Earnings Call Transcript - AXS Q4 2020

Matt Rohrmann, Head of Investor Relations

Thank you, Kate. 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 fourth quarter and year ended December 31, 2020. Our earnings press release and financial supplement 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've 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.

Albert Benchimol, CEO

Thank you, Matt. Good morning, everyone. Thank you for joining our fourth quarter conference call. 2020 was a tough year. AXIS and our industry faced the combination of COVID-19, which impacted both our underwriting and investment compounded by heightened hurricane activity that made 2020 the fifth costliest cat year on record. Given our presence in the diversifying U.K. market and global reinsurance business, we could not avoid COVID. But I'm proud of the manner in which AXIS responded to the pandemic. Our team did an outstanding job of sustaining excellent service to our clients and partners in distribution, and we exhibited our values in our support of our colleagues and our communities. We were early in identifying our potential COVID exposures and establishing prudent reserves in the first quarter. Unfortunately, the pandemic spiked again in the fourth quarter and a recent court judgment also increased the potential cost to the insurance industry. This caused us to take an additional COVID charge in the fourth quarter. While the pandemic is still an ongoing catastrophe event, I believe we've taken a prudent approach to analyzing our exposures and that we have the reserves to reasonably address our potential liability for both short- and long-tail related exposures incurred in 2020. COVID and the various catastrophe events of 2020 materially impacted our financial performance, and we delivered disappointing results that unfortunately overshadowed encouraging progress in our core underwriting performance. The fourth quarter of 2020 marked the fifth consecutive quarter and sixth quarter in the last date, in which we delivered significant year-over-year improvement in our current accident year ex-cat combined ratio.

Pete Vogt, CFO

Thank you, Albert, and good morning, everyone. As Albert noted in his comments, this was a challenging quarter for the company, heavily influenced by COVID-19 and above-average natural catastrophes. But it also included strong core underwriting results. During the quarter, we incurred a net loss attributable to common shareholders of $5 million and an annualized ROE of negative 0.4%. The operating loss was $16 million and the annualized operating ROE was negative 1.4%. As previously announced, the quarter's pretax catastrophe and weather-related losses, net of reinstatement premiums were $198 million or 18.4 points on the loss ratio. This included a $125 million loss provision for the COVID-19 pandemic, which is in addition to the $235 million loss provision recognized in the first quarter of 2020, resulting in a full-year 2020 COVID charge of $360 million.

Albert Benchimol, CEO

Thank you, Pete. And for those joining via webcast, we understand that there was a technical issue and that you missed the opening minutes on that. We deeply apologize for that. But please note that a replay of the webcast will be archived in the Investor Information section of our website to make sure you have access to all of the information. So, let's move on to the third part of our presentation, which is the overview of market conditions and the outlook before we go to the questions. So across both our insurance and reinsurance segments, we saw positive pricing momentum continue during the fourth quarter and into the January 1 renewals. In our insurance book, we saw average rate increases of nearly 18% in the fourth quarter. This compares to 16% in the third quarter, 15% in the second and 10% in the first. For the full year, our consolidated insurance business average rate increases were more than 14% on a gross basis. That's more than double the average rate increase that we saw in 2019. Going into the specifics, in our U.S. division, we saw average rate increases of 17% in the quarter. Within that, excess casualty reported average rate increases of more than 28%, while primary casualty was up more than 12%. E&S property saw increases of more than 21%. Our accident and health unit had rate increases of up 8%. And in our U.S. programs business, which focuses on homogeneous books of smaller accounts, we saw increases of 6%. Moving to our North American professional lines division, pricing continued to accelerate and rates there increased by more than 21% in the quarter. Our commercial management solutions unit saw average rate increases of more than 30%. We continue to see particularly strong grade action across public D&O, where we're essentially an excess writer, as well as private equity, with both up over 40% this quarter. In addition, privately held companies was up close to 30%, and ancillary lines increased 18%. Separately, we saw rate increases of 34% in our Canadian specialty business and 33% for Bermuda AXIS. Financial institutions delivered rate increases of more than 20%. Within Cyber and Tech, we saw increases of close to 14% as rates accelerated in response to increasing claims related to ransomware, among others. Given recent developments in this line, I expect the cyber market will rally to implement much improved pricing and changes in terms and conditions this year. Moving to our London-based international insurance division, rates were up more than 16% on average in the quarter. Renewable energy, where we're a global market leader, was up almost 23%. Professional and casualty lines were also up 23% and aviation saw increases of about 19%. Our international marine, political risk and property books all averaged in the low double digits. But within that, however, marine cargo once again continued to outperform and was up 20%, while global property and construction were also both up close to 20%. Overall, for the entire segment, in the quarter, fully 98% of our total insurance business renewed flat to up, and new business pricing is at least as good as and often better than renewal business. More than 60% of the premiums renewed experienced rate increases in excess of 10%. And within that, 40% of our portfolio had rate increases in excess of 20%. Let's move on to reinsurance. Only a small percentage of our reinsurance book renews in the fourth quarter, so it's better to look at the full year. And there, we estimate that for the full year 2020, we averaged reinsurance rate increases of about 8%. This accelerated into the January 1 renewals, where we renewed close to half of our reinsurance book with average rate increases of about 12%. The renewal season started early. There was much talk of discipline and demand for better terms. But in the final 2 weeks, most deals got done in an orderly fashion. We expect new capacity at both incumbents and new entrants had some impact, especially in cat and retro covers, where new entrants wrote a meaningful amount of business. Terms and conditions did improve, but it fell well short of being a hard market. Looking across geographies. Within North America, we estimate the average pure rate increased about 13%. Almost all lines achieved double-digit increases. Professional lines and liability were both up over 15%. We continue to see firming market conditions in property and catastrophe with better rate momentum at regional levels as nationwide companies varied by risk profile. In our Global Markets division, pricing also averaged 13%, with aviation the strongest at over 40%. Within our EMEA and LATAM division, the long downward trend in rates appears to have finally reversed on a broader basis, but pricing still shows much room for improvement. Rates were up 10% on average with liability and professional lines the strongest, while property and catastrophe were still stubbornly in the single digits. In APAC, we saw average increases in the low single digits, with catastrophe rates up in the high single digits. At AXIS, we entered the January 1 renewals with perhaps less optimism than many industry observers. And so for us, this meant that we achieved pricing that was a bit better than our expectations in some cases, a bit worse than others, but generally consistent with a moderate overall improvement that we had anticipated. In the end, we felt that we were able to execute well on our renewal strategy and that our portfolio is better positioned as we enter 2021. For us, that means close to a flat premium production year-over-year, and about 10% less premium in property and property cat, notwithstanding the achieved rate increases as we continue to reduce our overall exposure to cat volatility. While the pricing momentum that we're seeing in both insurance and reinsurance is encouraging, we still believe a multiyear correction is needed. There continues to be clear evidence of the catastrophic impact that climate change is having on weather, property, agriculture and other lines. According to industry data, 3 of the 5 worst cat years on record happened in the last 4 years, and 2020 tied as the hottest year on record and also saw a record number of Atlantic storms. Separately, we're still in the midst of a period of social inflation and increasing cyber threats, including ransomware, and there remain many uncertainties on how society will emerge from COVID. These trends and ongoing uncertainties must be reflected both in our pricing and in prudent reserving, all of which means that there remains clear motivation to sustain strong pricing and review the policy wordings for the foreseeable future. In this current phase of the cycle, most, if not all of our growth has been within the insurance business as market conditions there have been much more favorable. And in the short term, we anticipate that much of our growth will continue to come from insurance, particularly in the non-cat-exposed lines of business. We're looking at our hybrid model as a differentiator, providing a broad range of opportunities from which to choose the best possible outcomes and allocate capital to the areas offering the best returns as we build our optimized AXIS portfolio. We look to the future with optimism. We feel very good about the book of business that we have, and we're confident that we'll be able to continue to improve our results. We've got a terrific team, strong and lasting relationships with our producers, and are growing in the areas where we want to grow. We believe that the continued positive momentum that we're seeing in our underlying performance provides evidence that our strategy is working. Our team is disciplined, focused, and intent on driving meaningful profitable results in 2021. And with that, I'll open the line for questions.

Operator, Operator

Our first question is from Brian Meredith from UBS.

Brian Meredith, Analyst

A couple of questions here. First one, Albert, I'm wondering if you could just dig in a little bit more on your cyber exposure. I know you're a leader in that market. I understand the ransomware situation. How do you protect yourself in that market given the escalating loss trend we're seeing there?

Albert Benchimol, CEO

That's a very timely question, Brian. As you know, we have observed an increase in ransomware attacks, which led us to raise the loss ratio in the fourth quarter. This change was a key factor affecting the loss ratio in our insurance division. Thanks to our leadership in this area, we possess significant technical expertise. We've been actively working on our cyber portfolio since around the middle of the year, examining various models and implementing changes. We've taken several steps, including updating our underwriting guidelines to ensure our customers maintain better cyber hygiene. We've partnered with multiple tech companies to enhance our clients' education on cyber risk prevention and recovery. Additionally, we have raised prices and modified terms and conditions. We also increased our protection; last year, we had a 55% quota share along with an excess of loss aggregate, and this year we've raised it to a 65% quota share and purchased more excess of loss aggregate. Overall, we have effectively identified the issues early, made significant changes to our strategy, and secured additional protection. Therefore, I believe we are entering 2021 in a strong position regarding cyber risk.

Brian Meredith, Analyst

Great. And then my next question on the insurance segment a little more broadly here. Looking at underlying loss ratios and what's going on there, improved call it about 100, 150 basis points year-over-year, but you're getting rate on rate, and I assume loss trends are nowhere close to where rate is right now. I mean, as we look into 2021, should we expect some pretty meaningful underlying loss ratio improvement?

Albert Benchimol, CEO

Well, the first thing I want to answer is that my lawyer is listening, and the last thing he's going to let me do is give you specifics on that. But that said, we've had 2 good years now of rates, 7% in '19, 14% in '20. And as you've heard Pete talk about it, we took a very prudent approach in 2019 in view of some of the uncertainties, both relating to the actual claims emergence given COVID, and the fact that we wanted to make sure that we had adequate reserves at the end of the year. And you've heard me speak just a few minutes ago about all of the uncertainties that remain in the world today with regard to social inflation, with regard to the uncertainties around COVID and so on and so forth. And while clearly, we believe that the rate increases that we're getting are ahead of trend, we think that the right call is to also prudently reserve until we have more clarity on those lines. So the answer is yes, we expect to continue to make good progress. But I wouldn't ask you to use a formulaic approach to 14% minus loss trends to give you a big reduction in loss ratios.

Operator, Operator

Our next question is from Meyer Shields from KBW.

Meyer Shields, Analyst

Similar question to Brian's, I guess. Albert, can you give us some insight in terms of the cyber loss ratio increase? Was that on 4Q losses? Was that an adjustment to the full year loss ratio?

Albert Benchimol, CEO

That's a fair question. Pete, you can jump in on that.

Pete Vogt, CFO

Yes. Thanks, Albert. Meyer, this is Pete. We did a look at our full-year losses for cyber. And the loss ratio, we think, reflected what we think the full year experience would be. I don't like these words like catch-up or whatnot, but we took a view as to what we were seeing throughout the full year. So I think it was a little heavy in the quarter. But overall, we're comfortable with the full year view we have on cyber and the actions the underwriters have taken going into 2021.

Albert Benchimol, CEO

Your cyber loss number, we still showed meaningful improvement in year-over-year loss ratios for our insurance division.

Meyer Shields, Analyst

I want to make sure that we shouldn't expect the cyber issue to offset the loss ratio improvement in 2020.

Pete Vogt, CFO

Yes. I think what we saw in the quarter was about 2 points due to cyber, and I wouldn't expect to see that type of impact going forward every quarter, Meyer.

Meyer Shields, Analyst

Okay. And then this is sort of related, but I was hoping you could update us on how we should think about loss trend for lines like cyber and based on your recent report on catastrophe losses?

Albert Benchimol, CEO

Could you repeat that? I lost the last half of your question.

Meyer Shields, Analyst

So I just want to get a sense as to how we should think about loss trends for lines like cyber, and you recently published your report on sort of long-term climate change impact. I just want to get a sense in terms of recognizing the hesitation of the formulaic loss ratio model, but how should we think about trends in these one-off lines?

Albert Benchimol, CEO

Right. So our expectation, frankly, is that we're going to be seeing pricing increases in cyber anywhere from 10% to 25%, maybe even more as we go through. We are reducing limits, increasing attachment points, all of the things that you've been hearing us and other leaders of the industry make. So we think we'll be able to use all of those methodologies to both manage the loss trend, but also make sure there's more premium to reflect that. With regards to catastrophe, I think you know our message on cat, which is us. And so our view is that we just need to have less net cat exposure as we move forward because I think we're changing and the world is changing, and I think it's very difficult to project with any accuracy the impact of climate change on frequency and severity. And so from our perspective, we're obviously updating our models to assume a net shift up in loss curves, and we're responding to that with both increased pricing and less exposure to property, property cat. Our goal is to make property, property cat a smaller percentage of our overall book to make sure that we generate sufficient profits in other lines. So that even if profitability in property is not where we want it to be, we don't let it drag down the entire company.

Operator, Operator

Our next question is from Yaron Kinar from Goldman Sachs.

Yaron Kinar, Analyst

Could you discuss the size of the overall portfolio? With the recent price changes and adjustments you're implementing, do you anticipate the portfolio will grow into next year, or is there a possibility of retrenchment? Additionally, do you foresee the loss ratio for that portfolio remaining relatively stable compared to where it was at the end of 2020, or do you expect some changes?

Albert Benchimol, CEO

So there's a couple of things. First of all, as I mentioned earlier, we use a fair amount of reinsurance on this thing, and we're increasing that as we're going forward. Secondly, we are going to be reducing the amount of units that we're going to be taking in terms of risk in 2021. The volume is really going to be a question of how much rate is ahead of our reduction unit. But net-net, you can expect us to reduce that. We think we've got a good number for the loss ratio in 2020. I think we reflected everything we knew on that line. But let's be honest, we're going to have to see how that year develops and make sure that we reserve appropriately for it. I don't know if you want to add anything to that.

Pete Vogt, CFO

No, that sounds good, Albert. I would say that we acknowledged the risk in that business, that's why we increased our quota share back up to 65% and bought the additional excess of loss protection. But again, I think we're comfortable with the loss ratio that we have for 2020, and we know the underwriters are getting rate as we go into 2021, and they are improving terms and conditions. So we feel comfortable going forward, but it's obviously a lot of business to keep an eye on.

Albert Benchimol, CEO

And it's probably worth mentioning that because we use a lot. I mean, just to put things in scale there, we're probably going to end up with, what, somewhere between $125 million, maybe a little bit more of net earned premium in cyber next year. It's not a huge, huge line for us on a net basis. We write a lot of it, but we see a lot of it, too.

Yaron Kinar, Analyst

Got it. That's helpful. And then my second question, I apologize if you touched on it. I did have some technical difficulties. PMLs, I think they increased both year-over-year and sequentially, can you maybe talk about what drove those increases?

Albert Benchimol, CEO

Yes. I wouldn't make much of the 1/1 PMLs because, obviously, we renew our reinsurance in May, and the big increase there is the fact that we non-renewed a couple of aggregate and excess of loss treaties at 1/1. Obviously, we've got a good 5 months at least in front of us to manage the wind portfolio. So it really matters is where the portfolio ends up at June 1 and what kind of reinsurance we buy at May 15, which is when we renew ours. So I wouldn't read excessively into that right now. As you know, if you look at our numbers, we are writing less property certainly; we're writing less property than we're getting rate. So on a unit basis, that continues to come down.

Operator, Operator

Our next question is from Elyse Greenspan from Wells Fargo Securities.

Elyse Greenspan, Analyst

My first question, Albert, in your prepared remarks, you mentioned flat premiums when discussing reinsurance. You also indicated that you were down around 10% in property cat at January 1. I wanted to confirm if those numbers are accurate. If they are correct and represent the overall reinsurance situation unless there are significant changes in other seasons of the year, can we expect that portfolio to remain close to flat for 2021, regarding the total reinsurance book?

Albert Benchimol, CEO

Yes. My expectation is that we are going to write less gross exposures going forward. Obviously, price, we're going to be pushing for price everywhere that we can. But net-net, that portfolio should have less growth exposures as we go through the year. We still have, obviously, the important renewal seasons of April, May, June and July. And that was reinsurance, by the way, the 10% was a reference to the January 1 renewals.

Elyse Greenspan, Analyst

Yes, the conditions remain the same. If property was down 10% at the start of the year, we will see what happens for the rest of the year. It seems there has been some growth on the casualty side, which might balance out to an overall flat level. Am I understanding that correctly?

Albert Benchimol, CEO

That is consistent with the strategy we've shared, which is that we see a lot of good opportunities in property. I don't want anyone to overlook property, especially property catastrophe. However, we must acknowledge the inherent volatility in property. Therefore, we believe there is a suitable amount of property we can incorporate into our book as a percentage. As we grow, particularly in what appears to be an attractive market for casualty, professional lines, and other non-catastrophe-exposed businesses, we will seize that opportunity. Additionally, we've previously mentioned our desire for greater balance in our portfolio. The challenge we've faced over the past two or three years was our cautious approach towards professional and liability lines. Our assessment was validated as many have raised their reserves in 2017, 2018, and 2019 for those lines. Although we aimed to rebalance our portfolio, we felt it was not the right time in the past. Now, in 2020 and into 2021, we see a much better relative value opportunity in professional lines, casualty, and other non-catastrophe-exposed lines. We truly have a significant opportunity to expedite that rebalancing which the market did not permit us to pursue in the last couple of years.

Elyse Greenspan, Analyst

That's helpful. And then my second question was on reserves. So I think you guys just pointed out that you will lease some of the lines that you re-leased reserved that in the fourth quarter. And I know during some other quarters of the year, you would take an action right to strengthen up some of your liability lines. Were there any lines that you strengthened in the fourth quarter, or was it not material enough to call out?

Albert Benchimol, CEO

Pete, do you want to...

Pete Vogt, CFO

Elyse, this is Pete. Yes, I can address that, Albert. The main line we improved in the fourth quarter that is noteworthy is the insurance professional lines. We made this enhancement during the quarter, which counterbalanced the positive aspects we observed in the reinsurance, credit and surety, and insurance marine and property lines that I mentioned earlier. Looking back at the entire year, which I believe you'd be interested in, we actually enhanced both professional lines and liability throughout the year. We also experienced positive development from prior years due to the performance of other business lines, which balanced out the increases we made in professional lines and liability. For the calendar year, we raised the total for professional lines and liability, including reinsurance and insurance, by just over $100 million, focusing primarily on accident years '17, '18, and '19.

Elyse Greenspan, Analyst

Okay. That's helpful. And then one more. You guys have obviously been running down right on the runoff of the Novae portfolio that's been impacting your margins. Is there any runoff that we still need to think about for 2021?

Pete Vogt, CFO

No, that's really gone. There is a small amount of unearned premium left, but it's less than $10 million, so that's insignificant in the grand scheme. We're glad that's behind us, Elyse.

Operator, Operator

Our next question is from Josh Shanker from Bank of America.

Josh Shanker, Analyst

I appreciate the time. This is a theoretical question, I guess. If you look at a year of writing business that's building a portfolio, given COVID and cats, it's been hard to measure what the real ROE of the business is. But when you think about the portfolio you've built as of January 1, 2021, how much better do you think the ROE on that book of business is in the business you had 1 year ago, but normalization for cat and COVID and whatnot, or maybe even over a 3-year period, how much better design do you think your portfolio is or efficient if that's the right word?

Pete Vogt, CFO

Albert, you're on mute.

Albert Benchimol, CEO

So the first thing that I would say is the biggest impact needs to be interest rates because, obviously, that has a factor on every line of business that you look at. And then the second issue is the loss trends that you have. There's no question that other than COVID, pricing is ahead of loss trends in almost every line. If I'm looking at the business that we are writing today based on what we've achieved, we're feeling reasonably comfortable that this business should earn-out to a double-digit ROE. And I say earn-out obviously because we're writing it today and this thing gets over a period of time. I would say that between last year and this year, the rate increases have allowed us to absorb the reduction in interest rates and the loss trends and end up at about where we thought we were at the beginning of last year when we did not know about the reduction in interest rates or COVID.

Josh Shanker, Analyst

Okay. So let's assume that's right and that the book today is a double-digit interest rate business. It's hard to take COVID out of the equation, but what do you think it was one year ago?

Albert Benchimol, CEO

About a year ago, I mentioned that the business written on January 1 had a pricing structure aimed at achieving a double-digit return on equity. However, since then, we've encountered a rare pandemic and a catastrophic event that deviated significantly from the norm, along with decreased interest rates. These factors ultimately prevented us from reaching that double-digit return on equity. Looking at our current book of business compared to last year, it appears to have improved on average and in terms of pricing. Statistically speaking, the likelihood of breaking even has gotten better, and the variability within the distribution has also improved. Additionally, the one-in-ten probabilities have increased. Overall, all aspects of our portfolio have seen enhancements in pricing year-over-year after accounting for the trends, lower interest rates, and the measures we've implemented to strengthen the portfolio throughout the year.

Josh Shanker, Analyst

And let's take like individual lines like cyber or D&O or whatnot, how much of your return is based on portfolio construction versus being a better underwriter than the next guy. And so your D&O business will have several hundred basis points of better return than somebody else's. Your cyber business will have several hundred basis points of better points than somebody else's, how much is risk selection an important part of that sort of double-digit ROE goal? And how much is it creating the right portfolio?

Albert Benchimol, CEO

So I think it's a combination of both. I mean at the end of the day, if we don't do a good risk selection, we don't get good line results, and then it's about the allocation of the distribution. And by the way, Josh, you've actually identified the way we do our planning, which is we do individual bottom-up reviews of the individual portfolios and what we can do to improve each one of them. And then we bring them together and compare the relative returns and volatilities. And then we try to combine them to get the best optimized distribution of doing it. So I think there’s a fair amount that's required to do that. And I don't want to get into a lot of weird numbers, so I'm just going to give you one. Our brokers tell us that with regard to quota shares, we generally get very generous seating commissions compared to other people in the industry, which leads us to believe that our reinsurers are very happy to take a quota share of our business.

Operator, Operator

Our next question is from Ron Bobman from Capital Returns.

Ron Bobman, Analyst

I had a couple of reinsurance protection questions. The reinsurance asset, I guess, are recoverable against COVID losses. I'm wondering what sort of magnitude the, in essence, COVID reinsurance recoverable asset is at year-end?

Pete Vogt, CFO

Ron, I don't have that number right at my fingertips, but we do have some reinsurance recoverables, specifically on our per risk contracts on the insurance side, but we can follow up with you on the exact number.

Ron Bobman, Analyst

Okay. Also related to reinsurance recoverable, in regard to the reinsurance asset or the program for the cyber business, is there any information on loss ratio caps or event limits that might limit it, or can we assume it provides 65% protection on all losses?

Albert Benchimol, CEO

So some have caps, some don't. And then, of course, on top of that, we've got the excess of loss.

Ron Bobman, Analyst

Okay. Could you describe generally? I mean, I'm not looking for terms, but like generally, what type of caps?

Albert Benchimol, CEO

There are multiples of the premium. So there's basically loss ratio caps, which we feel are very comfortable and give us a lot of comfort in terms of getting protections across the curve.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Albert Benchimol for closing remarks.

Albert Benchimol, CEO

Thank you, operator, and thank you to everybody for participating and for your time this morning. I think we've addressed all the big points. If you don't mind, I would like to take a minute to express my appreciation to our team and to all of our colleagues. I continue to be inspired by the commitment and resilience that you’re showing in the face of a very difficult year. And as I've said before, in one of the worst years, we've seen the best of AXIS, and I have you all to thank for that. And to all of our investors and our analysts, just to remind you of our commitment, we are absolutely committed to deliver superior returns. We've been working very hard over the last several years to change the portfolio. We make no excuses. 2020 was what it was, but we also understand the unique impact and we feel that the underlying improvements in our portfolio give us a lot of confidence that we can deliver in 2021. So thank you to everybody, and we look forward to keeping you updated with our progress.

Operator, Operator

The conference call is now concluded. Thank you for attending today's presentation. You may now disconnect.