Everest Re Group, Ltd. (EG) Q3 2009 Earnings Report, Transcript and Summary

Good day, everyone and welcome to the third quarter 2009 earnings release call of Everest Re Group. Today's conference is being recorded. At this time, for opening remarks and introductions I would like to turn the conference over to Ms. Beth Farrell, Vice President of Investor Relations. Please go ahead, Ms. Farrell.

Thank you, Laura. Good morning, and welcome to Everest Re Group's third quarter 2009 earnings conference call. With me today are Joe Taranto, the company's Chairman and Chief Executive Officer; Ralph Jones, the President and Chief Operating Officer, and Dominic Addesso, our Chief Financial Officer. Before we begin, I will preface our comments by noting that our SEC filings include extensive disclosures with respect to forward-looking statements. In that regard, I note that statements made during today's call, which are forward-looking in nature such as statements about projections, estimates, expectations and the like are subject to various risks. As you know, actual results could differ materially from current projections or expectations. Our SEC filings have a full listing of the risks that investors should consider in connection with such statements. Now, let me turn the call over to Joe Taranto.

Thank you, Beth. Good morning. We are pleased to report the quarter where our top line grew 13%. Our operating earnings were $209 million, producing a 15% ROE and where surplus grew to $6.1 billion with book value per share increasing to $100.75, up 25% from year end. Reinsurance premium grew 12% for the quarter and is growing 12% through nine months. This growth has come from us capitalizing on the following First, a strong property reinsurance market, particularly in catastrophe exposed business. Second, a need for additional reinsurance going into 2009 as many companies weakened in 2008, needed reinsurance as a form of additional capital. Third, we continued the expansion on the international markets including our new office in Brazil. Fourth, new product development, most notably crop reinsurance. I am pleased as to how our staff used our financial strength and distribution channels to foster this growth. Our insurance operation grew its premium 19% for the quarter, and has increased premiums through nine months by 9%. Most of the new premium has come from a new unit we started this year in New York to write financial institution, directors’ and officers’ liability, and additional property insurance written in Florida where rates to exposure remain attractive. In a moment, Ralph will provide more specifics on our underwriting results and initiatives, and Don will provide more detail on financial results and plans. Whereas we are pleased that catastrophe losses have been light and that stocks and bonds have bounced back strengthening balance sheets, we know that these developments reduce pressure to correct insurance rates. Casualty rates are thin and getting thinner. We will remain extremely cautious in this area. Property reinsurance has well rated in 2009, but if there are no large catastrophes, we would expect a downward correction. Generally, my expectation is that 2010 rates will still be adequate, whereas our invested assets are higher than ever, interest rates are currently lower than ever adding to the challenge ahead. Our response to these conditions will be, as always, to stay disciplined underwriters. Part of our response has been to be buyback stock, which we expect to continue to do. I am confident that many strengths that Everest has built will allow us to continue to do well. Ralph?

Thank you, Joe. The U.S. reinsurance business was up 23% for the quarter, and produced a combined ratio of 67%. When the wind doesn’t blow – both performs very well. Much of the growth comes from our treaty property business, which has benefit to some degree from increased rates on catastrophe exposed business, but also from the addition of the crop business which contributed $27 million in the quarter and $68 million year-to-date. While treaty casualty terms and conditions are better that what we are seeing in the primary churns market, a slow deterioration of rates in the underlying market has caused for a cautious outlook in casualty. Our international business was up 9.6% during the quarter, and 12% in base currencies for the countries in which we operate. The combined ratio of 91.5% was impacted by $23 million in catastrophe [ph] losses during the quarter. This principally came from significant flooding in Turkey where we have a 3% market share on the property lines. There were also several smaller losses in Asia including the earthquake in Indonesia, which makes up the balance of this number, for the quarter. Year-over-year growth in the quarter was principally driven in the international segment by our Singapore office, up 19% in original currencies in the quarter we’ve some new opportunities have come from Australia, Korea and Japan. The new office in Brazil included $18 million in the quarter and $44 million year-to-date. Our Bermuda operations which includes London and Brussels, was flat for the quarter in original currencies and down 4% in US dollars. The combined ratio of 90.2% was just about what we've expected. The US insurance business, Everest National is up 9% year-to-date on a gross basis and 4% on a net basis. The growth is come from two areas of opportunity the new D&O operation in New York as Joe has mentioned, and from our E&S [ph] property came in Tampa, Florida. Net growth was lower than gross, since we reinsured greater proportion of the book in the umbrella and D&O segment has a way to manage the limits that we offer in the market place. Combined ratio year-to-date is 104%, which is principally driven by a program book is continues to signal a cautious outlook for the primary niche casualty programs. Renewal retentions are down in the quarter and programs because overall rate levels have been trending down earlier in the year. So some rates stabilizing in the third quarter mostly in the California account book where rates were up 5%. Overall, it’s a very strong quarter and is consistent with the trends we have described during the several past quarters. I’ll turn it over to Dominic Addesso.

Thank you, Ralph. Good morning. As previously highlighted, our third quarter earnings were favorable with net income for fully diluted common share of $3.75 compared to a loss one year-ago. Minimal CAT [ph] activity for this quarter as contrasted with one year ago was major factor in the year-over-year comparisons. Nevertheless, the current quarter in many respects continues to perform in a similar pattern what we have seen during the year. Property reinsurance rates continue to be strong and coupled with the low CAT activity during the year that resulted in very favorable underwriting results for those lines of business. Our casualty reinsurance book despite continued softening at the primary level is experiencing generally favorable underwriting results as reinsurance pricing remains adequate and prior year reserves continue to perform favorably. In addition, we have managed that portfolio down [ph] over time in response to competitive pressures. Overall these strategies have resulted in a combined ratio for the total reinsurance book of 83.7% for quarter and 85% for the year. The insurance results for the quarter stand at a 110.1% combined ratio and for the year at 103.9%. Prior year development on one claim counts for approximately six points in a quarter and two points in the year. In addition, the primary insurance space has been soft for several quarters, and it continues to reserve in recognition of that reality. As a result, underwriting results for this segment remain under pressure. Overall, given the mix of business segments the combine book produced a favorable 88.7% combined ratio for the quarter and an 88.8% for the year. The loss ratio component – the combined was 60.2% both quarter and year-to-date, while the expense ratio was 28.5% and 28.6% respectively for the same period. Investment income for the quarter is up only slightly over the prior year despite strong cash flow and therefore a higher invested asset base. Reinvestments rates are below those of the year ago and of the maturing positions in our portfolio. On a year-to-date basis, investment income is less than the prior year due to the decline in value during the first quarter of our limited partnership investments. Since then, the asset class has stabilized and we recognized approximately $23 million of income in the quarter from limited partnerships, up slightly from the second quarter of this year. Most of this income represents gains from the public equity portions of our limited partnerships. Net pre-tax realized gains for the quarter were positive at $31 million and for the most part reflect fair value adjustments on equity securities, as the equity markets have improved relative to the prior year when most markets have been formed [ph]. Net derivative expense, which reflects our equity put contracts with the prior years not material, but nevertheless down over prior periods. This reflects the methodology used to price these contracts and while the indices upon which these contracts were written have risen. Declining interest environment raises the present value of any potential obligation thereby offsetting the rise in the indices. Income taxes for the quarter and year are up over prior year and reflect the improved operating results. The year-to-date effective tax rate on operating results is up slightly over the first six months to 12% due to less than anticipated cat activity, since the tax rate during the year is based on projected results for the entire year. Other comprehensive income is up dramatically over prior years, primarily due to an increase in the unrealized values on our bond portfolio, net of tax. Pretax, the value of our bond portfolio has appreciated by $640 million so far this year. With comprehensive income of $605 million for the quarter and $1.3 billion for the year, shareholders' equity has risen to $6.1 billion. On a per share basis, this represents $100.75 in book value rising from $91.13 at June ‘09. The major factor in this growth along with our $3.75 of earnings was the $6 of growth and the change in our bond portfolio. Thus significant to that was the impact of our shares repurchased during the quarter, which amounted to $41 million, representing an average purchase price of $83.54 per share. With strong earnings, this was viewed to be an excellent use of capital, still remained quite strong. And with that as summary, I will turn it back to Beth for Q&A.

Laura?

Thank you. (Operator instructions) And our first question comes from Cliff Gallant with KBW. Cliff Gallant – KBW: Good morning.

Good morning. Cliff Gallant – KBW: First question was about the reserve additions in the quarter, you mentioned of one large claim in the primary side, but it looks like four out of the five segments saw some adverse development. Can you talk a little bit about what’s happening there?

Well, first of all, I think, any of the developments you’ve seen is in our view, relatively de minimis relative to $8 billion of total reserves. And yes, there was some movement among particular segments. Overall, our casualty reinsurance portfolio had favorable development. There was some movement in some of our property lines, in particular, marine, from some energy losses in prior year, but nevertheless, quite manageable overall. And, of course, in the insurance space where we had one large significant claim contributing to prior period development there. And that’s essentially blowing it down most of the development is coming from that – claim. We do not, from what we see in our quarterly process, and we do go through our reserves quarterly, we see things emerging quite nicely and favorably. We see no major surprises and we will undertake a more detailed analysis in the fourth quarter along with our auditors, but nothing that we’ve seen in the quarters as cause for any concern. Cliff Gallant – KBW: In the primary side, you are setting aside the one claim, you are still looking at a combined ratio of 104 taking up to six points for the one large claim. I would say with change in interest rates being where they are, should we assume that’s a profitable level you are running here to be running the businesses. Any comments as to what you are doing to address that just to start to move that to below a 100?

All right, Cliff, this is Ralph. The big issue that comes in the program both where it really comes down to price monitoring and price movement up, and, of course we’ve – when you approach the action here one-on-one that whole process is in motion. Very hard to get it at the first couple of quarters, we saw actual movement in the third quarter in almost every program with the change in direction. But the real only positive gains were in the California comp book where finally the market is showing some signs of kind of accepting the rate movements upwards. So, we have that price increase effort on every one of the program in the book which makes up about 75% of the insurance total. The other is just the change in mix as we focus on the pockets of opportunities. So, as you see the FI, D&O in Florida property facility, which is now about $35 million in premium, the Specialty areas, kind of around the programs, but it’s tough going on the primary casualty market. I don’t want to (inaudible) any comment on each of these. You tend to see a bit more competition on the bigger accounts, when you are doing the smaller ones, some are the specialty niche programs a little bit insulated, but it’s how it work.

Just add to that quick, Ralph is right. Some of the new areas like the FI, D&O, we like – we think we’ll produce some good results through time. The Florida property, we like but, in the main this book is 95% U.S. casualty business and that is top sledding for everyone right now. So, we are trying to kick up rates with some success here and there. We’re also looking at expenses and doing all the good things that we should do, but a lot of this just gets back to the market place and how it’s very competitive right now. Cliff Gallant – KBW: Thank you.

You’re welcome.

Jay Gelb – Barclays Capital Inc.: Thanks and good morning. Joe, could you update us on succession planning?

Didn’t you see that I extended for a year there, Jay? Jay Gelb – Barclays Capital Inc.: I did see that.

When a contract goes throughout the end of next year, but we have a process going on here where Ralph is basically studying the process and improving the process in certain areas. So I think we have the right situation in place that's all shareholders and clients should feel very good that we are going to have strength at the top for many years to come. The Board once it makes a final decision as to what timing we’ll let you know as soon as that decision is made. Jay Gelb – Barclays Capital Inc.:

Some of that was capitalizing on dislocations from late 2008, which helped us in some of the new product development like reinsurance and helped us with some international building that we've built including helping our Brazil office kickoff very, very nicely but other parts of the world we also saw opportunities because of weakness that some of our competitors had and the fact that some of our customers suddenly were down in surplus and needed some more reinsurance to help as a capital providers. We are pleased with what we've saw on the insurance side and the FI, D&O in the Florida sector. So there is number of things in 2009 that again we are happy with but that isn’t necessarily repeating it self going in to 2010. So if the market doesn’t particularly improve from where it’s at, the shorter answer would be you would not see double-digit growth next year. We’ll still work as hard as we can to find new opportunities and expand in to those new opportunities. But I can tell you right now that whereas we haven’t finalized the budget for 2010 we’re really not looking at much growth because our outlook is that the marketplace probably will not change significantly. Property reinsurance, in fact rates will all likely it would be down a bit from where they were in 2009 since the results have been very good there. And whereas, we hope casualty rates tick up at the insurance level, we are not planning on the fact that they will, if they do we can do much more but if they’re doing a significant way but that’s not part of our outlook at this stage. Some of that was capitalizing on dislocations from late 2008, which helped us in some of the new product development like reinsurance and helped us with some international building that we've built including helping our Brazil office kickoff very, very nicely but other parts of the world we also saw opportunities because of weakness that some of our competitors had and the fact that some of our customers suddenly were down in surplus and needed some more reinsurance to help as a capital providers. We are pleased with what we've saw on the insurance side and the FI, D&O in the Florida sector. So there is number of things in 2009 that again we are happy with but that isn’t necessarily repeating it self going in to 2010. So if the market doesn’t particularly improve from where it’s at, the shorter answer would be you would not see double-digit growth next year. We’ll still work as hard as we can to find new opportunities and expand in to those new opportunities. But I can tell you right now that whereas we haven’t finalized the budget for 2010 we’re really not looking at much growth because our outlook is that the marketplace probably will not change significantly. Property reinsurance, in fact rates will all likely it would be down a bit from where they were in 2009 since the results have been very good there. And whereas, we hope casualty rates tick up at the insurance level, we are not planning on the fact that they will, if they do we can do much more but if they’re doing a significant way but that’s not part of our outlook at this stage. Some of that was capitalizing on dislocations from late 2008, which helped us in some of the new product development like reinsurance and helped us with some international building that we've built including helping our Brazil office kickoff very, very nicely but other parts of the world we also saw opportunities because of weakness that some of our competitors had and the fact that some of our customers suddenly were down in surplus and needed some more reinsurance to help as a capital providers. We are pleased with what we've saw on the insurance side and the FI, D&O in the Florida sector. So there is number of things in 2009 that again we are happy with but that isn’t necessarily repeating it self going in to 2010. So if the market doesn’t particularly improve from where it’s at, the shorter answer would be you would not see double-digit growth next year. We’ll still work as hard as we can to find new opportunities and expand in to those new opportunities. But I can tell you right now that whereas we haven’t finalized the budget for 2010 we’re really not looking at much growth because our outlook is that the marketplace probably will not change significantly. Property reinsurance, in fact rates will all likely it would be down a bit from where they were in 2009 since the results have been very good there. And whereas, we hope casualty rates tick up at the insurance level, we are not planning on the fact that they will, if they do we can do much more but if they’re doing a significant way but that’s not part of our outlook at this stage. Some of that was capitalizing on dislocations from late 2008, which helped us in some of the new product development like reinsurance and helped us with some international building that we've built including helping our Brazil office kickoff very, very nicely but other parts of the world we also saw opportunities because of weakness that some of our competitors had and the fact that some of our customers suddenly were down in surplus and needed some more reinsurance to help as a capital providers. We are pleased with what we've saw on the insurance side and the FI, D&O in the Florida sector. So there is number of things in 2009 that again we are happy with but that isn’t necessarily repeating it self going in to 2010. So if the market doesn’t particularly improve from where it’s at, the shorter answer would be you would not see double-digit growth next year. We’ll still work as hard as we can to find new opportunities and expand in to those new opportunities. But I can tell you right now that whereas we haven’t finalized the budget for 2010 we’re really not looking at much growth because our outlook is that the marketplace probably will not change significantly. Property reinsurance, in fact rates will all likely it would be down a bit from where they were in 2009 since the results have been very good there. And whereas, we hope casualty rates tick up at the insurance level, we are not planning on the fact that they will, if they do we can do much more but if they’re doing a significant way but that’s not part of our outlook at this stage. Jay Gelb – Barclays Capital Inc.: All right that’s a very thoughtful answer, and then that sort of leads in to the capital management question with premium to equity at around 62% that the probably the firm out of excess capital on the balance sheet, what are your thoughts in terms of capital management?

Well, buyback has been for the last two quarters, part of the process. It will be going forward part of the process. And I think we were one of the few companies last quarter to be buying back stock. We’re one of the few reinsurance companies going into this quarter to say even though its CAT season, it’s likely that we’d be buying back stock. I expect us to be buying back going into the following quarter as well. We are not going to give targets. We like to maintain flexibility on that, so we can do what we think is best as we move from one point in time to the next. But expect us to be buying back. Jay Gelb – Barclays Capital Inc.: Thanks very much.

Our next question comes from Matthew Heimermann with J.P. Morgan. Matthew Heimermann – JP Morgan: Hi, good morning everybody. Couple of questions, if I may. I guess, with respect to the insurance segment, is there any – are you giving any thought to potentially actually restricting writings in that business given what's happening with pricing and loss costs transept [ph]?

Yes, the current actually here is 101.7, so we're not going to grow that at all. So, you're going to see the book to broad casualty programs probably decline, I think six out of the eight are declined already and with renewal retention because you're pushing the rates up. So, that’s going to continue in 2010 most likely. Matthew Heimermann – JP Morgan: Can you give a sense of order of magnitude what that will look like?

It’s very hard to predict exactly, I mean, we're pushing on all cylinders [ph] to get single-digit rate increases and in almost every one of the casualty programs, the kind of run-rate as you go into 2010 on the renewal retention, kind of depends on what it is. I mean, right now, you are seeing kind of 85% to 90% renewal retention on some of these. So, if it stays in that range you can get a picture of that, so you are hopefully – single digit rate increase and down 10 and renewal retention. That's kind of a way – it's probably shaping up on the bulk of the book. Matthew Heimermann – JP Morgan:

We have largely collapsed bad day (inaudible) over those years to really what we see as our core clients. The group that we are left with, we are very pleased to deal. In fact we continue to stay with because they do a great job in the market place. But as Ralph noted, it's really less than half of what we were doing a few years ago as we have responded to the changes in the marketplace and casualty pricing. Matthew Heimermann – JP Morgan: Are there any big changes in the products that make up this kind of a $200 million year-to-date relative to the peak of 600?

I think there is a gradual shift from customers from quota shares to (inaudible). And then those little uptick rise came under last year because people wanted more quota shares for capital reasons. So, we are certainly right. The quota shares, if we like the terms and conditions, you see a lot of unusual things like last quarter’s and high retention points and so on. But, no other great mix from that.

You might find this a bit more specialty today in terms of E&O and D&O and environmental that it was if you went back to 2003 and ’04 where the whole general liability market and the whole automobile market and stock market when everything was really in very, very good shape we really could write a broader spectrum, and frankly we've collapsed back to core pliancy [ph], and those that really are specialized and have some installation from the competition in the marketplace. Matthew Heimermann – JP Morgan: Okay. And then just one last one on demand, you did see some, some uptick because of some of the pressure on balance sheet last year. I was just curious if you could kind of estimate how much of a growth this year you think was just from demand uptick, that might reverse next year given where balance sheet sits today?

Yes. We did have some business in London that, I guess, we call the earring [ph] business that was quota share casualty that did come to us because the clients had diminish surplus and needed to use our balance sheet, if you will. And I guess, we had at least one sizeable deal casualty in U.S. that again our client surplus-wise needed to buy more reinsurance. You are right, things are stronger going into 2010, and so, those deals may not repeat themselves. I think, some of them will, and some of them won’t. So, it will be a different dynamic going into 2010. And that’s why we are not forecasting the kind of growth in 2010 that so far we’ve achieved in 2009. Matthew Heimermann – JP Morgan: All right, thanks.

Our next question comes from Brian Meredith with UBS. Brian Meredith – UBS: Yes, good morning, Joe. Couple of questions. First, Tom, can you give us what are the kind of key items that hit the other income loss item on expense line?

Primarily FX account. Brian Meredith – UBS: Next one. Second question, Joe, on the property markets, you said going in the year you think things will be pretty disciplined, but I guess, how much could rates go down in that marketplace before you say, all right, that’s enough, I got to start pulling back?

Well, I hope they don’t present so much but I really have to debate that too much. If there is a – I'll call it 5% to give you some sort of a number, reduction in rate, I think in most cat deals most reinsurers would find that – still would rate reasonably well, and they may even understand the reductions, in a sense that they just made a lot of money in the prior year on the deals. If it starts getting a whole lot larger than that, then it’s going to be more and more difficult. And if there is some pockets of the business rated a lot better than other pockets of the business, so, all you have to take them one at a time, but clearly, one would have to expect with the very good last year and benign [ph] losses, good results that there is going to pressure to reduce rates. But at the same time, I just think reinsurers still have a tremendous respect for cat business that it is cat business and it can explode and it's a volatile and it can hurt your surplus. I think insurers who buy have a respect for cat business that it’s the flip side, if they’re keeping that and don’t buy that could come back to hurt them too and they do want to maintain their surplus. So, I just think when you put it all together there will be discipline. I think there will be modest reductions, and I think at least with regard to 2010 on most cat business and I could be wrong for me but that hedging there. But I think with regard to most business we’ll find it more than adequately rated. Brian Meredith – UBS:

Well, I know I think we can have a respectable return, the challenges more with interest rates down and the casualty market being competitive. But as we look at the some of the numbers that we’re achieving this year, and putting the unrealized side for the moment, I think we’re well positioned. In part that comes from the fact that we’re much more of the property book at the end of the day. I think 72% of our reinsurance is property and that's by design that's where the rates have been better. So we hope casualty improves, but if it doesn’t I still think we can put forth some very good ROEs. Brian Meredith – UBS: Thank you.

It appears there are no further questions at this time. Ms. Farrell, I would like to turn the call back over to you for any additional or closing remarks.

Thank you for participating in our conference call this quarter. And certainly if you have any questions feel free to call me or Tom after the call. Again, thank you.

Thank you.

Thank you for your participation. This concludes today’s conference.