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Text: The Everest executives leading today's call are Juan Andrade, President and Chief Executive Officer; Craig Howie, EVP and Chief Financial Officer; and John Doucette, EVP and President and CEO of the Reinsurance division.
We are also joined today by other members of the Everest management team.
Management comments regarding estimates, projections and similar are subject to the risks, uncertainties and assumptions as noted in its filings.
Management may also refer to certain non-GAAP financial measures.
First and foremost, I hope you, your families, your friends and your neighbors are all staying healthy and safe.
On behalf of our company, I want to offer our heartfelt condolences to all of those, including many in the Everest Re family who have lost loved ones during this difficult time.
We took early, proactive and decisive actions to protect the health and safety of our employees, their families and our stakeholders.
As a result, Everest continues to successfully operate remotely.
We are doing our part in support of the global economy by serving all of our customers and stakeholders without interruption.
Our move to remote work was planful with a well-executed organizational resiliency plan and an underlying technology infrastructure that performs seamlessly and an information technology organization that has performed admirably.
Our employees have been flexible, resilient and productive.
We have received accolades regarding our responsiveness and our stability.
We also continue to support our local communities around the world in their pandemic relief efforts.
These are leadership moments for people and companies.
Our culture of collaboration, thoughtful assumption of risk, humility and relentless execution are at the bedrock of our performance.
I am incredibly proud of our people and our company.
Our diversified global platform, with its broad mix of products, distribution and geography, remains an important source of stable capacity to our broker partners and customers.
Our capital position remains a source of strength with high-quality invested assets, significant liquidity and low financial leverage.
Despite the pandemic and the economic downturn, Everest remains profitable, as reflected in our reported 98.6% combined ratio or 89.9% excluding catastrophe losses and the pandemic IBNR loss provision.
Additionally, Everest remains resilient, as reflected by both our 21% growth rate in gross written premium and by our capital position.
We have built a strong capital foundation over the years, holding $8.6 billion of shareholders' equity at March 31, 2020.
While this is a decrease from year-end 2019, this decrease primarily results from: one, the sharp decline in the fair value of the investment portfolio, which has now substantially recovered since the end of the quarter; two, share repurchases and dividends paid; and three, the pandemic loss IBNR provision.
Most importantly, our capital position continues to exceed what we need to run the business with excess capital relative to rating agency and regulatory requirements.
We have substantial liquidity from the cash we hold, and the cash flow from operations, which was over $0.5 billion for the quarter, were up 10% from 2019.
We have significant access to capital markets, including plenty of debt capacity as we carry very little debt compared to all of our peers at less than 7% of our capital when most of our peers typically carry upwards of 20% to 30%.
Lastly, our industry-leading expense ratio also gives us operating flexibility, which is particularly critical in times of uncertainty.
Turning to the first quarter of 2020.
Everest remains strong and is well positioned with broad capabilities and top talent.
And we remain focused on solving our clients' most critical risk transfer needs in a disciplined and profitable way.
We demonstrated excellent momentum across both of our Reinsurance and Insurance businesses with gross written premium growth of 16% and 33%, respectively.
We also continued to benefit from improved market conditions during the quarter, which I will discuss in a moment.
Excluding catastrophes and the pandemic IBNR loss estimate, our underlying combined ratios for the group at 89.9% and each of our divisions, Reinsurance at 87.7% and Insurance at 95.6%, are reflective of the strong underwriting performance across the group and the earnings generating power of the franchise.
Underwriting profitability remains at the core of everything we do.
Our Reinsurance division had a strong January one renewal season.
We continue to judiciously deploy capital, and we underwrote a high-performing book that is focused on strong economic returns while improving the diversification and balance of our overall portfolio.
We also saw stronger opportunities in several areas such as retro and facultative risk.
As the quarter progressed, we saw continued momentum across the portfolio.
John Doucette will provide additional details on market conditions and the underlying growth.
Our Insurance division's growth remained strong and consistent with recent quarters.
The drivers for this growth were: number one, strong and widespread rate momentum.
Excluding workers' compensation, the rate increase was plus 24% or plus 17% net of a handful of large deals booked in the quarter and over 12% including workers' compensation.
This is an improvement from the fourth quarter of 2019 where the rate increase was almost plus 12% excluding workers' compensation and plus 4% all in.
We also saw continued strength in the E&S space with strong submission flow and market conditions continuing to tighten in property and casualty in both primary and excess lines.
We also had strong renewal retention in both our retail and wholesale businesses.
And we had increased productivity resulting from additional underwriters hired in 2019 that are now fully onboarded and providing capacity to address the increased submission flow.
The insurance growth was also balanced and diversified across our many lines of business.
Strong rate and tightening terms drove the growth in the long-tail line.
Despite the impacts of the pandemic in the quarter, our underlying insurance portfolio continues to perform well, and we are seeing the benefits of our various investments in portfolio optimization efforts, all of which position us well for this environment.
Net investment income of $148 million was up 5% from the first quarter of 2019.
Our investment portfolio had been and is defensively positioned with over 75% in investment-grade fixed income bonds and less than 4% allocated to public equities.
Most of our risk is bond risk, and we also have the ability to hold bonds until they mature.
In addition, we have continued to further reposition our portfolio, moving up in fixed income credit quality and reducing equity exposure.
As per our April 23 announcement, we have taken $150 million IBNR loss provision in the first quarter related to the COVID-19 pandemic.
These losses relate to event cancellation, business interruption and other coverages such as accident and health and workers' compensation.
Our estimate was based on an analysis completed during the first quarter.
This analysis was a thorough cross-functional review of the in-force portfolio by line of business, industry and geography.
The review was completed by a team of professionals representing every area of the company.
Given the fluid and continuing nature of this pandemic, this is an ongoing event and so is our analysis.
While our analysis looked at all aspects of our global portfolio, our estimate does not take into account legal, regulatory or legislative intervention that could retroactively mandate or expand coverage provisions.
As stated in our release, our philosophy is to recognize and react to expected future losses on a timely basis.
We will be tracking pandemic losses separately from our attritional losses and as an ongoing event.
With regard to our specialty insurance business, we have limited exposure to event cancellation, accident and health, workers' compensation and business interruption.
Our property policies have unambiguous policy language that requires direct physical loss for business interruption coverage to be triggered.
Additionally, the majority of the property policies in force contain a virus exclusion.
Only a very small number of policies have endorsed sublimits typically less than $25,000 and with short-duration caps that would offer BI for a notable notifiable human disease.
These exposures have already been recognized as part of the overall IBNR loss estimate for the quarter.
The majority of the IBNR loss provision was for the Reinsurance business given the relative size of this portfolio compared to our Insurance businesses.
It is important to note that as a reinsurer, we have contractual terms and conditions, such as retentions, limits, event definitions, hours clauses and other coverage provisions that will apply to this ongoing event.
Thus, we do not simply follow the fortunes.
It will be very fact-specific.
We have also done a thorough review of our mortgage reinsurance contracts.
Based on our view of the economic situation that is aided by both external information and our own proprietary internal modeling, we currently believe that our loss picks and reserves remain adequate.
We will continue evaluating this business as the economic situation unfolds.
In summary, Everest showed forward momentum, resiliency and profitability in the first quarter of 2020.
We effectively transitioned to running our company remotely.
And as always, we'll remain a consistent and trusted provider of capacity to our customers.
Given the uncertainties in the current public health and economic environment, there could be an adverse impact on results for the property and casualty industry and Everest for the remaining part of the year.
The impact is clearly dependent on the shape and length of the recovery.
While the economic environment has changed, Everest remains a high-quality franchise with broad capabilities, a global platform and top talent.
We remain focused on solving our clients' most critical risk transfer needs in a disciplined and profitable way.
We have the right culture, the right platform and relevance with our clients and trading partners and the capital base to see us through this time.
Everest reported net income of $17 million for the first quarter of 2020.
This compares to net income of $355 million for the first quarter of 2019.
Net income included $172 million of net after-tax realized capital losses compared to $74 million of capital gains in the first quarter last year.
The 2020 capital losses were primarily attributable to fair value adjustments on the public equity portfolio.
Operating income for the quarter was $164 million driven by strong underwriting results across the group, stable net investment income and lower catastrophe losses, offset by a COVID-19 pandemic IBNR loss estimate of $150 million.
The overall underwriting gain for the group was $29 million for the quarter compared to an underwriting gain of $196 million in the same period last year.
In the first quarter of 2020, Everest saw $30 million of catastrophe losses related to fires and hailstorms in Australia and a tornado in Nashville, Tennessee.
This compares to $25 million of catastrophe losses reported during the first quarter of 2019.
Overall, our prior year catastrophe loss estimates continue to hold.
The combined ratio was 98.6% for the first quarter of 2020 compared to 88.7% for the first quarter of 2019.
Excluding the catastrophe events and the impact of the COVID pandemic, comparable combined ratios were 89.9% for the first quarter of 2020 and 87.4% for the first quarter of 2019.
Excluding the pandemic IBNR loss estimate, the attritional loss ratio was 61.5%, up from 60.2% for the full year 2019 primarily due to the continued change in business mix.
For the Reinsurance segment, the attritional loss ratio, excluding the pandemic loss estimate, was 59.8%, up from 58.2% for the full year of 2019.
This increase was related to the continued business mix shift toward more pro rata premium, which carry a higher loss pick but allow us to benefit directly from the firming primary market.
Pro rata premium is less volatile than excess premium, and we will see the benefit earn into our results as we lap the loss tax season over time.
For the Insurance segment, the attritional loss ratio, excluding the pandemic loss estimate, remained very steady at 66.1%, essentially flat compared to 66% for the full year 2019.
As you can see in the financial supplement, we also experienced more growth in areas that typically carry a higher loss pick and but a lower overall combined ratio.
Our U.S. insurance franchise, which makes up the majority of our global insurance business, continues to run an attritional combined ratio in the low 90s, excluding the pandemic loss estimate.
The group commission ratio of 22% was down slightly compared to prior year.
The group expense ratio remains low at 6.3% and was higher than last year due to an increase in nonrecurring incentive compensation, benefits and payroll taxes in the first quarter, which will normalize during the rest of the year.
Before moving to investments, I'd like to point out that we are now reporting two segments: Reinsurance and Insurance.
This is consistent with the way the business is managed and the way management views the company's results.
For investments, pre-tax investment income was $148 million for the quarter from our $20 billion investment portfolio.
Investment income was 5% above the first quarter of last year.
This result was primarily driven by the increase in investment-grade fixed income portfolio, which had a higher asset base this year, and higher limited partnership income quarter-over-quarter.
Since we report most partnership income on a quarter lag, the global equity market performance in the first quarter will be reflected in the limited partnership investment results in the second quarter.
Pretax yield on the overall portfolio was 2.9%, about flat compared to one year ago.
For our investment-grade portfolio, the new money rate was 2.7% for the quarter.
Other income included $21 million of foreign exchange gains in the quarter.
On income taxes, the $60 million tax benefit for the quarter included a $31 million tax benefit related to the CARES Act, which extended the carryback period for cat losses to five years.
Excluding this benefit, the effective tax rate on operating income was 12%, in line with our expected tax rate for the full year.
Positive cash flow continues with operating cash flow of $506 million compared to $460 million for the first quarter of 2019.
This increase reflects a lower level of paid catastrophe losses in 2020 compared to 2019 and an increase in cash flow from our ongoing growth in insurance and reinsurance premiums.
Shareholders' equity for the group was $8.6 billion at the end of the first quarter, down from $9.1 billion at year-end 2019.
The movement in shareholders' equity since year-end 2019 is primarily attributable to the sharp decline in the fair value of the investment portfolio and by capital return for $200 million of share buybacks and $63 million of dividends paid in the quarter.
The reduction in investment portfolio valuation came from the realized losses in the equity portfolio and the $248 million mark-to-market impact on the fixed income assets resulting from the widening of credit spreads.
These mark-to-market adjustments have substantially recovered since the end of the quarter.
During the first quarter, we made some tactical adjustments to reposition the portfolio by moving up in credit quality and further reducing our equity exposure.
As Juan said, our capital position remains a source of strength with high-quality invested assets, significant liquidity and low financial leverage in addition to our robust cash flow.
The strength of our balance sheet is critical to the success of our business.
And now John Doucette will provide a review of the reinsurance operations.
As Juan did at the start of the call, I would like to add my sympathies to our reinsurance trading partners and their families affected by the Coronavirus pandemic.
Like the rest of the group, the Reinsurance division, supported by our dedicated IT colleagues and our newly completed next-generation global underwriting platform was able to transition to 100% work from home without missing a beat.
We are reviewing submissions, quoting and binding facultative and treaty business and settling claims.
Now I will review the quarter.
During Q1, the Reinsurance division increased our gross written premium to a record of $1.8 billion, up 16% from last year.
Q1 growth was driven by January rate increases in loss-exposed areas and retro and writing more PURPLE products and casualty business due to improving conditions there.
Growth was widespread, spanning territories and lines, including the U.S., international, casualty and property and short- and long-tail facultative reinsurance.
Excluding COVID-19 losses, our underlying reinsurance loss ratio was up by two points largely due to more pro rata premium written over the last year.
Pro rata business directly benefits from an improvement in original rates while ceding commissions have generally been stable and, in some cases, improved.
Those improved original rates will take some time to be recognized in our loss picks.
Note that the volatility associated with $1 of pro rata premium is generally lower than $1 of excess premium, and combined ratio alone can obscure risk-adjusted returns.
We are pleased both with our progress at building a more diversified, profitable, sustainable gross portfolio and that we are seeing some tailwinds in the reinsurance market in casualty, property, retro, specialty and fac to help us achieve a stronger, more profitable portfolio.
Everest's facultative operations continue to see an increase in demand.
In the U.S. and international, we are continuing to see significant double-digit rate increases in short-tail and long-tail fac, with dramatic increase in submission count.
Given that facultative renews on multiple inception dates, it is a good forward indicator of reinsurance demand and pricing.
For our casualty business, original rates on certain lines have shown some increases, which will earn through on our pro rata premiums.
As always, we are deploying our shareholders' capital judiciously, seeking to build the strongest reinsurance portfolio possible while maximizing returns, while limiting our downside risk through increased diversification and balance.
Now to comment on recent and upcoming renewals.
April renewals showed continued rate momentum in loss-affected and capacity-constrained segments.
Japanese wind and retro rates showed strong increases, consistent with the need to maintain appropriate returns.
Looking near term, particularly the upcoming June Florida renewals, we expect rates will be affected by limited capacity, recent losses and the market's heightened sensitivity to risk due to climate change and social inflation.
Also, there is a strain on alternative capital, traditionally large players in Florida.
Therefore, we continue to see upward pricing momentum in Florida along with improved terms and conditions.
Now turning to mortgage.
With the ongoing economic disruption, primary mortgage insurers could see increased losses along with regulatory capital pressure.
However, housing fundamentals are stronger today than they were heading into the financial crisis with higher credit scores, tighter housing supply and lower-risk products.
Our reinsurance mortgage book is seasoned and pegged conservatively.
To give you some color on our mortgage book.
By limit, our book is roughly 80% GSEs and 20% mortgage insurance.
Virtually all business we write is on a QM basis.
The underwriting box we participate in is very controlled and tightly underwritten, meaning our portfolio has no exotic products and has high FICO scores particularly on the GSE business.
From the beginning of Everest entering the mortgage space, our pricing assumptions were and remain more conservative than the external vendor models that we use to validate our pricing assumptions.
Regarding the MI treaties we reinsure, we effectively play in an excess position, thus avoiding the working layer losses and resulting in a meaningful buffer in gross loss ratio deterioration before we suffer any economic loss to our reinsurance treaties.
Deterioration in this buffer range decreases the size of the profit commissions we would typically pay to the MIs but at no economic cost to us.
Regarding our GSE business.
Given our more conservative view of underwriting, pricing and capital modeling, we preferred higher layers over lower layers in these programs, and we have weighted our book to higher attachment points accordingly.
Much of our exposure has been seasoned for several years, which benefits from home price appreciation.
Going forward, credit standards at nearly all stages of mortgage origination are tightening and improving, therefore increasing the credit quality of borrowers in our book.
Additionally, early government intervention in the economic crisis to support borrowers and lenders, including the broad offering of forbearance, will mitigate potential losses and help keep people in their homes and avoid default.
We are continually reevaluating the dynamics of this economically sensitive line to prudently manage our mortgage exposures now and on a go-forward basis.
Now I will give some comments on the overall market ahead.
Despite the uncertainty the industry faces, we cautiously anticipate that the reinsurance markets will remain healthy for the highly rated traditional reinsurers who can deploy capacity in multiple lines of business around the world while also meeting clients' increasing counterparty credit requirements.
This view is based on current reinsurance industry dynamics and the supply demand curve.
Starting with the market supply.
More stable capital remains in place while some of the opportunistic capital is exiting.
Alternative capital investors are reevaluating the thesis that reinsurance is a non-correlated asset class.
Potential uncertainty from COVID-19 and the possibility of more trapped capital compounds frustrations of these investors from the last three years of cats and subsequent loss creep from several events.
This is in addition to higher relative return hurdle requirements given the increased price of risk across virtually all risk asset classes.
On the demand side, clients have increased reinsurance purchases for risk management and capital support particularly as some of them come under capital or earnings pressure given the volatile markets.
The flight to quality continues as reinsurance buyers and brokers are increasingly focused on the stability and quality of counterparties to protect program continuity and mitigate counterparty credit exposures in these volatile times.
The length of the economic downturn will ultimately be a key factor impacting reinsurance demand.
These market dynamics benefit Everest as we deliver stable capacity with strong security as a long-standing client-focused partner.
Regardless of where the market turns, we will focus our capacity on those clients that align with our philosophy of prudent underwriting and sound claims handling practices.
In summary, Everest is built to withstand volatility and uncertainty such as we are seeing now.
We continue to prove our resilience, our solution-driven partnerships with long-standing clients and our ability to execute through these unprecedented times.
Nadia, could you please open up for Q&A?

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co wrote nearly $2.6 billion in gross written premiums for quarter, an increase of 21% as compared to a year ago.

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