Everest Re Group, Ltd. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; balance-sheet comparisons are to December 31, 2011. Figures below are in U.S. dollars. The company principally provides reinsurance and insurance in the U.S., Bermuda and international markets.
Key financial results
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Gross written premiums | $1,204.0m | $1,128.5m | $3,159.5m | $3,181.3m |
| Premiums earned | $1,009.5m | $1,044.3m | $3,045.2m | $3,095.6m |
| Total revenue | $1,219.0m | $1,024.8m | $3,650.2m | $3,408.0m |
| Net income (loss) | $250.9m | $63.1m | $770.2m | $(121.5)m |
| Diluted EPS | $4.82 | $1.16 | $14.61 | $(2.24) |
| Combined ratio | 87.2% | 95.6% | 88.4% | 114.6% |
| Operating cash flow | $174.9m | $207.9m | $479.4m | $546.7m |
- Underwriting: Incurred losses and LAE were $603.7m in Q3 and $1,814.0m year to date, versus $720.7m and $2,706.3m, respectively, in 2011. The lower catastrophe burden was the principal driver of improved earnings and combined ratios: catastrophe losses were $25.0m in Q3 and $85.0m year to date, compared with $132.3m and $920.3m in the comparable 2011 periods.
- Investment results: Net investment income was $152.0m in Q3 and $453.8m year to date, down 2.8% and 8.1%. Net realized capital gains were $62.7m and $144.9m, compared with losses of $137.7m and $130.4m in 2011; 2012 gains included substantial fair-value remeasurement gains, particularly on equity securities.
- Margins: The Q3 loss ratio was 59.8% (down 9.2 percentage points); the nine-month loss ratio was 59.6% (down 27.8 points). Commission and brokerage and other underwriting expense ratios increased year over year for the nine-month period.
- Balance sheet and liquidity: At September 30, total assets were $19.67bn, investments and cash $16.53bn, cash and short-term investments $1.45bn, and shareholders’ equity $6.79bn, up from $6.07bn at year-end 2011. Book value per share was $131.22, up from $112.99. Management said available liquidity sources were ample for expected near-term loss payments.
- Debt and facilities: Reported total debt was $818.1m, essentially unchanged from year-end. The company had no revolving-credit borrowings; its $800m Group facility had $413.9m of letters of credit in use, and the $150m Holdings facility had $5.0m in letters of credit. The company reported compliance with facility covenants.
Material changes versus comparable periods
- Q3 net income rose to $250.9m from $63.1m; nine-month results moved to $770.2m of income from a $121.5m loss, mainly because 2012 catastrophe losses were far below the exceptional 2011 event losses.
- Premiums earned declined 3.3% in Q3 and 1.6% year to date. Management attributed premium trends to business mix and the non-renewal of a large Florida quota-share contract, alongside growth in crop and primary medical stop-loss insurance. Gross written premiums rose in Q3 but were slightly lower year to date.
- Shareholders’ equity increased $714.0m, reflecting earnings and investment appreciation, partly offset by $250.0m of share repurchases and $75.7m of dividends. The company repurchased 2.6m shares during the first nine months.
- Investment unrealized depreciation positions narrowed: securities in an unrealized-loss position had market value of $963.2m and gross unrealized losses of $34.6m at September 30, versus $2.09bn and $101.5m at December 31, 2011.
Outlook, risks and unusual items
- Outlook: Management expected positive operating cash flow to continue in the near term, absent unusual catastrophe activity. It noted that competition, pricing pressure and the strategy of prioritizing underwriting profitability over premium volume could affect future premiums and cash flows. Management saw profit opportunities in catastrophe coverages but provided no quantified earnings or premium guidance.
- Hurricane Sandy: The October 2012 storm severely affected the Northeastern U.S. The company could not estimate losses when it filed, but expected an adverse impact on Q4 and full-year 2012 results.
- Reserve uncertainty: Loss reserves were $9.85bn, including $455.6m gross for asbestos and environmental exposures. Management described reserves as estimates subject to potentially significant variation and stated that future reserve increases could be material.
- Investment and market risk: The portfolio included $838.2m of European sovereign securities, primarily from the U.K. and France; it held none from Portugal, Italy, Ireland, Greece or Spain. Investment income faced pressure from lower reinvestment rates. Seven unhedged equity-index put options had a $79.1m fair-value liability; the filing gives a present value of theoretical maximum payouts of $298.2m for S&P 500 contracts and $33.8m for the FTSE 100 contract.
- Ratings and liquidity contingencies: Moody’s had affirmed operating-subsidiary ratings but changed the outlook to negative in January 2012. The company said a one-notch downgrade was not expected to materially harm its business, while noting rating-related collateral provisions on derivatives. It had posted $48.5m collateral against the put-option liability; a zero collateral threshold would increase the requirement by $55.0m.
- Tax and accounting items: Year-to-date results included a $21.7m tax benefit from correcting deferred-tax-asset understatements and an $11.2m benefit from reducing uncertain-tax-position reserves after an IRS audit. The company said the corrections were immaterial to prior periods and did not restate them. New acquisition-cost accounting also led to previously deferrable costs being expensed, including $8.8m during the first nine months of 2012.
- Other contingencies: The company reported ordinary-course insurance and reinsurance disputes, but no other material litigation or arbitration. It also disclosed contingent annuity replacement estimates totaling about $172.7m; these are contingent exposures, not stated as recognized liabilities.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to its risk factors.
Important facts for investors to verify
- How Hurricane Sandy loss estimates developed after the filing, and the resulting effect on Q4 and full-year 2012 earnings and reserves.
- Whether the unusually low 2012 catastrophe losses and favorable investment remeasurements are sustainable; separate recurring underwriting performance from catastrophe comparisons and market-driven gains.
- Reserve development by accident year and segment, including the adequacy of asbestos and environmental reserves and the impact of any later claims information.
- Premium trends, pricing and renewal conditions by segment, particularly the effects of the Florida quota-share non-renewal, crop growth and competitive pressure in casualty and European markets.
- Investment portfolio performance, reinvestment yields, valuation assumptions for less-liquid assets, and the exposure and collateral terms of the unhedged equity-index put options.
- Any change in Moody’s outlook or other financial-strength ratings, and potential effects on collateral requirements, business volumes and capital flexibility.