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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission file number 1-13816
EVEREST REINSURANCE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3263609
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, $.01 par value per share New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
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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 such
filing requirements for the past 90 days.
Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value on March 3, 1998 of the voting stock held by
non-affiliates of the registrant was $1,841 million.
At March 3, 1998, the number of shares outstanding of the registrant's
common stock was 50,482,326.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required by Items 10, 11, 12, and 13 of Form 10-K is
incorporated by reference into Part III hereof from the registrant's proxy
statement for the 1998 Annual Meeting, which will be filed with the Securities
and Exchange Commission within 120 days of the close of the registrant's fiscal
year ended December 31, 1997.
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TABLE OF CONTENTS
Item Page
- ---- ----
PART I
1. Business .................................................... 1
2. Properties .................................................. 21
3. Legal Proceedings ........................................... 21
4. Submission of Matters to a Vote of Security
Holders .................................................... 21
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters ........................................ 21
6. Selected Financial Data ..................................... 22
7. Management's Discussion and Analysis of Financial
Condition and Results of Operation ......................... 24
7A. Quantitative and Qualitative Disclosures About
Market Risk ................................................ 32
8. Financial Statements and Supplementary Data ................. 32
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ........................ 33
PART III
10. Directors and Executive Officers of the Registrant .......... 33
11. Executive Compensation ...................................... 33
12. Security Ownership of Certain Beneficial Owners
and Management ............................................. 33
13. Certain Relationships and Related Transactions .............. 33
PART IV
14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K ........................................ 33
PART I
UNLESS OTHERWISE INDICATED, (I) ALL FINANCIAL DATA IN THIS DOCUMENT HAVE BEEN
PREPARED USING GENERALLY ACCEPTED ACCOUNTING PRINCIPLES ("GAAP"), AND (II) ALL
STATUTORY FINANCIAL DATA REFERRED TO IN THIS DOCUMENT REFER TO STATUTORY
FINANCIAL DATA OF EVEREST RE. AS USED IN THIS DOCUMENT, "EVEREST RE" MEANS
EVEREST REINSURANCE COMPANY (FORMERLY PRUDENTIAL REINSURANCE COMPANY) AND ITS
SUBSIDIARIES (UNLESS THE CONTEXT OTHERWISE REQUIRES); "HOLDINGS" MEANS EVEREST
REINSURANCE HOLDINGS, INC. (FORMERLY PRUDENTIAL REINSURANCE HOLDINGS, INC.); AND
THE "COMPANY" MEANS HOLDINGS AND ITS SUBSIDIARIES.
ITEM 1. BUSINESS
THE COMPANY
Everest Reinsurance Holdings, Inc., a Delaware corporation, was established in
1993 to serve as the parent holding company of Everest Reinsurance Company
(formed in 1973), a property and casualty reinsurance operation. Until October
6, 1995, the Company was an indirect wholly-owned subsidiary of The Prudential
Insurance Company of America ("The Prudential"). On October 6, 1995, The
Prudential sold its entire interest in Holdings' shares of common stock in an
initial public offering (the "IPO").
Holdings, through its wholly-owned subsidiary, Everest Re, underwrites property
and casualty reinsurance on a treaty and facultative basis for insurance and
reinsurance companies in the United States and selected international markets.
Everest Re writes reinsurance both through brokers and directly with ceding
insurance companies, giving it the flexibility to pursue business regardless of
the ceding company's preferred reinsurance purchasing method. The Company had
gross premiums written in 1997 of $1,075.0 million and stockholders' equity at
December 31, 1997 of $1,307.5 million and Everest Re had statutory surplus at
December 31, 1997 of $908.8 million. Based on industry data at December 31, 1997
published by the Reinsurance Association of America ("RAA"), Everest Re is the
sixth largest reinsurance company in the United States, ranked by statutory
surplus, and is rated "A+" ("Superior") by A.M. Best, an independent insurance
industry rating organization which rates insurance companies on factors of
concern to policyholders.
Everest Re has four subsidiaries: Everest Re Ltd. ("Everest Ltd.", formerly
Everest Reinsurance Ltd. and Le Rocher Reinsurance Ltd.), Everest National
Insurance Company ("Everest National", formerly Prudential National Insurance
Company), Everest Insurance Company of Canada ("Everest Canada") and Everest
Indemnity Insurance Company ("Everest Indemnity"). Everest Ltd., a United
Kingdom company, was authorized to engage in the reinsurance business in the
United Kingdom and, prior to January 1, 1997, it reinsured risks worldwide. In
1996, Everest Re obtained authorization to engage in the reinsurance business in
the United Kingdom, and the operations of Everest Ltd. were converted to branch
operations of Everest Re, effective January 1, 1997. Everest National, an
Arizona insurance company, is licensed in 39 states and the District of Columbia
and writes primary insurance on an admitted basis. On December 31, 1996, Everest
Re acquired Everest Canada (formerly OTIP/RAEO Insurance Company Inc.) from a
subsidiary of The Prudential. All liabilities incurred before the acquisition
date, including insurance obligations under expired and in-force business, were
assumed by Prudential of America General Insurance Company (Canada), a
subsidiary of The Prudential which was subsequently sold to Liberty Mutual
Insurance Company, whereupon it was renamed Liberty Insurance Company of Canada.
Everest Canada is federally licensed to write primary insurance under the
Insurance Companies Act of Canada and licensed in all Canadian provinces and
territories. In 1997, Everest Re formed Everest Indemnity, a Delaware insurance
company, to engage in the excess and surplus lines primary insurance business in
the United States. Everest Indemnity is licensed in Delaware and is in the
process of obtaining eligibility to write business in all states on a
non-admitted basis.
In 1997, Holdings formed Mt. McKinley Managers, L.L.C. ("Mt. McKinley"), a New
Jersey limited liability corporation, which is licensed as an insurance
producer, including surplus lines authority, in New Jersey.
REINSURANCE INDUSTRY OVERVIEW
Reinsurance is an arrangement in which an insurance company, the reinsurer,
agrees to indemnify another insurance company, the ceding company, against all
or a portion of the insurance risks underwritten by the ceding company under one
or more insurance contracts. Reinsurance can provide a ceding company with
several benefits, including a reduction in net liability on individual risks,
catastrophe protection from large or multiple losses and assistance in
maintaining acceptable financial ratios. Reinsurance also provides a ceding
company with additional underwriting capacity by permitting it to accept larger
risks and write more business than would be possible without a concomitant
increase in capital and surplus. Reinsurance, however, does not discharge the
ceding company from its liability to policyholders.
There are two basic types of reinsurance arrangements: treaty and facultative
reinsurance. In treaty reinsurance, the ceding company is obligated to cede and
the reinsurer is obligated to assume a specified portion of a type or category
of risks insured by the ceding company. Treaty reinsurers, including Everest Re,
do not separately evaluate each of the individual risks assumed under their
treaties and, consequently, after a review of the ceding company's underwriting
practices, are largely dependent on the original risk underwriting decisions
made by the ceding company. Such dependence subjects reinsurers in general,
including Everest Re, to the possibility that the ceding companies have not
adequately evaluated the risks to be reinsured and, therefore, that the premiums
ceded in connection therewith may not adequately compensate the reinsurer for
the risk assumed. The reinsurer's evaluation of the ceding company's risk
management and underwriting practices, therefore, will usually impact the
pricing of the treaty. In facultative reinsurance, the ceding company cedes and
the reinsurer assumes all or part of the risk under a single insurance contract.
Facultative reinsurance is negotiated separately for each insurance contract
that is reinsured. Facultative reinsurance normally is purchased by ceding
companies for individual risks not covered by their reinsurance treaties, for
amounts in excess of the dollar limits of their reinsurance treaties and for
unusual risks. Underwriting expenses and, in particular, personnel costs, are
higher on facultative business because each risk is individually underwritten
and administered. The ability to separately evaluate each risk reinsured,
however, increases the probability that the reinsurer can price the contract to
more accurately reflect the risks involved.
Both treaty and facultative reinsurance can be written on either a pro rata
basis or an excess of loss basis. With respect to pro rata reinsurance, the
ceding company and the reinsurer share the premiums as well as the losses and
expenses in an agreed proportion. In the case of reinsurance written on an
excess of loss basis, the reinsurer indemnifies the ceding company against all
or a specified portion of losses and expenses in excess of a specified dollar
amount, known as the ceding company's retention or reinsurer's attachment point,
generally subject to a negotiated reinsurance contract limit.
Premiums payable by the ceding company to a reinsurer for excess of loss
reinsurance are not directly proportional to the premiums that the ceding
company receives because the reinsurer does not assume a proportionate risk. In
contrast, premiums that the ceding company pays to the reinsurer for pro rata
reinsurance are proportional to the premiums that the ceding company receives,
consistent with the proportional sharing of risk. In addition, in pro rata
reinsurance the reinsurer generally pays the ceding company a ceding commission.
The ceding commission generally is based on the ceding company's cost of
acquiring the business being reinsured (commissions, premium taxes, assessments
and miscellaneous administrative expense) and also may include a profit factor
for producing the business.
Reinsurers typically purchase reinsurance to cover their own risk exposure.
Reinsurance of a reinsurer's business is called a retrocession. Reinsurance
companies cede risks under retrocessional agreements to other reinsurers, known
as retrocessionaires, for reasons similar to those that cause primary insurers
to purchase reinsurance: to reduce net liability on individual risks, protect
against catastrophic losses, stabilize financial ratios and obtain additional
underwriting capacity.
Reinsurance can be written through professional reinsurance brokers or directly
for ceding companies. From a ceding company's perspective, both the broker
market and the direct market have advantages and disadvantages. A ceding
company's decision to select one market over the other will be influenced by its
perception of such advantages and disadvantages relative to the reinsurance
coverage being placed.
BUSINESS STRATEGY
The Company's business strategies include effective management of the
underwriting cycle, management of catastrophe exposures and retrocessional cost
and expense control. The underwriting strategies seek to capitalize on the
Company's staff resources and its flexibility to offer multiple products through
multiple production sources in a cost efficient manner.
The Company's products include the full range of property and casualty
coverages, including marine, aviation, surety, errors & omissions liability
("E&O"), directors' & officers' liability ("D&O"), medical malpractice, other
specialty lines, accident and health, workers compensation, non-standard auto
and loss portfolios. The Company's distribution sources include both the direct
and broker reinsurance markets, international and domestic markets, reinsurance,
both treaty and facultative, and insurance, both admitted and non-admitted.
The Company's underwriting strategy emphasizes underwriting profitability rather
than premium volume, writing specialized risks and integration of underwriting
expertise across all underwriting units. Key elements of this strategy are
prudent risk selection, appropriate pricing through strict underwriting
discipline and adjusting the Company's business mix to respond to changing
market conditions. Management intends to focus on reinsuring companies that
effectively manage the underwriting cycle through proper analysis and pricing of
underlying risks and whose underwriting guidelines and performance are
compatible with the Company's profitability objectives.
2
The Company's underwriting strategy also emphasizes flexibility and
responsiveness to changing market conditions, such as increased demand or
favorable pricing trends. Management believes that Everest Re's existing
strengths, including its broad underwriting expertise, international presence
and substantial capital, will facilitate adjustments to its mix of business
geographically, by line of business and by type of coverage, allowing it to
capitalize on those market opportunities that provide the greatest potential for
underwriting profitability. The Company's primary insurance infrastructure will
facilitate this strategy by allowing the Company to develop business that
requires the Company to issue primary insurance policies. The Company will also
continue to carefully monitor its mix of business to avoid inappropriate
concentrations of geographic or other risk.
The Company's underwriting guidelines seek to limit the accumulation of known
risks in exposed areas, to require that business which is exposed to catastrophe
losses be written with greater geographic spread and to maintain a
cost-effective retrocession program. The Company's underwriting guidelines also
seek to better reflect the relationship between premiums and risk assumed while
maintaining the Company's probable maximum loss at appropriate levels.
Efforts to control expenses and to operate in a more cost-efficient manner
continue to be a focus of the Company. These efforts have resulted in a 45.7%
reduction in employees to 377 at December 31, 1997 from 694 at June 30, 1994,
the restructuring of the Company's facultative operations in 1995 and changes in
certain vendor relationships. These changes were implemented to improve
efficiency and eliminate redundant positions. Additionally, the Company is in
the process of implementing a plan to improve the cost effectiveness of its
information systems.
MARKETING
The Company writes its business on a worldwide basis for many different
customers and for many lines of property and casualty business. Its products
provide a broad array of coverages. The Company is not materially dependent on
any single customer, small group of customers, line of business or geographical
area. For the 1997 underwriting year, no single customer generated more than
3.6% of the Company's gross premiums written. The Company does not believe that
the reduction of business assumed from any one customer will have a materially
adverse effect on its future financial condition or results of operations due to
the Company's competitive position in the market place and the continuing
availability of other sources of business.
Approximately 64.8% and 35.2% of Everest Re's 1997 gross premiums written were
written in the broker and direct market, respectively. Everest Re's ability to
write reinsurance both through brokers and directly with ceding companies gives
it the flexibility to pursue business regardless of the ceding company's
preferred reinsurance purchasing method.
The reinsurance broker market consists of several substantial national and
international brokers and a number of smaller specialized brokers. Brokers do
not have the authority to bind Everest Re with respect to reinsurance
agreements, nor does Everest Re commit in advance to accept any portion of the
business that brokers submit to it. Reinsurance business from any ceding
company, whether new or renewal, is subject to acceptance by Everest Re.
Brokerage fees generally are paid by reinsurers. The Company's largest ten
brokers accounted for an aggregate of approximately 51.3% of gross premiums
written in 1997 with the two largest brokers accounting for approximately 19.3%
and 8.3%, respectively, of gross premiums written. The Company does not believe
that the reduction of business assumed from any one broker will have a
materially adverse effect on the Company due to its competitive position in the
market place, relationships with ceding companies and the continuing
availability of other sources of business.
The direct market remains an important distribution system for reinsurance
business written by Everest Re and primary insurance written through Everest
National and Everest Indemnity in the United States and Everest Canada in
Canada. Direct placement of reinsurance enables Everest Re to access clients who
prefer to place their reinsurance directly with their reinsurers based upon the
reinsurer's in-depth understanding of the ceding company's needs. The Company's
primary insurance business is written principally through general agency
relationships. The Company evaluates each business relationship, including the
underwriting expertise and experience of each distribution channel selected,
performs an analysis to evaluate financial security and monitors performance.
UNDERWRITING UNITS
The following table presents the distribution of Everest Re's gross premiums
written by its U.S. broker treaty, U.S. direct treaty reinsurance and insurance,
marine, aviation and surety, U.S. facultative and international operations for
the years ended December 31, 1997, 1996, 1995, 1994 and 1993, classified
according to whether such premium is derived from property or casualty business
and whether it represents pro rata or excess of loss business:
3
GROSS PREMIUMS WRITTEN BY UNDERWRITING UNIT
Years Ended December 31,
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1997 1996 1995 1994 1993
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(Dollars in millions) $ % $ % $ % $ % $ %
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U.S. Broker Treaty
Property
Pro Rata(1) $ 62.8 5.8% $ 45.4 4.4% $ 51.7 5.4% $ 59.7 6.3% $ 80.3 8.7%
Excess 53.3 5.0 60.4 5.8 59.0 6.2 53.9 5.7 88.8 9.7
Casualty
Pro Rata(1) 84.6 7.9 63.4 6.1 18.5 1.9 29.6 3.1 28.2 3.1
Excess 124.3 11.6 137.5 13.2 122.6 12.9 113.5 11.9 103.7 11.3
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Total(2) 325.0 30.2 306.8 29.4 251.8 26.5 256.6 26.9 301.0 32.8
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U.S. Direct Treaty
Reinsurance and
Insurance
Property
Pro Rata(1) 11.7 1.1 12.6 1.2 3.3 0.3 5.4 0.6 17.3 1.9
Excess 4.4 0.4 8.9 0.9 9.1 1.0 12.5 1.3 10.9 1.2
Casualty
Pro Rata(1) 128.0 11.9 114.5 11.0 99.8 10.5 83.2 8.7 56.2 6.1
Excess 14.3 1.3 12.5 1.2 10.0 1.1 38.6 4.0 46.3 5.0
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Total(2) 158.4 14.7 148.6 14.2 122.2 12.9 139.7 14.7 130.7 14.2
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Marine, Aviation
and Surety
Property
Pro Rata(1) 92.9 8.6 94.6 9.1 89.2 9.4 74.1 7.8 67.3 7.3
Excess 16.9 1.6 17.8 1.7 18.7 2.0 16.8 1.8 16.3 1.8
Casualty
Pro Rata(1) 45.4 4.2 43.1 4.1 53.0 5.6 66.0 6.9 48.6 5.3
Excess 6.4 0.6 5.6 0.5 6.0 0.6 4.8 0.5 10.5 1.1
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Total(2) 161.6 15.0 161.1 15.4 166.9 17.6 161.7 17.0 142.7 15.5
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U.S. Facultative
Property
Pro Rata(1) - - - - - - - - - -
Excess 29.0 2.7 26.9 2.6 22.3 2.3 27.4 2.9 20.9 2.3
Casualty
Pro Rata(1) - - - - - - - - - -
Excess 53.4 5.0 61.8 5.9 46.6 4.9 39.3 4.1 35.0 3.8
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Total(2) 82.4 7.7 88.7 8.5 68.8 7.2 66.7 7.0 55.9 6.1
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Total U.S.
Property
Pro Rata(1) 167.4 15.6 152.6 14.6 144.2 15.2 139.2 14.6 164.9 18.0
Excess 103.6 9.6 114.0 10.9 109.1 11.5 110.6 11.6 136.9 14.9
Casualty
Pro Rata(1) 258.0 24.0 221.1 21.2 171.3 18.0 178.8 18.8 133.0 14.5
Excess 198.4 18.5 217.6 20.8 185.2 19.5 196.1 20.6 195.5 21.3
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Total(2) 727.4 67.7 705.2 67.5 609.7 64.2 624.7 65.5 630.3 68.7
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International
Property
Pro Rata(1) 144.2 13.4 124.2 11.9 136.2 14.3 147.0 15.4 122.1 13.3
Excess 62.9 5.9 79.8 7.6 84.9 8.9 89.2 9.4 81.5 8.9
Casualty
Pro Rata(1) 99.2 9.2 90.5 8.7 66.4 7.0 49.6 5.2 44.4 4.8
Excess 41.3 3.8 44.4 4.3 52.3 5.5 42.7 4.5 39.8 4.3
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Total(2) 347.6 32.4 338.8 32.5 339.8 35.8 328.5 34.5 287.8 31.3
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Total Company
Property
Pro Rata(1) 311.6 29.0 276.7 26.5 280.4 29.5 286.2 30.0 287.0 31.3
Excess 166.5 15.5 193.8 18.6 194.0 20.4 199.8 21.0 218.4 23.8
Casualty
Pro Rata(1) 357.2 33.2 311.6 29.8 237.6 25.0 228.4 24.0 177.4 19.3
Excess 239.7 22.3 261.9 25.1 237.5 25.0 238.8 25.1 235.3 25.6
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Total(2) $ 1,075.0 100.0% $ 1,044.0 100.0% $ 949.5 100.0% $ 953.2 100.0% $ 918.1 100.0%
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(1) For purposes of the presentation above, pro rata reinsurance means
reinsurance attaching to the first dollar of loss incurred by the ceding
company.
(2) Certain totals and subtotals may not reconcile due to rounding.
4
U.S. BROKER TREATY OPERATIONS. Everest Re's U.S. broker treaty operations write
property, accident and health and casualty reinsurance through reinsurance
brokers. The Company targets certain brokers and, through the broker market,
specialty companies and small to medium sized standard lines companies. The U.S.
broker treaty operations also write portions of reinsurance programs for larger,
national insurance companies.
In 1997, $116.1 million of gross premiums written were attributable to domestic
property business (which in 1997 included accident and health business), of
which 45.9% was written on an excess of loss basis and 54.1% was written on a
pro rata basis. This unit utilizes sophisticated underwriting methods which
management believes are necessary to analyze and price property business,
particularly that segment of the property market which has catastrophe exposure.
Domestic casualty business accounted for $208.9 million of gross premiums
written in 1997, of which 59.5% was written on an excess of loss basis and 40.5%
was written on a pro rata basis. The treaty casualty portfolio consists
principally of professional liability, directors' & officers' liability,
workers' compensation, excess and surplus lines, and other liability coverages.
As a result of the complex technical nature of most of these risks, the
Company's casualty underwriters tend to specialize by line of business and work
closely with the Company's pricing actuaries.
DIRECT TREATY REINSURANCE AND INSURANCE OPERATIONS. The Company's direct treaty
reinsurance operation writes a full line of property and casualty business. In
1997, direct treaty business accounted for $83.5 million of gross premiums
written, of which 22.4% was written on an excess of loss basis and 77.6% was
written on a pro rata basis. The U.S. direct treaty underwriters target
companies which place their business predominantly in the direct market,
including small to medium sized regional ceding companies, and seek to develop
long-term relationships with such companies. A broad array of coverages are
offered.
In 1997, the Company's domestic insurance operation consisted of $74.9 million
of gross premiums written primarily through Everest National, which is licensed
in 39 states and the District of Columbia to write primary insurance. Everest
National targets commercial property and casualty business written through
agency relationships with program administrators. With respect to primary
insurance written through such agents, the Company supplements the initial
underwriting process with periodic claims and underwriting reviews.
MARINE, AVIATION AND SURETY OPERATIONS. The Company's marine and aviation unit
focuses on ceding companies with a particular expertise in marine and aviation
business. The marine and aviation business is written primarily through brokers
and contains a significant international component written primarily in the
London market. Surety business underwritten by the Company consists mainly of
reinsurance of contract surety bonds.
Gross premiums written by the marine and aviation unit in 1997 totaled $106.5
million, substantially all of which was written on a treaty basis and 69.1% of
which was sourced through reinsurance brokers. Marine treaties represented 51.4%
of marine and aviation gross premiums written in 1997 and consisted of hull and
liability coverage. Approximately 85.6% of the marine unit premiums in 1997 were
written on a pro rata basis and 14.4% as excess of loss. Aviation premiums
accounted for 48.6% of marine and aviation gross premiums written in 1997 and
included reinsurance for airlines, general aviation and satellites.
Approximately 87.7% of the aviation unit's premiums in 1997 were written on a
pro rata basis and 12.3% as excess of loss.
In 1997, gross premiums written by the surety unit totaled $55.1 million.
Approximately 83.6% of the surety unit premiums in 1997 were written on a pro
rata basis and 16.4% on an excess of loss basis. Most of the portfolio is
reinsurance of contract surety bonds written directly with ceding companies,
with the remainder being credit reinsurance, mostly in international markets.
The unit's strategy is to maintain long-term relationships with major surety and
fidelity writers and to continue to expand its international business.
FACULTATIVE OPERATIONS. The Company's U.S. facultative unit conducts business
both through brokers and directly with ceding companies. The U.S. facultative
operations consist of three underwriting units representing property, casualty
and specialty lines of business. Business is written from a facultative
headquarters office in New York and satellite offices in Chicago and San
Francisco. In 1997, $26.5 million, $29.0 million, and $26.9 million of gross
premiums written were attributable to property, general casualty and specialty
lines of business, respectively.
INTERNATIONAL. Everest Re's international operations are designed to
enable it to capitalize on the growth opportunities in the international
reinsurance market. The Company targets several international markets,
including: Europe and the London market, which are serviced by branch
operations in London and Brussels and a representative office in Moscow;
Canada, with branch operations in Toronto; Asia and Australia, with branch
operations in Hong Kong and Singapore; and Latin America, Africa and the
Middle East, which business is serviced from Everest Re's New Jersey
5
headquarters and Miami office. The Company also writes "home-foreign" business,
which provides reinsurance on the international portfolios of U.S. insurers,
from its headquarters in New Jersey. Approximately 59.6% of the gross premiums
written by the Company's international underwriters in 1997 represented property
business, while the balance represented casualty business. As with its U.S.
operations, Everest Re's international operations focus on financially sound
companies that have strong management and underwriting discipline and expertise.
Approximately 81.1% of the Company's international business was written through
brokers, with the remainder written directly with ceding companies.
In 1997, Everest Re's gross premiums written by its London and Brussels
operations totaled $159.1 million and consisted of pro rata property (29.5%),
excess property (21.2%), pro rata casualty (38.0%) and excess casualty (11.3%).
Substantially all of the London and Brussels premiums consisted of treaty
reinsurance. The Brussels office focuses on the continental European reinsurance
markets, while the London office covers international business written through
the London market. Gross premiums written in 1997 from the Brussels and London
offices totaled $83.2 million and $75.9 million, respectively.
Gross premiums written by Everest Re's Canadian operation totaled $57.7 million
in 1997 and consisted of pro rata property (5.2%), excess property (11.0%), pro
rata multi-line (46.6%), excess casualty (33.7%) and primary insurance written
by Everest Canada (3.5%). Approximately 69.4% of the Canadian premiums consisted
of treaty reinsurance while 27.1% was facultative reinsurance and 3.5% was
primary insurance.
Everest Re's Hong Kong and Singapore offices cover the Asian and Australian
markets and accounted for $45.2 million of gross written premiums in 1997. This
business consisted of pro rata treaty property (87.9%), excess treaty property
(11.1%) and excess facultative casualty (1.0%). No premiums were written in 1997
from the Singapore office, which opened in the fourth quarter of the year.
International business written out of Everest Re's New Jersey and Miami offices
accounted for $85.6 million of Everest Re's 1997 gross premiums written and
consisted of pro rata treaty property (61.7%), pro rata treaty casualty (13.5%),
excess treaty property (13.7%), excess treaty casualty (1.8%), excess
facultative property (6.6%) and excess facultative casualty (2.7%). Of the
treaty business 54.5% was sourced from Latin America, 19.8% was sourced from the
Middle East, 6.7% was sourced from Europe, 5.4% was sourced from Africa, 1.3%
was sourced from Asia and 12.3% was "home-foreign" business.
UNDERWRITING PROCESS
Everest Re offers ceding companies full service capability, including actuarial,
claims, accounting and systems support, either directly or through the broker
community. Everest Re's capacity for both casualty and property risks allows it
to underwrite entire contracts or major portions thereof that might otherwise
need to be syndicated among several reinsurers. Everest Re's strategy is to act
as "lead" reinsurer in the reinsurance treaties it underwrites. The lead
reinsurer on a treaty generally accepts one of the largest percentage shares of
the treaty and is in a stronger position to negotiate price, terms and
conditions than is a reinsurer which takes a smaller position. Management
believes this strategy enables it to influence more effectively the terms and
conditions of the treaties on which it participates. When Everest Re does not
lead the treaty, it may still suggest changes to any aspect of the treaty.
Everest Re may decline to participate in a treaty based upon its assessment of
all relevant factors.
Everest Re's treaty underwriting process emphasizes a team approach among
Everest Re's underwriters, actuaries and claims staff. Treaties are reviewed for
compliance with Everest Re's general underwriting standards and certain larger
treaties are evaluated in part based upon actuarial analyses conducted by
Everest Re. The actuarial models used in such analyses are tailored in each case
to the exposures and experience underlying the specific treaty and the loss
experience for the risks covered by such treaties. Everest Re does not
separately evaluate each of the individual risks assumed under its treaties.
Everest Re does, however, generally evaluate the underwriting guidelines of its
ceding companies to determine their adequacy prior to entering into a treaty.
Everest Re, when appropriate, also conducts underwriting audits at the offices
of ceding companies to ensure that the ceding companies operate within such
guidelines. Underwriting audits focus on the quality of the underwriting staff,
the selection and pricing of risks and the capability of monitoring price levels
over time. Claim audits, when appropriate, are performed in order to evaluate
the client's claims handling abilities and practices.
Everest Re's domestic facultative underwriters operate within guidelines
specifying acceptable types of risks, limits and maximum risk exposures.
Specified classes of risks and large premium risks are referred to the
Company's New York facultative headquarters for specific review before premium
quotations are given to clients. In addition, Everest Re's guidelines
6
require certain types of risks to be submitted for review because of their
aggregate limits, complexity or volatility regardless of premium amount or size
of the insured on the underlying contract.
Everest National and Everest Canada write property, casualty and professional
liability coverages for homogeneous risks through select program managers. These
commercial programs are evaluated based upon actuarial analysis and the program
manager's capabilities. The Company's rates, forms and underwriting guidelines
are tailored to specific risk types.
RISK MANAGEMENT AND RETROCESSION ARRANGEMENTS
Everest Re manages its risk of loss through a combination of aggregate exposure
limits, underwriting guidelines that take into account risks, prices and
coverage, and retrocessional arrangements.
Everest Re is exposed to multiple insured losses arising out of a single
occurrence, whether a natural event such as a hurricane or an earthquake, or
other catastrophe, such as a riot or an explosion at a major factory. Any such
catastrophic event could generate insured losses in one or many of Everest Re's
treaties or lines of business. Everest Re employs various techniques, including
licensed software modeling, to assess its accumulated exposure to property
catastrophe losses and summarizes that exposure in terms of the probable maximum
loss ("PML"). The Company defines PML as its anticipated maximum loss, taking
into account contract limits, caused by a single catastrophe affecting a broad
contiguous geographic area, such as that caused by a hurricane or earthquake of
such a magnitude that it is expected to occur once in every 100 years.
Management estimates that the Company's greatest catastrophe exposure worldwide
from any single event is to hurricanes and earthquakes in the coastal regions of
the United States, where Everest Re estimates it has a PML exposure, before
reinsurance, of approximately $200 million in each such region based on its
current book of business. Similarly, management estimates that the largest
current PML exposure, before reinsurance, outside the United States is
approximately $116 million. There can be no assurance that Everest Re will not
experience losses from one or more catastrophic events that exceed, perhaps by a
substantial amount, its estimated PML.
Underwriting guidelines have been established for each business unit. These
guidelines place dollar limits on the amount of business that can be written
based on a variety of factors, including ceding company, line of business,
geographical location and risk hazards. In each case, those guidelines permit
limited exceptions, which must be authorized by the Company's senior management.
Everest Re does not typically retrocede individual risks, but does, from time to
time, purchase retrocessional protections where the underwriter deems it to be
prudent to reinsure a portion of the specific risk being assumed. In addition,
Everest Re has purchased a three layer property facultative retrocession program
which provides $18 million of coverage in excess of $2 million of retained
losses per facultative certificate and purchases three retrocessional workers'
compensation excess of loss treaties which collectively provide $115 million of
coverage in excess of $5 million of retained losses on accidental death and
dismemberment claims resulting from a catastrophe loss. The Company also
purchases a worker's compensation reinsurance program which provides for
statutory limits coverage in excess of $250,000 per occurrence on the Company's
primary worker's compensation insurance business.
The Company also purchases catastrophe retrocessions covering the potential
accumulation of all property exposures that may be involved in the same
catastrophe, such as an earthquake or hurricane. Effective January 1, 1997, the
Company's worldwide catastrophe retrocession program was amended to provide
coverage in each of the three years, 1997 through 1999, subject to the
retrocessionaire's right to cancel on November 1, 1998. The attachment point,
net of inuring retrocessions, of the worldwide catastrophe retrocession program
is $25 million per catastrophe. In 1997, the Company could have retroceded 75.0%
of the next $75.0 million of losses in excess of the attachment point incurred
on a per catastrophe and aggregate basis. In 1998, the Company can retrocede
75.0% of the next $112.5 million of losses in excess of the attachment point
incurred on a per catastrophe and aggregate basis. Fifty percent of the unused
portion of the 1998 year's coverage increases the limit of coverage for 1999 (up
to 75.0% of $168.75 million). The maximum recoverable under the worldwide
catastrophe retrocession program over the three-year period is $126.56 million.
For the period from May 1, 1997 through May 1, 1998, the Company's catastrophe
retrocession program also provides coverage of 76.0% of $20.0 million per
occurrence in excess of $10.0 million in losses incurred by the Company outside
of the United States. And, for the period from May 23, 1997 through May 23,
1998, the Company's catastrophe retrocession program provides coverage of 75.0%
of $25.0 million per occurrence in excess of $30.0 million in losses incurred by
the Company in the Caribbean, Israel, Canada and Colombia. In each of 1997 and
1998, Everest Re purchased an accident year aggregate excess of loss
retrocession agreement which provides up to $100.0 million of limit if Everest
Re's statutory loss ratio exceeds 79.0% for the respective accident years.
7
Although the catastrophe and aggregate excess of loss retrocessions have terms
which provide for additional premiums to be paid to the retrocessionaire in the
event that losses are ceded, all aspects of the Company's retrocessional program
have been structured to permit these agreements to be accounted for as
reinsurance under Statement of Financial Accounting Standards ("SFAS") No. 113.
If a single catastrophe were to occur in the United States that resulted in
$200.0 million of gross losses and allocated loss adjustment expenses ("ALAE")
in 1998 (an amount equivalent to Everest Re's PML), management estimates that
the effect (including additional premiums and retained losses and ALAE) on the
Company's income before taxes would be $108.2 million. This pre-tax net loss
estimate assumes that Everest Re's aggregate losses and ALAE for 1998 would
exceed the 79.0% loss ratio requirement in the aggregate excess of loss cover by
at least $100.0 million.
In addition, Everest Re purchased an aggregate stop loss retrocession agreement
(the "Stop Loss Agreement") from Gibraltar Casualty Company ("Gibraltar"), an
affiliate of The Prudential. See "Stop Loss Agreement".
As of December 31, 1997, Everest Re had retrocessional arrangements with 418
retrocessionaires, and it carried as an asset $692.5 million in reinsurance
receivables with respect to losses ceded to retrocessionaires, substantially all
of which will not be due to Everest Re until Everest Re makes payment on the
underlying claims. Of this amount, $324.9 million, or 46.9%, was receivable from
Gibraltar ($88.9 million, net of collateral held and liability balances for
which Everest Re has a contractual right of offset). An additional $150.0
million, or 21.7%, was receivable from Continental Insurance Company
("Continental"). None of the reinsurance receivables from Gibraltar or
Continental was in dispute or more than 90 days in arrears. Everest Re's
arrangement with Continental is managed on a funds held basis, which means that
Everest Re did not release premium payments to the retrocessionaire but rather
retains such payments to secure obligations of the retrocessionaire, records
them as a liability and reduces the liability account as payments become due. As
of December 31, 1997, such funds had reduced Everest Re's net exposure to
Continental to $95.3 million. No other retrocessionaire accounted for more than
$20.5 million of Everest Re's receivables.
No assurance can be given that the Company will be able to obtain retrocessional
coverage similar to that currently in place in the future. Although management
carefully selects its retrocessionaires, the Company is subject to credit risk
with respect to its retrocessions because the ceding of risk to
retrocessionaires does not relieve the reinsurer of its liability to ceding
companies.
RELATIONSHIPS WITH GIBRALTAR
During its early years, Everest Re also wrote some direct insurance. In 1978,
Everest Re expanded its direct insurance operation by forming Gibraltar as a
subsidiary. In 1985, Gibraltar and Everest Re ceased writing new and renewal
direct insurance, and Gibraltar was put into run-off.
While Gibraltar actively wrote direct insurance, it was able to reinsure certain
business through Everest Re's management underwriting facility ("MUF"). Begun in
1977, MUF was a reinsurance arrangement pursuant to which Everest Re ceded
certain business to a number of insurance and reinsurance companies (the "MUF
Participants"), many of them domiciled outside the United States. Gibraltar
ceded its MUF-qualifying business first to Everest Re, which then immediately
and entirely retroceded it to the MUF Participants. As a result of these
cessions to Everest Re, Everest Re became, and remains, a reinsurer of Gibraltar
with respect to the Gibraltar MUF cessions. As of December 31, 1997, Gibraltar's
reinsurance receivables from Everest Re totaled $132.4 million. MUF became
inactive with respect to new business in 1991.
Following the 1985 decision to put Gibraltar in runoff, Everest Re and Gibraltar
entered into the following agreements pursuant to which Gibraltar became, and
remains, a reinsurer of Everest Re (the "Gibraltar Contracts"):
* In 1986, Gibraltar reinsured all insurance obligations of Everest
Re pursuant to certain insurance contracts written by Everest Re's
former direct excess insurance operations, which ceased writing
business in 1985 (the "Ceded Direct Insurance") (the "Direct
Excess Retrocession").
* In 1989, Gibraltar reinsured Everest Re's medical malpractice and
other professional liability reinsurance written in 1988 and prior
years (the "Professional Liability Retrocession").
* During 1985 through 1990, Gibraltar and Everest Re commuted the
obligations of a number of MUF Participants. In exchange for a
cash payment from each commuted MUF Participant, Gibraltar assumed
the obligations of such MUF Participant. The commuted business
included assumed reinsurance originally retroceded to MUF
Participants by Everest Re and direct insurance ceded by Everest
Re and Gibraltar.
8
In 1991, Everest Re distributed the stock of Gibraltar to PRUCO, Inc., a direct,
wholly-owned subsidiary of The Prudential ("PRUCO"). Simultaneously, PRUCO and
Gibraltar entered into a surplus maintenance agreement pursuant to which PRUCO
agreed to purchase such amount of surplus notes as may be necessary to maintain
Gibraltar's statutory surplus at no less than $15 million at all times. PRUCO
shortly thereafter distributed the stock of Gibraltar to The Prudential.
The Direct Excess Retrocession can be terminated by either Gibraltar or Everest
Re upon 90 days' notice, whereas the Professional Liability Retrocession can
only be terminated by Everest Re. A total of $94.1 million of the Gibraltar
receivables is attributable to the Direct Excess Retrocession. If the Direct
Excess Retrocession is terminated, all outstanding claims, including incurred
but not reported losses ("IBNR"), will be commuted with the value of such
claims, which may not exceed Everest Re's then outstanding loss reserves with
respect thereto, to be mutually agreed upon or, if no agreement can be reached,
determined by an actuary or appraiser mutually appointed. At the time of the
IPO, the parties agreed that if Gibraltar terminates the Direct Excess
Retrocession and the parties cannot agree on the value of the claims to be
commuted, Everest Re's chief actuary will determine such value. Gibraltar could
arbitrate the actuary's determination. If the Direct Excess Retrocession were to
be so terminated and Everest Re's ultimate losses on the Ceded Direct Insurance
were to exceed the commutation amount, the resulting reserve increases would
constitute adverse development eligible for coverage under the Stop Loss
Agreement (described below), subject to the applicable limits thereof.
STOP LOSS AGREEMENT
On October 5, 1995, Everest Re and Gibraltar entered into an aggregate stop loss
retrocession agreement (the "Stop Loss Agreement"). The Stop Loss Agreement is
intended to mitigate the impact on the Company's future earnings that could
result from the adverse development, if any, of Everest Re's consolidated
reserves for losses, allocated LAE and uncollectible reinsurance as of June 30,
1995, including IBNR; provided, that adverse development, if any, of such
reserves relating to catastrophes (as defined in the Stop Loss Agreement) will
only be covered to the extent that the catastrophe event to which such reserves
relate occurred prior to January 1, 1995. Such adverse development is referred
to herein as "Adverse Development". For a description of the Stop Loss
Agreement, see Note 7 of Notes to Consolidated Financial Statements. Also see
Note 8F of Notes to the Consolidated Financial Statements.
STANDBY CAPITAL CONTRIBUTION AGREEMENT AND PRUCO INDEMNITY
On October 5, 1995, Holdings agreed, pursuant to a Standby Capital Contribution
Agreement (the "Capital Contribution Agreement"), to make certain capital
contributions ("Capital Contributions") to Everest Re. And, on October 5, 1995,
PRUCO agreed to make payments ("Indemnity Payments") to Holdings, pursuant to an
Indemnity Agreement (the "PRUCO Indemnity"), in an amount equal to the Capital
Contributions. For a description of the Capital Contribution Agreement and the
PRUCO Indemnity, see Note 8A of Notes to the Consolidated Financial Statements.
PRUDENTIAL GUARANTEES
On October 5, 1995, The Prudential guaranteed (i) up to $775.0 million of
Gibraltar's obligations to Everest Re, and (ii) PRUCO's obligation to make the
Indemnity Payments (the "Prudential Guarantees"). The Prudential agreed, subject
to the terms and conditions thereof, to guarantee Gibraltar's payment
obligations with respect to (i) the Stop Loss Agreement, subject to maximum
aggregate payments of $375.0 million, and (ii) payment obligations under the
Gibraltar Contracts, subject to maximum aggregate payments of $400.0 million.
The maximum aggregate payments under the Prudential Guarantee of Gibraltar's
obligations will be reduced in certain circumstances to take account of payments
made and collateral provided in respect of the guaranteed obligations.
As of December 31, 1997, based on publicly available information, The Prudential
had statutory basis total assets of $194.0 billion, statutory surplus of $9.2
billion and total equity on a GAAP basis of $19.7 billion.
CLAIMS
Claims are managed by the Company's professional claims staff whose
responsibilities include reviewing initial loss reports and coverage issues,
monitoring claims handling activities of ceding companies, establishing and
adjusting proper case reserves and approving payment of claims. In addition to
claims assessment, processing and payment, the claims staff selectively conducts
comprehensive claims audits of both specific claims and overall claims
procedures at the offices of selected ceding companies.
9
RESERVES FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Significant periods of time may elapse between the occurrence of an insured
loss, the reporting of the loss to the ceding company and the reinsurer and the
ceding company's payment of that loss and subsequent payments to the ceding
company by the reinsurer. To recognize liabilities for unpaid losses and loss
adjustment expenses ("LAE"), insurers and reinsurers establish reserves, which
are balance sheet liabilities representing estimates of future amounts needed to
pay reported and unreported claims and related expenses on losses that have
already occurred. Actual losses and LAE paid may deviate, perhaps substantially,
from such reserves. To the extent reserves prove to be insufficient to cover
actual losses and LAE after taking into account available retrocessional
coverage, including the reinsurance provided through the Stop Loss Agreement,
Everest Re would have to augment such reserves and incur a charge to earnings
which could be material in the period such augmentation takes place. See Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Loss and LAE Reserves".
While the reserving process is difficult and subjective for the ceding
companies, the inherent uncertainties of estimating such reserves are even
greater for the reinsurer, due primarily to the longer time between the date of
an occurrence and the reporting of any attendant claims to the reinsurer, the
diversity of development patterns among different types of reinsurance treaties
or facultative contracts, the necessary reliance on the ceding companies for
information regarding reported claims and differing reserving practices among
ceding companies. In addition, trends that have affected development of
liabilities in the past may not necessarily occur or affect liability
development to the same degree in the future. Thus, actual losses and LAE may
deviate, perhaps substantially, from estimates of reserves reflected in the
Company's consolidated financial statements.
Like many other property and casualty insurance and reinsurance companies,
Everest Re has experienced adverse loss development for prior accident years,
which has led to adjustments in losses and LAE reserves. The increase in
reserves for prior accident years reduced net income for the periods in which
the adjustments were made. There can be no assurance that adverse development
from prior years will not continue in the future or that such adverse
development will not have a material adverse effect on net income. Adverse
Development will be reinsured under the Stop Loss Agreement, up to the maximum
limits thereunder and subject to the other terms and conditions thereof. See
"Relationships with Gibraltar" and "Stop Loss Agreement".
CHANGES IN HISTORICAL RESERVES
The following table shows changes in historical loss reserves for Everest Re for
1987 and subsequent years. The top line of each table shows the estimated
reserves for unpaid losses and LAE recorded at each year end date. Each amount
in the top line represents the estimated amount of future payments for losses
and LAE on claims occurring in that year and in all prior years. The upper
(paid) portion of the table presents the cumulative amounts paid through each
subsequent year on those claims for which reserves were carried as of each
specific year end. The lower (liability re-estimated) portion shows the
re-estimated amount of the previously recorded reserves based on experience as
of the end of each succeeding year. The estimate changes as more information
becomes known about the actual claims for which the initial reserves were
carried. The cumulative redundancy/deficiency line represents the cumulative
change in estimates since the initial reserve was established. It is equal to
the latest liability re-estimated amount less the initial reserve.
Each amount other than the original reserves in the top half of the table below
includes the effects of all changes in amounts for prior periods. For example,
if a loss settled in 1990 for $100,000 was first reserved in 1987 at $60,000 and
remained unchanged until settlement, the $40,000 deficiency (actual loss minus
original estimate) would be included in the cumulative redundancy (deficiency)
in each of the years in the period 1987 through 1989 shown below. Conditions and
trends that have affected development of liability in the past may not
necessarily occur in the future. Accordingly, it may not be appropriate to
extrapolate future redundancies or deficiencies based on this table.
10
TEN YEAR STATUTORY LOSS DEVELOPMENT TABLE PRESENTED NET OF REINSURANCE
WITH SUPPLEMENTAL GROSS DATA (1)
Years Ended December 31,
-------------------------------------------------------------------------------------------------------------
(Dollars in millions) 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
-------------------------------------------------------------------------------------------------------------
Reserves for unpaid
loss and LAE $ 1,676.7 $ 1,775.8 $ 1,766.7 $ 1,891.9 $ 1,752.9 $ 1,854.7 $ 1,934.2 $ 2,104.2 $ 2,316.0 $ 2,551.6 $ 2,810.0
Paid (cumulative)
as of:
One year later 345.7 299.1 321.9 597.1 333.3 461.5 403.5 359.5 270.4 331.2
Two years later 582.3 522.3 829.5 785.9 550.4 740.1 627.7 638.0 502.8
Three years later 757.0 984.3 966.3 933.1 758.3 897.0 820.5 828.0
Four years later 1,189.1 1,096.1 1,078.2 1,096.9 868.1 1,036.0 953.0
Five years later 1,278.7 1,189.5 1,209.0 1,176.9 970.0 1,141.0
Six years later 1,358.6 1,308.9 1,276.3 1,257.3 1,052.9
Seven years later 1,478.7 1,367.9 1,346.6 1,329.8
Eight years later 1,532.0 1,430.7 1,407.9
Nine years later 1,591.1 1,489.0
Ten years later 1,646.7
Liability re-
estimated as of:
One year later 1,768.0 1,794.6 1,835.4 1,866.3 1,737.8 1,929.2 2,008.5 2,120.8 2,286.5 2,548.4
Two years later 1,841.5 1,813.2 1,834.3 1,872.8 1,775.7 1,988.9 2,015.4 2,233.7 2,264.5
Three years later 1,839.6 1,805.6 1,849.5 1,907.5 1,843.3 2,010.0 2,119.0 2,271.2
Four years later 1,879.1 1,867.6 1,913.6 1,976.5 1,855.7 2,111.9 2,164.5
Five years later 1,942.2 1,934.5 1,982.3 1,984.3 1,955.1 2,155.3
Six years later 2,029.1 2,007.6 1,984.1 2,080.0 1,995.8
Seven years later 2,118.0 2,008.0 2,089.4 2,123.2
Eight years later 2,125.2 2,122.6 2,135.9
Nine years later 2,243.1 2,167.6
Ten years later 2,287.5
Cumulative
redundancy/
(deficiency) $ (610.8) $ (391.8) $ (369.2) $ (231.3) $ (242.9) $ (300.6) $ (230.3) $ (167.0) $ 51.5 $ 3.2
============================================================================================================
Gross liability -
end of year $2,576.0 $2,752.7 $3,016.9 $3,298.2 $3,498.7
Reinsurance
receivable 641.8 648.5 700.9 746.6 688.7
------------------------------------------------
Net liability-end
of year 1,934.2 2,104.2 2,316.0 2,551.6 2,810.0
--------------------------------------- ========
Gross re-estimated
liability at
December 31, 1997 3,056.9 3,096.2 3,228.7 3,380.0
Re-estimated
receivable at
December 31, 1997 892.4 825.0 964.2 831.6
---------------------------------------
Net re-estimated
liability at
December 31, 1997 2,164.5 2,271.2 2,264.5 2,548.4
---------------------------------------
Gross cumulative
redundancy/
(deficiency) $ (480.9) $ (343.5) $ (211.8) $ (81.8)
=======================================
- ----------
(1) Includes Gibraltar data through September 30, 1991
11
For years prior to 1987, management believes that two factors had the most
significant impact on loss development. First, through the mid-1980's, a number
of industry and external factors, such as the propensity of courts to award
large damage awards in liability cases, combined to increase loss frequency and
severity to unexpectedly high levels. Second, contracts written prior to 1986
contained coverage terms which, for Everest Re and the industry in general, have
been interpreted by courts to provide coverage for asbestos and environmental
exposures not contemplated by either the pricing or the initial reserving of the
contracts. Legal developments during the mid-1980's necessitated additional
reserving for such exposures on both a case and IBNR basis. Incurred losses with
respect to asbestos and environmental claims, net of reinsurance, were $3.5
million, -0-, -0-, $40.5 million and $70.6 million in 1997, 1996, 1995, 1994 and
1993, respectively. Substantially all of these losses related to pre-1986
exposures. The absence of net incurred losses in 1996 and 1995 is attributable
to coverage under the Company's Stop Loss Agreement. The net incurred losses in
1997 reflected coinsurance under the Stop Loss Agreement.
To the extent loss reserves on assumed reinsurance need to be increased, Everest
Re would be entitled to certain payments under the Stop Loss Agreement. See
"Stop Loss Agreement". Additionally, Holdings may be required to make payments
under the Capital Contribution Agreement for which it would be entitled to
indemnification under the PRUCO Indemnity. See "Standby Capital Contribution
Agreement and PRUCO Indemnity". To the extent loss reserves on the Ceded Direct
Insurance need to be increased and subject to the terms of the Gibraltar
Contracts, Everest Re will be entitled to 100% protection from Gibraltar under
the Gibraltar Contracts, which reinsurance obligations are guaranteed by The
Prudential subject to the terms and conditions of the applicable Prudential
Guarantee. See "Relationships with Gibraltar" and "Prudential Guarantees".
Management believes that adequate provision has been made for Everest Re's loss
and LAE reserves regardless of the availability of any such payments under the
Stop Loss Agreement, the PRUCO Indemnity, and the Prudential Guarantees.
Additionally, while there can be no assurance that reserves for and losses from
these claims will not increase in the future, management believes that Everest
Re's existing reserves and retrocessional arrangements and payments available
under the Stop Loss Agreement, the PRUCO Indemnity and the Prudential Guarantees
lessen the probability that such increases would have a material adverse effect
on the Company's financial condition, results of operations or cash flows.
The Ten Year Statutory Loss Development Table includes Gibraltar data until
September 30, 1991, at which time Everest Re distributed the stock of Gibraltar
to PRUCO. Thus the 1987-1990 "Reserves for unpaid loss and LAE" includes the
Gibraltar liability. Similarly, the "Paid (cumulative) as of" and "Liability
re-estimated as of" data include Gibraltar experience until September 30, 1991.
At the time of the distribution of Gibraltar, Gibraltar still had $288.5 million
of reserves outstanding. To more accurately reflect reserve development, the
Gibraltar reserves were removed from the reserves for unpaid losses and LAE line
for periods after 1991 and the $288.5 million was treated as a paid loss. The
amount so treated as paid in 1991 was $285.6 million for the year ended 1987 and
$288.5 for each of the years 1988 through 1990. The following table identifies
the cumulative reserve redundancy/(deficiency) relating to Gibraltar only,
Everest Re excluding Gibraltar and the consolidated group.
CUMULATIVE RESERVE REDUNDANCY/(DEFICIENCY) ATTRIBUTABLE TO GIBRALTAR
Years Ended December 31,
----------------------------------------------------------------------------------------------------
(Dollars in millions) 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
----------------------------------------------------------------------------------------------------
Everest Re excluding
Gibraltar $ (434.2) $ (261.9) $ (271.1) $ (201.3) $ (242.9) $ (300.6) $ (230.3) $ (167.0) $ 51.5 $ 3.2
Gibraltar (176.6) (129.9) (98.1) (30.0) - - - - - -
----------------------------------------------------------------------------------------------------
Consolidated $ (610.8) $ (391.8) $ (369.2) $ (231.3) $ (242.9) $ (300.6) $ (230.3) $ (167.0) $ 51.5 $ 3.2
====================================================================================================
The following table is derived from the Ten Year Statutory Loss Development
Table above and summarizes the effect of reserve re-estimates, net of
reinsurance, on calendar year operations for the same ten year period ended
December 31, 1997. Each column represents the amount of reserve re-estimates
made in the indicated calendar year and shows the accident years to which the
re-estimates are applicable. The amounts in the total accident year column on
the far right represent the cumulative reserve re-estimates for the indicated
accident years.
12
EFFECT OF RESERVE REESTIMATES ON CALENDAR YEAR OPERATIONS
Cumulative
Calendar Year Ended December 31, Re-estimates for
(Dollars in ----------------------------------------------------------------------------------------------- each Accident
millions) 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 Year
---------------------------------------------------------------------------------------------------------------
Accident
Years
1987 & prior $ (91.4) $ (73.5) $ 2.0 $ (39.5) $ (63.1) $ (86.9) $ (88.9) $ (7.2) $ (117.9) $ (44.4) $ (610.8)
1988 54.8 (20.6) 47.1 1.1 20.0 15.8 6.8 3.4 (0.7) 127.7
1989 (50.1) (6.5) 46.8 2.8 4.4 (1.4) 9.2 (1.5) 3.7
1990 24.5 8.7 29.4 (0.4) (6.0) 9.7 3.3 69.2
1991 21.6 (3.2) 1.4 (4.6) (3.8) 2.5 13.9
1992 (36.6) 7.9 (8.7) (2.5) (2.7) (42.6)
1993 (14.5) 14.2 (1.7) (2.1) (4.1)
1994 (9.8) (9.2) 8.0 (11.0)
1995 142.4 59.6 202.0
1996 (18.8) (18.8)
Total calendar
year effect $ (91.4) $ (18.7) $ (68.7) $ 25.6 $ 15.1 $ (74.5) $ (74.3) $ (16.7) $ 29.6 $ 3.2 $ (270.8)
As illustrated by this table, the factors which caused the deficiencies shown in
the Ten Year Statutory Loss Development Table relate almost entirely to accident
years prior to 1987. With the exception of the 1992 accident year, which
included Hurricane Andrew, the original reserves established for each accident
year since 1987 have developed either positively or in a manner that is not
materially adverse. Adverse development relating to accident years prior to July
1, 1995 (prior to January 1, 1995 for catastrophe losses) is mitigated by
recoveries under the Stop Loss Agreement. As the Stop Loss Agreement was entered
into in 1995, recoveries thereunder are reflected in the 1995 accident year
rather than in the accident year which included the underlying adverse
development.
The following table presents a reconciliation of beginning and ending reserve
balances for the years indicated on a GAAP basis:
RECONCILIATION OF RESERVES FOR LOSSES AND LAE
Years Ended December 31,
------------------------------------------
(Dollars in millions) 1997 1996 1995
------------------------------------------
Reserves at beginning of period $ 3,246.9 $ 2,969.3 $ 2,706.4
------------------------------------------
Incurred related to:
Current year 768.6 745.6 658.0
Prior years (3.2) (29.6) 16.7
------------------------------------------
Total incurred losses 765.4 716.0 674.7
------------------------------------------
Paid related to:
Current year 185.3 213.9 104.6
Prior years 331.2 270.4 359.5
------------------------------------------
Total paid losses 516.5 484.3 464.1
------------------------------------------
Change in reinsurance receivables
on unpaid losses and LAE (58.0) 45.9 52.3
------------------------------------------
Reserves at end of period $ 3,437.8 $ 3,246.9 $ 2,969.3
==========================================
13
The reconciliation of reserves on a GAAP basis to reserves reported on a
statutory basis for each of the three years in the period ended December 31,
1997 is shown below:
RECONCILIATION OF RESERVES FOR LOSSES AND LAE
FROM STATUTORY BASIS TO GAAP BASIS
Years Ended December 31,
--------------------------------------------
(Dollars in millions) 1997 1996 1995
--------------------------------------------
Statutory reserves-net (1) $ 2,778.6 $ 2,313.0 $ 2,108.3
Statutory retroactive
reinsurance reserves 31.4 15.4 5.4
Financing arrangement - (10.3) (10.3)
--------------------------------------------
Subtotal 2,810.0 2,318.1 2,103.4
Foreign subsidiary reserves (1) - 233.5 212.6
--------------------------------------------
Subtotal-net reserves as
shown in loss development
schedule 2,810.0 2,551.6 2,316.0
Reinsurance receivable on unpaid
losses 688.7 746.6 700.9
--------------------------------------------
Subtotal-gross reserves as
shown in loss development
schedule 3,498.7 3,298.2 3,016.9
Foreign translation effect of
Canadian reserves (2) (60.9) (51.3) (47.6)
--------------------------------------------
Reserves on a GAAP basis $ 3,437.8 $ 3,246.9 $ 2,969.3
============================================
- -----------
(1) On January 1, 1997 the insurance operations of Everest Re Ltd. were
converted to branches of Everest Re. For 1997, the net reserves for the
branches are included in statutory net reserves, and for 1996 and 1995, the
Everest Re Ltd. reserves are shown as foreign subsidiary reserves.
(2) Pursuant to statutory accounting conventions, reserves with respect to the
Canadian Branch are reflected in Canadian dollars.
Statutory reserves are presented net of reinsurance receivables on unpaid loss
and LAE for years ended December 31, 1997, 1996 and 1995. The amounts shown as
financing arrangement in 1996 and 1995 relate to a single treaty which did not
qualify for reinsurance accounting under GAAP.
RESERVES FOR ASBESTOS AND ENVIRONMENTAL LOSSES AND LOSS ADJUSTMENT EXPENSES
Everest Re's reserves include an estimate of Everest Re'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 Everest Re's potential losses from asbestos and
environmental claims. See Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Asbestos and Environmental
Exposures" and Note 11 of Notes to Consolidated Financial Statements.
The following table summarizes the composition of Everest Re's total reserves
for asbestos and environmental losses, gross and net of reinsurance for the
years ended December 31, 1997, 1996 and 1995.
Years Ended December 31,
--------------------------------------------
(Dollars in millions) 1997 1996 1995
--------------------------------------------
Case reserves reported
by ceding companies $ 125.9 $ 101.2 $ 108.5
Additional reserves
established by Everest Re
(assumed reinsurance) 52.0 50.1 43.8
Case reserves established
by Everest Re (Ceded
Direct Insurance) 45.8 52.8 50.3
IBNR reserves 222.4 219.2 225.9
--------------------------------------------
Gross reserves 446.1 423.3 428.5
Reinsurance receivable (233.7) (223.7) (242.5)
--------------------------------------------
Net reserves $ 212.4 $ 199.6 $ 186.0
============================================
Everest Re's asbestos and environmental claims are managed by an experienced
staff consisting of seven people. This claims unit works closely with members of
Everest Re's in-house legal staff on legal developments. The claims unit also
meets with the management of primary insurance companies to understand their
asbestos and environmental exposures and reserving practices.
14
Additional losses, the type or magnitude of which cannot be foreseen by the
Company, or the reinsurance industry generally, may emerge in the future. Such
future emergence, to the extent not covered by existing retrocessional
contracts, including the Stop Loss Agreement, could have material adverse
effects on the Company's future financial condition, results of operations and
cash flows.
INVESTMENTS
Everest Re's overall financial strength and results of operations are, in part,
dependent on the quality and performance of its investment portfolio. Net
investment income and net realized capital gains (losses) on Everest Re's
invested assets constituted 18.8%, 16.9% and 21.1% of the Company's revenues for
the years ending December 31, 1997, 1996 and 1995, respectively. The Company's
cash and invested assets totalled $4,163.3 million at December 31, 1997 of which
95.2% were cash or investment grade fixed maturities.
Everest Re's investment strategy emphasizes maintaining a high quality
investment portfolio while maximizing long-term after-tax investment income.
Everest Re's current investment strategy seeks to maximize after-tax income
through a high quality, diversified, taxable bond and tax-exempt municipal bond
portfolio, while maintaining an adequate level of liquidity. Everest Re's mix of
taxable and tax-preferenced investments is adjusted continuously, consistent
with Everest Re's current and projected operating results, market conditions and
tax position. Additionally, Everest Re invests in marketable equity securities
which it believes will enhance the risk-adjusted total return of the investment
portfolio.
The Investment Committee of Everest Re's Board of Directors is responsible for
establishing investment policy and guidelines and, together with senior
management, for overseeing their execution. Everest Re's investment portfolio is
in compliance with the insurance laws of the state of Delaware, its domiciliary
state, and of other jurisdictions in which it is regulated. These laws prescribe
the kind, quality and concentration of investments which may be made by
insurance companies. In general, these laws permit investments, within specified
limits and subject to certain qualifications, in government obligations,
corporate bonds, preferred and common stocks, real estate mortgages and real
estate. An independent investment advisor is utilized to manage the Company's
investment portfolio within the established guidelines and is required to report
activities on a current basis and to meet with the Company periodically to
review and discuss the portfolio structure, securities selection and performance
results.
Everest Re's investment guidelines include a duration guideline of five to six
years. The duration of an investment is based on the maturity of the security
but also reflects the possibility of early prepayment of such security without a
prepayment penalty. This investment duration guideline is sensitive to Everest
Re's average duration of potential liabilities which, at December 31, 1997, was
approximately five years. Liability duration is determined based on the
estimated payouts of underwriting liabilities using standard duration
calculations.
Approximately 12.6% of the Company's consolidated reserves for losses and LAE
and unearned premiums represents estimated amounts payable in foreign
currencies. For each currency in which the Company has established substantial
reserves, the Company seeks to maintain invested assets denominated in such
currency in an amount approximately equal to the estimated liabilities which are
denominated in such currency.
As of December 31, 1997, 99.3% of Everest Re's fixed maturities consisted of
investment grade securities. The average maturity of fixed maturities was 8.7
years at December 31, 1997, and their overall duration was 5.6 years. As of
December 31, 1997, Everest Re did not have any material holdings of issuers who
management believes are experiencing cash flow difficulty to an extent that the
ability of the obligor to meet debt service payments is threatened. Everest Re's
current investment strategy does not contemplate additional investment in
non-investment grade securities or any investments in commercial real estate or
direct commercial mortgages. Also, investments in derivative products (i.e.,
products which include features such as futures, forwards, swaps, options and
other investments with similar characteristics) are generally prohibited,
without the prior approval of Everest Re's Investment Committee. At December 31,
1997, the Company had no investments in derivative products.
As of December 31, 1997, the common stock portfolio was $158.8 million at market
value, is managed with a growth and income orientation and consisted primarily
of investments in dividend paying mid and large capitalization companies.
15
The following table reflects investment results for Everest Re for each of the
five years in the period ended December 31, 1997:
Pre-Tax
Pre-Tax Realized Net
Average Investment Effective Capital Gains
Years Ended December 31, Investments(1) Income(2) Yield (Losses)
(Dollars in millions) --------------------------------------------------------------
1997 $ 3,888.9 $ 228.5 5.88% $ 15.9
1996 3,416.4 191.9 5.62 5.7
1995 2,894.9 166.0 5.73 33.8
1994 2,620.9 143.6 5.48 (10.5)
1993 2,532.2 141.1 5.57 78.8
- ------------
(1) Average of the beginning and ending carrying values of investments and
cash, less net funds held and non-interest bearing cash. Common stocks and
nonredeemable preferred stocks are carried at fair market value. Bonds and
redeemable preferred stocks are carried at fair market value except for
1993 where such investments are shown at amortized cost.
(2) After investment expenses, excluding realized net capital gains (losses).
The following table summarizes fixed maturities as of December 31, 1997 and
1996:
Amortized Unrealized Unrealized Market
(Dollars in millions) Cost Appreciation Depreciation Value
-----------------------------------------------------------
December 31, 1997:
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 144.1 $ 3.1 $ 0.1 $ 147.1
Obligations of states and
political subdivisions 1,610.2 112.2 0.3 1,722.1
Corporate securities 893.9 39.2 - 933.1
Mortgage-backed securities 521.0 20.5 - 541.5
Foreign debt securities (1) 489.2 34.0 0.1 523.1
-----------------------------------------------------------
Total $ 3,658.4 $ 209.0 $ 0.5 $ 3,866.9
===========================================================
December 31, 1996:
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 192.6 $ 1.2 $ 1.4 $ 192.4
Obligations of states and
political subdivisions 1,309.9 56.1 1.0 1,365.0
Corporate securities 740.0 11.4 0.3 751.1
Mortgage-backed securities 487.1 7.7 2.0 492.8
Foreign debt securities (1) 545.2 24.7 0.9 569.0
-----------------------------------------------------------
Total $ 3,274.8 $ 101.1 $ 5.6 $ 3,370.3
===========================================================
- -------------
(1) At December 31, 1997, foreign debt securities at amortized cost are
comprised of $232.8 million and $256.4 million in foreign government
securities and foreign corporate bonds, respectively, compared to $299.3
million and $245.9 million, respectively, at December 31, 1996. At December
31, 1997, foreign debt securities at market value are comprised of $253.3
million and $269.8 million in foreign government securities and foreign
corporate bonds, respectively, compared to $315.0 million and $254.0
million, respectively, at December 31, 1996.
16
The following table presents the credit quality distribution by the National
Association of Insurance Commissioners ("NAIC") rating of Everest Re's fixed
maturities as of December 31, 1997:
(Dollars in millions)
NAIC Percent of
Rating(1) Standard and Poor's Equivalent Description Amount Total
- --------------------------------------------------------------------------------
1 AAA/AA/A $ 3,355.9 86.8%
2 BBB 481.9 12.5
3 BB 27.5 0.7
4 B 0.2 0.0
5 CCC/CC/C - -
6 CI/D 1.4 0.0
----------------------
Total $ 3,866.9 100.0%
======================
- ------------
(1) The Securities Valuation Office of the NAIC maintains a security valuation
system that assigns a numerical rating to securities. The numerical ratings
generally correspond to S & P's classifications, as indicated, although S &
P has not necessarily rated the securities indicated. Rating categories 1
and 2 are considered investment grade and categories 3 through 6 are
considered non-investment grade.
The following table summarizes fixed maturities by contractual maturity as of
December 31, 1997:
Percent of
(Dollars in millions) Amount Total
------------------------------
Maturity category:
Less than one year $ 56.4 1.5%
Due after 1-5 years 482.0 12.5
Due after 5-10 years 1,294.2 33.5
Due after 10 years 1,492.6 38.6
------------------------------
Subtotal 3,325.2 86.0
Mortgage-backed securities (1) 541.6 14.0
------------------------------
Total (2) $ 3,866.8 100.0%
==============================
- ------------
(1) Mortgage-backed securities generally are more likely to be prepaid than
other fixed maturities. Therefore contractual maturities are excluded from
this table since they may not be indicative of actual maturities.
(2) Certain totals may not reconcile due to rounding.
YEAR 2000 ISSUES
Like many other companies, the Company faces potential business disruption and
costs associated with the possible inability of many computer systems to
accurately process data containing information about the year 2000 or later. For
a discussion of these issues, see Management's Discussion and Analysis, Item 7.
RATINGS
Everest Re currently has a rating of "A+" ("Superior") from A.M. Best, an
independent insurance industry rating organization which rates companies on
factors of concern to policyholders. A.M. Best states that the "A+" ("Superior")
rating is assigned to those companies which, in its opinion, have, on balance,
achieved superior financial strength, operating performance and market profile
when compared to the standards established by A.M. Best and have demonstrated a
very strong ability to meet their ongoing obligations to policyholders. The "A+"
("Superior") rating is the second highest of fifteen ratings assigned by A.M.
Best, which range from "A++" ("Superior") to "F" ("In liquidation").
Additionally, A.M. Best has eleven classifications within the "Not Assigned"
category.
Everest Re currently has a claims-paying ability rating of "A+" (Good) from
Standard & Poor's, an independent rating organization which rates an insurance
company's financial capacity to meet the obligations of its insurance policies
in accordance with their terms. Standard & Poor's states that the "A+" rating is
assigned to those companies which, in its opinion, have secure financial
capacity to meet policyholder obligations. The "A+" rating is the fifth highest
of eighteen ratings assigned by Standard & Poor's, which range from "AAA"
(Superior) to "R" (Regulatory Action). Ratings from AA to B may be modified by
the use of a plus or minus sign to show relative standing of the insurer within
those rating categories.
17
Everest Re currently has an insurance financial strength rating of "A2" (Good)
from Moody's. Moody's states that insurance companies rated "A" offer good
financial security. However, elements may be present which suggest a
susceptibility to impairment sometime in the future. Moody's rating gradations
are shown through the use of nine distinct symbols, each symbol representing a
group of ratings in which the financial security is broadly the same. The "A2"
(Good) rating is the sixth highest of ratings assigned by Moody's, which range
from "Aaa" (Exceptional) to "C" (Lowest). Moody's further distinguishes the
ranking of an insurer within its generic rating classification from Aa to B with
1, 2 and 3 ("1" being the highest).
A.M. Best's, Standard & Poor's and Moody's ratings are based upon factors of
concern to policyholders and should not be considered an indication of the
degree or lack of risk involved in an equity investment in an insurance company.
Each of these rating agencies reviews its ratings periodically, and there can be
no assurance that Everest Re's ratings will be maintained in the future.
COMPETITION
The worldwide property and casualty reinsurance business is highly competitive.
Competition with respect to the types of reinsurance in which Everest Re is
engaged is based on many factors, including the perceived overall financial
strength of the reinsurer, A.M. Best's and/or Standard & Poor's rating of the
reinsurer, underwriting expertise, the jurisdictions where the reinsurer is
licensed or otherwise authorized, premiums charged, other terms and conditions
of the reinsurance offered, services offered, speed of claims payment and
reputation and experience in lines written. Everest Re competes for its business
in the United States and international reinsurance markets with numerous
international and domestic reinsurance companies, some of which have greater
financial resources than Everest Re.
Everest Re's competitors include independent reinsurance companies, subsidiaries
or affiliates of established worldwide insurance companies, reinsurance
departments of certain primary insurance companies and domestic and
international underwriting operations. Some of these competitors have greater
financial resources than Everest Re, have been operating for longer than Everest
Re, and have established long-term and continuing business relationships
throughout the industry, which can be a significant competitive advantage.
Although most U.S. reinsurance companies operate in the broker market, most of
Everest Re's largest competitors work directly with ceding companies, competing
with brokers. Management believes that Everest Re's major competitors are large
U.S. and foreign reinsurance companies.
Since 1987, the industry has experienced increased global competition. During
this period, primary insurers have retained an increasing portion of their
business, which, together with rate pressure at the primary insurance level and
ample reinsurance capacity, precluded reinsurance rate improvement and resulted
in generally low rates of premium growth, if any. In the early 1990s, several
well-capitalized new Bermuda-based companies entered the reinsurance industry,
and added significant capacity, particularly in the catastrophe reinsurance
market, and rendered future rate improvement uncertain. In addition, Lloyd's of
London relaxed its requirement that syndicate members have unlimited liability
for losses and allows limited liability investors to join syndicates, thereby
increasing the reinsurance capacity at Lloyd's. In 1996, Lloyd's implemented its
reconstruction and renewal plan in an attempt to separate past losses from the
current market participants and to provide a more secure market going forward.
Management believes that since 1987, a number of factors, including global
competition, the emergence of significant reinsurance capacity from the Bermuda
and rejuvenated Lloyds' markets, higher retentions by primary insurance
companies and consolidation in the insurance industry, have resulted in
increasingly competitive market conditions and have influenced the continuing
pressure on insurance and reinsurance rates and the expansion of contract terms
in the current marketplace.
The Company may, in the future, face additional competition from other
well-capitalized companies or from market participants that may devote more of
their capital to the reinsurance business or from the capital markets entry into
insurance and reinsurance investment products. And, the Company believes that
the insurance and reinsurance industries, including reinsurance brokers, will
continue to undergo further consolidation and that reinsurers will need
significant size and financial strength to compete effectively.
EMPLOYEES
As of March 2, 1998, Everest Re employed 369 persons. Management believes that
its employee relations are good. None of Everest Re's employees are subject to
collective bargaining agreements, and the Company is not aware of any current
efforts to implement such agreements at Everest Re.
18
INFORMATION RELATING TO DOMESTIC AND FOREIGN OPERATIONS
Financial information relating to geographic segments set forth in Note 13 of
Notes to Consolidated Financial Statements of the Company is incorporated herein
by reference.
REGULATORY MATTERS
The Company is subject to regulation under the insurance statutes of various
jurisdictions, including Delaware, the domiciliary state of Everest Re and
Everest Indemnity, Arizona, the domiciliary state of Everest National and
Canada, the domiciliary jurisdiction of Everest Canada.
INSURANCE HOLDING COMPANY REGULATION. Insurance holding company laws and
regulations generally require the holding company to register with the relevant
state regulatory authorities and file certain reports which include current
information concerning the capital structure, ownership, management, financial
condition and general business operations of the insurance holding company and
its subsidiaries licensed in the state. State regulators also require prior
notice or regulatory approval of changes in control of an insurer or its holding
company and of certain material inter-affiliate transactions within the holding
company structure. See "-Dividends by Everest Re".
Under the Delaware and Arizona Codes and regulations thereunder, no person,
corporation or other entity may acquire a controlling interest in the Company,
unless such person, corporation or entity has obtained the prior approval of the
Delaware and Arizona Insurance Commissioners for such acquisition. For the
purposes of the Delaware and Arizona Codes, any person acquiring, directly or
indirectly, 10% or more of the voting securities of an insurance company is
presumed to have acquired "control" of such company. To obtain the approval of
any such change in control, the proposed acquirer must file an application with
the Delaware and Arizona Insurance Commissioners. This application requires the
acquirer to disclose its background, financial condition, the financial
condition of its affiliates, the source and amount of funds by which it will
effect the acquisition, the criteria used in determining the nature and amount
of consideration to be paid for the acquisition, proposed changes in the
management and operations of the insurance company and any other related
matters.
The Insurance Companies Act of Canada also requires prior approval by the
Minister of Finance of anyone acquiring a significant interest in an authorized
Canadian insurance company. In addition, the Company is subject to regulation by
the insurance regulators of other states and foreign jurisdictions in which it
does business. Certain of these states and foreign jurisdictions impose
regulations regulating the ability of any person to acquire control of an
insurance company without appropriate regulatory approval similar to those
described above.
DIVIDENDS BY EVEREST RE. Because the operations of the Company are conducted
through Everest Re and its subsidiaries, the Company is dependent upon dividends
and other permissible payments from Everest Re to meet its obligations and to
pay dividends in the future should Holdings' Board of Directors decide to do so.
The payment of dividends to Holdings by Everest Re is subject to limitations
imposed by Delaware law.
Under the Delaware Code, before a Delaware domiciled insurer may pay any
dividend it must give 10 days prior notice to the Delaware Insurance
Commissioner. During this 10-day period, the Commissioner may, by order, limit
or disallow the payment of ordinary dividends if the Commissioner finds the
insurer to be presently or potentially in financial distress. A Delaware
domiciled insurer may only pay cash dividends from the portion of its available
and accumulated surplus funds derived from realized net operating profits and
realized capital gains. Additionally, a Delaware domiciled insurer may not pay
any "extraordinary" dividend or distribution until (i) 30 days after the
Delaware Insurance Commissioner has received notice of a declaration thereof and
has not within such period disapproved such a payment or (ii) the Delaware
Insurance Commissioner has approved such payment within the 30-day period. Under
the Delaware Code, an "extraordinary" dividend of a property and casualty
insurer is a dividend the amount of which, together with all other dividends and
distributions made in the preceding 12 months, exceeds the greater of (i) 10% of
an insurer's statutory surplus as of the end of the prior calendar year or (ii)
the insurer's statutory net income, not including realized capital gains, for
the prior calendar year. Under this definition, the maximum amount that will be
available for the payment of dividends by Everest Re in 1998 without triggering
the requirement for prior approval of regulatory authorities in connection with
an extraordinary dividend is $177.6 million. As of December 31, 1997, Everest
Re's accumulated statutory surplus from realized net operating profits and
realized gains was $535.8 million.
INSURANCE REGULATION. U.S. domestic property and casualty insurers, including
reinsurers, are subject to regulation by their state of domicile and by those
states in which they are licensed. The rates and policy terms of reinsurance
agreements generally are not subject to regulation by any governmental
authority. This contrasts with primary insurance policies and agreements, the
rates and policy terms of which are generally regulated closely by state
insurance departments.
19
Everest Re is subject primarily to regulation and supervision that relate to
licensing requirements, solvency requirements, investment requirements,
restrictions on the size of risks which may be insured, deposit of securities
for the benefit of ceding companies and/or policyholders, accounting
requirements, periodic examinations of financial condition and affairs, the form
and content of financial statements that must be filed with regulators and the
level of minimum reserves necessary to cover unearned premiums, losses and other
purposes. In general, such regulation is designed to protect ceding insurers
and, ultimately, their policyholders, rather than stockholders. The operations
of Everest Re's foreign branch offices in Canada, Hong Kong, Singapore and the
United Kingdom are subject to regulation by the insurance regulatory officials
of those jurisdictions. Management believes that the Company is in material
compliance with applicable laws and regulations pertaining to its business and
operations.
Everest Canada, Everest Indemnity and Everest National are subject to similar
regulation and, in addition, Everest National must comply with substantial
regulatory requirements in each state where it does business. These additional
requirements include, but are not limited to, rate and policy form requirements,
requirements with regard to licensing, agent appointments, participation in
residual markets and claims handling procedures. These regulations are primarily
designed for the protection of policyholders.
LICENSES. Ordinarily, in the United States, a primary insurer will only enter
into reinsurance agreements if it can obtain credit for the reinsurance on its
statutory financial statements. Credit is usually granted when the reinsurer is
licensed or accredited in a state where the primary insurer is domiciled. In
addition, many states permit credit for reinsurance ceded to a reinsurer that is
domiciled and licensed in another state. Such a reinsurer must meet certain
financial requirements and, in some instances, the domiciliary state of such a
reinsurer must have substantially similar reinsurance credit law requirements as
the domiciliary state of the primary insurer or if credit for reinsurance is not
available, the primary insurer may reduce its liabilities on its statutory
financial statements if it is provided with collateral to secure the reinsurer's
obligations.
Everest Re is a licensed property/casualty insurer and/or reinsurer in all
states and the District of Columbia with the exception of Nevada, North
Carolina, West Virginia and Wyoming. In New Hampshire and Puerto Rico, Everest
Re is licensed for reinsurance only.
Everest Re is licensed as a property/casualty reinsurer in Canada. It is also
authorized to conduct reinsurance business in the United Kingdom, Hong Kong and
Singapore. Everest Re can also write reinsurance in other foreign countries.
Because some jurisdictions require a reinsurer to register in order to be an
acceptable market for local insurers, Everest Re is registered as a foreign
insurer and/or reinsurer in the following countries: Argentina, Bolivia, Chile,
Colombia, Ecuador, Guatemala, Mexico, Peru, Venezuela and the Philippines.
Everest National is licensed in 39 states and the District of Columbia. Everest
Indemnity is licensed in Delaware and is eligible to write insurance on a
surplus lines basis in 11 states and the District of Columbia. Everest Canada is
federally licensed under the Insurance Companies Act of Canada and licensed in
all Canadian provinces and territories.
PERIODIC EXAMINATIONS. Everest Re, Everest National and Everest Indemnity are
subject to examination of their affairs by the insurance departments of the
states in which they are licensed, authorized or accredited. Delaware and
Arizona, the domiciliary states of Everest Re and Everest Indemnity, and Everest
National, respectively, usually conduct examinations of domestic companies every
3 years and may do so at such other times as are deemed advisable by the
respective insurance commissioner. Everest Re's and Everest National's last
examination reports were as of December 31, 1994. Neither report contained any
material recommendations. Everest Indemnity's last examination report was
conducted upon its organization in 1997. This report did not contain any
material recommendations.
NAIC RISK-BASED CAPITAL REQUIREMENTS. The NAIC has instituted a formula to
measure the amount of capital appropriate for a property and casualty insurance
company to support its overall business operations in light of its size and risk
profile. The major categories of a company's risk profile are its asset risk,
credit risk, and underwriting risk. The new standards are an effort by the NAIC
to prevent insolvencies, to ward off other financial difficulties of insurance
companies, and to establish uniform regulatory standards among state insurance
departments.
Under the approved formula, a company's statutory surplus is compared to its
risk based capital (RBC). If this ratio is above a minimum threshold, no action
is necessary. Below this threshold are four distinct action levels at which a
regulator can intervene with increasing degrees of authority over a domestic
insurer as the ratio of surplus to RBC decreases. The mildest intervention
requires the company to submit a plan of appropriate corrective actions. The
most severe action requires the company to be rehabilitated or liquidated.
20
Based upon Everest Re's, Everest National's and Everest Indemnity's financial
positions at December 31, 1997, Everest Re, Everest National and Everest
Indemnity exceed the minimum thresholds. Various proposals to change the RBC
formula have been proposed. The Company is unable to predict whether any such
proposal will be adopted, the form in which any such proposals would be adopted
or the effect, if any, the adoption of any such proposal or change in the RBC
calculations would have on the Company.
LEGISLATIVE AND REGULATORY PROPOSALS. Various regulatory and legislative changes
have from time to time been proposed that could affect reinsurers and insurers.
Among the proposals that have in the past been or are at present being
considered are the possible introduction of federal regulation in addition to,
or in lieu of, the current system of state regulation of insurers, Superfund
re-authorization, modernization of financial services regulation, product
liability and tort reform, state and federal involvement in insuring
catastrophes, limitations on the ability of primary insurance carriers to effect
premium rate increases or to cancel or not renew existing policies,
modifications to investment limitations, creation of interstate compacts for
multi-state insurer receivership proceedings or multi-state insurance regulation
and the codification of Statutory Accounting Principles. The Company is unable
to predict whether any of these proposals will be adopted, the form in which any
such proposals would be adopted, or the impact, if any, such adoption would have
on the Company.
ITEM 2. PROPERTIES
Everest Re's corporate offices are located in Liberty Corner, New Jersey, and
occupy approximately 112,000 square feet of office space under a sublease with
The Prudential Insurance Company of America that expires on November 29, 2003.
Everest Re's other ten office locations occupy a total of approximately 62,600
square feet, all of which are leased. Management believes that the above
described office space is adequate for its current and anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in 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. However, no assurance can be
given as to the decisions that may be rendered by the courts or arbitration
panels in any of such litigation and arbitration matters.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. (A) MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
Since October 3, 1995, the common stock of Holdings has been traded on the New
York Stock Exchange under the symbol "RE". Quarterly high and low market prices
of Holdings' common stock in 1997 and 1996 were as follows:
High Low
----------------------
First Quarter 1997: 32.75 26.00
Second Quarter 1997: 40.25 26.75
Third Quarter 1997: 41.125 34.50
Fourth Quarter 1997: 43.00 33.00
First Quarter 1996: 25.125 20.125
Second Quarter 1996: 26.50 21.375
Third Quarter 1996: 26.50 22.50
Fourth Quarter 1996: 29.50 23.875
NUMBER OF HOLDERS OF COMMON STOCK
The number of record holders of common stock as of March 2, 1998 was 108. That
number excludes the beneficial owners of shares held in "street" names or held
through participants in depositories, such as The Depository Trust Company.
21
DIVIDEND HISTORY AND RESTRICTIONS
In 1995, the Board of Directors of the Company established a policy of declaring
regular quarterly cash dividends. The first such dividend was $0.03 per share,
declared and paid in the fourth quarter of 1995. The Company declared and paid
its regular quarterly cash dividend of $0.03 per share for each quarter of 1996.
The Company declared and paid its regular quarterly cash dividend of $0.04 per
share for each quarter of 1997. On February 26, 1998, the Board of Directors
raised the quarterly dividend to $0.05 per share and declared a dividend,
payable on or before March 27, 1998 to shareholders of record on March 9, 1998.
The declaration and payment of future dividends, if any, by the Company will be
at the discretion of the Board of Directors and will depend upon many factors,
including the Company's earnings, financial condition and business needs,
capital and surplus requirements of the Company's operating subsidiaries,
regulator