Everest Group Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2023

There are 12 speakers on the call.

Operator

Welcome to the Everest Group Ltd. Third Quarter 2023 Earnings Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

Operator

I would now like to turn the conference over to Mr. Matthew Rohrman, Senior Vice President, Head of Investor Relations. Please go ahead.

Speaker 1

Good morning, everyone, and welcome to Everest Group Limited Q3 of 2023 earnings conference call. The Everest executives leading today's call are Juan Andrade, President and CEO and Mark Kosyancic, Executive Vice President and CFO. We're also joined by other members of the Everest Management team. Before we begin, I'll preface the comments on today's call by noting that Everest's SEC filings, including extensive disclosures with respect to forward looking statements, Management comments regarding estimates, projections and similar are subject to the risks, uncertainties and assumptions as noted in these filings. Management may also refer to certain non GAAP financial measures.

Speaker 1

These items are reconciled in our earnings release and financial supplement. With that, I'll turn

Speaker 2

the call over to Juan. Thank you, Matt. Good morning, everyone. Thank you for joining us. Everest's 3rd quarter performance was excellent.

Speaker 2

We delivered outstanding returns, including a near 20% operating return on equity and an annualized total shareholder return of 25%. We are leaning into the hard reinsurance market where favorable conditions in a flight to quality persist. As a lead reinsurance market and preferred partner, we are taking advantage of strong pricing, while deepening our client relationships We are positioned for success as we head into the January renewals. We also remain on track for January 2024 For the full deployment of the equity capital raised in May. Our primary insurance business Delivered strong underwriting income with a significant year over year improvement in the Q3.

Speaker 2

And our high quality investment portfolio continues to support our underwriting performance with outstanding returns. We achieved these results Despite another active catastrophe quarter, we tracked over 80 material events globally this quarter, resulting in a 9 month year to date industry loss Estimated at roughly $93,000,000,000 The industry is on course for another $100,000,000,000 loss this year. This reinforces the need for continued underwriting discipline and for additional pricing increases across all lines. As the world becomes increasingly complex, Everest value proposition is in greater demand. As you have heard me say before, we are on offense with strong tailwinds across all of our earnings streams, Strong balance sheet and top tier global talent powering it all.

Speaker 2

With that, I'll turn to our Q3 financial highlights Beginning at the group level. In addition to delivering exceptional returns, we drove substantial improvements across our group key financial metrics, underwriting income, net investment income, operating income and net income, and we delivered record increases in operating cash flow and book value per share. We grew the business at significantly expanded margins. Gross written premiums increased by 23% year over year in constant dollars, led by record quarterly reinsurance growth. We have generated $1,700,000,000 year to date.

Speaker 2

The group combined ratio of 91.4 Also improved year over year by 21 points, which translates to an underwriting profit of over $300,000,000 for the quarter and nearly $1,000,000,000 in underwriting profit year to date. Our attritional loss and combined ratios both improved We generated more than $400,000,000 in net investment income in the 3rd quarter and we delivered over $1,000,000,000 of net investment income In addition to the improved interest rate environment, this year over year improvement Was driven by strong returns from both our fixed income and our alternative investments. Turning now to our reinsurance business. The reinsurance division delivered an exceptional quarter With outstanding top and bottom line results and superb execution by our team. Leading into the strength of the market, We maintain our strategy of targeted and nimble capital deployment with core clients, resulting in significant growth across virtually all business lines And geographies have materially improved risk adjusted returns.

Speaker 2

We grew gross written premiums On a constant dollar basis and excluding reinstatements by 33% to $3,200,000,000 for the quarter. Excluding reinstatements were up 41% from last year. Property pro rata premiums increased 44%. Casualty pro rata agreements were up as well at 20%, while we carefully manage the casualty market cycle Internationally, we expanded in key target growth markets across Europe, Asia and Latin America. We also grew in specialty lines with strong margins, including aviation, Marine and Mortgage.

Speaker 2

Despite the active catastrophe quarter, we improved our catastrophe loss ratio significantly year over year, Reflecting our deliberate and consistent actions to manage volatility. The attritional loss and combined ratios were down year over year seat by 1.6 and almost 2 points respectively, with the overall combined ratio improving to 91%. This helped us achieve an underwriting profit of $234,000,000 Looking ahead, Our outlook for the January 1, 2024, renewal remains strong. We fully expect the robust pricing and favorable conditions To continue, and as a lead market, we stand to benefit. Our nimble, creative And collaborative approach allows us to simultaneously improve our economics and strengthen client relationships.

Speaker 2

This tremendous relationship equity Expectations for pricing and terms and conditions in the global property market Are now well understood, which should make future renewals more orderly. At recent industry events, including Monte Carlo In CIIB, our clients told us that they want more of our capacity and want to further broaden their partnership with us. Our confidence in our strategy and in the strength and durability of the market is high. I am excited by the magnitude of the We have created for the business. We are extremely well positioned with the expertise, global capabilities and financial strength to seize this generational market opportunity and to optimize the portfolio for the long term.

Speaker 2

Now turning to our insurance division. In our primary business, rate continues to exceed loss trend with improvements across multiple lines. We achieved an 11% increase in our core portfolio, excluding workers' compensation and financial lines. In addition to property, improved pricing was particularly strong in marine and other specialty lines. We grew the business approximately 4% and generated more than $1,000,000,000 in gross written premiums.

Speaker 2

Growth in the quarter was diversified seat and particularly strong across property where we see excellent opportunities and specialty lines such as marine, Aviation, trade credit and political risk. The growth was offset by reductions in workers' compensation Where we are methodically scaling our capabilities and our platform. Our focus remains on driving bottom line growth. We continue our disciplined underwriting to take advantage of high margin opportunities and reduce exposure in pockets of business seat that do not meet our profitability objectives. The attritional loss ratio improved year over year to 63%.

Speaker 2

Our pretax catastrophe losses at $10,000,000 net of estimated recoveries and reinstatement premiums We're modest, leading to an improvement in the reported combined ratio to 92.6. We achieved an underwriting profit of $66,000,000 in the quarter and a record profit of $196,000,000 year to date. We continue to attract and develop best in class talent. We share our vision for the company and our commitment to world class customer service. I am bullish about the momentum we have created for our business and Everest position in the market.

Speaker 2

We have every advantage at our disposal, a world class team, strong and diversified reinsurance and insurance platforms And market tailwinds at our back to accelerate our progress and build even greater value for our shareholders. With that, I'll turn it over to Mark to review the financials in more detail. Thank you, Juan, and good morning, everyone.

Speaker 3

Everest had another very strong quarter and built upon the momentum we saw in the first half of the year. The company reported Operating income of $613,000,000 or $14.14 per diluted share in the quarter, Equating to an operating income return on equity of 19.2%, year to date, total shareholder return while generating double digit growth as pricing and terms remain attractive in most lines of business around the world. The company's strong performance in the Q3 was led by our team's high level of execution in our core markets, And we have a number of tailwinds across both of our businesses heading into the last quarter of the year and into 2024. Looking at the group results for the Q3 of 2023, Everest reported gross written premium of $4,400,000,000 Representing 23.4 percent growth in constant dollars year over year. The combined ratio was 91.4%, Which includes 5 points of losses or $175,000,000 from pretax natural catastrophes Net of estimated recoveries, the natural catastrophe losses in the quarter were driven by a number of mid sized events globally.

Speaker 3

Group's attritional loss ratio was 59%, 120 basis point improvement Over the prior year's quarter, led by the Reinsurance segment, which I'll discuss in more detail in just a moment. The group's commission ratio increased 50 basis points to 21.4% on mix changes, While the group's expense ratio remains a competitive advantage of 6.1%, up modestly year over year as we continue to invest in our talent and systems within both franchises. Moving to the segment results and starting with Reinsurance. Reinsurance gross premiums grew 32.7% in constant dollars When adjusting for reinstatement premiums during the quarter, as Juan mentioned, this was a record for the segment. Strong growth was driven by double digit increases in property pro rata, property cat XOL, casualty XOL and casualty program and was broad based globally.

Speaker 3

The combined ratio was 91%, which improved from 115% in see the impact of the prior year period included $620,000,000 of pre tax catastrophe losses, net of recoveries And reinstatement premiums, largely due to Hurricane Ian. The attritional loss ratio improved 160 basis points 6% to 57.5% as we continue to achieve more favorable rate and terms, particularly in property, which we CFO, we expect to continue throughout 2024. The commission ratio was 24.8%, an increase of 90 basis similar quarter to the impact of reinstatement premiums from the Q3 cats last year, There was a modest 30 basis point underlying mix impact benefit excluding the Q3 2022 Reinstatements. The underwriting related expense ratio was 2.5%, which was essentially flat year over year. We continue to lean into the hard reinsurance market and the equity capital raise deployment remains on track And will be fully deployed by January 1 renewals.

Speaker 3

Moving to insurance, gross premiums written grew 3.5% significant portion of the business in constant dollars to $1,200,000,000 As you may have noticed, gross written premium growth was more modest this quarter as the division Enjoy double digit growth in a diversified mix of property and specialty lines, while being partially offset by lower written premiums In workers' compensation and financial lines, overall pricing remains ahead of loss trend and we continue to see attractive market opportunities across our book of business. We will also continue to have underwriting discipline in areas we find less attractive As we exhibited this quarter, the combined ratio was 92.6%, which improved from 103.5% in the prior year. The division benefited from a relatively low level of natural catastrophe losses in the quarter in the amount of 10,000,000 Net of estimated recoveries in reinstatement premiums, further demonstrating the success of our de risking actions on our portfolio. The attritional loss ratio improved slightly this quarter to 63.1%, driven primarily by business mix, Given the higher proportion of longer tail lines of business, the commission ratio improved 120 basis points, Largely driven by business mix as increased property writings earned through as well as increased volume of ceding commissions.

Speaker 3

The underwriting related expense ratio was 16.7%, largely driven by certain one off expenses And the continued investment in our global platform. And finally, to cover investments, tax and the balance sheet, Net investment income increased $255,000,000 to $406,000,000 for the quarter, driven primarily by higher new money yields, Our investment in floating rate securities and higher assets under management. Alternative assets generated $75,000,000 of net investment income, Sequential improvement as equity markets have continued to rebound. Overall, our book yield improved from 3.2% to 4.2% year over year and our reinvestment rate remains close to 6%. We continue to have a short asset duration of approximately 2.7 years, given the attractive level of short rates.

Speaker 3

And as a reminder, the 23% of our fixed income investments are in floating rate securities. For the Q3 of 2023, our operating income tax rate was 6.5%, which was lower than our working assumption of 11% to 12% for the year, and this was largely due to geographic income splits. Shareholders' equity ended the quarter at $11,300,000,000 $13,100,000,000 excluding net unrealized depreciation on available for sale fixed income securities. At the end of the quarter, net unrealized losses on the available for sale fixed income portfolio equate to Eximately $1,900,000,000 an increase of $242,000,000 as compared to the end of the second quarter, resulting from rate increases and foreign exchange movements. Cash flow from operations of $1,400,000,000 during the quarter was a company record and book value per share ended the quarter at $258.71 an improvement 22.4 percent from year end 2022, when adjusted for dividends of $5.05 per share year to date.

Speaker 3

Book value per share, excluding net unrealized depreciation, unavailable for sale fixed income securities stood at 301 point CECL 0.76 dollars versus $259.18 per share at year end 2022, Representing an increase of approximately 16.4%. Net leverage at quarter end stood at 18.6%, modestly lower on a sequential and year over year basis. In conclusion, Everest had an excellent Q3 of 2023 And is well positioned heading into the final quarter of the year and into 2024. And with that, I'll turn the call back over

Speaker 1

Operator, we're now ready to open the line for questions.

Operator

The first question comes from the line of Alex Scott with Goldman Sachs. Please go ahead.

Speaker 4

Hi, thanks. Good morning. First question I had for you is on the demand for property cat reinsurance headed into this next I'd just be interested if there's any color you can provide from early discussions and indications around that Piece of things in terms of just thinking through last year, the retentions brought up a bit. I think limits in certain cases weren't taken up as much as insured values were going up, that kind of thing. Are you seeing some willingness to reverse some of those actions?

Speaker 4

Do you think you'll see that kind of growth in the property cat reinsurance market this next year?

Speaker 5

On demand is that we see very strong signals That our clients are looking for more property cat capacity. And as you say, there was, I think, some pent up demand at oneone of 23 that ultimately didn't get fulfilled and so they're now back in the market and seeking capacity. We're having discussions with our clients actively about the oneone renewal and have also taken advantage of some opportunities to do some private placement activity in the latter half of this year to start filling in that demand. So I think that's a very strong signal. And our view with that is that, that will continue to drive really attractive returns in that market.

Speaker 5

As respects retention levels and The market's reaction to that and what might happen next year. Our view is overall, the movement in retentions were necessary and appropriate. There clearly was too much industry loss activity flowing into the reinsurance sector that needs to be retained in the primary market. Now does that mean that every single carrier landed in the right spot? Probably not, and I'm sure there'll be some adjustments around the edges.

Speaker 5

But fundamentally, I don't see any change in terms of going backwards on retentions.

Speaker 4

Got it. And in terms of a follow-up, I wanted to ask you about casualty reinsurance and just your comfort with the a price adequacy of the quota share commissions and so forth. We heard that there were Some negativity coming out of Monte Carlo from some of the European reinsurers. What's your perspective on some of the social inflation concerns and to see how well that's being captured in price and willingness to grow in some of those areas?

Speaker 5

Sure, Alex. It's Jim again. So as you say, I mean, this issue is clearly on the minds of the market, and it's been much discussed, Including by Everest with our customers at both Monte Carlo and CIAB. I think to fully understand Our view of the market and what happens next, you really have to understand the context of how we built our book of business. We've been incredibly deliberate seat and focused on managing the market cycle and growing with the best in class seatings around the world, right?

Speaker 5

So we timed it correctly. We grew after the market In 2019, we grew with best in class underwriters. We did not write the entire market. And I think some market participants did do that. And their results and their market commentary reflects that error.

Speaker 5

And you also may have heard recently a view expressed, I think, that reinsurers Have been slow to recognize the changes that are happening around social inflation and the other trends you mentioned. I mean, that is absolutely not the case with Everest. You would have seen our approach over the last 3 plus years. We've been very decisive on the reserve front. We've been prudent in our loss picks And which we've maintained, by the way, even though pricing over the last couple of years has exceeded our expectations, we've been updating our trend factors on a frequent basis.

Speaker 5

So We're staying very much close to these trends and staying on top of them. So today, we're sitting here with a very strong book With the best underwriters in the market, and those underwriters are not sitting by idly waiting for bad things to happen, which by the way is why we're starting to see signs of some reacceleration of rate taking among many of our clients. They're managing this closely. That said, social inflation is real. It's a real trend that needs to be managed.

Speaker 5

And so our approach, at whether it's the January 1 renewal that's coming up or really any renewal is to assess each deal on its merits. And we do that in a very rational way. If the deal passes muster, then and it's delivering terms we

Speaker 2

want, we'll write it.

Speaker 5

If it doesn't, we're more than happy to move away from it. We have many, many options seat to deploy our capital, which is why diversification is so important in our business, many, many different ways to get to our financial goals. And so we have ability to move among deals? The other point that I would make just relative to a piece of your question around ceding commissions. Given all these trends, our expectation is that ceding commissions will continue to improve.

Speaker 5

We've seen that movement already begin, and we expect it strengthen considerably as we move into 2024.

Speaker 4

Thanks for all the detail.

Speaker 2

You got it.

Operator

The next question comes from the line of Josh Shanker with Bank of America. Please go ahead.

Speaker 6

Yes. Thank you for taking my question. Maybe there's no answer to this question, but obviously, the attachment points have gone up this year and The portfolio is more risk averse than it was a year ago presumably. Given the moderate and frequent catastrophes this order, is there any way of putting into context what the cat loss would have been had it happened last year instead of this year?

Speaker 5

Sure, Josh. This is Jim. Well, one point I would start with, I know you've made a point that it was a moderate cat quarter, And I think we feel very good about our cat loss. But this quarter, from an industry perspective, was anything but moderate. I mean, we tracked over 80 events around the world.

Speaker 5

You had significant hurricane activity, which fortunately, because of landing points, etcetera, did not a significant damage. But the comment I would make, and as you say, it's sort of an unanswerable question, but you've seen our year to date performance in terms of our reported cat losses. And that's happening against the backdrop of a year. That's likely going to be another $100,000,000,000 plus industry loss a year, which is incredible, right? And our expectation is that, if you repeated the losses of 2022, for example, Our loss this year against those same events would have been meaningfully lower and that's because of attachment points, it's because of portfolio management, it's Because of aggregation, it's our underwriting discipline, it's all those things laddering up.

Speaker 5

So we have clearly changed and improved the risk profile of the book, Particularly when you're talking about a large number of mid to large size cat losses.

Speaker 6

Okay. And then if I can get one more in, you mentioned that you're ready to deploy the capital you raised earlier than year at January 1. Is there any way to discuss Degree to which capital is under deployed right now in 3Q 'twenty three and what the impact might be if you were fully deployed the way you want to be?

Speaker 5

Yes, sure. Sure, Josh. Jim again. Well, look, so just to kind of go back to what we said After the capital raise, our expectation was that we would begin the deployment meaningfully with the 7.1 renewal, That there would be incremental opportunities through the back half of twenty twenty three, and then we would complete the deployment at the January 1 renewal. So We have done exactly that.

Speaker 5

We've begun the process of deployment. We had a really strong 7.1. The back half of the year after 7.1 gets Quieter, but there's been some nice deal activity, both at the renewal periods as well as on a private placement basis. And based on the conversations we've had with our teams, we see a very strong path to Completing the deployment, we really have no concerns around that. So I'm not going to speculate on, well, what if I had just Sort of deployed all the capital at 7.1, but what I can say is the path to completing that process, as we described, is incredibly clear.

Speaker 3

Yes. Josh, it's Mark. Just to add a couple of points to Jim's commentary. So number 1, we're obviously very, very certain of our ability to deploy by 1-one. So you're dealing essentially with a 6 month timeframe between the raise and the 1-one deployment along the way.

Speaker 3

Clearly, we're deploying it Where we see fit, from an investment point of view, it's fully deployed the way we would like it for the time being. No issue for us to carry a little bit of excess capital. That's going to get remunerated to some extent, but we'll be, like I said, fully deployed by 511. And there's no benefit to rushing any kind of deployment. We want to stay disciplined and focused Just as our initial plan back in May for

Speaker 2

the equity raise indicated. Yes, Josh, and this is Juan. Just maybe to put a fine point on it. Rates are still improving in property and we also got paid a lot more for the risk that we took. And so that's part of the confidence that we have in being able to deploy this fully by the oneone renewal.

Speaker 6

And so we should expect a healthy growth with 11 given all that you've said?

Speaker 5

Yes, Josh, it's Jim. I mean, my expectation is we're going to grow our property Cat writings with our core clients very nicely. Again, we see significant demand. Our expectation is that risk adjusted rates will

Operator

The next question comes from the line of Yaron Kinar with Jefferies. Please go ahead.

Speaker 7

Thank you and good morning. My first question piggybacks on your thoughts on oneone renewals in the property reinsurance market. So certainly you sound very constructive. You're also talking about demand being up. But what about the supply side?

Speaker 7

Because I would thought that with relatively benign reinsurance losses this year and certainly in hurricane season, you're going to see an uptick in capital? So how are you thinking about that and the kind of supply demand dynamic, especially for maybe more remote risk, which seat to be where the insurers are more interested in playing right now into 11. Is the constructive view really driven by supply demand or is it more about sentiment and discipline considering maybe a more balanced equation this year?

Speaker 2

Yes, Yaron, this is Juan. Thank you for the question. Look, I think from our perspective, you're A couple of dynamics that really have not fundamentally changed since the beginning of the year since we've been talking about this issue. Number 1, there's still definitely a supply and demand imbalance that's out there. And I think as we've discussed before, whether that's $100,000,000,000 or $40,000,000,000 It doesn't really matter because it's a pretty big gap between supply and demand.

Speaker 2

And there has not been a particularly large or moderate influx of capital into the industry to close that gap. So there's definitely that imbalance that continues to exist on the supply side. In addition to that and building on what Jim said earlier, you're still seeing pent up demand and increased demand from our students seat across the board. A lot of that is also generated by frankly a flight quality. It's basically seedings wanting to work with more companies like us stronger balance sheet, we've been very constructive into renewals, etcetera.

Speaker 2

So from that perspective, we're not seeing anything in the environment right now That really fundamentally changes the pricing trajectory or the trajectory of this business going into oneone and frankly further. You saw the growth rates that I quoted earlier in my prepared remarks where we were up over 40% in property. You heard Jim's comments just a minute ago about what he expects C011? So we do expect that tailwind to continue to be behind us as we go forward. But let me ask Jim to jump in and see if he wants to add

Speaker 5

anything Yes, sure, Yaron. A couple of other points I'd add to what Juan said. I mean, there is I think you've referred to it as sentiment, but There's an underwriting discipline that underlies all of this, irrespective of how much capital is available to underwriters. In our industry, every underwriter I've talked They want to get paid more for the risk they've been taking, and that's a reflection of the last several years of elevated cat losses and even what we've seen This year and in this quarter, and I don't see any sign that that's dissipating. And then to your the other point you made around see more remote layers and that seems like an area where more people want to participate.

Speaker 5

You've seen some cap on activity up there, etcetera. I mean that How much rate gets added to the effects of 2023 and at which levels will remain to be seen. But In our view, it doesn't really matter. If there's more supply at the remote level, that means that just below that, there'll be great opportunities. We're very nimble and where we deploy our capital.

Speaker 5

And so those kinds of impacts don't really reflect or change our opportunity.

Speaker 7

Thank you. That's very helpful. And then if I can maybe shift gears to the insurance segment. And I think, Mark, in your prepared comments, you talked about see some mix shift as maybe driving the loss ratios to stay unchanged year over year despite see the fact that you're getting rate over trend, can you maybe elaborate on that a little bit? Because for me as an outsider, if I look at the book, it seems like Property and short tail lines grew by about 40% year over year in aggregate over the last 12 months.

Speaker 7

I see other specialty up 40% and then I see some of the lines that I would have thought have higher attritional loss ratios such workers' CCC comp, professional liability actually coming in a bit. So I'd love to better understand the dynamics there, if you could elaborate.

Speaker 3

Okay, Yaron. It's Mark. I'm going to start and then I'll ask Karam to finish and add some color to it. Look, first of all, I think the attritional loss ratio is pretty much right where it should be. We're still setting conservative loss picks for Casualty lines in particular, we are in an elevated risk environment.

Speaker 3

We want to be prudent on that. We're obviously getting rate and we're getting The kind of business we want to write in terms of cycle managing this particular marketplace. So you've seen some increases in writings and decreases in different lines and that gives you a sense of our Discipline in the marketplace. And so that mix, in the attritional loss ratio is coming out To broadly stable with last year, we don't see any problem with that. We've got an embedded margin in there that we're quite Comfortable with, quite confident in, and we think it takes into account the risk environment that's out there for a The different lines we've underwritten.

Speaker 1

Yes. And Yaron, I would add this is Mike Carm. I I would add to it a couple of things. First, the focus for us is, as Juan said in his opening comments, is about profitability. And we've been leaning into the 1st party lines pretty heavily, particularly on the property, aviation and marine.

Speaker 1

And then you see the other specialty lines like you mentioned, we're driving lines like current float up risk and energy where we see really, really strong risk adjusted returns, I think you'll see that play through hopefully on the year. And ultimately, that's being offset when you think about what we are in that cycle management that Mark mentioned, Particularly on the workers' comp and financial lines and that offsets it. If you think about the quarter for us, we are focused on mix. That is our general focus ultimately is to get the loss ratio You need to get lower. But for us, ultimately, it's really trying to make sure that we're leaning into the market where there's opportunity.

Speaker 1

And again, being disciplined around what we don't And we don't chase the lines that we think right now. We're not showing those risk adjusted returns. So if you took those out, particularly the workers' comp and particularly the financial lines, Our growth would have been where we are here to date around 9% plus. So I think for us, we tend to focus on the long term. It's really about generating the right mix And making sure that we're driving the best loss ratio we can do.

Speaker 7

Thanks so much.

Operator

The next question comes from the line of Michael Zaremski with BMO. Please go ahead.

Speaker 8

Good morning. Thank you. Maybe just looking at the paid to incurred ratio ex Catastrophes and reserves. It's been I think not just you all, but it's been ticking up a bit see year over year and quarter over quarter? Anything worth calling out or talking about in terms of trend there?

Speaker 3

Mike, it's Mark. I wouldn't say there's anything specific to say there. I think it's largely your portfolio mix That's just driving that trend, mix of property, the long tail lines. There's no particular significant set of claims or COVID settlements or anything like that, that's in the mix. So from my standpoint, It's just a natural outcome of the portfolio mix.

Speaker 8

Okay. That's helpful. I guess Switching gears a bit to back the discussion on ceding commissions. The business mix has changed a lot over time and I know you used the I think the wording it could improve considerably. Any perspective on kind of like if The questions are still many points different than they were many years ago, right?

Speaker 8

But I know your business mix has changed a lot too. So is there any context about what considerably could mean if things do go that continue to move in favor of reinsurers seat into 2024?

Speaker 5

Yes, Mike, this is Jim Williamson. Look, we've one of the things we've said this year is that ceding commissions on Casualty pro rata overall have moved by about a point and obviously it differs by deal and geography and all those sorts of things. I think our view is that, that will accelerate and needs to accelerate. And we've certainly seen some anecdotes That you probably would have heard of as well of deals in the back half of this year moving by more than that, and we've seen some of that as well. And I think that bodes well for us in 2024 being able to accelerate from that one point to a larger number.

Speaker 5

I'm not going to predict what that ends up being, but the trend line around getting a better outcome is certainly there.

Speaker 8

Okay, got it. And maybe lastly, Wanted to make sure on Everest historical cat load guidance, is it correct that Your last cat load guidance was less than 6%. And I'm we're I clearly heard what you said about cat losses last year happened this year, what would happen? But then also you're probably leaning into the market seat in place as well and business mix has changed? So just is the last 6% the most recent update?

Speaker 3

Yes, roughly 6% is the expected annual cat load that we would have Our operating plan for the year. Now that's consistent broadly consistent with what we said at IR Day back in 2021.

Speaker 7

Thank you.

Operator

The next question comes from the line question of Mike Ward from Citi. Please go ahead.

Speaker 9

Thanks guys. Good morning. I was just wondering if you had any preliminary view on maybe the industry exposure for Hurricane Otis and Acapulco?

Speaker 2

Yes, sure thing, Mike. This is Juan Andrade. Look, I think Ode is a great example of what we've been talking about over the last few minutes. And the reason why, Frankly, the property cat market will continue to be hard into 2024 and 2025. Let's put it into context of what we said earlier, right?

Speaker 2

We saw 80 events roughly around the world that we were able to track. The industry loss now is at about $93,000,000,000 9 months year to date Headed well probably into $100,000,000,000 plus by the end of the year. And now you have something like Godus, which if you follow what happened with that storm, It basically exploded from being a 70 mile an hour storm to being 165 miles an hour in a period of about 12 hours, which was pretty significant strengthening and then hitting Acapulco, right? So this is one of the things that when you look at the world, you realize that you still need to continue to push for pricing, you need to continue to push for cash flow points being up, terms and conditions, etcetera. Look, From our perspective, we expect that loss to be modest at the end of the day.

Speaker 2

I can't speak for others out there, I think this is also the discipline that you've seen from us on how we manage our volatility in our accumulations around the world.

Speaker 9

Thanks. That's helpful. Maybe on the expense ratio front, the internal investments seem A little weighted to insurance. I guess as you look to 2024, do you expect that to set up softer comps in that segment or for the group

Speaker 3

I missed the last three words on that. Sorry, could you repeat it, Mike?

Speaker 9

I was just looking to 2024, I was wondering if you expect the expense ratio Weighted towards insurance to set up softer comps, whether it's insurance or just for the group overall?

Speaker 3

Well, we're continuing to expand in insurance, both in North America, but also internationally. So that comes with a bit of Front end loaded expenses, something we think we can manage well within our combined ratio expectations for the business. It's a bit elevated right now compared to prior years as we start to gear up, But it's not something that I would expect to have any kind of meaningful impact on our combined ratio going forward. Having said that, I think the benefits of our expansion, this is something we'll get into in our Investor Day, but that's something we feel very Confident about going forward in terms of being a future profit driver and an expansion of our franchise

Operator

The next question comes from the line of Ryan Tunis with Autonomous Research. Please go ahead.

Speaker 10

Hey, thanks. Good morning. So I just have one. And I guess it's on the Kilimanjaro bond. So Earlier in the year, it looked like you guys let a couple of 100,000,000 of those expire without replacing them.

Speaker 10

And it looks like There's almost another $500,000,000 of those that expire at year end. I'm just curious if there is a plan To replace those with some other form of reinsurance or should we think about the capital raise you did earlier CFO potentially going to fill a little bit of that?

Speaker 3

Brian, it's Mark. So let me take a shot at this. I think whenever we talk about our capital shield, we always start with the gross risk We're underwriting. We essentially want to be gross underwriters, not a flow through or anything else in terms of the use of retrocession Cat bonds, etcetera. So that's kind of the starting point.

Speaker 3

So we have a substantial laddering of cat bonds, Typically over a 5 4 or 5 year type of duration, there are different layers of which they Attach and our book changes as well on the growth side from time to time. So we take The gross portfolio that we're underwriting into account, we take our overall cat, physician into our account and then we start to modify. And there's a couple of other factors that would go into it. So let me just start with the easy stuff. So we always We have the ability to use and we prefer to use Mount Logan, our 3rd party sidecar vehicle, as much as We can in terms of hedging and aligning it with the kind of risk we're taking in property cat.

Speaker 3

Tactical use of ILWs on a periodic basis is another tool that we use. And We use this proactively depending on where the efficiency of the pricing and the placements are for cat bonds And ILWs and then Logan, of course. So, we also take into account the capital position. You referenced Capital raise in May as an additional source of capital base for the company. So that definitely enters the equation.

Speaker 3

And lastly, I would throw into the mix The economic capital at risk graph that we talk about frequently in our investor deck. And essentially, that space that we're comfortable playing in shows that we have a lot of room to expand risk appetite within our tolerances, for tail risk, earnings at risk, and we tend to do that especially when we see superior margin on the types of risks that we're underwriting, particularly property cat. And so we take all of these factors that I've mentioned to plan out our capital shield going forward. And so Obviously, we had a conscious decision to not renew the I think we had 2 bonds in the spring. We did add another one at a different layer, but net net, there was a reduction.

Speaker 3

We've got significant capacity that's Up for maturity in, I believe it's November, December, and that's something that we're We're taking into account now, but I've given you the framework of how we look at it. So I can assure you that given our ambition as a gross underwriter And pursuing superior risk adjusted returns, we're going to look at the options, on the Capital Shield side relative to our gross book

Operator

The next question comes from the line of Gregory Peters with Raymond James. Please go ahead.

Speaker 11

Good morning, everyone. I guess I wanted to step back and with the substantial growth And as you're leaning into the market and property in the reinsurance side and then you're also reporting the growth and the insurance operations on Property Shoretel. Could you just talk to us about how you're managing risk aggregation because it's a lot of growth And just I'm sure there's a lot of involvement in managing your risk, but give us some perspective there.

Speaker 5

Yes, Greg, this is Jim Williams. And it's clearly an important topic. We have a very robust risk management process at Everest that spans Both our reinsurance and our insurance business across really all aspects of the risk we're taking, whether it's property cat, it's credit risk, Casualty, etcetera. And there are robust processes underneath that framework, where underwriters in the respective Divisions are analyzing our aggregations, assessing risk reward. We have a company wide risk reward scorecard that shows us where getting best paid for capital deployment, and we leverage that process to ensure that we're moving capacity To the areas of the business that drive the best returns.

Speaker 5

And so what you would have seen, for example, early this year, if we rewind the clock In those discussions, Mike, Carm and I were staying very close on what was happening in the reinsurance market. And so reinsurance started consuming more of the available capacity That's where the opportunities lie. That started to balance out a little bit more now as the opportunity in insurance has strengthened so much.

Speaker 2

A So that's the process we use.

Speaker 5

If you look at our P and Ls by peak zone, we're still in really good shape In all of our peak zones, we do monitor it very carefully. But as market indicated on an earnings and capital at risk or if you look at our stated risk tolerances in our ORSA filings, etcetera, we're all well within risk tolerances, which gives us room to grow both Reinsurance and insurance as these opportunities emerge. Yes, Greg.

Speaker 2

And one thing that I would add to what Jim just said, and this is one. A lot of it is rate, not necessarily exposure, right? And that's the trade that we've talked about in the past that is an excellent trade for us, which is We're able to get significant rate for similar exposure and significantly better risk adjusted returns. And that's our focus right now and Basically, we're achieving that.

Speaker 3

Yes. Sorry, I guess you're going to get all 4 of us. Greg, it's Mark here, and then I'll let Mike finish it off. I just want to add 2 points. So number 1, we have very clearly defined risk tolerances inside the company for how much risk We're willing to take.

Speaker 3

Those are not going to be breached. Those are governed at the board level, respected by management, and we have clear process to manage that stuff. A Lot of flexibility there as well. And number 2, we are fairly diversified and broad based with our exposures as well on a geographic line basis, which also helps. You're not seeing single concentrations that are onerous, in the different zones.

Speaker 3

Mike? Sure.

Speaker 1

Yes. And I'll finish it off.

Speaker 2

I guess just from

Speaker 1

a perspective, you've seen over the last few years in insurance, we've meaningfully de risked a lot of the portfolio, particularly in the peak zones. Over the last 2 years alone, you saw us exit the for the condo business, not just because it wasn't profitable, but because it really didn't meet our risk adjusted returns and we just saw the regulatory environment and litigation environment changing. And more importantly, the specific portfolio actions you've taken around our Hurricane 100 PML over 40%, we reduced that. We took our gross limits our wholesale, which is more cat prone again and reduced that over 40% deployed limits over the last year. And what you're seeing from us right now is CCE getting much, much better risk adjusted returns, but really derisking our concentration around these peak zones and really basically diversifying the portfolio, not just domestically, but globally as well?

Speaker 11

Well, that's good detail. Juan, I think you mentioned the durability of the market Wind and which has not been an issue this year at least in any sort of material way, but There hasn't been many losses in fire or DIC in North America either. And I'm just curious, I know it's rather a specific question, but do you see any change in pricing or terms in fire or DIC going into oneone, considering the lack

Speaker 2

the fundamental question is to how much capacity is available for property in general. So I think it is part of the same equation. And so in our view, we expect this market to continue the way it is. You look at the rates that you're getting in wholesale in North America Are basically 30% or plus. In the retail property in North America, there are 20% to 30% and see?

Speaker 2

That has continued. That sort of gone unabated in this period of time. So I think that same dynamic that we talked about earlier where not only is there Supply and demand issue here, but there's also the psychology that Jim was talking about. I think Yaron may have asked a question. The environment hasn't fundamentally changed.

Speaker 2

And so because of that, I don't think there's going to be a fundamental change in pricing in property ex cat at this point in time.

Speaker 11

Fair enough. Thank you for the answers.

Speaker 2

Thanks, Greg.

Operator

The next question comes from the line of Meyer Shields

Speaker 8

1st, Mark, in addition to the investment spend, I think you noted some one time expenses in insurance. And I was wondering whether there's any way of quantifying that?

Speaker 3

Well, one time expenses. So let me break Down into kind of 2 components on the insurance expansion. So I would say roughly Maybe a little less than 2 thirds of our expenses compensation related, so human capital. So we are expanding. That's going to provide future bandwidth Underwrite and current bandwidth, it's clearly actionable.

Speaker 3

The second piece is you are dealing with Technology spends as well to improve systems and middle office process type stuff. So that stuff is making its way through. It's very manageable. It's a relatively modest amount and it's something that comes first And the growth is trailing somewhat, but we definitely see this paying for itself and again manageable within the Combined ratio assumptions that we have for the plan.

Speaker 8

Okay, perfect. That's very helpful.

Speaker 2

The second question, just to make

Speaker 8

sure I'm seat overlooking anything? I think, Juan, you've talked about a lot of executives have noted that this year or sorry, the 1onetwenty CFO, reinsurance renewals should be much more orderly. Is there any benefits to the more chaotic renewals that we saw last year to that? Were there any good guys embedded in that?

Speaker 2

Well, look, I mean, you always want to be in a place where Your customers, your seedings and the brokers sort of understand the situation and understand what you are Essentially putting forth the storms, conditions, etcetera, etcetera. And I think that was a more challenging renewal last year because the market changed Quickly, I think what we see now is basically what I articulated earlier, where at this point in time, I think we all recognize the world that We're living in, we all recognize the environment. Discussions have begun much earlier than they did last year. And so from that perspective, I think that's actually Pretty good thing. So we feel pretty good about it.

Speaker 2

I think frankly, the only benefit that I would have seen last year is the fact that Everest was one of 1st, if not the first, to get out and offer constructive terms and conditions and pricing, whereas a lot of our competitors We're still looking to essentially fill the retro buckets to know how much capacity they had. So I think for us, that was a good guy last year, but I think having an orderly market is good for the industry.

Speaker 1

Perfect. Thank you so much.

Speaker 2

Thanks, Manav.

Operator

The next question comes from the line of Ryan Meredith with UBS. Please go ahead.

Speaker 2

Yes, thanks. Just one quick one here. Mount Logan, I'm just curious, what plans are for 1.1. You can think you're going to be able to increase capital there and maybe investor demand for those types of facilities?

Speaker 5

Yes, Brian, this is Jim Williamson. Yes, Mt. Logan has had a pretty solid year from a capital raising standpoint, particularly against the backdrop of a lot of the big ILS allocators sort of being on the sidelines share, we've raised over $250,000,000 AUM sits just under $1,100,000,000 so feeling very good about that. The team at Mount Logan has done a terrific job of building a pipeline of what we view as sort of world leading allocators, meaning the really smart see the long term money, the sovereign wealth funds, the pensions, etcetera. And we do expect some incremental capital raising at oneone and throughout CFO of next year.

Speaker 5

I will say as a general comment, I've had a number of discussions recently with some large pension fund allocators. A The challenge they still have is they've seen a lot of deterioration in other parts of their portfolio, which tends to bump them up against their ILS risk limits. And that is easing a little bit, but it's still a factor. And so I think, which by the way, we view as a good guide, it helps sustain significant momentum in our underlying market, which is our critical priority. But my guess is that we'll have some nice successes in 2024.

Speaker 2

Great. Thank you. Appreciate it.

Speaker 5

Got it.

Operator

The last question for today is a follow-up from Mike Ward with Citi. Please go ahead.

Speaker 9

Hey, guys. Thanks. I was just I wanted to follow-up on the Otis and Acapulco. Is there any Quantification on the potential industry exposure? I know it's early.

Speaker 2

No, Mike. This is Juan. I think it's so early. I mean, this thing just made landfall really yesterday at this point in time. And for us, as I said, this is a modest exposure Based on how we have managed the portfolio to reduce the volatility, but I think it's way too early.

Speaker 2

We haven't seen anything yet from any of the modeling agencies at this point in time.

Speaker 9

Okay. Thanks so much guys.

Speaker 5

Thanks, Mike.

Operator

That was the last question.

Speaker 2

Okay. Well, thank you all for your questions and for the excellent discussion. We had an excellent quarter, and I look forward to discussing the company's strategic plan at our Investor Day on November 14. I hope to see you all then.

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Key Takeaways

  • Everest delivered exceptional Q3 results with a 19.2% operating return on equity, 23% growth in gross written premiums and a combined ratio improvement to 91.4%, driving an underwriting profit of over $300 million.
  • In reinsurance, gross written premiums rose 33% (41% ex-reinstatements) to $3.2 billion, the combined ratio improved to 91%, and Everest expects continued strong pricing and demand heading into the Jan 1, 2024 renewals.
  • The primary insurance division posted 4% GWP growth to more than $1 billion, achieved a combined ratio of 92.6% and generated a Q3 underwriting profit of $66 million (a record $196 million YTD) on disciplined underwriting and favorable rate trends.
  • Net investment income exceeded $400 million in Q3 (over $1 billion YTD), driven by higher new-money yields, floating-rate securities and alternative assets, lifting the book yield from 3.2% to 4.2% and reinvestment rate near 6%.
  • Everest is on track to fully deploy the equity capital raised in May by the January renewals, while a strong balance sheet ($11.3 billion equity) and record $1.4 billion operating cash flow support further growth.
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Earnings Conference Call
Everest Group Q3 2023
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