EVEREST RE GROUP, LTD. — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. Everest Re Group, Ltd., a Bermuda-based group, principally provides reinsurance and insurance in the U.S., Bermuda and international markets. Unless otherwise noted, amounts below are in millions of U.S. dollars.
Financial and operating performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Gross written premiums | $1,666.7 | $1,465.0 | $4,349.5 | $3,906.0 |
| Net written premiums | $1,517.6 | $1,389.1 | $3,962.7 | $3,751.5 |
| Premiums earned | $1,390.0 | $1,225.8 | $3,806.8 | $3,466.0 |
| Total revenues | $1,535.9 | $1,401.5 | $4,272.2 | $4,123.7 |
| Net income | $301.3 | $238.5 | $901.2 | $898.5 |
| Net income attributable to Everest Re Group | $274.9 | $234.8 | $859.0 | $894.7 |
| Diluted EPS | $6.00 | $4.81 | $18.47 | $17.94 |
| Net cash from operating activities | $335.5 | $386.0 | $925.9 | $825.0 |
- Underwriting: Combined ratio was 85.7% for Q3 and 83.7% year to date, improving 2.3 and 1.9 percentage points, respectively. Lower catastrophe losses helped; the loss ratio was 60.3% for Q3 and 57.6% year to date.
- Investment results: Net investment income was $142.1 for Q3, up 11.2%, but $396.5 year to date, down 6.1%. Management attributed the quarterly increase to limited partnership income and the year-to-date decline to lower partnership income and fixed-income reinvestment rates. Realized capital results were a $9.4 Q3 loss versus a $45.0 gain in 2013, and a $70.7 year-to-date gain versus $205.6.
- Balance sheet at September 30: Total assets were $21,487.2; investments and cash were $17,598.7; shareholders’ equity was $7,382.2; loss and LAE reserves were $9,795.4. Cash was $401.8 and short-term investments $1,496.7.
- Debt and liquidity: Total debt was $888.4, versus $488.3 at year-end 2013, including $400.0 of 4.868% senior notes issued in June and $238.4 of subordinated notes. The $250.0 of 5.4% senior notes was due October 15, 2014; management said the new-note proceeds were used in part to repay it at maturity. The $800.0 group credit facility had $499.4 of letters of credit outstanding and no revolving borrowings; the company reported compliance with covenants. A separate $150.0 facility expired in August and was not renewed.
- Capital returns: The company repurchased 2.6 million shares for $399.9 year to date and declared $2.25 per share in dividends. Book value per share was $163.14, up from $146.57 at December 31, 2013.
Material changes versus comparable periods
- Premium growth reflected increased reinsurance production, including new quota-share, catastrophe-exposed and mortgage-guaranty business, and growth at Mt. Logan Re. Year-to-date gross written premiums rose 11.4%, while net written premiums rose 5.6%; management cited greater reinsurance cessions associated with new quota-share contracts.
- Segment underwriting was mixed. U.S. Reinsurance year-to-date underwriting gain rose to $404.6 from $274.7; International fell to $113.8 from $145.6, with a 99.5% Q3 combined ratio; Bermuda rose to $69.3 from $66.6. Insurance shifted to a year-to-date underwriting loss of $13.2 from a gain of $8.5, with a 107.2% Q3 combined ratio. Mt. Logan Re reported a $47.1 year-to-date underwriting gain, compared with $5.0 during its initial 2013 operating period.
- Year-to-date catastrophe losses were $75.0 versus $165.0 in 2013. Q3 losses included Hurricane Odile and the Chilean earthquake. Conversely, Insurance’s higher attritional losses, mainly associated with crop business, weighed on its results.
- Attributable net income was up 17.1% in Q3 but down 4.0% year to date. For the nine-month comparison, lower realized investment gains and investment income more than offset improved underwriting and lower taxes.
- Shareholders’ equity increased 5.9% from December 31, 2013, reflecting earnings and investment appreciation, partly offset by share repurchases, dividends and foreign-currency translation losses.
Outlook, risks and unusual items
- Management gave no specific numerical earnings or premium guidance. It expected annual positive operating cash flow in the near term absent unusual catastrophe activity, while cautioning that competition could pressure pricing and that longer-term cash flow depends on market pricing and the company’s focus on underwriting profitability over premium volume.
- Management described insurance and reinsurance markets as highly competitive, with ample capacity, particularly in casualty lines, and capital-markets capacity putting downward pressure on catastrophe rates. It said current conditions still offered profit opportunities and emphasized selective underwriting and portfolio diversification.
- Loss reserves are estimates subject to potentially significant variation; management cautioned that future reserve increases could be material. Gross asbestos and environmental reserves were $349.6, net of reinsurance $335.6; the net three-year asbestos survival ratio was 6.2 years.
- The company had seven unhedged equity-index put options. Their recorded liability was $31.5, with collateral of $17.8 posted. The filing disclosed theoretical maximum present-value payouts of $416.9 for the S&P 500 contracts and $45.0 for the FTSE contract, assuming the relevant index fell to zero at exercise; management estimated the probability of the specified index falling below strike at less than 20% for each S&P contract and less than 39% for the FTSE contract.
- Investment risks include interest-rate, credit, equity-price and foreign-currency exposures. Fixed-income duration was 3.0 years and composite credit quality Aa3. The company held $673.0 of European sovereign securities, primarily U.K., French and Dutch; it held no sovereign securities of Portugal, Italy, Ireland, Greece or Spain.
- Subsequent event: the company said it would enter an earthquake-only catastrophe reinsurance agreement funded by an anticipated $500.0 catastrophe bond. Existing Kilimanjaro agreements provided up to $450.0 of specified catastrophe coverage.
- Ordinary-course insurance and reinsurance disputes were disclosed; the company reported no other material litigation or arbitration. It also had contingent exposure to replace annuities supporting settled claims, with estimated replacement costs totaling approximately $175.8.
Most important facts for investors to verify
- Whether Insurance’s elevated loss ratio and underwriting loss persist, and how crop-business attritional experience develops.
- Whether International’s higher Q3 loss ratio and weaker underwriting gain are temporary or reflect broader claims trends.
- Reserve adequacy, including asbestos and environmental liabilities and potential prior-period development.
- How premium growth, reinsurance cessions and competitive pricing affect net premiums and underwriting profitability.
- Investment income and realized gains’ contribution to earnings, along with investment-portfolio and unhedged index-option exposures.
- Repurchase pace, debt and liquidity following the October 2014 note maturity, and execution and terms of the planned $500.0 earthquake catastrophe bond.