Everest Group Ltd (EG) 2009 Q1 法說會逐字稿

Good day, everyone and welcome to the first quarter 2009 earnings release of Everest Re Group Ltd..

Just as a reminder, today's call is being recorded.

At this time, I would like to turn the conference over to your host for today's call, Beth Farrell, Vice President of Investor Relationships.

Please go ahead, Ma'am

Thank you, Sara.

Good morning and welcome to the Everest Re first quarter,2009, earnings conference call.

With me today are Joe Taranto, the company's Chairman and Chief Executive Officer, Tom Gallagher, Vice Chairman and Chief Underwriting Officer, Ralph Jones our President and Chief Operating Officer and Craig Eisenacher, 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 and the investors should consider in connection with such statements.

Let me turn the call over to Joe.

Thanks, Beth.

Good morning.

The reinsurance and insurance market place continues to transform itself, very much as we had expected.

Reinsurance rates for catastrophe products have gone up, and are continuing to rise.

Consequentially, retro rates are up, energy rates are up and excess of loss rates are up.

The supply and demand curves dictate that this process will continue, as buyers need to protect their capital with reinsurance, and reinsurance providers will demand better and better prices to provide these protections.

In the next couple of months, most Florida business will renew, and we anticipate meaningful rate increases over last year's rates.

As reported last quarter, insurers that write property business would have to raise rates or be faced with the losing proposition of reinsurance costs they could not pass on.

Our underwriters are reporting this change has finally started.

In April, we have seen a serious change in property insurance terms and conditions, and our property facultative department and property insurance operation in Florida experienced the best month that they've had a long time.

Casualty reinsurance and insurance rates and terms are not changing as meaningfully as property with the exception of isolated pockets such as D&O for financial institutions.

It's unclear how this part of the market will respond as 2009 progresses.

We stand ready to write more business if market improvements bring additional business up to our underwriting standards.

Ralph and Tom will provide more color on this sector, including the California workers comp market.

Meanwhile, on a macro level, the flight to security was more intense than ever before.

This has been true both at the reinsurance level and at the insurance level and has greatly benefited Everest.

It's allowed us to attract new business and increase shares on existing deals.

On the reinsurance level, some of our bigger competitors suffered loss of business from concerns about their economic status or ownership.

At the insurance level, our A+ Best rating and financial stability has buyers putting us on the top tier of their preferred list.

All of these changes resulted in gross written premiums being of up 14% in the first quarter with reinsurance premiums being up 19%, despite foreign currency devaluations relative to the dollar.

I expect top line production to remain robust for the remainder of the year.

Our underwriting result was solid, with the combined ratio of 89.7, which affirms the underlying quality of the portfolio.

Our investment results were disappointing, as losses on limited partnerships significantly reduced overall investment income.

Craig will later provide more color on investments.

Surplus grew $79 million in the quarter, and their ROE was 8.3%.

I would hope and expect to achieve a much higher ROE in succeeding quarters, as I anticipate premiums to remain strong, underwriting results continuing to be solid, and investment income beginning to normalize as the world economy stabilizes.

Ralph?

Thank you, Joe.

As you can see from the first quarter results, we had a very strong January 1 renewal season, with premiums up nearly 14% in the quarter.

Much of the growth emanated from our overseas business, that now makes up half of our reinsurance premiums.

We benefited from opportunities in just about every region in which we operate.

Our Latin American business was up substantially, partly due to the new office in Brazil, which we expect will write over $60 million in premium this year.

Much of our strength overseas comes in the first party lines where catastrophe exposed property treaties show the most demand.

We also benefited from the uncertain future of several large competitors.

Overall, rates for the overseas business were up between 5 and 10% during the first quarter.

Our Bermuda and UK book was up 14%, coming from good opportunities presented in London and Brussels.

Some of the growth came from quota share contracts written for two Lloyds Syndicates that are looking for capital support, partly due to the weakness of the pound versus the dollar.

We see a distinct trend in clients focusing more on reinsurance for capital support.

Our US reinsurance business was up 13%, coming partly from several new crop quota share treaties which will amount to about $80 million on a full-year basis.

This is a relatively new segment for us, where we see good margins still available.

For the US, reinsurance terms and conditions are tightening for casualty treaties.

The trend we see is a switch to some degree from excess loss to more quota share deals, which we believe is often driven by the capital concerns of our ceding company customers where they are now looking for broader reinsurance support.

The US insurance business was flat during the quarter.

80% of this business comes from niche casualty programs.

Underlying rates on the primary casualty side were flat to down 5% during the quarter, while casualty reinsurance terms and conditions are improving a bit, the underlying primary casualty business remains pretty stagnant.

As for California workers comp, the rate increases anticipated at year end based on competitors' rate filings, their initiatives in the rate filings have been slow to materialize in the market place.

If actual rates do not improve, we will slow down our growth plans for this line of business.

We have established a new division in New York called Everest Specialty Underwriters, led by Mark Herman.

Mark is an experienced underwriting leader in the D&O, and E&O product lines.

He was formerly president of Ace Bermuda and more recently chairman of Ariel's Insurance Business.

Mark and I worked together for several years during our Chubb days and we're thrilled to have him join us as president of this new division.

This will help bolster our direct insurance operation, Everest National, where we look to match underwriting expertise to market opportunity.

I'm certainly pleased with our first quarter underwriting results, with a combined ratio under 90.

This includes $33 million in cat losses resulting from the European storms and the Australian brush fires.

Tom Gallagher will now share some observations about the market place in which we expect some excitement as the June 1 Florida cat treaty season approaches.

Thanks, Ralph.

As Joe noted in his opening comments, the transformation of the reinsurance market continues.

The upward trend noted in January is showing signs of building momentum, which we also noted in April renewals.

And getting more pronounced as we head into mid-year activity.

Although the pace of change varies by line, industry, territory and loss history.

The theme is the same.

It is an improved reinsurance environment.

The strongest changes noted are in the US property and commercial and cat business, international, retro and the energy area where there remains an increased demand for stable, high quality security in a turbulent market.

Also, as Ralph noted we have experienced growth from emerging markets such as Brazil, new lines such as Crop, plus positive rate movement in many areas, a change in some buying habits from excess to proportional and obviously the flight to quality.

For casualty, it's much more of a mixed bag.

With some improvements in rate terms, conditions, the general theme continues to be relatively flat.

Overall, we are beginning to see their rates decline slow or stall, but it's a slow process.

The only area which Joe noted, where prices have moved greatly is in the financial area for D&O and E&O, where cautious growth is the watch word.

We would project the casualty markets to remain challenging throughout 2009.

Now, there are some signs of positive change, as new submission activity has increased.

And we see that most of them are not easily filled.

We would expect this trend to continue also through the remainder of the year.

All participants in the market are gaining a greater appreciation for the need to improve terms.

Presently, it is evident that the reinsurance market is firming much quicker, but that will filter through the primary sector as well over time.

Everyone is dealing with the same market dynamics.

Underwriting performance has deteriorated, investment income has diminished, the volatility of the exchange rates, capital constraints, profitability has declined, all leading to a new respect for their financial security.

Capital preservation is a key item today.

Both insureds and cedants are very focused on the financial security of their counterparties, and seeking much more diversification of placements, not putting all of their eggs in one basket.

All of which works quite well for us.

Another consequence of the current financial environment is that everyone is managing their exposure much more prudently, both as respects to property and casualty underwriting, investments and the use of capacity.

Capacity remains a very precious commodity.

It is an area where there's higher demand but reduced supply in many segments of the market and that is for many reasons.

Capital constrains, exchange rate fluctuations, limited retro capacity, concerns about sub prime.

Specifically, cat capacity for the critical zones remains tight with some suggesting a potential shortfall of 15% between the desired covers and the availability with no immediate relief in sight in the near term.

This was observed in January, also in April, and we expect the stress levels to increase as we head into the mid-year renewals with Florida issues which are still percolating at the top of the list.

But you still have Australia, the Caribbean, Mexico, Central and South America, as well.

As we look out to the remainder of the year, we expect the positive trends noted in the first quarter to continue and take a firmer hold.

We are in a great position to reap the benefits of this transformation in the market place for the future.

Now, I will turn it over to Craig.

Thanks, Tom.

As stated in our earnings release, operating income for the quarter was $106 million, or $1.73 per diluted share.

Net income including the gain on our debt repurchase and realized capital losses was $109 million, or $1.77 per diluted share.

Our pretax underwriting income was strong.

Our combined ratio was just under 90%, about equivalent to last year's first quarter.

However, our investment results were disappointing, largely driven by our limited partnership investments, and I will talk a little bit more about that in a moment.

As well, we reported a $20 million loss on the equity index put options we wrote in 2001 and 2005.

We had realized capital losses of $65 million before tax and $48 million after tax.

Most of this loss emanates from sales of Bank of America and Wells Fargo fixed maturity securities as a result of their acquisitions of Merrill and Wachovia.

Our aggregated debt holdings exceeded our risk thresholds, and we reduced our holdings accordingly.

As well, we recorded other than temporary impairments of $8.3 million before tax and $7.6 million after tax.

As you know, we repurchased via tender offer $161 million of our outstanding subordinated debt for $83 million including the transaction costs.

This produced a pretax gain of $78 million and an after-tax gain of $51 million.

We like the outcome, the tender offer was at its core an opportunistic play.

We have the liquidity, capital and earnings power to easily handle this transaction.

So we repurchased 40% of the issue, and in so doing, reduced our leverage a bit, although it's already very conservative, booked a gain and reduced our interest expense going forward.

From a cash perspective, the opportunity return is roundly 13%.

So well in excess of investment market opportunities, even very long opportunities.

Tom and Ralph have described the quarter's production and written premiums and outlook.

I would like to add a couple of comments on our underwriting results.

Our underwriting profitability was strong in the quarter with a combined ratio of 89.7%, up very slightly compared to the first quarter of 2008.

Catastrophe losses were light at $33 million.

We continue to closely monitor our reserves for hurricanes Gustaf and Ike, and they continue to look very good.

As a result, we are staying with our original estimate.

We experienced a small amount of adverse development in the quarter, $18 million.

There were some small increases and decreases in our U.S.

treaty and Bermuda operations.

We didn't receive any new reports of credit crisis losses, and reported losses to date are still less than $5 million.

Nevertheless, we did add a bit to our IBNR.

In fact more than half of the increase relates to this as activity in that arena continues to build.

The current year attritional loss ratio at 55.6% was up just a bit from last year, as one might expect.

Corporate expenses were about level with last year's first quarter, and the commission ratio was a bit lower.

So all in, we are quite pleased with our underwriting result.

On the other hand, our investment income was very negatively impacted by the results of our limited partnership investments, which in total lost $73 million.

This compares to losses of $5 million in last year's first quarter, and $73 million in the -- in last year's fourth quarter.

The losses in the fourth quarter of last year came principally from funds invested in public securities that generally report one month in arrears.

The losses this quarter came principally from the partnerships invested in nonpublic securities, both equity and debt.

These funds generally report to us a quarter in arrears and so the results reported in our first quarter reflect their results from the fourth quarter of last year.

The preponderance, 75%, of our limited partnership portfolio is nonpublic equity, with concentrations in energy which is about 25% of the portfolio, healthcare about 7% of the portfolio and real estate about 10% of the portfolio.

Also about 16% is in funds with a country or a region specific focus.

As well we own some mezzanine debt, early stage, and LBO funds.

We have no quant funds and no leverage funds per se, although a couple of our funds do employ modest leverage.

As of March 31, 2009, the market value on our balance sheet was $563 million.

It's difficult to forecast future results for these investments.

Each has its own unique strategy and portfolio consisting of a few to many investments.

So any one funds' results can vary significantly from financial market trends.

It seems clear, though, that the last couple of quarters, results of these investments were heavily impacted by the sizable declines in the equity markets and with some improvement in the general climate, we might expect better results in the future.

Over time, excepting the last couple of quarters, these investments have done well for us.

We would expect that to continue to be the case, although obviously we can expect a great deal of variability on a quarter-to-quarter basis.

Otherwise, our net investment income was down somewhat compared to the first quarter of last year, as our invested asset base is somewhat smaller and short term yields are lower.

As well, in this uncertain financial environment, we have been holding more liquidity and those longer term investments we have been making have been in very short, very high quality paper.

We recorded derivative expense of $20 million in the quarter...

that's on the equity put options principally because the S&P 500 index declined in the quarter.

Our cash flow from operations was $181 million in the quarter, about $70 million lower than in last year's first quarter -- $70 million lower than in last year's first quarter.

Paid losses were quite low in last year's first quarter and hence trended higher in this year's first quarter.

We paid out $83 million for the debt repurchase and $30 million in dividends.

So net cash flow to the investment portfolio was just under $70 million.

Our investment portfolio continues to be very high quality.

AA2 on average.

Short duration and liquid.

Our public equity exposure, including public equity oriented limited partnerships remains light at about 2% of the portfolio in total.

At this point, I would like to give you a note on presentation.

We give you the embedded yield on our portfolio in the supplement.

Prior to this quarter and I think I noted that on prior calls, we have been using 8.5% for our limited partnership investments.

We dropped that to zero this quarter and that's what caused the 30 basis point decline in the overall yield.

Our capital position is very strong and increased by $79 million in the quarter and our financial leverage continues to be very conservative with a debt-to-cap ratio of 16.8%.

So all in we feel we are in a strong financial position to capitalize on market opportunities as they arise.

Underwriting trends are favorable, and if financial markets cooperate, we should be reporting some better net income numbers in future quarters.

And now we'd like to open it up for questions.

Thank you.

(Operator instructions) We'll go first to Matthew Heimermann of JPMorgan.

Hi, good morning everybody.

You talked, Joe, about expecting growth to remain pretty healthy over the balance of the year.

With respect to some of the growth you saw in the international sector, there wasn't any -- was there any front-end loading with respect to business you're writing this year?

I know you had the S&P review going on.

I wanted to make sure that this was not anything unusual in any of those numbers.

No.

There wasn't anything unusual about the numbers.

Okay.

Easy enough.

And then could you just revisit either you or Tom the comments with respect to buyer changes?

On one hand, I thought you mentioned people shifting to excess of loss versus proportional which I've heard in other places but in another comment, I thought I heard that this was some shifts from excess to proportional.

If you could just flesh that out a little bit.

Sure.

Let me give you a more broad answer to that, Matt.

First of all, I think there's just a lot of positive things going on in the market place that have benefited us and that we are capitalizing on.

Part of that is a flight to security.

Part of it is some of our competitors having difficulties and even some of our customers having some difficulty when it comes to protecting their surplus.

I think what we probably were referring to on some of the shift to quota share was at least in some cases where clients wanted essentially more surplus relief.

Ease their balance sheet a little bit, and that's something that we could provide since we have a -- a strong balance sheet.

You are right in any particular point in time, different lines, different countries.

There's an ebb and flow, as clients move between excess of loss and pro rata.

But we did see, at least with regard to surplus strain, some clients moving more to the pro rata side.

But between pockets that are hardening very nicely, where we have some very unique opportunities, and the flight to security, and some of the troubles that others have had, we have just had a lot to operate with in first quarter and I see most of those drivers being opportunities that we have to capitalize on for the remainder of the year.

Okay.

That's helpful.

The other question, just with respect to some of the surplus relief you are providing customers, as well as the quota share to some of the Lloyds entities, how is that affecting the PML?

Or your -- your risk tolerance, your ability to take more risk as we move into the mid-year renewals, if at all?

Well, this is Tom.

As with respects to accumulations, let me go back for a moment on the question of proportional, versus excess of loss.

Most of the activity we've seen on the proportional side has been related to casualty moreso than property.

So accumulation is not necessarily affected.

Now with respect to accumulation, since the beginning of the year, we have taken a pretty conservative stance on our accumulations, both in the US as well as internationally.

And at this point in time, from 1/1, we have in the US shrunk our accumulation by zone in almost every one of the individual zones.

In the international market, we have seen declines as well in our overall.

We will have some limited growth in PMLs all within our willing to risk capabilities.

Perfect.

All right.

Thanks very much.

We'll go next to [Arthur Winston of Pilot Advisors].

In terms of the investment portfolio, it seems like there's a bar bell approach.

You say these very risky investments on one hand and then buy very conservative securities and I wonder two things, if you can estimate the future -- how the future risk compared to the past risk on these partnerships, derivatives, S&P puts; and, two, are you going to continue to be conservative on the investment portfolio after being so aggressive and risk taking on these partnership situations?

Sounds to me like there's three questions here.

The S&P puts, the partnerships and the portfolio structure.

Yes.

With respect to the S&P puts, they react to the S&P index and they react to interest rates as well.

So in looking at them, I tend to look at them as a long investment in equities and short on bonds, if you will.

So even though it runs through our income statement, it's in effect a bit of a hedge against interest rates.

To the extent that the indexes are better, we should have no loss or gains going forward.

And hopefully that will be the case.

With respect to the partnership investments, we started investing in these things probably 2001, although maybe our first investment was a little earlier than that.

Generally speaking, they've been very-- they've produced very good returns for us over time.

We have several that we have completely exited, and I think we invested $125 million roundly in the ones that we exited and they have returned over $200 million to us.

Having said that, they are equity or equity-like investments, and they do vary with the equity markets.

Having said that, they haven't varied as much or as negatively as the indexes have.

So we'll -- we will see going forward.

Again, with a better financial environment, we would expect better results.

With respect to the portfolio structure, we -- we tend to run a highly liquid, short duration, high quality portfolio, and we're willing to give up some level of income to -- to obtain those results.

On the other hand, we do invest in equities looking over time to get a better return in the equity markets, recognizing that they are more volatile than bond markets.

We have backed off our equity exposure, particularly our public equity exposure over the last six months, and really our remaining equity exposures in public and private equities are in the limited partnerships which represent a small portion of our investment.

Net, net, I would say that we have lowered the risk in our portfolio.

Does that answer your question?

Yes.

For the near term, that's our strategy.

Fine.

And it appears we have no further questions at this time.

I will turn the conference back over to our speakers for closing remarks.

I would like to thank everybody for participating and certainly if you have any questions, please feel free to call myself or Craig Eisenacher.

Again, thank you.

That concludes today's conference.

Again, thank you all for joining us.