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Everest Re Group, Ltd. (NYSE:RE)

Q4 2012 Earnings Call

February 7, 2013 10:30 AM ET

Executives

Beth Farrell – VP, IR

Joe Taranto – Chairman and CEO

Dom Addesso – President

Craig Howie – CFO

Analysts

Josh Shanker – Deutsche Bank

Amit Kumar – Macquarie

Mike Nannizzi – Goldman Sachs

Vinay Misquith – Evercore Partners

Brian Meredith – UBS

Greg Locraft – Morgan Stanley

Operator

Good day, everyone, and welcome to the Everest Re Group Limited Fourth Quarter 2012 Earnings Call. Today’s conference is being recorded. At this time for opening remarks and introductions, I’d like to turn the conference over to Beth Farrell. Please go ahead.

Beth Farrell

Thanks, Tim. Good morning and welcome to Everest Re Group’s fourth quarter and full year 2012 earnings conference call. On the call with me today are Joe Taranto, the company’s Chairman and Chief Executive Officer; Dom Addesso, our President; and Craig Howie, our Chief Financial Officer.

Before we begin, I will preface our comments by noting that our SEC filings include extensive disclosures with respect to forward-looking statements. In that regard, I note that statements made during today’s call which are forward-looking in nature, such as statements about projections, estimates, expectations, and the like are subject to various risks. As you know, actual results could differ materially from current projections or expectations. Our SEC filings have a full listing of the risks that investors should consider in connection with such statements.

Now let me turn the call over to Joe.

Joe Taranto

Thanks Beth. Good morning. I am pleased to report that in 2012 Everest increased shareholder value by 18% and had comprehensive income of $1 billion. These results were achieved despite losses from Sandy and the crop insurance industry having one of its worst years ever. Achieving these results despite these losses demonstrates the strength of our franchise.

We were pleased with our January 1 renewals. On our reinsurance business, rates, terms and conditions were relatively the same as in 2012. We did add some new business. Accordingly, the expected margins remained quite good for 2013 and up from 2012. Dom will provide more detail on this momentarily.

For our insurance operations, we continue to see double-digit increases in workers’ compensation and general liability and single-digit increases in D&O and property. We believe the workers’ comp business is positioned for profit and that continued rate increases will provide for growth. For our crop book, we are expecting a much better year. Further, our net crop premiums will increase meaningfully as we no longer purchase quota share reinsurance. Again, Dom will provide more detail.

Our investments performed very well in 2012 and are off to a good start in 2013. Craig will provide more color on this. We bought back $40 million worth of stock in the fourth quarter and $38 million in the first quarter of 2013. We wanted to buy a great deal more, but Sandy kept us out of the market for much of the quarter. It is our plan to buy when our window reopens.

We have achieved a 13% increase in shareholder value compounded over an 18-year period. In 2012, we did better than our historic average coming in at 18%. Given these returns, our current quality portfolio and solid balance sheet, our stock being below book makes no sense to us, meaning we are most happy to buy more and fully expect the price to book to correct. In summary, I’m bullish on 2013. Our franchise has never been stronger. Dom?

Dom Addesso

Thanks, Joe and good morning. The financial details regarding the quarter will be covered by Craig, but it is worth highlighting the areas that address how we have positioned the portfolio and what that means for current and future performance. The attritional combined ratio continues to improve in both the reinsurance segments and the insurance segments.

For reinsurance, this primarily reflects the increasing proportion of excessive loss business versus pro rata, in particular for catastrophe exposure business, as well as increasing rates in 2012. The calendar year combined ratio for the reinsurance book, despite Superstorm Sandy and the other catastrophe losses earlier in the year, came in at 90.1%. This result reflects a 102.1% combined ratio in the U.S. book due to the losses incurred for Sandy, offset by a 75.4% and a 91.5% combined ratio in our international and Bermuda portfolios respectively. This overall outcome reflects our balanced and geographically diversified book of business.

During 2012, there was a continued emphasis on excess-of-loss business, particularly in our non-peak zones. This allowed us to diversify or spread our aggregate exposure more broadly without any material impact on our average annual loss. Along with rate increases, this strategy helped grow our catastrophe premium by $150 million to approximately $1 billion. At this level of premium, we’re well positioned to absorb any infrequent, but significant industry event, such as Superstorm Sandy. This strategy has also been instrumental in expanding our customer base, thereby improving diversification both by client and by line of business. Broadening of the customer base has supported some growth in the treaty and facultative casualty lines, as rates are beginning to firm. Overall, we expect margins to improve in these areas, while rates in the treaty property area begin to moderate. Nevertheless, margins there are still favorable as evidenced by the results this past year.

New products developed in 2012 should continue to push momentum in 2013. At January 1, we had already seen approximately $150 million of premium growth in property business as a result of these efforts. The development of our capital markets platform will continue to support this growth with the ability to bring more capacity to the marketplace.

In the insurance segment, the improving current year attritional results with 100.9% combined ratio are due in part to continued double-digit rate increases in workers’ comp and select casualty classes. Also, growth in our shorter tail books including primary accident and health stop loss business and our property E&S operation have provided for improved results. These businesses, along with the professional liability book and the California DIC business have consistently produced underwriting profits. And when coupled with a rapid decline in our historical program oriented casualty book that resulted in an overall improvement in the attritional results.

It should be noted that the drought conditions that adversely impacted crop results are included in the attritional results and 119.1% combined ratio, which had a 3.9 – 3.8 point impact on the overall insurance combined ratio. Excluding crop, the current year attritional combined ratio stood at 97.2%. Ongoing trend for workers comp and general casualty rate increases along with continued growth in accident and health and an expected improvement in crop insurance should reflect positively into 2013.

The insurance operation is expected to expand this year on the back of a number of new initiatives. Our non-standard auto business will grow with the establishment of a new strategic relationship to be announced within the next month or so. Canadian platform will expand with the recent hire of a key executive there. And in the U.S., we’ve added an experienced underwriting and marketing team with a specialty focus.

These initiatives, coupled with the growth in our existing portfolio due to rate increases, new business and a higher retention of the crop business with the elimination of the quota share arrangement will grow our top line premium.

The insurance results were impacted by prior year development, mainly in California workers comp and construction liability. However, it should be emphasized that the contractors program has been in runoff for some time and in the case of workers comp the amounts are relatively benign considering that our profits from this line of business have approximated $1 billion since inception. This is a long-term business that is emerging profitably as rate increases, our earnings grew.

Moving onto investments, we’ve continued to dynamically allocate our portfolio in order to maximize returns and minimize risk. Overall, we’ve maintained above average credit quality in the portfolio and have shortened the duration to reduce potential interest rate risk. Our allocations to equities and fixed income investments has resulted in pre-tax investment income and realized capital gains of $764 million in 2012 versus $627 million in 2011, a $137 million increase.

Despite significant cat losses from Sandy, we achieved a 12% operating ROE and a 14% net income ROE. This was accomplished while still carrying a capital book, providing us with one of the strongest balance sheets in the industry. We prefer this because it provides a competitive advantage by allowing us the ability to respond aggressively into the market when the unexpected occurs.

While some in our industry are accepting single-digit ROEs, because of the interest rate environment, our strategy is to position our underwriting portfolio to achieve improved returns, and mitigate the loss of investment income. As I’ve been discussing, we have been strategically shifting our portfolio towards shorter tail, higher ROE risks, but managing the potential volatility of this strategy by broadening our footprint and managing accumulations.

Our benchmark is focused on total shareholder return. We seek to achieve returns that provide a mid-teens compound annual growth and book value per share adjusted for dividends. That has proven successful with a long term return of 13% to our shareholders despite catastrophe losses and other challenges that have confronted the industry.

Over the last year, we have established a number of new initiatives including our newest Mt. Logan. I’m quite optimistic that these efforts will enable us to profitably expand our operation over the years to come and continue to provide our shareholders with double digit returns. Along with our talented employees, global footprint and financial strength, we remain one of the strongest franchises in the business.

I’ll now turn it over to Craig for further details on the financials.

Craig Howie

Thank you, Dom and good morning everyone. We’re pleased to report that Everest had a very strong year with after-tax operating income of $715.2 million or $13.62 per diluted common share. This represents an operating return on equity of 12.2%. I won’t be comparing these results to last year given the record catastrophes experienced in 2011.

Operating income for the fourth quarter was $41.7 million or $0.80 per diluted share. Net income for the fourth quarter was $58.8 million or $1.13 per diluted share. Net income includes realized capital gains. Net income for the year was $829 million or $15.79 per share. These results reflect the continued improvement in the overall current year attritional combined ratio which has decline a full three points from 88.0% to 85.0%. This measure excludes the impact of catastrophes, reinstatement premiums and prior period loss development. The total reinsurance attritional combined ratio was 80.9% compared to 83.5% in the prior year. The insurance segment attritional combined ratio was 100.9% compared to 105.8% in the prior year.

However, eliminating the effects of the primary crop book, this ratio would have been 97.2% compared to 105.3% in the prior year. These improvements, both on the reinsurance book and the insurance book should continue as rate increases earn-in over time. Also providing better margins is the shift in our reinsurance portfolio from quota share to excess-of-loss.

Gross written premiums of $1.15 billion for the quarter were up 4% compared to the fourth quarter of 2011. This increase was primarily related to the insurance segment. Gross written premiums for the year were $4.3 billion. This represents an increase of 2% after adjusting for reinstatement premiums and the effects of foreign currency movement.

Earned premiums of $1.12 billion for the quarter were up 9% compared to the same quarter last year after adjusting for reinstatement premiums. Earned premiums for the year of $4.2 billion were also up 2% on the same basis. The reinsurance segments reported earned premiums of $3.3 billion for the year, up about 1% from 2011.

Insurance segment earned premiums of $852 million, were up 4% year-over-year. This increase was primarily due to the acquisition of Heartland and the growth in primary accident and health staff loss business.

The fourth quarter underwriting results were impacted by Superstorm Sandy. Total reinsurance reported an underwriting loss of $48 million for the quarter, but an underwriting gain of $327 million for the year. The insurance segment reported a $46 million underwriting loss for the quarter and a $68 million loss for the year. These results reflect a crop loss of $23 million for the year and loss reserve development which I’ll discuss in a moment. The overall underwriting loss for the group was $94 million for the quarter, but an underwriting gain of $259 million for the year.

Our reported combined ratio was 108.4% for the quarter and 93.8% for the year. The commission ratio of 22.9% for the year is down 0.3 points compared to the prior year. However, after eliminating the effect of reinstatement premiums, contingent commissions, and several one-time adjustments, the commission ratio would have been 21.2%, compared to 22.7%, in the prior year, on a similar basis. This loss ratio reflects the shift from prorated excess loss contracts, which generally carry a lower commission. The expense ratio of 5% for the year is up 0.6 points compared to last year. This increase primarily relates to the increased accrual for personnel costs and incentive compensation.

For the year, we reported $325 million of gross current year catastrophe losses for the quarter. These losses were related to Superstorm Sandy in U.S. this quarter. The pre-tax Sandy losses were $287 million after reinstatement premiums. This estimate has not changed since our preannouncement in December. Our gross cat losses totaled $410 million for the year or 9.8% of earned premiums.

On reserves, we’ve completed our annual loss reserve studies. The results of the studies indicated that overall reserves remained adequate. In the fourth quarter, we booked some prior year development in the insurance segment, which was offset by favorable development in the reinsurance segments. The $48 million of prior year reserve development in the insurance segment related to construction liability and workers compensation. The construction liability relates to landscape of programs that the company no longer writes. The $51 million of favorable prior year development in the reinsurance segments mostly related to treaty casualty and treaty property business both in the U.S. and internationally.

For investments, pre-tax investment income was $146 million for the quarter and $600 million for the year, on our $16.6 billion investment portfolio. Investment income for the year declined $20 million from one year ago. This decrease was primarily driven by declining reinvestment rates, partially offset by higher limited partnership income for the year.

Despite the declining rates, our investment portfolio continues to perform well. It is conservative, well-diversified portfolio with high average credit quality. The pre-tax yield on the overall portfolio was 3.5% with a duration of three years. The quarter reflected $21 million of pre-tax realized capital gains and $17 million of gains after tax. For the year, we had $164 million of pre-tax revised capital gains and $114 million of gains after tax. These gains are mainly attributable to fair value adjustments.

On income taxes, the 7.7% effective tax rate on operating income for the year reflects one-time adjustments during 2012 and the impact of the realized capital gains on the effective tax rate calculation. It is expected that the tax rate on operating income will normalize toward an overall effective rate of approximately 13% in 2013. This rate depends on the geographic region where the income is earned, the tax rate in that region and the impact of realized capital gains or losses.

Strong cash flow continues, with operating cash flows of $664 million for the year compared to $660 million in 2011. This is despite the high-level catastrophe loss payments over the last two years. We’ve earned almost $1 billion of comprehensive income this year. This primarily reflects $829 million of net income for the year plus unrealized appreciation on securities of $154 million and foreign currency translation adjustments of $23 million.

Turning to capital management, in addition to dividend payments to shareholders of $25 million, we repurchased 371,000 shares this quarter at a total cost of $40 million. For the year, we’ve repurchased 3 million shares at a total cost of $290 million. Additionally, we repurchased another $38 million of stock after the year-end close. These purchases will be reflected in the first quarter 2013 financial statements. Company has 4 million shares remaining after these January purchases under a share repurchase authorization from the board of directors.

Shareholders’ equity increased to $6.7 billion this year, up 11% from $6.1 billion at year-end 2011. This is after taking into account the $290 million of stock repurchases and the $100 million of dividends paid in 2012. Book value per share increased 16% to $130.96 from $112.99 at year-end 2011. Our strong capital position leads us with capacity to maximize our business opportunities as well as continue share repurchases.

Thank you. And now I’ll turn it back to Beth for Q&A.

Beth Farrell

Tim, we’re ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we’ll take our first question from Josh Shanker with Deutsche Bank.

Josh Shanker – Deutsche Bank

Good morning. I realized your holding us a little bit in suspense about a partnership coming up, but can you explain a little bit about how partnerships overall are going to be able to transform the business and how transformational it can be?

Dom Addesso

Yeah, relates, Josh this is Dom, what I was referencing, I can’t get into the details because we have not concluded on the transaction, but essentially it’s going to leave us with the ability to take our non-standard auto book which is currently running at about $30 million of premium and it’s anticipated that that could grow to as much as $80 million in to 2013.

This will give us much better scale in that business, which it is a business that needs scale. And as a consequence not only the ability to improve our underwriting account meaning by the loss ratio, but also gives us an expense advantage. So that – without getting into the details of the structure and the who, that’s the intended outcome.

Josh Shanker – Deutsche Bank

Understood. And you may have seen one of your former peers was railing against sidecars as potentially it raises a issue that will ultimately lower the profits for the industry. Where do you think the industry is five years from now and as you participate to some extent in that, what’s the right business mix over the long-term?

Joe Taranto

Well, I’ll start with that Josh. Clearly, we see more alternate capacity coming into the marketplace; some of it is sidecar, some of its pension fund and other ways. And we intend to participate in that market and frankly we intend to make some fees on that market. In the beginning, the fee part of our book is going to be quite small compared to the risk taking part that we’re currently on. But at the end of the day, given our ratings and our offices around the world, our people, the fact that we know clients for many, many years, we see a lot more business especially on the cat side than we can accommodate or want to accommodate given the fact that we want to keep PMLs to a certain degree.

So we have a tremendous opportunity to write a lot more business share it with some partners and make fees in the process. Yes, that kind of brings more capacity into the marketplace especially as others do it as well. And it may make more competition, although there’s always competition. And we still think all the money that’s coming in and any of the money that we bring in will only want to come in from profitable business, and so we think it will be a good model. In terms of ultimately what – how much will be fee and how much will be risk taking, that remains to be seen but clearly for now it’s going to be mostly – most of our earning is going to be on the risk-taking side.

Josh Shanker – Deutsche Bank

And then given that you guys have extra capacity along those lines (inaudible) but you certainly could write more business if it became available. Are you giving up profitability in order to make a footprint in the alternative capacity market?

Joe Taranto

No, we’re not looking to take away from anything that we would want to keep for ourselves. That really is the design. Now we’ll try to put ourselves in the same position with our new partners, so they feel as if it’s really a equal trading. But we are not looking to give away $1 worth of business that we would normally write for ourselves.

Josh Shanker – Deutsche Bank

Is there any risk to that? I mean that’s always been my concern that, of course you don’t want to give any way that, there’s a risk of that happening, am I mistaken about that?

Joe Taranto

I don’t see that Josh. We really kind of measure our appetite quite keenly nowadays and would continue to do so. And I think again given the opportunities, we’ll be able to fill our plate with everything that we want. And then have more that we can share with others on a fee basis.

Josh Shanker – Deutsche Bank

Well, thank you. I appreciate the answers.

Operator

And we’ll take our next question from Amit Kumar with Macquarie.

Amit Kumar – Macquarie

Thanks and good morning. Maybe just going back to the discussion on capital, obviously you have all these new opportunities. How do you think about capital management for 2013? The reason why I’m asking is that relatively it has been lower than some of the other companies. What sort of math do you use? Is it buybacks plus dividends would equal net income or is there something beyond in terms of how you look at 2013 in terms of capital management?

Joe Taranto

Well, I think we start with what are the opportunities that we see and we certainly see plenty of that including some new opportunities on the business side. As Dom noted, we certainly want to be prepared for future opportunities that arise if the world changes and it has a habit of doing that. But at the same time, we look at our stock, where it’s trading, the current portfolio, the people, the future. And we feel very good about buying back a whole lot more stock.

Now, we were kind of prevented from doing that in 2012. We took ourselves out of the market for hurricane season. We’re keen to get back into the market in the fourth quarter and then Sandy happened. And we did not want to get back into the market until we put out an estimate on Sandy, which took us late into December. So, we bought some after that and a bit early January. But as I noted, we’re keen as soon as the open window comes to get back into the market and buy some more. So, we are going to foster earnings and ROE in multiple ways, some of it in business, some of it in new business, some of it stock buyback.

Amit Kumar – Macquarie

So, it seems that just based on the ranking, it seems to be of lower relative importance. Just based on how much you’ve grown excess capital in 2012, it seems that you’re saying that let’s look at the opportunities and maybe further down the list, you’re looking at the stocks multiple, because clearly, there’s value which can be created in terms of a buyback right now, but it just seems that it’s somewhat down the list, is that a fair assertion?

Joe Taranto

No, I wouldn’t put it that way. We bought back about 25% of our stock in recent years. We bought back close to $300 million in 2012 and would have bought back a bunch more if it wasn’t for Sandy. So, no, I think it’s still important in the sense that we think it’s a great opportunity for us to buy. And we don’t think it’s going to last forever quite honestly, so we’re keen to do a fair amount now. But there are opportunities out there; both in the existing business and new business, and again what else may come about. So, it’s always a bit of a juggling act, but we’re happy that we’ve both levers to press to increase the ROE for next year. And I would not say that it’s of less importance.

Amit Kumar – Macquarie

I guess, my offset to that point would be why even look at non-standard auto opportunities based on the history, just based on the stock multiple right now?

Joe Taranto

Well, that’s a business we’re already in. We have a small company that operates out of Georgia. We’re looking to be able to add to that and add to the margins by the construction that Dom took you through. And frankly it’s just an add-on and that requires very little capital quite honestly and we believe it will increase profits. We like the proposed business plan, but in the scheme of capital usage, it’s really quite small.

Dom Addesso

And it meets our return objectives in terms of how we think it can perform.

Amit Kumar – Macquarie

And what is the return objective?

Dom Addesso

12% to 13%, 14% return on capital.

Amit Kumar – Macquarie

Okay. The only other question I have is a lot of the other companies have talked about – they’ve given sort of a flavor in terms of 1/1 renewals, and you sort of have broadly alluded to it. How much do you expect your prop cat book to grow for 2013? I think previously we’ve talked about maybe $1 billion plus number, generally how do you think about that for 2013?

Dom Addesso

Well, as I mentioned in my opening comments, we’ve already at 1/1 increased our property premium by $150 million. So, that was essentially 15% growth if you will.

Amit Kumar – Macquarie

Okay. I’m sorry I was on another call.

Dom Addesso

The annual number – shame on you.

Amit Kumar – Macquarie

I guess related to that, did you discuss your PMLs? Did I miss that too in terms of how do you expect the risk profile to shift with that growth? I think previously the number was 11%ish.

Dom Addesso

Well, you didn’t miss that because we didn’t discuss our PMLs. And they will go up slightly, but as a percentage of capital they’re not expected to move at all.

Amit Kumar – Macquarie

Got it. Okay, that’s...

Dom Addesso

But nominally they will increase of course.

Amit Kumar – Macquarie

Nominal, okay. That’s all I have for now. Thanks so much.

Dom Addesso

Thank you.

Operator

And we’ll take our next question from Michael Nannizzi with Goldman Sachs.

Mike Nannizzi – Goldman Sachs

Thanks. Just want to understand, Dom, maybe in the insurance book, can you tell us like what percentage of the business is crop, maybe this year and now with all the noise out the way in 2013? And how big is that book as a percentage of the total?

Dom Addesso

Well, for 2012, of the top of my head, I’d say around 20%.

Mike Nannizzi – Goldman Sachs

Okay.

Dom Addesso

And going into next year, we would expect that to increase, because of not only growth objectives and the hiring of some underwriters and marketing teams, and the elimination of the quota share, that’s likely to grow by $100 million, at least.

Mike Nannizzi – Goldman Sachs

Okay.

Craig Howie

Be about 30% to the overall book. Yeah.

Dom Addesso

Right.

Mike Nannizzi – Goldman Sachs

Got it. Okay. And then, do you expect the rest of the – like the non-crop insurance book to grow as well, or do you expect that to kind of – because it sounded like you’ve got a lot of puts and takes, lot of moving parts, some new initiatives, some things kind of going away, I’m guessing the program business is kind of done in terms of the net change?

Dom Addesso

Yeah, the runoff for the program business is not going to have any major impact. But yeah, we will have growth in our excess casualty book, the initiatives that we started, environmental book of business that we have announced. The nonstandard auto was already mentioned. We’ve started up a new specialty unit that will grow – will have a modest amount of new premium maybe $20 million in 2012, but that could rapidly grow from there in the years beyond and as well as, as I mentioned, expansion of the Canadian platform. So, we’ve got a number of oars in the water all over the place in for the insurance space. And as the California DIC will be growing our professional liability book as well, and then of course the double-digit rate increases for workers comp. So, it’s – we’re quite enthusiastic about that space right now.

Mike Nannizzi – Goldman Sachs

And you think, I mean if your double-digit rate on the 80% – 70% or 80% of the book outside the crop, crop gets back to, I don’t know, high 80% or maybe 90%. I mean is low 90s% feasible for 2013 in the insurance business, is that possible?

Dom Addesso

With the good crop year, I suppose that’s possible, sure.

Joe Taranto

Yeah, I would say yes with the good crop year. Comp continues to trend very nicely. We continue to get very sizeable rate increases and that continued into January and Dom touched on all the other areas which we really feel quite good about as well. So the answer is yes.

Mike Nannizzi – Goldman Sachs

Great. And then last question, not to beat on the buyback, I mean I guess I mean in my math, I get about $100 million of buybacks in the beginning of the year next year, book value goes up a buckish. I mean what math when you think about deployment outside of buybacks gets you to that sort of book value growth? I mean if you assume that you’re writing business against $100 million for example like, what is the kind of tradeoff as you see it internally? Thanks.

Joe Taranto

Well, you get into where you can invest it and where you can use it against the business. And we can get into what’s the timing as to when you want to use it, if you don’t buy back on Monday, you can always buy back on Tuesday so it’s not like the opportunity necessarily goes away. But I’ll say that the levels that we’ve been trading at really are pushing us to do more sooner as opposed to later. But frankly we don’t believe it’ll stay at these levels.

But having bought back 25% is a good chunk to begin with. And again the fact that we bought back $300 million, we’re looking to buyback more and kind of telling as soon as we can we’re going to jump into the market, tells you that that’s certainly part of what we plan to do as well.

Mike Nannizzi – Goldman Sachs

Great. Thank you.

Operator

And we’ll take our next question from Vinay Misquith with Evercore Partners.

Vinay Misquith – Evercore Partners

Hi. First just a numbers question within the U.S. primary insurance operation, the commission expense ratio was really low this quarter. I was just wondering if there was some one-time items in there?

Craig Howie

Primarily related to crops, in other words contingent commissions that would have had to be paid out given that a poor crop year took place were taken down in the quarter.

Vinay Misquith – Evercore Partners

Sure, so we should just move it backup to the normal about 17.5% for the future, correct? Okay.

Craig Howie

That’s correct.

Vinay Misquith – Evercore Partners

Okay, that’s helpful. Secondly, on the margins, as you look at the various opportunities, do you expect your accident – your combined ratio to improve further from these levels? I mean they’re certainly very good right now.

Dom Addesso

Yes we do.

Vinay Misquith – Evercore Partners

Okay. And that’s driven by business mix change or is that pure pricing?

Dom Addesso

Well, some of the pricing that I referenced particularly in the insurance space and in cat, general casualty rate increases as it affects our treaty books. And then of course continued push towards write more excess-of-loss business spread our cat aggregate laterally if you will. And that will have – should have a furthering impact – positive impact on the attritional loss ratio.

Vinay Misquith – Evercore Partners

Okay. That’s helpful. And the one final thing if I may, just looking in terms of cats, could you say that this year is – last year, sorry, was a normal year in terms of cats or do you think it was higher than normal year in term of cats and ag losses?

Dom Addesso

That number was approximately what we project as what we call our average annual loss. And that does...

Vinay Misquith – Evercore Partners

Right.

Dom Addesso

I don’t know that there is an average angle. But over the long-term that would be considered a theoretical average year.

Vinay Misquith – Evercore Partners

Okay, that’s fair. Thank you very much.

Operator

And we’ll take our next question from Brian Meredith with UBS.

Brian Meredith – UBS

Yeah, good morning everybody. Couple of questions here, first the property growth that you’re seeing, where is that coming from? Is it cat business, is it international, U.S.?

Dom Addesso

The cat business, it’s....

Brian Meredith – UBS

Is it property cat, when you refer to property $150 million?

Dom Addesso

Yes, property – U.S. and Europe, that’s predominantly.

Brian Meredith – UBS

Okay. Great. And then I’m just curious what your thoughts are on the opportunities in Florida as we approach the midyear renewals with the depopulation at Citizens?

Joe Taranto

Well, we think this will be some very good opportunities there. Certainly, the market at the insurance level continues to get healthier with rate increases, so it will be a bigger pie. There’s still an awful lot of companies down there that are very much in need of reinsurance. You saw what Citizens did last year. So I think it’s a big pie, it’s an explosive pie and the people are somewhat cautious as to how they fill up. It tends to be everyone’s number one zone in terms of PML. It is for us. So I think it’ll continue to be some very good opportunities down there for companies like ourselves in June.

Brian Meredith – UBS

Joe, is that a place that you’re more likely to use a sidecar you think at this point?

Joe Taranto

Yeah, it’s not a sidecar that we’re putting together and that’s in the sense that sidecars tend to be operations that are put together for one and two years and then they’re kind of designed to go away. We’re putting something together that would be in place permanently. But Florida is exactly the kind of opportunity where we’re going to have a PML that we don’t want to exceed and we’re going to have a ton of business beyond that that we could write if we wanted to.

Brian Meredith – UBS

Great. And then last quick questions here. Is Heartland much of a player in the winter wheat area? I know they’ve been having some issues with wheat crop this year?

Joe Taranto

It’s in that space. It’s probably about 10% of the book. Soybean and corn is bigger, but it’s in that space and so yes, that is started. And it’s early days, but looks fine so far.

Brian Meredith – UBS

Great. Thank you very much.

Dom Addesso

Thank you, Brian.

Operator

And we’ll take our final question from Greg Locraft with Morgan Stanley.

Greg Locraft – Morgan Stanley

Hi, thanks. Just wanted to open up the reserve side of the equation. It’s been in the past, a concern of some in the investment community. It seems like you exit 2012, it’s a third year of very, very low reserve moving either way. How are you feeling on this line? Our work suggests you have considerable excess here. Many in the industry have been releasing, I guess on the good side that isn’t a headwind going forward because you don’t need to pull from reserves to hit your target ROEs. On the other hand, you haven’t been releasing, it seems like you’ve been holding back. So, how do you feel on reserves as you enter 2013 and beyond?

Craig Howie

Greg, this is Craig. I don’t know. We’ve completed our annual loss reserve studies and we’re comfortable with our overall position that we remain adequate. You know we posted our global cost development triangles for the past couple of years, and they also appear adequate. I’m comfortable with this position and I’m also comfortable with respect to the practices and the procedures that we’ve put into place to come up with such a good reserve position.

I think this company produces good results without those releases in place. I think one of the things that I like also is the fact that we’re – we take our time to react to favorable development. Some of these redundancies that you’ve seen have developed over time, but we don’t want to react until that position becomes more mature. So, we continue to hold the more recent years and we expect to do the same going forward as well.

Greg Locraft – Morgan Stanley

Okay. So, actually the peers that are releasing, it’s not that you’re any different; it’s just that you’re holding back. Philosophically you’re holding back more than they are?

Dom Addesso

We can’t speak, we can’t speak to.

Joe Taranto

We’re not going to get into what others do. We don’t know what they do, and we’re not here to comment on that.

Greg Locraft – Morgan Stanley

Okay. And then just last one this is – has the reserving practices of the corporation changed at all in the last few years? And again, it was never a big issue; it just seemed to break against shareholders more frequently several years ago, than it has happened in the last several years. So, I’m just wondering if there’s a shift at all?

Craig Howie

Well, Greg, that’s a good question. I think the reserve practices did change a few years back to create this position that we’re in today. I think the practices that we’ve put into place by meeting on a quarterly basis, and setting up these estimates on a quarterly basis, it’s difficult to estimate what these numbers should be to begin with. But the practice that we put into place is pretty conservative. We look at prior year losses, look at the prior loss review, and then we compare and put loss trend on top of that. And then we also take note of any rate increases or decreases in the marketplace at the same time. But what that does is gives us appropriate data to look and set of our reserve position at given point in time. But that same process has been taking place for the last three years.

Dom Addesso

It’s a kind way of saying, Greg that is my fault.

Joe Taranto

Let me chime in. I was about to say we had a great CFO by the name of Dom Addesso who started this process, did an excellent job in making out process more robust.

Greg Locraft – Morgan Stanley

Okay. Great. And I do just want to clarify. Your forward view on ROE and everything that includes no reserve moving either way, right?

Joe Taranto

Yes, I think that’s correct. We do not put that into any thoughts that we give you with regard to the targets we’re shooting for.

Greg Locraft – Morgan Stanley

Okay. Awesome. Okay, good. Thanks and solid year. I appreciate it.

Dom Addesso

Thank you.

Operator

And that concludes our question-and-answer session. I’ll turn it over to our presenters for any closing remarks.

Beth Farrell

I’d like to thank everybody for participating on the call and talk again next quarter. Thank you.

Operator

That concludes today’s conference call. We appreciate your participation.

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