Good day, everyone. Welcome to the fourth quarter 2013 earnings call of Everest Re Group, Ltd. Today's conference is being recorded. At this time, for opening remarks and introduction, I would like to turn the conference over to Ms. Beth Farrell, Vice President of Investor Relations. Please go ahead, ma'am.
Thank you, Sharon. Good morning and welcome to Everest Re Group's fourth quarter and full year 2013 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. Now let me turn the call over to Dom.
Thanks, Beth. Good morning, everyone, and thank you for joining us this morning. We are very pleased to report record earnings for the fourth quarter and the year. There were many elements of our portfolio that performed very well and others less so. However, with over $1.3 billion in earnings and a 20% ROE, it is a great result overall. Certainly a factor was the absence of any major catastrophe, but it is worth noting that the year was not without losses. In fact, there were $195 million or $170 million net of cat losses during the year. Growth by diversification, with a 21% or $900 million growth in premium during 2013, enabled the company to absorb a reasonable level of loss events while still expanding margins. New products and growth in many of our traditional lines have all contributed to margin expansion.
Growth in our core businesses was noted in treaty casualty, treaty property, facultative, and specialty insurance line. In particular, our property strategy continues to be fluid, meaning that we allocate our capacity to those products offering the best return profile. This translates into more primary insurance and some additional pro rata in the U.S. reinsurance segment. As cat XOL rates were trending down, we have been shifting to a different product mix or moving capacity to the better price layers. The ability to adapt and react quickly to changing market conditions remains a core competency of the Everest team. The continued management of our portfolio mix resulted in a four-point improvement in the combined ratio to 81%. All of this improvement came in the reinsurance portfolio. On the other hand, our insurance business underperformed relative to our expectations. Crop losses and prior period development overshadowed many underlying improvements in this business.
Excluding crop, the underlying accident year combined ratio improved to 94.6% in 2013. John and Craig will go into further details. In summary, the crop losses were primarily due to the significant decline in the price of corn. Our estimate at the end of the third quarter did not sufficiently take into account yield factors, which were unknown at that time in our largest states. The loss development we continued to see was in lines of business that are some of the most difficult to assess, as can be observed generally in the industry. In fact, much of the development we saw emerged on business we had terminated several years ago. The good news was that our overall reserve position was redundant. Therefore, this specific development had no impact on overall earnings.
We continue to feel confident about our overall reserve position. Recognize that any one of our numerous reserve buckets could prove inadequate, while at the same time, many others will result in savings. That is the nature of the estimation process within a portfolio of reserves. The key is the overall adequacy. Let me finish up with some commentary on the overall market. As many observers point out, there are many challenges that we face. Nothing new, of course, to those of us who have been around a while. Today's headline topics are declining rates and capital markets invasion. Throw on top of that a low investment yield environment, and you have a recipe for lower overall returns to the industry.
The key is, of course, not to get your company stuck in the averages, which were down in 2013. At one-one, they were down in the 10%-15% range. However, this view of the market and how it applies to us is too binary or one-dimensional. These factors are just a slice of the market. In other parts of the world, particularly in loss-affected areas, rates were up, and in many other regions, rates were flat. In addition, primary pricing is still holding, and we access this business through our direct insurance platform, facultative operations, and through pro rata deals in the reinsurance portfolio. Other examples include new products. As I mentioned previously, we have and will continue to deploy capacity to those areas and others, including new products, that provide the best risk-adjusted returns.
Yes, the capital markets is a factor. Frankly, we see it as a tool, not a threat. John will speak to that when he discusses our facility, which for us is another form of capital that can be used to deliver well underwritten products. Nevertheless, capital markets is not a perfect fit for all risks. This is where company capital can be deployed to new products and risks not well suited to a capital market structure. The world is changing as it always has. It's how one adapts that determines if you can beat the averages. Our business plan and strategy anticipates that we can continue to replicate similar returns to what you have seen over the last two years. Thank you. Now Craig will cover the financial results followed by John Doucette, our Chief Underwriting Officer for the operations review. Craig?
Thank you, Dom, and good morning, everyone. We're pleased to report that Everest had a record quarter of earnings, with net income of $365 million, or $7.54 per diluted common share. This compares to net income of $59 million, or $1.13 per share for the fourth quarter of 2012. Net income includes realized capital gains and losses. For the year, Everest had record net income of $1.3 billion, or $25.44 per share, compared to $829 million, or $15.79 per share in 2012. The 2013 result represents a return on equity of 19.5%. Operating income for the year was $1.1 billion, or $21.47 per share. This represents a 58% increase over operating income of $13.62 per share last year. These results were driven by a $480 million increase in underwriting income, representing a 185% increase year-over-year.
As you will hear from John Doucette, there are a number of strategic initiatives that are driving these improved results. This increase in underwriting income was partially offset by higher income taxes and lower net investment income compared to 2012. The results continued to reflect the improvement in the overall current year attritional combined ratio, which has declined a full four points from 85.0% to 81.0% for the year. This measure excludes the impact of catastrophes, reinstatement premiums, and prior period loss development. The total reinsurance attritional combined ratio was 75.5% for the year compared to 80.9% in the prior year. The insurance segment attritional combined ratio was 101.4% for the year compared to 100.9% in the prior year. Removing the crop results would show a 94.6% attritional combined ratio for the insurance segment compared to 97.2% in 2012.
All segments reported increases in premium volume for the year, and all reinsurance segments reported underwriting gains for the year. Total reinsurance reported an underwriting gain of $390 million for the quarter compared to a $48 million underwriting loss last year. For the year, total reinsurance reported an underwriting gain of $877 million compared to a $327 million gain last year. The insurance segment reported an underwriting loss of $156 million for the quarter, compared to a loss of $46 million last year. For the year, the insurance segment reported an underwriting loss of $147 million compared to a loss of $68 million in 2012. The 2013 results reflected prior period reserve development and a crop loss for the year. John will discuss the crop insurance results in more detail. Mt. Logan Re's financial position and operating results were consolidated into Everest beginning July 1st, 2013.
These results were included in a separate segment and reflected a $9 million underwriting gain for 2013. Everest retained $3 million of income, and $6 million was attributable to the non-controlling interests of this entity. The overall underwriting gain for the group was $238 million for the quarter compared to an underwriting loss of $94 million in the same period last year. For 2013, the underwriting gain was $739 million compared to a gain of $259 million in 2012. These results reflect $30 million of current year catastrophe losses in the fourth quarter of 2013 related to Typhoon Haiyan, compared to $325 million of cats in the fourth quarter of 2012 related to Hurricane Sandy. For the year, catastrophe losses were $195 million in 2013 compared to $410 million in 2012. Our reported combined ratio was 84.5% for the year 2013, compared to 93.8% in 2012.
On reserves, we completed our annual loss reserve studies. The results of the studies indicated that overall reserves remained adequate. In the fourth quarter, we booked prior year development in the insurance segment, which was more than offset by favorable development in the reinsurance segment. The $125 million of prior year reserve development in the insurance segment is largely related to workers' compensation, construction liability, and umbrella business. The construction liability and umbrella were programs the company discontinued several years ago. The $142 million of favorable prior year development in the reinsurance segments mostly related to treaty casualty and treaty property business, both in the U.S. and internationally. These redundancies have developed over time, we don't react until the position becomes more mature. We continue to hold our estimates for the more recent years.
For investments, pre-tax investment income was $126 million for the quarter and $549 million for the year on our $16.6 billion investment portfolio. Both the quarter and the year investment income amounts were below last year as anticipated. This result was primarily driven by the low interest rate environment, the decline in limited partnership income, and the amount of cash flow used for share buybacks and the redemption of debt. However, our investment strategy to diversify into high yield bonds and dividend-paying stocks enabled us to exceed our planned investment income for the year. The increased allocation to equities was also a benefit to net income, as the year reflected $197 million of net after-tax realized capital gains compared to $114 million last year. These gains are mainly attributable to fair value adjustments on the equity portfolio.
On income taxes, the effective tax rate is primarily driven by lower than planned catastrophe losses in the year, resulting in higher than expected taxable income for the year. The 2013 operating income effective tax rate was 14.9%. This 14.9% effective tax rate for the year is in line with our expectations in a year with much lower than planned cat losses, as mentioned last quarter. Total cash flow continues with operating cash flows of $1.1 billion for the year compared to $695 million in 2012. This is primarily due to our premium growth and lower catastrophe loss payment. As you previously heard, Mt. Logan Re successfully completed its initial capital raise and now has over $360 million of assets under management. This serves to validate Mt. Logan's business model as investors recognize the value proposition of partnering up with a leading global reinsurer.
Shareholders' equity for the group was $7 billion at the end of 2013, up 3.5% compared to the $6.7 billion balance at year-end 2012. This is after taking into account capital return through $622 million of share buybacks and $107 million of dividends paid in 2013. The company announced a 56% increase in its regular quarterly dividend and paid $0.75 per share in the fourth quarter. Additionally, we repurchased another $28 million of stock after the year-end close. These purchases will be reflected in the first quarter 2014 financial statements. Book value per share increased 12% to $146.57 from $130.96 at year-end 2012. Our strong capital position leaves us with capacity to maximize our potential business opportunities as well as continue share repurchases. Thank you. Now John Doucette will provide the operations review.
Thank you, Craig, and good morning. As Dom highlighted, we had a solid Q4, finishing a successful year. Our group 2013 gross written premium was $5.2 billion, up $908 million from 2012, with growth coming from all segments of reinsurance and insurance. For our reinsurance segments, total reinsurance gross written premium was up 21% in 2013, with new opportunities globally, and all reinsurance segments had increasing gross written premium. Led by our U.S. reinsurance segment, up 38%. We benefited both from a continued flight to quality and Everest being one of the leading U.S. domestic property reinsurers. With over 50% of the global property cat premium emanating from the U.S., this is an important, sustainable competitive advantage for Everest. We write U.S. cat business from the U.S. with the ability to seamlessly provide capacity in any form, excess loss, pro rata, per risk, all underwritten by the same underwriting team.
We grew top line on several attractively priced treaties with clients seeking capacity exclusively from domestic traditional reinsurers. In particular, we wrote several large multi-line treaties with U.S. regional companies, a targeted market for us. Total reinsurance bottom line had a $549 million improvement in underwriting profits for the year to $877 million, benefiting from the successful rollout of new product initiatives such as Purple, Everest's pillar product, increased capacity to property pro rata deals, where we saw improving original pricing terms and conditions, and new credit-related opportunities in multiple places. Globally, we saw the benefit of Mt. Logan Re in 2013, as we chose to deploy larger lines on deals we like and increased our cat capacity for key clients.
Logan allowed us to manage our net PMLs while growing our top line and having additional flexible capital management dials, such as Logan, gives us more flexibility to manage our PMLs before wind season. As Dom said, we view capital markets more as a tool than a true competitor. In several cases, providing clients with more property capacity resulted in securing better signings on deals we wanted in other classes. As a leading global multi-class reinsurer, we have the ability and expertise to underwrite all lines of P&C business. This is important to note as less than 25% of our overall business is property catastrophe related. We wrote several new crop reinsurance and weather deals globally, and these performed well in 2013. We continue to develop capabilities here and view weather and agriculture as long-term strategic core competencies.
In 2013, we also wrote some large quota shares, both internationally and in the U.S. across various lines. These were strategic transactions with some large global clients. The premium on these deals has not yet been fully reflected in earnings. We continue to execute on several large one-off transactions from new and existing clients, which require significant reinsurance structuring capabilities, the ability to combine underwriting skill sets across multiple lines of business, manuscript policy wording expertise, and global capabilities with multiple jurisdictional expertise and paper. We can bring all of this to bear, and our ability to execute nimbly and in size with a highly rated balance sheet has been a key differentiator in this competitive market. Globally, we deployed more FAC capacity, increasing shares on well-rated programs and enhancing our product offering to our FAC and treaty clients.
To summarize, we are a leading global multi-line reinsurer, and we have the culture and organizational structure to react quickly to changing market dynamics and identify strategic opportunities that can enhance the long-term franchise of the group. Turning to insurance operation. Our premium grew by $195 million in 2013, primarily driven by crop, workers' comp, non-standard auto, property E&S, and casualty. Insurance calendar year results underperformed, as Craig indicated, driven by prior year loss development and a difficult U.S. crop season. The result was an underwriting loss of $147 million. Our crop insurance had an underwriting loss of $57 million in Q4, resulting in an underwriting loss of $68 million in 2013. This was driven by falling commodity prices, particularly corn, as well as final crop yields that were lower than we originally expected and even what we expected a quarter ago.
We saw crop yields fall below average in some areas where we have a large footprint. Such as Southern Minnesota, due to excess moisture, and in Texas, due to abnormally dry conditions in the areas we write in. We anticipate improved underwriting results in our crop book in 2014 as we continue to build out a more diversified geographic footprint, increase operating efficiencies, and roll out new systems. As I stated earlier, ag and weather are long-term strategic focuses for us, and the crop business we write through this platform complements that well. We have a great team at Heartland. We believe that under more normalized circumstances, our crop insurance book will achieve profitable growth along with our ag and weather reinsurance products.
Our California workers' comp book saw 13% rate increases in 2013, continuing the double-digit rate increases for the last several years, providing a compound rate change of over 60% since 2009. Workers' comp writings increased $50 million, mostly from rate increases. Our current accident year workers' comp combined ratio is in the mid-90s. Our non-standard auto book grew nicely, giving broader geographic mix and economies of scale. Our property E&S book continued to see rate increases, growing over $30 million in 2013, with additional geographic diversification. Our financial institutions book remains profitable, but growth was flat as we remain cautious in light of increased competition. Our casualty and environmental facilities achieved rate increases throughout 2013, and we grew these books.
Other recent insurance initiatives, including our primary A&H, Canadian insurance, and contingency business, all continue to enhance their capabilities with new hires, new products, new distribution channels and are poised for profitable growth in 2014 and beyond. Finally, some color on January 1st reinsurance renewals, which represents approximately 45% of our annual reinsurance premiums. Some key themes we saw at 1/1. First, it has become a stratified reinsurance market of haves and have-nots. Everest is solidly in the haves, and we have found new business opportunities, had strong signings on existing treaties, and in some cases, differential pricing. Second, there has been a globalization and consolidation of treaties by several global insurers seeking to both narrow their reinsurance panel to improve security, but also diversify their credit exposure with a broader panel of high-quality reinsurers.
This has generally been positive for companies such as Everest, with strong ratings and high-quality balance sheet. Third, we are successfully competing with and winning against non-traditional capacity everywhere. In many instances, Everest won placements despite offering higher prices due to our ratings and diversified 40-year-plus franchise, the breadth of our trading relationships with clients globally, and our ability to tailor solutions to meet clients' needs and to design products that benefit from structural advantages we have over competitors, which have all proven to be significant competitive advantages. Furthermore, unlike the non-traditional markets, Everest's promise to pay does not expire, nor do we force a collateral release mechanism into products earlier than the natural expiry of the liabilities being reinsured. Specifically, on 1/1 renewals, casualty was challenging, especially pro rata, due to demands for expanded terms and conditions.
As a result, we did withdraw from some contracts and deployed capacity at higher layers on others. On the other hand, despite headlines on property conditions, we had a successful renewal of our property portfolio globally. Net written premium for property grew by $150 million this January 1st. Overall territories and all products, our property book combined ratio increased by a couple of points at 1/1, but we still saw margin expansion across the whole book at this renewal as we continued to grow at what we consider to still be attractive returns. Across all classes, we grew gross reinsurance premium by $300 million, or 18%, on our 1/1 reinsurance renewal book, and our net reinsurance premium grew by 6%.
We accomplished this growth by expanding shares with existing clients on desirable treaties or layers, writing new quota shares at attractive terms and conditions, and increasing our marketing of new products and deploying capacity to them. For example, our Purple premium was up significantly at 1/1/2014, as our long-term clients clearly prefer to buy this product from Everest's highly rated traditional balance sheet. The ability to flexibly move between products has been critical to our 1/1 success. We trade with our clients in many different products in every P&C line of business around the world. We are not beholden to excess of loss or pro rata, nor to reinsurance, retro or insurance, and we will dynamically reallocate capacity to where the best risk-adjusted returns exist. We are not restricted to any product class, premium size, or minimum rate on line.
We continue to roll out many new insurance and reinsurance products in 2014. Thank you. Now back to Beth for Q&A.
Shannon, we're open for questions now.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that's star one to ask a question. We'll move to our first question from Michael Nannizzi from Goldman Sachs.
In the insurance segment, I'm just wondering if we could talk about what books specifically, what years that related to, and can you tell us in the case of the affected books, what's total case in IBNR that you're currently holding? Thanks.
Michael, the first part of your question kind of cut out. Could you just, again, restate?
Oh, I'm sorry. Yes, I was just saying the reserve development in your insurance segment, was just wondering, you mentioned work comp, construction, and umbrella. Could you give us some color on what accident year is that related to, and just from a magnitude perspective, what's the total case in IBNR that you're currently holding after development for those books?
Well, in the insurance segment, we had approximately $45 million of development in work comp, a little over $40 million in construction liability and $17 million in umbrella. In the construction liability and the umbrella, those are programs that we discontinued several years ago. That should not be something that we see in our future results. In the workers' comp, part of the development related back to some earlier years, the early part of the 2000 time period, when we first got into the program, and it's just a matter of some severity in a handful of claims that we saw from the early part of the decade. We also, though, did see some increase in frequency of some smaller claims in the later years, primarily in 2009, 2010, and 2011, I believe.
In that particular case, what we've seen in that increased frequency has been contemplated in the more recent accident years. Our more recent accident years do reflect that increased frequency. Might I point out those most recent accident years are profitable.
And-
Just a second. Mike, I just wanted to add that the majority of the workers' compensation adverse development came from years before our rate increases started to kick in four years ago. We've been getting double digit rate increases since then as well.
Got it. Has that been related to case reserves, or do you still hold IBNR for those older years?
We still hold IBNR for those years, yes. I don't know that we have at our disposal right this minute the split between case and IBNR.
Okay
Talk to corporate.
Great. Okay. Have you had any adverse development? You mentioned recent years, was that comp or, I'm just curious because we've heard some commentary about recent professional liability years. Have you seen any adverse development either in recent comp or recent professional liability years, just to be clear?
No, we have not seen any development in the recent years for professional liability in particular. As I mentioned, the comp, where we saw the development on the insurance side was really in the more recent years, was 2009, 2010, and 2011.
Great. Thanks. Just on the renewal comment, I think it's for John. You seem pretty optimistic about opportunities in property cat. Just curious, how are you thinking about opportunities heading into mid-year renewals? Do you think that your structure, your market position, or some other differentiator is allowing you to achieve terms and pricing that are materially better than the market? Thanks.
You're welcome. Michael, as we talked about, I think each of us talked about in a different way in our drafted response, we do believe that we have, given our balance sheet, given our market position, given how we access U.S. catastrophe business and the ability to dynamically move between different structures around the globe, that we do have an opportunity to get better than market results. We wrote, as you may recall, we increased our quota share writings in June and July, and we also increased quota share writings at 1/1, as well as moving, repositioning the book to better lines that we like at more attractive prices.
Michael, let me add to that. In many cases, we're not necessarily going to get different terms and conditions than market pricing. There are unique circumstances where with certain clients, we've had longstanding relationships, the terms that we do get may be different than the market. I wouldn't say that it's universally in every particular offering that we'd get terms different than the market. As John is pointing out, if those terms come to us and it doesn't hit our pricing targets, then we begin to allocate our capacity into other places, whether that be pro rata, facultative, or into the primary space. Even if terms and conditions are at the market, we still have the ability to not take those terms and conditions, and we can move our capacity into different lines or segments.
Great. Thank you.
We'll move next to Amit Kumar with Macquarie Capital.
Thanks. Good morning. I guess two quick follow-ups to the previous question. You had mentioned that some of the piece was from some of the runoff lines. Can you expand on that piece, or is that also related to the comp piece?
It is not related to the comp piece. These are separate programs. As I mentioned, part of it was construction liability, in particular, one program where it was a landscapers program. Because of the additional insured endorsement that we have on many of those policies, what we're seeing is an increase in expense, even though you wouldn't normally expect landscapers to be brought into a construction liability claim. Because of the additional insured endorsement, they are being drawn into those matters, and it's mostly an expense or a defense issue. The umbrella program, again, is one that we canceled a while ago. Again, that umbrella, as you probably know, is a very volatile class of business. We've got hit this year with several large claims, which caused us to increase our estimates in some of the older years.
That's helpful. I guess what should give us comfort that hopefully this is the last time that this noise sort of resurfaces. What would you say to that?
Well, I guess, Amit, I would say that it's not really noise at all. We have $10 billion of reserves. We actually reported an overall reserve redundancy coming through the numbers. As I've mentioned on previous calls, we manage some 200 different reserve buckets, and there are pluses and minuses in all of those buckets each and every year. These estimates on these particular lines are well within the actuarial ranges. It's not anything unusual to those of us that have been around the reserving process for a long time, as I have been. I think we're proud to point out that our overall reserve position as a group, positive, and our accident year development, if you go back in time for the entity, has been a pretty stellar record relative to how each accident year has ultimately developed at the group level.
Here again, you're managing a portfolio, and you have individual buckets or lines of business that sometimes develop poorly. On the other hand, offsetting that would be lines of business that develop redundantly. That is the nature of the beast.
That's helpful. I guess the one other question, and I will reach you after this is, the discussion on the increase in cat premiums, I guess growth on 18% and net 6%, do you have corresponding PML numbers which might have been updated post-renewals?
Well, we can get into that detail later, just generally-
Yeah
our net PMLs are up about consistently with those premium increases we cited. It's in different regions. That doesn't mean that's where we'll end the year. As John pointed out in his opening comments, we have the ability to go into the market before wind season and change that if we so desire. Right now, given our capital position, we're quite comfortable with where our PMLs are at. As you probably have noted through the years, that what we carry as our net PMLs for 1 in 100 and 1 in 250 are pretty conservative relative to the industry.
Got it. I will stop here. Thanks for all the answers.
Thank you.
We'll move next to Josh Shanker with Deutsche Bank.
Yes. Going back a little bit on the reserving issues, I just want to understand the process that you go through. Is there an annual reserve review that comes in the fourth quarter? This is sort of how it came to be. What's the process right now at Everest Re?
We review reserves throughout the year. Starting at the beginning of the year, though, the reserve buckets that we review tend to be the less material buckets. As we get into the fourth quarter, we're evaluating our largest lines of business, our largest classes of business, beginning with the most recent data, meaning it's as of September timeframe. In other words, all the claims data up through September is accumulated in order to do our year-end reserve review. That's the process that we've been under at least since I've been here in 2009. If there is anything, for example, during the year that comes up with some of those smaller classes of business, we would certainly book that into our numbers. Generally, given the size of it's generally not an issue.
Of course, the larger, more material lines, as I mentioned, we wait until the fourth quarter to accumulate all those studies. Is that what you were asking about?
Yes. Is the charges that you took, are they more prone to changing views on frequency or severity?
As I mentioned, we saw both.
Both.
We saw both, not out of the same accident periods. The more recent years, 2009, and 2010, and 2011, was predominantly due to frequency of smaller claims. It's hard to tell, maybe due to economic conditions, nevertheless, what we have done is we factored in that increased frequency into our most recent accident year pick. That influences the entire booking of all of our results. The severity that we encountered was due to business that has since been discontinued, there really wasn't any need to make any dramatic adjustment for severity relative to our current book.
Finally, in thinking about the pricing on reinsurance, going forward, do you see an opportunity for Everest to buy more XOL coverage in mid-year or even thinking about a long-term reinsurance protection plan for the company?
There's always that opportunity, as I mentioned, I think in the answer to a previous question, and John even made some reference to it. Now that one is over, we have the opportunity between now and wind season to look at various structures. We did put a structure in place last year.
Okay.
Actually, it was a renewal last year.
Josh, this is John. Part of the reason that we decided to start Mt. Logan Re and are very excited about that is it gives us a lot more flexibility in terms of how we position our footprint and how we manage our capital and our cat PMLs. With Mt. Logan Re and other capital market initiatives, whether it's traditional reinsurance or otherwise, we think we can grow the overall book very profitably and keep the PMLs to a level that we're comfortable with. It will be accretive to average shareholders.
Well, congratulations on a very strong quarter. Thank you.
Thank you.
We'll take our next question from Vinay Misquith with Evercore.
Hi, good morning. The first question is on the adverse development on the construction liability and umbrella. Curious as to what the tail on those liabilities are. When were those programs discontinued, when can we see the end of these claims?
Well, on the construction liability area, I believe it's a seven-year period after which the policy was issued. I don't recollect the exact date, it was 2008 was the last policy that was issued. I think the claims can be made in a period of seven years after that date. We feel obviously our reserve addition was sufficient, to answer your question about seeing the end of it. As you know, again, reserves can always move around. Again, in the context of our overall reserve posture, we don't believe it's going to be a problem. Umbrella, on the other hand, doesn't have a fixed discovery period, if you will. Umbrella claims can come in for a long time, again, for that class, we feel as if what we've booked is reasonably conservative.
Again, in the context of our overall reserve position, we don't feel that either one of these classes or lines of business will present a problem for our future financial performance.
Okay, when was the umbrella program discontinued?
Three or four years ago.
Okay, that's helpful. Then moving on to crop, you said $68 million of losses. I believe crop premium is worth about $300 million-ish last year?
Gross. Yeah.
Okay. Just looking at the combined ratio, that seems to be about 122 combined ratio. Just curious why it would be that high on crop.
Our technical ratio was about 112, and then the rest is just expenses. We were a little higher than the industry, at least what's been reported to date, just because of some of the concentration we have, in particular, as John mentioned, in Minnesota and Texas being some of our largest states, which in fact, relative to the industry, held us in better stead last year. Minnesota, for example, has a long history of being a very, very profitable state.
Okay, that's helpful. For 2014, what's the targeted combined ratio for the primary insurance operations in total? I believe that on the workers' comp you said you're reserving to the mid-90s. The rest of the book ex-crop was, I think, 94.6. Looking at 2014, what's your targeted combined ratio for the primary business?
We believe that the numbers in the low to mid-90s would still be achievable and maybe perhaps better. For now, I'll leave it at that.
One last thing, if I may, on the reinsurance business. I think it's changing your business mix just a tad, moving to write more pro rata versus excess of loss business. Should we see an uptick in the accident year loss ratio ex cats because of that business mix shift?
Not necessarily. There might be an uptick in certain lines of business due to rate movements, but also as we move the portfolio into other lines of business, particularly new products, that's actually having the impact of lowering our attritional combined ratio. I'm not going to give you a number at this point because we don't really give guidance. To be honest with you, it depends on what the final mix at the end of the year comes in at. We're not anticipating an increase in that number. I'll leave it at that.
All right. Thank you.
We'll move next to Greg Locraft with Morgan Stanley.
Hey, guys. Congrats on a great year and a strong quarter. Wanted to understand, I'm just looking at the profitability of the insurance segment, and it hasn't been profitable on the underwriting side for many years. I certainly understand the reasons why this particular year, but how do we think about net investment income allocation to this segment? Is it just kind of pro rata with premiums, or is there more investment income being earned out of this book of business?
We don't really do a specific allocation, and we could talk about it in this call, but I would think about it more in the context of a premium allocation.
Okay. For those of us that are looking saying, oh, they're not making any money in underwriting, the reality is you're making, call it $100 million plus probably in investment income as well, if you were to actually break it.
Our focus, quite frankly, Greg, is on the underwriting account. That's where our attention is, and we don't rely on the investment income because with today's yields, that's not really giving you the appropriate return. As I mentioned, our current year attritionals are on very good position. Given the rate increases we're continuing to get in California comp, what we're doing in the property E&S space, our other strategic initiatives, insurance platform, we're quite bullish on it. The profitability issues that you're seeing are things that relate to, frankly, a lot of which was discontinued four or five years ago.
Crop as well. Yeah.
Well, the crop in particular. Remember, we look at that not unlike we look at our reinsurance catastrophe business, right? Also, even though it's reported within the insurance segment, we have capabilities now globally, as John somewhat mentioned in his comments. We look at weather and crop in other jurisdictions kind of jointly. We have capabilities that we can look across the organization and how we're doing in crop, and that's part of our consideration as well, even though they're reported in two different segments.
Okay. Great. Then turning to capital management. On the one hand, you bought back 9% of the shares outstanding at the beginning of the year. It was a robust buyback in a strong year. On the other hand, it was only 68% of capital returned via buybacks and dividends on the year. You actually, in a way, you held back. Looks like you haven't done much the month of January. You've done a little bit, but I'm sort of wondering, stock's below book value. What's keeping you from doing more on the buyback front?
Well, we were in January as long as we could be in the month of January. Of course, as you know, at some point during the month, we begin to know the numbers, and we're basically restricted from being in the market. That's really the only thing that held us back in the month of January. In the fourth quarter, we were buying stock even at above book value. We couldn't get all the stock that we wanted at the prices that we wanted it at. We continue to be bullish on share repurchase, balance that up against what the market opportunities are. As has been pointed out, we've had a strong one one. We'll consider that in the upcoming four one as we evaluate, and the price of the stock, as we evaluate what our share repurchases will be in this quarter and the upcoming quarters.
I think it's fair to say that we're still very interested in share repurchases.
Okay, great. Congrats again on the year. Excellent job.
Thank you.
We'll take our final question from Meyer Shields with KBW.
Thanks. Morning. Two quick questions if I can. One, is there any way of ballparking, given the growth you had at one one, how much more capital you think you need this year compared to last year?
How much more capital we need? Well, I guess if you wanted to ballpark it, you could relate it to PMLs and to premium growth.
Okay. Yeah, just wondering if there's any offset to that. Second, was there any adjustment to the accident year 2013 loss pick for workers' compensation in the quarter, given the adverse development on recent years?
Meyer, no, there was not.
Okay. Are you confident with the level of pricing that you've been implementing, let's say over the last six months?
Well, our reserve numbers that we pick in the most recent accident year is what I call bridged off of the previous accident year. It's taking into account the experience of those years plus, then layer on top of that, rate increases that we've had, and as John pointed out, over 60% cumulative rate increase since 2009. The subtraction from that would be assumed loss cost trends. Our most recent accident years are a reflection of the development we've seen, plus pricing.
Right. I guess the question is that you've known the pricing for a while, but the base on which it kind of applied seems like it would be higher.
I'm not sure I understand that question.
Meyer, I think what's happened here as well, this is Craig, is that you're essentially picking a conservative number to begin with. We have not let that number come down just because of the pricing that Dom was talking about. Does that help?
Okay, understood. Thanks very much.
I will now turn the call back to the presenters for any additional or closing remarks.
This is Dom. I just want to close with thanking you all for participating on the call. As you've heard, we are quite bullish on our opportunities and trajectory going into 2014. We think we have the capital to take advantage of market conditions, while at the same time maintaining our interest in share repurchasing. Again, thank you for your interest. Have a good day.
That does conclude today's conference. Thank you for your participation.