Everyone and welcome to the Everest Re Group, Ltd. first quarter 2012 earnings release call. Today's conference is being recorded. At this time, for your remarks, I would like to turn the conference over to Beth Farrell. Please go ahead, ma'am.
Thank you, Jim. Good morning and welcome to Everest Re Group's first quarter 2012 earnings conference call. With me today are Joe Taranto, the company's chairman and chief executive officer, and Dom Addesso, our President and 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. Let me turn the call over to Joe.
Thanks, Beth. Good morning. We were pleased with our first quarter results as we generated an annualized operating ROE of 17%, an annualized net income ROE of 21%, and group book value per share adjusting for dividends by 7%. Including other comprehensive income, we made over $400 million for the quarter. We bought back $125 million of our shares, paid $26 million in dividends, and still increased our surplus by $260 million. This increase adds to the already strong excess capital position we had established. Our balance sheet has never been stronger, with high-quality, well-performing assets and reserves that continue to test well. Even though it is by no means a hard market, we have positioned our portfolio to take the best the market has to offer.
We have continued to find opportunities in the property catastrophe market, where losses in the last 18 months have driven improved rates, terms, and conditions. Although our expected margins have increased, we have not materially increased our PMLs in any of our peak zones year-over-year. Since our last call, we have completed the April 1st Japanese renewals, and we were pleased with the result. Rates on earthquake excess of loss treaties had increases ranging from 20%-60% compared to 2011, and from 40%-150% when compared to the pre-earthquake 2010 rates. Wind excess of loss treaties experienced rate increases of 10-ish% following 5-ish% increases from the year prior. Japanese interest abroad proportional covers were improved to exclude natural perils, which increased the demand for specific excess of loss coverage on these overseas risks.
The next important renewal date for us will be June 1st when we have our Florida renewals. We anticipate that that will go very well given the following dynamics. First, the new RMS v11 model increases the need for most buyers to buy more reinsurance at higher model prices, while it reduces the risk capacity of many of the sellers. Second, the state of Florida will be providing less reinsurance, which will increase the need for professional reinsurance capacity. Third, the underlying homeowners' insurance rates have been permitted to increase, allowing for a bigger, healthier premium base. Moving on to casualty reinsurance, we continue to take a conservative position, essentially keeping our book to long-term key clients that we have made money with. Many insurance executives are anticipating meaningful improvements in this market, and we hope they are correct, in which case we would adjust our appetite.
For now, we will continue to hedge our bets. Our insurance operation continues to show improvement. Whereas it ran through a 101 combined ratio for the first quarter, we expect continued improvement for ensuing quarters as rate increases achieved last year and this year on California workers' comp business works its way into the earnings, and our crop premiums, which are seasonal in nature, will be much heavier in subsequent quarters. Our financial institution D&O, our medical stop loss insurance, and our property insurance book continued to produce an underwriting profit. On the investment front, we continue to perform quite well despite lowering our duration to better insulate us from an upward move in interest rates. Strong cash flow continues to build our invested asset base. As previously announced, Craig Howie has joined us as Executive Vice President and will become CFO following our first quarter SEC filings.
Dom and I interviewed a large number of qualified candidates for the position, and we were delighted that we were able to attract our number one choice. Dom remains CFO for the first quarter and accordingly, he will present the financial report this quarter. Craig will be on the next call presenting the second quarter financial report. Now that Craig has joined us, Dom will be able to spend most of his time on the operational side of our business. Our management team has never been stronger. With Dom as President, Craig as CFO, John Doucette as Chief Underwriting Officer for Worldwide Reinsurance and our many strong executives around the world like Mark de Saram, who oversees Bermuda, Europe, and Asia, and Ron Diaz, who oversees Latin America and the other international areas. Last quarter, I said I was optimistic about 2012. Clearly, now I'm only more optimistic.
I like our team, our plan, and our portfolio. We have achieved a compounded 13% growth in book value per share, including dividends through our 17-year history as a public company. Given our first quarter, we are hopeful we will exceed that historical average this year. Dom?
Thank you, Joe. We are very pleased with the performance in the first quarter. In comparing the results to last year, consideration must be given to the catastrophes experienced in 2011. Over the long term, despite catastrophe levels in recent years, our returns have been quite favorable, and this quarter has moved our compound annual growth in shareholder value back towards our historical average. This most recent quarter, with $7.31 of growth in book value per share or 6.5%, reflects an underlying 21% net income ROE. This return is reflective of the reinsurance attritional combined ratio, excluding the impact of reinstatement premiums, improving two points from 85% to 83.2%. It should be noted that the 2012 results include a $20 million provision for the Concordia loss, and if adjusted for this, would mean that there was an underlying four-point improvement in the combined ratio results.
Rate increases are a primary driver of this improvement, as well as the portfolio shift from pro-rata to excess contracts in heavily cat-exposed regions. The favorable impact of rate increases earning through is expected to continue during the year as rate increases on cat-exposed business began picking up momentum starting last April after the Japan earthquake. In this first quarter of 2012, property cat excess of loss premium written increased over $50 million or 17.5%. Overall cat-exposed premium is up 12% without any meaningful increases in PMLs for peak zones. Premiums in the reinsurance segments were up approximately 9% after adjusting for reinstatement premiums and foreign exchange. This increase was less than the percentage rate increases we have cited due to shifts in geographic mix, as well as shifting capacity to excess of loss from pro-rata.
For this quarter, in addition to the attritional results, there was a catastrophe loss of $30 million for the February and March tornadoes. Despite these events, the reinsurance underwriting gain for the quarter as a result of portfolio changes and rate increases, as mentioned, was at $112 million. On the insurance front, there has been a similar improvement in the attritional combined ratio when compared to the full year run rate. The insurance operation ended the full year 2011 at a 106 current year attritional combined ratio. This year's first quarter is, as expected, showing dramatic improvement over that run rate of a 101.2 combined ratio. This improvement is in part being driven by over two years of rate increases, most notably in California workers' compensation. Rate increases in casualty and workers' comp have continued into the first quarter.
In addition, the insurance portfolio is benefiting from a shift in mix with new products such as crop and A&H insurance and a reduction in certain casualty programs. Insurance premiums are down quarter-over-quarter due to runoff of certain program business and a light quarter for crop premium. Last year's crop business was recorded evenly throughout the year as reinsurance premium. With the shift to insurance, this business now has a certain seasonality, which resulted in only $8 million of first-quarter net premium. Nevertheless, we expect approximately $150 million of crop premium for the balance of the year with an expected combined ratio in the low 90s given more normalized weather events. Turning to investment income, for the quarter there was $152.4 million of income compared to $178.7 million one year ago or a decline of $26.3 million. The difference is primarily due to income from limited partnerships.
After adjusting for the impact of the $24 million decline in income from limited partnerships, core investment income is down by approximately 2% or $2.5 million. This is a result of declining reinvestment result rates offset by new cash flows, which continues to be positive at $166 million this quarter. Capital gains were quite strong for the quarter at $99 million pre-tax, and were reflective of the rising equity markets in the first quarter. The combination of solid investment performance and strong underwriting results produced net income before taxes of $343 million. Taxes for the quarter of $38 million results in net income of $305 million or $5.68 per share. Operating results pre-tax equal $244 million and $240 million after tax.
The low effective tax rate on operating income of 1.7% during this quarter was a result of the impact of the large realized gains in the quarter on the annualized effective tax rate calculation and other one-time adjustments. It is expected that the tax rate on operating income will normalize towards an overall effective rate of approximately 6% by year-end. Turning to other miscellaneous items, the $6 million gain on derivatives was comparable to the prior year's $7.5 million. The gain this quarter was a reflection of the rise in equity markets. Other expenses, which are mostly foreign exchange losses, were just slightly ahead of the prior year, but still relatively minor at $6 million. There was no meaningful change in corporate expenses, and other underwriting expenses increased by $3.5 million due to timing of certain expenses.
Commissions were increased by $2.6 million due to the change in accounting for deferred acquisition costs. Commissions are therefore down on a like-for-like basis due to the shift to XOL business, which carries lower commissions. This accounting change was adopted prospectively and will impact each of the next four quarters through commission expense for a similar amount. Adding to our income position this quarter was $80 million of unrealized gains after tax from our bond portfolio as a result of declining yields. When added to our net income plus foreign currency translation gains, we total $402 million of comprehensive income. After taking into account $25.6 million of dividends and $125 million of share repurchases, we ended the quarter at $120.30 of book value per share. Our total capital position of $6.3 billion leaves us with capacity to maximize our business opportunities as well as continue share repurchases.
We're also pleased to report that our A+ rating from S&P was recently affirmed with a stable outlook. Thank you. With that, I'll now turn it back to Beth for Q&A.
Jim, we're ready to take questions from the group.
Thank you. For the phone audience, if you'd like to ask a question, you may do so by pressing the star key followed by the digit 1 on your touchtone telephone. If you're using a speakerphone, please pick up your handset or release your mute button feature to allow your signal to reach our equipment. Again, that is star 1, and we'll pause for a moment to assemble our queue. We'll take our first question from Matthew Heimermann, J.P. Morgan.
Hey, good morning, everybody. Just a couple of quick numbers questions before a bigger picture question, which is just the Concordia loss. What segment was that in, or was it spread across multiple?
It's U.S. reinsurance.
Okay. Then the reinstatement premiums in the quarter, what segment were those booked in?
International.
Okay.
They were mostly from last year's events.
Okay. Then the crop premium to earn the rest of the year. Is it fair to assume that probably about 90% of that will be written in the second and third quarters?
The bulk of that will be, yes.
Okay. Then your tax rate comment, I was a little surprised by 6% because that would imply basically no tax on underwriting income if I'm doing the algebra correctly. Did I hear that right? Is that 6% true run rate? If so, what's the significant change there?
Please stand by. Good day, everyone, and welcome to the Everest Re Group Limited First Quarter 2012 earnings release call. Today's conference is being recorded. At this time, for remarks, I would like to turn the conference over to Beth Farrell. Please go ahead, ma'am.
Thank you, Jim. Good morning and welcome to Everest Re Group's First Quarter 2012 earnings conference call. With me today are Joe Taranto, the company's Chairman and Chief Executive Officer, and Dom Addesso, our President and 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.
Let me turn the call over to Joe.
Thanks, Beth. Good morning. We were pleased with our first quarter results as we generated an annualized operating ROE of 17%, an annualized net income ROE of 21%, and group book value per share adjusting for dividends by 7%. Including other comprehensive income, we made over $400 million for the quarter. We bought back $125 million of our shares, paid $26 million in dividends, and still increased our surplus by $260 million. This increase adds to the already strong excess capital position we had established. Our balance sheet has never been stronger, with high-quality, well-performing assets and reserves that continue to test well. Even though it is by no means a hard market, we have positioned our portfolio to take the best the market has to offer.
We have continued to find opportunities in the property catastrophe market, where losses in the last 18 months have driven improved rates, terms, and conditions. Although our expected margins have increased, we have not materially increased our PMLs in any of our peak zones year-over-year. Since our last call, we have completed the April 1st Japanese renewals, and we were pleased with the result. Rates on earthquake excess of loss treaties had increases ranging from 20%-60% compared to 2011, and from 40%-150% when compared to the pre-earthquake 2010 rates. Wind excess of loss treaties experienced rate increases of 10-ish%, following five-ish% increases from the year prior. Japanese interest abroad proportional covers were improved to exclude natural perils, which increased the demand for specific excess of loss coverage on these overseas risks.
The next important renewal date for us will be June 1st when we have our Florida renewals. We anticipate that that will go very well given the following dynamic. First, the new RMS v11-
We're anticipating, obviously our effective tax rate to grow from 1.7%-6% by the end of the year. In that calculation would be any other anticipated adjustments that we might have to our tax accounts during the year.
Sorry, is that like favorable resolution of prior year tax matters, things like that?
Things of that sort.
Okay.
Yes, Matt.
We shouldn't play that forward, let's say, to next year?
Probably not.
Okay. That's helpful. Then, big picture, Joe, on Florida, just with respect to the demand picture, because I think there clearly is some increased demand. Citizens though, it looked like used the capital markets for a bit more of their program than people were anticipating. There's obviously been a lot of third-party capital set up alongside companies in the form of sidecars and other rated entities. I'd be curious if you could just talk to the supply side, and how that's changing relative to demand side.
You're right, Matt. There certainly are some moving parts and some go one way and some go the other. Citizens, it does seem as if they've done more or will do more into the bond market. It's unclear if they'll buy more or less outright reinsurance. They're depopulating, of course, which may put more risk and exposure into other companies and create more need for reinsurance. I think the big things are RMS v11 and the fact that the premium base at the insurance level is getting healthier. On the supply side, again, RMS v11 for many reinsurers starts to limit the amount of capacity they can provide. I am not seeing any sort of groundswell in sidecars or new companies that I think is going to create any sort of meaningful additional capacity for the marketplace.
When you do look at the whole equation, I think it'll continue to be improvements for reinsurers at six one. That's my expectation.
Okay. Do you think for your portfolio, does that mean growing just with your existing clients? Let's say, you get rate pass-through on pro-rata and maybe with depop-ing there's a little bit of growth in their books. Are you expecting on top of that to be putting new accounts on the book as well?
Well, I'd like to see there may be some new accounts. Existing clients will certainly come first. The limitations will be that we don't really want to increase our PML in any significant way in Florida. Of course, if there's rate increase, we would be pleased about that.
Okay. Thank you much.
Moving on. We'll take our next question from Josh Shanker from Deutsche Bank.
Yes. Thank you. I was hoping you might help me out by walking through reinstatement premiums for 1Q11 by segment, and then maybe talking about exposure growth by various segments, if we can understand premium exposure that way.
Okay
All right, reinstatement premium for this year?
Well, comparing, trying to sort of normalize this year's numbers with last year's by segment.
Okay. Just keep in mind that what you're trying to do is look at the attritional combined ratios, excluding the effects of reinstates. We could give you those if that's easier.
I'm actually interested in your growth and where you're taking more risk, where you're taking less risk, and it's hard to describe that with premium, but I'd like the qualitative on top of the quantitative, I guess.
Okay. What we've got in U.S. reinsurance this year, $337,000 against $16 million of reinstatement premiums last year in the first quarter. International, $4 million this year versus $9 million a year ago. Bermuda, 0 this year against $5 million a year ago. That brings the total reinsurance to a little over $4 million against a little over $30 million a year ago.
Okay. That's great, Dom. Can we talk about where you're taking more exposure, where you're taking less exposure, and where the rates are justifying that and whatnot? You can handle that any way you want, I guess.
As we mentioned earlier, in all of our peak zones, our PMLs have not changed in any meaningful way. Any exposure growth or stretching out our Ag has been primarily in the Midwest, a little bit, maybe a little bit of growth in the Northeast, but most of our exposure growth has been in the Midwest.
Is that in terms of events like tornado or like New Madrid earthquake?
It would be all cat exposed.
All cat. Okay.
There may be pockets like Dom just cited where we have done more, again, reacting to the rate changes that happened post the tornadoes that took place last year. In the main, when you get to the big zones, Japan and Europe and California and Florida, we really don't have at least increased risk, at least subject to one shock loss.
The Midwest doesn't feel like one of those zones in aggregates as one of the big three?
It's not a big item for us, but it's bigger than it was before. It doesn't go into the peak zone area, no.
Okay. Very good. I appreciate all the
And I think-
Yeah, continue
Josh, there's been other areas where we've decreased as well, of course.
Do you want to highlight that? Just trying to get as much information as possible.
A little bit of a reduction in Cal quake, some modest reduction in Japan wind, Canadian, British Columbia quake, things of that sort.
Okay.
Just to give you some broad executive summary, and it's broad, but last call, I mentioned that we expected to write an additional $100 million-$150 million in pure cat premium on our book of business. That still looks to be a pretty good number. Yet if you ask me in terms of just worldwide exposure, I think if anything, we're down a bit because terms and conditions are much better. Again, the rates being up, that's really where the premium growth comes from.
Well, appreciate it. Congratulations on a very good quarter.
Thank you.
Moving on. We'll take our next question from Greg Locraft from Morgan Stanley.
Hi, good morning, and congrats on a great start to the year. I wanted to just follow up on the commentary regarding book value growth this year. You mentioned you're hopeful that you can exceed the long-term 13% average for the corporation. How do you think about catastrophe losses from here? How do you think about catastrophe losses and equity market or partnership returns within that commentary?
Are you asking about each of them separately or collectively, Greg? I'm not sure I follow.
Separately, because obviously that's where the volatility can come in to achieving or missing that target. I'm just curious how you guys, quote, "model it" internally as you think forward. Knowing that it's impossible to predict with exact accuracy.
Okay. We obviously carry capital against all of the risks in our portfolio, not the least of which are the ones that you mentioned. Thinking about equity returns, for example, what we try to do is carry a balanced investment portfolio, particularly coming out of 2008, 2009. We saw opportunities to expand our investment portfolio, if you will, not with any undue risk. We generally like the direction or the position or the posture of our portfolio, and it has obviously performed well for us over the last couple of years and quarters, and particularly in the first quarter. We're not going to necessarily dramatically change, directly say, our investment portfolio in terms of allocation from here. We like the way it's positioned.
In terms of catastrophe risk, we still manage our catastrophe risk to about 11%, on an after-tax basis, having to our largest events to about 11%-12% of capital. We're not looking to meaningfully change that.
I guess, Dom, if I may, I think what I'm trying to get at.
We clearly, yes. Cat business, you get some volatility with that. We usually put in about nine points in our plan as to what we expect in terms of anticipated catastrophes. Obviously, we were below that for the first quarter. When I start looking forward, I'm going to put back in the average expectation, if you will, for the future. I think, frankly, we have less volatility on our books this year than we had last year. Again, between changes in terms and conditions, which have been happening both at the insurance level and at the reinsurance level, and I think have multiplied to make for a very, very meaningful change. When we start replaying even events like last year at $100 billion under varying scenarios, we come out with much better answers and much less volatility.
Trying to kind of get to the bottom line for your question. Yes, I very much expect to have or hope to have good results for the next nine months that give us a yearly result that's much better than the historical average. That certainly will encourage us to continue to buy back stock as well, and I think it'll lead to a good answer if it's a year that's not outrageous in terms of various catastrophes.
Okay. That's helpful. Nine points is what you budget for on cats.
Yes.
Is the equity market assumption like a seven, an eight, a nine? How do you think about that on the investment side? Again, knowing it's not perfect.
The equity markets are going, I think you can probably guess at that as well as we can guess at that. It's been a good place for us to be in the last year. We'll have an investment meeting every month to decide what we chart to do going forward. I think we'll leave it to you to put expected increases on the equity markets.
Perfect. Fair enough. Again, on that 13% growth number, I know it's a historical and hopefully you beat it, obviously you're off to a decent start, that points to earnings of north of $14 a share to get to that level. Street's not even close today to that. As you guys look at our models, what are we missing with regards to the earnings power of Everest Re?
Well, I think what you're missing currently is the improvement in the attritional results. Essentially, we've highlighted, as an example, the additional cap premium we've had just in the first quarter. Already taking into account April renewals, that number is now approximately $100 million. Joe mentioned that we expect that number to be an increase by the year's end of $150 million. That's having a dramatic improvement on our attritional combined ratios. In addition, the shift from pro-rata to excess, change in terms and conditions, is all pointed towards driving that attritional loss ratio down lower.
I would add insurance on top of that improving. Put it all together, it's really improved underwriting with some help from the markets, especially in the property catastrophe side. It's not so much any changes on investments or even future taxes. Share buyback, of course, will sweeten things. Yes, Greg, I think what's being missed is what Dom just said, improvement on the underwriting side.
Perfect. Okay, great. Then one last one, if I could, on capital deployment. It was nice to see the buyback in the quarter. Should we be thinking about buybacks plus dividends being at or below operating income going forward? What is your appetite at, well, I guess you're still at 83% of book value now, even after today's move, given the growth.
Look, our appetite is to buy back. We haven't issued forecasts, and we won't because we want flexibility, but we will continue to buy back. At 83%, we think it's very attractive to buy back. The fact that we've had very good earnings and certainly are hopeful of continued good earnings only encourages us to buy back more. That's our formula. Good earnings, buy back.
Okay, great. Thanks, guys.
Thank you.
Moving on. We'll take our next question from Amit Kumar from Macquarie.
Thanks. Good morning. Maybe just going back to the discussion on California comp. I wanted you to refresh us as to what you think is the gap between earned premium rate versus loss cost.
Earned premium rate?
Rates that we're achieving versus how much loss costs are going up?
Yes. one is the written rate and it's earned over time. There's a gap, right? It lags. That's what I'm trying to figure out. Do you think that on an earned basis, the margin is positive or negative or where do you think we'll get to at end of 2012?
We feel that by year's end, you'll see positive margins in our California comp book.
Maybe expand on the loss cost trends?
Go ahead.
Yeah, let me help. We, and certainly agree with Dom. We achieved, I think something like 9% increases on the book two years ago, this pure rate increase. Last year, I believe we averaged 15%. This year through the first quarter, we're averaging 10%. These are all compound. We think they're well in excess of claim cost inflation. It's hard to put a number on what claim cost inflation is exactly, but if you want to use half of that might be close to my best guess. That means as the rates continue to play out, we are surpassing claim cost by a pretty decent margin, and that's why we think each quarter, just on the back of that, should be better, and why by the end of the year, if not sooner, we'll be booking underwriting profits on California Comp.
Got it. Okay. That's helpful. I guess the other question was just going back to the discussion on 6/1 and your PMLs being flat 12% or so. I'm curious, just based on the market opportunities you're talking about, why not move that number higher? Just based on the margin you might be getting on that.
It's a good question, certainly we debate it. We have some other great opportunities like buying stock back, we want to limit volatility to make sure that we can act on that front as much as we want to as well. I think it's just a question of how much do we go on with the various opportunities that we have.
There's also opportunities to deploy our capital, as I mentioned earlier, spread our aggregate to other parts of the U.S. and the globe, continue to balance out that portfolio as rate increases outside of Florida present themselves. We'd like to deploy our capital in the most diversified way, that helps us do that as well.
Got it. Okay. Thanks for the answers.
Moving on. We'll take our next question from Michael Nannizzi from Goldman Sachs.
Thanks. Yeah, just a couple of questions, I guess, if I could. One is just trying in the insurance segment, trying to understand if we're thinking about 2012 premiums versus 2011. You had the STAR Program phase out in 2011. You had, it sounded like crop was booked as reinsurance in 2011. I'm guessing it was in this segment, and now it's going to be written on your own paper in 2012, and then you have the new A&H business. Just trying to think about what does that look like relative to 2011, just kind of with all these puts and takes from just a top line perspective?
I would anticipate that it would be kind of flattish for the year.
Okay
On the insurance front.
Okay, that makes sense. With crop, I'm guessing that the expense and loss ratios kind of look differently than the rest of the book. Should we assume then that the combined ratios look differently in the center, in kind of the two center quarters of the year versus the edges? Are there other contributing factors that would make that less relevant?
No, I think that you're right. I think what you're focusing on is the expense ratio on the insurance side was obviously challenged a little bit, not terribly so, but a little bit by the fact that the crop premium, in particular, was not a heavy number in the first quarter. As that begins to emerge to back towards that annualized $150 million or $160 million number, we'll enjoy the benefit of a lower expense ratio in the succeeding quarters.
Great. Thank you. One question, I guess, just on capital and your buybacks, clearly buybacks were big in the first quarter, not just relative to last year, but just even going back further than that, it was a large quarter for buybacks. You talked about writing more cat business and your PMLs have not risen. I guess just kind of want to understand, I'm guessing as you were saying before, it's in geographic concentration. Would you expect as you go through the year to see PMLs rise either from writing more business at June 1, or just the impact of continuing to buy back your own stock?
I don't anticipate any rise. I really like the formula that we've been using, which is we don't want increases in exposures. If anything, we probably want less, but we want more margin and more premium. I think that's the sign of an improving market. I think that's what we want our underwriters to achieve. Again, this is all coming on the back of a lot of losses that were paid last year, I think it's proper. I just like the plan as it currently is, and at least for this year, I'm not envisioning any increase in PML, certainly not in the peak zones.
What are you expecting to see, I mean, out of Florida? It sounds like you mentioned that conditions are improving, that you're optimistic heading into 6/1.
Increases the need for most buyers to buy more reinsurance at higher modeled prices, while it reduces the risk capacity of many of the sellers. Second, the state of Florida will be providing less reinsurance, which will increase the need for professional reinsurance capacity. Third, the underlying homeowners insurance rates have been permitted to increase, allowing for a bigger, healthier premium base. Moving on to casualty reinsurance, we continue to take a conservative position, essentially keeping our book to long-term key clients that we have made money with. Many insurance executives are anticipating meaningful improvements in this market. We hope they are correct, in which case we would adjust our appetite. For now, we will continue to hedge our bets. Our insurance operation continues to show improvement.
Whereas it ran through a 101 combined ratio for the first quarter, we expect continued improvement for ensuing quarters as rate increases achieved last year and this year on California workers' comp business works its way into the earnings. Our crop premiums, which are seasonal in nature, will be much heavier in subsequent quarters. Our financial institution D&O, our medical stop loss insurance, and our property insurance book continued to produce an underwriting profit. On the investment front, we continue to perform quite well despite lowering our duration to better insulate us from an upward move in interest rates. Strong cash flow continues to build our invested asset base. As previously announced, Craig Howie has joined us as Executive Vice President and will become CFO following our first quarter SEC filings.
Dom and I interviewed a large number of qualified candidates for the position. We were delighted that we were able to attract our number one choice. Dom remains CFO for the first quarter. Accordingly, he will present the financial report this quarter. Craig will be on the next call presenting the second quarter financial report. Craig has joined us, Dom will be able to spend most of his time on the operational side of our business. Our management team has never been stronger with Dom as President, Craig as CFO, John Doucette as Chief Underwriting Officer for Worldwide Reinsurance. Our many strong executives around the world like Mark de Saram, who oversees Bermuda, Europe, and Asia, and Ron Diaz, who oversees Latin America and the other international areas. Last quarter, I said I was optimistic about 2012. Clearly, now I'm only more optimistic.
I like our team, our plan, and our portfolio. We have achieved a compounded 13% growth in book value per share, including dividends, through our 17-year history as a public company. Given our first quarter, we are hopeful we will exceed that historical average this year. Dom?
Thank you, Joe. We are very pleased.
Should we read that to mean that if everything worked out the way you wanted it to, your exposure wouldn't change, you would just be earning more on that business? I guess the question is there a rate at which you would write more of that business than you are currently expecting if conditions are better?
It might be something modestly more, but it won't be something tremendously more. I think what we're looking for is less volatility, more profitability, and the ability to, again, continue to buy back the stock. I think it's a good spot. I think that's the sweet spot for us at this point. We're not looking to, in any significant way, increase the cat exposure in the peak zones. We have found opportunities in zones that we didn't have large exposure. Dom mentioned the Midwest, where we weren't big before the last year or so, and we will continue to look for other opportunities around the world. No, we don't expect any big increase in PML in Florida, even though we do expect improved conditions.
Great. Thank you.
Moving on, we'll take our next question from Howard Flinker from Flinker & Company.
Hello. I have two questions. One, in your usual releases, your loss ratio differs from the loss ratio in the 10-Qs. Why is that?
It should not. You'd have to be more specific in referencing-
For example, I haven't looked at this year's 10-Q, but last year in the 10-Q, the loss ratio was 120.4, and in your announcement it was 123.6, and that's happened for a number of quarters, so you're using some different measures. I want to know what the difference is.
Well, it could be reinstatement premiums, the impact of reinstatement premiums would be.
Wouldn't you know that when you announce your quarter?
Of course we do. I don't have the specifics in front of me, so I'm struggling a little bit with the particular.
Well, I don't know what the loss ratio's going to be in the 10-Q, this year you said the loss ratio was 60.4 and last year the similar number is 123.6. Correct? First page of your release. If you look at the 10-Q on the table, that 123.6 became, what did I say? 120.4? I have to flip some pages. Yeah. It's on page 28 of the Q. There's a consistent difference, so I don't understand the difference.
I don't have the Q with me, sir.
No, we'd be happy to call you back and do the reconciliation.
Okay. You used a term where I'm not acquainted. It's not runoff, but it relates to the premium. I forget the word now. My memory slipped me.
Well, on the insurance side, I was referencing the runoff of certain programs, essentially what I was referencing there was business that was terminating performance in the first quarter. In comparing the results to last year, consideration must be given to the catastrophes experienced in 2011. Over the long term, despite catastrophe levels in recent years, our returns have been quite favorable, and this quarter has moved our compound annual growth in shareholder value back towards our historical average. This most recent quarter, with $7.31 of growth in book value per share, or 6.5%, reflects an underlying 21% net income ROE. This return is reflective of the reinsurance attritional combined ratio, excluding the impact of reinstatement premiums, improving two points from 85% to 83.2%.
It should be noted that the 2012 results include a $20 million provision for the Concordia loss, and if adjusted for this, would mean that there was an underlying four-point improvement in the combined ratio results. Rate increases are a primary driver of this improvement, as well as the portfolio shift from pro-rata to excess contracts in heavily cat-exposed regions. The favorable impact of rate increases earning through is expected to continue during the year, as rate increases on cat-exposed business began picking up momentum starting last April after the Japan earthquake. In this first quarter of 2012, property cat excess of loss premium written increased over $50 million or 17.5%. Overall cat exposed premium is up 12% without any meaningful increases in PMLs for peak zones. Premiums in the reinsurance segments were up approximately 9% after adjusting for reinstatement premiums and foreign exchange.
This increase was less than the percentage rate increases we have cited due to shifts in geographic mix as well as shifting capacity to excess of loss from pro-rata. For this quarter, in addition to the attritional results, there was a catastrophe loss of $30 million for the February and March tornadoes. Despite these events, the reinsurance underwriting gain for the quarter as a result of portfolio changes and rate increases, as mentioned, was at $112 million. On the insurance front, there has been a similar improvement in the attritional combined ratio when compared to the full-year run rate. The insurance operation ended the full year 2011 at a 106 current year attritional combined ratio. This year's first quarter is, as expected, showing dramatic improvement over that run rate of a 101.2 combined ratio.
This improvement is in part being driven by over two years of rate increases, most notably and of course, using the term runoff implying that the premiums would be coming down each and every quarter as that.
Yeah, that I understand. That's not the word I was thinking. There's another word you used, and I haven't heard it used very much. It wasn't underlying premium. It was another word. I'll probably have to get back in queue, and I'll ask the operator.
That'll be fine. We'll go through when we chat with you.
Okay, thanks.
Thank you.
Moving on. We'll take our final question from Ron Bobman from Capital Returns.
Sounds like you have a bunch to talk about with Howard after the call. I just had a follow-up sort of more qualitatively than anything specific about your exact reserves. Qualitatively about Thailand. I'm just curious to hear what's happening there claim-wise. Obviously, more time has passed since the flooding. Is there a lot more certainty, I know is a strong word, but sort of the risk of variability in claims, claim amounts, et cetera? Could you talk about what's transpired over the last, I guess almost been six months or so?
That's a fair question. That's of course right up.
Thanks, Dom.
Right up until year-end, of course, we obviously saw a lot of upward pressure on claims from Thailand, late reporting, et cetera. We did, of course, a deep dive on the events there in closing out the year-end. We've had, and of course, we do the same thing every quarter with all of our events. Happy to report that this particular quarter has been very stable. As you do know that at the year-end, we had some additional provisions that we made given the uncertainty of 2011 around all of those events. I'm also pleased to say that we've not seen any movement around that number. That's been stable. We've had no reason to, quite frankly, utilize that IBNR at this point. It still exists there in the event that there is some volatility around those results. Pleased to report that it's been very, very stable.
Is that what you were after?
Yeah. I was a little more qualitative than specifically about any risk or actual movements in your numbers. Just, there's all sorts of claims that immediately following these events, people talk about BI, CBI, the linkages, I was just sort of qualitatively-
Well-
-to get yours or Joe's thoughts.
Yeah, I do think that in the case of CBI, for example, I think the industry was obviously very worried about that early on, that seems to have tempered quite a bit. I don't think the losses actually reached a level that the industry had feared.
Okay, thanks a lot for your thoughts. Appreciate it, and best of luck. Hope it continues.
Thank you.
At this time, that will conclude today's question and answer session, and turn it back over to our speakers for any additional or closing remarks.
I want to thank everybody for their time and participation, and we look forward to speaking with you again next quarter.
Thank you. That will conclude today's conference.
California workers' compensation. Rate increases in casualty and workers' comp have continued into the first quarter. In addition, the insurance portfolio is benefiting from a shift in mix with new products such as crop and A&H insurance, and a reduction in certain casualty programs. Insurance premiums are down quarter-over-quarter due to runoff of certain program business and a light quarter for crop premium. Last year's crop business was recorded evenly throughout the year as reinsurance premium. With the shift to insurance, this business now has a certain seasonality, which resulted in only $8 million of first quarter net premium. Nevertheless, we expect approximately $150 million of crop premium for the balance of the year, with an expected combined ratio in the low 90s, given more normalized weather events.
Turning to investment income, for the quarter, there was $152.4 million of income compared to $178.7 million one year ago, or a decline of $26.3 million. The difference is primarily due to income from limited partnerships. After adjusting for the impact of the $24 million decline in income from limited partnerships, core investment income is down by approximately 2% or $2.5 million. This is a result of declining reinvestment rates offset by new cash flows, which continues to be positive at $166 million this quarter. Capital gains were quite strong for the quarter at $99 million pre-tax and were reflective of the rising equity markets in the first quarter. The combination of solid investment performance and strong underwriting results produced net income before taxes of $343 million. Taxes for the quarter of $38 million results in net income of $305 million or $5.68 per share.
Operating results pre-tax equal $244 million and $240 million after tax. The low effective tax rate on operating income of 1.7% during this quarter was a result of the impact of the large realized gains in the quarter on the annualized effective tax rate calculation and other one-time adjustments. It is expected that the tax rate on operating income will normalize towards an overall effective rate of approximately 6% by year-end. Turning to other miscellaneous items, the $6 million gain on derivatives was comparable to the prior year's $7.5 million. The gain this quarter was a reflection of the rise in equity markets. Other expenses, which are mostly foreign exchange losses, were just slightly ahead of the prior year, but still relatively minor at $6 million. There was no meaningful change in corporate expenses, and other underwriting expenses increased by $3.5 million due to timing of certain expenses.
Commissions were increased by $2.6 million due to the change in accounting for deferred acquisition costs. Commissions are therefore down on a like-for-like basis due to the shift to XOL business, which carries lower commissions. This accounting change was adopted prospectively and will impact each of the next four quarters through commission expense for a similar amount. Adding to our income position this quarter was $80 million of unrealized gains after tax from our bond portfolio as a result of declining yields. When added to our net income plus foreign currency translation gains, we total $402 million of comprehensive income. After taking into account $25.6 million of dividends, $125 million of share repurchases, we ended the quarter at $120.30 of book value per share. Our total capital position of $6.3 billion leaves us with capacity to maximize our business opportunities as well as continue share repurchases.
We're also pleased to report that our A+ rating from S&P was recently affirmed with a stable outlook. Thank you. With that, I'll now turn it back to Beth for Q&A.
Jim, we're ready to take questions from the group.
Thank you. For the phone audience, if you'd like to ask a question, you may do so by pressing the star key, followed by the digit 1 on your touchtone telephone. If you're using a speakerphone, please pick up your handset or release your mute button feature to allow your signal to reach our equipment. Again, that is star one, we'll pause for a moment to assemble our queue. We'll take our first question from Matthew Heimermann, J.P. Morgan.
Hey, good morning, everybody. Just a couple of quick numbers questions before a bigger picture question, which is just the Concordia loss. What segment was that in, or was it spread across multiple?
It's U.S. reinsurance.
Okay. The reinstatement premiums in the quarter, what segment were those booked in?
International.
Okay.
They were mostly from last year's events.
Okay. Mostly from last year. Okay. The crop premium to earn the rest of the year. Is it fair to assume that probably about 90% of that will be written in the second and third quarters?
The bulk of that will be, yes.
Okay. Your tax rate comment, I was a little surprised by 6% because that would imply basically no tax on underwriting income if I'm doing the algebra correctly. Did I hear that right? Is that 6% true run rate? If so, what's the significant change there?
We're anticipating obviously our effective tax rate to grow from 1.7% to 6% by the end of the year. In that calculation would be any other anticipated adjustments that we might have to our tax accounts during the year.
Is that like favorable resolution of prior year tax matters, things like that?
Things of that sort, yes.
Okay. We shouldn't play that forward, let's say, to next year.
Probably not.
Okay. That's helpful. Big picture, Joe, on Florida, just with respect to the demand picture, because there clearly is some increased demand. Citizens, though, it looked like used the capital markets for a bit more of their program than people were anticipating. There's obviously been a lot of third-party capital set up alongside companies in the form of sidecars and other rated entities. I'd be curious if you could just talk to the supply side and how that's changing relative to demand side.
Well, you're right, Matt. There certainly are some moving parts, and some go one way and some go the other. Citizens, it does seem as if they've done more or will do more into the bond market. It's unclear if they'll buy more or less outright reinsurance. They're depopulating, of course, which may put more risk and exposure into other companies and create more need for reinsurance. I think the big things are RMS v11 and the fact that the premium base at the insurance level is getting healthier. On the supply side, again, RMS v11 for many reinsurers starts to limit the amount of capacity they can provide. I am not seeing any sort of groundswell in sidecars or new companies that I think is going to create any sort of meaningful additional capacity for the marketplace.
When you do look at the whole equation, I think it'll continue to be improvements for reinsurers at 6/1. That's my expectation.
Okay. Do you think for your portfolio, does that mean growing just with your existing clients? Let's say you get rate pass-through on pro-rata and maybe with depop-ing there's a little bit of growth in their books? Or are you expecting on top of that to be putting new accounts on the book as well?
Well, there may be some new accounts. Existing clients will certainly come first. The limitations will be that we don't really want to increase our PML in any significant way in Florida. Of course, if there's rate increase, we would be pleased about that.
Okay. Thank you much.
Moving on. We'll take our next question from Josh Shanker from Deutsche Bank.
Yes. Thank you. I was hoping you might help me out by walking through reinstatement premiums for 1Q11 by segment, then maybe talking about exposure growth by various segments, if we can understand premium exposure that way.
Okay. All right. reinstatement premium for this year?
Well, trying to sort of normalize this year's numbers with last year's by segment.
Okay. Just keep in mind that what you're trying to do is look at the attritional combined ratios excluding the effects of reinstatements we could give you those if that's easier.
I'm actually interested in your growth and where you're taking more risk, where you're taking less risk. It's hard to describe that with premium, I'd like the qualitative on top of the quantitative, I guess.
Okay. What we've got in U.S. reinsurance this year, $337,000 against $16 million of reinstatement premium last year in the first quarter. International, $4 million this year versus $9 million a year ago. Bermuda, zero this year against $5 million a year ago. That brings the total reinsurance to a little over $4 million against a little over $30 million a year ago.
Okay. That's great, Dom. Can we talk about where you're taking more exposure, where you're taking less exposure, and where the rates are justifying that and whatnot? You can handle that any way you want, I guess.
As we mentioned earlier, in all of our peak zones, our PMLs have not changed in any meaningful way. Any exposure growth or stretching at our agricultural has been primarily in the Midwest, maybe a little bit of growth in the Northeast, but most of our exposure growth has been in the Midwest.
Is that in terms of events like tornado or like New Madrid earthquake?
It would be all cat exposure.
All cat, okay.
There may be pockets like Dom just cited where we have done more, again, reacting to the rate changes that happened post the tornadoes that took place last year. In the main, when you get to the big zones, Japan and Europe and California and Florida, we really don't have at least increased risk, at least subject to one shock loss.
In the Midwest doesn't feel like one of those zones in ag as one of the big three.
It's not a big item for us, but it's bigger than it was before. It doesn't go into the peak zone area, no.
Okay. Very good. I appreciate all the.
And then-
Yeah, continue.
Josh, there's been other areas where we've decreased as well, of course.
Do you want to highlight that? Just trying to get as much information as possible.
A little bit of a reduction in Cal quake, some modest reduction in Japan wind, Canadian, British Columbia quake, things of that sort.
Okay.
Just to give you some broad executive summary, and it's broad, but last call I mentioned that we expected to write an additional $100 million-$150 million in pure cat in premium on our book of business. That still looks to be a pretty good number. Yet if you ask me in terms of just worldwide exposure, I think if anything, we're down a bit because terms and conditions are much better and again, the rates being up, that's really where the premium growth comes from.
Appreciate it. Congratulations on a very good quarter.
Thank you.
Moving on. We'll take our next question from Greg Locraft from Morgan Stanley.
Hi, good morning, and congrats on a great start to the year. Wanted to just follow up on the commentary regarding book value growth this year. You mentioned you're hopeful that you can exceed the long-term 13% average for the corporation. How do you think about catastrophe losses from here? Or how do you think about catastrophe losses in equity market or partnership returns within that commentary?
Are you asking about each of them separately or collectively, Greg Locraft? I'm not sure I follow.
Separately, because obviously that's where the volatility can come in to achieving or missing that target. I'm just curious how you guys, quote, "model it" internally as you think forward. Knowing that it's impossible to predict with exact accuracy.
Okay. We obviously carry capital against all of the risks in our portfolio, not the least of which are the ones that you mentioned. Thinking about equity returns, for example, what we try to do is carry a balanced investment portfolio, particularly coming out of 2008, 2009. We saw opportunities to expand our investment portfolio, if you will, not with any undue risk. We generally like the direction or the position or the posture of our portfolio, and it has obviously performed well for us over the last couple of years and quarters, and particularly in the first quarter. We're not going to necessarily dramatically change, I could say, our investment portfolio in terms of allocation from here. We like the way it's positioned.
In terms of catastrophe risk, we still manage our catastrophe risk on an after-tax basis, serving to our largest events to about 11%, 12% of capital. We're not looking to meaningfully change that.
I guess, Dom, if I may. I think what I'm trying to get at-
We clearly, yes. Cat business you get some volatility with that. We usually put in about nine points in our plan as to what we expect in terms of anticipated catastrophes, obviously we were below that for the first quarter. When I start looking forward, I'm going to put back in the average expectation, if you will, for the future. I think, frankly, we have less volatility on our books this year than we had last year. Again, between changes in terms and conditions, which have been happening both at the insurance level and at the reinsurance level. I think it multiplied to make for a very meaningful change. When we start replaying even events like last year at $100 billion under varying scenarios, we come out with much better answers and much less volatility.
Trying to kind of get to the bottom line for your question, yes, I very much expect to have or hope to have good results for the next nine months that give us a yearly result that's much better than the historical average. That certainly will encourage us to continue to buy back stock as well, and I think it'll lead to a good answer if it's a year that's not outrageous in terms of various catastrophes.
Okay. Then, yeah, that's helpful. Nine points is what you budget for on cats.
Yes.
Is the equity market assumption like a seven, an eight, a nine? How do you think about that on the investment side? Again, knowing it's not perfect.
In terms of where the equity markets are going, I think you can probably guess at that as well as we can guess at that. It's been a good place for us to be in the last year. We'll have an investment meeting every month to decide what we chart to do going forward. I think we'll leave it to you to put expected increases on the equity markets.
Perfect. Fair enough. On that 13% growth number, and I know it's a historical and hopefully you beat it and obviously you're off to a decent start, but that points to earnings of north of $14 a share to get to that level. Street's not even close today to that. As you guys look at our models, what are we missing with regards to the earnings power of Everest Re?
Well, I think what you're missing currently is the improvement in the attritional results. We've highlighted, as an example, the additional cat premium we've had just in the first quarter. Already taking into account April renewals, that number is now approximately $100 million. Joe mentioned that we expect that number to be an increase by the year's end of $150 million. That's having a dramatic improvement on our attritional combined ratios. In addition, the shift from pro-rata to excess, change in terms and conditions, is all pointed towards driving that attritional loss ratio down lower.
I would add insurance on top of that improving. Put it all together, it's really improved underwriting with some help from the markets, especially in the property catastrophe side. It's not so much any changes on investments or even future taxes. Share buyback, of course, will sweeten things. Yes, Greg, I think what's being missed is what Dom just said, improvement on the underwriting side.
Perfect. Okay, great. One last one, if I could, on capital deployment. It was nice to see the buyback in the quarter. Should we be thinking about buybacks plus dividends being at or below operating income going forward? What is your appetite, well, I guess you're still at 83% of book value now even after today's move, given the growth.
Look, our appetite is to buy back. We haven't issued forecasts, and we won't because we want flexibility, but we will continue to buy back. At 83%, we think it's very attractive to buy back. The fact that we've had very good earnings and certainly are hopeful of continued good earnings only encourages us to buy back more. That's our formula, good earnings, buy back.
Okay, great. Thanks, guys.
Thank you.
Moving on, we'll take our next question from Amit Kumar from Macquarie.
Thanks. Good morning. Maybe just going back to the discussion on California comp. I wanted you to refresh us as to what you think is the gap between earned premium rate versus loss cost.
Earned premium rate?
Rates that we're achieving versus how much loss costs are going up?
Yes. One is the written rate and it's earned over time. There's a gap, right? It lags. That's what I'm trying to figure out. Do you think that on an earned basis, the margin is positive or negative or where do you think we'll get to at end of 2012?
We feel that by year's end, you'll see positive margins in our California comp book.
Maybe expand on the loss cost trends?
Go ahead.
Yeah, let me help. Certainly agree with Dom. We achieved, I think something like 9% increases on the book two years ago, this pure rate increase. Last year, I believe we averaged 15%. This year through the first quarter, we're averaging 10%. Now these are all compound.
We think they're well in excess of claim cost inflation. It's hard to put a number on what claim cost inflation is exactly, but if you want to use half of that might be close to my best guess. That means as these rates continue to play out We are surpassing claim costs by a pretty decent margin, and that's why we think each quarter, just on the back of that, should be better and why by the end of the year, if not sooner, we'll be booking underwriting profits on California comp.
Got it. Okay. That's helpful. I guess the other question was just going back to the discussion on 6/1 and your PMLs being flat 12% or so. I'm curious, just based on the market opportunities you're talking about, why not move that number higher? Just based on the margin you might be getting on that.
It's a good question, certainly we debate it. We have some other great opportunities like buying stock back, we want to limit volatility to make sure that we can act on that front as much as we want to as well. I think it's just a question of how much do we go on with the various opportunities that we have.
There's also opportunities to deploy our capital, as I mentioned earlier, and spread our aggregate to other parts of the U.S. and the globe, and continue to balance out that portfolio as rate increases outside of Florida present themselves. We'd like to deploy our capital in the most diversified way, that helps us do that as well.
Got it. Okay, thanks for the answers.
Moving on. We'll take our next question from Michael Nannizzi from Goldman Sachs.
Thanks. Yeah, just a couple of questions, I guess, if I could. One is just trying in the insurance segment, trying to understand if we are thinking about 2012 premiums versus 2011. You had the STAR Program phase out in 2011. You had, it sounded like crop was booked as reinsurance in 2011. I am guessing it was in the segment, and now it is going to be written on your own paper in 2012, then you have the new A&H business. Just trying to think about what does that look like relative to 2011, just kind of with all these puts and takes from just the top line perspective? The top.
I would anticipate that it would be kind of flattish for the year-
Okay
on the insurance front.
Okay, that makes sense. With crop, I am guessing that the expense and loss ratio kind of look differently than the rest of the book. Should we assume that the combined ratios look differently in the center, in kind of the two center quarters of the year versus the edges? Are there other contributing factors that would make that less relevant?
No, I think that you're right. I think what you're focusing on is the expense ratio on the insurance side was obviously challenged a little bit, not terribly so, but a little bit by the fact that the crop premium, in particular, was not a heavy number in the first quarter. As that begins to emerge back towards that annualized $150 million-$160 million number, we'll enjoy the benefit of a lower expense ratio in the succeeding quarters.
Great, thank you. One question, I guess, just on capital and your buybacks, and clearly buybacks were big in the first quarter, not just relative to last year, but just even going back further than that, it was a large quarter for buybacks. You talked about writing more cat business and your PMLs have not risen. I guess just kind of want to understand, I'm guessing as you were saying before, it's in geographic concentration. Would you expect as you go through the year to see PMLs rise either from writing more business at June 1 or just the impact of continuing to buy back your own stock?
I don't anticipate any rise. I really like the formula that we've been using, which is we don't want increases in exposures. If anything, we'd probably want less, but we want more margin and more premium. I think that's the sign of an improving market. I think that's what we want our underwriters to achieve. Again, this is all coming on the back of a lot of losses that were paid last year, and so I think it's proper. I just like the plan as it currently is, and at least for this year, I'm not envisioning any increase in PML, certainly not in the peak zones.
What are you expecting to see, I mean, out of Florida? It sound like you mentioned that conditions are improving, that you're optimistic heading into 6/1. Should we read that to mean that if everything worked out the way you wanted it to, your exposure wouldn't change, you would just be earning more on that business? I guess the question is there a rate at which you would write more of that business than you are currently expecting if conditions are better?
It might be something modestly more, but it won't be something tremendously more. I think what we're looking for is less volatility, more profitability, and the ability to, again, continue to buy back the stock. I think it's a good spot. I think that's the sweet spot for us at this point. We're not looking to, in any significant way, increase the cat exposure in the peak zones. We have found opportunities in zones that we didn't have large exposure. Dom mentioned the Midwest, where we weren't big before the last year or so, and we will continue to look for other opportunities around the world. No, we don't expect any big increase in PML in Florida, even though we do expect improved conditions.
Great. Thank you.
Our next question from Howard Flinker from Flinker & Company.
Hello. I have two questions. One, in your usual releases, your loss ratio differs from the loss ratio in the 10-Qs. Why is that?
It should not. You'd have to be more specific.
For example, I haven't looked at this year's 10-Q, but last year in the 10-Q, the loss ratio was 120.4, and in your announcement, it was 123.6, and that's happened for a number of quarters. You're using some different measures. I want to know what the difference is.
Well, it could be reinstatement premiums. The impact of reinstatement premiums.
Wouldn't you know that when you announce your quarter?
Of course we do. I don't have the specifics in front of me, so I'm struggling a little bit with the particular numbers.
I don't know what the loss ratio is going to be in the 10-Q, but this year you said the loss ratio was 60.4, and last year the similar number is 123.6. Correct? First page of your release. If you look at the 10-Q.
Yeah
On the table, that 123.6 became, what did I say, 120.4? I have to flip the pages. Yeah. It's on page 28 of the Q. There's a consistent difference, so I don't understand the difference.
I don't have the Q with me, sir.
No, we'd be happy to call you back and do the reconciliation.
Then you used a term where I'm not acquainted. It's not runoff, but it relates to the premium. I forget the word now. My memory slipped me.
On the insurance side, I was referencing the runoff of certain programs. Essentially what I was referencing there was business that was terminated. Of course, using the term runoff, implying that the premiums would be coming down each and every quarter.
That I understand. That's not the word I was thinking. There's another word you used. I haven't heard it used very much. It wasn't underlying premium, it was another word. I'll probably have to get back in queue.
That'll be fine. We'll go through when we chat with you.
Okay, thanks.
Thank you.
Moving on. We'll take our final question from Ron Bobman from Capital Returns.
Sounds like you have a bunch to talk about with Howard Flinker after the call. I just had a follow-up, sort of more qualitatively than anything specific about your exact reserves. Qualitatively about Thailand. I'm just curious to hear what's happening there claim-wise. Obviously, more time has passed since the flooding. Is there a lot more, certainty I know is a strong word, but sort of the risk of variability in claims, claim amounts, et cetera? Could you talk about what's transpired over the last, I guess it's been six months or so?
That's a fair question. That's, of course, right up until the.
Thanks, Dom.
Right up until year-end, of course, we obviously saw a lot of upward pressure on claims from Thailand, late reporting, et cetera. We did, of course, a deep dive on the events there in closing out the year-end. Of course, we do the same thing every quarter with all of our events. Happy to report that this particular quarter has been very stable. As you do know that at the year-end, we had some additional provisions that we made given the uncertainty of 2011 around all of those events. I'm also pleased to say that we've not seen any movement around that number. That's been stable. We've had no reason to, quite frankly, utilize that IBNR at this point. It still exists there in the event that there is some volatility around those results, but pleased to report that it's been very, very stable.
Is that what you were after?
Yeah, I was a little more qualitative than specifically about any risk or actual movements in your numbers, just there's all sorts of claims immediately following these events. People talk about BI, CBI, the linkages. I was just sort of qualitatively trying to get yours or Joe's thoughts.
Yeah, I do think that in the case of CBI, for example, I think the industry was obviously very worried about that early on. That seems to have tempered quite a bit. I don't think the losses actually reached a level that the industry had feared.
Okay. Thanks a lot for your thoughts. Appreciate it. Best of luck. Our coverage continues.
Thank you.
At this time, that will conclude today's question and answer session and turn it back over to our speakers for any additional or closing remarks.
I want to thank everybody for their time and participation, and we look forward to speaking with you again next quarter.
Thank you. That will conclude today's conference.