Everest Re Group, Ltd. — Q3 2017 Form 10-Q
Business context and period. Bermuda-domiciled Everest Re Group provides property and casualty reinsurance and insurance in the U.S., Bermuda, and international markets. This unaudited report covers the quarter and nine months ended September 30, 2017; comparisons are to the corresponding 2016 periods unless noted. Amounts below are U.S. dollars.
Financial performance and position
| Metric | Q3 2017 | Nine months 2017 | Comparable 2016 |
|---|---|---|---|
| Gross written premiums | $2.045 billion, +14.7% | $5.248 billion, +16.6% | $1.783 billion; $4.499 billion |
| Premiums earned | $1.599 billion, +16.6% | $4.281 billion, +10.3% | $1.371 billion; $3.879 billion |
| Total revenues | $1.725 billion | $4.741 billion | $1.510 billion; $4.180 billion |
| Net income (loss) | $(639.4) million | $(102.1) million | $295.4 million; $622.8 million |
| Diluted EPS | $(15.73) | $(2.51) | $7.06; $14.70 |
| Combined ratio | 163.6% | 116.5% | 85.6%; 88.9% |
| Net investment income | $137.0 million | $393.8 million | $122.7 million; $357.9 million |
Catastrophe impact and margins. Incurred losses and loss-adjustment expenses were $2.210 billion in Q3 and $3.842 billion year to date. Q3 catastrophe losses were $1.370 billion; nine-month catastrophe losses were $1.444 billion, principally from Hurricanes Irma, Maria and Harvey and the Mexico City earthquake. The Q3 loss ratio was 138.2%, versus 57.3% a year earlier; the nine-month loss ratio was 89.8%, versus 60.4%. The company recorded only $1.3 million of favorable prior-year reserve development year to date, compared with $72.0 million in the 2016 comparable period.
Cash flow, liquidity and capital. Operating cash flow was $1.044 billion for the first nine months, compared with $960.7 million in 2016; investing cash flow was $(764.5) million and financing cash flow was $(172.2) million. Cash ended the period at $585.4 million. Cash and short-term investments totaled $947.8 million; management also cited $368.0 million of liquidity in its short-duration investment facility. Total investments and cash were $18.482 billion. Shareholders’ equity was $7.969 billion, down from $8.075 billion at year-end 2016; book value per share was $194.05 versus $197.45.
Total debt was approximately $633.3 million, principally senior notes and subordinated notes. The subordinated notes moved from a fixed 6.6% rate to a floating rate; the rate was 3.70% at September 30, 2017. The company reported compliance with credit facility covenants and no revolving-credit borrowings. Facilities provide up to $200 million of unsecured revolving credit and additional capacity for letters of credit.
Material changes and segment results
- Net loss and the combined ratio deterioration were driven chiefly by the exceptional third-quarter catastrophe losses. Q3 net loss compared with $295.4 million net income in Q3 2016; year-to-date results shifted from $622.8 million net income to a $102.1 million loss.
- Premium growth reflected expansion in reinsurance and insurance, new crop reinsurance transactions, and catastrophe-related reinstatement premiums. Q3 gross premiums in insurance declined 9.9%, in part because Heartland was sold in 2016; excluding Heartland, insurance premiums increased, according to management.
- All four segments reported underwriting losses in Q3: U.S. Reinsurance $(401.2) million; International $(333.9) million; Bermuda $(126.7) million; Insurance $(155.6) million. International had the highest Q3 combined ratio at 209.1%; U.S. Reinsurance was 161.7%, Insurance 141.4%, and Bermuda 147.4%.
- Net realized capital gains were $41.5 million in Q3 and $119.5 million year to date, including fair-value gains; 2016 year-to-date included a $28.0 million Heartland sale loss and larger investment impairments.
- Other expense was $54.6 million in Q3, principally reflecting foreign-exchange expense. Management attributed currency effects in part to the strengthening of the Canadian dollar, pound sterling and euro against the U.S. dollar.
Outlook, risks and unusual items
- October 2017 events—Hurricane Nate, Hurricane Ophelia and California wildfires—were not yet quantifiable; management expected them to adversely affect Q4 2017 results. Management also cautioned that catastrophe claim payments could reduce operating cash flow and potentially make it negative in the near term, while stating that liquidity was ample.
- Management described insurance and reinsurance markets as highly competitive, with abundant capacity pressuring rates and terms. It noted the possibility of market firming and rate increases following the 2017 catastrophe losses, but provided no quantified earnings or premium guidance.
- Gross loss and LAE reserves were $12.455 billion, including $415.6 million of gross asbestos and environmental reserves ($293.0 million net). Management emphasized that reserves are estimates and could increase materially. Reinsurance recoverables were $1.367 billion, including $329.9 million from Mt. Logan Re segregated accounts.
- The company had $663.2 million of outstanding commitments to invest in limited partnerships. It also had contingent exposure if two annuity providers cannot meet future payments; estimated replacement cost was $178.1 million in total.
- Six unhedged equity-index put contracts remained. Their recorded fair-value liability was $16.0 million. The filing estimates low probabilities of falling below stated exercise levels, but theoretical maximum payouts were $397.6 million for the S&P 500 contracts and $41.1 million for the FTSE 100 contract.
- Management cited uncertainty around Brexit’s potential effects on regulation, rates, currencies and markets. The filing reported no material change in risk factors and no other material litigation beyond disputes arising in the ordinary course.
Important facts for investors to verify
- How catastrophe loss estimates develop—including recoveries, reinstatement premiums and the subsequent-event impact of October storms and wildfires.
- Whether loss reserves, especially catastrophe and asbestos/environmental reserves, prove adequate as claims mature.
- Whether operating cash flow remains sufficient as catastrophe claims are paid, and how much readily available liquidity remains after collateral and letter-of-credit requirements.
- Whether premium growth and any post-catastrophe rate firming translate into improved underwriting profitability, particularly in segments with Q3 combined ratios well above 100%.
- The sensitivity of earnings and capital to foreign exchange, investment valuations, and the remaining equity-index put-option exposure.