SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended: Commission File Number: September 30, 2001 1-15731 ---------------------- ----------------------- EVEREST RE GROUP, LTD. ---------------------- (Exact name of Registrant as specified in its charter) Bermuda Not Applicable ------------------------ ---------------------------- (State or other juris- (IRS Employer Identification diction of incorporation Number) or organization) c/o ABG Financial & Management Services, Inc. Parker House Wildey Business Park, Wildey Road St. Michael, Barbados (246) 228-7398 (Address, including zip code, and telephone number, including area code, of registrant's principal executive office) -------------------------------------------------------------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days. YES X NO ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Number of Shares Outstanding Class at October 26, 2001 ----- ---------------------------- Common Shares, $.01 par value 46,254,583
EVEREST RE GROUP, LTD. Index To Form 10-Q PART I FINANCIAL INFORMATION --------------------- Page ITEM 1. FINANCIAL STATEMENTS ---- -------------------- Consolidated Balance Sheets at September 30, 2001 (unaudited) and December 31, 2000 3 Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2001 and 2000 (unaudited) 4 Consolidated Statements of Changes in Shareholders' Equity for the three and nine months ended September 30, 2001 and 2000 (unaudited) 5 Consolidated Statements of Cash Flows for the three and nine months ended September 30, 2001 and 2000 (unaudited) 6 Notes to Consolidated Financial Statements (unaudited) 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ----------------------------------------------------------- AND RESULTS OF OPERATIONS 18 ------------------------- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 31 ---------------------------------------------------------- PART II OTHER INFORMATION ----------------- ITEM 1. LEGAL PROCEEDINGS 32 ----------------- ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 32 ----------------------------------------- ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ------------------------------- ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None --------------------------------------------------- ITEM 5. OTHER INFORMATION None ----------------- ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 32 --------------------------------
Part I - Item 1 EVEREST RE GROUP, LTD. CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except par value per share) <TABLE> <CAPTION> September 30, December 31, ------------- ------------- 2001 2000 ------------- ------------- <S> <C> <C> ASSETS: (unaudited) Fixed maturities - available for sale, at market value (amortized cost: 2001, $5,173,716; 2000, $4,849,679) $ 5,394,882 $ 4,951,893 Equity securities, at market value (cost: 2001, $35,542; 2000, $22,340) 31,914 36,491 Short-term investments 173,221 398,542 Other invested assets 32,103 29,211 Cash 79,715 76,823 ------------- ------------- Total investments and cash 5,711,835 5,492,960 Accrued investment income 88,613 77,312 Premiums receivable 469,057 394,137 Reinsurance receivables 774,443 508,998 Funds held by reinsureds 157,481 161,350 Deferred acquisition costs 135,156 106,638 Prepaid reinsurance premiums 57,763 58,196 Deferred tax asset 188,983 174,482 Other assets 77,404 39,022 ------------- ------------- TOTAL ASSETS $ 7,660,735 $ 7,013,095 ============= ============= LIABILITIES: Reserve for losses and adjustment expenses $ 4,140,836 $ 3,786,178 Future policy benefit reserve 234,579 206,589 Unearned premium reserve 528,989 401,148 Funds held under reinsurance treaties 203,812 110,464 Losses in the course of payment 93,355 102,167 Contingent commissions 6,566 9,380 Other net payable to reinsurers 71,069 60,564 Current federal income taxes (40,055) (8,209) 8.5% Senior notes due 3/15/2005 249,674 249,615 8.75% Senior notes due 3/15/2010 199,058 199,004 Revolving credit agreement borrowings 134,000 235,000 Accrued interest on debt and borrowings 2,086 12,212 Other liabilities 116,510 65,631 ------------- ------------- Total liabilities 5,940,479 5,429,743 ------------- ------------- SHAREHOLDERS' EQUITY: Preferred shares, par value: $0.01; 50 million shares authorized; no shares issued and outstanding - - Common shares, par value: $0.01; 200 million shares authorized; 46.2 million shares issued in 2001 and 46.0 million shares issued in 2000 463 460 Additional paid-in capital 268,948 259,958 Unearned compensation (129) (170) Accumulated other comprehensive income, net of deferred income taxes of $55.0 million in 2001 and $30.4 million in 2000 146,749 72,846 Retained earnings 1,304,280 1,250,313 Treasury shares, at cost; 0.0 million shares in 2001 and 2000 (55) (55) ------------- ------------- Total shareholders' equity 1,720,256 1,583,352 ------------- ------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,660,735 $ 7,013,095 ============= ============= </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 3
EVEREST RE GROUP, LTD. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (Dollars in thousands, except per share amounts) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ------------------------ -------------------------- 2001 2000 2001 2000 ---------- ---------- ----------- ----------- (unaudited) (unaudited) <S> <C> <C> <C> <C> REVENUES: Premiums earned $ 348,502 $ 291,191 $ 1,072,134 $ 843,155 Net investment income 83,993 78,897 257,243 218,353 Net realized capital (loss) (6,525) (90) (7,646) (459) Other (expense) income (1,879) 605 (914) 1,045 ---------- ---------- ----------- ----------- Total revenues 424,091 370,603 1,320,817 1,062,094 ---------- ---------- ----------- ----------- CLAIMS AND EXPENSES: Incurred loss and loss adjustment expenses 366,564 219,953 903,636 650,011 Commission, brokerage, taxes and fees 109,698 65,863 288,781 177,793 Other underwriting expenses 15,246 12,826 42,841 37,542 Interest expense on senior notes 9,726 9,831 29,176 21,173 Interest expense on credit facility 1,574 2,100 6,090 5,451 ---------- ---------- ----------- ----------- Total claims and expenses 502,808 310,573 1,270,524 891,970 ---------- ---------- ----------- ----------- (LOSS) INCOME BEFORE TAXES (78,717) 60,030 50,293 170,124 Income tax (benefit) expense (34,952) 12,343 (13,363) 35,150 ---------- ---------- ----------- ----------- NET (LOSS) INCOME $ (43,765) $ 47,687 $ 63,656 $ 134,974 ========== ========== =========== =========== Other comprehensive income, net of tax 57,557 24,619 73,903 32,123 ---------- ---------- ----------- ----------- COMPREHENSIVE INCOME $ 13,792 $ 72,306 $ 137,559 $ 167,097 ========== ========== =========== =========== PER SHARE DATA: Average shares outstanding (000's) 46,228 45,834 46,143 45,848 Net (loss) income per common share - basic $ (0.95) $ 1.04 $ 1.38 $ 2.94 ========== ========== =========== =========== Average diluted shares outstanding (000's) 46,228 46,414 47,064 46,181 Net (loss) income per common share - diluted $ (0.93) $ 1.03 $ 1.35 $ 2.92 ========== ========== =========== =========== </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 4
EVEREST RE GROUP, LTD. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (Dollars in thousands, except per share amounts) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------ 2001 2000 2001 2000 ---------- ---------- ---------- ---------- (unaudited) (unaudited) <S> <C> <C> <C> <C> COMMON SHARES (shares outstanding): Balance, beginning of period 46,205,633 45,821,341 46,029,354 46,457,817 Issued during the period 43,254 26,511 219,533 38,655 Treasury shares acquired during the period - - - (650,400) Treasury shares reissued during the period - - - 1,780 ---------- ---------- ---------- ---------- Balance, end of period 46,248,887 45,847,852 46,248,887 45,847,852 ========== ========== ========== ========== COMMON SHARES (par value): Balance, beginning of period $ 462 $ 458 $ 460 $ 509 Retirement of common shares during the period - - - (51) Issued during the period 1 - 3 - ---------- ---------- ---------- ---------- Balance, end of period 463 458 463 458 ---------- ---------- ---------- ---------- ADDITIONAL PAID IN CAPITAL: Balance, beginning of period 267,252 252,769 259,958 390,912 Retirement of treasury shares during the period - - - (138,546) Common shares issued during the period 1,696 756 8,990 1,161 Treasury shares reissued during the period - - - (2) ---------- ---------- ---------- ---------- Balance, end of period 268,948 253,525 268,948 253,525 ---------- ---------- ---------- ---------- UNEARNED COMPENSATION: Balance, beginning of period (136) (64) (170) (109) Net increase (decrease) during the period 7 (123) 41 (78) ---------- ---------- ---------- ---------- Balance, end of period (129) (187) (129) (187) ---------- ---------- ---------- ---------- ACCUMULATED OTHER COMPREHENSIVE INCOME, NET OF DEFERRED INCOME TAXES: Balance, beginning of period 89,192 (9,197) 72,846 (16,701) Net increase during the period 57,557 24,619 73,903 32,123 ---------- ---------- ---------- ---------- Balance, end of period 146,749 15,422 146,749 15,422 ---------- ---------- ---------- ---------- RETAINED EARNINGS: Balance, beginning of period 1,351,281 1,156,730 1,250,313 1,074,941 Net (loss) income (43,765) 47,687 63,656 134,974 Dividends declared ($0.07 and $0.21 per share in 2001 and $0.06 and $0.18 per share in 2000) (3,236) (2,751) (9,689) (8,249) ---------- ---------- ---------- ---------- Balance, end of period 1,304,280 1,201,666 1,304,280 1,201,666 ---------- ---------- ---------- ---------- TREASURY SHARES AT COST: Balance, beginning of period (55) (55) (55) (122,070) Retirement of treasury shares during the period - - - 138,399 Treasury shares acquired during the period - - - (16,426) Treasury shares reissued during the period - - - 42 ---------- ---------- ---------- ---------- Balance, end of period (55) (55) (55) (55) ---------- ---------- ---------- ---------- TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD $1,720,256 $1,470,829 $1,720,256 $1,470,829 ========== ========== ========== ========== </TABLE> The accompanying notes are an integral part of the consolidated financial statements. 5
EVEREST RE GROUP, LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) <TABLE> <CAPTION> Three Months Ended Nine Months Ended September 30, September 30, -------------------------- -------------------------- 2001 2000 2001 2000 ----------- ----------- ----------- ----------- (unaudited) (unaudited) <S> <C> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (43,765) $ 47,687 $ 63,656 $ 134,974 Adjustments to reconcile net income to net cash provided by operating activities, net of effects from the purchase of subsidiary: (Increase) in premiums receivable (32,872) (22,045) (75,674) (69,207) Decrease in funds held, net 79,288 7,387 97,216 1,419 (Increase) in reinsurance receivables (198,791) (14,400) (265,907) (32,218) Decrease (increase) in deferred tax asset 4,679 4,122 (27,222) (360) Increase in reserve for losses and loss adjustment expenses 291,236 24,651 362,696 8,787 Increase in future policy benefit reserve 5,015 - 27,990 - Increase in unearned premiums 23,137 33,185 128,492 78,113 (Increase) in other assets and liabilities (60,583) (52,959) (97,350) (65,552) Non cash compensation expense 7 (123) 41 (78) Accrual of bond discount/amortization of bond premium (2,235) (2,446) (6,233) (7,557) Amortization of underwriting discount on senior notes 38 36 113 76 Realized capital losses 6,525 90 7,646 459 ----------- ----------- ----------- ----------- Net cash provided by operating activities 71,679 25,185 215,464 48,856 ----------- ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from fixed maturities matured/called - available for sale 48,563 61,965 343,657 150,770 Proceeds from fixed maturities sold - available for sale 238,632 23,664 454,085 434,801 Proceeds from equity securities sold - - 28,949 48,267 Proceeds from other invested assets sold 261 - 284 - Cost of fixed maturities acquired - available for sale (305,450) (512,133) (1,147,188) (1,482,316) Cost of equity securities acquired (9,048) (1,107) (29,075) (2,930) Cost of other invested assets acquired (298) (18) (2,105) (1,576) Net sales (purchases) of short-term securities 63,593 35,645 219,692 (41,404) Net (decrease) increase in unsettled securities transactions (52,069) (6,313) 20,757 5,555 Payment for purchase of subsidiary, net of cash acquired - 349,743 - 349,743 ----------- ----------- ----------- ----------- Net cash (used in) investing activities (15,816) (48,554) (110,944) (539,090) ----------- ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Acquisition of treasury shares net of reissuances - - - (16,533) Common shares issued during the period 1,697 756 8,993 1,110 Dividends paid to shareholders (3,236) (2,751) (9,689) (8,249) Proceeds from issuance of senior notes - - - 448,507 Borrowing on revolving credit agreement - 31,000 22,000 78,000 Repayments on revolving credit agreement - - (123,000) - ----------- ----------- ----------- ----------- Net cash (used in) provided by financing activities (1,539) 29,005 (101,696) 502,835 ----------- ----------- ----------- ----------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 7,270 (6,147) 68 (8,502) ----------- ----------- ----------- ----------- Net increase (decrease) in cash 61,594 (511) 2,892 4,099 Cash, beginning of period 18,121 66,837 76,823 62,227 ----------- ----------- ----------- ----------- Cash, end of period $ 79,715 $ 66,326 $ 79,715 $ 66,326 =========== =========== =========== =========== SUPPLEMENTAL CASH FLOW INFORMATION Cash transactions: Income taxes paid, net $ 47 $ 16,553 $ 54,564 $ 55,072 Interest paid $ 20,621 $ 21,467 $ 45,278 $ 24,377 Non-cash financing transaction: Issuance of common shares $ 7 $ (123) $ 41 $ (78) </TABLE> In the quarter ended September 30, 2000, the Company purchased all of the capital stock of Mt. McKinley Insurance Company for $51,800. In conjunction with the acquisition, the fair value of assets acquired was $679,672 and liabilities assumed was $627,872. The accompanying notes are an integral part of the consolidated financial statements. 6
EVEREST RE GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For the Three and Nine Months Ended September 30, 2001 and 2000 1. GENERAL On February 24, 2000, a corporate restructuring was completed and Everest Re Group, Ltd. ("Group") became the new parent holding company of Everest Reinsurance Holdings, Inc. ("Holdings"), which remains the holding company for Group's U.S. based operations. The "Company" means Group and its subsidiaries, except when referring to periods prior to February 24, 2000, when it means Holdings and its subsidiaries. The consolidated financial statements of the Company for the three and nine months ended September 30, 2001 and 2000 include all adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair presentation of the results on an interim basis. Certain financial information, which is normally included in annual financial statements prepared in accordance with generally accepted accounting principles in the United States of America, has been omitted since it is not required for interim reporting purposes. The year-end consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles in the United States of America. The results for the three and nine months ended September 30, 2001 and 2000 are not necessarily indicative of the results for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, 2000, 1999 and 1998 included in the Company's most recent Form 10-K filing. 2. UNUSUAL LOSS EVENT As a result of the terrorist attacks at the World Trade Center, the Pentagon and on various airlines on September 11, 2001 (collectively the "September 11 attacks"), the Company incurred pre-tax losses, based on an estimate of ultimate exposure developed through a review of its coverages, which totaled $195.0 million gross of reinsurance and $55.0 million net of reinsurance. Associated with this reinsurance were $60.0 million of pre-tax charges, predominantly from adjustment premiums, resulting in a total pre-tax loss from the September 11 attacks of $115.0 million. After tax recoveries relating specifically to this unusual loss event, the net loss from the September 11 attacks totaled $75.0 million. Over 90% of the losses ceded were to treaties where the reinsurers' obligations are fully collateralized, which in the Company's opinion eliminates reinsurance collection risk. 3. ACQUISITIONS On September 19, 2000, Holdings completed the acquisition of all of the issued and outstanding capital stock of Gibraltar Casualty Company ("Gibraltar") from The Prudential Insurance Company of America ("The Prudential") pursuant to a Stock Purchase Agreement between The Prudential and Holdings dated February 24, 2000 and amended on August 8, 2000 (the "Stock Purchase Agreement"). As a result of the acquisition, Gibraltar became a wholly owned subsidiary of Holdings and, immediately following the acquisition, its name was changed to Mt. McKinley Insurance Company ("Mt. McKinley"). Mt. McKinley, a run-off property and casualty insurer in the United States, has had a long relationship with Holdings 7
EVEREST RE GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) For the Three and Nine Months Ended September 30, 2001 and 2000 and its principal operating company, Everest Reinsurance Company ("Everest Re"). Mt. McKinley was formed in 1978 by Everest Re and wrote direct insurance until 1985, when it was placed in run-off. In 1991, Mt. McKinley became a subsidiary of The Prudential. Mt. McKinley is also a reinsurer of Everest Re. Under a series of transactions dating to 1986, Mt. McKinley reinsured several components of Everest Re's business. In particular, Mt. McKinley provided stop-loss reinsurance protection, in connection with the Company's October 5, 1995 Initial Public Offering, for any adverse loss development on Everest Re's June 30, 1995 (December 31, 1994 for catastrophe losses) reserves, with $375.0 million in limits, of which $89.4 million was available (the "Stop Loss Agreement") at the acquisition date. The Stop Loss Agreement and other reinsurance contracts between Mt. McKinley and Everest Re remain in effect following the acquisition. However, these contracts have become transactions with affiliates with the financial impact eliminated in consolidation. Also during 2000, the Company completed two additional acquisitions, Everest Security Insurance Company, formerly known as Southeastern Security Insurance Company, a United States property and casualty company whose primary business is non-standard automobile insurance, and Everest International Reinsurance, Ltd. ("Everest International"), formerly known as AFC Re, Ltd., a Bermuda based life and annuity reinsurer. 4. CONTINGENCIES The Company continues to receive claims under expired contracts which assert alleged injuries and/or damages relating to or resulting from toxic torts, toxic waste and other hazardous substances, such as asbestos. The Company's asbestos claims typically involve potential liability for bodily injury from exposure to asbestos or for property damage resulting from asbestos or products containing asbestos. The Company's environmental claims typically involve potential liability for (a) the mitigation or remediation of environmental contamination or (b) bodily injury or property damages caused by the release of hazardous substances into the land, air or water. The Company's reserves include an estimate of the Company's ultimate liability for asbestos and environmental claims for which ultimate value cannot be estimated using traditional reserving techniques. There are significant uncertainties in estimating the amount of the Company's potential losses from asbestos and environmental claims. Among the complications are: (a) potentially long waiting periods between exposure and manifestation of any bodily injury or property damage; (b) difficulty in identifying sources of asbestos or environmental contamination; (c) difficulty in properly allocating responsibility and/or liability for asbestos or environmental damage; (d) changes in underlying laws and judicial interpretation of those laws; (e) potential for an asbestos or environmental claim to involve many insurance providers over many policy periods; (f) long reporting delays, both from insureds to insurance companies and ceding companies to reinsurers; (g) historical data concerning asbestos and environmental losses, which is more limited than historical information on other types of casualty claims; (h) questions concerning interpretation and application of insurance and reinsurance coverage; and (i) uncertainty regarding the number and identity of insureds with potential asbestos or environmental exposure. 8
EVEREST RE GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) For the Three and Nine Months Ended September 30, 2001 and 2000 Management believes that these factors continue to render reserves for asbestos and environmental losses significantly less subject to traditional actuarial methods than are reserves on other types of losses. Given these uncertainties, management believes that no meaningful range for such ultimate losses can be established. The Company establishes reserves to the extent that, in the judgment of management, the facts and prevailing law reflect an exposure for the Company or its ceding companies. In connection with the acquisition of Mt. McKinley, which has significant exposure to asbestos and environmental claims, Prudential Property and Casualty Insurance Company ("Prupac"), a subsidiary of The Prudential, provided reinsurance to Mt. McKinley covering 80% ($160.0 million) of the first $200.0 million of any adverse development of Mt. McKinley's reserves as of September 19, 2000 and The Prudential guaranteed Prupac's obligations to Mt. McKinley. Through September 30, 2001, cessions under this reinsurance agreement have reduced the available remaining limits to $137.8 million net of coinsurance. Due to the uncertainties discussed above, the ultimate losses may vary materially from current loss reserves and, depending on coverage under the Company's various reinsurance arrangements, could have a material adverse effect on the Company's future financial condition, results of operations and cash flows. The following table shows the development of prior year asbestos and environmental reserves on both a gross and net of retrocessional basis for the three and nine months ended September 30, 2001 and 2000: <TABLE> <CAPTION> (dollar amounts in thousands) Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 --------------------- --------------------- <S> <C> <C> <C> <C> Gross basis: Beginning of period reserves (1) $ 673,927 $ 580,268 $ 693,704 $ 614,236 Incurred losses 12,563 - 29,673 - Paid losses (2) (18,830) 153,035 (55,717) 119,067 --------- --------- --------- --------- End of period reserves $ 667,660 $ 733,303 $ 667,660 $ 733,303 ========= ========= ========= ========= Net basis: Beginning of period reserves (1) $ 606,496 $ 344,904 $ 628,535 $ 365,069 Incurred losses 2,218 - 4,921 - Paid losses (2) (17,230) 305,877 (41,972) 285,712 --------- --------- --------- --------- End of period reserves $ 591,484 $ 650,781 $ 591,484 $ 650,781 ========= ========= ========= ========= </TABLE> (1) The January 1, 2001 beginning of period reserves include Mt. McKinley's reserves from the 2000 acquisition transaction. (2) Paid losses for the three months and nine months ended September 30, 2000 were reduced by $161.4 million gross and $310.8 million net, respectively, reflecting the incoming reserves at the acquisition of Mt. McKinley, together with the impact of eliminating consolidation entries with respect to inter-company reinsurance pre-dating the acquisition. 9
EVEREST RE GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) For the Three and Nine Months Ended September 30, 2001 and 2000 At September 30, 2001, the gross reserves for asbestos and environmental losses were comprised of $113.5 million representing case reserves reported by ceding companies, $60.4 million representing additional case reserves established by the Company on assumed reinsurance claims, $165.2 million representing case reserves established by the Company on direct excess insurance claims, including Mt. McKinley, and $328.6 million representing incurred but not reported ("IBNR") reserves. The Company is involved from time to time in ordinary routine litigation and arbitration proceedings incidental to its business. The Company does not believe that there are any other material pending legal proceedings to which it or any of its subsidiaries or their properties are subject. The Prudential sells annuities which are purchased by property and casualty insurance companies to settle certain types of claim liabilities. In 1993 and prior years, the Company, for a fee, accepted the claim payment obligation of these property and casualty insurers, and, concurrently, became the owner of the annuity or assignee of the annuity proceeds. In these circumstances, the Company would be liable if The Prudential were unable to make the annuity payments. The estimated cost to replace all such annuities for which the Company was contingently liable at September 30, 2001 was $140.7 million. The Company has purchased annuities from an unaffiliated life insurance company to settle certain claim liabilities of the Company. Should the life insurance company become unable to make the annuity payments, the Company would be liable for those claim liabilities. The estimated cost to replace such annuities at September 30, 2001 was $13.4 million. 10
EVEREST RE GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) For the Three and Nine Months Ended September 30, 2001 and 2000 5. EARNINGS PER SHARE Net (loss) income per common share has been computed as follows: <TABLE> <CAPTION> (shares and dollar amounts in thousands except per share amounts) Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 ---------------------- ---------------------- <S> <C> <C> <C> <C> Net (loss) income (numerator) ($ 43,765) $ 47,687 $ 63,656 $ 134,974 ========= ========= ========= ========= Weighted average common and effect of dilutive shares used in the computation of net income per share: Average shares outstanding - basic (denominator) 46,228 45,834 46,143 45,848 Effect of dilutive shares 869 580 921 333 --------- --------- --------- --------- Average shares outstanding - diluted (denominator) 47,097 46,414 47,064 46,181 --------- --------- --------- --------- Weighted average common equivalent shares when anti-dilutive 46,228 45,834 46,143 45,848 --------- --------- --------- --------- Net (loss) income per common share: Basic ($ 0.95) $ 1.04 $ 1.38 $ 2.94 Diluted ($ 0.95) $ 1.03 $ 1.35 $ 2.92 </TABLE> On a pro-forma basis, net income per common share on a fully diluted basis, excluding the anti-dilutive effect which arises from a net loss, was ($0.93) for the three months ended September 30, 2001. All outstanding options to purchase common shares at September 30, 2001 and 2000 were included in the computation of diluted earnings per share for the three month and nine month periods ended on such dates, because the average market price of the common shares was greater than the options exercise price during these periods. 11
EVEREST RE GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) For the Three and Nine Months Ended September 30, 2001 and 2000 6. OTHER COMPREHENSIVE INCOME The Company's other comprehensive income is comprised as follows: <TABLE> <CAPTION> (dollar amounts in thousands) Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 ------------------------ ------------------------ <S> <C> <C> <C> <C> Net unrealized appreciation of investments, net of deferred income taxes $ 58,549 $ 25,360 $ 75,686 $ 33,061 Currency translation adjustments, net of deferred income taxes (992) (741) (1,783) (938) ---------- ---------- ---------- ---------- Other comprehensive income, net of deferred income taxes $ 57,557 $ 24,619 $ 73,903 $ 32,123 ========== ========== ========== ========== </TABLE> 7. CREDIT LINE On December 21, 1999, Holdings entered into a three-year senior revolving credit facility with a syndicate of lenders (the "Credit Facility"). First Union National Bank is the administrative agent for the Credit Facility. The Credit Facility is used for liquidity and general corporate purposes and replaced a prior credit facility. The Credit Facility provides for the borrowing of up to $150.0 million with interest at a rate selected by the Company equal to either (i) the Base Rate (as defined below) or (ii) an adjusted London InterBank Offered Rate ("LIBOR") plus a margin. The Base Rate is the higher of the rate of interest established by First Union National Bank from time to time as its prime rate or the Federal Funds rate plus 0.5% per annum. On December 18, 2000, the Credit Facility was amended to extend the borrowing limit to $235.0 million for a period of 120 days. This 120-day period expired during the three months ended March 31, 2001 and the limit has reverted back to $150.0 million. The amount of margin and the fees payable for the Credit Facility depend upon Holdings' senior unsecured debt rating. Group has guaranteed all of Holdings' obligations under the Credit Facility. The Credit Facility requires Group to maintain a debt to capital ratio of not greater than 0.35 to 1, Holdings to maintain a minimum interest coverage ratio of 2.5 to 1 and Everest Re to maintain its statutory surplus at $850.0 million plus 25% of aggregate net income and 25% of aggregate capital contributions earned or received after December 31, 1999. The Company was in compliance with all covenants under the facility at September 30, 2001 and 2000 as well as for the three and nine months ended September 30, 2001 and 2000. 12
EVEREST RE GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) For the Three and Nine Months Ended September 30, 2001 and 2000 During the three and nine months ended September 30, 2001, Holdings made payments on the Credit Facility of $0.0 million and $123.0 million, respectively, and borrowings of $0.0 million and $22.0 million, respectively. As of September 30, 2001 and 2000, Holdings had outstanding Credit Facility borrowings of $134.0 million and $137.0 million, respectively. Interest expense incurred in connection with these borrowings was $1.6 million and $2.1 million for the three months ended September 30, 2001 and 2000, respectively, and $6.1 million and $5.5 million for the nine months ended September 30, 2001 and 2000, respectively. 8. SENIOR NOTES During the first quarter of 2000, Holdings completed a public offering of $200.0 million principal amount of 8.75% senior notes due March 15, 2010 and $250.0 million principal amount of 8.5% senior notes due March 15, 2005. During the first quarter of 2000, Holdings distributed $400.0 million of these proceeds to Group of which $250.0 million was used by Group to capitalize Everest Reinsurance (Bermuda), Ltd. Interest expense incurred in connection with these senior notes was $9.7 million and $9.8 million for the three months ended September 30, 2001 and 2000, respectively, and $29.2 million and $21.2 million for the nine months ended September 30, 2001 and 2000, respectively. 9. SEGMENT REPORTING During the quarter ended December 31, 2000, the Company's management realigned its operating segments to better reflect the way that management monitors and evaluates the Company's financial performance. The Company has restated all information for prior years to conform to the new segment structure. The Company, through its subsidiaries, operates in five segments: U.S. Reinsurance, U.S. Insurance, Specialty Reinsurance, International Reinsurance and Bermuda Reinsurance. The U.S. Reinsurance operation writes property and casualty treaty reinsurance through reinsurance brokers as well as directly with ceding companies within the United States, in addition to property, casualty and specialty facultative reinsurance through brokers and directly with ceding companies within the United States. The U.S. Insurance operation writes property and casualty insurance primarily through general agent relationships and surplus lines brokers within the United States. The Specialty Reinsurance operation writes accident and health, marine, aviation and surety business within the United States and worldwide through brokers and directly with ceding companies. The International Reinsurance operation writes property and casualty reinsurance through the Company's branches in Belgium, London, Canada, and Singapore, in addition to foreign "home-office" business. The Bermuda Reinsurance operation writes property, casualty, life and annuity business through brokers and directly with ceding companies. 13
EVEREST RE GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) For the Three and Nine Months Ended September 30, 2001 and 2000 These segments are managed in a carefully coordinated fashion with strong elements of central control, including with respect to capital, investments and support operations. As a result, management monitors and evaluates the financial performance of these operating segments principally based upon their underwriting gain or loss ("underwriting results"). Underwriting results include earned premium less incurred loss and loss adjustment expenses, commission and brokerage expenses and other underwriting expenses. The following tables present the relevant underwriting results for the operating segments for the three and nine months ended September 30, 2001 and 2000, with all dollar values presented in thousands. <TABLE> <CAPTION> U.S. REINSURANCE -------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 ------------------------------------------------ <S> <C> <C> <C> <C> Earned premiums $ 91,768 $ 105,817 $ 341,134 $ 334,844 Incurred losses and loss adjustment expenses 168,479 79,004 353,574 256,937 Commission and brokerage 42,592 22,329 106,444 49,171 Other underwriting expenses 4,049 4,529 11,383 12,606 --------- --------- --------- --------- Underwriting (loss) gain ($ 123,352) ($ 45) ($ 130,267) $ 16,130 ========= ========= ========= ========= </TABLE> <TABLE> <CAPTION> U.S. INSURANCE -------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 ------------------------------------------------ <S> <C> <C> <C> <C> Earned premiums $ 82,901 $ 25,788 $ 203,399 $ 64,747 Incurred losses and loss adjustment expenses 58,919 16,128 145,183 40,813 Commission and brokerage 18,751 4,235 46,279 15,044 Other underwriting expenses 4,919 2,386 12,836 7,872 --------- --------- --------- --------- Underwriting gain (loss) $ 312 $ 3,039 ($ 899) $ 1,018 ========= ========= ========= ========= </TABLE> 14
EVEREST RE GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) For the Three and Nine Months Ended September 30, 2001 and 2000 <TABLE> <CAPTION> SPECIALTY REINSURANCE -------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 ------------------------------------------------ <S> <C> <C> <C> <C> Earned premiums $ 103,242 $ 83,975 $ 296,050 $ 226,801 Incurred losses and loss adjustment expenses 90,027 59,680 238,123 173,843 Commission and brokerage 28,778 18,979 76,343 58,372 Other underwriting expenses 1,350 1,626 4,300 4,489 --------- --------- --------- --------- Underwriting (loss) gain ($ 16,913) $ 3,690 ($ 22,716) ($ 9,903) ========= ========= ========= ========= </TABLE> <TABLE> <CAPTION> INTERNATIONAL REINSURANCE -------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 ------------------------------------------------ <S> <C> <C> <C> <C> Earned premiums $ 65,917 $ 75,611 $ 222,321 $ 216,763 Incurred losses and loss adjustment expenses 41,064 65,141 154,300 178,418 Commission and brokerage 19,310 20,320 59,044 55,206 Other underwriting expenses 3,960 3,550 10,573 10,396 --------- --------- --------- --------- Underwriting gain (loss) $ 1,583 ($ 13,400) ($ 1,596) ($ 27,257) ========= ========= ========= ========= </TABLE> <TABLE> <CAPTION> BERMUDA REINSURANCE -------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 ------------------------------------------------ <S> <C> <C> <C> <C> Earned premiums $ 4,674 $ - $ 9,230 $ - Incurred losses and loss adjustment expenses 8,075 - 12,456 - Commission and brokerage 267 - 671 - Other underwriting expenses 357 - 1,098 - --------- --------- --------- --------- Underwriting (loss) ($ 4,025) $ - ($ 4,995) $ - ========= ========= ========= ========= </TABLE> 15
EVEREST RE GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) For the Three and Nine Months Ended September 30, 2001 and 2000 The following table reconciles the underwriting results for the operating segments to income before tax as reported in the consolidated statements of operations and comprehensive income, with all dollar values presented in thousands: <TABLE> <CAPTION> ------------------------------------------------ Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 ------------------------------------------------ <S> <C> <C> <C> <C> Underwriting (loss) ($ 142,395) ($ 6,716) ($ 160,473) ($ 20,012) Net investment income 83,993 78,897 257,243 218,353 Realized (loss) (6,525) (90) (7,646) (459) Corporate operations 611 735 2,651 2,179 Interest expense 11,300 11,931 35,266 26,624 Other (expense) income (1,879) 605 (914) 1,045 --------- --------- --------- --------- (Loss) income before taxes ($ 78,717) $ 60,030 $ 50,293 $ 170,124 ========= ========= ========= ========= </TABLE> The Company writes premium in the United States, Bermuda and international markets. The revenues, net income and identifiable assets of the individual foreign countries in which the Company writes business are not material. 10. NEW ACCOUNTING PRONOUNCEMENT In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS 133"). In June 1999, the FASB issued Statement of Financial Accounting Standards No. 137, "Deferral of the Effective Date of FASB Statement No. 133" ("FAS 137"), which allowed entities that had not adopted FAS 133 to defer its effective date to all fiscal quarters of all fiscal years beginning after June 15, 2000. In June 2000, the FASB issued Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133," which amended the accounting and reporting standards of FAS 133. FAS 133 established accounting and reporting standards for derivative instruments. It requires that an entity recognize all derivatives as either assets or liabilities in the consolidated balance sheet and measure those instruments at fair value. The Company adopted the deferral provisions of FAS 137, effective January 1, 2000 and adopted FAS 133, as amended, effective January 1, 2001. The Company continually seeks to expand its product portfolio and certain of its products have been determined to meet the definition of a derivative under FAS 133. These products consist of credit default swaps and specialized equity options, all of which have characteristics which allow the transactions to be analyzed using approaches consistent with those used in the Company's 16
EVEREST RE GROUP, LTD. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (continued) For the Three and Nine Months Ended September 30, 2001 and 2000 reinsurance operations. The Company has previously recorded the derivatives at their fair value in earlier financial statements, but chose to delay the adoption of FAS 133. As such, the adoption of FAS 133 has not caused a cumulative-effect-type adjustment. The fair value of these products are included as part of other liabilities and the corresponding mark to market adjustment is included as part of other expense and not shown separately due to their immaterial nature. In June 2001, the FASB issued FAS 142, "Goodwill and Other Intangible Assets". FAS 142 establishes new accounting and reporting standards for acquired goodwill and other intangible assets. It requires that an entity determine if the goodwill or other intangible asset has an indefinite useful life or a finite useful life. Those with indefinite useful lives will not be subject to amortization and must be tested annually for impairment. Those with finite useful lives will be subject to amortization and must be tested annually for impairment. This statement is effective for all fiscal quarters of all fiscal years beginning after December 15, 2001. Management believes that implementation of this statement will not have a material impact on the financial position of the Company. 11. RELATED-PARTY TRANSACTIONS During the normal course of business, the Company, through its affiliates, engages in arms-length reinsurance and brokerage and commission business transactions with companies controlled by or affiliated with its outside directors. Such transactions, individually and in the aggregate, are immaterial to the Company's financial condition, results of operations and cash flows. 17
Part I - Item 2 EVEREST RE GROUP, LTD. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS RESTRUCTURING On February 24, 2000, a corporate restructuring was completed and Everest Re Group, Ltd. ("Group") became the new parent holding company of Everest Reinsurance Holdings, Inc. ("Holdings"), which remains the holding company for Group's U.S. based operations. The "Company" means Group and its subsidiaries, except when referring to periods prior to February 24, 2000, when it means Holdings and its subsidiaries. UNUSUAL LOSS EVENT As a result of the terrorist attacks at the World Trade Center, the Pentagon and on various airlines on September 11, 2001 (collectively the "September 11 attacks"), the Company incurred pre-tax losses, based on an estimate of ultimate exposure developed through a review of its coverages, which totaled $195.0 million gross of reinsurance and $55.0 million net of reinsurance. Associated with this reinsurance were $60.0 million of pre-tax charges, predominantly from adjustment premiums, resulting in a total pre-tax loss from the September 11 attacks of $115.0 million. After tax recoveries relating specifically to this unusual loss event, the net loss from the September 11 attacks totaled $75.0 million. Over 90% of the losses ceded were to treaties where the reinsurers' obligations are fully collateralized, which in the Company's opinion eliminates reinsurance collection risk. ACQUISITIONS On September 19, 2000, Holdings completed the acquisition of all of the issued and outstanding capital stock of Gibraltar Casualty Company ("Gibraltar") from The Prudential Insurance Company of America ("The Prudential") pursuant to a Stock Purchase Agreement between The Prudential and Holdings dated February 24, 2000 and amended on August 8, 2000 (the "Stock Purchase Agreement"). As a result of the acquisition, Gibraltar became a wholly owned subsidiary of Holdings and, immediately following the acquisition, its name was changed to Mt. McKinley Insurance Company ("Mt. McKinley"). In connection with the acquisition of Mt. McKinley, which has significant exposure to asbestos and environmental claims, Prudential Property and Casualty Insurance Company ("Prupac"), a subsidiary of The Prudential, provided reinsurance to Mt. McKinley covering 80% ($160.0 million) of the first $200.0 million of any adverse development of Mt. McKinley's reserves as of September 19, 2000 and The Prudential guaranteed Prupac's obligations to Mt. McKinley. Mt. McKinley, a run-off property and casualty insurer in the United States, has had a long relationship with Holdings and its principal operating company, Everest Reinsurance Company ("Everest Re"). Mt. McKinley was formed in 1978 by Everest Re and wrote direct insurance until 1985, when it was placed in run-off. In 1991, Mt. McKinley became a subsidiary of The Prudential. Mt. McKinley is 18
also a reinsurer of Everest Re. Under a series of transactions dating to 1986, Mt. McKinley reinsured several components of Everest Re's business. In particular, Mt. McKinley provided stop-loss reinsurance protection, in connection with the Company's October 5, 1995 Initial Public Offering, for any adverse loss development on Everest Re's June 30, 1995 (December 31, 1994 for catastrophe losses) reserves, with $375.0 million in limits, of which $89.4 million was available (the "Stop Loss Agreement") at the acquisition date. The Stop Loss Agreement and other reinsurance contracts between Mt. McKinley and Everest Re remain in effect following the acquisition. However, these contracts have become transactions with affiliates with the financial impact eliminated in consolidation. Also during 2000, the Company completed two additional acquisitions, Everest Security Insurance Company ("ESIC"), formerly known as Southeastern Security Insurance Company, a United States property and casualty company whose primary business is non-standard auto mobile insurance, and Everest International Reinsurance, Ltd. ("Everest International"), formerly known as AFC Re, Ltd. ("AFC Re"), a Bermuda based life and annuity reinsurer. INDUSTRY CONDITIONS Losses from the September 11 attacks have reduced industry capacity and caused individual insurance and reinsurance industry participants to reassess their capital position, tolerance for risk, exposure control mechanisms and the price and terms at which they will take on risk. The result has been immediate and significant upward pressure on rates and tightening of limits, terms and conditions and availability. These characteristics of a hardening market exist in varying degrees across insurance and reinsurance business lines, although supply and demand elements of the market have not yet fully re-settled into equilibrium. In addition to the modest rate increases and terms and condition improvements evident in many insurance and reinsurance lines since 1999, there has been an apparent reversal of the trend seen from 1987 to 1999 toward increasingly competitive global market conditions as reflected by decreasing rates and broadening terms and conditions and availability. Although the Company is encouraged by the apparent new trend, there remains uncertainty as to its strength and persistence. SEGMENT INFORMATION During the quarter ended December 31, 2000, the Company's management realigned its operating segments to better reflect the way that management monitors and evaluates the Company's financial performance. The Company has restated all information for prior years to conform to the new segment structure. The Company, through its subsidiaries, operates in five segments: U.S. Reinsurance, U.S. Insurance, Specialty Reinsurance, International Reinsurance and Bermuda Reinsurance. The U.S. Reinsurance operation writes property and casualty treaty reinsurance through reinsurance brokers as well as directly with ceding companies within the United States, in addition to property, casualty and specialty facultative reinsurance through brokers and directly with ceding companies within the United States. The U.S. Insurance operation writes property and casualty insurance primarily through general agent relationships and surplus lines brokers within the United States. The Specialty Reinsurance operation writes accident and health ("A&H"), marine, aviation and surety business within the United States and worldwide through brokers and directly with ceding companies. The International Reinsurance operation writes property and casualty reinsurance through the Company's branches in Belgium, London, Canada, and Singapore, in addition to foreign "home-office" business. The Bermuda Reinsurance operation writes property, casualty, life and annuity business through brokers and directly with ceding companies. 19
These segments are managed in a carefully coordinated fashion with strong elements of central control, including with respect to capital, investments and support operations. As a result, management monitors and evaluates the financial performance of these operating segments principally based upon their underwriting results. THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2000 PREMIUMS. Gross premiums written increased 41.5% to $503.3 million in the three months ended September 30, 2001 from $355.6 million in the three months ended September 30, 2000 as the Company took advantage of selected growth opportunities, while continuing to maintain a disciplined underwriting approach. Premium growth areas included an 89.2% ($65.4 million) increase in the U.S. Insurance operation, principally attributable to growth in workers' compensation insurance, a 36.8% ($41.6 million) increase in the U.S. Reinsurance operation, primarily reflecting improved market conditions, a 29.4% ($25.1 million) increase in the Specialty Reinsurance operation, principally attributable to growth in medical stop loss business, a component of A&H writings, and $16.2 million of writings through the Bermuda Reinsurance operation, which began writing business late in 2000. Partially offsetting these increases was a 0.7% ($0.6 million) decrease in the International Reinsurance operation. The Company continued to decline business that did not meet its objectives regarding underwriting profitability. Ceded premiums increased to $123.1 million in the three months ended September 30, 2001 from $53.5 million in the three months ended September 30, 2000. This increase was principally attributable to $59.9 million of adjustment premiums incurred under the 2001 accident year aggregate excess of loss element of the Company's corporate retrocessional program relating to losses incurred as a result of the September 11 attacks, together with increased utilization of contract specific retrocessions in the U.S. Insurance operation. The ceded premiums for the three months ended September 30, 2001 and 2000 also included adjustment premiums of $10.9 million and $7.0 million, respectively, relating to claims made under the 1999 accident year aggregate excess of loss element of the Company's corporate retrocessional program. Net premiums written increased by 25.9% to $380.1 million in the three months ended September 30, 2001 from $302.0 million in the three months ended September 30, 2000. This increase was consistent with the increase in gross premiums written, partially offset by the increase in ceded premiums. PREMIUM REVENUES. Net premiums earned increased by 19.7% to $348.5 million in the three months ended September 30, 2001 from $291.2 million in the three months ended September 30, 2000. Contributing to this increase was a 221.5% ($57.1 million) increase in the U.S. Insurance operation, a 22.9% ($19.3 million) increase in the Specialty Reinsurance operation and $4.7 million of net premiums earned from the Bermuda Reinsurance operation. These increases were partially offset by a 13.3% ($14.0 million) decrease in the U.S. Reinsurance operation and a 12.8% ($9.7 million) decrease in the International Reinsurance operation. All of these changes reflect period to period changes in net written premiums and business mix together with normal variability in earnings patterns. Business mix changes occur not only as the Company shifts emphasis between products, lines of business, distribution channels and markets but also as individual contracts renew or non-renew, almost always with changes in coverage, 20
structure, prices and/or terms, and as new contracts are accepted with coverages, structures, prices and/or terms different from those of expiring contracts. As premium reporting and earnings and loss and commission characteristics derive from the provisions of individual contracts, the continuous turnover of individual contracts, arising from both strategic shifts and day to day underwriting, can and does introduce appreciable background variability in various underwriting line items. EXPENSES. Incurred loss and loss adjustment expenses ("LAE") increased by 66.7% to $366.6 million in the three months ended September 30, 2001 from $220.0 million in the three months ended September 30, 2000. The increase in incurred losses and LAE was principally attributable to the impact of incurred losses relating to the September 11 attacks, the increase in net premiums earned and the impact of changes in the Company's mix of business. Incurred losses and LAE include catastrophe losses, which include the impact of both current period events, and favorable and unfavorable development on prior period events and are net of reinsurance. Catastrophe losses, net of contract specific cessions but before cessions under the corporate retrocessional program, were $192.8 million in the three months ended September 30, 2001 and related principally to the September 11 attacks, compared to net catastrophe losses of $4.4 million in the three months ended September 30, 2000. Incurred losses and LAE for the three months ended September 30, 2001 reflected ceded losses and LAE of $225.5 million compared to ceded losses and LAE in the three months ended September 30, 2000 of $35.7 million, with the increase principally attributable to cessions relating to the September 11 attack losses and to the increased utilization of contract specific retrocessions in the U.S. Insurance operation. The ceded losses and LAE for the three months ended September 30, 2001 and 2000 reflect $130.0 million and $0.0 million, respectively, of losses ceded under the 2001 accident year aggregate excess of loss component of the Company's corporate retrocessional program. The ceded losses and LAE for the three months ended September 30, 2001 and 2000 reflect $20.0 million and $15.6 million, respectively, of losses ceded under the 1999 accident year aggregate excess of loss component of the Company's corporate retrocessional program. Contributing to the increase in incurred losses and LAE in the three months ended September 30, 2001 from the three months ended September 30, 2000 were a 265.3% ($42.8 million) increase in the U.S. Insurance operation principally reflecting increased premium volume coupled with changes in this segment's specific reinsurance programs, a 113.3% ($89.5 million) increase in the U.S. Reinsurance operation, principally reflecting losses in connection with the September 11 attacks, a 50.8% ($30.3 million) increase in the Specialty Reinsurance operation principally reflecting losses in connection with the September 11 attacks and increased premium volume in A&H and $8.1 million of losses from the Bermuda Reinsurance operation, principally reflecting incurred losses assumed from Mt. McKinley. These increases were partially offset by a 37.0% ($24.1 million) decrease in the International Reinsurance operation related principally to a decrease in catastrophe losses. Incurred losses and LAE for each operation were also impacted by variability relating to changes in the level of premium volume and mix of business by class and type. The Company's loss and LAE ratio ("loss ratio"), which is calculated by dividing incurred losses and LAE by premiums earned, increased by 29.7 percentage points to 105.2% in the three months ended September 30, 2001 from 75.5% in the three months ended September 30, 2000, reflecting the incurred losses and LAE discussed above. The following table shows the loss ratios for each of the Company's operating segments for the three months ended September 30, 2001 and 2000. The loss ratios for all operations were impacted by the factors noted above. 21
<TABLE> <CAPTION> OPERATING SEGMENT LOSS RATIOS -------------------------------------------------------------------------------- Segment 2001 2000 -------------------------------------------------------------------------------- <S> <C> <C> U.S. Reinsurance 183.6% 74.7% U.S. Insurance 71.1% 62.5% Specialty Reinsurance 87.2% 71.1% International Reinsurance 62.3% 86.2% Bermuda Reinsurance 172.8% N/A </TABLE> Underwriting expenses increased by 58.8% to $124.9 million in the three months ended September 30, 2001 from $78.7 million in the three months ended September 30, 2000. Commission, brokerage, taxes and fees increased by $43.8 million, principally reflecting increases in premium volume and changes in the mix of business. Other underwriting expenses increased by $2.4 million. Contributing to these underwriting expense increases were a 257.5% ($17.0 million) increase in the U.S. Insurance operation, mainly relating to increased premium volume, a 73.7% ($19.8 million) increase in the U.S. Reinsurance operation, a 46.2% ($9.5 million) increase in the Specialty Reinsurance operation and $0.6 million of expenses from the Bermuda Reinsurance operation. These increases were partially offset by a 0.1% ($0.6 million) decrease in the International Reinsurance operation. The changes for each operation's expenses principally resulted from changes in commission expenses related to changes in premium volume and business mix by class and type and, in some cases, changes in the use of specific retrocessions and the underwriting performance of the underlying business. The Company's expense ratio, which is calculated by dividing underwriting expenses by premiums earned, was 35.9% for the three months ended September 30, 2001 compared to 27.0% for the three months ended September 30, 2000. The Company's combined ratio, which is the sum of the loss and expense ratios, increased by 38.4 percentage points to 141.0% in the three months ended September 30, 2001 compared to 102.6% in the three months ended September 30, 2000. The following table shows the combined ratios for each of the Company's operating segments for the three months ended September 30, 2001 and 2000. The combined ratios for all operations were impacted by the loss and expense ratio variability noted above, and for certain operations, by the impact of adjustment premiums ceded under the accident year aggregate excess of loss element of the Company's retrocessional program, principally relating to losses incurred as the result of the September 11 attacks. <TABLE> <CAPTION> OPERATING SEGMENT COMBINED RATIOS -------------------------------------------------------------------------------- Segment 2001 2000 -------------------------------------------------------------------------------- <S> <C> <C> U.S. Reinsurance 234.4% 100.0% U.S. Insurance 99.6% 88.2% Specialty Reinsurance 116.4% 95.6% International Reinsurance 97.6% 117.7% Bermuda Reinsurance 186.1% N/A </TABLE> Interest expense for the three months ended September 30, 2001 was $11.3 million compared to $11.9 million for the three months ended September 30, 2000. Interest expense for the three months ended September 30, 2001 reflects $9.7 million relating to Holdings' issuance of senior notes and $1.6 million relating 22
to Holdings' borrowings under its revolving credit facility. Interest expense for the three months ended September 30, 2000 reflects $9.8 million relating to Holdings' issuance of senior notes and $2.1 million relating to Holdings' borrowings under its revolving credit facility. Other expense for the three months ended September 30, 2001 was $1.9 million compared to other income of $0.6 million for the three months ended September 30, 2000. Significant contributors to other expense for the three months ended September 30, 2001 were losses realized in connection with future derivative loss events, the amortization of deferred expenses relating to Holdings' issuance of senior notes in 2000 and foreign exchange losses, partially offset by financing fees. Other income for the three months ended September 30, 2000 principally reflected foreign exchange gains. The foreign exchange gains for both periods are attributable to fluctuations in foreign currency exchange rates. INVESTMENT RESULTS. Net investment income increased 6.5% to $84.0 million in the three months ended September 30, 2001 from $78.9 million in the three months ended September 30, 2000, principally reflecting the effect of investing the $256.6 million of cash flow from operations in the twelve months ended September 30, 2001 and the investment of the approximately $554.5 million of additional net invested assets resulting from the acquisitions of Mt. McKinley and Everest International, partially offset by the impact of generally lower interest rates available on new investments. The following table shows a comparison of various investment yields as of September 30, 2001 and December 31, 2000, respectively, and for the periods ended September 30, 2001 and 2000, respectively. <TABLE> <CAPTION> 2001 2000 -------------------- <S> <C> <C> Imbedded pre-tax yield of cash and invested assets at September 30, 2001 and December 31, 2000 6.3% 6.7% Imbedded after-tax yield of cash and invested assets at September 30, 2001 and December 31, 2000 5.2% 5.4% Annualized pre-tax yield on average cash and invested assets for the three months ended September 30, 2001 and 2000 6.1% 6.5% Annualized after-tax yield on average cash and invested assets for the three months ended September 30, 2001 and 2000 5.1% 5.0% </TABLE> Net realized capital losses were $6.5 million in the three months ended September 30, 2001, reflecting realized capital losses on the Company's investments of $13.1 million, partially offset by $6.6 million of realized capital gains, compared to net realized capital losses of $0.1 million in the three months ended September 30, 2000. The net realized capital losses in the three months ended September 30, 2000 reflected realized capital losses of $0.2 million, partially offset by $0.1 million of realized capital gains. The realized capital losses in the three months ended September 30, 2001 and 2000 arose mainly from activity in the Company's U.S. fixed maturity portfolio. The realized capital gains in the three months ended September 30, 2001 and 2000 arose mainly from activity in the Company's equity portfolio. 23
INCOME TAXES. The Company generated income tax benefits of $35.0 million in the three months ended September 30, 2001 compared to income tax expense of $12.3 million incurred in the three months ended September 30, 2000. This tax benefit primarily resulted from the losses relating to the September 11 attacks, for which the benefit has been calculated based on the specific impacts of this unusual event. NET INCOME. Net loss was $43.8 million in the three months ended September 30, 2001 compared to net income of $47.7 million in the three months ended September 30, 2000, with the change principally attributable to the impact of the September 11 attacks. NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2000 PREMIUMS. Gross premiums written increased 43.5% to $1,415.0 million in the nine months ended September 30, 2001 from $986.0 million in the nine months ended September 30, 2000 as the Company took advantage of selected growth opportunities, while continuing to maintain a disciplined underwriting approach. Premium growth areas included a 162.8% ($241.9 million) increase in the U.S. Insurance operation, principally attributable to growth in workers' compensation insurance, a 34.3% ($79.1 million) increase in the Specialty Reinsurance operation, principally attributable to growth in medical stop loss business, a component of A&H writings, an 18.7% ($69.6 million) increase in the U.S. Reinsurance operation, primarily reflecting improved market conditions, a 5.1% ($11.9 million) increase in the International Reinsurance operation, mainly attributable to growth in Latin America and $26.4 million of writings through the Bermuda Reinsurance operation, which began writing business late in 2000. The Company continued to decline business that did not meet its objectives regarding underwriting profitability. Ceded premiums increased to $221.1 million in the nine months ended September 30, 2001 from $101.3 million in the nine months ended September 30, 2000. This increase was principally attributable to $59.9 million of adjustment premiums incurred under the 2001 accident year aggregate excess of loss element of the Company's corporate retrocessional program relating to losses incurred as a result of the September 11 attacks, together with increased utilization of contract specific retrocessions in the U.S. Insurance operation. The ceded premiums for the nine months ended September 30, 2001 and 2000 also included adjustment premiums of $26.3 million and $18.6 million, respectively, relating to claims made under the 1999 accident year aggregate excess of loss element of the Company's corporate retrocessional program. Net premiums written increased by 34.9% to $1,193.9 million in the nine months ended September 30, 2001 from $884.7 million in the nine months ended September 30, 2000. This increase was consistent with the increase in gross premiums written, partially offset by the increase in ceded premiums. PREMIUM REVENUES. Net premiums earned increased by 27.2% to $1,072.1 million in the nine months ended September 30, 2001 from $843.2 million in the nine months ended September 30, 2000. Contributing to this increase was a 214.1% ($138.7 million) increase in the U.S. Insurance operation, a 30.5% ($69.2 million) increase in the Specialty Reinsurance operation, a 2.6% ($5.6 million) increase in the International Reinsurance operation, a 1.9% ($6.3 million) increase in the U.S. Reinsurance operation and $9.2 million of net premiums earned from the 24
Bermuda Reinsurance operation. All of these changes reflect period to period changes in net written premiums and business mix together with normal variability in earnings patterns. EXPENSES. Incurred loss and LAE increased by 39.0% to $903.6 million in the nine months ended September 30, 2001 from $650.0 million in the nine months ended September 30, 2000. The increase in incurred losses and LAE was principally attributable to the increase in net premiums earned, the impact of incurred losses relating to the September 11 attacks and the impact of changes in the Company's mix of business. Incurred losses and LAE include catastrophe losses, which include the impact of both current period events, and favorable and unfavorable development on prior period events and are net of reinsurance. Catastrophe losses, net of contract specific cessions but before cessions under the corporate retrocessional program, were $222.1 million in the nine months ended September 30, 2001 and related principally to the September 11 attacks, tropical storm Alison, Petrobras Oil Rig and El Salvador earthquake loss events, compared to net catastrophe losses of $13.6 million in the nine months ended September 30, 2000. Incurred losses and LAE for the nine months ended September 30, 2001 reflected ceded losses and LAE of $332.1 million compared to ceded losses and LAE in the nine months ended September 30, 2000 of $93.0 million, with the increase principally attributable to cessions relating to the September 11 attack losses and to the increased utilization of contract specific retrocessions in the U.S. Insurance operation. The ceded losses and LAE for the nine months ended September 30, 2001 and 2000 reflect $130.0 million and $0.0 million, respectively, of losses ceded under the 2001 accident year aggregate excess of loss component of the Company's corporate retrocessional program. The ceded losses and LAE for the nine months ended September 30, 2001 and 2000 reflect $49.0 million and $39.1 million, respectively, of losses ceded under the 1999 accident year aggregate excess of loss component of the Company's corporate retrocessional program. Contributing to the increase in incurred losses and LAE in the nine months ended September 30, 2001 from the nine months ended September 30, 2000 were a 255.7% ($104.4 million) increase in the U.S. Insurance operation principally reflecting increased premium volume coupled with changes in this segments specific retrocession programs, a 37.6% ($96.6 million) increase in the U.S. Reinsurance operation, principally reflecting losses in connection with the September 11 attacks and tropical storm Alison, a 37.0% ($64.3 million) increase in the Specialty Reinsurance operation principally attributable to increased premium volume in A&H business together with losses relating to the September 11 attacks and Petrobras Oil Rig loss events and $12.5 million of losses from the Bermuda Reinsurance operation, principally reflecting incurred losses assumed from Mt. McKinley. These increases were partially offset by a 13.5% ($24.1 million) decrease in the International Reinsurance operation related principally to a decrease in catastrophe losses. Incurred losses and LAE for each operation were also impacted by variability relating to changes in the level of premium volume and mix of business by class and type. The Company's loss ratio, which is calculated by dividing incurred losses and LAE by premiums earned, increased by 7.2 percentage points to 84.3% in the nine months ended September 30, 2001 from 77.1% in the nine months ended September 30, 2000 reflecting the incurred losses and LAE discussed above. The following table shows the loss ratios for each of the Company's operating segments for the nine months ended September 30, 2001 and 2000. The loss ratios for all operations were impacted by the factors noted above. 25
<TABLE> <CAPTION> OPERATING SEGMENT LOSS RATIOS -------------------------------------------------------------------------------- Segment 2001 2000 -------------------------------------------------------------------------------- <S> <C> <C> U.S. Reinsurance 103.6% 76.7% U.S. Insurance 71.4% 63.0% Specialty Reinsurance 80.4% 76.7% International Reinsurance 69.4% 82.3% Bermuda Reinsurance 135.0% N/A </TABLE> Underwriting expenses increased by 54.0% to $331.6 million in the nine months ended September 30, 2001 from $215.3 million in the nine months ended September 30, 2000. Commission, brokerage, taxes and fees increased by $111.0 million, principally reflecting increases in premium volume and changes in the mix of business. In addition, in 2000, the Company's reassessment of the expected losses on a multi-year reinsurance treaty led to a $29.4 million decrease in contingent commissions with a corresponding increase to losses. Other underwriting expenses increased by $5.3 million. Contributing to these underwriting expense increases were a 158.0% ($36.2 million) increase in the U.S. Insurance operation, mainly relating to the increased premium volume, a 90.7% ($56.1 million) increase in the U.S. Reinsurance operation, which included the impact of the contingent commission adjustment noted above, a 28.3% ($17.8 million) increase in the Specialty Reinsurance operation, a 6.1% ($4.0 million) increase in the International Reinsurance operation and $1.8 million of expenses from the Bermuda Reinsurance operation. The changes for each operation's expenses principally resulted from changes in commission expenses related to changes in premium volume and business mix by class and type and, in some cases, changes in the use of specific retrocessions and the underwriting performance of the underlying business. The Company's expense ratio, which is calculated by dividing underwriting expenses by premiums earned, was 30.9% for the nine months ended September 30, 2001 compared to 25.6% for the nine months ended September 30, 2000. The Company's combined ratio, which is the sum of the loss and expense ratios, increased by 12.6 percentage points to 115.2% in the nine months ended September 30, 2001 compared to 102.6% in the nine months ended September 30, 2000. The following table shows the combined ratios for each of the Company's operating segments for the nine months ended September 30, 2001 and 2000. The combined ratios for all operations were impacted by the loss and expense ratio variability noted above, and for certain operations, by the impact of adjustment premiums ceded under the accident year aggregate excess of loss element of the Company's retrocessional program, principally relating to losses incurred as the result of the September 11 attacks. <TABLE> <CAPTION> OPERATING SEGMENT COMBINED RATIOS -------------------------------------------------------------------------------- Segment 2001 2000 -------------------------------------------------------------------------------- <S> <C> <C> U.S. Reinsurance 138.2% 95.2% U.S. Insurance 100.4% 98.4% Specialty Reinsurance 107.7% 104.4% International Reinsurance 100.7% 112.6% Bermuda Reinsurance 154.1% N/A </TABLE> 26
Interest expense for the nine months ended September 30, 2001 was $35.3million compared to $26.6 million for the nine months ended September 30, 2000. Interest expense for the nine months ended September 30, 2001 reflects $29.2 million relating to Holdings' issuance of senior notes and $6.1 million relating to Holdings' borrowings under its revolving credit facility. Interest expense for the nine months ended September 30, 2000 reflects $21.2 million relating to Holdings' issuance of senior notes and $5.4 million relating to Holdings' borrowings under its revolving credit facility. Other expense for the nine months ended September 30, 2001 was $0.9 million compared to other income of $1.0 million for the nine months ended September 30, 2000. Significant contributors to other expense for the nine months ended September 30, 2001 were losses realized in connection with future derivative loss events and the amortization of deferred expenses relating to Holdings' issuance of senior notes in 2000, partially offset by foreign exchange gains and financing fees. Other income for the nine months ended September 30, 2000 principally included foreign exchange gains and financing fees. The foreign exchange gains for both periods are attributable to fluctuations in foreign currency exchange rates. INVESTMENT RESULTS. Net investment income increased 17.8% to $257.2 million in the nine months ended September 30, 2001 from $218.4 million in the nine months ended September 30, 2000, principally reflecting the effect of investing the $256.6 million of cash flow from operations in the twelve months ended September 30, 2001, the investment in the second quarter of 2000 of the $450.0 million in proceeds from Holdings' issuance of senior notes and the investment of the approximately $554.5 million of additional net invested assets resulting from the acquisitions of Mt. McKinley and Everest International, partially offset by the impact of generally lower interest rates available on new investments. The following table shows a comparison of various investment yields as of September 30, 2001 and December 31, 2000, respectively, and for the periods ended September 30, 2001 and 2000, respectively. <TABLE> <CAPTION> 2001 2000 -------------------- <S> <C> <C> Imbedded pre-tax yield of cash and invested assets at September 30, 2001 and December 31, 2000 6.3% 6.7% Imbedded after-tax yield of cash and invested assets at September 30, 2001 and December 31, 2000 5.2% 5.4% Annualized pre-tax yield on average cash and invested assets for the six months ended September 30, 2001 and 2000 6.3% 6.3% Annualized after-tax yield on average cash and invested assets for the six months ended September 30, 2001 and 2000 5.1% 5.0% </TABLE> Net realized capital losses were $7.6 million in the nine months ended September 30, 2001, reflecting realized capital losses on the Company's investments of $35.7 million, partially offset by $28.1 million of realized capital gains, compared to net realized capital losses of $0.5 million in the nine months ended September 30, 2000. The net realized capital losses in the nine months ended September 30, 2000 reflected realized capital losses of $23.9 million, partially offset by $23.4 million of realized capital gains. The realized capital losses in the nine months ended September 30, 2001 and 2000 arose mainly from activity 27
in the Company's U.S. fixed maturity portfolio. The realized capital gains in the nine months ended September 30, 2001and 2000 arose mainly from activity in the Company's equity portfolio. INCOME TAXES. The Company generated income tax benefits of $13.4 million in the nine months ended September 30, 2001 compared to income tax expense of $35.2 million incurred in the nine months ended September 30, 2000. This tax benefit primarily resulted from the losses relating to the September 11 attacks, for which the benefit has been calculated based on the specific impacts of this unusual event. NET INCOME. Net income was $63.7 million in the nine months ended September 30, 2001 compared to $135.0 million in the nine months ended September 30, 2000. This decrease generally reflects the losses attributable to the September 11 attacks, partially offset by improved investment results. FINANCIAL CONDITION INVESTED ASSETS. Aggregate invested assets, including cash and short-term investments, were $5,711.8 million at September 30, 2001 and $5,493.0 million at December 31, 2000. The increase in invested assets between December 31, 2000 and September 30, 2001 resulted primarily from $215.5 million in cash flows from operations generated during the nine months ended September 30, 2001 and $101.2 million in net unrealized appreciation of the Company's investments, partially offset by $101.0 million in net payments on the Company's credit facility. LIQUIDITY. The Company's liquidity requirements are met on both a short- and long-term basis by funds provided by premiums collected, investment income, collected reinsurance receivables balances and from the sale and maturity of investments together with the availability of funds under the Company's revolving credit facility. The Company's net cash flows from operating activities were $215.5 million and $48.9 million in the nine months ended September 30, 2001 and 2000, respectively. These cash flows were impacted by net catastrophe loss payments of $21.4 million and $38.5 million in the nine months ended September 30, 2001 and 2000, respectively, and by net income taxes paid of $54.6 million and $55.1 million for the nine months ended September 30, 2001 and 2000, respectively. The tax payments for the nine months ended September 30, 2001 reflect a $35.0 million payment to the Internal Revenue Service in connection with the Company's 1997 tax year liabilities. This one time payment effectively settled a deferred tax liability relating to the tax basis losses incurred for the 1997 tax year. This payment, which relates to a timing item, had no impact to the Company's results of operations for the period. Proceeds from sales, calls and maturities and investment asset acquisitions were $1,067.4 million and $1,178.4 million, respectively, in the nine months ended September 30, 2001, compared to $639.4 million and $1,528.2 million, respectively, in the nine months ended September 30, 2000. The investment asset acquisitions in the nine months ended September 30, 2000 reflect the investment of the proceeds from Holdings' issuance of senior notes. The Company's current investment strategy seeks to maximize after-tax income through a high quality, diversified, duration sensitive, taxable bond and tax-exempt municipal bond portfolio, while maintaining an adequate level of liquidity. 28
On December 21, 1999, Holdings entered into a three-year senior revolving credit facility with a syndicate of lenders (the "Credit Facility). First Union National Bank is the administrative agent for the Credit Facility. The Credit Facility is used for liquidity and general corporate purposes and replaced a prior credit facility. The Credit Facility provides for the borrowing of up to $150.0 million with interest at a rate selected by Holdings equal to either (i) the Base Rate (as defined below) or (ii) an adjusted London InterBank Offered Rate ("LIBOR") plus a margin. The Base Rate is the higher of the rate of interest established by First Union National Bank from time to time as its prime rate or the Federal Funds rate plus 0.5% per annum. On December 18, 2000, the Credit Facility was amended to extend the borrowing limit to $235.0 million for a period of 120 days. This 120-day period expired during the three months ended March 31, 2001 and the limit reverted back to $150.0 million. The amount of margin and the fees payable for the Credit Facility depend upon Holdings' senior unsecured debt rating. Group has guaranteed all of Holdings' obligations under the Credit Facility. The Credit Facility requires Group to maintain a debt to capital ratio of not greater than 0.35 to 1, Holdings to maintain a minimum interest coverage ratio of 2.5 to 1 and Everest Re to maintain its statutory surplus at $850.0 million plus 25% of aggregate net income and 25% of aggregate capital contributions earned or received after December 31, 1999. The Company was in compliance with all covenants under the facility at September 30, 2001 and 2000 as well as for the three and nine months ended September 30, 2001 and 2000. During the three and nine months ended September 30, 2001, Holdings made payments on the Credit Facility of $0.0 million and $123.0 million, respectively, and borrowings of $0.0 million and $22.0 million, respectively. As of September 30, 2001 and 2000, Holdings had outstanding Credit Facility borrowings of $134.0 million and $137.0 million, respectively. Interest expense incurred in connection with these borrowings was $1.6 million and $2.1 million for the three months ended September 30, 2001 and 2000, respectively, and $6.1 million and $5.5 million for the nine months ended September 30, 2001 and 2000, respectively. During the first quarter of 2000, Holdings completed a public offering of $200.0 million principal amount of 8.75% senior notes due March 15, 2010 and $250.0 million principal amount of 8.5% senior notes due March 15, 2005. During the first quarter of 2000, Holdings distributed $400.0 million of these proceeds to Group of which $250.0 million was used by Group to capitalize Everest Reinsurance (Bermuda), Ltd. Interest expense incurred in connection with these senior notes was $9.7 million and $9.8 million for the three months ended September 30, 2001 and 2000, respectively, and $29.2 million and $21.2 million for the nine months ended September 30, 2001 and 2000, respectively. SHAREHOLDERS' EQUITY. The Company's shareholders' equity increased to $1,720.3 million as of September 30, 2001, from $1,583.4 million as of December 31, 2000, principally reflecting net income of $63.7 million for the nine months ended September 30, 2001 and net unrealized appreciation of $75.7 million on the Company's investments. Dividends of $3.2 million and $9.7 million were declared and paid by the Company in the three and nine months ended September 30, 2001, respectively. During the three months ended March 31, 2000, the Company repurchased 0.650 million of its common shares at an average price of $25.24 per share, raising the total repurchases under the Company's authorized repurchase program to 4.720 million shares at an average price of $27.60 per share with a total repurchase expenditure to date of $130.4 million. There have been no repurchases in subsequent quarters. At September 30, 2001, 2.180 million shares 29
remained available for repurchase under the existing repurchase authorization. As part of the Company's restructuring, the treasury shares held by the Company prior to February 24, 2000 were retired, resulting in a reduction to treasury shares with a corresponding reduction of paid-in capital and common shares. MARKET SENSITIVE INSTRUMENTS. The Company's risks associated with market sensitive instruments have not changed materially since the period ended December 31, 2000. SAFE HARBOR DISCLOSURE. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 (the "Act"), the Company in its Form 10-K for the fiscal year ended December 31, 2000 set forth cautionary statements identifying important factors, among others, that could cause its actual results to differ materially from those which might be projected, forecasted or estimated in its forward-looking statements, as defined in the Act, made by or on behalf of the Company in press releases, written statements or documents filed with the Securities and Exchange Commission, or in its communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls. These cautionary statements supplement other factors contained in this report which could cause the Company's actual results to differ materially from those which might be projected, forecasted or estimated in its forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the Company's results to differ materially from such forward-looking statements. Such forward-looking statements may include, but are not limited to, projections of premium revenue, investment income, other revenue, losses, expenses, earnings (including earnings per share), cash flows, and common shareholders' equity (including book value per share), plans for future operations, investments, financing needs, capital plans, dividends, plans relating to products or services of the Company, and estimates concerning the effects of litigation or other disputes, as well as assumptions for any of the foregoing and are generally expressed with words such as "believes," "estimates," "expects," "anticipates," "plans," "projects," "forecasts," "goals," "could have," "may have" and similar expressions. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 30
Part I - Item 3 EVEREST RE GROUP, LTD. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK INSTRUMENTS. The Company's risks associated with market sensitive instruments have not changed materially since the period ended December 31, 2000. 31
EVEREST RE GROUP, LTD. OTHER INFORMATION Part II - Item 1. Legal Proceedings The Company is involved from time to time in ordinary routine litigation and arbitration proceedings incidental to its business. The Company does not believe that there are any other material pending legal proceedings to which it or any of its subsidiaries or their properties are subject. Part II - Item 2. Changes in Securities c) Information required by Item 701 of Regulation S-K: (a) On July 2, 2001, 604 common shares of the Company were distributed and on October 1, 2001, 696 common shares of the Company were distributed. (b) The securities were distributed to the Company's four non-employee directors. (c) The securities were issued as compensation to the non-employee directors for services rendered to the Company. (d) Exemption from registration was claimed pursuant to Section 4(2) of the Securities Act of 1933. There was no public offering and the participants in the transactions were the Company and its non-employee directors. (e) Not applicable. Part II - Item 6. Exhibits and Reports on Form 8-K a) Exhibit Index: Exhibit No. Description Location ----------- ----------- -------- 11.1 Statement regarding computation Filed herewith of per share earnings b) There were no reports on Form 8-K filed during the three-month period ending September 30, 2001. Omitted from this Part II are items which are inapplicable or to which the answer is negative for the period covered. 32
EVEREST RE GROUP, LTD. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. EVEREST RE GROUP, LTD. (Registrant) /S/ STEPHEN L. LIMAURO -------------------------------- Stephen L. Limauro Executive Vice President and Chief Financial Officer (Duly authorized officer and principal accounting officer) Dated: October 26, 2001