Q4 2022 Everest Re Group Ltd Earnings Call
Good day and welcome to the Everest re group limited fourth quarter of 2022 earnings Conference call.
All participants will be in listen only mode.
Should you need assistance. Please see my conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions.
So ask your question anyway for the Star then one on your Touchtone phone.
Charter a question. Please press Star then two.
Please note today's event is being recorded.
I would now like to turn the conference over to Matt Wilson, Senior Vice President and head of Investor Relations. Please go ahead.
Good morning, everyone and welcome to the Everest re group limited fourth quarter 2022 earnings Conference call.
The Everest executives, leading today's call are won and Johnny President and CEO and Mark <unk> Executive Vice President and CFO . 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 ever SEC filings, putting 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 statements with that I'll turn the call over to Juan.
Thank you Matt.
Morning, everyone. Thank you for joining us.
Excellent fourth quarter performance.
Strong year of consistent execution of our strategy and continued positive momentum.
We advanced our objective of creating sustainable value for our shareholders with disciplined underwriting and targeted growth driving margin expansion in both businesses.
The increased diversification in each of our segments, both geographically and by product line.
When you combine all of this with healthy and consistent rate increases and improved terms our risk adjusted return profile improved across the board.
Both franchises delivered solid top and bottom line performance.
Profitably grew our primary insurance division and executed an outstanding January one reinsurance renewal.
This further reinforces our global market leadership and positions <unk> well for the future.
Our actions resulted in solid underwriting profit for the year.
Over 1 billion and operating income.
And a double digit operating return on equity for both the border Andy.
An excellent result.
We achieved these results despite market volatility.
Economic and geopolitical uncertainty.
Industry catastrophe losses totaling over 140 billion and defense costly as cat year in history.
Sure.
We accomplished a great deal in 2022, and built a wide runway for future opportunity.
We are uniquely positioned with accelerating momentum in top tier talent driving this business.
Ever since more agile and well equipped than ever we have the ability and the drive to seize attractive opportunities and deliver on our commitments in 2023.
Now I will briefly recap our financial highlights focused on the full year beginning at the group level.
In 2022, we grew the company by 9% in constant dollars ending the year at approximately $14 billion in gross written premium.
We generated 477 million an underwriting profit with a 96 combined ratio.
This is a near two point improvement year over year, despite an active cat year.
The Attritional combined ratio of 87.4 also improved from the end of 2021.
We achieved a 70 basis point improvement year over year in the group loss ratio.
The operating expense ratio remains remains best in class five eight.
Finally, our high quality investment portfolio generated 830 million net investment income.
Our actions to optimize the investment portfolio over the past three years and position it for a rising rate environment have paid significant dividends.
Now turning to our underwriting segments, beginning with reinsurance.
Our reinsurance divisions focused execution in 2020 to further enhance our global market leadership and preferred partner decision.
We continue to optimize our portfolio, while achieving solid top and bottom line growth.
For the full year reinsurance growth was 5% on a constant dollar basis with $9 3 billion and total gross written premiums.
Growth was driven by broad opportunities with our core seasons.
And our nimble allocation of capital to achieve the highest returns.
We took deliberate action during 2020 to shed underperforming business.
This also positions us well to take advantage of the strong trading conditions at January one.
These actions resulted in over 300 million in underwriting profit for the year.
A combined ratio of $96 four.
Just a one seven point improvement from 'twenty one.
Yeah.
For the full year, both the Attritional loss ratio at 58, seven and the Attritional combined ratio at 86 point to improved 90 basis points and 10 basis points respectively.
Our deliberate underwriting actions significantly reduced our cat losses.
Demonstrated by our less than 1% market share from Hurricanes in the third quarter.
Second largest hurricane in U S history.
Our focus reinsurance strategy continues to pay dividends.
2022, we leveraged our market position deep client and broker relationships and strong balance sheet to build a more profitable and higher margin book.
Which culminated in an outstanding January one renewal.
I'll provide more color on one one in a few minutes.
Now turning to our primary insurance division.
In 2022, we made tremendous strides expanding our reach capabilities product set and breadth of global talent, while hitting important financial milestones.
We finished the year with insurance growth of 18% in constant dollars and $4 6 billion of premiums.
This is supported by a new quarterly gross written premium record in the fourth quarter.
Growth was balanced and diversified across the business by product line and by geography.
After four years of significant and cumulative rate increases we achieved high single digit average increases excluding workers' compensation throughout the year.
In addition to rate exposure growth driven by revenue and payroll increases reading.
Is it additional margin against loss trend.
Pricing increases in the quarter were led by commercial auto general liability and property.
Our proactive cycle management actions contributed to our continued improved underwriting profitability.
Our ability to pivot quickly is a key advantage.
Average continues to benefit from an influx of top talent with the market expertise.
<unk> record underwriting acumen and relationships to execute our strategy.
We achieved a milestone full year underwriting profit of 164 million.
Which is a new annual record for the insurance Division with.
With a full year combined ratio of 94 point.
Down two three points year over year.
Our Attritional combined ratio also improved 80 basis points year over year to 94.
We are enhancing our operations to become even more connected and efficient on a global scale.
It's an exciting time for our primary business, we continue to see significant opportunities and I look forward to even greater momentum ahead.
122 was a year of multiple wins, we reduce volatility diversified the portfolio.
Banded margins and enhanced our risk adjusted return.
We got there with consistent and precise execution.
We deployed our capital in areas, where we can get the best risk adjusted returns.
We also reshaped our property portfolio through continued diversification via growth internationally.
All of this accomplished while increasing our top and bottom lines.
And we improved net exposure to our balance sheet.
As I mentioned before we remain rich gone for property cat pricing.
Pricing terms and conditions provide attractive returns within our defined trading range.
Turning to 2023 the January one reinsurance renewals were executed by our global reinsurance team with equal precision.
And as a result, we have a significantly stronger portfolio heading into 2023 and beyond.
We approached the January one renewals from a position of strength.
With a superior value proposition well prepare to support our clients and take advantage of excellent market conditions around the world.
We set clear goals for our portfolio.
We achieved every one of them.
Leveraging average global market leadership, and setting early expectations with clients and brokers, which drove significant pricing improvements.
In addition to rate, we also substantially improved terms and conditions.
We targeted attractive property opportunities, both domestically and internationally.
We drove higher attachment.
And reduced exposure to named and secondary barrels.
Significant property cat rate increases were evident across all geographies.
In North America, the property Cat ex ol risk adjusted rate change was up approximately 50%.
The average attachment point for our global property Cat business also increased meaningfully.
Resulting in significantly reduced risk exposure.
At the same time, you expected return for our cat portfolio increased materially.
In casualty and professional lines pricing and terms and conditions.
They need to improve overall.
And we leveraged a hard property market to strengthen and further diversify the portfolio.
Internationally, the one one renewal exceeded our expectations throughout Europe and Asia.
Grew our regional portfolios increased participations and by expanding our base of new clients.
We also saw significant rate movement and specialty lines exposed to the Russia, Ukraine War, particularly in marine and aviation.
Political violence.
I am very pleased with the performance of our outstanding reinsurance team.
<unk> distinguished itself in this renewal by early and consistent communication with our brokers and clients.
We set expectations heading into one one and constructively worked with them to find solutions.
As a result, we improved our portfolio and expanded margins, while deepening our relationships with brokers and clients.
Looking forward to future 2023 renewals, we expect reinsurance pricing momentum to continue.
We see abundant opportunity to continue growing and diversifying our portfolio in all markets.
Focused on further growth in Asia and Europe , while.
<unk> on the continuing market dislocation and property.
Given significant firming of the reinsurance market on January one and the heightened risk environment primary insurers should also see firming prices in 2023, they will need to maintain underwriting discipline.
I am proud of whatever achieved in 'twenty two.
We delivered on our strategic objectives, while laying the groundwork for sustained profitable growth.
I attribute ever success to our outstanding team under consistent and relentless execution in every aspect of the business.
The outlook for 2023 is bright.
And I look forward to taking this company to the next level.
Now I will turn the call over to Mark to take us through the numbers in more detail.
Good morning, everyone. Everest finished off 2022 with very strong results across the board in the fourth quarter operating income was $478 million or $12.21 per diluted share for the quarter equating to an operating ROE of 19, 4% for.
For the full year operating income was approximately $1 1 billion or $27.08 per diluted share with an operating ROE of 10, 6%, while the annualized <unk> portals.
Total shareholder return was five 4%.
One highlighted we have a number of strengths in both our insurance and reinsurance businesses bolstered by our teams consistent execution around the globe.
We remain very well positioned to take advantage of the market opportunities ahead.
Looking at the group results for the fourth quarter Everest reported gross written premiums of $3 7 billion, representing 9% growth in constant dollars. The combined ratio of 87, 8% for the quarter represents four one points of improvement over the prior year's quarter, driven by lower cap loss.
As well as a continued improvement in attritional loss experience primarily in reinsurance.
Group.
Your loss ratio was 59, 6%, a 90 basis point improvement over the prior year's quarter led primarily by the reinsurance segment, which I'll discuss in more detail in just a moment.
Group's commission ratio was 21, 6% up modestly on mix changes, while the group expense ratio was modestly higher year over year at 6%.
Moving to the segment results and.
Starting with reinsurance in the fourth quarter. The reinsurance gross premiums written grew three 7% to $2 4 billion in constant dollars.
Growth was driven primarily by property pro rata business.
Combined ratio was strong at 86, 4% an improvement of five one points year over year, primarily on lower cat losses.
Current year loss ratio improved one five points to 58, 2%.
As we continue to achieve favorable rate and terms optimized mix and scale.
Various lines as well as shifting the book towards accounts with better risk adjusted return potential Commission.
Commission ratio was 25% up modestly largely driven by mix and the underwriting expense ratio was two 8% broadly in line with the prior year's quarter.
Moving to insurance, where we continue to build solid momentum gross premiums written grew 25% in constant dollars and nearly $1 3 billion in the quarter.
Juan mentioned a record level of production in the fourth quarter for the division.
Combined ratio for the quarter was 91, 4%, a 1.4 point improvement from a year ago.
Current year loss ratio was 63, 4% in the quarter slightly higher year over year.
Due to mix and a one time adjustment relating to our Lloyds syndicate.
Commission ratio improved one point largely driven by business mix.
The underwriting related expense ratio was 15%, which was within our expectations as we continue to expand our franchise and invest in a number of growth initiatives across the business and finally to cover investments tax in the balance sheet.
Investment income for the quarter was $210 million versus $205 million a year ago as we continue to benefit from higher new money yields and increasing resets in our floating rate securities within the fixed income portfolio.
Private equity investments yielded a negative 30 million P&L impact in Q4, and they are reported on a one quarter lag.
Overall, our reinvestment rate continues to trend higher year over year as new money yields remain in the 5% range. While the book yield was three 5% at the end of the fourth quarter. We continue to have a short asset duration approximately three one years and as a reminder.
The 22% of our fixed income investments are in floating rate securities.
Fourth quarter, our operating income tax rate was approximately 11% within our assumed range of 11% to 12% over the course of the year.
Regarding the balance sheet, we completed the last of our granular reserve reviews across our entire portfolio.
Which affirmed the overall strength of our balance sheet underpinned by our disciplined underwriting and prudent reserving philosophies.
Overall, our reserve adequacy remains solid.
We did strengthen our asbestos and environmental reserves, which makes up approximately 1% total net reserves by $138 million to position that runoff book comfortably within the average range for industry survival ratios.
This was offset by favorable development from a variety of areas primarily from short tail lines.
Also had other marginal adjustments in both segments, resulting in zero net prior year development.
We continue to remain prudent given the uncertainty of inflation and the heightened risk environment. The entire P&C industry. Currently faces in short we remain confident in the strength of our reserve position.
Moving to shareholders' equity ended the quarter at $8 4 billion driven.
Driven primarily by the strong earnings in the quarter as well as a modest recovery on the value of available for sale extra income securities.
As rates moderated slightly.
Net unrealized losses in the fixed income portfolio as of December 31 were approximately $1 7 billion down from a net unrealized loss of $2 billion at the end of the third quarter 2022.
Operating cash flow was strong at over 1 billion during the quarter and it stands at three 7 billion year to date.
Book value per share ended the quarter at $215.54 per share while the book value per share, excluding unrealized depreciation and depreciation of securities.
$259 18 versus $2 $52 12 per share at the end of 2021, driven by the strong underwriting results mentioned earlier.
Long term debt to total capital at quarter end stood at 23, 3% broadly similar to the level last quarter.
In conclusion Everest ended 2022 with a very strong fourth quarter, we have the platform balance sheet and the team to continue to take advantage of the current environment and we have a lot of momentum as we look ahead into 2023.
That summarizes our fourth quarter results and with that I'll turn the call back over to Matt to begin our Q&A session.
Thanks, Mark operator, we're now ready to open the line for questions. You ask that you. Please limit your questions to one question plus one path then rejoin the queue. If you have any additional questions.
Thank you can I ask a question. Please press Star then one on your Touchtone phone.
If you are using a speaker phone we ask you. Please pick up your handset before pressing the keys.
The charter question. Please first started them too.
We'll pause momentarily to assemble our roster.
And our first question today comes from your own canola with Jefferies. Please go ahead.
Thank you good morning.
Two questions if I may the first one.
Listening to your commentary on one one renewals and expectations that the reinsurance market remains hard at least in some mid year.
I guess as I look at the P&L that we saw in 4411.
Still seem to be down quite a bit relative to mid.
Mid 'twenty two levels is that the right comparison or should we think about what the <unk> will look like in midyear 'twenty three relative to mid year 'twenty two.
And can you give us some maybe thoughts on how we should see those develop.
Yeah. This is Jim Williams and thanks for the question.
You know, maybe just set a little bit of a stage I'd like to add some color around one one to add to the comments that you've heard from one and mark because I think it's important context, when we're talking about P&L and reiterate what Juan said it was simply an outstanding renewal, we executed with incredible precision and achieved a number of them.
Important objectives in the renewal that really resulted in a step change in the risk reward equation for Everest.
You heard we received a significant rate increases in our U S property cat business on the order of 50%.
Essentially improved every metric that we use to measure our cat portfolio. Our average attachment points were up our attachment probabilities were down despite all of that rate online increased our expected combined ratio dropped materially our expected ROE increased materially on.
Our expected loss in dollars.
Went up slightly as we deployed incremental capacity to targeted clients.
And our dollars are expected profit per dollar of expected loss increased very meaningfully.
Similar.
Factors played out in our international markets, where rate increases significantly overachieve expectations as we were coming into the end of the year and on average our international markets took 40 points of rate, including over 30 points of rate in the U K, which hasn't seen a major cat loss in decades.
Simply put on the property cat side. It was a fantastic one one and I think we expect those conditions to play out through the remainder of this year and into next year. So just exceptional and so when you think about the resulting P&L. So that you know what.
I would share with you.
The comparison, you always want to be making is quarter to quarter. Because what you are looking at is an analysis of our in force book and what I would the way I would characterize our P&L movement is the P&L is that that we that we publish were essentially flat and you see some ups and downs in those P&L on a net basis they were essentially flat.
That translates into more deployment of some gross capacity offset by improved.
AUM and Mount Logan and that gets you to a roughly flat P&L picture.
My expectation is we will probably remain in that in that sort of territory. We feel really good about our ability to get those incredible economics without really having to stretch the cat appetite and as you'll see in the investor presentation I in terms of where we are in our earnings and capital at risk measures, we continue to trade well within our DIFM.
Find range, which we're very comfortable with so it's really the best of all worlds, where we're able to get rate.
That improves economics overcomes the inflationary factors that you see in the market and do it while maintaining.
Our risk position and are pretty stable manner, so really could not be happier with the results we achieved.
Thanks, Jim that's very helpful and my follow up to that then would be if I were to try and take that commentary and color and translate that into the combined ratio. So I think you've stated that you expect the 91 to 93.
Reported combined.
Would you be surprised to see that come in well below that 90, 193 range and a quote unquote normal cat year in 'twenty, three and would you expect to give us an updated.
Number at some point this year.
Yeah, Hi, Erinn. This is south, Florida, and driving look what I would that go is a couple of things I mean, you look at the.
The 20% net income ROE that we generated in the fourth quarter, 19% operating ROE, which again, it's an excellent result, as I mentioned in my opening remarks, particularly in the at the market environment that we're in right. Now in addition to that you layer the amount of rate.
Jim and I, just talked about over 50% on U S cat extra well over 40% in our European businesses et cetera, you talk about the terms and conditions that I referred to earlier in my remarks, which are also significant changes and all of this is very much across.
<unk>.
Our portfolio. In addition to that you also look at the work that has been done on the primary insurance side.
The margin improvement that we've been able to drive through 2022. So all of that leads you to a place that I say you know we're in a good place and I would not be surprised if we ended up being on the better end of that range.
And would you expect to give us an update at some point in a hard number yeah.
Yeah for us so we're expecting to do another investor day towards the end of this year.
And at that point, we will be updating our numbers in our financials. This will be the third year of our three year numbers that we put out there initially back in 2021.
Thank you very much and good luck in the year ahead.
Thanks Sharon.
And our next question today comes from Brian Meredith UBS. Please go ahead.
Yeah. Thanks, So one it sounds like Youre going to update premium guidance also in November .
Yeah look I think by then we're going to have a pretty good idea of how the environment shaping but I think Brian If you go back to again in my prepared remarks, you know, we just renewed 53% of the reinsurance book.
At very attractive terms and as I said in my comments. We also expected for 16171, we will continue to be very favorable for the reinsurance industry. So I think that also gives us a pretty good idea as to where that might be shaping up. In addition to that I would also say on the primary side. We also would expect.
Pricing to continue to improve as I mentioned in my remarks, and frankly, we already saw some of that in the fourth quarter, where we saw commercial auto property and general liability.
Make some significant improvements quarter over quarter on the pricing.
We're in a heightened risk environment, you've got pressure from the reinsurance heart market and so I would expect that all of these things will lead to a very good trajectory on the growth, but yes, we will be providing.
Providing additional guidance later in the year, when we do our Investor day great.
Great. Thanks, and then second question one I'm just curious how do you think about allocating your P. M. L. On the property side between the insurance and the reinsurance business I mean would you hold back some on the reinsurance because of opportunities.
Primaries are one that you prefer a little bit more than the other how do you think about that.
Yeah, No. That's that's a great question, Brian one of the the terms that we like to use inside of a company is that we do quite a bit of a dynamic capital allocation. So this is a fact.
Frankly, our fundamental discipline that we have with our enterprise risk management framework. We're on a very regular basis, we essentially looking at by line of business.
Where we're coming in against our expected returns et.
Et cetera, So that's how we start deciding who gets to capital.
We do not do is peanut butter. This around the company right. So we will look at the market opportunity. We look at where we think we can get the best economics, the best risk adjusted returns and that's essentially how we deploy the capital and its an important point because I think you heard both me and Jim Williams and talk about the precision with.
Which one was executed and I think it's important to step back to understand that in order to get to the heart of your question and it's the fact that we have pretty good control of our business around the world. So we are able to decide whether we're going to deploy more capital in the U S versus in the continent of Europe versus Asia.
Versus Latin America, depending on the market conditions, and we apply that same rigor across the segments, whether its a primary reinsurance or whether it's on the reinsurance side of things and that's ultimately how we make those decisions, but I would invite either Jim or mark to maybe provide some additional comments on that as well yeah no Brian its Jim I think that's spot on I think.
Clearly what you've seen is a situation, particularly as we came into one one where it took primary market a little while to start to adjust to what.
What was coming in terms of insurance rates and are our primary insurance business has been very disciplined on their portfolio management and in some ways, that's freeing up capacity and thereby capital that we were able to very effectively deploy and reinsurance at one one and that's I think really brings to life. The dynamic capital allocation that was mentioned.
We are very nimble that way and it allows us to really achieve a best in class returns.
Great. Thank you.
And our next question comes from Meyer Shields with VW. Please go ahead.
Great Thanks, and good morning.
First question is I know this is only one piece of the changes at one one but I'm trying to get a.
Thin.
The significance of higher reinsurance attachment points anyway, or maybe recasting 2022 losses.
This new framework just to get a sense of how much difference that particular stat.
Sure Meyer this is Jim Williams, and it's a it is a very important point and actually I think the fourth quarter gives us a little bit of a demonstration of that because we began a lot of these strategies are really long before one 123, and if you think about how we execute in one 122.
And the actions that we told you we were taking it was all about moving away from lower performing programs, particularly pro rata deals moving away from high volatility structures, particularly around retro around aggregate programs, making sure that we were deploying capacity where risk adjusted returns warranted. It which is why we withdrew some capacity of 120.
Two and then started deploying it back into the market as conditions improve and what does that do for losses like what happened in the fourth quarter with early in our view losses like that should be primarily routine by seasons. That's that's really not the type of loss that should be a fundamental loss to the reinsurance market.
And you saw our Q4 cat loss for wounds was.
Relatively small $10 million and that is the type of loss, we want for events like that so that gives you a sense of how we think our book will perform over time, so if in 2023.
There are a number of what we would call frequency cats, the 1 billion $2 billion of events.
Our expectation is our participation in those events will be lower than it would've been prior to 123, because the average attachment point moved up our scenes are gonna be retaining more of those losses net into their portfolio, which is where those losses belong and that allows us to really preserve our capacity for major industry events, which was one of them.
Slide four so that should give you a flavor of how we expect the portfolio for them.
Okay, that's very helpful.
The second question is there and I apologize if I missed it I'm just looking for any thoughts on ceding Commission changes.
Both are at.
Reinsurer and on the insurance book.
Yeah, Mike This is Jim I'll start and then turn it over to my colleague my term.
So we did see a really excellent results in our casualty renewal as well, obviously a lot of attention.
Being paid to property and rightfully, so, but we enjoy a premier position with many of our seasons.
On their casualty portfolios and we participated in this cycle of market hardening over the last few years by taking increasing share of casualty programs for those core clients.
On a pro rata basis.
One of the things. That's happened is all of that margin is getting accreted in the primary market as you've seen ceding commissions go up we think that made sense. It was a reasonable trade. It was still resulting in more margin for us. So we like that what we're starting to see now is still very attractive opportunity we did.
Continue to participate very meaningfully at one one in the programs I'm describing in fact in a number of cases, we increased participation in I think grew our portfolio and a really nice fashion, but.
But what we also saw as obviously the amount of Av.
Margin expansion in the primary market is narrowing a bit and so we started to see seeding commissions certainly leveling off.
Really only at full small handful of instances, where they continue to increase and that was usually when they were already below market to begin with what we what we saw mostly was.
A modest improvement in average ceding commissions across the portfolio and we think that's justified and our expectation is that that phenomenon of moderating ceding commissions will continue to play out as we go forward so with that I'll turn it over to Mike sure. Thanks, Jim.
For us it's about striking the right balance of retaining on heartland underwriting profit, while managing volatility and really actually as we continue to scale our businesses.
Given the reinsurance market and what's happening, we're certainly not immune to what is going on but I would say to you. We're also not reliant on reinsurance like others and given our financial strength and our capital our strong capital base. We will continue to be have all the flexibility in the world here to try and what we need to do as an organization and trusted again, it's about being thoughtful as we retain more prime.
For mis there'll be more skewed towards portfolio whenever economics, nor to our medicine will continue to try and frankly, given where we are in a position of how we've scaled up our businesses. We feel in a good position and I don't think there'll be anything material that we're concerned about driving our overall strategy.
Meyer. This is Juan I think look just to round out the answer I think at the end of the day bottom line as we saw improvement in seat commissions in this renewal.
Okay Fantastic, that's very thorough very helpful.
Thanks, Mike.
Thank you and our next question today comes from Elyse Greenspan with Wells Fargo. Please go ahead.
Hi, Thanks, Good morning, My first question.
I want to go back to the one widens by you guys spoke about you know he expected return increasing materially.
So I'm not sure you know.
What color or numbers, you want to give us, but like could you say you know what the expected return on your business would be in a normal cat year or you know for instance, if we looked at the 11% return you guys generated in 'twenty, two what would that be if last year's events for card to something to give us a sense of just.
You know how much better the expected return is in 'twenty three relative to 'twenty, two given right the better pricing and the improved terms and conditions.
Sure Yeah at least this is Jim Williams and I'll provide you some of that some of that color.
And maybe at the risk of repeating some of what I said, but I do think it's really critical if you think about our objectives coming into this renewable were pretty straightforward in there very similar to what we focused on last year.
You know continue to optimize the portfolio and move away from underperforming programs control volatility, particularly around how we structure deals and for that for us that means mainly avoiding aggregate structures and minimizing the amount of capacity. We have deployed at really high return probability layers like the you know the.
One in three type of player that's not really where we want to be playing.
And then ensuring that we're moving capacity into the best in class programs and that same phenomenon that we've consistently executed through 2022 laid out in January one and so we were able to take capacity from let's.
Let's say the bottom tier of our programs and reallocate it to the best opportunities in the market. We did it with significant rate increases as one and I've mentioned, you know 50% in the U S. 40% in international markets. As you mentioned there was also significant movement in terms and conditions in particular in the U S. A significant portion.
Our deals are on now on a named peril only basis. We've also eliminated write backs of exclusions on a number of areas that will over time result in better economics and so.
You know the heart of your question of what does that mean for the portfolio in practical terms, obviously every year.
Sent us with a different set of actual catastrophes and so as opposed to looking back what I would tell you what I, how I would expect the portfolio to perform is that you know frequency at which have really been download the reinsurance industry will increasingly be retained by our customers. So we're getting a lot more rate to now focus on the.
Type of losses that reinsurance was designed to cover the first part.
We would also expect.
For major losses that similar to what happened with Hurricane and you know, we're very thoughtful about how much of a share of the major losses that you wanted to be taking and I would expect that to look quite good as well and then lastly, what I would say for all of this we have a meaningful increase in the amount of cat premium available to pay these losses and still make.
Our strong return so hopefully that gives you the color that would help you to triangulate you know.
What is an excellent expected return position as we move through 2023 at least in this is Juan let me piggyback on Jim's answer because I think he was quite thorough and I would point you back to that 20% ROE that we just talked about for the fourth quarter and then we put it in perspective right because while we don't give specific.
Guidance on what we think the ROE outlook is going to be for the coming year.
We still generated double digit roe's, despite the industry facing a top five catastrophe year and I think you've got to put those results in the context of all the activities that we have been talking about really over the past three years on how we have been managing this company, reducing the volatility being very disciplined portfolio management being very disciplined with.
Where we deploy our capital.
And with the material improvements that we achieved at one one that we just talked about and that we expect to expand upon in the coming renewals, we expect that steady improvement to continue and so I would say all signs point to a significantly improved risk adjusted returns across the portfolio. So just a little bit more color on that.
Thanks, and then the equity portfolio went down from 1.3 billion to like $281 million in the quarter.
Why did you guys take that portfolio down and in the fourth quarter.
Good morning, Elyse, it's mark so we have a strategic asset allocation.
Table that we're pretty disciplined with and it allows us.
Flexibility to move between asset classes, whether it's on the fixed income side private equity public equity private credit et cetera et cetera. So.
Tactically, we had a large reduction of the equity portfolio in the fourth quarter shifted into other assets that we felt were more attractive, but still consistent with that strategic asset allocation.
<unk> been focused on since 2021 Investor day, So we will probably move around a bit.
'twenty, three but stay disciplined to do that.
Thank you.
Thanks.
Our next question today comes from Sea renovating theaters with Raymond James. Please go ahead.
Well good morning, everyone.
I'd like to.
Go back to I think in your comments you talked about the annual ground up Reserve review that you do every year.
And especially on the primary side, obviously inflation is it's been a big issue.
Statistics came out in 'twenty two.
Couldn't have been anticipated in fiscal year, 'twenty and 2019. So can you talk to us about the process what were the puts and takes for you to come out where you did.
Some perspective, there would be helpful.
Yeah.
It's Marc So let me get into that it just in a few ways. The process itself is a year round.
So we're looking at.
Reserves throughout the year performing reserve studies, it's quite comprehensive in terms of aligning.
Aligning underwriting.
<unk> reserving claims in the course of that process. So you've got many different stakeholders involved and then.
It's quite ground up in terms of the analytics that go into it.
And I bring you back to.
Principles that we set out back in 2020 about setting up a prudent loss picks holding them in a disciplined fashion over time until we see a seasoning.
In the different lines of business and for US. Those are those are kind of a ground up rules and processes that we use to evaluate.
Now in terms of the in terms of you know what we did in Q4 I mentioned, the asbestos and environmental reserves.
<unk>. So we've got roughly $20 billion of carried net reserves were strengthened by 138.
We had.
Some offsets favorable offsets coming from shorter tail lines, and then we had smaller or more marginal adjustments.
Susan minuses in both segments, but nothing approaching the $1 38.
In the process overall.
Phil you know very solid on in terms of our loss position and we obviously take into account macro factors like loss inflation by making sure that we've got prudent loss picks.
Our and our reserves and then we do dynamic modeling and I think one of the benefits that we have in our company. It was really the diversified nature.
The lines of business that we have in the reserve profile that we have there is no single emphasis on one class and that diversification helps to absorb any potential volatility that might come from a loss inflation factors in general so not not.
Gives us I think I'm, just a better mix or diversification of reserves to handle these types of issues.
Got it.
I guess my follow up question sticking with <unk>.
The specialty insurance platform, we look at your primary growth.
18% for the year, I think 19% for the quarter.
I think after we get through earnings season, that's going to be.
Pretty outstanding result relative to some of your peer group so.
Could you spend a minute and talk to us about where you're seeing growth I guess not only.
Looking back to 'twenty, two but when we think about 'twenty three.
Sure.
Thank you for the question.
So a couple of things.
We have a lot of moving pieces in the organization, but the reality is our underwriting profit focus is first and foremost the number one thing we tend to focus on and given that with all the things we have from scaling up our existing businesses and given our market share and given the opportunity we have with our expansion you're starting to see a lot of these things play out so when I think about the opportunity for that.
It's not without discipline in cycle management that comes along with that ground, but for US we see what the market opportunity in front of us. So we have the expertise we can deploy anywhere in the world now with the expansion now starting to play through in some of the things you've done you're starting to see that come into play and in addition to that we have the ability to have the flexibility.
Either to drive this in local regions I think Roes.
There's been great 32 straight quarters.
The specialty businesses, where we see areas like we opened up and you saw adding to that would you be aviation and energy and construction complementing our credit and political risk and surety, helping offset some of the things that are happening with like transaction liability and then you go over to some of the market and property and when we Havent see these things that are actually opening themselves up we can do this any.
Where in the World and I think for US our benefit has been our agility and the way, we actually are able to capitalize with our speed to market and we'll continue to do this we're going to refine our offering whether its retail or wholesale we're going to figure out where the opportunities globally and if we don't like what we see from a risk adjusted return basis, we'll pull back and we'll do the right thing you've seen that with our cycle management.
Have you seen that we're doing in Dino and if we don't see those things we're going to sit there and we'll continue to look for opportunity where it best fits and the growth just comes with that and so we will continue to drive that opportunity, where we see it and it's about playing offense in a decent.
Yeah. Greg. This is one of driving I would add a couple of thoughts because I think that was well said by Mike look I think at the end of the day. There's a couple of key factors. One we're highly diversified within the primary insurance division and so that means that we can find opportunities in the market, where they exist and as Mike pointed out it's always about profitability. So.
The for instances youre not seeing a good environment for financial lines, right now, but youre seeing a very good environment, where things like property casualty still in other lines of business. So that allows us to essentially pick our spots and be able to do that.
The point that I don't think can be underestimated is really the agility of our company and I've mentioned that in our prepared remarks, our ability to be able to pivot we're pretty lean we're pretty intrapreneur real we have great relationships with our distribution and we have a lot of good talent in this company and all of these things are basically what enable us to continue the momentum.
Some debt that you have seen from us really over the last number of years.
Got it thank you for the answers.
Thanks, Greg.
And our next question comes from Mike Zaremski with BMO. Please go ahead.
Hey, good morning.
Maybe a first question thinking about capital management capital uses.
Yes.
Should we expect.
A bit more kind of operating leverage to like when we take a look at the premiums to equity ratio is there room for that.
In sharp given kind of better economics youre at.
Painting, and just and also just thinking about capital uses.
Yeah in 'twenty three.
Should we be still thinking that the growth will kind of eat up most of the capital versus.
Buybacks.
Yeah, Mike it's Mark So a few points here I do think we've got ample capital to take on the opportunities of 2023.
And it includes you know more than just the traditional balance sheet youre looking at a what we call our capital shield, So Logan I'll, probably use cat bonds et cetera.
Operating leverage.
There's definitely more room on the balance sheet too expand that leverage.
I think one of the key points to keep in mind is.
Really the risk adjusted return profile is improving so youre seeing exposure.
Being managed thoughtfully in the REIT and the expected return go up significantly and that's one of the key.
Key points that I think allows us to expand our operating leverage.
Also fairly well diversified with multiple income streams and so I do expect the net income.
<unk> for the year to provide significant retained earnings to support our growth and we'll see how that growth comes about because there are other levers that we can pull.
If if the opportunities in the market are even more significant.
And what we think they could be.
Just in terms of your buyback comment look at it.
It's always on the table, we can pull that lever, but this is a VEBA.
The bus market, we've seen in a generation and so the value creation that comes out of the organic growth plan that we've got and the fact that we're ready for it in terms of balance sheet.
James franchise, the whole the whole ball of wax you couldn't have a better alignment. So I think you'll see us really attack this opportunity in 2023.
Full bore.
So I'll leave it there.
That's helpful.
My my follow up is.
On the alternative reinsurance maybe ILS marketplace.
Mount Logan is one of the leaders.
And that space is.
Is there.
Are you seeing dislocation in that marketplace.
And U S.
Do you see that kind of persisting I know, there's some puts and takes on how that impacts.
Someone like address but what what's going on in the ILS market place that you're you're seeing and does that is.
Is that part of the reason you feel that the discipline within the overall reinsurance marketplace, well well well continue.
Yeah, Mike This is Jim Williams and thanks for the question I mean, clearly ILS.
Has been a dislocated market coming into one one and for many of the reasons that you know that.
Everyone participating in this market there've been a lot of cat losses over the last few years and I think particularly around the margins you had a lot of investors participating in ILS vehicles.
And maybe I didn't quite understand or weren't quite prepared for the prospects of <unk>.
Having multiple years in a row of cat activity, which which is not uncommon. These clusters happen and so that is definitely I think put a number of investors in a position where they're on pause you also have obviously the the phenomenon of from those cat losses, Theres a lot of trapped capital.
That is just sidelined no matter what rates terms and conditions are doing they they just can't deploy that capacity because it's preserved against prior events and so that has definitely created and helped to contribute to a capacity crunch in our industry now from our perspective.
That affects us in two ways on the one hand, and our primary reinsurance business our balance sheet reinsurance business. If you will we're seeing all the phenomenal results that we've talked about plus 50 U S property cat pricing, plus 40 international terms and conditions getting better attachment points rising and that's all happening.
Because there's more demand for reinsurance capacity than there is supply and part of part of the reason that's occurred is because of the crunch in Iowa.
The second thing that it does is it makes it a little more challenging for us to raise funds in Mount Logan.
Because investors are sidelined or they have trapped capital.
In terms of that trade will take that trade all day long.
Driving improvement in our in our core reinsurance business as our first priority and it also a nurse to the benefit of our Mount Logan investors, who are consistently invest in the ILS space, They get better returns as well so we like that at.
At the same time, what I would say is we have.
We have been getting traction in Logan, we did raise money at one one and the team is doing an excellent job of conveying our value proposition to protect potential investors in and in particular, unlike a lot of other vehicles in the market our investors get the same results that Everest gets you know we're not we're.
We're not making money when they're not making money so.
That's a real focus of ours and I think that's very compelling we have a strong pipeline of investor interest and our expectation is that Mount Logan will grow.
Over the course of time and that's that's a key priority for us.
Thank you.
Thank you and our next question today comes from Ryan Tunis with.
With Autonomous research. Please go ahead.
Hey, Thanks, Good morning, guys, just a few hopefully quick one for Jim.
First question, just I guess following up on mirror and our leases line of questioning on.
How the changes in the portfolio might map to the actual cat numbers. So you mentioned that.
Youre shying away from kind of like the one in three type of risks.
What I'm struggling with is that you know like in the supplement the one in 'twenty looks like it grew about as much as the one in 250.
So from the P&L disclosures alone.
It's difficult.
For me to really see what's going on so I don't I don't know the right way to ask it maybe.
Could you give us some idea over the past few years like how much of your cat losses have come from sort of those.
Frequency layers that were even.
More frequent and one in 'twenty I'm, not really sure, but just any numbers would be helpful.
Yeah sure Ryan, Yes, Jim obviously.
It's an important question and so I'm going to give you a few threads I think.
<unk> really helped describe what's happening in the portfolio, So obviously and I cant restate it enough exceptional execution at one one.
Which really followed on really strong execution in 2022, as we reposition the portfolio and right sized.
Our cat risk for our company in a go forward and sustainable basis, and that's really critical work.
What I would do if you want to think about movement of P&L first of all I wouldn't look at it on a year over year basis too much has changed in 'twenty. One 'twenty two I really look at our more recent p&l's, whether you want to pick 10, one or seven one and I think that shows what is essentially a flat profile of P&L deployment at though at a variety of return periods, whether its one in 'twenty.
One in 250.
One and $2 50 is down by about $50 million from 10, one one in 'twenty is essentially the same number it's down by $5 million.
And so that gives you some sense of what we expect.
What I would say in terms of the balance of where cat losses have been going in the industry is it's not so much that you know what percent is the one and three event versus the 120 events, where are you getting appropriately paid where are you getting reasonable risk adjusted returns.
So for us at all.
Our portfolio has shifted clearly toward the areas where risk adjusted returns.
Our strong and warrant the risk, we're taking and that's the one and 22, one and $2 50 range, we feel really good about that.
The other thing to keep in mind thats been happening against the backdrop of all of this is the discipline required in the underwriting and the terms and conditions to ensure that your inflation loading your programs appropriately those are all things that which will also over time in order to the benefit of our portfolio. Now obviously the actual result is going to be highly dependent on which events occur.
But if we have a year, where you have a couple of large events, but you also have a frequency of smaller cats, we think our portfolio.
We will perform better now.
Sleep better now than it would have a year ago and that's because of all the actions we've taken the right and you know all the improvements we've made so hopefully that gives you some perspective on how to interpret those p&l's.
Yes, that's helpful and then just lastly.
Could you give us an update on kind of how youre thinking about your original.
Hurricane Ian pick.
Yeah sure Yeah, Ryan it's Jim again, Yeah, we feel very good about it I mean.
Obviously, it seems like it was a long time ago, but it's still relatively early as you've seen there have been puts and takes in the industry in terms of folks adjusting.
Their view of what their ultimate losses can be in terms of our clients feeding them and so we're watching that very closely.
A key thing to keep in mind, which we communicated in.
In the last quarterly call when we talked about it in as you know in terms of any upside risk to the numbers. We put up we feel very good about that because of the protection that we receive from our from our Cat Bond program as we had indicated.
In our last call, we have about $350 million of potentially expose cat bond limit, which will engage in Pcs reaches $48 1 billion in the rest of it are currently at 47 four.
And we will recover around a pro rata basis up to 64 billion or $63 8 billion. So we don't really have any kind of material concerned about upside to that number whether it ultimately there's a good guy in there it's going to take quite a bit of time for that to play out, but we're watching it very closely.
Thanks.
And ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to management for any final remarks.
Great. Thank you all for your questions and the excellent discussion. This morning. This is wanted to drive a I am very optimistic about the opportunities ahead, and our ability to continue driving a world class platform.
Our strategy is clear our businesses were growing with strong resilient portfolios and we have an attractive risk return profile.
This is all underpinned by our strong culture, which is an increasingly significant competitive advantage.
We will expand on this foundation to accelerate our progress and create increased value for our investors colleagues and clients around the world. Thank.
Thank you for your time with US today and for your continued support of our company I look forward to speaking with all of you again, when we discuss our first quarter 2023 results. Thank you.
<unk>.
Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.