Everest Group, Ltd. Q3 FY2025 Earnings Call

Good day, and welcome to the Everest Group Limited Third Quarter 2025 Earnings Conference Call. Please note this event is being recorded. I would now like to turn the conference over to Matt Rohrmann, Head of Investor Relations. Please go ahead.

Thank you, Betsy. Good morning, everyone, and welcome to the Everest Group Limited Third Quarter of 2025 Earnings Conference Call. The Everest executives leading today's call are Jim Williamson, 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'll preface the comments by noting that today's call will include forward-looking statements. Actual results may differ materially, and we undertake no obligation to publicly update forward-looking statements. Management comments regarding estimates, projections, and future results are subject to the risks, uncertainties, and assumptions as noted in Everest's SEC filings. Management may also refer to certain non-GAAP financial measures. Available explanations and reconciliations to GAAP can be found in our earnings press release, investor presentation, and financial supplement on our website. With that, I'll turn the call over to Jim.

Thanks, Matt, and good morning, everyone. Since becoming CEO of Everest 9 months ago, I've been focused on resolving the legacy issues surrounding our U.S. insurance casualty book, evaluating how and where capital is allocated in the group, and assessing the results, opportunities, and challenges facing each of our businesses. Yesterday, we announced 2 strategic actions that position Everest as a more agile and profitable company with greater capital flexibility to invest in developing the group and return capital to shareholders. First, we are exiting global retail insurance. The teams running that business have done an exceptional job improving performance over the last 2 years. At the same time, it's clear to me the ongoing investments required in that business and the capital needed to support it are better placed in Everest's other opportunities. Second, we have established a comprehensive adverse development cover for our North America insurance division covering reserves for accident years 2024 and prior. With $1.2 billion of gross limit attaching at a strengthened carried reserve level, this cover will help ensure the results of prior poor underwriting decisions no longer overshadow our strong current performance. Long-term prospects in our core Reinsurance business and in the Wholesale & Specialty insurance operations we're retaining are excellent. I'll continue to set a simple standard for the businesses we operate. Capital deployed must be properly remunerated at acceptable levels of risk. We will operate in businesses with clear competitive advantage, strong economics, and a well-defined forward path. This standard will be applied as we continue to develop our operations and evaluate opportunities to further diversify the company. Turning now to performance in the quarter. Group gross written premium was $4.4 billion, down 1% from last year, largely reflecting targeted re-underwriting in Insurance and careful portfolio mix management in Reinsurance. Our combined ratio for the quarter was 103.4%. Excluding prior year development and net cat losses, the attritional combined ratio was 89.6%, demonstrating the strength of our underlying book. Operating income was $316 million compared with $630 million last year, the difference almost entirely attributable to the reserve adjustment I mentioned earlier. Our Reinsurance business continued to perform exceptionally well in the quarter. Gross written premium of $3.2 billion was down 2% year-over-year, reflecting disciplined cycle management. The combined ratio was 87%, improving year-over-year, driven by lower cat losses and favorable prior year development. Reinsurance reserves are in a strong position. Portfolio mix in Reinsurance continues to develop favorably with property and other short-tail lines increasing by almost 5% year-over-year, while casualty and financial lines decreased by over 10%. This reflects our consistent strategy of reducing exposure to U.S. casualty in the face of persistent legal system abuse. I would also highlight the strong performance of our Global Specialties business, which produced almost $500 million of gross written premium and over $100 million of underwriting income in the quarter. We're investing in this business and expect it to deliver top and bottom line growth in the coming quarters and years. Market conditions in the Reinsurance business, particularly in our cat-exposed lines, should remain favorable through the January 1, 2026, renewal. While market capacity is increasing, Everest is a preferred partner, and we see no barriers to continued attractive capital deployment in this market. Make no mistake, though, where deals do not offer attractive and appropriate returns, we will cut back. Moving to Insurance. The team's execution of our 1-Renewal Strategy remediated the North America casualty book in record time. We're maintaining pricing momentum, improving risk selection, and exiting underperforming accounts, all of which position the go-forward Insurance portfolio for increased profitability. In the quarter, 45% of our U.S. casualty business did not renew. We believe AIG is ideally positioned to maximize the value of this portfolio going forward, and we were pleased to conclude our renewal rights transaction with such a close partner. We're now reorganizing our insurance operation to focus on our global wholesale and specialty insurance capabilities and expertise. This is a strategic move that directly aligns Everest with the evolving needs of the market. Historically, our go-forward wholesale and specialty businesses have outperformed our retail business by approximately 10 combined ratio points. Year-to-date, total written premium was approximately $1.7 billion. The long-term profitability and growth outlooks for the market segments we're focused on are excellent, while Everest's current share is measured in basis points. I'll have more to say about that business in future quarters. To summarize, I would characterize this past quarter as one of action and clarity. We've confronted our legacy casualty issues head on, optimized the portfolio, and positioned Everest for a new chapter. Our core business engines, Reinsurance as well as Wholesale & Specialty insurance are performing well. Our balance sheet is strong and generating meaningful net investment income. Our capital is flexible, and we're moving to a position of significant excess capital to deploy. And our team remains intensely focused on disciplined execution. Before I hand it over to Mark, I want to thank my Everest colleagues around the world. These past months have required both focus and resolve, and our team has handled them with the utmost professionalism and integrity. We're all driving toward a unified goal of a more nimble, resilient, and profitable enterprise. And with that, I'll turn the call over to Mark.

Thank you, Jim, and good morning, everyone. The transformative actions we announced this quarter helped drive certainty into Everest's insurance reserve adequacy and position the company to focus on well-developed and more profitable lines of business. We expect these moves to yield improved returns on capital for Everest and value creation for shareholders. As Jim mentioned earlier, we sold the renewal rights of our U.S., U.K., European, and Asia Pacific commercial retail insurance business to AIG. These businesses collectively total approximately $2 billion in gross written premiums. The transaction will result in meaningful total value to Everest, and significant capital will be released over time. We expect to take a pretax nonoperating charge in the range of $250 million to $350 million associated with the transaction, with the charge being recognized over 2025 and 2026. The transaction meaningfully streamlines Everest's operating model and bolsters our focus on core Reinsurance and Specialty & Wholesale Insurance businesses. We took further action to fortify our U.S. casualty reserves, strengthening reserves by $478 million on a net basis or 12.4 points on the combined ratio. This was split between the insurance and other segments and follows the acceleration of our global reserve studies into the third quarter. We also entered into an adverse development cover, providing $1.2 billion of gross limit with Everest having co-participation of $200 million. The ADC covers $5.4 billion of North American insurance subject reserves for accident years 2024 and prior, with an effective date of October 1, 2025. Everest will be transferring $1.25 billion of in-the-money reserves. As a result, we expect net investment income to be lower by approximately $60 million per year over the next several years. And we will be paying approximately $122 million of premium upon closing of the transaction, which is expected to be in the fourth quarter. Starting with group results, Everest reported gross written premiums of $4.4 billion, representing a 1.2% decrease in constant dollars, while excluding reinstatement premiums from the prior year quarter. The combined ratio was 103.4% for the quarter, reflecting the net reserve strengthening I mentioned a few moments ago. The Reinsurance business had favorable reserve development of $29 million, and this was more than offset by reserve strengthening of $361 million in our Insurance segment and $146 million in our Other segment. The quarter benefited from relatively light catastrophe losses, which contributed 1.3 points to the group combined ratio. The group attritional loss ratio increased 1.4 points to 59.9% in the quarter, with the increase largely driven by our conservative approach to setting initial loss picks in U.S. casualty lines. The attritional combined ratio increased 3 points to 88.8% when excluding the impact of $34 million in profit commissions related to prior year loss reserve releases in mortgage lines, largely due to contingent commissions also associated with our mortgage lines business. Moving to Reinsurance. Gross written premiums decreased 1.7% in constant dollars when adjusting for reinstatement premiums during the quarter. Consistent with prior quarters, we exhibited solid growth in property and specialty lines while remaining disciplined in casualty lines. The combined ratio improved 4.8 points from the prior year to 87%. The improvement was largely driven by lower catastrophe losses, which amounted to $45 million or 1.6 points on the combined ratio versus 9.1 points on the combined ratio in the prior year quarter. Net favorable prior year development also contributed 1 point to the improvement. Our reinsurance reserve studies yielded minor development in casualty lines with continued strength in property, mortgage, and international lines. Overall, we believe we are continuing to build upon our embedded reserve margins. The attritional loss ratio increased 60 basis points to 57.5% as we proactively embedded conservatism into our U.S. casualty loss picks. The attritional combined ratio increased 180 basis points to 85.3% when excluding the impact of $34 million in profit commissions associated with favorable mortgage reserve development. And moving to Insurance. Gross premiums written increased 2.7% in constant dollars to $1.1 billion. Strong growth in Other Specialty and Accident & Health was largely offset by the aggressive actions we are taking in U.S. casualty lines. The underwriting-related expense ratio was 19%, with the increase driven by reduced casualty earned premium growth from our 1-Renewal Strategy. The attritional loss ratio increased to 67% this quarter, reflecting our disciplined approach to setting and sustaining prudent loss picks in our U.S. casualty lines portfolio, given the elevated risk environment due to social inflation. As I mentioned earlier, we strengthened our insurance reserves in the quarter, largely driven by U.S. casualty lines in accident years 2022 through 2024. And this was due to an acceleration of large loss activity, particularly in excess casualty and management liability, and higher frequency in general liability and management liability, resulting in more conservative assumptions. We believe that increased prudence in loss development factors in 2025 loss picks in conjunction with the ADC transaction we entered into will help us turn the page on the U.S. casualty reserving issues experienced over the past several years. Reserve strengthening in the Other segment was largely driven by U.S. casualty lines, primarily the sports and leisure business. Most other segment reserves are also covered in the ADC, excluding asbestos, amongst other minor items. Moving on to investments. Net investment income increased to $540 million for the quarter, and this was driven by higher assets under management and strong alternative asset returns, which generated $112 million of net investment income in the quarter versus $72 million in the prior year quarter. Overall, our book yield decreased slightly to 4.5% given the large component of non-U.S. dollar assets. Our current new money yield is approximately 4.8%, and we continue to have a short asset duration of approximately 3.4 years, and the fixed income portfolio benefits from an average credit rating of AA-. For the third quarter of 2025, our operating income tax rate was 9.4%, which was below our working assumption of 17% to 18% for the year due to the jurisdictional mix of profits in the quarter and a $23 million one-time benefit from our 2024 U.S. tax filing. Shareholders' equity ended the quarter at $15.4 billion or $15.5 billion, excluding $87 million of net unrealized depreciation on available-for-sale fixed income securities. Book value per share ended the quarter at $366.22, an improvement of 15.2% from year-end 2024. When adjusted for dividends of $6 per share year-to-date. We will also realign our reporting segments beginning in Q1 2026 and communicate that once it's finalized in the coming weeks. We did not repurchase any shares in the quarter. However, we continue to view share repurchases as an attractive opportunity to deploy capital, and we expect to resume meaningful share repurchases going forward. With that, I will turn the call back over to Matt.

Thanks, Mark. Betsy, we're now ready to open the line for questions.

The first question today comes from Josh Shanker with Bank of America. The first question comes from Meyer Shields.

May I come in, too?

Yes. Josh, we hear you.

It's actually, Meyer, but I'm glad you can hear me.

Yes. So doing some very quick math on the 10 percentage point differential between the specialty and the retail business in insurance, it suggests that it's running at a 95% combined ratio, excluding cat. I was hoping you can get a sense as to what the cat load is for the specialty business, whether 2025 or 2026?

Meyer, it's quite modest actually, almost de minimis, definitely very low relative to the overall insurance division burden that we currently have.

Okay. Fantastic. And when I look at the transferred reserves and the fact that $2 billion of insurance gross written premiums are going to be non-renewed one way or the other. Is there any way of ballparking what that ultimately means in terms of capital liberation?

So Meyer, just I want to make sure I understand your question. So the $2 billion of retail business that we transferred to AIG and any other non-renewal of subject premium over the renewal, you're interested in the capital release from that? Is that accurate?

Yes, that's exactly right.

Yes. There are several aspects to consider. We anticipate substantial progress over time. It's primarily a timing issue. The renewal process will occur over the next 12 months. During this period, we will benefit from the non-renewal of that premium on our own paper, allowing us to lower the capital intensity linked to the premium. Additionally, we expect meaningful net earned premium from 2025 writings to appear in our P&L as anticipated, alongside traditional P&L components such as commission expense, loss expense, and general and administrative expenses. The loss reserves will incur some capital charges during this timeframe. Furthermore, we will have existing reserves that have been bolstered by approximately $0.5 billion in casualty reserves, which will gradually contribute to capital release over time. However, due to the additional $0.5 billion primarily in casualty reserves, we will see a higher level of these reserves, resulting in reduced diversification benefits in the upcoming quarters of this reserve runoff. Therefore, I expect the capital relief from this transaction, remediation, and runoff to become more apparent in the latter half of 2026, but we definitely see it on the horizon.

The next question comes from Josh Shanker with Bank of America.

There's a lot of moving parts in the announcement. There's the ADC, there's the renewal rights transfer. Obviously, there's the charge related. The one thing that hasn't been announced is a plan of what to do with capital. I think investors might have felt some comfort if there was some announcement that we plan a large repurchase or there was a commitment from management to want to own the shares here. The stock is trading below book, how should we frame the appetite for returning capital to shareholders over the 1-, 2-year period?

So Josh, it's Mark. We obviously view capital repatriation, share buybacks very attractively for several of the points you mentioned. Clearly, trading at a discount to book makes it attractive. We're in a lower growth period of the cycle. And so as we're generating returns, we certainly foresee meaningful retained earnings accumulation. I would say that the kind of activity that you saw in the first half of the year this year would represent a floor on buybacks as we pursue Q4 and then into 2026. And to my earlier point to Meyer, we do expect the transactions that we've entered into to unlock more capital for that purpose over time.

All right. And then trying to understand the sort of chronology. Obviously, a little less than a year ago, there was a plan for a 1-year renewal and obviously, the decision that Everest is not the appropriate owner for a lot of its retail risk. When did the company come to understand that? And of the underwriting that had done in like the past 6 months, do we have any concerns that Everest wasn't the right underwriter for that risk and we need to worry about '25 reserves?

Yes, Josh. So let me start by talking a little bit about the re-underwriting process and where we are in that process, and then I'll come on to the timing of the decisions around the go-forward business. So just to refresh memories, I took on leadership of the Insurance business last year 2024 at the sort of end of the spring. We had really ramped up the remediation process that you've seen play out that we've called the 1-Renewal Strategy in July of '24, meaning it essentially began to complete itself in July of '25 and with a little bit of tail into the third quarter. And so that re-underwriting is complete. There is no further re-underwriting of the casualty book other than normal portfolio management that is required as we go forward. One statistic that I will share with you, and this is going to be relevant to how you think about the '25 loss picks. But if you look at the development that we've observed in 2025 that led us to an additional strengthening of our back book reserves, 80% of that development in U.S. casualty came from policies that were eliminated from our portfolio during the course of the remediation. And I think that's a good early indicator that we were over the right target that we dealt with the remediation decisively and that the go-forward portfolio will perform extremely well. Now that said, we've still booked it at very, very prudent loss picks. We're not taking credit for any of that, but we do expect it to play out. And then to the broader question you asked, which I think is an important one, and I'm going to spend a couple of minutes on it, if you'll indulge me. In terms of how we got to the decision and the chronology of getting to the decision around the go-forward portfolio, that was a comprehensive process. It was not driven by what we observed in the reserves. It was a process that was led by the management team, included a number of outside strategic advisers, and ultimately included our Board of Directors in a very thorough process. And the purpose of that process was to determine what are our best opportunities to drive shareholder value and compounded book value per share growth over time period. We didn't bring any biases into that process around businesses we had built, businesses that we otherwise liked, et cetera. It was purely a strategic review to get at those critical answers. And during the course of that process, as I shared in my opening comments, it became really clear to me, to the rest of the management team, to our advisers, and to our Board that our best opportunities are in our Reinsurance business, which is a leading market-leading franchise, and in our Wholesale & Specialty Insurance operations, which perform at a very high level, which allow us to very nimbly manage the market cycle, which require much less investment in terms of people and technology and therefore, have less execution risk. And we talked a little bit about the performance gap in the combined ratio. And so therefore, the decision was to focus on those businesses. And as a result, we determined that it was best to exit retail insurance, and that's how we got to the transaction that we announced yesterday. But that gives you a comprehensive sense of how these things play together.

The next question comes from Gregory Peters with Raymond James.

One recurring question that arises as you've addressed your insurance operation casualty reserves is the risk of affect on your reinsurance book related to casualty business. Now that you've completed your full year reserve review a bit ahead of schedule, could you share your rationale behind the confidence that the casualty reserves within your reinsurance business will remain stable?

Yes, Greg, I understand your question. I want to start by clarifying that we have two very different portfolios. I've been transparent about the historical performance of our insurance casualty book, which I would frankly describe as being in the bottom quartile of our industry. There's a significant difference in performance between bottom quartile underwriters and top quartile ones, a trend that has persisted through all market cycles across all lines of business. We were in the bottom quartile, but we have addressed that, and I believe this portfolio will perform very well over time. I think it will be valuable to our partner, AIG, as they take it on. Additionally, since we have a top quartile reinsurance portfolio, there is no reason to expect that it will perform like a bottom quartile portfolio. While the top quartile is still affected by social inflation and similar issues, they have consistently managed limits, secured top pricing for the risks they take, carefully selected business classes, and utilized loss-sensitive features to align interests with clients. All these strategies have been part of our remediation efforts and have been implemented by our reinsurance clients consistently throughout the cycle. Thus, I do not expect these portfolios to perform in a similar manner over time.

And then can we just talk about property reinsurance pricing conditions going forward, considering the light year, I noted in your presentation that your PMLs are inching upwards and that you grew your property cat and non-cat reinsurance business in the quarter. How are you thinking about that business in the '26 period of time, considering what looks to be like a lot of pricing pressure?

Yes, I would say the current environment remains very favorable. One point I made during last quarter's call is that if you weren’t aware that prices corrected by 50% at the start of this year, and you looked at the current rates in the market compared to historical levels from the 2010s, you’d conclude that this is a strong property catastrophe market and it makes sense for people to write it. This recognition of good pricing is driving competition. Prices may decrease, and if we assume a 10% drop at the start of the year, I still believe property catastrophe is adequately priced. Therefore, we will continue to seek this risk. As I mentioned earlier, if the market sees a 10% decline, there may be clients whose pricing we find inadequate, and we will make adjustments. Regarding the growth outside of catastrophe, it reflects the growth we've seen over the past couple of years as we've adapted to the market correction. We are being very selective about where we are expanding that portfolio and with which clients, and I feel confident about that book. It's also important to note that discussions about a light year won’t influence our decisions for the 2026 renewals. I didn’t perceive this year as particularly light, starting with a significant wildfire and a Cat-5 hurricane currently in the Caribbean. We don’t let a single good year dictate our actions. We are focused on long-term decisions based on the pricing trajectory of the business. We will take necessary actions when the time is right if we feel we are not being appropriately compensated for the risks we accept.

The next question comes from Alex Scott with Barclays.

I wanted to come back to the ADC and just see if you could talk a bit about how you thought about sizing the $1.2 billion gross protection. I mean, can you characterize that in terms of like standard deviations away from your point estimate and that kind of thing, just so we can get a sense for how protected this is?

Yes, Alex, that's a great question. To begin with, let me share some of the philosophy or strategy behind our approach before we discuss the ADC numbers. Our goal was to move past the challenges we faced with our historical casualty reserves. I believe this management team has been quite focused on achieving that and has taken various actions to make it happen. The reserve strengthening that was highlighted this quarter aimed to establish an ADC that would provide finality regarding these issues. We do not want to revisit this topic. In terms of sizing, we've previously mentioned a reserve margin in the hundreds of millions of dollars. I see the ADC as representing a $1.2 billion reserve margin. This is about ensuring finality so that there's no ongoing concern. Rather than aiming for a specific percentage of the actuarial best estimate or a certain standard deviation, our focus has been on addressing this concern so that it no longer needs to be a worry. That’s the primary driver behind our decision, rather than trying to fit it into a specific framework.

Alex, I would add a couple of points to Jim's commentary. So the subject matter reserve pool is approximately $5.4 billion. So when you take into context the $1.2 billion of cover on top of that, that is very substantial. So if you think about a distribution to the point you were making, I would call that quite broad, quite strong, certainly more than a traditional range of an ACE and certainly nothing that we would expect to blow through, to be quite frank with you, given the overwhelming nature of it. So the underlying reserve base is also somewhat diversified with other lines of business. So the casualty reserves, I would say, are the ones that are currently in focus from a risk perspective. And so this $1.2 billion can really be seen, I think, as to Jim's point, finality on the subject for us.

Got it. Very helpful. My follow-up question is regarding the insurance segment. You spoke about the profitability of what you're retaining compared to what's included in the renewal rights. You also mentioned the conservatism you're integrating into loss picks. I want to clarify two things. Meyer mentioned 95%, and you didn't correct him as we move forward. Is there any conservatism that we should consider adding on top of that for a while before reaching that level? Or is that the current state, even with the conservatism you're implementing now?

Yes, Alex. Look, I would say one of the reasons I didn't correct the 95% is we don't give forward guidance. But I'd say we have tried to create some clarity here by indicating this business performs well. I'd say the lower half of the 90s is a reasonable way of thinking about a conservative approach to booking that business. Given where we've come from, we want to make sure that we are being prudent in the loss picks. And so the way I'm talking about it assumes that we're going to keep some conservatism. The other key point to keep in mind, though, is if you think about the Wholesale & Specialty business on a go-forward basis, the share of that business that's U.S. casualty exposed is something that we're managing very closely. And so the need for conservatism gets affected, obviously, by the mix of the portfolio you're writing, and that's certainly within our control. So I think you can see us print some very solid current period results while also being conservative in the picks, which to me is the best combination.

The next question comes from Andrew Andersen with Jefferies.

Hear your comments on the difference between the reinsurance casualty and insurance casualty, but I think you did mention some movement on casualty reinsurance this quarter. Could you just expand a bit on what that was? And I just want to confirm, this was effectively the reserve study for the year across both segments? Or is there still some studies in the fourth quarter?

No. Reinsurance is complete in terms of the reserve studies. There might be a couple of very small ones, but they'd be immaterial to this. Clearly, we did all the casualty studies, very minor puts and takes, nowhere close to the magnitude of what we had last year. Feeling very good about it, and it's fully reflected in our Q3 figures.

Okay. If you don't have a favorable view on primary casualty, that may somewhat reflect your reinsurance casualty growth. However, that line has been declining for a while. What are you observing in the pricing environment for casualty reinsurance, and what is your outlook for growth going forward?

Yes. The primary way we engage in the casualty reinsurance market is through a quota share arrangement. The key price we monitor is the rate in relation to the trend line, which has been quite favorable for over a year. I don’t anticipate that changing significantly. While it has tightened somewhat, our clients are still maintaining rates above the trend across those casualty lines. I haven’t noticed any decline in underwriting quality, especially not among our clients, as those that have shown decline are no longer with us. Additionally, there has been a consistent reluctance to adjust ceding commissions on the part of the reinsurance industry, which I believe is unwise. Therefore, we may be acting contrary to some others by ensuring that our interests are aligned and we’re not overpaying for business. I don't foresee a change in this approach. Overall, I believe we are in a stable situation. There remains a good amount of quality casualty reinsurance available to pursue, even if it isn't as much as we would prefer, and we have excellent clients to work with. We’re at the right level currently, and our focus will be on the usual portfolio management tasks.

The next question comes from Brian Meredith with UBS.

Jim, first question, I think in your prepared comments, you talked about looking for ways to diversify the company more. Can you maybe elaborate a little bit on that? And why is that important? And why not just kind of stick with your kind of core competencies here right now in Reinsurance and Wholesale & Specialty businesses?

Sure, Brian. I wouldn't read too much into that comment. We are always looking for opportunities. When discussing diversification, I prioritize what I mentioned in my prepared remarks: any capital deployment must meet acceptable risk and return levels. It has to be in areas where we have a clear competitive edge, favorable economics, and strong execution prospects. There are numerous markets we engage in meaningfully, yet we remain underrepresented in many areas, as I’ve previously noted. In specialties, for instance, our reinsurance segment generated $500 million in premiums last quarter, yielding over $100 million in profit. It’s a great business with significant growth potential, which enhances diversification since it’s not reliant on property catastrophe or core U.S. casualty sectors. We are also underrepresented in Asia, where our Reinsurance team has excelled in business growth and can continue doing so. We are restructuring around Global Wholesale & Specialty in a new manner, appointing Jason Keen, the former co-CEO of our International Insurance unit, as the CEO of this division. He will uncover promising growth opportunities over time. That's what I meant, and we approach these evaluations with care. You can trust that we've established a clear standard for how we will assess such opportunities moving forward.

Great. That's helpful. And then second question, just back on the ADC. I'm just curious, any way you can provide maybe some details on how you think the ADC reinsurers arrived at the attachment point? I mean, I look at the adverse development you had in your insurance, it's about 2x your risk margin at year-end 2024 and 1x on the other segment.

I am really glad we were able to complete the transaction with Longtail Re, known for their credible underwriting team led by Mike Sapnar. They did an excellent job in assessing the portfolio. I would describe this as a collaborative process. A critical aspect of this ADC is its lack of a loss corridor. Building a stronger reserve base is essential for obtaining a gross limit of $1.2 billion on top of your carry position without a loss corridor. This feature was crucial in bringing everything together and gives us certainty about any North America insurance development in 2024 and prior. If there is any development, it will be covered under the ADC. The process involved was rigorous and collaborative, leading to economics that are favorable for Longtail Re while also being reasonable from Everest's perspective.

The next question comes from David Motemaden with Evercore ISI.

I had a question just on the casualty reinsurance reserves. Mark, you had mentioned there was some minor development there in the quarter that was offset by some of the shorter tail releases. I was wondering if you could just elaborate a little bit on what happened exactly there and some of the trends you're observing on the casualty reserves.

Yes, I have a few comments. It has certainly calmed down. We are examining some older years that were affected by a few cedents. Overall, we are observing positive signs of adequacy. In comparison to the trends of last year and the previous year, we didn't encounter the same level of development, especially when bridging the data. We feel quite confident about our observations and our ability to manage it. Additionally, this is entirely U.S. casualty based, with no concerns arising from an international perspective. We are focused on this issue due to its prominence in discussions about social inflation. Therefore, we conduct thorough individual cedent reviews as we analyze the data. Another point I highlighted is the overall strength of the reinsurance segment and the embedded margin we believe we are cultivating. We continue to see positive indicators of adding embedded margin, and we are waiting for it to mature before releasing it when the time is right.

Got it. And the gross change on the Casualty Re side, is that something you could size for us?

A few percentage points, very small on the base. So definitely on the low end.

Got it. And then just quickly, I think just staying on the Casualty Re reserves. I think when we had the reserve update at the end of last year, there was $180 million of risk margin in that book, and you guys had said it was at the upper part of the actuarial best estimate range. I was wondering, has that improved? Is that in the 90th percentile now? I guess, how big is the risk margin? Has that stayed the same? Any sort of detail on those metrics would be helpful.

Yes. I want to make sure I understand which segment you're referring to. Was it Reinsurance or Insurance?

Yes, the casualty on the Casualty Re side.

On the Casualty Re side, yes. So we're definitely comfortable with it. I think what we did last year, the concept of the risk margin that we put into the management best estimate was really to deal with uncertainties that we foresaw from a management perspective relative to the actuarial central estimate. And so as we observe the data coming in, the loss experience and how broad-based it was, we could see that, that uncertainty really wasn't crystallized into a loss experience that was more in line with our expectations. And so the point that I would make is that the uncertainty on the higher end is not something that we see today. We're quite comfortable with the loss development factors that we put into our Q3 studies. We're benefiting from this extra data. We're seeing stabilizing trends. The loss picks are in a good spot. It's something we've also taken the time out of prudence to strengthen in the current year 2025. So from a Reinsurance perspective, we're in a good spot.

The next question comes from Ryan Tunis with Cantor.

Just, I guess, Jim, kind of a broad question on just the ROE trajectory. At the beginning of the year, you thought the ROE was x, I don't know, call it, 14%, 15%. Just thinking through the moving parts on what that is now. I mean we're losing $2 billion of insurance premium, $60 million of investment income, but obviously, we're getting some costs out and some elevated capital management. So I'm just wondering how you're thinking about the ROE profile of this company.

Yes, Ryan, thank you for your question. It's great to hear from you. Let me provide some broader context before addressing your specific inquiry regarding the transaction and its implications for the group. Firstly, there's a cost embedded in the P&L that will now be transferred, which includes employee costs, technology, and so on. We have a clear strategy for managing this by 2026. As Mark mentioned earlier, we anticipate a strong flow of earned premium from the portfolio we are selling in 2026 as it diminishes. Generally speaking, the decline in costs and the earned premium appears to be aligned. While there may be occasional challenges, I am confident we will reach a positive outcome. As we complete the transaction and adjust the business accordingly, I do not foresee this being a long-term challenge for the group beyond 2026. Additionally, we are currently experiencing typical market cycles, which fluctuate. Presently, particularly in short-tail lines, we are seeing a decrease in both the primary and reinsurance markets regarding property pricing. However, as I have noted in previous discussions, I still find the situation attractive. Are we maintaining mid-teens levels of ROE over the cycle? Yes. Is there a possibility that in 2026 it might be slightly less than that? Perhaps. Nonetheless, we have several measures at our disposal, including capital management initiatives, as Mark pointed out, to navigate this effectively over time.

I have a follow-up regarding the decision to enter into the renewal rights deal. I was somewhat surprised to hear that there appears to be no overlap between the retail business and the remediation performed. This seems quite clear from a reserve perspective, and it's operating under a sub-100% combined ratio. So, why opt for the renewal rights deal instead of exploring sale opportunities?

Yes, that's a fair question. To reiterate what I mentioned earlier, the strategic decision I made with the management team, our advisers, and the Board focused on our core reinsurance business and the appealing Wholesale & Specialty sectors. This decision to exit retail insurance stems from that focus. The next step was to determine the most effective way to implement this change. A few factors influenced our choice of a renewal rights transaction. Firstly, we recognize that while we need to manage the back book of reserves from the ADC, transferring that at this stage isn’t practical. Additionally, several legal entities involved in the retail business are crucial to the Wholesale & Specialty areas we are maintaining. Finally, we were fortunate to find the right partner to facilitate this deal quickly and with certainty, considering their needs as well. All these elements aligned perfectly, leading me to conclude that a renewal rights transaction was the most efficient approach to meet our strategic objectives of concentrating on our Reinsurance and Wholesale & Specialty Insurance businesses.

The next question comes from Hristian Getsov with Wells Fargo.

In the past, you've spoken about increasing the international component of the primary insurance book. I guess with all the moving pieces, particularly around the renewal rights and the new focus on the Wholesale & Specialty side, is there any change in that game plan? And then I guess, sticking to that, is there enough runway for you guys to grow that business organically? Or can M&A be a bigger part of the story moving forward?

Certainly, Hristian. I'll address the questions one by one. The growth in international was mainly driven by our retail strategy, although we also have a strong wholesale business in our London market. I want to clarify something important: there were no issues with our business operations or the execution of our teams’ strategies; they were performing well. The strategic question we faced was about the optimal allocation of our capital and investments moving forward. Clearly, as I have mentioned several times, the opportunities in Reinsurance and in Wholesale & Specialty Insurance present a much stronger case for us at this stage than continuing our investments in retail. While the decision to divest the retail business may slow international growth in the short term, it is based on strategic reasons we've discussed in detail today. Regarding the future of our business, particularly in Wholesale & Specialty, which we've reorganized under strong leadership, I believe there will be growth opportunities. We are very focused on improving our bottom line, and as market conditions permit, I foresee potential for organic growth. I want to emphasize, and I realize I may be repeating myself, that we can pursue these growth opportunities with significantly less investment in personnel and infrastructure compared to what is required in retail, which we find appealing. As for M&A being part of the plan, I think it’s a possibility. However, we have been clear that if we proceed with any moves in Wholesale & Specialty, it will be to enhance our capabilities in a way that is attractive, feasible, and carries minimal execution risk. Those are the characteristics we would prioritize for any M&A activity in the Wholesale & Specialty sector. So in terms of the pricing outlook, I think the market consensus is prices are going to come off a bit, probably in the range of 10%, depending on who you believe. I think the business is still well priced if that happens in terms of expected return. Now having said that, I would not expect us to look to significantly grow from that point when prices are coming down, I think it's more about being very selective. Capital constraints were never an issue as we've expanded the book. And we had excess capital before this transaction. We have more of it now. That is not a factor in determining how much cat we're going to write. It's really more about the underlying dynamics of the cat market and how it compares to other opportunities to deploy capital.

The next question comes from Tracy Benguigui with Wolfe Research.

Just some clarification on your comment, there was no loss corridor. I mean, I see that in the schematic. But I just assumed that the $539 million of casualty reserve strengthening would have been your loss corridor had you not taken those actions. So I'm just wondering, did Longtail Re come in and say, I will attach $5.4 billion, so you have to fill in the gap? Or would they have done the deal at a lower attachment?

Well, yes, Tracy, I'm not going to speculate on what they might have done. However, I can say that the process of structuring this deal was collaborative, and there was a significant exchange of information and transparency involved. It's important to remember that this is primarily driven by a thorough actuarial assessment within Everest to determine what we believe the ultimate loss ratios will be. I won't speak for Longtail, but I think anyone examining our approach to those reserves would agree that we have confidence in the ultimate figures. That's the key takeaway. Those ultimate loss ratios are appropriate considering everything that has happened in the external environment and the underwriting challenges we've faced. Therefore, we can confidently base our actions on those ultimate figures, which indicates a strong belief in their stability moving forward.

Got it. And I'm just curious how wide of a search did you conduct? This is not a knock on Longtail Re, but just doing a deal with a non-rated reinsurer piqued my interest given the capital discussion on this call. I mean, there's less relief given higher counterparty credit risk.

Yes. In terms of the deal features, we are engaging with two rated fronting carriers as part of the transaction, which means we are not assuming credit risk to Longtail Re. We have highly rated balance sheets backing us in this deal. This was an important consideration for us. We conducted a thorough process using Gallagher Re as our broker, who did an extensive search with their world-class casualty team. We worked with several parties, but what stood out about Longtail was our existing relationship with Stoneridge Asset Management through Mount Logan, where they've been reliable partners. There is a lot we can do together now and in the future. I also have great respect for Mike Sapnar and consider him an excellent underwriter, so his endorsement of this transaction was significant to me. Overall, I believe this outcome is exceptional for Everest and will also be beneficial for Longtail.

Okay, so you said there were 2 fronting companies. It's like retrocession. Like if you could just share a little bit more detail behind that.

Yes. So the deal, the transaction, the $1.2 billion gross limit is split into 2 layers. The first layer is fronted by State National. The second layer is fronted by MS Transverse. Longtail sits behind those 2 carriers and has collateral arrangements, et cetera. But we face off, we are ceding to those 2 rated balance sheets.

Yes. Tracy, it's worth pointing out we have an 8-K with all the details on the ADC. I think we issued it yesterday. So certainly, you can get that structure from there.

This concludes our question-and-answer session and concludes our conference call today. Thank you for attending today's presentation. You may now disconnect.