SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q/A
QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended: Commission File Number:
SEPTEMBER 30, 2002 1-13816
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EVEREST REINSURANCE HOLDINGS, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 22-3263609
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(State or other juris- (IRS Employer Identification
diction of incorporation Number)
or organization)
477 MARTINSVILLE ROAD
POST OFFICE BOX 830
LIBERTY CORNER, NEW JERSEY 07938-0830
(908) 604-3000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive office)
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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
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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 5, 2002
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COMMON STOCK, $.01 PAR VALUE 1,000
The registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this form with the reduced disclosure
format permitted by General Instruction H of Form 10-Q.
EVEREST REINSURANCE HOLDINGS, INC.
INDEX TO FORM 10-Q/A
PART I
FINANCIAL INFORMATION
PAGE
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
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OF FINANCIAL CONDITION AND RESULTS OF OPERATION 1
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PART II
OTHER INFORMATION
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 12
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PART I - ITEM 2
EVEREST REINSURANCE HOLDINGS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
INDUSTRY CONDITIONS
The worldwide reinsurance and insurance businesses are highly competitive yet
cyclical by product and market. The terrorist attacks on September 11, 2001
resulted in losses which reduced industry capacity and were of sufficient
magnitude to cause most individual companies to reassess their capital position,
tolerance for risk, exposure control mechanisms and the pricing terms and
conditions at which they are willing to take on risk. The gradual and variable
improving trend that had been apparent through 2000 and earlier in 2001 firmed
significantly. This firming generally took the form of immediate and significant
upward pressure on prices, more restrictive terms and conditions and a reduction
of coverage limits and capacity availability. Such pressures were widespread
with variability depending on the product and markets involved, but mainly
depending on the characteristics of the underlying risk exposures. The magnitude
of the changes was sufficient to create temporary disequilibrium in some markets
as individual buyers and sellers adapted to changes in both their internal and
market dynamics.
Thus far in 2002, our markets, and reinsurance and insurance markets in general,
have continued to firm. This firming reflects the continuing implications of
losses arising from the September 11 attacks as well as aggregate company
reactions to broad and growing recognition that competition in the late 1990's
reached extremes in many classes and markets, which ultimately led to inadequate
pricing and overly broad terms, conditions and coverages. The effect of these
extremes, which is only now becoming apparent through excessive loss emergence,
varies widely by company depending on product offerings, markets accessed,
underwriting and operating practices, competitive strategies and business
volumes. Across all market participants, however, the aggregate effect has been
impaired financial results and erosion of the industry capital base. Coupled
with deteriorating investment market conditions and results, and renewed
concerns regarding longer term industry specific issues, including asbestos
exposure and sub-par capital returns, these financial impacts have introduced
substantial, and in some cases extreme, pressure for the initiation and/or
strengthening of corrective action by individual market participants. These
pressures, aggregating across industry participants, have resulted in firming
prices, terms and conditions and tightened coverage availability across most
classes and markets.
These changes reflect a clear reversal of the general trend from 1987 through
1999 toward increasingly competitive global market conditions across most lines
of business as reflected by decreasing prices and broadening contract terms. The
earlier trend resulted from a number of factors, including the emergence of
significant reinsurance capacity in Bermuda, changes in the Lloyds market,
consolidation and increased capital levels in the insurance and reinsurance
industries, as well as the emergence of new reinsurance and financial products
addressing traditional exposures in alternative fashions. Many of these factors
continue to exist and may take on additional importance as the result of the
firming conditions which have emerged. As a result, although the Company is
1
encouraged by the recent improvements, and more generally, current market
conditions, the Company cannot predict with any reasonable certainty whether and
to what extent these improvements will persist.
SEGMENT INFORMATION
The Company, through its subsidiaries, operates in four segments: U.S.
Reinsurance, U.S. Insurance, Specialty Reinsurance and International
Reinsurance. The U.S. Reinsurance operation writes property and casualty treaty
reinsurance through reinsurance brokers as well as directly with ceding
companies within the United States, in addition to property, casualty and
specialty facultative reinsurance through brokers and directly with ceding
companies within the United States. The U.S. Insurance operation writes property
and casualty insurance primarily through general agent relationships and surplus
lines brokers within the United States. The Specialty Reinsurance operation
writes accident and health, marine, aviation and surety business within the
United States and worldwide through brokers and directly with ceding companies.
The International Reinsurance operation writes property and casualty reinsurance
through the Company's branches in London, Canada, and Singapore, in addition to
foreign "home-office" business.
These segments are managed in a carefully coordinated fashion with strong
elements of central control, including with respect to capital, investments and
support operations. As a result, management monitors and evaluates the financial
performance of these operating segments principally based upon their
underwriting results. The Company utilizes inter-affiliate reinsurance and such
reinsurance does not impact segment results as business is reported in the unit
responsible for the business as initially written with third parties, generally
within the segment in which the business was first produced.
THREE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2001
PREMIUMS. Gross premiums written increased 42.6% to $693.5 million in the three
months ended September 30, 2002 from $486.3 million in the three months ended
September 30, 2001 as the Company took advantage of selected growth
opportunities, while continuing to maintain a disciplined underwriting approach.
Premium growth areas included a 65.2% ($100.2 million) increase in the U.S.
Reinsurance operation principally attributable to growth across property and
casualty lines, a 60.4% ($50.3 million) increase in the International
Reinsurance operation, mainly attributable to growth in the London, Canada and
Latin American markets and a 41.6% ($57.7 million) increase in the U.S.
Insurance operation, principally attributable to growth in workers' compensation
insurance. These increases were partially offset by a 0.9% ($1.0 million)
decrease in the Specialty Reinsurance operation. The Company continued to
decline business that did not meet its objectives regarding underwriting
profitability.
Ceded premiums increased to $169.9 million in the three months ended September
30, 2002 from $123.1 million in the three months ended September 30, 2001. This
increase was principally attributable to $100.2 million of ceded premiums
relating to a Quota Share Reinsurance Agreement between Everest Re and Bermuda
Re, whereby Everest Re cedes 20% of its net retained liability on all new and
renewal policies written during the term of this agreement, and an Excess of
Loss Agreement between Everest Re, Everest National Insurance Company and
Everest Security Insurance Company and Bermuda Re, whereby Bermuda Re assumes
2
liability for primary insurance workers' compensation losses exceeding $100,000
per occurrence, with its liability not to exceed $150,000 per occurrence. Ceded
premiums for the three months ended September 30, 2002 included $4.5 million and
$11.9 million in adjustment premiums relating to claims made under the 2001 and
2000 accident year aggregate excess of loss elements of the Company's corporate
retrocessional program, respectively. Ceded premiums for the three months ended
September 30, 2001 included $59.9 million and $10.9 million in adjustment
premiums relating to claims made under the 2001 and 1999 accident year aggregate
excess of loss elements of the Company's corporate retrocessional program,
respectively, with the 2001 accident year cessions relating to losses incurred
as a result of the September 11 attacks.
Net premiums written increased by 44.2% to $523.6 million in the three months
ended September 30, 2002 from $363.2 million in the three months ended September
30, 2001. This increase reflects the increase in gross premiums written,
partially offset by the increase in ceded premiums.
PREMIUM REVENUES. Net premiums earned increased by 33.0% to $456.4 million in
the three months ended September 30, 2002 from $343.0 million in the three
months ended September 30, 2001. Contributing to this increase was a 69.2%
($63.0 million) increase in the U.S. Reinsurance operation, a 43.9% ($28.9
million) increase in the International Reinsurance operation and a 42.8% ($35.5
million) increase in the U.S. Insurance operation. These increases were
partially offset by a 13.6% ($14.0 million) decrease in the Specialty
Reinsurance operation. All of these changes reflect period to period changes in
net written premiums and business mix together with normal variability in
earnings patterns. Business mix changes occur not only as the Company shifts
emphasis between products, lines of business, distribution channels and markets
but also as individual contracts renew or non-renew, almost always with changes
in coverage, structure, prices and/or terms, and as new contracts are accepted
with coverages, structures, prices and/or terms different from those of expiring
contracts. As premium reporting and earnings and loss and commission
characteristics derive from the provisions of individual contracts, the
continuous turnover of individual contracts, arising from both strategic shifts
and day to day underwriting, can and does introduce appreciable background
variability in various underwriting line items.
EXPENSES. Incurred loss and loss adjustment expenses ("LAE") decreased by 8.3%
to $328.8 million in the three months ended September 30, 2002 from $358.5
million in the three months ended September 30, 2001. The decrease in incurred
losses and LAE was principally attributable to the decrease in catastrophe
losses, partially offset by the increase in net premiums earned and also
reflects the impact of changes in the Company's mix of business. Incurred losses
and LAE include catastrophe losses, which include the impact of both current
period events and favorable and unfavorable development on prior period events,
and are net of reinsurance. A catastrophe is an event that causes a pre-tax loss
on property exposures of at least $5.0 million and has an event date of January
1, 1988 or later. Catastrophe losses, net of contract specific cessions but
before cessions under the corporate retrocessional program, were $10.2 million
in the three months ended September 30, 2002, principally relating to European
flood losses, compared to net catastrophe losses of $192.8 million in the three
months ended September 30, 2001, which was principally related to the September
11 attacks. Incurred losses and LAE for the three months ended September 30,
2002 reflected ceded losses and LAE of $130.4 million compared to ceded losses
and LAE in the three months ended September 30, 2001 of $227.8 million. Ceded
losses and LAE in the three months ended September 30, 2002 include $55.6
million of ceded losses relating to the reinsurance transactions noted earlier
between the Company and Bermuda Re. The ceded losses and LAE for the three
months ended September 30, 2002 included $9.6 million and $22.0 million of
3
losses ceded under the 2001 and 2000 accident year aggregate excess of loss
component of the Company's corporate retrocessional program, respectively. The
ceded losses and LAE for the three months ended September 30, 2001 included
$130.0 million and $20.0 million of losses ceded under the 2001 and 1999
accident year aggregate excess of loss component of the Company's corporate
retrocessional program, respectively, with the 2001 accident year cessions
relating to losses incurred as a result of the September 11 attacks.
Contributing to the decrease in incurred losses and LAE in the three months
ended September 30, 2002 from the three months ended September 30, 2001 were a
32.8% ($55.2 million) decrease in the U.S. Reinsurance operation principally
reflecting decreased catastrophe losses, partially offset by increased premium
volume and a 20.6% ($18.5 million) decrease in the Specialty Reinsurance
operation principally attributable to decreased catastrophe losses, partially
offset by increased premium volume in A&H business. These decreases were
partially offset by a 49.0% ($28.8 million) increase in the U.S. Insurance
operation and a 37.1% ($15.2 million) increase in the International operation;
both increases principally reflect increased premium volume. Incurred losses and
LAE for each operation were also impacted by variability relating to changes in
the level of premium volume and mix of business by class and type.
The Company's loss and LAE ratio ("loss ratio"), which is calculated by dividing
incurred losses and LAE by premiums earned, decreased by 32.4 percentage points
to 72.1% in the three months ended September 30, 2002 from 104.5% in the three
months ended September 30, 2001 reflecting the incurred losses and LAE discussed
above. The following table shows the loss ratios for each of the Company's
operating segments for the three months ended September 30, 2002 and 2001. The
loss ratios for all operations were impacted by the factors noted above.
Operating Segment Loss Ratios
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Segment 2002 2001
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U.S. Reinsurance 73.6% 185.2%
U.S. Insurance 74.2% 71.1%
Specialty Reinsurance 80.1% 87.2%
International Reinsurance 59.4% 62.3%
Underwriting expenses increased by 0.3% to $124.5 million in the three months
ended September 30, 2002 from $124.1 million in the three months ended September
30, 2001. Commission, brokerage, taxes and fees decreased by $1.6 million,
principally reflecting $18.2 million of ceded commissions relating to the
reinsurance transactions noted earlier between the Company and Bermuda Re,
partially offset by increases in premium volume and changes in the mix of
business. Other underwriting expenses increased by $1.9 million as the Company
expanded its operations to support its increased business volume. Contributing
to these underwriting expense increases were a 55.2% ($13.1 million) increase in
the U.S. Insurance operation and a 2.7% ($0.6 million) increase in the
International operation. These increases were partially offset by a 20.0% ($9.3
million) decrease in the U.S. Reinsurance operation and a 17.2% ($5.2 million)
decrease in the Specialty Reinsurance operation. The changes for each
operation's expenses principally resulted from changes in commission expenses
related to changes in premium volume and business mix by class and type and, in
some cases, changes in the use of reinsurance, including with Bermuda Re, and
the underwriting performance of the underlying business. The Company's expense
ratio, which is calculated by dividing underwriting expenses by premiums earned,
was 27.3% for the three months ended September 30, 2002 compared to 36.2% for
the three months ended September 30, 2001.
4
The Company's combined ratio, which is the sum of the loss and expense ratios,
decreased by 41.4 percentage points to 99.3% in the three months ended September
30, 2002 compared to 140.7% in the three months ended September 30, 2001. The
following table shows the combined ratios for each of the Company's operating
segments for the three months ended September 30, 2002 and 2001. The combined
ratios for all operations were impacted by the loss and expense ratio
variability noted above, and for certain operations, by the impact of adjustment
premiums ceded under the accident year aggregate excess of loss element of the
Company's retrocessional program, principally relating to losses incurred as the
result of the September 11 attacks.
Operating Segment Combined Ratios
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Segment 2002 2001
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U.S. Reinsurance 97.8% 236.5%
U.S. Insurance 105.2% 99.6%
Specialty Reinsurance 108.1% 116.4%
International Reinsurance 84.6% 97.6%
INVESTMENT RESULTS. Net investment income decreased 1.4% to $64.4 million in the
three months ended September 30, 2002 from $65.3 million in the three months
ended September 30, 2001, principally reflecting the effects of the lower
interest rate environment, partially offset by the effect of investing the
$413.0 million of cash flow from operations in the twelve months ended September
30, 2002. The following table shows a comparison of various investment yields as
of September 30, 2002 and December 31, 2001, respectively, and for the periods
ended September 30, 2002 and 2001, respectively.
2002 2001
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Imbedded pre-tax yield of cash and invested
assets at September 30, 2002 and December 31, 2001 5.6% 6.0%
Imbedded after-tax yield of cash and invested
assets at September 30, 2002 and December 31, 2001 4.4% 4.6%
Annualized pre-tax yield on average cash and
invested assets for the three months ended September 30,
2002 and 2001 5.6% 6.2%
Annualized after-tax yield on average cash and
invested assets for the three months ended September 30,
2002 and 2001 4.4% 4.7%
Net realized capital loss was $7.1 million in the three months ended September
30, 2002, reflecting realized capital losses on the Company's investments of
$18.4 million which included $8.7 million relating to write-downs in the value
of securities deemed to be impaired on an other than temporary basis, partially
offset by $11.3 million of realized capital gains, compared to net realized
capital losses of $1.0 million in the three months ended September 30, 2001. The
net realized capital losses in the three months ended September 30, 2001
reflected realized capital losses of $4.7 million, which included $0.0 million
relating to write-downs in the value of securities deemed to be impaired on an
other than temporary basis, partially offset by $3.7 million of realized capital
gains.
5
Interest expense for the three months ended September 30, 2002 was $10.7 million
compared to $11.3 million for the three months ended September 30, 2001.
Interest expense for the three months ended September 30, 2002 reflects $9.7
million relating to the Company's issuance of senior notes and $1.0 million
relating to the Company's borrowings under its revolving credit facility.
Interest expense for the three months ended September 30, 2001 reflects $9.7
million relating to the Company's issuance of senior notes and $1.6 million
relating to the Company's borrowings under its revolving credit facility.
Other income for the three months ended September 30, 2002 was $0.5 million
compared to other expense of $1.6 million for the three months ended September
30, 2001. Significant contributors to other income for the three months ended
September 30, 2002 were normal provision for uncollectible audit premium in the
U.S. Insurance operation and the amortization of deferred expenses relating to
the Company's issuance of senior notes in 2000, partially offset by foreign
exchange gains and fee income. Other expense for the three months ended
September 30, 2001 principally included the amortization of deferred expenses
relating to the Company's issuance of senior notes in 2000 and foreign exchange
losses, partially offset by fee income. The foreign exchange gains and losses
for both periods are attributable to fluctuations in foreign currency exchange
rates.
The Company has in its product portfolio a credit default swap contract, which
it no longer offers. This contract meets the definition of a derivative under
FAS 133. Net derivative expense, essentially reflecting changes in fair value,
from this credit default transaction for the three months ended September 30,
2002 was $1.0 million compared to $0.0 million for the three months ended
September 30, 2001.
INCOME TAXES. The Company recognized income tax expense of $14.5 million in the
three months ended September 30, 2002 compared to an income tax benefit of $35.1
million in the three months ended September 30, 2001. The tax benefit in the
three months ended September 30, 2001 resulted primarily from the losses
relating to the September 11 attacks, for which the benefit was calculated based
on the specific impacts of the event.
NET INCOME. Net income was $34.8 million in the three months ended September 30,
2002 compared to a net loss of $53.1 million in the three months ended September
30, 2001. The net loss in the three months ended September 30, 2001 resulted
primarily from the losses relating to the September 11 attacks.
NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2001
PREMIUMS. Gross premiums written increased 37.9% to $1,911.1 million in the nine
months ended September 30, 2002 from $1,386.1 million in the nine months ended
September 30, 2001 as the Company took advantage of selected growth
opportunities, while continuing to maintain a disciplined underwriting approach.
Premium growth areas included a 58.0% ($226.4 million) increase in the U.S.
Insurance operation, principally attributable to growth in workers' compensation
insurance, a 44.8% ($110.9 million) increase in the International Reinsurance
operation, mainly attributable to growth in the London, Canada and Latin
American markets, a 34.5% ($151.3 million) increase in the U.S. Reinsurance
operation primarily reflecting growth across property and casualty lines and an
11.8% ($36.5 million) increase in the Specialty Reinsurance operation,
6
principally attributable to growth in marine and aviation business. The Company
continued to decline business that did not meet its objectives regarding
underwriting profitability.
Ceded premiums increased to $354.0 million in the nine months ended September
30, 2002 from $221.1 million in the nine months ended September 30, 2001. This
increase was principally attributable to $214.4 million of ceded premiums
relating to a Quota Share Reinsurance Agreement between Everest Re and Bermuda
Re, whereby Everest Re cedes 20% of its net retained liability on all new and
renewal policies written during the term of this agreement, and an Excess of
Loss Agreement between Everest Re, Everest National Insurance Company and
Everest Security Insurance Company and Bermuda Re, whereby Bermuda Re assumes
liability for primary insurance workers' compensation losses exceeding $100,000
per occurrence, with its liability not to exceed $150,000 per occurrence. Ceded
premiums for the nine months ended September 30, 2002 included $5.1 million and
$11.9 million in adjustment premiums relating to claims made under the 2001 and
2000 accident year aggregate excess of loss elements of the Company's corporate
retrocessional program, respectively. Ceded premiums for the nine months ended
September 30, 2001 included $59.9 million and $26.3 million in adjustment
premiums relating to claims made under the 2001 and 1999 accident year aggregate
excess of loss elements of the Company's corporate retrocessional program,
respectively, with the 2001 accident year cessions relating to losses incurred
as a result of the September 11 attacks.
Net premiums written increased by 33.6% to $1,557.0 million in the nine months
ended September 30, 2002 from $1,165.0 million in the nine months ended
September 30, 2001. This increase reflects the increase in gross premiums
written, partially offset by the increase in ceded premiums.
PREMIUM REVENUES. Net premiums earned increased by 28.8% to $1,366.1 million in
the nine months ended September 30, 2002 from $1,060.4 million in the nine
months ended September 30, 2001. Contributing to this increase was a 59.7%
($121.4 million) increase in the U.S. Insurance operation, a 35.4% ($120.0
million) increase in the U.S. Reinsurance operation, a 23.6% ($52.6 million)
increase in the International Reinsurance operation and a 4.0% ($11.7 million)
increase in the Specialty Reinsurance operation. All of these changes reflect
period to period changes in net written premiums and business mix together with
normal variability in earnings patterns.
EXPENSES. Incurred loss and LAE increased by 8.7% to $967.0 million in the nine
months ended September 30, 2002 from $889.5 million in the nine months ended
September 30, 2001. The increase in incurred losses and LAE was principally
attributable to the increase in net premiums earned and lower catastrophe losses
and also reflects the impact of changes in the Company's mix of business.
Incurred losses and LAE include catastrophe losses, which include the impact of
both current period events, and favorable and unfavorable development on prior
period events and are net of reinsurance. A catastrophe is an event that causes
a pre-tax loss on property exposures of at least $5.0 million and has an event
date of January 1, 1988 or later. Catastrophe losses, net of contract specific
cessions but before cessions under the corporate retrocessional program, were
$11.9 million in the nine months ended September 30, 2002, principally relating
to European flood losses, compared to net catastrophe losses of $222.1 million
in the nine months ended September 30, 2001, which was principally related to
the September 11 attacks. Incurred losses and LAE for the nine months ended
September 30, 2002 reflected ceded losses and LAE of $263.7 million compared to
7
ceded losses and LAE in the nine months ended September 30, 2001 of $337.5
million. Ceded losses and LAE in the nine months ended September 30, 2002
include $115.7 million of ceded losses relating to the reinsurance transactions
noted earlier between the Company and Bermuda Re. The ceded losses and LAE for
the nine months ended September 30, 2002 included $11.0 million and $22.0
million of losses ceded under the 2001 and 2000 accident year aggregate excess
of loss component of the Company's corporate retrocessional program,
respectively. The ceded losses and LAE for the nine months ended September 30,
2001 included $130.0 million and $49.0 million of losses ceded under the 2001
and 1999 accident year aggregate excess of loss component of the Company's
corporate retrocessional program, respectively, with the 2001 accident year
cessions relating to losses incurred as a result of the September 11 attacks.
Contributing to the increase in incurred losses and LAE in the nine months ended
September 30, 2002 from the nine months ended September 30, 2001 were a 58.9%
($85.1 million) increase in the U.S. Insurance operation principally reflecting
increased premium volume coupled with changes in this segments specific
reinsurance programs and an 11.0% ($16.9 million) increase in the International
Reinsurance operation. These increases were partially offset by a 6.9% ($24.4
million) decrease in the U.S. Reinsurance operation. Incurred losses and LAE for
each operation were also impacted by variability relating to changes in the
level of premium volume and mix of business by class and type.
The Company's loss ratio, decreased by 13.1 percentage points to 70.8% in the
nine months ended September 30, 2002 from 83.9% in the nine months ended
September 30, 2001 reflecting the incurred losses and LAE discussed above. The
following table shows the loss ratios for each of the Company's operating
segments for the nine months ended September 30, 2002 and 2001. The loss ratios
for all operations were impacted by the factors noted above.
Operating Segment Loss Ratios
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Segment 2002 2001
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U.S. Reinsurance 71.4% 103.9%
U.S. Insurance 70.9% 71.4%
Specialty Reinsurance 77.4% 80.4%
International Reinsurance 62.3% 69.4%
Underwriting expenses increased by 15.2% to $379.1 million in the nine months
ended September 30, 2002 from $329.0 million in the nine months ended September
30, 2001. Commission, brokerage, taxes and fees increased by $45.0 million,
principally reflecting increases in premium volume and changes in the mix of
business, partially offset by $31.3 million of ceded commissions relating to the
reinsurance transactions noted earlier between the Company and Bermuda Re. Other
underwriting expenses increased by $5.1 million as the Company expanded its
operations to support its increased business volume. Contributing to these
underwriting expense increases were a 61.9% ($36.6 million) increase in the U.S.
Insurance operation, a 13.1% ($10.5 million) increase in the Specialty
Reinsurance operation and a 7.4% ($8.7 million) increase in the U.S. Reinsurance
operation. These increases were partially offset by a 7.8% ($5.4 million)
decrease in the International Reinsurance operation. The changes for each
operation's expenses principally resulted from changes in commission expenses
related to changes in premium volume and business mix by class and type and, in
some cases, changes in the use of reinsurance and the underwriting performance
of the underlying business. The Company's expense ratio was 27.7% for the nine
months ended September 30, 2002 compared to 31.0% for the nine months ended
September 30, 2001.
8
The Company's combined ratio decreased by 16.4 percentage points to 98.5% in the
nine months ended September 30, 2002 compared to 114.9% in the nine months ended
September 30, 2001. The following table shows the combined ratios for each of
the Company's operating segments for the nine months ended September 30, 2002
and 2001. The combined ratios for all operations were impacted by the loss and
expense ratio variability noted above, and for certain operations, by the impact
of adjustment premiums ceded under the accident year aggregate excess of loss
element of the Company's retrocessional program, principally relating to losses
incurred as the result of the September 11 attacks.
Operating Segment Combined Ratios
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Segment 2002 2001
----------------------------------------------------------------------------------------
U.S. Reinsurance 99.0% 138.7%
U.S. Insurance 100.3% 100.4%
Specialty Reinsurance 107.0% 107.7%
International Reinsurance 85.6% 100.7%
INVESTMENT RESULTS. Net investment income decreased 3.4% to $194.7 million in
the nine months ended September 30, 2002 from $201.4 million in the nine months
ended September 30, 2001, principally reflecting the effects of the lower
interest rate environment, partially offset by the effect of investing the
$413.0 million of cash flow from operations in the twelve months ended September
30, 2002. The following table shows a comparison of various investment yields as
of September 30, 2002 and December 31, 2001, respectively, and for the periods
ended September 30, 2002 and 2001, respectively.
2002 2001
-----------------------
Imbedded pre-tax yield of cash and invested
assets at September 30, 2002 and December 31, 2001 5.6% 6.0%
Imbedded after-tax yield of cash and invested
assets at September 30, 2002 and December 31, 2001 4.4% 4.6%
Annualized pre-tax yield on average cash and
invested assets for the nine months ended September 30,
2002 and 2001 5.8% 6.4%
Annualized after-tax yield on average cash and
invested assets for the nine months ended September 30,
2002 and 2001 4.5% 4.8%
Net realized capital losses were $45.9 million in the nine months ended
September 30, 2002, reflecting realized capital losses on the Company's
investments of $79.8 million, which included $65.6 million relating to
write-downs in the value of securities deemed to be impaired on an other than
temporary basis, of which $25.7 million related to WorldCom, partially offset by
$33.9 million of realized capital gains, compared to net realized capital losses
of $1.7 million in the nine months ended September 30, 2001. The net realized
capital losses in the nine months ended September 30, 2001 reflected realized
capital losses of $26.0 million, which included $16.7 million relating to
write-downs in the value of securities deemed to be impaired on an other than
temporary basis, partially offset by $24.3 million of realized capital gains.
9
Interest expense for the nine months ended September 30, 2002 was $31.9 million
compared to $35.3 million for the nine months ended September 30, 2001. Interest
expense for the nine months ended September 30, 2002 reflects $29.2 million
relating to the Company's issuance of senior notes and $2.7 million relating to
the Company's borrowings under its revolving credit facility. Interest expense
for the nine months ended September 30, 2001 reflects $29.2 million relating to
the Company's issuance of senior notes and $6.1 million relating to the
Company's borrowings under its revolving credit facility.
Other expenses for the nine months ended September 30, 2002 were $3.9 million
compared to other expenses of $0.1 million for the nine months ended September
30, 2001. Significant contributors to other expense for the nine months ended
September 30, 2002 were an increase in other liabilities related to deferred
recognition of reinsurance recoveries under retroactive reinsurance between the
Company and Bermuda Re, the normal provision for uncollectible audit premium in
the U.S. Insurance operation and the amortization of deferred expenses relating
to the Company's issuance of senior notes in 2000, partially offset by fee
income and foreign exchange gains. Other expense for the nine months ended
September 30, 2001 principally included the amortization of deferred expenses
relating to Company's issuance of senior notes in 2000, partially offset by
foreign exchange gains and fee income. The foreign exchange gains for both
periods are attributable to fluctuations in foreign currency exchange rates.
INCOME TAXES. The Company recognized income tax expense of $28.0 million in the
nine months ended September 30, 2002 compared to a tax benefit of $14.1 million
in the nine months ended September 30, 2001. The tax benefit in the nine months
ended September 30, 2001 resulted primarily from the losses relating to the
September 11 attacks, for which the benefit was calculated based on the specific
impacts of the event.
NET INCOME. Net income was $103.7 million in the nine months ended September 30,
2002 compared to $20.3 million in the nine months ended September 30, 2001. This
increase generally reflects the improved underwriting results and decreased
interest expense, partially offset by increased tax expense and realized capital
losses.
MARKET SENSITIVE INSTRUMENTS. The Company's risks associated with market
sensitive instruments have not changed materially since the period ended
December 31, 2001.
SAFE HARBOR DISCLOSURE. This report contains forward-looking statements within
the meaning of the U.S. federal securities laws. The Company intends these
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements in the federal securities laws. In some cases, these
statements can be identified by the use of forward-looking words such as "may",
"will", "should", "could", "anticipate", "estimate", "expect", "plan",
"believe", "predict", "potential" and "intend". Forward-looking statements
contained in this report include information regarding the Company's reserves
for losses and LAE, including estimates of the Company's catastrophe exposure.
Forward-looking statements only reflect the Company's expectations and are not
guarantees of performance. These statements involve risks, uncertainties and
assumptions. Actual events or results may differ materially from the Company's
expectations. Important factors that could cause the Company's actual results to
be materially different from its expectations include the uncertainties that
surround the estimating of reserves for losses and LAE, those discussed in Note
2 to the Financial Statements included in this report and the risks described
under the caption "Risk Factors" in the Company's most recent Report on Form
10-K. The Company undertakes no obligation to update or revise publicly any
10
forward-looking statements, whether as a result of new information, future
events or otherwise.
11
EVEREST REINSURANCE HOLDINGS, INC.
Other Information
PART II - ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibit Index:
Exhibit No. Description Location
----------- ----------- --------
99.1 CEO and CFO certification of Form 10-Q/A Filed herewith
b) A report on Form 8-K dated August 13, 2002 was filed on August 13, 2002,
reporting the voluntary certification by Joseph V. Taranto, the Company's
Chief Executive Officer, and Stephen L. Limauro, the Company's Chief
Financial Officer, of the Company's 2001 annual report on Form 10-K and all
subsequent reports filed prior to such date.
Omitted from this Part II are items which are inapplicable or to which the
answer is negative for the period covered.
28
EVEREST REINSURANCE HOLDINGS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Everest Reinsurance Holdings, Inc.
(Registrant)
/S/ STEPHEN L. LIMAURO
----------------------------------
Stephen L. Limauro
Executive Vice President and Chief
Financial Officer
(Duly Authorized Officer,
Executive Vice President and Chief
Financial Officer)
Dated: November 5, 2002
I, Joseph V. Taranto, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Everest Reinsurance
Holdings, Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have;
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
November 5, 2002 /S/ JOSEPH V. TARANTO
---------------- ---------------------
Joseph V. Taranto
Chairman and Chief
Executive Officer
I, Stephen L. Limauro, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Everest Reinsurance
Holdings, Inc;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have;
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
November 5, 2002 /S/ STEPHEN L. LIMAURO
---------------- ----------------------------
Stephen L. Limauro
Executive Vice President and
Chief Financial Officer