Everest Re Group, Ltd. — Q2 2022 Form 10-Q
Business context and reporting period
Everest Re Group provides property and casualty reinsurance and insurance in the U.S., Bermuda and international markets. This unaudited filing covers the quarter and six months ended June 30, 2022; comparisons are with the same 2021 periods unless otherwise noted.
Financial and operating results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Gross written premiums | $3,447m | $3,190m | $6,633m | $6,122m |
| Premiums earned | $2,916m | $2,558m | $5,708m | $4,946m |
| Total revenues | $2,835m | $3,077m | $5,731m | $5,820m |
| Net investment income | $226m | $407m | $469m | $668m |
| Net investment gains (losses) | $(236)m | $104m | $(390)m | $143m |
| Incurred losses and LAE | $1,876m | $1,586m | $3,666m | $3,298m |
| Income before taxes | $119m | $760m | $421m | $1,133m |
| Net income | $123m | $680m | $420m | $1,022m |
| Diluted EPS | $3.11 | $16.95 | $10.67 | $25.47 |
| Combined ratio | 91.8% | 89.3% | 91.7% | 93.6% |
- Premium growth was broad-based: Q2 gross written premiums rose 8.1%; Insurance grew 19.6% and Reinsurance 2.5%. Six-month growth was 8.4% overall, with Insurance up 17.4% and Reinsurance up 4.3%.
- Underwriting gain was $240m in Q2 and $476m for the first half. The Q2 combined ratio worsened 2.5 points, while the first-half ratio improved 1.9 points, mainly reflecting lower catastrophe losses year to date.
- Investment results were a major earnings headwind. Q2 and first-half net investment income fell 44.5% and 29.8%, respectively, mainly because limited-partnership income declined. Net investment losses included equity fair-value losses of $189m for Q2 and $326m for the first half.
- Other expense was $71m in Q2 and $56m for the first half, primarily reflecting foreign-exchange movements.
Financial position, cash flow and liquidity
- At June 30, total assets were $37.9bn and shareholders’ equity was $8.9bn, down from $10.1bn at December 31, 2021. Book value per share fell 13% to $224.59.
- Equity was pressured by $1.5bn of after-tax unrealized investment depreciation and $62m of adverse foreign-currency translation, partly offset by $420m of net income. Accumulated other comprehensive loss was $1.58bn at quarter-end.
- Cash was $2.12bn and short-term investments were $301m; together they totaled $2.42bn. The company reported $1.56bn of operating cash flow for the first half, versus $1.63bn in 2021. Investing cash outflow was $757m; financing cash outflow was $160m.
- Total debt was approximately $3.09bn: $2.35bn senior notes, $224m subordinated notes and $519m FHLB borrowings. FHLB borrowings mature in November and December 2022. The company also reported $1.2bn of committed letter-of-credit capacity and up to $340m of additional uncommitted capacity, which is not assured to be available.
- Gross loss and LAE reserves were $19.99bn, up 5.2% from year-end. Management describes reserves as estimates subject to possible material variation.
Material changes, outlook and risks
- Q2 net income fell 82% and first-half net income fell 59% year over year, despite premium growth. Lower investment income, investment losses and foreign-exchange expense drove much of the deterioration. Q2 losses and expenses rose 17.2%.
- First-half catastrophe losses were $200m versus $315m in 2021; Q2 catastrophe losses were $85m versus $45m. The 2022 first-half events included Australian floods, South African flooding, European storms, a Canadian derecho and U.S. storms. The 2021 comparison included $270m of Texas winter-storm losses.
- The company recorded $45m of underwriting losses related to the Ukraine/Russia war. Management characterizes the conflict and sanctions as evolving, with significant political and economic uncertainty. It also recorded a $13m increase in fixed-maturity credit-loss allowances, primarily related to direct Russian corporate securities.
- Higher interest rates reduced fixed-maturity fair values: available-for-sale securities had $1.57bn of gross unrealized depreciation at June 30, versus $203m at December 31, 2021. Management attributed the losses primarily to rates and non-issuer-specific credit spreads, stated it did not intend to sell the securities, and considered it more likely than not that it would not need to sell before recovery.
- Management described market pricing as generally firming, especially in catastrophe-affected and certain casualty lines, while noting conditions vary by line and geography. It cited strong capital, liquidity and a diversified platform, but warned operating cash flow could decline or turn negative in the near term as catastrophe claims are paid. No specific earnings or premium guidance was provided.
- Other exposures include $2.4bn of commitments to limited partnerships and private-placement loan securities, reserve uncertainty (including asbestos and environmental claims), catastrophe risk, investment-market and foreign-exchange volatility, and ordinary-course insurance and reinsurance disputes. Management reported no other material litigation or arbitration and no material changes to risk factors.
Most important facts for investors to verify
- Whether premium growth and underwriting margins persist, particularly given the higher Q2 loss ratio and growing Insurance platform expenses.
- How investment income, equity-market movements and unrealized bond losses evolve, and whether any securities must be sold before recovery.
- Reserve development and ultimate catastrophe and Ukraine/Russia-related losses, including any changes in reinsurance recoverability.
- Liquidity and capital adequacy under a heavier claims-payment scenario; the filing’s projected largest 100-year catastrophe economic loss was 7.4% of June 30 equity, up from 4.8% of year-end equity.
- The timing and funding of the $2.4bn investment commitments and the availability and collateral requirements of credit and letter-of-credit facilities.