Everest Re Group, Ltd. — FY 2016 Form 10-K
Business context and reporting period. Everest Re Group, Ltd. is a Bermuda-based insurance and reinsurance holding company. This audited annual report covers the year ended December 31, 2016; the filing also presents unaudited quarterly results. The company operates U.S. Reinsurance, International, Bermuda and Insurance segments. All amounts below are U.S. dollars.
Financial performance and position
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Gross written premiums | $6.034 billion | $5.892 billion | +2.4% |
| Net written premiums | $5.271 billion | $5.182 billion | +1.7% |
| Premiums earned | $5.320 billion | $5.293 billion | +0.5% |
| Total revenues | $5.794 billion | $5.677 billion | +2.1% |
| Net investment income | $473.1 million | $473.5 million | -0.1% |
| Net realized capital losses | $7.2 million | $184.1 million | Losses narrowed |
| Net income | $996.3 million | $977.9 million | +1.9% |
| Diluted earnings per share | $23.68 | $22.10 | +7.1% |
| Combined ratio | 87.0% | 85.1% | +1.9 points |
| Operating cash flow | $1.373 billion | $1.097 billion | +25.2% |
| Shareholders’ equity | $8.075 billion | $7.609 billion | +6.1% |
| Total debt | $633.2 million | $633.0 million | Nearly unchanged |
The loss ratio rose to 59.0% from 57.9%; the other underwriting expense ratio rose to 5.7% from 4.8%. The 87.0% combined ratio reflects profitable underwriting overall, but results differed sharply by segment: Insurance recorded a $213.5 million underwriting loss and a 116.5% combined ratio; U.S. Reinsurance earned $483.6 million, International $313.6 million and Bermuda $105.7 million.
At year-end, total assets were $21.322 billion, investments and cash were $17.483 billion, gross loss and LAE reserves were $10.312 billion, and book value per share was $197.45. Cash and short-term investments totaled $913.4 million. Fixed maturities were 90.6% investment grade; their duration was 3.3 years. The company reported approximately $1.2 billion of contractual debt principal: $400 million of 4.868% senior notes due 2044 and $238.6 million of 6.6% subordinated notes due 2067, alongside other debt carrying values that bring reported total debt to $633.2 million.
Fourth-quarter 2016 net income was $373.6 million, or $9.14 diluted EPS, versus $357.3 million, or $8.26 diluted EPS, in fourth-quarter 2015. Fourth-quarter premiums earned were $1.441 billion versus $1.372 billion.
Material changes versus 2015
- Insurance gross written premiums increased 16.6% to $1.787 billion, supporting total premium growth; reinsurance gross written premiums declined 2.6%, including lower International and U.S. treaty property business and adverse foreign-exchange effects.
- Current-year catastrophe losses increased substantially. The filing reports $387.9 million of current-year catastrophe incurred losses and $301.2 million after prior-year catastrophe development; its selected-data measure of net catastrophe losses is $286.0 million. Major 2016 events included Hurricane Matthew and the Fort McMurray wildfire.
- Prior-year reserves developed favorably by $295.3 million, compared with $65.0 million in 2015. Favorable reinsurance development was partly offset by $173.4 million of adverse development in Insurance, mainly run-off construction liability and umbrella business, and $53.9 million of adverse A&E development.
- Insurance underwriting losses widened as claims and operating expenses grew faster than earned premiums. Management attributed higher expense partly to building out the insurance platform.
- The 2016 net realized capital loss narrowed to $7.2 million from $184.1 million. The 2016 result included $31.6 million in impairments and a $28.0 million loss on the Heartland sale, offset in part by $59.1 million of fair-value gains.
- Equity increased despite $386.3 million of share repurchases and $195.4 million of dividends. The company repurchased 2.1 million shares during 2016.
Liquidity, outlook, risks and unusual items
- Liquidity and capital: Operating cash flow was $1.373 billion. The company reported $913.4 million of cash and short-term investments, plus readily marketable investments and a liquidity-sweep facility with $378.9 million available. It expected positive operating cash flow near term absent unusual catastrophe activity. The company was in compliance with credit-facility covenants; its $800 million group facility included a $200 million revolving tranche and a $600 million collateralized letter-of-credit tranche.
- Outlook and strategy: No specific earnings or premium guidance was provided. Management emphasized underwriting profitability over volume, while continuing to expand Insurance operations and use the new Lloyd’s syndicate to pursue international business. Management described market conditions as highly competitive, with ample traditional and alternative capital pressuring rates and terms.
- Catastrophe exposure: Management estimated the largest 1-in-100-year event in a single zone could produce approximately $921 million in net economic loss, about 11% of year-end equity. The largest modeled zone exposure was Southeast U.S. wind, with a $1.544 billion net PML. Management cautioned that catastrophe models are imprecise and actual losses may materially exceed estimates.
- Reserves and recoverables: Reserves depend on estimates and ceding-company reporting; adverse development could materially affect earnings. A&E reserves were $441.1 million gross and $319.1 million net. Reinsurance receivables were $1.018 billion, creating counterparty risk despite collateral on certain balances.
- Other risks and contingencies: Risks include investment-market and interest-rate volatility, foreign-exchange exposure and Brexit uncertainty, competitive pricing, cyber incidents, regulatory limits on subsidiary dividends, and potential tax-law changes. The company disclosed no material litigation beyond ordinary-course insurance and reinsurance disputes. Seven unhedged equity-index put options had a $22.1 million year-end liability; their theoretical maximum payouts were substantially larger, although management estimated low probabilities of falling below applicable strike levels.
- Unusual transaction: Heartland was sold in August 2016 for $49 million, with a reported after-tax loss of $12.9 million. The company retained a strategic crop reinsurance relationship with the buyer.
- Dividend: The 2016 fourth-quarter dividend was $1.25 per share. A further $1.25-per-share dividend was declared in February 2017, subject to the board’s ongoing discretion and regulatory restrictions.
Important facts for investors to verify
- Whether Insurance underwriting performance improves from its 116.5% combined ratio as the platform expands.
- Whether favorable prior-year reserve development persists, particularly given adverse Insurance and A&E trends and the stated reserve estimation uncertainty.
- The net impact of catastrophe losses, retrocession protection and counterparty collectability; review the distinction among the filing’s catastrophe-loss measures.
- Investment portfolio valuation, alternative-asset exposure, future investment income and sensitivity to interest rates, credit markets and foreign exchange.
- Subsidiary statutory capital, dividend capacity and holding-company liquidity relative to debt service, share repurchases and shareholder dividends.
- Confirm the quarterly and annual figures in the audited statements and notes. The auditor issued an unqualified opinion, and management and the auditor reported effective internal control over financial reporting.