Everest Group, Ltd. — Q2 2023 Form 10-Q
Business context and period. Everest provides property-and-casualty reinsurance and insurance in the U.S., Bermuda and international markets through its Reinsurance and Insurance segments. This unaudited filing covers the quarter and six months ended June 30, 2023, compared with the same 2022 periods. The company changed its name from Everest Re Group, Ltd. effective July 10, 2023.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Gross written premiums | $4.18B | $3.45B | $7.92B | $6.63B |
| Premiums earned | $3.25B | $2.92B | $6.35B | $5.71B |
| Net investment income | $357M | $226M | $617M | $469M |
| Net investment gains (losses) | $5M | $(236)M | $10M | $(390)M |
| Net income | $670M | $123M | $1.04B | $420M |
| Diluted EPS | $16.26 | $3.11 | $25.74 | $10.67 |
| Combined ratio | 87.7% | 91.8% | 89.4% | 91.7% |
| Operating cash flow | — | $2.16B | $1.56B |
Q2 underwriting gain was $401M, versus $240M a year earlier. Reinsurance contributed $337M (combined ratio 85.9%); Insurance contributed $64M (combined ratio 92.7%). For the first half, underwriting gain was $673M: $544M from Reinsurance and $129M from Insurance.
Balance sheet, debt and liquidity
- At June 30, total assets were $44.67B, total liabilities $33.77B and shareholders’ equity $10.90B, compared with $39.97B, $31.53B and $8.44B, respectively, at year-end 2022. Book value per share was $251.17, up 16.5% from $215.54.
- Total investments and cash were $33.55B. Cash and short-term investments were $3.74B, up from $2.43B at December 31, 2022.
- Total debt was $3.09B, essentially unchanged from year-end: $2.35B of senior notes, $218M of subordinated notes and $519M of Federal Home Loan Bank borrowings. The FHLB borrowings expire in 2023.
- Operating cash flow was $2.16B; investing activities used $2.75B, while financing activities provided $1.27B, including $1.45B net proceeds from a public share offering. Cash ended the period at $2.07B.
- Available-for-sale fixed maturities had $1.8B of net pre-tax unrealized depreciation. Management attributed the losses to interest rates and non-issuer-specific credit spreads, and stated it did not expect to need to sell securities before recovery.
Material changes and management commentary
- Gross written premiums rose 21.3% in Q2 and 19.4% year to date. Reinsurance growth reflected increases across lines; Insurance growth was led by property/short-tail and specialty business, with positive rate and exposure changes, new business and renewal retention cited for the first half.
- Net income improved substantially year over year, reflecting higher earned premiums and investment income, as well as much smaller investment losses. Fixed-maturity income increased with higher yields; limited-partnership income declined $98M year to date, and management noted that partnership results can be volatile and are generally reported with a lag.
- The combined ratio improved 4.1 points in Q2 and 2.3 points year to date. Lower catastrophe losses helped: catastrophe losses were $27M in Q2 and $142M year to date, versus $85M and $200M in 2022. Attritional losses rose with earned premiums; Insurance’s combined ratio worsened 1.2 points in Q2 as its expense ratio increased with continued platform expansion.
- Management described property-catastrophe market conditions as having generally improved rates and terms, while casualty rate increases were modest and some lines, including workers’ compensation and directors and officers liability, were softer. Competition, market capacity and pricing vary by line and geography.
- The company completed a public offering of 4.14M shares on May 19, raising $1.445B net. Proceeds are intended for long-term reinsurance opportunities and continued global Insurance expansion. It paid $136M in dividends in the first half and made no open-market share repurchases.
- The filing provides no specific earnings or premium guidance. Management expects positive annual operating cash flow in general, but cautioned that catastrophe claim payments could reduce cash flow or make it negative in the near term; it cited cash, short-term investments, maturities and operating cash flow as liquidity sources.
Risks, contingencies and unusual items
- Catastrophe estimates remain subject to change. The company estimated $30M of Hurricane Ian reinsurance recoveries and a further $25M recovery under a catastrophe bond, based on a reported industry loss above the attachment point; the bond recovery is subject to revision.
- Gross loss and LAE reserves were $23.41B, up from $22.07B at year-end. Management emphasized that reserves are estimates and may increase materially. Net asbestos and environmental reserves were $247M; management cautioned that ultimate A&E losses may exceed reserves.
- The company had $1.5B of committed letter-of-credit capacity and up to $440M of additional uncommitted capacity, which is not guaranteed. It also had $2.8B of commitments to invest in limited partnerships and private-placement loans; $2.2B of non-consolidated VIE commitments were disclosed, with the categories not necessarily additive.
- Ordinary-course insurance and reinsurance disputes are considered in reserve estimates; the company reported no other material litigation or arbitration. No material changes to risk factors were reported.
- Management cited competition, catastrophe and pandemic exposure, reserving uncertainty, investment performance, currency movements, cyber risks, ratings and counterparty performance among forward-looking risks. A refined premium-estimation method increased Reinsurance gross written premium in 2023 but did not affect total treaty premium, net earned premium or income.
Important facts for investors to verify
- Whether premium growth and improved combined ratios persist, particularly as catastrophe experience and the Insurance segment’s expansion costs evolve.
- How catastrophe losses, the estimated CAT-bond recovery and Hurricane Ian recoveries develop as industry loss estimates are revised.
- Reserve adequacy, including attritional claims, IBNR estimates and asbestos/environmental exposures.
- Investment portfolio sensitivity to interest rates and credit spreads, the substantial unrealized depreciation, and the performance and liquidity of limited partnerships and other alternative assets.
- Use of the offering proceeds, the maturity and refinancing of 2023 FHLB borrowings, and the availability of uncommitted credit capacity.