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), including the Issuer Default Rating (IDR) at 'A+', and the Insurer Financial Strength (IFS) rating at 'AA-'. A full list of ratings follows at the end of this press release. The Rating Outlook is Stable.
KEY RATING DRIVERS
Fitch's affirmation of Everest's ratings reflects the company's high quality balance sheet, strong competitive position and franchise, diversified underwriting portfolio in primary insurance and reinsurance markets and good long-term track record of earnings and capital generation. The 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.
These favorable factors are partially offset by the potential for earnings volatility from exposure to low-frequency, high-severity loss events, potential adverse reserve development in casualty reserves and the continuing challenging reinsurance market conditions. Fitch currently has a negative sector outlook on global reinsurance, as the fundamentals of the reinsurance sector have deteriorated with declining premium pricing and weakening of terms and conditions across a wide range of lines.
Everest reported record earnings in 2013 with net income of $1.26 billion compared to $829 million in 2012, as catastrophe losses were less severe. The company's combined ratio improved to 84.5% in 2013, which included 4.1 points for catastrophe losses and 0.4 points of favorable loss reserve development, with favorable development in reinsurance operations partially offset by unfavorable development in insurance operations. This compares to a combined ratio of 93.8% for full-year 2012, which included approximately 9.8 points for catastrophe losses, primarily from $325 million of Hurricane Sandy losses, and 0.1 points of favorable reserve development.
Everest posted sizable growth in written premiums in 2013 at levels greater than the market and most peers, as the company opportunistically added business across most lines. Total company net premiums written (NPW) increased 22.6% in 2013, following a modest decline in 2012. This included 20.8% growth in reinsurance segment NPW due to the return of a Florida quota share reinsurance contract as well as from new business and increased participations on existing business. Insurance segment NPW was up 27.5% due to growth in California workers' compensation, crop and nonstandard auto business.
Fitch recognizes that top line premium growth can prove beneficial in advancing a company's market position and size/scale. However, Fitch also cautions that rapid growth can create additional risks in underwriting quality and pricing adequacy on new business, especially during a period of market competitiveness. Fitch expects Everest to manage its growth prudently and does not anticipate that the company will grow its premiums considerably greater than the market and peers over the longer term.
Everest continues to maintain a solid, high-quality balance sheet with minimal leverage risk and ample financial flexibility. Fitch believes Everest's operating leverage ratios are modest for the rating category, with NPW to equity of 0.7 times at Dec. 31, 2013, up from 0.6x at Dec. 31, 2012, reflecting the written premium growth. Favorably, the company's capital position improved in 2013, with total GAAP shareholders' equity of $7 billion at Dec. 31, 2013, up from $6.7 billion at Dec. 31, 2012, as favorable net income was partially offset by a decline in unrealized gains on fixed maturities from a rise in interest rates, common share dividends and share repurchases. Fitch's current ratings incorporate expectations that any future share repurchases will not exceed earnings over an extended time.
Fitch believes that Everest's financial leverage ratio continues to be very modest at 6.7% as of Dec. 31, 2013, down from 11.5% at Dec. 31, 2012. This drop is the result of the company's redemption of its $330 million junior subordinated debt securities in May 2013. Everest's operating earnings-based interest and preferred dividend coverage improved to an extremely strong 27.3x in 2013 from 15.6x in 2012. Everest's coverage averaged a favorable 12.4x from 2009-2013, which included negative coverage in 2011 due to high catastrophe losses.
Key rating triggers that could result in a downgrade include material adverse loss reserve development that caused Fitch to question Everest's balance sheet strength, failure to report run-rate combined ratios normalized for average catastrophes in the mid-90s, or if the company reports significantly worse overall profitability than comparably rated peers. In addition, run-rate operating earnings-based interest and preferred dividend coverage ratios that fall below 10x, an increase in net premiums written to equity ratio to over 0.9x, or an increase in financial leverage to more than 20% could result in a downgrade.
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 resulting in significantly lower underwriting volatility.
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';
--6.6% junior subordinated debenture due 2067 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' (Nov. 13, 2013).
Applicable Criteria and Related Research:
Insurance Rating Methodology