Everest Re Group, Ltd. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. The company provides property and casualty reinsurance and insurance in the U.S., Bermuda and international markets. Financial amounts below are in U.S. dollars; millions unless stated otherwise.
Financial performance and position
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Gross written premiums | $1,363.4 | $1,261.7 | $2,716.5 | $2,679.7 |
| Net written premiums | $1,155.0 | $1,135.7 | $2,336.4 | $2,360.0 |
| Premiums earned | $1,288.9 | $1,285.3 | $2,507.7 | $2,557.7 |
| Total revenue | $1,427.9 | $1,390.4 | $2,669.9 | $2,826.0 |
| Net income | $155.7 | $209.1 | $327.4 | $532.0 |
| Diluted EPS | $3.67 | $4.68 | $7.68 | $11.88 |
| Combined ratio | 95.1% | 88.0% | 90.7% | 85.5% |
- Underwriting and losses: Underwriting gain was $63.5 million in Q2 and $234.5 million year to date, versus $154.6 million and $370.1 million, respectively, in 2015. The higher combined ratios chiefly reflected increased catastrophe losses. Q2 2016 catastrophe losses were $149.1 million, including the Fort McMurray wildfire, U.S. storms and Ecuador earthquake; first-half catastrophe losses were $159.5 million.
- Segment results: First-half underwriting gains were $240.2 million for U.S. Reinsurance and $46.0 million for Bermuda. International reported a $15.1 million underwriting loss and Insurance a $36.7 million loss. International’s Q2 combined ratio was 115.8%; Insurance’s was 110.4%.
- Investment results: Net investment income rose 6.2% to $132.7 million in Q2, mainly on higher limited-partnership income, but fell 5.0% to $235.3 million for the half as lower fixed-income reinvestment rates weighed on returns. Net realized capital gains were $32.7 million in Q2, while first-half realized losses were $41.6 million, including $30.3 million of other-than-temporary impairments.
- Cash flow: First-half operating cash flow was $674.5 million, compared with $531.6 million in 2015. Investing cash outflow was $296.6 million and financing cash outflow was $280.5 million. Cash at June 30 was $429.3 million, up from $283.7 million at year-end.
- Balance sheet and liquidity: Total assets were $21.28 billion; investments and cash were $17.46 billion. Shareholders’ equity was $7.99 billion, up 5.0% from year-end; book value per share was $190.66, up 7.0%. Cash and short-term investments totaled $960.8 million, and management reported $359.2 million of available liquidity in its new short-maturity investment facility.
- Debt: Reported debt carrying value was $633.1 million, comprising $396.7 million of 4.868% senior notes and $236.4 million of 6.6% subordinated notes. The company reported no revolving-credit borrowings at June 30 and compliance with credit-facility covenants.
- Capital returns: First-half share repurchases were $186.4 million and dividends paid were $96.8 million. The declared dividend was $1.15 per share for Q2 ($2.30 year to date).
Material changes versus comparable periods
- Net income fell 25.5% in Q2 and 38.5% year to date. For the half, premiums earned declined 2.0%, total revenue declined 5.5%, and incurred losses rose 4.4% year over year.
- Gross written premiums increased 8.1% in Q2 and 1.4% year to date, driven by Insurance growth; net written premiums were down 1.0% year to date. Insurance gross written premiums rose 21.6% year to date, while reinsurance premiums declined amid lower treaty property and international business and foreign-exchange effects.
- The Q2 combined ratio increased 7.1 percentage points and the first-half ratio 5.2 points, mainly due to the higher catastrophe-loss burden. Other underwriting expenses also rose as the company expanded its Insurance platform.
- Investment portfolio unrealized appreciation improved materially: accumulated other comprehensive income was $84.0 million at June 30, versus a $231.8 million loss at year-end, principally reflecting investment-market appreciation.
- Adoption of revised consolidation guidance resulted in deconsolidation of Mt. Logan Re segregated accounts and retrospective presentation changes. Management said the change did not affect net income or retained earnings.
Outlook, risks and unusual items
- Management described worldwide insurance and reinsurance markets as highly competitive, with ample capacity and downward rate pressure in some markets. It said it would prioritize underwriting profitability and portfolio diversification while expanding Insurance and international business; no specific earnings or premium guidance was provided.
- Management expected positive operating cash flow to continue over the near term absent unusual catastrophe activity. It cautioned that competition, pricing, catastrophe experience and its emphasis on profitability over premium volume could affect future cash flows.
- Loss reserves were $10.26 billion, including $6.06 billion of IBNR reserves. Management stressed that reserves are estimates subject to potentially significant variation. Net asbestos and environmental reserves were $302.8 million; the net asbestos survival ratio was 5.6 years.
- Seven unhedged, long-dated equity-index put options had a $41.7 million fair-value liability, measured using Level 3 inputs. The company estimated exercise probabilities below 12% for the S&P 500 contracts and below 38% for the FTSE contract, but disclosed theoretical maximum discounted payouts of $439.0 million and $39.1 million, respectively.
- Brexit-related uncertainty and sterling weakness contributed to foreign-exchange losses and could affect the company’s U.K. branch, Lloyd’s syndicate, currencies, rates and markets. Management said the ultimate impact remained uncertain.
- The company had signed a letter of intent to sell Heartland Crop Insurance, its crop Managing General Agent, with a proposed long-term reinsurance relationship. It expected no material gain or loss and no material change in crop business volume; the transaction was pending.
- Ordinary-course insurance and reinsurance disputes are considered in reserving; the company reported no other material litigation or arbitration. It reported no material changes to risk factors and no subsequent events to report.
Important facts for investors to verify
- Whether reserve estimates, catastrophe claims and prior-year development remain adequate as claims mature, particularly the substantial IBNR and asbestos/environmental exposures.
- Whether Insurance expansion can improve underwriting results, given its first-half $36.7 million underwriting loss and 106.0% combined ratio.
- How catastrophe frequency, competitive pricing and foreign-exchange movements affect premiums, loss ratios and operating cash flow.
- Investment portfolio exposure and valuation, including limited partnerships, Level 3 assets, impairment judgments and $471.8 million of remaining limited-partnership commitments.
- The terms, progress and eventual financial effect of the proposed Heartland Crop Insurance sale and related reinsurance arrangement.
- Potential exposure from the equity-index put options, including the assumptions behind the probability estimates and maximum payout disclosures.