EVEREST RE GROUP, LTD. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; quarterly figures below include the fourth quarter. The filing describes a Bermuda-based global property and casualty insurer and reinsurer, reporting in U.S. dollars under GAAP. Its five segments are U.S. Reinsurance, International, Bermuda, Insurance and Mt. Logan Re.
Financial performance and condition
| Metric | 2015 | 2014 |
|---|---|---|
| Gross written premiums | $5.876 billion | $5.749 billion |
| Premiums earned | $5.481 billion | $5.169 billion |
| Total revenue | $5.838 billion | $5.791 billion |
| Net income attributable to Everest Re Group | $977.9 million | $1.199 billion |
| Basic / diluted EPS | $22.29 / $22.10 | $26.16 / $25.91 |
| Combined ratio | 83.4% | 82.8% |
| Net investment income | $473.8 million | $530.6 million |
| Net realized investment gains (losses) | ($184.1 million) | $84.0 million |
| Operating cash flow | $1.308 billion | $1.314 billion |
At December 31, 2015, total assets were $21.426 billion, shareholders’ equity was $7.609 billion, gross loss and LAE reserves were $9.952 billion, and total debt was $638.4 million. Cash and short-term investments were $2.079 billion; total investments and cash were $17.672 billion. Debt comprised $400 million of senior notes due 2044 and $238.4 million of subordinated notes due 2067.
Fourth-quarter 2015 net income attributable to the Group was $357.3 million, or $8.32 per diluted share, compared with $340.1 million, or $7.47, in fourth-quarter 2014. Quarterly premiums earned were $1.428 billion versus $1.362 billion.
Material changes versus prior periods
- Gross written premiums grew 2.2%; insurance premiums rose 25.8% and Mt. Logan Re premiums rose 69.1%, while reinsurance premiums declined 6.4%. Management attributed the reinsurance decline partly to reduced treaty casualty business, lower quota-share writings and foreign exchange movements.
- Net income attributable to the Group fell 18.5%, and diluted EPS declined from $25.91 to $22.10. Revenue increased only 0.8%; lower investment income and the shift from prior-year realized gains to 2015 realized losses were significant factors.
- Combined ratio worsened 0.6 percentage points. The loss ratio rose 0.4 points, with management citing the Tianjin port explosion and weather losses below the company’s catastrophe-reporting threshold.
- Segment underwriting results diverged: U.S. Reinsurance gain increased to $584.3 million; International gain declined to $168.7 million; Bermuda gain declined to $113.9 million; Insurance reported a $79.5 million underwriting loss; Mt. Logan Re gain rose to $124.1 million.
- Prior-year reserve development was favorable by $68.6 million overall, reflecting favorable development in reinsurance, partly offset by $152.1 million of unfavorable development in Insurance, mainly umbrella and construction liability.
- Shareholders’ equity increased 2.1% despite $400.1 million of share repurchases and $175.1 million of dividends. Book value per share rose to $178.21 from $166.75.
Outlook, risks and unusual items
- Outlook: No specific earnings or premium guidance is provided. Management expects positive operating cash flow in the near term absent unusual catastrophe activity, while warning that competition and pricing affect future cash flows. It is expanding the insurance platform and planned to launch a Lloyd’s syndicate in 2016.
- Competition: Management described ample industry capacity and pressure on rates, terms and conditions, particularly in catastrophe and casualty reinsurance. The strategy emphasizes underwriting profitability over premium volume.
- Catastrophe exposure: Management estimated the largest 1-in-100-year event in a single zone would produce net economic loss of about 13% of projected 2016 equity. The largest disclosed zone/peril was Southeast U.S. wind, with a $1.540 billion net PML and estimated $983 million economic loss. These are model-based estimates and may be exceeded; year-end PML figures did not include expired industry loss warranty protection for Southeast wind.
- Reserves and A&E: Gross loss reserves were $9.952 billion; gross asbestos and environmental reserves were $433.1 million and net reserves were $319.6 million. Management emphasizes that long-tail and A&E estimates are uncertain. Its reserve range for total gross reserves was $8.928–$10.975 billion.
- Investments: 2015 included $102.2 million of other-than-temporary impairments and $184.1 million of net realized capital losses. Unrealized investment depreciation and foreign-currency translation also reduced other comprehensive income. Fixed-income securities were 91.4% investment grade, as stated in the filing.
- Dispositions and contingencies: The company sold Mt. McKinley in July 2015 for $20.2 million, with no recognized gain or loss, and retroceded specified liabilities subject to a $440.3 million maximum; the company retains liability above that cap. Ordinary-course insurance and reinsurance disputes continue; no other material litigation was reported.
- Liquidity and capital: The company reported compliance with credit-facility covenants and substantial statutory capital above applicable requirements. Dividend capacity remains subject to insurance-regulatory restrictions; Everest Re could pay up to $498.5 million in 2016 without prior regulatory approval.
Most important facts for investors to verify
- Whether the weaker investment result and lower attributable earnings persist, and how much future results depend on realized investment gains or losses.
- Insurance-segment underwriting performance, especially the elevated 106.3% combined ratio and adverse prior-year liability development.
- Reserve adequacy, including A&E exposure and the retained liability above the Mt. McKinley retrocession cap.
- Catastrophe-model assumptions, retrocessional protection and the impact of expired or renewed protection on peak-zone exposure.
- Reinsurance receivable collectability and counterparty concentration: Resolution Group represented 23.1% and C.V. Starr 12.5% of the $840.4 million receivable balance; both were reported fully collateralized.
- Execution and underwriting profitability of the insurance expansion and planned Lloyd’s syndicate, alongside the effects of competitive pricing and foreign exchange.