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Everest Re Group's Earnings Hurt by Catastrophe Losses

Insurance and reinsurance specialist Everest Re Group (NYSE: RE) posted a decline in second-quarter profit this week that was driven by a spike in catastrophe losses. Its underlying business returned to solid premium growth, though, despite what management called a broadly challenging sales environment.

Here's how the Q2 results stacked up against the year-ago period:

Metric 

Q2 2016 Actuals

Q2 2015 Actuals

Growth (YOY)

Revenue

$1.43 billion

$1.4 billion

3%

Net income

$156 million

$209 million

(25%)

EPS

$3.67

$4.68

(22%)

Data source: Everest Re's financial filings.

What happened this quarter?

Everest returned to growth in its biggest market, reinsurance. The insurance segment, meanwhile, posted unusually strong gains. These improvements were largely offset by catastrophe losses, foreign currency swings, and low interest rates.

Highlights of the quarter included:

  • Reinsurance premiums ticked up by 1%, compared to an 8% drop in the prior quarter. Insurance premiums soared higher by 32% as Everest pushed into new areas like property, crop lines, and sports and entertainment. Overall gross premium growth was 8%, compared to a 5% decline in Q1.
  • Catastrophe losses amounted to $124 million as the company paid out for major events including wildfires in Canada, an earthquake in Ecuador, and hailstorms in Texas.
  • Investment income rose by a solid 6% despite continued pressure from low interest rates.
  • The combined ratio, a measure of profitability, held steady at 86%.
  • Operating return on equity fell to a 9% annualized rate, marking a decline from the 12% pace Everest had managed in Q1.
  • Book value per share rose 7% to $191, compared to a 4% rise in the prior quarter.

What management had to say

Image source: Everest Re.

CEO Dominic Addesso described the results as strong in the context of the many challenges that Everest faced in the quarter.

"Everest's six-month annualized operating return on equity of 9.4% is an excellent result given the number of catastrophe loss events, the impact of foreign currency movements around the world, and the continued low interest rate environment," Addesso explained in the earnings release. "It remains a challenging environment but the strategic actions we have taken to position Everest for continued success are borne out by these results."

Looking forward

It's an encouraging sign for the business that Everest is back to reinsurance premium growth, even if it was just a modest 1% uptick this quarter. Meanwhile, the initiatives that Addesso and his executive team have recently taken -- to push into less competitive markets such as sports and entertainment -- are clearly generating momentum in the insurance division that makes up a quarter of its operations.

Everest can't do much about the pressures from a more competitive reinsurance market and the low interest rates that are holding back investment income. However, its low expense structure and market-leading scale is allowing it to produce solid earnings growth. That success is powering continued gains in a book value that, together with dividend payments, has generated 12.5% annual returns for investors over the last decade.

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Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends Everest Re Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.