10-Q 1 0001.txt FORM 10-Q FOR EVEREST RE GROUP, LTD. 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: SEPTEMBER 30, 2000 1-15731 ---------------------- ----------------------- EVEREST RE GROUP, LTD. ------------------------------ (Exact name of Registrant as specified in its charter) BERMUDA NOT APPLICABLE ------------------------ ---------------------------- (State or other juris- (IRS Employer Identification diction of incorporation Number) or organization) C/O ABG FINANCIAL & MANAGEMENT SERVICES, INC. PARKER HOUSE WILDEY BUSINESS PARK, WILDEY ROAD ST. MICHAEL, BARBADOS (246) 436-6287 (Address, including zip code, and telephone number, including area code, of registrant's principal executive office) -------------------------------------------------------------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities 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 November 7, 2000 ----- ---------------------------- COMMON SHARES, $.01 PAR VALUE 45,847,852 EVEREST RE GROUP, LTD. INDEX TO FORM 10-Q PART I FINANCIAL INFORMATION --------------------- PAGE ---- ITEM 1. FINANCIAL STATEMENTS -------------------- Consolidated Balance Sheets at September 30, 2000 (unaudited) and December 31, 1999 3 Consolidated Statements of Operations and Comprehensive Income for the three months and nine months ended September 30, 2000 and 1999 (unaudited) 4 Consolidated Statements of Changes in Shareholders' Equity for the three months and nine months ended September 30, 2000 and 1999 (unaudited) 5 Consolidated Statements of Cash Flows for the three months and nine months ended September 30, 2000 and 1999 (unaudited) 6 Notes to Consolidated Interim Financial Statements (unaudited) 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ----------------------------------------------------------- AND RESULTS OF OPERATIONS 17 ------------------------- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 28 ---------------------------------------------------------- PART II OTHER INFORMATION ----------------- ITEM 1. LEGAL PROCEEDINGS 29 ----------------- ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 29 ----------------------------------------- ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ------------------------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None --------------------------------------------------- ITEM 5. OTHER INFORMATION None ----------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 29 -------------------------------- Part I - Item 1 EVEREST RE GROUP, LTD. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except par value per share)
September 30, December 31, ------------- ------------ 2000 1999 ------------- ------------ ASSETS: (unaudited) Fixed maturities - available for sale, at market value (amortized cost: 2000, $4,789,772; 1999, $3,940,625) $ 4,806,405 $ 3,885,278 Equity securities, at market value (cost: 2000, $24,021; 1999, $50,224) 41,737 90,693 Short-term investments 118,210 73,558 Other invested assets 29,542 27,482 Cash 66,326 62,227 ------------- ------------ Total investments and cash 5,062,220 4,139,238 Accrued investment income 82,590 64,898 Premiums receivable 358,577 294,941 Reinsurance receivables 468,389 742,513 Funds held by reinsureds 168,376 157,237 Deferred acquisition costs 97,806 82,713 Prepaid reinsurance premiums 44,623 9,582 Deferred tax asset 193,253 188,326 Other assets 32,850 24,854 ------------- ------------ TOTAL ASSETS $ 6,508,684 $ 5,704,302 ============= ============ LIABILITIES: Reserve for losses and adjustment expenses $ 3,780,914 $ 3,646,992 Unearned premium reserve 384,120 308,563 Funds held under reinsurance treaties 91,054 178,520 Losses in the course of payment 64,143 67,065 Contingent commissions 23,848 58,169 Other net payable to reinsurers 51,998 13,217 Current federal income taxes (11,511) (4,475) 8.5% Senior notes due 3/15/2005 249,597 - 8.75% Senior notes due 3/15/2010 198,986 - Revolving credit agreement borrowings 137,000 59,000 Accrued interest on debt and borrowings 2,278 106 Other liabilities 65,428 49,663 ------------- ------------ Total liabilities 5,037,855 4,376,820 ------------- ------------- SHAREHOLDERS' EQUITY: Preferred shares, par value: $0.01; 50 million shares authorized; no shares issued and outstanding - - Common shares, par value: $0.01; 200 million shares authorized; 45.8 million shares issued in 2000 and 50.9 million shares issued in 1999 458 509 Additional paid-in capital 253,525 390,912 Unearned compensation (187) (109) Accumulated other comprehensive income, net of deferred income taxes of $6.6 million in 2000 and deferred income taxes benefit of $9.1 million in 1999 15,422 (16,701) Retained earnings 1,201,666 1,074,941 Treasury shares, at cost; 0.0 million shares in 2000 and 4.4 million shares in 1999 (55) (122,070) ------------- ------------ Total shareholders' equity 1,470,829 1,327,482 ------------- ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 6,508,684 $ 5,704,302 ============= ============
The accompanying notes are an integral part of the consolidated financial statements. 3 EVEREST RE GROUP, LTD. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Dollars in thousands, except per share amounts)
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ------------------------- 2000 1999 2000 1999 --------- --------- ---------- ---------- (unaudited) REVENUES: Premiums earned $ 291,191 $ 285,480 $ 843,155 $ 795,034 Net investment income 78,897 62,232 218,353 188,882 Net realized capital (loss) (90) (7,686) (459) (17,139) Other income 605 1,860 1,045 258 --------- --------- ---------- ---------- Total revenues 370,603 341,886 1,062,094 967,035 --------- --------- ---------- ---------- CLAIMS AND EXPENSES: Incurred loss and loss adjustment expenses 219,953 203,199 650,011 568,920 Commission, brokerage, taxes and fees 65,863 78,143 177,793 214,384 Other underwriting expenses 12,826 12,089 37,542 36,073 Interest expense on senior notes 9,831 - 21,173 - Interest expense on credit facility 2,100 452 5,451 736 --------- --------- ---------- ---------- Total claims and expenses 310,573 293,883 891,970 820,113 --------- --------- ---------- ---------- INCOME BEFORE TAXES 60,030 48,003 170,124 146,922 Income tax 12,343 8,794 35,150 28,406 --------- --------- ---------- ---------- NET INCOME $ 47,687 $ 39,209 $ 134,974 $ 118,516 ========= ========= ========== ========== Other comprehensive income/(loss), net of tax 24,619 (57,314) 32,123 (155,835) --------- --------- ---------- ---------- COMPREHENSIVE INCOME/ (LOSS) $ 72,306 $ (18,105) $ 167,097 $ (37,319) ========= ========= ========== ========== PER SHARE DATA: Average shares outstanding (000's) 45,834 48,618 45,848 49,029 Net income per common share - basic $ 1.04 $ 0.81 $ 2.94 $ 2.42 ========= ========= ========== ========== Average diluted shares outstanding (000's) 46,414 48,796 46,181 49,236 Net income per common share - diluted $ 1.03 $ 0.80 $ 2.92 $ 2.41 ========= ========= ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 4 EVEREST RE GROUP, LTD. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Dollars in thousands, except per share amounts)
Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ----------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- (unaudited) COMMON SHARES (SHARES OUTSTANDING): Balance, beginning of period 45,821,341 48,654,228 46,457,817 49,989,204 Issued during the period 26,511 - 38,655 16,800 Treasury shares acquired during the period - (500,297) (650,400) (1,854,417) Treasury shares reissued during the period - 1,200 1,780 3,544 ---------- ---------- ---------- ---------- Balance, end of period 45,847,852 48,155,131 45,847,852 48,155,131 ========== ========== ========== ========== COMMON SHARES (PAR VALUE): Balance, beginning of period $ 458 $ 509 $ 509 $ 509 Retirement of common shares during the period - - (51) - Issued during the period - - - - ---------- ---------- ---------- ---------- Balance, end of period 458 509 458 509 ---------- ---------- ---------- ---------- ADDITIONAL PAID IN CAPITAL: Balance, beginning of period 252,769 390,891 390,912 390,559 Retirement of treasury shares during the period - - (138,546) - Common shares issued during the period 756 - 1,161 307 Treasury shares reissued during the period - 11 (2) 36 ---------- ---------- ---------- ---------- Balance, end of period 253,525 390,902 253,525 390,902 ---------- ---------- ---------- ---------- UNEARNED COMPENSATION: Balance, beginning of period (64) (160) (109) (240) Net increase during the period (123) 29 (78) 109 ---------- ---------- ---------- ---------- Balance, end of period (187) (131) (187) (131) ---------- ---------- ---------- ---------- ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF DEFERRED INCOME TAXES: Balance, beginning of period (9,197) 86,997 (16,701) 185,518 Net increase (decrease) during the period 24,619 (57,314) 32,123 (155,835) ---------- ---------- ---------- ---------- Balance, end of period 15,422 29,683 15,422 29,683 ---------- ---------- ---------- ---------- RETAINED EARNINGS: Balance, beginning of period 1,156,730 1,001,906 1,074,941 928,500 Net income 47,687 39,209 134,974 118,516 Dividends declared ($0.06 and $0.18 per share in 2000 and 1999) (2,751) (2,920) (8,249) (8,821) ---------- ---------- ---------- ---------- Balance, end of period 1,201,666 1,038,195 1,201,666 1,038,195 ---------- ---------- ---------- ---------- TREASURY SHARES AT COST: Balance, beginning of period (55) (69,386) (122,070) (25,642) Retirement of treasury shares during the period - - 138,399 - Treasury shares acquired during the period - (12,011) (16,426) (55,810) Treasury shares reissued during the period - 28 42 83 ---------- ---------- ---------- ---------- Balance, end of period (55) (81,369) (55) (81,369) ---------- ---------- ---------- ---------- TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD $1,470,829 $1,377,789 $1,470,829 $1,377,789 ========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 5 EVEREST RE GROUP, LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Three Months Ended Nine Months Ended September 30, September 30, --------------------- ----------------------- 2000 1999 2000 1999 --------- --------- ---------- ---------- CASH FLOWS FROM OPERATING (unaudited) ACTIVITIES: Net income $ 47,687 $ 39,209 $ 134,974 $ 118,516 Adjustments to reconcile net income to net cash provided by operating activities net of effects from the purchase of Mt. McKinley Insurance Company: (Increase) in premiums receivable (22,045) (18,483) (69,207) (35,324) Decrease in funds held, net 7,387 46,572 1,419 26,474 (Increase) decrease in reinsurance receivables (14,400) 14,345 (32,218) 143,046 Decrease (increase) in deferred tax asset 4,122 (6,959) (360) (16,141) Increase (decrease) in reserve for losses and loss adjustment expense 24,651 (22,781) 8,787 (85,629) Increase in unearned premiums 33,185 2,511 78,113 11,159 (Increase) in other assets and liabilities (52,959) (36,783) (65,552) (46,746) Non cash compensation expense (123) 29 (78) 109 Accrual of bond discount/ amortization of bond premium (2,446) (1,060) (7,557) (3,600) Amortization of underwriting discount on senior notes 36 - 76 - Realized capital losses 90 7,686 459 17,139 --------- --------- ---------- ---------- Net cash provided by operating activities 25,185 24,286 48,856 129,003 --------- --------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from fixed maturities matured/called - available for sale 61,965 51,294 150,770 174,973 Proceeds from fixed maturities sold - available for sale 23,664 321,662 434,801 648,756 Proceeds from equity securities sold - 26,647 48,267 29,267 Proceeds from other invested assets sold - 50 - 181 Cost of fixed maturities acquired - available for sale (512,133) (386,479) (1,482,316) (924,124) Cost of equity securities acquired (1,107) (4,570) (2,930) (5,215) Cost of other invested assets acquired (18) (781) (1,576) (2,610) Net sales (purchases) of short-term securities 35,645 (4,279) (41,404) (22,994) Net (decrease) increase in unsettled securities transactions (6,313) (9,087) 5,555 4,964 Payment for purchase of Mt. McKinley Insurance Company, net of cash acquired 349,743 - 349,743 - --------- --------- ---------- ---------- Net cash (used in) investing activities (48,554) (5,543) (539,090) (96,802) --------- --------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Acquisition of treasury shares net of reissuances - (11,962) (16,533) (55,691) Common shares issued during the period 756 (10) 1,110 307 Dividends paid to shareholders (2,751) (2,920) (8,249) (8,821) Proceeds from issuance of senior notes - - 448,507 - Net borrowing on revolving credit agreement 31,000 - 78,000 35,000 --------- --------- ---------- ---------- Net cash provided by (used in) financing activities 29,005 (14,892) 502,835 (29,205) --------- --------- ---------- ---------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (6,147) 797 (8,502) (3,564) --------- --------- ---------- ---------- Net (decrease) increase in cash (511) 4,648 4,099 (568) Cash, beginning of period 66,837 34,110 62,227 39,326 --------- --------- ---------- ---------- Cash, end of period $ 66,326 $ 38,758 $ 66,326 $ 38,758 ========= ========= ========== ========== SUPPLEMENTAL CASH FLOW INFORMATION CASH TRANSACTIONS: Income taxes paid, net $ 16,553 $ 15,989 $ 55,072 $ 49,623 Interest paid $ 21,467 $ - $ 24,377 $ 213 NON-CASH FINANCING TRANSACTION: Issuance of common shares $ (123) $ 29 $ (78) $ 109
In the quarter ended September 30, 2000, the Company purchased all of the capital stock of Mt. McKinley Insurance Company for $51,800. In conjunction with the acquisition, the fair value of assets acquired was $679,672 and liabilities assumed was $627,872. The accompanying notes are an integral part of the consolidated financial statements. 6 EVEREST RE GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 1. GENERAL On February 24, 2000, a corporate restructuring was completed and Everest Re Group, Ltd. ("Group") became the new parent holding company of Everest Reinsurance Holdings, Inc. ("Holdings"), which remains the holding company for Group's U.S. based operations. The "Company" means Group and its subsidiaries, except when referring to periods prior to February 24, 2000, when it means Holdings and its subsidiaries. The consolidated financial statements of the Company for the three months and nine months ended September 30, 2000 and 1999 include all adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair presentation of the results on an interim basis. Certain financial information which is normally included in annual financial statements prepared in accordance with generally accepted accounting principles has been omitted since it is not required for interim reporting purposes. The year end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The results for the three months and nine months ended September 30, 2000 and 1999 are not necessarily indicative of the results for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, 1999, 1998 and 1997 included in the Company's most recent Form 10-K filing. 2. ACQUISITION OF GIBRALTAR CASUALTY COMPANY On September 19, 2000, Holdings completed the acquisition of all of the issued and outstanding capital stock of Gibraltar Casualty Company ("Gibraltar") from The Prudential Insurance Company of America ("The Prudential") pursuant to a Stock Purchase Agreement between The Prudential and Holdings dated February 24, 2000 and amended on August 8, 2000 (the "Stock Purchase Agreement"). As a result of the acquisition, Gibraltar became a wholly owned subsidiary of Holdings and, immediately following the acquisition, its name was changed to Mt. McKinley Insurance Company ("Mt. McKinley"). Mt. McKinley, a run-off property and casualty insurer in the United States, has had a long relationship with Holdings and its principal operating company, Everest Reinsurance Company ("Everest Re"). Mt. McKinley was formed in 1978 by Everest Re and wrote direct insurance until 1985, when it was placed in run-off. In 1991, Mt. McKinley became a subsidiary of The Prudential. Mt. McKinley is also a reinsurer of Everest Re (all as detailed in filings with the Securities and Exchange Commission). Under a series of transactions dating to 1986, Mt. McKinley reinsured several components of Everest Re's business. In particular, Mt. McKinley provided stop-loss reinsurance protection, in connection with the Company's October 5, 1995 Initial Public Offering ("IPO"), for any adverse loss development on Everest Re's June 30, 1995 (December 31, 1994 for catastrophe losses) reserves, with $375.0 million in limits, of which $89.4 million remains available (the "Stop Loss Agreement"). The Stop Loss Agreement and other reinsurance contracts between Mt. McKinley and Everest Re remain in effect following the 7 EVEREST RE GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 acquisition. However, these contracts have become transactions with affiliates with the financial impact eliminated through inter-company accounts. 3. CONTINGENCIES The Company continues to receive claims under expired contracts which assert alleged injuries and/or damages relating to or resulting from toxic torts, toxic waste and other hazardous substances, such as asbestos. The Company's asbestos claims typically involve potential liability for bodily injury from exposure to asbestos or for property damage resulting from asbestos or products containing asbestos. The Company's environmental claims typically involve potential liability for (a) the mitigation or remediation of environmental contamination or (b) bodily injury or property damages caused by the release of hazardous substances into the land, air or water. The Company's reserves include an estimate of the Company's ultimate liability for asbestos and environmental claims for which ultimate value cannot be estimated using traditional reserving techniques. There are significant uncertainties in estimating the amount of the Company's potential losses from asbestos and environmental claims. Among the complications are: (a) potentially long waiting periods between exposure and manifestation of any bodily injury or property damage; (b) difficulty in identifying sources of asbestos or environmental contamination; (c) difficulty in properly allocating responsibility and/or liability for asbestos or environmental damage; (d) changes in underlying laws and judicial interpretation of those laws; (e) potential for an asbestos or environmental claim to involve many insurance providers over many policy periods; (f) long reporting delays, both from insureds to insurance companies and ceding companies to reinsurers; (g) historical data concerning asbestos and environmental losses, which is more limited than historical information on other types of casualty claims; (h) questions concerning interpretation and application of insurance and reinsurance coverage; and (i) uncertainty regarding the number and identity of insureds with potential asbestos or environmental exposure. Although these complications have become less severe in recent years, management believes that these factors continue to render reserves for asbestos and environmental losses significantly less subject to traditional actuarial methods than are reserves on other types of losses. Given these uncertainties, management believes that no meaningful range for such ultimate losses can be established. The Company establishes reserves to the extent that, in the judgement of management, the facts and prevailing law reflect an exposure for the Company or its ceding companies. In connection with the acquisition of Mt. McKinley, which has significant exposure to asbestos and environmental claims, Prudential Property and Casualty Insurance Company ("Prupac"), a subsidiary of The Prudential, provided reinsurance to Mt. McKinley covering 80% ($160.0 million) of the first $200.0 million of any adverse development of Mt. McKinley's reserves as of September 19, 2000 and The Prudential guaranteed Prupac's obligations to Mt. McKinley. Due to the uncertainties discussed above, the ultimate losses may vary materially 8 EVEREST RE GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 from current loss reserves and, depending on coverage under the Company's various reinsurance arrangements, could have a material adverse effect on the Company's future financial condition, results of operations and cash flows. The following table shows the development of prior year asbestos and environmental reserves on both a gross and net of retrocessional basis for the three months and nine months ended September 30, 2000 and 1999:
(dollar amounts in thousands) Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 ---------------------------------------------------- Gross basis: Beginning of period reserves $ 580,268 $ 639,493 $ 614,236 $ 660,793 Incurred losses - 469 - 3,054 Paid losses (1) 153,035 (13,116) 119,067 (37,001) ----------------------------------------------------- End of period reserves $ 733,303 $ 626,846 $ 733,303 $ 626,846 ==================================================== Net basis: Beginning of period reserves $ 344,904 $ 373,013 $ 365,069 $ 263,542 Incurred losses - - - - Paid losses (1) (2) 305,877 (6,014) 285,712 103,457 ---------------------------------------------------- End of period reserves $ 650,781 $ 366,999 $ 650,781 $ 366,999 ====================================================
(1) Paid losses for the three months and nine months ended September 30, 2000 were reduced by $161.4 million gross and $310.8 million net, respectively, reflecting the incoming reserves at the acquisition of Mt. McKinley, together with the impact of eliminating consolidation entries with respect to inter-company reinsurance pre-dating the acquisition. (2) $0.0 million and $118.8 million were ceded as paid losses under the Stop Loss Agreement in the three months and nine months ended September 30, 1999, respectively. At September 30, 2000, the gross reserves for asbestos and environmental losses were comprised of $114.1 million representing case reserves reported by ceding companies, $77.7 million representing additional case reserves established by the Company on assumed reinsurance claims, $125.3 million representing case reserves established by the Company on direct excess insurance claims, including Mt. McKinley, and $416.2 million representing incurred but not reported ("IBNR") reserves. 9 EVEREST RE GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 The Company is involved from time to time in ordinary routine litigation and arbitration proceedings incidental to its business. The Company does not believe that there are any other material pending legal proceedings to which it or any of its subsidiaries or their properties are subject. The Prudential sells annuities which are purchased by property and casualty insurance companies to settle certain types of claim liabilities. In 1993 and prior years, the Company, for a fee, accepted the claim payment obligation of these property and casualty insurers, and, concurrently, became the owner of the annuity or assignee of the annuity proceeds. In these circumstances, the Company would be liable if The Prudential were unable to make the annuity payments. The estimated cost to replace all such annuities for which the Company was contingently liable at September 30, 2000 was $141.9 million. The Company has purchased annuities from an unaffiliated life insurance company to settle certain claim liabilities of the Company. Should the life insurance company become unable to make the annuity payments, the Company would be liable for those claim liabilities. The estimated cost to replace such annuities at September 30, 2000 was $12.4 million. 10 EVEREST RE GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 4. EARNINGS PER SHARE Net income per common share has been computed as follows:
(shares and dollar amounts in thousands except per share amounts) Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 ------------------------------------------------- Net income (numerator) $ 47,687 $ 39,209 $ 134,974 $ 118,516 ================================================= Weighted average common and effect of dilutive shares used in the computation of net income per share: Average shares outstanding - basic(denominator) 45,834 48,618 45,848 49,029 Effect of dilutive shares 580 178 333 207 ------------------------------------------------- Average shares outstanding - diluted (denominator) 46,414 48,796 46,181 49,236 Net income per common share: Basic $ 1.04 $ 0.81 $ 2.94 $ 2.42 Diluted $ 1.03 $ 0.80 $ 2.92 $ 2.41
As of September 30, 1999, options to purchase 1,123,000 shares of common stock were outstanding but were not included in the computation of diluted earnings per share for the three month and nine month period ended on such date, because the options' exercise price was greater than the average market price of the common shares during the period. As of September 30, 2000, all outstanding options were included in the computation of diluted earnings per share for the three month and nine month period ended on such date, because the average market price of the common shares during the period was greater than the options' exercise price. 11 EVEREST RE GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 5. OTHER COMPREHENSIVE INCOME The Company's other comprehensive income / (loss) is comprised as follows:
(dollar amounts in thousands) Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 ------------------------------------------------ Net unrealized appreciation (depreciation) of investments, net of deferred income taxes $ 25,360 ($ 57,306) $ 33,061 ($ 159,718) Currency translation adjustments, net of deferred income taxes (741) (8) (938) 3,883 ------------------------------------------------ Other comprehensive income/(loss), net of deferred income taxes $ 24,619 ($ 57,314) $ 32,123 ($ 155,835) ================================================
6. CREDIT LINE On December 21, 1999, Holdings entered into a three-year senior revolving credit facility with a syndicate of lenders (the "Credit Facility"). First Union National Bank is the administrative agent for the Credit Facility. The Credit Facility will be used for liquidity and general corporate purposes and to refinance existing debt under Holdings' prior credit facility, which has been terminated. The Credit Facility provides for the borrowing of up to $150.0 million with interest at a rate selected by the Company equal to either (i) the Base Rate (as defined below) or (ii) an adjusted London InterBank Offered Rate ("LIBOR") plus a margin. The Base Rate is the higher of the rate of interest established by First Union National Bank from time to time as its prime rate or the Federal Funds rate plus 0.5% per annum. The amount of margin and the fees payable for the Credit Facility depend upon Holdings' senior unsecured debt rating. The Company has guaranteed all of Holdings' obligations under the Credit Facility. The Credit Facility requires Group to maintain a debt to capital ratio of not greater than 0.35 to 1, Holdings to maintain a minimum interest coverage ratio of 2.5 to 1 and Everest Reinsurance Company ("Everest Re") to maintain its statutory surplus at $850.0 million plus 25% of future aggregate net income and 25% of future aggregate capital contributions. The Company was in compliance with all covenants under the facility at September 30, 2000 as well as for the three months and nine months ended September 30, 2000. 12 EVEREST RE GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 As of September 30, 2000 and 1999, Holdings had outstanding credit line borrowings of $137.0 million and $35.0 million, respectively. Interest expense incurred in connection with these borrowings was $2.1 million and $0.5 million for the three months ended September 30, 2000 and 1999, respectively, and $5.5 million and $0.7 million for the nine months ended September 30, 2000 and 1999, respectively. 7. SENIOR NOTES During the first quarter of 2000, Holdings completed a public offering of $200.0 million principal amount of 8.75% senior notes due March 15, 2010 and $250.0 million principal amount of 8.5% senior notes due March 15, 2005. Holdings distributed $400.0 million of these proceeds to 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 $9.8 million and $21.2 million for the three months and nine months ended September 30, 2000, respectively. 8. SEGMENT REPORTING The Company, through its subsidiaries, operates in six segments: U.S. Broker Treaty, U.S. Direct Treaty Reinsurance and Insurance, U.S. Facultative, Marine, Aviation and Surety, International and Bermuda. The U.S. Broker Treaty operation writes property, casualty and accident and health reinsurance through reinsurance brokers within the United States. The U.S. Direct Treaty Reinsurance and Insurance operation writes property, casualty and accident and health reinsurance directly with ceding companies and primary property and casualty insurance through agency relationships and program administrators within the United States. The U.S. Facultative operation writes property, casualty and specialty business through brokers and directly with ceding companies within the United States. The Marine, Aviation and Surety operation writes marine, aviation and surety business within the United States and worldwide. The International operation writes reinsurance through the Company's branches in Belgium, London, Canada, Hong Kong and Singapore, in addition to foreign "home-office" business. The U.S. Facultative, Marine, Aviation and Surety and International operations write business through brokers and directly with ceding companies. The Bermuda operation has not yet begun writing business; therefore, there are no underwriting results for this segment in the current period disclosures. 13 EVEREST RE GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 These segments are managed in a carefully coordinated fashion with strong elements of central control, including with respect to capital, investments and support operations. As a result, management monitors and evaluates the financial performance of these operating segments principally based upon their underwriting gain or loss ("underwriting results"). Underwriting results include earned premium less incurred loss and loss adjustment expenses, commission and brokerage expenses and other underwriting expenses. The following tables present the relevant underwriting results for the operating segments for the three months and nine months ended September 30, 2000 and 1999, with all dollar values presented in thousands.
U.S. BROKER TREATY ------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 ----------------------------------------------- Earned premiums $ 98,144 $ 109,075 $ 307,862 $ 286,958 Incurred losses and loss adjustment expenses 69,063 80,700 243,074 224,580 Commission and brokerage 22,268 31,157 45,539 75,429 Other underwriting expenses 2,577 2,281 7,457 7,045 ----------------------------------------------- Underwriting gain/(loss) $ 4,236 ($ 5,063) $ 11,792 ($ 20,096) ===============================================
U.S. DIRECT TREATY REINSURANCE AND INSURANCE ------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 ----------------------------------------------- Earned premiums $ 72,625 $ 50,280 $ 188,874 $ 138,502 Incurred losses and loss adjustment expenses 48,811 37,986 125,596 100,208 Commission and brokerage 15,895 14,298 45,583 38,885 Other underwriting expenses 3,019 3,480 9,670 9,409 ----------------------------------------------- Underwriting gain/(loss) $ 4,900 ($ 5,484) $ 8,025 ($ 10,000) ===============================================
14 EVEREST RE GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
U.S. FACULTATIVE ------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 ----------------------------------------------- Earned premiums $ 16,536 $ 17,809 $ 51,632 $ 52,753 Incurred losses and loss adjustment expenses 10,226 11,610 33,965 31,948 Commission and brokerage 1,535 3,613 8,725 11,195 Other underwriting expenses 1,563 1,540 4,555 4,666 ----------------------------------------------- Underwriting gain $ 3,212 $ 1,046 $ 4,387 $ 4,944 ===============================================
MARINE, AVIATION AND SURETY ------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 ----------------------------------------------- Earned premiums $ 28,263 $ 36,657 $ 78,024 $ 97,196 Incurred losses and loss adjustment expenses 26,659 23,332 68,958 63,936 Commission and brokerage 5,845 10,575 22,740 30,105 Other underwriting expenses 1,035 903 2,938 2,747 ----------------------------------------------- Underwriting gain/(loss) ($ 5,276) $ 1,847 ($ 16,612) $ 408 ===============================================
INTERNATIONAL ------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 ----------------------------------------------- Earned premiums $ 75,623 $ 71,656 $ 216,763 $ 219,624 Incurred losses and loss adjustment expenses 65,194 49,570 178,418 148,248 Commission and brokerage 20,320 18,499 55,206 58,770 Other underwriting expenses 3,897 3,437 10,743 10,987 ----------------------------------------------- Underwriting gain/(loss) ($ 13,788) $ 150 ($ 27,604) $ 1,619 ===============================================
15 EVEREST RE GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 The following table reconciles the underwriting results for the operating segments to income before tax as reported in the consolidated statements of operations and comprehensive income, with all dollar values presented in thousands:
-------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, 2000 1999 2000 1999 -------------------------------------------------- Underwriting (loss) ($ 6,716) ($ 7,504) ($ 20,012) ($ 23,125) Net investment income 78,897 62,232 218,353 188,882 Realized (loss) (90) (7,686) (459) (17,139) Corporate operations 735 447 2,179 1,218 Interest expense 11,931 452 26,624 736 Other income 605 1,860 1,045 258 -------------------------------------------------- Income before taxes $ 60,030 $ 48,003 $ 170,124 $ 146,922 ==================================================
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 has written business are, in each case, less than 10% of the Company's consolidated results. 9. FUTURE APPLICATION OF ACCOUNTING STANDARDS The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement requires all derivatives to be recognized as either assets or liabilities in the statement of financial position and to be measured at fair value. This statement shall be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. In June 2000, the Financial Accounting Standards Board amended SFAS No. 133 with SFAS No. 138, which facilitates the implementation of SFAS No. 133. Management believes that these statements will not have a material impact on the financial position of the Company. 10. 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 by or affiliated with its outside directors. Such transactions, individually and in the aggregate, are immaterial to the Company's financial condition, results of operations and cash flows. 16 PART I - ITEM 2 EVEREST RE GROUP, LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS RESTRUCTURING On February 24, 2000, a corporate restructuring was completed and Everest Re Group, Ltd. ("Group") became the new parent holding company of Everest Reinsurance Holdings, Inc. ("Holdings"), which remains the holding company for Group's U.S. based operations. The "Company" means Group and its subsidiaries, except when referring to periods prior to February 24, 2000, when it means Holdings and its subsidiaries. ACQUISITION OF GIBRALTAR CASUALTY COMPANY On September 19, 2000, Holdings completed the acquisition of all of the issued and outstanding capital stock of Gibraltar Casualty Company ("Gibraltar") from The Prudential Insurance Company of America ("The Prudential") pursuant to a Stock Purchase Agreement between The Prudential and Holdings dated February 24, 2000 and amended on August 8, 2000 (the "Stock Purchase Agreement"). As a result of the acquisition, Gibraltar became a wholly owned subsidiary of Holdings and, immediately following the acquisition, its name was changed to Mt. McKinley Insurance Company ("Mt. McKinley"). In connection with the acquisition of Mt. McKinley, which has significant exposure to asbestos and environmental claims, Prudential Property and Casualty Insurance Company ("Prupac"), a subsidiary of The Prudential, provided reinsurance to Mt. McKinley covering 80% ($160.0 million) of the first $200.0 million of any adverse development of Mt. McKinley's reserves as of September 19, 2000 and The Prudential guaranteed Prupac's obligations to Mt. McKinley. Mt. McKinley, a run-off property and casualty insurer in the United States, has had a long relationship with Holdings and its principal operating company, Everest Reinsurance Company ("Everest Re"). Mt. McKinley was formed in 1978 by Everest Re and wrote direct insurance until 1985, when it was placed in run-off. In 1991, Mt. McKinley became a subsidiary of The Prudential. Mt. McKinley is also a reinsurer of Everest Re (all as detailed in filings with the Securities and Exchange Commission). Under a series of transactions dating to 1986, Mt. McKinley reinsured several components of Everest Re's business. In particular, Mt. McKinley provided stop-loss reinsurance protection, in connection with the Company's October 5, 1995 IPO, for any adverse loss development on Everest Re's June 30, 1995 (December 31, 1994 for catastrophe losses) reserves, with $375.0 million in limits, of which $89.4 million remains available (the "Stop Loss Agreement"). The Stop Loss Agreement and other reinsurance contracts between Mt. McKinley and Everest Re remain in effect following the acquisition. However, these contracts have become transactions with affiliates with the financial impact eliminated through inter-company accounts. 17 INDUSTRY CONDITIONS Since 1987, a number of factors, including the emergence of significant reinsurance capacity from the Bermuda and rejuvenated Lloyd's markets, higher retentions by primary insurance companies and consolidation and increased capital levels in the insurance industry, have caused increasingly competitive global market conditions across most lines of business and have influenced the softening of prices and contract terms in the market place. Recently, market conditions, including industry-wide results of operations, have led to modest premium rate increases and modest improvements in contract terms in many lines of insurance and reinsurance. Although the Company is encouraged by these improvements in market conditions, the Company cannot predict with any reasonable certainty if, when or to what extent market conditions as a whole will change. SEGMENT INFORMATION The Company, through its subsidiaries, operates in six segments: U.S. Broker Treaty, U.S. Direct Treaty Reinsurance and Insurance, U.S. Facultative, Marine, Aviation and Surety, International and Bermuda. The U.S. Broker Treaty operation writes property, casualty and accident and health reinsurance through reinsurance brokers within the United States. The U.S. Direct Treaty Reinsurance and Insurance operation writes property, casualty and accident and health reinsurance directly with ceding companies and primary property and casualty insurance through agency relationships and program administrators within the United States. The U.S. Facultative operation writes property, casualty and specialty business through brokers and directly with ceding companies within the United States. The Marine, Aviation and Surety operation writes marine, aviation and surety business within the United States and worldwide. The International operation writes reinsurance through the Company's branches in Belgium, London, Canada, Hong Kong and Singapore, in addition to foreign "home-office" business. The U.S. Facultative, Marine, Aviation and Surety and International operations write business through brokers and directly with ceding companies. The Bermuda operation has not yet begun writing business; therefore, there are no underwriting results for this segment in the current period disclosures. These segments are managed in a carefully coordinated fashion with strong elements of central control, including with respect to capital, investments and support operations. As a result, management monitors and evaluates the financial performance of these operating segments principally based upon their underwriting results. THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1999 PREMIUMS. Gross premiums written increased 18.7% to $355.6 million in the three months ended September 30, 2000 from $299.5 million in the three months ended September 30, 1999 as the Company took advantage of selected growth opportunities, while continuing to generally maintain a disciplined underwriting approach. Premium growth areas included a 147.5% ($70.9 million) increase in the U.S. Direct Treaty Reinsurance and Insurance operation, mainly attributable to growth in accident and health reinsurance and primary insurance writings and an 11.6% ($8.7 million) increase in the International operation, mainly attributable to growth in North and South America and the markets served from 18 the Company's London office. These increases were partially offset by a 16.3% ($5.8 million) decrease in the Marine, Aviation and Surety operation, reflecting the continued highly competitive current market conditions faced by this operation, a 14.2% ($17.4 million) decrease in the U.S. Broker Treaty operation reflecting production variability and a 2.1% ($0.4 million) decrease in the U.S. Facultative operation. The Company continued to decline business that did not meet its objectives regarding underwriting profitability. Ceded premiums increased to $53.5 million in the three months ended September 30, 2000 from $9.2 million in the three months ended September 30, 1999. This increase was principally attributable to the higher utilization of contract specific retrocessions in the U.S. Direct Reinsurance and Insurance and U.S. Broker Treaty operations, including a new workers compensation program in the U.S. Direct Reinsurance and Insurance operation, which contributed $22.0 million to the increase. In addition, adjustment premiums of $7.0 million were ceded in 2000 relating to claims made under the 1999 accident year aggregate excess of loss element of the Company's corporate retrocessional program. Net premiums written increased by 4.0% to $302.0 million in the three months ended September 30, 2000 from $290.4 million in the three months ended September 30, 1999. This increase was consistent with the increase in gross premiums written, partially offset by the increase in ceded premiums. PREMIUM REVENUES. Net premiums earned increased by 2.0% to $291.2 million in the three months ended September 30, 2000 from $285.5 million in the three months ended September 30, 1999. Contributing to this increase was a 44.4% ($22.3 million) increase in the U.S. Direct Treaty Reinsurance and Insurance operation and a 5.5% ($4.0 million) increase in the International operation. These increases were partially offset by a 22.9% ($36.7 million) decrease in the Marine, Aviation and Surety operation, a 10.0% ($10.9 million) decrease in the U.S. Broker Treaty operation and a 7.1% ($1.3 million) decrease in the U.S. Facultative operation. All of these changes reflect period to period changes in net written premiums and business mix together with normal variability in earnings patterns. EXPENSES. Incurred loss and loss adjustment expenses ("LAE") increased by 8.2% to $220.0 million in the three months ended September 30, 2000 from $203.2 million in the three months ended September 30, 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. This increase was partially offset by losses ceded under the Company's corporate retrocessional program and also reflects the impact of changes in the Company's mix of business. Incurred losses and LAE include catastrophe losses, which include the impact of both current period events, and favorable and unfavorable development on prior period events and are net of reinsurance. Catastrophe losses, net of contract specific cessions but before cessions under the corporate retrocessional program, in the three months ended September 30, 2000 were $4.4 million, mainly reflecting modest net adverse development on 1999 catastrophe events, compared to net catastrophe losses of $7.6 million in the three months ended September 30, 1999. Net incurred losses and LAE for the three months ended September 30, 2000 reflected ceded losses and LAE of $35.7 million, including $15.6 million ceded under the 1999 accident year aggregate excess of loss component of the Company's corporate retrocessional program. Ceded losses and LAE in the three months ended September 30, 1999 were $8.0 million with no cessions under the accident year aggregate excess of loss component of the Company's corporate retrocessional program. 19 Contributing to the increase in incurred losses and LAE in the three months ended September 30, 2000 from the three months ended September 30, 1999 were a 31.5% ($15.6 million) increase in the International operation principally reflecting modest reserve strengthening for select prior period exposures and a 28.5% ($10.8 million) increase in the Direct Treaty Reinsurance and Insurance operation principally reflecting increased premium volume. Incurred losses and LAE increased by 14.4% ($3.3 million) in the Marine, Aviation and Surety operation reflecting modest reserve strengthening for prior period aviation exposures. These increases were partially offset by a 14.4% ($11.6 million) decrease in the U.S. Broker Treaty operation reflecting decreased premium volume and more favorable loss experience and an 11.9% ($1.4 million) decrease in the U.S. Facultative operation. Incurred losses and LAE for each operation were also impacted by variability relating to changes in the level of premium volume and mix of business by class and type. The Company's loss and LAE ratio ("loss ratio"), which is calculated by dividing incurred losses and LAE by premiums earned, increased by 4.3 percentage points to 75.5% for the three months ended September 30, 2000 from 71.2% for the three months ended September 30, 1999 reflecting the incurred losses and LAE discussed above. The Marine, Aviation and Surety and International operations' loss ratios increased to 94.3% and 86.2% for the three months ended September 30, 2000 from 63.6% and 69.2% for the three months ended September 30, 1999, respectively. The U.S. Broker Treaty, U.S. Direct Treaty Reinsurance and Insurance and U.S. Facultative operations' loss ratios decreased to 70.4%, 67.2% and 61.8% for the three months ended September 30, 2000 from 74.0%, 75.5% and 65.2% for the three months ended September 30, 1999, respectively. The loss ratios for all operations were impacted by the factors noted above. Underwriting expenses decreased by 12.8% to $78.7 million in the three months ended September 30, 2000 from $90.2 million in the three months ended September 30, 1999. Commission, brokerage, taxes and fees decreased by $12.3 million. Other underwriting expenses increased by $0.7 million. Contributing to these underwriting expense decreases were a 40.1% ($4.6 million) decrease in the Marine, Aviation and Surety operation, a 39.9% ($2.1 million) decrease in the U.S. Facultative operation and a 25.7% ($8.6 million) decrease in the U.S. Broker Treaty operation. These decreases were partially offset by a 10.4% ($2.3 million) increase in the International operation and a 6.4% ($1.1 million) increase in the U.S. Direct Treaty Reinsurance and Insurance operation. The changes for each operation's expenses principally resulted from changes in commission expenses related to changes in premium volume and business mix by class and type and, in some cases, the underwriting performance of the underlying business. The Company's expense ratio, which is calculated by dividing underwriting expenses by premiums earned, was 27.0% for the three months ended September 30, 2000 compared to 31.6% for the three months ended September 30, 1999. The Company's combined ratio, which is the sum of the loss and expense ratios, decreased to 102.6% in the three months ended September 30, 2000 compared to 102.8% in the three months ended September 30, 1999. The U.S. Broker Treaty, U.S. Direct Treaty Reinsurance and Insurance and U.S. Facultative operations' combined ratios decreased to 95.7%, 93.3% and 80.6% for the three months ended September 30, 2000 from 104.6%, 110.9% and 94.1% for the three months ended September 30, 1999, respectively. The Marine, Aviation and Surety and International operations' combined ratios increased to 118.7% and 118.2% for the three months ended September 30, 2000 from 95.0% and 99.8% for the three months ended September 30, 1999, respectively. These changes reflect the loss and expense ratio variability noted above. 20 Interest expense for the three months ended September 30, 2000 was $11.9 million compared to $0.5 million for the three months ended September 30, 1999. Interest expense for the three months ended September 30, 2000 reflects $9.8 million relating to Holdings' issuance of senior notes and $2.1 million relating to Holdings' borrowings under it's revolving credit facility. Interest expense for the three months ended September 30, 1999 reflects $0.5 million relating to Holdings' borrowings under its revolving credit facility. Other income for the three months ended September 30, 2000 was $0.6 million compared to $1.9 million for the three months ended September 30, 1999. The change in other income for the respective periods was principally attributable to the impact of fluctuations in foreign currency exchange rates. INVESTMENT RESULTS. Net investment income increased 26.8% to $78.9 million in the three months ended September 30, 2000 from $62.2 million in the three months ended September 30, 1999, principally reflecting the effect of investing the $123.3 million of cash flow from operations in the twelve months ended September 30, 2000 as well as the investment of the $450.0 million in proceeds from Holdings' issuance of senior notes. The annualized pre-tax yield on average cash and invested assets increased to 6.5% in the three months ended September 30, 2000 from the 6.1% yield in the three months ended September 30, 1999, reflecting changes in investment market conditions coupled with the investment of the proceeds of Holdings' issuance of senior notes during the three months ended March 31, 2000 and normal portfolio management activities. The imbedded pre-tax yield on cash and invested assets at September 30, 2000 was 6.9% compared with 6.2% at December 31, 1999, reflecting the additional funds invested over the intervening period, as well as the continued emphasis on enhancing investment yields through changes in asset mix, all in the context of changes in investment market conditions. Net realized capital losses were $0.1 million in the three months ended September 30, 2000, reflecting realized capital losses on the Company's investments of $0.2 million, partially offset by $0.1 million of realized capital gains, compared to net realized capital losses of $7.7 million in the three months ended September 30, 1999. The net realized capital losses in the three months ended September 30, 1999 reflected realized capital losses of $16.9 million, partially offset by $9.2 million of realized capital gains. The realized capital losses in the three months ended September 30, 2000 and 1999 arose mainly from activity in the Company's fixed maturity portfolio. The realized capital gains in the three months ended September 30, 2000 and 1999 arose mainly from activity in the Company's equity portfolio. INCOME TAXES. The Company recognized income tax expense of $12.3 million in the three months ended September 30, 2000 compared to $8.8 million in the three months ended September 30, 1999 principally reflecting increased net investment income and decreased realized capital losses. NET INCOME. Net income was $47.7 million in the three months ended September 30, 2000 compared to $39.2 million in the three months ended September 30, 1999. This increase generally reflects the improved underwriting and investment results, partially offset by increased interest and income tax expense. 21 NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1999 PREMIUMS. Gross premiums written increased 17.9% to $986.0 million in the nine months ended September 30, 2000 from $836.6 million in the nine months ended September 30, 1999 as the Company took advantage of selected growth opportunities, while continuing to generally maintain a disciplined underwriting approach. Premium growth areas included an 84.8% ($123.5 million) increase in the U.S. Direct Treaty Reinsurance and Insurance operation, mainly attributable to growth in accident and health reinsurance and primary insurance writings, a 10.5% ($32.8 million) increase in the U.S. Broker Treaty operation, attributable to growth across both property and casualty lines, a 2.8% ($6.4 million) increase in the International operation and a 2.4% ($1.3 million) increase in the U.S. Facultative operation. These increases were partially offset by a 15.1% ($14.6 million) decrease in the Marine, Aviation and Surety operation reflecting the continued highly competitive current market conditions faced by this operation. The Company continued to decline business that did not meet its objectives regarding underwriting profitability. Ceded premiums increased to $101.3 million in the nine months ended September 30, 2000 from $32.3 million in the nine months ended September 30, 1999. This increase was principally attributable to the higher utilization of contract specific retrocessions in the U.S. Direct Reinsurance and Insurance and U.S. Broker Treaty operations, including a new workers compensation program in the U.S. Direct Reinsurance and Insurance operation, which contributed $22.0 million to the increase. In addition, adjustment premiums of $18.6 million were ceded in 2000 relating to claims made under the 1999 accident year aggregate excess of loss element of the Company's corporate retrocessional program. Net premiums written increased by 10.0% to $884.7 million in the nine months ended September 30, 2000 from $804.3 million in the nine months ended September 30, 1999. This increase was consistent with the increase in gross premiums written, partially offset by the increase in ceded premiums. PREMIUM REVENUES. Net premiums earned increased by 6.1% to $843.2 million in the nine months ended September 30, 2000 from $795.0 million in the nine months ended September 30, 1999. Contributing to this increase was a 36.4% ($50.4 million) increase in the U.S. Direct Treaty Reinsurance and Insurance operation and a 7.3% ($20.9 million) increase in the U.S. Broker Treaty operation. These increases were partially offset by a 19.7% ($19.2 million) decrease in the Marine, Aviation and Surety operation, a 2.1% ($1.1 million) decrease in the U.S. Facultative operation and a 1.3% ($2.9 million) decrease in the International operation. All of these changes reflect period to period changes in net written premiums and business mix together with normal variability in earnings patterns. EXPENSES. Incurred loss and LAE increased by 14.3% to $650.0 million in the nine months ended September 30, 2000 from $568.9 million in the nine months ended September 30, 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, including on a multi-year reinsurance treaty where such losses within the current experience band were accompanied by correspondingly lower commissions. This increase was partially offset by losses ceded under the Company's corporate retrocessional program and the impact of changes in the Company's mix of business. Incurred losses and LAE include catastrophe losses, which include the impact of both 22 current period events and favorable and unfavorable development on prior period events and are net of reinsurance. Catastrophe losses, net of contract specific cessions but before cessions under the corporate retrocessional program, in the nine months ended September 30, 2000 were $13.6 million, mainly reflecting modest net adverse development on 1999 catastrophe events, compared to net catastrophe losses of $25.3 million in the nine months ended September 30, 1999. Net incurred losses and LAE for the nine months ended September 30, 2000 reflected ceded losses and LAE of $93.0 million, including $39.1 million ceded under the 1999 accident year aggregate excess of loss component of the corporate retrocessional program. Ceded losses and LAE in the nine months ended September 30, 1999 were $27.1 million, with no cessions under the accident year aggregate excess of loss component of the corporate retrocessional program. Contributing to the increase in incurred losses and LAE in the nine months ended September 30, 2000 compared to the nine months ended September 30, 1999 were a 25.3% ($25.4 million) increase in the U.S. Direct Treaty Reinsurance and Insurance operation, principally as a result of increased premium volume, a 20.4% ($30.2 million) increase in the International operation mainly due to reserve strengthening related to prior period exposures, including 1999 accident year catastrophe losses, an 8.2% ($18.5 million) increase in the U.S. Broker Treaty operation, attributable to the increased premium volume as well as the loss reserve strengthening on the multi-year reinsurance treaty noted above, a 7.9% ($5.0 million) increase in the Marine, Aviation and Surety operation, principally reflecting reserve strengthening relating to prior period aviation exposures, and a 6.3% ($2.0 million) increase in the U.S. Facultative operation. Incurred losses and LAE for each operation were also impacted by variability relating to changes in the level of premium volume and mix of business by class and type. The Company's loss ratio increased by 5.5 percentage points to 77.1% for the nine months ended September 30, 2000 from 71.6% for the nine months ended September 30, 1999 reflecting the incurred losses and LAE discussed above. The U.S. Broker Treaty, International, Marine, Aviation and Surety and U.S. Facultative operations' loss ratios increased to 79.0%, 82.3%, 88.4% and 65.8% for the nine months ended September 30, 2000 from 78.3%, 67.5%, 65.8% and 60.6% for the nine months ended September 30, 1999, respectively. The U.S. Direct Treaty Reinsurance and Insurance operations' loss ratio decreased to 66.5% for the nine months ended September 30, 2000 from 72.4% for the nine months ended September 30, 1999. The loss ratios for all operations are impacted by the factors noted above. Underwriting expenses decreased by 14.0% to $215.3 million in the nine months ended September 30, 2000 from $250.5 million in the nine months ended September 30, 1999. Commission, brokerage, taxes and fees decreased by $36.6 million, principally reflecting the Company's reassessment of the expected losses on a multi-year reinsurance treaty noted above that led to a $29.4 million decrease in contingent commissions with a corresponding increase to losses, partially offset by the increases in premiums written and also reflecting changes in the mix of business. Other underwriting expenses increased by $1.5 million. Contributing to the underwriting expense decrease were a 35.7% ($29.5 million) decrease in the U.S. Broker Treaty operation, which included the impact of the contingent commission adjustment noted above, a 21.8% ($7.2 million) decrease in the Marine, Aviation and Surety operation, a 16.3% ($2.6 million) decrease in the U.S. Facultative operation and a 5.5% ($3.8 million) decrease in the International operation. These decreases were partially offset by a 14.4% ($7.0 million) increase in the U.S. Direct Treaty Reinsurance and Insurance operation. Except as noted, the changes for each operation's expenses principally resulted 23 from changes in commission expenses related to changes in premium volume and business mix by class and type and, in some cases, the underwriting performance of the underlying business. The Company's expense ratio was 25.6% for the nine months ended September 30, 2000 compared to 31.5% for the nine months ended September 30, 1999. The Company's combined ratio decreased to 102.6% in the nine months ended September 30, 2000 compared to 103.1% in the nine months ended September 30, 1999. The U.S. Broker Treaty and U.S. Direct Treaty Reinsurance and Insurance operations' combined ratios decreased to 96.2% and 95.8%, respectively, for the nine months ended September 30, 2000 from 107.0% and 107.2%, respectively, for the nine months ended September 30, 1999. The International, Marine, Aviation and Surety and U.S. Facultative operations' combined ratios increased to 112.7%, 121.3% and 91.5%, respectively, for the nine months ended September 30, 2000 from 99.3%, 99.6% and 90.6%, respectively, for the nine months ended September 30, 1999. These changes reflect the loss and expense ratio variability noted above. Interest expense for the nine months ended September 30, 2000 was $26.6 million compared to $0.7 million for the nine months ended September 30, 1999. Interest expense for the nine months ended September 30, 2000 reflects $21.2 million relating to Holdings' issuance of senior notes and $5.4 million relating to Holdings' borrowing under it's revolving credit facility. Interest expense for the nine months ended September 30, 1999 reflects $0.7 million relating to Holdings' borrowings under its revolving credit facility. Other income for the nine months ended September 30, 2000 was $1.0 million compared to $0.3 million for the nine months ended September 30, 1999. The change in other income for the respective periods was principally attributable to the impact of fluctuations in foreign currency exchange rates. INVESTMENT RESULTS. Net investment income increased 15.6% to $218.4 million in the nine months ended September 30, 2000 from $188.9 million in the nine months ended September 30, 1999, principally reflecting the effect of investing the $123.3 million of cash flow from operations in the twelve months ended September 30, 2000 as well as the investment of the $450.0 million in proceeds from Holdings' issuance of senior notes. The annualized pre-tax yield on average cash and invested assets increased to 6.3% in the nine months ended September 30, 2000 from the 6.2% yield in the nine months ended September 30, 1999, reflecting changes in investment market conditions coupled with the investment of the proceeds of Holdings' issuance of senior notes late in the period ended March 31, 2000. The imbedded pre-tax yield of cash and invested assets at September 30, 2000 was 6.9% compared with 6.2% at December 31, 1999, reflecting the additional funds invested over the intervening period, as well as the continued emphasis on enhancing investment yields through changes in asset mix, all in the context of changes in investment market conditions. Net realized capital losses were $0.5 million in the nine months ended September 30, 2000, reflecting realized capital losses on the Company's investments of $23.9 million, partially offset by $23.4 million of realized capital gains, compared to net realized capital losses of $17.1 million in the nine months ended September 30, 1999. The net realized capital losses in the nine months ended September 30, 1999 reflected realized capital losses of $28.2 million, partially offset by $11.1 million of realized capital gains. The realized capital losses in the nine months ended September 30, 2000 and 1999 arose mainly 24 from activity in the Company's fixed maturity portfolio. The realized capital gains in the nine months ended September 30, 2000 and 1999 arose mainly from activity in the Company's equity portfolio. INCOME TAXES. The Company recognized income tax expense of $35.2 million in the nine months ended September 30, 2000 compared to $28.4 million in the nine months ended September 30, 1999 with the increase mainly attributable to increased net investment income and decreased realized capital losses. NET INCOME. Net income was $135.0 million in the nine months ended September 30, 2000 compared to $118.5 million in the nine months ended September 30, 1999. This increase generally reflects the decreases in net realized capital losses, together with the improved underwriting and investment results, partially offset by increased interest and income tax expense. FINANCIAL CONDITION INVESTED ASSETS. Aggregate invested assets, including cash and short-term investments, were $5,062.2 million at September 30, 2000 and $4,139.2 million at December 31, 1999. The increase in invested assets between December 31, 1999 and September 30, 2000 resulted primarily from Holdings' issuance of senior notes totaling $450.0 million, the proceeds of which have been invested, $349.7 million of new cash from the acquisition of Mt. McKinley, $78.0 million in credit facility borrowings, $47.0 million in net unrealized appreciation of the Company's fixed maturity investments and $48.9 million in cash flows from operations generated during the nine months ended September 30, 2000. This increase was partially offset by a $49.0 million decrease in 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 $48.9 million and $129.0 million in the nine months ended September 30, 2000 and 1999, respectively. These cash flows were impacted by recoveries under the Company's Stop Loss Agreement with Mt. McKinley, which, prior to Mt. McKinley's acquisition, contributed $9.5 million and $79.0 million of such net cash flows in the nine months ended September 30, 2000 and 1999, respectively. These cash flows were also impacted by net catastrophe loss payments of $38.5 million and $24.2 million in the nine months ended September 30, 2000 and 1999, respectively, and by net income taxes paid of $55.1 million and $50.0 million for the nine months ended September 30, 2000 and 1999, respectively. Management believes that net cash flows from operating activities, after consideration of the factors noted above, are generally consistent with expectations given changes in the Company's mix of business over the past few years toward products with shorter loss development and payout periods and normal variability in the payout of loss reserves. Proceeds from sales, calls and maturities and investment asset acquisitions were $639.4 million and $1,528.2 million, respectively, in the nine months ended September 30, 2000, compared to $858.1 million and $954.9 million, respectively, in the nine months ended September 30, 1999. Additionally, the cash flow 25 activity in the nine months ended September 30, 2000 included $349.7 million of new cash resulting from the acquisition of Mt. McKinley and $450.0 million in proceeds from Holdings' offering of senior notes as well as the impact of normal portfolio management activity aimed at enhancing the Company's portfolio. The Company's current investment strategy seeks to maximize after-tax income through a high quality, diversified, duration sensitive, taxable bond and tax-exempt municipal bond portfolio, while maintaining an adequate level of liquidity. On December 21, 1999, Holdings entered into a three-year senior revolving credit facility with a syndicate of lenders (the "Credit Facility"), which replaced its prior credit facility which had been extended in June 1999 and increased from $50.0 million to $75.0 million on November 9, 1999. First Union National Bank is the administrative agent for the Credit Facility. The Credit Facility will be used for liquidity and general corporate purposes and to refinance existing debt under Holdings' prior credit facility, which has been terminated. The Credit Facility provides for the borrowing of up to $150.0 million with interest at a rate selected by Holdings equal to either (i) the Base Rate (as defined below) or (ii) an adjusted London InterBank Offered Rate ("LIBOR") plus a margin. The Base Rate is the higher of the rate of interest established by First Union National Bank from time to time as its prime rate or the Federal Funds rate plus 0.5% per annum. The amount of margin and the fees payable for the Credit Facility depend upon Holdings' senior unsecured debt rating. The Company has guaranteed all of Holdings' obligations under the Credit Facility. The Credit Facility requires the Company to maintain a debt to capital ratio of not greater than 0.35 to 1, Holdings to maintain a minimum interest coverage ratio of 2.5 to 1 and Everest Re to maintain its statutory surplus at $850.0 million plus 25% of future aggregate net income and 25% of future aggregate capital contributions. The Company was in compliance with these requirements at September 30, 2000 as well as for the three months and nine months ended September 30, 2000. At September 30, 2000 and 1999, Holdings had outstanding borrowings under the Credit Facility of $137.0 million and $35.0 million, respectively. Interest expense incurred in connection with these borrowings was $2.1 million and $0.5 million for the three months ended September 30, 2000 and 1999, respectively, and $5.5 million and $0.7 million for the nine months ended September 30, 2000 and 1999, respectively. During the first quarter of 2000, Holdings completed a public offering of $200.0 million principal amount of 8.75% senior notes due March 15, 2010 and $250.0 million principal amount of 8.5% senior notes due March 15, 2005. Holdings distributed $400.0 million of these proceeds to 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 $9.8 million and $21.2 million for the three months and nine months ended September 30, 2000, respectively. SHAREHOLDERS' EQUITY. The Company's shareholders' equity increased to $1,470.8 million as of September 30, 2000, from $1,327.5 million as of December 31, 1999, principally reflecting net income of $135.0 million for the nine months ended September 30, 2000, partially offset by $16.4 million in treasury shares acquired in the nine months ended September 30, 2000. Dividends of $8.2 million were declared and paid by the Company in the nine months ended September 30, 2000. During the nine months ended September 30, 2000, the Company repurchased 0.650 million of its common shares at an average price of $25.24 per share with 26 all such repurchases occurring in the three months ended March 31, 2000, raising the total repurchases under the Company's authorized repurchase program to 4.720 million shares at an average price of $27.60 per share with a total repurchase expenditure to date of $130.4 million. At September 30, 2000, 2.180 million shares remained under the existing repurchase authorization. As part of the Company's restructuring, the treasury shares held by the Company prior to February 24, 2000 were retired, resulting in a reduction to treasury shares with a corresponding reduction of paid-in capital and common shares. MARKET SENSITIVE INSTRUMENTS. The Company's risks associated with market sensitive instruments have not changed materially since the period ended December 31, 1999. SAFE HARBOR DISCLOSURE. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 (the "Act"), the Company in its Form 10-K for the fiscal year ended December 31, 1999 set forth cautionary statements identifying important factors, among others, that could cause its actual results to differ materially from those which might be projected, forecasted or estimated in its forward-looking statements, as defined in the Act, made by or on behalf of the Company in press releases, written statements or documents filed with the Securities and Exchange Commission, or in its communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls. These cautionary statements supplement other factors contained in this report which could cause the Company's actual results to differ materially from those which might be projected, forecasted or estimated in its forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the Company's results to differ materially from such forward-looking statements. Such forward-looking statements may include, but are not limited to, projections of premium revenue, investment income, other revenue, losses, expenses, earnings (including earnings per share), cash flows, and common shareholders' equity (including book value per share), plans for future operations, investments, financing needs, capital plans, dividends, plans relating to products or services of the Company, and estimates concerning the effects of litigation or other disputes, as well as assumptions for any of the foregoing and are generally expressed with words such as "believes," "estimates," "expects," "anticipates," "plans," "projects," "forecasts," "goals," "could have," "may have" and similar expressions. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 27 PART I - ITEM 3 EVEREST RE GROUP, LTD. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK INSTRUMENTS. The Company's risks associated with market sensitive instruments have not changed materially since the period ended December 31, 1999. 28 EVEREST RE GROUP, LTD. OTHER INFORMATION Part II - ITEM 1. LEGAL PROCEEDINGS The Company is involved from time to time in ordinary routine litigation and arbitration proceedings incidental to its business. The Company does not believe that there are any other material pending legal proceedings to which it or any of its subsidiaries or their properties are subject. Part II - ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS c) Information required by Item 701 of Regulation S-K: (a) On July 1, 2000, 1,364 common shares of the Company were distributed and, on October 2, 2000, 924 common shares of the Company were distributed. (b) The securities were distributed to the Company's four non- employee directors. (c) The securities were issued as compensation to the non- employee directors for services rendered to the Company. (d) Exemption from registration was claimed pursuant to Section 4(2) of the Securities Act of 1933. There was no public offering and the participants in the transactions were the Company and its non-employee directors. (e) Not applicable. Part II - ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibit Index: Exhibit No. Description Location ----------- ----------- -------- 11.1 Statement regarding computation of per-share earnings Filed herewith 27 Financial Data Schedule Filed herewith 29 b) A report on Form 8-K dated September 19, 2000 was filed on October 3, 2000 reporting the acquisition of Gibraltar Casualty Company by Everest Reinsurance Holdings, Inc. The financial statements and pro forma financial information required to be filed with this Form 8-K will be filed by amendment no later than 60 days after the date that the initial report on Form 8-K was required to be filed. Omitted from this Part II are items which are inapplicable or to which the answer is negative for the period covered. 30 EVEREST RE GROUP, LTD. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Everest Re Group, Ltd. (Registrant) /S/ STEPHEN L. LIMAURO --------------------------------- Stephen L. Limauro Duly Authorized Officer and Principal Accounting Officer Executive Vice President and Chief Financial Officer Dated: November 7, 2000