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AXIS Capital Holdings Ltd
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Good day, and welcome to the Second Quarter 2020 Axis Capital Earnings Conference Call and Webcast. All participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference call over to Mr. Matt Rohrmann, Investor Relations. Mr. Rohrmann, the floor is yours, sir.
Thank you, Mike. 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 second quarter and period ended June 30, 2020. Our earnings press release and financial supplement and 10-Q were issued yesterday evening after the market closed. If you'd like copies, please visit the Investor Information section of our website at axiscapital.com. We set aside an hour for today's call, which is also available as an audio webcast. This is also available to the information Investor information section of our website.
With me today are Albert Benchimol, our President and CEO; and Pete Vogt, our CFO. Before I turn the call over to Albert, I'll remind everyone that the statements made during this call, including the question-and-answer session, which are not historical facts, may be forward-looking statements.
Forward-looking statements involve risks, uncertainties and assumptions. Actual events or results may differ materially from those projected in the forward-looking statements due to a variety of factors, including the risk factors set forth in the company's most recent report on Form 10-K and other reports, the company files with the SEC. This includes the company's Form 10-Q for the quarter ended June 30, 2020, as well as the additional risks identified in the cautionary note regarding forward-looking statements and our earnings press release. We undertake no obligation to update or revise publicly any forward-looking statements. In addition, this presentation may contain non-GAAP financial measures. Reconciliations are included in our earnings press release and financial supplement.
With that, I'll turn the call over to Albert.
Thank you, Matt. And good morning, everyone. And thank you for joining our second quarter earnings call. I'm pleased to report the positive momentum that we've seen in our underlying performance over the past few quarters continued into this most recent period. We're highly encouraged by the sustained progress, which follows several years of rigorous efforts to enhance our market positioning, reshape our portfolio, reduce volatility and increase our operating efficiency with investments in technology and a company wide focus on expense discipline.
As we noted in the press release, we saw meaningful improvements in our underwriting results in the quarter. Underwriting income increased year-over-year, notwithstanding higher cats and lower prior year development. Our reported current accident year combined ratio, excluding catastrophes and weather-related losses of 91.4 is a nearly five point improvement in core performance compared to the prior year quarter. This includes a 1.7 point decrease in our current year ex-cat loss ratio, more than a one point improvement in our acquisition costs and a two-point reduction in our G&A ratio.
And for the six-month period, our reported current year ex-cat combined ratio of 92.3 reflects core performance that was more than 4.5 points better than the prior year. While the combined ratios I've noted are GAAP reported figures, the year-over-year improvements in core performance are based on ex-cat figures, which I believe provide an apples-to-apple reflection of our progress on acquisition expense.
We haven't reported quarterly or half year ex-cat accident year combined ratios this low since 2013. This is tangible evidence of the work that our team has done over the past few years to strengthen our portfolio is bearing fruit. The improvements in our loss ratio is due to a combination of enhancements to our portfolio, change in mix and run off of discontinued books of business, as well as the interest rates that we're earning.
And even as we're delivering good growth in attractive lines, we're focused on limiting volatility and controlling expenses. While it may have taken longer than we wanted, we're convinced that this new level of profitability is not only sustainable, but one upon which we can continue to improve beyond simply the impact of rate. Stepping back and as I've said this in past calls, we believe that our hardest work is behind us and that Axis is poised to capitalize on the best market conditions that the reinsurance industry has seen in more than a decade.
We have the most balanced book in the history of our company and given our leadership in our chosen markets and our very strong relationships with our producers, Axis is exceedingly well positioned to reap the benefits of the favorable market environment. We worked very hard to get to this point. And with firming conditions and pricing momentum across virtually every line of business that we write, we have the wind at our backs.
Before passing the call to Pete, I'd like to mention a few words on the impact of COVID-19 on our company. You'll recall that Axis was among the first to provide a more transparent and granular estimate of COVID losses. We conducted in-depth reviews of our policies and programs and saw no reason to wait in sharing our conclusions with you. We took a charge of $235 million in the first quarter. So far, we've seen no surprises and this estimate continues to hold. Pete will speak more on this during his financial update.
While there was no impact of COVID on second quarter underwriting results, it did affect our investment income due to the one quarter lag in reporting performance of some alternative investments. Nevertheless, our high quality portfolio experienced a meaningful recovery in the quarter contributed into our strong 11% growth in book value to $55.09 per share.
Finally, I'd like to add that despite the unprecedented upheavals sparked by COVID-19, as well as societal challenges, including increased racial tensions in the U.S. and throughout the world, our teams have come together more than ever. We've been seeing the best of Axis. I'm proud of our team and deeply appreciative of their tireless work, the way that they're working today to strengthen our business, support our clients and partners and distributions, promote a collaborative and inclusive culture within Axis and help make a positive impact in our local communities.
In summary, this was a solid quarter for Axis, where we continue to see meaningful improvements in our performance. We feel good about where our business is today and even better about where we're headed. Peter will now walk us through the financials and I'll come back to talk more about pricing and have our Q&A. Pete?
Thank you, Albert, and good morning, everyone. As Albert noted, this was a quarter where we continue to see sustained improvement in our financial performance. During the quarter, we generated net income available to common shareholders of $112 million and annualized ROE of 10%. We generated operating income of $72 million and an annualized operating ROE of 6.3%. Underwriting income in the quarter of $87 million, was 11% over the same period last year with both segments contributing positive results.
In the quarter, we kept our COVID-19 loss estimate steady at $235 million, as well as the first quarter write-down of our WHO pandemic swap of $10 million. This doesn't mean we've been standing still. We are constantly evaluating our estimates and the underlying assumptions. As we continue to monitor developments across the world and gather more data, we are getting more granular with our analysis and we're refining our views. At this point, while it is early days, we remain comfortable with our provisions.
As a reminder, the COVID-19 loss provisions are associated with property, event cancellation, A&H and pandemic coverages. And as of June 30, the vast majority of the loss provision is still IBNR and the paid amount is de minimis. We've also carried out detailed analysis of our exposure in lines of business that may also have been impacted such as professional lines, liability and credit lines.
As you know, we are proactive in establishing reserves where warranted, but based on current facts and circumstances, we have no basis for making additional provisions in these lines at this time. For example, in our insurance segment, claim notifications are running favorable for casualty and professional lines compared to recent years at the same stage of development. We have prudently not reacted to these favorable indications at this stage. In addition, as part of our normal process, we establish IBNR for systemic risks, which give us further comfort that our provisions are reasonable at this time. We will continue to rigorously and carefully monitor developments and establish reserves if needed, when it's appropriate to do so.
Lastly, I would remind you that all estimates are subject to a higher than usual level of uncertainty because of the inherent difficulty in making assumptions around COVID-19 due to the lack of comparable historic events, it’s ongoing nature and far reaching impacts.
Moving into the details of our group level numbers. During the second quarter, we continue to see improvement our company's underwriting results. Our consolidated combined ratio this quarter of 94.7%, a decrease of 1.4 points as compared to the prior year. Our current accident year combined ratio ex-cat and weather decreased by 4.6 points as the repositioning of the portfolios in both segments and the exit from certain product lines in the insurance segment earned through.
The cat and weather loss ratio in the quarter was 3.5% largely driven by the U.S. weather related events this quarter. This compared to 2.3% in the second quarter of 2019. Given the significant increase in weather activity and the civil unrest experienced by the industry this quarter and the minimal increase in our cat and weather loss ratio. It appears the repositioning of our property portfolios is delivering the intended impact.
We reported net favorable prior year reserve development of $3 million in the quarter, mainly related to the reinsurance segment. Overall, we had positive reserve development in short-tail lines, but this was offset as we strengthened insurance liability reserves and to a lesser extent, the pro lines reserves. The strengthening in reserves for the insurance liability is attributable to an uptick in adverse signals, mainly focused in our U.S. excess casualty and program books of business. Our prudent reserving philosophy of reacting to adverse signals immediately while delaying recognition of favorable trends.
The consolidated G&A expense ratio was 12.7%. The decrease of two points compared to the second quarter of 2019 and total G&A expenses declined by $25 million. As we discussed in the first quarter, given the uncertainty of the year, we cut $50 million from our 2020 expense budget. A significant portion of these savings came through in the second quarter, the savings were driven by lower personnel costs, including deferring non-critical hires, reduced travel and entertainment costs, lower office costs and delaying certain projects.
If I adjust the quarterly G&A and add back what a temporary expense reductions, a normalized G&A ratio would have been approximately 14%. In the quarter, we achieved our previously announced target of a $100 million in net run rate savings compared to the 2017 run rate. This was related to our transformation program. However, we have not stopped there and we continue to improve our operating efficiency through leveraging our global platform while advancing our processes and technology.
Operating efficiency and expense control remain important goals of ours. And we continue to target the G&A ratio of the mid-thirteens for 2021.
Moving on, fee income from strategic capital partners was $16 million this quarter compared to $19 million in the prior year quarter.
We will now discuss the segments. Let me first start with insurance. The repositioning of our insurance business is demonstrating real traction with an all in combined ratio of 94.2. The insurance segment reported an increase in gross premiums written of $69 million or 7%. This is the third quarter in a row where we've reported growth in the insurance line as the largest portfolio actions are behind us. The increase came principally from professional lines, property, marine and liability lines, largely attributable to new business and very favorable rate changes, which Albert will address later. The increase was partially offset by a 3% drag from exited lines of business, as well as less business opportunity in primary casualty and the credit political risk lines due to the global economic slowdown.
The current accident year loss ratio ex-cat and weather decreased by just over three points in the quarter compared to the second quarter of 2019. This was due to the impact of favorable pricing over trends and improve loss experience and our property and aviation lines associated with the repositioning of those portfolios, as well as the exiting from certain books of business.
In addition, we saw reduced loss experience in the credit and political risk lines. The current accident year combined ratio ex-cat, and whether decreased by more than 7.5 points as the lower loss ratio was complimented with an almost four point reduction in G&A ratio due to the expense actions mentioned earlier.
Let's now move on to the reinsurance segment, which delivered another strong quarter with an all in combined ratio of 90.2. The reinsurance segments gross premium written of 679 [ph] for the second quarter was comparable to the same period in the prior year.
However, this year we are seeing firming conditions across substantially all of our lines of business. We had decreases in gross premiums written in our catastrophe, agriculture and A&H lines as we look to better balance the portfolio. These decreases were partially offset by increases in motor, liability and professional lines driven by rate increases and new business at favorable market conditions.
This quarter, pretax, catastrophe and weather-related losses, net of reinstatement premiums were $20 million primarily attributable to weather related events this quarter. This compares to $11 million in the same period in 2019. Net investment income of $45 million for the quarter with $93 million lower than the second quarter of 2019. This is primarily attributable to negative returns from our alternative assets.
As Albert mentioned, there was a one quarter of reporting lag on this asset class. So the performance is indicative of the first quarter market activity. Lastly, we add reduced investment income from fixed income instruments as compared to the prior year.
Our current book yield is 2.5% and our new money yield is 1.6%. The duration of our portfolio is approximately 3.4 years. Interest in income of equity method investments of $7 million, represent the company share in Harrington Re's income for the quarter, which was attributable to positive investment returns.
Diluted book value per share increased by $5.31 or 11% in the quarter to $55.09. This was principally driven by net income and net unrealized gains partially offset by common shared dividends.
With respect to capital actions. Following two debt issuances in 2019 that raised $725 million. As you recall, we redeemed our Series D preferred shares of $225 million at par this past January. And in the second quarter, we repaid unsecured senior notes of $500 million at maturity in June, which lowered our debt plus preferred to total capital ratio to 28.1%.
Now that we have finished refinancing our debt, on a go forward basis, our interest expense will decrease by $5 million on a quarterly basis as compared to what was reported this quarter.
Finally, I will add that we feel good about our current capital position as we enter the year in a strong position with capital in excess of AAA levels. And at this moment, we have the ability to grow into the hardening market.
With that, I'll turn the call back over to Albert.
Thank you, Pete. Let's do a brief overview of market conditions and outlook, and we'll then open the call for questions. As I noted in my upfront comments, we continue to see accelerated improvement in pricing throughout our business. For our insurance segment, we're now into 11 consecutive quarters of rate increases. For reinsurance, the pricing actions have become more recently, but we're seeing positive momentum picking up now.
So within the insurance segment, we saw average rate increases of almost 15% across the book in the second quarter that compares to about 10% in the first quarter of this year and 7% in the second quarter of last year. Through the first six months, the average rate increase is 12% – a little over 12%. And our U.S. division, once again delivered the strongest pricing increases this quarter with average rate change of almost 17%.
In Excess Casualty, we're seeing hard market conditions highlighted with – by average rate increases in excess of 30%. E&S property rates were up 19% and primary casualty increased by 11%. Our U.S. programs business, which focuses on homogeneous books of smaller accounts saw increases of more than 6%. Within our North American professional lines division pricing also continued to accelerate and rates were up by more than 13% in the quarter.
Our commercial management solutions unit is also in hard market territory with average rate increases of more than 30% in the quarter, notably public D&O, where we're essentially an excess writer showed impressive rate change at 60%. In addition, we saw strong double digit increases in our Canadian specialty businesses, Bermuda excess, and if financial institutions.
Accidents and health was up more than 12%, even cyber and tech long laggards and pricing are starting to show rate increases. And our London-based international insurance division rates were up 13% on average during the quarter. Renewable energy where we're a market leader was up more than 20%. Professional and casualty lines were up about 17%.
Aviation was up 16% and the marine political risks and property books average about 10%. But within that, several sublines outperformed with marine cargo up more than 25% and global property up 20%. Overall in the quarter, 97% of our total insurance business renewed flat to up. More than 60% of premiums renewed, experienced rate increases in excess of 10%. And within that, fully 35% of the book had rate increases in excess of 20%.
Let's move to reinsurance. We estimate that our renewed business was priced up about 12% overall in the quarter with the cat business up close to 20% and the non-cat business up close to 10%. We've already covered in our last call the Japanese April one renewals where quake was flat, but wind was up more than 50%. For the June one renewals, we saw the best market conditions and more than 10 years with tightening terms and conditions in addition to higher pricing. We saw lower layers up about 15%, while upper layers increased as much as 60%, depending on loss experience.
Our own book was up about 20% on average at the June one renewals. Nevertheless, we reduced our Florida book as part of our strategy to manage risk, optimize the portfolio and better position ourselves for the upcoming January one renewals. For the July one renewals, we saw positive momentum across almost every line of business that renewed, although it did vary by line and region. Overall, reinsurance is clearly participating in the rebound, sharing in the underlying rate increases on subject business and also benefiting from improvements in reinsurance terms and conditions.
In Axis Re's case, we've used these recent renewals to continue upgrading the quality of our portfolio. And we think that we're well positioned to capitalize on the improving market. Importantly, we're seeing improvements in wordings in terms and conditions in both insurance and reinsurance, and that will help loss ratios beyond the impact of rate.
Looking forward, we believe the favorable conditions that we're seeing will very likely sustain well into 2021. And there's growing consensus that it will extend even beyond that. We see several reasons for this. First, we're dealing with an underlying social inflationary period that is putting pressure on prior year reserves and adds uncertainty to outlook. Second, interest rates are about as low as they've ever been, creating substantial headwinds for investment income. And third, it's our expectation of the effects of COVID-19 and its economic repercussions will be felt over a number of years. This is not, or these are not Axis-only issues.
The industry is facing several challenges to its profitability and need sustain strong pricing to deliver an adequate return on capital within the difficult social and economic environment expected over the next few years. For Axis, we continue to be encouraged by the conditions that we see. We're fortunate to be well positioned in some of the markets that are experiencing the most meaningful improvements.
Moreover, we're seeing an almost across the board increase in the number of opportunities that are being presented to us across our company. Of course, we're cognizant that a rising tide lifts all boats, and we're not satisfied by rate alone. As I noted earlier, we're committed to sustain our progress and optimizing our portfolio, increasing our operating efficiency and leveraging technology to better serve our clients and partners in distribution.
In short, the current market environment we're seeing has a lot of opportunity and to the credit of our team, despite the pandemic, we've seen no drop off in productivity. Within both segments where everywhere that we choose to be, and we believe that we have one of the best position books for today's market and that Axis is poised and ready to grow, where we want to do so. We've worked hard to get to this place and our team is ready to capitalize on the opportunities of stand in front of us.
And with that, let's please open the line for questions. Operator?
Thank you sir. We will now begin the question-and-answer session. [Operator Instructions] And the first question we have will come from Brian Meredith, UBS.
First, I'm curious, can you talk a little bit about your capital position? I know you've got your debt to capital down, which is great. But just kind of looking forward, where are you in the process of reducing your volatility? Where are you right now from a capital position where you feel comfortable, that you can kind of really ramp up growth for this hard market?
Hey, Brian. This is Pete. Let me hit that with a couple of things. One, we do feel good about where our capital position is. We have rebuilt it and actually that both rating agencies and they looked at our ratings actually mentioned that we have a very strong capital position. So we do feel good about the capital position going forward and some of the work that we've been doing. So we can actually feel better about it going forward. As Albert mentioned, we've brought down our PMLs, especially at the low end of the curve. So you can see in the supplement, you'll see the one in 50 total AAL, but also especially the Southeast wind are both down from prior year.
And as we looked at our reinsurance purchasing for property in the second quarter, we did not review renew our cat – our cat bond, which really helped the one in 250, but we actually replaced it with more protection at the lower end of the curve. So I can tell you, when I look at the lower end of the curve, our AALs are actually down from 2019 levels by 20% in the one in five, one in 10 and one in 20. And actually in the Southeast wind, we're down by over 30%. So we do feel good that we're more protected going into wind season this year. So we're more protected going into winter season and we had our capital levels back over AAA entering this year. So we feel really good about the capital position right now, Brian.
Great. That's terrific. And then just quickly you mentioned that some of the businesses you exited had a 3% headwind on in the insurance segment, premium growth. Curious, was there any impact from the runoff lines on the underlying loss ratios in the insurance segment?
Yes, there's still was, I'll point out, we got about still got about $30 million of unearned premium on that book. Especially this quarter, we had about two points on the combined ratio really centered in the loss ratio, Brian, really came out of some losses coming out of the whole business that we exited. And so if I take out the exited business, the ex-cat loss ratio for insurance would be just about two points better than the reported 55.6.
Great, that’s terrific. And then last one for Albert, I’m just curious Albert when you switch to COVID-19 loss estimates here, what are your kind of assumptions with respect to the international DI losses? I know there’s something going on right now with the FCA does that matter at all to you all and just kind of thoughts around that?
Yes, so let's talk about the FCA and what's happening in the UK. As you know, they are reviewing all the wordings. And just to set the table here, our expectation is that the arguments will be finished this week. We probably will get a response sometime in September, and then that will probably go to appeal and no idea when those appeals will be resolved.
But let's talk about what it means for us. There's a whole range of outcome and Brian, some of them could be very favorable to us in terms of some of the assumptions that we made in our reserves could end up being, not as necessary, but certainly they could also look at it more adversely than we looked at it.
But I think what's really important is to remember that in the UK, we have a cat program that attaches a $75 million. And with regard to the $235 million that we took in Q1, I think, we mentioned to you somewhere $50 million, $55 million is allocated to the UK.
So when you think about the net impact to us on the insurance book, maybe in the worst case, there could be $20 million, $25 million, but I think we've got a real containment on the UK side on insurance. Obviously that could also have a little bit of impact on the reinsurance side, but we don't have a large cat book in the UK. So I think the FCA – judgment ultimately would have a limited impact on us if it went against us. But it's still early days.
Great. Thank you.
Next we have Meyer Shields, KBW.
Thanks. Good morning. I think there's a question for Pete. I was hoping you could run through maybe give us a little more color on the reserve adjustment for the longer tail liability in professional lines.
Yes Meyer, so in the quarter – it's mostly on the insurance liability side, we strengthened those reserves by about $17 million. And was really focused on, I'll call it some adverse signals we're seeing coming out of the 2017 and 2018 accident years. As you know, early on in the development of our reserve process, when we see some negative signals, we will react quickly to it. And on the pro line side, we saw some adverse signals, both in insurance and reinsurance. And again, we strengthened those in the single digits. And again, that was centered more on the 2018 accident year.
And so all in all that probably added up to about $27 million of strengthening, actually close to $30 million of strengthening through those three lines. And then we had really favorable development continuing in property and credit insecurity that offset that. So we ended up with just a small, positive development reported in the quarter.
Okay. I know this is an impossible question, but should we assume that that long-term line strengthening is like a onetime adjustment assuming that reality doesn't get worse?
Yes, I mean, we peg our reserves to what we think the ultimate is going to be. So, we are keeping our eyes on those 17 and 18 years. Again, before COVID came around, we kept talking about social inflation. We think we've caught up with that, but we are keeping our eye on that. But we think that that is inappropriate reserve level on a go-forward basis. But as new developments come, especially if we want to – especially if we want to stay in front of things, like I said, we do react to adverse before we actually show the positives.
The last thing I'd say is since 2017 we have been getting significant rate on our liability book on excess casualty and primary casualty. So when I look at the 2018, 2019 years and 2020 year they're at a much better level of premium than we saw call it the 2015, 2016 year.
Okay. Thanks, that's very helpful. Albert, just big picture question, when we look at the Southeast U.S. hurricane PML on a sequential basis, it's up. Is that the cap on, is there anything else playing a role there?
Yes, so if you look at it, I think, it's down year-over-year. So if you look at July 1 to July 1, it's down meaningfully year-over-year across every period. And with regards to the difference between Q1 and Q2 is as Pete noted earlier the different reinsurance program that we purchased and so we emphasized protecting ourselves in the more frequent periods. And we decided not to renew our CAD bond. And since the CAD bond was attaching on a high level, you can see the these impacts in the 150 and 250 going up. But that's the impact. And we think right now we think we've built a better book across the curve.
Okay, understood. Thank you very much.
Thank you. The next question will come from Elyse Greenspan of Wells Fargo.
Hi thank you. Good morning. My first question I guess goes back to one of the earlier questions. You had said that there was about two points on the insurance loss ratio on some of those runoff lines in the quarter. Could you just remind us I thought maybe it was the first half of the year, or when do you expect out you kind of have those off your book?
So at Elyse this is Pete. As I mentioned at the beginning of the year, we had right around $50 million, of UPR that those exited books it's down to about $30 million now. By the end of the year, it'll be diminimous. That will run off pretty much, it'll be like low single digits. But I would say, one of the losses we had in the quarter, was on a tray, a client that was to be ended 10 days. And then all of a sudden they hadn't had a claim. So, I do think that we're keeping our eye on this, we've projected it ours is a fairly high loss ratio. But this should be done by the end of the year. We'll have single digit UPR into 2021.
Right. And then I guess a follow-up to that you guys are running at about kind of a 55 underlying loss ratio in insurance through the first half of this year, right. So if we kind of neutralized for that two points, I guess I would put you at around 53, so you're getting a lot of weight in your insurance book. So is that the right case to think about improvement off of in 2021? I guess with some assumption rate counter balancing against loss trend within that thought process.
Yes, so we're starting Elyse to look at these things going forward. Basically we've had 12% average rate increase through the first six months a little bit more than that. And if you take just as a yes – just as a placeholder, an average trend of about five points, so that would indicate that there would be three, four plus points of improvement in the loss ratio. My expectation is that we'll probably be cautious in terms of some of these outlooks around the systemic loads around loss trends. So I'm not sure that we would see the full benefit of those four points immediately. But that doesn't mean that they might not develop over time. So we've got that.
We’ve got the drag that we've got on the discontinued operations in the insurance division alone, which we also think could be an improvement. And then there's the ongoing improvements in the book of business as we go forward. So we're feeling very optimistic about the trend of improvement going forward from here.
Okay, great. And then on the capital side you guys made a point right, or saying, feel confident in your capital position, but what feels like a pretty good market that we're heading into for 2021? So as we think about the leverage, but as we think holistically, is there a light no rule of thumb that we could look at for a premium to equity or premium to capital basis for all of Axis or maybe thoughts around insurance and reinsurance that we can think about what incremental writings are, that's your current capital base?
I would look at it from two perspectives. I think as Pete mentioned our portfolio is increasingly capital efficient, given the way we're managing the cat book. And importantly, one of the things that we are very focused on is making sure that our growth as we take advantage of this market is balanced growth. We're not going to be looking to go extreme on the tail on any one of the areas.
So right now everybody in this company is looking forward to meaningful growth. As we enter into 2021 and into 2021, we don't see us having any capital limitations on the growth that we're seeing with regard to the opportunities that we want to take advantage of.
And then of course, we've also got the benefit of having a meaningful third party capital business, which would allow us to make sure that we take advantage of all of the opportunities that are available to Axis. And at that point, we can decide whether we want to monetize that opportunity through the retention of underwriting risk and income, or increasing essentially risk-free fee business. So in both cases, we think we've got opportunities to increase our profitability going forward. But at this point in time, given where our people are sizing the opportunities we don't see ourselves as being limited.
Okay. And then one last one, when you guys set up your COVID loss last quarter, I believe you had mentioned taking some advance canceled covers through the middle of July. So given that you were obviously not fully back to normal, can you just talk to you the potential for losses on our business to pop up in the first quarter?
Yes Elyse this is Pete. We are not big in the event cancellation business at all. We literally have two contracts and they're both associated with the Olympics. So we're just looking at that one event. And we feel good about the reserve, the loss provision we have up. But for us that's the only event we're really looking at.
Okay. Thank you. I appreciate the color.
Next we have Josh Shanker, Bank of America.
Thank you very much. The first one looking at the renewal season and what you're saying about rates in various areas, one thing that we're very understanding of is this cat seen through the PML. Can you sort of explain how the pricing improvements related to decline in property cat reinsurance? And whether 2Q 2020 is a period of time to be taking more exposure rather than less exposure in the cat markets?
So two thoughts there, we think the cat markets are now they were pretty inadequately priced. We think right now they are probably somewhere in the teens which we're happy to take. And it's important as part of our overall book of business. But these are not the pricing opportunities that we had back in 2002, 2003, when it made sense to overweight it. So that's the way that I would put it in the short term. But I think it's really important that we put this in the context of our own longer term strategy.
And Josh you're very familiar with this, our goal has been to move away from what was a very volatile book of business that was built in the knots. And what we want to do is build more of a specialty portfolio on both insurance and reinsurance that has strong results, but that are more stable and less volatile. And so I want to be very clear about this, we are not going to look to double and triple down and the cat market, because that is not what we're aiming for in this company. What we're aiming for in this company is to deliver a profitable, stable book of specialty risks.
And so, yes, we will certainly grow our cat exposures in this market in a balanced way to take advantage of it. But we have a very clear expectation of our appetite for cats and for our portfolio in general.
Okay. And then unrelated question, looking at companies that have reported so far, most companies that reported have a very low paid to incurred ratio during the quarter is the flow down in COVID has maybe slowed payments, maybe slowed claims and there's a lot of IBNR. And your net loss reserve was flat from 1Q 2020? Were there any unusual, large payments you made for claims in the quarter? Should we expect that for this COVID period, you should see a low pay-to-incurred ratio? Do you have any thoughts there?
Yes probably, this is Pete, the only thing that I would suggest we had pays in the quarter associated with the Japanese cats. So that flowed through this quarter. And that would be affecting that ratio, Josh.
And if I exclude those, are you also experiencing unusually low paid-to-incurred under the current conditions in the market?
Yes, overall, I don't have the exact number in front of me, but we can get back to you on that exact one. I would say what's been a little bit more interesting is we saw lower frequency coming in and that could be just due to lower losses or could be due to just us not being able to get the just slow down in the reporting of claims. And we did not recognize that at all in the quarter.
Okay. And Japanese cats, you're fully paid out on those for the most part?
No, no, we’re not fully paid out, we just made – some payments were made in the quarter.
Okay, thank you for all the detail.
Next way of [indiscernible] of Goldman Sachs. I think your line might be muted.
Hello can you hear?
Yes.
Okay, sorry about that. Yes, so I guess my first question actually goes back to the fixed income yield, I think, the quarter-over-quarter compression, like 25 basis points, or so it seemed a little greater than I would have expected for this type of duration. Any comments as to the moving parts there, and what would have led to that level of compression?
Yes, it actually compressed about 22 points in the quarter. This is Pete. And where we saw that come true is one about 15% of that portfolio is associated with floaters. So while we were actually getting some good rate increases in 2018, due to the floaters resetting higher, those floaters are based off LIBOR. And so they reset lower really right in the quarter. So that impacted us. And we also had the maturity profile of the portfolio. We just had some maturities come up this particular quarter. And so they got reinvested at a lower rate.
So I wouldn't say the 22 bip drop in the quarter is going to be an indicative run rate going forward. It just happened to be some specifics in this quarter.
Okay, that's helpful. Then on the BI debate can you give us any sense of what’s the limit of that a UK reinsurance treaty is of how much protection you have once you get to that $75 million attachment point?
This is Pete. I know we've looked at it, it's got a couple layers to it. And in the most extreme circumstance, we didn't feel we'd go through the top of the tower. That's what I can tell you you're on.
Okay. Okay, and then maybe one broader conceptual question. Given the improvement that you've already achieved in the underlying combined ratios and the rate environment we're seeing now, is this the point of start prioritizing growth over further improvement, or are you still more focused on the improvement overgrowth, or both to choose at the same time?
Well, this is Pete. I'll just start with that and I I'd ask Albert to pile on. But I would just say that, especially, overall, when we've repositioned the portfolios, and if, I think just about insurance, they were at 7.2% growth. The exited line was about 3% drag. And I guess I would say lower business opportunity in areas affected by the economic slowdown. So that being primary casualty, credit, political risk. We really saw about a 3% drag from that. So in the lines we really want to grow in, we were growing into the double digits. And so we do feel that we're poised for growth there.
And on the reinsurance side, the second half of the year is more of a quiet time, but the team is geared up and is looking at growth as we go into 2021 to take advantage of the hardening markets. Albert, would you like to add onto that?
I think that's right. Look, I think on the reinsurance side, in particular, you will have noticed that those reductions actually came mostly in the first quarter as we were not renewing certain books that we felt would not be part of our book going forward. So we believe that we had made all of the big moves whether it's on the insurance or reinsurance side. We're certainly looking to continue improving the book, but we're also, as we mentioned during our prepared remarks, we're incredibly well positioned in the markets that are seeing some of the best improvements. We've got great relationships with our clients and our brokers, and we are looking to take advantage of the growth opportunity.
Thank you.
Next, we have Douglas Eden, Eden.
Good morning and congratulations on the solid quarter. A bit more comfort – with a bit more comfort this quarter, it sounds like regarding the company's coverage exposure to COVID and with tangible book value of more than, it appears to be about $51 a share. Would it be a creative to EPS instead of investing, some of the new money at the low 1.6 yields that you mentioned to allocate a portion of this to returning additional capital to shareholders, it'd be by repurchasing some of the shares that are trading it currently that 80% of tangible book?
So thank you. You're asking two very good questions. The first I'll answer the second one, which is that it makes no sense to us, given where we are with our profitability book value and opportunities that we're trading there. So that just does not make any sense to me. But the other issue Douglas would be that if we were not looking to grow our underwriting book at acceptable and attractive returns, you would be absolutely right. If the only use for that capital was to invest at 1.6, the right call would be to buy back stock. But we see the use of the capital, not just investing at 1.6, but to write underwriting business, which is probably the best we've seen in a decade.
Sure. I'm sorry, I missed maybe the overseas. I missed the first part of the answer. Did you – I heard you mentioned the – it makes sense to keep writing business at these hard rates – at the hard market rate levels and get more of a return there. But what did you say about – with the stock trading so low to tangible, did you say it does not make sense to repurchase some of their shares?
No, what I said was I agreed with you that the stock price was very attractive, especially given the opportunities ahead of us.
Okay. And is it released to repurchasing shares?
Right now we believe that we could create more value by growing our franchise and taking advantage of the growth opportunities that we have in the insurance and reinsurance markets in which we participate.
Okay. That's fair. As a fairly large shareholder, I think, maybe it doesn't have to be either/or, I think, maybe a combination of both could make sense. I mean, if the stock is so attractive trading at such a discount compared to some of our peers and with our low debt position, I think, now is the time it could make sense that it just seems ridiculous really low. So I'm in your guys' corner. We're all on the same team, but I think it doesn't necessarily have to be an either/or. I think maybe it could be a hybrid of both with the 20% discount to book.
I agree with you that the price of the stock does not make sense. And I'd be happy to talk to any investor who wants to analyze our book, our reserves and our opportunities. This price does not make any sense to us either.
Yes, thank you very much. Keep up the good work.
Thank you.
Next we have Adam Star, from Star Asset Management [ph].
Hi, thanks for taking my question. Just approaching the volume and growth from a different angle if we look how much of your business is shrinking and how much you know is growing, you've certainly mentioned the price activity and the appeal that certain lines have today. Where did the lines cross over? And where do you start to see the growing lines more than offset the business you've non-renewed or discontinued? Is there a way of looking at it from that standpoint?
Adam, I'm sorry. I'm not quite sure I understand the question because if you look at our insurance book…
It’s growing very nicely.
No, but it’s the best. So I'm not sure I understand what you mean by the growing point. Our discounts, or canceled lines probably took a three point negative impact on gross written premium this quarter, but the rest of the lines went up 10 points. So that net-net, it was a positive seven. So I believe that we've crossed the line over there. So I'm not sure I understand your question.
Well, when we look at the reinsurance business, you are kind of neutral.
Okay.
And that brings down the overall company growth rate below the growth of price that you are getting. So you are actually shrinking exposures, which isn't necessarily a bad thing. But all your prices growth, you are not and if business is so attractive today one would assume that there's an incentive…
Hello. Hello.
Gentlemen I'm certain the line is connected, but it seems there is a disconnection somewhere. We'll go ahead and proceed to the next question. Josh Shanker.
Let me at least let me at least address the question as I think I understood it. Again if we look at the reinsurance book, it was flat and we explained that one of the areas for that was that we curtailed our cat book, and I believe that the financial supplement provides the reduction in that book.
I would say two things. I would say that on the one hand we have been cautious about our cat book. And as I mentioned, we are going to look to grow our overall cat position, but within a balanced portfolio. That would be the first comment that I would make.
The second comment that I would make is that there are still a number of markets in the world that are not moving sufficiently on the reinsurance side, where the opportunities are in the single digits and we do not believe that that's the best use of our capital. So if we see those opportunities, we will certainly want to take advantage of it. But we're very focused on making sure that the growth comes in from adequately and attractively priced business.
Operator I'm happy to go to the next question.
Yes, sir. It'll be a follow-up from Josh Shanker, Bank of America.
Thank you for letting me for the second time. I mean it's not a question, but a comment, Albert, you said you'd be happy to talk to any investor about the status of your reserve. I can tell you that Matt does a great job explaining, but I just want to make a suggestion, you could really benefit from: changing your disclosure on the reserves to make them more granular. The basic analysis doesn't do justice to what you're talking about.
Thanks for that. And you know what, and we'll sit down with you and we'll take a look at what it is that you're looking for, and we'll see if we can be helpful.
Thank you.
And gentlemen it looks like we have Mr. Star back in the queue.
Yes, I'm sorry we got cut off. And if you were answering me, I didn't hear it. So I hope I'm not wasting everyone else's time, but when do you think you will start to see unit growth as well as growth across the Board, both primary and re-insurance?
That's a fair question. And I would say that we would be looking at on the insurance side, very likely as we enter the rest of this year. And I would say that on insurance and reinsurance, I would expect both of those to happen next year in 2021. It will of course depend on the market opportunities. But that would be our outlook.
But you will be pretty much done with the non-renewal process and the sorting out the existing exposures.
Generally, yes. I want to be comprehensive in my response to you. There are a number of treaties where we are expecting to see increases that would get us to adequate levels coming into the January 1 renewals. If they don't, then we will of course have to take corrective action. But our expectation is that these trends continue if the markets start to equate liberate at reasonable double digit ROEs, then we would be very happy to resume growth. But it will be obviously treaty and risk dependent.
Okay. Well, thank you very much. I appreciate your answers.
Thank you.
So no further questions at this time, we will conclude our question-and-answer session. At this time, I'd like to turn the call back over to Mr. Albert Benchimol for any closing remarks. Sir?
Thank you very much operator. And thank you to all of you for joining us this morning. And just to conclude, obviously we feel really good about our second quarter results. And as I hope we communicated even better about our future and our outlook. We've got a very well positioned book and market conditions are working in our favor and we're growing significantly with our strategic partners.
And again, just to my team despite the pandemic, the team has continued to rise to the challenge, did great job, and we're providing exceptional service to our clients and partners in distribution while living our values at Axis. I couldn't be more proud of our team. So thank you all once again. And we look forward to continuing to update you on our progress on individual call and in our future earnings releases.
Thank you. And operator that ends our call.
All right thank you sir. And I would say thank you to the rest of the management for your time. Again the conference call is now concluded, at this time you may disconnect your lines. Take care, and have a great day.