Everest Re Group, Ltd. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015; financial results are unaudited. Everest Re Group provides reinsurance and insurance in the U.S., Bermuda, and international markets.
Financial performance and position
- Third quarter: Earned premiums were $1.414 billion, up 1.7% year over year. Net income attributable to Everest Re Group was $88.6 million, down 67.8%; diluted EPS was $2.00 versus $6.00. The combined ratio was 89.0%, compared with 85.7%.
- First nine months: Earned premiums were $4.053 billion, up 6.5%. Net income attributable to the Group was $620.6 million, down 27.8%; diluted EPS was $13.92 versus $18.47. The combined ratio was 85.8%, compared with 83.7%.
- Investment results: Net investment income declined 18.7% in Q3 to $115.5 million and 8.4% year to date to $363.1 million. Net realized capital losses were $160.0 million for Q3 and $194.7 million year to date, versus losses of $9.4 million and gains of $70.7 million, respectively, in 2014.
- Cash flow and liquidity: Operating cash flow for the first nine months was $987.5 million, versus $925.9 million. Cash and short-term investments totaled $2.016 billion at quarter end; total investments and cash were $17.647 billion. Management said liquid assets and operating cash flows provide ample near-term claims-paying resources.
- Capital and debt: Shareholders’ equity was $7.486 billion, up 0.5% from year-end 2014; book value per share was $173.76, up 4.2%. Debt was $638.4 million, consisting principally of $400 million senior notes and $238.4 million subordinated notes. The company reported compliance with credit-facility covenants and no revolving borrowings outstanding.
Material changes versus comparable periods
- Premium growth reflected expansion in Insurance and Mt. Logan Re, partly offset by lower reinsurance premiums. Year-to-date gross written premiums rose 1.0%; Insurance premiums grew 28.7%, while reinsurance premiums declined, including from foreign-exchange movements and reduced treaty business.
- Earnings fell mainly because of investment losses and lower investment income, alongside higher claims and underwriting expenses. Q3 realized losses included $117.1 million from fair-value remeasurements, $22.5 million from security sales, and $20.4 million of impairments. Year-to-date impairments were $62.7 million.
- Losses from the Tianjin port explosion totaled approximately $60 million across the business. Q3 catastrophe losses were $40 million, principally from the 2015 Chilean earthquake; year-to-date catastrophe losses were $80 million.
- Investment-related accumulated other comprehensive income shifted to a total accumulated other comprehensive loss of $112.2 million, versus income of $48.3 million at December 31, 2014, including adverse currency translation and investment valuation movements.
Outlook, risks, and unusual items
- Management described insurance and reinsurance markets as highly competitive, with ample capacity and pressure on rates, particularly in property catastrophe and casualty reinsurance. It said it would continue targeting business for profitability while maintaining portfolio diversification.
- Management expected positive operating cash flow to continue in the near term absent unusual catastrophe activity. No specific earnings or premium guidance was provided.
- Loss reserves totaled $9.966 billion, including $420.9 million of gross asbestos and environmental reserves. Management cautioned that reserve estimates may vary significantly and ultimate claims could exceed recorded reserves.
- The company sold Mt. McKinley Insurance Company in July for $20.2 million, recognizing no gain or loss. In a related retrocession, it transferred $140.3 million of cash against specified liabilities; the maximum retroceded liability is $440.3 million, and the company retains liability above that cap.
- Seven outstanding, unhedged equity-index put options had a $52.2 million recorded liability and generated a $11.4 million Q3 derivative loss. The filing disclosed theoretical maximum payouts with a present value of $429.4 million for the S&P 500 contracts and $43.9 million for the FTSE contract; these are modeled extremes, not reported expected payments.
- The company had $469.1 million of remaining limited-partnership investment commitments. It was negotiating two additional Kilimanjaro catastrophe-reinsurance agreements. Ordinary-course insurance and reinsurance disputes are ongoing; the company reported no other material litigation. It identified no material change in risk factors.
Important facts for investors to verify
- Whether investment marks, impairments, and reduced investment income continue to weigh on earnings and equity.
- Whether the deterioration in the combined ratio—especially in International and Bermuda—persists, and how the Tianjin losses and other catastrophe claims develop.
- Whether reserve estimates, including asbestos and environmental exposures, and the Mt. McKinley retrocession recoveries remain adequate and collectible.
- Whether capital returns, including $325.0 million of year-to-date share repurchases and $125.9 million of dividends, remain consistent with capital needs and catastrophe exposure.
- How competitive pricing, foreign-exchange movements, limited-partnership commitments, and the outstanding equity-index options affect future results and liquidity.