Everest Re Group, Ltd. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; unaudited. Everest Re Group is a Bermuda-based provider of reinsurance and insurance in the U.S., Bermuda and international markets. Unless otherwise noted, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 / prior date |
|---|---|---|
| Gross written premiums | $1,064.9 million | $1,021.0 million |
| Net written premiums | $1,019.9 million | $969.3 million |
| Premiums earned | $1,011.4 million | $927.3 million |
| Total revenues | $1,206.4 million | $1,169.9 million |
| Net investment income | $178.7 million | $161.5 million |
| Net realized capital gains | $12.2 million | $72.7 million |
| Incurred losses and loss adjustment expenses | $1,249.8 million | $906.9 million |
| Net income (loss) | $(315.9) million | $(22.7) million |
| Basic and diluted loss per share | $(5.81) | $(0.38) |
| Operating cash flow | $188.1 million | $271.3 million |
- The combined ratio was 151.4%, up 26.5 percentage points from 124.9%; the loss ratio rose to 123.6% from 97.8%. The combined ratio above 100% reflects an underwriting loss.
- Catastrophe losses were $665.1 million, versus $354.4 million in Q1 2010, primarily from the Japan earthquake, New Zealand earthquake and Australian floods. Attritional losses were $584.7 million, compared with $552.4 million.
- At March 31, 2011, total assets were $18.8 billion, investments and cash $15.4 billion, and shareholders’ equity $5.9 billion, down from $6.3 billion at December 31, 2010. Book value per share was $109.07, down from $115.45.
- Loss and LAE reserves were $10.0 billion, up from $9.3 billion at year-end. Cash and short-term investments totaled $937.8 million. Total debt was approximately $858.1 million, including $40.0 million in revolving borrowings; debt was $868.1 million at December 31, 2010.
Material changes versus the prior-year quarter
- Premiums earned increased 9.1%, while net investment income increased 10.7%, mainly due to higher limited partnership income and increased equity dividend income.
- Net loss widened substantially as catastrophe losses increased. Lower net realized capital gains also contributed: Q1 2011 gains were $12.2 million versus $72.7 million in Q1 2010. Q1 2011 included $14.8 million of other-than-temporary fixed-maturity impairments and $9.6 million of net realized losses from security sales.
- Underwriting performance varied by segment. Specialty Underwriting reported a $7.5 million underwriting gain and an 89.6% combined ratio. U.S. Reinsurance, Insurance, International and Bermuda reported underwriting losses; International’s combined ratio was 218.0% and Bermuda’s was 154.7%.
- Shareholders’ equity declined $369.3 million, principally from the net loss, $37.6 million of share repurchases, $26.0 million of dividends and $24.5 million of after-tax unrealized investment depreciation.
- Operating cash flow declined year over year, while cash at quarter-end increased to $284.1 million from $214.2 million a year earlier.
Outlook, commentary and risks
- Management said catastrophe-market rate increases were expected, particularly in regions affected by Q1 losses, but it was too early to assess the broader market impact. It described insurance and reinsurance markets as highly competitive, especially in casualty lines.
- Management expected positive annual operating cash flow in the near term absent unusual catastrophe activity, but said cash flow could be slightly negative near term as Q1 catastrophe losses are paid. Longer-term cash flow depends partly on pricing competition and the company’s emphasis on underwriting profitability over premium volume.
- The company reported $188.1 million of operating cash flow and said its cash, short-term investments, marketable securities and operating cash flows provided ample near-term liquidity. It did not anticipate selling securities or drawing available facilities to pay losses, but retained that ability. The company was in compliance with credit-facility covenants at quarter-end.
- First-quarter acquisitions expanded domestic and Canadian insurance operations: Heartland Crop Insurance was acquired for $55.0 million in cash plus contingent future payments; the company also acquired Premiere Underwriting Services and certain Executive Risk financial-lines operations. The acquisitions generated $35.1 million of goodwill and $26.9 million of intangible assets.
- Unhedged equity-index put options had a $50.9 million fair-value liability. Their theoretical maximum payouts, discounted at 6%, were $273.1 million for the S&P 500 contracts and $30.7 million for the FTSE 100 contract. The filing notes uncertainty in modeled fair values and potential collateral requirements; $32.2 million of collateral had been posted.
- Management said ordinary-course legal disputes were not expected to materially affect financial position or liquidity, though an adverse resolution could materially affect results in a particular period. It also disclosed contingent exposure if certain annuity providers could not make payments; estimated replacement costs were $143.1 million and $26.5 million for the two arrangements described.
- Management emphasized that loss reserves are estimates subject to potentially significant variation. Gross asbestos and environmental reserves were $535.8 million; the company reported a 4.9-year net asbestos survival ratio, or 8.1 years adjusted for specified settlements. No material changes to risk factors were reported. No subsequent events were reported.
Important facts for investors to verify
- How catastrophe-loss estimates and recoveries from reinsurers develop, particularly for the Japan, New Zealand and Australia events, and whether loss reserves remain adequate.
- Whether pricing improves in catastrophe-exposed markets and whether competitive pressure continues to affect casualty underwriting and premium volume.
- The sustainability and volatility of limited partnership investment income, realized investment gains and the expanded allocation to equity, high-yield, bank-loan and private-equity investments.
- Near-term catastrophe claim payments, operating cash flow, available liquidity and credit-facility capacity, including collateral and covenant requirements.
- Acquisition performance and contingent payments, and the valuation, collateral and potential payout exposure of the equity-index put options.