EVEREST GROUP, LTD. annual report, FY2011

Business context and reporting period

Everest Re Group, Ltd. is a Bermuda-based property and casualty insurer and reinsurer operating in the U.S., Bermuda and international markets. This Form 10-K covers the fiscal year ended December 31, 2011; quarterly figures below are for Q4 2011. Unless noted, amounts are U.S. dollars.

Gross written premiums were $4.29 billion: approximately 77% reinsurance and 23% insurance. The company realigned its reporting segments in 2011 and restated prior-period segment information.

Financial performance and condition

Q4 2011 net income was $41.0 million, or $0.76 per share, versus $302.5 million, or $5.53 per share, in Q4 2010. Q4 2011 earned premiums were $1.006 billion.

Operating cash flow was $659.5 million, down from $918.5 million. Cash and invested assets totaled $15.797 billion, including $1.134 billion in cash and short-term investments. Total assets were $18.894 billion; shareholders’ equity was $6.071 billion, down 3.4%, and book value per share was $112.99, down from $115.45.

Total debt was $818.1 million, down from $868.1 million. There were no revolving-credit borrowings at year-end. The company reported compliance with credit-facility covenants. Annual dividends declared were $1.92 per share.

Material changes versus the prior comparable period

• Net loss swung from $610.8 million of income to a loss of $80.5 million, principally reflecting catastrophe losses. Net catastrophe losses were $1.238 billion, versus $544.1 million in 2010.
• The combined ratio deteriorated to 118.5% from 102.8%; a ratio above 100% indicates an underwriting loss. All four segments reported underwriting losses in 2011: U.S. Reinsurance $(88.5) million, Insurance $(111.9) million, International $(466.1) million and Bermuda $(91.2) million.
• International’s 2011 underwriting loss included $840.2 million of catastrophe losses; catastrophe claims also materially worsened U.S. Reinsurance and Bermuda results.
• Insurance gross written premiums grew 12.7%, partly reflecting the Heartland crop-insurance acquisition and growth in primary accident and health business. Total gross premiums increased 2.0%; reinsurance premiums declined slightly.
• Net investment income fell 5.1%, to $620.0 million. Net realized capital gains fell to $6.9 million from $101.9 million, including $16.2 million of other-than-temporary impairments.
• Gross loss and LAE reserves rose to $10.123 billion from $9.340 billion. Prior-year reserve development was a $3.7 million adverse charge in 2011, compared with $30.9 million of favorable development in 2010.

Outlook, risks and unusual items

• Management expected positive operating cash flow near term absent unusual catastrophe activity, but cautioned that 2011 catastrophe claim payments could affect near-term cash flow. It provided no specific earnings or premium guidance in the supplied filing text.
• Management cited profit opportunities in catastrophe-exposed markets following industry losses, while noting that pricing effects beyond affected catastrophe regions remained uncertain. Competitive pressure, especially in casualty markets, remained significant.
• Catastrophe models are inherently uncertain. The largest disclosed 1-in-100-year gross PML was $913 million for Southeast U.S. wind; estimated economic loss was $629 million. Management estimated the largest 100-year event in a zone at approximately 10% of projected 2012 equity.
• Loss reserves, particularly long-tail casualty and asbestos and environmental (A&E) reserves, depend on estimates and ceding-company information. Gross A&E reserves were $499.9 million, 4.9% of total reserves; ultimate claims may materially exceed estimates.
• Moody’s affirmed subsidiary ratings in January 2012 but changed the outlook from stable to negative. Management said a one-notch downgrade was not expected to materially affect the business; reinsurance contracts may permit termination or collateral demands after specified downgrades.
• A fourth-quarter tax-accounting correction increased the deferred tax asset and tax benefit by $12.2 million. Management considered the adjustment immaterial to 2011 and prior periods and did not restate prior periods.
• Heartland and other 2011 acquisitions generated $35.1 million of goodwill and $26.9 million of intangible assets. The company also had $159.3 million of remaining limited-partnership investment commitments.
• Insurance-subsidiary dividends are subject to regulatory limits. Everest Re could pay up to $232.2 million in 2012 without prior regulatory approval. Ordinary insurance/reinsurance disputes are reflected in reserves; the company reported no other material litigation.

Important facts for investors to verify

• Reconcile the $1.238 billion net catastrophe loss figure to the event-level disclosures and assess the remaining catastrophe exposure and retrocession protection.
• Review reserve adequacy and development by segment and accident year, especially casualty, California workers’ compensation, contractors’ liability and A&E.
• Assess the assumptions behind the $153.5 million income-tax benefit, including the $12.2 million out-of-period correction and deferred tax asset recoverability.
• Examine the composition, valuation and liquidity of the investment portfolio, including its alternative-asset allocation, foreign-currency exposure and put-option liabilities.
• Confirm the impact of rating-agency outlook changes, regulatory dividend constraints, and the ability of subsidiaries to fund parent-company obligations and shareholder distributions.