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Everest Re Group, Ltd. (NYSE:RE)

Q1 2014 Earnings Conference Call

April 24, 2014 10:30 ET

Executives

Beth Farrell - Vice President, Investor Relations

Dom Addesso - President and Chief Executive Officer

John Doucette - Chief Underwriting Officer

Craig Howie - Chief Financial Officer

Analysts

Jay Gelb - Barclays

Vinay Misquith - Evercore

Michael Nannizzi - Goldman Sachs

Amit Kumar - Macquarie

Meyer Shields - KBW

Brian Meredith - UBS

Ian Gutterman - BAM

Kai Pan - Morgan Stanley

Operator

Good day, everyone and welcome to the Everest Re Group Limited First Quarter 2014 Earnings Call. Today’s conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference to Ms. Beth Farrell, Vice President of Investor Relations. Please go ahead, ma’am.

Beth Farrell - Vice President, Investor Relations

Thank you, Augusta. Good morning, and welcome to Everest Re Group’s first quarter 2014 earnings conference call. On the call with me today are Dom Addesso, the company’s President and Chief Executive Officer; John Doucette, our Chief Underwriting Officer; 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 full listing of the risks that investors should consider in connection with such statements.

Now, let me turn the call over to Dom.

Dom Addesso - President and Chief Executive Officer

Thanks, Beth and good morning to all. We are pleased to report another excellent quarter, which continues to improve on the trend from last year. The attritional combined ratio for the first quarter improved to 80.4% from 81% for the full year of 2013. Premium volume continues to grow rising 7% over last year. Despite softening in the property cat market, there are still sufficient opportunities for profitable growth for Everest given our scale and financial strength. John will get into further detail in his report, but is evidenced by the improving combined ratio. The growth has come with improving margins, which is partly the result of new products, particularly in the credit and specialty line space.

In the property reinsurance lines, where there have been rate reductions would continue to modify our portfolio to achieve the best risk-adjusted return. So, for example, in Canada, where rates were going up for property catastrophe exposed lines, we committed more capacity. Likewise in other territories, we reduced our move to different layers, our move to pro rata from excess, or we rode different types of product. Of course, we did renew accounts at reduced rates, but only when they met our return hurdles. And in most regions, there is still business at attractive rates. I must emphasize that the ability to diversify and remain flexible is the key to improving margins.

An additional tool that has enabled us to improve our net position is our capital markets platform, Mt. Logan. This has enabled us to increase our share across many programs and bring new product to market. While at the same time earned fees and profit share on the business sourced. A key value of our global franchise is being able to marry the risk appetite of the capital markets, with a global, well-diversified source of business, constructed by best-in-class underwriting and analytical skills. There are not many that can duplicate this value proposition.

You also no doubt saw that we recently came to market for cap-on placement. This is another capital market vehicle allowing us to leverage our underwriting ability and marketing reach across a larger capital base. This transformation of our business at least for now is about capital management. Capital is now available in many forms. And while this can cause us to reshape our capital structure, one thing is constant, developing business, underwriting that business, producing contracts and paying claims. These additional forms of capital provide more options for managing our equity base and funding growth. We are flexible and adaptive to change that can add value to customers and shareholders.

You have also heard us speak about our insurance operations as another source of business that can be a diversifying risk. For these reasons we have continued to increase our emphasis in building this business out further while remaining focused on improving results. In the first quarter results we are clearly seeing the early signs of this progress with a 98.2% combined ratio. Same time, we have already expanded into new products and territories. And excluding crop insurance which was down in the quarter, our insurance book grew 10% in the first quarter. Craig will explain the adjustment in crop premiums (first) quarter. Our crop business remains an important part of our strategy, but we will face some downward pressure on the premium side in part because of the decline in commodity prices from last year. Nevertheless, our plan is to grow our footprint as diversification is key to developing and managing a profitable book in this sector.

As we move forward, the significance of emphasizing underwriting profitability in all segments takes on even greater importance as investment income continues to come under pressure. In the low rate environment and in a business where asset allocation is closely followed by rating agencies, there are limited options. We were an – early adopters of different asset allocation strategies which has kept our returns amongst the best in the sector. However, given constraints, we are not expecting dramatic changes from here. Nevertheless, we will continue to be active but prudent in terms of allocation.

Despite these headwinds, whether it is a tough rate environment, third party capital, with declining investment income, we have another terrific quarter with net income of almost $300 million and return on capital of 17%. And we would expect this to continue through the remainder of the year absent any significant events. With these results and our focus on managing capital we are pleased to be able to return to shareholders $285 million in the first quarter through share repurchase and dividends. This is a record for us in any one quarter. And we are committed to returning capital consistent with the needs of the business.

Thank you and now to Craig for the financial highlights.

Craig Howie - Chief Financial Officer

Thank you, Dom and good morning everyone. We are pleased to report that Everest had another strong quarter of earnings with after-tax operating income of $281 million or $5.93 per diluted common share for the first quarter of 2014, this compares to operating income of $301 million or $5.88 per share for the first quarter of 2013. Net income for the first quarter was $294 million or $6.21 per diluted share, compared to $384 million or $7.50 per share in 2013. Net income includes realized capital gains and represents an annualized return on equity of over 17%.

These results were driven by a solid underwriting result offset by lower net investment income compared to the first quarter of 2013. The results reflect the continued improvement in the overall current year attritional combined ratio of 80.4%, down from 80.7% at the first quarter of 2013 and down from 81.0% at year end 2013. This measure excludes the impact of catastrophes reinstatement premiums and prior period loss development.

The total reinsurance attritional combined ratio was 77.3% compared to 76.8% in the prior year first quarter. The slight increase in this ratio for the reinsurance portfolio was anticipated after the January 1 renewals and with the additional pro rata business written. The insurance segment attritional combined ratio was 97.2% compared to 98.5% in the prior year. However, eliminating the effects of the primary crop book, this ratio would have been 92.8% compared to 95.9% in the prior year.

All segments reported underwriting gains for the quarter. Neither this year, nor last year included any catastrophe losses in the first quarter. Total reinsurance reported an underwriting gain of $215 million for the quarter compared to $210 million underwriting gain last year. The insurance segment reported an underwriting gain of $4 million for the quarter compared to an underwriting gain of $193,000 last year.

Each year reflected an underwriting loss for crop insurance in the first quarter due to the seasonality of crop premium. Earned premium for crop insurance declined at $17 million in the first quarter of 2014 compared to last year. The estimated premium was adjusted to reflect the lower-than-expected premium for the winter crop season due to the re-underwriting of the book and commodity price reductions year-over-year. Based on current prices, we expect the crop premium to decline for the full year of 2014 as well compared to 2013.

Mt. Logan Re’s financial position and operating results were consolidated into Everest beginning July 1, 2013. These results were included in a separate segment and reflected a $10 million underwriting gain in the first quarter of 2014. Everest retained $2 million of income and $8 million was attributable to the non-controlling interests of this entity. The overall underwriting gain for the group was $228 million for the quarter compared to an underwriting gain of $210 million in the same period last year. Our reported combined ratio was 80.0% for the quarter compared to 80.7% in 2013. Our low expense ratio of 4.4% continues to be a major competitive advantage.

On reserves, our overall quarterly internal reserving metrics remained favorable. For investments, pre-tax investment income was $123 million for the quarter on our $16.8 billion investment portfolio. Investment income declined $23 million from one year ago. This decrease was primarily driven by the decline in the limited partnership result for the quarter, although low reinvestment rates and capital used to redeem stock and debt also contributed.

Limited partnership investments resulted in a loss of $2 million for the quarter compared to a $17 million gain in the first quarter of 2013. Our existing limited partnership portfolio was fairly mature and we are starting to see a decline in current gains coming from these investments. Despite the declining rates, our investment portfolio continues to perform well. The pre-tax yield on the overall portfolio was 3.1% with the duration of just over three years. The quarter reflected $13 million of net after-tax realized capital gains compared to $83 million last year. These gains are mainly attributable to fair value adjustments on the equity portfolio. There were $2 million of derivative losses during the first quarter compared to $15 million of derivative gains last year. This is related to our equity put options and is a function of the change in interest rates during the fourth quarter.

On income taxes, the 13.8% effective tax rate on operating income is in line with our expected tax rate for the year. Stable cash flow continues with operating cash flows of $367 million for the quarter compared to $259 million in 2013. This is despite the high level of catastrophe loss payments over the past few years. Shareholders’ equity for the group was $7 billion at the end of the first quarter, up $69 million from year end 2013. This is after taking into account capital return through the $250 million share buybacks and the $35 million dividends paid in the first quarter of 2014. Book value per share increased 4% to $152.80 from $146.57 at year end 2013.

Our strong capital position leaves us with capacity to maximize our business opportunities as well as continue share repurchases. Thank you. And now John Doucette, our Chief Underwriting Officer will provide the operations review.

John Doucette - Chief Underwriting Officer

Thank you, Craig. Good morning. As Dom highlighted we had a strong start to the 2014 year. Our group first quarter 2014 gross written premium was $1.3 billion, up $90 million from Q1 of last year with growth coming predominantly from U.S. reinsurance and international reinsurance. For our reinsurance segments total reinsurance gross written premium including Logan was $1.04 billion for the quarter, up 12% from Q1 last year. As mentioned on the last earnings call, we continued to benefit from flight-to-quality, rolling out new products, expanding our relationships with some larger clients and writing U.S. property exposures domestically as we leverage the competitive advantage of our high ratings and significant capacity.

We have continued to make progress in our multi-line initiative in the USA developing new relationships and broadening existing relationships with multi-line clients as our underwriters relationships with those clients go back for many years sometimes decades. In Q1 we deployed capacity to fund several short tailed quota share treaties at terms we found attractive. Expanded our purple lightings and continued to deploy capacity this quarter in credit related opportunities. Total reinsurance including Logan bottom line we had a very solid quarter with underwriting profits of $225 million, up 7% compared to last year Q1 underwriting profits.

Now, some color on April 1 reinsurance renewals. For our overall reinsurance book, we grew our global property gross written premium and continued to see dollar margin expansion in the overall book at 41 compared to last year. With the combined ratio and the expected risk adjusted returns remaining flat from the prior period. This demonstrates the strength and the diversification of our business. That said, specifically for Japan our premium dollars in Japan were down from last year due to the following reasons. The continued consolidation trend among of longstanding clients result in an emerged reinsurance treaties and in some cases less pro rata premium. Japanese exchange rates caused the decrease in gross written premium in U.S. dollars. And rate decreases on Japanese excess of loss treaties of 10% to 15%.

Turning to our overall casualty reinsurance book globally, while primary rates remain attractive seeding commissions on casualty quota share treaties are still under pressure. Therefore we remain cautious of deploying capacity on risks, which appear to have heavy competition. Nonetheless, we continue to find new insurance and reinsurance products and new deals where we can and deploy our capacity at attractive risk adjusted rates. Through the first quarter and at 41 we continued to rollout and utilize Mt. Logan Re and saw these benefits at each renewal as it allowed us to deploy larger lines on attractively priced treaties and provide more capacity to targeted clients, while containing our PMLs.

We are pleased to report that with additional capital raised at 41, Logan is now in excess of $400 million in AUM. And again 100% of the Logan capacity is fully deployed. This success continues to highlight the significant value proposition we bring to our capital market investor partners in Logan while being completely seamless to our clients who continued to deal with the same core reinsurance trading partner Everest as they have for many years. This smooth flexible deployment of capacity to our clients has helped us secure better signings on many non-cat exposed classes as more of our clients look to have broader and deeper relationships with pure high-quality re-insurers.

In addition to Logan, we have initiated other PML and capital management strategies. As Dom mentioned, we recently obtained $450 million of fully collateralized catastrophe reinsurance coverage funded in the cap-on market. This coverage was purchased through Kilimanjaro Re across two layers. One layer is in a current space deal providing tail protection for Southeastern USA wind risk and the other layer is an aggregate cover for providing tail protection for all natural perils in the U.S. and Puerto Rico as well as British Columbia earthquake risk in Canada.

The combination of Logan cap-ons and other reinsurance and retrocessional protections from both traditional and alternative markets allows us to match our portfolio of risks to the best capital structure. This in turn allows us to broaden our product offerings and our value proposition both to our clients and to our shareholders. With this flexibility on how and where we deploy our underwriting capacity combined with flexibility of the form of our capital structure to mange those same risks, we believe we can and will continue to improve our risk adjusted returns and improve our cost of capital. In the end, we are pleased with our Q1 reinsurance results and continue to nimbly identify, execute, and deploy capital to profitable opportunities across the global reinsurance market.

Turning to our insurance operations, our premium was $230 million in Q1, down from last year’s Q1 gross written premium of $250 million. However, this decrease is primarily driven by premium adjustments for Heartland’s crop book for the reasons, which Greg mentioned. Stripping out Heartland premium, our insurance operations GWP is up 10% year-over-year for Q1 with most other insurance segments showing growth reflecting the impact of the initiatives we have put in place over the last couple of years. We continue to see profitable growth opportunities in many areas and we have been successful growing in those areas that we have targeted, including non-program workers’ comp, casualty, specialty lines, property, E&S and DIC, non-standard auto and accident and health.

We continue to see primary rate improvements in almost all insurance segments. However, we have seen some weakening in some of the professional insurance lines, where we remain cautious in our deployment of capacity. Our California Workers’ Comp book saw an average of 8% rate increases in the first quarter continuing the significant rate increases for the last several years providing a compound rate increase in excess of 60% over the last five years. We continue to see profitable growth and positive rate increases in our property E&S and DIC books and see that expanding throughout the rest of 2014 as primary rates have been holding across this book.

Bottom line, our reported insurance results were positive with a 98% combined ratio for the first quarter. And after eliminating the effects of Heartland, the combined ratio was 94%, down 2 points when viewing Q1 2013 on a comparable basis. We are pleased with the underlying trends in our insurance book as we begin to see the positive results of our initiatives over the last several years with noted improvements in both loss ratios and expense ratios.

In summary, around the globe, we have viewed not only as a lead re-insurer in all P&C lines of business, but also as a creative problem solver and we continue to be given the opportunity with our broker partners to structure new deals, new products, and alternative solutions for many of our corporate and insurance clients. Thus, we remain very bullish on our future.

Thank you and now back to Beth for Q&A.

Beth Farrell - Vice President, Investor Relations

Yes. Augusta, we are open for questions now.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question will come from Jay Gelb of Barclays.

Jay Gelb - Barclays

Thank you. On the insurance segment with the 94 combined ratio excluding Heartland in the first quarter, would you anticipate is that sort of the right run rate we should anticipate for the rest of the year barring any usual items?

Dom Addesso

Jay, this is Dom. That certainly would be a reasonable assumption. It could improve from there, but due to continued improvement in California comp, but that’s a reasonable assumption.

Jay Gelb - Barclays

Including the crop book would be a couple of points higher all-in?

Dom Addesso

The crop book actually for the year we are still anticipating at this point mid 90s combined, so low 90s combined depending on the outcome of winter wheat, but generally we are expecting the overall number to gravitate towards the mid 90s on an accident year basis.

Jay Gelb - Barclays

The next issue is on partnership income, Craig, I think you mentioned that were – that part of the decline was reflecting the book seasoning. So just trying to get a perspective on for the remaining quarters, maybe what we should be penciling in, in terms of partnership return?

Craig Howie

Well, as I said, we are starting to see a slight decline, because they are become fairly mature, but as you noticed even over the last several quarters, it has started to come down. This quarter we happen to have one partnership that threw off a loss of over $5 million, which is what was driving the $2 million loss in the quarter, but it has been coming down over the last several quarters.

Jay Gelb - Barclays

Right. So in the back half of last year when it was running in that kind of $5 million…

Craig Howie

$5 million for quarter.

Jay Gelb - Barclays

Yes.

Craig Howie

I think that’s probably a better estimate, Jay.

Jay Gelb - Barclays

Okay, that’s helpful. And then Dom, do you have any thoughts or commentary on the recent movement we have seen in Bermuda between Endurance and Aspen, has that changed your view at all on M&A in Bermuda or anticipating any sort of increased consolidation beyond that transaction?

Dom Addesso

Well, I didn’t expect that question right out of the gate. I think first of all let me say, it certainly would be inappropriate for me to comment on the transaction per se and I know that’s not what you are asking about, but clearly I think that as we have been discussing in some of our opening comments, we have benefited by, for example, by our scale and our strength in the marketplace and our capital position. And I think in part if this transaction or transactions like this are in fact an attempt to achieve a different level of scale in the marketplace. So, it doesn’t surprise me, not particularly this transaction, but that we would see transactions like this bubble up in the marketplace for that reason. The other reasons I really wouldn’t be in a position to comment on, but I do think that’s in part what’s driving this particular idea and perhaps ideas like this in the future.

Jay Gelb - Barclays

I appreciate that. Thank you.

Operator

Our next question will come from the Vinay Misquith of Evercore.

Vinay Misquith - Evercore

Hi, good morning. So, first just the numbers questions, curious how much was the crop insurance negative adjustment, I believe you mentioned $17 million, so was that for the earned premiums, so was the adjustment $17 million or what the premiums down $17 million?

Dom Addesso

The earned premium was down $17 million. The net premium that was written is down $30 million for the quarter.

Vinay Misquith – Evercore

Sorry. And what was the impact of – just the adjustment for the entire $40 million, sorry?

Dom Addesso

Down $15 million.

Vinay Misquith – Evercore

Okay. So down $15 million, okay, fine. That’s the adjustment, okay. Second is we have seen that citizens has upsized take at bond significantly, what do you think is going to happen on the June 1 renewals for Florida?

Dom Addesso

Well, certainly there is downward pressure in the overall property cat space depending on the territory. And given how well that market is still priced, we certainly would expect that pressure to carryover into Florida. In terms of our prediction as to how much, well, we will just have to wait and see. We are not prognosticating at this point. No, for us, we write on an XOL basis about $130 million in Florida and then the remainder of our exposure is on a pro rata basis. And as we said again in our opening comments, if rates are down, but still meet our return hurdles, yes, we may do some continuing XOL, but it more likely be that perhaps we would ship some of our capacity to quota share. And again it depends on what the market is willing to give us from this June.

Vinay Misquith - Evercore

Okay, that’s helpful. And just one last numbers question I believe the tax rate 13.8% that I hear correctly that you expect, yes, and I believe you mentioned that you expect that for the entire year. Historically, I thought it was between 12% and 13%, so curious why you expect a higher tax rate for this year? Thanks.

Dom Addesso

13.8% is an effective tax rate that we would expect for the year that rate could even go up from there as we have talked about in the past specifically on the last quarter call that if there are no catastrophes for the year that rate could even go up. That’s with an expected amount of catastrophes for the year.

Vinay Misquith - Evercore

Okay, thank you.

Operator

Our next question is …

Dom Addesso

Excuse me, one other point, keep in mind that, that in your assumptions that rate does have to move with cat losses, so you can take the rate up without taking expected cat losses down, correct.

Operator

Thank you. We’ll go next to Michael Nannizzi of Goldman Sachs.

Michael Nannizzi - Goldman Sachs

Thanks. Wouldn’t just I know we – it sounds like we got some pieces per crop, but would it be possible just to get the 1Q premium for crop and then the combined ratio for crop for the first quarter?

Dom Addesso

1Q premium for crop was minus 15% for gross written premium.

Michael Nannizzi - Goldman Sachs

Okay.

Dom Addesso

And I’m sorry your second question was…

Michael Nannizzi - Goldman Sachs

The earn premium, I mean, I guess the earned premium that rolled into revenues?

Dom Addesso

The earned premium that you would see in the first quarter for crop is only about $2 million.

Michael Nannizzi - Goldman Sachs

Okay, got it. Great, thanks. And then the question about the California comp book, can you talk about the rate you took in remind us what the rate you took in 2013 and where loss churn was there and where you are booking comps today on an action in here on an initial pick basis?

Dom Addesso

I’ll let Craig give you the last year information, but right now for California comp on an accident year basis, we are in the mid 90s.

Michael Nannizzi - Goldman Sachs

Accident year combined?

Dom Addesso

Yes.

Michael Nannizzi - Goldman Sachs

Okay, got it. Great.

Dom Addesso

I don’t know if Craig is looking for some of the information…

Michael Nannizzi - Goldman Sachs

Okay, great. And then if I can just ask one more. So in Bermuda, is it possible to know and I realize it to blended book and probably there is some – there is some composition change to it, but is it possible to get an idea of what the year-over-year change in pricing or rate was in that book?

Dom Addesso

You are talking about….

Michael Nannizzi – Goldman Sachs

Roughly.

Dom Addesso

What property cat, because Bermuda is a mixture of property and casualty, so it’s a little tough to answer that question.

Michael Nannizzi - Goldman Sachs

Well, let me get to the base of my question. So the part I am trying to understand is the attritional loss ratio was flattish year-over-year and it’s been down on a year-over-year basis for the last few quarters. And I am just trying to understand just given generally that there has been some pressure in reinsurance pricing how does that factoring, because if it were just typical primary insurance or something very simple, you have reductions in pricing that would cause your combined ratio to rise, but it seems like we have absorbed is the market some declines in pricing, but that attritional ratio has been flat. I am guessing there is some mix change in there or something I am just trying to reconcile that?

Dom Addesso

It’s exactly that. It’s the mix change. They can move in and out of retro business depending on what we do, out of London and some of those transactions, it’s essentially mix change which is driving that.

Michael Nannizzi - Goldman Sachs

Right. So, I mean – so, is it fair to assume that if all else equal if you have this environment and you have mix change, which it allows you to keep your attritional flat, does that mean that you are taking more risk per unit of premium that you are collecting?

Dom Addesso

Well, first of all, keep in mind that on a gross written premium basis, Bermuda was down year-over-year.

Michael Nannizzi - Goldman Sachs

Yes.

Dom Addesso

And I think it’s a reflection of when we say a mix change, it’s kind of we would like to emphasize over and over is that we have the capacity, the willingness and the ability to actually change our mix and move from one class of business to another, one layer to another always trying to achieve the best risk-adjusted return. So that’s really what we are striving to do and in times you will see a segment like Bermuda, for example, perhaps slip in premium, because we are backing away from certain class of business that aren’t giving us the right return.

Michael Nannizzi - Goldman Sachs

Right. I mean, if we are in an environment where if there continues to be challenges in the reinsurance market, is it possible to just keep that attritional loss ratio flat even with pressure just, are there some limitations of mix that will cause at some point that attritional loss ratio to start to rise?

Dom Addesso

There is always that potential. And it all depends on how fast and how far rate decreases are and what we back away from in terms of business that doesn’t meet our return hurdle. So, yes, if you would want to continue to write the same book of business, year-in and year-out, yes, attritionals will rise. On the other hand, if you move into different new products, different geographies change attachment point, use the capital markets potentially. I mean, there is lots of ways in which we can maintain our profitability throughout difficult, which you are describing as a difficult market.

Michael Nannizzi - Goldman Sachs

Great, thank you very much for answering those questions. I appreciate it.

Operator

We will go next to Amit Kumar of Macquarie.

Amit Kumar - Macquarie

Thanks and good morning. Just a few quick follow-up questions. First of all, going back to the Florida piece, you mentioned that your XOL piece is $130 million, is the remainder $70 million or so or am I thinking of the total Florida book wrongly?

Dom Addesso

Our Florida pro rata is approximately it would be another couple of $100 million or in total – sorry, in total it would be $280 million roughly, that’s XOL and pro rata.

Amit Kumar - Macquarie

Got it. That’s helpful. The follow-up to that point is I think last year you had talked about getting preferential signings, you talked about private players, multi-year deals are you seeing that phenomenon for at least this year too or is it much different?

Dom Addesso

I will let John answer that.

John Doucette

Yes, this is John, Amit. Yes, we are seeing that opportunity in some cases private layers, in some cases clearly at 11 and 41 preferential signings, but also new products, new layers, new products with existing clients and new clients. And that answers the prior question about attritional losses as well. It’s our job to figure out how to make money, no matter what market we face. And yes we are seeing the opportunities where we are one of the biggest broker markets in the world and we are getting better and better signings from brokers and clients working with the brokers.

Amit Kumar - Macquarie

And then when you mentioned new clients are the smaller I guess new de-pop entities who exactly are these…?

Dom Addesso

We are not talking just Florida here. We are talking across the entire portfolio globally. So its new clients globally, it’s an with existing clients across the world. Specifically in Florida I mean we have relationships with almost 40 companies and we see how deal that comes into the market and we have been trading with many of those clients for many, many years. And we do have relationships that are not broadly marketed.

Amit Kumar - Macquarie

Got it. That’s quite helpful. The other question I think is a follow-up to Mike’s question on maybe California comp. Did you see any changes in loss cost trends over the past quarter. There has been obviously a lot of debate. A lot of reports have come out on the impact of SB-863. And it seems that impacted very strong the companies presence in the marketplace do you see any changes in your book or has it been sort of a steady state from 2013?

Dom Addesso

We have not yet seen any changes I am not saying we are not out there. But we have maintained – actually we didn’t answer much question earlier about loss cost trends. We have build loss cost trends into projection and that’s typically depending on massive business in the mid to high single digit range so that’s built into our reserve assumptions. And so far that has been sufficient clearly in the most recent accident years. The reserve development we saw in the fourth quarter of last year is primarily older years.

John Doucette

And the answer to Mike’s question was the rate increase for 2013 was 13%. And we were running in the 96 range last year on an accident basis.

Amit Kumar - Macquarie

Got it. The final question?

Dom Addesso

So just to follow-up on that you can see that we – while the combined ratio has not improved to the level of rate increases which means that we are taking some of that obviously into loss cost trend and probably more than as necessary at this point but (indiscernible).

Amit Kumar - Macquarie

That’s good. The final question is probably a follow-up to Jade initial question as you look at your growth prospects your purple on Logan you have talked about different new products I am curious as you sort of look out how do you look at organic growth versus outside opportunities to add to the portfolio?

Dom Addesso

What’s the distinction that you are making between organic growth and outside opportunities.

Amit Kumar - Macquarie

What I am trying to ask is based on all the changes we are seeing recently is it fair to say that probably you don’t need to look at other entities at this juncture?

Dom Addesso

Okay, I am sorry. So right now we do not need to do that and in fact growth strategy at least for us will never be built on an acquisition. It doesn’t mean that we don’t look at many things because as you can well imagine everyone calls us when there is a potential deal out there. But we do not build our growth strategy off of an acquisition. We prefer frankly to build from within so you don’t have to deal with legacy issues, integration issues and nine times out of ten there is limited strategic value to many of the opportunities that we see.

Amit Kumar - Macquarie

Got it. That did answer my question. Thanks. Thanks for the answers and good luck for the future.

Dom Addesso

Thank you.

Craig Howie

Thank you.

Operator

Your next question will come from Meyer Shields with KBW.

Meyer Shields - KBW

Thanks. Dom you talked earlier about the tendency of seeding commissions to go up now, is that trend varying by the size of the seeding, is that different now than it was five or ten years ago?

Dom Addesso

That was John that spoke to that and I don’t know that we are necessarily seeing it differently by size customer. Certainly, it can be influenced by the size of the transaction given that there might be some that are hungrier for premium. That would maybe – could be the only comment I would make about that.

John Doucette

And obviously, this is John, and obviously it is also reflective of the clients’ individual experience. So, lot of cases, whether it’s whatever class of business they are in, if they are spending that results, we see seeding commissions going down. If there has been catastrophes that have hit, there are covers, including pro rata deals, seeding commissions go down. So, really it’s both the macro and the micro situation that drives these.

Meyer Shields - KBW

Okay, that’s helpful. Thank you. And very briefly is there a good proxy we can use of limited partnerships?

Dom Addesso

Well in the past, we have guided people to just the general equity markets. And I think we probably still would say that, that is as good a proxy as you can get and I think it points to what Craig mentioned earlier that in response to another question that our limited partnerships were quite strong last year, but that’s kind of in line with the general equity markets were strong last year. And conversely, the equity markets in the first quarter this year were not quite as strong or flattish. And I think that’s consistent with our limited partnership experience, except for the one. I mean, in our particular case, there was this one LP, which was distorting I think what we would otherwise normally have expected for the quarter. And that we would not expect that going forward. So, I would say that the best proxy you can use is the general equity market – public equity market.

Meyer Shields - KBW

Okay, fantastic. Thank you very much.

Operator

Our next question will come from Brian Meredith of UBS.

Brian Meredith - UBS

Yes. Couple of quick questions. The first one and my apologies if I missed this, but in the insurance segment, operating expenses were down about 13% year-over-year, was there something unusual that happened there?

Dom Addesso

Just good stewards on the expense side, in part it’s premium growth and frankly that’s most of it and maybe some internal allocations, but nothing dramatic other than premium growth.

Brian Meredith - UBS

Premium right, but actual expenses were down 13% year-over-year.

Dom Addesso

That would be driven by allocation, you include commissions in that.

Brian Meredith - UBS

No.

Dom Addesso

That would just be allocations then.

Brian Meredith - UBS

Okay, thanks. And then Dom and John, I wonder if you could just update or not update or just remind us kind of what’s your thoughts are on Watford Re and then there is a bunch of other companies that are kind of looking into these types of potential facilities, what interest level would an Everest have of potentially doing something like that and what do you think the potential impact is on the casualty markets, reinsurance markets?

Dom Addesso

Well, yes, one of your questions was that we are looking at that as I think probably most of our peer companies are doing. And we haven’t yet determined where we are going with or we have not yet concluded on that analysis yet. And generally it would certainly cause one to think that it could soften the casualty reinsurance market further from where it is now.

On the other hand of the types of transactions that are likely to go into these types – into these facilities are not generally – generally already tend to be lower margin type business, lower volatility associated with the class of the business that fit these structures. And so it may not have as dramatic an impact as has been prognosticated by many on the overall capital market. That remains to be seen. I am not sure that any of us really know for sure where that all ends up, but it is something we are looking at. And in fact it can create interesting opportunities for seeding companies frankly that to help them with their cost to capital on transactions and they in fact create opportunities into the reinsurance market space that don’t exist today. We are the casualty space frankly where a lot of companies are holding on seeding less business, increasing mix. Some of these ideas can in fact create transactions that can help their P&L or balance sheet and perhaps a reinsurer can add value and see premium go up in the space. There are a lot of possibilities that can come out of these structures, but we are examining that very closely.

Brian Meredith – UBS

Great. Thanks for answers.

Operator

We will go next to Ian Gutterman of BAM.

Ian Gutterman - BAM

Hi, good morning. I guess a few different questions on different parts of your cap book, just to follow up on the Florida question from earlier, obviously we speculate pressure on extra well which is mentioned, you talked about your book, can you talk about I assume there will be upward pressure on seed-in commissions in quarter two is out there and can you give us the sense of how you think about that?

Dom Addesso

Again there is many, many moving parts to it. There is a current submits to seed-in commissions to the extent and we saw this phenomenon last year to the extent that there was a – to the extent that the reinsurance spanning goes down from some of our clients resulted in more attractive combined ratios including seed-in commission to the reinsurer. So we – as we talked about it on the last couple of calls, we wrote more pro rata business last June. We also wrote more pro rata business at one -one. We wrote another $50 million - $55 million of property pro rata at one-one. And again we crossed our book the combined ratio globally improved.

John Doucette

I wouldn’t expect that the same dynamics that we are expecting be extra well of our market from the introduction of third party capital to have as to no matter can impact on the pro rata market that I think is really what you are getting in.

Ian Gutterman - BAM

Yes, exactly. Okay, great and then as a follow up to that on the extra well side given the talk on how much rates will fall this year, do you feel like we are approaching a bottom or are we near people’s walk away price or if there is another no last year and there is still abundant capacity next year can flow the rate go down another double digits or are we getting closer to walk away point.

Dom Addesso

I don’t know we answered that question certainly if we were to go down to your question, 10 this year and 10 next year, we certainly would be getting very, very close to all walk away point.

Ian Gutterman - BAM

Okay.

Dom Addesso

On a full basis, but again remember that it doesn’t mean that we don’t participate in that market through our platform. If capital markets are willing to come down to those levels then we have the capacity that we can deploy in that fashion or move again to more pro rata. And as we can still stay very, very active in the marketplace and move to other products, move to different attachments points. Perhaps write the business and use the capital markets as a reinsurer, so there are many ways in which this can play out to our benefit frankly going forward.

Ian Gutterman - BAM

Got it. And then that actually leads to the next question on the cap on, I was just confused and maybe this was just nomenclature or something that I don’t quite follow, but is your for US vendors I think $1.2 billion at the 1 and 100 and the cap on, on the index that was referenced had $1.4 billion to $2.1 billion index loss that equated to 1 and 34 to 1 and close to 100, so on the current one you are obviously talking so that I can be comparable, I was curious why index loss at the 1 and 100 is $2.1 billion when your PML 1 and 100 is $1.2 billion are they not comparable for some reason?

John Doucette

Yes, this is John. Basically that’s the (indiscernible) cap-on the mechanics of that really reflect, it’s basically is taking for the current one it’s Southeast states and it basically is taking industry loss events because it’s a PCS trigger. It’s taking industry loss event and then there is effectively market shares by each of those states. And so it’s taking a very big loss and then scaling it down or range of big losses and then scaling it down to the market share. So those are – the short answer is those are two different things, our PMLs and how the mechanics of the bond responds.

Ian Gutterman - BAM

Okay, that does that. I can maybe follow up more from that. That’s what I was trying to get at. And then just….

Dom Addesso

I think, Ian, just bottom line is that purchase of that bond did reduce our PMLs, our 1-in-100.

Ian Gutterman - BAM

Basically the $2.1 billion equates to your $1.2 billion, is that the right way to think about it?

Dom Addesso

It’s not – the $1.2 billion is one point in the curve. The reinsurance we purchased is a special purpose vehicle, Kilimanjaro, that finishes that cap-on is not one point on the curve, it’s across the distribution.

Ian Gutterman - BAM

Okay, got it. Okay. And then just real quick on Mt. Logan, the $36 million in gross premium just knowing the capital deployed is a little over 10% rate online, if my math is correct, is that right?

Dom Addesso

Yes, but remember the $400 million be careful though, the $400 million that we cited as now assets under management that’s a recent number.

Ian Gutterman - BAM

Right, using I think it was 320 million earlier in the year maybe?

Dom Addesso

There is also a accounting recognition of the premium. Over 2014, we would expect it to be higher and more seeded premium in each of the quarters going forward against that capital base.

Ian Gutterman - BAM

Okay. Well, what I was getting at is just I thought normally for fleet collateralizing indeed closer to a 20% rate online to sort of make the math work, is that generally accurate?

Dom Addesso

I think we are trying to build the mousetrap that is maybe different and better than what is out there. And I think the fact that we have been able to go from zero to $400 million in the relatively short of time highlights that we may have a better mousetrap than others that are out there.

Craig Howie

But I do think though that the simple arithmetic that you were trying to do is probably a bit low.

Ian Gutterman - BAM

Got it, okay. I will follow up on that one offline to you. Thanks.

Operator

We will go next to Kai Pan of Morgan Stanley.

Kai Pan - Morgan Stanley

Good morning. Thank you for taking my call. And I have two questions. One is on the capital structure, another on reserves on the capital structure you have the one of sort of the least levered balance sheet debt to capital ratio less than 7%. And now you have a third-party capital Mt. Logan and cap-ons and what do you think about your equity base of $7 billion. Could you sort of buyback more than you earned like you did this quarter that actually actively reducing your shareholder base?

Dom Addesso

Well, we tend to want to think about share repurchases within the context of earnings. That’s generally has been our approach. And what we are trying to do with our capital in Mt. Logan and the use of cap-ons and other types of third-party capital structures is grow the business. Alright, this is a growth strategy not one in which we are trying to shrink the business. As we have mentioned earlier, we think that our size capital position rating, global franchise and the ability to grow is what perpetuates the good earnings we have been able to produce and good ROEs we have been able to produce. So in all of that context, it really means that it’s to our advantage in the marketplace to the extent that opportunities present themselves to grow our capital base. And when I say grow our capital base that means in all vehicles that we have mentioned meaning our own equity capital, Mt. Logan, use of cap-on structures and other vehicles. But in the context of our equity capital, it is important to us to be the size that we are at. So we think about share repurchases in the context of earnings.

Kai Pan - Morgan Stanley

So would 100% payout ratio a fair assumption?

Dom Addesso

That depends on the price of our stock. It depends on what opportunities present themselves. It depends on a lot of things. And we don’t give prognostications about what level of shares we are going to be repurchasing, but as you saw we did obviously have $250 million this quarter was a pretty good number for us.

Kai Pan - Morgan Stanley

Okay. In terms of my second question on reserves and your reserve development has been minimal throughout the past two years and each quarter actually, but if you look underneath, you have some large reserve charges and the insurance operation why you have large reserve releases from your reinsurance operation, then they tend to coincide like in the fourth quarter, I just wonder are those just coincidental that you do big reserves like study at year end? And then following on that is that going forward as you see the past reserve issues in your insurance book gradually well hopefully were diminishing and you said Dom, since you joined Everest you have been focusing on the reserve side setting probably more prudent like setting more cushions in your reserve that is possible we will see sort of these efforts actually playing out in formal favorable development in the future?

Dom Addesso

Yes, hopefully the reserve practices that we have been adopting over the last couple of years I think will hold us in good stead, but we point out that our reserves even prior to we getting here in many years developed favorably, probably less than 9 years come in positive relative to the initial pick. The we do our reserve studies meanly around the year end we do some of the smaller classes of business throughout the year, but the larger material lines, we focus on that in the fourth quarter, certainly if we see anything coming out of the smaller lines of business during the years we can pick some action certainly like we did here in the first quarter with the insurance from the medical amounts side and but insurance has been more of an issue than reinsurance because many of the business we were in were lines of business and those typically many of the business tend to be more problematic than in the ongoing book. And also our insurance lines of business tend to be on overall basis tend to be in the longer tail areas in the reinsurance side. So those are some of the more challenges related to insurance, but we clearly think that we have got control.

Kai Pan - Morgan Stanley

Thank you very much.

Operator

And it appears that’s all the time we have for questions today. And I would like to turn it back to our presenters for any additional or closing remarks.

Dom Addesso - President and Chief Executive Officer

We thank you very much and thanks for your questions. We would like to just say in summary that clearly we think we had a great quarter what some will describe as a challenging environment. We happened to think that the challenges create opportunities for a company like Everest and we have the ability to do different things and respond quickly and appropriately to market conditions that are at our feet today and they certainly won’t be the same tomorrow or two years from now. We appreciate your questions and your support and look forward to seeing everybody in the interim. Thank you.

Operator

That does conclude today’s conference. Thank you all for your participation.

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