Everest Re Group, Ltd. — Q1 2019 Form 10-Q
Business context and period. The filing is for the unaudited three months ended March 31, 2019, with comparisons to Q1 2018. Everest Re Group is a Bermuda-domiciled provider of reinsurance and insurance in the U.S., Bermuda and international markets. Unless stated otherwise, financial amounts below are in U.S. dollars.
Key financial results
| Metric | Q1 2019 | Q1 2018 / prior period |
|---|---|---|
| Gross written premiums | $2.127 billion | $1.932 billion; up 10.1% |
| Net written premiums | $1.852 billion | $1.672 billion; up 10.7% |
| Premiums earned | $1.733 billion | $1.619 billion; up 7.0% |
| Net investment income | $141.0 million | $138.3 million; up 1.9% |
| Net realized capital gains (losses) | $92.2 million gain | $24.9 million loss |
| Income before taxes | $408.8 million | $217.6 million; up 87.8% |
| Income tax expense | $59.9 million | $7.3 million |
| Net income | $348.9 million | $210.3 million; up 65.9% |
| Diluted earnings per share | $8.54 | $5.11 |
| Operating cash flow | $459.8 million | $195.6 million |
Underwriting and margins. The consolidated combined ratio improved to 88.7% from 93.3%; the loss ratio was 60.5%, commission and brokerage ratio 22.5%, and other underwriting expense ratio 5.7%. Segment underwriting gains were $123.7 million for U.S. Reinsurance, $6.7 million for International, $46.5 million for Bermuda and $18.8 million for Insurance.
Balance sheet and liquidity. At March 31, total assets were $25.631 billion, investments and cash $19.224 billion, shareholders’ equity $8.427 billion and gross loss and LAE reserves $13.247 billion. Book value per share was $206.68, up from $194.43 at year-end 2018. Cash and short-term investments totaled $1.181 billion. Cash fell by $72.1 million during the quarter to $584.0 million, after operating cash flow was more than offset by investing and financing outflows.
Debt and facilities. Reported debt was approximately $633.7 million: $397.0 million of senior notes and $236.7 million of subordinated notes. There were no borrowings under the $200 million revolving credit tranche. Letters of credit used $588.0 million of the $600 million collateralized tranche, $125.9 million of a $200 million facility, and £26 million of a £30 million facility. The company reported compliance with applicable credit-facility covenants.
Material changes versus the comparable period
- Premium growth reflected higher reinsurance and insurance writings. U.S. Reinsurance gross written premiums rose 18.6% and Insurance rose 17.8%; Bermuda declined 11.5%.
- Net income growth reflected stronger underwriting, but also a $117.1 million year-over-year swing in realized investment results. Q1 2019 gains included $84.4 million from equity-security fair-value changes; Q1 2018 included $35.3 million of fair-value losses.
- Prior-year catastrophe reserve development was slightly favorable overall in Q1 2019, compared with $100.0 million of unfavorable development in Q1 2018. Q1 2019 also included $25.0 million of current-year catastrophe losses from the Townsville monsoon in Australia.
- International underwriting weakened: its combined ratio rose to 98.1% from 64.0%, primarily reflecting unfavorable development on prior-year catastrophe losses and the Townsville event. Bermuda’s combined ratio rose to 85.9% from 69.3%, mainly because prior-year catastrophe reserve releases were smaller.
- Shareholders’ equity increased $522.8 million from year-end, including net income and $231.2 million of after-tax unrealized investment appreciation; dividends of $57.1 million and $16.2 million of share repurchases partly offset the increase.
Outlook, commentary, risks and unusual items
- Management described insurance and reinsurance markets as highly competitive, with ample capacity and capital-market competition pressuring rates and terms, though some catastrophe-affected markets and other lines had shown rate improvement. The company said it would continue targeting business with attractive profit potential while maintaining portfolio diversification.
- Management generally expects positive annual operating cash flow, but cautioned that catastrophe claim payments could reduce cash flow or make it negative in the near term; it stated that available liquidity should be ample for expected claims. No specific numerical earnings or premium guidance was provided.
- Reserve estimates are subject to uncertainty and may increase materially. The filing identifies prior catastrophe claims, claim inflation and loss-adjustment expenses as relevant factors. Net asbestos and environmental reserves were $251.6 million; management cautioned that ultimate payments could exceed estimates.
- Investment exposures include interest-rate, equity-price and foreign-exchange risk. The filing’s sensitivity analysis estimated that a 200-basis-point rise in rates would reduce fixed-income portfolio market value by 6.4%; a 20% decline in equity prices would reduce after-tax fair/market value by $145.7 million.
- Six equity-index put option contracts remained outstanding. Their recorded liability was $8.7 million; the filing gives theoretical maximum present-value payouts of $415.6 million for the S&P 500 contracts and $42.0 million for the FTSE 100 contract, while noting estimated probabilities of falling below strike prices of less than 1% and less than 12%, respectively.
- Other disclosed considerations include uncertainty around Brexit and ordinary-course insurance and reinsurance disputes. The company reported no other material litigation or arbitration and no material changes to risk factors. It adopted the new lease accounting standard in Q1, recognizing a $69.9 million right-of-use asset and $77.3 million lease liability, with no material effect on results or liquidity.
Important facts for investors to verify
- How sustainable the underwriting improvement is, especially given weaker International and Bermuda results and the timing and amount of catastrophe losses.
- How much reported earnings depend on equity-security fair-value gains, and how investment performance may change with market conditions.
- Reserve adequacy, including prior-year catastrophe development, asbestos and environmental exposures, and reinsurance recoverable collectability.
- Liquidity under elevated catastrophe claims, including collateralized assets, committed investment-partnership funding of up to $797.9 million, and letter-of-credit usage.
- Potential effects of interest rates, equity prices, foreign exchange and Brexit on investment values, earnings and capital.