Everest Re Group, Ltd. — 2014 Form 10-K
Business context and period: Bermuda-based global property-and-casualty insurer and reinsurer; fiscal year ended December 31, 2014. Results are GAAP and consolidated unless otherwise noted. The filing also provides unaudited quarterly data. Gross written premiums were approximately 79% reinsurance and 21% insurance.
Financial performance and condition
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Gross written premiums | $5.749 billion | $5.219 billion | +10.2% |
| Net written premiums | $5.257 billion | $5.005 billion | +5.0% |
| Premiums earned | $5.169 billion | $4.754 billion | +8.7% |
| Total revenues | $5.791 billion | $5.641 billion | +2.7% |
| Net income | $1.258 billion | $1.265 billion | -0.5% |
| Net income attributable to Everest Re Group | $1.199 billion | $1.259 billion | -4.8% |
| Basic / diluted EPS | $26.16 / $25.91 | $25.67 / $25.44 | Higher |
| Combined ratio | 82.8% | 84.5% | Improved 1.7 points |
| Net investment income | $530.6 million | $548.5 million | -3.3% |
| Net realized capital gains | $84.0 million | $300.2 million | -72.0% |
| Operating cash flow | $1.314 billion | $1.098 billion | Higher |
The 2014 loss ratio was 56.2%, down 2.7 points; the commission and brokerage ratio increased 1.4 points to 22.0%, while the other underwriting expense ratio improved 0.4 points to 4.6%. Lower catastrophe losses helped the combined ratio: net catastrophe losses were $56.0 million versus $177.7 million in 2013.
At December 31, 2014, total assets were $20.818 billion, cash and investments were $17.436 billion, shareholders’ equity was $7.451 billion, gross loss and LAE reserves were $9.721 billion, and total debt was $638.4 million. Cash and short-term investments were $2.143 billion. Debt included $400 million of 4.868% senior notes due 2044 and $238.4 million of subordinated notes; the company also repaid $250 million of senior notes that matured in 2014. It reported no borrowings under its revolving credit line and compliance with facility covenants.
Material changes and notable results
- Premium growth was led by reinsurance, including new quota-share and catastrophe-exposed contracts, and by expansion of Mt. Logan Re. Greater use of reinsurance meant net written premium growth lagged gross growth. Insurance gross written premiums fell 4.0%, mainly on lower crop premiums.
- Attributable earnings declined despite higher earned premiums and a better combined ratio, primarily reflecting much lower realized capital gains, lower investment income, and $59.3 million of net income attributable to Mt. Logan Re noncontrolling interests.
- Investment income declined as fixed-income reinvestment yields and limited-partnership income fell. Realized gains included $121.7 million from fair-value remeasurements and $1.9 million from sales, offset in part by $39.5 million of other-than-temporary impairments.
- Shareholders’ equity rose 6.9% to $7.451 billion, supported by attributable net income, but partly offset by $500.0 million of share repurchases, $145.9 million of dividends, and $95.4 million of foreign-currency translation losses. The company repurchased 3.2 million shares.
- Segment underwriting results were mixed: U.S. Reinsurance earned $520.4 million; International $221.9 million; Bermuda $120.2 million; Mt. Logan Re $73.1 million; and Insurance recorded a $48.9 million underwriting loss. Insurance’s combined ratio improved to 104.7% from 114.2%, but remained above 100%.
- Fourth-quarter 2014 attributable net income was $340.1 million, versus $364.6 million in fourth-quarter 2013; quarterly diluted EPS was $7.47 versus $7.54. Fourth-quarter premiums earned were $1.362 billion, compared with $1.287 billion.
Outlook, risks, and unusual items
- Management expected positive operating cash flow to continue in the near term absent unusual catastrophe activity. It gave no specific earnings or premium guidance, and noted that competitive pressure could weigh on pricing and future cash flows. The market remained highly competitive, particularly in property-catastrophe and casualty reinsurance; benign 2014 catastrophe activity could add pressure in 2015.
- Reserving remains a central uncertainty. Prior-year reserve development was favorable by $39.9 million overall in 2014, but included a $137.8 million increase in net asbestos and environmental (A&E) reserves, partly offset by favorable reinsurance development; Insurance had $25.0 million of unfavorable development. Gross A&E reserves reached $476.2 million, or 4.9% of gross reserves. Management cautioned that ultimate claims could materially exceed estimates.
- Catastrophe models are inherently imprecise. Management estimated the largest single-zone 1-in-100-year net economic loss at approximately 11% of projected 2015 shareholders’ equity. The largest 1-in-100-year modeled PML was $1.371 billion for Southeast U.S. wind; estimated economic loss for that event was $852 million.
- Other material exposures include investment-market and interest-rate volatility, foreign exchange, reinsurer credit risk, and terrorism. The 2014 investment portfolio included $13.1 billion of fixed maturities; a modeled 200-basis-point rate increase would reduce after-tax unrealized appreciation by about $695.8 million. Reinsurance receivables were $670.9 million; the two largest counterparties’ balances were fully collateralized.
- Dividends remain subject to regulatory and capital constraints. The company paid a $0.95-per-share fourth-quarter dividend and declared another $0.95 dividend in February 2015. Everest Re had $357.3 million available for dividends in 2015 without prior regulatory approval. The Group’s holding-company payments depend partly on subsidiary distributions.
- Unusual or potentially volatile items include the outstanding unhedged equity-index put options, carried at a $47.0 million liability and generating an $11.6 million 2014 loss; and the increased A&E reserve estimate. Management reported no subsequent events to disclose, no material litigation outside ordinary-course insurance disputes, and no material cybersecurity incident known to management.
Important facts for investors to verify
- Whether the $137.8 million net A&E reserve increase and the broader reserve assumptions adequately reflect long-tail claims and future development.
- Whether premium growth can be sustained at profitable prices, particularly in the competitive reinsurance markets, and whether the Insurance segment can move below a 100% combined ratio.
- How much earnings depend on investment gains, and the portfolio’s sensitivity to interest rates, energy-sector credit conditions, foreign exchange, and limited-partnership valuations.
- The adequacy and collectability of reinsurance recoverables, catastrophe protection, and modeled catastrophe-loss estimates relative to actual exposure.
- Capital deployment—including share repurchases, dividends, and Mt. Logan Re third-party capital—and the effect of regulatory restrictions on subsidiary distributions.
- Fourth-quarter figures are unaudited; consult the audited annual statements and notes for the full-year results, reserve detail, debt terms, and liquidity disclosures.