Everest Group, Ltd. — 2024 Q1
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Good morning, everyone, and welcome to the Everest Group Limited First Quarter of 2024 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.
Thank you, Matt. Good morning, everyone. Thank you for joining us. We had a strong start to 2024. Our first quarter results included record underwriting profit and significant increases in operating income, net income and investment income. This resulted in a total shareholder return exceeding 18% and an operating return on equity of 20%.
Thank you, Juan, and good morning, everyone. Everest is off to a strong start to 2024. We delivered significant growth in underwriting income, net investment income, operating income and net income for the first quarter. This drove operating EPS of $16.32, and an operating ROE of 20%. The annualized TSR or total shareholder return was strong at 18.1% despite modest foreign exchange headwinds. The company's strong performance in the first quarter was led by our team's high level of execution and ability to capitalize on attractive opportunities. We have significant momentum behind us across both of our franchises driven by excellent outcomes at recent renewals and our disciplined insurance expansion into target global markets.
Thanks, Mark. Operator, we are now ready to open the line for questions. We do ask that you please limit your questions to 1 question plus 1 follow up, then rejoin the queue if you have additional questions.
[Operator Instructions]
I just had a question on the premium growth in property Cat. I was a little surprised at the 4% growth, I thought it would have been more than that, just given how attractive market conditions are. Could you elaborate on what you're seeing and it looks like you may have shifted a little bit more towards property pro rata. Maybe just talk about why you chose to grow that instead of a property Cat.
Sure, David, this is Jim Williamson. Thanks for the question.
Got it. Understood. Thanks for that clarification on the property Cat growth. I appreciate it.
Yes. This is Juan. Let me start and then I'll ask Mark Kociancic to add some color as well.
Yes. Juan, just a couple of things to add to the equation. So in addition to the conservatism and the prudence of the lost fix, we feel very good about the margin that we're building in the lines that we're writing. We're obviously tracking loss trend, give you a couple of high-level points on that. Essentially, it's been elevated for a while, for several quarters, but stable, broadly stable, and rate has been meaningfully in excess of trends. So we feel good. No issue on our side to have the extra, what we would call, level of prudence in those loss picks given the loss environment that Juan spoke about and I spoke about during the Investor Day.
Our next question comes from Brian Meredith from UBS.
Juan, I was hoping you could talk a little bit more about your expectations for midyear renewals. We're hearing some signs from brokers that there's ample capacity and maybe we're seeing property Reinsurance pricing kind of peaking out. Is that your perspective on things?
So sure, Brian. Let me get started, and I'll ask Jim to give you a little bit of extra color on all of this.
Sure, Brian. Thanks for the question. Just to maybe reinforce some of the points Juan made, which I think are spot on. We have seen really terrific results from the most recent renewals, including April. And you would certainly have expected, given how much rate the market took last year, that more underwriters are going to be interested in writing the business. And while that's true, we've also seen just a floor under the discipline that people are applying to this market, which is what's sustaining terms and conditions, keeping risk-adjusted rate on the upward trajectory, which is resulting in the economics that we find so attractive.
That's really helpful. And then I just wanted to pivot back to the Insurance underlying, call it loss ratio just quickly here. I know that last year, you had some mid stop loss one-offs. So year-over-year, it looks like about 150 basis points up year-over-year.
Yes. Brian, it's Mark. I don't think it is. I think workers' comp is broadly stable in the last few years. So that's not driving it.
Do you have the all-in number for kind of what rate looked like in the first quarter when you include financial and comp?
Yes, that would be about a little bit over 7%.
And our next question is coming from Michael Zaremski from BMO.
Follow-up on the primary insurance pricing. I think you might have answered part of this, but so the rates have accelerated in social inflation, I guess, associated lines and the decelerated in property, I think, is how -- what kept the kind of the math flat at 12%.
Yes, Mike, this is Juan. So let me give you a little bit of perspective, and I think you can break it down sort of into different lines.
Okay. Got it. An encouraging trend on the liability side, given what we're seeing. I believe my follow-up in the prepared remarks, I think, Jim Williamson said that property Cat grew by 24%, I believe. Is that -- I feel like when we're looking at the disclosure in the earnings release, we see a much lower number for Cat XOL? Am I thinking about something incorrectly?
Yes, Mike, this is Jim. Yes, the -- an earlier question was about the fact that we had printed a lower Cat growth number. You would have seen about a 4% growth number on Cat XOL. And what I had indicated is that's really the impact of the recognition of written premium flowing through the first quarter financials, which included a renewal last year, the June 23 renewal where we actually chose to step back a bit on Florida because of the stringent -- our own stringent financial underwriting approach. And so now that's kind of flowing into the financials.
Our next question comes from Josh Shanker from Bank of America.
A lot of property questions. So on the big pro rata growth, can you talk about what that means for your exposures and how that affects your capital utilization?
Sure, Josh. This is Jim. So a couple of things. One, if you look at our gross PML and then further our net PMLs as they've trajected over the last several renewals, they're up modestly. I would say that's being driven more by taking advantage of the property Cat XOL market. We've been pretty cautious on how much Cat exposure we're taking in the property pro rata book. Obviously, it exists, but we're being thoughtful about that balance.
And capital utilization?
Are you referring in terms of how we put the capital to work?
Yes. As you've grown that book, does that -- obviously, more efficiently, I guess, it is capital. Does that -- is there a binding constraint on how much of this property pro rata you can write?
No. Josh, it's Mark. The answer is no. Despite the large level of growth, very manageable full degrees of freedom to underwrite as we see in the market going forward. No issue on that side.
And then switching gears to casualty reinsurance. Can you talk about what you're seeing in terms of incurred loss activity versus claims as disclosed by your customers on the reinsurance side for the older accident years as they deal with social inflation? Have they taken their picks up enough? Or are you -- do you think that they're playing a game of sort of catch-up based on picks that you've set in the space?
Yes, Josh, it's Jim again. Look, I'm not going to comment on the approach that other companies are taking to lost pick selection. What I would say is -- and this is true of older accident years and more recent accident years. We take a very prudent approach to ultimate loss ratio selection. We certainly did that over the last few years as we've strengthened reserves in reinsurance casualty. You saw us do that. We took a very conservative approach to how we set those ultimate loss ratios and put ourselves in a position to ensure that, that's in the rearview mirror.
And now we have a question from Elyse Greenspan from Wells Fargo.
Sorry to follow up again on the property Cat question, but just going back to the 4% reported growth. And Jim, I know you said that the property Cat XOL book grew 24%, sorry at 1/1. I understand that debt premium earn lags as you write business. I just didn't, I guess, appreciate that there's a lag on a gross or net premiums written basis on business that you would have written in the middle of last year. Can you just, I guess, just kind of explain that just that concept to me, just like the lag on the written that would, I guess, flow through 6 months later?
Yes. Sure, Elyse. It's Jim. Yes, we've recognized written. We don't recognize written premium on a reinsurance contract the way you might on a primary insurance contract where you recognize all of the written premium in the period that you originally incepted the deal. Instead, the written recognition of premium is spread out. In the case of property Cat, it would typically be over a 4-quarter period, whereas something like casualty pro rata is typically recognized over an 8-quarter period and you don't recognize all the premium in a straight line, particularly for casualty pro rata.
Okay. And then on the -- on the capital side, you guys started to buy back a little bit of your stock this quarter. I think you used the word opportunistic around that. So can you just give us a sense of just kind of capital return thoughts from here just balancing growth? And I guess, obviously, as we get closer to win season?
Elyse, it's Mark. So you're right. We did start some modest share buybacks in the first quarter, really no change from what we've been saying all along. We're privileging the organic growth, no reason we can't do capital management actions like share buybacks. At the same time, we demonstrated that in March and no reason it won't continue going forward, it's an attractive level.
And our next question comes from Gregory Peters from Raymond James.
So for the first question, I'm going to pivot back to the TSR target that you guys have rolled out. And I'm just curious if there's been an updated view on the risks to hitting your TSA target -- TSR target, excuse me. And in that regard, I was looking at your slide deck, and I noticed your -- you disclosed your 1:100 PMLs. I'm wondering how that might look when we get to [ 7/1/24 ]?
So it's -- Greg, it's Mark talking. Let me kind of split this into 2 pieces of PMLs and TSR, ways of getting there. So back in the Investor Day, one of the points that I made during the presentation was that we had lots of different avenues to achieving leading financial returns as measured by total shareholder return.
Yes. Greg, it's Jim. So referencing your question and the PMLs that you would have seen in the investor presentation. So a couple of things. One, look, the peak zones that are represented there, we certainly have seen a little bit of growth in our net PMLs from July of last year to 1/1 this year.
Greg, this is Juan. And I would just essentially reinforce 2 points that Mark and Jim have made. So number one, we absolutely see no change to the 17% target. And you see where we started the year at the 18.1%.
I guess, my follow-up question, just more specific. Can you talk a little bit about how the facultative market is evolving because sort of hearing mixed messages out of the market and value your perspective on that.
Sure, Greg. It's Jim again. Yes. So in terms of facultative, we had a terrific quarter in our facultative business. We were able to grow that business very nicely, about 14% over prior year. And that's really on the back of significant demand by our cedents. And in particular, in short tail lines where they had to increase their Cat XOL attachment points last year to manage the market cycle. That means that, in some cases, they're feeling exposed on larger risks. Their per-risk limits might be uncomfortable. And so they're coming to Everest to try to manage that exposure. And so we're getting really great results that we're excited about and I expect we'll continue to lean into.
And our next question is coming from Bob Jian Huang from Morgan Stanley.
So first question is on reserving. So looking at the last year's reserve charge, a large portion of that came from the accident year 2016 to 2019 cohort. I understand that you will probably do more reserve studies later on in the year. But just curious if there are any new developments or update at this particular point regarding the current reserving positions and as well as that 2016 to 2019 cohort as well?
Bob, it's Mark. So we did do our Q1 quarterly review process. It's quite comprehensive. You're right, no real reserve studies to go through in the first quarter, but plenty of anecdotal data that we're looking at, all kinds of information.
Got it. That's very helpful. Second one is more of a modeling question. So I understand that your expense ratio for the Insurance segment was elevated a little bit due to international build-out. How should we think about maybe a near-term run rate on this? Is this something that will persist for next few quarters, next few years? Is there a good way to think about the expense element on the Insurance segment?
Bob, it's Mark again. So I think it will be elevated for several quarters. So we're adding talent, technology. The premium, as you can see, is growing meaningfully. The earned is trailing and obviously earns in over time. And so we're still in a process of scaling. And you can see, just in the Q1 comparatives, we're coming in for the insurance division of 16.6% expense ratio versus something closer to 15% a year ago.
Bob, this is Juan. Let me add a couple of comments as well to what Mark just said. I think one important thing to keep in mind is really the hallmark expense discipline of Everest. And if you look at the group expense ratio really at that low 6% range, 6.1%, 6.2%, we've been able to maintain that throughout the entire build-out of that international component because of our expense discipline and our ability to prioritize things that matter and say no to things that don't. So I think that is something you can expect for the company going forward is that we continue to have one of the most competitive expense ratios in the industry, and that, frankly, is not going to change as we invest and build and grow the international component.
And next in question is Yaron Kinar from Jefferies.
This is Andrew on for Yaron. Within Insurance, it sounds like there could be some benefit on the underlying loss ratio for the remainder of the year. But does the guide of 90% to 92% for reported combined for full year '24 still stand, considering the reported 93% this quarter?
Yes, Andrew, it's Mark. The short answer is yes. I think there are several factors that are going towards that. You heard me in the previous question speak to some of the scaling benefits that we expect to get, particularly from the insurance franchise. So there are several factors, tailwinds that we have that I think will help us achieve that range.
And maybe on Reinsurance, some strong growth within casualty pro rata and casualty XOL. Could you talk about some of the opportunities there this quarter?
Yes. So let me start, and then I'll turn it over to Jim. This is Juan, Andrew.
Yes, I think that's right. It is on the pro rata side, it is largely timing of recognition. As we had indicated after the January 1, 2023 renewal, we earn casualty pro rata or I should say, recognized written premium over 8 quarters. And it's really in the middle of that period that you see the largest recognition of premium. And so we're in that period. We had really strong printed numbers last quarter on Cat's pro rata, same this quarter, et cetera. And there have been incremental opportunities, as Juan indicated. And in particular, when those are taking place outside the U.S. and in a very balanced way, we're more than happy to lean in to those opportunities.
And next, we have a question from Meyer Shields from KBW.
It's Jean on for Meyer. I have a question on the professional line growth, kind of accelerated from 9.9% in 4Q. So instead of 11.7%, you mentioned rate acceleration. Are you guys expecting more if rates continue? Can you give more color on that, please?
Yes, it's Jim Williamson. Thanks for the question. Actually, for the most part, the acceleration you would have seen some of the growth in professional lines for the quarter in our Insurance business was really related to one large fronting arrangement in our Canadian operation. So it's not really a general trend that you can apply to the rest of our business.
Yes. The only other comment I would make and this is Juan, is [ freight ] also had some implications into that as well. But the growth that you're seeing is really what Jim has described, is that fronting deal in Canada.
Got you. So we don't expect that to continue for the rest of the year?
No, I don't think we would expect that to continue for the rest of the year. Again, that was due to just one specific deal in Canada.
Okay. Got it. Just one more question, just a board question on Reinsurance. Just curious, can you share any plans for buying reinsurance for the Insurance segment?
Yes. Sure. It's Jim Williamson again. Yes, we've been a pretty consistent buyer of reinsurance for our Insurance business. There are a lot of good reasons to procure reinsurance, obviously, it helps us to manage volatility within that line. In a number of cases, particularly our pro rata treaties in North America are quite accretive from a ceding commission perspective. So I think that strategy of using reinsurance strategically to manage our exposure and our economics will continue.
And this concludes our question-and-answer session. I would like to turn the conference back over to Juan Andrade for some closing remarks. Please go ahead.
Great. Thank you for all the questions and the excellent discussion. And I'll end really where I started, which is we're off to a very good start in 2024, with an 88% combined ratio for the quarter and a 20% ROE. And from the prepared remarks and the commentary that we found over the past hour, you see that we are still in a market with strong trading conditions, generating that 17% growth that you saw overall for the first quarter. And then you certainly heard about the opportunities we see in both Reinsurance and Insurance for the remaining part of the year.
And the conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Have a great day.