Everest Re Group, Ltd. — Q3 2010 Form 10-Q
Business and period. Bermuda-based insurer and reinsurer operating in the U.S., Bermuda, and international markets across five segments. This unaudited report covers the three and nine months ended September 30, 2010; comparisons are to the corresponding 2009 periods unless noted. Dollar amounts below are in millions unless specified.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Premiums earned | $997.3 | $975.4 | $2,914.5 | $2,864.6 |
| Total revenues | $1,178.1 | $1,156.5 | $3,447.4 | $3,317.1 |
| Net investment income | $141.4 | $165.4 | $468.6 | $401.4 |
| Net income | $174.2 | $228.6 | $308.2 | $609.8 |
| Diluted EPS | $3.11 | $3.75 | $5.33 | $9.94 |
| Combined ratio | 95.9% | 88.3% | 104.2% | 88.3% |
| Operating cash flow | Not separately stated | Not separately stated | $790.6 | $598.7 |
Gross written premiums rose 3.1% in Q3 and 3.2% year to date; net written premiums rose 2.6% and 1.6%, respectively. Q3 pretax income was $204.4 million versus $273.7 million; nine-month pretax income was $355.0 million versus $719.6 million. Other comprehensive income was $192.7 million in Q3 and $287.6 million year to date, largely reflecting investment appreciation and currency movements.
Underwriting and segment performance
- Incurred losses and loss adjustment expenses increased 14.9% in Q3 and 29.1% year to date. Catastrophe losses were $89.7 million in Q3 and $513.8 million year to date; events cited include the Chile and New Zealand earthquakes and Australian and Canadian hailstorms.
- The year-to-date combined ratio exceeded 100%, indicating an underwriting loss; underwriting results were negative $122.8 million versus a $334.3 million gain in 2009. The company attributed the deterioration chiefly to catastrophe losses.
- International was especially affected: year-to-date underwriting loss was $247.0 million and its combined ratio was 128.4%, with catastrophe claims driving the increase. U.S. Insurance also remained loss-making, with a 105.5% year-to-date combined ratio. U.S. Reinsurance and Bermuda remained profitable, but their underwriting gains declined from 2009.
- Investment results varied: limited partnership results shifted from a $23.5 million gain in Q3 2009 to a $1.1 million loss in Q3 2010; year-to-date they were a $30.4 million gain versus a $29.2 million loss in 2009. Nine-month realized capital gains were $69.3 million, compared with a $10.6 million loss.
Financial position and liquidity
- At September 30, total assets were $18.55 billion, investments and cash $15.49 billion, shareholders’ equity $6.28 billion, and gross loss and LAE reserves $9.33 billion. Equity increased 2.9% from year-end 2009, partly due to investment appreciation and net income, offset by share repurchases and dividends.
- Total debt was $901 million, down 11.5% from $1.02 billion at year-end. The company repaid $200 million of senior notes that matured in March and had $83 million of revolving borrowings outstanding. The filing reports compliance with credit-facility covenants.
- Cash and short-term investments totaled $791.3 million. The company had $1.30 billion of aggregate credit commitments, including letters of credit and revolving facilities, and reported ample liquidity and no foreseeable near-term need to access capital markets.
- Nine-month cash flow from operations was $790.6 million. Cash ended the period at $201.1 million, down $46.5 million from year-end. The company repurchased 4.48 million shares for $346.8 million year to date and declared dividends of $1.44 per share.
- The fixed-income portfolio had an average credit quality of Aa2 and duration of 3.7 years. At September 30, the portfolio had $741.7 million of net pretax unrealized appreciation. Management reported that unrealized-loss positions had improved since year-end and stated it did not intend, and was unlikely to be required, to sell those securities before recovery.
Outlook, risks, and unusual items
- No specific earnings or premium guidance was provided. Management expected positive annual operating cash flow over the near term, absent unusual catastrophe activity, while warning that competition and a strategy prioritizing underwriting profitability over premium volume could affect future cash flows.
- Management described insurance and reinsurance markets as highly competitive, particularly U.S. casualty markets, with ample capacity. It saw selective pricing opportunities, including some catastrophe-exposed international markets, and cited expansion in Brazil and other international markets.
- Unhedged equity-index put options had a $77.2 million fair-value liability. The contracts have long-dated settlement dates; management’s estimated probability of the relevant indices finishing below strike was less than 45% for the S&P 500 contracts and less than 36% for the FTSE contract. The filing gives a combined theoretical maximum payout present value of $293.8 million using a 6% discount factor. Collateral posted was $53.1 million; a ratings-related threshold change could require about $55 million more.
- Loss reserves are estimates and may develop materially. Management said ordinary-course disputes were not expected to materially affect financial position or liquidity, but an adverse resolution could affect results in a particular period. Contingent exposure also exists if certain annuity providers cannot meet payments; estimated replacement costs were $176.6 million in total.
- The company reported no material change in risk factors, no reportable subsequent events, and effective disclosure controls. A tax appeal could result in recognition of unrecognized tax benefits within 12 months, positively affecting results if recognized.
Important facts for investors to verify
- Whether catastrophe claims and reserve estimates, especially International-segment losses, develop further and how they affect the combined ratio.
- Whether the 2010 underwriting deterioration persists after the reported catastrophe events and amid competitive pricing conditions.
- The quality and timing of limited-partnership returns, and the sustainability of investment income and realized gains.
- The terms, valuation assumptions, collateral requirements, and potential cash exposure associated with the unhedged index put options.
- Debt maturities and refinancing, continued covenant compliance, and the impact of repurchases and dividends on capital and liquidity.