Everest Re Group, Ltd. — Q1 2020 Form 10-Q
Business context and reporting period. Bermuda-based Everest Re Group provides property-and-casualty reinsurance and insurance in the U.S. and international markets. This unaudited filing covers the three months ended March 31, 2020; balance-sheet comparisons are with December 31, 2019. The company reorganized reporting segments effective January 1, 2020 into Reinsurance Operations and Insurance Operations, and recast prior-period segment data accordingly.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / prior date |
|---|---|---|
| Gross written premiums | $2,570.9 million | $2,127.1 million; up 20.9% |
| Net written premiums | $2,201.5 million | $1,851.7 million; up 18.9% |
| Premiums earned | $2,036.8 million | $1,732.7 million; up 17.6% |
| Total revenues | $1,982.0 million | $1,965.8 million; up 0.8% |
| Net investment income | $147.8 million | $141.0 million; up 4.8% |
| Net realized capital gains (losses) | $(210.6) million | $92.2 million |
| Pre-tax income (loss) | $(43.6) million | $414.5 million |
| Income tax expense (benefit) | $(60.2) million benefit | $60.0 million expense |
| Net income | $16.6 million; diluted EPS $0.41 | $354.6 million; diluted EPS $8.67 |
| Combined ratio | 98.6% | 88.7%; increased 9.9 points |
| Operating cash flow | $506.0 million | $459.8 million |
| Total assets / shareholders’ equity | $27,222.6 million / $8,580.9 million | $27,324.1 million / $9,132.9 million |
| Total debt | $682.2 million | $633.8 million |
| Cash and short-term investments | $1,259.3 million | $1,222.7 million |
Underwriting by segment. Reinsurance earned premiums of $1,485.2 million and generated an underwriting gain of $50.1 million, versus $176.9 million a year earlier; its combined ratio rose to 96.6% from 86.5%. Insurance earned premiums of $551.6 million and recorded an underwriting loss of $21.5 million, versus a $18.8 million gain; its combined ratio rose to 103.9% from 95.6%.
Debt and liquidity. Cash from operations exceeded investing and financing outflows; cash ended the quarter at $817.6 million, compared with $808.0 million at year-end. The company drew $50.0 million on its revolving credit facility in March. It reported compliance with credit-facility covenants. Management stated it believes cash flows, liquid investments and available facilities provide ample liquidity for near-term claims, while noting operating cash flow could decline or become negative.
Material changes and drivers
- Premium growth was broad-based, with gross written premiums increasing 16.0% in Reinsurance and 33.3% in Insurance.
- Incurred losses and loss-adjustment expenses rose 36.5% to $1,430.8 million. The company estimated $150 million of COVID-19 losses: $110 million in Reinsurance and $40 million in Insurance. Higher earned premiums and catastrophe losses also contributed.
- Investment-market volatility drove $210.6 million of net realized capital losses, including $145.1 million of fair-value remeasurement losses, $43.7 million of losses on investment sales and $21.8 million of credit-loss allowances. Equity-security fair-value losses were $144.0 million.
- Other comprehensive loss was $297.9 million, including $248.0 million of after-tax securities depreciation and $50.8 million of foreign-currency translation losses. Shareholders’ equity fell 6.0%; book value per share declined to $214.59 from $223.85.
- The company repurchased 970,892 shares for $200.0 million and paid $63.3 million in dividends. It also repurchased $1.7 million of subordinated notes and recognized a $0.5 million gain.
Outlook, risks and unusual items
- COVID-19 and economic conditions: Management said the pandemic could meaningfully affect revenue and net and operating income in subsequent quarters through claims, reduced business activity, premium collection challenges and broader economic effects. Potential retroactive legal, regulatory or legislative changes to coverage were not included in its analysis. The extent of losses depends on the duration of the event and the recovery.
- Investments: Management reported that some market declines had recovered in April, but warned that bankruptcies could increase credit losses. Limited-partnership valuations are generally reported on a lag, so first-quarter market impacts may appear in Q2. Investments and cash totaled $20.3 billion; fixed-income portfolio duration was 3.6 years and composite credit quality Aa3.
- Tax benefit: The $60.2 million tax benefit included a $31.0 million benefit from the CARES Act provision allowing eligible net operating loss carrybacks. This benefit helped produce positive net income despite a pre-tax loss.
- Reserving and contingencies: Gross loss and LAE reserves were $13.8 billion. Management cautioned that reserve estimates may vary materially. Net asbestos and environmental reserves were $221.4 million; ultimate asbestos/environmental losses remain uncertain. Ordinary-course insurance and reinsurance disputes are considered in reserve estimates; the company reported no other material litigation or arbitration.
- Equity-index options: The unhedged options had a $21.0 million fair-value liability. Management estimated less than 3% probability that the S&P 500 contract would fall below its strike at exercise, but approximately 70% probability for the FTSE 100 contract. The theoretical maximum payouts were $144.6 million and $40.0 million, respectively; these are maximum scenarios, not expected payments.
- Other risks and outlook: The filing gives no specific earnings or premium guidance. Management cited competitive market conditions and uncertainty around pricing, COVID-19 impacts and Brexit. It stated that the company’s capital, liquidity and diversified platform remain strengths. Risk factors were reported as having no material changes from the latest Form 10-K.
Important facts for investors to verify
- How COVID-19 claims develop relative to the $150 million Q1 estimate, including potential coverage disputes, claim emergence and premium collectability.
- Whether the elevated loss ratios—especially Insurance’s 103.9% combined ratio—improve as pricing, business mix and claims experience develop.
- Subsequent-quarter investment results, including recovery or further declines in securities and limited-partnership valuations, and any additional credit-loss allowances.
- Reserve adequacy, particularly for casualty and asbestos/environmental exposures, and the company’s dependence on reinsurance recoverables and collateral.
- Capital and liquidity after share repurchases and dividends, including the $50 million revolving draw, available facility capacity and covenant compliance.
- The effects of the CARES Act tax benefit and whether future tax results remain sensitive to geographic income mix and market losses.