Everest Re Group, Ltd. — Q1 2012 Form 10-Q
Business context and period: Bermuda-domiciled reinsurance and insurance group operating in the U.S., Bermuda and international markets. This unaudited report covers the three months ended March 31, 2012; comparisons are with Q1 2011 unless otherwise stated. The company cautions that quarterly results are not necessarily indicative of full-year results.
Key financial results
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Gross written premiums | $1,046.5 million | $1,064.9 million; down 1.7% |
| Net written premiums | $1,014.9 million | $1,019.9 million; down 0.5% |
| Premiums earned | $998.0 million | $1,011.4 million; down 1.3% |
| Total revenues | $1,249.1 million | $1,206.4 million; up 3.5% |
| Net investment income | $152.4 million | $178.7 million; down 14.7% |
| Net realized capital gains | $98.7 million | $12.2 million |
| Incurred losses and LAE | $602.5 million | $1,249.8 million; down 51.8% |
| Income before taxes | $342.8 million | Loss of $341.7 million |
| Net income (loss) | $304.7 million | Loss of $315.9 million |
| Basic / diluted EPS | $5.70 / $5.68 | Loss of $5.81 per share |
| Combined ratio | 89.0% | 151.4%; improved 62.4 points |
| Operating cash flow | $165.7 million | $188.1 million |
The earnings reversal was primarily driven by lower catastrophe losses: Q1 2012 catastrophe losses were $30.0 million versus $665.1 million in Q1 2011. The loss ratio improved to 60.4% from 123.6%; commission and brokerage ratio was 23.8%, and other underwriting expense ratio was 4.8%.
Financial position, liquidity and debt
- At March 31, 2012, total assets were $19.17 billion, total liabilities $12.83 billion and shareholders’ equity $6.33 billion, up 4.3% from year-end 2011. Book value per share was $120.30, up 6.5%.
- Investments and cash totaled $16.12 billion. Cash was $472.0 million and short-term investments $943.6 million, together $1.42 billion of cash and short-term liquidity.
- Loss and LAE reserves were $10.03 billion, down from $10.12 billion at December 31, 2011. Reinsurance receivables were $574.3 million.
- Total debt was approximately $818.1 million, essentially unchanged. It comprised $249.9 million of 5.4% senior notes due 2014, $238.4 million of 6.6% subordinated notes and $329.9 million of junior subordinated debt.
- Operating cash flow was positive; investing activities used $6.5 million and financing activities used $148.0 million, including $125.0 million for share repurchases and $25.6 million in dividends. Cash ended the quarter at $472.0 million.
- Credit facilities totaled $1.30 billion. There were no revolving borrowings outstanding; letters of credit were in use. The company reported compliance with applicable facility covenants.
Material changes and segment performance
- U.S. Reinsurance underwriting gain was $33.7 million versus a $55.7 million loss; earned premiums rose 12.2% and the combined ratio improved to 90.6% from 117.4%. Growth reflected new property business and higher renewal rates, particularly for catastrophe-exposed risks.
- Insurance recorded a $2.1 million underwriting loss, broadly similar to the prior-year $2.0 million loss. Earned premiums declined 15.7%, mainly from runoff or termination of casualty programs and crop premium seasonality; the combined ratio was 101.2%.
- International produced a $70.0 million underwriting gain versus a $373.3 million loss, largely reflecting the much lower catastrophe burden. Earned premiums declined 6.4%; the combined ratio improved to 76.4% from 218.0%.
- Bermuda produced a $7.9 million underwriting gain versus an $88.8 million loss. Earned premiums were up 0.9%, and the combined ratio improved to 95.2% from 154.7%.
- Shareholders’ equity rose despite $125.0 million of repurchases of 1.4 million shares and $25.6 million of declared dividends. The repurchase authorization was increased to 20 million shares; 14.1 million had been repurchased cumulatively by quarter-end.
Outlook, commentary and risks
- Management said competitive conditions remained broad, especially in casualty markets, while catastrophe-cover rate increases had occurred in some regions affected by 2011 losses. It saw profit opportunities in catastrophe coverage and emphasized underwriting profitability, portfolio balance and diversification. No specific earnings or premium guidance was provided.
- Management expected positive operating cash flow to continue in the near term absent unusual catastrophe activity, but noted that payments for 2011 catastrophe losses could affect near-term cash flow. Longer-term cash flow depends partly on pricing competition and the company’s emphasis on profitability over premium volume.
- Investment income declined as limited partnership income fell and fixed-income income was lower amid reduced municipal exposure and lower reinvestment rates. The annualized pre-tax yield on average invested assets declined to 4.0% from 4.8%.
- The portfolio included $764.5 million of European sovereign securities, principally U.K. and French holdings; the company reported no sovereign exposure to Portugal, Italy, Ireland, Greece or Spain. Investments in higher-return asset classes, including equities, emerging-market debt, high-yield securities, bank loans and private-equity partnerships, equaled approximately 57.3% of shareholders’ equity and may be more volatile.
- Seven unhedged equity-index put options had a $63.5 million fair-value liability. The contracts have long-dated exposures; the company disclosed theoretical maximum discounted payouts of $289.6 million for S&P 500 contracts and $32.1 million for the FTSE 100 contract. Collateral posted was $48.9 million; a zero collateral threshold would increase the requirement by $55.0 million.
- Loss reserves are estimates subject to potentially significant variation. Gross asbestos and environmental reserves were $486.5 million; management’s reserve adequacy assessment includes actuarial analysis and judgment. Ordinary-course insurance and reinsurance disputes continue, with no other material litigation reported.
- Moody’s affirmed operating-subsidiary ratings in January 2012 but changed the outlook from stable to negative. Management said a one-notch downgrade was not expected to materially harm the business, but the outcome was uncertain.
- A $12.4 million deferred-tax-asset understatement from prior periods was corrected in Q1 2012, increasing the quarter’s tax benefit and net income by that amount. Management considered the adjustment immaterial to Q1 and prior periods and did not restate prior statements.
Important facts for investors to verify
- How much of the earnings rebound reflects the unusually low catastrophe-loss comparison, and how results develop through subsequent catastrophe seasons.
- Whether reserve estimates, including asbestos and environmental claims, remain adequate as claims develop and prior-period estimates are revised.
- The sustainability of investment income and realized gains, particularly the effect of lower yields, limited-partnership reporting lags and market-value changes.
- Exposure and potential collateral demands from the unhedged equity-index put options, and the sensitivity of their valuation to equity indices, interest rates and volatility.
- Premium and underwriting trends across segments, especially Insurance contraction, reinsurance rate changes and the quality of catastrophe-exposed growth.
- The effect of Moody’s negative outlook, rating changes, credit-facility covenants and regulatory restrictions on subsidiary distributions and capital flexibility.