Everest Re Group Ltd. And Operating Subsidiaries

Transcription

1 Everest Re Group Ltd. And Operating Subsidiaries Primary Credit Analyst: Taoufik Gharib, New York (1) ; Secondary Contact: Zikomo L Simmons, CFA, FRM, New York (1) ; zikomo.simmons@spglobal.com Table Of Contents Rationale Outlook Base-Case Scenario Company Description: Leading Global Reinsurer With U.S. Primary Presence Business Risk Profile Financial Risk Profile Other Assessments Accounting Considerations Related Criteria Related Research JULY 13,

2 Rationale S&P Global Ratings' ratings on Everest Re Group Ltd. and its operating subsidiaries (collectively, Everest) reflect our view of the company's strong business risk profile and strong financial risk profile built on extremely strong capital and earnings, but partially offset by its high risk position. Under our criteria, these factors lead to a possible anchor of either 'a-' or 'a'. We assigned an 'a' anchor, reflecting Everest's strong competitive position and long-standing presence in the reinsurance market with strong, long-term client relations and a strong balance sheet. Business Risk Profile: Strong Strong competitive position with global footprint, strong brand name, and long-standing presence in the reinsurance sector Ninth-largest reinsurer in the world based on 2015 net reinsurance premiums written Strong underwriting results with average combined ratio of 87.2% during Intermediate insurance industry and country risk assessment (IICRA) reflects exposure in global property casualty (P/C) reinsurance, and U.S. insurance sectors Financial Risk Profile: Strong Extremely strong capital and earnings supported by strong operating results with capital redundancy at the 'AAA' level High risk position due to significant exposure to property catastrophe risks and long-tail reserves Strong financial flexibility because of low financial leverage, strong debt-servicing capabilities, and access to debt and equity markets Other Factors Strong enterprise risk management (ERM) and satisfactory management and governance provide one-notch uplift to anchor rating Strong liquidity supported by highly liquid invested assets and strong operating cash flows Factors Specific to the Holding Company Because the majority of the group's capital resides in Bermuda, we apply a two-notch differential between the counterparty credit ratings on the holding companies and the financial strength ratings on the core subsidiaries. Fewer regulatory restrictions apply to dividends from Bermuda insurance subsidiaries than to those of U.S.-domiciled subsidiaries. The two-notch difference reflects the structural subordination and the holding companies' dependence on dividends from their operating subsidiaries to meet financial obligations. JULY 13,

3 Outlook: Stable The stable outlook reflects our view that Everest will maintain its strong competitive position, global reinsurance presence, and extremely strong capitalization redundant at the 'AAA' level, and will generate strong and sustainable earnings in line with our expectations. Downside scenario We may lower our ratings if Everest does not meet our performance expectations, especially if it experiences outlier catastrophe losses, adverse reserve development that materially deteriorates capital, or significant underwriting losses relative to similarly rated peers. Upside scenario An upgrade is unlikely in the next months because of the ongoing competitive pressures facing the global P/C reinsurance sector and U.S. specialty lines, potential earnings volatility arising from Everest's substantial exposure to property catastrophe risk, and persistent challenges to its insurance business profitability. Base-Case Scenario Macroeconomic Assumptions Real U.S. GDP growth of 2.2% in 2017 and 2.3% in 2018 Real Eurozone GDP growth of 2% in 2017 and 1.7% in year U.S. Treasury-note yield of 2.4% in 2017 and 2.9% in 2018 U.S. core Consumer Price Index at 1.8% in 2017 and 2.1% in 2018 Company-Specific Assumptions Overall reinsurance pricing stays soft across most lines of business and regions Gross premiums written (GPW) rise by low double digits in 2017, mostly driven by initiatives within the insurance segment, but slows in 2018 to mid-single digits Combined ratio of 93%-96% and return on revenue (ROR) in the mid-teens in (assuming a catastrophe load of 10 percentage points) Capital adequacy remains redundant at the 'AAA' level in , including share buy-backs Financial leverage remains less than 10% and fixed-charge coverage at least 20x JULY 13,

4 Key Metrics (Mil. $) 2018* 2017* Gross premiums written (GPW) Mid-single digits Low-double digits 6, , ,749.0 Return on reported shareholders' equity (%) Low-double digits Low-double digits Return on revenue (%) Mid-teens Mid-teens P/C net combined ratio including corporate expenses (%) S&P Global Ratings capital adequacy Extremely strong Extremely strong Extremely strong Extremely strong Extremely strong Financial leverage (%) Less than 10 Less than Fixed-charge coverage (x) At least 20x At least 20x *Forecast data reflect S&P Global Ratings base-case scenario. Company Description: Leading Global Reinsurer With U.S. Primary Presence Everest is a leading Bermuda-based P/C reinsurer and primary insurer. The company operates globally and generated $6.03 billion of GPW in % from reinsurance and 30% from insurance. The overall business is split 62% property and 38% casualty. The reinsurance business is global and targets standard P/C lines as well as specialty classes such as marine, aviation, surety, and accident and health. Its U.S. insurance business writes property/short tail, workers' compensation, other casualty, professional liability, and accident and health. In February 2013, Everest launched Mt. Logan Re Ltd., a third-party capital vehicle that supports its property catastrophe reinsurance business. As of Jan. 1, 2017, Mt. Logan had $869 million in capital, including $813 million from third-party investors. Mt. Logan offers investors differing tranches of catastrophe risk based on risk preferences. In January 2016, the company also established a Lloyd's syndicate to write insurance business internationally. Business Risk Profile: Strong Insurance industry and country risk: Intermediate Everest's overall IICRA reflects low country risk and moderate industry risk for its P/C re/insurance operations. Its risk exposures are primarily global P/C reinsurance and U.S. P/C insurance. The company operates mostly in developed markets, which are typically characterized by low risks such as political environment, financial system, payment culture, and rule of law. The industry risk assessments are primarily driven by our negative view of the product risk. This is the result of exposure to catastrophe volatility and reserve volatility in certain long-tail lines, as well as the relatively moderate operational barriers to entry that materially expose P/C reinsurers to competition from existing players and new entrants. However, we believe it is more challenging for new entrants to establish a defensible competitive position especially in casualty lines, which tend to be more relationship-based and require knowledge and a track record that takes years to develop. JULY 13,

5 Table 1 Everest Re Group Ltd. Industry And Country Risk (Re)Insurance sector IICRA Business mix (%) U.S. P/C insurance Intermediate risk 29.6 Global P/C reinsurance Intermediate risk 70.4 Weighted average IICRA Intermediate risk Competitive position: A global footprint and a 40-year history Everest has a strong competitive position in the U.S. and Latin America. The company benefits from its relatively large balance sheet and long history, which bolsters its strong presence in its chosen and often very competitive reinsurance markets. Many of its cedents have been clients for more than 30 years (47% more than 30 years, 32% between 10 and 30 years, and 21% less than 10 years), and it leads a substantial portion of its treaties. Everest also benefits from a diversified mix of short- and long-tail lines of business in addition to writing in both the reinsurance and insurance markets. Table 2 Everest Re Group Ltd. Competitive Position (Mil. $) 2016* 2015* Gross premiums written 1, , , , , , ,310.5 Change in gross premiums written (%) 18.3 (4.6) Net premiums written 1, , , , , , ,081.1 Change in net premiums written (%) 19.7 (3.5) 1.7 (1.4) (0.7) Reinsurance utilization - premiums written (%) Business segment (% of GPW) P/C reinsurance P/C insurance *Data as of March 31. Everest's GPW were up 2.4% to $6.03 billion in 2016 from $5.89 billion in 2015, reflecting a $255 million (16.6%) increase in insurance, partially offset by a $113 million (2.6%) decrease in reinsurance. The rise in insurance premiums was primarily due to increases in most lines of business as the company is focused on expanding its insurance operations. The decline in reinsurance premiums was chiefly due to a decrease in treaty property business, a decline in international premiums related to quota-share agreements, and a negative impact of $74 million from the year-over-year movement in foreign-exchange rates. Although Everest writes direct reinsurance for large U.S. national carriers, it targets small to midsize standard market cedents and non-u.s. cedents through the broker market. It writes its U.S. insurance business through general agents and surplus-lines brokers. It wrote about 60%, 30%, and 10% of 2016 GPW in broker reinsurance, insurance, and direct reinsurance markets, respectively. Reinsurance. Everest's market presence and strong brand recognition allow it to identify and write attractive business not readily accessible to smaller, less-seasoned competitors. It also has strong risk diversification across business lines and territories, and it was ranked the ninth-largest reinsurer in the world based on 2015 net reinsurance premiums JULY 13,

6 written. The reinsurance business is well diversified, spanning numerous lines of business across the globe with about 52% of premiums from the U.S. The international business is heavily weighted toward property lines. Table 3 Top-10 Global Reinsurers Ranked By 2015 Net Reinsurance Premiums Written Rank Reinsurer Country Net reinsurance premiums written (mil. $) 1 Munich Re Germany 33, Swiss Re Switzerland 30, Hannover Re Germany 16, Berkshire Hathaway Re U.S. 13, SCOR France 13, Lloyd's U.K. 10, Reinsurance Group of America U.S. 8, China Re China 7, Everest Re Bermuda 5, PartnerRe Bermuda 5,229.5 Source: S&P Global Ratings, Global Reinsurance Highlights 2016 Edition. Everest has reduced its casualty reinsurance business during the past five years down to its core book of clients, reflecting its active management of the soft market conditions. In 2012, casualty reinsurance GPW represented 36% of the reinsurance segment premiums, compared with 27% in During the same time, it boosted its proportion of reinsurance business written on an excess-of-loss basis to 45% from 38% of its total reinsurance GPW. Mt. Logan. Everest has gained traction in its Mt. Logan platform, with $813 million of outside investment, allowing Everest's total capacity to reach $11.15 billion as of year-end 2016 ($8.08 billion common equity, $1.58 billion cat bonds, $869 million Mt. Logan, and $633 million debt). The products are written on Everest's traditional reinsurance paper and retroceded to Mt. Logan, which allows cedents to transact with Everest as in any other deal and prevents channel conflicts. Mt. Logan has its own underwriting practice that is responsible for approving each deal and serving investors' interests. Insurance. The insurance segment has been undergoing a transition during the past few years. Originally built through a collection of program businesses, Everest has discontinued poorly performing, mostly long-tail programs. From a high of 63% in 2010, the long-tail business is now only 33% of the total insurance writings, with the rest comprising medium (23%) and short-tail business (44%). Most of the current premium growth is from specialty or niche businesses such as California workers' compensation and short-tail lines. Programs declined to 36% of GPW in 2016 from 77% in Everest continues to focus on small-to-midsize accounts, which although competitive, are less prone to aggressive price competition. Internationally, Everest has a Canadian insurance company (EvCan) and started a Lloyd's syndicate effective Jan. 1, 2016, to pursue growth in territories outside of North America. The Lloyd's syndicate made up 3% of insurance GPW in In August 2016, Everest sold its U.S. crop-managing general agent, Heartland Crop Insurance Inc., which it bought in January 2011 for $55 million. The sale was driven by continued underperformance of this book, which is highly scale dependent. In conjunction with the sale, Everest entered into a strategic long-term reinsurance agreement with CGB Diversified Services Inc., the buyer of Heartland, to provide quota-share reinsurance on the combined crop insurance portfolio. JULY 13,

7 The company has a significant expense advantage over most of its Bermudian peers, with a three-year average expense ratio of 27.8%, compared with the Bermudians' 35.8%. The reinsurance business, which is 70% of the book based on GPW, has been more profitable than the insurance business, with a five-year average combined ratio of 80.2% as compared with 110% for the insurance segment, which has not had a profitable underwriting year since The insurance underperformance in recent years has been mostly driven by crop insurance, other casualty, and professional liability. We expect GPW to increase by low double digits in 2017, mostly due to new initiatives in the insurance segment. However, the premium growth will slow in 2018 to low single digits. Continued price declines will challenge Everest's growth strategy. Financial Risk Profile: Strong Capital and earnings: Extremely strong, redundant at the 'AAA' level Everest's extremely strong capital adequacy cushions the company from the severity exposure it assumes in its underwriting operations. We expect Everest to maintain redundancies at the 'AAA' level even after incorporating returns to shareholders in the form of share buybacks and dividends. Table 4 Everest Re Group Ltd. Capitalization Statistics (Mil. $) 2016* 2015* Common shareholders' equity 8, , , , , , ,733.5 Change in common shareholders' equity (%) Total reported capital 8, , , , , , ,552.0 Change in total reported capital (%) (1.3) 9.6 *Data as of March 31. ` Table 5 Everest Re Group Ltd. Earnings Statistics (Mil. $) 2016* 2015* Total revenue 1, , , , , , ,768.1 EBIT adjusted , , , , Net income (attributable to all shareholders) , , Return on revenue (%) Return on reported shareholders' equity (%) P/C: net expense ratio (%) P/C: net loss ratio (%) P/C: net combined ratio (%) *Data as of March 31. Retrocession purchases tend to be opportunistic and focus on portfolio optimization. Like many reinsurers, Everest has JULY 13,

8 been increasingly ceding catastrophe risk given the favorable pricing in retrocession markets. Although we believe that Everest's loss reserves are not deficient, development patterns during the past decade have not compared favorably with peers'. Although management ensures loss reserves are well understood and rigorously valued, Everest's reserves are long-tailed, which makes them potentially more sensitive to adverse claims trends. Everest also had 4.3% of its gross reserves comprised of asbestos and environmental (A&E) as of year-end A&E has proven to be historically problematic for the re/insurance industry, and Everest took a $54 million unfavorable development in 2016, all of which related to its assumed reinsurance business. Despite this, we believe Everest has incrementally improved its overall reserve position, having $295 million of favorable reserve releases in 2016, which positively affected the company's combined ratio by 3.9 percentage points. Everest's sizable invested asset base continues to provide the foundation for its operating performance, with additional income from reinsurance underwriting results and improving insurance underwriting. We believe Everest will generate a combined ratio in the 93%-96% range and an ROR in the mid-teens in (assuming a catastrophe load of 10 percentage points). Table 6 Everest Re Group Ltd. Combined Ratio (%) 2016* 2015* Insurance combined ratio Reinsurance combined ratio Consolidated combined ratio *Data as of March 31. Risk position: High risk due to substantial exposure to severity risk The company underwrites a substantial property book, which can cause significant volatility in its earnings and capital position. It writes and holds loss reserves in a number of long-tail insurance and reinsurance exposures, including workers' compensation, A&E, and excess liability. The associated pricing and reserving risk could also add to capital volatility. Of the company's $17.48 billion invested assets as of year-end 2016, 77% of the portfolio comprised investment-grade fixed maturities. The company has a sizable alternative fixed-income portfolio, publicly traded equity, and private equity, which make up 12%, 6%, and 5% of invested assets, respectively. Furthermore, the group focuses strongly on capital protection, with inbuilt conservatism in capital management. Table 7 Everest Re Group Ltd. Risk Position (Mil. $) 2016* 2015* Total invested assets 18, , , , , , ,576.2 Change in total invested assets (%) 6.2 (4.1) 4.8 (4.4) Net investment income Realized capital gains/(losses) 52.7 (74.3) 20.8 (184.1) Unrealized capital gains/(losses) (187.7) 8.7 (423.1) JULY 13,

9 Table 7 Everest Re Group Ltd. Risk Position (cont.) (Mil. $) 2016* 2015* Net investment yield (%) Net investment yield including realized capital gains/(losses) (%) Net investment yield including realized and unrealized gains/(losses) (%) Portfolio composition (% of total invested assets) Bonds Other investments Equity investments Cash and short-term investments *Data as of March 31. Financial flexibility: Strong with the lowest financial leverage of peers Everest operates with low financial leverage and strong fixed-charge coverage ratios. As a publicly traded company, Everest has access to various sources of capital in both the debt and equity markets with a long history of raising capital. Everest issued $400 million of senior notes in June 2014 to repay maturing $250 million senior notes as well as for general corporate purposes. Since 2013, the company raised third-party capital through its sidecar, Mt. Logan Re. In 2017, the company also issued additional catastrophe bonds under its Kilimanjaro Re Ltd. program worth $1.25 billion, bringing the total cat bond issuance to a value of $2.8 billion since We expect Everest's financial leverage to remain below 10%, and fixed-charge coverage to be more than 20x. Table 8 Everest Re Group Ltd. Financial Flexibility 2016* 2015* Fixed-charge coverage (x) Financial leverage (including net present value of operating leases and pension deficit as debt)(%) *Data as of March Other Assessments Enterprise risk management: Strong with continued enhancement Our assessment of Everest's ERM is strong, based on positive assessments for all aspects of its ERM program. The re/insurer has demonstrated a strong commitment to enhancing its ERM framework and has a track record of consistently managing to risk-adjusted return metrics. Because Everest's risk profile consists of significant catastrophe and reserving risks emanating from its complex, global mix of long- and short-tailed risks in addition to the continued aggressive growth of the primary insurance book, we consider ERM to be of high importance to the overall rating. JULY 13,

10 Everest's risk-management culture is positive, supported by the strong commitment from the board of directors and senior management toward embedding effective governance structures and ERM framework throughout the group. Risk controls are positive, driven by positive scores for the key risk control categories of catastrophe, reserves and underwriting pricing, and cycle management. Emerging risk management at Everest is positive, reflecting the group's continued efforts to identify, prioritize, and proactively manage emerging risks. Risk models are positive, supported by the company's robust model governance and validation processes and effective use of risk models in all major business decisions. Strategic risk management is positive given management's track record of applying a consistent risk-based approach to strategic business decisions, supported by effective use of its economic capital model. Management and governance: Satisfactory with a flat organizational structure The company benefits from an experienced management team. Management has been transitioning since the hiring of Dominic Addesso as CFO in Subsequently, he was promoted to president in 2011 and took over as CEO as part of a planned succession in early The former CEO, Joseph Taranto, continues to serve as the chairman of the board. Before joining Everest, Mr. Addesso was president of Munich Re America's regional clients division and CFO of Selective Insurance Group Inc. In 2011, John Doucette became chief underwriting officer after serving as the global head of ERM, where he made significant improvements to the ERM framework. In April 2016, he was named CEO and President of the company's reinsurance division. Other recent hires include Jonathan Zaffino in 2015, who is President of the Insurance Division, and Michael Kerner in 2016 as Executive Vice President and head of Strategy and Risk Management. Thomas Passante, the named chief risk officer, working with Michael Kerner, is responsible for ERM. With the changes in leadership, management has implemented a number of strategic changes, but Everest maintains its goal to sustain a leading position with a meaningful presence in its target re/insurance markets, with a recent focus on the insurance segment. To that end, Everest values a substantial capital base. Everest has also taken advantage of changing marketplace conditions, such as setting up Mt. Logan Re to tap into alternative capital, issuing cat bonds, and setting up a Lloyd's syndicate at the inception of Despite the global footprint, a flat organizational structure facilitates the flow of information to management and affords more flexibility for strategic initiatives. The group also seeks to maintain an efficient and effective operating structure, which is reflected in its low administrative expense ratio. The company prepares an annual detailed marketing plan, identifies threats and opportunities for each major country/territory, and specifies an action plan for the year. Everest has a prudently conservative capital structure, supported by one of the lowest financial leverage ratios of its peer group. It seeks to maximize growth in dividend-adjusted book value per share for common stockholders by targeting an operating return on equity in the low to mid-teens over the market cycle. Liquidity: Strong, supported by highly liquid investments and strong operating cash flows As of March 31, 2017, the company had $945 million in cash and short-term investments. In addition, Everest has access to an $800 million credit facility. Everest refinanced $250 million in maturing senior notes by issuing $400 million in senior notes in None of the notes are due in the near term. JULY 13,

11 Accounting Considerations Everest is listed on NYSE and files quarterly and annual financial statements on a generally accepted accounting principles basis. The group reports income from limited partnership and other investments on an equity basis, flowing through net investment income. In years when these investments appreciate, profitability metrics such as ROR and adjusted EBITDA (which otherwise excludes unrealized gains and losses) are boosted. If these investments depreciate, these metrics would appear worse. Everest's capital-markets vehicle, Mt. Logan Re, is funded primarily by third parties. Previously, it was consolidated in Everest's financials. The equity and income from Mt. Logan Re that did not belong to Everest appears in the noncontrolling interests. However, following the issuance of new guidelines by FASB, Mt. Logan Re's financials were deconsolidated from the group in first-quarter Everest Re Group Ltd. Rating Score Snapshot Holding Company Rating A-/Stable/-- Financial Strength Rating A+/Stable Anchor a Business Risk Profile Strong JULY 13,

12 Everest Re Group Ltd. Rating Score Snapshot (cont.) IICRA* Competitive Position Financial Risk Profile Capital & Earnings Risk Position Financial Flexibility Intermediate Risk Strong Strong Extremely Strong High Risk Strong Modifiers +1 ERM and Management +1 Enterprise Risk Management Management & Governance Strong Satisfactory Holistic Analysis 0 Liquidity Strong Support 0 Group Support 0 Government Support 0 *Insurance Industry And Country Risk Assessment. Related Criteria General Criteria: Group Rating Methodology, Nov. 19, 2013 Criteria - Insurance - General: Enterprise Risk Management, May 7, 2013 Criteria - Insurance - General: Insurers: Rating Methodology, May 7, 2013 General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities And Insurers, Nov. 13, 2012 Criteria - Insurance - General: Refined Methodology And Assumptions For Analyzing Insurer Capital Adequacy Using The Risk-Based Insurance Capital Model, June 7, 2010 General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009 Criteria - Insurance - General: Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008 Related Research Deja Vu All Over Again: Global Reinsurers Awake To Another Year Of Declining Rates, June 22, 2017 Bermuda Re/Insurance Quarterly Insights: A Shaky Start To 2017, May 11, 2017 Bermuda Re/Insurance Quarterly Insights: Underwriting Profitability Slips In 2016 As Reinsurers Navigate Prolonged Soft Market, April 21, 2017 Insurance Industry And Country Risk Assessment: Global Property/Casualty Reinsurance, March 17, 2017 The Bermuda Triangle: The New U.S. Administration, Taxes, And Reinsurance, Feb. 3, 2017 Ratings Detail (As Of July 13, 2017) Everest Re Group Ltd. Counterparty Credit Rating A-/Stable/-- JULY 13,

13 Ratings Detail (As Of July 13, 2017) (cont.) Related Entities Everest Indemnity Insurance Co Financial Strength Rating Issuer Credit Rating Everest International Assurance Ltd Financial Strength Rating Issuer Credit Rating Everest National Insurance Co. Financial Strength Rating Issuer Credit Rating Everest Reinsurance (Bermuda) Ltd. Financial Strength Rating Issuer Credit Rating Everest Reinsurance Co. Financial Strength Rating Issuer Credit Rating Everest Reinsurance Co. (Ireland) Ltd. Financial Strength Rating Issuer Credit Rating Everest Reinsurance Holdings Inc. Issuer Credit Rating Junior Subordinated Senior Unsecured A- Kilimanjaro Re Ltd Senior Unsecured Domicile A/Stable/-- A/Stable/-- A-/Stable/-- BBB BB- Bermuda *Unless otherwise noted, all ratings in this report are global scale ratings. S&P Global Ratings credit ratings on the global scale are comparable across countries. S&P Global Ratings credit ratings on a national scale are relative to obligors or obligations within that specific country. Issue and debt ratings could include debt guaranteed by another entity, and rated debt that an entity guarantees. JULY 13,

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