Q3 2019 Earnings Call
Good day and welcome to the Everest re third quarter 2019 earnings call Today's conference is being recorded.
This time I would like to turn the call over to Mr. Jon Levenson. Please go ahead Sir.
Thank you Holly and welcome the Everest re group limited 2019 third quarter earnings Conference call.
Yeah, just executive leading todays call, our Dom Addesso, President and Chief Executive Officer, Juan Andrada, Chief operating officer.
Craig Howie.
Pete and Chief Financial Officer.
John Doucette, ATP, and President and CEO reinsurance Division.
Jonathan just veto GBP, <unk>, president and CEO he ever insurance Division.
Before we begin I need to press the comments on todays call by noting that are actually see filings include extensive disclosures with respect to forward looking statements.
Management comments regarding estimates projections and similar are subject to the risks uncertainties assumptions as noted in these FCC filings.
Management nails refer to certain non-GAAP financial measures. These items are reconciled in our earnings release and financial supplement.
With that I turn the called ever Dom Addesso.
Thanks, John Good morning, welcome to our call.
In the third quarter ever produced operating earnings of $3.39 per share despite experiencing $280 million of cat losses.
Our underlying performance continued to be excellent.
Our attritional underwriting gain of $250 million nearly offset the cat losses.
On a year to date basis, our underwriting profit was $365 million.
$700 million excluding cats.
This is a solid outcome and demonstrates our ability to absorb volatility.
We do a large and well diversified book of business.
When combined with another solid quarter of investment income the year to date operating income is at $742 million.
These outcomes are being driven by an organization that has evolved dramatically over the last several years due to an intentional strategic focus and supported by market conditions.
What you see for example is a continued effort to reduce cap volatility as a result of growth.
First of occasion and exposure reductions.
In reinsurance the growth has been focused largely on mortgage risk and casualty lines, where rates terms and conditions have been improving.
Keep in mind that are pushing to these lines, especially casually.
Was of a more recent vintage.
For many years, we deemphasize casually.
Only recently as the market has been improving or we've been growing premium.
The greatest diversify our however has been our successful push into the specialty insurance space.
By year end, we will be closing in on $3 billion as annual gross premium.
And as you have seen the profit picture there remain solid.
Our timing on these initiatives has been good.
Rates are improving in many sectors and yes, while there have been pockets of frequency and severity trends to take note of.
These are managed through conservative loss picks up through the cycle.
We're in a long term business and at times cost of goods sold may seem uncertain.
Well, we are less worried about that and what we see on trend versus rate.
Given our book of business and where we haven't picked.
The market is poised to continue higher as a grapples with trend increasing weather events and anemic investment returns on new money.
Now is not the time to retreat.
With that let me pass it over to my colleagues to give you some of the details around the story.
First one on dry was you know is my successor effective January Onest Juan.
Thank you Don it's a privilege to be here, it's a member of the adverse team.
After eight weeks on the job I thought the opportunity to start getting deeper into our businesses and to meet our employees major customers in our key distribution partners in the U.S. and around the world.
I'm very appreciative for dumps support and data the entire leadership team as we transition responsibilities at the end of the year.
Tom has built a great business still we will continue to advance.
Everest is well positioned for the current market environment, we have a highly diversified franchise with a strong team of smart and experienced leaders a rock solid balance sheet and enduring customer relationships.
I had been very pleased with the talent division.
Energy the focus and the pride enough risk that everyone I have met a show.
The feedback that I have received from our customers has been universally Pos.
The value the longevity of our trading relationships, our financial strength and sizable capacity.
Our knowledgeable underwriters and the access to products and the right locations, along with our responsiveness and innovation.
We have two very strong and complementary businesses. We are a top 10 global reinsure with a 47 year history.
We have a seasoned and strong underwriting team around the globe.
Rob product capabilities dynamic strategy that is responsive to market conditions best in class data driven management systems and a competitive expense advantage.
We also have an entrepreneurialism and growing primary specialty insurance business with a client first culture of providing solutions with more than 150 products and services.
This team is led by highly skilled industry professionals, who are focused on sustainable profitability and growth and who have the underwriting discipline and built the tools and processes required to ensure continued success.
While being very cognizant to the challenges facing our industry, we also see opportunity.
These industry challenges are resulting in improving pricing and terms and conditions in both insurance and reinsurance and some classes of business, we're seeing the strongest rate movement in many years.
This change in the market is long overdue and we remain committed to being selective to where we dedicate resources and capacity.
I'd Everest, we will continue to focus on underwriting profitability and sustainable growth with a relentless focus on execution.
Diversifying our business always strengthening our enduring relationships managing our cat exposure and maintaining our strong balance sheet that provides the foundation for the security that we provide to our customers.
I am optimistic about the future about first we have a strong franchise that is positioned to succeed regardless of market conditions with that I turn the call over to Craig.
Thank you won and good morning, everyone.
For the third quarter of 29 team Everest reported net income of $104 million. This compares to net income of $198 million for the third quarter of 2018.
On a year to date basis Everest had net income of $792 million compared to net income of $474 million for the first nine months of 2018.
The 2019 result represents an annualized net income return on equity a 13%.
These results were driven by a strong underwriting performance across the group our highest quarterly investment income in the last nine years and lower catastrophe losses compared to the first nine months of 2018.
In the third quarter of 2019, the group incurred $280 million of net pretax catastrophe losses compared to $230 million in the third quarter of 2018.
The catastrophe losses related to hurricane Dorian at $160 million and Tiphone faxing at $120 million.
On a year to date basis. The results reflected net pre tax estimate of catastrophe losses of $335 million in 2019 compared to $795 million in 2018.
Everest reported $52 million a favorable prior year reserve development in the quarter.
This primarily related to a onetime commutation of a multiyear contract that reduced prior year carried loss reserves by $44 million.
Which was offset by $44 million of commission paid.
Effectively no material impact to the underwriting result in the quarter.
Another $4 million of the favorable development was identified through reserve studies completed in the third quarter of 2019.
Excluding the catastrophe events and favorable prior year development.
Underlying book continues to perform well within overall current year Attritional combined ratio of 87.7% through the first nine months compared to 87.0% for the full year 2018.
This increase was primarily due to the business mix and the reinsurance segment, which as we have noted.
Has been writing more casualty business over the past several quarters.
Turning to investments.
Pretax investment income was $181 million for the quarter and $501 million year to date on our 20 billion dollar investment portfolio.
Investment income was up $60 million or 14% from one year ago.
This result is primarily driven by the growth and invested assets coming from our record cash flow, which was $1.5 billion during the first nine months.
Some of the strong cash flow comes from the increase in overall premium volume, including an increase in the casualty writings, which has a longer tail and allows us to invest the money longer.
Before moving to taxes I'd like to point out that we included for the first time on page 15 in the financial supplement a split of our net investment income between the insurance segment and total reinsurance.
This shows an indication of the contribution provided by each segment to pretax operating income.
And reflects $361 million allocated to reinsurance and $140 million of net investment income allocated to the insurance segment.
The split is based on gross carried loss reserves, excluding catastrophe reserves.
We are including this information to better demonstrate the total contribution by business segment and illustrate the unrecognized embedded value of the growing insurance franchise.
This is consistent with previous comments encouraging investors to look at efforts.
On a some of the parts basis.
On income taxes, the tax benefit we recorded in the quarter was the result of the amount and geography of the losses associated with the catastrophes and the favorable prior year reserve development associated with the onetime commutation of a multiyear contract that I previously mentioned.
Year to date effective tax rate of 9% is an annualized calculation that concludes plant catastrophe losses for the remainder of the year.
Higher than expected catastrophe losses would cause the tax rate to trend lower than the current 9%.
Shareholders' equity for the group ended the quarter at $9 billion up over $1 billion or 14% compared to year end 2018.
The increase in shareholders equity is primarily attributable to $792 million of net income and recovery and the fair value of the investment portfolio.
Our balance sheet and overall financial position remained strong.
We maintain industry low debt leverage a high quality investment portfolio and continue to generate positive cash flow.
You will notice some minor revisions related to foreign exchange in our financial supplement.
None of these revisions impact operating income.
Thank you and now John to set will provide a review of the reinsurance operations.
Thank you Craig good morning.
The magnitude of industry losses over the past three years has been extraordinary for the reinsurance market. Although the insurance industry would have hoped for a quieter 2019 to regroup.
This has not been the case.
The losses have shaken up the primary reinsurance and retro markets, creating dislocation.
And in turn opportunity.
No not an across the board traditional hard market, we see a foundationally more sustainable environment for the near and medium term in many lives.
Multiple factors are pushing the market, including 2017, 18, and 19 cat losses with corresponding trapped capital and negative sentiment fryer less.
Emerging industry loss trends and casualty.
Proving primary market and underwriting actions taken by major participant.
And continued low investment income yield.
Given the above we are increasingly optimistic on the treaty and facultative global reinsurance markets heading into renewal and are improving opportunity to deploy capital profitably in 2020 and beyond.
We continue to see increased demand for reinsurance globally durn, driven by our clients desire to reduce volatility.
Manage regulatory capital constraints and decrease net capacity being deployed.
That increase in demand in conjunction with improved insurance and reinsurance pricing terms and conditions will result in more opportunities hitting our underwriting requirements and pricing targets.
At the same time, the supply of reinsurance capital is relatively flat or down considering trapped capital given that over 50% of the retro capacity is supported by unrated alternative capital.
And there will be more collateral trapped by the recent events. In addition to the remaining collateral still trapped from the 2017 and 18 event.
Not all rated reinsurers are physician to write multiple classes of business across all territories to clients large and small.
But we are.
With our solid financial strength and ratings.
Multi decades long trading relationships. We are one of a few global reinsurers, writing an all PNC lines in most developed territories, making us well positioned to take advantage of these positive trends to drive differentiated results.
Year to date reinsurance premium is $4.7 billion up 3% from last year.
Growth in our business is being driven by increased casualty writings more proportional business mortgage more treaties with our global clients and increased back opportunities.
This growth was muted by the re underwriting of some portions of our property book as we pushed pricing and reduced lines are came off programs that did not meet our required pricing targets.
Year to date reinsurance underwriting profits are $310 million impacted this quarter by the door in in fact say losses mentioned by Craig.
Year to date reintroduced year to date reinsurance attritional losses are 57.5% compared to 57.0% for the full year 2018, due predominantly to shift in mix.
Increased casualty business as well as overall more proportional business to capture the primary rate movement.
This is offset by increased mortgage writings, which have a lower combined ratio.
Heading into the renewal season, we're optimistic about the market conditions in casualty fac.
Mortgage and certain property markets, including retro and loss affected areas.
In us casualty reinsurance terms are improving primary rates are increasing on loss effective programs, along with some tightening of terms and conditions.
Some market participants have signal reducing capacity combine this results in some interesting opportunities.
Since 2018, we have been increasing our casualty reinsurance writings based on these improving conditions and this trend will likely continue heading into January onest renewals.
Facultative is seeing meaningful increase submission activity globally improved rates and terms in both property and casualty, resulting in an increased business at much improved economics.
As mentioned last quarter, our global Fac book is well over $400 million gross written premium enforce and we see continued growth opportunities there given favorable market conditions.
Back is typically a leading indicator of client risk appetite and therefore shows increased future demand for our treaty capacity.
The global impact of Lloyds and other major ensures re underwriting is meaningful significant premium is coming to market, which is then subject increased rate and improved terms and conditions. This is in addition to some large primary insurers tightening capacity and pushing rate in.
Both property and casualty lines.
The mortgage market remains favorable as the large gscc, Fannie and Freddie continue to privatized risk.
Our well seasoned mortgage portfolio continues to produce strong earnings with growth potential.
Currently our annualized mortgage book is about $200 million of gross written premium, including many multi year deals with future premium that has not yet been recognized.
We continue to proactively scrutinize relevant economic trends and underwriting standards, which remain attractive and we'll continue to look for more opportunities there.
Given these multiple areas to deploy profitably our capital our pricing targets for cat exposed property reinsurance and retro continue to rise.
We remain committed to managed volatility through our longstanding disciplined underwriting robust portfolio construction and through increased property hedging in both traditional and alternative hedges.
The current property momentum is generally favorable and likely will last well into 2020.
But additional improvement in rates terms and conditions are required in global property reinsurance and retro market given the elevated risk factors and increased exposures in certain territories as well as the recent substantial industry losses.
More rate is required to get back to adequate levels to achieve a long term appropriate and sustainable return on capital.
Concentrating property underwriting on our core clients has created a better risk adjusted portfolio with significantly more dollars of profit per unit of risk.
And we do have the capacity to increase our participation in improving markets when returns increase enough to warrant.
We expect January one property rates to generally be up in most regions and more recently loss affected territories will see greater impacts.
In retro, we anticipate double digit rate increases with hagibis, causing further losses and trapped capital late in the year and uncertainty of ultimate loss rates may improve more.
Improvement in retro is necessary given those rates have been under the most pressured by non traditional capital, but also because retro bore a disproportionate share of losses since 2017.
Everest has the capital and capability to effectively right in this market.
We believe there will be select opportunities to deploy additional capital depending on market conditions.
Overall, we are in a reinsurance market were favorable trends exist for those able to capture and maximize the best opportunities.
With our financial strength nimble culture global capabilities and diversified capital sources, we are prepared to meet our clients' needs, while delivering superior results to our shareholders.
Thank you and now I will turn it over to Jon Zaffino to review our insurance operation.
Thanks, John Good morning.
Everest insurance has just completed another quarter of solid execution, resulting in excellent top line growth more importantly continued profitability.
We continue to advance our strategy to build a world class diversified specialty insurance group fueled by talent partnerships and a deep set of specialty products that are well positioned within this changing market.
Our solid results this quarter build on the first two quarters of this year and mark the 19th consecutive quarter of growth for the insurance operations.
Our gross written premium growth of 29% quarter over quarter.
As once again balanced across all major business segment.
Our growth accelerated this quarter beyond our year to date trend line of plus 21%.
In part, reflecting the changing nature of the market, which is impacting nearly all major product line.
This is particularly the case for business originated within the excess and surplus lines market, which accounted for over one third of our premium written in the quarter.
Our new business. This quarter provides some additional context on our balance growth.
It was driven by a multitude of areas, reflecting the specialty nature of our portfolio, including specialty casualty, which once again experienced meaningful rate increases in the quarter.
Our property in short tail businesses led by both our retail and excess and surplus property divisions.
Both of which also achieved meaningful rate increases and our various other specialty product lines, including transactional risk.
And political risk and surety.
Each of these businesses continues to see meaningful increases in opportunity.
The segments I, just referenced to make up approximately 75% of our business growth in the quarter and represents a balanced portfolio, we seek to bill.
The combined ratio for the quarter is 96.4% 3.2 points better than the third quarter of 2018 and year to date is 96% or 2.1 points better year over year.
This is due to both lower catastrophe losses impacting our reposition property portfolio.
And to improve Attritional loss ratio.
The expense ratio remained stable. Despite our continued commitment toward investments in people technology, new business unit and new facility.
New underwriting capabilities established in Bermuda and regulatory approval of the London branch of our Irish Insurance company are good examples of these new facilities and represent our continued commitment to international expansion.
Further new and expanded office locations in the us are bringing us closer to the customers and trading partners we serve.
Turning to the rate environment, we are encouraged by the results we see here.
In the quarter, we experienced pure rate increases, which excludes the impact of exposure of 7.6%, excluding workers' compensation and a positive 6.7% year to date.
The quarterly X work comp rate increase as the largest increasing since the second quarter of 2012.
And continues to be led by double digit rate increases within our property and commercial auto portfolios.
Financial lines and umbrella excess are also showing improvement in the mid to high single digits.
While general liability rate lift continues to build momentum with rate increases in the mid single digit range.
The London wholesale market has also improving showing double digit improvement this quarter, driven by professional indemnity management liability and property.
Year to date international is showing a 7% improvement.
We are very well positioned to take advantage of this improved pricing environment in terms of our people product set and our ability to offer compelling solution to the market.
This coupled with strong retention rates within both our wholesale and retail books as an encouraging sign.
In other words, the strategic plan, we have been executing over the last several years has positioned us well in this current rate environment.
Most importantly, this growth in topline coupled with improved business metrics has resulted in Everest insurance continuing to post an underwriting profit over two times greater for the year to date period and now standing at 10 of the past 11 quarters.
As Craig mentioned in the new investment disclosure the pre tax net investment income for insurance is $140 million year to date, thus our pre tax operating income year to date now stands at 195 million an excellent results.
In conclusion, we remain pleased with the continued progress we're making can the establishment of a world class specialty insurer.
The over 90000, new business submissions, we have received year to date and our direct broker operations speak to our relevance and positioning in this market.
Further the underlying performance of our diverse books of business remained solid and hence we are well positioned to create value for all of our constituents and the evolving market ahead.
We look forward to reporting back to you on our progress next quarter and with that I'll turn the call back over to Holly for killing it.
Thank you if you would like to ask a question. Please take note by pressing star one on your telephone keypad.
There are using a speakerphone. Please make sure your mute function is turned off two and now you're seeing now should we cherish glickman.
I wonder to accommodate you all callers for M&A management tasks.
You ask only one question on one related follow up if you have additional questions. Please re queue again, that's one ask a question.
I'll now take our first question from Amit Kumar from Buckingham Research Group. Please go ahead.
Thanks, and good morning, and welcome to one on the conference call.
One question and one follow up maybe I'll start to decline.
We do coming on board and I know you mentioned that that you've been meeting people et cetera over the past two months.
Do you have a view on average freeze in France, and Ville, you'll be doing some sort of a ground up.
As of review as we head into year end.
Thanks, Amit then thank you for the welcome on that then look as you pointed out.
I've had the opportunity to actually travel quite extensively over the past two months.
Meeting people reviewing our businesses et cetera, with the point specifically on reserves.
I have had a number of discussions with our actuarial team and what I can tell you is that Everest has a very solid process.
Expected loss ratios are reflective of our best current information industry data and other data sources.
We also have very experienced underwriters with other business Sunday proactively work to mitigate note potential unknown exposures and the company also reacts to bad news quicker than good news. So we're constantly analyzing taking actions on these findings and constantly repeating this process to ensure the strength of our balance sheet.
Frankly this process has resulted in Everest in initial loss ratio picks developing on averaged over the last over two points favorable including cats over the past 10 years and again I think thats an important point that we have seen favorable development on average of two points over the last 10 years from our initial loss ratio picks so.
I believe that we have a solid process and we're constantly reviewing this performance of our business and we will take action if it's warranted.
Got it that's helpful and only follow up and able to re queue. This might be for gom or mistras is.
Going back to the growth in the insurance segment I think 21%.
No. We discussed this on the last call. However in some of the recent conference calls there had been further alarm bells.
On the loss cost trends the discussion on social inflation the told environment.
Even though the underlying loss cost trends does this give you a reason to maybe slowed down the growth from here or how are you thinking about.
The rate versus.
Your loss cost trend metric.
Let me start and then I'll ask the.
Johnson to jump in as well.
As previously mentioned in the opening comments.
Any new business opportunities that we take on.
Appropriately contemplate trend.
Since the end severity et cetera.
And obviously, we've been getting rate increase for the last couple of years in many of the line.
I'd also point out that.
As I mentioned in my opening remarks.
Our loss picks that we put on these books of business are very conservative from the very beginning and reflect those trends.
That we're all concerned about.
In fact.
Relative to the market.
Point out good take commercial auto for example, we've been increasing our loan loss pick there for the last couple of years in recognition of those trends. Similarly on excess liability same thing, although we're not necessarily seeing any spike and claims activity, but in anticipation of some of the noise within the marketplace.
Again, we're picking a conservative number likewise on workers compensation, where we've seen.
Rate decreases we've also been increasing our while selection there although that line of business continues to trend very favorably from a loss reserve perspective. So.
We certainly share of the market's concerns over these issues.
But as I've mentioned earlier, we think we have them properly ring fence.
And we'll see with the future will tell for that and John do you have anything to potentially yes, let me let me touch on the growth for a second.
In the quarter here and there is theres really five or six things were seeing as as.
Tributary to the growth.
First and foremost as I mentioned in my prepared remarks, as both increased rate opportunity that we're seeing across the board a lost.
Excluding workers compensation combined with pretty solid renewal retention. So if you recall some prior quarters. There was a lot of portfolio reshaping repositioning going on we've seen that stabilized. So our retention ratios are much stronger than they have been.
Secondly, as I also mentioned, we're seeing a lot of opportunity in the space.
Submission flow through the roof, we're seeing a lot more opportunity there a lot of dislocation.
And it's it's predicated off of a number of different factors, but we're certainly taking advantage of that and then somewhat linked to that is the growth in our underwriting population.
Over the last year, we sort of stopped the clock in third quarter of 18 say, we've increased the underrated population by almost 20%.
So we have more people wonderful talent across the board was able to respond to this market changing conditions.
And we're taking advantage of that.
The other piece I'll point out is even as you look at the supplement.
Even in our some of our specialty casualty areas remember very little of what we do is standard business because the specialty company. So while it might be in a certain line like Joe We will write GL head of 12 13 different areas each with various tones of specialization on as Don mentioned.
Going to react to trends, we see them, we're constantly monitoring for those.
And react accordingly, so you always have the deconstruct those buckets to really get to the feel what's happening underneath there, but we're comfortable where we are.
Got it Thats very helpful. Thanks for the color and good luck for the future.
Thank you.
We'll now take our next question from a lease Greenspan from Wells Fargo. Please go ahead.
Hi, good morning.
My first question.
Thank you want to get on.
Color from you just in terms of thinking about every kid outbound retro strategy for next year. If you have a view in terms of using cat bonds aisle Davies, our traditional retro within.
Found purchases and I guess, just and an overall basis, you guys alluded to retro rates increasing substantially at one one until fluctuate really do sky rocket next year.
Would you have to shrank are kind of current capacity, if you aren't able to combine that coverage.
Surely so let me start and then I'll ask John Doucette to add some color to that look I think his job is John Doucette mentioned in his remarks.
We are seeing a change in into retro market.
There's a lot of trapped capital currently out there, particularly from the events in 17 18 to 19 and as John mentioned the majority of that retro really has been without alternative capital as far as weighted carriers are concerned. This does create an opportunity for us to get additional rate.
That is much needed in that space and for us to have essentially opportunities for growth there, albeit on a disciplined disciplined way of doing that so we are looking at opportunities for growth in that space right now and I think John can give you a little bit more color on on our strategy.
Yes, Thanks, why and good morning leases so.
So part of that the rationale as to how we built in the strategy of how we we think of of hedging. The book is we want to get it to the right net risk appetite and then also shape the book to where we want more here less there in terms of net position, but very importantly is we have and we've talked.
But this a lot we have a variety of hedges different products different durations different attachment points different territories, frankly different investor pools of capital that work that we've been tapping into and Thats.
The cap on capital pool is different than the Logan investor pull is different than our traditional reinsurance and retro hedges that we put in place different than aisle wwes and what we have built as a suite of those that are a lot more robust than any one of them individually.
And I would note that.
Actually with the cat bonds.
This was intentional the cat bonds that we do or on a multi year basis and.
We are one of the largest if not the largest sponsor of the catastrophe bonds.
In the world on the property side.
And those basically year over year will have no increase in the cost hedging and so that provides a nice stable anchor to our hedging strategy and then and again, we'll look at all across the whole suite of of the different hedges that we have.
We'll look at that in terms of how what we want to do where and based on availability and price and execution and things like that.
Okay. Thank you and then my second question. If we could do you guys have an initial view on the Q4 cat losses for adverse we obviously had another case.
Japan, We also had the California fires and it sounds.
Within Texas and Craig in terms of taking to the Q4 cats can you just kind of guide us in terms that tax rate for the fourth quarter as well.
Let me, let me start in although as Fred mentioned attack rate tax rate.
No. It's really early days on assessing hagibis, you've seen I'm sure what the modeling firms have put out in one particular case the range is pretty wide.
And it's really too soon for us to direct the market on where that losses ending up.
Obviously, we have.
Other events vaccine that.
Can be used somewhat as a guy close but even in that particular case. It is still very early in assessing.
Where that might end up although obviously, we feel we've.
Reserved it conservatively at the high end of the range. So.
We can't give any guidance at this point until we know more and then we know more come up with an estimate we certainly will be.
Potentially disclosing that.
And Craig women should always at least this is Craig with respect to tax as I mentioned in my comments I'm one of the things that we look at view from an effective tax rate standpoint is the number that we gave for this quarter is in annualized number it's essentially a 9% rate.
If that catastrophe estimates for the fourth quarter on are higher than our planned catastrophe estimates for the fourth quarter, we would expect that rate to be lower than the 9% rate.
As far as whats in the plan for the fourth quarter, we've given you guidance before that our average annual cat load is just under seven points of cats and about one quarter of that would be in or planned cat load for the fourth quarter.
We keep in mind that I know, you're trying to get through specific number on the TNL, but again back to the.
The whole notion of how we manage cat exposure.
We do managed cat exposure on an after tax basis.
Surely some markets don't have for the ability to do that because we're in a tax free jurisdiction, but we look at our net cat exposure on an after tax basis. So we think we have a unique.
Ability to.
To take on business in the tax efficient.
Okay. Thank you very much I appreciate the color.
Thank you Julie.
I will now take our next question from Brian Meredith.
Please go ahead.
Yes. Thank you.
John Im just curious your commentary about.
One more renewals and solid pricing and what's what was happening here.
If you break that down what are you looking at spars Europe goes because Europe I don't think has had quite the cat activity it could that potentially.
Offset some of the kind of good pricing, we're seeing a retro we look at the total total picture.
Yes, good morning, Brian It's John .
Yes, I mean look we right you know.
$6 billion to $7 billion premium all over the world all products.
All lines and the across large clients small clients.
Theres going to be pockets that we think are doing better we'll try to allocate more pockets that are aren't necessarily doing as well there will be less.
To your point you know so we went to this with the conference season. So several of US when Monte Carlo and there was a lot of.
Bullish talk on on pricing there.
Then we some of US went to CIA be out in Colorado and it was more bullish they're part of that's the timing part of that's the territory and then a lot of our underwriters just recently came from.
A PCIA.
And were more bullish still so so we're seeing I generally I think we're feeling like there is a momentum building on the pricing, but there are definitely pockets. So that that wouldn't apply to is as much and bought in the conversation was was more muted partially because of the loss activity over the last few years and.
Right now going on now is the Asian Conference ESI RC.
So we're looking to get feedback there, but for part of as we really think about this global portfolio in how we dynamically allocate it will do that in real time based on where we see the opportunity set for us best to deploy our capital.
Great and then just quickly on the insurance side I'm, just curious big growth and your property short tail that this quarter after being kind of down for the last several quarters.
What kind of happened to all of sudden caused big shift there.
I don't know was the biggest shift is as it might look.
There are obviously improved market conditions that were seeing.
Some of it has to do with lower year over year comps.
On some deliberate actions we took in the prior year in the portfolio.
But overall, we're feeling quite optimistic about the the opportunities that are coming in obviously, we measure those on a real time.
Attribution basis, and we can see sort of what's happening and we're very confident that the book that we're assembling right now is.
As quite strong so some of its year over year comps, but it's also just simply a function of market opportunity in rate.
Great Great and just one other quick one on the insurance side.
Special liability or you guys seem the same type of loss trend pressure that others have kind of talked about reported.
We're seeing it as an industry observation, but not as much in our book if you recall three years ago, we took very aggressive corrective action.
And.
Basically took most of our exposure all particularly in the public Dnos base.
So we are we are watching the same types of events and we are seeing those but our book is a bit different a bit insulated what we're encouraged by Brian is the as the rate we're seeing so we look at it quarter over quarter.
On our professional liability book or book, it's the range of almost doubled so.
We're more constructive on that market going forwards are starting to build some exposure but.
We've been a little bit insulated by but some of broader trends and that is another series of lines of businesses, where we took.
But some loss picks elections higher a couple of years ago. So we have been aggressively pushing up our loss picks in those lines as well I mentioned earlier the.
Casualty and particularly in the commercial auto but also in the professional areas, we've been pushing up our loss costs.
Great. Thank you for our loss and loss pick yet.
Okay.
We'll now take our next question from Yaron Kinar from Goldman Sachs. Please go ahead.
Hi, good morning, everybody.
First question as around losses from oriented facts.
I guess are many ways to slice and dice. This but one thing I did note was that the market share.
Yes market share of these losses seem to be pretty much in line with market share of.
Prior losses in these regions for the company.
I was just thought that maybe that market shares should compress just given the actions that you've taken to shrink your catastrophe exposure so any thoughts on that.
Good morning here at its John I mean.
Overall, we did.
As we repriced the book, we did take a decrease of net exposure as you saw on our.
PML that we stated.
And part of it is a function of of what we were trying to get to in some of the more of the peak zones and part of it as a function of where we see the opportunity set.
So we have been a very.
Strong supporter for example in the Caribbean for a long time, we have.
Develop the very nice attractive book.
There and correspondingly we have.
A decent market share there and our intention to always is to try to have a lower market share the lost market share as a premium.
As we try to build out the portfolio, but but so part of it is where the specifics of the losses that happen.
So you would have seen.
Good.
Another way to answer that question is that because we were trying to reduce some volatility.
And as John mentioned looking at our PML disclosures.
Certainly a big part of the reduction would have would have occurred in Florida specifically.
Okay. That's helpful.
And then my second question just goes back to the Bermuda reinsurance segment, where we saw significant decrease in the commissions in brokerage ratio can you maybe talk about that.
Correct.
This is Craig.
One other things that I would encourage you to take a look at with respect to that that Bermuda book and the Commission line specifically is look at it more on a year to date basis. What is included in that line is also contingent commissions.
But what you're really seeing as a changing business mix.
What we've seen is lower costs on the commissions paid for some of the property pro rata business in some larger global account deals that have been written as well as mortgage.
Offsetting this slightly is what you're seeing as a higher loss pick which is up about one point.
Year over year.
So again the idea was to grow the book, but to get it to grow the book at a better overall margin.
Okay. So I guess, we should look at the year to date results as maybe a better indicator of.
The actual run rate.
Yes, so that's down about three points, but that's that's more in line with where we would expect it to be than the quarter number yes.
Got it thank you so much.
Sure.
And keep in mind that highlights the fact that.
In saying about improving rates terms and conditions on the reinsurance portfolio that evidence felt through.
A portion of business through lower lower seasons, so thats what were seeing the benefit of that.
Got it.
I will now take our next question from Ryan Tunis from Autonomous Research. Please go ahead.
Hi, This is Chris Dillon on for Ryan Tunis.
First questions about the reserve development. This quarter can you provide some detail on where the reserve releases came from.
Sure Chris though this is Craig what I would say tier with respect to the reserve studies that were completed this quarter essentially what we saw were releases.
In Canada, as well as accident and health on the reinsurance side.
In addition to the mortgage in addition to.
In addition to what we what we headset with respect to.
The commutation of the.
Multiyear deal, but the actual reserve studies that were completed for the quarter were favorable by about $4 million.
Okay.
That's helpful and.
The second question is on capital management.
Can you just talk a little bit about your desire to build capital versus return it going forward.
Well first of all.
Our strategy around capital.
As always been too certainly maintain some level of excess capital in order to support the growth that we've had you've seen.
You've seen how we've been able to grow the business organically over the last couple of years. So we clearly feel as if we do have sufficient capital and we also feel we have some excess capital.
But we have not been in essence, returning buying in shares over the last several months is you know our stated intentions have always been too.
Not be aggressive in terms of buying in shares during catastrophe seasons. So it doesn't diminish our our appetite for share repurchases going forward.
Average or in any other forms of returning capital to shareholders.
Once we emerge out of the cat season.
Okay. Thank you.
Thank you Chris.
I will now take our next question from their shields from KBW. Please go ahead.
Great. Thanks. This is I think mostly for John to said I'm trying to balance the benefit of accelerating and increasingly earned rate increases against the book of business diversification into higher loss ratio line. So basically can you give us a sense as to when the benefits of rate will.
Match or outpace the higher attritional combined associated with more casualty.
Good morning, there that's a multifaceted question with there's not a simple answer for that.
We do look at I mean, maybe I'll bring it back to kind of our pricing in our ROE you framework. So we do have a holistic are we framework that goes across all lines business all territories.
And that factors in.
You know volatility of the lines historical performance of the line.
It also factors in duration. So we can kind of crystallize things into one view of risk and return.
Based on an ROI, we framework that we have and we would see.
To that would factor in long duration versus short duration volatility versus non volatile and things like that that allows us to help turn the dial.
And again that will vary all over the place by territory by line by client by size.
By product et cetera.
Keep in mind to may or the other thing I think is worth considering we're looking at things something we referenced in the past is that go to be careful about just looking at the combined ratio.
Sometimes you got to pay attention to the to the dollars to the Bucks and the reality is that when you look at our underwriting result in dollar terms.
It's actually gone up year over year.
Okay.
I understand.
Look at the at the combined ratios themselves.
But we also look at dollars of profit.
No. That's that's very fair. Thank you just a quick follow up the stuff I estimate that you guys put that was clearly very conservative, but I'm wondering now that we've had another typhoon in sort of the same region and the.
The risk of some demand surge associated with that is this still a risk of.
I guess either industry wide effort or Everest.
Losses going up.
Yeah.
Oh, I don't know how you answer that there.
Yes, good net you could always say, there's a risk to any of it.
And perhaps as a risk that it could go down to maybe that's the right way to answer it.
With that we've reserved it.
What we think is is a very conservative level.
Yes.
Yes, I think it's been suggested that the.
The industry ranges reflect the risks that you are you are referencing so therefore.
Perhaps is already embedded in the in the industry estimates.
Look at more than that.
We're not certain but you don't have so.
Strong conviction that the.
We're going to be sure with that.
Okay perfect. Thank you.
The best way I can say.
We'll now take our next question from Mike Zaremski from Credit Suisse. Please go ahead.
Hey, good afternoon, and that's first Tom Congrats on I assessable career at adverse and all the best deal.
On.
My.
My first questions.
I take and other things, but said on the call so far.
It feels like if we think about on the casualty side.
That you're saying the trend is well within rate increases.
And then also I think Tom you mentioned.
You guys have been underway.
Some of the lines that might be causing some some higher trend for some more so for your peers. Just kind of curious is there or is there a fear factor in the broader marketplace right now in the casualty side, causing rates too.
So.
A move so much or is it is it there's a truly a change in loss trends coming into the marketplace or both.
So I think it's to be a number of factors and all this certainly any my colleagues here to chime in as well.
I do think that the marketplaces seeing trend.
Clearly.
Which again, we feel that.
We view group, either accommodated through rate increase and or a higher loss pick.
And just to.
Stay on that point for just the second.
I think you'll find that if you examine our lines of businesses that we are.
Near the high end, if not at the high end or even above.
Many industry loss estimates for the industry loss picks so we have reserved it conservatively and clearly.
With our mid Ninetys combined ratio and you back off.
Very competitive expense ratio lower than average expense ratio.
Back into a loss ratios I think you'll find is again above above the industry and thats not because of our book of business is because weve conservatism conservatively selected.
Loss picks so.
Just to focus on that for just the second.
But I do think back to your question.
Factor will be trend the factor will be perhaps.
Some of the industry maintaining their loss picks through a softening cycle and perhaps they're seeing some other redundancy or if they had redundancy start to erode.
That's.
Factor as well.
Certainly.
Anemic investment returns.
Meeting, an increasing desire or need to have an increasing underwriting return was all factors.
That impact or any underwriters, new or any managements are executives view.
Where the market needs to go.
And Mike This is John Doucette, and I, just want to add a little more color from the reinsurance side.
So yes, we have been underweight over the last several years and I encourage you all to go back and look at what we've been saying about casualty going back six or seven starting six or seven years ago, where we talked about concern of worsening casualty markets broadening terms and conditions in some emerging risks and clearly increased ceding commissions.
On the reinsurance side.
A lot of that is now coming to fruition. So it's exactly what we have been talking about and re underwriting and managing our portfolio for a long time, which we think puts us in a in a good stead.
Going forward to take advantage, we are seeing some of the larger buyers come back and in the market.
And that can have a meaningful impact on the reinsurance market.
So a lot of those losses also had stayed with some of the large global.
Who had been buying less and I think the pendulum swinging back now is they're looking to help.
<unk> decreased their net lines as well as the underwriting results that they're doing on a gross basis. So we think that that'll certainly impact the market. So a combination of what we had done starting six or seven years ago.
As well as.
<expletive> the opportunity set that we have.
With our ratings and balance sheet and positioning with the.
The large global clients, who have very very tight reinsurance security less and a whole lot of reinsurers.
There don't qualify or aren't allocated large lines to them, we think puts us in a good stead for what we see as an improving casualty market going forward.
That's helpful points enough finally.
Yes, it's one thing that no I was going to add one quick point from the insurance side and.
I just to be clear I don't think we dispute the fact that there is trend.
There is trying to think with Don's referencing is weve made conservative last questions I'll give you a for instance here on our commercial auto book.
On the insurance I will remind you is less than 10% of our total premiums for quite a big part of what we do.
Our accident years 13 through 16, we took corrective measures all throughout the reserving processes and so we did see the adverse development. The reality is we've already taken the measures to address that so just a quick point, where we're not disputing. The fact that there is trend is real.
But I think some of the measures we've taken our union back.
Go ahead, Mike Okay. That's that's helpful. And then lastly, this maybe for John just sat.
You spoke about property reinsurance at about there being.
Elevated risks and up more rate needed to reach quote unquote adequate levels. So I guess do you feel that segment of the plus the prop cat market that get maybe isn't earning its cost of capital today, and so that we need to see.
[noise] double digit loss rate increases to tick and I get more more bullish on on you guys growing that portfolio meaningfully.
Yes, so it's yeah theres a lot of moving parts there and so it lot of its a function of what were the losses have happened and frankly.
What the response for the market and what the response of some of our clients is two to losses and you know 250 $300 billion losses, we sometimes have a disagreement with some of our clients in terms of what the right price equilibrium should be after the losses of happen and you know you look at different brokers put out different.
Rating index indices.
And while we have seen some rate that's kind of coming back.
That's building back up to some of the rate decreases that have been happening since 2011 2012, we watch that carefully. So we are looking it'll vary certainly theres been underwriting issues that we've been.
Focused on in terms of re underwriting.
And managing our wildfire exposure and things like that that we had focused on so there's a variety of conditions that where we're going to get too, but we're going to deploy capacity, where we think we're getting paid the best we're going to deploy capacity behind a long term strategic clients and that will vary by product and then we'll allocate and this is important that.
I don't think people realize as much we also move between excess of loss capex, while versus proportional versus per risk.
And we'll move that within the same client.
To get and will also move within cat layers will move up and down layers based on where we think we have the best rates.
And that's very helpful and because of our trading relationships and our balance sheet, we have more ability to do that and that our than some of our competitors.
We'll also look at allocating between you know reinsurance and retro.
Based on where we see the best pricing conditions. So there's a lot of moving parts going into that footwear, and how we're going to deploy our capacity.
Yeah.
Thank you.
Thanks, Mike.
Well take our next question from Josh Shanker from Deutsche Bank. Please go ahead.
Thank you for going a little over and taking my call and Tom Congratulations on a decade.
Hopefully, we won't be a stranger and congratulations wanting your start.
Robert Wish you the best.
Thank you Josh up first question I guess for John just sat and if you look over a multi year attritional.
Combined ratio at the underlying in the reinsurance space, it's been going up as you've been de emphasizing catastrophe or not deemphasizing, but writing non cat and casualty is a higher proportion the book.
Within about 2020, and the mix of the book should we continue to see the Attritional combined ratio of rising.
In the in the reinsurance segment based on mix.
Good morning, Josh I think.
I would say the year to date numbers today for the attritional loss or probably.
You know.
A decent indicator for what 2020 is going to look like.
Okay and back to back to let me just let me just to jump in and by the way. Thank you for your thoughts.
Let me just jump in here again back to my comment I made earlier about let's not get too focused on the on the quote unquote combined ratio the only way you'd see the combined ratio go up.
On the Attritional basis, if the dollars profit margin would be going up so that's that's the way we look at.
Okay, I remember, but of course I mean, the the cat business has a very low attritional combined ratio to it and it's a lower proportion of the overall pie I guess I take your point on that and I don't think you'd necessarily see.
And.
That book of business shrink so dramatically that it would that it would have a meaningful impact on that element of the combined ratio your reference.
All right and then for Johnson being on the insurance and and winning business. We are seeing with some of the companies that have already reported a decline in retention on their insurance businesses, you just talk a little bit about the relationship with with distributors and what they're seeing.
In terms of how competitive you need to be with the brokers in order to win new business.
Good morning, Josh.
I guess I would maybe rephrase the question a little bit in start by offering comment on what what defines relevance to our brokers.
Number one and we've talked about this in the past on while we've been active at transforming and building the insurance operation over the last five years.
Recall that all of our main divisional quote unquote client facing leaders are far from new to this business.
Averaging over 30 years experience they have deep and long.
Relationships with many of our distribution sources. So number one we have.
On a number of connection points within both the retail wholesale even delegated authority pockets of the market.
Secondly, I think one of the key themes for relevance is can you bring forth a very strong differentiated balance sheet across a wide range of products.
That's why we constantly sort of quote the 150 specialty products.
And we're we're finding that happened in lots of different pockets were seeing the relevance of that in a lot of different pockets for instance.
Some of our our rating sensitive lines of business Dino credit political risks surety our balance sheet differentiates.
So we're seeing a good flow of opportunity there.
In a market like this the key is to be able to respond to the flow that you're receiving so a lot of the work we're doing a we constantly talk again about investments in technology.
How do we handle all this throughput again I mentioned I think the 90000 submissions new business year to date.
How do you see how do you handle that the lot of work, we're doing operationally to make sure. We're prepared so when you think of those things together the relationships. We have the wonderful balance sheet deep set of products and the improving operational environment to handle all this it creates a pretty powerful formula.
So I get to adjust.
Hi, I suppose and do you think that some of your.
Competitors are getting less relevant as youre as yours abilities become more.
Relevant in the market.
Well I think one thing we are seeing is a change underwriting posture from one of our competitors and you heard about limit compressions and a bunch of different markets, which is opening up opportunity for us we've been pretty much front foot from the beginning we know we want to do audits organic build were not distracted by rapid changes in underwriting appetite. So.
So we are picking up some of the advantage of a market that is viewed I think generally as quite skilled and what we do.
Very stable and very clear on what our appetites are so that's that's been benefiting us.
Okay, well. Thank you for all the answers and good luck in the year to come.
Thank you thank you Josh.
Okay.
No further questions.
Go ahead.
My apologies I mechanical back to my speakers for any additional we're not using remarks.
Yes, Thank you Holly and let me just to close this out.
I'd like to thank you all for joining this morning and of course, thanks for the many years relationships and develop.
As you know this is this is my last earnings call.
You can well imagine the smile on my face.
Not that I don't love you all.
Just saying.
Actually through that time, I've appreciated the exchange and it's not easy to summarize.
Yes, 10 years.
But let me leave you with a few quick thoughts.
As I've said many times. This is a long term business and needs to be managed in that fashion.
And while at times conflicts with your mandate, which I understand.
One shouldn't lose sight of the game plan.
To that end adverse has been on a path to grow shareholder value and over a 10 year period.
We had a compound annual growth rate or close to 10% in active shareholder value.
And gross written premium has grown from $4 billion in 2009.
Who will be hopefully an annualized $9 billion in 2019.
At the same time.
We reengineered our legacy insurance business.
And bolster those reserves.
And went on to build would is becoming one of the best Premier specialty insurance franchises in the business approaching $3 billion in gross premium written.
Our reinsurance business has evolved.
Into a more diversified portfolio growing profitably.
Into what is now one of the top markets for brokers globally.
A true international brand.
Our investment portfolio has been greatly diversified.
And by several metrics has proven to be one of the best performing relative to duration quality and beta.
None of this happens without the great team sitting with me here today.
And I, thank them enormously for their support and efforts.
And now we ask want to lead us on that journey.
I am extremely confident that he messages to sentence pheno long with the rest of the average team will continue to do great things.
Thanks for this morning and.
Hopefully, we'll see you and the days days ahead.
Have a good good day.
Ladies and gentlemen, this concludes today's call. Thank you for your participation you may now disconnect.