Everest Re Group, Ltd. (NYSE:RE)

Q1 2017 Earnings Conference Call

April 25, 2017 10:30 a.m. ET

Executives

Beth Farrell – VP, IR

Dom Addesso – President and CEO

Craig Howie – CFO

John Doucette – President and CEO of Reinsurance Operations

Jon Zaffino – President, North America Insurance Operations

Analysts

Elyse Greenspan – Wells Fargo

Kai Pan – Morgan Stanley

Sarah DeWitt – JPMorgan

Jay Gelb – Barclays

Joshua Shanker – Deutsche Bank

Brian Meredith – UBS

Nicholas Mezick – KBW

Operator

Good day everyone, and welcome to the First Quarter 2017 Earnings Call of Everest Re Group. Today’s conference is being recorded. At this time for opening remarks and introductions, I will turn the conference over to Ms. Beth Farrell, Vice President of Investor Relations. Beth, please go ahead.

Beth Farrell

Thank you, Debbie. Good morning and welcome to Everest Re Group’s first quarter 2017 earnings conference call. On the call with me today are Dom Addesso, the company’s President and Chief Executive Officer; Craig Howie, our Chief Financial Officer; John Doucette, our President and CEO of Reinsurance Operations; and Jon Zaffino, our President of North American Insurance Operations.

Before we begin, I will preface our comments by noting that our SEC filings include extensive disclosures with respect to forward-looking statements. In that regard, I note that statements made during today’s call, which are forward-looking in nature, such as statements about projections, estimates, expectations and the like are subject to various risks. As you know, actual results could differ materially from current projections or expectations. Our SEC filings have a full listing of the risks that investors should consider in connection with such statements.

Now, let me turn the call over to Dom.

Dom Addesso

Thanks, Beth. Good morning to all, and welcome to our first quarter earnings call, and we have a positive report for you today.

Before we dive into the quarterly results, I would like to touch briefly on the characteristics that have helped the Everest Re Group deliver above average returns. Certainly our size and scope are important differentiators, but more critical to our success is the entrepreneurial and decisive culture that permeates our organization. We are not satisfied with the status quo, but instead, continually seek to expand our horizons for new opportunities as well as increase our penetration to existing clients.

Examples of this would be our expansion into credit opportunities in both our Reinsurance and Insurance businesses. And just this quarter, we participated on the new National Flood Reinsurance Program which represents new business to the market. As governments seek to privatize certain markets, we could see similar additional opportunity. So why is this important? These new market segments allow us to continue to diversify our portfolio away from the more competitive markets and sustain underwriting profitability. This, and a constant focus on expenses, and our expanding use of capital market tools explains why we continue to outperform the market. This now leads me to our discussion on results, which again were quite positive for the quarter.

Operating income increased 17% in the quarter to $260 million, giving rise to $6.29 in earnings per share, and a 13% operating ROE for the quarter. The increase in earnings is a result of an increase in both the underwriting and investment income. Furthermore, the underwriting result improved in both the Reinsurance and Insurance division. While our reinsurance combined ratio was up slightly over the prior year, due to a relatively minor increase in cash, the increase in earned premium propelled us to a higher underwriting result.

Increase in earned premium is a continuing result of broadening our reinsurance product set over the last several quarters into crop, mortgage, and other credit-related opportunity. Entering into credit-related business has contributed to the almost one-point improvement in quarter’s attritional combined ratio, 80%. John Doucette will discuss this in greater detail in his Reinsurance operations.

The Insurance segment results improved year-over-year to an underwriting gain position. This was in part a result of the drag in the prior year from the crop operation that we sold late last year. Excluding the Heartland crop business, the attritional combined ratio of 98.1 for the quarter reflects a stable loss ratio, but an uptick in the commission and operating expense ratio. The commission ratio was up on a changing business mix, while operating expenses are trending as planned.

We continue to build out the North America and European platforms, and have had great success with gross premiums written up 21% in the quarter excluding crop. Expenses are still outpacing earned premium thereby putting pressure on the expense ratio. But we would expect this to stabilize as the operation matures. However, despite this more elevated expense ratio, you will find that by comparison we are still quite efficient relative to the market. We are pleased with what the team has accomplished in a relatively short timeframe, which was aided in part by the market dislocation created by a few large players. In fact, given the opportunities presented by this market turmoil, we accelerated our investment in the operation. You will hear more details on all this later in Jon Zaffino’s operations report.

Another strong spot this quarter was investment income, which increased approximately $20 million. Our alternative portfolio accounted for some of that improvement, along with a higher asset base. Our strategy here is not much different than the fundamentals principles we use in our total business, conservative yet look for differentiated opportunities that provide good margins relative to risk. As a result, our overall portfolio has a beta of less than one, but yet our returns have been in the upper quartile relative to our peer group. Overall, we continue our optimism in our ability to not only outperform, but also provide above-market returns through the cycle.

I maintain that optimism because of, as I referenced earlier, the well-diversified platform we have built, but perhaps more importantly because of our adaptability to market changes and opportunities. That comes from a corporate culture that embraces new opportunities, and that has the skilled talent to execute. You will hear more about our newest initiatives from my colleagues and how we continue to build our franchise for the future. Thank you and I look forward to your questions later on.

Now to Craig, for the financial report.

Craig Howie

Thank you, Dom, and good morning everyone. Everest had another solid quarter of earnings, with net income of $292 million for the first quarter of 2017. This compares to net income of $172 million for the first quarter of 2016. The 2017 result represents an annualized net income return on equity of over 14%.

Net income included $32 million of net after-tax realized capital gains compared to $51 million of capital losses in the first quarter of last year. 2017 capital gains were primarily attributable to fair value adjustments on the equity portfolio. After-tax operating income for the first quarter was $260 million compared to $223 million in 2016. The overall underlying gain for the group was $183 million for the quarter compared to an underwriting gain of $171 million in the same period last year all segments reported underwriting gains for the quarter.

In the first quarter of 2017, Everest saw $20 million of current year catastrophe losses related to Cyclone Debbie in Australia compared to $10 million of catastrophe losses during the first quarter of 2016. The overall current year attritional combined ratio was 84.5% down from 85.3% in the first quarter of 2016 primarily due to a lower commission ratio in 2017. Our overall expense ratio of 5.8% was down slightly from the first quarter of 2016.

Our reported combined ratio of 86% was flat compared to the first quarter last year. For investments, pre-tax investment income was $122 million for the quarter on our $18 billion investment portfolio. Investment income was 19% above last year; this result was primarily driven by an increase of limited partnership income which was up $17 million from the first quarter of 2016 primarily due to the turnaround in energy related investments compared to last year. Pre-tax year on the overall portfolio was 2.8% with the duration of just over three years.

Foreign exchanges reported another income, for the first quarter of 2017 foreign exchange losses were $4 million similar to the first quarter of 2016. Other income also included $2 million of earnings and fees from Mt. Logan Re compared to $3 million of income in the first quarter of last year.

On income taxes, the 9% effective tax rate on operating income was on the low end of our expected range for the year. First quarter of 2017 tax rate is slightly lower than the 10% tax rate for the full year of 2016 due to a $5 million tax benefit for a size B tax accounting change related to share based compensation. Previously these tax benefits were book through additional paid in capital in the balance sheet. The effective tax rate is an annualized calculation that includes plan to Catastrophe losses for the rest of the year should catastrophe was coming lower than this estimate it would be expected that the tax rate would go up.

Stable cash flows continues with operating cash flows of $382 million for the quarter compared with $375 million in the first quarter of 2016. Shareholders’ equity for the group was $8.3 billion at the end of the first quarter up $272 million from year end 2016. This is after taking into account the capital return for $51 million of dividends period in the first quarter of 2017. Capital position remains very strong and continues to grow.

Thank you and now John Doucette will provide a review of the Reinsurance operation.

John Doucette

Thank you, Craig. Good morning. We are pleased to report another strong quarter with a $178 million of reinsurance underwriting profit. Our earnings reflect the continued strength of our reinsurance franchise the stain by product and geographic diversification, underwriting discipline and ultimately relevance to our client. Everest long standing global presence high ratings and nimble execution underpin our outperformance through this part of the underwriting cycle.

Before discussing renewals, here’s some color on the first quarter results. Total gross written premium for the first quarter was $1.2 billion an increase of 19% compared to Q1, 2016. There were a combination of growth on existing business and new business opportunities. This included $53 million of crop premium on the new quarter share arrangement done in conjunction with the sale of Heartland as well as new structured reinsurance business. The growth in these profitable, diversifying, and strategic line, fortifies our competitive strength in an otherwise difficult market.

Additionally, these customized transactions require a differentiating breath and skill from a sizeable and strong partner. Our agility in executing these bespoke transactions is highly valued by our clients, and accomplished to attracting best-in-class underwriting actuarial and analytical talent and providing them appropriate resources within a lean and responsive organization conducive to creative solution.

The Q1 loss ratio increased from 55.6% to 53.2% in Q1 2016, driven in part by an increase in the cat loss ratio with losses in Cyclone Debbie impacting the quarter. In addition, the quarter experienced lower favorable prior year loss development and an uptick in the current year attritional loss ratio. The shift in the composition of our book to the higher expected loss ratio on a new crop business accounted for the slight increase in our attritional loss ratio.

In our U.S. reinsurance segment, Q1 2017 gross written premium was up 8% to $579 million. Growth was driven by crop and credit related reinsurance writing, offset by a 9% decrease in property line as we walked away from underpriced pro rata business. The Q1 combined ratio for the U.S. reinsurance segment was up 3.1 point, affected by the new crop writing with a higher attritional loss ratio and non-catastrophe weather-related losses. This was partially offset by a lower commission ratio. Although the crop writing produced higher combined ratios, they consumed relatively little capital.

Our international reinsurance segment, premium was $266 million, up 13% for the quarter and up 8% on a constant dollar basis. We saw growth across most of our territories: Middle East, Africa, Latin America, Singapore, and Canada. Increased property pro rata business and some higher cat XOL business, particularly in loss-affected region coupled with our growth in our worldwide facultative operation provided for this growth; the combined ratio for this segment improved by 1.1 point to 86.6% despite higher cat losses and lower level of reserve release. This was due to an almost 6 point improvement in the attritional loss ratio, driven by better experience in certain region and a lower mix of casualty pro rata business.

Our Bermuda segment written premium increased 57% to $321 million, about 61% on a constant dollar basis. The growth was largely from new business including new credit opportunities and account true ups on financial line treaty. In addition, premium growth also came from both London and Europe, including motor quota shares and new strategic reinsurance deals with large core global client. The combined ratio improved to 83.5% with a lower current year attritional loss ratio, no prior year reserve development, and a lower expense ratio.

Moving on to the 4/1 renewals; Everest is well positioned in a market that appears to be stabilizing. Rate pressures continue but are showing signs of moderating, as ample capacity is partially offset by increase in demand in some zones. In the Asia-Pacific market, renewal rate in loss-affected area such as New Zealand were up an average of 5% with rates in a range of flat to down 10% in other areas. Japanese renewal decreases were more moderate at flat to down 5%.

In the U.S. property markets, excessive loss rates were flat to down 5% with indications that some early 6/1 renewals will be flat. We are expecting incremental Florida demand fostering some market stability, but this could be somewhat offset by decreased purchasing by citizen. As Dom mentioned, we did participate on the new National Flood Program that came to the market and we are exploring other potential opportunities around flood coverage.

In our casualty book, reinsurance rates, terms and conditions are stable but reductions on underlying business continue, put pressure on overall economic. Nevertheless, we were able to reallocate our capital to more favorable opportunities, and we see some improvement in certain facultative lines.

Internationally, some of the recent currency movements have allowed foreign-based competitors to report accounting gains, softening the otherwise REIT profitability across major classes and delaying market stabilization. However, rate decreases were smaller than in prior renewal.

In the U.K, augment rate change which has affected the UK model market has caused the market disruption with treaties being extended as insurers reassess their strategy. Large rate increases and program restructurings have been the norm on affected motor programs. Throughout the world, our clients demand multi-faceted solutions commensurate with their expanding scope, complex capital requirements and unique demand. Our clients clearly want to trade with reinsurers like Everest that offers scale, expertise, and a sustainable franchise.

We just completed our latest cap fund transaction with the issuance of $1.25 billion of Kilimanjaro 2 catastrophe bond. That brings our total catastrophe bond capacity to $2.8 billion, which in conjunction with Mt. Logan and our balance sheet elevates every total capacity and capital across those rated and unrated balance sheets to almost $13 billion. This place is among the very largest reinsurers in the industry making us even more relevant to our clients and brokers.

Overall, Everest Reinsurance operations remain well-positioned and diversified by product, distribution, geography, client, and capital, giving us numerous levers to control our market efficiency and effectiveness. We continually enhance our strategic focus to succeed in the new reinsurance world order. Thank you. And now, I will turn it over to Jon Zaffino to review our insurance operations.

Jon Zaffino

Thank you, John, and good morning. The Everest Global Insurance operations performed well and in line with our expectations in the first quarter. Many strategic actions we have taken will establish a world-class specialty diversified insurance organization by becoming increasing evident in our results; they consistently expand in top line across a balance portfolio, a testament to the relevant we are achieving among our insurance and brokers.

We continue applying opportunities to profitably expand our business across our global platform despite a challenging market environment. As a result, Everest Insurance is firmly positioned in the market landscape as a specialty provider offering a live breadth of product solutions in lines of business that we expect to outperform over the long-term. As in prior quarters, due to the divestiture of Heartland in late third quarter of 2016, I will be discussing our comparative results, excluding this business. For the first quarter of 2017, the Global Insurance operations registered $434 million in gross written premium, an increase of $75 million or 21% over first quarter of 2016.

Another outstanding result and consistent with the growth rate we saw in 4Q 2016; this represents the ninth consecutive quarter of growth for our Global Insurance Operation, each division within the North American segment contributed to this with notable strong performances from our Canadian and accident and health platforms. Each of which grew in excess of 30%.

A further note, roughly 18% of our production in the quarter was derived from our recent new business launches and from our Lloyd’s operation, which as you will recall has entered only second year of account. We remain encouraged by this balanced contribution across the diversity of our growing underwriting platform.

Net written premiums for the quarter were $346 million, an increase of $37 million or 12% over 2016. As we’ve shared in the past, net written premium growth slightly lags gross written premium growth due to the marginally more conservative reinsurance position we have taken to support our many new underwriting divisions. There were notable transactions in the quarter particularly within our teenage group that also contributed to a slightly lower net to gross ratio. We expect this to normalize throughout the year. Net earned premium in the quarter increased by more in line with our gross written premium on a percentage basis producing $323 million, which represents 17% growth from the first quarter of 2016.

Turning to the combined ratio, the GAAP combined ratio for the first quarter was 98.4%. While we are pleased to produce and underwriting profit with more than 5 million in the segment, we expect to show continued improvement as earned from new develops in future quarters. The overall loss and loss adjustment expense ratio for the Global Insurance Operations remained essentially flat year-over-year registering a 68.25 in the first quarter of 2017 were 68.1% in the first quarter of 2016. On a nutritional basis, these ratios improved 67.8% and our flat period-over-period.

Let me offer a couple of additional comments to further amplify our performance. First, for the 1Q ’16 and 1Q ’17 had unprecedented levels of connectivity in the U.S. with 12 PCS events declared in first quarter of this year. Despite this our book is performing well, our conservative loss estimates for our US property lines coupled with a series of deliberate underwriting actions taken over the past several quarters are largely mitigated the impact of these events to us. Second as earned premium comes in on several of our new business launches referenced earlier, which have historically generated better combine ratios, we expect the shipping portfolio mix will result in improved overall profitability.

Again the bottom-line, we expect improvement in the underlying loss ratios as we move through the year. Our expense ratio in the first quarter was 30.3% up when compared to 28.2% in the first quarter of 2016 were essentially in line with the full year 2016 results up 29.9%. The changed first quarter of 2016 represents roughly a one point increase in our commission in premium tax expenses and a one point increase in our operating expenses. There remained moderate pressure on our expense ratio due to the continued organic build of our operation along with the impact from the lag of earned premium. We anticipate the expense ratio to moderate and stabilize as we continue on our growth path. As Dom mentioned an expense ratio of roughly 30% remains very competitive in the Specialty Insurance segment.

I’ll now turn to the performance of our major insurance portfolios starting with the North America P&C book which is our largest business. In the first quarter, the core P&C portfolio grew 15% or $353 million over the prior year period. They continue to gain momentum across the breadth of our specialty P&C operations headlining the quarter were a continued steady growth from our new business initiatives, which represented 17% of our total premium production in the quarter; the highest level we have experienced today.

The continued addition of outstanding talents supports our strategy across underwriting claims technology, actuarial and several support areas. And the announcement of a portfolio transaction, we consummated to effectively acquire renewal rates to a direct and facultative book of property business. This book of business closely aligned with our own appetite newly into our property expansion strategy, and we are pleased to welcome several new talents and underwriters to the Everest family.

Our assets in health group also delivered an excellent quarter of growth, with a 38% increase over the prior year comparable quarter. Our continued efforts to thoughtfully diversify and grow our product lines, including medical stop loss continue to prove successful. Notably in the quarter, several of our new A&H products, particularly our sports visibility offering also contributed meaningfully to growth. We expect we will continue to find opportunities across the balance book of A&H business as the year progresses.

Our Lloyd’s operation also continued its expansion. The Syndicate contributed $21 million to the insurance growth in the quarter, nearly double the contribution from 4Q 2016. All lines of business ranging from our property through our professional indemnity books experienced growth despite a challenging rate environment. We remain deliberate in our growth pursuits and are finding opportunities for continued expansion.

Turning to the operating environment, the first quarter represented a predictably mixed picture from a rate perspective. The overall level of rate change varies meaningfully my major line of business. As a general statement across the entirety of the North American portfolio, I would say that rate pressures are somewhat mitigating. In fact, we have many lines of business that are gaining rate across our book. Let’s take a look at this my major line of business. Commercial Auto again headlined our rate change results in the first quarter, as it has in several prior quarters. We continue to achieve high single to low double-digit rate changes for this line of business. Again, our exposure to this line is limited as it continues to represent less than 5% of our overall writings.

Also, as in prior quarters, the primarily general liability and umbrella markets continue to remain in the tight range and are basically flat year-over-year. The professional liability markets remain competitive with continued rate pressures in the mid single-digit range across various lines. We continue to take a conservative posture in this market. Of particular interest to us is the broader attention to rate in terms being exhibited in the U.S. property market, while capacity remains plentiful, the market continues to find the bottom. Directional price changes month-by-month are recognizing this reality. 12 PCS convective storm cat events in the first quarter, a record for insured losses, on top of last year’s prior record quarter should add momentum to this price action. As we noted last quarter, we feel there is a larger positive story emerging that will allow us to selectively expand our portfolio.

Finally, workers’ compensation, our largest line of business, continued to experience moderate rate pressure in the low to mid single-digit range on the back of continued favorable underwriting results. While not an unexpected result, there is still an opportunity to consider new business in certain select territories as we closely monitor the many trends across this line. So, while the rate environment is trending predictably line by line, the overall rate picture is improving across the entirety of our portfolio.

In conclusion, we are pleased with our start to the year. Our team continues to execute very well against the major strategic objectives within our organic growth plan. As a result, our market brand and capabilities continue to grow. The Annual RIMS Conference, which is underway as we speak, is reaffirming our belief in the Everest insurance value proposition. Based on the client interaction and meeting schedules of our colleagues in attendance, it is clear we are being embraced by a growing range of brokers and insurers alike. We look forward to continuing our momentum and reporting back to you on our progress next quarter.

With that, let me turn it back over to Beth for q-and-a.

Beth Farrell

Thank you, Jon. That ends our prepared remarks. I’d like to open up for the Q&A session.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We’ll take our first question today from Elyse Greenspan with Wells Fargo.

Elyse Greenspan

Hi, good morning. My first question, I was hoping just to get a little bit more color. You guys saw exceptional growth in your reinsurance business to start the year. I know lots of moving parts with the crop, some growth in credit, and then also in other geographies outside of the U.S., but when you kind of blend your market outlook together, how do you really see the growth trajectory over the remaining three quarters. And just a question in relation to the Q1, is any of the premium growth that you saw kind of one-time in nature or are there any multi-year covers included within the strong growth you saw in the first quarter?

John Doucette

Good morning, Elyse. It’s John, and thanks for the question. So, I think there were some one-off parts to the growth in the reinsurance operation. As we mentioned, there were some true ups, but there is also a combination of growth in the mortgage and credit lines. Some of those are new deals, and some of those are multi-year deals where we’re continuing to get premium from prior quarters. So we would think a normalized growth rate would be high single-digit.

Elyse Greenspan

And do you think that high single-digit is something that’s sustainable over the balance of 2017 based on how you see the market right now?

John Doucette

We do. We do think that — I mean, there’s a lot of gives and takes in that, but we continue to see new opportunities. There’s places where we’re coming off business that we don’t think is attractive, but at the same time we continue to find new opportunities, both — we talked about the motor quota shares in Europe tied to Solvency II. Also, in the U.K. motor market there’s opportunities. But then also in the mortgage and the credit and one-off structured deals that we have in the pipeline now.

Dom Addesso

And this is Dom. I mean, it’s also highly dependant upon June 1. So while we have had lots of new opportunities and growth in new areas, new types of products that we’re offering, in particular credit, but depending on what happens with rates is just one; it’s still yet to be determined. So hard to predict some sustainability to our growth rate, and we don’t yet know what June 1 will be offering us.

Elyse Greenspan

Okay, great. You guys [indiscernible] loss, did you guys have any adverse development associated with the change in the rate there?

Dom Addesso

The [indiscernible] loss, the prior period event, and that was covered in our prior year-end reserve position. And it’s a kind of thing that though not specifically known at prior years, the kind of thing our reserve analysis contemplates for things that can go wrong. So it’s completely covered in that reserve position. We estimate that with the current discount rate that they’re applying up to $30 million was the impact.

Elyse Greenspan

And that’s included in how your reserves are set today?

Dom Addesso

Yes, absolutely.

Elyse Greenspan

Okay. And then in terms of capital return, there was no share repurchase in the quarter. I know we also saw a slowdown at the end of 2016. When you guys are thinking through capital return right now, how do you kind of balance just the growth opportunities that you’re seeing in reinsurance as well as insurance? And then just also where your staff is obviously trading at a higher valuation, so can you just update us on your thought process for the first quarter, as well as when you think about capital return over the balance of 2017.

Dom Addesso

Sometimes I feel like a broken record on this one. As you know, we do not give any predictions as to what we will be doing in terms of share repurchases. But relative to the first quarter how we were thinking about it was that, as you did see, we had significant growth. So we remained a little bit more cautious on capital return, to the point of not buying in any shares. This coupled with the fact that we had a number of cat events that were potentially swirling out, surround [ph] out there. So that was part of our deliberations. And then the third, I think that you made reference to of course, was our rise in stock price. While in and of itself and by itself not a sole determinant, but along with the other factors led us to not be purchasing any shares back in the first question. And none of that means that we won’t be back into the market throughout the year. But again, it has to be balanced up against events are the occurring in the marketplace as well as our premium growth trajectory.

Elyse Greenspan

Okay. Thanks so much, and congrats on a great start to the year.

Dom Addesso

Thank you, Elyse.

Operator

We’ll take our next question from Kai Pan with Morgan Stanley.

Kai Pan

Thank you and good morning. And so first question on the insurance side. What do you think are your competitive advantages that you can grow in this — like a more changing market condition, at the same time improving your core or your combined ratio towards your 95%, like maybe long-term target? How soon do you think you can get there?

Jon Zaffino

Good morning, Kai, this is Jon. I think our competitive position in the market is quite strong. And think sits on the backs of we are obviously trading with the benefit of a significant balance sheet from the Everest Group, which credentials exceedingly well in a number of our chosen markets. We have been able to amass what we feel is very distinguished talent, taking advantage of the dislocation in the market over the past couple of years. And remember, our insurance platform has been around for a while, so we have a pretty good reach in terms of different market segments, different product lines, et cetera. So as we refined our strategy and focused on the areas that we thought would contribute more to our bottom line and also help us increase our relevance with clients by providing solutions. We’re now starting to see the momentum of all those actions take hold.

So that’s been very encouraging. As for why we feel that’s going to produce better results, there’s a lot of changes. So to borrow John’s comment earlier, there’s a lot of ins and outs here, lot of different mix scenarios coming in. Our new businesses tend to trend at a lower ELR, expected loss ratios, than we’ve had in the past. So as those gain more scale, as we exit certain lines, such as our crop operation which is better handled in our reinsurance side, as we deemphasize a couple of other areas that had higher loss ratios, we expect that combination and mix to produce better performance that we’ve seen historically.

Dom Addesso

And I think in part, Kai, to answer that, the — a little bit of market disruption along with, as Jonathan pointed out, the significant capital base that is attractive to our clients and brokers, but that market disruption again allowed us to get very capable people, but also as other competitors were reevaluating their strategies, that enabled us to grow certain segments faster than we might otherwise would’ve been able to do.

Kai Pan

And do you see yourself can get down to the mid-90’s combined ratio next couple of years?

Dom Addesso

Well, one interesting point that we shouldn’t gloss over is that the first quarter, while none of the events — the weather events, catastrophes if you will, PCI events that Jonathan referenced, while none of them reached our threshold for declaring them to be cats, nonetheless, we had $15 million of weather losses in the first quarter of the insurance operations, which amounts to four-and-a-half points in the combined ratio for the insurance results. So as you could see, we’re pretty much already where you’re referencing.

Kai Pan

Okay, that’s great. My second question is on the reinsurance side. So I just wonder, is there any seasonality because now you have the crop reinsurance in the U.S. reinsurance book. That would impact your second quarter and third quarter year-over-year comparison in term of the core combined ratio.

John Doucette

Hi, Kai, it’s John. There isn’t that much seasonality. And crop, while it’s a new piece given the move from the insurance to the reinsurance, in the grand scheme of things it’s relatively small across the overall global portfolio for the reinsurance operations. So I would say, no, there’s not really much seasonality.

Kai Pan

So the fourth quarter and the first quarter results should be a good indication for the coming two quarters?

Dom Addesso

You’re talking in terms of loss ratio?

Kai Pan

Yes, just the overall, the core combined ratio, attritional combined ratio, because there are probably different mix between loss and, like, commission expenses.

Dom Addesso

Yes, that doesn’t move around all that much because from quarter to quarter based on our pegged loss ratios. Obviously, when we get to the fourth quarter we have our reserve here, and reserve review which could impact the attritional in that quarter. I don’t know that you’d refer to that as a seasonality, but our earned premium is earned ratably through the year, and we book a consistent estimated loss ratio absent any [indiscernible] type events.

Kai Pan

Great. Just quick number clarification, there it’s $30 million Ogden [ph] rate impact, is that already including in this quarter reserve development, or in the fourth quarter one? You said year-end [technical difficulty] reserve…

Dom Addesso

What I was referencing was that the impact of Ogden in terms of a dollar amount wasn’t made known of course until the first quarter. But what I was referencing was that we consider that to be a prior-year event which was more than covered in our year-end reserve review. While not specifically of course an item in the year-end reserve review just like many other discrete events that occur many quarters or years later frankly when you look at reserves pointing this is that our reserve review contemplates the fact that things can go wrong, things can happen, but you cannot specifically identify what they might be. So, our reserve review has a certain amount of conservatism built into it, or I would describe as a fact that the point of the reserve review as an unknown event and we have been in situation it was prior year event for us and well within the balance of being covered in our year-end reserve review contemplations.

Kai Pan

It’s great. Well, thank you so much for all the answers.

Dom Addesso

Thank you, Kai.

Operator

We will take our next question from Sarah DeWitt with JPMorgan.

Sarah DeWitt

Hi, good morning. In the Reinsurance segment, I was surprised with the underlying combined ratio improved year-over-year in what is still competitive market, can you talk about how you’re achieving this and how sustainable is that going forward?

Dom Addesso

The simple answer is, Sarah, is just the changing mix, so as for example as mortgage and other credit related opportunities as that premium begins to flow through the books that carriers a lower loss ratio, combined ratio than which you would think about as the more traditional lines. That’s frankly the simplest example of explanation. We will also have quota share coming into the reinsurance book, which also helps maintain that ratio.

Sarah DeWitt

Okay, great. And then just a couple of numbers questions, how much did the crop Reinsurance transaction contribute to the top line and then how much is your mortgage and credit business?

Dom Addesso

Crop was about $50 million.

Craig Howie

Yes, $53 million in the first quarter.

Sarah DeWitt

Okay. And how big is the mortgage and credit business?

Craig Howie

And the total mortgage of gross written premiums, it’s about $150 million to $200 million.

Sarah DeWitt

Annually?

Craig Howie

In the quarter.

Dom Addesso

Sorry could you say that again?

Sarah DeWitt

That’s an annual number or in the quarter?

Dom Addesso

Yes, that’s annual.

Sarah DeWitt

Okay, great thank you.

Operator

We’ll take our next question from Jay Gelb with Barclays.

Jay Gelb

Thanks and good morning. My first question is on the outlook for the, the midyear Florida renewals where I believe you said hoping for flat rates I think it’s pretty well understood that citizens insurance capacities can be down midyear in terms of demand for reinsurance protection but I just wanted understand if I have you correctly are you saying demand from other primary writers in Florida is going to enough to offset that.

Dom Addesso

Well citizen is down because private market as soon much of that exposure so capacity will be soft from private market.

Jay Gelb

Okay, is there any influence do you think it midyear as a result of Matthew.

Craig Howie

We hope we think that there could be some influence but that all dependence on how much capital has been go into the market so look, based on the returns that the industry is producing on overall capital. We do you think it, it suggest that that rate should be in flat but there’s no way for us to know what that might be right now.

John Doucette

This is John. There’s also other contributing factors with AOB issue that’s out there and that impacted people in 2016 including the capital position. The assignment of benefits, so the assignment of benefits issue that happened in that has been happening that has resulted in an increase in the attritional loss ratio for many of the Florida teams and so some of them had to go get more capital or in the process of getting more capital or raising more capital and as reinsurance is the form of capital. And so a lot of them are potentially looking to increase their buys whether it comes, whether that’s on a quota share or on an excess loss basis, as well as some of the larger Florida seasons have also been diversifying outside the state, so as they’ve been growing, they have natural exposure growth for their overall books of business, their reinsurance demands to protect that book have also been increasing and we would see that to directionally to continue.

Jay Gelb

That is helpful, thanks very much. And then my separate question, Dom, in this year’s annual shareholder letter, you talked about the decision to build in the Insurance segment as opposed to buy I’m kind of glad you brought that up in the letter hopefully it’s pretty good jumping off point just to touch on it in a bit more detail.

Dom Addesso

That was specific question.

Jay Gelb

Yes, just in terms of — in terms of that decision and kind of where you see the insurance segment going forward?

Dom Addesso

We have had this view for long time and it’s not because we haven’t considered opportunities that are out there and our view was based on the fact that integration since we had an existing operation as contrasted with not having one at all, we felt it was easier for us to grow our existing franchise. In the phase of acquisitions are tough because the integration issues are challenged in addition you’re not quite sure talent that you’re getting, the legacy issues that you might be attaining, there is a whole different face to the market in terms of how a particular company might be presenting itself to the distribution partners, they will have ability to kind of build our message, or culture or products or appetite all those things from the ground up is more attractive to us.

And then, of course, it coupled with many of these acquisitions as you know are occurring at tremendous multiples creating lot of goodwill but that aside we are potentially buying businesses that have mid-single digit ROEs that is not and I’m paying a premium for that, that’s not all that attractive. And what we think we have done here in the short years has been too we’re still in the legacy issues that we’ve had but you think the current enforce portfolio as I mentioned before. Absent the weather losses as already we had in the first quarter as already in the low to mid single 90s combined ratio so, I think our strategy there is proving to be so far so good one.

Jay Gelb

And a final one, if I can, the reinsurance performance in the first quarter was incredibly strong especially taking to account it was a worst first quarter for catastrophe losses in the U.S. in over 20 years, is that — can you talk a little about whether that’s risk management program structure primary companies just retaining more exposure, or what — how come we didn’t see more that impact on Everest results on the Reinsurance side?

Dom Addesso

There wasn’t one event right was many events which for the most part has fallen on within company retentions along with the fact that as we’ve mentioned each quarter for many quarters now we keep, we tend to keep moving up our attachment point there is a most competitive part of the market has been down low. And so, and it have been spreading our aggregate, so we have been diversifying our cap portfolio slightly moving up attachment point coupled with the fact that many scenes as their capital base is going to continue to retain more so it’s all of those things not any one of them, but it’s all of those things come into play.

Jay Gelb

Thank you again.

Dom Addesso

Thank you, Jay.

Operator

We’ll go next to Joshua Shanker with Deutsche Bank.

Joshua Shanker

Yes, thank you. Can I start with mortgage reinsurance, for a second? I want to know how you think about catastrophe risk versus mortgage reinsurance risk, is it similar and whatever remodeling in terms of its exposure to a mortgage catastrophe, and to how much business is there to be written out, there what’s going to cause mortgage insurers want to see that risk in the future?

John Doucette

Good morning, Josh. It’s John. So, couple of things, so we have then as we’ve talked about on the last several calls focused on the mortgage opportunity within a broader credit play that we are doing, but mortgage is a meaningful part of that. And we do see — so we have focus on that both in the underwriting side but also and arguably more importantly building out underwriting capabilities, analytical capabilities, ERM risk and very technical capabilities for us to be able to think about that really to get it — to bring it up to the level of, which it has, we have done to the level of how have been moved to best-in-class over the last several years in the property side.

So, in terms of how we think about to model it, we look at it from at the macro macro level and how it overlaps in intersection correlates with our asset portfolio. We think about it on an overall economic capital model to the group. We look at it on a realistic disaster scenario. We look at it as total limits that we deploy. We think about across years the correlation and the aggregation that can happen and really try to focus on what the economic situation is today and where we think it will be in the future so to determine how we want to play, where what attachment points we want to play at, how that would impact if something like the financial crisis of 2008 happen again, how that could perform.

Joshua Shankar

So, along those lines, is it normal think that sometime in the next decade, there will be a mortgage ad event? And is there a way to have that occur and avoid the loss of the underwriting?

John Doucette

Well, we have no idea if a loss is going to happen just like we don’t know if catastrophe loss is going to happen. We…

Joshua Shankar

I can promise you a catastrophe loss will happen in the next 10 years. I am certain of that.

John Doucette

I am going to write that down. So — but we — we’re going to build a book and have an underwriting strategy that we think will succeed based on underwriting conditions, macroeconomic conditions, pricing conditions, and we’re going to adjust the book. And that’s our job. That’s Dom and mine and the rest of the team’s job to do that to react and how we think the book will best move going forward. But we do –- we certainly manage to idea that a loss could happen and try to think of limits deployed and capital required in that context.

Dom Addesso

And it’s also — keep in mind that it’s — we tend to agree with you that you have to consider the fact that a loss can happen but it’s also where you attach, how diversified you are. There is many factors which go into what the level of loss might be. And from a realistic disaster scenario perspective, the exposure that we have to the mortgage base is relative to property cat risk is much less and of course also relative to our capital, it’s pretty small.

Joshua Shankar

And then I guess one more, can we expect that if you’ve done your homework correctly, a well-run mortgage rebook should outperform primary mortgage book?

John Doucette

I think the strength — advantages and disadvantages of both clearly from a — we have decided to make a reinsurance bet on it. And that gives us the benefit of hard dollar limits, that gives us the benefit of retentions, that gives us the benefit of having a compared to running an insurance operation far less resources, both capital and people wise. So, it gives us more ability to navigate the underwriting market, market cycle that could happen. So we feel like — we feel pretty good about how we’re deploying capacity and capital and our underwriting strategy and will be able to hopefully expand it if the market – the pricing and the market conditions allow but also be in a position to dial it back if we don’t think we are getting paid a good risk adjusted return.

Joshua Shankar

And then quickly for Jon Zaffino, I want to know how he thinks about one, three, five-year plan? When you started like at the beginning of ’15, did you have a three-year plan? Do you have a five-year plan? Wouldn’t you sort of in the check points to note that the insurance business is performing in line with sort of the predicted plan on how to get this be important part of Everest Re?

Jon Zaffino

Sure, Josh. We have very much phased out a deliberate roadmap that aligns with what Dom mentioned before about an organic growth plan. What does that look like? What are the key milestones along that journey and how do we get there? So, certainly for us there was a few prominent themes in that process. Number one was sort of foundationally preparing the organization for that journey which is an ongoing everyday type of exercise. Certainly looking to enhance our market relevance in the form of people and products and distribution connectivity has also been very much a part of that. And then, certainly along the path we are going to make portfolio selection along the way.

A lot of that work has been at the forefront of our activity in the last several quarters if not year and a half or so. But remember, we are still adding talent as we go here to make sure that we continue keep up with our growth and aspiration. So that’s ongoing work. So I would say that we’re very much on track. We’re going to follow market opportunity where it presents itself. We don’t have a sort of hard dollar specific target in mind other than we certainly see a lot of growth opportunity that we want to pursue in our chosen markets. But certainly looking to foundation prepare, refine our operations, add the talent, increase the relevance. There is a lot of work going on day to day which the tactical activity that drives success on the insurance side that we’re working hard at across the board.

Joshua Shankar

Well, thank you for all the answers and I appreciate the extra time.

Dom Addesso

Thank you, Joshua.

Operator

We will go next Brian Meredith with UBS.

Brian Meredith

Yes, thanks. Just a couple of quick questions here; first, I am just curious in the Bermuda segment, what was the current dollar figure of the true-up which you had in the first quarter, just so we get a good sense of kind of what the year over year growth was looking like without this true-ups, the Bermuda segment?

Dom Addesso

Just one second.

Brian Meredith

Sure.

Dom Addesso

Yes, it’s roughly about $60 million.

Brian Meredith

Great, that’s truly helpful. And then, second question on the credit mortgage business, I am just curious when you think about the capital allocation to that business, how do you think about it? Are you using call it rating agency models? What are you using in — and what is the risk here that perhaps has changed and where the rating agency look at the mortgage reinsurance business to get to maybe some type of capital requiring closer to [indiscernible] particularly with quota share, would that change your kind of view of the business?

Jon Zaffino

So, Brian, it’s Jon. As a — I think a couple of things. I think we feel like just overall first principle that Everest given our overall capital position and diversified book business, we feel we are pretty capital efficient in deploying capital in the areas like mortgage. We also know there has been conversations and some of the rating agencies have been looking at this fairly carefully about what the rating, how they should think about the capital required to support this book going forward. More times than not when more capital is required whether it’s on the [indiscernible], or the rating agencies that puts pressure on supply. And we do that — given our strong capital position and balance sheet and ratings, we do that as positive that will drive increases in demand and put downward pressure on supply. So, in terms of we think about it, we think about it as all of the above rating agencies with limits deployed, realistic disaster scenarios, stochastic, pricing, reserving, looking at an overall economic capital model, thinking about the assets and the liabilities and whole balance sheet.

Brian Meredith

Got you. Great. And then, another just quick question here. Given that you are moving to more shorter tail type businesses which on the liability side with MI and crop and stuff, is that causing any changes in your investment portfolio and kind of where you are going to invest and proceed?

Dom Addesso

No, it hasn’t. The duration on the liability side really hasn’t moved much approximately three years – four years, and our asset portfolio is underneath that. So that has not changed.

Brian Meredith

Great, great. Thanks. And last quick question here, workers comp market, I know you guys did mention that there are some dislocation of the insurance market in general and you are taking immense opportunities there. How about he workers comp market with some of the recent activity that we are seen there, any opportunities there?

Dom Addesso

In the insurance side?

Brian Meredith

Yes, insurance side, sorry, yes.

Dom Addesso

There are a lot of select opportunities. And we have expanded slightly some of our offerings we have expanded into some different states, but only selectively into certain states. California you know which is our biggest comp market, very profitable for us, rates are off a little bit, but we’re still very bullish on sector given where rates are. And we will use comp frankly as a competitive advantage. There is a lot of — a lot of markets we compete against that don’t have comp capability and that gives us an edge to get into some other — some of the other lines of business. So that’s how we are thinking about it.

Brian Meredith

Got you. Thank you.

Operator

We’ll take our final question today from Nicholas Mezick with KBW.

Nicholas Mezick

Hi, good morning everyone.

Dom Addesso

Good morning.

Craig Howie

Good morning.

Nicholas Mezick

Thanks for fitting me in. A year ago, you mentioned that you have not done hiring in the insurance division. And in the prepared remarks today, you mentioned due to market turmoil, you have accelerated those investments. At Heartland, I see other underwriting expenses up about $9 million quarter over quarter. Where do you see the notional dollar amount is going in 2017 and 2018 or the other underwriting expense?

Dom Addesso

I don’t know that we have an answer for you on that because it is all dependent on market opportunity. So, we think about it more as an operating expense ratio. And I think where we are at today, we are lower, particularly as the earned premium begins to catch up, because our lead of add for resources is not necessarily plateauing but not going up at the same pace that it has been over the last 18 months as we have been building up some of these new businesses. And as these businesses have – the premium begins to earn in, the expense ratio all other things being equal, should moderate. And as Jonathan pointed out earlier, we will continue to make new additions consistent with what we see as the growth opportunity. So it’s a little difficult for us to give you nominal dollar amount because that will emerge as opportunity emerges.

Nicholas Mezick

Okay. And one of the governors to that sort of the sub 30 expense ratio target?

Dom Addesso

Right.

Nicholas Mezick

Okay, thanks.

Dom Addesso

And by the way, if it remained at 30 for foreseeable future again as we pointed out before, most of our competitors aren’t even close to us there. So, while everyone seems to be focused on the increase in expenses, reality is that where we are at today is competitive relative to the market.

Nicholas Mezick

Just a quick follow-up on that last point, any overrides from the more conservative reinsurance program?

Dom Addesso

We have overrides in our reinsurance purchases, is that what you are asking?

Nicholas Mezick

Yes, that’s driving the expense ratio to that sub 30 target?

Dom Addesso

Not to any significant degree. We do have some overrides but that’s not driving.

Nicholas Mezick

Okay, thanks guys.

Dom Addesso

Thank you.

Operator

This concludes our question-and-answer session. I’ll turn it back to management for closing remarks.

Dom Addesso

Well, I’ll conclude by just thanking everyone for participating in this morning. And as you can surmise from our prepared comments as well as some of the answers to questions, we remain optimistic about our ability to deliver — continue to deliver solid returns. Conservative management of our cat exposure, solid reserve position along with expense discipline and all that positions us to withstand what the market might bring to us. Coupled with growth into newer product areas and our reinsurance operations as well as what’s proving to be a successful growth strategy for our insurance division, these things should continue to help us maintain our above average returns.

So, thank you for your interest, and I look forward to perhaps meeting with many of you in the months ahead. Thanks again for participating.

Operator

Ladies and gentlemen, thank you for your participation. This does include today’s conference. You may now disconnect.

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