Everest Re Group, Ltd. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise stated. Everest Re Group provides insurance and reinsurance in the U.S., Bermuda and international markets. Amounts below are U.S. dollars.
Financial performance
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Gross written premiums | $1.353 billion | $1.418 billion; down 4.6% |
| Net written premiums | $1.182 billion | $1.224 billion; down 3.5% |
| Premiums earned | $1.219 billion | $1.272 billion; down 4.2% |
| Total revenues | $1.242 billion | $1.436 billion; down 13.5% |
| Net investment income | $102.5 million | $122.6 million; down 16.4% |
| Net realized capital losses | $74.3 million | $10.5 million |
| Income before taxes | $177.1 million | $364.1 million; down 51.4% |
| Net income / diluted EPS | $171.7 million / $4.00 | $323.0 million / $7.19 |
| Combined ratio | 86.0% | 83.1%; worsened 2.9 points |
| Operating cash flow | $367.1 million | $350.6 million |
The combined ratio remained below 100%, indicating an underwriting gain overall, but increased as loss and expense ratios rose. The loss ratio was 57.5%, commission and brokerage ratio 22.6%, and other underwriting expense ratio 5.9%. Catastrophe losses were $10.4 million, related to the 2016 Taiwan earthquake; there were no current-year catastrophe losses in Q1 2015.
Balance sheet, capital and liquidity
- At March 31, 2016, total assets were $20.856 billion, investments and cash $17.071 billion, shareholders’ equity $7.840 billion, and book value per share $184.91. Equity increased 3.0% from year-end 2015; book value per share increased 3.8%.
- Gross loss and loss-adjustment-expense reserves were $9.986 billion, up slightly from $9.952 billion at December 31, 2015.
- Total debt was $638.4 million, essentially unchanged from year-end: $400 million of 4.868% senior notes and $238.4 million carrying value of 6.6% subordinated notes.
- Cash and short-term investments totaled $770.5 million, down from $1.083 billion at year-end. Management also cited $290.8 million of liquidity in a new short-maturity investment facility and marketable securities as additional liquidity sources.
- Credit facilities include $200 million of unsecured revolving capacity, $600 million for collateralized letters of credit, and a £175 million facility. The company reported covenant compliance; renewal of the Group facility was in progress, with similar terms anticipated.
- Q1 share repurchases were $85.9 million and dividends paid were $48.7 million. The declared dividend was $1.15 per share, versus $0.95 a year earlier.
Material changes and segment results
- Premium contraction was concentrated in reinsurance, particularly International. International gross written premiums fell 28.0%, mainly from reduced quota-share, Latin American and Asian business and foreign-exchange effects. U.S. Reinsurance gross premiums declined 4.6%.
- Insurance gross written premiums rose 10.5%, supported by accident and health, new Lloyd’s syndicate business and expansion of other lines. However, Insurance underwriting recorded a $2.9 million loss and a 101.0% combined ratio, versus a $10.7 million gain and 95.9% ratio a year earlier.
- Segment underwriting gains were $119.3 million in U.S. Reinsurance, $30.8 million in International and $23.8 million in Bermuda. Each was lower than the prior-year quarter; Insurance was loss-making.
- Investment income fell as limited partnerships recorded a $6.2 million loss versus $7.0 million of income a year earlier, and fixed-income reinvestment rates were lower. Annualized pre-tax yield on average invested assets declined to 2.5% from 3.0%.
- Q1 realized losses included $28.8 million of other-than-temporary impairments, $25.2 million of net losses on securities sales and $20.2 million of fair-value remeasurement losses. Unrealized investment appreciation, net of tax, was $175.3 million and helped lift comprehensive income to $358.1 million.
Outlook, commentary and risks
- Management expects annual positive operating cash flow to continue in the near term, absent unusual catastrophe activity. It noted that competitive pressure may affect pricing and that its emphasis on underwriting profitability over premium volume can affect premium receipts. No specific earnings or premium guidance was provided.
- Management described a highly competitive market, with ample capacity and capital-markets participation pressuring rates, terms and conditions, especially in property catastrophe and casualty reinsurance. Its stated strategy is to target business with attractive profit potential while maintaining portfolio diversification.
- Reserves are estimates and may change materially as claims develop. Management noted the possibility of future adverse reserve development. Gross asbestos and environmental reserves were $428.0 million; net reserves were $314.7 million. The filing states that ultimate A&E payments could exceed reserves, potentially significantly.
- Investment risks include interest-rate, equity-price, currency and credit movements. The portfolio had $174.4 million of gross unrealized depreciation at quarter-end, much of it attributed to foreign exchange and energy-sector weakness; management said the securities were current on payments and it was more likely than not the company would not need to sell before recovery.
- The company has seven unhedged, long-dated equity-index put options. Their carrying liability was $43.7 million. The filing disclosed theoretical maximum present-value payouts of $435.8 million for the S&P 500 contracts and $41.2 million for the FTSE contract, while estimating probabilities of falling below strike at under 13% and under 45%, respectively.
- Ordinary-course insurance and reinsurance disputes continue; the company reported no other material litigation or arbitration. It also has contingent exposure if insurers fail to make payments under annuity agreements. No material changes to risk factors were reported.
Accounting and other notable items
Effective January 1, 2016, the company retrospectively adopted revised consolidation guidance and deconsolidated Mt. Logan Re segregated accounts because it was not their primary beneficiary. The change reduced reported assets and liabilities in comparative periods but had no impact on net income or retained earnings. The filing states that results for the quarter are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether premium declines in International and reinsurance continue, and whether Insurance growth can improve underwriting results and bring its combined ratio below 100%.
- Development of loss reserves, including prior-year claims and asbestos/environmental exposures, and the impact of future catastrophe losses.
- Sources and sustainability of investment income, limited-partnership performance, realized impairments, and portfolio sensitivity to rates, currencies and credit conditions.
- Renewal of the Group credit facility, continued covenant compliance, and the adequacy of available liquidity under stressed claims and catastrophe scenarios.
- Valuation and potential exposure associated with the unhedged equity-index put options, alongside the company’s stated probability estimates.