Q1 2020 Earnings Call
Here.
I'll provide more details on the Japanese in Florida renewals later in the call, but first I want to.
During the call over to Bob to take a look at our financials. Thanks up thanks, Kevin and good morning, everyone.
Today, we will provide you with an overview of our capital management activities operational response to covert 19 and financial results. As a reminder, you can find our full financial results in the press release and financial supplement that will release last night and are available on our website.
As Kevin discussed we strengthened reserves by 104 million in response to covert 19, the first quarter saw significant volatility in the financial markets. Given this we remain in a strong capital and liquidity position going into 2020 with an improving insurance rate environment, we anticipate additional opportunities to deploy.
Capital into the business.
We undertook a number of capital management actions during the first quarter.
To begin with.
We used a portion of our available excess capital to repurchase 406000 of our common shares for $63 million at an average price per share of $154 in 36 cents.
As the cobot situation developed during March our bias shifted towards conserving capital and liquidity and we halted our share repurchases.
We have not repurchased any shares in the second quarter and given market opportunities, we expect to prioritize capital redeployment into the business.
As announced we retired the $250 million of 5.75% senior notes that matured on March 15th.
This will result in annual pre tax interest savings of $14.4 million.
Early in the quarter, we decided to redeem the outstanding series C preference shares at par for $125 million plus accrued dividends.
This redemption closed on March 26, and will result in annual dividends savings of $7.6 million.
In aggregate the reduction of high cost debt and preference shares this quarter will reduce interest and dividend payments by $22 million annually, while improving our debt to capital ratio and operating leverage.
We do not have any additional debt maturing until 2025, and our remaining preference shares. Our perpetual. In addition, we have $500 million of available revolving credit none of which has drawn.
Last year between retained earnings and the Tokio Marine share investment, we added about $1 billion in capital and as Kevin pointed out in his comments, we have about $1 billion in excess capital and over $1 billion of excess liquidity based on our internal models.
Now moving onto our operational response to coated 19 in a matter of months. It seems as if the cobot 19 global out great has changed everything about how we live and work.
We started preparations in late February.
Mobilizing our business continuity planning team and ensuring technology and processes were in place to support a remote working environment.
As March progress in the virus spread we took swift precautions to protect our staff Austin in advance of government mandate and move to an entirely work from home model.
Technology upgrades, we have adopted over the last several years, such as integrating our infrastructure to the cloud and enhancing our video conferencing and collaboration capabilities have eased this transition.
Our strong culture of collaboration has been a significant asset during this time.
We adapted quickly to a new model and im extremely proud of the team's ability to renew business pay claims and carry out back office functions on a global scale.
We also continued to advance important projects were working remotely. This month, we are completing the integration of the remaining TMR back office systems, moving our teams to a single platform, which will deliver many operational benefits and efficiencies I would like to thank our employees for their commitment and effort during an unprecedented and check.
Plunging time.
So at this point I'll move to our consolidated results for our annualized return on average common equity was negative 6.3% driven in part by Mark to market losses in the investment portfolio, our annualized operating return on average common equity was positive 2.6%.
Reported a net loss for the quarter of $82 million or $1.89 per diluted common share.
Our operating income was $33.4 million or 76 cents per diluted common share. This excludes realized and unrealized losses on investments transaction integration and compensation expenses associated with the TMR integration and net foreign exchange losses.
Gross premiums written for the quarter were $2 billion up $461 million or 30% from the comparable quarter last year, 41% of this growth came from our property segment and 59% came from casualty.
We had an underwriting gain for the quarter of $64 million and reported an overall combined ratio of 93%.
Now turning to our underwriting results and let's start with property segment, which reported an underwriting gain of $147 million and a combined ratio of 65% with property catastrophe reporting a 28% combined ratio and other property reporting 106 combined ratio.
The property underwriting expense ratio increased by 2.4 percentage points to 31%, primarily driven by an increase in acquisition costs due to growth in our other property book.
Within property catastrophe was a quiet quarter for cats.
For the current accident year loss ratio of 10.6% driven by a variety of small caps. This quarter is favorable development of 11.5% was spread across the last three accident years.
The performance this quarter and other property was impacted by adverse development of roughly $40 million or 20 loss ratio points roughly half of this is related to the legacy TMR portfolio and is protected by the adverse development cover radio.
The already see the AIDC is like a whole account cover which as we've discussed the accounting is not always intuitive.
This can result in short term volatility in reported results due to movements in many factors beyond adverse reserve developments, such as unearned premiums, earning out profit commissions and FX volatility the performance of property Cat and casualty also influenced our ADC recoveries are booked.
Overtime. These are all factors, which we expect will true up to be clear this $20 million of TMR Reserve development is in amount, we either do not expect to pay for eventually be made whole for under the SEC.
The other half of the property adverse development includes late reporting of losses by seeds, and some attritional losses, which Kevin will address.
As a current accident year basis. Other property is running at 54% loss ratio, which is within our expectations.
Now moving on to casualty, where we reported an underwriting loss of $83 million on a combined ratio of 117% driven by $104 million of losses related to cobot 19 or 21 points.
Backing out the cobot 19 losses, the loss ratio for the current accident year would have been about 66%, which is in line with our expectations.
The casualty underwriting expense ratio improved by three percentage points to 30% driven by improved operating leverage.
I'd now like to provide more clarity on how the noncontrolling interest from our joint ventures impact our financial statements.
Each quarter, we fully consolidate the results of Davinci, DG and Vermeer and since we do not owned 100% of these entities, we removed a portion of their returns that we do not only.
For the quarter, we recorded a non controlling interest of $98 million, which reduced our earnings. Accordingly. This non controlling interest was driven by strong underwriting results at davinci and Vermeer due to low catastrophes and prior year favorable development.
The Vinci also experienced mark to market gains of $19 million for the quarter 4 million of which we retained and 15 million of which was included in non controlling interests.
As a reminder, page 14 in the supplement provides a breakdown of the components of of Noncontrolling interest adjustments.
Now moving to fee income were total fee income was $45 million for the quarter with management fees contributing $27 million and performance. These contributing $19 million fee income was up 57% from the comparable quarter, which is due to a combination of the growth and performance of our partner capital business.
Now turning to investments our overall investment portfolio was favorably positioned to withstand the volatility of the first quarter.
It is almost $18 billion in size and consists of primarily high quality liquid fixed income government and corporate securities with a relatively low allocation to equities.
Our portfolio includes strategic investments in our ventures unit and this is where we experienced most of the equity volatility in the quarter.
We posted total investment results of negative $11 million for the quarter, which was driven by realized and unrealized losses of $121 million from our equity investments overall.
So far in the second quarter, they have recovered roughly in line with the market.
Our fixed maturity and short term investment income for the quarter was $85 million in overall net investment income for the quarter was $99 million.
Of the $99 million of net investment income, we retained 73 million with with the remainder being shared with partner capital.
In the first quarter, our managed investment portfolio reported yield to maturity of 1.5% and duration of 2.8 years on assets of $16.3 billion.
While retained investment portfolio of reported yield to maturity of 1.9% and duration of 3.5 years on assets of $11.1 billion.
Over the last couple of years, we increased the duration of our retained portfolio to 3.5 years, which helped us benefit from the historic drop in interest rate as the market appreciated.
And now with that I'll turn the call back over to Kevin.
Thanks, Bob.
The first and second quarters are significant renewal periods for us. It's all devote a few minutes discussing our segments and then we'll open up for questions.
As we engage in renewals, we have been firm in requiring exclusionary language on the business lines, most exposed to pandemic, which further clarifies that these exposures are excluded as previously contemplated.
Being a leader means remaining disciplined and doing the right thing, especially when it might be difficult.
That said, we do not anticipate that this requirement and in of itself will having meaningful impact on the size of our portfolio.
Starting with our property segment, beginning with Japan, our Japanese property Cat business renewed at April Onest.
And the market was expecting rate on the backup to large loss years for the industry.
Our proprietary view of risk gives us a competitive advantage and I spoke on our last call about how we believe that climate change will increase the natural catastrophe risk that Japan phases.
We greatly value our long term relationships in the Japanese market and started preparing for this renewal early we revised our Japanese cat models to reflect our increased fuel risk and our underwriters started communicating our views and expectations for rate increases in late 2019.
At an industry level, we estimate that wind risk rates were up from 30% to 60%.
Earthquake only business renews, mostly flat so remains at attractive levels.
As rates have not declined materially from the poster hope to increases.
Consequently, we renewed a larger very strong portfolio in Japan. This year with expected profit under our internal metrics up over 50% consistent with our practice of exposing more capital when we are paid to do so.
Moving to June renewals in Florida, as I've discussed the Florida market remains challenged with losses from both hurricane aroma and Michael continuing to increase years later and the benefits aveo be reforms yet to be realized.
Florida's continuing structural issues remain deeply concerning.
Last years level legislative changes had no impact on the prior catastrophe catastrophic events Theres adverse development exceeded all expectations nor is it impacted other aspects of Florida is uniquely perilous tort environment.
When I spoke to you last quarter I noted that we were prepared to reduce our exposure in Florida again, if rates were not sufficient.
Since then the world has changed.
We are now in an environment, where capital is garrison risk is abundant.
Im optimistic about our ability to access the best risks in the coming months.
Even with rates improving in Florida remains said both capacity as we expect to see better opportunities in the second half of the year.
That said, we have long term relationships with a number of high quality carriers that we expect to maintain for the remainder of the Florida market. We have raised the bar.
And we'll remain disciplined in the face of competition.
I would now like to address the performance of our other property book there are three major categories of risk. This book is exposed to Scott risk is large individual risks and its attritional risk.
Over the last several quarters, we've seen losses from each of these categories.
We expect cat losses from time to time, but we understand this risk and were paid sufficiently in that book to take it.
Larger risk losses can be difficult to managers. They are a shock loss to a single.
Location.
These are losses that do not always make the front page, but nonetheless, our significant.
We manage this exposure with line size and rate.
We are getting substantially more rate so feel we've made progress here.
The third category is Attritional risk. This has managed by good underwriting and rate.
We have cancelled several programs that were underperforming and are requiring more rate to write these risks.
I have spent substantial amount of time focused on improving the performance of our other property book for example, we've been increasing the proportion of cat exposed business as we believe it has a higher margin.
Our other property business is improving and I'm confident we will drift deliver attractive long term results. All that said we are monitoring its performance closely.
Moving now to casualty and specialty about 45% of our casualty book renews in the second quarter. Our casual team is working remotely and is actively underwriting and renewing this business.
We maintain consistency and disciplined across platforms, we have a clear underwriting renewal guideline.
And our for our team and as a result are collaborating as a team with a single unified underwriting strategy that we are executing.
Most of our casualty clients have reported rate increases in 2019 that exceeded their original projections and we anticipate that we will continue to see substantial rate increases through 2020.
And our specialty business, we have also seen.
I've seen insurance rate increases and anticipate that covert 19 will further accelerate these rate increases.
We are monitoring our credit exposure in the context of anticipated global recession, and the impact that government support programs will have on our risk positions.
In closing.
The World is changing quickly we will be nimble and we will be well coordinated and will observe orientate decide and act accordingly.
Our core franchise remains strong we are well capitalized and focused on opportunities ahead.
As I've said capital is scarce and risk is abundant it is times like these when the best underwriters can outperform.
And that is exactly what we plan to do.
With that I'll open up the call for questions. Thank you.
At this time I would like to remind everyone in order to ask a question. Please press star from the number one on your telephone keep in mind.
Hi, This star one on your telephone keypad still be placed into Q.
Our first question comes from Meyer Shields from KBW. Your line is open.
Great. Thanks, so much and good morning.
Two questions first Kevin in your comments on fee.
Should we.
I understand that Youre.
First quarter business interruption reserve depend on individual feed and pre.
Perception of the risks or is there on over arching consistency besides that.
So there is there's two pieces of FFO, there's two areas of focus when we think about the VI exposure, we have within within the organization.
First is.
Is is cobot 19, a trigger for prudish traditional VI and the second how much specific communicable disease cover was sold by our seats.
So for the first fees.
We rely on our cedents interpretation of their contracts.
And the discussions they are adding with their insureds about the coverage that they provided.
We are not really involved in that dialogue because thats between the in short and the unsure what we're involved with is how does our treaty protect the seasons.
We are relying on their advice that they don't believe they have VI exposure from cobot 19 under the policies they have sold.
Secondly, with regard to the communicable disease, we've asked each of our savings to give us more transparency on what those.
Endorsements look like.
In.
Each piece of feedback is different but in general the feedback and at the kind of a 10000 foot level is that there are heavily sub limited and below per risk treaty attachment points and aggregations are below.
Property cat treaties. So that's that's going to the way we're approaching it again, that's that's the frontline we sit behind them. So we have to take their advice to understand the risk.
Okay understood just wanted to get the process.
Hi, can you talk about accelerating rate increases in casualty and specialty on among other things higher perceived risks.
Is the incremental rate increase bigger than the incremental a few risks from from your perspective.
So it's a great question and what we've talked about on the previous calls is that we were seeing rate above trend.
What we're seeing now is is a acceleration in rate change. So the rate change that we were saying before as is bigger now.
It is hard to determine at this juncture in time as to whether that rate change will be above trend related to covert 19.
Just because of the uncertainty as to where we are on the development of the recession and the recovery. It we've done tremendous stress testing on our portfolio and I feel that where we are and how we're thinking about it is a book that we would definitely look to write more up with the rate that we're seeing against apparel for which were exposed.
Again in order to ask a question. Please press Star then the number one on your telephone keypad and we do you have you limit yourself to one question and one follow up. Thank you. Our next question comes from a lease Greenspan from Wells Fargo. Your line is open.
Hi, good morning.
My first question on carbon going back to your prepared remarks.
Clock when Youre talking about hospital.
Michael Keaton, knowing your strong from Mario.
I will kind of loss.
Hi.
Capital troublesome.
Yes, I'm wondering if you can give us a little bit more color. When you won different models and no clinical come up gross drank alcohol on what does that assume purposes interruption lawful our volume from other lines corporate bonds and like foremost strata outcome.
Yes.
Some of the other lines world, having put up reserves for yes, absolutely what it looked like a word coal alcott I will for longer formal approval broken, Alabama, probably a lot.
So let me give an example, that's a little bit more transparent. So if you take some of our credit lines.
We are looking at stress scenarios with unemployment in the United States of 30%, which we believe is significantly higher than what you to the banks are looking at is likely scenarios and hopefully an unlikely scenario generally I think thinking about worst case scenarios as a point.
It's something that one needs to be aware of but I've been in this business for a long time.
And uncertainty generally leads to pessimism and experienced provides judgment I'm fortunate that the team that I've had been through for met with many of them 911 have been through Kate R.W. up into the financial crisis. So the judgment that we can provide us to what is likely and what is realistic is different than what is.
Worst case, and I think that precision in our judgment as to how to position the book and manage our capital is what is guiding us through this so when I think about what is possible with VI, we need to prepare and maintain capital and liquidity for that but we can act against a worst case scenario, we have to react against what is real.
He has taken the judgment of our team is unparalleled in the industry to provide US a course forward.
Okay. That's helpful and then in your pricing commentary.
When you were discussing applied renewal, you said that might hold back capacity for better opportunities in the second half the year.
I'm assuming that.
To your posture keep up and then so.
When you all.
Expecting later on here that could provide.
Hi, we might see in Florida.
Yeah. So I think it's so theres a lot of things going on in your question.
For casualty and specialty we have quite a bit of just.
Got a run rate renewal that we're working through.
And I expect that we'll see opportunities there and I expect that that book at the end of 2020 will be larger than 2019.
My comments, you're absolutely right, we're much more around the property cat I don't think its renewals.
That we're looking for after the Florida, we're looking for new purchases potentially from companies wanting to managed volatility due to the coded uncertainty and secondarily, if we write a bit business at one one.
We're going to.
We want to position ourselves at this six wanted to make sure that we've got the flexibility to bring more catastrophe risk on.
At that book rather than at six one the other thing I'll mention is our book has inherent growth should we choose to that leverage it based on simply purchasing less retro I think we'll probably have less retro in 2021.
And with that will probably hold capital back just to prepare for the embedded growth that we already have within our system.
Your next question comes from Brian Meredith from you May ask your line is open.
Yes, Thanks, Kevin a couple of question too for you first I'm just curious.
When we look at your catastrophe reinsurance book, you talked about some losses that.
Don't believe are actually covered in your cat reinsurance contracts Im just curious.
If you could describe that force it would be great and then also on that topic.
How do you deal with the hours clauses in the Cat Cat Treaty with respect to the cobot 19 losses.
Yeah I think.
And the governing documents as well will be disciplined and making sure that as losses are ceded to us there in compliance with our governing documents with regard to the hours clause.
We all know the hours causes is an imperfect way to measure when something like a hurricane starts and stops so that a primary company can aggregate losses in a consistent way for sessions to property cat to be perfectly honest, it's unclear, how a pandemic and fit into an hours cause.
And I think you're thinking about one even just it when we think about how to approach a claim we always approaching constructively fully approach it on epic spoke basis with each cedent, but you have to consider the entire agreement and the hours causes one complicated element, but there are many complicated pieces to a property cat treaty for this.
Great. Thanks, and then second question I Wonder if you could talk a little bit more about can describe what's your mortgage reinsurance books looks like is it.
Stop loss as it has lost as a quota share and just kind of trying to frame. The exposure is around I mean, you talked about assuming a 30% unemployment rate I mean, we think that would be pretty meaningful loss for.
The mortgage.
Okay.
Yes, it's.
That's a hard question to answer simply.
We right we write both the private mortgage and.
The gses the.
The book so.
At a level that maybe is helpful for this call.
Our book is more excess of loss, we posted up recently, so were more risk remote on the more.
Recent transactions.
At the older transactions, which can be a little bit more exposed to a loss at the benefit of having a higher equity.
Built in just because of the tenure of the transactions. So when we've stressed the portfolio. The reason we were using 30% on employment was to begin to.
Really run some loss into that portfolio because it is reasonably risk remote at this point in time.
So that actually two other things I Wanna mention we do take mortgage risk in our bonds. So like we have associate with CMBS portfolio, but no thats largely a AAA portfolio. So we feel pretty comfortable with that and then we have an ownership in essent, which has added some volatility as Bob mentioned to our to our investment results, but we think essence is is it is a good business.
Just had a bad quarter, but from a return perspective.
Your next question comes from Ryan Tunis from Autonomous Research Your line is open.
Hey, Thanks, So Kevin I appreciate the discussion about.
Thinking about what is likely versus the worst case.
And I guess I'd like to maybe get a little bit of the better idea about.
What is your definition of what is likely so.
And then buyer and like what you think is likely will round, we pay material.
Claims on its property cat treaties associated with business interruption.
So.
We're not going to engage in hypotheticals, because as I said each of these contracts are different.
The scenarios that we run on this are different than what we would typically done where what we've talked about in the past as we've had a top down and bottom up approach, where you take the industry event you run some market shares and you look at each account run it back up the other way and see what your results look like.
This is too broad geographically and two diverse from a line of business perspective for a single.
A single.
Approach to understand the risks so what we've done on the credit book is very different than what we're doing on the property Cat book and then we also have to take into account. If you take things like trade credit, where we have a whole account turnover book there are countries that have taken the view that in order for them to preserve directly.
Port business, they need to provide a government backstops, which will substantially limit the exposure that we have so it's a much more complicated problem then thinking solely of.
It's the size of that in that side loss and as I mentioned, we don't even know the depth of the recession, yet so for us to begin to speculate hat as to how these things can play through our book can only be managed through scenario analysis by platform.
Okay understood.
And then I guess my follow up is just on the only other property book.
Just trying to get a better I'm more granular understanding of what are the problems. There early in particular widens coming to manifest itself.
I'd say uncharacteristically in an inability to set reserves right.
So.
As Bob mentioned about half of the adverse development is from the technical accounting complexity with the agency. So the problem that is represented on our financials. In my belief is is half timing because of that and the other half of the issues that I tried to address I think that really comes down to its where we made some poor.
Our underwriting decisions to write some programs in London, which we extracted ourselves from in late 18 and early 19. It just takes a while for those to run off the rest of the book I think we'll be solved because of the new underwriting guidelines on the rate that we are getting so I think.
In any portfolio is larger sars, they're going to be good deals and bad deals a good underwriter recognizes went to go large on the good deals and more importantly went to exit the bad deals and we've done that so I feel like we're in a good place with the book, but we've had some pain.
The cat stuff I don't think is it's a problem, which again is a component of the issued that your rate that is a risks that we took in were paid for it really is the attritional on those few deals.
There's been some timing issues, which are not worth getting into now, but that's where the way I look at it and I feel as if the mitigating steps we've made other REIT ones and the book is in the right spot, particularly for where the market is headed.
And again, if you would like to ask a question. Please press Star then the number one on your telephone keypad World. Your next question comes from fills the panel from Deutsche Bank. Your line is helpful.
Yes.
A quick follow up on the mortgage rebook I guess when thinking about the primary am I reserving it's more on the claims made basis and its quirky that we need to wait for the defaults to come in.
Before we can actually begin to reserve to that business I am I assumed in the mechanics are different on the reinsurance side, maybe you can talk too about the reserving process. There to the extent. This is more of a defaults we've been an actual claim we bid is coming.
How you can just be confident in the initial reserves that you set and just kind of whether that up and down on the default.
Yes, let me turn over Bob and I, just want to make one comment after Bob.
Yes fill it can mean, what we're looking at and what Kevin stocking about as we're looking at exposures.
We don't know how those of manifest themselves into reserves and when you go through the reserving process you really reserve. When you think is probable. So we think there's probably going to be losses, but you have to be able estimated and we have no idea based on these exposures and how the will manifest themselves into losses, and we're following really kind of what's happening with the recession.
And so we've done it over at some scenarios and as we learn more we will take the reserves, but we don't expect these reserves to develop in the near term because you have to go through the whole process of four brands and losses in developing the would occur over time. So that's how we're looking at the reserves from that perspective, and Kevin you on the and I think the point that Bob is making on Forbearances.
Is really important because as my understand so demonize will have to take capital, it's even for losses and forbearance that actually I think creates for an excess of loss writer creates huge opportunities for us to provide capital protections in the near term for the company has that are going to be capital constrained with uncertainty between what mortgages are truly.
In flaps and water and for parents.
I think I think we're in.
Really preferred position to be able to offer assistance to our customers who are going to be exposed to the exact thing here anything.
Got it thank you and just thinking more broadly about the.
The students business versus the ceded business I guess I'd be it in my mind Theres the potential mismatch in that you soon business that Youre, writing is more from in all pearls coverage perspective, where is the rest of your buying might be more specific and he big names Carl.
I'll eat is that consumer warranted and then secondary to that as we think about renewals over the next years no does any potential mismatches AG in terms of condition tighten between between your assumed in your restaurant business.
Yes, it's a good question I think.
And you're right. So the such as we'll make some simple assumptions that are assumed to book is all perils, but that's not accurate either but.
So what you're asking is about.
I think when I look at our stated our we surprised that we thought we had coverage and don't.
And then.
Why did we bought cover so the I've gone through our ceded portfolio and I've seen no surprises as to where we think we should have coverage.
And where we do have coverage, but we do have certain deals that are named apparel and those were basically a trade for price to coverage. An example could be that we issued a large cap bond, which was a specific perils specific but provided enormous capital relief. There is no surprise in that but it's not going to be recoverable for pandemic. So.
I think about it when when it when you assessing the quality of your hedges is it a surprising negative outcome and the answer that I have seen from the ceded portfolio that we have as I have seen no surprising negative outcomes for where I anticipate our book to develop.
There are no further questions at this time I turn the call back over the presenters.
So.
Thank you for tuning in today I'm sure. Many of you were tuning in from home.
The new world for Us and I do find it.
Sometimes difficult to think that.
Discussing opportunities on a calls like this are often at times, where there is substantial social stress. So I believe we are a compassionate for the social stressed that out is out there and the growth that we see I believe will provide needed protections, which will add further to the reduction of that stress.
Ordinarily optimistic about the future.
But also recognized the difficulty that many of us or in today. So my Hearts go out to you and thank you for tuning in.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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