Everest Re Group, Ltd. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; balance-sheet comparisons are to December 31, 2017. The company provides property and casualty reinsurance and insurance in the U.S., Bermuda and international markets. Dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Gross written premiums | $2,066.5 | $1,601.6 | $3,998.1 | $3,202.6 |
| Premiums earned | $1,729.8 | $1,369.7 | $3,349.2 | $2,681.8 |
| Total revenues | $1,892.9 | $1,530.6 | $3,638.1 | $3,015.4 |
| Net investment income | $141.3 | $134.5 | $279.6 | $256.8 |
| Net income | $69.9 | $245.7 | $280.2 | $537.3 |
| Diluted EPS | $1.70 | $5.95 | $6.81 | $13.02 |
| Combined ratio | 105.1% | 90.5% | 99.4% | 88.3% |
Q2 underwriting loss was $88.0 million; first-half underwriting gain was $20.3 million. The combined ratio exceeded 100% in Q2, indicating an underwriting loss before investment and other income. First-half net realized capital losses were $9.1 million, compared with gains of $78.0 million in 2017.
- Cash flow: Operating cash flow was $132.6 million in the first half, down from $634.4 million a year earlier. Net catastrophe loss payments were $573.2 million versus $116.6 million. Ending cash was $619.5 million.
- Financial position: Total assets were $23,885.9 million; investments and cash totaled $18,205.7 million. Gross loss and LAE reserves were $12,043.3 million. Shareholders’ equity was $8,241.3 million, down from $8,369.2 million at year-end 2017; book value per share was $201.70.
- Debt and liquidity: Debt was $633.5 million, comprising $396.9 million of senior notes and $236.6 million of subordinated notes. Cash and short-term investments totaled $912.7 million. The company reported no revolver borrowings and was in compliance with credit-facility covenants; facilities also support letters of credit.
Changes and operating drivers
- Premium growth was broad-based: first-half gross written premiums rose 24.8%, with reinsurance up 29.5% and insurance up 14.7%. Management attributed growth to property and casualty treaty business, Latin America, U.K. and Ireland production, and expansion in insurance lines including casualty and accident and health.
- First-half losses and LAE rose 47.0% to $2,398.5 million. Prior-year catastrophe reserve development was adverse by $532.2 million, mainly for Hurricanes Harvey, Irma and Maria and the California wildfires; favorable prior-year attritional development of $97.4 million partly offset this.
- Management said reopened claims and higher-than-expected loss-adjustment expenses, particularly on aggregate covers, drove the increased estimates for the 2017 hurricanes. Q2 current-year catastrophe losses were $65.0 million, including Cyclone Mekunu and U.S. winter storms.
- Segment results were uneven in the first half: U.S. Reinsurance reported a $196.0 million underwriting loss; International earned $83.8 million, Bermuda $110.5 million and Insurance $22.0 million. Q2 underwriting losses in U.S. Reinsurance and International were partly offset by gains in Bermuda and Insurance.
- Equity fell mainly because of $240.9 million of after-tax unrealized investment depreciation, $106.5 million in dividends, foreign currency translation losses and $25.3 million of share repurchases, partly offset by net income.
Outlook, risks and unusual items
- Management described insurance and reinsurance markets as highly competitive, with ample capacity and pressure on rates and terms, though it saw potential profit opportunities and continued to target business with stronger expected returns. It gave no specific earnings or premium guidance.
- Management expects annual positive operating cash flow generally, but cautioned that catastrophe claim payments could reduce near-term cash flow and could make it negative. It said available liquidity was ample for expected near-term claims and did not anticipate significant securities sales or use of credit facilities to pay losses.
- Reserve estimates remain uncertain and may increase materially. Gross reserves included $397.4 million for asbestos and environmental exposures; net A&E reserves were $282.9 million. The filing warns ultimate A&E payments could exceed reserves.
- The company entered a retroactive reinsurance transaction effective April 1, 2018, ceding $269.2 million of casualty reserves to a Mt. Logan Re segregated account for $252.0 million consideration; the retrocession limit is $319.0 million, with excess liability retained by the company. It also reported $689.3 million of remaining limited-partnership investment commitments.
- Six unhedged equity-index put options remained outstanding. Their carrying liability was $9.2 million; the filing estimates low probabilities of index levels falling below strike prices but discloses much larger theoretical maximum payouts under zero-index scenarios.
- Investment markets and foreign exchange affected results and equity: fixed-maturity securities had $192.9 million of net pre-tax unrealized depreciation at June 30. Brexit-related regulatory, currency and market effects remain uncertain. The filing reported no subsequent events, no other material litigation beyond ordinary-course insurance/reinsurance disputes, and no material change in risk factors.
Important facts for investors to verify
- Whether further development of the 2017 catastrophe reserves—especially reopened hurricane claims and loss-adjustment expenses—changes reserve adequacy or underwriting results.
- Whether premium growth translates into profitable underwriting, particularly in U.S. Reinsurance and International, where first-half segment results were pressured by catastrophe development.
- How catastrophe claim payments affect operating cash flow, liquidity and the use of reinsurance recoverables and collateral.
- The quality and collectability of reinsurance receivables, including the concentration in Mt. Logan Re, and the economics and limits of the new retroactive transaction.
- Changes in investment valuations, unrealized losses, limited-partnership commitments, and the valuation and potential exposure of the remaining equity-index put options.
- Reserve assumptions for asbestos and environmental claims, as well as the status of credit-facility covenants and regulatory capital requirements.