Business context and reporting period
Everest Re Group, Ltd. (Bermuda-domiciled; the filing identifies the registrant as Everest Re Group, Ltd.) provides property and casualty reinsurance and insurance in the U.S., Bermuda and international markets. This unaudited Form 10-Q covers the three months ended March 31, 2014, compared with the three months ended March 31, 2013, and the balance sheet date March 31, 2014, compared with December 31, 2013. Interim results are not necessarily indicative of full-year results.
Financial results and key metrics
Amounts below are in U.S. dollars; income statement and cash flow amounts are for the quarter unless otherwise indicated.
| Metric | Q1 2014 | Q1 2013 / prior date |
|---|---|---|
| Gross written premiums | $1,267.4 million | $1,180.8 million (+7.3%) |
| Net written premiums | $1,227.6 million | $1,149.7 million (+6.8%) |
| Premiums earned | $1,144.5 million | $1,088.8 million (+5.1%) |
| Total revenues | $1,283.8 million | $1,367.7 million (-6.1%) |
| Income before taxes | $355.3 million | $469.8 million (-24.4%) |
| Net income | $302.0 million | $384.3 million (-21.4%) |
| Net income attributable to Everest Re Group | $293.9 million | $384.3 million (-23.5%) |
| Diluted EPS | $6.21 | $7.50 |
| Combined ratio | 80.0% | 80.7% |
| Operating cash flow | $367.1 million | $259.4 million |
| Shareholders’ equity | $7,037.5 million | $6,968.3 million at Dec. 31, 2013 |
Underwriting, earnings and capital
- The combined ratio improved 0.7 percentage point: the loss ratio fell 0.3 point to 54.1%, commission and brokerage was essentially flat at 21.5%, and other underwriting expense fell 0.5 point to 4.4%. No current-year catastrophe losses were recorded in either quarter.
- Segment underwriting gains were $113.7 million for U.S. Reinsurance, $76.4 million International, $25.2 million Bermuda, $3.6 million Insurance and $9.5 million Mt. Logan Re. Bermuda’s combined ratio worsened to 85.5% from 77.4%; U.S. Reinsurance and International improved to 73.5% and 76.0%, respectively.
- Net investment income declined 15.5% to $123.2 million. Management cited reduced limited-partnership income (a $2.3 million loss versus $17.5 million income) and lower fixed-income reinvestment rates. Annualized pre-tax yield on average invested assets was 3.1%, versus 3.7%.
- Net realized capital gains fell to $21.1 million from $126.7 million, largely because equity-security fair-value gains were $24.0 million versus $113.8 million a year earlier. Derivatives produced a $1.7 million loss versus a $15.3 million gain.
- Shareholders’ equity increased $69.2 million, reflecting earnings and $55.3 million of after-tax unrealized investment appreciation, partly offset by $250.0 million spent repurchasing 1.7 million shares and $34.7 million of dividends. Book value per share was $152.80, up from $146.57 at year-end; the declared quarterly dividend was $0.75 per share, compared with $0.48.
Financial position and liquidity
- Total assets were $20.11 billion and total liabilities $12.76 billion at March 31. Investments and cash totaled $16.81 billion, including $13.02 billion of fixed maturities and $1.36 billion of short-term investments. Cash alone was $385.4 million, down from $611.4 million at year-end.
- Operating cash flow of $367.1 million was offset by $384.4 million of investing outflows and $211.9 million of financing outflows; cash decreased $226.0 million during the quarter. Financing included share repurchases and dividends, partly offset by third-party Mt. Logan Re investment.
- Management reported $1.75 billion in cash and short-term investments and described liquid securities and operating cash flow as ample for near-term claims. It does not anticipate selling securities or drawing credit facilities to pay losses. Cash and short-term investments were $1.83 billion at year-end.
- Total debt was $488.3 million: $250.0 million of 5.4% senior notes due October 15, 2014, and $238.4 million of 6.6% subordinated notes due 2067. The company reported no revolving borrowings and compliance with credit-facility covenants. Its credit facilities total up to $1.25 billion; letters of credit were in use, including $501.9 million under the Group facility’s collateralized tranche.
- Gross loss and LAE reserves were $9.61 billion, down from $9.67 billion at year-end. Gross asbestos and environmental reserves were $392.5 million ($377.0 million net of reinsurance); management cautions that ultimate A&E payments could exceed estimates.
- Reinsurance receivables were $653.1 million, up from $540.9 million at year-end. Federal Crop Insurance Company accounted for 26.5% and C.V. Starr (Bermuda) 22.2%; the latter was fully collateralized by a trust.
Changes, outlook, risks and unusual items
- Premium growth reflected increased reinsurance business, particularly catastrophe-exposed and mortgage-guaranty risks, and new Mt. Logan Re activity; this was partly offset by lower Insurance premiums, primarily from crop business. Bermuda premiums declined following non-renewal of a casualty quota-share contract.
- Management described worldwide markets as highly competitive, with ample capacity and downward rate pressure, particularly in catastrophe coverage and U.S. casualty lines. It nevertheless sees profit opportunities in catastrophe business and says it will prioritize underwriting profitability and portfolio diversification over premium volume. No specific numerical earnings or premium guidance was provided.
- Management expects positive annual operating cash flow in the near term absent unusual catastrophe activity, but says longer-term cash flow depends on competitive pricing and its underwriting strategy. It stated that the $250 million senior-note maturity may be funded from operating cash or refinanced, depending on market conditions.
- Investment risks include interest-rate sensitivity, foreign exchange movements, and market volatility in higher-return assets; investments in selected higher-risk sectors represented approximately 61.8% of shareholders’ equity. The modeled impact of an immediate 200-basis-point rate increase was a 6.0% decline in fixed-income market value and a $722.8 million after-tax reduction in unrealized appreciation, before considering liability effects.
- The company has seven unhedged equity-index put options. Their balance-sheet liability was $37.1 million; modeled present-value theoretical maximum payouts were $410.8 million for S&P 500 contracts and $45.4 million for the FTSE 100 contract. Management estimated the probability of the relevant index falling below strike at exercise at less than 25% for each S&P contract and less than 41% for the FTSE contract. These are long-dated obligations whose valuation depends on model assumptions.
- Mt. Logan Re’s redeemable noncontrolling interest rose to $315.2 million, including $213.7 million of third-party investments during the quarter. After quarter-end, on April 24, the company entered two catastrophe reinsurance agreements with Kilimanjaro Re, funded by $450 million of catastrophe bonds.
- Ordinary-course insurance and reinsurance disputes continue; the company reported no other material litigation or arbitration. The filing reported no material change in risk factors and no material change to internal control over financial reporting. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether reserve estimates remain adequate as claims develop, particularly A&E liabilities and prior-year catastrophe and attritional losses.
- The quality, collectability and concentration of reinsurance receivables, including the Federal Crop Insurance Company exposure.
- How the company will repay or refinance the $250 million senior notes due October 2014, and the status and terms of its credit facilities and letters of credit.
- Whether premium growth and underwriting margins can be sustained amid competitive pricing, especially in catastrophe and U.S. casualty markets; monitor Bermuda’s weaker year-over-year combined ratio.
- The drivers and volatility of investment income and realized gains, including limited-partnership results, valuations, interest-rate exposure and the unhedged index put options.
- Mt. Logan Re’s underwriting performance, third-party capital/redemption terms, and the cost, coverage and risk transfer of the subsequent $450 million Kilimanjaro Re catastrophe-bond-backed protection.