Everest Re Group, Ltd. — FY 2010 Form 10-K
Business and reporting period. Bermuda-domiciled insurance and reinsurance group reporting under U.S. GAAP for the fiscal year ended December 31, 2010, with 2009 and 2008 comparisons. The company operates across U.S. Reinsurance, U.S. Insurance, Specialty Underwriting, International and Bermuda segments; approximately 80% of 2010 gross written premiums were reinsurance and 20% insurance.
Financial performance and position
| Metric | 2010 | 2009 | Change / context |
|---|---|---|---|
| Gross written premiums | $4.201 billion | $4.129 billion | Up 1.7% |
| Net written premiums | $3.946 billion | $3.930 billion | Up 0.4% |
| Premiums earned | $3.935 billion | $3.894 billion | Up 1.0% |
| Total revenues | $4.706 billion | $4.499 billion | Up 4.6% |
| Net investment income | $653.5 million | $547.8 million | Up 19.3%, mainly from limited partnerships |
| Net realized capital gains (losses) | $101.9 million | $(2.3) million | Improved from 2009 |
| Net income | $610.8 million | $807.0 million | Down 24.3% |
| Diluted earnings per share | $10.70 | $13.22 | Down from prior year |
| Combined ratio | 102.8% | 89.1% | Up 13.7 percentage points; above 100% indicates an underwriting loss |
| Operating cash flow | $918.5 million | $784.7 million | Up from prior year |
| Shareholders’ equity | $6.284 billion | $6.102 billion | Up 3.0% |
| Total debt | $868.1 million | $1.018 billion | Down 14.7% |
Quarterly context: Fourth-quarter 2010 net income was $302.5 million, versus $197.2 million in fourth-quarter 2009; diluted EPS was $5.51 versus $3.28. Quarterly figures are unaudited.
Liquidity and capital: Cash and investments totaled $15.365 billion at year-end, including $1.044 billion of cash and short-term investments. Gross loss and LAE reserves were $9.340 billion, up from $8.938 billion. The company reported $50 million of revolving borrowings and said it complied with credit facility covenants. Operating cash flow was positive; management characterized near-term liquidity as ample.
Investment portfolio: Fixed maturities and cash accounted for most invested assets; 94.7% of fixed maturities were investment grade. Fixed-income duration was 3.8 years. Alternative and higher-return investment sectors represented approximately 36% of shareholders’ equity, exposing results to greater investment volatility.
Material changes versus 2009
- Catastrophe losses rose sharply: 2010 net catastrophe losses were $544.1 million, compared with $65.2 million in 2009. Management cited the Chile and New Zealand earthquakes, Australian hailstorms and floods, and a Canadian hailstorm. The filing also reports $571.1 million of pre-tax catastrophe losses before corporate-level reinsurance and taxes.
- Incurred losses and LAE increased 24.1% to $2.946 billion; the loss ratio rose from 61.0% to 74.9%. Current-year catastrophe losses and higher expected attritional losses drove the deterioration.
- Prior-year reserve development was favorable by $30.9 million in 2010, compared with $128.8 million of adverse development in 2009. Favorable development in non-U.S. reinsurance was partly offset by U.S. casualty strengthening, including construction liability, and strengthening on terminated insurance programs.
- International segment underwriting moved from a $150.1 million gain to a $198.0 million loss, principally reflecting catastrophe claims. U.S. Insurance also remained loss-making, with an $88.9 million underwriting loss and a 114.2% combined ratio. Bermuda reported an $83.0 million underwriting gain.
- Investments recovered versus 2009: realized capital gains were $101.9 million, while 2009 recorded a $2.3 million loss. Net investment income also increased, partly offsetting underwriting deterioration.
- Shareholders’ equity rose modestly despite $398.6 million of repurchases of 5.1 million shares and $108.5 million of dividends. The company paid off $200 million of senior notes at maturity during 2010.
Outlook, risks and unusual items
- Outlook: No numerical earnings or premium guidance is provided. Management expected positive operating cash flow near term absent unusual catastrophe activity, while warning that competition and pricing pressure could affect longer-term cash generation. Management described selective profit opportunities, particularly in some catastrophe-exposed international markets, and emphasized underwriting profitability over premium volume.
- Subsequent events: The company estimated $45 million of pre-tax losses from late-2010 and January 2011 Northeastern Australia floods for first-quarter 2011. It could not yet estimate losses from the February 22, 2011 New Zealand earthquake but expected an adverse first-quarter impact.
- Tax item: 2010 income tax included a $48.9 million benefit from a favorable IRS audit settlement; the filing reports a $25.9 million net benefit including interest and release of a tax reserve. The company recorded an overall income tax benefit of $19.5 million for 2010.
- Reserve uncertainty: Loss reserves depend on estimates, ceding-company information and actuarial assumptions. Asbestos and environmental reserves were $554.8 million gross and $532.9 million net; ultimate claims could exceed estimates. The filing’s estimated range for total gross reserves was $8.431 billion to $10.249 billion.
- Catastrophe exposure: Management estimated a gross 1-in-100-year Southeast U.S. wind PML of $941 million and an associated economic loss of about $640 million. Models and exposure data are imprecise; actual events can exceed modeled estimates. Disclosed catastrophe cover for July 2010–July 2011 excludes U.S., Japan, Europe and Caribbean wind territories.
- Other risks: Competitive pricing, investment and interest-rate volatility, foreign-exchange movements, reinsurer credit exposure, regulatory limits on subsidiary dividends, rating downgrades, and potential U.S. or Bermuda tax changes. Ordinary-course legal disputes were not expected to materially affect financial position or liquidity, though an adverse resolution could affect a period’s results.
- Shareholder distributions: The company declared $0.48 per share quarterly dividends in 2010 and announced the same amount payable in March 2011. Future dividends remain subject to board discretion, subsidiary earnings and regulatory restrictions.
Important facts for investors to verify
- Reconcile the catastrophe loss measures: $544.1 million net catastrophe losses versus $571.1 million before corporate-level reinsurance and taxes, and assess the effect of 2011 flood and earthquake claims.
- Review reserve development by segment and accident year, especially U.S. casualty construction liability, terminated programs, and asbestos/environmental exposures.
- Assess whether the 102.8% combined ratio and underwriting losses in International and U.S. Insurance persist, and whether premium growth is profitable amid competitive pricing.
- Check the sustainability of investment income and gains, including limited partnership performance, valuation lags and the increased allocation to higher-volatility assets.
- Monitor liquidity, debt maturities, credit facility availability and covenant compliance, as well as regulatory capacity to upstream dividends supporting parent-company obligations.
- Confirm subsequent catastrophe loss estimates and their effect on 2011 results; the filing does not provide a clear estimate for the February 2011 New Zealand earthquake.