-----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, F4gNL5ee9/8uiKgRE/OqO260YteefiUiUS5wcS1iOdEQDcqjHfP1e9nLQDAPadLN jWUVZpR5yOYpUNIWMuVZqg== 0001047469-98-030576.txt : 19980813 0001047469-98-030576.hdr.sgml : 19980813 ACCESSION NUMBER: 0001047469-98-030576 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980812 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EXECUTIVE RISK INC /DE/ CENTRAL INDEX KEY: 0000914069 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 061388171 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12800 FILM NUMBER: 98682946 BUSINESS ADDRESS: STREET 1: 82 HOPMEADOW ST CITY: SIMSBURY STATE: CT ZIP: 06070 BUSINESS PHONE: 8604082000 MAIL ADDRESS: STREET 1: 82 HOPMEADOW ST CITY: SIMSBURY STATE: CT ZIP: 06070-7683 10-Q 1 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarter Ended June 30, 1998. [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Commission File Number 1-12800 EXECUTIVE RISK INC. (Exact name of registrant as specified in its charter)
Delaware 06-1388171 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 82 Hopmeadow Street Simsbury, Connecticut 06070 (Address of principal executive offices) (Zip Code)
(860) 408-2000 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No . --- --- As of August 7, 1998, there were 10,936,343 shares of Executive Risk Inc. Common Stock, $0.01 par value, outstanding, net of treasury shares. EXECUTIVE RISK INC. TABLE OF CONTENTS
Part I - Financial Information Page Item 1. Financial Statements Independent Accountants' Review Report............................................... 2 Consolidated Balance Sheets - June 30, 1998 and December 31, 1997.................................................. 3 Consolidated Statements of Income - Three Months and Six Months Ended June 30, 1998 and 1997............................. 4 Consolidated Statements of Cash Flows - Six Months Ended June 30, 1998 and 1997.............................................. 5 Notes to Consolidated Financial Statements........................................... 6 -7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................ 7-10 Part II - Other Information Item 4. Submission of Matters to Vote of Securityholders .............................. 10 Item 5. Other Information ........................................................................................ 11 Item 6. Exhibits and Reports on Form 8-K............................................... 11 Signatures.............................................................................. 12 Exhibit 15.1 - Independent Accountants' Acknowledgment Letter........................... 13 Exhibit 27 - Financial Data Schedule ........................................................................................ --
Note on forward-looking statements: The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. This Report may include forward-looking statements, as do other publicly available Company documents, including reports on Forms 10-K, 10-Q and 8-K filed with the Securities and Exchange Commission and other written or oral statements made by or on behalf of the Company, its officers and employees. When made, such forward-looking statements reflect the then-current views of the Company or its management with respect to future events and financial performance. There are known and unknown risks, uncertainties and other factors that could cause actual results to differ materially from those contemplated or indicated by such forward-looking statements. These include, but are not limited to, risks and uncertainties inherent in or relating to (i) general economic conditions, including interest rate movements, inflation and cyclical industry conditions, (ii) governmental and regulatory policies affecting professional liability, as well as the judicial environment, (iii) the loss reserving process, (iv) increasing competition in the market segments in which the Company operates, (v) the conduct of international operations, including exchange rate fluctuations and foreign regulatory changes, and (vi) the effects of Year 2000 on Company insureds and the degree to which liability exposure is affected thereby. The words "believe," "expect," "anticipate," "project," and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. Neither the Company or its management undertakes any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 1 Item 1. Financial Statements INDEPENDENT ACCOUNTANTS' REVIEW REPORT To the Stockholders and Board of Directors Executive Risk Inc. We have reviewed the accompanying consolidated balance sheet of Executive Risk Inc. and its subsidiaries as of June 30, 1998, and the related consolidated statements of income for the three-month and six-month periods ended June 30, 1998 and 1997 and the consolidated statements of cash flows for the six-month periods ended June 30, 1998 and 1997. These consolidated financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, which will be performed for the full year with the objective of expressing an opinion regarding the consolidated financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated financial statements referred to above for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Executive Risk Inc. and its subsidiaries as of December 31, 1997, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended (not presented herein) and in our report dated February 3, 1998, we expressed an unqualified opinion on those consolidated financial statements. /S/ ERNST & YOUNG LLP Stamford, Connecticut August 3, 1998 2 EXECUTIVE RISK INC. CONSOLIDATED BALANCE SHEETS
(Unaudited) June 30, December 31, (In thousands, except share data) 1998 1997 -------------- -------------- Assets Fixed maturities available for sale, at fair value (amortized cost: 1998 - $998,870 and 1997 - $905,050) ................... $ 1,028,539 $ 934,981 Equity securities available for sale, at fair value (cost: 1998 - $45,633 and 1997 - $42,787) ............................... 72,528 61,732 Cash and short-term investments, at cost which approximates market .......... 72,190 88,505 --------- --------- Total Cash and Invested Assets ......................................... 1,173,257 1,085,218 Premiums receivable ......................................................... 50,021 40,033 Reinsurance recoverables .................................................... 222,729 159,918 Accrued investment income ................................................... 14,960 13,731 Deferred acquisition costs .................................................. 39,909 34,581 Prepaid reinsurance premiums ................................................ 114,493 99,847 Deferred income taxes ....................................................... 21,344 23,316 Other assets ................................................................ 37,767 29,160 --------- --------- Total Assets ........................................................... $ 1,674,480 $ 1,485,804 --------- --------- --------- --------- Liabilities Loss and loss adjustment expenses ........................................... $ 750,757 $ 637,929 Unearned premiums ........................................................... 315,908 289,840 Senior notes payable ........................................................ 75,000 75,000 Ceded balances payable ...................................................... 38,762 37,165 Accrued expenses and other liabilities ...................................... 63,605 44,687 --------- --------- Total Liabilities ...................................................... 1,244,032 1,084,621 Preferred Securities of Executive Risk Capital Trust Company obligated mandatorily redeemable preferred securities of subsidiary, Executive Risk Capital Trust, holding solely $125,000,000 aggregate principal amount of 8.675% Series B Junior Subordinated Deferrable Interest Debentures of the Company due February 1, 2027 and $3,866,000 aggregate principal amount of 8.675% Series A Junior Subordinated Deferrable Interest Debentures of the Company due February 1, 2027 .................................................. 125,000 125,000 Stockholders' Equity Preferred Stock, $.01 par value; authorized 4,000,000 shares; issued - 1998 and 1997 - 0 shares ......................................... -- - Common Stock, $.01 par value; authorized 52,500,000 shares; issued - 1998 - 12,039,112 shares and 1997 - 11,953,358 shares ............ 120 120 Additional paid-in capital .................................................. 177,287 176,234 Accumulated other comprehensive income ...................................... 37,092 31,288 Retained earnings ........................................................... 123,505 101,101 Cost of shares in treasury, at cost: 1998 - 1,114,294 and 1997 - 1,114,421 shares ............................... (32,556) (32,560) --------- --------- Total Stockholders' Equity ............................................. 305,448 276,183 --------- --------- Total Liabilities, Preferred Securities of Executive Risk Capital Trust and Stockholders' Equity ................................ $ 1,674,480 $ 1,485,804 --------- --------- --------- ---------
The accompanying notes are an integral part of the consolidated financial statements. 3 EXECUTIVE RISK INC. CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended June 30, Six Months Ended June 30, (In thousands, except per share data) 1998 1997 1998 1997 ------------ ------------ ------------ ------------ Revenues Gross premiums written .................................. $130,019 $111,753 $230,103 $194,788 Premiums ceded .......................................... (54,779) (39,512) (94,521) (72,810) ------- ------- ------- ------- Net premiums written ................................. 75,240 72,241 135,582 121,978 Change in unearned premiums ............................. (10,864) (22,035) (11,421) (25,543) ------- ------- ------- ------- NET PREMIUMS EARNED ................................. 64,376 50,206 124,161 96,435 Net investment income ................................... 14,811 11,255 29,950 21,360 Net realized capital gains .............................. 870 335 2,645 1,341 Other income (losses) ................................... 82 (31) 165 115 -- -- -- -- Total Revenues ..................................... 80,139 61,765 156,921 119,251 Expenses Loss and loss adjustment expenses ....................... 42,617 33,789 82,733 65,110 Policy acquisition costs ................................ 12,342 7,961 22,959 15,442 General and administrative expenses ..................... 7,533 6,546 14,904 12,085 Interest expense ........................................ 1,356 -- 2,732 1,419 Minority interest in Executive Risk Capital Trust ....... 2,635 2,711 5,317 4,337 ------- ------- ------- ------- Total Expenses ...................................... 66,483 51,007 128,645 98,393 ------- ------- ------- ------- Income Before Taxes ................................. 13,656 10,758 28,276 20,858 Income tax expense (benefit) Current ................................................. 4,191 4,477 6,155 6,754 Deferred ................................................ (1,896) (2,287) (719) (2,878) ------- ------- ------- ------- 2,295 2,190 5,436 3,876 ------- ------- ------- ------- Net Income ......................................... $11,361 $8,568 $22,840 $16,982 ------- ------- ------- ------- ------- ------- ------- ------- Earnings per common and common equivalent .................. $1.04 $0.91 $2.09 $1.81 share (1) Weighted average shares outstanding ........................ 10,921 9,412 10,907 9,370 Earnings per common and common equivalent share - assuming full dilution ................................ $0.97 $0.83 $1.95 $1.66 Weighted average shares outstanding - assuming full dilution ................................ 11,725 10,263 11,723 10,217 Dividends declared per common share ........................ $0.02 $0.02 $0.04 $0.04
The accompanying notes are an integral part of the consolidated financial statements. (1) The sum of the 1998 quarters' earnings per common and common euivalent share does not equal the year-to-date per share amount. 4 EXECUTIVE RISK INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended June 30, (In thousands) 1998 1997 ------------ ------------ Operating Activities Net income ..................................................................... $ 22,840 $ 16,982 Adjustments to reconcile net income to net cash provided by operating activities: Amortization and depreciation ............................................ 2,030 1,113 Deferred income taxes .................................................... (719) (2,878) Amortization of bond premium ............................................. 1,392 760 Net realized gains on investments ........................................ (2,645) (1,341) Stock based compensation plans ........................................... (546) 2,250 Amortization of loan arrangement fees .................................... 910 Other .................................................................... 186 (332) Change in: Premiums receivable, net of ceded balances payable ................... (8,391) (15,140) Accrued investment income ............................................ (1,229) (721) Deferred acquisition costs ........................................... (5,328) (6,661) Loss and loss adjustment expenses, net of reinsurance recoverables ... 50,017 50,012 Unearned premiums, net of prepaid reinsurance premiums ............... 11,422 25,530 Accrued expenses and other liabilities ............................... (5,948) (10,229) -------- -------- Net Cash Provided by Operating Activities ............................ 63,081 60,255 Investing Activities Proceeds from sales of fixed maturities available for sale ................. 269,219 141,182 Proceeds from sales of equity securities available for sale ................ 2,544 1,370 Proceeds from maturities of investment securities .......................... 39,329 17,661 Purchase of fixed maturities available for sale ............................ (376,719) (224,898) Purchase of equity securities available for sale ........................... (6,774) (9,712) Net capital expenditures ................................................... (7,062) (3,203) -------- -------- Net Cash Used in Investing Activities ................................ (79,463) (77,600) Financing Activities Proceeds from exercise of options .......................................... 686 2,189 Repayment of note payable to bank .......................................... (70,000) Proceeds from Capital Securities offering .................................. 125,000 Placement fees and other ................................................... (183) (1,250) Dividends paid on Common Stock ............................................. (436) (377) -------- -------- Net Cash Provided by Financing Activities ............................ 67 55,562 -------- -------- Net (Decrease) Increase in Cash and Short-Term Investments ........... (16,315) 38,217 -------- -------- Cash and short-term investments at beginning of period ......................... 88,505 24,706 -------- -------- Cash and Short-Term Investments at End of Period ..................... $ 72,190 $ 62,923 -------- -------- -------- --------
The accompanying notes are an integral part of the consolidated financial statements. 5 EXECUTIVE RISK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 (Unaudited) Note 1 - Significant Accounting Policies Basis of Presentation: The accompanying unaudited interim consolidated financial statements of Executive Risk Inc. (the "Company" or "ERI") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting solely of normal recurring accruals) considered necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been included. Operating results for any interim period are not necessarily indicative of results that may be expected for the full year. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes contained in the Company's Annual Report to Stockholders incorporated by reference in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997. Certain prior year amounts have been reclassified to conform with the 1998 presentation. Note 2 - New Accounting Pronouncements As of January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net income or stockholders' equity. SFAS 130 requires unrealized gains or losses on the Company's available for sale securities and foreign currency translation adjustments, which prior to adoption were reported separately in stockholders' equity, to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of SFAS 130. During the second quarter of 1998 and 1997, total comprehensive income amounted to $28.6 million and $21.2 million, respectively. The components of comprehensive income, net of related tax, for the six-month periods ended June 30, 1998 and 1997, respectively, are as follows:
1998 1997 ------- ------- Net income ........................................ $22,840 $16,982 ------- ------- Unrealized gains (losses) on securities ........... 4,997 4,589 Foreign currency translation adjustments .......... 807 (370) ------- ------- Comprehensive income .............................. $28,644 $21,201 ------- ------- ------- -------
6 EXECUTIVE RISK INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1998 (Unaudited) Note 2 - New Accounting Pronouncements (continued) The components of accumulated other comprehensive income, net of related tax, at June 30, 1998 and December 31, 1997 are as follows:
1998 1997 ------- ------- Unrealized gains (losses) on securities ........... $36,766 $31,769 Foreign currency translation adjustments .......... 326 (481) ------- ------- Accumulated comprehensive income .................. $37,092 $31,288 ------- ------- ------- -------
In March 1998, the American Institute of Certified Public Accountants and the Accounting Standards Executive Committee issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 requires the capitalization of certain costs incurred after the date of adoption in connection with developing or obtaining software for internal use. SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998, and is not expected to have a material impact on the Company. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those derivatives at fair value. The accounting for the changes in the fair value of the derivatives depends on the intended use of the derivative and the resulting designation as prescribed by the provisions of SFAS 133. SFAS 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999, with earlier application permitted. The Company is currently reviewing the provisions of SFAS 133 and its anticipated financial statement impact to the Company. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion and analysis of financial condition and results of operations compares certain financial results for the six months ended June 30, 1998 with the corresponding period for 1997. The results of Executive Risk Inc. (the "Company" or "ERI") include the consolidated results of Executive Risk Management Associates ("ERMA"), Executive Re Inc. ("Executive Re"), and Executive Re's direct and indirect insurance company subsidiaries, Executive Risk Indemnity Inc. ("ERII"), Executive Risk Specialty Insurance Company ("ERSIC"), Executive Risk N.V. ("ERNV"), Quadrant Indemnity Company ("Quadrant") and Executive Risk (Bermuda) Ltd. In addition, the Company's results include Executive Risk Capital Trust, a Delaware statutory business trust (the "Trust"), and Sullivan Kelly Inc. ("Sullivan Kelly"), an underwriting managment company which is a subsidiary of Executive Re. Also, 1997 results include a 50% interest in UAP Executive Partners ("UPEX"),a French underwriting agency which was a joint venture between the Company and Union des Assurances de Paris -Incendie Accidents ("UAP"). The joint venture agreement between the Company and UAP was terminated on December 31, 1997. RESULTS OF OPERATIONS The Company's net income for the second quarter of 1998 was $11.4 million, or $0.97 per diluted share, as compared to $8.6 million, or $0.83 per diluted share, earned in the second quarter of 1997. For the six months ended June 30, 1998 and 1997, net income was $22.8 and $17.0, respectively. Diluted earnings per share were $1.95 and $1.66 for the corresponding periods. The Company's operating earnings, calculated as net income before realized capital gains or losses, net of tax, were $10.8 million, or $0.92 per diluted 7 share, for the quarter ended June 30, 1998 and $8.4 million, or $0.81 per diluted share, for the quarter ended June 30, 1997. For the six months ended June 30, 1998, operating earnings were $21.1 million, or $1.80 per diluted share, as compared to $16.1 million, or $1.57 per diluted share, for the first half of 1997. Gross premiums written increased by $18.2 million, or 16%, to $130.0 million in the second quarter of 1998 from $111.8 million in the second quarter of 1997. The increase was principally due to growth in sales in of largeand medium-sized law firm, accouting firm and miscellaneous professional liability errors and omissions insurance ("E&O") partially offset by a decrease in domestic and international directors and officers liability insurance ("D&O"). The level of D&O gross premiums written has been adversely affected both by continued strong competition in the D&O market and by declinations of D&O applicants that appear to present greater than acceptable exposure to the Year 2000 issue. These factors are likely to continue to affect the level of D&O writings for the foreseeable future. For the first half of 1998, gross premiums written were $230.1 million compared to $194.8 million in the first half of 1997. Ceded premiums increased $15.3 million, or 39%, to $54.8 million in the second quarter of 1998 from $39.5 million in the second quarter of 1997. For the first six months of 1998, ceded premiums totaled $94.5, representing a 30% increase over 1997. The rise in ceded premiums was due principally to increased cessions on E&O and certain D&O products as a result of higher writings. As a result of the foregoing, net premiums written increased $3.0 million, or 4%, to $75.2 million for the quarter ended June 30, 1998 from $72.2 million for the quarter ended June 30, 1997. For the first six months of 1998, net premiums written totaled $135.6 million, as compared to $122.0 million for the six months ended June 30, 1997. Net premiums earned for the second quarter increased to $64.4 million in 1998 from $50.2 million in 1997. Year-to-date, net premiums earned increased to $124.2 million in 1998 from $96.4 million during the first six months of 1997. Net investment income increased by $3.5 million, or 32%, to $14.8 million for the quarter ended June 30, 1998 from $11.3 million for the quarter ended June 30, 1997. For the first half of 1998 and 1997, net investment income was $30.0 million and $21.4 million, respectively. These increases resulted principally from growth in invested assets, measured on an amortized cost basis, from $783.0 million at June 30, 1997 to $1,116.7 million at June 30, 1998, partially offset by a decrease in nominal yields. The nominal portfolio yield of the fixed maturity portfolio at June 30, 1998 was 5.98%, compared to 6.24% at June 30, 1997. The tax equivalent yields on the fixed maturity portfolio were 7.48% and 7.98% at these dates, respectively. The Company's net realized capital gains were $0.9 million in the second quarter of 1998 as compared to $0.4 million in the second quarter of 1997. For the six months ended June 30, 1998, net realized capital gains totaled $2.6 million as compared to $1.3 million for the first six months of 1997. In 1998, net capital gains were realized principally from the sale of fixed maturity investments, equity mutual fund distributions and certain equity limited partnership investments. Loss and loss adjustment expenses ("LAE") increased by $8.8 million, or 26%, from $33.8 million in the second quarter of 1997 to $42.6 million in the comparable period of 1998 due to higher premiums earned. For the six months ended June 30, 1998 and 1997, loss and LAE were $82.7 million and $65.1 million, respectively. The Company's loss ratio was 66.2% in the second quarter of 1998 and 66.6% for the first six months of 1998 as compared to 67.3% in the second quarter of 1997 and 67.5% for the first six months of 1997. In connection with the Company's normal reserving review, which includes a reevaluation of the adequacy of reserve levels for prior years' claims, the Company reduced its unpaid loss and LAE reserves for prior report years by $6.8 million, or $0.38 per diluted share, in the first half of 1998. In the first half of 1997, the Company reduced its unpaid loss and LAE reserves for prior report years by $4.3 million, or $0.27 per fully diluted share. There can be no assurance that reserve adequacy reevaluations will produce similar reserve reductions and net income increases in future quarters. Policy acquisition costs increased by $4.3 million, or 55%, to $12.3 million for the quarter ended June 30, 1998 from $8.0 million for the quarter ended June 30, 1997. For the first half of 1998 and 1997, policy acquisition costs totaled $23.0 million and $15.4 million, respectively. The Company's ratio of policy acquisition costs to net premiums earned increased from 15.9% in the second quarter of 1997 to 19.2% in the second quarter of 1998. Year-to-date, the policy acquisition cost ratio increased from 16.0% for the first six months of 1997 to 18.5% for the first six months of 1998. The increase in the policy acquisition 8 cost ratio was attributable to both higher commission amounts paid to brokers and increased compensation and related expenses incurred in hiring additional underwriting staff to support the growth in the Company's business. General and administrative ("G&A") expenses increased $1.0 million, or 15%, to $7.5 million in the second quarter of 1998 from $6.5 million in the second quarter of 1997. For the six months ended June 30, 1998 and 1997, G&A expenses totaled $14.9 million and $12.1 million, respectively. The increase in G&A costs is due primarily to increased compensation, benefit and related overhead costs associated with the growth in premium volume. The ratio of G&A costs to premiums earned decreased from 13.0% during the second quarter of 1997 to 11.7% in the second quarter of 1998, and also decreased slightly from 12.6% for the first six months of 1997 to 12.0% for the first six months of 1998. The GAAP combined ratio increased to 97.1% in the second quarter of 1998 from 96.2% in the second quarter of 1997. For the first half of 1998, the GAAP combined ratio was 97.1%, as compared to 96.1% for the first half of 1997. The increase for the three and six month periods ended June 30, 1998 was attributable to the increase in the policy acquisition cost ratio, partially offset by a decreases in the loss and G&A ratios as discussed above. A combined ratio below 100% indicates profitable underwriting prior to the consideration of investment income, capital gains and interest expense. A company with a combined ratio exceeding 100% can still be profitable in that period due to such factors as investment income and capital gains realized during that period. Interest expense of $2.7 million for the first half of 1998 was attributable principally to the Company's outstanding senior notes payable, while interest expense of $1.4 million for the first half of 1997 was attributable principally to outstanding balances under the Company's bank credit agreement. On December 12, 1997, the Company sold $75 million aggregate amount of 7.125% senior notes payable. The outstanding balance under the Company's bank credit agreement was $70 million from January 1, 1997 through February 5, 1997. On February 5, 1997, the Company repaid the $70 million outstanding under the term loan portion of a senior credit facility arranged through The Chase Manhattan Bank. In January 1997, the Company formed the Trust, the common securities of which are wholly owned by the Company. On February 5, 1997, the Trust sold $125,000, 000 principal amount of 8.675% Series A Capital Securities, which were later entirely exchanged for a like amount of 8.657% Series B Capital Securities, due February 1, 2027. Minority interest in the Trust, as shown on the Company's income statement, is attributable to distributions payable on the securities of the Trust. LIQUIDITY AND CAPITAL RESOURCES ERI is a holding company, the principal asset of which is equity in its subsidiaries. ERI's cash flows depend primarily on dividends and other payments from its subsidiaries. ERI's sources of funds consist primarily of premiums received by the insurance subsidiaries, investment income and proceeds from sales and redemptions of investments. Funds are used primarily to pay claims and operating expenses, to purchase investments, to pay interest and principal under the terms of the Company's indebtedness for borrowed money and to pay dividends to Common Stock holders. Cash flows from operating activities were $63.1 million for the six months ended June 30, 1998 and $60.3 million for the six months ended June 30, 1997. The increase in operating cash flows resulted from an increase in net premiums and investment income received partially offset by higher losses and G&A expenses paid. Rising loss payments are expected of a maturing professional liability underwriter. The Company believes that it has sufficient liquidity to meet its anticipated insurance obligations as well as its operating and capital expenditure needs. The Company's investment strategy emphasizes quality, liquidity and diversification. With respect to liquidity, the Company considers liability durations, specifically loss reserves, when determining investment maturities. Average investment duration of the fixed maturity portfolio at June 30, 1998 and December 31, 1997 was 4.7 and 4.6 years, respectively, as compared to an expected loss reserve duration of 5.0 to 5.5 years. The Company's short-term investment pool was $72.2 million (6.2% of the total investment portfolio) at June 30, 1998 and $88.5 million (8.2%) at December 31, 1997. The decrease in the short-term investment pool was due principally to the fact that approximately $40 million of the senior note proceeds, which had been held in short-term investments at year-end 1997, were used to capitalize ERNV in February 1998. 9 The Company's entire investment portfolio is classified as available for sale under the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and is reported at fair value, with the resulting unrealized gains or losses included as a separate component of stockholders' equity until realized. The market value of the portfolio at June 30, 1998 and December 31, 1997 was 103% of amortized cost. At June 30, 1998 and December 31, 1997, stockholders' equity was increased by $19.3 million and $19.5 million, respectively, to record the Company's fixed maturity investment portfolio at fair value. At June 30, 1998, the Company owned no derivative instruments, except for $123.7 million (fair value) invested in mortgage and asset backed securities. In July 1998, a national rating agency revised its outlook on the rating of the Company's senior debt from "stable" to "negative", which could affect future borrowing costs should the Company decide to incur additional debt. The revised outlook was premised upon the agency's analysis of D&O insurer exposures to the Year 2000 issue. While the Company acknowledges that the year 2000 entails significant risks, it believes that its underwriting techniques, reinsurance practices and loss reserve levels are reasonable and appropriate to manage the Year 2000 risk. On May 8, 1998, the Company declared its second quarter dividend on the Company's Common Stock of $.02 per share, which was paid on June 30, 1998 to stockholders of record as of June 15, 1998. Such dividends totaled $0.2 million. Part II - Other Information Item 4 - Submission of Matters to a Vote of Security Holders On May 8, 1998, the Company held its annual meeting of stockholders at its headquarters in Simsbury, Connecticut. The stockholders voted on nominees for election to the Board of Directors and on one other matter. The following votes were cast for nominees for election of directors, and all such nominees were elected.
Votes for Votes Withheld Gary G. Benanav ................. 8,455,046 60,622 Robert V. Deutsch ............... 8,455,046 60,622 Michael D. Rice ................. 8,455,046 60,622 Irving B. Yoskowitz ............. 8,455,046 60,622
The votes cast on the approval of Ernst & Young LLP as the Independent Auditors for the Company for the 1998 fiscal year were as follows:
8,513,513 ... In Favor 2,045 ... Against 150 ... Abstain
10 Item 5 - Other Information The Securities and Exchange Commission ("SEC") has modified its rule pertaining to management's discretionary voting on stockholder proposals at annual meetings. Under SEC Rule 14a-4, if a stockholder-proponent fails to notify the Company at least 45 days prior to the month and day of mailing of the prior year's proxy statement, then management proxies are allowed to use their discretionary voting authority when the proposal is raised at the annual meeting, without discussion of the matter in the proxy statement. For purposes of the Company's 1999 Annual Meeting, the Rule 14a-4 deadline is February 10, 1999. The new deadline does not affect stockholder proposals under SEC Rule 14a-8, which must be received no later than December 1, 1998 in order to be included in the Company's proxy materials. Item 6 - Exhibits and Reports on Form 8-K a) Exhibit Index
Exhibit No. Description ----------- ----------- 15.1 .............. Independent Accountant's Acknowledgment Letter 27 .............. Financial Data Schedule
b) Reports on Form 8-K There were no Current Reports on Form 8-K filed during the quarter ended June 30, 1998. 11 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.
Signature Title Date --------- ----- ---- /s/ Robert H. Kullas Chairman and Director August 12, 1998 - -------------------- Robert H. Kullas /s/ Robert V. Deutsch Executive Vice President, Chief Financial Officer, August 12, 1998 - --------------------- Chief Actuary, Treasurer and Assistant Secretary Robert V. Deutsch (Principal Financial and Accounting Officer) and Director
12 EX-15.1 2 EXHIBIT-15.1 EXHIBIT 15.1 Acknowledgment Letter To the Stockholders and Board of Directors Executive Risk Inc. We are aware of the incorporation by reference in the Registration Statement (Form S-8 No. 33-78414) pertaining to the Executive Risk Inc. Nonqualified Stock Option Plan, Executive Risk Inc. Employee Incentive Nonqualified Stock Option Plan, Executive Risk Inc. IPO Stock Compensation Plan, Executive Risk Inc. Nonemployee Directors Stock Option Plan, Option Agreements for Outside Directors of Executive Re Inc. and in the Registration Statement (Form S-8 No. 333-52307) pertaining to the Executive Risk Inc. Performance Share Plan and the Executive Risk Inc. Stock Incentive Plan of our report dated August 3, 1998 relating to the unaudited consolidated interim financial statements of Executive Risk Inc. which are included in its Form 10-Q for the quarter ended June 30, 1998. /S/ ERNST & YOUNG LLP August 11, 1998 13 EX-27 3 EXHIBIT 27 FDS
7 1,000 U.S. 6-MOS JUN-30-1998 JAN-01-1998 JUN-30-1998 1 1,028,539 0 0 72,528 0 0 1,101,067 72,190 5,266 39,909 1,674,480 750,757 315,908 0 0 75,000 125,000 0 120 305,328 1,674,480 124,161 29,950 2,645 165 82,733 22,959 22,953 28,276 5,436 22,840 0 0 0 22,840 2.09 1.95 0 0 0 0 0 0 0
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