Everest Re Group, Ltd. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; balance-sheet comparisons are with December 31, 2016. The company provides reinsurance and insurance in the U.S., Bermuda and international markets. Unless indicated otherwise, amounts below are U.S. dollars.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change / context |
|---|---|---|---|
| Gross written premiums | $1,600.9 million | $1,353.2 million | Up 18.3% |
| Net written premiums | $1,413.8 million | $1,181.5 million | Up 19.7% |
| Premiums earned | $1,312.1 million | $1,218.9 million | Up 7.6% |
| Net investment income | $122.3 million | $102.5 million | Up 19.3%, mainly from higher limited partnership income |
| Net realized capital gains (losses) | $52.7 million | $(74.3) million | Improved by $127.0 million; 2017 included $41.5 million of fair-value gains, $12.5 million of net sale gains, and $1.2 million of impairments |
| Income before taxes | $338.4 million | $177.1 million | Up 91.1% |
| Net income | $291.6 million | $171.7 million | Up 69.9% |
| Diluted earnings per share | $7.07 | $4.00 | Up from prior year |
| Combined ratio | 86.0% | 86.0% | Unchanged; loss ratio rose 1.2 points to 58.7% |
| Operating cash flow | $381.8 million | $375.5 million | Positive in both periods |
Underwriting and segments: Total segment underwriting gain was $183.2 million versus $171.0 million. U.S. Reinsurance gain fell to $102.8 million from $119.3 million, with its combined ratio increasing to 78.6% from 75.5%. International gain rose to $36.5 million from $30.8 million, with an 86.6% combined ratio versus 87.7%. Bermuda gain increased to $38.8 million from $23.8 million, and its combined ratio improved to 83.5% from 87.8%. Insurance moved to a $5.1 million gain from a $2.9 million loss; its combined ratio improved to 98.4% from 101.0%.
Financial position, debt and liquidity
- At March 31, 2017, total assets were $22.19 billion, total liabilities $13.85 billion and shareholders’ equity $8.35 billion. Equity increased 3.4% from year-end; book value per share rose to $203.32 from $197.45.
- Total investments and cash were $18.12 billion, including $14.73 billion of fixed maturities, $477.2 million of short-term investments and $468.2 million of cash. Cash plus short-term investments totaled $945.4 million.
- Gross loss and loss adjustment expense reserves were $10.41 billion, up 1.0% from year-end. Total debt was $633.2 million, comprising senior and subordinated notes; it was unchanged from December 31, 2016.
- Credit facilities included $200 million of unsecured revolving capacity, $600 million for collateralized letters of credit and a £140 million letter-of-credit facility. No revolving borrowings were outstanding. The company reported compliance with facility covenants.
- Management said it expects annual positive operating cash flow near term absent unusual catastrophe activity, and considers available liquid assets, investment maturities and operating cash flow ample for expected near-term claim payments. It does not anticipate selling securities or drawing credit facilities to pay losses, though it retains that ability.
Material changes and management commentary
- Premium growth reflected expansion across businesses: reinsurance gross written premiums rose 19.4% and insurance premiums rose 15.5%. Management cited new crop reinsurance transactions, Bermuda production growth, casualty and financial lines, insurance expansion and the Lloyd’s syndicate.
- Incurred losses and LAE increased 10.0% to $770.8 million. The consolidated loss ratio increased 1.2 points, primarily due to catastrophe losses and higher attritional losses. Q1 2017 catastrophe losses were $20.0 million, attributed to Cyclone Debbie in Australia, versus $10.4 million from the 2016 Taiwan earthquake in Q1 2016.
- Prior-year incurred losses were approximately $0.1 million adverse in Q1 2017, compared with $2.0 million favorable in Q1 2016. Management emphasizes that reserves are estimates and may vary materially.
- Income tax expense increased to $46.8 million from $5.4 million, mainly due to higher U.S. realized capital gains. Earnings also benefited from the substantial year-over-year swing in realized investment results; Q1 2017 net income should not be read as solely an underwriting outcome.
- Investment portfolio unrealized losses were $189.8 million at March 31, 2017, down from $220.6 million at year-end. Management attributed most long-duration fixed-income unrealized losses to foreign exchange movements and reported no projected cash-flow shortfalls on the affected securities.
- After quarter-end, on April 13, 2017, the company entered six collateralized catastrophe reinsurance agreements backed by $1.25 billion of catastrophe-bond issuances. The agreements provide specified annual aggregate named-storm and earthquake protection in the U.S., Puerto Rico and Canada.
- Management described market capacity as ample and competition as intense, particularly in property catastrophe and casualty reinsurance, pressuring rates and terms. It also identified uncertainty around Brexit and potential effects on regulation, interest rates, currencies and financial markets.
Risks, contingencies and unusual items
- Asbestos and environmental reserves were $431.8 million gross and $310.2 million net of reinsurance; net asbestos reserves were $295.5 million. The company cautioned that ultimate A&E losses may exceed estimates. Its net asbestos survival ratio was 5.2 years.
- Seven legacy equity-index put options are unhedged and valued using Level 3 inputs. Their recorded liability was $19.4 million. The filing disclosed theoretical maximum payouts of $448.9 million for six S&P 500 contracts and $36.3 million for the FTSE 100 contract, while estimating the probability of falling below the applicable strikes at less than 4% and less than 22%, respectively.
- The company had commitments to invest up to $535.6 million in limited partnerships. Partnership results are generally reported with a lag.
- Ordinary-course insurance and reinsurance disputes are considered in reserve estimates. The company reported no other material litigation or arbitration and no material changes to its risk factors.
- Market exposures include interest rates, equity prices and foreign currencies. The filing’s sensitivity analysis estimated that an immediate 200-basis-point rate increase would reduce after-tax unrealized appreciation by $772.2 million from the base case; a 20% equity decline would reduce after-tax fair/market value by $148.3 million.
Most important facts for investors to verify
- Whether premium growth, especially in Bermuda and the expanding Insurance platform, can be sustained without weakening underwriting discipline or combined ratios.
- How much earnings growth is repeatable from underwriting and recurring investment income versus realized gains, fair-value movements and limited partnership results.
- Whether reserves remain adequate as claims develop, particularly A&E exposures and the higher current-year attritional and catastrophe losses.
- The terms, attachment points and actual risk transfer provided by the post-quarter catastrophe reinsurance agreements, and how they affect net catastrophe exposure and costs.
- Liquidity and capital headroom under stressed catastrophe, investment-market, currency and interest-rate scenarios, including covenant compliance and letter-of-credit usage.
No quantitative earnings or premium guidance for future periods is provided in the filing.