Good day, everyone, and welcome to the Everest Re Group, Ltd. fourth quarter 2012 earnings call. Today's conference is being recorded. At this time, for opening remarks and introductions, I'd like to turn the conference over to Beth Farrell. Please go ahead.
Thanks, Tim. Good morning, welcome to Everest Re Group's fourth quarter and full year 2012 earnings conference call. On the call with me today are Joe Taranto, the company's Chairman and Chief Executive Officer, Dom Addesso, our President, 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 Joe.
Thanks, Beth. Good morning. I am pleased to report that in 2012, Everest increased shareholder value by 18% and had comprehensive income of $1 billion. These results were achieved despite losses from Sandy and the crop insurance industry having one of its worst years ever. Achieving these results despite these losses demonstrates the strength of our franchise. We were pleased with our January 1 renewals. On our reinsurance business, rates, terms, and conditions were relatively the same as in 2012. We did add some new business. Accordingly, the expected margins remain quite good for 2013 and up from 2012. Dom will provide more detail on this momentarily. For our insurance operations, we continue to see double-digit increases in workers' compensation and general liability, single-digit increases in D&O and property. We believe the workers' comp business is positioned for profit, that continued rate increases will provide for growth.
For our prop book, we are expecting a much better year. Further, our net prop premiums will increase meaningfully as we no longer purchase quota share reinsurance. Again, Dom will provide more detail. Our investments performed very well in 2012 and are off to a good start in 2013. Craig will provide more color on this. We bought back $40 million worth of stock in the fourth quarter and $38 million in the first quarter of 2013. We wanted to buy a great deal more, Sandy kept us out of the market for much of the quarter. It is our plan to buy when our window reopens. We have achieved a 13% increase in shareholder value compounded over an 18-year period. In 2012, we did better than our historic average coming in at 18%.
Given these returns, our current quality portfolio and solid balance sheet, our stock being below book makes no sense to us, meaning we are most happy to buy more. We fully expect the price to book to correct. In summary, I'm bullish on 2013. Our franchise has never been stronger. Dom?
Thanks, Joe, good morning. The financial details regarding the quarter will be covered by Craig, but it is worth highlighting the areas that address how we have positioned the portfolio and what that means for current and future performance. The attritional combined ratio continues to improve in both the reinsurance segments and the insurance segments. For reinsurance, this primarily reflects the increasing proportion of excess of loss business versus pro rata, in particular for catastrophe exposed business, as well as increasing rates in 2012. The calendar year combined ratio for the reinsurance book, despite Superstorm Sandy and the other catastrophe losses earlier in the year, came in at 90.1%. This result reflects a 102.1% combined ratio in the U.S. book due to the losses incurred for Sandy, offset by a 75.4% and a 91.5% combined ratio in our international and Bermuda portfolios, respectively.
This overall outcome reflects our balanced and geographically diversified book of business. During 2012, there was a continued emphasis on excess of loss business, particularly in our non-peak zones. This allowed us to diversify or spread our aggregate exposure more broadly without any material impact on our average annual loss. Along with rate increases, this strategy helped grow our catastrophe premium by $150 million to approximately $1 billion. At this level of premium, we are well positioned to absorb any infrequent but significant industry event, such as Superstorm Sandy. This strategy has also been instrumental in expanding our customer base, thereby improving diversification both by client and by line of business.
Broadening of the customer base has supported some growth in the treaty and facultative casualty lines as rates are beginning to firm. Overall, we expect margins to improve in these areas while rates in the treaty property area begin to moderate. Nevertheless, margins there are still favorable, as evidenced by the results this past year. Products developed in 2012 should continue to push momentum in 2013. At January 1, we had already seen approximately $150 million of premium growth in property business as a result of these efforts. The development of our capital markets platform will continue to support this growth, with the ability to bring more capacity to the marketplace. In the insurance segment, the improving current year attritional results with a 100.9% combined ratio are due in part to continued double-digit rate increases in workers' comp and select casualty classes.
Growth in our shorter tail books, including primary accident and health stop-loss business, and our property E&S operation, have provided for improved results. These businesses, along with the professional liability book and the California DIC business, have consistently produced underwriting profits. When coupled with a rapid decline in our historical program-oriented casualty book, have resulted in an overall improvement in the attritional results. It should be noted that the drought conditions that adversely impacted crop results are included in the attritional results at a 119.1% combined ratio, which had a 3.8 point impact on the overall insurance combined ratio. Excluding crop, the current year attritional combined ratio stood at 97.2%. Ongoing trend for workers' comp and general casualty rate increases, along with continued growth in accident and health, and an expected improvement in crop insurance, should reflect positively into 2013.
The insurance operation is expected to expand this year on the back of a number of new initiatives. Our non-standard auto business will grow with the establishment of a new strategic relationship to be announced within the next month or so. Canadian platform will expand with the recent hire of a key executive there. In the U.S., we have added an experienced underwriting and marketing team with a specialty focus. These initiatives, coupled with the growth in our existing portfolio due to rate increases, new business, and a higher retention of the crop business with the elimination of the quota share arrangement, will grow our top-line premium. The insurance results were impacted by prior year development, mainly in California workers' comp and construction liability. However, it should be emphasized that the contractors program has been in runoff for some time.
In the case of workers' comp, the amounts are relatively benign, considering that our profits from this line of business have approximated $1 billion since inception. This is a long-term business that is emerging profitably as rate increases are earned through. Moving on to investments. We have continued to dynamically allocate our portfolio in order to maximize returns and minimize risk. Overall, we've maintained above-average credit quality in the portfolio and have shortened the duration to reduce potential interest rate risk. Our allocations to equities and fixed income investments has resulted in pretax investment income and realized capital gains of $764 million in 2012 versus $627 million in 2011, a $137 million increase. Despite significant cat losses from Sandy, we achieved a 12% operating ROE and a 14% net income ROE.
This was accomplished while still carrying a capital buffer, providing us with one of the strongest balance sheets in the industry. We prefer this because it provides a competitive advantage by allowing us the ability to respond aggressively into the market when the unexpected occurs. While some in our industry are accepting of single-digit ROEs because of the interest rate environment, our strategy is to position our underwriting portfolio to achieve improved returns and mitigate the loss of investment income. As I have been discussing, we have been strategically shifting our portfolio towards shorter tail, higher ROE risks, but managing the potential volatility of this strategy by broadening our footprint and managing accumulations. Our benchmark is focused on total shareholder return. We seek to achieve returns that provide a mid-teens compound annual growth in book value per share, adjusted for dividends.
That has proven successful with a long-term return of 13% to our shareholders, despite catastrophe losses and other challenges that have confronted the industry. Over the last year, we have established a number of new initiatives, including our newest, Mount Logan. I'm quite optimistic that these efforts will enable us to profitably expand our operation over the years to come and continue to provide our shareholders with double-digit returns. Along with our talented employees, global footprint, and financial strength, we remain one of the strongest franchises in the business. I will now turn it over to Craig for further details on the financials.
Thank you, Dom, and good morning, everyone. We're pleased to report that Everest had a very strong year with after-tax operating income of $715.2 million, or $13.62 per diluted common share. This represents an operating return on equity of 12.2%. I won't be comparing these results to last year, given the record catastrophes experienced in 2011. Operating income for the fourth quarter was $41.7 million, or $0.80 per diluted share. Net income for the fourth quarter was $58.8 million, or $1.13 per diluted share. Net income includes realized capital gains. Net income for the year was $829 million, or $15.79 per share. These results reflect the continued improvement in the overall current year attritional combined ratio, which has declined a full three points from 88.0% to 85.0%. This measure excludes the impact of catastrophes, reinstatement premiums, and prior period loss development.
The total reinsurance attritional combined ratio was 80.9%, compared to 83.5% in the prior year. The insurance segment attritional combined ratio was 100.9%, compared to 105.8% in the prior year. However, eliminating the effects of the primary crop book, this ratio would have been 97.2%, compared to 105.3% in the prior year. These improvements, both on the reinsurance book and the insurance book, should continue as rate increases earn in over time. Also providing better margins is the shift in our reinsurance portfolio from quota share to excess of loss. Gross written premiums of $1.15 billion for the quarter were up 4% compared to the fourth quarter of 2011. This increase was primarily related to the insurance segment. Gross written premiums for the year were $4.3 billion. This represents an increase of 2% after adjusting for reinstatement premiums and the effects of foreign currency movement.
Earned premiums of $1.12 billion for the quarter were up 9% compared to the same quarter last year, after adjusting for reinstatement premiums. Earned premiums for the year of $4.2 billion were also up 2% on this same basis. The reinsurance segments reported earned premiums of $3.3 billion for the year, up about 1% from 2011. Insurance segment earned premiums of $852 million were up 4% year-over-year. This increase was primarily due to the acquisition of Heartland and the growth in primary accident and health stop loss business. The fourth quarter underwriting results were impacted by Superstorm Sandy. Total reinsurance reported an underwriting loss of $48 million for the quarter, but an underwriting gain of $327 million for the year. The insurance segment reported a $46 million underwriting loss for the quarter and a $68 million loss for the year.
These results reflect a crop loss of $23 million for the year and loss reserve development, which I'll discuss in a moment. The overall underwriting loss for the group was $94 million for the quarter, but an underwriting gain of $259 million for the year. Our reported combined ratio was 108.4% for the quarter and 93.8% for the year. The commission ratio of 22.9% for the year is down 0.3 points compared to the prior year. However, after eliminating the effect of reinstatement premiums, contingent commissions, and several one-time adjustments, the commission ratio would have been 21.2% compared to 22.7% in the prior year on a similar basis. This loss ratio reflects the shift from pro-rated excess loss contracts, which generally carry a lower commission. The expense ratio of 5% for the year is up 0.6 points compared to last year.
This increase primarily relates to the increased accrual for personnel costs and incentive compensation. For the year, we recorded $325 million of gross current year catastrophe losses for the quarter. These losses were related to Superstorm Sandy in the U.S. this quarter. The pre-tax Sandy losses were $287 million after reinstatement premiums. This estimate has not changed since our pre-announcement in December. Our gross cat losses totaled $410 million for the year, or 9.8% of earned premiums. On reserves, we've completed our annual loss reserve studies. The results of the studies indicated that overall reserves remained adequate. In the fourth quarter, we booked some prior year development in the insurance segment, which was offset by favorable development in the reinsurance segments. The $48 million of prior year reserve development in the insurance segment related to construction liability and workers' compensation.
The construction liability relates to landscaper programs that the company no longer writes. The $51 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. For investments, pre-tax investment income was $146 million for the quarter and $600 million for the year on our $16.6 billion investment portfolio. Investment income for the year declined $20 million from one year ago. This decrease was primarily driven by declining reinvestment rates, partially offset by higher limited partnership income for the year. Despite the declining rates, our investment portfolio continues to perform well. It is a conservative, well-diversified portfolio with high average credit quality. The pre-tax yield on the overall portfolio was 3.5% with a duration of three years. The quarter reflected $20 million of pre-tax realized capital gains and $17 million of gains after tax.
For the year, we had $164 million of pre-tax realized capital gains and $114 million of gains after tax. These gains are mainly attributable to fair value adjustments. On income taxes, the 7.7% effective tax rate on operating income for the year reflects one-time adjustments during 2012 and the impact of the realized capital gains on the effective tax rate calculation. It is expected that the tax rate on operating income will normalize toward an overall effective rate of approximately 13% in 2013. This rate depends on the geographic region where the income is earned, the tax rate in that region, and the impact of realized capital gains or losses. Strong cash flow continues, with operating cash flows of $664 million for the year compared to $660 million in 2011. This is despite the high level of catastrophe loss payments over the last two years.
We've earned almost $1 billion of comprehensive income this year. This primarily reflects $829 million of net income for the year, plus unrealized appreciation on securities of $154 million and foreign currency translation adjustments of $23 million. Turning to capital management. In addition to dividend payments to shareholders of $25 million, we repurchased 371,000 shares this quarter at a total cost of $40 million. For the year, we've repurchased 3 million shares at a total cost of $290 million. We repurchased another $38 million of stock after the year-end close. These purchases will be reflected in the first quarter 2013 financial statements. The company has 4 million shares remaining after these January purchases under a share repurchase authorization from the board of directors. Shareholders' equity increased to $6.7 billion this year, up 11% from $6.1 billion at year-end 2011.
This is after taking into account the $290 million of stock repurchases and the $100 million of dividends paid in 2012. Book value per share increased 16% to $130.96 from $112.99 at year-end 2011. Our strong capital position leaves us with capacity to maximize our business opportunities as well as continue share repurchases. Thank you. Now I'll turn it back to Beth for Q&A.
Tim, we're ready to take questions.
At this time, if you'd like to ask a question, please press star then the number 1 on your telephone keypad. Once again, that's star 1 to ask a question. We'll take our first question from Josh Shanker with Deutsche Bank.
Good morning. I realize you're holding us a little bit in suspense about a partnership coming up. Can you explain a little bit about how partnerships overall are going to be able to transform the business and how transformational it can be?
Yeah, Josh, this is Dom, what I was referencing, I can't get into the details because we have not concluded on the transaction. Essentially, it's going to leave us with the ability to take our non-standard auto book, which is currently running at about $30 million of premium, and it's anticipated that that could grow to as much as $80 million into 2013. This will give us much better scale in that business, which it is a business that needs scale. As a consequence, not only the ability to improve our underwriting account, meaning by the loss ratio, but also give us an expense advantage. Without getting into the details of the structure and with who, that's the intended outcome.
Understood. You may have seen one of your former peers was railing against sidecars as a potential, yesterday, as a issue that will ultimately lower the profits for the industry. Where do you think the industry is five years from now? As you participate to some extent in that, what's the right business mix over the long term?
Well, I'll start with that, Josh. Clearly we see more alternate capacity coming into the marketplace, some of it's sidecar, some of it's pension fund, and other ways. We intend to participate in that market, and frankly, we intend to make some fees on that market. In the beginning, the fee part of our book is going to be quite small compared to the risk-taking part that we're currently on. At the end of the day, given our ratings and our offices around the world, our people, the fact that we know clients for many, many years, we see a lot more business, especially on the cat side, than we can accommodate or want to accommodate, given the fact that we want to keep PMLs to a certain degree.
We have tremendous opportunity to write a lot more business, share it with some partners, and make fees in the process. That kind of brings more capacity into the marketplace, especially as others do it as well. It may make for more competition, although there's always competition. We still think all the money that's coming in and any of the money that we bring in will only want to come in for profitable business. We think it'll be a good model. In terms of ultimately how much will be fee and how much will be risk taking, that remains to be seen, but clearly for now, most of our earnings are going to be on the risk-taking side.
Given that you guys have extra capacity, along those lines, if you think about, you certainly could write more business if it became available. Are you giving up profitability in order to make a footprint in the alternative capacity market?
We're not looking to take away from anything that we would want to keep for ourself. That really is the design. We'll try to put ourselves in the same position with our new partners so they feel as if it's really equal trading. We are not looking to give away $1 worth of business that we would normally write for ourselves.
Is there any risk to that? I mean, that's always been my concern, that while of course you don't want to give any way that there's a risk of that happening. Am I mistaken about that?
I don't see that, Josh. We really kind of measure our appetite quite keenly nowadays and would continue to do so. I think, again, given the opportunities, we'll be able to fill our plate with everything that we want and then have more that we can share with others on a fee basis.
Well, thank you. I appreciate the answers.
We'll take our next question from Amit Kumar with Macquarie.
Thanks, good morning. Maybe just going back to the discussion on capital. Obviously, you have all these new opportunities. How do you think about capital management for 2013? The reason why I'm asking is that relatively it has been lower than some of the other companies. What sort of math do you use? Is it buybacks plus dividends would equal net income? Is there something beyond in terms of how you look at 2013 in terms of capital management?
Well, I think we start with what are the opportunities that we see. We certainly see plenty of that, including some new opportunities on the business side. As Dom noted, we certainly want to be prepared for future opportunities that arise if the world changes, and it has a habit of doing that. At the same time, we look at our stock, where it's trading, the current portfolio, the people, the future, and we feel very good about buying back a whole lot more stock. Now, we were kind of prevented from doing that in 2012. We took ourselves out of the market for hurricane season. We're keen to get back into the market in the fourth quarter, then Sandy happened. We did not want to get back into the market until we'd put out an estimate on Sandy, which took us late into December.
We bought some after that and a bit early January. As I noted, we're keen as soon as the open window comes to get back into the market and buy some more. We are going to foster earnings and ROE in multiple ways. Some of it's the business, some of it new business, some of it stock buyback.
It seems that just based on the ranking, it seems to be of lower relative importance, just based on how much you've grown excess capital in 2012. It seems that you're saying that let's look at the opportunities and maybe further down the list, you're looking at the stocks multiple, because clearly, there's value which can be created in terms of a buyback right now. It just seems that it's somewhat down the list. Is that a fair assertion?
No, I wouldn't put it that way. We bought back about 25% of our stock in recent years. We bought back close to $300 million in 2012 and would have bought back a bunch more if it wasn't for Sandy. No, I think it's still important in the sense that we think it's a great opportunity for us to buy, and we don't think it's one that's going to last forever, quite honestly, so we're keen to do a fair amount now. There are opportunities out there both in the existing business and new business, and again, what else may come about. It's always a bit of a juggling act. We're happy that we have both levers to press to increase the ROE for next year, and I would not say that it's of less importance.
I guess my offset to that point would be why even look at non-standard auto opportunities based on the history, just based on the stock multiple right now?
Well, that's a business we're already in. We have a small company that operates out of Georgia. We're looking to be able to add to that and add to the margins by the construction that Dom took you through. Frankly, it's just an add-on that requires very little capital, quite honestly, and we believe it'll increase profits. We like the proposed business plan, but in the scheme of capital usage, it's really quite small.
It meets our return objectives, in terms of how we think it can perform.
What is the return objective?
12%-13%, 14% return on capital.
Okay. The only other question I have is, a lot of the other companies have talked about, they've given sort of a flavor in terms of 1/1 renewals, and you sort of have broadly alluded to it. How much do you expect your Prop cat book to grow for 2013? I think previously you've talked about maybe a $1 billion plus number. Generally, how do you think about that for 2013?
As I mentioned in my opening comments, we've already, at 1/1, increased our property premium by $150 million. That was essentially a 15% growth, if you will.
Okay. I'm sorry, I was on another call.
To the annual number. Shame on you.
I guess related to that, did you discuss your PMLs? Did I miss that too, in terms of how do you expect the risk profile to shift with that growth? I think previously the number was 11 percentage-ish.
Well, you didn't miss that because we didn't discuss our PMLs. They will go up slightly, but as a % of capital, they're not expected to move at all.
Got it. Okay.
Nominally, they will increase, of course.
Nominal. Okay. That's all I have for now. Thanks so much.
Thank you.
I'll take our next question from Michael Nannizzi with Goldman Sachs.
Thanks. Just wondering, Dom, maybe in the insurance book, can you tell us what % of the business is crop? Maybe this year and now with all the noise out of the way in 2013, how big is that book as a % of the total?
Well, for 2012, off the top of my head, I would say around 20%.
Okay.
Going into next year, we would expect that to increase because of not only growth objectives and the hiring of some underwriters and marketing teams, the elimination of the quota share, that's likely to grow by $100 million, at least.
Okay.
It'll be about 30% of the overall book.
Right.
Yeah.
Got it. Okay. Do you expect the rest of the non-crop insurance book to grow as well, or do you expect that to kind of Because it sounds like you got a lot of puts and takes, a lot of moving parts, some new initiatives, some things kind of going away. I'm guessing the program business is kind of done in terms of the net change.
Yeah. The runoff of the program business is not going to have any major impact. Yeah, we will have growth in our excess casualty book initiative that we've started, an environmental book of business that we have, the non-standard auto I've already mentioned. We've started up a new specialty unit that will have a modest amount of new premium, maybe $20 million in 2012, but that could rapidly grow from there in the years beyond. As well as I mentioned, expansion of the Canadian platform. We've got a number of oars in the water all over the place in the insurance space. As the California DIC will be growing our professional liability book as well, then, of course, the double-digit rate increases in workers' comp. We're quite enthusiastic about that space right now.
Do you think, if your double-digit rate on the 70% or 80% of the book outside of crop gets back to high 80s, maybe 90, is low 90s feasible for 2013 in the insurance business? Is that possible?
With a good crop year, I suppose that's possible, sure.
Yeah, I would say yes with a good crop year. Comp continues to trend very nicely. We continue to get very sizable rate increases. That continued into January. Dom touched on all the other areas, which we really feel quite good about as well. The answer is yes.
Great. Just last question, not to beat on the buyback, but I guess in my math, I get about $100 million of buybacks in the beginning of the year. Next year, book value goes up a buck-ish. What math, when you think about deployment outside of buybacks, gets you to that sort of book value growth? If you assume that you're writing business against $100 million, for example. What is the kind of trade-off as you see it internally? Thanks.
Well, you get into where you can invest it and where you can use it against the business. You get into what's the timing as to when you want to use it. If you don't buy back on Monday, you can always buy back on Tuesday. It's not like the opportunity necessarily goes away. I will say that the levels that we've been trading at really are pushing us to do more sooner as opposed to later, because frankly, we don't believe it'll stay at these levels. Having bought back 25% is a good chunk to begin with. Again, the fact that we bought back $300 million, we're looking to buy back more, and kind of telling you as soon as we can, we're going to jump into the market, tells you that's certainly part of what we plan to do as well.
Great. Thank you.
I'll take our next question from Vinay Misquith with Evercore Partners.
Hi. First, just a numbers question. Within the U.S. primary insurance operation, the commission expense ratio was really low this quarter. Just wondering if there was some one-time items in there?
Primarily related to crop. In other words, contingent commissions that would have had to be paid out, given that a poor crop year took place, were taken down in the quarter.
Sure. We should just move it back up to the normal, about 17.5% for the future, correct? Okay.
That's correct.
Okay, that's helpful. Secondly, on the margins, as you look at the various opportunities, do you expect your accident year combined ratio to improve further from these levels? I mean, they're certainly very good right now.
Yes, we do.
Okay. That's driven by business exchange, or is that pure pricing?
Well, some of the pricing that I referenced, particularly in the insurance space and in general casualty rate increases as it affects our treaty books. Of course, continued push towards write more excess of loss business, spread our cat aggregate laterally, if you will, and that should have a furthering positive impact on the attritional loss ratio.
Okay, that's helpful. One final thing, if I may, just looking in terms of cats, would you say that this year is, I mean last year, sorry, was a normal year in terms of cats, or do you think it was a higher than normal year in terms of cats and ag losses?
That number was approximately what we project as what we call our average annual loss. I don't know that there is an average annual, but over the long term, that would be considered a theoretical average year.
Okay, that's fair. Thank you very much.
We'll take our next question from Brian Meredith with UBS.
Yeah. Good morning, everybody. Couple questions here. First, the property growth that you're seeing, where is that coming from? Is that cat business? Is it international? U.S.?
The cat business that we
Is it property cat when you refer to property under $50 million?
Yes. Property U.S., and Europe predominantly.
Okay. Great. Then, I'm just curious what your thoughts are on the opportunities in Florida as we approach the mid-year renewals with the depopulation of Citizens.
Well, we think this will be some very good opportunities there. Certainly, the market at the insurance level continues to get healthier with rate increases, so it'll be a bigger pie. There's still an awful lot of companies down there that are very much in need of reinsurance. You saw what Citizens did last year. I think it's a big pie. It's an explosive pie, and people are somewhat cautious as to how they fill up. It tends to be everyone's number one zone in terms of PML. It is for us. I think it'll continue to be some very good opportunities down there for companies like ourselves in June.
Joe, is that a place that you're more likely to use your sidecar, you think, at this point?
Yeah. It's not a sidecar that we're putting together, and that's in the sense that sidecars tend to be operations that are put together for one or two years, and then they're kind of designed to go away. We're putting something together that will be in place permanently. Florida is exactly the kind of opportunity where we're going to have a PML that we don't want to exceed, and we're going to have a ton of business beyond that we could write if we wanted to.
Great. Last quick question here. Is Heartland a player in the winter wheat area? I know they've been having some issues with winter wheat crop this year.
It's in that space. It's probably about 10% of the book. Soybean and corn is bigger, but it's in that space, and so yes, that has started. It's early days, but looks fine so far.
Great. Thank you very much.
Thank you, Brian.
We'll take our final question from Greg Locraft with Morgan Stanley.
Hi, thanks. Just wanted to open up the reserve side of the equation. It's been in the past a concern of some in the investment community. Seems like in the exit 2012, it's the third year of very little reserve movement either way. How are you feeling on this line? Our work suggests you have considerable excess here. Many in the industry have been releasing. I guess on the good side, that isn't a headwind going forward because you don't need to pull from reserves to hit your target ROEs. On the other hand, you haven't been releasing. It seems like you've been holding back. How do you feel on reserves as you enter 2013 and beyond?
Greg, this is Craig. We've completed our annual loss reserve studies, and we're comfortable with our overall position that we remain adequate. We've posted our global loss development triangles for the past couple of years, and they also appear adequate. I'm comfortable with this position, and I'm also comfortable with respect to the practices and the procedures that we've put into place to come up with such a good reserve position. I think this company produces good results without those releases in place. I think one of the things that I like also is the fact that we take our time to react to favorable development. Some of these redundancies that you've seen have developed over time, but we don't want to react until that position becomes more mature. We continue to hold the more recent years, and we expect to do the same going forward as well.
Okay. Actually, the peers that are releasing, it's not that you're any different, it's just that you're holding back. Philosophically, you're holding back more than they are?
No. We can't speak to-
We're not going to get into what others do. We don't know what they do, and we're not here to comment on that.
Okay. Then just last one on this is, has the reserving practices of the corporation changed at all in the last few years? Again, it was never a big issue. It just seemed to break against shareholders more frequently several years ago than it has happened in the last several years. I'm just wondering if there was a shift at all.
Well, Greg, that's a good question. I think the reserve practices did change a few years back to create this position that we're in today. I think the practices that we put into place by meeting on a quarterly basis and setting up these estimates on a quarterly basis, it's difficult to estimate what these numbers should be to begin with. The practice that we've put into place is pretty conservative. We look at prior year losses, look at the prior year loss review, and then we compare and put loss trend on top of that. We also take note of any rate increases or decreases in the marketplace at the same time. What that does is gives us appropriate data to look and set our reserve position at any given point in time.
That same process has been taking place for the last three years.
It's a kind way of saying, Greg, that it's my fault. Let me chime in. I was about to say we had a great CFO by the name of Dominic J. Addesso that started this process that did an excellent job in making our process more robust.
Okay, great. I do just want to clarify. Your forward view on ROE and everything, that includes no reserve movement either way, right?
Yes, I think that's correct. We do not put that into any thoughts that we give you with regard to the targets we're shooting for.
Okay, awesome.
That's correct.
Okay, good. Thanks, and solid year. Appreciate it.
Thank you.
That concludes our question and answer session. I'll turn it over to our presenters for any closing remarks.
I'd like to thank everybody for participating on the call, and talk to you again next quarter. Thank you.
That concludes today's conference call. We appreciate your participation.