Everest Re Group, Ltd. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparisons are to Q1 2014 unless noted. Everest is a Bermuda-based insurer and reinsurer operating in the U.S., Bermuda and international markets. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2015 / March 31, 2015 | Comparable period / prior year-end |
|---|---|---|
| Gross written premiums | $1,414.0 million | $1,267.4 million; up 11.6% |
| Net written premiums | $1,283.9 million | $1,227.6 million; up 4.6% |
| Premiums earned | $1,307.1 million | $1,144.5 million; up 14.2% |
| Total revenues | $1,465.0 million | $1,283.8 million; up 14.1% |
| Net income | $339.1 million | $302.0 million; up 12.3% |
| Net income attributable to Everest Re Group | $323.0 million; diluted EPS $7.19 | $293.9 million; diluted EPS $6.21 |
| Underwriting gain / combined ratio | $236.8 million / 81.9% | $228.4 million / 80.0% |
| Operating cash flow | $455.1 million | $367.1 million |
| Investments and cash | $17,794.5 million | $17,435.9 million at December 31, 2014 |
| Total assets / shareholders’ equity | $21,267.3 million / $7,666.6 million | $20,817.8 million / $7,451.1 million at December 31, 2014 |
| Total debt | $638.4 million | $638.4 million at December 31, 2014 |
| Cash and short-term investments | $2,105.3 million | $2,143.4 million at December 31, 2014 |
Net investment income was $122.6 million, down 0.5%; annualized pre-tax yield on average invested assets was 2.9%, versus 3.1%. Net realized capital losses were $10.5 million, compared with $21.1 million of gains a year earlier. Income before taxes was $380.2 million and income tax expense was $41.2 million. Cash decreased by $38.9 million during the quarter to $398.6 million at period-end, despite positive operating cash flow, as investing outflows exceeded operating inflows.
Material changes and operating drivers
- Premium growth was led by the Insurance segment, where gross written premiums rose 47.5% to $340.3 million, primarily from crop, workers’ compensation and other business units. Mt. Logan Re gross written premiums more than doubled to $74.0 million as the operation expanded.
- Losses and loss adjustment expenses rose 16.6% to $722.5 million, largely tracking increased earned premiums. No current-year catastrophe losses were reported in Q1 2015 or Q1 2014.
- The combined ratio worsened by 1.9 percentage points. The loss ratio rose 1.2 points to 55.3%; commission and brokerage ratio rose 0.5 points to 22.0%.
- International underwriting gain fell 38.2% to $47.2 million and its combined ratio deteriorated to 84.6% from 76.0%, reflecting higher losses, including in the Middle East, Africa and Latin America. U.S. Reinsurance underwriting gain increased 16.0% to $131.9 million; Insurance gain increased to $10.7 million from $3.6 million. Bermuda gain was broadly stable at $25.8 million.
- Other income was $46.1 million versus a $3.3 million expense a year earlier; management attributed the swing primarily to foreign-exchange fluctuations. Foreign-currency translation reduced other comprehensive income by $102.3 million, while investment appreciation partly offset that impact.
- Shareholders’ equity rose 2.9% from year-end, principally on attributable earnings and investment appreciation, partly offset by currency translation losses, $75.0 million of share repurchases and $42.3 million of shareholder dividends. Book value per share was $172.63, up from $166.75.
Liquidity, capital and debt
Management says liquidity needs are generally met from operating cash flow, liquid investments and investment maturities. It reported $2,105.3 million in cash and short-term investments and substantial marketable fixed-income and equity holdings. Management considers these resources and operating cash flow ample for expected near-term claims; it does not anticipate selling securities or drawing credit facilities to pay losses. The company reported $455.1 million of operating cash flow and $40.3 million of net catastrophe loss payments during the quarter.
Debt comprised $400.0 million of 4.868% senior notes due 2044 and approximately $238.4 million of 6.6% subordinated notes. Credit facilities provided up to $1.1 billion in aggregate commitments, primarily for letters of credit; no revolving borrowings were outstanding. The Group facility had $454.2 million of letters of credit in use, and the separate Bermuda facility had $210.6 million in use. The company reported compliance with facility covenants, including the debt-to-capital limit.
Outlook, risks and unusual items
- Outlook: No specific earnings or premium guidance is provided. Management expects annual positive operating cash flow near term absent unusual catastrophe activity, while noting that competition may pressure pricing and future cash flow. It described worldwide markets as highly competitive, particularly property catastrophe and casualty reinsurance, with ample capacity and capital-market competition. Benign catastrophe experience in 2014 and Q1 2015 could add pressure to regional catastrophe markets during 2015.
- Investment impairment: The company recorded $26.0 million of other-than-temporary impairments on fixed-maturity securities. Unrealized losses were attributed in part to foreign-exchange movements and energy-sector weakness; management said securities were current on payments and it did not expect to need to sell them before recovery.
- Derivatives: Seven legacy equity-index put options are unhedged and carried at fair value; the liability was $47.3 million. The filing discloses theoretical maximum present-value payouts of $423.1 million for the S&P 500 contracts and $41.4 million for the FTSE 100 contract. These are extreme theoretical scenarios, not expected settlement amounts; management’s estimated probability of falling below the respective strike prices was less than 19% and 39%.
- Reserves and contingencies: Gross loss and LAE reserves were $9.634 billion, including $442.0 million of asbestos and environmental reserves. Management cautions that reserve estimates may vary materially and ultimate A&E payments could exceed estimates. The company is involved in ordinary-course insurance and reinsurance disputes; it reported no other material litigation or arbitration. It also has contingent exposure if two insurers fail to make annuity payments.
- Commitments and subsequent event: The company had up to $364.1 million of remaining limited-partnership investment commitments. After quarter-end, it agreed to sell Mt. McKinley Insurance Company for cash based on closing statutory book value, expected to be approximately $20 million, subject to approvals and other conditions. A related retrocession transaction transfers certain liabilities; the filing states Everest retains liability above a cap equal to $300 million plus the retrocession payment. No material realized gain is expected.
- Management reported no material change in risk factors and concluded disclosure controls were effective; no material change in internal control over financial reporting was identified during the quarter.
Key facts for investors to verify
- Whether premium growth, especially in Insurance and Mt. Logan Re, is sustainable and appropriately priced, and whether the weaker International segment improves.
- Subsequent loss development and reserve adequacy, including asbestos and environmental exposures and the possible variability of ultimate claims.
- Investment portfolio credit and currency risks, the $26.0 million impairment charge, and the valuation and exposure of the unhedged equity-index put options.
- Liquidity and capital effects of share repurchases, dividends, third-party Mt. Logan Re capital, and the Mt. McKinley sale and retrocession agreement.
- How competitive pricing and catastrophe activity affect the company’s stated expectation of positive operating cash flow.