Everest Group Ltd (EG) 2009 Q4 法說會逐字稿

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

All lines are currently in a listen only mode.

Later you will have the opportunity to ask questions.

(Operator Instructions).

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.

Good morning and welcome to Everest Re Group's fourth quarter and full year 2009 earnings conference call.

With me are Joe Taranto, the Company's Chairman and Chief Executive Officer; Ralph Jones, President and Chief Operating Officer; and, Dominic Addesso, our Chief Financial Officer.

Before we begin, I will preface our comments by noting that our SEC filings include extensive disclosures with respect to forward-looking statements.

In that regard, I note that statements made during today's call which are forward-looking in nature, such as statements about projections, estimates, expectations and the like are subject to various risks.

As you know, actual results could differ materially from current projections or expectations.

Our SEC filings have a full listing of the risks that investors should consider in connection with such statements.

Now let me turn the call over to Joe Taranto.

Thanks, Beth.

Good afternoon, everyone.

Looking back at 2009 we're pleased with what we achieved.

Most notably we were able to increase our worldwide premium base by 12% to $4.1 billion, as we capitalized on market dislocations and property rate increases, created by the financial meltdown from late 2008.

Our successes included a great start for our new office in Brazil, growing our international book on attractive accounts, which was aided by some of our major competitors having financial problems, maintaining a leadership position in the retro-property market and the Florida property market, maintaining our core casualty reinsurance clients, starting a new insurance operation to respond to the future need for a financial institution directors and officers' liability, and adding a new insurance program for smaller financial institutions.

Looking forward, I was pleased with our January 1 renewals, and the quality of our portfolio remains very strong.

This comes despite catastrophe excess rates being somewhat lower and a continued slow decline in casualty insurance rates.

Let me explain why.

First, much of the momentum we had in the international reinsurance sector, including the development of our presence in Brazil, continued in 2010.

Further, on our US property reinsurance portfolio we added a couple of new meaningful single state accounts, that although cat in nature, did not enter into our largest zone.

Hence, more premium and more spread.

Much of our worldwide property reinsurance book is done on a pro rata basis not excess of loss and accordingly not impacted by excess of loss catastrophe rate changes.

This includes most of our business in Florida, as well.

And although the Florida treaties renew mid-year, our clients have recently been given permission by the insurance department to charge higher rates.

On our pro rata accounts, these increases will inure to our benefit, as well, increasing our premium and our potential margin.

Our casualty reinsurance book is half of what it was a few years ago as we have responded to rate changes in the market.

Our reinsurance book has switched from predominantly casualty in 2004 to predominantly property in 2010.

We have taken the casualty book down to a few core clients who we know well and we believe in their ability to manage through the current marketplace successfully.

Our insurance book is mostly casualty but roughly half of the book is either workers comp or D&O and E&O for financial institutions.

In both of these areas we're currently getting rate increases.

We will need to remain disciplined in parts of the casualty insurance market that continue to be challenging.

Ralph will provide more retails on 2009 and 2010 underwriting activities in a moment.

In 2009 we were also pleased to have grown book value per share by 27% and finish the year with $6.1 billion of surplus.

In addition, we paid $117 million in dividends for the year.

The Company repurchased roughly $100 million of its shares in the fourth quarter and $190 million for the year.

The Company has more than sufficient capital for its current business plans and expects to continue to buy back stock in the first quarter.

Under the current repurchase authorization, 3.5 million shares remain.

Dom will provide more details on the financials momentarily.

In summary, 2009 was a very good year top line and bottom line.

Given the successful 1/1 renewal, we expect growth in our international reinsurance book, which is mostly property reinsurance, and growth in our US property reinsurance book.

All without increasing our PML in our biggest zone.

These two areas have been our most profitable and most well rated.

We will take a disciplined underwriting approach to our casualty business, both insurance and reinsurance.

And without a market correction these sectors will likely decrease.

I expect our overall world-wide composite portfolio to remain high quality.

So I have every reason to expect 2010 to be a good year.

Ralph?

Thank you, Joe.

The international reinsurance business was a very strong driver for both growth and underwriting profits in 2009.

We wrote $1.08 billion last year, up 20% in US dollars, and 23% when adjusted for local currencies.

The combined ratio was 86%.

The Brazil operation was essentially new this year adding $68 million in 2009.

Canada at $163 million and Asia at $222 million, both grew at 17%.

Some of the growth came from increased rates for catastrophe exposed business in the 5% to 7% range during the year.

About 60% of our international book renews in the first quarter, predominantly January 1.

We had a strong renewal season in January with premiums up 14% driven equally by increased rates, some new business, and increased signings.

Primary property rates were up in South Africa and Australia.

The US reinsurance business finished at $1.17 billion, up 22% over 2008.

The growth here was principally driven by the addition of our crop reinsurance business, which added $85 million during the year.

The combined ratio was 76.8% for the year, driven virtually by no cat loss activity.

The largest segment within US reinsurance is our treaty property book which was a strong driver of the growth and underwriting profit.

About half of our US reinsurance book renews on January 1st, and we were happy with the stability of the market at 1/1.

Cat rates for the bulk of our book held up pretty well at renewal with an overall impact in the range of minus 5%.

We were able to fill out the treaty property book with several new single state programs that have good pricing margins but do not add to our peak zone aggregate cat exposure.

The casualty reinsurance book was down at year end except for one long time client that ran from an excess of loss program to quota share.

This was done for principally for reasons of surplus relief for them.

The year end renewal negotiations for treaty casualty, again, half the book renews at 1/1, were more challenging across the board which leads me to expect this book to be down for 2010.

The Bermuda operations, which include the UK and Continental Europe, wrote nearly $800 million in 2009.

About the same volume as last year in US dollars, and up 6% in local currencies.

The combined ratio for the year was 89% which includes $20 million in cat losses, mostly due to the earthquake in Italy.

Nearly 80% of our Bermuda and European reinsurance book renews during the first quarter.

We saw more competition in Continental Europe at year-end, as well as with the property retro market.

We only renewed 70% of our aggregate exposures for the Bermuda property retro account due to increased capacity available to the brokers, principally from new participants.

For those accounts we renewed, the average rate drop was about 5%.

Many retro clients had clearly demonstrated increased exposures in their underlying book that we thought was not adequately reflected by some of the new players in this segment.

The US retro account was more stable as contrasted with Bermuda.

I expect Continental Europe to be down in 2010 and London to be about flat with the total Bermuda operations to be down modestly for 2010.

The specialty segment was $235 million, down 10% for the year and 23% for the quarter.

The combined ratio in 2009 was 104% driven mainly by the marine book.

Several large quota share marine contracts reported late claims during their renewal process.

Two-thirds of the marine book renews during the first quarter.

And based on the difficult negotiations at 1/1 we expect the book to be substantially down for 2010.

I am not excited about the profit potential in the marine market.

Accident and health and surety, which make up the balance of our specialty lines, were both profitable and growing.

That sums up a very good year for the reinsurance business.

$3.3 billion, up 13%, at 85 combined, year-end renewals were pretty strong.

In 2010 I expect international will be up, treaty property will be up, casualty will be down, and marine will be down.

That now let me turn to our primary insurance business, Everest National.

The insurance segment ended the year at $843 million, up 9.2% over 2008.

The growth came principally from our direct insurance operations in E&S property and D&O and E&O for financial institutions.

The direct business now makes up 20% of our insurance business and will become an increasingly large share over time.

The combined ratio for the year was 109.9% which included a $45 million charge in the fourth quarter due to comprehensive reserve study at year-end.

The underlying casualty market in the US is very competitive, probably the most challenging environment in which we operate.

The eight core program managers that we support, which makes up the other 80% of our insurance book, all face declining renewal retentions as we execute our rate plans.

Combined ratio for the 2009 accident year at 101% shows we still have work to do on our program book.

For the fourth quarter, rates were up 5% overall, with the bulk of those increases coming from California workers' comp, whose prospects are improving.

I expect our core eight program managers to be down next year as we continue to drive rate improvement.

We will also need to continue the belt-tightening on expenses and commissions to meet our objectives.

Our strategy here is pretty simple.

Maintain the core eight program managers, increase rates by at least 5% on average, and improve the expense ratio at the same time.

Anything new will come from an acquisition of a specialty company, or MGA that can demonstrate a competitive advantage in a requisite margin that follows.

With programs declining I expect the direct specialty business to become a bigger and bigger proportion of our insurance business over time.

Let me now turn it over to Dom Addesso.

Thanks, Ralph, and good afternoon.

As noted earnings for the quarter continued the favorable trend experienced throughout the year.

The comparisons of net income to the prior year results for both the quarter and year-to-date are quite dramatic due in large part to the after-tax realized capital losses of $196 million in last year's fourth quarter, and $581 million for the entire year of 2008.

These losses were a result of the financial market crisis as securities were adjusted to fair value or sold.

Operating income for the year excluding realized capital losses, on the other hand, increased to $12.51 per share, compared to $9.10 per share in 2008.

This year-over-year comparison was largely influenced by $364 million of cat losses in 2008, versus $67 million in 2009.

On a quarterly basis operating earnings per share increased 9% to $3.19 compared to $2.92 in 2008.

You just heard from Ralph the details on premium by segment.

But overall the increase in gross written was 14.8% for the quarter and 12.3% for the year.

The impact of foreign currency on premiums was not significant for the quarter.

But for the year premiums increased approximately 14% after adjusting for foreign currency due to the weakening dollar.

Premiums earned for the year of $3.9 billion produced an underwriting gain of $407 million, compared to $162 million in 2008.

On a quarterly basis the underwriting gain of $85 million in 2009, compared to a gain of $150 million in the prior year's quarter.

These underwriting results were driven by several factors.

In both the quarter-over-quarter and year-over-year comparisons, there was an improvement in the commission of brokerage ratio of 2.8 points and 1.4 points, respectively.

This is primarily due to improved seating commission terms on reinsurance contracts and reductions in profit share on certain insurance contracts.

Other underwriting expenses rose slightly as staff was added to build out our financial institutions business.

Another factor in the analysis of underwriting results was the development of prior-year losses.

During the quarter we added $92 million to our reserves for prior year attritional losses which amounted to 8.9 points on our loss ratio for the quarter.

Year-to-date, we added $125 million or 3.2 loss ratio points.

The development activity in the fourth quarter was the result of our annual detailed loss reserve analysis, which indicated a need to add approximately $49 million to reserves in the insurance segment.

This, along with actions earlier in the year, added approximately 9 points to the combined ratio in that segment for the year.

The balance of the reserve addition of $43 million in the quarter, was in our reinsurance book, in both the domestic and international property lines, where we experienced a higher than expected level of late reported losses from a small number of contracts.

But offset by some favorable development in the casualty book overall.

Also affecting the year-over-year comparison of underwriting results were cat losses.

Cat losses in 2008 represented almost 10 points or $364 million of loss in 2008.

Whereas in 2009, the cat losses were $67 million for the year or 1.7 loss ratio points.

Excluding cat losses at prior period development, the accident year loss ratio has increased to 56% in 2009, from 55.5% in 2008.

The increase is largely evident in the insurance portfolio where the accident year loss ratio has risen to 71.5 from 68.2.

This is a reflection, in general, of a softening market, particularly in the casualty lines.

In the reinsurance segment, the current accident year loss ratio was up, but only slightly since this portfolio was dominated by property business, where rates in certain markets and products have been firm.

The reinsurance segments, overall, had a strong year exhibiting an accident year combined ratio excluding cats of 80.7%.

The overall combined ratio on an accident year basis excluding cats for the year, was 84.2%.

And these results produced very favorable cash flow from operations of $785 million for the year and $186 million for the quarter.

Turning to the investment results, you will note that core investment results are down slightly year-over-year, but up dramatically on the quarterly comparison.

First the year, which is down $18 million to $548 million.

This is mainly attributed to lower yield available for new money, as well as what we had invested in our short-term accounts where yields have been at historically low levels.

As a result funds in short term instruments have been reduced over the prior year end.

Overall, the yield on our fixed income portfolio has decreased 27 basis points.

Offsetting this was a reduction in the loss from limited partnerships, or a $23 million improvement.

And while we did have less income in 2009 from equity securities due to sales in 2008, these proceeds were moved into fixed-income securities and have minimal impact on the year-to-year comparison.

The quarter-over-quarter comparison is much different, although driven by the same factors.

Net investment income for the fourth quarter rose to $146 million from $75 million in the prior year.

And the largest factor was a swing in limited partnership income to a gain of $10 million in 2009, from a loss of $73 million in 2008.

In terms of our shareholders' equity accident account, the book value has grown to $6.1 billion or $102.87 per share, up from $80.77 per share at the prior year end, and $100.75 at the end of the third quarter.

The increase in our book value from earnings was, of course, impacted by the normal shareholder dividends, but also other comprehensive income.

In the fourth quarter, there was approximately $46 million of unrealized loss after-tax from our bond portfolio flowing through other comprehensive income.

On the other hand, for the year, there was an increase of $530 million after-tax coming from the bond portfolio.

As a result, the overall value of our fixed income portfolio is approximately $400 million above amortized cost.

The majority of the remaining change in other comprehensive income is derived from translation adjustments which were a decrease of $20 million for the quarter, but an increase of $84 million for the year as the dollar weakened for most of the year but rebounded slightly in the fourth quarter.

And the final factor affecting the equity account was our share repurchases during the year which in 2009 amounted to $190.6 million at an average price of $80.65 per share.

This was, of course, accretive to our $13.22 per share earnings and our $102.87 book value per share, and added positively to our 15% return on equity.

And with that, I will turn it back to Beth for the Q&A.

We are ready for questions.

Thank you.

(Operator Instructions).

And we'll take our first question from the line of Brian Meredith from UBS, please go ahead.

Yes, good afternoon.

A couple of questions here .

The first one, I think, on the primary business, when we look at the reserve increase there, the question is, what is now the loss trend assumption that you're assuming in that contractor's book

Help me out here, Brian.

Like loss costs in place because obviously when you took the reserve charge --

Let me explain the reserve.

We do a reserve review, of course, every quarter, but we do a more comprehensive one at year end, and we decided to strengthen the reserves for the insurance company quite substantially at year end, as you can see.

This came principally from two run-off programs that ended back in 2007.

So I'm happy to get those behind us and strengthen our reserve position.

So as we head into a softer market, we'll be fully reserved, so to speak.

The accident year run rate for the insurance group, we moved up 3 points, as you could notice for 2009, from Dom's commentary.

I think it is 68 to 71 on the loss ratio.

On the loss, yes.

So that moves up the combined right over 100.

So that's where we see the book is today, so what we need to do is to continue that rate increase and belt-tightening that will improve the overall combined for the insurance group which I'm confident we can do.

How did the professional liability business do this quarter?

Extremely well.

Extremely well.

The direct business, which the biggest component, is our D&O business, and also the property business in Florida, was in a combined under 90.

Okay.

Excellent.

And then on the Florida business, you talked about rate increases and how that should positively affect that business.

What wind credits, how could that factor into your quota share business?

The wind mitigation credits that the Florida companies have had to endure over the last couple of years, are in the results, they're in the book.

What's really changed there is the overall attitude or orientation of the insurance department, because a year ago they were forcing these guys to be more and more competitive.

And now with the concerns about solvency of some of the Florida companies, they have taken the opposite tack and they're granting 15% rate increases pretty much to anybody who asks for one.

On our largest client, they were granted a 15% rate increase in October, and that really should not only take care of some of the credit issues but also as you go into 2010 look pretty good.

For our bigger clients, as Ralph, noted we got the 15% rate increase which works to our benefit.

The wind mitigation credits is something that the Department is still tackling.

I think there is a lot of agreement that there has been abuse in that system, and I think there will be changes going forward that will also help the companies in terms of generating a better result into the future.

It's a little unclear just how much that will be at this stage of the game.

But the rate increase, 15%, that's just clear, and being applied to all policies.

Great, thank you.

And we'll take our next question from the line of Jay Gelb, from Barclays Capital.

Please go ahead.

Specialty Re seems to be another challenging segment.

Can you tell us a little bit about what was going on in the fourth quarter there.

Sure, Jay, this is Ralph.

It is principally the marine business.

We had a couple of large contracts, quota shares, that did not perform well, came up for renewal at 1/1, and we were not able to come to an agreement on the negotiations for each of those.

So that was the center of my conversation in the report, which was the marine results and what that's going to mean for a drop in revenue in that area for the next year.

The other components of the specialty, the accident and health and insurety, did perform, in fact, quite well.

So the loss issues, especially on an accident year basis were driven by the marine book?

Correct.

Okay.

Ralph, if you put all of your comments together in terms of the moving pieces within the franchise, does it still lead you to an outlook of roughly flattish premium growth in 2010 overall?

For the entire organization?

Yes.

I would say it would probably be up in the single-digit range.

Yes, it's hard for us to guess exactly and 1/1 certainly isn't the entire year.

It may be up a bit, but flattish is I think probably the best take-away.

Some parts will be up, mostly property.

Some parts will be down, mostly casualty.

Okay.

And then for Dom, the link quarter core investment income, around $146 million in the quarter, was down almost $20 million from the third quarter?

What was driving that?

A big part of that was the decline in the limited partnership income, primarily public equity, limited partnerships that are invested in public equities.

Lag effect.

Partly lag effect and then also since the third quarter we've sold out of some of our public equity exposure in the limited partnership space.

Okay.

And then on the share buy-backs, with the stock trading slightly below 80% of book, I'm just wondering, do you have any updated thoughts in terms of how fast you'll do the buy-back here?

Again, we're not going to provide forecasts, but clearly we're going to be in the market and we're keen to get into the market as soon as the window opens, and we're going to be buying back in the first quarter a reasonable amount.

Okay.

Thank you.

And we'll take our next question from the line of Matthew Heimermann from JPMorgan.

Please go ahead.

Hi, good morning -- or good afternoon, everybody, it feels like the morning still.

A couple of questions.

First, on the reserve increases, can you talk about just how the process of reviewing reserves is the same or different relative to prior years given, obviously, some of the people on the phone have changed over the last couple of years?

Let me explain the process.

I'm not sure that I could describe completely how -- this is Dom -- how it differed from prior years, other than maybe a little bit of timing.

I obviously came on into the organization in May, and there had been previously, in prior years some detailed reserve reviews done during, partly detailed reserve reviews, done at interim quarters.

We elected to have a full reserve review done in the fourth quarter, which is what gave rise to the adjustment that we just talked about before.

But in the intervening quarters, we do do a fair bit of work, as well.

We monitor how our losses are performing relative to our expected.

So we're constantly monitoring actual losses up against expected losses in many of our segments and what we call reserving groups, if you will.

So that is a continual process throughout the year, but the annual detail, or the detailed reserve study, which was in prior years split into two different quarters, we conducted all in the fourth quarter this year.

Is the byproduct of the change in quarterly monitoring, is it fair to think that that in future years probably means the 4Q review will be less impactful in terms of the total change to the reserving amounts?

I'm not sure why it would be less impactful, but we are actually looking, or I'm looking at how we might conduct these reserve studies going forward into future periods.

In fact, moving the dates upon which we examine losses closer to the valuation date, which would give us a better answer and a more timely answer.

There are a number of things I'm looking at, in fact may have the reserve study moved to throughout the year, back to a moving calendar.

But let me be clear.

I think that whether we do the reserve study, the detailed reserve study, if we split it up into two quarters or do it all in one quarter, does not lessen my conviction about where I think reserves are, or the process here.

I think that the process here, the adjustment we made in the fourth quarter, on an overall basis relative to $8 billion of reserves is well within the bounds of reason.

And I still feel very strongly about our overall reserve position and its reasonableness, and certainly how conservative stance that we're taking here at the end of the fourth quarter.

That's fair.

And this might be unfair but from an external perspective clearly reserve additions has been a struggle over the last maybe four years in total, and it stands in a bit of contrast to the trends that other companies are reporting.

What are you seeing internally that you maybe could communicate externally, that makes you feel like you're on top of the issues that have been driving these increases?

Let me first say that that's something I fully expect and working hard to put behind us, and I think what we've done here in the fourth quarter will do just that.

So let me be clear on that point.

And I think the others, there is another element to it.

There's also current accident year.

And so while you're examining, paying a lot of attention to prior-period reserves, as we should, and as we did at the end of the fourth quarter, we also need to be sure that we've got a good and adequate and conservative loss pick for the current accident year, so that that doesn't become a prior period adjustment into the future.

So that's the other element of this which I feel quite strongly that we've taken good steps in that regard.

Okay.

Moving on and maybe this is for Ralph.

Just on the program manager business, given that you're saying professional lines and the D&O and E&O professional lines operations are running at an underwriting profit, the question I have is, is this 5% rate enough in that book to actually drive improvement?

Or is the improvement more going come in that segment just from the fact that the work comp, property, or property D&O is just going to become a bigger portion of it, and the mix is what's going to get you there, rather than necessarily big improvement on the stuff that's problematic today?

The mix comes automatically, really, by the process.

Think of it that way.

Most of the rate increases that we're really getting traction on have been in California comp during the last six months.

So we're seeing good traction there, happy with the prices, and that book will maybe grow modestly.

On the general liability programs, we have two big ones.

We're having a harder time getting traction because the program managers are losing renewals when we push for the requisite rate increase.

So, naturally, that will be a smaller portion of the book over time.

So it is a natural selection process, really.

On the other direct business, which again is not through program managers, we control our own destiny to a greater degree, and we're happier with that.

And, we can get the army to march more clearly in those areas, and that's happening in two or three good pockets of business where we see opportunity.

So that will just naturally become a larger component of the insurance segment over time.

I'm happy with the eight program managers that we have.

They are doing the job.

It is starting to take shape.

It hasn't performed to the degree that we would have liked in the past, and we're going to fix that.

Let me add to that, that Ralph noted a minimum of 5%.

So clearly we're hoping and certainly are going to push for more than 5%.

Now, we're not sure what we can actually achieve, given the marketplace.

If it doesn't change all that much, it's going to be difficult to achieve a big number.

But we will push and get what we can get.

And the other form of attack was the expense ratio.

We are going to look to take that down a bit, as well.

Okay.

That's helpful.

And just one -- sorry to take so much time -- but when you talk about premiums for next year and the renewals that went on, was that adjusting for FX or was that before contemplating the impact of FX?

That was without contemplating anything for FX.

Okay.

Much appreciated, thanks.

(Operator Instructions).

And it looks like we have no more questions at this time.

Okay, thank you.

If certainly anybody has questions off-line, please feel free to call me.

I do appreciate everybody's participation this afternoon.

Thank you.

This concludes today's conference.

You may disconnect at this time and have a great day.