Q1 2020 Earnings Call
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Good day, everybody. This is the conference operator, and I would like everybody. Thank you for attending today's presentation, we will be beginning in about two to three minutes I just wonder let everybody know we're going to begin in about two to three minutes. Thank you very much for attending and thank you for your pension.
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Good day and welcome to the Q1 2020 Axis Capital earnings Conference call. All participants will be in listen only mode should you need assistance. Please signal a copper specialist by pressing that starkey followed by zero.
After today's presentation, there will be an opportunity to ask questions.
Good question you weigh press Star then one on your Touchtone phone to withdraw your question. Please press Star then too.
Please note today's event is being recorded I would now like to turn the conference over to map more kind of Investor Relations. Please proceed sir.
Thank you Eric Good morning, ladies and gentlemen, I'm happy to walk me to our conference call to discuss the financial results practice capital for the first quarter agreed that at March 31st 2020.
Earnings press release, and financial supplement where issued yesterday evening after the market close.
You'd like copies. Please visit the Investor information section of our website at Axis capital Dot com.
We set aside an hour for today's call, which is also available. It's an audio webcast. This is also available to our information.
Investor Information section of our website.
With me today are Albert Benchimol, our president and CEO Peep out 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 assumptions actual events or results may differ materially from those projected the forward looking statements due to a variety of factors, including the risk factors set forth in the company.
His most recent report on form 10-K, and other reports the comedy files with the FCC. This includes a company form 10-Q for the quarter ended March 31st 2020.
It will be filed after the date of this call as well the additional risks identified the cautionary note regarding forward looking statements and earnings press release issued yesterday evening undertake no obligation to update or revise publicly any forward looking statements.
In addition, this presentation may contain non-GAAP financial measures.
For the purposes of this call we believe the best way to discuss our operating results is on X P. GAAP basis, which is a better representation of the run rate performance of our business.
Reconciliations are included in our earnings press release, and financial supplement, which can be found on the better information on our website with that I'll turn the call over to Albert.
Thank you Matt.
Good morning, everyone. Thank you for joint earnings call.
On behalf of Axis I'd like to begin by expressing a heartfelt sympathies to the families who loved ones all those whose lives Monday, but I've been tragically cut short.
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Over the past few months.
Because we know what has been up ended.
And we must now work together to navigate the unprecedented challenges brought on.
90.
And yet heroes of arisen everywhere.
And we had axis guillemots gratitude for the brave individuals who are on the frontline fighting independently and put equal their own and their families lives in parallel.
We then access our foremost concern has been with the health and safety our colleagues.
We also believe very deeply that our industry fulfilled the final social purpose to help people when they're down.
Individual businesses organizations rebuild in times of crisis [noise].
We probably SAP, I promised where customers partners and distribution and our communities.
We're reviewing each claim on an individual basis, and where our policies do provide coverage, we're already making payments to help our insured overcome financial setbacks.
I'm proud to say that we've seen the best Abaxis and these last few weeks.
We sustain a high level the response and the start producers.
And with them to help our common clients manage risk and these highly uncertain times.
The investments we've made over the past years update our technology platform and implement our digital transformation.
I'm allowed us to ship seamlessly to remote worked protocols and by all accounts, we maintained a high level of service that our producers have come to expect to us.
Separately, we're also continuing to support the relief efforts underway in our local communities.
I'm, most thankful to our team met the challenges resilient grit and great.
We're convinced them even have the actions brand with our service over the past six weeks.
Within a large part of this call discussing our exposure to cope with my team, it's impacting our results in our plans for managing through the global crisis.
But an essential component of this discussion in the state of our company at the start of the pandemic.
We entered 2020 strongly position amongst four key attributes.
We had the strongest capital adequacy, we've had since 2016.
We had a prudently construction investment portfolio with over 84% about that's an investment grade bonds.
And while our portfolio experienced negative return in the first quarter given the recovery of markets. We're now in positive return territory for the year to date in our portfolio.
We also had an outstanding team at technology platform that allows us to operate remotely without any reduction in our capabilities.
We have the best belts book of business and that's really a company. The result of many years of portfolio repositioning and reduction in Cat Mone Tony.
Now while in the last couple of years are promising demonstrating the benefits of this result of this repositioning has been slower than we had last.
We believe the our results this quarter provide tangible crew that we're now delivering on our goals.
We use our key metric to monitor our progress in underwriting the XP got X cat current your lawn acquisition and DNA ratios.
And we delivered strong progress along each of these metrics.
Our consolidated P. cap ex cats Germans your combined ratio was 93.6% this quarter four points lower than the prior year, not least sustaining but accelerating the progress that we've achieved in prior quarters.
This attritional underwriting result, along with much lower diesel PML cat cat loss curves over recent years.
That's well for continued improved performance.
I hasten to add like with any carrier to always be some quarterly volatility not result, but we're now working off a much better base.
Let's now discuss the financial impact of Cobiz 19.
I shared and our pre release, we're projecting $300 million the cat losses.
235 million coming from Cobiz 19.
Axis was among the first to provide a more comprehensive estimates.
Good losses this quarter.
We saw no reason to wait.
We conducted a deep reviews of our policies and programs within our insurance segment and found that the vast majority of our business does not response to the current situation.
While we do have some contracts to provide to cover the do but the majority of our business includes physical damage requirements for business interruption clear virus epidemic exclusions and sub limits in terms of coverage.
Where we do have exposures, we believe that we have a good understanding of our potential losses for our first party business.
For the reinsurance segment, we use various approaches to determine the companies that claims provision.
We reviewed our varies property catastrophe in H contract and made a number of judgment calls based on the nature of our clients business.
We supplement that these the conversations and lots indications we see from clients.
Before the sense checked our estimates using a variety of industries short loss estimates marketshare analyses and catastrophe modeling analyses.
While our loss provision up to 35 is of course subject to change given the uncertainty on the situation. We believe it appropriately reflects retention law firms that have been incurred.
Assuming the shelter in place remains through July 31st.
I would like but our team for their tremendous effort required that is and the gone into to prepare this estimate.
We did not take a provision for third party business.
Frankly, we haven't seen anything yet there and we expect that it'll take several quarters, it's not yours.
At the current 90 to be realized.
That's another reason, we expect that market pricing will continue to remain strong to allow the industry to absorb our laws that are expected to emerge from this pandemic overtime.
To conclude my introduction it was a tough for.
It took its toll on our underwriting and investment results.
We're not alone and facing the challenges the pandemic, but I'm confident we outperformed in many ways.
The actions team continues to make progress that underwriting grew an attractive line.
Staying high service with customers and producers throughout the condemn.
I'm very proud of our performance this quarter.
But when I walk through the financial and I'll come back to talk more about pricing and how acuity Pete.
Thank you Albert good morning, everyone.
To Echo Albert's comments from earlier, our Hearts go out to everyone, whose lives had been directly affected by covert 19.
We find inspiration every day the heroism displayed by the healthcare workers early responders and he central workers.
Like Albert I'm impressed by the way our SAP is come together to advance the business support our customers as well support the relief efforts at our own local communities.
I'll now proceed with the uptake.
As you heard from Albert and saw in our earnings pre released last week.
Consolidated quarterly performance was heavily influenced by Koby 19.
And the adverse impact it had a both our underwriting and investment results.
During the quarter, we incurred a net loss attributable to common shareholders of 185 million.
And an X.P. GAAP operating loss of 161 million.
During the quarter, we reported 300 million of pre tax net catastrophe and weather related losses, including 235 million for koby 19th.
These koby 19 losses increased our consolidated combined ratio by 21.3 points in the quarter.
As Albert noted these reserves were established following detailed reviews within both segments.
And those instances, where we identified cobot 19, as they likely cause of loss, we established loss reserves in the first quarter. Our losses from covert 19 are largely attributable to property related coverages, but also including bank cancellation and age coverages.
Our current estimate assumes the shelter in place remains in effect through July 30, Onest of this year.
And this applies to both of our business segments.
The vast majority of our reserves are IB NR.
Our subject our estimates are based to a higher than usual level of uncertainty because of the inherent difficulty in making assumptions around cobot 19, due to lack of comparable historic events.
It's ongoing nature and far reaching impacts.
These assumptions include the nature in the duration of the pandemic its effects on human health the economy at our customers the coverage provided under our contracts and by ceded reinsurance.
Devaluation of loss and the impact of loss mitigation actions.
In addition to the loss provisions associated with the pandemic. We also incurred a full EBIT loss of $10 million related to the Whrrl pandemic risk link swap.
This losses reported through the other insurance related income wide in the income statement.
Excluding the effects of Koby 19, we incurred 65 million, a pretax cat and weather losses in the quarter.
Primarily associated with U.S. weather events, UK flooding and Australian wildfires.
Moving beyond Koby 19, the first quarter saw continued improvement and the company's ex cat underwriting result.
We believe the best way to discuss our result is on an X.P. GAAP basis, which is a better if representation of the run rate performance of our business.
Our X P got current accident year combined ratio ex cat and weather decreased by over four points as the repositioning of the portfolios in both segments, including the exit from certain product lines in the insurance segment earned through.
The consolidated current accident year loss ratio ex cat and weather was 57.1.
A decrease of 1.8 points attributable to the progress in both segments.
We reported net favorable prior year reserve development of 6 million in a quarter of which 4 million came from insurance and 2 million from reinsurance.
The consolidated X P gap acquisition cost ratio was 22%.
And a half decrease for the first quarter 2019.
The consolidated DNA expense ratio was 14 and a half a decrease of almost a point compared to the first quarter 2018.
The reduced DNA ratio is largely driven by decreases in personnel costs professional fees and travel and entertainment expenses.
The normalized DNA ratio for this quarter was 14.6.
We continue on track to achieve our annualized run rate expense reduction of $100 million started in 2018.
However, given the uncertainty of the current situation, we have planned additional savings targets throughout the rest of this year.
The income from strategic capital partners was 16 million this quarter compared to 20 million in the prior year quarter.
Now moving to the segments, let's begin on insurance.
The insurance segment reported an increase in gross premiums written of 11% for the first quarter.
This increase principally came from the professional lines liability property and marine lines, largely attributable to new business and favorable rate.
This is the second quarter in a row, we reported growth in the insurance segment as we move beyond the portfolio actions taken in 2018 and 2019.
This quarter pre tax cat and weather related losses were 178 million.
The covert loss estimate was 135 million and is primarily associated with property related coverages, but also include event cancellation coverages.
Virtually all of the reserves are IB NR.
Insurance segment had meaningful improvement in the X P gap current accident year combined ratio ex cat and improved by over five points down to 92.3 for the quarter.
This is the second quarter in a row, where we've seen over a five point improvement any insurance segment ratio.
The current accident year loss ratio ex cat and weather decreased by two points in the quarter. The decrease was due to approve loss experienced a marine and aviation together with continued impact of rate over tread.
These improvements were partially offset by an increase of about a point due to business mix as professional lines and liability businesses now represent a greater proportion of our portfolio relative to the property business.
Well, the greater proportion of professional lines and liability business adds about a point to the ex cat loss ratio.
These lines benefit the XP gap acquisition cost ratio, because they have lower net acquisition costs.
The changing business mix accounted for about half of the over two point decrease in the X P. GAAP acquisition ratio for the insurance segment.
Now, let's move on to the reinsurance segment.
The reinsurance segment reported a decrease in gross premiums written of 242 million for the quarter.
We had a decrease across a number of wise as we look to better balance the portfolio.
These were partially offset.
By increases in liability in accident health lines, driven by rate increases and new business under favorable market conditions.
The quarter pre tax cat and weather related losses were 122 million primarily attributable to covert 19.
The Koby 19 loss estimate was 100 million was primarily associated with property related coverages as well as some medical expense and travel coverages.
The current accident year loss ratio ex cat weather decreased by over a point compared to the first quarter of 2018.
The decrease was due to favorable impact of changes in business mix due to less motor and agriculture business earned in the quarter together with improved loss experienced an aviation.
The acquisition cost ratio is almost a point lower than last year due to changes in business mix the impact of retro contracts, partially offset by adjustments related to loss sensitive features.
Net investment income of 93 million in the quarter was 14 million lower than the first quarter 2018.
Merely due to lower hedge fund returns.
The hedge funds are part of our alternative asset portfolio, well report out a current quarter basis.
At quarter end, our total alternative portfolio was just under 700 million.
Of which about 70% reports on a one quarter last.
We expect the impact of those first quarter returns to be reported in the second quarter.
Our current book yield is 2.7, our current new money yield at quarter end was 2.9%.
Our current new money yield is 2.3% and the duration of our portfolio continues to be approximately 3.3 years.
Loss associated with an equity method investment of 24 million for the quarter was attributable to negative investment returns achieved by the Investee.
With respect to capital actions as discussed during our last earnings call in December we issued 425 million of junior subordinated notes at a favorable rate.
In January two were at 25 million of the proceeds were used to redeem all of our series D preferred shares.
We intend to use the remaining proceeds along with the proceeds raised last June to redeem our 500 million dollar a senior notes maturing this coming June.
Adjusting for the repayment of the June senior notes, our pro forma quarter end debt would have been 1.3 billion.
Resulting in total capital of 6.1 billion.
Our pro forma quarter and leverage ratios would be total debt to capital of 21% and total debt plus preferred of 30%.
Both of these ratios are up about two points from year end pro forma comparables.
After we repay the senior notes in June we have effectively and efficiently refinanced our long term debt over the past two years and have no long term debt maturing until 2027.
Because we had an overlap of debt, we had temporarily higher interest costs of $7 million in the quarter.
This will disappear on a go forward basis after the second quarter.
Diluted book value per share decreased by $6 in one sense in the quarter to $49 at 78 cents. This was principally driven by the net loss net unrealized losses and common share dividends.
Summarizes our first quarter results and with that I'll turn the call back over to Albert.
Thank you Pete.
Let's do a brief overview of market conditions and outlook and then we'll open the call for questions.
Seasoning.
Overall the momentum in market for me is accelerating and spreading to just about every line in market.
For insurance. This is a continuation of pricing improvements that we've now seen for 10 quarters.
For reinsurance I'd say that it's only recently that we've seen real pricing momentum take hold.
This difference is what drove the topline divergence between our insurance and reinsurance segments.
Our strong 11% growth and insurance speaks to both our satisfaction with our current portfolio and the improved terms that were seeing.
On the other half we did not always get there we were looking for the January one reinsurance renewals.
In many cases, we reduced our participation exited certain treaties.
Well renewals were different story, we'll get to that later, but first let's start with insurance market conditions.
Overall across the entire insurance book, we saw average rate increases of 10% about twice would we achieved in last year's first quarter.
Our us division once again saw the strongest pricing actions with average rate increases of almost 15%.
Primary and excess casualty achieved average increases in excess of 20%.
Yes, this property rates were up 15%.
And our U.S. programs business, which focuses on homogeneous books of smaller accounts was up almost 5%.
Within our North American Professionalized Division.
We also continue to accelerate and rates were up over 7% in the quarter.
Now most of our business units within professional lines double digit pricing increases however, our global hybrid technology line exhibited modest price action and had been over 1% impacting the average.
Well cyber attacks are not yet generating the same increases that were seeing other areas of our professional lines Division, we are starting to see upward movement in rate there too.
Within our commercial management solutions unit, we saw strong rate improvement with average increases in more than 17%.
Public and private Dino.
Impressive average increases of over 40% and 25% respectively.
We are definitely entering hard market territory and these lines.
In addition, we saw strong double digit increases in our financial institutions and Kenny specialty businesses.
Our Bermuda excess business was up 18%.
In our London based International Insurance Division rents were up more than 8% on average in the corner.
Usually.
We are double digit increases across property professional and casualty lines renewable energy and the abuse.
Our Marina political risk ones were up on average by 5%.
Cargo see increases of more than 20%.
To give you a sense of the momentum in our markets.
Across the entire insurance segment the March rate change was the strongest quarter averaging 15%.
Overall in the quarter, 95% of our insurance business renewed flat to up interestingly, 40% of our renewals by volume.
Rate increases of at least 10%.
And almost about what renewals achieved great increases of more than 20%.
These are by far the best numbers, we see in over a decade.
Looking forward, we see no indication that we'd activity will subside indeed, as I noted earlier with Covidien ITD be limited claims emerging over the next few quarters.
Ongoing low interest rates and the spectrum social inflation overhanging the industry the motivation to sustain pricing discipline is high.
There is talk that exposure growth may face headwinds in coming quarters.
Given the difficulties common shorts and brokers are facing with a pandemic.
Hey, Mike why did you see or could we knew incumbent carriers.
Renewal Retentions may increase as new business slows.
On the other hand.
The characteristics of a hardening market a better incumbent look to reduce limits and standard carriers tend to kick complex business back into the market and that's our sweet spot.
So I think we'll need to see willing to wait and see a little bit more before taking a view on these positions.
In our mind, there's better visibility within reinsurance.
There, we expect more demand as insurers look to buy additional protection.
And tighter supply as reinsurers are also looking to manage the capital and the risk appetite.
This will drive stronger reinsurance conditions in upcoming renewals.
The April one we introduce rule were generally encouraging.
We observed meaningful improvement improvements across all lines with the exception of Asian, non cat business, which is relatively small part of our book.
In Japan earthquake pricing was flat and when will that covers on had rate increases on average of over 50%, although on a risk adjusted basis, we see that increase warn that arrangement range of 20% or so.
We use the renewals to reduce our exposure on low attaching treaties as we continue to push for a more balanced in our portfolio.
We also renewed us casualty business, where we achieved double digit rate increases and a small aviation book where rate was up over 40%.
As we look ahead to the June renewal season, there was talk of 20, 10% to 20% price increases in Florida, but now it looks likely to be stronger than that better terms and conditions.
Does the fast developing situation and is this promising but we'll have to wait and see how it develops.
I expect reinsurers, including taxes.
So appropriate caution.
We'll evaluate treaty by Treaty, making sure that we select the right business and the right partners for long term profitability.
And whether its insurance or reinsurance business, our focus will remain on enhancing the balance and profitability of our book.
We intend to sustain the improvement trends and the underwriting results and we believe that the current environment offers excellent opportunity for us to do so.
Before I open the question period, I do want to speak a bit of how we're managing through the pandemic.
We've advanced three key operating priorities. The first it's a sustained operating capabilities and clients centricity.
The second is to minimize the downside.
Third is to prepare for the recovery.
Regarding the first as I noted earlier, our investments in our technology platform and digital capabilities have paid off and helping us to seamlessly transition to remote work model.
All of our staff of work from home capabilities and our platform is strong.
Importantly, the feedback we're getting is that our service and responsiveness have been sustained at high levels.
We intend to limit the downside so what we were strong and participate fully in the eventual recovery.
We've modified our appetite in certain London market.
Looking at limit imposing exclusion and generally making investments in underwriting decisions with the understanding that no one truly know how long or how bad this pandemic will be both in terms of human economic Archer.
We also cut our expense budget to help protect profitability in 2020.
If I say $50 million an expense cuts.
This concludes the firming non critical hires and delaying certain projects as well as the natural attrition and travel and entertainment given remote working.
But we also know the world eventually emerged from this crisis and we expect there will be significant opportunities when economic activity picks up again.
So we are continuing to invest in the future enhancing current coverages and developing new ones accelerating investments in digital capabilities and processes and continuing to invest in our brand and our franchise with our key producers.
To conclude.
We're coming up three years of aggressive efforts to strengthen our business.
We've made significant changes and believe the hardest part is behind US we've taken the right actions and we're seeing meaningful and tangible progress in our results.
We entered 2020 and a strong state of readiness and while the pandemic as a challenge for access our industry in our communities, we faced that challenge with confidence and optimism that we will manage the downside preserve our strengths and emerged stronger than the other side.
Throughout all of the we will continue to be therefore, our clients and partners in distribution every step of the way.
Finally, a recent piece of news.
Have you may have noticed that shortly before this morning's call and best announced that it has revised its ready access to a excellent eight plus superior.
[noise] their reasoning is that our operating performance over the past five years has met our expectation.
The report here in front of me.
This report and best credits access in a number of area.
Axis maintains levels of risk adjusted capitalization that place us in the strongest category on both a standard and stress that's the basis.
And best noted that axis has a favorable business profile and a solid spread risk by both loan business job.
It says we have a well development comprehensive enterprise risk management program and that it's embedded throughout the organization.
In operating performance they they talk to us from the drop is adequate so in short our lower operating performance for the past five years is the basis for ambitious downgrade.
Well with for the first to agree that our progress has been slow than we desired is disappointing to see the screening option. After we're seeing such encouraging underwriting results from the significant action the actions taken during that time to strengthen our business.
That said, we expect responsibility and we're committed to doing all that we can so that we can earn back that superior rating.
And with that let's please open the line for questions operator back to you.
Thank you we will now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone, if you're using a speakerphone. Please pick up your handset for more pressing the keys to withdraw your question. Please press Star then too we will pause for one moment similar roster.
Our first question today will come from Brian Meredith.
Yes. Please proceed with your question.
Yes. Thanks, a couple of questions here first I Wonder if you could talk a little bit about how much of your business interruption coverage.
Actually has a positive or a virus endorsement on it and did you book called out in the quarter and then Conversely, how much of your kind of exposure property exposure has doesn't have any virus exclusions.
Okay.
Let me see I can take it.
Our course.
Focus on children's one.
And it's really two different markets. One is the UK market one is the.
One is the U.S. market in the unit.
We have property exposure that generally comes from our DNS book.
Our program book and some binder business.
The program book in the Binder business have ISO virus excludes language. So that's out.
Yes I.
I would say, 80% of our Ian as book had axis forms with the virus exclusion.
We do have some policies that are broker Paul Volcker warning, we've gone through every single one of them.
Densified, what's explosion sub limits and so on and so forth and we've taken the and we've taken the exposures for that.
In the UK business.
There is.
Some local business.
Right and then there's some general property business.
In the UK in particular.
The cost of loss is denial of access through the government program and so we've gone we've gone through all of our book, we only had a limited number.
A handful of programs and binders that provide this coverage on the buyback.
And what we've done there is weve.
We viewed and we.
Every industry frankly against the the list that was provided by the government in terms of that in terms of the closures. We've reviewed those policies, we looked at where their sub limit and in many of those are small accounts with a very small sub limits in terms of dollars.
And in most cases, we generally assume let's say through July 31st in most cases that was longer than even the sub limits that we use the sub limits.
Estimate our losses.
And we're not we've made some prudent estimate of the claims there.
The only remaining piece lessen as the global property book There that book is.
Over half of it in excess above any sub limit.
We've gone through every policy, that's one can see no dolly hotels restaurants, and so on and so forth. We reviewed the business we've looked at whether it be eyes are whether you.
May or may not be and we took a charge against that so by and large we believe that we've done a comprehensive review all of our.
Property exposures, where there will be eyewear their business and we're comfortable that we've identified on the policies where there is coverage.
That's great and then I'm wondering if you could talk little bit about trade credit and maybe political risk.
Exposure shop, that's an area that I know a lot like people in the market think there'll be some pretty meaningful losses, what's your exposure to that area.
So we have trade credit and political unrest in two areas treat you know we have a small book on the reinsurance book.
Now that book is one that we've reduced significantly over the last several years, we literally have $20 million of net written premium and the trade credit area and it was multiples of that a few years ago. So we've really got went back.
We think that one's handled well I think its little early.
Two.
Provide an estimate of the potential damage and the reason for that is that there is significant potential impact from government actions as you know a number of European countries. The governments are coming in supporting that business, taking a share of the losses. So there's there's a number of areas. There to look out we do have some surety business, we look at on the reinsurance.
Well.
That we feel is going to do well.
It really even in the last financial crisis was not hurt and so we think the conditions of the surety book will do well on the insurance side, we do have.
Some credit and political risk in our Lloyd's credit political risk book.
About 60 plus percent of that book.
It is concentrated in a in energy and in sovereigns.
Excuse me and financial and then the rest is literally very small shares of metal.
The fan infrastructure and so on so let's look at the big lot of the big areas in our energy book about half that book.
Backs emerging market purchases of energy.
We just don't see.
Loss exposure as company, it's countries are going to want to import oil that they're going to want to pay for it. So we don't see much there.
Other half that energy book generally supports state owned or state sponsored energy companies and again, we think that happened after having we do that but we think we're in a good place. There we literally have $200 million of exposure to NP companies, we've evaluated their book their hedging program.
Production in terms of costs and most of them can do very well.
Even in the 20 $30 range and of course, there's some exposure there and they don't but by and large we seem to that portfolio is very well managed I think all the sovereign again, we think that those are usually ammo.
Guarantees and support we think they'll manage on the financials. These are really to support.
Letters of credit funds transfers between countries and again, we don't see the banking system being impacted by this and so we continue to believe that book is good and and frankly, when you get down to the smaller shares I think it's generally strong.
Strong public wars, and small shares with a very good reinsurance program. So for the moment again.
I think it's early to tell but we don't see that book as being.
Particularly at risk.
Of course, we would expect to see some losses, we assume there's going be losses every year it could be higher but I think it's way too early again, given the potential government support other actions to.
So the to to make an estimate there and our Crs book, we do a lot of project finance again those projects are continuing to go on.
We've taken a look at the take or pay contracts. We've taken a look at the production costs and very little of that is in terms of production and exploration, where we are in energy and I'd love to do with pipelines and so on so again, we see these things continuing we've got a large book of renewable energy.
Projects in development, we think these continue for all of reasonably expect.
We do have a small block.
Airline financing.
There the vast majority of the airline that we do business with our government sponsored or government owned.
Monitoring the situation. Obviously, we also have collateral as you know so again I think the under foreseeable even an extended.
And extended the recession, we think that book being good shape, but again given the government support.
And the uncertainty I think it's too early to really take a strong view there, but we think that book as well constructed it's well reinsured. The limits are much much much smaller than they were in the last global financial crisis. So.
Whereas there, but we think we're in good shape.
Great. Thanks. Thanks.
Okay.
Our next question will come from Meyer Shields KBW. Please proceed with your question.
Great. Thanks, Good morning, Albert I was hoping to update us on expectations for premiums and.
Maybe I'll use the loss experience in the motor reinsurance book.
[music].
I'm, sorry could you repeat the question.
Yeah.
Just trying to understand how we should think about a premium volumes and.
Ill say, maybe better than expected near term experience in motor reinsurance because of the seller place orders.
Right. So we don't really do any reinsurance of motor business new assets most of your European book.
Some of that exact next so well some of it as far as this quarter share.
We certainly expect that there would be some volume reduction and that going forward.
On the other hand, we also expect that the negative impact of premium reduction.
I would.
Also be offset by improved experience and theres less instances, that's probably going forward.
It's important we continue to reduce I think you.
I believe that Peter smoke in his remarks about how that went down again at January one so it's not large book for us and we're not exposed to what's happening in the U.S.
Okay and I.
I mean, that's I'm trying to get the timeline of the $50 million a planned expense reductions in response to.
Pressured exposure units.
So I'll handle Albert Meyer, we we came in a kind of a under our expectations in the first quarter by little bit but for this year, we've actually read out our budgets in the expectation that revenue maybe less and just just through what we're seeing right now obviously, our travel and entertainment yeah as we can see it sorry.
In the second quarter is way down and just because of the stay in place orders were going to see a lower expense run rate and as we project out the rest of the year with where were up focusing our energies, we believe that we'll be able to drop.
Kind of about $50 million from what our budgets were for the year.
The one thing I would say is my expectation is as we get back into a normal work environment going at 2021, some of that teeny is going to go back up.
Some of the jobs that we may have put delayed hiring die because it's a little bit difficult to hire some people in places right now given stayed home what we'll wrap that back up but we did a bottoms up we feel really good about at least the short term nature and we will manage it going into 2021 based upon what we see for the rest of this year.
Okay is that 50 million an annualized number that you asked a little expected.
Diminished saving.
It's been spent.
Yeah, it's really annualized for the cost of our entire year. So you'll see some more of that come in that the last three quarters of the year.
Okay, great. Thank you so much.
Our next question will come from Ron Konare of Goldman Sachs. Please proceed with your question.
Good morning, everybody first question.
Mortgage reinsurance book.
Can you maybe offers for more color on how it's structured both with regards to the GFC reinsurance and the PMI reinsurance.
And then maybe also just talk about the stress scenario that you Brian.
What the impact there would be and maybe some of the underlying assumptions behind disrupting area.
So we look at our our mortgage reinsurance book, it's primarily the government sponsored entities.
I think less.
Well, it's somewhere between five and 10% is private but the vast majority of our book is there.
So in terms of that book, what we've done the good news, but that book as you might imagine is a lot of data on it theres lot of rating agency model. So we stressed it using the regime the rating agencies stress models all the weight on the top.
And we feel that under a wide range of scenarios that book still generates profit.
There is always a and extreme.
Scenario.
That is beyond anything that's in the plans right now.
Where it would start to make some losses, but but for a very wide range that that portfolio should be continuing to generate some profits.
I think the second question was with regard to the the scenarios that we used.
Pete you may want to go through that because of the combination of both the impact of the of the closures as well as the economic environments correct. Yeah. So so we did run multiple scenarios with the company that test to test our veracity through some various scenarios, we did a a full body.
It is up economic scenario, where we've taken and stress the books and the asset portfolio to.
Well the global financial crisis, and then doubled the financial the global financial crisis, and and we laid out assumptions with regard to GDP with regard to market indices for both credit markets and the and the equity markets unemployment rates.
Pandemic rates as into the amount of infection rate the increase in mortality rate. The unemployment rates was very full scenarios and ran that through all of our books of business to to get a view as to what we think could impact the company. Both on the topline loss line and on the asset side. So we're doing that to help us plan.
As this current situation evolve, but but the teams have done a good job. So we've got a lot of guidepost to align us to take actions over the rest of the year.
Got it thank you.
And then my second question I realize maybe a bit challenging by but I'm going to give a try anyway.
So the terms of $35 million of.
Have a covered losses in the quarter assumes that the shelf in place really are left at the end of July.
Do you have any sense of what those losses would look like if we stay in place orders word techxtend another month or if we had another round of a shelter in place orders coming later in the year.
You know in in our a scenario planning that we did do what are the key assumptions was the duration of the stay in place and so we have you as to what that could be obviously I think it starts to drive into into account more coverages like like Albert said, but it would not be wouldn't be prudent for us to actually take those.
Or is it and just discuss the right now we're using them for modeling purposes, but we do have ideas of our underlying books. We review the contract languages and all the coverages and lines of business, where we think theres exposure and we have a sense of what that could be but it would be really.
Speculative to provide any numbers.
Under under Peter Me It may be it may make sense to provide a little bit of cover so.
On the one hand.
In a number of our accounts, we've already gone through the limits right. So there are some sub limits.
In many cases, sometimes three months, sometimes dollar amounts and most of those case, who already through those.
So whether this happens again.
Youre extends longer I think that we'd be we'd be okay. There. The other thing is that.
The area, where we have our biggest exposure as we just discussed with you is really in the UK book and there we do have a catastrophe cover a internationally where the attachment points.
Is that $75 million retention for $75 million and there were already more than two thirds into that tower.
Just with these numbers here. So we think that there is.
There's also some additional areas that give us comfort that the.
The potential deterioration here he has some factors that could that could mitigate it.
And just any color you say, you're you're two thirds of the way into the 75 million dollar attachment.
If you're probably in the UK okay.
That was good play Albert I should have mentioned that that our protection in the UK.
Thank you. Our next question will come from at least Greenspan of Wells Fargo. Please proceed with your question.
Moving on my first question.
No interruption died on how can we think about watches.
Stem from reinsurance book, So if you.
EBIT up to your property cat.
Yes, you have any color.
Sure.
The virus exclusions that they might.
Just thoughts around.
In short.
Attaching it's their positive.
On the beach coverage that you actually provide a more ken.
[noise] soon these obviously when you're in the reinsurance business your once that removed.
So I think Thats just nature of the business I think what we did I feel very good than what we did was.
Was quite comprehensive based on weather and so let me just give you a sense of it.
The first thing we did of course, we that the by all of our affected property treaties, whether they were quota share or ex oil property cat.
We also manage book and evaluated that we looked at where there was coverage.
We then evaluated.
Was exposed just give you. An example for example on the property book.
We scaled both the.
The property property cat book into countries, because different countries of different exposures than others.
And into clients and into.
They were lower level policies and higher level policies and so just to give you a sense of.
More than 60% of our policies.
On the property property cat side or exposure, I mean, not policies, but exposure.
We think has not affected at all because of the nature of the customers either because their personal lines businesses are exclusions and so we feel pretty good that we were able to do that.
We look to Canada, we looked at the UK, which our countries where people are concerned and again, we've got very few limits exposed there. So we've done that we then gone to individual accounts.
We called our customers, we got we got feedback from our customers we rent.
What you read and you've talked to brokers, but who may have a book of business not evaluated those modeled though.
And went through it.
And then we so that was the bulk of the analysis and then we kind of sense checked that analysis using some modeling market share you know what if the loss were X. What is the loss were Y and so those are the ways that we that we know we evaluated.
As you know we do provide some pandemic.
In each covers.
But as I'm sure. You also know these are really not meant to be loss protection covers but really more solvency too cumbersome and thats very high.
And there what we did is where current we're continuing to monitor the all mortality.
Although the various countries and we're comparing those to the attachment points.
Of the various treaties. So we think we've gone to a reasonably granular level of detail.
To be able to estimate goes various losses.
Same thing on the travel book, So I think that understanding the limitations.
Being a reinsured versus being an insurer I believe that the announced that we've done was very comprehensive.
Okay. That's helpful.
My next question on the prior year development slowed in the quarter.
And can you just give us a sense.
What year so.
Added any line here is or.
Test results.
That was well during the quarter.
Yeah, we're always we as we look to the reserves this past quarter Elise given a lot of the uncertainties, we're seeing right now, especially when it comes to socialization and the covert 19th situation. We did see some positive development coming out of the property book as well as the motor book.
But we thought a prudent as always since we like to take the bad news early and weight on the good news that we really did put a put some reserves up on the liability side, especially given the current situation. So again, we're being prudent with that but we basically we did see positive development and motor property, but we we put much of that backup on the liability.
Slides in both insurance and reinsurance.
And what was the side the mountain.
I don't have that number protamine, we can get that right back to you.
Okay, and then on in terms of insurance segment by the talked about.
Run off business.
Hi, Nevada, and the negative impact on your own bargain.
You know going down as we kind of getting the first half of this year, yeah, I mean that comment so five and then could you just give us a sense of the magnitude any impact on you saw in first quarter.
Hey later on this year sure so any insurance side a lease the ex cat loss ratio was impacted by just under a point negatively by the runoff book.
I mentioned at year end that runoff book had about $50 million a you PR, it's down to just slightly over 30 and that will just wrote off the rest of the year, probably with a 15 10, five kind of run off the rest of the year.
But that did hurt us did that was a negative to the insurance ex cat loss ratio by about a little little under a point this first quarter.
Okay, and then one last quick one on expenses so Greg.
The 50 million.
The here that you just highlighted on the call and then there is about what was it 30 million lack of that.
Through this year.
Yep, Yeah, and we've got line of sight to that Elise, we've actually accelerated some of that so.
I do think that.
The $100 million will be achieved and again thats off a run rate 2017 base and then.
And that we've just taken our annual budget right now and dial that back due to the uncertainty the current situation.
Okay. Thank you very much.
As a reminder, if you wish to ask a question. Please press Star then one.
Our next question will come from Ron Bobman of capital returns. Please proceed with your question.
Hi, Thanks, a lot and good morning, everybody.
I had a question about reinsurance protections and I'm sort of trying to understand.
What a carrier and shore.
Sort of thinking and might have to do.
As far as buying additional property cat reinsurance covers and sort of the context of if covert losses currently or ultimately could.
Utilize some portion of the carriers.
Cat power is that ensure need to buy sort of effectively a third event cover now.
So it has the protections for the balance of the year.
Could you walk through that the thought.
Touching on thanks.
Yes, I think generally I would say that it will be it'll be a choice that different carriers will make right. So in some cases in the U.S. The tower. They can use up most reinsurance policies not all of them, but most reinsurance policies, how the reinstatement provision there.
So they would buy another tower.
I think different companies will will make their individual choices I don't know that we can generalize.
I don't know that we can generalize right now.
It's everybody, Brazil, we don't know that a lot of people are going to get into their towers is number one but.
I think one of the things that I mentioned earlier is that we don't think that this is but these losses are going to spread through the industry like peanut butter and there's a lot of lot of businesses personal lines, others, U.S. exclusions, whatever where it's unlikely to happen I think if you got certain countries or certain programs, where you've got that exposure I think is where that.
Likely to happen.
When I think it will become the decision of each management team to determine.
What they want to do within reinsurance purchases I'm not sure that we can provide better insight than that.
Thanks.
Okay.
Our next question will come from Doug Eaton E. C. M. Please proceed with your question.
Good morning, with with the shares trading at such a discounted tangible book value or do you see any value and repurchasing shares at these levels for EPS accretion.
Hey, Doug This is Pete vote. We currently do not have a stock repurchase program in place.
And given the current situation as it were kinda like in the middle of a cat that's still evolving I don't think it would be a prudent for US right now to put a repurchase plan in place and to repurchase any shares.
We would really given that.
The movement in evolving situation. So we don't have any place to repurchase shares right now.
Thank you.
As a final reminder, if you wish to ask a question. Please press Star then one.
Our next question will come from Gerald Fine of M.C.N. Group. Please proceed with your question. Yes. Thank you. How confident are you on policies that are written with specific exclusion for viruses or business interruption will hold up go to expect all this to be litigated and the political nature of.
And the target we all could be how confident are you just those specifically will hold up.
That's a fair question and let's agree that for the moment, we're talking the.
But a hypothetical.
My My view here is that if you want to do this.
You would so hurt the insurance industry that it would end up being an industry that requires a bailout I mean, the that's exactly the issue if you.
And I think that and I see that regulators and legislatures when they realize the full negative impact.
What this would mean I think they would step back.
We ended the day I think the very simple question, then what has to ask.
Every every legislature and every regulators.
Okay, you want to take all of our capital to witness what we don't have covers.
So when the Hurricane hits Miami, how do you want the insurance industry to respond nothing that no longer has happened.
And that's the issue the issue is that the downside is making that decision. It's so bad number one and number two I think as has been recognized by Republicans Senators and their letter to the president and so on is basically saying that this goes against the constitution and I'd say, it's very likely to have to go to the Supreme Court, which means that.
The insurance are unlikely to see any benefits from an action up the sort.
For many years and so why would you want to do all that.
When the are much better mechanisms to support the economy.
Are you reserving a money for legal expenses, assuming that we have some politically minded insurance commissioners and attorney generals coming out the industry with it you know target pending on your back are you is that part of your reserving technique.
To build up your reserves for legal expenses.
So the person that I would say is it that would happen we wouldn't be the first company in line to go against Us.
This would be a massively funded movement by the entire insurance and reinsurance industry. So thank god, we wouldn't have to pay for it ourselves.
But to be specific we do have a budget in this $235 million charge for defense cost because we do believe there will be additional litigation to defend our position.
Thank you for your answer.
Our final question will come from build Stephano of Deutsche Bank. Please.
Please proceed with your question.
Yes. Thanks.
Congrats on your underlying improvement I guess I wanted to ask a question around the A.M. best action.
And the extent to which.
Forward projections that you're making may have been included or not included in how they contemplated taking action that they did.
And I guess, how do you know when we're thinking about the sustainability of the underlying improvements and it feels like there is a more tailwinds to come as the negative impact from nearby continues to burn off.
Should we read anything into how they're thinking about the sustainability of the improvement. It is just based on the news we got this morning.
Well.
Let me not let me not mince words here, we're obviously very disappointed by by the and best action.
Again, especially because we believe we have turned the corner and we're starting to Sean tangible results. So I'll start my answer by saying that I cannot speak nobody had access can speak on behalf of A.M. best and they will need to explain does but let me say this.
Everything that I see in terms of and best communication speaks to the prior five year operating return not the forward looking return in fact, the report that I have in front of me actually says that there are improvements coming down the pike.
So I will leave it to am best but my expectation is that this is based on a backwards looking performance not on a forward looking performance, which also made a reference and your question about.
Ongoing bad news because of the remaining business.
Let me give you some comfort there we have taken all of the actions necessary.
To curtail the business that hurt our results in the past and we've discussed this earlier, we're already now at frankly, an ex cat combined ratio that this company has delivered since 2013.
And so we've moved into right direction, we've identified the business that we that we have decided to eliminate.
Peter announced a little while back that that hurt the loss ratio by little under appointment, there's again very little left.
I I do want to provide you the assurance that there is nothing left in our books that we believe needs to be addressed in terms of Theres a book of business here what are we waiting for.
I I there were there were areas in the past, where we have to wait from one January one to the next January want to non renewed.
You know a binder or this or that but when we look at the book of business today and in fact, you can see and the growth of insurance insurance is now on the front foot growth mode in a hard mark.
So we're not looking for we're not looking to cut back there.
We we cut back again on our on our property in our property cat exposures. The January one in December.
Reinsurance because we wanted to make sure that we would reach the volatility the potential volatility of the book down so to the extent that we can.
I I do want to express my confidence that we've taken the actions necessary to get rid of the business that's been hurting us and other than just $30 million a premium Peter spoke about we're feeling very confident and very optimistic about our outlook.
No I got a I appreciate the thoughts and I bet best of luck improving them room.
Thank you were looking forward to doing it.
Thank you. This concludes our question and answer session I would now like to turn the conference back over to Albert benchmark for any closing remarks.
Thank you operator, so I want to thank everybody for your time this morning.
So notwithstanding the challenges of Cobiz 19, you know would be the four point improvement.
In our X cat accident year combined ratio I think speaks to the hard work.
So we've done over the last several years I think we're starting to see.
Consistent meaningful improvement, obviously were very disappointed by the ambitious action, which really speaks on a backward looking basis and not a forward looking basis I think our team's doing an incredible job.
During the shelter in place our services grades.
As we look to the to the future in the months ahead, we're remaining focused on limiting the downside we're going to practice expense discipline, we're going to continue to deliver great service to our customers I believe we're taking all the right actions and I believe that axis is well positioned to manage through the pandemic can come out stronger than the other side. So we do hope.
We look forward to reporting more positive news and upcoming calls. Thank you very much in please stay safe.
The conference is now can operator, thank you.
Thank you very much for attending today's presentation you may now disconnect.
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