Q3 2020 Renaissancere Holdings Ltd Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the restaurant three third quarter 2020, <unk> financial results Conference call.
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I would now like to hand, the conference over to your speaker today, Keith Thank you.
And your Vice President Finance and Investor Relations. Please.
Please go ahead Mr. Mchugh.
Good morning, Thank you for joining our third quarter financial results conference call yesterday. After the market closed we issued or so that we would be.
You didn't receive a copy please call me up to 41239, 40, threes Euro and we'll make sure to provide you with one there.
There will be an audio replay of the call available from about two P.M. eastern time today through midnight on November 28, the replay can be accessed by dialing 855.59 choose your fivesix U.S. toll free or one 404 or 5373 406 internationally.
The passcode, you'll need for both numbers is 296 E. Four seven todays call is also available through the Investor information section of Www Dot Regnery dotcom and will be archived on Renaissance Reis website through midnight on November 28, 2020 before we begin.
I'm obliged to caution that todays discussion may contain forward looking statements and actual results may differ materially from those discussed addition.
Additional information regarding the factors shaping these outcomes can be found in Renaissance trees, FCC filings to which we direct you.
We're supposed to discuss today's results are Kevin Odonnell, President and Chief Executive Officer, and Bob Qutub Executive Vice President and Chief Financial Officer.
Now I'd like to turn the call over to Kevin Kevin.
Thanks, Keith good.
Good morning, everyone and thank you for joining todays call.
Once again, we find ourselves at the end of a very active third quarter, which saw numerous name storms, making landfall in the U.S.
<unk> record breaking wildfires across the west coast.
And multiple typhoons in Asia.
We extend our sympathies to all those impacted by these catastrophes.
An important part of our purpose is to support rebuilding and recovery efforts after disasters strike, which we do by providing solutions and protection sharing our expertise and paying valid claims properly. So while our results for the third quarter reflect an elevated level of back activity.
As there are risks that we face.
Fully understand and are paid to take and I'm proud of the role we play in helping people when they need it most.
The Q3 2020 large loss events were driven in particular by Hurricanes, Laura and Sally in the Gulf of Mexico, and the wildfires in California, Oregon, and Washington, The fourth quarter has also been active so far with hurricane Delta, making landfall as a category to nearly the same location as hurricane Laura.
Continued wildfire activity.
Last year during our third quarter call I discussed our belief that climate change contributes to making extreme events more frequent and more severe.
This year. It is already clear that we are experiencing and especially active season for both wildfire and wind.
On the West Coast, California, wildfires have already consumed more than 4 million acres in 2020, which is more than double either 2017 or 2018 and has resulted in over 90 million metric tons of carbon dioxide being released into the atmosphere for perspective. This is one and a half time.
It's more carbon dioxide, then has released empowering the entire state for a year.
We continue to believe that there is strong evidence that climate change is increasing wildfire risk in California for two primary reasons first California's climate is hotter and drier now than at any time in the past 120 years.
Higher temperatures and longer dry seasons accelerate the desiccation in death of vegetation, creating fuel for larger more intense wildfires.
Second climate change extends the length of the dry season into the late autumn, causing it to overlap with the Diablo and Santa Ana winds. This combination of high heat and strong winds results in the dramatic spread of damaging fires as we've experienced in 2017 and 18.
Climate changes also influencing hurricane risk due to a globally warmed world, we anticipate a future where a greater proportion of tropical cycle and for each category four or category five status climate change also drive sea level rise, which increases the impacts from storm surge.
While there have always been natural cycles of variability in sea surface temperatures. We believe recent increases are primarily a product of climate change. Consequently sea surface temperatures and associated hurricane activity will not revert to lower levels of prior prior periods, rather the heightened activity levels over the last two decades or likely that.
New normal for Atlantic Hurricane.
[noise] vendor cat models. However, we rely on the long term historical record to estimate risk. Unfortunately due to climate change. This long term record of past experience may no longer be a reliable guide for what we can expect in the future.
Making the problem worse human behavior can interact in complex ways with climate change to amplify risk of loss. For example, we have seen a long term trend to build on coast lines or in the wildland urban interface, often with building codes and materials that fail to provide resilience in the face of now.
Natural perils.
Recognizing the fact that climate change is increasing the risk of natural disasters is only the first step however to gain a true competitive advantage. This insight must be accurately reflected in the cat models used to price risk.
Our scientists meteorologists and engineers at Renaissance Rerisk Sciences have been studying the impact of climate change on natural hazards for decades. They believed that a physical model informed by historical observations, but calibrated to our best understanding of how the climate has and will continue to change grades.
The best basis per carat categorizing the full distribution of outcomes that should be.
Underwritten against applying these insights Renaissance, we risk Sciences works closely with our underwriters and risk managers to build proprietary cat models to capture the physics and future impact of climate change.
Our approach sets us apart from many other underwriters are high unless managers, who often rely on a single vendor model that fails to capture the true impact of a change to climate. This.
This can result in an optimistic representation of risk and overestimation of expected profit and dollar returns.
This is obvious implications for Io less investors, but building proprietary climate change and formed CAD models goes beyond investments in cat risk and benefits all of our stakeholders, our iOS partners rely on us to accurately model the risks inherent to their investment.
Clients appreciate the superior customer service that we can provide through deeper insight into the full distribution of their risk profile, which often leads to increased demand for our products.
And our shareholders benefit from the more efficient portfolios of risk, we can construct as well as our enhanced sustainability.
Contrary to some perspectives accurately pricing for climate risk does not put us at a competitive disadvantage to our fears rather an industry, leading understanding of the influence of climate.
On risk is a key component of superior risk selection, allowing us to shape our portfolios.
Growing on the best business and shrinking on the worse.
Moving on from climate change I want to take a minute to discuss capital deployment opportunities as we enter the important January one.
Renewal period, I believe we will have one of the best opportunities in many years to profitably deploy material additional capital Eric.
Our focus on superior risk selection should prove increasingly valuable as the combination of historically low interest rates. The Q3, 2020 large loss events and mature material trapped capital put additional upward pressure on reinsurance rates.
We have legacy positions on the best programs first call status to capture opportunistic an off cycle business and significant capital to support growth on new and existing profitable opportunities.
I'll provide more detailed update on the renewal at our segments at the end of the call, but first I will turn it over to Bob to discuss the financial performance for the quarter.
Thanks, Kevin and good morning, everyone as Kevin discussed and as you saw in our press release, our third quarter results were impacted by active wind and wildfire season.
Despite this elevated activity, we reported positive net income and remain in a very strong capital position going into renewals.
Today, I will discuss our consolidated performance and then provide more detail on our three drivers of profit underwriting income fee income and investment income.
Starting with our consolidated results, where we reported an annualized return on average common equity of 2.8% benefiting from mark to market gains in our strategic investment portfolio.
Annualized operating return on average common equity was negative 7.7% with the loss primarily driven by the Q3 2020 large loss events.
We grew our book value per common share by 86 cents, 4.6% and our tangible book value per share per common share plus accumulated dividends by $1.24 or 1%.
Year to date, we have grown tangible book value per common share plus change in accumulated dividends by 14.6%.
Net income for the quarter was $48 million or 94 cents per diluted common share.
We reported an operating loss of $132 million for $2.64 per diluted common share. This excludes net realized and unrealized gains on investments the sale of Renaissance re UK limited net foreign exchange gains and expenses related to the integration in TMR.
Included in this operating loss is $322 million of net negative impact, resulting from Q3 2020 large loss events.
To clarify net negative impact is the bottom line impact of events to us after taking into account our best estimate of net incurred losses, along with related adjustments for current and ceded reinstatement premiums lost profit commissions and redeemable non controlling interest.
I will now discuss our three drivers of profit starting with underwriting income.
On a consolidated basis, we reported an underwriting loss of $206 million for the quarter and a combined ratio of 121%.
Our results were driven predominantly by natural catastrophe losses little impact from COVID-19 losses in the quarter.
Gross premiums written for the quarter were $1.1 billion up $282 million or 33% from the comparable quarter of last year approximately 60% of this growth came from our casualty segment and 40% came from property.
We're pleased with our growth so far this year as I mentioned last year, we anticipate that we will have many opportunities to deploy additional capital in 2021 and beyond.
Moving now to our property segment, where gross written premiums increased by $113 million or 36% from the comparable quarter.
This was driven by an increase in reinstatement premiums related to the Q3 2020 large loss events.
A negative premium adjustments in 2019 and continued expansion of our Lloyd delegated authority insurance.
The overall combined ratio for the property segment was 140%.
Pretty catastrophe and other property reporting combined ratios of 159% and 113% respectively.
We reported a current accident year loss ratio for the property segment of 122%.
And as we've indicated in the past our other property class of business is exposed to catastrophe risk.
With the cute with the Q3 2020 large loss events, adding 30 percentage points to its loss ratio.
Favorable development for the property segment during the quarter was 8% with property catastrophe experiencing favorable development of 11% and other property experiencing favorable development of 3%.
The underwriting expense ratio for the property was 26%, which is flat to the comparable quarter. However, within the underwriting expense ratio. The acquisition expense ratio was up approximately one percentage point due to the unwinding in previously earn profit commission given the large cat events of the quarter.
This was offset by a one percentage point decline in the operating expense ratio.
Improved leverage and slightly lower operating expenses.
Now moving onto our casualty segment, where gross premiums grew $169 billion or 31%. This growth was a combination of expansion of existing deal share in premium as well as new business opportunities overall.
Overall, our casualty combined ratio was 99.9%.
The current accident loss ratio was 76%, which is seven percentage points higher than the comparable quarter.
This increase is driven by three factors each of which contributed about two percentage points to the loss ratio.
First.
$10 million of Ivy and are related to hurricane, Laura and our marine and energy book.
Second increased reserves from our private mortgage insurer book, which did not impact the combined ratio.
And third.
$15 million in ceded premium for our new Lloyds adverse development cover.
Now let me walk you through the last two items in more detail Steve.
Starting with our private mortgage insurance book, where we increased our reserves to reflect delinquency notifications.
Private mortgage insurers are required to report loans as delinquent at 60 days without payment even if the loans are in forbearance or payment holiday and otherwise expected to perform long term.
The reserve for these delinquencies as they are reported to us that said, we do not anticipate that all of the notifications will crystallize this paid losses.
Well these mortgage delinquencies increased our casualty loss ratio by two points due to the structure of the transaction. These losses were offset by a decrease in profit commissions paid to our seasons. As a result, there is no impact to the combined ratio.
Now moving to the Lloyd adverse development cover we close this transaction in August to reinsure, the casualty reserves for our Lloyds Syndicate for the 2009 through 2017 underwriting years.
The premium cost to discover as reflected in the current accident year loss ratio for our casualty segment contributing about two points.
This transaction is an innovative example of our gross to net strategy in action.
Provides capital relief to our syndicate overtime, creating additional capacity to underwrite into an improving market.
This protection is a retroactive reinsurance transaction. This means that we are protected economically but given the accounting treatment. You may continue to see reserve volatility and short to medium term from an accounting standpoint.
During the third quarter. The casualty segment also experienced favorable development of 3% driven by a variety of specialty lines.
Now moving to our second driver of profit fee income or total fee income for the third quarter was $18 million.
Management fees were $30 million up 23% from the comparable quarter driven by increases in assets under management at Davinci Premier and Upsilon.
This was offset by negative $12 million in performance fees due to the impact of catastrophe events on Davinci and ops line year over year total fees are up 8%.
The net non controlling interest charge attributable to davinci, the DG and premier for the quarter was $19 million.
As reflected in overall loss for Davinci that was more than offset by income MDT and vermeer the.
The $19 million is pass onto our partner capital, reducing our operating earnings accordingly.
Now turning to our third driver of profit investment income.
We reported total investment results for the third quarter of $308 million with realized and unrealized gains of $224 million. These.
These mark to market gains were predominantly in our fixed maturity and equity investment portfolio with equity gains driven by our strategic investment portfolio.
We take a prudent and reasonably conservative approach to our investment portfolio and have not materially increased our allocation to high yield equities in attempt to stretch for yield.
As I discussed on our previous call, we increased our allocation to investment grade corporate credit in the second quarter and the third quarter, we made more marginal allocations, increasing and higher quality credit sectors, such as AAA rated collateralized loan obligations and commercial mortgage backed securities.
Our fixed maturity and short term investment income for the quarter was $70 million and overall net investment income for the quarter was $84 million of which we retained $65 million and shared the remainder with partner capital.
Our management, our managed investment portfolio reported yield to maturity of 1% and duration of 2.9 years on assets of 18.6 billion, while our retained investment portfolio reported yield to maturity of 1.3% and duration of 3.7 years and assets of $13 billion.
Now before handing over to Kevin I'd like to provide more information on our expenses and foreign exchange gains for the quarter.
Direct expenses, which are the some of our operational and corporate expenses totaled $97 million for the quarter, which is an increase of $30 million from the third quarter of 2019. This increase is predominantly driven by the sale of brand re UK limited.
Discuss momentarily.
The ratio of direct expense to net premiums earned was 10% an increase of more than two percentage points from the comparable period last year.
This increase was driven by corporate expenses, which increased by $34 million for three percentage points on the corporate expense ratio, including corporate expenses were $32 million related to the loss on sale of Renaissance three UK limited and associated transaction related expenses and $5 million of one off items, including expense.
Related to senior management departures.
Renaissance re UK limited was acquired as part of the TMR transaction and primarily long tail commercial auto business.
His place into run off by Tokyo Molina Millennium re in 2015, and our stated intent has always been to divest. This entity. This allows us to focus on our core strategy simplify our operations and decreased underwriting and foreign exchange volatility.
As a reminder, the loss on sale of Renaissance three UK limited and associated transaction costs are excluded from the operating loss in the quarter.
Excluding the impact of Renaissance for UK limited in the one off items I. Just described the ratio of direct extends to net premium earned was 6%. This is a decrease of one percentage point from the comparable period last year, demonstrating the operator operating leverage embedded in our business model.
And the operational expense ratio also declined by 1% point due to the reduction in office travel expense related to COVID-19 restrictions.
Finally, we reported a seven cents.
$13 million foreign exchange gain.
Approximately half of this gain is an accounting adjustment for the prior quarter related to the Tokyo Millennium re integration the.
The majority of the remaining gain relates to the DG and has no impact on our bottom line and as bad as it's back down through non controlling interest and with that I'll now turn it back over to Kevin.
Thanks, Bob.
As usual I will divide my comments between our property and casualty segments overall, I'm very optimistic regarding opportunities across our business as we head into the January one renewal, we anticipate that there will be a supply demand imbalance in certain areas of our portfolio, particularly for capital intensive risks.
Given by continued uncertainty related to cold at 19, and further accelerated by another active year for natural catastrophes.
When we is positioned to deploy additional capital and growth given our market leadership and long term relationships with brokers and customers.
Beginning with property cat.
The third quarter was very active for natural catastrophes in the U.S.J. I would categorize as high frequency and low to medium severity.
The largest and most impactful events for us for Hurricanes, Lora and Sally in the Gulf of Mexico Hurricane.
Is is in the northeast and wildfires on the West Coast.
Because the U.S. had already experienced above average frequency of events prior to the third quarter aggregate covers also increasingly came into play.
These events will add additional pressure to the already hardening rate environment property cat and should lead to increased demand for property cat reinsurance the route 2021.
At the same time I LS capital is becoming for Tiet.
As investors contemplate a fourth consecutive year of elevated cat losses, and additional trapped collateral caused by COVID-19, VI claim uncertainty.
While we are encouraged by the market we must remember that we are still in a pandemic that is likely to result in losses across the insurance industry.
In the U.S. So far we have received generally favorable news regarding the courts interpretations of the availability of business interruption protections from the COVID-19 related shutdown.
It's important to recognize however that for the most part these processes remain at an early stage.
I remain concerned that the plaintiff's bar will continue to test new theories for recovery in multiple venues in the hopes of obtaining judgments more favorable to insurers such challenges will result in continued uncertainty regarding VI coverage that could extend for years and its a rational to believe that these for us.
This is will not result in material liability to the insurance industry.
As with any time, there is uncertainty with coverage in short we will submit claims to protect their rights under their insurance policies.
Ultimately some of those claims may be presented to reinsurers.
I think we are a long way from understanding the impact of the virus and the shutdowns, but I expect that we will see an increase in submitted claims, particularly as information is shared during the renewal process.
Internationally business interruption Theres, a more fluid issue.
As more affirmative coverage was sold outside the U.S. addition.
Additionally, various jurisdictions are approaching the issue of coverage differently. So we are watching this space carefully.
In the fourth quarter, we expect that our renewal conversations will provide us with greater clarity regarding potential customer claims for business interruption related losses, and we will react appropriately as we assess the validity of such claims.
Turning to other property.
It was also an active quarter this was expected.
As I explained to you earlier this year, we have increased the other property books catastrophe exposure as we believe we are being paid sufficiently for it.
Consequently, other property experienced losses from the Q3 2020 large loss events, primarily from Hurricanes, Laura and Sally and the Midwest to Rachel.
That said Attritional losses were within our expectations. Prior year development was favorable this quarter and overall I am satisfied with the performance of the other property book.
Similar to property Cat, we are seeing increased opportunities to profitably deploy material capital in other property rate.
Rates are up, particularly in the U.S. Ns business and the Q3 2020 large loss events will only accelerate the velocity and persistence of these rate increases.
Of course, incessant losses, and increasing uncertainty is aggravating and already dislocated retro market, we are experienced and comfortable managing the level of uncertainty in this market, both as a buyer and seller of Retrocessional coverage.
Focusing on selling more in 2021 is at another opportunity to profitably deploy significant amounts of capital.
Moving now to our casualty and specialty business as Bob explained this segment largely performed within our expectations during the third quarter.
We experienced rate increases across all major risk losses.
Along with acquisition and profit Commission ratio improvements and executed on several key transactions at economics that exemplify both our strategic position with core clients and a continuing hardening of casualty markets.
Our ability to increase lines on targeted deals that were oversubscribed substantiates, our strategy to build options with core trading partners.
We have been closely monitoring economic impact of COVID-19 related shutdowns in the development of forbearance measures on our mortgage book.
While the homeowners market has seen significant price appreciation appreciation in recent months. It comes on the back of a challenging on employment picture that could put pressure on homeowners ability to repay their outstanding mortgages. Despite.
Despite this challenging economic backdrop, we believe that the portfolio. We have constructed will remain resilient the fundamentals of the U.S. housing market were strong heading into the pandemic supported by tight underwriting standards and banking regulations high loan quality and growth of homeowner equity.
And although we did not expect it to be pandemic, driven we have been underwriting and constructing the portfolio in anticipation of an economic downturn and have actively avoided risk from lower credit borrowers for several years.
Forbearance trends are showing improvement as well with GE Si E.
Forbearance speaking at around 6.4% in May and having consistently reduced since that time.
Looking forward to the January renewal, we expect ample opportunities to deploy significant additional capital in both of our segments and across our platforms.
Many markets are exhibiting supply demand imbalances and overall, we are seeing strong rate romantic across all lines with stable or improving terms and conditions.
We are focused for many years building strong positions on high quality programs.
As the market hardens, we believe we are preferentially poised to expand our share on existing programs, while being first call for new opportunities.
Bolt said improved economics.
I'm pleased to report debentures team continues to operate effectively and overall, our joint venture balance sheets continue to perform well.
With the level of catastrophe losses in the quarter Davinci also experienced losses for year to date remains profitable.
Top layer, three upsilon and Vermeer all had positive quarters.
Mcgeachy, our Cott Cat Bond fund had one of its best performances in its history and we expect it to continue to benefit from the flight to simplicity that caught the cat bond market is currently experiencing.
The wireless industry will likely suffer significant amounts of trapped capital yet again at 2020 due to the impact of COVID-19 catastrophe loss events to date and it already active fourth quarter to.
The potential for trapped collateral highlights an important difference between collateralized to others and traditional reinsurance.
In a collateralized delisting enjoys protection for as long as collateral is available.
Consequently in a year like 2020, Cedents would prefer to maintain protection against the heightened uncertainty of losses, all providers will want to roll their capital into new deals and new premium.
Business interruption related COVID-19 claims only intensify this inherent tension the.
The industry remains in the early stages of assessing the myriad of factors affecting potential VI losses, a process that will play out over years.
Given this going into 2021, we expect that Cedents will increasingly prefer the certainty of rated balance sheets.
Provide over collateralized vehicles. If this occurs we have the flexibility to transact with our customers through their preferred means of risk transfer. This.
This is likely to result in us deploying more rated paper and shrinking upsilon.
In conclusion, we find ourselves in a very enviable position heading into the January onest renewal cycle.
Market conditions continue to improve as the natural catastrophe activity of the quarter further restrict supply in an already on balanced market.
As the industry grapples with the uncertainties from climate change and COVID-19, our independent view of risk provides us with an enduring competitive advantage I am confident that we can profitably deploy material amounts of capital in this environment.
And continue creating long term shareholder value in 2021 and beyond.
Thank you and with that I'll turn it over for questions.
Thank you.
A reminder to ask a question you will need to press star one on your telephone.
Just on your question. Please press the pound key.
And we ask that you limit yourself to two questions and reaching for any additional questions you may have.
Your first question. This morning comes from lease Greenspan from Wells Fargo. Please go ahead.
Hi, Thanks. Good morning, My first question, Kevin on I was hoping to get a little bit more color on your specific pricing outlook for January line on in terms of what you would expect in the U.S. Europe as well as the retro market recognizing obviously, we saw a couple of.
Now you have a sense for the dialogue, you're having with Stephen.
How pricing to come in at one line.
Yeah. So I think your comment about it being early is right and we are having lots of discussions with our clients about what their coverage needs are.
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Without giving specific guidance.
Let me start with actually outside of your question, but the casualty markets.
We are increasingly seeing that on the accounts that were viewing casualty rates increasing.
At faster rates than what has been forecast by our Cedents. So we're seeing a lot of positive movement, there which has been extremely.
Gratifying to see and within the expectations that we had as we head into 2021.
With regard to proper.
Property I'll start with other property Theres been a lot of discussion that you asked DNA as rates are up.
Double digits, we are observing that and we are continuing to see opportunities to deploy.
Reinsurance capital supporting Us CNS portfolios, and we feel optimistic that that will continue into 2021.
Property cat for traditional reinsurance, there's not that much price discovery yet in the market because we're early in the renewal process, but all the.
Variables that we look to support.
They are being momentum for better pricing support that we're going to see better pricing and 2021.
The U.S. and probably in Europe, but to a lesser degree.
Part of the reason for that is the retro market is fair is extremely dislocated, which has a levered effect on how much we and capacity reinsurance capacity.
Reinsurers like to sell so the retro market contracts further we expect that to add more momentum to the price gains that we anticipate in the property cat market.
Okay. That's helpful. And then my second question appreciate.
Appreciate the disclosure on the losses that you guys saw in third quarter as we think about the fourth quarter with the ongoing wildfire and multiple her team on how should we think about the aggregate limits that you guys have a goal is on.
How much more aggregate loss.
Comes from four in the fourth quarter.
Yes, So I think that's a good question and then when you move into.
You've got to the later part of the year, particularly an active year. The aggregate contracts are going to play a more significant role that said.
Wow.
When we're looking at a lot of ours. There are ongoing it's difficult to assess that those 10 too often concentrate with a few.
In shorts, so I anticipate that we will have aggregate exposure if the fires continue at the rate that we're seeing now.
And then from Hurricane Delta, which is also fourth quarter that we expect to be up well for what we are seeing at this point to be smaller than Laura, but we're still counting.
And talking to customers about what the impact is but I would expect that there will be.
Increased aggregate.
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Participation in these losses simply because there has been more events earlier in the year.
Okay. Thanks, I appreciate the color.
Yes. It does somebody asks are actually exhausted as well. So I think there is aggregate exposure out there, but not all of that is exposed on a continued basis, it's important to point out.
Okay. That's helpful. Thanks, Kevin.
Your next question comes from Josh Shanker from Bank of America. Please go ahead.
Yes. Thank you for taking my question.
You talked about casualty pricing being ahead of expectations at this point right. Now can you talk about rental lease roll a little bit in terms of how you capture that with what you are right. If you write quota share business and there's a collar around it and there's a ceding commission or round it how does random.
We take advantage of that better pricing.
On those lines of business and to what extent.
Does the Cedents are have the ability to.
Dictate your profitability.
Yes, so I think there are <unk>.
What we're saying is is.
From a reinsurance perspective from.
From a terms and conditions perspective, we're seeing.
On the best accounts relatively stable terms, which means the benefit of the underlying insurance rate enhancement is inuring to our benefit and on accounts that are more challenged we're seeing improved reinsurance terms through either more restrictive cover or.
More beneficial ceding commissions to the reinsurer, so I think in a market yet the reinsurers always exposed to the negotiation with the seating we have strong relationships with the cedents.
That we have our most important relationships with and I believe that most of our growth in the early part of 2021 will come from our existing core relationships and likely in existing lines that equal to better terms than what we had in 2020.
And then then amplifying that is the benefit of the underlying rate increase.
And when you look at various you didnt in the casualty markets, who might be interested in some new business.
What is your sense of the.
There.
Reserve adequacy I to works is the reinsurance markets I guess more aware problems I guess in the.
In the quality of primary reserves to the extent that it might be reflected right now in the market in general.
So we have our own reserving philosophy, and we do kind of a ground up underwriting to make sure that we can assess what we think the expected profitability of an account is the question you're asking I think is one there is a legacy piece on business, we may not be on and have less interest in understanding.
And then there is the current.
Underwriting year, where we're participating where we have a very deep understanding there is often a difference between our reserving let loss ratio and our clients reserving loss ratio, but I think thats not a problem for the way, we think about the business and over time.
They'll probably reconcile into a much more close we aligned representation of the risk. So it's I think from from a current x. underwriting year basis, we do look at it.
For older reserves and legacy portfolios were less interested because we're not in that business.
You are through TMR, although you obviously have the the.
Adverse covers you're not as concerned about I suppose.
Yes, and on those were developing them on our best estimate of the portfolios and as they age.
They are becoming much more stable, but you're absolutely right all of that legacy business is protected.
Thank you.
Yes.
Your next question comes from Meyer Shields from KBW.
Go ahead.
Thanks, Good morning.
Kevin you talked about.
More accurate pricing.
Pricing models, and maybe phrasing that poorly is the gap between proprietary models and vendor models in terms of assessing catastrophes do you see that gap is increasing or shrieking.
I think it's it's important that we think about it depending on.
The peril in that location.
Well I think it's also that the b.
The gap is also is how is the underwriter employing it and what is the representation of risk. So we rely very heavily on being highly integrated and our risk.
Our scientists are speaking to our underwriters to make sure that we understand where there are differences in the model. So that we can understand how the market might be pricing or risk different than the way were looking at it. So it's not a simple answer I would say a place I would point to where I think there is a large differences with California wildfire.
Then if you break it down I think for years people have recognized that.
Warmer oceans will lead to more severe hurricanes, but in thinking about what that really means is understanding what is the rainfall contract with how.
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Deeply the attenuation functions go in at the point of entry to the Hurricane Theres a lot of more subtle analysis that really gives the clarity on the deeper understanding. So it's a more complicated conversation I think it can be quite large depending on the barrel, but then even within the layers that we're writing I believe it to be meaningful.
Okay that is that's very helpful.
Good question. This is particularly early but when thinking about January one 2022, but should we think of the current dislocation in the Io less or the retro market does that mean that pricing will be excessive because he got the temporary dislocation that will be resolved with supply demand over time or are you.
Thinking about this as maybe the new normal.
Equilibrium point.
So firstly, we we're a believer in iOS, we wouldn't have built all the all the frameworks and the resilience in our platform form at the different forms of capital that we have if we didnt I think it is challenged right now.
Difficult for me to know what 2022, it looks like there could be and a new crop of investors who have become interested that don't have the legacy issues that the existing crop of investors as.
When I think about 2021, though I do think that we have persistence in the rate.
Enhancements that I mentioned I don't think this is a one one.
Rate change and then markets begin to return to a softening phase I think we're going to see strong rates through 2021, and when we think about the deployment of capital that I'm mentioning I'm thinking about it much more long term 2021 to deploy 2022 to harvest some of the deployment that we've had so I'm optimistic long term about them.
Market.
Whether the retro market grows or shrinks for a company like us simply means were a buyer or seller.
We're going to use it solely to.
Enhance returns and to solve our customers' problems.
Okay and then one final question if I can squeeze this and when you look at 2020, and let's exclude coal that because hopefully pandemics are more rare is this an average last year and above average last year for the industry.
It's a good question.
The better to answer that at the end of the year with the storms still hitting and the wildfires.
I will point out that if you looked at the Ace index.
And think about the frequency of moderate storms that we've experienced it this way and then you compare it to 2000 for.
The Ace index would indicate that there was a lot more energy created from the storms of 2004, so I think of that as being an important more important here to understand climate change than potentially the high frequency to medium severity that we had this year. So I think we can look at it from uninsured loss from a formation formation, its certainly high with permanent and from.
At energy creation from from all the storm activity its probably more normal.
Okay perfect. Thank you very much.
Sure.
Your next question comes from urine Konare from Goldman Sachs. Please go ahead.
Hi, good morning, Thanks for taking my questions.
My first question.
As it relates to topline growth.
I think year to date, you're growing at about 130 ish percent.
Gross premiums written I I think that earlier in the or you had talked about really seeing more of an opportunity into next year. So I guess my question is.
Have you just seen more opportunities this year than you initially expected or are your comments from earlier in the year. So true in the sense that you expect further acceleration going forward.
We are seeing more opportunities I think.
I'm not sure exactly how to answer that question other than.
Your first call market, we are growing in lines of business that we have previously targeted.
And we are benefiting.
Benefiting an awful lot of that growth is benefiting from rate change.
So I think we can continue that growth in 2021.
I haven't actually put a judgment as to whether I think this year's growth is greater than expected, but I'm pleased to see it because I see the quality of the portfolio coming in and I think its long term accretive.
Okay.
And then my second question.
The California wildfires exposures.
You talked about the impact of climate change and.
Okay.
Question that came up on a couple of years ago as well with the wildfires. We saw back in 17 18 is that still a risk that is as it's currently.
Currently priced attractive or is that a risk that you'd look to to.
Shrink here.
So we did a lot of work and we published a paper after the 2017 events discussing how we thought that the risk could be better represented to the models and changed our models represent that that updated view of risk, which is pretty common for the way, we think about amending our models over time.
I believe its insurable I believe.
It.
It's a risk that exist and needs to be owned.
By by someone and I think insurance has a role to play in helping to mitigate the impacts.
Particularly on homeowners with regard to the buyers. So I believe insurance has a role to play I believe there are appropriate retentions for insurers to to participate in that risk and from a reinsurance perspective, we want to provide capacity to allow that for that protection to be available.
Okay I appreciate the answers.
Sure.
Your next question comes from Ryan Byrnes from economists research. Please go ahead.
Hey, Thanks, Good morning, I'm, sorry, I Didnt observation, Kevin and then just a question.
I guess kind of more from a stock analysts standpoint, but.
When I think about Ryan there might not be a more volatile company out there from an earnings from an earning standpoint, the way that you report in everything.
And you know for the stock I clearly you feel a lot better about the prospects for one one than you did at the beginning of the year and as an observation consensus estimates were actually lower for 2021 today than they were back in January.
I think some of that probably has to do with just the difficulty of modeling this company, but I.
Hi.
The point I would make is this kind of two ways that you I think the stock and get value. It you need to grow book value per share, which is like I said, it's extremely volatile you have an elevated cat year next year that could be tough or.
We could have a better understanding of actually what is really how is the core earnings power on a normal basis of this company moving forward I think that that's just the observation I guess my question Kevin is.
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With with your financial supplement in the materials that you give us.
We sat down for half an hour.
Would be the main metrics.
You would point to that are actually showing in your mind in your view that yes. It look like our earnings power here is is really increasing like as we get into 2021, what would be the things that you would quite be too.
Yeah, I think what historically, we appointed two so appreciate your observations. Thank you what we've historically pointed to as growth in tangible book value per share as being what we think is the most appropriate measure for growth.
For creating value.
What you're asking for is what do we provide that provides a forecast and we don't provide earnings guidance. So I would say that when I think about how we construct the portfolios. We're thinking about all the things that you are raising which is what is the volatility what's the return are we providing.
Adequate return for the volatility that we're assuming and then we try to provide transparency on a very complicated set of decisions that we make to build our portfolios but.
But we don't provide the guidance that you're asking with regard to the financial supplement, but I would say the tangible book value our book value per share.
Is is the primary metric that we look out for success.
Understood I mean, I hear you I'm, just saying in that context in some ways.
This is clearly one of the best stories in PMC, but in a lot of ways just dependent on whether or not we have an elevator and not elevated at year end 2021, but thank you.
Yep.
Your next question comes from Brian Meredith from EPA.
Please go ahead.
Yeah. Thanks, Kevin.
If an add on to it.
A little bit to that question. So if I take a look at it and I know you've talked about this in the past maybe some updates but take a look at what your return on call. It tangible equity spend you know over the last five years and granted we even a lower interest rate environment right now, it's kind of been single digits or mid single digits Im just curious.
Given your business profile given your business.
What do you think it appropriate kind of return on equity for your business should be and do you think the current market is you can achieve that.
Yes, I think.
When you think about the types of risks that we take and how we think about a portfolios we need to think about much longer term.
Periods for us to begin to assess as to what the return of our portfolio is really just really pro.
Providing and the last several years has had elevated cat activity, which has certainly had.
An impact on us.
With regard to you know the way we think about it is we're constantly measuring.
On.
Oh portfolio by portfolio basis, how much capital we are using what form of capital. We're using and are we getting a return on that capital on an expected basis above the cost of that capital. So I feel comfortable that weve achieved that although the results have been challenging and I feel increasingly comfortable that that is achievable with where I'm observing trend on the casualty.
Compared to rate and for what were seeing.
From an increased profitability within the property Cat book that we're underwriting.
Okay. Thanks, and then curious what are the quick question what are your thoughts kind as we as we head into 2021 on on reinsurance demand from a buyer's perspective, I mean thinking that one you know we've had a lot of you know frequency of events is do you think that that one increases demand or on the other hand if.
If buyers on the primary side are achieving some pretty good price increases themselves is that can no.
And then maybe scale back a little bit and retain more business themselves.
Yeah, I think our.
It can be different by line of business, but I think.
Within the property Cat area I think that we are anticipating a small increase in demand.
We also believe that we are the preferred provider of supply. So we feel like were in an advantaged position against that increase in demand casualty is more of a mixed bag.
As to how much increase we're going to see by line of business, but we're we should experience.
Because of the relationship in a position that we have an ability for us to grow even at relatively flat demand in some casualty classes and as I've mentioned earlier in the call I believe that a lot of the benefit of the insurance rate enhancement will in order to our benefit because terms are relatively flat.
To improve that.
Makes sense. Thank you.
Yes. Thanks.
Your next question comes from Josephine from Deutsche Bank. Please go ahead.
Yes. Thanks, just wanted to dig in on the mortgage rebook, a little bit more I guess, the it and Kevin you had talked about the improving default environment home price appreciation to me. These are metrics that would have awkward for an improvement in the loss ratio not a deterioration. So I was hoping you could just give a little color.
What you saw in that book and whether this is a reaction to maybe a second wave of unemployment coming or or how you thought about taking losses up there.
Well this is Bob I'll take the question here, what I tried to outline in the prepared comments is we have seen an increase in reported delinquencies that has come through from the seasons.
And that has gone up but they've been they come in and just because they are delayed by 60 days and that could be on friendly terms forbearance or other reasons, but we really believe that not all of these personal ex that having said that the way the contract works with US we have the profit commissions that offset that neutralizes that but.
We're not seeing dramatically and increasingly we're seeing a reported coming in which is what did elevate our current accident year loss ratio on the casualty side.
Okay got it that's it for me thanks.
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Your next question comes from Elyse Greenspan from Wells Fargo. Please go ahead.
Hi, Thanks for fitting me back in.
Just to follow up first kind of Kevin if we combine all your comments together, obviously a little bit in response to my question really around one one pricing environment, but where do you see today right. Now you know almost five months. After you guys on free that up the capital in June.
Soon that you to feel putting it all together incrementally more positive about the ability to put that capital to use that up pretty strongly turning 2021 is on do you think there's any banking corrected that statement.
No I think if you go back to the capital raise in June we kind of get to two primary areas in which we we knew we had ability to deploy the first is just across our platform. We can restructure our risks. So that is frankly on change because it's something that we already control everything.
Everything else with regard to our assessment of where the market is it each in each point of our portfolio assessment, we're seeing.
Affirming to better news so although we demonstrated good confidence in our ability to to deploy the money in June we have even stronger confidence in our ability to deploy as we go in to as 2021 becomes closer.
Okay, Great and then my second question and brought them pretty positive on a rational market I think 12 point might that you might see on you know last I will add capacity sequentially like black for Epsilon and more on Lady balance sheet can you give us a sense.
How much terrestrial.
Was on your books this year weighted versus offline or just a way that we can think about I guess the rest so well in 2020 and that incremental opportunity.
In 2021.
The let me make sure I understood. Your question are you, saying within Upsilon.
How much of the retro can we renew or.
Yes, let me try to get a sense of how much you both upsilon as well.
You touched on wrong on balance sheet away from offline full 2020 times of Wesco does side to get a sense I guess of what it will grow right well that's a lot of money on how does that comes about the growth opportunity barring slide 21.
Yeah I.
When I think about a follow ups on wrote a broader portfolio than simply retro wrote some structure deals some aggregates and and and some retro.
The retro that we put into upsilon was retro that on a rated balance sheet is cap.
Capital Consumptive because of the structure so it fits well within a collateralized structure I anticipate that much of that retro is going to be restructured I think sometimes people focused on price in the retro market and there's a certain tolerance for price for retro and that it begins to be restructured my hope is that much of the upsilon portfolio.
So.
Can be renewed and ups on with the capital that we bring in for 2021, but the stuff that will not fit into 20 into upsilon will likely be restructured in a way that is more suitable for a rated balance sheet and we have the flexibility across our platforms to provide solutions for every deal within upsilon. It just depends on which balance sheet, we choose to put it in or which vehicle.
If we choose to put it in.
Okay. That's helpful. Thanks, Kevin.
Yes. Thank you.
Your next question comes from Jimmy Bhullar from Jpmorgan. Please go ahead.
Hi, Good morning, So I just had a question along the lines of some of the earlier questions. On your response that the returns have been poor because of in recent years, just because of elevate it gets.
Given your optimism on pricing how do you think about your return potential. The next few years, it's sort of the debt levels over the last few years are more of a trend as opposed to an up aberration do you feel that pricing adequate or do you still expect to generate low returns even at the current levels if.
Cats are close to where they've been the last few years.
So let me divide your comments first between property and casualty and then I'll talk more generally.
So within property.
We work hard to do is to make sure that we find the right risk and put it to the right capital. The net result is that we build portfolios that are better than the market. So we think that the portfolios that we built on the property side certainly met our.
Return objectives on an expected basis within casualty, what we had talked about before as we think about casualty over a much longer time frame. So on a rolling 10 year basis are we making the needed return on the casualty business that were writing we didnt believe that we were at that level of margin over a rolling 10.
Year period, but our observations are that we are seeing rate above trend. So overall, we are moving to a much more adequate.
Inforce portfolio and my belief is that we still have a little bit more ways to go which adds to my confidence that casualty rates will continue but I feel very very positive that the way we're thinking about it over 10 year period will produce the right level of return for the portfolio when we bring them. Both together, obviously, we would achieve a cap.
Capital efficiency. So the combined portfolio, then enhances the adequacy of both portfolios.
Okay, and then just on goal that obviously, it's going to take a while to determine ultimate losses, but what's your sort of level of confidence in your reserves based on the information you have thus far like are you are your reserves sort of contemplating whatever you've gotten from the from the.
Your clients or is there a little bit of a cushion for sort of adverse court outcomes or otherwise.
I think we as always but our best estimate on our reserves. So it is a dynamic situation, it's an ongoing event.
No it's an ongoing pandemic event.
And it's something that we're going to continue to need to monitor, but we feel as if we've got our best estimate on the reserves were currently holding.
Thanks.
Thank you.
This concludes security portion of our call.
Kevin O'donnell.
Thank you everybody for participating on today's call and we look forward to talking to you. After the one one renewals. Thanks again bye.
Ladies and gentlemen, this does conclude today's conference call. Thank you once again for participating you may now disconnect.
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