Everest Re Group, Ltd. — 2013 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2013. The filing also provides unaudited fourth-quarter results. Amounts below are in U.S. dollars.
Business context
Everest underwrites property and casualty reinsurance and insurance across the U.S., Bermuda and international markets. In 2013, gross written premiums were $5.22 billion, approximately 76% reinsurance and 24% insurance. A new Mt. Logan Re segment began operating through segregated accounts in July 2013, writing diversified catastrophe exposures with third-party capital.
Financial performance and position
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Gross written premiums | $5,218.6 million | $4,310.5 million | +21.1% |
| Premiums earned | $4,753.5 million | $4,164.6 million | +14.1% |
| Total revenues | $5,640.8 million | $4,922.8 million | +14.6% |
| Net income attributable to Everest Re Group | $1,259.4 million | $829.0 million | +51.9% |
| Diluted earnings per share | $25.44 | $15.79 | Higher |
| Combined ratio | 84.5% | 93.8% | Improved 9.3 points |
| Net investment income | $548.5 million | $600.2 million | -8.6% |
| Net realized capital gains | $300.2 million | $164.4 million | Higher |
| Operating cash flow | $1,098.3 million | $694.6 million | Higher |
Fourth-quarter 2013 net income attributable to Everest Re Group was $364.6 million, or $7.62 diluted EPS, versus $58.8 million, or $1.13 diluted EPS, in fourth-quarter 2012. Fourth-quarter gross written premiums were $1,312.7 million.
- Year-end shareholders’ equity was $7.0 billion, up 3.5%; book value per share was $146.57, up 11.9%.
- Total assets were $19.8 billion. Total debt was $488.3 million, down from $818.2 million, principally after redeeming $329.9 million of junior subordinated debt in May 2013.
- Cash and short-term investments were $1.83 billion; total investments and cash were $16.60 billion. Management said operating cash flow, liquid investments and available credit provided ample near-term liquidity.
- Gross loss and LAE reserves were $9.67 billion, down from $10.07 billion. Cash flow from operations benefited from premium collection timing and other working-capital movements.
Material changes and drivers
- Premium growth reflected a large Florida quota-share reinsurance contract, new business, increased participations and higher subject rates. Excluding the contract’s year-over-year effect, gross written premiums rose 15.0% and reinsurance premiums rose 13.4%.
- The combined ratio improved mainly because catastrophe losses were lower: net catastrophe losses were $177.7 million in 2013 versus $361.1 million in 2012. The 2013 events included Canadian floods, U.S. storms, Typhoon Fitow, German hailstorms and European floods.
- Investment earnings weakened as fixed-income reinvestment rates fell and equity and limited-partnership income declined. Reported realized gains included $258.9 million from fair-value remeasurements, making investment-market movements a material contributor to earnings.
- The Insurance segment remained loss-making on underwriting, with a 114.2% combined ratio and a $147.0 million underwriting loss. Its loss ratio rose to 89.8%, reflecting higher crop losses and adverse prior-year development in workers’ compensation, construction liability and umbrella business.
- Share repurchases totaled 4.7 million shares for $621.9 million; dividends paid were $106.7 million. The quarterly dividend increased to $0.75 per share in the fourth quarter from $0.48 in the first three quarters.
- Net unrealized investment gains, net of tax, fell to $201.2 million from $603.9 million; 2013 other comprehensive income included $402.8 million of after-tax investment depreciation.
Outlook, risks and unusual items
- Management expected positive annual operating cash flow to continue in the near term absent unusual catastrophe activity, but did not provide quantified earnings, premium or combined-ratio guidance. It described competitive market conditions, particularly in casualty, and downward rate pressure in some catastrophe markets, while identifying selected catastrophe opportunities.
- Management estimated the largest single-zone 100-year catastrophe event could produce net economic loss of approximately 11% of projected 2014 shareholders’ equity. The largest modeled exposure was Southeast U.S. wind, with a $1.231 billion 1-in-100-year PML and estimated economic loss of $796 million. These are uncertain model estimates, not caps on actual losses.
- Loss-reserve adequacy is a key judgment risk. Prior-year reserve re-estimates reduced 2013 incurred losses by $18.2 million overall, as favorable reinsurance development was partly offset by adverse development in insurance lines. Asbestos and environmental reserves were $402.5 million gross; the company cautioned that ultimate amounts are uncertain.
- Reinsurance recoverables were $540.9 million; 26.9% was due from C.V. Starr and reported as fully collateralized. Reinsurer non-payment could still affect cash flow and earnings.
- Investment risks include interest rates, credit, equity markets, foreign exchange and private-equity valuations. A 200-basis-point rate increase was modeled to reduce fixed-maturity portfolio market value by 6.0%. The company also has long-dated, unhedged equity-index put options; their reported liability was $35.4 million, while theoretical maximum present-value payouts were substantially higher.
- Moody’s downgraded the company and subsidiaries by one level in March 2013; A.M. Best and S&P affirmed their ratings. The $250 million senior notes mature in October 2014. The company reported compliance with credit-facility covenants and no year-end revolving borrowings.
- Other notable matters: 2013 results included a $44.0 million derivative gain; no subsequent events were reported. Management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- How much of premium growth and earnings improvement is repeatable after separating the Florida quota-share contract, catastrophe experience and investment fair-value gains?
- Whether the Insurance segment’s elevated loss ratio and adverse prior-year development improve, particularly in crop, California workers’ compensation and long-tail liability lines.
- Reserve development trends, including A&E exposures and the effect of future claims inflation, litigation and catastrophe events.
- Investment portfolio sensitivity to interest rates, credit deterioration, equity markets and valuation lags in limited partnerships; also monitor the equity-index put-option liability and collateral requirements.
- Availability of subsidiary dividends and liquidity to meet the October 2014 senior-note maturity, shareholder distributions and catastrophe claims, subject to regulatory restrictions.
- Changes in ratings, reinsurance recoverable collectability, and catastrophe-model assumptions and exposure concentrations.