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RE > SEC Filings for RE > Form 10-K on 3-Mar-2014All Recent SEC Filings

Show all filings for EVEREST RE GROUP LTD

Form 10-K for EVEREST RE GROUP LTD


3-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

The following is a discussion and analysis of our results of operations and financial condition. It should be read in conjunction with the Consolidated Financial Statements and accompanying notes thereto presented under ITEM 8, "Financial Statements and Supplementary Data".

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. Although there were flooding and wind storm events in Europe and Asia in the latter part of 2013, the overall 2013 catastrophe losses for the industry were lower than average. This lower level of losses, combined with increased competition is putting downward pressure on rates in certain geographical areas.

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.

                                                         Years Ended December 31,               Percentage Increase/(Decrease)
(Dollars in millions)                               2013           2012           2011               2013/2012          2012/2011
Gross written premiums                           $  5,218.6     $  4,310.5     $  4,286.2                 21.1 %              0.6 %
Net written premiums                                5,004.8        4,081.1        4,108.9                 22.6 %             -0.7 %

REVENUES:
Premiums earned                                  $  4,753.5     $  4,164.6     $  4,101.3                 14.1 %              1.5 %
Net investment income                                 548.5          600.2          620.0                 -8.6 %             -3.2 %
Net realized capital gains (losses)                   300.2          164.4            6.9                 82.6 %                 NM
Net derivative gain (loss)                             44.0           (9.7 )        (11.3 )                    NM           -13.5 %
Other income (expense)                                 (5.5 )          3.3          (23.1 )                    NM          -114.4 %
Total revenues                                      5,640.8        4,922.8        4,694.0                 14.6 %              4.9 %

CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses        2,800.3        2,745.3        3,726.2                  2.0 %            -26.3 %
Commission, brokerage, taxes and fees                 977.6          952.7          950.5                  2.6 %              0.2 %
Other underwriting expenses                           237.1          207.7          182.4                 14.2 %             13.8 %
Corporate expenses                                     24.8           24.0           16.5                  3.5 %             45.7 %
Interest, fees and bond issue cost
amortization expense                                   46.1           53.7           52.3                -14.1 %              2.6 %
Total claims and expenses                           4,085.9        3,983.3        4,927.9                  2.6 %            -19.2 %

INCOME (LOSS) BEFORE TAXES                          1,555.0          939.5         (233.9 )               65.5 %                 NM
Income tax expense (benefit)                          289.7          110.6         (153.5 )              162.0 %           -172.1 %
NET INCOME (LOSS)                                $  1,265.3     $    829.0     $    (80.5 )               52.6 %                 NM
Net (income) loss attributable to
noncontrolling interests                               (5.9 )            -              -                      NM                NM
NET INCOME (LOSS) ATTRIBUTABLE TO EVEREST RE
GROUP                                            $  1,259.4     $    829.0     $    (80.5 )               51.9 %                 NM

RATIOS:                                                                                                  Point Change
Loss ratio                                             58.9 %         65.9 %         90.9 %               (7.0 )            (25.0 )
Commission and brokerage ratio                         20.6 %         22.9 %         23.2 %               (2.3 )             (0.3 )
Other underwriting expense ratio                        5.0 %          5.0 %          4.4 %                  -                0.6
Combined ratio                                         84.5 %         93.8 %        118.5 %               (9.3 )            (24.7 )

                                                             At December 31,                    Percentage Increase/(Decrease)
(Dollars in millions, except per share
amounts)                                             2013           2012           2011              2013/2012          2012/2011
Balance sheet data:
Total investments and cash                       $ 16,596.5     $ 16,576.2     $ 15,797.4                  0.1 %              4.9 %
Total assets                                       19,808.0       19,777.9       18,893.6                  0.2 %              4.7 %
Loss and loss adjustment expense reserves           9,673.2       10,069.1       10,123.2                 -3.9 %             -0.5 %
Total debt                                            488.3          818.2          818.1                -40.3 %              0.0 %
Total liabilities                                  12,746.4       13,044.4       12,822.2                 -2.3 %              1.7 %
Redeemable noncontrolling interests - Mt.
Logan Re                                               93.4              -              -                      NM                NM
Shareholders' equity                                6,968.3        6,733.5        6,071.4                  3.5 %             10.9 %
Book value per share                                 146.57         130.96         112.99                 11.9 %             15.9 %

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

Revenues.
Premiums. Gross written premiums increased by 21.1% to $5,218.6 million in 2013, compared to $4,310.5 million in 2012, reflecting a $692.3 million, or 21.4%, increase in our reinsurance business, a $195.6 million, or 18.2%, increase in our insurance business and $20.2 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 year over year impact of the large Florida quota share reinsurance contract, gross written premiums increased 15.0% and reinsurance premiums increased 13.4%, compared to the prior year. 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 by 22.6% to $5,004.8 million in 2013 compared to $4,081.1 million in 2012, which is consistent with the increase in


gross written premiums. Premiums earned increased by 14.1% to $4,753.5 million in 2013, compared to $4,164.6 million in 2012. Unlike written premiums, premiums earned were minimally 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.

Gross written premiums increased by 0.6% to $4,310.5 million in 2012, compared to $4,286.2 million in 2011, reflecting a $97.5 million increase in our insurance business, partially offset by a $73.1 million decrease in our reinsurance business. The increase in insurance premiums was primarily due to the growth in crop and primary A&H medical stop loss insurance, partially offset by the termination and runoff of several large casualty programs. The decrease in reinsurance premiums was primarily due to the non-renewal of a large Florida quota share reinsurance contract and a $42.5 million decline due to movement in foreign exchange rates, partially offset by increases in new business and rate increases on renewals, particularly for catastrophe exposed contracts. Eliminating the effects of reinstatement premiums, which were higher in 2011 due to a higher level of catastrophe losses, and foreign currency fluctuations, gross written premiums were up 2% year over year. Net written premiums decreased 0.7% to $4,081.1 million in 2012 compared to $4,108.9 million in 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 increased by 1.5% to $4,164.6 million in 2012, compared to $4,101.3 million in 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 8.6% to $548.5 million in 2013 compared with net investment income of $600.2 million in 2012. Net pre-tax investment income, as a percentage of average invested assets, was 3.5% in 2013 compared to 3.9% in 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 investment income decreased by 3.2% to $600.2 million in 2012 compared with net investment income of $620.0 million in 2011. Net pre-tax investment income, as a percentage of average invested assets, was 3.9% in 2012 compared to 4.1% in 2011. The decline in income and yield was primarily the result of lower reinvestment rates for the fixed income portfolio, partially offset by an increase in our limited partnership income.

Net Realized Capital Gains (Losses). Net realized capital gains were $300.2 million, $164.4 million and $6.9 million in 2013, 2012 and 2011, respectively. The $300.2 million was comprised of $258.9 million of gains from fair value re-measurements and $42.4 million of net realized capital gains from sales on our fixed maturity and equity securities, which were partially offset by $1.1 million of other-than-temporary impairments. The net realized capital gains of $164.4 million in 2012 were the result of $118.1 million of gains from fair value re-measurements and $56.3 million of net realized capital gains from sales on our fixed maturity and equity securities, which were partially offset by $10.0 million of other-than-temporary impairments. The net realized capital gains of $6.9 million in 2011 were the result of $27.5 million of net realized capital gains from sales on our fixed maturity and equity securities which was partially offset by $4.4 million of losses from fair value re-measurements and $16.2 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 $44.0 million in 2013 and net derivative losses of $9.7 million and $11.3 million in 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.

Other Income (Expense). We recorded other expense of $5.5 million in 2013, other income of $3.3 million in 2012 and other expense of $23.1 million in 2011. 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.

                                                                      Years Ended December 31,
                                         Current               Ratio %/        Prior          Ratio %/        Total          Ratio %/
(Dollars in millions)                     Year                Pt Change        Years         Pt Change      Incurred        Pt Change
2013
Attritional (a)                   $             2,623.5         55.2 %       $   (18.2 )       -0.4 %       $ 2,605.3         54.8 %
Catastrophes                                      195.0          4.1 %               -          0.0 %           195.0          4.1 %
Total                             $             2,818.5         59.3 %       $   (18.2 )       -0.4 %       $ 2,800.3         58.9 %

2012
Attritional (a)                   $             2,338.9         56.2 %       $    (3.7 )       -0.1 %       $ 2,335.2         56.1 %
Catastrophes                                      410.0          9.8 %               -          0.0 %           410.0          9.8 %
Total                             $             2,748.9         66.0 %       $    (3.7 )       -0.1 %       $ 2,745.3         65.9 %

2011
Attritional (a)                   $             2,422.1         59.1 %       $     3.7          0.1 %       $ 2,425.8         59.2 %
Catastrophes                                    1,300.4         31.7 %               -          0.0 %         1,300.4         31.7 %
Total                             $             3,722.5         90.8 %       $     3.7          0.1 %       $ 3,726.2         90.9 %

Variance 2013/2012
Attritional (a)                   $               284.6         (1.0 ) pts   $   (14.5 )       (0.3 ) pts   $   270.1         (1.3 ) pts
Catastrophes                                     (215.0 )       (5.7 ) pts           -            -   pts      (215.0 )       (5.7 ) pts
Total                             $                69.6         (6.7 ) pts   $   (14.5 )       (0.3 ) pts   $    55.0         (7.0 ) pts

Variance 2012/2011
Attritional (a)                   $               (83.2 )       (2.9 ) pts   $    (7.4 )       (0.2 ) pts   $   (90.6 )       (3.1 ) pts

Catastrophes (890.4 ) (21.9 ) pts - - pts (890.4 ) (21.9 ) pts Total $ (973.6 ) (24.8 ) pts $ (7.4 ) (0.2 ) pts $ (980.9 ) (25.0 ) pts

(a) Attritional losses exclude catastrophe losses.
(Some amounts may not reconcile due to rounding.)

Incurred losses and LAE increased by 2.0% to $2,800.3 million for the year ended December 31, 2013 compared to $2,745.3 million for the year ended December 31, 2012, primarily due to increases in current year attritional losses, partially offset by the decline in current year catastrophe losses. The increase in current year attritional losses of $284.6 million is primarily due to the impact of the increase in premiums earned. Despite the increase in current year attritional losses, the current year attritional loss ratio decreased by 1.0 points due to the shift in the mix of business towards excess of loss business, which generally results in lower loss ratios. Current year catastrophe losses for the year ended December 31, 2013 were $195.0 million, or 4.1 points, due to Canadian floods ($79.7 million), U.S. storms ($44.8 million), Typhoon Fitow ($30.0 million), German hailstorms ($20.5 million) and European floods ($20.0 million). The $410.0 million of current year catastrophe losses for 2012 represented 9.8 points and related to Superstorm Sandy ($325.0 million), U.S. storms ($60.0 million) and Hurricane Isaac ($25.0 million).

Incurred losses and LAE decreased by 26.3% to $2,745.3 million for the year ended December 31, 2012 compared to $3,726.2 million in 2011, representing 25.0 loss ratio points. Current year 2012 catastrophe losses discussed above were lower by $890.4 million, or 21.9 points, period over period. The $1,300.4 million of current year catastrophe losses for 2011 related primarily to the Japanese earthquake and tsunami ($531.7 million), the 2011 New Zealand earthquake ($305.8 million), the Thailand floods ($225.0 million), U.S. storms ($60.6 million), the 2011 Australian floods ($56.1 million) and Hurricane Irene ($38.0 million) as well as $50.0 million of IBNR reserves for these 2011 catastrophe events collectively, which were not allocated to a specific event. During 2012 and 2013, $41.0 million and $3.9 million, respectively, of the IBNR reserve was allocated to specific 2011 catastrophes, leaving $5.1 million of unallocated IBNR reserves at December 31, 2013. Current year attritional losses decreased $83.2 million, representing 2.9 loss ratio points, due to a shift in mix of business towards excess of loss business, which generally has lower attritional losses.


Commission, Brokerage, Taxes and Fees. Commission, brokerage, taxes and fees increased by 2.6% to $977.6 million for the year ended December 31, 2013 compared to $952.7 million for the year ended December 31, 2012. The year over year changes were primarily due to the impact of the increase 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.

Commission, brokerage, taxes and fees increased by 0.2% to $952.7 million for the year ended December 31, 2012 compared to $950.5 million in 2011. The 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 increased expenses in 2012. The increased expenses resulting from these two factors were partially offset by an increase in excess of loss business which carries a lower commission than pro rata business.

Other Underwriting Expenses. Other underwriting expenses were $237.1 million, $207.7 million and $182.4 million in 2013, 2012 and 2011, respectively. The increase in other underwriting expenses for 2013 compared to 2012 was mainly due to the impact of higher premiums earned and higher compensation expenses. The increase in other underwriting expenses for 2012 compared to 2011 was mainly due to higher share-based compensation expenses and employee benefit plan expenses.

Corporate Expenses. Corporate expenses, which are general operating expenses that are not allocated to segments, were $24.8 million, $24.0 million and $16.5 million for the years ended December 31, 2013, 2012 and 2011, respectively. The increase 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 $46.1 million and $53.7 million in 2013 and 2012, respectively. The decrease was 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 $7.7 million of amortization expense on remaining capitalized issuance costs related to the redeemed securities.

Interest, fees and other bond amortization expense was $53.7 million and $52.3 million in 2012 and 2011, respectively. The increase was primarily due to additional costs for the new Group Credit Facility signed in June, 2012.

Income Tax Expense (Benefit). We had income tax expenses of $289.7 million and $110.6 million in 2013 and 2012, respectively, and income tax benefits of $153.5 million in 2011. 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 increase in the tax expense/(benefit) between 2013 and 2012, as well as 2012 versus 2011, is primarily due to higher taxable income from improved underwriting margins and capital gains in each successive year. The income tax expense for year ended December 31, 2012, also reflects tax benefits of $17.5 million realized due to corrections of understatements in the deferred tax asset account and $31.9 million of tax benefits from a reduction in our reserve for uncertain tax positions due to the re-measurement of our exposure following the closing of an IRS audit.

Net Income (Loss).
Our net income was $1,265.3 million and $829.0 million in 2013 and 2012, respectively. The changes were primarily driven by the financial component fluctuations explained above.

Our net income was $829.0 million in 2012 and our net loss was $80.5 in 2011. The increase was primarily driven by the decline in catastrophe losses in 2012.


Net Income (Loss) Attributable to Everest Re Group.
Our net income attributable to Everest Re Group was $1,259.4 million and $829.0 million in 2013 and 2012, respectively, and our net loss attributable to Everest Re Group was $80.5 million in 2011. The changes were primarily driven by the financial component fluctuations described above, as well as the impact of net income attributable to noncontrolling interests in 2013.

Ratios.
Our combined ratio decreased by 9.3 points to 84.5% in 2013 compared to 93.8% in 2012. The loss ratio component decreased 7.0 points in 2013, over the same period last year primarily due to the $215.0 million decrease in current year catastrophe losses, which lowered the loss ratio by 5.7 points. The commission and brokerage ratio components decreased 2.3 points in 2013 due to the one time impact of the termination of the Florida quota share contract in 2012 and the increase in excess of loss business which carries a lower commission than pro rata business. The other underwriting expense ratio components remained flat in 2013 over the same period last year.

Our combined ratio decreased by 24.7 points to 93.8% in 2012 compared to 118.5% in 2011. The loss ratio component decreased 25.0 points in 2012 over the same period last year primarily due to the decline in catastrophe losses in 2012 compared to 2011. The commission and brokerage ratio component slightly decreased over the same period last year due to an increase in excess of loss business which carries a lower commission than pro rata business, partially offset by the one-time effect of the non-renewal of the Florida quota share and the adoption of new accounting standards concerning the accounting for acquisition costs. Eliminating the impact of reinstatement premiums, contingent commissions, and these one-time items, the commission and brokerage ratio improved 1.5 points to 21.2% driven by the shift in the mix of business. The other underwriting expense ratio component increased slightly from the same period last year due to higher employee benefit costs.

Shareholders' Equity.
Shareholders' equity increased by $234.8 million to $6,968.3 million at December 31, 2013 from $6,733.5 million at December 31, 2012, principally as a result of $1,259.4 million of net income attributable to Everest Re Group, share-based compensation transactions of $83.3 million and $23.6 million of net benefit plan obligation adjustments, partially offset by repurchases of 4.7 million common shares for $621.9 million, $402.8 million of unrealized depreciation on investments, net of tax, $106.7 million of shareholder dividends and $0.2 million of net foreign currency translation adjustments.

Shareholders' equity increased by $662.1 million to $6,733.5 million at December 31, 2012 from $6,071.4 million at December 31, 2011, principally as a result of $829.0 million of net income, $154.3 million of unrealized appreciation on investments, net of tax, share-based compensation transactions of $53.5 million, $22.7 million of net foreign currency translation adjustments, partially offset by repurchases of 3.0 million common shares for $290.0 million, $100.4 million of shareholder dividends and $7.0 million of net benefit plan obligation adjustments.

Consolidated Investment Results

Net Investment Income.
Net investment income decreased by 8.6% to $548.5 million in 2013 compared to $600.2 million in 2012, primarily due to declines in income from our fixed maturities, reflective of declining reinvestment rates, from our equities, due to the partial liquidation of some mutual funds and from our limited partnership investments.

Net investment income decreased by 3.2% to $600.2 million in 2012 compared to $620.0 million in 2011, primarily due to declines in income from our fixed maturities, reflective of declining reinvestment rates, partially offset by an increase in income from our limited partnership investments.


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

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