Everest Group, Ltd. Q4 FY2022 Earnings Call

Good day, and welcome to the Everest Re Group, Ltd. Fourth Quarter of 2022 Earnings Conference Call. Please note today's event is being recorded. I would now like to turn the conference over to Matt Rohrmann, Senior Vice President and Head of Investor Relations. Please go ahead.

Good morning, everyone, and welcome to the Everest Re Group, Ltd. fourth quarter of 2022 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're 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 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 statements. With that, I'll turn the call over to Juan.

Thank you, Matt. Good morning, everyone. Thank you for joining us. Everest's excellent fourth quarter performance capped another 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. We 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. We profitably grew our primary insurance division and executed an outstanding January 1 reinsurance renewal. This further reinforced our global market leadership and positions Everest well for the future. Our actions resulted in solid underwriting profit for the year, over $1 billion in operating income and a double-digit operating return on equity for both the quarter and the year, an excellent result. We achieved these results despite market volatility, economic and geopolitical uncertainty and industry catastrophe losses totaling over $140 billion in the fifth costliest CAT year in history. In short, we accomplished a great deal in 2022 and built a wide runway for future opportunity. We are uniquely positioned with accelerating momentum and top tier talent driving this business. Everest is more agile and well-equipped than ever and 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 in underwriting profit with a 96 combined ratio. This is a near 2 points improvement year-over-year despite an active CAT year. The attritional combined ratio of 87.4% also improved from the end of 2021 and we achieved a 70 basis point improvement year-over-year in the group loss ratio. The operating expense ratio remains best-in-class at 5.8%. Finally, our high quality investment portfolio generated $830 million in 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 division's focused execution in 2022 further enhanced our global market leadership and preferred partner position. 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 in total gross written premiums. This growth was driven by broadened opportunities with our core cedents and our nimble allocation of capital to achieve the highest returns. We took deliberate actions during 2022 to shed underperforming business. This also positioned us well to take advantage of the strong trading conditions at January 1. These actions resulted in over $300 million in underwriting profit for the year and a combined ratio of 96.4%, there's a 1.7 point improvement from '21. For the full year, both the attritional loss ratio at 58.7% and the attritional combined ratio at 86.2% improved down 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 Hurricane Ian in the third quarter, the second largest hurricane in U.S. history. Our focused Reinsurance strategy continues to pay dividends. Throughout 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 1 renewal. I'll provide more color on 1/1 in a few minutes. Now turning to our primary insurance division. In 2022, we've 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 in 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 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 created 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. Everest continues to benefit from an influx of top talent with the market expertise, track-record, underwriting acumen and relationships to execute our strategy. We achieved the milestone full year underwriting profit of $164 million, which is a new annual record for the Insurance Division with a full year combined ratio of 94.8%, down 2.3 points year-over-year. Our attritional combined ratio also improved 80 basis points year-over-year to 90.4%. 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. 2022 was a year of multiple wins, we've reduced volatility, diversified the portfolio, expanded margins and enhanced our risk adjusted return. We got there with consistent and precise execution. We deployed our capital in areas where we could get the best risk-adjusted returns. We also reshaped our property portfolio through continued diversification via growth internationally. All this accomplished while increasing our top and bottom-lines and we improved net exposure to our balance sheet. As I mentioned before, we remain risk-on for property CAT as pricing, terms and conditions provide attractive returns within our defined trading range. Turning to 2023, the January 1 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 1 renewals from a position of strength. With a superior value proposition, well-prepared to support our clients and taking advantage of excellent market conditions around the world. We set clear goals for our portfolio and we achieved every one of them by leveraging Everest's 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 at materially improved risk-adjusted returns. We drove higher attachment points and reduced exposure to named and secondary payrolls. Significant property CAT rate increases were evident across all geographies. In North America, the property CAT XOL 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, the expected return for our CAT portfolio increased materially. In casualty and professional lines pricing and terms and conditions continue to improve overall. And we leveraged our property market to strengthen and further diversify the portfolio. Internationally, the 1/1 renewal exceeded our expectations throughout Europe and Asia. We grew our regional portfolios through increased participations and by expanding our base of new clients. We also saw significant rate movement in specialty lines exposed to the Russia, Ukraine war particularly in marine, aviation and political violence. I am very pleased with the performance of our outstanding reinsurance team. Everest distinguished itself in this renewal by our early and consistent communication with our brokers and clients. We set expectations heading into 1/1 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 capitalizing on the continuing market dislocation in property. Given the significant firming of the reinsurance market on January 1 and the heightened risk environment, primary insurers should also see firming prices in 2023, and they will need to maintain underwriting discipline. I am proud of what Everest achieved in '22. We delivered on our strategic objectives, while laying the groundwork for sustained profitable growth. I attribute Everest's 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 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 TSR or total shareholder return was 5.4%. Juan highlighted, we have a number of strengths in both our insurance and reinsurance businesses, bolstered by our team's 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 4.1 points of improvement over the prior year's quarter, driven by lower CAT losses as well as a continued improvement in attritional loss experience primarily in reinsurance. Group current year 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 3.7% to $2.4 billion in constant dollars. The growth was driven primarily by property pro rata business. Combined ratio was strong at 86.4%, an improvement of 5.1 points year-over-year primarily on lower CAT losses. Current year loss ratio improved 1.5 points to 58.2%, as we continue to achieve favorable rate and terms, optimize mix and scale various lines as well as shifting the book towards accounts with better risk-adjusted return potential. The commission ratio was 25%, up modestly, largely driven by mix and the underwriting expense ratio was 2.8%, broadly in line with the prior year's quarter. Moving to insurance, where we continue to build solid momentum. Gross premiums written grew 20.5% in constant dollars to nearly $1.3 billion in the quarter. As 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. The 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 Lloyd's Syndicate. Commission ratio improved 1 point, largely driven by business mix. The underwriting-related expense ratio was 15%, which is 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 and the balance sheet. Net investment income for the quarter was $210 million versus $205 million a year ago, as we continue to benefit from higher new money yields, an 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 3.5% at the end of the fourth quarter. We continue to have a short asset duration of approximately 3.1 years. And as a reminder, that 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. And regarding the balance sheet, we completed the last of our granular reserve reviews across our entire portfolio, which affirm 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% of 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. We also had other marginal adjustments in both segments, resulting in 0 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 primarily by the strong earnings in the quarter as well as a modest recovery on the value of available-for-sale fixed 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 $3.7 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, stood at $259.18 versus $252.12 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 are now ready to open the line for questions.

And our first question today comes from Yaron Kinar with Jefferies. Please go ahead.

Thank you. Good morning. I have two questions, if that’s alright. First, based on your comments about the January 1 renewals and your expectations that the reinsurance market will remain challenging at least until midyear, it seems that the PMLs we observed for January 1 are still significantly lower compared to levels in mid-2022. Is that the appropriate comparison, or should we be looking at what the PML might be in mid-2023 in relation to mid-2022? Additionally, could you share some insights on how we might expect those to evolve?

Yes, Yaron. This is Jim Williamson. Thanks for the question. To provide some context, I'd like to elaborate on the 1/1 renewals, building on what Juan and Mark mentioned, as it’s crucial for understanding our PMLs. Reiterating Juan's point, the renewal was outstanding. We executed with exceptional precision and met several key objectives that significantly improved the risk-reward profile for Everest. As noted, we achieved substantial rate increases in our U.S. property CAT business, around 50%. We enhanced every metric associated with our CAT portfolio. Our average attachment points rose, while attachment probabilities decreased. Despite this, the rate online increased. Our expected combined ratio dropped significantly, and our expected return on equity rose notably. Our anticipated losses in dollars increased slightly as we allocated additional capacity to selected clients. The profit per dollar of expected loss saw a meaningful increase. Similar trends were observed in our international markets, where rate increases exceeded our expectations as the year closed. On average, our international markets recorded a 40-point rate increase, including over 30 points in the U.K., which hasn’t experienced a major CAT loss in decades. In summary, the property CAT side saw an excellent 1/1 renewal, and we expect these favorable conditions to persist through this year and into next year. Regarding our PMLs, I recommend comparing them quarter-to-quarter, focusing on our in-force book. Our published PMLs were essentially stable, showing minor fluctuations but ultimately remaining flat. This indicates more deployment of gross capacity balanced by improved AUM in Mt. Logan, resulting in a mostly flat profit and loss picture. I expect we'll continue in this range. We're confident in securing these attractive economics without significantly enhancing our CAT appetite. As seen in our investor presentation regarding earnings and capital at risk, we're performing well within our established range, which is reassuring. Overall, we’re achieving rate improvements that enhance economics, mitigate inflationary pressures, and maintain our risk position in a stable manner. I couldn’t be more pleased with the results we’ve attained.

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 expected 91, 93 reported combined. Would you be surprised to see that come in well below that 91 to 93 range in a 'normal CAT' year in '23? And would you expect to give us an updated number at some point this year?

Yaron, this is Juan Andrade. Look, what I would echo is a couple of things. I mean if you look at 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 market environment that we're in right now. In addition to that, you layer the amount of rate that Jim and I just talked about, over 50% on U.S. CAT XOL, 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 accretive to our portfolio. In addition to that, you also look at the work that has been done on the primary insurance side and just the margin improvement that we've been able to drive through 2022. So all of that leads you to a place that I say, we're in a good place. And I would not be surprised if we end up being on the better end of that range.

And would you expect to give us an update at some point and a hard number?

Yes. For us, we're expecting to do another Investor Day towards the end of this year. And at that point, we will be updating our numbers and 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 Yaron.

Our next question today comes from Brian Meredith, UBS. Please go ahead.

Yes, thanks. Juan, it sounds like you're going to update premium guidance also in November?

Yes. Look, I think by then, we're going to have a pretty good idea of how the environment is shaping. But I think, Brian, if you go back to, again, in my prepared remarks, we just renewed 53% of the reinsurance book at very attractive terms. And as I said in my comments, we also expect that 4/1, 6/1 and 7/1 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. 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, right, 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 hard 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 additional guidance later in the year when we do our Investor Day.

Great. Thanks. And then second question, Juan, I'm just curious, how do you think about allocating your PML on the property side between the insurance and the reinsurance business? I mean, would you hold back some on the reinsurance because of opportunities? On primary is there one that you prefer a little bit more than the other? How do you think about that?

Yes. No, that's a great question, Brian. One of the terms that we like to use inside our company is that we do quite a bit of dynamic capital allocation. So this is, frankly, a fundamental discipline that we have with our enterprise risk management framework. On a very regular basis, we're essentially looking at by line of business, where we're coming in against expected returns, et cetera. And so that's how we start deciding who gets the capital. What 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 it's an important point because I think you heard both me and Jim Williamson talk about the precision with which 1/1 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 Continental Europe versus in Asia versus Latin America, depending on the market conditions. And we apply that same rigor across the segments, whether it's in primary insurance 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.

Yes. No, Brian, it's Jim. I think that's spot on. I think clearly, what you've seen is a situation, particularly as we came into 1/1, where it took the primary market a little while to start to adjust to what was coming in terms of insurance rates. And 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 in reinsurance at 1/1. And that's, I think, really brings to life that dynamic capital allocation that Juan is mentioning. And we are very nimble that way, and it allows us to really achieve best-in-class returns.

Great. Thank you.

And our next question today comes from Meyer Shields with KBW. Please go ahead.

Great. Thanks, and good morning. First question is, I know this is only one piece of the changes at 1/1, but I'm trying to get a sense of the significance of higher reinsurance attachment points. Is there any way of maybe recasting 2022 losses in this new framework, just to give us a sense of how much difference that particular step make?

Sure, Meyer. This is Jim Williamson. It's a crucial point. The fourth quarter actually illustrates this as we initiated many of these strategies well before January 1, 2023. If we reflect on our execution from January 1, 2022, the actions we shared with you focused on moving away from lower-performing programs, especially pro rata deals, and high volatility structures, particularly regarding retro and aggregate programs. We aimed to allocate capacity based on risk-adjusted returns, which is why we reduced capacity at the beginning of 2022 and began to reintegrate it into the market as conditions improved. What this means is that for losses like the one we experienced in the fourth quarter with Elliot, we believe those losses should mainly be retained by the seeds and shouldn’t fundamentally impact the reinsurance market. Our Q4 CAT loss for reinsurance was relatively small at $10 million, which is the kind of loss we aim for in such events. This gives insight into our expectations for how our book will perform over time. In 2023, if there are several frequency CAT events with losses around $1 billion to $2 billion, we anticipate our participation in those will be less than it would have been before January 1, 2023, since the average attachment point has increased. Our cedings will retain more of those losses in their portfolios, which is where they should be, allowing us to maintain our capacity for significant industry events, which the products are intended for. This should give you an idea of how we expect the portfolio to perform.

Okay. That is very helpful. The second question is, and I apologize if I missed this. I'm just looking for any thoughts on ceding commission changes, both as a reinsurer and on the insurance book?

Yes, Meyer, this is Jim. I'll start and then turn it over to my colleague, Mike Karm. Yes, so we did see 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 seats 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, mainly on a pro rata basis. And one of the things that's happened is all 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 1/1 in the programs I'm describing. In fact, in a number of cases, we increased participation and I think, grew our portfolio in a really nice fashion. But what we also saw is obviously the amount of margin expansion in the primary market is narrowing a bit. And so we started to see ceding commissions certainly leveling off. I really only have a small handful of instances where they continue to increase, and that was usually when they were already below market to begin with. 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.

Thank you, Jim. Our focus is on finding the right balance between retaining more premium to enhance profitability while managing volatility as we grow our businesses. We are aware of the developments in the reinsurance market, and while we are affected by these trends, we are not as dependent on reinsurance as some others. Our financial strength and solid capital base give us the flexibility to pursue our organizational goals. We aim to be strategic as we retain more premium related to our risks, which will benefit our portfolio. Overall, given our current position and growth strategy, we believe we are well-positioned, and there are no significant concerns that would impact our overall strategy.

Yes, Meyer, this is Juan. I think look, just to round out the answer, I think at the end of the day, bottom line is we saw improvement in cede commissions in this renewal.

Okay. Fantastic. That was very thorough. Very helpful.

Thanks Meyer.

Thank you. Our next question today comes from Elyse Greenspan with Wells Fargo. Please go ahead.

Hi, thanks. Good morning. My first question is about the expected return on your business in a normal catastrophe year. You mentioned that the expected return has increased significantly. Can you provide any details on what that expected return might be? For example, if we look at the 11% return you achieved in 2022, how would that change if last year's events happened again? I'm just trying to understand how much the expected return in 2023 compares to 2022, especially considering the improved pricing and terms.

Sure. This is Jim Williamson, and I'll share some insights. As we approached renewal, our goals were quite clear and aligned with our previous year's focus. We aimed to optimize our portfolio by moving away from underperforming programs, controlling volatility, particularly in deal structuring, which means avoiding aggregate structures and minimizing capacity at high return probability layers. Instead, we focused on allocating capacity to the best-in-class programs. This strategy, which we successfully implemented throughout 2022, continued into January 1. We reallocated capacity from the lower-performing tiers to the best market opportunities, achieving significant rate increases of 50% in the U.S. and 40% internationally. Additionally, in the U.S., many of our deals are now on a named peril only basis, and we've removed write-backs of exclusions in several areas, which should improve our economics over time. Regarding portfolio performance, while each year presents different catastrophic events, we expect that frequency pass issues, which have troubled the reinsurance industry, will increasingly be retained by our customers. We're now receiving higher rates that allow us to concentrate on the types of losses reinsurance was originally meant to cover. For major losses like those from Hurricane Ian, we're carefully considering how much risk we want to assume, and I expect this to look favorable. Additionally, we have a substantial increase in cat premium to help cover these losses while still ensuring a strong return. I hope this provides clarity on our excellent expected return position as we progress through 2023.

Elyse, and 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 ROEs despite the industry facing a top 5 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 in portfolio management, being very disciplined with where we deploy our capital. And with the material improvements that we achieved at 1/1 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 return 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 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 that we've been focused on since the 2021 Investor Day. So we will probably move around a bit in 2023, but stay disciplined to that SAA.

Thank you.

Our next question today comes from C. Gregory Peters 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 has been a big issue in the statistics that came out in '22 couldn't have been anticipated in fiscal year '20 and '19. 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.

Yes. Good morning. It's Mark. So let me get into that just in a few ways. The process itself is year-round. And so we're looking at reserves throughout the year, performing reserve studies. It's quite comprehensive in terms of aligning, underwriting, pricing, 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 then I'd bring you back to principles that we set out back in 2020 about setting up 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 kind of a ground-up rules and processes that we use to evaluate. Now in terms of what we did in Q4, I mentioned the asbestos and environmental reserves strengthening. So we've got roughly $20 billion of carried net reserves. We strengthened that by 138. We had some offsets, favorable offsets coming from shorter tail line and we had smaller, more marginal adjustments, pluses and minuses in both segments, but nothing approaching the 138 in the process. So overall, we feel very solid 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 in our reserves. And then we do dynamic modeling. And I think one of the benefits that we have in our company is really the diversified nature of the lines of business that we have and 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 loss inflation factors, in general. So that gives us, I think, just a better mix or diversification of reserves to handle these types of issues.

Got it. My follow-up question is about the specialty insurance platform. Your primary growth is 18% for the year and 19% for the quarter. Once we get past earnings season, that will be an impressive result compared to some of your peer groups. Could you take a moment to discuss where you're seeing growth, not only in comparison to 2022 but also when considering 2023?

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 growth, it's not without discipline and cycle management that comes along with that growth. But for us, we see what the market opportunity lies 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 and some of the things we've done, you're starting to see that come into play. And in addition to that, we have the ability to have the flexibility rather to drive this in a local region. So I think growth has been great, 32 straight quarters. The specialty businesses where we see areas like we opened up and you saw adding to that, which would be aviation and energy and construction, complementing our credit political risk and surety, helping offset some of the things that are happening with like transaction liability, then you go over to some of the market and property. And when we have and see these things that are actually opening themselves up, we can do this anywhere 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 it's retail or wholesale. We're going to figure out where the opportunity is 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 and comp. You see that we're doing in D&O 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'll continue to drive that opportunity where we see it, and it's about playing offense and not defense.

Yes, Greg, this is Juan Andrade. 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 for instance, if you're not seeing a good environment for financial lines right now, but you're seeing a very good environment for things like property, casualty still and other lines of business. So that allows us to essentially pick our spots and be able to do that. The other point that I don't think can be underestimated is really the agility of our company. And I mentioned that in our prepared remarks, our ability to be able to pivot. We're pretty lean, we're pretty entrepreneurial, 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 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 today comes from Mike Zaremski with BMO. Please go ahead.

Hi, good morning. Maybe first question, thinking about capital management and capital uses. Should we expect a bit more kind of operating leverage? So when we look at the premiums to equity ratio, is there room for that to inch up given kind of better economics you're attaining? And also just thinking about capital uses in '23, should we be still thinking that the growth will kind of eat up most of the capital versus buybacks?

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 more than just the traditional balance sheet. You're looking at what we call our capital shield, so Logan ILWs, CAT bonds, et cetera. Operating leverage, there's definitely more room on the balance sheet to expand that leverage. I think one of the key points to keep in mind is really the risk-adjusted return profile is improving. So you're seeing exposure being managed thoughtfully and the rate and the expected return go up significantly. And that's one of the key points that I think allows us to expand that operating leverage. We're also fairly well diversified with multiple income streams. And so I do expect the net income projections for the year to provide significant retained earnings to support growth. And we'll see how that growth comes about because there are other levers that we can pull if the opportunities in the market are even more significant than what we think they could be. But just in terms of your buyback comment, look, it's always on the table. We can pull that lever, but this is the best 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, teams, franchise, 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 borne. So I'll leave it there.

That's helpful. My follow-up is regarding the alternative reinsurance, specifically the ILS marketplace, since Mt. Logan is one of the leaders in that area. Are you experiencing dislocation in that marketplace? Do you anticipate that it will persist? I understand there are various factors affecting how this impacts a company like Everest. What is happening in the ILS marketplace that you are observing? Is that part of why you believe discipline within the overall reinsurance marketplace will continue?

Yes, Mike, this is Jim Williamson. Thanks for the question. I mean clearly, ILS has been a dislocated market coming into 1/1. And for many of the reasons that have affected everyone participating in this market, there have 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 didn't quite understand or weren't quite prepared for the prospects of having multiple years in a row of CAT activity, which is not uncommon. These clusters happen. And so that has definitely, I think, put a number of investors in a position where they're on pause. You also have, obviously, the phenomena from those CAT losses, there's a lot of trapped capital that is just sidelined no matter what rates, terms and conditions are doing, 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, in 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 the reason that's occurred is because of the crunch in ILS. The second thing that it does is it makes it a little more challenging for us to raise funds in Mt. Logan because investors are sidelined or they have trapped capital. In terms of that trade, we'll take that trade all day long. Driving improvement in our core reinsurance business is our first priority. And it also inures to the benefit of our Mt. Logan investors who are consistently invested in the ILS space, they get better returns as well. So we like that. At the same time, what I would say is, we have been getting traction in Logan. We did raise money in 1/1. And the team is doing an excellent job of conveying our value proposition to potential investors. And in particular, unlike a lot of other vehicles in the market, our investors get the same results that Everest gets. 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 Mt. Logan will grow over the course of time, and that's a key priority for us.

Thank you.

Thank you. And our next question today comes from Ryan Tunis with Autonomous Research. Please go ahead.

Good morning, everyone. I have a couple of quick questions for Jim. First, I wanted to follow up on the discussion regarding how the changes in the portfolio relate to the actual CAT numbers. You mentioned that you are stepping back from the 1-in-3 type of risk, but I'm finding it challenging to understand because, in the supplement, the 1-in-20 seemed to increase similarly to the 1-in-250. From the PML disclosures alone, it's hard to grasp what's happening. I'm not sure how to phrase this, but could you provide some insight into how much of your CAT losses over the past few years have originated from those frequency layers that are more frequent than 1-in-20? Any numbers you can share would be helpful.

Yes, it's Jim. That's an important question, and I'll share some insights about what's happening in the portfolio. First off, there's been exceptional execution since the beginning of the year, building on strong performance from 2022 as we worked to reposition the portfolio and align our CAT risk in a sustainable way. If you're looking at P&L movement, I recommend focusing on recent PMLs instead of year-over-year comparisons, given the significant changes since early 2022. Whether you choose 10/1 or 7/1, the profile of PML deployment remains relatively flat across various return periods, with a slight decrease of about $50 million for the 1 in 250 and a minor dip of $5 million for the 1 in 20. This gives you an idea of our expectations. It's also important to assess where CAT losses are occurring in the industry, focusing on reasonable risk-adjusted returns rather than the percentages of different event frequencies. Our portfolio has shifted towards areas that provide strong risk-adjusted returns, particularly in the 1 in 20 to 1 in 250 range, and we feel confident about that. Additionally, we've maintained discipline in underwriting and terms to appropriately load for inflation, which will benefit our portfolio over time. While actual results will depend on the events that occur, we believe our portfolio will perform significantly better now than it did last year due to the actions we've taken and improvements made. I hope that provides clarity on how to interpret the PMLs.

Yes, that's helpful. And then just lastly, can you give us an update on kind of how you're thinking about your original Hurricane Ian impact?

Yes. Sure. Yes, Ryan, it's Jim again. Yes, 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 folks adjusting their view of what their ultimate loss is going to be in terms of our clients' scenes, and so we're watching that very closely. A key thing to keep in mind, which we communicated in the last quarterly call when we talked about Ian is in terms of any upside risk to the numbers we've put up, we feel very good about that because of the protection that we received from our cap-on program. As we had indicated, in the last call, we have about $350 million of potentially exposed cap-on limit, which will engage if PCS reaches $48.1 billion in their estimate. They're currently at $47.4 million and we'll recover on a pro rata basis up to $64 billion or $63.8 billion. So we don't really have any kind of material concern 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.

Appreciate it. Thanks.

And ladies and gentlemen, this concludes our question-and-answer session. I'd 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 Juan Andrade. I am very optimistic about the opportunities ahead and our ability to continue driving a world-class platform. Our strategy is clear. Our businesses are 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 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.

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.