Everest Re Group, Ltd. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also presents unaudited fourth-quarter results. Unless noted, amounts are U.S. dollars.
Business context and reporting period
Everest is a global property-and-casualty reinsurer and insurer, operating through U.S. Reinsurance, International, Bermuda and Insurance segments. In 2012, about 75% of gross written premiums were reinsurance and 25% insurance. Management emphasizes underwriting profitability, risk diversification and disciplined catastrophe exposure management.
Financial performance and position
| Metric | 2012 | 2011 |
|---|---|---|
| Gross written premiums | $4.31 billion | $4.29 billion |
| Net premiums written | $4.08 billion | $4.11 billion |
| Premiums earned | $4.16 billion | $4.10 billion |
| Net investment income | $600.2 million | $620.0 million |
| Net realized investment gains | $164.4 million | $6.9 million |
| Net income (loss) | $829.0 million | $(80.5) million |
| Diluted EPS | $15.79 | $(1.49) |
| Combined ratio | 93.8% | 118.5% |
| Operating cash flow | $663.9 million | $659.5 million |
| Shareholders’ equity | $6.73 billion | $6.07 billion |
Fourth-quarter 2012 unaudited net income was $58.8 million ($1.13 diluted EPS), versus $41.0 million ($0.76) in fourth-quarter 2011. Earned premiums were $1.12 billion versus $1.01 billion; net investment income was $146.4 million versus $126.3 million. Fourth-quarter net realized gains were $19.5 million, compared with $137.3 million a year earlier.
At year-end, total assets were $19.78 billion, investments and cash $16.58 billion, gross loss and LAE reserves $10.07 billion, total liabilities $13.04 billion and total debt $818.2 million. Cash and short-term investments were $1.40 billion. The company reported no revolving-credit borrowings; its facilities had $463.2 million of letters of credit outstanding under the Group facility and $246.4 million under Bermuda Re’s facility. It reported compliance with facility covenants.
Material changes versus the prior comparable period
- Net income improved by $909.4 million, primarily because catastrophe losses fell substantially from the elevated 2011 level. The combined ratio improved 24.7 points to 93.8%.
- 2012 incurred losses and LAE were $2.75 billion, down 26.3%. Current-year catastrophe losses were $410.0 million gross, including $325.0 million related to Superstorm Sandy; the selected financial data reports $361.1 million of net catastrophe losses.
- Gross premiums rose 0.6%, but net premiums written declined 0.7%. Insurance growth, particularly crop and primary medical stop-loss business, offset lower reinsurance premiums, including the non-renewal of a large Florida quota-share contract.
- Net investment income fell 3.2% as fixed-income reinvestment yields declined. Net realized gains rose sharply, including $118.1 million of fair-value remeasurements and $56.3 million of gains from sales, partly offset by $10.0 million of other-than-temporary impairments.
- Equity increased by $662.1 million, supported mainly by net income and investment appreciation, partly offset by $290.0 million of share repurchases and $100.4 million of dividends. The company repurchased approximately 3.0 million shares during 2012.
Outlook, commentary, risks and unusual items
- Management expected positive operating cash flow to continue over the near term absent unusual catastrophe activity, while noting that competition, pricing and continued payments on prior catastrophe losses could affect cash generation. No specific earnings or premium guidance was provided.
- Management saw profit opportunities particularly in catastrophe coverage after industry losses, but said it was too early to determine the broader, longer-term effect on pricing and market conditions. Casualty markets remained highly competitive.
- Reserve adequacy is a key uncertainty. Gross A&E reserves were $442.8 million, 4.4% of total gross reserves. Management reported minimal recent A&E reserve development, but emphasized that ultimate asbestos and environmental losses could differ materially from estimates. The actuarial range for total gross reserves was approximately $9.14 billion to $11.00 billion.
- Catastrophe models and probable-maximum-loss estimates are inherently imprecise. The largest modeled 100-year event in a single zone was Southeast U.S. wind, with a $1.084 billion gross PML and estimated $671 million net economic loss. Management estimated that net economic loss from its largest 100-year event would equal about 10% of projected 2013 equity.
- Other material risks include investment-market and interest-rate exposure, foreign exchange, reinsurer credit risk, regulatory limits on subsidiary dividends, rating changes and the potential for reserve deterioration. Moody’s had affirmed operating-subsidiary ratings but changed the outlook to negative in January 2012.
- 2012 income tax expense was $110.6 million. The year included $17.5 million of deferred-tax-asset corrections and $31.9 million of benefit from reducing uncertain-tax-position reserves after an IRS audit; management considered the out-of-period correction immaterial to the current and prior periods. A new acquisition-cost accounting standard also resulted in $10.9 million of previously deferrable costs being expensed in 2012.
- The company disclosed ordinary-course insurance and reinsurance disputes, but no other material litigation. The auditor issued an unqualified opinion, and management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- How much of 2012 earnings improvement reflects lower catastrophe losses versus sustainable underlying underwriting performance, especially given underwriting losses in U.S. Reinsurance and Insurance.
- Whether catastrophe and other reserve estimates remain adequate; monitor subsequent development, particularly for long-tail casualty and A&E exposures.
- The durability of premium rates and margins, including the effects of competition, business mix and crop-insurance growth.
- The composition and valuation sensitivity of the investment portfolio, including equity and alternative investments, and the continued decline in fixed-income yields.
- Availability of subsidiary dividends and capital under regulatory restrictions, the negative Moody’s outlook, and liquidity and collateral requirements under credit facilities.
- The financial-statement notes for the equity-index put-option liability, reported at $79.5 million, and its model-based valuation and potential collateral demands.