Everest Group Ltd (EG) 2009 Q2 法說會逐字稿

Good day, everyone.

Welcome to second quarter 2009 earnings release of Everest Re Group.

Today's conference is being recorded.

At this time for opening remarks and introductions I would like to tush the call over to Ms.

Beth Farrell, Vice President of investor relations.

Please go ahead.

Thank you, Joseph.

Good morning and welcome to Everest Re's second quarter 2009 earnings conference call.

With me today are Joe Taranto, the Company's Chairman and Chief Executive Officer; Tom Gallagher, our Vice Chairman and Chief Underwriting Officer; Ralph Jones, President and Chief Operating Officer; and Dom Addesso, Executive Vice President and 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.

Thanks, Beth.

Good morning.

We are pleased to record a quarter where our underwriting ratios remained strong, a testing to the underlying quality of our portfolio, and where our investment income normalized, producing the best quarterly per share earnings we have ever had.

Gross written premium increased roughly 8% for the quarter, and over 10% for the six months.

Adjusting for foreign exchange, worldwide, we grew approximately 12% for the quarter, and 15% for the six months.

I believe we will produce double-digit growth for the year, as the dynamic that drove the first six months will drive the remainder of the year.

We have continued to capitalize on market dislocations created by the weakness of many of our competitors.

This has been particularly the case for our international reinsurance book but also extends to the US reinsurance and insurance portfolio.

Our strong balance sheet and ratings have been more sought after than ever before.

Parts of our market remain better rated than others.

Property reinsurance certainly offers better opportunity than most casualty business, which is why the majority of our current business and our growth is in property.

We are only looking to grow in select casualty areas, such as FID&O where rates and terms are improving.

Much of the general casualty market continues to languish and it is unclear as to when this will end.

Whereas we hope for the market to improve in this area we are please to be less dependent on it for future earnings than many of our competitors.

Shortly, Ralph will drill done into our major areas of concentration and update you on our current plan and our market assessments.

In the quarter we increased surplus from $5 billion to $5.5 billion, while we bought back roughly 50 million of our stock and paid $30 million in dividends.

We have more than enough capital to support our business plans and now that the world economy appears to have stabilize, we are prepared to use buy back to enhance our earnings per share and book value per share.

As we are in hurricane season we will be more cautious than otherwise, but we remain prepared to invest in ourselves.

Dom will shortly give you the quarterly financial highlights.

On a separate note my contract, which goes to the end of 2009, is being extended to the end of next year so I will remain CEO for 2010.

To recap, we're pleased with the quarterly results, and pleased with how we are executing to maximize our opportunities in the current somewhat fractured marketplace.

Ralph?

Thank you, Joe.

Underwriting results for the quarter were very good.

The combined ratio was 87.9%, reflecting very little in the way of cat losses, and growth overall was nearly 8% for the quarter and 11% year to date.

Much of the growth came from our international business, which was up 25% over last year.

This was broad based, as we saw strength in Canada, Latin America, and Asia.

We continue to benefit from increased client focus on financial security and a rise in rates of between 5% and 10% on any catastrophe-exposed property business.

Our growth in Latin America came principally from our new office in Brazil, which included $15 million of new revenue in the quarter.

We expect to write about $75 million there for the full year.

The April 1st renewals in Japan for both wind and quake were very strong, and included rate increases of 7%.

I visited the Singapore office last month to meet several of our customers there.

We have 25 people covering the region, which includes ten countries from Australia to China.

I was quite impressed with the range of customers, as well as the investment that the major reinsurance brokers have made to keep up with the economic growth in the region.

We have been in Asia over 30 years and have built a very good position.

Solid financials and a long-term commitment there has really helped us.

In the US our reinsurance business was also very strong, as we saw good opportunities, particularly in property.

In the second quarter we booked $266 million in US reinsurance premium, and about two-thirds of this came from the property lines.

June 1 is a big renewal date for the Florida business and the deals came together pretty much as we expected.

Cat rates moved up in the neighborhood of 15%, allowing us to generate increased revenue for approximately the same aggregate exposure that we had last year.

While we did see a modest contraction overall of capacity for Florida clients from a year ago leading up to June 1, most of them were able to fill out their placements, or they chose to buy as much as they could afford given the increase in prices.

Some of the growth also came from the addition of several new crop treaties that were written in the first quarter, but run during the course of the year, and are new as respects to the quarter-to-quarter comparison.

This accounts for about $24 million in the quarter.

We expect to write about $80 million for the year.

The property catastrophe accumulations are approximately the same as they were at 4/1 and we have no plans for any dramatic changes going forward.

Our insurance business grew about 12%.

While the niche casualty programs were pretty much flat for the quarter, the growth really came from our new D&O team in New York.

You will recall that we started Everest Specialty Underwriters earlier in the year to focus on the opportunities we saw to write financial institutions in the D&O and E&O lines.

This market is in great dislocation, with the rates up between 20% and 50%, depending on the type of cover.

We wrote about $15 million during the second quarter.

The A+ rating and a highly-qualified team in New York are seeing a lot of submissions.

The D&O market is big, probably $10 billion market overall.

We plan to write a selective book, maybe between $50 million and $100 million during the next year going into 2010, as opportunities present themselves.

It's better on the FI side than for commercial accounts at the moment but we will be equipped to do both.

We are taking a cautious approach to our workers' comp book, which is predominantly in California.

We finally saw a small upward rate movement in June, and a little bit better one in July, and have filed for another 5% rate increase e effective August 1st.

While many companies have filed for increased rates, we have yet to see them getting any real pricing traction in the marketplace until recently.

If it happens then we would be in a good position to move ahead.

The general casualty market is pretty weak.

There continues to be overcapacity and while we certainly hope to see this change, we will be prepared if it doesn't, and be ready to take advantage if it does.

On the reinsurance side we have chosen to limit our aggregate exposure for umbrellas and access limits until we see things improve.

Overall the growth in premium is based on rate, geographic expansion in our international segment, and two new product lines that I mentioned without any real material change in cat exposure.

With that summary I will turn it over to Dom Addesso.

Thank you, Ralph, and good morning.

Certainly we are pleased to be reporting record earnings per diluted common share for the quarter of $4.43 and the 19.2% annualized operating ROE, leading to a growth in book value per share of $9.24, or 11.3% for the quarter.

I'd like to start by summarizing the major components of our $120 million improvement in the second quarter net income of $273 million compared to the same period last year.

$63 million of this favorable improvement resulted from increased underwriting profits; $55 million from realized capital gains and $19 million from derivative income on the equity index put contracts.

Partially offsetting these increases was a modest decrease of $9 million in investment income, which I will discuss later, and an increase of $24 million in income taxes.

However, since there was no material change in our effective tax rate the increase in taxes was consistent with better operating results.

Getting back to the underwriting results.

Overall, the combined ratio of 87.9% for the second quarter compared favorably to the 94.4% of a year ago.

As we examine the various segments, the strongest contributors to our $120 million underwriting profit for the quarter, which is doubled over the previous year, were the US reinsurance segment with $59 million of underwriting profit and an 80.1% combined ratio, and the international segment, with $52 million of underwriting profit and a 79.5% combined ratio.

These two segments, in particular, have benefited from strong rates in the property market, as noted in Ralph's comments.

Therefore these are the two segment with our highest growth rates.

Also producing an underwriting gain of $18 million was our Bermuda segment, although revenues were down year over year due in part to foreign exchange and adjustments or nonrenewal of certain programs in continental Europe.

The specialty underwriting segment produced a combined ratio of over 100, which reflects, for the most part, marine loss activity.

The impact on results is not significant since this is the smallest portion of our portfolio.

Premiums were down as well in the segment due to pricing levels and as a consequent we have reduced our exposure in marine and A&H business.

In the US insurance segment the combined ratio rose above 100 for the quarter, and while a large property loss was a factor, there continues to be weakness in primary rates keeping pressure on our loss cost and the expense ratio.

Nevertheless, there are elements of this segment, particularly the new business group mentioned previously Ralph in the FID&O business, which we expect will produce very favorable margins.

The commission and brokerage ratio overall is consistent with the first quarter but down over the prior year.

This is primarily driven by business mix.

Operating expenses continue to remain at very competitive levels relative to our competitors and there was no significant prior period loss development in the quarter.

We did continue to add to our ID&R for subprime potential but other than that our overall reserves were in line with our expectations for the quarter.

The attritional loss ratio is up slightly over prior periods, reflecting our conservatism as we view the current market environment, certain markets exhibiting higher loss trends and a softer rate environment.

Moving to investment income, which was down 5% year over year due to declining bond yields and lower income from our limited partnership and equity investments.

The year-over-year income from our limited partnership investments declined $5 million to $20.3 million.

These factors caused our pretax book yield to decline to 4% compared to 4.5% a year ago.

In addition, the duration of our portfolio decreased to 3.9 years from 4.4 years.

Our realized gains were modest for the quarter at $23 million but nevertheless showed a positive swing of $55 million over the prior year due to fair value gains in the current period from our equity portfolio compared to a loss one year ago.

Net derivative income was positive this quarter due to a rise in the indices upon which our equity index put contracts were written and an increase in interest rates.

Overall, the value of our portfolio, which now stands at $14.2 billion, performed well for the quarter, which was consistent with the market.

We experienced $185 million gain, net of tax, in unrealized appreciation on our fixed income portfolio, before the effect of the adoption of the new accounts pronouncement.

Reflecting the impact of this new pronouncement the change in unrealized appreciation for the quarter was $128 million.

The difference of $57 million was due to a reclassification from retained earnings into accumulated other comprehensive income with no impact on book value.

This amount was for investments previously recorded as other than temporary losses through realized losses and represent s market value losses deem today be other than credit related and therefore accounted for unrealized under the new standard.

The net effect of this unrealized increase is that the current market value of our fixed maturities available for sale now reflect -- reflects a pretax unrealized gain of $34 million compared to a loss of $172 million at December 31, 2008.

We continue to focus our investment strategy on credit quality, shorter duration, and limited equity exposure.

To the extent that markets maintain their recent stability, this should enable us to better manage the interest rate and credit risk, and thus more stable market values.

Equity exposure, both public and private, is modest at this time at approximately 5% of our portfolio and we do not expect any major shifts over the near-term horizon.

Other comprehensive income for the three months was a gain of $308 million.

This reflects the positive change I mentioned earlier in the unrealized appreciation, as well as a gain of $121 million on foreign currency translation adjustments, as other major currencies strengthened against the US dollar.

Cash flow from operations remained strong and with $0.5 billion of growth and shareholders equity our capital ratios remain extremely positive, enabling us greater flexibility in our capital management.

With that as a summary I turn it back to Beth to open the Q&A.

Joseph?

Thank you.

(Operator Instructions).

And we'll take our first question from Matthew Heimermann of JPMorgan.

Good morning, everybody.

A couple questions.

First, with respect to the crop growth you're seeing, did you suffer any losses this quarter from any of the southern weather in wheat?

Yes, there's a drought in Texas that will affect a couple of our quota share crops.

We talked to them recently and that would probably be a third quarter event, but it's only a few points, really, on their combined ratio from their early indications.

Okay.

And then with respect to the growth in the insurance business and the D&O effort, can you maybe give us a little bit of color on how much of that is growth from the small bank pro -- community bank program versus growth other individually written accounts?

Yes.

In the second quarter all of that was individual accounts written in New York by our team there and we do -- have entered into the small bank program, the ABA, and that is starting -- actually in August 1st.

It rolls in during the course of the year so it's -- each month will be a little bit of volume.

We expect growth volume in that to be in the $40 million range over the next year.

Okay, that's helpful.

And the one last one, just with respect to Florida.

Any big change there in terms of how you allocated your capacity between traditional cat cover versus the pro rata business?

There really wasn't a significant change.

The four big reasonably large pro rata accounts renewed, tougher terms on each of them.

Currents limits on those went down a little bit as the rates went up, and the excess of losses were about the same.

So, in aggregate, we've kept our aggregate limit there in Florida approximately the same as last year.

Okay.

Very helpful.

Thanks.

(Operator Instructions).

Our next question comes from [Shoba Frye] of Putnam Investments.

Hi.

I just wanted to ask you about your share buy back program, what is the extent of it for the rest of the year?

We really haven't provided ever a guidance on share buy back in the sense that we do want to maintain complete flexibility and be able to respond to business opportunities and as I noted concern over the hurricane season.

Certainly were pleased to buy back last quarter and getting 50 million at an average of $69 a share was very helpful to the cause.

And as I did note in the speech, just because it is hurricane season doesn't mean that we will exclude buy back, but just how much, we'll report that at the end of the quarter.

We have quite a bit remaining on the program.

Dom, do you --

A little over five million shares remaining under authorization.

For this year; is that right.

Yes.

Okay.

And then if you can just talk about continuing opportunities in the international businesses, especially Latin America.

I know that's somewhere where you hired a team or you got a team from another reinsurance company.

If you can be maybe --?

Well, we did in Brazil.

Oh, Brazil okay.

Ralph, you want to give us a little more color on that?

The overall operation we ran it out of Miami and we'll write about $300 million in Latin America overall.

The quarter-to-quarter comparison is about Brazil, which is new, but overall that's predominantly a property book and I would expect the growth rate to continue and low double digits would be more my expectation.

Just --

I would like to come back to the share authorization question, the five million is an all-time share authorization not just -- it doesn't expire at the end of the year.

Okay.

Just to clarify that.

Okay.

Then just -- it seems like you -- all the reinsurance companies are having a great year this year, as evidenced by the quarter book value growth, as well as premium growth and the ability to take rate, especially if property.

And of course, if you look at the forecast then people are expecting a mild hurricane season, which means that you could at the end of the year, if you're very well placed, which you are, end up with a lot of capital and a lot of profits.

So how should we look about -- how should we think about it for next year.

Is this something that's one time or do you think these rates could last next year, as well?

That's a little hard to say.

You are right on the property side.

Most of us reinsurers are pleased with where the property cat rates are and most property rates are worldwide.

They have continued to go up through July.

Now, certainly we're seeing that stabilize.

It's hard to predict next year and certainly it'll be a function of what happens in the way of losses this year.

I wouldn't put too much faith in some of these hurricane forecasts.

We don't, so we'll just wait and see what happens.

My guess is if there is no hurricane you might see rates come off a bit going into next year but probably still be at a pretty good place.

That's on property side.

The casualty side, as I noted, a different story.

The margins are much thinner and there does need to be some rate correction there to get that market to be rated healthier.

I would get back to what you said about all reinsurers growing.

Some have and some haven't.

Right.

We're pleased to be one of those that have grown.

Right.

Do you think that -- just on your view on just -- it seems like there's a couple of reinsurers consolidating, do you think that's healthy for the market for next year in terms of keeping prices up or any views on that?

I don't think it'll have a big impact, to be quite honest with you.

We do see some smaller companies getting together and even some mid-size companies getting a bit bigger by acquiring a smaller company.

In all likelihood, when you put the two together they'll probably write less cat aggregate than they wrote as separate entities, so that might be a small plus for the marketplace, but I don't think it is a big deal overall.

Okay.

Thanks very much.

You're welcome.

Moving on our next question comes from Arthur Winston of Pilot Advisors.

Given that you said last time that some of your private equity and partnerships are delayed by one quarter, can we assume that with the results of the financial and capital and stock markets in the last four months that we would -- should continue to have more derivative income and more profit from these partnerships and private equity, et cetera?

Well, it's a little difficult to be forecasting invest --.

It's not a forecast.

It is three-months delayed; right?

Yes, the private is three-months delayed and the public is one-month delayed.

There's a portion of the limited partnerships which comes from public equity.

Certainly we would expect the portion coming from public equities to continue -- at least through this point in the quarter to continue with a favorable result.

It's less clear what would be coming from the private equity portion of those limited partnerships.

We have had a gain through the second quarter on the limited partnerships, predominantly coming from the public equity portion of those investments.

Given that some of these things probably recovered to some degree are you going to make any changes in the exposure to these kind of investments or keep the status quo?

Relative to the limited partnerships there's little that we can do at this point in changing those commitments that we have, so those will remain for the most part as is.

We do have some other limited partnerships, which are just public equities exposure, which we could consider changes in our position on those funds.

Thank you very much.

We'll take a follow-up question from Matthew Heimermann of JPMorgan.

Hi.

Hey, Joe, just one question on the contract extension, can you just talk -- give us a little bit of your perspective on the decision to extend by year and then what your main priorities would be over the next year before that is completed?

I think put simply the board and myself just felt as if that was best for Everest in the sense that it really would ultimately lead to a seemless future transition.

As far as the next year, business wise, you hear the plan.

There's no major changes.

Okay.

Thank you.

Our next question comes from Marc Serafin of Citadel.

Good morning.

First one, maybe Dom, could you tell us what percentage of the other assets are public versus private and maybe give us a little bit more detail on what's true private equity versus public, like mezz funds or LBO funds?

Give me a second and we'll try to locate that information in order to be precise.

Excellent.

Maybe while you're going through that just -- I might have missed it on the call.

Did you guys talk about where the premiums in the Bermuda segment were down in the quarter and if that's something you would expect to continue as you emphasize other areas?

The segment that we call Bermuda ops includes our European business, which is written out of Brussels and London, so it was down 23% in the quarter.

If you take out the currency exchange there with the pound, it would be just down 10%.

It came from one contract that we adjusted in Belgium that was significant under expectation from the seeding Company, so it's really just a lumpy adjustment in the quarter.

I would expect it to even out during the course of the year.

Excellent.

And then was there an FX impact specifically on the specialty underwriting segment, as well, that contributed to that number?

You guys mentioned reducing some marine and A&H business, but --

That wasn't FX related.

That was just us cutting back on the marine segment in general.

Is that something we should expect to continue?

Yes, but it's relatively modest size in the grand scheme of things

Great.

Marc, back to the question on the limited partnerships, the public equity component of our limited partnerships is approximately $170 million.

Okay.

Part of $600 million.

Okay.

So just a little under 30%.

And those are also on a one quarter not a one month lag?

The public equities are on a one month lag.

The private piece is on a quarter lag.

Great.

And the private piece, if I understand that, that's like energy, healthcare and real estate related?

Correct.

Correct.

Okay.

International.

Thanks.

And the last question currently in queue will come from Vinay Misquith of Credit Suisse.

Hi.

This is actually [Max Zumato] on Vinay's line.

Had a question about the underwriting expense ratio declining significantly this quarter, I just wanted to -- I know you mentioned that it was due to business mix, just wondering if you could dig in a little bit further and give me some more color on that, please.

Well, in part the -- it's driven by -- heavily by the commission ratio and lower seating commissions on a number of pro rata contracts is a large contributor to that.

Okay, and then I wanted to follow up on that.

On the tax rate I noticed It's as similar as it was last quarter and we're just wondering should we expect the 11.5% instead of the usual 15% run rate?

Yes, that's on operating earnings, too.

I'm not sure the 15% run rate, you might have that on total net income pretax so you're got to be careful --

This is the operating income.

Right.

11.5% is our expectation.

Going forward?

For the remainder of year, yes.

Okay, all right.

Thank you very much.

That's all I had.

There are no further questions in the queue at this time.

Okay.

Thank you so much for participating on the call and certainly if you have any further questions you can call my number.

Again, thank you.

Thank you, again, for participating in today's conference call.

This does conclude the event.