-----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, IlAkc0VPYD9PnxBD1hMOcOiP4zDvEWp72Zsy9GJEP9Ryxsf9wPRrAwvzI8f0HSwJ oJ9qnDOg+t088GkUFH/zQA== 0000950130-96-002891.txt : 19960807 0000950130-96-002891.hdr.sgml : 19960807 ACCESSION NUMBER: 0000950130-96-002891 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960806 SROS: NYSE 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: 1934 Act SEC FILE NUMBER: 033-71652 FILM NUMBER: 96604238 BUSINESS ADDRESS: STREET 1: THREE GATEWAY CENTER CITY: NEWARK STATE: NJ ZIP: 07102 BUSINESS PHONE: 2018028000 MAIL ADDRESS: STREET 1: THREE GATEWAY CENTER CITY: NEWARK STATE: NJ ZIP: 07102 FORMER COMPANY: FORMER CONFORMED NAME: PRUDENTIAL REINSURANCE HOLDINGS INC DATE OF NAME CHANGE: 19931115 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended: Commission File Number: JUNE 30, 1996 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) 3 GATEWAY CENTER NEWARK, NEW JERSEY 07102 ------------------------------------------------------------------- (201) 802-8000 ------------------------------------------------------------------- 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 5, 1996 ----- ---------------------------- COMMON STOCK, $.01 PAR VALUE 50,486,638 EVEREST REINSURANCE HOLDINGS, INC. INDEX TO FORM 10-Q PART I FINANCIAL INFORMATION --------------------- PAGE ---- ITEM 1. FINANCIAL STATEMENTS -------------------- Consolidated balance sheets at June 30, 1996 (unaudited) and December 31, 1995 3 Consolidated statements of operations for the three months and six months ended June 30, 1996 and 1995 (unaudited) 4 Consolidated statements of stockholders' equity for the three months and six months ended June 30, 1996 and 1995 (unaudited) 5 Consolidated statements of cash flows for the three months and six months ended June 30, 1996 and 1995 (unaudited) 6 Notes to consolidated interim financial statements 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------ OF FINANCIAL CONDITION AND RESULTS OF ------------------------------------- OPERATIONS 10 ---------- PART II OTHER INFORMATION ----------------- ITEM 1. LEGAL PROCEEDINGS 14 ----------------- ITEM 2. CHANGES IN SECURITIES None --------------------- ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ------------------------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF ---------------------------------- SECURITY HOLDERS 14 ---------------- ITEM 5. OTHER INFORMATION None ----------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15 -------------------------------- PART I - ITEM 1 EVEREST REINSURANCE HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS ( Dollars in thousands, except par value per share )
June 30, December 31, ------------------------------- ASSETS: 1996 1995 -------------- -------------- (unaudited) Fixed maturities - held to maturity, at amortized cost (market value: 1996, $92,288; 1995, $100,043) $82,026 $87,903 Fixed maturities- available for sale, at market value (amortized cost: 1996, $2,870,049; 1995, $2,783,903 ) 2,885,762 2,886,070 Equity securities, at market value (cost: 1996, $108,506; 1995, $105,176) 132,275 131,192 Short-term investments 121,401 76,649 Other invested assets 8,467 5,566 Cash 55,416 50,912 -------------- -------------- Total investments and cash 3,285,347 3,238,292 Premiums receivable 299,637 295,805 Funds held by reinsureds 164,306 171,384 Reinsurance receivables 725,525 712,002 Deferred acquisition costs 79,435 80,019 Prepaid reinsurance premiums 6,077 2,334 Accrued investment income 46,786 48,423 Deferred tax asset 145,733 112,599 Other assets 10,710 17,504 -------------- -------------- TOTAL ASSETS $4,763,556 $4,678,362 ============= ============= LIABILITIES: Reserve for losses and loss adjustment expenses $3,056,620 $2,969,341 Unearned premium reserve 322,584 294,291 Funds held under reinsurance treaties 216,817 195,864 Losses in the course of payment 72,511 75,453 Contingent commissions 68,922 66,725 Other net payable to reinsurers 17,901 9,203 Current federal income taxes 8,213 20,843 Other liabilities 27,200 63,048 -------------- -------------- Total liabilities 3,790,768 3,694,768 -------------- -------------- STOCKHOLDERS' EQUITY: Preferred stock, par value: $0.01; 50 million shares authorized; no shares issued and outstanding - - Common stock, par value: $0.01; 200 million shares authorized; 50.8 million shares issued 508 508 Paid-in capital 389,132 387,349 Unearned compensation (513) (692) Net unrealized appreciation (depreciation) of investments 25,663 83,726 Cumulative foreign currency translation adjustment (8,779) (7,838) Retained earnings 573,993 520,541 Treasury stock, at cost; 0.3 million shares in 1996 (7,216) - -------------- -------------- Total stockholders' equity 972,788 983,594 -------------- -------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,763,556 $4,678,362 ============= ============= The accompanying notes are an integral part of the consolidated financial statements.
3 EVEREST REINSURANCE HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts)
Three Months Ended Six Months Ended June 30, June 30, ------------------------- ------------------------- 1996 1995 1996 1995 ------------ ------------ ------------ ------------ (unaudited) REVENUES: Premiums earned $218,806 $210,744 $429,075 $410,507 Net investment income 46,261 41,194 91,029 79,220 Other income/(loss) 619 (2,821) 243 (2,880) Net realized capital gain/(loss) 3,672 19,527 7,484 22,756 ------------ ------------ ------------ ------------ 269,358 268,644 527,831 509,603 ------------ ------------ ------------ ------------ CLAIMS AND EXPENSES: Incurred loss and loss adjustment expenses 161,430 148,670 316,555 304,513 Commission and brokerage expenses 55,806 60,834 110,285 111,434 Other underwriting expenses 14,040 16,337 27,911 29,504 ------------ ------------ ------------ ------------ 231,276 225,841 454,751 445,451 ------------ ------------ ------------ ------------ INCOME BEFORE TAXES 38,082 42,803 73,080 64,152 Income tax 9,343 10,893 16,590 13,651 ------------ ------------ ------------ ------------ NET INCOME $28,739 $31,910 $56,490 $50,501 ============ ============ ============ ============ PER SHARE DATA: Average shares outstanding (000's) 50,497 50,000 50,645 50,000 Net income per share $ 0.57 $ 0.64 $ 1.12 $ 1.01 ============ ============ ============ ============ 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, ----------------------------- ----------------------------- 1996 1995 1996 1995 -------------- -------------- -------------- -------------- (unaudited) COMMON STOCK (shares outstanding): Balance, beginning of period 50,792,869 50,000,000 50,792,869 50,000,000 Issued during the period - - - - Treasury stock acquired during period (306,231) - (306,231) - -------------- -------------- -------------- -------------- Balance net of treasury stock, end of period 50,486,638 50,000,000 50,486,638 50,000,000 ============== ============== ============== ============== COMMON STOCK (par value): Balance, beginning of period $ 508 $ 500 $ 508 $ 500 Issued during the period - - - - -------------- -------------- -------------- -------------- Balance, end of period 508 500 508 500 -------------- -------------- -------------- -------------- ADDITIONAL PAID IN CAPITAL: Balance, beginning of period 387,349 283,076 387,349 283,076 Contributions during the period (Note 3) 1,783 - 1,783 - Common stock issued during period - - - - -------------- -------------- -------------- -------------- Balance, end of period 389,132 283,076 389,132 283,076 -------------- -------------- -------------- -------------- UNEARNED COMPENSATION Balance, beginning of period (602) - (692) - Net (increase) decrease during the period 89 - 179 - -------------- -------------- -------------- -------------- Balance, end of period (513) - (513) - -------------- -------------- -------------- -------------- NET UNREALIZED APPRECIATION(DEPRECIATION) ON INVESTMENTS, NET OF DEFERRED TAXES: Balance, beginning of period 41,718 (4,371) 83,726 (58,172) Net increase (decrease) during the period (16,055) 34,688 (58,063) 88,489 -------------- -------------- -------------- -------------- Balance, end of period 25,663 30,317 25,663 30,317 -------------- -------------- -------------- -------------- CUMULATIVE TRANSLATION ADJUSTMENTS: Balance, beginning of period (9,355) (7,876) (7,838) (11,255) Net increase (decrease) during the period 576 (467) (941) 2,912 -------------- -------------- -------------- -------------- Balance, end of period (8,779) (8,343) (8,779) (8,343) -------------- -------------- -------------- -------------- RETAINED EARNINGS: Balance, beginning of period 546,768 542,909 520,541 526,818 Net income 28,739 31,910 56,490 50,501 Dividends declared ( $0.03 and $0.06 per share in 1996 and $0.05 and $0.11 per share in 1995) (1,514) (3,000) (3,038) (5,500) -------------- -------------- -------------- -------------- Balance, end of period 573,993 571,819 573,993 571,819 -------------- -------------- -------------- -------------- TREASURY STOCK AT COST: Balance, beginning of period - - - - Treasury stock acquired during period (Note 3) (7,216) - (7,216) - -------------- -------------- -------------- -------------- Balance, end of period (7,216) - (7,216) - -------------- -------------- -------------- -------------- TOTAL STOCKHOLDERS' EQUITY, END OF PERIOD $972,788 $877,369 $972,788 $877,369 ============== ============== ============== ============== 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 June 30, Six Months Ended June 30, --------------------------- --------------------------- 1996 1995 1996 1995 ------------ ------------ ------------ -------------- CASH FLOWS FROM OPERATING ACTIVITIES: (unaudited) Net income $ 28,739 $ 31,910 $56,490 $50,501 Adjustments to reconcile net income to net cash provided by operating activities: (Increase) decrease in premiums receivable (5,096) (5,509) (6,578) (1,009) (Increase) decrease in funds held by reinsureds, net 1,043 (294) 25,570 23,078 (Increase) decrease in reinsurance receivables 19,948 24,111 (13,500) 36,333 (Increase) decrease in deferred tax asset (865) (1,040) (3,970) (1,352) Increase (decrease) in reserve for losses and loss adjustment expenses 24,851 17,828 96,604 50,480 Increase (decrease) in unearned premiums 19,908 3,073 29,307 8,845 (Increase) decrease in other assets and liabilities (18,215) 35,849 (12,895) 25,537 Non cash compensation expense 89 - 179 - Accrual of bond discount/amortization of bond premium 323 (2,606) 1,079 (2,767) Realized capital (gains) losses (3,672) (19,527) (7,484) (22,756) ------------ ------------ ------------ -------------- Net cash provided by operating activities 67,053 83,795 164,802 166,890 ------------ ------------ ------------ -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from fixed maturities matured/called - held to maturity 5,851 8,976 10,244 16,050 Proceeds from fixed maturities matured/called - available for sale 41,911 94,540 60,731 94,540 Proceeds from fixed maturities sold - available for sale 174,223 114,496 273,414 229,180 Proceeds from equity securities sold 31,677 41,671 63,395 75,470 Cost of fixed maturities acquired - held to maturity - (8,276) (25) (8,276) Cost of fixed maturities acquired - available for sale (264,354) (346,947) (436,089) (573,555) Cost of equity securities acquired (23,707) (26,025) (53,878) (56,957) Cost of other invested assets acquired (2,709) (174) (2,901) (1,687) Net (purchases) sales of short-term securities (12,720) 26,989 (45,648) 24,106 Net increase (decrease) in unsettled securities transactions 63 (17,963) (1,151) 6,176 Net increase (decrease) in collateral for loaned securities (21,674) 30,822 (19,897) 25,765 ------------ ------------ ------------ -------------- Net cash used in investing activities (71,439) (81,891) (151,805) (169,188) ------------ ------------ ------------ -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Purchase of treasury stock (Note 3) (7,216) - (7,216) - Contributions during the period (Note 3) 1,783 - 1,783 - Dividends paid to stockholders (1,514) (5,500) (3,038) (5,500) ------------ ------------ ------------ -------------- Net cash used in financing activities (6,947) (5,500) (8,471) (5,500) ------------ ------------ ------------ -------------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 1,132 (3,883) (22) 2,264 ------------ ------------ ------------ -------------- Net increase (decrease) in cash (10,201) (7,479) 4,504 (5,534) Cash, beginning of period 65,617 46,353 50,912 44,408 ------------ ------------ ------------ -------------- Cash, end of period $ 55,416 $ 38,874 $ 55,416 $ 38,874 ============ ============ ============ ============== SUPPLEMENTAL CASH FLOW INFORMATION CASH TRANSACTIONS: Income taxes paid (received), net $ 17,463 $(13,523) $ 29,321 $(11,850) 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, 1996 AND 1995 (DOLLARS IN THOUSANDS) 1. GENERAL 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 consolidated financial statements of Everest Reinsurance Holdings, Inc. (the "Company") for the three months and six months ended June 30, 1996 and 1995 include all adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair presentation of results on an interim basis. 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 six months ended June 30, 1996 and 1995 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, 1995, 1994 and 1993. 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 (i) the mitigation or remediation of environmental contamination or (ii) 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: (i) potentially long waiting periods between exposure and manifestation of any bodily injury or property damage; (ii) difficulty in identifying sources of asbestos or environmental contamination; (iii) difficulty in properly allocating responsibility and/or liability for asbestos or environmental damage; (iv) changes in underlying laws and judicial interpretation of those laws; (v) potential for an asbestos or environmental claim to involve many insurance providers over many policy periods; (vi) long reporting delays, both from insureds to insurance companies and ceding companies to reinsurers; (vii) limited historical data concerning asbestos and environmental losses; (viii) questions concerning interpretation and application of insurance and reinsurance coverage; and (ix) 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 SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (DOLLARS IN THOUSANDS) Management believes that these issues are not likely to be resolved in the near future. 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 judgment 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 $375.0 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). 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. 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, 1996 and 1995:
Three Months Ended Six Months Ended June 30, June 30, 1996 1995 1996 1995 --------- --------- --------- --------- Gross Basis: Beginning of period reserves $ 423,767 $ 442,461 $ 428,495 $ 445,537 Incurred losses 9,371 41 11,967 6,004 Paid losses ( 15,062) ( 10,521) ( 22,386) ( 19,560) ---------- ---------- ---------- --------- End of period reserves $ 418,076 $ 431,981 $ 418,076 $ 431,981 ========= ========= ========= ========= Net Basis: Beginning of period reserves $ 197,487 $ 197,435 $ 197,668 $ 203,676 Incurred losses - - - - Paid losses 21 ( 6,124) ( 160) ( 12,365) --------- ---------- --------- ---------- End of period reserves $ 197,508 $ 191,311 $ 197,508 $ 191,311 ========= ========== ========= ==========
8 EVEREST REINSURANCE HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (DOLLARS IN THOUSANDS) At June 30, 1996, the gross reserves for asbestos and environmental losses was comprised of $106,503 representing case reserves reported by ceding companies, $44,696 representing additional case reserves established by the Company on assumed reinsurance claims, $50,293 representing case reserves established by the Company on direct excess insurance claims and $216,584 representing 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 certain reimbursements under 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 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. The Company is also named in various legal proceedings incidental to its normal business activities. In the opinion of management, none of these proceedings is likely to have a material adverse effect upon the financial condition, results of operations or cash flows of the Company. 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 June 30, 1996 was $133,964. 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 June 30, 1996 was $8,848. 3. CAPITAL TRANSACTIONS The increase in the Company's paid in capital in the quarter ended June 30, 1996 represents the tax benefits attributable to the difference between the amount of compensation expense deductible for tax purposes with respect to stock awards and the amount of such compensation expense reflected in the Company's financial statements. In addition, on April 4, 1996, pursuant to the Company's stock incentive plan, the Company acquired 306,231 shares of its common stock at a cost of $7,216 from the Company's Chief Executive Officer to fund required withholding taxes. 9 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 JUNE 30, 1996 COMPARED TO THREE MONTHS ENDED JUNE 30, 1995 PREMIUMS. Gross premiums written increased 14.8% to $247.4 million in the three months ended June 30, 1996 from $215.5 million in the three months ended June 30, 1995. Factors contributing to this increase included a 64.2% increase (to $22.9 million) in U.S. facultative operations, reflecting growth in specialty casualty business and the initial adverse impact in 1995 of the restructuring of facultative operations, a 17.6% increase (to $63.1 million) in U.S. broker treaty operations, also reflecting growth in specialty casualty business, a 12.6% increase (to $88.9 million) in international operations, mainly in the worldwide business produced through the Company's London operations, a 10.0% increase (to $35.5 million) in U.S. direct treaty reinsurance and insurance operations, largely attributable to growth in primary insurance written through (Everest National Insurance Company) and a 1.1% increase (to $37.0 million) in marine, aviation and surety operations. Ceded premiums increased to $11.5 million in the three months ended June 30, 1996 from $7.2 million in the three months ended June 30, 1995. This increase was attributable to common account retrocessions by ceding sources. Net premiums written increased by 13.3% to $235.9 million in the three months ended June, 1996 from $208.3 million in the three months ended June 30, 1995 as the increases in gross premiums written more than offset the increase in ceded premiums. REVENUES. Net premiums earned increased by 3.8% to $218.8 million in the three months ended June 30, 1996 from $210.7 million in the three months ended June 30, 1995, generally consistent with the growth in net premiums written over the preceding year. Net investment income increased 12.3% to $46.3 million in the three months ended June 30, 1996 from $41.2 million in the three months ended June 30, 1995, reflecting principally the effect of investing the $395.8 million of cash flow (of which $304.8 million was cash flow from operations and $91.0 million was cash flow from a capital contribution from the Company's former parent, which contribution was simultaneous with a $140.0 million ($91.0 million after tax) reinsurance premium paid out of operating cash flow by the Company to an affiliate of the former parent in connection with the Company's initial public offering in October, 1995) in the twelve months ended June 30, 1996. The annualized pre-tax yield on average cash and invested assets remained at 5.8% in the three months ended June 30, 1996, the same as the 5.8% yield in the three months ended June 30, 1995. 10 Net realized capital gains were $3.7 million in the three months ended June 30, 1996, compared to $19.5 million in the three months ended June 30, 1995 with the gains in both periods mainly arising from activity in the Company's portfolio of equity securities including, in 1995, a $20.2 million gain on the sale of one half of the Company's investment in the common stock of Corporacion MAPFRE S.A.("MAPFRE"), an insurance group in Spain. EXPENSES. Incurred losses and loss adjustment expenses ("LAE") increased by 8.6% to $161.4 million in the three months ended June 30, 1996 from $148.7 million in the three months ended June 30, 1995. The Company's loss and LAE ratio increased by 3.3 percentage points to 73.8% in the three months ended June 30, 1996 from 70.5% in the three months ended June 30, 1995. This was attributable principally to the impact in 1995 of favorable loss experience on contracts with adjustable commission features, the impact of which was to decrease losses with substantially offsetting contingent commission expense. Net incurred losses and LAE for the three months ended June 30, 1996 reflected ceded losses and LAE of $17.0 million, including $10.6 million ceded under the Stop Loss Agreement, compared to ceded losses and LAE of $(13.2) million in the three months ended June 30, 1995. Underwriting expenses decreased by 9.5% to $69.8 million in the three months ended June 30, 1996 from $77.2 million in the three months ended June 30, 1995. Commission and brokerage expenses decreased by $5.0 million, principally reflecting reduced contingent commission expense partially offset by commission increases relating to premium growth as well as the commission impact of changes in the business mix. Other underwriting expenses decreased by $2.3 million, reflecting the impact of the Company's continuing expense reduction initiatives. The Company had 421 employees at June 30, 1996 compared to 470 employees at June 30, 1995. The Company's expense ratio was 31.9% in the three months ended June 30, 1996 compared to 36.7% in the three months ended June 30, 1995. The Company's combined ratio decreased to 105.7% in the three months ended June 30, 1996 from 107.2% in the three months ended June 30, 1995. INCOME TAXES. The Company recognized income tax expense of $9.3 million in the three months ended June 30, 1996 compared to $10.9 million in the three months ended June 30, 1995. The principal cause of this change was the decrease in pre-tax income. NET INCOME. Net income was $28.7 million in the three months ended June 30, 1996 compared to $31.9 million in the three months ended June 30, 1995. This mainly reflected lower net realized capital gains, which more than offset higher investment income and improved underwriting results. RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995 PREMIUMS. Gross premiums written increased 10.2% to $477.4 million in the six months ended June 30, 1996 from $433.0 million in the six months ended June 30, 1995. Factors contributing to this increase included a 32.6% increase (to $36.3 million) in U.S. facultative operations, reflecting growth in specialty casualty business and the initial adverse impact in 1995 of the restructuring of facultative operations, a 24.7% increase (to $72.6 million) in U.S. direct 11 treaty reinsurance and insurance operations, largely attributable to growth in primary insurance written through Everest National, an 11.3% increase (to $127.9 million) in U.S. broker treaty operations, also reflecting growth in specialty casualty business, a 3.9% increase (to $167.1 million) in international operations and a 2.4% increase (to $73.5 million) in marine, aviation and surety operations. Ceded premiums increased to $22.7 million in the six months ended June 30, 1996 from $14.0 million in the six months ended June 30, 1995. This increase was attributable to common account retrocessions by ceding sources. Net premiums written increased by 8.5% to $454.7 million in the six months ended June, 1996 from $419.1 million in the six months ended June 30, 1995 as the increases in gross premiums written more than offset the increase in ceded premiums. REVENUES. Net premiums earned increased by 4.5% to $429.1 million in the six months ended June 30, 1996 from $410.5 million in the six months ended June 30, 1995, generally consistent with the growth in net premiums written over the preceding year. Net investment income increased 14.9% to $91.0 million in the six months ended June 30, 1996 from $79.2 million in the six months ended June 30, 1995, reflecting both the effect of investing the $395.8 million of cash flow (of which $304.8 million was cash flow from operations and $91.0 million was cash flow from a capital contribution from the Company's former parent, which contribution was simultaneous with a $140.0 million ($91.0 million after tax) reinsurance premium paid out of operating cash flow by the Company to an affiliate of the former parent in connection with the Company's initial public offering in October, 1995) in the twelve months ended June 30, 1996 and higher yields earned on the investment portfolio. The annualized pre-tax yield on average cash and invested assets improved to 5.8% in the six months ended June 30, 1996 from 5.7% in the six months ended June 30, 1995. Net realized capital gains were $7.5 million in the six months ended June 30, 1996, compared to $22.8 million in the six months ended June 30, 1995 with the gains in both periods mainly arising from activity in the Company's portfolio of equity securities including, in 1995, the gain on the sale of one half of the Company's investment in MAPFRE. EXPENSES. Incurred losses and loss adjustment expenses ("LAE") increased by 4.0% to $316.6 million in the six months ended June 30, 1996 from $304.5 million in the six months ended June 30, 1995. The Company's loss and LAE ratio decreased by 0.4 percentage points to 73.8% in the six months ended June 30, 1996 from 74.2% in the six months ended June 30, 1995. This improvement was attributable principally to lower catastrophe losses and changes in the Company's business mix. Net incurred losses and LAE for the six months ended June 30, 1996 reflected ceded losses and LAE of $69.4 million, including $29.5 million ceded under the Stop Loss Agreement, compared to ceded losses and LAE of $7.8 million in the six months ended June 30, 1995. Underwriting expenses decreased by 1.9% to $138.2 million in the six months ended June 30, 1996 from $140.9 million in the six months ended June 30, 1995. Commission and brokerage expenses decreased by $1.1 million, which was generally consistent with the level of earned premiums coupled with a reduction in contingent commission expense. Other underwriting expenses decreased by $1.6 million, reflecting the impact of the Company's continuing expense 12 reduction initiatives. The Company's expense ratio was 32.2% in the six months ended June 30, 1996 compared to 34.3% in the six months ended June 30, 1995. The Company's combined ratio decreased to 106.0% in the six months ended June 30, 1996 from 108.5% in the six months ended June 30, 1995. INCOME TAXES. The Company recognized income tax expense of $16.6 million in the six months ended June 30, 1996 compared to $13.7 million in the six months ended June 30, 1995. The principal cause of this change was the increase in pre-tax income. NET INCOME. Net income was $56.5 million in the six months ended June 30, 1996 compared to $50.5 million in the six months ended June 30, 1995. This improvement mainly reflected higher investment income and improved underwriting results, partially offset by lower net realized capital gains. FINANCIAL CONDITION INVESTED ASSETS. Aggregate invested assets, including cash and short-term investments, were $3,285.3 million at June 30, 1996 and $3,238.3 million at December 31, 1995. The increase in invested assets between December 31, 1995 and June 30, 1996 resulted primarily from cash flow from operations of $164.8 million generated during the six months ended June 30, 1996 partially offset by a decrease of $81.2 million in net appreciation on investments. STOCKHOLDERS' EQUITY. Holdings' stockholders' equity decreased to $972.8 million as of June 30,1996, from $983.6 million as of December 31, 1995 principally reflecting a decrease of $58.1 million in unrealized appreciation (depreciation) on investments, net of deferred taxes, which was partially offset by net income of $56.5 million for the six months ended June 30, 1996. Dividends of $3.0 million were declared and paid by Holdings and $7.2 million of treasury stock was acquired in the six months ended June 30, 1996. 13 EVEREST REINSURANCE HOLDINGS, INC. OTHER INFORMATION Part II - ITEM 1. LEGAL PROCEEDINGS The Company is subject to litigation and arbitration in the normal course of its business. Management does not believe that any such pending litigation or arbitration will have a material adverse effect on the Company's results of operations, financial condition and cash flows. Part II - ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS a) The Annual Meeting was held on May 23, 1996. b) Thomas J. Gallagher and William F. Galtney, Jr. were elected at the Annual Meeting as Directors of the Company for a term expiring in 1999. The term of office of the following Directors continued after the meeting: Martin Abrahams, Kenneth J. Duffy, Robert P. Jacobson and Joseph V. Taranto. c) The following matters were voted on at the Annual Meeting: (1) The following Directors were elected: Votes Votes For Withheld ----- -------- Thomas J. Gallagher 42,317,235 400,435 William F. Galtney, Jr. 42,317,890 399,780 (2) The Company's Certificate of Incorporation was amended to change the Company's name to Everest Reinsurance Holdings, Inc. The holders of 42,621,409 shares voted in favor, 31,463 shares voted against and 64,798 shares abstained; there were no broker non-votes. (3) The Company's 1995 Stock Option Plan for Non-Employee Directors was amended. The holders of 37,032,619 shares voted in favor, 5,612,761 shares voted against and 72,290 shares abstained; there were no broker non- votes. 14 Part II - ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibit Index: Exhibit No. Description Location ----------- ----------- -------- 3.1 Certificate of Incorporation of Everest Reinsurance Holdings, Inc., as amended, incorporated herein by reference to Exhibit 4.1 to the Registration Statement on Form S-8 (No. 333-05771) 27 Financial Data Schedule Filed herewith (b) Reports on Form 8-K: A report on Form 8-K, dated June 11, 1996, was filed on June 14, 1996 regarding (i) a press release (which was attached to that report as an exhibit) announcing, among other things, that John R. Dunne has become a Director of the Company, and (ii) reporting that at the Annual Meeting of shareholders held on May 23, 1996, the shareholders approved a proposal to amend the Company's Certificate of Incorporation to change its name and that the Company's name was changed to Everest Reinsurance Holdings, Inc. on May 24, 1996. 15 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/ Robert P. Jacobson ------------------------ Robert P. Jacobson Duly Authorized Officer, Senior Vice President, Chief Financial Officer and Comptroller Dated: August 5, 1996 EX-27 2 FINANCIAL DATA SCHEDULE
7 1,000 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 2,885,762 82,026 92,288 132,275 0 0 3,229,931 55,416 725,525 79,435 4,763,556 3,056,620 322,584 0 0 0 0 0 508 972,280 4,763,556 429,075 91,029 7,484 243 316,555 (437) 137,759 73,080 16,590 56,490 0 0 0 56,490 1.11 1.11 2,969,341 0 0 0 0 3,056,620 0
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