Lancashire Holdings Ltd
LSE:LRE
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Lancashire Holdings Ltd
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Hello, and welcome to the Lancashire Holdings Limited Third 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 COO; and Natalie Kershaw, Group CFO. Please begin the meeting.
Thank you, operator. In what has been a difficult year, I continue to be immensely proud of my colleagues for demonstrating continued professionalism and resilience during these unusual times. During the third quarter, we have witnessed a high number of natural catastrophe losses following one of the most active hurricane seasons on record. Coupled with this, we've also experienced a higher-than-usual run rate of single-risk losses emanating from our specialty insurance portfolio. These are business-as-usual losses for us and relate to, for example, the Beirut port explosion, a couple of airline crashes, a refinery explosion, an oil spill offshore Mauritius and similar loss events. Importantly, no individual claim amount falls outside of our expectation for these events. But clearly, the aggregate of these losses is higher than we usually see in a quarter. Although we cannot predict when our clients may present a claim, these events do allow us the opportunity to demonstrate the value of insurance. We are, after all, in the claims-paying business. Turning to our top line. Our business has continued the momentum we saw at the half year. Therefore, I'm pleased to report we continue to grow into the improving underwriting climate. Our gross premiums have grown 14% for the year-to-date with an underlying growth rate of 20%. We have seen continued rates hardening in virtually every class of business we underwrite. We expect this to continue during the fourth quarter and into the 2021 underwriting year. Our capital base remains strong following our successful capital raise in June. We explained at the time of our raise our plan was to deploy these funds over the next 6 to 12 months. As such, these funds have not yet been deployed. With the important January renewals upon us, coupled with the improving underwriting climate, we expect to start utilizing this additional capital to allow us to grow further into this opportunity.Our COVID-19 loss amount remains unchanged at this point. As we have stated before, this event is ongoing, and the ultimate industry loss will take years to mature, particularly with the casualty elements. We continue to believe that like all things COVID-19-related, there will be further challenges ahead as we learn more about this terrible virus and its implications. But we remain confident that we have applied the same level of prudence to this loss amount as we would any other large loss the group assumes. We have a tried and tested process for such large losses, which we will continue to apply. As we have stated before, there is more uncertainty with regard to COVID-19 losses for us and the wider industry versus the usual large losses we have historically navigated.The outlook for the Lancashire Group is strong. We are now seeing a greater degree of hardening across most of our underwriting portfolio than we have seen in years. We continue to grow organically but also through the acquisition of new underwriting teams. We have been busy during this calendar year, building a broader, more diverse business, which we expect to further strengthen our franchise over the coming years. In summary, I couldn't be happier with our current market positioning. We have no legacy issues, excellent people and a strong capital base. We fully intend to maximize the current underwriting opportunity for the benefit of our shareholders who I thank for their continued support for our business. I'll now hand over to Paul.
Thank you, Alex. The third quarter has been a challenging loss quarter for both the industry and ourselves given the frequency of both natural catastrophe and large risk losses. Ahead of Q3, our outlook for market conditions was positive, and the size of the industry losses in Q3 only strengthens our belief that market conditions will continue to improve in 2021 across the majority of our product lines. And you can see some of this already.Whilst Q3 is not a significant premium quarter, we have once again grown top line, and our RPI for Q3 was a very encouraging 117%, bringing the year-to-date renewal price index up to 112%. This acceleration of strong market conditions gives us confidence we can grow into 2021 and beyond. The capital we raised at midyear remains fully available, and we will look to deploy this through the 2021 renewal season. The capital will be used in 2 main ways: firstly, for growth in catastrophe exposed lines, such as retrocession, property catastrophe reinsurance and property insurance. Market conditions have allowed us to grow in each of these lines during 2020, and we expect this to continue into 2021. Secondly, we'll use some of this capital to retain more risk. We anticipate dislocation in the reinsurance markets, particularly for natural-catastrophe-exposed products, and we will not be immune from this. There will always be core reinsurance products we buy from core reinsurance partners throughout the cycle, and we will have to pay more for these. The capital just allows us the flexibility to retain more risk in certain areas if we feel this is the best risk-adjusted decision.It's worth reiterating that we remain both product and platform-agnostic as to where we deliver this growth. The weighting will be dictated by the market opportunity.Let me move on to our specialty book, which is less capital intensive. Market conditions in lines such as marine, aviation and distinct parts of the energy book continue to improve and will provide the opportunity for continued portfolio growth. Demand in these product lines has held up well despite COVID-19 with no material impact to premiums seen thus far in 2020. We are anticipating future demand headwinds, but we would expect rate increases and expanding market share to help offset this somewhat. Finally, we've continued to add new and complementary underwriting teams to the group. Our accident and health underwriter joined earlier this year and is now underwriting by Lancashire Syndicate 3010. In Lancashire Bermuda, we've employed a casualty treaty underwriter and a specialty treaty underwriter. And subject to regulatory approval will start underwriting these classes in 2021. That is now 6 new product lines in the past 3 years added to the Group's product offering.In summary, 2020 has so far been a challenging year from pretty much every angle. However, from an underwriting perspective, we're extremely well placed to take full advantage of the improving market conditions, and that's exactly what we intend to do.I'll now pass over to Nat.
Thanks, Paul. Today, I'm going to give a brief update on our top line, losses, investment return and capital. New business and rate rises across all our segments have contributed to continued growth momentum in gross premiums written in the third quarter. Our top line is up 14% year-on-year with underlying growth of 20%, once the impact for multiyear contracts and reinstatement premiums are taken into account. The largest increases in dollar terms are in the property cat excessive loss and property direct and cat classes, which have increased by 21% for the first 9 months of the year compared to the same period in 2019. As a reminder, these increases will take a while to earn through to the bottom line, so the majority of the benefit will come through in 2021 and 2022. As Paul has already mentioned, we plan to deploy our newly raised capital during 2021. We are likely to see healthy demand in the property catastrophe space, but in light of the economic outlook, there is potential for weaker demand on the specialty side. We'd expect this to be at least some way, if not fully, offset by rate increases. Moving on to our loss experience. Our COVID loss estimate remained stable at $42 million. The pace and quantum of loss notifications have thus far been fully in line with expectations. But to reiterate, this is an unprecedented loss for the industry. So there is a greater degree of uncertainty still remaining. Elsewhere, the third quarter of 2020 witnessed an active North American hurricane season as well as California wildfires on a large derecho storm in the Midwest. Our ultimate loss estimate for these events, net of reinsurance and reinstatement premiums, is in the range of $65 million to $75 million and in line with our 10-year average annual loss exposure for such events where cat losses account for around 15% of the Group's annual combined ratio. The third quarter of 2020 also saw an unusual frequency of single-risk losses, including the Beirut explosion, aviation losses and a number of tanker groundings amongst others. Although none of these events are individually material, they aggregate for a total net ultimate loss of approximately $30 million, net of reinsurance and reinstatement premiums for the quarter, in addition to the usual level of attrition that we guide to. These type of losses are not unexpected given the portfolio that we write. Prior year favorable reserve development in the quarter was in line with normal expectations and brings total favorable development for the first 9 months of 2020 to $11.2 million. Our investments produced a total return of 2.4% for the year-to-date, with most of our asset classes having a positive contribution to the return. Fixed maturities have recouped all of the losses from the first quarter, with hedge funds, bank loans and private debt funds still showing small losses on a year-to-date basis.As a reminder, we carried excess headroom over our internal preferences and overall rating agency requirements coming into 2020. Therefore, even given that active loss year we have seen so far in 2020, all the capital raised in June is still available to take advantage of the continuing rate improvements we are seeing and will be utilized in 2021. With that, I'll now hand over to the operator for questions.
[Operator Instructions] And our first question comes from Kamran Hossain from RBC.
A couple of questions about the COVID loss. The first one is, I guess, of the $42 million revenue, it's great news that it stayed stable. Could you maybe comment on how much of that is IBNR versus kind of case reserves? And I guess, as we go into second wave, I guess, kind of second lockdowns, is there any risk that the number gets bigger in Q4 just because of that? And then the second question, I think you're very -- you addressed all my questions on cat already. But as we move towards 1/1, do you think the shape of next year's earnings kind of previously had assumed higher retentions exposure growth. Is this still the same way to think about it as we were kind of, I guess, last quarter?
Okay. Kamran, I'll take the COVID question. So the first part on the IBNR versus case, most of that $42 million is still IBNR. And on the question of the second lockdown, obviously, this loss is highly uncertain. So we can't really comment on how that might change in the future.
Yes. I'll now comment. We were very clear from day one that any COVID number for ourselves or the industry, there is just going to be more uncertainty of loss creep on that. We are still comfortable with our numbers today. And we think adopting the same approach we always do, there's -- we obviously try and be as prudent as we can, but you have to be completely clear about the fact that all COVID losses, whether it's us or anyone in our industry, there is a level of uncertainty just because of the uncertainty that COVID brings to all of us. So that is a fact. And I know people want more certainty than that on COVID, but I don't believe any insurance company or reinsurance company can give you the ultimate sort of loss at this point. It's an ongoing event. But as Natalie said, we are comfortable with our number. We see no reason to change it at this point.
And sorry, Kamran, could you repeat the second question, please?
I guess, looking back to the half year, when we talked about what might happen to your P&L next year, you told us about higher retentions exposure growth. I guess as market conditions have gone a little bit clearer, is that still the same intensity? Or have things changed kind of more reinsurance, more retro or something else or less retro?
Yes. So kind of on the inwards, it's kind of what we're talking about before, we expect to grow in all of those cat-exposed lines. As I said in my script, we're pretty agnostic about where that comes from. But in all honesty, I'd expect to grow in retro, property cat and D&F. In terms of retaining more, yes, particularly on the catastrophe-exposed lines, we will retain more risk. Some of that, in all honesty, will be forced upon us. Some of it will be tactical. We are, of course, going to be paying more money for that coverage as well because we're not immune from market conditions. And then obviously, on the reinsurance spend, you need to factor in things like new teams joining and associated that reinsurance spend with those start-up portfolio as well. But yes, look, we're going to be looking to grow the top line. We'll definitely be retaining more cat risk at certain points. What that exactly looks like yet, we don't know. I think this is going to be a very interesting renewal season, both inwards and outwards, and certainly in February, we'll be able to give you a much clearer picture of exactly what's happened.
Yes. And on that Kamran, everything we've seen so far is all in line with our expectations. So there's no change from what we thought was going to happen at half year and, arguably, with the events in Q3, that just strengthens everything we thought was going to happen anyway.
Our next question comes from Emanuele Musio from Morgan Stanley.
Two questions from me, please. In discussing capital deployment, you referred to capital raised this year weather. When you raise capital, you said you already had $600 million surplus. So when you refer to capital that you intend to deploy next year, do you refer to adjust the $340 million that you raised or maybe you envisage to utilize some of the surplus that you had prior to the capital raise? Second question, you didn't mention casualty in the press release. But you recently talked about it, so focusing on capital still, I'm just curious to know when do you think you may start to see some diversification benefit in your solvency calculation. Or maybe rephrasing the question, do you think that your recent proposition in casualty will be supportive of more efficient capital allocation at some point or maybe it will always be too small to matter?
Okay. On your first point, you are correct. When we've done our capital raise, we were in a strong capital position. If you remember, we had a very good '19. We retained those earnings, and we did have headroom in our PMLs at that point. We've also done the capital raise, which just gave us more flexibility. So we do have all of the capital that we raised in June, but we did have headroom in our PMLs already. So yes, we can deploy more than the capital that we raised in June. As I said, we're in a strong position now. So -- look, 1/1 is the first real time to do that, and that's exactly what we told our investors at the time. We said that we would deploy that capital within 6 to 12 months. So we're completely on track.
Emanuele, on your second point about the potential benefits of casualty in the capital model, and the capital model's really highly geared towards catastrophe. So where we may see a small amount of diversification benefit from casualty business, it really isn't going to impact us significantly at all.
And I'd also add to that, at the moment, this is going to be a relatively small amount of group premium income. So maybe in a number of years' time, we can answer that question again. But at the moment, it's going to be a relatively small proportion of group income.
Our next question comes from the line of Edward Morris from JPMorgan.
A few questions from my side, please. So first of all, I mean, obviously, you've seen pretty good growth this year in premiums. When I look at the sort of makeup of that growth, it does appear that the vast majority of it is coming from improvements in pricing, so that the difference between the premium growth and the RPI that you show is relatively modest. So I wonder if you could just explain, is there any reasons why there hasn't been more underlying volume growth this year? And as we come to think about this into next year, would you expect that delta to be greater, i.e., continuing to benefit from price improvements and also seeing an underlying increase in volumes? So any view on how that dynamic between the 2 might change would be helpful.Secondly, could you just remind us, when it comes to capital requirements, particularly capital requirements associated with growth, if you're growing just because pricing is better, i.e., the RPI is above 100%, does that in itself deploy more capital? Or is it only increases in the sort of underlying risk exposure? I'm just trying to understand how consumptive of capital, any premium growth would be. And then lastly, you mentioned some of the new business lines. I think you said you had 3 new areas that you're writing in addition to another 3 that you've recently launched. I think some of the new business lines you've been writing with quota share reinsurance or proportional-type reinsurance, could you just confirm what your plans are for some of the new areas like casualty, et cetera? How are you going to approach writing this business on a gross and net basis?
Okay. Ed, I can probably take all of those. So on the growth side, the first thing I said was year-to-date, our renewal price index is 112%. Our underlying growth, which is, as Nat said, in her script, where we strip out impacts of reinstatement premiums and multiyear, is at 120 -- sorry, at 20% growth. So we are trending above the RPI. So there's some good underlying growth in there. One -- I suppose one area, which is always lumpy for us every year is our political risk portfolio, which is nonrenewable by nature. That is linked to kind of economic activity, and we have seen that book kind of reduce year-on-year, but that -- we can see that go up a lot in one year and down in another. But all the other lines, we've seen kind of growth above RPI, and I think you can see that from our main segments. On the capital piece, it's primarily risk that drives our capital requirements. There are small elements for things like premium charges, but its risk really is underlying risk and changes in that, that drives capital. On the new business lines, it's predominantly the aviation team that we brought in that had -- or does have a quota share protection associated with it. On the new lines of business, they're going to be more focused on XL -- traditional XL purchases as of excess and loss purchases as opposed to quota share purchases, and we'll be buying those products in the first quarter of next year when we start underwriting those classes.
And also, just to remember that when -- if you go back to what we said earlier in the year, the -- our market only really started to move in Q2. So I think the difference is looking into '21, we're going to have a full year to have a run at. So as Paul said, there are some -- that 20%, if you stripped out some of the political risk, would probably look better. It's still a good number. But as you come into '21, you -- 1/1/21 looks a very different market to 1/1/20.
Our next question comes from the line of Iain Pearce from Credit Suisse.
Two for me. Firstly, just on the multiyear and the headwind you've had. I guess, the difference between the RPI and the rate growth you've seen is mainly on that multiyear headwinds. So I'm just looking for some comments on the expected future headwind from some of these multiyear deals that we should be factoring into our growth expectations. And then secondly, I think I'm right in saying that the Q4 period is quite big for the aviation book in the aviation deductible business. So I'm just wondering if you could give us some comments around volume expectations there given, obviously, the headwinds that a number of clients are facing there.
Okay. Iain, I'll take the first question on multiyear. Yes, you're right. Most of the difference to get to that 20% is the impact of multiyear contracts that we've written in prior years. I would expect the impact to be lower in 2021 than we've seen previously. There's a couple of reasons for that. One is that some of the multiyear deals we wrote a couple of years ago are actually coming up for renewal in 2021. And also, we have written less multiyear deals in 2020 in property cat and energy. Given the rate rises we've seen, you would expect that. But also take into account what PG has just said that we do have the political risk and construction classes that we don't expect to renew year-on-year.
And on aviation, yes, Iain, you're quite right, Q4 is really big for all aviation classes really, and then deductible is included within that. What we're seeing at the moment is demand has remained reasonably robust so far. Q4 will clearly be a test. We do expect demand headwinds moving into '21 for obvious reasons. But kind of offsetting that, we've seen -- and as you can see from our renewal price index, we're seeing really strong rate momentum, and that's across all subclasses of our aviation portfolio. And we're able -- we have been able to increase our market share in certain of those subclasses as well. So thus far, the growth -- we've been able to continue to grow in aviation. 2021 will be a challenge. But as I said in my script, we believe that rate increases and increased market share will kind of help offset that. I think we're expecting a reasonably strong Q4 from a rating perspective, and it will be interesting to see some of our bigger clients, what they buy. Now a lot of them do need to buy the insurance they currently have, but that's always worth remembering.
Just following up on that, if I can. Is there anything on the frequency side in the aviation book or maybe in sort of marine book as well that's worth flagging that either you haven't recognized or recognized so far year-to-date?
Well, I think if you look at Q3, clearly, there's been some frequency in both of those classes. We'll never take one quarter as a trend. But going forward, clearly, there's less planes flying. That's helpful. It doesn't mean you can't still have losses. You can, but less activity usually brings less attrition. Our marine portfolio in all fairness other than our cruise account, everything in terms of demand has remained the same, and activities remain broadly the same. So we wouldn't necessarily expect to see anything there.
Our next question comes from Oliver Troop from Autonomous.
So you mentioned some incremental retrenchment from competitors this quarter. I just wondered if you could give us a bit more color on that, which lines that you're seeing that in most? And then secondly, just to be 100% crystal clear, we shouldn't expect massive GWP growth in Q4 above RPI because you're not planning on really deploying that capital that you raised until 1/1. And then finally, just quickly, are there any tax risks that you possibly see on the horizon, either for yourselves or just the insurance industry in Bermuda from a possible Biden presidency?
So on the first point, the kind of classes where we have seen people retract or reduce appetite continues to be some of the specialty classes. We've seen in aviation, for example, some of our competitors pull back on appetite, the same in certain subclasses of marine, albeit you've seen a lot of that in the buildup to 2020. And again, in the property insurance market, which is a very big market, there are parts of that. That market have historically been written locally in the U.S. that are now coming back to London because of changed appetite from larger carriers in the states. That trend is still continuing. And then obviously, as we move closer to 1/1, it will be interesting to see people's appetite for write-in retrocession business, which is an area that we feel will be dislocated at 1/1.
On the tax point, we're not really expecting anything. We haven't seen him mentioning Bermuda in particular, but we'll obviously, we'll keep an eye on it going forward.
And then your last point about capital, you're correct on that. Obviously, the Q4 is not a heavy quarter for cat exposed business, but obviously, the 1st of January is.
Our next question comes from Ming Zhu from Panmule Gordon.
Just 2 questions for me, please. First, you talked about some of your competitors pulling back, and this year's above net cat losses and COVID impact, et cetera. So with this rate hardening environment, how long do you think it will last? And my second question is, is there any update you could give since the last long table? Could you talk about your entry into some of the new classes? Have you got all the underwriting teams you want? And I remember one of the classes you mentioned was casualty, which tend to have a longer tail. I mean would that impact your overall duration of your -- the tail of your portfolio?
Okay. Ming, I think on the first question, I mean that's the question everyone wants answered. My personal view is that this is the start of the sort of hardening market. Obviously, as I said earlier, we saw real momentum build from Q2. I think 1/1 is going to be one of the hardest markets we've seen in years, and I expect that to continue throughout '21. Any further than that is very hard to predict, but my personal view is that you can look at previous cycles, and that will give you the answer to what will happen in this cycle. So I think you're going to go into a very good market for at least 2 years. Pricing will be reset. People will come off of business, as you've seen already. So people will reshape their portfolios. They will arguably clean up the sins of the soft market. So I think for a good couple of years, we're into much, much better underwriting conditions.
On the underwriting team side, I think that we're always talking to up to underwriters and underwriting teams that offer something that the group doesn't currently. That happens in all parts of the cycle. We tend to land more when the market is getting better because it's obviously easier to make the metrics work. At the moment, we're currently having discussions with a number of underwriting teams. But as I say, we do that all the time. There are still products that we don't offer as a group. And as the market improves, then there are other areas of the market that we could look to go into, if we feel we can make money out of them and if we feel we can get the right people that will fit our underwriting culture.
And then lastly, on the casualty side, I think as Paul mentioned earlier, we'll be starting off with pretty low levels of exposure on casualty next year. So we wouldn't expect that to have any impact on duration of either our reserves or our investment portfolio, at least in the first year of writing.
Our next question comes from Paris Hadjiantonis from Exane BNP Paribas.
A couple of remaining questions. Firstly, on the message about capital deployment going forwards, I am not completely clear how exactly would you like us to essentially judge this capital deployment. Obviously, you have hired new teams, but at the same time, you're talking about material growth in lines of business that I assume are not very high premium-driven or driven by the top line, rather they are just very capital intense. So from the outside going into 2021, would you tell us to essentially expect mainly double-digit premium growth, but what really matters is what happens to your PMLs because you are retaining a lot more class of risk? So that's question number one. The second question is on your Lloyd's platform. Given we are in the business planning process, any update on that front, what kind of capacity increases are you planning for your Lloyd's platform?
Okay, Paris, so in general, we are looking to grow across every product line. You are correct in that a lot of the product lines that we've gone into in the last couple of years are more non-cat focused. But if you remember, we've already got the cat teams at Lancashire. So the capital will be deployed to grow the cat book into a better market. As Paul said, we will retain more risk because that makes sense for us to do in a better market when we're getting paid more. And you will be able to see that with the growth in our PMLs, obviously, once we get past the 1st of January, we haven't deployed the capital to date that we raised in June, but obviously, that's a timing issue. And Q3 is not a very busy quarter for us for capital deployment. But once we get to the 1st of January, where the market that we see is very favorable, then you should see the change that comes through our PMLs.
And on Lloyd's, obviously, we have the 2 syndicates, Syndicate 3010 and 2010. We're happy with the business plans we've had approved by Lloyd's. Given that 3010 is a predominantly non-cat specialty insurance syndicate, we're able to achieve more growth there. But we were also able to get growth agreed within 2010 Syndicate, which is predominantly a catastrophe-exposed syndicate. So we've been able to get growth from both of those platforms, and we're happy with what we've achieved.
PG, when you say growth, I assume growth over and above price.
Correct.
Exactly. Yes.
Our next question comes from Faizan Lakhani from HSBC.
Your guidance for attrition loss ratio is 37% to 38%. Given that we are seeing good rates, given that we are seeing the business mix shift towards potentially higher cat business, what does that do to your attritional loss ratio guidance going forward? And then question two, I appreciate the single-risk losses that you saw, can be described as part of the business and part of the work, the stuff that you guys do, but is there a case that we're seeing an uptick in frequency of manmade losses? Or can we associate that with treating normal experience?
So on the losses, look, all these losses are completely business as usual for us. As Paul said a quarter for us, it wouldn't be anything if we would measure any kind of trends. We've been through every individual loss, every loss is in line with our expectation for such events. So there's no uptick there. These are standard losses. We have had quarters like this in the past. We've also had quarters in the past that -- where we've had very little loss experience. So I think it's just the nature of the specialty insurance world. We're not kind of a car insurer or anything like that. So our book can always be a bit lumpy, and it's actually one of the reasons we moved away from quarterly reporting because we just know we can have quarters like this, and we know we can have quarters that are very light on loss experience.
Okay. On the attritional loss ratio, you're right about the RPIs that I would still keep the attritional loss ratios in the mid- to high 30s for next year. There's a couple of reasons that. One is on the new lines of business we're going to write, we will reserve prudently for those as we always do when we enter into new classes. And also the new lines of business we have gone into recently, such as aviation deductible, tend to have relatively high attritional loss ratios compared to the rest of the book. And then also, especially given the second phase of lockdowns due to COVID, we are expecting that, that will impact higher claims costs generally, such as increased cost for parts and materials and higher loss adjustment costs going forward. So I think we would so advise keeping attritional loss ratios in the mid-30s for next year.
But I assume the 2 offsetting factors with COVID as well, you're going to see potentially lower frequency or lower economic activity, which might mean lower losses as well. Plus given the fact you're writing more cat as well, I assume that would outweigh the business you're writing in new lines of business?
So I think your logic is right, but I think it's impossible to make those assumptions, to be honest.
[Operator Instructions] And we have a follow-up question from Paris Hadjiantonis from Exane BNP Paribas.
Just on LCM, traditionally, you have been writing a lot of retro business through Kinesis. So going into 2021 and since you are expecting a hard market in retro, can you give us an idea of what are the indications when it comes to LCM, what kind of conversations you're having with your investors on that platform and whether or not if you ask ultimate owners are willing to basically put more money into underwriting through LCM?
It's Darren. Yes, I mean we're in the middle of capital raising at the moment. We never really make any comment around how much AUM we've got. I mean what I can give you a bit more color is that the existing investors are very supportive of where we are on the target returns. Getting new investors is challenging, not impossible but very challenging, for the whole sector. So you can draw whatever conclusions you want from that.
I think a good point to make as well is we do a lot of retro through LCM, as you know. And as Darren said, we feel in a reasonably good spot there given the context of the market. But as retro rates improve, then it's certainly something that we will be looking to underwrite through the rated carrier, particularly the platform in Bermuda as well as we move into 1/1. We have that -- we have the ability to do that and have done that many times in the past.
So you -- I assume it means you'd rather do it direct rather than through LCM, if prices are what you think they are.
No, the preference is we'll do both. Ultimately, it will be a client's decision as to what paper they want, and we have the ability to offer them both.
Yes. And both entities sell slightly different products as well, so it's -- it will be what the client chooses as the product they want.
Our next question comes from Ben Cohen from Investec.
I just had 2 questions. Firstly, on the net cat losses in the third quarter, I just wondered if you sort of have had any kind of, for want of a better phrase, kind of learnings from what you've seen in Q3, I suppose, particularly around ongoing frequency of Californian wildfires, whether there are just any parts of the market after numerous years of losses that it's not really worth participating in? Is that something that you're weighing? And the second question is, again, back on LCM, anything to sort of flag up from the sort of H2 performance in terms of impact on the sort of fees that they're going to earn either this year or into next year from their loss performance?
Yes. On your first point, Ben, again, we've looked at all the claims that we've got. And I think everything that we've got is in line with what we would expect for such events. Clearly, there's been an increase in frequency in these type of small losses that have come through the system. And clearly, that demonstrates to us something that we've said for a long time that property cat rates or cat-exposed business then needs to pay more money to be able to absorb these losses. And that's for us and the wider industry. But we're still in the cat business. We still see -- we see greater opportunity in cat business for '21, so it would be a mistake to not see if there's anything else. But equally, you can't ignore the frequency, and that's why the underwriting opportunity has to improve for us and the industry.
Ben, it's Darren. On your second point regarding fees. I mean, as we said, we have no real comment on that. I mean it's just the year is still ongoing, so we can't really comment on that as to the quarter to go.
[Operator Instructions] Okay, as there appear to be no further questions, I will turn the conference to the speakers for any closing remarks.
Okay. Thank you, everyone, and thank you for your questions.
Thank you. This now concludes our presentation. Thank you all for attending. You may now disconnect your lines.