Oct 27, 2015
Executives
Beth Farrell - VP of IR Dom Addesso - President and CEO John Doucette - Chief Underwriting Officer Craig Howie - CFO
Analysts
Amit Kumar - Macquarie Research Joshua Shanker - Deutsche Bank Kai Pan - Morgan Stanley Sarah DeWitt - JP Morgan Meyer Shields - KBW Ian Gutterman - Balyasny
Operator
Good day, everyone and welcome to the third quarter 2015 earnings call from Everest Re Group. Today's conference is being recorded.
At this time, for opening remarks and introductions, I would like to turn the conference over to Ms. Beth Farrell, Vice President of Investor Relations.
Please go ahead, ma’am.
Beth Farrell
Thanks, Tony. Good morning and welcome to Everest Re Group's third quarter 2015 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 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 and good morning. We are pleased to report another favorable quarter despite industry losses in China and Chile.
For us, these two events totaled $100 million gross and $79 million, net of tax and reinsurance. Nevertheless, we were still able to generate $200 million of operating income, producing an ROE for the quarter of 11%.
Also impacting the quarter was lower investment income due to reduced limited partnership income. Investment returns continue to be an obvious challenge, which means an even greater result to produce adequate underwriting profits as evidenced by our year-to-date underwriting gain of $574 million and a year-to-date ROE of 14%.
I expect both our quarter and year-to-date results to be better than overall industry performance, due to our well-diversified portfolio and expected advantage. The underwriting gain for the quarter was $155 million and absent the China loss, the attritional combined ratio stood at approximately 82%.
While reinsurance segments drive the underwriting profit, the insurance operation has improved its attritional combined ratio year-over-year by almost 5 points for the nine months. This is a result of a number of quarters of improving rates as well as profitable growth of almost 30% during the nine months.
Reinsurance, including Mt. Logan on the other hand, had a premium decline of approximately 6% on a year-to-date basis, but on a constant dollar basis, our reinsurance premium is down 3%.
Several factors are attributing to this. The market environment is an important element of this where renewal rates are down which also causes us to non-renew certain programs or layers.
Offsetting this somewhat is the ability to move our capacity to more profitable but different layers, typically at higher attachment points, and therefore less premium per dollar of limit. This portfolio optimization is done in concert with our various hedging strategies, which include use of cat bonds, IOWs and Mount Logan.
Market conditions may flatten out as industry returns are subpar, capital growth is slowing and demand potential may be on the horizon. However, in the near term, we are not likely to see a market that would dramatically change our plans as price adequacy is mixed.
This means we will continue to expect that most of our growth would come from our insurance units. The ongoing emphasis on adding superior talent and broadening our broker relationships will be key to our continued success there.
In addition, broadening our insurance platform by developing our Lloyds Syndicate to the new Bermuda-based insurance platform will be immediately accretive. There are many new and exciting initiatives taking play at Everest in both the reinsurance and the insurance businesses.
The new products and the effective use of capital markets in the reinsurance portfolio to line of business and geographic expansion in our insurance segment. These are all efforts that enable us to continue to generate superior returns on our capital compared to the overall market.
Thank you, and now I will turn it to Craig for the financial report.
Craig Howie
Thank you, Dom, and good morning everyone. Everest had another strong quarter of earnings with operating income of $200 million or $4.53 per diluted common share.
This compares to operating income of $280 million or $6.12 per share for the third quarter of 2014. On a year-to-date basis, operating income was $755 million or $16.92 per share compared to $812 million or $17.46 per share in 2014.
The 2015 result represents an annualized return on equity of 14%. These results reflected a slight increase in the overall current year-to-date attritional combined ratio of 84.2% up from 81.9% for the same period last year.
This attritional measure includes a $60 million gross loss estimate for the explosions at the Chinese Port of Tianjin. The estimate was based on a $3.25 billion industry loss estimate for this event.
Net income year-to-date was $621 million or $13.92 per share compared to $859 million $18.47 per share in 2014. Net income included $134 million of net after-tax realized capital losses compared to $47 million of capital gains last year or a difference of about $4 per share year-over-year.
The 2015 capital losses were primarily attributable to fair value adjustments on the equity portfolio and impairments on the fixed income portfolio. The impairments mainly relate to credit write-downs on energy investments.
Since the end of September, the majority of the fair value adjustments on the equity portfolio have already recovered. On a year-to-date basis the overall results reflected gross catastrophe losses of $70 million in 2015 compared to $75 million in 2014.
The third quarter of 2015 reflected $40 million of gross current year catastrophe losses related to the earthquake in Chile. This compares to $30 million of cats during the third quarter of 2014.
Our reported combined ratio was 85.8% for the first nine months of 2015 compared to 83.7% in 2014. The higher 2015 ratio includes Tianjin loss as well as numerous weather related losses during the year that did not meet our $10 million catastrophe threshold.
The year-to-date commission ratio of 21.8% was slightly up from 21.5% in 2014, primarily due to higher contingent commissions. Our expense ratio remains low at 4.8% on a year-to-date basis.
Expense dollars are up from 2014, due to new hires and build out of our insurance platform. For investments, pre-tax investment income was $116 million for the quarter and $363 million year to date on our $17.6 billion investment portfolio.
Investment income year-to-date declined $33 million from one-year ago. This decrease was primarily driven by the low interest rate environment and by the decline in limited partnership [Technical Difficulty].
This is Craig Howie; I know we were cut off, so I'm sorry if I repeat it, if I’m repeating anything that I’ve previously mentioned but I’m going to start again with taxes. So on income taxes, the overall year-to-date 2015 tax expense $67 million lower than 2014.
Mainly due to the 2015 capital losses which reduced income. Operating income does not include capital gains or losses.
The 14.8% annualized effective tax rate on operating income is primarily driven by lower than planned catastrophe losses resulting in higher than expected taxable income for the year. A 14% to 16% effective tax rate on operating income for the year is in line with our expectations given our planned cat losses for the remainder of the year.
Strong cash flow continues with operating cash flow of $988 million for the first nine months of 2015 compared to $926 million in 2014. Shareholders’ equity at the end of the quarter was $7.5 billion, essentially flat compared to year-end 2014.
This is after taking into account capital returned through $325 million of share buybacks and $126 million of dividends paid in the first nine months of 2015, representing a total return of capital through shareholders of over $450 million so far this year. Book value per share increased over 4% to $173.76 from $166.75 at year-end 2014.
Our continued strong capital balance positions us well for potential business opportunities as well as continuing stock repurchases. Thank you.
And now John Doucette will provide the operations review.
John Doucette
Thank you Craig. Good morning.
As Dom, highlighted, we had a very solid underwriting results into the third quarter of 2015 despite the industry’s macro challenges. Our Group gross written premium for Q3 was $1.7 billion, up over $50 million from Q3 last year, with diverging trends in reinsurance and insurance.
Quarter-over-quarter, our reinsurance book declined modestly, driven in part by foreign exchange, while insurance growth accelerated meaningfully due to our many growth initiatives. I will provide more details shortly.
Our Group net written premium for Q3 was $1.6 billion, which was up 3% compared to Q3 last year. Year-to-date, our Group net written premium of $4 billion is up about 1% year-over-year and generated Group underwriting profits of $574 million.
For our reinsurance segment, all reinsurance gross written premium, including Logan was $1.2 billion for the quarter, down 5% from Q3 last year, but on a constant dollar basis, premium was down only 2%. As discussed last quarter, we have been declining, reducing and non-renewing unattractively priced business.
In addition, as previously discussed, we restructured deal for a significant client that continues to impact the topline. However, the expected profits are essentially unchanged.
Our reinsurance book including Mt. Logan generated $142 million of underwriting profit in Q3, a $77 million decrease compared to last Q3, driven predominantly by the $100 million of losses related to the explosion at the Chinese port of Tianjin, and also the Chile earthquake.
The Tianjin loss, while not a natural catastrophe, one of the largest insurer industrial loss in Asia and also one of the most complex losses in recent history making the outcome uncertain. But as Craig reported, we have conservatively estimated our loss by assuming industry losses at the high-end of the range.
Year-to-date, our reinsurance segments including Mt. Logan generated $574 million of underwriting profit.
We are pleased with these underwriting results, particularly in light of this quarter’s loss event and the [Technical Difficulty] Logan is core to our hedging strategy. Supplemented by cap bond, IOWs, traditional reinsurance and retrocessional protection, we successfully enhanced our capital efficiency while delivering meaningful capacity to support our underwriting strategies.
Turning to the insurance operations, we are progressing with the strategic build out of our platform while focusing on improving the bottom line results. This has been accomplished through the investment in key leadership hires, which in turn have brought significant underwriting talent and stronger direction toward achieving our strategic goals.
Through nine months, premium in this segment is up 29% to $1.2 billion. This growth is highly diversified, coming from many areas, including several newly launched lines of business as well as product and geographic expansion in existing lines of business.
We are building a world-class insurance platform, capable of offering products across lines and geographies, complementing our leading global reinsurance franchise. Year-to-date, we are up 35% in gross written premium on our direct brokerage business, which is underwritten internally by Everest underwriters.
Our program business is up 10% year-to-date. This split growth trend is consistent with last quarter and our expectations, as we continue building out our retail books.
Insurance rates remind mixed with some lines seeing modest rate improvement and others coming under pressure. For the year, our rate monitoring systems indicate relatively flat risk-adjusted pricing across all lines, which we are pleased with in this rating environment.
Bottom line, our quarterly insurance results for Q3 included an underwriting profit of $12 million with a 96.5% combined ratio, over 10 points better than our Q3 combined ratio last year. The underlying accident year results remain profitable and we're driving improvement in our loss and expense ratio through our rebalancing of the portfolio by risk, by product and by geography, as we gain economies of scale.
As previously announced, we've received approval and principal from Lloyds to launch our syndicate, number 2786. We expect to obtain final approval to start business on January 1, 2016.
Our Lloyds syndicate will provide Everest access to additional international business and new product opportunities, enabling us to further diversify and broaden our insurance portfolio in 2016 and beyond. Now, some further detail on what we are seeing in each insurance markets.
For California workers comp, gross written premium is up 13% to $75 million for Q3 compared to Q3 last year. With a mid-90s combined ratio, the rates are under pressure with increased competition.
Professional liability premium dominated by our financial institutions book was $40 million for the quarter, flat compared to last Q3 and we continue to see rate pressure driven by excess capacity. Other casualty business is relatively flat quarter-over-quarter, but the combined ratio has been improving as our new initiatives gain traction and enhance diversification.
In the short tail business, including property, DIC, non-stand auto and contingency business, written premium was $80 million for the quarter, an increase of over 38% from last Q3 as we have deployed more property insurance capacity and geographically diversified the book. Despite rate pressure in property, our opportunity to deploy capital at attractive returns remains, with the book running at high-80s combined ratio.
Similarly, our contingency business continues to grow at a nice rate with attractive opportunities and new strategic relationships, while running at a mid-90s combined ratio. Accident and health premium was up over 40% in Q3 compared to last Q3 to approximately $30 million, as several new initiatives gain traction and is running at a low-90s combined ratio.
Crop conditions remain favorable and commodity prices are stable. Our crop insurance premium is up and more geographically diversified.
We're running at a slight underwriting profit for the quarter, a meaningful improvement over last Q3. The outlook is favorable for profitable 2015 results.
In summary, given our new growth initiatives, particularly on the insurance side, as well as our ability to deploy capital effectively on the reinsurance side, due to our core strengths and sustainable competitive advantages, we continue to achieve bottom line results that are among the best in the industry. Thank you and now back to Beth for Q&A.
Beth Farrell
Yes, Tony, we are ready for questions. But first I'd like to apologize for the connection issue which seems to be coming from our end.
If we have a future connection issue, please stay on the line and we will call back in. Thank you.
Tony?
Operator
Thank you. [Operator Instructions] We will take our first question from Amit Kumar with Macquarie Research.
Please go ahead. Your line is open.
Amit Kumar
Thanks, and good morning and congrats on the quarter. Maybe two quick questions.
Number one is the discussion on the underlying AOI LR in the insurance segment. Can you talk about, I know you talked about 10 point improvement, if you adjusted for the agriculture book, what would that number be for ex-ag for the insurance book on an underlying basis, on an apples-to-apples basis?
Dom Addesso
Give us one second. It’s 96% for the quarter, Amit.
As far as our attritional combined ratio without crop, it’s 96% compared to 95% last year – sorry 96% for the quarter, 94% year-to-date.
Amit Kumar
Got it. Okay, that's helpful.
Thanks. The other question I had was the discussion obviously on growth versus capital versus not talking about the Lloyd's which has a stamp capacity of I guess 151 million.
Now the buyback this quarter was a bit higher than I guess what we were expecting and trying to sort of think about that, was it higher because of some sort of catch up because on the Q2 call you had said that it was running a bit lower, is that simply the fact or is this sort of a new normal, how should we think about the repurchase this quarter? Thanks.
Dom Addesso
I think, Amit, you should think about perhaps a little bit of catch up. We were lighter than we certainly anticipated in the second quarter as the price target ran away from us a little bit in the second quarter and we just continued to have steady progress towards repurchasing shares.
And we continued that into the third quarter particularly as we grew going through the quarter, it seemed as if it was going to going light cat quarter.
Amit Kumar
Got it. And then can you just upon the Lloyd's, when does that fully ramp up, the 151 million stamp capacity?
Dom Addesso
We expect to go live with Lloyd’s in -- for the year subject to final approval by the franchise board or business plan et cetera, but we are on track to do that effective 1/1.
Amit Kumar
Got it. Okay, that’s all I have.
Thanks for the answers.
Dom Addesso
Thank you.
Operator
Thank you. Next we'll move to Joshua Shanker with Deutsche Bank.
Please go ahead. Your line is open.
Joshua Shanker
Yeah, good morning. Thanks for taking my question.
Dom, whether you like it or not everyone looks at you as all bad things happening in Latin America must be happening to Everest Re. And so in the largest recorded hurricane in history is bearing down on Puerto Vallarta.
How should we think about the pricing in the Mexican market, how should we think of agri risks that Everest is taking? Why or why not our investor is conspicuously concerned about Everest to benefit or to their detriment?
Dom Addesso
Well, I can’t speak to why investors are conspicuously concerned or not concerned. All I can speak to is what we try to do.
We manage our accumulations by each of our zone and of course as you and others know, our largest zone is in the Southeast US and of course we manage that down from there. Relative to what was happening in Mexico as an example or in Latin America for that matter.
The industry was quite lucky of course that that event did not hit some of the more occupied regions in the resort areas. Interestingly enough, in the more recent times, we actually downsized of our participations in Mexico due to pricing trends and conditions.
And as we continue to emphasize in each of these calls, we will look for fairly priced transactions and if we cannot need our hurdle rates, we will terminate or look to change our participations in some ways that matches our re-adjusted return targets that we have. So we continue to manage our P&Ls consistent with the balance sheet and we believe that what we’re doing in terms of managing our risk through cat bonds, IOWs, and Mt.
Logan, in fact, we write sizes that risk relative to our balance sheet. So, I think we benefit frankly from the diversification that we have across the globe as opposed to thinking about a particular event in some region of the world.
As you’ve probably have noted our [indiscernible] was probably slightly below what others have reported. And again, I think it's a result of those actions that I’ve just described where we actually got of some deals and actually our exposure turned out to be less.
In Chile, we were at much less proportion of business than we did previously and of course that event again hitting offshore, the insured loss was not as great as maybe was originally feared. So I think on balance, again, the portfolio is diversified across the globe, which frankly we believe benefits us from a return perspective in using our balance sheet most effectively because I don’t -- I hope that answers your question.
Joshua Shanker
It did to some extent; it did to the open end of the question. The other question as you mentioned in the previous questioner that the stock price got a little bit away from you in 2Q.
The stock prices are between 180 and 185 in the second quarter, are you trying where possible to buy stock at book value and not above. Is 180, 185 when you have a $175 in book value a significant premium to where you want buy?
Operator
Pardon the interruption Mr. Shanker, it looks like we did unfortunately lose our speakers once again, if you could please hold your question, we’ll get them re-established as soon as possible.
And we've been rejoined by our speakers and Joshua ifyou wanted to ask your last question again.
Joshua Shanker
Must be that industry low expense ratio coming through here guys, I don’t know.
Dom Addesso
But I don’t think we were going to make the same comment but –
Joshua Shanker
Actually my associate is who pointed that out by the way. So, the question was, you mentioned on the previous question that the stock kind of got away from your repurchased desires in the second quarter, it was all bobbing between 180 and 185, are you trying to buy at book and not above?
Dom Addesso
Not necessarily, we do look at over 6 to 12 month period but we just had a price target for that particular period and the stock just kept moving ahead of that. It's nothing more complicated than that.
And we can think over the long-term, we have been repurchasing stocks and we look to do at not a specific target but I’ll -- that we care to get share in a public [Technical Difficulty] to any levels repurchases, particularly our [indiscernible].
Joshua Shanker
But let me just put it in another way.
Dom Addesso
You can try.
Joshua Shanker
Do you have sufficient capital right now on the books to write in your business or do you need to build up some more capital?
Craig Howie
We do have sufficient capital, we do like to maintain some bid of excess capital. But as I’ve mentioned in previous calls, the rating agencies have increased, particularly S&P has increased their capital requirements, so that excess position has shrunk a bit just based on rating agency actions.
Joshua Shanker
Sure, fair enough. And then on the growth on the primary insurance side, that appears that some of the growth came from short-tail lines, I think that was up 40% this quarter and also the accident and health, and also you’re planning to go on to Lloyds.
Help us understand the risk management that’s in place for that. This line seem to be I think under some pressure now.
So help us understand what risk management put in place for that?
Dom Addesso
Well, we do have – first of all, we have our risk management committee that reports regularly to the Board, so I will point that out. And we monitor, if your question is about accumulations –
Joshua Shanker
Well, I said, Dom, sort of more in the sense of – people in the industry are saying pricing has weakened these lines and we are seeing that – I mean, using growth right now from Everest, so just curious where you’re finding --.
Dom Addesso
Let me just add to that, because pricing is, I would say, it’s weaker. It does not mean necessarily that it’s not adequate.
So for example, as John Doucette highlighted in his comments, we talked about casualty being flat year-over-year, so that’s kind of a reflection of what’s going on in the market, perhaps what we feel are adequate returns relative to what we have seen. In the property space, we are still seeing many opportunities.
A&H is a specialty segment, which experienced nice growth as well as some new product opportunities. Our contingency business/sports and entertainment book is again a specialty business that’s not necessarily subject to some of the pricing pressures that you mentioned.
In addition, we have done some things in Canada, which have given us some growth. California DIC, while things have flattened out there, it’s still – from a returns – just on return perspective, it’s still very good business.
So all of these pockets, we do monitor rates each and every month and quarter in all of our classes of business on the insurance side.
John Doucette
And it’s John. I just want to add a couple more things.
You mentioned property specifically. We’ve talked about this before, but I think it’s worth repeating.
We have one global catastrophe property and catastrophe pricing and accumulation system, which every underwriter around globe, well, insurance, facultative, treaty, IOWs, selling, buying, retro, and products we have talked about before, purple, whether it’s from individual building or it’s a territory, multiple territories or worldwide capacity and we have a view of risk built up by a lot of analytics and a lot – a dedicated cat team that is central and we can look at the relative pricing and the absolute pricing over time and across product irrespective of where it is, what form, what territory and we can allocate capital [Technical Difficulty] .
Operator
And pardon me, interruption, it appears that we are still experiencing some technical difficulties, please remain on the line, and we will get our speakers reconnected as soon as possible. Thank you for your patience.
Once again, we appreciate your patience as we reconnect our speakers for today’s conference. Please continue to stand by.
Once again, we appreciate your patience as we reconnect our speakers for today’s conference call. Please continue to stand by.
Once again, we appreciate your patience as we reconnect our speakers for today’s conference call. Please continue to stand by.
And we’ve been reconnected with our speakers.
Dom Addesso
Again, we apologize. We are going to a different room and a different phone.
Let’s see if this works better. So I think John was responding to the question we got cut off, is it correct?
Operator
Yes.
John Doucette
So, just to finish the thought and again, I apologize if I’m repeating myself. We have one system for globally by product irrespective of the product, every underwriter on their desk has that, it rolls up for real time accumulations, real time pricing, whether it’s insurance, fac, treaty, retro or any other products that we sell.
We have a new Chief Underwriting Officer as part of the building out the insurance leadership team, whose job is responsible to make sure we’re getting paid adequately for the risk that we’re taking on a risk adjusted basis. And we continue to have the advantage of the various capital markets, convergence vehicles and structures that allow us to have capital efficiencies for the products that we sell and help the group get the most capital efficiency and the best risk adjusted return.
Joshua Shanker
Sure. That’s helpful.
And are you seeing pricing on the primary side better than on the reinsurance for property?
John Doucette
It varies, it doesn’t boil down necessarily to one answer, but directionally, there are certainly cases of that, yeah.
Joshua Shanker
Okay. Thank you.
Operator
Thank you. And our next question will come from Kai Pan with Morgan Stanley.
Please go ahead.
Kai Pan
Thank you. Alright.
So I would start with your take on the upcoming B court changes, what potentially impacts for the reinsurance demand?
Dom Addesso
I can’t comment specifically, because I’m not sure that we know all the details of those changes at this point, other than to know that we do expect that we’ll have some impact for certain clients and that is, I did mention in my comments that we would expect some increase in demand and frankly that would be one of the reasons that I would expect some increase in demand, but I really can’t give you any specific on what that might be for the industry as a whole.
Kai Pan
Okay. And then more broadly for the sort of upcoming renewal in Jan 1, it seems like you’re more confident at this time that the rate will become more stabilized than the past renewal season.
So what could go wrong from here?
Dom Addesso
Well, I suppose what could go wrong is that rates are down another 5 to 10 that would be wrong. And that would cause us to continue to make major modification to our portfolio but coming back from the two major industry events, they are certainly mixed thoughts on that subject.
But given where we see the industry, where we see the returns, what we see from capital markets perspective, it doesn't look to me as if it should be a market that is continuing to slide dramatically.
Kai Pan
Okay, that's great. Then just a pick number question.
Do you have a breakdown of the $6 million Tianjin losses by segments and also on Volkswagen what’s your view on the industry exposure as Everest Re’s exposure on that event?
Dom Addesso
The Tianjin loss by segment -- when you say segment, meaning our segments?
Kai Pan
Yes, reported segments.
Dom Addesso
I'll ask Craig to.
Craig Howie
The majority of it is in international, our international second. So essentially from our Singapore office but also from our Bermuda operation as well.
Dom Addesso
I'm sorry, what was the second question Kai?
Kai Pan
On the Volkswagen potential industry exposure there?
Dom Addesso
There I think we have something like $12 million of limits exposed to Volkswagen and we have not heard anything on that.
Kai Pan
Okay, that's great. Well, last question you might may.
The insurance growth and margin looks like you’re growing pretty fast, especially in short-tail and accident and health which has lower combined ratio -- underlying combined ratio than the group. So shall we expect mid-90s combined ratio continue to improve given the high growth like coming from those lower combined ratio business and also if you’re stepping back, last year you have higher growth in the primary line of business was in early 2000 and which eventually doesn't help the Company.
So I just wonder what give you confidence that what you're doing now that's different and your confidence by profitability going forward. Thanks.
Dom Addesso
There's a lot to that question. First of all, yes, that’s certainly our plan to continue to have the insurance combined ratio to continue to trend down and we have every expectation that would happen over time.
Relative to the early 2000s, well part of that growth was California comp, which actually over the very long time periods of 13 to 15 years that we’re talking about was hugely profitable, yes there were periods were the comp turned into a loss for a period there but if you look at the body of work over that entire cycle, it’s been extremely profitable, probably close to $1 billion of profit in total. The other parts of growth from the insurance base that emanated from the time period that you're referencing was a lot of program business and is decided we’re deemphasizing the growth, our growth is primary coming from the brokerage space, the retail space, where we are underwriting risk by risk and not relying or dependent as much upon growth in the program space.
Doesn't mean that we won't continue to do business with great partners in that space, it just means that we’re a lot more selective than we have other way in which to grow the insurance portfolio and by that I mean direct brokerage space, we control the account and you control the underwriting at the desk level.
Kai Pan
That's great, thank you so much for all of the answers.
Operator
Thank you. Next we will move to Sarah DeWitt with JP Morgan.
Please go ahead your line is open.
Sarah DeWitt
Hi, good morning. As you look out a bit longer term how'd you see the business mix evolving between insurance versus reinsurance?
Dom Addesso
Well as I mentioned in my comments, I certainly expect in the short term given what we expect out of the reinsurance space that is like to be that insurance will become a bigger part of the pie. If you look out over the very long term, I would expect that to be the case as well as we look to rebalance our portfolio.
But we don’t have any -- put out any procrastination [ph] about what percentage may or may not be. We frankly take advantage of what the marketplace is giving us in each part of the cycle whether that – and so if pricing is more adequate and very hard market in the reinsurance base and you are likely to see strong growth spurt there.
It doesn’t mean that it would necessarily be change our appetite in the insurance side, it’s just a matter of which segment is growing faster than the next due to pricing adequacy.
Sarah DeWitt
Okay, thanks. And then I think historically you’ve targeted a 12% to 13% ROE assuming normalized catastrophe losses, is that still an achievable goal as we think about 2016 and I think that will probably be better than the industry as well?
Dom Addesso
If you are asking including cat losses or ex-cat losses?
Sarah DeWitt
Including some level of normalized catastrophe losses.
Dom Addesso
I do think that’s potentially achievable. I don’t know given where pricing is today on the reinsurance side ex-cats whether 13 might be pushing it, but again we don’t forecast our results, but relative to what real rates are I think that’s still a great return, but I do think our target is low teens absolutely.
Sarah DeWitt
Okay, great. Thanks for the answers.
Operator
Thank you. Next we will move to Meyer Shields with KBW.
Please go ahead. Your line is open.
Meyer Shields
Great. Thanks so much.
So two maybe big picture questions. One, is there any reason to expect the historical cycle in California workers’ comp to not play out with this year next year looking really, really good and then things getting worse?
Dom Addesso
I don’t know that on any line of business that I would fight any historical side. So there are cycles in every segment of our business and I don’t know why California comp would be any different than any other segment of the business.
Meyer Shields
Okay, me neither. Second, setting aside pricing trends in underwriting decision, is there any risk to the reinsurance book from the efforts you have in insurance in general or maybe opening a Lloyd’s platform from companies that you are not competing with more directly?
Dom Addesso
I think that risk is moderate at worst. I think as you look across the industry landscape most enterprises have both an insurance and a reinsurance footprint, even to the point where some more traditional insurance enterprises have started up reinsurance arms.
So I don’t see that as much of a threat. And in particular, what we do in the insurance side is mostly specialty lines business.
Meyer Shields
Right, understood. Is the run rate for expenses and insurance likely to rise as Lloyd’s goes live?
Dom Addesso
Well, we’ve already – in our numbers already this year to date we’ve expended some monies to get this project off the ground and certainly Lloyd’s does have slightly higher expense ratio, but given the amount of premium relative to our $5 billion of gross premium across the organization I am not sure that it would -- really make much of a difference.
Meyer Shields
That makes sense. Great, thanks so much.
Operator
Thank you. And we will take our final question from Ian Gutterman with Balyasny.
Please go ahead. Your line is open.
Ian Gutterman
Great, thanks. I guess on the insurance business, is there any -- as the book is growing and changing, is there any seasonality to it?
I guess the reason I ask is, normally Q3 has been a little higher than the first two quarters, but this year was much higher. Is there something seasonal about that or is that just the increased growth and this is -- think of this as sort of more of a normalized?
Dom Addesso
Well, the insurance side, remember, is influenced by crop which does have seasonality to it. To the extent that there is some seasonality that would come from property E&S book to the extent that we have some of that in south-eastern US.
They haven't had any major events, so there hasn’t been losses coming from that and again property E&S to the extent that it’s growing and it has been growing in the north-east, could have some impact from winter storms, so yeah, there will be packets of seasonality across the portfolio. John wanted to add something.
Ian Gutterman
Okay. Got it.
Okay.
John Doucette
The second part of your question was the type of growth initiatives and we've been talking about growth initiatives and we've been putting in place a lot of different resources, we've been hiring talent, we've been building the infrastructure on the insurance side and that takes time. We've been talking about that for several quarters and it’s starting to kick in, including in this third quarter and we’re seeing the fruits of the plan and the resources and the labor that we've committed to growing the insurance book.
So it's that combined with the seasonality Dom alluded to.
Ian Gutterman
Got it. And I clearly realized both, I just don’t know if I should just kind of a little bit of the magnitude of the increase this quarter, I was always trying to get at, but okay and then moving on I guess just a follow-up on the Lloyds question, can you talk more about specific business plan, I mean I don't know if, what stack capacity you've been approved for, what sort of lines of business you are targeting initially, is it going to be prop type stuff or might be just try to do like holders or even some casualties, what's the focus going to be?
John Doucette
It's -- a significant portion of it is professional liability, D&O, E&O commercial D&O and E&O. We also are -- we will have some reinsurance business that will flow through the syndicate, particularly as our China and perhaps our Australian business because of expense advantages of running it through the platform relative to keeping in on the reinsurance company paper, because particularly changes in China from a regulatory perspective, we won’t have to bricks and mortar in China, that’s one example.
We will be granting cover holder status to a number of underwriting units around the globe to utilize the syndicate that will be some sports and entertainment business for example and contingency business that would come into the syndicate generally.
Dom Addesso
And the stamp capacity is $150 million roughly.
Ian Gutterman
Got it, great. Thank you.
And then on Tianjin, this feels to me, I guess, I'm asking for your opinion and maybe some detail as well. It feels to me like this is one of those losses maybe like a deep water or a costa where it is just so hard to, it seems the primaries themselves don't really have any great insight into what the losses and it seems to me when we get these events, they tend to creep over time.
Does this feel like one of those where you’re worried about creep and if so as you are looking at how much put up this quarter and how did you account for that?
John Doucette
Well, I'm not sure that it is really like costa, custom because with that, it was a salvage situation and that really is what was driving up the cost tremendously. Here, you have frankly complete destruction, my understanding is that the area has been completely levelled and I don't know that because there are discrete values, I think that that would be less of an issue as contrasting with costa.
I guess the other question would be maybe the more uncertainly would revolve around any kind of BI, contingent BI claims that might be coming out of it, but again we reserved it at the high end of the range based on the estimates. As I mentioned before in answer to another question, our participation in the region is actually reduced.
So we’re feeling comfortable with our pick, but I'm not sure that any movement around that pick is necessarily all that material.
Ian Gutterman
Perfect. And then just lastly, just a follow-up on the B court question from earlier, what about as far as your handwriting appetite, does anything potentially change there and I think one of the more key topics on that is the changes in the tail factor on cat, does that have to change how you would look at tail beyond 250 or maybe how you look at aggregate covers, occurrence covers things like that, especially your appetite to write them.
John Doucette
So we have always looked at in terms of pricing and accumulation, all points on the curve to one in ten thousand and beyond, we look at AO, we look at annual occurrence, we look at aggregate, we look at multiple events, we look at things that happen whether it was 2005 or Katrina, Rita, William – Wilma or 2011 with multiple events around the world. So we think about that as we create, manage our book and try to get the best risk adjusted return.
In general, [indiscernible] which we think it will increase demand and therefore increase limit that’s going to be purchased potentially by our customers and therefore upward pressure on pricing, that’s a good thing. And we have the capital to support that and – including both our own equity capital and the various hedges that we’ve been talking about for many quarters now that we have put in place.
So we think that’s going to put upward pressure and upward demand and we like that.
Ian Gutterman
Great, thanks so much. Good luck guys.
Dom Addesso
Now, I understand from the moderator that that was the last question, but because of our interruptions, if there are other questions, we certainly would stand a few minutes.
Operator
[Operator Instructions] And it appears, we have no further questions at this time.
Dom Addesso
Okay, that’s fine, just [indiscernible].
Beth Farrell
Thank you, and as always, we’ll see you next quarter.
John Doucette
Thank you.
Dom Addesso
Thank you very much. And gain, apologies for the connection issues we have had.
We appreciate the interest. Again, we think we’ve had an excellent.
We’ve had some events, but I think what you’ve seen the way Everest has performed with the scale and diversification of our book, despite those industry losses, we are still able to produce very, very good returns, and I think it’s just a reflection of how we manage our book of business. Thanks again for your interest.
Operator
Thank you. This does conclude today’s conference.
You may disconnect any time and have a great day.