Everest Re Group, Ltd. — Q3 2020 Form 10-Q
Business context and reporting period. Bermuda-based Everest Re Group provides property and casualty reinsurance and insurance in the U.S. and international markets. This unaudited report covers the quarter and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods unless noted. Effective January 1, 2020, the company reports two segments: Reinsurance Operations and Insurance Operations.
Financial performance
Amounts below are in millions of dollars, except per-share amounts and ratios.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Gross written premiums | $2,791.6 | $2,403.3 | $7,731.8 | $6,697.0 |
| Premiums earned | $2,205.8 | $1,905.6 | $6,285.0 | $5,455.6 |
| Total revenues | $2,610.2 | $2,042.5 | $6,836.7 | $6,017.1 |
| Net income | $243.1 | $104.4 | $450.5 | $791.8 |
| Diluted EPS | $6.07 | $2.56 | $11.18 | $19.38 |
| Combined ratio | 105.2% | 101.4% | 100.6% | 93.3% |
- Underwriting and margins: The combined ratio exceeded 100% in both periods in 2020, indicating underwriting losses. Q3 underwriting loss was $114.6 million, versus $27.5 million a year earlier; nine-month underwriting loss was $35.1 million, versus a $365.0 million gain. Reinsurance reported underwriting losses of $90.4 million in Q3 and a $29.3 million gain year to date; Insurance reported losses of $24.2 million and $64.3 million, respectively.
- Losses and catastrophe activity: Incurred losses and loss adjustment expenses rose 26.6% to $1,736.2 million in Q3 and 30.1% to $4,574.1 million year to date. Management attributed much of the increase to premium growth and COVID-19 claims, estimated at $124.9 million for Q3 and $434.9 million for the nine months. Q3 catastrophe losses were $310.0 million; nine-month catastrophe losses were $355.0 million.
- Investments: Net investment income rose 29.4% in Q3 to $234.2 million, but declined 16.2% year to date to $420.1 million, reflecting second-quarter limited-partnership losses partly offset by income from a larger fixed-income portfolio. Net realized capital gains were $110.2 million in Q3 and $84.3 million year to date; Q3 gains primarily reflected equity valuation recoveries.
Financial position, cash flow and liquidity
- At September 30, 2020, total assets were $30.15 billion, total liabilities $20.56 billion, and shareholders’ equity $9.59 billion, up from $9.13 billion at December 31, 2019. Book value per share was $239.98, up 7.2% from $223.85.
- Total investments and cash were $23.10 billion, including $17.86 billion of available-for-sale fixed maturities, $1.22 billion of short-term investments and $938.9 million of cash. Cash and short-term investments together were $2.16 billion.
- Gross loss and LAE reserves were $15.23 billion, up 11.9% from year-end 2019. Reinsurance receivables were $1.92 billion; 37.2% was due from Mt. Logan Re segregated accounts.
- Nine-month operating cash flow was $2.19 billion, compared with $1.49 billion in 2019. Investing cash outflow was $1.73 billion and financing cash outflow was $336.7 million. Cash increased $130.8 million to $938.9 million.
- Reported debt was $710.8 million at quarter-end, comprising $397.2 million of senior notes, $223.6 million of subordinated notes and a $90.0 million FHLB advance. The FHLB advance matured November 30, 2020. In October, after quarter-end, the company issued $1.0 billion of 30-year senior notes at 3.5%.
Changes, outlook and risks
- Premium growth was broad-based: gross written premiums increased 16.2% in Q3 and 15.5% year to date. Management cited growth in treaty property, casualty and facultative reinsurance, as well as several insurance lines.
- Management said market rates were firming in some catastrophe-affected and casualty lines, while conditions varied by line and geography. It did not provide quantified earnings or premium guidance in the supplied filing text.
- Management warned that COVID-19 could continue to affect claims, premium volumes, investment returns, credit quality and operations. Potential legislative or regulatory actions, including retroactive coverage requirements or premium relief, could increase losses and expenses. The company also noted greater cybersecurity and business-continuity risks from remote working.
- Hurricanes Delta and Zeta affected the Caribbean and southeastern U.S. in October. The company could not estimate losses at filing time but expected them to adversely affect Q4 2020 results.
- Management described capital and liquidity as strong and said it did not anticipate needing significant securities sales or credit-facility use to pay near-term losses. The company reported compliance with credit-facility covenants. It also increased net catastrophe exposure during the first three quarters; its largest projected 100-year event represented approximately 7% of June 30, 2020 shareholders’ equity.
- Unusual items include a $31.0 million tax benefit recorded in Q1 under the CARES Act loss carryback provision and adoption of the expected-credit-loss standard, which reduced opening retained earnings by $4.2 million, net of tax. The remaining unhedged S&P 500 put option had a $6.6 million fair-value liability; its theoretical maximum payout was $146.8 million, although management estimated the probability of falling below the strike at less than 0.5%.
- Ordinary-course insurance and reinsurance disputes are ongoing; the company said it was not party to other material litigation or arbitration. It cautioned that reserve estimates, including asbestos and environmental reserves, may change materially.
Key facts for investors to verify
- How COVID-19 claim estimates develop, including the adequacy of the $434.9 million nine-month estimate and any future regulatory or legal changes to coverage.
- Whether reserve development, catastrophe claims and the elevated combined ratio improve in subsequent quarters; review segment results separately.
- Performance and valuation of limited partnerships, equities and other invested assets, including the effect of market volatility and reported investment gains.
- Loss estimates for Hurricanes Delta and Zeta and other catastrophe events, and the company’s increased net catastrophe exposure.
- Post-quarter debt issuance, subsequent liquidity and capital levels, and the timing and cost of the November 2020 FHLB advance maturity.