Everest Re Group, Ltd. — Q3 2016 Form 10-Q
Business context and period. Bermuda-based Everest Re Group provides property and casualty reinsurance and insurance in the U.S., Bermuda and international markets. This unaudited report covers the quarter and nine months ended September 30, 2016, compared with the corresponding 2015 periods; amounts below are U.S. dollars. Interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Gross written premiums | $1,782.6m | $1,724.9m | $4,499.2m | $4,404.6m |
| Premiums earned | $1,371.5m | $1,362.9m | $3,879.2m | $3,920.6m |
| Net investment income | $122.7m | $115.4m | $357.9m | $363.0m |
| Total revenues | $1,510.5m | $1,332.1m | $4,180.4m | $4,158.2m |
| Net income | $295.4m | $88.6m | $622.8m | $620.6m |
| Diluted EPS | $7.06 | $2.00 | $14.70 | $13.92 |
| Combined ratio | 85.6% | 90.6% | 88.9% | 87.3% |
Q3 pretax income was $320.9m versus $82.4m; nine-month pretax income was $684.3m versus $691.5m. The quarter’s stronger earnings chiefly reflect lower losses and much smaller realized investment losses than in Q3 2015, not a comparable step-up in earned premiums. Q3 incurred losses fell 9.8% to $786.2m, including $42.9m of favorable prior-year development; nine-month incurred losses declined 0.9% to $2,344.7m, while the loss ratio was nearly flat year over year. Nine-month combined ratio worsened 1.6 points, as higher catastrophe losses and underwriting expense ratios offset favorable prior-year development.
Q3 net realized capital gains were $0.4m versus losses of $160.0m a year earlier; nine-month realized losses were $41.2m versus $194.7m. The 2016 nine-month figure included $31.1m of other-than-temporary impairments and a $28.0m pretax loss on the Heartland sale, partly offset by $37.7m of fair-value remeasurement gains. Other income was a $21.0m expense for the nine months, primarily reflecting foreign-exchange losses following the decline in sterling after the U.K. Brexit vote.
Balance sheet, cash flow and capital
- At September 30, total assets were $21.66bn, investments and cash $17.54bn, and shareholders’ equity $8.04bn, up 5.7% from year-end 2015. Book value per share was $196.67, up 10.4% from $178.21.
- Cash was $435.8m; cash plus short-term investments totaled $750.3m, compared with $1,083.3m at December 31, 2015. The company also reported $381.6m of available liquidity through a short-maturity investment facility.
- Nine-month operating cash flow was $950.7m, versus $801.8m in 2015; investing cash flow was negative $331.0m and financing cash flow negative $518.2m. Financing included $379.2m of share repurchases and $144.3m of dividends paid. Ending cash increased $152.1m.
- Reported debt was approximately $633.1m, comprising $396.7m of 4.868% senior notes due 2044 and $236.4m of 6.6% subordinated notes with final maturity in 2067. Total liabilities were $13.62bn. The filing reports compliance with credit-facility covenants.
- Credit facilities include a $200m unsecured revolving tranche, $600m for collateralized letters of credit, a separate $300m letter-of-credit facility and a £175m facility. At quarter-end, the unsecured revolver had no borrowings; letter-of-credit usage included $452.9m under the $600m tranche and £165.0m under the £175m facility.
Material changes and segment results
Premium growth reflected expansion of Insurance operations, partly offset by weaker international and some reinsurance writings. Nine-month gross written premiums rose 16.3% in Insurance, while declining 1.1% in U.S. Reinsurance, 6.6% in International and 2.2% in Bermuda. Insurance underwriting remained a drag: its nine-month combined ratio was 104.4% and underwriting loss $42.5m, compared with approximately break-even results in 2015. Management attributed rising expenses in part to building out the insurance platform. The Lloyd’s syndicate contributed to Insurance growth.
Q3 segment underwriting gains were $112.0m in U.S. Reinsurance, $70.8m in International, $20.1m in Bermuda and a $5.7m loss in Insurance. International’s Q3 result improved from a $17.6m loss, aided by lower losses and favorable catastrophe reserve development. U.S. Reinsurance’s Q3 combined ratio increased to 78.4% from 73.8%, while Bermuda’s improved to 90.7% from 97.5%.
Investments and cash increased 5.2% from year-end. Fixed maturities totaled $14.27bn at market value; the portfolio’s stated composite credit quality was Aa3 and duration 3.2 years. Nine-month investment income fell 1.4%, primarily from lower fixed-income reinvestment yields, partly offset by greater limited-partnership income. Net unrealized appreciation on investments contributed $286.0m after tax to nine-month other comprehensive income.
Outlook, risks and unusual items
- Outlook: Management expects annual positive operating cash flow over the near term absent unusual catastrophe activity. It cited competitive pressure and ample market capacity as downward pressures on rates, while stating it will target business with the greatest profit potential rather than prioritize premium volume. No numerical earnings or premium guidance was provided.
- Hurricane Matthew: A subsequent event after quarter-end. Based on early industry estimates and the company’s estimated market share, management’s preliminary loss range was $75m–$200m.
- Catastrophes and reserves: Nine-month 2016 catastrophe losses included $117.6m from the Fort McMurray wildfire, $49.9m from U.S. storms, and losses from earthquakes and other events. Gross loss and LAE reserves were $10.38bn, including $415.9m of asbestos and environmental reserves. Management cautioned that reserve estimates can vary materially and may increase.
- Market and currency risks: The portfolio is exposed to interest rates, equity prices and foreign exchange. Management noted continued uncertainty over Brexit’s effects on regulation, rates, currencies and markets. Competitive conditions and catastrophe experience could affect underwriting and cash flows.
- Derivatives: Seven legacy equity-index put options are unhedged and valued using Level 3 inputs. The liability was $35.2m. The filing estimates low probabilities of the indices falling below strike at exercise, but gives theoretical maximum present-value payouts of $442.3m for the S&P 500 contracts and $39.2m for the FTSE 100 contract.
- Corporate actions and contingencies: Heartland was sold on August 24, 2016 for $49m, with a $28.0m pretax and $12.9m after-tax loss; the sale included a long-term strategic reinsurance relationship. The company reported ordinary-course insurance and reinsurance disputes, but no other material litigation or arbitration. It has contingent exposure if two annuity providers cannot meet payments; estimated replacement cost was $174.0m.
The company adopted revised consolidation guidance retrospectively, deconsolidating Mt. Logan Re segregated accounts; management said this had no impact on net income or retained earnings. Disclosure controls were judged effective, with no material change in internal control reported. The filing stated there were no material changes to risk factors.
Important facts for investors to verify
- Whether the preliminary Hurricane Matthew loss estimate of $75m–$200m changed as claims developed.
- Whether Insurance underwriting performance improves as the expanded platform matures, particularly given its 104.4% nine-month combined ratio.
- Reserve development and catastrophe exposure, including the adequacy of the $10.38bn loss reserve and the asbestos/environmental portfolio.
- How ongoing pricing competition, reinvestment yields and foreign-exchange movements affect premium growth, investment income and earnings.
- Valuation assumptions and potential exposure from the unhedged Level 3 equity-index put options, alongside liquidity and capital needs after repurchases and dividends.