Everest Group, Ltd. Q1 FY2021 Earnings Call

Welcome to the Everest Re Group Earnings Conference Call. All participants are currently in a listen-only mode. I would now like to turn the call over to Jon Levenson, Head of Investor Relations. Thank you. Please proceed.

Good morning. And welcome to the Everest Re Group Limited 2021 First Quarter Earnings Conference Call. The Everest Executives leading today’s call are Juan Andrade, President and Chief Executive Officer; Mark Kociancic, Executive Vice President and Chief Financial Officer. We are also joined by other members of the Everest management team. Before we begin, I will preface the comments on today’s call by noting that Everest SEC filings include extensive disclosures with respect to forward-looking statements. Management comments regarding estimates, projections and similar are subject to the risks, uncertainties and assumptions as noted in these filings. Management may also refer to certain non-GAAP financial measures. These items are reconciled in our earnings release and financial supplement. With that, I turn the call over to Juan Andrade.

Thank you, Jon. Good morning, everyone, and thank you for joining the call. Everest is off to a strong start in 2021, with robust growth, strong overall profitability, continued improvement in attritional underwriting margins and excellent investment performance. We achieved these results despite the meaningful impact to the industry of the U.S. winter storms in the first quarter. Our thoughts are with those affected by the storms, as well as the Australian floods, and I am very proud of the work our claims team is doing on the ground to help people restore their lives. Our first quarter results demonstrate the earnings power of Everest and our success in implementing our strategy to build a broadly diversified company with a relentless focus on operational performance and disciplined underwriting. We are bullish about 2021. We will continue to profitably grow the Insurance segment while continuing to grow and strengthen our position as a leading global P&C reinsurer. Our diversified Reinsurance and Insurance franchises, financial strength, deep distribution relationships and leading customer solutions enable us to thrive in today’s market. I will now discuss our Group, Reinsurance and Insurance first quarter 2021 results. Starting with the Group results, we grew gross written premiums by 14% and net written premiums by 16% with robust growth across both segments. Our growth stems from, one, the combination of new business opportunities; two, improved terms and conditions; three, increased rate levels; four, expanded shares on attractive renewals; and five, high overall renewal retention. The as-reported combined ratio was 98.1%, including the previously announced U.S. winter storms and the Australian flooding catastrophe losses. We generated $45 million in underwriting profit, compared to $29 million in the first quarter last year. While the pandemic is not over, and as we have done in prior quarters, we completed a rigorous analysis of our COVID exposure in the first quarter, resulting in no change to our COVID loss provision. Our COVID loss provision remains at $511 million, of which approximately 80% is IBNR. The attritional combined ratio was 87.3%, a 2.5 point improvement over the first quarter of 2020, with both segments continuing to show significant year-over-year improvement in loss and expense ratios. We continue to diligently manage our portfolios to improve returns with a broad array of underwriting actions. This includes managing attachment points and limits, improving on terms and conditions, and targeting non-renewals of business that do not meet our hurdle rates, as well as many other actions. Underwriting profitability remains at the core of everything we do. Net investment income was excellent at $260 million, compared to $148 million in the prior year first quarter. These strong operating results led to a net income for the quarter of $342 million, resulting in an annualized return on equity of 15%. For our Reinsurance Division, the first quarter continued our strong growth, with gross written premiums up 16%. We were pleased with our successful execution of our January 1 renewal plan. The targeted and disciplined growth was driven by higher rate, increased shares on profitable deals, along with new opportunities in property, casualty, specialty lines, and facultative business. The attritional combined ratio was 85.5% for the quarter, a 2.3 point improvement year-over-year. This came from improvement in both the loss and expense ratio. We saw better economics in most treaties and parts of business around the world. We were disciplined and reduced shares or non-renewed underperforming treaties or those where we did not get our target rate, terms, conditions, wordings, or exclusions. We also deployed additional capacity into lines with more attractive risk-adjusted returns. This dynamic capital allocation resulted in an improved attritional combined ratio. Overall, we continue to write a stronger, more diversified, and more profitable book. With regard to the April 1 renewals, we achieved 10% to 15% rate increases on Japanese wind treaties and 5% rate increases in earthquake treaties. Rates in other geographies continue to rise in both property and casualty lines. Mark will provide additional details during the Q&A. Our Insurance Division continued its solid execution in the market, resulting in strong attritional underwriting performance and premium growth. Gross written premium grew 10%. If we exclude workers’ compensation, where we see less attractive pricing, gross written premium grew 20%. This growth is driven by disciplined cycle management, new business opportunities, ongoing strong rate increases in our target classes of business, and high retention rates on existing business. We are also seeing a slow but steady improvement in overall economic activity. The growth was well diversified in our target classes, where market conditions are prime for profitable growth, including specialty, casualty, professional liability, and property short tail. We are happy with this diversification as it is a core tenet of our strategy. Everest Insurance delivered an improved attritional combined ratio of 92.2% for the first quarter, a 2.7 point improvement over Q1 2020. These results continue to be driven by proactive underwriting actions and a continued focus on expense management. These actions are resulting in the continued expansion of our Insurance margins. The attritional loss ratio of 64.3% improved 1.4 points year-over-year, and the total expense ratio improved 1.3 points year-over-year. Renewal rate increases continue to exceed our expectations for loss trend, up 16% in the quarter excluding workers’ compensation, and up 10% including workers’ compensation. The increased rate we achieved and the expected increase in margin is a function of market conditions and disciplined proactive underwriting actions across our businesses. After years of soft pricing and rising loss costs, pricing adjustments remain necessary. We expect this favorable pricing to continue throughout 2021. Consistent with prior quarters, rate increases were led by excess casualty up 33%, D&O up 24%, property up 13%, and commercial auto up 13%. We are also seeing widespread rate increases in other lines of business. We are managing the Insurance business to build a diversified portfolio, steering our mix of product lines with better rate adequacy and higher long-term margins. We also continue to manage average limits deployed to control volatility. We are happy with the progress we have made, and we expect that the strategic direction should positively impact our results going forward. Conversely, we have been thoughtfully managing workers’ compensation through the cycle. This portfolio now represents 14% of our first quarter premiums, down from 21% the year ago. We have pared back writings in the monoline guaranteed cost base and shifted our portfolio to more loss-sensitive, loss-ratable business. Workers’ compensation is an area of expertise at Everest, and we are monitoring market conditions closely for potential opportunities, but these efforts illustrate the disciplined cycle management we have implemented in the company. Lastly, our strong position in both the E&S and retail channels continues to give us access to a wide set of opportunities. We had a strong start to 2021, with robust growth, strong overall profitability, continued improvement in attritional underwriting margins, and excellent investment performance. We have vibrant and well-diversified Reinsurance and Insurance businesses with experienced leadership and underwriting teams providing industry-leading solutions to customers. We have sustained momentum. This company has excellent financial strength, top talent, and a prudent capital management philosophy. We are focused on sustained profitable growth, a more diversified, targeted, and deliberate mix of business, and superior risk-adjusted returns. We believe that the relentless and disciplined execution of our strategies will result in maximizing shareholder returns. I am confident in Everest’s future and in our ability to deliver and our commitments to customers and shareholders. Now, let me turn the call over to Mark Kociancic for additional details on the financials.

Thank you, Juan, and good morning, everyone. Everest had very attractive results for the first quarter of 2021, with strong overall profitability, continued improving underlying margins, robust growth, and excellent investment results. I will touch on these points over the next few minutes. For the first quarter of 2021, Everest reported a net income of $342 million, resulting in an annualized return on equity of 15%. We also reported operating income of $260 million for Q1 and operating earnings per share of $6.49. Starting with underwriting income, Everest had positive contributions from both Reinsurance and Insurance with $45.2 million of underwriting income. This reflects the improved underlying attritional loss and expense ratios, offset by the impact of catastrophe losses. The catastrophe losses of $260 million of pretax and net of Reinsurance and reinstatement premiums, with $213 million in the Reinsurance segment and $47 million in the Insurance segment. The vast majority of $250 million is coming from the U.S. winter storms, with the balance from the floods in New South Wales, Australia. Also worth noting is that we have not added to our COVID-19 loss provision, which remains at $511 million, with approximately 80% of our pandemic loss estimate remaining as IBNR. First quarter results continue to reflect the impact of our underwriting and portfolio management initiatives. Our underlying attritional loss and combined ratios are strong and continue to improve. Excluding the catastrophe losses, reinstatement premiums, prior year development, and COVID-19 pandemic impact, the attritional loss ratio was 60.7% in Q1, compared to 61.4% in the first quarter of 2020. The attritional combined ratio was 87.3% for the first quarter of 2021, compared to 89.8% for the first quarter last year, representing a 2.5 percentage point improvement. For Insurance, the attritional loss ratio improved from 65.7% in the first quarter of 2020 to 64.3% this quarter. And the attritional combined ratio for Insurance improved to 92.2%, compared to 94.9% in the first quarter of 2020. Our U.S. Insurance business, which makes up the majority of our overall Insurance business, continues to run very well, with an attritional combined ratio in the high 80s. For Reinsurance, the first quarter 2021 attritional loss ratio was 59.5%, down from 59.8% a year ago. The attritional combined ratio on the same basis was 85.5%, down from 87.8%. The Group commission ratio of 20.5% for the first quarter of 2021, was down 150 basis points from 22% reported last year in Q1, largely due to changes in the composition of our business mix plus higher ceding commissions received in the Insurance segment. The Group expense ratio remains low at 5.9% for the first quarter of 2021 versus 6.3% a year ago. The expense ratio continues to benefit from our continued focus on expense management, cost economies of scale as our premium base continues to grow. First quarter investment income had an excellent result of $260 million, as compared to $148 million for the first quarter 2020. Alternative investments recorded a quarterly record $120 million of income in the first quarter, largely due to increases in the net asset values from our portfolio of diversified private equity investments, reflecting the strong economy and financial markets. As a reminder, we report our limited partnership income one quarter in arrears. Invested assets grew approximately 2% to $25.9 billion during the quarter, up from $25.5 billion at year end 2020. Approximately 80% of our invested assets are comprised of a well-diversified, high credit quality bond portfolio with a duration of 3.5 years. The remaining investments are allocated to equities and other invested assets, which include private equity investments, cash, and short-term investments. Our effective tax rate on operating income for the first quarter of 2021 was 7.9% and 8.4% on net income. This was favorable versus our planned effective tax rate of approximately 12%, largely due to the geographic distribution of the catastrophe losses occurring within the United States. For the first quarter of 2021, Everest generated strong operating cash flows of $904 million, compared to $506 million for the first quarter of 2020, reflecting the strength of our premium growth year-over-year. Our balance sheet remains strong with a capital structure that allows for the efficient deployment of capital and ample capacity to execute on market opportunities. Shareholders’ equity was $9.7 billion at the end of the first quarter and broadly flat versus the $9.7 billion at year end 2020. Our debt leverage ratio stands at 16.5%, and book value per share stood at $241.57 at quarter end. I close by noting that Everest repurchased approximately $24 million of common shares during the first quarter. And with that, I will now turn it back to Jon.

Thanks, Mark. Operator, we are now ready to open the line for questions. We do ask that you please limit your questions to two or one question plus one follow-up and then rejoin the queue if you have any remaining questions.

Thank you. Your first question comes from Elyse Greenspan from Wells Fargo. Please go ahead; your line is now open.

Hi. Thanks. Good morning. My first question, if we went back to last year, you guys within your Insurance book were getting 24% of price that was excluding comps, 12% with workers comp, and if we were to assume a 5% loss trend, that would have resulted in about 4 points of accident year underlying loss ratio improvement this quarter. And when we look at the Insurance book in back of COVID, you produced just under 1.5 points. So is it a good rule of thumb that you will apply less than half of the improvement brought at the bottom line and the other half you would use to build some reserves for conservatism?

Yeah. Thanks, Elyse. And this is Juan, and good morning also. I think there are a couple of things to keep in mind. Number one is, we had strong results across the board. As I said in my prepared remarks, it’s a 2.5 point improvement in the combined ratio year-over-year. When you look specifically at the Insurance Division, that’s a 2.7 improvement that you are seeing there as well. But frankly, it’s led by the loss ratio with 1.4 improvements in the attritional loss ratio. Now the mechanics of that improvement, I think, it’s along the lines of what we discussed in prior quarters. So, certainly, we are seeing very good rate. We saw, as I mentioned, 16% rate increases in the Insurance book in the first quarter, and that continues to do quite well. As a matter of fact, to put it in perspective, that 16% is two times the rate that we achieved in all of 2019. So rate is part of that. But the bigger part of all of this is really the myriad of actions that we are taking on the underwriting side. As I mentioned previously, to continue to position our book of business both on the Insurance side and the Reinsurance side to have sustained profitability over the long term. And it’s important to keep in mind one thing, right, we are deliberately shifting the portfolios toward segments that have better overall economics. In addition to all the underwriting actions that we are taking and that I have mentioned in the past and in my script to continue to improve sustained profitability. Now when it comes to loss picks, I think it’s also important to keep in mind that we continue to hold the line on loss picks. We have clear indications that underlying profitability is continuing to improve, some of that you saw in this quarter’s results and some of that will need to be proven over time as the accident years continue to mature. So I think that’s probably the best guidance that I can give you on that. And with that, let me ask also one of my colleagues, Jim Williamson, to jump into this question as well.

Yeah. Good morning, Elyse. The only thing I would add, and I think it’s important both in Insurance and Reinsurance, and I suspect it’s on the minds of everyone on the call today is just this question of the loss trend. We talked about rate achievement exceeding the loss trend. But we have also talked over the last few years about the fact that the trend line has been accelerating in terms of whether it’s social inflation or inflation in building cost in terms of repair after natural disasters and things of that nature. And so that does two things: one, it will certainly consume a little bit more of the rate increases, and we want to be prudent about that; that’s, I would say, a smaller effect. The larger effect, though, is the degree that places uncertainty around what the ultimate trend line will turn out to be, which is why we are going to take a very conservative position around making sure that we have proven out our trend selections over time, which would ultimately allow us to be looking at these accident years more favorably, but it’s going to take time for that to fully mature.

That's helpful. My second question concerns your expense ratio. I believe your consolidated expense ratio was approximately 26.4 in the quarter, which aligns with the levels you experienced in the latter half of last year but is significantly lower than pre-COVID figures. I'm trying to understand what the expense ratio might settle at once we move past COVID and what a reasonable run rate for that would be.

Sure. Thanks, Elyse. I think it’s important, as you were describing just now, to decompose the parts of the expense ratio. I think if we look at the operating expense ratio, that 5.9, I think that 5.9, et cetera, it’s going to be pretty consistent for us. One of the things that you know about Everest and our company, it’s our disciplined expense management, whether it’s COVID or no COVID. The reality is we are pretty focused on being efficient. So I would expect that the operating expense ratio would be relatively consistent with those numbers that you have been seeing. The commission ratio is going to fluctuate based on the type of business that we are writing in any given quarter, right? For instance, if you are writing on the primary Insurance business, lines that are growing faster but you are getting better seeds because of our Reinsurance structure, that obviously will have an impact. On the Reinsurance side, obviously, the business mix that we write at the 1.1 renewals will also have an impact on that. But let me ask Mark Kociancic to weigh in on that as well.

Yeah. I would echo that, Elyse. I think that expense run rate is going to be hovering around that 6 points. You might see some quarterly volatility, but in general, that’s roughly the area I would expect it to go. There could be awaiting differential depending on the growth rate of Insurance, which comes with a higher general expense operating rate versus the Reinsurance Division. And then the other piece that I would just highlight is we are having a fairly strong net earned premium growth as we develop both franchises even more. So these are things we are all keeping an eye on. So we wouldn’t get caught up in quarterly volatility, but that run rate of 6 is a pretty good bogey.

Okay. Thanks for the color.

Thank you, Elyse.

Your next question comes from the line of Phil Stefano from Deutsche Bank. Please go ahead. Your line is now open.

Yeah. Thanks and good morning. We have been spending a lot of time with the first quarter earnings call, talking about the concept of rate adequacy. And I was hoping you could give us your thoughts on just the proportion of business that feels rate adequate or the extent to which we are reaching rate adequacy and pricing momentum may start to decelerate, and of course, the offset to that could be exposure growth as the global economy starts to recover in the back half of the year and overall what this could mean for potential top line growth? I mean it’s more of an Insurance question than Reinsurance question, but appreciate whatever color you have.

Great. Phil, thank you for that. Let me start with the top line growth question and then we will come back to the margin expansion point that you had. As I mentioned in my commentary and the script, one of the things that we are starting to see is a slow and steady return of exposure growth. It is starting to get near pre-pandemic levels. And I think that’s something that, as well as the economic recovery is consistent, you are going to continue to see probably for the back half of the year. So I think that obviously bodes well for the Insurance industry as we are creatures of an economy, and as there is more to ensure, there is more opportunity for growth. So I think again in the back half of the year, if exposure growth continues, you are going to see improvement in that. With regard to rate adequacy, et cetera, we have been seeing rates exceeding our expectations for loss cost trend now for a number of quarters, and obviously, it’s going to vary by line of business. But you are starting to see where the majority of your lines of business are rate adequate at this point in time. Now that being said, it’s important to also keep in mind the starting, particularly for some of the longer tail lines, such as general liability, excess, and maybe some of the D&O lines, where they may be needed more rates as an industry over time and we are starting to catch up and we are starting to get there. Now what you see in our numbers, frankly, is that we have that steady improvement of underlying profitability continue to improve. As I have just mentioned to Elyse a few minutes ago, we are holding the line on our loss picks. We expect that over time we will be bringing that to the bottom line. But all of that bodes very well for expected margin growth over time. But let me also ask Jim Williamson to weigh in on this question.

I would just add that while Juan covered it well, it's important to highlight that we are very disciplined underwriters. Our recent growth in revenue is a clear indication that we are confident in the trades we are making in both Insurance and Reinsurance. We wouldn't achieve this level of growth if we didn't feel positive about the adequacy levels, which is perhaps the best indication we can provide.

Okay. No. I appreciate that. Right. So my follow-up is going to be dialing in on the workers’ comp line. So we have now got four consecutive quarters of material declines. How should we think about the impact of remixing the book of business versus exposure versus price? And what has caused this line to come down and how should we think about this line in particularly as we move forward? Is it economically sensitive or is price just not at a rate adequate point where you feel comfortable turning the valve on and growing that business?

Yeah. Great. Thanks, Phil. Let me start and then I will ask Mike Karmilowicz to jump in on this call. Look, the first thing I would say is we like workers’ compensation, and we are experts at it at Everest. But we are also disciplined underwriters. And as I said in my prepared remarks, we see better pricing opportunities in other lines of business right now: property, D&O, specialty casualty. Those kinds of things. As I also mentioned, we are still writing comp. We are just changing the type of comp that we are writing going forward. Where we see less attractive pricing right now is in the monoline workers’ compensation space. As a result of that, we have really shifted more toward loss rateable, loss sensitive business at that point. But as I also mentioned in my remarks, we are very much looking for the opportunities as the economy begins to heal and as things begin to improve. We will see an improvement in exposures also in the workers’ compensation line for us, and when we see the opportunity and the pricing improving, firms improving, exposures beginning to grow, you will see us start to deploy more capital into workers’ compensation as well. But, look, this is how we are managing this company proactively, presumptively to focus on lines with better rate adequacy, with better opportunities for growth and with better margin. But, again, we like comp; we are just taking a pause on it right now from the perspective of monoline until we see conditions begin to improve. But with that, let me ask Mike Karmilowicz to jump in.

Sure. Thanks. Thanks for the question. Yeah. I think only to follow up, I think that was well said is that we have been obviously managing overall exposure down as exposure growth has also shrunk as well. But the reality is we are starting to see that bottom out. And to the point that was made by Juan, as we start to see that opportunity, particularly pick up. I think we will cease that opportunity. We have been basically focused in the composition of the portfolio, really around low and moderate type hazard risk. And so we feel very good about where we are, and we are starting to see signs particularly outside of California where rate is starting to go up and nudge up, and in California, we are seeing it starting to bottom out. But we are optimistic that toward the end of the year should start to change in California, and when the opportunity presents itself, you will see us certainly continue to gain some market share.

Your next question comes from the line of Mike Phillips from Morgan Stanley. Please go ahead. Your line is now open.

Good morning and thank you for your time. I would like to follow up on an earlier question regarding insurance margins and seek further clarification. Juan, you mentioned the year-over-year improvement in the loss ratio to 64.3%, and you indicated that the loss trends are prompting a more cautious approach. Is that the reason we saw an increase in the loss pick for the first time in over a year, sequentially from the previous quarter? It had been declining quarter over quarter, and now it has risen from the fourth quarter. Is this increase solely due to concerns about loss trends, or is there something else affecting the change from the fourth quarter?

Yeah. Thanks, Mike. Thanks for the question. I would start by saying, look, the appropriate comparison is more of a year-over-year comparison than a sequential comparison, and that’s going to be driven more by mix of business than anything else. So I think that’s an important point. The second point that I would make is, look, we feel pretty good about the business that we are writing today, about the rate adequacy on that business, and about the margin that we are building. My comments about holding the line on loss picks are really pretty straightforward. It’s the fact, and I have been pretty consistent in this messaging over the last number of quarters. In this business, you got to wait for things to season out over time, and so in the meantime, it’s not just about rate; it’s about all those actions that we are taking on the underwriting side, portfolio management, limit management, attachment points, et cetera, to continue to improve the profitability and the quality of your book, and that is what you are seeing. Those are the numbers that are being reflected not only in this quarter but in the last several quarters as well. And so going forward, we do believe we are building expected margin in those lines. And as we start getting more certainty on the fact that rate has indeed exceeded our trend expectations, that margin will start coming through the bottom line basically.

Thanks, Juan. Transitioning to capital, last quarter you hadn't utilized the $1 billion of debt, and today you indicated that some new funds have been allocated to Reinsurance. I may have missed your comments on Reinsurance. Could you clarify the status of the $1 billion you raised back in October and how you plan to deploy it this year? Will it lean more toward gross allocations or shift back to other opportunities? Thanks.

Yes, this is Mark speaking. To start, we still have plenty of capacity to deploy capital; it’s not fully allocated yet. However, there are no limitations on our growth expectations for this year or our goals related to underwriting and investments. We are focused on identifying the best opportunities to execute our plan, and capital is not a limiting factor for our business operations or capital management activities, including buybacks and dividends.

Yeah. Mike, and what I would build on Mark’s answer is, remember what we said back in October when we did the debt raise, it was purely opportunistic, right? We have plenty of capital to be able to deploy. And so, as Mark said, and I will affirm that, we are seeing great opportunities in this market. You are seeing the continued momentum on the top line in both Reinsurance and Insurance, and we feel pretty good about the capital backing all of that.

Your next question comes from the line of Yaron Kinar from Goldman Sachs. Please go ahead. Your line is now open.

Good morning. My first question, I hope that you will be willing or able to answer it. I am going to give it a shot. I am looking at the slowdown in rate improvement 500 basis points quarter-over-quarter in Insurance. I am looking across some of your competitors; it sounds like there is a pretty wide range there of the rate of slowdown. And I am just trying to understand what would drive one company’s slowdown to be greater than another’s? Is it a business mix? Are you accounting for rate in a different way? Any help there that you can offer in looking at this wide variance of trends would be helpful.

Yeah. Yaron, happy to give you a perspective and then I will invite Jim Williamson to jump in as well. Look, starting with Everest, and as I mentioned to Elyse earlier in the call, 16% is very good. It continued significant momentum on the rate side of things. Business mix certainly will influence that, the type of business that you write in a particular quarter. For instance, if it’s more heavily weighted toward a property, a short line type exposure, that carries a certain rate, that’s certainly going to impact the mix. Now, if I elevate the answer to your question and basically then talk more about the industry and look across companies, I think, again, business mix plays a part of that. I think execution plays part of that, right? I think one of the most important things about our primary Insurance business, and I talk about it often, I am very proud of them, is how well they execute in the market. So I would say business mix is part of that, execution is part of that, portfolio management and how you look at risk is certainly part of that, and ultimately, risk selection which is a component of that. I think those are all the things that essentially go into play. But look, speaking from our perspective about Everest, we expect continued momentum and strong renewal rate growth throughout 2021.

Yeah. Not a lot to add, Yaron. Other than to say when you start looking across companies, just to give you a sense of how we think about it within our own portfolio. I mean, obviously, we are well aware of the top line number for our Insurance Division, for example. But we really do look at it at a much more granular level because of all the reasons that Juan cited. And at the end of the day, we have got underwriters; they are approaching the market in a very disciplined fashion. But they are selecting one deal at a time. They are focused on making sure they underwrite the deal appropriately that they attach the right terms and conditions to drive the total margin outcome, and so it’s really only at a debt level that the numbers are truly meaningful. So I would just be careful about reading too much into the fact that there is variation across firms.

Yeah. That’s fair. I appreciate the thoughts there. And then if I for my second question, if I could shift to a Reinsurance segment, helpful color around April renewals, just curious, as we are starting to look at 6.1 renewals and the turmoil in Florida. How do you see the potential for growth there? I mean, we are hearing that there is a lot of need for rate on the one hand and much more involved in citizens and cat bonds on the other hand. So what opportunity exists there as far as you can tell today?

No. That’s great, and I will invite John Doucette to jump into this question, please.

Good morning, Yaron. Thank you for the call. We had a successful renewal period on April 1, and we're now focusing on the upcoming renewals on June 1 and July 1 as we wrap up the treaty year. We expect to deploy about the same amount of capacity and will concentrate on increasing rates, terms, and conditions due to various factors such as social inflation, climate change, and the assignment of benefits issue. We anticipate that our book will resemble last year's, and we aim to enhance the overall economics.

Your next question comes from the line of Josh Shanker from BofA. Please go ahead. Your line is now open.

Good morning, everyone. I want to focus on Reinsurance. The underlying loss ratio didn’t show significant improvement year-over-year, although the expense ratio did. When I consider the business mix, there’s a considerable amount of non-catastrophe excess of loss business written, which contributes to the overall mix. In Reinsurance, the acquisition costs vary widely across different types of businesses. Could you please explain the differences in acquisition costs between catastrophe and non-catastrophe, property and casualty, as well as how they differ between excess of loss and pro rata? This could help clarify the improvements we’ve seen in the combined ratio during the quarter.

Great. Thanks, Josh. And I will ask John Doucette to please answer this.

Thank you for the question, Josh. You are correct that this is a business mix issue, involving a blend of different commissions and expenses, whether it's excess of loss or pro-rata. However, it's more complex than that. There are deals with very low commission structures, and certain lines of business have commissions that, despite being on a pro-rata basis, are considerably lower due to the loss ratio, making them more akin to excess of loss business. The situation is tied to the mix, and we also observed improvements in ceding commissions on proportional deals, particularly in property, where the ceding commission essentially reflects rate changes. Some proportional deals required better economics from a reinsurance perspective, which led to downward pressure on ceding commissions that have influenced the figures you see today.

So if I want to extrapolate the first quarter result into the full year, you write the most amount of premium Reinsurance in the first quarter. Are the changes we are seeing year-over-year in the first quarter indicative of how the loss ratio and expense ratio might play out as we move across 2021?

So I think the best estimate of where the loss and expense ratio would be this quarter, yes.

Your next question comes from the line of Meyer Shields from KBW. Please go ahead. Your line is now open.

I know you touched on this, but when I look at the non-acquisition expenses in Reinsurance, so we saw a pretty big jump on a year-over-year basis and I was wondering, is that tied to mix also or are there other factors driving that?

Meyer, just to make sure I understand your question correctly, are you looking at the non-acquisition expenses, so are you focused on the 2.9?

Yeah. The ratio was flat, but the dollars were up a lot.

Yeah. So I think there’s a couple of things playing here. Number one, I think, as Mark mentioned, we certainly are seeing a benefit from earned premium growth coming through as a result of the business that we have been writing, and frankly, the success that we had last year in growing the franchise. If you recall, we grew that franchise by about 15%. So you are seeing the benefit of that coming through. Specifically to the dollars being up in the quarter on the Reinsurance segment, I think a lot of that is frankly noise, as Mark said earlier. There’s always going to be a bit of volatility in the expense ratio from quarter to quarter, so I wouldn’t read too much into that. But as both Mark and I said earlier, when you think about the operating expense ratio, trajectory, you know that 2.9, 3 is probably a good number for Reinsurance. Mark, I don’t know if you would like to add anything?

I want to expand on that because Juan provided a good overview. This quarter, we are witnessing some slight volatility. Although there was strong earned premium growth in Reinsurance, it might have been just below 2.9. However, there are no fundamental issues, and we should still be expecting to finish the year below 3.

Okay. That’s very helpful. And then a big picture question, I can’t remotely disagree with the rationality of rate increases slowing down as more business achieves adequacy. But the history of this industry is that second derivative continues and eventually becomes disruptive. This is a non-Everest question, but as a reinsurer, you talk to a lot of companies and Everest has been focused on relationships. Is there any reason to be more optimistic about the post-hard market phase of the cycle whenever that emerges?

Yeah. That’s a great question. I think you are getting into psychology now, Meyer, not the Insurance, Reinsurance economics. But, look, I think from my perspective, there is a number of things that might be slightly different, right? If you look at the underlying conditions that drove the need for rate, right? So a number of years of soft pricing, inadequate pricing, inadequate rates, et cetera, that finally began to turn as you had the impact of the catastrophes in 2017, 2018, and 2019, as you had the impact of social inflation coming through. Now you have the impact of the COVID pandemic and the correlated impact on both the asset and the liability sides of the business. So all of these things are at play, right? And I think what you found is that people have achieved some level of discipline and you are hearing it from us certainly; you have certainly heard it from our peers, particularly on the Reinsurance side, that they have all approached 1-1 renewals with a level of discipline. Frankly from some of our competitors that maybe we haven’t seen that level of discipline in the past. So I am an optimist, and I think that some of that will continue as we go forward. There’s also been capital that’s coming into the market, into the industry. But that capital has only been impacting on the margins and nibbling on the edges, so it has not been a significant amount of capital. So look, I think you still have some of the underlying factors that drove the need for rate. Rates are getting more adequate, as I mentioned earlier. But again, there are still environmental issues that we all need to keep an eye on, particularly the more disciplined companies, like Everest, I think will be very focused on that going forward.

Okay. That’s very helpful. Thank you so much.

Thanks, Meyer.

Your next question comes from the line of Brian Meredith from UBS. Please go ahead. Your line is now open.

Yeah. Thanks. Good morning. I guess the first question I am just curious in the Insurance segment, the acquisition expense ratio, you talked about better kind of ceding commissions benefiting the acquisition expense ratio. Is that a kind of a function of kind of changes in your Reinsurance buying philosophy, and should we continue to see that lower kind of acquisition cost benefit ratio going forward?

Yeah. So let me start, and then I will ask Mike Karmilowicz to jump in. I think a big driver of that, Brian, was really the business that we wrote in the quarter and how that business then fits into the Reinsurance structure that we have in place. So I think that’s part of that. I think the other part of that is that our reinsurers for the primary business are seeing and have seen the quality of the portfolio and the quality of the book that we have put together, and so because of that, we are able to get slightly higher seed commissions on that business. But let me turn it over to Mike and he can add some additional color and context.

Sure. Thanks, Brian. Yeah. So I think definitely business mix to Juan’s point, it’s certainly a factor in that as you saw like excess cash in some areas, we have had significant growth that we are getting a little bit of the benefit of that. Also there’s a little bit of us shifting to some of the more open market from programs that growth in that business mix again will play into that. And then finally, what I’d say, you probably see us as we continue to gain scale, be less dependent; we tend to be very conservative in basically buying Reinsurance, and so I think you will see that net to gross number change as well as we continue to evolve. But in general, I think that the business mix is mainly a bit much driver for the quarter.

Great. Thanks. And the second question I have I know it’s really early in the process here, but just wanted to ask a quick question about taxes here and the discussion about corporate income tax rates going up and particularly the GILTI tax. Does the GILTI tax have a big asset for you guys and how should we kind of think about that in the event that we do get some big changes in the GILTI tax?

It’s premature to say how that’s going to play out for us. Right now, I don’t think it’s what we see on the table from the administration or at least the public dialogue is not good for the, in general. But I don’t think it will have a material impact on us in terms of the way we are organized. So I would expect it to be marginal if something like that is implemented in the fall.

And I am not showing any further questions at this time. I will turn the call back over to management for closing comments.

Great. Thank you. Everest is well positioned for this market and for the opportunities we have seen and improving economy. Despite the material, social and economic impact of the COVID pandemic, we continue to grow unimpeded, recruiting top talent and delivering value to our stakeholders. We have leading financial strength, a preferred market presence and a diversified global platform. We are nimble. We have deep distribution relationships, great people, and a great culture. I am very excited by the opportunity ahead of us, and I believe we are well positioned to excel. Thank you for your time with us this quarter and for your continued support in the company. We will talk to you after the second quarter. Thank you.

Thank you. And this concludes today’s conference call. Thank you for participating. You may now disconnect.