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RE > SEC Filings for RE > Form 10-Q on 11-Aug-2014All Recent SEC Filings

Show all filings for EVEREST RE GROUP LTD

Form 10-Q for EVEREST RE GROUP LTD


11-Aug-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            Six Months Ended           Percentage
                                                    June 30,              Increase/                June 30,                Increase/
(Dollars in millions)                          2014          2013        (Decrease)         2014            2013          (Decrease)
Gross written premiums                      $ 1,415.4     $ 1,260.2            12.3 %   $  2,682.8     $     2,441.0             9.9 %
Net written premiums                          1,217.5       1,212.6             0.4 %      2,445.1           2,362.3             3.5 %

REVENUES:
Premiums earned                             $ 1,272.3     $ 1,151.5            10.5 %   $  2,416.8     $     2,240.3             7.9 %
Net investment income                           131.2         148.7           -11.8 %        254.4             294.5           -13.6 %
Net realized capital gains (losses)              59.0          33.9            74.1 %         80.1             160.6           -50.1 %
Net derivative gain (loss)                        3.8          12.1           -68.8 %          2.1              27.4           -92.3 %
Other income (expense)                          (13.9 )         8.3               NM         (17.2 )            (0.6 )             NM
Total revenues                                1,452.5       1,354.5             7.2 %      2,736.3           2,722.2             0.5 %

CLAIMS AND EXPENSES:
Incurred losses and loss adjustment
expenses                                        735.7         711.6             3.4 %      1,355.1           1,304.2             3.9 %
Commission, brokerage, taxes and fees           283.7         242.1            17.2 %        529.7             475.1            11.5 %
Other underwriting expenses                      58.4          54.9             6.4 %        109.1             107.8             1.1 %
Corporate expenses                                3.9           6.2           -36.8 %          8.8              11.9           -25.6 %
Interest, fees and bond issue cost
amortization expense                              9.0          17.4           -48.3 %         16.5              30.8           -46.4 %
Total claims and expenses                     1,090.7       1,032.1             5.7 %      2,019.2           1,929.9             4.6 %

INCOME (LOSS) BEFORE TAXES                      361.8         322.5            12.2 %        717.0             792.3            -9.5 %
Income tax expense (benefit)                     63.9          46.8            36.4 %        117.1             132.3           -11.5 %
NET INCOME (LOSS)                           $   297.9     $   275.6             8.1 %   $    599.9     $       660.0            -9.1 %
Net (income) loss attributable to
noncontrolling interests                         (7.7 )           -               NM         (15.8 )               -               NM
NET INCOME (LOSS) ATTRIBUTABLE TO EVEREST
RE GROUP                                    $   290.2     $   275.6             5.3 %   $    584.1     $       660.0           -11.5 %


                                                                            Point                                            Point
RATIOS:                                                                    Change                                           Change
Loss ratio                                       57.8 %        61.8 %          (4.0 )         56.1 %            58.2 %          (2.1 )
Commission and brokerage ratio                   22.3 %        21.0 %           1.3           21.9 %            21.2 %           0.7
Other underwriting expense ratio                  4.6 %         4.8 %          (0.2 )          4.5 %             4.8 %          (0.3 )
Combined ratio                                   84.7 %        87.6 %          (2.9 )         82.5 %            84.2 %          (1.7 )

                                                                                             At              At           Percentage
                                                                                          June 30,      December 31,       Increase/
(Dollars in millions, except per share
amounts)                                                                                    2014             2013         (Decrease)
Balance sheet data:
Total investments and cash                                                              $ 17,641.4     $    16,596.5             6.3 %
Total assets                                                                              21,191.6          19,808.0             7.0 %
Loss and loss adjustment expense reserves                                                  9,704.5           9,673.2             0.3 %
Total debt                                                                                   888.3             488.3            81.9 %
Total liabilities                                                                         13,492.9          12,746.4             5.9 %
Redeemable noncontrolling interests - Mt.
Logan Re                                                                                     375.9              93.4               NM
Shareholders' equity                                                                       7,322.9           6,968.3             5.1 %
Book value per share                                                                        160.27            146.57             9.3 %

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

Revenues.
Premiums. Gross written premiums increased by 12.3% to $1,415.4 million for the three months ended June 30, 2014, compared to $1,260.2 million for the three months ended June 30, 2013, reflecting a $132.7 million, or 14.1%, increase in our reinsurance business and $22.4 million from our new Mt. Logan Re segment, while our insurance business remained relatively flat. The increase in reinsurance premiums was mainly due to new business: quota share contracts, contracts with catastrophe exposed risks and mortgage guaranty business. Gross written premiums increased by 9.9% to $2,682.8 million for the six months ended June 30, 2014, compared to $2,441.0 million for the six months ended June 30, 2013, reflecting a $204.9 million, or 10.9%, increase in our reinsurance business and $58.8 million from our new


Mt. Logan Re segment, partially offset by a $21.9 million, or 3.9%, decrease in our insurance business. The increase in reinsurance premiums was mainly due to new business: quota share contracts, 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 0.4% to $1,217.5 million for the three months ended June 30, 2014 compared to $1,212.6 million for the three months ended June 30, 2013, and increased by 3.5% to $2,445.1 million for the six months ended June 30, 2014 compared to $2,362.3 million for the six months ended June 30, 2013. The variance between the increase in gross written premiums compared to the increase in net written premiums is primarily due to a higher utilization of reinsurance related to the new quota share contracts. Premiums earned increased by 10.5% to $1,272.3 million for the three months ended June 30, 2014, compared to $1,151.5 million for the three months ended June 30, 2013 and increased by 7.9% to $2,416.8 million for the six months ended June 30, 2014, compared to $2,240.3 million for the six months ended June 30, 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 11.8% to $131.2 million for the three months ended June 30, 2014, compared with net investment income of $148.7 million for the three months ended June 30, 2013. Net investment income decreased by 13.6% to $254.4 million for the six months ended June 30, 2014, compared with net investment income of $294.5 million for the six months ended June 30, 2013. Net pre-tax investment income, as a percentage of average invested assets, was 3.2% and 3.1% for the three and six months ended June 30, 2014, respectively, compared to 3.8% for the three and six months ended June 30, 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 $59.0 million and $33.9 million for the three months ended June 30, 2014 and 2013, respectively. The $59.0 million was comprised of $60.3 million of net gains from fair value re-measurements on equity securities, partially offset by $0.9 million of net realized capital losses from sales on our fixed maturity and equity securities and $0.4 million of other-than-temporary impairments. The net realized capital gains of $33.9 million for the three months ended June 30, 2013, were the result of $18.3 million of net realized capital gains from sales on our fixed maturity and equity securities and $15.6 million of net gains from fair value re-measurements.

Net realized capital gains were $80.1 million and $160.6 million for the six months ended June 30, 2014 and 2013, respectively. The $80.1 million was comprised of $84.3 million of net gains from fair value re-measurements on equity securities, partially offset by $3.8 million of net realized capital losses from sales on our fixed maturity and equity securities and $0.4 million of other-than-temporary impairments. The net realized capital gains of $160.6 million for the six months ended June 30, 2013, were the result of $129.5 million of net gains from fair value re-measurements and $31.4 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 net derivative gains of $3.8 million and $2.1 million for the three and six months ended June 30, 2014, respectively, and net derivative gains of $12.1 million and $27.4 million for the three and six months ended June 30, 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 $13.9 million and $17.2 million for the three and six months ended June 30, 2014, respectively. We recorded other income of $8.3 million and other expense of $0.6 million for the three and six months ended June 30, 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 tables present our
incurred losses and loss adjustment expenses ("LAE") for the periods indicated.

                                                   Three Months Ended June 30,
                        Current        Ratio %/     Prior        Ratio %/       Total          Ratio %/
(Dollars in millions)     Year        Pt Change     Years       Pt Change      Incurred       Pt Change
2014
Attritional (a)         $  691.4       54.4 %       $ (0.7 )     -0.1 %       $    690.7       54.3 %
Catastrophes                45.0        3.5 %            -        0.0 %             45.0        3.5 %
Total                   $  736.4       57.9 %       $ (0.7 )     -0.1 %       $    735.7       57.8 %

2013
Attritional (a)         $  622.6       54.1 %       $ (1.0 )     -0.1 %       $    621.6       54.0 %
Catastrophes                90.0        7.8 %            -        0.0 %             90.0        7.8 %
Total                   $  712.6       61.9 %       $ (1.0 )     -0.1 %       $    711.6       61.8 %

Variance 2014/2013
Attritional (a)         $   68.8        0.3   pts   $  0.3          -   pts   $     69.1        0.3   pts
Catastrophes               (45.0 )     (4.3 ) pts        -          -   pts        (45.0 )     (4.3 ) pts
Total                   $   23.8       (4.0 ) pts   $  0.3          -   pts   $     24.1       (4.0 ) pts




                                                                           Six Months Ended June 30,
                                                Current            Ratio %/     Prior        Ratio %/       Total         Ratio %/
(Dollars in millions)                             Year            Pt Change     Years       Pt Change     Incurred       Pt Change
2014
Attritional (a)                             $        1,313.5       54.3 %       $ (3.4 )     -0.1 %       $ 1,310.1       54.2 %
Catastrophes                                            45.0        1.9 %            -        0.0 %            45.0        1.9 %
Total                                       $        1,358.5       56.2 %       $ (3.4 )     -0.1 %       $ 1,355.1       56.1 %

2013
Attritional (a)                             $        1,215.2       54.2 %       $ (1.0 )      0.0 %       $ 1,214.2       54.2 %
Catastrophes                                            90.0        4.0 %            -        0.0 %            90.0        4.0 %
Total                                       $        1,305.2       58.2 %       $ (1.0 )      0.0 %       $ 1,304.2       58.2 %

Variance 2014/2013
Attritional (a) $ 98.3 0.1 pts $ (2.4 ) (0.1 ) pts $ 95.9 - pts Catastrophes (45.0 ) (2.1 ) pts - - pts (45.0 ) (2.1 ) pts Total $ 53.3 (2.0 ) pts $ (2.4 ) (0.1 ) pts $ 50.9 (2.1 ) pts

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

Incurred losses and LAE increased by 3.4% to $735.7 million for the three months ended June 30, 2014 compared to $711.6 million for the three months ended June 30, 2013, primarily due to increases in current year attritional losses, partially offset by a reduction in current year catastrophe losses. The increase in current year attritional losses of $68.8 million is primarily due to the impact of the increase in premiums earned. The $45.0 million of current year catastrophe losses for the three months ended June 30, 2014 represented 3.5 points and related to the Japan snowstorm ($30.0 million) and the Chilean earthquake ($15.0 million). The $90.0 million of current year catastrophe losses for the three months ended June 30, 2013 represented 7.8 points and related to U.S. storms ($50.0 million), Canadian floods ($20.0 million) and European floods ($20.0 million).

Incurred losses and LAE increased by 3.9% to $1,355.1 million for the six months ended June 30, 2014 compared to $1,304.2 million for the six months ended June 30, 2013, primarily due to increases in current year attritional losses, partially offset by a reduction in current year catastrophe losses. The increase in current year attritional losses of $98.3 million is primarily due to the impact of the increase in premiums earned. The $45.0 million of current year catastrophe losses for the six months ended June 30, 2014 represented 1.9 points and related to the Japan snowstorm ($30.0 million) and the Chilean earthquake ($15.0 million). The $90.0 million of current year catastrophe losses for the six months ended June 30, 2013 represented 4.0 points and related primarily to U.S. storms ($50.0 million), Canadian floods ($20.0 million) and European floods ($20.0 million).


Commission, Brokerage, Taxes and Fees. Commission, brokerage, taxes and fees increased by 17.2% to $283.7 million for the three months ended June 30, 2014 compared to $242.1 million for the three months ended June 30, 2013. Commission, brokerage, taxes and fees increased by 11.5% to $529.7 million for the six months ended June 30, 2014 compared to $475.1 million for the six months ended June 30, 2013. The quarter over quarter and year over year changes were primarily due to the impact of the increase in premiums earned, higher contingent commissions and changes in the mix of business.

Other Underwriting Expenses. Other underwriting expenses were $58.4 million and $54.9 million for the three months ended June 30, 2014 and 2013, respectively. Other underwriting expenses were $109.1 million and $107.8 million for the six months ended June 30, 2014 and 2013, respectively. The increases in other underwriting expenses were mainly due to the impact of the increase in premiums earned.

Corporate Expenses. Corporate expenses, which are general operating expenses that are not allocated to segments, were $3.9 million and $6.2 million for the three months ended June 30, 2014 and 2013, respectively, and $8.8 million and $11.9 million for the six months ended June 30, 2014 and 2013, respectively. The decreases in corporate expenses were mainly due to lower compensation expenses.

Interest, Fees and Bond Issue Cost Amortization Expense. Interest, fees and other bond amortization expense was $9.0 million and $17.4 million for the three months ended June 30, 2014 and 2013, respectively. Interest, fees and other bond amortization expense was $16.5 million and $30.8 million for the six months ended June 30, 2014 and 2013, respectively. The decreases were primarily due to the redemption of $329.9 million of trust preferred securities in May 2013, but partially offset by the impact of the issuance of $400.0 million of senior notes on June 5, 2014.

Income Tax Expense (Benefit). We had income tax expenses of $63.9 million and $46.8 million for the three months ended June 30, 2014 and 2013, respectively, and income tax expenses of $117.1 million and $132.3 million for the six months ended June 30, 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 increase in income tax expense for the three months ended June 30, 2014 compared to 2013 is primarily due to lower catastrophe losses and higher net realized capital gains in the U.S. The decrease in income tax expense for the six months ended June 30, 2014 compared to 2013 is primarily due to lower net realized capital gains in the US.

Net Income (Loss).
Our net income was $297.9 million and $275.6 million for the three months ended June 30, 2014 and 2013, respectively. Our net income was $599.9 million and $660.0 million for the six months ended June 30, 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 $290.2 million and $275.6 million for the three months ended June 30, 2014 and 2013, respectively. Our net income attributable to Everest Re Group was $584.1 million and $660.0 million for the six months ended June 30, 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 2.9 points to 84.7% for the three months ended June 30, 2014 compared to 87.6% for the three months ended June 30, 2013, and decreased by 1.7 points to 82.5% for the six months ended June 30, 2014 compared to 84.2% for the six months ended June 30, 2013. The loss ratio components decreased 4.0 points and 2.1 points for the three and six months ended June 30, 2014, respectively, over the same periods last year, primarily due to lower current year catastrophe losses. The commission and brokerage ratio components increased by 1.3 points and 0.7 points for the three and six months ended June 30, 2014, respectively, over the same periods last year, primarily due to an increase in contingent commissions and changes in the mix of business. The other underwriting expense ratio


components decreased slightly by 0.2 points and 0.3 points for the three and six months ended June 30, 2014, respectively, over the same periods last year due to higher premiums earned.

Shareholders' Equity.
Shareholders' equity increased by $354.6 million to $7,322.9 million at June 30, 2014 from $6,968.3 million at December 31, 2013, principally as a result of $584.1 million of net income attributable to Everest Re Group, $143.4 million of unrealized appreciation on investments, net of tax, share-based compensation transactions of $22.9 million and $1.5 million of net benefit plan obligation adjustments, partially offset by repurchases of 2.2 million common shares for $325.0 million, $69.1 million of shareholder dividends and $3.4 million of net foreign currency translation adjustments.

Consolidated Investment Results

Net Investment Income.
Net investment income decreased by 11.8% to $131.2 million for the three months ended June 30, 2014 compared to $148.7 million for the three months ended June 30, 2013, and decreased by 13.6% to $254.4 million for the six months ended June 30, 2014 compared to $294.5 million for the six months ended June 30, 2013, primarily due to a decline in income from our limited partnership investments and a decline in income from our fixed maturities, reflective of lower reinvestment rates.

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

                                                         Three Months Ended          Six Months Ended
                                                              June 30,                   June 30,
(Dollars in millions)                                     2014          2013         2014         2013
Fixed maturities                                       $    117.6      $ 120.3     $   233.8     $ 241.0
Equity securities                                            13.6         12.8          25.0        22.5
Short-term investments and cash                               0.6          0.2           0.9         0.5
Other invested assets
Limited partnerships                                          6.2         19.6           4.0        37.1
Other                                                         0.3          1.9           2.4         4.3
Gross investment income before adjustments                  138.3        154.7         266.1       305.4
Funds held interest income (expense)                          2.0          1.8           5.1         6.3
Future policy benefit reserve income (expense)               (0.1 )       (0.6 )        (0.4 )      (1.2 )
Gross investment income                                     140.2        156.0         270.7       310.5
Investment expenses                                          (8.9 )       (7.2 )       (16.3 )     (16.0 )
Net investment income                                  $    131.2      $ 148.7     $   254.4     $ 294.5

(Some amounts may not reconcile due to rounding.)

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

                                                        At           At
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