Everest Group, Ltd. Q3 FY2023 Earnings Call

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

Thank you, Matt. Good morning, everyone. Thank you for joining us. Everest's third quarter performance was excellent. We delivered outstanding returns, including a near 20% operating return on equity and an annualized total shareholder return of 25%. We are leaning into the hard reinsurance market, where favorable conditions and a flight to quality persist. As a lead reinsurance market and preferred partner, we are taking advantage of strong pricing while deepening our client relationships and expanding our global portfolio at significantly improved risk-adjusted returns. We are positioned for success as we head into the January renewals. We also remain on track for January 2024 for the full deployment of the equity capital raised in May. Our primary insurance business delivered strong underwriting income with a significant year-over-year improvement in the third quarter. And our high-quality investment portfolio continues to support our underwriting performance with outstanding returns. We achieved these results despite another active catastrophe quarter. We tracked over 80 material events globally this quarter, resulting in a 9-month year-to-date industry loss estimated at roughly $93 billion. The industry is on course for another $100 billion loss this year. This reinforces the need for continued underwriting discipline and for additional pricing increases across all lines. As the world becomes increasingly complex, Everest's value proposition is in greater demand. As you have heard me say before, we are on offense with strong tailwinds across all of our earnings streams, a strong balance sheet, and top-tier global talent powering it all. With that, I'll turn to our third quarter financial highlights, beginning at the Group level. In addition to delivering exceptional returns, we drove substantial improvements across our Group key financial metrics, underwriting income, net investment income, operating income, and net income, and we delivered record increases in operating cash flow and book value per share. We grew the business at significantly expanded margins. Gross written premiums increased by 23% year-over-year in constant dollars, led by record quarterly reinsurance growth. We generated $613 million in net operating income, a significant year-over-year increase, and we have generated $1.7 billion year-to-date. The Group combined ratio of 91.4% also improved year-over-year by 21 points, which translates to an underwriting profit of over $300 million for the quarter and nearly $1 billion in underwriting profit year-to-date. Our attritional loss and combined ratios both improved by more than a point year-over-year to 59% and 86.5%, respectively. We generated more than $400 million in net investment income in the third quarter, and we delivered over $1 billion of net investment income year-to-date. In addition to the improved interest rate environment, this year-over-year improvement was driven by strong returns from both our fixed income and our alternative investments. Turning now to our reinsurance business. The reinsurance division delivered an exceptional quarter with outstanding top and bottom line results and superb execution by our team. Leading into the strength of the market, we maintained our strategy of targeted and nimble capital deployment with core clients, resulting in significant growth across virtually all business lines and geographies at materially improved risk-adjusted returns. We grew gross written premiums on a constant dollar basis and excluding reinstatements, by 33% to $3.2 billion for the quarter. This is a new record for the division. In property catastrophe, where the market remains outstanding, premiums, excluding reinstatements, were up 41% from last year. Property pro-rata premiums increased 44%. Casualty pro-rata premiums were up as well at 20%, while we carefully manage the casualty market cycle and target best-in-class clients. Internationally, we expanded in key target growth markets across Europe, Asia, and Latin America. We also grew in specialty lines with strong margins, including aviation, marine, and mortgage. Despite the active catastrophe quarter, we improved our catastrophe loss ratio significantly year-over-year, reflecting our deliberate and consistent actions to manage volatility. The attritional loss and combined ratios were down year-over-year by 1.6 and almost two points, respectively, with the overall combined ratio improving to 91%. This helped us achieve an underwriting profit of $234 million. Looking ahead, our outlook for the January 1, 2024 renewal remains strong. We fully expect the robust pricing and favorable conditions to continue. And as a lead market, we stand to benefit. Our nimble, creative, and collaborative approach allows us to simultaneously improve our economics and strengthen client relationships. This tremendous relationship equity will serve us well. Expectations for pricing and terms and conditions in the global property market are now well understood, which should make future renewals more orderly. At recent industry events, including Monte Carlo and CIAB, our clients told us that they want more of our capacity and want to further broaden their partnership with us. Our confidence in our strategy and in the strength and durability of the market is high. I am excited by the magnitude of the opportunity we have created for the business. We are extremely well-positioned with the expertise, global capabilities, and financial strength to seize this generational market opportunity and to optimize the portfolio for the long-term. Now turning to our Insurance division. In our primary business, rates continue to exceed loss trends with improvements across multiple lines. We achieved an 11% increase in our core portfolio, excluding workers' compensation and financial lines. In addition to property, improved pricing was particularly strong in marine and other specialty lines. We grew the business approximately 4% and generated more than $1 billion in gross written premiums. Growth in the quarter was diversified and particularly strong across property, where we see excellent opportunities and specialty lines such as marine, aviation, trade credit, and political risk. The growth was offset by reductions in workers' compensation and financial lines where the market is less attractive. Additionally, we are gaining traction internationally, where we are methodically scaling our capabilities and our platform. Our focus remains on driving bottom line growth. We continue our disciplined underwriting to take advantage of high margin opportunities and reduce exposure in pockets of business that do not meet our profitability objectives. The attritional loss ratio improved year-over-year to 63%. Our pre-tax catastrophe losses at $10 million, net of estimated recoveries and reinstatement premiums, were modest, leading to an improvement in the reported combined ratio to 92.6%. We achieved an underwriting profit of $66 million in the quarter and a record profit of $196 million year-to-date. We continue to attract and develop best-in-class talent. We share our vision for the company and our commitment to world-class customer service. I am bullish about the momentum we have created for our business and Everest's position in the market. We have every advantage at our disposal, a world-class team, strong and diversified reinsurance and insurance platforms, and market tailwinds at our back to accelerate our progress and build even greater value for our shareholders. With that, I'll turn it over to Mark to review the financials in more detail.

Thank you, Juan, and good morning, everyone. Everest had another very strong quarter and built upon the momentum we saw in the first half of the year. The company reported operating income of $613 million or $14.14 per diluted share in the quarter, equating to an operating income return on equity of 19.2%. Year-to-date, total shareholder return or TSR, stands at 24.5% annualized. We significantly improved our overall combined ratio while generating double-digit growth as pricing and terms remain attractive in most lines of business around the world. The company's strong performance in the third quarter was led by our team's high level of execution in our core markets, and we have a number of tailwinds across both of our businesses heading into the last quarter of the year and into 2024. Looking at the Group results for the third quarter of 2023, Everest reported gross written premium of $4.4 billion, representing 23.4% growth in constant dollars year-over-year. The combined ratio was 91.4%, which includes five points of losses or $175 million from pre-tax natural catastrophes, net of estimated recoveries. The natural catastrophe losses in the quarter were driven by a number of midsized events globally. Group's attritional loss ratio was 59%, a 120 basis point improvement over the prior year's quarter, led by the reinsurance segment, which I'll discuss in more detail in just a moment. The Group's commission ratio increased 50 basis points to 21.4% on mix changes, while the Group's expense ratio remains a competitive advantage of 6.1%, up modestly year-over-year as we continue to invest in our talent and systems within both franchises. Moving to the segment results and starting with reinsurance. Reinsurance gross premiums grew 32.7% in constant dollars when adjusting for reinstatement premiums during the quarter. As Juan mentioned, this was a record for the segment. The strong growth was driven by double-digit increases in Property Pro-rata, Property Cat XOL, Casualty XOL, and Casualty Pro-rata, and was broad-based globally. The combined ratio was 91%, which improved from 115% in the prior year. The prior year period included $620 million of pre-tax catastrophe losses, net of recoveries and reinstatement premiums, largely due to Hurricane Ian. The attritional loss ratio improved 160 basis points to 57.5% as we continue to achieve more favorable rate in terms, particularly in property, which we expect to continue throughout 2024. The commission ratio was 24.8%, an increase of 90 basis points from the prior year due to the impact of reinstatement premiums from the Q3 Cats last year. There was a modest 30 basis point underlying mix impact benefit, excluding the Q3 2022 reinstatements. The underwriting-related expense ratio was 2.5%, which was essentially flat year-over-year. We continue to lean into the hard reinsurance market and the equity capital raise deployment remains on track and will be fully deployed by January 1 renewals. Moving to Insurance. Gross premiums written grew 3.5% in constant dollars to $1.2 billion. As you may have noticed, gross written premium growth was more modest this quarter as the division enjoyed double-digit growth in a diversified mix of property and specialty lines, while being partially offset by lower written premiums in workers' compensation and financial lines. Overall, pricing remains ahead of loss trends, and we continue to see attractive market opportunities across our book of business. We will also continue to have underwriting discipline in areas we find less attractive, as we exhibited this quarter. The combined ratio was 92.6%, which improved from 103.5% in the prior year. The division benefited from a relatively low level of natural catastrophe losses in the quarter in the amount of $10 million net of estimated recoveries and reinstatement premiums, further demonstrating the success of our derisking actions on our portfolio. The attritional loss ratio improved slightly this quarter to 63.1%, driven primarily by business mix, given the higher proportion of longer tail lines of business. The commission ratio improved 120 basis points, largely driven by business mix as increased property writings earned through as well as increased volume of seating commissions. The underwriting-related expense ratio was 16.7%, largely driven by certain one-off expenses and the continued investment in our global platform. And finally, to cover investments, tax, and the balance sheet, net investment income increased $255 million to $406 million for the quarter, driven primarily by higher new money yields, our investment in floating rate securities, and higher assets under management. Alternative assets generated $75 million of net investment income, a sequential improvement as equity markets have continued to rebound. Overall, our book yield improved from 3.2% to 4.2% year-over-year, and our reinvestment rate remains close to 6%. We continue to have a short asset duration of approximately 2.7 years given the attractive level of short rates. And as a reminder, 23% of our fixed income investments are in floating rate securities. For the third quarter of 2023, our operating income tax rate was 6.5%, which was lower than our working assumption of 11% to 12% for the year, and this was largely due to geographic income splits. Shareholders' equity ended the quarter at $11.3 billion or $13.1 billion, excluding net unrealized depreciation on available-for-sale fixed income securities. At the end of the quarter, net unrealized losses on the available-for-sale fixed income portfolio equates to approximately $1.9 billion, an increase of $242 million as compared to the end of the second quarter, resulting from rate increases and foreign exchange movements. Cash flow from operations of $1.4 billion during the quarter was a company record, and book value per share ended the quarter at $258.71, an improvement of 22.4% from year-end 2022. When adjusted for dividends of $5.05 per share year-to-date, book value per share, excluding net unrealized depreciation on available-for-sale fixed income securities stood at $301.76 versus $259.18 per share at year-end 2022, representing an increase of approximately 16.4%. Net leverage at quarter-end stood at 18.6%, modestly lower on a sequential and year-over-year basis. In conclusion, Everest had an excellent third quarter of 2023 and is well-positioned heading into the final quarter of the year and into 2024.

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

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

We have observed strong indicators that our clients are seeking additional Property Cat capacity. There was some unmet demand at the start of 2023, which has led clients to return to the market in search of capacity. We are actively engaging with our clients regarding the January 1 renewal and have also seized some opportunities for private placements in the latter half of this year to begin addressing that demand. We believe this is a significant indicator, and we expect it will continue to yield attractive returns in that market. Regarding retention levels and the market's response, we believe the recent adjustments in retention were necessary and appropriate. There was an excess of industry losses entering the reinsurance sector that should be retained in the primary market. This doesn’t imply that every carrier executed perfectly, and there may be minor adjustments needed. However, I do not foresee any regression in retention levels.

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

Sure, Alex. It's Jim again. So as you say, I mean, this issue is clearly on the minds of the market, and it's been much discussed, including by Everest with our customers at both Monte Carlo and CIAB. I think to fully understand our view of the market and what happens next, you really have to understand the context of how we built our book of business. We've been incredibly deliberate and focused on managing the market cycle, and growing with the best-in-class cedents around the world, right? So we timed it correctly. We grew after the market began to harden. In 2019, we grew with best-in-class underwriters. We did not write the entire market. And I think some market participants did do that, and their results and their market commentary reflect that error. And you also may have heard recently if you expressed, I think, that reinsurers have been slow to recognize the changes that are happening around social inflation and the other trends you mentioned. I mean, that is absolutely not the case with Everest. You would have seen our approach over the last three-plus years. We've been very decisive on the reserve front. We've been prudent in our loss picks, and which we've maintained, by the way, even though pricing over the last couple of years has exceeded our expectations. We've been updating our trend factors on a frequent basis. So we are staying very much close to these trends and staying on top of them. So today, we are sitting here with a very strong book with the best underwriters in the market. And those underwriters are not sitting by idly waiting for bad things to happen, which, by the way, is why we are starting to see signs of some reacceleration of rate taking among many of our clients; they're managing this closely. That said, social inflation is real. It's a real trend that needs to be managed. And so our approach at whether it's January 1 renewal that's coming up or really any renewal is to assess each deal on its merits. And we do that in a very rational way. If the deal passes muster and is delivering returns we want, we'll write it. If it doesn't, we are more than happy to move away from it. We have many options to deploy our capital, which is why diversification is so important in our business, many different ways to get to our financial goals. And so we have the flexibility to move among deals. The other point that I would make just relative to a piece of your question around ceding commissions, given all these trends, our expectation is that ceding commissions will continue to improve. We've seen that movement already begin, and we expect it to strengthen considerably as we move into 2024.

Thanks for all the details.

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

Sure, Josh, this is Jim. Well, one point I would start with, I know you've made a point that it was a moderate Cat quarter, and I think we feel very good about our Cat loss. But this quarter, from an industry perspective, was anything but moderate. I mean, we tracked over 80 events around the world. You had significant hurricane activity, which fortunately because of landing points, etc., did not do significant damage. But the comment I would make, and as you say, it's sort of an unanswerable question, but you've seen our year-to-date performance in terms of our reported Cat losses, and that's happening against the backdrop of a year that's likely going to be another $100 billion plus industry loss year, which is incredible, right? And our expectation is that if you repeated the losses of 2022, for example, our loss this year against those same events would have been meaningfully lower, and that's because of attachment points. It's because of portfolio management, it's because of aggregation, it's our underwriting discipline, it's all those things laddering up. So we have clearly changed and improved the risk profile of the book, particularly when you're talking about a large number of mid to large-sized Cat losses.

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

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

Yes, Josh, it's Mark. Just to add a couple of points to Jim's commentary. So number one, we are obviously very certain of our ability to deploy by January 1. So you're dealing essentially with a 6-month time frame between the raise and the January 1 deployment along the way. Clearly, we are deploying it where we see fit. From an investment point of view, it's fully deployed the way we would like it for the time being. No issue for us to carry a little bit of excess capital. That's going to get remunerated to some extent, but will be, like I said, fully deployed by January 1. And there's no benefit to rushing any kind of deployment. We want to stay disciplined and focused just as our initial plan back in May for the equity raise indicated.

Josh, and this is Juan. Just maybe to put a fine point on it. Rates are still improving in property. And we also got paid a lot more for the risk that we took, and so that's part of the confidence that we have in being able to deploy this fully by the January 1 renewal.

And so we should expect healthy growth with January 1 given all that you've said?

Yes, Josh, it's Jim. I mean my expectation is we are going to grow our Property Cat writings with our core clients very nicely. Again, we see significant demand. Our expectation is that risk-adjusted rates will increase at the January 1 renewal. So lots of opportunity in the environment.

Thank you and good morning. My first question piggybacks on your thoughts on January 1 renewals in the property reinsurance market. So certainly, you sound very constructive. You're also talking about demand being up. What about the supply side? Because I would have thought that with relatively benign reinsurance losses this year and certainly in hurricane season, you're going to see an uptick in capital. So how are you thinking about that and the kind of supply-demand dynamic, especially for maybe more remote risk, which seems to be where the insurers are more interested in playing right now into January 1? Is the constructive view really driven by supply/demand? Or is it more about sentiment and discipline considering maybe a more balanced equation this year?

Yes. Yaron, this is Juan. Thank you for the question. Look, I think from our perspective, you're seeing a couple of dynamics that really have not fundamentally changed since the beginning of the year since we've been talking about this issue. Number one, there's still definitely a supply and demand imbalance that's out there. And I think as we've discussed before, whether that's $100 billion or $40 billion, it doesn't really matter because it's a pretty big gap between supply and demand. And there has not been a particularly large or moderate influx of capital into the industry to close that gap. So there's definitely that imbalance that continues to exist on the supply side. In addition to that and building on what Jim said earlier, you're still seeing pent-up demand and increased demand from our cedents across the board. A lot of that is also generated by, frankly, a flight to quality. It is basically cedents wanting to work with more companies like us who have stronger balance sheets, who've been very constructive into renewals, etc. So from that perspective, we are not seeing anything in the environment right now that really fundamentally changes the pricing trajectory or the trajectory of this business going into January 1. And frankly, further, you saw the growth rates that I quoted earlier in my prepared remarks, where we were up over 40% of property. You heard Jim's comments just a minute ago about what he expects to see at January 1. So we do expect that tailwind to continue to be behind us as we go forward. But let me ask Jim to jump in and see if he wants to add anything to that.

Yes, sure, Yaron. I’d like to add a couple of points to what Juan mentioned. There is an underwriting discipline that supports all of this, regardless of the amount of capital available to underwriters. In our industry, every underwriter I’ve spoken to wants to earn more for the risk they are assuming, which reflects the higher Cat losses we’ve experienced over the past few years and what we’ve seen this year and in this quarter. I don’t see any signs of this changing. Regarding your other point about more remote layers, it seems like more participants are interested in that area. We’ve observed some Cat bond activity there, among other things. How much rate will be added due to the effects of 2023 and at which levels is still uncertain. However, in our perspective, it doesn’t really matter. If there's increased supply at the remote level, there will still be significant opportunities just below that level. We are very adaptable in how we allocate our capital, and such impacts do not alter our opportunities.

Thank you for the information. I’d like to discuss the Insurance segment. Mark, you mentioned in your prepared comments that some mix changes might be keeping the loss ratios stable year-over-year, even though you are seeing rate increases. Could you clarify that a bit more? From my perspective, it seems like property and short-tail lines grew by about 40% year-over-year. Additionally, over the past year, other specialty lines have also increased by 40%. However, some lines that I would have expected to have higher attritional loss ratios, such as workers' compensation and professional liability, actually show improvement. I would appreciate your insights on the dynamics at play here.

Okay, Yaron. It's Mark. I'm going to start, and then I'll ask Karm to finish and add some color to it. Look, first of all, I think the attritional loss ratio is pretty much right where it should be. We are still setting conservative loss picks for casualty lines in particular. We are in an elevated risk environment. We want to be prudent on that. We are obviously getting rate, and we are getting the kind of business we want to write in terms of cycle managing this particular marketplace. So you've seen some increases in writings and decreases in different lines, and that gives you a sense of our discipline in the marketplace. And so that mix in the attritional loss ratio is coming out too broadly stable with last year. We don't see any problem with that. We've got an embedded margin in there that we are quite comfortable with, quite confident in, and we think it takes into account the risk environment that's out there for the different lines we've underwritten.

Yes, this is Mike Karm. I would like to add a couple of things. First, our focus, as Juan mentioned in his opening comments, is on profitability. We are heavily investing in our first-party lines, specifically in property, aviation, and marine. Additionally, we are building our presence in other specialty lines such as energy, where we observe strong risk-adjusted returns. You will see this reflected in our technical performance, although it is being offset by our cycle management efforts, particularly concerning workers' compensation and financial lines. Regarding this quarter, we are emphasizing our mix to lower the loss ratio further. Our goal is to capitalize on market opportunities while being disciplined about the lines we do not pursue. We are avoiding lines that currently do not provide strong risk-adjusted returns. If we exclude those, especially workers' compensation and financial lines, our growth would be around 9% year-to-date. We are focused on long-term results, striving for the right mix and optimizing our loss ratio.

Hey, good morning. Thank you. Maybe just looking at the paid to incurred ratio ex catastrophes and reserves. It's been, I think, not just you all, but it's been ticking up a bit year-over-year and quarter-over-quarter. Anything worth calling out or talking about in terms of trend there?

Mike, it's Mark. I wouldn't say there's anything specific to say there. I think it's largely your portfolio mix that's just driving that trend, mix of property, the long-tail lines. There's no particular significant set of claims or COVID settlements or anything like that, that's in the mix. So from my standpoint, it's just a natural outcome of the portfolio mix.

Okay, that's helpful. I guess shifting back to the topic of ceding commissions. The business mix has changed significantly over time. I think it could improve greatly. Do you have any insights on whether ceding commissions are still notably different from what they were many years ago? I understand your business mix has also evolved a lot. So is there any additional context about what greatly could mean if trends continue to shift in favor of reinsurers into 2024?

Yes, Mike, this is Jim Williamson. One of the things we've discussed this year is that ceding commissions on Casualty Pro-rata have increased by about a percentage point. Of course, this varies depending on the deal and geography. We believe this trend will speed up and needs to do so. We've certainly observed instances of deals in the latter half of this year increasing by more than that, and we have experienced some of this ourselves. This is a promising sign for us in 2024, as we aim to grow beyond that one point. While I won't speculate on the exact figure, the trend towards achieving better outcomes is definitely evident.

Okay. Got it. I just want to confirm the historical Cat load guidance for Everest. Was your last guidance for Cat load indeed less than 6%? I heard what you mentioned about the implications if last year's Cat losses occurred this year, and it seems like you're adjusting to the marketplace, given the changes in business mix. So, is less than 6% the latest update?

Yes. The expected annual Cat load we have in our operating plan for the year is roughly 6%. This is broadly consistent with what we communicated during the IR Day in 2021.

Thanks, guys. Good morning. I was just wondering if you had any preliminary view on maybe the industry exposure for Hurricane Otis in Acapulco?

Yes. Sure thing, Mike. This is Juan Andrade. Look, I think Otis is a great example of what we've been talking about over the last few minutes. And the reason why frankly, the property cat market will continue to be hard into 2024 and 2025. Let's put it in the context of what we said earlier, right? We saw 80 events roughly around the world that we were able to track. The industry loss now is at about $93 billion, 9 months year-to-date, headed well probably into $100 billion plus by the end of the year. And now you have something like Otis, which if you follow what happened with that storm, it basically exploded from being a 70-mile an hour storm to being at 165 miles an hour in a period of about 12 hours, which was pretty significant strengthening and then hitting Acapulco, right? So this is one of the things that when you look at the world, you realize that you still need to continue to push for pricing. You need to continue to push for cash flow points being up, terms and conditions, etc. Look, from our perspective, we expect that loss to be modest at the end of the day, I can't speak for others out there. But I think this is also the discipline that you've seen from us on how we manage our volatility and our accumulations around the world.

Thanks. That's helpful. Maybe on the expense ratio front, the internal investments seem a little weighted to insurance. I guess as you look to 2024, do you expect that to set up softer comps in that segment or for the group overall?

We are continuing to expand in insurance, both in North America and internationally. This expansion involves some initial expenses, but we believe we can manage these within our combined ratio expectations for the business. Currently, our combined ratio is somewhat higher than in previous years as we ramp up our efforts. However, I do not anticipate this having a significant impact on our combined ratio in the future. We are confident that the benefits of our expansion will be a future profit driver and will enhance our franchise offering, which we will discuss further at our Investor Day.

Hey, thanks. Good morning. So I just have one, and I guess it's on the Kilimanjaro bond. So earlier in the year, it looked like you guys let a couple of hundred million of those expire without replacing them. And it looks like there's almost another half a billion of those that expire at year-end. And I'm just curious if there is a plan to replace those with some other form of reinsurance? Or should we think about the capital raise you did earlier this year as potentially going to fill a little bit of that?

Ryan, it's Mark. Let me address this. When we discuss our capital shield, we begin with the gross risk we underwrite, aiming to be gross underwriters without relying on retrocession cat bonds. We typically have a significant laddering of Cat bonds over a four- or five-year duration, with different attachment layers, and our book grows periodically. We consider the gross portfolio as well as our overall cat position before making adjustments, factoring in several elements. We prefer to utilize Mt. Logan, our third-party sidecar vehicle, for hedging in line with the property cat risks we assume. We also use ILWs tactically, based on pricing efficiency and placements for cat bonds and ILWs. Moreover, we account for our capital position, including the capital raise in May, which enhances our capital base. Additionally, we refer to the economic capital at risk graph in our investor deck, indicating that we have ample room to expand our risk appetite within our tail risk tolerances. This is particularly relevant when we identify lucrative margins on the property cat risks we're underwriting. All these factors contribute to planning our future capital shield. We made a deliberate choice not to renew two bonds in the spring and added another at a different layer, resulting in a net reduction. We also have significant capacity maturing in November and December, which we are considering. Overall, our goal as a gross underwriter is to pursue superior risk-adjusted returns, and we will evaluate options for our capital shield relative to our gross book.

Thank you. That's helpful.

Good morning, everyone. I guess I wanted to step back with the substantial growth as you're leaning into the market and property, and the reinsurance side, I mean, you're also reporting the growth in the insurance operations on property short tail. Could you just talk to us about how you're managing risk aggregation because it's a lot of growth, and just I'm sure there's a lot of involvement in managing your risk, but give us some perspective there?

Yes, Greg, this is Jim Williamson. It's clearly an important topic. We have a very robust risk management process at Everest that spans both our reinsurance and our insurance business across really all aspects of the risk we are taking, whether it's property cat, it's credit risk, casualty, etc. And there are robust processes underneath that framework where underwriters in the respective divisions are analyzing our aggregation, assessing risk reward. We have a company-wide risk reward scorecard that shows us where we are getting best paid for capital deployment. And we leverage that process to ensure that we are moving capacity to the areas of the business that drive the best returns. And so what you would have seen, for example, earlier this year, if we rewind the clock in those discussions, Mike Karm and I were staying very close on what was happening in the reinsurance market. And so reinsurance started consuming more of the available capacity because that's where the opportunities lie. That started to balance out a little bit more now as the opportunity in insurance has strengthened so much. So that's the process we use. If you look at our PMLs by peak zone, we are still in really good shape in all of our peak zones. We do monitor it very carefully. But as Mark indicated, on an earnings and capital at risk, or if you look at our stated risk tolerances in our ORSA filings, etc., we are all well within risk tolerances, which gives us room to grow both reinsurance and insurance as these opportunities emerge.

Yes, Greg. And one thing that I would add to what Jim just said, and this is Juan. A lot of it is rate, not necessarily exposure, right? And that's the trade that we've talked about in the past that is an excellent trade for us, which is, we are able to get significant rate for similar exposure and significantly better risk-adjusted returns. And that's our focus right now, and basically we are achieving that.

Yes. Sorry, I guess you're going to get all four of us, Greg, it's Mark here, and then I'll let Mike finish it off. I just want to add two points. So number one, we have very clearly defined risk tolerances inside the company for how much risk we are willing to take. Those are not going to be breached. Those are governed at the Board level, respected by management, and we have a clear process to manage that stuff, a lot of flexibility there as well. And number two, we are fairly diversified and broad-based with our exposures as well on a geographic and line basis, which also helps. You're not seeing single concentrations that are onerous in the different zones. Mike?

Sure. Yes. And I'll finish it off. I guess just from a perspective, you've seen over the last few years in insurance, we've meaningfully derisked a lot of the portfolio, particularly in the peak zones. Over the last two years alone, you saw us exit the Florida condo business, not just because it wasn't profitable, but because it really didn't meet our risk-adjusted returns and we just saw the regulatory environment and litigation environment changing. And then more importantly, the specific portfolio actions we've taken around our hurricane 100 PML over 40%, we reduced that. We took our gross limits in our wholesale, which is more cat-prone again and reduce that over 40% deployed limits over the last year. And what you're seeing from us right now is basically getting much, much better risk-adjusted returns, but really derisking our concentration around these P zones and really basically diversifying the portfolio, not just domestically, but globally as well.

Well, that's good detail. Juan, I think you mentioned the durability of the market in your prepared remarks, and I know very well, many of us are focused on wind in North America wind which has not been an issue this year, at least in a sort of material way. But there haven't been many losses in fire at DIC in North America either. And I'm just curious, I know it's rather a specific question, but do you see any change in pricing or terms in fire or DIC going into January 1 considering the lack of any loss there?

Thank you, Greg. It's Juan. Ultimately, all of this ties back to the fundamental question of how much capacity is available for property overall. This is part of the same equation. In our view, we expect the market to continue as it is. The rates for wholesale in North America are approximately 30% or more, while retail property rates are between 20% and 30%, and this trend has remained steady throughout this period. The same dynamic we discussed earlier is in play, where there is not only a supply and demand issue, but also the psychology Jim mentioned. The environment hasn't fundamentally changed, so I don't anticipate a significant shift in pricing for property at this time.

Fair enough. Thank you for the answers.

Great. Thanks so much for fitting me in. Two really quick questions. First, Mark, in addition to the investment spend, I think you noted some one-time expenses in insurance. I was wondering whether there's any way of quantifying that?

Well, one-time expenses. So let me break it down into kind of two components on the insurance expansion. So I would say roughly maybe a little less than two-thirds of our expense is compensation related to human capital. So we are expanding that's going to provide future bandwidth to underwrite and current bandwidth. It's clearly actionable. The second piece is you are dealing with technology spends as well to improve systems and middle office process type stuff. So that stuff is making its way through. It's very manageable. It's a relatively modest amount, and it's something that comes first and the growth is trailing somewhat. But we definitely see this paying for itself, and again, manageable within the combined ratio assumptions that we have for the plan.

Okay. Perfect. That's very helpful. Second question, just to ensure I'm not missing anything. Juan, you've mentioned that many executives have pointed out that the reinsurance renewals on January 1, 2024, should be much more orderly. Is there any advantage to the more chaotic renewals that we experienced last year? Were there any positives in that situation?

Well, look, I mean, you always want to be in a place where your customers, your cedents and the brokers sort of understand the situation and understand what you are, essentially putting forth the storms, conditions, etc. And I think that was a more challenging renewal last year because the market changed so quickly. I think what we see now is basically what I articulated earlier, where at this point in time, I think we all recognize the world that we are living in, we all recognize the environment. Discussions have begun much earlier than they did last year. And so from that perspective, I think that's actually a pretty good thing. So we feel pretty good about it. I think, frankly, the only benefit that I would have seen last year is the fact that Everest was one of the first, if not the first, to get out and offer constructive terms and conditions and pricing, whereas a lot of our competitors were still looking to essentially fill the retro buckets to know how much capacity they had. So I think for us, that was a good guy last year. But ultimately, I think having an orderly market is good for the industry.

Yes, thanks. Just one quick one here. Mt. Logan, I'm just curious kind of plans are for January 1. Do you think you're going to be able to increase capital there and maybe investor demand for those types of facilities?

Yes, Brian, this is Jim Williamson. Mt. Logan has had a strong year in raising capital, especially considering many large ILS allocators have been inactive this year. We've raised over $250 million, and our assets under management are just under $1.1 billion, which we feel very positive about. The team at Mt. Logan has done an excellent job of developing relationships with what we consider top-tier allocators, including wise, long-term investors like sovereign wealth funds and pensions. We anticipate some additional capital raising starting January 1 and continuing throughout the year. However, I want to note that I've had several discussions lately with major pension fund allocators, and they are still facing challenges due to declines in other areas of their portfolios, which puts them close to their ILS risk limits. While this situation is beginning to improve, it remains a concern. However, we believe this is beneficial for our underlying market, which is our main priority. I expect we will achieve significant successes in 2024.

Great. Thank you. I appreciate it.

Hey, thanks. I wanted to follow up on Otis and Acapulco. Is there any estimate on the potential industry exposure? I know it's early.

No, Mike, this is Juan. I think it's so early. I mean, this thing just made landfall really yesterday at this point in time. And for us, as I said, this is a modest exposure based on how we have managed the portfolio to reduce the volatility. But I think it's way too early. We haven't seen anything yet from any of the modeling agencies at this point in time.

Okay. Well, thank you all for your questions and for the excellent discussion. We had an excellent quarter, and I look forward to discussing the company's strategic plan at our Investor Day on November 14. I hope to see you all then. Thank you.

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