-----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, J/2HrnAvJ4uyN5aupDFEDb7if+Lh+LndDgWe4ftmas1xq7g59SMfBvDlCQfG1+eI MdXCPbu7NMu4hdro/6YCnQ== 0001095073-02-000006.txt : 20020507 0001095073-02-000006.hdr.sgml : 20020507 ACCESSION NUMBER: 0001095073-02-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020507 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EVEREST RE GROUP LTD CENTRAL INDEX KEY: 0001095073 STANDARD INDUSTRIAL CLASSIFICATION: ACCIDENT & HEALTH INSURANCE [6321] IRS NUMBER: 000000000 STATE OF INCORPORATION: C8 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15731 FILM NUMBER: 02635859 BUSINESS ADDRESS: STREET 1: C/O ABG FINANCIAL & MANAGEMENT SERVICES STREET 2: PARKER HOUSE WILDEY ROAD CITY: ST MICHAEL BARBADOS BUSINESS PHONE: 2464366287 MAIL ADDRESS: STREET 1: C/O REINSURANCE HOLDINGS INC STREET 2: 477 MARTINSVILLE RD PO BOX 830 CITY: LIBERTY CORNER STATE: NJ ZIP: 07938 FORMER COMPANY: FORMER CONFORMED NAME: EVEREST REINSURANCE GROUP LTD DATE OF NAME CHANGE: 19990915 10-Q 1 groupq.txt EVEREST RE GROUP, LTD. FORM 10-Q 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, 2002 1-15731 - ---------------------- ----------------------- EVEREST RE GROUP, LTD. ------------------------------ (Exact name of Registrant as specified in its charter) Bermuda 98-0365432 - ------------------------ ---------------------------- (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) 228-7398 (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 May 7, 2002 ----- ---------------------------- Common Shares, $.01 par value 51,287,883 EVEREST RE GROUP, LTD. Index To Form 10-Q PART I FINANCIAL INFORMATION --------------------- Page ---- ITEM 1. FINANCIAL STATEMENTS -------------------- Consolidated Balance Sheets at March 31, 2002 (unaudited) and December 31, 2001 3 Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2002 and 2001 (unaudited) 4 Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2002 and 2001 (unaudited) 5 Consolidated Statements of Cash Flows for the three months ended March 31, 2002 and 2001 (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 25 ---------------------------------------------------------- PART II OTHER INFORMATION ----------------- ITEM 1. LEGAL PROCEEDINGS 26 ----------------- ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS None ----------------------------------------- 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 26 -------------------------------- Part I - Item 1 EVEREST RE GROUP, LTD. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except par value per share)
March 31, December 31, ------------ ------------ 2002 2001 ------------ ------------ (unaudited) ASSETS: Fixed maturities - available for sale, at market value (amortized cost: 2002, $5,580,450; 2001, $5,288,860) $ 5,662,543 $ 5,461,584 Equity securities, at market value (cost: 2002, $69,929; 2001, $66,357) 70,820 67,311 Short-term investments 286,492 148,851 Other invested assets 31,044 33,899 Cash 101,753 71,878 ------------ ------------ Total investments and cash 6,152,652 5,783,523 Accrued investment income 91,738 83,088 Premiums receivable 533,579 468,897 Reinsurance receivables 923,702 895,061 Funds held by reinsureds 134,742 149,969 Deferred acquisition costs 145,911 130,709 Prepaid reinsurance premiums 48,035 47,185 Deferred tax asset 177,252 178,507 Other assets 157,896 59,221 ------------ ------------ TOTAL ASSETS $ 8,365,507 $ 7,796,160 ============ ============ LIABILITIES: Reserve for losses and adjustment expenses $ 4,341,370 $ 4,278,267 Future policy benefit reserve 243,465 238,753 Unearned premium reserve 563,769 489,171 Funds held under reinsurance treaties 271,959 267,105 Losses in the course of payment 98,169 89,492 Contingent commissions 2,046 2,119 Other net payable to reinsurers 66,506 66,462 Current federal income taxes (23,827) (30,459) 8.5% Senior notes due 3/15/2005 249,715 249,694 8.75% Senior notes due 3/15/2010 199,097 199,077 Revolving credit agreement borrowings 105,000 105,000 Accrued interest on debt and borrowings 2,241 11,944 Other liabilities 190,029 109,013 ------------ ------------ Total liabilities 6,309,539 6,075,638 ------------ ------------ 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; 51.3 million shares issued in 2002 and 46.3 million shares issued in 2001 513 463 Additional paid-in capital 616,508 269,945 Unearned compensation (115) (115) Accumulated other comprehensive income, net of deferred income taxes of $16.9 million in 2002 and $40.8 million in 2001 45,754 113,880 Retained earnings 1,393,363 1,336,404 Treasury shares, at cost; 0.0 million shares in 2002 and 2001 (55) (55) ------------ ------------ Total shareholders' equity 2,055,968 1,720,522 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,365,507 $ 7,796,160 ============ ============
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 March 31, ---------------------------- 2002 2001 ----------- ----------- (unaudited) REVENUES: Premiums earned $ 491,208 $ 328,493 Net investment income 85,540 86,155 Net realized capital (loss) (3,855) (5,057) Net derivative (expense) (250) (727) Other income 1,337 868 ----------- ----------- Total revenues 573,980 409,732 ----------- ----------- CLAIMS AND EXPENSES: Incurred loss and loss adjustment expenses 352,506 243,126 Commission, brokerage, taxes and fees 121,009 81,957 Other underwriting expenses 14,125 13,096 Interest expense on senior notes 9,728 9,724 Interest expense on credit facility 909 2,697 ----------- ----------- Total claims and expenses 498,277 350,600 ----------- ----------- INCOME BEFORE TAXES 75,703 59,132 Income tax expense 14,642 9,002 ----------- ----------- NET INCOME $ 61,061 $ 50,130 =========== =========== Other comprehensive (loss) income, net of tax (68,126) 47,072 ----------- ----------- COMPREHENSIVE (LOSS) INCOME $ (7,065) $ 97,202 =========== =========== PER SHARE DATA: Average shares outstanding (000's) 48,108 46,059 Net income per common share - basic $ 1.27 $ 1.09 =========== =========== Average diluted shares outstanding (000's) 49,087 47,004 Net income per common share - diluted $ 1.24 $ 1.07 =========== ===========
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 March 31, ---------------------------- 2002 2001 ----------- ----------- (unaudited) COMMON SHARES (shares outstanding): Balance, beginning of period 46,269,015 46,029,354 Issued during the period 5,017,450 67,024 ----------- ----------- Balance, end of period 51,286,465 46,096,378 =========== =========== COMMON SHARES (par value): Balance, beginning of period $ 463 $ 460 Issued during the period 50 1 ----------- ----------- Balance, end of period 513 461 ----------- ----------- ADDITIONAL PAID IN CAPITAL: Balance, beginning of period 269,945 259,958 Common shares issued during the period 346,563 2,947 ----------- ----------- Balance, end of period 616,508 262,905 ----------- ----------- UNEARNED COMPENSATION: Balance, beginning of period (115) (170) Net increase during the period - 17 ----------- ----------- Balance, end of period (115) (153) ----------- ----------- ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF DEFERRED INCOME TAXES: Balance, beginning of period 113,880 72,846 Net (decrease) increase during the period (68,126) 47,072 ----------- ----------- Balance, end of period 45,754 119,918 ----------- ----------- RETAINED EARNINGS: Balance, beginning of period 1,336,404 1,250,313 Net income 61,061 50,130 Dividends declared ($0.08 per share in 2002 and $0.07 per share in 2001) (4,102) (3,225) ----------- ----------- Balance, end of period 1,393,363 1,297,218 ----------- ----------- TREASURY SHARES AT COST: Balance, beginning of period (55) (55) ----------- ----------- Balance, end of period (55) (55) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD $ 2,055,968 $ 1,680,294 =========== ===========
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 March 31, ---------------------------- 2002 2001 ----------- ----------- (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 61,061 $ 50,130 Adjustments to reconcile net income to net cash provided by operating activities: (Increase) in premiums receivable (66,264) (16,684) Decrease (increase) in funds held, net 19,980 (4,041) (Increase) in reinsurance receivables (29,554) (16,734) Decrease in deferred tax asset 25,158 3,117 Increase in reserve for losses and loss adjustment expenses 67,527 5,976 Increase in future policy benefit reserve 4,712 15,621 Increase in unearned premiums 74,778 68,172 (Increase) in other assets and liabilities (53,882) (45,154) Non cash compensation expense - 17 Accrual of bond discount/amortization of bond premium (1,911) (2,060) Amortization of underwriting discount on senior notes 41 38 Realized capital losses 3,855 5,057 ----------- ----------- Net cash provided by operating activities 105,501 63,455 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from fixed maturities matured/called - available for sale 147,594 70,007 Proceeds from fixed maturities sold - available for sale 416,572 78,572 Proceeds from equity securities sold 5,370 - Proceeds from other invested assets sold 3,261 8 Cost of fixed maturities acquired - available for sale (859,060) (410,921) Cost of equity securities acquired (9,227) - Cost of other invested assets acquired (328) (368) Net (purchases) sales of short-term securities (137,219) 275,171 Net increase in unsettled securities transactions 18,879 25,136 ----------- ----------- Net cash (used in) provided by investing activities (414,158) 37,605 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Common shares issued during the period 346,613 2,948 Dividends paid to shareholders (4,102) (3,225) Borrowing on revolving credit agreement 20,000 20,000 Repayments on revolving credit agreement (20,000) (123,000) ----------- ----------- Net cash provided by (used in) financing activities 342,511 (103,277) ----------- ----------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (3,979) (4,583) ----------- ----------- Net increase (decrease) in cash 29,875 (6,800) Cash, beginning of period 71,878 76,823 ----------- ----------- Cash, end of period $ 101,753 $ 70,023 =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION Cash transactions: Income taxes paid, net $ (17,397) $ 2,603 Interest paid $ 20,299 $ 22,746 Non-cash financing transaction: Issuance of common shares $ - $ 17
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 Ended March 31, 2002 and 2001 1. GENERAL As used in this document, "Group" means Everest Re Group, Ltd., "Holdings" means Everest Reinsurance Holdings, Inc., "Everest Re" means Everest Reinsurance Company and the "Company" means Everest Re Group, Ltd. and its subsidiaries. The consolidated financial statements of the Company for the three months ended March 31, 2002 and 2001 include all adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair presentation of the results on an interim basis. Certain financial information, which is normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States of America, has been omitted since it is not required for interim reporting purposes. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States of America. The results for the three months ended March 31, 2002 and 2001 are not necessarily indicative of the results for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, 2001, 2000 and 1999 included in the Company's most recent Form 10-K filing. 2. SECONDARY COMMON SHARE ISSUANCE On November 7, 2001, the Company filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission, which provided for the issuance of up to $575 million of common equity. On February 27, 2002, pursuant to this registration statement, the Company completed a secondary offering of 5,000,000 of its common shares at a price of $69.25 per share, which resulted in $346.3 million of proceeds, before expense of approximately $0.5 million related to the offering. The Company has used the net proceeds for working capital and general corporate purposes. The remaining limit on this shelf registration statement as of March 31, 2002 is $228.7 million. 7 EVEREST RE GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) For the Three Months Ended March 31, 2002 and 2001 3. EARNINGS PER SHARE Net income per common share has been computed as follows:
(shares and dollar amounts in thousands except per share amounts) Three Months Ended March 31, ---------------------------- 2002 2001 ---------------------------- Net income (numerator) $ 61,061 $ 50,130 =========== =========== Weighted average common and effect of dilutive shares used in the computation of net income per share: Average shares outstanding - basic (denominator) 48,108 46,059 Effect of dilutive shares 979 945 ----------- ----------- Average shares outstanding - diluted (denominator) 49,087 47,004 Net income per common share: Basic $ 1.27 $ 1.09 Diluted $ 1.24 $ 1.07
As of March 31, 2002 and 2001, options to purchase 2,000 and 10,000 shares of common stock, respectively, were outstanding but were not included in the computation of diluted earnings per share for the three month period ended on such dates, because the options' exercise price was greater than the average market price of the common shares during the period. 8 EVEREST RE GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) For the Three Months Ended March 31, 2002 and 2001 4. 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. Management believes that these factors continue to render reserves for asbestos and environmental losses significantly less subject to traditional actuarial methods than are reserves on other types of losses. Given these uncertainties, management believes that no meaningful range for such ultimate losses can be established. The Company establishes reserves to the extent that, in the judgement of management, the facts and prevailing law reflect an exposure for the Company or its ceding companies. In connection with the acquisition of Mt. McKinley Insurance Company ("Mt. McKinley"), which has significant exposure to asbestos and environmental claims, Prudential Property and Casualty Insurance Company ("Prupac"), a subsidiary of The Prudential Insurance Company of America "(The Prudential"), provided reinsurance to Mt. McKinley covering 80% ($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. Through March 31, 2002, cessions under this reinsurance agreement have reduced the available remaining limits to $131.3 million net of coinsurance. Due to the uncertainties discussed above, the ultimate losses may vary materially from current loss reserves and, depending on coverage under the Company's various reinsurance arrangements, could have a material adverse effect on the Company's future financial condition, results of operations and cash flows. 9 EVEREST RE GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) For the Three Months Ended March 31, 2002 and 2001 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, 2002 and 2001:
(dollar amounts in thousands) Three Months Ended March 31, 2002 2001 ---------------------------- Gross basis: Beginning of period reserves $ 644,390 $ 693,704 Incurred losses 10,000 12,110 Paid losses (22,612) (15,155) ---------------------------- End of period reserves $ 631,778 $ 690,659 ============================ Net basis: Beginning of period reserves $ 568,592 $ 628,535 Incurred losses 2,477 1,886 Paid losses (20,493) (13,670) ---------------------------- End of period reserves $ 550,576 $ 616,753 ============================
At March 31, 2002, the gross reserves for asbestos and environmental losses were comprised of $109.2 million representing case reserves reported by ceding companies, $48.7 million representing additional case reserves established by the Company on assumed reinsurance claims, $152.5 million representing case reserves established by the Company on direct excess insurance claims, including Mt. McKinley, and $321.4 million representing incurred but not reported ("IBNR") reserves. The Company is involved from time to time in ordinary routine litigation and arbitration proceedings incidental to its business. The Company does not believe that there are any other material pending legal proceedings to which it or any of its subsidiaries or their properties are subject. The Prudential sells annuities which are purchased by property and casualty insurance companies to settle certain types of claim liabilities. In 1993 and prior years, the Company, for a fee, accepted the claim payment obligation of these property and casualty insurers, and, concurrently, became the owner of the annuity or assignee of the annuity proceeds. In these circumstances, the Company would be liable if The Prudential were unable to make the annuity payments. The estimated cost to replace all such annuities for which the Company was contingently liable at March 31, 2002 was $147.9 million. 10 EVEREST RE GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) For the Three Months Ended March 31, 2002 and 2001 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 March 31, 2002 was $14.0 million. 5. OTHER COMPREHENSIVE INCOME The Company's other comprehensive (loss) income is comprised as follows:
(dollar amounts in thousands) Three Months Ended March 31, 2002 2001 ---------------------------- Net unrealized (depreciation)/ appreciation of investments, net of deferred income taxes ($ 67,139) $ 49,750 Currency translation adjustments, net of deferred income taxes (987) (2,678) ---------------------------- Other comprehensive (loss)/ income, net of deferred income taxes ($ 68,126) $ 47,072 ============================
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 is used for liquidity and general corporate purposes. The Credit Facility provides for the borrowing of up to $150.0 million with interest at a rate selected by the Company equal to either (i) the Base Rate (as defined below) or (ii) an adjusted London InterBank Offered Rate ("LIBOR") plus a margin. The Base Rate is the higher of the rate of interest established by First Union National Bank from time to time as its prime rate or the Federal Funds rate plus 0.5% per annum. On December 18, 2000, the Credit Facility was amended to extend the borrowing limit to $235.0 million for a period of 120 days. This 120-day period expired during the three months ended March 31, 2001, after which the limit reverted to $150.0 million. The amount of margin and the fees payable for the Credit Facility depend upon Holdings' senior unsecured debt rating. Group has guaranteed all of Holdings' obligations under the Credit Facility. 11 EVEREST RE GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) For the Three Months Ended March 31, 2002 and 2001 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 aggregate net income and 25% of aggregate capital contributions. During the three months ended March 31, 2002 and 2001, Holdings made payments on the Credit Facility of $20.0 million and $123.0 million, respectively, and made borrowings of $20.0 million and $20.0 million, respectively. As of March 31, 2002 and 2001, Holdings had outstanding Credit Facility borrowings of $105.0 million and $132.0 million, respectively. Interest expense incurred in connection with these borrowings was $0.9 million and $2.7 million for the three months ended March 31, 2002 and 2001, 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. Interest expense incurred in connection with these senior notes was $9.7 million and $9.7 million for the three months ended March 31, 2002 and 2001, respectively. 8. SEGMENT REPORTING The Company, through its subsidiaries, operates in five segments: U.S. Reinsurance, U.S. Insurance, Specialty Reinsurance, International Reinsurance and Bermuda. The U.S. Reinsurance operation writes property and casualty treaty reinsurance through reinsurance brokers as well as directly with ceding companies within the United States, in addition to property, casualty and specialty facultative reinsurance through brokers and directly with ceding companies within the United States. The U.S. Insurance operation writes property and casualty insurance primarily through general agent relationships and surplus lines brokers within the United States. The Specialty Reinsurance operation writes accident and health, marine, aviation and surety business within the United States and worldwide through brokers and directly with ceding companies. The International Reinsurance operation writes property and casualty reinsurance through the Company's branches in London, Canada and Singapore, in addition to foreign "home-office" business. The Bermuda operation writes property, casualty, life and annuity business through brokers and directly with ceding companies. 12 EVEREST RE GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) For the Three Months Ended March 31, 2002 and 2001 The non-Bermuda segments are managed in a carefully coordinated fashion with strong elements of central control, including with respect to capital, investments and support operations. The Bermuda segment is managed independently with strong alignment as respects capital, investment and support operation strategies. As a result, management monitors and evaluates the financial performance of all of the Company's operating segments principally based upon their underwriting gain or loss ("underwriting results"). The Company utilizes inter-affiliate reinsurance and such reinsurance does not impact segment results as business is reported within the segment in which the business was first produced. Underwriting results include earned premium less incurred loss and loss adjustment expenses, commission and brokerage expenses and other underwriting expenses. The following tables present the relevant underwriting results for the operating segments for the three months ended March 31, 2002 and 2001, with all dollar values presented in thousands.
U.S. REINSURANCE - -------------------------------------------------------------------------------- Three Months Ended March 31, 2002 2001 ---------------------------- Earned premiums $ 176,558 $ 109,110 Incurred losses and loss adjustment expenses 123,574 75,361 Commission and brokerage 45,989 26,530 Other underwriting expenses 4,169 3,240 ---------------------------- Underwriting gain $ 2,826 $ 3,979 ============================
U.S. INSURANCE - -------------------------------------------------------------------------------- Three Months Ended March 31, 2002 2001 ---------------------------- Earned premiums $ 108,845 $ 52,141 Incurred losses and loss adjustment expenses 80,697 37,199 Commission and brokerage 23,697 13,538 Other underwriting expenses 4,740 3,965 ---------------------------- Underwriting (loss) ($ 289) ($ 2,561) ============================
13 EVEREST RE GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) For the Three Months Ended March 31, 2002 and 2001
SPECIALTY REINSURANCE - -------------------------------------------------------------------------------- Three Months Ended March 31, 2002 2001 ---------------------------- Earned premiums $ 114,369 $ 93,738 Incurred losses and loss adjustment expenses 86,593 74,549 Commission and brokerage 33,242 23,935 Other underwriting expenses 1,366 1,372 ---------------------------- Underwriting (loss) ($ 6,832) ($ 6,118) ============================
INTERNATIONAL REINSURANCE - -------------------------------------------------------------------------------- Three Months Ended March 31, 2002 2001 ---------------------------- Earned premiums $ 87,275 $ 73,003 Incurred losses and loss adjustment expenses 57,292 55,339 Commission and brokerage 16,880 17,850 Other underwriting expenses 3,009 3,167 ---------------------------- Underwriting gain (loss) $ 10,094 ($ 3,353) ============================
BERMUDA - -------------------------------------------------------------------------------- Three Months Ended March 31, 2002 2001 ---------------------------- Earned premiums $ 4,161 $ 501 Incurred losses and loss adjustment expenses 4,350 678 Commission and brokerage 1,201 104 Other underwriting expenses 374 806 ---------------------------- Underwriting (loss) ($ 1,764) ($ 1,087) ============================
14 EVEREST RE GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) For the Three Months Ended March 31, 2002 and 2001 The following table reconciles the underwriting results for the operating segments to income before tax as reported in the consolidated statements of operations and comprehensive income, with all dollar values presented in thousands:
---------------------------- Three Months Ended March 31, 2002 2001 ---------------------------- Underwriting gain (loss) $ 4,035 ($ 9,140) Net investment income 85,540 86,155 Realized (loss) (3,855) (5,057) Net derivative (expense) (250) (727) Corporate expenses (467) (546) Interest expense (10,637) (12,421) Other income 1,337 868 ---------------------------- Income before taxes $ 75,703 $ 59,132 ============================
The Company writes premium in the United States, Bermuda and international markets. The revenues, net income and identifiable assets of the individual foreign countries in which the Company writes business are not material to the Company's financial condition, results of operations and cash flows. 9. DERIVATIVES The Company has in its product portfolio three credit default swaps, which it no longer offers, and five specialized equity put options. These products meet the definition of a derivative under Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). The Company's position in these contracts is unhedged and is accounted for as derivatives in accordance with FAS 133. Accordingly, these contracts are carried at fair value with changes in fair value recorded in the statement of operations. The Company's three credit default swap contracts provide credit default protection on a portfolio of referenced securities. Due to changing credit market conditions and defaults, the Company recorded net losses from these contracts of $0.3 million and $0.7 million in the three months ended March 31, 2002 and 2001, respectively, to reflect them at fair value. 15 EVEREST RE GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) For the Three Months Ended March 31, 2002 and 2001 10. NEW ACCOUNTING PRONOUNCEMENT In June 2001, the Financial Accounting Standards Board ("FASB") issued FAS 142, "Goodwill and Other Intangible Assets". FAS 142 established new accounting and reporting standards for acquired goodwill and other intangible assets. It requires that an entity determine if the goodwill or other intangible asset has an indefinite useful life or a finite useful life. Those with indefinite useful lives are not be subject to amortization and must be tested annually for impairment. Those with finite useful lives are subject to amortization and must be tested annually for impairment. This statement is effective for all fiscal quarters of all fiscal years beginning after December 15, 2001. The Company adopted FAS 142 on January 1, 2002. The implementation of this statement has not had a material impact on the financial position, results of operations or cash flows of the Company. 11. RELATED-PARTY TRANSACTIONS During the normal course of business, the Company, through its affiliates, engages in what management believes to be arm's-length reinsurance and brokerage and commission business transactions with companies controlled by or affiliated with its outside directors. Such transactions, individually and in the aggregate, are immaterial to the Company's financial condition, results of operations and cash flows. 16 Part I - Item 2 EVEREST RE GROUP, LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS INDUSTRY CONDITIONS The worldwide reinsurance and insurance businesses are highly competitive yet cyclical by product and market. The terrorist attacks on September 11, 2001 (the "September 11th attacks") resulted in losses which reduced industry capacity and were of sufficient magnitude to cause most individual companies to reassess their capital position, tolerance for risk, exposure control mechanisms and the pricing terms and conditions at which they are willing to take on risk. The gradual and variable improving trend that had been apparent through 2000 and earlier in 2001 firmed significantly. This firming generally took the form of immediate and significant upward pressure on prices, more restrictive terms and conditions and a reduction of coverage limits and capacity availability. Such pressures were widespread with variability depending on the product and markets involved, but mainly depending on the characteristics of the underlying risk exposures. The magnitude of the changes was sufficient to create temporary disequilibrium in some markets as individual buyers and sellers adapted to changes in both their internal and market dynamics. These changes reflect a reversal of the general trend from 1987 through 1999 toward increasingly competitive global market conditions across most lines of business as reflected by decreasing prices and broadening contract terms. The earlier trend resulted from a number of factors, including the emergence of significant reinsurance capacity in Bermuda, changes in the Lloyds market, consolidation and increased capital levels in the insurance and reinsurance industries, as well as the emergence of new reinsurance and financial products addressing traditional exposures in alternative fashions. Many of these factors continue to exist and may be amplified as the result of market changes since the September 11th attacks. As a result, although the Company is encouraged by the recent improvements, and more generally, current market conditions, the Company cannot predict with any reasonable certainty whether and to what extent these improvements will persist. SEGMENT INFORMATION The Company, through its subsidiaries, operates in five segments: U.S. Reinsurance, U.S. Insurance, Specialty Reinsurance, International Reinsurance and Bermuda. The U.S. Reinsurance operation writes property and casualty treaty reinsurance through reinsurance brokers as well as directly with ceding companies within the United States, in addition to property, casualty and specialty facultative reinsurance through brokers and directly with ceding companies within the United States. The U.S. Insurance operation writes property and casualty insurance primarily through general agent relationships and surplus lines brokers within the United States. The Specialty Reinsurance operation writes accident and health ("A&H"), marine, aviation and surety business within the United States and worldwide through brokers and directly with ceding 17 companies. The International Reinsurance operation writes property and casualty reinsurance through the Company's branches in London, Canada and Singapore, in addition to foreign "home-office" business. The Bermuda operation writes property, casualty, life and annuity business through brokers and directly with ceding companies. The non-Bermuda segments are managed in a carefully coordinated fashion with strong elements of central control, including with respect to capital, investments and support operations. The Bermuda segment is managed independently with strong alignment as respects capital, investment and support operation strategies. As a result, management monitors and evaluates the financial performance of all of the Company's operating segments principally based upon their underwriting results. The Company utilizes inter-affiliate reinsurance and such reinsurance does not impact segment results as business is reported within the segment in which the business was first produced. THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001 PREMIUMS. Gross premiums written increased 42.2% to $596.3 million in the three months ended March 31, 2002 from $419.4 million in the three months ended March 31, 2001 as the Company took advantage of selected growth opportunities, while continuing to maintain a disciplined underwriting approach. Premium growth areas included a 56.3% ($71.6 million) increase in the U.S. Insurance operation, principally attributable to growth in workers' compensation insurance, a 50.3% ($60.8 million) increase in the U.S. Reinsurance operation primarily reflecting growth across casualty lines, a 26.2% ($19.7 million) increase in the International Reinsurance operation, mainly attributable to growth in the London, Canada and Latin American markets, a 22.7% ($21.7 million) increase in the Specialty Reinsurance operation, principally attributable to growth in A&H medical stop loss business and a $3.0 million increase in the Bermuda operation. The Company continued to decline business that did not meet its objectives regarding underwriting profitability. Ceded premiums decreased to $31.3 million in the three months ended March 31, 2002 from $32.1 million in the three months ended March 31, 2001. This decrease was principally attributable to a decrease in ceded premium in the U.S. Insurance operation as a result of changes in this segment's specific reinsurance programs. Net premiums written increased by 45.9% to $565.0 million in the three months ended March 31, 2002 from $387.3 million in the three months ended March 31, 2001. This increase was consistent with the increase in gross premiums written and the decrease in ceded premiums. PREMIUM REVENUES. Net premiums earned increased by 49.5% to $491.2 million in the three months ended March 31, 2002 from $328.5 million in the three months ended March 31, 2001. Contributing to this increase was a 108.8% ($56.7 million) increase in the U.S. Insurance operation, a 61.8% ($67.4 million) increase in the U.S. Reinsurance operation, a 22.0% ($20.6 million) increase in the Specialty Reinsurance operation, a 19.5% ($14.3 million) increase in the International Reinsurance operation and a $3.7 million increase in the Bermuda operation. All of these changes reflect period to period changes in net written premiums and business mix together with normal variability in earnings patterns. Business mix changes occur not only as the Company shifts emphasis between products, lines of business, distribution channels and markets but also as individual contracts renew or non-renew, almost always with changes in coverage, structure, prices and/or terms, and as new contracts are accepted with 18 coverages, structures, prices and/or terms different from those of expiring contracts. As premium reporting and earnings and loss and commission characteristics derive from the provisions of individual contracts, the continuous turnover of individual contracts, arising from both strategic shifts and day to day underwriting, can and does introduce appreciable background variability in various underwriting line items. EXPENSES. Incurred loss and loss adjustment expenses ("LAE") increased by 45.0% to $352.5 million in the three months ended March 31, 2002 from $243.1 million in the three months ended March 31, 2001. The increase in incurred losses and LAE was principally attributable to the increase in net premiums earned and also reflects the impact of changes in the Company's mix of business. Incurred losses and LAE include catastrophe losses, which include the impact of both current period events, and favorable and unfavorable development on prior period events and are net of reinsurance. A catastrophe is an event that causes a pre-tax loss on property exposures of at least $5.0 million and has an event date of January 1, 1988 or later. Catastrophe losses, net of contract specific cessions but before cessions under the corporate retrocessional program, were $1.4 million in the three months ended March 31, 2002 compared to net catastrophe losses of $14.9 million in the three months ended March 31, 2001. Incurred losses and LAE for the three months ended March 31, 2002 reflected ceded losses and LAE of $38.0 million compared to ceded losses and LAE in the three months ended March 31, 2001 of $32.2 million. Contributing to the increase in incurred losses and LAE in the three months ended March 31, 2002 from the three months ended March 31, 2001 were a 116.9% ($43.5 million) increase in the U.S. Insurance operation principally reflecting increased premium volume coupled with changes in this segments specific reinsurance programs, a 64.0% ($48.2 million) increase in the U.S. Reinsurance operation, a 16.2% ($12.0 million) increase in the Specialty Reinsurance operation principally attributable to increased premium volume in A&H business, a 3.5% ($2.0 million) increase in the International operation reflecting increased premium volume, offset by lower catastrophe losses and a $3.7 million increase in the Bermuda 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, decreased by 2.3 percentage points to 71.8% in the three months ended March 31, 2002 from 74.1% in the three months ended March 31, 2001 reflecting the incurred losses and LAE discussed above. The following table shows the loss ratios for each of the Company's operating segments for the three months ended March 31, 2002 and 2001. The loss ratios for all operations were impacted by the factors noted above.
Operating Segment Loss Ratios - -------------------------------------------------------------------------------- Segment 2002 2001 - -------------------------------------------------------------------------------- U.S. Reinsurance 70.0% 69.1% U.S. Insurance 74.1% 71.3% Specialty Reinsurance 75.7% 79.5% International Reinsurance 65.6% 75.8% Bermuda 104.5% N/M
Underwriting expenses increased by 42.2% to $135.1 million in the three months ended March 31, 2002 from $95.1 million in the three months ended March 31, 2001. Commission, brokerage, taxes and fees increased by $39.1 million, principally reflecting increases in premium volume and changes in the mix of 19 business. Other underwriting expenses increased by $1.0 million as the Company has expanded its business volume and operations. Contributing to these underwriting expense increases were a 68.5% ($20.4 million) increase in the U.S. Reinsurance operation, a 62.5% ($10.9 million) increase in the U.S. Insurance operation, a 36.8% ($9.3 million) increase in the Specialty Reinsurance operation and a $0.7 million increase in the Bermuda operation. These increases were partially offset by a 5.4% ($1.1 million) decrease in the International operation. The changes for each operation's expenses principally resulted from changes in commission expenses related to changes in premium volume and business mix by class and type and, in some cases, changes in the use of specific reinsurance and the underwriting performance of the underlying business. The Company's expense ratio, which is calculated by dividing underwriting expenses by premiums earned, was 27.5% for the three months ended March 31, 2002 compared to 28.9% for the three months ended March 31, 2001. The Company's combined ratio, which is the sum of the loss and expense ratios, decreased by 3.7 percentage points to 99.3% in the three months ended March 31, 2002 compared to 103.0% in the three months ended March 31, 2001. The following table shows the combined ratios for each of the Company's operating segments for the three months ended March 31, 2002 and 2001. The combined ratios for all operations were impacted by the loss and expense ratio variability noted above.
Operating Segment Combined Ratios - -------------------------------------------------------------------------------- Segment 2002 2001 - -------------------------------------------------------------------------------- U.S. Reinsurance 98.4% 96.4% U.S. Insurance 100.3% 104.9% Specialty Reinsurance 106.0% 106.5% International Reinsurance 88.4% 104.6% Bermuda 142.4% N/M
INVESTMENT RESULTS. Net investment income decreased 0.7% to $85.5 million in the three months ended March 31, 2002 from $86.2 million in the three months ended March 31, 2001, principally reflecting the effects of the lower interest rate environment, partially offset by the effects of investing the $448.1 million of cash flow from operations in the twelve months ended March 31, 2002. The following table shows a comparison of various investment yields as of March 31, 2002 and December 31, 2001, respectively, and for the periods ended March 31, 2002 and 2001, respectively.
2002 2001 ----------------------- Imbedded pre-tax yield of cash and invested assets at March 31, 2002 and December 31, 2001 6.0% 6.0% Imbedded after-tax yield of cash and invested assets at March 31, 2002 and December 31, 2001 5.0% 5.0% Annualized pre-tax yield on average cash and invested assets for the three months ended March 31, 2002 and 2001 5.9% 6.4% Annualized after-tax yield on average cash and invested assets for the three months ended March 31, 2002 and 2001 4.8% 5.2%
20 Net realized capital losses were $3.9 million in the three months ended March 31, 2002, reflecting realized capital losses on the Company's investments of $9.7 million, which included $3.8 million relating to write-downs in the value of securities deemed to be other than temporary, partially offset by $5.8 million of realized capital gains, compared to net realized capital losses of $5.1 million in the three months ended March 31, 2001. The net realized capital gains in the three months ended March 31, 2001 reflected realized capital losses of $5.7 million, partially offset by $0.6 million of realized capital gains. Interest expense for the three months ended March 31, 2002 was $10.6 million compared to $12.4 million for the three months ended March 31, 2001. Interest expense for the three months ended March 31, 2002 reflects $9.7 million relating to Holdings' issuance of senior notes and $0.9 million relating to Holdings' borrowings under it's revolving credit facility. Interest expense for the three months ended March 31, 2001 reflects $9.7 million relating to Holdings' issuance of senior notes and $2.7 million relating to Holdings' borrowings under its revolving credit facility. Other income for the three months ended March 31, 2002 was $1.3 million compared to $0.9 million for the three months ended March 31, 2001. Significant contributors to other income for the three months ended March 31, 2002 were foreign exchange gains as well as financing fees, partially offset by the establishment of uncollectible audit premium reserves in the U.S. Insurance operation and the amortization of deferred expenses relating to Holdings' issuance of senior notes. Other income for the three months ended March 31, 2001 principally included foreign exchange gains and financing fees, partially offset by the amortization of deferred expenses relating to Holdings' issuance of senior notes. The foreign exchange gains for both periods are attributable to fluctuations in foreign currency exchange rates. The Company has a small number of credit default swaps, which it no longer offers, and specialized equity put options in its product portfolio. These products meet the definition of a derivative under FAS 133. Net derivative expense, essentially reflecting changes in fair value, from these transactions for the three months ended March 31, 2002 was $0.3 million compared to $0.7 million for the three months ended March 31, 2001. INCOME TAXES. The Company recognized income tax expense of $14.6 million in the three months ended March 31, 2002 compared to $9.0 million in the three months ended March 31, 2001 principally reflecting improved underwriting results, decreased interest expense and taxable capital gains. NET INCOME. Net income was $61.1 million in the three months ended March 31, 2002 compared to $50.1 million in the three months ended March 31, 2001. This increase generally reflects the improved underwriting results and decreased interest expense. FINANCIAL CONDITION INVESTED ASSETS. Aggregate invested assets, including cash and short-term investments, were $6,152.7 million at March 31, 2002 and $5,783.5 million at December 31, 2001. The increase in invested assets between December 31, 2001 and March 31, 2002 resulted primarily from $346.3 million of proceeds from the Company's secondary offering of 5,000,000 common shares on February 27, 2002 and 21 $105.5 million in cash flows from operations generated during the three months ended March 31, 2002, partially offset by $90.7 million in net unrealized depreciation of the Company's investments. LOSS AND LAE RESERVES. Gross loss and LAE reserves totaled $4,341.4 million at March 31, 2002 and $4,278.3 million at December 31, 2001. The increase during the three months ended March 31, 2002 was primarily attributable to increased earned premiums and normal variability in claim settlements. SHAREHOLDERS' EQUITY. The Company's shareholders' equity increased to $2,056.0 million as of March 31, 2002, from $1,720.5 million as of December 31, 2001, principally reflecting $346.3 million of proceeds from the Company's secondary offering of 5,000,000 common shares on February 27, 2002 and net income of $61.1 million for the three months ended March 31, 2002, partially offset by net unrealized depreciation of $67.1 million on the Company's investments. Dividends of $4.1 million were declared and paid by the Company in the three months ended March 31, 2002. At March 31, 2002, 2.180 million shares remained available for repurchase under the Company's existing repurchase authorization. LIQUIDITY AND CAPITAL RESOURCES CAPITAL. The Company's business operations are in part dependent on the Company's financial strength, and the market's perception thereof, as measured in part by shareholders' equity, which was $2,056.0 million and $1,720.5 million at March 31, 2002 and December 31, 2001, respectively. The Company has flexibility with respect to capitalization as the result of its perceived financial strength, including its financial strength ratings as assign by independent rating agencies, and its access to the debt and equity markets. The Company continuously monitors its capital and financial position, as well as investment and security market conditions, in general and with respect to the Company's securities, and responds accordingly. On November 7, 2001, the Company filed a shelf registration statement on Form S-3 with the Securities and Exchange Commission, which provided for the issuance of up to $575 million of common equity. On February 27, 2002, pursuant to this registration statement, the Company completed an offering of 5,000,000 of its common shares at a price of $69.25 per share, which resulted in $346.3 million of proceeds before expenses of approximately $0.5 million related to the offering. The Company has used the net proceeds for working capital and general corporate purposes. The remaining limit on this shelf registration statement as of March 31, 2002 is $228.7 million. LIQUIDITY. The Company's current investment strategy seeks to maximize after-tax income through a high quality, diversified, taxable bond and tax-preferenced fixed maturity portfolio, while maintaining an adequate level of liquidity. The Company's mix of taxable and tax-preferenced investments is adjusted continuously, consistent with the Company's current and projected operating results, market conditions and tax position. Additionally, the Company invests in equity securities, which it believes will enhance the risk-adjusted total return of the investment portfolio. 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 $105.5 million and $63.5 million in the three months ended March 31, 2002 and 2001, 22 respectively. The following table shows cash flows from operating activities, as well as the impacts of select transactions on those cash flows, for the three months ended March 31, 2002 2001.
- -------------------------------------------------------------------------------- 2002 2001 - -------------------------------------------------------------------------------- Cash flow from operations $ 105.5 $ 63.5 Catastrophe loss payments 15.8 4.0 Derivative settlement payments 23.6 - Net tax payments (17.4) 2.6 --------------------------- Cash flow from operations, net of adjustments $ 127.5 $ 70.1 ---------------------------
Management believes that net cash flows from operating activities are generally consistent with expectations given the Company's investment strategies, mix of business and the normal variability of premium collections and the payout of loss reserves. Proceeds from sales, calls and maturities and investment asset acquisitions were $591.7 million and $1,005.8 million, respectively, in the three months ended March 31, 2002, compared to $448.9 million and $411.3 million, respectively, in the three months ended March 31, 2001. 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 is used for liquidity and general corporate purposes. The Credit Facility provides for the borrowing of up to $150.0 million with interest at a rate selected by 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. On December 18, 2000, the Credit Facility was amended to extend the borrowing limit to $235.0 million for a period of 120 days. This 120-day period expired during the three months ended March 31, 2001 after which the limit reverted to $150.0 million. The amount of margin and the fees payable for the Credit Facility depend upon Holdings' senior unsecured debt rating. Group 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 Re to maintain its statutory surplus at $850.0 million plus 25% of aggregate net income and 25% of aggregate capital contributions. During the three months ended March 31, 2002 and 2001, Holdings made payments on the Credit Facility of $20.0 million and $123.0 million, respectively, and made borrowings of $20.0 million and $20.0 million, respectively. As of March 31, 2002 and 2001, Holdings had outstanding Credit Facility borrowings of $105.0 million and $132.0 million, respectively. Interest expense incurred in connection with these borrowings was $0.9 million and $2.7 million for the three months ended March 31, 2002 and 2001, 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. Interest expense incurred in connection with these senior notes was $9.7 million and $9.7 million for the three months ended March 31, 2002 and 2001, respectively. 23 MARKET SENSITIVE INSTRUMENTS. The Company's risks associated with market sensitive instruments have not changed materially since the period ended December 31, 2001. SAFE HARBOR DISCLOSURE. This report contains forward-looking statements within the meaning of the U.S. federal securities laws. The Company intends these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in the federal securities laws. In some cases, these statements can be identified by the use of forward-looking words such as "may", "will", "should", "could", "anticipate", "estimate", "expect", "plan", "believe", "predict", "potential" and "intend". Forward-looking statements contained in this report include information regarding the Company's reserves for losses and LAE and estimates of the Company's catastrophe exposure. Forward-looking statements only reflect the Company's expectations and are not guarantees of performance. These statements involve risks, uncertainties and assumptions. Actual events or results may differ materially from the Company's expectations. Important factors that could cause actual events or results to be materially different from the Company's expectations include those discussed below under the caption "Risk Factors". The Company undertakes no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. 24 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, 2001. 25 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 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibit Index: Exhibit No. Description Location ----------- ----------- -------- 11.1 Statement regarding computation Filed herewith of per share earnings b) A report on Form 8-K dated February 19, 2002 was filed on February 19, 2002 reporting the Company's fourth quarter results and an increase in the dividend. A report on Form 8-K dated February 27, 2002 was filed on February 27, 2002 reporting the completion of an offering of common shares pursuant to it Registration Statement on Form S-3 (File No. 333-72664), including the Prospectus, as supplemented, filed with the Securities and Exchange Commission on February 25, 2002. Omitted from this Part II are items which are inapplicable or to which the answer is negative for the period covered. 26 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: May 7, 2002 EX-11 3 ex111.txt COMPUTATION OF EARNINGS PER SHARE Exhibit 11.1 EVEREST RE GROUP, LTD. COMPUTATION OF EARNINGS PER SHARE For The Quarter Ended March 31, 2002 and 2001 (Dollars in thousands)
Three Months Ended March 31, 2002 2001 ----------------------------- Net Income (Numerator) $ 61,061 $ 50,130 =========== =========== Weighted average common and effect of dilutive shares used in the computation of net income per share: Average shares outstanding - basic (denominator) 48,108,113 46,059,428 Effect of dilutive shares: Options outstanding 970,071 921,656 Options cancelled 2,291 23,283 Options exercised 6,506 - ----------- ----------- Average share outstanding - diluted (denominator) 49,086,980 47,004,367 Net Income per common share: Basic $ 1.27 $ 1.09 Diluted $ 1.24 $ 1.07
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