Axis Capital Holdings Ltd Q3 FY2020 Earnings Call

Good morning, ladies and gentlemen. I'm happy to welcome you to our conference call to discuss the financial results for AXIS Capital for the third quarter and period ended September 30, 2020. Our earnings press release, financial supplement and 10-Q were issued yesterday evening after the market closed. If you'd like copies, please visit the Investor Information section of our website at axiscapital.com. We set aside an hour for today's call, which is also available as an audio webcast. This is also available through the Investor Information section of our website. With me today are Albert Benchimol, our President and CEO; and Pete Vogt, our CFO. Before I turn the call over to Albert, I'll remind everyone that the statements made during this call, including the question-and-answer session, which are not historical facts, may be forward-looking statements. Forward-looking statements involve risks, uncertainties and assumptions. Actual events or results may differ materially from those projected in the forward-looking statements due to a variety of factors, including the risk factors set forth in the company's most recent report on Form 10-K and other reports the company files with the SEC. This includes the company's Form 10-Q, the quarter ended September 30, 2020, as well as the additional risks identified in the cautionary note regarding forward-looking statements in our earnings press release. We undertake no obligation to update or revise publicly any forward-looking statements. In addition, this presentation may contain non-GAAP financial measures. Reconciliations are included in our earnings press release and financial supplement. With that, I'll turn the call over to Albert.

Thank you, Matt. Good morning, everyone, and thank you for joining our third quarter conference call. This has been a year of two stories for AXIS, one of exceptional catastrophe activity, but also one where our repositioning over the past few years, which continues into 2020, is delivering demonstrably strong positive impact. First and foremost, our hearts go out to all who have been impacted by the pandemic, storms, wildfires and other calamities. We're committed to delivering on the promise we've made to our customers, to stand by them in times of need, with our industry-leading claims service. On a reported basis, this has been one of our more challenging years, with a combined ratio of 115% in the quarter and 110% for the year-to-date. The reasons are evident to all of us. We're experiencing the impacts from the global COVID-19 pandemic, and this is compounded by a highly active year in terms of natural catastrophes. Indeed, with storms data, 2020 has matched 2005's record in the number of named storms. Our cat losses in the quarter were $240 million or 22 points. For the year-to-date, we've recognized $576 million in combined cat and COVID losses, contributing 18 points to our year-to-date combined ratio. On the other hand, it's also a year of undeniable progress for AXIS. Our ex-cat current year combined ratio at 92.4% for both the quarter and the year-to-date is clear evidence that our repositioning is delivering tangible results. It's a 5-point improvement over the prior year, continuing the positive trend that we've been seeing for several quarters. On an ex-cat basis, we're seeing improvement in almost every line. Even in our property and catastrophe lines, our recent risk and volatility reduction activities have served us well. By way of illustration, in 2018, industry cat losses were about $71 billion, and we lost 9.6% of common equity to cats. Last year, industry cat losses were about $50 billion, and we lost 8.3% of common equity to cats. This year, we estimate year-to-date industry cat losses at about $65 billion, excluding COVID. And while industry cat losses are close to 30% higher than the full-year 2019, our common equity loss to cats this year was down to 7.1%. Even if we had no further cat losses in the fourth quarter, that would make 2020 the fifth worst year for industry cat losses in the history of our company. However, in terms of common equity loss to cats, 2020 would rank only 10th. This improvement is primarily due to the ongoing reduction of our catastrophe-related exposures, most recently in the frequency end of the curve. While this naturally impacts our overall premium growth, we believe it comes with the benefit of a stronger portfolio that delivers both superior profitability and lower volatility. We're confident that our improving trend can be sustained as we are rigorously pushing for improved pricing and growing where rates, terms and conditions are adequate, but also continuing to exercise discipline in strengthening, reducing or exiting books of business that do not offer sufficient profit potential. Our industry segment grew gross premiums written by 5%, and we saw strong rate increases as well as significant amounts of new business growth. This was offset by actions we took to prune our portfolio coupled with headwinds we faced due to the economic climate. All in all, we're confident that we are growing where we should be and taking disciplined actions where necessary. Our reinsurance segment had a 23% reduction in gross premiums written in a lower volume quarter. This is the continuation of the repositioning we've been reporting to you since the beginning of this year, accentuated by some timing issues and premium adjustments. On a year-to-date basis, reinsurance GPW was down 12%, in line with the 10% reduction that we reported in the six-month period. Peter will speak more about the movements by line in this report. But before I pass the floor on to Peter, I want to highlight that we are effectively executing on the COVID-19 tactical response plan that we shared with you earlier in the year. You will recall the plan had three operating priorities, the first was to stand up the organization to sustain operating capabilities and client centricity. Our staff and IT team have responded superbly, and our customers are telling us that we haven't missed a beat. We're receiving and processing more submissions and binding more policies this year even under remote work conditions, a testament to the agility of our team. The second operating priority was to minimize the downside. This was reflected in lower PMLs across the curve, and increasing our underwriting guidelines to reduce exposure to industries that were most likely to be affected by the pandemic or its economic impacts. A material reduction in our credit lines is a natural consequence of these actions. And the third operating priority is to prepare AXIS to participate strongly in the recovery, and we're well on our way to doing just that, identifying and adding resources to lines and markets where we expect attractive conditions. All the while, we remain on the sidelines or continue to improve books that are not yet providing the desired results. As I'll discuss later when I report on market conditions, this is a firming, but not a hard market. Lower levels of favorable development, social inflation, the pandemic, more frequent natural catastrophes and lower interest rates drive the need for substantial price increases. And in many lines, it may take increases beyond 2021 before we reach adequate risk-adjusted returns. This remains an underwriter's market. There are excellent opportunities out there, but there are still many unattractive lines and markets to be avoided. With the strength of our talent, our positioning in the markets showing the most impressive corrections and our relationships with our producers and customers, we're confident that AXIS is well placed to make the most of the attractive opportunities and to continue to improve our book of business and results as we build a global leader in specialty risks. I'll now pass the floor to Pete, who will walk us through the financials, and I'll come back to talk more about pricing, and I'll have our Q&A. Pete?

Thank you, Albert, and good morning, everyone. As Albert noted in his comments, this was a challenging quarter for the company, but it also included strong core underwriting results. During the quarter, we incurred a net loss attributable to common shareholders of $73 million and operating loss of $65 million. High catastrophe and weather-related losses overshadowed the core underwriting results that continue to show improvement. The company produced a current accident year combined ratio ex-cat and weather of 92.4%, which was a more than 5-point improvement over the prior-year quarter. As previously announced, the quarter pretax cat and weather-related losses, net of reinstatement premiums, were $240 million or 22.2 points, primarily attributable to hurricanes Laura and Sally, the Midwest derecho, wildfires across the West Coast of the United States, the Beirut port explosion and other weather events. I'll provide a bit more color on a couple of these events. Hurricanes Laura and Sally were a combined $120 million event for us, predominantly an insurance event, where we experienced approximately $100 million of insurance losses versus $20 million of reinsurance losses. The Midwest derecho was only an insurance event for us and contributed $45 million to our cat losses in the quarter. In the quarter, we kept our COVID-19 loss estimate steady at $235 million. As a reminder, the COVID-19 loss provision is associated with property, event cancellation, A&H and pandemic coverages. And as of September 30, the vast majority of the loss provision is still IBNR and the paid amount is de minimis. During the quarter, the FCA test case ruling was decided. We took this information into account as well as other data as we continue to monitor the level of our COVID loss provisions. While there was some movement between subclasses of business, we remain comfortable with the overall loss provision. I would remind everyone that COVID is an ongoing situation, and we will continue to rigorously and carefully monitor developments across all lines of business and establish reserves if and when appropriate. Moving into the details of the group level. During the third quarter, we continued to see improvement in our underwriting results. Our current accident year combined ratio ex-cat and weather decreased by over 5 points as the repositioning of the portfolios in both segments starts to earn through. The consolidated accident year loss ratio, ex-cat and weather, of 58.5%, a decrease of over 3 points, with improvement attributable to both segments. We reported essentially no net favorable prior year reserve development in the quarter. We observed adverse loss experience in our liability and professional lines, and this was offset by favorable releases in some of our short-tail lines. In these times of social inflation, COVID and economic uncertainties, we believe it is appropriate to maintain a prudent approach to our reserves and to stay consistent with our strategy, which is to take bad news early and good news only after it has been confirmed. The consolidated acquisition cost ratio was 21.1%, a decrease of 1.4 points compared to the third quarter of 2019, and again, this was attributable to both segments. The consolidated G&A expense ratio was 12.8%, a decrease of 0.6 of a point compared to the third quarter of 2019. The total general and administrative expenses decreased by $18 million. As we have discussed in previous quarters, due to the pandemic, we continue to experience lower run rate expenses in a number of areas. The temporarily lower run rate is helping our G&A ratio by about 1 point this quarter. Moving on to fee income from strategic capital partners, this was $16 million for the quarter compared to $18 million in the prior year quarter. The decrease is due to lower profit commissions. We'll now discuss the segments. Let me start with insurance. During the quarter, our current accident year combined ratio ex-cat and weather, for insurance, decreased by over 7 points as the repeat positioning of the portfolio continued to earn through. The insurance segment reported an increase of gross premiums written of $41 million or 5% for the third quarter. The increase principally came from good growth in professional lines, accident and health, and aviation, largely attributable to new business and favorable rate changes. This was partially offset by decreases in liability, marine, credit, and political risk due to less opportunities driven by the economic climate as well as the runoff of our discontinued lines. The current accident year loss ratio ex-cat and weather decreased by 3.5 points in the quarter compared to the third quarter of 2019. This was due to the impact of favorable pricing over loss trends as well as the improved loss experience in the short-tail lines, largely associated with the repositioning of the portfolio and the exit from certain product lines. With respect to the longer tail lines, notably professional lines and liability, given the uncertainty of the current situation, we are prudently not reflecting the majority of excess rate over trend pricing in our expected loss ratios. Let's now move on to the reinsurance segment. During the quarter, our current accident year combined ratio ex-cat and weather decreased by 2.7 points, again, as we reposition this portfolio and it continues to earn through. Reinsurance segment gross premiums written of $395 million for the third quarter was $116 million lower than the same period in the prior year. The third quarter is a lower GPW quarter for the insurance segment, typically representing only 15% of the reinsurance gross premiums written in the year. This year, the quarterly gross premiums written were impacted by our decision earlier in the year to exit the Middle East Accident & Health business and the engineering line of business, which we believe will have a positive impact on the bottom-line results. In addition, gross premiums written decreased in motor lines due to premium adjustments and other timing effects. As we look year-to-date, the reinsurance gross premiums written is down 12%, and this is consistent with the trend we have seen earlier this year as we rebalanced our book with lower catastrophe, agriculture, and credit, and surety business. The current accident year loss ratio, excluding catastrophe and weather-related losses, decreased by over 2 points in the third quarter compared to the same period in 2019. This was principally due to changes in business mix and improved performance in aviation, professional lines, and liability lines. Net investment income of $102 million for the quarter was $14 million lower than the third quarter of 2019, primarily due to the decrease in yields. Sequentially, we had a bit of a rebound in our alternative portfolio in the quarter as it produced $25 million of net investment income. Our current book yield is 2.3%, and our new money yield is 1.4%. The duration of our portfolio continues to be approximately 3.4 years. Diluted book value per share decreased by $0.34 in the quarter to $54.75. This was primarily driven by the net loss and common dividends declared, partially offset by net unrealized gains. With that, I'll turn the call back over to Albert.

Thank you, Pete. Let's do a brief overview of market conditions and outlook, and then we'll open the call for questions. We continue to see acceleration across virtually every line of business that we write. Within insurance, we saw average rate increases of more than 16% across the book in the third quarter. This compares to about 15% in the second quarter, 10% in the first quarter of this year and 8% in the third quarter of 2019. Through the first nine months, the average rate increase was a little more than 13%, that's more than double the average increase in the first nine months of last year. In our U.S. division, we saw average rate increases of more than 16%. Within that, excess casualty reported average rate increases in excess of 25%, while primary casualty averaged over 15%. E&S property rates were up almost 20%. And our U.S. programs business, which focuses on homogeneous books of smaller accounts, saw increases of about 6%. Moving on to our North American professional lines division, pricing there also continued to accelerate, and rates were up by close to 17% in the quarter. Our commercial management solutions unit reported average rate increases of over 35%. We saw particularly strong rate action across public D&O, where we're essentially an excess writer at more than 55%. In addition, private equity was up more than 40% and privately held companies up more than 30%. Furthermore, we're seeing rate increases of about 25% in our Canadian specialty business and 20% for Bermuda excess. Within Cyber and tech, we saw a 6% improvement as rates are now rising to reflect increased claims related to ransomware, among others. Accident and health was essentially flat on low volume this quarter. In our London-based international insurance division, rates were up close to 17% on average in the quarter. Renewable energy, where we're a global market leader, was up more than 35%. Professional and casualty lines were up over 20%, and aviation is finally correcting with pricing well over 55% in the quarter. Our London marine, political risks and property books averaged a bit shy of 10%, held back a bit by terrorism and offshore energy. Within that group, though, marine cargo continues to outperform and was up almost 25%, as did global property, which was up close to 20%. Overall, in the quarter, 97% of our total insurance business renewed flat to up. More than half of the premiums experienced rate increases in excess of 10%. And within that, over 30% of the book had rate increases in excess of 20%. Let's move on to reinsurance. There, we're seeing encouraging signs of firming, although not quite as high as insurance, with the understanding, of course, that there are meaningful variances by market. Our year-to-date average rate increase in reinsurance is about 8%. And here too, we saw encouraging acceleration from lower levels at January 1 to about double digits on average as the years developed. Catastrophe in some specialty lines, including liability, are in double digits. Other than those lines, the U.S. and global specialty markets are seeing the strongest rate increases with EMEA and Asia lagging behind. Nevertheless, while we see pricing and conditions starting to respond to loss trends in reinsurance, we believe they are not yet making up for much lower interest rates, leading to less attractive total returns in some lines. We responded appropriately by reducing our participation in certain treaties and markets, although we're optimistic that conditions going into 2021 will provide opportunities to grow across a number of lines and markets. Overall, across both insurance and reinsurance markets, we are seeing some impressive numbers in terms of rate change. That said, I caution that with a significant increase in the frequency and severity of weather-related events, social inflation, the uncertainties stemming from the COVID pandemic and significantly lower interest rates, current pricing is approaching adequacy, but does not yet translate into stellar ROEs for the industry. We remain optimistic that we will continue to see progress with the understanding that more rate action is needed and very likely it will take increases beyond 2021 in some lines to get to rate adequacy. At AXIS, we're leveraging a hybrid model to access risk across the globe and at different points of the risk transfer chain. We seek to grow the parts of our business where we're seeing the best opportunities and create a more balanced and diversified portfolio of risks, delivering an appropriate risk-adjusted return. We're well-positioned in the lines and markets that are seeing some of the strongest pricing momentum and are confident that this will accelerate our progress. We feel well prepared and optimistic for the future. We've delivered meaningful progress in our portfolio results in recent quarters, and we're confident that we can continue this positive momentum through the rigorous execution of our strategy. And with the favorable pricing environment anticipated to extend into 2021 and beyond, market conditions are working in our favor. As we look to the year ahead, it feels like all the pieces are coming into place.

First question comes from Yaron Kinar, Goldman Sachs.

I guess my first question goes to the underlying loss ratios in both reinsurance and insurance. Clearly, we're seeing significant improvement year-over-year. I seem to recall that last year, you had called out some midsized losses. Are there any such losses in this quarter's results?

Yes, this is Pete. Before I address your question, I want to clarify something regarding the derecho event. We had $45 million in losses from the derecho, all of which were related to reinsurance. I mistakenly referred to it as insurance, so I want to set the record straight – the derecho was purely a catastrophic event on the reinsurance side. Now, regarding your question, last year the third quarter was a bit volatile. Currently, we are considering all losses as performance indicators. We did incur some losses this quarter, but year-over-year, there was roughly a 2-point difference. Overall, the loss ratio has decreased by more than 3 points, with about 2 of those points attributable to that event. The remaining improvement comes from strong performance. As I noted earlier, particularly concerning insurance, we are experiencing rate increases on long-tail lines, yet we are maintaining our in-force loss ratios essentially the same as last year due to uncertainties in the economy, COVID, and social inflation. Overall, we are pleased with the improvements in our portfolio, remembering that about 2 of those 3 points relate to a significant loss. Year-to-date, our loss ratio is currently below 58%, factoring in the usual variations from large losses. As we've reunderwritten the insurance portfolio, we've reduced the coverage limits, which has led to fewer large losses moving forward.

Got it. That's very helpful.

Yes. The way that I look at it fundamentally is that I think our year-to-date loss ratio is probably just a good base. I mean there are so many puts and takes at this point given some of the positions that we're taking with regard to the current environment. We think we're in a good place with the loss ratios we have.

Understood. And then with regards to holding the loss ratios study compared to last year and for long-tail lines, certainly prudent in this environment of uncertainty. If you maybe give us some color as to how you're thinking about when you cross that threshold of feeling more comfortable with booking these loss trends? Sorry, the rates that you're getting over trend. Is it like waiting for a vaccine to be readily available? Is it getting past the credit cycle? At what point do we become more comfortable to release some of that pent-up margin?

There are two components to consider. One is the rate over trend, and the other is the current decrease in claims activity. We believe this reduction in claims is likely temporary. While we hope this is true, it's not a solid foundation for reserving. Currently, the rate over trend we are experiencing reflects last year's rate of about 8%. Given the current climate in the industry, it makes sense to account for this in the loss ratio this year. Looking ahead to 2021, we expect to see a much higher rate over trend, and we'll start to reflect some of that in our accounting. However, we won’t immediately apply it all to the loss ratio. As these lines of business mature, we will begin to account for the positive changes. I believe that no company has faced repercussions for reserving prudently and then adjusting later on.

Agreed.

Could you discuss the potential impact of a double-dip scenario, particularly if we see a rise in state home orders? What level of COVID exposure should we anticipate going forward, and how should we consider the likelihood of additional event cancellations in this context?

I think we're in a good place there. Let me just kind of walk you through some of the numbers, and Pete, feel free to jump in and complement. So obviously, we didn't have a lot of business that was exposed to event cancellation. Frankly, we only had one event, the Olympics. We took a partial reserve against the Olympics. If we get it to wave 3, 4, 5 and the Olympics were ultimately to be canceled, obviously, we'd be closer to a full-limit loss on the Olympics, and that full limit is $50 million. And I think we took about one-third of that, give or take, in the first quarter. With regard to policies for businesses that have business interruption, obviously, we were very quick as were a lot of people to immediately change the wordings of our policies. And in particular, a good bunch of our policies were already in businesses that were canceled or in the process of being canceled. We believe that today, we have reduced the number of policies exposed to the COVID lockdowns in the U.K. by about 70%, simply through the attrition of those policies expiring, not being renewed and/or new language being brought in. In the U.S., frankly, we've always had both physical damage and virus exclusion, except for a very small number of policies, which are already reserved for. So by and large, I think we're in much better shape right now if there were to be a COVID lockdown. Any more that you want to add to that, Peter?

No. I just want to clarify that most of our exposure this year was in the U.K. As that portfolio has turned over, we've been able to implement exclusionary language on renewals and with other clients that have not been renewed, which has reduced the exposure by about 70%. We're confident about our position in the U.S.

Yes. That obviously speaks to our insurance book. The reinsurance book is a little bit more difficult to evaluate. But I would expect that many of our customers would have taken similar kinds of corrective actions. So less able to give you specific numbers there, Brian, but we think we're in a better place now than we were certainly at the beginning of this year.

Got you. And I had two more here quickly. So Pete, I'm just curious, given the difference we're seeing in new money yields versus your current book yields, is there any way you can kind of give us some kind of outlook or guidance with respect to investment income, pressures and fixed income investment?

Yes. So, Brian, I mean, we're looking at down to 2.3. You'll see sequentially, the rate came down about 0.2 of a point. Again, that was some of the floaters, which are pegged to LIBOR resetting even lower. LIBOR is so low right now, I don't think that's really going to go much lower. So if you look at new money yields at about 1.4 with a 3-year duration, I just think the headwinds there are going to be on the yields, probably at about a 0.1 of a point a quarter or so, Brian, unless we can get an uptick back up into the mid-2s on those yields.

Got you. And then last question, Albert, for you. So maybe you could talk a little bit about where you are with respect to lowering volatility. And the reason I ask is that, look at you guys, you lost money this quarter, and granted, it was a big cat loss quarter. But if you look, a lot of other companies and P&T companies that are reporting, they're also having large cat losses, but they are actually still making money this quarter. Is there an issue with kind of scale at AXIS that you maybe need some bigger scale? Or do you still need to reduce volatility? Maybe give us some perspective on that.

Yes. Well, a, I don't think everybody has reported, number one. Number two, as you know, there are different kinds of accounting. Some people put all of their changes in the comprehensive income through their income statement; we don't. So there's a bunch of things. Some people have taken reserve releases. We've just told you that we think of it in this market. It's probably not a good idea to take reserve releases. So I'm not sure that things are comparable to the decimal point. But let me address your question more broadly. Our goal has been and continues to be to do two things; one is to increase the profitability of our non-cat business, and b, to reduce our exposure to the cat business. And that's exactly what we're doing. I gave you some statistics in the early part of the presentation about how we're much less exposed this year than we were last year than the years before that. And we will continue to do that. We were explicit in telling everybody we are not going to be increasing our PMLs into 2021 even with the market growing there. So that would be the first thing. The second thing is making sure that our non-cat business contributes a bigger piece of profitability. And there, I'm feeling really good about our trends. And obviously, this is not a number that we're going to be reporting on a regular basis. But when I look at the ROE of this company, ex-cat, which is just for our own analysis of the drag of cat. Our ex-cat ROE in the third quarter was up over 230 basis points. So the two parts of our strategy, increase the profitability of your overall non-cat business. We're making great progress. You see that in the improvement in the ex-cat combined ratio, or we're seeing that the improvement in the ex-cat ROE. And then secondly, continuing to reduce the volatility through more intelligent portfolio construction and net-net simply reducing the amount of cat-exposed business that we have, the net of which is going to be a better result. I absolutely am convinced that scale is not the issue. It's just continuing to work on the two levers I've just discussed.

Great. I guess the biggest big-picture question is when should we expect the heightened level of portfolio reshaping to be done? And maybe a simpler way of stating that is given the pricing environment, should we expect overall topline growth in 2021?

Well, the answer is absolutely. We should expect overall topline growth in 2021. I think that fundamentally, we feel that all of the big blocks of our repositioning are done. I mean we're earning through it, if you would, this year as we're writing it, we canceled a number of producer relationships and so on in January 1, which are running through the year and so on and so forth. I think from now on, it's really about optimizing the portfolio. And as I've discussed with you earlier, we think that there are a number of areas that are not yet reflecting all of the headwinds that we've talked about, and in particular, interest rates. If we have lines of business in 2021 that are not appropriately responding and not giving us adequate returns, obviously, we will not look to grow those. But if those lines of business are giving us the returns that we want, then we're open to growth in just about every line, subject, of course, to managing the overall volatility of our book of business. Anything you want to add to that, Peter?

No. I agree with you, Meyer. When I look at insurance, we made significant progress in shedding some business in 2019, which had a negative impact of about 2.5 points due to discontinued operations. That impact will be eliminated this year. We may see a slight headwind in the fourth quarter, but moving into 2021, that should clear up for the insurance segment, which has already begun to show positive growth. Regarding reinsurance, we implemented many changes in the first half of this year. Therefore, I anticipate we will see growth again next year.

Okay. Perfect. Yes, go ahead. I'm sorry.

Yes. So, Michael, again, when you look, especially with respect to the longer tail lines, notably professional lines and liability, given the uncertainties of the current situation, we are prudently not reflecting the majority of excess rate over trend pricing in our expected loss ratios. And I would remind you that, that the live playbook is continuously being updated in terms of managing the exposures around COVID.

Yes. When considering the significant dollar value reductions year-to-date, we previously mentioned the issues with cat and that has been addressed. The same goes for agriculture, which has faced challenges due to climate change and a couple of tough years. We sought better terms, but did not receive them. There was a substantial reduction in agro this year. As we continue to optimize our portfolio, we realized we were overlapping lines between insurance and reinsurance in engineering, and we've decided to exit engineering on the reinsurance side. This allows us to offer our customers larger lines in insurance without concerns about overlapping lines. We are still focused on optimizing the portfolio. My view is that the reductions in reinsurance have been strategic moves to enhance our overall consolidated portfolio. Moving forward, it will depend on whether specific markets adjust their pricing sufficiently to provide the returns we seek. It’s important to note that over 70% of our reinsurance business is quota share. Additionally, many lines of business in insurance are becoming increasingly attractive. Therefore, I anticipate that the quota share business will see improvements, and we want to engage in that. I believe the year-over-year changes in reinsurance reflect a low point due to our portfolio repositioning.

If I could follow-up on Pete's comment there on the professional liability reinsurance. And you said now at the end of the third quarter you feel comfortable with where you are. Can you maybe qualitatively say compare your level of comfort today versus maybe where you were in that specific line for about a year ago?

I would say definitely more comfortable today because, again, our underlying scenes have been getting rate, and again, that's a big quota share book for us. And so I do feel that the underlying business we have there is more profitable today than what it was, and we haven't moved our IELRs. We haven't responded to that. I'd say the same on our insurance side, where we've been getting a lot of rate, especially this year, and we really haven't responded in our IELRs. But overall, I mean, this is on pro lines, sort of on the reinsurance side, I would say, this was the first quarter we've actually had an increase in the PYD, an adverse on reinsurance pro lines. The first half of the year, it was essentially flat. So it was just this quarter responding to what we saw in a couple of years.

Sorry about that. You laid out a scenario where there will be some lines of business that still at the end of 2021, still won't be rate adequate. So I mean, there's two questions. And one is, if we think about 2021, how much of your top line is going to be associated with exposures that COVID-19 has sort of shrunk price lines of business that you're just not interested in writing anymore versus willingness to grow the business? I know that it's going to be impossible for you to lay out all four things, but can you go through each of the items, I guess, price on willingness to write certain lines, exposures, and willingness to expand? Can you talk about those four categories?

I think it's important to note that we are currently open for business across all our lines of operation. We have completed our macro exits, and now the focus is on ensuring rate adequacy and optimizing our portfolio. We want to emphasize that we are not aiming to increase our Property Maximum Limits (PMLs). Instead, we anticipate better returns in property and property catastrophe-exposed lines of business. Our goal is to create a more balanced and less volatile portfolio. We are willing to accept all rates and will continue to adjust the portfolio using analytics. However, you should not expect significant increases in our PMLs. Regarding COVID, we have not historically been significant writers of contingencies, and following the Olympics, we have no related exposures. In terms of our property and business interruption lines, we have enhanced our language and exclusions considerably, which gives us confidence moving forward.

My first question is about the business initiatives you've undertaken. We noticed a slight slowdown in reinsurance this quarter, but you indicated growth for 2021. We're hearing about potential increases in retro pricing starting January 1. As you consider strategies to grow your revenue in 2021, how do you foresee the growth to net revenue compared to 2020?

Right. So when you think about our insurance book of business, I know you asked about retro, but let me give you the comprehensive answer. I think when you look at our reinsurance book of business, most of what we write or what we buy is quota share, and so obviously, our reinsurers are getting the benefit of all of the improvements that we're delivering. So I think that, that will continue. Whether we increase or decrease our retentions, frankly, is a decision that we'll make at the time. When we see most of our book reinsured sometime in the spring, so we will be reactive to that. With regard to the reinsurance book, we're actually not a big buyer of retro. As you know, we use third-party capital, but that's mostly quota share. So because we're not a large writer of retro, we don't view changes in the retro market, not a large buyer, I apologize, of retro. Changes in the retro market really don't affect us in a meaningful way.

Okay. That's helpful. Your PMLs for every return period seemed to decrease this quarter, similar to last quarter. As you consider 2021 and the rates, I remember you mentioned wanting to reduce cat exposure a bit. Should we anticipate that PMLs will keep declining from this point?

Well, the PMLs in this quarter have a little bit of a benefit because, frankly, with the activity that we've had this year, we've eroded a lot of the aggregate covers. So I think that has an impact on the net PMLs. But I think if you look at where we were at July 1, I think that's probably more of an independent view. And so to my point, I think around the levels of July 1, maybe a little bit lower, is where I would expect it to be.

Okay. That's helpful. And my last question, the fourth quarter seems to also be pretty active. We've had Delta, Zeta, the ongoing California fires. You guys just have a little bit of a sense of how we can think about the cat loss, the exposure to some of these events in the fourth quarter. Maybe I know some of them are ongoing, but not looking for an exact number, but more qualitative in terms of your exposure and how we should think about the fourth quarter?

You're correct. These events just occurred. Zeta passed through Louisiana yesterday. Both of them seem to be relatively low-level hurricanes. Additionally, Zeta appears to be following a similar path as Laura, which might complicate the process of assigning losses to either Laura or Zeta. I believe this will pose a challenge for the entire industry, not just for us. We'll see how this progresses as we move into the fourth quarter. Interestingly, if you look at the past five years or so, the median catastrophic losses for the industry have been around $50 billion. Currently, we estimate that we're already in the mid-60s by the end of the third quarter, which indicates the type of year we’re experiencing.

Elyse, the only other thing I'd point out, and this is Pete. When you look historically, especially the '17 and '18 with the wildfires, we had been on a number of large aggregate treaties on the reinsurance side, and we're no longer on those treaties. So we don't have those aggregates in our portfolio anymore. So just as you're looking historically, I thought I'd point that out.

Operator: This concludes our question-and-answer session. Now I'd like to turn the call back over to Mr. Albert Benchimol for closing remarks.

Thank you, operator, and thank you all for participating and for your interest and questions. This quarter has certainly had its ups and downs. However, I believe that AXIS has effectively tackled this year's challenges, resulting in a reduced exposure to catastrophic events compared to historical levels. We have made noteworthy advancements in our ex-cat business, and we are steadily progressing toward our goal of becoming a global leader in specialty risk. I want to assure you that we remain committed to our plan, maintain discipline in our underwriting practices, and manage our portfolio to be well-positioned for future recovery. We have made adjustments to several business segments in 2020, and we are pleased with our current positioning and ready to engage when pricing and returns are favorable. To my colleagues listening today, thank you for your hard work and dedication; it is noticed by our clients and brokers alike. I appreciate all of you. To everyone who joined our call, thank you, and we look forward to updating you on our progress in future calls. Thank you, everyone. Operator, that concludes our call.

Operator: Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.