Everest Re Group, Ltd. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. The company provides property and casualty reinsurance and insurance in the U.S., Bermuda, and international markets. Unless stated otherwise, amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Gross written premiums | $2.931 billion | $2.571 billion; up 14.0% |
| Net written premiums | $2.554 billion | $2.202 billion; up 16.0% |
| Premiums earned | $2.388 billion | $2.037 billion; up 17.2% |
| Total revenues | $2.744 billion | $1.982 billion; up 38.4% |
| Net investment income | $260.4 million | $147.8 million; up 76.2% |
| Net realized investment gains (losses) | $38.9 million | ($210.6) million |
| Pre-tax income (loss) | $373.1 million | ($43.6) million |
| Net income | $341.9 million | $16.6 million |
| Diluted earnings per share | $8.52 | $0.41 |
| Operating cash flow | $904.4 million | $506.0 million |
| Combined ratio | 98.1% | 98.6%; improved 0.5 percentage point |
| Shareholders’ equity | $9.683 billion at March 31 | $9.726 billion at December 31, 2020 |
| Total debt | $1.911 billion at March 31 | $1.910 billion at December 31, 2020 |
Business results and material changes
- Premium growth reflected increases in both segments. Reinsurance gross written premiums rose 15.8%; Insurance premiums rose 10.0%.
- Incurred losses and loss adjustment expenses increased 19.6% to $1.711 billion. Q1 2021 catastrophe losses were $270 million, including $260 million from Texas winter storms and $10 million from Australia floods, versus $30 million of catastrophe losses in Q1 2020.
- The loss ratio rose 1.4 points to 71.7%, but lower commission and brokerage and other underwriting expense ratios brought the combined ratio down to 98.1%.
- Reinsurance underwriting gain was $44.8 million, down from $50.1 million; its combined ratio increased to 97.5% from 96.6%. Insurance reported a $0.4 million underwriting gain versus a $21.5 million loss; its combined ratio improved to 99.9% from 103.9%.
- Net investment income rose primarily because limited partnership income increased to $114.3 million from $21.6 million. Management says partnership results are generally reported on a one-month or one-quarter lag.
- Investment gains were $38.9 million versus losses of $210.6 million in the prior-year quarter. Q1 2021 gains included $29.1 million from fair-value remeasurements and $16.8 million from sales, partly offset by $7.0 million of credit-loss allowances. Q1 2020 included substantial fair-value losses, particularly on equities.
- Other income was $56.6 million, primarily reflecting foreign exchange income of $51.8 million. The filing attributes the prior-year comparison partly to foreign exchange fluctuations.
- Other comprehensive loss was $299.8 million, principally from unrealized investment depreciation and foreign-currency translation. This outweighed net income and contributed to the $43.3 million decline in shareholders’ equity. Book value per share was $241.57 versus $243.25 at year-end.
Financial position, liquidity, and capital
- Total assets were $33.595 billion and total liabilities $23.912 billion at March 31, 2021. Investments and cash totaled $25.941 billion, including $1.133 billion of cash and $826.8 million of short-term investments.
- Gross loss and loss adjustment expense reserves were $17.091 billion, up from $16.399 billion at year-end. Management describes reserves as estimates subject to potentially significant variation; Q1 prior-year reserve development was a $1.8 million benefit.
- Operating cash flow increased to $904.4 million. The company reported $1.959 billion of cash and short-term investments, and stated that liquid investments and operating cash flows provide ample near-term claims-paying resources. Management expects annual positive operating cash flow generally, but cautioned that catastrophe payments could reduce cash flow or make it negative in the near term.
- Debt comprised senior notes, subordinated notes, and $310 million of Federal Home Loan Bank borrowings. The company had no outstanding borrowings on its revolving credit line at quarter-end. It reported compliance with applicable credit-facility covenants.
- The company paid $62.2 million in dividends and repurchased 97,462 shares for $23.5 million during the quarter. It had $1.414 billion of remaining investment commitments to limited partnerships and private placement loans.
- Management reported statutory capital above regulatory target levels based on year-end 2020 figures; the filing does not provide March 31, 2021 statutory capital figures in that comparison.
Outlook, risks, contingencies, and unusual items
- No specific earnings or premium guidance was provided. Management described pricing as firming in many lines, particularly catastrophe-affected areas and certain casualty lines, while conditions varied by line and geography. It said the full effects of COVID-19 and the economic recovery remained uncertain.
- COVID-19 may adversely affect industry and company results; estimates may be affected by the continuing pandemic and by possible legal, regulatory, or legislative actions affecting coverage. The company reported that critical operations were functioning remotely.
- Management identified competitive pressure, catastrophe exposure, reserve uncertainty, investment-market volatility, interest-rate risk, foreign-currency risk, and possible liquidity pressure from claims as relevant risks. Fixed-maturity portfolio sensitivity analysis showed an estimated 6.9% market-value change for a 200-basis-point interest-rate move in either direction.
- The company reported $193.5 million of gross unrealized depreciation on fixed maturities at March 31, while stating it did not intend to sell securities in loss positions and considered it more likely than not it could hold them until recovery. It reported no projected cash-flow shortfalls on those securities.
- Ordinary-course insurance and reinsurance disputes continue; the company said it was not party to other material litigation or arbitration. A single S&P 500 put option had an estimated probability below 0.2% of falling below its strike price; its theoretical maximum payout was $149.0 million, though there would have been no settlement if it had expired at the March 31 index level.
- On April 8, 2021, the company entered six collateralized catastrophe reinsurance agreements with Kilimanjaro; the filing describes annual aggregate coverage limits totaling up to $650 million. The notes’ subsequent-events section separately states that there were no subsequent events to report.
- The CARES Act five-year net operating loss carryback provision generated a $31.0 million tax benefit in Q1 2020, affecting the prior-period comparison. Q1 2021 tax expense was $31.2 million, versus a $60.2 million benefit in Q1 2020.
Important facts for investors to verify
- How Texas winter storm and other catastrophe claims develop, and whether reserve estimates require material strengthening.
- Whether elevated limited partnership income is sustainable, given the reported lag in partnership results and the $1.414 billion of unfunded investment commitments.
- How investment valuations, interest rates, credit losses, and foreign-exchange movements affect earnings, accumulated other comprehensive income, and book value.
- Whether COVID-19-related claims, coverage disputes, or regulatory actions materially change the company’s loss exposure.
- The April 8 catastrophe-reinsurance agreements and the filing’s statement that it had no subsequent events to report.
- Liquidity and capital flexibility under severe catastrophe scenarios, including collateral and letter-of-credit usage and debt covenant compliance.