Everest Group Ltd (EG) 2009 Q3 法說會逐字稿

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 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 Dom 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% and 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 has grown 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, a continued expansion in the international markets, including our new office in Brazil.

Fourth, new product development, most notably crop treaty insurance.

I am pleased as to how our staff used our financial strength and distribution channels to foster this growth.

Our insurance operation grew its premiums 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 Dom 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 exceedingly cautious in this area.

Property reinsurance has been 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, Where as 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 buy back stock, which we expect to continue to do.

I'm confident the many strengths that Everest has built will allow us to continue to do well.

Ralph?

Thank you, Joe.

The US reinsurance business was up 23% for the quarter and produced a combined ratio of 67%.

When the wind doesn't blow, this book performs very well.

Much of the growth come from our treaty property business, which has benefited 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 than what we're seeing in the primary insurance market, the slow deterioration of rates in the underlying market is cause 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 cat losses during the quarter.

This principally came from significant flooding in Turkey, where we have a 3% market share in 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 currency in the quarter, where 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 fort quarter in original currencies and down 4% in US dollars.

The combined ratio of 90.2% was just about what we 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 has come from two areas of opportunity; the new D&O operation in New York, as Joe has mentioned, and from our E&S property team in Tampa, Florida.

Net growth was lower than gross since we reinsurance a greater of the book in umbrella and D&O segment as a way to manage the limits that we offer in the marketplace.

The combined ratio year to date is 104%, which is principally driven by our program book.

This continues to signal a cautious outlook for the primary (inaudible) casualty programs.

Renewal retentions are down in the quarter and programs, because overall rate levels have been trending down earlier in the year.

We saw some rate stabilizing in the third quarter, mostly in the California comp book where rates were up 5%.

Overall it was a very strong quarter and it's consistent with the trends we have described during the several past quarters.

I'll now turn it over to Dom Addesso.

Thank you, Ralph.

Good morning.

As previously highlighted our third-quarter earnings were favorable, with net income per fully-diluted common share of $3.75 compared to a loss one year ago.

Minimal cat activity for this quarter, as contrasted with one year ago, was a major factor in the year-over-year comparison.

Nevertheless the current quarter in many respects continues to perform in a similar pattern to what we have seen during the year.

Property reinsurance rates continue to be strong, and coupled with low cat activity during the year, have resulted in very favorable underlying 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 over time in response to competitive pressures.

Overall these strategies have resulted in a combined ratio for total reinsurance book of 83.7% for the quarter and 85% for the year.

The insurance results for the quarter stand at 110.1% combined ratio and for the year at 103.9%.

Prior-year development on one claim accounts for approximately six points in the quarter and two points in the year.

In addition, the primary insurance base has been soft for several quarters and we continue to reserve in recognition of that reality.

As a result, underwriting results for this segment remain under pressure.

But overall, given the mix of business segments, the combined book produced a favorable 88.7% combined ratio for the quarter and an 88.8% for the year.

The loss ratio component combined was 60.2% both the quarter and year to date, while the expense ratio was 28.5% and 28.6% respectively for the same periods.

Investment income for the quarter is up only slightly over the prior year, despite strong cash flow and therefore a higher invested asset base.

The investment rates are below those of a 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 that 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 pretax 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 had been falling.

Net derivative expense, which reflects our equity put contracts written in 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 are risen, the declining interest rate 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 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 value 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 of '09.

The major factor in this growth, along with our $3.75 of earnings, was the $6 of growth from the change in our bond portfolio.

Less significant to that was the impact of our shares repurchased during the quarter, which amount 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, which still remains quite strong.

And with that as summary I will turn it back to Beth for Q&A.

Laura?

(Operator Instructions).

Our first question comes from Cliff Gallant with KBW.

Good morning.

Morning.

The first question was about the reserve additions in the quarter.

You mentioned the one large claim in the primary side, but it looked like four out of five segments saw some adverse development.

Could you talk a little bit about what's happening there?

Well, first of all, I think any of the development 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 then, of course, in the insurance space, where we had one large significant claim contributing to prior-period development there.

And that's essentially -- boiling it down, most of the development is coming from that one particular claim.

We do not -- from what we see in our quarterly process, and we do go through our reserves quarterly, we do -- 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 is cause for any concern.

On the -- in the primary side, setting aside the one claim, you're still looking at a combined ratio of 104, taking out the six points for that one large claim and it would say with interest rates being what they are it doesn't seem like that's a profitable level to be running your -- to be running the businesses.

Do you have any comment in terms of what you are doing to address that to start to move that to below 100?

Sure, Cliff, this is Ralph.

The big issue comes in the program book where it really comes down to price monitoring and price movement up and, of course, we've -- when you approach the accident year of 101 that whole process is in motion.

Very hard to get it the first couple of quarters.

We saw actual movement in the third quarter in almost every program with a change of direction, but the real only positive gains was in the California comp book, where finally the market is showing some signs of accepting the rate movements upwards.

So we have that price increase effort on every one of the program book, which makes up about 70% of the -- 75% of the insurance total.

The other is just the changing mix, as we focus on the pockets of opportunity, so as you see the FI D&O and the Florida property facility, which is now about $35 million in premium, will be specialty areas around the programs.

But it's tough going on the primary casualty market.

I don't want to [tell it isn't].

It's hand-to-hand combat on almost each of these.

You tend to see a bit more competition on the bigger accounts than you do on the smaller ones, so some of the specialty east programs are a little bit insulated, but it's hard work.

Just to answer that, Cliff, Ralph is right.

Some of the new areas, like the FI D&O we like, we think will produce some good results through time.

The Florida property we like.

But in the main this book is 95% US casualty business, and that is tough 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 of the good things that we should do.

But a lot of this just gets back to the marketplace and how it's very competitive right now.

Thank you.

You're welcome.

Our next question comes from Jay Gelb with Barclays Capital.

Thanks, and good morning.

Joe, could you update us on succession planning?

Well, gee, didn't you see that I extended for a year there, Jay?

I did see that.

(LAUGHTER)

My 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, and so I think we have the right situation in place that all shareholders and clients should feel very good that we're going to have strength at the top for many years to come.

The board, once it makes a final decision as to timing, we'll let you know as soon as that decision is made.

All right, that's helpful, thanks.

And how about your outlook for gross written premium growth for next year?

We're probably in the planning stages in terms of looking for that, should we expect another year of double-digit growth out of Everest?

We are in the planning stages and we're putting the finishing touches on that.

I guess I would start with saying we're very pleased with what we achieved this year because we had to really execute well on a number of fronts to achieve the double-digit growth that we have so far through nine months.

Some of that was capitalizing on dislocations from late 2008, which helped us in some of the new product development.

like crop reinsurance, and helped us with some international building that we have been doing, including helping our Brazil office kick-off 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 capital providers.

We're pleased with what we've done on the insurance side and the FI D&O and in the Florida sector.

So there's a number of things in the 2009 that, again, we're happy with, but that is not necessarily repeating itself going into 2010.

So if the market doesn't particularly improve from where it's at, the answer -- the short answer would be that you would not see double-digit growth next year.

We'll still work as hard as we can to find new opportunities and expand into 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 in all likelihood be down 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're not planning on the fact that they will.

If they do, we can do much more, but -- if they do in a significant way, but that's not part of our outlook at this stage.

All right, that's a very thoughtful answer and then that sort of leads into the capital management question with premium to equity at around 62%, that probably leaves a fair amount of excess capital on the balance sheet.

What are your thoughts in terms of capital management?

Well, buy-back has been, for the last two quarters, part of the process.

It will be going forward part of the process.

I think we were one of the few companies last quarter to be buying back stock.

I think we were one of the few reinsurance companies going into this quarter to say, even though it is tax season, it's likely that we'd be buying back stock and I expect us to be buying back going into the following quarter, as well.

We're not going to give targets.

We like to maintain flexibility on that so we can do what we can do is best as we move from one point in time to the next, but expect us to be buying back.

Thanks very much.

Our next question comes from Matthew Heimermann with JPMorgan.

Hi, good morning, everybody.

A couple of questions, if I may.

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 cost trends there?

Yes, the current accident year is 101.7, so we're not going to grow that at all, so you're going to see the broad casualty programs probably decline.

I think six out of the eight have declined already and -- with renewal retention because you're pushing the rates up, so that's going to continue into -- in 2010, most likely.

Can you give a sense of order of magnitude of what that will look like?

It's very hard to predict exactly.

We're pushing on all cylinders to get single-digit rate increases in almost everyone of the casualty programs.

The run rate, as you go into 2010 on the renewal retention, depends on what it is.

Right now you're seeing 85% to 90% on renewal retention on some of these, so if it stays in that range you can get a fixer of that, so your hopefully single-digit rate increase and down ten in the renewal retention.

That's kind of the way it's probably shaping up on the bulk of the book.

Okay.

And then with respect to casualty timing a lot of the growth has obviously come in property and you've had the crop in Brazil and things like that, but specific to the US reinsurance book, could you talk a little bit about how much casualty cons -- how much casualty represents as a percentage of total on that book now, and just some of the underlying trends with that piece of it?

Sure, sure.

Well, you go back in time, now three or four years ago we had a $600 million book of casualty business, treaty casualty, and we're probably down on an annualized basis about $300 million.

So the direction based on what we've seen as available price in terms and condition has dropped dramatically over the last couple of years.

Right now, through nine months, if you look at the US reinsurance, $700 million, about $200 million is treaty casualty just as a proportion to give you that perspective.

Okay.

We've largely collapsed over those years to really what we see as our core clients.

The group that we are left with, we're very pleased, (inaudible), effectively continue to stay with because they do a great job in the marketplace.

But as Ralph noted, it's really less than half of what we were doing a few years ago as we've responded to the changes in the marketplace and casualty pricing.

Are there any big changes in the products that make up the $200 million year to date relative to the peak of $600 million?

I think there's a gradual shift from customers from quota shares to excess of loss, and then there was a little uptick last -- tail end of last year because people wanted more quota shares for capital reasons, so we'll certainly write the quota shares if we like the terms and conditions.

You see a lot of unusual things like loss quarters and higher retention points, and so on, but no other great mix than that.

You might find us a bit more specialty today in terms of E&O and D&O and environmental than it was if you go back to 2003 and '04 where the whole general liability market and the whole automobile market, and comp 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 clients and those that really are specialized and have some insulation from the competition in the marketplace.

Okay, and just one last one on demand.

You did see some uptick because of some of the pressure on balance sheets last year, I was just curious if you could estimate how much of the growth this year you think was just from demand uptick that might reverse next year given where balance sheets sit today?

Yes, we did have some business in London that, I guess, we called the [yearing] business that was quota share casualty that did come to us because the clients had diminished surplus and needed to use our balance sheet, if you will, and I guess we had at least one sizeable deal casualty in the US that again our client surplus-wise need to do buy more reinsurance.

You're 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'll be a different dynamic going into 2010 and that's why we're not forecasting the kind of growth in 2010 that so far we've achieved in 2009.

All right.

Thanks.

Your next question comes from Brian Meredith with UBS.

Yes, Good morning, Joe, a couple of questions here.

First, Dom, can you give us -- what are the key items that hit the other income loss item or expense line?

(inaudible) FX?

Primarily FX.

Okay, excellent.

Second questions, Joe, on the property markets you said going into next year you think things will be pretty disciplined, but how much can 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 go down so much that 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 it still would rate reasonably well and they'd even understand the reductions in the 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 it varies, some pockets of the business are rated a lot better than other pockets of the business, so we'll just have to take them one at a time.

But clearly, one would have to expect with a very good loss year and benign losses, good results, that there is going to be pressure to reduce rate.

But at the same time I just think rate insurers still have a tremendous respect for cat business; that it is cat business, and it can explode and it's volatile and it can hurt your surplus, and I think insurers who buy have a respect for cat business that it is the flip-side.

If they keep it net 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 they'll be disciplined.

I think there'll be modest reductions, and I think, at least with regard to 2010 on most cat business -- I could be wrong, let me put that hedge in there, but I think with regard to most business we'll find it more than adequately rated.

Great.

Last question, Joe, taking a look at what's going on with casualty pricing and where interest rates are today, how much confidence do you have that you can actually achieve double-digit growth in book value in 2010 or have a respectable return on equity?

Well, I think we can have a respectable return.

The challenge is more with interest rates down and the casualty market being competitive, but look at some of the numbers that we're achieving this year.

Even putting the unrealized aside for the moment I think we're well positioned.

In part that comes from the fact that we're much more of a 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.

Great, thank you.

It appears there are no further questions at this time.

Ms.

Farrell, I'd 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 Dom after the call.

Again, thank you.

Thank you.

thank you for your participation, this concludes today's conference.