Everest Group, Ltd. (NYSE:EG) Q1 2024 Earnings Call Transcript

Everest Group, Ltd. (NYSE:EG) Q1 2024 Earnings Call Transcript April 30, 2024

Everest Group, Ltd. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, everyone, and welcome to the Everest Group Limited First Quarter of 2024 Earnings Conference Call. The Everest executives leading today's call are Juan Andrade, President and CEO; and Mark Kociancic, Executive Vice President and CFO. We are also joined by other members of the Everest Management team. Before we begin, I'll preface the comments on today's call by noting that Everest SEC filings include extensive disclosures with respect to forward-looking statements. Management comments regarding estimates, projections and similar are subject to the risks, uncertainties and assumptions as noted in these filings. Management may also refer to certain non-GAAP financial measures. These items are reconciled in our earnings release and financial supplement. With that, I'll turn the call over to Juan.

Juan Andrade: Thank you, Matt. Good morning, everyone. Thank you for joining us. We had a strong start to 2024. Our first quarter results included record underwriting profit and significant increases in operating income, net income and investment income. This resulted in a total shareholder return exceeding 18%, and an operating return on equity of 20%. We drove margin expansion through rate increases that are meaningfully in excess of loss trend, targeted risk selection, portfolio and cycle management, exposure growth and with underwriting discipline. We accomplished this while consistently and purposely maintaining conservatism in our loss space. We are confident in how we have shaped our portfolio. In Reinsurance, we built on our preferred lead market position at the January 1 renewals and continue to distinguish Everest in the accelerating flight to quality.

Our reinsurance portfolio is well positioned and driving strong risk-adjusted returns. In Insurance, we advanced our disciplined expansion in targeted markets while remaining focused on prudent risk selection and the bottom line. We are focused on our primary objective of delivering consistent, leading financial returns. With the 3-year strategic plan, we laid out during November 2023 Investor Day, Everest has entered a new chapter of profitable growth and opportunity, and we are well positioned for the future with a focused strategy and great talent. Now I'll turn to the first quarter financial highlights, beginning with our group results. We delivered $709 million in net operating income, a 60% increase from the prior year. Gross written premium increased by over 17% in constant dollars.

Our growth in the quarter was broad-based and reflects Everest's diversification by segment, geography, business line and distribution. Growth was supported by best-in-class execution and our ability to take advantage of market conditions and reinsurance and insurance, particularly in property and specialty lines. Our underwriting performance was strong in the first quarter. We delivered $409 million in underwriting profit. The group combined ratio was 88.8%, a significant improvement from last year. This is despite the industry incurring approximately $20 billion in catastrophe losses in the quarter. For Everest, pretax catastrophe losses, net of estimated recoveries and reinstatement premiums were $85 million or just 2.3 points, a year-over-year decrease directly resulting from our portfolio optimization efforts.

Everest catastrophe losses were primarily driven by the Francis Scott Key Bridge collapse in Baltimore. With regard to investments, we generated net investment income of $457 million, a new quarterly record. Now turning to our Reinsurance business. Reinsurance delivered significant top and bottom-line growth. Our success at the January 1 renewal gave us a running start to the year, delivering a higher quality, higher-margin portfolio. We grew the Reinsurance business in the first quarter, over 20% on a constant dollar basis, with $3.2 billion in gross written premiums. We increased underwriting profit to $345 million, with an 87.3% combined ratio. The attritional loss ratio and attritional combined ratio also improved to 57.2% and 84.4%, respectively.

This quarter included pretax catastrophe losses of $80 million net of estimated recoveries and reinstatement premiums. Both rate and terms and conditions remained at attractive levels, resulting in a portfolio that should continue to achieve excellent risk-adjusted returns. We grew our total property portfolio significantly, building on meaningful increases in 2023. We expanded our portfolio in attractive specialty lines of business, particularly marine and aviation. We remain disciplined and surgical in our approach to certain casualty lines. Our responsiveness, creativity and constructive approach to the market once again set Everest apart. We deepened relationships with top-tier clients globally while capturing incremental demand and growing share on oversubscribed deals.

We continued this positive momentum through the April renewals, resulting in high-quality, broad-based growth, particularly in property lines and excellent overall risk-adjusted returns. We capitalized on strong demand, expanding with core cedents, while also growing with targeted new partners. Consistent with the January renewal, we maintained discipline in certain casualty lines, nonrenewing business that did not meet our thresholds. Overall, the market remains disciplined and trading conditions continue to be favorable, particularly in property and specialty lines. We continue to see incremental demand from cedents, and we are leaning into these opportunities. We expect risk-adjusted returns to remain attractive through upcoming renewals and into 2025.

Now turning to insurance. We continue to unlock value in our primary insurance business, making solid strides in bringing our capabilities to new markets globally. We grew the Insurance segment by 10% in constant dollars, and generated over $1.2 billion in premiums for the quarter. Growth was diversified with 37% growth in property and 36% in specialty lines such as aviation, energy, surety and marine. We see strong rate and terms and conditions in these lines. Also, due to strong rate increases, we saw modest growth in some casualty lines. With a consistent emphasis on profitability, we focused on lines of business with favorable pricing and strong profit trajectories. We achieved a 12% rate increase across the portfolio, excluding workers' compensation and financial lines.

Loss trends in casualty remain elevated, but they're stable, and pricing continues to meaningfully outpace that trend. We continue to see rate acceleration across casualty lines excluding financial lines. This was most pronounced in commercial auto liability, general liability and excess casualty lines. The rate increases in these 3 lines average mid-teens overall. The combined ratio at 93.1% resulted in an underwriting profit of $64 million. The attritional loss ratio was 64%, reflecting our discipline and continued loss pick conservatism in casualty lines of business. We also continued our proactive shift to short-tail lines, which we expect will benefit underlying margins throughout the remainder of the year. As I've said in the past, we will recognize bad news quickly, and the good news from our positive portfolio rate actions will season over time.

We are focused on profitably growing in geographies and lines of business we find attract while continuing to drive rate in excess of loss trend. Our first quarter continued to demonstrate the strength of Everest franchise and the results of our actions over the past 4 years. We see significant opportunities for our underwriting businesses globally, and trading conditions remain favorable. I'm excited about the journey ahead for our business and our ability to continue delivering leading financial returns. With that, I'll turn it over to Mark to review the financials in more detail.

Mark Kociancic: Thank you, Juan, and good morning, everyone. Everest is off to a strong start to 2024. We delivered significant growth in underwriting income, net investment income, operating income and net income for the first quarter. This drove operating EPS of $16.32, and an operating ROE of 20%. The annualized TSR or total shareholder return was strong at 18.1% despite modest foreign exchange headwinds. The company's strong performance in the first quarter was led by our team's high level of execution and ability to capitalize on attractive opportunities. We have significant momentum behind us across both of our franchises driven by excellent outcomes at recent renewals and our disciplined insurance expansion into target global markets.

Looking at the group results, Everest reported gross written premiums of $4.4 billion, representing 17.2% growth in constant dollars and excluding reinstatement premiums. The combined ratio was 88.8% for the quarter, driven by an improved underlying loss ratio and lower cat losses. The cat losses in the quarter were largely driven by the Baltimore bridge collapse, which contributed $70 million to cat losses. The group attritional loss ratio was 58.9% and a 90 basis point improvement over the prior year's quarter with both segments contributing to the improvement. The group's commission ratio was 21.4%, consistent with the prior year. The group expense ratio improved 30 basis points to 6.1% in the quarter, an excellent result as we continue to invest in talent and systems within both franchises.

Moving to the segment results and starting with Reinsurance. Gross written premiums grew 20.4% in constant dollars when adjusting for reinstatement premiums during the quarter. Growth in the quarter was consistent with the trends seen throughout the prior year with strong and broad-based growth in property and specialty lines, while we continue to remain disciplined in certain casualty lines. Property lines grew 31% in the quarter, while casualty lines grew 11% in the quarter, and we continue to see the written premium mix shift towards property and short-tail lines, which now stands at 54% property and 46% casualty versus 50% property and 50% casualty in the prior year. Growth will continue to favor short-tail business as we trend throughout the year, which will be more pronounced on an earned basis.

The combined ratio was 87.3%, an improvement of 350 basis points from the prior year. The attritional loss ratio improved 80 basis points to 57.2% as we continue to achieve more favorable rate and terms, particularly in property and specialty lines. The attritional combined ratio improved 150 basis points to 84.4% during the quarter. Both the commission ratio and underwriting expense ratio improved modestly to 24.6% and 2.6% in the quarter, respectively. Moving to Insurance. Gross premiums written grew approximately 10% in constant dollars to $1.2 billion. We continue to methodically scale our primary franchise globally while proactively focusing our North American portfolio towards the most accretive lines of business, led by retail property and short-tail specialty lines.

The growth in casualty and professional lines was driven by rate increases as a number of lines saw continued price acceleration in the quarter. The attritional loss ratio stood at 64% this quarter, an improvement of 40 basis points from the prior year. The commission ratio was consistent with the prior year, while the underwriting related expense ratio increased to 16.6%, driven by the continued investment in our global platform. Moving on to investments. Net investment income increased nearly $200 million year-over-year to $457 million for the quarter, driven primarily by higher assets under management and higher new money yields versus maturing assets. Alternative assets generated $74 million of net investment income, an improvement from the prior year as equity markets have continued to rebound.

Our overall book yield improved from 3.8% to 4.7% year-over-year, and our reinvestment rate remains north of 5%, which is in excess of maturing security yields. We continue to have a short asset duration of approximately 3.4 years given the attractive level of short rates. The investment portfolio remains well positioned for the current environment and is supported by the compounding effect of strong underwriting income and cash flow. Our high-quality portfolio is built to generate strong returns on a consistent basis. For the first quarter of 2024, our operating income tax rate was 12.2%, which was broadly in line with our working assumption for the year. Our capital strength gives us ample capacity for 2024 and positions us well for profitable organic growth.

We opportunistically repurchased 90,000 shares in the quarter, amounting to $35 million with an average of $387.64 per share. Shareholders' equity ended the quarter at $13.6 billion or $14.5 billion when excluding net unrealized depreciation on available-for-sale fixed income securities. At the end of the quarter, net after-tax unrealized losses on the available-for-sale fixed income portfolio equates to approximately $876 million, an increase of $153 million as compared to the end of the fourth quarter, resulting from interest rate increases. Cash flow from operations was $1.1 billion during the quarter. Book value per share ended the quarter at $313.55, an improvement of 3.6% from year-end 2023 when adjusted for dividends of $1.75 per share year-to-date.

Book value per share excluding net unrealized depreciation on available-for-sale fixed income securities stood at $333.70 versus $320.95 per share at year-end 2023, representing an increase of approximately 4%. Net debt leverage at quarter end stood at 15.8%, modestly lower on a sequential and year-over-year basis. In conclusion, Everest had an excellent start to the year. Market fundamentals remain attractive, and we have strong momentum across both underwriting franchises. And with that, I'll turn the call back over to Matt.

Matt Rohrmann: Thanks, Mark. Operator, we are now ready to open the line for questions. We ask that you please limit your questions to 1 question plus 1 follow-up, and rejoin the queue if you have additional questions.

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