Feb 5, 2015
Executives
Beth Farrell - Vice President, Investor Relations Dom Addesso - President and Chief Executive Officer John Doucette - Executive Vice President and Chief Underwriting Officer Craig Howie - Executive Vice President and Chief Financial Officer
Analysts
Amit Kumar - Macquarie Michael Nannizzi - Goldman Sachs Vinay Misquith - Evercore Josh Shanker - Deutsche Bank
Operator
Good day, everyone, welcome to the Fourth Quarter 2014 earnings call of Everest Re Group Limited. Today's conference is being recorded.
At this time, for opening remarks and introductions, I would like to turn the conference over Ms. Beth Farrell, Vice President of Investor Relations.
Please go ahead.
Beth Farrell
Thank you, Kelly. Good morning, and welcome to Everest Re Group's Fourth Quarter and Full Year 2014 Earnings Conference Call.
On the call with me today are Dom Addesso, the company's President and Chief Executive Officer; John Doucette, our Chief Underwriting Officer; and Craig Howie, our Chief Financial Officer. 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 alike 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.
We are very pleased to report record operating earnings for the year and quarter. Net income was slightly below that in 2013 due mainly to less realized gains on investments.
However, as a result of share buybacks net income on an earnings per share basis was higher year-over-year at just under $26 per share. Most of our areas of our operations had excellent results which contributed to the overall result.
The reinsurance segments continue to be the main engine and another good year was posted with the absence of many cats. The underwriting result was flatting year-over-year and while the combined ratio slipped two points, the portfolio was still generating above average returns.
This slippage and combined ratio points will be discussed in great detail by Craig and John but a couple of general factors accounted for this increase. These would include the business mix shift and in our international operations a higher attritional loss ratio due to shock losses and storm losses not classified as cats.
Declining rates overall are also a factor but we have muted much of that by moving attachment points to more attractively priced layers and buying external reinsurance in the capital markets and from traditional providers. The flexibility and adaptability to the market has been one of our point, in fact in many cases due to our capital structure which effectively includes Mount Logan and our sponsored [indiscernible].
We have the ability to put out more capacity with the same or less net peak zone P&L exposure and better risk-adjusted returns. Overall, the net returns on the cap portfolio in 2-14 were higher than the gross returns due to efficient capital management with the purchase of third-party reinsurance.
As a result, the absolute margins on our property portfolio on an expected basis were up despite an annual expected loss from tax of approximately 12 points on our underwriting combined ratio. This resulted in an increase in the ROE in this business as we deployed our aggregate across the more diversified portfolio rather than expanding net exposures in any of our peak zones.
One of the few challenges in the portfolio last year was our crop book which suffered $64 million on loss, primarily due to a severe commodity price decline, which accounted for $36 million. But the remainder coming mostly from crop hail losses.
Over the past couple of years, the industry has suffered a bit in this class but over the longer term it has been a good business. The crop division caused our insurance operations to incur an underwriting loss for the year.
However, the improvement in the balance of the book has been notable. Excluding crop, the insurance operation produced an underwriting profit of $15 million.
On an [indiscernible] basis that portfolio was now running around at 95% combined ratio. This has been a good turnaround story.
Worker’s comp continues to benefit from rate increases in our growth initiatives and property and casualty ENS lines and speciality lines are all contributing to premium growth and profit. Among other notable items in the quarter was the adjustment in our various reserve positions.
Overall, the impact from reserves was minimal but yet favorable. We did add approximately $140 million to our [indiscernible] reserve enabling us to increase our survival ratio to its historical levels.
It had recently dropped due to an increased level of payment activity during year. This area is difficult to estimate but we felt that prudent to increase the reserves to be a more conservative position.
Other reserve adjustments were in the insurance segment for run-off lines. These various charges, however, had no meaningful net impact on results due to redundancies in other areas.
Overall, a very sound reserve position with a track record of favorable access New Year development in each of the last ten plus years. Investment income continues to trend downward due to low rates in the fixed-income markets.
However the fourth quarter was a bit stronger than earlier quarters due to limited partnership income in our alternative asset category. We have no immediate plans to make significant shifts in our allocations so with these interest-rate levels, we should expect the downward trend in book yield to continue into 2016.
The impact on net investment income of declining yield will be somewhat offset by any increase in investable assets. The rate of premium growth into 2015 will likely slow the decline reinsurance price environment and are increasing selectivity.
However, we continue with new products in the reinsurance segments and our insurance segment will continue to be an area of great [indiscernible]. Of note is that more than half of our expected underwriting profit after consideration for normalized catastrophe losses is derived from non-cat expose business These other lines of business have therefore been an important area to focus as mitigated rate pressures as well as providing for a more diversified portfolio.
Share buybacks continued in the fourth quarter, as well as an increase in our dividend. Capital return to shareholders totaled almost $650 million in 2014.
Nevertheless, equity capital increased $500 million dollars during the year which gives us capacity for growth opportunities during 2015 and beyond. Given the market conditions ahead, we would expect to continue share repurchases in 2015.
Since 2006, we have repurchased 36% of outstanding shares and returned $3.4 billion of capital and at the same time through equity of 46% from $5 billion to $7 billion. The level of share purchases in the future will of course be dependent on business opportunities.
We remain committed to finding profitable growth through new initiatives and increasing our returns from capital alternatives. Our responsive, flexible and adaptive style will no doubt continue to create opportunities in the year ahead.
Thank you and now to Craig for the financial report.
Craig Howie
Thank you, Dom and good morning, everyone. Everest start another strong quarter earning with net income of $340 million or $7.47 per diluted common share.
This compares to net income of $365 million dollars or $7.54 per share for the fourth quarter of 2014. Net income includes realized capital gains and losses.
For the year, Everest had net income of $1.2 billion dollars or $25.91 per share compared to $1.3 billion or $25.44 per share in 2013. The 2014 result represents a return on equity of 17%.
Operating income for the year was $1.1 billion or $24.71 per share. This represents a 15% increase over operating income of $21.47 per share last year.
These record operating results were driven by a strong underwriting result, foreign exchange gains and lower income taxes compared to 2013. The increase in underwriting income was partially offset by a lower derivative result and lower net investment income compared to 2013.
The results reflect a slight increase in the overall current year attritional combined ratio of 82%, up from 81% last year. This measure excludes the impact of catastrophes, reinstatement premiums and prior-period loss developments.
All reinsurance segments reported underwriting gains for the quarter and for the year. Total reinsurance reported in underwriting gain of $275 million for the quarter compared to $390 million dollars underwriting gain last year.
For the year, total reinsurance reported in underwriting gain of $862 million compared to an $877 million gain last year. The insurance segment reported an underwriting loss of $36 million for the quarter compared to a loss of $156 [ph] million last year.
For the year, the insurance segment reported an underwriting loss of $49 million compared to a loss of $147 million in 2013. The 2014 results reflected a crop loss of $64 million for the year, comparable to last year, but lower prior period loss reserve development in the insurance segment.
The Mt. Logan Re segment reported a $26 million dollars underwriting gain from the quarter compared to $4 million underwriting gain for the same period last year.
For the year, Mt. Logan reported an underwriting gain of $73 million compared to a $9 million gain in 2013.
Everest retained $14 million of the underwriting income and $59 million was attributable to the non-controlling interests of this entity in 2014. The overall underwriting gain for the group was $265 million for the quarter compared to an underwriting gain of $238 million for the same period last year.
For 2014, the underwriting gain was $887 million compared to a gain of $739 million in 2013. These results reflect $15 dollars of current catastrophe losses in the fourth quarter of 2014, related to the Brisbane, Australia hail storms.
This compares to $30 million of cats during the fourth quarter of 2013. The fourth quarter of 2014 also included favorable development on prior year cap losses, primarily from Sandy losses in 2012.
For the year catastrophe losses were $62 million in 2014 compared to $195 million in 2013. Our reported combined ratio was 82.8% for the year 2014 compared to 84.5% in 2013.
The 2014 commission ratio of 22.0 was slightly up from 20.6% in 2013 primarily due to higher contingent commissions on several years of profitable results. Our expense ratio remains low at 4.6% for the year compared to 5.0% in 2013.
Everest has one of the lowest internal expense ratios in the industry. We believe each point of lower expense ratio translates to about a half point of hire ROE.
This is truly a strategic competitive advantage for Everest. On reserves, we completed our annual loss reserve studies.
The results of the studies indicated that the overall reserves remain adequate. In the fourth quarter, we booked prior year development in the insurance segment and for asbestos which was more than offset by favorable development in the reinsurance segment.
The $20 million dollars of prior year reserve development in the insurance segment during the quarter was largely related to construction liability and umbrella business. These run-off programs were discontinued by the company several years ago.
The $30 million of favorable prior-year development in the reinsurance segments reflects $167 million of favorable development. This was offset by $137 million increase in asbestos reserves.
The asbestos charge can be split into two components. First, the reserves associated with the company’s assumed reinsurance business were strengthened by $100 million after completing our normal exposure analysis.
In part to bring the survival ratio more in line with our historical trend. Second, the asbestos reserves related to Mt.
McKinley's direct insurance business were increased by $37 million. Everest has entered into a letter of intent to transfer the Mt.
McKinley asbestos reserves to another company. The proposed transaction indicated $37 million dollars of funding would be required for the other company to assume the liabilities, so no additional increase will be needed should the transfer be completed.
The $167 million of reinsurance favorable development, mostly related to treat the casualty and treaty property business both in the United States and internationally. These redundancies have developed over time but we don't react until the position becomes more mature.
We continue to hold our estimates for the more recent years. For investments, pre-tax investment income was $134 million for the quarter and $531 million for the year, a $17.4 billion investment at total.
Investment income was below last year as anticipated. This result was primarily driven by the low-interest environment and the decline in limited partnership income.
Also, the cash flow used for share buybacks and the redemption of debt contributed to this lower income. The pre-tax yield on the overall portfolio was 3.2% as compared to 3.5% in 2013.
Limited partnership income was down $6 million year-over-year. However, our diversified investment strategy enabled us to exceed our planned investment income for the year.
The increased allocation to equities was also a benefit to net income, as the year reflected $55 million of net after-tax realized capital gains compared to $197 million last year. These gains are mainly attributable to the fair value adjustments on the equity portfolio.
A derivative loss of $60 [ph] million was recorded in the fourth quarter reflecting a change in the estimated valuation of our equity index put option contracts to include a better estimate for expected future dividends. This change resulted in cumulative catch up loss adjustments over the seven open option contracts.
On income taxes, the 2014 operating income effective tax rate was 12.2%. This 12.2% effective tax rate for the year was in line with our expectations for a year with much lower than planned cap losses and the addition of foreign tax credits utilized.
Strong cash flow continues with operating cash flows of $1.3 billion for the year compared to $1.1 billion in 2013. This is primarily due to our premium growth and lower catastrophe lost payments Shareholder’s equity for the group was $7.5 billion at the end of 2014, up 7% compared to the $7 billion balance at year-end 2013.
This is after taking into account capital return for $500 million of share buybacks and $146 million of dividends paid in 2014. The company announced the 27% increase to its regular quarterly dividend and paid $0.95 per share in the fourth quarter.
Additionally, we repurchased another $36 million of stock after the year end close. These purchases will be reflected in the first quarter 2015 financial statements.
Book value per share increased 14% to $166.75 from $146.57 at year-end 2013. Our strong capital balance positions us well for potential business opportunities as well as continue share repurchases.
Thank you. And now John Doucette will provide the operations review.
John Doucette
Thank you, Greg. Good morning.
As Dom highlighted we had a strong Q4 finishing a very successfully year. Our group gross written premium for Q4 was 1.4 billion up 7% from Q4 in 2013 with the growth coming from all reinsurance segments.
Our group net written premium was $1.3 billion which was up $40 million or 3% over Q4 2013. For the full year, our group wide 2014 premium was 5.75 billion up 530 million of 10% from 2013.
Our group net written premium was 5.26 billion up 250 million or 5%. Let me start with our reinsurance segment.
I will focus more on the full year results for 2014 then turned to our January first renewals to give you some color on what we are seeing in the market and some themes as to how we are navigating it. For our global reinsurance segments including both Total Reinsurance and Logan, gross premium was $4.5 billion up 15% with growth coming predominantly from our U.S.
and international reinsurance segments. Net premiums were $4.2 billion up 7% as we continue to pursue our retrocession strategy to lay off some of our catastrophe exposure and lower our cost of capital.
Our reinsurance book including Mt. Logan generated $935 million of underwriting profit, a 5% improvement compared to 2013.
These results highlight the success of the initiatives we have put in place over the last couple of years to achieve profitable, reinsurance growth, including the introduction of several new reinsurance products such as Purple Everest Color Product. Deploying increased capacity to pro-rata deal where we saw attractive original pricing terms and conditions.
Pursuing new credit related opportunities to various territory, developing new strategic relationships across the globe with several key reinsurance clients, increasing line capacity on several attractively priced property catastrophe treaties aided by Mt. Logan Logan.
Developing increased penetration and breath of our international faculty of book, growing our regional footprint and leveraging our competitive strength to become reinsurer on various treaties in multiple countries allowing us to drive terms and conditions. These initiatives have broadened and enhanced both our broker and client relationships which in turn has provided new opportunities to expand our writings, whether it is on new program or layers or larger shares of existing treaties with our long-standing clients and despite a challenging rate environment, we achieved profitable growth as evidenced by the results of 2014.
So what are we say in for 2015? Certainly it continues to be a challenging market with rate offs between 5% and 15% depending on the line of business and territory but having said that we were able to achieve better than market results, given our rating, long-standing client and broker relationships, broadly diversified portfolio and our underwriting diligent and flexibility.
We take an objective view of each deal at renewal and will scale back or non-renew deals we do not like and redeploy capacity to deal in layers which we find to be better priced. This mitigated the downward impact on our portfolio.
Let me provide you a bit more color on January first reinsurance renewals in which we wrote about $2.1 billion of treaty premium which represents approximately 45% of our annual reinsurance treaty premiums. Catastrophe excess of loss business represented roughly 25% of this renewal.
This is an important point that you have all heard market participants expound on the double-digit rate decline in this sector while we are not immune to these pressures, 75% of our renewal was in line outside of property cat excess of loss which speaks to the diversity of our portfolio and a mitigate to just following the general market down. We also have Mt.
Logan which provides efficient capacity to support this line. We continue to see robust, ongoing investor appetite for the Everest Logan value proposition highlighted by Logan's best in class, risk-adjusted returns to investors.
As of 01/01/2015 we raised approximately $270 million of additional funds and Logan now stand at about $690 million dollars of assets under management and 100% of Logan’s capacity was fully deployed at the 1/1 renewal. During 2014, Logan generated approximately twenty eight million dollars of earnings for Everest, including fees.
Property related and short tail business outside of catastrophe excess of loss represented another 50% of the renewal writings and while much of this has a cat component, it is balanced by risk premium. Putting up larger capacity on short-tail deals we like, and in general moving up attachments on property excess of loss players soften the impact of some of the rate reduction.
Our 1:1 [ph] cat-expose premium saw a couple of points of deterioration in the combined ratio but both are expected cat premium and dollar cap margins are approximately flat compared to last year, USA rates held up pretty well but we saw more competition this renewal in Latin America, Canada, and China. Rates in Europe were also under pressure.
For Purple, we saw some undisciplined competition in that space so we redeployed some capacity away from purple to some of our long-standing [indiscernible] clients. Overall, we did see three point drop in our expected ROE at this 1:1, one a worldwide property actual book as the deal that many of the clients are now buying are more capital intensive.
We believe this highlight and validates our property retrocessional strategy with the increased use of Logan, Kilimanjaro issuing $950 million of cap on and other non-traditional and traditional sessions to manage our net cat PMLs and lower our cost to capital. As a result of these strategies, our net ROE continues to be greater than our gross ROE on our worldwide property cat book.
Casually remains challenging, especially pro-rata due to demands for expanded terms and conditions. As a result, we continue to withdraw from some contracts, move from quota share excess loss and deploy capacity at higher layers on others.
We saw a new opportunity that at 1:1, outside of the mainstream that meaningfully added to our top line. This includes a large motor, quota share in Europe, a large international professional liability quote share, increased lines for some of our global client that were only offered to Everest and surplus relief deals that were not widely marketed too many reinsurers.
These new deal offset some of the premium from the quota share deal and excess of loss deals which we non-renewed at 1:1 2015. Four themes helped us this 1:1.
Number one, we have one of the lowest internal expense ratios in the industry with our total reinsurance segment carrying only a 2.9% expense ratio. Therefore, we get more dollars of margin and a higher ROE on the same premium than others do.
Number two: we are more diversified than most of our competitors, we use our capital across more zone and perils and that naturally lowers our internal cost of capital. Number three: the retrocessional strategy of Logan, Kilimanjaro Cat on, IOWs and other traditional and non-traditional sessions lowers our cost of capital further.
And number four: our reinsurance operational structure is another sustainable competitive advantage. Everett has one view of risk around the globe but we deploy capacity to our clients by senior lead market experienced underwriting team in a decentralized fashion and empower those teams to make decisions.
This allows us to know our customers very well and move quicker and in scale better and faster than our competitors who write only few lines of business or who right out of one, only one or two offices. Across all classes on a constant foreign exchange basis, our gross reinsurance premium at 01/01/2015 was approximately flat compared to last 01/01.
Our net reinsurance premium declined by about 2% this one 01/01 as we reassured more of our book with the growth in Mt. Logan at UM and the capacity provided by the Kilimanjaro caps on.
In addition to increase use of other traditional reinsurance to effectively protect our net position. We are to be the outcome of our 1:1 renewal despite market condition and expect 2015 to be another, strong year for our reinsurance book.
Being innovative and providing ideas and solutions to our clients as well as our ability to execute quickly and incise it is now more important than ever. Our focus on new business opportunities, new products, new distribution sources and leveraging our competitive strength remains key to our underwriting success.
With our balance sheet, ratings and ability to nimbly deploy both rated capacity and unrated capacity inside the support our business, we have more tools in our toolkit to compete and win against non-traditional capacity as well as other traditional reinsurers. Now turning to our insurance operations, we wrote $300 million of insurance premium in the fourth quarter and wrote $1.2 billion for the year for both the quarter and the full year that is down about 5% compared to the same period last year but removing crop insurance both the quarter and the full year are up approximately 10% in premium with growth coming from each large insurance units.
The insurance growth initiatives that we have put in place over the last couple of years have been providing benefits to the top and bottom line, these include staffing up underwriting operation and expanding both the relationship, both property and casualty, increasing our property insurance geographic footprint, driving international insurance expansion, including growing our existing Canadian platform and building out new product distribution and strategic relationships within our specialty insurance operation both in the U.S. and internationally.
The insurance calendar year results [indiscernible] lost due to our crop results which is consistent with what we've been discussing on prior earnings calls. Excluding crop, our insurance operation ran to a $50 million underwriting profit.
This was almost a 100 million dollar improvement in underwriting results year-over-year. Our crop insurance book had an underwriting loss of $22 million in Q4 resulting in a calendar year underwriting loss of $64 million in 2014.
These results were driven by four issues: lower commodity prices during 2014 particularly for corn, below average result in Minnesota, our largest state and typically are most profitable, significant losses and crop hail due to an unusual number of hailstorms throughout the Midwest, higher expenses associated with new technology and IT initiatives. We anticipate improved underwriting results in our crop book in 2015 with a larger, more diverse book of business and increased operating efficiencies derived from an updated systems infrastructure.
In other lines of business in terms of rates, we continue to see rate increases in her California workers comp book of about 7% but the rate increases have slowed as more competition is coming to that space. General liability was up about 7% for the quarter.
Professional liability rates were down about 5% and property insurance rates were also down about 5%. As before we continue to roll out many new insurance and reinsurance products in 2015, we are hopeful for meaningful growth in our insurance operations as we capitalized on opportunistic expansion both geographically and cross product lines.
Thank you and now back to Beth for Q&A.
Beth Farrell
Yes Kelly, we are open now for questions.
Operator
[Operator Instructions] we have our first question from Amit Kumar from Macquarie. Your line is open.
Please go ahead.
Amit Kumar
Congrats on the quarter. Just a few clarification type of questions.
Number one, just going back to the discussion on Mount McKinley. How much -- what's the size of the reserve status being shipped off from that?
Dom Addesso
Now McKinley is about $150 million in reserves that would be transfer.
Amit Kumar
And that’s in Q1?
Dom Addesso
Well, we don't know when the transaction will close. We have to go through all the regulatory approvals and things like that but I would suggest that it probably would be the beginning of Q2.
Amit Kumar
Okay, that's helpful. The other question I had was on, this goes back to the discussion on renewals, and thank you for the expanded commentary this quarter.
In terms of some of the new opportunities which you talk but I think you mentioned a motor quota share and a large international account, do you have some sense of, why was it shifted to you and how did it perform previously. I am just trying to get a sense why it was non-renewed by the previous reinsurer.
Dom Addesso
I am not sure Amit that we can really get into that level of detail relative to prior are reinsurance, in some cases it might not be into the transaction that it had been in the market. A number of these deals that John has went through, are surplus driven or financially driven transactions and probably they do have transferring them of course but it's capital relief type products in some cases and in another cases it is helpful companies as they have managed their capital at various subsidiaries around the world.
So they are all different. Why is Everest the company of choice?
Some of things that John mentioned, I think are important to us. I think in community at large, I think we hope that we're viewed as an innovative market and the market that is quick to respond, flat organizational structure so that any significant transaction can quickly get to John's desk or my desk if it needs that level of approval and strong writing and the global footprint.
Now those are all reasons that we have been emphasizing and that's what we found as why are a market of choice in many of these unique transactions.
Amit Kumar
I guess what I was trying to figure out is and I am just a bit surprised that you have had these opportunities for few quarters. And I'm just trying to figure out if it's a size issue why some of your peer companies have not been able to capitalize and find similar opportunities.
Dom Addesso
It's hard to generalize. I do think in parts, it’s the size issue, it could be a ratings issue, it could be the fact that these are not the types of transactions that this company has shown an interest and had a risk appetite for.
It's hard for me to explain what the reason might be.
Amit Kumar
Okay. And just finally, any change in the buyback philosophy versus as it relates to your discussion on premiums, should we anticipate that to be any different versus what we've seen in the past.
Thank you.
Dom Addesso
I think what I've tried to emphasize in my comments was that we bought back a significant return to significant amount of capital in the several years. I would anticipate that we continue to do that given the current market conditions but obviously if the market changes, then change direction on how much capital would it return.
So I don’t anticipate any major change at this point. This is what I think be the short answer to your question.
Amit Kumar
Got it, thanks for the answer and good luck for the future.
Dom Addesso
Thank you, Amit.
Operator
Our next question comes from Michael Nannizzi from Goldman Sachs. Your line is open please go ahead.
Michael Nannizzi
Thanks, just a couple of here if I could. The expense ratio in international reinsurance in Bermuda in particular lifted in the fourth quarter.
Was there something that happened that was kind of fourth quarter-specific in particular in Bermuda, or maybe there was some other driver. Thanks.
Craig Howie
In the fourth quarter, we typically had compensation related accruals at year-end and I hope you recall. Again, we had a record quarter of results in the fourth quarter as well.
Michael Nannizzi
Okay but even with the year-over-year comps and the fourth quarter of the last year was pretty good too. So that's all just incremental comp that we should be thinking about, and it's just specifically in Bermuda?
Craig Howie
No, the majority of it is, where you are seeing it may be even in total segments, compared to third quarter into fourth quarter.
Dom Addesso
Michael I wouldn’t look too much into individual segments because each of those are subject to individual accruals and year-end adjustments. I think the main topic is the overall group and the difference in the fourth quarter was what Craig specified which was predominantly compensation adjustments as relates to putting them on with our year-end results.
So the individual segments can be, [indiscernible] of factors that are local.
Michael Nannizzi
Okay, great. Thanks.
And then, Dom, you mentioned the net ROE versus the, I am sorry John mentioned the net versus gross ROE. Just trying to understand, I imagine that includes the difference is in part Mt.
Logan because you seed some business to Mt. Logan.
So just trying to understand the relationship over the ROE at Mt. Logan versus the ROE at Everest
John Doucette
Good morning, Michael this is John. We have talking about this for several quarters that there is difference by having rated and unrated capacity, there is different constraints to different capital requirements and it is not just cost to capital but it is also that there is different ROE for a rated company is impacted by how rating agency think of the capital that you need to hold to support the businesses and so it gives us the ability to find right fit for business but dealing across the portfolio, Logan is very critical for that but it is also part of a broader strategy than involved the cap on and other traditional sessions that we have and it allows us to kind of and also within Mt.
Logan we have different investor appetites, low-risk, medium risk, high risk that results and lower return, medium return and high return and having that combination gives us a lot more flexibility to be able to deliver the most value for our client and have the best in that position for Everest.
Michael Nannizzi
Okay and then Dom, I think you had mentioned, in your opening remarks that cat business represents about half of the underlying profit or of the profit on a run-rate basis, I guess, when you adjust for model cats. Can you share what was that percentage in 2014 on an actual basis?
Do we have that?
Dom Addesso
The number is probably somewhere between $300 million and $400 million of underwriting profit, non-cat.
Michael Nannizzi
Okay, got it. Great.
Thanks. And then last one if I could sneak one more in.
I think John, you mentioned last quarter that you were seeing some 20% return opportunities in, I think, somewhere more on the financial side in terms of those types of transactions. Just would love an update on that, is there still an opportunity to generate that level of return in that part of the portfolio?
And thanks so much for all the answers.
John Doucette
The short answer is yes. We continue to see you and again we have been talking about this for a while, not just do we have a large balance sheet and high rating but we also a have a lot of underwriting expertise bringing, underwriting, accounting tax, legal contract wording and an actuarial and brining that all to the mix and solving client’s client need and creating some run-off structures and we continue to look for those and I think in general we think the more, it's less commodity with plain vanilla that seems to be under more pricing pressure to having the ability to execute kind of multijurisdictional insurance, reinsurance combination deal give us the ability to really solve client’s problems and use a lot of the different competitive advantage that we have and we continue to think that there's a lot of our runway for that.
Michael Nannizzi
Great. Thank you so much.
Operator
Our next question comes from Vinay Misquith from Evercore. Your line is open, please go ahead.
Vinay Misquith
Good morning, the first question is on the increase of the combined ratio for next year, that's 2015. You talked about, I think, a couple of points increasing the combined ratio from the cat business.
So was just curious as to -- so when you shake it all together for the other lines of business because pricing is down. Where do you see it sort of coming out to?
Dom Addesso
What was the last part of that...
Vinay Misquith
So for the cat business, I believe you said that the combined ratio would increase maybe about a couple of points for the cat business. I was wondering also for the non-cat business.
So if we shake it all together for the Company as a whole on the reinsurance side, how many points of an increase on the combined ratio do you think you got of the January 1 renewals?
Dom Addesso
you are really leaning us more towards giving earnings areas guidance which we really try not to do. I think, we expect, let me say this way, we expect our insurance operations combined ratio to improve, I am not really going to give any guidance on what that expected combined ratios would be in the insurance portfolio.
On the reinsurance portfolio, a lot of that is dependent upon the types of transactions that we see. Certainly we will strive to maintain the combined ratio targets that we have been accustom to.
And that will likely mean that some of the transactions that we were on in ’14 will probably not renew and they will look for other types of transactions. As John mentioned, we are doing some new product -- expanded our capabilities into the credit area and a lot of that reinsurance we expect to run it better combined ratios than are traditional reinsurance book.
So part of it is dependent upon the mix of and that's the best answer that I can give you at this point.
Vinay Misquith
Sure. Fair enough.
And on the cat business, you said that it's going to be about a couple of points higher, but pricing seems to be a lot lower. I was just wondering what the difference is -- the difference, the retro that you guys are buying.
John Doucette
No the retro really is the capital issue. The combined ratio on a gross – those were gross basis comments and what it did, a lot of that again and we keep trying to articulate as to the ability to move between product between layers, between clients to redeploy capacity from one product segment to another as we try to utilize the cat capacity that we are willing to deploy at any renewal and really be able to move seamlessly between that and one example is within our treaty property department.
it's the same team that writes so lot of risk, cat and retro and that having the ability to dynamically allocate capacity to help where the client needs are and where we think the best pricing is as well as moving up and down attachment points within the layer and ask again, we think because of our market position we have the ability to get more defining in the layers want and that really helps drive what you're seeing.
Vinay Misquith
Sure. So it's a mix issue besides the pricing...
Dom Addesso
The mix influences the combined ratio of them.
Vinay Misquith
Sure, sure. Fair enough.
Then just the 50,000-foot view, we've seen a lot of M&A in the industry. You guys are about an $8 billion market cap Company.
Curious about your thoughts on M&A.
Dom Addesso
What thoughts and what regard?
Vinay Misquith
Are you interested in combining with others, do you think your size is large enough that you don't need to and also, do you think you're going to get some more opportunities if you guys don't combine and the others do. Do you see some more opportunities within the industry for your premiums?
Dom Addesso
I think we have emphasizing our scale and diversity for some time. So obviously I think it has been communicating that we think we have sufficient scale, so we don’t really see that necessity, urgency for combinations.
Others, others may view it differently but I think in essence what you're seeing in the marketplace in that regard somewhat validates one what would be have been the adverse advantage. So that's what I will say about that.
In terms of the combinations and what it needs to the marketplace in general, it all depends on execution. Many times these combinations can be disruptive.
Maybe they won't be. We will see, they can affect market, they can affect shares of programs with the teams of people.
There's always some churn that will occur as the result of any kind of merger in any industry so time will tell and we will see how that will evolve over the months ahead. Perhaps it creates opportunities, perhaps not.
But I will say is that in some regards, this could be good for the industry in the sense that perhaps some of the capital does come out of the business and creates further discipline. So that could be a good outcome, some of these combinations.
Vinay Misquith
Fair enough. And then just really on Mt.
Logan Re, so it appears you guys have increased capital by maybe 60% because you raised about $270 million more. Correct?
So would it be fair to assume that the premiums also would be up a similar amount because you've already deployed all the capital as of 1/1?
John Doucette
Yes, we would expect there to be a some increase in the [indiscernible] to Logan.
Vinay Misquith
Okay, alright. Thank you.
Dom Addesso
Vinay, one more thought relative to your side question. Keep in mind as you mentioned $8 million market cap company, we are also adding the Logan piece and the sponsor cat also we have, so essentially you can almost argue that they were operating more like $10 billion capitalized company.
Vinay Misquith
Fair enough, thank you.
Operator
Our next question comes from Josh Shanker from Deutsche Bank
Josh Shanker
Good morning, everyone. I think you made a very compelling case about your expense advantage compared to your competitors on this call this morning.
I don't know if that translates necessarily to the insurance business, though. Why is Everest better in the insurance businesses than their peers?
And we've seen some variable results from different reporters of crop insurance. Why have your results been weak this year while some others haven't seen such weakness?
Dom Addesso
I will let John talk about the crop piece because I think he include some of those points in his prepared remarks but let me just perhaps admit that I don't know that we are better than the industry on the insurance side. Our comment about the expense ratio was a reinsurance company and why were they getting superior returns, there.
John Doucette
Okay, go ahead Dom and then we will come back.
Dom Addesso
So in terms of crop insurance, we have a great team at Heartland but we know that we need to grow that book, we need to diversify the book. A lot of it is fixed expenses, those high fixed expenses and if infrastructure and systems.
And so we know that—so in all a lot of things we are talking about what were going on. The reinsurance side.
We are trying to do that with various books including the Heartland Corp Book. And we would expect that with the better geographic footprint than we have a bigger and better geographic footprint will give us more diversification, more better risk-adjusted returns, that allows to economics to scale and I think some of the competitors may buy quota shares, we do not and bipolar shares as then they get an override from the reinsurers and that may be impacting their expense ratio as well.
John Doucette
We have some work to do there but again to remind you that significant portion of the crop lost from Crop Hill and they are not just NPCI.
Josh Shanker
That's a great answer. And then coming back, if you are not necessarily better than your peers in the insurance business, does it make sense to you to continue in that business?
I'm not telling you have to sell it or anything. But when you think longer-term, might it be worth more to somebody else than it is to you?
Dom Addesso
Right now, we think it is a good diversifier for a platform, you have the ability to deliver we think again because of the diversification fact, he greater ROE is also a source of business and for us into any capital markets that we talked about earlier as well, so we do hear again when we talk about our net ROE being the gross ROE. There is an opportunity to leverage that as well.
So for the time being we think that the diversification and access to risk being able to build out that platform is important to the future of the Everest.
John Doucette
We spent a lot of time looking at the trends and we know buy each other business units that we have in the trends available. We've been growing up footprint whether it’s A&H operation, the safe operation, our property facilities around the group, the workers comp, BFI and professional teams the casual and environmental teams.
The trends have been favorable and we are going to continue to extract to keep those teams support and capacity and help them grow their footprint and help them get an economy as the scale. Additional we can commonly use the scale and leverage again, the financial strength rating and an ability to execute that Everest pride itself there.
Dom Addesso
The enforced portfolio, is a little bit great results for us now we recognize what have had over the last couple of years and drag from discontinued books of business and obviously as you can tell from this year been, that has been greatly diminished and so we think it’s a bright future there.
Josh Shanker
Well, congratulations. Certainly a great year overall.
Dom Addesso
Thank you, Josh.
Operator
At this time I would like to turn the call back over to Mrs. Beth Farrell for closing remarks.
I will turn the call over to Dom Addesso for closing remarks.
Dom Addesso
Thank you and thank you from participating in today’s call. Now we talk, today we continue to emphasize about our competitive advantages which have yielded above market returns.
These are a competitive manager of global franchise and scale, diversified portfolio, we have talented staff and as we mentioned very competitive expense ratio. Market conditions are difficult to trend is difficult but we have proven our ability to deliver superior results.
They are certainly many areas to be cautious about but also there is lot more to do. And we thank you for your continued interest.
Have a good day.
Operator
This conclude your teleconference. Thank you for your participation.
You may now disconnect.