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RE > SEC Filings for RE > Form 10-Q on 12-May-2014All Recent SEC Filings

Show all filings for EVEREST RE GROUP LTD

Form 10-Q for EVEREST RE GROUP LTD


12-May-2014

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 has resulted in higher catastrophe rates in these areas. 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 resulting in lower rates for most catastrophe coverages in the beginning of 2014.

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
                                                                       March 31,                Increase/
(Dollars in millions)                                            2014            2013          (Decrease)
Gross written premiums                                       $  1,267.4     $     1,180.8             7.3 %
Net written premiums                                            1,227.6           1,149.7             6.8 %

REVENUES:
Premiums earned                                              $  1,144.5     $     1,088.8             5.1 %
Net investment income                                             123.2             145.8           -15.5 %
Net realized capital gains (losses)                                21.1             126.7           -83.3 %
Net derivative gain (loss)                                         (1.7 )            15.3          -110.9 %
Other income (expense)                                             (3.3 )            (8.9 )         -62.9 %
Total revenues                                                  1,283.8           1,367.7            -6.1 %

CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses                      619.4             592.6             4.5 %
Commission, brokerage, taxes and fees                             246.0             233.0             5.6 %
Other underwriting expenses                                        50.6              52.9            -4.4 %
Corporate expenses                                                  4.9               5.7           -13.5 %
Interest, fees and bond issue cost amortization expense             7.6              13.5           -43.9 %
Total claims and expenses                                         928.6             897.8             3.4 %

INCOME (LOSS) BEFORE TAXES                                        355.3             469.8           -24.4 %
Income tax expense (benefit)                                       53.2              85.5           -37.7 %
NET INCOME (LOSS)                                            $    302.0     $       384.3           -21.4 %
Net (income) loss attributable to noncontrolling interests         (8.1 )               -               NM
NET INCOME (LOSS) ATTRIBUTABLE TO EVEREST RE GROUP           $    293.9     $       384.3           -23.5 %


                                                                                                  Point
RATIOS:                                                                                          Change
Loss ratio                                                         54.1 %            54.4 %          (0.3 )
Commission and brokerage ratio                                     21.5 %            21.4 %           0.1
Other underwriting expense ratio                                    4.4 %             4.9 %          (0.5 )
Combined ratio                                                     80.0 %            80.7 %          (0.7 )

                                                                  At              At           Percentage
                                                              March 31,      December 31,       Increase/
(Dollars in millions, except per share amounts)                  2014             2013         (Decrease)
Balance sheet data:
Total investments and cash                                   $ 16,806.5     $    16,596.5             1.3 %
Total assets                                                   20,112.4          19,808.0             1.5 %
Loss and loss adjustment expense reserves                       9,611.1           9,673.2            -0.6 %
Total debt                                                        488.3             488.3             0.0 %
Total liabilities                                              12,759.7          12,746.4             0.1 %
Redeemable noncontrolling interests - Mt. Logan Re                315.2              93.4           237.5 %
Shareholders' equity                                            7,037.5           6,968.3             1.0 %
Book value per share                                             152.80            146.57             4.3 %

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

Revenues.
Premiums. Gross written premiums increased by 7.3% to $1,267.4 million for the three months ended March 31, 2014, compared to $1,180.8 million for the three months ended March 31, 2013, reflecting a $72.2 million, or 7.8%, increase in our reinsurance business and $36.5 million from our new Mt. Logan Re segment, partially offset by a $22.0 million, or 8.7%, decrease in our insurance business. The increase in


reinsurance premiums was mainly due to new business, particularly for contracts with catastrophe exposed risks and mortgage guaranty business. The decrease in insurance premiums was primarily due to lower crop premiums, partially offset by an increase in non-standard auto business. Net written premiums increased by 6.8% to $1,227.6 million for the three months ended March 31, 2014 compared to $1,149.7 million for the three months ended March 31, 2013, which is consistent with the increase in gross written premiums. Premiums earned increased by 5.1% to $1,144.5 million for the three months ended March 31, 2014, compared to $1,088.8 million for the three months ended March 31, 2013. The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.

Net Investment Income. Net investment income decreased by 15.5% to $123.2 million for the three months ended March 31, 2014, compared with net investment income of $145.8 million for the three months ended March 31, 2013. Net pre-tax investment income, as a percentage of average invested assets, was 3.1% for the three months ended March 31, 2014 compared to 3.7% for the three months ended March 31, 2013. The decline in income and yield was primarily the result of a decrease in our limited partnership income and lower reinvestment rates for the fixed income portfolios.

Net Realized Capital Gains (Losses). Net realized capital gains were $21.1 million and $126.7 million for the three months ended March 31, 2014 and 2013, respectively. The $21.1 million was comprised of $24.0 million of gains from fair value re-measurements, partially offset by $2.9 million of net realized capital losses from sales on our fixed maturity and equity securities. The net realized capital gains of $126.7 million for the three months ended March 31, 2013, were the result of $113.8 million of gains from fair value re-measurements and $13.1 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.

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 a net derivative loss of $1.7 million and a net derivative gain of $15.3 million for the three months ended March 31, 2014 and 2013, 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 $3.3 million and $8.9 million for the three months ended March 31, 2014 and 2013, 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 March 31,
                                           Current           Ratio %/      Prior        Ratio %/       Total          Ratio %/
(Dollars in millions)                       Year            Pt Change      Years       Pt Change      Incurred       Pt Change
2014
Attritional (a)                        $         622.1       54.3 %       $  (2.7 )     -0.2 %       $    619.4       54.1 %
Catastrophes                                         -        0.0 %             -        0.0 %                -        0.0 %
Total                                  $         622.1       54.3 %       $  (2.7 )     -0.2 %       $    619.4       54.1 %

2013
Attritional (a)                        $         592.6       54.4 %       $     -        0.0 %       $    592.6       54.4 %
Catastrophes                                         -        0.0 %             -        0.0 %                -        0.0 %
Total                                  $         592.6       54.4 %       $     -        0.0 %       $    592.6       54.4 %

Variance 2014/2013
Attritional (a)                        $          29.5       (0.1 ) pts   $  (2.7 )     (0.2 ) pts   $     26.8       (0.3 ) pts
Catastrophes                                         -          -   pts         -          -   pts            -          -   pts
Total                                  $          29.5       (0.1 ) pts   $  (2.7 )     (0.2 ) pts   $     26.8       (0.3 ) pts

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

Incurred losses and LAE increased by 4.5% to $619.4 million for the three months ended March 31, 2014 compared to $592.6 million for the three months ended March 31, 2013, primarily due to increases in current year attritional losses. The increase in current year attritional losses of $29.5 million is primarily due to the impact of the increase in premiums earned. There were no current year catastrophe losses for the three months ended March 31, 2014 and 2013.

Commission, Brokerage, Taxes and Fees. Commission, brokerage, taxes and fees increased by 5.6% to $246.0 million for the three months ended March 31, 2014 compared to $233.0 million for the three months ended March 31, 2013. The year over year changes were primarily due to the impact of the increase in premiums earned.

Other Underwriting Expenses. Other underwriting expenses were $50.6 million and $52.9 million for the three months ended March 31, 2014 and 2013, respectively. The decrease in other underwriting expenses for the three months ended March 31, 2014 compared to the three months ended March 31, 2013 was mainly due to lower employee related expenses.

Corporate Expenses. Corporate expenses, which are general operating expenses that are not allocated to segments, were $4.9 million and $5.7 million for the three months ended March 31, 2014 and 2013, respectively. The decrease in corporate expenses was mainly due to lower compensation expenses.

Interest, Fees and Bond Issue Cost Amortization Expense. Interest, fees and other bond amortization expense was $7.6 million and $13.5 million for the three months ended March 31, 2014 and 2013, respectively. The decrease was primarily due to the redemption of $329.9 million of trust preferred securities in May 2013.


Income Tax Expense (Benefit). We had income tax expenses of $53.2 million and $85.5 million for the three months ended March 31, 2014 and 2013, respectively. Income tax expense is primarily a function of the geographic location of the Company's pre-tax income and the statutory tax rates in those jurisdictions, as affected by tax-exempt investment income and as calculated under the AETR method. Variations in the AETR generally result from changes in the relative levels of pre-tax income, including the impact of catastrophe losses and net capital gains (losses), among jurisdictions with different tax rates. The decrease in income tax expense for the three months ended March 31, 2014 compared to 2013 is primarily due to lower net realized capital gains in the US.

Net Income (Loss).
Our net income was $302.0 million and $384.3 million for the three months ended March 31, 2014 and 2013, 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 $293.9 million and $384.3 million for the three months ended March 31, 2014 and 2013, 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 in 2014.

Ratios.
Our combined ratio decreased by 0.7 points to 80.0% for the three months ended March 31, 2014 compared to 80.7% for the three months ended March 31, 2013. The loss ratio component decreased 0.3 points for the three months ended March 31, 2014, over the same period last year, primarily due to changes in the mix of business. The commission and brokerage ratio components remained relatively flat for the three months ended March 31, 2014 over the same period last year. The other underwriting expense ratio components decreased 0.5 points for the three months ended March 31, 2014 over the same period last year due to lower compensation expenses.

Shareholders' Equity.
Shareholders' equity increased by $69.2 million to $7,037.5 million at March 31, 2014 from $6,968.3 million at December 31, 2013, principally as a result of $293.9 million of net income attributable to Everest Re Group, $55.3 million of unrealized appreciation on investments, net of tax, share-based compensation transactions of $6.5 million and $0.8 million of net benefit plan obligation adjustments, partially offset by repurchases of 1.7 million common shares for $250.0 million, $34.7 million of shareholder dividends and $2.6 million of net foreign currency translation adjustments.

Consolidated Investment Results

Net Investment Income.
Net investment income decreased by 15.5% to $123.2 million for the three months ended March 31, 2014 compared to $145.8 million for the three months ended March 31, 2013, primarily due to a decline in income from our limited partnership investments and a decline 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
                                                           March 31,
(Dollars in millions)                                  2014          2013
Fixed maturities                                    $    116.3      $ 120.8
Equity securities                                         11.5          9.7
Short-term investments and cash                            0.3          0.3
Other invested assets
Limited partnerships                                      (2.3 )       17.5
Other                                                      2.0          2.3
Gross investment income before adjustments               127.8        150.6
Funds held interest income (expense)                       3.0          4.4
Future policy benefit reserve income (expense)            (0.3 )       (0.5 )
Gross investment income                                  130.5        154.5
Investment expenses                                       (7.4 )       (8.7 )
Net investment income                               $    123.2      $ 145.8

(Some amounts may not reconcile due to rounding.)

The following tables show a comparison of various investment yields for the periods indicated.

                                                        At            At
                                                     March 31,   December 31,
                                                       2014          2013
Imbedded pre-tax yield of cash and invested assets        3.2%           3.2%
Imbedded after-tax yield of cash and invested assets      2.7%           2.8%




                                                                Three Months Ended
                                                                    March 31,
                                                                 2014        2013
Annualized pre-tax yield on average cash and invested assets       3.1%        3.7%
Annualized after-tax yield on average cash and invested assets     2.6%        3.1%


Net Realized Capital Gains (Losses).
The following table presents the composition of our net realized capital gains
(losses) for the periods indicated.

                                                                 Three Months Ended March 31,
(Dollars in millions)                                          2014           2013       Variance
Gains (losses) from sales:
   Fixed maturity securities, market value:
     Gains                                                  $      6.7       $   7.6     $    (0.9 )
     Losses                                                       (8.7 )        (2.7 )        (6.0 )
   Total                                                          (1.9 )         4.9          (6.8 )

   Fixed maturity securities, fair value:
     Gains                                                         1.2           0.1           1.1
     Losses                                                       (0.3 )        (0.2 )        (0.1 )
   Total                                                           0.9          (0.1 )         1.0

   Equity securities, market value:
     Gains                                                           -           0.2          (0.2 )
     Losses                                                       (0.5 )           -          (0.5 )
   Total                                                          (0.5 )         0.2          (0.7 )

   Equity securities, fair value:
     Gains                                                         6.6           8.9          (2.3 )
     Losses                                                       (8.0 )        (0.9 )        (7.1 )
   Total                                                          (1.4 )         8.0          (9.4 )

Total net realized capital gains (losses) from sales:
     Gains                                                        14.6          16.8          (2.2 )
     Losses                                                      (17.5 )        (3.7 )       (13.8 )
   Total                                                          (2.9 )        13.1         (16.0 )

Other-than-temporary impairments:                                    -          (0.2 )         0.2

Gains (losses) from fair value adjustments:
   Fixed maturities, fair value                                      -           0.1          (0.1 )
   Equity securities, fair value                                  24.0         113.8         (89.8 )
Total                                                             24.0         113.8         (89.8 )

Total net realized capital gains (losses)                   $     21.1       $ 126.7     $  (105.6 )

(Some amounts may not reconcile due to rounding.)

Net realized capital gains were $21.1 million and $126.7 million for the three months ended March 31, 2014 and 2013, respectively. For the three months ended March 31, 2014, we recorded $24.0 million of net realized capital gains due to fair value re-measurements on equity securities, partially offset by $2.9 million of net realized capital losses from sales of fixed maturity and equity securities. For the three months ended March 31, 2013, we recorded $113.8 million of net realized capital gains due to fair value re-measurements on fixed maturity and equity securities and $13.1 million of net realized capital gains from sales of fixed maturity and equity securities, partially offset by $0.2 million of other-than-temporary impairments. The fixed maturity and equity sales for the three months ended March 31, 2014 and 2013 related primarily to adjusting the portfolios for overall market changes and individual credit shifts along with maintaining a balanced foreign currency exposure.


Segment Results.
The U.S. Reinsurance operation writes property and casualty reinsurance and specialty lines of business, including Marine, Aviation, Surety and A&H business, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies primarily within the U.S. The International operation writes foreign property and casualty reinsurance through Everest Re's branches in Canada and Singapore and through offices in Brazil, Miami and New Jersey. The Bermuda operation provides reinsurance and insurance to worldwide property and casualty markets through brokers and directly with ceding companies from its Bermuda office and reinsurance to the United Kingdom and European markets through its UK branch and Ireland Re. The Insurance operation writes property and casualty insurance, including medical stop loss insurance, directly and through general agents, brokers and surplus lines brokers within the U.S. and Canada. The Mt. Logan Re segment represents business written for the segregated accounts of Mt. Logan Re, which were formed on July 1, 2013. The Mt. Logan Re business represents a diversified set of catastrophe exposures, diversified by risk/peril and across different geographical regions globally.

These segments, with the exception of Mt. Logan Re, are managed independently, but conform with corporate guidelines with respect to pricing, risk management, control of aggregate catastrophe exposures, capital, investments and support operations. Management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting results. The Mt. Logan Re segment is managed independently and seeks to write a diverse portfolio of catastrophe risks for each segregated account to achieve desired risk and return criteria.

Underwriting results include earned premium less losses and LAE incurred, commission and brokerage expenses and other underwriting expenses. We measure our underwriting results using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which, respectively, divide incurred losses, commissions and brokerage and other underwriting expenses by premiums earned.

Mt. Logan Re's business is sourced through operating subsidiaries of the Company; however, the activity is only reflected in the Mt. Logan Re segment. For other inter-affiliate reinsurance, business is generally reported within the segment in which the business was first produced, consistent with how the business is managed.

Except for Mt. Logan Re, the Company does not maintain separate balance sheet data for its operating segments. Accordingly, the Company does not review and evaluate the financial results of its operating segments based upon balance sheet data.

Our loss and LAE reserves are our best estimate of our ultimate liability for unpaid claims. We re-evaluate our estimates on an ongoing basis, including all prior period reserves, taking into consideration all available information and, in particular, recently reported loss claim experience and trends related to prior periods. Such re-evaluations are recorded in incurred losses in the period in which re-evaluation is made.


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