Q4 2021 Renaissancere Holdings Ltd Earnings Call
Ladies and gentlemen, this is the operator today's conference is scheduled to begin momentarily until that time your lines will again be placed on music hold thank you for your patience.
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Renaissance <unk> fourth quarter and year end results conference call. At this time, all participants are in a listen only mode.
After the speaker presentation, there will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
If you require any further assistance. Please press star zero I would now like to hand, the conference over to Keith Mccue, Senior Vice President Finance and Investor Relations. Thank you. Please go ahead Sir.
Good morning, Thank you for joining our fourth quarter and year end financial results Conference call yesterday. After the market closed we issued our quarterly release you Didnt 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 from about one PM eastern time.
Today through midnight on February 26.
The replay can be accessed by dialing 805, 8592056 U S toll free or 1404, 537 3406 internationally passcode you will need for both numbers is 2256505.
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 February 26, 2022, 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 directly with us to discuss today's results are Kevin O'donnell, President and Chief Executive Officer, and Bob <unk> Executive Vice President and Chief Financial Officer, I would now like to turn the call over to Kevin Kevin.
Thanks, Steve.
Good morning, everyone and thank you for joining today's call.
For our investors and many of our capital partners 2021 was a difficult year.
The insurance industry experienced its fifth consecutive year of elevated catastrophe losses, which by several estimates exceeded $100 billion in insured loss and a continuation of the themes of climate change rising inflation and the increasing occurrence of secondary barrels.
We saw these themes repeated in the fourth quarter with severe convective storms caused widespread damage across the Midwest and wildfires impacting Colorado.
In contrast to the year's catastrophe losses and in part due to them. We had a strong January one renewal.
We expected a divergence between the property and casualty and specialty renewals anticipating that the property renewal would be challenging and entails difficult conversations given this we communicated our risk appetite and expectations early to clients and brokers and worked closely with them to avoid surprises.
We had several goals, we wanted to achieve and property renewal the most important of which we're seeking rate.
Improving terms and conditions.
Adjusting for our increased view of risk.
Decreasing exposure to aggregate deals in keeping our <unk> relatively flat.
We achieved these goals at the renewal, which preceded well despite being rather late <unk>.
By January one most programs were filled.
In property catastrophe lines, however, lower layers and retro covers struggled more to be placed in higher layers as reinsurers increasingly shifted away from frequency expose players.
As always we were consistent partner offering capacity across the risk spectrum.
Which resulted in many opportunities for us.
That said in our property business rate increases were sufficient to maintain our current book, but not enough to warrant significant growth.
The renewal in our casualty business proceeded smoothly, which I'll discuss in greater detail in part two of my comments.
Overall, I believe we optimize the portfolio.
Significantly increasing both the model profitability and the efficiency of our underwriting portfolio.
We reduced our growth rate at this renewal as we have increased our net premiums written by 75% over the last few years.
In 2022, we will be paid more for the book we are.
Already built and we'll focus on capital management and profit maximization.
As usual at the end of the year I'd like to review our performance by responding to two questions. The first is how did we do financially in the second.
Have we executed our strategy effectively.
Starting with the first question how did we do financially as previously mentioned it was a difficult year, where three out of four quarters were impacted by weather related catastrophic losses.
And interest rates remained near record lows as a result, our operating return on average common equity was one 3%.
As I made clear last quarter. This performance was disappointing I.
I am confident however that we have the right strategy to deliver superior returns over the long term.
This quarter, we demonstrated the benefit of our growing diversification as we achieved an operating return on average common equity of 14, 4% despite over $50 million of net negative impact from large catastrophic events.
In 2022, we think we have.
I think we can improve on this performance.
As we will be paid more for the risk that we take earn more on the investments, we make and continue to grow our fee generating capital partners business.
Which leads to my second question.
And we executed our strategy effectively.
It is essential for our company to have a consistent vision clear purpose and coherent long term strategy.
Thanks to the diligent efforts of our employees, we executed well on our strategy in 2021 and distinguish ourselves in the consistent application of our three superiors superior customer relationships superior risk selection and superior capital management.
Beginning with superior customer relationships, we built a global multi line specialist company in order to write more business with more customers in more locations around the world.
The trusted relationships, we have developed have provided us an incumbency position.
Allowing us to grow significantly in 2021.
At the January renewal this incumbency position to continue to provide us a competitive advantage and the opportunity to acquire attractive business across many lines.
As I already discussed it was a difficult year for property, but we communicated early and often in the lead up to the renewals managing expectations and ensuring that our customers were not surprised.
Moving to superior risk selection, we continue to be recognized as the best underwriter of property catastrophe risk the <unk>.
That trend in 2021 was to move away from property cat risk due to fears of climate change social and monetary inflation as well as a lack of confidence in cat modeling.
However, our expertise and experience gave us the confidence to know when we were being paid adequately to assume this risk.
Which we are uniquely positioned to understand and price due to.
Our strong underwriting bench with many of our under this having experience over multiple market cycles, our scientists engineers and risk Modelers that Renaissance, we were sciences and our integrated system.
We're also a leader in casualty and specialty underwriting.
Our superior risk and capital management technology, along with deep underwriting expertise has provided us a competitive advantage, enabling us to grow on the best deals and access new business as rates and profit margins have improved.
Finally, there are superior capital management.
Bob will have more to say about our achievements here, but the highlights include deploying $1 billion in new capital to grow into a strong market.
Turning over a $1 billion to shareholders and maintaining a robust excess capital position.
Superior Capital Management was also distinguished by the continued growth of our capital partners business.
It is difficult to overstate the competitive advantage that capital partners provides us which is most obvious in the fee stream. It generates equally important is the ability to use our capital partners business to provide flexibility and.
And optimize our gross to net strategy across all our balance sheets, and thereby complement superior risk selection.
This was evident at January one where we.
Grew da Vinci by $500 million and increase the percentage of property cat business, we allocated to it.
This is a win for our customers as we continue to support their programs during a period of market dislocation.
A win for third party capital investors, who continue to have opportunities to grow by investing in da Vinci and a win for our shareholders will benefit from increased fee income and optimized portfolio construction across all vehicles.
Our Medici cat.
Bond fund continues to execute extremely well and had a strong.
Returns in 2021.
This portfolio has grown to $1 1 billion and we anticipate continued robust investor demand in 2022.
And finally with respect to capital partners Upsilon with significantly smaller at January one due to losses and trapped capital offering less than half the limit it did in 2021.
Before turning the call over to Bob I want to update you on our progress on our ESG strategy. As a reminder, we formalized our ESG efforts around three priorities, where we believe we can make the most meaningful impact on society first promoting climate resilience and adaptation, including societies transition towards <unk>.
Zero.
In closing the protection gap and third inducing positive societal change you can read more about our accomplishments on our web site, but there are a few endeavors I'd like to highlight.
We further the transition to a net zero world through our participation at the United Nations 26 climate change conference in Glasgow, we were.
We're active in several risk focused initiatives, including the building resilience riskier World event sponsored by the insurance development Forum as well as the launch of the global risk modeling Alliance, which is supported by the U N idea with the <unk>.
And government and the B 20.
Yes.
In 2021, we also continued our focus on diversity equity and inclusion to our global sponsorship of the Diamond Festival.
We reduced the carbon intensity of our corporate credit and public equity portfolio was by 70% as measured by MSCI with negligible expected impact on the portfolios yield.
Finally, we participated in Blackrock U S carbon transition readiness fund with a $100 million seed investment, which actively supports the transition to a low carbon world.
I am proud of the progress we are making as a company on ESG. This is important to all of our stakeholders, including our employees, who I would like to thank for their meaningful contributions towards achieving these goals.
That concludes my initial comments I will provide more detailed update on the renewal and our segments at the end of the call, but first Bob will discuss our financial performance for the quarter.
Thanks, Kevin and good morning, everyone. We finished the year with a strong fourth quarter reporting an annualized operating return on average common equity of 14, 4%. Despite recording a net negative impact of $53 million from weather related and large losses.
Both our segments were profitable with casualty in particular are performing well.
For the year, our results were impacted by an elevated level of catastrophes and we reported an operating return on average common equity of one 3%.
Want to start my comments today discussing the platform, we've built and how we have the capabilities and scale needed to generate superior returns I'll, then cover our capital management activities and the three drivers of profit in greater detail.
With the platform, which generates diversifying earnings streams for our investors from three drivers of profit and to put this in perspective.
21 was the second highest loss year for natural catastrophes in our industry's history.
We are estimating which are estimated to exceed $100 billion in it.
A year like this you can see the power of the platform. We have built we reported a modest operating profit, where we were able to absorb that negative impact from current year catastrophes of nearly $1 billion because of our larger and more diversified business.
In the fourth quarter industry Cat losses were about the 10 year average and well above the median even with weather related large losses of $53 million. We reported a 14, 4% operating return on average common equity our property book readily absorbed the quarter's volatility with a 64% combined ratio in our cash.
The book performed well with a 93% combined ratio.
We achieved these quarterly results with relatively modest fee and investment income as we look forward. We believe that each of our three drivers of profit is poised to benefit from improving conditions first we have significantly grown our underwriting book in a period of improved rates and higher expected margins across almost all of our lines of.
Second we've expanded da Vinci, Medici, and Vermeer and as Kevin mentioned allocated more business to da Vinci, all of which should reduce volatility and generate a steadier source of fees for our investors and third interest rates are rising which should benefit our net investment income over the long term.
In short we believe we have built a platform that is increasingly resilient to catastrophic events.
In 2021, we proactively managed our capital to improve the efficiency of our platform.
As I've said many times before our first preference is to deploy capital into the business profitable underwriting and infrastructure improvement and second to return the excess to shareholders.
This year, we did both on a large scale.
Net premiums written by $1 billion.
A 45% property up 41% and casualty up 49% at the same time over the course of 2021, we returned over $1 billion of capital to shareholders, which includes $327 million in the fourth quarter.
In total for the year, we repurchased six 6 million shares at an average price of just under $1 57 per share and paid common dividends of $68 million subsequent to quarter end, we continued to repurchase shares and as of January 21 had repurchased an additional 339000 shares for 50.
$7 million.
At an average share price of just over $167 per share.
These aggregate repurchases have reduced our outstanding share count by 13% to just above 44 million shares effectively where it was prior to our capital raise in 2020.
Since the beginning of 2020, we have grown net premiums written by over 75%.
So we are now a materially larger company with the same share count.
One outcome of the share repurchases in the year as a tangible book value per share declined by 5%, partly driven by our GAAP net loss for the year three percentage points of the decline related to repurchasing shares at a premium to book value.
Long term growth intangible book value per share remains our primary metric and focus.
And repurchasing shares at 2021 was the right decision for our shareholders with that objective in mind.
We began 2022 and a strong capital position with the ability to grow but equally comfortable continuing to return capital to our shareholders at attractive multiples.
After our successful January one renewal, we expect to grow our underwriting portfolio in 2022.
Although at a more modest pace than last year, we continue to find our shares attractive and believe we will have the ability to return excess capital to investors roughly in line with our net earnings.
Shifting now to our three drivers of profit and starting with underwriting income.
In the fourth quarter gross premiums written were up 40% to $1 3 billion driven.
Driven by ongoing robust growth in our casualty segment as well as with our other property class of business.
Reported an underwriting gain of $277 million.
Current accident year loss ratio of 55% and a combined ratio of 79% in the quarter weather related large losses added five percentage points to the combined ratio.
Moving to the year.
Gross premiums written were $7 8 billion, increasing by $2 billion or.
Or 35% with the property segment growing $960 million in the casualty segment growing $1 1 billion.
$349 million of reinstatement premiums from the 2021 weather related and large losses, primarily in our property catastrophe class of business.
This compares to 2020 reinstatement premiums of $79 million from the weather related events and $35 million from COVID-19.
Excluding these reinstatement premiums gross premiums written were up 31% for the year.
For the year net premiums written were $5 9 billion up $1 8 billion or 45%.
As a reminder, we initially expected to grow net premiums written by $1 billion in 2021.
Martin conditions surpassed our expectations, particularly in the casualty and other property and we decided to write significantly more of this attractive business.
Reported an underwriting loss of $109 million for the year and a combined ratio of 102% 29 percentage points of which are from weather related and large losses.
Moving to our casualty results I'm pleased to report that the segment performed well this quarter with growth in gross written premiums of 48% current accident year loss ratio of 64% and a combined ratio of 93%.
The key drivers of our strong results were the reduction in initial expected loss.
<unk> three percentage points.
In the third quarter modest favorable development and reduced operating expenses I will discuss this later in my comments, but the two primary drivers of reduced operating expenses. This quarter were lower performance based compensation expenses and growth in net premiums earned together contributing about a point to the reduction.
Going forward all things equal we would expect operating expenses to normalize by about one point to reflect anticipated performance based compensation expense.
In addition acquisition expenses will likely increase by a point and a half and 2022, which Kevin will further explain.
As we have discussed racing casualty have been rising since the end of 2018 over this time, we have grown our gross casualty book by more than $2 billion or 115%.
In 2021, we grew gross written premiums by 38% from the prior year.
For the current year the current accident year loss ratio was 67% and the combined ratio was 97% the weather related large losses added one percentage point to these ratios.
Moving now to our property segment, where in the quarter. We grew gross written premiums by 25% with other property up 51% and property catastrophe down 87%.
As a reminder, we do not write much property cat business in the fourth quarter the decline in premiums from the prior years due to higher reinstatement premiums from weather related losses in the fourth quarter of 2020 from Hurricanes Delta data. In addition to COVID-19.
The fourth quarter property current accident year loss ratio was 44%.
Combined ratio was 64%.
The combined ratio included 11 percentage point impact from the weather related large losses, including severe convective storms in the Midwest and impacts of aggregate contracts.
The other property current accident year loss ratio of 54% included five percentage points from the weather related and large losses.
This quarter, we recorded five points of prior year favorable development in property.
Favorable developments stem from the 2017 to 2019 years across both other property and property catastrophe.
For the year, we grew gross written premiums by 32% with other property up 55% and property catastrophe up 18%.
Reinstatement premiums from large events in the year increased by $237 million year over year in the property catastrophe class of business driving about two thirds of the growth in cat.
We reported current accident year loss ratio for 2021 in the property segment of 92% and a combined ratio of 107% two.
2021 weather related large losses added 59 percentage points to this combined ratio.
For 2021 other property current accident year loss ratio of 71% included 24 percentage points from the weather related large losses.
Attritional losses continue to run below 50%, which is within our expectations for this business.
Now moving onto our second driver of profit fee income where.
Total fee income was $30 million in the quarter and $129 million for the year, both of which reflect the impact of the weather related large losses in 2021.
The fees in the fourth quarter continued to be impacted by the deferral of da Vinci management fees that I discussed with you on the last call and we expect to recapture these management teams from future quarters.
In general management fees are related to the growth in our joint venture vehicles, and we expect these to steadily increase over time, even after adjusting for the decrease in the size of Upsilon re.
<unk> were impacted both.
We're impacted in both the quarter and the year by the cumulative effect of weather related large losses in 2021.
Partially offset by the favorable development from prior losses in da Vinci.
To start recapturing these performance fees later on into 2022.
In preparation for the 2022 renewal.
We raised over $663 million across our joint ventures in connection with this capital raise we grew our ownership in da Vinci by two percentage points to 31% further strengthening our alignment with long standing capital partners.
This was in addition to the $1 1 billion in capital that we added to our joint venture vehicles over the course of 2021.
As a reminder, we earn fees on the management and the performance of our joint venture vehicles and increasing their size to capital raising enhances the earnings power of our fee income over time. It was a challenging year for third party and our ability to raise these funds is testament to the deep experience of our capital partners team and their relationships that we have built over 20 years in this area.
Yes.
Moving to our third driver of profit investment income.
Important stable net investment income through the year.
For the year and closed 2021 with net investment income of $319 million for the quarter. This was for the year. This was partially offset by $218 million in realized and unrealized losses, resulting in total investment returns for 2021 of $101 million.
For both the quarter and the year realized and unrealized losses were driven by our fixed maturity portfolio.
<unk> related to increased yield on U S Treasury.
This was partially offset by gains in our public equity portfolio and favorable valuations and our fund investments.
As you can see in our financial supplement, although we reported $22 million in realized and unrealized losses in the fourth quarter on a retained basis, we actually gained $2 million.
The yield on our retained our fixed maturity portfolio for 2021 increased to one 6% and the duration on our retained portfolio.
Constant at three seven years.
We continue to monitor inflation and are comfortable with the positioning of our investment portfolio. The bond market expects the fed to raise interest rates several times in 2022.
The rising rates would have an initial negative mark to market on our investment portfolio with a relatively low duration, we would expect to more than recoup these losses overtime to reinvestment in higher yielding securities.
At this point I'll turn to our expenses, starting with the acquisition expense ratio, which was up slightly for the quarter at 25% and flat for the year, 23%.
In the quarter the property acquisition expense ratio increased by six percentage points, primarily driven by lower reinstatement premiums and profit commissions when compared to the fourth quarter of 2020.
Our direct expense ratio was 4% for the quarter and 5% for the year with the decline primarily related to reduced corporate expenses. As a reminder, there were a number of onetime corporate expense items in both the fourth quarter and full year of 2020.
In the fourth quarter operational expenses were also down due to reduced performance based compensation expenses.
For the year operational expenses were up on an absolute basis, but down as a percentage of net earned premiums.
Going forward, we will continue to leverage our platform in 2022. However, we anticipate operational expenses will increase on an absolute basis as we further invest in the scalability of our platform.
And finally, we finished the year a difficult year with a strong quarter and believe that we have built a solid platform with multiple diversifying streams of income that will benefit our shareholders in 2022 and beyond.
And with that I'll turn the call back over to Kevin.
Thanks, Bob.
As usual I will divide my comments between our property and casualty segments.
Starting with property. The January one renewal is the largest for our property business and as I noted we were pleased with the results by almost any measure our property portfolio has improved and is reflective of better market conditions.
Rates on property Cat treaties were up 5% to 20% for U S business with aggregate covers up between 15 and 30%.
In General we wrote fewer aggregate covers and restructured those that we did right to reduce overall risk.
Europe also experienced decent rate increases as a result of the summer floods, most notably in Germany.
But cross markets, we pushed hard for rate and remain disciplined when rate increases were not sufficient.
Many customers chose to retain more risk and as a result, it is likely that the gross written premiums on our property book will be down in 2022 that said, we anticipate that net premiums will be flat to.
To slightly up.
A significant amount of growth in our property premiums over the last few years has been in other property.
Due largely to the substantial rate increases.
In the U S property E&S market.
Capacity for Cat exposed primary property business remains constrained with many large players pulling back in addition to increased rate ceding commissions remain flat in terms and conditions continue to improve.
The tight retro in property cat market at January one should ensure these trends continue well into 2022.
As we expected there was significant dislocation in the property retro market at January one with quota share capacity down meaningfully.
We moved early and were able to secure capacity on our renewing programs at terms that met our objectives.
Overall, we are pleased with the property portfolio, we constructed at the renewal as well as the steps we took to optimize our gross to net strategy. We were paid significantly more for the risk that we took and as a result, we have written a book of business with higher average profit and capital efficiency.
Looking forward to the midyear renewals, we anticipate the positive trends in this market to persist and should remain first call on any opportunities that arise.
Moving now to our casualty and specialty business.
It's a property January one is an important renewal for our casualty book.
Casualty business has become increasingly desirable due to a combination of robust multiyear rate increase as well as recent favorable claims performance.
In traditional casualty lines, we continued to grow through both rate increases and the volume of underlying business retaining attractive shares in the face of increased competition.
We also grew our specialty portfolio with focus on cyber lines cyber is particularly dislocated with very strong demand and limited supply, resulting in triple digit rate increases and tightening terms and conditions.
Finally, our credit portfolio, we saw positive growth at January one and strengthen our relationships with key customers.
In aggregate, we grew our casualty premium at January one.
Though at a more moderate pace relative to previous years.
In addition, we realized significant improvements in expected underwriting market.
Which were principally driven by strong underlying insurance rate increases.
This improved profitability is already becoming evident in our casualty results as the quarters combined ratio of 93% demonstrates.
One trend evident at the renewal was the willingness of primary companies to increase their retentions of casualty business. Despite.
Despite this trend we successfully maintained our shares the most attractive lines demonstrating the value of our incumbency.
As well as our robust ratings and capital position.
The quota share protection, we purchase for our casualty segments was more readily available than property retro.
But given the improvement in the portfolio, we decided to reduce our purchase modestly.
As Bob noted reinsurance generally agreed to increased ceding commissions of about one and a half points at the renewal to acquire casualty business.
It increases have been strong since at least 2019 and underlying expected profitability and performance continued to improve so we view the increase in acquisition cost to be acceptable.
Overall, we were pleased with the casualty renewal we have grown this book by more than 60% over the last two years and have written what we see as our largest and most attractive portfolio to date.
Before I close I wanted to address the issue of inflation.
We have been speaking about social inflation for many years and expected to be an ongoing trend over the course of 2021. However, we saw the rapid increase of monetary inflation, which has been muted for the past two decades.
Particularly impactful to our industry as inflation that drives rebuilding costs, such as increases in wages and commodity prices.
We account for expected inflation in our models by adjusting the demand surge buckets function up to <unk>.
<unk> increased post event prices.
We also stress test our portfolio's fragrance increased inflation. Consequently, we are comfortable.
So we are being paid adequately for the risk and risk of inflation, but continue to watch it closely.
Once again we.
We had another challenging year with the effects of climate change and resurgent inflation drove elevated catastrophe losses nominal interest rates remained low limiting investment returns throughout the year, we remain true to our strategy and focused on growing our business profitably in solving our customers' biggest problems.
Looking forward to 2022, I believe our shareholders will benefit from the strong growth and portfolio optimization that we implemented in 2021.
And with that I'll open it up for questions.
As a reminder, if you'd like to ask a question you may do so by pressing Star then the number one on your telephone keypad.
We do ask that you limit yourself to one question and one follow up.
Your first question is from Elyse Greenspan of Wells Fargo.
Hi, Thanks. Good morning, My first question, Kevin goes to some of your comments that you just shared at the end of the prepared remarks, you talked about.
Average profit and capital efficiency.
Your property book at one line can you just maybe dive into that a little bit more and just give us a sense of the return profile of the business that you will this January one versus last year, just to give us a sense of the expected return now that we could see over the course of this year.
Thanks Alicia.
Yeah.
There's been a lot of press about what the rate change was at one one and in general I think it's been reasonably accurate as to what our observations have been.
Our objectives at one one we're not simply to write more because rates are up we were looking at the underlying reasons why rates were changing and trying to think about how we can best optimize our portfolio knowing rates, we're going to be improving so when.
Going into the renewal, we recognize supply will be constrained more constrained for retro and aggregates than potentially other covers and that demand was going to be increasing.
Looking at the opportunity that we had with the growth and the incumbency that we had on programs, we recognized that by restructuring into the improving market beyond just price, we could take advantage of building a better and more efficient portfolio, we increased our capital.
Our capital and da Vinci and increased our share of Cat two da Vinci.
That we've created room for us to continue to grow into 2022 as opportunity continues to present itself.
I think it's a more nuanced question for us and simply thinking about rate change and how to leverage into a better market. This has been a two year journey for us to build options into how to construct our portfolio in general larger portfolios create more opportunity for us to think about how to spread risk across our platform and when I look at all the things that we set out to achieve.
Holding <unk> relatively flat for our own balance sheets thinking about restructuring aggregates.
Increasing our view of risk, particularly for Atlantic Hurricane and then thinking about secondary parallels I don't think we could have had a better renewal are constructed a more efficient portfolio. So when I look at where we are in 2022, I couldnt be happier with the portfolio that we constructed and I think we'll have more opportunities as we head into the second half of the year.
That's helpful. Thanks, Kevin and then my second question relates to the potential capital changes put forth by S&P.
Few parts to that one.
First of all just your internal.
Internal model the binding constraints on your capital or S&P and second.
Thanks, Dan today would you be required would.
Would your required capital under the new model go up or down and the last question. There is do you think that changes the capital model could be meaningfully could lead to a meaningfully increased demand for reinsurance.
Yes, let.
Let me start with your with your last question.
The model changes in the past have created opportunities to sell more.
<unk>.
Cat cover in particular I'm not sure that this model change will create the same opportunity, but we're certain we're certainly looking at the effects on our own balance sheets as well as opportunities presented in the market.
Our internal model is how we continue to manage our business and build our portfolios we've spent.
An awful lot of money over the years and have deep understanding of the way in which we write property cat and manage it so and that will continue regardless of what changes within the S&P model. So when I think about it there are.
In the early phases of the adoption of the new model. We are looking to see if it can create opportunities I think the bigger opportunity for growth in property cat, we will potentially be from the lack of retro thats been available and the shift in primary companies purchasing to have fewer aggregates and higher retentions, which will impact income statements I think that might be a driver for <unk>.
<unk>, new demand, but S&P certainly can contribute to that with regard to our required capital, let Bob talk a little bit more specifically about that yes.
Good question timely to lease.
Just came out last month right before the holidays and we're just now getting a chance to try and understand it I guess, if we haven't seen all the technicals that go behind it there's a lot of different things there and we're not getting focused on one thing.
That we don't underwrite against our debt, there's a number of different factors and considerations that we're looking at now and then we have a common period that extends through the end of February we're working with other trade groups as well to make sure we understand it and the voice on how we can react to comment back to S&P later on in this process.
Okay. Thanks for the color.
Your next question is from Meyer Shields of K B W.
Hi, Thanks, good morning.
I'm, hoping you can clarify and you gave us a lot of information but no.
It's about a broadly flat property.
Book.
And roughly stable PMO.
You could.
Reconcile that with the expectation that the book of business improved overall.
Yes.
And.
Remember that we had a lot of changes in the portfolio.
And thinking about how to construct and we reduced the size of Upsilon materially we wrote those contracts.
More on an occurrence basis, which fit our rated balance sheets that created opportunity for us to think about what are the optimal programs to retain and what are the optimal programs.
To continue to press for right. So when I think about the the holding of our PMA was flat that's on our retained business.
And we're being paid more for the risk that we're taking we have changed our view of risk. So when I'm talking about changing the stable <unk>. It's on an elevated view of risk, but all that said, we're being paid more for the same level of risk and we have ample excess capital to continue to leverage into the market one.
I will say is the binding constraint for a portfolio that is heavily skewed to property cat typically is southeast hurricane and much of the southeast hurricane absent the other property portfolio that we write.
It comes up after one one.
So depending on where rates go we can revisit the decision to hold <unk> flat, but judging from where the market wasn't our ability to improve the capital efficiency of the portfolio and the profitability holding pms stable was the right call.
Okay. No that's helpful. Thank you.
If we turn to the casualty and specialty so we've seen a decent amount of loss ratio progress.
I was wondering whether you could break that down how much of that is sort of a true up or true down for the first nine months of 2021.
And how much of it is just the.
A meeting of the minds between pricing and reserving actuaries.
It's a good question, we talked a little bit about this last quarter, we talked about the three percentage point in the current accident year reduction going forward. That's really I think that's the convergence of the reserving and pricing actuaries, we have to go through a development period and about a third of it we wait and hold back the actuaries will look at it.
A positive adjustment going forward, we talked about that.
Last call and I'm trying to reiterate that for 2022 and my prepared comments.
The noise that can happen, but that's kind of a baseline where we're starting.
Okay excellent. Thanks, so much.
Okay.
Josh Your line is open.
Thank you.
Hi, there.
<unk> kind of asked my question, but I just wanted to understand something.
Yes. My question was there first nine months of the year.
Intra year reduction that went into that perhaps the pyxis for this fourth quarter or is that based on mostly on losses incurred in <unk> 'twenty one.
Actually Josh this is Bob.
That was actually a third quarter adjustment that we've made that we've talked about it.
In November so that was a mid year change in the convergence going back to accident years.
When we started to see the rate increases in $2019 20, So that's what we're carrying forward in the fourth quarter.
And now we're going into 2022 still the same thing.
Great. My my only comment I guess, it's not that it's going to be.
Concentration every quarter, but it's a whole lot more improvement and 300 basis points I'm. Just wondering if you guys are ahead of plan.
Last year I think when you look at it from a year over year, we had I think four five.
Points.
Five points of catastrophe impact on the loss ratio for casualty and so that would have actually raised it up higher so you have to factor that in when we had one percentage point.
For the year on casualty, so that does create a little bit of noise in there Josh.
And thats the wildfire liability.
We're focusing on what I wanted to focus you on in my comments, you know adjusting for the operational and acquisition as it were looking at the mid Ninety's plus or minus from a combined ratio.
Okay.
In our approach to casualty and specialty.
Okay.
That helps me and I'm going to go back and try and put some catastrophe into the casualty and see what I come out with.
Thank you.
Yeah.
Yeah.
Your next question is from Michael Phillips of Morgan Stanley .
Yeah.
Thanks, Good morning.
I guess I wanted to touch on your philosophy on I assume that there was no reserve release from.
From the initial set our reserves set up last year for Covid reserve. So just talking about your philosophy behind timing of releasing any of that.
Okay.
I missed it did.
Did you say you are co.
<unk> reserves that you set up on last year, I think it's north of $300 million Thats still the case in <unk>. So just kind of your thoughts on that.
Gets released timing around that.
Yes, I think we review our Covid reserves each quarter, we did a fulsome review in the fourth quarter, we feel like we're in the right place. The world is developing differently. If you look back as to how we initially reserved COVID-19 , we had three categories.
The first category was more transparent covers such as event cancellation I'd say that that is paying out in developing kind of as expected. The second was more about adjustments to lines that could be affected for COVID-19 I would say, we've seen a lot of thats more U S exposed would probably continue to see favorable trends there.
But that's not the biggest component of the reserve and then the third piece is the is the property portfolio and the uncertainty around business interruption.
<unk> continues to have favorable.
News from the challenges to those coverages, but I think we're still in the early innings Europe theres been more explicit coverage and more payment when we review and we feel like we're in a good spot.
It's part of our normal reserve process, and we don't have an anticipated schedule to make changes to it we will do it as we learn more and need to make adjustments.
Okay. Thanks, that's helpful.
We're pretty broad apologizing, a pretty broad question here, but we can kind of mixed signal from casualty primary writers over the next two years might be headed for that book of business.
In general.
Not really lines specific but can you talk about how you see the demand for casualty reinsurance.
This year and next year, possibly versus what it's been in the Permian.
Here's the demand for <unk>.
How does your reinsurance changing at all.
I think.
That can be a longer conversation as we break it down there's a lot of lines in casualty as I mentioned in my comments, we think of casualty specialty as a segment.
We are seeing enormous demand for credit and I'm, sorry for well for credit, but I meant to say on cyber.
Great increase I don't think thats going to abate anytime soon.
Mike when I look at the casualty environment I think there is probably a continuing trend of rate increase at a decelerating rate.
From a reinsurance perspective, I touched a little bit on higher ceding commissions I think there could be.
Some pressure on ceding commissions if rates.
Sales to continue to increase.
With that companies may retain more so to your demand question, there might be less demand for casualty reinsurance if rate flattens and reinsurers put pressure on ceding commissions I think we're in a strong enough position with the relationships that we have that we're less likely to be affected in the early stages of that change.
Disciplined portfolio managers against all the lines of business that we write we will continue to monitor it we will think about ways in which we can build more flexibility on our casualty platform for sharing risk.
So that we can maintain the same flexibility in that business as we've had in our property business as well.
Okay. Thank you guys I appreciate it.
Thank you.
Your next question is from Brian Meredith of UBS.
Yes, Thanks, a couple ones here for you.
Kevin I'm just curious.
What's your thoughts with respect to alternative capital and kind of demand from investors as we kind of look towards midyear renewals with trapped capital will be freed up.
You were somewhat unique obviously in your and your.
Expertise on an alternative capital, but do you expect any investor demand to increase given the price increases we saw at one one.
Yes.
So.
As you said Theres a few questions there so with regard to attract capital.
It's been a.
Typical years for particularly the more volatile funds. So those that are exposed to retrofit for the past several years. Some of the older years, there might be some role of capital, but I don't think it's going to be meaningful.
I think investor skepticism is extremely high and I think there is.
If you look at where were separate us from the market for a second investors are flocking to cat bonds and if you look at the spectrum of transparency and simplicity to enter a cat market and take diversifying risk cat bonds are a good place to do that as you move through the spectrum of reinsurance and then all the way.
The retro the lack of transparency and understanding diminishes materially and I think there'll be continued skepticism at the more risky and of the risk perspective from ILS investors.
That said I think a company like us with our track record and with the flexibility of our platform.
Maintain opportunities for ILS investors to continue to deploy across our platform we've increased with DG we've increased.
Da Vinci.
Upsilon.
As anticipated is reducing.
So I think we still have opportunities for third party capital, but I think it's going to be a difficult year.
For for third party capital managers to continue to solicit funds.
Great. Thanks, and then my second question is and I know I think at least half to kind of ask it also but I just want to clarify. This so I'm just curious if if rates were up nicely for property cat at one one better book of business.
Why would you.
As more capital with da Vinci, why wouldn't you retain more of it yourself into that you want to keep some more dry powder for midyear renewals.
Curious given that the business is better this year than it was last year.
Why would you what would you put more da Vinci why not keep more not yourself.
It's a great question I think if you look over two years and look at the growth that we've achieved.
We feel really comfortable that we built ourselves into this market with great skill and effectiveness.
From the da Vinci perspective, we did raise some capital and da Vinci, but we saw an opportunity to continue to add risk to that portfolio and optimized optimize it even further.
More in line with the growth that <unk> limited in some of our other vehicles have achieved Additionally, we reduced upsilon, which created a pool of incumbent risk for us that.
We had the opportunity to restructure and bring to the limited balance sheet and the da Vinci balance sheet. So it's not a single.
Here and not there it was kind of a multi journey multiyear journey from when we raised $1 billion in 'twenty to thinking about how to optimize it in this renewal, which so.
Had significant rate increase and a reduction of supply, which provided more flexibility for us to move the portfolio around it optimized.
Makes sense. Thank you.
Yes.
Your next question is from Ryan Tunis of Autonomous research.
Yes.
Hey, Thanks, Good morning, I had a couple on capital.
First one I.
Thinking about the other property line and just I guess, the marginal capital requirement of writing more of that business, because that's still growing nicely.
Only think about the marginal capital requirement in terms of what it does to your P&L or is.
Is there an attritional consideration alongside that.
The other property portfolio is much more reflective of the economics of our primary portfolio. So we definitely consider the attritional element of that portfolio. When we split it though we do keep secondary cat perils in the Attritional side of the development and the <unk>.
At the cat component of the pricing is strictly for major perils like earthquakes and hurricane. So the attritional is a little less clear than what it would be on stream slip and falls and fires we have some cat in that as well.
And given how much of that book has grown Kevin I guess, you're saying your PMO is flat.
What percentage of that P&L is emanating out of me.
The faculty the other property book versus Treaty at this juncture is that most of it or is still substantially all of the PMO.
Coming from property Cat Treaty.
I don't have that number in front of me, but I can tell you how it works.
The other property portfolio is more of a proportional participation in the property market.
So if we think about the excess of loss portfolio that we're riding on the cat side, there's going to be greater concentrations of cat ex oil layers at the.
More remote return periods and at the most frequent return periods other property will have a more dominant.
Portrayal.
Our capital utilization so when we think about it we are constantly optimizing the return we're getting on a marginal basis.
Queen other property property Cat and then also within other property deals.
And where.
Thinking about the best way to allocate into the portfolio to make sure that we're efficiently using the full distribution of outcomes.
So it's a slightly different answer across the portfolio get property cat at the more extreme levels or the more remote return periods dominates the curve.
So thinking about wanting to keep the PMO flat or maybe just a little bit up this year that that doesn't really put a gating item on growth in other property. That's really just much more of a consideration with property cat.
And the other thing just to highlight as we reduced our.
<unk> footprint in the aggregate market, which creates room in the property Cat book, but it also creates significant room in the other property portfolio. So we've got a lot of things moving around to make sure that we can continue to grow where we see opportunities and then we can share risk differently than other property compared to property cat, which is the retro market was constrained.
So we feel we've got it.
Part.
Sorry, just shifting gears.
Kind of a bigger picture one so.
The plan is to return capital.
At the pace of earnings so we'd be thinking kind of a flat capital base at the end of this year.
Is.
Is your thinking that the.
The capital base you have today can support a historical level of run rate gross over the next few years you have that level of access maybe not super outsized, but the thinking is hey, we can continue to.
Grow our casualty book grow other property, maybe grow our PMA was a bit for the next few years just given the capital base. We have is that.
The way Youre thinking about it in the medium term or would you need to.
To build your balance sheet, a little bit more too.
<unk> done a reality.
So.
It didn't.
We built a portfolio that we're proud of and the growth that we've achieved over the last two years is not really our objective in 2022.
Our objective in 2022 is to continue to optimize our portfolio and maximize its capital contribution of its profit.
From a capital perspective.
Casualty is still does not constrain us so we have opportunities to grow casualty from a property perspective, our first objective is to deploy into markets, where we see it accretive.
Two returns over the long term and then secondly to manage effectively through share buybacks or whatever.
Nothing has changed there we also feel like we have as.
As I mentioned in my earlier comment very strong access to capital.
So we do not feel constrained by growth the decisions, we're making about how to construct the portfolio are active decisions, we're making as to what is optimal to produce the highest return for our shareholders.
Your final question is from Jimmy Buhler of J P. Morgan.
Hi, Good morning, So I had a couple of questions first.
You, obviously bought back a decent amount of stock last year, but you had gone into the year, but a lot of excess capital I guess, because you raised about $1 billion.
Before how do you think about your capital levels now and whether you still have on balance sheet excess capacity that might be used towards buybacks or buybacks and dividends.
B or buyback is going to be dependent primarily on the free cash flow that you generate.
Going forward.
I think I'd characterize it as good as its Bob.
We did start the year for two reasons, we raised $1 billion in capital back in June of 2020, but then over the course of 2020, we earned about another $1 billion for the investment portfolio. So we came into the year with a very strong capital position, which allowed us to understand the risk that we're going to underwrite coming into 2021 and over the course of 'twenty, one that allowed us to return that.
Capital back we finished last quarter with the excess capital we talked about that we still remain near the high end of that range that we've talked about we were at last year. So we do have sufficient capital to be able to invest in the business or find opportunities that we can deploy it to and yet at the same time continuing to return earnings.
The ability to do that things can change we can see opportunities. We can find the areas where the mid years can be better, but right now we feel comfortable where we're at with our capital position.
Okay, and then how should we think about the pace and magnitude of the recapture of the da Vinci piece.
As I put in my prepared comments, the bankruptcies are going to start to come back here in the first quarter, we will recapture that that's that's pretty straightforward on the profit commissions. There is basically a da Vinci is got to come back into profitability towards the back end of the year is when you'll see the profit commissions coming in.
Yeah.
Okay. Thank you.
We have no other questions in queue.
Thank you for joining.
The conference call today, we appreciate your time.
In closing I think we've executed extremely well into a rising market. It's been a multi year journey. The decisions. We've made about how to construct the portfolio increase the capital efficiency and profitability will serve us well throughout the rest of 2022.
Thanks for joining the call and look forward to talking to you next quarter.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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