Good everyone, and welcome to the Everest Re Group, Ltd. First Quarter 2014 earnings call. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference to Ms. Beth Burks, Vice President of Investor Relations. Please go ahead, ma'am.
Thank you, Augusta. Good morning and welcome to Everest Re Group's First Quarter 2014 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 to all. We are pleased to report another excellent quarter, which continues to improve on the trend from last year. The attritional combined ratio for the first quarter improved to 80.4% from 81% for the full year of 2013. Premium volume continues to grow, rising 7% over last year. Despite softening the property cat market, there are still sufficient opportunities for profitable growth for Everest given our scale and financial strength. John will get into further detail in his report, but as evidenced by the improving combined ratio, the growth has come with improving margins, which is partly the result of new products, particularly in the credit and specialty line space. In the property reinsurance lines, where there have been rate reductions, we continue to modify our portfolio to achieve the best risk-adjusted return.
For example, in Canada, where rates were going up for property catastrophe-exposed lines, we committed more capacity. Likewise, in other territories, we reduced or moved to different layers or moved to pro rata from excess, or we wrote different types of product. Of course, we did renew accounts at reduced rates, but only when they met our return hurdles. In most regions, there is still business at attractive rates. I must emphasize that the ability to diversify and remain flexible is the key to improving margins. An additional tool that has enabled us to improve our net position is our capital markets platform, Mount Logan. This has enabled us to increase our share across many programs and bring new product to market, while at the same time earn fees and profit share on the business sourced.
A key value of our global franchise is being able to marry the risk appetite of the capital markets with a global, well-diversified source of business constructed by best-in-class underwriting and analytical skills. There are not many that can duplicate this value proposition. You also no doubt saw that we recently came to market for a cat bond placement. This is another capital market vehicle allowing us to leverage our underwriting ability and marketing reach across a larger capital base. This transformation of our business, at least for now, is about capital management. Capital is now available in many forms, and while this can cause us to reshape our capital structure, one thing is constant: developing business, underwriting that business, producing contracts, and paying claims. These additional forms of capital provide more options for managing our equity base and funding growth.
We are flexible and adaptive to change that can add value to customers and shareholders. You've also heard us speak about our insurance operations as another source of business that can be a diversifying risk. For these reasons, we have continued to increase our emphasis in building this business out further while remaining focused on improving results. In the first quarter results, we are clearly seeing the early signs of this progress with a 98.2% combined ratio. At the same time, we have already expanded into new products and territories. Excluding crop insurance, which was down in the quarter, our insurance book grew 10% in the first quarter. Craig will explain the adjustment in crop premiums for the first quarter.
Our crop business remains an important part of our strategy, we'll face some downward pressure on the premium side, in part because of the decline in commodity prices from last year. The plan is to grow our footprint as diversification is key to developing and managing a profitable book in this sector. As we move forward, the significance of emphasizing underwriting profitability in all segments takes on even greater importance as investment income continues to come under pressure. In a low-rate environment and in a business where asset allocation is closely followed by rating agencies, there are limited options. We were an early adopter of different asset allocation strategies, which has kept our returns amongst the best in the sector. Given constraints, we are not expecting dramatic changes from here. We will continue to be active but prudent in terms of allocation.
Despite these headwinds, whether it is a tough rate environment, third-party capital, or declining investment income, we had another terrific quarter with net income of almost $300 million and return on capital of 17%. We expect this to continue through the remainder of the year, absent any significant events. With these results and our focus on managing capital, we're pleased to be able to return to shareholders $285 million in the first quarter through share repurchase and dividends. This is a record for us in any one quarter. We are committed to returning capital consistent with the needs of the business. Thank you. Now to Craig for the financial highlights.
Thank you, Dom, and good morning, everyone. We're pleased to report that Everest had another strong quarter of earnings with after-tax operating income of $281 million, or $5.93 per diluted common share for the first quarter of 2014. This compares to operating income of $301 million, or $5.88 per share for the first quarter of 2013. Net income for the first quarter was $294 million, or $6.21 per diluted share, compared to $384 million, or $7.50 per share in 2013. Net income includes realized capital gains and represents an annualized return on equity of over 17%. These results were driven by a solid underwriting result, offset by lower net investment income compared to the first quarter of 2013. The results reflect the continued improvement in the overall current year attritional combined ratio of 80.4%, down from 80.7% at the first quarter of 2013, and down from 81.0% at year-end 2013.
This measure excludes the impact of catastrophes, reinstatement premiums, and prior period loss development. The total reinsurance attritional combined ratio was 77.3%, compared to 76.8% in the prior year first quarter. The slight increase in this ratio for the reinsurance portfolio was anticipated after the January 1 renewals and with the additional pro rata business written. The insurance segment attritional combined ratio was 97.2%, compared to 98.5% in the prior year. However, eliminating the effects of the primary crop book, this ratio would have been 92.8%, compared to 95.9% in the prior year. All segments reported underwriting gains for the quarter. Neither this year nor last year included any catastrophe losses in the first quarter. Total reinsurance reported an underwriting gain of $215 million for the quarter, compared to a $210 million underwriting gain last year.
The insurance segment reported an underwriting gain of $4 million for the quarter, compared to an underwriting gain of $193,000 last year. Each year reflected an underwriting loss for crop insurance in the first quarter due to the seasonality of crop premium. Earned premium for crop insurance declined $17 million in the first quarter of 2014 compared to last year. The estimated premium was adjusted to reflect the lower than expected premium for the winter crop season due to the re-underwriting of the book and commodity price reductions year-over-year. Based on current prices, we expect the crop premium to decline for the full year of 2014 as well, compared to 2013. Mt. Logan Re's financial position and operating results were consolidated into Everest beginning July 1, 2013. These results were included in a separate segment and reflected a $10 million underwriting gain in the first quarter of 2014.
Everest retained $2 million of income, and $8 million was attributable to the non-controlling interests of this entity. The overall underwriting gain for the group was $228 million for the quarter, compared to an underwriting gain of $210 million in the same period last year. Our reported combined ratio was 80.0% for the quarter, compared to 80.7% in 2013. Our low expense ratio of 4.4% continues to be a major competitive advantage. On reserves, our overall quarterly internal reserving metrics remain favorable. For investments, pre-tax investment income was $123 million for the quarter on our $16.8 billion investment portfolio. Investment income declined $23 million from one year ago. This decrease was primarily driven by the decline in the limited partnership result for the quarter. Although low reinvestment rates and capital used to redeem stock and debt also contributed.
Limited partnership investments resulted in a loss of $2 million for the quarter, compared to a $17 million gain in the first quarter of 2013. Our existing limited partnership portfolio is fairly mature, and we are starting to see a decline in current gains coming from these investments. Despite the declining rates, our investment portfolio continues to perform well. The pre-tax yield on the overall portfolio was 3.1%, with a duration of just over three years. The quarter reflected $13 million of net after-tax realized capital gains, compared to $83 million last year. These gains are mainly attributable to fair value adjustments on the equity portfolio. There were $2 million of derivative losses during the first quarter, compared to $15 million of derivative gains last year. This is related to our equity put options and is a function of the change in interest rates during the first quarter.
On income taxes, the 13.8% effective tax rate on operating income is in line with our expected tax rate for the year. Stable cash flow continues, with operating cash flows of $367 million for the quarter, compared to $259 million in 2013. This is despite the high level of catastrophe loss payments over the past few years. Shareholders' equity for the group was $7 billion at the end of the first quarter, up $69 million from year-end 2013. This is after taking into account capital returned through the $250 million share buybacks and the $35 million dividends paid in the first quarter of 2014. Book value per share increased 4% to $152.80, from $146.57 at year-end 2013. Our strong capital position leaves us with capacity to maximize our business opportunities as well as continue share repurchases. Thank you.
Now John Doucette, our Chief Underwriting Officer, will provide the operations review.
Thank you, Craig. Good morning. As Dom highlighted, we had a strong start to the 2014 year. Our group first quarter 2014 gross written premium was $1.3 billion, up $90 million from Q1 of last year, with growth coming predominantly from U.S. reinsurance and international reinsurance. For our reinsurance segments, total reinsurance gross written premium, including Logan, was $1.04 billion for the quarter, up 12% from Q1 last year. As mentioned on the last earnings call, we continued to benefit from flight to quality, rolling out new products, expanding our relationships with some larger clients, and writing U.S. property exposures domestically as we leverage the competitive advantage of our high ratings and significant capacity.
We have continued to make progress in our multi-line initiative in the U.S.A., developing new relationships and broadening existing relationships with multi-line clients, as our underwriters' relationships with those clients go back for many years, sometimes decades. In Q1, we also deployed capacity on several short-tail quota share treaties at terms we found attractive, expanded our Portfolio writings, and continued to deploy capacity this quarter in credit-related opportunities. Total reinsurance, including Logan, bottom line, we had a very solid quarter, with underwriting profits of $225 million, up 7% compared to last year Q1 underwriting profits. Now, some color on April 1st reinsurance renewals. For our overall reinsurance book, we grew our global property gross written premium and continued to see dollar margin expansion in the overall book at 41% compared to last year, with the combined ratio and the expected risk-adjusted returns remaining flat from the prior period.
This demonstrates the strength and the diversification of our business. That said, specifically for Japan, our premium dollars in Japan were down from last year due to the following reasons. The continued consolidation trend among our long-standing clients, resulting in merged reinsurance treaties and, in some cases, less pro rata premium. Japanese exchange rates caused a decrease in gross written premium in U.S. dollars. Rate decreases on Japanese excess of loss treaties of 10%-15%. Turning to our overall casualty reinsurance book globally, while primary rates remain attractive because of deploying capacity on risks which appear to have heavy competition. Nonetheless, we continue to find new insurance and reinsurance products and new deals where we can and will deploy our capacity at attractive risk-adjusted rates.
Through the first quarter and at four one, we continued to roll out and utilize Mt. Logan Re and saw these benefits at each renewal as it allowed us to deploy larger lines on attractively priced treaties and provide more capacity to targeted clients while containing our PMLs. We are pleased to report that with additional capital raised at four one, Logan is now in excess of $400 million in AUM, and again, 100% of the Logan capacity is fully deployed. This success continues to highlight the significant value proposition we bring to our capital market investor partners in Logan while being completely seamless to our clients who continue to deal with the same core reinsurance trading partner, Everest, as they have for many years.
This smooth, flexible deployment of capacity to our clients has helped us secure better signings on many non-cat exposed classes as more of our clients look to have broader and deeper relationships with fewer high-quality reinsurers. In addition to Logan, we have initiated other PML and capital management strategies. As Dom mentioned, we recently obtained $450 million of fully collateralized catastrophe reinsurance coverage funded in the cat bond market. This coverage was purchased through Kilimanjaro Re across two layers. One layer is an occurrence-based deal providing tail protection for Southeastern U.S.A. wind risk, and the other layer is an aggregate cover providing tail protection for all natural perils in the U.S. and Puerto Rico, as well as British Columbia earthquake risk in Canada.
The combination of Logan, cat bonds, and other reinsurance and retrocessional protections from both traditional and alternative markets allows us to match our portfolio of risks to the best capital structure. This in turn allows us to broaden our product offerings and our value proposition both to our clients and to our shareholders. With this flexibility on how and where we deploy our underwriting capacity, combined with flexibility of the form of our capital structure to manage those same risks, we believe we can and will continue to improve our risk-adjusted returns and improve our cost of capital. In the end, we are pleased with our Q1 reinsurance results and continue to nimbly identify, execute, and deploy capital to profitable opportunities across the global reinsurance market. Turning to our insurance operations, our premium was $230 million in Q1, down from last year's Q1 gross written premium of $250 million.
This decrease is primarily driven by premium adjustments for Heartland's crop book for the reasons which Craig mentioned. Stripping out Heartland premium, our insurance operations GWP is up 10% year-over-year for Q1, with most other insurance segments showing growth, reflecting the impact of the initiatives we have put in place over the last couple of years. We continue to see profitable growth opportunities in many areas, and we have been successful growing in those areas that we have targeted, including non-program workers' comp, casualty, specialty lines, property E&S and DIC, non-standard auto, and accident and health. We continue to see primary rate improvements in almost all insurance segments. We have seen some weakening in some of the professional insurance lines where we remain cautious in our deployment of capacity.
Our California workers' comp book saw an average of 8% rate increases in the first quarter, continuing the significant rate increases for the last several years, providing a compound rate increase in excess of 60% over the last five years. We continue to see profitable growth and positive rate increases in our property E&S and DIC books and see that footprint expanding throughout the rest of 2014 as primary rates have been holding across this book. Bottom line, our reported insurance results were positive with a 98% combined ratio for the first quarter. After eliminating the effects of Heartland, the combined ratio was 94%, down two points when viewing Q1 2013 on a comparable basis.
We are pleased with the underlying trends in our insurance book as we begin to see the positive results of our initiatives over the last several years, with noted improvements in both loss ratios and expense ratios. In summary, around the globe, we are viewed not only as a lead reinsurer in all P&C lines of business, but also as a creative problem solver, and we continue to be given the opportunity with our broker partners to structure new deals, new products, and alternative solutions for many of our corporate and insurance clients. We remain very bullish on our future.
Thank you. Now back to Beth for Q&A.
Yes, Augusta, we are open for questions, ma'am.
Thank you. The question and answer session will be conducted electronically. If you would like to ask a question, you may do so by pressing the star key followed by the digit one on your telephone. If you're on a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's star one if you would like to ask a question. Our first question will come from Jay Gelb of Barclays.
Thank you. On the insurance segment, with the 94 combined ratio excluding Heartland in the first quarter, is that sort of the right run rate we should anticipate for the rest of the year, barring any unusual items?
Jay, this is Dom. That certainly would be a reasonable assumption.
And-
It could improve from there, due to continued improvement in California comp. That's a reasonable assumption.
Including the crop book, would it be a couple points higher all in?
The crop book, actually for the year, we're still anticipating at this point mid-nineties combined. To low nineties combined, depending on the outcome of winter wheat. Generally, we're expecting the overall number to gravitate towards the mid-nineties on an actual year basis.
The next issue is on partnership income. Craig, I think you mentioned that part of the decline was reflecting the book seasoning. Just trying to get a perspective on, for the remaining quarters, maybe what we should be penciling in in terms of partnership returns.
Well, as I said, we're starting to see a slight decline because they're becoming fairly mature. As you noticed, even over the last several quarters, it has started to come down. This quarter, we happen to have one partnership that threw off a loss of over $5 million, which is what was driving the $2 million loss in the quarter. It has been coming down over the last several quarters.
Right. In the back half of last year when it was running in that kind of $5 million.
$5 million per quarter.
Yeah.
I think that's probably a better estimate, Jay.
Okay, that's helpful. Dom, do you have any thoughts or commentary on the recent movement we've seen in Bermuda between Endurance and Aspen? Does that change your view at all on M&A in Bermuda or anticipating any sort of increased consolidation beyond that transaction?
Well, I didn't expect that question right out of the gate. I think, first of all, let me just say it certainly would be inappropriate for me to comment on the transaction per se, and I know that's not what you're asking about. Clearly, I think that, as we've been discussing in some of our opening comments, we have benefited by, for example, by our scale and our strength in the marketplace and our capital position. I think in part, this transaction or transactions like this are in fact an attempt to achieve a different level of scale in the marketplace. It doesn't surprise me, not particularly this transaction, but that we would see transactions like this bubble up in the marketplace for that reason.
The other reasons I really wouldn't be in a position to comment on, but I do think that's in part what's driving this particular idea and perhaps ideas like this in the future.
I appreciate that. Thank you.
Our next question will come from Vinay Misquith of Evercore.
Hi, good morning. First, just a numbers question. Curious how much was the crop insurance negative adjustment? I believe you mentioned $17 million. Was that for the earned premiums? Was the adjustment $17 million, or was the premiums down $17 million?
The earned premium was down $17 million. The net premium that was written is down $40 million for the quarter.
That's right. What was the impact of just the adjustment? Was that the entire $40 million? Sorry.
Down $15.
Okay, down $15. Okay, fine. That's the adjustment. Okay. The second is, we've seen that Citizens has upsized the cat bond significantly. What do you think is going to happen on the June 1 renewals for Florida?
Well, certainly there's downward pressure in the overall property cat space, depending on the territory. Given how well that market is still priced, we certainly would expect that pressure to carry over into Florida. In terms of a prediction as to how much, well, we'll just have to wait and see. We're not prognosticating at this point. For us, we write on an XOL basis about $130 million in Florida, then the remainder of our exposure is on a pro rata basis. As we said again in our opening comments, if rates are down but still meet our return hurdles, yes, we may do some continuing XOL, but it'd more likely be that perhaps we would shift some of our capacity to quota share. Again, it depends on what the market is willing to give us come this June.
Okay. That's helpful. Just one last numbers question. I believe the tax rate, 13.8%. Did I hear that correctly?
That's correct.
Yes. I believe you mentioned that you expect that for the entire year. Historically, I thought it was between 12% and 13%. Curious why you expect a higher tax rate for this year. Thanks.
13.8% is an effective tax rate that we would expect for the year. That rate could even go up from there, as we've talked about in the past, specifically on the last quarter call, that if there are no catastrophes for the year, that rate could even go up. That's with an expected amount of catastrophes for the year.
Okay, thank you.
Our next question.
Excuse me, one other point. Keep in mind that in your assumptions, that rate does have to move with cat losses. You can't take the rate up without taking expected cat losses down.
Correct.
Thank you. We'll go next to Michael Nannizzi of Goldman Sachs.
Thanks. I know it sounds like we got some pieces for crop, but would it be possible just to get the Q1 premium for crop and then the combined ratio for crop for the first quarter?
Q1 premium for crop was -15% for gross written premium.
Okay.
I'm sorry, your second question was?
The earned premium, I guess, or the earned premium that rolled into revenues.
The earned premium that you would see in the first quarter for crop is only about $2 million.
Okay, got it. Great. Thanks. A question about the California comp book. Remind us what the rate you took in 2013, and where loss trend was there, and where you're booking comp today on an accident year on an initial pick basis.
I'll let Craig give you the last year information, but right now for California comp, on an accident year basis, we're in the mid-90s%.
Accident year combined?
Yes.
Okay, got it. Great.
I don't know if Craig is looking for some of the information.
Okay, great. If I could just ask one more. In Bermuda, is it possible to know, and I realize it's a blended book and probably there's some composition change to it, but is it possible to get an idea of what the year-over-year change in pricing or rate was in that book?
You're talking about?
Roughly.
What, property cat? You mean because Bermuda.
We'll do that.
Bermuda is a mixture of property and casualty, so it's a little tough to answer that question.
Well, let me get to the baseline question then. The part I'm trying to understand is the attritional loss ratio was flattish year-over-year, and it's been down on a year-over-year basis for the last few quarters. I'm just trying to understand, just given generally that there's been some pressure in reinsurance pricing, how does that factor in? If it were just typical primary insurance or something very simple, you have reductions in pricing that would cause your combined ratio to rise, but it seems like we've absorbed as a market some declines in pricing. That attritional ratio has been flat. I'm guessing there's some mix change in there or something. I'm just trying to reconcile that.
It's exactly that.
Okay.
It's mix change. They can move in and out of retro business depending on what you do out of London. In some of those transactions, it's essentially mix change which is driving that.
I see. Is it fair to assume then if all else equal, if you have this environment, you have mix change, which allows you to keep your attritional flat, does that mean that you're taking more risk per unit of premium that you're collecting?
Well, just first of all, keep in mind that on a gross written premium basis, Bermuda was down year-over-year.
Yep.
I think it's a reflection of when we say a mix change, it's kind of what we said in our opening comments. We'd like to emphasize over and over that we have the capacity, the willingness, and the ability to actually change our mix and move from one class of business to another, one layer to another, always trying to achieve the best risk-adjusted return. That's really what we're striving to do. In times you will see a segment like Bermuda, for example, perhaps slip in premium because we're backing away from certain classes of business that aren't giving us the right return.
I see. If we're in an environment where if there continue to be challenges in the reinsurance market, is it possible to just keep that attritional loss ratio flat even with pressure, or are there some limitations of mix that will cause, at some point, that attritional loss ratio to start to rise?
There's always that potential, and it all depends on how fast and how far rate decreases are and what we back away from in terms of business that doesn't meet our return hurdle. Yes, if you want to continue to write the same book of business year in and year out, yes, attritionals will rise. On the other hand, if you move into different new products, different geographies, change attachment point, use the capital markets, potentially. There's lots of ways in which we can maintain our profitability throughout what you're describing as a difficult market.
Great. Thank you very much for answering those questions. Appreciate it.
Thanks.
We'll go next to Amit Kumar of Macquarie.
Thanks, Operator, Good morning. Just a few quick follow-up questions. First of all, going back to the Florida piece, you mentioned that your XOL piece is $130 million. Is the remainder $70 million or so, or am I thinking of the total Florida book wrongly?
Our Florida pro rata premium is.
It would be another $200 million.
Okay.
In total, it would be about $280 million, roughly.
That's XOL and pro rata.
Got it. That's helpful. The follow-up to that point is, I think last year you had talked about getting preferential signings. You had talked about private layers, multi-year deals. Are you seeing that phenomenon for Everest this year too, or is it much different?
Oh, do you want to answer that?
This is John, Amit. We are seeing that opportunity, in some cases private layers, in some cases clearly at 1-1 and 4-1 preferential signings, but also new products, new layers, new products with existing clients and new clients. That answers the prior question about attritional losses as well. It's our job to figure out how to make money no matter what market we face. Yes, we are seeing the opportunities where we're one of the biggest broker markets in the world, and we are getting better and better signings from brokers and clients working with the brokers.
When you mention new clients, are these the smaller, I guess, new depop entities? Who exactly are these new clients?
We're not talking just Florida here. We're talking across our entire portfolio globally. It's new clients globally. It's an expansion of existing clients across the world.
Specifically in Florida, Amit, we have relationships with almost 40 companies. We see every deal that comes into the market. We have been trading with many of those clients for many, many years. We do have relationships that are not broadly marketed.
Got it. That's quite helpful. The other question, I think, is a follow-up to Mike's question on maybe California comp. Did you see any changes in loss cost trends over the past quarter? There has been, obviously, a lot of debate. A lot of reports have come out on the impact of SB 863. It seems that that impact varies from the company's presence in the marketplace. Did you see any changes in your book, or has it been sort of a steady state from 2013?
We have not yet seen any changes. I'm not saying they're not out there, but we've maintained. Actually, we didn't answer Mike's question earlier about loss cost trend. We build loss cost trend into our reserve projection, and that's typically depending on class of business in the mid to high single-digit range. That's built into our reserve assumptions. So far, that has been sufficient, clearly in the most recent accident years. The reserve development we saw in the fourth quarter of last year was primarily older years.
The answer to Mike's question was the rate increase for 2013 was 13%, and we were running in the 96 range last year on an accident year basis.
Got it.
For California workers' comp.
96. Final question.
Just to follow up on that, you can see that while the combined ratio has not improved to the level of rate increases, which means that we're taking some of that, obviously, into loss cost trend, and probably more than is necessary at this point, but concerned.
Okay.
concerned.
No, that's good. The final question, it's probably a follow-up to Jay's initial question. As you look at your growth prospects, you have Purple, you have Mt. Logan, you've talked about different new products. I'm curious, as you look out, how do you look at organic growth versus outside opportunities to add to the portfolio?
What's the distinction that you're making between organic growth and outside opportunities?
What I'm trying to ask is, based on all the changes we have seen recently, is it fair to say that probably, you don't need to look at other entities at this juncture?
Okay. I'm sorry. For right now, we do not need to do that. In fact, a growth strategy, at least for us, will never be built on an acquisition. It doesn't mean that we don't look at many things because, as you can well imagine, everyone calls us when there's a potential deal out there. We do not build our growth strategy off of an acquisition. We prefer, frankly, to build from within so you don't have to deal with legacy issues, integration issues, and nine times out of 10, there's limited strategic value to many of the opportunities at this stage.
Got it. That did answer my question. Thanks for the answers and good luck for the future.
Thank you.
Our next question will come from Meyer Shields with KBW.
Thanks. Dom, you talked earlier about the tendency of ceding commissions to go up now. Is that trend varying by the size of the cedant? Is that different now than it was five or 10 years ago?
That was John that spoke to that. I don't know that we're necessarily seeing it differently by size of customer. Certainly, it can be influenced by the size of the transaction, given that there might be some that are hungrier for premium. That would maybe only be the only comment I would make about that.
Obviously, this is John. It obviously is also reflective of the client's individual experience. A lot of cases, whether it's whatever class of business they're in, if there's been bad results, we see ceding commissions going down. If there's been catastrophes that have hit their covers, including Colorado deals, ceding commissions go down. Really, it's both the macro and the micro situation that drives these.
Okay. That's helpful. Thank you. Very briefly, is there a good proxy we could use for limited partnerships?
Well, in the past, we have guided people to just the general equity markets. I think we probably still would say that that is as good a proxy as you can get. I think it points to what Craig mentioned earlier in response to another question, that our limited partnerships were quite strong last year, but that's kind of in line with the general equity markets were strong last year. Conversely, the equity markets in the first quarter of this year were not quite as strong or were flattish. I think that's consistent with our limited partnership experience, except for the one. In our particular case, there was just one LP, which was distorting, I think, what we would otherwise normally have expected for the quarter. That we would not expect that going forward.
I would say that the best proxy you can use is the general equity market, public equity market.
Okay. Fantastic. Thank you very much.
Our next question will come from Brian Meredith of UBS.
Yeah, a couple of quick questions. The first one, my apologies that I missed this, in the insurance segment, operating expenses were down about 13% year-over-year. Was there something unusual that happened there?
Just good stewards on the expenses side. No, in part, it's premium growth. Frankly, that's most of it. Maybe some internal allocations, nothing dramatic other than premium growth.
Premium. All right. Actual expenses were down 13% year-over-year. Allocations.
That would be driven by allocations. Are you including commissions in that?
No.
That would just be allocations then.
Okay. Thanks. Then, Dom and John, I wonder if you could just update, or not update, or just remind us kind of what your thoughts are on Watford Re, I know there's a bunch of other companies that are kind of looking into these types of potential facilities. What interest level would an Everest have of potentially doing something like that? What do you think the potential impact is on the casualty markets, reinsurance markets?
Well, yes. One of your questions was that we are looking at that, as I think probably most of our peer groups are doing. We haven't yet determined where we're going with or have not yet concluded on that analysis yet. Generally, it would certainly cause one to think that it could soften the casualty reinsurance market further from where it is now. On the other hand, the types of transactions that are likely to go into these facilities are not generally, They're generally already
tend to be lower margin type business, lower volatility associated with the class of business that fit these structures. So it may not have as dramatic an impact as has been prognosticated by many on the overall capital market. That remains to be seen. I'm not sure that any of us really know for sure where that all ends up, but it is something we're looking at. In fact, it can create interesting opportunities for ceding companies, frankly, to help them with their cost of capital on transactions, and may in fact create opportunities into the reinsurance market space that don't exist today. Where the casualty space, frankly, a lot of companies are holding on or are ceding less business, increasing nets. Some of these ideas can, in fact, create transactions that can help their P&L or balance sheet.
Perhaps a reinsurer can add value, and see premium go up in this space. There's a lot of possibilities that can come out of these structures, but we are examining that very closely.
Great. Thanks then .
We'll go next to Ian Gutterman of BAM.
Hi. Good morning. I guess a few different questions on different parts of your cat book. Just to follow up on the Florida question from earlier. Obviously, we expect great pressure on XOL, which was mentioned. You talked about your quota share book. I assume there'd be upward pressure on ceding commissions in quota share, too. Is that fair? Can you give us a sense of how you think about that?
Again, there's many moving parts to it. There's occurrence limits, ceding commissions. We saw this phenomenon last year to the extent that the reinsurance spend was down from some of our clients. It resulted in more attractive combined ratios, including ceding commissions to the reinsurer. As we talked about on the last couple of calls, we wrote more pro-rata business last June. We also wrote more pro-rata business at one-one. We wrote another $50 million-$55 million of property pro-rata at one-one. Again, across our book, the combined ratio globally improved. Ian, I wouldn't expect that the same dynamics that are affecting the XOL market from the introduction of third-party capital to have as dramatic an impact on the pro-rata market. That, I think, is really what you're getting at.
Yeah, exactly. Okay, great. Then as a follow-up to that on the XOL side, given the talk on how much rates will fall this year, do you feel like we're approaching a bottom or are we near people's walkaway price? If there's another no loss year and there's still abundant capacity next year, can Florida rates go down another double-digits, or are we getting close to the walkaway point?
I don't know the answer to that question. Certainly, if it were to go down, to your question, 10 this year and 10 next year, it certainly would be getting very close to our walkaway point.
Okay
On an XOL basis. Again, remember that it doesn't mean that we don't participate in that market through our platform. If capital markets are willing to come down to those levels, then we have the capacity that we can deploy in that fashion. Move again to more pro-rata. We can still stay very active in the marketplace, and move to other products, move to different attachment points. Perhaps write the business and use the capital markets as a reinsurer. There are many ways in which this can play out to our benefit, frankly, going forward.
Got it. That actually leads into the next question on the cat bond. I was just confused, and maybe this is just nomenclature or something I don't quite follow, but your PML for U.S. wind is, I think, $1.2 billion at the one in 100. The cat bond on the index that was referenced had a $1.4 billion-$2.1 billion index loss that equated to a one in 45 to a one in close to 100. On the occurrence one, I'm obviously talking to that, I can be comparable. I was curious why an index loss at the one in 100 is $2.1 billion when your PML one in 100 is $1.2 billion. Are they not comparable for some reason?
Yeah. This is John. The Kilimanjaro cat bond, the mechanics of that really reflect, it basically is taking for the occurrence one in Southeast states, it basically is taking industry loss event because it's a PCS trigger. It's taking industry loss events, then there's effectively market shares by each of those states. It's taking a very big loss and then scaling it down or a range of big losses, and then scaling it down to the market share. The short answer is those are two different things, our PMLs and how the mechanics of the bond respond.
Okay. That's what I can maybe follow up more on. That's what I was trying to get at.
I think, Ian, just the bottom line is that purchase of that bond did reduce our PML by 100.
Right. Basically, the $2.1 billion equates to your $1.2 billion. Is that the right way to think about it?
The $1.2 billion is one point on the curve.
Okay.
The reinsurance we purchased through the special purpose vehicle, Kilimanjaro, that issued the cat bond, is not one point on the curve. It's across the distribution.
Okay, got it. Okay, just real quick on Mount Logan. The $36 million of gross premium, just knowing the capital deployed, is a little over a 10% rate on line, if my math is correct. Is that right? 36 over 300 something.
Yeah, remember the $400 million. Be careful, though. The $400 million that we cited as now assets under management, that's a recent number.
Right. I was using, I think it was $320 earlier in the year, maybe.
There's also an accounting recognition of the premium. Over 2014, we would expect it to be higher and more ceded premium in each of the quarters going forward against that capital base.
Okay. Well, what I was getting at is just I thought normally for fully collateralized, you need closer to a 20% rate on line to sort of make the math work. Is that generally accurate?
I think we're trying to build a mousetrap that is maybe different and better than what is out there. I think the fact that we've been able to go from zero to $400 million in a relatively short amount of time highlights that we may have a better mousetrap than others that are out there.
I do think, though, that the simple arithmetic that you were trying to do is probably a bit low.
Got it. Okay. I'll follow up on that one offline, too. Thanks.
We'll go next to Kai Pan of Morgan Stanley.
Good morning. Thank you for taking my call. I have two questions. One is on the capital structure, another one on reserves. On the capital structure, you have one of sort of the least levered balance sheet, debt to capital ratio less than 7%. Now you have a third-party capital, Mt. Logan and the cat bonds. What do you think about your equity base of $7 billion? Could you sort of buy back more than you earned like you did this quarter that actually actively reducing your shareholder base?
Well, we tend to want to think about share repurchases within the context of earnings. That generally has been our approach. What we're trying to do with our capital and Mt. Logan and the use of cat bonds and other types of third-party capital structures is grow the business. This is a growth strategy, not one in which we're trying to shrink the business. As we've mentioned earlier, we think that our size, capital position, rating, global franchise, and the ability to grow is what perpetuates the good earnings we've been able to produce and good ROE we've been able to produce. In all of that context, it really means that it's to our advantage in the marketplace to the extent that opportunities present themselves to grow our capital base.
When I say grow our capital base, that means in all the vehicles that we've mentioned, meaning our own equity capital, Mt. Logan, use of cat bond structures, and other vehicles. In the context of our equity capital, it is important to us to be of the size that we're at. We think about share repurchases in the context of earnings.
Would 100% payout ratio a fair assumption?
That depends on the price of our stock. It depends on what opportunities present themselves. It depends on a lot of things. We don't give prognostications about what level of shares we're going to be repurchasing. As you saw, we did obviously have $250 million this quarter, was a pretty good number for us.
Okay. Turning to my second question on reserves, your reserve development has been minimal throughout the past few years and each quarter, actually. If you look underneath, you have some large reserve charges and the insurance operation, why you have large reserve releases from your reinsurance operation. They tend to coincide, like in the fourth quarter. I just wonder, are those just coincidental that you do a big reserve study at year-end? Following on that, is that going forward as you see the past reserve issues in your insurance book gradually will, hopefully, diminishing. You said, Dom, since you joined Everest, you've been focusing on the reserve side, setting probably more prudent, setting more cushions in your reserve. Is that possible we will see sort of these efforts actually playing out in more favorable development in the future?
Yes. Hopefully the reserve practices that we've been adopting over the last couple of years, I think will hold us in good stead. I will point out that our reserves, even prior to me getting here, in many years developed favorably. Probably the last eight or nine accident years have all come in positive relative to the initial pick. We do our reserve studies mainly around the year-end. We do some of the smaller classes of business throughout the year, but the larger, more material lines, we focus on that in the fourth quarter. Certainly, if we see anything coming out of the smaller lines of business during the year, we will take some action. Certainly like we did here in the first quarter with the insurance on the medical mal side.
Insurance has been more of an issue than reinsurance because many of the lines of business we were in were runoff lines of business. Those typically, many in the business tend to be more problematic than an ongoing book. Also our insurance lines of business, on an overall basis, tend to be in the longer tail areas than in the reinsurance side. Those are some of the challenges related to insurance, but we clearly think that we've got that under control.
Thank you very much.
Okay.
It appears that's all the time we have for questions today. I'd like to turn it back to our presenters for any additional or closing remarks.
Well, thank you very much and thanks for your questions. I'd like to just say in summary that clearly we think we had a great quarter in what some would describe as a challenging environment. We happen to think that the challenges create opportunities for a company like Everest, and we have the ability to do different things and respond quickly and appropriately to the market conditions that are at our feet today, and they certainly won't be the same tomorrow or two years from now. We appreciate your questions and your support, and look forward to seeing everybody in the interim. Thank you.
That does conclude today's conference. Thank you all for your participation.