Everest Re Group, Ltd. — Q1 2018 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 report covers the three months ended March 31, 2018, compared with Q1 2017; balance-sheet comparisons are with December 31, 2017. Amounts below are in U.S. dollars unless noted. Management cautions that interim results are not necessarily indicative of full-year results.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / prior date |
|---|---|---|
| Gross written premiums | $1,931.6 million | $1,600.9 million; up 20.7% |
| Net written premiums | $1,672.2 million | $1,413.8 million; up 18.3% |
| Premiums earned | $1,619.4 million | $1,312.1 million; up 23.4% |
| Total revenues | $1,745.2 million | $1,484.8 million |
| Net investment income | $138.3 million | $122.3 million; up 13.1% |
| Net realized capital gains (losses) | ($24.9) million | $52.7 million |
| Income before taxes | $217.6 million | $338.4 million |
| Net income | $210.3 million | $291.6 million; down 27.9% |
| Diluted EPS | $5.11 | $7.07 |
| Combined ratio | 93.3% | 86.0%; increased 7.3 points |
| Operating cash flow | $195.6 million | $381.8 million |
| Total investments and cash | $18,582.9 million | $18,626.5 million at Dec. 31, 2017 |
| Shareholders’ equity | $8,344.2 million | $8,369.2 million at Dec. 31, 2017 |
| Total debt | $633.4 million | $633.4 million at Dec. 31, 2017 |
The overall loss ratio rose to 65.3% from 58.7%; commission and brokerage ratio was 22.1% versus 21.5%, and other underwriting expense ratio was 5.9% versus 5.8%. The company declared dividends of $1.30 per share, compared with $1.25 a year earlier.
By segment, underwriting gain was $123.8 million for International, $98.0 million for Bermuda and $12.5 million for Insurance. U.S. Reinsurance recorded an underwriting loss of $126.0 million, including $218.8 million of prior-year catastrophe losses. The U.S. Reinsurance combined ratio was 122.4%; International, Bermuda and Insurance reported 64.0%, 69.3% and 96.8%, respectively.
Material changes versus the prior comparable period
- Premium growth was broad-based: management cited higher treaty property, U.K. branch and Latin American reinsurance business, and growth in insurance lines including property, accident and health, and Lloyd’s Syndicate business.
- Incurred losses and loss adjustment expenses increased 37.2% to $1,057.2 million. Management attributed the increase to $206.5 million more current-year attritional losses, reflecting premium growth and business mix, and $100.0 million of unfavorable prior-year development, primarily related to 2017 California wildfires. There were no current-year catastrophe losses in Q1 2018.
- Results included offsetting segment reserve movements: U.S. Reinsurance recorded $218.8 million of prior-year catastrophe losses, while International and Bermuda recorded $55.0 million and $59.2 million of favorable prior-year catastrophe development, respectively. These segment amounts should not be conflated with the consolidated $100.0 million unfavorable prior-year development figure.
- Investment income improved, including higher limited partnership income ($23.4 million versus $11.0 million) and fixed-maturity income. However, fair-value remeasurements of equity securities contributed a $35.3 million realized loss in Q1 2018 versus a $41.5 million gain in Q1 2017; total net realized investment results shifted by $77.6 million.
- Other comprehensive income was a loss of $179.9 million, principally reflecting investment depreciation. Net unrealized depreciation on securities included in equity was $199.4 million after tax. This contributed to the modest decline in shareholders’ equity despite quarterly net income.
- Net operating cash flow fell to $195.6 million from $381.8 million. Management cited catastrophe claim payments of $265.8 million in Q1 2018 versus $53.1 million in Q1 2017, among other working-capital movements.
Liquidity, debt and capital
Cash was $700.6 million and short-term investments were $338.7 million at March 31, 2018. Management also reported $220.2 million of available liquidity in its short-duration investment sweep facility and described the liquid investment portfolio and operating cash flows as ample for near-term claims. It expects annual positive operating cash flow in general, but warned that catastrophe claim payments could reduce cash flow and potentially make it negative in the near term.
Debt comprised approximately $396.9 million of 4.868% senior notes due 2044 and $236.6 million of subordinated notes, which had moved to a floating rate; the Q1 rate was approximately 4.22%. The company reported compliance with credit-facility covenants. Its $200 million unsecured revolving tranche had no borrowings; $564.6 million of the $600 million collateralized letter-of-credit tranche was in use. A separate $250 million facility had $215.5 million of letters of credit outstanding; the £145 million Lloyd’s facility was unused.
Outlook, risks, contingencies and unusual items
- Market outlook: Management described worldwide insurance and reinsurance markets as highly competitive, with ample capacity and capital-markets competition pressuring rates and terms, particularly in property catastrophe and casualty reinsurance. It noted some market firming after the 2016–2017 catastrophe losses, but gave no specific earnings, premium or combined-ratio guidance.
- Reserves and catastrophe exposure: Management estimates reserves using actuarial methods and judgment and cautions that actual claim outcomes may differ materially. Prior-year catastrophe development was unfavorable overall in the quarter. Gross loss and LAE reserves were $11,793.3 million, including $430.3 million of asbestos and environmental reserves; net A&E reserves were $301.7 million.
- Investment and market risks: The portfolio is exposed to interest rates, equity prices and foreign exchange. A parallel 100-basis-point rate increase was modeled to reduce fixed-maturity market value by 3.1%; a 10% equity-price decline was modeled to reduce after-tax equity value by $94.9 million. The company reported $324.1 million of gross unrealized fixed-maturity depreciation and stated it did not expect to need to sell the securities before recovery.
- Other contingencies: The company is involved in ordinary-course insurance and reinsurance disputes and reports no other material litigation or arbitration. It is contingently liable for certain annuity arrangements; estimated replacement cost was $177.2 million. It had commitments to invest up to $777.1 million in limited partnerships as capital calls arise.
- Derivatives: Six unhedged equity-index put options remained outstanding, with a $12.2 million fair-value liability. The filing estimated the probability of the S&P 500 contracts falling below strike at less than 2% and the FTSE 100 contract at less than 17%; theoretical maximum payouts were much larger than the recorded liability.
- Subsequent event and accounting: On April 30, 2018, the company entered into four new collateralized catastrophe reinsurance agreements; related catastrophe bonds totaled $525 million. Adoption of the equity-investment accounting standard moved fair-value changes through earnings and produced a $1.2 million cumulative adjustment between accumulated other comprehensive income and retained earnings. The company also early-adopted guidance reclassifying certain tax effects in accumulated other comprehensive income.
Most important facts for investors to verify
- Whether subsequent reserve reviews confirm the $100.0 million consolidated unfavorable prior-year development and the significant segment-level catastrophe reserve movements.
- Whether premium growth translates into sustainable underwriting profitability, particularly in U.S. Reinsurance, and whether the higher overall combined ratio persists.
- How equity-market remeasurement losses, interest-rate movements and unrealized fixed-maturity depreciation affect reported earnings, book value and liquidity.
- Whether catastrophe claim payments pressure operating cash flow beyond management’s near-term expectations, and how the new collateralized reinsurance coverage changes net catastrophe exposure.
- Whether the $777.1 million of limited partnership commitments, A&E reserves and contingent annuity obligations develop as estimated.