Everest Re Group, Ltd. — FY2017 Form 10-K
Reporting period: Year ended December 31, 2017; filed March 1, 2018. Amounts are in U.S. dollars unless noted. Everest conducts global property-and-casualty reinsurance and insurance through four segments: U.S. Reinsurance, International, Bermuda and Insurance.
Financial performance and condition
- Premiums and revenue: Gross written premiums rose 18.9% to $7.174 billion; net written premiums increased 18.5% to $6.245 billion; earned premiums increased 11.6% to $5.938 billion. Total revenue was $6.608 billion.
- Profit and margins: Net income fell 52.9% to $469.0 million, or diluted EPS of $11.36, from $996.3 million and $23.68. Pre-tax income was $405.2 million. The $63.8 million income tax benefit supported net income; catastrophe losses drove the deterioration in underwriting results. The combined ratio rose to 103.5% from 87.0%, including a 76.2% loss ratio.
- Underwriting by segment: U.S. Reinsurance earned $30.0 million (combined ratio 98.6%); Bermuda earned $16.2 million (98.5%); International recorded a $184.1 million underwriting loss (115.3%); and Insurance recorded a $69.6 million loss (104.8%).
- Catastrophe and reserves: Current-year catastrophe losses were $1.503 billion; catastrophe losses including prior-year development were reported at $1.473 billion. Major events included Hurricanes Irma, Maria and Harvey, California wildfires and the Mexico City earthquake. Favorable prior-year reserve development totaled $293.4 million, partly offset by $37.1 million of adverse asbestos-and-environmental development.
- Investment results: Net investment income increased 14.8% to $542.9 million; net realized capital gains were $153.2 million, versus a $7.2 million loss in 2016. Cash and invested assets totaled $18.627 billion; fixed maturities were $14.757 billion, with 91.9% of fixed maturities rated investment grade. Fixed-income duration was 3.1 years.
- Cash flow and liquidity: Operating cash flow was $1.163 billion, down from $1.384 billion. Cash and short-term investments totaled $1.145 billion; management also cited $447.9 million of available liquidity in a short-duration investment facility. The company said operating cash flow could decline or turn negative in the near term as catastrophe claims are paid.
- Capital and debt: Shareholders’ equity was $8.369 billion, up 3.6%; book value per share was $204.95. Total debt was $633.4 million, comprising $400 million of senior notes and approximately $238.6 million of subordinated notes. No revolving-credit borrowings were outstanding. The company reported compliance with credit-facility covenants.
Material changes versus 2016
- Catastrophe losses increased sharply: total catastrophe losses in the underwriting results were $1.473 billion versus $301.2 million in 2016. The combined ratio worsened 16.5 points and net income fell by more than half.
- Gross written premiums grew across reinsurance and insurance. The Insurance segment’s premiums rose 15.2%, while International underwriting results swung from a $313.6 million gain to a $184.1 million loss, primarily reflecting catastrophe losses and the absence of substantial favorable prior-year development recorded in 2016.
- Net investment income and realized capital gains improved. Shareholders’ equity increased despite $207.2 million of dividends, $50.0 million of share repurchases and $71.3 million of after-tax unrealized investment depreciation.
- Gross loss and LAE reserves rose 15.2% to $11.884 billion; reinsurance receivables rose to $1.348 billion. The company established Ireland Insurance in Q4 to write mainly European business.
Outlook, risks and unusual items
- Outlook: No numerical earnings or premium guidance is provided. Management expected catastrophe losses to contribute to firmer rates in affected markets and potentially broader rate increases, while noting that competitive capacity remained ample and the impact on pricing was uncertain. The company’s stated strategy is to prioritize underwriting profitability, diversification and disciplined risk selection.
- Tax reform: The December 2017 U.S. Tax Cuts and Jobs Act resulted in $8.2 million of tax expense. Management expected to finalize certain tax estimates in 2018 and did not expect further adjustments to be material. The filing also discusses potential future tax exposure, including BEAT and possible U.S. taxation of Bermuda operations.
- Reserving and catastrophe exposure: Reserves depend on estimates, ceding-company data and actuarial judgment; actual claims may materially exceed estimates. A&E reserves were $449.0 million gross and $318.1 million net. Management estimated its largest 100-year event’s net economic loss at about 11% of year-end equity, but cautioned that catastrophe models are imprecise and actual losses could exceed projections.
- Other risks and contingencies: Material risks include reinsurance counterparty collectability, investment-market and interest-rate changes, foreign exchange, competitive pricing, regulatory limits on subsidiary dividends, and cyber incidents. Ordinary-course insurance and reinsurance disputes are considered in reserves; the company reported no other material litigation. One remaining contingent obligation relates to annuity contracts, with estimated replacement costs of $179.1 million in total at year-end.
- Quarterly volatility: The unaudited quarterly table reports a Q3 net loss of $639.4 million, followed by Q4 net income of $571.0 million; full-year net income was $469.0 million.
Important facts for investors to verify
- Reconcile the filing’s catastrophe-loss presentations: $1.503 billion of current-year incurred catastrophe losses, $1.473 billion including prior-year development, and $1.339 billion shown as “net catastrophe losses” in selected financial data.
- Track development and payment experience for 2017 catastrophe claims, including reinsurance recoveries, and assess whether operating cash flow remains adequate as claims are paid.
- Monitor reserve development, especially long-tail casualty and A&E exposures, against the disclosed gross reserve range of $10.639 billion to $13.130 billion.
- Assess whether premium growth and any market rate firming improve underwriting profitability, particularly in International and Insurance, without compromising pricing discipline.
- Review investment returns, limited-partnership valuations and commitments, credit quality, and sensitivity to interest rates, equity markets and foreign exchange.
- Confirm the final effects of tax reform and regulatory capital requirements, including the new Delaware catastrophe-capital component, and the capacity of regulated subsidiaries to remit dividends.