Everest Re Group, Ltd. — Q2 2011 Form 10-Q
Business context and reporting period. The filing is for the three and six months ended June 30, 2011; the comparable periods are 2010. Everest Re Group, Ltd. provides reinsurance and insurance in the U.S., Bermuda and international markets through five segments: U.S. Reinsurance, Insurance, Specialty Underwriting, International and Bermuda. Unless stated otherwise, financial amounts below are in millions of U.S. dollars.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Premiums earned | $1,039.8 | $989.9 | $2,051.3 | $1,917.2 |
| Total revenues | $1,176.8 | $1,099.4 | $2,383.2 | $2,269.3 |
| Net income (loss) | $131.3 | $156.7 | $(184.6) | $134.0 |
| Diluted EPS | $2.41 | $2.70 | $(3.40) | $2.28 |
| Combined ratio | 98.0% | 93.2% | 124.3% | 108.5% |
| Operating cash flow | $150.6 | $221.5 | $338.7 | $492.8 |
- Underwriting and catastrophe impact: The loss ratio was 70.8% in Q2 and 96.8% year to date, versus 65.1% and 80.9% in 2010. First-half incurred losses and loss adjustment expenses rose 28.0% to $1,985.6, including $788.1 of catastrophe losses, compared with $424.1 in the prior-year period. Events cited include earthquakes in Japan and New Zealand, Australian floods and U.S. storms.
- Balance sheet at June 30, 2011: Total assets were $19,003.9; investments and cash, $15,836.6; loss and LAE reserves, $10,145.7; total liabilities, $12,851.4; and shareholders’ equity, $6,152.6. Equity declined from $6,283.5 at December 31, 2010. Book value per share was $113.21, down from $115.45.
- Debt and liquidity: Total debt was $858.1, versus $868.1 at year-end, including $40.0 of revolving borrowings. Cash and short-term investments totaled $1,196.2. Credit facilities had total commitments of up to $1,300.0; the company reported covenant compliance. Management planned to replace the Holdings facility, which was due to expire in August 2011.
- Investment results: Net investment income was $158.6 in Q2, down 4.3%, and $337.3 for the half, up 3.1%. The annualized pre-tax yield on average invested assets was 4.2% for Q2 and 4.5% year to date. Net realized capital results were losses of $4.8 in Q2 and gains of $7.3 for the half.
Material changes versus comparable periods
- Earned premiums rose 5.0% in Q2 and 7.0% year to date. First-half net written premiums increased 3.0%; gross written premiums increased 0.9%. Insurance growth, including $77.4 of crop premiums from the Heartland acquisition, was partly offset by reduced reinsurance writings.
- Despite higher earned premiums, catastrophe claims materially worsened first-half underwriting: the combined ratio rose 15.8 percentage points to 124.3%, and the company moved from first-half 2010 net income of $134.0 to a net loss of $184.6.
- Segment results varied: first-half underwriting losses were $358.5 in International, $73.9 in U.S. Reinsurance and $71.5 in Bermuda. Specialty Underwriting reported an $8.8 gain; Insurance reported a $3.9 loss. The International segment’s result was particularly affected by catastrophe losses.
- Investments and cash increased 3.1% from year-end, while loss reserves rose 8.6%. Shareholders’ equity fell 2.1%, reflecting the net loss, dividends and share repurchases, partly offset by investment appreciation and currency translation gains.
Outlook, commentary, risks and unusual items
- Management described insurance and reinsurance markets as highly competitive, with ample capacity and particular pressure in U.S. casualty lines. It said catastrophe pricing had increased in some affected regions, but the broader market impact of 2011 catastrophe losses remained uncertain. The company intends to target business with greater profit potential over premium volume.
- Management expected annual positive operating cash flow in the near term absent unusual catastrophe activity, but cautioned that first-half catastrophe payments could make near-term operating cash flow slightly negative. No specific earnings or revenue guidance was provided.
- Loss reserves are estimates subject to significant variation; management said adverse development could be material. Gross A&E reserves were $526.7, with net reserves of $505.9. The company reported a 5.1-year net asbestos survival ratio, or 9.0 years adjusted for specified settlements, while cautioning that the metric is not a measure of reserve adequacy.
- The company had seven unhedged equity-index put options, with a fair-value liability of $54.3. Management estimated the probability of the indices falling below the applicable strike prices at exercise at less than 37% for S&P 500 contracts and less than 33% for the FTSE 100 contract. Estimated present value of theoretical maximum payouts was $308.6 in aggregate; the estimate is model-dependent. Collateral posted was $32.3, and a zero collateral threshold could increase the requirement by $55.0.
- First-quarter 2011 acquisitions included Heartland Crop Insurance and two Canadian businesses; the company recorded $35.1 of goodwill and $26.9 of intangible assets. It also had commitments to invest up to $194.3 more in limited partnerships.
- Routine insurance and reinsurance disputes were pending. Management did not expect them to materially affect financial position or liquidity, but an adverse resolution could materially affect results in a particular period. The filing reported no material changes to risk factors and no subsequent events to report.
Important facts for investors to verify
- How catastrophe claims and subsequent reserve development compare with the $788.1 of first-half 2011 catastrophe losses, including event-level exposures and recoveries.
- Whether the June 2011 reserve estimates remain adequate, particularly for International and Bermuda business and asbestos and environmental claims.
- Whether catastrophe-related rate increases improve renewal pricing and margins, and whether management continues to prioritize underwriting profitability over premium growth.
- The terms and completion of the planned replacement Holdings credit facility, and liquidity as catastrophe claims are paid.
- The valuation assumptions, collateral terms and potential cash exposure of the unhedged equity-index put options.
- Investment portfolio credit quality, realized and unrealized results, and limited-partnership valuation timing and unfunded commitments.