Welcome to the Everest Re Group third quarter 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded. I would now like to turn the conference over to Mr. Matthew Rohrmann, Senior Vice President, Head of Finance and Investor Relations. Please go ahead, sir.
Good morning, everyone, and welcome to the Everest Re Group, Ltd. third quarter 2022 earnings conference call. The Everest executives leading today's call are Juan Andrade, President and CEO, and Mark Kociancic, Executive Vice President and CFO. We are also joined by other members of the Everest management team. Before we begin, I'll preface the comments on today's call by noting that Everest SEC filings, including extensive disclosures with respect to forward-looking statements, management comments regarding estimates, projections, and similar, are subject to the risks, uncertainties, and assumptions as noted in these filings. Management may also refer to certain non-GAAP financial measures. These items are reconciled in our earnings release and financial supplement. With that, I'll turn the call over to Juan.
Thank you, Matt, and good morning, everyone. Thank you for joining us today. The current heightened and complex risk environment underscores the value of Everest's balance sheet and our commitment to support our customers with solutions vital to navigating this turbulent period. Everest's diversification strategy and underwriting discipline mitigated our exposure to one of the largest hurricane losses in U.S. history. With our well-defined strategy, we are poised to take advantage of the hardening market, focused on segments with the best risk-adjusted returns. Both underwriting businesses delivered sub ninety attritional combined ratios, and we are profitable on a year-to-date basis. Led by top talent, we continue to grow and diversify globally by business and product line. We are focused on executing our strategic plan as we build a company for the long term. Our purpose is to provide protection and stability in the face of uncertainty.
As someone with roots and family in Florida, the devastation caused by Ian is heartbreaking, and our thoughts are with all those affected. I am grateful to our colleagues around the world who are supporting our customers and communities as they rebuild. We have improved the company's risk profile across both reinsurance and insurance, reducing our cat exposure with a more durable, resilient portfolio capable of absorbing a historic industry loss like Ian and containing it to an earnings event at just 1% of our estimated industry loss, and with our reinsurance segment being below 1%. We apply the same consistency and discipline to how we develop the overall portfolio, manage expenses, invest our capital, and expand operational efficiencies. In short, we're managing what is in our control and building flexibility into the business.
Everest value proposition has never been more important to our clients and partners, and we are committed as both insurers and reinsurers to being where we are needed. Now I'll turn to the company's financial results, first from the group and then for each of the underwriting businesses. In the third quarter, we grew gross written premiums by over 6% in constant dollars. Growth was broadly diversified, led by continued double-digit growth in insurance. We continue to benefit from positive rate and increased exposure growth. We are ahead of loss trend, and that is before the effect of all the deliberate portfolio management actions we are taking to improve margin. The combined ratio for the group was 112%, including the previously announced pre-tax catastrophe losses, net of recoveries and reinstatement premiums of $730 million, primarily from Hurricane Ian.
It is important to note Everest has additional hedging protection in place in the form of cat bonds. We did not include a cat bond recovery in our net loss estimate. However, recoveries start if the PCS industry event for Ian exceeds $48 billion. Mark will provide additional details. Again, the actions we took in both our businesses to reduce cat exposure have meaningfully benefited us. In reinsurance, we significantly scaled back our retro book, reduced participation in aggregate programs, shed cat exposed pro rata and exposure to lower layers of cat programs, and achieved significant rate increases, higher attachment points, and improved terms and conditions in the past several years. Reinsurance gross and net PMLs have reduced significantly across the entire curve. In insurance, we decreased gross PMLs for Southeast wind by over 40% since last year.
Gross exposed limits in our U.S. property portfolio are down more than 35% year-over-year. Put this in concrete terms. Our share of the industry loss for Ian is lower than any other major landfalling hurricane in more than 15 years. We will continue to optimize our portfolio. Turning to our underlying performance in the third quarter. The group attritional combined ratio improved to 87.6 year-over-year, with improvements in both segments and a new historic low for insurance. The group attritional loss ratio was strong in the quarter at 60.2, with a 70 basis point improvement from last year. This includes an outstanding 110 basis point improvement year-over-year in reinsurance. The group expense ratio in the quarter was stable at 5.5% and remains a competitive advantage.
An elevated level of catastrophes during the third quarter resulted in a pre-tax underwriting loss of $367 million. Net investment income was $151 million, driven by stronger fixed income returns as new money yields continued to improve. As expected, this was partially offset by volatility in the equity markets. On a year-to-date basis, we generated net investment income of $620 million, despite severe turbulence in all markets. Finally, operating cash flow for the quarter was strong at $1.1 billion. We continue to execute our strategy despite the challenging environment, evidenced by our year-to-date profitability. Now turning to our reinsurance business. Reinsurance gross written premiums increased 3.4% over last year on a constant dollar basis, excluding the impacts of reinstatement premiums.
Growth was broadly diversified, led by 16% growth in our global casualty and professional lines book, where we are focused on key cedents for achieving strong underlying profit improvement with pricing outpacing loss trend. This was offset by targeted reductions in our property book, which was down 8% over prior year as part of our strategy to improve the diversification and economics of our overall portfolio. We continued to benefit from a flight to quality, and we grew with our core clients. We're affording those new and expanded opportunities across their portfolios. This strategy serves us well. We bring clients a strong balance sheet, flexibility and expertise, allowing us to target higher-margin opportunities in all lines of business and geographies. This is a key advantage of broad diversification.
Combined ratio of 115 was driven by the previously announced pre-tax catastrophe loss, net of recoveries and reinstatement premiums of $620 million from Hurricane Ian, as well as the European hailstorms, Hurricane Fiona and Typhoon Nanmadol. Year to date, reinsurance generated $14 million in underwriting profit. Our attritional combined ratio of 86.8 improved 30 basis points from the prior year, including a year-over-year attritional loss ratio improvement of 110 basis points to 59.1. Our attritional loss picks reflect our deliberate actions to improve the portfolio's risk-adjusted profitability. We continue to see improving loss ratios while the pressure for increased commissions is easing. Everest is well-positioned to benefit from the underlying rate increases and improving terms and conditions in the market post-Ian. Events from the year will affect the January 1 renewal in a variety of ways.
In North America, we expect the property market to be dislocated, particularly in property cat, due to recent losses combined with economic inflation, increasing demand, and a meaningful contraction of capacity. Underlying casualty pricing should remain strong. Internationally, there are nuances depending on class and region, and we will flex accordingly. We are well-positioned with the balance sheet capabilities and relationships to capitalize on the momentum, fueling improved economics across property and casualty in a targeted and disciplined manner. Because of the balance between property and casualty in our book, we have the ability to dynamically deploy capital both across line and geography, and can remain nimble and opportunistic as market conditions warrant, always within our defined risk appetite framework. Jim Williamson is available to provide additional details during the Q&A. Turning to our insurance business, where we continue to achieve double-digit growth with sustained margin expansion.
Growth in insurance was strong. We achieved a new third quarter premium record for this segment with over $1.1 billion of gross written premium, up 13% in constant dollars. Growth was broad and diversified across most lines and regions and was especially strong in U.S. casualty. Excluding D&O and transactional liability, where the macro environment, a slowdown in M&A activity, IPOs, et cetera, has had an impact on deal flow, our growth was 20%. This is a testament to our underwriting discipline as we focus on trades meeting our underwriting return objectives. We are benefiting from additional premium on many inflation-sensitive lines, particularly in property, general liability and workers' compensation. We continue to exceed loss trend.
Renewal rate and exposure ranged from high single digits to double digits for the quarter, depending on line and geography, excluding workers' compensation, which is now a small part of our portfolio. In addition, both earned and new business rates meaningfully exceed renewal rate changes. The new business rate level bodes well for continued margin expansion as these policies renew and losses to more normalized levels in the future. Increasing rates are important, but risk selection, improving terms and conditions, limits management, and growth in inflation-sensitive exposures also contribute meaningfully to sustaining and increasing margins. Insurance growth was partially offset by continued actions to optimize the portfolio, including reductions in U.S. property catastrophe exposure.
The impact of natural catastrophes, primarily Hurricane Ian, led to a $110 million pre-tax catastrophe loss, net of recoveries and reinstatement premiums in the quarter, and resulted in a combined ratio of 103.5%. As I mentioned earlier, underwriting actions to diversify our property portfolio made a significant difference in our results. We will continue to hone our portfolio to manage volatility. This discipline is reflected in our year-to-date underwriting profit of $95 million, and it is indicative of our progress in portfolio composition. The insurance division's third quarter attritional combined ratio of 89.8% is the best in its history and a 50 basis point improvement from the third quarter last year. The attritional loss ratio for the quarter was 63.2%, up slightly compared to Q3 2021, driven predominantly by business mix relative to last year.
The year-to-date attritional loss ratio, which is less affected by timing and business mix, improved by almost a full point over last year. We continue to diversify internationally, with progress in Europe, Latin America, and Asia. We recently opened two new Everest Insurance operations in France and in Germany, in addition to our operations in the Netherlands, Chile, and Singapore. Our success continues to be powered by investments in great talent, and we continue to fuel our growth with sophisticated data, analytics, and systems that support streamlined and best-in-class service across the organization. Mike Karmilowicz is on the call to provide more detail during the Q&A. Our discipline and seamless execution are essential to performing in today's environment. We are targeted in our approach. We're highly diversified by geography, business lines, product, and in our people. We have a cultural advantage in how we manage the company.
We view this as essential to cultivating excellence in our business, and we are proud to have been recently recognized as an industry leader in this area. I am very optimistic about Everest's ability to deliver superior value to our shareholders, clients, and colleagues. Now, I will turn the call over to Mark to take us through the financials in more detail. Mark?
Thank you, Juan, and good morning, everyone. As Juan mentioned, given the impact of Hurricane Ian, Everest reported an operating loss of $5.28 per diluted share in the third quarter. We remain profitable year-to-date with operating income of $14.91 per diluted share, which demonstrates the resiliency of our diversified businesses and the disciplined execution of our strategy. Net income stands at $101 million year-to-date, while total shareholder return, or TSR, was -1% year-to-date, given the cat losses as well as continued volatility in the equity markets. Despite those headwinds, we improved our attritional combined ratio in both segments again while generating disciplined growth as pricing and terms remain attractive in a number of our core lines of business.
Based on the underlying performance of the business, our team continues to execute at a high level despite the cat and macro volatility, and we remain well positioned to take advantage of opportunities present in the current marketplace. Looking at the group results for the third quarter of 2022, Everest reported gross written premiums of $3.7 billion, representing 6% growth in constant dollars. The combined ratio of 112% for the quarter includes 27.4 points of losses from previously announced natural catastrophes, primarily from Hurricane Ian, as well as European hailstorms, Hurricane Fiona, and several other cat events around the globe. While it is still early days following Hurricane Ian, our industry and company net cat loss estimates are $55 billion and $600 million, respectively.
Everest also has up to $350 million of cat bond protection that will begin to attach starting at a $48 billion PCS industry loss threshold for Ian. This recovery would be recognized on a pro-rata basis up to a $64 billion PCS industry loss level. PCS has currently estimated the loss at roughly $41 billion. This potential recovery is currently not included in our $600 million Ian loss estimate, but it does provide significant downside protection should the industry loss grow. I would also like to mention that our exposure in Florida, which is primarily homeowners-based, mitigates our exposure to auto and flood losses, and that our participation to the NFIP is de minimis.
Group attritional loss ratio was 60.2%, a 70 basis point improvement over the prior year's quarter, led primarily by the reinsurance segment, which I'll discuss in more detail in just a moment. The group's commission ratio improved 30 basis points, 20.9% on mix changes, while the group expense ratio was stable at 5.5%. Moving to the segment results, starting with reinsurance. The reinsurance gross premiums written grew 3.4% to $2.6 billion in constant dollars. The growth in the quarter was driven primarily by casualty pro rata, as well as strategic growth in other international lines. The combined ratio of 115% includes 32.5 points related to natural catastrophes, largely attributable to Hurricane Ian.
The attritional loss ratio improved 1.1 points to 59.1% as we continue to achieve more favorable rate and terms, as well as shifting the book towards accounts with better risk-adjusted return potential. Commission ratio was 23.9%, broadly in line with last year. The underwriting expense ratio was 2.4% as earned premium grows, and we remain focused on operational efficiency across the entire platform. Moving to insurance, where we continue to build solid momentum. Gross written premiums grew 13.1% in constant dollars to $1.1 billion in the quarter. The combined ratio for the quarter was 103.5%, up modestly year-over-year due to the cat losses I mentioned earlier.
The attritional combined ratio improved 50 basis points to 89.8% for the quarter and 120 basis points year to date, as rate and exposure continue to outpace trend, further supported by our focus on risk selection and favorable loss experience. The attritional loss ratio was slightly higher year-over-year due to mix of business. The commission ratio improved 1 point, largely driven by business mix and increased ceding commissions. The underwriting-related expense ratio was 14%, 10 basis points of reduction over the prior year, which is within our expectations as we continue to expand our global footprint and continue to proactively invest in a number of growth initiatives across the business. Finally, to cover investments, tax, and the balance sheet. Net investment income for the quarter was $151 million.
We are continuing to see the benefit of higher new money yields in the fixed income portfolio, while the lag in reporting for alternatives was a modest drag on results in the quarter. Overall, our reinvestment rate continues to trend higher as new money yields, which were roughly 4% just a few months ago, are now north of 5% in today's market. We continue to have a short asset duration of approximately 3.1 years. As a reminder that 22% of our fixed income investments are in floating rate securities. Private equity investments yielded a negative $30 million P&L impact in Q3 as equity markets have declined in 2022. As a reminder, they are reported on a one-quarter lag.
For the third quarter of 2022, our operating income tax rate was approximately -22% due to the geographic mix of income and loss, significantly impacted by the cat losses and thus favorable to our working assumption of 11%-12% for the year. Shareholders' equity ended the quarter at $7.6 billion, driven primarily by the third quarter rise in interest rates. There was a corresponding negative $671 million impact on the value of available-for-sale fixed income securities. Year to date, unrealized losses in the fixed income portfolio equate to approximately $2.2 billion. However, operating cash flow of $1.1 billion was very strong during the quarter, and it stands at $2.7 billion year to date.
We also repurchased $58 million of our own stock during the quarter, as well as approximately $6 million of subordinated debt. Book value per share ended the quarter at $195.27 per share, while the book value, excluding unrealized appreciation and depreciation of securities, stood at $245.29, versus $252.12 per share at the end of 2021 due to the lower net income and foreign exchange headwinds of a stronger U.S. dollar. Debt leverage at quarter end stood at 25.1%, an increase in the leverage ratio driven by the unrealized fixed income market value declines noted previously. In conclusion, Everest ended the third quarter of 2022 with favorable underlying results, notwithstanding the notable catastrophes.
We have ample capital to take advantage of the current environment, and we continue to seek good opportunities to invest in the platform and scalability of our company. That summarizes our third quarter results. With that, I'll turn the call back over to Matt to begin our Q&A.
Thanks, Mark. Operator, we're now ready to open the line for questions. We do ask you that you please limit your questions to one question plus one follow-up, and rejoin the queue if you have any additional questions.
Thank you. We'll now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two.
Our first question comes from Michael Phillips from Morgan Stanley. Please go ahead.
Thanks. Good morning, everybody. First question, Juan, is centered around the dislocated property cat market. I kind of want to get onto, I guess, both your willingness and ability to take part in that. You know, you've been talking a lot about, you know, reducing volatility and kind of shying away from that business, but now things have changed. I would ask on your willingness, you know, how much do you want to grow in that business? I think the answer is probably going to be, what's the function of how rates move at the end of the year?
Maybe you could share with us, you know, is there some kind of threshold you have in mind where you'd like to participate pretty aggressively, to be willing to grow in that property cat market? Assume that you do want to, you know, how much is your ability to do so inhibited by, you know, the markdowns and book value and AOCI impacts, and especially in light of what we're seeing from S&P recently? Thanks.
Oh, that's great, Mike. That's a pretty comprehensive question. Let me give you some thoughts on that, and then I'll invite some of my colleagues as well. Let me address the growth question first. You know, as I just said in my prepared remarks, we absolutely continue to see significant opportunities for growth in 2023. Everest is very well-positioned to achieve that growth given the market as you just described it, also the strong client relationships and broker relationships that we have, relationships that have been built over decades. We also have the strength in the portfolio, and we have expertise across lines and geographies that allow us to deploy capacity where we're seeing the best opportunities. Again, very bullish about the growth opportunities that we see going forward.
In the property cat space, specifically to your question, the hardening that we're already seeing is gonna intensify post-Ian. We've seen that in the discussions that we've been having initially in Monte Carlo, but certainly post that at CIAB and individual discussions that we've been having with our cedents. Our key priorities with regard to property cat are pretty straightforward. Number one is continue to harden our portfolio from a limits, structure, rate, and term standpoint. Basically continue the work that we've been doing now for the past several years. Number two is get paid significantly more for the risks that we're already taking. Number three, prudently grow with core cedents, where we see the opportunity, where we see the alignment of interests, et cetera. All of this, however, within the trading range that we have outlined with respect for natural catastrophe exposure.
Look, Mike, the bottom line is the market affords us tremendous opportunity right now, and we will select the best options to maximize our returns and appropriately manage the volatility. From a growth perspective, that's how we're looking at the market right now. I would invite, Jim Williamson to talk a little bit more specifically about pricing and some of the other questions that you had as well.
Sure. Thanks for the question, Mike. It's Jim. I would reiterate some of what Juan said to start by just really conveying how tremendous we think this market opportunity is. I think in the U.S., that is really a complete dislocation of the property cat market, and it's gonna allow us to do a number of things. Juan described the categories. Let me give you a little bit more detail because I think it's critical. On the first part, in terms of, you know, hardening our portfolio, even while the market's been taking rate over the last couple of years, I think we've still been living for the most part with soft market terms, conditions and contracts. That's a key priority. We're making progress on that front.
I think you'll see us continue to trade away from some of the areas of the market which really make you susceptible to climate change, things like aggregate programs, cat-exposed pro rata, some of the peak risk that comes along with the retro book. You know, on the second piece, which is really about getting paid more, to put some context around that, I would say the expectation that the market had for pricing going into Monte Carlo, in terms of average rate increase, is now the minimum for programs that really haven't been affected by loss, and it'll go up from there.
While I expect clients to try to mitigate some of those rate increases by taking higher attachment points, which we're in favor of, my sense at this point is that rate change will be top line accretive for us, even if we, you know, are making changes to the portfolio. The last piece around growth with target cedents, that's a very real opportunity for us in front of us. We're already having discussions with our core trading partners around the world. There is an intense demand for capacity in general and Everest capacity specifically, and we are being very thoughtful about picking up high-quality opportunities.
I think all of that nets up to a higher margin portfolio, a portfolio that's, I would guess, more likely to be, you know, bigger after 1/1 than it is today. Also one, as Juan indicated, that's well within the defined trading range that we set out in 2021.
Yeah. Maybe what I would add to that, Mike, is that at the end of all of this, we can see additional premium coming in because of this, but also reduced exposure overall, which for us is a terrific trade.
Okay. Thank you, guys. That's pretty comprehensive. Second question then. You talked about the cap on recovery, potential recovery, given where peak cats might head. Are there other potential recoveries that might come, that might be more likely for Ian relative to other prior hurricanes that you've experienced? I'm thinking maybe peaks that you have more LAE versus loss mix this time that could come back, if litigation doesn't take off, or things like that. Other possible recoveries like that might happen more so for this storm than prior storms.
Yeah. Thanks, Mike. Look, I think a couple of thoughts, and I think Mark Kociancic alluded to some of these in his statement. Look, the cat bond that would start attaching at in excess of $48 billion, I think it's a primary downside protection that is definitely worth keeping in mind and thinking about. As you know, PCS is the trigger for that. PCS right now is effectively at $40.9 billion, rounded up to $41 billion. We could potentially foresee that loss growing to that trigger point at $48 billion. As Mark mentioned, that would be a pro-rata recovery up into the $60 billion range, and it would be significant downside protection. I think that's one of the most important things to keep in mind.
The other thing that I think Mark mentioned that's worth spending a little bit of time on is our exposure to Florida is particularly to the specialty carriers that focus on homeowners. To the extent that this is more of an auto loss or it has a higher proportion of auto losses as we are seeing already in the market, that's essentially a good thing for us. The other thing that is a good thing for us is essentially a higher percentage of flood losses as we're also seeing in the market right now, and also the fact that we don't really have a significant participation at all in the NFIP. I think all of these things bode well for the estimate that we've put up there.
The other part of it is we do have a good LAE load into our estimates as well, given the dynamics of the Florida environment as well. So from that perspective, we continue to see this as being a prudent estimate that we have out there right now. But let me ask my colleagues and see if they would add anything to that answer as well.
Yeah, sure, Mike, it's Jim Williamson again. You know, just to add a little bit of flavor to what Juan has already described on LAE loading in particular. You know, I think we've obviously leveraged a lot of the data we have to come up with a loading for LAE that we think is extremely prudent. You know, if there is, you know, better than expected activity on that front, which I think is possible, that would definitely inure to our benefit.
The other thing I would sort of say to put this in some concrete terms, I mean, I think our view would be if the loss ends up being, you know, smaller than we've indicated in terms of total industry loss, you know, our view is that our share would remain relatively stable over a reasonable range. That means our net loss would ultimately come in smaller. Then to Juan's earlier point, you know, there's also upside protection in the form of cat bonds if PCS calls an industry loss that's, you know, ends up being larger, which sort of caps our upside dollar value of net loss. I think it puts us in a really confident position relative to the net loss that we'd indicated.
Yeah. This is Mike Karmilowicz. I would just add on the insurance division side, we certainly benefit from third-party reinsurance as well. We do obviously have a different structure, but not to get into details, but we do have quota share per risk and other cat XoL that we use that we'd be able to get some benefit from as well.
Okay, wonderful. Thanks, guys. All the best.
Thanks, Mike.
The next question comes from Elyse Greenspan from Wells Fargo. Please go ahead.
Hi. Thanks. Good morning. My first question, I guess, picking up on the reinsurance side, you know, so it sounds like, right, you guys will try to manage any increase within, you know, your risk tolerances, but you could write more business, I think you said, with existing clients. As you see the market evolving next year, you know, how do you envision that coming together in both your cat load and your PML? Would they be higher, or how do you envision managing those next year?
Yeah. Elyse, this is Jim Williamson. Yeah. To first of all, to reiterate some of what I said earlier, I mean, I think this is a fantastic market opportunity. What that translates into is an ability for us to really set terms and conditions in a way that, you know, are obviously gonna be highly favorable. I think that'll include an ability for us to manage our total exposure, as Juan had indicated, while still driving higher revenue and more importantly, you know, much better margins, much better contracts, terms, conditions, attachment points, et cetera.
You know, I would say my sense is we're not gonna have to stretch, you know, our total risk load, whether you measure it in PML or the cat load, in order to drive the types of outcomes we're describing, which again could include some really nice growth, as well as margin expansion.
Yeah. I think this is Juan, Elyse, and again, thanks for the question. Again, our goal is to expand risk-adjusted returns, right? It's really to expand our margin, and that's really the significant opportunity that we see in front of us. As I just said to Mike a few seconds ago, the reality is with the current pricing, the current terms, we think we can grow the top line without necessarily growing the exposure. You know, our strategy to continue to manage volatility for the long term to diversify the company is still very much in place. We do have the nuances of this market, which will allow us to make those trades where we think we can expand margins and we can continue to grow, given the conditions in place right now.
Thanks. My second question, you know, you guys pointed out mix impacting the insurance underlying loss ratio. How should we think about the underlying loss ratio trending from here as you're getting price above trend, and we're also thinking about mix shift? Would you expect improvement in that number? I'm not just talking about the Q4, I'm also thinking about 2023 as well.
Yeah, no, thank you, Elyse. Look, what I would guide you to is what I said in my prepared remarks, and this is one, which is look at the year-to-date attritional loss ratio for the insurance division. That's basically 80 basis points better than the prior year. The way we get there is through a lot of the levers that I've talked about in the past, right? It's the cycle management. It's the diversity of our business mix, where we're able to move pretty nimbly to lines that have better risk-adjusted returns, better profitability, et cetera, et cetera. You know, our commitment is to continue to improve that profitability and the margin within the insurance division.
I think as I've said in prior calls, you go back to the end of 2019 where that was running at around a 96. Now you're running sub 90 on the attritional combined ratio for the division. That's what you should expect. I mean, that's the commitment and that's where we're driving this to going forward. I would invite Mike Karmilowicz maybe to add anything to that.
Yeah, I would just add, you know, a couple of things. One, this is a long-term game. We continue to focus on this business that drive the right margins. And the other piece too is we focus heavily on the combined ratio as well. So it's the entire package. And as you've seen over the last, you know, from a rolling perspective in the last 24 months, we've actually brought our combined ratio down 5 points alone. So our goal is to continue to drive the ultimate loss ratio and the overall results of the organization. Exactly what Juan said.
Thank you.
Thanks, Elyse.
The next question comes from Brian Meredith from UBS. Please go ahead.
Yeah, thank you. A couple questions here. Just first one, I'm just curious, how is Mount Logan going to fare in this event? I'm just curious on that topic, how does that kind of interplay with Everest's willingness to write kind of gross cat exposure in the marketplace?
Sure, Brian. This is Jim Williamson. A couple things. You know, Mount Logan is structured essentially on a quota share basis. The results that Everest generates for its own balance sheet are the same results that our Mount Logan investors experience, which is, I think, a differentiator for us because it creates an incredible alignment of interests. It means in situations where we have a large loss event, you know, the investors in Mount Logan are getting the exact experience that we're having on our side. It'll be very consistent that way. One thing that I would mention, you know, obviously any given quarter in the third quarter in particular can have elevated cat losses. You really need to look at it over time.
I would say on a year-to-date basis, while we have had significant cat activity this year, we've also collected a great deal of cat premium, and that is inuring to the benefit of our Mount Logan investors. I think you know, I don't think there'll be any surprises in that for them. You know, just a little comment on the external environment around ILS and fundraising. You know, we have a very robust pipeline of ILS investment opportunities. I think there's a lot of interest in the offering that we have in Mount Logan, and in particular based on the factor that I just mentioned around alignment of interests.
It is a more challenging environment to raise ILS capital just because people are giving it a rethink, but that's what's driving a lot of the hardening and the dislocation we've seen in the market. I think the good news is from our perspective, you know, we think about gross lines management, you know, really as an independent factor. Whether we raise, you know, X or Y amount of money in Mount Logan is not going to affect how we think about our gross line underwriting. We're really looking to drive gross profits that translates into net profit for our balance sheet as well as good results for our Logan investors. We're going to continue that approach.
Great. Thank you. That's helpful. Juan, I'm just curious, you may have kind of alluded to this in your comments, but what are your thoughts on the casualty reinsurance market here? Are these events gonna have a favorable impact on pricing and in terms of conditions in the casualty reinsurance markets? It sounds like you're well positioned to take advantage of that if that's the case.
Yeah, Brian, I would agree with you. Look, I think number one, I think we are very well positioned for frankly the reasons that I stated earlier, right? We're well diversified. We have the client and the broker relationships. We have the balance sheet. From that perspective, we feel very good about where we are. You saw it in the numbers that we quoted this morning, right? Our global casualty book and reinsurance grew by 16% in the quarter. The reason for that is because we do see the opportunity continuing, right? We do expect primary rates to keep up with trend in 2023 in the casualty lines. We expect reinsurance terms and conditions to be stable to improving, and that will allow us to continue to deploy additional capacity into the space.
Look, when you think about the macro factors that are impacting that, you know, there's a lot of risk in the environment, right? If you think about social inflation in the U.S., if you think about economic inflation around the world, you know, companies are being very disciplined, right? From that perspective, we do expect that pricing terms and conditions to remain favorable throughout 2023. I think that's again a great opportunity for us to continue executing on our strategy, which is diversifying the book. You know, if you look at our numbers in the supplement now, our reinsurance division is basically now split 50/50 between property and casualty. That's important because we're not a one-trick pony, right? We have levers to pull and we're pulling them.
Let me invite Jim to also maybe deepen that answer.
Sure. Thanks, Juan. Yeah, Brian, I think what our expectation is and what we're starting to see even in the, you know, the 11/1 renewals, for example, it's relatively light, but we are seeing some indications that we've really started to see the leveling of ceding commissions play itself out. We expected that to begin to occur. That is, in fact, occurring. In fact, we're starting to see some examples of ceding commissions receding a little bit, which we think is quite healthy. I do think to a degree that's tied to what's happening in the property cat market. When we engage our cedents, you know, we really try to come up with constructive solutions across lines for those customers.
In many cases, they're absolutely willing to, you know, discuss ceding commission reduction on core casualty programs, in some cases, you know, related to an increase in, you know, available cat capacity or a restructuring of another program. All the cards are on the table that way. I do think that combined with the ongoing strength in the underlying market that Juan talked about, means that casualty will be a great opportunity for us in 2023.
Great. Thank you.
Thanks, Brian.
The next question comes from Joshua Shanker from Bank of America. Please go ahead.
Yeah, thank you. I wanted to hear a little bit about your outward reinsurance purchasing, what might happen to that next year, to the extent to which you're reliant on the ILS markets and as the next few years go by and perhaps investors in those markets pull capital out, what it means for the degree to which you protect yourself in retro and reinsurance bond.
Yeah. Thanks, Josh. This is Juan. Let me start that, and then I'll ask Mike Karmilowicz to talk more about the ceded reprogram within the insurance division. Look, I think as we've talked about in the past, we are not dependent on retro, on the ILS market, et cetera, to deploy capacity. I think that is one of the significant advantages that we have here at Everest, where, you know, we have a capital shield, we have the balance sheet to be able to do what we need to do.
Some of our peer competitors are not in that situation, and it's gonna be a very difficult renewal in some ways on January 1 because they're also still at the point of trying to line up their retro and their capacity so they know how much they can deploy. We are not in that situation. We're actively working in the market to be able to deploy capacity according to the strategy that we outlined a few minutes ago. Let me ask Mike to jump in and talk a little bit about the ceded program that we employ within the insurance division.
Yeah. Thanks, Juan. Thanks, Josh, for the question. Yeah, I think specific to the insurance business, the reality is just like Juan said, we're not relying on third-party coverage. Even though we do purchase and manage our portfolio that way, it doesn't help, but not necessary for us to execute our business plan. We see that market having impact, and I think we'll see some things. I don't think it'll be material, but for us, having the wherewithal, the financial strength of Everest and having all the different scale that we've created over the last couple of years gives us the availability to be able to execute our plans without being reliant on it.
I will tell you, I do think it'll have impact on behavior of a lot of peers who are reliant on reinsurance.
Thank you. Just a question on the investment portfolio. Is there any arbitrage opportunity for you to crystallize and recognize investment losses in order to have the opportunity to redeploy at a higher yield? Or, is it just a matter of taking expiring bonds and redeploying them at the current opportunity?
Josh, it's Mark. We have that opportunity set, but we do have you know a few other considerations in that kind of you know decision tree. One, you've got the strength of the operating cash flow coming in and the maturing portfolio. That's feeding you know quite a bit of cash into the current reinvestment you know structure that we have in new money yields. The second point is, you know, where are we with rates in general? I think the FOMC caught the market off guard in late September with their rate rise. You know, you have a question here is, are they done? We've seen them kind of undershoot throughout the year, and so it's also a question of when you go in.
Having said that, I would say that we are looking to lengthen duration a bit on the fixed income side, and we do have the significant allocation to floating rate securities, the 22 points, which rises in that environment. I think we're quite comfortable with both the pace and the direction that we're moving in. But your first option is definitely something that's on the table if we want it.
Thanks for the answers.
Thanks, Josh.
The next question comes from Michael Zaremski from BMO. Please go ahead.
Hey, good morning. Follow-up to the last question on the investment portfolio. I'm curious, what's the duration of the floating rate portfolio or maybe the yield too that we should think about in the floating rate portfolio?
Well, the duration is, you know, de minimis. You're dealing with a 0.1, 0.2 type of effective duration calculation on it. The yield itself on a standalone basis is quite attractive, just depending on the, you know, the type of CLOs we're dealing with. It's pretty much an investment-grade portfolio, the triple As, the triple Bs. You're gonna get different series of yields between them. You can get anything from six handles to, you know, even upwards of a nine, on, depending on the type of credit quality that's being discussed.
Okay, interesting. Thank you. Moving to outside the investment portfolio, you know, clear in the commentary that you feel, you know, rates are in excess of loss trend, which bodes well for margins. You know, I heard your commentary on ceding commissions on the reinsurance side. Kind of just curious, have rates, and I'm maybe I just need to reread the transcript. There's a lot of good stuff in the prepared remarks. Have rates on the primary side decelerated a bit, 3Q versus kind of the first half of the year? Or are they holding kind of up?
Mike, this is Juan. No, they're actually quite steady. Frankly, in some lines they've actually improved. You know, we have not seen a deceleration in the third quarter over the second quarter.
Okay. Okay, interesting. It just sounds like you guys don't want to quantify, you know, what the dollar amount of recoveries would be between like the $48 to the $1 billion if it hits it, versus your $55 billion peg on the industry loss. Am I thinking about that correctly? It'll just be significant?
No. I was during my prepared remarks, Mike, I was making the point that we have a $350 million limit on our cat bonds between an industry loss of $48.9 billion and approximately $64 billion. It's really a pro rata recovery depending on where PCS ultimately sets their industry loss peg, right? Currently they are below that 48.9, if I recall correctly. So there is downside protection. Obviously our loss peg for the industry is 55. You'd have, you know, full recovery in essence with maybe some basis risk between our pegs and whatever the cat bond is coming out with. That gives you a sense of how it could develop.
Okay. Understood. Thank you for the color.
Thanks, Mike.
The next question comes from Meyer Shields from KBW. Please go ahead.
Great. Thank you. A couple of, I think quick questions. First, in the context of Mount Logan or ILS investors, are there new investors that are now looking at the asset class that you're either speaking with or observing?
It's Mark, Meyer. There's definitely, I think a lot of emphasis on sophisticated investors who have been in the asset space for quite some time. We have, I would say, a pretty good pipeline, a high degree of interest, you know, particularly given the opportunities they have with Everest, the fact that we have such a strong alignment with the underwriting of our cat book and the reinsurance division. From that standpoint, you know, like I said, nice pipeline and sophisticated investors and lots of money to deploy tactically, you know, at different layers. We're fortunate that we can, you know, meet those different types of appetite because of our scale.
Okay. That's very helpful. Thanks. Just a small question in terms of operations. When you've gotten events like Hurricane Ian, how should we think about the impact on the acquisition expense ratio related to just big cat losses?
Yeah, Meyer, it's Jim Williamson. I think you might be referring to, you know, primarily on the reinsurance side, in terms of what our commission ratio would be in a quarter where we have a significant cat event and reinstatement premiums. Look, reinstatement premiums do come with acquisition costs. They tend to be significantly lower than our average. You know, on balance, they would tend to bring down the average acquisition cost of the division. I think that's the question you're asking. If it's not though, please let me know.
Yeah. No, that's helpful. I was actually asking about incentive compensation and whether there's a change to year-to-date numbers, because of the loss.
Sorry, Meyer. Say that one more time.
I was asking about whether any of the incentive costs that have been accrued in the first half of the year were reversed when you've got a single large loss.
Yeah. Okay. I see your point, Meyer. On a reinsurance basis, I think that's a relatively minor issue. That would not be the factor you're describing. There's that component I would say. I don't know, Mike, if there's anything that you would add on the insurance side.
I don't have anything to add on the insurance side.
Yeah. I think it's a relatively minor issue.
Perfect. Thank you so much.
The next question comes from Yaron Kinar from Jefferies. Please go ahead.
Good morning, everybody. I wanted to circle back to the cat load. You're clearly seeing an improvement in the cat load and improvement in the market share. No doubt about that. At the same time, I think if we look at year-to-date cat losses and extrapolate into the fourth quarter, we are getting to about 10% cat load range for the year. And that's off of, I think, a relatively normal industry cat loss year of call it $110 billion. I think it's still coming up a little bit ahead of what you had guided to for the year. Was hoping to get a better understanding of that delta.
I appreciate the fact that you haven't captured any of the cap on recoveries on Hurricane Ian yet, but I would think that those only start recovering if the loss really starts spiking to the point that we are well above a annualized non-normalized cat load.
Sure, Yaron, it's Jim Williamson. Thanks for the question. It's gonna, I think, take a couple of key points to unpack the question 'cause it's an important one. I'll start with you know a little bit of a description on how we arrive at the 6% to give you some perspective on that. We leverage both external you know cat modeling capabilities, the same ones that are used across the industry, as well as our own internal analytics to perform a ground-up assessment of our in-force portfolio, which gives us an average view over you know an extended period of time of what we expect net cat losses to look like. It's important to remember it's an average. In any given year, obviously, actual results will vary from that average.
In terms of the alignment of that load to total industry losses, or the idea that, you know, we're in a period where industry losses are gonna range, whether it's you think it's $100 billion or $120 billion a year, how does that comport to our cat load? It's very consistent. Our view is that, you know, that is a relatively normal year. What you have to keep in mind is what events make up the $100 billion or $120 billion is incredibly important. I'll share some specific examples just from this third quarter. You know, we're tracking around the world 74 events that occurred during the quarter that are considered cats by the industry. Only three of them resulted in losses to Everest for the quarter, and we've talked about those.
What that means is that there are a lot of events that occur in the industry that'll drive loss for primary insurers or some reinsurers that don't result in losses to Everest. That's because we have a definition of a cat. It has to be over 10 million involving multiple cedants. Obviously, our book in various parts of the world is structured to avoid more attritional type of cat losses. That gives you a sense of that. In a year where you have a cat four, nearly cat five, Florida landfall hurricane, that's obviously going to be much more of a reinsurance event and drive more loss into the reinsurance market, which is what's resulting in our cat actual cat loss being in excess of our cat load.
Hopefully that allows you to square the circle. There's no question that you could have a year with $120 billion of cat losses where our cat load is less than 6%. You know, it really is that dependent on what events are driving it. Then the last piece, as you do mention, we're not including any cap on recovery in our estimate of net losses. My view would be if PCS continues to develop upward and does trigger our cat bonds, remember, we called it at $55 billion. My gross loss wouldn't move just because PCS gets to $49 billion, which gives us, I think, a good degree of prudence.
Above our 55 level, I think that's when the cat recovery really holds our dollar value of net losses at the level that we've indicated. We feel very good about that number, and there's a lot of prudence built into it.
Great. That is very reassuring. Thank you. My second question, and it's amazing what a difference a quarter makes. I think last quarter I asked about the 8%-12% CAGR in reinsurance CAGR target in reinsurance for three years, maybe coming in a little bit below that expectation. You know, again, a quarter makes a big difference. Just given the different market dynamics, do you think that 8%-12% CAGR may be on the low end now?
Yeah, Yaron, it's Jim again. I mean, I think the first thing I would just remind everybody of that, you know, that was an assumption that we made that was built into our strategy for getting to a total shareholder return. We have a lot of levers to drive those returns outside of reinsurance growth rate. So that would be one key point. The next is, you know, we have driven significant growth. If you think about when we made that call, you know, we were really beginning at the launching off point was the end of 2020. So we have driven very significant growth. It was very front-loaded because we saw that market opportunity, particularly in casualty. So that's very relevant.
To your broader point, do I believe that our prospects for growth in 2023 are greater now than I would've believed the last time we talked about it? Absolutely. I think the market opportunity that we all know is in front of us will give us the opportunity to drive more top line at better margins, probably with less total exposure on the property side. As Juan and others have indicated, on the casualty side, we think there's a renewed opportunity to continue our growth rate in the specialty lines. There's a tremendous amount of dislocation that's occurred due to the war in Ukraine and other factors. We think that will present some very interesting opportunities.
We continue to invest in our business, which gives us new capabilities to deliver value to our customers and drive top-line growth. I think, yeah, a quarter does make a huge difference on that front.
Yaron, the last thing I would say, and I've said it before, it's all about risk-adjusted return and expanding margins and profitability, and we see the opportunity to be able to do both.
Thanks so much, and best of luck.
Thanks, Yaron.
The next question comes from Ryan Tunis from Autonomous Research. Please go ahead.
Yeah. I guess first question, can you just give us an idea of, on the reinsurance side from Ian, the complexion of the loss between domestic Florida carriers, national carriers, and how concentrated is it in individual programs?
Yeah, sure, Ryan. It's Jim Williamson. The first thing to indicate, just when we think about our view of the industry loss, we do think this is primarily gonna be a residential driven loss, with obviously a very large component of home, but probably a bit of an outsized auto loss as well. For our particular portfolio, we will definitely be concentrated in the Florida specialists. For the most part. This is a general comment, but for the most part, our large national clients won't see significant attachment in their programs. Obviously, there'll be some loss, but not that significant. They've managed their exposure in Florida very carefully. There is that factor.
As Mark had indicated, in his comments, you know, I think that's actually quite a good thing for us because, you know, potential creep around the loss related to things like auto, for example, or commercial flooding are not gonna be a factor for us. If that, if those two factors were to drive uplift in the ultimate industry loss, that really shouldn't have an impact on our net loss. I think about that as a very good thing.
Got it. Then, just to follow up, I guess, kind of a risk management standpoint, if I look at the 10-Q, it would predict a southeast wind loss of this size somewhere between one in every 100 and one in every 250 years. Obviously, Ian is not that rare. Is there any thinking internally about maybe dusting off these models or just putting a little bit more weight toward common sense?
Yeah. Ryan, well, one, just with respect to where you ended that question, you know, we use the models for a number of things, but underwriting judgment, expertise, and a whole lot of common sense go into how we manage risk, how we set our risk thresholds, how we price our business, how we decide whether or not to participate in programs, et cetera. In terms of your point, look, I think what Ian shows, if you look at our current loss estimate at $55 billion, and our net PML statistics, it's showing more like a one in 40, one in 50, which I don't think the return period on a storm like this is that remote. I think it's more like a one in 20 plus range.
The delta between those two figures is really our prudence around the cat bond recovery. Because again, we're publishing net PMLs. Our expectation, you know, as market indicated to give you that number is if PCS catches up to our view of the ultimate industry loss, there's going to be a meaningful cat bond recovery, which would lower our net loss, which would square with our published PMLs. That's why you're seeing a little bit of headache. It's not anywhere near a 1 in 100 or 1 in 250.
Got it. I mean, the 10-Q says if this were 1 in 20, the net loss should have been half of what it was. Thank you.
Right. To Mark's point, right, we have $350 million of cat bond limit that will begin attaching just under $49 billion of PCS event and will exhaust just around $64 billion. That is a meaningful number. My view would be, remember, we've pegged the industry loss at $55 billion. If PCS begins to catch up to us and development in their numbers is not unprecedented, you know, they can travel upward a long way without having any impact on our view of our gross loss. We would begin to recover lowering our net loss. I think it tracks to my view of what a one in 20-ish type of event would look like.
Thanks, Jim.
Ryan.
This concludes our question and answer session. I would like to turn the conference back over to Juan Andrade for any closing remarks.
Thank you for your questions and the great discussion today. I think as you can hear from this management team, we are very bullish about the future and the opportunity for all of our stakeholders. The passion, the innovation from our team is palpable in every facet of this business. Thank you for your time today and for your continued support of our company. We look forward to talking to you at the end of the next quarter.
Conference is now concluded. Thank you for attending today's presentation. You may now disconnect.