Good day, everyone. Welcome to the fourth quarter 2014 earnings call of Everest Re Group, Ltd. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to Ms. Beth Farrell, Vice President of Investor Relations. Please go ahead.
Thank you, Callie. Good morning and welcome to Everest Re Group's fourth quarter and full year 2014 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, and 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, and the like, are subject to various risks. As you know, actual results could differ materially from 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.
Thank you, Beth. Good morning. We were very pleased to report record operating earnings for the year and quarter. Net income was slightly below that in 2013, due mainly to less realized gains on investments. However, as a result of share buybacks, net income on an earnings per share basis was higher year-over-year at just under $26 per share. Most areas of our operations had excellent results, which contributed to the overall result. The reinsurance segments continue to be the main engine, and another good year was posted with the absence of any major cats. The underwriting result was flattish year-over-year, and while the combined ratio slipped two points, the portfolio was still generating above-average returns. This slippage in combined ratio points will be discussed in greater detail by Craig and John, but a couple of general factors accounted for this increase.
These would include business mix shift and, in our international operations, a higher attritional loss ratio due to shock losses and storm losses not classified as cats. Declining rates overall are also a factor, but we have muted much of that by moving attachment points to more attractively priced layers and buying external reinsurance in the capital markets and from traditional providers. The flexibility and adaptability to the market has been one of our hallmarks. In fact, in many cases, due to our capital structure, which effectively includes Mount Logan Re and our sponsored cat bonds, we have the ability to put out more capacity with the same or less net peak zone PML exposure at better risk-adjusted returns. Overall, the net returns on the cat portfolio in 2014 were higher than the gross returns due to efficient capital management with the purchase of third-party reinsurance.
As a result, the absolute margins on our property portfolio on an expected basis were up, despite an annual expected loss from cats of approximately 12 points on our underwriting combined ratio. This resulted in an increase in the ROE on this business as we deployed our aggregate across a more diversified portfolio rather than expanding net exposures in any of our peak zones. One of the few challenges in the portfolio last year was our crop book, which suffered a $64 million loss, primarily due to a severe commodity price decline, which accounted for $36 million, with the remainder coming mostly from crop hail losses. Over the past couple of years, the industry has suffered a bit in this class, but over the longer term, it has been a good business. The crop division caused our insurance operations to incur an underwriting loss for the year.
The improvement in the balance of the book has been notable. Excluding crop, the insurance operation produced an underwriting profit of $15 million. On an accident year basis, that portfolio is now running around a 95% combined ratio. This has been a good turnaround story. workers' comp continues to benefit from rate increases, and our growth initiatives in property and casualty E&S lines and specialty lines are all contributing to premium growth and profit. Among other notable items in the quarter was the adjustment in our various reserve positions. Overall, the impact from reserves was minimal, yet favorable. We did add approximately $140 million to our asbestos reserves, enabling us to increase our survival ratio to its historical levels. It had recently dropped due to an increased level of payment activity during the year.
This area is difficult to estimate, but we felt it prudent to increase these reserves to a more conservative position. Other reserve adjustments were in the insurance segment for run-off lines. These various charges, however, had no meaningful net impact on results due to redundancies in other areas. Overall, a very sound reserve position with a track record of favorable accident year development in each of the last 10 plus years. Investment income continues to trend downward due to low rates in the fixed income markets. The fourth quarter was a bit stronger than earlier quarters due to limited partnership income in our alternative asset category. We have no immediate plans to make significant shifts in our allocations. With these interest rate levels, we should expect the downward trend in book yield to continue into 2016.
The impact on net investment income of a decline in yield will be somewhat offset by any increase in investable assets. The rate of premium growth into 2015 will likely slow due to a decline in reinsurance price environment and our increasing selectivity. We continue with new products in the reinsurance segments, and our insurance segment will continue to be an area of focus. Of note is that more than half of our expected underwriting profit, after consideration for normalized catastrophe losses, is derived from non-cat exposed business. These other lines of business have therefore been an important area to focus on as a mitigator to rate pressures, as well as providing for a more diversified portfolio. Share buybacks continued in the fourth quarter, as well as an increase in our dividend. Capital return to shareholders totaled almost $650 million in 2014.
Nevertheless, equity capital increased $500 million during the year, which gives us capacity for growth opportunities during 2015 and beyond. Given the market conditions ahead, we would expect to continue share repurchases in 2015. Since 2006, we have repurchased 36% of outstanding shares and returned $3.4 billion of capital, and at the same time, grew equity 46% from $5 billion to $7 billion. The level of share repurchases in the future will, of course, be dependent on business opportunities. We remain committed to finding profitable growth through new initiatives and increasing our returns through capital alternatives. Our responsive, flexible, and adaptive style will no doubt continue to create opportunities in the year ahead. Thank you. Now to Craig for the financial report.
Thank you, Dom. Good morning, everyone. Everest had another strong quarter of earnings, with net income of $340 million, or $7.47 per diluted common share. This compares to net income of $365 million, or $7.54 per share for the fourth quarter of 2013. Net income includes realized capital gains and losses. For the year, Everest had net income of $1.2 billion, or $25.91 per share, compared to $1.3 billion or $25.44 per share in 2013. The 2014 result represents a return on equity of 17%. Operating income for the year was $1.1 billion or $24.71 per share. This represents a 15% increase over operating income of $21.47 per share last year. These record operating results were driven by a strong underwriting result, foreign exchange gains, and lower income taxes compared to 2013.
The increase in underwriting income was partially offset by a lower derivative result and lower net investment income compared to 2013. The results reflect a slight increase in the overall current year attritional combined ratio of 82%, up from 81% last year. This measure excludes the impact of catastrophes, reinstatement premiums, and prior period loss development. All reinsurance segments reported underwriting gains for the quarter and for the year. Total reinsurance reported an underwriting gain of $275 million for the quarter, compared to a $390 million underwriting gain last year. For the year, total reinsurance reported an underwriting gain of $862 million, compared to an $877 million gain last year. The insurance segment reported an underwriting loss of $36 million for the quarter, compared to a loss of $156 million last year.
For the year, the insurance segment reported an underwriting loss of $49 million, compared to a loss of $147 million in 2013. The 2014 results reflected a crop loss of $64 million for the year, comparable to last year, but lower prior period loss reserve development in the insurance segment. The Mount Logan Re segment reported a $26 million underwriting gain for the quarter, compared to a $4 million underwriting gain for the same period last year. For the year, Mount Logan reported an underwriting gain of $73 million, compared to a $9 million gain in 2013. Everest retained $14 million of the underwriting income, and $59 million was attributable to the non-controlling interests of this entity in 2014. The overall underwriting gain for the group was $265 million for the quarter, compared to an underwriting gain of $238 million for the same period last year.
For 2014, the underwriting gain was $887 million compared to a gain of $739 million in 2013. These results reflect $15 million of current catastrophe losses in the fourth quarter of 2014 related to the Brisbane, Australia hail storms. This compares to $30 million of cats during the fourth quarter of 2013. The fourth quarter of 2014 also included favorable development on prior year cat losses, primarily from Sandy losses in 2012. For the year, catastrophe losses were $62 million in 2014 compared to $195 million in 2013. Our reported combined ratio was 82.8% for the year 2014 compared to 84.5% in 2013. The 2014 commission ratio of 22.0% was slightly up from 20.6% in 2013, primarily due to higher contingent commissions on several years of profitable results. Our expense ratio remains low at 4.6% for the year, compared to 5.0% in 2013.
Everest has one of the lowest internal expense ratios in the industry. We believe each point of lower expense ratio translates to about a half point of higher ROE. This is truly a strategic competitive advantage for Everest. On reserves, we completed our annual loss reserve studies. The results of the studies indicated that the 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 $20 million of prior year reserve development in the insurance segment during the quarter was largely related to construction liability and umbrella business. These runoff programs were discontinued by the company several years ago. The $30 million of favorable prior year development in the reinsurance segments reflects $167 million of favorable development.
This was offset by a $137 million increase in asbestos reserves. The asbestos charge can be split into two components. First, the reserves associated with the company's assumed reinsurance business were strengthened by $100 million after completing our normal exposure analysis, in part to bring the survival ratio more in line with our historical trend. Second, the asbestos reserves related to Mount McKinley's direct insurance business were increased by $37 million. Everest has entered into a letter of intent to transfer the Mount McKinley asbestos reserves to another company. The proposed transaction indicated $37 million of funding would be required for the other company to assume the liabilities, so no additional increase will be needed should the transfer be completed. The $167 million of reinsurance favorable development mostly related to treaty casualty and treaty property business, both in the U.S. and internationally.
We don't react until the position becomes more mature. We continue to hold our estimates for the more recent years. For investments, pretax investment income was $134 million for the quarter and $531 million for the year, a $17.4 billion investment portfolio. Investment income was below last year as anticipated. This result was primarily driven by the low interest rate environment and the decline in limited partnership income. The cash flow used for share buybacks and the redemption of debt contributed to this lower income. The pretax yield on the overall portfolio was 3.2% as compared to 3.5% in 2013. Limited partnership income was down $6 million year-over-year. Our diversified investment strategy enabled us to exceed our planned investment income for the year.
The increased allocation to equities was also a benefit to net income, as the year reflected $55 million of net after-tax realized capital gains, compared to $197 million last year. These gains are mainly attributable to the fair value adjustments on the equity portfolio. A derivative loss of $16 million was recorded in the fourth quarter, reflecting a change in the estimated valuation of our equity index put option contracts to include a better estimate for expected future dividends. This change resulted in cumulative catch-up loss adjustments over the seven open option contracts. On income taxes, the 2014 operating income effective tax rate was 12.2%. This 12.2% effective tax rate for the year was in line with our expectations for a year with much lower than planned cat losses and the additional foreign tax credits utilized.
Strong cash flow continues with operating cash flows of $1.3 billion for the year, compared to $1.1 billion in 2013. This is primarily due to our premium growth and lower catastrophe loss payments. Shareholders' equity for the group was $7.5 billion at the end of 2014, up 7% compared to the $7 billion balance at year-end 2013. This is after taking into account capital return through $500 million of share buybacks and $146 million of dividends paid in 2014. The company announced a 27% increase to its regular quarterly dividend and paid $0.95 per share in the fourth quarter. Additionally, we repurchased another $36 million of stock after the year-end close. These purchases will be reflected in the first quarter 2015 financial statements. Book value per share increased 14% to $166.75 from $146.57 at year-end 2013.
Our strong capital balance positions us well for potential business opportunities as well as continued share repurchases. Thank you. Now John Doucette will provide the operations review.
Thank you, Craig. Good morning. As Dom highlighted, we had a strong Q4, finishing a very successful year. Our group gross written premium for Q4 was $1.4 billion, up 7% from Q4 in 2013, with the growth coming from all reinsurance segments. Our group net written premium was $1.3 billion, which was up $40 million or 3% over Q4 2013. For the full year, our group-wide 2014 premium was $5.75 billion, up $530 million or 10% from 2013. Our group net written premium was $5.26 billion, up $250 million or 5%. Let me start with our reinsurance segments. I will focus more on the full year results for 2014, then turn to our January 1st renewals to give you some color on what we are seeing in the market and some themes as to how we are navigating it.
For our global reinsurance segments, including both Total Reinsurance and Logan, gross premium was $4.5 billion, up 15%, with growth coming predominantly from our US and international reinsurance segments. Net premiums were $4.2 billion, up 7% as we continued to pursue our retrocessional strategy to lay off some of our catastrophe exposure and lower our cost of capital. Our reinsurance book, including Mount Logan, generated $935 million of underwriting profit, a 5% improvement compared to 2013. These results highlight the success of the initiatives we have put in place over the last couple of years to achieve profitable reinsurance growth, including the introduction of several new reinsurance products such as PURPLE, Everest Pillar product. Deploying increased capacity to pro-rata deals where we saw attractive original pricing terms and conditions. Pursuing new credit-related opportunities through various territories. Developing new strategic relationships across the globe with several key reinsurance clients.
Increasing line capacity on several attractively priced property catastrophe treaties aided by Mount Logan. Developing increased penetration and breadth of our international facultative book. Growing our regional footprint. Leveraging our competitive strengths to become lead reinsurer on various treaties in multiple countries, allowing us to drive terms and conditions. These initiatives have broadened and enhanced both our broker and client relationships, which in turn has provided new opportunities to expand our writings, whether it is on new programs or layers or larger shares of existing treaties with our long-standing clients. Despite a challenging rate environment, we achieved profitable growth as evidenced by the results of 2014. What are we seeing for 2015? Certainly, it continues to be a challenging market, with rates off between 5%-15%, depending on the line of business and territory.
Having said that, we were able to achieve better than market results, given our ratings, long-standing client and broker relationships, broadly diversified portfolio, and our underwriting diligence and flexibility. We take an objective view of each deal at renewal and will scale back or non-renew deals we do not like and redeploy capacity to deals and layers which we find to be better priced. This mitigated the downward impact on our portfolio. Let me provide you a bit more color on the January 1st reinsurance renewals, in which we wrote about $2.1 billion of treaty premium, which represents approximately 45% of our annual reinsurance treaty premiums. Catastrophe excess of loss business represented roughly 25% of this renewal. This is an important point as you have all heard market participants expound on the double-digit rate declines in this sector.
While we are not immune to these pressures, 75% of our renewal was in lines outside of property cat excess of loss, which speaks to the diversity of our portfolio and a mitigant to just following the general market down. We also have Mount Logan, which provides efficient capacity to support this line. We continue to see robust, ongoing investor appetite for the Everest Logan value proposition, highlighted by Logan's best-in-class risk-adjusted returns to investors. As of 1/1/2015, we raised approximately $270 million of additional funds, and Logan now stands at about $690 million of assets under management. 100% of Logan's capacity was fully deployed at the 1/1 renewals. During 2014, Logan generated approximately $28 million of earnings for Everest, including fees. Property-related and short-tail business outside of catastrophe excess of loss represented another 50% of the renewal writings.
While much of this has a cat component, it is balanced by risk premium. Putting up larger capacity on short-tail deals we liked, and in general, moving up attachments on property excess of loss layers softened the impact of some of the rate reduction. Our 1/1 cat exposed premium saw a couple of points of deterioration in the combined ratio, but both our expected cat premiums and dollar cat margins are approximately flat compared to last year. USA rates held up pretty well, but we saw more competition this renewal in Latin America, Canada, and China. Rates in Europe were also under pressure. For PURPLE, we saw some undisciplined competition in that space, so we redeployed some capacity away from PURPLE to some of our longstanding retro clients.
We did see a three-point drop in our expected ROE at this 1/1 on our worldwide property XOL book, as the deals that many of the clients are now buying are more capital intensive. We believe this highlights and validates our property retrocessional strategy with the increased use of Logan, Kilimanjaro issuing $950 million of cat bonds, and other non-traditional and traditional cessions to manage our net cat PMLs and lower our cost of capital. As a result of these strategies, our net ROE continues to be greater than our gross ROE on our worldwide property cat book. Casualty remains challenging, especially pro-rata, due to demands for expanded terms and conditions. As a result, we continue to withdraw from some contracts, move from quota share to excess of loss, and deploy capacity at higher layers on others.
We saw new opportunities at 1/1 outside of the mainstream that meaningfully added to our top line. This includes a large motor quota share in Europe, a large international professional liability quota share, increased lines for some of our global clients that were only offered to Everest, and surplus relief deals that were not widely marketed to many reinsurers. These new deals offset some of the premium from the quota share deals and excess of loss deals which we non-renewed at 1/1/2015. Four themes helped us this 1/1. Number one, we have one of the lowest internal expense ratios in the industry, with our total reinsurance segment carrying only a 2.9% expense ratio. Therefore, we get more dollars of margin and a higher ROE on the same premiums than others do. Number two, we are more diversified than most of our competitors.
We use our capital across more zones and perils, that naturally lowers our internal cost of capital. Number three, the retrocessional strategy of Logan, Kilimanjaro cat bonds, ILWs, and other traditional and non-traditional cessions lowers our cost of capital further. Number four, our reinsurance operational structure is another sustainable competitive advantage. Everest has one view of risk around the globe, but we deploy capacity to our clients by senior lead market experienced underwriting teams in a decentralized fashion and empower those teams to make decisions. This allows us to know our customers very well and move quicker and in scale, better and faster than our competitors, who write only a few lines of business or who write out of only one or two offices.
Across all classes on a constant foreign exchange basis, our gross reinsurance premium at 1/1/2015 was approximately flat compared to last 1/1. Our net reinsurance premium declined by about 2% this 1/1 as we reinsured more of our book with the growth in Mount Logan's AUM and the capacity provided by the Kilimanjaro cat bonds, in addition to increased use of other traditional reinsurance to effectively protect our net position. We are pleased with the outcome of our 1/1 renewal despite market conditions and expect 2015 to be another strong year for our reinsurance book. Being innovative and providing ideas and solutions to our clients, as well as our ability to execute quickly and in size, is now more important than ever. Our focus on new business opportunities, new products, new distribution sources, and leveraging our competitive strengths remains key to our underwriting success.
With our balance sheet, ratings, and ability to nimbly deploy both rated capacity and unrated capacity in size to support our business, we have more tools in our toolkit to compete and win against non-traditional capacity as well as other traditional reinsurers. Turning to our insurance operations. We wrote $300 million of insurance premium in the fourth quarter, and wrote $1.2 billion for the year. For both the quarter and the full year, that is down about 5% compared to the same period last year. Removing crop insurance, both the quarter and the full year are up approximately 10% in premium, with growth coming from each of our insurance units. Insurance growth initiatives that we have put in place over the last couple of years have been providing benefits to the top and bottom line.
These include staffing up underwriting operations and expanding broker relationships, both property and casualty. Increasing our property insurance geographic footprint. Driving international insurance expansion, including growing our existing Canadian platform. Building out new product distribution and strategic relationships within our specialty insurance operation, both in the U.S. and internationally. Insurance calendar year results ran to a loss due to our crop results, which is consistent with what we have been discussing on prior earnings calls. Excluding crop, our insurance operation ran to a $15 million underwriting profit. This was almost a $100 million improvement in underwriting results year-over-year. Our crop insurance book had an underwriting loss of $22 million in Q4, resulting in a calendar year underwriting loss of $64 million in 2014. These results were driven by four issues. Lower commodity prices during 2014, particularly for corn.
Below average result in Minnesota, our largest state and typically our most profitable. Significant losses in crop hail due to an unusual number of hailstorms throughout the Midwest. Higher expenses associated with new technology and IT initiatives. We anticipate improved underwriting results in our crop book in 2015 with a larger, more diverse book of business and increased operating efficiencies derived from an updated systems infrastructure. In other lines of business, in terms of rates, we continue to see rate increases in our California workers' comp book of about 7%, the rate increases have slowed as more competition has come into that space. General liability was up about 7% for the quarter. Professional liability rates were down about 5%, and property insurance rates were also down about 5%. As before, we continue to roll out many new insurance and reinsurance products in 2015.
We are hopeful for meaningful growth in our insurance operations as we capitalize on opportunistic expansion, both geographically and across product lines. Thank you. Now back to Beth for Q&A.
Yes, Callie, we are now for questions.
At this time, if you would like to ask a question, please press the star and one on your touch tone telephone. You may withdraw yourself from questions at any time by pressing the pound key. Once again, to ask a question, please press the star and one on your touch tone phone. We have our first question from Amit Kumar from Macquarie. Your line is open. Please go ahead.
Thanks, and good morning, and congrats on the quarter. Just a few clarification type of questions. Number one, just going back to the discussion on Mount McKinley, what's the size of the reserves that is being shipped off from that?
Mount McKinley is about $150 million of reserves that would be transferred.
That's in Q1?
Well, we don't know when the transaction will close. We have to go through all the regulatory approvals and things like that, I would suggest that it probably would be the beginning of Q2.
Okay, that's helpful. The other question I had was on, this goes back to the discussion on renewals, thank you for the expanded commentary this quarter. In terms of some of the new opportunities which you talked about, I think you mentioned a motor quota share and a large international account. Do you have some sense of, I guess, why was it shifted to you, and how did it perform previously? I'm just trying to get a sense why it was non-renewed by the previous reinsurer.
I'm not sure, Amit, that we can really get into that level of detail relative to a prior reinsurer. In some cases, it might not have even been a transaction that had been in the market. A number of these deals that John had referenced are surplus-driven or financially driven transactions. They do have risk transfer in them, of course, but it's capital relief type products in some cases. In other cases, it's helpful to companies as to how they manage their capital at various subsidiaries around the world. They're all different. Why is Everest the company of choice? Some of the things that John mentioned I think are important to us. I think in the community at large, I think we hope that we're viewed as an innovative market and a market that's quick to respond.
Flat organizational structure so that any significant transaction can quickly get to John's desk or my desk, if it needs that level of approval. The strong rating and the global footprint. Those are all reasons that we've been emphasizing, and that's what we found is why we're a market of choice in many of these unique transactions.
I guess what I was trying to figure out is, I'm just a bit surprised that you've had these opportunities for a few quarters, I'm just trying to figure out if it's a size issue, why some of your peer companies have not been able to capitalize and find similar opportunities.
I think it's hard to generalize. I do think in part it's a size issue. It could be a ratings issue. It could be the fact that these are not the types of transactions that this company has shown an interest in or had a risk appetite for. It's hard for me to explain what the reason might be.
Okay. Just finally, any change in the buyback philosophy versus as it relates to your discussion on premiums? Should we anticipate that to be any different versus what we've seen in the past? Thank you.
I think what I tried to emphasize in my comments was that we've returned a significant amount of capital in the past several years. I would anticipate that we would continue to do that given the current market conditions. Obviously, if the market changes, then we would change direction on how much capital we would return. I don't anticipate any major change at this point, would, I think, be the short answer to your question.
Got it. Thanks for that answer. Good luck for the future.
Thanks, Amit.
Our next question comes from Michael Nannizzi from Goldman Sachs. Your line is open. Please go ahead.
Thanks. Just a couple here, if I could. The expense ratio in international reinsurance and Bermuda in particular, listed in the fourth quarter, was there something that happened that was kind of fourth quarter specific, in particular in Bermuda, or was there maybe some other driver? Thanks.
Michael, this is Craig. In the fourth quarter, we typically have compensation related accruals at year-end. As you recall, again, we had a record quarter of results in the fourth quarter as well.
Okay. Even with the year-over-year comps, I mean, the fourth quarter last year was pretty good too. That's all just incremental comp that we should be thinking about, and it's just specifically in Bermuda?
No, the majority of it is where you're seeing it, maybe even in total segments compared to third quarter into fourth quarter.
Michael, I wouldn't look too much into individual segments because each of those are subject to individual accruals and year-end adjustments. I think the main topic is the overall group and the difference in the fourth quarter was what Craig specified, which was predominantly compensation adjustments as it relates to putting it in line with our year-end results.
Okay.
The individual segments can be a myriad of factors that are local.
Okay, great. Thanks. John, you mentioned the net versus gross ROE. Just trying to understand I imagine that includes the difference is in part in Mount Logan, because you cede some business to Mount Logan. Just trying to understand the relationship of the ROE at Mount Logan versus the ROE at Everest.
Good morning, Michael, this is John.
Good morning.
We've been talking about this for several quarters, that by having rated and unrated capacity, there's different constraints. There's different capital requirements, and it's not just cost of capital, it's also that there's different ROE for a rated company is impacted by how rating agencies think of the capital that you need to hold to support the businesses. It gives us the ability to find the right fit for business deal by deal and across the portfolio. Logan is very critical for that. It's also part of a broader strategy that involves the cat bonds, and other traditional cessions that we have, and also within Mount Logan, we have different investor appetites, low risk, medium risk, high risk, that results in lower return, medium return, higher return.
Having that combination gives us a lot more flexibility to be able to deliver the most value for our clients and have the best net position for Everest.
Got it. Okay. Dom, I think you had mentioned that, I think in your opening remarks that cat business represents about half of the underlying profit or of the profit on a run rate basis, I guess when you adjust for model cats. What was that percentage in 2014 on an actual basis? Do we have that?
The number is probably somewhere between three and $400 million of underwriting profit, non-cat.
Okay. Got it. Great. Thanks. Last one, if I can sneak one more in. I think, John, you mentioned last quarter that you were seeing some 20% return opportunities, I think more on the financial side in terms of those types of transactions. Just would love an update on that. Is there still an opportunity to generate that level of return in that part of the portfolio? Thanks so much for all the answers.
The short answer is yes. We continue to see, again, we've been talking about this for a while. Not just do we have a large balance sheet and a high rating, we also have a lot of underwriting expertise bringing underwriting, accounting, tax, legal, contract wording, and actuarial, bringing that all to the mix and solving clients' needs and creating some one-off structures. We continue to look for those. I think in general, we think the more it's less commodity, less plain vanilla, that seems to be under more pricing pressure. Having the ability to execute kind of multi-jurisdictional insurance reinsurance combination deals gives us the ability to really solve the client's problems and use a lot of the different competitive advantages that we have. We continue to think that there's a lot of runway for that.
Great. Thank you so much.
Our next question comes from Vinay Misquith from Evercore. Your line is open. Please go ahead.
Hi. Good morning. The first question is on the increase in combined ratio for next year, that's 2015. You talked about, I think a couple of points increase in the combined ratio from the cat business. I was just curious as to, so when you shake it all together for the other lines of business, because pricing is down, where do you see it sort of coming out to?
What was the last part of that, Vinay?
For the cat business, I believe you said that the combined ratio would increase maybe about a couple points for the cat business. I was wondering also for the non-cat business. If you shake it all together for the company as a whole on the reinsurance side, how many points of an increase on the combined ratio do you think you got at the January 1 renewals?
You're really leaning us more towards giving earnings guidance, which Vinay, we really try not to do. Let me just say it this way. We expect our insurance operations combined ratio to improve. I'm not really going to give you any guidance on what that expected combined ratios would be in the insurance portfolio. On the reinsurance portfolio, a lot of that is dependent upon the types of transactions that we see. Certainly, we will strive to maintain the combined ratio of targets that we've been accustomed to. That will likely mean that some of the transactions that we were on in 2014 will probably not renew. We'll look for other types of transactions. As John mentioned, we're doing some new products. We expanded our capabilities into the credit area.
A lot of that reinsurance, we expect to run at better combined ratios than our traditional reinsurance book. Part of it is dependent upon the mix. That's the best answer that I can give you at this point.
Sure. Fair enough. On the cat business, you said that it's going to be about a couple points higher, pricing seems to be a lot lower. Just wondering what the difference is. The difference is the retro that you guys are buying?
No, the retro really is a capital issue, Vinay. The combined ratio on a gross basis, those were gross basis comments. A lot of that, again, and we keep trying to articulate this to you, that the ability to move between product, between layers, between clients, to redeploy capacity, from one product segment to another as we try to utilize the cat capacity that we're willing to deploy at any renewal and really be able to move seamlessly between that. One example is within our treaty property department, it's the same team that writes pro-rata risk cat and retro.
That having the ability to dynamically allocate capacity to help where the client's needs are and where we think the best pricing is, as well as moving up and down attachment points within a layer and ask, again, we think because of our market position, we have the ability to get more of the signings in the layers we want. That really helps drive what you're seeing.
Sure. It's a mix issue besides the pricing, right? Okay.
The mix influences the combined ratio outcome.
Sure. Fair enough. Just a 50,000-foot view, we've seen a lot of M&A in the industry. You guys have bought an $8 billion market cap company. Curious about your thoughts on M&A.
Thoughts in what regard?
Are you interested in combining with others? Do you think your size is large enough that you don't need to? Also, do you think you're going to get some more opportunities if you guys don't combine and the others do? Do you see some more opportunities sort of within the industry for your premiums?
Well, I think we have been emphasizing our scale and diversity for some time. Obviously, I think we've been communicating that we think we have sufficient scale, so we don't really see the necessity or urgency for combinations. Others may view it differently, but I think in essence, what you're seeing in the marketplace in that regard somewhat validates what we've been saying has been the Everest advantage. That's what I'll really say about that. In terms of the combinations and what it means to the marketplace in general, it all depends on execution. Many times these combinations can be disruptive. Maybe they won't be. We will see. It can affect markets, it can affect shares of programs. It can affect teams of people. There's always some churn that will occur as a result of any kind of a merger in any industry.
Time will tell, and we'll see how that will evolve over the months ahead. Perhaps it creates opportunities, perhaps not. What I will say is that in some regard, this could be good for the industry in the sense that perhaps some of the capital does come out of the business and creates further discipline. That could be a good outcome of some of these combinations.
Fair enough. Just separately on Logan Re, it appears that you guys have increased capital by maybe 60% because you raised about $270 million more, correct? Would it be fair to assume that the premiums also would be up a similar amount because you've already deployed all the capital as of 1/1?
Yes. This is John. Yes. We would expect there to be some increase in the ceded this session to Logan.
Okay. All right. Thank you.
Just, Vinay, one more thought relative to your size question. Keep in mind, as you mentioned, an 8 billion market cap company. We add in the Logan piece and the sponsored cat bonds that we have. Essentially, you could almost argue that we're operating more like a $10 billion capitalized company.
Fair enough. Thank you.
Our next question comes from Josh Shanker of Deutsche Bank. Your line is open. Please go ahead.
Good morning, everyone. I think you made a very compelling case about your expense advantage compared to your competitors on this call this morning. I don't know if that translates necessarily to the insurance business, though. Why is Everest better in the insurance businesses than their peers? We've seen some variable results from different reporters of crop insurance. Why have your results been weak this year while some others haven't seen such weakness?
I will let John talk about the crop piece because I think he hit some of those points in his prepared remarks. Let me just perhaps admit that I don't know that we are better than the industry on the insurance side. Our comment about the expense ratio was a reinsurance comment and why we feel we're getting superior returns there.
Does it make sense? Go ahead, John, and then we'll come back.
In terms of the crop insurance, we have a great team at Heartland. We know we need to grow that book. We need to diversify the book. A lot of it, there's fixed expenses. There's high fixed expenses with infrastructure and systems We know that in a lot of things we're talking about what we're doing on the reinsurance side, we're trying to do that with various insurance books, including the Heartland Crop book. We would expect that with a better geographic footprint than we have, a bigger and better geographic footprint will give us more diversification, better risk-adjusted returns. It'll also give us economies of scale. I think some of the competitors may buy quota shares. We do not. Buy quota shares, and then they get an override from the reinsurers, and that may be impacting their expense ratio as well.
We have some work to do there. Again, to remind you that a significant portion of that crop loss came from crop hail and not just MPCI.
Right.
That's a great answer. Coming back, if you are not necessarily better than your peers in the insurance business, does it make sense to you to continue in that business? I'm not telling you have to sell it or anything. When you think longer term, might it be worth more to somebody else than it is to you?
Right now, Josh, we think it is a good diversifier for our platform. We have the ability to deliver, we think, again, because of the diversification effect, a greater ROE. It's also a source of business for us into any capital market platforms that we talked about earlier as well. We do, here again, when we talk about our net ROE being higher than our gross ROE, there's an opportunity to leverage that as well. For the time being, we think that the diversification and access to risk, being able to build out that platform is important to the future of Everest.
We spend a lot of time looking at the trends and we buy each of the business units that we have. The trends are favorable. We've been growing our footprint, whether it's our A&H operation, the SIG operation, our property facilities around the group, the workers' comp, the FI and professional teams, the casualty and environmental teams. The trends have been favorable, we are going to continue to give those teams support and capacity and help them grow their footprint to help them get additional economies of scale and leverage, again, the financial strength and rating and ability to execute that Everest prides itself in.
The in-force portfolio is delivering great results for us now, and we recognize that we've had, over the last couple of years, some drag from discontinued books of business. Obviously, as you can tell from this year, that's been greatly diminished. We think it's a bright future there.
Well, congratulations. Certainly a great year overall.
Thank you, Josh.
At this time, I would like to turn the call back over to Miss Beth Farrell for closing remarks.
I will turn the call over to Dom Addesso for closing remarks.
Thank you. Thank you all for participating in today's call. We've talked a lot today, we continue to emphasize about our competitive advantages, which have yielded above-market returns. Our competitive advantage are our global franchise and scale, diversified portfolio. We have a very talented staff and, as we mentioned, a very competitive expense ratio. Market conditions are difficult. The trend is difficult. We've proven our ability to deliver superior results. There certainly are many areas to be cautious about, but also there's lots more to do. We thank you for your continued interest. Have a good day.
This concludes your teleconference. Thank you for your participation. You may now disconnect.