Everest Group Ltd (EG) 2005 Q2 法說會逐字稿

Good day, everyone, and welcome to the second-quarter 2005 earnings release conference call of Everest Reinsurance.

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, ma'am.

Thank you.

Good morning and welcome to the call.

With me this morning are Joe Taranto, our CEO, and Steve Limauro, our CFO.

Before I turn it over to Steve for a review of the numbers, 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 Steve Limauro.

Thanks, Beth, and good morning.

I'm pleased to report that Everest had another strong quarter with after-tax operating income of 173.3 million, or $3.03 per diluted share, which is within 1% of the second quarter 2004's best-ever results.

Net income, which includes realized capital gains and losses, was 194.2 million, or $3.40 per diluted share, a 26% decrease from 2004's 264 million or $4.64 per diluted share.

On a year-to-date basis, operating income is 338.6 million or $5.93 per diluted share, a 4% increase over 2004's 325.9 million or $5.73 per diluted share.

Net income year-to-date is 361.3 million or $6.33 per diluted share, reflecting a decrease of 7% from 2004's 390.1 million or $6.86 per share.

On these earnings, shareholder equity is up to 4.1 billion, or $72.37 per outstanding share, with a book value per share up 9% from March, 2005.

These are excellent results and despite intensifying competitive pressures, we expect 2005 to continue to produce strong financial results.

On a year-to-date basis, we've written 2.2 billion of gross premiums, a decrease of 6.6% from 2004.

This includes our worldwide reinsurance operations matching 2004's 1.65 billion of writings and our insurance operations experiencing an 18% reduction.

Total net written and earned premiums at 2.1 billion each declined by 6% and increased by 2% respectively.

Focusing on year-to-date gross written premium, which minimizes the quarter-to-quarter variability inherent in our writings, our segment highlights are as follows -- U.S. reinsurance operations are up 6% to 726 million, reflecting continued strength in property treaty business coupled with modest declines in casualty treaty writings and a broader softening of facultative writings.

Our U.S. specialty operations are down 13% to 196 million, reflecting continued retrenchment in our medical stop-loss business, partially offset by growth in our marine, aviation and surety businesses.

International reinsurance operations are up 14% to 352 million, mainly reflecting continued strong growth in Asia, combined with more modest growth in Latin America.

Our Bermuda operation is down 21% to 337 million with declines in London and Bermuda offsetting continued growth in New York.

Our insurance operation is down 18% to 545 million, reflecting continued reduction in our Workers' Compensation writings driven by California, a market where competition continues to intensify, all partly offset by strong growth in our non-comp lines, both admitted and E&S.

Our insurance segment, excluding California comp, is actually our fastest-growing segment, up 25% year-over-year to 410 million or 75% of the overall insurance book.

Across all of our segments, changing and variable market conditions are generally characterized by pricing, which remains at or above adequate, continues to focus us on disciplined underwriting.

Underwriting results remain strong with a combined ratio at 91.3% for both the quarter and year-to-date, both within 2/10 of the comparable periods in 2004.

Catastrophe losses for the quarter were 62 million, reflecting a combination of $37 million of late reported developments on the 2004 Florida hurricanes and 25 million of mainly 2005 industrial risk losses meeting our 5 million catastrophe disclosure threshold.

For information later on in the year, we will be re-examining the $5 million threshold, mainly to consider excluding industrial risk losses for better comparability with industry Cat reporting standards.

Basically, 2005's strong underlying fundamentals, combined with the absence of non-catastrophe adverse development on 2004 and prior, overcame these catastrophe impacts.

I will note there's been some movement between loss and commission ratios over the period, mainly driven by mix changes.

Maintaining reserve strength remains a priority with net loss reserves increasing 113 million for the quarter and 267 million year-to-date, despite having paid, on a year-to-date basis, $150 million in Cat payouts.

If anything, our internal metrics indicate that these actions have strengthened our position in our reserve ranges.

Turning to investments, pre-tax investment income at 137.5 million is up only nominally over second quarter 2004, in part reflecting the extraordinary push that 2004 received in the second quarter from an equity limited partnership return.

Our invested assets base continues to grow nicely, up 4% for the quarter and 17% from June 2004.

We continue to move cautiously to a modestly more total return-oriented mix, having invested $712 million in equity and equity-like other assets over the past 12 months.

While this has depressed growth in reported investment income, we see the shift as a compelling realignment, which takes advantage of our strong investment leverage and positions us for the long term.

In a similar vein, late in the quarter, we took advantage of extraordinary industry movements to shift our fixed income durations to the lower end of our range.

We did this through both bond trades and modest interest-only strip investments, realizing $21 million of net after-tax gains.

The embedded pre-tax and after-tax yields of the quarter and portfolio are 4.6% and 4.0% respectively, down from 4.7% and 4.1% respectively at December 2004.

The duration is down to 3.8 years from 5.2 years at year-end 2004.

Unrealized appreciation on the Company's investment portfolio has risen by $34 million pre-tax and 27 million after-tax over the six months, reflecting both the interest rate environment and market conditions in the context of the changes I just noted.

Because of interest rate conditions, our quarter reflected $6.8 million of pre and post-tax expense on marking our S&P 500 Put derivative position to model.

Turning to cash, cash from operations was 291 million for the quarter, down 26% from 2004's 393 million, with all of the reduction attributable to $71 million of greater Cat payouts and $34 million of greater income tax payments.

Cash from operations year-to-date was 616 million versus 793 million in 2004 with incremental Cat loss and tax payouts totaling 206 million accounting for more than the difference.

Cash and invested assets stand at 11.96 billion and are up 430 million or 4% from December 2004 with the increase mainly reflecting our $618 million of cash flow from operations and a $34 million increase in unrealized appreciation on our investment portfolio, partly offset by the 250 million payoff of the march, 2005 senior notes.

Shareholders equity at 4.082 billion or 72.37 per outstanding share is up 10% from $3.712 billion and $66.09 per share at December 2004.

Our annualized ROE stands at 18.9%.

No shares were repurchased in the quarter but we continue to monitor our capital position and remain committed to using our capital effectively.

In summary, we had a strong quarter and our continuing strong fundamentals position us well for both a great year in 2005 and the longer term.

Our commitment to underwriting discipline in the face of changing markets remains strong and coupled with effective use of our expertise, capital and infrastructure, we believe we're well-positioned to keep generating significant shareholder value.

Joe and I will now take any questions you may have.

Thank you.

The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS).

Tom Cholnoky with Goldman Sachs.

Joe or Steve and Joe, I know you like to talk about six-month numbers, but can you get into a little bit more depth of what drove the big increase in the quarter in U.S. reinsurance and also international?

I know you touched on it a little bit, but can you give us a little bit more detail?

Then -- well, go ahead and then I'll ask one follow-up.

Sure, Tom.

Yes, we do prefer to talk about six-month numbers because there's just always a certain amount of lumpiness to a quarter.

Frankly, I think that's what you see in the second quarter, so in some areas, we were up quite a bit but not so much in the first quarter.

I think it's a better measure to just look at the six months to see what's going on in the marketplace and for the year.

What I would tell you is that we have seen some modest growth over that six-month period in the U.S. reinsurance market.

You know, that market has proven to be, I think, a more reasonable market than I might have guessed a few months ago.

I think there has been less slippage in that market.

The marketplace still kind of overall remains a mixed bag, but some pockets are looking better to us than others.

Frankly, I think there's still some very good opportunity for a company that's nimble and focused, terrific ratings and a distribution system looking to lead deals.

In the U.S. reinsurance sector, I think we've seen some opportunities in the Cat side.

Most recently, we did see an uptick in the rates for Florida business.

That's both with regard to homeowner rates going up and we've seen some uptick in commercial property rates in Florida and on reinsurance rates in that sector.

Finally, we saw a response to the four hurricanes that happened last year.

It took a while for that to happen, but perhaps with us approaching or finally into the new hurricane season, we've seen some bounce (ph).

Steve noted, on the international side, really most of our growth came from Asia.

Asia is a market that, up until the last two or three years, we kept a very low profile.

We weren't too interested in the offerings out there, but the improvements in the marketplace in the last two or three years, which still are giving us pretty good rates in most of these countries, Japan, Australia and Thailand, we have been able to grow our book in Asia from what was a very small book to something that's more meaningful.

In Latin America, we've been able to do a bit more business.

We've been in Latin America for 30 years.

We have a seasoned book of business there, a very stable book of business, but once again, our reputation and our ratings have attracted more opportunities.

Again, as Steve noted on the insurance side, Tom, we're growing quite nicely, ex-California comps, so the programs that we have there, there's a handful of them -- security guard program, architects, E&O, credit program -- they are all highly specialized agency programs, but they are growing quite nicely as we diminish our writings in California comp area.

So, you know, there's some pockets we're shying away from, California comp, medical stop-loss, large account D&O, but there's still ample opportunity and that's why we are able to overall generate modest growth for the second quarter.

If I could then just follow-up, I guess the one other thing which we look at -- obviously your premiums-to-surplus ratio is starting to approach 1-to-1.

Do you feel enough confidence that there are enough opportunities out there for you to leverage that capital, or are you starting to think more about what to do with potentially excess capital that might be building up?

Well, you know, there's still good opportunity.

The ratios that you cite -- yes, we're pleased but means surplus is growing quite nicely, and we're happy about that.

Also, the ROE is still 19%, so we're quite pleased with that.

But you know, we're still looking to do more.

We are just entering hurricane season, so I think, at least for now, we are certainly going to be cautious with regard to capital, but yes, we're still in the process of, both on the investment side and the underwriting side, looking for more opportunity.

Okay.

Sorry, one last question -- you mentioned hurricanes; any sort of estimates yet on Dennis?

No, not really, but we're just not looking at it like it's going to be a big event, Tom.

We have not yet put a number on it but we don't think we will be putting a big number on it.

Stephan Petersen (ph) with (indiscernible) Investment Group.

Good morning.

I was wondering if you might be able to provide just a tad more color on the industrial risk losses that you had mentioned, maybe a little bit about what those involved.

Was there one or two particular events that may have contributed the most to the $25 million that you'd cited?

Sure.

Stephan, what's happened over the last couple of years, as our scale has shifted dramatically, is, you know, our $5 million threshold for catastrophes has begun to capture some industrial risk losses.

Probably the largest one this quarter -- there were three or four of them -- the largest one was a Canadian energy loss, but beyond that, we had a factory fire and then we had an industrial explosion, all of which are well within the framework of the kinds of risk losses that are embedded in our book of business.

I think we are growing a little bit uncomfortable that where many folks focus on large weather-oriented catastrophes for their catastrophe reporting, we've gone the path of simply highlighting all of the losses that fall above this $5 million threshold.

So I think we're going to revisit that as we go through the year.

We've made no real firm determination, but we are concluding that these kinds of losses, which range from 5 to $9 million, are not the kinds of losses that ought to be picked up in what we are comparing against others that are oriented to large catastrophes like the Florida hurricanes or the tsunami, etc.

The 25 million of risk losses, reporting that as tax is consistent with the way we've reported in the past, but I think almost all other companies would not put those into their Cat losses, so trying to get into apples-to-apples, us versus other companies, you really would take out the 25 million.

Okay.

Then one second question real quick -- I have the portfolio duration at 3.8.

Is that pretty much where you expect it to reside for a while, or will you still be sort of adjusting that downward?

Well, I think the 3.8, we typically talk about a range of 4 to a bit over 6, and so the 3.8 is at the lower end of our range.

Having said that, we will be responsive and reactive to market conditions.

We certainly saw an opportunity, in the second quarter, to take gains, reduce credit exposure and reduce duration all at the same time.

We like that combination, so we moved on it.

We will continue to watch what's going on in the marketplace, and I wouldn't expect it would go a whole lot lower than that.

By the same token, I don't know that we are in a position, at this point, to see exactly when we might spin it back out to 5.5 or 6 years.

Terrific.

Thank you very much.

With HSBC, Scott Frost.

Yes, just to go over the pricing environment a little bit here, again, on a scale of 1 to 10, with 10 being the worst, how would you in general characterize the pricing environment at present?

I know you've said we've seen some modest softening in the prior call but how would you sort of rate it now?

It's always tough for me to put the whole world and all products into one number.

Well, break it out if you like.

Let me just leave it to say that it's pretty good.

You know, I mean, people look at it like it's off the highs from a couple of years ago, and it is.

There's no question about that.

But a couple of years ago was pretty close to as good as it ever gets.

In all products and all lines, you could have written them and you didn't have to be that sharp as an underwriter and you still would have probably made a buck.

Today is more realistic; it can't stay the way it was forever.

There are certain areas to be avoided; there are certainly better deals and there's worst deals.

So the better underwriters with the better ratings, with the better focus doing the better end of today's deals I think will pull out a very nice profit, which is what we're looking to do.

We will post a very good underwriting gain as we have and as we plan to continue to do, and we will enjoy a reasonable topline.

So, it's still a pretty good market.

It's an underwriter's market; it's kind of picking and choosing; it's emphasizing the areas that you like better; it's deemphasizing those that you don't like as well.

But if it stayed this way forever, I would be thrilled!

William Wilt with Morgan Stanley.

Good morning.

Was Everest Reinsurance a meaningful writer of professional liability reinsurance during the soft cycle?

We've heard a fair amount about that from some competitors, both domestic and overseas.

(LAUGHTER).

We wrote some D&O for the '97-to-2001 period.

Some of the other lines that have been looked at as tough in that period, like umbrella and comp excess (ph), we were completely out of.

But if your question gets back to how do we feel about our reserves, we feel very good about our reserves.

That's helpful, thanks.

Either as a result of some of the charges and the news flow that's been out recently from competitors or other changes going on underneath the surface, is Everest seeing increased opportunities from some of the large competitors pulling back?

I've heard that some of the large direct writers are trimming their business pretty substantially.

You know, a little, nothing gigantic.

Some of the larger, more established companies have been kind of frozen, frankly, for a while.

You know, a lot of our competition in the last few years has been more so from the new companies that were born in Bermuda, so some more opportunity but nothing on a grand scale.

Susan Spivak with Wachovia Securities.

Most of my questions were asked but I was wondering, Joe, Steve, if you could just update us on your recent discussions with the rating agencies and their new capital models and where you stand there and whether you think, following the hurricane season, that's going to be any kind of impediment to your being a bit more aggressive on the share repurchase like you've been in the past.

Well, we've really completed our discussions with most of the rating agencies with one significant exception.

A.M.

Best is complete;

Moody's is complete;

Fitch is complete.

Of course, we continue to have conversations with the rating agencies virtually all year around on a variety of issues, but I think I can safely say for those three that we are pretty much landed for the year and in very good shape.

The one outstanding rating affirmation is S&P; we expect that to take place late-ish October.

We continue to have discussions with them; we think we are in great shape.

Frankly, we have, as we have indicated before, made clear to them that we really believe that we are due for an uptick.

We will wait and see whether or not they feel the same way, but certainly that is part of our plan ratings, or our lifeblood, and we continue to emphasize them significantly.

Having said that, the rating agencies certainly understand the capital management dilemma that the business may face and are quite reasonable in the way they come at the world with respect to share repurchases and other capital management devices.

So, I wouldn't necessarily suggest that we are holding our powder simply because we are waiting for S&P to complete its ratings process.

I think we have a complex process of evaluating where our capital is, how we are using it, where it's deployed, where it's headed.

Frankly, Joe and I go through those discussions very regularly and at the moment, we continue to see business opportunities on both the reinsurance and the investment side, and we're pleased with that.

While we note that the leverage is down to 1.1 on premium, the fact of the matter is, a few years ago, being under 1.0 was very much the commonality across the business.

So, we think we've got the right amount of capital.

We continue to work to deploy it.

Frankly, we will look at all the options as time progresses.

That's a great answer, Steve.

Thank you.

Josh Shanker with Smith Barney.

Great quarter.

In terms of the issue with higher retentions, what effect is that having on you pricing out your reinsurance business?

Also, looking into pricing environment associated with Workers' Comp right now, how you are dealing with that?

You know, we haven't been that affected by higher retentions.

We certainly -- clearly the industry, some of the bigger companies are keeping more net, certainly on the casualty side, because rates have been good, results have been good, they've been able to keep more and they've built surplus.

A lot of our deals have been more with the smaller and the mid-sized companies that very much need reinsurance.

On the property side, even the bigger guys -- you know, they've seen how the wind can blow and it can take a big chunk out of them, so retentions haven't changed all that much on the property side.

Given the way we've kind of geared our book and the insurance side of course being now 25% of the overall, the fact that people are generally raising their retentions just haven't had that big and impact on us.

As far as Workers' Comp, I will start with California, which is certainly the state that we have the biggest numbers in.

You know, it continues to be I guess okay at best.

It's a market that's changing quite rapidly.

The last two or three years, the results out of California have been terrific, and you know we are thrilled that we have a good share of the last two or three years of the California premium.

The rest of the world has been increasingly recognizing that.

The bureau that sets rates has been recognizing that.

So, I guess, about six months ago, most of the industry put through a rate decrease.

More recently, this past July 1, another round of rate decreases went through.

The bureau was recommending something like a 13% decrease.

We ourselves took a 13% decrease on rates.

The commissioner was asking people to take 18 and 20% decrease and some people did; that was on top of an earlier decrease.

You've probably seen rates today, prevailing rates 30-ish% less than what they were a year ago.

Now, having said that, the legislative reforms seem to be working and working quite well and reducing costs to the point where you can justify a significant rate decrease.

But with the market showing excellent results, we are seeing more competition.

Rates are down 30%.

If you wrote the same business this year you wrote last year, you would be down 30% just on the back of rate decrease.

So, that market has gone from what was a terrific market to what is an okay market in our opinion.

So, we will do some business this year but substantially less this year than last year.

We will probably do less business next year versus this year.

As far as other states are concerned, we are in the Midwest to some degree; we are in the Florida market with regard to Workers' Compensation.

Those are much more stable situations.

We are seeing, if anything, modest rate increases in those areas.

We will continue to be in those areas; we will probably continue to have modest growth opportunities there.

Comp varies very, very much by state and the phenomenon in California is very different than what you see in most other places.

Just a question for the capital allocation on the investment portfolio -- in terms of ideal mix of equities as a whole of the portfolio or as compared to your shareholders equity and whether the substantial performance in the S&P over the last three months changed your outlook about how much you're willing to contribute towards equities securities?

I don't think three months of a pretty good market is going to change our view.

We are basically looking at this as a long-term realignment of our investment portfolio where, in our business, you certainly need to be looking at bond yields in the 4-and-a-bit range as not being particularly attractive, particularly with the potential for interest rates to go up.

As we look at long-term returns in the stock market and private equity, we certainly are attractive for a reasonable component of our shareholder equity.

We've invested 750-ish million over the last 12 months and about 1 billion in the last two years.

Frankly, I think we continue to go down the path of preferring equities to bonds.

Having said that, we certainly understand that outsiders looking at our mix would be concerned if we tried to turn ourselves into a leveraged investment vehicle.

So, we're trying to balance that out; we do have more room to grow.

How far we will take it, I don't know, but we will be prudent in terms of making sure that we don't pierce the kinds of thresholds that rating agencies and our public constituencies wouldn't support.

Ira Zuckerman with Stanford Group.

A couple of quick questions -- first of all, on reserve development, it looks like you added very modestly to as far as your asbestos reserves.

Was there any other movement in the quarter?

There really wasn't.

Of course, every quarter, you need to go back and look at all of your reserve components, and we have 30 some-odd years that are open and we typically track between 100 and 200 IB&R groups for each of those years.

So, you're going to get some movement, but at the end of the day, our development for the quarter was 80% the Florida hurricanes and a little bit of asbestos and everything else balanced out.

We are very pleased with the way that our reserves are developing, particularly '02, '03, '04.

We continue to watch very carefully the 2000 and prior and while there's always movement among these various reserve groups, we are very comfortable that there's nothing significant going on there.

Frankly, as we look at overall reserves for '04 and prior, we see ourselves -- our metrics are indicating that we are moving up in the reserve range that we typically track.

So then you're saying basically that there was positive movement offsetting the hurricanes?

No, not -- on balance, there really wasn't.

I mean, on balance, what you see is the hurricanes coming through, the noise with respect to asbestos.

Everything else is moving and now of course everything else -- while there's some movement within classes and years, at the end of the day, very minor and really nothing that affected the total.

Thank you.

I have one other question.

Where do you guys sit now in terms of all of the finite reinsurance investigations?

Well, there really isn't much to even talk about.

We had one I guess question, set of questions that was farmed to us from the SEC with regard to a review that they were doing of another company.

We responded and gave them all the information that they were asking for.

We believe, you know, that is the end of it.

Certainly, there has been no suggestion by anyone of anything inappropriate with regard to anything coming from Everest, and I know of nothing inappropriate with regard to Everest and its record.

So, that's the long and the short of it.

So you have not been a significant player either way on -- (multiple speakers)?

No, we really haven't.

There certainly were companies that were geared up to be big in that area; we were not.

Peter Wade with Dynamet (ph) Capital Management.

My question has been answered.

Thank you.

William Wilt with Morgan Stanley.

Just a quick follow-up -- property/catastrophe business, can you give a sense for the what Property Cat writings represent as a percentage of the total today and kind of what the near to medium-term plan is for Property Cat writings as a percentage of the overall book?

You know, I'm not sure.

It's probably 5 or 10% of the overall book.

I mean, we are a Cat writer, but we certainly write a lot of other business.

We saw some more opportunities in Florida this past July 1, so I think it will be modestly up our premiums.

Other parts of the world, the opportunities weren't increased.

In fact, in California, a quake -- we see those rates dropping to the point where we are doing less of that business.

But on the international scene, the UK and elsewhere, we're still doing some Cat business.

So you put it altogether, I think there will be a modest uptick for us going forward.

Thanks very much.

There are no further questions at this time.

Ms. Farrell, I will turn the conference back to you for closing remarks.

Yes, thank you for joining us and if you have any further questions, please feel free to call the investor line or call myself or Steve directly.

Thank you.

That does conclude today's teleconference.

We thank you all for your participation.

Have a great day.