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RE > SEC Filings for RE > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for EVEREST RE GROUP LTD

Form 10-Q for EVEREST RE GROUP LTD


12-Nov-2013

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 and additional capacity from the capital markets is impacting worldwide catastrophe rates.

Catastrophe rates tend to fluctuate by global region, particularly areas recently impacted by large catastrophic events. During the second and third quarters of 2013, Canada experienced historic flooding in Alberta and Toronto, which will likely result in higher future catastrophe rates. Other recent catastrophe events that have led to higher regional rates were Superstorm Sandy in 2012 and the Australian and Thailand floods, the New Zealand earthquake and the earthquake and Tsunami in Japan during 2011.

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.


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)                              2013          2012         (Decrease)           2013              2012           (Decrease)
Gross written premiums                           $ 1,465.0     $ 1,204.0             21.7 %   $      3,906.0     $     3,159.5             23.6 %
Net written premiums                               1,389.1       1,100.5             26.2 %          3,751.5           2,972.0             26.2 %

REVENUES:
Premiums earned                                  $ 1,225.8     $ 1,009.5             21.4 %   $      3,466.0     $     3,045.2             13.8 %
Net investment income                                127.9         152.0            -15.9 %            422.4             453.8             -6.9 %
Net realized capital gains (losses)                   45.0          62.7            -28.3 %            205.6             144.9             41.9 %
Net derivative gain (loss)                             5.6           0.7                NM              33.0              (9.4 )              NM
Other income (expense)                                (2.7 )        (5.9 )          -54.1 %             (3.3 )            15.7           -121.2 %
Total revenues                                     1,401.5       1,219.0             15.0 %          4,123.7           3,650.2             13.0 %

CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses         770.1         603.7             27.6 %          2,074.3           1,814.0             14.4 %
Commission, brokerage, taxes and fees                248.6         221.1             12.4 %            723.7             724.4             -0.1 %
Other underwriting expenses                           59.9          55.8              7.3 %            167.7             153.9              8.9 %
Corporate expenses                                     4.8           5.9            -20.0 %             16.6              16.7             -0.2 %
Interest, fees and bond issue cost
amortization expense                                   7.6          13.3            -42.7 %             38.5              39.8             -3.2 %
Total claims and expenses                          1,090.9         899.8             21.2 %          3,020.9           2,748.7              9.9 %

INCOME (LOSS) BEFORE TAXES                           310.6         319.2             -2.7 %          1,102.8             901.4             22.3 %
Income tax expense (benefit)                          72.0          68.3              5.5 %            204.3             131.3             55.7 %
NET INCOME (LOSS)                                $   238.5     $   250.9             -4.9 %   $        898.5     $       770.2             16.7 %
Net (income) loss attributable to
noncontrolling interests                              (3.8 )           -                NM              (3.8 )               -                NM
NET INCOME (LOSS) ATTRIBUTABLE TO EVEREST RE
GROUP                                            $   234.8     $   250.9             -6.4 %   $        894.7     $       770.2             16.2 %


                                                                                Point                                                 Point
RATIOS:                                                                         Change                                                Change
Loss ratio                                            62.8 %        59.8 %            3.0               59.8 %            59.6 %            0.2
Commission and brokerage ratio                        20.3 %        21.9 %           (1.6 )             20.9 %            23.8 %           (2.9 )
Other underwriting expense ratio                       4.9 %         5.5 %           (0.6 )              4.9 %             5.0 %           (0.1 )
Combined ratio                                        88.0 %        87.2 %            0.8               85.6 %            88.4 %           (2.8 )

                                                                                                     At                At           Percentage
                                                                                               September 30,      December 31,      Increase/
(Dollars in millions, except per share
amounts)                                                                                            2013               2012         (Decrease)
Balance sheet data:
Total investments and cash                                                                    $     16,247.9     $    16,576.2             -2.0 %
Total assets                                                                                        20,027.9          19,777.9              1.3 %
Loss and loss adjustment expense reserves                                                            9,737.9          10,069.1             -3.3 %
Total debt                                                                                             488.3             818.2            -40.3 %
Total liabilities                                                                                   13,219.2          13,044.4              1.3 %
Redeemable noncontrolling interests - Mt.
Logan Re                                                                                                91.3                 -                NM
Shareholders' equity                                                                                 6,717.5           6,733.5             -0.2 %
Book value per share                                                                                  140.20            130.96              7.1 %

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

Revenues. Gross written premiums increased by 21.7% to $1,465.0 million for the three months ended September 30, 2013, compared to $1,204.0 million for the three months ended September 30, 2012, reflecting a $207.5 million, or 23.9%, increase in our reinsurance business, a $40.3 million, or 12.1%, increase in our insurance business and $13.2 million from our new Mt. Logan Re segment. The increase in reinsurance premiums was mainly due to new business, increased participations on existing business and higher original rates on subject business. The increase in insurance premiums was primarily due to the growth in California workers' compensation, crop and non-standard auto business. Gross written premiums increased by 23.6% to $3,906.0 million for the nine months ended September 30, 2013, compared to $3,159.5 million for the nine months ended September 30, 2012, reflecting a $590.9 million, or 25.1%, increase in our reinsurance business, a $142.4 million, or 17.8%, increase in our insurance business and


$13.2 million from our new Mt. Logan Re segment. The increase in reinsurance premiums was mainly due to the impact of a Florida quota share reinsurance contract as well as new business, increased participations on existing business, and higher original rates on subject business. Excluding the large Florida quota share reinsurance contract, gross written premiums increased 15.4% and reinsurance premiums increased 14.1%, compared to the prior year nine-month period. The increase in insurance premiums was primarily due to the growth in California workers' compensation, crop and non-standard auto business.

Net written premiums increased 26.2% to $1,389.1 million for the three months ended September 30, 2013 compared to $1,100.5 million for the three months ended September 30, 2012, and increased 26.2% to $3,751.5 million for the nine months ended September 30, 2013 compared to $2,972.0 million for the nine months ended September 30, 2012, which is consistent with the increase in gross written premiums. Premiums earned increased by 21.4% to $1,225.8 million for the three months ended September 30, 2013, compared to $1,009.5 million for the three months ended September 30, 2012, and increased by 13.8% to $3,466.0 million for the nine months ended September 30, 2013, compared to $3,045.2 million for the nine months ended September 30, 2012. Unlike written premiums, premiums earned were not impacted by the Florida quota share reinsurance contract. The change in premiums earned was comparable to net written premiums, excluding the impact of the Florida quota share reinsurance contract.

Net Investment Income. Net investment income decreased by 15.9% to $127.9 million for the three months ended September 30, 2013 compared with net investment income of $152.0 million for the three months ended September 30, 2012. Net investment income decreased by 6.9% to $422.4 million for the nine months ended September 30, 2013 compared with net investment income of $453.8 million for the nine months ended September 30, 2012. Net pre-tax investment income, as a percentage of average invested assets, was 3.3% for the three months ended September 30, 2013 compared to 4.0% for the three months ended September 30, 2012 and 3.6% for the nine months ended September 30, 2013 compared to 3.9% for the nine months ended September 30, 2012. The decline in income and yield was primarily the result of lower reinvestment rates for the fixed income portfolios, less dividend income from equity investments and a decrease in our limited partnership income.

Net Realized Capital Gains (Losses). Net realized capital gains were $45.0 million and $62.7 million for the three months ended September 30, 2013 and 2012, respectively. The $45.0 million was comprised of $41.2 million of gains from fair value re-measurements and $3.7 million of net realized capital gains from sales on our fixed maturity and equity securities. The net realized capital gains of $62.7 million for the three months ended September 30, 2012 were the result 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, partially offset by $3.5 million of other-than-temporary impairments.

Net realized capital gains were $205.6 million and $144.9 million for the nine months ended September 30, 2013 and 2012, respectively. The $205.6 million was comprised of $170.7 million of gains from fair value re-measurements and $35.1 million of net realized capital gains from sales on our fixed maturity and equity securities, which were partially offset by $0.2 million of other-than-temporary impairments. The net realized capital gains of $144.9 million for the nine months ended September 30, 2012 were the result 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, partially offset by $9.9 million of other-than-temporary impairments.

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 $5.6 million and $33.0 million for the three and nine months ended September 30, 2013, respectively, and net derivative gains of $0.7 million and net derivative losses of $9.4 million for the three and nine months ended September 30, 2012, 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.


Other Income (Expense). We recorded other expense of $2.7 million and $3.3 million, respectively, for the three and nine months ended September 30, 2013. We recorded other expense of $5.9 million and other income of $15.7 million, respectively, for the three and nine months ended September 30, 2012. 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
2013
Attritional (a)         $  694.9       56.7 %       $  0.2        0.0 %       $    695.1       56.7 %
Catastrophes                75.0        6.1 %            -        0.0 %             75.0        6.1 %
A&E                            -        0.0 %            -        0.0 %                -        0.0 %
Total                   $  769.9       62.8 %       $  0.2        0.0 %       $    770.1       62.8 %

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 %

Variance 2013/2012
Attritional (a)         $  115.7       (0.7 ) pts   $  0.8        0.1   pts   $    116.4       (0.6 ) pts
Catastrophes                50.0        3.6   pts        -          -   pts         50.0        3.6   pts
A&E                            -          -   pts        -          -   pts            -          -   pts
Total                   $  165.7        2.9   pts   $  0.8        0.1   pts   $    166.4        3.0   pts



                                                                                       Nine Months Ended September 30,
                                                Current                             Ratio %/                Prior          Ratio %/         Total          Ratio %/
(Dollars in millions)                             Year                             Pt Change                Years          Pt Change      Incurred        Pt Change
2013
Attritional (a)                         $                1,910.2                     55.0 %               $    (0.9 )         0.0 %       $ 1,909.3         55.0 %
Catastrophes                                               165.0                      4.8 %                       -           0.0 %           165.0          4.8 %
A&E                                                            -                      0.0 %                       -           0.0 %               -          0.0 %
Total                                   $                2,075.2                     59.8 %               $    (0.9 )         0.0 %       $ 2,074.3         59.8 %

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 %

Variance 2013/2012
Attritional (a)                         $                  180.4                     (1.8 )   pts         $     0.1             -   pts   $   180.4         (1.8 ) pts
Catastrophes                                                80.0                      2.0     pts                 -             -   pts        80.0          2.0   pts
A&E                                                            -                        -     pts              (0.1 )           -   pts        (0.1 )          -   pts
Total                                   $                  260.4                      0.2     pts         $    (0.1 )           -   pts   $   260.3          0.2   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 increased by 27.6% to $770.1 million for the three months ended September 30, 2013 compared to $603.7 million for the three months ended September 30, 2012, primarily due to an increase in current year catastrophe losses and current year attritional losses. Current year catastrophe losses for the three months ended September 30, 2013 were $75.0 million, or 6.1 points, related to Canadian floods ($55.0 million) and German hailstorms ($20.0 million). The $25.0 million of current year catastrophe losses for the three months ended September 30, 2012 represented 2.5 points and related to Hurricane Isaac. Current year attritional losses increased $115.7 million, primarily due to higher premiums earned. Despite the increase in current year attritional losses, the current year attritional loss ratio decreased by 0.7 points, due to a shift in the mix of business towards excess of loss business, which generally results in lower loss ratios.


Incurred losses and LAE increased by 14.4% to $2,074.3 million for the nine months ended September 30, 2013 compared to $1,814.0 million for the nine months ended September 30, 2012, primarily due to increases in current year catastrophe losses and current year attritional losses. Current year catastrophe losses for the nine months ended September 30, 2013 were $165.0 million, or 4.8 points, due to Canadian floods ($75.0 million), U.S. storms ($50.0 million), European floods ($20.0 million) and German hailstorms ($20.0 million). The $85.0 million of current year catastrophe losses for the nine months ended September 30, 2012 represented 2.8 points and related to U.S. storms ($60.0 million) and Hurricane Isaac ($25.0 million). Current year attritional losses increased $180.4 million, primarily due to higher premiums earned. Despite the increase in current year attritional losses, the current year attritional loss ratio decreased by 1.8 points due to the shift in the mix of business towards excess of loss business, which generally results in lower loss ratios.

Commission, Brokerage, Taxes and Fees. Commission, brokerage, taxes and fees increased by 12.4% to $248.6 million for the three months ended September 30, 2013 compared to $221.1 million for the three months ended September 30 2012. Commission, brokerage, taxes and fees decreased by 0.1% to $723.7 million for the nine months ended September 30, 2013 compared to $724.4 million for the nine months ended September 30, 2012. The period over period changes were primarily due to the increases in premiums earned, partially offset by an increase in excess of loss business in 2013 which carries a lower commission rate than pro rata business. In addition, the nine month variance was impacted by the termination of the Florida quota share reinsurance contract in the second quarter of 2012.

Other Underwriting Expenses. Other underwriting expenses were $59.9 million and $55.8 million for the three months ended September 30, 2013 and 2012, respectively. Other underwriting expenses were $167.7 million and $153.9 million for the nine months ended September 30, 2013 and 2012, respectively. The increases in other underwriting expenses were mainly due to higher compensation expenses.

Corporate Expenses. Corporate expenses, which are general operating expenses that are not allocated to segments, were $4.8 million and $5.9 million for the three months ended September 30, 2013 and 2012, respectively, and $16.6 million and $16.7 million for the nine months ended September 30, 2013 and 2012, respectively. The decreases in corporate expenses were mainly due to lower share-based compensation expense.

Interest, Fees and Bond Issue Cost Amortization Expense. Interest, fees and other bond amortization expense was $7.6 million and $13.3 million for the three months ended September 30, 2013 and 2012, respectively. Interest, fees and other bond amortization expense was $38.5 million and $39.8 million for the nine months ended September 30, 2013 and 2012, respectively. The decreases were primarily due to the redemption of $329.9 million of trust preferred securities in May 2013. The year over year decrease was partially offset by $7.3 million of amortization expense on remaining capitalized issuance costs.

Income Tax Expense (Benefit). We had income tax expenses of $72.0 million and $68.3 million for the three months ended September 30, 2013 and 2012, respectively. We had income tax expenses of $204.3 million and $131.3 million for the nine months ended September 30, 2013 and 2012, 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 year-to-date 2013 annualized effective tax rate was 18.6% compared to the second quarter annualized effective tax rate of 16.7% resulting in an effective tax rate for the 2013 third quarter of 23.5%. The increase in the annualized effective tax rate was primarily attributable to lower than planned catastrophes resulting in higher taxable income. The income tax expense for the nine months ended September 30, 2012, also reflects tax benefits of $21.7 million realized due to corrections of understatements in the deferred tax asset account and $11.2 million realized due to closing the IRS audit for 2007 and 2008 tax years.


Net Income (Loss).
Our net income was $238.5 million and $250.9 million for the three months ended September 30, 2013 and 2012, respectively. Our net income was $898.5 million and $770.2 million for the nine months ended September 30, 2013 and 2012, respectively. The changes were primarily driven by the financial component fluctuations explained above.

Net Income (Loss) Attributable to Everest Re Group.
Our net income attributable to Everest Re Group was $234.8 million and $250.9 million for the three months ended September 30, 2013 and 2012, respectively. Our net income attributable to Everest Re Group was $894.7 million and $770.2 million for the nine months ended September 30, 2013 and 2012, respectively. The changes were primarily driven by the financial component fluctuations described above, as well as the impact of net income attributable to noncontrolling interests.

Ratios.
Our combined ratio increased by 0.8 points to 88.0% for the three months ended September 30, 2013 compared to 87.2% for the three months ended September 30, 2012 and decreased by 2.8 points to 85.6% for the nine months ended September 30, 2013 compared to 88.4% for the nine months ended September 30, 2012. The loss ratio component increased 3.0 points for the three months ended September 30, 2013, over the same period last year primarily due to the $50.0 million increase in current year catastrophe losses, which added 3.6 points to the loss ratio. The loss ratio increased 0.2 points for the nine months ended September 30, 2013, over the same period last year primarily due to the $80.0 million increase in current year catastrophe losses, partially offset by a lower attritional loss ratio with the shift towards excess of loss business. The commission and brokerage ratio components decreased 1.6 points and 2.9 points for the three and nine months ended September 30, 2013, respectively, due to an increase in excess of loss business which carries a lower commission than pro rata business. The other underwriting expense ratio components decreased 0.6 points and 0.1 points for the three and nine months ended September 30, 2013, respectively, over the same periods last year, primarily due to higher premiums earned.

Shareholders' Equity.
Shareholders' equity decreased by $16.0 million to $6,717.5 million at September 30, 2013 from $6,733.5 million at December 31, 2012, principally as a result of . . .

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