Good day, welcome to the fourth quarter 2015 earnings call of Everest Re Group, Ltd. Today's conference is being recorded. At this time, I would like to turn the conference now over to Beth Paretta, Vice President of Investor Relations. Please go ahead.
Thank you, Holly. Good morning, welcome to Everest Re Group's fourth quarter and full year 2015 earnings conference call. On the call with me today are Dom Addesso, the company's President and Chief Executive Officer, John Doucette, our Chief Underwriting Officer, Craig Howie, our Chief Financial Officer. Before we begin, I will preface our comments by noting that our SEC filings include extensive disclosures with respect to forward-looking statements. In that regard, I note that statements made during today's call, which are forward-looking in nature, such as statements about projections, estimates, expectations, the like, are subject to various risks. As you know, actual results could differ materially from our current projections or expectations. Our SEC filings have a full listing of the risks that investors should consider in connection with such statements. Let me turn the call over to Dom.
Thanks, Beth, good morning. I am pleased to report record operating earnings per share for 2015 of $25.04 per share. This translates into an operating return on equity of 15%. The underwriting account produced record underwriting results of $912 million as a result of continued discipline and portfolio shifts undertaken in a very challenging market. Of course, the absolute number is stronger than expected due to the low level of cats. However, it is noteworthy that in a declining rate environment, the combined ratio remained relatively stable at 83.4% versus 82.8% one year ago. The slight uptick is due to the growth in the insurance portfolio. In fact, the reinsurance combined ratio stood at 78.5% in the last two years. In 2015, reserve releases helped, other contributing factors were portfolio shifts, expanding mortgage credit ratings, increased facultative business, and profits derived from our Mount Logan operation.
All in, we have been extremely pleased with how the organization has navigated through this market. On the insurance front, it very much remains an improving story. Although the overall results at first glance continue to look challenged. The attritional combined ratio improved eight points and came in at 94.3%, demonstrating that our current strategies are producing the desired outcome. Nevertheless, the overall result came in at 106.3% combined ratio. This was due to prior year development, once again, coming from two of our runoff books of business. One is an excess casualty program book, the other is a construction liability account experiencing late reported construction defect claims. While this has been a difficult sector to reserve, it should be noted that our overall reserve position was more than adequate to absorb these developments, resulting in an overall reserve release of $36 million for the year.
Going forward, we remain confident that our overall reserve position is sufficient to handle developments in any of our many lines of business, but more importantly, we feel the same as it relates to the insurance segment specifically. The insurance segment has made great progress during the past year, and key additions have been made to our executive management, underwriting, and distribution ranks. Overall premiums grew by 26%, led by our property E&S and crop lines, as well as A&H, casualty, E&O, and our sports and entertainment business. We continue to build out these sectors, as well as some new areas that will come online in 2016. Profitability in each of these sectors is strong despite some rate flattening. John will get into some of these details in his report. Overall, we would expect continued momentum in the insurance segment into 2016 and beyond.
Overall, we were very pleased with our underwriting results and initiatives in both reinsurance and insurance. A bit of a continual challenge, however, remains on the investment front. As we all know, the low interest rate environment continues, and new money rates are less than the yields for maturities rolling off. In addition, certain sectors have been more recently challenged, and in particular, the energy sector, along with emerging market debt and high yield generally. As we, along with others, have well diversified portfolios, we are not immune to some of these impacts. As a result, investment income is down, mostly driven by lower limited partnership income impacted by the aforementioned factors. In addition, there were some realized losses due to write-downs taken on certain oil and gas investments.
The factors in the investment markets also had an impact on book value, where growth was constrained due to a decline in the unrealized account. Nevertheless, book value per share grew 7% to $178.21 from $166.75. In general, as I mentioned previously, this was another successful year. We are appropriately navigating through continual competitive pressures. Going forward, we expect to maintain our utilization of alternative capital to maximize returns. In addition, we expect continued growth in specialty risks in the North American insurance platform, as well as in Continental Europe through our new Lloyd's syndicate. No doubt the rate pressures we saw at one-one will further challenge us and the industry, but we remain confident in our ability to outperform. Thank you, and now to Craig for further details on the results.
Thank you, Dom, and good morning, everyone. Everest had a terrific end to 2015, with one of our strongest quarters in history, helped by reserve releases that impacted both current and prior years. For the fourth quarter of 2015, operating income was $353 million, or $8.17 per diluted common share. This compares to operating income of $331 million, or $7.28 per share in the fourth quarter of 2014. The 2015 quarterly result represents an annualized operating return on equity of 19%. For the year, operating income was $1.1 billion or $25.04 per share, compared to $1.1 billion or $24.71 per share in 2014. Net income for the year was $978 million, or $22.10 per share, compared to $1.2 billion or $25.91 per share in 2014.
Net income included $130 million of net after-tax realized capital losses, compared to $55 million of capital gains last year, for a difference of over $4 per share year-over-year. The 2015 capital losses were primarily attributable to fair value adjustments on the equity portfolio and impairments on the fixed income portfolio. The impairments mainly related to credit write-downs on energy investments. The results reflect a slight increase in the overall current year attritional combined ratio of 82.9%, up from 82% last year. This attritional measure increase of less than one point includes higher-than-expected current year losses in the reinsurance segments, including $60 million of estimated losses for Tianjin and numerous weather-related losses that did not meet our $10 million catastrophe threshold. In the fourth quarter, Everest saw $20 million of current year catastrophe losses related to the U.S. storms that occurred during the last week of the year.
The fourth quarter of 2015 also included favorable development on prior Cat losses, largely from the 2013 year. Therefore, net catastrophe losses for the quarter were negative $4 million. Catastrophe losses for the year were $66 million in 2015, compared to $62 million in 2014. For 2015, gross catastrophe losses were $100 million, but were offset by $33 million of favorable development on prior year Cat losses, primarily from the 2013 German hailstorms, European floods, Typhoon Fitow, and U.S. storm events. Our reported combined ratio was 83.4% for the year 2015, compared to 82.8% in 2014. The 2015 commission ratio of 21.9% was slightly down from 22% in 2014. Our expense ratio remains low at 4.9% for the year, compared to 4.6% in 2014. The expense ratio for the reinsurance segments remained flat at 2.9%, while the overall expense ratio was influenced by the build-out of our insurance platform.
Everest has one of the lowest internal expense ratios in the industry. This is a strategic competitive advantage for Everest. On reserves, we completed our annual loss reserve studies. The results of the studies indicated that overall reserves remained adequate. In the fourth quarter, we booked prior year development in the insurance segment and for asbestos, which was more than offset by favorable development in the reinsurance segments. The $121 million of prior year reserve development in the insurance segment during the quarter, as referenced by Dom, was largely related to umbrella business and construction liability. These run-off programs were discontinued by the company several years ago. The $155 million of favorable prior year development in the reinsurance segments, including Mt. Logan Re, reflected $193 million of favorable development, offset by a $38 million increase in asbestos reserves related to several large settlements during the year.
The $193 million of reinsurance favorable development during the quarter mostly related to casualty and property treaty business, both in the U.S. and internationally. These redundancies have developed over time, but we don't react until the position becomes more mature. We continue to hold our loss reserve estimates for the more recent years. For investments, pre-tax investment income was $111 million for the quarter and $474 million for the year on our $17.7 billion investment portfolio. Investment income was below last year as anticipated. This result was primarily driven by the low interest rate environment and by the decline in limited partnership income. On the fixed income portfolio, income was down $30 million year-over-year. Limited partnership income was down $26 million year-over-year, primarily due to energy-related investments.
The pre-tax yield on the overall portfolio was 2.8% compared to 3.2% in 2014, and duration remained at three years. Other income and expense included $61 million of foreign exchange gains for the 2015 year, compared to $30 million of foreign exchange gains in 2014. The foreign exchange gains resulted from the relative strengthening of the US dollar against other world currencies. On income taxes, the 2015 operating income effective tax rate was 14.5%. This effective tax rate for the year was in line with our expectations for the year. Operating income does not include capital gains or losses. Strong cash flow continues with operating cash flows of $1.3 billion for the year, essentially flat compared to 2014. This is primarily due to our continued premium growth. Shareholders' equity for the group was $7.6 billion at the end of 2015, up $157 million compared to year-end 2014.
This is after taking into account capital return through $400 million of share buybacks and $175 million of dividends paid in 2015. The company announced a 21% increase to its regular quarterly dividend and paid $1.15 per share in the fourth quarter of 2015. Our strong capital balance positions us well to continue share repurchases. Thank you. Now John Doucette will provide the operations review.
Thank you. Good morning. As Craig mentioned, we had a very strong Q4, finishing a successful 2015 year. Our group gross written premium for Q4 was $1.5 billion, up 6% from Q4 in 2014, predominantly driven by growth in insurance. Our group net written premium was $1.4 billion, which was up $70 million, or 5%, over Q4 2014. For the full year, our group 2015 gross written premium was $5.9 billion, up almost $130 million, or 2% from 2014. Our group net written premium was $5.4 billion, also up 2%. Let me first review our reinsurance segments, starting with 2015 full-year results, then give some color on January 1st renewals and how we are navigating the market. For our global reinsurance segments, including both Total Reinsurance and Logan, gross written premium for 2015 was $4.3 billion, down 4%. Adjusted for exchange rates, it is essentially flat year-over-year.
Net premiums were $4.1 billion, down 3%. On constant currency basis, it is closer to flat. Our reinsurance book, including Mount Logan, generated $991 million of underwriting profit in 2015, up 6% compared to 2014. This is noteworthy given a similar amount of property catastrophe losses in 2014 and 2015, as well as some other large losses this year, including the Tianjin port loss. These record reinsurance underwriting results, despite the soft market, highlight the successful execution of the strategy and initiatives that we put in place over the last couple of years.
These expanded our opportunities and reinsurance profits by developing new and enhancing existing strategic relationships with key reinsurance clients across multiple lines of business, deploying capital to credit opportunities and other new products worldwide, offering meaningful line capacity on attractive property catastrophe treaties, utilizing both Mount Logan and Cat Bonds, and growing both our regional and facultative books. These initiatives broadened and enhanced both our broker and client relationships and continue to provide new opportunities to expand with longstanding clients, whether on new deals or larger shares of existing ones. Offsetting this, we are scaling down or non-renewing treaties which inadequately compensate us for putting our capital at risk. In the current market, this causes significant churn in our renewals. This, combined with a dynamic allocation of capital to the best price business, resulted in the outperformance of our portfolio relative to the broader market.
Some color on the January 1st reinsurance renewals. We wrote about $2.1 billion of premium across all reinsurance lines, which was down 3% compared to last 1/1 as we continue to face currency headwinds. On a constant dollar basis, premium was roughly flat. Our catastrophe exposed property book saw risk adjusted rates down low single digits for U.S. business, but down more in other areas such as Europe, Asia, Australia, and some Latin American countries. We moved to higher attachments where risk adjusted rates were generally better. Globally, our expected combined ratio was up about 1% for our property cat XOL book compared to the 1/1 renewals last year. Overall, our 1/1 cat XOL premium was about flat, driven by increased signings in the U.S., but offset by reductions in some emerging markets and Europe due to FX and softer rates.
Our purple book, which has had strong results, shrunk this 1/1 due to elevated competition, which drove rates down to inadequate levels. Consequently, we redeployed some capacity to better priced reinsurance deals. We did have some wins at 1/1 in our traditional casualty book with several large quota shares for strategic clients. Generally, this area remains challenging. In particular, we continue to de-emphasize management and professional liability. On the positive front, casualty pro rata ceding commissions began stabilizing. We also found attractive opportunities in the credit space, and we continue to enjoy meaningful opportunities with key P&C clients where we have the ability to offer multi-line capacity.
We executed on new opportunities at 1/1 that added meaningfully to our top line, including several Solvency II surplus relief quota shares, increased lines on existing treaties with several global clients, as well as new layers for the same customer group where they are looking to reinsure their growing global retentions. In aggregate, these new deals offset some of the premium lost on deals that we non-renewed. We continue to utilize Mount Logan Cat Bonds and traditional hedges, which have allowed us to grow our gross portfolio over the last few years, while generally keeping our net PMLs on our 1/1 renewal book fairly stable relative to our capital base.
During the fourth quarter, we sponsored another $625 million of Cat Bonds, protecting us from wind and quake losses in both the U.S. and Canada, where we have a dominant lead reinsurance market position and enjoy preferential access to and signings on favorable deals. This brings the total multi-year protection provided by Kilimanjaro Cat Bonds to $1.6 billion. As of 1/1, Mount Logan's assets under management was up to $860 million, a growth of 25% in AUM from 1/1 last year. Once again, 100% of Logan's capacity was fully deployed at 1/1 renewal. During 2015, Everest's common shareholders earned $27 million from the Logan platform, including fees. The combination of Cat Bonds and Logan have added $2.5 billion of off-balance sheet capacity for deployment in the property cat market, which has enhanced our competitive position in this very important class.
As highlighted before, Everest possesses sustainable competitive advantages that continue to position us well for success in this reinsurance market. These include, number one, we have one of the lowest internal expense ratios in the industry at 2.9% for our total reinsurance segment. Therefore, on the same rates, we have higher dollar margins and higher ROEs than our competitors. Number two, all across zones and perils, we are more diversified than most competitors, which naturally lowers our internal capital charges and improves our risk adjusted returns. Number three, our scaled up retrocession including growing Mount Logan is centralized but controlled. We empower experienced leading underwriting teams to provide responsive service and direct customer access to decision makers. Unconstrained by narrow geographic scope or overly central, we deploy highly rated capacity faster, more creatively, and in scale.
We are pleased with the outcome of our 1/1 renewals despite market conditions. We are off to another strong start this year for our reinsurance book. Now turning to our insurance operations. We wrote about $360 million of insurance gross written premium in Q4. Wrote $1.5 billion for the year. This is up 17% for Q4 and up 26% for the 2015 year compared to prior periods. Our direct operations, including our property, casualty, professional liability, and contingency businesses, were up 23% year-over-year. Our specialty operations, Heartland, our crop insurer, Everest Insurance Company of Canada, our Canadian company, and A&H, each saw meaningful top-line growth in 2015, achieving gross written premium increases in excess of 40% year-over-year. Our focused growth initiatives in each of these sectors has provided an improving opportunity set.
While calendar year results for insurance were marred by prior year development on runoff books of business, the 2015 accident year results have been improving and showing a strong bottom-line result. This year, we had a notable 94.3% accident year combined ratio, translating into $73 million of underwriting profits, meaningfully improved from the 102.3% combined ratio for 2014 accident year. While this improvement was driven in part by better results on our crop business, we are continuing to see improvement in the accident year results of our other businesses as well. Excluding Heartland, this business had a 1.6% improvement to the accident year combined ratio, lowering it to 93.4%, a very strong result. We have successfully attracted talented underwriters in many segments, added a new distribution team, and hired operational staff to enhance our processes and technology to support the scale, diversification, and geographic scope of our growing insurance platform.
We are also launching several new product lines in excess casualty, private company D&O, and inland marine, with additional new products planned for 2016. Regarding the rating environment, in 2015, we have seen slightly positive pricing in most lines, led by commercial auto at about 7%. However, we saw negative rate trends in financial institutions and commercial management liability, which both remain very competitive due to excess capacity. Insurance property rates were down slightly, but margins remain adequate to deploy capital. We are bullish about our opportunities despite the challenging market and are excited by the development of our insurance platform and the launch of our new Lloyd's Syndicate. We continue to leverage the strengths in both our reinsurance and insurance books to be the best-in-class manager of capital in the new insurance world order. Thank you, and now back to Beth for Q&A.
Thanks, John. Operator, we are open for questions at this time.
Thank you. If you would like to ask a question at this time, please press the star or asterisk key followed by the digit 1 on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star two. Once again, please press star one to ask a question. We will pause for just a moment to allow everyone to signal. Thank you. Our first question comes from Vinay Misquith. Please go ahead. Your line is open.
Hi, good morning, Congratulations on a very strong quarter and a super year. The first question is on the primary insurance operations. Was there some favorable reserve development prior quarter, favorable developed quarter of this year?
I'm sorry, Vinay, was there a favorable development in the insurance segment?
Yeah, prior quarter, because I get a 66.6% accident year loss ratio ex cat. Was there some prior quarter reserving true up that was favorable?
There was some favorable prior year development that came through as well in this segment, but it's very small in comparison to the reserve charges that we took for construction liability and umbrella. That's what represents the majority of that.
All right. I was talking about from prior quarters, but never mind.
Vinay, this is Dom. Prior quarters-
Yeah
That would just be movement in the expected loss picks for the current accident year. That wouldn't relate to any prior period development or any reserve study as it would work.
Right. Okay.
Mix of business, portfolio shifts, an assessment of what the current year loss trend is.
In the primary business, you've certainly grown the top line very strongly. We've heard press reports of you making a lot of hires. Dom, what are you doing in that business to ensure that the new business you're getting is priced appropriately?
Well, there's several things. First of all, as I mentioned in my comments and John referenced as well, we're adding underwriting talent across the organization, but that also includes a separate office of, or Chief Underwriting Officer within that unit. John, as the Group Chief Underwriting Officer, is in regular contact with him as we expand our writings, as we talk about the underwriting template and the underwriting box, if you will, and our risk appetite. That occurs at the individual insurance level and then, of course, monitored at the group level. That's the first thing. The other thing that we have is a very strong price monitoring process. We're able to understand what's going on at the transactional level from a rate adequacy point of view that all of our business units report up corporately to us on a quarterly basis.
Those are some of the factors in addition to the regularly scheduled underwriting audits and Risk Management Committee that we have, not only internally but also reported up through the Board of Directors. It is a comprehensive process.
Okay, that's helpful. On the reinsurance side, I think what was mentioned was that the new business on January 1 was written at a 1% higher combined ratio. Did I hear that correctly?
Vinay, this is John. Yes. That was for our overall worldwide property catastrophe XOL book.
Okay, that's great. It would be lower than the rate declines that we're hearing in the markets. Was that because of a mix change that you did this year?
Right. It's a combination of things, but as we alluded to in our script, one of the things we found at this one-one was that higher layers in general were priced, we thought had a better pricing to them. On average, there's exceptions to this, but on average, the attachment point of our property cat book went up, and that helped mitigate it. I also think, we've talked about this before, when it comes to signings across a program, given Everest's relationship, 40-plus year relationship with our clients and brokers, and given our balance sheet and high ratings, we get a lot more selection of the layers that we like than others. That allows us to mitigate the overall market rate softening.
Another factor there, Vinay, is that we are down generally in all non-U.S. territories, and in the U.S. being a better price. That portfolio mix, while your question is why is the combined ratio only expected combined down one when maybe what we reported in terms of generally rate decreases might suggest otherwise. A little bit of mix shift on a geographic basis is part of the answer there as well.
Okay, that's helpful. The last question is on capital management. This year, I think we saw about 50% of earnings being returned to shareholders. Just curious about 2016 and it seems that your primary business, though it's growing pretty meaningfully, I would've thought that would be diversifying versus reinsurance. Curious why you're consuming capital for that growth.
Well, Vinay, I'm glad you were the first one to get that question out of the box. Clearly we expect it at every call. Look, we don't telegraph what we're likely to do in terms of share repurchases. Yes, we look at operating earnings. Yes, we look at the opportunities that are ahead of us in the marketplace and look at the growth opportunities, and look at our rating agency capital requirements as well as our own internal economic capital requirements. What I'll say is that we continue to remain bullish on repurchasing shares into 2016. We did do some in the fourth quarter. Of course, price kind of got away from us a little bit, and we probably did a little less than we might otherwise would have.
We still will be repurchasing stock into 2016, but I'm not going to be giving any forecast of what that might be.
Well, thank you.
Thank you.
Thank you. Our next question today comes from Michael Nannizzi of Goldman Sachs. Please go ahead. Your line is open.
Thanks. John, I have one question on the insurance business. You mentioned 160 basis points of improvement excluding crop. I was just trying to figure out what was the base against which you were looking at that number? Maybe I got that wrong, but I thought that's what you said.
Good morning.
Hi, good morning.
It's basically the accident year combined ratio, attritional combined ratio looking this year for our insurance book, excluding Heartland, compared to last. Last period. The reason we gave that number was because there was a meaningful improvement in the Heartland results from last year to this. We wanted to identify that it wasn't just the improvement in the Heartland results.
Michael-
Got it.
The net written premium for the insurance group for the year is $1.325 billion. Of that, $250 million approximately was Heartland, if that's getting to your question.
Yeah. Is there any way, John, to know sort of what the number is in terms of 160 basis points? Could we know what that number was last year just to have some idea of Just because there's obviously been a lot of change, there's new business, there's been a lot of mix shift in that book. It would be just helpful to sort of square what that sort of baseline looks like. Maybe give the Heartland piece, and then we can figure out the other side.
Right. This is Dom, Mike.
Yeah.
I gave you the 2015. The 2014 Heartland premium number was $130 million.
Right.
Does that help you figure that out?
Excluding Heartland last year, Mike, this is Craig. Excluding Heartland last year, it was a 95.0% combined.
This year it's 93.4% excluding crop. This year crop had a profit. Last year crop was running at a loss.
95 to You cut out for a second there. 95 to 90.4%, I would guess.
Last year, the combined ratio excluding crop on the insurance book was 95.0. That number is now 93.4. That's the 1.6 points of improvement that John mentioned.
Perfect. Okay, great. That really helps. Thank you so much. John, the $800 million or so in Mount Logan, just so we can right size it, what was a comparable dollar amount for 2014? Obviously you raised it $600, but I'm guessing there was some retirement of bonds as well. I just want to know what was the comparable number there last year?
It's up about 25%. This is Mount Logan, not the bonds that I'm answering.
Correct. Yep.
Mount Logan is up 25%, so bringing it to $880 million.
Perfect. Excellent. That's what I need. Just last one, just on the commentary about 1/1 renewals and the higher attachment. The rate on line was better on the high attachment versus low attachment. Should we take that to understand that there's just less competition at those higher levels, or is there some other aspect of the landscape just from an operational perspective that would contribute to that dynamic?
I think that's really where there's more limit purchase. From a demand point of view, that's higher. Typically how the programs are laid out, the lower layers are smaller, they increasingly, as you go up the tower, the dollar limits that are purchased are larger, so there is more demand at that point. To the extent that our business is being impacted by alternative capital, those higher layers have lower rates on line, which are more challenging for alternative capital, unrated capital, to find an attractive return for that. I think that's partially playing into that too.
Got it. Great. Thank you so much.
Thanks, Michael.
Thank you.
Thank you. Our next question now comes from Kai Pan of Morgan Stanley. Please go ahead, your line is open.
Good morning. Thank you. Just follow up Mike's question. Could you tell the other piece in your insurance basic crop? Basically, try to understand what's your current year combined ratio running at, and just want to see if that meet your long term average, or it just is better than expected.
This is Craig, Kai. Current year crop is running at a 99. That is certainly better than our long term average because this is a profitable year for us in crop. It is not where we expect to be over the long term. This business needs scale and geographic diversity, and that's what we've attempted to do this year. We've grown the premium, and we've grown it diversifying it into other states as well. That will help the expense structure going forward.
I'm sorry. There's still room for improvements. It's not like you have a normally good year on the crop side.
There's still room for improvement, yes. We did show a profit this year for the first time.
Okay, that's great. Then on the reserve charge, $120 million in the insurance segment, the 2 runoff business, could you tell us how big is the remaining reserve on the book?
Remaining reserves on the book for insurance overall or?
No, for these two runoffs.
For these two runoffs, this is what we are attempting to do with these is look at where we expect these reserves to be over time, and I don't have that number in front of me, Kai.
Okay. That's fine. Then it looks remarkable that Dom, you mentioned that you'd be able to keep the underlying combined ratio stable in your reinsurance segment despite the pricing pressure. Part of that might be business mix. I just wonder on the accident year loss ratio pick side, on the loss trend inflation, what trend do you see there in your major line of business?
Well, the underlying combined ratio on the reinsurance side is comprised of several factors. We have, obviously, a property cat book, we have a property pro rata book, a casualty pro rata, casualty excess, facultative mortgage credit, et cetera. All of those things, when combined together, obviously produce the overall combined ratio. Our expected combined ratio on property cat XOL year-over-year in terms of what was expected was slightly up. Of course, with no cats, then that has a very positive impact on the results. Our treaty casualty results have been improving year-over-year. We've been expanding our facultative operations, which typically have had higher margins than the treaty book of business. The mortgage credit, of course, has been something that we've mildly added to our portfolio, also contributing to that.
To point to any one factor is difficult, but it's just a composition of the portfolio, and as it evolves, we're able to maintain a decent level of profitability and return on capital as a result. Partly to your question, if you're asking about trend, it obviously depends on the line of business. Clearly in all of our businesses, in all the lines of businesses, trend is not strong. There's not a loss inflation factor that we're seeing in any of our lines of business.
Do you book to the lower cost trends, or are you taking probably more longer-term approach on your assumption?
Well, loss cost trends generally are going to be more of a factor in casualty than anything else. What our underwriters are looking at and actuaries are looking at depends on the client's book of business. Those loss cost trends are the average trends that we've seen over the last couple of years. It's not anything, I wouldn't describe it as being at the low end of the range or at the high end of the range. It's essentially based on the experience that we've seen in the marketplace over the last five or six years.
Kai, it's John. Just to add to that, we have a very experienced actuarial pricing team that have priced all property and casualty lines of business all over the world and have been doing that for 20+ years. We've added over the last several years more talent to that team and enhanced the analytics. We feel pretty comfortable that we understand what the trends are, what the loss picks are for the reinsurance business that we're putting on the books.
I think I'll add one other thing that maybe will hopefully answer the question and maybe provide you some comfort relative to that question. That is if you look over the last 12 years at our initial accident year pick combined ratio, every year in the last 12, that accident year combined ratio has developed positively. In other words, each accident year has had redundancy in it. That basically tells you that our expected loss pick in the year of the account is a conservative pick.
That's great. Lastly, Dominic, can you talk a little bit more about the growth areas, including Lloyd's?
Lloyd's of course we just got off the ground at January 1st. It was a process that we were able to move relatively quickly on into Lloyd's, I think we've got it done in near record time. Given our scale in the marketplace, I think it was a win-win not only for us, but I think also for Lloyd's as a market in general. We're pleased with that. In that space, in Lloyd's in particular as a growth area, we're looking at primarily continental Europe. In addition to Lloyd's will be a platform that will help us in some of the Asian markets, particularly China and Australia, where it's advantageous to issue Lloyd's paper as contrasted with what we had been doing was issuing paper at Everest Re. Just some cost advantages to that.
It also provides a facility for U.S. business that might have multinational exposure. Those are the opportunities for Lloyd's. Generally in the insurance space, as we mentioned, property E&S is a big growth area for us, A&H, commercial D&O, private company D&O. We've got an inland marine team. We're looking at growth in the excess casualty and environmental areas. Our work comp book, particularly in California, has been growing and we're looking at how we can possibly use that capability in other jurisdictions that are favorable as far as work comp is concerned. There's just a number of areas, whether it be lines of business or segments that we're focusing on. The contingency business, our sports and entertainment as well, I mentioned, is growing nicely. It's across a number of different areas.
That's great. Well, thank you so much for all the answers and good luck.
Thank you, Kai.
Thank you.
Thank you. Our next question comes from Sarah DeWitt of J.P. Morgan. Please go ahead, your line is open.
Hi, good morning. Congrats on a good quarter. The underlying combined ratio for the whole company, you've done a good job at keeping this stable in 2015 versus 2014, despite some rate pressure as well as growing the insurance business. Can you just talk about your ability to maintain margins going forward, or should we expect any deterioration?
Sarah, this is Dom. I think clearly with the rates going down, it's fairly obvious that margins are no doubt going to be under pressure. The way we look at it, as opposed to looking at it from a combined ratio point of view, maybe just give you a high-level view based on what we saw at 1/1 and perhaps what we could expect through the balance of the year and also factoring in where we see insurance pricing as well, which is generally more flattish than it is in the reinsurance space. We would expect an overall impact of about one point in our ROE. That's essentially how we think about. Maybe that's the best way to answer the question that you've asked.
Okay. That's helpful. Then on the insurance reserve strengthening, when do you think we could turn a corner on that runoff business? Can you give us any color in terms of what's the duration of these claims, how much has been paid out? Anything that gives you comfort that we might be reaching an inflection point on this would be helpful.
Well, let me first say that what I think is most important and what I pay most attention to is our overall reserve adequacy of the entire group, which I think personally has been improving over time. Partly evidence of that is what I referenced earlier in response to Kai, in terms of how our accident year combined ratios or loss picks have developed. Right now, your question is very focused on the insurance side and understandably so. You never know in any of these lines of business. We have a couple of hundred different IBNR groups. Clearly, in each year, we have redundancies in some and deficiencies in others. This is a natural occurrence in the complete reserving process. I can't emphasize enough that the overall reserve position is what we really stay focused on.
As I said in my opening comments, was that we're reasonably confident that our overall insurance position, again, as a group, is sufficient. With reserves, it's one of those things that you never know as it relates to any individual class within the segment. As I said, I think our overall insurance portfolio is well reserved.
Just to add to that, during the reserve process this year when we went through the insurance segments, we did consider the severity scenarios as well as volatility assumptions in those calculations that were done during the reserve studies, management did elect to book a higher number than the actuarial indicated estimate for both of these books of reserves, both the umbrella book and the construction liability book.
Okay. Was that the major factor that changed versus last year when you did the study at this time?
One of the major factors that changed this year was we did a claim review for the umbrella book. We had done a claim review earlier in the year, we utilized those results that came out of that claim review to take into account that impact, that was considered during the actuarial studies for that book of business. On the construction liability side, this relates to a runoff landscapers program that we stopped writing back in 2008. The company no longer writes this book of business. These are not indemnity type claims anymore. We're considered an additional insurer. Claimants have 10 years to file claims against the general contractor. Again, they're not indemnity claims at this point. They're mostly legal fees.
It is a little bit more difficult to wrap your arms around this other than looking at not only frequency but also severity of those cases.
Great. That's helpful. Thank you.
Thank you.
Thank you.
We'll now move to our final caller for today's Q&A. This is Joshua Shanker from Deutsche Bank. Please go ahead. Your line is open.
Yeah. Good morning, everyone.
Good morning, Josh.
Good morning. I would guess that on average, I ask a question about the insurance business about once every three quarters. Dom, you were named CFO in 2009, President in 2011, CEO in 2013. If Everest had chosen any of those times to dump the insurance business, would that have been a mistake?
Yes.
Why should we think that Everest is in the long term in a great position to be in the insurance business?
Obviously, with the premise of your question, you're referencing the reserve outcomes, which are undisputedly-
I'm also noting that current accident years are running at about 100% anyways
No, they're not. We reported current accident years running at 94. 94.3.
Well, this year, maybe that's the new trend, I guess. I'm looking at over a 10 year period, I guess.
Well, look, we have significantly modified the method in which we're doing business on the insurance space. The historical insurance footprint of Everest was a program-based book of business. Today, that book of business is dominated by a direct brokerage book of business, one in which we are primarily driving the underwriting as opposed to an MGA driving the underwriting. That does not mean, by the way, that we don't have some favorable and significant MGA relationships that we still maintain. Predominantly, the book is being driven by desk underwriters that are employed by Everest. That's the significant change. I think we've been able to demonstrate over the last couple of years the improvement in the accident year and calendar year or accident year combined ratio.
Clearly, there's been a challenge with reserves that come up from books of business, as Craig pointed out, that have been terminated in 2008 and earlier. There's nothing that the current management can do about that except focus on building out a first-class insurance organization, which we believe we're doing today.
Your view is over the next two or three years, you'll be surprised if the insurance industry is not a contributor to profits the way the reinsurance business has been?
Absolutely.
Absolutely.
By definition, in a cat year, the reinsurance segments are going to produce a better combined ratio than the insurance space, but the insurance sector is much more stable in that perspective. I think the current year attritional ratios demonstrate that already.
Josh, it's John. Just to add a little more color. I think also in the context of one of the things we've really been focused on over the last several years, Don and the executive management team, is expanding our opportunity set and trying to figure out how we can get profitable growth. That's why we've been hiring very talented teams of people or individuals that can hire teams of people and can access business on the insurance side. That's why we're getting into Lloyd's. That's why we're setting up the alternative capital to give us more capacity to deploy in other areas. Around the globe, whether it's insurance or reinsurance, whether it's in the U.S. or internationally, we're looking for ways to expand our opportunity set. I think that's my job.
That's the senior leaders of the reinsurance and insurance team to develop new products, new distribution, new opportunities. That also is one of the reasons why, as we've developed that, one of the reasons why the combined ratio has stabilized and our goal is to hopefully improve even in this market condition.
Josh, had, let's say, the decision that thank you for your recollection of all my stints at Everest. Had we made maybe a decision that you're suggesting to, let's say, dispose of the insurance sector, these reserve developments that we've seen would not have gone away. Those are things that would have been there regardless of whether we had chosen to go forward on the insurance sector or not. In fact, I think if anything, the insurance sector, based on the new strategy, has been accretive to earnings regardless of the prior year development. That prior year development was baked. There's nothing that we could have done about that.
Well, good luck. I hope it ceases in the future, and we'll see what happens.
We will see.
Thank you.
Is that the last question?
Thank you.
That was the last question in the queue. I'd like to hand back to our speakers now for any additional or closing remarks.
Thank you very much. Again, we're very pleased to report a record quarter and an outstanding year, particularly compared to generally what's going on in the overall market. We appreciate your questions and certainly understand even the tough ones. We think, though, we have demonstrated over the past couple of years that our strategies that we embarked on a couple of years ago are beginning to demonstrate that we can produce returns that are above market returns, above the market. Again, thank you for your questions and your interest in Everest, and we'll talk to you in the months ahead.
Thank you. That will now conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.