Q2 2020 Renaissancere Holdings Ltd Earnings Call
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<unk>, President Finance and Investor Relations. Thank you. Please go ahead Sir.
Good morning, Thank you for joining our second quarter financial results Conference call yesterday after market close we issued our quarterly release, if you didn't receive a copy. Please call me up 44123 943 zero.
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Yeah, we begin I'm obliged to caution that today's discussion may contain forward looking statements and actual results may differ materially from those discussed additional information regarding the factor shaping these outcomes can be found him Renaissance Reis FCC filings to which we direct you.
With us to discuss these results for Kevin who don't know President and Chief Executive Officer, and bought Utah Executive Vice President and Chief Financial Officer, I'd now like to turn the call over to Kevin Kevin.
Thanks Kate.
Good morning, Thank you for joining todays call.
I'm glad to report that we had strong performance both financially and operationally in the second quarter.
For me three accomplishments in particular stand out.
First we raised over $1 billion of new common equity building at fortress balance sheet in anticipation of significant future opportunities.
Second our three category approach to manage their cobot 19 exposure proved sound with reported claims developing and lines with expectations.
Finally.
We executed disciplined and focused renewals across property and casualty working constructively with their customers and brokers to achieve rate adequacy.
And improved terms and conditions.
I will address each of these accomplishments in greater detail.
Just got the quarter more generally as usual Bob will also update you on our financial performance for the quarter.
Beginning with our capital raise.
Out or 27 year history, we have placed at high bar to raising common equity.
Post IPO, we have only your should common shares on one other occasionally not concurrent with an acquisition.
To raising equity I believe we need to answer at least three questions why now why equity and why a billion.
First why now.
We were confident in our ability to execute into an improved market I believe the opportunity will persist for several years.
Prior to the emergence of cobot 19.
To answer any markets were already experiencing constrained supply and elevated demand, resulting an upward pressure on rates.
Numerous factors led to this supply demand imbalance.
Property markets experienced three consecutive years of elevated catastrophe activity, resulting in large losses and substantial trap diet less capital.
Capital casualty markets, where beset by significant loss inflation.
Caused by historically large jury verdicts and increasing frequency or severity.
This preexisting rate trend was accelerated by coping 19, and the deep economic recession that follows gold at 19 will be among the largest insured losses in history.
The loss will develop slowly and we'll add uncertainty, which drugs drives demand for reinsurance as buyers look to reduce volatility.
At the same time the increase in demand has been mirrored by a reduction in supply caused by increased underwriting discipline of dislocated retro markets.
This confluence of Black factors has resulted in material rate increases that will impact almost all lines for an extended period in which we expect will create opportunities for us over the next several years.
For all the reasons we.
We concluded that this would be ideal time to raise new equity.
Second why did we choose equity.
Our strategy is to use our integrated system to match desirable risk with efficient capital.
Out or history, we have been innovators in preparation for preferentially accessing the most efficient forms of capital depending on market conditions flexing between common preferred cat bonds Retrocyte cars and dedicated third party capital as well as senior debt.
Credit revolvers analyses each form of capital was selected to maximize insufficiency relative to the risk it is deployed against.
Given our current conditions common equity was the best option. It is permanent it is flexible capital fully available for underwriting. So we can deploy in order to maximize long term shareholder value.
And finally, why a billion.
On a previous earnings call. We told you we already have excess capital.
But we chose this amount as we believe it gives us the increased scale necessary to maximize the market opportunity. We are expecting we ran multiple pro formas to determine the size of this opportunity and feel confident that we can deploy the capital we raised while maintaining a prudent buffer.
We envision two main opportunities to deploy the capital we raised opportunity one is growing into an improving market and opportunity to is retaining more risk.
Our first and best opportunities to grow into an improving market.
We have a long term demonstrated track record of profitable growth and believe that current conditions afford us considerable options to grow our business by deploying more equity.
With a fortress balance sheet, we can provider customers with certainty of execution. Many insurers are concerned about their ability to purchase sufficient reinsurance and retro next year. This really results in a reluctance to take new risk or renew existing business even at attractive rates.
Approximately half of our business renews at January 1st and we already having productive conversations with our customers out of this important renewal.
Providing certainty of execution makes us a first call market for both new and large opportunities and gives us preferential access to private deals.
Our second deployment opportunities to much retain more risk.
A key component of our gross to nets strategy is the flexibility to grow in shrink the amount of risk.
We share with others in order to construct the most efficient underwriting portfolio.
As market conditions have evolved our customers are increasingly seeking the stable flexible long term capacity that a rated balance sheet can provide.
With additional common equity on our balance sheet, we were able to offer more rated capacity would soon enhances the flexibility of solutions wearable to provide to our customers.
That was retro rates rise and the island's market faces challenges, we will share less risk and sell more retro expose more of our capital and should be able to do so in a matter that increasingly contributes to our bottom line.
Shifting to covert 19.
Last quarter I explained our three category approach to managing our code at 19 exposures to date reported losses have developed largely.
As expected within this framework.
If you recall that CAGR categorized our potential Kobe 19 exposure, that's falling into one of three distinct categories category. One includes event like losses closely linked to the virus. So.
So just event contingency event based casualty class and certain types of accident and health.
We booked.
Well limit losses for canceled events through the end of the year and excluded called at 19 from future renewals.
In the second quarter, we began to receive claim notifications against these reserves as events have been canceled or postponed which had been inline with expectations.
To be clear however, we have not canceled events in 2021.
Category to cover is well understood economic risks. These include losses caused by recession and our risks we are paid to take.
Last quarter, we increased certain loss ratios and our casualty and specialty book to reflect the elevated risk related to covert 19.
We continue to monitor a credit portfolio, including mortgage for covert 19 losses, while the likelihood of loss has risen the current situation is fundamentally different than the great financial crisis.
Loans are up higher quality regulations are tighter in the housing market is under bill.
In addition, the U.S. government has extended the largest and most comprehensive fairborn forbearance measures in history.
For these reasons, we believe that our mortgage book is adequately reserved.
And category three is the known unknowns primarily business interruption.
As has been widely reported coverage a pandemic business interruption risk under <unk> property policies has been controversial, except where communicable disease coverage extensions have been provided policy holders generally have not paid for the benefit of protection and it follows that pandemic losses should not be covered.
Our seasons continue to advisors that they have minimal exposure to business interruption losses, and intend to fight any and all attempts by the plaintiff bar to impose liability.
We continue to stay closely connected with our savings on these exposures in our monitoring court actions in Europe and the U.S.
Finally, before I turn it over to Bob There's one more item I'd like to address as we announced several weeks ago. It did your dot has departed and I have assumed interim responsibility for ventures business.
Just excited to have the opportunity work with our close to work closely with our talented ventures team at a time, we are seeing many opportunities to profitably deploy partner capital.
We thank attention first 12 years of service and wish him continued success.
Our ventures unit.
It's one of the oldest and most respected Ireland's managers in the business. It has grown to play a critical role in our gross to net strategy and integrated system, which you will continue to do so going forward.
Despite third party capital markets, becoming increasingly dislocated, we successfully raised over $250 million of capital, including our aligned participation for Upsilon, Mcgeachy and Vermeer balance sheets and supported the midyear renewals our ability to do so as a result of superior underwriting.
Excellent enterprise risk management, and investor confidence in our aligned approach we greatly valued the trust that our partner capital is placed in us to deliver high quality portfolios of risk and I'm confident that we can continue to earn that trust in the future.
With that I'll provide an update on the renewals for segments at the end of the call, but first let me turn it over Bob to talk about our financial performance.
Thanks, Kevin and good morning, everyone. We had a solid core strong financial results and several strategic accomplishments.
Again, my prepared comments with an update on our operational response to cover 19, and then we'll provide an overview of the capital raise and its impact on our financials.
I will then discuss our financial results starting with our consolidated returns and then providing more detail on our three main drivers and profit underwriting income fee income and investment income.
Beginning with an update on our operational response to covert 19 after more than three months from working from home, we began to transition back to our offices in Bermuda and Zurich.
Opened these two offices on an optional and limited basis in June and then transition back has been smooth most of our employees. However continue to work remotely and we're all operating well in this mix model importantly throughout the second quarter, we continue to invest in the business through active recruiting we hired.
Onboarded several new employees remotely to support the needs of our expanding business.
Now moving to the capital raise.
Kevin discussed we raised $1.1 billion in common equity through a public offering and a concurrent private placement with state farm of 6.8 million common shares at a price of $166 per share.
We anticipate that our largest opportunities to deploy this capital will be path and subsequent to the January one renewal any interim this capital we'll have some pressure on earnings per share this quarter that impact was minimal.
And finally, you will note that during the quarter, our book value per share increased $17 or 15% as a result of our capital raise significant mark to market gains on our investment portfolio and strong operating income.
Now moving to our consolidated results, we reported annualized return on average common equity of 38.5% driven by Mark to market gains in our investment portfolio.
Annualized operating return on average common equity was 12.7% influenced primarily by favorable underwriting results and fee income.
Reported net income for the quarter of $576 million or $12.63 per diluted common share.
Our operating income was $190 million or $4.06 per diluted common share. This excludes net realized and unrealized gains on investments Tamar transition related expenses and net foreign exchange losses.
Gross premiums written for the quarter were $1.7 billion up $225 million or 15% from the comparable quarter last year, 90% of this growth came from our property segment and 10% came from casualty.
As a reminder, we acquired Tokyo Millennium Murray on March 22nd 2019. So this is the first full quarter since the acquisition where results are comparable year over year.
As we indicated before we did not renew a significant portion of the TMR portfolio. So our topline growth of 15% during the quarter was achieved despite downwards pressure.
You also see the impact of the TMR acquisition and the ratio of our ceded to gross premiums.
Legacy business that we acquired from TMR was covered by the AIDC, so not subject to our normalcy in program, while the ratio of our seed into gross premium stayed flat year over year at 31%. This ratio has increased in the casualty segment from 25% to 28% as renewed business is incorporated into.
Our ceded program. This was offset by a decline in property ceded from 35% to 32%, reflecting our decision to see less business this quarter.
Now I'll dive deeper into our financial results and to begin with we've reorganized our financial supplement to better align it with our three primary drivers and profit underwriting income fee income and investment income.
We have enhanced disclosure around non controlling interests and retained investments well also we're moving duplicative information.
I'll begin by discussing underwriting income, where we reported income of $217 million for the quarter for a combined ratio of 78.5%.
Both segments performed well in the quarter when park property contributing underwriting income of $201 million and casualty contributing $16 billion. It income.
Premiums earned were approximately $1 billion up $99 million or 11%.
Our direct expenses, which are the some of our operational and corporate expenses totaled $61 million for the quarter, which is a decrease of $23 million from the second quarter of 2019.
The ratio of direct expense to net premiums earned was 6% decrease of more than three percentage points from the comparable period last year, driven by strong operating leverage as well as lower transition and operating expenses.
Transition related expenses associated with the acquisition is TMR have declined by $12 million from $14 million in the second quarter of 2000 $19 billion to $2 billion and 2020.
We anticipate these expenses will continue to wind down over the near term.
Additionally, operating expenses were down two percentage points, partially driven by about $5 million in savings from reduced travel marketing and office operational expenses related to covert 19.
Now moving to the property segment, where gross written premiums were up by $203 million or 24% from the comparable quarter driven by rate increases broken lines in the four one renewals in Japan midyear renewals and expansion of our Lloyd's delegated authority insurance book.
We reported a current accident year loss ratios, 35% and prior favorable development of 1% in the property segment.
We did have $8 million, an adverse development in the other property book, which was driven predominantly by a variety of small events and the Attritional book This was more than offset by $15 million, a favorable development and the property cat from reserve releases across the last three accident years.
Underwriting expenses were down four percentage points, reflecting improved operating leverage and a lower acquisition expense ratio in both property cat and other property.
Overall, we reported a combined ratio, 59% and the property book.
Property Cat and other property were favorable profitable reporting combined ratios and 33% and 86% respectively.
Moving onto our casualty results, where we grew gross premiums by $22 million for 3% primarily related to increases in underlying rate and growth in new and existing deals.
Well reported growth was $22 million, excluding the impact of TMR Nonrenewals, we estimate that organic growth in our casualty segment resulted in more than $100 million of premium increases in the second quarter.
The current accident year loss ratio was 68%, which is inline with our expectations and finally, we reported a combined ratio of 97% with favorable prior development of 2%.
Now I'll shift to our second driver of profit fee income.
Total fee income for the second quarter was $46 million made up of $27 million in management fees and $18 million in performance fees.
Year to date these are up 32% compared to the first half of 2019 as our partner capital business continues to grow underperform.
As I mentioned at the beginning at my prepared comments, we've made several changes and improvements to the financial supplement with page 12, providing greater insight into how the non controlling interest from our joint ventures business impact our financials.
We have added a new table to this page that shows the amount of partner capital that we manage on behalf of Davinci, the DG and Vermeer. This capital reflect the is reflected as non controlling interest on our balance sheet and for the second quarter totaled $3.4 billion up from $2.7 billion and they can peril.
Well quarter last year.
As a reminder, this non controlling interest does not include partner capital related to Upsilon top layer four langhorne.
Deventci, the DG and Vermeer reported solid results in the second quarter bolstered by low catastrophes and mark to market gains the non controlling interest charge attributable to these vehicles was $119 million, which reduced our earnings accordingly.
Compared to the second quarter 2019, the non controlling interest charges increased by $47 million. This was driven by strong underwriting performance growth than partner capital and mark to market gains.
Regarding upsilon, which is not highlighted in the financial supplement total manage capital at the end of the second quarter was $2.1 billion 1.8 billion of which belongs to our partners.
All premiums associated with Upsilon flow through our financial statements as gross written premiums. However, we treat our partners portion upsilon as ceded premium.
Therefore, only our 14% share is included in net written premiums.
Seasonally earned from Upsilon served to offset operating and acquisition expenses.
And now closing with a third driver of profit investment income.
Financial markets snap back in the second quarter in contrast to the extreme volatility we saw in the first quarter our.
Portfolio also recovered mark to market losses from the first quarter of 2020.
Sporting total investment results for the second quarter of $538 million with realized and unrealized gains and $448 million predominantly fixed maturity and equity investments.
During the quarter, we increase both the allocation to and duration of investment grade corporate credit both of which benefited our investment results as rates decreased and spreads tightened.
Our fixed maturity and short term investment income for the quarter was $76 million and overall net investment income for the quarter was $89 billion of the $89 million and net investment income, we retain $67 million with the remainder being shared with partner capital.
Our manage investment portfolio reported yield to maturity of 1.1% and duration of 2.9 years on assets and $18.1 billion well our retained investment portfolio reported yield to maturity of 1.4% and duration of 3.7 years on assets at 12.7 billion.
In dollars.
We're comfortable with our asset allocation and duration and we'll continue to monitor economic development and the impact on our investment portfolio.
And with that I'll turn it back over to Kevin.
Thanks, Bob.
I'll start with comments on our property segment, then moved onto casualty.
Across the board however, the common denominator for the quarter from an underwriting perspective was that we achieved higher rates and better terms and conditions in both our segments and almost all lines of business.
Starting with property cat.
We had a disciplined renewal in Florida at midyear executing a proactive plan to prudently manage our net risk and renew on our preferred core accounts, our strategy going into the renewal was to push rate as well as terms and conditions.
Rates were up 30% to 40% on average we were the first call for a number of purchases and were able to obtain private market rate well in excess of firm order terms on a preponderance of our deals.
We consolidated our participation to a smaller number of more meaningful relationships in Florida reduced reducing the number of clients we support by about a third.
Our Florida book, we reduced our limit while holding premium is flat and increasing expected profit.
Overall, we reduced our southeast PML, both as a percentage of equity and on an absolute basis.
There were several reasons, we reduced in Florida at the June one renewal.
Active claims handling has been a challenge for some Florida companies, especially those relying on independent claims adjusters.
We believe that claims adjusting and subsequent repair it will be made more difficult and therefore costly by the impact of cobot 19, and the restrictions it places on movement.
CAD models do not reflect this shift.
In addition, the environment of pervasive claims broad remains unchanged.
Consequently, we chose to maintain relationships with our best partners in Florida.
Those who we believe will most effectively handle post storm claims adjusting.
Ultimately it was our willingness to meaningfully cutback on Florida exposure that allowed us to aggressively and successfully push for higher rates.
Outside of Florida rates across our property segment learning increasing prior to cobot 19.
The crisis has accelerated these increases.
For peak zone exposure, we saw rate increases of 10% to 20%.
For non peak exposure rates were up five to 10, even with increased rates capacity with tight and we fully expect this momentum to carry through the January one renewal.
With the new capital that we have raised we earn an excellent position to grow into a dislocated markets.
The widespread positive reaction to our capital raise and in Strewing strong recognition of our fortress balance sheet have further enhanced our reputation as a first call market.
Which can bring certainty to the renewals of even the largest and most complicated reinsurance programs.
In fact during the quarter, we're able to provide bespoke solutions to a number of very large cedents seeking to reduce their volatility by utilizing our full suite of cat focused balance sheets.
Renaissance reinsurance limited Davinci Upsilon Vermeer top layer and syndicate 14 58.
As I discussed last quarter, we've been monitoring the performance of our other property book closely and have been increasing on cat exposed risk, where we believe we are being paid appropriately.
We continue to optimize our other property portfolio with the renewal focus for this quarter being on proportional and per risk contracts, specifically with global clients.
The second quarter, we chose not to renew several large deals that did not meet our return hurdles you know risk book, we increased on good programs, we got back where rate was inadequate.
We continue to see ample opportunity in the U.S. primary CNS insurance market, where risk adjusted rates are up 20% to 30% is capacity tightens terms and conditions also improved with ceding commissions down materially, especially on the most challenged programs.
Shifting now to ceded retro.
June one is the second largest renewal date.
Retrocessional protection that we purchase.
As I've already mentioned retro markets remain dislocated, we went to market early engaged fully with brokers and add a successful renewal. Despite these challenging market conditions.
Prices were.
Well up at midyear as expected, but we were in a strong position due to the $400 million Mona Lisa Cat bond issued in January.
Average the price we pay for retro increased about 20% over 2009 teams midyear program.
And as expected we purchased less limit then last year and at higher attachment points that said, we were happy with our portfolio and believe that we're going to strong competitive position.
Moving now to casualty the second quarter is a significant renewal period for our casualty business and we were able to execute our renewals in a precise and coordinated way.
Like property rates were increasing across many casualty lines prior to covert 19, driven in part by loss cost inflation trends.
Increased uncertainty from covert 19 is accelerating these preexisting rate increases and rate continues to surpass trend in most lines, including general liability umbrella Dino professional liability and cyber.
The market has not experienced bankers corrections of this magnitude and almost 20 years with rate increase in the double digit territory for many classes and well above what was anticipated at the beginning of the here.
In addition, ceding commissions ceding commissions are reducing on many programs amplifying the impact of rate increases.
Over the year, we're focused on building strong positions on high quality casualty programs.
We believe this puts us in an excellent positioned to benefit from underlying rate increases as the market improves.
As well as to grow on the best programs as others cutback.
With respect to covert 19, we clearly articulated our risk appetite and our approach to exclusions, we were able to attain cobot 19 exclusion.
Many deals and we're only comfortable renewing business without wonder when.
The underlying policy contained to covert 19 exclusion the product. It was intended to cover losses from economic recession, and it was appropriately priced given the elevated uncertainty for where exposure was minimal.
In several instances, where we were not able to exclude covert 19, we chose to walk away from business.
Overall, however, we renewed our casualty portfolio largely intact and with an improved margin.
There's been some speculation in the market that cobot 19 will suppressed loss cost inflation and twentytwenty.
Well this is possible we believe that the underlying dynamics that led to this problem continue to exist and to the extent.
It is currently muted loss inflation will resurface as the pandemics or subside.
In closing, we overcame a number of challenges to outperform both financially and operationally in the second quarter.
We exercise disciplined at the June one property renewal and continue to build a market leading casualty book.
Over 19 risk remains manageable and we experienced strong gains in our investment portfolio.
Finally, we began the process reopening our office, which will begin to execute slowly, but deliberately and with that I'll turn it over for questions. Thank you.
Thank you as a reminder to ask a question.
Star one I knew telephone.
Your question perhaps.
Please limit to one question and one follow up please standby will be compile acumen a roster.
And your first question comes from the line other we screen stands from Wells Fargo. Your line is open.
Thanks. Good morning, My first question I guess kind of goes that come into some of your introductory remarks on you pointed to the seeing an improving market that played.
A couple of years and what I believe you said.
Thank you hi that together with a timeframe.
This is over 1 billion of equity capital that we rang over what time per year.
Do you think that you can put that to what would that be plenty plenty plenty plenty ones are you thinking on 2021 and beyond.
Thanks, That's a great question we.
Well look to deploy it in 2021, we might find some opportunities that come up but you know as you know most of the business in reinsurance is placed in the first half of the year.
Our capital raise was really targeting and deploying it 2021, obviously January being a very important date for that as I mentioned.
We have kind of two levers we're going to pull one is we're going to restructure our portfolios and the others, we're gonna grow into the opportunity.
The restructuring is something that.
It was 100% in our control so as we think about what the book looks like we can absolutely deployed a based on.
The target pro forma we have in 2021, and we feel confident that where the markets are in our observations of rate that we're seeing that we can deploy this in 2021 from from from.
Organic perspective based on our performance as well.
Okay, and then my follow up there.
Obviously in the middle of wind season, right now right on and seems like it could be an active glenn but obviously the flip side is it could be an inactive storm season. So it if there's not a high level of hurricane losses.
I don't view one one right now do you think that there is enough momentum you can you just give us your initial thoughts on pricing there to put the capital that you. If there is not an active drilling.
Yes so.
I think I think there's enough uncertainty in the market and I feel confident about where rates are headed that even if there is relatively light number of land falling hurricanes or no land falling hurricanes that we're still going to have strong momentum moving into 2021, I think there could be substantial further dislocation at Theres addition.
A large losses from hurricanes in 2020.
Okay. Thank you I appreciate the color.
Yeah. Thanks.
Our next question comes from the line of Yaron Kinar from Goldman Sachs. Your line of Olson.
Hi, Good morning, everybody I guess following up on at least one last question.
I think we're we're also starting to see some capital raises and human from I think incumbents that are looking to get into yes markets.
How how much does that impact the longer term opportunity.
Hey, Thanks again in 2005, we kind of saw I think the.
The rates capital slow down the that the rate story is there a chance if that happens this time tail.
So obviously, we're watching closely what's going on with both.
The capital raises into existing companies a new formations.
That doesn't affect anything that we're trying to do other than it may change exactly as you're saying the environment in which we're conducting our we were executing a strategy the way we looked at it as we build.
Our strategy, we build our performance and we're engaged with our customers.
We're not competing with that capital necessarily that capital is not informing our strategy. So as we look at what we're trying to do.
I remain confident that regardless of the capital that's being raised by both existing companies and by new formations that shouldn't dislocate, our plans for growth.
Okay longer term to I. I can see how they wouldn't be ready necessarily to compete in the marketing one line, but maybe beyond that you could see a little more of a competitive environment.
No I think that's a good point you know our goal is to book deploy the capital we raised and 2021.
The benefit of incumbency in this business is quite high.
So as we see more demand for reinsurance, we'll look to meet it with this capital and also as others look to recalibrate their books against the risk they want to take we'll look to grow into that so as this other capital comes on line I think we're just in a stronger position and it'll be up to us to execute our strategy to make sure we're not dislocated by it.
Got it.
My second question and Bob I apologize, if I Miss you and your comments, but.
What was the source for the large realized gain this quarter I just wouldn't have expected. This large of a number considering the relatively short duration of the portfolio.
There are some two sources and you'll see in the supplemental probably three quarters of the came from our fixed income and that was a result generally of our positioning we started late in the first quarter repositioning into some investment grade credit and we saw some opportunities in the spread we continue that in April and that gave us some benefit on that aspect.
Now that coupled with the rebounds and fixed income came back actually stronger than it did when he gave back in the first quarter equities made a significant rebound as we saw significant resurgence in that over 100 million. So that's the other quarter of it.
That's how we get there.
Got it thank you.
Thank you.
And our next question comes from the line of Meyer Shields from KBW. Your line is also.
Yes. Thanks.
Okay clarify one point and that is you've just got to think being optimistic about the.
About the opportunities that will last on the multiple year basis am I wrong in thinking that the dislocation in the IMF market.
Subject to these hurricanes, but that dislocation shouldn't take more than 12 month to date itself over the other.
So I think.
I'm not sure what how does how to answer that but what I would say is there. The island's market has suffered from a couple of years in a row of trapped capital and in many instances what was trapped to being lost particularly because of the development in Michael and aroma.
So I think there there's some brews isn't that market I think the uncertainty about.
About trapped capital and be I losses will be a awakening for many.
LS capital providers as to better understanding the types of risk that they're taking I think the retro market.
Being heavily impacted again, we'll weigh on appetites for I less capital and then finally this has been seen as a low beta asset and you're saying that it's suddenly correlating with losses, they've taken elsewhere in their portfolios.
So when I look at how high less capital is allocated into this space I think theres a lot of internal obstacles for the I'll ask portfolio manager to compete against other asset classes based on the uncertainty that they've realized over several years. So when I think about eyelets capital. We are a believer in iOS LS capital otherwise we wouldn't have built every.
That we built but I think there are headwinds there that will certainly last through 2021.
The debate, depending on where the where other markets go and how losses develop there could be some more interest over 2021 or or the lack of interest we will continue to persist.
Okay. That's helpful. Thank you very much.
Is there any useful rules on that we can adopt in terms of how much.
Net written premium the additional billion dollars of common equity would support.
Looking that through the lens of assuming that a lot of it would be in either reduce metro purchases or additional third party retro writings.
Yeah. It's.
Understand your question I think the.
The way we looked at it is.
We're going to deploy it one way or the issues as we have to money at the holding company, we will downstream it into different balance sheets based on how we can construct those two best leveraged the return on the capital so it'll be different by the amount and business mix within each of the portfolios. So I think it's difficult for.
Just to give you a two to one two and a half to one or something like that.
Ratio to think about the capital.
I'd say, what we're going to focus on is maximizing return and then downstream in the capital as appropriate to the balance sheet that optimizes.
The new opportunity and this capital most efficiently sorry, I can't be more clear, but it's not a simple answer it's just saying what the ratio was.
No really understand thanks, so much.
Yes.
<unk>.
Our next question comes from the line of Josh Shanker from Bank of America. Your line is open.
Yeah, good morning, everybody.
I was trying to figure out you know look higher.
[laughter] phenomenal.
And I, probably that you're optimizing portfolio.
But in the decision to cut PML I mean, I guess do you expect that I'm still I'm I'm not satisfied to get the answer it seems like that there would have been opportunity to increase exposure here at this moment right now as well as one one.
I mean, you went into a little bit, but I'm just I just thought there would have been more exposed or given what you're talking about rate and whatnot can you can you go into sort of when you raised the capital maybe timing there was an issue there I can you walk wrote a little bit better.
Sure you broke up a little bit I think your question is why didn't we grow more in Florida why do we raise the capital now because you would've thought would rate change or would have been good for the portfolio.
Or maybe I mean, maybe because it's on June 2nd maybe you didn't have the capital I don't know I I just thought that there was a great opportunities deploy your and you went to cutting PML I mean, theres, yes, you cut PML, it's more efficient portfolio, but here, we have a non cat quarter with a 12, 13% or are we it just seems like there was an opportunity already.
Asked that maybe wasn't taking advantage of.
Okay. So.
You know what we looked at Florida, Firstly, Florida is a much smaller part of our portfolio to just let me outline that with a premium for Florida currently is significantly less than 5% of our overall premium so so growing or cutting in Florida means a lot less now than it did.
For a company like 10 years ago.
Secondly, the decision not to grow was ours. So we had ample opportunity to put more company to more capital at risk and we decided that the uncertainty in the market didn't warrant the exposure of significant more capital we did bring some more or less capital to the market through the 250 million that we commented on us raise.
So when I think about.
The opportunity in Florida.
And the opportunity for this capital we raised it early because we needed to have conversations with our clients early to make sure that they understood that we were coming in.
Positively positioned to grow at one one.
Whether we deployed this year or not is not going to matter over the long term.
Our success, we're having raised this money our success in raising this money is whether we can deploy it in 2021 and keep it deployed as time passes and make sure. It's accretive so we didnt put an emphasis on trying to grow in Florida and the conversations we had with investors. We were clear that that is not what the target of this capital was and what we were doing is looking to the.
Future to make sure that in 2021, we take advantage of the opportunity and construct the best portfolio. So nothing about our actions in Florida, where it were different than what our expectations were at Florida is a significantly smaller part of our portfolio than it used to be as kind of it the way I would summarize it.
Okay. That's good and an unrelated question do you have any approximate dollar number for how much expenses you saved in the quarter by not being able to travel and whatnot and how much that help yes.
Yeah, just as Bob I talked about that in the prepared comments about $5 million and that's probably lower travel lower travel mostly covered that there was some marketing and reduced office expenses, we kind of expect that to hold through this quarter here. We don't expect much to open up we'll see how that develops over time, but as.
Offices start opening up we'll see some of that come back the bulk of its going to be traveler until the till the markets open up for business travel that that probably will stay down slightly.
Thank you.
Thank you.
Our next question comes from the line of GBP words from JP Morgan Your line is open.
Hi, Thanks.
The first another question on just your view on good losses to what extent do you think you've got sort of clarity and ultimately ends and have already booked it most of them horses.
And just ongoing uncertainty in some lines, whether its business interruption or something else.
Covert 19, I think if something we'd be talking about for many quarters as as we go forward.
Firstly, it's still an ongoing.
The pandemic its ongoing as we all see in the news every day and our belief that this will result in very large losses has not changed.
We think the best way to handle.
Covert related losses is within that framework that we haven't with.
And applied disciplined to that framework. So we think about the framework, we're trying to be as transparent as possible recognizing that this loss is going to be slow to develop and very difficult to estimate. So if you think about three categories. We go from pretty transparent.
And the most direct impact from the virus to category, two which things had less direct tie to the virus and probably more related to the recession and adapted to the reception, which is on known in the length of the recession is on known is probably the primary driver for loss into category too.
And the third one is is a bit.
And on known because.
The challenges that will continue I think for many prefer a significant period of time with regard to how b. I losses.
Our our are not covered in primary policies.
So what we're trying to do is provide a framework that's transparent and be disciplined.
In our approach to that framework.
So with that it is it is not possible at this time to come up with what a final koby lost related number is because we believe the event to be ongoing and it's largely dependent on the on the shape of the recession.
And as you think about losses for your balance sheet are you comfortable deploying the capital that you agreed even with that uncertainty or is it likely that you'll keep some of it as long as there is not great visibility into what what your exposure could be.
That's a great question I think the way we think about it is although a number is difficult to produce we have done extensive analysis on understanding what our exposure can be and then testing that exposure under.
Under very extreme scenarios as well as more and more likely scenarios. So all that said and I feel very very comfortable about our balance sheets and the exposure that we have the realization of the exposure to loss maybe.
Temporally, it's difficult to predict but none of it affects our appetite for risk and none of it changes our willingness to deploy this capital. So when I think about the capital raise that we have it's 100% opportunistic looking for the future. It is not in reflect of potential uncertainty with related.
Losses potentially from Cobot 19.
Okay and then just lastly on expenses you mentioned you give the number out on travel expenses, but as we look at your expense ratio overall, it was fairly low or how do you see that sort of ramping up now that more people are back at the office and I'm, assuming you're marketing related activity they'll pick up as well do you think the extent social stay depressed through the second half.
A year and bought back to more to but.
Well I read that it was that in one Q.
Yeah. So two things on that one one as we expect the cobot related reductions just because we're not working in the office that will stay around for a while because we don't expect everything to get back to business as usual, but more importantly, the driver. If you look back over history I talked about you know are we leverage our operational base extreme.
Okay, well relative to the gross or the net premium written I talk about that so we do step investments, we expect overtime as we deploy more capital out there that volumes increase will have to spend more on the infrastructure, but if you look back over time, you'll see it was demonstrated a strong track record for leveraging operating platform.
Thank you.
Our next question comes from line fill still channels from Deutsche Bank. Your line is open.
Yeah, Thanks, and good morning.
Including messaging earlier in the year may have been around the potential to withhold some capacity.
So the midyear renewals lose expectation that there might be new purchases reinsurance just to help manage volatility in the cobot uncertainty right does it feel like that demand came through or.
Beginning to come through or is it has the conversations you had feel like this might be more of a 2021 event, which is kind of helping to steer.
Where are the equity raise could be put into play.
Yeah I.
As we said I think in last gone and trying to emphasize and this fall we we think that.
The Cowen <unk> Co. <unk>.
Tobin is at the pandemic is ongoing and with that.
We believe that the losses will emerge slowly.
All that kind of it the lens in which we're looking at the market. We think the opportunity for us to deploy this capital is in 2021.
Should there be additional purchasing we've been good contact with our customers and if they are looking to supplement their purchases in 2020, now we're having those discussions, but but I don't want to leave with a false impression.
We're going to deploy this in 2020, our goal is to deploy in 2021.
Oh I understood.
I guess my follow up question would be he was there a reaction from the ventures capital partners in response to the equity rates and I guess pardon me wonders.
Whether they view the increase in pricing and maybe to an extent than being crowded out as you have the ability to do to do additional business yourself on the heels of the equity raise you know maybe maybe that's unfair correlation and trying to draw but we're just curious if that the conversations with them to capital partners changed in anyway.
Yeah, that's a great question.
Welcome to all our largest investors.
Over the last couple of weeks and we've spoken to all our vast investors over the last few weeks. So firstly, if you think we raised 250 million in the quarter end deployed.
So we are continuing to bring risk to third party capital.
Going into the one one renewal the way I think about our our partner capital is that they have a right of incumbency on the deals that they're on just as we do.
So when I look at how we're going to structure. Other portfolios. We will we were not going to did de risk them to deploy the capital that we have what we're going to do is optimize their portfolio against the rate environment and the opportunity and then build our portfolios.
The new equity the one.
Likely area, where risk will be re underwritten in a material way is in the retro market.
And in the aggregate market.
The.
The vehicle, which mostly takes that risk for us is upsilon. So I anticipate that the way ops upsilon will be structured consistent with the mandate for the risk that it targets will be less appealing to buyers than other vehicles that we have and with that if there is a shift of risk I think it's.
More likely to come from Upsilon that it is from certainly Vermeer Davinci top layer.
And some of our other balance sheets. So we'll constantly look at how we can best.
Match efficient capital.
With desirable risk, but we will not looked and it's not our objective to cherry pick the investors that we have we give them right of.
<unk> right to participate alongside and capital raises and they are true partners to us in the risks that we take.
Got it thanks, Okay, well continue to do well.
No I appreciate it thank you thanks.
Our next question comes from the line of only screen stand from Wells Fargo. Your line is open.
Hi, Thanks for taking the follow up on my first question I guess, Kevin goes back or something you just answered. So in response to the capital you said that the holding company with downstream <unk>, depending upon where you can get the best returns on capital, but is the desire to use mobile.
On on your balance sheet.
Depending on opportunity you could use some of that.
In partnership with.
Venture capital.
Yes, and it's a good question I think.
I think it could be a little of everything so I anticipate.
If you look at our percentage on our vehicles and you look at the size of the capital raise most of it will be deployed on our fully owned balance sheets.
That said if there are opportunities too.
Chris Davinci his participation in the market or others, we'll look to deploy along alongside our partners into those vehicles.
So when I think about it I would think about it is mostly on our on balance sheets that said, we will also look for ways in which we can bring more risk to.
Davinci is probably the most likely one and we can certainly continue to invest more in upsilon should that vehicle or is it should should we want to rightsize that vehicle. We get a is the issue is what's written on some of these will likely.
Shifting structure.
Where the risk appetite of the vehicle may not be as defined it may not be as natural fit for the vehicle and with that when we limited which has the broadest appetite is it likely home for it.
Okay. That's helpful. And then my second question on so on the TMR side on sizing called out right. This is the first quarter, we annualize the deal still than non renewal at some of the business had an impact on the growth within specialty casualty I know when you bye now.
He played out and figures for what you expected to retain up a book of business. But then my sense is that we've had conversations you got incrementally more positive on some of the business that you thought you might not when you. So can you just give us then.
How much investment needs to not I knew I guess is we think about the modeling over the next week quarter within that specialty business.
Yeah I'll.
Getting back and Anthony we did started last year, we looked at will walk you down from about a billion to premium down to about 700 is what we said we thought we would be able to renew.
Going through the books getting to know the terms getting to know the understanding in the relationships gave us a much more favorable view some of the books were unsure of at the time. So we did outperform our expectations on the renewal of the TMR book, we get probably well over $800 million versus the 700, which we felt very comfortable with.
Having said that as a strong element that we did not renew and I talked about our implied growth as more of a 100 and then it was 20 things we didn't renew leases like auto and things like that drove it down in general liability, you'll see that coming down on pieces of it but we didn't we generally renewed a lot more of the book and we felt got to know a better only feel strong with what weve underwritten.
The good news about having to 700 target and then getting to a third is if we found more good business than we originally hoped and that was only attitude to our confirmation that that was a good deal for us to engage and.
Yeah. That's helpful. Thank you for any additional color.
Sure.
I'd now like turn the call back over to our presenters for closing remarks.
[noise]. So appreciate your died your dialing in for Ah. This quarter's call we feel great about the quarter that we just had and we feel highly engaged in highly confident about our ability to deploy the billion dollars as we move towards the one one renewal and look forward to speaking to the next quarter. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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