Everest Re Group, Ltd. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; balance-sheet comparisons are to December 31, 2018. The company provides reinsurance and insurance in the U.S., Bermuda and international markets. Unless stated otherwise, financial amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q3 2019 | Q3 2018 | First nine months 2019 | First nine months 2018 |
|---|---|---|---|---|
| Gross written premiums | $2.403 billion | $2.199 billion | $6.697 billion | $6.197 billion |
| Premiums earned | $1.906 billion | $1.731 billion | $5.456 billion | $5.081 billion |
| Net investment income | $181.1 million | $161.4 million | $501.1 million | $441.0 million |
| Net realized investment gains (losses) | $(12.9) million | $54.8 million | $109.6 million | $45.7 million |
| Income before tax | $93.0 million | $189.5 million | $879.9 million | $463.2 million |
| Net income | $104.4 million | $198.4 million | $791.8 million | $474.4 million |
| Diluted EPS | $2.56 | $4.84 | $19.38 | $11.55 |
| Combined ratio | 101.4% | 100.0% | 93.3% | 99.6% |
Q3 underwriting was loss-making overall, with a combined ratio above 100%; the nine-month underwriting result remained profitable. Q3 net income declined despite higher earned premiums and investment income, reflecting lower realized investment results, higher other expense and increased claims and expenses. A $11.4 million tax benefit partly offset the Q3 pretax decline. Nine-month earnings rose substantially, mainly reflecting lower prior-year catastrophe reserve development than in 2018 and stronger investment results.
- Claims and catastrophe exposure: Q3 incurred losses and LAE rose 9.6% to $1.372 billion. Current-quarter catastrophe losses were $295.5 million, principally Hurricane Dorian ($164.5 million) and Typhoon Faxai ($131.0 million). For nine months, incurred losses and LAE fell 3.7% to $3.515 billion; prior-year development was favorable by $44.4 million, versus $432.2 million of adverse development in 2018.
- Segments, nine months: U.S. Reinsurance underwriting gain was $234.7 million, compared with a $138.1 million loss in 2018; Bermuda gain was $152.9 million; Insurance gain was $55.0 million. International recorded a $77.6 million underwriting loss, versus a $24.0 million gain, with a 107.2% combined ratio. Its Q3 combined ratio was 135.8%, primarily reflecting catastrophe losses including Dorian and Faxai.
- Cash flow: Operating cash flow was $1.487 billion for nine months, versus $543.6 million in 2018. Investing activities used $1.212 billion and financing activities used $216.0 million. Cash ended the period at $717.2 million, up from $656.1 million at year-end.
- Capital and liquidity: Total investments and cash were $20.365 billion; total assets were $27.024 billion. Shareholders’ equity increased 14.3% from year-end to $8.983 billion; book value per share was $220.28, up from $193.37. Cash and short-term investments totaled $1.176 billion. Fixed-rate investments and expected operating cash flows are identified as additional liquidity sources.
- Debt and facilities: Reported debt was approximately $633.8 million, consisting chiefly of $397.0 million of senior notes due 2044 and $236.7 million of subordinated notes due 2067. No revolving credit borrowings were outstanding. The company reported compliance with facility covenants; $595.6 million of a $600 million letter-of-credit tranche was in use, and £24.8 million of the £30 million international facility was in use.
- Investment and shareholder items: Nine-month other comprehensive income was $508.8 million, largely from after-tax unrealized investment appreciation. The company declared dividends of $1.40 per share each quarter; nine-month dividends paid were $171.1 million. It repurchased 114,633 shares for $24.6 million.
Changes, outlook, risks and unusual items
- Premium growth was led by Insurance, whose gross written premiums rose 21.0% for nine months; company-wide gross written premiums increased 8.1%. Management attributed growth to expansion across insurance lines and increased casualty, facultative and proportional reinsurance writings, partly offset by lower treaty property business.
- Management described insurance and reinsurance markets as highly competitive, with ample capacity and capital-markets participation pressuring rates and terms. It said the company continues to target business with the greatest profit potential and believes current market conditions still offer opportunities. No specific earnings or premium guidance was provided.
- In October 2019, Typhoon Hagibis struck Japan and wildfires were affecting California. The company could not estimate losses at the filing date but expected these events to adversely affect Q4 2019 results.
- The company revised prior-period financial statements after identifying errors in foreign-exchange accounting for premium funds held from reinsureds. Management said the prior-period impact was not material, but recording the cumulative difference in the current period would have significantly affected current results. The revision changed reported 2018 nine-month net income by $(11.5) million and 2018 full-year net income by $(14.5) million; 2019 interim comparisons were also revised.
- Loss reserves are estimates and may increase materially. Gross loss and LAE reserves were $13.638 billion. Net asbestos and environmental reserves were $241.6 million; management cautioned that ultimate asbestos and environmental payments may exceed reserves.
- Other disclosed exposures include competitive and catastrophe risks, foreign-currency and investment-market movements, uncertainty concerning Brexit, litigation and arbitration arising in the ordinary course of insurance and reinsurance business, and contingent liability if insurers backing certain annuity settlements cannot pay. The company also had $934.3 million of unfunded limited-partnership and private-placement commitments.
- Three unexpired equity-index put options had a recorded liability of $8.6 million. Management estimated exercise probabilities below 1% for the S&P 500 contracts and below 7% for the FTSE 100 contract, while disclosing substantially larger theoretical maximum payouts.
Important facts for investors to verify
- How Q4 catastrophe losses from Hagibis and California wildfires developed, and their net impact after reinsurance recoveries.
- Whether International segment underwriting performance improves after its elevated catastrophe losses and combined ratios.
- The adequacy and sensitivity of loss reserves, especially prior-year catastrophe and asbestos/environmental exposures.
- The drivers and recurrence of foreign-exchange expense and other expense, and the effects of the disclosed prior-period accounting revisions.
- Investment portfolio credit, valuation and liquidity risks, including the impact of market movements on unrealized gains and equity investments.
- Available capacity under credit and letter-of-credit facilities, covenant compliance, and the timing and funding of investment commitments.
- Whether premium growth and pricing remain profitable amid competitive market conditions; the filing provides no quantified forward guidance.