The projected economic losses, defined as PML exposures, net of third party reinsurance, reinstatement premiums and estimated income taxes, for the top zones/perils scheduled are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Return Periods (in years) | 1 in 20 | | 1 in 50 | | 1 in 100 | | 1 in 250 | | 1 in 500 |
| Exceeding Probability | 5.0% | | 2.0% | | 1.0% | | 0.4% | | 0.2% |
| (Dollars in millions) | | | | | | | | | |
| Zone/ Peril | | | | | | | | | |
| Southeast U.S., Wind | $ | 593 | | | $ | 918 | | | $ | 1,270 | | | $ | 1,646 | | | $ | 1,817 | |
| California, Earthquake | 161 | | | 691 | | | 1,066 | | | 1,596 | | | 1,852 | |
| Texas Wind | 146 | | | 354 | | | 608 | | | 1,096 | | | 1,524 | |
|
|
For the six months ended June 30, 2024, we repurchased 264,009 of our shares at a cost of $100 million in the open market. We paid $163 million in dividends to adjust our capital position and enhance long-term expected returns to our shareholders. As of December 31, 2023, we repurchased no shares in the open market and paid $288 million in dividends. On May 22, 2020, our existing Board authorization to purchase up to 30 million of our shares was amended to authorize the purchase of up to 32 million shares. As of June 30, 2024, we had repurchased 31.0 million shares under this authorization. During the second quarter of 2024, the Company’s Board of Directors declared an increase in the quarterly common stock dividend from $1.75 to $2.00 per share. The increase applied to the common stock dividend paid on June 14, 2024 for holders of record as of May 29, 2024. We paid $86 million in dividends during the second quarter 2024.
We may continue, from time to time, to seek to retire portions of our outstanding debt securities through cash repurchases, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will be subject to and depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved in any such transactions, individually or in the aggregate, may be material.
On May 19, 2023, the Company completed the public offering of 4,140,000 common shares, which includes full exercise of the underwriters’ option to purchase an additional 540,000 common shares, at a public offering price of $360.00 per share. Total net proceeds from the public offering were $1,445 million, after underwriting discount and expenses. The Company intends to use the net proceeds from this offering for long-term reinsurance opportunity and continuing build out of the global insurance business.
Liquidity. Our liquidity requirements are generally met from positive cash flow from operations. Positive cash flow results from reinsurance and insurance premiums being collected prior to disbursements for claims, which disbursements generally take place over an extended period after the collection of premiums, sometimes a period of many years. Collected premiums are generally invested, prior to their use in such disbursements, and investment income provides
additional funding for loss payments. Our net cash flows from operating activities were $2.4 billion and $2.2 billion for the six months ended June 30, 2024 and 2023, respectively. Additionally, these cash flows reflected net catastrophe loss payments of $365 million and $458 million for the six months ended June 30, 2024 and 2023, respectively, and net tax payments of $203 million and $73 million for the six months ended June 30, 2024 and 2023, respectively.
If disbursements for losses and LAE, policy acquisition costs and other operating expenses were to exceed premium inflows, cash flow from reinsurance and insurance operations would be negative. The effect on cash flow from insurance operations would be partially offset by cash flow from investment income. Additionally, cash inflows from investment maturities of both short-term investments and longer term maturities are available to supplement other operating cash flows. We do not expect to supplement negative insurance operations cash flows with investment dispositions.
As the timing of payments for losses and LAE cannot be predicted with certainty, we maintain portfolios of long-term invested assets with varying maturities, along with short-term investments that provide additional liquidity for payment of claims. At June 30, 2024 and December 31, 2023, we held cash and short-term investments of $4.0 billion and $3.6 billion, respectively. Our short-term investments are generally readily marketable and can be converted to cash. In addition to these cash and short-term investments, at June 30, 2024, we had $1.4 billion of available for sale fixed maturity securities maturing within one year or less, $7.3 billion maturing within one to five years and $8.4 billion maturing after five years. We believe that these fixed maturity securities, in conjunction with the short-term investments and positive cash flow from operations, provide ample sources of liquidity for the expected payment of losses and LAE in the near future. We do not anticipate selling a significant amount of securities to pay losses and LAE. At June 30, 2024, we had $1.1 billion of net pre-tax unrealized depreciation related to fixed maturity - available for sale securities, comprised of $1.2 billion of pre-tax unrealized depreciation and $188 million of pre-tax unrealized appreciation.
Management generally expects annual positive cash flow from operations, which reflects the strength of overall pricing. However, given catastrophic events observed in recent periods, cash flow from operations may decline and could become negative in the near term as significant claim payments are made related to the catastrophes. However, as indicated above, the Company has access to ample liquidity to settle its catastrophe claims and also may receive payments under the catastrophe bond program and the Mt. Logan Re collateralized reinsurance arrangement.
In addition to our cash flows from operations and liquid investments, we also have multiple active credit facilities that provide commitments of up to $1.7 billion of collateralized standby letters of credit to support business written by our Bermuda operating subsidiaries. In addition, the Company has the ability to request access to an additional $240 million of uncommitted credit facilities, which would require approval from the applicable lender. There is no guarantee the uncommitted capacity will be available to us on a future date. See Note 7 – Credit Facilities for further details.
Market Sensitive Instruments.
The SEC’s Financial Reporting Release #48 requires registrants to clarify and expand upon the existing financial statement disclosure requirements for derivative financial instruments, derivative commodity instruments and other financial instruments (collectively, “market sensitive instruments”). We do not generally enter into market sensitive instruments for trading purposes.
Our current investment strategy seeks to maximize after-tax income through a high quality, diversified, fixed maturity portfolio, while maintaining an adequate level of liquidity. Our mix of investments is adjusted periodically, consistent with our current and projected operating results and market conditions. The fixed maturity securities in the investment portfolio are comprised of available for sale and held to maturity securities. Additionally, we have invested in equity securities.
The overall investment strategy considers the scope of present and anticipated Company operations. In particular, estimates of the financial impact resulting from non-investment asset and liability transactions, together with our capital structure and other factors, are used to develop a net liability analysis. This analysis includes estimated payout characteristics for which our investments provide liquidity. This analysis is considered in the development of specific investment strategies for asset allocation, duration and credit quality. The change in overall market sensitive risk exposure principally reflects the asset changes that took place during the period.
Interest Rate Risk. Our $39.1 billion investment portfolio at June 30, 2024 is principally comprised of fixed maturity securities, which are generally subject to interest rate risk and some foreign currency exchange rate risk, and some equity securities, which are subject to price fluctuations and some foreign exchange rate risk. The overall economic impact of the foreign exchange risks on the investment portfolio is partially mitigated by changes in the dollar value of foreign currency denominated liabilities and their associated income statement impact.
Interest rate risk is the potential change in value of the fixed maturity securities portfolio, including short-term investments, from a change in market interest rates. In a declining interest rate environment, interest rate risk includes prepayment risk on the $6.6 billion of mortgage-backed securities in the $29.8 billion fixed maturity portfolio. Prepayment risk results from potential accelerated principal payments that shorten the average life and thus the expected yield of the security.
The table below displays the potential impact of market value fluctuations and after-tax unrealized appreciation on our fixed maturity portfolio (including $2.5 billion of short-term investments) for the period indicated based on upward and downward parallel and immediate 100 and 200 basis point shifts in interest rates. For legal entities with a U.S. dollar functional currency, this modeling was performed on each security individually. To generate appropriate price estimates on mortgage-backed securities, changes in prepayment expectations under different interest rate environments were taken into account. For legal entities with a non-U.S. dollar functional currency, the effective duration of the involved portfolio of securities was used as a proxy for the market value change under the various interest rate change scenarios.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Impact of Interest Rate Shift in Basis Points
At June 30, 2024 |
| -200 | | -100 | | 0 | | 100 | | 200 |
| (Dollars in millions) | | | | | | | | | |
| Total Fair Value | $ | 34,490 | | | $ | 33,386 | | | $ | 32,283 | | | $ | 31,179 | | | $ | 30,075 | |
| Fair Value Change from Base (%) | 6.8 | % | | 3.4 | % | | — | % | | (3.4) | % | | (6.8) | % |
| Change in Unrealized Appreciation | | | | | | | | | |
| After-tax from Base ($) | $ | 1,899 | | | $ | 950 | | | $ | — | | | $ | (950) | | | $ | (1,899) | |
We had $25.9 billion and $24.6 billion of gross reserves for losses and LAE as of June 30, 2024 and December 31, 2023, respectively. These amounts are recorded at their nominal value, as opposed to present value, which would reflect a discount adjustment to reflect the time value of money. Since losses are paid out over a period of time, the present value of the reserves is less than the nominal value. As interest rates rise, the present value of the reserves decreases and, conversely, as interest rates decline, the present value increases. These movements are the opposite of the interest rate impacts on the fair value of investments. While the difference between present value and nominal value is not reflected in our financial statements, our financial results will include investment income over time from the investment portfolio until the claims are paid. Our loss and loss reserve obligations have an expected duration of approximately 3.9 years, which is reasonably consistent with our fixed income portfolio. If we were to discount our loss and LAE reserves, net of ceded reserves, the discount would be approximately $4.6 billion resulting in a discounted reserve balance of approximately $19.2 billion, representing approximately 59.3% of the value of the fixed maturity investment portfolio funds.
Foreign Currency Risk. Foreign currency risk is the potential change in value, income and cash flow arising from adverse changes in foreign currency exchange rates. Each of our non-U.S./Bermuda operations maintains capital in the currency of the country of its geographic location consistent with local regulatory guidelines. Each non-U.S. operation may conduct business in its local currency, as well as the currency of other countries in which it operates. The primary foreign currency exposures for these non-U.S. operations are the Canadian Dollar, the Singapore Dollar, the British Pound Sterling and the Euro. We mitigate foreign exchange exposure by generally matching the currency and duration of our assets to our corresponding operating liabilities. In accordance with FASB guidance, the impact on the fair value of available for sale fixed maturities due to changes in foreign currency exchange rates, in relation to functional currency, is reflected as part of other comprehensive income. Conversely, the impact of changes in foreign currency exchange rates, in relation to functional currency, on other assets and liabilities is reflected through net income as a component of other income (expense). In addition, we translate the assets, liabilities and income of non-U.S. dollar functional currency legal entities to the U.S. dollar. This translation amount is reported as a component of other comprehensive income.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Instruments. See “Liquidity and Capital Resources - Market Sensitive Instruments” in PART I – ITEM 2.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, our management carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures
are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this report.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the ordinary course of business, the Company is involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine the Company’s rights and obligations under insurance and reinsurance agreements. In some disputes, the Company seeks to enforce its rights under an agreement or to collect funds owing to it. In other matters, the Company is resisting attempts by others to collect funds or enforce alleged rights. These disputes arise from time to time and are ultimately resolved through both informal and formal means, including negotiated resolution, arbitration and litigation. In all such matters, the Company believes that its positions are legally and commercially reasonable. The Company considers the statuses of these proceedings when determining its reserves for unpaid loss and LAE.
Aside from litigation and arbitrations related to these insurance and reinsurance agreements, the Company is not a party to any other material litigation or arbitration.
ITEM 1A. RISK FACTORS
No material changes.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities.
| | | | | | | | | | | | | | |
| Issuer Purchases of Equity Securities |
| (a) | (b) | (c) | (d) |
| Period | Total Number of Shares (or Units) Purchased (2) | Average Price Paid
per Share (or Unit) | Total Number of
Shares (or Units)
Purchased as Part
of Publicly
Announced Plans or
Programs | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (1) |
| April 1 - 30, 2024 | 40 | $ | 356.44 | | — | 1,138,617 |
| May 1 - 31, 2024 | 174,202 | $ | 374.19 | | 173,718 | 964,899 |
| June 1 - 30, 2024 | 42 | $ | 380.42 | | — | 964,899 |
| Total | 174,284 | $ | — | | 173,718 | 964,899 |
(1)On May 22, 2020, the Company’s executive committee of the Board of Directors approved an amendment to the share repurchase program authorizing the Company and/or its subsidiary Holdings, to purchase up to a current aggregate of 32.0 million of the Company’s shares (recognizing that the number of shares authorized for repurchase has been reduced by those shares that have already been purchased) in open market transactions, privately negotiated transactions or both. Currently, the Company and/or its subsidiary Holdings have repurchased 31.0 million of the Company’s shares.
(2)Shares that have not been repurchased through a publicly announced plan or program consist of shares repurchased by the Company from employees in order to satisfy tax withholding obligations on vestings and/or settlements of share-based compensation awards.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
During the fiscal quarter ended June 30, 2024, none of our directors or officers (as defined in Exchange Act Rule 16a-1(f)) , modified or a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as those terms are defined in Regulation S-K, Item 408.
ITEM 6. EXHIBITS
Exhibit Index
| | | | | | | | |
| Exhibit No. | | Description |
10.1* | | |
| | |
10.2* | | |
| | |
10.3* | | |
| | |
10.4* | | |
| | |
10.5 | | |
| | |
| 31.1 | | |
| | |
| 31.2 | | |
| | |
| 32.1 | | |
| | |
| 101.INS | | XBRL Instance Document |
| | |
| 101.SCH | | XBRL Taxonomy Extension Schema |
| | |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase |
| | |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase |
| | |
| 101.LAB | | XBRL Taxonomy Extension Labels Linkbase |
| | |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase |
| | |
| 104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
_________________
*Management contract or compensatory plan or arrangement.
Everest Group, Ltd.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | | |
| Everest Group, Ltd. |
| (Registrant) |
| |
| |
| /S/ MARK KOCIANCIC |
| Mark Kociancic |
| Executive Vice President and Chief Financial Officer |
| |
| (Duly Authorized Officer and Principal Financial Officer) |
Dated: August 2, 2024
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