Everest Re Group, Ltd. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013; unaudited. The group provides reinsurance and insurance in U.S., Bermuda and international markets. Dollar amounts below are U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Gross written premiums | $1,465.0 | $1,204.0 | $3,906.0 | $3,159.5 |
| Premiums earned | $1,225.8 | $1,009.5 | $3,466.0 | $3,045.2 |
| Net investment income | $127.9 | $152.0 | $422.4 | $453.8 |
| Net realized capital gains | $45.0 | $62.7 | $205.6 | $144.9 |
| Net income attributable to Everest Re Group | $234.8 | $250.9 | $894.7 | $770.2 |
| Diluted EPS | $4.81 | $4.82 | $17.94 | $14.61 |
| Combined ratio | 88.0% | 87.2% | 85.6% | 88.4% |
| Operating cash flow | $380.4 | $174.9 | $776.2 | $479.4 |
- Q3 total revenue rose 15.0% to $1,401.5 million, while income attributable to the group fell 6.4%. Nine-month attributable income increased 16.2%.
- Written premiums grew strongly: nine-month gross premiums rose 23.6%; the large Florida quota-share contract contributed to growth, though it did not affect earned premiums. Excluding that contract, nine-month gross written premiums increased 15.4%.
- Q3 loss ratio was 62.8%, up 3.0 percentage points; the nine-month loss ratio was 59.8%, up 0.2 points. The nine-month combined ratio improved 2.8 points, primarily reflecting lower commission ratios and business mix.
- Nine-month net realized gains included $170.7 million from fair-value remeasurements, mainly equity securities, and $35.1 million from sales. Investment income declined as reinvestment yields, equity dividends and limited-partnership income fell.
- At September 30, total assets were $20,027.9 million, investments and cash $16,247.9 million, and shareholders’ equity $6,717.5 million. Cash plus short-term investments was $1,456.9 million.
- Debt was $488.3 million, versus $818.2 million at December 31, 2012. The company redeemed $329.9 million of junior subordinated securities in May; the redemption produced $7.3 million of accelerated issuance-cost amortization. Remaining reported debt included $249.9 million of senior notes due October 2014 and $238.4 million of subordinated notes.
- Gross loss and LAE reserves were $9,737.9 million, down from $10,069.1 million at year-end 2012. AOCI was $180.2 million, compared with $537.0 million at year-end, reflecting $347.8 million of nine-month after-tax unrealized investment depreciation.
Material changes and segment results
- U.S. Reinsurance generated underwriting gains of $120.0 million in Q3 and $274.7 million year to date; nine-month premiums earned increased 19.4%.
- International underwriting gains fell to $17.2 million in Q3 and $145.6 million year to date. Its Q3 combined ratio rose to 94.5% from 68.3%, with Canadian flood losses a significant factor.
- Bermuda’s Q3 underwriting gain was $5.3 million, down from $19.9 million; its nine-month gain increased to $66.6 million from $43.8 million.
- Insurance recorded a Q3 underwriting loss of $0.2 million, improved from a $28.2 million loss; its nine-month underwriting result was a gain of $8.5 million versus a $22.8 million loss.
- New Mt. Logan Re began reporting in Q3 following the July 2013 formation of segregated accounts. Third parties invested $87.5 million and the group invested $30.0 million; the segment reported $5.0 million of underwriting gain on $9.3 million earned premiums.
- The company repurchased 4.3 million shares for $550.0 million in the first nine months and declared dividends of $1.44 per share year to date. Equity declined slightly despite earnings, principally due to repurchases, dividends and investment depreciation.
Outlook, risks and contingencies
- Management described worldwide markets as highly competitive, with ample capacity and particular pressure in casualty lines; capital-market capacity was also affecting catastrophe pricing. It nevertheless saw profit opportunities in catastrophe coverages and said it would prioritize underwriting profitability over premium volume.
- Management expected positive operating cash flow over the near term absent unusual catastrophe activity. Longer-term cash flow could be affected by competition, pricing and the focus on underwriting quality over volume. No numerical earnings or premium guidance was provided.
- Q3 current-year catastrophe losses were $75.0 million, including $55.0 million from Canadian floods and $20.0 million from German hailstorms. Nine-month catastrophe losses were $165.0 million, including Canadian floods, U.S. storms, European floods and German hailstorms.
- Management cautioned that loss reserves are estimates and may change materially; future adverse reserve development could occur. Gross asbestos and environmental reserves were $411.6 million, with net asbestos survival ratio reported at 7.9 years.
- The company reported $46.5 million of liabilities for seven unhedged equity-index put options. Although management estimated the probability of index levels falling below applicable strikes at less than 29% for S&P 500 contracts and less than 37% for the FTSE 100 contract, theoretical discounted maximum payouts were substantially larger. Collateral posted was $31.2 million; a zero collateral threshold would increase required collateral by $55.0 million.
- Investment-market risks include interest-rate and equity-price changes. Nine-month unrealized investment depreciation reduced equity; management’s sensitivity analysis estimated a $350.3 million after-tax decline in fixed-income value for a 100-basis-point rate increase. Credit facilities totaled $1.25 billion; the group reported compliance with covenants. Routine insurance and reinsurance disputes were disclosed, with no other material litigation identified; no material risk-factor changes or subsequent events were reported.
Important facts for investors to verify
- Whether premium growth—especially growth tied to the Florida quota-share contract and newer business—translates into sustainable earned-premium growth and underwriting returns.
- International segment loss experience and the development of catastrophe claims, particularly Canadian flood losses, as estimates mature.
- Reserve adequacy and any subsequent adverse or favorable development, including asbestos and environmental exposures.
- How much future earnings depend on realized investment gains, equity valuations and derivative fair-value movements, given lower investment income and reduced AOCI.
- Capital deployment and liquidity after substantial share repurchases, the 2014 senior-note maturity, and Mt. Logan Re’s evolving third-party participation and catastrophe exposures.