Everest Re Group, Ltd. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet comparisons are to December 31, 2012. The unaudited filing covers a Bermuda-domiciled group providing reinsurance and insurance in the U.S., Bermuda and international markets. Amounts below are in U.S. dollars; financial figures are generally in millions unless stated otherwise.
Financial performance and condition
| Metric | Q1 2013 | Q1 2012 / prior date | Change |
|---|---|---|---|
| Gross written premiums | $1,180.8 | $1,046.5 | +12.8% |
| Net written premiums | $1,149.7 | $1,014.9 | +13.3% |
| Premiums earned | $1,088.8 | $998.0 | +9.1% |
| Net investment income | $145.8 | $152.4 | -4.4% |
| Net realized capital gains | $126.7 | $98.7 | +$28.0 |
| Income before taxes | $469.8 | $342.8 | +37.1% |
| Income tax expense | $85.5 | $38.1 | +124.3% |
| Net income | $384.3 | $304.7 | +26.1% |
| Diluted earnings per share | $7.50 | $5.68 | Higher |
| Operating cash flow | $225.7 | $165.7 | Higher |
- Underwriting: Combined ratio improved to 80.7% from 89.0%; loss ratio was 54.4% versus 60.4%, commission and brokerage ratio 21.4% versus 23.8%, and other underwriting expense ratio 4.9% versus 4.8%. Underwriting gain rose to $210.1 million from $109.5 million.
- Drivers and segment mix: There were no current-year catastrophe losses in Q1 2013, compared with $30.0 million of U.S. tornado losses in Q1 2012. Lower prior-year catastrophe losses also helped Bermuda results. U.S. Reinsurance underwriting gain increased to $96.6 million from $33.7 million; International rose to $71.4 million from $70.0 million; Bermuda rose to $41.9 million from $7.9 million; and Insurance improved to $0.2 million from a $2.1 million loss. International and Insurance loss ratios worsened modestly, to 51.7% and 71.1%, respectively.
- Investment results: Realized gains included $113.8 million from fair-value remeasurements and $13.1 million net gains from sales, partly offset by $0.2 million of impairments. Net investment income fell as fixed-income reinvestment rates declined and equity income decreased, partly offset by increased limited-partnership income. Annualized pretax yield on average invested assets was 3.7%, versus 4.0%.
- Balance sheet at March 31: Total assets were $19,802.1 million; investments and cash were $16,562.2 million; shareholders’ equity was $6,816.9 million, up 1.2% from year-end; and book value per share was $136.43, up 4.2%. Gross loss and LAE reserves were $9,843.3 million, down 2.2% from year-end.
- Liquidity and cash: Cash was $524.1 million and short-term investments were $781.7 million. Operating cash flow exceeded the prior-year quarter; investing cash flow was negative $14.1 million and financing cash flow was negative $235.9 million, including $238.6 million of share repurchases and $24.2 million of dividends. Cash ended the quarter at $524.1 million, down $12.9 million from year-end.
- Debt and facilities: Total debt was $818.2 million, essentially unchanged from year-end, comprising $249.9 million of 5.4% senior notes due October 2014, $238.4 million of long-term subordinated notes, and $329.9 million of junior subordinated debt. Credit commitments totaled $1.25 billion; facilities had no revolving borrowings, although letters of credit were in use. The company reported compliance with facility covenants.
Material changes and management commentary
- Premium growth reflected new business, higher participations and rates in parts of reinsurance, and growth in California workers’ compensation, crop and non-standard auto insurance. Management said competition remained strong, especially in casualty, with ample capacity relative to demand. It viewed catastrophe coverage opportunities as favorable but said it was too early to assess the lasting market impact of recent catastrophe losses.
- Management attributed stronger underwriting results principally to fewer catastrophe losses and a business-mix shift toward excess-of-loss contracts. It stated that the company targets business with the greatest profit potential while maintaining portfolio balance and diversification.
- Equity increased despite $238.6 million in repurchases, $24.2 million in dividends, $50.9 million of after-tax unrealized investment depreciation and $21.1 million of adverse currency translation; net income was the principal offsetting contributor. The company repurchased 1.95 million shares during Q1, with 2.36 million shares remaining under authorization at March 31. It reported additional purchases of 805,100 shares for $106.9 million through May 7.
- Management expected positive annual operating cash flow over the near term absent unusual catastrophe activity. It cautioned that future cash flow depends on competition and pricing, premium receipts, and its emphasis on underwriting profitability over premium volume. No specific earnings or premium guidance was provided.
Risks, contingencies and unusual items
- Reserves: Loss reserves are estimates subject to potentially significant variation. Management said there can be no assurance that reserves will not increase materially. The filing reported no current-quarter prior-period reserve development in the consolidated loss table, but certain segments recorded prior-year catastrophe adjustments and Insurance recorded $2.8 million of adverse prior-year development.
- Investments and market risk: Fixed maturities had $44.97 million of gross unrealized depreciation at quarter-end; management considered losses temporary and reported securities current on principal and interest. The portfolio includes $828.7 million of European sovereign securities, primarily UK and French holdings; none were from Portugal, Italy, Ireland, Greece or Spain. Interest-rate and equity-price changes could affect portfolio values.
- Unhedged equity-index puts: Seven long-dated S&P 500 and FTSE 100 put contracts were unhedged and carried a $64.2 million liability. The filing estimates probabilities of exercise below 38% for the S&P contracts and below 43% for the FTSE contract, but disclosed theoretical maximum present-value payouts of $398.8 million and $40.0 million, respectively. Collateral posted was $47.7 million; a zero collateral threshold would increase the requirement by $55.0 million.
- Ratings and debt action: Moody’s downgraded the company and subsidiaries by one level on March 25, 2013. Subsequent to quarter-end, the company announced it would redeem at par the $329.9 million of 6.2% junior subordinated debt on May 24, 2013, primarily using available funds.
- Other contingencies: The company is involved in ordinary-course insurance and reinsurance disputes; it reported no other material litigation or arbitration. It also has contingent exposure if certain annuity providers cannot make payments: estimated replacement costs were $144.5 million and $28.9 million for two arrangements. Limited-partnership investment commitments were $103.5 million.
- The 2012 comparison includes a $12.4 million tax benefit from correction of a deferred-tax-asset understatement; management considered that out-of-period adjustment immaterial and did not restate prior periods. The 2013 quarter also included $1.8 million of acquisition costs expensed under newly adopted accounting guidance.
Important facts for investors to verify
- Whether premium growth and the improved combined ratio persist when catastrophe losses normalize, and how competitive pricing affects renewal rates and underwriting margins.
- Reserve adequacy and development trends, especially for long-tail claims, crop business and asbestos and environmental exposures; gross A&E reserves were $432.8 million and the net asbestos survival ratio was 7.0 years (8.1 years adjusted for unsettled claims, per management).
- How much reported earnings growth depended on investment remeasurement gains, and the sensitivity of investment income and unrealized values to interest rates, equity markets and credit conditions.
- The potential cash and collateral impact of the unhedged index puts, the May 2013 debt redemption, ongoing repurchases and dividends, and the effect of the Moody’s downgrade on financing costs or collateral terms.
- Management’s near-term positive operating-cash-flow expectation is conditional on the absence of unusual catastrophe activity; the filing cautions that interim results are not necessarily indicative of full-year results.