Good day, everyone, and welcome to the third quarter 2015 earnings call from Everest Re Group. Today's conference is being recorded. At this time, for opening remarks and introductions, I'd like to turn the conference over to Ms. Beth Farrell, Vice President of Investor Relations. Please go ahead, ma'am.
Thanks, Tony. Good morning, and welcome to Everest Re Group's third quarter 2015 earnings conference call. On the call with me today are Dominic 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.
Thanks, Beth, and good morning. We are pleased to report another favorable quarter, despite industry losses in China and Chile. For us, these two events totaled $100 million gross and $79 million net of tax and reinsurance. We were still able to generate $200 million of operating income, producing an ROE for the quarter of 11%. Also impacting the quarter was lower investment income due to reduced limited partnership income. Investment returns continue to be an obvious challenge, which means an even greater resolve to produce adequate underwriting profit, as evidenced by our year-to-date underwriting gain of $574 million and a year-to-date ROE of 14%. I expect both our quarter and year-to-date results to be better than overall industry performance due to our well-diversified portfolio and expense advantage. The underwriting gain for the quarter was $155 million.
Absent the China loss, the attritional combined ratio stood at approximately 82%. While the insurance segments drive the underwriting profit, the insurance operation has improved its attritional combined ratio year-over-year by almost five points for the nine months. This is a result of a number of quarters of improving rates, as well as profitable growth of almost 30% during the nine months. Reinsurance, including Mt. Logan, on the other hand, had a premium decline of approximately 6% on a year-to-date basis. On a constant dollar basis, our reinsurance premium is down 3%. Several factors are contributing to this. The market environment is an important element of this, where renewal rates are down, which also causes us to non-renew certain programs or layers.
Offsetting this somewhat is the ability to move our capacity to more profitable but different layers, typically at higher attachment points and therefore less premium per dollar of limit. This portfolio optimization is done in concert with our various hedging strategies, which include use of cat bonds, ILWs and Mt. Logan. Market conditions may flatten out as industry returns are subpar, capital growth is slowing, and demand potential may be on the horizon. However, in the near term, we are not likely to see a market that would dramatically change our plans as price adequacy is mixed. This means we would continue to expect that most of our growth would come from our insurance units. The ongoing emphasis on adding superior talent and broadening our broker relationships will be key to our continued success there.
Broadening our insurance platform by developing our Lloyd's syndicate and a new Bermuda-based insurance platform will be immediately accretive. There are many new and exciting initiatives taking place at Everest in both the reinsurance and insurance businesses. From new products and effective use of capital markets in the reinsurance portfolio to line of business and geographic expansion in our insurance segment. These are all efforts that enable us to continue to generate superior returns on our capital compared to the overall market. Thank you. I'll turn it to Craig for the financial report.
Thank you, Dom. Good morning, everyone. Everest had another strong quarter of earnings with operating income of $200 million or $4.53 per diluted common share. This compares to operating income of $280 million or $6.12 per share for the third quarter of 2014. On a year-to-date basis, operating income was $755 million or $16.92 per share, compared to $812 million or $17.46 per share in 2014. The 2015 result represents an annualized return on equity of 14%. These results reflected a slight increase in the overall current year-to-date attritional combined ratio of 84.2%, up from 81.9% for the same period last year. This attritional measure includes a $60 million gross loss estimate for the explosions at the Chinese port of Tianjin. The estimate was based on a $3.25 billion industry loss estimate for this event.
Net income year-to-date was $621 million, or $13.92 per share, compared to $859 million, or $18.47 per share in 2014. Net income included $134 million of net after-tax realized capital losses, compared to $47 million of capital gains last year, or a difference of about $4 per share year-over-year. The 2015 capital losses were primarily attributable to fair value adjustments on the equity portfolio and impairments on the fixed income portfolio. The impairments mainly related to credit write-downs on energy investments. Since the end of September, the majority of the fair value adjustments on the equity portfolio have already recovered. On a year-to-date basis, the overall results reflected gross catastrophe losses of $70 million in 2015 compared to $75 million in 2014. The third quarter of 2015 reflected $40 million of gross current year catastrophe losses related to the earthquake in Chile.
This compares to $30 million of cats during the third quarter of 2014. Our reported combined ratio was 85.8% for the first nine months of 2015, compared to 83.7% in 2014. The higher 2015 ratio includes the Tianjin loss, as well as numerous weather-related losses during the year that did not meet our $10 million catastrophe threshold. The year-to-date commission ratio of 21.8% was slightly up from 21.5% in 2014, primarily due to higher contingent commissions. Our expense ratio remains low at 4.8% on a year-to-date basis. Expense dollars are up from 2014 due to new hires and the build-out of our insurance platform. For investments, pre-tax investment income was $116 million for the quarter and $363 million year to date on our $17.6 billion investment portfolio. Investment income year to date declined $33 million from one year ago.
This decrease was primarily driven by the low interest rate environment and by the decline in limited partner-
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Please stand by. Today's program will resume momentarily. We have been rejoined by management. Please go ahead.
This is Craig Howie. I know we were cut off, I'm sorry if I'm repeating anything that I previously mentioned. I'm going to start again with taxes. On income taxes, the overall year-to-date 2015 tax expense was $67 million lower than 2014, mainly due to the 2015 capital losses, which reduced income. Operating income does not include capital gains or losses. The 14.8% annualized effective tax rate on operating income is primarily driven by lower than planned catastrophe losses, resulting in higher than expected taxable income for the year. A 14%-16% effective tax rate on operating income for the year is in line with our expectations, given our planned cat losses for the remainder of the year. Strong cash flow continues with operating cash flows of $988 million for the first nine months of 2015, compared to $926 million in 2014.
Shareholders' equity at the end of the quarter was $7.5 billion, essentially flat compared to year-end 2014. This is after taking into account capital returned through $325 million of share buybacks and $126 million of dividends paid in the first nine months of 2015, representing a total return of capital to the shareholders of over $450 million so far this year. Book value per share increased over 4% to $173.76 from $166.75 at year-end 2014. Our continued strong capital balance positions us well for potential business opportunities as well as continuing stock repurchases. Thank you. Now John Doucette will provide the operations review.
Thank you, Craig. Good morning. As Dom highlighted, we had a very solid underwriting result into the third quarter of 2015, despite the industry's macro challenges. Our group gross written premium for Q3 was $1.7 billion, up over $50 million from Q3 of last year, with diverging trends in reinsurance and insurance. Quarter-over-quarter, our reinsurance book declined modestly, driven in part by foreign exchange, while insurance growth accelerated meaningfully due to our many growth initiatives. I will provide more details shortly. Our group net written premium for Q3 was $1.6 billion, which was up 3% compared to Q3 last year. Year to date, our group net written premium of $4 billion is up about 1% year-over-year and generated group underwriting profits of $574 million.
For our reinsurance segments, all reinsurance gross written premium, including Logan, was $1.2 billion for the quarter, down 5% from Q3 last year. On a constant dollar basis, premium was down only 2%. As discussed last quarter, we have been declining, reducing, and non-renewing unattractively priced business. In addition, as previously discussed, we restructured a deal for a significant client that continues to impact the top line. However, the expected profits are essentially unchanged. Our reinsurance book, including Mount Logan, generated $142 million of underwriting profit in Q3, a $77 million decrease compared to last Q3, driven predominantly by the $100 million of losses related to the explosion at the Chinese port of Tianjin and also the Chile earthquake.
The Tianjin loss, while not a natural catastrophe, was the largest insured industrial loss in Asia and also one of the most complex losses in recent history, making the outcome uncertain. As Craig reported, we have conservatively estimated our loss by assuming industry losses at the high end of the range. Year to date, our reinsurance segments, including Mount Logan, generated $574 million of underwriting profit. We are pleased with these underwriting results, particularly in light of this quarter's loss events and the prevailing soft market. With respect to Logan, AUM or assets under management is essentially flat from last quarter at about $840 million, as we do not typically take in money between 7/1 and 1/1. Investor appetite remains strong for the Everest Logan value proposition. Logan is core to our hedging strategy.
Supplemented by cat bonds, ILWs, traditional reinsurance, and retrocessional protections, we successfully enhance our capital efficiency while delivering meaningful capacity to support our underwriting strategies. Turning to the insurance operation, we are progressing with the strategic build-out of our platform while focusing on improving the bottom-line results. This has been accomplished through the investment in key leadership hires, which in turn have brought significant underwriting talent and stronger direction toward achieving our strategic goals. Through nine months, premium in this segment is up 29% to $1.2 billion. This growth is highly diversified, coming from many areas, including several newly launched lines of business, as well as product and geographic expansion in existing lines of business. We are building a world-class insurance platform capable of offering products across lines and geographies, complementing our leading global reinsurance franchise.
Year to date, we are up 35% in gross written premium on our direct brokerage business, which is underwritten internally by Everest Underwriters. Our program business is up 10% year to date. This split growth trend is consistent with last quarter and our expectations as we continue building out our retail books. Insurance rates remain mixed, with some lines seeing modest rate improvement and others coming under pressure. For the year, our rate monitoring systems indicate relatively flat risk-adjusted pricing across all lines, which we are pleased with in this rating environment. Bottom line, our quarterly insurance results for Q3 included an underwriting profit of $12 million, with a 96.5% combined ratio, over 10 points better than our Q3 combined ratio last year.
The underlying accident year results remain profitable, and we are driving improvement in our loss and expense ratio through our rebalancing of the portfolio by risk, by product, and by geography as we gain economies of scale. As previously announced, we received approval in principle from Lloyd's to launch our Syndicate 2786. We expect to obtain final approval to start business on January 1, 2016. Our Lloyd's Syndicate will provide Everest access to additional international business and new product opportunities, enabling us to further diversify and broaden our insurance portfolio in 2016 and beyond. Some further detail on what we are seeing in each insurance market. For California workers' comp, gross written premium is up 13% to $75 million for Q3 compared to Q3 last year, with a mid-90s combined ratio, but rates are under pressure with increased competition.
Professional liability premium, dominated by our financial institutions book, was $40 million for the quarter, flat compared to last Q3, and we continue to see rate pressure driven by excess capacity. Other casualty business is relatively flat quarter-over-quarter, but the combined ratio has been improving as our new initiatives gain traction and enhance diversification. In the short tail business, including property, DIC, non-standard auto, and contingency business, written premium was $80 million for the quarter, an increase of over 38% from last Q3 as we have deployed more property insurance capacity and geographically diversified the book. Despite rate pressure in property, our opportunity to deploy capital at attractive returns remains, with the book running at a high 80s combined ratio. Similarly, our contingency business continues to grow at a nice rate with attractive opportunities and new strategic relationships while running at a mid-90s combined ratio.
Accident and Health premium was up over 40% in Q3 compared to last Q3 to approximately $30 million, as several new initiatives gain traction and is running at a low 90s combined ratio. Crop conditions remain favorable, and commodity prices are stable. Our crop insurance premium is up and more geographically diversified. We are running at a slight underwriting profit for the quarter, a meaningful improvement over last Q3. The outlook is favorable for profitable 2015 results. In summary, given our new growth initiatives, particularly on the insurance side, as well as our ability to deploy capital effectively on the reinsurance side, due to our core strengths and sustainable competitive advantages, we continue to achieve bottom-line results that are among the best in the industry. Thank you. Now back to Beth for Q&A.
Yes, Tony, we are ready for questions. First, I'd like to apologize for the connection issue, which seems to be coming from our end. If we have a future connection issue, please stay on the line and we will call back in. Thank you. Tony?
Thank you. At this time, if you would like to ask your question, simply press star and one on your touch tone telephone. If your question has been answered or you wish to be removed from the queue, please press the pound key. Again, that's star and one to ask your question. We'll take our first question from Amit Kumar with Macquarie Research. Please go ahead. Your line is open.
Thanks, and good morning, and congrats on the quarter. Maybe two quick question. Number one is the discussion on the underlying AYLR in the insurance segment. Can you talk about, I know you talked about the 10-point improvement. If we adjusted for the agriculture book, what would that number be, ex ag, for the insurance book on an underlying basis, on an apples-to-apples basis?
Give us one second. It's 96% for the quarter, Amit.
Yep.
As far as our attritional combined ratio without crop, it's 96% compared to 95% last year. I'm sorry, 96% for the quarter, 94% year to date.
Got it. Okay. That's helpful. Thanks. The other question I had was the discussion, obviously, on growth versus capital versus now talking about the Lloyd's, which has a stamp capacity of, I guess, $151 million. The buyback this quarter was a bit higher than, I guess, what we were expecting, and I'm trying to think about that. Was it higher because of some sort of catch-up? Because on the Q2 call, you had said that it was running a bit lower. Is that simply the fact, or is this sort of a new normal? How should we think about the repurchase this quarter? Thanks.
I think, Amit, you should think about perhaps a little bit of a catch-up. We were lighter than.
Yep
certainly anticipated in the second quarter as the price target kind of ran away from us a little bit in the second quarter. We just continue to have steady progress towards repurchasing shares. We continued that into the third quarter, particularly as we grew, as we were going through the quarter, it seemed as if it was going to be a light cat quarter.
Got it. Can you just touch upon the Lloyd's? When does that fully ramp up, the $151 million stamp capacity?
We expect to go live with Lloyd's in the first of the year.
Got it.
Subject to final approval by the franchise board, our business plan, et cetera. We're on track to do that effective one/one.
Got it. Okay. That's all I have. Thanks for the answers.
Thank you.
Thank you. Next, we'll move to Joshua Shanker with Deutsche Bank. Please go ahead. Your line is open.
Good morning. Thanks for taking my question. Dom, whether you like it or not, everyone looks at you as all bad things happening in Latin America must be happening to Everest Re. So when the largest recorded hurricane in history is bearing down on Puerto Vallarta, how should we think about the pricing in the Mexican market? How should we think of aggregate risks that Everest is taking? Why or why not are investors conspicuously concerned about Everest to their benefit or to their detriment?
Well, I can't speak to why investors are conspicuously concerned or not concerned. All I can speak to is what we try to do. We manage our accumulations by each of our zones. Of course, as you know, and others know, our largest zone is in the southeast U.S., and of course, we manage that down from there. Relative to what was happening in Mexico, as an example, or in Latin America, for that matter, the industry was quite lucky, of course, that event did not hit some of the more occupied regions in the resort areas. Interestingly enough, in more recent times, we actually downsized some of our participations in Mexico due to pricing terms and conditions. As we continue to emphasize in each of these calls, we will look for fairly priced transactions.
If it cannot meet our hurdle rates, we will terminate or look to change our participations in some ways that matches our risk-adjusted return targets that we have. We continue to manage our PMLs consistent with our balance sheet, and we believe that what we're doing in terms of managing our risk through cat bonds, ILWs, and Mt. Logan effectively right sizes that risk relative to our balance sheet. I think we benefit, frankly, from the diversification that we have across the globe as opposed to thinking about a particular event in some region of the world. As you probably have noted, our TNJ loss was probably slightly below what others have reported. Again, I think it's a result of those actions that I've just described, where we actually got off some deals. Actually, our exposure turned out to be less.
In Chile, we write much less proportional business than we did previously. Of course, that event, again, hitting offshore, the insured loss was not as great as maybe was originally feared. I think on balance, again, the portfolio is diversified across the globe, which frankly we believe benefits us from a return perspective in using our balance sheet most effectively. I hope that answered your question.
To some extent. It's an open-ended question. The other question I had is, you mentioned in the previous questioner that the stock price got a little bit away from you in 2Q. The stock price was between $180 and $185 in the second quarter. Are you trying where possible to buy stock at book value and not above? Is $180, $185, when you have $175 in book value, a significant premium to where you want to buy?
Pardon the interruption, Mr. Shanker. It looks like we did unfortunately lose our speakers once again. If you could please hold your question, we'll get them reestablished as soon as possible.
What did you say?
We've been rejoined by our speakers. Joshua, if you wanted to ask your last question again.
It must be that industry low expense ratio coming through here, guys. I don't know.
I think we were going to make the same comment.
Hat tip to my associate who pointed that out, by the way. The question was, you mentioned in the previous question that the stock kind of got away from your repurchase desires in the second quarter. It was only bobbing between 180 and 185. Are you trying to buy at book and not above?
Not necessarily. We do look out over a six to 12-month period. We just had a price target for that particular period, and the stock just kept moving ahead of that. It's nothing more complicated than that. We think over the long term, we have been repurchasing stock, and we look to do it, not at a specific target that we care to share in a public setting, but we just have a measured approach to how we do it, and over the long term, we've returned plenty of capital.
Excellent. Thank you very much for the answers.
Thank you, Josh.
Thank you. Next, we'll move to Vinay Misquith with Sterne Agee. Please go ahead. Your line is open.
Hi, good morning. I just wanted to follow up on the capital question. You have several new initiatives this year. You also have the Lloyd's next year. Curious about whether you want to build up capital next year, or do you think you could return all the earnings that you generate to shareholders next year?
Vinay, I'll give the standard response of the question that we get every quarter in that regard, just you folks find unique ways to ask it each time. It's we don't put out any forecast, any of our repurchase plans. We look at it quarter to quarter based on what we think are the opportunities that are ahead of us, and based on where the stock is trading. We don't commit to any levels of repurchases, particularly out a year in advance.
Sure. Let me just put it another way.
You can try.
Do you have sufficient capital right now on the books to write the new business, or do you need to build up some more capital?
We do have sufficient capital. We do like to maintain some bit of excess capital. Again, as I've mentioned in previous calls, the rating agencies have increased, particularly S&P has increased their capital requirements. That excess position has shrunk a bit, just based on rating agency actions.
Sure, fair enough. Then on the growth on the primary insurance side, it appears that some of the growth came from short tail lines. I think that was up 40% this quarter, and also the accident and health, and also you're planning to go under Lloyd's. Help us understand the risk management that's in place for that. These lines seem to be, I think, under some pressure now, help us understand what risk management put in place for that.
Well, first of all, we have our risk management committee that reports regularly to the board, so I will point that out. We monitor if your question is about accumulations.
Well, I say, Dom, sort of more in the sense of people in the industry are saying pricing is weak in these lines, and we're seeing that, I mean, using growth right now from Everest. Just curious where you're finding pockets.
Let me just add to that. Because pricing is, I would say it's weaker, it does not mean necessarily that it's not adequate. For example, as John Doucette highlighted in his comments, we talked about casualty being flat year-over-year. That's kind of a reflection of what's going on in the market and perhaps what we feel are adequate returns relative to what we're seeing. In the property space, we're still seeing many opportunities. A&H is a specialty segment, which we experienced nice growth in, as well as some new product opportunities. Our contingency business/sports and entertainment book is again, a specialty business that is not necessarily subject to some of the pricing pressures that you mentioned. In addition, we've done some things in Canada which have given us some growth.
California DIC, while things have flattened out there, from a returns congested return perspective, it's still very good business. All of these pockets we do monitor for each and every month and quarter in all of our classes of business on the insurance side.
Vinay, it's John. I just want to add a couple more things. You mentioned property specifically. We've talked about this before, but I think it's worth repeating. We have one global catastrophe property and catastrophe pricing and accumulation system which every underwriter around the globe, whether that's insurance, facultative, treaty, ILWs, selling, buying, retro, and products we've talked about before, peril by peril, whether it's for an individual building or it's a territory, multiple territories or worldwide capacity. We have a view of risk built up by a lot of analytics and a dedicated cat team that is central, and we can look at the relative pricing and the absolute pricing over time and across product irrespective of where it is, what form, what territory, and we can allocate cap
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We apologize. We're going to a different room and a different phone. Let's see if this works better. I think John was responding to the question when we got cut off. Is that correct?
Yes.
Okay.
Just to finish the thought, again, I apologize if I'm repeating myself. We have one system for globally by product, irrespective of the product. Every underwriter on their desk has that. It rolls up for real-time accumulations, real-time pricing, whether it's insurance, fac, treaty, retro, or any other products that we sell. We have a new Chief Underwriting Officer as part of the building out the insurance leadership team, whose job is responsible to make sure we're getting paid adequately for the risk that we're taking on a risk-adjusted basis. We continue to have the advantage of the various capital markets, convergence vehicles and structures that allow us to have capital efficiencies for the products that we sell and help the group get the most capital efficiency and the best risk-adjusted return.
Sure. That's helpful. Are you seeing pricing on the primary side better than on the reinsurance for property?
It varies. It doesn't boil down necessarily to one answer, but directionally, there's certainly cases of that, yes.
Okay. Thank you.
Thank you. Our next question will come from Kai Pan with Morgan Stanley. Please go ahead.
Thank you. I would add that we probably should all buy basic interruption insurance for conference calls. All right. I'll start with your take on the upcoming BCAR changes, what potential impact for the reinsurance demand?
I can't comment specifically because I'm not sure that we know all the details of those changes at this point other than to know that we do expect that it will have some impact for certain clients. That is, I did mention in my comments that we would expect some increase in demand, and frankly, that would be one of the reasons that we'd expect some increase in demand. I really can't give you any specific on what that might be for the industry as a whole.
Okay. More broadly for the sort of upcoming renewal in January 1, seems like you're more confident at this time that the rate will become more stabilized than the past renewal season. What could go wrong from here?
Well, I suppose what could go wrong is that rates are down another 5%-10%. That would be wrong, and that would cause us to continue to make major modifications to our portfolio. Coming back from two major industry events, there are certainly mixed thoughts on that subject. Given where we see the industry, where we see returns, what we see from a capital markets perspective, it doesn't look to me as if it should be a market that's continuing to slide dramatically.
Okay, that's great. Just quick number question. Do you have a breakdown of the $6 million change in losses by segments? Also on Volkswagen, what's your view on industry exposure as well as Everest Group's exposure on that event?
The P&L loss by segment, when you say segment meaning our segments?
Yes, reported segments.
I'll ask Craig to answer. The majority of it is in international, our international segment. Essentially from our Singapore office, but also from our Bermuda operations as well.
Okay.
I'm sorry, what was the second question, Kai?
On the Volkswagen potential industry exposure there.
I think we have something like $12 million of limits exposed to Volkswagen, we have not heard anything on that point.
Okay, that's great. Well, last question, if I may, on the insurance growth and margin. Looks like you're growing pretty fast, especially in short tail and accident health, which has lower combined ratio, underlying combined ratio than the group. Shall we expect mid-90s combined ratio continue to improve given the high growth coming in from those lower combined ratio business? If you're stepping back, the last period you have higher growth in the primary line of business was in early 2000, which eventually doesn't help the company. I just wonder what give you confidence that what you're doing now that's different, and your confidence by the probability going forward? Thanks.
There's a lot to that question. First of all, yes, that's certainly our plan to continue to have the insurance combined ratio to continue to trend down. We have every expectation that that would happen over time. Relative to the early 2000s, well, part of that growth was California comp, which actually over the very long time period, the 13 to 15 years that we're talking about, was hugely profitable. Yes, there were periods where the comp turned into a loss for a period there. If you look at the body of work over that entire cycle, it's been extremely profitable, probably close to $1 billion of profit in total. The other parts of growth from the insurance space that emanated from in the time period that you're referencing was a lot of program business. As we cited, we're de-emphasizing the growth.
Our growth primarily is coming from the brokerage space, the retail space, where we are underwriting risk by risk and not relying or dependent as much upon growth in the program space. Doesn't mean that we won't continue to do business with great partners in that space. It just means that we're a lot more selective, and we have other ways in which to grow the insurance portfolio. By that I mean in the direct broker space, where you control the account, and you control the underwriting at the desk level.
That's great. Thank you so much for all the answers.
Thank you, Kai.
Thank you. Next, we'll move to Sarah DeWitt with JP Morgan. Please go ahead. Your line is open.
Hi, good morning. As you look out a bit longer term, how do you see the business mix evolving between insurance versus reinsurance?
Well, as I mentioned in my comments, I certainly expect in the short term, given what we expect out of the reinsurance market, that it's likely to be that insurance will become a bigger part of the pie. If you look out over the very long term, I would expect that to be the case as well as we look to rebalance our portfolio. We don't put out any prognostications about what that percentage may or may not be. We frankly take advantage of what the marketplace is giving us in each part of the cycle. Pricing looks more adequate and a very hard market in the reinsurance space, and you're likely to see strong growth spurt there.
It doesn't mean that it would necessarily be a change our appetite in the insurance side, it's just a matter of which segment is growing faster than the next due to pricing adequacy.
Okay, thanks. I think historically, you've targeted a 12%-13% ROE, assuming normalized catastrophe losses. Is that still an achievable goal as we think about 2016? I think that'd probably be better than the industry as well.
If you're asking including cat losses or exclude cat losses?
Including some level of normalized catastrophe losses.
I do think that's potentially achievable. I don't know, given where pricing is today on the reinsurance side, ex cats, whether 13 might be pushing it. Again, we don't forecast our results. Relative to what real rates are, I think that's still a great return. I do think our target's low teens, absolutely.
Okay, great. Thanks for the answer.
Thank you. Next, we'll move to Meyer Shields with KBW. Please go ahead. Your line is open.
Thanks so much. Two maybe big picture questions. One, is there any reason to expect the historical cycle in California workers' comp to not play out with this year or next year looking really good and then things getting worse?
I don't know that on any line of business that I'd fight any historical cycle. There are cycles in every segment of our business, and I don't know why California comp would be any different than any other segment of the business.
Okay. Me neither. Second, setting aside pricing trends and underwriting decisions, is there any risk to the reinsurance book from the efforts you have in insurance in general or maybe opening a Lloyd's platform from companies that you're now competing with more directly?
I think that risk is moderate at worst. I think that as you look across the industry landscape, most enterprises have both an insurance and a reinsurance footprint, even to the point where some more traditional insurance enterprises have started up reinsurance arms. I don't see that as much of a threat.
Okay.
In particular, what we do in the insurance side is mostly specialty lines of business.
Right. Understood. Is the run rate for expenses in insurance likely to rise as Lloyd's goes live?
Well, in our numbers already this year to date, we've expended some monies to get this project off the ground. Certainly Lloyd's does have a slightly higher expense ratio. Given the amount of premium relative to our $5 billion of gross premium across the organization, I'm not sure that would really make much of a difference.
No, that makes sense. Great. Thanks so much.
Thank you. We'll take our final question from Ian Gutterman with Balyasny. Please go ahead. Your line's open.
Hi. Great. Thanks. I guess on the insurance business, as the book is growing and changing, is there any seasonality to it? I guess the reason I ask is normally Q3's been a little higher than the first two quarters, but this year was much higher. Is there something seasonal about that, or is that just the increased growth and think of this as sort of more of a normalized?
Well, the insurance side, remember, is influenced by crop-
Right
which does have seasonality to it. To the extent that there is some seasonality that would come from our property E&S book, to the extent that we have some of that in the southeastern U.S. We haven't had any major events, so there hasn't been losses coming from that. Again, property E&S, to the extent that it's growing, and it has been growing in the Northeast, could have some impact from winter storms. Yeah, there'll be pockets of seasonality across the portfolio.
Okay. Got it. Okay.
John wanted to add something.
Yeah.
Sure.
The second part of your question was, or is it tied to growth initiatives? We've been talking about growth initiatives, and we've been putting in place a lot of different resources. We've been hiring talent. We've been building the infrastructure on the insurance side, and that takes time. We've been talking about that for several quarters, and it's starting to kick in, including in this third quarter. We're seeing the fruits of the plan and the resources and the labor that we've committed to growing the insurance book. It's that combined with the seasonality that Dom alluded to.
Got it. No, I clearly realized it's both. I just didn't know if I should discount a little bit of the magnitude of the increase this quarter was all I was trying to get at. Okay. Moving on, I guess just to follow up on the Lloyd's question, can you talk more about specific business plan? I don't know what stamp capacity you've been approved for or what sort of lines of business you're targeting initially. Is it going to be property type stuff, or might you try to do cover holders or even some casualty? What's the focus going to be?
A significant portion of it is professional liability, D&O, E&O, commercial D&O and E&O. We also will have some reinsurance business that will flow through the syndicate, particularly as our China and perhaps Australian business, because of expense advantages of running it through that platform.
Okay
Relative to keeping it on the reinsurance, on the company paper, because particularly changes in China from a regulatory perspective, we won't have to put bricks and mortar in China. That's one example. We will be granting cover holder status to a number of underwriting units around the globe, to utilize the syndicate. There will be some sports and entertainment business, for example, and contingency business, that would come into the syndicate, generally.
The stamp capacity is $150 million, roughly.
Got it. Great. Thank you. Then, on Tianjin, this feels to me, I guess I'm asking for your opinion and maybe some detail as well. It feels to me like this is one of those losses, maybe like a Deepwater or a Costa, where it seems the primaries themselves don't really have any great insight into what the loss is. It seems when we get those types of events, they tend to creep over time. Does this feel like one of those where you're worried about creep? If so, as you were looking at how much put up this quarter, how did you account for that?
I'm not sure that it's really like Costa because, with that, it was a salvage situation, and that really is what was driving up the cost tremendously.
Okay.
Here, you have, frankly, complete destruction. My understanding is that the area has been completely leveled. I don't know that because there are discrete values, I think that would be less of an issue as contrasted with Costa. I guess, the other question will be, maybe the more uncertainty would revolve around any kind of BI, contingent BI claims that might be coming out of it.
Okay
again, we reserved it at the high end of the range, based on the estimates. As I mentioned before in answer to another question, our participation in the region actually reduced. We're feeling comfortable with our pick. I'm not sure that any movement around that pick is necessarily all that material to us.
Perfect. Just lastly, just to follow up on the BCAR question from earlier, what about as far as your underwriting appetite, does anything potentially change there? I think one of the more heated topics on that is the changes in the tail factor on CAT. Does that have to change how you would look at tail beyond 250 or maybe how you look at aggregate covers versus occurrence covers, things like that? As far as your appetite to write them.
We have always looked at, in terms of pricing and accumulation, all points on the curve to the 1 in 10,000 and beyond. We look at AO, we look at annual occurrence, we look at aggregate, we look at multiple events, we look at things that happened, whether it was 2005 with Hurricane Katrina, Hurricane Rita, Hurricane Wilma, or 2011 with the multiple events around the world. We think about that as we create, manage our book and try to get the best risk-adjusted return. In general, if BCAR, which we think it will, increase demand and therefore increase limit that's going to be purchased potentially by our customers and therefore upward pressure on pricing, that's a good thing. We have the capital to support that.
Including both our own equity capital and the various hedges that we've been talking about for many quarters now that we've put in place. We think that's going to put upward pressure and upward demand, and we like that.
Great. Thanks so much. Good luck, guys.
Thank you.
Thanks, Ian. I understand from the moderator that that was the last question, but because of our interruptions, if there are other questions out there, we certainly would spend a few minutes.
Again, that is star and one if you'd like to ask your question. It appears we have no further questions at this time.
Okay. That's fine. Just wanted to offer that up.
Thank you. As always, we'll see you next quarter.
Thank you very much. Again, apologies for the connection issues we've had. We appreciate the interest. Again, we think we've had an excellent quarter. We've had some events, I think what you've seen, the way Everest has performed, with the scale and diversification of our book. Despite those industry losses, we're still able to produce very, very good returns. I think it's just a reflection of how we manage our book of business. Thanks again for your interest.
Thank you. This does conclude today's conference. You may disconnect any time and have a great day.
Thank you.