Q3 2019 Earnings Call
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Come to the third quarter 2019 Axis capital earnings conference call and webcast.
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I would like to turn the conference Robertson Mr., Matt Rohrman Investor Relations Mr. woman the floors or Sir.
Thank you Mike Good morning, ladies and gentlemen wasn't our conference call discuss the financial results for access capital for the third quarter and period ended attempt at September Thirtyth <unk> 2019 earnings press release financial supplement where issued yesterday evening. After the market close if you'd like copies. Please visit the investor information section of our website.
At Axis capital Dotcom.
Set aside in our for today's call, which is also babble audio webcast through the Investor information section of our website.
With me on today's call or Albert Benchimol, our president and CEO at peak, though our CFO .
Before I turn the call over to Albert I remind everyone that the statements made during this call, including the question answer session, which are not historical facts, maybe forward looking statements forward looking statements involve risks.
Uncertainties and assumptions actual events or results may differ materially from those projected in the forward looking statements due to a variety of factors, including the risk factors set forth in act as most recent report on Form 10-K , as well as the additional risks identified in the cautionary note regarding forward looking statements and our earnings press release issued yesterday evening went to take.
No obligation to update or revise publicly any forward looking statements.
In addition, this presentation may contain non-GAAP financial measures for the purposes at the school, we believe the best way discuss their operating results is on XP GAAP basis, which is a better representation of the run rate performance of our business.
Reconciliations are included our earnings press release, and financial supplement, which can be found the investor information section of our website with that I'd like turn the call over to Albert.
Thank you Matt.
Good morning, everyone and thanks for joining our call.
[noise] as I noted our earnings press release, this was a challenging quarter with large catastrophes in the Caribbean U.S. and Japan.
There was also higher incidence of midsize losses, particularly in our credit and aviation lives.
Can be sure.
Even with these factors that affected our entire industry.
Very disappointed to be reporting an operating loss for this quarter.
[noise], but what we're not pleased with our results. We are also encouraged by a number of positive indicators that we had the progress that we've made to strengthen our business.
At this point.
I'd like to take a few minutes to discuss our third quarter results within the context of where we are in our journey and why we're confident that our performance will continue to show progress.
To better address these metrics I'll break down my comments by speaking individually about our two segments insurance and reinsurance.
First let's talk about insurance.
Our quarterly insurance combined ratio, excluding the effects of peak up on acquisition expense improved by three points.
This reflected a lower attritional loss ratio, which absorbed the higher incidence of midsize losses, and still came down over a point.
A lower cat loss ratio at lower acquisition expense.
Excluding cats and prior year development, the combined ratio was flat at 99.
At a much improved technical ratio was offset by what we see as a short term bump and the DNA ratio.
Let me explain.
As part of the remediation of our portfolio, we set a meaningful amount of premium and me greater use of reinsurance.
As a result third quarter net earned premiums for insurance are down 13%.
The consequence of these actions and reduction in premium is that while G.N. expense for insurance ours is essentially flat on a dollar basis. The insurance DNA ratio is up by two points of given the lower premium base.
Reducing our premium writings in the short term isn't necessary step to improving both of profitability and volatility of our insurance portfolio.
We view, the resulting increase and the GE any expense ratio as an acceptable price to pay for delivering a much stronger performing business.
I'm confident that given our strong positioning coupled with increasingly attractive market conditions, we will make up the lost volume, allowing us to more clearly demonstrate improving loss and expense ratios over the next couple of years.
To that point.
The reporting 6% reduction in insurance gross written premiums year to date is not a good indicator of our growth potential.
Specifically.
This year, we reduced gross writings of less attractive business by more than 40% in our insurance book.
While we were remediating. It in parallel we grew the more attractive business by over 13% year to date.
Indeed.
In markets that we consider highly attractive our growth rate has been well in excess of 20%, including cyber primary and excess casualty marine and design professionals that environmental business.
We've also had strong growth in Canada, and UK liability business.
In addition, we're shifting more of our insurance portfolio towards more SMB exposure, which tend to exhibit.
Less volatility.
We're not going in every line.
And that's because as I've said, all last calls with the pricing actions that we're saying we believe the industry's appropriately reacting to loss trends that have deteriorated over the last few years and then of exacerbated the negative impact of several years of price declines.
Our view remains that even with the increases we've seen in the last two years. Many lines of business are still not an acceptable pricing.
I would add that the cancelled and non renewed business are adding about two points to the reported insurance combined ratio.
Thus adjusting for GE and a ratio that is on par with last years are continuing core business in the insurance segment is currently running at an ex cat accident year combined ratio in the mid nineties.
These metrics are highly encouraging and demonstrate to us that we're taking the right actions to strengthen our insurance book.
Let's move to reinsurance, where we reported a very disappointed to quarter.
Our quarterly ex cat reinsurance results reflect normal quarterly volatility.
However, it's worth pointing out the year to date the accident year ex cat combined ratio for our reinsurance business is still down by more than a point showing the progress over the prior year.
But the big item this quarter was the large losses that we experienced in Japan.
As noted in our last earnings call.
We took advantage of improving market conditions to expand our presence in Japan.
Earlier opportunity given the high client loyalty within that market.
This aligned with our long term strategy as we viewed Japan to be among the most attractive reinsurance markets.
In addition, increasing our Japanese exposure brought more capital efficiency and further diversification to our overall cat portfolio.
Unfortunately.
2019 proved to be a highly active year for typhoon activity in Japan.
However, we continue to believe that from a longer term perspective drilling in Japan is the right call.
We're confident that we will receive appropriate returns for our commitments to the Japanese market.
So let me conclude by say then well was a tough quarter. There were many positive indicators reinforcing that we have the right strategy, we're continuing to build momentum and we're seeing significant growth in the most attractive areas of our business.
It's because of that the we're confident that we will deliver the results that our team and our investors expect.
Later during the call I'll speak on trends that we're seeing in the marketplace, but first I'll pass the floor to be.
Thank you Albert and good morning, everyone.
During the quarter, we generated net income of 28 million in an annualized ROI, we have 2.3%.
On an X.P. GAAP basis, our operating loss was 28 million generating an X.P. GAAP annualized operating ROE, we have a negative 2.4%.
Our results this quarter were adversely impacted by a couple of items, including.
Pre tax cat and weather related losses net of reinstatement premiums of $160 million.
As we recently announced these losses were primarily driven by Hurricane Dorian and the Japanese typhoons.
In addition, the current accident year loss ratio ex cat and weather related.
Increased by a half a point over the same period last year.
Due to some volatility in the claims area of reinsurance segment.
And this more than offset improvement the insurance segment and the positive impact of rate over trend across both segments.
As Matt mentioned at the beginning of the call. We believe the best way to discuss our results is on an X.P. GAAP basis.
Which is a better representation of the.
Run rate performance of our business.
This is relevant for our group results and our insurance segment results. This quarter. Accordingly, all my remarks regarding the quarterly operating performance for group and for insurance will be on an X.P. GAAP basis.
Moving into the details.
The group level the current quarter consolidated XP got combined ratio was what or 9.5, an increase of over nine points from third quarter 2018.
This was driven by an increase of 6.6 points to the cat and weather related losses that I mentioned, a moment ago as well as a half a point increase in the current accident year loss ratio ex cat and weather.
Combined with a decrease of wondering have points and favorable prior year Reserve development.
We reported net favorable prior year reserve development of $27 million in the quarter.
Which 15 million came from insurance and 12 million came from reinsurance.
The consolidated XP GAAP acquisition cost ratio was 22.6, which is comparable to the prior year.
The consolidated DNA expense ratio of 13 for increased by seven tenths of a point compared to the third quarter of 18.
The increase in the gene a ratio was driven by the decrease in net premiums earned.
The year to date DNA ratio is at 14 five.
And has trended down over the course of the year as we expected.
As Albert stated the increase in a gene a ratio is a natural consequence of building a more profitable book.
We expect this will reverse as we grow earned premiums in the strengthening market and further advance our operational transformation.
Regarding the operational transformation, we continue to remain on schedule to achieve our annual run rate net savings of $100 million as compared to our 2017 run rate by the end of next year.
Fee income from strategic capital partners was $18 million for the quarter essentially flat to prior year.
For the year to date fee income was $57 million a year over year increase of over 30%.
Now, we'll move to the segments.
Let's begin with insurance.
The insurance segment reported a decrease in gross premiums written of 74 million in third quarter.
This was due to decreases in property, partially offset by increases in liability lines.
In the quarter almost 90% of the reduction was in relation to lowering our property exposure, which is consistent with this strategy that we've indicated to you during past calls.
Offsetting this decrease we saw a favorable new business opportunities and liability, especially U.S. excess casualty and us primary casualty.
The insurance segment XP GAAP combined ratio was one of 3.8, which was 3.1 points lower than the same period last year.
This quarter pre tax cat and weather losses were 41 million, primarily attributable to hurricane Dorian compared to 62 million in the same period in 2018.
The decrease in the current accident year cat loss ratio was almost 2.5 points compared to the third quarter 2018.
As we have continued to improve the property portfolio, we have seen our market share of us weather related storms come down year over year.
The insurance segment current accident year loss ratio ex cat and weather decreased by one and a half points in the quarter compared to the third quarter of 2018.
The decrease was driven by favorable loss experience and property lines as rich as well as favorable rate over trend in all lines.
These improvements were partially offset by mid size loss experience and credit aviation and marine.
As well as changes in mix of business as we are less premium at property and more in liability and professional lines.
The insurance segment XP GAAP acquisition cost ratio was 21.8, which is over a point decrease for the prior period.
Now, let's move onto the reinsurance segment.
Reinsurance segment reported an increase in gross premiums written a 57 million in the third quarter.
The increase principally came from the catastrophe eight h. and liability lines, partially offset by property lines.
The increase in cat H. and liability business was largely due to timing.
These increases were offset by non renewals and property largely related to underperforming businesses.
The reinsurance combined ratio was 109.9.
Which was 20.4 higher in the same period last year.
The reinsurance the reinsurance segments current accident year loss ratio ex cat and weather 64.8 was 2.2 points higher compared to the third quarter 2018.
This was driven by claims volatility in the credit surety lines as well as the aviation line.
The year to date current accident year loss ratio ex cat and weather was down 1.2 points over the prior period and we believe this is more indicative of the improvement in this portfolio.
The reinsurance segment current accident year cat and weather loss ratio increased by 14.6 points.
Pre tax cat and weather related losses net of reinstatement premiums were $119 million.
This was primarily attributable to hurricane Dorian and the Japanese typhoons.
This compares to $30 million in the same period in 2018.
The decrease of favorable prior year reserve development of $20 million was due largely to some lay claim reporting centered in the property lines.
Reinsurance segments acquisition cost ratio was almost a point hired to last year.
This was principally due to adjustments related to loss sensitive features and the impact of retro contracts, partially offset by changes in business mix.
Net investment income of $116 million for the quarter was comparable to the third quarter 2018.
Our current book yield is 2.9% and our new money yield is 2.5%.
The duration of the portfolio is approximately 3.1 years.
With respect to the know by transaction in the quarter the net drag on operating loss.
From P. gap Voba DAC adjustments was $4 million after tax or approximately five cents per share.
As we've previously disclosed Voba DAC impact will be minimal from this point moving forward.
Lastly, diluted book value per share increase to half a percent in the quarter to $56 in 26 cents.
This was principally driven by net income generated a net unrealized gains partially offset by common dividends.
That summarizes our third quarter results with that I'll turn the call back over to Albert. Thank you Pete Let's do a quick overview of market conditions, and then we'll open up the call for questions.
So we're now entering the third year of price firming and as more pain as a flooded the market the pace of improvements in pricing terms and conditions has accelerated.
The average rate increase on renewed business across our insurance portfolio was 8% in the third quarter.
Compared to 7% in the second and 4% in the first.
The markets that have suffered the most are the ones exhibiting the largest dislocations and pricing increases.
There's no denying that many of our lines of business have been under intense pressure over the past few years, but now we also have the opportunity to take advantage of the recovery, especially with our stronger relevance and leadership in many attractive market.
Let's move to specific data.
And our Us division.
Average rate increases were close to 11% for the quarter.
The strongest increases came in excess casualty.
Where rates were up 17% for the second straight quarter.
Ian as property came in at more than 14%.
US primary casualty was up close to 7% while program business renewed at about 4%.
Overall rates and our U.S division were up approximately 10% year to date.
Within our North American professional lines division rate increases are picking up coming in at 4% versus 2% and the second quarter.
Our commercial management solutions unit.
Which rights, mostly excess Dino and some private company and I want to primary basis achieved average increases of nearly 14%.
And we saw 8% increase in our Canadian specialty insurance business.
Small CNO and cyber were flat to down 1% or so.
Although recent cyber losses appear to be stabilizing that market providing opportunity for price increases.
Overall average year to date increases for the professional lines division were over 3%.
In our London based International Insurance Division, our average rate increases were nearly 10% for the quarter. Although there are many units that were up well in excess of that level.
For example, the average rate increase across the entire Marine book was almost 25%.
Additionally, we achieved double digit increases across the renewable energy professional academy and casualty and global property books.
Most program units are up single digits, and political and credit risk for flat.
The only reduction isn't terrorism, where results have been strong in recent years.
The average year to date increase in our international book came in at 6.5%.
And for the overall consolidated insurance book the year to date average increase of 6.5%.
Up from 4.5% in the prior year.
Overall, almost 90% of the entire insurance book was renewed flat to up this year.
Everything we see in here convinces us that rate increases will continue to 2020 and very likely longer.
Results have been inadequate and remains so in many lines large loss activity seems to be increasing.
Social inflation is a top concern.
And benefits from prior year releases will likely fade away.
Interest rates are also likely to stay lower for longer than most of us expected.
Carriers essentially have no choice other than to improve kermanshah underwriting results.
Notwithstanding the challenges we faced this quarter, we're confident that access will do very well in this environment.
As I noted earlier, we grew our more attractive lines by more than 13% year to date.
And we intend to expand our appetite for growth as additional lines start to reach levels of acceptable profit opportunity.
Moving to reinsurance.
Well that market does not appear to be as dislocated as the primary a retro market, we still expect ongoing improvements at coming renewals.
For proportional business.
Reinsurers will benefit from strong underlying primary rate increases combined with pressure on reducing ceding commissions.
Excess of loss treaties should respond to recent loss experience and we expect to see pricing corrections and many lines, including aviation Marine credit engineering casualty and professional lines.
As the catastrophe covers at the upcoming one one renewals, we expect to see ongoing increases in North American and Caribbean markets, driven by an increase demand for reinsurance combined with another year of unsatisfactory results were reinsurers.
On the other hand at this point, we expect Europe , and Latin America to be flat or up low single digits, given the absence of large losses in recent years.
As we move later into 2020.
We would expect that the Japanese on us midyear renewals to show increases and double digit range, including significant increases in loss impacted layers.
Although of course, a lot that happened between now and then.
We will use these market conditions to further improve our aggregate catastrophe exposure to volatility.
I do want to share with you the progress that we've made in just this year.
Between the third quarter of 2018, and the third quarter of this year, we've saved speak exposures increased geographic diversification and made other changes to shift our entire annual expected cat loss curve down by more than 10% across the curve.
While we improved the cat combined ratio by eight points.
It's our goal to make similar reductions in the cat loss curve, while we continue to improve the underlying profitability and volatility or that book in 2020.
And outside of cat across both the insurance and reinsurance book, we are using multiple levers beyond pricing to improve portfolio quality.
We are pushing for more favorable limits exclusions and attachment points and are improving our risk selection across the enterprise.
So to conclude this was a tough quarter.
But we've also seen very encouraging indicators that we're making tangible progress and are on the right Pat.
The markets are improving we're seeing great opportunities growing where we want to and making ongoing investments necessary to become a stronger company that is well positioned to deliver long term profitable growth and now let's please open the lines for questions operator.
Thank you Sir.
We will not begin the question answer session.
Yes. Good question you May proceed Star then one on the Touchtone phone, if you're using speakerphone, please pick up Branson before presently keys.
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Okay.
And the first question you have will come from Amit Kumar of Buckingham Research. Please go ahead.
Thanks, and good morning.
Alberta few questions I wanted to talk to the topic off.
Of these midsize losses.
These midsize losses have impacted our results for for several quarters. Despite repositioning your portfolio.
I wanted to get some sense as to how would you respond to investors to give them confidence.
That this volatility will diminish going forward and can you talk about some specific steps.
You might be taking to address this issue.
Thank you for that question that after the first thing to do is let's talk about the the nature of the losses, because some really do deal with.
Truly.
The normal volatility in those lines half of our large loss experience this quarter.
In credit lines Theres been a number of large bankruptcies that you've seen.
And if you look at our credit lines, both in insurance and reinsurance they tend to give you.
45678, very very strong quarters, and then you get one bad quarter.
But on average these are lines of business that are coming in with performance in the seventies and 80%.
And Thats exactly what we're seeing so half of our large loss this quarter is due to.
Credit losses, where we've had essentially no credit losses in the last seven quarters and so the lines of business that are affected are still very good.
And if you might credit Thats, what you expect to see 567, good quarters, one bad one, but a great average result, and Thats what happened that'd be number one number.
Number two I think that as you look at the overall midsize losses of our businesses. These are not large lines. These are essentially losses. When we talk about mid size. There are only $5 million, there's nothing unusual in the underwriting or in the risk appetites to lead to this there are occasional quarters, where.
You have a higher frequency and I think you've all read the headlines certainly around a number of the big aviation cases going on where there has been change of fats and patterns, which of course caused us to revisit.
The estimate and those.
And and just.
Couple of small marine losses, but otherwise there is nothing big.
And there's nothing unusual in the severity and frequency I will say that last year was generally a good year for.
For for mid sized losses, and so the deterioration that you see year over year is not a poor results in our book on average I would say that midsize losses averaged about three points across the year.
What we're seeing here is maybe a half a point higher than that but nothing nothing unusual it's perhaps that comparison year over year.
But I will say this we spent a lot of time analyzing every part of the book.
We have spent.
Many years, improving the quality by reducing limits, increasing attachment points using more reinsurance there is nothing here that is a runaway loss.
There's just an unusual frequency and this quarter compared to the prior quarter.
And the very large concentration of credit losses. This quarter is not in any way indicator of poor results and credits in fact, our credit results continue to be very very strong.
And that's that's helpful.
Using that answer as a backdrop, let's link it to that discussion on insurance and.
Maybe we can also talk about rate versus last funding effect gain I think one other questions I'd been getting since last evening is as you pivot away from.
From the property cat sorry, the larger lines.
On the liability side and you talked about growth in excess casualty in primary casualty now theres, a new debate emerging on loss cost inflation, including social inflation toward climate.
Jury awards et cetera.
What should give investors confidence.
Yeah.
Yeah, that's not not another area.
Where things could develop.
Understand what we are talking about today.
That's a very good question and I.
I'd be happy to talk about that in a number of areas, but excess casualty in casualty is actually one area, where we think we're on very very solid footing and let me tell you why.
So first of all.
If you go back to.
Conference calls in the last 234 years, you'll hear that we were very negative on casualty trends for for many years, we've actually shrunk our book of business over the past few years, and we've made significant changes to that book of business, including increasing attachment points.
Reducing gross Louis So just to give you. An example average net limits exposed in 2019 in the excess casualty book is literally 50% of what it was just in 2015.
So we've taken a significant amount of correction already and we've been demanding price.
On.
Excess casualty since 16th.
And we indicated to you for example that we had very low retention ratios and so on as we were taking those.
Those those changes the second thing is that whenever we've seen any negative indication in liability. We immediately booked at on our reserves and so if you look at the trying to that we provide you will see that we've been very responsive to.
Taking any bad news early on our reserve such that we believe that we're currently.
Very good position with regard to our reserves and we believe that we've got a very good handle on on where the the casualty book is and then to be fair, we're getting 17% price increases you can rest very assured we're not to get equal anywhere close to that as reductions in loss ratios, we will incorporate in our reserving and it's.
Assumption of a very very heavy loss trend.
We will show improvement I hope, but we're not assuming that the 17% is a free gift and.
So we will reflect that in our reserving and I think that we're in very very strong position with regard to our casualty book and I would make exactly the same case for example on R&D and notebook you've heard US talk about do you know you know that we made major changes to our Dino book back in 2014.
Because even then we already saw increased trends in technology in healthcare and we told you at that point that we would make significant reductions to our.
Public Dino book, we told you that we would significantly reduced the primary book and we did we told you that we will increase the attachment point that we would reduce limits and again.
Damage point attachment points on our newest public do you know our literally 40 point, 40% higher than they were just four years ago five years ago, and we also continued to reduce the limits. So we've been making those changes as we've been seeing those those trends.
We reduced our reinsurance professional lines book, we probably peaked at and 15 16 and started breaking it down again in expectation of those trends. So I think we've actually been taking those actions early on.
We've been taking the right actions and we feel that now in fact is a good time to grow on the excess casualty, we do not yet thing, but now with the good time to grow in the public Vienna.
So we're being cautious on where we choose to grow that makes sense. The last question I'll re queue in Q1, the gap between Los Cabos I'm, sorry, the pricing versus loss cost trend was awesome on insurance side was 100 points in Q2, which was.
The 100 point, so where do you think we are now and where are we headed from here. Thanks.
Again, I think on a long term basis, if you look at 8% to they get US you members a year to date book is at 6.5%, which is really what we're going to be earning next year, but if you look at 8%.
Obviously, if you look at longer term trends solidly 300 basis points, but as I indicated to you when you get lines of business that are giving you 10, 11 12 15.
Pricing increases that you're not using a we're not using a 5% loss trend on those we're assuming that a most of that increase is going to go. So I think that clearly there is room for a couple of hundred basis points of of lots improvements.
Based on that because we're going to assume a longer than a higher than average.
Long term trends on losses, but theres clearly room for improvement and results with the kind of rates that were seeing but again, let's remember what we're going to be earning next year is not a book Thats, 8% higher it's a book at 6.5% higher.
Capsules maintenance that's helpful. I'll stop here. Thanks for the answers. Thank you I mean.
Next we have Brian Meredith.
Yes.
Yes. Thanks, how would you I just wanted to go back to the mid sized last thing what's been going on it I think it's been like six quarters almost in a row and insurance industry that we sure business that we've had these elevated property mid size those types of things is perhaps.
I guess first question is is that coming from.
Largely kind of unattractive or call it attractive business and I know you mentioned that credit businesses, clearly attractive, but generally speaking where's that coming from and should we see that kind of going away as we go into 2020 in some of that on attractive business runs off.
So the first thing again is to talk about the fact that when we talk about a three percentish average large mid sized loss loads.
Thats not unreasonable and even if theres good business, you're going to have claims every once in awhile that are going to pop for 5 million or more.
So what is good news for what it's worth is that.
It's true that's in the insurance division the large loss this is a bit higher over the last.
I believe three four quarters, but thats because in the prior period, they were pretty good but here's the issue.
If you look at where the losses are.
They're not coming from our property book, because we have made so many strong changes to our property book that we're seeing significant improvements both in the attritional loss ratio mid sized loss ratio and cat loss ratio. So when you look at our large losses.
In the last couple of quarters property is not is not there.
The only obviously youre the only place that you're seeing getting this quarter as I said half of that is in credit and again.
I'll take the I'll take the trade of having sub 90 combined ratio business that Pops, you every six or seven quarters that is that is good business.
And I think of the aviation I think everybody has been reading the newspapers and.
There's been a change in venue and a in very visible cases, which clearly has caused us to take a more conservative view on that but the the distribution of the large losses.
On the credit and aviation line.
Frankly, I look at them I don't see them as disturbing and I don't want to give you a false hope I think it's going to be about 3% of year, plus or minus appointed any one quarter.
But our job is to reduce the overall loss ratio, including those midsize losses and again, what's really good about what we're seeing in the results this year.
Is that.
Even with the increase in the midsize losses, you're still seeing a reduction in the ex cat loss ratio on the insurance book and that reflects a lot of hard work and again, although we had some volatility in the quarter for reinsurance the year to date results for your insurance are still better than they were last year's year to date results.
I want to be very clear here, we're as frustrated with this quarterly result, as Youre Theres no way that I'm going to try and tell you that this is a good quarter, but we feel this quarter every way we could.
And what we're seeing is that the the losses are reasonable in the context of an improved portfolio and there's nothing.
Untoward in what we see.
Is there anything you could do with ceded reinsurance to maybe would mitigate some of this.
I think we've optimized our ceded reinsurance.
Substantially last year in fact.
I need to give a shout out to our ceded retain because I think we're doing very well obviously degree.
And you have to realize that if you're going to starts to take a loss to be materially lower than $5 million on any one line, you're going to be giving up a huge amount of long term profits and giving up diversification you're going to take your own diversification benefit and you're going to handed to your reinsurers.
And so I think I think theres a lot. There's there's a lot of and I'm happy to sit down and and have the analysis.
But I think where we are makes sense I would argue with you.
As.
Business gets better.
Where there is an opportunity for us is actually to reduce.
Quota shares so that we can keep more that business as it gets better next year.
Gotcha Gotcha that makes sense. So therefore, if I kind of take everything you're saying Albert.
As we look into next year 2020.
You know if we aren't seeing a meaningful improvement in the underlying kind of loss ratios and in the insurance industry at that point would you say, hey, listen there's something wrong.
Well.
I have all the confidence in the world that we are going to see those locations because as I mentioned to you when we look at our continuing book versus the cancel the non renewed book that we're feeling that those numbers are very strong and there right now on an accident year basis.
Admitted that we got to do something with the Gionee ratio, we're going we're going to pay attention to the expenses.
But the book that we are that we're bringing ourselves down too is a high quality book and a great platform on which to build and so I'm absolutely confident that the loss ratios will improve if they don't it's because the industry is seeing.
Much higher loss trends than than any of us as expected and what we will do in that case is we will take corrective action on the underwriting and we will take corrective action on demanding more rate.
Gotcha Gotcha, and just wanted to one last one just curious.
Some of the acquisitions you've made of late.
Performing as kind of expected I would like if you Bill and obviously Nova.
So on the know by book as you know we acquired Nova in 15, we aging year, we made some changes to that book in the beginning of 18. There were some additional changes that we told you we were making and I'll be blunt some of that non renewed book that I'm, telling you is hurting us as part of that Council business.
But what I will tell you is that the strategic positioning that we now have the London market, which is one of the strongest markets in the world right now being a top 10 leader is really giving us the opportunity to two to demand rate and get very good business. So we're feeling really good that we have the opportunity to take advantage of this 10%.
Average rate that we saw in in the business and I indicated to you, 25% increases and marine.
The increase in the teens and property and so on so we think that position is very well obviously some of that book just like our own book that some lines of business that need to improve but theres nothing unusual or unexpected in the composition of the.
And of the composition of the.
No by book I think I have you bill.
That was not a very expensive acquisition that was a small acquisition to help us reposition our book of business in aviation and the reason for that as the following.
We have found that the large airline business has gone down so much that it was no longer attractive we were reducing that significantly.
And we believed that the general aviation market was a much better market still not great where it was but a better market since the acquisition of value Bill and it was really literally a 50 million dollar book, it's not that huge.
We acquired that to shift our book of business away from large airlines want towards general aviation that tends to report well, it's still not a great result, but it's an improving results we've.
We've cut back on that book, we've cut back on the expenses and so it's one where we're seeing progress. It's certainly not what we wanted to be and we will continue to monitor it and fix it but those are the two acquisitions, we've made and by and large.
Are there are risks and their lines in there that I wish we are better performing yes, but overall, our we have better company today because of those acquisitions I believe the answer remains yes.
Thank you.
Thank you Brad.
That that Sir next as a lease greenspan with Wells Fargo.
Hi, good morning.
My first question.
Also sticking with the insurance Bob.
So I guess part of what's going on with away from Novartis yourself on the expense I think you guys pointed to in terms of the impact.
Lower earned premiums with flat DNA. So when do you think we're going to get to the point where on.
All the we underwriting actions are complete and given all the pacing that you're getting that.
Net gross and net premiums and insurance kind of flat.
Positively.
Ill.
I'll speak to that.
Yes.
I guess.
What I want to say.
So is that we should minimize the progress that is actually shown in the insurance results. We're talking about delivering the technical ratio that absorbed a higher amounts of losses and still came down by two points.
So there is progress being shown in the property book, we certainly sorry in the insurance book, we're still intending to do more but but there has been significant progress.
In the insurance results.
I think that.
Thanks to the inflection curve. It's a combination of two factors. One is we're clearly focused on looking at where we can reduce the DNA expenses that we can handle that and secondly, as I mentioned with Brian one of the things that we're looking to do in 2020 is.
As we grow the book, where we find the attractive opportunities, but also where lines of business are now looking good to us is reducing.
Reducing some of this some of the quota share. So we can keep more of that profitable premium on our books and improve the ratio accordingly, I'm loath to give a specific.
Timeframe, but I can tell that as we look at our projections, we expect that.
The negative quote unquote.
Impact that we've had on the Gionee ratio should start to turn.
As early as the beginning of 2020, Peter you should look at that but.
Yes, I mean as we.
Hey, guys think more about the growth side I think as we get into next year. The <expletive> cancel business that we have the you PR is running off that as we've indicated that you PR should be down by about the middle of next year. So therefore, we get into next year insurance should start to show some growth as long as the markets continue to be favorable for us but.
And we get into the by the second half of next year as wed say.
Have a crystal ball in that but but I do think that theres. Some positive momentum there in the growth lines on the DNA, we continue to be able to pull down our operational transformation that we're doing we expect you that we have all indications will get more of that into next year and as we're planning on going into next year I think we'll take another hard look at expenses and the GM.
Ratio and insurance to make sure effectively reflects the size of the book.
So I guess the short answer is we've got four three left but we can that we can pull and we'll be working on those.
Okay. That's helpful and then.
So that the 2.5 canceled and then non renewed business that you alluded to in insurance.
So when it does that does that circle out at the end of this year in terms that we don't have to think about that impacting margins I will only still see some might have an impact in 2020.
Leasing it still see an impact to that I would say going through the first half of 2020 as we indicated a lot of those things we canceled head to head tails on them.
So it all depends on how they perform in a certain quarter. This quarter that book Didnt perform really well I jumped up and fit us it actually one of the cancel books was actually had some cat exposure to it that hit us on the Cat line also so as that runs off again, a lot of it was ngs uncover holders we cancelled so there was a bit of a tail on it but.
Something that we keep our eye out every quarter and I expect on that I need to keep my eye on for at least for the first half of next year.
Okay, and then in terms of fourth quarter cats. So we have another sizable typhoon in Japan.
So it sounds like California wildfires.
Ongoing and then some other.
Events within the U.S.
Do you guys have.
Sense of losses, and it might be too soon as California, maybe on with the fourth quarter type filling in Japan can you kind of on size has a best in relation to the losses are you talking that third quarter, just kind of give us a little less time on both those events.
Well with regard to Hagibis, what I, what I'd say is we don't know what it is yet I mean AI. Our had an estimate was $8 billion to $16 billion, which is really quite wide.
So we expect given what we've talked with our seed into it will be something thats, probably larger than fox side, but but lower than July and so it's somewhere in there. The only thing I get that could really tell you is we know we did increase our market share with regard to Japan. So we will see higher losses from that market than we saw with JV if it so.
So were associated with Jedi, what I would tell you is as we noted in our press release, we had a couple Japanese aggregate trees that were impacted by Fox side and those were exhausted. So they won't be if they will be will not be impacting the fourth quarter.
Okay. Thank you very much thank you.
Next we'll have you already konare.
Goldman Sachs.
Good morning, everybody.
I guess first question and I apologize if I missed the first part of the call, but and insurance, so im seeing a material shrinkage and both aviation and credit and political risk premiums.
Those are lines had previously been emphasized.
What's changed and specifically I guess in aviation that Albert you just pointed out that you're doing that.
Yes, the shift from larger line business to general aviation that as simple as that shift thats, creating the pressure and premiums there and then maybe additional thoughts on credit and political risk.
Yes, so on the insurance book per Se.
We're just not seeing enough improvement in aviation quietly quite frankly, and so further reductions is the right move.
And so we're just reacting to market conditions, I with regard to credit and political risk.
There's been.
The way that business works, it's literally.
One deal at a time and Theres no.
Theres no renewal business.
And so we evaluate every risk as it comes.
Depending on the market conditions, we take more or less we're actually very clear with our with our people that there is never a budget for volume on the credit line.
So.
It's really a question of the fact that.
The opportunities that we've seen.
We took the ones we wanted.
There weren't as many.
There are a couple of sources that are slowing down right now.
At some point will pick up but we're not overly concerned.
But the credit line is one where.
As you know, there's there's large limits and credit so you want to be very careful how you underwrite it and so this was question simply a question this quarter not of changing our appetite for credit, but the fact that we just didnt see the opportunities that we wanted to see in credit.
Okay.
And then shifting to Japan, I guess, one clarifying question. The Hagibis losses that you said that you expect it to be smaller than JV is that for the industry is that for access specifically.
No actually to be clear.
We we were talking to people in fact, we've got some of our team members in Singapore right now talking to customers at the conference.
They.
All we can tell you is that people are are not prepared to share a lot of information they want to get it right I think there embarrassing fire losses.
I think if there was to be a guess I think it with people are saying that I give us could be the size of JV, maybe a little smaller, but thats kind of the industry.
For what it's worth one of the reasons that modeling.
Prior losses is not going to be as easy is that hagibis is going to have substantial flooding losses compared to the traditional when losses.
And flood losses tend to be larger because they tend to be industrial and commercial versus residential and so there's a lot more idiosyncratic either either the plant flooded or it isn't so I think there's a there's a certain sense of caution that modeling.
May or may not get through the right answer so I think everybody is holding it up.
But it's more likely to be.
Close closer to a JV type loss than it is to a fast I type loss I think with regard to us.
If it were a JV type loss it would be bigger than our all JV type loss because our market shares are bigger on the other had I think what Peter was trying to do was to guide you not to extrapolate from fast.
Because for US I had some exposure to low aggregate treaties that have now been.
Basically paid through and then there are one shot deal. So the fact that we had a higher concentration at the lower layers.
And the fact side should not affect us in the same way in.
It had give us that was that I believe was the indication that was the indication yet.
I'd say there.
I would estimate to what our losses, yet all we're hearing is.
Industry Intersil industry estimates that are pretty broad yes, okay.
And.
Assuming that.
That rates keep up with loss trends in Japan.
As you look into next year would you expect that your exposure there youre willing to exposure remains roughly the same or do you see any changes just given the higher.
Frequency of these severe events.
I appreciate that no I think that we'd be looking to maybe shifted around maybe between layers, but I think in terms of overall exposure, we had a real opportunity this year too.
What we needed to do to optimize our portfolio and to be fair. The Japanese exposure is really did improve the balance in that portfolio. So we have the Japanese exposure, we want in our portfolio. So it's simply a question of optimizing it based on the renewals that are available rather than increasing it.
Got it. Thank you so much and good luck.
Thank you.
And next we have some reidenbach of KBW.
Good morning.
Morning.
Assuming reinsurance.
You know acute rates keep firming and it looks like they are would you suspect that 2020 will look similar for gross written premium growth as 2019.
Im not sure that I can answer that question, because we're literally going through our plan as we speak and.
As you might imagine.
Every large loss in the market changes expectations as to what clients will will do what rates are achievable.
I would say that on a gross basis.
We probably would not.
Grow as much on the Cat line.
Because I think that we will take the rate when we can get but in terms of opex excuse me in terms of exposure.
I think we'd be looking too as I mentioned to you earlier, we took our entire.
Aggregate cat loss curve over 10% down just in one year and we're looking to do more of that so I expect that we're going to rights were going to take all the benefit of rate that we can get we will continue to.
Make some improvements in terms of where we are at various layers, but the large growth on a gross basis that you saw on cat you are unlikely to see.
Next year as to the other lines.
I think we would be responsive to the opportunities.
Okay. Thanks, that's very helpful. And then secondly on the Lloyds positioning do you have any over arching thoughts on the blueprint one that came out and how that helps are probably not hurts your positioning.
So I think as you probably have to say that I am on the council of Lloyds. So.
Be aware that but secondly, whatever answer I give you I'm speaking as the CEO of axis not as a member of the Lloyds Council I'm happy to let Bruce and John Neale speak for Lloyds up from one from our perspective.
We always believed that that London market in Lloyds in particular needed to make some real changes.
To get out of the funk they were in the though in the 15 16 17.
Europe business and so I think the.
The changes that they're making I think our all in the right direction.
Broad range from improving the processes and making claims payment faster.
Two looking to take advantage of technology digital capabilities.
Create a small accounts.
Create a small account platform to improve.
The way that we.
We write larger risk all of those.
All of those initiatives relates to leveraging digital capabilities to better serve as the customer do a cheaper and ultimately make better decisions.
Then there are.
You've heard about the.
The syndicate in a box, which is to facilitate the entrepreneurial introduction of new business into Lloyds I think thats, a good way of bringing more business into Lloyds and allowing us to increase.
The platform and leverage our costs over a greater premium base. That's that's very very good.
And.
Looking for ways to leverage third party capital. So there are a number of factors of initiatives within the blueprint that all have.
Very strong and positive intent, it's obvious that they're not all going to move at the same speeds.
It's obvious that they're not all going to have the same level of success, but they all are moving in the right direction.
I would say that even if we make even if we fall short of the Lloyds goals, but make significant progress.
It would be a much stronger market and our participation within Lloyds market would benefit strongly.
From those improvements.
Thank you very much.
You're welcome.
The next question will come from Josh Shanker of Deutsche Bank. Please go ahead.
Yes. Thank you for taking my question.
If we take a little stroll down three lane I remember another thing is even before your tenure as CEO Albert and when the great Differentiators for access was going to be a robust accident health business and I've never really understood completely the goal. The now obviously, it's a line. Your deemphasizing can you talk a little bit what's going on there what were the initial.
Designs, and why that business might not be attractive today as it was five and 10 years ago.
Okay. So the first and that I want to say is we're not we're not deemphasizing. It it's still a business that is very important continues to grow for us.
The issue in the particular issue that you see this year in an age.
Is that we canceled a large treaty that was moving in the wrong direction.
In regard to performance wasn't specialty reinsurance treaty was an insurance really.
That was heading in the wrong direction than we couldn't come to terms.
With our partner and we thought investment it wasn't me it was a meaningful treaty.
But we are continuing to grow our and age business.
In North America, we're continuing to grow our and age business.
Our reinsurance business so.
I just want to correct that were not deemphasizing. It is simply a what you're seeing this year simply action to continue to improve the quality that book, but let me take let me take it back.
When the NH business was initially.
Launched.
Our goal was to have was to build a at the time was to build a retail h. platform I think that within a reasonable amount of time, we recognized that access as a wholesale company not a retail company and so we needed to change the focus of the h. business to be more into the wholesale business and the re.
Insurance business and so we've done that.
That was really the big change.
In in the strategy.
Between the time that we launched its and I would say the.
2013.
There are so 2013, when we said you know what we don't have the platform to truly the retail platform to truly create a retail eight age business.
And rather than try and.
And compete with one hand behind our back in that market, let's let's shift into markets, where we have a more.
More relevant and a better chance of success and so we took it more to the wholesale market and our performance since that obviously, we didn't build $1 billion business at the 500 million dollar business. So it didnt meet perhaps the original.
Goals of building, a retail business, but once we changed that focus from retail to wholesale.
It's been making good progress, it's delivering an underwriting profit.
And so that is moving in the right direction all you're seeing this year is a correction to a large treaty that was moving in the wrong direction and we just wanted to correct that.
Does that help you.
Great I really appreciate that and then on the underwriting actions you're taking this quarter I assume we'll see that continue into the next few quarters can you sort of scale for me the timing of when we see the earn premium benefit of these changes making material difference in loss ratios.
Again, I need to start by saying that we're seeing them now you're seeing the loss ratios.
Declining today, you are seeing our share of cat losses in the in North America declining because of the changes that we've made to our property book So.
There are some whenever you do we underwrite Albert actually it's sometimes hard for us to see ex cat margins for low low ex cat loss ratios versus higher Attritional margins on business. That's left cat exposed I guess, it's unreal.
I appreciate what you're saying, but no but at the end of the day you still had a one of the half point reduction in the ex cat loss ratio. This quarter notwithstanding the fact that we had higher mid midsize losses, and so that's a real progress and certainly we expect to continue to deliver on that every quarter I think that as the.
Actions that we have.
Made.
Work their way out. So for example, Peter spoke about the fact that we've got this discontinued business, which is hurting us to the tune of two points.
Just staying around for about a year to the second into the first half of next year, but in a declining great. I believe yes, yes. So we will feed that started to improve and as we earn more of the business that we're writing today versus the business side, we wrote a year year and a half ago.
We are going to see more benefit.
Hi.
I'm, absolutely confident that we're already seeing those benefits and as that and as the slope continues to earn out we will see more of those benefits.
It's just a different book today.
Yep.
I would forcing it next quarter in 2020, thank you.
As to why.
Next we have a follow up from Amit Kumar of Buckingham Research.
Thanks.
I know, it's at the time of the hours how to make this quick just a few cleanup questions number one going back to your initial remarks Albert on.
On the credit book did you say April is running at a loss ratio or a combined ratio of 70 than 80%.
Combined in the seventies and Eightys got it Thats helpful number two our you blacked out from buying I'm, sorry, repurchasing stock right now.
No we're not.
And any thoughts on capital management with how the stock is reacting today.
We we do not have a stock authorization plan in place right now, okay, but yet, but there is no black out other than the fact that we can theres no blackout. Other we can get the board approval, but we do not have no I think Atlanta place right now I think we'll sit down and we'll look at our we'll look at our.
What was the down with our board if I look at our planning we'll look at the.
At the opportunities we have next year.
To that point I think it's worth saying that the balance sheet has strengthened a lot over the last two years.
We took out some additional leverage.
When we acquired know why we're working our way down.
And so we are bringing the equity back up we're taking.
We're taking the leverage down so the balance sheet is definitely and a stronger position than it was at this time last year, but we'll sit down with our board will look at our plan for next year and we'll take a position.
Got it and.
The other question is I know you have.
In AG and MPCI reinsurance AG book.
Any top on.
The performance and how we should think about an impact your Q4 from that.
I don't have that we've had any.
Okay.
Okay.
I don't know that we've had any indication that it would be.
That it would be negative.
Let me go back and check a little bit more on that but I can tell that as we went through as there was no surprise in the most recent review.
But I could come back to you on that got it and final question I know there was a question on Q4 Cats I know you give a very detailed answer on hagibis.
Did I Miss could you comment on the Dallas losses, or the California, wildfire did I, miss that or or was that not addressed.
I think on the.
On the California wildfires, we said it was still too early obviously, they're they're still burning.
The Dallas event was just not a major event overall, we consider that to be float a pvcs event, which is just one of these non cat weather type of events.
But there is nothing nothing unusual there.
Got it okay thats.
That's a lab thanks rolled answers thank you.
At this time, assuming no further questions. We'll go to conclude our question answer session on Mr. Brown small gentlemen did you have any closing remarks. Thank.
Thank you very much operator I'll take so.
So thank you all for participating in the call and.
As I said at the beginning of this call. We're just not satisfied with these results and we understand.
Your frustration, but I remain confident that the the metrics that we're saying.
Continue to confirm that we are moving into right direction, we have the right strategy.
And our success will be grounded in our ability to continue to execute on that strategy.
You can rest assured that the entire team is going to be focused on doing nothing other than improving results.
We look forward to speaking with you again soon.
Bye.
Thank you Sir for your time also into the rest of management team.
The conference calls now concluded at this time you may disconnect. Your lines. Thank you again, everyone take care and have a great day.