Q3 2021 Everest Re Group Ltd Earnings Call
Welcome to the Everest re group earnings Conference call at this time, all participants are in a listen only mode.
After the speaker presentation, there will be a question and answer session.
Ask a question during the session you will need to press star one on your telephone.
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I would now like to turn the call over to Jon Levenson head of Investor Relations. Please go ahead Sir.
Good morning, and welcome to the Everest re group limited 2021 third quarter earnings Conference call.
The Everest executives, leading today's call are one undrawn, <unk>, President and Chief Executive Officer.
Mark <unk> Executive Vice President and Chief Financial Officer.
We are also joined by other members of the Everest management team.
Before we begin I will preface the comments on today's call by noting that everest's SEC filings include 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. These items are reconciled in our earnings release and financial supplement.
With that I turn the call over to what Andre.
Thank you John and good morning, everyone.
Thank you for joining us today.
During the third quarter <unk> continued to make progress towards the strategic plan objectives detailed in the June Investor Day presentation.
We achieved outstanding topline growth across both our insurance and reinsurance businesses continued.
Continued to improve underlying profitability for our insurance segment continued diversification of our reinsurance franchise.
Demonstrated strong expense discipline.
Delivered excellent investment income results.
<unk> reduced our cost of capital.
And returned capital to our shareholders.
We continued to execute our plans regardless of the external environment.
Before I get into the results I want to first acknowledge the human cost of the catastrophes in the quarter.
For those people, whose lives have been affected around the world by the wind fire floods and earthquakes experienced in the quarter. These are life changing events and this is always top of mind for us at Everest.
As insurers and reinsurers we are here as these communities worked to rebuild recover and hopefully emerge even stronger.
And forever.
This is what our ability to execute really matters.
Turning to the results for the third quarter, the strength and resilience of our fundamentals continues to prove our strategy is working and our execution is on pace.
As we shared during the June Investor Day, we measure our success against the three year strategic plan with a simple goal.
Create value and drive meaningful shareholder returns over time.
This starts by ensuring that our reinsurance and insurance businesses supported by our investment portfolio.
Are doing exactly what we said they would do.
Drive forward momentum to fuel profitable growth.
But our core ever such a growth company focused on sustained profitability with a well diversified earnings stream.
Beginning with our insurance Division, which delivered record high quarterly top line growth.
Marking the second consecutive quarter of over $1 billion in gross written premium.
And the lowest attritional combined ratio to date.
We continue to prove our relevance in the market and our ability to execute.
There is significant runway ahead of us to grow profitably.
And we're capitalizing on it we're well on our way to growing into the World class specialty global insurer, we've set out to be.
Reinsurance delivered double digit growth and we continued to further diversify our book across lines and geographies around the world.
A key part of our disciplined strategy to reduce volatility.
This discipline was evident in the previously announced third quarter pre tax net catastrophe losses of $635 million from Hurricane Ida ended July European floods.
Events totaling over 40 billion in industry insured losses.
That was just not immune to cat losses, but the cumulative deliberate and purposeful actions, we have taken to reduce volatility have changed our company's risk profile.
We have taken a disciplined approach to diversifying our book.
And reducing reliance on a single peak Cat zone for example.
We have reduced our P M L for southwest southeast wind to almost half of what they were in 2017 from 11% to five 9% of equity.
We have scaled back our total property cat ex ol premium.
Which comprises 17% of our total reinsurance premium today versus 26% at the end of 2017.
Our book is better positioned and less volatile today than it was two years ago.
We will continue to thoughtfully manage our risk profile to maximize returns.
Turning to investments.
Performance here was excellent we continue to optimize our portfolio and its earnings power, that's a key diversify or of our earnings.
Prudent capital management, it's another important part of our strategy.
Just after quarter end, we completed an opportunistic $1 billion debt raise at a 3% and eight coupon. This is very efficient long term capital.
In addition.
We continue to a port <unk> repurchase shares throughout the quarter for a total of $200 million year to date.
If the engines of our strategy, our core underwriting platforms supported by our investment portfolio.
Our transformation efforts focused on operational excellence and underwriting discipline are the field for those engines.
During the quarter when the industry sustained meaningful losses from catastrophes. This disciplined made a material difference in our financial outcome.
It is about commitment to consistent execution.
And building a company for the long term.
Throughout the third quarter, we saw the benefit of this commitment manifest in several ways.
We continue to prove we can play offense in a favorable market.
To pivot and respond to changing market conditions.
We're executing on a value proposition that continues to be well received by our customer and broker partners.
We have the talent and capabilities to deepen distribution relationships and diversify our presence in key markets around the world.
We have established our purpose driven culture as a differentiator.
We also see it in the top industry talent, who have joined Everest and review the company has a great environment for development and opportunity.
With that let's dive into more detail around our results this quarter at the group and segment level.
Yeah.
Beginning with our group results growth in the third quarter continued to be strong and diversified across both of our businesses.
We grew gross written premiums by 25% a barometer of our market relevance.
The increase in premiums was a product of our ability to capitalize on improving economic conditions driving exposure growth and new business opportunities.
The favorable double digit rate environment and high renewal retention.
The combined ratio of 112 includes $635 million of pre tax net catastrophe losses from hurricane Ida and the European floods during the quarter.
The group Attritional combined ratio of 87.9 reflect strong underlying profitability in insurance and our continued diversification in reinsurance coupled with ongoing prudence and loss pick selection.
Catastrophe losses during the third quarter resulted in an underwriting loss of $323 million.
Net investment income for the quarter was again outstanding up 25% to $293 million.
And the expense ratio also improved this quarter.
The meaningful progress this quarter, it's not a sprint it's about consistency day by day quarter by quarter being thoughtful and strategic about developing the portfolio prudently.
Prudently managing expenses and pursuing overall operational excellence these actions all add up.
The cumulative effect is evident in our year to date results and a few are worth highlighting now.
Year to date gross written premiums were up 24% our business has continued to drive strong growth and momentum.
We generated close to $1 billion in net income year to date.
This is a testament to the earnings power of the company.
Net investment income year to date has more than doubled from $420 million for the period last year to close to $1 billion today.
Our expenses continue to improve and the group Attritional combined ratio is also trending better year to date.
Finally for the nine months year to date annualized total shareholder return on equity is over 13%.
With that I'd like to turn to the results in our reinsurance business.
We had another excellent growth quarter in our reinsurance division with gross written premiums up 19%.
We strengthened the franchise through underwriting actions to create a more diversified resilient and lower volatility business.
The growth was broad and diversified.
Every geography and targeted line saw continued expansion in the quarter.
The combined ratio of 115 includes the impact of third quarter pre tax net catastrophe losses of $555 million from Hurricane Ida and the European floods.
Our focused actions to Derisk our portfolio are reflected in these results the.
The share of our book exposed to cat losses has declined.
Diversification is key because the severity and frequency of these events are a reality.
We see the impact of climate change and our data and we take a proactive and scientific approach to how we model and underwrite for it.
Our dedicated team of experts continuously assess the science and integrate its effect on loss costs into our models.
This focus will continue to be a key part of our strategy.
Our attritional combined ratio for the quarter was 87%, including an attritional loss ratio of 60.
Our attritional loss pick reflects our deliberate and targeted shaping of our portfolio to maximize results.
This includes a higher mix of pro rata structures, and an improved balance of property and casualty exposures.
These underwriting actions position Everest to benefit from the underlying rate increases and improving terms and conditions achieved by of course seasons in the primary market.
Combined with continued prudent loss picks this results in a relatively higher attritional loss ratio, but with better long term risk adjusted returns on capital.
As you know the primary market has benefited from multiple quarters of strong rate improvement a reduction in limits and the strengthening of terms and conditions are.
Our strategy of focusing growth on core trading partners means we are benefiting from these effects alongside some of the industry's best underwriters and.
And we expect strong portfolio economics to emerge.
Risk adjusted return expectations are improving in every line and every geography.
At the same time, we remain vigilant regarding market trends, including climate change supply constraints and social and material inflation.
As a result, we continue to hold prudent loss picks.
Finally, Mount Logan continues to be an important part of our strategy and we are thrilled to have brought in John Modine as its new leader.
Jim Williamson is available to provide additional details during the Q&A.
Now for our insurance Division.
Performance continued to be strong with exceptional growth and expanding underlying margins.
In the third quarter, we wrote over 1 billion in gross written premium for the second quarter in a row and achieved the highest quarterly growth rate to date at 43%.
The growth in insurance was fueled by a few factors number one we continue to seize opportunities from increasingly favorable economic conditions.
We continue to grow through new business and demonstrate our relevance to customers from brokers.
Third we're benefiting from strong retention rates. This coupled with continued favorable double digit rate increases is creating the kind of opportunity <unk> was built for and that we are poised to capitalize on.
We maintain a strong focus on portfolio management as an important part of our strategy and driver of long term profitability.
We continue to proactively position the company to play offense and react nimbly to market conditions by driving our business mix storage product lines with better rate adequacy and higher long term margins.
Renewal rate increases continued to exceed our expectations for loss trend up 12% in the quarter, excluding workers' compensation and up 8%, including workers' compensation, which now represents 12% of our overall portfolio with mono line comped down to only 7%.
Rate increases were led by excess casualty up 17% and financial lines up 14%.
I've said it before those who execute best in this business win.
And the quality of growth and insurance and our focused discipline comes down to simply excellent execution.
During the third quarter, we expanded attritional underwriting margins with improvements in loss and expense ratios.
This includes a two percentage point improvement in our Attritional loss ratio of $62 nine and an improvement to 14 in the operating expense ratio.
This resulted in the divisions lowest attritional combined ratio to date at 93.
And almost four point improvement over the same period last year.
The underwriting loss of $17 2 million in the quarter was the result of the impact of pre tax net catastrophe losses, including $80 million for Hurricane Ida.
However, the year to date underwriting profitability shows the indicative strength of our portfolio and ability to execute.
We have a long runway in front of us and we're investing in the talent the systems in our worldwide capabilities to make us better more efficient and more relevant in the market.
<unk> is available to provide additional details during the Q&A.
Reflecting on the progress we made against our long term objectives. It is evident we're working with the right formula for success.
Our risk management team has the level of focus.
Deep expertise and entrepreneurial approach to take us on our path forward and bring this even further.
I am proud of the work we're doing building on a strong inclusive culture that is constantly delivering for our clients and for our partners pushing the envelope in digital innovation and in our commitments as good corporate citizens.
The opportunities are there and Everest is well positioned to seize them.
Now I will turn it over to Mark <unk> to take us through the numbers in more detail.
Mark.
Thank you Juan and good morning, everyone ever has continued to make excellent progress executing its strategic plan and remains well on track to achieve its objectives I'll discuss these topics in a few minutes, but first a recap of the third quarter results.
For the third quarter of 2021 Everest reported gross written premium of $3 5 billion, representing 25, 3% growth over the same quarter a year ago by segment reinsurance grew 19, 2% to two 5 billion and.
In insurance once again reported gross written premium of $1 billion in the quarter, representing 43, 2% year over year growth year.
Year to date the group's gross written premium was $9 6 billion up 24, 4% compared with the sub 7 billion figure from the first nine months of 2020.
Turning to net income net income results for the quarter were impacted by the global cat events seen worldwide, particularly hurricane Ida in the U S and European flooding in Germany, and Belgium, as a result for the third quarter Everest reported a net loss of $73 million and a net operating loss of 53.
Million equaled a negative $1 88, and negative $1 34 per share respectively.
For the nine months ended September 30th Everest reported net income of 948 million and operating income of $795 million <unk>.
Equally the $23 72 nine.
$19 87 per common share respectively.
Everest reported $635 million and net catastrophe losses during the quarter as detailed in our October 14th earnings press release.
Manageable losses from these events are strong evidence of the material derisking of the portfolio over the past few years. The one described and as evidenced by a reduced <unk>.
Accordingly, these results were well within our risk expectations from events of this magnitude and within our risk appetite.
We also note that.
There is no prior period development in the cat losses this quarter all of our current accident quarter events beyond data and the European floods. There were a number of smaller events, which did not breach the Everest cat event threshold of $10 million per event, our practice for reserving for the smaller.
Events is to include them in our Attritional loss ratio estimates.
And as such these events did not materially impact our Q3 attritional loss ratio selections.
I also note we have not added to our COVID-19 incurred loss provision, which remains at $511 million with the vast majority remaining as IV NR.
Third quarter results continued to reflect the impact of our underwriting and portfolio management initiatives for the group our underlying attritional profitability remained strong during the third quarter.
Excluding the catastrophe losses.
Reinstatement premiums prior year development, and COVID-19 pandemic impact the Attritional loss ratio for the group was 69% in the third quarter of 2021.
Compared with 59, 3% in the third quarter of 2020.
The year to date Attritional loss ratio for the group was 66% compared with 62% a year ago, reflecting our overall mix of business shifts to longer tail casualty lines.
The Attritional combined ratio for the group was 87, 9% for the third quarter compared to 85, 8% for the third quarter 2020 and year to date. The Attritional combined ratio for the group was 87, 6% compared with 88% a year ago as commission and expense ratio improvements offset the.
Attritional loss ratio movements.
For insurance, the Attritional loss ratio improved one nine percentage points in the third quarter to 62, 9% compared with 64, 8% in 2020 the.
The Attritional combined ratio for insurance improved three nine points during Q3 to 93% as compared to 94, 2% over the same period, a year ago, given the favorable attritional loss ratio improvement and the reduced expense ratio.
Our U S insurance business, which makes up the majority of the book continues to run very well with an attritional combined ratio in the high eighties.
Turning to reinsurance Attritional losses in the reinsurance segment were largely driven by changes to the mix of business, notably proportionately more casualty premium plus four 8% year over year.
As a result, the third quarter 2021, Attritional loss ratio was 62% compared with 57, 5% a year ago.
The Attritional combined ratio for reinsurance was 87, 1% compared with 83% for the third quarter of 2020.
The group's commission ratio of 21, 2% for the third quarter was up one percentage point from 22% reported in Q3 2020, largely due to changes in the composition of our business mix.
With more pro rata property and casualty business, which has a higher commission ratio versus excess of loss.
The group expense ratio was exceptional at five 3% for the quarter and down a full point as compared with six 3% a year ago. The.
The expense ratio continues to benefit from our continued focus on expense management and the benefits of increased scale and efficiency from our operating model.
For the third quarter investment income once again produced an exceptional result of $293 million as compared to 234 million for Q3 2020.
Alternative investments accounted for $170 million of income during the third quarter.
Largely due to increases in the reported net asset values of our diversified limited partnership investments driven by the continued economic and financial markets recovery.
As a reminder, Everest reports limited partnership income one quarter in arrears.
So the current quarter results are based on the valuations as of June 30th.
Invested assets at the end of the third quarter totaled $27 8 billion compared with $27 1 billion at the end of the second quarter of 2021.
And $25 5 billion at year end 2020.
Approximately 78% of our invested assets are comprised of a well diversified high credit quality bond portfolio with a duration of three three years.
The remaining investments are allocated to equities and other invested assets, which include private equity investments cash and short term investments.
Our effective taxes on net income and operating income for the third quarter of 2021 were negative 16, 2% and negative 21, 4% respectively.
<unk> from our estimated tax rate of 11% for the year was largely due to the geographic distribution of income impacted this quarter by the catastrophe losses, which were primarily underwritten on our U S domiciled entities.
For the first nine months of 2021 Everest generated $2 8 billion in operating cash flow compared to $2 2 billion for the first nine months of 2020, reflecting the strength of our premium growth year over year.
We also note that operating cash flow for the quarter was a record at approximately $1 2 billion.
The average balance sheet remains exceptionally strong with ample capacity to continue to execute on market opportunities shareholders' equity was just under $10 billion at the end of the third quarter compared with $9 7 billion at year end 2020.
Our attractiveness as a counterparty was endorsed by the markets as evidenced by the debt raise in early October.
Everest issued $1 billion, a 31 year senior notes at a very attractive coupon of three <unk>.
Lowering our cost of capital over the long term with this additional capital Everest pro forma financial leverage at the end of Q3 is just above 20% in line with our long term target of 15% to 20% and we will manage our leverage within this range as we continue to optimize our capital.
Structure through the course of the strategic plan.
And that's with the offering from last year, we will deploy the proceeds into the business given the organic growth opportunities highlighted in our strategic plan and the current favorable underwriting environment.
Everest repurchased 625000 shares in the quarter for a total of $160 million and year to date. The numbers are 791000 shares and $200 million.
Yes.
Quarter end book value per share was $253 40.
Compared with $260 and 32 <unk> at the end of the second quarter.
<unk> from a $100 million and the change in unrealized gains and losses on the fixed income portfolio driven by changes in interest rates plus the quarterly net income result.
I want to close with an update on our progress towards the Everest total return or <unk> target as detailed during our Investor day.
Through the third quarter of 2021, the <unk> stands at 13, 2% annualized on track to meet the three year <unk> target of at least 13%.
The fundamentals of our long term value creation plan remains strong based on the diversified set of earnings streams reinsurance insurance and investments along with an efficient capital structure.
We affirm our strategic plan assumptions and tsi target over the three year timeframe as detailed in our June Investor day, and with that I'll now turn it back to John.
Thanks Mark.
Operator, we are now ready to open the line for questions. We do ask that you. Please limit your questions to two or one question plus one follow up and then rejoin the queue. If you have any remaining questions.
As a reminder to ask a question you will need to press star one on your telephone.
Joe Your question press the pound key please standby, while we compile the Q&A roster.
And your first question is from Elyse Greenspan with Wells Fargo.
Hi, Thanks. Good morning. My first question is on capital. So we saw your capital return.
Buybacks will pick up in the quarter can you just give us a sense of how we should think about repurchase.
And is that depending upon how market conditions evolve over the course of the next year.
Tying into that answer can you just give us.
Some commentary on potential M&A would fit into any capital return decisions that you guys are.
Thanks, Elyse, it's Mark <unk> speaking, so we did have a.
Pretty meaningful share buyback this quarter, that's pretty much par for the course.
Given where we are with our strategic plan and the very strong growth assumptions that you see there not much has changed we're simply privileging.
Organic growth as we develop our franchise with our capital.
We see very good conditions in the market in both reinsurance and insurance.
But the capital management side is something we can do alongside that expansion and so you'll continue to see share buybacks.
Consistent with what we've done in the past moving forward.
As time moves on.
Regarding the M&A, yes, so let me address that at least in this one and drive a look as I've said publicly before M&A is certainly part of our toolkit that we prefer to build our businesses organically.
And we see great opportunities in the market right now to be able to do that as evidenced by the growth rates that we have posted not only this quarter, but really on the on a year to date basis, but it is something that we look at it and if we find the right opportunities to advance our agenda and advance our business. We will certainly take a look at that but our strategy remains primarily focused on growing our <unk>.
Organically.
Okay. Thanks, and then my second question on in written and earned basis.
What's the gap versus loss trend right now and how much more.
Even before you would take down your marketing.
Yes, Elyse. This is one again, so look I would say that we continue to see very strong double digit rate momentum as we quoted in my remarks, plus 12 for the quarter and essentially every line of business right now with the exception of workers' comp.
It's ahead of trend and it has been for a number of quarters at this point in time, So we expect that to continue.
The way we look at.
At our reserving and again I think I've been pretty consistent about this since I started as the CEO here almost two years ago is we're very disciplined.
Mentioned in my remarks, we are also cognizant of the external environment, whether it's social inflation climate change.
CPI type inflation and everything Thats out there right now so we do prefer to let things season over time before we take action and out and bring that down. However, you also saw in the insurance numbers. This quarter the improvement that we've made in the loss ratio and again this is consecutive to prior quarter.
So as well and I would point the fact two against statements I've made in the past that it's not only about right. It's about all the management actions day to day in the portfolio. How we look at at individual books of business, how we shape that portfolio, how we manage that.
We focus our attention and our execution on lines of business that we believe have a higher potential for long term margins. So all of that is built into that and essentially that is what you see reflected in the improvement in the loss ratio on an underlying basis for the insurance Division.
Okay. That's helpful. Thanks for the color sure lease thank you.
Your next question is from Mike <unk> with Wolfe Research.
Hey, great good morning.
Maybe on the reinsurance segment first please thanks.
Thanks for the commentary about the change in business mix, So I guess I.
Just wanted to be clear.
Should we kind of should we be factoring in this kind of changing business mix and our is kind of a new baseline and our go forward in terms of kind of.
Higher attritional on some of.
The business you are putting on it.
It sounds like that that's the read through from from the good commentary on the call so far.
Thanks, Mike and again this is one and drive it let me start and then I'll ask Jim Williamson to add some color too.
To reiterate.
Some of what I said in my prepared remarks, what you see happening in the reinsurance Attritional ratio. This quarter loss ratio. This quarter is really the result of deliberate actions that we're taking right and dose our deliberate actions to accomplish really three things number one is to fully benefit from the strong market that we're seeing.
We're seeing rates and long tail lines to be up terms and conditions to have been improved limits have been shortened and so as a result of that we're growing in our pro rata structures and casualty alongside some of the best underwriters in the primary market.
You see it in the supplement our casualty pro rata business was up 63% for the quarter. So that's indicative of how we're playing offense and taking advantage of these market conditions there.
The second thing for us that we're trying to accomplish is really this is part of our deliberate strategy to reduce volatility and diversify our book of Port Tunis stickley into lines of business that we believe can deliver strong risk adjusted returns. That's the other part that youre seeing there right now lets us purposefully moving our book of business in a direction.
That we believe will give us long term risk adjusted returns on capital that are quite attractive.
And the third part of it and this is related to the answer that I just gave to a lease.
Again as I've said from the beginning we are a disciplined underwriting company and we do maintain prudent loss picks in light of the external environment. So what you are seeing is that particularly the long tail lines will carry.
Essentially higher loss picks in the short tail lines and as we move that business over this is the end result that you will see but with an outcome that we expect to return much better margins in the future, while reducing the volatility of the company.
The bottom line is we feel very good about the portfolio that we're creating right now and the embedded margin that we're creating and we also feel very good about this being able to achieve the targets that we laid out on investor day that Mark just affirmed.
Yes, Mike This is Jim Williams, and the only thing I would add to what <unk> had said and really only to add some additional color as we obviously are very close to our core seasons, who are driving the really strong growth that we've had in areas like casualty pro rata and when you unpack their results in terms of what they're seeing from a rate change person.
Active their ability to reduce limit profiles to improve terms and conditions. These are not subtle changes.
These will have a dramatic impact obviously on the quality of the book that we have today and we're very excited about that and our expectation is that those conditions will persist and so we want to continue to partner with those core seasons as they move through this market, but the last thing I would add obviously as we remain very flexible and where we.
We see good risk adjusted returns, we're absolutely willing to shift our mix.
Quarter to quarter year to year, and we will retain that flexibility as we move forward.
That's very helpful. I guess, just one follow up so.
With this business since it sounds like it's going to result in the near term and obviously I don't want to just focus on the near term, but in a slightly higher.
Our attritional loss ratio as it is it more capital efficient to and that you can.
More business versus the rest of the business. It really should we just be thinking. This is just better long term business and eventually it'll probably come through over time and in a better combined ratio in outer years.
Yes sure. Mike. This is this is Jim again, so look it is something we keep a very close eye on we have a very disciplined capital allocation process within the company and for every line, we're continuously referencing back to how various lines of business consume capital and our return on those lines, but but this is not about <unk>.
Trying to maximize top line.
It's not a strategy related to that it's really about pursuing best risk adjusted returns and in a market environment that we're moving and we see a lot of excellent opportunity in the casualty lines and so it's about the pursuit of good bottom line performance about good consistent results about achieving our long term strategic ambition.
<unk> and about managing the volatility of the group those are really the decision factors that are driving.
The growth that we're seeing in casualty, yes, Mike could I would just add to that look this is part of when we talk about execution. This is a proof point and this is exactly what we're talking about that we identify an opportunity we identified a core group of seasons that are driving this forward in a very positive way and we see the economic benefit that can result for the company by partner.
Bring up with them. This is how we're driving our business forward.
Understood good color and one last follow up.
Given the.
Change in business mix and some new.
The management team members.
I think historically there has been.
More it looks like true ups on reserves and at the end of the year and for Q.
Or is that something we should be thinking about is there some type of kind of seasonality, we should be thinking about it the back half of the year.
The back quarter of the year.
Yes, Mike This is Jim again, thanks for the question one of the things that we've talked about in the past is the work we're doing to continuously improve our approach to reserving and one of the changes that we've made coming into this year as we've rebalanced our reserve.
Study calendar to move away from having so much activity in the fourth quarter and so year to date, we've completed about half of the number of reserve studies that we plan on completing for the year as we do every quarter. We're reviewing the results of those studies and.
And we'll continue to do that so it's absolutely something we're.
We're changing over time, and I think youll see us continue to make progress into next year to create a more balanced level of activity across quarters.
Thank you.
Thanks, Mike.
Your next question is from Mike Phillips with Morgan Stanley.
Thanks, Good morning.
Let me start first question on on the ILS market anything you've seen there from <unk>.
Fund managers in terms of just changing appetite to continue.
Apply given what's been a pretty tough last couple of years and certainly in this quarter.
Yes, Thanks, Mike Let me start and then I'll ask Mark <unk> to add his point of view as well look I think definitely what were hearing from investors, particularly post data.
And in post to floods in Europe is basically a bit of a concern about the catastrophe activity. That's out there in the industry. You have also seen the fact that some of that money has moved more towards the cat bond market and towards very much higher up in structures.
And there is still appetite there some effect, we saw a lot of capacity and attractive pricing again at the higher levels and at the higher attachment points et cetera.
But I think in general terms I would say you probably are seeing.
A little bit of concern right now in the ILS market with some of these investors, but I would ask mark to also add his perspective on this.
Clearly it's clear we've had.
Underwhelming performance to say the least over the last few years in terms of cat activity and the impact of.
Climate change I think is something that is still trying to be understood by the market in general and then <unk> had examples of trapped collateral and so I'd say, that's that's somewhat slowed the inflow.
Based on this.
Recent history that we've seen.
But look today's today's losses, I think Mike Morris pricing and so I see this as kind of a.
A cycle that will work its way out.
Information becomes clearer terms become better.
And the volatility starts to reduce as a result of that better information entering the models.
Mike can I would finish up by saying this also creates an opportunity for rated carriers like us. The reality is theres going to be a lot more demand for companies with the financial strength of the ratings like got wrist.
To continue to write business going forward so.
While there has been maybe more of a muted concerns that we're hearing on the other hand. It also presents an opportunity for us on the front end.
Okay. Thanks, guys I appreciate that.
Second and final question.
On the one you mentioned youre still seeing pretty good pricing and insurance.
Loss trend can you say, what your what youre, assuming in the on casualty loss trends in your pricing.
Well, it's typically not something that we have disclosed publicly but what I can tell you. Mike is that we review this on a quarterly basis I think as Jim was basically talking about this is really part of the analysis that we do every day or every quarter and.
We true this up for everything that we're seeing from the perspective of social inflation that we see from the perspective of what we're seeing.
Wage inflation out there et cetera et cetera, So we try to stay very much on top of that.
Okay. Thank you Juan.
Your next question is from Ryan Tunis with Autonomous research.
Hey, Thanks, good morning.
First question, just thinking about your guidance, 7% cat load.
The average cat load over the past five years has been 15%.
Just curious.
Why do you still think that that's it.
A prudent best estimate.
Well, so Ryan it's mark.
Answering here, so obviously our cat budget.
And our cap planning exercise within the operating plan as modeled out based on expected losses, clearly theres been substantial volatility over several of the year's not all of them last year was a bit more modest actually below plan.
The 7% is how it works out mechanically between.
Reinsurance and insurance, having said that we have taken our cap portfolio.
Reduced its.
Our risk profile over the years since essentially since Harvey Irma Maria back in 2017, and so that de risking that we've taken has been quite conscious and Alternatively the group and I think you saw this highlighted during the Investor day is really expanding in other noncash.
At lines of business, So I would expect.
Going forward, whether it's reinsurance or insurance to continue to deemphasize.
That is a significant driver of our premium and profit, but it's still a meaningful and attractive risk despite the volatility.
Got it and then just.
Just wanted reinsurance it sounded like you didn't have to change your loss picks because of that.
The cash that didn't meet the $10 billion threshold.
Should we think about that as a more likely outcome in the fourth quarter.
Given the pace of the activity we've seen year to date is there is a risk that that could be.
There could be some lasting change for <unk> based on weather activity.
I just want to make sure I understand your question are you are you are you wondering if our Q3 events that were smaller smaller in size are going to blur.
Bleed into Q4 or are you.
Question on what's happening in Q4.
No I mean, my understanding was that you guys have like a loss pick budget.
For those Attritional type losses, and I was wondering.
Maybe you haven't you hadn't exceeded that yet, but maybe you were close to that it might not.
Yeah, Yeah. Okay. So look in in Q3, there were several other cat events globally, they were relatively small for us.
I highlighted in my opening remarks that our cat threshold is $10 million and so there were a few that fell.
Underneath that.
And those were easily absorbed into our Q3 attritional loss ratios. So.
I don't expect any.
Development from there going into Q4.
Got it and then.
Just wondering I was curious about is <unk>.
Reinsurance perspective with property Cat Treaty when you have a storm like Aida.
Just looking for some perspective here.
How many how many treaty claims.
Most of that loss is in.
Five claims or are we talking about 70 or 80 treaties.
Directionally trying to understand when you get losses like how concentrated is that an individual's seasons.
Yeah. Ryan. This is this is Jim Williamson.
Look what I would say if you're talking about an event like Ida.
You're definitely going to see losses across a large number of scenes I think thats to be expected and then a bit of an obvious statement, but really big seasons, who have larger exposures will drive a meaningful portion of the total loss, but but this was a pretty broad event and particularly as it related to.
Major impact followed by smaller flooding event, it's going to I think carry a fair number of seasons.
Into loss activity.
Yes, the one thing that I would add to that Ryan is think about the geographic this just want to drive it by the way I think about the geographic scope.
Of the storm, making impact in Louisiana, extending through the mid Atlantic and going up into the northeast all the way along the way so you're going to have different actors right. So youre going to have some regional seasons, particularly in the Gulf States and then you have some of the national carriers were impacted both in the southeast as well.
Well as the mid Atlantic and the northeast as well so I would say, it's a mixture of that basically.
Thanks sure.
Your next question is from Meyer Shields with <unk>.
Small question and one bigger picture question is did the attritional loss ratios in either reinsurance or insurance include any adjustments to the first half of the year.
Yeah Meyer. This is this is Jim Williamson.
No. There were there were really no material adjustments related to activity that happened earlier in the year. It was really reflective of the third quarter.
Activity.
Okay.
Perfect and I know, we're all sort of.
On 10, so I want to ask a question in a slightly different way with S&P sort of rumbling that theyre going to possibly increase capital requirements for cat because the industry might be underestimating it and given the.
Apparently high possibility.
Call it above average losses for the year.
Sure.
How important is it to.
We have risk strategy to write any property count at all.
Yeah. So let me address that Mark So I think that's that's a fundamental question look we are in the property cat business, but we're also mindful that the external market conditions have changed over time and they have changed for a number of reasons right.
You clearly have the impact of climate changes we've discussed it has manifested.
We certainly see the impact of the ILS market that basically I think has muted the size of the rate increases that you see post events like guidance into that market and so while we see it as an attractive line of business. We also see better returns in other lines of business going forward and it's part and parcel of the reason why we have been.
This derisking journey that we have continued to talk about so essentially changed the profile of our company. So all of that is in our minds. We are students of the environment. We are students of the science. We're also very disciplined in how we look at our portfolio and how we allocate capital between lines of business and this brings us full circle back to the question.
The lease end mics around ski asked earlier in the call right. It's one of the reasons why you see us basically growing India into casualty lines of business at this point in time. So it's definitely part of the equation. It's definitely part of the strategy as we can see our plan and we drive the company forward.
Okay understood. Thank you very much.
Sure Mark Thank you.
Yes.
Your next question is from Brian Meredith with UBS.
Thanks, a couple of quick ones here.
Just wanted to just curious can you talk a little bit about how the current inflationary pressures that we're seeing economically you impact to your business and does it influence your loss picks and then on top of that maybe add a little bit on your view of the tort inflationary body right. Now are you seeing any increase is core to reopen at all.
Yeah sure let me, let me address that Brian and then I'll invite both Mark and Jim to also at their points of view on it.
Look I think it's important to recognize what inflation means to the industry versus what we see in the CPI index and the headline news Thats out there I think it's undeniable that we are in a period of inflationary pressure from a purely CPI perspective, you see it in hard goods.
Youll see the upsurge in demand the restriction in supply that's going on up there and you definitely see a part of that and it's manifested in used car values and chips and all of these things that are out there basically.
Our perspective.
<unk> from the asset and the liability side on the liability side of our balance sheet, we're specifically focused on wage inflation.
And also on health care inflation, the cost of medical care basically those are critical things that we watch very carefully now your question on how that translates into how we think about loss picks et cetera is excellent because that is part of the analysis that we do on a quarterly basis. When we're looking at our loss picks and frankly, what we're doing are bridging for future years.
Plans and when we're doing our reserve studies et cetera, and we try to build in those inflationary pressures into our numbers and it's one of the reasons why we keep pushing for pricing and why we believe that this pricing environment will continue for at least another year, if not longer for the longer tailed classes of businesses.
The other thing that's important to recognize is that also on the liability side. There are some mitigates into book right. So if you think about exposure rated lines like general liability workers' compensation et cetera. Those will rise also with the impact of inflation and so theres. Some hedges that are built into that but the primary hedge for us.
We look at our loss picks and how we do the analysis on a quarterly basis. When we look at the asset side of the balance sheet. That's also how we positioned our portfolio to make sure that we're as fireproof this possible and while we maintained a liquidity that but.
But let me ask mark to add some commentary on the asset side, and then I'll invite Jim Williamson to talk a little bit more on on the liability side.
Yeah, So Brian its mark.
On the asset side. This is something we think about because it's unclear how permanent or transitory. The inflationary pressure that we're seeing is is going to be going forward and so we've got our portfolio the asset portfolio positioned.
Such that we think it can react.
Reasonably well.
Versus a high inflation environment and so there's a high degree of liquidity as well that augments.
The kind of cash demands that you would have in a high inflation.
Scenario, we benefit from <unk>.
Short term asset duration in a relatively short duration on our liability portfolio plus a significant amount of assets in.
Exposed to equities or floating rate debt, which should be.
Somewhat immunized in a high inflation environment. The other the other piece that I'll add.
Maybe before Jim steps in as we have stressed the.
Liability portfolio for different inflation scenarios to see how it would perform and our ability to absorb it and so that's something we do in addition to.
The reserving side, the assumptions et cetera is to see how it can perform and different types of environments.
Yes, Brian This is Jim Williams, and I will just address the second part of your question related to any any bounce back that we may be seeing in our data related to the reopening of courts and frankly, the reopening and growth in the economy and I think there is a there is a degree of bounce back occurring we certainly see it in areas like liability frequency.
<unk>, we see it in medical utilization.
Not a tremendous effect.
But it's also I think feeds into.
The rationale for being very consistent in how we set loss picks and not over responding to some of the good news that has come through in our data and you wait for that to mature so that some of these transitory items like a bounce back in activity.
We have time to play themselves out and that's very consistent with our with our approach around loss selection.
Makes sense. Thanks, and then my second question, one you've talked about growing your insurance business internationally I'm. Just curious do you have the platform right now to actually really see some good growth there or are there some areas that you need to expand either organically or inorganically.
Yeah, No I think it's a little bit of both so we are.
Very focused right now on the next step of our journey on the primary side of our business I think we've done a very nice job growing it in the U S. Specifically over time, and we see significant overseas opportunity right. The reality is that.
The market is quite big and it's also a diversifying opportunity one of the things that you've learned over time is that emerging markets and developed markets moved at different rhythms and so when developed economies are down emerging economies are up and it's a good diversifying hedge from that perspective. In addition to the insurance market opportunity that's out there.
Right now we have a company out of Ireland that allows us to do business in the continent of Europe, we have our Lloyds syndicate and so we're able to utilize it as a platform for expansion in Europe and in the U K when.
When you start thinking about expansion into Latin America, and Asia, you are thinking more of a greenfield type opportunity at that point in time and our plants are very much in motion right now to be able to grow that business organically, but it also goes back to the question that I was asked earlier in the call as to how does M&A potentially fit into all of this in our <unk>.
Strategies organic as I said, but we're also mindful of any opportunities that may help to accelerate our progress as we move forward.
Makes sense. Thank you.
Sure. Thank you.
Your next question is from Josh Shanker with Banc of America Securities.
Yes. Thank you very much for taking my questions later in the call.
Growth, obviously is very large.
Well, we can actually get better pricing than D'amato line and that's one of the reasons why in my prepared remarks, I emphasize the fact that while comp overall is now down to only 12% of the portfolio Mono line is down to only 7% of the portfolio right. So it's important to understand that new once with income at the same time.
Thank you and this is maybe a bit cheeky, but you raise the debt and you had a you don't and you bump next <unk> I know you said that your preferences to grow organically, but can you talk about when you bought the stock in the quarter I mean, maybe I'm trying to get a little sense of appetite more so it was it.
After I eat or was it before either with an after the capital raised.
Yeah, I guess I'm looking for a little color there.
Yeah, both before and after so at the beginning of the quarter and and also in September and if I could just add Josh sorry, It's Mark speaking if I could just add a couple of points.
We made it pretty clear during the Investor day.
But we felt we could get a more efficient capital structure and part of that is increasing that that leverage of the company into a 15% to 20% range and when you look at the kind of print that we got the three and an eighth coupon that's very low long-term.
Capital costs, so for us the.
The combination of issuing.
Issuing the debt and using it to fund future growth expansion is really a function of providing a lower cost of capital for that organic growth.
And in line with I think what is a more conventional capital structure with something closer to 20% Dot leverage I think the share buybacks that's really.
You know look a function of our confidence in our in our business I wouldn't read too much else into it the volatility that we had from the cats is something that we expect in this business. It was very much in a risk appetite it never dissuaded us from any kind of capital management actions and so we we move forward.
Here with a lot of confidence and that was one of the points I was trying to make towards the end of my monologue regarding the affirmation of our plan assumptions that target and in the past that were on we we feel like there is an excellent opportunity in front of US were built for it we're executing there's a lot of momentum.
Well I appreciate all the clarity thank you very much.
Okay. Thanks, Josh.
Oh, no Friday classes.
I when I turn the call back over Tomatoes for closing remarks.
Thank you all for your questions and the excellent discussion today I'll wrap up today's call by reiterating our confidence in our ability to continue fueling profitable growth ceasing the opportunities before us and advancing our strategy.
The goals that we've outlined are ambitious, but we've already made material inroads on our path forward, we're making investments in our talent, our culture and our capabilities. Because we believe those are the ones that will help us drive superior shareholder returns.
I'm bullish about the future of Everest. Thank you for your time with US today and for your continued support of our company I look forward to seeing you all again to discuss our fourth quarter and year end results. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
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