Lancashire Holdings Ltd
LSE:LRE
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Lancashire Holdings Ltd
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Hello, and welcome to the Lancashire Holdings Limited First Quarter 2020 results. [Operator Instructions] Please note, this call is being recorded. Today, I'm pleased to present Alex Maloney, Group CEO; Paul Gregory, Group CEO; Natalie Kershaw, Group CFO; Denise O'Donoghue, Group Chief Investment Officer; and Darren Redhead, Group Chief Executive Officer of Lancashire Capital Management. Please begin your meeting.
Hi, good morning, everyone. Firstly, I would like to express my personal sympathies to any of our colleagues, business partners or friends who have been directly or indirectly affected by this terrible virus. We know this is a difficult time and the Lancashire Group's charitable foundation has donated GBP 100,000 to various charities in both the U.K. and Bermuda to try and help respond to the COVID-19 pandemic.Moving on to our operational performance. I'm proud of our -- of how our employees have dealt with challenges posed by working from home. It has, by and large, been business as usual for us. The Lancashire Group has grown top line premiums, 12% during the first quarter of 2020. And after stripping out the impact of multiyear contracts and reinstatement premiums, we have an underlying growth rate of 18%. This is in line with our expectations due to the improving underwriting opportunities we have seen during the first quarter.Equally pleasing has been the rate improvement of 8% across our portfolio of comparable renewable business when compared to the corresponding quarter of 2019. We entered 2020 with increased optimism of a hardening pricing cycle, and we witnessed -- as we witnessed more indicators of an improving cycle after years of soft market conditions. This has been borne out in the first quarter of this year. Therefore, in anticipation of this and in line with our long-term strategy, we retained our 2019 earnings to enable us to grow our business as risk and return metrics improved. We did, however, maintain the same level of reinsurance at group level as we did in 2019. Therefore, our net risk levels have not materially changed at this stage of the cycle. Our opening year capital is higher than we would normally carry.As we entered the COVID-19 pandemic, we had several hundred million dollars of excess capital in excess of our A investment rating agency requirement. Equally, we have in excess of 200% of the solvency capital our group regulator, the BMA, requires us to hold. Therefore, I believe we're in the best possible position to absorb the financial hit from COVID-19 pandemic and look to grow into a better underwriting opportunities that we expect to arise over the next 18 months. We believe this event to be the catalyst for a steeper hardening curve in the insurance and reinsurance pricing cycle. This loss is truly unprecedented. This is an overused word in our industry. At this time, this is appropriate. Therefore, there will be a higher risk of reserve deterioration over time as we and the industry receive claims from our clients and deal with the inevitable gray areas.We at Lancashire, have a tried and tested process when assessing any large claim, and we have used the same process when assessing our potential exposure to COVID-19. At this point, like in the early stages of any large claim, we have little real data. We believe our loss number to be sensible and calculated using the same level of prudence we always apply to large events. It's worth noting that Lancashire does not write the following classes of business: travel, trade credit or any casualty classes, apart from some liability cover within our marine and energy classes. Therefore, we believe our lack of wider footprint, coupled with our simple business structure, allows management a greater deal of transparency not only when assessing exposure to such events like COVID-19, but when assessing future business opportunities. In summary, I feel that Lakeshore is perfectly positioned at this stage of the underwriting cycle. We have no legacy issues and therefore able to focus our attention on the improving underwriting climate.Lastly, I would like to thank my colleagues for their continued hard work and our shareholders for their continued support. I will now hand over to Paul.
Thank you, Alex. Before I turn to the possible impact of COVID-19, it's worth summarizing how Q1 shaped up in relation to our expectations at the start of the year. We had anticipated that rates in almost all product lines would continue to increase as we entered 2020, with the exception of terrorism and political risks. I will take each business segment in turn to outline what we have seen during Q1.In property, we anticipated positive rating movement in both insurance D&F and reinsurance lines, albeit much like 2019, rate increases to be more muted in Q1 than what we will see in Q2 due to the portfolio mix. This has played out as expected for Q1 although in reinsurance lines, we saw a marginally better market than in 2019 with a slightly positive change in sentiment. Terrorism and political risks were broadly flat, again, in line with expectation. Which is what dampens the overall RPI for the property segment. We have been able to expand in almost all property segment subclasses as rates improve. The build-out of our new D&F offering within Lancashire U.K. is going smoothly, and we are seeing good traction, which bodes well for Q2 and beyond.In energy, we have seen the downstream and power subclasses continue to harden with no signs of momentum slowing. Years of large losses and market capacity retracting is keeping rating moving forward. Both lines remain in their build-out stage, so this market environment is helpful in aiding their maturity, and this has helped grow overall energy segment premiums year-on-year. Upstream energy rates remain positive, albeit marginally; we have yet to see the capacity withdrawals seen in the other energy subclasses. Our belief is that this market remains finely balanced and our current strategy is to remain focused on our core clients. Marine is another segment that continues to see rate momentum across all subclasses. Lost capacity in this sector has not yet been fully replaced. And as such, the rating environment continues to improve. Premium for the quarter is down, albeit this is more a function of accounts renewing outside of Q1 as they are nonannual.Following on from the strong Q4 in 2019, aviation rates across all subclasses have continued to improve. Q1 is not particularly significant quarter for aviation. This is later in the year. However, it is good to see rating momentum continue for us and to continue to grow our footprint further. So overall, we're really pleased with what we've seen through Q1 regarding market conditions, and also that we've been able to grow with the market opportunity with top line gross written premium up just under 12% year-on-year. It goes without saying that we expect COVID-19 to have an impact on both rates and demand for our products, and therefore, our outlook for the remainder of the year. The first important point to make is that the event remains an ongoing event, so trying to come up with definitive answers at this stage is incredibly difficult. However, we can provide some of our views and possible future trends that will likely impact our business segments.In terms of headwinds, we expect there to be negative demand impacts in lines such as energy, marine and aviation. To date, though, we have seen very little of this, but we do expect to see this as we move through the year. Establishing exactly what this could look like from a quantum perspective is currently extremely difficult, given we do not know how long the global lockdown will continue for, what the effect will be for any particular sector and how quick any recovery will be. However, our clients still need insurance for their assets, whether they're fully operational or not, so demand is not likely to completely disappear even in highly stressed scenarios.Our primary focus at this stage is to work with our clients to ensure that we can assist with their current insurance needs and remain pragmatic in order to help our core clients where possible. There are also potential tailwinds. We believe that this event only adds more stress to the system. It will result in losses to various classes of business and will also impact the asset side of the balance sheet. This is all at the time when the market has been struggling to get back to underwriting profitability. Our view prior to this event is for continued rate hardening, and we can only see the rating curve steepening from here. The full effects of COVID-19 will not be known for some time yet, so calling how quickly the rate curve steepens is difficult and will be different for each line of business. We are, however, confident in the broad direction of travel.COVID-19 has certainly created various challenges for the industry and our company, but it doesn't change our strategy. In all market conditions, our strategy remains the same, to match risk and return. Our view down into 2020 was to grow with an improving market. This doesn't change. And as the market changes from here, we have the capital, people and platforms to change with it.Finally, I'd like to thank all our underwriters and all those employees who support our underwriters for adapting so seamlessly to this new way of working. Whilst the challenges we face are clearly only minor inconveniences, compared to the many dedicated frontline workers across the country, I'm nonetheless proud to have continued to serve the needs of both our brokers and clients through this period. I'll now pass over to Natalie.
Thanks, Paul. Hello, everyone. It's certainly been an eventful quarter to be starting a new role. And today, I'm going to update you on 4 areas: our top line, losses, investment returns and capital. As you will have noted from our trading update, we are now presenting our results across 4 operating segments: property, energy, marine and aviation. This new segmental presentation reflects how we internally view and manage our business now that our Lloyd's Syndicates are fully integrated with the rest of the group.For the first quarter of the year, our gross premiums written increased across all segments with the exception of marine. The increases were largely due to new business and rate rises. In the marine book, there are a couple of nonannual contracts written in the first quarter of 2019 that will renew later in 2020. As noted by Paul, although gross premium written is up just under 12% year-on-year, underlying growth is approximately 18% once the impact of multiyear contracts and reinstatement premiums in the first quarter of 2019 are taken into account. We expect the net annual impact of multiyear premiums not renewing to be lower than in previous years, at approximately $30 million. There may also be a reduction in demand across a number of our business lines due to the impacts of COVID-19 in the second half of the year. The COVID-19 event is still ongoing, which makes any estimate of losses exceptionally difficult. Our current estimate of $35 million of losses for the first quarter was arrived at following our standard cat event loss review process. This brings together underwriters, claims and actuarial personnel from across the business as well as senior management to view all lines of business to assess the likelihood of claims arising. Our approach has, therefore, been bottom up by contracts and class rather than estimating a market share of an industry loss. Our current expectations of losses are largely focused in the property classes, where we are aware of some instances of [indiscernible] pandemic cover.Aside from COVID-19, we have seen an increase in attritional claims being reported in the quarter for both the current and prior accident years. These claims are across a number of risk and natural event losses, and we do not think these are indicative of any increasing trend. We would keep our guidance as attritional loss ratios in the region of 36% to 37% for the year. Even given positive RPI rates as we are expecting that there could be some secondary impacts from COVID-19 on the cost of part and labor, the claims arising across the book.The negative investment return of 1.9% was largely driven by unrealized mark-to-market moves on our bank loan and hedge fund portfolios, given the significant spread widening and volatility in the equity markets towards the end of the quarter. This negative position has now largely unwound through April. As mentioned on our previous earnings call, we redeemed a portion of our hedge fund allocation during the quarter, as our allocation to this asset class had not historically produced strong enough returns on a risk-adjusted basis. We have now redeemed just over 1/3 of the hedge fund portfolio. Given the ongoing market volatility, the proceeds from these redemptions are currently being held in treasury money market funds. However, we do not intend to change our investment strategy over the medium term. Over the next few weeks or so, we will be publishing our year-end 2019 financial condition report for the group under the BMA solvency capital regime. This will show that we started the year with a solvency ratio of 225% or about $620 million over the enhanced capital requirements. Even given the negative results for the first quarter, we do not estimate a significant drop in this ratio at the end of Q1 2020.We also carried excess headroom over our internal preferences and overall rating agency requirements coming into 2020. We, therefore, believe that we will remain more than adequately capitalized for the remainder of the year and are in a good position to take advantage of any market improvements that may arise following the COVID-19 crisis.On the 12th of February 2020, the Board of Directors declared a payment of an ordinary dividend of $0.10 per common share or $20.1 million. This was approved at yesterday's AGM and is due to be paid on the fifth of June. With that, I'll now hand over to the operator for questions.
[Operator Instructions] The first question comes from the line of Kamran Hossain from RBC.
It's Kamran Hossain same from RBC. My first question is on capital. And thanks for kind of articulating an idea of the headroom up there and best rating. I guess when I look at Hiscox, they made a statement yesterday. They sound relatively excited about the backdrop. Can you just maybe articulate why you're not quite as excited or kind of any thoughts around that?And then in terms of additional capital, I understand you've got plenty of room -- headroom for growth. But what would be the trigger point for the market in the market pricing for you to kind of go and raise some money. So that's the first question. The second question is on, I guess, on the midyear renewals. I've heard a few bits and pieces from brokers in London. Can you just talk a little bit about your expectations to the midyear renewals and whether you're seeing more people trying to come to market earlier this year?
So Kamran, on capital, we've also seen the Hiscox and Beazley comments. I think for us, we -- as we've been very sort of explicit on this call and probably more than we usually are. I think we are in a strong capital position. We did hold more capital this year to grow into a better market, and that's what we intend to do. So I think we believe we have enough capital to go into win season. Even if the market hardens substantially tomorrow. And then we will -- in tune with our long-term strategy, if we believe that the returns are there to warrant an equity raise, we will definitely consider that. I think myself and Paul are in the unique position where we have that daily underwriting call so we're on the call every single day. And we can confirm that rates are starting to move. I personally don't think, we sit here today, but I'm quite excited, but rates are improving, and we will write more business. We are probably not of the view we're quite there yet to warrant a raise. But equally, we do have excess headroom to write in better market anyway. So maybe we're just in a slightly different position. Paul, can you just answer the question about midyear and timing, please?
Sure. Yes. So I think it is fair to say that we have seen, across a number of lines, things starting to come in a little bit earlier than normal. I think to be honest, part of this is just purely a function of people working from home and clients and brokers just trying to get information to underwriters quicker. I also think there is an element of, as Alex alluded to there, we are seeing rates improve. So clients wanting to get in and secure terms a little bit earlier than in markets where rates are going the other way. In terms of what we're seeing, as Alex mentioned, rates, of course, most of those we've been talking about are continuing to improve. And as I said in my script, I think this just adds a further stress to the system. So I would imagine that the momentum will continue.
The next question comes from the line of Oliver Troop from Autonomous.
Yes. I'm Oliver Troop from Autonomous. I've got 2 questions. Firstly, just thinking, if we do see a drop in demand in lines like energy, aviation and marine, does that mean we should expect lower overall growth? Or is that not necessarily the case because you can just deploy that capital elsewhere? And obviously, there's going to be a lot of opportunities out there.And then the second question just on attritional claim. I know you mentioned the secondary impact on parts and labor. But obviously, there's a lot of things going on. So there's less activity, obviously, less planes flying, less shipping. There's things like more oil being stored in tankers, for instance. And so I just wondered if you could talk a bit more about some of the kind of knock-on effects on attritional levels. And yes, I guess, whether they're likely to be on balance, positive or negative?
So I think I'll ask Paul to cover the demand point in a minute. I think on attrition, it's a very difficult one to call. We're not we're not in motor insuring. If you're in motor insuring, you would expect attrition to go down this year, obviously. So we're in an unprecedented scenario.So I think there's 2 ways you can look at it, and it's very hard to answer. Clearly, we have clients that have oil rigs, or cruise ships is a good example, that are not currently trading. So that would perceive to be a better risk. But equally, there can be start-up risks when the investors go back to work, there can be aggregation issues. We're seeing that in the aviation world. So I think it's very, very hard to call. I think you could see a very quiet period. But then as the world goes back to work at the same time, then you could see some claims, but it's very, very hard to calculate. And as I said, it's not like a motor insurance portfolio, where I guess, it would be reasonably easy to calculate that a lockdown equals no claims. I think it's a very, very hard question to answer.I think on demand, I'll ask Paul to answer demand. The only hedge, I suppose, that we have on demand is supply as well. And we have seen carriers cutting back already or at least looking at line sizes and both of the -- trying to buy more reinsurance. And equally so, we expect demand to come down for certain classes, and Paul can tell you how we've approached this. But equally, you have to think about it in the supply as well. We believe, for the 2021 underwriting year, there could be less supply.
Okay. So I'll just follow-up a bit on the demand there, Oliver. As of now, we haven't seen any significant drop in demand across any of our lines of business. But as I said in my script, it would be naive to think that, that's not going to happen as we move through the year. When you mentioned the obvious lines there, oil price clearly has an impact in energy, particularly the upstream energy book. And we've seen this in previous cycles where oil prices softened. The kind of areas there that were impacted, things like drilling activity and construction. But what I would say is they're at relatively low levels already. The kind of other part of the energy portfolio, things like downstream and power that can be affected, but less impacted by oil price movements and they're a growing part of our book. In marine, the obvious areas are things like cargo and cruise, and in aviation. That's an obvious area that could be hit, albeit noting that not all policies adjust for activity. But to answer your overall question around overall growth assumptions, I think I'm just going to go back to the fact that we're very early in this event. It's very, very difficult to understand exactly how we're going to move from here. And there could well be opportunities in other lines of business, whether that be to -- from other people coming out, whether that be from rates improving. And clearly, our mantra through cycles is to grow and there's opportunities like that. But it's very difficult at this particular stage to say we're going to be at x point come the end of the year. What we can say is there will be some demand stresses on parts of our business, albeit rate momentum in those are continuing. And if there are opportunities in other areas, then we're ready to kind of enter and write more business should the rating get to the levels we require.
The next question comes from the line of Ben Cohen from Investec.
I just wondered if you could say firstly, a bit more about the COVID loss recognition that you made in the first quarter. How much do you think this is you getting ahead of these issues as they come out? And how much would you expect to make material loss estimate update later through the year? And the second question I had was the impact of COVID on the ILS market, perhaps just a comment from Darren in terms of what he's seeing there about supply and maybe also demand for the product in this market?
So okay, Ben. So I think if you think about this loss, there's 2 ways to think about it. You've got the loss itself, which is truly unprecedented. I know everyone uses that in our industry too much, but I think it's warranted this time. And that provides its own challenges for any carrier, including ourselves when trying to estimate losses. You've also got most of the world on lockdown. So you just don't have -- usually when we come to market, we don't have a huge amount of data. We've not got a lot of data here on COVID. We believe our exposure comes through where we write property lines, and that can be at the Syndicate. It can be at Lancashire. And we believe we are not exposed to some of the more obvious areas. So that's just a simpler viewpoint from that point of view. I think -- as I said in my script, there will be uncertainty around anyone's Q1 numbers. We will all learn from this event, and we will all get the better data into Q2. But what I can say to you is we have followed the process that we always do when we have large events at Lancashire, we've used the same amount of prudence we always do.As Natalie said, there's a lot of people involved in covering this loss estimate, and we believe, where we are today with the information we have and using the same amount of prudence we generally do, we think this is a fair number. But clearly, there is uncertainty because this is unprecedented. Darren, can you just answer the question, please, about ILS?
Sure. Hi, Ben. Just a couple of points, really, regarding the ILS [indiscernible] we've been saying it's an ongoing event and continue to be evaluated. I think there will be reduced capacity in the ILS sector and traditional sector for reinsurance, which will cause pricing increases. You will see redemptions where people are trying to -- liquidity issues from other types of assets. There will be redemptions or liquidity issues where people have used leverage a funding carrier. So there's a number of issues, really, that will come through. And then you'd also have the issue of capital as we go through the coming months and quarters. I mean one thing you can be certain of, there will be lesser capacity. There will be investors looking to come in, and it will be -- on what basis do they come in, obviously, they're going to want more money and reduced exposure, but that's all to be determined as we go through the coming months.
Next question comes from the line of Andreas van Embden from Peel Hunt.
A few questions from my side, please. On the COVID-19 loss estimate of $35 million, you mentioned in your press release, this is mainly weighs towards property lines. So could you perhaps disclose how much of that is business interruption and whether you've assumed any business interruption losses, not only your property insurance book, but also our property reinsurance book?Secondly, again, on business interruption, could you maybe disclose a bit where the risks are across your portfolio? Is it mainly the large corporates where you've explicitly included some business interruption payout for critical disease in your policies? Or is this a large gray area you're trying to calculate. So is it the specific business interruption, clear-cut claim that it's included in the 35 million. Is there a large gray area in your portfolio?And then finally, what timeline have you assumed in your $35 million loss assumption? Does this assume a lockdown all the way through the summer or longer?
So I think I Andreas, there's a lot of points there, and I think there's a lot of uncertainty across the sector. We have [ corrected ] our numbers on looking at policies where we think claims are valid. We have used that as a base assumption. You have to remember, we're not a retail insurer. We do write some property binders that give some of this color, so that's quite easy to understand. But as I said, we don't have a lot of direct exposure. So we have -- well these numbers are on claims that we think are valid in our portfolio. I think -- I can't really say much more than that. We've made assumptions. We've looked at the data. Some policies to give business interruptions, some don't. But clearly, we've made all of our assumptions based on what claims we think are valid to those policies.
Is it more weighted towards your reinsurance portfolio? Or is it mainly insurance? Could you be able to disclose that?
Look, for us, it's where we write property business. So that could be property direct and facultative at the Syndicate and at Lancashire. And equally, we expect -- we've set aside some claims, IBNR, for our property catastrophe book as well.
The next question comes from the Ian [ Pence ] from Crédit Suisse.
Two for me. Firstly, you spoke about holding a higher level of excess capital above that AM Best A rating requirement coming into the start of the year. So I'm just wondering what you would have viewed as a sort of normal level of capital above that A level requirement that you would hold. And secondly, if you could just give us any details of if there's any exposure to potential business interruption claims in the ILS funds, that would be great.
So we don't give our headroom ranges typically. The reason we have today is because I think these are unprecedented times. So we thought it would be good to give what headroom that we usually carry as a company. But obviously, we had a good 2019. We kept our earnings. So that was -- that created a larger buffer than what we would normally carry. Clearly, we carry buffers anyway. But that created a larger buffer, but we don't disclose what we normally give as a buffer. Darren, do you want to answer the ILS question?
Yes, sure. Thank you. Regarding the comment of the BI claims in the ILS sector. I mean, the vast majority of claims coming through in the property sections are going to be, obviously, from business interruption. It's really going to depend on the quantum that actually comes through, first from insurance, then the reinsurance direct, and how far it goes up to these programs and the number of events. So really, it's way too early to tell, but I mean the one thing is it will be BI claims that obviously impact the reinsurance market and NRS sector. So it's going to depend on the quantum coming through of the ongoing event.
[Operator Instructions]. The next question comes from the line of Nick Johnson from Numis Securities.
My question is on the COVID loss estimate. Sorry to go back to it, but aggregates published numbers from companies so far don't really seem to tell you that by some predictions by senior industry figures, this will be the worst insurance [ spend ] ever, which might imply or probably does imply there's a lot more to come in Q2. Just wondered what your thoughts are on that particular angle. Or is there actually a risk that it could turn out to be a smaller loss than some have feared, and that might mean we don't see a steepening in the price curve that you talked about?
I think we've seen the ranges, Nick, from various different people. And our view is that we just wouldn't want to comment. Clearly, the ranges themselves are much bigger from various different parties than you see on a typical cat claim. I think that demonstrates the uncertainty. And as you said, we would expect more clarity coming into Q2. So we're focused on our own book. We believe our number is sensible, and we -- industry loss numbers equally involve a lot of business we just don't do. So we're not going to comment on product lines. We don't do a lot workers comp and trade credit. So we haven't taken that much notice, to be honest, to industry numbers, and we're just focusing on our own book at this point. But as you said, there will be more clarity over time. And if this is a very large loss, it will lead to a harder market and the smaller the loss, it will be easier for the industry to absorb.
The next question comes from the line of Ryan [ Bartman ] from Capital Returns.
A couple of questions. Your property binder book, could you describe the sort of the caliber of wordings that you have in that book, in effect as it relates to BI conclusions?
That's the first question, yes?
Yes. The first question, and then I've got some other sort of more market-related questions, reinsurance market related.
Right. Okay. Paul, do you care to take that one?
Yes. Sure. Ryan, it's Paul Gregory. Look, on a dime, like the luck of our business, our wordings are different. So giving kind of succinct answer to that question is incredibly difficult. I think, as Alex mentioned earlier, there are parts of our portfolio that do provide explicit coverage for this kind of event, and some of that sits within our property binder book, which has been identified. But when you write kind of specialty insurance business, every policy wording can be different.
Would you ballpark the portion of that book where the BI wording has limitations that stop at physical damage and property loss as compared to those that have the supplemental exclusion that carves out pandemic and virus?
I just don't think we'd pull apart that number, Ryan. It's just not -- we're not speculating today so
Okay. I'll move on. I'm curious to know in sort of about reinsurance basis risk for primary insurers that write commercial property that may have some degree of basis risk in the reinsurance program maybe being peril-specific or named some portion that may cover BI, virus-induced VI and some may not. Do you think that's a big problem where primary companies will have some limitations in their tower that will not cover this losses that come out of COVID?
I think that everyone is going to have different programs as everyone's got different books. So I think that's hard to answer on behalf of other people. I suppose our approach as a business is that the partners that we choose when we buy reinsurance, we've built over 10 years. We've got multi-class relationships and they're people that we want to trade with in the future. So I think that should aid some of those conversations. But you can't really put any numbers on these things. I think everyone would be different. Everyone buys cover in a different way. And obviously, it depends on what your front end book looks like. I think it's -- there aren't going to be a lot of conversations that's clear. There are going to be some gray areas, but that's why we buy our reinsurance with people that we've built deep relationships with because that's the purpose of building those deep relationships is that sometimes you may have to have conversations about gray areas or unprecedented events.
I -- my last question's for Darren, I think. Darren, as collateralized re contracts come up for maturity or expiration soon. What do you expect the behavior to be for holders of those protections as it relates to sort of releasing capital and permitting the counterparty to take the capital back or not, given the uncertainty that, that's going to probably last as it relates to BI for some -- for quite a while.
Like any loss, if it's a covered event and the counterparty thinks there's a possibility of there being a claims there, normally around half of the deductible, I would expect the customer client to track the funds because they're unsure whether they're going to have a claim or not. So for a vast majority of them where they think there's a covered claim, I would expect there to be tracking. Just to elaborate on that a bit more, I think, as we go through the year and we get to 1:1 policies, I think we'll be having those conversations with clients, customers in a bit more detail what we've discussed today, i.e. what's the quantum of the event? And is -- are they covered?
Okay. And is it true -- some market participants say that if the holder of the protection is going to retain -- force the collateral to fit in the account to the extent that they have to, in fact, book a loss reserve sort of consistent with that collateral claim? Is that sort of nearly 100% situation?
Sorry, are you talking for the seller or...
If the holder of protection is going to force the collateral to be retained in the collateral account beyond the coverage terms, traffic capital, do they always, in fact, have to book a gross loss sort of simultaneous, on their own books, simultaneous with the action to track capital?
I can't speak for all the ILS market, but it all depends on what your view of the event is within your reserving within - meaning since we reserved as the group does. So if we was of the view that the contract had a loss irrespective of trapping, we would mark that contract as a loss.
[Operator Instructions]. The next question comes from the line of Daniel Ryan from Barclays.
I've got 2 please, if I may. Firstly, just to follow-up on that -- the discussion around pandemic exclusions. Would you say there are any geographies you see as potentially a bit more vulnerable than others? And have you been able to enforce any more exclusion for pandemics at renewals? And then secondly, just on the demand point, just wondering if you have at hand the percentage of volumes that are activity-based or dependent on economic activity. Would be interested to know that if you have it at hand?
Dan, look, we wouldn't comment on legal matters about pandemic exclusions. That would just be the wrong thing to do. It's the wrong time. The market, in general, is moving to, I wouldn't say completely exclude pandemic on every single account, but the market has moved quite quickly to identify pandemic exclusions, and we are seeing that across the majority of contracts. It's not every single contact, but we are seeing that. And clearly, I think in the longer-term view of the industry, there may be some kind of pandemic solution, probably government backed, but I think it's -- that's where we'll end up. But at the moment, I think we are seeing pandemic exclusions, but we wouldn't comment about the current ones that we had.And PG, [ won't you ] cover the demand part, please?
Yes. Sorry, Daniel, could you repeat your question? Because I missed the last piece of it.
No worries. So just sort of following up on that discussion earlier on in the call. Just interested to know maybe what percentage of your volumes are activity-based or dependent on economic activity?
Yes. Yes, sure. So I mean, we publish our kind of split per segment. And I think you can see that in our annual report from '19. And I think the areas kind of to focus on are the ones we talked about earlier on the call. So the energy portfolio, aviation portfolio and marine portfolio are the most obvious ones. There are elements, the property portfolio, where you could potentially also see impact from reduced economic activity. And as I said, I haven't got the numbers in front of me, which is why I'm not going to give the split, but if you just take a quick look at our '19 premiums, and you can see the split per sector.
We have a follow-up question from Andreas van Embden from Peel Hunt.
I've got 2 follow-ups, please. First of all, again on your COVID-19 loss estimate. Could you perhaps disclose what your gross loss was rather than your net loss and how your reinsurance program sort of has behaved relative to these COVID-19 losses? Is your reinsurance program -- because I've seen you've paid a reinstatement premium, does it react to pandemic as a sublimit for BI? Or is this your sort of pole reinsurance program that you've reinstated ahead of the hurricane season, i.e. is it the same program that would pick up property cat losses in the remainder of the year? And secondly, on your aviation, your aviation deductible book. What is the exposure here for you? And how have you quantified any potential claims from the fact that sort of the airline industry has parked most of its fleet?
Andreas, we never publish our gross losses. We always publish our net losses net of the applicable reinsurance where we think we have coverage. So we -- where these claims, by the looks of it, at where they come from in the group, we've applied the reinsurance that we think is appropriate, and that's our net loss number, and we just don't disclose gross, okay?PG, can you answer the question about the deductible, please?
Yes, sure. Sorry, was it around claims activity on aviation deductible, just to clarify?
Yes. Is there any claims activity yet? And if not, can I have you included potential claims activity in your COVID-19 loss estimate?
So I think as you mentioned earlier, COVID-19 is predominantly associated with property losses. The aviation portfolio, you would not expect direct proxies from this kind of event. Obviously, as we've mentioned, you had to have other events in the year and parts and labor are harder to come by. Then that comes with secondary implications on things like aviation. That said, the planes aren't flying at the moment. So only thing, an aviation portfolio claims tend to be linked to activity.
So if the fleet comes out of lockdown and has to restart, do you think you'll -- there won't be any sort of claims activity on the back of that and when we come out of lockdown?
Aviation's deductible in this whole, that particularly is an attritional line of business. So as planes go back to work, yes, you would expect losses to come through. But look, that focus you price for attrition. So if we feel that attrition is likely to increase then we'll price to that accordingly.
We have another follow-up question from Oliver Troop from Autonomous.
Just 1 follow-up question, please. Sorry, on the COVID, the $35 million reserve again. You've obviously got some claims where there are some policies, whether explicit sublimits for communicable diseases. So obviously, you would have put something aside for those. And then obviously, you've got other policies where it's explicitly excluded. And I suppose, as a third category where you've got policies where maybe the wording is perhaps a bit ambiguous or silent. How significant is that third category? Or are they mostly the reserve coming from the first category?
Oliver, we've clearly calculated some income along the lines of those 3 categories. And in the numbers that we've published today cases for that, but we won't give a split. That would be unwise to give that kind of split due to uncertainty. But clearly, as you said, we're taking into account when we're coming with our claims number. And as I said earlier, we've used the same process that we always do, the same level of [ prudence ] we do. But for us and for everyone, it's a more difficult plan to calculate.
Yes. I guess I was just trying to get a sense of how uncertain the estimate was. I know you say, obviously, it's very uncertain, the state is in a pandemic but -- but yes, okay, that's fine.
There are currently no further questions registered. I'll hand the conference back to you, speakers.
Okay. Thank you, everyone, for your questions, and we'll talk to you next quarter.