Everest : Fourth Quarter 2024 Earnings Call Transcript

Published: 2025-02-05 13:13:04 ET EG

Corrected Transcript

04-Feb-2025

Everest Group Ltd. (EG)

Q4 2024 Earnings Call

Total Pages: 18

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Everest Group Ltd. (EG)

Corrected Transcript

Q4 2024 Earnings Call

04-Feb-2025

CORPORATE PARTICIPANTS

Matt Rohrmann

Mark Kociancic

Head-Investor Relations, Everest Group Ltd.

Chief Financial Officer & Executive Vice President, Everest Group Ltd.

Jim Williamson

President, Chief Executive Officer & Director, Everest Group Ltd.

......................................................................................................................................................................................................................................................

OTHER PARTICIPANTS

C. Gregory Peters

David Motemaden

Analyst, Raymond James & Associates, Inc.

Analyst, Evercore ISI

Meyer Shields

Brian Meredith

Analyst, Keefe, Bruyette & Woods, Inc.

Analyst, UBS Securities LLC

Joshua Shanker

Elyse Greenspan

Analyst, BofA Securities, Inc.

Analyst, Wells Fargo Securities LLC

Alex Scott

Wes Carmichael

Analyst, Barclays Capital, Inc.

Analyst, Autonomous Research US LP

MANAGEMENT DISCUSSION SECTION

Operator: Good day and welcome to the Everest Group Limited Fourth Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] 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.

Matt Rohrmann

Head-Investor Relations, Everest Group Ltd.

Thanks, Dave. Good morning, everyone, and welcome to Everest Group Limited Fourth Quarter of 2024 Earnings Conference Call. The Everest executives leading today's call are Jim Williamson, our President and CEO; and Mark Kociancic, Executive Vice President and CFO. We are also joined by the 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 obligations to publicly update forward-looking statements. Management comments regarding estimates, projections and similar are subject to risks, uncertainties and assumptions as noted in Everest's SEC filings. Management may also refer to certain non-

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Everest Group Ltd. (EG)

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GAAP financial measures. Available explanation and reconciliations to GAAP can be found in our earnings release and financial supplement on our website.

With that, I'll turn the call over to Jim.

Jim Williamson

President, Chief Executive Officer & Director, Everest Group Ltd.

Thanks, Matt, and good morning, everyone. Let me begin by addressing two recent tragedies, wildfires in California and a plane crash in Washington, D.C. last Wednesday. The human toll of both events is devastating. Our thoughts and prayers are with the people, families and communities affected. We are particularly grateful to the first responders who worked tirelessly during and in the aftermath of these events. Everest stands ready to put its financial resources to work and fulfill its societal mission of aiding recovery. Both of these events remain ongoing from a loss assessment perspective. Regarding the L.A. wildfires, I would expect Everest to take a pre- tax net loss for the Group of between $350 million and $450 million, equating to a 1% market share. Obviously, this loss will impact our Reinsurance division. We are confident in the underwriting of this exposure by both our Insurance and Reinsurance teams, and our share of loss reflects careful client selection. Most teams are unable to provide expected loss ranges, except in those cases where a total loss to their reinsurance program is nearly certain. As a result, this loss estimate remains a broad range based on the most widely used industry loss figures. Specific to the aviation tragedy, it's too early to provide a loss estimate for the event, but we expect it to be well managed in our Q1 results.

Moving on to our fourth quarter results. As we discussed last week, Everest decisive reserve action added $1.7 billion to net reserves, including over $200 million of additions to our 2024 loss picks. Worth emphasizing that despite the impact of our reserve strengthening, Everest earned $1.3 billion in operating income for the year and achieved a 9% operating return on equity. While these results are not consistent with the goals for our company, they speak to the resilience of our business as strong income streams in Reinsurance and investments more than offset needed reserve strengthening, predominantly in U.S. casualty lines.

Putting aside the reserving action for a moment, let me unpack our current period business performance, starting with Reinsurance, where results were once again excellent. Quite an elevated cat year, including a major hurricane in the fourth quarter, we earned $286 million and $1.2 billion of underwriting income for the quarter and year respectively. Fourth quarter all-in combined ratio, excluding the impact of prior year favorable cat development and profit commissions due to reserve releases in our mortgage book is 91.5%. This result clearly demonstrates Everest's ability to absorb significant cat activity and still deliver.

Premium growth in the quarter excluding the impact of reinstatement premiums was 12.6%. This is a result of strong execution with our core clients, particularly in property lines, as well as selective expansion in some of our specialty underwriting areas and International business. This growth was offset by the effects of the discipline we're exercising in U.S. Exposed Treaty Casualty. Our casualty pro-rata book was down more than 7% in the quarter, which really understates the extent of our discipline actions, which were offset by growth in non-U.S. casualty.

Everest has been an early and consistent voice regarding the changes needed in the U.S. casualty quota share market. Ceding commissions are too high and capacity is generally available regardless of the quality of the cedants. Faced with those conditions, we've maintained our singular focus on underwriting discipline and cedants selection. Highlight the point, since the January 1st, 2024, renewal, we walked away from nearly $750 million in North American casualty quota share business. Our approach in this line is simple. We conduct a thorough

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ground up underwriting and loss cost review of each treaty, and we cut back anything that doesn't meet our return expectations, period.

Moving on to the January 1, 2025, renewal, where our team again executed at the highest levels. Overall, our total Reinsurance division bound premium was down by about 3% during the renewal, driven mostly by the aforementioned casualty discipline, which was offset by growth on the very best deals in the market, mostly in property and specialty lines. Although property cat prices were down generally between 5% and 15% for loss reprograms, overall rate levels remain above what we need to be willing to deploy capacity in most markets. An exception to my view on the property cat market is Continental Europe. European cat activity in the form of severe convective storm, hail and flooding is clearly a rising trend. Those events drove significant annual [ph] losses (00:16:30), France, Germany, Italy and Eastern Europe have all been particularly affected over the last several years.

After a thorough review of our modeling and analytics for these perils, we reached the conclusion that we needed to charge more for European cat exposure, in some cases significantly more. As a result, our average model loss costs increased by about 10%. We fully exited over 20 deals, significantly cut back on many others, while increasing moderately on the most profitable layers and programs.

Going forward, we expect the California wildfires to serve as a reminder, as if one was needed to own property reinsurance underwriters of the need to maintain pricing discipline and achieve adequate rate. The global property cat reinsurance market overall remains attractive for Everest's capacity. As I have said, our customers prefer, prefer to do more business with Everest, when they can, which means we will continue to enjoy the option of choosing where to put our capacity to work.

Moving to Insurance. Overall, gross written premium was down marginally due to our casualty remediation, offset by growth in short tail and specialty lines. Of course, the published combined ratios for the quarter and year are unacceptable. But if you look at it purely on a current period basis, our 2024 combined ratio is a 100.7%. That is certainly not good, but it gives us a launching point for our portfolio remediation that we can work with.

Our International operation continues to grow with a strong overall written premium increase in key short tail and specialty lines. Despite substantial investments in people and infrastructure, the International Insurance business earned an underwriting profit in 2024. Our loss ratio in that business is excellent and consistent actual versus expected data in what is largely a short tail portfolio gives us confidence in our loss tax.

2025, we're focused on increasing scale in the 12 markets we're operating in. We do not expect to enter additional markets this year, which will result in greater premium leverage against expenses as we move forward.

Finally, our North American Insurance business is making great strides in remediating our casualty portfolio. Consistent with our actions in Q3, 40% of our casualty premiums in the fourth quarter were not renewed, including actions in our EverSports portfolio now captured in our Other segment. In our ongoing Insurance business, this results in a premium reduction in our U.S. Specialty Casualty business of approximately 23%. This is despite accelerated rate achievement in GL, auto liability and umbrella, excess, ranging from 14% to 27%.

Loss cost inflation remained steady at an elevated level. And as we discussed last week, we will be assuming 12- plus points of average trend across those lines.

Also, the last quarter affected by the runoff of our medical stop loss business impact in the quarter was $75 million. Our team in the field has done a good job pipelining and underwriting a number of large risk management

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accounts. These are well-structured with sophisticated clients who understand the need to manage exposure in a heavy social inflation environment. Recent wins in this business include a multi-line solution for a leading global industrial firm. Property cross-sell to an existing casualty account in the public advocacy arena, and a large deductible casualty program for a consumer products company.

We set ourselves apart from the competition on these deals through the quality of our relationships, breadth of our offering and specialized services. Results of our portfolio remediation coupled with the targeted growth, are already being reflected in our data. Our Specialty Casualty business made up 25% of our global insurance premiums in Q4, down from over 30% one year ago. And the quality of the accounts has improved dramatically. As I said on our pre-release call, we will take no credit in our loss picks for this, but I certainly expect it to yield increasing margin over time.

And now, I'll turn it over to Mark to discuss the financials in more detail.

Mark Kociancic

Chief Financial Officer & Executive Vice President, Everest Group Ltd.

Thank you, Jim, and good morning, everyone. As we discussed last week, 2024 was a pivotal year of transformation for Everest. We took decisive action to fortify our U.S. casualty reserves following a comprehensive reserve review, and it's reflected in our fourth quarter 2024 results.

Looking at the Group results, Everest reported gross written premiums of $4.7 billion, representing 7.2% growth in constant dollars and excluding reinstatement premiums. The combined ratio was a 135.5% for the quarter. This includes unfavorable development of prior year loss reserves of $1.5 billion or 37.6 points on the combined ratio. We also strengthened current accident year losses by $229 million, with total strengthening of $1.7 billion for the full year and fourth quarter 2024. Cat losses in the quarter contributed 5.3 points to the combined ratio, largely driven by Hurricane Milton. We also had releases on prior year events largely driven by Hurricane Ian, which partially offset cat losses this quarter, which as a reminder, run through the catastrophe line in the segment PML. I would also note that the prior year quarter had much lower than average, average cat capacity.

The Group attritional loss ratio was 63.9%, a 490-basis point increase over the prior year's quarter. This reflects the current accident year strengthening, I mentioned a few moments ago, primarily within our Insurance segment. The Group's commission ratio was 21.2% when excluding the impact of 1.8 points from the profit commissions associated with favorable reserve development in the Reinsurance segment related to the mortgage business and consistent with the prior year. The Group expense ratio was 6.2% in the quarter as we continue to invest in talent and systems within both franchises.

Moving to the segment results and starting with Reinsurance. Reinsurance gross premiums grew 12.6% in constant dollars when adjusting for reinstatement premiums during the quarter. The strong growth was primarily driven by strong double-digit increases in Property Pro-Rata and Property Cat XOL partially offset by continued discipline in casualty lines. For the full year 2024, Property Cat XOL grew approximately 26.2% versus the prior year. Combined ratio was 90.4% in the fourth quarter. The prior year, fourth quarter's combined ratio of 78.9% included 15.3 points of favorable prior year reserve development.

As you saw in our press release last week, favorable development in property and mortgage lines fully offset reserve strengthening in U.S. casualty lines. Catastrophe losses contributed 5.4 points to the combined ratio in the quarter consistent with the prior year. This quarter's cat losses were largely driven by $275 million of losses from Hurricane Milton and were partially offset by a $125 million of releases on prior year events, namely Hurricane Ian.

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Attritional loss ratio improved 90 basis points to 56.9%, which was primarily driven by mix as we continue to grow strongly in Property Cat XOL and reduce our Casualty Pro-Rata business. Attritional combined ratio improved a 140 basis points to 83.7%, when excluding the impact of $68 million in profit commissions associated with favorable mortgage reserve development this quarter. The prior year quarter included $94 million of profit commission related to loss reserve releases in mortgage lines. Normalized commission ratio was 24% when you exclude the 2.3 points attributed to the profit commissions associated with favorable development in Reinsurance. The underwriting related expense ratio was 2.5%, consistent with the prior year.

Moving to Insurance, gross premiums written decreased 1.6% in constant dollars to $1.4 billion, driven by our decisive actions to shed underperforming U.S. casualty business. We are targeting growth in the most accretive lines to improve the portfolio quality and further diversify the book. We made meaningful progress this quarter with property and specialty lines, each growing above 30% in the quarter. This growth was offset by the aggressive underwriting action we are taking in Specialty casualty lines centered around U.S. casualty lines, as well as the runoff of our A&H medical stop loss business, which was completed in Q4.

As you saw in our press release last week, we strengthened U.S. casualty prior year reserves in our recently redefined Insurance segment by approximately $1.1 billion in the quarter. We also strengthened current accident year losses by $206 million, which is reflected in the increased attritional loss ratio of 84% this quarter at 68.1% for the full year 2024. Combined ratio also included 5.3 points of catastrophe losses, primarily driven by losses from Hurricane Milton while the prior year fourth quarter benefited from a relatively benign level of cat losses.

Commission ratio increased a 100 basis points, largely driven by business mix. The underwriting related expense ratio was 17.9%, with the increase largely driven by the continued investment in our global platform and slower earned premium growth as we rationalize our U.S. casualty portfolio.

We recently formed our Other segment to enhance disclosure around non-core lines of business, strengthened reserves by $425 million in the quarter, which includes an increase of $22 million through current accident year losses. The Other segment includes $1.1 billion of net reserves.

Moving on, net investment income increased to $473 million for the quarter, driven primarily by higher assets under management. [ph] Alternative (00:27:52) assets generated $41 million of net investment income, which was in line with the prior year. Overall, our book yield was stable at 4.7% and our reinvestment rate is just north of 5%, continue to have a short asset duration of approximately 3.1 years and the fixed income portfolio benefits from an average credit rating of AA minus. Our investment portfolio remains well-positioned for the current environment.

For the fourth quarter of 2024, our operating income tax rate was minus 16.6%, which was lower than our working assumption of 11% to 12% for the year due to the net operating loss this quarter. However, the full year operating effective tax rate was 9%, which is closer to our expected range. Shareholders' equity ended the quarter at $13.9 billion or $14.7 billion, excluding net unrealized depreciation unavailable for sale fixed income securities. At the end of the quarter, net after tax unrealized losses on the available for sale fixed income portfolio equates to approximately $849 million, an increase of $629 million as compared to the end of the third quarter. And this was driven by increases in the Treasury yield curve.

Cash flow from operations was $780 million during the quarter and approximately $5 billion for the full year. Book value per share ended the quarter at $322.97, an improvement of 8.7% from year-end 2023, when adjusted for dividends of $7.75 per share year to date. Book value per share excluding net unrealized depreciation on

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available for sale, fixed income securities stood at $342.74 versus $320.95 per share at year-end 2023, representing an increase of approximately 6.8%.

Our full year 2024 total shareholder return was 9.2%. Net debt leverage at quarter end stood at 15.6%, modestly lower from year-end 2023.

Everest continues to have a strong financial position. We are focused on achieving our mid-teens total shareholder return over the cycle. We are well-positioned to execute our strategic initiatives, and we will look to continue to opportunistically repurchase shares this year, in this quarter specifically.

And with that, I'll turn the call back over to Matt.

Matt Rohrmann

Head-Investor Relations, Everest Group Ltd.

Thanks, Mark. Dave, we're now ready to open the line for questions. We'll ask you please limit your questions to one question plus one follow-up and rejoin the queue for any additional questions.

QUESTION AND ANSWER SECTION

Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Gregory Peters with Raymond James. Please go ahead.

C. Gregory Peters

Analyst, Raymond James & Associates, Inc.

Good morning, everyone. For my first question, I'm going to focus on the Insurance segment, and I'm wondering if you could give us some additional detail on how you plan to manage volatility, considering that you're non- renewing all this casualty business and you'll have rising exposures to the Property/Short Tail business in the International segment?

Jim Williamson

President, Chief Executive Officer & Director, Everest Group Ltd.

Yeah. Greg, this is Jim. Thanks for the question. Yeah, it's - look, it's pretty straightforward. I mean, we're very diligent around PML management in each of our divisions and we are very careful about how we plan for the coming year, for example, and where we're going to deploy capital and at what terms and conditions. We also very strategically, as you can imagine in our Insurance business, leverage the use of outbound Reinsurance to manage per risk as well as overall volatility. And so, while the short tail book in the Insurance division is growing very nicely, as you would have seen in this quarter, and we're happy about it, we're happy about the pricing levels and the quality of the accounts we're writing, in terms of moving our overall Group risk profile, it's really not moving the needle at this point. And as it continues to grow, we'll just manage it within our general PML framework. So, not something that is outside of our ability to very thoughtfully approach.

C. Gregory Peters

Analyst, Raymond James & Associates, Inc.

Okay. And my follow-up question is on the capital management comments. Mark, you, well, in the press release, you acknowledged that you didn't buy any stock back during the quarter. I assume that's because of the review

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issue. Can you give us sort of some framework about what your budget looks like for capital management activities? Should we think about it in terms of a payout ratio with dividends and share repurchase on total income for the year? Or perhaps just give us some framework on how we should be thinking about that?

Mark Kociancic

Chief Financial Officer & Executive Vice President, Everest Group Ltd.

Hey, Greg. It's Mark. Thanks for the question. I think, there's a lot of factors that go into it. So, you start with obviously the fact we have, I think, still a strong financial position coming out a year in 2024 despite the significant reserve charge. And we've got a very good earnings engine in the company.

Last week, we gave the guidance of mid-teens total shareholder return over the cycle. We feel confident about that as an immediate objective and something that's set for 2025.

Few other points. I think, the growth rate of the company is one factor that goes into the equation, being able to execute our organic plan, and that's something we feel confident with. You're seeing us be cautious with casualty on the Reinsurance side, disciplined in particular on the Insurance side. And Property remains very attractive as do other Specialty lines. So, but I do think you'll see less overall growth than in some prior years and that will free up resources, I think, for more capital management type actions.

And then, lastly, I think, when you get into the equation, obviously, the attractiveness of our share price at the present time creates a very compelling incentive to buyback. And so, as I mentioned in my prepared remarks, I fully expect us to be active this quarter.

C. Gregory Peters

Analyst, Raymond James & Associates, Inc.

Thank you for the answers.

Operator: And the next question comes from Meyer Shields with Keefe, Bruyette and Woods. Please go ahead.

Meyer Shields

Analyst, Keefe, Bruyette & Woods, Inc.

Thanks, and good morning. Jim, I want to drill down a little bit in terms of, I guess, what - on the outside, we can expect in terms of Insurance segment loss ratio progress. In other words, I understand the sustained 12% plus loss trend for casualty lines, but should we expect things like the runoff of the weaker portfolios or other business mix issues? Is that going to show up in 2025?

Jim Williamson

President, Chief Executive Officer & Director, Everest Group Ltd.

Yes. Meyer, it's, it's Jim. Thanks for the question. So, we definitely provided a little bit of insight around this during the pre-release call. And I think, there are two key points. Number one, the prudence that we applied in the construction of the reserve actions that we took as well as the topping off of the 2024 loss picks, is a level of prudence that we plan on continuing in 2025, and you'll see that in how we select our casualty loss picks during this year. But we also indicated, I think, it is very important that mechanically mix is moving quite quickly. And of course, that's, as I indicated in my prepared remarks, that aspect of it in terms of the shift of mix is already showing up in our data.

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And so, yeah, as mix improves the total loss ratio, obviously, that's a very positive tailwind for us to think about as we move through 2025.

Meyer Shields

Analyst, Keefe, Bruyette & Woods, Inc.

[indiscernible] (00:36:54)

Mark Kociancic

Chief Financial Officer & Executive Vice President, Everest Group Ltd.

Meyer, it's Mark. Just to add one point to Jim's remarks. So, if you look at our financial supplement on the Insurance segment, you'll see our current year loss ratio, attritional loss ratio of 68.3%. And that obviously takes into account the current year strengthening for 2024. And that's with remediation underway in the Casualty segment and a mix of business that is moving towards a more balanced portfolio as we shared some of the casualty numbers. So, I think, that's kind of the starting point for where the portfolio was.

Now, to your point, obviously, there are still unearned premium that is earning out into 2025 with some of the older casualty business that we likely will non-renew. And that will be a bit of a drag in 2025. But that's something we've expected, we've forecasted, and we clearly have two other pieces that I would say are favorable. So, one is the mix of business aspect that Jim mentioned. And then, the second is really the approach we're taking to the casualty account renewals and new business in general in terms of rate. So, I see those as favorable, two favorable impacts that'll help that loss ratio development improve year-over-year and still respect the loss trend assumption we gave last week plus the prudence actions that we indicated that are going to be taking place in U.S. liability, in particular.

Meyer Shields

Analyst, Keefe, Bruyette & Woods, Inc.

Okay, perfect. Thank you both. That's very helpful. Second question, it sounds like some casualty lines are improving rapidly. When you look at that, there may be business you don't want to write in 2025, but maybe by 2026, it's good enough. So, are you maintaining, I guess, full run rate expenses in anticipation of eventual profitability? I'm not sure how that aspect of expense management plays in.

Jim Williamson

President, Chief Executive Officer & Director, Everest Group Ltd.

Well, yeah. So, if your question is, are we continuing to invest in our business very thoughtfully? The answer is yes. Now, we're also very prudent expense managers, as you clearly see in the overall Group expense ratio in our Reinsurance business, obviously, Insurance expense ratios elevated slightly because of the investments we're making as well as the impact the remediation has on earned premium. But as we go forward, I'd expect that, that phenomena to sort of persist for a while because there are great opportunities for us to make prudent investments in the business. And the remediation puts a little bit of a lid on, on some earned premium, but we're going to manage it very carefully, Meyer, and on a quarter-by-quarter basis to ensure that the level of investments we're making is consistent with our ability to generate the margin we need.

Meyer Shields

Analyst, Keefe, Bruyette & Woods, Inc.

Perfect. Thanks so much.

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Operator: And the next question comes from Josh Shanker with Bank of America. Please go ahead.

Joshua Shanker

Analyst, BofA Securities, Inc.

Yeah, thank you for taking my question. In the prepared remarks and whatnot, in addition to the sports book being sold, you're also exiting the medical staff loss business. Why or why not is medical staff loss business a business that can't be taken care of in a one renewal type methodology like the rest of the businesses? Why can't you just raise the price in the business that sticks, sticks and what leaves, leaves?

Jim Williamson

President, Chief Executive Officer & Director, Everest Group Ltd.

Yeah. Josh, it's Jim. Thanks for the question. We essentially non-renewed a major block, the block that was causing us difficulties in our medical stop loss business at the beginning of 2024. And it is a block, but it has renewal dates that occur throughout the year. So, it wasn't a matter of getting increased price. We didn't want to be on the business. We non-renewed it and it just takes the year for the full impact of the financials to run through, which is now done. So, we won't be talking about the runoff of medical stop loss in 2025.

Joshua Shanker

Analyst, BofA Securities, Inc.

All right. And another quick one. Obviously, I think, it's very clear your thoughts about the wildfire as it regards your book. Is - as a general rule, should we think about Everest as being a 1% market share, loss of major global events? Or is there more ground up sort of analysis in how you're thinking about your exposure to California wildfires?

Jim Williamson

President, Chief Executive Officer & Director, Everest Group Ltd.

Sure, Josh. It's Jim again. Good question. Look, this is a, this 1% market share that, that we've indicated for this event is the result of exceptional underwriting. And the simple fact is, there are a number of large contributors to what will be an industry loss of, pick whatever number you like. We're kind of in the $35 billion to $45 billion range and some others like different numbers. That's fine. But, but a number of, of the major contributors to that industry loss are not clients of Everest. And the reason they're not clients of Everest is because we assessed the programs on offer and did not believe they offered us an adequate risk adjusted return for the exposure involved.

So, we said no, and others said yes. And so, you'll see different market shares, et cetera, which is a ground up result of the underwriting actions that could take in. There could be an entirely different loss and an entirely different market where, we get different opportunities, and it'll result in a different market share of the loss. It's not about trying to create peanut butter and outcome. It's pursuing the best quality deals for all the perils we take in all the different geographies we compete in all day, every day. And that's what we do here.

Joshua Shanker

Analyst, BofA Securities, Inc.

Thank you for the clear answers.

Jim Williamson

President, Chief Executive Officer & Director, Everest Group Ltd.

[indiscernible] (00:43:02).

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Everest Group Ltd. published this content on February 05, 2025, and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on February 05, 2025 at 18:12:09.014.