Business context and reporting period
Everest Re Group, Ltd. is a Bermuda-based global property-and-casualty reinsurer and insurer, operating through U.S. Reinsurance, International, Bermuda and Insurance segments. This Form 10-K covers the fiscal year ended December 31, 2018; quarterly figures below identify the fourth quarter where provided. Amounts are in U.S. dollars.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Gross written premiums | $8.475 billion, up 18.1% | $7.174 billion |
| Net written premiums | $7.414 billion, up 18.7% | $6.245 billion |
| Premiums earned | $6.932 billion, up 16.7% | $5.938 billion |
| Total revenues | $7.377 billion, up 11.6% | $6.608 billion |
| Net investment income | $581.2 million, up 7.1% | $542.9 million |
| Net realized capital gains (losses) | $(127.1) million | $153.2 million |
| Pre-tax income (loss) | $(226.5) million | $405.2 million |
| Income tax benefit | $330.0 million | $63.8 million |
| Net income | $103.6 million, down 77.9% | $469.0 million |
| Diluted EPS | $2.53 | $11.36 |
| Combined ratio | 108.8% | 103.5% |
| Operating cash flow | $610.1 million | $1.163 billion |
The 2018 combined ratio above 100% indicates an underwriting loss overall. The loss ratio was 81.5%; commission and brokerage ratio was 21.9%, and other underwriting expense ratio was 5.4%. Segment underwriting results were U.S. Reinsurance $(883.8) million, International $44.1 million, Bermuda $152.7 million and Insurance $76.7 million.
At December 31, 2018, total assets were $24.794 billion, investments and cash $18.433 billion, gross loss and LAE reserves $13.119 billion, total debt $633.6 million, total liabilities $16.890 billion and shareholders’ equity $7.904 billion. Book value per share was $194.43. Cash and short-term investments totaled $897.1 million. Cash flow from operations fell from 2017, while catastrophe claim payments increased to $1.126 billion from $745.0 million.
Debt consisted principally of $400 million senior notes due 2044 and $238.6 million principal amount of subordinated notes due 2067. There were no borrowings outstanding on the $200 million revolving credit line; the company had $558.8 million of letters of credit outstanding under its separate collateralized facility. Management reported compliance with facility covenants and applicable capital requirements.
In fourth-quarter 2018, gross written premiums were $2.278 billion, net written premiums $2.057 billion and premiums earned $1.851 billion. Net investment income was $140.2 million; net realized capital losses were $172.8 million; net loss was $382.3 million, or $(9.50) per diluted share. Fourth-quarter 2017 net income was $571.0 million. The filing does not provide quarterly cash-flow figures.
Material changes versus prior period
- Premiums continued to grow, led by reinsurance expansion and increased production in Bermuda, the U.K. and Ireland; insurance premiums also rose.
- Net income declined to $103.6 million from $469.0 million. Losses and LAE rose 25.0% to $5.651 billion, and the combined ratio worsened by 5.3 percentage points.
- Prior-year reserves had $387.1 million of adverse development in 2018, versus $293.4 million of favorable development in 2017. The 2018 adverse development primarily reflected catastrophe claims from Hurricanes Harvey, Irma and Maria and the 2017 California wildfires.
- Net catastrophe losses were significant in both years. In 2018, current-year events included Hurricane Michael and the Camp and Woolsey wildfires; reserve strengthening also reflected reopened claims and higher-than-expected loss adjustment expenses on prior catastrophes.
- Net realized investment results swung from $153.2 million of gains in 2017 to $127.1 million of losses in 2018, including $67.3 million of fair-value losses. Unrealized investment depreciation and foreign currency translation also reduced equity.
- Shareholders’ equity declined 5.6% to $7.904 billion, reflecting investment depreciation, dividends of $216.2 million, foreign currency translation losses and $75.3 million of share repurchases, partly offset by net income.
Outlook, commentary, risks and unusual items
- Management gave no specific numerical earnings or premium guidance. It said it generally expects positive annual operating cash flow, but warned catastrophe claim payments could reduce cash flow or make it negative in the near term. Management stated available liquidity was ample to meet expected claims.
- Management described the market as highly competitive, with abundant traditional and alternative capital putting pressure on rates and terms. It nevertheless sees profit opportunities and intends to prioritize underwriting profitability and portfolio diversification.
- Catastrophe and reserve uncertainty are major risks. Management estimated the largest modeled 1-in-100-year net economic loss in a single zone at approximately 10% of year-end equity; the Southeast U.S. wind PML was $1.036 billion before the stated economic-loss adjustments. The filing cautions that modeled outcomes are imprecise and actual losses could materially exceed estimates.
- Gross asbestos and environmental reserves were $347.5 million, or 2.6% of gross reserves; net reserves were $261.5 million. The company notes substantial uncertainty in ultimate A&E claims. Its reserve range for total gross reserves was approximately $11.750 billion to $14.489 billion, versus $13.119 billion recorded.
- Reinsurance recoverables were $1.788 billion. Mt. Logan Re collateralized segregated accounts accounted for 38.3% of the balance, creating counterparty and collectability exposure despite collateral arrangements.
- The $330.0 million tax benefit contributed to positive net income despite a pre-tax loss. The filing attributes tax results to jurisdictional losses, tax carrybacks and tax-law effects; it also reports a $28.4 million 2017 tax-provision true-up benefit recorded in 2018. Fourth-quarter investment losses were unusually large relative to the full-year result.
- Other risks include investment-market and interest-rate volatility, foreign exchange, competitive pricing, rating changes, regulatory limits on subsidiary dividends, tax-law changes, cybersecurity, and uncertainty around Brexit and LIBOR replacement. The CEO announced plans to retire at the end of his contract on December 31, 2019; the board began a succession search.
- The auditor issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting; management also reported effective controls. The company reported no other material litigation beyond ordinary-course insurance and reinsurance disputes.
Important facts for investors to verify
- Whether catastrophe loss estimates and adverse development on the 2017 events stabilize, and how subsequent claims affect reserves and the combined ratio.
- Whether premium growth is producing adequate risk-adjusted pricing and improved underwriting results, particularly in U.S. Reinsurance.
- The composition, timing and realizability of the tax benefits and carryforwards supporting 2018 net income and deferred tax assets.
- Investment portfolio performance, unrealized losses, alternative-investment valuations and the concentration and collectability of reinsurance recoverables.
- Liquidity and statutory capital after catastrophe payments, dividends, and any restrictions on upstreaming subsidiary funds; also verify the status of outstanding credit facilities and letters of credit.
- CEO succession developments and any effects on underwriting strategy, insurance-platform expansion or capital allocation.