Q2 2020 AXIS Capital Holdings Ltd Earnings Call
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Welcome to the second quarter 2020 Axis capital earnings Conference call the webcast.
All participants will be in listen only mode.
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Please note this is being recorded.
I would like to turn the conference call Mr., Bob Wahlman Investor Relations Mr. woman the floors yourself.
Thank you Mike Good morning, ladies and gentlemen, I'm happy to walk me to our conference call to discuss financial results practice capital.
The quarter period ended June Thirtyth 2020 earnings press release financial supplement and 10-Q were issued yesterday evening. After the market closed if you'd like copies. Please visit the investor information section of our web site at Axis capital Dot Com, we set aside our for today's call, which is also available it's an audio webcast.
I'd also be able to the investor information section of our website.
With me today, or Albert Benchimol, President and CEO and people our CFO.
Before I turn the call as Albert I'll remind everyone that statements made today during this call.
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 in the forward looking statement due to a variety of factors, including the risk factors set forth in the company's most recent report on form 10-K.
The other reports the company filed the FCC does include the company's form 10-Q for the quarter ended June Thirtyth 2020, as well as additional risks identified in the cautionary note regarding forward looking statements earnings press release.
We undertake no obligation to update or revise publicly any forward looking statements. In addition, this presentation may contain non-GAAP financial measures. Reconciliations are included in our earnings press release and financial supplement with that I'll turn the call over to Albert.
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Good morning, everyone and thank you for joining our second quarter earnings call.
I'm pleased to report the positive momentum that we've seen an underlying performance over the past few quarters continued into this most recent period.
Well highly encouraged by the sustained progress which follows several years of rigorous efforts to enhance our market positioning reshape our portfolio reduce volatility and increase our operating efficiency with investments in technology and a companywide focus on expense discipline.
As we noted in the press release, we saw a meaningful improvements at our underwriting results in the quarter underwriting income increased year over year, notwithstanding higher cats and lower prior year development.
Our reported current accident year combined ratio, excluding catastrophe little weather related losses of 91.4 isn't nearly five point improvement in core performance compared to the prior year quarter.
This includes a 1.7 point decrease.
Recurrent your ex cat loss ratio.
More than a one point improvement in our acquisition cost.
And a two point reduction NRG and a ratio.
For the six month period, our reported current year ex cat combined ratio of 92.3 reflects core performance that was more than four and a half points better than the prior year.
Well the combined ratios I've noted our GAAP reported figures the year over year improvements in core performance are based on X GAAP figures, which I believe provide an apples to apples reflection of our progress on acquisition expense.
We haven't reported quarterly or half your ex cat accident year combined ratio this low since 2013.
This is tangible evidence of the work that our team has done over the past few years to strengthen our portfolio is bearing fruit.
The improvement in our loss ratio was due to a combination of enhancements to our portfolio change in mix and run off of this Katrina books of business as well as the interest rates that were earning.
And even as we're delivering good growth in attractive lives, we're focused on limiting volatility and controlling expenses.
Well I may have taken longer than we want it.
We're convinced that this new level of profitability is not only sustainable but one upon which we can continue to improve beyond simply the impact of right.
Stepping back and I've said this in past calls we believe that all hardest work is behind us and the access is poised to capitalize on the best market conditions at the reinsurance industry as seen in more than a decade.
We are the most balanced book in the history of our company and given our leadership in our children market.
And our very strong relationships with our producers access is exceedingly well positioned to reap the benefits of the favorable market environment.
We worked very hard to get to this point with firming conditions and pricing momentum across virtually every line of business that we right. We have the wind at our backs.
Before passing the called the Pete I'd like to mentioned a few words on the impact of covert 19 on our company.
You'll recall that access was among the first to providing more transparent and granular estimate of covered losses.
We conducted in depth reviews of our policies and programs at saw no reason to wait ensuring our conclusions with you.
We took a charge of $235 million and the first quarter.
So far we've seen no surprises.
This estimate continues to hold.
Pete will speak more on this during his financial update.
Well there was no impact of covert on second quarter underwriting result, it did affect our investment income due to the one quarter like in reporting performance of some alternative investments.
Nevertheless, our high quality portfolio experienced a meaningful recovery in the quarter contributors to our strong 11% growth and book value.
$55, a nine cents per share.
Finally, I'd like to add the despite the unprecedented upheaval sparked by cold 19, as well as the seidl challenges, including increased racial tensions in the U.S. throughout the world our teams have come together more than ever.
We've been seeing the best of Axis I'm proud of our team and deeply appreciative of their tireless work the way that they're working today to strengthen our business support our clients and partners on distributions.
Promoted collaborative and inclusive culture within axis and help make a positive impact in our local communities.
In summary, this was a solid quarter for axis, well, we continued to see meaningful improvements in our performance.
We feel good about where our businesses today, and even better about where we're headed.
Peter will now walk us through the financial and I'll come back to talk more about pricing and how acuity Pete.
Thank you Albert and good morning, everyone.
As Albert noted this was a quarter, where we continue to see sustained improvement in our financial performance.
During the quarter, we generated net income available to common shareholders of 112 million in an annualized star or we have 10%.
We generated operating income of 72 million in an annualized operating ROE we have 6.3%.
Underwriting income in the quarter of $87 million was 11% over the same period last year with both segments contributing positive results.
In the quarter, we kept our Kobin 19 last estimate steady at $235 million.
As well as the first quarter write down of our Whr pandemic swap of $10 million.
This does it mean wouldn't standing still.
We're constantly evaluating our estimates and the underlying assumptions.
As we continue to monitor developments across the world and gather more data, we're getting more granular with our analysis and we're refining our views.
At this point, while it is early days, we remain comfortable with our provisions.
As a reminder, the koby 19 loss provisions are associated with property I think cancellation h. and pandemic coverages.
And as of June 30, the vast majority of the loss provision is still IB NR and the paid amount is de minimis.
We've also carried out detailed analysis of our exposure in lines of business that may also have been impacted such as professional lines liability and credit lines.
As you know, we're proactive in establishing reserves where warranted.
But based on current facts and circumstances, we have no basis for making additional provisions in these lines at this time.
For example, in our insurance segment claim notifications are running favorable for casualty and professional lines compared to recent years at the same stage of development.
We have prudently not reacted to these favorable indications at this stage.
In addition, as part of our normal process, we establish I'd be in Arpus systemic risks, which give us further corporate that our provisions are reasonable at this time.
We will continue to rigorously and carefully monitor developments and established reserves if needed when it's appropriate to do so.
Lastly, I would remind you that all estimates are subject to a higher than usual level of uncertainty because of the inherent difficulty in making assumptions around Tobin 19, due to lack of comparable historic events, it's ongoing nature and far reaching impacts.
Moving into the details of our group level numbers during the second quarter, we continued to see improvement our companys underwriting results.
Our consolidated combined ratio this quarter of 94.7, a decrease of 1.4 points as compared to the prior year.
Our current accident year combined ratio ex cat and weather decreased by 4.6 points as the repositioning the portfolios in both segments.
And the exit from certain product lines any insurance segment earned through.
The cat weather loss ratio in the quarter was 3.5% largely driven by the U.S. weather related events this quarter.
This compared to 2.3% in the second quarter 2018.
Given the significant increase in weather activity and the civil unrest experienced by the industry this quarter and the minimal increase in our cat and weather loss ratio. It appears the repositioning of our property portfolios is delivering the intended impact.
We reported net favorable prior year reserve development of $3 million in the quarter, mainly related to the reinsurance segment.
Overall, we had positive reserve development in short tail lines, but this was offset as we strengthened insurance liability reserves and to a lesser extent the pro lines reserves.
Strengthening in reserves for the insurance liability is attributable to an uptick in adverse signals mainly focused in our U.S. excess casualty in program books of business.
Our prudent reserving philosophy of reacting to adverse signals immediately while delaying recognition of favorable trends.
The consolidated Gina expense ratio was 12.7%.
A decrease of two points compared to the second quarter 2018.
And total DNA expenses declined by $25 million.
As we discussed in the first quarter given the uncertainty of the year, we got 50 million from our 2020 expense budget.
A significant portion of these savings came through in the second quarter. The savings were driven by lower personnel costs, including deferring non critical hires reduced travel and entertainment costs.
Lower office costs and delaying certain projects.
If I adjust the quarterly DNA and add back what a temporary expense reductions in normalized DNA ratio would've been approximately 14%.
In the quarter, we achieved our previously announced target of 100 million net run rate savings.
Prior to the 2017 run rate.
This was related to our transformation program.
However, we have not stop there and we continue to improve our operating efficiency through leveraging our global platform, while advancing our processes and technology.
Operating efficiency and expense control remain important goals of ours.
We continue to targeted gene a ratio of the mid Thirteens.
For 2021.
Moving on.
Fee income from strategic capital partners was 16 million this quarter compared to 19 million in the prior year quarter.
Well now discuss the segments, let me first start with insurance.
The repositioning of our insurance business is demonstrating real traction with an all in combined ratio of 94.2.
The insurance segment reported an increase in gross premiums written of 69 million or 7%.
This is the third quarter in a row, where we have reported growth in the insurance line as the largest portfolio actions are behind us.
The increase came principally for professional lines property marine liability lines, largely attributable to new business and very favorable rate changes, which Albert will address later.
The increase was partially offset by 3% drag from exited lines of business.
As well as less business opportunity in primary casualty and the credit political risk lines due to the global economic slowdown.
The current accident year loss ratio ex cat and weather decreased by just over three point in the quarter compared to the second quarter 2018.
This was due to the impact of favorable pricing over trends.
And improved loss experience and our property in aviation lines associated with the repositioning of those portfolios.
As well as the exiting from certain books of business.
In addition, we saw reduce loss experience in the credit and political risk loans.
The current accident year combined ratio ex cat and weather decreased by more than seven and a half points.
The lower loss ratio was complemented with an almost four point reduction in DNA ratio due to the expense actions mentioned earlier.
Let's now move onto the reinsurance segment.
Which delivered another strong quarter with an all in combined ratio of 90.2.
The reinsurance segment's gross premium written of 679 for the second quarter was comparable to the same period in the prior year.
However, this year, we're seeing firming conditions across substantially all of our lines of business.
We had decreases in gross premiums written in our catastrophe agriculture in H. lines, as we look to better balance the portfolio.
These decreases were partially offset by increases in motor liability in professional lines, driven by rate increases and new business at favorable market conditions.
This quarter pretax catastrophe and weather related losses net of reinstatement premiums were 20 million primarily attributed to weather related events this quarter.
This compares to $11 million in the same period in 2019.
Net investment income of 45 million for the quarter was 93 million lower than in the second quarter 2018.
This is primarily attributable to negative returns more alternative assets.
Albert mentioned, there was a one quarter reporting lag on this asset class. So the performance is indicative of the first quarter market activity.
Lastly, we add reduced investment income from fixed income instruments as compared to the prior year.
Our current book yield is 2.5%.
Our new money yield is 1.6%.
The duration of our portfolio was approximately 3.4 years.
Interest in income of equity method investments of 7 million represent the company's share in Harrington re is income for the quarter, which was attributable to positive investment returns.
Diluted book value per share increased by $5 in 31 cents.
Or 11% in the quarter to $55 and Knight said.
This was principally driven by net income and net unrealized gains partially offset by common share dividends.
With respect to capital actions.
Following two debt issuances in 2019 that raised 725 million as you we call. We redeemed our series D preferred shares of 225 million at par this past January.
And in the second quarter, we repaid unsecured senior notes of 500 million at maturity in June, which lowered our debt plus preferred to total capital ratio to 28.1%.
Now do we have finished refinancing our debt on a go forward basis, our interest expense will decrease by $5 million on a quarterly basis as compared to what was reported this quarter.
Finally, I will add that we feel good about our current capital position as we entered the year in a strong position with capital in excess of AAA levels and at this moment, we have the ability to grow into the hardening market.
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 we'll then open the call for questions.
As I noted in my upfront comments, we continue to see accelerated improvement and pricing throughout our business.
For our insurance segment, when I went to 11 consecutive quarters of rate increases.
For reinsurance the pricing actions have become more recently, but we're seeing positive momentum picking up now.
So within the insurance segment, we saw average rate increases of almost 15% across the book in the second quarter.
That compares to about 10% in the first quarter this year and 7% in the second quarter of last year through the first six months the average rate increases 12, a little over 12%.
And our U.S. division once again delivered the strongest pricing increases this quarter with average rate change of almost 17%.
In excess casualty, we're seeing hard market conditions highlighted with my average rate increases in excess of 30%.
This property rates were up 19% and primary casualty increased by 11%.
Our U.S. programs business, which focuses on how would you just books of smaller accounts saw increases of more than 6%.
Within our North American professional lines Division pricing also continued to accelerate and rates were up by more than 13% in the quarter.
Our commercial management solutions unit is also in hard market territory with average rate increases of more than 30% in the quarter.
Notably public do you know, where we're essentially an excess writer showed impressive rate change at 60%.
In addition, we saw adult strong double digit increases in our Canadian specialty businesses, Bermuda excess added financial institutions.
So the from the health was up more than 12%.
Even fiber in tech long laggards in pricing are starting to show rate increases.
And our London based international shorts Division rates were up 13% on average during the quarter.
Renewable energy, where a market leader was up more than 20%.
Professional and casualty lines were up about 17%.
Aviation was up 16% and the marine political risks and property books averaged about 10%, but within that several supplies outperformed with marine cargo up more than 25% and global property up 20%.
Overall in the quarter, 97% of our total insurance business renewed flat to up.
More than 60% of premiums renewed experienced rate increases in excess of 10% and within that.
Well, the 35% of the book had rate increases in excess of 20%.
Let's move to reinsurance.
We estimate that our renewed business was priced up about 12% overall in the quarter with the cat business up close to 20% and the non cat business up close to 10%.
We've already covered in our last call. The Japanese April one renewals, where quake was flat, but wind was up more than 50%.
For the June one renewals, we saw the best market conditions at more than 10 years with tightening terms and conditions in addition to higher pricing.
We saw lower layers up about 15% well upper layers increased as much as 60% depending on loss experience.
Our own book was up about 20% on average for the June one renewals.
Nevertheless, we reduced our Florida book as part of our strategy to manage risk optimize the portfolio and better position ourselves for the upcoming January one renewals.
For the July one renewals, we saw positive momentum across almost every line of business that renewed although it did very byline and region.
Overall reinsurance is clearly participating in the rebound sharing in the underlying great increases on subject business and also benefiting from improvements in reinsurance terms and conditions.
In accessories case, we use these recent renewals to continue upgrading the quality of our portfolio and we think that we're well positioned to capitalize on the improving market.
Importantly, we're seeing improvements in wordings in terms and conditions in both insurance and reinsurance.
That will help loss ratios beyond the impact of right.
Looking forward, we believe the favorable conditions that were seeing will very likely sustain well into 2021.
There's growing consensus that it will extend even beyond that.
We see several reasons for this.
First we are dealing with an underlying social inflationary period that is putting pressure on prior year reserves as uncertainty the outlook.
Second interest rates are but as low as they've ever been creating substantial headwinds for investment income.
And third it's our expectation of the effects of cobot 19, and its economic repercussions will be felt over a number of years.
This is not or these are not axess all the issues.
The industry is facing several challenges towards profitability and need sustained strong pricing to deliver an adequate return on capital within the difficult social economic environment expected over the next few years.
For access we continue to be encouraged by the conditions that we see.
We're fortunate to be well positioned and some of the markets that are experiencing the most meaningful improvements.
Moreover, we're seeing it almost across the board increase and the number of opportunities that are being presented to us across our company.
Of course, we're cognizant that are rising tide lifts all boats and we're not satisfied by rate alone.
As I noted earlier, we're committed to sustain our progress and optimizing our portfolio, increasing our operating efficiency and leveraging technology to better serve our clients and partners and distribution.
In short.
The current market environment, we're seeing has a lot of opportunity after the credit of our team. Despite the pandemic, we've seen no drop off in productivity.
Within both segments were everywhere that we choose to be and we believe that we have one of the best position books for today's market and that axis is poised and ready to grow where we want to do so.
We've worked hard to get to this place and our team is ready to capitalize on the opportunities that stand in front of us.
And with that let's please open the line for questions operator.
Hi, Thank you Sir.
We'll now begin the question answer session.
Good question you met press Star then one under touched on solid it's amazing that speakerphone. Please pick up Brad said before passing the keys. If any time a question has been addressed your legs will drive your question. Please press Star then.
Again in a star then one to ask your question at this terrible would just pause momentarily sort of some our roster.
Let me first question, we have come from Brian Meredith.
Yes.
Pure for you first I'm curious can you talk little bit about your all capital position I know you've got your debt capitals down which is which is great.
But just kind of looking forward where are you in the process of reducing your volatility.
You know where are you right now from a capital position, where you feel comfortable that you can kind of really ramped up growth for this hard market.
Hey, Brian This is Pete let me hit that with a couple of things one we do feel good about where our capital position is we have rebuilt it and actually that both both rating agencies and they looked at our ratings actually mentioned that we have a very strong capital position. So we do feel.
Good about the capital position going forward and some of the work that we've been doing so we can actually feel better about going forward is have you had mentioned we brought down our PML is especially at the low end to the curve. So you can see in the supplement you'll see the one in 50.
Total.
Total way al, but also especially the southeast wind or both down from prior year and as we looked at our reinsurance purchasing for property in the second quarter. We did not review renew our cat art Cat bond, which really helped the one into 50, but we actually replaced it with more protection at the lower end to the curve.
I can tell you when I look at the lower end of the curve are eight wells are actually down from 2019 levels by 20% in the one in five one in 10 and one in 20.
And actually in the southeast wind were down by over 30%. So we do feel good that were more protected going into wind season. This year. So were more protected going into wind season, and we had our capital levels back over AAA.
Entering this year, so we feel really good about the capital position right now Brian.
Great. That's terrific and then just quickly you mentioned that some of the.
Business, you exited had a 3% headwind on and the insurance segment premium growth curious was there any impact from the run off lines on the underlying loss ratios and insurance segment.
Yeah, there's there's still was.
I'll point out we've got about still got about $30 million of unearned premium on that book.
Especially this quarter, we had about two points on.
The combined ratio really really centered in the loss ratio Brian.
Really came out of some losses coming out of the whole business that we that we exited and so if I take out the exited business. The ex cat loss ratio for insurance would be just about two points better than the reported 55 six.
All right. This terrific and then last one.
For Albert I'm, just curious Albert.
When you set your cobot 19 loss estimates here.
What are your kind of assumptions with respect to the international VI.
Losses, I know, there's something going on right now with the FDA does that matter in all key all.
Just kind of thoughts around that.
Yes, so let's talk about the FDA and what's happening in the UK as you know there they're reviewing all the wording so just to set the table here.
Our expectation is that the.
Arguments will be finished this week, we probably will get a response sometime in September and then that'll probably go to appeal and no idea when would those appeals will be resolved, but let's talk about what it means for us theres a whole range of outcome and Brian some of them could be very favorable to us in terms of some of the assumptions that we made in our reserves could end up being you know not as necessary.
But certainly they could also look at it more adversely than we looked at it but I think what's really important is to remember that in the UK. We have a cat program that attaches at $75 million and with regard to the 235 that we took in Q1 I think we mention to you somewhere 50 55 million is Alex.
Got it to the UK. So when you think about the net impact to us on the insurance book, maybe in the worst case, there could be 20 25 million, but I think we've got real containment on the UK side Uninsureds, obviously that could also have a little bit of impact on the reinsurance side, but we don't have a large cat book in the UK. So I think the.
CA.
I judgment ultimately.
Would have a limited impact on us if it went against us, but it's still early days.
Great. Thank you.
Next well Meyer Shields KBW.
Thanks, Good morning.
I think there's a question for Pete I was hoping you could run through maybe give us a little more color on the reserve adjustment for the.
Longer tail liability professional lines.
Yes, my or so so in the quarter is mostly on the insurance liability side, we strengthen those reserves by about $17 million and was really focused on I'll call. It some adverse signal, we're seeing coming out of the 17 18 accident years.
Early on in the development of of our reserve process. When we see some negative signals will react quickly to it.
And on the pro line side, we saw some adverse signals both in insurance and reinsurance and again, we strengthen those in the single digits and again that was centered more on that 2018 accident year.
And so all in all that probably added up to about $27 million is strengthening actually close to $30 million is strengthening through those three lines and then we had really favorable development continuing in property in credit and surety that offset that so we ended up with just a small positive development reported in the quarter.
Okay.
An impossible question, but should we assume that that.
Let me tell line strengthening it like a onetime adjustment that's you mean that.
Reality doesn't get worse.
Yeah, I mean, we pegged our reserves to what we think the ultimate is going to be so we are keeping our eyes on those 17 and 18 years again before koby came around we kept talking about social inflation. We think we've caught up with that but we are keeping our eye on that but we think that that is an appropriate reserve level on a go forward basis.
But.
As new developments come, especially if we want to.
Especially if we want to stay in front of things like I said, we do react to adverse before we actually show the positives.
Last thing I'd say, a since 2017.
We have been getting significant rate on our on our liability book on excess casualty in primary casualty. So the when I look at the 18 19 years and 20 year.
There are at a much level better or level of premium that we saw call. It the 15 16 year.
Okay, that's very helpful.
Thanks for question when we look at the southeast due to hurricane PML on a sequential basis, it's up and that the cap on but anything else playing a role there.
Yes. So if you look at it I think it's down year over year. So if you look at July wants to July one is down meaningfully year over year across every every period and with regards to the difference between Q1 in Q2 is as Pete noted earlier the different reinsurance program that we purchased.
And so we emphasized protecting ourselves in the more frequent period, and we decided not to renew our cat bond and since the cat bond was attaching at a high level you can see the its impact.
In the one or 250 going up but that's that's the impact than we think right now we think we've built a better book across the curve.
Okay understood. Thank you very much.
Your next question will come from at least Greenspan Wells Fargo.
Hi, Thank you good morning on my first question.
Exactly.
You I said that there was about two points on the insurance loss ratio.
Run off line the quarter on can you just a mind.
I thought maybe I missed the first half a year or when do you expect.
Oh, okay.
So at least this is Pete you as I mentioned at the beginning of the year, we had right around $50 million a you PR of that those exited books, it's down to about 30 million now.
By the ended the year it'll be de Minimis that will run off pretty much it'll be like low single digits.
But yes, I would say one of the losses, we had in the quarter was on a was out like a trade off a client that was to be ended 10 days and then also they had it had a claim so I do think that we're keeping our eye on this we projected it out as a fairly high loss ratio, but.
But.
It should be done by the end of the year, we'll have single digit you PRT into 2021.
Right and then I guess, a follow up to that you guys are running at about.
Thank you.
Through the first part.
So if we kind of neutralized for that should point I guess.
At around 53, so getting a lot of weight Sean.
The Rite aid and think about improvement then 2021.
No what.
On the assumption.
Hi.
Bob.
Okay.
Yes, so we're starting to lease a two to look at these things going forward.
Basically we've had.
12% average rate increase through the first six months, a little bit more than that.
And if you take just as a.
Just as a place holder an average trend of about five point.
So that would indicate that there would be three four plus points of improvement than the loss ratio.
My expectation is that will probably be cautious in terms of some of these outlooks around the systemic low around loss trend. So I'm not sure that we would see the full benefit of those four points immediately.
But that doesn't mean that they might not develop over time.
So we've got that we've got the the drag that we've got on the discontinued operations in the insurance Division alone, which we also think could be an improvement.
And then theres the ongoing improvements in the book of business as we go forward. So we're feeling very optimistic about the trend of improvement going forward from here.
Okay, Great and then on the hospital.
No.
No.
Thank you feel confident.
Yes, that's a pretty good market.
I just wanted to 21.
So we think about.
Well.
I think holistically is there like.
No.
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No.
No.
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No.
We thought insurance.
It's about.
What what incremental.
Correct.
I would look at it from two perspectives I think you know as Pete mentioned arc, our portfolio is increasingly capital efficient given the way, we're managing the cat book and importantly, one of the things.
That we are very focused on is making sure that our growth as we take advantage of this market is balanced growth, we're not going to be looking too.
To go extreme on on the tail on hand on any one of the areas. So right now everybody in this company is looking forward to meaningful growth.
As we enter into 2021 and into 2021, we don't see us having any capital limitations on the growth that we're saying with regard to the opportunities that we want to take advantage of and then of course, we've also got the benefit of having.
A meaningful third party capital business, which would allow us to make sure that we took advantage of all of the opportunities that are available to access and at that point, we can decide whether we want to monetize that opportunity through the retention of underwriting.
Risk and income or increasing essentially risk free fee business. So in both cases, we think we've got opportunities.
To increase our profitability going forward, but at this point in time.
Given where our people our sizing the opportunities.
We don't see ourselves as being limited.
Okay and then one last one can you got your coal goodbye.
Whatever I believe you had mentioned taking.
Yes, well covered through the middle of July So give me.
You know obviously not.
Back to normal.
Can you just hockey.
So.
Wow.
That's a pop up in the first quarter.
Yeah at least this this is Pete we are not not big in the event cancellation business at all we literally have to two contracts and.
And they're both associated with the Olympics. So we're just looking at that one event.
And we feel good about the reserve the loss provision, we have up but but for us thats. The only that we're really looking at.
Okay. Thank you appreciate the color.
Next we have Josh Shanker Bank of America.
Thank you very much.
Bob.
During the first one you know looking at throughout the renewal season in what you're seeing rates in I'm embarrassed Gerry one thing that we're very understanding of the cast we went through the PML.
Can you sort of explain how deep racing improvements relates to the crime in property cat reinsurance and whether to Q 20 is a period of time to be taking more exposure rather than less exposure and the cap markets.
So two thoughts there.
We think the cap markets are now they were pretty.
Inadequately priced we think right now, they're probably somewhere in the teens.
Which were happy to take and it's important as part of our overall book of business, but.
These are not the the pricing opportunities that we had you'll back in 2002 2003, when it made sense to overweight. It up so that's the way that I would put it in the short term, but I think it's really important that we put this in the context of our own longer term strategy.
And Josh you're very familiar with us.
Our goal has been to move away from what was a very volatile book of business that was built.
In the knots, and what we want to do is build more of a specialty portfolio on both insurance and reinsurance that has strong results that are more stable it less volatile.
And so.
I want to be very clear about this we are not going to look to double and triple down and the cat market because that is not what we're aiming for in this company. We're aiming for this company is to deliver a profitable stable book of specialty risks and so yes, we will certainly grow our cat exposures in this market in a balanced.
The way to take advantage of it.
We have a very clear expectation of our appetite for cat and far portfolio in general.
Okay, and then unrelated question looking at companies that have reported so far most companies have reported have a very low hate to incur ratio during the quarter the flow down and co bid has maybe slowed payment maybe slowed or claims and there's a lot of IP in our are your net.
Loss Reserve was flat from one do you want to any unusual large payments you made for quite a quarter or should we expect that for this coburn pure should see low paid to incurred reissued you're going from there.
Yes, probably a this this is Pete the only thing that I would suggest we had page in the quarter associated with the Japanese cats, so that flowed through this quarter and that would that would be effecting that ratio Josh.
And then you probably exclude those are you also experienced unusually low paid to incurred under the current conditions in the market.
Yeah overall I don't have exact number in front of me, but but we can get back to you on that exact one I'd say, what's been a little bit more interesting is we saw lower frequency coming in and that could be just due to lower losses or could be due to just us not being able to get the.
Just slow down in the reporting of claims and we did not.
Recognize that at all in the quarter.
Okay and Japanese ask your full we paid out on those from an old or no no. We're not fully paid out we just made that some payments were made in the quarter.
Okay. Thank you for all the detail.
Next we have yaroslavsky sort of Goldman Sachs.
So you're lapping unit.
Hello can you hear me.
Yes.
Okay, all right about that.
Yeah.
So I guess my first question actually goes back to be fixed income yield I think the quarter over quarter compression 25 basis points are so it seemed a little greater than I would've expected for for this type of duration.
Any common sense does the moving parts, there and what would have led to that level of compression.
Yeah, It actually compressed about 22 points in the quarter. This is Pete and where we saw that come through is one about 15% of that portfolio is on is associated with floaters. So while we were actually getting some good rate increases in 2018 due to the flows floaters reset higher those floaters are based off why bore and.
And so they reset lower really right in the quarter, so that impacted us and we also the maturity profile. The portfolio. We just had some maturities come up this particular quarter and and so they got reinvested at a lower rate. So I wouldn't say the 22 big drop in the quarter is going to be an indicative run rate going forward. It just happened to be some.
Specifics in this quarter.
Okay. That's helpful.
Then on the B. I debate.
Can you give us any sense of what the limit of that UK reinsurance treaty as of how much protection you have once you get to that some 5 million dollar attachment point.
This is Pete I know we've looked at it it's got a couple layers to it and in the most extreme circumstances, we didn't feel we go through the top of the tower, that's what I can tell your on.
Okay.
Okay, and then maybe one broader conceptual question.
Given the improvement that you've already achieved and the underlying combined ratios.
And the rate environment, we're seeing now.
Is this the point to start prioritizing gross over further improvement or you still.
More focus on the improvement over growth.
Or both that she is at the same gone.
Well this is Pete I'll just start with that then I'll, let ask Alberta pile on but I would you say that you know, especially you know overall, one we've repositioned the portfolios and if I think just about insurance there at 7.2% growth. The exited line was about 3% drag and I guess I would say lower business.
Attunitys in areas affected by the economic slowdowns that being primary casualty credit political risk.
We really saw about a 3% drag from that so in the lines, we really want to grow in we were growing into the into the into the double digits and so we do feel that we're poised for growth there and on the reinsurance side you know the second half of the years more of a quiet time, but the team is geared up and is looking at growth as we go into.
2021 to take advantage of the hardening markets.
Albert we'd like to add on to that.
Look I think other reinsurance side in particular, you will have noticed that those reductions actually came mostly in the first quarter. As we were non renewing certain books that we felt would not be part of our of our book going forward. So we believe that we've made all of the big moves or whether it's on the insurance are we.
Insurance side.
We're certainly looking to continue improving the book, but we're also as we mentioned during our prepared remarks.
We are incredibly well positioned in the markets that are seeing some of the best improvements we've got a great relationships with our clients and our brokers and we are looking to take advantage of the growth opportunity.
Thank you.
Next we have Douglas either you see.
Good morning, and congratulations on the solid quarter.
No more comfort.
With a bit more comfort this quarter it sounds like regarding the company's coverage exposure to code bid.
And with tangible book value of more than it appears to be about $51 a share would it be accretive to EPS.
That is investing some of the new money at the low 1.6 deal, but you mentioned to allocate a portion of this to returning additional capital to shareholders maybe by repurchasing some of the shares that are trading at currently about 80% of tangible book.
[noise]. So thank you you are asking two very good questions. The first I'll answer the second one which mean, which is that it makes no sense to us given where we are with our profitability book value and opportunities that were trading there. So.
Just that just does not make any sense to me, but the other issue.
Douglas would be that if we were not good looking to grow.
ER, our underwriting book at acceptable at an attractive returns you would be absolutely right. If the only used for that capital west to invested 1.6, the right call would be to buyback to buy back stock, but we see the use of the capital not just investing 1.6, but to right.
Underwriting business, which is probably the best we've seen in a decade.
Sure Yeah, maybe I missed I'm, sorry, I missed maybe the yes overseas I missed the first part of the answer about.
Did you I understand I heard you mentioned the it makes sense you know to keep writing business at these hard right at the hard market rate levels and get more of a return there.
But what did you say that report with the stock trading solo to tangible did you say it does not make sense to repurchase some other sure.
No what I said was I agreed with you that the stock price was very attractive, especially given the opportunities ahead of us.
Okay and as it relates to repurchasing shares.
Right now right now we believe that we can create more value by growing our franchise and taking advantage of the growth opportunities that we have in the insurance and reinsurance markets in which we participate.
Okay, that's fair.
As a fairly large shareholder I think I think maybe it doesn't have to be either or I think maybe a combination of both could make sense than it used to stock is so attractive trading at such a discount compared to some of our peers.
You know it and that our low debt position I.
I think now the time could make sense. It just seems ridiculously low so.
Yeah, I mean, your guys corner, we're on the same team, but I think it doesn't necessarily mean, either or I think maybe it could be a hybrid of both with the 20% discount to book.
I agree with you that the price of the stock does not make sense and I'd be happy to talk to any investor who wants to analyze our book our reserves and our opportunities. This price does not make any sense to us either.
Yeah.
Thank you very much keep up the good work.
Thank you.
Next we have Adams star.
Gulfside asset management.
Right. Thank for taking my question just approaching the volume.
Growth.
From a different angle, if we look how much of your business is shrinking and how much you know is growing you've certainly mentioned the price activity in the appeal.
Certain lines have today, where do the lines crossover and where do you start to see the growing lines or more than offset.
Business, you've non renewed or discontinued it is there way of looking at it.
From that standpoint.
Adam I'm, sorry, I'm not quite sure I understand the question because if you look at our insurance book.
Growing very nicely no but.
So I'm not sure I understand what you made by the going point.
Our disc ops or or or or canceled lines.
Probably took a three point negative impact on gross written premiums this quarter, but the rest of the lines went up 10 point. So net net it was a positive seven so I believe that weve crossed the line over there so I'm not sure I understand your question well when we look at the reinsurance business.
Neutral and that brings down the overall company growth rate below the growth of.
Price that you're getting so you're actually shrinking exposures, which isn't necessarily a bad thing, but all your prices growth you're not.
And that business is so attractive today.
One would assume that there's.
And incentive.
Hello.
Hello.
And then I'm certain that line is connected but it seems as if there is a disconnection. So we'll go ahead proceed.
Your next question, Josh Shanker, Let me let me let me at least maybe at least the trust question as I think I understood. It again.
If we look at the the reinsurance book.
Was flat.
And we explained that one of the areas for that was that we curtailed our cat book and I believe that to the financial supplement provides the the reduction in that book.
I would say two things.
I would say that up on the one hand.
We have been cautious about our cat book and as I mentioned, we are going to look to grow our overall cat position, but within a balanced portfolio that would be the first comment that I would make the second comment that I would make is that there are still a number of market.
And the world that are not moving sufficiently on the reinsurance side, where the opportunities are in the single digits and we do not believe the that's.
The best use of our capital. So if if we see those opportunities we will certainly want to take advantage of it.
But we're very focused on making sure that the growth comes in from adequately and attractively priced business.
Operator, I'm happy to go to the next question.
Yes, Sir it'll be a follow ups exhausted anchor bank of America.
Yes, if you prevent them your second when it's not good question, but a common Albert you said you'd be happier to talk to any investor about the status of your reserve.
I can tell you that Mount does a great job, explaining but I just want to make suggestions you couldn't really [laughter] from changing your disclosure on the reserves to make them more granular.
Basic analysis doesn't to jump to what you're talking about.
Thanks for that and you know what will sit down with you and we'll take a look at what it is that you're looking for and we'll see if we can be helpful.
Thank you.
And gentlemen, it looks like we have missed the star back in Q.
I'm, sorry, we got cut off and if you were answering me I Didnt Eric.
I hope I know wasting everyone else is time, but when do you think you'll start to see unit growth there as well as price growth across the board both primary and reinsurance.
That's a fair question and I would say that we would be looking that are on the insurance side very likely as we enter the rest of this year and I would say that on insurance and reinsurance I would expect both of those to happen next year in 2021 and of course depend on the market opportunities.
That would be our that would be Arkansas our outlook.
Right, but you'll be pretty much done with the non renewal process and the sorting out the existing exposures.
[noise] generally, yes, I want to be comprehensive and my response to you. The are a number of treaties, where we are expecting to see increases that would get us to adequate levels coming out of the January one renewals. If they don't then we will of course have to take corrective action.
But our expectation is that the these trends continue if the markets start to incorporate a at.
Reasonable double digit are always then we wouldn't be very happy to resumed growth.
But it will be obviously treaty and risk dependent.
Okay, well. Thank you very much I appreciate your answers.
Thank you.
Oh, sorry, no further questions at this time, we will conclude our question answer session.
How about like the car rental conference call back over to Mr. Albert Benchimol for closing remarks, Sir.
Thank you very much operator I. Thank you to all the view for Ah for joining US. This morning, and just to conclude obviously, we feel really good about our second quarter results and as I hope, we communicated even better about our future and our outlook. We've got a very well positioned book and market conditions are working in our favor and we're growing so.
Inefficiently with our strategic partners.
And again just to my team. Despite the pandemic. The teams continue to rise to the challenge has done a great job and we're providing exceptional service to our clients and partners and distribution, while living our values at axis I couldn't be more proud of our team. So thank you all once again and we look forward to a continuing to update you on.
Our progress on individual calls and in our future earnings releases. Thank you and operator that ends our call.
Thank you Sir we also thank you answer the rest of management team for your time again. The conference calls now concluded that the Sunday may disconnect your lines take care and I've been great.
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