Q3 2021 AXIS Capital Holdings Ltd Earnings Call
[music].
Good morning, and welcome to access capital third quarter earnings call.
All participants will be in listen only mode. If you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be opportunity to ask questions. Please.
Please note that this event is being recorded.
I'd like to turn the conference over to Mr. Matt Woman. That's the relations. Please go ahead.
Thank you Nick good morning, ladies and gentlemen, I'm happy to welcome you to our conference call to discuss the financial results for Axis capital for the third quarter ended September 32021 earnings press release and financial supplement were issued yesterday evening. After the market closed if you'd like copies. Please visit the information section.
What's your information section of our website and our capital Dot Com, we set aside an hour for todays call, which is also available as an audio webcast founding investor information section of our website with me today I have a bunch of all our president and CEO and Pete Vogt, our CFO before I turn the call over to Albert I'll remind everyone that the statements made during this call, including the question and answer session, which are not historical.
Facts may be forward looking statements forward looking statements involve risks uncertainties and assumptions actual events or results may differ materially from those projected in the forward looking statements.
Due to a variety of factors and the risk factors set forth in the company's most recent report on Form 10-K, and other reports the company files with the SEC. This includes the additional risks identified in the cautionary note regarding forward looking statements in our earnings press release issued yesterday evening, we undertake no obligation to publicly update or revise any forward looking statements. In addition, this presents.
Jason May contain non-GAAP financial measures reconciliations are included in our earnings press release and financial supplement with that I'll turn the call over to Albert.
Thank you Matt.
Good morning, everyone and thank you for joining today's call.
Our company's performance in recent quarters has been defined by consistency and accelerating momentum in our results.
A trend that continued in the third quarter, even in the face of heavy cat and weather activity.
We expect industry cat losses in the third quarter will exceed $50 billion.
With year to date industry natural catastrophe losses already ahead of full year 2020. This year should rank among the top five cat loss years for the industry.
Despite this access generated net operating income for the quarter.
Our operating income is up $66 million in the quarter.
And $412 million year to date as compared to the prior year periods.
And our core underwriting profitability is on a strong positive trajectory.
Our all in ex Cat underwriting income.
Was up 82% in the quarter to $191 million and year to date, it's up 56%.
$518 million.
Over the last few years, we have both improved our core ex cat results and reduced our exposure to cat events and the results are now evident.
This quarter marks the eighth consecutive quarter of year over year improvements in our ex cat combined ratio.
Over that period, we've reduced our reported ex cat combined ratio by more than seven points.
Now stands below 88% year to date.
In that same period, we've reduced our <unk> by 25% to 40% at various points along the curve.
To ensure that the less of our core <unk> profits are we wrote it by cat events.
Our modest year over year change in the cat losses, and lower market share of global Cat events. This year reflects our progress in reducing earnings volatility, allowing us to deliver a consolidated underwriting profit in the year to date period.
I want to highlight the strong performance of our insurance business to illustrate just how far we've come.
During the quarter, our insurance business produced 26% growth in premiums.
Reflecting our strong positioning in the attractive.
Ines and specialty markets and.
And we're on pace to report record premium production for the second year in a row.
We continue to extend our footprint in highly attractive markets that are seeing the most favorable conditions.
And we feel good about the pricing and terms that our underwriters are securing.
Importantly, this growth came with improvements in profitability as insurance delivered an underwriting profit in the quarter and our all in year to date insurance combined ratio is below 93%, even with all the cats incurred this year.
This is on the strength of an insurance ex cat combined ratio below 85%.
And the cat loss ratio of less than 8% and a heavy cat year.
We're confident that we're building one of the better specialty commercial insurance franchises in the industry.
Our reinsurance business. Similarly delivered a strong year to date ex cat combined ratio of 86%.
And with an all in year to date combined ratio of 101.6, our reinsurance operations are within reach of generating an underwriting profit for this year.
Within our reinsurance business year to date volume has been essentially flat.
Our team remains focused on increasing profitability and reducing earnings volatility related to catastrophes.
Stepping back our teams remain disciplined and we are allocating more of our capital to attractive insurance opportunities.
Across this company, we have a strong team and a consistent record of developing and recruiting great talent.
And our performance over the last few years tells us that our plan is generating tangible results.
And we know exactly what we need to do to sustain this momentum.
We will continue to intelligently develop our portfolio, while reducing our exposure to catastrophe events. We will further manage expenses and we will continue to invest in our culture and in our people.
These are the actions that have delivered consistent progress over the past three years and we're confident that they will continue to drive improvements to our performance our value creation and delivering attractive returns to our shareholders.
I'll now pass the floor to Pete who will walk us through the third party. The third quarter financials, then I'll come back and discuss market trends and will have our Q&A.
Pete.
Thank you Albert.
And good morning, everyone.
During the quarter, we generated net income available to common shareholders of $47 million.
An annualized ROE of three 9%.
Operating income was $1 billion.
Diluted book value per share decreased by 64.
To $54 86.
This was principally driven by a decrease in net unrealized gains as reported in other comprehensive income due to increasing interest rates as.
As well as common share dividends declared this was partially offset by net income generated.
As previously announced pre tax cat and weather related losses net of reinsurance and reinstatement premiums were $250 million or 27 points on the combined ratio.
This was primarily attributable to hurricane Ida the July European floods, and other weather related events.
As Albert noted core underwriting results continued to show improvement as the company produced a consolidated current accident year combined ratio ex cat and weather of 87, 6%.
It was five points better than the prior year quarter.
The improvement was across both segments.
This is the strongest our consolidated current accident year combined ratio ex cat and weather has been since the fourth quarter of 2012.
The consolidated current accident year loss ratio ex cat and weather was 55, 4% a decrease of more than three points over the prior year quarter also driven by improvements in both segments.
There was no change to the net loss estimate of $360 million established for the COVID-19 pandemic in 2020.
We reported net favorable prior year reserve development of $11 million compared to under $1 million in the third quarter of 2020.
The consolidated acquisition cost ratio was 19, 1% a decrease of two points compared to the third quarter of 2020 again attributable to both segments.
The consolidated G&A expense ratio was 13, 1%.
Slightly higher than the prior year quarter. This was mainly driven by an increase in personnel costs and technology investments as well as lower expenses during the prior year period due to the impacts of the pandemic.
Overall operating efficiency and expense control remained important goals for us.
And we expect the G&A ratio to come in below 14 for full year 2021.
And lastly on a consolidated basis fee income from strategic capital partners was $18 million, a modest increase year over year.
Now I will discuss the segments.
I'll start in insurance, where once again, we have continued solid improvement across all underwriting metrics.
Gross premiums written increased by 26% to $1 2 billion.
Making it our highest third quarter ever.
The increase came primarily from new business in professional lines liability and property as well as favorable rate changes across virtually all lines of business.
The current accident year loss ratio ex cat and weather decreased by almost four points.
Resulting from not only the impact of favorable rate over trend.
But also driven by improved performance due to the underwriting actions taken most notably in property liability and aviation lines.
The acquisition cost ratio decreased by two points in the third quarter compared to 2020.
This was primarily due to changes in business mix as we wrote less high cost property MGA business and more low cost pro line some liability business together with an increase in ceding commissions.
Now, let's move on to the reinsurance segment.
The reinsurance segment gross premiums written of $470 million was $75 million or 19% higher than the prior year.
Approximately 15% of our reinsurance business is written during the third quarter.
As such during the third quarter, a few treaties can move growth figures dramatically either way.
In this instance, the increase was driven by the timing of renewals and motor and accident and health.
As well as new business production that was primarily attributable to liability.
And accident and health.
The increases in our Cat book were driven by reinstatement premiums due to the cat activity that occurred during the quarter.
These increases were offset by a significant $20 million decrease in property lines as we continue to reshape that book.
The current accident year loss ratio ex cat and weather decreased by one three points due to improved loss experience in credit and surety and accident and health lines.
As well as the impact of favorable pricing over loss trends.
This was partially offset by the impact of changes in some retro sessional agreements and changes in business mix as we earned less cat premium in the quarter.
The acquisition cost ratio decreased by one nine points compared to the prior year quarter and this was primarily due to changes in the retro programs.
Net investment income was $107 million in the quarter compared to net investment income of $102 million.
For the third quarter of 2020.
The increase in net investment income was primarily attributable to positive returns from alternative assets principally that private equity funds.
This was partially offset by a decrease in income from fixed maturities attributable to lower yields on the portfolio.
At quarter end, the fixed income portfolio had a book yield of one 9% and a duration of three one years and our.
Our market yield was one 4%.
Lastly, I'll note that when you review our PMO disclosures you will see that the <unk> have come down significantly as compared to July one.
The decrease is driven by a cat aggregate cover on our insurance property book with a deductible has been nearly exhausted due to the cats in the third quarter.
With this cover in place on a go forward basis, we feel well protected on the insurance property book from now through May 2022.
Excluding the impact of the cat aggregate cover the pmla levels would be generally consistent with what you saw in July one 2021.
Overall with continued improvement in most operating metrics and positive momentum in our core underwriting book This was a solid quarter for axis.
And with that summary of our third quarter results.
I'll turn the call back over to Albert.
Thank you Pete.
Let's do a brief overview of market conditions and outlook and we'll then open the call for questions.
Market conditions remained strong with rates ahead of loss cost trends in practically every line across our book.
This represents the 16th consecutive quarter of insurance rate increases and the sixth consecutive quarter of double digit increases.
Rate increases in insurance, where almost 14% this quarter, which is close to flat with a 14% reported in the second quarter of this year.
Looking at our insurance segment by region, the North American market is up 13% and London is up 15%.
By class of business professional lines. Once again saw the strongest pricing actions with average rate increases close to 21%.
Rapid pricing escalation on cyber continues to be the key factor.
For the quarter cyber is up 52%, which follows on a 38% increase in the second quarter.
Excluding cyber other professional lines are averaging 12% with a lot of it in Canada in the high teens, while in the U S rates are averaging about 9%.
Liability primary casualty and excess casualty are averaging increases of close to 10%.
Property Likewise is seeing great increases at 10%.
A number of our specialty lines continue to do well in the low to mid double digits for.
For example, renewable energy, where we're a global leader is up close to 15%.
Looking broadly from an industry view.
<unk> rate increases are not as high as they were in the third quarter of last year.
But putting things in perspective within axis for the first nine months of this year, we achieved average rate increases of 13% that are on par with a 13% increase we saw in the first nine months of 2020.
So we're getting solid rate on rate.
It is understandable that after four years of rate increases that have now aggregated to more than 40% pricing action is slowing modestly in certain lines.
But overall conditions remain very strong and most importantly, we're staying meaningfully ahead of loss costs.
During the quarter, 97% of our insurance portfolio renewed flat to up and almost half the portfolio renewed at double digit increases.
We're also generating record levels of new business and our new business pricing metrics are at least as strong as if not stronger the renewal pricing metrics.
Let's move to reinsurance.
As Pete noted the third quarter is a relatively small renewal period for axis rate impacting less than 15% of our reinsurance business.
By comparison, just over half of our insurance business will renew at January one.
The third quarter reinsurance rate change was up 9% in the quarter.
While this is below the 11% average year to date timing and mix issues are a factor.
A better comparison, maybe the prior year third quarter, where rate change was 8%.
As is typical in the reinsurance market there was great variation by geography and line of business.
The North American market was strongest with average increases of 11%, while the rest of the world averaged in the low single digits.
By class of business numerous lifestyle increases in the low double digits.
Accident, and health up 13% liability at 12.
And catastrophe and property averaging 11%.
Motor and credit and surety were close to flat.
Heading into the January one renewals, we expect to see reinsurance rate increases, but the quantum remains uncertain at the moment.
In property and property Cat, we anticipate that this year's cash will continue to drive market momentum.
These most recent events coupled with five years of poor performance within the sector and concerns about the immediate impact of climate change have most reinsurance carriers signaling stable to reduce capacity.
There's also the question of how much retro and third party capital will be trapped or withdrawn at year end.
And the amount of capital new capital that may be deployed.
In other lines the rationale for rate increases is also clear as we've covered before and the reinsurance industry has not gained relative improvements equal to what it has achieved in prior cycles.
So there is a strong case for meaningful increases at least on par with insurance pricing.
However, the absolute amount of reinsurance capital that is presently available continues to be the main offsetting driver to a more meaningful correction.
For Axis re.
Underwriting discipline in optimizing the portfolio remains a foremost priorities.
And we plan to further reduce our catastrophe exposure into the new year and another lines align our appetite to attractive terms and conditions.
Taking a broader view of both insurance and reinsurance markets.
Notwithstanding four years of price increases not all lines offer adequate pricing.
What the industry needs at this point is to get all lines adequacy.
Our sustained the discipline to price at or ahead of loss cost trends.
I believe that in the near term there are sufficient drivers to maintain that discipline.
This includes continuing low interest rates below book yields, which will provide a headwind to future growth of investment income.
The catastrophic impacts of climate change as well as financial and social inflation.
On that last point I believe most insurers recognize that the drivers of social inflation remain.
Including legislative and regulatory intervention, social inequality and litigation funding as.
As well as new causes for actions, including scrutiny surrounding ESG practices.
I am increasingly confident that pricing discipline will run through 2022 and likely beyond.
And as long as our industry can stay ahead of loss cost trends, we should have attractive opportunities for profitable growth at axis.
As we look to the future.
Primary sentiment that we're feeling at axis is one of optimism we.
We've made significant progress through decisive action we.
We're delivering on our commitments and we're seeing the intended results.
We have a strong franchise grounded in a culture of providing superior service to our customers a great team and we believe that we're well on our way to building an optimized hybrid underwriter that will deliver attractive returns to our shareholders.
Everything that we're seeing tells us that we're on the right path.
Each quarter, we are seeing increasing evidence that our plan is working.
And with our performance during the third quarter, providing yet another positive data points to that trend.
We believe that the future looks bright.
And with that <unk>.
Let's please open the line for questions.
Thank you well now begin the question and answer session.
Question You May Press Star then one on your Touchtone phone.
Can you just get a speakerphone please pick up your handset before pressing the keys.
Well your question. Please press Star then two.
At this time, we'll pause momentarily to assemble the roster.
First question comes from Brian Meredith UBS.
UBS. Please go ahead.
Yes. Thank you a couple of questions here for you all.
First one just curious the underlying loss ratio, we have in the insurance segment.
Is that kind of a good run rate number was any current year development or anything on that number.
Hey, Brian There was nothing unusual go ahead Peter.
Yes, Brian This is Pete there was nothing unusual in that Brian. So I would say overall, it's a good run rate number again, there's always a little bit of noise, just because of where we are in quarters I'd look at the year to date numbers is a really good number right now going forward.
Got you and then second question you talked about that aggregate cover the effect on <unk>, maybe you can describe it a little bit better for us what would impact will that have on mitigating cat losses here for for you all over the next I guess.
A couple of quarters, yes, I'll give you a little bit more color on that Bryan we purchased a when.
When we read our property purchasing first of all our XO L cover for insurance attaches at a $100 million.
That has to be aware and then we bought an aggregate that attaches at a $100 million.
That was almost exhausted with hurricane Ina. So we've got about $10 million less left to exhaust that it is a 150 in excess of 100 tower.
It's got a $10 million event deductible and it's about 70% placed so you can sort of see that should give you. All the details you need what I would tell you is when you do the modeling that cover really plays well on the lower end of the curve, which is why you saw a sort of a more of a more of a benefit on the lower end of the curve and say in the one and $2 50.
Part of the curve.
And when does that does it cover expire at year end or when does it actually yes. That's a good point to I am sorry that goes to May of 2022, So that got you will through the winter and the early spring.
Great and then my last question just curious.
Your stock still trades at a pretty attractive valuation here.
I know you had we had the big cat losses in the quarter, but just looking at your capital position looking at your leverage ratios, where are we with respect to your ability or desire willingness to repurchase your shares.
Yes.
Yes, so I mean, I think right now as you noted the stock does create definitely trade and attractive valuation, we're coming out of wind period. Now. So we will take a look at where the capital land as well as what we wanted to do for growth next year as Albert mentioned still very attractive markets that we are in especially on the insurance side and will as.
I said at the second quarter call, we'll get that decision with our board in the in the December timeframe.
Makes sense. Thanks.
Thanks, Tom.
Thank you next question is from Derek <unk>. Please go ahead.
Good morning, Thanks for taking my question.
I just had a question on the underlying margin improvement you, obviously had good underlying margin improvement in the quarter can you provide some color on how much is being driven by the casualty and specialty lines.
Whether you've kind of lowered loss picks in that in those lines of business or whether you have plans to do so.
Actually every single one of our lines showed improvement year over year.
So I think it's a combination of pricing and changes in.
In underwriting.
So really every single line produced an improvement and improved underwriting result.
Okay. That's helpful and then I have.
Another numbers question.
We have premium ratio.
61%, which is quite quite a drop sequentially and year over year.
Is that just being driven by SCE treaties are.
Low sixty's or mid $60, something thats run ratable, given that youre going to allocate more capital to the insurance side.
Derek could you could you repeat the first part of your question you cut out there.
Sorry about that.
Can you hear me okay.
Yes, they come in and better yet.
Was that a question.
Reinsurance gross written premium ratio is about 61%.
That said pretty steep drop off from.
Both sequentially and year over year.
I was just wondering if that's being driven by sea treaty user.
Thats something thats more of a ratable.
Yes, I would say right now that is something that's more run ratable, we increased our sessions on our property cat as we went into as we went into the second half of this year. So that showed more than the third quarter and as Albert noted we are looking to reduce our net on the on especially the property and property cat and we've done that through.
More third party capital partnerships and Thats actually lead led to higher sessions.
Okay. Thank you for taking my questions.
Again, if you have a question. Please press Star then one.
Next question from Elyse Greenspan of Wells Fargo. Please go ahead.
Hi, Thanks, Good morning, My first question.
G&A ratio was pretty low.
Quarter relative.
13, one right and I think you guys were talking about setting.
Mid teens next year.
But I know that seasonally that can sometimes be lower in the back half of the year.
There anything there or is that.
One run rate of all our should we think about seasonality.
Yeah, the only thing that impacted in the quarter, our lease was a little bit of noise I would call a normalized G&A ratio for the quarter at 13, 5%.
Again, I do think that means as you know it tends to be a little bit higher in the first half of the year that will allow us to come in under 14 for the year had been indicating kind of low fourteens, but will come in under 14 and I believe that means we will be in the <unk> for next year also.
And then what about.
The acquisition cost ratio was that impacted by mix like that came in at 19, one so good level of improvement a couple of points year over year is there anything there or is that just kind of run rate.
No that actually is a pretty good run rate for the quarter a lease if you noted I noted there.
<unk> back, especially in insurance to around that debt to 18, Mark because it was <unk> 17 in the second quarter due to some one time good guys for the third quarter is a pretty good run rate right now for our book is.
Okay, and then Albert.
Of your commentary in the reinsurance market it sounds like.
Realistic pessimism, just give it alternative capital and how things might shake out in January one.
So I just want to make sure I'm understanding that correctly in your thoughts there and then.
Second of all it's a market opportunity.
The stronger at January one just given the losses that we've had this year.
<unk> done really well in terms of taking down its cat exposure.
Pricing does include significantly while you can.
Consider.
Question, Corey adding to your exposure are you buy regardless of what happens.
Sat Fi.
Continuing to total Pablo in cat exposure.
Yes, Elyse, so I wasn't trying to put pessimism what I was trying to say is it's a wide range of possible outcomes.
And.
Certainly.
Looking to people in conferences and elsewhere.
A number of reinsurers retro providers ILS providers, all communicating dissatisfaction with results kind of indicating flat to down capacity as I mentioned.
If retro and ILS.
Trapped or capacity gets reduced I think that could put even more pressure on pricing. So basically what we're saying is it's.
Something to look for there are a lot of pressures for increased rates Theres also some capacity in the market and that's why we're just we're seeing the quantum of the increase is one that we're not not clear on right now it's a little foggy as we get closer to one one will get more clarity, but I want to be very clear.
Our goal is to deliver strong and steady and less volatile earnings going forward, we will not be increasing our cat exposure no matter what the prices.
We want to bring our book down to a specialty lines book that is an appropriate amount of property and property cat, but not too much we suffered from being overweight property and property cat in the last three four years, we're working our way down we like what it does to us to be fair I think if I were to tell you a year or two or three ago that access insurance.
Reported underwriting profit or that we would report.
Operating gain and a $50 billion cat quarter.
You would have been surprised of that.
We like the trend, we're delivering and we're going to stay on that trend.
Okay. That's helpful. Thanks for the color.
Thank you.
Thank you next we have a follow up question from Brian Meredith UBS. Please go ahead.
Yes, Thanks, Albert I'm, just curious the current inflationary environment that we're in.
CPI as well as medical cost inflation, and just looking for a tort inflation.
How are you thinking about that and how is that factoring into how you are setting loss picks right now.
The straight line of US is that it's incorporated in our loss trends so.
I think.
Our loss trends right now are more elevated than the way, we're looking to price and reserve and I think it's.
It's something that we incorporate every year.
So something that we spend a lot of time on on when we settle individual claims I feel really proud of the fact that when our claims.
Professionals look at something they take into consideration, what's the current and anticipated price of.
Our services and supplies whats happening with demand surge and I feel really good about the fact that we do a very good job of of valuing those costs, but to your point Brian.
We are for the moment estimating a higher loss trends.
And our loss ratios, but I would also say something which is that it's really important that when we renew policies, where we price policies that we reflect recent inflation in calculating the exposures the values of assets that are being in short and so on one of the real risks in our industry is insufficient and short value compared to.
Actual replacement value and so it's important that as part of the underwriting process.
<unk> got a good a good estimate of what your insured values are.
Makes sense. Thank you.
Youre welcome.
Thank you next question from Michael Phillips Morgan Stanley. Please go ahead.
Thanks, Good morning.
You talked a lot about building a.
Specialty insurance company.
And mitigating getting out of the cat risk and volatility there I guess and you also talked about recruiting so I'm curious on the specialty fluid. It requires a lot of deep underwriting expertise at the underwriting level.
Are you do you have the staff you need there if not on the recruiting efforts, where you get where you get into trouble.
So the short answer is we've got a great team, we've got a strong staff and frankly, our strong underwriters have been.
An important part of who we are for a long time and I would say that I'm very proud of the culture at axis that has a great culture at recruiting and retaining people and developing them. So we absolutely have a great team.
We like to bring them in young and develop them, but when we need to bring somebody in at the middle of our senior levels. We also recruit outside from other providers.
And we've had a very strong track record of recruiting talent in.
In fact, I believe you've probably seen a number of head of press releases.
Throughout the year that we're adding talent to property, we're adding talent to liability, we're adding to help the cyber we're adding talent to renewable energy. So if we if we don't have the sufficient number of people.
To support the great growth opportunities in front of US, we're very happy to recruit talent and to date our track record has been very good.
Okay. Thanks for that and then maybe one for Hudson for Pete.
Do you think.
The reserve level today do you feel more comfortable in your reserve level today, maybe because of.
What we went through with Covid is there more of a cushion than otherwise would have been there.
Mike I guess, what I'd say is I'm very comfortable with our reserve levels today, especially since as we've actually increased some reserves in our pro lines and liability area. That's been focused on those 16 to 18 years and so we feel that we've really.
<unk> gotten good balance there and then since those years those are the books of business that have really gotten a lot of rate a lot of good terms and conditions.
And we have as you can see we've as we've gotten a lot of rate we've been very.
I called it conservative, but we're looking at social inflation in our in our underwriting our current accident year loss picks have not come down near as much as you've seen as we've said for the rate increases so I feel really good, especially about the 19 2021 years and so far this year as we put some reserves up in those <unk> areas.
Those were really focused in the 16 to 18 years and also what I would say in the current accident year as some of those reserves, we've put up, especially probably 50% of them. This quarter are associated with books of business that were no longer in so the underwriting actions. We've taken we're we've gotten out of some particular sub lines of business actually make our.
Current book much better and therefore, I think are are more younger reserves much stronger than we had in 16 that 60 to 80.
Okay, great. Thanks for the color.
Thank you. This concludes our question and answer session I would like to turn the conference back over to Mr. Albert <unk> for closing remarks. Please go ahead.
Thank you everybody for your time. This morning appreciate the interaction again really pleased and we feel very optimistic about the future.
Before I wrap up the call.
Just want to thank all of my colleagues, who are listening across axis for the fantastic work that Youre doing every day for a deep commitment to the company and our clients and our partners in distribution.
All working together to make this a stronger more profitable company and it's a great team. Thank you all.
Operator that ends our call.
Yes.
I'll now concluded. Thank you for attending today's presentation you may now disconnect.
Yes.