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RE > SEC Filings for RE > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for EVEREST RE GROUP LTD

Form 10-Q for EVEREST RE GROUP LTD


9-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Industry Conditions.
The worldwide reinsurance and insurance businesses are highly competitive, as well as cyclical by product and market. As such, financial results tend to fluctuate with periods of constrained availability, high rates and strong profits followed by periods of abundant capacity, low rates and constrained profitability. Competition in the types of reinsurance and insurance business that we underwrite is based on many factors, including the perceived overall financial strength of the reinsurer or insurer, ratings of the reinsurer or insurer by A.M. Best and/or Standard & Poor's, underwriting expertise, the jurisdictions where the reinsurer or insurer is licensed or otherwise authorized, capacity and coverages offered, premiums charged, other terms and conditions of the reinsurance and insurance business offered, services offered, speed of claims payment and reputation and experience in lines written. Furthermore, the market impact from these competitive factors related to reinsurance and insurance is generally not consistent across lines of business, domestic and international geographical areas and distribution channels.

We compete in the U.S., Bermuda and international reinsurance and insurance markets with numerous global competitors. Our competitors include independent reinsurance and insurance companies, subsidiaries or affiliates of established worldwide insurance companies, reinsurance departments of certain insurance companies and domestic and international underwriting operations, including underwriting syndicates at Lloyd's. Some of these competitors have greater financial resources than we do and have established long term and continuing business relationships, which can be a significant competitive advantage. In addition, the lack of strong barriers to entry into the reinsurance business and the potential for securitization of reinsurance and insurance risks through capital markets provide additional sources of potential reinsurance and insurance capacity and competition.

Worldwide insurance and reinsurance market conditions continued to be very competitive, particularly in the casualty lines of business. Generally, there was ample insurance and reinsurance capacity relative to demand. Competition and its effect on rates, terms and conditions vary widely by market and coverage yet continued to be most prevalent in the U.S. casualty insurance and reinsurance markets.

However, during 2011, the industry experienced significant losses from Australian floods, the New Zealand earthquake, the earthquake and tsunami in Japan, storms in the U.S., and the Thailand floods. It is too early to determine the longer term impact on market conditions as a result of these events. While there have been meaningful rate increases for catastrophe coverages in some global catastrophe prone regions, particularly areas impacted by these losses, whether the magnitude of these losses is sufficient to increase rates and improve market conditions for other lines of business remains to be seen.

Overall, we believe that current marketplace conditions, particularly for catastrophe coverages, provide profit opportunities for us given our strong ratings, distribution system, reputation and expertise. We continue to employ our strategy of targeting business that offers the greatest profit potential, while maintaining balance and diversification in our overall portfolio.


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Financial Summary.
We monitor and evaluate our overall performance based upon financial
results. The following table displays a summary of the consolidated net income
(loss), ratios and shareholders' equity for the periods indicated.

                                          Three Months Ended         Percentage              Nine Months Ended               Percentage
                                             September 30,           Increase/                 September 30,                 Increase/
(Dollars in millions)                     2012          2011         (Decrease)           2012                2011           (Decrease)
Gross written premiums                  $ 1,204.0     $ 1,128.5              6.7 %   $       3,159.5     $      3,181.3             -0.7 %
Net written premiums                      1,100.5       1,090.8              0.9 %           2,972.0            3,065.8             -3.1 %

REVENUES:
Premiums earned                         $ 1,009.5     $ 1,044.3             -3.3 %   $       3,045.2     $      3,095.6             -1.6 %
Net investment income                       152.0         156.5             -2.8 %             453.8              493.8             -8.1 %
Net realized capital gains (losses)          62.7        (137.7 )         -145.6 %             144.9             (130.4 )         -211.1 %
Net derivative gain (loss)                    0.7         (23.4 )         -103.0 %              (9.4 )            (19.3 )          -51.1 %
Other income (expense)                       (5.9 )       (14.9 )          -60.2 %              15.7              (31.7 )         -149.4 %
Total revenues                            1,219.0       1,024.8             18.9 %           3,650.2            3,408.0              7.1 %

CLAIMS AND EXPENSES:
Incurred losses and loss adjustment
expenses                                    603.7         720.7            -16.2 %           1,814.0            2,706.3            -33.0 %
Commission, brokerage, taxes and fees       221.1         228.0             -3.0 %             724.4              701.8              3.2 %
Other underwriting expenses                  55.8          49.4             12.8 %             153.9              140.3              9.7 %
Corporate expenses                            5.9           4.2             41.4 %              16.7               11.9             39.9 %
Interest, fees and bond issue cost
amortization expense                         13.3          13.1              1.9 %              39.8               39.2              1.4 %
Total claims and expenses                   899.8       1,015.4            -11.4 %           2,748.7            3,599.5            -23.6 %

INCOME (LOSS) BEFORE TAXES                  319.2           9.4                 NM             901.4             (191.5 )               NM
Income tax expense (benefit)                 68.3         (53.7 )         -227.2 %             131.3              (69.9 )               NM
NET INCOME (LOSS)                       $   250.9     $    63.1                 NM   $         770.2     $       (121.5 )               NM

                                                                       Point                                                   Point
RATIOS:                                                                Change                                                  Change
Loss ratio                                   59.8 %        69.0 %           (9.2 )              59.6 %             87.4 %          (27.8 )
Commission and brokerage ratio               21.9 %        21.8 %            0.1                23.8 %             22.7 %            1.1
Other underwriting expense ratio              5.5 %         4.8 %            0.7                 5.0 %              4.5 %            0.5
Combined ratio                               87.2 %        95.6 %           (8.4 )              88.4 %            114.6 %          (26.2 )

                                                                                           At                  At            Percentage
                                                                                      September 30,       December 31,       Increase/
(Dollars in millions, except per
share amounts)                                                                              2012               2011          (Decrease)
Balance sheet data:
Total investments and cash                                                           $      16,534.0     $     15,797.4              4.7 %
Total assets                                                                                19,667.5           18,893.6              4.1 %
Loss and loss adjustment expense
reserves                                                                                     9,847.2           10,123.2             -2.7 %
Total debt                                                                                     818.1              818.1              0.0 %
Total liabilities                                                                           12,882.1           12,822.2              0.5 %
Shareholders' equity                                                                         6,785.4            6,071.4             11.8 %
Book value per share                                                                          131.22             112.99             16.1 %

(NM, not meaningful)
(Some amounts may not reconcile due
to rounding.)

Revenues.
Premiums. Gross written premiums increased by 6.7% to $1,204.0 million for the three months ended September 30, 2012, compared to $1,128.5 million for the three months ended September 30, 2011 reflecting a $98.2 million increase in our insurance business, partially offset by a $22.7 million decrease in our reinsurance business. Gross written premiums decreased by 0.7% to $3,159.5 million for the nine months ended September 30, 2012, compared to $3,181.3 million for the nine months ended September 30, 2011 reflecting a $73.1 million decrease in our reinsurance business, partially offset by a $51.2 million increase in our insurance business. The decrease in reinsurance premiums was primarily due to the non-renewal of a large Florida quota share reinsurance contract, partially offset by increases in new business and rate increases on renewals, particularly for catastrophe exposed contracts. The increase in insurance


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premiums was primarily due to the growth in crop and primary medical stop loss insurance, partially offset by the termination and runoff of several large casualty programs.

Net written premiums increased by 0.9% to $1,100.5 million for the three months ended September 30, 2012 compared to $1,090.8 million for the three months ended September 30, 2011 and decreased by 3.1% to $2,972.0 million for the nine months ended September 30, 2012 compared to $3,065.8 million for the nine months ended September 30, 2011. The variance between the changes in gross and net written premiums was primarily attributable to the growth in the crop business, for which the Company uses a higher level of reinsurance. Premiums earned decreased by 3.3% to $1,009.5 million for the three months ended September 30, 2012 compared to $1,044.3 million for the three months ended September 30, 2011 and decreased by 1.6% to $3,045.2 million for the nine months ended September 30, 2012 compared to $3,095.6 million for the nine months ended September 30, 2011. The fluctuations in premiums earned in comparison to net written premiums were primarily attributable to changes in the mix of business, particularly crop insurance which has a different premiums earning pattern.

Net Investment Income. Net investment income decreased by 2.8% to $152.0 million for the three months ended September 30, 2012 compared with net investment income of $156.5 million for the three months ended September 30, 2011, primarily due to the impact from lower reinvestment rates on fixed maturity securities over the past several years. Net investment income decreased by 8.1% to $453.8 million for the nine months ended September 30, 2012 compared with net investment income of $493.8 million for the nine months ended September 30, 2011, primarily as a result of an $18.8 million decrease in investment income from our limited partnership investments and the impact from lower reinvestment rates. Net pre-tax investment income, as a percentage of average invested assets, was 4.0% for the three months ended September 30, 2012 compared to 4.1% for the three months ended September 30, 2011 and 3.9% for the nine months ended September 30, 2012 compared to 4.4% for the nine months ended September 30, 2011. The declines in these yields were primarily the result of fluctuations in our limited partnership income and lower reinvestment rates for the fixed income portfolio.

Net Realized Capital Gains (Losses). Net realized capital gains were $62.7 million and net realized capital losses were $137.7 million for the three months ended September 30, 2012 and 2011, respectively. The $62.7 million was comprised of $60.8 million of gains from fair value re-measurements and $5.5 million of net realized capital gains from sales on our fixed maturity and equity securities, which were partially offset by $3.5 million of other-than-temporary impairments. The net realized capital losses of $137.7 million for the three months ended September 30, 2011 were the result of $160.7 million of losses from fair value re-measurements and $1.1 million of other-than-temporary impairments, partially offset by $24.0 million from net realized capital gains from sales on our fixed maturity and equity securities.

Net realized capital gains were $144.9 million and net realized capital losses were $130.4 million for the nine months ended September 30, 2012 and 2011, respectively. The $144.9 million was comprised of $111.2 million of gains from fair value re-measurements and $43.6 million of net realized capital gains from sales on our fixed maturity and equity securities, which were partially offset by $9.9 million of other-than-temporary impairments. The net realized capital losses of $130.4 million for the nine months ended September 30, 2011 were the result of $123.8 million of losses from fair value re-measurements and $15.8 million of other-than-temporary impairments, partially offset by $9.2 million of net realized capital gains from sales on our fixed maturity and equity securities.

Net Derivative Gain (Loss). In 2005 and prior, we sold seven equity index put option contracts, which remain outstanding. These contracts meet the definition of a derivative in accordance with FASB guidance and as such, are fair valued each quarter with the change recorded as net derivative gain or loss in the consolidated statements of operations and comprehensive income (loss). As a result of these adjustments in value, we recognized net derivative gains of $0.7 million and net derivative losses of $23.4 million for the three months ended September 30, 2012 and 2011, respectively, and net derivative losses of $9.4 million and $19.3 million for the nine months ended September 30, 2012 and 2011, respectively. The change in the fair value of these equity index put option contracts is indicative of the change in the equity markets and interest rates over the same periods.


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Other Income (Expense). We recorded other expense of $5.9 million and other income of $15.7 million for the three and nine months ended September 30, 2012, respectively, and other expense of $14.9 million and $31.7 million for the three and nine months ended September 30, 2011, respectively. The changes were primarily the result of fluctuations in foreign currency exchange rates for the corresponding periods.

Claims and Expenses.
Incurred Losses and Loss Adjustment Expenses. The following table presents our
incurred losses and loss adjustment expenses ("LAE") for the periods indicated.

                                                 Three Months Ended September 30,
                        Current        Ratio %/      Prior        Ratio %/       Total         Ratio %/
(Dollars in millions)     Year         Pt Change     Years       Pt Change     Incurred        Pt Change
2012
Attritional (a)         $  579.2        57.4 %       $ (0.6 )     -0.1 %       $   578.7        57.3 %
Catastrophes                25.0         2.5 %            -        0.0 %            25.0         2.5 %
A&E                            -         0.0 %            -        0.0 %               -         0.0 %
Total                   $  604.2        59.9 %       $ (0.6 )     -0.1 %       $   603.7        59.8 %

2011
Attritional (a)         $  584.1        55.9 %       $  4.3        0.4 %       $   588.4        56.3 %
Catastrophes               132.3        12.7 %            -        0.0 %           132.3        12.7 %
A&E                            -         0.0 %            -        0.0 %               -         0.0 %
Total                   $  716.4        68.6 %       $  4.3        0.4 %       $   720.7        69.0 %

Variance 2012/2011
Attritional (a)         $   (4.9 )       1.5   pts   $ (4.9 )     (0.5 ) pts   $    (9.7 )       1.0   pts
Catastrophes              (107.3 )     (10.2 ) pts        -          -   pts      (107.3 )     (10.2 ) pts
A&E                            -           -   pts        -          -   pts           -           -   pts
Total                   $ (112.2 )      (8.7 ) pts   $ (4.9 )     (0.5 ) pts   $  (117.1 )      (9.2 ) pts



                                                                                 Nine Months Ended September 30,
                                       Current                          Ratio %/                  Prior            Ratio %/         Total           Ratio %/
(Dollars in millions)                    Year                          Pt Change                  Years           Pt Change        Incurred         Pt Change
2012
Attritional (a)                  $            1,729.8                     56.8 %               $      (1.0 )          0.0 %       $  1,728.9          56.8 %
Catastrophes                                     85.0                      2.8 %                         -            0.0 %             85.0           2.8 %
A&E                                                 -                      0.0 %                       0.1            0.0 %              0.1           0.0 %
Total                            $            1,814.8                     59.6 %               $      (0.8 )          0.0 %       $  1,814.0          59.6 %

2011
Attritional (a)                  $            1,784.6                     57.6 %               $       0.6            0.0 %       $  1,785.2          57.6 %
Catastrophes                                    920.3                     29.7 %                         -            0.0 %            920.3          29.7 %
A&E                                                 -                      0.0 %                       0.8            0.0 %              0.8           0.0 %
Total                            $            2,705.0                     87.4 %               $       1.3            0.0 %       $  2,706.3          87.4 %

Variance 2012/2011
Attritional (a)                  $              (54.8 )                   (0.8 )   pts         $      (1.6 )            -   pts   $    (56.3 )        (0.8 ) pts
Catastrophes                                   (835.3 )                  (26.9 )   pts                   -              -   pts       (835.3 )       (26.9 ) pts
A&E                                                 -                        -     pts                (0.7 )            -   pts         (0.7 )           -   pts
Total                            $             (890.2 )                  (27.8 )   pts         $      (2.1 )            -   pts   $   (892.3 )       (27.8 ) pts

(a) Attritional losses exclude catastrophe and Asbestos and Environmental ("A&E") losses.
(Some amounts may not reconcile due to rounding.)

Incurred losses and LAE decreased by 16.2% to $603.7 million for the three months ended September 30, 2012 compared to $720.7 million for the three months ended September 30, 2011, representing 9.2 loss ratio points. Current year catastrophe losses were lower by $107.3 million, or 10.2 points, period over period. The $25.0 million of current year catastrophe losses for 2012 relate to Hurricane Isaac. The $132.3 million of current year catastrophe losses for 2011 relates primarily to increased loss estimates for the first quarter 2011 Japanese earthquake and tsunami ($65.0 million), Hurricane Irene ($35.0 million) and the 2011 New Zealand earthquake ($27.0 million). Current year attritional losses decreased $4.9 million reflecting the decline in premiums earned but loss ratio increased 1.5 points, primarily due to losses on the crop book of business.


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Incurred losses and LAE decreased by 33.0% to $1,814.0 million for the nine months ended September 30, 2012 compared to $2,706.3 million for the nine months ended September 30, 2011, representing 27.8 loss ratio points. Current year catastrophe losses were lower by $835.3 million, or 26.9 points, period over period. The $85.0 million of current year catastrophe losses for 2012 related to U.S. storms ($60.0 million) and Hurricane Isaac ($25.0 million). The $920.3 million of current year catastrophe losses for 2011 related primarily to the Japanese earthquake and tsunami ($479.7 million), the 2011 New Zealand earthquake ($269.0 million), the Australian floods ($54.9 million), U.S. storms ($52.1 million), Hurricane Irene ($35.0 million) and the Canadian Slave Lake fire ($13.0 million). Current year attritional losses decreased $54.8 million, representing 0.8 loss ratio points, due to significant rate increases in catastrophe exposed areas and a shift in mix of business towards property catastrophe and excess of loss business, which generally has lower attritional losses, partially offset by losses from crop insurance.

Commission, Brokerage, Taxes and Fees. Commission, brokerage, taxes and fees decreased by 3.0% to $221.1 million for the three months ended September 30, 2012 compared to $228.0 million for the three months ended September 30, 2011, and increased by 3.2% to $724.4 million for the nine months ended September 30, 2012 compared to $701.8 million for the nine months ended September 30, 2011. The three month decrease is primarily due to an increase in excess of loss business which carries a lower commission than pro rata business. The nine month increase is due primarily to the one-time effect of the non-renewal of a Florida quota share contract and the adoption of new accounting standards concerning the accounting for acquisition costs, which is increasing expenses in 2012.

Other Underwriting Expenses. Other underwriting expenses increased to $55.8 million from $49.4 million for the three months ended September 30, 2012 and 2011, respectively. Other underwriting expenses increased to $153.9 million from $140.3 million for the nine months ended September 30, 2012 and 2011, respectively. The increases in other underwriting expenses were mainly due to higher share-based compensation and employee benefit plan expenses.

Corporate Expenses. Corporate expenses, which are general operating expenses that are not allocated to segments, were $5.9 million and $4.2 million for the three months ended September 30, 2012 and 2011, respectively, and $16.7 million and $11.9 million for the nine months ended September 30, 2012 and 2011, respectively. The increases in corporate expenses were mainly due to higher share-based compensation expense.

Interest, Fees and Bond Issue Cost Amortization Expense. Interest, fees and other bond amortization expense was $13.3 million and $13.1 million for the three months ended September 30, 2012 and 2011, respectively, and $39.8 million and $39.2 million for the nine months ended September 30, 2012 and 2011, respectively.

Income Tax Expense (Benefit). We had an income tax expense of $68.3 million and $131.3 million for the three and nine months ended September 30, 2012, respectively, and an income tax benefit of $53.7 million and $69.9 million for the three and nine months ended September 30, 2011, respectively. Our income tax is primarily a function of the statutory tax rates and corresponding pre-tax income in the jurisdictions where we operate, coupled with the impact from tax-preferenced investment income. Variations in our effective tax rate generally result from changes in the relative levels of pre-tax income among jurisdictions with different tax rates. The increases in tax expense were mainly due to the improvement in taxable income resulting from lower catastrophe losses in 2012. The nine month income tax expense also reflects tax benefits of $21.7 million realized due to corrections of understatements in the deferred tax asset account and $11.2 million of tax benefits from a reduction in our reserve for uncertain tax positions due to the closing of an IRS audit.

Net Income (Loss).
Our net income was $250.9 million and $63.1 million for the three months ended September 30, 2012 and 2011, respectively. Our net income was $770.2 million and our net loss was $121.5 million for the nine months ended September 30, 2012 and 2011, respectively. The increases were primarily driven by the decline in catastrophe losses in 2012.


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Ratios.
Our combined ratio decreased by 8.4 points to 87.2% for the three months ended September 30, 2012 compared to 95.6% for the same period in 2011 and decreased by 26.2 points to 88.4% for the nine months ended September 30, 2012 compared to 114.6% for the same period in 2011. The loss ratio component decreased 9.2 points and 27.8 points for the three and nine months ended September 30, 2012, respectively, over the same periods last year. The other underwriting expense ratio component and the commission and brokerage ratio component both increased over the same periods last year due to the explanations provided above.

Shareholders' Equity.
Shareholders' equity increased by $714.0 million to $6,785.4 million at September 30, 2012 from $6,071.4 million at December 31, 2011, principally as a result of $770.2 million of net income, $196.5 million of unrealized appreciation on investments, net of tax, share-based compensation transactions of $42.7 million, $27.1 million of net foreign currency translation adjustments and $3.2 million of net benefit plan obligation adjustments, partially offset by repurchases of 2.6 million common shares for $250.0 million and $75.7 million of shareholder dividends.

Consolidated Investment Results

Net Investment Income.
Net investment income decreased by 2.8% to $152.0 million for the three months ended September 30, 2012 compared to $156.5 million for the three months ended September 30, 2011, and decreased by 8.1% to $453.8 million for the nine months ended September 30, 2012 compared to $493.8 million for the nine months ended September 30, 2011, primarily due to changes in income from our limited partnership investments and declines in income from our fixed maturities, reflective of declining reinvestment rates.

The following table shows the components of net investment income for the periods indicated.

                                                       Three Months Ended           Nine Months Ended
                                                         September 30,                September 30,
(Dollars in millions)                                  2012           2011          2012          2011
Fixed maturities                                    $    122.9      $  131.7     $    367.8     $  397.2
Equity securities                                         13.4          15.8           46.9         40.8
Short-term investments and cash                            0.4           0.4            0.9          1.0
Other invested assets
Limited partnerships                                      18.6          15.7           47.9         66.7
Other                                                      1.5          (1.5 )          2.5          3.2
Total gross investment income                            156.6         162.0          465.9        509.0
. . .
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