Everest Group, Ltd. (NYSE:EG) Q3 2023 Earnings Call Transcript

Everest Group, Ltd. (NYSE:EG) Q3 2023 Earnings Call Transcript October 28, 2023

Operator: Welcome to the Everest Group Ltd. Third Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Matthew Rohrmann, Senior Vice President, Head of Investor Relations. Please go ahead.

Matthew Rohrmann: Good morning, everyone, and welcome to Everest Group Ltd. third quarter of 2023 earnings conference call. The Everest executives leading today’s call are Juan Andrade, President and CEO; and Mark Kociancic, Executive Vice President and CFO. We are also joined by other members of the Everest management team. Before we begin, I’ll preface the comments on today’s call by noting that Everest SEC filings, including extensive disclosures with respect to forward-looking statements. Management comments regarding estimates, projections and similar are subject to the risks, uncertainties and assumptions as noted in these filings. Management may also refer to certain non-GAAP financial measures. These items are reconciled in our earnings release and financial supplement. With that, I’ll turn the call over to Juan.

Juan Andrade: Thank you, Matt. Good morning, everyone. Thank you for joining us. Everest’s third quarter performance was excellent. We delivered outstanding returns, including a near 20% operating return on equity and an annualized total shareholder return of 25%. We are leaning into the hard reinsurance market, where favorable conditions and a flight to quality persist. As a lead reinsurance market and preferred partner, we are taking advantage of strong pricing while deepening our client relationships and expanding our global portfolio at significantly improved risk-adjusted returns. We are positioned for success as we head into the January renewals. We also remain on track for January 2024 for the full deployment of the equity capital raised in May.

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

With that, I’ll turn to our third quarter financial highlights, beginning at the Group level. In addition to delivering exceptional returns, we drove substantial improvements across our Group key financial metrics, underwriting income, net investment income, operating income and net income and we delivered record increases in operating cash flow and book value per share. We grew the business at significantly expanded margins. Gross written premiums increased by 23% year-over-year in constant dollars, led by record quarterly reinsurance growth. We generated $613 million in net operating income, a significant year-over-year increase, and we have generated $1.7 billion year-to-date. The Group combined ratio of 91.4% also improved year-over-year by 21 points, which translates to an underwriting profit of over $300 million for the quarter and nearly $1 billion in underwriting profit year-to-date.

Our attritional loss and combined ratios both improved by more than a point year-over-year to 59% and 86.5%, respectively. We generated more than $400 million in net investment income in the third quarter and we delivered over $1 billion of net investment income year-to-date. In addition to the improved interest rate environment, this year-over-year improvement was driven by strong returns from both our fixed income and our alternative investments. Turning now to our reinsurance business. The reinsurance division delivered an exceptional quarter with outstanding top and bottom line results and superb execution by our team. Leading into the strength of the market, we maintained our strategy of targeted and nimble capital deployment with core clients, resulting in significant growth across virtually all business lines and geographies at materially improved risk-adjusted returns.

We grew gross written premiums on a constant dollar basis and excluding reinstatements, by 33% to $3.2 billion for the quarter. This is a new record for the division. In property catastrophe, where the market remains outstanding, premiums, excluding reinstatements, were up 41% from last year. Property pro rata premiums increased 44%. Casualty pro rata premiums were up as well at 20%, while we carefully manage the casualty market cycle and target best-in-class clients. Internationally, we expanded in key target growth markets across Europe, Asia and Latin America. We also grew in specialty lines with strong margins, including aviation, marine and mortgage. Despite the active catastrophe quarter, we improved our catastrophe loss ratio significantly year-over-year, reflecting our deliberate and consistent actions to manage volatility.

The attritional loss and combined ratios were down year-over-year by 1.6 and almost two points, respectively, with the overall combined ratio improving to 91%. This helped us achieve an underwriting profit of $234 million. Looking ahead, our outlook for the January 1, 2024 renewal remains strong. We fully expect the robust pricing and favorable conditions to continue. And as a lead market, we stand to benefit. Our nimble, creative and collaborative approach allows us to simultaneously improve our economics and strengthen client relationships. This tremendous relationship equity will serve us well. Expectations for pricing and terms and conditions in the global property market are now well understood, which should make future renewals more orderly.

At recent industry events, including Monte Carlo and CIAB, our clients told us that they want more of our capacity and want to further broaden their partnership with us. Our confidence in our strategy and in the strength and durability of the market is high. I am excited by the magnitude of the opportunity we have created for the business. We are extremely well-positioned with the expertise, global capabilities and financial strength to seize this generational market opportunity and to optimize the portfolio for the long-term. Now turning to our Insurance division. In our primary business, rate continues to exceed loss trend with improvements across multiple lines. We achieved an 11% increase in our core portfolio, excluding workers’ compensation and financial lines.

In addition to property, improved pricing was particularly strong in marine and other specialty lines. We grew the business approximately 4% and generated more than $1 billion in gross written premiums. Growth in the quarter was diversified and particularly strong across property, where we see excellent opportunities and specialty lines such as marine, aviation, trade credit and political risk. The growth was offset by reductions in workers’ compensation and financial lines where the market is less attractive. Additionally, we are gaining traction internationally, where we are methodically scaling our capabilities and our platform. Our focus remains on driving bottom line growth. We continue our disciplined underwriting to take advantage of high margin opportunities and reduce exposure in pockets of business that do not meet our profitability objectives.

The attritional loss ratio improved year-over-year to 63%. Our pre-tax catastrophe losses at $10 million, net of estimated recoveries and reinstatement premiums were modest, leading to an improvement in the reported combined ratio to 92.6%. We achieved an underwriting profit of $66 million in the quarter and a record profit of $196 million year-to-date. We continue to attract and develop best-in-class talent. We share our vision for the company and our commitment to world-class customer service. I am bullish about the momentum we have created for our business and Everest’s position in the market. We have every advantage at our disposal, a world-class team, strong and diversified reinsurance and insurance platforms and market tailwinds at our back to accelerate our progress and build even greater value for our shareholders.

With that, I’ll turn it over to Mark to review the financials in more detail.

Mark Kociancic: Thank you, Juan, and good morning, everyone. Everest had another very strong quarter and built upon the momentum we saw in the first half of the year. The company reported operating income of $613 million or $14.14 per diluted share in the quarter, equating to an operating income return on equity of 19.2%. Year-to-date, total shareholder return or TSR, stands at 24.5% annualized. We significantly improved our overall combined ratio while generating double-digit growth as pricing and terms remain attractive in most lines of business around the world. The company’s strong performance in the third quarter was led by our team’s high level of execution in our core markets and we have a number of tailwinds across both of our businesses heading into the last quarter of the year and into 2024.

Looking at the Group results for the third quarter of 2023, Everest reported gross written premium of $4.4 billion, representing 23.4% growth in constant dollars year-over-year. The combined ratio was 91.4%, which includes 5 points of losses or $175 million from pre-tax natural catastrophes, net of estimated recoveries. The natural catastrophe losses in the quarter were driven by a number of midsized events globally. Group’s attritional loss ratio was 59%, 120 basis point improvement over the prior year’s quarter, led by the reinsurance segment, which I’ll discuss in more detail in just a moment. The Group’s commission ratio increased 50 basis points to 21.4% on mix changes, while the Group’s expense ratio remains a competitive advantage of 6.1%, up modestly year-over-year as we continue to invest in our talent and systems within both franchises.

Moving to the segment results and starting with reinsurance. Reinsurance gross premiums grew 32.7% in constant dollars when adjusting for reinstatement premiums during the quarter. As Juan mentioned, this was a record for the segment. The strong growth was driven by double-digit increases in Property Pro rata, Property Cat XOL, Casualty XOL and Casualty Pro rata and was broad-based globally. The combined ratio was 91%, which improved from 115% in the prior year. The prior year period included $620 million of pre-tax catastrophe losses, net of recoveries and reinstatement premiums, largely due to Hurricane Ian. The attritional loss ratio improved 160 basis points to 57.5% as we continue to achieve more favorable rate in terms, particularly in property, which we expect to continue throughout 2024.

The commission ratio was 24.8%, an increase of 90 basis points from the prior year due to the impact of reinstatement premiums from the Q3 Cats last year. There was a modest 30 basis point underlying mix impact benefit, excluding the Q3 2022 reinstatements. The underwriting-related expense ratio was 2.5%, which was essentially flat year-over-year. We continue to lean into the hard reinsurance market and the equity capital raise deployment remains on track and will be fully deployed by January 1 renewals. Moving to Insurance. Gross premiums written grew 3.5% in constant dollars to $1.2 billion. As you may have noticed, gross written premium growth was more modest this quarter as the division enjoyed double-digit growth in a diversified mix of property and specialty lines, while being partially offset by lower written premiums in workers’ compensation and financial lines.

Overall, pricing remains ahead of loss trend, and we continue to see attractive market opportunities across our book of business. We will also continue to have underwriting discipline in areas we find less attractive as we exhibited this quarter. The combined ratio was 92.6%, which improved from 103.5% in the prior year. The division benefited from a relatively low level of natural catastrophe losses in the quarter in the amount of $10 million net of estimated recoveries and reinstatement premiums, further demonstrating the success of our derisking actions on our portfolio. The attritional loss ratio improved slightly this quarter to 63.1% driven primarily by business mix, given the higher proportion of longer tail lines of business. The commission ratio improved 120 basis points largely driven by business mix as increased property writings earned through as well as increased volume of seating commissions.

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

And as a reminder, the 23% of our fixed income investments are in floating rate securities. For the third quarter of 2023, our operating income tax rate was 6.5%, which was lower than our working assumption of 11% to 12% for the year, and this was largely due to geographic income splits. Shareholders’ equity ended the quarter at $11.3 billion or $13.1 billion, excluding net unrealized depreciation on available-for-sale fixed income securities. At the end of the quarter, net unrealized losses on the available-for-sale fixed income portfolio equates to approximately $1.9 billion, an increase of $242 million as compared to the end of the second quarter, resulting from rate increases and foreign exchange movements. Cash flow from operations of $1.4 billion during the quarter was a company record and book value per share ended the quarter at $258.71, an improvement of 22.4% from year-end 2022.

When adjusted for dividends of $5.05 per share year-to-date. Book value per share, excluding net unrealized depreciation on available-for-sale fixed income securities stood at $301.76 versus $259.18 per share at year-end 2022, representing an increase of approximately 16.4%. Net leverage at quarter end stood at 18.6%, modestly lower on a sequential and year-over-year basis. In conclusion, Everest had an excellent third quarter of 2023 and is well-positioned heading into the final quarter of the year and into 2024. And with that, I’ll turn the call back over to Matt.

Matthew Rohrmann: Thanks, Mark. Operator, we are now ready to open the line for questions . We do ask that you please limit your questions to one question plus one follow-up, then rejoin the queue if you have additional questions.

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Q&A Session

Operator: [Operator Instructions] The first question comes from the line of Alex Scott with Goldman Sachs. Please go ahead.

Alex Scott: Hi. Thanks. Good morning. First question I had for you is on the demand for Property Cat reinsurance headed into this next year. And I’d just be interested if there’s any color you can provide from early discussions and indications around that piece of things in terms of just thinking through last year, the retentions brought up a bit, I think limits in certain cases, weren’t taking up as much as insured values were going up, that kind of thing. Are you seeing some willingness to reverse some of those actions? Do you think you’ll see that kind of growth in the Property Cat reinsurance market this next year?

James Williamson: [Audio break] on demand is that we see very strong signals that our clients are looking for more Property Cat capacity. And as you say, there was, I think, some pent-up demand at 1/1 of ’23 that ultimately didn’t get fulfilled. And so they’re now back in the market and seeking capacity. We are having discussions with our clients actively about the 1/1 renewal and have also taken advantage of some opportunities to do some private placement activity in the latter half of this year to start filling in that demand. So I think that’s a very strong signal and our view with that is that, that will continue to drive really attractive returns in that market. As respects retention levels and the market’s reaction to that and what might happen next year, our view is, overall, the movement in retentions were necessary and appropriate.

There clearly was too much industry loss activity flowing into the reinsurance sector that needs to be retained in the primary market. Now does that mean that every single carrier landed in the right spot, probably not. And I’m sure there’ll be some adjustments around the edges. But fundamentally, I don’t see any change in terms of going backwards on retentions.

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

James Williamson: Sure, Alex. It’s Jim again. So as you say, I mean, this issue is clearly on the minds of the market, and it’s been much discussed, including by Everest with our customers at both Monte-Carlo and CIAB. I think to fully understand our view of the market and what happens next, you really have to understand the context of how we built our book of business. We’ve been incredibly deliberate and focused on managing the market cycle, and growing with the best-in-class cedents around the world, right? So we timed it correctly. We grew after the market began to harden. In 2019, we grew with best-in-class underwriters. We did not write the entire market. And I think some market participants did do that, and their results and their market commentary reflects that error.

And you also may have heard recently if you expressed, I think, that reinsurers have been slow to recognize the changes that are happening around social inflation and the other trends you mentioned. I mean that is absolutely not the case with Everest. You would have seen our approach over the last 3-plus years. We’ve been very decisive on the reserve front. We’ve been prudent in our loss picks and which we’ve maintained by the way, even though pricing over the last couple of years has exceeded our expectations. We’ve been updating our trend factors on a frequent basis. So we are staying very much close to these trends and staying on top of them. So today, we are sitting here with a very strong book with the best underwriters in the market. And those underwriters are not sitting by idly waiting for bad things to happen, which, by the way, is why we are starting to see signs of some reacceleration of rate taking among many of our clients, they’re managing this closely.

That said, social inflation is real. It’s a real trend that needs to be managed. And so our approach at whether it’s the January 1 renewal that’s coming up or really any renewal is to assess each deal on its merits. And we do that in a very rational way. If the deal passes muster and is delivering returns we want, we’ll write it. If it doesn’t, we are more than happy to move away from it. We have many, many options to deploy our capital, which is why diversification is so important in our business, many different ways to get to our financial goals. And so we have the flexibility to move among deals. The other point that I would make just relative to a piece of your question around ceding commissions, given all these trends, our expectation is that ceding commissions will continue to improve.

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

Alex Scott: Thanks for all the details.

James Williamson: You got it.

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

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

James Williamson: Sure, Josh, this is Jim. Well, one point I would start with, I know you’ve made a point that it was a moderate Cat quarter and I think we feel very good about our Cat loss. But this quarter, from an industry perspective was anything but moderate. I mean we tracked over 80 events around the world. You had significant hurricane activity, which fortunately because of landing points, et cetera, did not do significant damage. But the comment I would make, and as you say, it’s sort of an unanswerable question, but you’ve seen our year-to-date performance in terms of our reported Cat losses. And that’s happening against the backdrop of a year that’s likely going to be another $100 billion plus industry loss a year, which is incredible, right?

And our expectation is that if you repeated the losses of 2022, for example, our loss this year against those same events would have been meaningfully lower, and that’s because of attachment points. It’s because of portfolio management, it’s because of aggregation, it’s our underwriting discipline, it’s all those things laddering up. So we have clearly changed and improved the risk profile of the book, particularly when you’re talking about a large number of mid to large sized Cat losses.

Joshua Shanker: Okay. And then if I can get one more in. You mentioned that you’re ready to deploy the capital you raised earlier in the year at January 1. Is there any way to discuss the degree to which capital is underdeployed right now in 3Q ’23? And what the impact might be if you were fully deployed the way you want to be?

James Williamson: Yes. Sure, Josh. Jim again. Well, look, so just to kind of go back to what we said after the capital raise, our expectation was that we would begin the deployment meaningfully with the 7/1 renewal that there would be incremental opportunities through the back half of 2023, and then we would complete the deployment at the January 1 renewal. So, we have done exactly that. We’ve begun the process of deployment. We had a really strong 7/1. The back half of the year after 7/1 gets quieter, but there’s been some nice deal activity both at the renewal periods as well as on a private placement basis. And based on the conversations we’ve had with our cedents, we see a very strong path to completing the deployment. We really have no concerns around that. So I’m not going to speculate on, well, what if I just sort of deploy all the capital at 7/1. But what I can say is the path to completing that process, as we described, is incredibly clear.