Everest Re Group Ltd. (RE) has reported second quarter 2011 operating profit of $2.46 per share, 2 cents ahead of the Zacks Consensus Estimate. Results, however, compares unfavorably with earnings of $3.18 per share incurred in the year-ago quarter. Year-over-year results suffered hugely due to heavy catastrophe incidence during the first half of the year.
Total pre-tax catastrophe losses (cat loss), net of reinstatement premiums, were $113 million in the reported quarter as against $64.6 million in the second quarter of 2010. On an after-tax basis, net catastrophe losses amounted to $90 million, or $1.65 per diluted common share, in the quarter. The company’s second quarter cat losses were higher than previously projected due to late reporting by a single client with increased exposures to the New Zealand earthquake that occurred earlier this year.
Operational Update
The company’s total revenue for the quarter came in at $1.18 billion, up 7.0% year over year, on the back of an increase in premiums earned, lower realized capital losses, and lower derivative loss, partly offset by lower investment income.
Gross written premiums were $987.9 million, down 2.5% from the prior-year quarter. However, excluding the effects of foreign exchange, premiums were down 5.5%, primarily owing to a continued reduction in casualty business.
The loss ratio in the quarter stood at 70.8% compared with 65.1% in the prior-year quarter. Excluding catastrophe losses, related reinstatement premium and favorable prior-year development, loss ratio was 59.7%, modestly up from 59.3% in the year-ago period.
Net investment income in the quarter decreased 4% year over year to $158.6 million due to declining reinvestment rates and lower income on limited partnership investments.
Total claims and expenses increased 10% year over year to $1.04 billion owing to higher incurred losses and loss adjustment expenses, slightly higher commission, brokerage, taxes and fees, and higher other underwriting expenses.
Financial Update
Bermuda-based Everest Re ended the quarter with cash balance of $411.5 million, up 59% from the level at 2010 end.
Book value per share, a measure of company’s net worth, was $113.21 as of June 30, 2011, down 1.9% from the 2010-end level.
Share Repurchase and Dividend
During the quarter under review, Everest Re did not repurchase any of its common shares. During the first half of 2011, the company repurchased 428,038 of its common shares for a total cost of $37.6 million. The company is still left with 3.0 million shares under its current share buyback authorization.
The company also declared a regular dividend of 48 cents per share during the reported quarter.
Though Everest Re suffered during the quarter on the back of high catastrophe activity, the silver lining to this event is that it will harden rates because of strained capital across the industry. Therefore, we expect meaningful rate increases, particularly in the regions mostly affected by catastrophes. Other factors that are likely to increase reinsurance demand include higher capital requirements owing to the implementation of Solvency II in Europe. In the United States, the new version (RMS 11) of catastrophe model has already increased PMLs (probable maximum loss) considerably. The combination of these events is likely to improve reinsurance demand going forward. We also expect Everest Re to benefit from a shift in the market trend.
Everest Re competes with peers such as Zurich-based ACE Ltd. (ACE) and Ireland-based XL Group plc (XL).
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