CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of Everest Re Group, Ltd.'s debt-issuing holding company, Everest Reinsurance Holdings, Inc. and its subsidiaries (Everest). The Rating Outlook is Stable. A full list of ratings follows at the end of this release.
KEY RATING DRIVERS
The ratings affirmation reflects Everest's high quality balance sheet and financial flexibility, strong competitive position and franchise, and good long-term track record of earnings and capital generation. The company's ratings also reflect Fitch's belief that the company's risk management capabilities will enable it to maintain its strong, liquid balance sheet during periods that experience heightened underwriting losses and/or capital market volatility.
Fitch believes the company remains well positioned to take advantage of any potential rate improvement in catastrophe-exposed lines and certain others, this despite Hurricane Sandy losses in 2012 and in the aftermath of the large worldwide catastrophe losses suffered in 2011. Fitch also anticipates that steps taken by Everest's management to reduce its exposure to large catastrophe events will result in lower earnings volatility in the long term. Favorably, Everest has a diversified underwriting portfolio in primary insurance and reinsurance markets.
Offsetting these positives are the current competitive market conditions and the company's potential for earnings volatility from exposure to low-frequency, high-severity loss events. Minimal reinsurance usage and a history of varied reserve development point to further volatility.
The company reported strong earnings and improved underwriting results through June 30, 2013 with net income of $660 million compared to $519 million for the same six-month period in 2012. The combined ratio improved to 84.2% compared to 89% in 2012. Improved operating performance was also due to modest improvement in underlying accident year results, along with favorable reserve development and continued reasonable investment performance.
In 2012, net pretax catastrophe losses were significantly less than prior years totaling roughly $361 million and resulted in $829 million of net income. This contributed to a 93.8% combined ratio and an 11% increase in equity. In 2011, net pretax catastrophe losses totaled roughly $1.2 billion and resulted in a $80.5 million net loss. This contributed to a 118.5% combined ratio and a 3.4% decline in equity. Although significant, Fitch notes that this was less than the declines experienced by other reinsurers it rates.
Positively, Fitch believes that Everest continues to maintain a solid, high-quality balance sheet with minimal leverage risk and ample financial flexibility. Fitch believes Everest's operating leverage and financial leverage ratios are modest for the rating category. Net premiums written to equity and total debt to capital ratios were 0.65 times at Dec. 31, 2012 and 6.9% at June 30, 2013, respectively.
Everest has more-than replenished capital internally following Hurricane Sandy in 2012 and record-high catastrophe losses in 2011 primarily as a result of strong earnings and unrealized investment gains. At June 30, 2013, stockholders' equity was near its all-time high at $6.6 billion, an increase of roughly 9% since 2011, which includes a significant return of capital to shareholders. During the first six months of 2013, Everest repurchased $450 million of shares. Fitch's current ratings incorporate expectations that any future share repurchases will not exceed earnings over an extended time.
Key rating triggers that, if observed over the next 12-to-18 months, could result in a downgrade include:
--Material investment write downs or adverse loss reserve development of a magnitude that caused Fitch to question the strength of Everest's balance sheet; or
--If Everest were to report significantly worse underwriting results and overall profitability than comparably rated peers.
Additional rating triggers that could result in a downgrade when viewed on a run-rate or multi-year rolling average basis include:
--Failure to report calendar year combined ratios in the mid-90%'s;
--Operating-earnings-based interest and preferred dividend coverage ratios that fall below roughly 10x;
--Barring a significant shift in business mix toward less volatile lines, an increase in net written premium to equity exceeding 1.1x;
--An increase in financial leverage to over 20%.
Due to Everest's current high rating category, Fitch views a near-term ratings upgrade as unlikely, in the absence of a material increase in capitalization or a change in risk profile that resulted in significantly lower underwriting volatility observed over an extended period.
Fitch has affirmed the following ratings:
Everest Reinsurance Holdings, Inc.
--Long-term Issuer Default Rating (IDR) at 'A+';
--5.4% senior notes due 2014 at 'A';
--6.60% junior subordinated debenture due 2037 at 'BBB+'.
Everest Reinsurance Company;
Everest National Insurance Company;
Everest Indemnity Insurance Company;
Everest Security Insurance Company;
Everest Reinsurance Company (Ireland), Limited;
Everest Reinsurance (Bermuda) Ltd.
--Insurer Financial Strength (IFS) at 'AA-'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Jan. 11, 2013).
Applicable Criteria and Related Research:
Insurance Rating Methodology — Amended