-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LkzuhHpuBZskN7Rb/DeikOiCWdeyJ9L/svrTUjEk2gSGY4lMJgP2gmrgQlREgDZT fcKQq4UsIsdzkOEUE1CaJA== 0000914748-00-000004.txt : 20000515 0000914748-00-000004.hdr.sgml : 20000515 ACCESSION NUMBER: 0000914748-00-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EVEREST REINSURANCE HOLDINGS INC CENTRAL INDEX KEY: 0000914748 STANDARD INDUSTRIAL CLASSIFICATION: ACCIDENT & HEALTH INSURANCE [6321] IRS NUMBER: 223263609 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-71652 FILM NUMBER: 628158 BUSINESS ADDRESS: STREET 1: 477 MARTINSVILLE RD STREET 2: PO BOX 830 CITY: LIBERTY CORNER STATE: NJ ZIP: 07938 BUSINESS PHONE: 9086043000 MAIL ADDRESS: STREET 1: 477 MARTINSVILLE RD STREET 2: PO BOX 830 CITY: LIBERTY CORNER STATE: NJ ZIP: 07938 FORMER COMPANY: FORMER CONFORMED NAME: PRUDENTIAL REINSURANCE HOLDINGS INC DATE OF NAME CHANGE: 19931115 10-Q 1 FORM 10-Q FOR EVEREST REINSURANCE HOLDINGS, INC. SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended: Commission File Number: MARCH 31, 2000 1-13816 - ---------------------- ----------------------- EVEREST REINSURANCE HOLDINGS, INC. ---------------------------------- (Exact name of Registrant as specified in its charter) DELAWARE 22-3263609 - ---------------------------- ---------------------------- (State or other juris- (IRS Employer Identification diction of incorporation Number) or organization) WESTGATE CORPORATE CENTER LIBERTY CORNER, NEW JERSEY 07938-0830 ------------------------------------- (908) 604-3000 ------------------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. YES X NO ------- ------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Number of Shares Outstanding Class at May 9, 2000 ----- ---------------------------- COMMON STOCK, $.01 PAR VALUE 1,000 EVEREST REINSURANCE HOLDINGS, INC. INDEX TO FORM 10-Q PART I FINANCIAL INFORMATION --------------------- PAGE ---- ITEM 1. FINANCIAL STATEMENTS -------------------- Consolidated Balance Sheets at March 31, 2000 (unaudited) and December 31, 1999 3 Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2000 and 1999 (unaudited) 4 Consolidated Statements of Changes in Stockholders' Equity for the three months ended March 31, 2000 and 1999 (unaudited) 5 Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 1999 (unaudited) 6 Notes to Consolidated Interim Financial Statements 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ----------------------------------------------------------- AND RESULTS OF OPERATIONS 16 ------------------------- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 23 ---------------------------------------------------------- PART II OTHER INFORMATION ----------------- ITEM 1. LEGAL PROCEEDINGS 24 ----------------- ITEM 2. CHANGES IN SECURITIES None --------------------- ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ------------------------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 24 --------------------------------------------------- ITEM 5. OTHER INFORMATION None ----------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 24 -------------------------------- Part I - Item 1 EVEREST REINSURANCE HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except par value per share)
March 31, December 31, ------------ ------------ 2000 1999 ------------ ------------ ASSETS: (unaudited) Fixed maturities - available for sale, at market value (amortized cost: 2000, $4,045,373; 1999, $3,940,625) $ 4,032,376 $ 3,885,278 Equity securities, at market value (cost: 2000, $24,112; 1999, $50,224) 46,566 90,693 Short-term investments 99,712 73,558 Other invested assets 28,453 27,482 Cash 58,705 62,227 ------------ ------------ Total investments and cash 4,265,812 4,139,238 Accrued investment income 67,937 64,898 Premiums receivable 323,767 294,941 Reinsurance receivables 733,477 742,513 Funds held by reinsureds 167,768 157,237 Deferred acquisition costs 87,613 82,713 Prepaid reinsurance premiums 16,802 9,582 Deferred tax asset 181,424 188,326 Other assets 27,126 24,854 ------------ ------------ TOTAL ASSETS $ 5,871,726 $ 5,704,302 ============ ============ LIABILITIES: Reserve for losses and adjustment expenses $ 3,623,143 $ 3,646,992 Unearned premium reserve 338,156 308,563 Funds held under reinsurance treaties 176,146 178,520 Losses in the course of payment 74,833 67,065 Contingent commissions 51,945 58,169 Other net payable to reinsurers 18,822 13,217 Current federal income taxes 4,410 (4,475) 8.5% Senior notes due 3/15/2005 249,560 - 8.75% Senior notes due 3/15/2010 198,953 - Revolving credit agreement borrowings 106,000 59,000 Interest accrued on debt and borrowings 2,160 106 Other liabilities 52,472 49,663 ------------ ------------ Total liabilities 4,896,600 4,376,820 ------------ ------------ STOCKHOLDERS' EQUITY: Common stock, par value: $0.01; 200 million shares authorized; 1,000 shares issued in 2000 and 50.9 million shares issued in 1999 - 509 Additional paid-in capital 252,979 390,912 Unearned compensation - (109) Accumulated other comprehensive income, net of deferred income taxes benefit of $1.1 million in 2000 and deferred income taxes benefit of $9.1 million in 1999 (1,767) (16,701) Retained earnings 723,914 1,074,941 Treasury stock, at cost; 0.0 million shares in 2000 and 4.4 million shares in 1999 - (122,070) ------------ ------------ Total stockholders' equity 975,126 1,327,482 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,871,726 $ 5,704,302 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 3 EVEREST REINSURANCE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Dollars in thousands, except per share amounts)
Three Months Ended March 31, ---------------------------- 2000 1999 ----------- ----------- (unaudited) REVENUES: Premiums earned $ 266,184 $ 234,135 Net investment income 63,809 62,080 Net realized capital gain/(loss) 7,864 (2,186) Other income 810 97 ----------- ----------- Total revenues 338,667 294,126 ----------- ----------- CLAIMS AND EXPENSES: Incurred loss and loss adjustment expenses 196,389 168,869 Commission, brokerage, taxes and fees 65,658 61,651 Other underwriting expenses 11,508 11,527 Interest expense on senior notes 1,620 - Interest expense on credit facility 1,463 - ----------- ----------- Total claims and expenses 276,638 242,047 ----------- ----------- INCOME BEFORE TAXES 62,029 52,079 Income tax 12,978 10,837 ----------- ----------- NET INCOME $ 49,051 $ 41,242 =========== =========== Other comprehensive income/(loss), net of tax 14,934 (29,850) ----------- ----------- COMPREHENSIVE INCOME $ 63,985 $ 11,392 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 4 EVEREST REINSURANCE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Dollars in thousands, except per share amounts)
Three Months Ended March 31, ------------------------------ 2000 1999 ------------ ------------ (unaudited) COMMON STOCK (SHARES OUTSTANDING): Balance, beginning of period 46,457,817 49,989,204 Issued during the period 8,500 16,800 Treasury stock acquired during the period (648,400) (1,000,320) Treasury stock reissued during the period 1,780 1,056 Common stock retired during the period (45,819,697) - Issued during the period 1,000 - ------------ ------------ Balance, end of period 1,000 49,006,740 ============ ============ COMMON STOCK (PAR VALUE): Balance, beginning of period $ 509 $ 509 Common stock retired during the period (509) - Issued during the period - - ------------ ------------ Balance, end of period - 509 ------------ ------------ ADDITIONAL PAID IN CAPITAL: Balance, beginning of period 390,912 390,559 Retirement of treasury stock during the period (138,546) - Common stock issued during the period 157 307 Treasury stock reissued during the period (2) 15 Common stock retired during the period 458 - ------------ ------------ Balance, end of period 252,979 390,881 ------------ ------------ UNEARNED COMPENSATION: Balance, beginning of period (109) (240) Net increase during the period 109 40 ------------ ------------ Balance, end of period - (200) ------------ ------------ ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF DEFERRED INCOME TAXES: Balance, beginning of period (16,701) 185,518 Net increase (decrease) during the period 14,934 (29,850) ------------ ------------ Balance, end of period (1,767) 155,668 ------------ ------------ RETAINED EARNINGS: Balance, beginning of period 1,074,941 928,500 Net income 49,051 41,242 Restructure adjustments (78) - Dividends paid to parent (400,000) (3,005) ------------ ------------ Balance, end of period 723,914 966,737 ------------ ------------ TREASURY STOCK AT COST: Balance, beginning of period (122,070) (25,642) Treasury stock retired during the period 138,454 - Treasury stock acquired during the period (16,426) (32,727) Treasury stock reissued during the period 42 25 ------------ ------------ Balance, end of period - (58,344) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY, END OF PERIOD $ 975,126 $ 1,455,251 ============ ============
The accompanying notes are an integral part of the consolidated financial statements. 5 EVEREST REINSURANCE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Three Months Ended March 31, ------------------------- 2000 1999 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: (unaudited) Net income $ 49,051 $ 41,242 Adjustments to reconcile net income to net cash provided by operating activities: (Increase) in premiums receivable (29,893) (26,252) (Increase) decrease in funds held, net (13,888) 3,394 Decrease in reinsurance receivables 8,697 85,638 (Increase) in deferred tax asset (2,771) (7,072) (Decrease) in reserve for losses and loss adjustment expenses (13,651) (21,361) Increase in unearned premiums 30,275 9,991 Decrease in other assets and liabilities 6,127 22,227 Non cash compensation expense 109 40 Accrual of bond discount/amortization of bond premium (1,507) (1,312) Amortization of underwriting discount on senior notes 6 - Restructure adjustment (78) - Realized capital (gains) losses (7,864) 2,186 ---------- ---------- Net cash provided by operating activities 24,613 108,721 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from fixed maturities matured/ called - available for sale 29,456 73,631 Proceeds from fixed maturities sold - available for sale 97,690 76,118 Proceeds from equity securities sold 42,663 - Cost of fixed maturities acquired - available for sale (246,440) (237,705) Cost of equity securities acquired (1,178) - Cost of other invested assets acquired (1,530) (1,762) Net (purchases) sales of short-term securitie (25,706) 3,938 Net (decrease) increase in unsettled securities transactions (2,081) 20,074 ---------- ---------- Net cash (used in) investing activities (107,126) (65,706) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Acquisition of treasury stock net of reissuances (16,478) (32,687) Common stock issued during the period 106 307 Dividends paid to stockholders (400,000) (3,005) Proceeds from issuance of senior notes 448,507 - Net borrowing on revolving credit agreement 47,000 - ---------- ---------- Net cash provided by (used in) financing activities 79,135 (35,385) ---------- ---------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (144) (2,381) ---------- ---------- Net (decrease) increase in cash (3,522) 5,249 Cash, beginning of period 62,227 39,326 ---------- ---------- Cash, end of period $ 58,705 $ 44,575 ========== ========== SUPPLEMENTAL CASH FLOW INFORMATION CASH TRANSACTIONS: Income taxes paid, net $ 4,990 $ 4,795 Interest paid $ 923 $ - NON-CASH FINANCING TRANSACTION: Issuance of common stock $ - $ 40
The accompanying notes are an integral part of the consolidated financial statements. 6 EVEREST REINSURANCE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 1. GENERAL On February 24, 2000, a corporate restructuring was completed and Everest Re Group, Ltd. ("Group") became the new parent holding company of Everest Reinsurance Holdings, Inc. (the "Company"), which remains the holding company for Group's U.S. operations. The Company is filing this report as a result of its public issuance of debt securities on March 14, 2000. The consolidated financial statements of the Company for the three months ended March 31, 2000 and 1999 include all adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair presentation of the results on an interim basis. Certain financial information which is normally included in annual financial statements prepared in accordance with generally accepted accounting principles has been omitted since it is not required for interim reporting purposes. The year end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The results for the three months ended March 31, 2000 and 1999 are not necessarily indicative of the results for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, 1999, 1998 and 1997. 2. CONTINGENCIES The Company continues to receive claims under expired contracts which assert alleged injuries and/or damages relating to or resulting from toxic torts, toxic waste and other hazardous substances, such as asbestos. The Company's asbestos claims typically involve potential liability for bodily injury from exposure to asbestos or for property damage resulting from asbestos or products containing asbestos. The Company's environmental claims typically involve potential liability for (a) the mitigation or remediation of environmental contamination or (b) bodily injury or property damages caused by the release of hazardous substances into the land, air or water. The Company's reserves include an estimate of the Company's ultimate liability for asbestos and environmental claims for which ultimate value cannot be estimated using traditional reserving techniques. There are significant uncertainties in estimating the amount of the Company's potential losses from asbestos and environmental claims. Among the complications are: (a) potentially long waiting periods between exposure and manifestation of any bodily injury or property damage; (b) difficulty in identifying sources of asbestos or environmental contamination; (c) difficulty in properly allocating responsibility and/or liability for asbestos or environmental damage; (d) changes in underlying laws and judicial interpretation of those laws; (e) potential for an asbestos or environmental claim to involve many insurance providers over many policy periods; (f) long reporting delays, both from insureds to insurance companies and ceding companies to reinsurers; (g) historical data concerning asbestos and environmental losses, which is more limited than historical information on other types of casualty claims; (h) questions concerning interpretation and application of insurance and reinsurance coverage; and (i) 7 EVEREST REINSURANCE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 uncertainty regarding the number and identity of insureds with potential asbestos or environmental exposure. Although these complications have become less severe in recent years, management believes that these factors continue to render reserves for asbestos and environmental losses significantly less subject to traditional actuarial methods than are reserves on other types of losses. Given these uncertainties, management believes that no meaningful range for such ultimate losses can be established. The Company establishes reserves to the extent that, in the judgement of management, the facts and prevailing law reflect an exposure for the Company or its ceding company. In connection with its initial public offering in October 1995, the Company purchased an aggregate stop loss retrocession agreement (the "Stop Loss Agreement") from Gibraltar Casualty Company ("Gibraltar"), an affiliate of the Company's former parent, The Prudential Insurance Company of America ("The Prudential"). This coverage protects the Company's consolidated earnings against up to $375.0 million of the first $400.0 million of adverse development, if any, on the Company's consolidated reserves for losses, allocated loss adjustment expenses and uncollectible reinsurance at June 30, 1995 (December 31, 1994 for catastrophe losses). Through March 31, 2000, cessions under the Stop Loss Agreement have aggregated $285.6 million with available remaining limits net of coinsurance of $89.4 million. Due to the uncertainties discussed above, the ultimate losses may vary materially from current loss reserves and, if coverage under the Stop Loss Agreement is exhausted, could have a material adverse effect on the Company's future financial condition, results of operations and cash flows. 8 EVEREST REINSURANCE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 The following table shows the development of prior year asbestos and environmental reserves on both a gross and net of retrocessional basis for the three months ended March 31, 2000 and 1999:
(dollar amounts in thousands) Three Months Ended March 31, 2000 1999 ----------------------------- Gross basis: Beginning of period reserves $ 614,236 $ 660,793 Incurred losses - 1,601 Paid losses (16,190) (7,977) ----------------------------- End of period reserves $ 598,046 $ 654,417 ============================= Net basis: Beginning of period reserves $ 365,069 $ 263,542 Incurred losses (1) - - Paid losses (2) (7,984) 116,286 ----------------------------- End of period reserves $ 357,085 $ 379,828 =============================
(1) No losses were ceded in either the three months ended March 31, 2000 or in the three months ended March 31, 1999 under the incurred loss reimbursement feature of the Stop Loss Agreement. (2) No losses were ceded in the three months ended March 31, 2000 and $118.8 million were ceded as paid losses under the Stop Loss Agreement in the three months ended March 31, 1999. At March 31, 2000, the gross reserves for asbestos and environmental losses were comprised of $131.3 million representing case reserves reported by ceding companies, $74.7 million representing additional case reserves established by the Company on assumed reinsurance claims, $45.3 million representing case reserves established by the Company on direct excess insurance claims and $346.8 million representing incurred but not reported ("IBNR") reserves. To the extent loss reserves on assumed reinsurance need to be increased and were not ceded to unaffiliated reinsurers under existing reinsurance agreements, the Company would be entitled to partial reimbursements consistent with the terms of the Stop Loss Agreement. To the extent loss reserves on direct excess insurance policies needed to be increased and were not ceded to unaffiliated reinsurers under existing reinsurance agreements, the Company would be entitled to 9 EVEREST REINSURANCE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 100% protection from Gibraltar under a retrocessional agreement in place since 1986. While there can be no assurance that reserves for and losses from these claims would not increase in the future, management believes that the Company's existing reserves and ceded reinsurance arrangements, including reimbursements available under the Stop Loss Agreement, lessen the probability that such increases, if any, would have a material adverse effect on the Company's financial condition, results of operations or cash flows. On February 24, 2000, the Company announced an agreement with The Prudential to acquire all of the issued and outstanding shares of Gibraltar for approximately $52.0 million. Closing of the acquisition will be subject to the satisfaction of customary closing conditions and the receipt of regulatory approvals. Upon the closing of the acquisition, the Company's current reinsurance contracts with Gibraltar, including the Stop Loss Agreement, will remain in effect. However, these contracts will become transactions with affiliates with the financial impact eliminated through inter-company accounts. The Prudential's guarantee of Gibraltar's obligations to the Company will be terminated and The Prudential will be released from its obligations. In connection with the acquisition, The Prudential will provide reinsurance to Gibraltar covering 80% of the first $200.0 million of any adverse development in Gibraltar's reserves. The Company is involved from time to time in ordinary routine litigation and arbitration proceedings incidental to its business. The Company does not believe that there are any other material pending legal proceedings to which it or any of its subsidiaries or their properties are subject. The Prudential sells annuities which are purchased by property and casualty insurance companies to settle certain types of claim liabilities. In 1993 and prior, the Company, for a fee, accepted the claim payment obligation of the property and casualty insurer, and, concurrently, became the owner of the annuity or assignee of the annuity proceeds. In these circumstances, the Company would be liable if The Prudential were unable to make the annuity payments. The estimated cost to replace all such annuities for which the Company was contingently liable at March 31, 2000 was $141.3 million. The Company has purchased annuities from an unaffiliated life insurance company to settle certain claim liabilities of the Company. Should the life insurance company become unable to make the annuity payments, the Company would be liable. The estimated cost to replace such annuities at March 31, 2000 was $11.9 million. 10 EVEREST REINSURANCE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 3. OTHER COMPREHENSIVE INCOME The Company's other comprehensive income / (loss) is comprised as follows:
(dollar amounts in thousands) Three Months Ended March 31, 2000 1999 ----------------------------- Net unrealized appreciation (depreciation) of investments, net of deferred income taxes $ 15,774 ($ 31,164) Currency translation (840) 1,314 ----------------------------- Other comprehensive income/(loss), net of deferred income taxes $ 14,934 ($ 29,850) =============================
4. CREDIT LINE On December 21, 1999, the Company entered into a three-year senior revolving credit facility with a syndicate of lenders (the "Credit Facility"). First Union National Bank is the administrative agent for the Credit Facility. The Credit Facility will be used for liquidity and general corporate purposes and to refinance existing debt under the Company's prior credit facility, which has been terminated. The Credit Facility provides for the borrowing of up to $150.0 million with interest at a rate selected by the Company equal to either (i) the Base Rate (as defined below) or (ii) an adjusted London InterBank Offered Rate ("LIBOR") plus a margin. The Base Rate is the higher of the rate of interest established by First Union National Bank from time to time as its prime rate or the Federal Funds rate plus 0.5% per annum. The amount of margin and the fees payable for the Credit Facility depend upon the Company's senior unsecured debt rating. Group has guaranteed all of the Company's obligations under the Credit Facility. The Credit Facility requires Group to maintain a debt to capital ratio of not greater than 0.35 to 1, Holdings to maintain a minimum interest coverage ratio of 2.5 to 1 and Everest Reinsurance Company ("Everest Re") to maintain its statutory surplus at $850.0 million plus 25% of future aggregate net income and 25% of future aggregate capital contributions. The Company was in compliance with these requirements at March 31, 2000 as well as for the three months ended March 31, 2000. 11 EVEREST REINSURANCE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 As of March 31, 2000 and 1999, the Company had outstanding credit line borrowings of $106.0 million and $0.0 million, respectively. Interest expense incurred in connection with these borrowings was $1.5 million and $0.0 million for the periods ended March 31, 2000 and 1999, respectively. 5. SENIOR NOTES During the first quarter of 2000, the Company completed a public offering of $200.0 million principal amount of 8.75% senior notes due March 15, 2010 and $250.0 million principal amount of 8.5% senior notes due March 15, 2005. The Company distributed $400.0 million of these proceeds to Group, of which $250.0 million was used by Group to capitalize Everest Reinsurance (Bermuda), Ltd. Interest expense incurred in connection with these senior notes was $1.6 million for the three months ended March 31, 2000. 6. SEGMENT REPORTING The Company, through its subsidiaries, operates in five segments: U.S. Broker Treaty, U.S. Direct Treaty Reinsurance and Insurance, U.S. Facultative, Marine, Aviation and Surety and International. The U.S. Broker Treaty operation writes property, accident and health and casualty reinsurance through reinsurance brokers within the United States. The U.S. Direct Treaty Reinsurance and Insurance operation writes property and casualty reinsurance directly with ceding companies and primary property and casualty insurance through agency relationships and program administrators within the United States. The U.S. Facultative operation writes property, casualty and specialty business through brokers and directly with ceding companies within the United States. The Marine, Aviation and Surety operation writes marine, aviation and surety business within the United States and worldwide. The International operation writes reinsurance through the Company's branches in Belgium, London, Canada, Hong Kong and Singapore, in addition to foreign "home-office" business. The U.S. Facultative, Marine, Aviation and Surety and International operations write business through brokers and directly with ceding companies. 12 EVEREST REINSURANCE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 These segments are managed in a carefully coordinated fashion with strong elements of central control, including with respect to capital, investments and support operations. As a result, management monitors and evaluates the financial performance of these operating segments based upon their underwriting gain or loss ("underwriting results"). Underwriting results include earned premium less loss and loss adjustment expenses incurred, commission and brokerage expenses and other underwriting expenses. The Company does not review and evaluate the financial results of its operating segments based upon balance sheet data. The following tables present the relevant underwriting results for the operating segments for the three months ended March 31, 2000 and 1999, with all dollar values presented in thousands.
U.S. BROKER TREATY - ------------------------------------------------------------------------------- 2000 1999 ---------------------------------- Earned premiums $ 106,064 $ 75,325 Incurred losses and loss adjustment expenses 77,302 68,129 Commission and brokerage 22,048 19,880 Other underwriting expenses 2,344 2,235 ---------------------------------- Underwriting gain/(loss) $ 4,370 ($ 14,919) ==================================
U.S. DIRECT TREATY REINSURANCE AND INSURANCE - ------------------------------------------------------------------------------- 2000 1999 Earned premiums $ 52,785 $ 36,030 Incurred losses and loss adjustment 33,695 25,075 Commission and brokerage 15,551 10,073 Other underwriting expenses 3,280 2,201 ---------------------------------- Underwriting gain/(loss) $ 259 ($ 1,319) ==================================
13 EVEREST REINSURANCE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
U.S. FACULTATIVE - ------------------------------------------------------------------------------- 2000 1999 ---------------------------------- Earned premiums $ 16,849 $ 19,029 Incurred losses and loss adjustment 11,041 11,287 Commission and brokerage 3,479 4,198 Other underwriting expenses 1,501 1,493 ---------------------------------- Underwriting gain/(loss) $ 828 $ 2,051 ==================================
MARINE, AVIATION AND SURETY - ------------------------------------------------------------------------------- 2000 1999 ---------------------------------- Earned premiums $ 24,288 $ 31,371 Incurred losses and loss adjustment 17,851 20,290 Commission and brokerage 8,778 9,349 Other underwriting expenses 916 869 ---------------------------------- Underwriting gain/(loss) ($ 3,257) $ 863 ==================================
INTERNATIONAL - ------------------------------------------------------------------------------- 2000 1999 ---------------------------------- Earned premiums $ 66,197 $ 72,380 Incurred losses and loss adjustment 56,502 44,088 Commission and brokerage 15,800 18,151 Other underwriting expenses 3,386 3,559 ---------------------------------- Underwriting gain/(loss) ($ 9,491) $ 6,582 ==================================
The following table reconciles the underwriting results for the operating segments to income before tax as reported in the consolidated statements of operations and comprehensive income, with all dollar values presented in thousands:
2000 1999 ---------------------------------- Underwriting gain (loss) ($ 7,291) ($ 6,742) Net investment income 63,809 62,080 Realized gain (loss) 7,864 (2,186) Corporate expenses (80) (1,170) Interest expense (3,083) - Other income (expense) 810 97 ---------------------------------- Income before taxes $ 62,029 $ 52,079 ==================================
14 EVEREST REINSURANCE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 The Company writes premium in the United States and selected international markets. The revenues, net income and identifiable assets of any individual non-U.S. country in which the Company writes business are, in each case, less than 10% of the Company's consolidated results. 7. FUTURE APPLICATION OF ACCOUNTING STANDARDS The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement requires all derivatives to be recognized as either assets or liabilities in the statement of financial position and to be measured at fair value. This statement shall be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. Management believes that the statement will not have a material impact on the financial position of the Company. 8. RELATED-PARTY TRANSACTIONS During the normal course of business, the Company, through its affiliates, engages in arms-length reinsurance and brokerage and commission business transactions with companies controlled or affiliated with Group's outside directors. These transactions are immaterial to the Company's financial condition, results of operations and cash flows. In addition, the Company engages in business transactions with Group. The only material transaction with Group that occurred during the first quarter of 2000 was a $400.0 million distribution to Group to facilitate the completion of the corporate restructuring. 15 PART I - ITEM 2 EVEREST REINSURANCE HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS RESTRUCTURING On February 24, 2000, a corporate restructuring was completed and Everest Re Group, Ltd. ("Group") became the new parent holding company of Everest Reinsurance Holdings, Inc. (the "Company"), which remains the holding company for Group's U.S. operations. The Company is filing this report as a result of its public issuance of debt securities on March 14, 2000. SEGMENT INFORMATION The Company, through its subsidiaries, operates in five segments: U.S. Broker Treaty, U.S. Direct Treaty Reinsurance and Insurance, U.S. Facultative, Marine, Aviation and Surety and International. The U.S. Broker Treaty operation writes property, accident and health and casualty reinsurance through reinsurance brokers within the United States. The U.S. Direct Treaty Reinsurance and Insurance operation writes property and casualty reinsurance directly with ceding companies and primary property and casualty insurance through agency relationships and program administrators within the United States. The U.S. Facultative operation writes property, casualty and specialty business through brokers and directly with ceding companies within the United States. The Marine, Aviation and Surety operation writes marine, aviation and surety business within the United States and worldwide. The International operation writes reinsurance through the Company's branches in Belgium, London, Canada, Hong Kong and Singapore, in addition to foreign "home-office" business. The U.S. Facultative, Marine, Aviation and Surety and International operations write business through brokers and directly with ceding companies. These segments are managed in a carefully coordinated fashion with strong elements of central control, including with respect to capital, investments and support operations. As a result, management monitors and evaluates the financial performance of these operating segments based upon their underwriting results. THREE MONTHS ENDED MARCH 31, 2000 COMPARED TO THREE MONTHS ENDED MARCH 31, 1999 PREMIUMS. Gross premiums written increased 19.8% to $304.3 million in the three months ended March 31, 2000 from $253.9 million in the three months ended March 31, 1999 as the Company took advantage of selected growth opportunities, while continuing to generally maintain a very disciplined underwriting approach. Premium growth areas included a 54.3% ($24.7 million) increase in the U.S. Direct Treaty Reinsurance and Insurance operation, mainly attributable to growth in primary insurance and accident and health writings, and a 50.7% ($41.7 16 million) increase in the U.S. Broker Treaty operation, attributable to growth across its property and casualty lines, including from several large casualty reinsurance treaties. These increases were partially offset by a 19.2% ($3.6 million) decrease in the U.S. Facultative operation, a 16.8% ($5.1 million) decrease in the Marine, Aviation and Surety operation and a 9.5% ($7.4 million) decrease in the International operation reflecting the continued highly competitive current market conditions faced by these operations. The Company continued to decline business that did not meet its objectives regarding underwriting profitability. Ceded premiums increased to $16.7 million in the three months ended March 31, 2000 from $11.4 million in the three months ended March 31, 1999. This increase was principally attributable to higher utilization of contract specific retrocessions in the U.S. Broker Treaty and U.S. Direct Reinsurance and Insurance operations. Net premiums written increased by 18.6% to $287.5 million in the three months ended March 31, 2000 from $242.5 million in the three months ended March 31, 1999 consistent with the increase in gross premiums written. PREMIUM REVENUES. Net premiums earned increased by 13.7% to $266.2 million in the three months ended March 31, 2000 from $234.1 million in the three months ended March 31, 1999. Contributing to this increase was a 46.5% ($16.8 million) increase in the U.S. Direct Treaty Reinsurance and Insurance operation and a 40.8% ($30.7 million) increase in the U.S. Broker Treaty operation. These increases were partially offset by a 22.6% ($7.1 million) decrease in the Marine, Aviation and Surety operation, an 11.5% ($2.2 million) decrease in the U.S. Facultative operation and an 8.5% ($6.2 million) decrease in the International operation. All of these changes reflect period to period changes in net written premiums together with normal variability in earnings patterns. EXPENSES. Incurred loss and loss adjustment expenses ("LAE") increased by 16.3% to $196.4 million in the three months ended March 31, 2000 from $168.9 million in the three months ended March 31, 1999. The increase in incurred losses and LAE was principally attributable to the increase in net premiums earned together with modest strengthening of prior period reserves in select areas and a reinsurance treaty with higher losses, and correspondingly lower commissions, partially offset by lower catastrophe losses. Incurred losses and LAE include catastrophe losses, which include the impact of both current period events and favorable and unfavorable development on prior period events and are net of reinsurance. Net catastrophe losses in the three months ended March 31, 2000 were $3.0 million, mainly reflecting modest net adverse development on 1999 catastrophe events, compared to net catastrophe losses of $11.4 million in the three months ended March 31, 1999. Net incurred losses and LAE for the three months ended March 31, 2000 reflected ceded losses and LAE of $16.8 million with $0.0 million ceded under the Stop Loss Agreement compared to ceded losses and LAE of $10.3 million in the three months ended March 31, 1999, including $0.0 million ceded under the Stop Loss Agreement. Contributing to the increase in incurred losses and LAE in the three months ended March 31, 2000 from the three months ended March 31, 1999 were a 34.4% ($8.6 million) increase in the U.S. Direct Treaty Reinsurance and Insurance operation principally as a result of increased premium volume, a 28.2% ($12.4 million) increase in the International operation due to unfavorable development of prior years catastrophe losses and modest strengthening of prior period non-catastrophe reserves in the three months ended March 31, 2000 contrasted 17 against favorable development of prior years catastrophe losses for the three months ended March 31, 1999, and a 13.5% ($9.2 million) increase in the U.S. Broker Treaty operation, attributable to the increased premium volume as well as a reinsurance treaty with higher losses, and correspondingly lower commissions. These increases were partially offset by a 12.0% ($2.4 million) decrease in the Marine, Aviation and Surety operation mainly reflecting lower premium volume and a 2.2% ($0.2 million) decrease in the U.S. Facultative operation. Incurred losses and LAE for each operation were impacted by variability relating to changes in the level of premium volume and mix of business by class and type. The Company's loss and LAE ratio ("loss ratio"), which is calculated by dividing incurred losses and LAE by premiums earned, increased by 1.7 percentage points to 73.8% for the three months ended March 31, 2000 from 72.1% for the three months ended March 31, 1999 reflecting the incurred losses and LAE discussed above. The International, Marine, Aviation and Surety and U.S. Facultative operations' loss ratios increased to 85.4%, 73.5% and 65.5% for the three months ended March 31, 2000 from 60.9%, 64.7% and 59.3% for the three months ended March 31, 1999, respectively. The U.S. Broker Treaty and U.S. Direct Treaty Reinsurance and Insurance operations' loss ratios to 72.9% and 63.8% for the three months ended March 31, 2000 from 90.4% and 69.6% for the three months ended March 31, 1999, respectively. The loss ratios for all operations are impacted by the factors noted above as well as by changes in mix of business by class and type. Underwriting expenses increased by 5.5% to $77.2 million in the three months ended March 31, 2000 from $73.2 million in the three months ended March 31, 1999. Commission, brokerage, taxes and fees increased by $4.0 million, principally relating to the increase in premiums written and changes in the business mix. Other underwriting expenses remained constant at $11.5 million. Contributing to these underwriting expense increases were a 53.4% ($6.6 million) increase in the U.S. Direct Treaty Reinsurance and Insurance operation and a 10.3% ($2.3 million) increase in the U.S. Broker Treaty operation. The increase in the U.S. Broker Treaty operation was generally consistent with increased premium volume, partially offset by the impact of a reinsurance treaty with lower commissions and higher losses as noted earlier. These increases were partially offset by a 12.5% ($0.7 million) decrease in the U.S. Facultative operation, an 11.6% ($2.5 million) decrease in the International operation and a 5.1% ($0.5 million) decrease in the Marine, Aviation and Surety operation. The changes for each operation's expenses principally resulted from changes in commission expenses relating to changes in premium volume and business mix by class and type. The Company's expense ratio, which is calculated by dividing underwriting expenses by premiums earned, was 29.0% for the three months ended March 31, 2000 compared to 31.2% for the three months ended March 31, 1999. The Company's combined ratio, which is the sum of the loss and expense ratios, decreased to 102.8% in the three months ended March 31, 2000 compared to 103.4% in the three months ended March 31, 1999. The U.S. Broker Treaty and U.S. Direct Treaty Reinsurance and Insurance operations' combined ratios decreased to 95.9% and 99.5% for the three months ended March 31, 2000 from 119.8% and 103.7% for the three months ended March 31, 1999, respectively. The International, Marine, Aviation and Surety and U.S. Facultative operations' combined ratios increased to 114.3%, 113.4% and 95.1% for the three months ended March 31, 2000 from 90.9%, 97.2% and 89.2% for the three months ended March 31, 1999, respectively. These changes reflect the loss and expense ratio variability noted above. 18 Interest expense for the three months ended March 31, 2000 was $3.1 million compared to $0.0 million for the three months ended March 31, 1999. Interest expense for the three months ended March 31, 2000 reflects $1.6 million relating to the Company's issuance of senior notes and $1.5 million relating to the Company's borrowing under it's revolving credit facility. Other income for the three months ended March 31, 2000 was $0.8 million compared to $0.1 million for the three months ended March 31, 1999. Other income for the respective periods was principally attributable to the impact of fluctuations in foreign currency exchange rates. INVESTMENTS. Net investment income increased 2.8% to $63.8 million in the three months ended March 31, 2000 from $62.1 million in the three months ended March 31, 1999, principally reflecting the effect of investing the $119.3 million of cash flow from operations in the twelve months ended March 31, 2000 as well as the investment of $50.0 million of the proceeds from the Company's debt issuance. The annualized pre-tax yield on average cash and invested assets was 6.1% in the three months ended March 31, 2000 and in the three months ended March 31, 1999. Net realized capital gains were $7.9 million in the three months ended March 31, 200, reflecting realized capital gains on the Company's investments of $17.5 million which were partially offset by $9.6 million of realized capital losses, compared to net realized capital losses of $2.2 million in the three months ended March 31, 1999. The net realized capital losses in the three months ended March 31, 1999 reflected realized capital losses of $2.5 million which were offset by $0.3 million of realized capital gains. The realized capital gains in the three months ended March 31, 2000 arose mainly from activity in the Company's domestic equity portfolio, whereas the realized capital gains in the three months ended March 31, 1999 were attributable to activity in the Company's foreign taxable fixed maturities portfolio. The realized capital losses in the three months ended March 31, 2000 arose mainly from activity in the Company's tax-exempt fixed maturities portfolio, whereas, the realized capital losses in the three months ended March 31, 1999 mainly arose from activity in the Company's taxable fixed maturities portfolio. INCOME TAXES. The Company recognized income tax expense of $13.0 million in the three months ended March 31, 2000 compared to $10.8 million in the three months ended March 31, 1999. The principal cause of this change was the increase in net realized capital gains. NET INCOME. Net income was $49.1 million in the three months ended March 31, 2000 compared to $41.2 million in the three months ended March 31, 1999. This increase generally reflects the increases in net realized capital gains, together with the improved underwriting and investment results, partially offset by increased interest expense. FINANCIAL CONDITION INVESTED ASSETS. Aggregate invested assets, including cash and short-term investments, were $4,265.8 million at March 31, 2000 and $4,139.2 million at December 31, 1999. The increase in invested assets between December 31, 1999 and March 31, 2000 resulted primarily from its issuance of senior notes from which $50.0 million was retained in the Company and subsequently invested, $47.0 million in credit facility borrowings, $41.4 million in net unrealized appreciation of the Company's fixed maturity investments and $24.6 million in cash flows from operations generated during the three months ended March 31, 19 2000, partially offset by $18.0 million in net unrealized depreciation of the Company's equity portfolio and $16.4 million in share repurchases. LIQUIDITY. The Company's liquidity requirements are met on both a short- and long-term basis by funds provided by premiums collected, investment income, collected reinsurance receivables balances and from the sale and maturity of investments together with the availability of funds under the Company's revolving credit facility. The Company's net cash flows from operating activities were $24.6 million and $108.7 million in the three months ended March 31, 2000 and 1999, respectively. These cash flows were impacted by recoveries under the Company's Stop Loss Agreement with Gibraltar, which contributed $9.5 million and $79.0 million of such net cash flows in the three months ended March 31, 2000 and 1999, respectively, as well as by net catastrophe loss payments of $15.0 million and $8.0 million in the three months ended March 31, 2000 and 1999, respectively. Through March 31, 2000, cessions under the Stop Loss Agreement have aggregated $285.6 million with available remaining limits net of coinsurance of $89.4 million. Excluding the Stop Loss Agreement recoveries, management believes the decrease in net cash flows from operating activities generally reflects changes in the Company's mix of business and variability in the payout of loss reserves. On February 24, 2000, the Company announced an agreement with The Prudential to acquire all of the issued and outstanding shares of Gibraltar for approximately $52.0 million. Closing of the acquisition will be subject to the satisfaction of customary closing conditions and the receipt of regulatory approvals. Upon the closing of the acquisition, the Company's current reinsurance contracts with Gibraltar, including the Stop Loss Agreement, will remain in effect. However, these contracts will become transactions with affiliates with the financial impact eliminated through inter-company accounts. The Prudential's guarantee of Gibraltar's obligations to the Company will be terminated and The Prudential will be released from its obligations. In connection with the acquisition, The Prudential will provide reinsurance to Gibraltar covering 80% of the first $200.0 million of any adverse development in Gibraltar's reserves. Proceeds from sales, calls and maturities and investment asset acquisitions were $169.8 million and $276.9 million, respectively, in the three months ended March 31, 2000, compared to $173.8 million and $239.5 million, respectively, in the three months ended March 31, 1999. The activity in the three months ended March 31, 2000 generally reflected normal portfolio management activity aimed at enhancing the Company's portfolio yield. The Company's current investment strategy seeks to maximize after-tax income through a high quality, diversified, duration sensitive, taxable bond and tax-exempt municipal bond portfolio, while maintaining an adequate level of liquidity. On December 21, 1999, the Company entered into a three-year senior revolving credit facility with a syndicate of lenders (the "Credit Facility"), which replaced its prior credit facility which had been extended in June 1999 and increased from $50.0 million to $75.0 million on November 9, 1999. First Union National Bank is the administrative agent for the Credit Facility. The Credit Facility will be used for liquidity and general corporate purposes and to refinance existing debt under the Company's prior credit facility, which has been terminated. The Credit Facility provides for the borrowing of up to $150.0 million with interest at a rate selected by the Company equal to either (i) the Base Rate (as defined below) or (ii) an adjusted London InterBank Offered Rate 20 ("LIBOR") plus a margin. The Base Rate is the higher of the rate of interest established by First Union National Bank from time to time as its prime rate or the Federal Funds rate plus 0.5% per annum. The amount of margin and the fees payable for the Credit Facility depend upon the Company's senior unsecured debt rating. Group has guaranteed all of the Company's obligations under the Credit Facility. The Credit Facility requires Group to maintain a debt to capital ratio of not greater than 0.35 to 1, Holdings to maintain a minimum interest coverage ratio of 2.5 to 1 and Everest Re to maintain its statutory surplus at $850.0 million plus 25% of future aggregate net income and 25% of future aggregate capital contributions. The Company was in compliance with these requirements at March 31, 2000 as well as for the three months ended March 31, 2000. At March 31, 2000 and 1999, the Company had outstanding borrowings under the Credit Facility of $106.0 million and $0.0 million, respectively. Interest expense incurred in connection with these borrowings was $1.5 million and $0.0 million for the periods ended March 31, 2000 and 1999, respectively. During the first quarter of 2000, the Company completed a public offering of $200.0 million principal amount of 8.75% senior notes due March 15, 2010 and $250.0 million principal amount of 8.5% senior notes due March 15, 2005. The Company distributed $400.0 million of these proceeds to Group of which $250.0 million was used by Group to capitalize Everest Reinsurance (Bermuda), Ltd. Interest expense incurred in connection with these senior notes was $1.6 million for the three months ended March 31, 2000. STOCKHOLDERS' EQUITY. The Company's stockholders' equity decreased to $975.1 million as of March 31, 2000, from $1,327.5 million as of December 31, 1999, principally reflecting a $400.0 million distribution to Group as a result of the Company's debt issuance and $16.4 million in treasury stock acquired in the three months ended March 31, 2000, partially offset by net income of $49.1 million for the three months ended March 31, 2000 and an increase of $15.5 million in unrealized appreciation on investments, net of deferred taxes. Prior to the restructuring, the Company repurchased 0.648 million shares of its common shares at an average price of $25.23 per share, raising the total repurchases under the Company's authorized repurchase program to 4.718 million shares at an average price of $27.60 per share with a total repurchase expenditure to date of $130.3 million. As part of the Company's restructuring: (i) the treasury stock held by the Company prior to February 24, 2000 was retired, resulting in a reduction to treasury stock with a corresponding reduction of paid in capital and common stock; (ii) all issued and outstanding common stock of the Company was retired, as the stockholders of the Company became shareholders of Group; and (iii) the Company issued 1,000 shares of common stock to Group as its sole stockholder. MARKET SENSITIVE INSTRUMENTS. The Company's risks associated with market sensitive instruments have not changed materially since the period ended December 31, 1999. SAFE HARBOR DISCLOSURE. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 (the "Act"), the Company in its Form 10-K for the fiscal year ended December 31, 1999 set forth cautionary statements identifying important factors, among others, that could cause its actual results to differ materially from those which might be projected, forecasted or estimated in its forward-looking statements, as defined in the Act, made by or on behalf of the Company in press releases, written statements 21 or documents filed with the Securities and Exchange Commission, or in its communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls. These cautionary statements supplement other factors contained in this report which could cause the Company's actual results to differ materially from those which might be projected, forecasted or estimated in its forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the Company's results to differ materially from such forward-looking statements. Such forward-looking statements may include, but are not limited to, projections of premium revenue, investment income, other revenue, losses, expenses, earnings (including earnings per share), cash flows, and common stockholders' equity (including book value per share), plans for future operations, investments, financing needs, capital plans, dividends, plans relating to products or services of the Company, and estimates concerning the effects of litigation or other disputes, as well as assumptions for any of the foregoing and are generally expressed with words such as "believes," "estimates," "expects," "anticipates," "plans," "projects," "forecasts," "goals," "could have," "may have" and similar expressions. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 22 PART I - ITEM 3 EVEREST REINSURANCE HOLDINGS, INC. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK INSTRUMENTS. The Company's risks associated with market sensitive instruments have not changed materially since the period ended December 31, 1999. 23 EVEREST REINSURANCE HOLDINGS, INC. OTHER INFORMATION PART II - ITEM 1. LEGAL PROCEEDINGS The Company is involved from time to time in ordinary routine litigation and arbitration proceedings incidental to its business. The Company does not believe that there are any other material pending legal proceedings to which it or any of is subsidiaries or their properties are subject. PART II - ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS a. A special meeting of stockholders was held on February 23, 2000. c. An Agreement and Plan of Merger among Everest Reinsurance Holdings, Inc., Everest Re Group, Ltd. and Everest Re Merger Corporation was approved by the stockholders. The holders of 28,314,453 shares voted in favor of the Agreement and Plan of Merger; the holders of 780,732 shares voted against the Agreement and Plan of Merger; and the holders of 31,200 shares abstained. There were no broker-non-votes. PART II - ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a. Exhibit Index: Exhibit No. ----------- 3.2 By-Laws of Everest Reinsurance Holdings, Inc., filed herewith. 27.1 Financial Data Schedule, filed herewith. b. Reports on Form 8-K A report on Form 8-K dated February 23, 2000 was filed on February 24, 2000 reporting the completion of a corporate restructuring involving the Company and reporting that Holdings entered into an agreement with The Prudential Insurance Company of America to acquire Gibraltar Casualty Company. A report on Form 8-K, dated March 14, 2000 was filed on March 15, 2000 reporting that Holdings closed its offering of 8.5% Senior Notes due March 15, 2005 and 8.75% Senior Notes due March 15, 2010. 24 EVEREST REINSURANCE HOLDINGS, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Everest Reinsurance Holdings, Inc. (Registrant) - By: /S/ Stephen L. Limauro ----------------------------------- Stephen L. Limauro Duly Authorized Officer, Senior Vice President and Chief Financial Officer Dated: May 9, 2000 EX-3.2 2 BYE-LAWS OF EVEREST REINSURANCE HOLDINGS, INC. Exhibit 3.2 BY - LAWS OF EVEREST REINSURANCE HOLDINGS, INC. ARTICLE I MEETING OF STOCKHOLDERS ----------------------- Section 1. The annual meeting of the stockholders of the corporation shall be held on a date and time designated by the Board of Directors for the election of directors and the transaction of such other business as may properly come before the meeting. Unless otherwise determined by the Board of Directors, such meeting shall be held at the principle executive office of the corporation. Section 2. Special meetings of the stockholders, except those regulated otherwise by statute or the Certificate of Incorporation, may be called at any time by the Chairman of the Board and Chief Executive Officer, the President, or the Board of Directors, and shall be called by the Chairman of the Board and Chief Executive Officer, the President, or the Secretary upon the request of a majority of the Board of Directors or of the holders of the majority of the outstanding shares entitled to vote, made to the Chairman of the Board and Chief Executive Officer, the President, or the Secretary in writing, stating the purpose or purposes of the proposed meeting. Section 3. Written notice of each meeting of stockholders stating the date, time and place, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given by serving a copy of such notice upon each stockholder entitled to vote at such meeting, either personally, by facsimile or by mail, not less than ten nor more than sixty days before the date of the meeting. If mailed, such copy shall be addressed to each such stockholder at his address as it appears on the records of the corporation. Section 4. At all meetings of stockholders, the holders of record of a majority of the outstanding shares entitled to vote, present either in person or by proxy, shall constitute a quorum, except as may be otherwise provided by law, by the Certificate of Incorporation or by the By-Laws. A quorum, once established, shall not be broken by the withdrawal of enough votes to leave less than a quorum and the votes present may continue to transact business until adjournment. Any meeting of stockholders may be adjourned to a designated time and place by the vote of a majority of the stockholders present in person or by proxy and entitled to vote, even though less than a quorum is so present. No notice of such an adjourned meeting of stockholders need be given, other than by announcement at the meeting, unless the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed. At any such adjourned meeting at which a quorum shall attend, any business may be transacted which might have been transacted at the meeting as originally called. Section 5. Every stockholder of record entitled to vote shall be entitled at every meeting of the stockholders to one vote for every share of voting stock standing in his name. Every such stockholder shall have the right to vote in person or by proxy, but no proxy shall be voted after three years from its date, unless the proxy provides for a longer period. All elections of directors shall be by a majority vote of all outstanding shares entitled to vote and, unless otherwise provided by law, by the Certificate of Incorporation or by the By-Laws, all questions shall be decided by the vote of a majority of the outstanding shares entitled to vote thereon. Section 6. Whenever by statute or under any provision of the Certificate of Incorporation or the By-Laws the vote of the holders of stock of the corporation is required or permitted to be taken for or in connection with any corporate action, the meeting and vote of such stockholders may be dispensed with, without prior notice and without a vote, if a consent in writing, setting forth the action so taken shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE II DIRECTORS --------- Section 1. The business and affairs of the corporation shall be managed by the Board of Directors consisting of a minimum of three directors. The number of directors shall not be subject to any maximum and shall be fixed from time to time either by the Board of Directors or by the stockholders. Each director shall hold office until his successor is elected and qualified, or until his earlier resignation or removal. The Board of Directors may adopt such rules and regulations for the call and conduct of its meetings and the management of the affairs of the corporation as it may deem proper, not inconsistent with the laws of the State of Delaware or the By-Laws. Meetings of the Board of Directors, or of any committee thereof, may be held either within or outside of the State of Delaware. Section 2. At each meeting of the Board of Directors, the presence of a majority of the total number of members of the Board of Directors then holding office shall be necessary and sufficient to constitute a quorum for the transaction of business. In the absence of a quorum, a majority of those present at the time and place of any meeting may adjourn the meeting from time to time until a quorum shall be present and the meeting may be held as adjourned without further notice or waiver. A majority of those present at any meeting at which a -2- quorum is present may decide any questions brought before such meeting, except as otherwise provided by law, the Certificate of Incorporation of the Company or these By-Laws. Members of the Board of Directors may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other and such participation shall constitute presence in person at such meeting. Section 3. The Chairman of the Board and Chief Executive Officer or the President may call a special meeting of the Board of Directors, twenty-four (24) hours notice of which shall be given in person or by mail, telegraph, telephone, facsimile, cable, courier service or electronic mail. At the written request of two directors, such officers or the Secretary shall call a special meeting in like manner and on like notice. Regular meetings of the Board of Directors may be held without notice at such time and places as the Board may determine by prior resolution. Section 4. Except as provided in Section 5 of this Article, vacancies occurring in the membership of the Board of Directors, from whatever cause arising, and newly created directorships resulting from any increase in the number of directors, may be filled by the affirmative vote of a majority of the directors in office at the time, although less than a quorum, or of a sole remaining director. Section 5. Any one or more or all the directors may be removed from office, either with or without cause, at any time, by the affirmative vote of the stockholders holding a majority of the outstanding stock, and thereupon the terms of such director or directors who shall have been so removed shall forthwith terminate. Any vacancy or vacancies may be filled by a majority of the remaining Directors, though less than a quorum, provided, however, that the stockholders removing any Director may fill the vacancy caused by such removal. Section 6. The Board of Directors may, by resolution or resolutions passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more directors of the corporation. The board may also designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in the resolution of the Board or in the By-Laws, shall have and may exercise all the powers and authority of the board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it, except that no such committee shall have such power or authority in reference to: (a) amending the Certificate of Incorporation; (b) adopting an agreement of merger or consolidation; -3- (c) recommending to the stockholders the sale, lease, or exchange of all or substantially all of the Company's property and assets; (d) recommending to the stockholders a dissolution of the Company or a revocation of dissolution; (e) amending or repealing of the By-Laws or adopting new By-Laws; (f) fixing compensation of the directors for serving on the Board or any committee thereof; (g) filling vacancies on the Board or any committee thereof; or (h) amending or repealing any resolution of the Board which by its terms shall not be so amendable or repealable. The Board may in the resolution designating a committee, provide that such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. The Board may also in the resolution designating a committee, adopt rules and regulations for the call and conduct of the meetings of such committee. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. Section 7. Any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if all members of the Board or of such committee, as the case may be, consent thereto in writing and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee. ARTICLE III OFFICERS -------- Section 1. The officers of the corporation shall be a Chairman of the Board and Chief Executive Officer, a President, a Treasurer, a Comptroller, and a Secretary (of whom only the Chairman of the Board and Chief Executive Officer need be a director of the corporation), and one or more Vice Presidents, Assistant Treasurers, Assistant Comptrollers and Assistant Secretaries, and such other officers, assistant officers or agents (none of whom need be a director) as the Board of Directors from time to time may determine. -4- Any two or more offices may be held by the same person, except that the offices of Chairman of the Board and Chief Executive Officer and Secretary or Assistant Secretary and of President and Secretary or Assistant Secretary may not be held by the same person; nor shall the offices of Chairman of the Board and Chief Executive Officer and Comptroller or Assistant Comptroller and of President and Comptroller or Assistant Comptroller be held by the same person. Any Vice President may, in the discretion of the Board of Directors be designated as "Executive" or "Senior" and, in the case of any appointed Vice President, may be designated by the proper officer of the corporation by departmental or functional classification, by any succeeding ordinal number or such other designation that the proper officer may from time to time determine. The Chairman of the Board and Chief Executive Officer, President, Treasurer, Comptroller, Secretary and officers at the level of Senior and Executive Vice President and above, and such other officers as the Board may from time to time determine, shall be elected by the Board of Directors. Elected officers shall hold office until a successor is elected and qualified or until their earlier resignation or removal. The Board of Directors may remove any officer from office at any time, with or without cause. All other officers of the corporation shall be appointed by the Chairman of the Board and Chief Executive Officer of the corporation or his designee. Appointed officers shall hold office until their resignation or until revocation of their appointment, with or without cause, by such proper officer or his designee or by the Board of Directors. No person shall be deemed to be an officer of the corporation, excepting such as shall have been elected or appointed and is holding office pursuant to the provisions of these By-Laws. The Board of Directors may require any and all officers and employees to give bonds. The Board of Directors shall fix the compensation of the Chairman and Chief Executive Officer, President, Comptroller, Treasurer and Secretary and all officers of the corporation at or above the level of Senior and Executive Vice President and such other officers as the Board may from time to time determine. The compensation for all officers other than those whose compensation requires approval of the Board of Directors under this By-Law shall be fixed by the proper officer of the corporation or his designee, in accordance with the corporation's compensation plans. Section 2. The Chairman of the Board and Chief Executive Officer shall be the Chief Executive Officer of the Company and shall have the general powers and duties of supervision and management usually vested in the office of Chief Executive Officer of a corporation. He shall preside at all -5- meetings of the stockholders and of the Board of Directors, if present thereat. Subject to the control of the Board of Directors, he shall supervise and direct the business of the Company and shall also have and perform such other duties as from time to time be assigned to him by the Board of Directors. He may sign with any other officer so duly authorized, certificates representing stock of the Company, the issuance of which shall have been duly authorized (the signature to which may be a facsimile signature) and may sign and execute documents in the name of the Company, including, but not limited to, deeds, mortgages, bonds, contracts, agreements, proxies, bank checks and bank drafts. From time to time, he shall report to the Board of Directors all matters within his knowledge which the interests of the Company may require to be brought to their attention. He shall have such other powers and perform such other duties as may from time to time be prescribed by the Board of Directors or these By-Laws. Section 3. The President shall have the responsibility to implement the directives of the Board of Directors and the Chairman of the Board and Chief Executive Officer as such directives relate to the corporation's business plans and the conduct of its business operations. He shall exercise all the powers and perform all the duties usual to such office. Unless prohibited by law, the Certificate of Incorporation or the By-Laws, the President may execute any contract, agreement or instrument necessary for the conduct of the business of the corporation. In the absence or incapacity of the Chairman of the Board and Chief Executive Officer, the President shall perform all the duties and exercise the authority of the Chairman of the Board and Chief Executive Officer. He shall also perform such other duties and have such other powers as may be prescribed or assigned to him from time to time by the Board of Directors, by the Chairman of the Board and Chief Executive Officer, or the By-Laws. Section 4. The Vice President or, if more than one, the Vice Presidents in the order established by the Board of Directors, shall in the absence or incapacity of the President, exercise all the powers and perform the duties of the President. The Vice Presidents shall also perform such other duties and have such other powers as may be prescribed or assigned to them, respectively, from time to time by the Chairman of the Board and Chief Executive Officer, the President, the Board of Directors or the By-Laws. Section 5. The Treasurer shall, except as may be otherwise provided in the By-Laws or by the Board of Directors, exercise all the powers and perform all the duties usual to such office, including having the care and custody of the funds and securities of the corporation and depositing the same with such depositories as the Board of Directors may designate. The Treasurer shall also perform such other duties and have such other powers as may be prescribed or assigned to him from time to time by the Chairman of the Board and Chief Executive Officer, the President, the Board of Directors or the By-Laws. Section 6. The Secretary shall exercise all the powers and perform all the duties usual to such office, including keeping the minutes of the meetings of the Board of Directors and of the stockholders, having custody of the seal of -6- the corporation and affixing the seal to documents when authorized to do so. He shall also perform such other duties and have such other powers as may be prescribed or assigned to him from time to time by the Chairman of the Board and Chief Executive Officer, the President, the Board of Directors or the By-Laws. Section 7. The Comptroller shall exercise all the powers and perform all the duties usual to such office, including supervising the accounts of the corporation, having supervision over and responsibility for the books, records, accounting and system of accounting and auditing in each office of the corporation. He shall also perform such other duties and have such other powers as may be prescribed or assigned to him from time to time by the Chairman of the Board and Chief Executive Officer, the President, the Board of Directors or the By-Laws. Section 8. The assistant officers of the corporation shall have such powers and authority and perform such duties as commonly pertain to their respective offices and as may be prescribed by the Chairman of the Board and Chief Executive Officer, the President, the Treasurer, the Secretary, the Comptroller, the Board of Directors or the By-Laws. ARTICLE IV CORPORATE SEAL -------------- The corporate seal shall be circular in form and shall contain the name of the corporation around the circumference and "Delaware 1973" in the center. ARTICLE V CAPITAL STOCK ------------- Section 1. Certificates of stocks shall be in such form or forms as shall be approved by the Board of Directors and shall be signed by the Chairman of the Board and Chief Executive Officer, or the President or a Vice President, and the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, such certificate may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. -7- Section 2. Transfers of shares shall only be made upon the books of the corporations by the registered holder in person or by attorney, duly authorized, and on surrender of the certificate or certificates for such shares, properly assigned for transfer. Section 3. Any person claiming a certificate of stock to be lost or destroyed shall make an affidavit or affirmation of that fact and shall give the corporation a bond of indemnity in such form and amount or unlimited in amount as the Board of Directors may prescribe or approve and, if requested to do so, shall advertise the fact of loss or destruction in such manner as the Board of Directors may prescribe, whereupon a new certificate may be issued for the same number of shares as the one claimed to be lost or destroyed. ARTICLE VI CHECKS AND DRAFTS ----------------- All checks, drafts or orders for the payment of money shall be signed by such officer or officers or agent or agents, and in such manner, as shall be determined from time to time by the Board of Directors. ARTICLE VII RECORD DATES ------------ In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. -8- ARTICLE VIII NOTICE AND WAIVER OF NOTICE --------------------------- Section 1. Whenever any notice is required by these By-Laws to be given, personal notice is not meant unless expressly so stated; and any notice so required shall be deemed to be sufficient if given by depositing it in the United States mail, postage prepaid, directed to the person entitled thereto at his address, as shown on the records of the corporation in the case of a stockholder, or to his last known post office address, if he is not a stockholder, and such notice shall be deemed to have been given on the day of such mailing. Section 2. Any notice required to be given under these By-Laws may be waived by the person entitled thereto. ARTICLE IX INDEMNIFICATION --------------- Section 1. Any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including any action or suit by or in the right of the corporation to procure a judgment in its favor) by reason of the fact that he is or was a director, officer, employee or agent of the corporation or, while a director, officer, employee or agent of the corporation, is or was serving at the request of the corporation as a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, shall be indemnified by the corporation, if, as and to the extent authorized by the laws of the State of Delaware, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with, or in connection with the defense or settlement of, such action, suit or proceeding. The indemnification provided by statute shall not be deemed exclusive of any other rights to which any person seeking indemnification may be entitled under any lawful agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. -9- Section 2. Expenses incurred by a person who is or was a director, officer, employee or agent of the corporation or, while a director, officer, employee or agent of the corporation, is or was serving at the request of the corporation as a director, officer, employee, trustee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, in appearing at, participating in or defending any such action, suit or proceeding shall be paid by the corporation at reasonable intervals in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of the director, officer, employee or agent to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by corporation as authorized by this Article. If a claim under this Article is not paid in full by the corporation within ninety (90) days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law or other applicable law for the corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the corporation. Neither the failure of the corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper in the circumstances because the claimant has met the applicable standard of conduct set forth in the Delaware General Corporation Law or other applicable law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. Section 3. The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee, agent or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against any liability asserted against him and incurred by him in any such capacity or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of the Delaware General Corporation Law or other applicable law. -10- ARTICLE X CONFLICTING INTERESTS --------------------- No director, officer or employee of the corporation at manager level or higher or other employee from time to time designated by the Chairman of the Board and Chief Executive Officer or the President shall have any position with or a substantial interest in any other enterprise operated for profit, the existence of which would conflict or might reasonably be supposed to conflict with the proper performance of his or her responsibilities to the corporation or which might tend to affect his or her independence of judgment with respect to transactions between the corporation and such other enterprise. If a director, officer or any such employee has a position with or substantial interest in another such enterprise, which, when acquired, did not create such an actual or apparent conflict of interest, he or she shall make timely disclosure of such position or interest to the Board of Directors when he or she learns that there is an impending transaction between such enterprise and the corporation or any subsidiary or affiliate of the corporation that might create such an actual or apparent conflict. The Board of Directors, which may act through an appropriate committee or sub-committee, shall adopt such regulations and procedures as shall from time to time appear to it sufficient to secure compliance with the above policy. ARTICLE XI RESIGNATIONS ------------ Any director, member of a committee, officer or agent of the corporation may resign at any time. Such resignation shall be made in writing, and shall take effect at the time specified therein, and if no time be specified, at the time of its receipt by the corporation. The acceptance of such resignation shall not be necessary to make it effective. ARTICLE XII AMENDMENTS ---------- These By-Laws may be altered, amended or repealed at any stockholders' meeting by the affirmative vote of the stockholders holding a majority of the outstanding shares entitled to vote, present in person or by proxy, provided that notice of such meeting shall have contained a reference to the proposed alteration, amendment or repeal. The Board of Directors also may alter, amend or repeal these By-Laws at any regular or special meeting, by a majority vote of the entire Board. -11- EX-27 3 FDS FOR EVEREST REINSURANCE HOLDINGS, INC. 10-Q
7 EVEREST REINSURANCE HOLDINGS, INC. AND SUBSIDIARIES FINANCIAL DATA SCHEDULE THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EVEREST REINSURANCE HOLDINGS, INC.'S FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 4,032,376 0 0 46,566 0 0 4,207,107 58,705 733,477 87,613 5,871,726 3,623,143 338,156 0 0 0 0 0 0 975,126 5,871,726 266,184 63,809 7,864 810 196,389 (5,063) 82,229 62,029 12,978 49,051 0 0 0 49,051 0 0 0 0 0 0 0 0 0
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