Everest Re Group, Ltd. — Q2 2019 Form 10-Q
Business and period. Everest Re Group is a Bermuda-domiciled global reinsurance and insurance group operating through U.S. Reinsurance, International, Bermuda and Insurance segments. This unaudited filing covers the three and six months ended June 30, 2019, compared with the same 2018 periods; balance-sheet comparisons are to December 31, 2018. Unless noted, amounts below are U.S. dollars.
Financial performance
- Q2 revenue and earnings: Premiums earned were $1.817 billion, up 5.1%; total revenue was $2.019 billion, up 6.7%. Net income was $342.9 million versus $69.9 million; diluted EPS was $8.39 versus $1.70.
- First-half revenue and earnings: Premiums earned were $3.550 billion, up 6.0%; total revenue was $3.979 billion, up 9.4%. Net income was $691.8 million versus $280.2 million; diluted EPS was $16.93 versus $6.81.
- Underwriting: The consolidated combined ratio improved to 89.2% in Q2 from 105.1%, and to 88.9% for the first half from 99.4%. The improvement primarily reflected much lower unfavorable prior-year catastrophe-loss development than in 2018. The first-half loss ratio was 60.4%, commission and brokerage ratio 22.8%, and other underwriting expense ratio 5.7%.
- Investment results: Net investment income increased 26.7% to $179.0 million in Q2 and 14.4% to $320.0 million in the first half. Management attributed the increase to limited partnership income and a larger fixed-maturity portfolio, partly offset by lower equity dividends. Net realized capital gains were $30.3 million in Q2 and $122.5 million in the first half, compared with $15.8 million and a $9.1 million loss, respectively, in 2018. First-half 2019 gains included $114.8 million from equity fair-value remeasurements.
- Cash flow: Operating cash flow was $853.5 million for the first half, versus $132.6 million in 2018. Investing activities used $690.4 million and financing activities used $158.0 million. Cash ended the period at $661.4 million, up $5.3 million from year-end.
- Balance sheet and capital: At June 30, investments and cash totaled $19.794 billion; total assets were $26.388 billion; loss and LAE reserves were $13.249 billion; total liabilities were $17.504 billion; and shareholders’ equity was $8.884 billion, up 12.4% from year-end. Book value per share was $218.07, up 12.2%.
- Debt and liquidity: Reported debt was $633.7 million, consisting principally of $397.0 million of senior notes and $236.7 million of subordinated notes. Cash and short-term investments totaled $1.406 billion. The company reported no revolving-credit borrowings, was in compliance with facility covenants, and had up to $200 million of unsecured revolving liquidity available. Letter-of-credit capacity was largely used to support reinsurance obligations.
Changes, segments and management commentary
- Gross written premiums grew 4.8% in Q2 and 7.4% in the first half. Insurance was the principal growth driver: its gross written premiums rose 17.2% and 17.5%, respectively. Reinsurance growth was mixed by segment and affected by foreign exchange and business mix.
- Q2 underwriting gains were reported in all four segments: U.S. Reinsurance $80.7 million, International $49.1 million, Bermuda $48.0 million and Insurance $19.0 million. For the first half, U.S. Reinsurance earned $204.4 million, International $55.8 million, Bermuda $94.6 million and Insurance $37.8 million. International and Bermuda first-half underwriting gains were below 2018; other segments improved.
- First-half incurred losses and LAE fell 10.6% to $2.143 billion. Prior-year losses developed adversely by $7.8 million overall, compared with $434.7 million adverse development in 2018, largely reflecting 2017 catastrophe claims. First-half 2019 current-year catastrophe losses included $25 million from the Townsville monsoon; there were no current-year catastrophe losses in Q2.
- Management described insurance and reinsurance markets as highly competitive, with ample capacity—particularly in property catastrophe and casualty. It noted some rate firming in catastrophe-affected markets and selected other lines, and said it continues to target business offering the greatest profit potential while maintaining portfolio diversification.
- Management generally expects positive annual operating cash flow, but cautioned that catastrophe claim payments could reduce cash flow or make it negative in the near term. It said available cash, liquid investments and operating cash flows provide ample liquidity for expected near-term claims. No specific earnings or premium guidance was provided.
Risks, contingencies and unusual items
- Loss reserves are estimates subject to potentially significant variation. Gross asbestos and environmental reserves were $331.5 million, including $248.5 million net of reinsurance; management cautioned that ultimate A&E payments could exceed reserves. The net asbestos survival ratio was 5.5 years.
- Catastrophe exposure remains material. Management reported that the largest projected 1-in-100-year event in a zone represented approximately 6% of June 30 shareholders’ equity, down from approximately 10% at year-end 2018. These are model-based estimates, not forecasts of losses.
- The company had $823.6 million of remaining commitments to limited partnerships and private-placement loans. It also had contingent exposure if two annuity providers could not meet payments; estimated replacement costs were $175.1 million in total.
- Five equity-index put-option contracts remained outstanding at June 30. Their recorded liability was $8.4 million. The filing disclosed theoretical maximum payouts substantially larger than the recorded liability, while management estimated the probability of index values falling below relevant strike prices at less than 1% for the S&P 500 contracts and less than 9% for the FTSE 100 contract.
- Investment portfolio values are exposed to interest-rate, equity-market and foreign-exchange movements. The filing also identifies uncertainty around Brexit and the potential impact of proposed U.S. passive foreign investment company tax regulations, which management was evaluating.
- Ordinary-course insurance and reinsurance disputes are ongoing; the company said it was not party to other material litigation or arbitration. Management considers litigation status in setting reserves. No material changes to risk factors were reported.
- The company adopted the new lease accounting standard in 2019, recognizing an initial $69.9 million right-of-use asset and $77.3 million lease liability, with no material effect on results or liquidity. A July 2, 2019 lease for a new New Jersey office, effective October 2019 through 2036, was disclosed after quarter-end.
Important facts for investors to verify
- How much of the earnings increase reflects sustainable underwriting and investment income versus unusually strong equity fair-value gains and the comparison with 2018 catastrophe reserve development.
- Whether insurance premium growth can continue while maintaining underwriting profitability, and how competitive pricing affects renewal rates and business mix.
- Whether loss-reserve estimates—especially catastrophe, casualty and A&E reserves—remain adequate as claims develop.
- The quality, liquidity and valuation sensitivity of the investment portfolio, including limited partnerships and securities valued using significant unobservable inputs.
- Catastrophe-model assumptions, recoverability and availability of reinsurance, and the effect of major events on liquidity and capital.
- Future cash demands from committed investments, credit-facility letters of credit, the new office lease and shareholder returns.