-----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, JDG235+hHYzW+tg6eEXeY9LQS+UEnYkAUitEIZXXZ7sZpuv+VIIqDjg+6GTJwKnP 0tXjV4x1vjakMCRh4IooZg== 0000914748-99-000009.txt : 19991115 0000914748-99-000009.hdr.sgml : 19991115 ACCESSION NUMBER: 0000914748-99-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EVEREST REINSURANCE HOLDINGS INC CENTRAL INDEX KEY: 0000914748 STANDARD INDUSTRIAL CLASSIFICATION: ACCIDENT & HEALTH INSURANCE [6321] IRS NUMBER: 223263609 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14527 FILM NUMBER: 99747409 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 EVEREST REINSURANCE HOLDINGS, INC. 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended: Commission File Number: SEPTEMBER 30, 1999 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 November 8, 1999 ----- ---------------------------- COMMON STOCK, $.01 PAR VALUE 46,957,817 EVEREST REINSURANCE HOLDINGS, INC. INDEX TO FORM 10-Q PART I FINANCIAL INFORMATION --------------------- PAGE ---- ITEM 1. FINANCIAL STATEMENTS -------------------- Consolidated Balance Sheets at September 30, 1999 (unaudited) and December 31, 1998 3 Consolidated Statements of Operations and Comprehensive Income for the three months and nine months ended September 30, 1999 and 1998 (unaudited) 4 Consolidated Statements of Changes in Stockholders' Equity for the three months and nine months ended September 30, 1999 and 1998 (unaudited) 5 Consolidated Statements of Cash Flows for the three months and nine months ended September 30, 1999 and 1998 (unaudited) 6 Notes to Consolidated Interim Financial Statements 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL ------------------------------------------------- CONDITION AND RESULTS OF OPERATIONS 16 ----------------------------------- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT ---------------------------------------------- MARKET RISK 25 ----------- PART II OTHER INFORMATION ----------------- ITEM 1. LEGAL PROCEEDINGS 26 ----------------- ITEM 2. CHANGES IN SECURITIES 26 --------------------- ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ------------------------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None --------------------------------------------------- ITEM 5. OTHER INFORMATION None ----------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 26 -------------------------------- Part I - Item 1
EVEREST REINSURANCE HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except par value per share) September 30, December 31, ------------------------------- 1999 1998 ------------- ------------- (unaudited) ASSETS: Fixed maturities - available for sale, at market value (amortized cost: 1999, $3,922,120; 1998, $3,851,051) $ 3,943,415 $ 4,100,575 Equity securities, at market value (cost: 1999, $77,699; 1998, $91,787) 114,740 146,274 Short-term investments 58,006 34,846 Other invested assets 5,741 4,736 Cash 38,758 39,326 ------------- ------------- Total investments and cash 4,160,660 4,325,757 Accrued investment income 64,981 64,220 Premiums receivable 294,471 261,488 Reinsurance receivables 839,160 981,959 Funds held by reinsureds 152,114 200,302 Deferred acquisition costs 75,364 70,753 Prepaid reinsurance premiums 10,572 8,592 Deferred tax asset 162,312 62,237 Other assets 23,417 21,420 ------------- ------------- TOTAL ASSETS $ 5,783,051 $ 5,996,728 ============= ============= LIABILITIES: Reserve for losses and adjustment expenses $ 3,697,999 $ 3,800,041 Unearned premium reserve 294,684 284,640 Funds held under reinsurance treaties 176,120 195,169 Losses in the course of payment 82,201 64,630 Contingent commissions 56,547 111,344 Other net payable to reinsurers 20,327 18,731 Current federal income taxes (7,047) (581) Revolving credit agreement borrowings 35,000 - Other liabilities 49,431 43,550 ------------- ------------- Total liabilities 4,405,262 4,517,524 ------------- ------------- STOCKHOLDERS' EQUITY: Preferred stock, par value: $0.01; 50 million shares authorized; no shares issued and outstanding (includes 0.2 million shares of Series A Junior Preferred Stock) - - Common stock, par value: $0.01; 200 million shares authorized; 50.9 million shares issued in 1999 and 1998 509 509 Additional paid-in capital 390,902 390,559 Unearned compensation (131) (240) Accumulated other comprehensive income, net of deferred income taxes ($15.9 million in 1999 and $99.8 million in 1998) 29,683 185,518 Retained earnings 1,038,195 928,500 Treasury stock, at cost; 2.7 million shares in 1999 and 0.9 million shares in 1998 (81,369) (25,642) ------------- ------------- Total stockholders' equity 1,377,789 1,479,204 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,783,051 $ 5,996,728 ============= =============
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 Nine Months Ended September 30, September 30, ------------------------ ------------------------ 1999 1998 1999 1998 ---------- ---------- ---------- ---------- (unaudited) REVENUES: Premiums earned $ 285,480 $ 265,241 $ 795,034 $ 771,303 Net investment income 62,232 60,667 188,882 183,205 Net realized capital gain/(loss) (7,686) 989 (17,139) 3,495 Other income/(loss) 1,408 468 (478) 2,663 ---------- ---------- ---------- ---------- Total revenues 341,434 327,365 966,299 960,666 ---------- ---------- ---------- ---------- CLAIMS AND EXPENSES: Incurred loss and loss adjustment expenses 203,199 189,904 568,920 564,048 Commission, brokerage, taxes and fees 78,143 71,815 214,384 197,720 Other underwriting expenses 12,089 12,014 36,073 36,231 ---------- ---------- ---------- ---------- Total claims and expenses 293,431 273,733 819,377 797,999 ---------- ---------- ---------- ---------- INCOME BEFORE TAXES 48,003 53,632 146,922 162,667 Income tax 8,794 11,506 28,406 37,196 ---------- ---------- ---------- ---------- NET INCOME $ 39,209 $ 42,126 $ 118,516 $ 125,471 ========== ========== ========== ========== Other comprehensive income /(loss), net of tax (57,314) 27,094 (155,835) 40,501 ---------- ---------- ---------- ---------- COMPREHENSIVE INCOME /(LOSS) $ (18,105) $ 69,220 $ (37,319) $ 165,972 ========== ========== ========== ========== PER SHARE DATA: Average shares outstanding (000's) 48,618 50,465 49,029 50,475 Net income per common share - basic $ 0.81 $ 0.83 $ 2.42 $ 2.49 ========== ========== ========== ========= Average diluted shares outstanding (000's) 48,796 50,748 49,236 50,782 Net income per common share - diluted $ 0.80 $ 0.83 $ 2.41 $ 2.47 ========== ========== ========== =========
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 Nine Months Ended September 30, September 30, --------------------------- --------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ (unaudited) COMMON STOCK (shares outstanding): Balance, beginning of period 48,654,228 50,477,228 49,989,204 50,479,271 Issued during the period - 30,436 16,800 34,436 Treasury stock acquired during the period (500,297) (221,200) (1,854,417) (229,660) Treasury stock reissued during the period 1,200 1,040 3,544 3,457 ------------ ------------ ------------ ------------ Balance, end of period 48,155,131 50,287,504 48,155,131 50,287,504 ------------ ------------ ------------ ------------ COMMON STOCK (par value): Balance, beginning of period $ 509 $ 508 $ 509 $ 508 Issued during the period - 1 - 1 ------------ ------------ ------------ ------------ Balance, end of period 509 509 509 509 ------------ ------------ ------------ ------------ ADDITIONAL PAID IN CAPITAL: Balance, beginning of period 390,891 389,985 390,559 389,876 Common stock issued during the period - 543 307 610 Treasury stock reissued during the period 11 16 36 58 ------------ ------------ ------------ ------------ Balance, end of period 390,902 390,544 390,902 390,544 ------------ ------------ ------------ ------------ UNEARNED COMPENSATION: Balance, beginning of period (160) (335) (240) (514) Net increase during the period 29 50 109 229 ------------ ------------ ------------ ------------ Balance, end of period (131) (285) (131) (285) ------------ ------------ ------------ ------------ ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF DEFERRED INCOME TAXES: Balance, beginning of period 86,997 165,726 185,518 152,319 Net increase (decrease) during the period (57,314) 27,094 (155,835) 40,501 ------------ ------------ ------------ ------------ Balance, end of period 29,683 192,820 29,683 192,820 ------------ ------------ ------------ ------------ RETAINED EARNINGS: Balance, beginning of period 1,001,906 851,677 928,500 773,380 Net income 39,209 42,126 118,516 125,471 Dividends declared ($0.06 and $0.18 per share in 1999 and $0.05 and $0.15 per share in 1998) (2,920) (2,525) (8,821) (7,573) ------------ ------------ ------------ ------------ Balance, end of period 1,038,195 891,278 1,038,195 891,278 ------------ ------------ ------------ ------------ TREASURY STOCK AT COST: Balance, beginning of period (69,386) (8,170) (25,642) (8,086) Treasury stock acquired during the period (12,011) (8,170) (55,810) (8,311) Treasury stock reissued during the period 28 25 83 82 ------------ ------------ ------------ ------------ Balance, end of period (81,369) (16,315) (81,369) (16,315) ------------ ------------ ------------ ------------ TOTAL STOCKHOLDERS' EQUITY, END OF PERIOD $ 1,377,789 $ 1,458,551 $ 1,377,789 $ 1,458,551 ============ ============ ============ ============
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 Nine Months Ended September 30, Sepember 30, --------------------------- --------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 39,209 $ 42,126 $ 118,516 $ 125,471 Adjustments to reconcile net income to net cash provided by operating activities: (Increase) decrease in premiums receivable (18,483) (21,462) (35,324) (47,771) (Increase) decrease in funds held, net 46,572 (3,078) 26,474 4,595 Decrease in reinsurance receivables 14,345 29,940 143,046 51,685 (Increase) decrease in deferred tax asset (6,959) 7,535 (16,141) (1,650) Increase (decrease) in reserve for losses and loss adjustment expenses (22,781) 3,678 (85,629) 53,166 Increase (decrease) in unearned premiums 2,511 (9,770) 11,159 (17,126) (Increase) decrease in other assets and liabilities (36,783) 17,332 (46,746) 23,448 Non cash compensation expense 29 50 109 229 Accrual of bond discount/ amortization of bond premium (1,060) (378) (3,600) (670) Realized capital (gains) losses 7,686 (989) 17,139 (3,495) ------------ ------------ ------------ ------------ Net cash provided by operating activities 24,286 64,984 129,003 187,882 ------------ ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from fixed maturities matured/called - available for sale 51,294 38,289 174,973 108,915 Proceeds from fixed maturities sold - available for sale 321,662 30,724 648,756 348,395 Proceeds from equity securities sold 26,647 11,213 29,267 18,200 Proceeds from other invested assets sold 50 834 181 7,505 Cost of fixed maturities acquired - available for sale (386,479) (104,224) (924,124) (635,323) Cost of equity securities acquired (4,570) (11,006) (5,215) (19,193) Cost of other invested assets acquired (781) (868) (2,610) (1,313) Net (purchases) sales of short-term securities (4,279) (4,615) (22,994) (28,203) Net increase (decrease) in unsettled securities transactions (9,087) (7,977) 4,964 (704) ------------ ------------ ------------ ------------ Net cash used in investing activities (5,543) (47,630) (96,802) (201,721) ------------ ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Acquisition of treasury stock net of reissuances (11,972) (8,129) (55,691) (8,171) Common stock issued during the period - 543 307 610 Dividends paid to stockholders (2,920) (2,525) (8,821) (7,573) Net borrowing on revolving credit agreement - - 35,000 - Net increase in collateral for loaned securities - 13,376 - 45,129 ------------ ------------ ------------ ------------ Net cash provided by (used in) financing activities (14,892) 3,265 (29,205) 29,995 ------------ ------------ ------------ ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH 797 4,583 (3,564) 5,811 ------------ ------------ ------------ ------------ Net increase (decrease) in cash 4,648 25,202 (568) 21,967 Cash, beginning of period 34,110 48,343 39,326 51,578 ------------ ------------ ------------ ------------ Cash, end of period $ 38,758 $ 73,545 $ 38,758 $ 73,545 ============ ============ ============ ============ SUPPLEMENTAL CASH FLOW INFORMATION Cash transactions: Income taxes paid, net $ 15,989 $ 11,309 $ 49,623 $ 45,003 Non-cash financing transaction: Issuance of common stock $ 29 $ 50 $ 109 $ 229
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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (DOLLARS IN THOUSANDS) 1. GENERAL The consolidated financial statements of Everest Reinsurance Holdings Inc. (the "Company") for the three months and nine months ended September 30, 1999 and 1998 include all adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair presentation of the results of its single reportable segment on an interim basis. Certain financial information which is normally included in annual financial statements prepared in accordance with generally accepted accounting principles has been omitted since it is not required for interim reporting purposes. The year end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. The results for the three months and nine months ended September 30, 1999 and 1998 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, 1998, 1997 and 1996. 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) uncertainty regarding the number and identity of insureds with potential asbestos or environmental exposure. 7 EVEREST REINSURANCE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (DOLLARS IN THOUSANDS) Although these complications have become less severe in recent years, management believes that these factors continue to render reserves for asbestos and environmental losses significantly less subject to traditional actuarial methods than are reserves on other types of losses. Given these uncertainties, management believes that no meaningful range for such ultimate losses can be established. The Company establishes reserves to the extent that, in the judgement of management, the facts and prevailing law reflect an exposure for the Company or its ceding company. In connection with its initial public offering in October 1995, the Company purchased an aggregate stop loss retrocession agreement (the "Stop Loss Agreement") from Gibraltar Casualty Company ("Gibraltar"), an affiliate of the Company's former parent, The Prudential Insurance Company of America ("The Prudential"). This coverage protects the Company's consolidated earnings against up to $375,000 of the first $400,000 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 September 30, 1999, cessions under the Stop Loss Agreement have aggregated $339,179 with available remaining limits net of coinsurance of $35,821. 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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (DOLLARS IN THOUSANDS) The following table shows the development of prior year asbestos and environmental reserves on both a gross and net of retrocessional basis for the three months and nine months ended September 30, 1999 and 1998:
Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ----------------------------------------------------- Gross Basis: Beginning of period reserves $ 639,493 $ 466,568 $ 660,793 $ 446,132 Incurred losses 469 522 3,054 37,242 Paid losses (13,116) (8,995) (37,001) (25,279) ----------------------------------------------------- End of period reserves $ 626,846 $ 458,095 $ 626,846 $ 458,095 ===================================================== Net Basis: Beginning of period reserves $ 373,013 $ 252,892 $ 263,542 $ 212,376 Incurred losses (1) - - - 2,222 Paid losses (2) (6,014) (4,785) 103,457 33,509 ----------------------------------------------------- End of period reserves $ 366,999 $ 248,107 $ 366,999 $ 248,107 =====================================================
(1) Net of $0 and $0 in the three months and nine months ended September 30, 1999 and $0 and $20,000 in the three months and nine months ended September 30, 1998 ceded under the incurred loss reimbursement feature of the Stop Loss Agreement. (2) Net of $0 and $118,800 in the three months and nine months ended September 30, 1999 and $0 and $40,000 in the three months and nine months ended September 30, 1998 ceded as paid losses under the Stop Loss Agreement. At September 30, 1999, the gross reserves for asbestos and environmental losses were comprised of $148,501 representing case reserves reported by ceding companies, $64,430 representing additional case reserves established by the Company on assumed reinsurance claims, $50,618 representing case reserves established by the Company on direct excess insurance claims and $363,297 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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (DOLLARS IN THOUSANDS) 100% protection from Gibraltar under a retrocessional agreement in place since 1986. While there can be no assurance that reserves for and losses from these claims would not increase in the future, management believes that the Company's existing reserves and ceded reinsurance arrangements, including reimbursements available under the Stop Loss Agreement, lessen the probability that such increases, if any, would have a material adverse effect on the Company's financial condition, results of operations or cash flows. During the first quarter of 1999, Gibraltar disputed $63,000 ceded under the Stop Loss Agreement in the fourth quarter of 1998 and, pursuant to the terms of the Stop Loss Agreement, Gibraltar has placed the disputed amount in a trust. Gibraltar has also disputed the Company's level of reserves previously ceded to and paid by Gibraltar under the Stop Loss Agreement and claimed a refund of $91,700. These disputes are based on Gibraltar's belief that there are redundancies in that portion of the Company's IBNR reserves which are subject to the Stop Loss Agreement. Pursuant to the terms of the Stop Loss Agreement, the Company and Gibraltar have appointed an independent examiner to review the Company's reserves underlying the disputed amounts to determine the appropriate amount of cessions to Gibraltar, and the Company has placed the $91,700 in a trust. In May 1999, the Company and Gibraltar entered into a standstill agreement, temporarily halting the independent examination, while the two companies held further discussions which might have led to the resolution of the dispute. In September 1999, the two companies terminated their standstill agreement and the independent examination process continues. If the examination process does not resolve the disputes to the satisfaction of the parties, the Stop Loss Agreement provides for resolution through arbitration. In the event the cessions to Gibraltar were determined to be excessive, the Company would reduce the cession to Gibraltar by such excess, refund previous payments made by Gibraltar, if applicable, and the unused portion of the limits of the Stop Loss Agreement would be restored. Also, the Company would consider the independent examiners' finding in its ongoing determination of appropriate reserve levels which may lead to a corresponding reduction in the Company's gross reserves, and net reserves to the extent of the coinsurance under the Stop Loss Agreement. In the event the cessions are not determined to be excessive, Gibraltar would be obligated to pay the disputed amount. Accordingly, if the disputes are resolved in Gibraltar's favor, any adverse effect on the Company's financial condition and results of operations would be immaterial and would likely be limited to a reduction in cash flows from operations with a corresponding impact on future investment income. 10 EVEREST REINSURANCE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (DOLLARS IN THOUSANDS) In addition, Gibraltar has disputed $39,714 ceded under a 1986 quota share reinsurance agreement ("Direct Excess Retrocession") through which Gibraltar assumed 100% of the liabilities related to Everest Reinsurance Company's direct excess insurance written in and prior to 1985. This dispute is based on Gibraltar's disagreement with the level of IBNR reserves for asbestos exposures which the Company recorded in 1998. Gibraltar disputes the Company's right to establish and its obligation to fund such reserves, however it does not dispute its responsibility to pay the ultimate losses in accordance with the terms of the Direct Excess Retrocession. The Company and Gibraltar are arbitrating this dispute in accordance with the terms of the Direct Excess Retrocession. Management does not expect that this dispute will have a material adverse effect on the Company's future financial condition, results of operations or cash flows. The Company is involved from time to time in ordinary routine litigation and arbitration proceedings incidental to its business. The Company does not believe that there are any other material pending legal proceedings to which it or any of its subsidiaries or their properties are subject. The Prudential sells annuities which are purchased by property and casualty insurance companies to settle certain types of claim liabilities. In 1993 and prior, the Company, for a fee, accepted the claim payment obligation of the property and casualty insurer, and, concurrently, became the owner of the annuity or assignee of the annuity proceeds. In these circumstances, the Company would be liable if The Prudential were unable to make the annuity payments. The estimated cost to replace all such annuities for which the Company was contingently liable at September 30, 1999 was $140,514. The Company has purchased annuities from an unaffiliated life insurance company to settle certain claim liabilities of the Company. Should the life insurance company become unable to make the annuity payments, the Company would be liable. The estimated cost to replace such annuities at September 30, 1999 was $11,449. 11 EVEREST REINSURANCE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (DOLLARS IN THOUSANDS) 3. EARNINGS PER SHARE Net income per common share has been computed as follows (shares in thousands, except per share amounts):
Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 -------------------------------------------------- Net Income (numerator) $ 39,209 $ 42,126 $ 118,516 $ 125,471 ================================================== Weighted average common and effect of dilutive shares used in the computation of net income per share: Average shares outstanding - basic (denominator) 48,618 50,465 49,029 50,475 Effect of dilutive shares 178 283 207 307 -------------------------------------------------- Average shares outstanding - diluted (denominator) 48,796 50,748 49,236 50,782 Net income per common share: Basic $ 0.81 $ 0.83 $ 2.42 $ 2.49 Diluted $ 0.80 $ 0.83 $ 2.41 $ 2.47
As of September 30, 1999 and 1998, options to purchase 1,123,000 and 745,000 shares of common stock, respectively, were outstanding but were not included in the computation of diluted earnings per share for the three month and nine month periods ended on such dates, because the options' exercise price was greater than the average market price of the common shares during the period. 12 EVEREST REINSURANCE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (DOLLARS IN THOUSANDS) 4. OTHER COMPREHENSIVE INCOME The Company's other comprehensive income / (loss) is comprised as follows:
Three Months Ended Nine Months Ended September 30, September 30, 1999 1998 1999 1998 ----------------------------------------------- Net unrealized appreciation (depreciation) of investments, net of deferred income taxes ($ 57,306) $ 29,355 ($ 159,718) $ 44,089 Currency translation adjustments, net of deferred income taxes (8) (2,261) 3,883 (3,588) ----------------------------------------------- Other comprehensive income/ (loss), net of deferred income taxes ($ 57,314) $ 27,094 ($ 155,835) $ 40,501 ===============================================
5. CREDIT LINE In June 1999, the Company renewed its 364 day revolving line of credit with First Union National Bank. All of the terms and conditions of the original credit facility remain in full force and effect, except that the maturity date was extended to June 10, 2000 and the statutory surplus maintenance requirement and pricing terms were amended. Outstanding borrowings under the Company's revolving credit facility were $35,000 as of September 30, 1999, reflecting short-term borrowings for general corporate liquidity purposes. Interest expense incurred in connection with these borrowings was $472 and $755 for the three and nine months ending September 30, 1999, respectively. 6. FUTURE APPLICATION OF ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statements 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. In June 1999, SFAS No. 137 was issued, which extended the effective date of SFAS No. 133 to all fiscal quarters and fiscal years beginning after June 15, 2000. Management believes that implementation of SFAS No. 133 and No. 137 will not have a material impact on the financial position of the Company. 13 EVEREST REINSURANCE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (DOLLARS IN THOUSANDS) 7. RECENT DEVELOPMENTS Everest Reinsurance Group, Ltd. ("Group") was incorporated on August 26, 1999 as a holding company under the laws of Bermuda. On September 14, 1999, Group was capitalized as a wholly owned subsidiary of Everest Reinsurance Holdings, Inc by the issuance of $12 in common stock and a contribution of $38 as additional capital. On September 16, 1999, the board of directors of Everest Reinsurance Holdings, Inc. unanimously approved a proposed corporate restructuring pursuant to which Group will become the parent holding company of Everest Reinsurance Holdings, Inc. On September 17, 1999 Group filed with the SEC a Form S-4, Registration Statement under the Securities Act of 1933 which describes the proposed restructure of Everest Reinsurance Holdings, Inc. On September 17, 1999, Everest Reinsurance Holdings, Inc. filed with the Securities and Exchange Commission ("SEC") a Form S-3, Registration Statement under the Securities Act of 1933 for the purpose of issuing various securities in the future in an amount not to exceed $450,000. In connection with the restructuring, Group has organized a Delaware subsidiary, Everest Re Merger Corporation ("Everest Merger"). Everest Merger will be merged into Everest Reinsurance Holdings, Inc., with Everest Reinsurance Holdings, Inc. as the surviving corporation. Upon completion of the merger, Everest Reinsurance Holdings, Inc. will become a subsidiary of Group and each outstanding share of common stock of the Company will be automatically converted into and become one fully paid and nonassessable common share of Group. The merger must be approved by the stockholders of the Company at a special shareholder meeting to be held in the future. The board of directors and shareholder of Group must approve a resolution to increase the number of authorized shares prior to the merger. Upon completion of the reorganization, Group will carry on the holding company functions currently conducted by the Company. Group also intends to form and capitalize Everest Reinsurance (Bermuda) Ltd., which will be a wholly-owned subsidiary of Group, the purpose of which will be to expand Group's underwriting operations into the Bermuda market place. Group further intends to form and capitalize Everest Global Services Inc., which will be a wholly owned subsidiary of Group, the purpose of which will be to provide administrative services to Group and its other subsidiaries. 8. SUBSEQUENT EVENT In the fourth quarter of 1999, the Company and First Union National Bank amended the Credit Agreement. This amendment extended the existing $50,000 revolving line of credit to $75,000. In addition, the Company has entered into discussions regarding a syndicated credit facility to further extend its borrowing capacity. 14 EVEREST REINSURANCE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (DOLLARS IN THOUSANDS) 9. 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 its outside directors. These transactions are immaterial to the Company's financial condition, results of operations and cash flows. 15 PART I - ITEM 2 EVEREST REINSURANCE HOLDINGS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998 PREMIUMS. Gross premiums written increased 10.0% to $299.5 million in the three months ended September 30, 1999 from $272.4 million in the three months ended September 30, 1998 as the Company maintained a cautious approach to extremely competitive market conditions. Factors contributing to this increase include a 49.4% increase (to $48.1 million) in U.S. direct treaty reinsurance and insurance operations, mainly attributable to a single large accident and health reinsurance treaty, the impact of which offset declines elsewhere in these operations, a 28.1 % increase (to $122.2 million) in U.S. broker treaty operations, attributable to growth in accident and health, professional liability and worker's compensation business, and a 7.9% increase (to $35.5 million) in marine, aviation and surety premiums. These gains were partially offset by a decrease of 17.7% (to $75.2 million) in international premiums and a 9.4% decrease (to $18.5 million) in U.S. facultative premiums. The declines in our international and facultative operations reflect the Company's response to competitive conditions in these markets. Ceded premiums decreased to $9.2 million in the three months ended September 30, 1999 from $14.4 million in the three months ended September 30, 1998. This decrease was principally attributable to changes to the Company's catastrophe retrocessional protections, the impact of which was partially offset by increases in contract specific retrocessions on insurance operations. The Company's corporate retrocession program was restructured at January 1, 1999 and resulted in the cancellation of a multi year property catastrophe treaty at December 31, 1998 and the acquisition of an accident year aggregate excess of loss treaty which management believes provides appropriate coverage on more effective terms. Net premiums written increased by 12.5% to $290.4 million in the three months ended September 30, 1999 from $258.0 million in the three months ended September 30, 1998 consistent with the increase in gross premiums written. REVENUES. Premiums earned increased by 7.6% to $285.5 million in the three months ended September 30, 1999 from $265.2 million in the three months ended September 30, 1998, generally consistent with the increase in net premiums written and changes in the Company's mix of business during the preceding twelve months. Net investment income increased 2.6% to $62.2 million in the three months ended September 30, 1999 from $60.7 million in the three months ended September 30, 1998, principally reflecting the effect of investing the $124.4 million of cash flow from operations in the twelve months ended September 30, 1999. The annualized pre-tax yield on average cash and invested assets 16 increased to 6.1% in the three months ended September 30, 1999, from the 5.9% yield in the three months ended September 30, 1998, reflecting implementation of the Company's investment strategies in the context of the generally higher interest rate environment. Net realized capital losses were $7.7 million in the three months ended September 30, 1999, reflecting realized capital losses on the Company's investments of $16.9 million which were partially offset by $9.2 million of realized capital gains, compared to net realized capital gains of $1.0 million in the three months ended September 30, 1998. The net realized capital gains in the three months ended September 30, 1998 reflected realized capital gains of $1.6 million which were offset by $0.6 million of realized capital losses. The realized capital losses in the three months ended September 30, 1999 arose mainly from activity in the Company's taxable and tax-exempt domestic fixed maturities portfolios, whereas the realized capital losses in the three months ended September 30, 1998 were attributable to activity in the Company's domestic equity portfolio. The realized capital gains in the three months ended September 30, 1999 and 1998 mainly arose from activity in the Company's domestic equity portfolio. The net realized capital losses in the three months ended September 30, 1999 generally reflect a specific program, which has been completed, to realize capital losses aimed at recovering taxes on realized capital gains paid in prior years, with corresponding reinvestment of proceeds at current reinvestment rates, and enhancing the Company's long-term after-tax portfolio yield. Other income for the three months ended September 30, 1999 was $1.4 million compared to $0.5 million for the three months ended September 30, 1998. Other income for the respective periods was principally attributable to the impact of fluctuations in foreign currency exchange rates. In addition, other income for the three months ended September 30, 1999 was partially offset by $0.5 million in interest expense relating to the Company's revolving credit agreement. EXPENSES. Incurred loss and loss adjustment expenses ("LAE") increased by 7.0% to $203.2 million in the three months ended September 30, 1999 from $189.9 million in the three months ended September 30, 1998. Catastrophe losses in the three months ended September 30, 1999 were $7.6 million compared with $10.1 million in the three months ended September 30, 1998. The catastrophe losses in the three months ended September 30, 1999 resulted primarily from losses associated with Hurricane Floyd and the Turkish Earthquakes. Catastrophe losses include the pre-tax impact of both current period events and favorable and unfavorable loss development on prior period events and are net of reinsurance. The Company's loss and LAE ratio decreased by 0.4 percentage points to 71.2% in the three months ended September 30, 1999 from 71.6% in the three months ended September 30, 1998. The decrease principally resulted from changes in the Company's mix of business and a decrease in catastrophe losses in the three months ended September 30, 1999. Net incurred losses and LAE for the three months ended September 30, 1999 reflected ceded losses and LAE of $8.0 million with $0.0 million ceded under the Stop Loss Agreement compared to ceded losses and LAE of $4.4 million in the three months ended September 30, 1998, including $12.5 million of recoveries principally on corporate catastrophe reinsurance protections offset by an $8.1 million reduction in losses ceded under the Stop Loss Agreement. Underwriting expenses increased by 7.6% to $90.2 million in the three months ended September 30, 1999 from $83.8 million in the three months ended September 30, 1998. Commission, brokerage, taxes and fees increased by $6.3 million, principally relating to the increase in premiums written and changes in the business mix. Other underwriting expenses increased by 17 $0.1 million. The Company's expense ratio was 31.6% in the three months ended September 30, 1999 and September 30, 1998. The Company's combined ratio decreased to 102.8% in the three months ended September 30, 1999 compared to 103.2% in the three months ended September 30, 1998. INCOME TAXES. The Company recognized income tax expense of $8.8 million in the three months ended September 30, 1999 compared to $11.5 million in the three months ended September 30, 1998. The principal cause of this change was the increase in net realized capital losses. NET INCOME. Net income was $39.2 million in the three months ended September 30, 1999 compared to $42.1 million in the three months ended September 30, 1998. This generally reflected improved underwriting results and an increase in net investment income, offset by increased realized capital losses, the result of which lowered the overall taxes for the period. RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998 PREMIUMS. Gross premiums written increased 5.5% to $836.6 million in the nine months ended September 30, 1999 from $792.9 million in the nine months ended September 30, 1998 as the Company maintained a cautious approach to extremely competitive market conditions. Factors contributing to this increase included a 14.0% increase (to $312.5 million) in U.S. broker treaty operations, attributable to growth in accident and health, professional liability and worker's compensation business, a 9.5% increase (to $145.6 million) in U.S. direct treaty reinsurance and insurance operations, mainly attributable to a single large accident and health reinsurance treaty, the impact of which offset declines elsewhere in these operations, and a 4.3% increase (to $96.4 million) in marine, aviation and surety operations. These gains were partially offset by a 4.9% decrease (to $53.0 million) in U.S. facultative operations and a 3.6% decrease (to $229.1 million) in international premiums. The declines in our facultative and international operations reflect the Company's response to competitive conditions in these markets. Ceded premiums decreased to $32.3 million in the nine months ended September 30, 1999 from $36.6 million in the nine months ended September 30, 1998. This decrease was principally attributable to changes to the Company's catastrophe retrocessional protections, the impact of which was partially offset by increases in contract specific retrocessions on insurance operations. The Company's corporate retrocession program was restructured at January 1, 1999 and resulted in the cancellation of a multi year property catastrophe treaty at December 31, 1998 and the acquisition of an accident year aggregate excess of loss treaty which management believes provides appropriate coverage on more effective terms. Net premiums written increased by 6.3% to $804.3 million in the nine months ended September 30, 1999 from $756.3 million in the nine months ended September 30, 1998, reflecting the growth in gross premiums written and the decrease in ceded premiums. 18 REVENUES. Premiums earned increased by 3.1% to $795.0 million in the nine months ended September 30, 1999 from $771.3 million in the nine months ended September 30, 1998, generally consistent with the growth in net premiums written and changes in the Company's mix of business during the preceding twelve months. Net investment income increased 3.1% to $188.9 million in the nine months ended September 30, 1999 from $183.2 million in the nine months ended September 30, 1998, reflecting the effect of investing the $124.4 million of cash flow from operations in the twelve months ended September 30, 1999. The annualized pre-tax yield on average cash and invested assets increased to 6.2% in the nine months ended September 30, 1999 from the 6.1% yield in the nine months ended September 30, 1998, reflecting implementation of the Company's investment strategies in the context of the generally higher interest rate environment. Net realized capital losses were $17.1 million in the nine months ended September 30, 1999, reflecting realized capital losses on the Company's investments of $28.2 million which were offset by $11.1 million of realized capital gains, compared to net realized capital gains of $3.5 million in the nine months ended September 30, 1998. The net realized capital gains in the nine months ended September 30, 1998 reflected realized capital gains of $8.5 million which were offset by $5.0 million of realized capital losses. The realized capital losses in the nine months ended September 30, 1999 arose mainly from activity in the Company's taxable and tax-exempt domestic fixed maturities portfolios, whereas the realized capital losses in the nine months ended September 30, 1998 were attributable to activity in the Company's tax-exempt domestic fixed maturities portfolio. The realized capital gains in the nine months ended September 30, 1999 mainly arose from activity in the Company's domestic equity portfolio, whereas the realized capital gains in the nine months ended September 30, 1998 were attributable to a combination of the activity in the Company's taxable domestic fixed maturities portfolio and domestic equity portfolio. The net realized capital losses in the nine months ended September 30, 1999 generally reflect a specific program, which has been completed, to realize capital losses aimed at recovering taxes on realized capital gains paid in prior years, with corresponding reinvestment of proceeds at current reinvestment rates, and enhancing the Company's long-term after-tax portfolio yield. Other loss for the nine months ended September 30, 1999 was $0.5 million compared to other income of $2.7 million for the nine months ended September 30, 1998. Other loss and income for the respective periods were principally attributable to the impact of fluctuations in foreign currency exchange rates. In addition, other loss for the nine months ended September 30, 1999 included $0.8 million in interest expense relating to the Company's revolving credit agreement. EXPENSES. Incurred loss and LAE increased by 0.9% to $568.9 million in the nine months ended September 30, 1999 from $564.0 million in the nine months ended September 30, 1998. Catastrophe losses in the nine months ended September 30, 1999 were $25.3 million compared with $17.1 million in the nine months ended September 30, 1998. The catastrophe losses in the nine months ended September 30, 1999 resulted primarily from $13.0 million for the Rouge Steel Plant Fire, together with lesser losses related to Hurricane Floyd, the Turkish Earthquakes and the Oklahoma Tornadoes. Catastrophe losses include the pre-tax impact of both current period events and favorable and unfavorable development on prior period events and are net of reinsurance. The Company's loss and LAE ratio decreased by 1.5 percentage points to 71.6% for the nine months ended September 30, 1999 from 73.1% in the nine months ended September 30, 1998. The decrease principally results from changes in the Company's mix of business, 19 including the absence in the nine months ended September 30, 1999 of the impact of certain reinsurance treaties with higher expected losses and lower ceding commissions which were reflected in the nine months ended September 30, 1998, partially offset by an increase in catastrophe losses in the nine months ended September 30, 1999. Net incurred losses and LAE for the nine months ended September 30, 1999 reflected ceded losses and LAE of $27.1 million, including $0.0 million ceded under the Stop Loss Agreement, compared to ceded losses and LAE of $39.6 million in the nine months ended September 30, 1998, including $11.9 million ceded under the Stop Loss Agreement. Underwriting expenses increased by 7.1% to $250.5 million in the nine months ended September 30, 1999 from $234.0 million in the nine months ended September 30, 1998. Commission and brokerage expenses increased by $16.7 million, principally reflecting the increase in premiums written together with changes in the Company's business mix. Other underwriting expenses decreased by $0.1 million. The Company's expense ratio was 31.5% in the nine months ended September 30, 1999 compared to 30.3% in the nine months ended September 30, 1998. The Company's combined ratio decreased to 103.1% in the nine months ended September 30, 1999 from 103.5% in the nine months ended September 30, 1998. INCOME TAXES. The Company recognized income tax expense of $28.4 million in the nine months ended September 30, 1999 compared to $37.2 million in the nine months ended September 30, 1998. The principal cause of this change was the increase in net realized capital losses. NET INCOME. Net income was $118.5 million in the nine months ended September 30, 1999 compared to $125.5 million in the nine months ended September 30, 1998. This generally reflected improved underwriting results and an increase in net investment income, offset by increased realized capital losses, the result of which lowered the overall taxes for the period. FINANCIAL CONDITION INVESTED ASSETS. Aggregate invested assets, including cash and short-term investments, were $4,160.7 million at September 30, 1999 and $4,325.8 million at December 31, 1998. The decrease in invested assets between December 31, 1998 and September 30, 1999 resulted primarily from a decrease of $228.2 million in net unrealized appreciation on fixed maturity investments, repurchases of the Company's stock totaling $55.8 million and a $17.4 million decrease in net unrealized appreciation on the equity security portfolio partially offset by cash flow from operations of $129.0 million generated during the nine months ended September 30, 1999. 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 $129.0 million and $187.9 million in the nine months ended September 30, 1999 and 1998, respectively. Recoveries under the Company's Stop Loss Agreement with Gibraltar contributed $79.0 million and $40.0 million of such net cash flows in the nine months ended September 30, 1999 and 1998, respectively. Through September 30, 1999, cessions under the 20 Stop Loss Agreement have aggregated $339.2 million with available remaining limits net of coinsurance of $35.8 million. Excluding the Stop Loss recoveries, management believes the decrease in net cash flows from operating activities reflects changes in the Company's mix of business and variability in the payout of loss reserves. Proceeds and applications from sales and acquisitions of investment assets were $858.1 million and $954.9 million, respectively, in the nine months ended September 30, 1999, compared to $483.0 million and $684.7 million, respectively, in the nine months ended September 30, 1998 reflecting normal portfolio management activity aimed at enhancing the Company's portfolio yield. The Company's current investment strategy seeks to maximize after-tax income through a high quality, diversified, duration sensitive, taxable bond and tax-exempt municipal bond portfolio, while maintaining an adequate level of liquidity. In June 1999, the Company renewed its 364 day revolving line of credit with First Union National Bank. In the fourth quarter of 1999, the Company secured an amendment to the credit facility which raised it's limit to $75.0 million from $50.0 million and entered into discussions regarding a syndicated facility which would further increase this limit. The amendment and syndicated facility have been sought to enhance overall corporate liquidity. The terms of the revolving line of credit require that Everest Reinsurance Company maintain statutory surplus of not less than $800.0 million and that the Company maintain a capitalization ratio not greater than 0.35 to 1. Everest Reinsurance Company's statutory surplus was $1,128.1 million for the period ending September 30, 1999. The Company's capitalization ratio was 0.02 for the period ending September 30, 1999. Outstanding borrowings under the Company's revolving credit facility were $35.0 million as of September 30, 1999, reflecting short-term borrowings for general corporate liquidity purposes, including share repurchases and dividends. Interest expense incurred in connection with these borrowings was $0.8 million for the period ending September 30, 1999. STOCKHOLDERS' EQUITY. The Company's stockholders' equity decreased to $1,377.8 million as of September 30, 1999, from $1,479.2 million as of December 31, 1998, principally reflecting a decrease of $159.7 million in unrealized appreciation on investments, net of deferred taxes, and $55.8 million in treasury stock acquired in the nine months ended September 30, 1999, offset by net income of $118.5 million for the nine months ended September 30, 1999. Dividends of $8.8 million were declared and paid by the Company in the nine months ended September 30, 1999. During the nine months ended September 30, 1999, the Company repurchased 1.854 million shares of its common stock at an average price of $30.07 per share, raising the total repurchases under the Company's authorized repurchase program to 2.371 million shares at an average price of $30.86 per share with a total repurchase expenditure to date of $73.2 million. GIBRALTAR CESSION. During the first quarter of 1999, Gibraltar disputed $63.0 million ceded under the Stop Loss Agreement in the fourth quarter of 1998 and, pursuant to the terms of the Stop Loss Agreement, Gibraltar has placed the disputed amount in a trust. Gibraltar has also disputed the Company's level of reserves previously ceded to and paid by Gibraltar under the Stop Loss Agreement and claimed a refund of $91.7 million. These disputes are based on Gibraltar's belief that there are redundancies in that portion of the Company's incurred but not reported ("IBNR") reserves which are subject to the Stop Loss Agreement. Pursuant to the terms of the Stop Loss Agreement, the Company and Gibraltar have appointed an independent examiner to review the Company's reserves underlying the disputed amounts to determine the appropriate amount of cessions to Gibraltar, and the Company has placed the $91.7 million in a 21 trust. In May 1999, the Company and Gibraltar entered into a standstill agreement, temporarily halting the independent examination, while the two companies held further discussions which might have led to the resolution of the dispute. In September 1999, the two companies terminated their standstill agreement and the independent examination process continues. If the examination process does not resolve the disputes to the satisfaction of the parties, the Stop Loss Agreement provides for resolution through arbitration. In the event the cessions to Gibraltar were determined to be excessive, the Company would reduce the cession to Gibraltar by such excess, refund previous payments made by Gibraltar, if applicable, and the unused portion of the limits of the Stop Loss Agreement would be replenished. Also, the Company would consider the independent examiners' finding in its ongoing determination of appropriate reserve levels which would likely lead to a corresponding reduction in the Company's gross reserves, and net reserves to the extent of the coinsurance under the Stop Loss Agreement. In the event the cessions are not determined to be excessive, Gibraltar would be obligated to pay the disputed amount. Accordingly, if the disputes are resolved in Gibraltar's favor, any adverse effect on the Company's financial condition and results of operations would be immaterial and would likely be limited to a reduction in cash flows from operations with a corresponding impact on future investment income. In addition, Gibraltar has disputed $39.7 million ceded under a 1986 quota share reinsurance agreement ("Direct Excess Retrocession") through which Gibraltar assumed 100% of the liabilities related to Everest Reinsurance Company's direct excess insurance written in and prior to 1985. This dispute is based on Gibraltar's disagreement with the level of IBNR reserves for asbestos exposures which the Company recorded in 1998. Gibraltar disputes the Company's right to establish and its obligation to fund such reserves, however it does not dispute its responsibility to pay the ultimate losses in accordance with the terms of the Direct Excess Retrocession. The Company and Gibraltar are arbitrating this dispute in accordance with the terms of the Direct Excess Retrocession. Management does not expect that this dispute will have a material adverse effect on the Company's future financial condition, results of operations or cash flows. MARKET SENSITIVE INSTRUMENTS. The Company's risks associated with market sensitive instruments have not changed materially since the period ended December 31, 1998. YEAR 2000 ISSUES. Many computers, software programs and microprocessors embedded in certain equipment (collectively, "systems") were designed to accommodate only two-digit date fields to represent a given year (e.g., "98" represents 1998). It is possible that such systems, if not modified or replaced, will not be able to accurately process data containing information relating to dates before, during or after the year 2000. It is also possible that such systems could fail entirely, although in many instances the consequences of a system not being "year 2000 compliant" are unknown. This "year 2000 issue" has the potential to affect the Company through (i) the disruption of the processing of business and general corporate transactions, both at the Company and between the Company and other business entities with which it interacts, and (ii) claims which may be brought asserting that costs associated with the issue may be covered under insurance or reinsurance contracts in which the Company participates. READINESS. The Company has been actively engaged in a project to mitigate the potential effects of the year 2000 issue. For each segment of its internal computer processing environment (mainframe, midrange and PC equipment), the Company has a multi-phase plan that involves (a) 22 the identification and assessment of year 2000 compliance, (b) the design and development of remedies (including the replacement of non-compliant systems if needed), (c) testing of year 2000 readiness and (d) the implementation of fully integrated year 2000-compliant processing. The Company has substantially completed all year 2000 preparations for its technology infrastructure, including mainframe, mid-range and PC operating systems, networks, voice and data telecommunications, buildings and facilities, and vendor software products that are critical to the business. The Company has also developed its year 2000 contingency plans. The Company continues to work to mitigate exposures with respect to less critical software applications and monitor and test its technology environment for compliance. The Company has continued to actively survey its significant business partners (e.g., ceding companies) and service providers (e.g., banks) concerning their compliance status. The information received to date has not identified any significant barriers to year 2000 compliance. COSTS. The Company's historical and expected future costs to make its systems year 2000 compliant are not material. The total expected out-of-pocket costs of the year 2000 effort are approximately $0.6 million, of which approximately $0.5 million had been incurred as of September 30, 1999. These figures include only expenses specifically related to Year 2000 compliance and do not include the cost of hardware or software acquisitions made in the normal course of business. RISKS. The Company does not rely on computer-dependent transactions to the same extent as many other businesses. However, in the event that the Company's internal processing environment could not be made year 2000-compliant, or in the event that significant business partners or service providers or other business entities experienced serious year 2000 problems, the Company could experience disruption in its business. This disruption could conceivably take several forms: (a) having to compile information and process transactions manually, (b) if compliance problems persisted, impairing the Company's ability to receive premiums from and make claim payments to its ceding companies, (c) impairing the Company's ability to obtain information about its investments or (d) impairing the value of the Company's fixed maturity and equity investments, if the entities underlying those investments themselves have substantial year 2000 costs, liabilities or disruptions. Any or all of the types of possible disruptions in such a "worst case scenario" could materially increase the cost of doing business, could impair the Company's ability to make required regulatory filings and could materially affect the Company's financial condition, results of operations or liquidity. However, based upon current information, the Company does not expect such scenarios to occur and does not expect material disruption to its business. CONTINGENCY PLANS. The Company has developed a contingency plan which addresses how each business unit in its corporate office would continue to perform its mission-critical functions in the event of a systems failure related to Year 2000. The plan is currently being extended to its branch offices and will be reevaluated and updated as needed. POTENTIAL CLAIMS EXPOSURE. Individuals or entities which experience business disruption, increased costs or other problems associated with the year 2000 issue may assert claims, which could be substantial, against their own insurance carrier to recover such costs or against other entities for damages, which carriers or entities may in turn assert that such potential damages are covered by insurance. It is not yet possible to determine the extent to which any such claims will be made against insurers, whether such claims will be held to have merit or whether any such 23 claims may be made against insurance or reinsurance contracts in which the Company participates. With respect to prospective business, the Company works with brokers and ceding companies to attempt to determine whether prospective or existing business written carries potential year 2000 exposures. If the ceding company, in the Company's opinion, is adequately underwriting the exposures, the Company may not exclude such exposures from its contracts. If the ceding company is not adequately addressing the issue, the Company will attempt to exclude those exposures from its contracts or non-renew those contracts. There can be no assurance, however, that such business will be completely free of potential exposure to claims related to the year 2000 issue. EURO CONVERSION. On January 1, 1999, eleven of the fifteen member countries of the European Union established fixed conversion rates between their existing sovereign currencies and the Euro. Beginning January 1, 2002, new Euro-denominated bills and coins will be issued and by July 1, 2002, the participating countries' legacy currencies will no longer be legal tender for any transactions. The Company has established the necessary procedures to accept the Euro as a new currency in which it does business. Systems that support the Company's United Kingdom and Belgian operations require modifications to enable conversion of legacy currency historical data. These modifications are under discussion with the system vendor. The Company does not expect the Euro conversion to have a material impact on its business because of the nature of its business and investments. 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, 1998 set forth cautionary statements identifying important factors, among others, that in some cases have affected and 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, plans for future operations, common stockholders' equity (including book value per share), 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. Undue reliance on any forward-looking statements should be avoided. 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. 24 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, 1998. 25 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 2. CHANGES IN SECURITIES c) Information required by Item 701 of Regulation S-K: (a) On July 1, 1999, 1,200 common shares of the Company (previously held Treasury shares) were distributed. (b) The securities were distributed to the Company's four non- employee directors. (c) The securities were issued as compensation to the non-employee directors for services rendered to the Company during the second quarter of 1999. (d) Exemption from registration was claimed pursuant to Section 4(2) of the Securities Act of 1933. There was no public offering and the participants in the transactions were the Company and its non-employee directors. (e) Not applicable. Part II - ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) EXHIBIT INDEX: Exhibit No. Description Location ----------- ----------- -------- 2.1 Agreement and Plan of Merger Incorporated herein among Everest Reinsurance by reference to Holdings, Inc., Everest Exhibit 2.1 to the Reinsurance Group, Ltd. and Registration Everest Re Merger Corporation Statement on Form dated as of September 17, 1999 S-4 (No. 333-87361) 26 4.2 Amendment dated as of Filed herewith September 16, 1999 to Rights Agreement, dated as of September 24, 1998 between Everest Reinsurance Holdings, Inc. and First Chicago Trust Company of New York *10.28 Amendment to Amended and Filed herewith and Restated Employment Agreement between Everest Reinsurance Company, Everest Reinsurance Holdings, Inc., and Joseph V. Taranto dated September 21, 1999 10.29 Second Amendment to Credit Filed herewith Agreement, Consent and Waiver, Dated November 9, 1999, between Everest Reinsurance Holdings, Inc. and First Union National Bank 11.1 Statement regarding computation Filed herewith of per-share earnings 27 Financial Data Schedule Filed herewith - -------------- * Management contract or compensatory plan or arrangement. b) There were no reports on Form 8-K filed during the three-month period ending September 30, 1999. Omitted from this Part II are items which are inapplicable or to which the answer is negative for the period covered 27 EVEREST REINSURANCE HOLDINGS, INC. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Everest Reinsurance Holdings, Inc. (Registrant) - By: /S/ Stephen L. Limauro ----------------------------- Stephen L. Limauro Duly Authorized Officer, Senior Vice President and Comptroller Dated: November 9, 1999 EX-4.2 2 AMENDMENT TO RIGHTS AGREEMENT Exhibit 4.2 AMENDMENT TO RIGHTS AGREEMENT ---------------- This AMENDMENT TO RIGHTS AGREEMENT (this "AMENDMENT"), dated as of September 16, 1999, is entered into by and between EVEREST REINSURANCE HOLDINGS, INC., a Delaware corporation (the "COMPANY"), and FIRST CHICAGO TRUST COMPANY OF NEW YORK (the "RIGHTS AGENT"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Company and the Rights Agent are parties to a Rights Agreement dated as of September 24, 1998 (the "RIGHTS AGREEMENT"); and WHEREAS, the parties hereto desire to amend the Rights Agreement in certain respects as provided for herein; and WHEREAS, Board of Directors of the Company has authorized the execution and delivery of this Amendment to the Rights Agreement in connection with the proposed merger between the Company and Everest Re Merger Corporation ("EVEREST MERGER"), a Delaware corporation and wholly owned subsidiary of Everest Reinsurance Group, Ltd., a Bermuda company ("EVEREST GROUP"); and WHEREAS, this Amendment is being executed prior to the execution and delivery of the Agreement and Plan of Merger among the Company, Everest Group and Everest Merger. NOW, THEREFORE, in consideration of the foregoing, and for other good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. DEFINED TERMS. Terms used in this Amendment which are defined in the Rights Agreement shall have the meaning assigned to such terms in the Rights Agreement unless otherwise defined herein. SECTION 2. AMENDMENT TO RIGHTS AGREEMENT. The definition of "Beneficial Owner" in Section 1(c) of the Rights Agreement is hereby amended to add the following paragraph at the end thereof: "Notwithstanding anything in this Agreement to the contrary, for purposes of this Agreement, neither Everest Reinsurance Group, Ltd., a Bermuda company ("Everest Group"), nor any of its Affiliates or Associates shall be deemed a "Beneficial Owner" of, or to "beneficially own," any shares of any class of capital stock of the Company as a result of the execution, delivery or performance of the Agreement and Plan of Merger -1- dated as of September 17, 1999 among the Company, Everest Group and Everest Re Merger Corporation, a Delaware corporation and wholly owned subsidiary of Everest Group, as amended from time to time, or the consummation of any of the transactions contemplated thereunder." SECTION 3. MISCELLANEOUS. 3.1 GOVERNING LAW; SEVERABILITY. THIS AMENDMENT IS TO BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, APPLICABLE TO CONTRACTS MADE AND TO BE ENTIRELY PERFORMED IN SAID STATE. If any provision of this Amendment 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 and enforceable provision as similar as possible to the provision at issue. 3.2 HEADINGS. The headings preceding the text of Sections and subsections included in this Amendment are for convenience only and shall not be deemed part of this Amendment or be given any effect in interpreting this Amendment. 3.3 COUNTERPARTS. This Amendment may be executed in one or more counterparts, all of which shall together constitute one and the same instrument. 3.4 REFERENCES TO RIGHTS AGREEMENT. Except as herein amended, the Rights Agreement shall remain in full force and effect and is hereby ratified in all respects. On and after the effectiveness of the amendments to the Rights Agreement accomplished hereby, (i) each reference in the Rights Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import shall be a reference to the Rights Agreement as amended hereby, (ii) and each reference to the Rights Agreement in any agreement, document or other instrument executed and delivered prior hereto shall be a reference to the Rights Agreement as amended by this Amendment. * * * * * * -2- IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the date set forth above. EVEREST REINSURANCE HOLDINGS, INC. By: ----------------------------- Name: Janet J. Burak Title: Senior Vice President FIRST CHICAGO TRUST COMPANY OF NEW YORK By: ----------------------------- Name: Michael S. Duncan Title: Director, Corporate Actions -3- EX-10.28 3 AMENDED AND RESTATED EMPLOYMENT AGREEMENT Exhibit 10.28 AMENDMENT TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT BETWEEN EVEREST REINSURANCE COMPANY (FORMERLY KNOWN AS PRUDENTIAL REINSURANCE COMPANY), EVEREST REINSURANCE HOLDINGS, INC. (FORMERLY KNOWN AS PRUDENTIAL REINSURANCE HOLDINGS, INC.) AND JOSEPH V. TARANTO WHEREAS, Everest Reinsurance Company ("Company"), Everest Reinsurance Holdings, Inc. ("Holdings") and Joseph V. Taranto ("Taranto") entered into an Amended and Restated Employment Agreement effective as of October 11, 1994 ("Amended Agreement") pursuant to which Taranto is employed by the Company; and WHEREAS, Taranto's term of employment under the Amended Agreement commenced as of October 17, 1994 and continues through December 31, 1999 unless sooner terminated in accordance with the Amended Agreement; and WHEREAS, pursuant to Paragraph 5.1 of the Amended Agreement, Taranto is eligible to participate in the Annual Incentive Bonus Plan ("Plan") during the course of his employment for such period as the Plan continues in effect or, if the plan is terminated or adversely amended, to have his annual cash bonus determined in accordance with the provisions of the Plan as last in effect prior to such termination or material adverse amendment; and WHEREAS, at the May 20, 1999 annual shareholders' meeting of Holdings, the shareholders approved the Executive Performance Annual Incentive Plan adopted by the Holdings' Board of Directors on December 10, 1998 as an incentive for executives such as Taranto who are in a position to contribute materially to the success of Holdings and its subsidiaries; and WHEREAS, the Company, Holdings and Taranto desire to amend Paragraph 5.1 of the Amended Agreement to hereafter provide that the cash bonus payable under Paragraph 5 shall be determined in accordance with the Executive Performance Annual Incentive Plan instead of being determined under the provisions of the Annual Incentive Bonus Plan for the bonus paid in 2000 in respect of services provided by Taranto in 1999. NOW, THEREFORE, for one dollar and other good and valuable consideration, the sufficiency of which is hereby acknowledged, the parties hereto agree as follows: Effective as of May 20, 1999, Paragraph 5.1 of the Amended and Restated Employment Agreement shall be amended in its entirety to read as follows: - 2 - "5.1 During the course of his employment under this Agreement in 1999, Taranto shall be eligible to participate in the Executive Performance Annual Incentive Plan of Holdings. In the event the Executive Performance Annual Incentive Plan is terminated or materially adversely amended, Taranto shall receive an annual cash bonus determined in accordance with the provisions of the Annual Incentive Plan of Holdings as in effect prior to May 20, 1999." IN WITNESS WHEREOF, the parties hereto have executed this Amendment to the Amended and Restated Employment Agreement as of the 21st day of September 1999. Everest Reinsurance Company ___________________________ By: ________________________ Joseph V. Taranto Janet J. Burak Senior Vice President Everest Reinsurance Holdings, Inc. By: _________________________ Janet J. Burak Senior Vice President EX-10.29 4 SECOND AMENDMENT TO CREDIT AGREEMENT Exhibit 10.29 SECOND AMENDMENT TO CREDIT AGREEMENT, CONSENT AND WAIVER THIS SECOND AMENDMENT TO CREDIT AGREEMENT, CONSENT AND WAIVER, dated as of the 9th day of November, 1999 (this "Amendment"), is made among EVEREST REINSURANCE HOLDINGS, INC., a Delaware corporation (the "Borrower"), and FIRST UNION NATIONAL BANK (the "Lender"). RECITALS A. The Borrower and the Lender are parties to a Credit Agreement, dated as of June 16, 1997, as amended by a First Amendment dated June 10, 1998 (as further amended, the "Credit Agreement"), providing for the availability of a revolving credit facility to the Borrower upon the terms and conditions set forth therein. Capitalized terms used herein without definition shall have the meanings given to them in the Credit Agreement. B. The Borrower has informed the Lender that it intends to undertake the following transactions as part of a corporate restructuring (the "Restructuring"), all as more particularly described in Form S-4 Registration Statement of Everest Reinsurance Group, Ltd., a Bermuda corporation ("Everest Group"), filed with the Securities and Exchange Commission on September 17, 1999: (i) the Borrower formed a new subsidiary, Everest Group, (ii) Everest Group formed a new subsidiary, Everest Re Merger Corporation, a Delaware company ("Everest Merger"), and (iii) Everest Merger will be merged with and into the Borrower with the Borrower as the surviving company and pursuant to which (A) each share of common stock of the Borrower shall be automatically converted into one share of common stock of Everest Group, and (B) each share of common stock of Everest Merger will be converted into one share of the Borrower. After the consummation of the Restructuring, Everest Group shall own 100% of the issued and outstanding stock of the Borrower. The Restructuring would result in an Event of Default pursuant to SECTION 8.1(L) of the Credit Agreement, and the Borrower has requested that the Lender consent to the Restructuring. The Lender has agreed to so consent upon the terms and conditions set forth herein. C. The Borrower has also informed the Lender that it has placed $91,700,000 in trust for the benefit of one of Everest Re's reinsurers, Gilbraltar Casualty Company, on account of a dispute between Everest Re and Gilbraltar (the "Gilbraltar Dispute"), all as more particularly described in the Forms 10-Q and 10-K filed by the Borrower before the date hereof, which has resulted in an Event of Default under SECTION 7.3 of the Credit Agreement (the "Lien Default"). The Borrower has requested that the Lender waive the Lien Default and the Lender has agreed to waive such Default upon the terms and conditions set forth herein. D. The Borrower has also requested that the Lender increase the Commitment to $75,000,000 until January 18, 2000. The Lender has agreed to effect such amendments upon the terms and conditions set forth herein. STATEMENT OF AGREEMENT NOW, THEREFORE, in consideration of the foregoing and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE I AMENDMENTS 1.1 DEFINITIONS. SECTION 1.1 of the Credit Agreement is amended by amending and restating in their entirety the definitions of "Commitment" and "Margin Percentage" as follows: "Commitment" shall mean (i) on or before January 18, 2000, $75,000,000, and (ii) thereafter, $50,000,000, subject to reduction as provided in SECTION 2.4. "Margin Percentage" shall mean, at any time, (a) if to be added to the LIBOR Rate pursuant to SECTION 2.6 for purposes of determining the Adjusted LIBOR Rate, (i) with respect to the first $50,000,000 of principal amount of LIBOR Loans outstanding, 0.40%, and (ii) with respect to the principal amount of LIBOR Loans outstanding in excess of $50,000,000, 0.725%, and (b) if to be used in calculating the facility fee payable pursuant to SECTION 2.7, (i) with respect to the first $50,000,000 of Commitments, 0.10%, and (ii) with respect to the Commitments in excess of $50,000,000, 0.15%. 1.2 NEW DEFINITIONS. SECTION 1.1 of the Credit Agreement is hereby amended by adding the following definition of Everest Group in appropriate alphabetical order: "Everest Group" shall mean Everest Reinsurance Group, Ltd., a Bermuda corporation. 1.3 LIENS. SECTION 7.3 of the Credit Agreement is hereby amended by (a) deleting the word "and" at the end of clause (ix) thereof, (b) deleting the "." at the end of clause (x) thereof and replacing it with "; and", and (c) inserting the following as a new clause (xi) thereof: "(xi) Liens with respect to $91,700,000 placed in trust for the benefit of Gilbraltar Casualty Company on account of a dispute between Everest Re and such Person. 1.4 CHANGE OF CONTROL. Upon the consummation of the Restructuring, SECTION 8.1(L) of the Credit Agreement shall be amended and restated in its entirety as follows: (l) Any of the following shall occur: (i) any Person or group of Persons acting in concert as a partnership or other group, 2 shall, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, have become, after the date hereof, the "beneficial owner" (within the meaning of such term under Rule 13d-3 under the Exchange Act) of securities of Everest Group representing 20% or more of the combined voting power of the then outstanding securities of Everest Group ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors; (ii) the Board of Directors of Everest Group shall cease to consist of a majority of the individuals who constituted the Board of Directors as of the date hereof or who shall have become a member thereof subsequent to the date hereof after having been nominated, or otherwise approved in writing, by at least a majority of individuals who constituted the Board of Directors of Everest Group, as applicable, as of the date hereof (or their replacements approved as herein required); (iii) the Borrower shall cease to own directly 100% of the issued and outstanding capital stock of Everest Re; or (iv) Everest Group shall cease to own directly 100% of the issued and outstanding capital stock of the Borrower. ARTICLE II CONSENT AND WAIVER The Lender, based upon the representations, warranties and covenants set forth herein, hereby consents to the Restructuring and waives the Lien Default. This consent and waiver is limited as specified and shall not constitute or be deemed to constitute an amendment, modification or waiver of any provision of the Credit Agreement or a waiver of any Default or Event of Default except as expressly set forth herein with respect to the Restructuring and the Lien Default. ARTICLE III REPRESENTATIONS AND WARRANTIES The Borrower hereby represents and warrants to the Lender as follows: 3.1 REPRESENTATIONS AND WARRANTIES. After giving effect to this Amendment, each of the representations and warranties of the Borrower contained in the Credit Agreement and in the other Credit Documents is true and correct on and as of the date hereof with the same effect as if made on and as of the date hereof (except to the extent any such representation or warranty is expressly stated to have been made as of a specific date, in which case such representation or warranty is true and correct as of such date). 3.2 NO DEFAULT. After giving effect to this Amendment, no Default or Event of Default has occurred and is continuing. 3 3.3 GILBRALTAR DISPUTE. The Borrower and its Subsidiaries are contesting the Gilbraltar Dispute in good faith by appropriate proceedings. ARTICLE IV MISCELLANEOUS 4.1 EFFECT OF AMENDMENT. From and after the effective date of the amendments to the Credit Agreement set forth herein, all references to the Credit Agreement set forth in any other Credit Document or other agreement or instrument shall, unless otherwise specifically provided, be references to the Credit Agreement as amended by this Amendment and as may be further amended, modified, restated or supplemented from time to time. This Amendment is limited as specified and shall not constitute or be deemed to constitute an amendment, modification or waiver of any provision of the Credit Agreement except as expressly set forth herein. Except as expressly amended hereby, the Credit Agreement shall remain in full force and effect in accordance with its terms. 4.2 GOVERNING LAW. This Amendment shall be governed by and construed and enforced in accordance with the laws of the State of New Jersey (without regard to the conflicts of law provisions thereof). 4.3 EXPENSES. The Borrower agrees to pay upon demand all reasonable out-of-pocket costs and expenses of the Lender (including, without limitation, the reasonable fees and expenses of counsel to the Lender) in connection with the preparation, negotiation, execution and delivery of this Amendment and the other Credit Documents delivered in connection herewith. 4.4 SEVERABILITY. To the extent any provision of this Amendment is prohibited by or invalid under the applicable law of any jurisdiction, such provision shall be ineffective only to the extent of such prohibition or invalidity and only in any such jurisdiction, without prohibiting or invalidating such provision in any other jurisdiction or the remaining provisions of this Amendment in any jurisdiction. 4.5 SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon, inure to the benefit of and be enforceable by the respective successors and assigns of the parties hereto. 4.6 CONSTRUCTION. The headings of the various sections and subsections of this Amendment have been inserted for convenience only and shall not in any way affect the meaning or construction of any of the provisions hereof. 4.7 COUNTERPARTS; EFFECTIVENESS. This Amendment may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which when so executed and delivered shall be an original, but all of which shall together constitute one and the same instrument. This Amendment shall become effective upon the execution and delivery of a counterpart hereof by each of the parties hereto. 4 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their duly authorized officers as of the date first above written. EVEREST REINSURANCE HOLDINGS, INC. ----------------------------------- By: Stephen L. Limauro Title: Senior Vice President & Comptroller FIRST UNION NATIONAL BANK ----------------------------------- By: Thomas L. Stitchberry Title: Senior Vice President 5 EX-11.1 5 COMPUTATION OF EARNINGS PER SHARE Exhibit 11.1 EVEREST REINSURANCE HOLDINGS, INC. COMPUTATION OF EARNINGS PER SHARE For The Three Months and Nine Months Ended September 30, 1999 and 1998 (Dollars in thousands)
Three Months Ended Nine Months Ended September 30, September 30, --------------------------- --------------------------- 1999 1998 1999 1998 --------------------------- --------------------------- Net Income (Numerator) $ 39,209 $ 42,126 $ 118,516 $ 125,471 ============ ============ ============ ============ Weighted average common and effect of dilutive shares used in the computation of net income per share: Average shares outstanding - basic (denominator) 48,617,621 50,464,704 49,028,737 50,475,261 Effect of dilutive shares: Options outstanding 178,395 280,717 206,457 302,857 Options exercised 297 2,388 105 985 Options cancelled - - 322 3,070 ------------ ------------ ------------ ------------ Average share outstanding - diluted (denominator) 48,796,313 50,747,809 49,235,621 50,782,173 Net Income per common share: Basic $ 0.81 $ 0.83 $ 2.42 $ 2.49 Diluted 0.80 0.83 2.41 2.47
EX-27 6 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 SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1,000 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 3,943,415 0 0 114,740 0 0 4,121,902 38,758 839,160 75,364 5,783,051 3,697,999 294,684 0 0 0 0 0 509 1,377,280 5,783,051 795,034 188,882 (17,139) (478) 568,920 (4,962) 255,419 146,922 28,406 118,516 0 0 0 118,516 2.42 2.41 0 0 0 0 0 0 0
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