Everest Re Group, Ltd. — Q3 2018 Form 10-Q
Business and period: Bermuda-domiciled insurer and reinsurer operating in the U.S., Bermuda and international markets. This unaudited report covers the three and nine months ended September 30, 2018; comparisons are with the same 2017 periods unless noted. Dollar amounts below are USD millions.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Gross written premiums | 2,198.7 | 2,044.9 | 6,196.8 | 5,247.5 |
| Net written premiums | 1,938.8 | 1,798.1 | 5,357.4 | 4,551.0 |
| Premiums earned | 1,731.5 | 1,598.9 | 5,080.7 | 4,280.7 |
| Total revenue | 1,944.4 | 1,725.5 | 5,582.5 | 4,740.9 |
| Net investment income | 161.4 | 137.0 | 441.0 | 393.8 |
| Net income (loss) | 205.6 | (639.4) | 485.8 | (102.1) |
| Diluted EPS | $5.02 | $(15.73) | $11.83 | $(2.51) |
| Combined ratio | 100.0% | 163.6% | 99.6% | 116.5% |
| Operating cash flow | Not presented by quarter | 543.6 | 1,044.2 |
- Growth: Nine-month gross and net written premiums increased 18.1% and 17.7%, respectively. Growth reflected expansion across reinsurance and insurance, notably Bermuda, International and the insurance platform.
- Profitability and margins: Q3 returned to net income from the large prior-year loss; the nine-month period also returned to profit. The principal comparison was lower catastrophe losses than in 2017. Q3 incurred losses fell 43.4% to $1,251.9 million; the combined ratio improved 63.6 points. The nine-month combined ratio improved 16.9 points. Q3 underwriting result was approximately break-even ($0.3 million), while the nine-month result was a $20.6 million gain.
- Investment results: Net investment income rose 17.8% in Q3 and 12.0% year to date, supported by limited partnership and fixed-income income. Nine-month realized investment gains were $45.7 million, down from $119.5 million in 2017.
- Cash flow: Nine-month operating cash flow declined to $543.6 million from $1,044.2 million, including catastrophe loss payments of $754.4 million versus $305.3 million. Cash and short-term investments totaled $1,332.9 million at quarter-end.
Financial position and material changes
- At September 30, total assets were $24,410.9 million, total liabilities $16,081.8 million and shareholders’ equity $8,329.0 million. Equity was down $40.2 million from year-end 2017, mainly reflecting investment depreciation, dividends, share repurchases and currency translation, partly offset by net income.
- Total investments and cash were $18,665.9 million. Fixed-maturity securities had $214.9 million of net pretax unrealized depreciation. The company reported that securities in unrealized-loss positions were current on payments and that it did not intend, and was not likely required, to sell them before recovery.
- Debt was approximately $633.6 million, consisting principally of $396.9 million of senior notes and $236.6 million of subordinated notes. No revolving-credit borrowings were outstanding. Credit-facility covenants were met; facilities also support letters of credit.
- Gross loss and LAE reserves increased to $12,390.2 million from $11,884.3 million at year-end. Nine-month prior-year reserve development was adverse by $432.2 million, chiefly catastrophe-related, partly offset by favorable development on prior-year attritional claims.
- Accumulated other comprehensive loss widened to $470.3 million from $160.9 million, driven principally by unrealized investment depreciation and foreign-currency translation.
Outlook, risks and unusual items
- Catastrophe exposure: Management reported $305.0 million of current-year catastrophe losses in the first nine months, including Hurricane Florence, Typhoons Jebi and Trami, Cyclone Mekunu, Japan floods, California wildfires and winter storms. Prior-year catastrophe reserve increases were primarily tied to Hurricanes Harvey, Irma and Maria and the 2017 California wildfires, including reopened claims and higher-than-expected loss-adjustment expenses.
- Subsequent event: Hurricane Michael affected the Southeastern U.S. in October. The company could not estimate its losses at filing, but expected an adverse impact on fourth-quarter results.
- Management outlook: No numerical earnings or premium guidance was provided. Management expects annual positive operating cash flow in general, but said catastrophe claim payments could reduce cash flow and potentially make it negative in the near term; it considers liquidity adequate.
- Market and investment risks: Management described competitive markets with ample capacity and pressure on rates and terms, though some catastrophe-affected markets had begun to firm. Interest-rate, equity-price, foreign-exchange, catastrophe, reserve-estimation and Brexit-related uncertainty remain relevant.
- Other items: The company consolidated a private-placement liquidity sweep facility beginning July 1, 2018, reclassifying investments among balance-sheet categories. It entered a retroactive reinsurance transaction with a Mt. Logan Re segregated account, transferring $252.0 million of cash against casualty reserves, subject to a $319.0 million maximum recovery. No material change to disclosed risk factors was reported; ordinary-course insurance and reinsurance disputes continue, with no other material litigation identified.
Important facts for investors to verify
- Fourth-quarter estimates and ultimate claims from Hurricane Michael and other 2018 catastrophe events.
- Whether the adverse development on 2017 catastrophe reserves persists, and the sensitivity of reserves to reopened claims, loss inflation and aggregate covers.
- Cash generation and liquidity as catastrophe payments continue, including the timing and recoverability of reinsurance receivables.
- Investment portfolio valuations, unrealized losses, and the performance and valuation of limited partnerships and other less-liquid assets.
- Premium growth and underwriting quality by segment, particularly the effect of business mix, commissions and the expanding insurance operation on future combined ratios.