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Text: The Everest executives leading today's call are Dom Addesso, President and Chief Executive Officer; Juan Andrade, Chief Operating Officer; Craig Howie, EVP and Chief Financial Officer; John Doucette, EVP and President and CEO of the Reinsurance Division; and Jonathan Zaffino, EVP and President and CEO of the Everest Insurance Division.
Management comments regarding estimates, projections and similar are subject to the risks, uncertainties and assumptions as noted in these SEC filings.
Management may also refer to certain non-GAAP financial measures.
In the third quarter, Everest produced operating earnings of $3.39 per share, despite experiencing $280 million of cat losses.
Our underlying performance continue to be excellent, as our attritional underwriting gain of $250 million nearly offset the cat loss.
On a year-to-date basis, our underwriting profit was $365 million and $700 million, excluding cats.
This is a solid outcome and demonstrates our ability to absorb cat volatility due to a large and well diversified book of business.
When combined with another solid quarter of investment income the year-to-date operating income is at $742 million.
These outcomes are being driven by an organization that has evolve dramatically over the last several years due to an intentional strategic focus and supported by market conditions.
What you see, for example, is a continued effort to reduce cat volatility as a result of growth, diversification and exposure reductions.
In reinsurance, the growth has been focused largely on mortgage risk and casualty lines, where rates, terms and conditions have been improving.
Keep in mind that our push into these lines, especially casualty, was more recent vintage.
For many years, we de-emphasized casualty only recently, as the market has been improving and we've been growing premium.
The greatest diversify, however, has been our successful push into the specialty insurance space.
By year-end, we will be closing in on $3 billion of annual gross premium, and as you have seen, the profit picture there remains solid.
Our timing on these initiatives has been good.
Rates are improving in many sectors.
And yes, while there have been pockets of frequency and severity trends to take note of, these are managed through conservative loss picks through the cycle.
We are in a long-term business, and at times cost of goods sold may seem uncertain.
But we are less worried about that and what we see on trend versus rate, given our book of business and where we have impact.
The market is poised to continue higher as it grapples with trend, increasing weather events and anemic investment returns on new money, but now is not the time to retreat.
With that, let me pass it over to my colleagues to give you some of the details around this story.
First Juan Andrade, who as you know is my successor, effective January 1.
It's a privilege to be here as a member of the Everest team.
After 8 weeks on the job, I've had the opportunity to start getting deeper into our businesses and to meet our employees, major customers and our key distribution partners in the US and around the world.
I'm very appreciative for Dom's support and that of the entire leadership team.
As we transition responsibilities at the end of the year.
Dom has built a great business that we will continue to advance.
Everest is well positioned for the current market environment.
We have a highly diversified franchise with a strong team of smart and experienced leaders, a rock-solid balance sheet and enduring customer relationships.
I've been very pleased with the talent, division, the energy, the focus and the pride in Everest that everyone I have met has shown.
The feedback that I have received from our customers has been universally passed.
They value the longevity of our trading relationship, our financial strength and sizable capacity, our knowledgeable underwriters and the access to products in the right locations, along with our responsiveness and innovation.
We have two very strong and complementary businesses.
We are a top 10 global reinsurer with a 47-year history.
We have a seasoned and strong underwriting team around the globe, broad product capabilities, a dynamic strategy that is responsive to market conditions, best-in-class data-driven management systems and a competitive expense advantage.
We also have an entrepreneurial and growing primary specialty insurance business with a 'client first' culture of providing solutions with more than 150 products and services.
This team is led by highly skilled industry professionals who are focused on sustainable profitability and growth and who have the underwriting discipline and built the tools and processes required to ensure continued success.
While being very cognizant to the challenges facing our industry, we also see opportunity.
These industry challenges are resulting in improving pricing and terms and conditions in both insurance and reinsurance.
In some classes of business, we are seeing the strongest rate movement than many years.
This change in the market is long overdue, and we remain committed to being selective to where we dedicate resources and capacity.
At Everest, we will continue to focus on underwriting profitability and sustainable growth with a relentless focus on execution, diversifying our, business always strengthening our enduring relationships, managing our cat exposure and maintaining our strong balance sheet that provides the foundation for the security that we provide to our customers.
I am optimistic about the future of Everest.
We have a strong franchise that is positioned to succeed, regardless of market conditions.
For the third quarter of 2019, Everest reported net income of $104 million.
This compares to net income of $198 million for the third quarter of 2018.
On a year-to-date basis, Everest had net income of $792 million compared to net income of $474 million for the first nine months of 2018.
The 2019 result represents an annualized net income return on equity of 13%.
These results were driven by a strong underwriting performance across the Group, our highest quarterly investment income in the last nine years and lower catastrophe losses compared to the first nine months of 2018.
In the third quarter of 2019, the group incurred $280 million of net pre-tax catastrophe losses compared to $230 million in the third quarter of 2018, the catastrophe losses related to Hurricane Dorian at $160 million and Typhoon Faxai at $120 million.
On a year-to-date basis, the results reflected net pre-tax estimated catastrophe losses of $335 million in 2019 compared to $795 million in 2018.
Average reported $52 million of favorable prior year reserve development in the quarter.
This primarily related to a one-time commutation of a multi-year contract that reduced prior year carried loss reserves by $44 million, which was offset by $44 million of commission paid.
Effectively, no material impact to the underwriting result in the quarter.
Another $4 million of the favorable development was identified through reserve studies completed in the third quarter of 2019.
Excluding the catastrophe events and favorable prior year development, the underlying book continues to perform well with an overall current year attritional combined ratio of 87.7% through the first nine months compared to 87% for the full year of 2018.
This increase was primarily due to the business mix in the Reinsurance segment, which as we have noted has been writing more casualty business over the past several quarters.
Pre-tax investment income was $181 million for the quarter and $501 million year-to-date on our $20 billion investment portfolio.
Investment income was up $60 million or 14% from one year ago.
This result is primarily driven by the growth in invested assets coming from our record cash flow, which was $1.5 billion during the first nine months.
Some of the strong cash flow comes from the increase in overall premium volume, including an increase in the casualty writings, which has a longer tail and allows us to invest the money longer.
Before moving into taxes, I'd like to point out that we included for the first time on Page 15 in the financial supplement a split of our net investment income between the Insurance segment and total Reinsurance.
This shows an indication of the contribution provided by each segment to pre-tax operating income and reflects $361 million allocated to reinsurance and $140 million of net investment income allocated to the insurance segment.
The split is based on gross carried loss reserves, excluding catastrophe reserves.
We are including this information to better demonstrate the total contribution by business segment and illustrate the unrecognized embedded value of the growing insurance franchise.
This is consistent with previous comments encouraging investors to look at Everest on a 'sum of the parts' basis.
On income taxes, the tax benefit we recorded in the quarter was the result of the amount and geography of the losses associated with the catastrophes and the favorable prior year reserve development associated with the one-time commutation of a multi-year contract that I previously mentioned.
The year-to-date effective tax rate of 9% is an annualized speculation that includes planned catastrophe losses for the remainder of the year.
Higher-than-expected catastrophe losses would cause the tax rate to trend lower than the current 9%.
Shareholders' equity for the Group ended the quarter at $9 billion, up over $1 billion or 14% compared to year-end 2018.
The increase in shareholders' equity is primarily attributable to $792 million of net income and the recovery in the fair value of the investment portfolio.
Our balance sheet and overall financial position remained strong.
We maintain industry-low debt leverage, a high quality investment portfolio and continue to generate positive cash flow.
You will notice some minor revisions related to foreign exchange in our financial supplement, none of these revisions impact operating income.
And now John Doucette will provide a review of the reinsurance operations.
The magnitude of industry losses over the past three years has been extraordinary for the reinsurance market.
Although the insurance industry would have hoped for a quieter 2019 to regroup, this has not been the case.
The losses have shaken up the primary reinsurance and retro markets, creating dislocation and in turn opportunity.
Though not an across-the-board traditional hard market, we see a foundationally more sustainable environment for the near and medium term in many lines.
Multiple factors are pushing the market, including 2017, '18 and '19 cat losses, with corresponding trapped capital and negative sentiment for ILS; emerging industry loss trends in casualty; improving primary market and underwriting actions taken by major participants; and continued low investment income yields.
Given the above, we are increasingly optimistic on the treaty and facultative global reinsurance markets heading into renewal and our improving opportunity to deploy capital profitably in n 2020 and beyond.
We continue to see increased demand for reinsurance globally, driven by our clients' desire to reduce volatility, manage regulatory capital constraints and decrease net capacity deployed.
That increase in demand, in conjunction with improved insurance and reinsurance pricing terms and conditions, will result in more opportunities hitting our underwriting requirements and pricing targets.
At the same time, the supply of reinsurance capital is relatively flat or down considering trapped capital, given that over 50% of the retro capacity is supported by unrated alternative capital.
And there will be more collateral trapped by the recent events, in addition to the remaining collateral still trapped from the 2017 and '18 events.
Not all rated reinsurers are position to right multiple classes of business across all territories to clients, large and small, but we are.
With our solid financial strength in ratings, multi-decades long trading relationships, we are one of a few global reinsurers writing in all P&C lines in most developed territories, making us well positioned to take advantage of these positive trends to drive differentiated results.
Year-to-date reinsurance premium is $4.7 billion, up 3% from last year.
Growth in our business is being driven by increased casualty writings, more proportional business.
, mortgage, more treaties with our global clients and increased back opportunities.
This growth was muted by the reunderwriting of some portions of our property book, as we pushed pricing and reduced lines or came-off programs that did not meet our required pricing targets.
Year-to-date reinsurance underwriting profits are $310 million, impacted this quarter by the Dorian and Faxai losses mentioned by Craig.
Year-to-date reinsurance attritional losses are 57.5% compared to 57% for the full year 2018, due predominantly to shift in mix, increased casualty business as well as overall more proportional business to capture the primary rate movements.
This is offset by increased mortgage writings, which have a lower combined ratio.
Heading into the renewal season, we are optimistic about the market conditions in casualty, fac, mortgage and certain property markets, including retro and loss affected areas.
In US casualty, reinsurance terms are improving.
Primary rates are increasing on loss-affected programs, along with some tightening of terms and conditions.
Some market participants have signaled reducing capacity.
Combined, this results in some interesting opportunities.
Since 2018, we have been increasing our casualty reinsurance writings based on these improving conditions.
And this trend will likely continue heading into January 1 renewals.
Facultative is seeing meaningful increased submission activity globally, improved rates and terms in both property and casualty, resulting in an increased business at much improved economics.
As mentioned last quarter, our global fac book is well over $400 million gross written premium in force, and we see continued growth opportunities there, given favorable market conditions.
Fac is typically a leading indicator of client risk appetite and therefore shows increased future demand for our treaty capacity.
The global impact of Lloyd's and other major insurers reunderwriting is meaningful.
Significant premium is coming to market, which is then subject increased rate and improved terms and conditions.
This is in addition to some large primary insurers' tightening capacity and pushing rate in both property and casualty lines.
The mortgage market remains favorable as the large GSEs, Fannie and Freddie continue to privatize risk.
Our well-seasoned mortgage portfolio continues to produce strong earnings with growth potential.
Currently, our annualized mortgage book is about $200 million of gross written premium, including many multi-year deals with future premium that has not yet been recognized.
We continue to proactively scrutinize relevant economic trends and underwriting standards, which remain attractive, and we'll continue to look for more opportunities there.
Given these multiple areas to deploy profitably our capital, our pricing targets for cat-exposed property reinsurance and retro continue to rise.
We remain committed to manage volatility through our long-standing disciplined underwriting, robust portfolio construction and through increased property hedging in both traditional and alternative hedges.
The current property momentum is generally favorable and likely will last well into 2020.
But additional improvement in rates terms and conditions are required in global property reinsurance and retro markets, given the elevated risk factors and increased exposures in certain territories, as well as the recent substantial industry losses.
More rate is required to get back to adequate levels to achieve a long-term, appropriate and sustainable return on capital.
Concentrating property underwriting on our core clients has created a better risk-adjusted portfolio with significantly more dollars of profit per unit of risk.
And we do have the capacity to increase our participation in improvement markets when returns increase enough to warrant.
We expect January 1 property rates generally be up in most regions and more recently loss-affected territories will see greater impact.
In retro, we anticipate double-digit rate increases.
With Hagabis causing further losses in trapped capital late in the year and uncertainty of ultimate loss, rates may improve more.
Improvement in retro is necessary, given those rates have been under the most pressured by non-traditional capital, but also because retro bore a disproportionate share of losses since 2017.
Everest has the capital and capability to effectively right in this market.
We believe there will be select opportunities to deploy additional capital, depending on market conditions.
Overall, we are in a reinsurance market where favorable trends exists for those able to capture and maximize the best opportunities.
With our financial strength, nimble culture, global capabilities and diversified capital sources, we are prepared to meet our clients' needs, while delivering superior results to our shareholders.
Everest Insurance has just completed another quarter of solid execution, resulting in excellent top line growth and more importantly continued profitability.
We continue to advance our strategy to build a world-class diversified specialty insurance group fueled by talent, partnerships and a deep set of specialty products that are well positioned within this changing market.
Our solid result this quarter build on the first two quarters of this year and mark the 19th consecutive quarter of growth for the insurance operations.
Our gross written premium growth of 29% quarter-over-quarter has once again balanced across all major business segments.
Our growth accelerated this quarter beyond our year-to-date trend line of plus 21%, in part reflecting the changing nature of the market, which is impacting nearly all major product lines.
This is particularly the case for business originated within the excess and surplus lines market, which accounted for over 1/3 of our premium written in the quarter.
Our new business this quarter provide some additional context on our balanced growth.
It was driven by a multitude of areas reflecting the specialty nature of our portfolio, including specialty casualty, which once again experienced meaningful rate increases in the quarter; our property and short-tailed businesses, led by both our retail and excess and surplus property division, both of which also achieve meaningful rate increases; and our various other specialty product lines, including transactional risk, credit and political risk and surety.
Each of these businesses continues to see meaningful increases in opportunity.
The segments I just referenced to make up approximately 75% of our business growth in the quarter and represent the balanced portfolio we seek to build.
The combined ratio for the quarter is 96.4%, 3.2 points better than the third quarter of 2018, and year-to-date is 96% or 2.1 points better year-over-year.
This is due to both lower catastrophe losses impacting our repositioned property portfolio and to an improved attritional loss ratio.
The expense ratio remained stable, despite our continued commitment toward investments in people, technology, new business unit and a new facility.
New underwriting capabilities established in Bermuda and a regulatory approval of the London branch of our Irish Insurance company are good examples of these new facilities and represent our continued commitment to international expansion.
Further, new and expanded office locations in the US are bringing us closer to the customers and trading partners we serve.
Turning to the rate environment, we are encouraged by the results we see here.
In the quarter, we experienced pure rate increases, which excludes the impact of exposure, of 7.6%, excluding workers' compensation, and a positive 6.7% year-to-date.
The quarterly ex work comp rate increase is the largest increase seen since the second quarter of 2012 and continues to be led by double-digit rate increases within our property and commercial auto portfolios.
Financial line and Umbrella & Excess are also showing improvement in the mid to high single digits, while general liability rate lift continues to build momentum with rate increases in the mid-single-digit range.
So London wholesale market is also improving, showing double-digit improvement this quarter, driven by professional indemnity, management liability, and property.
Year-to-date, international is showing a 7% improvement.
We are very well positioned to take advantage of this improved pricing environment in terms of our people, product sets and our ability to offer compelling solutions to the market.
This, coupled with strong retention rates within both our wholesale and retail books, is an encouraging sign.
In other words, the strategic plan we have been executing over the last several years has positioned us well in this current rate environment.
Most importantly, this growth in top line, coupled with improved business metrics, has resulted in Everest Insurance continuing to post an underwriting profit, over two times greater for the year-to-date period and now standing 10 of the past 11 quarters.
As Craig mentioned in the new investment disclosure, the pre-tax net investment income per insurance is $140 million year-to-date, plus our pre-tax operating income year-to-date now stands at $195 million.
In conclusion, we remain pleased with the continued progress we are making in the establishment of a world-class specialty insurer.
The over 90,000 new business submissions we have received year-to-date in our direct broker operations speak to our relevance and positioning in this market.
Further, the underlying performance of our diverse books of business remain solid, and hence, we are well positioned to create value for all of our constituents in the evolving market ahead.
We look forward to reporting back to you on our progress next quarter.

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qtrly after-tax operating income $3.39 per diluted common share.
gross written premiums for quarter were $2.4 billion, up 9%.

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