-----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, FKrUcHKqVnyJWHHpVdAqIWnvdB1AlG+YFfig0StQoGMm1vqi2P8/HseQQn9myx4S JnJ8HiGwzondh7ZAterYVQ== /in/edgar/work/20000811/0000914748-00-000006/0000914748-00-000006.txt : 20000921 0000914748-00-000006.hdr.sgml : 20000921 ACCESSION NUMBER: 0000914748-00-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EVEREST REINSURANCE HOLDINGS INC CENTRAL INDEX KEY: 0000914748 STANDARD INDUSTRIAL CLASSIFICATION: [6321 ] IRS NUMBER: 223263609 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-71652 FILM NUMBER: 692666 BUSINESS ADDRESS: STREET 1: 477 MARTINSVILLE RD STREET 2: PO BOX 830 CITY: LIBERTY CORNER STATE: NJ ZIP: 07938 BUSINESS PHONE: 9086043000 MAIL ADDRESS: STREET 1: 477 MARTINSVILLE RD STREET 2: PO BOX 830 CITY: LIBERTY CORNER STATE: NJ ZIP: 07938 FORMER COMPANY: FORMER CONFORMED NAME: PRUDENTIAL REINSURANCE HOLDINGS INC DATE OF NAME CHANGE: 19931115 10-Q 1 0001.txt FORM 10-Q FOR EVEREST REINSURANCE HOLDINGS, INC. SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended: Commission File Number: June 30, 2000 1-13816 - --------------------- ---------------------- Everest Reinsurance Holdings, Inc. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) Delaware 22-3263609 - ------------------------ ---------------------------- (State or other juris- (IRS Employer Identification diction of incorporation Number) or organization) Westgate Corporate Center Liberty Corner, New Jersey 07938-0830 ---------------------------- (908) 604-3000 ---------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. YES X NO ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Number of Shares Outstanding Class at August 10, 2000 ----- ---------------------------- Common Stock, $.01 par value 1,000 EVEREST REINSURANCE HOLDINGS, INC. Index To Form 10-Q PART I FINANCIAL INFORMATION --------------------- Page ---- ITEM 1. FINANCIAL STATEMENTS -------------------- Consolidated Balance Sheets at June 30, 2000 (unaudited) and December 31, 1999 3 Consolidated Statements of Operations and Comprehensive Income for the three months and six months ended June 30, 2000 and 1999 (unaudited) 4 Consolidated Statements of Changes in Stockholders' Equity for the three months and six months ended June 30, 2000 and 1999 (unaudited) 5 Consolidated Statements of Cash Flows for the three months and six months ended June 30, 2000 and 1999 (unaudited) 6 Notes to Consolidated Interim Financial Statements 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ----------------------------------------------------------- AND RESULTS OF OPERATIONS 17 ------------------------- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 27 ---------------------------------------------------------- PART II OTHER INFORMATION ----------------- ITEM 1. LEGAL PROCEEDINGS 28 ----------------- ITEM 2. CHANGES IN SECURITIES 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 28 -------------------------------- Part I - Item 1 EVEREST REINSURANCE HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except par value per share)
June 30, December 31, ----------- ----------- 2000 1999 ----------- ----------- ASSETS: (unaudited) Fixed maturities - available for sale, at market value (amortized cost: 2000, $4,029,951; 1999, $3,940,625) $ 4,010,134 $ 3,885,278 Equity securities, at market value (cost: 2000, $23,035; 1999, $50,224) 41,984 90,693 Short-term investments 101,481 73,558 Other invested assets 28,666 27,482 Cash 66,169 62,227 ----------- ----------- Total investments and cash 4,248,434 4,139,238 Accrued investment income 64,042 64,898 Premiums receivable 338,716 294,941 Reinsurance receivables 759,552 742,513 Funds held by reinsureds 170,238 157,237 Deferred acquisition costs 93,396 82,713 Prepaid reinsurance premiums 22,040 9,582 Deferred tax asset 188,009 188,326 Other assets 30,836 24,854 ----------- ----------- TOTAL ASSETS $ 5,915,263 $ 5,704,302 =========== =========== LIABILITIES: Reserve for losses and adjustment expenses $ 3,605,768 $ 3,646,992 Unearned premium reserve 351,673 308,563 Funds held under reinsurance treaties 187,392 178,520 Losses in the course of payment 100,051 67,065 Contingent commissions 25,445 58,169 Other net payable to reinsurers 27,256 13,217 Current federal income taxes (14,894) (4,475) 8.5% Senior notes due 3/15/2005 249,578 - 8.75% Senior notes due 3/15/2010 198,969 - Revolving credit agreement borrowings 106,000 59,000 Interest accrued on debt and borrowings 11,849 106 Other liabilities 65,324 49,663 ----------- ----------- Total liabilities 4,914,411 4,376,820 ----------- ----------- STOCKHOLDERS' EQUITY: Common stock, par value: $0.01; 200 million shares authorized; 1,000 shares issued in 2000 and 50.9 million shares issued in 1999 - 509 Additional paid-in capital 253,177 390,912 Unearned compensation - (109) Accumulated other comprehensive income, net of deferred income taxes benefit of $1.1 million in 2000 and deferred income taxes benefit of $9.1 million in 1999 (7,802) (16,701) Retained earnings 755,477 1,074,941 Treasury stock, at cost; 0.0 million shares in 2000 and 4.4 million shares in 1999 - (122,070) ----------- ----------- Total stockholders' equity 1,000,852 1,327,482 ----------- ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,915,263 $ 5,704,302 =========== ===========
The accompanying notes are an integral part of the consolidated financial statements. 3 EVEREST REINSURANCE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended June 30, June 30, ---------------------- ---------------------- 2000 1999 2000 1999 --------- --------- --------- --------- (unaudited) REVENUES: Premiums earned $ 285,780 $ 275,419 $ 551,964 $ 509,554 Net investment income 66,941 64,570 130,750 126,650 Net realized capital (loss) (8,185) (7,267) (321) (9,453) Other income/(expense) (370) (1,700) 440 (1,603) --------- --------- --------- --------- Total revenues 344,166 331,022 682,833 625,148 --------- --------- --------- --------- CLAIMS AND EXPENSES: Incurred loss and loss adjustment expenses 233,669 196,852 430,058 365,721 Commission, brokerage, taxes and fees 46,272 74,590 111,930 136,241 Other underwriting expenses 12,734 12,457 24,242 23,984 Interest expense on senior notes 9,722 - 11,342 - Interest expense on credit facility 1,888 283 3,351 283 --------- --------- --------- --------- Total claims and expenses 304,285 284,182 580,923 526,229 --------- --------- --------- --------- INCOME BEFORE TAXES 39,881 46,840 101,910 98,919 Income tax 8,340 8,775 21,319 19,612 --------- --------- --------- --------- NET INCOME $ 31,541 $ 38,065 $ 80,591 $ 79,307 ========= ========= ========= ========= Other comprehensive income/ (loss), net of tax (6,035) (68,671) 8,899 (98,521) --------- --------- --------- --------- COMPREHENSIVE INCOME/(LOSS) $ 25,506 $ (30,606) $ 89,490 $ (19,214) ========= ========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements. 4 EVEREST REINSURANCE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- (unaudited) COMMON STOCK (shares outstanding): Balance, beginning of period 1,000 49,006,740 46,457,817 49,989,204 Issued during the period - - 8,500 16,800 Treasury stock acquired during the period - (353,800) (648,400) (1,354,120) Treasury stock reissued during the period - 1,288 1,780 2,344 Common stock retired during the period - - (45,819,697) - Issued during the period - - 1,000 - ---------- ---------- ---------- ---------- Balance, end of period 1,000 48,654,228 1,000 48,654,228 ========== ========== ========== ========== COMMON STOCK (par value): Balance, beginning of period $ - $ 509 $ 509 $ 509 Common stock retired during the period - - (509) - Issued during the period - - - - ---------- ---------- ---------- ---------- Balance, end of period - 509 - 509 ---------- ---------- ---------- ---------- ADDITIONAL PAID IN CAPITAL: Balance, beginning of period 252,979 390,881 390,912 390,559 Retirement of treasury stock during the period - - (138,546) - Common stock issued during the period - - 157 307 Treasury stock reissued during the period - 10 (2) 25 Contribution from subsidiary 198 - 198 - Common stock retired during the period - - 458 - ---------- ---------- ---------- ---------- Balance, end of period 253,177 390,891 253,177 390,891 ---------- ---------- ---------- ---------- UNEARNED COMPENSATION: Balance, beginning of period - (200) (109) (240) Net increase during the period - 40 109 80 ---------- ---------- ---------- ---------- Balance, end of period - (160) - (160) ---------- ---------- ---------- ---------- ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF DEFERRED INCOME TAXES: Balance, beginning of period (1,767) 155,668 (16,701) 185,518 Net increase (decrease) during the period (6,035) (68,671) 8,899 (98,521) ---------- ---------- ---------- ---------- Balance, end of period (7,802) 86,997 (7,802) 86,997 ---------- ---------- ---------- ---------- RETAINED EARNINGS: Balance, beginning of period 723,914 966,737 1,074,941 928,500 Net income 31,541 38,065 80,591 79,307 Restructure adjustments 22 - (55) - Dividends paid to parent - (2,896) (400,000) (5,901) ---------- ---------- ---------- ---------- Balance, end of period 755,477 1,001,906 755,477 1,001,906 ---------- ---------- ---------- ---------- TREASURY STOCK AT COST: Balance, beginning of period - (58,344) (122,070) (25,642) Treasury stock retired during the period - - 138,454 - Treasury stock acquired during the period - (11,072) (16,426) (43,799) Treasury stock reissued during the period - 30 42 55 ---------- ---------- ---------- ---------- Balance, end of period - (69,386) - (69,386) ---------- ---------- ---------- ---------- TOTAL STOCKHOLDERS' EQUITY, END OF PERIOD $1,000,852 $1,410,757 $1,000,852 $1,410,757 ========== ========== ========== ==========
The accompanying notes are an integral part of the consolidated financial statements. 5 EVEREST REINSURANCE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
Three Months Ended Six Months Ended June 30, June 30, ----------------------- ----------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- CASH FLOWS FROM OPERATING (unaudited) ACTIVITIES: Net income $ 31,540 $ 38,065 $ 80,591 $ 79,307 Adjustments to reconcile net income to net cash provided by operating activities: (Increase) decrease in premiums receivable (17,269) 9,411 (47,162) (16,841) Decrease (increase) in funds held, net 7,920 (23,492) (5,968) (20,098) (Increase) decrease in reinsurance receivables (26,843) 43,063 (18,146) 128,701 (Increase) in deferred tax asset (1,711) (2,110) (4,482) (9,182) (Decrease) in reserve for losses and loss adjustment expenses (2,213) (41,487) (15,864) (62,848) Increase (decrease) in unearned premiums 14,653 (1,343) 44,928 8,648 Decrease in other assets and liabilities (13,316) (32,190) (7,189) (9,963) Non cash compensation expense - 40 109 80 Accrual of bond discount/ amortization of bond premium (2,076) (1,228) (3,583) (2,540) Amortization of underwriting discount on senior notes 34 - 40 - Restructure adjustment 23 - (55) - Realized capital losses 8,185 7,267 321 9,453 ---------- ---------- ---------- ---------- Net cash (used in) provided by operating activities (1,073) (4,004) 23,540 104,717 ---------- ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from fixed maturities matured/called - available for sale 58,159 50,048 87,615 123,679 Proceeds from fixed maturities sold - available for sale 313,447 250,976 411,137 327,094 Proceeds from equity securities sold 4,917 2,620 47,580 2,620 Proceeds from other invested assets sold - 131 - 131 Cost of fixed maturities acquired - available for sale (379,238) (299,940) (625,678) (537,645) Cost of equity securities acquired (13) (645) (1,191) (645) Cost of other invested assets acquired (28) (67) (1,558) (1,829) Net (purchases) of short-term securities (643) (22,653) (26,349) (18,715) Net increase (decrease) increase in unsettled securities transactions 13,949 (6,023) 11,868 14,051 ---------- ---------- ---------- ---------- Net cash provided by (used in) investing activities 10,550 (25,553) (96,576) (91,259) ---------- ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Acquisition of treasury stock net of reissuances - (11,042) (16,478) (43,729) Common stock issued during the period - 10 106 317 Dividends paid to stockholders - (2,896) (400,000) (5,901) Proceeds from issuance of senior notes - - 448,507 - Net borrowing on revolving credit agreement - 35,000 47,000 35,000 Contribution from subsidiary 198 - 198 - ---------- ---------- ---------- ---------- Net cash provided by (used in) financing activities 198 21,072 79,333 (14,313) ---------- ---------- ---------- ---------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (2,211) (1,980) (2,355) (4,361) ---------- ---------- ---------- ---------- Net increase (decrease) increase in cash 7,464 (10,465) 3,942 (5,216) Cash, beginning of period 58,705 44,575 62,227 39,326 ---------- ---------- ---------- ---------- Cash, end of period $ 66,169 $ 34,110 $ 66,169 $ 34,110 ========== ========== ========== ========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash transactions: Income taxes paid, net $ 32,026 $ 33,634 $ 37,016 $ 33,634 Interest paid $ 1,987 $ 213 $ 2,910 $ 213 Non-cash financing transaction: Issuance of common stock $ - $ 40 $ - $ 80
The accompanying notes are an integral part of the consolidated financial statements. 6 EVEREST REINSURANCE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999 1. GENERAL On February 24, 2000, a corporate restructuring was completed and Everest Re Group, Ltd. ("Group") became the new parent holding company of Everest Reinsurance Holdings, Inc. (the "Company"), which remains the holding company for Group's U.S. based operations. The Company is filing this report as a result of its public issuance of debt securities on March 14, 2000. The consolidated financial statements of the Company for the three months and six months ended June 30, 2000 and 1999 include all adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair presentation of the results on an interim basis. Certain financial information, which is normally included in annual financial statements prepared in accordance with generally accepted accounting principles has been omitted since it is not required for interim reporting purposes. The year end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The results for the three months and six months ended June 30, 2000 and 1999 are not necessarily indicative of the results for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, 1999, 1998 and 1997. 2. CONTINGENCIES The Company continues to receive claims under expired contracts which assert alleged injuries and/or damages relating to or resulting from toxic torts, toxic waste and other hazardous substances, such as asbestos. The Company's asbestos claims typically involve potential liability for bodily injury from exposure to asbestos or for property damage resulting from asbestos or products containing asbestos. The Company's environmental claims typically involve potential liability for (a) the mitigation or remediation of environmental contamination or (b) bodily injury or property damages caused by the release of hazardous substances into the land, air or water. The Company's reserves include an estimate of the Company's ultimate liability for asbestos and environmental claims for which ultimate value cannot be estimated using traditional reserving techniques. There are significant uncertainties in estimating the amount of the Company's potential losses from asbestos and environmental claims. Among the complications are: (a) potentially long waiting periods between exposure and manifestation of any bodily injury or property damage; (b) difficulty in identifying sources of asbestos or environmental contamination; (c) difficulty in properly allocating responsibility and/or liability for asbestos or environmental damage; (d) changes in underlying laws and judicial interpretation of those laws; (e) potential for an asbestos or environmental claim to involve many insurance providers over many policy periods; (f) long reporting delays, both from insureds to insurance companies and ceding companies to reinsurers; (g) historical data concerning asbestos and environmental losses, which is more limited than historical information on other types of casualty claims; (h) questions concerning interpretation and application of insurance and reinsurance coverage; and (i) 7 EVEREST REINSURANCE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999 uncertainty regarding the number and identity of insureds with potential asbestos or environmental exposure. Although these complications have become less severe in recent years, management believes that these factors continue to render reserves for asbestos and environmental losses significantly less subject to traditional actuarial methods than are reserves on other types of losses. Given these uncertainties, management believes that no meaningful range for such ultimate losses can be established. The Company establishes reserves to the extent that, in the judgement of management, the facts and prevailing law reflect an exposure for the Company or its ceding companies. In connection with its initial public offering in October 1995, the Company purchased an aggregate stop loss retrocession agreement (the "Stop Loss Agreement") from Gibraltar Casualty Company ("Gibraltar"), an affiliate of the Company's former parent, The Prudential Insurance Company of America ("The Prudential"). This coverage protects the Company's consolidated earnings against up to $375.0 million of the first $400.0 million of adverse development, if any, on the Company's consolidated reserves for losses, allocated loss adjustment expenses and uncollectible reinsurance at June 30, 1995 (December 31, 1994 for catastrophe losses). Through June 30, 2000, cessions under the Stop Loss Agreement have aggregated $285.6 million with available remaining limits net of coinsurance of $89.4 million. Due to the uncertainties discussed above, the ultimate losses may vary materially from current loss reserves and, if coverage under the Stop Loss Agreement is exhausted, could have a material adverse effect on the Company's future financial condition, results of operations and cash flows. 8 EVEREST REINSURANCE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999 The following table shows the development of prior year asbestos and environmental reserves on both a gross and net of retrocessional basis for the three months and six months ended June 30, 2000 and 1999:
(dollar amounts in thousands) Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 ------------------------------------------------- Gross basis: Beginning of period reserves $ 598,046 $ 654,417 $ 614,236 $ 660,793 Incurred losses - 985 - 2,586 Paid losses (17,778) (15,909) (33,968) (23,886) ------------------------------------------------- End of period reserves $ 580,268 $ 639,493 $ 580,268 $ 639,493 ================================================= Net basis: Beginning of period reserves $ 357,085 $ 379,828 $ 365,069 $ 263,542 Incurred losses (1) - - - - Paid losses (2) (12,181) (6,815) (20,165) 109,471 ------------------------------------------------- End of period reserves $ 344,904 $ 373,013 $ 344,904 $ 373,013 =================================================
(1) No losses were ceded in either the three months or the six months ended June 30, 2000 or in the three months or six months ended June 30, 1999 under the incurred loss reimbursement feature of the Stop Loss Agreement. (2) No losses were ceded in either the three months or the six months ended June 30, 2000 and $0.0 million and $118.8 million were ceded as paid losses under the Stop Loss Agreement in the three months ended and the six months ended June 30, 1999, respectively. At June 30, 2000, the gross reserves for asbestos and environmental losses were comprised of $120.4 million representing case reserves reported by ceding companies, $78.1 million representing additional case reserves established by the Company on assumed reinsurance claims, $51.1 million representing case reserves established by the Company on direct excess insurance claims and $330.6 million representing incurred but not reported ("IBNR") reserves. To the extent loss reserves on assumed reinsurance need to be increased and were not ceded to unaffiliated reinsurers under existing reinsurance agreements, the Company would be entitled to partial reimbursements consistent with the terms of the Stop Loss Agreement. To the extent loss reserves on direct excess insurance policies needed to be increased and were not ceded to unaffiliated reinsurers under existing reinsurance agreements, the Company would be entitled to 9 EVEREST REINSURANCE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999 100% protection from Gibraltar under a retrocessional agreement that has been in place since 1986. While there can be no assurance that reserves for and losses from these claims would not increase in the future, management believes that the Company's existing reserves and ceded reinsurance arrangements, including reimbursements available under the Stop Loss Agreement, lessen the probability that such increases, if any, would have a material adverse effect on the Company's financial condition, results of operations or cash flows. On February 24, 2000, the Company announced an agreement with The Prudential to acquire all of the issued and outstanding shares of Gibraltar for approximately $52.0 million. Closing of the acquisition will be subject to the satisfaction of customary closing conditions and the receipt of regulatory approvals. Upon the closing of the acquisition, the Company's current reinsurance contracts with Gibraltar, including the Stop Loss Agreement, will remain in effect. However, these contracts will become transactions with affiliates with the financial impact eliminated through inter-company accounts. The Prudential's guarantee of Gibraltar's obligations to the Company will be terminated. In connection with the acquisition, a subsidiary of The Prudential will provide reinsurance to Gibraltar covering 80% of the first $200.0 million of any adverse development in Gibraltar's reserves and The Prudential will guarantee the subsidiary's obligations to Gibraltar. 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 June 30, 2000 was $141.7 million. The Company has purchased annuities from an unaffiliated life insurance company to settle certain claim liabilities of the Company. Should the life insurance company become unable to make the annuity payments, the Company would be liable for those claim liabilities. The estimated cost to replace such annuities at June 30, 2000 was $12.4 million. 10 EVEREST REINSURANCE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999 3. OTHER COMPREHENSIVE INCOME The Company's other comprehensive income / (loss) is comprised as follows:
(dollar amounts in thousands) Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 ------------------------------------------------- Net unrealized appreciation (depreciation) of investments, net of deferred income taxes ($ 6,681) ($ 71,248) $ 9,093 ($ 102,412) Currency translation 646 2,577 (194) 3,891 ------------------------------------------------- Other comprehensive income/(loss), net of deferred income taxes ($ 6,035) ($ 68,671) $ 8,899 ($ 98,521) =================================================
4. CREDIT LINE On December 21, 1999, the Company entered into a three-year senior revolving credit facility with a syndicate of lenders (the "Credit Facility"). First Union National Bank is the administrative agent for the Credit Facility. The Credit Facility will be used for liquidity and general corporate purposes and to refinance existing debt under the Company's prior credit facility, which has been terminated. The Credit Facility provides for the borrowing of up to $150.0 million with interest at a rate selected by the Company equal to either (i) the Base Rate (as defined below) or (ii) an adjusted London InterBank Offered Rate ("LIBOR") plus a margin. The Base Rate is the higher of the rate of interest established by First Union National Bank from time to time as its prime rate or the Federal Funds rate plus 0.5% per annum. The amount of margin and the fees payable for the Credit Facility depend upon the Company's senior unsecured debt rating. Group has guaranteed all of the Company's obligations under the Credit Facility. The Credit Facility requires Group to maintain a debt to capital ratio of not greater than 0.35 to 1, Holdings to maintain a minimum interest coverage ratio of 2.5 to 1 and Everest Reinsurance Company ("Everest Re") to maintain its statutory surplus at $850.0 million plus 25% of future aggregate net income and 25% of future aggregate capital contributions. The Company was in compliance with these requirements at June 30, 2000 as well as for the three months and the six months ended June 30, 2000. 11 EVEREST REINSURANCE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999 As of June 30, 2000 and 1999, the Company had outstanding credit line borrowings of $106.0 million and $35.0 million, respectively. Interest expense incurred in connection with these borrowings was $3.4 million and $0.3 million for the periods ended June 30, 2000 and 1999, respectively. 5. SENIOR NOTES During the first quarter of 2000, the Company completed a public offering of $200.0 million principal amount of 8.75% senior notes due March 15, 2010 and $250.0 million principal amount of 8.5% senior notes due March 15, 2005. The Company distributed $400.0 million of these proceeds to Group, of which $250.0 million was used by Group to capitalize Everest Reinsurance (Bermuda), Ltd. Interest expense incurred in connection with these senior notes was $11.3 million for the period ended June 30, 2000. 6. SEGMENT REPORTING The Company, through its subsidiaries, operates in five segments: U.S. Broker Treaty, U.S. Direct Treaty Reinsurance and Insurance, U.S. Facultative, Marine, Aviation and Surety and International. The U.S. Broker Treaty operation writes property, casualty and accident and health reinsurance through reinsurance brokers within the United States. The U.S. Direct Treaty Reinsurance and Insurance operation writes property, casualty and accident and health reinsurance directly with ceding companies and primary property and casualty insurance through agency relationships and program administrators within the United States. The U.S. Facultative operation writes property, casualty and specialty business through brokers and directly with ceding companies within the United States. The Marine, Aviation and Surety operation writes marine, aviation and surety business within the United States and worldwide. The International operation writes reinsurance through the Company's branches in Belgium, London, Canada, Hong Kong and Singapore, in addition to foreign "home-office" business. The U.S. Facultative, Marine, Aviation and Surety and International operations write business through brokers and directly with ceding companies. 12 EVEREST REINSURANCE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999 These segments are managed in a carefully coordinated fashion with strong elements of central control, including with respect to capital, investments and support operations. As a result, management monitors and evaluates the financial performance of these operating segments based upon their underwriting gain or loss ("underwriting results"). Underwriting results include earned premium less loss and loss adjustment expenses incurred, commission and brokerage expenses and other underwriting expenses. The following tables present the relevant underwriting results for the operating segments for the three months and six months ended June 30, 2000 and 1999, with all dollar values presented in thousands.
U.S. BROKER TREATY - ------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 ------------------------------------------------ Earned premiums $ 103,655 $ 102,558 $ 209,718 $ 177,883 Incurred losses and loss adjustment expenses 96,709 75,751 174,011 143,880 Commission and brokerage 1,223 24,392 23,271 44,272 Other underwriting expenses 2,536 2,528 4,880 4,764 ------------------------------------------------ Underwriting gain/(loss) $ 3,187 ($ 113) $ 7,556 ($ 15,033) =================================================
U.S. DIRECT TREATY REINSURANCE AND INSURANCE - ------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 ------------------------------------------------ Earned premiums $ 63,464 $ 52,192 $ 116,249 $ 88,222 Incurred losses and loss adjustment expenses 43,090 37,147 76,785 62,222 Commission and brokerage 14,137 14,514 29,688 24,587 Other underwriting expenses 3,370 3,729 6,651 5,929 ------------------------------------------------ Underwriting gain/(loss) $ 2,867 ($ 3,198) $ 3,125 ($ 4,516) ================================================
13 EVEREST REINSURANCE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
U.S. FACULTATIVE - ------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 ------------------------------------------------ Earned premiums $ 18,247 $ 15,915 $ 35,096 $ 34,944 Incurred losses and loss adjustment expenses 12,698 9,051 23,739 20,338 Commission and brokerage 3,711 3,384 7,190 7,582 Other underwriting expenses 1,491 1,633 2,992 3,126 ------------------------------------------------ Underwriting gain/(loss) $ 347 $ 1,847 $ 1,175 $ 3,898 ================================================
MARINE, AVIATION AND SURETY - ------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 ------------------------------------------------ Earned premiums $ 25,473 $ 29,168 $ 49,761 $ 60,539 Incurred losses and loss adjustment expenses 24,447 20,314 42,299 40,604 Commission and brokerage 8,117 10,181 16,895 19,530 Other underwriting expenses 987 975 1,903 1,844 ------------------------------------------------ Underwriting gain/(loss) ($ 8,078) ($ 2,302) ($ 11,336) ($ 1,439) ================================================
INTERNATIONAL - ------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 ------------------------------------------------ Earned premiums $ 74,941 $ 75,588 $ 141,140 $ 147,968 Incurred losses and loss adjustment expenses 56,722 54,590 113,224 98,678 Commission and brokerage 19,087 22,120 34,886 40,271 Other underwriting expenses 3,460 3,991 6,846 7,550 ------------------------------------------------ Underwriting gain/(loss) ($ 4,328) ($ 5,113) ($ 13,816) $ 1,469 ================================================
14 EVEREST REINSURANCE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999 The following table reconciles the underwriting results for the operating segments to income before tax as reported in the consolidated statements of operations and comprehensive income, with all dollar values presented in thousands:
--------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, 2000 1999 2000 1999 --------------------------------------------------- Underwriting gain (loss) ($ 6,005) ($ 8,879) ($ 13,296) ($ 15,621) Net investment income 66,941 64,570 130,750 126,650 Realized gain (loss) (8,185) (7,267) (321) (9,453) Corporate expenses 890 (399) 970 771 Interest expense 11,610 283 14,693 283 Other income (expense) (370) (1,700) 440 (1,603) --------------------------------------------------- Income before taxes $ 39,881 $ 46,840 $ 101,910 $ 98,919 ===================================================
The Company writes premium in the United States and selected international markets. The revenues, net income and identifiable assets of any individual non-U.S. country in which the Company writes business are, in each case, less than 10% of the Company's consolidated results. 7. FUTURE APPLICATION OF ACCOUNTING STANDARDS The Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement requires all derivatives to be recognized as either assets or liabilities in the statement of financial position and to be measured at fair value. This statement shall be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. In June 2000, the Financial Accounting Standards Board amended SFAS No. 133 with SFAS No. 138, which facilitates the implementation of SFAS No. 133. Management believes that these statements will not have a material impact on the financial position of the Company. 8. RELATED-PARTY TRANSACTIONS During the normal course of business, the Company, through its affiliates, engages in arms-length reinsurance and brokerage and commission business transactions with companies controlled or affiliated with Group's outside directors. These transactions are immaterial to the Company's financial condition, results of operations and cash flows. 15 EVEREST REINSURANCE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999 In addition, the Company engages in business transactions with Group. The only material transaction with Group that occurred during the period ended June 30, 2000 was a $400.0 million distribution to Group to facilitate the completion of the corporate restructuring. 16 PART I - ITEM 2 EVEREST REINSURANCE HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS RESTRUCTURING On February 24, 2000, a corporate restructuring was completed and Everest Re Group, Ltd. ("Group") became the new parent holding company of Everest Reinsurance Holdings, Inc. (the "Company"), which remains the holding company for Group's U.S. based operations. The Company is filing this report as a result of its public issuance of debt securities on March 14, 2000. INDUSTRY CONDITIONS Since 1987, a number of factors, including the emergence of significant reinsurance capacity from the Bermuda and rejuvenated Lloyd's markets, higher retentions by primary insurance companies and consolidation and increased capital levels in the insurance industry, have caused increasingly competitive global market conditions across most lines of business and have influenced the softening of prices and contract terms in the current market place. Recently, market conditions, including industry-wide results of operations, have led to modest premium rate increases in some lines of insurance and reinsurance. Although the Company is encouraged by these improvements in some market conditions, the Company cannot predict with any reasonable certainty if, when or to what extent market conditions as a whole will change. SEGMENT INFORMATION The Company, through its subsidiaries, operates in five segments: U.S. Broker Treaty, U.S. Direct Treaty Reinsurance and Insurance, U.S. Facultative, Marine, Aviation and Surety and International. The U.S. Broker Treaty operation writes property, casualty and accident and health reinsurance through reinsurance brokers within the United States. The U.S. Direct Treaty Reinsurance and Insurance operation writes property, casualty and accident and health reinsurance directly with ceding companies and primary property and casualty insurance through agency relationships and program administrators within the United States. The U.S. Facultative operation writes property, casualty and specialty business through brokers and directly with ceding companies within the United States. The Marine, Aviation and Surety operation writes marine, aviation and surety business within the United States and worldwide. The International operation writes reinsurance through the Company's branches in Belgium, London, Canada, Hong Kong and Singapore, in addition to foreign "home-office" business. The U.S. Facultative, Marine, Aviation and Surety and International operations write business through brokers and directly with ceding companies. 17 These segments are managed in a carefully coordinated fashion with strong elements of central control, including with respect to capital, investments and support operations. As a result, management monitors and evaluates the financial performance of these operating segments based upon their underwriting results. THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999 PREMIUMS. Gross premiums written increased 15.2% to $326.2 million in the three months ended June 30, 2000 from $283.2 million in the three months ended June 30, 1999 as the Company took advantage of selected growth opportunities, while continuing to generally maintain a disciplined underwriting approach. Premium growth areas included a 53.6% ($27.9 million) increase in the U.S. Direct Treaty Reinsurance and Insurance operation, mainly attributable to growth in accident and health reinsurance and primary insurance writings, a 33.4% ($5.3 million) increase in the U.S. Facultative operation, attributable to growth across all lines coupled with reporting variability, a 7.8% ($8.5 million) increase in the U.S. Broker Treaty operation, attributable to growth across its property and casualty lines and a 6.7% ($5.1 million) increase in the International operation. These increases were partially offset by a 12.0% ($3.7 million) decrease in the Marine, Aviation and Surety operation, reflecting the continued highly competitive current market conditions faced by this operation. The Company continued to decline business that did not meet its objectives regarding underwriting profitability. Ceded premiums increased to $31.1 million in the three months ended June 30, 2000 from $11.8 million in the three months ended June 30, 1999. This increase was principally attributable to adjustment premiums of $11.7 million ceded in 2000 relating to claims made under the 1999 accident year aggregate excess of loss element of the Company's corporate retrocessional program, together with the higher utilization of contract specific retrocessions in the U.S. Broker Treaty and U.S. Direct Reinsurance and Insurance operations. Net premiums written increased by 8.7% to $295.1 million in the three months ended June 30, 2000 from $271.4 million in the three months ended June 30, 1999. This increase was consistent with the increase in gross premiums written, partially offset by the increase in ceded premiums. PREMIUM REVENUES. Net premiums earned increased by 3.4% to $285.8 million in the three months ended June 31, 2000 from $275.4 million in the three months ended June 30, 1999. Contributing to this increase was a 21.6% ($11.3 million) increase in the U.S. Direct Treaty Reinsurance and Insurance operation, a 14.7% ($2.3 million) increase in the U.S. Facultative operation and a 1.1% ($1.1 million) increase in the U.S. Broker Treaty operation. These increases were partially offset by a 12.7% ($3.7 million) decrease in the Marine, Aviation and Surety operation and a 0.9% ($0.6 million) decrease in the International operation. All of these changes reflect period to period changes in net written premiums and business mix together with normal variability in earnings patterns. EXPENSES. Incurred loss and loss adjustment expenses ("LAE") increased by 18.7% to $233.7 million in the three months ended June 30, 2000 from $196.9 million in the three months ended June 30, 1999. The increase in incurred losses and LAE was principally attributable to the increase in net premiums earned together with strengthening of prior period reserves in select areas, including on a multi-year reinsurance treaty where such losses within the current experience band were accompanied by correspondingly lower commissions. This increase was 18 partially offset by losses ceded under the Company's corporate retrocessional program and the impact of changes in the Company's mix of business. Incurred losses and LAE include catastrophe losses, which include the impact of both current period events and favorable and unfavorable development on prior period events, and are net of reinsurance. Catastrophe losses, net of contract specific cessions but before cessions under the corporate retrocessional program, in the three months ended June 30, 2000 were $6.2 million, mainly reflecting modest net adverse development on 1999 catastrophe events, compared to net catastrophe losses of $6.2 million in the three months ended June 30, 1999. Net incurred losses and LAE for the three months ended June 30, 2000 reflected ceded losses and LAE of $40.5 million, including $23.5 million ceded under the 1999 accident year aggregate excess of loss component of the Company's corporate retrocessional program and $0.0 million ceded under the Stop Loss Agreement. Ceded losses and LAE in the three months ended June 30, 1999 were $8.9 million with no cessions under the Stop Loss Agreement or the accident year aggregate excess of loss component of the Company's corporate retrocessional program. Contributing to the increase in incurred losses and LAE in the three months ended June 30, 2000 from the three months ended June 30, 1999 were a 40.3% ($3.6 million) increase in the U.S. Facultative operation mainly attributable to increased premium volume, a 27.7% ($21.0 million) increase in the U.S. Broker Treaty operation attributable to the increased premium volume as well as the loss reserve strengthening on the multi-year reinsurance treaty noted above, an 20.3% ($4.1 million) increase in the Marine, Aviation and Surety operation, principally reflecting reserve strengthening relating to prior period aviation exposures, a 16.0% ($5.9 million) increase in the U.S. Direct Treaty Reinsurance and Insurance operation, principally as a result of increased premium volume and a 3.9% ($2.1 million) increase in the International operation due to reserve strengthening relating to prior period exposures, including 1999 accident year catastrophe losses. Incurred losses and LAE for each operation were also impacted by variability relating to changes in the level of premium volume and mix of business by class and type. The Company's loss and LAE ratio ("loss ratio"), which is calculated by dividing incurred losses and LAE by premiums earned, increased by 10.3 percentage points to 81.8% for the three months ended June 30, 2000 from 71.5% for the three months ended June 30, 1999 reflecting the incurred losses and LAE discussed above. The Marine, Aviation and Surety, U.S. Broker Treaty, U.S. Facultative and International operations' loss ratios increased to 96.0%, 93.3%, 69.6% and 75.7% for the three months ended June 30, 2000 from 69.6%, 73.9%, 56.9% and 72.2% for the three months ended June 30, 1999, respectively. The U.S. Direct Treaty Reinsurance and Insurance operations' loss ratio decreased to 67.9% for the three months ended June 30, 2000 from 71.2% for the three months ended June 30, 1999. The loss ratios for all operations are impacted by the factors noted above. Underwriting expenses decreased by 32.2% to $59.0 million in the three months ended June 30, 2000 from $87.0 million in the three months ended June 30, 1999. Commission, brokerage, taxes and fees decreased by $28.3 million, principally reflecting the Company's reassessment of the expected losses on the multi-year reinsurance treaty noted above that led to a $32.3 million decrease in contingent commissions with a corresponding increase to losses, partially offset by the increases in premiums written and changes in the business mix. Other underwriting expenses increased by $0.3 million. Contributing to these underwriting expense decreases were an 86.0% ($23.2 million) decrease in the U.S. Broker Treaty operation, which included the impact of the contingent commission adjustment noted above, an 18.4% ($2.1 million) decrease in the Marine, Aviation and Surety operation, a 13.6% ($3.6 million) decrease in the 19 International operation and a 4.0% ($0.8 million) decrease in the U.S. Direct Treaty Reinsurance and Insurance operation. These decreases were partially offset by a 3.7% ($0.2 million) increase in the U.S. Facultative operation. Except as noted, 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. The Company's expense ratio, which is calculated by dividing underwriting expenses by premiums earned, was 20.6% for the three months ended June 30, 2000 compared to 31.6% for the three months ended June 30, 1999. The Company's combined ratio, which is the sum of the loss and expense ratios, decreased to 102.4% in the three months ended June 30, 2000 compared to 103.1% in the three months ended June 30, 1999. The U.S. Broker Treaty, International and U.S. Direct Treaty Reinsurance and Insurance operations' combined ratios decreased to 96.9%, 105.8% and 95.5%, respectively, for the three months ended June 30, 2000 from 100.1%, 106.8% and 106.1%, respectively, for the three months ended June 30, 1999. The Marine, Aviation and Surety and U.S. Facultative operations' combined ratios increased to 131.7% and 98.1%, respectively, for the three months ended June 30, 2000 from 107.9% and 88.4%, respectively, for the three months ended June 30, 1999. These changes reflect the loss and expense ratio variability noted above. Interest expense for the three months ended June 30, 2000 was $11.6 million compared to $0.3 million for the three months ended June 30, 1999. Interest expense for the three months ended June 30, 2000 reflects $9.7 million relating to the Company's issuance of senior notes and $1.9 million relating to the Company's borrowing under it's revolving credit facility. Interest expense for the three months ended June 30, 1999 reflects $0.3 million relating to the Company's borrowing under its revolving credit facility. Other expense for the three months ended June 30, 2000 was $0.4 million compared to $1.7 million for the three months ended June 30, 1999. The change in other expense for the respective periods was principally attributable to the impact of fluctuations in foreign currency exchange rates. INVESTMENTS. Net investment income increased 3.7% to $66.9 million in the three months ended June 30, 2000 from $64.6 million in the three months ended June 30, 1999, principally reflecting the effect of investing the $122.3 million of cash flow from operations in the twelve months ended June 30, 2000 as well as the investment of $50.0 million in proceeds from the Company's debt issuance. The annualized pre-tax yield on average cash and invested assets was 6.3% in the three months ended June 30, 2000 and 1999. The imbedded pre-tax yield of cash and invested assets at June 30, 2000 was 6.6% compared with 6.2% at December 31, 1999, reflecting the additional funds invested over the intervening period, as well as the continued emphasis on enhancing investment yields through changes in asset mix, all in the context of changes in investment market conditions. Net realized capital losses were $8.2 million in the three months ended June 30, 200, reflecting realized capital losses on the Company's investments of $12.0 million, partially offset by $3.8 million of realized capital gains, compared to net realized capital losses of $7.3 million in the three months ended June 30, 1999. The net realized capital losses in the three months ended June 30, 1999 reflected realized capital losses of $8.5 million, partially offset by $1.2 million of realized capital gains. The realized capital losses in the three months ended June 30, 2000 and 1999 arose mainly from activity in the Company's 20 fixed maturity portfolio. The realized capital gains in the three months ended June 30, 2000 and 1999 arose mainly from activity in the Company's equity portfolio. INCOME TAXES. The Company recognized income tax expense of $8.3 million in the three months ended June 30, 2000 compared to $8.8 million in the three months ended June 30, 1999. NET INCOME. Net income was $31.5 million in the three months ended June 30, 2000 compared to $38.1 million in the three months ended June 30, 1999. This decrease generally reflects increased interest expense, partially offset by the improved underwriting and investment results. SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999 PREMIUMS. Gross premiums written increased 17.4% to $630.5 million in the six months ended June 30, 2000 from $537.1 million in the six months ended June 30, 1999 as the Company took advantage of selected growth opportunities, while continuing to generally maintain a disciplined underwriting approach. Premium growth areas included a 53.9% ($52.6 million) increase in the U.S. Direct Treaty Reinsurance and Insurance operation, mainly attributable to growth in accident and health reinsurance and primary insurance writings, a 26.4% ($50.2 million) increase in the U.S. Broker Treaty operation, attributable to growth across its property and casualty lines and a 4.9% ($1.7 million) increase in the U.S. Facultative operation. These increases were partially offset by a 14.4% ($8.8 million) decrease in the Marine, Aviation and Surety operation and a 1.5% ($2.3 million) decrease in the International operation reflecting the continued highly competitive current market conditions faced by these operations. The Company continued to decline business that did not meet its objectives regarding underwriting profitability. Ceded premiums increased to $47.8 million in the six months ended June 30, 2000 from $23.1 million in the six months ended June 30, 1999. This increase was principally attributable to the higher utilization of contract specific retrocessions in the U.S. Broker Treaty and U.S. Direct Reinsurance and Insurance operations, together with adjustment premiums of $11.7 million ceded in 2000 relating to claims made under the 1999 accident year aggregate excess of loss element of the Company's corporate retrocessional program. Net premiums written increased by 13.4% to $582.7 million in the six months ended June 30, 2000 from $513.9 million in the six months ended June 30, 1999. This increase was consistent with the increase in gross premiums written, partially offset by the increase in ceded premiums. PREMIUM REVENUES. Net premiums earned increased by 8.3% to $552.0 million in the six months ended June 31, 2000 from $509.6 million in the six months ended June 30, 1999. Contributing to this increase was a 31.8% ($28.0 million) increase in the U.S. Direct Treaty Reinsurance and Insurance operation, a 17.9% ($31.8 million) increase in the U.S. Broker Treaty operation and a 0.4% ($0.2 million) increase in the U.S. Facultative operation. These increases were partially offset by a 17.8% ($10.8 million) decrease in the Marine, Aviation and Surety operation and a 4.6% ($6.8 million) decrease in the International operation. All of these changes reflect period to period changes in net written premiums and business mix together with normal variability in earnings patterns. EXPENSES. Incurred loss and LAE increased by 17.6% to $430.1 million in the six months ended June 30, 2000 from $365.7 million in the six months ended June 30, 1999. The increase in incurred losses and LAE was principally attributable to 21 the increase in net premiums earned together with strengthening of prior period reserves in select areas, including on a multi-year reinsurance treaty where such losses within the current experience band were accompanied by correspondingly lower commissions. This increase was partially offset by losses ceded under the Company's corporate retrocessional program and the impact of changes in the Company's mix of business. Incurred losses and LAE include catastrophe losses, which include the impact of both current period events and favorable and unfavorable development on prior period events and are net of reinsurance. Catastrophe losses, net of contract specific cessions but before cessions under the corporate retrocessional program, in the six months ended June 30, 2000 were $9.2 million, mainly reflecting modest net adverse development on 1999 catastrophe events, compared to net catastrophe losses of $17.6 million in the six months ended June 30, 1999. Net incurred losses and LAE for the six months ended June 30, 2000 reflected ceded losses and LAE of $57.3 million, including $23.5 million ceded under the 1999 accident year aggregate excess of loss component of the corporate retrocessional program and $0.0 million ceded under the Stop Loss Agreement. Ceded losses and LAE in the six months ended June 30, 1999 were $19.2 million with no cessions under the Stop Loss Agreement or the accident year aggregate excess of loss component of the corporate retrocessional program. Contributing to the increase in incurred losses and LAE in the six months ended June 30, 2000 compared to the six months ended June 30, 1999 were a 23.4% ($14.6 million) increase in the U.S. Direct Treaty Reinsurance and Insurance operation, principally as a result of increased premium volume, a 20.9% ($30.1 million) increase in U.S. Broker Treaty operation, attributable to the increased premium volume as well as the loss reserve strengthening on the multi-year reinsurance treaty noted above, a 16.7% ($3.4 million) increase in the U.S. Facultative operation, a 14.7% ($14.5 million) increase in the International operation due to reserve strengthening related to prior period exposures, including 1999 accident year catastrophe losses, partially offset by the decrease in premium volume, and a 4.2% ($1.7 million) increase in the Marine, Aviation and Surety operation, principally reflecting reserve strengthening relating to prior period aviation exposures, partially offset by the decrease in premium volume. Incurred losses and LAE for each operation were also impacted by variability relating to changes in the level of premium volume and mix of business by class and type. The Company's loss ratio increased by 6.1 percentage points to 77.9% for the six months ended June 30, 2000 from 71.8% for the six months ended June 30, 1999 reflecting the incurred losses and LAE discussed above. The U.S. Broker Treaty, International, Marine, Aviation and Surety and U.S. Facultative operations' loss ratios increased to 83.0%, 80.2%, 85.0% and 67.6% for the six months ended June 30, 2000 from 80.9%, 66.7%, 67.1% and 58.2% for the six months ended June 30, 1999, respectively. The U.S. Direct Treaty Reinsurance and Insurance operations' loss ratio decreased to 66.1% for the six months ended June 30, 2000 from 70.5% for the six months ended June 30, 1999. The loss ratios for all operations are impacted by the factors noted above. Underwriting expenses decreased by 15.0% to $136.2 million in the six months ended June 30, 2000 from $160.2 million in the six months ended June 30, 1999. Commission, brokerage, taxes and fees decreased by $24.3 million, principally reflecting the Company's reassessment of the expected losses on a multi-year reinsurance treaty noted above that led to a $32.3 million decrease in contingent commissions with a corresponding increase to losses, partially offset by the increases in premiums written and changes in the mix of business. Other underwriting expenses increased by $0.3 million. Contributing to the underwriting expense decreases were a 42.6% ($20.9 million) decrease in the U.S. Broker Treaty operation, which included the impact of the contingent commission 22 adjustment noted above, a 12.7% ($6.1 million) decrease in the International operation, a 12.1% ($2.6 million) decrease in the Marine, Aviation and Surety operation and a 4.9% ($0.5 million) decrease in the U.S. Facultative operation. These decreases were partially offset by a 19.1% ($5.8 million) increase in the U.S. Direct Treaty Reinsurance and Insurance operation. Except as noted, 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. The Company's expense ratio was 24.7% for the six months ended June 30, 2000 compared to 31.4% for the six months ended June 30, 1999. The Company's combined ratio decreased to 102.6% in the six months ended June 30, 2000 compared to 103.2% in the six months ended June 30, 1999. The U.S. Broker Treaty and U.S. Direct Treaty Reinsurance and Insurance operations' combined ratios decreased to 96.4% and 97.3%, respectively, for the six months ended June 30, 2000 from 108.5% and 105.1%, respectively, for the six months ended June 30, 1999. The International, Marine, Aviation and Surety and U.S. Facultative operations' combined ratios increased to 109.8%, 122.8% and 96.7%, respectively, for the six months ended June 30, 2000 from 99.0%, 102.4% and 88.8%, respectively, for the six months ended June 30, 1999. These changes reflect the loss and expense ratio variability noted above. Interest expense for the six months ended June 30, 2000 was $14.7 million compared to $0.3 million for the six months ended June 30, 1999. Interest expense for the six months ended June 30, 2000 reflects $11.3 million relating to the Company's issuance of senior notes and $3.4 million relating to the Company's borrowing under it's revolving credit facility. Interest expense for the six months ended June 30, 1999 reflects $0.3 million relating to the Company's borrowing under its revolving credit facility. Other income for the six months ended June 30, 2000 was $0.4 million compared to other expenses of $1.6 million for the six months ended June 30, 1999. The change in other income and expense for the respective periods was principally attributable to the impact of fluctuations in foreign currency exchange rates. INVESTMENTS. Net investment income increased 3.2% to $130.8 million in the six months ended June 30, 2000 from $126.7 million in the six months ended June 30, 1999, principally reflecting the effect of investing the $122.3 million of cash flow from operations in the twelve months ended June 30, 2000 as well as the investment of $50.0 million in proceeds from the Company's debt issuance. The annualized pre-tax yield on average cash and invested assets was 6.2% in the six months ended June 30, 2000 and 1999. The imbedded pre-tax yield of cash and invested assets at June 30, 2000 was 6.6% compared with 6.2% at December 31, 1999, reflecting the additional funds invested over the intervening period, as well as the continued emphasis on enhancing investment yields through changes in asset mix, all in the context of changes in investment market conditions. Net realized capital losses were $0.3 million in the six months ended June 30, 200, reflecting realized capital losses on the Company's investments of $19.7 million, partially offset by $19.4 million of realized capital gains, compared to net realized capital losses of $9.5 million in the six months ended June 30, 1999. The net realized capital losses in the six months ended June 30, 1999 reflected realized capital losses of $10.9 million, partially offset by $1.4 million of realized capital gains. The realized capital losses in the six months ended June 30, 2000 and 1999 arose mainly from activity in the Company's fixed 23 maturity portfolio. The realized capital gains in the six months ended June 30, 2000 and 1999 arose mainly from activity in the Company's equity portfolio. INCOME TAXES. The Company recognized income tax expense of $21.3 million in the six months ended June 30, 2000 compared to $19.6 million in the six months ended June 30, 1999. NET INCOME. Net income was $80.6 million in the six months ended June 30, 2000 compared to $79.3 million in the six months ended June 30, 1999. This increase generally reflects the decreases in net realized capital losses, together with the improved underwriting and investment results, partially offset by increased interest expense. FINANCIAL CONDITION INVESTED ASSETS. Aggregate invested assets, including cash and short-term investments, were $4,248.4 million at June 30, 2000 and $4,139.2 million at December 31, 1999. The increase in invested assets between December 31, 1999 and June 30, 2000 resulted primarily from the Company's issuance of senior notes from which $50.0 million was retained in the Company and subsequently invested, $47.0 million in credit facility borrowings, $35.6 million in net unrealized appreciation of the Company's fixed maturity investments and $23.5 million in cash flows from operations generated during the six months ended June 30, 2000. This increase was partially offset by $21.6 million in net unrealized depreciation of the Company's equity portfolio and $16.4 million in share repurchases. LIQUIDITY. The Company's liquidity requirements are met on both a short- and long-term basis by funds provided by premiums collected, investment income, collected reinsurance receivables balances and from the sale and maturity of investments together with the availability of funds under the Company's revolving credit facility. The Company's net cash flows from operating activities were $23.5 million and $104.7 million in the six months ended June 30, 2000 and 1999, respectively. These cash flows were impacted by recoveries under the Company's Stop Loss Agreement with Gibraltar, which contributed $9.5 million and $79.0 million of such net cash flows in the six months ended June 30, 2000 and 1999, respectively. Through June 30, 2000, cessions under the Stop Loss Agreement have aggregated $285.6 million with available remaining limits net of coinsurance of $89.4 million. These cash flows were also impacted by net catastrophe loss payments of $30.2 million and $20.5 million in the six months ended June 30, 2000 and 1999, respectively, net loss payments on asbestos and environmental exposures of $20.2 million and $9.3 million for the six months ended June 30, 2000 and 1999, respectively, and by net income taxes paid of $37.0 million and $33.3 million for the six months ended June 30, 2000 and 1999, respectively. Management believes that net cash flows from operating activities, after consideration of the factors noted above, are generally consistent with expectations given changes in the Company's mix of business over the past few years toward products with shorter loss development and payout periods and normal variability in the payout of loss reserves. On February 24, 2000, the Company announced an agreement with The Prudential to acquire all of the issued and outstanding shares of Gibraltar for approximately $52.0 million. Closing of the acquisition will be subject to the satisfaction of customary closing conditions and the receipt of regulatory approvals. 24 Upon the closing of the acquisition, the Company's current reinsurance contracts with Gibraltar, including the Stop Loss Agreement, will remain in effect. However, these contracts will become transactions with affiliates with the financial impact eliminated through inter-company accounts. The Prudential's guarantee of Gibraltar's obligations to the Company will be terminated. In connection with the acquisition, a subsidiary of The Prudential will provide reinsurance to Gibraltar covering 80% of the first $200.0 million of any adverse development in Gibraltar's reserves and The Prudential will guarantee the subsidiary's obligations to Gibraltar. Proceeds from sales, calls and maturities and investment asset acquisitions were $558.2 million and $654.8 million, respectively, in the six months ended June 30, 2000, compared to $467.6 million and $558.9 million, respectively, in the six months ended June 30, 1999. The activity in the six months ended June 30, 2000 generally reflected normal portfolio management activity aimed at enhancing the Company's portfolio yield along with investment asset acquisitions made utilizing $50.0 million of the proceeds from the Company's debt issuance. The Company's current investment strategy seeks to maximize after-tax income through a high quality, diversified, duration sensitive, taxable bond and tax-exempt municipal bond portfolio, while maintaining an adequate level of liquidity. On December 21, 1999, the Company entered into a three-year senior revolving credit facility with a syndicate of lenders (the "Credit Facility"), which replaced its prior credit facility which had been extended in June 1999 and increased from $50.0 million to $75.0 million on November 9, 1999. First Union National Bank is the administrative agent for the Credit Facility. The Credit Facility will be used for liquidity and general corporate purposes and to refinance existing debt under the Company's prior credit facility, which has been terminated. The Credit Facility provides for the borrowing of up to $150.0 million with interest at a rate selected by the Company equal to either (i) the Base Rate (as defined below) or (ii) an adjusted London InterBank Offered Rate ("LIBOR") plus a margin. The Base Rate is the higher of the rate of interest established by First Union National Bank from time to time as its prime rate or the Federal Funds rate plus 0.5% per annum. The amount of margin and the fees payable for the Credit Facility depend upon the Company's senior unsecured debt rating. Group has guaranteed all of the Company's obligations under the Credit Facility. The Credit Facility requires Group to maintain a debt to capital ratio of not greater than 0.35 to 1, the Company to maintain a minimum interest coverage ratio of 2.5 to 1 and Everest Re to maintain its statutory surplus at $850.0 million plus 25% of future aggregate net income and 25% of future aggregate capital contributions. The Company was in compliance with these requirements at June 30, 2000 as well as for the three months and six months ended June 30, 2000. At June 30, 2000 and 1999, the Company had outstanding borrowings under the Credit Facility of $106.0 million and $35.0 million, respectively. Interest expense incurred in connection with these borrowings was $3.4 million and $0.3 million for the periods ended June 30, 2000 and 1999, respectively. During the first quarter of 2000, the Company completed a public offering of $200.0 million principal amount of 8.75% senior notes due March 15, 2010 and $250.0 million principal amount of 8.5% senior notes due March 15, 2005. The Company distributed $400.0 million of these proceeds to Group of which $250.0 25 million was used by Group to capitalize Everest Reinsurance (Bermuda), Ltd. Interest expense incurred in connection with these senior notes was $11.3 million for the six months ended June 30, 2000. SHAREHOLDERS' EQUITY. The Company's shareholders' equity decreased to $1,000.9 million as of June 30, 2000, from $1,327.5 million as of December 31, 1999, principally reflecting a $400.0 million distribution to Group as a result of the Company's debt issuance and $16.4 million in treasury stock acquired in the three months ended March 31, 2000, partially offset by net income of $80.6 million for the six months ended June 30, 2000. Prior to the restructuring, the Company repurchased 0.648 million shares of its common shares at an average price of $25.23 per share, raising the total repurchases under the Company's authorized repurchase program to 4.718 million shares at an average price of $27.60 per share with a total repurchase expenditure to date of $130.3 million. As part of the Company's restructuring: (i) the treasury stock held by the Company prior to February 24, 2000 was retired, resulting in a reduction to treasury stock with a corresponding reduction of paid-in capital and common stock; (ii) all issued and outstanding common stock of the Company was retired, as the stockholders of the Company became shareholders of Group; and (iii) the Company issued 1,000 shares of common stock to Group as its sole stockholder. In support of Group's share repurchase plan, the Company purchased 2,000 shares of Group's common shares at an average price of $27.44 per share subsequent to the restructuring in the three months ended March 31, 2000. MARKET SENSITIVE INSTRUMENTS. The Company's risks associated with market sensitive instruments have not changed materially since the period ended December 31, 1999. SAFE HARBOR DISCLOSURE. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 (the "Act"), the Company in its Form 10-K for the fiscal year ended December 31, 1999 set forth cautionary statements identifying important factors, among others, that could cause its actual results to differ materially from those which might be projected, forecasted or estimated in its forward-looking statements, as defined in the Act, made by or on behalf of the Company in press releases, written statements or documents filed with the Securities and Exchange Commission, or in its communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls. These cautionary statements supplement other factors contained in this report which could cause the Company's actual results to differ materially from those which might be projected, forecasted or estimated in its forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the Company's results to differ materially from such forward-looking statements. Such forward-looking statements may include, but are not limited to, projections of premium revenue, investment income, other revenue, losses, expenses, earnings (including earnings per share), cash flows, and common shareholders' equity (including book value per share), plans for future operations, investments, financing needs, capital plans, dividends, plans relating to products or services of the Company, and estimates concerning the effects of litigation or other disputes, as well as assumptions for any of the foregoing and are generally expressed with words such as "believes," "estimates," "expects," "anticipates," "plans," "projects," "forecasts," "goals," "could have," "may have" and similar expressions. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 26 PART I - ITEM 3 EVEREST REINSURANCE HOLDINGS, INC. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK INSTRUMENTS. The Company's risks associated with market sensitive instruments have not changed materially since the period ended December 31, 1999. 27 EVEREST REINSURANCE HOLDINGS, INC. OTHER INFORMATION Part II - ITEM 1. LEGAL PROCEEDINGS The Company is involved from time to time in ordinary routine litigation and arbitration proceedings incidental to its business. The Company does not believe that there are any other material pending legal proceedings to which it or any of 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 ----------- ----------- -------- 10.1 Stock Purchase Agreement Incorporated between The Prudential Insurance herein by Company of America and Everest reference to Reinsurance Holdings, Inc. for the Exhibit 10.32 sale of common stock of Gibraltar to the Everest Casualty Company dated Re Group, Ltd. February 24, 2000 Annual Report on Form 10-K For the year ended December 31, 1999 10.2 Amendment No. 1 to Stock Purchase Agreement between The Prudential Insurance Company of America and Everest Reinsurance Holdings, Inc. for the sale of common stock of Gibraltar Casualty Company dated August 8, 2000 Filed herewith 27 Financial Data Schedule Filed herewith b) There were no reports on Form 8-K filed during the three-month period ending June 30, 2000. Omitted from this Part II are items which are inapplicable or to which the answer is negative for the period covered. 28 Everest Reinsurance Holdings, Inc. Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Everest Reinsurance Holdings, Inc. (Registrant) /S/ Stephen L. Limauro --------------------------------- Stephen L. Limauro Duly Authorized Officer and Principal Accounting Officer Senior Vice President and Chief Financial Officer Dated: August 10, 2000 EX-10.2 2 0002.txt AMENDMENT TO STOCK PURCHASE AGREEMENT Exhibit 10.2 Execution Copy Pursuant to Section 14.1 of the Stock Purchase Agreement (the "Agreement"), dated as of February 24, 2000, by and among THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a mutual insurance company domiciled in the State of New Jersey (the "Seller"), and EVEREST REINSURANCE HOLDINGS, INC., a corporation organized and existing under the laws of the State of Delaware (the "Purchaser"), the parties hereto hereby agree to amend the Agreement as follows: 1. Section 1.1 of the Agreement is hereby amended by adding the following definitions: ""Employee Terminations and Transfer" shall have the meaning specified in Section 12.1(a). "Guarantee" shall have the meaning specified in Section 9.6. "PruPac" means Prudential Property and Casualty Insurance Company, an Indiana corporation and an indirect subsidiary of Seller." 2. Section 1.1 of the Agreement is hereby amended so that the definitions of "Employee," "State Insurance Commissioner" and "State Insurance Commission" read in their entirety as follows: ""Employee" means all individuals who are employed by the Seller and perform substantial work for Gibraltar or who are employed by Gibraltar." "State Insurance Commissioner" means each of the Insurance Commissioners of the States of Delaware, Indiana and New Jersey, as applicable. "State Insurance Commission" means each of the Offices of the Insurance Commissioner of the States of Delaware, Indiana and New Jersey, as applicable." 3. Section 3.1 of the Agreement is hereby amended by adding the following paragraph at the end of such Section: "(c) Prupac is an insurance company domiciled, validly existing and in good standing under the laws of the State of Indiana and has all requisite corporate power and authority to execute and deliver the MUF Agreement and the Additional Stop-Loss Agreement, to perform its obligations thereunder and to consummate the transactions contemplated thereby. At the Closing, the execution, delivery and performance by Prupac of the MUF Agreement and the Additional Stop-Loss Agreement and the consummation by Prupac of the transactions contemplated thereby will have been duly and validly authorized by all necesssary corporate action, and no other corporate proceedings on the part of Prupac will be necessary to authorize the execution, delivery and performance by Prupac of the MUF Agreement and the Additional Stop- Loss Agreement or the consummation of the transactions contemplated thereby. At the Closing, the MUF Agreement and the Additional Stop- Loss Agreement will each have been duly and validly executed and delivered by Prupac and will constitute a legal, valid and binding obligation of Prupac, enforceable against Prupac in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency, moratorium or other similar laws affecting creditors' rights generally and except as rights to specific enforcement may be limited by the application of equitable principles (whether such equitable principles are applied in a proceeding at law or in equity)." 4. Section 3.20 of the Agreement is hereby amended by adding the following sentence at the end of such Section: "Except as set forth in Schedule 3.20, no consent, authorization, order or approval of, or filing or registration with, any governmental authority, board or other regulatory body is required for or in connection with the execution and delivery of the MUF Agreement and the Additional Stop-Loss Agreement by Prupac or the consummation by Prupac of the transactions contemplated thereby, except for notifications to be given to, and the approval to be obtained from, the applicable State Insurance Commissioner." 5. The first sentence of Section 3.27 of the Agreement is hereby amended by so that such sentence reads in its entirety as follows: "Except for Adam Kenney, there are no employees of Gibraltar." 6. The third sentence of Section 3.27 of the Agreement is hereby amended by so that such sentence reads in its entirety as follows: "Except for the Employee Terminations and Transfer, the Seller's relationship with the Employees is good and no labor dispute or disturbance exists and, to the knowledge of Gibraltar, none is threatened." 7. Schedule 3.27 to the Agreement is hereby replaced in its entirety by Schedule 3.27 attached to this Amendment. 8. Section 5.7(b) of the Agreement is hereby amended by inserting in the first sentence after the phrase "Seller or Gibraltar" the words "or Prupac." 9. Section 5.7(c) of the Agreement is hereby amended by inserting in the first sentence after the phrase "or by Gibraltar" the words "or Prupac." 10. Section 9.4 of the Agreement is hereby amended so that Section 9.4 reads in its entirety as follows: "9.4 MUF Agreement. PruPac and Gibraltar shall have entered a quota share reinsurance agreement (the "MUF Agreement") substantially in the form of Exhibit C to this Agreement, relating to certain uncollectible MUF reinsurance recoveries and the Purchaser shall or shall cause Everest Re to provide to the Seller Schedule A to the MUF Agreement on or before the first Business Day following the date on which all the conditions set forth in Articles IX, X and XI shall have been satisfied or waived." 11. Section 9.5 of the Agreement is here by amended so that Section 9.5 reads in its entirety as follows: "9.5 Additional Stop-Loss Coverage. PruPac and Gibraltar shall have entered into a proportional excess of loss reinsurance agreement (the "Additional Stop-Loss Agreement") substantially in the form of Exhibit D to this Agreement, relating to the provision by PruPac of additional stop-loss coverage." 12. Article IX is hereby amended by adding the following Section: "9.6 Guarantee The Seller shall have executed and delivered to Gibraltar a guarantee (the "Guarantee") substantially in the form of Exhibit E to this Agreement." 13. Exhibit C to the Agreement is hereby amended in its entirety by the form of MUF Agreement attached hereto as Exhibit C. 14. Exhibit D to the Agreement is hereby amended in its entirety by the form of Additional Stop-Loss Agreement attached hereto as Exhibit D. 15. Exhibit E attached hereto shall be added as Exhibit E to the Agreement. 16. Section 12.1(a) of the Agreement is hereby amended by inserting in the first and second sentence of the second paragraph after the phrase "the MUF Agreement and the Additional Stop-Loss Agreement" the words "and the Guarantee" and by adding the following subsection after subsection (ii) and before the first proviso: "or (iii) any termination by Seller of the employment of Joanne Poles, Erika Kill, Rosemarie Weisshapp, Felicia Pittman, Marco Abdelsayed or Michael Rant or transfer by Seller of the employment of Adam Kenney (the "Employee Terminations and Transfer")" 17. Section 13.1(d) of the Agreement is hereby amended so that Section 13(d) reads in its entirety as follows: "(d) By either the Purchaser or the Seller if the Closing shall not have occurred by September 30, 2000; provided, however, that the right to terminate this Agreement under this Section 13.1 shall not be available to the party whose failure to fulfill any obligation under this Agreement has been the cause or shall result in the failure of the Closing to occur prior to such date." 18. Exhibit A to the Agreement is hereby amended by replacing all references to "the MUF Agreement and the Additional Stop-Loss Agreement" with a reference to "and the Guarantee" and by adding the following paragraphs to the end of such Exhibit: "5. Prupac is an insurance company domiciled, validly existing and in good standing under the laws of the State of Indiana and has all requisite corporate power and authority to execute and deliver the MUF Agreement and the Additional Stop-Loss Agreement, to perform its obligations thereunder and to consummate the transactions contemplated thereby. 6. The execution and delivery by Prupac of the MUF Agreement and the Additional Stop-Loss Agreement, the performance by Prupac of its obligations thereunder and the consummation by Prupac of the transactions contemplated thereby have been duly and validly authorized by all necessary corporate action on the part of Prupac. The MUF Agreement and the Additional Stop-Loss Agreement have each been duly and validly executed and delivered by a duly authorized officer of Prupac and constitute a legal, valid and binding obligation of Prupac, enforceable against Prupac in accordance with its terms (subject to applicable bankruptcy, insolvency, fraudulent transfer, reoganization, moratorium or other laws affecting creditors' rights generally from time to time in effect). The enforceability of Prupac's obligations is also subject to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 7. All necessary filings or registrations with any governmental or regulatory authority required for the consummation by Prupac of the transactions contemplated by the MUF Agreement and the Additional Stop- Loss Agreement have been duly made, and all permits, authorizations, consents or approvals of any governmental or regulatory authority required in connection with such transactions have been duly obtained." 19. The Purchaser hereby consents to the termination by the Seller of the employment of Joanne Poles, Erika Kill, Rosemarie Weisshapp, Felicia Pittman and Marco Abdelsayed and waives any breach of the Agreement, including Section 5.1 and Section 5.3(i), that may have occurred in connection therewith. The Purchaser hereby consents to the termination by the Seller of the employment of Michael Rant and waives any breach of the Agreement, including Section 5.1 and Section 5.3(i), that may occur in connection therewith; provided, that such termination occurs no earlier than five Business Days prior to the Closing. The Purchaser hereby consents to the transfer of the employment of Adam Kenney from the Seller to Gibraltar and waives any breach of the Agreement, including Section 5.1 and Section 5.3(i), that may occur in connection therewith; provided, that such transfer occurs not earlier than immediately prior to the Closing on the Closing Date. 20. Capitalized terms used herein but not otherwise defined herein shall have the meanings given to such terms in the Agreement. 21. The provisions of the Agreement, as amended hereby, shall remain in full force and effect in accordance with its terms. 22. This Amendment shall be governed by and construed in accordance with the laws of the State of New York. 23. This Amendment may be executed in two or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when two or more counterparts have been signed by each of the parties and delivered to the other parties, it being understood that the parties need not sign the same counterpart. * * * IN WITNESS WHEREOF, the parties hereto have caused this Amendment Number 1 to Stock Purchase Agreement to be executed as of this 8th day of August, 2000. THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By: /S/ DOUGLAS A. GREGORY -------------------- Name: Douglas A. Gregory Its: Vice President EVEREST REINSURANCE HOLDINGS, INC. By: /S/ STEPHEN L. LIMAURO ------------------- Name: Stephen L. Limauro Its: Senior Vice President and Chief Financial Officer EXHIBIT C QUOTA SHARE REINSURANCE AGREEMENT (hereinafter referred to as the "Agreement") between GIBRALTAR CASUALTY COMPANY, a Delaware Corporation (hereinafter referred to as the "Company") and PRUDENTIAL PROPERTY AND CASUALTY INSURANCE COMPANY, an Indiana Corporation (hereinafter referred to as the "Reinsurer") (Both the Company and the Reinsurer collectively are referred to as the "Parties" and individually as "Party") WHEREAS, The Prudential Insurance Company of America ("Prudential") is the ultimate parent of the Reinsurer; WHEREAS Prudential and Everest Reinsurance Holdings, Inc., a Delaware corporation ("Holdings"), have executed a Stock Purchase Agreement dated as of February 24, 2000 ("Sale Agreement") wherein Holdings will purchase from Prudential all issued and outstanding shares of the Company, a wholly owned subsidiary of Prudential, effective as of the "Closing Date" set forth in the Sale Agreement. WHEREAS, Holdings is the parent of Everest Reinsurance Company, formerly known as Prudential Reinsurance Company ("Everest Re"). WHEREAS, the Company has, and in the future may have, Uncollectible Reinsurance Recoverables, as defined herein, with regard to business reinsured by or through the Management Underwriting Facility ("MUF"), as defined in the Sale Agreement. WHEREAS, the Company desires to procure reinsurance coverage for its Uncollectible Reinsurance Recoverables. NOW, THEREFORE, in consideration of mutual covenants, representations, warranties, and agreements contained herein and in the Sale Agreement, the Parties agree as follows: ARTICLE I - CLASSES OF BUSINESS COVERED A. By this Agreement and subject to the terms and conditions set forth below, the Reinsurer agrees to indemnify the Company for the Company's Uncollectible Reinsurance Recoverables, as defined herein, with regard to business reinsured by or through MUF respecting Direct Excess Business and Gibraltar-Sourced Business, as defined herein. B. "Uncollectible Reinsurance Recoverables", with respect to Reinsurance Coverage, is defined as including (i) Uncollected Reinsurance and (ii) Settlement Concessions. C. "Reinsurance Coverage" is defined as any amount of paid and unpaid losses and loss adjustment expenses ceded by Everest Re to MUF reinsurers with respect to Direct Excess Business or Gibraltar-Sourced Business, whether such amounts were ceded prior to or during the term of this Agreement. D. "Uncollected Reinsurance" is defined as Reinsurance Coverage for paid loss and loss adjustment cessions relating to Direct Excess Business, with respect to each company on Schedule A hereto, that is unpaid by the reinsurer after one-hundred-and-eighty (180) days from the date that such paid loss and loss adjustment cessions were due to be paid by the reinsurer. E. "Settlement Concessions" is defined as the difference, with respect to each company on Schedule A hereto, between the Reinsurance Coverage for Direct Excess Business or Gibraltar-Sourced Business reinsured by MUF and ceded to such company and the amount received from such company. F. "Direct Excess Business" is defined as policies, contracts, and binders of insurance or reinsurance ("Policies") that were issued by Everest Re prior to January 1, 1986. G. "Gibraltar-Sourced Business" is defined as Policies that were issued by the Company prior to January 1, 1986. H. Although Everest Re rather than the Company has the direct ceding relationship with MUF, solely for purposes of this Agreement and only up to the amounts scheduled in Schedule A hereto, the Parties hereby deem any Uncollectible Reinsurance Recoverables to belong to the Company and not to Everest Re. ARTICLE II - COMMENCEMENT AND TERMINATION A. This Agreement shall become effective on the Closing Date. This Agreement will terminate, with respect to the Reinsurer's Per-Company Sub-Limit of Liability under Article V, on the earlier of (i) two years following the Reinsurer's payment of the sub-limit or (ii) the tenth anniversary of Closing Date. This Agreement shall terminate, with respect to the Reinsurer's Aggregate Limit of Liability under Article V, on the earlier of (i) two years following the Reinsurer's payment of the limit or (ii) the tenth anniversary of the Closing Date. B. Neither Party may terminate this Agreement. ARTICLE III - TERRITORY The territorial scope of this Agreement shall be identical to that of the Policies. ARTICLE IV - CONSIDERATION The consideration for this reinsurance coverage is deemed paid as of the Closing Date and, with respect to the Reinsurer, includes, among other things, certain operational and other assistance (i) previously provided to the Reinsurer, which is deemed paid as of the Closing Date, and (ii) to be provided to the Reinsurer in connection with this Agreement, including pursuant to the Keepwell Agreement between Prudential and the Reinsurer of even date herewith. No further consideration shall be due to the Reinsurer. ARTICLE V - SCHEDULE OF UNCOLLECTIBLE REINSURANCE RECOVERABLES AND REINSURER'S LIMIT OF LIABILITY Pursuant to the Sale Agreement, on or before the first Business Day following the date on which all of the conditions set forth in Articles IX, X, and XI of the Sale Agreement have been satisfied or waived, Holdings will cause Everest Re to provide to the Reinsurer a schedule setting forth all expected Uncollectible Reinsurance Recoverables ("Schedule A"), which shall be incorporated herein by reference. Schedule A shall identify, by reinsurer name, (1) the expected amounts of Uncollected Reinsurance attributable to each reinsurer with respect to Direct Excess Business and (2) the expected amounts of Settlement Concessions with respect to Direct Excess Business and Gibraltar-Sourced Business. If the Company identifies a given reinsurer on Schedule A with respect to both Uncollected Reinsurance and for Settlement Concessions, then the amount scheduled for Uncollected Reinsurance shall represent only paid loss and loss adjustment expense amounts and the amount scheduled for Settlement Concessions shall include only unpaid loss and loss adjustment expense amounts. The Reinsurer shall pay to the Company one hundred percent (100.0%) of up to the scheduled amount of the Company's Uncollectible Reinsurance Recoverables with respect to each company listed on Schedule A ("Per Company Sub-Limit of Liability"), provided that the Reinsurer's total liability under this Agreement shall in no event be greater than $8,500,000 ("Aggregate Limit of Liability"). ARTICLE VI - PAYMENT OF ADVANCES BY REINSURER AND REFUNDS BY COMPANY Subject to the limits set forth in Article V, pursuant to Article IX the Reinsurer shall make payments ("Advances") to the Company in the amount of the Uncollected Reinsurance and Settlement Concessions shown on the Company's statements. If after receiving an Advance from the Reinsurer with respect to an Uncollected Reinsurance amount, the Company actually collects all or a portion of the amount due from the reinsurer identified on Schedule A, then the Company shall pay to the Reinsurer a sum equal to the amount so collected ("Refund"), up to the amount of the corresponding Advance paid by the Reinsurer. Refunds shall not bear interest except as set forth in Article IX (G), and in no event shall the Reinsurer be entitled to a Refund in an amount greater than the corresponding Advance. In the event that a Refund is made to the Reinsurer, the Per Company Sub-Limit of Liability and the Aggregate Limit of Liability shall each be replenished by the amount of such Refund. No Refunds shall be due for Advances paid by the Reinsurer with respect to Settlement Concessions. ARTICLE VII - OTHER REINSURANCE On or after the Closing Date, the Company shall be permitted to obtain other reinsurance, recoveries under which shall inure solely to the benefit of the Company, and all recoveries under such other reinsurance shall be entirely disregarded in applying all of the provisions of this Agreement. ARTICLE VIII - ORIGINAL CONDITIONS A. The Reinsurer shall follow the fortunes of the Company with respect to settlements of any Reinsurance Coverage and with respect to Uncollectible Reinsurance Recoverables. B. The reinsurance coverage provided under this Agreement shall be subject to all interpretations, modifications, waivers, and alterations of the Policies and Reinsurance Coverage. C. Nothing herein shall in any manner create any obligations or establish any rights against the Reinsurer in favor of any third party or any person not a Party to this Agreement. ARTICLE IX - REPORTS AND REMITTANCES A. The first statement of account shall be due to the Reinsurer from the Company on the anniversary of the Closing Date. The first statement only shall include a charge for interest on any Uncollectible Reinsurance Recoverables due from the Reinsurer as of the statement date. Such interest charge shall be equal to the rate of interest announced by Citibank, N.A. as its prime or base rate as of the statement date, calculated on the basis of the actual number of days elapsed since the Uncollectible Reinsurance Recoverables accrued or the Closing Date, whichever is less, divided by three-hundred-and-sixty-five (365) days. Such interest charge shall be included in the Per Company Sub-Limit of Liability set forth on Schedule A. B. Thereafter, the Company shall submit quarterly statements of account ("quarterly reports") within forty-five (45) days after the end of each calendar quarter. C. Such quarterly reports shall be sent by both facsimile transmission and United States Postal Service or any other delivery service used by the Company. D. Such quarterly reports shall include information showing, as applicable with respect to each company listed on Schedule A, Uncollected Reinsurance, Settlement Concessions, Advances received, Advances due, Refunds due, and unpaid amounts outstanding. E. Remittances shall be on a "Net Basis," defined as amounts owed between the Parties under this Agreement. F. Remittances, whether due to the Company from the Reinsurer or to the Reinsurer from the Company, shall be due within forty-five (45) days from the date of receipt of the facsimile transmission of each quarterly report. G. Failure by the Reinsurer or the Company to pay amounts owed when due under this Agreement shall result in imposition of an interest penalty equal to the rate of interest announced by Citibank, N.A. as its prime or base rate as of the due date of any remittance, calculated on the basis of the actual number of days elapsed past the due date of any remittance divided by three-hundred-and-sixty-five (365) days and payment of other losses, costs, and expenses accrued or incurred by the Company or Reinsurer as a result of the other Party's late payment. ARTICLE X - OFFSET The Company and the Reinsurer shall have the right to offset any balance or amounts due from one party to the other under this Agreement. ARTICLE XI - ACCESS TO RECORDS A. The Company shall place at the disposal of the Reinsurer at all reasonable times, and the Reinsurer will have the right to inspect, all books, records, and papers of the Company in connection with any reinsurance coverage hereunder or any claims in connection herewith. B. All records reviewed by the Reinsurer are deemed proprietary and confidential property of the Company. Further, unless pursuant to the express, written permission of the Company, the Reinsurer shall not disclose the contents of such information to any other person, persons, entity, or entities; provided, that the Reinsurer may disclose such information or portions thereof in connection with any arbitration hereunder or any legal or regulatory process, or to its directors, officers and employees and the directors, officers and employees of its affiliates and to its agents, representatives, attorneys, accountants, auditors, reinsurers (collectively, "the Reinsurer's Representatives"), in each case, who have a legitimate need to know such information (which would include, but not be limited to the right to dispute and/or assess in furtherance of a dispute) and who are informed of and agree to be bound by the confidentiality terms of this Agreement. The Reinsurer shall indemnify and hold harmless the Company for all damages resulting from any unauthorized disclosure by the Reinsurer or the Reinsurer's Representatives of records obtained pursuant to this Article. Nothing contained in this Agreement shall be construed to prevent the Company from applying to a court of competent jurisdiction for equitable relief including injunction and specific performance as a remedy if the Reinsurer or any of the Reinsurer's Representatives breach or threaten to breach any of the provisions of this Article. Without prejudice to the rights and remedies otherwise available at law or equity to the Company, it is understood and agreed that the Company would be irreparably injured by a breach of this Article, that money damages would not be a sufficient remedy for any actual or threatened breach of this Article by the Reinsurer or any of the Reinsurer's Representatives and that the Company shall (without proof of actual damages) be entitled to equitable relief. In the event of litigation relating to this Article, if a court of competent jurisdiction determines that the Reinsurer or any of the Reinsurer's Representatives have breached this Article, then the Reinsurer shall be liable and pay to the Company the reasonable legal fees incurred by the Company in connection with the subject litigation, including any appeal therefrom. ARTICLE XII - ERRORS AND OMISSIONS Inadvertent delays, errors or omissions in connection with this Agreement or any transaction hereunder shall not relieve either Party of any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery. ARTICLE XIII - SECURITY A. If the Company is or becomes unable to take credit in any financial statement filed with its domiciliary insurance regulator or with insurance regulators in New Jersey, California or any other state in which it currently is approved as a surplus lines insurer (or any successors to said regulators) for the reinsurance coverage provided hereunder, or if Prudential's Financial Strength Rating published by A.M. Best becomes less than "A-," the Reinsurer agrees to fund within thirty (30) days from receipt of notice from the Company that funding is required its share of Uncollectible Reinsurance Recoverables (and to replenish such funding from time to time as necessary) by: 1. Clean, irrevocable and nconditional letters of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a qualified United States financial institution acceptable to said insurance regulatory authorities; 2. cash; and/or 3. a Trust in compliance with the requirements of and acceptable to said insurance regulatory authorities. B. With regard to funding in whole or in part by letters of credit, it is agreed that each letter of credit will be in a form that would be acceptable to the Company's domiciliary insurance regulatory authority, will be issued for a term of at least one year and will include an "evergreen clause," that automatically extends the term for at least one additional year at each expiration date unless written notice of non-renewal is given to the Company not less than 30 days prior to said expiration date. The Company and the Reinsurer further agree that said letters of credit may be drawn upon by the Company or its successors in interest at any time, without diminution because of the insolvency of the Company or the Reinsurer, but only for one or more of the following purposes: 1. To reimburse itself for the Reinsurer's share of Uncollectible Reinsurance Recoverables, unless paid in cash by the Reinsurer; 2. To reimburse itself for the Reinsurer's share of any other amounts claimed to be due hereunder, unless paid in cash by the Reinsurer; 3. To fund a cash account in an amount equal to the Reinsurer's share of Uncollectible Reinsurance Recoverables funded by means of a letter of credit that is under non-renewal notice, if said letter of credit has not been renewed or replaced by the Reinsurer 10 days prior to its expiration date; 4. To refund to the Reinsurer any sum in excess of the actual amount required to fund the Reinsurer's share of Uncollectible Reinsurance Recoverables and other amounts claimed to be due hereunder, if so requested by the Reinsurer. C. In the event the amount drawn by the Company on any letter of credit is in excess of the actual amount required for B (1), B (3) or B (4), or in the case of B (2), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. D. In the event of funding through a Trust: 1. The Reinsurer shall establish a Trust Account for the benefit of the Company to fund the amounts receivable under the Agreement in a qualified United States financial institution reasonably acceptable to the Company and to said insurance regulatory authorities. 2. The assets deposited into the Trust Account shall be valued according to their current fair market value and shall consist only of cash (United States legal tender), certificates of deposit (issued by a United States bank and payable in United States legal tender) and investments of the type permitted by and acceptable to said insurance regulatory authorities or any combination of the above, provided that such investments are issued by an institution that is not the parent, subsidiary or affiliate of either the Reinsurer or the Company; 3. The Reinsurer, prior to depositing assets with the trustee, shall execute assignments, endorsements in blank, or transfer legal title to the trustee of a ll shares, obligations or any other assets requiring assignments, in order that the Company, or the trustee upon the Company's direction, may whenever necessary negotiate any such assets without consent or signature from the Reinsurer or any other entity; 4. All settlements of account between the Reinsurer and the Company shall be in cash or its equivalent; 5. The assets in the trust account may be withdrawn by the Company at any time, notwithstanding any other provisions in this Agreement, and shall be utilized by the Company or any successor by operation of law, including without limitation any liquidator, rehabilitator, receiver or conservator of the Company, for the purposes set forth in paragraphs B(1) -B(4) above. ARTICLE XIV - INSOLVENCY In the event of the insolvency of the Company, the reinsurance coverage hereunder shall be payable directly to the Company or to its liquidator, receiver, conservator or statutory successor on the basis of the amount of claim allowed in the insolvency proceeding without diminution by reason of the inability of the Company to pay all or any part of the claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the Company, indicating the Policy or bond covered hereunder which claim would involve a possible liability on the part of the Reinsurer, within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. ARTICLE XV - ARBITRATION A. Except with respect to disputes arising solely out of or solely in connection with Article XI above (Access to Records), as a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising with respect to this Agreement, including its formation and validity, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration. B. Except as provided in subsections A. and D. of this Article or with respect to judicial proceedings instituted in aid of arbitration, this Article shall constitute a waiver of the Parties' rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as might otherwise be permitted by the laws of the United States or of any State or other jurisdiction in the United States. C. One Arbiter shall be chosen by the Company, the other by the Reinsurer, and an Umpire shall be chosen by the two Arbiters before they enter upon arbitration, all of whom shall be active or retired disinterested executive officers of United States domiciled insurance or reinsurance companies. In the event that either Party should fail to choose an Arbiter within 30 days following a written request by the other Party to do so, the requesting Party may choose two Arbiters who shall in turn choose an Umpire before entering upon arbitration. If the two Arbiters fail to agree upon the selection of an Umpire within 30 days following their appointment, each Arbiter shall nominate three candidates within 10 days thereafter, two of whom the other shall decline, and the decision shall be made by drawing lots. D. The Arbiters and the Umpire ("the Arbitration Panel") shall consider this Agreement as an honorable engagement rather than merely as a legal obligation, and they are relieved of all judicial formalities and may abstain from following the strict rules of law. The majority decision of the Arbitration Panel shall be final and binding on both Parties. Judgment upon the final decision of the Arbitration Panel may be entered in any court of competent jurisdiction. E. Except as provided in sub-section G. of this Article, each Party shall bear the expense of its own Arbiter, and shall jointly and equally bear with the other the expense of the Umpire and of the arbitration. In the event that the two Arbiters are chosen by one Party, as above provided, the expense of the Arbiters, the Umpire and the arbitration shall be equally divided between the two Parties. F. Any arbitration pursuant to this Article shall be conducted in New York, New York unless otherwise agreed by the parties; provided, however, that the Arbitration Panel may choose to take evidence and/or convene a hearing in a place other than New York for the convenience of the parties, the witnesses or the Arbitration Panel. G. The Arbitration Panel shall have the power to award costs, expenses, and interest to the prevailing Party in an arbitration. ARTICLE XVI - SERVICE OF SUIT A. It is agreed that in the event of the failure of the Reinsurer to pay any amount claimed to be due hereunder or to otherwise perform its obligations hereunder, the Reinsurer will, at the request of the Company, submit to the jurisdiction of any court of competent jurisdiction within the State of New Jersey or such other jurisdiction within the United States as the Company can select as a forum, and will comply with all requirements necessary to give such court jurisdiction and all matters arising hereunder shall be determined in accordance with the law and practice of such court. B. Service of process in such suit may be made on the Reinsurer by serving the Commissioner of Insurance of the State of New Jersey, who shall forward such process to the Reinsurer in accordance with Article XXI or at such other address as the Reinsurer shall advise. In any suit instituted, the Reinsurer will abide by the final decision of such court. C. Further, pursuant to any statute of any state, territory, or district of the United States of America which makes provisions therefore, the Reinsurer herein hereby designates the superintendent, commissioner or director of insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Agreement of reinsurance and hereby designates the above-named person to whom the said office is authorized to mail such process or a true copy thereof. D. This Article is not meant to supersede Article XV of this Agreement or override the obligation of the parties to arbitrate their disputes in accordance with Article XV. ARTICLE XVII - ENTIRE AGREEMENT This Agreement, the Sale Agreement and the Guaranty, and any exhibits to such agreements, collectively constitute the entire agreement between the Parties regarding the subject matter hereof and supercede all prior agreements and understandings, both written and oral and do not confer any rights or remedies to any other party or any other person. ARTICLE XVIII - AMENDMENTS AND ALTERATIONS This Agreement shall not be changed, supplemented, modified, or amended except by an endorsement/addendum signed by the Parties and attached hereto. ARTICLE XIX - NO WAIVER No forbearance to enforce any provision or right hereunder shall be deemed a waiver thereof, and no waiver of any breach of any term or covenant herein shall be construed as a waiver of any other breach of the same, or any other term or covenant herein. ARTICLE XX - CONSTRUCTION This Agreement is the result of arms-length negotiations between the Parties and has been prepared jointly by the Parties. In applying and interpreting the provisions of this Agreement, there shall be no presumption that either the Company or the Reinsurer prepared this Agreement, or that this Agreement shall be construed in favor of or against either the Company or the Reinsurer. ARTICLE XXI - NOTICES Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, telegraphed, telexed, sent by facsimile transmission, or sent by certified, registered or express mail, postage prepaid, to: If to the Reinsurer, to: Richard Green, Vice President Prudential Property and Casualty Insurance Company 23 Main St., 4th Floor Holmdel, NJ 07032 Phone: 732-946-5082 Fax: 732-946-5029 with a copy to: Doreen Faga President, Gibraltar Operations The Prudential Insurance Company of America Eisenhower Corporate Center, Building 3 290 West Mt. Pleasant Avenue Livingston, NJ 07039 Phone: 973-548-5980 Fax: 973-548-5950 If to the Company, to: Janet J. Burak Senior Vice President and General Counsel Everest Reinsurance Holdings 477 Martinsville Road P.O. Box 830 Liberty Corner, NJ 07938 Phone: 908-604-3170 Fax: 908-604-3450 or in each case to such other address as a party may designate for itself by like notice to the other party. ARTICLE XXII - GOVERNING LAW This Agreement shall be governed by and construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the Company, by its duly authorized representative, has executed this Agreement as of the date undermentioned at: __________, ____________, this ____________ day of _______________________ 2000. - -------------------------------------------------------------------------------- IN WITNESS WHEREOF, the Reinsurer, by its duly authorized representative, has executed this Agreement as of the date undermentioned at: __________, ____________, this ____________ day of _______________________ 2000. EXHIBIT D PROPORTIONAL EXCESS OF LOSS REINSURANCE AGREEMENT (hereinafter referred to as the "Agreement") between GIBRALTAR CASUALTY COMPANY, a Delaware Corporation (hereinafter referred to as the "Company") and PRUDENTIAL PROPERTY AND CASUALTY INSURANCE COMPANY, an Indiana Corporation (hereinafter referred to as the "Reinsurer") (Both the Company and the Reinsurer collectively are referred to as the "Parties" and individually as "Party") WHEREAS, The Prudential Insurance Company of America ("Prudential") is the ultimate parent of the Reinsurer; WHEREAS Prudential and Everest Reinsurance Holdings, Inc., a Delaware corporation ("Holdings"), have executed a Stock Purchase Agreement dated as of February 24, 2000 ("Sale Agreement") wherein Holdings will purchase from Prudential all issued and outstanding shares of the Company, a wholly owned subsidiary of Prudential, effective as of the "Closing Date" set forth in the Sale Agreement. WHEREAS, as of the "Closing Date," as this term is defined in the Sale Agreement, the Company has outstanding "Loss Reserves," as defined in the Sale Agreement, relating to all Policies, as defined herein, in the amount stated in the "Closing Date Financial Statement," as defined in the Sale Agreement. WHEREAS, the Company also has potential adverse Loss Reserves development ("Adverse Loss Development"), as defined herein, and the Company desires reinsurance coverage for such Adverse Loss Development. NOW, THEREFORE, in consideration of mutual covenants, representations, warranties, and agreements contained herein and in the Sale Agreement, the Parties agree as follows: ARTICLE I - CLASSES OF BUSINESS COVERED A. By this Agreement and subject to the terms and conditions set forth below, the Reinsurer agrees to indemnify the Company for the Adverse Loss Development that may accrue to the Company under all policies, contracts, and binders of insurance or reinsurance (hereinafter "Policies") issued or renewed by the Company prior to the Closing Date. B. Adverse Loss Development is defined as the Company's Ultimate Net Loss that is in excess of the Loss Reserves carried by the Company at the Closing Date. Subject to the Reinsurer's Limit of Liability set forth in Article V hereof, the Reinsurer shall reimburse the Company for the Adverse Loss Development paid by the Company, provided that the Company has paid an amount equal to the Loss Reserves carried by the Company at the Closing Date. Provided, however, that this Agreement shall not apply to the first four million dollars ($4,000,000) of any Settlement Concessions on Gibraltar-Sourced Business, as those terms are defined in the Quota Share Reinsurance Agreement between the Parties ("Quota Share Reinsurance Agreement"), in excess of Settlement Concessions listed on Schedule A to the Quota Share Reinsurance Agreement. C. "Ultimate Net Loss" is defined as the Company's determination of the sum or sums (including Loss Adjustment Expenses, as defined herein) incurred by the Company in settlement of claims and in satisfaction of judgments rendered on account of such claims under all Policies, after deduction of all reinsurance and insurance recoveries and subrogation and salvage recoveries collected and received by the Company and losses paid prior to the Closing Date. Nothing herein shall be construed to mean that losses under this Agreement are not recoverable until the Company's Ultimate Net Loss has been ascertained. Ultimate Net Loss shall not include Loss in Excess of Policy Limits or Extra Contractual Obligations (as defined herein) incurred by the Company. ARTICLE II - COMMENCEMENT AND TERMINATION A. This Agreement shall become effective on the Closing Date and shall continue in force thereafter until two (2) years after the earlier of when (i) the Company settles all claims under all Policies, or (ii) the Reinsurer exhausts its Limits of Liability as set forth in Article V. B. Neither Party may terminate this Agreement. ARTICLE III - TERRITORY The territorial scope of this Agreement shall be identical to that of the Policies reinsured hereunder. ARTICLE IV - CONSIDERATION The consideration for the reinsurance coverage is deemed paid as of the Closing Date and, with respect to the Reinsurer, includes, among other things, certain operational and other assistance (i) previously provided to the Reinsurer, which is deemed paid as of the Closing Date, and (ii) to be provided to the Reinsurer in connection with this Agreement, including pursuant to the Keepwell Agreement between Prudential and the Reinsurer of even date herewith. No further consideration shall be due to the Reinsurer. ARTICLE V - REINSURER'S LIMIT OF LIABILITY AND COMPANY'S RETENTION The Reinsurer shall pay to the Company an 80% quota share interest of the first two hundred million dollars ($200,000,000) of Adverse Loss Development paid by the Company, with the Reinsurer's maximum liability under this Agreement limited to one hundred and sixty million dollars ($160,000,000). The Company may reinsure its 20% quota share retention in the first two hundred million dollars ($200,000,000) of Adverse Loss Development only with an affiliate within its insurance holding company system, with `affiliate' and `insurance holding company system' having the meanings set forth under Section 5001 of the Delaware Insurance Code. Such reinsurance by the Company of any share of its 20% quota share retention with an affiliate is permissible only if the assuming affiliate fully retains and does not further cede or retrocede any share of its assumption of the 20% quota share retention, except to another affiliate of the Company; and any affiliate of the Company which assumes some share of the Company's 20% quota share retention under this provision shall be subject to the same prohibition on ceding or retroceding any share of the Company's 20% quota share retention to any person or entity that is not an affiliate of the Company. ARTICLE VI - LOSS IN EXCESS OF POLICY LIMITS/EXTRA CONTRACTUAL OBLIGATIONS Ultimate Net Loss shall not include any amounts that the Company pays or is held liable to pay in excess of its Policy limit, but otherwise within the terms of its Policy ("Loss in Excess of Policy Limits"), or any punitive, exemplary, compensatory or consequential damages ("Extra Contractual Obligations"), because of alleged or actual bad faith or negligence on its part in rejecting a settlement within Policy limits, or in discharging its duty to defend or prepare the defense in the trial of an action against its policyholder, or in discharging its duty to prepare or prosecute an appeal consequent upon such an action, or in otherwise handling a claim under a Policy. ARTICLE VII - OTHER REINSURANCE Subject always to the retention provision set forth in Article V above, on or after the Closing Date, the Company shall be permitted to obtain other reinsurance, recoveries under which shall inure solely to the benefit of the Company and all recoveries under such other reinsurance shall be entirely disregarded in applying all of the provisions of this Agreement; provided, however, that the Quota Share Reinsurance Agreement shall inure to the benefit of this Agreement. ARTICLE VIII - LOSS ADJUSTMENT EXPENSES Loss Adjustment Expenses shall include both allocated and unallocated loss expenses and shall be included in the Ultimate Net Loss, and are defined as all expenses of the Company, including expenses for declaratory judgment actions, monitoring of underlying litigation or claims, and coverage opinions, incurred by the Company in the settlement, investigation, defense, or adjustment of all claims under all Policies. ARTICLE IX - SUBROGATION AND SALVAGE The Reinsurer shall be credited with subrogation and salvage collected and received by the Company, less the actual cost, excluding salaries and expenses of officials and employees of the Company respecting their time spent on subrogation and salvage recoveries and also excluding sums paid to any attorney as a retainer in obtaining such reimbursement or making such recovery, on account of claims and settlements involving the reinsurance coverage hereunder. Enforcement of subrogation and salvage rights shall be determined solely by the Company. ARTICLE X - ORIGINAL CONDITIONS A. The Reinsurer shall follow the fortunes of the Company for it Ultimate Net Loss for all loss settlements and shall pay as paid by the Company. B. The reinsurance coverage provided under this Agreement shall be subject to all interpretations, modifications, waivers, and alterations of the Policies; provided, however, that the agreements set forth on Exhibit A hereto that are in force as of the Closing Date shall remain, or shall for purposes of determining the parties' rights and obligations under this Agreement be deemed to have remained, in force during the term of this Agreement and shall not be modified or altered, or shall for purposes of determining the parties' rights and obligations under this Agreement be deemed not to have been modified or altered, during the term of this Agreement, unless otherwise mutually agreed by the Parties. C. Nothing herein shall in any manner create any obligations or establish any rights against the Reinsurer in favor of any third party or any person not a Party to this Agreement. ARTICLE XI - REPORTS AND REMITTANCES A. The first statement of account shall be due to the Reinsurer from the Company forty-five (45) days after the close of the first fiscal quarter that includes the Closing Date. B. Thereafter, the Company shall submit quarterly statements of account ("quarterly reports") within forty-five (45) days after the end of each calendar quarter. C. Such quarterly reports shall be sent by both facsimile transmission and United States Postal Service or any other delivery service used by the Company. D. Such quarterly reports shall be in the form attached hereto as Exhibit B, or in any other form mutually agreed by the Parties. E. Remittances shall be on a "Net Basis," defined as amounts owed between the Parties under this Agreement. F. Remittances shall be due to the Company from the Reinsurer within forty-five (45) days from the date of receipt of the facsimile transmission of each quarterly report. G. Failure of a Party to pay amounts owed when due under this Agreement shall result in imposition on that Party of an interest penalty equal to the rate of interest announced by Citibank, N.A. as its prime or base rate as of the due date of any remittance, calculated on the basis of the actual number of days elapsed past the due date of any remittance divided by three- hundred-and-sixty-five (365) days and payment of other losses, costs, and expenses accrued or incurred by the other Party as a result of the late payment. ARTICLE XII - OFFSET The Company and the Reinsurer shall have the right to offset any balance or amounts due from one Party to the other under this Agreement. ARTICLE XIII - ACCESS TO RECORDS A. The Company shall place at the disposal of the Reinsurer at all reasonable times, and the Reinsurer will have the right to inspect, all books, records, and papers of the Company in connection with any reinsurance coverage hereunder or any claims in connection herewith. B. All records reviewed by the Reinsurer are deemed proprietary and confidential property of the Company. Further, unless pursuant to the express, written permission of the Company, the Reinsurer shall not disclose the contents of such information to any other person, persons, entity, or entities; provided, that the Reinsurer may disclose such information or portions thereof in connection with any arbitration hereunder or any legal or regulatory process, or to its directors, officers and employees and the directors, officers and employees of its affiliates and to its agents, representatives, attorneys, accountants, auditors, reinsurers (collectively, "the Reinsurer's Representatives"), in each case, who have a legitimate need to know such information (which would include, but not be limited to the right to dispute and/or assess in furtherance of a dispute) and who are informed of and agree to be bound by the confidentiality terms of this Agreement. The Reinsurer shall indemnify and hold harmless the Company for all damages resulting from any unauthorized disclosure by the Reinsurer or the Reinsurer's Representatives of records obtained pursuant to this Article. Nothing contained in this Agreement shall be construed to prevent the Company from applying to a court of competent jurisdiction for equitable relief including injunction and specific performance as a remedy if the Reinsurer or any of the Reinsurer's Representatives breach or threaten to breach any of the provisions of this Article. Without prejudice to the rights and remedies otherwise available at law or equity to the Company, it is understood and agreed that the Company would be irreparably injured by a breach of this Article, that money damages would not be a sufficient remedy for any actual or threatened breach of this Article by the Reinsurer or any of the Reinsurer's Representatives and that the Company shall (without proof of actual damages) be entitled to equitable relief. In the event of litigation relating to this Article, if a court of competent jurisdiction determines that the Reinsurer or any of the Reinsurer's Representatives have breached this Article, then the Reinsurer shall be liable and pay to the Company the reasonable legal fees incurred by the Company in connection with the subject litigation, including any appeal therefrom. ARTICLE XIV - ERRORS AND OMISSIONS Inadvertent delays, errors or omissions in connection with this Agreement or any transaction hereunder shall not relieve either Party of any liability which would have attached had such delay, error or omission not occurred, provided always that such error or omission is rectified as soon as possible after discovery. ARTICLE XV - SECURITY A. If the Company is or becomes unable to take credit in any financial statement filed with its domiciliary insurance regulator or with insurance regulators in New Jersey, California or any other state in which it currently is approved as a surplus lines insurer (or any successors to said regulators) for the reinsurance coverage provided hereunder, or if Prudential's Financial Strength Rating published by A.M. Best becomes less than "A-," the Reinsurer agrees to fund within thirty (30) days from receipt of notice from the Company that funding is required its share of Adverse Loss Development (and to replenish such funding from time to time as necessary) by: 1. Clean, irrevocable and unconditional letters of credit issued and confirmed, if confirmation is required by the insurance regulatory authorities involved, by a qualified United States financial institution acceptable to said insurance regulatory authorities; 2. cash; and/or 3. a Trust in compliance with the requirements of and acceptable to said insurance regulatory authorities. B. With regard to funding in whole or in part by letters of credit, it is agreed that each letter of credit will be in a form that would be acceptable to the Company's domiciliary insurance regulatory authority, will be issued for a term of at least one year and will include an "evergreen clause," that automatically extends the term for at least one additional year at each expiration date unless written notice of non-renewal is given to the Company not less than 30 days prior to said expiration date. The Company and the Reinsurer further agree that said letters of credit may be drawn upon by the Company or its successors in interest at any time, without diminution because of the insolvency of the Company or the Reinsurer, but only for one or more of the following purposes: 1. To reimburse itself for the Reinsurer's share of paid Adverse Loss Development, unless paid in cash by the Reinsurer; 2. To reimburse itself for the Reinsurer's share of any other amounts claimed to be due hereunder, unless paid in cash by the Reinsurer; 3. To fund a cash account in an amount equal to the Reinsurer's share of Adverse Loss Development funded by means of a letter of credit that is under non-renewal notice, if said letter of credit has not been renewed or replaced by the Reinsurer 10 days prior to its expiration date; 4. To refund to the Reinsurer any sum in excess of the actual amount required to fund the Reinsurer's share of Adverse Loss Development and other amounts claimed to be due hereunder, if so requested by the Reinsurer. C. In the event the amount drawn by the Company on any letter of credit is in excess of the actual amount required for B (1), B (3) or B (4), or in the case of B (2), the actual amount determined to be due, the Company shall promptly return to the Reinsurer the excess amount so drawn. D. In the event of funding through a Trust: 1. The Reinsurer shall establish a Trust Account for the benefit of the Company to fund the amounts receivable under the Agreement in a qualified United States financial institution reasonably acceptable to the Company and to said insurance regulatory authorities. 2. The assets deposited into the Trust Account shall be valued according to their current fair market value and shall consist only of cash (United States legal tender), certificates of deposit (issued by a United States bank and payable in United States legal tender) and investments of the type permitted by and acceptable to said insurance regulatory authorities or any combination of the above, provided that such investments are issued by an institution that is not the parent, subsidiary or affiliate of either the Reinsurer or the Company; 3. The Reinsurer, prior to depositing assets with the trustee, shall execute assignments, endorsements in blank, or transfer legal title to the trustee of all shares, obligations or any other assets requiring assignments, in order that the Company, or the trustee upon the Company's direction, may whenever necessary negotiate any such assets without consent or signature from the Reinsurer or any other entity; 4. All settlements of account between the Reinsurer and the Company shall be in cash or its equivalent; 5. The assets in the trust account may be withdrawn by the Company at any time, notwithstanding any other provisions in this Agreement, and shall be utilized by the Company or any successor by operation of law, including without limitation any liquidator, rehabilitator, receiver or conservator of the Company, for the purposes set forth in paragraphs B(1) -B(4) above. ARTICLE XVI - INSOLVENCY In the event of the insolvency of the Company, the reinsurance coverage hereunder shall be payable directly to the Company or to its liquidator, receiver, conservator or statutory successor on the basis of the amount of claim allowed in the insolvency proceeding without diminution by reason of the inability of the Company to pay all or any part of the claim. It is agreed, however, that the liquidator, receiver, conservator or statutory successor of the Company shall give written notice to the Reinsurer of the pendency of a claim against the Company, indicating the Policy or bond covered hereunder which claim would involve a possible liability on the part of the Reinsurer, within a reasonable time after such claim is filed in the conservation or liquidation proceeding or in the receivership, and that during the pendency of such claim, the Reinsurer may investigate such claim and interpose, at its own expense, in the proceeding where such claim is to be adjudicated, any defense or defenses that it may deem available to the Company or its liquidator, receiver, conservator or statutory successor. The expense thus incurred by the Reinsurer shall be chargeable, subject to the approval of the Court, against the Company as part of the expense of conservation or liquidation to the extent of a pro rata share of the benefit which may accrue to the Company solely as a result of the defense undertaken by the Reinsurer. ARTICLE XVII - ARBITRATION A. Except with respect to disputes arising solely out of or solely in connection with Article XIII above (Access to Records), as a condition precedent to any right of action hereunder, in the event of any dispute or difference of opinion hereafter arising with respect to this Agreement, including its formation and validity, it is hereby mutually agreed that such dispute or difference of opinion shall be submitted to arbitration. B. Except as provided in subsections A. and D. of this Article or with respect to judicial proceedings instituted in aid of arbitration, this Article shall constitute a waiver of the Parties' rights to commence an action in any court of competent jurisdiction in the United States, to remove an action to a United States District Court, or to seek a transfer of a case to another court as might otherwise be permitted by the laws of the United States or of any State or other jurisdiction in the United States. C. One Arbiter shall be chosen by the Company, the other by the Reinsurer, and an Umpire shall be chosen by the two Arbiters before they enter upon arbitration, all of whom shall be active or retired disinterested executive officers of United States domiciled insurance or reinsurance companies. In the event that either Party should fail to choose an Arbiter within 30 days following a written request by the other Party to do so, the requesting Party may choose two Arbiters who shall in turn choose an Umpire before entering upon arbitration. If the two Arbiters fail to agree upon the selection of an Umpire within 30 days following their appointment, each Arbiter shall nominate three candidates within 10 days thereafter, two of whom the other shall decline, and the decision shall be made by drawing lots. D. The Arbiters and the Umpire ("the Arbitration Panel") shall consider this Agreement as an honorable engagement rather than merely as a legal obligation, and they are relieved of all judicial formalities and may abstain from following the strict rules of law. The majority decision of the Arbitration Panel shall be final and binding on both Parties. Judgment upon the final decision of the Arbitration Panel may be entered in any court of competent jurisdiction. E. Except as provided in sub-section G. of this Article, each Party shall bear the expense of its own Arbiter, and shall jointly and equally bear with the other the expense of the Umpire and of the arbitration. In the event that the two Arbiters are chosen by one Party, as above provided, the expense of the Arbiters, the Umpire and the arbitration shall be equally divided between the two Parties. F. Any arbitration pursuant to this Article shall be conducted in New York, New York unless otherwise agreed by the parties; provided, however, that the Arbitration Panel may choose to take evidence and/or convene a hearing in a place other than New York for the convenience of the parties, the witnesses or the Arbitration Panel. G. The Arbitration Panel shall have the power to award costs, expenses, and interest to the prevailing Party in an arbitration. ARTICLE XVIII - SERVICE OF SUIT A. It is agreed that in the event of the failure of the Reinsurer to pay any amount claimed to be due hereunder or to otherwise perform its obligations hereunder, the Reinsurer will, at the request of the Company, submit to the jurisdiction of any court of competent jurisdiction within the State of New Jersey or such other jurisdiction within the United States as the Company can select as a forum, and will comply with all requirements necessary to give such court jurisdiction and all matters arising hereunder shall be determined in accordance with the law and practice of such court. B. Service of process in such suit may be made on the Reinsurer by serving the Commissioner of Insurance of the State of New Jersey, who shall forward such process to the Reinsurer in accordance with Article XXIII or at such other address as the Reinsurer shall advise. In any suit instituted, the Reinsurer will abide by the final decision of such court. C. Further, pursuant to any statute of any state, territory, or district of the United States of America which makes provisions therefore, the Reinsurer herein hereby designates the superintendent, commissioner or director of insurance or other officer specified for that purpose in the statute, or his successor or successors in office, as its true and lawful attorney upon whom may be served any lawful process in any action, suit or proceeding instituted by or on behalf of the Company or any beneficiary hereunder arising out of this Agreement of reinsurance and hereby designates the above-named person to whom the said office is authorized to mail such process or a true copy thereof. D. This Article is not meant to supersede Article XVII of this Agreement or override the obligation of the parties to arbitrate their disputes in accordance with Article XVII. ARTICLE XIX - ENTIRE AGREEMENT This Agreement, the Sale Agreement and the Guaranty, and any exhibits to such agreements, collectively constitute the entire agreement between the Parties regarding the subject matter hereof and supercede all prior agreements and understandings, both written and oral and do not confer any rights or remedies to any other party or any other person. ARTICLE XX - AMENDMENTS AND ALTERATIONS This Agreement shall not be changed, supplemented, modified, or amended except by an endorsement/addendum signed by the Parties and attached hereto. ARTICLE XXI - NO WAIVER No forbearance to enforce any provision or right hereunder shall be deemed a waiver thereof, and no waiver of any breach of any term or covenant herein shall be construed as a waiver of any other breach of the same, or any other term or covenant herein. ARTICLE XXII - CONSTRUCTION This Agreement is the result of arms-length negotiations between the Parties and has been prepared jointly by the Parties. In applying and interpreting the provisions of this Agreement, there shall be no presumption that either the Company or the Reinsurer prepared this Agreement, or that this Agreement shall be construed in favor of or against either the Company or the Reinsurer. ARTICLE XXIII - NOTICES Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, telegraphed, telexed, sent by facsimile transmission, or sent by certified, registered or express mail, postage prepaid, to: If to the Reinsurer, to: Richard Green, Vice President Prudential Property and Casualty Insurance Company 23 Main St., 4th Floor Holmdel, NJ 07032 Phone: 732-946-5082 Fax: 732-946-5029 with a copy to: Doreen Faga President, Gibraltar Operations The Prudential Insurance Company of America Eisenhower Corporate Center, Building 3 290 West Mt. Pleasant Avenue Livingston, NJ 07039 Phone: 973-548-5980 Fax: 973-548-5950 If to the Company, to: Janet J. Burak Senior Vice President and General Counsel Everest Reinsurance Holdings 477 Martinsville Road P.O. Box 830 Liberty Corner, NJ 07938 Phone: 908-604-3170 Fax: 908-604-3450 or in each case to such other address as a party may designate for itself by like notice to the other party. ARTICLE XXIV - GOVERNING LAW This Agreement shall be governed by and construed in accordance with the laws of the State of New York. IN WITNESS WHEREOF, the Company, by its duly authorized representative, has executed this Agreement as of the date undermentioned at: _________, ____________, this ____________ day of ________________________ 2000. - -------------------------------------------------------------------------------- IN WITNESS WHEREOF, the Reinsurer, by its duly authorized representative, has executed this Agreement as of the date undermentioned at: _________, ____________, this ____________ day of ________________________ 2000. EXHIBIT A Aggregate Stop Loss Retrocession Agreement between Prudential Reinsurance Company and Gibraltar Casualty Company (effective 10/6/95) Quota Share Reinsurance Agreement issued to Gibraltar Casualty Company by Prudential Reinsurance Company (dated May 1, 1985) (Gibraltar's cession to Prudential Reinsurance for MUF eligible business) Direct Excess Quota Share Reinsurance Agreement between Prudential Reinsurance Company and Gibraltar Casualty Company (effective January 1, 1986) Quota Share Reinsurance Agreement between Prudential Reinsurance Company and Gibraltar Casualty Company ("Med Mal") effective 1/1/89 MUF Commutation Agreements between Gibraltar Casualty Company, Prudential Reinsurance Company and various MUF participants executed between 1985 and 1987, the "MUF Buybacks" EXHIBIT E GUARANTEE AGREEMENT BETWEEN THE PRUDENTIAL INSURANCE COMPANY OF AMERICA ("GUARANTOR") AND GIBRALTAR CASUALTY COMPANY ("BENEFICIARY") DATED AS OF _______, 2000 TABLE OF CONTENTS Page Section 1. Definitions........................................................1 Section 2. Guaranty...........................................................2 2.1 Guaranteed Obligations.............................................2 2.2 Nature of Obligations..............................................2 Section 3. Character of Obligations............................................3 3.1 Obligations Not Affected...........................................3 3.2 Waiver by Guarantor................................................3 3.3 Reinstatement......................................................3 Section 4. Rights of Third Parties.............................................4 Section 5. Representations and Warranties.....................................4 5.1 Due Incorporation, etc.............................................4 5.2 Due Authorization..................................................4 5.3 Consents; No Conflicts.............................................4 5.4 Access to Information..............................................5 5.5 Solvency...........................................................5 Section 6. Miscellaneous.......................................................5 6.1 Expenses...........................................................5 6.2 Amendment..........................................................5 6.3 Notices............................................................5 6.4 Waivers............................................................5 6.5 Counterparts.......................................................6 6.6 Successors and Assigns.............................................6 6.7 Further Assurances.................................................6 6.8 Severability.......................................................6 6.9 Entire Understanding...............................................6 6.10 Applicable Law....................................................6 6.11 Headings..........................................................6 6.12 Term..............................................................6 GUARANTEE AGREEMENT ------------------- This GUARANTEE AGREEMENT is made as of the ____ day of ______, 2000, by and between THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey mutual insurance company ("Guarantor"), and GIBRALTAR CASUALTY COMPANY, a Delaware corporation (together with its successors and assigns, "Beneficiary"). W I T N E S S E T H: WHEREAS, Guarantor and Everest Reinsurance Holdings, Inc., a Delaware corporation ("Everest"), are parties to that certain Stock Purchase Agreement, dated as of February 24, 2000, as amended by Amendment No. 1 thereto, dated as of July, 2000, pertaining to the sale by Guarantor of all of the issued and outstanding shares of capital stock of Beneficiary to Everest (the "Stock Purchase Agreement"); WHEREAS, it is a condition to the consummation of the transactions contemplated by the Stock Purchase Agreement that Beneficiary and Prudential Property and Casualty Insurance Company, an Indiana corporation and an indirect subsidiary of Guarantor ("Prupac"), enter into, as of the date hereof, a proportional excess of loss reinsurance agreement and a quota share reinsurance agreement (collectively, the "Prupac Reinsurance Agreements"); and WHEREAS, it is a further condition to the consummation of the transactions contemplated by the Stock Purchase Agreement that Guarantor enter into this Agreement. NOW THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Guarantor and Beneficiary hereby agree as follows: Section 1. DEFINITIONS When used herein, the following terms shall have the following meanings: "Guaranteed Agreements" means the Prupac Reinsurance Agreements (as any of them may be amended from time to time). "Obligor" means Prupac and its successors and assigns. Capitalized terms used but not defined herein shall have the meanings given to such terms in the Stock Purchase Agreement. Section 2. GUARANTY 2.1 GUARANTEED OBLIGATIONS. (a) Guarantor hereby irrevocably and unconditionally guarantees to Beneficiary the prompt payment of all amounts payable as and when the same shall become due and payable at any time by Obligor under, and the full and prompt performance by the Obligor of each and every agreement, covenant, indemnity and obligation of Obligor under and in accordance with the terms of, the Guaranteed Agreements, in each case however created, arising or evidenced, whether direct or indirect, primary or secondary, absolute or contingent, joint or several, and whether now or hereafter existing or due or to become due. (b) Guarantor hereby agrees that if for any reason (including, without limitation, the liquidation, dissolution, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, composition or readjustment of, or other similar proceedings affecting the status, existence, assets or obligations of, Obligor) Obligor shall fail fully and promptly to pay any amount payable at any time under any of the Guaranteed Agreements as and when the same shall become due and payable, or if Obligor shall fail to perform and discharge any agreement, covenant, indemnity or obligation of Obligor under any of the Guaranteed Agreements, then Guarantor (i) in the event of any such failure to make payment of any amount, shall promptly pay such amount to Beneficiary and (ii) in the event of any failure to perform and discharge any such agreement, covenant, indemnity or obligation, shall promptly cause the same to be performed and discharged. (c) The amounts payable by (including, without limitation, any penalties or default amounts), and the agreements, covenants, indemnities and obligations of, Obligor hereby guaranteed are hereinafter referred to collectively as the "Guaranteed Obligations" and individually as a "Guaranteed Obligation." 2.2 NATURE OF OBLIGATIONS. This Agreement shall constitute a guaranty of payment when due and of performance when due and not of collection, and Guarantor specifically agrees that it shall not be necessary, and that Guarantor shall not be entitled to require, before or as a condition of enforcing the liability of Guarantor under this Agreement or requiring payment or performance of the Guaranteed Obligations by Guarantor hereunder, or at any time thereafter, that any Person: (a) file suit or proceed to obtain judgment or assert a claim against Obligor or any other Person that may be liable for any Guaranteed Obligation; (b) make any other effort to obtain payment or performance of any Guaranteed Obligation from Obligor or any other Person that may be liable for such Guaranteed Obligation; (c) foreclose against or seek to realize upon any security now or hereafter existing for any Guaranteed Obligation; (d) exercise or assert any other right or remedy to which such Person is or may be entitled in connection with any Guaranteed Obligation or any security or other guaranty therefor; or (e) assert or file any claim against the assets of Obligor or any other Person liable for any Guaranteed Obligation. 2 Section 3. CHARACTER OF OBLIGATIONS 3.1 OBLIGATIONS NOT AFFECTED. The obligations of Guarantor pursuant to Section 2.1 shall be continuing and irrevocable, absolute and unconditional, primary and original, immediate and not contingent and shall remain in full force and effect without regard to and shall not be released, discharged or in any way affected by any circumstance or condition (other than the defense that the Guaranteed Obligations are not due and payable or required to be performed and discharged or the defense of payment or performance by Obligor or any other Person that may be liable for any Guaranteed Obligation). Should any money or performance due or owing under this Agreement not be recoverable from or performed by Guarantor due to any reason, then, in any such case, such money or performance shall nevertheless be recoverable from or performed by Guarantor as though Guarantor were the principal obligor in respect thereof and not merely a guarantor and shall be paid or performed by Guarantor forthwith. 3.2 WAIVER BY GUARANTOR. Except as herein otherwise expressly provided or as may be required by applicable law, Guarantor hereby expressly and irrevocably waives diligence, demand for payment, filing of claims with any court, any proceeding to enforce any provision of any of the Guaranteed Agreements, notice of acceptance of this Agreement, notice of the creation of any liabilities of Obligor or any other Person, notice of nonpayment of any Guaranteed Obligation, any right to require a proceeding first against Obligor or any other Person, whether to marshall any assets or to exhaust any security for the performance of the obligations of Obligor or any other Person or otherwise, any diligence in collection or protection of or realization upon any Guaranteed Obligation, any obligation hereunder or any collateral security for any of the foregoing, any right of protest, presentment, notice or demand whatsoever, all claims of waiver, release, surrender, alteration or compromise, and all defenses (other than the defense that the Guaranteed Obligations are not due and payable or required to be performed and discharged and the defense of payment or performance by Obligor or any other Person that may be liable for any Guaranteed Obligation), set-offs, counterclaims, recoupments, reductions, limitations, impairments or terminations, whether arising hereunder or otherwise. Guarantor agrees that no payment made by it or for its account pursuant to this Agreement shall entitle it, by subrogation, indemnification, exoneration, contribution, reimbursement or otherwise to any payment by Obligor or any other Person or from or out of any property of Obligor or any other Person unless and until all Guaranteed Obligations are fully and finally paid and performed, and Guarantor hereby expressly waives, to the fullest extent possible, and shall not exercise, rights or remedies it has or may in the future have with respect to any of the foregoing unless and until all Guaranteed Obligations are fully and finally paid and performed. 3.3 REINSTATEMENT. Guarantor agrees that this Agreement shall be automatically reinstated if and to the extent that for any reason any payment or performance by or on behalf of Obligor, or any other Person that may have paid a Guaranteed Obligation, is rescinded or rendered incomplete or must be otherwise restored by the Beneficiary, whether as a result of any proceedings in bankruptcy or reorganization or otherwise. 3 Section 4. RIGHTS OF THIRD PARTIES This Agreement is made for the benefit of, and shall be enforceable by, Beneficiary and its successors and assigns to the extent of its interest hereunder. This Agreement shall not be construed to create any right in any Person other than Beneficiary and its successors and assigns or to be a contract in whole or in part for the benefit of any Person other than Beneficiary and its successors and assigns. Section 5. REPRESENTATIONS AND WARRANTIES Guarantor hereby represents and warrants to Beneficiary as set forth in this Section 5. 5.1 DUE INCORPORATION, ETC. Guarantor is a mutual insurance company domiciled, validly existing and in good standing under the laws of the State of New Jersey and has all requisite corporate power and authority to own, lease and operate its properties and to carry on its business as they are now owned, leased and operated. Guarantor is licensed or qualified to do business and is in good standing as a foreign entity in each jurisdiction where (a) the nature of the properties owned, leased or operated by it or the businesses transacted by it require such licensing or qualification and (b) the failure to be so licensed, qualified or in good standing would adversely affect Guarantor's ability to perform its obligations hereunder or would materially and adversely affect Guarantor. 5.2 DUE AUTHORIZATION. Guarantor has all requisite corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder and to consummate the transactions contemplated hereby. The execution, delivery and performance by Guarantor of this Agreement and the consummation by Guarantor of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate proceedings and no other corporate proceedings on the part of Guarantor are necessary to authorize the execution, delivery and performance by Guarantor of this Agreement or the consummation of the transactions contemplated hereby. This Agreement has been duly and validly executed and delivered by Guarantor and constitutes a legal, valid and binding obligation of Guarantor, enforceable against Guarantor in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, moratorium or similar laws affecting creditors' rights generally and except as rights to specific enforcement may be limited by the application of equitable principles (whether such equitable principles are applied in a proceeding at law or in equity). 5.3 CONSENTS; NO CONFLICTS. No consent, authorization, order or approval of, or filing or registration with, any governmental authority, board or other regulatory authority is required for or in connection with the execution, delivery and performance by Guarantor of this Agreement and the consummation of the transactions contemplated hereby, except those already duly obtained or made. The execution, delivery and performance by Guarantor of this Agreement and the consummation by Guarantor of the transactions contemplated hereby do not and will not, with or without the giving of notice or the passage of time, or both, (a) violate any provision of the Governing Instruments of Guarantor, (b) violate, result in a breach of or constitute a 4 default under or give rise to a right of termination or cancellation of, or accelerate the performance required by any terms of, as the case may be, any contract, lease, license, mortgage, note, permit or instrument to which Guarantor is a party or by which any of its assets are bound, (c) violate any law, regulation, judgment, order, writ, injunction or decree of any court, governmental body (domestic or foreign) or administrative agency of any jurisdiction applicable to Guarantor or (d) require the consent or approval of any third parties; other than, in the case of (b) and (d), such violations, breaches, defaults, terminations, cancellations and accelerations which would not, in the aggregate, reasonably be expected to have a Material Adverse Effect on Guarantor. 5.4 ACCESS TO INFORMATION. Guarantor now has and will continue to have independent means of obtaining such information concerning the affairs, financial condition and business of Obligor as Guarantor desires to obtain. Except as set forth in the Stock Purchase Agreement, no party hereto shall have any duty or responsibility to provide Guarantor with any credit or other information concerning the affairs, financial condition or business of Obligor or other Persons that may come into its possession. Guarantor has executed this Agreement based solely on its own knowledge and investigation of Obligor and other Persons and their financial condition. 5.5 SOLVENCY. The execution, delivery and performance by Guarantor of this Agreement will not render Guarantor insolvent, nor is it being made in contemplation of Guarantor's insolvency. Guarantor does not have unreasonably small capital with which to carry on its business. Section 6. MISCELLANEOUS. 6.1 EXPENSES. Guarantor shall pay to or reimburse Beneficiary for, and agrees to indemnify and hold harmless Beneficiary from and against, all costs and expenses, including, without limitation, reasonable attorneys' fees and disbursements, incurred by Beneficiary in connection with enforcing this Agreement or any of its rights hereunder. In the event of any litigation involving Guarantor and Beneficiary in connection with this Agreement, a court of applicable jurisdiction may award reimbursement of attorneys' fees and disbursements to either Guarantor or Beneficiary as such court deems appropriate. 6.2 AMENDMENT. This Agreement may be amended, modified or supplemented but only in writing signed by Guarantor and Beneficiary. 6.3 NOTICES. Any notice, request, instruction or other document to be given hereunder by a party hereto or a Beneficiary shall be in writing and shall be deemed to have been given (a) when received if given in person or by courier or a courier service, (b) on the date of transmission if sent by telex, facsimile or other wire transmission (receipt confirmed) or (c) three (3) business days after being deposited in the mail, certified or registered, postage prepaid. Notice shall be given as set forth in the Stock Purchase Agreement. 6.4 WAIVERS. The failure of a party hereto or any Beneficiary at any time or times to require performance of any provision hereof shall in no manner affect its right at a later time to enforce the same. No delay in exercising any 5 right shall operate as a waiver or impair such right. No single or partial exercise of any right shall preclude any other or further exercise thereof or the exercise of any other right. No waiver by a party hereto or any Beneficiary of any condition or of any breach of any term, covenant, representation or warranty contained in this Agreement shall be effective unless in writing, and no waiver in any one or more instances shall be deemed to be a further or continuing waiver of any such condition or breach in other instances or a waiver of any other condition or breach of any other term, covenant, representation or warranty. 6.5 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 6.6 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon Guarantor and its successors and permitted assigns and shall inure to the benefit of, and may be enforced by, Beneficiary and its successors and assigns; provided, that no assignment of any of the rights or obligations of Guarantor under this Agreement shall be made by Guarantor without the prior written consent of Beneficiary. 6.7 FURTHER ASSURANCES. Guarantor will, at Guarantor's expense, do, execute, acknowledge and deliver all and every such further acts, deeds, agreements, instruments and assurances as may be reasonably necessary or appropriate in order to protect the right, title and interest of Beneficiary hereunder. 6.8 SEVERABILITY. If any provision of this Agreement shall be held invalid, illegal or unenforceable, the validity, legality or enforceability of the other provisions hereof shall not be affected thereby, and there shall be deemed substituted for the provision at issue a valid, legal and enforceable provision as similar as possible to the provision at issue. 6.9 ENTIRE UNDERSTANDING. This Agreement, together with the Stock Purchase Agreement and the Guaranteed Agreements, set forth the entire agreement and understanding of the parties hereto with respect to the subject matter hereof and supersede any and all prior agreements, arrangements and understandings among the parties relating to the subject matter hereof. 6.10 APPLICABLE LAW. This Agreement shall be governed by and construed and enforced in accordance with the internal laws of the State of New York without giving effect to the principles of conflicts of law thereof. 6.11 HEADINGS. The headings of Sections have been included herein for convenience only and shall not constitute a part of this Agreement for any other purpose. References in this Agreement to Sections are to Sections of this Agreement unless otherwise indicated. 6.12 TERM. Subject to reinstatement as set forth in Section 3.3, this Agreement shall be in effect until payment and performance in full of all Guaranteed Obligations. * * * 6 IN WITNESS WHEREOF, the parties have signed this Agreement on the date first written above. THE PRUDENTIAL COMPANY OF AMERICA By: Name: Title: GIBRALTAR CASUALTY COMPANY By: Name: Title: 7 EX-27 3 0003.txt FDS FOR EVEREST REINSURANCE HOLDINGS, INC. 10-Q
7 EVEREST REINSURANCE HOLDINGS, INC. AND SUBSIDIARIES FINANCIAL DATA SCHEDULE THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM EVEREST REINSURANCE HOLDINGS, INC.'S FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 4,010,134 0 0 41,984 0 0 4,182,265 66,169 759,552 93,396 5,915,263 3,605,768 351,673 0 0 0 0 0 0 1,000,852 5,915,263 551,964 130,750 (321) 440 430,058 (10,951) 147,123 101,910 21,319 80,591 0 0 0 80,591 0 0 0 0 0 0 0 0 0
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