Everest Re Group, Ltd. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; unaudited. The company provides property-and-casualty reinsurance and insurance. Amounts below are USD millions except per-share figures and ratios.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Gross written premiums | $2,369.3 | $2,166.7 | $4,940.2 | $4,293.8 |
| Premiums earned | $2,042.4 | $1,817.3 | $4,079.2 | $3,550.0 |
| Total revenues | $2,244.5 | $2,008.7 | $4,226.5 | $3,974.6 |
| Net investment income | $38.1 | $179.0 | $185.9 | $320.0 |
| Net income | $190.9 | $332.9 | $207.5 | $687.4 |
| Diluted EPS | $4.77 | $8.15 | $5.13 | $16.82 |
| Combined ratio | 97.5% | 89.2% | 98.1% | 88.9% |
| Operating cash flow | — | $1,104.6 | $853.5 |
Premiums earned rose 12.4% in Q2 and 14.9% in the first half. Net income fell 42.7% and 69.8%, respectively. Higher claims, including COVID-19 losses, and sharply lower investment income outweighed premium growth. Q2 realized investment gains of $184.6 million supported results; the first-half result included $25.9 million of realized investment losses. Q2 comprehensive income was $757.8 million, including $566.9 million of other comprehensive income, principally investment appreciation.
The Q2 loss ratio was 68.9%, up 8.7 percentage points year over year; the first-half loss ratio was 69.6%, up 9.2 points. Reinsurance generated underwriting gains of $69.5 million in Q2 and $119.6 million in the first half, while Insurance recorded underwriting losses of $18.6 million and $40.1 million, respectively. Insurance combined ratios were 103.4% for Q2 and 103.7% for the first half.
Financial position and liquidity
- At June 30, total assets were $28,584.8 million, total liabilities $19,298.5 million, and shareholders’ equity $9,286.3 million, versus $27,324.1 million, $18,191.1 million, and $9,132.9 million, respectively, at year-end 2019. Book value per share was $232.32, up 3.8% from $223.85.
- Investments and cash totaled $21,601.7 million. Cash and short-term investments were $1,776.4 million. Management said liquid assets and operating cash flow provide ample near-term claims-paying capacity.
- Loss and LAE reserves were $14,276.6 million, up 4.9% from year-end. Reported debt was $620.8 million, down from $633.8 million: $397.1 million of senior notes and $223.6 million of subordinated notes.
- Operating cash flow was $1,104.6 million; investing cash outflow was $629.0 million and financing cash outflow was $362.9 million. Cash ended the period at $922.5 million. The company paid $125.2 million in dividends and repurchased $200.0 million of shares during the first half.
- The company reported compliance with credit-facility covenants. Its $50 million revolving borrowing drawn in March was repaid in June; no revolving borrowings were outstanding at quarter-end. Letters of credit were in use under its facilities.
Material changes, outlook and risks
- COVID-19: Management estimated pandemic-related incurred losses of $160 million for Q2 and $310 million for the first half. The filing warns that estimates may change materially, economic disruption may reduce premium volumes and collections, and regulatory or legislative actions could expand coverage or require policyholder accommodations. Management could not predict the pandemic’s magnitude or duration and anticipated potential further effects on revenue and income.
- Investments: Net investment income fell largely because limited-partnership investments, reported generally on a lag, produced losses of $88.3 million in Q2 and $66.7 million in the first half. Q2 equity-market recovery generated realized and unrealized gains, but the company warned further market disruption could cause investment losses and lower future income. First-half fixed-income and equity portfolio returns were 4.0% and 2.6%, respectively.
- Catastrophe and other losses: First-half catastrophe losses were $45 million, including civil unrest, Nashville tornadoes, an Australia East Coast storm and Australian fires. The company increased catastrophe exposure during the first half; its largest modeled 100-year event represented approximately 7% of June 30 equity, versus 6% at year-end 2019.
- Subsequent events: Management said Hurricane Isaias and the August 4 Beirut explosion were expected to adversely affect Q3 2020 results, but losses could not yet be estimated.
- No quantified earnings guidance was provided. Management described capital, liquidity, high-quality investments and the diversified global platform as strengths, while noting uncertainty around pandemic claims, economic recovery and pricing.
- Other exposures: Net asbestos and environmental reserves were $213.5 million. The company noted uncertainty in ultimate A&E losses. One S&P 500 equity-index put option remained at June 30 with a $9.1 million fair-value liability; the theoretical maximum payout was disclosed as $145.7 million, while estimated probability of falling below its strike was below 0.8%.
- Accounting and presentation: The company adopted the expected-credit-loss standard in January, recording a $4.2 million opening retained-earnings reduction and $25.8 million of credit-loss allowances at June 30. Prior 2019 comparative results were revised for foreign-exchange errors related to premium funds held from reinsureds; management had judged the prior-period impact not material.
Most important facts for investors to verify
- Whether COVID-19 claims estimates, coverage disputes, premium collections and regulatory actions materially change in subsequent quarters.
- Whether limited-partnership valuations recover and investment income normalizes, and the sustainability of gains driven by market-value changes.
- Reserve development, particularly pandemic, catastrophe and asbestos/environmental exposures, against the higher loss ratio and reserve balance.
- Q3 losses from Hurricane Isaias and the Beirut explosion, which were not estimable when the filing was prepared.
- Capital and catastrophe-risk position, including the increased modeled 100-year exposure and ongoing share repurchases and dividends.