Everest Re Group, Ltd. — Q2 2014 Form 10-Q
Business context and period. Bermuda-domiciled Everest Re Group provides property and casualty reinsurance and insurance in the U.S., Bermuda and international markets. This unaudited report covers the three and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods unless noted. Results for the interim periods are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Gross written premiums | $1,415.4m | $1,260.2m | $2,682.8m | $2,441.0m |
| Net written premiums | $1,217.5m | $1,212.6m | $2,445.1m | $2,362.3m |
| Premiums earned | $1,272.3m | $1,151.5m | $2,416.8m | $2,240.3m |
| Total revenues | $1,452.5m | $1,354.5m | $2,736.3m | $2,722.2m |
| Net income attributable to Everest Re Group | $290.2m | $275.6m | $584.1m | $660.0m |
| Diluted EPS | $6.26 | $5.56 | $12.46 | $13.09 |
| Combined ratio | 84.7% | 87.6% | 82.5% | 84.2% |
| Operating cash flow | $223.3m | $179.6m | $590.4m | $438.9m |
Balance sheet at June 30, 2014: Total assets were $21.19bn, including $17.64bn of investments and cash; shareholders’ equity was $7.32bn and book value per share was $160.27. Gross loss and loss adjustment expense reserves were $9.70bn. Cash and short-term investments totaled $1.98bn. Total debt was $888.3m, comprising $400m of 4.868% senior notes due 2044, approximately $250m of 5.4% senior notes due October 2014, and $238.4m of subordinated notes. The company reported no revolving borrowings and was in compliance with its credit facility covenants.
Material changes and management commentary
- Q2 premiums earned rose 10.5%; six-month premiums earned rose 7.9%. Gross written premiums increased faster than net written premiums, partly because new quota-share business used more reinsurance.
- Q2 net income attributable to the Group rose 5.3%, while six-month income fell 11.5%. The six-month decline reflected lower investment income and realized gains, partly offset by improved underwriting.
- Net investment income fell 11.8% in Q2 and 13.6% year to date. Management cited reduced limited-partnership income and lower reinvestment rates; annualized pre-tax yield on average invested assets was 3.2% in Q2 and 3.1% for the six months, versus 3.8% in both 2013 periods.
- Net realized capital gains were $59.0m in Q2 and $80.1m year to date, largely from fair-value gains on equity securities. The six-month comparison was $160.6m in 2013. Q2 2014 also included $0.4m of other-than-temporary impairments.
- Lower catastrophe losses contributed to improved consolidated combined ratios. 2014 catastrophe losses included $30m from the Japan snowstorm and $15m from the Chilean earthquake. Q2 2013 included $90m of catastrophe losses.
- Segment underwriting was mixed: U.S. Reinsurance earned $115.9m in Q2 versus $58.1m, with a 76.3% combined ratio; International earned $35.9m versus $57.0m, with an 88.8% ratio; Insurance earned $4.2m versus $8.5m, with a 98.3% ratio. Mt. Logan Re, which began reporting in 2013, reported Q2 underwriting gain of $9.4m and a 60.2% combined ratio.
- Shareholders’ equity increased $354.6m from year-end, primarily through earnings and investment appreciation, partly offset by $325.0m of share repurchases and $69.1m of dividends. The six-month dividend declared was $1.50 per share, up from $0.96.
Outlook, risks and unusual items
- No numerical earnings or premium guidance was provided. Management expects positive operating cash flow to continue in the near term absent unusual catastrophe activity, but noted that longer-term cash flow depends on competition, pricing and its emphasis on underwriting profitability over premium volume. Management sees profit opportunities in current catastrophe markets while describing the broader market as highly competitive, with ample capacity and downward rate pressure in some catastrophe lines.
- Liquidity sources include operating cash flow, $1.98bn in cash and short-term investments, marketable securities and credit facilities. Management considers these sources ample for near-term expected loss payments and does not anticipate selling securities or drawing credit facilities to pay losses.
- Interest-rate, equity-price and foreign-currency movements affect investment values. A modeled 200-basis-point rate increase would reduce fixed-income market value by 5.6%; a 20% equity-price decline would reduce after-tax equity value by approximately $220.5m. These are sensitivities, not forecasts.
- The company has seven unhedged equity-index put options. Their recorded liability was $33.3m; theoretical maximum present-value payouts were $413.8m for the S&P 500 contracts and $46.6m for the FTSE 100 contract, assuming the relevant index fell to zero. Management estimated the probability of an index ending below the relevant strike at less than 22% for each S&P contract and less than 39% for the FTSE contract; valuations depend on model assumptions.
- Loss reserves are estimates subject to potentially significant variation. Gross asbestos and environmental reserves were $379.6m ($364.5m net); management reported a 7.7-year net asbestos survival ratio and cautioned ultimate payments could exceed reserves. Ordinary-course insurance and reinsurance disputes continue; the filing identifies no other material litigation or arbitration.
- Other notable items: the company issued $400m of 30-year senior notes in June, intended partly to refinance the $250m notes due October 2014; third-party redeemable interests in Mt. Logan Re rose to $375.9m. The company had $214.9m of remaining limited-partnership investment commitments. It also disclosed contingent annuity replacement estimates of about $174.7m in aggregate.
- Risk factors had no material changes. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether premium growth, especially new quota-share business, translates into adequate net underwriting returns as competition puts pressure on rates and commissions rise.
- Reserve adequacy and subsequent development, including asbestos/environmental exposures, prior-year catastrophe claims and the concentration of reinsurance receivables (24.6% from Federal Crop Insurance Company and 20.0% from C.V. Starr Bermuda at June 30).
- Investment income and portfolio valuations, particularly limited partnerships reported on a lag, equity fair-value gains, interest-rate exposure and the assumptions used to value the unhedged index puts.
- Refinancing and capital allocation: repayment of the October 2014 notes, the impact of the new long-dated debt, continued share repurchases and dividends, and compliance with credit covenants.
- Mt. Logan Re’s catastrophe risk, third-party capital and redeemable noncontrolling interests, and the company’s outstanding $214.9m partnership commitments.