Everest Re Group, Ltd. — Q2 2013 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods unless noted. The Bermuda-based group writes reinsurance and insurance in the U.S., Bermuda, and international markets. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Gross written premiums | $1,260.2 | $909.0 | $2,441.0 | $1,955.5 |
| Premiums earned | $1,151.5 | $1,037.8 | $2,240.3 | $2,035.8 |
| Total revenues | $1,354.5 | $1,182.1 | $2,722.2 | $2,431.2 |
| Net income | $275.6 | $214.6 | $660.0 | $519.3 |
| Diluted EPS | $5.56 | $4.08 | $13.09 | $9.79 |
| Combined ratio | 87.6% | 89.0% | 84.2% | 89.0% |
| Operating cash flow | Six-month amount: $395.8 | Prior-year six-month amount: $304.5 |
Q2 premiums earned rose 11.0% and net income rose 28.5%. Six-month premiums earned increased 10.0% and net income increased 27.1%. The six-month combined ratio improved 4.8 percentage points; Q2 improved 1.4 points. Q2 loss ratio increased 3.2 points to 61.8%, while the commission and brokerage ratio fell 4.6 points to 21.0%.
Investment results were mixed: net investment income was $148.7 in Q2, down 0.4%, and $294.5 for six months, down 2.4%. Net realized capital gains were $33.9 in Q2 versus a $16.6 loss, and $160.6 for six months versus $82.1. Derivative gains were $12.1 and $27.4, respectively. Management attributed lower investment income mainly to lower fixed-income reinvestment rates, partly offset by limited partnership income.
Other comprehensive loss was $259.3 in Q2 and $329.9 for six months, principally reflecting investment depreciation. This reduced accumulated other comprehensive income to $207.2 at June 30 from $537.0 at year-end 2012.
Financial position, debt, and liquidity
- At June 30, total assets were $19,559.0, total liabilities $12,936.2, and shareholders’ equity $6,622.8, down 1.6% from year-end. Book value per share was $136.31, up 4.1% from $130.96.
- Investments and cash totaled $16,027.9, down 3.3% from year-end. Cash plus short-term investments was $1,167.1. Management said liquid investments, operating cash flow, and maturities provide ample near-term liquidity.
- Total debt was $528.3 versus $818.2 at year-end. The company redeemed $329.9 of 6.2% junior subordinated securities in May, recording $7.3 of expense to write off remaining issuance costs; it also had $40.0 outstanding on a revolving credit line. The 5.4% senior notes, with $249.9 carrying value, mature October 2014.
- Gross loss and loss-adjustment-expense reserves were $9,843.5, down 2.2% from year-end. A&E reserves were $420.8 gross and $404.5 net of retrocessions.
- The company repurchased 3.5 million shares for $450.0 during the first six months and paid $47.5 in dividends. The quarterly dividend was $0.48 per share.
Material changes and segment results
- Written-premium growth was partly driven by a large Florida quota-share reinsurance contract. Excluding it, gross written premiums increased 10.8% in Q2 and 11.8% for six months. Insurance premium growth reflected California workers’ compensation, crop, and non-standard auto business.
- Q2 catastrophe losses were $90.0, versus $30.0 in 2012, from U.S. storms ($50.0), Canadian floods ($20.0), and European floods ($20.0). Six-month catastrophe losses were also $90.0.
- U.S. Reinsurance underwriting gain rose to $58.1 in Q2 and $154.7 for six months, with segment combined ratios of 85.2% and 80.3%. Results benefited from lower commission ratios and premium growth, including the Florida contract.
- International underwriting gain declined to $57.0 in Q2 and $128.4 for six months; its combined ratios were 82.5% and 79.9%, respectively. Higher catastrophe and attritional losses weighed on results.
- Bermuda underwriting gain was $19.4 in Q2 and $61.3 for six months; six-month results included favorable prior-year catastrophe development, mainly related to the 2011 Japan earthquake. Insurance underwriting gain was $8.5 in Q2 and $8.7 for six months; its combined ratios were 96.6% and 98.0%.
Outlook, risks, and unusual items
- No formal earnings or premium guidance was provided. Management expected annual positive operating cash flow to continue in the near term absent unusual catastrophe activity. It saw profit opportunities in catastrophe coverages but cited intense competition, especially in casualty lines and from capital-markets capacity.
- Management identified lower reinvestment yields, catastrophe activity, competition and pricing, reserve-estimation uncertainty, and market-value volatility as relevant risks. It cautioned that actual reserve development may differ materially from estimates; reserves are not discounted in the financial statements.
- Seven unhedged equity-index put options had a $52.1 fair-value liability. The contracts have long-dated settlement dates; theoretical maximum present-value payouts were $401.7 for the S&P 500 contracts and $41.9 for the FTSE 100 contract. Management estimated probabilities of falling below the respective strikes at less than 37% and 46%. Collateral posted was $43.1; a zero collateral threshold could require an additional $55.0.
- Moody’s downgraded the company and subsidiaries one level on March 25, 2013. The company reported compliance with credit-facility covenants at June 30.
- Routine insurance and reinsurance disputes and contingent annuity obligations were disclosed; the filing reported no other material litigation or subsequent events. Risk factors were reported as unchanged. Disclosure controls were judged effective.
- The 2012 comparison includes deferred-tax-asset corrections that increased tax benefits by $9.3 in Q2 and $21.7 for the first half. The company considered these out-of-period adjustments immaterial and did not restate prior periods.
Important facts for investors to verify
- How much of premium growth and underwriting performance is sustainable apart from the Florida quota-share contract and changes in business mix?
- Whether catastrophe losses, crop losses, and future reserve development alter the current favorable combined-ratio and reserve trends.
- How investment yields and unrealized losses evolve, and how gains from fair-value remeasurements affect reported earnings.
- The valuation, collateral requirements, and potential cash exposure of the unhedged equity-index put options.
- Near-term refinancing plans for the 2014 senior notes and the continuing effects of share repurchases, dividends, and the Moody’s downgrade on capital and liquidity.