Everest Re Group, Ltd. — Q2 2017 Form 10-Q
Business context and reporting period. Bermuda-domiciled insurer and reinsurer operating in the U.S., Bermuda and international markets. This unaudited filing covers the three and six months ended June 30, 2017; comparisons are with the same periods in 2016 unless otherwise noted. Amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q2 2017 | H1 2017 |
|---|---|---|
| Gross written premiums | $1.602 billion (+17.5%) | $3.203 billion (+17.9%) |
| Net written premiums | $1.339 billion (+15.9%) | $2.753 billion (+17.8%) |
| Premiums earned | $1.370 billion (+6.3%) | $2.682 billion (+6.9%) |
| Net investment income | $134.5 million (+1.3%) | $256.8 million (+9.2%) |
| Net realized capital gains | $25.3 million (vs. $32.7 million) | $78.0 million (vs. $41.6 million loss) |
| Net income | $245.7 million (+57.8%) | $537.3 million (+64.1%) |
| Diluted EPS | $5.95 (vs. $3.67) | $13.02 (vs. $7.68) |
| Combined ratio | 90.5% (improved 4.6 points) | 88.3% (improved 2.4 points) |
For H1, underwriting gain was $312.7 million, up from $234.5 million. The improvement in overall combined ratio was primarily associated with lower catastrophe losses; H1 current-year catastrophe losses were $73.5 million versus $133.6 million in 2016. Prior-year reserve development was nearly neutral in H1 2017, with a $0.4 million reduction in incurred losses.
Segment results were mixed: H1 underwriting gain declined to $187.0 million in U.S. Reinsurance from $240.2 million, while International returned to an underwriting gain of $53.1 million from a $15.1 million loss. Bermuda gain increased to $64.4 million from $46.0 million, and Insurance moved to an $8.2 million gain from a $36.7 million loss.
Cash flow and balance sheet. H1 operating cash flow was $634.4 million, down from $683.6 million; investing cash outflow was $529.5 million and financing cash outflow was $120.8 million. Cash at June 30 was $469.2 million. Total investments and cash were $18.201 billion, total assets $22.522 billion, shareholders’ equity $8.585 billion and gross loss and LAE reserves $10.476 billion. Cash plus short-term investments were $795.8 million.
Total debt was approximately $633.3 million, comprising $396.8 million of senior notes and $236.5 million of subordinated notes. The subordinated notes shifted from a 6.6% fixed rate to a floating rate in May 2017; the rate through August 14, 2017 was 3.56678%. The company reported compliance with credit-facility covenants and no outstanding revolving-credit borrowings. Shareholders’ equity rose 6.3% from year-end 2016; the company declared dividends of $1.25 per share in Q2 and $2.50 per share year to date.
Material changes, outlook and risks
- Premium growth reflected expansion in Insurance, new crop reinsurance transactions, treaty property and financial lines, and growth in Bermuda business. Management described the global market as highly competitive, with ample capacity and capital-markets competition pressuring rates and terms, especially in property catastrophe and casualty reinsurance.
- H1 realized gains benefited from $54.9 million of fair-value remeasurements and $26.8 million of net gains on securities sales, partly offset by $3.7 million of other-than-temporary impairments. The gain comparison with H1 2016 also reflects that period’s $30.3 million of impairments and net losses on sales.
- Management expects positive operating cash flow in the near term absent unusual catastrophe activity. It cautioned that longer-term cash flows depend on competitive pricing and the company’s emphasis on underwriting profitability over premium volume. The filing provides no specific earnings or premium guidance.
- Loss reserves are estimates subject to potentially significant variation; management stated that future reserve increases could be material. Gross asbestos and environmental reserves were $443.7 million and net reserves $302.9 million; management noted that ultimate A&E payments could exceed reserves. H1 prior-year reserve movement was small, following substantial favorable development in 2016.
- Catastrophe exposure, interest rates, equity prices and foreign exchange remain material risks. Management highlighted uncertainty around Brexit’s effects on regulation, rates, currencies and markets. Six unhedged equity-index put options remained outstanding; their recorded liability was $18.7 million. Management estimated low probabilities of index values falling below strike prices, but disclosed theoretical maximum payouts substantially above the recorded liability.
- The company reported ordinary-course insurance and reinsurance disputes, but no other material litigation or arbitration; it reported no material changes to risk factors and no subsequent events to report.
Most important facts for investors to verify
- Whether premium growth—particularly in the expanding Insurance and crop reinsurance businesses—can be sustained at adequate pricing and underwriting margins.
- Whether reserve adequacy holds as claims develop, including A&E exposures and the 2017 catastrophe losses; review subsequent reserve development.
- How much H1 earnings depended on realized investment gains and fair-value remeasurements, and whether investment returns and yields are repeatable.
- Liquidity and capital adequacy under severe catastrophe scenarios, including collateral and letter-of-credit requirements; verify regulatory capital figures, which the filing presents for year-end 2016 rather than June 2017.
- The assumptions and potential downside attached to the long-dated, unhedged equity-index put options, along with exposure to Brexit, foreign currency and market movements.