Everest Re Group, Ltd.

Good day and welcome to the Evers Free Group Limited fourth quarter of 2022 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touch-tone phone. To withdraw your question, please press star then two. Please note today's event is being recorded. I would now like to turn the conference over to Matt Roman, Senior Vice President and Head of Investor Relations. Please go ahead.

Good morning, everyone, and welcome to the Everest Regroup Limited fourth quarter of 2022 earnings conference call. The Everest executives leading today's call are Juan Andrade, President and CEO, and Marco Ciancik, 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, including 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 statement. With that, I'll turn the call over to Juan.

Thank you, Matt. Good morning, everyone. Thank you for joining us. Everest's excellent fourth quarter performance capped another strong year of consistent execution of our strategy and continued positive momentum. We advanced our objective of creating sustainable value for our shareholders with disciplined underwriting and targeted growth driving margin expansion in both businesses. We increased diversification in each of our segments, both geographically and by product line. When you combine all of this, With healthy and consistent rate increases and improved terms, our risk-adjusted return profile improved across the board. Both franchises delivered solid top and bottom line performance. We profitably grew our primary insurance division and executed an outstanding January 1 reinsurance renewal. This further reinforced our global market leadership and positions Everest well for the future. Our actions resulted in solid underwriting profit for the year, over $1 billion in operating income, and a double-digit operating return on equity for both the quarter and the year, an excellent result. We achieved these results despite market volatility, economic and geopolitical uncertainty, and industry catastrophe losses totaling over $140 billion in the fifth costliest cat year in history. In short, we accomplished a great deal in 2022 and built a wide runway for future opportunity. We are uniquely positioned with accelerating momentum and top-tier talent driving this business. Everest is more agile and well-equipped than ever, and we have the ability and the drive to seize attractive opportunities and deliver on our commitments in 2023. Now I will briefly recap our financial highlights. focused on the full year, beginning at the group level. In 2022, we grew the company by 9% in constant dollars, ending the year at approximately $14 billion in gross written premium. We generated $477 million in underwriting profit, with a 96 combined ratio. This is a near two-point improvement year over year, despite an active CAT year. The attritional combined ratio of 87.4 also improved from the end of 2021, and we achieved a 70 basis point improvement year-over-year in the group loss ratio. The operating expense ratio remains best in class at 5.8. Finally, our high-quality investment portfolio generated $830 million in net investment income. Our actions to optimize the investment portfolio over the past three years and position it for a rising rate environment have paid significant dividends. Now turning to our underwriting segments, beginning with reinsurance. Our reinsurance division's focused execution in 2022 further enhanced our global market leadership and preferred partner position. We continue to optimize our portfolio while achieving solid top and bottom line growth. For the full year, reinsurance growth was 5% on a constant dollar basis, with $9.3 billion in total gross written premiums. This growth was driven by broadened opportunities with our core seedings and our nimble allocation of capital to achieve the highest returns. We took deliberate action during 2022 to shed underperforming business. This also positioned us well to take advantage of the strong trading conditions at January 1. These actions resulted in over $300 million in underwriting profit for the year and a combined ratio of 96.4, which is a 1.7-point improvement from 21. For the full year, both the attritional loss ratio at 58.7 and the attritional combined ratio at 86.2 improved, down 90 basis points and 10 basis points respectively. Our deliberate underwriting actions significantly reduced our cap losses, demonstrated by our less than 1% market share from Hurricane Ian in the third quarter, the second largest hurricane in U.S. history. Our focused reinsurance strategy continues to pay dividends. Throughout 2022, we leveraged our market position, deep client and broker relationships, and strong balance sheet to build a more profitable and higher margin book, which culminated in an outstanding January 1 renewal. I'll provide more color on 1.1 in a few minutes. Now turning to our primary insurance division. In 2022, we made tremendous strides expanding our reach, capabilities, product set, and breadth of global talent, while hitting important financial milestones. We finished the year with insurance growth of 18% in constant dollars and $4.6 billion in premiums. This is supported by a new quarterly gross written premium record in the fourth quarter. Growth was balanced and diversified across the business by product line and by geography. After four years of significant and cumulative rate increase we achieved high single-digit average increases, excluding workers' compensation throughout the year. In addition to rate, exposure growth, driven by revenue and payroll increases, created additional margin against loss trends. Pricing increases in the quarter were led by commercial auto, general liability, and property. Our proactive cycle management actions contributed to our continued improved underwriting profitability Our ability to pivot quickly is a key advantage. Everest continues to benefit from an influx of top talent with the market expertise, track record, underwriting acumen, and relationships to execute our strategy. We achieved a milestone full-year underwriting profit of $164 million, which is a new annual record for the insurance division, with a full-year combined ratio of 94.8. down 2.3 points year over year. Our attritional combined ratio also improved 80 basis points year over year to 90.4. We are enhancing our operations to become even more connected and efficient on a global scale. It's an exciting time for our primary business. We continue to see significant opportunities, and I look forward to even greater momentum ahead. 2022 was a year of multiple wins. We reduced volatility, diversified the portfolio, expanded margins, and enhanced our risk-adjusted return. We got there with consistent and precise execution. We deployed our capital in areas where we could get the best risk-adjusted returns. We also reshaped our property portfolio through continued diversification via growth internationally. All this accomplished while increasing our top and bottom lines. and we improve net exposure to our balance sheet. As I mentioned before, we remain risk-on for PropertyCat as pricing, terms, and conditions provide attractive returns within our defined trading range. Turning to 2023, the January 1 reinsurance renewals were executed by our global reinsurance team with equal precision. And as a result, we have a significantly stronger portfolio heading into 2023 and beyond. We approached the January 1 renewals from a position of strength, with a superior value proposition, well prepared to support our clients and take advantage of excellent market conditions around the world. We set clear goals for our portfolio, and we achieved every one of them by leveraging Everest global market leadership and setting early expectations with clients and brokers, which drove significant pricing improvement. In addition to rate, we also substantially improved terms and conditions. We targeted attractive property opportunities, both domestically and internationally, at materially improved risk-adjusted returns. We drove higher attachment plans and reduced exposure to named and secondary perils. Significant property cat rate increases were evident across all geographies. In North America, the Property Cat XOL risk-adjusted rate change was up approximately 50%. The average attachment point for our global Property Cat business also increased meaningfully, resulting in significantly reduced risk exposure. At the same time, the expected return for our cat portfolio increased materially. In casualty and professional lines, pricing and terms and conditions continued to improve overall, and we leveraged the hard property market to strengthen and further diversify the portfolio. Internationally, the 1-1 renewal exceeded our expectations throughout Europe and Asia. We grew our regional portfolios through increased participations and by expanding our base of new clients. We also saw significant rate movement in specialty lines exposed to the Russia-Ukraine war, particularly in marine, aviation, and political violence. I am very pleased with the performance of our outstanding reinsurance team. Traverse distinguished itself in this renewal by our early and consistent communication with our brokers and clients. We set expectations heading into 1.1 and constructively worked with them to find solutions. As a result, we improved our portfolio and expanded margins while deepening our relationships with brokers and clients. Looking forward to future 2023 renewals, we expect reinsurance pricing momentum to continue. We see abundant opportunity to continue growing and diversifying our portfolio in all markets, focused on further growth in Asia and Europe, while capitalizing on the continuing market dislocation in property. Given significant firming of the reinsurance market on January 1 and the heightened risk environment, Primary insurers should also see firming prices in 2023. They will need to maintain underwriting discipline. I am proud of what Everest achieved in 22. We delivered our strategic objectives while laying the groundwork for sustained profitable growth. I attribute Everest's success to our outstanding team under consistent and relentless execution in every aspect of the business. The outlook for 2023 is bright, and I look forward to taking this company to the next level. Now I will turn the call over to Mark to take us through the numbers in more detail.

Good morning, everyone. Everest finished off 2022 with very strong results across the board in the fourth quarter. Operating income was $478 million, or $12.21 per diluted share for the quarter, equating to an operating ROE of 19.4%. For the full year, operating income was approximately $1.1 billion, or $27.08 per diluted share. With an operating ROE of 10.6%, while the annualized TSR, or total shareholder return, was 5.4%. As Juan highlighted, we have a number of strengths in both our insurance and reinsurance businesses, bolstered by our team's consistent execution around the globe. We remained very well positioned to take advantage of the market opportunities ahead. Looking at the group results for the fourth quarter, Everest reported gross written premiums of $3.7 billion, representing 9% growth in constant dollars. The combined ratio of 87.8% for the quarter represents 4.1 points of improvement over the prior year's quarter, driven by lower cap losses as well as a continued improvement in attritional loss experience, primarily in reinsurance. Group current year loss ratio was 59.6%, a 90 basis point improvement over the prior year's quarter, led primarily by the reinsurance segment, which I'll discuss in more detail in just a moment. The group's commission ratio was 21.6%, up modestly on mixed changes, while the group expense ratio was modestly higher year over year at 6%. Moving to the segment results and starting with reinsurance. In the fourth quarter, the reinsurance gross premiums written grew 3.7% to $2.4 billion in constant dollars. The growth was driven primarily by property pro rata business. The combined ratio was strong at 86.4%, an improvement of 5.1 points year-over-year, primarily on lower CAT losses. Current year loss ratio improved 1.5 points to 58.2% as we continue to achieve favorable rate and terms, optimize mix and scale, various lines, as well as shifting the book towards accounts with better risk-adjusted return potential. The commission ratio is 25%, up modestly, largely driven by mix. and the underwriting expense ratio was 2.8%, broadly in line with the prior year's quarter. Moving to insurance, where we continue to build solid momentum, gross premiums written grew 20.5% in constant dollars to nearly $1.3 billion in the quarter. As Juan mentioned, a record level of production in the fourth quarter for the division. The combined ratio for the quarter was 91.4%, a 1.4 point improvement from a year ago. The current year loss ratio was 63.4% in the quarter, slightly higher year over year due to mix and a one-time adjustment relating to our Lloyds syndicate. Commission ratio improved one point, largely driven by business mix. The underwriting-related expense ratio was 15%, which is within our expectations as we continue to expand our franchise and invest in a number of growth initiatives across the business. And finally, to cover investments, tax, and the balance sheet, net investment income for the quarter was $210 million versus $205 million a year ago. As we continue to benefit from higher new money yields, and increasing resets in our floating rate securities within the fixed income portfolio. Private equity investments yielded a negative 30 million P&L impact in Q4, and they are reported on a one-quarter lag. Overall, our reinvestment rate continues to trend higher year over year, as new money yields remain in the 5% range, while the book yield was 3.5% at the end of the fourth quarter. We continue to have a short asset duration, approximately 3.1 years, and as a reminder, that 22% of our fixed income investments are in floating rate securities. Fourth quarter, our operating income tax rate was approximately 11%, within our assumed range of 11% to 12% over the course of the year. Regarding the balance sheet, we completed the last of our granular reserve reviews across our entire portfolio, which affirm the overall strength of our balance sheet, underpinned by our disciplined underwriting and prudent reserving philosophies. Overall, our reserve adequacy remains solid. We did strengthen our asbestos and environmental reserves, which makes up approximately 1% of total net reserves. by $138 million to position that runoff book comfortably within the average range for industry survival ratios. This was offset by favorable development from a variety of areas, primarily from short tail lines. We also had other marginal adjustments in both segments, resulting in zero net prior year developments. We continue to remain prudent given the uncertainty of inflation and the heightened risk environment the entire P&C industry currently faces. In short, we remain confident in the strength of our reserve position. Moving the shareholders' equity ended the quarter at $8.4 billion. driven primarily by the strong earnings in the quarter, as well as a modest recovery on the value of available-for-sale fixed-income securities, as rates moderated slightly. The net unrealized losses in the fixed-income portfolio as of December 31st were approximately $1.7 billion down from a net unrealized loss of $2 billion at the end of the third quarter, 2022. Operating cash flow was strong at over $1 billion during the quarter, and it stands at $3.7 billion year-to-date. Book value per share ended the quarter at $215.54 per share, while the book value per share excluding unrealized depreciation and depreciation of securities stood at $259.18 versus $252.12 per share at the end of 2021. driven by the strong underwriting results mentioned earlier. Long-term debt to total capital at quarter ends stood at 23.3%, broadly similar to the level last quarter. In conclusion, Everest ended 2022 with a very strong fourth quarter. We have the platform, balance sheet, and the team to continue to take advantage of the current environment, and we have a lot of momentum as we look ahead into 2023. That summarizes our fourth quarter results. And with that, I'll turn the call back over to Matt to begin our Q&A session.

Thanks, Mark. Operator, we are now ready to open the line for questions. If you ask that you please limit your questions to one question plus one follow-up, then rejoin the queue if you have any additional questions.

Thank you. To ask a question, please press star then 1 on your touch-tone phone. If you are using a speaker phone, we ask that you please pick up your handset before pressing the keys. To withdraw your question, please press Start in 2. We'll pause momentarily to assemble our roster. And our first question today comes from Yaron Kinnar with Jefferies. Please go ahead.

Thank you. Good morning. Two questions, if I may. The first one, just listening to your commentary on 1.1 renewals and expectations that the reinsurance market remains at least into mid-year. I guess as I look at the PMLs that we saw for 1.1, they still seem to be down quite a bit relative to mid-22 levels. Is that the right comparison, or should we think about kind of what the PMLs will look like in mid-year 23 relative to mid-year 22? And could you give us some maybe thoughts on how we should see those develop?

Yeah, Yaron, this is Jim Williamson. Thanks for the question. You know, maybe to set a little bit of the stage, I'd like to add some color around 1.1 to add to the comments that you heard from Juan and Mark, because I think it's important context when we're talking about PMLs. And to reiterate what Juan said, it was simply an outstanding renewal. We executed with incredible precision and achieved a number of important objectives in the renewal process. that really resulted in a step change in the risk-reward equation for Everest. As you heard, we received significant rate increases in our U.S. property cap business on the order of 50%. We essentially improved every metric that we used to measure our cap portfolio. Our average attachment points were up. Our attachment probabilities were down. Despite all of that, rate online increased. Our expected combined ratio dropped materially. Our expected ROE increased materially. Our expected loss in dollars went up slightly as we deployed incremental capacity to targeted clients. And our dollars of expected profit per dollar of expected loss increased very meaningfully. Similar factors played out in our international markets where rate increases significantly overachieved expectations as we were coming into the end of the year. And on average, our international markets took 40 points of rate, including over 30 points of rate in the UK, which hasn't seen a major cat loss in decades. So simply put on the property cat side, it was a fantastic 1-1. And I think we expect those conditions to play out through the remainder of this year and into next year. So just exceptional. And so when you think about the resulting PMLs of that, what I would share with you is the comparison you always want to be making is quarter to quarter, because what you're looking at is an analysis of our in-force book. And the way I would characterize our PML movement is the PMLs that we publish were essentially flat. And you see some ups and downs in those PMLs on a net basis. They were essentially flat. And that translates into more deployment of some gross capacity offset by improved AUM in Mount Logan. And that gets you to a roughly flat PML picture. My expectation is we'll probably remain in that sort of territory. We feel really good about our ability to get those incredible economics without really having to stretch the cat appetite. And as you'll see in the investor presentation, in terms of where we are at our earnings and capital at risk measures, you know, we continue to trade well within our defined range, which we're very comfortable with. So it's really the best of all worlds where we're able to get rate that improves economics, overcomes the inflationary factors that you see in the market and do it while maintaining, you know, a risk position in a pretty stable manner. So really could not be happier with the results we achieved.

Thanks, Jim. That's very helpful. And my follow-up to that then would be if I were to try and take that commentary in color and translate that into the combined ratio. So I think you've stated that you expected 91 and 93 reported combined. Would you be surprised to see that come in well below that 91 to 93 range in a quote unquote normal cat year in 23? And would you expect to give us an updated number at some point this year?

Hi, Aaron. This is Juan Andrade. Look, what I would echo is a couple of things. I mean, you look at the 20% net income ROE that we generated in the fourth quarter and 19% operating ROE, which again, it's an excellent result, as I mentioned in my opening remarks, particularly in the market environment that we're in right now. In addition to that, you layer the amount of rate that Jim and I just talked about, over 50% on US CatXOL, over 40% in our European businesses, et cetera. You talk about the terms and conditions that I referred to earlier, in my remarks, which are also significant changes. And all of this is very much accretive to our portfolio. In addition to that, you also look at the work that has been done on the primary insurance side, and just the margin improvement that we've been able to drive through 2022. So all of that leads you to a place that I say, you know, we're in a good place. And I would not be surprised if we end up being on the better end of that range.

And would you expect to give us an update at some point and a hard number?

Yeah, for us, we're expecting to do another investor day towards the end of this year. And at that point, we will be updating our numbers and our financials. You know, this will be the third year of our three-year numbers that we put out there initially back in 2021.

Thank you very much, and good luck in the year ahead.

Thanks, Aaron.

And our next question today comes from Brian Meredith, UBS. Please go ahead.

Yeah, thanks. Juan, it sounds like you're going to update premium guidance also in November.

Yeah, look, I think by then we're going to have a pretty good idea of how the environment is shaping. But I think, Brian, if you go back to, again, my prepared remarks, we just renewed 53% of the reinsurance book at very attractive terms. And as I said in my comments, we also expect that 4.1, 6.1, and 7.1 will continue to be very favorable for the reinsurance industry. So I think that also gives us a pretty good idea as to where that might be shaping. In addition to that, I would also say on the primary side, we also would expect pricing to continue to improve, as I mentioned in my remarks. And frankly, we already saw some of that in the fourth quarter, right, where we saw commercial auto property and general liability make some significant improvements quarter over quarter on the pricing. You know, we're in a heightened risk environment. You've got pressure from the reinsurance hard market. And so I would expect that all of these things will lead to a very good trajectory on the growth. But, yes, we will be providing additional guidance later in the year when we do our investor day.

Great. Thanks. And then second question, I'm just curious, how do you think about allocating your PML on the property side between the insurance and the reinsurance business? I mean, would you hold back some on the reinsurance because of opportunities? On primary, is there one that you prefer a little bit more than the other? How do you think about that?

Yeah, no, that's a great question, Brian. You know, one of the terms that we like to use inside our company is that we do quite a bit of dynamic capital allocation. So this is, frankly, a fundamental discipline that we have with our enterprise risk management framework. We're on a very regular basis. We're essentially looking at byline of business, where we're coming in against expected returns, et cetera. And so that's how we start deciding who gets the capital. What we do not do is peanut butter this around the company, right? So we will look at the market opportunity. We look at where we think we can get the best economics, the best risk-adjusted returns, and that's essentially how we deploy the capital. And it's an important point because I think you heard both me and Jim Williamson talk about the precision with which 1-1 was executed. And I think it's important to step back to understand that in order to get to the heart of your question. And it's the fact that we have pretty good control of our business around the world. So we are able to decide whether we're going to deploy more capital in the U.S. versus in the continent of Europe, versus in Asia, versus Latin America, depending on the market conditions. And we apply that same rigor across the segments, whether it's a primary insurance or whether it's on the reinsurance side of things. And that's ultimately how we make those decisions. But I would invite either Jim or Mark to maybe provide some additional comments on that as well.

Yeah, no, Brian, it's Jim. I think that's spot on. I think clearly what you've seen is a situation, particularly as we came into 1.1, where it took the primary market a little while to start to adjust to the what was coming in terms of insurance rates. And our primary insurance business has been very disciplined on their portfolio management. And in some ways, that's freeing up capacity and thereby capital that we were able to very effectively deploy and reinsurance at 1-1. And that, I think, really brings to life that dynamic capital allocation that Juan is mentioning. And we are very nimble that way, and it allows us to really achieve best-in-class returns.

Great. Thank you.

And our next question today comes from Meyer Shields with KBW. Please go ahead.

Great. Thanks, and good morning. The first question is, I know this is only one piece of the changes at 1.1, but I'm trying to get a sense of the significance of higher reinsurance attachment points. Is there any way of maybe recasting 2022 losses in this new framework just to give us a sense of how much difference that particular step makes?

Sure, Meyer. This is Jim Williamson. It is a very important point. And actually, I think the fourth quarter gives us a little bit of a demonstration of that because we began a lot of these strategies really long before 1.1.23. And if you think about how we executed in 1.1.22 and the actions that we told you we were taking, it was all about moving away from lower performing programs, particularly pro rata deals, moving away from high volatility structures, particularly around retro, around aggregate programs, making sure that we were deploying capacity where risk-adjusted returns warranted it, which is why we withdrew some capacity at 1-1-22 and then started deploying it back into the market as conditions improved. And what does that do? For losses like what happened in the fourth quarter with Elliott, in our view, losses like that should be primarily retained by seedings. That's really not the type of loss that should be a fundamental loss to the reinsurance market. And you saw... our Q4 cat loss for real insurance was relatively small, $10 million. And that is the type of loss we want for events like that. So that gives you a sense of how we think our book will perform over time. So if in 2023, there's a number of what we would call frequency cats, the $1 billion, $2 billion events, our expectation is our participation in those events will be lower than they would have been prior to 1-1-23 because the average attachment point moved up. Our students are going to be retaining more of those losses net into their portfolio, which is where those losses belong. And that allows us to really preserve our capacity for major industry events, which is what our product is designed for. So that should give you a flavor of how we expect the portfolio to perform.

Okay. That is very helpful. The second question is there – and I apologize if I missed this. I'm just looking for – Any thoughts on seating commission changes, both as a reinsurer and on the insurance book?

Yeah, Meyer, this is Jim. I'll start and then turn it over to my colleague, Mike Karm. Yeah, so we did see really excellent results in our casualty renewal as well. Obviously, a lot of attention being paid to property, and rightfully so. But we enjoy a premier position with many of our seatants. on their casualty portfolios, and we've participated in this cycle of market hardening over the last few years by taking increasing share of casualty programs for those core clients, mainly on a pro rata basis. And one of the things that's happened is all that margin is getting accreted in the primary market is you've seen seeding commissions go up. We think that made sense. It was a reasonable trade. It was still resulting in more margin for us, so we like that. What we're starting to see now is still very attractive opportunity. We did continue to participate very meaningfully at 1-1 in the programs I'm describing. In fact, in a number of cases, we increased participation and I think grew our portfolio in a really nice fashion. But what we also saw is obviously the amount of margin expansion in the primary market is narrowing a bit. And so we started to see seating commissions certainly leveling off, really only a small handful of instances where they continue to increase, and that was usually when they were already below market to begin with. What we saw mostly was a modest improvement in average exceeding commissions across the portfolio, and we think that's justified, and our expectation is that that phenomenon of moderating exceeding commissions will continue to play out as we go forward. So with that, I'll turn it over to Mike.

Sure. Thanks, Jim. You know, for us, it's Rob striking the right balance about retaining our hard-earned and earning profit while managing our volatility and really actually, as we continue to scale up our businesses, You know, given the reinsurance market and what's happening, we're certainly not immune to what is going on. But I would say we're also not reliant on reinsurance like others. And given our financial strength and our strong capital base, you know, we will continue to have all the flexibility in the world here to drive what we need to do as an organization. And for us, again, it's about being thoughtful as we retain more premium for our risk. It will be more accrued to our portfolio. Whatever economics in order to our benefit will continue to thrive. So I think given where we are in the position of how we've scaled up our businesses, We feel in a good position, and I don't think there'll be anything material that we're concerned about driving our overall strategy.

Yeah. Meyer, this is what I think. Look, just to round out the answer, I think at the end of the day, bottom line is we saw improvement in seed commissions in this renewal.

Okay.

Fantastic. That was very thorough, very helpful.

Thanks, Mike. Thank you. And our next question today comes from Elise Greenspan with Wells Fargo. Please go ahead.

Hi, thanks. Good morning. My first question, you know, I want to, you know, go back to the one ones, right? You guys spoke about, you know, the expected return increasing materially. So I'm not sure, you know, what color or, you know, numbers you want to give us, but like, you know, could you say, you know, what the expected return on your business would be in a normal cat year or, You know, for instance, if we looked at the 11% return you guys generated in 22, what would that be, you know, if last year's events recurred? Just something to give us a sense of just, you know, how much better the expected return is in 23 relative to 22, given, right, the better pricing and the improved terms and conditions.

Sure. Yeah, Elise, this is Jim Williamson. I'll provide you some of that color information. And maybe at the risk of repeating some of what I said, but I do think it's really critical. If you think about our objectives coming into this renewal were pretty straightforward, and they're very similar to what we focused on last year. You know, continue to optimize the portfolio and move away from underperforming programs. Control volatility, particularly around how we structure deals. And for us, that means mainly avoiding aggregate structures and minimizing the amount of capacity we have deployed at really high return probability layers, like the one in three type of layer. That's not really where we want to be playing. And then ensuring that we're moving capacity to the best-in-class programs. And that same phenomena that we've consistently executed through 2022 played out at January 1. And so we were able to take capacity from, let's say, the bottom tier of our programs and reallocate it to the best opportunities in the market. We did it with significant rate increases, as Juan and I have mentioned, 50% in the U.S., 40% in international markets. As you mentioned, there was also significant movement in terms and conditions. In particular, in the U.S., a significant portion of our deals are now on a name-parallel-only basis. We've also eliminated write-backs of exclusions on a number of areas that will, over time, result in better economics. know the heart of your question of what does that mean for the portfolio in practical terms obviously every year will present us with a different set of actual catastrophes and so as opposed to looking back what i would tell you what i how i would expect the portfolio to perform is that you know frequency stats which have really bedeviled the reinsurance industry will increasingly be retained by our customers so we're getting a lot more rates to now focus on the types of losses that reinsurance was designed to cover in the first place. We would also expect for major losses that, similar to what happened with Hurricane Ian, we're very thoughtful about how much of a share of the major losses that we want to be taking. And I would expect that to look quite good as well. And then lastly, what I would say for all of this, we have a meaningful increase in the amount of cap premium available to pay these losses and still make a strong return. Hopefully that gives you the color that would help you to triangulate, you know, what is an excellent expected return position as we move through 2023.

Elise, and this is Juan, and let me piggyback on Jim's answer because I think he was quite thorough. And I would point you back to that 20% ROE that we just talked about for the fourth quarter. And then we put it in perspective, right? Because while we don't give specific guidance on what we think the ROE outlook is going to be for the coming year, You know, we still generated double-digit ROEs despite the industry facing a top-five catastrophe year. And I think you've got to put those results in the context of all the activities that we have been talking about really over the past three years on how we have been managing this company, reducing the volatility, being very disciplined at portfolio management, being very disciplined with where we deploy our capital. And with the material improvements that we achieved at 1.1 that we just talked about, and that we expect to expand upon in the coming renewals, we expect that steady improvement to continue. And so I would say all signs point to a significantly improved risk adjusted return across the portfolio. So just a little bit more color on that.

Thanks. And then the equity portfolio went down from 1.3 billion to like 281 million in the quarter. Why did you guys take that portfolio down in the fourth quarter?

Good morning, Elise. It's Mark. So, we have a strategic asset allocation table that we're pretty disciplined with. And it allows us flexibility to move between asset classes, whether it's on the fixed income side, private equity, public equity, private credit, et cetera, et cetera. So, tactically, we had a large reduction of the equity portfolio in the fourth quarter. shifted into other assets that we felt were more attractive, but still consistent with that strategic asset allocation that we've been focused on since the 2021 investor day. So we will probably move around a bit in 2023, but stay disciplined to that SAA.

Thank you.

Thank you. Our next question today comes from C. Gregory Peters with Raymond James. Please go ahead.

Well, good morning, everyone. I'd like to go back to I think in your comments you talked about the annual ground up reserve review that you do every year. And especially on the primary side, obviously inflation has been a big issue. The statistics that came out in 22 couldn't have been anticipated in fiscal year 20 and 19. So can you talk to us about the process? What were the puts and takes for you to come out where you did? Some perspective there would be helpful.

Yeah. Morning. It's Mark. Let me get into that just in a few ways. The process itself is year-round. And so we're looking at reserves throughout the year, performing reserve studies. It's quite comprehensive in terms of aligning, underwriting, pricing, reserving claims in the course of that process. So you've got many different stakeholders involved. you know, it's quite ground up in terms of the analytics that go into it. And then I bring you back to, you know, principles that we set out back in 2020 about setting up prudent loss picks, holding them in a disciplined fashion over time until we see a seasoning in the different lines of business. And for us, those are kind of a ground up rules and processes that we use to evaluate Now, in terms of the, in terms of, you know, what we did in Q4, I mentioned the asbestos and environmental reserves strengthening. So we've got roughly 20 billion of, you know, carried net reserves. We strengthened that by 138. We had, you know, some offsets, favorable offsets coming from shorter tail lines. And then we had smaller, more marginal adjustments, pluses and minuses in both segments, but nothing approaching the 138 in the process. So, overall, we feel, you know, very solid in terms of our loss position. And we obviously take into account, you know, macro factors like loss inflation by making sure that we've got prudent loss picks in our reserves. And then we do dynamic And I think one of the benefits that we have in our company is really the diversified nature of the lines of business that we have and the reserve profile that we have. There is no single emphasis on one class. And that diversification helps to absorb any potential, you know, volatility that might come from loss inflation factors in general. So that gives us, I think, just a better mix or diversification of reserves to handle these types of Got it.

I guess, so my follow-up question, well, sticking with the specialty insurance platform, we look at your primary growth, 18% for the year, I think 19% for the quarter. I think after we get through earnings season, that's going to be a pretty outstanding result relative to some of your peer groups. Could you spend a minute and talk to us about where you're seeing growth? I guess not only, you know, looking back to 22, but when we think about 23. Sure.

Thank you for the question. So a couple things. You know, we have a lot of moving pieces in the organization, but the reality is our underwriting profit focus is first and foremost the number one thing we tend to focus on. And given that with all the things we have from scaling up our existing businesses and given our market share and given the opportunity we have with our expansions, you're starting to see a lot of these things play out. So when I think about the opportunity for that growth, it's not without discipline and cycle management that comes along with that growth. But for us, we see what the market opportunity lays in front of us. So we have the expertise we can deploy anywhere in the world now with the expansion now starting to play through and some of the things we've done. You're starting to see that come into play. And in addition to that, we have the ability to have the flexibility, rather, to drive this in a local region. So I think growth has been great, 32 straight quarters. The specialty businesses where we see areas like we opened up and you saw adding to that, which would be aviation and energy and construction, complementing our credit and political risk and charity, helping offset some of the things that are happening with, like, transaction liability. And then you go over to some of the market and property. And when we have and see these things that are actually opening themselves up, We can do this anywhere in the world. And I think for us, our benefit has been our agility and the way we actually are able to capitalize with our speed to market. And we'll continue to do this. We're going to refine our offering, whether it's retail or wholesale. We're going to figure out where the opportunity is globally. And if we don't like what we see from a risk-adjusted return basis, we'll pull back and we'll do the right thing. You've seen that with our cycle management comp. You see that we're doing in D&O. And if we don't see those things, we're going to sit there and we'll continue to look for opportunity where it best fits And the growth just comes with that. And so we'll continue to drive that opportunity where we see it. And it's about playing offense and not defense.

Yeah, Greg, and this is Juan Andrade. I would add a couple of thoughts because I think that was well said by Mike. Look, I think at the end of the day, there's a couple of key factors. One, we're highly diversified within the primary insurance division. And so that means that we can find opportunities in the market where they exist. And as Mike pointed out, it's always about profitability. So it's The for instance is, you know, you're not seeing a good environment for financial lines right now, but you're seeing a very good environment for things like property, casualty still, and other lines of business. So that allows us to essentially pick our spots and be able to do that. The other point that I don't think can be underestimated is really the agility of our company. And I mentioned that in our prepared remarks. Our ability to be able to pivot. We're pretty lean. We're pretty entrepreneurial. We have great relationships with our distribution, and we have a lot of good talent in this company. And all of these things are basically what enable us to continue the momentum that you have seen from us really over the last number of years.

Got it. Thank you for the answers. Thanks, Greg.

And our next question today comes from Mike Zaramski with BMO. Please go ahead.

Hey, good morning. Maybe a first question, thinking about capital management and capital uses. Should we expect a bit more kind of operating leverage? So like when we look at the premiums to equity ratio, is there some room for that to inch up given kind of better economics you're attaining? And also just thinking about capital uses in 23, Should we be still thinking that growth will kind of eat up most of the capital versus buybacks?

Mike, it's Mark. So a few points here. I do think we've got ample capital to take on the opportunities of 2023 and And it includes, you know, more than just the traditional balance sheet. You're looking at what we call our capital shield, so Logan, ILWs, cap bonds, et cetera. Operating leverage, there's definitely more room on the balance sheet to, you know, expand that leverage. I think one of the key points to keep in mind is really the risk adjusted return profile is improving. So you're seeing exposure being managed thoughtfully and the rate and the expected return go up significantly. And that's one of the key points that I think allows us to expand that operating leverage. We're also fairly well diversified with multiple income streams. And so I do expect the net income projections for the year to provide significant retained earnings to support growth. And we'll see how that growth comes about because there are other levers that we can pull if the opportunities in the market are even more significant than what we think they could be. Just in terms of your buyback comment, look, it's always on the table. We can pull that lever, but this is, you know, the best market we've seen in a generation. And so the value creation that comes out of, the organic growth plan that we've got and the fact that we're ready for it, you know, in terms of balance sheet, teams, franchise, the whole, the whole ball of wax, you couldn't have a better alignment. So I think you'll see us really attack this opportunity in 2023, uh, full board. So I'll leave it there.

That's helpful. Um, my, my followup is, um, on the alternative reinsurance, maybe ILS marketplace, given Mount Logan's one of the leaders in that space. Are you seeing dislocation in that marketplace? Do you see that kind of persisting? I know there's some puts and takes on how that impacts someone like Everest, but what's going on in the ILS marketplace that you're seeing? Is that part of the reason you feel that the discipline within the overall reinsurance marketplace will continue?

Yeah, Mike, this is Jim Williamson. Thanks for the question. I mean, clearly ILS has been a dislocated market coming into 1.1. And for many of the reasons that have affected everyone participating in this market, there have been a lot of cat losses over the last few years. And I think particularly around the margins, you had a lot of investors participating in ILS vehicles and maybe didn't quite understand or weren't quite prepared for the prospects of, you know, having multiple years in a row of cat activity, which is not uncommon. These clusters happen. And so that has definitely, I think, put a number of investors in a position where they're on pause. You also have, obviously, the phenomena from those cat losses. There's a lot of trapped capital that is just sidelined. No matter what rates, terms, and conditions are doing, they just can't against prior events. And so that has definitely created and helped to contribute to a capacity crunch in our industry. Now, from our perspective, you know, that affects us in two ways. On the one hand, in our primary reinsurance business, our balance sheet reinsurance business, if you will, we're seeing all the phenomenal results that we've talked about, plus 50 U.S. property cap pricing, plus 40 international terms and conditions getting better, attachment points rising. And that's all happening because because there's more demand for reinsurance capacity than there is supply. And part of the reason that's occurred is because of the crunch in ILS. The second thing that it does is it makes it a little more challenging for us to raise funds in Mount Logan because investors are sidelined or they have trapped capital. In terms of that trade, we'll take that trade all day long. You know, driving improvement in our core reinsurance business is our first priority. And it also inures to the benefit of our Mount Logan investors who've or consistently invest in the ILS space, they get better returns as well. So we like that. At the same time, what I would say is we have, uh, we have been getting traction in Logan. We did raise money at one, one, and the team is doing an excellent job of conveying our value proposition to potential investors. And, and in particular, unlike a lot of other vehicles in the market, our investors get the same results that Everest gets. You know, we're not, uh, we're not making money when they're not making money. So, uh, You know, that's a real focus of ours, and I think that's very compelling. We have a strong pipeline of investor interest, and our expectation is that Mount Logan will grow over the course of time, and that's a key priority for us.

Thank you. Thank you. And our next question today comes from Ryan Tunis with Autonomous Research. Please go ahead.

Hey, thanks. Good morning, guys. Just a few hopefully quick ones from Jim. First question, just, I guess, following up on Mayor and Elise's line of questioning on, you know, how the changes in the portfolio, you know, might map to the actual CAT numbers. So you mentioned that you're shying away from kind of like the one in three type of risks. But what I'm struggling with is that, you know, like in the supplement, the one in 20 looked like it grew about as much as the one in 250. So from the PML disclosures alone, it's difficult for me to really see what's going on. So I don't know the right way to ask it. Maybe could you give us some idea over the past few years, like how much of your CAT losses have come from sort of those frequency layers that were even more frequent than 1 in 20? I'm not really sure, but just any numbers would be helpful.

Yeah, sure, Ryan. Yes, Jim, obviously. Look, it's an important question, and so I'm going to give you a few threads that I think really help describe what's happening in the portfolio. So obviously, and I can't restate it enough, exceptional execution at 1.1, which really followed on really strong execution in 2022 as we repositioned the portfolio and right-sized our cat risk for our company in a go-forward and sustainable basis, and that's really critical work. What I would do, if you want to think about movement of PML, first of all, I wouldn't look at it on a year-over-year basis. Too much has changed since 1-1-22. I'd really look at our more recent PMLs, whether you want to pick 10-1 or 7-1. And I think that shows what is essentially a flat profile of PML deployment at a variety of return periods, whether it's 1-20 or 1-2-50. You know, 1-2-50 is down by about $50 million from 10-1. 1 in 20 is essentially the same number. It's down by 5 million. And so, you know, that gives you some sense of what we expect. What I would say in terms of the balance of where CAT losses have been going in the industry is it's not so much that, you know, what percent is the 1 in 3 event versus the 1 in 20 event. It's where are you getting appropriately paid? Where are you getting reasonable risk-adjusted returns? And so for us, our portfolio has shifted clearly toward the areas where risk-adjusted returns are strong and warrant the risk we're taking. And that's the 1 in 20 to, you know, 1 in 250 range. We feel really good about that. The other thing to keep in mind that's been happening against the backdrop of all this is the discipline required in the underwriting and the terms and conditions to ensure that you're inflation loading your programs appropriately. Those are all things which will also, over time, inure to the benefit of our portfolio. Now, obviously, the actual result is going to be highly dependent on which events occur. But if we have a year where you have a couple large events, but you also have a frequency of smaller cats, we think our portfolio will perform better now, meaningfully better now, than it would have a year ago. And that's because of all the actions we've taken, the rate, and all the improvements we've made. So hopefully that gives you some perspective on how to interpret those PMLs.

Yeah, that's helpful. And then just lastly, Can you give us an update on kind of how you're thinking about your original Hurricane Ian pick?

Yeah, sure. Yeah, Ryan, it's Jim again. Yeah, we feel very good about it. I mean, you know, obviously, you know, it seems like it was a long time ago, but it's still relatively early. As you've seen, there have been puts and takes in the industry in terms of folks adjusting their view of what their ultimate loss is going to be in terms of, you know, our clients' feedings. And so we're watching that very closely. You know, a key thing to keep in mind, which we communicated in the last quarterly call when we talked about EN is, you know, in terms of any upside risk to the numbers we put up, you know, we feel very good about that because of the protection that we received from our cap bond program. As we had indicated in the last call, we have about $350 million of potentially exposed cap bond limit which will engage if PCS reaches $48.1 billion in their estimate. They're currently at $47.4, and we'll recover on a pro rata basis up to $64 billion or $63.8 billion. So we don't really have any kind of material concern about upside to that number, whether, you know, it ultimately, you know, there's a good guy in there. It's going to take quite a bit of time for that to play out, but we're watching it very closely.

Appreciate it. Thanks.

And, ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to management for any final remarks.

Great. Thank you all for your questions and the excellent discussion this morning. This is Juan Andrade. I am very optimistic about the opportunities ahead and our ability to continue driving a world-class platform. Our strategy is clear. Our businesses are growing with strong, resilient portfolios, and we have an attractive risk-return profile. This is all underpinned by our strong culture, which is an increasingly significant competitive advantage. We will expand on this foundation to accelerate our progress and create increased value for our investors, colleagues, and clients around the world. Thank you for your time with us today and for your continued support of our company. I look forward to speaking with all of you again when we discuss our first quarter 2023 results. Thank you.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.