Everest Re Group Ltd. (RE) reported third quarter operating profit of $2.67 per share, in line with the Zacks Consensus Estimate. The company had earned $3.43 in the prior year quarter.
Including realized capital gains and losses, Everest reported a net income of $174.2 million or $3.11 per share, compared with a net income of $228.6 million or $3.75 per share in the year-ago period.
The Bermuda-based reinsurer reported total revenues of $1.18 billion, greater than the Zacks Consensus Estimate of $1.16 billion. Revenues were also up 13% on the yearly basis led by an increase in premiums earned, higher net realized capital gains, and higher other income.
Gross written premiums were $1.2 billion, up 3% from the prior-year quarter. However, excluding the effects of foreign exchange, premiums were up 2%. Reinsurance premiums increased 6% to $952, new business opportunities coupled with rate increases on select covers and insurance market growth in some international regions contributed to this increased volume. Insurance gross premiums written were down 8% primarily due to underwriting measures adopted in response to unprofitable business.
The loss and combined ratios were 67.7% and 95.9% respectively, compared with 60.2% and 88.3% in the prior-year quarter. The loss ratio increased due to the increase in current year catastrophe losses emanating from New Zealand earthquake and a hailstorm in Calgary.
Net investment income was $141.4 million, down 15% year over year, primarily led by lower return on alternative assets. After-tax net realized capital gains totaled $24.9 million, compared with after-tax net realized capital gains of $19.3 million in the same period last year. The gains for the current quarter were primarily attributable to fair value adjustments on the equity portfolio.
Book value per share increased to $114.16 as of September 30, 2010, from $102.87 as of the year-end 2009, led by share repurchases. Return on equity was 10.6% compared with 14.9% in the 2009 period.
Cash flow from operations was $297.8 million down 5% year over year. During the quarter, the company repurchased 1.2 million of its common shares at an average price of $80.84 and a total cost of $99.7 million.
Everest Re is facing a decline in casualty and property insurance rates both in the U.S. and abroad. Management was pessimistic for top-line growth in 2011 and said that without any favorable market change the company is not expected to see top-line growth in 2011.The company is taking the use of this market situation to establish new units to prepare the company for eventual growth as and when the insurance market turns favorable.
Though top-line growth will remain restricted in 2011, earnings are expected to be above 2010 levels, helped by expected strong cash flow in 2011. The company also expects its insurance operation to achieve underwriting profits in 2011. Further, the recent acquisition of Heartland is expected to add $175 million worth of business this year.
Moreover, California workers’ company, which forms 25% of 2011 insurance writing, is expected to reach double-digit rate from 9% rate increase experienced in 2010. Moreover, the company’s New York direct operation is expected to produce approximately 15% of insurance business in 2011, which writes Directors’ and Officers’ and E&O products mostly for financial institutions. This operation has been quite profitable and is believed to continue to be so in 2011.
On the reinsurance side, Berkley is expects to institute operational changes and lower catastrophe incidence, despite Australian flood losses occurring at the beginning of the year.
Berkleycontinues to have strong excess capital that it expects to use for continued share buyback, which would also buoy earnings to some extent.
Currently we give a “Neutral” recommendation to the shares for the long term (3–6 months). The shares carry a Zacks #3 Rank, which translates into a “Hold” recommendation for the short term (1–3 months).
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