Everest Re Group, Ltd. — Q2 2015 Form 10-Q
Business and period: Bermuda-based insurance and reinsurance group operating through U.S. Reinsurance, International, Bermuda, Insurance and Mt. Logan Re segments. This summary covers the unaudited three and six months ended June 30, 2015, compared with the corresponding 2014 periods; balance-sheet comparisons are with December 31, 2014. Dollar amounts are in millions unless otherwise stated.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Gross written premiums | $1,258.2 | $1,415.4 | $2,672.3 | $2,682.8 |
| Net written premiums | $1,168.5 | $1,217.5 | $2,452.4 | $2,445.1 |
| Premiums earned | $1,332.4 | $1,272.3 | $2,639.5 | $2,416.8 |
| Net investment income | $125.0 | $131.2 | $247.6 | $254.4 |
| Net realized capital gains (losses) | $(24.2) | $59.0 | $(34.7) | $80.1 |
| Income before taxes | $271.3 | $361.8 | $651.5 | $717.0 |
| Net income attributable to Everest Re Group | $209.1 | $290.2 | $532.0 | $584.1 |
| Diluted EPS | $4.68 | $6.26 | $11.88 | $12.46 |
| Combined ratio | 86.3% | 84.7% | 84.1% | 82.5% |
Profitability and margins: Attributable net income declined 28.0% in Q2 and 8.9% year to date. Premiums earned grew, but incurred losses and LAE rose 7.5% in Q2 and 11.7% year to date. The combined ratio worsened 1.6 percentage points in both comparisons; the loss ratio increased 1.5 points in Q2 and 1.2 points year to date. Investment yield also softened: annualized pre-tax yield on average cash and invested assets was 2.9% for Q2 and first half 2015, versus 3.2% and 3.1%, respectively, in 2014.
Cash flow and liquidity: First-half operating cash flow was $683.1, versus $590.4 in 2014. Investing activities used $826.8; financing activities provided $52.0. Cash ended at $338.9, down from $437.5 at year-end. Cash and short-term investments totaled $2,240.7, and total investments and cash were $18,002.2. Management said it expects positive operating cash flow near term absent unusual catastrophe activity and considers liquidity adequate for expected near-term claims.
Capital and debt: Total debt was $638.4, unchanged from year-end, comprising $400.0 of 4.868% senior notes due 2044 and $238.4 of subordinated notes. Shareholders’ equity was $7,726.7, up 3.7%; book value per share was $174.84, up 4.9%. The company repurchased 0.7 million shares for $125.0 and declared $1.90 per share in dividends year to date. It reported compliance with credit facility covenants and no revolving-credit borrowings; $450.1 of the $600.0 collateralized letter-of-credit tranche was in use.
Material changes and operating drivers
- Premium mix: Q2 gross written premiums fell 11.1%, chiefly from lower reinsurance premiums, including reduced treaty casualty and quota-share business and foreign-exchange effects. Insurance premiums rose 8.6% in Q2 and 25.0% year to date, while International gross written premiums fell 35.5% and 21.2%, respectively. Mt. Logan Re premiums expanded as the operation grew.
- Segment underwriting: Q2 underwriting gains were $120.1 U.S. Reinsurance, $23.3 International, $34.0 Bermuda and $28.2 Mt. Logan Re; Insurance recorded a $22.8 underwriting loss. Insurance’s combined ratio was 108.5%, compared with 98.3% a year earlier, reflecting higher current- and prior-year attritional losses, including run-off excess casualty business. International’s combined ratio rose to 93.1% from 88.8%; U.S. Reinsurance improved to 75.0% from 76.3%, and Bermuda to 82.8% from 84.8%.
- Claims and catastrophe activity: Q2 current-year catastrophe losses were $40.0, related to Northern Chile storms and New South Wales storms. The company also recognized $10.0 of favorable prior-year catastrophe development, mainly related to 2013 U.S. storms. Current-year attritional losses increased, including marine and non-catastrophe weather losses.
- Investments and earnings volatility: Realized losses included $16.3 of Q2 and $42.3 year-to-date other-than-temporary impairments. The prior-year comparisons benefited from large fair-value gains on equity securities ($60.3 in Q2 2014 and $84.3 in first-half 2014). Q2 securities unrealized depreciation contributed to a $67.8 other comprehensive loss; AOCI moved from $48.3 at year-end to a $14.8 deficit.
Outlook, risks and unusual items
- Management described worldwide reinsurance and insurance markets as highly competitive, with ample capacity and capital-market-backed alternatives pressuring rates, terms and conditions, particularly in property catastrophe and casualty reinsurance. Management said it would prioritize underwriting profitability over premium volume and sees profit opportunities based on its market position and expertise.
- No quantified earnings or premium guidance was provided. Management expects near-term positive operating cash flow absent unusual catastrophe activity; longer-term cash flow depends partly on pricing competition and underwriting strategy.
- Loss reserves are estimates subject to potentially significant variation. Gross loss and LAE reserves were $9,783.6, including $432.7 of asbestos and environmental reserves ($416.6 net). Management cautioned that ultimate A&E payments could exceed reserves. The net three-year asbestos survival ratio was 7.5 years.
- Investment risks include low reinvestment yields, market and interest-rate fluctuations, foreign currency exposure, and energy-sector losses. Unrealized losses on investments were attributed chiefly to foreign-exchange movements and energy-sector weakness; management said securities were current on payments and it did not expect to need to sell them before recovery.
- Seven outstanding, unhedged equity-index put options had a $40.8 fair-value liability. The filing disclosed theoretical present-value maximum payouts of $426.2 for the S&P 500 contracts and $43.8 for the FTSE 100 contract; the company estimated probabilities of falling below strike at less than 18% and 42%, respectively. No settlement would have been due had the contracts expired at June 30 index levels.
- Ordinary-course insurance and reinsurance disputes are considered in reserve setting; the company reported no other material litigation or arbitration. It is contingently liable for future annuity payments if the issuing insurers cannot pay; estimated replacement cost was $174.4.
- Subsequent event: On July 13, 2015, the company completed the sale of Mt. McKinley Insurance Company and entered a retrocession treaty covering specified liabilities. It did not expect a material realized gain.
Most important facts for investors to verify
- Whether elevated Insurance and International loss ratios, including the Insurance segment’s adverse prior-year attritional development, persist or require further reserve strengthening.
- The drivers and composition of the $42.3 year-to-date investment impairments and the extent to which investment gains, losses and foreign-exchange movements affect reported earnings and equity.
- Actual catastrophe experience and whether the stated expectation of positive operating cash flow holds under changing catastrophe activity and market pricing.
- Liquidity and capital trends, including Mt. Logan Re’s growing third-party capital and related noncontrolling interests, share repurchases, dividends and remaining repurchase authorization.
- Developments in asbestos and environmental claims, reinsurance recoverables, and the unhedged equity-index put-option exposures.