Q3 2021 Renaissancere Holdings Ltd Earnings Call
[music].
Good morning, My name is Sia and I will be the conference operator today at this time I would like to welcome everyone to the Renaissance Reis third quarter earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If he would like to ask a question. During this time.
Simply press Star and the number one on your telephone keypad to withdraw the question press the pound key. Thank you at this time I would like to turn the conference over to Keith Mccue, Senior Vice President Finance and Investor Relations. Please go ahead Sir.
Thank you. Good morning, Thank you for joining our third quarter financial results conference call yesterday. After the market close we issued our quarterly release, if you didn't receive a copy. Please call me at four one to three 943 zero and we will make sure to provide you with one there will be an audio replay of the call available.
About one P M. Eastern time today through midnight on November 26, the replay can be accessed by dialing 8558592056 U S toll free or 1404, 537 3406 internationally. The passcode you will need for both.
Numbers is 70 440669.
Today's call is also available through the Investor information section of Www Dot <unk> dot com and will be archived on Renaissance <unk> website through midnight on November 26, 2021.
Before 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 factors shaping these outcomes can be found in Renaissance <unk> SEC filings to which we direct you.
With us to discuss todays results are Kevin O'donnell, President and Chief Executive Officer, and Bob <unk> Executive Vice President and Chief Financial Officer.
Now I'd like to turn the call over to Kevin Kevin.
Thanks, Steve Good morning, everyone and thank you for joining today's call.
Regarding our financial results. This was a difficult quarter and a continuation of what we have been experiencing in the PC industry over the last five years.
That said, we believe that the market will continue to experience significant rate increases, which will accrue to the benefit of our shareholders.
Let's start by discussing the third quarter, given the large catastrophe losses I will focus my comments, primarily on our property business, where climate change social inflation and other loss drivers are paused.
<unk> losses.
As you would expect reinsurers have absorbed a significant share of this volatility.
Absorbing volatility is an important component of our value proposition to our customers.
Over the past five years, we have delivered on this promise.
Ultimately, however, we need to be paid adequately for the risk that we assume.
And the returns for our shareholders over the recent five year period, we're not sufficient for capital they have deployed.
Our industry that has experienced more change recently than at any time since our founding in 1993 and.
In response, we set out to build the capabilities and scale needed to generate superior returns in this marketplace.
We began this journey by forming our Lloyd's syndicate.
Continued with the acquisitions of platinum and TMR <unk>.
The accelerated with the expansion of our capital partners business and culminated with last year's capital raise which afforded us the ability to lean into one of the best reinsurance markets, we've experienced with them a long time.
We are now at an inflection point in our evolution. We have built an organization that will succeed in an industry impacted by low interest rates abundant and third party capital social inflation and climate change. It is now time to monetize what we have built.
Our fortress balance sheet will help us achieve this goal as it easily absorbed this quarter's losses, our shares have been trading at attractive levels, which provides us more options to deploy excess capital than probably any other time in recent history.
As you saw we continued to repurchase our shares in the fourth quarter and thanks to our strong excess capital position and expect to continue to do so in 2022.
The attractiveness of our shares versus other opportunities places, an increasingly higher hurdle against deploying excess capital into our business.
We have achieved a competitive scale and will only pursue future growth to the extent new business is expected to clear stringent profitability hurdle rates.
This will allow our underwriters to focus on building efficient portfolios through pricing discipline and strong underwriting.
We will continue to engage with their clients discussing our developing view of risk and the pricing and structures that are needed to provide fair returns to absorb the volatility.
At times, these discussions may prove difficult or challenging I'm comfortable reducing on any business.
We do not believe will create superior returns for our shareholders. This results in additional excess capital, we have more tools than ever to manage it effectively.
That said I expect that we will write a larger and more profitable portfolio in 2022.
To begin with the property market has enjoyed material rate increases over the last five years, which will continue to earn through.
Rate increases have been similar if not steeper in the casualty market over the last three years.
Going forward, we believe rates will continue to rise across the industry for several reasons.
First due to continuing volatility realized results have lagged expected returns in the industry at large for several years.
As a result substantial proportions of the reinsurance industry in particular third party capital that fail to earn their cost of capital Investor patience is wearing thin and they are requiring increased return profiles to accept volatility.
We expect retro capacity will shrink due to poor performance and substantial trapped to kill it trapped capital.
Any retro that is available we will likely move up in attachment level. So those shifts protection from earnings to capital.
So theres less retro at lower attachment points reinsurers will be more exposed to income statement volatility since the cost of accepting volatility has risen the supply of reinsurance will decrease and further push rate.
Third social inflation will continue plaguing the industry and price inflation will increasingly push up loss costs.
Fourth persistent losses, and the fear of climate change will likely raise primary carriers demand for hedges against their own volatility.
We expect these various dynamics will reduce the supply of and increase the demand for the products that we sell this will result in further rate increases and improved profitability.
I should also note that our casualty business is now beginning to reflect the substantial rate improvements over the last three years as a result, this quarter, we reduced our initial expected loss ratio by three points.
We absorbed the casualty segment share of cat losses, and still made an underwriting profit I will discuss this further in the second half of my comments, but suffice it to say that we anticipate casualty will increasingly contribute to our bottom line in the future. So.
So when I look forward to 2022, I'm very excited about our prospects our fortress balance sheet allows us to maintain our current underwriting portfolio or even grow it if desirable increasing rates across our business will add to the portfolio is profitability.
And finally prudent capital management will leverage our potential to generate bottom line profitability on a percentage of equity basis.
That concludes my opening comments I'll provide more detailed update on our segment performance at the end of the call, but first I'll turn it over to Bob to discuss the financial performance for the quarter.
Thanks, Kevin and good morning, everyone as Kevin pointed out this was an active season for catastrophes, which is reflected in our results for the quarter.
I will discuss our performance in detail, but there are two main points I want to take away first we have maintained a fortress balance sheet that gives us tremendous flexibility to create value for shareholders by actively managing how we deploy our capital we will grow if underwriting opportunities are sufficiently profitable, but equally we can continue to repurchase our share.
<unk> at attractive multiples second the business that we have invested in and grown this year casualty and other property.
Continue to trend in a positive direction.
We're starting to recognize these results in our financials. This quarter, we had the confidence to lower our initial expected loss ratio in casualty by three percentage points.
Additionally, the attritional loss ratio for other property has been steadily improving as a result of the portfolio management activities. We discussed with you at the beginning of last year.
With this in mind I'll start my comments with a discussion of our capital position, how we're thinking about managing this capital going into the January renewals and will then move to our consolidated results and three drivers of profit.
So starting with capital management and this was an active quarter in material share repurchases. Our capital position remains strong weather related large losses were within expectations, and we have sufficient capital and liquidity to absorb them.
We generally like to hold and excess capital buffer of up to $1 billion, which gives us the flexibility to take advantage of future opportunities. As we look ahead to 2022, we're very comfortable with our excess capital position.
As you know our first preference is to always to deploy capital into profitable business opportunities and second to return the excess to shareholders, which we have been doing this year.
Kevin explained this framework is still valid.
Our stock valuation is so attractive our hurdle rate for an attractive underwriting opportunity is higher than it has been in the past.
Ultimately our goal is to grow tangible book value per share going into January one renewals our fortress balance sheet provides multiple levers to do just that we have sufficient capital to support our existing risk and we will continue to grow if price increases in 2022 improved sufficient.
Similarly, we anticipate returning capital to our shareholders at a pace roughly equal to net earnings.
Moving now from our capital management framework to the capital management activities, we undertook in the third quarter.
I mentioned in the last call, we issued $500 million of our series G perpetual preference shares in the third quarter.
The series G has a fixed for life dividend, 4.20% and we used $275 million of the proceeds to refinance our five and three eight series E preference shares as a result, we increased our outstanding preference equity by $225 million.
We also purchased one 5 million common shares for about $224 million in the third quarter.
This works out to an average price per share of about $151 at an average price to book value of less than one two times, our current book value subs.
Subsequent to quarter end, we continued to repurchase shares and as of October 21 had repurchased an additional 518000 shares for $75 million at an average price of just over $145 per share.
In total this year, we have repurchased 5 million shares for $780 million at an average price of $155 per share, reducing our share count by about 10% of the year end 2020 total.
Even after weather related large losses in our active share repurchases, our total common and preferred equity position was $6 $75 billion at the end of the quarter. This is roughly flat compared to our equity position immediately following last year's equity raise and provides us with scale and flexibility to effectively X.
Cute our strategy with improved capital efficiency.
Moving now to our consolidated results, we reported a net loss of $450 million and operating loss of $415 million for the quarter.
These results were driven by a net negative impact of $727 million from the weather related large losses, primarily from hurricane Ida record flooding in the northwestern Europe and losses from aggregate contracts as a result, we reported annualized return on average common equity of negative 28% and annualized operating.
Return on average common equity of negative 26%.
I will now shift to our three drivers of profit starting with underwriting income, where we grew gross premiums written by $631 million or 55% with the property segment growing $346 million in the casualty segment growing $285 million.
This quarter, we reported $255 million of reinstatement premiums from the weather related large losses. This compares to $54 million of reinstatement premiums related to the Q3 2020 large loss events. Excluding these reinstatement premiums.
Gross premiums written were up 39%.
Year to date net premiums written were up 44% to $4 $8 billion and we remain on track to comfortably surpassed $1 billion in growth for the year, even when excluding reinstatement premiums. Most of this growth has come from casualty and specialty and other property or where we have seen strong rate increases this year.
We reported underwriting losses of $679 million in the quarter and a combined ratio of 145% 74 percentage points of which are from the weather related large losses, specifically 43 points or from Hurricane Ida and 19 points from European floods.
Our property segment, where gross premiums written increased by $346 million or 81%.
Reinstatement premiums from large loss events in the third quarter increased by $202 million year over year with the vast majority impacting the property catastrophe class of business. Excluding this growth growth in property. Excluding these growth in property premiums was $144 million or 38% with other <unk>.
Property at $182 million, or 73% and property cat catastrophe down $38 million or 30%.
Is it not a major renewal period for property catastrophe in the decline excluding reinstatement is partially driven by a few bespoke nonrecurring deals that we wrote in the third quarter of 2020.
We reported a current accident year loss ratio of 180% and a combined ratio of 184% in the property segment driven by the weather related large losses, which added 141 percentage points to the combined ratio.
As a reminder, our other property book contains both Attritional and catastrophe risk.
The current accident year loss ratio of 112% included 66 percentage points from the weather related large losses the.
The Attritional portion of other property business has been steadily improving since last year and has been consistently below 50% in 2021.
There were also 18 points of favorable development in property this quarter, primarily related to the 2017 to 2019 large catastrophe events in the property catastrophe class of business.
Moving onto our casualty results, where we reported gross premiums written of $1 billion growing $285 million or 40% versus the comparable quarter.
As we have received more information, we're starting to reflect some of the positive rate trends, we have seen in casualty over the last few years as Kevin noted this quarter, we reduced our initial expected loss ratio by three percentage points, which should have a favorable effect on the current accident year loss ratio going forward. This is one factor of many and.
We expect the current accident year loss ratio to fluctuate based on loss events business mix and other items in the quarter.
The combined ratio for casualty was 99, 6% in current accident year loss ratio was 69% the weather related large losses added three five percentage points to these ratios.
Excluding the impact of weather related large catastrophe events and COVID-19. The current accident year loss ratio for casualty has improved modestly compared to the last several quarters and full year 2020.
These improved margins both in casualty and other property R&R increased earned premium base up 43% and 73% respectively from the third quarter, while our capital base remained flat. This demonstrates the enhanced premium leverage we are starting to achieve following our growth initiatives in these segments over the last 12 months.
18 months.
Now moving onto our second driver of profit fee income total fee income in the quarter was $28 million, which reflects the impact of the weather related large losses in 2021.
Starting with management fees, which were down compared to recent quarters. This decline is primarily driven by year to date losses, and da Vinci, which triggered a deferral of management fees, we expect to recapture these fees in future quarters at the point that da Vinci returns to a net profit position and general management fees are related to the growth.
Our joint venture vehicles, and they should steadily increase over time.
Now moving to performance fees, which were up compared to the third quarter of 2020. This difference primarily relates to performance fee reversals.
In the third quarter of 2020, we reversed previously book performance fees, which led to a negative result. This year. However performance fees have been low year to date due to losses from winter storm here, removing the need to reverse in this quarter.
Overall, we shared $198 million of underwriting losses with partners in our joint ventures as reflected in our redeemable noncontrolling interest driven by weather related large losses.
Turning now to our third driver of profit investment income.
Net investment income was $78 million, which is consistent with the second quarter of 2021. This was partially offset by $42 million in realized and unrealized losses, resulting in total investment returns of $36 million $31 million of these realized and unrealized losses came from our fixed maturity portfolio.
And were primarily related to increased interest rates on medium and some longer duration treasuries and a modest widening in credit spreads in some sectors.
Yield on our retained fixed maturity portfolio stayed constant at one 3% and the duration on our retained portfolio decreased slightly to three seven years.
We remain very comfortable with the composition of our investment portfolio and believe that it provides the liquidity that we need to support our underwriting business.
At this point I'll turn to our expenses starting with the acquisition expense ratio, which remained flat at 22%. The casualty expense ratio increased by four percentage points to 28%, which is consistent with our expectations.
As a reminder, the acquisition expense ratio in the third quarter of 2020 was low due to reduced profit commissions associated with losses in our mortgage book.
The property acquisition expense ratio decreased by three percentage points to 16% primarily related to the increase in reinstatement premiums excluding the impact of reinstatement premiums property acquisition expense ratio increased from the comparable quarter.
As a reminder, the other property business typically carried higher acquisition cost ratio than property catastrophe. So we would expect the acquisition cost ratio to increase as other property becomes a more meaningful part of our property portfolio.
Our direct expense ratio, which is the sum of our operational and corporate expenses divided by net premiums earned was 5%.
This is broadly flat with last year after excluding the impact of loss on sale of the Renren U K limited and some other onetime items from the third quarter of 2020.
On an absolute basis operational expenses were up in the quarter, but the operational expense ratio declined by one percentage point to 4%.
Now before I turn it back to Kevin I'd like to spend a moment on global tax developments as.
As I mentioned on the last call. We've been closely following recent announcements on setting a global minimum corporate tax. The OECD is work on pillar, one and pillar two and president by the proposals for U S tax changes in October the OECD announced a framework between many countries to institute, a 15% global minimum tax however.
Most of the practical details about how this would be implemented or not yet clear. We're monitoring this issue closely and believe that our global operating platform will continue to provide us with a competitive advantage so that conclusion.
While our results for the quarter were impacted by natural catastrophes.
We're seeing positive momentum across both segments, we have taken a very active approach to capital management and going into the important January one renewals have built a fortress balance sheet that provides many levers to build value for our shareholders.
I'll turn it back over to Kevin.
Thanks, Bob.
As usual I'll divide my comments between our property and casualty segments, starting with property I thought it'd be helpful to spend a few minutes discussing the loss drivers for natural catastrophes, including the evolving impact of climate change and the increasing costs due to inflation.
For almost two decades, we have invested heavily to understand the influence of climate change on weather and its impact on the risks that we take when it sounds to re risk Sciences is a large part of this investment.
It provides us a significant competitive advantage and assessing the impact of climate change. It also AIDS us in continually updating our models to reflect the latest science such as the recent IPCC six assessment report.
Having this ability is critical as an example, our.
There are many decades of research on the Climate's influence on Atlantic Hurricanes helps inform our belief that the recent activity box since 1995.
Friedly constitutes a new baseline from which to further refine the assumptions that underlie our hurricane wind risk models.
Other words due to climate change, we believe that the elevated average of the last 25 years to pick some more representative view of hurricane risk for the present and that the long term historic record, which serves as the baseline for the vendor Hurricane models is a poor guide for the future.
Our proprietary models reflect this elevated view of frequency and severity and our view of Atlantic Hurricane wind risk in the context of hazard.
Quincy and severity as well as expected modeled industry losses is significantly above the vendor long term view of the risk. This supports our view that we are successfully incorporating the impact of climate change into our models.
It's important to note that while storms are increasing in both frequency and severity. Some of those changes are cyclical in nature and not tied to climate change. So while it's important to understand and price for climate change. It is not the only factor increasing losses in the P&C industry.
In all likelihood the recent clustering of weather events is more attributable to statistical fluctuation in arrival rates than the influence of climate change in the same way that the 10 year period prior to Hurricane Irma was assisted stickle outlier due to the absence of U S land falling hurricanes.
The five year period since then.
<unk> outlier for its heightened activity.
Unlike climate change this is not a systemic issue and should average out over time.
And then there is inflation, even though Ida is tied to the fifth strongest land falling hurricane in U S history.
Norm with Hurricane Ike I, just characteristics simply does not generate enough energy to result in the industry losses that are being projected.
The truth is that as much as storms are getting stronger and more frequent which we can model for social inflation and outright fraud or increasing loss costs in ways that are more difficult to quantify price inflation also plays a role in the elevated cost of catastrophes in part due to labor shortages and supply chain.
These disruptions and rising commodity prices affecting building costs. So.
While we actively adjust our view of natural catastrophe frequency and severity, but the influence of climate change. We also know that these other factors represent a substantial accelerator of loss costs.
Consequently, we are focused on appropriately waiting all of these factors in our model. So we can be confident that we are being paid adequately for the risks we assume.
We believe that we are successfully doing this one indication is that actual hurricane losses in the United States have averaged about $18 4 billion over the last five years, which is below the average that our models predict this strongly suggests that we're accurately capturing recent changes.
We had an opportunity to test our models again this year with hurricane Ida and believe that losses will be within modeled expectations. For example, Tcs is currently estimating that hurricane Ida industry losses at 29 billion.
Our models indicate that the either industry losses about a one in five year event for the U S and about a 1% to 30 year event for the Gulf in other words, a large event, but not an extreme outlier.
The third quarter also experienced a large European flood from Burns.
As further evidence of the expanding influence of climate change burned is likely to be about a 12% to $15 billion industry events, which in our view of the 50 to 100 year return period for the peril of flooding.
In the U K and Europe taken together.
Moving on from this discussion of loss drivers.
This is the time of year, we shift our underwriting focus to the January one renewal.
We are optimistic that we will find ample opportunities to construct an improved portfolio of risks given.
Given the substantial losses in the quarter are under is expect to obtain increased rates and better terms and conditions across our property book that the January one renewal.
This effort will be particularly focused on the property cat business, which has experienced larger losses and smaller rate increases over the last five years relative to other lines.
Shifting to other property.
Our other property business, which was also impacted by weather related large losses of the quarter. Prior to Q3. This market was already dislocated and experiencing substantial rate increases given the active quarter. We expect this favorable trend to continue.
I am delighted with our ability to construct a high quality other property portfolio. This portfolio has been built from largely cat exposed excess and surplus insurance lines that we write on a proportional basis.
This is the most impacted and dislocated segment of the property market and our underwriters have definitely leveraged into this space, we're having more than $1 3 billion in gross premiums so far in 2021.
Cats aside the other property portfolio is enjoying low attritional loss emergence as Bob discussed in his comments in general this business is performing at or above our initial expectations and we continue to realize material rate increases.
Let's now shift to the retro protection that we purchase for ourselves.
Given the weather related large losses. It is likely that this protection will be less available and more expensive in 2022.
Consequently, we may purchase less retro protection and take more risk net.
With the expectation of improved rates, we are comfortable with this potential outcome.
Moving now to our casualty and specialty segment.
Heading into the January one renewals, we continue to enjoy the benefit of accelerating underlying rate increases across multiple lines of business and geographies.
As previously discussed this quarter, we reduced our initial expected loss ratios in some casualty classes.
If pricing and trends continue as they are I expect that our casualty book will continue to show a lower combined ratios over the course of 2022.
This should be the kits are reserving team is moving cautiously to reflect new information until recent year season, and we see more evidence of favorable loss emergence.
We have discussed our casualty book being rate adequate over a rolling 10 year period.
While we continue to see rate churn rate change above loss trend.
We believe more rate as required in the casualty market to produce adequate returns after an extended period of rate reductions up until about 2018.
Finally, putting aside the ongoing organic growth we have planned for 2022 by simply earning through the casualty portfolio that we have already written we expect to grow net earned premiums by over $400 million. This demonstrates the enhanced premium leverage we are beginning to achieve which is good news in an improving market.
Our capital partners business continues to be core and a growing part of our platform.
Over the past five years, we have grown our partner capital by approximately $5 2 billion, which represents a compounded annual growth rate of about 30%.
This allows us to bring more capital into the market and generate fees.
Our fee schedules have remained constant and we're turning away more capital than we are accepting.
We are not an asset accumulator, but rather see ourselves as managing these funds to solve customer problems by sourcing and matching the most desirable risks and the moat with the most efficient capital.
This is a business that continues to mature investors are demanding more accountability for managers with respect to strong governance structures robust internal audit capabilities and a clear understanding of the importance of building ESG transparency responsibility and accountability.
Given our long term record track record robust enterprise risk management framework, we believe we maintained a considerable competitive advantage in this space.
This was a difficult quarter, mark by material net and operating losses.
That said, we head to the January one renewals with ample liquidity and a fortress balance sheet.
Our fundamentals are strong our prospects.
Alright, and I believe that we will have the opportunity to underwrite and increasingly profitable portfolio of business such as the January one renewal that will generate superior returns for our shareholders.
Thank you and with that I'll turn it over for questions.
At this time I would like to remind everyone that if he would like to ask a question two questions and then number one on your telephone keypad. As a reminder, please limit yourself to one question and one follow up if he would like to ask an additional question. Please get back into queue, we'll pause for just a moment.
Yes.
And the first question will come from Elyse Green Green span with Wells Fargo. Please go ahead.
Hi, Thanks, Good morning, Mike.
My first question.
Just on capital.
I'm trying to piece together some of the comments throughout the call.
Thank you I'd like to point Glenn.
Exactly how much excess capital you have today.
Equity levels are below where they were after the equity raise but I think you said.
In line like because that was in the middle of the second quarter of last year, and you said you'd like to hold up to 1 billion buffer.
Where does that actually today.
Hey.
Just in terms of excess capital.
Yeah, Thanks, Elyse hope you're doing well.
Yes, It did say $6 75, now remember we started our journey in building out our capital raise in the second quarter. So we raised it in the second quarter and my comments were really based off the referencing to the end of the first quarter, we did print.
An unrealized gain in the portfolio in the second quarter I think that's your comparative out there, but as I talked about last quarter.
The reconciliation in terms of earnings based on share buybacks and what we've returned back to investors, but your other second question on excess capital I mean, I think it is we're not capital constrained I just want to make sure that's clear and as we look to 2022 will go into the building of our book and it's what Kevin talked about some pretty desirable growth that's out there that we've seen.
We're looking at probably going in with excess capital on the higher side of that that we can reserve for future opportunities that we may see come at us in 2022, but in the same vein. My comments also said that I think given the earnings that we'll be able to generate off of that portfolio will continue to return capital next year as well based on earnings.
So when you say higher side of that.
That range of that $1 million buffer.
Yeah be closer to the day, we'll keep it higher than us as we go through the year, we'll see we'll continue to manage that.
Okay. Thanks, and then my follow up question.
You guys highlighted.
Cat losses for the industry.
Overall, if you go back over the past few years, we've heard that every year coming across in different ways.
Kevin You said that you are optimistic for the January one renewals.
No.
That outcome I know were.
Still a ways away and things change as we get closer.
Based off of what the industry dealt with this year with losses in the U S and in Europe.
What do you what do you think happens to the cat market and what do you guys need to happen for you Doug.
Incrementally right more property cat business.
And return capital to shareholders.
Yeah I think.
It's a great question and we're in a period, where we don't really have a lot of.
Price discovery that we can point to so what I tried to highlight is what I think will be the drivers that will be resonate in the market for us to increase the rate that we get on the property cat that we take.
Think the way that I would think about it.
Is.
We're gonna have I believe a demand and supply imbalance on we've already seen a few large buyers say they would like to increase the amount of protection that the purchasing I think the effect of the reduction in retro we will have a material impact on our reinsurers and their ability to continue to serve as the portfolios that they have and <unk>.
Pricing is always done at the margin so I feel optimistic that there'll be a strong sense and a willingness to reduce risk should rates not be at a significantly improved level.
I think and I use the term rate I should probably say economics, because I think we'll also see a shift in attach.
Attachment points, particularly in Europe will go up.
And we'll see improved terms and conditions and we will see we will achieve more right. So in a rate adjusted basis I have significant hope certainly in the double digits as to what sort of rate change I expect.
And the double digit in both the U S and in Europe.
Sure.
Europe is less important to us, but it certainly deserves double digits and we're prepared to reduce if we don't get it.
I think more important in Europe is probably the attachment point. So if we get the same rate on a risk adjusted but on a risk adjusted basis have double digit improvement in economics will be satisfied.
Okay. Thanks for the color.
Sure.
The next question will come from Mayor Shields with <unk>. Please go ahead.
Great. Thank you I guess key question is.
And specialty segment.
You've been very descriptive.
In terms of the loss ratio improvement have you seen any components of losses, there or I'm, sorry loss trend that it's getting worse rather than better.
It's always a bit of a mixed bag on a quarterly basis. When you do your actuarial reviews to close the books I would say in general.
19 and forward it looks pretty good 18, and prior is where theres more challenge in the book the good news for US is our book was growing and we knew at the time, we were investing into a market that we expect it to improve so the biggest portfolios that we have a really 2021 'twenty two and expect to be 22, so the balance of our portfolio I think is in.
Significantly better shape than others, what we're seeing in our portfolio will be pretty consistent with what others are seeing because we're writing a proportional book.
Okay, that's helpful and.
Uh huh.
To get your perspective on development in Florida, I know you've been fairly pessimistic about what's been accomplished so far and it is.
Hoping for an update.
Florida is honestly not on our radar screen just yet just because it's you know as you know it's a midyear renewal.
We've done in building our pro forma is to hold our PMO and Florida flat for 2022, that's easily adjustable as we begin to learn more at the one one renewal and transfer that into what's likely to happen at 671, Florida is dislocating one of the.
Mark as I generally look at to see the health of the market just to see the growth in citizens and citizens continues to grow which often is a sign of stress in the market. So the fact that the market stressed there might be an opportunity for there to be real legislative change that is beneficial and reinsurers are probably going to continue to look for right. So we've got great relationships down.
There we have pulled back over the last several years, but I don't feel impeded should we decide to grow.
Okay perfect. Thank you so much.
Sure. The next question will come from Brian Meredith with UBS. Please go ahead.
Yeah. Thanks, Kevin a couple of questions here first just curious you gave us the 29 billion Pcs losses that what's your view of what the Ida losses for the industry. How do you factor in demand surged to that given the inflationary environment.
So.
The.
The $29 billion is probably a reasonable estimate not including.
And if I T.
So I think from that standpoint, our last numbers are always a little bit different than what <unk> I think the important thing to note is we did include.
Inflation, social inflation and demand surge in the number that we put up for Ida and for corn, So our numbers reflect our best estimate.
Based on the energy of the Ida laws and the environment in which incurred which is with inflation social inflation and of course demand surge.
Got you. So your number would be probably higher than <unk> given that places.
Yes, I would say, that's probably a reasonable estimate.
We don't disclose that.
Three number on that more importantly wanted to get the number that affected us.
It makes sense and then my.
My second one is I'm just curious you made the comment that you're likely to.
Kind of repurchase shares.
Capital management in line with your net income that you're generating.
But you havent generated than anything.
Past 12 months does that basically imply.
Fourth quarters.
Zero for some reason the CAC I'm sure you would be buying back any stock.
I think we're gonna take it each quarter as it comes Brian. The question is really presented more Kevin said, we've reached a competitive scale, we feel good about the portfolio that we built and as we look at 2022, we're going to go in with some excess to buffer that probably at the high side I said, so it does give us capacity to continue to pull all the levers in our capital management portfolio.
Absolutely right. The most important thing for us is to maintain a fortress balance sheet and liquidity to pay our losses in half.
Capital available should there be opportunities to grow we will maintain all of that in 2022 and still have room to purchase shares back should we have normal cat activity.
Makes sense. Thank you.
The next question will come from Ryan Tunis with Autonomous Research. Please go ahead.
Yeah.
Hi, Thanks.
First question following up on some of the capital questions.
I'm just trying to understand I guess, where the access is coming from because.
If we go back to the capital raise last year you raised your bill.
It didn't seem like you had that much excellence then you said you'd be deployed all of it earlier this year and now there's less equity is less capital and they're ones come before the capital ratio.
I don't know the right way to ask the question I mean, what was your view of X cents, maybe after the capital raise last year.
I'm, just trying to understand where the access is coming from.
No. That's a good question for clarity, we entered Covid with surplus capital we talked about that so as we looked at the capital base. We were looking at that in the context of the uncertainty that we face with Covid and we still have that uncertainty out there. So in the second quarter. We also saw enormous opportunities to continue to grow into the business at that point in time at the end of Q1.
When we were starting to think about raising capital. That's my reference pointed out the six and three quarter $1 billion that I'm talking about on a comparable basis subsequent to that we generated significant earnings.
On the portfolio that came to an unrealized gains and losses. In this case. They were most of the gains that came through that I talked about last quarter that straight common equity that comes into the capital from our capital standpoint perspective, and as over time and that crystallizes, we're able to return that and still maintain the adequacy of capital that we needed as we look into 2022.
So we feel comfortable about it we feel comfortable for the reasons that we cited about but that's kind of the reconciliation in terms of earnings if you're looking back where it came from what it has also provided US with as you also noticed our premiums have gone up by <unk> billion dollars and our capital is the same. So it's also reflecting the premium leverage that we have now.
Embedded in our portfolio going forward in the areas that we talked about.
Got it.
And then I guess for Kevin.
Right.
That was interesting that you said.
Vendor models for hurricanes or actually below your internal view for the past five years.
Which would seem to indicate that.
Perhaps you have been over earning relative to expectations.
How do we reconcile that I guess within the property cat loss ratios.
About 80% since 2017.
We should see we indicated a lot more rate need and I think you said or economic needed.
More than just double digits for.
For this business could be attractive to right.
Yeah.
Yeah.
So our view of risk being higher.
<unk> is a demonstration of kind of our commitment to being good stewards of capital and being kind of superior risk selection, we effectively what that would mean is we are holding.
The same deal at a higher loss ratio and a lower expected return that someone using a different model.
That to US is the right way for us to look at the business because if it appropriately states our profit rather than overstating, our profit and more importantly, it allows us to build much more detailed.
E P curves to understand the use of capital and our capital management. There are benefits from having a view of risk that we feel reflects climate change and that we have competence in.
So when I think about.
Where the model is its where someone should be thinking about this risk and not have rose colored glasses about the return that they hope to achieve but reflect the richer preserve that theyre likely to achieve due to the effects of climate change.
The other thing that I tried to highlight in my comments is there's also.
Against the model that we have statistically we are above the arrival rate for large storms compared to what our model would predict which we believe is a normal statistical anomaly just like what we saw prior to Irma, we're still within a confidence range about 70 bps.
Centile unexpected returns for our portfolio against the heightened average so I still feel good about where we are but we are in a period of climate change adjustment that's required but also a statistical increase in arrival rate, which should revert back to its norm.
So.
I feel like we've done a good job on thinking about the models and reflecting it and we've tried to demonstrate that with the transparency on the call today.
Got it and then just one more.
Just kind of an information question two parts first I guess for Bob.
Da Vinci management fees it sounds like there is a high watermark.
Yeah.
Do you have an expectation of.
How much management fees should be depressed over the next few quarters. How far are you from getting that back to two positive P&L and then the one other one I had for cabinet and separately.
For something like eight.
What is your level of certainty around what your losses at this point it happened a month and a half ago.
Just curious how much do you.
When you think about your loss estimate how much is that is that pinned down a month and a half after you back.
Do you want to start with D. D D D. The management fees a restart next year, it's a quick turnaround I mean, they get suspended.
For the year when they go negative and then they'll restart next year and that will reset the market as they go forward.
Separately I anticipate that da Vinci, it will be a little bit larger next year, which should benefit.
Where were the fees that will generate out of that.
With regard to Ida and certainty.
Well I think we have a.
Really strong process and thinking about we've talked about before the bottom up and top down approach to loss estimation. It is early days I think COVID-19.
And some of the supply chain inflation uncertainty and labor shortages has a high degree of uncertainty to any loss estimate in this environment I believe that that will be particularly visible in some needing to increase their European flood loss I think we've done a better job than others in reflecting these.
Variables, but.
Perfectly candid I think there is uncertainty in the general macroeconomic environment that could affect this loss we've done our best I think it's the right estimate and I feel confident in it.
Thank you.
The next question. The next question will come from Josh Shanker with Bank of America. Please go ahead.
Yes, good morning, everybody.
I'm, just a little worried about Lucy and the football a little bit.
Like we've had a year like 2017, yes property pricing was up but interest rates were down and the ILS money and the pension we're really happy to participate I felt it was coming in 2021 as well can you talk about your confidence in some way.
One of the stopgap as the wide participation of ILS money isn't going to be as enthusiastic about participating this coming year.
Thank you.
You raised a good point, where there has been more persistence and some of the ILS money than we originally expected.
We enjoy great relationships and we have a different platform than others. I think if you look back theres been several large ILS managers that are not going going forward compared to 2020, I think that plays a role I think the role of retro.
Think retro funds.
If appropriately managed will have 70% to 80% trapped or lost that's another very difficult year to explain to investors.
So I frankly, I believe we will shrink our upsilon portfolio. The good news for US is we obtained tend to restructure those deals so that they more comfortably flipped with fit within <unk> limited and D. V. So that we can still manage them on our platform.
So I feel as if it's just it's another body blow to the ILS market with the.
Enhanced volatility that this year and also the fact that a lot of it will shift to the retro market at Burns is even higher than I think about 75% of the burnt loss will come to reinsurance and that will make its way into retro as well.
So.
I don't feel impaired or encumbered in our ability to access capital.
And I think it's because of our track record and our unique structures. So what I'm, saying is an industry phenomenon not a <unk>, but.
We could be wrong in capital could come flooding in but we haven't seen that as of yet there are some capital raised is going on in the industry, which give some transparency and it's our expectation that we will probably increase our capital managed under the da Vinci platform at least for sure.
Okay. Thank you for all the clarity and then just a.
Housekeeping item at the beginning Kevin you said that the loss ratio improved 300 basis points in the casualty business I was just talking about what time frame are you measuring that to me and what and when did the you go through the gate I guess that told you. It was the right time to take the lower loss pick.
So that'll be on an earned basis.
The current year accident.
Expected ultimate that I'm talking about we have for the.
Full year 'twenty for full year 'twenty one.
From this quarter forward.
One one since it was more of a 'twenty two issue earned partially in 'twenty, two and 'twenty three.
Okay.
Yeah.
Yeah, and what was the event that transpired and said now is the time and three Q 'twenty. One that we feel we have enough information that we can take that down a little bit.
It's actually not an event it was.
Our normal process to go through the curves.
And it's the fact that we're beginning to have enough maturity in certain years to begin to reflect the trend that we are already observing but haven't reacted too.
So I've talked in previous calls.
There has been a gap in what our underwriters believe the profitability of the portfolio is in the conservative nature of the actuarial process to reflect positive trend more slowly and that's all it is it's a normal.
It's the normal delay in recognition of casualty profitability in an improving market.
Okay.
Perfect complete thank you.
No.
The final question is from Jimmy <unk> with Jpmorgan. Please go ahead.
Hi, Good morning. So first just had a question on buybacks and you've been fairly active.
And I think you've started to a little bit a little bit after you raise the equity, but you've been fairly active in buybacks to what extent is it.
Just do you have that stuck out bill and do you have an inability to deploy at the returns that you'd want versus maybe.
Right being depressed in trying to take advantage of that.
I think.
We started buying back in the first quarter slowly about 175, 972 actually and that was after we saw the accumulation of some mark to market gains actually fortified our capital base and in my comments I was talking about I think Kevin was two we see the opportunities in 2022, and that's what we're focused on in the context of 2022 and the growth.
And we're seeing there we will have excess capital going into it that we keep for pump potential deployment into profitable business opportunities that we'll see come over the course of the year, but we will have excess capital and we will be generating earnings in the fourth quarter and carrying it into the first quarter and that would be the baseline that we've been looking at returning if those opportunities present itself.
Absolutely right and I think you presented it as an either or we've actually gone both we've grown our portfolio increase the efficiency of the portfolios that we're managing and have continued to buy shares back so I feel great about that okay.
Okay.
And then on inflation.
To what extent are you assuming sort of continuing continuation of the uptick in inflation, we've seen in your pricing versus maybe viewing it as somewhat transitory.
Yeah.
Okay.
We've always had inflation.
There are times, we called the demand surge that after an event, we'd see that there'll be increased competition for labor and resources.
We have increased that.
The good thing is when an event happens we can kind of adjusted in the moment our belief going into 2022 is we're going to continue to see demand surge of course, we're continuing to see the effects of social inflation.
One of the tricks is to determine whether 2020 was a pause or a change in behavior. We believe it's probably more of a pause.
Because of the slowdown in the courts, and we believe inflation will play a role and more importantly, the competition for labor. So we're going in with less than a rosy picture to the economic backdrop to which losses will be settled.
That will be included in our modeling and thinking about how to price transactions in 2022.
Okay and then just lastly, you mentioned a few of the reasons Youre optimistic about great thing.
We're opening remark.
I think some of those reasons existed last year or this year as well yet it seems like while prices were up they weren't up as much as people were expecting.
Going into the year. So what gives you more confidence or are there things that are different as you see them in the market now versus may.
Maybe a year ago.
Yeah, It's a good point I think.
I think it's just the persistence, it's another difficult year for ILS capital for retro.
There is a total change in how.
Primary companies are seeing volatility, how they're thinking about the impacts of the increased price of their housing stock in the tsi values that they're ensuring.
I think it's not a single thing it's it's just.
In some ways just the straw that broke the camel's back where I think there is finally going to be resolved to right to raise prices. We've seen good rate change and every line other than property cat and we've talked about it being an insurance lead pricing.
Hardening I believe that were coming in where reinsurers are going to have some price pricing power in some and some control of terms and conditions that will be different than what we've seen in the last couple of years, it's difficult for me to put a confidence level on it but I feel that.
Through the conversations we're having with brokers and clients that there is an expectation that they're going to pay more.
Okay. Thank you.
Sure.
At this time there are no further questions I would like to turn the conference back over to Kevin for any closing comments.
Thank you everybody for your time.
Our focus as I mentioned is squarely looking forward I am enormously optimistic about what our prospects are January one and 2022 overall I've got confidence in our model confidence in our team we've got great relationships.
And I think that the windows that are back in our sales are out full and we're looking forward to executing for you in 2022. Thank you.
Ladies and gentlemen, thank you for your for participating in today's conference call you may now disconnect.
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