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 that expires on November 29, 2003. In January, 1999, Everest Re entered into an agreement to sub-sublease, for the remaining term of Everest Re's sub-lease, approximately 27,000 square feet of space in Everest Re's corporate headquarters. The Company's other twelve office locations occupy a total of approximately 69,000 square feet, all of which are leased. Management believes that the above described office space is adequate for its current and anticipated needs.
The following selected consolidated GAAP financial data of the Company as of and for the years ended December 31, 1999, 1998, 1997, 1996 and 1995 were derived from the consolidated financial statements of the Company, which were audited by PricewaterhouseCoopers LLP (1999, 1998, 1997 and 1996) and by other independent auditors (1995). The statutory data have been derived from statutory financial statements of Everest Re filed with the Delaware Insurance Department. Such statutory financial statements are prepared in accordance with Statutory Accounting Principals ("SAP"), which differ from GAAP. The statutory financial statements are unconsolidated and reflect the net assets of Everest Re's subsidiaries, Everest Ltd., Everest National, Everest Canada and Everest Indemnity on the equity method. The following financial data should be read in conjunction with the Consolidated Financial Statements and accompanying notes. The supplemental information for 1995 excludes the effects of an IPO-related premium charge of $140.0 million ($91.0 million after taxes) for the Stop Loss Agreement and an IPO-related compensation expense charge of $13.3 million ($8.7 million after taxes) principally for stock awards to the Company's Chief Executive Officer. Such supplemental information is presented to facilitate an understanding of the impact on the Company's results of operations of these non-recurring charges, but should not, however, be considered as an alternative to the respective amounts determined in accordance with GAAP as an indicator of the Company's operating performance.
Group, a Bermuda company, was established in 1999 as a wholly-owned subsidiary of Holdings. On February 24, 2000, a corporate restructuring was completed and Group became the new parent holding company of Holdings. Holders of Holdings' common stock automatically became holders of the same number of Group common shares. Prior to the restructuring, Group had no significant assets or capitalization and had not engaged in any business or prior activities other than in connection with the restructuring. See ITEM 1 - "The Business - Company" for a further discussion.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 PREMIUMS. Gross premiums written increased 9.2% to $1,141.8 million in 1999 from $1,045.9 million in 1998 as the Company took advantage of selected growth opportunities, while continuing to maintain a disciplined underwriting approach. Premium growth areas included a 24.0% ($86.4 million) increase in the U.S. Broker Treaty premiums, largely attributable to growth in accident and health, non-standard auto and workers' compensation lines where the Company's relatively recent entry to these lines allowed it to selectively grow from a relatively small base, a 12.9% ($21.8 million) increase in the U.S. Direct Treaty Reinsurance and Insurance premiums mainly attributable to two large accident and health reinsurance treaties, the impact of which offset declines elsewhere in this operation and a 5.3% ($6.3 million) increase in the Marine, Aviation and Surety operation. These increases were offset by an 8.8% ($6.3 million) decrease in the U.S. Facultative premiums and a 3.8% ($12.3 million) decrease in the International premiums reflecting highly competitive current market conditions. The Company continued to decline business that did not meet its objectives regarding underwriting profitability.
Ceded premiums increased to $46.3 million in 1999 from $29.3 million in 1998. Ceded premiums in 1998 reflected a $32.3 million return premium relating to a restructuring of the Company's catastrophe retrocessional protection. Absent the impact of this return premium, the Company would have had lower ceded premiums in 1999 as a result of the impact of the changes in the Company's catastrophe retrocessional protections, partially offset by increased utilization of contract specific retrocessions, including common account protections.
Net premiums written increased by 7.8% to $1,095.6 million in 1999 from $1,016.6 million in 1998, reflecting the growth in gross premiums written partially offset by the increase in ceded premiums.
Contributing to the decrease in incurred losses and LAE in 1999 from 1998 were an 15.7% ($42.5 million) decrease in the International operation which experienced unusual catastrophe losses in 1998 relating to hurricanes Georges and Mitch and Canadian ice storms, a 3.2% ($4.2 million) decrease in the U.S. Direct Treaty Reinsurance and Insurance operation, a 1.5% ($0.7 million) decrease in the U.S. Facultative operation and a 0.1% ($0.4 million) decrease in the Marine, Aviation and Surety operation. These decreases were partially offset by a 16.3% ($40.9 million) increase in the U.S. Broker Treaty operation that was affected by the Rouge Steel Plant Fire and Oklahoma tornados in 1999. 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.
treaties with higher expected losses and lower ceding commission which were reflected in 1998. The International operation's loss ratio decreased by 1.0 percentage points to 78.3% for 1999 from 79.3% in 1998 mainly due to lower net catastrophe losses in 1999. The U.S. Broker Treaty operation's loss ratio increased by 4.1 percentage points to 71.9% for 1999 from 67.8% in 1998 generally due to higher net catastrophe losses in 1999, in addition to changes in the operation's mix of business. The U.S. Facultative operation's loss ratio increased by 3.1 percentage points to 64.2% for 1999 from 61.1% in 1998. The loss ratios for all operations are impacted by mix of business by class and type.
Underwriting expenses increased by 4.0% to $337.0 million in 1999 from $324.1 million in 1998. Commission, brokerage, taxes and fees increased by $11.4 million attributable to increases in written premium and changes in the Company's business mix. Other underwriting expenses increased by $1.5 million, primarily attributable to $2.8 million of non-recurring reorganization expenses in 1999, principally relating to the Company's restructuring to a Bermuda parent holding company. Contributing to these underwriting expense increases were a 15.0% ($5.6 million) increase in the Marine, Aviation and Surety operation, an 8.5% ($4.7 million) increase in the U.S. Direct Treaty Reinsurance and Insurance operation and 6.3% ($6.6 million) increase in the U.S. Broker Treaty operation. These underwriting expense increases were partially offset by a 5.8% ($5.9 million) decrease in the International operation and a 2.8% ($0.6 million) decrease in the U.S. Facultative operation. The changes for each operation's expenses were principally the result of changes in commission expenses relating to changes in premium volume and business mix by class and type. The Company's expense ratio increased by 1.2 percentage points to 31.5% in 1999 from 30.3% in 1998.
The Company's combined ratio increased by 0.3 percentage points to 103.5% in 1999 from 103.2% in 1998. The U.S. Facultative operation's combined ratio increased by 4.2 percentage points to 95.2% for 1999 from 91.1% in 1998. The U.S. Broker Treaty operation's combined ratio increased by 3.2 percentage points to 99.4% for 1999 from 96.2% in 1998. The International operation's combined ratio increased by 2.1 percentage points to 111.5% for 1999 from 109.4% in 1998. The Marine, Aviation and Surety operation's combined ratio decreased by 6.8 percentage points to 101.8% for 1999 from 108.6% in 1998. The U.S. Direct Treaty Reinsurance and Insurance operation's combined ratio decreased by 5.2 percentage points to 101.3% for 1999 from 106.5% in 1998. These changes reflect the expense and loss ratio variability noted above.
INVESTMENTS. Net investment income increased 3.3% to $253.0 million in 1999 from $244.9 million in 1998, principally reflecting the effect of investing the $203.4 million of cash flow from operating activities in 1999. The Company's pre-tax yield on average cash and invested assets increased to 6.2% in 1999 from 6.0% in 1998 principally reflecting a higher interest rate environment.
Net realized capital losses were $16.8 million in 1999 reflecting realized capital losses on the Company's investments of $33.9 million which were offset by $17.1 million of realized capital gains, compared to net realized losses of $0.8 million in 1998. The net realized capital losses in 1998 reflected realized capital losses of $13.5 million which were offset by $12.7 million of realized capital gains. The realized capital losses in 1999 arose mainly from activity in the Company's taxable and tax-exempt domestic fixed maturities portfolios, whereas the realized capital losses in 1998 were attributable to activity in the Company's tax-exempt fixed maturities portfolio. The realized capital gains in 1999 mainly arose from activity in the Company's domestic equity portfolio, whereas the realized capital gains in 1998 were attributable to a combination of the activity in the Company's taxable domestic fixed maturities portfolio and domestic equity portfolio. The net realized losses in 1999 generally reflect a specific program, which has been completed, to realize capital losses aimed at recovering taxes on realized capital gains paid in prior years, with corresponding reinvestment of proceeds at current reinvestment rates, and enhancing the Company's long-term after-tax portfolio yield.
NET INCOME. Net income was $158.1 million in 1999 compared to $165.2 million in 1998. This decline mainly reflects increases in net capital losses.
25.5% ($41.2 million) decrease in the Marine, Aviation, and Surety premiums, a 13.2% ($10.9 million) decrease in the U.S. Facultative premiums and a 6.6% ($23.0 million) decrease in the International premiums reflecting highly competitive current market conditions. The Company continued to decline business that did not meet the Company's objectives regarding underwriting profitability.
Ceded premiums decreased by 33.2% to $29.3 million in 1998 from $43.8 million in 1997, principally as a result of a $32.3 million return premium in 1998 relating to a restructuring of the Company's catastrophe retrocessional protection. The impact of this transaction was partially offset by increases in ceded premiums in 1998 over 1997 attributable to increased utilization of contract specific retrocessions, including common account protections, and reinstatement premiums on corporate catastrophe reinsurance protections.
EXPENSES. Incurred losses and LAE increased by 1.7% to $778.4 million in 1998 from $765.4 million in 1997. The Company's loss and LAE ratio remained at 72.9% for 1998, as was the case in 1997. Net catastrophe losses for 1998 were $30.6 million mainly arising from Hurricanes Georges and Mitch, Canadian Ice Storm losses and a major fire impacting a facultative coverage partially offset by favorable development on prior period catastrophes compared to net catastrophe losses of $8.6 million for 1997. Catastrophe losses include the impact of both current period events and favorable and unfavorable development on prior period events and are net of reinsurance. The underlying loss ratio increase was attributable to changes to the Company's business mix consistent with its underwriting strategy. Net incurred losses and LAE for 1998 reflected ceded losses and LAE of $357.4 million, including $153.9 million ceded under the Stop Loss Agreement. The ceded losses and LAE for 1998 principally reflect a $214.9 million increase in gross reserves with respect to asbestos exposures which the Company judged to be necessary based on continuing reported and paid loss emergence, particularly with respect to secondary defendants, internal and third party statistical analysis, and its assessment of potential ultimate liabilities, $25.7 million of non-asbestos related losses ceded under the Stop Loss Agreement and $23.1 million ceded under various catastrophe retrocessions. The 1998 ceded losses and LAE compares to ceded losses and LAE of $109.6 million in 1997, including $45.0 million ceded under the Stop Loss Agreement.
INCOME TAXES. The Company had income tax expense of $47.5 million in 1998 compared to $52.3 million in 1997, with the decrease resulting from the relationship of tax-exempt income to pre-tax income as the Company increased the tax preferenced element of investment income at a rate greater than the increase in pre-tax income as a result of growth in the Company's tax preferenced investment holdings.
Everest Re maintains reserves to cover its estimated ultimate liability for losses and LAE with respect to reported and unreported claims. Because reserves are estimates of ultimate losses and LAE, management monitors reserve adequacy over time, evaluating new information as it becomes known and adjusting reserves, as necessary. Management considers many factors when setting reserves, including: (i) current legal interpretations of coverage and liability; (ii) economic conditions; (iii) internal actuarial methodologies which analyze Everest Re's experience with similar cases, information from ceding companies and historical trends, such as reserving patterns, loss payments, pending levels of unpaid claims and product mix; and (iv) the uncertainties discussed below regarding reserve requirements for asbestos and environmental claims. Based on these considerations, management believes that adequate provision has been made for Everest Re's loss and LAE reserves. Actual losses and LAE ultimately paid may deviate, perhaps substantially, from such reserves.
claims. Among the complications impacting the estimation of such losses are: (i) potentially long waiting periods between exposure and manifestation of any bodily injury or property damage; (ii) difficulty in identifying sources of asbestos or environmental contamination; (iii) difficulty in properly allocating responsibility and/or liability for asbestos or environmental damage; (iv) changes in underlying laws and judicial interpretation of those laws; (v) potential for an asbestos or environmental claim to involve many insurance providers over many policy periods; (vi) long reporting delays, both from insureds to insurance companies and ceding companies to reinsurers; (vii) historical data concerning asbestos and environmental losses, which is more limited than historical information on other types of casualty claims; (viii) questions concerning interpretation and application of insurance and reinsurance coverage; and (ix) uncertainty regarding the number and identity of insureds with potential asbestos or environmental exposure. Although these complications have become less severe in recent years, management believes that these factors continue to render reserves for asbestos and environmental losses significantly less subject to traditional actuarial methods than are reserves on other types of losses. Given these uncertainties, management believes that no meaningful range for such ultimate losses can be established. Everest Re establishes reserves to the extent that, in the judgment of management, the facts and prevailing law reflect an exposure for Everest Re or its ceding company. Due to the uncertainties discussed above, the ultimate losses may vary materially from current loss reserves and could have a material adverse effect on the Company's future financial condition, results of operations and cash flows.
- ---------- (1) Net of $0.0 million in 1999, $138.5 million in 1998 and $41.2 million in 1997 ceded under the incurred loss reimbursement feature of the Stop Loss Agreement. (2) Net of $118.8 million in 1999, $39.7 million in 1998 and $22.6 million in 1997 ceded as paid losses under the Stop Loss Agreement.
The gross IBNR reserves for asbestos and environmental exposures increased by $192.0 million in 1998. During 1998, the Company reviewed all relevant data in considering the estimate of ultimate reserves for asbestos and environmental exposures. This included analysis of incurred and paid loss development, qualitative assessments of claims, claimants, judgements and emerging trend information. Overall, these analytical activities concluded that the underlying ultimate exposures were greater than previously estimated, principally with respect to continuing shifts in loss emergence and payment patterns, including the unexpectedly large impact of newly reported claims for insureds/defendants not previously expected to have significant exposures. The gross IBNR reserves for asbestos and environmental exposures decreased by $65.2 million in 1999. The decrease resulted primarily from management's belief that there has been no material change in the ultimate asbestos and environmental loss exposures. Thus, the reported incurred losses in 1999 were offset with corresponding reductions in IBNR reserves.
The $249.1 million of reinsurance receivables with respect to asbestos and environmental reserves as of December 31, 1999 was attributable principally to two retrocessional arrangements: (i) $166.5 million was ceded to various insurance and reinsurance companies, including Gibraltar, in connection with their participation in MUF; and (ii) $69.1 million resulting from the Company's former direct excess insurance operations, which ceased writing business in 1985 and which has been 100% ceded to Gibraltar since 1986.
STOP LOSS AGREEMENT AND PRUDENTIAL GUARANTEES. To the extent reserves as of June 30, 1995 (December 31, 1994 for catastrophe losses) for losses, allocated LAE and uncollectible reinsurance experience adverse development ("Adverse Development"), Everest Re is entitled, at the time reserves are increased, to payments under the Stop Loss Agreement, subject to the limit and other terms thereof. Gibraltar's obligations to make payments to Everest Re under the Stop Loss Agreement are guaranteed by The Prudential. Management expects that the general effect of the Stop Loss Agreement will be to protect the Company's consolidated earnings against up to $375.0 million of the first $400.0 million of Adverse Development. There can be no assurance, however, that the Company's net liability for such Adverse Development will be limited to $25.0 million. With respect to liquidity, the incurred loss reimbursement features of these agreements provide the Company with cash on or prior to the time it is required to make payment on account of such Adverse Development. Through December 31, 1999, Adverse Development ceded under the Stop Loss Agreement have aggregated $285.6 million with remaining limits available of $89.4 million as respects the next $99.3 million of Adverse Development. Everest Re does not intend to enter into any new stop loss agreements with respect to exposures arising from periods prior to July 1, 1995 if the current Stop Loss Agreement with Gibraltar is exhausted or when it terminates.
In December 1999, the independent examiner issued its findings with respect to the disputed amounts. As a result, Everest Re and Gibraltar resolved these disputes. The resolution resulted in Everest Re reducing its gross reserves for 1995 and prior periods by $67.6 million and reducing its claim to the Stop Loss by $60.8 million. Everest Re will also receive $2.3 million in additional cash from Gibraltar as a result of the revised billing and the trust noted above has been terminated. The gross coverage limit under the Stop Loss Agreement, excluding cessions of $8.0 million in the fourth quarter of 1999, has been restored to $107.4 million. As a result, Everest Re will receive $9.5 million from Gibraltar in the first quarter of 2000. Pursuant to the Stop Loss Agreement, Everest Re will continue to evaluate its reserves each quarter to determine if additional cessions are appropriate.
During the first quarter of 1999, Gibraltar disputed $39.7 million ceded under a 1986 quota share reinsurance ("Direct Excess Retrocession") through which Gibraltar assumed 100% of the liabilities related to Everest Re's former direct excess insurance operations which ceased writing business in 1985. Gibraltar then commenced an arbitration proceeding in accordance with the terms of the Direct Excess Retrocession. Gibraltar disputed the level of reserves established by Everest Re primarily reflecting reserves for asbestos losses and Everest Re's right to determine these reserves, but Gibraltar did not dispute its responsibility to pay the ultimate losses in accordance with the terms of the Direct Excess Retrocession. As a result of the dispute, Gibraltar initially failed to provide funds or security to Everest Re in order to secure Gibraltar's payment obligations to Everest Re in accordance with the terms of the Direct Excess Retrocession. However, throughout the remainder of 1999, Gibraltar has provided substantially all of the required funding to Everest Re and Everest Re and Gibraltar agreed to halt the arbitration proceeding and to postpone the resolution of the remaining disputed issues. Management does not expect that this dispute will have a material adverse effect on the Company's future financial condition, results of operations or cash flows.
In addition, since June 30, 1995, Gibraltar has paid $167.3 million to Everest Re in respect of such other reinsurance agreements.
o Everest Re's current reinsurance contracts with Gibraltar, including the Stop Loss Agreement, will remain in effect. However, these contracts will become transactions with affiliates with the financial impact eliminated through inter-company accounts.
o The Prudential Guarantees will be terminated and Prudential will be released from its obligations.
Proceeds and applications from sales and acquisitions of investment assets were $941.1 million and $1,068.4 million, respectively, in 1999 principally reflecting normal portfolio management activity aimed at enhancing the Company's portfolio yield, compared to $634.2 million and $755.3 million, respectively, in 1998 and $1,077.0 million and $1,482.8 million, respectively, in 1997. Everest Re'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.
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 $181.0 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 $98.0 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.
GROUP. Under Bermuda law, Group is prohibited from declaring or paying a dividend if such payment would reduce the realizable value of its assets to an amount less than the aggregate value of its liabilities and its issued share capital and share premium (additional paid-in capital) accounts. Group's ability to pay dividends and its operating expenses is dependent upon dividends from its subsidiaries. The payment of such dividends by insurer subsidiaries is limited under Bermuda and the United States laws in which Group's insurance and reinsurance subsidiaries are licensed to transact business. The limitations are generally based upon net income and compliance with applicable policyholders' surplus or minimum solvency margin and liquidity ratio requirements as determined in accordance with the relevant statutory accounting practices.
HOLDINGS. Holdings is a holding company whose only material asset is the capital stock of Everest Re. Holdings' cash flow consists primarily of dividends and other permissible payments from Everest Re and borrowings under credit facilities and offerings. Holdings depends upon such payments for funds for general corporate purposes, including its debt and operating expense obligations.
On December 21, 1999, Holdings entered into a three-year senior revolving credit facility with a syndicate of lenders (the "Credit Facility"), which replaced its prior credit facility which had been extended in June 1999 and increased from $50.0 million to $75.0 million on November 9, 1999. First Union National Bank is the administrative agent for the Credit Facility. The Credit Facility will be used for liquidity and general corporate purposes and to refinance existing debt under
The payment of dividends to Holdings by Everest Re is subject to limitations imposed by the Delaware Insurance Code. Based upon these restrictions, the maximum amount that will be available for payment of dividends to Holdings by Everest Re in 2000 without the prior approval of regulatory authorities is $166.5 million. Everest Re's future cash flow available to Holdings may be influenced by a variety of factors, including changes in the property and casualty reinsurance market, Everest Re's financial results, insurance regulatory changes and changes in general economic conditions. The availability of such cash flow to Holdings could also be influenced by, among other things, changes in the limitations imposed by the Delaware Insurance Code on the payment of dividends by Everest Re. Holdings expects that, absent significant catastrophe losses, such restrictions should not affect Everest Re's ability to declare and pay dividends sufficient to support Holdings' general corporate needs.
The $4.1 billion investment portfolio is comprised of fixed maturity securities that are subject to interest rate risk and foreign currency rate risk, and equity securities that are subject to equity price risk. The impact of these risks in the investment portfolio is generally mitigated by changes in the value of operating assets and liabilities and their associated income statement impact.
Interest rate risk is the potential change in value of the fixed maturity portfolio due to change in market interest rates. Further, it includes prepayment risk in a declining interest rate environment on the $337.8 million of the $3.9 billion fixed maturity portfolio, which consists of mortgage-backed securities. Prepayment risk results from accelerated principal payments that shorten the average life and thus, the expected yield of the security.
Foreign currency rate risk is the potential change in value, income, and cash flow arising from adverse changes in foreign currency exchange rates. The Company's foreign operations each maintain capital in the currency of the country of its geographic location consistent with local regulatory guidelines. Generally, the Company prefers to maintain the capital of its foreign operations in U.S. dollar assets although this varies by regulatory jurisdiction in accordance with market needs. Each foreign operation may conduct business in its local currency as well as the currency of other countries in which it operates. The primary foreign currency exposures are the Canadian Dollar, the British Pound Sterling and the Euro for these foreign operations. The Company mitigates foreign exchange exposure by a general matching of the currency and duration of its assets to its corresponding operating liabilities. In accordance with FAS 52, the Company translates the assets, liabilities and income of non-U.S. dollar functional currency legal entities to the U.S. dollar. This translation amount is reported as a component of other comprehensive income. The primary functional foreign currency exposures are the Canadian Dollar, the Belgian Franc and the British Pound Sterling for these foreign operations.
The tables below display the potential impact of a parallel 20% increase and decrease in foreign exchange rates on the valuation of invested assets subject to foreign currency exposure in 10% increments as of December 31, 1999 and 1998. This analysis includes the after-tax impact of translation from transactional currency to functional currency as well as the after-tax impact of translation from functional currency to the U.S. dollar reporting currency. During the year, the Company redenominated all invested assets whose currency was one of the eleven eligible currencies to be converted to the Euro. The impact of the Euro conversion was not material to the Company's business, operations or financial condition. All amounts are in millions of U.S.$.
YEAR 2000 ISSUES AND READINESS DISCLOSURE YEAR 2000 ISSUES. Many computers, software programs and microprocessors embedded in certain equipment (collectively, "systems") were designed to accommodate only two-digit date fields to represent a given year (e.g., "99" represents 1999). It is possible that such systems, if not modified or replaced, will not be able to accurately process data containing information relating to dates before, during or after the year 2000. It is also possible that such systems could fail entirely, although in many instances the consequences of a system not being "year 2000 compliant" are unknown. This "year 2000 issue" has the potential to affect the Company through (i) the disruption of the processing of business and general corporate transactions, both at the Company and between the Company and other business entities with which it interacts, and (ii) claims which may be brought asserting that costs associated with the issue may be covered under insurance or reinsurance contracts in which the Company participates.
The Company has continued to actively survey its significant business partners (e.g., ceding companies) and service providers (e.g., banks) concerning their compliance status. No material disruption in these services or relationships was detected on or after January 1, 2000, although the Company continues to be watchful for signs of year 2000 problems.
COSTS. The Company's historical and expected future costs to make its systems year 2000 compliant are not material. The total expected out-of-pocket costs of the year 2000 effort are approximately $0.6 million, all of which had been incurred as of December 31, 1999. These figures include only expenses specifically related to year 2000 compliance and do not include the cost of hardware or software acquisitions made in the normal course of business.
SAFE HARBOR DISCLOSURE In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 (the "Act"), the Company sets forth below cautionary statements identifying important factors that, among others, in some cases have affected and that could cause its actual results to differ materially from those which might be projected, forecasted, or estimated in its forward-looking statements, as defined in the Act, made by or on behalf of the Company in press releases, written statements or documents filed with the Securities and Exchange Commission, or in its communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls. These cautionary statements supplement other factors contained in this report which could cause the Company's actual results to differ materially from those which might be projected, forecasted or estimated in its forward-looking statements.
Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the Company's results to differ materially from such forward-looking statements. Such risks, uncertainties and other factors include, but are not limited to, the following:
11) Changes in interest rates, increases in which cause a reduction in the market value of the Company's fixed income investment portfolio, and its common stockholders' equity, and decreases in which cause a reduction of income earned on new cash flow from operations as well as on the reinvestment of the proceeds from sales, calls or maturities of existing investments;
16) Impact of year 2000 computer hardware, software and microprocessors embedded in certain equipment issues on the Company's operations and potential for year 2000 claims under reinsurance and insurance contracts written by the Company;
24) Changes in the regulatory environment or regulatory challenges that may restrict the ability of Everest Bermuda to conduct business;
25) Inability of Everest Bermuda to arrange security to back its reinsurance; and
26) Inability of Everest Bermuda to execute its business plan because of inability to provide it financing.