Business context and reporting period
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 quarter and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods unless noted. Amounts below are U.S. dollars.
Financial results and condition
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Premiums earned | $1,044.3m | $997.3m | $3,095.6m | $2,914.5m |
| Net investment income | $156.5m | $141.4m | $493.8m | $468.6m |
| Total revenues | $1,024.8m | $1,178.1m | $3,408.0m | $3,447.4m |
| Net realized capital gains (losses) | ($137.7m) | $38.3m | ($130.4m) | $69.3m |
| Net income (loss) | $63.1m | $174.2m | ($121.5m) | $308.2m |
| Basic earnings (loss) per share | $1.16 | $3.12 | ($2.24) | $5.35 |
| Combined ratio | 95.6% | 95.9% | 114.6% | 104.2% |
| Operating cash flow | $207.9m | $297.8m | $546.7m | $790.6m |
For the nine months, the loss ratio rose to 87.4% from 76.4%; catastrophe losses were $920.3m versus $527.1m. Q3 catastrophe losses were $132.3m versus $89.7m. Investment income growth reflected limited partnership and equity income, partly offset by lower fixed-maturity income and reinvestment rates. The Q3 realized loss largely reflected $155.7m of losses on fair-value equity securities and $5.0m on fair-value fixed maturities.
At September 30, 2011, total assets were $18.74bn, investments and cash $15.71bn, loss and LAE reserves $9.98bn, total liabilities $12.64bn and shareholders’ equity $6.09bn. Equity declined from $6.28bn at year-end 2010; reported book value per share was $113.26 versus $115.45. Cash and short-term investments totaled $1.28bn. Total debt was $818.1m, down from $868.1m at December 31, 2010; revolving borrowings were zero. The company reported compliance with credit-facility covenants.
Material changes versus prior comparable periods
- Premiums earned increased 4.7% in Q3 and 6.2% year to date. Gross written premiums declined 3.0% in Q3 and 0.5% year to date; growth in Insurance was offset by lower reinsurance premiums. The Heartland crop-insurance acquisition contributed to Insurance growth.
- The year-to-date underwriting loss was $452.7m, compared with a $122.8m loss in 2010. International and Bermuda underwriting losses were $313.0m and $79.4m, respectively; Insurance lost $39.7m and U.S. Reinsurance lost $20.7m.
- The year-to-date combined ratio deteriorated by 10.4 percentage points, principally from catastrophe losses in Japan, New Zealand and Australia, and U.S. storms, along with reduced favorable prior-year development. Q3 combined ratio improved slightly year over year.
- Investment results were affected by sharp declines in fair values during the quarter. The company expanded equity and other higher-return investments; those market-sensitive holdings represented approximately 52% of shareholders’ equity.
- Shareholders’ equity also reflected $84.2m of share repurchases and $78.1m of dividends during the first nine months. The company realigned reporting segments, moving A&H primary business to Insurance and other specialty operations to U.S. Reinsurance; prior segment data was restated.
Outlook, commentary, risks and unusual items
- Management said competitive conditions remained intense, particularly in U.S. casualty markets, while catastrophe losses had prompted rate increases in some affected regions. It cited potential profit opportunities in catastrophe coverages but gave no quantified earnings or premium guidance.
- Management expected positive annual operating cash flow near term absent unusual catastrophe activity, but noted cash flow could be slightly negative as 2011 catastrophe claims are paid. It emphasized underwriting profitability over premium volume.
- Subsequent event: significant Thailand flooding was ongoing when the filing was prepared. The company could not estimate its loss but expected an adverse effect on fourth-quarter results.
- Seven equity-index put options are unhedged. Their carrying liability was $77.7m; the filing reports a $281.2m present value of theoretical maximum S&P 500 payouts and $31.2m for the FTSE 100 contract. $40.4m of collateral was posted; a zero collateral threshold would require an additional $55.0m.
- Loss reserves are estimates subject to potentially significant revision. Ordinary-course insurance and reinsurance disputes are considered in reserve estimates; the company reported no other material litigation or arbitration. It also disclosed contingent annuity-replacement exposures of $143.0m and $27.1m.
- Management said disclosure controls were effective, with no material change in internal control over financial reporting during the quarter. The filing reported no material changes to risk factors.
Important facts for investors to verify
- How catastrophe claims develop, including Thailand flooding, and whether loss reserves remain adequate as claims are reported and paid.
- Whether equity-market losses, valuation changes in limited partnerships and other investments, or the unhedged index puts materially affect earnings, equity or collateral needs.
- Whether underwriting performance improves in International, Bermuda and Insurance, and whether catastrophe pricing gains offset competitive pressure and reduced premium volume.
- The cash-flow impact of catastrophe payments, reserve movements and continued dividends and repurchases; confirm current debt, facility availability and covenant headroom.