaware, the domiciliary state of Everest Re, Arizona,
the domiciliary state of Everest National, the United Kingdom, the domiciliary
jurisdiction of Everest Ltd., and Canada, the domiciliary jurisdiction of
Everest Canada.
INSURANCE HOLDING COMPANY REGULATION. Insurance holding company laws and
regulations generally require the holding company to register with the relevant
state regulatory authorities and file certain reports which include current
information concerning the capital structure, ownership, management, financial
condition and general business operations of the insurance holding company and
its subsidiaries licensed in the state. State regulators also require prior
notice or regulatory approval of changes in control of an insurer or its holding
company and of certain material inter-affiliate transactions within the holding
company structure. See "-Dividends by Everest Re".
Under the Delaware and Arizona Codes and regulations thereunder, no person,
corporation or other entity may acquire a controlling interest in the Company,
unless such person, corporation or entity has obtained the prior approval of the
Delaware and Arizona Insurance Commissioners for such acquisition. For the
purposes of the Delaware and Arizona Codes, any person acquiring, directly or
indirectly, 10% or more of the voting securities of an insurance company is
presumed to have acquired "control" of such company. To obtain the approval of
any such change in control, the proposed acquirer must file an application with
the Delaware and Arizona Insurance Commissioners. This application requires the
acquirer to disclose its background, financial condition, the financial
condition of its affiliates, the source and amount of funds by which it will
effect the acquisition, the criteria used in determining the nature and amount
of consideration to be paid for the acquisition, proposed changes in the
management and operations of the insurance company and any other related
matters.
The United Kingdom Insurance Companies Act 1982 requires the prior approval by
the Department of Trade and Industry of anyone proposing to become a
"controller" of any insurance company regulated under such Act. Any company or
individual that directly or indirectly exercises 15% or more of the voting power
at a general meeting of a regulated insurance company incorporated in the United
Kingdom which only engages in reinsurance business is considered a "controller".
The Insurance Companies Act of Canada also requires prior approval by the
Minister of Finance of anyone acquiring a significant interest in an authorized
Canadian insurance company. In addition, the Company is subject to regulation by
the insurance regulators of other states and foreign jurisdictions in which it
does business. Certain of these states and foreign jurisdictions impose
regulations regulating the ability of any person to acquire control of an
insurance company without appropriate regulatory approval similar to those
described above.
DIVIDENDS BY EVEREST RE. Because the operations of the Company are conducted
through Everest Re and its subsidiaries, the Company is dependent upon dividends
and other permissible payments from Everest Re to meet its obligations and to
pay dividends in the future should Holdings' Board of Directors decide to do so.
The payment of dividends to Holdings by Everest Re is subject to limitations
imposed by Delaware law.
Under the Delaware Code, before a Delaware domiciled insurer may pay any
dividend it must give 10 days prior notice to the Delaware Insurance
Commissioner. During this 10-day period, the Commissioner may, by order,
limit or disallow the payment of ordinary dividends if the Commissioner
finds the insurer to be presently or potentially in financial distress.
A Delaware domiciled insurer may only pay cash dividends from the portion
of its available and accumulated surplus funds derived from realized net
operating profits and realized capital gains. Additionally, a Delaware domiciled
insurer may not pay any "extraordinary" dividend or distribution until
(i) 30 days after the Delaware Insurance Commissioner has received notice of a
declaration thereof and has not within such period disapproved such a payment
or (ii) the Delaware Insurance Commissioner has approved such payment within the
21
30-day period. Under the Delaware Code, an "extraordinary" dividend of a
property and casualty insurer is a dividend the amount of which, together with
all other dividends and distributions made in the preceding 12 months, exceeds
the greater of (i) 10% of an insurer's statutory surplus as of the end of the
prior calendar year or (ii) the insurer's statutory net income, not including
realized capital gains, for the prior calendar year. Under this definition, the
maximum amount that will be available for the payment of dividends by Everest Re
in 1997 without triggering the requirement for prior approval of regulatory
authorities in connection with an extraordinary dividend is $84.4 million. As of
December 31, 1996, Everest Re's accumulated statutory surplus from realized net
operating profits and realized gains was $399.7 million.
STATE INSURANCE REGULATION. U.S. domestic property and casualty insurers,
including reinsurers, are subject to regulation by their state of domicile and
by those states in which they are licensed. The rates and policy terms of
reinsurance agreements generally are not subject to regulation by any
governmental authority. This contrasts with primary insurance policies and
agreements, the rates and policy terms of which are generally regulated closely
by state insurance departments.
Everest Re is subject primarily to regulation and supervision that relate to
licensing requirements, solvency requirements, investment requirements,
restrictions on the size of risks which may be insured, deposit of securities
for the benefit of ceding companies and/or policyholders, accounting
requirements, periodic examinations of financial condition and affairs, the form
and content of financial statements that must be filed with regulators and the
level of minimum reserves necessary to cover unearned premiums, losses and other
purposes. In general, such regulation is designed to protect ceding insurers
and, ultimately, their policyholders, rather than stockholders. The operations
of Everest Re's foreign branch offices in Canada, Hong Kong and the United
Kingdom are subject to regulation by the insurance regulatory officials of those
jurisdictions. Management believes that the Company is in material compliance
with applicable laws and regulations pertaining to its business and operations.
Everest National is subject to similar regulation and, in addition, must comply
with substantial regulatory requirements in each state where it does business.
These additional requirements include, but are not limited to, rate and policy
form requirements, requirements with regard to licensing, agent appointments,
participation in residual markets and claims handling procedures. These
regulations are primarily designed for the protection of policyholders.
LICENSES. Ordinarily, in the United States, a primary insurer will only enter
into reinsurance agreements if it can obtain credit for the reinsurance on its
statutory financial statements. Credit is usually granted when the reinsurer is
licensed or accredited in a state where the primary insurer is domiciled. In
addition, many states permit credit for reinsurance ceded to a reinsurer that is
domiciled and licensed in another state. Such a reinsurer must meet certain
financial requirements and, in some instances, the domiciliary state of such a
reinsurer must have substantially similar reinsurance credit law requirements as
the domiciliary state of the primary insurer or if credit for reinsurance is not
available, the primary insurer may reduce its liabilities on its statutory
financial statements if it is provided with collateral to secure the reinsurer's
obligations.
Everest Re is a licensed property/casualty insurer and/or reinsurer in all
states and the District of Columbia with the exception of Nevada, North
Carolina, West Virginia and Wyoming. In New Hampshire and Puerto Rico, Everest
Re is licensed for reinsurance only.
Everest Re is licensed as a property/casualty reinsurer in Canada. It is also
authorized to conduct reinsurance business in the United Kingdom and Hong Kong.
Everest Re can also write reinsurance in other foreign countries. Because some
jurisdictions require a reinsurer to register in order to be an acceptable
market for local insurers, Everest Re is registered as a foreign insurer and/or
reinsurer in the following countries: Argentina, Bolivia, Chile, Colombia,
Ecuador, Guatemala, Mexico, Peru, Venezuela and the Philippines. Everest Ltd. is
authorized to engage in the reinsurance business in the United Kingdom and
reinsures risks worldwide. Everest National is licensed in 38 states and the
District of Columbia. Everest Canada is federally licensed under the Insurance
Companies Act of Canada and provincially licensed in Ontario.
PERIODIC EXAMINATIONS. Everest Re and Everest National are
subject to examination of their affairs by the insurance departments
of the states in which they are licensed, authorized or accredited.
Delaware and Arizona, the domiciliary states of Everest Re and Everest
National, respectively, usually conduct examinations of domestic
22
companies every 3 years and may do so at such other times as are deemed
advisable by the respective insurance commissioner. Everest Re's and Everest
National's last examination reports were as of December 31, 1994. Neither report
contained any material recommendations.
NAIC RISK-BASED CAPITAL REQUIREMENTS. The NAIC has instituted a formula to
measure the amount of capital appropriate for a property and casualty insurance
company to support its overall business operations in light of its size and risk
profile. The major categories of a company's risk profile are its asset risk,
credit risk, and underwriting risk. The new standards are an effort by the NAIC
to prevent insolvencies, to ward off other financial difficulties of insurance
companies, and to establish uniform regulatory standards among state insurance
departments.
Under the approved formula, a company's statutory surplus is compared to its
risk based capital (RBC). If this ratio is above a minimum threshold, no action
is necessary. Below this threshold are four distinct action levels at which a
regulator can intervene with increasing degrees of authority over a domestic
insurer as the ratio of surplus to RBC decreases. The mildest intervention
requires the company to submit a plan of appropriate corrective actions. The
most severe action requires the company to be rehabilitated or liquidated.
Based upon Everest Re's and Everest National's financial positions at December
31, 1996, Everest Re and Everest National exceed the minimum thresholds. Various
proposals to change the RBC formula have been proposed. The Company is unable to
predict whether any such proposal will be adopted, the form in which any such
proposals would be adopted or the effect, if any, the adoption of any such
proposal or change in the RBC calculations would have on the Company.
LEGISLATIVE AND REGULATORY PROPOSALS. Various regulatory and legislative changes
have from time to time been proposed that could affect reinsurers and insurers.
Among the proposals that have in the past been or are at present being
considered are the possible introduction of federal regulation in addition to,
or in lieu of, the current system of state regulation of insurers, Superfund
re-authorization, state and federal involvement in insuring catastrophes,
limitations on the ability of primary insurance carriers to effect premium rate
increase or to cancel or not renew existing policies, modifications to
investment limitations, and creation of interstate compacts for multi-state
insurer receivership proceedings or multi-state insurance regulation. The
Company is unable to predict whether any of these proposals will be adopted, the
form in which any such proposals would be adopted, or the impact, if any, such
adoption would have on the Company.
ITEM 2. PROPERTIES
Everest Re's corporate offices are located in Newark, New Jersey, and occupy
approximately 130,000 square feet of office space under a sublease with The
Prudential that expires on December 31, 2004, subject to Everest Re's option to
terminate the sublease with no penalty under certain circumstances. On December
3, 1996, Everest Re entered into a new sublease with The Prudential for 112,000
square feet of office space in Liberty Corner, New Jersey. On or about May 1,
1997, Everest Re will move its corporate offices to this new location and will
terminate its sublease of the Newark, New Jersey office on a date to coincide
with the commencement of rent payments under the sublease for the Liberty
Corner, New Jersey office, without any penalties. Everest Re's other eight
office locations occupy a total of 57,500 square feet, all of which are leased.
Management believes that the above described office space is adequate for its
current and anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation and arbitration in the normal course of
its business. Management does not believe that any such pending litigation or
arbitration will have a material adverse effect on the Company's results of
operations, financial condition and cash flows. However, no assurance can be
given as to the decisions that may be rendered by the courts or arbitration
panels in any of such litigation and arbitration matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
23
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) MARKET INFORMATION
Since October 3, 1995, the common stock of the Company has been traded on the
New York Stock Exchange under the symbol "RE". Quarterly high and low market
prices of the Company's common stock in 1995 and 1996 were as follows:
High Low
----- ------
From October 3 to December 31, 1995: 23.50 18.50
First Quarter 1996: 25.125 20.125
Second Quarter 1996: 26.50 21.375
Third Quarter 1996: 26.50 22.50
Fourth Quarter 1996: 29.50 23.875
(b) NUMBER OF HOLDERS OF COMMON STOCK
The number of record holders of common stock as of March 1, 1997 was 84. That
number excludes the beneficial owners of shares held in "street" names or held
through participants in depositories, such as The Depository Trust Company.
(c) DIVIDEND HISTORY AND RESTRICTIONS
In 1995, the Board of Directors of the Company established a policy of declaring
regular quarterly cash dividends. The first such dividend was $0.03 per share,
declared and paid in the fourth quarter of 1995. The Company declared and paid
its regular quarterly cash dividend of $0.03 per share for each quarter of 1996.
On February 24, 1997, the Board of Directors raised the quarterly dividend to
$0.04 per share and declared a dividend, payable on or before March 27, 1997, to
shareholders of record on March 7, 1997.
The declaration and payment of future dividends, if any, by the Company will be
at the discretion of the Board of Directors and will depend upon many factors,
including the Company's earnings, financial condition and business needs,
capital and surplus requirements of the Company's operating subsidiaries,
regulatory considerations and other factors, and the ability of Everest Re to
pay dividends to the Company.
As an insurance holding company, the Company depends on payments from Everest Re
to pay cash dividends to stockholders. The payment of dividends by Everest Re is
subject to certain limitations imposed by the Delaware Code. See "Regulatory
Matters -- Dividends by Everest Re" and Note 7A of Notes to Consolidated
Financial Statements.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated GAAP financial data of the Company as of and
for the years ended December 31, 1996, 1995, 1994, 1993 and 1992 were derived
from consolidated financial statements of the Company which were audited by
Coopers and Lybrand L.L.P. (1996) and Deloitte and Touche LLP (1992 - 1995),
independent auditors. The statutory data have been derived from statutory
financial statements filed with the Delaware Insurance Department. Such
statutory financial statements are prepared in accordance with SAP, which differ
from GAAP. The statutory financial statements are unconsolidated and reflect the
results of operations of Everest Re's subsidiaries, Everest Ltd. and Everest
National on the equity method. The following financial data should be read in
conjunction with the Consolidated Financial Statements and accompanying notes.
The supplemental information for 1995 excludes the effects of an IPO-related
premium charge of $140.0 million ($91.0 million after taxes) for the Stop Loss
Agreement and an IPO-related compensation expense charge of $13.3 million ($8.7
million after taxes) principally for stock awards to the Company's Chief
Executive Officer. Such supplemental information is presented to facilitate
an understanding of the impact on the Company's results of operations of
24
these non-recurring charges, but should not, however, be considered as an
alternative to the respective amounts determined in accordance with GAAP as an
indicator of the Company's operating performance.
Years Ended December 31,
--------------------------------------------------------
(Dollars in millions, except per share amounts) 1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
Operating data:
Gross premiums written $1,044.0 $ 949.5 $ 953.2 $ 918.1 $ 837.8
Net premiums written 1,030.5 783.2 863.2 892.3 767.6
Net premiums earned 973.6 753.3 853.3 883.2 753.2
Net investment income 191.9 166.0 143.6 141.1 159.3
Net realized capital gains (losses)(1) 5.7 33.8 (10.5) 78.8 87.5
Total revenue 1,169.3 948.9 982.8 1,098.3 998.1
Losses and LAE incurred (including
catastrophes) 716.0 674.7 720.8 687.4 853.1
Catastrophe losses(2):
Hurricane Andrew(3) -- 0.5 3.9 30.4 247.2
Northridge earthquake -- -- 70.9 -- --
Other(4) 7.1 30.9 7.1 (7.8) 59.6
Total catastrophe losses(5) 7.1 31.4 81.9 22.7 306.8
Commission and brokerage expenses 252.9 226.8 197.9 189.6 202.0
Other underwriting expenses 56.5 60.6 68.3 64.7 56.7
Compensation related to public offering -- 13.3 -- -- --
Restructuring and early retirement costs -- -- 7.8 -- --
Total expenses(5) 1,025.5 975.4 994.8 941.7 1,111.8
Income (loss) before taxes(5) 143.8 (26.6) (12.0) 156.5 (113.8)
Income tax (benefit) 31.8 (27.3) (22.6) 30.2 (52.2)
Net income (loss)(5) $ 112.0 $ 0.7 $ 10.7 $ 126.4 $ (61.6)
======== ======== ======== ======== ========
Net income (loss) per share(6) $ 2.22 $ 0.01 $ 0.21 $ 2.53 $ (1.23)
======== ======== ======== ======== ========
Dividends paid per share $ 0.12 $ 0.14 $ 0.15 $ -- $ --
======== ======== ======== ======== ========
Certain GAAP financial ratios:
Loss and LAE ratio(7) 73.5% 89.6% 84.5% 77.8% 113.3%
Underwriting expense ratio(8) 31.8 39.9 31.2 28.8 34.3
-------- -------- -------- -------- --------
Combined ratio 105.3% 129.5% 115.7% 106.6% 147.6%
======== ======== ======== ======== ========
Certain SAP data(9):
Ratio of net premiums written to surplus(10) 1.2x 1.0x 1.2x 1.3x 1.4X
Statutory surplus $ 772.7 $ 686.9 $ 600.7 $ 607.7 $ 519.0
Loss and LAE ratio(11) 71.2% 92.2% 85.8% 81.0% 112.7%
Underwriting expense ratio(12) 31.7 38.9 32.6 29.1 33.0
-------- -------- -------- -------- --------
Combined ratio 102.9% 131.1% 118.4% 110.1% 145.7%
======== ======== ======== ======== ========
Balance sheet data (at end of period):
Total investments and cash $3,624.6 $3,238.3 $2,573.2 $2,610.8 $2,347.1
Total assets 5,039.4 4,647.8 4,040.6 3,920.6 3,705.5
Loss and LAE reserves 3,246.9 2,969.3 2,706.4 2,540.1 2,443.9
Total liabilities 3,953.3 3,664.2 3,299.6 3,045.2 3,002.3
Stockholder's equity(13) 1,086.0 983.6 741.0 875.4 703.2
Book value per share(14) 21.51 19.36 14.82 17.51 14.06
Supplemental information, excluding IPO-related
charges:
Net premiums written $ 923.2
Net premiums earned 893.3
Income before taxes 126.8
Net income $ 100.4
========
Net income per share $ 2.00
========
Supplemental GAAP financial ratios:
Loss and LAE ratio 75.5%
Underwriting expense ratio 32.2
--------
Combined ratio 107.7%
========
Supplemental SAP data:
Ratio of net premiums written to surplus 1.2X
Loss and LAE ratio 75.5%
Underwriting expense ratio 32.0
--------
Combined ratio 107.5%
========
25
- - ------------
(1) After-tax operating income (loss), before after-tax net realized capital
gains or losses, was $108.3 million (or $2.14 per share), ($21.2)
million (or ($0.42)per share), $17.5 million (or $0.35 per share), $75.2
million (or $1.50 per share) and ($119.4) million (or ($2.39) per share)
for the years ended December 31, 1996, 1995, 1994, 1993 and 1992,
respectively. Supplemental after-tax operating income, before net
realized capital gains and excluding IPO-related charges, was $78.4
million (or $1.56 per share) for the year ended December 31, 1995.
(2) Catastrophe losses are net of reinsurance. A catastrophe is defined, for
purposes of the Selected Consolidated Financial Data, as an event that
causes a pre-tax loss before reinsurance of at least $5.0 million and
has an event date of January 1, 1988 or later.
(3) Losses with respect to Hurricane Andrew are net of a $100.0 million
aggregate excess of loss reinsurance recovery in 1992.
(4) Other catastrophe losses include adverse (favorable) development on loss
reserves for other catastrophes occurring on or after January 1, 1988.
(5) Some amounts may not reconcile due to rounding.
(6) Based on 50.6 million weighted average shares outstanding for 1996, 50.2
million weighted average shares outstanding for 1995, and 50.0 million
shares outstanding for 1994, 1993 and 1992.
(7) GAAP losses and LAE incurred as a percentage of GAAP net premiums earned.
(8) GAAP underwriting expenses as a percentage of GAAP net premiums earned.
Including restructuring and early retirement costs, incurred in the
fourth quarter of 1994, the Company's GAAP underwriting expense ratio in
1994 was 32.1%.
(9) Statutory results are on a Everest Re legal entity basis; consequently,
investments in subsidiary operations are accounted for on an equity basis.
(10) Statutory net premiums written as a percentage of period-end surplus.
(11) Statutory losses and LAE incurred as a percentage of SAP net premiums
earned.
(12) Statutory underwriting expenses as a percentage of SAP net premiums
written.
(13) Excluding net unrealized appreciation (depreciation) of investments,
stockholder's equity was $1,008.3 million, $899.9 million, $799.1
million, $794.6 million and $675.0 million as of December 31, 1996,
1995, 1994, 1993 and 1992, respectively.
(14) Based on 50.5 million shares outstanding for December 31, 1996, 50.8
million shares outstanding for December 31, 1995 and 50.0 million
shares outstanding for December 31, 1994, 1993 and 1992, respectively.
26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
INDUSTRY CONDITIONS. Since 1987, a number of factors, including global
competition, the emergence of significant reinsurance capacity from the Bermuda
and rejuvenated Lloyds' markets, higher retentions by primary insurance
companies and consolidation in the insurance industry, have caused increasingly
competitive market conditions across most lines of business and have influenced
the softening of prices and contract terms in the current market place. The
Company cannot predict with any reasonable certainty, if, when or to what extent
market conditions as a whole will change. See "Business-Competition" for a
further discussion.
INITIAL PUBLIC OFFERING. On October 6, 1995 the Company's former ultimate
parent, The Prudential Insurance Company of America, ("The Prudential"),
completed an initial public offering ("IPO") of 100% of the outstanding stock of
the Company. In connection with the IPO, the company incurred a non-recurring
premium charge of $140.0 million ($91.0 million after-tax) for aggregate excess
of loss reinsurance coverage (THE "STOP LOSS AGREEMENT") provided by Gibraltar
Casualty Company ("Gibraltar") an affiliate of the former parent. 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). At the same time, The Prudential paid $140.0 million to the Company, of
which amount $91.0 million was a contribution to capital and $49.0 million was a
payment in respect of the tax benefit of the premium paid for the Stop Loss
Agreement. In addition, the Company incurred $13.3 million ($8.7 million
after-tax) of non-recurring compensation expense, including $12.5 million in
connection with IPO-related stock awards to the Chief Executive Officer. All of
these IPO-related transactions had the effect of reducing cash flow for 1995 by
$0.8 million and increasing stockholders' equity by $3.8 million. The following
table shows the Company's 1995 results of operations as reported in the
accompanying statement of operations and as adjusted to exclude these
IPO-related charges:
IPO
related
As reported charges As adjusted
----------- -------- -----------
Revenues:
Net earned premiums $753,321 $140,000 $ 893,321
Net investment income 166,023 166,023
Other income (loss) (4,315) (4,315)
Net realized capital gains 33,835 33,835
-------- -------- ----------
948,864 140,000 1,088,864
-------- -------- ----------
Claims and expenses:
Incurred losses and loss adjustment expenses 674,696 674,696
Commission and brokerage expenses 226,819 226,819
Other underwriting expenses 60,574 60,574
Compensation related to public offering 13,343 (13,343) --
-------- -------- ----------
975,432 (13,343) 962,089
-------- -------- ----------
INCOME (LOSS)BEFORE TAXES (26,568) 153,343 126,775
Income tax (benefit) (27,315) 53,670 26,355
-------- -------- ----------
NET INCOME $ 747 $ 99,673 $ 100,420
======== ======== ==========
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The following discussion and analysis is focused on a comparison of 1996 results
of operations to 1995 results of operations, as adjusted to exclude the
IPO-related charges.
PREMIUMS. Gross premiums written increased 10.0% to $1,044.0 million in
1996 from $949.5 million in 1995. Factors contributing to this increase
included a 21.8% ($55.0 million) increase in U.S. broker treaty premiums,
principally from increased writings in specialty casualty, workers compensation
and substandard automobile lines, a 21.6% ($26.4 million) increase in
U.S. direct treaty reinsurance and insurance due to the growth in primary
27
insurance written through Everest National, a subsidiary of the Company, and a
28.9% ($19.9 million) increase in U.S. facultative premiums, reflecting growth
in casualty and specialty casualty lines, as the unit completed its first full
year after its major restructuring and took advantage of significant dislocation
in the market. These increases were partially offset by a 3.5% ($5.8 million)
decrease in marine, aviation and surety premiums and a 0.3% ($0.9 million)
decrease in international premiums.
Ceded premiums, as adjusted, decreased by 48.7% to $13.5 million in 1996 from
$26.3 million in 1995, principally as a result of a return premium under the
Company's catastrophe retrocessional protection, partially offset by increases
in common account retrocessions by ceding sources.
Net premiums written, as adjusted, increased by 11.6% to $1,030.5 million in
1996 from $923.2 million in 1995, reflecting the growth in U.S. broker, U.S.
direct treaty reinsurance and insurance and facultative gross written premiums
coupled with decreased retrocessional costs.
REVENUES. Net premiums earned, as adjusted, increased by 9.0% to $973.6 million
in 1996 from $893.3 million in 1995, generally consistent with the change in net
premiums written.
Net investment income increased 15.6% to $191.9 million in 1996 from $166.0
million in 1995, reflecting the effect of investing the $414.0 million of cash
flow from operating activities in 1996. The Company's pre-tax yield on average
cash and invested assets decreased to 5.6% in 1996 from 5.7% in 1995 reflecting
the dilutive effect of new money investment rates.
Net realized capital gains decreased 83.1% to $5.7 million in 1996 from $33.8
million in 1995, principally reflecting the sale in 1995 of one half of the
Company's investment in the common stock of Corporacion MAPFRE S.A. ("MAPFRE"),
an insurance group in Spain. Realized capital gains on the sale of equity
securities totalled $17.4 million, as generally favorable conditions continued
in the U.S. equity securities market, and were partially offset by $11.7 million
in realized capital losses on the sale of fixed maturities.
EXPENSES. Incurred losses and loss adjustment expenses ("LAE") increased by 6.1%
to $716.0 million in 1996 from $674.7 million in 1995. Catastrophe losses on
events with ultimate gross losses estimated at $5.0 million or greater
("CATASTROPHE LOSSES") in 1996 were $7.1 million, which included $10.0 million
estimated for Hurricane Fran and $2.9 million of net favorable development on
prior year occurrences, compared with $31.4 million in 1995, which included
$30.9 million estimated for the Kobe, Japan earthquake and Hurricanes Marilyn
and Opal and $0.5 million of net adverse development on prior year occurrences.
The Company's loss and LAE ratio, as adjusted, decreased by 2.0 percentage
points to 73.5% in 1996 from 75.5% in 1995. This improvement was attributable
principally to the lower catastrophe losses and changes in the Company's
business mix in line with the new underwriting strategy. Net incurred losses and
LAE for 1996 reflected ceded losses and LAE of $206.0 million, including $116.5
million ceded under the Stop Loss Agreement, compared to ceded losses and LAE of
$119.1 million in 1995.
Underwriting expenses, as adjusted, increased by 7.7% to $309.5 million in 1996
from $287.4 million in 1995. Commission and brokerage expenses increased by
$26.1 million attributable primarily to increases in written premium and changes
in the Company's business mix. Other underwriting expenses decreased by $4.0
million, as the impact of the significant reduction in employees over the course
of 1995 and 1996 and other cost reduction initiatives more than offset the
impact of salary and other expense increases that were generally in line with
inflation. The Company's expense ratio, as adjusted, decreased by 0.4 points to
31.8% in 1996 from 32.2% in 1995 as the increase of premiums earned more than
offset the increases in underwriting expenses.
The Company's combined ratio, as adjusted, decreased by 2.4 points to 105.3% in
1996 from 107.7% in 1995, reflecting the lower loss ratio and increased
premiums.
INCOME TAXES. The Company had income tax expense, as adjusted, of $31.8 million
in 1996 compared to $26.4 million in 1995, with the difference substantially
attributable to the improvement in pre-tax income to $143.8 million in 1996 from
$126.8 million in 1995.
NET INCOME. Net income was $112.0 million in 1996 compared to $100.4 million, as
adjusted, in 1995. This improvement mainly reflects higher premiums earned,
higher investment income and a lower combined ratio, offset by lower realized
capital gains and higher income taxes.
28
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The following discussion and analysis is focused on a comparison of 1995 results
of operations, as adjusted to exclude the IPO-related charges, to 1994 results
of operations.
PREMIUMS. Gross premiums written decreased 0.4% to $949.5 million in 1995 from
$953.2 million in 1994. Factors contributing to this decrease included a 12.5%
decrease in U.S. direct treaty reinsurance and insurance, where the non-renewal
of certain larger contracts, because the ceding companies did not agree to
pricing terms that satisfied the Company's revised underwriting guidelines, more
than offset the growth of the primary insurance written through Everest
National, a subsidiary of the Company, and a 1.9% decrease in U.S. broker treaty
premiums resulting from efforts to improve underwriting standards and better
control catastrophe exposures. These decreases were partially offset by growth
in international premiums (which increased by 3.4%), U.S. facultative premiums
(which increased by 3.2%), marine and aviation premiums (which increased by
1.8%) and surety premiums (which increased by 6.0%).
Ceded premiums, as adjusted, decreased by 70.8% to $26.3 million in 1995 from
$90.0 million in 1994 as a result of the lower premiums ceded under the
Company's significantly restructured corporate-level retrocessional protection.
Net premiums written, as adjusted, increased by 6.9% to $923.2 million in 1995
from $863.2 million in 1994, mainly as a result of decreased retrocessional
costs.
REVENUES. Net premiums earned, as adjusted, increased by 4.7% to $893.3 million
in 1995 from $853.3 million in 1994, generally consistent with the change in net
premiums written.
Net investment income increased 15.6% to $166.0 million in 1995 from $143.6
million in 1994, reflecting both the effect of investing the $397.9 million of
cash flow from operating activities, as adjusted, in 1995 and higher yields
earned on the investment portfolio. In the fourth quarter of 1993, the Company
sold $530.4 million in appreciated bonds to realize capital gains sufficient to
offset the impact on statutory surplus of a $30.0 million increase to asbestos
and environmental incurred but not reported ("IBNR") reserves in that year (the
"1993 Bond Sale"). At year-end 1993 and through most of the first quarter of
1994, a significant portion of the proceeds from the 1993 Bond Sale was held in
short-term investments in anticipation of rising interest rates. As a result of
the higher than normal amount of short-term investments in 1994, the Company's
pre-tax yield on average cash and invested assets improved to 5.7% in 1995 from
5.5% in 1994.
Net realized capital gains were $33.8 million in 1995, principally from the sale
of one half of the Company's investment in the common stock of MAPFRE and
generally favorable conditions in the U.S. equity securities market. Net
realized capital losses were $10.5 million in the year ended December 31, 1994
as sales of securities were limited due to the then declining market value of
the Company's fixed maturities.
EXPENSES. Incurred losses and LAE decreased by 6.4% to $674.7 million in 1995
from $720.8 million in 1994. Catastrophe losses in 1995 were $31.4 million,
including $30.9 million estimated for the Kobe, Japan earthquake and Hurricanes
Marilyn and Opal and $0.5 million of net adverse development on prior year
occurrences. These losses compared to the $81.9 million of catastrophe losses in
1994, including $70.9 million estimated for the Northridge earthquake and $11.0
million of net adverse development on prior year occurrences. The Company's loss
and LAE ratio, as adjusted, decreased by 9.0 percentage points to 75.5% in 1995
from 84.5% in 1994. This improvement was attributable principally to the lower
catastrophe losses, the absence of adverse development on net asbestos and
environmental reserves, the lower premiums ceded under the Company's 1995
corporate-level retrocession program and changes in the Company's business mix
in line with the new underwriting strategy. Net incurred losses and LAE for 1995
reflected ceded losses and LAE of $119.1 million, including $23.7 million ceded
under the Stop Loss Agreement, compared to ceded losses and LAE of $119.7
million in 1994.
Underwriting expenses, as adjusted, increased by 8.0% to $287.4 million
in 1995 from $266.2 million in 1994. Commission and brokerage expenses
increased by $29.0 million, which was partly attributable to the $14.5
million of profit commission income in 1994 on the 1994 corporate-level
retrocession program; (the adjustable features of the 1995 corporate-level
retrocession program provide for the return of premiums rather than
profit commissions). The balance was attributable primarily to changes
in the Company's business mix. Other underwriting expenses decreased by
$7.7 million, as the impact of the significant reduction in employees
over the course of 1994 and 1995 more than offset the impact of salary and
other expense increases that were generally in line with inflation. The
29
Company's expense ratio, as adjusted, increased to 32.2% in 1995 from 31.2% in
1994 as the reduction of other underwriting expenses was more than offset by the
increase in commission and brokerage expenses.
The Company's combined ratio, as adjusted, decreased to 107.7% in 1995 from
115.7% in 1994, largely attributable to lower catastrophe losses and lower ceded
premiums.
INCOME TAXES. The Company had income tax expense, as adjusted, of $26.4 million
in 1995 compared to an income tax benefit of $22.6 million in 1994, with the
difference substantially attributable to the improvement in pre-tax income, as
adjusted, to $126.8 million in 1995 from a $12.0 million pre-tax loss in 1994.
NET INCOME. Net income, as adjusted, was $100.4 million in 1995 compared to
$10.7 million in 1994. This improvement mainly reflected lower catastrophe
losses, the absence of adverse development on net asbestos and environmental
reserves, lower premiums ceded under the 1995 corporate-level retrocession
program, higher investment income, lower operating expenses and realized capital
gains.
FINANCIAL CONDITION
CASH AND INVESTED ASSETS. Aggregate invested assets, including cash and
short-term investments, were $3,624.6 million at December 31, 1996, $3,238.3
million at December 31, 1995 and $2,573.2 million at December 31, 1994. The
change in invested assets resulted primarily from cash flows from operations
generated during the period together with net realized and unrealized gains
(losses) on investments.
LOSS AND LAE RESERVES
GENERAL. Gross loss and LAE reserves totaled $3,246.9 million at December 31,
1996, $2,969.3 million at December 31, 1995 and $2,706.4 million at December 31,
1994. These increases were consistent with the continued growth in the Company's
book of business and, in 1994, adverse development of gross loss reserves
principally related to asbestos and environmental exposures, most of which was
ceded. In addition, the steady decline in paid losses that the Company has
experienced since 1992 continued with paid losses in 1996 $31.2 million lower
than in 1995, which were $108.8 million lower than in 1994.
Everest Re maintains reserves to cover its estimated ultimate liability for
losses and LAE with respect to reported and unreported claims. Because reserves
are estimates of ultimate losses and LAE, management monitors reserve adequacy
over time, evaluating new information as it becomes known and adjusting
reserves, as necessary. Management considers many factors when setting reserves,
including: (i) current legal interpretations of coverage and liability; (ii)
economic conditions; (iii) internal methodologies which analyze Everest Re's
experience with similar cases, information from ceding companies and historical
trends, such as reserving patterns, loss payments, pending levels of unpaid
claims and product mix; and (iv) the uncertainties discussed below regarding
reserve requirements for asbestos and environmental claims. Based on these
considerations, management believes that adequate provision has been made for
Everest Re's loss and LAE reserves, which were $3,246.9 million as of December
31, 1996. Actual losses and LAE paid may deviate, perhaps substantially, from
such reserves.
ASBESTOS AND ENVIRONMENTAL EXPOSURES. Everest Re's asbestos claims typically
involve liability or potential liability for bodily injury from exposure
to asbestos or liability for property damage resulting from asbestos or
asbestos containing materials. Everest Re's environmental claims typically
involve potential liability for the mitigation or remediation of
environmental contamination or bodily injury or property damages caused
by the release of hazardous substances into the land, air or water. In
addition to the previously described general uncertainties inherent in
estimating reserves, there are significant uncertainties in estimating the
amount of Everest Re's potential losses from asbestos and environmental
claims. Among the complications are: (i) potentially long waiting periods
between exposure and manifestation of any bodily injury or property damage;
(ii) difficulty in identifying sources of asbestos or environmental
contamination; (iii) difficulty in properly allocating responsibility and/or
liability for asbestos or environmental damage; (iv) changes in underlying
laws and judicial interpretation of those laws; (v) potential for an
asbestos or environmental claim to involve many insurance providers over many
policy periods ; (vi) long reporting delays, both from insureds to insurance
companies and ceding companies to reinsurers; (vii) limited historical data
concerning asbestos and environmental losses; (viii) questions concerning
interpretation and application of insurance and reinsurance coverage; and
(ix) uncertainty regarding the number and identity of insureds with potential
asbestos or environmental exposure. Management believes that these issues
30
are not likely to be resolved in the near future. Everest Re establishes
reserves to the extent that, in the judgment of management, the facts and
prevailing law reflect an exposure for Everest Re or its ceding company. Due to
the uncertainties discussed above, the ultimate losses may vary materially from
current loss reserves and, if coverage under the Stop Loss Agreement were
exhausted, could have a material adverse effect on the Company's future
financial condition, results of operations and cash flows.
The table below summarizes reserves and claim activity for asbestos and
environmental claims, on both a gross and net of ceded reinsurance basis, for
the periods indicated:
Asbestos and
Environmental Reserves
Years Ended December 31,
--------------------------------
1996 1995 1994
------ ------ ------
(Dollars in millions)
Gross Basis:
Beginning of period reserves $428.5 $445.5 $421.5
------ ------ ------
Incurred losses and LAE:
Reported losses 36.7 31.9 52.8
Change in IBNR (6.7) (14.6) 74.3
------ ------ ------
Total 30.0 17.3 127.1
Paid losses (35.2) (34.3) (103.1)
------ ------ ------
End of period reserves $423.3 $428.5 $445.5
====== ====== ======
Net Basis:
Beginning of period reserves $197.7 $203.7 $214.6
------ ------ ------
Incurred losses and LAE:
Reported losses (4.4) 5.5 29.5
Change in IBNR 4.4 (5.5) 11.0
------ ------ ------
Total (1) 0.0 0.0 40.5
Paid losses (1) 3.3 (6.0) (51.4)
------ ------ ------
End of period reserves $201.0 $197.7 $203.7
====== ====== ======
- - ----------
(1) Net of $24,196 in 1996 and $16,687 in 1995 ceded under the incurred loss
reimbursement feature of the Stop Loss Agreement.
The $222.3 million of reinsurance receivables as of December 31, 1996 was
attributable principally to two retrocessional arrangements: (i) $116.4 million
was due from various insurance and reinsurance companies, including Gibraltar,
in connection with their participation in Everest Re's management underwriting
facility ("MUF"), a reinsurance arrangement begun in 1977 pursuant to which
Everest Re ceded certain reinsurance and direct excess insurance business; and
(ii) $105.9 million was due as a result of the Company's former direct excess
insurance operations, which ceased writing business in 1985 and which has been
100% ceded to Gibraltar since 1986. Paid losses for 1994 reflects the settlement
of all asbestos-related claims from one ceding company, which management
believes represents a settlement of Everest Re's largest asbestos-related
exposure to any one ceding company.
STOP LOSS AGREEMENT AND PRUDENTIAL GUARANTEES. To the extent reserves
as of June 30, 1995 (December 31, 1994 for catastrophe losses) for losses,
allocated LAE and uncollectible reinsurance experience adverse development
("Adverse Development"), Everest Re is entitled, at the time reserves
are increased, to payments under the Stop Loss Agreement, subject to
the limit and other terms thereof. Gibraltar's obligations to make
payments to Everest Re under the Stop Loss Agreement are guaranteed by The
Prudential. Management expects that the general effect of the Stop Loss
Agreement will be to protect the Company's consolidated earnings against
up to $375.0 million of the first $400.0 million of Adverse Development.
There can be no assurance, however, that the Company's net liability
for such Adverse Development will be limited to $25.0 million. With respect
to liquidity, the incurred loss reimbursement features of these agreements
provide the Company with cash on or prior to the time it is required to
31
make payment on account of such Adverse Development. Through December 31, 1996,
cessions under the Stop Loss Agreement have aggregated $140.2 million.
STOCKHOLDER'S EQUITY. Holdings' stockholder's equity increased to $1,086.0
million as of December 31, 1996 from $983.6 million as of December 31, 1995
principally reflecting $106.0 million in retained earnings for the year.
Stockholder's equity as of December 31, 1995 increased to $983.6 million from
$741.0 million as of December 31, 1994, principally reflecting the addition to
paid in capital that offset the impact of non-recurring IPO related charges and
an increase of $141.9 million in unrealized appreciation (depreciation) on
investments, net of deferred taxes. Dividends of $6.1 million, $7.0 million and
$7.5 million were declared and paid by Holdings in 1996, 1995 and 1994,
respectively.
Holdings' stockholder's equity exceeded Everest Re's statutory-basis surplus by
$313.3 million at December 31, 1996. The primary differences between GAAP and
SAP as they relate to the Company are: (i) the deferral of acquisition costs
under GAAP, which are immediately expensed under SAP; (ii) the provision for
deferred taxes on temporary tax differences under GAAP, which are excluded under
SAP; and (iii) the carrying at market value of fixed maturities available for
sale under GAAP, as compared to at amortized cost under SAP.
LIQUIDITY AND CAPITAL RESOURCES
EVEREST RE. Everest Re's liquidity requirements are met on both a short- and
long-term basis by funds provided by premiums collected, investment income and
collected reinsurance receivables balances, and from the sale and maturity of
investments. Everest Re's net cash flows from operating activities were $414.0
million, $397.9 million, as adjusted, and $192.9 million in 1996, 1995 and 1994,
respectively. The increases over 1994 in cash provided by operating activities
were principally a result of decreases in net paid losses, including recoveries
under the Stop Loss Agreement, and improved profitability. Recoveries under the
Company's Stop Loss Agreement with Gibraltar contributed $53.4 million and $12.0
million of such net cash flows in 1996 and 1995, respectively.
Proceeds and applications from sales and acquisitions of investment assets were
$1,632.9 million and $2,034.8 million, respectively, in 1996, compared to
$1,113.4 million and $1,494.7 million, respectively, in 1995 and $1,362.5
million and $1,572.7 million, respectively, in 1994. Everest Re'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.
EXPOSURE TO CATASTROPHES. As with other reinsurers, Everest Re's operating
results and financial condition can be adversely affected by volatile and
unpredictable natural and other disasters, such as hurricanes, windstorms,
earthquakes, floods, fires and explosions. Although Everest Re attempts to limit
its exposure to acceptable levels, it is possible that an actual catastrophic
event or multiple catastrophic events could have a material adverse effect on
the financial condition, results of operations and cash flows of the Company.
The Company maintains a corporate-level retrocessional protection program, above
and beyond retrocessions purchased with respect to specific assumed coverages,
to mitigate the potential impact of catastrophe losses. At December 31, the
attachment point of this program was $25.0 million per catastrophe in the U.S.
and $10.0 million per catastrophe outside the U.S. No losses were ceded under
the corporate-level retrocession program during 1996 or 1995. All aspects of the
retrocession program have been structured to permit the program to be accounted
for as reinsurance under SFAS No. 113.
HOLDINGS. Holdings is a holding company whose only material asset is the capital
stock of Everest Re. Holdings' cash flow will consist primarily of dividends and
other permissible payments from Everest Re. Holdings depends upon such payments
for funds for general corporate purposes and for the payment of any dividends on
its common stock. Holdings expects to finalize a $50.0 million bank line of
credit as a means of expanding the liquidity options of the Company's operating
subsidiaries.
The payment of dividends to Holdings by Everest Re is subject to limitations
imposed by the Delaware Code. Based upon these restrictions, the
maximum amount that will be available for payment of dividends to
Holdings by Everest Re in 1997 without the prior approval of regulatory
authorities is $84.4 million. Everest Re's future cash flow available
to Holdings may be influenced by a variety of factors, including cyclical
changes in the property and casualty reinsurance market, Everest Re's
financial results, insurance regulatory changes and changes in general
32
economic conditions. The availability of such cash flow to Holdings could also
be influenced by, among other things, changes in the limitations imposed by the
Delaware Code on the payment of dividends by Everest Re. Holdings expects that,
absent significant catastrophe losses, such restrictions should not affect
Everest Re's ability to declare and pay dividends sufficient to support
Holdings' current dividend policy.
During 1996 and 1995, Holdings declared and paid dividends of $6.1 million and
$7.0 million, respectively.
On March 21, 1996 the Holdings' Board of Directors approved a stock repurchase
plan authorizing the repurchase of an aggregate amount of 2.5 million shares of
common stock from time to time in open market transactions. To date, no shares
have been repurchased pursuant to this plan.
TAX CONSOLIDATION WITH THE PRUDENTIAL
The Internal Revenue Service ("IRS") has completed its examinations of The
Prudential's tax returns for all years through 1992. As those examinations
relate to Everest Re, the IRS has disallowed that portion of the fresh start
benefit which relates to 1986 reserve strengthening as defined by the IRS.
Consistent with case law favorable to taxpayers on the issue, the Company
believes that, because there were no changes in reserving assumptions or
methodologies between 1985 and 1986, all increases to reserves in 1986 for which
a fresh start benefit was taken are normal reserve additions and, therefore,
pursuant to the case law, does not constitute reserve strengthening that is not
eligible for the fresh start benefit. If the IRS position prevails, the Company
will be required to reimburse The Prudential, thereby incurring an additional
charge of approximately $8.8 million, including the after-tax cost of interest
through December 31, 1996.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and schedules listed in the accompanying Index to
Financial Statements and Schedules on page F-1 are filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 9, 1996, the Company filed a Form 8-K with the Securities and Exchange
Commission reporting that Coopers & Lybrand L.L.P. replaced Deloitte & Touche
LLP on August 6, 1996 as the Company's independent accountants.
During the Company's two most recent fiscal years, there were no disagreements
with Deloitte & Touche LLP on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Deloitte & Touche LLP,
would have caused them to make reference to the subject matter of the
disagreement in their reports. Also, there were no reportable events of the
nature described in Regulation S-K Item 304(a)(1)(v) during the Company's two
most recent fiscal years.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to "Election of Directors", "Information Concerning Nominees"
and "Information Concerning Continuing Directors and Executive Officers" in the
Company's proxy statement for the 1997 Annual Meeting of Stockholders, which
will be filed with the Commission within 120 days of the close of the Company's
fiscal year ended December 31, 1996 (the "Proxy Statement"), and which are
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to "Directors' Compensation" and "Compensation of Executive
Officers" in the Proxy Statement, which is incorporated herein by reference,
except that the Compensation Committee Report and the Performance Graph are not
so incorporated.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Reference is made to "Common Stock Ownership by Directors and Executive
Officers" and "Principal Holders of Common Stock" in the Proxy Statement, which
are incorporated herein by reference.
33
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to "Certain Transactions with Directors" in the Proxy
Statement, which is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
FINANCIAL STATEMENTS AND SCHEDULES
The financial statements and schedules listed in the accompanying Index to
Financial Statements and Schedules on page F-1 are filed as part of this report.
EXHIBITS
The exhibits listed on the accompanying Index to Exhibits on page E-1 are filed
as part of this report.
REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the last quarter of 1996.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on March 20, 1997.
EVEREST REINSURANCE HOLDINGS, INC.
By: /s/ JOSEPH V. TARANTO
----------------------------------------
JOSEPH V. TARANTO
(CHAIRMAN AND CHIEF EXECUTIVE OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/s/ JOSEPH V. TARANTO Chairman and Chief Executive March 20, 1997
- - --------------------------------- Officer and Director
JOSEPH V. TARANTO
/s/ ROBERT P. JACOBSON Chief Financial Officer and March 20, 1997
- - --------------------------------- Comptroller and Director
ROBERT P. JACOBSON
/s/ MARTIN ABRAHAMS Director March 20, 1997
- - ---------------------------------
MARTIN ABRAHAMS
/s/ KENNETH J. DUFFY Director March 20, 1997
- - ---------------------------------
KENNETH J. DUFFY
/s/ JOHN R. DUNNE Director March 20, 1997
- - ---------------------------------
JOHN R. DUNNE
/s/ THOMAS J. GALLAGHER Director March 20, 1997
- - ---------------------------------
THOMAS J. GALLAGHER
/s/ WILLIAM F. GALTNEY, JR. Director March 20, 1997
- - ---------------------------------
WILLIAM F. GALTNEY, JR.
/s/ ROBERT A. MULDERIG Director March 20, 1997
- - ---------------------------------
ROBERT A. MULDERIG
35
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
PAGES
-----
EVEREST REINSURANCE HOLDINGS, INC.
Reports of Independent Auditors on Financial Statements and Schedules... F-2
Consolidated Balance Sheets at December 31, 1996 and 1995............... F-4
Consolidated Statements of Operations for the years ended December 31,
1996, 1995 and 1994................................................... F-5
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1996, 1995 and 1994.......................... F-6
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994................................................... F-7
Notes to Consolidated Financial Statements.............................. F-8
SCHEDULES
I Summary of Investments Other Than Investments in Related Parties at
December 31, 1996................................................. S-1
II Condensed Financial Information of Registrant:
Balance Sheets as of December 31, 1996 and 1995................. S-2
Statements of Operations for the Years Ended December 31, 1996,
1995 and 1994................................................. S-3
Statements of Cash Flows for the Years Ended December 31, 1996,
1995 and 1994................................................. S-4
III Supplementary Insurance Information as of December 31, 1996 and 1995
and for the years ended December 31, 1996, 1995 and 1994.......... S-5
IV Reinsurance for the years ended December 31, 1996, 1995 and 1994.... S-6
Schedules other than those listed above are omitted for the reason that they are
not applicable or the information is otherwise contained in the Financial
Statements.
F-1
INDEPENDENT AUDITOR'S REPORT
The Stockholders and Board of Directors
Everest Reinsurance Holdings, Inc.
We have audited the accompanying consolidated financial statements and the
financial statement schedules of Everest Reinsurance Holdings, Inc. and
subsidiaries ("the Company") as of December 31, 1996 and for the year then
ended, as listed in the accompanying index on page F-1. These consolidated
financial statements and financial statement schedules are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our
audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Everest
Reinsurance Holdings, Inc. and subsidiaries as of December 31, 1996, and the
results of their operations and their cash flows for the year ended December 31,
1996, in conformity with generally accepted accounting principles. In addition,
in our opinion, the financial statement schedules referred to above, when
considered in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
New York, New York
February 13, 1997
F-2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Everest Reinsurance Holdings, Inc. (formerly
Prudential Reinsurance Holdings, Inc.)
Newark, New Jersey
We have audited the accompanying consolidated balance sheet of Everest
Reinsurance Holdings, Inc. and subsidiaries as of December 31, 1995 and the
related consolidated statements of income, stockholders' equity, and cash flows
for the years ended December 31, 1995 and 1994. Our audits also included the
financial statement schedules listed in the Index at Item 8 for the years then
ended. These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Everest Reinsurance Holdings, Inc.
and subsidiaries as of December 31, 1995, and the results of their operations
and their cash flows for the years ended December 31, 1995 and 1994 in
conformity with generally accepted accounting principles. Also, in our opinion,
such financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 23, 1996
F-3
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
- - -------------------------------------------------------------------------------------
As of December 31, (Dollars in thousands, except par value per share)
1996 1995
ASSETS: ---------- ----------
Fixed maturities - held to maturity, at amortized cost
(market value: 1996, $88,374; 1995, $100,043) $ 80,522 $ 87,903
Fixed maturities- available for sale, at market value
(amortized cost: 1996, $3,194,246; 1995, $2,783,903) 3,281,972 2,886,070
Equity securities, at market value (cost: 1996, $115,367;
1995, $105,176) 147,280 131,192
Short-term investments 49,486 76,649
Other invested assets 12,750 5,566
Cash 52,595 50,912
---------- ----------
Total investments and cash 3,624,605 3,238,292
Accrued investment income 50,211 48,423
Premiums receivable 218,087 265,205
Reinsurance receivables 749,062 712,002
Funds held by reinsureds 173,386 171,384
Deferred acquisition costs 84,123 80,019
Prepaid reinsurance premiums 5,265 2,334
Deferred tax asset 124,664 112,599
Other assets 9,949 17,504
---------- ----------
TOTAL ASSETS $5,039,352 $4,647,762
========== ==========
LIABILITIES:
Reserve for losses and adjustment expenses $3,246,858 $2,969,341
Unearned premium reserve 355,908 294,291
Funds held under reinsurance treaties 177,921 195,864
Losses in the course of payment 24,343 44,853
Contingent commissions 83,279 66,725
Other net payable to reinsurers 8,779 9,203
Current federal income taxes 25,879 20,843
Other liabilities 30,362 63,048
---------- ----------
Total liabilities 3,953,329 3,664,168
---------- ----------
Commitments and contingencies (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock, par value: $0.01; 50 million shares
authorized; no shares issued and outstanding -- --
Common stock, par value: $0.01; 200 million shares
authorized; 50.8 million shares issued 508 508
Paid-in capital 389,196 387,349
Unearned compensation (374) (692)
Net unrealized appreciation (depreciation) of investments,
net of deferred income taxes 77,766 83,726
Cumulative foreign currency translation adjustment, net of
deferred income taxes (354) (7,838)
Retained earnings 626,501 520,541
Treasury stock, at cost; 0.3 million shares in 1996 (7,220) --
---------- ----------
Total stockholders' equity 1,086,023 983,594
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,039,352 $4,647,762
========== ==========
The accompanying notes are an integral part of the consolidated financial statements.
F-4
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
- - ----------------------------------------------------------------------------------
Years Ended December 31, (Dollars in thousands, except per share amounts)
1996 1995 1994
---------- -------- --------
REVENUES:
Premiums earned:
Before stop loss premium $ 973,611 $893,321 $853,346
Stop loss premium -- 140,000 --
---------- -------- --------
Net premiums earned 973,611 753,321 853,346
Net investment income 191,901 166,023 143,609
Net realized capital gain/(loss) 5,695 33,835 (10,499)
Other income/(loss) (1,867) (4,315) (3,654)
---------- -------- --------
1,169,340 948,864 982,802
---------- -------- --------
CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses 716,033 674,696 720,800
Commission and brokerage expenses 252,928 226,819 197,859
Other underwriting expenses 56,540 60,574 68,292
Compensation related to public offering -- 13,343 --
Restructuring and early retirement costs -- -- 7,833
---------- -------- --------
1,025,501 975,432 994,784
---------- -------- --------
INCOME (LOSS) BEFORE TAXES 143,839 (26,568) (11,982)
Income tax (benefit) 31,812 (27,315) (22,644)
---------- -------- --------
NET INCOME $ 112,027 $ 747 $ 10,662
========== ======== ========
PER SHARE DATA:
Weighted average shares outstanding (000's) 50,567 50,189 50,000
Net income per share $ 2.22 $ 0.01 $ 0.21
========== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
F-5
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES
IN STOCKHOLDERS' EQUITY
- - -----------------------------------------------------------------------------------------
Years Ended December 31, (Dollars in thousands, except per share amounts)
1996 1995 1994
----------- ----------- -----------
COMMON STOCK (SHARES OUTSTANDING):
Balance, beginning of period 50,792,869 50,000,000 50,000,000
Issued during the period 3,800 792,869 --
Treasury stock acquired during period (306,396) -- --
----------- ----------- -----------
Balance, end of period 50,490,273 50,792,869 50,000,000
=========== =========== ===========
COMMON STOCK (PAR VALUE):
Balance, beginning of period $ 508 $ 500 $ 500
Issued during the period -- 8 --
----------- ----------- -----------
Balance, end of period 508 508 500
----------- ----------- -----------
ADDITIONAL PAID IN CAPITAL:
Balance, beginning of period 387,349 283,076 281,467
Contributions during the period 1,783 91,000 1,609
Common stock issued during the period 64 13,273 --
----------- ----------- -----------
Balance, end of period 389,196 387,349 283,076
----------- ----------- -----------
UNEARNED COMPENSATION:
Balance, beginning of period (692) -- --
Net increase (decrease) during the period 318 (692) --
----------- ----------- -----------
Balance, end of period (374) (692) --
----------- ----------- -----------
NET UNREALIZED APPRECIATION(DEPRECIATION) OF
INVESTMENTS, NET OF DEFERRED INCOME TAXES:
Balance, beginning of period 83,726 (58,172) 80,768
Net increase (decrease) during the period (5,960) 141,898 (138,940)
----------- ----------- -----------
Balance, end of period 77,766 83,726 (58,172)
----------- ----------- -----------
CUMULATIVE TRANSLATION ADJUSTMENTS, NET OF
DEFERRED INCOME TAXES:
Balance, beginning of period (7,838) (11,255) (11,034)
Net increase (decrease) during the period 7,484 3,417 (221)
----------- ----------- -----------
Balance, end of period (354) (7,838) (11,255)
----------- ----------- -----------
RETAINED EARNINGS:
Balance, beginning of period 520,541 526,818 523,656
Net income (loss) 112,027 747 10,662
Dividends declared ( $0.12 per share in 1996,
$0.14 per share in 1995 and $0.15 per share
in 1994) (6,067) (7,024) (7,500)
----------- ----------- -----------
Balance, end of period 626,501 520,541 526,818
----------- ----------- -----------
TREASURY STOCK AT COST:
Balance, beginning of period -- -- --
Treasury stock acquired during period (7,220) -- --
----------- ----------- -----------
Balance, end of period (7,220) -- --
----------- ----------- -----------
TOTAL STOCKHOLDERS' EQUITY, END OF PERIOD $ 1,086,023 $ 983,594 $ 740,967
=========== =========== ===========
The accompanying notes are an integral part of the consolidated financial statements.
F-6
EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- - --------------------------------------------------------------------------------------------------------------
Years Ended December 31, (Dollars in thousands)
1996 1995 1994
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 112,027 $ 747 $ 10,662
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
(Increase) decrease in premiums receivable 46,700 24,986 (526)
(Increase) decrease in funds held by reinsureds, net (21,606) 31,511 62,217
(Increase) in reinsurance receivables (37,084) (20,656) (22,761)
(Increase) in deferred tax asset (13,065) (8,143) (15,536)
Increase in reserve for losses and loss adjustment expenses 281,590 248,789 154,552
Increase in unearned premiums 60,293 30,268 11,288
(Increase) decrease in other assets and liabilities (9,479) 16,343 (26,087)
Non cash compensation expense 318 12,589 --
Accrual of bond discount/amortization of bond premium (46) 4,264 8,555
Realized capital (gains) losses (5,695) (33,835) 10,499
----------- ----------- -----------
Net cash provided by operating activities 413,953 306,863 192,863
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES :
Proceeds from fixed maturities matured/called - held to maturity 20,582 30,961 5,934
Proceeds from fixed maturities matured/called - available for sale 143,114 145,543 69,394
Proceeds from fixed maturities sold - available for sale 1,281,882 699,869 970,050
Proceeds from equity securities sold 160,429 164,723 64,038
Proceeds from other invested assets sold -- -- 3,811
Cost of fixed maturities acquired - held to maturity (17,378) (10) (850)
Cost of fixed maturities acquired - available for sale (1,836,274) (1,370,981) (1,506,358)
Cost of equity securities acquired (150,861) (121,569) (56,859)
Cost of other invested assets acquired (7,184) (2,133) (1,837)
Net sales of short-term securities 26,890 58,408 241,804
Net increase (decrease) in unsettled securities transactions (3,166) 1,526 (6,746)
Net increase (decrease) in collateral for loaned securities (19,897) 12,372 7,377
----------- ----------- -----------
Net cash provided by (used in) investing activities (401,863) (381,291) (210,242)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury stock (7,220) -- --
Contributions during the period 1,847 91,000 --
Dividends paid to stockholders (6,067) (7,024) (7,500)
----------- ----------- -----------
Net cash used in financing activities (11,440) 83,976 (7,500)
----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH: 1,033 (3,044) 4,594
----------- ----------- -----------
Net increase (decrease) in cash 1,683 6,504 (20,285)
Cash, beginning of period 50,912 44,408 64,693
----------- ----------- -----------
Cash, end of period $ 52,595 $ 50,912 $ 44,408
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash transactions:
Income taxes paid (received), net $ 38,055 $ (50,944) $ 8,153
NON-CASH FINANCING TRANSACTION:
Issuance of common stock in connection with public offering $ 318 $ 12,589 $ --
The accompanying notes are an integral part of the consolidated financial statements.
F-7
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
Years Ended December 31, 1996, 1995 and 1994
For purposes of footnote presentation, all dollar values, except per share
amounts where otherwise indicated, are presented in thousands.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. BUSINESS AND BASIS OF PRESENTATION
Everest Reinsurance Holdings, Inc. ("Holdings") (formerly known as Prudential
Reinsurance Holdings, Inc.), is a holding company incorporated in the state of
Delaware. Prior to an initial public offering ("IPO") of all 50 million shares
outstanding on October 6, 1995, Holdings was a direct wholly owned subsidiary of
PRUCO, Inc. ("PRUCO"), which is wholly owned by The Prudential Insurance Company
of America ("The Prudential"). The stock of Everest Reinsurance Company
("Everest Re") (formerly known as Prudential Reinsurance Company) was
contributed by PRUCO to Holdings effective December 31, 1993. The contribution
has been accounted for at historical cost in a manner similar to the pooling of
interest method of accounting as the entities were under common control. Everest
Re's principal business is reinsuring property and casualty risks of domestic
and foreign insurance companies under excess and pro rata reinsurance contracts.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities (and disclosure of
contingent assets and liabilities) at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The consolidated financial statements include the domestic and foreign
subsidiaries of Everest Re: Everest National Insurance Company ("Everest
National") (formerly known as Prudential National Insurance Company), Everest
Reinsurance Ltd. ("Everest Re Ltd.") (formerly known as Le Rocher Reinsurance
Ltd.) and Everest Insurance Company of Canada ("Everest Canada") (formerly known
as OTIP/RAEO Insurance Company, Inc.), which was acquired from The Prudential
for $3,700 on December 31, 1996. The acquisition of Everest Canada has been
accounted for by the purchase method. Had this acquisition occurred at the
beginning of either 1995 or 1996, there would have been no material effect on
the Company's results of operations. All material intercompany balances and
transactions have been eliminated in consolidation.
Certain reclassifications have been made to the 1994 and 1995 financial
statements to conform to the 1996 presentation.
B. INVESTMENTS
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
requires that a company segment its fixed maturity investment portfolio between
held to maturity (carried at amortized cost), available for sale (carried at
market value, with unrealized appreciation or depreciation, net of applicable
deferred income taxes, reflected as a separate component of stockholder's
equity) and trading (carried at market value with unrealized appreciation or
depreciation reflected in income). Investments that are available for sale are
expected to be held for an indefinite period but may be sold depending on tax
position, interest rates and other considerations. Short-term investments are
stated at cost, which approximates market value. Equity securities are carried
at market value with unrealized appreciation or depreciation of equity
securities, net of applicable deferred income tax, credited or charged directly
to stockholder's equity. Realized gains or losses on sale of investments are
determined on the basis of identified cost. With respect to securities which are
not publicly traded, market value has been determined based on pricing models.
For publicly traded securities, market value is based on quoted market prices.
Cash includes cash and bank time deposits with original maturities of ninety
days or under.
C. UNCOLLECTIBLE REINSURANCE RECOVERABLE BALANCES
The Company provides reserves for uncollectible reinsurance balances based on
management's assessment of the collectibility of the outstanding balances. Such
reserves were $14,267 and $14,267 at December 31, 1996 and December 31, 1995,
respectively. See also Note 5.
F-8
D. DEFERRED ACQUISITION COSTS
Acquisition costs, consisting principally of commissions and brokerage expenses
incurred at the time a contract or policy is issued, are deferred and amortized
over the period in which the related premiums are earned, generally one year.
Deferred policy acquisition costs are limited to their estimated realizable
value based on the related unearned premiums, anticipated claims and claim
expenses and anticipated investment income. Deferred acquisition costs amortized
to income were $252,812, $224,340 and $201,200 in 1996, 1995 and 1994,
respectively.
E. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVE
The reserve for unpaid losses and loss adjustment expenses is based on
individual case estimates and reports received from ceding companies. A
provision is included for losses and loss adjustment expenses incurred but not
reported ("IBNR") based on past experience. A provision is also included for
certain potential liabilities relating to asbestos and environmental exposures,
which liabilities cannot be estimated with traditional reserving techniques. The
reserves are reviewed continually and any changes in estimates are reflected in
earnings in the period the adjustment is made. Management believes that adequate
provision has been made for the Company's loss and loss adjustment expenses.
Accruals for contingent commission liabilities are estimated based on carried
loss and loss adjustment expense reserves.
F. PREMIUM REVENUES
Premiums written are earned ratably over the periods of the related insurance
and reinsurance contracts or policies. Unearned premium reserves are established
to cover the remainder of the unexpired contract period. Such reserves are
established based upon reports received from ceding companies or computed using
pro rata methods based on statistical data. Written and earned premiums, and the
related costs, which have not yet been reported to the Company are estimated and
accrued. Premiums are net of retrocessions (ceded reinsurance).
G. INCOME TAXES
Prior to the IPO, the Company was a member of a group of affiliated companies
which joined in filing a consolidated federal tax return. Current tax
liabilities were determined for individual companies based upon their separate
return basis taxable income. Members with taxable income incurred an amount in
lieu of the separate return basis federal tax. Members with a loss for tax
purposes recognized a current benefit in proportion to the amount of their
losses utilized in computing consolidated taxable income. Since the IPO, the
Company and its subsidiaries file their own federal tax returns and calculate
their current tax provisions accordingly. Deferred income taxes have been
recorded to recognize the tax effect of temporary differences between the
financial reporting and income tax bases of assets and liabilities.
H. FOREIGN CURRENCY TRANSLATION
Assets and liabilities relating to foreign operations are translated into U.S.
dollars at the exchange rates in effect at the balance sheet date; revenues and
expenses are translated into U.S. dollars using average exchange rates. Gains
and losses resulting from translating foreign currency financial statements, net
of deferred income taxes, are excluded from income and accumulated in
stockholder's equity.
I. EARNINGS PER SHARE
Earnings per common share are based on the weighted average number of common
shares outstanding during the relevant period and, if dilutive, shares issuable
under stock option plans.
F-9
2. INVESTMENTS
The amortized cost, market value, and gross unrealized appreciation and
depreciation of fixed maturity investments are presented in the tables below:
Amortized Unrealized Unrealized Market
Cost Appreciation Depreciation Value
---------- ------------ ------------ ----------
As of December 31, 1996:
Fixed maturities - held to maturity
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 30,182 $ 307 $ 54 $ 30,435
Obligations of states and
political subdivisions 50,340 7,824 225 57,939
---------- ---------- ---------- ----------
TOTAL $ 80,522 $ 8,131 $ 279 $ 88,374
========== ========== ========== ==========
Fixed maturities - available for sale
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 162,406 $ 909 $ 1,361 $ 161,954
Obligations of states and
political subdivisions 1,259,544 48,277 733 1,307,088
Corporate securities 739,997 11,440 315 751,122
Mortgage-backed securities 487,145 7,692 2,007 492,830
Foreign debt securities 545,154 24,660 836 568,978
---------- ---------- ---------- ----------
TOTAL $3,194,246 $ 92,978 $ 5,252 $3,281,972
========== ========== ========== ==========
As of December 31, 1995:
Fixed maturities - held to maturity
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 29,238 $ 686 $ 129 $ 29,795
Obligations of states and
political subdivisions 58,665 11,668 85 70,248
---------- ---------- ---------- ----------
TOTAL $ 87,903 $ 12,354 $ 214 $ 100,043
========== ========== ========== ==========
Fixed maturities - available for sale
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 72,495 $ 1,678 $ 224 $ 73,949
Obligations of states and
political subdivisions 1,126,694 53,390 316 1,179,768
Corporate securities 773,446 24,986 703 797,729
Mortgage-backed securities 355,725 9,911 475 365,161
Foreign debt securities 455,543 17,673 3,753 469,463
---------- ---------- ---------- ----------
TOTAL $2,783,903 $ 107,638 $ 5,471 $2,886,070
========== ========== ========== ==========
F-10
The amortized cost and market value of fixed maturities are shown in the
following table by contractual maturity. Actual maturities may differ from
contractual maturities because securities may be called or prepaid with or
without call or prepayment penalties.
December 31, 1996
-------------------------
Amortized Market
Cost Value
---------- ----------
Fixed maturities - held to maturity
Due in one year or less $ 10,657 $ 11,042
Due after one year through five years 26,793 26,980
Due after five years through ten years 7,243 7,096
Due after ten years 35,829 43,256
---------- ----------
TOTAL $ 80,522 $ 88,374
========== ==========
Fixed maturities - available for sale
Due in one year or less $ 74,025 $ 75,699
Due after one year through five years 644,792 655,055
Due after five years through ten years 930,000 963,056
Due after ten years 1,058,284 1,095,332
Mortgage-backed securities 487,145 492,830
---------- ----------
TOTAL $3,194,246 $3,281,972
========== ==========
Proceeds from sales of fixed maturity investments during 1996, 1995 and 1994
were $1,281,882, $699,869 and $970,050, respectively. Gross gains of $9,146,
$7,058 and $5,482, and gross losses of $20,952, $12,058 and $26,692 were
realized on those sales during 1996, 1995 and 1994, respectively.
The cost, market value and gross unrealized appreciation and depreciation of
investments in equity securities is presented in the table below:
December 31,
--------------------------
1996 1995
-------- --------
Cost $115,367 $105,176
Unrealized appreciation 33,015 30,033
Unrealized depreciation 1,102 4,017
-------- --------
Market Value $147,280 $131,192
======== ========
The changes in net unrealized gains (losses) of investments of the Company
(including unrealized gains and losses on fixed maturities not reflected in
stockholders' equity) are derived from the following sources:
Years Ended December 31,
------------------------------------
1996 1995 1994
--------- --------- ----------
Increase (decrease) during the period
between the market value and cost of
investments carried at market value,
and deferred tax thereon:
Equity securities $ 5,897 $ (8,153) $ (24,843)
Fixed maturities (14,440) 226,459 (188,507)
Other invested assets -- -- (404)
Deferred taxes 2,583 (76,408) 74,814
--------- --------- ---------
Increase (decrease) in unrealized
appreciation, net of deferred taxes,
included in stockholder's equity (5,960) 141,898 (138,940)
--------- --------- ---------
Increase (decrease) during the period
between the market value and cost of
fixed maturities carried at amortized
cost (4,288) 3,294 (9,247)
--------- --------- ---------
TOTAL $ (10,248) $ 145,192 $(148,187)
========= ========= =========
F-11
The components of net investment income are presented in the table below:
Years Ended December 31,
------------------------------------
1996 1995 1994
-------- -------- --------
Fixed maturities $198,947 $168,268 $137,284
Equity securities 2,835 2,017 3,301
Short-term investments 5,357 9,005 8,658
Other interest income 1,450 860 3,555
-------- -------- --------
Total gross investment income 208,589 180,150 152,798
-------- -------- --------
Interest on funds held 12,294 9,451 4,995
Other investment expenses 4,394 4,676 4,194
-------- -------- --------
Total investment expenses 16,688 14,127 9,189
-------- -------- --------
Total net investment income $191,901 $166,023 $143,609
======== ======== ========
The components of realized capital gains (losses) are presented in the table
below:
Years Ended December 31,
---------------------------------------
1996 1995 1994
-------- -------- ---------
Fixed maturities $(11,805) $ (5,000) $(21,994)
Equity securities 17,443 38,833 11,516
Short-term investments 57 2 (21)
-------- -------- --------
Total $ 5,695 $ 33,835 $(10,499)
======== ======== ========
In addition, in 1994, the Company sold to The Prudential all of the remaining
privately placed equity securities and fixed maturities in its available for
sale investment portfolio. Proceeds from this sale were $71,191, with the amount
in excess of book value, $2,476 ($1,609 net of deferred income taxes), reflected
in the accompanying financial statements as an increase to paid in capital.
Securities with a carrying value amount of $295,607 at December 31, 1996 were on
deposit with various state or governmental insurance departments in compliance
with insurance laws. The Company had no investments in derivative financial
instruments for the years ended December 31, 1996, 1995 and 1994.
3. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity in the reserve for losses and loss adjustment expenses is summarized as
follows:
Years Ended December 31,
----------------------------------------
1996 1995 1994
----------- ----------- -----------
Reserves at January 1 $ 2,969,341 $ 2,706,429 $ 2,540,129
Less reinsurance recoverables 689,190 648,550 641,824
----------- ----------- -----------
Net balance at January 1 2,280,151 2,057,879 1,898,305
----------- ----------- -----------
Incurred related to:
Current year 745,594 658,039 646,534
Prior years (29,561) 16,657 74,266
----------- ----------- -----------
Total incurred losses and
loss adjustment expenses 716,033 674,696 720,800
----------- ----------- -----------
Paid related to:
Current year 139,073 92,949 157,688
Prior years 282,134 359,475 403,538
----------- ----------- -----------
Total paid losses and loss
adjustment expenses 421,207 452,424 561,226
----------- ----------- -----------
Net balance at December 31 2,574,977 2,280,151 2,057,879
Plus reinsurance recoverables 671,881 689,190 648,550
----------- ----------- -----------
Balance at December 31 $ 3,246,858 $ 2,969,341 $ 2,706,429
=========== =========== ===========
F-12
4. INCOME TAXES
The components of income taxes for the periods presented are as follows:
Years Ended December 31,
---------------------------------
1996 1995 1994
-------- -------- ---------
Current tax (benefit):
U.S $ 24,363 $(35,435) $(21,683)
Foreign 20,735 18,351 14,575
-------- -------- --------
Total current tax (benefit) 45,098 (17,084) (7,108)
Total deferred U.S. tax (benefit) (13,286) (10,231) (15,536)
-------- -------- --------
Total income tax (benefit) $ 31,812 $(27,315) $(22,644)
======== ======== ========
A reconciliation of the U.S. Federal income tax rate to the Company's effective
tax rate is as follows:
Years Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
Federal income tax rate 35.0% (35.0)% (35.0)%
Increase (reduction) in taxes resulting from:
Tax exempt income (15.1) (73.4) (160.8)
Other, net 2.2 5.6 6.8
---- ----- -----
Effective tax rate 22.1% (102.8)% (189.0)%
==== ===== =====
Deferred income taxes reflect the tax effect of the temporary differences
between the value of assets and liabilities for financial statement purposes and
such values as measured by the tax laws and regulations. The principal items
making up the net deferred income tax asset are as follows:
December 31,
---------------------
1996 1995
-------- --------
Deferred tax assets:
Reserve for losses and loss adjustment
expenses $164,477 $141,917
Unearned premium reserve 24,545 18,575
Foreign currency translation 232 4,179
Net operating loss carryforward 1,579 5,019
Restricted stock -- 4,406
Other assets 6,569 12,767
-------- --------
Total deferred tax assets 197,402 186,863
-------- --------
Deferred tax liabilities:
Deferred acquisition costs 29,443 27,734
Net unrealized appreciation of investments 41,874 44,864
Other liabilities 1,421 1,666
-------- --------
Total deferred tax liabilities 72,738 74,264
-------- --------
Net deferred tax assets $124,664 $112,599
======== ========
Pursuant to the terms of a separation agreement, The Prudential retained the net
operating loss carryforward attributable to the Company at the date of the IPO
and has paid the Company for the tax benefit thereof in 1996. Holdings has total
net operating loss carryforwards of $4,510, of which $323 expire in 2011 and
$4,187 expire in 2012. Management believes that it is more likely than not that
the Company will generate sufficient future taxable income to realize the
benefits of the other net deferred tax assets and, accordingly, no valuation
allowance has been recorded for the periods presented.
Everest Re has not provided for U.S. Federal income or foreign withholding
taxes on $9,393 of pre-1987 undistributed earnings of non-U.S. subsidiaries,
because such earnings are intended to be retained by the foreign
F-13
subsidiaries indefinitely. If these earnings were distributed, foreign tax
credits should become available under current law to reduce or eliminate any
resulting income tax liability.
The Internal Revenue Service ("IRS") has completed its examinations of The
Prudential's tax returns for all years through 1992. As those examinations
relate to Everest Re, the IRS has disallowed that portion of the fresh start
benefit which relates to 1986 reserve strengthening as defined by the IRS.
Consistent with case law favorable to taxpayers on the issue, the Company
believes that, because there were no changes in reserving assumptions or
methodologies between 1985 and 1986, all increases to reserves in 1986 for which
a fresh start benefit was taken are normal reserve additions and, therefore,
pursuant to the case law, does not constitute reserve strengthening that is not
eligible for the fresh start benefit. If the IRS position prevails, the Company
will be required to reimburse The Prudential, thereby incurring an additional
charge of approximately $8,777, including the after-tax cost of interest through
December 31, 1996.
5. RETROCESSIONS
The Company utilizes retrocessional (reinsurance) agreements to reduce its
exposure to large claims and catastrophic loss occurrences. These agreements
provide for recovery from retrocessionaires of a portion of losses and loss
expenses under certain circumstances. Losses and loss adjustment expenses
incurred and earned premiums are after deduction for retrocessions. In the event
retrocessionaires were unable to meet their obligations under retrocession
agreements, the Company would not be able to realize the full value of the
reinsurance recoverable balances. The Company may hold partial collateral under
these agreements and has never suffered a significant loss because of a
retrocessionaire's default. See Note 1(C) and the following paragraph.
Effective October 5, 1995, Everest Re entered into a stop loss agreement (the
"Stop Loss Agreement") with Gibraltar Casualty Company ("Gibraltar") (see Note
6). This agreement, for a premium of $140 million, provides protection against
100% of the first $150 million of adverse development, if any, and 90% of the
next $250 million of adverse development, if any, of Everest Re's consolidated
reserves for losses and uncollectable reinsurance as of June 30, 1995, including
allocated loss adjustment expense and incurred but not reported losses, provided
that adverse development, if any, relating to catastrophes will be covered only
to the extent that the catastrophe event occurred prior to January 1, 1995. All
such adverse development is referred to herein as "Adverse Development".
Payments will be made to Everest Re under the Stop Loss Agreement as Adverse
Development is incurred by Everest Re. The $375.0 million aggregate limit under
the Stop Loss Agreement will be reduced by an amount equal to the Adverse
Development which is not ceded, in accordance with the terms of the Stop Loss
Agreement, to Gibraltar (See Note 6A). Coverage under the Stop Loss Agreement
terminates on December 31, 2007, or earlier if coverage is exhausted. Through
December 31, 1996 and 1995, cessions under the Stop Loss Agreement have
aggregated $140,231 and $23,687, respectively.
Written and earned premiums are comprised of the following:
Years Ended December 31,
----------------------------------------------
1996 1995 1994
----------- ----------- ------------
Written premium:
Direct $ 59,691 $ 16,064 $ 6,821
Assumed 984,340 933,436 946,397
Retroceded (13,497) (166,309) (90,013)
----------- ----------- -----------
Net written premium $ 1,030,534 $ 783,191 $ 863,205
=========== =========== ===========
Earned premium:
Direct $ 37,963 $ 10,784 $ 6,234
Assumed 945,698 907,995 942,419
Retroceded (10,050) (165,458) (95,307)
----------- ----------- -----------
Net earned premium $ 973,611 $ 753,321 $ 853,346
=========== =========== ===========
The amounts deducted from losses and loss adjustment expenses incurred for
retrocessional recoveries were $206,032, $119,115 and $119,710 for the years
ended December 31, 1996, 1995 and 1994, respectively.
F-14
6. TRANSACTIONS WITH FORMER AFFILIATES
A. INDEMNITY AGREEMENT
On October 5, 1995, Holdings agreed, pursuant to a Standby Capital Contribution
Agreement (the "Capital Contribution Agreement"), to make capital contributions
("Capital Contributions") to Everest Re in respect of the first $375.0 million
of Adverse Development experienced by Everest Re that is not ceded, in
accordance with the terms of the Stop Loss Agreement, to Gibraltar. Each Capital
Contribution, if any, will equal the amount of such Adverse Development,
adjusted to reflect an assumed tax rate of 36%, although the Company's actual
tax rate may be greater than or less than 36%. Holdings' obligation to make
Capital Contributions shall be limited to an aggregate maximum amount of $240.0
million, which amount shall be reduced by 64% of the amount of Adverse
Development ceded to Gibraltar under the Stop Loss Agreement.
Also on October 5, 1995, PRUCO agreed to make payments ("Indemnity Payments") to
Holdings, pursuant to an Indemnity Agreement (the "PRUCO Indemnity"), in an
amount equal to the Capital Contributions at such times as such Capital
Contributions, if any, are required to be paid by Holdings to Everest Re. The
Capital Contribution Agreement and the PRUCO Indemnity are intended to mitigate
the impact of up to the first $375.0 million of Adverse Development on the
Company's earnings not otherwise covered by the Stop Loss Agreement.
B. REINSURANCE
The Company engages in reinsurance activities with certain Prudential entities,
including Prudential Property and Casualty Insurance Company, Gibraltar, and The
Prudential.
The following summarizes the financial statement impact of certain reinsurance
transactions with Gibraltar and other former affiliates, while they were
affiliated, for the periods presented.
January 1
Through Year Ended
October 5, December 31,
1995 1994
---------- ------------
Income statement:
Premiums earned - assumed
Gibraltar $ -- $ --
Other 24,298 37,179
Premiums earned - retroceded
Gibraltar 140,000 --
Incurred losses and loss adjustment
expenses - assumed
Gibraltar 37,877 41,490
Other 13,587 28,436
Incurred losses and loss adjustment
expenses - retroceded
Gibraltar 27,640 112,011
Other 16 --
The Prudential has guaranteed all of Gibraltar's obligations under the Stop Loss
Agreement, all of PRUCO's obligations under the PRUCO Indemnity and up to $400
million of Gibraltar's net obligations that became due after June 30, 1995 under
all other reinsurance agreements between Gibraltar and Everest Re. At December
31, 1996, Gibraltar's net obligations under such other reinsurance agreements
consisted of the following balances:
Reinsurance receivables from Gibraltar $ 322,266
Reserve for losses and loss adjustment expenses assumed
from Gibraltar (141,700)
Losses in the course of payment assumed from Gibraltar (1,765)
Funds held by Everest Re under reinsurance treaties with
with Gibraltar (115,694)
---------
Net obligations of Gibraltar $ 63,107
=========
In addition, since June 30, 1995, Gibraltar has paid $65,472 to Everest Re in
respect of such other reinsurance agreements.
F-15
C. EXPENSES
Everest Re has service and lease agreements with The Prudential. Under these
agreements, The Prudential has furnished services of its employees, provided
supplies, use of equipment and office space, and made payment to third parties
for general expenses on behalf of Everest Re. The agreements obligate Everest Re
to reimburse The Prudential for disbursements made on Everest Re's behalf and to
pay for providing these services. The cost of such services for the period
January 1 through October 5, 1995 and for the year ended December 31, 1994 were
$10,789 and $14,273, respectively.
D. EMPLOYEE RETIREMENT PLAN
The Prudential sponsored a defined benefit pension plan which covered
substantially all of the employees of Everest Re through October 6, 1995. The
benefits are generally based on average earnings over a period prescribed by the
plan and credited length of service. In connection with the IPO, the Company has
established its own employee retirement plan which is substantially the same as
The Prudential's plan. In September 1996, The Prudential completed a
plan-to-plan asset transfer of $13,270 to fully fund the Company's projected
benefit obligations as of the IPO date, plus interest from the IPO date.
No pension expense for contributions to the Prudential plan has been charged to
Everest Re for the years ended December 31, 1995 and 1994 because the Prudential
plan was subject to the full funding limitation under the IRS guidelines.
Pension expense for the Company's plan for the year ended December 31, 1996 and
for the period of October 6, 1995 through December 31, 1995 was $901 and $312,
respectively.
The following table summarizes the plan's funded status:
December 31,
1996
------------
Accumulated benefit obligation
Vested $ (7,985)
Non-vested 0
--------
Total (7,985)
Additional benefits based on estimated
future salary levels (7,146)
--------
Projected benefit obligation (15,131)
Fair value of plan assets 14,610
--------
Unfunded projected benefit obligation (521)
Unrecognized net loss or (gain) (692)
--------
Unfunded (accrued) or prepaid pension
cost in the financial statements $ (1,213)
========
Plan assets are comprised of shares in investment trusts with approximately 70%
and 30% of the underlying assets consisting of equity securities and fixed
maturities, respectively.
Net periodic pension cost included the following components:
October 6
Year Ended Through
December 31, December 31,
1996 1995
------------ ------------
Service cost $ 1,102 $ 382
Interest cost 948 328
Actual return on assets (1,841) (638)
Net asset gain during period deferred
for later recognition 692 240
------- -------
Net periodic pension cost $ 901 $ 312
======= =======
The weighted average discount rate and rate of compensation increase used to
determine the actuarial present value of the projected benefit obligation are
7.3% and 4.5%, respectively. The expected long-term rate of return on plan
assets is 9.0%.
F-16
In 1994, an early retirement incentive program was offered to certain employees
of The Prudential and its subsidiaries who were eligible to retire after adding
any combination of seven years to their service and/or their age. The one-time
1994 expense allocated to Everest Re in connection with its employees who
accepted this program was $777.
E. POSTRETIREMENT BENEFIT PLANS
The Prudential sponsors postretirement defined benefit plans which provide
certain life insurance and health care benefits ("postretirement benefits") for
Everest Re's employees eligible to retire at October 6, 1995. The Company is
considering establishing its own plan for its employees who were not eligible to
retire at October 6, 1995. The expense allocated to the Company for the cost of
these benefits incurred by The Prudential was $239 and $1,370 for the period
ending October 6, 1995 and the year ended December 31, 1994, respectively.
F. CAPITAL CONTRIBUTION
Immediately prior to the IPO, The Prudential paid $140,000 to the Company, of
which amount $91,000 was a contribution to capital and $49,000 was a payment in
respect of the tax benefit of the premium paid for the Stop Loss Agreement.
7. DIVIDEND RESTRICTIONS AND STATUTORY FINANCIAL INFORMATION
A. DIVIDEND RESTRICTIONS
Delaware law provides that an insurance company, which is either an insurance
holding company or a member of an insurance holding system and is domiciled in
the state, shall not pay dividends without giving prior notice to the Insurance
Commissioner of Delaware and may not pay dividends without the approval of the
Insurance Commissioner if the value of the proposed dividend, together with all
other dividends and distributions made in the preceding twelve months, exceeds
the greater of (1) 10% of statutory surplus or (2) net income, not including
realized capital gains, each as reported in the prior year's statutory annual
statement. In addition, no dividend may be paid in excess of unassigned earned
surplus. At December 31, 1996, Everest Re had $84,415 available for payment of
dividends in 1997 without prior regulatory approval.
B. STATUTORY FINANCIAL INFORMATION
Everest Re prepares its statutory financial statements in accordance with
accounting practices prescribed by the National Association of Insurance
Commissioners ("NAIC") and the Delaware Insurance Department. Prescribed
statutory accounting practices are set forth in a variety of publications of the
NAIC, as well as state laws, regulations, and general administrative rules. The
capital and statutory surplus of Everest Re was $772,691 and $686,857 at
December 31, 1996 and 1995, respectively. The statutory net income (loss) of
Everest Re was $88,517, $(736) and $2,987 for the years ended December 31, 1996,
1995 and 1994, respectively.
8. CONTINGENCIES
Everest Re 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. Everest Re's asbestos
claims typically involve liability or potential liability for bodily injury from
exposure to asbestos or for property damage resulting from asbestos or products
containing asbestos. Everest Re's environmental claims typically involve
potential liability for (i) the mitigation or remediation of environmental
contamination or (ii) bodily injury or property damages caused by the release of
hazardous substances into the land, air or water.
Everest Re's reserves include an estimate of Everest Re'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 Everest Re's potential losses
from asbestos and environmental claims. Among the complications are: (i)
potentially long waiting periods between exposure and manifestation of any
bodily injury or property damage; (ii) difficulty in identifying sources
of asbestos or environmental contamination; (iii) difficulty in properly
allocating responsibility and/or liability for asbestos or environmental
damage; (iv) changes in underlying laws and judicial interpretation of those
laws; (v) potential for an asbestos or environmental claim to involve many
insurance providers over many policy periods; (vi) long reporting delays,
both from insureds to insurance companies and ceding companies to reinsurers;
(vii) limited historical data concerning asbestos and environmental losses;
F-17
(viii) questions concerning interpretation and application of insurance and
reinsurance coverage; and (ix) uncertainty regarding the number and identity of
insureds with potential asbestos or environmental exposure.
Management believes that these issues are not likely to be resolved in the near
future. Everest Re establishes reserves to the extent that, in the judgment of
management, the facts and prevailing law reflect an exposure for Everest Re or
its ceding company. 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. See
Note 5.
The following table shows the development of prior year asbestos and
environmental reserves on both a gross and net of retrocessional basis for the
years ended:
1996 1995 1994
--------- --------- ----------
Gross Basis
Beginning of period reserves $ 428,495 $ 445,537 $ 421,528
Incurred losses 30,028 17,269 127,058
Paid losses (35,187) (34,311) (103,049)
--------- --------- ---------
End of period reserves $ 423,336 $ 428,495 $ 445,537
========= ========= =========
Net Basis
Beginning of period reserves $ 197,668 $ 203,676 $ 214,600
Incurred losses (1) -- -- 40,537
Paid losses (1) 3,321 (6,008) (51,461)
--------- --------- ---------
End of period reserves $ 200,989 $ 197,668 $ 203,676
========= ========= =========
- - ------------
(1) Net of $24,196 and $16,687 ceded in 1996 and 1995, respectively, under the
incurred loss reimbursement feature of the Stop Loss Agreement.
At December 31, 1996, the gross reserves for asbestos and environmental losses
were comprised of $101.2 million representing case reserves reported by ceding
companies, $50.1 million representing additional case reserves established by
Everest Re on assumed reinsurance claims, $52.8 million representing case
reserves established by Everest Re on direct excess insurance claims and $219.2
million representing IBNR reserves.
To the extent loss reserves for claims incurred on June 30, 1995 (December 31,
1994 for catastrophe losses) or prior on assumed reinsurance needed to be
increased, and were not ceded to unaffiliated reinsurers under existing
reinsurance agreements, Everest Re would be entitled to certain reimbursements
under the Stop Loss Agreement (see Note 5). 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, Everest Re would
be entitled to 100% protection under a 100% quota share retrocession entered
into with Gibraltar in 1986. While there can be no assurance that reserves for
and losses from these claims would not increase in the future, management
believes that Everest Re's existing reserves and ceded reinsurance arrangements
and reimbursements available under the Stop Loss Agreement lessen the
probability that such increases, if any, would have a material effect on Everest
Re's financial condition, results of operations or cash flows.
Everest Re is also named in various legal proceedings incidental to its normal
business activities. In the opinion of Everest Re, none of these proceedings
would have a material adverse effect upon the financial condition, results of
operations or cash flows of Everest Re.
The Prudential sells annuities which are purchased by property and casualty
insurance companies to settle certain types of claim liabilities. In
1993 and prior, Everest Re, for a fee, accepted the claim payment obligation
of the property and casualty insurer, and, concurrently, became the owner
of the annuity or assignee of the annuity proceeds. In these circumstances,
Everest Re would be liable if The Prudential were unable to make the annuity
F-18
payments. The estimated cost to replace all such annuities for which Everest Re
was contingently liable at December 31, 1996 and 1995 was $136,234 and $133,428,
respectively.
Everest Re has purchased annuities from an unaffiliated life insurance company
to settle certain claim liabilities of Everest Re. Should the life insurance
company become unable to make the annuity payments, Everest Re would be liable.
The estimated cost to replace such annuities at December 31, 1996 and 1995 was
$9,208 and $8,506, respectively.
9. STOCK BASED COMPENSATION PLANS
The Company has in place its 1995 Stock Incentive Plan for key employees (the
"1995 Employee Plan") and its 1995 Stock Option Plan for Non-Employee Directors
(the "1995 Director Plan") and applies APB Opinion 25 and related
interpretations in accounting for these plans. Accordingly, no compensation
expense has been recognized in the accompanying financial statements in respect
of stock options granted under these plans.
Under the 1995 Employee Plan, a total of 3,949,000 shares of common stock have
been authorized to be granted as stock options, stock awards or restricted stock
awards to officers and key employees of the Company. At December 31, 1996, there
were 2,423,031 remaining shares available to be granted. Under the 1995 Director
Plan, a total of 50,000 shares of common stock have been authorized to be
granted as stock options to non-employee directors of the Company. At December
31, 1996, there were 37,130 remaining shares available to be granted. Options
granted under the 1995 Employee Plan vest at 20% per year over five years and
options granted under the 1995 Director Plan vest at 50% per year over two
years. All options are exercisable at fair market value of the stock at the date
of grant and expire ten years after the date of grant. Restricted stock granted
under the 1995 Employee Plan vests, beginning one year after the date of grant,
in equal annual installments over five years.
A summary of the status of the Company's stock options as of December 31, 1996
and 1995 and changes during the years ended on those dates is presented below:
1996 1995
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
------- ---------------- ------- ----------------
Outstanding, beginning of year 459,700 $16.93 0 $ xx
Granted 286,270 24.10 459,700 16.93
Exercised 3,800 16.75 0 xx
Forfeited 9,600 18.25 0 xx
------- -------
Outstanding, end of year 732,570 $19.72 459,700 $16.93
======= =======
Options exercisable at year-end 89,340 0
======= =======
Weighted-average fair value of
options granted during the year $11.55 $ 7.92
====== ======
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions: (i) dividend
yield of 0.7%, (ii) expected volatility of 34.33%, (iii) risk-free interest
rates ranging from a low of 5.90% to a high of 7.01%, and (iv) expected life of
7.5 years.
The following table summarizes information about stock options outstanding at
December 31, 1996:
Options Outstanding Options Exercisable
----------------------------- -------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted-Average
Exercise Prices at 12/31/96 Contractual Life Exercise Price at 12/31/96 Exercise Price
- - ---------------- ----------- ---------------- ---------------- ------------------- ----------------
$16.75 to $20.94 448,300 8.75 years $16.94 89,340 $16.94
22.56 to 26.63 284,270 9.66 24.10 0 xx
------- ------
$16.75 to $26.63 732,570 9.11 $19.72 89,340 $16.94
======= ======
In conjunction with its initial public offering, the Company issued to certain
key employees of the Company 746,269 shares of stock and 46,600 restricted
shares of stock, respectively. In 1995, the Company expensed $12,500 in
F-19
recognition of the unrestricted stock awards. Upon issuance of restricted
shares, unearned compensation is charged to stockholder's equity for the cost of
the restricted stock and is amortized over the vesting period. The amount of
earned compensation recognized as expense with respect to restricted stock
awards was $318 and $89 for 1996 and 1995, respectively.
Had the compensation cost for the Company's stock based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
1996 1995
-------- -----
Net Income As reported $112,027 $ 747
Pro forma $110,850 $ 514
Earnings per share As reported $ 2.22 $0.01
Pro forma $ 2.19 $0.01
10. SEGMENT INFORMATION
Everest Re's principal business is reinsuring property and casualty risks of
domestic and foreign insurance companies. The following table provides summary
financial information by geographic region for the periods disclosed.
Years Ended December 31,
----------------------------------
1996 1995 1994
--------- --------- ---------
Premiums earned:
Domestic $ 655,097 $ 565,540 $ 548,832
Canada 63,615 57,133 51,324
Other international 254,899 270,648 253,190
Premium for Stop Loss Agreement -- (140,000) --
--------- --------- ---------
Total premiums earned $ 973,611 $ 753,321 $ 853,346
========= ========= =========
Net income (loss):
Domestic $ 70,978 $ 37,305 $ (22,684)
Canada 8,548 17,774 8,062
Other international 32,501 45,341 25,284
After-tax cost of Stop Loss Agreement and
compensation related to public offering -- (99,673) --
--------- --------- ---------
Total net income (loss) $ 112,027 $ 747 $ 10,662
========= ========= =========
December 31,
-----------------------------
1996 1995
---------- ----------
Total identifiable assets:
Domestic $4,205,198 $3,895,209
Canada 303,369 264,777
Other international 530,785 487,776
---------- ----------
Total identifiable assets $5,039,352 $4,647,762
========== ==========
F-20
11. UNAUDITED QUARTERLY FINANCIAL DATA
Summarized quarterly financial data were as follows:
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
1996 Operating data:
Gross written premium $ 229,963 $ 247,392 $ 282,399 $ 284,277
Net written premium 218,743 235,914 275,009 300,868
Earned premium 210,269 218,806 245,341 299,195
Net investment income 44,768 46,261 49,467 51,405
Net realized capital gain(loss) 3,812 3,672 (6,505) 4,716
Incurred losses and LAE 155,125 161,430 179,856 219,622
Underwriting expenses 68,350 69,846 79,152 92,120
Underwriting loss (13,206) (12,470) (13,667) (12,547)
Net income (loss) $ 27,751 $ 28,739 $ 23,219 $ 32,318
========= ========= ========= =========
Primary earnings per share:
Weighted average shares
outstanding (000's) 50,793 50,497 50,487 50,488
Net income per common share $ 0.55 $ 0.57 $ 0.46 $ 0.64
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
1995 Operating data:
Gross written premium $ 217,581 $ 215,465 $ 268,031 $ 248,423
Net written premium 210,789 208,301 261,667 102,434
Earned premium 199,763 210,744 242,349 100,465
Net investment income 38,026 41,194 42,866 43,937
Net realized capital gain(loss) 3,229 19,527 (609) 11,688
Incurred losses and LAE 155,843 148,670 185,836 184,347
Underwriting expenses 63,767 77,171 73,675 86,123
Underwriting loss (19,847) (15,097) (17,162) (170,005)
Net income (loss) $ 18,591 $ 31,910 $ 20,714 $ (70,468)
========= ========= ========= =========
Primary earnings per share:
Weighted average shares
outstanding (000's) 50,000 50,000 50,000 50,750
Net income per common share $ 0.37 $ 0.64 $ 0.41 $ (1.39)
In connection with the IPO, the Company incurred non-recurring fourth quarter
1995 charges of $140,000 ($91,000 after taxes) for the Stop Loss Agreement (see
Note 5) and $13,343 ($8,673 after taxes) for compensation expense (see Note 9).
12. RESTRUCTURING COSTS
In December 1994, the Company adopted a plan to restructure its operations. The
plan, which was implemented in January 1995, included the termination of
approximately 20% of the Company's employees and the closing of four of seven
domestic branch offices. The estimated cost of the restructuring, consisting of
$6,243 for severance pay and benefits and $813 for remaining lease obligations,
net of estimated sublease income of approximately $900, subsequent to the branch
closings, was accrued in the financial statements for 1994 and has been
substantially paid.
13. CAPITAL TRANSACTIONS
The contribution to the Company's paid in capital in the twelve months ended
December 31, 1996 represents the tax benefits attributable to the difference
between the amount of compensation expense deductible for tax purposes with
respect to stock awards and the amount of such compensation expense reflected in
the Company's financial statements. In addition, on April 4, 1996, pursuant to
the Company's stock incentive plan, the Company acquired 306,231 shares of its
common stock at a cost of $7,216 from the Company's Chief Executive Officer to
fund required withholding taxes.
F-21
EVEREST REINSURANCE HOLDINGS, INC.
SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
- - --------------------------------------------------------------------------------
Column A Column B Column C Column D
-------- ---------- ---------- ----------
Amount
Shown in
Market Balance
(Dollars in thousands) Cost Value Sheet
---------- ---------- ----------
Fixed maturities-held to maturity:
Bonds:
U.S. Government and government agencies $ 30,182 $ 30,435 $ 30,182
State, municipalities and political
subdivisions 50,340 57,939 50,340
Foreign bonds -- -- --
Public Utilities -- -- --
All other corporate bonds -- -- --
Mortgage pass-through securities -- -- --
---------- ---------- ----------
Total fixed maturities-held to maturity 80,522 88,374 80,522
---------- ---------- ----------
Fixed maturities-available for sale
Bonds:
U.S. Government and government agencies 162,406 161,954 161,954
State, municipalities and political
subdivisions 1,259,544 1,307,088 1,307,088
Foreign bonds 545,154 568,978 568,978
Public Utilities 26,007 26,590 26,590
All other corporate bonds 708,990 719,482 719,482
Mortgage pass-through securities 487,145 492,830 492,830
Redeemable preferred stock 5,000 5,050 5,050
---------- ---------- ----------
Total fixed maturities-available for sale 3,194,246 3,281,972 3,281,972
Equity securities 115,367 147,280 147,280
Short-term investments 49,486 49,486 49,486
Other invested assets 12,750 12,750 12,750
Cash 52,595 52,595 52,595
---------- ---------- ----------
Total investments and cash $3,504,966 $3,632,457 $3,624,605
========== ========== ==========
S-1
EVEREST REINSURANCE HOLDINGS, INC.
SCHEDULE II -
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED BALANCE SHEET
- - --------------------------------------------------------------------------------
December 31, (Dollars in thousands, except par value per share)
1996 1995
---------- --------
ASSETS
Investment in subsidiary, at equity in the
underlying net assets $1,080,131 $982,027
Income tax receivable 4,606 3,634
Receivable from affliate 3,431 0
Cash 0 442
---------- --------
Total assets $1,088,168 $986,103
========== ========
LIABILITIES
Other liabilities $ 2,145 $ 2,509
---------- --------
STOCKHOLDERS' EQUITY
Preferred stock, par value: $0.01; 50 million shares
authorized; no shares issued and outstanding -- --
Common stock, par value: $0.01; 200 million shares
authorized; 50.8 million shares issued 508 508
Paid-in capital 389,196 387,349
Unearned compensation (374) (692)
Net unrealized appreciation(depreciation) of
investments 77,766 83,726
Cumulative foreign currency translation adjustment (354) (7,838)
Treasury Stock (7,220) 0
Retained earnings 626,501 520,541
---------- --------
Total stockholders' equity 1,086,023 983,594
---------- --------
Total liabilities and stockholders' equity $1,088,168 $986,103
========== ========
See notes to consolidated financial statements.
S-2
EVEREST REINSURANCE HOLDINGS, INC.
SCHEDULE II -
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED STATEMENT OF OPERATIONS
- - --------------------------------------------------------------------------------
For Years Ended December 31, (Dollars in thousands)
1996 1995 1994
--------- ------- -------
REVENUES
Dividends received from subsidiary $ 17,924 $13,722 $ 7,500
Equity in undistributed net income
(loss) of subsidiary 95,242 (9,956) 7,774
--------- ------- -------
Total revenues 113,166 3,766 15,274
--------- ------- -------
EXPENSES
Other expenses 1,752 4,612 7,095
--------- ------- -------
Income (loss) before taxes 111,414 (846) 8,179
Income tax (benefit) (613) (1,593) (2,483)
--------- ------- -------
Net income $ 112,027 $ 747 $10,662
========= ======= =======
See notes to consolidated financial statements.
S-3
EVEREST REINSURANCE HOLDINGS, INC.
SCHEDULE II -
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
CONDENSED STATEMENT OF CASHFLOWS
- - --------------------------------------------------------------------------------
For Years Ended December 31, (Dollars in thousands)
1996 1995 1994
-------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $112,027 $ 747 $10,662
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed (earnings) loss of
subsidiary (95,242) 9,956 (7,774)
Increase (decrease) in other liabilities (364) (4,586) 7,095
(Increase) in income taxes receivable (972) (1,151) (2,483)
(Increase) in receivable from affliates (3,431) -- --
Non-cash compensation 407 2,500 --
-------- ------- -------
Net cash provided by operating activities 12,425 7,466 7,500
CASH FLOWS FROM FINANCING ACTIVITIES:
Treasury Stock Purchase (7,220) -- --
Contributions during period 420 -- --
Dividends paid to stockholders (6,067) (7,024) (7,500)
-------- ------- -------
Net cash used in financing activities (12,867) (7,024) (7,500)
Net increase in cash (442) 442 --
Cash, beginning of period 442 -- --
-------- ------- -------
Cash, end of period $ -- $ 442 $ --
======== ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash transaction:
Income tax received -- $ 442 --
Non-cash operating transactions:
Dividends received from subsidiary in the
form of forgiveness of liabilities $ 1,767 6,698 --
Non-cash financing transaction:
Issuance of common stock in connection with
public offering -- 12,500 --
See notes to consolidated financial statements.
S-4
EVEREST REINSURANCE HOLDINGS, INC.
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
- - --------------------------------------------------------------------------------
Column A Column B Column C Column D Column F Column G Column H Column I Column J Column K
- - ------------------- ----------- ----------- -------- -------- ---------- ------------- ------------ --------- ----------
Reserve for
Losses Incurred Amortization
Deferred and Loss Unearned Net Loss and Loss of Deferred Other
Acquisition Adjustment Premium Earned Investment Adjustment Acquisition Operating Written
SEGMENT Costs Expenses Reserves Premium Income Expenses Costs Expenses Premium
------- ----------- ----------- -------- -------- ---------- ------------- ------------ --------- ----------
December 31, 1996
Domestic $56,676 $2,751,282 $242,654 $655,097 $143,301 $508,247 $175,203 $45,712 $694,053
Canada 7,640 142,346 25,835 63,615 17,489 37,896 15,781 2,408 65,030
Other international 19,807 353,230 87,419 254,899 31,111 169,890 61,828 8,536 271,451
------- ---------- -------- -------- -------- -------- -------- ------- ----------
Total $84,123 $3,246,858 $355,908 $973,611 $191,901 $716,033 $252,812 $56,656 $1,030,534
======= ========== ======== ======== ======== ======== ======== ======= ==========
December 31, 1995
Domestic $55,743 $2,504,947 $200,886 $565,540 $125,676 $474,864 $151,909 $64,259 $590,717
Canada 7,716 133,559 24,456 57,133 16,112 35,571 10,736 2,515 64,064
Other international 16,560 330,835 68,949 270,648 24,235 164,261 61,695 9,622 268,410
Premium for Stop
Loss Agreement -- -- -- (140,000) -- -- -- -- (140,000)
------- ---------- -------- -------- -------- -------- -------- ------- ----------
Total $80,019 $2,969,341 $294,291 $753,321 $166,023 $674,696 $224,340 $76,396 $783,191
======= ========== ======== ======== ======== ======== ======== ======= ==========
December 31, 1994
Domestic $548,832 $110,747 $529,305 $133,323 $62,469 $561,694
Canada 51,324 14,268 32,314 11,199 2,221 53,149
Other international 253,190 18,594 159,181 56,678 8,095 248,361
-------- -------- -------- -------- ------- ----------
Total $853,346 $143,609 $720,800 $201,200 $72,785 $863,204
======== ======== ======== ======== ======= ==========
S-5
EVEREST REINSURANCE HOLDINGS, INC.
SCHEDULE IV - REINSURANCE
- - ---------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
- - ---------------------------- -------- --------------- --------------- -------- ----------
Gross Ceded To Assumed From Net Assumed to
Amount Other Companies Other Companies Amount Net
(Dollars in thousands) -------- --------------- --------------- -------- ----------
December 31, 1996
Total property and liability
insurance earned premium $37,963 $ 10,050 $945,698 $973,611 97.1%
======= ======== ======== ======== =====
December 31, 1995
Total property and liability
insurance earned premium $10,784 $165,458 $907,995 $753,321 120.5%
======= ======== ======== ======== =====
December 31, 1994
Total property and liability
insurance earned premium $ 6,234 $ 95,307 $942,419 $853,346 110.4%
======= ======== ======== ======== =====
S-6
INDEX TO EXHIBITS
EXHIBIT
NO. PAGE
- - ------- ----
3.1 Certificate of Incorporation of Everest Reinsurance Holdings,
Inc., incorporated herein by reference to Exhibit 4.1 to
the Registration Statement on Form S-8 (No. 333-05771)
3.2 By-Laws (as amended and restated) of Everest Reinsurance
Holdings, Inc., incorporated herein by reference to Exhibit
3.2 to the Registration Statement on Form S-1 (No. 33-71652)
10.1 Sublease, effective as of January 1, 1994, between The
Prudential Insurance Company of America and Everest Reinsurance
Company, incorporated herein by reference to Exhibit 10.3 to
the Registration Statement on Form S-1 (No. 33-71652)
10.2 Stop Loss Agreement entered into between Everest Reinsurance
Company and Gibraltar Casualty Company, incorporated herein by
reference to Exhibit 10.6 to the Registration Statement on Form
S-1 (No. 33-71652)
10.3 Everest Reinsurance Holdings, Inc. Amended 1995 Stock Incentive
Plan, incorporated herein by reference to Exhibit 10.3 to the
Annual Report on Form 10-K for the year ended December 31, 1995
(the "1995 10-K")
10.4 Everest Reinsurance Holdings, Inc. Amended Annual Incentive
Plan, incorporated herein by reference to Exhibit 10.4 to the
1995 10-K
10.5 Sublease, effective as of February 1, 1997 between The
Prudential Insurance Company of America and Everest Reinsurance
Company
*10.6 Everest Reinsurance Holdings, Inc. 1995 Stock Option Plan for
Non-Employee Directors, incorporated herein by reference to
Exhibit 4.3 to the Registration Statement on Form S-8 (No.
333-05771)
*10.7 Amended and Restated Employment Agreement between Everest
Reinsurance Company and Joseph V. Taranto, incorporated herein
by reference to Exhibit 10.50 to the Registration Statement on
Form S-1 (No. 33-71652)
*10.8 Letter, Dated April 20, 1995, from Everest Reinsurance Company
to Sheldon Rosenberg, incorporated herein by reference to
Exhibit 10.51 to the Registration Statement on Form S-1 (No.
33-71652)
10.9 Standby Capital Contribution Agreement between Everest
Reinsurance Holdings, Inc. and Everest Reinsurance Company,
incorporated herein by reference to Exhibit 10.69 to the
Registration Statement on Form S-1 (No. 33-71652)
10.10 Indemnification Agreement between PRUCO, Inc. and Everest
Reinsurance Holdings, Inc., incorporated herein by reference to
Exhibit 10.70 to the Registration Statement on Form S-1 (No.
33-71652)
10.11 Guarantee made by The Prudential Insurance Company of America
in favor of Everest Reinsurance Company, incorporated herein
by reference to Exhibit 10.71 to the Registration Statement on
Form S-1 (No. 33-71652)
10.12 Guarantee made by The Prudential Insurance Company of America
in favor of Everest Reinsurance Holdings, Inc., incorporated
herein by reference to Exhibit 10.72 to the Registration
Statement on Form S-1 (No. 33-71652)
10.13 1995 Service Contract between Everest Reinsurance Company
and Gibraltar Casualty Company, incorporated herein by
reference to Exhibit 10.73 to the Registration Statement on
Form S-1 (No. 33-71652)
10.14 Separation Agreement among The Prudential Insurance Company
of America, Gibraltar Casualty Company, Everest Reinsurance
Company, PRUCO, Inc., and Everest Reinsurance Holdings, Inc.,
incorporated herein by reference to Exhibit 10.2 to the
Registration Statement on Form S-1 (No. 33-71652)
*10.15 Form of Non-Qualified Stock Option Award Agreement to be
entered into between Everest Reinsurance Holdings, Inc. and
participants in the 1995 Stock Incentive Plan, incorporated
herein by reference to Exhibit 10.15 to the 1995 10-K
E-1
EXHIBIT
NO. PAGE
- - ------- ----
*10.16 Form of Restricted Stock Agreement to be entered into
between Everest Reinsurance Holdings, Inc. and participants in
the 1995 Stock Incentive Plan, incorporated herein by reference
to Exhibit 10.16 to the 1995 10-K
*10.17 Form of Stock Option Agreement (Version 1) to be entered into
between Everest Reinsurance Holdings, Inc. and participants
in the 1995 Stock Option Plan for Non-Employee Directors,
incorporated herein by reference to Exhibit 10.17 to the 1995
10-K
*10.18 Form of Stock Option Agreement (Version 2) to be entered into
between Everest Reinsurance Holdings, Inc. and participants
in the 1995 Stock Option Plan for Non-Employee Directors,
incorporated herein by reference to Exhibit 10.18 to the 1995
10-K
11.1 Statement regarding computation of per share earnings
16.1 Letter from Deloitte & Touche LLP, dated August 8, 1996,
incorporated herein by reference to Exhibit 16 to the Form 8-K
filed on August 9, 1996
21.1 Subsidiaries of the registrant
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Coopers & Lybrand L.L.P.
27.1 Financial Data Schedule
28.1 Information from reports furnished to state insurance
regulatory authorities
- - --------------
* Management contract or compensatory plan or arrangement.
E-2