AXIS Capital Holdings Ltd

NYSE:AXS

Earnings Call Transcript 2020-Q3

[Operator]

[00:00:01] Good morning and welcome to AXIS Capital Holdings third quarter 2020 earnings call, all participants will be in listen only mode. Any assistance, please signal conference specialists by pressing the star key, followed by zero after the presentation or the opportunity to ask questions. Please note that this event is being recorded. I'd like to turn the conference over to Mr. Matt Rohrmann, head of investor relations. Please go ahead.

[Matt Rohrmann, Head of Investor Relations]

[00:00:28] Thank you, Nick. Good morning, ladies, and gentlemen. I'm happy to welcome you to our conference call to discuss the financial results for Access Capital for the third quarter and period ended September 30th, TWENTY TWENTY earnings, press release, financial supplement and thank you. Received yesterday evening after the market close be like copies. Please visit the investor information section of our website at Axscapital.com. We set aside an hour for today's call, which is also available as an audio webcast is also available to the investor information section of our website. With me today, Robert Benchwarmer, our president and CEO and our CFO. Before I turn the call over to Albert, I will 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 and company's most recent report on form 10K and other reports the company files with the S.E.C. This includes the company's form Tinker. The quarter ended September 30th twenty twenty, as well as the additional risk factors additional risks identified in the cautionary note regarding forward looking statements in our earnings press release. We undertake no obligation to update revised publicly any forward looking statements. In addition, this presentation may contain non-financial measures. Reconciliations are included in our earnings, press release and financial supplement. With that, I'll turn the call over to Albert.

[Albert Benchimol, President and Chief Executive Officer]

[00:01:57] Thank you, Matt. Good morning, everyone, and thank you for joining our third quarter conference call. This has been a year of two stories. Fir axis one of exceptional catastrophe activity, but also one where our repositioning over the past few years, which continues into Twenty twenty, is delivering demonstrably strong positive impact. First and foremost, our hearts go out to all who've been impacted by the pandemic storms, wildfires, and other calamities. We're committed to delivering on the promise we've made to our customers to stand by them in times of need with our industry leading claim service. On a reported basis, this has been one of our more challenging years with the combined ratio of 115 in the quarter and 110 for the year to date. The reasons are evident to all of us. We're experiencing the impacts from the global covid-19 pandemic. And this is compounded by a highly active year in terms of natural catastrophes. Indeed, was Storm Zeta Twenty twenty as matched 2005 record and the number of named storms. Our cattle losses in the quarter were two hundred and forty million dollars or 22 points for the year to date we've recognized five hundred and seventy six million dollars in combined cap and covid losses, contributing 18 points to our year to date combined ratio.

[00:03:25] On the other hand, it's also a year of undeniable progress, Firaxis, our XCAP Kermanshah combined ratio at ninety two point four for both the quarter and the year to date is clear evidence that our repositioning is delivering tangible results. It's a five point improvement over the prior year, continuing the positive trend that we've been seeing for several quarters on an index card basis, we're seeing improvement in almost every line. Even in our property, in catastrophe lines are recent risk and volatility reduction activities have served us well. By way of illustration, in twenty eighteen industry cat losses were about seventy one billion dollars and we lost nine point six percent of common equity to cats last year, industry cat losses were about 50 billion and we lost eight point three percent of common equity to cats. This year, we estimate year to date industry cat losses at about 65 billion dollars, excluding covid. And while industry cat losses are close to 30 percent higher than the full year 2019, our common equity loss to cash this year was down to seven point one percent. Even if we had no further cattle losses in the fourth quarter, that would make Twenty twenty the fifth worst year for industry cattle losses in the history of our company. However, in terms of common equity lost to cats, twenty twenty would rank only 10th. This improvement is primarily due to the ongoing reduction of our catastrophe related exposures most recently and the frequency and of the curve.

[00:05:08] While this naturally impacts our overall premium growth, we believe it comes with the benefit of a stronger portfolio that delivers both superior profitability and lower volatility. We're confident that our improving trend can be sustained as we are rigorously pushing for improved pricing and growing where rates, terms and conditions are adequate, but also continuing to exercise discipline and strengthening, reducing or exiting books of business that do not offer sufficient profit potential. Our industry segment grew gross premium written by five percent, and we saw strong rate increases as well as significant amounts of new business growth. This was offset by actions we took to prune our portfolio, coupled with headwinds we faced due to the economic climate. All in we're confident that we're going where we should be and taking disciplined actions where necessary. Our insurance segment had a 23 percent reduction in gross premiums written in a lower volume quarter. This is the continuation of the repositioning we've been reporting to you since the beginning of this year, accentuated by some timing issues and premium adjustments. On a year to date basis reinsurance, GBW is down 12 percent, in line with a 10 percent reduction that we reported in the six month period. Peter will speak more about the movements by line in this report. But before I pass the floor on to Peter, I want to highlight that we are effectively executing on the covid-19 tactical response plan that we shared with you earlier in the year.

[00:06:48] You will recall the plant has three operating priorities. The first was to stand up the organization to sustain operating capabilities and client centricity, our staff and team have responded superbly, and our customers are telling us that we haven't missed a beat. We're receiving and processing more submissions and binding more policies this year. Even a remote work conditions a testament to the agility of our team. The second operating priority was to minimize the downside. This was reflected in lower PMAs across the curve and increasing our underwriting guidelines to reduce exposure to industries that were most likely to be affected by the pandemic or its economic impacts.

[00:07:34] A material reduction in our credit lines is a natural consequence of these actions. And the third operating priority is to prepare access to participate strongly in the recovery, and we're well on our way to doing just that, identifying, and adding resources to lines and markets where we expect attractive conditions. All the while we remain on the sidelines or continue to improve books that are not yet providing the desired results. As I'll discuss later when I report on market conditions, this is a firming, but not a hard market, lower levels of favorable development, social inflation, the pandemic, more frequent natural catastrophes, and lower interest rates drive the need for substantial price increases. And in many minds, it may take increases beyond Twenty twenty one before we reach adequate risk adjusted returns. This remains an underwriters market. There are excellent opportunities out there, but there are still many unattractive loans in markets to be avoided. With the strength of our talent, our positioning in the markets, showing the most impressive corrections and our relationships with our producers and customers, we're confident that access is well placed to make the most of the attractive opportunities and to continue to improve our book of business and results as we build a global leader in specialty risks. I'm not part of Florida people who walk us through the financials and I'll come back to talk more about pricing, and I'll have our Q&A, Pete.

[Pete Vogt, Chief Financial Officer]

[00:09:13] Thank you, Albert. And good morning, everyone. As Albert noted in his comments, this was a challenging quarter for the company, but it also included strong core underwriting results. During the quarter, we incurred a net loss attributable to common shareholders of 73 million and an operating loss of sixty five million. High catastrophe and weather related losses overshadow the core underwriting results that continue to show improvement. The company produced a current accident year combined ratio EQECAT and weather of ninety two point four percent, which was a more than five point improvement over the prior year quarter. As previously announced, the quarter pretax cat and weather related losses native reinstatement premiums were two hundred and forty million dollars, or twenty two point two points, primarily attributable to hurricanes Laura and Sally, the Midwest, Jericho wildfires across the west coast of the United States. The Beirut port explosion and other weather events. I'll provide a bit more color on a couple of these events. Hurricanes, War and Sally were combined hundred and twenty million dollar event for us, predominantly an insurance event where we experienced approximately one hundred million of insurance losses versus 20 million of reinsurance losses. The Midwest, Rachel, was only an insurance event for us and contributed forty five million to our cat losses in the quarter. In the quarter, we kept our covid-19 loss estimate steady at two hundred and thirty five million. As a reminder, the covid-19 loss provision is associated with property and then cancelations and H and pandemic coverages.

[00:11:02] And as of September 30, the vast majority of the lost provision is still IBNR and the paid amount is de minimis. During the quarter, the FCA test case ruling was decided. We took this information into account as well as other data as we continue to monitor the level of our covid loss provisions. While there was some movement between subclasses of business, we remain comfortable with the overall loss provision. I would remind everyone that covid is an ongoing situation and we will continue to monitor developments rigorously and carefully across all lines of business and establish reserves if and when appropriate. Moving into the details of the group level during the third quarter, we continue to see improvement in our underwriting results. Our current accident year combined ratio EQECAT weather decreased by over five points as the repositioning of the portfolios in both segments starts to earn through the consolidated accident year loss ratio. Ex cat and whether it's fifty eight and a half, a decrease of over three points, with improvement attributable to both segments. We reported essentially no net favorable prior year reserve development in the quarter, we observed adverse loss experience in our liability and professional lines, and this was offset by favorable releases in some of our short tail lines. In these times of social inflation, covid and economic uncertainties, we believe it is appropriate to maintain a prudent approach to our reserves and to stay consistent with our strategy, which is to take bad news early and good news only after it has been confirmed.

[00:12:49] The consolidated acquisition cost ratio was twenty one point one, a decrease of one point four points compared to the third quarter of twenty nineteen. And again, this was attributable to both segments. The Consolidated Gene expense ratio was twelve point eight, a decrease of six tenths of a point compared to the third quarter of twenty nineteen. The total general and administrative expenses decreased by eighteen million dollars. As we have discussed in previous quarters. Due to the pandemic, we continue to experience lower run rate expenses in a number of areas that temporarily lower run rate is helping our Gene ratio by about a point this quarter. Moving on to fee income from Strategic Capital Partners, this was sixteen million dollars for the quarter compared to eight million dollars in the prior year quarter. The decrease is due to lower profit commissions. Well, not discuss the segments, let me start with insurance during the quarter, our current accident year combined ratio EQECAT, whether for insurance, decreased by over seven points as a repeat positioning of the portfolio continue to earn through insurance segment reported an increase of gross premiums, written a forty one million dollars or five percent for the third quarter.

[00:14:10] The increase principally came from good growth in professional lines, accident in health and aviation, largely attributable to new business and favorable rate changes. This is partially offset by decreases in liability, marine credit, and political risk due to less opportunities driven by the economic climate, as well as the runoff of our discontinued on the current accident year loss ratio. Erekat weather decreased by three and a half points in the quarter, compared to the third quarter of twenty nineteen. This was due to the impact of favorable pricing over loss trends, as well as the improved loss experienced in the short tail lines largely associated with the repositioning, the portfolio, and the exit from certain product lines. With respect to the longer tail lines, notably professional lines, and liability. Given the uncertainty of the current situation, we are prudently not reflected the majority of excess rate over trend pricing in our expected loss ratios. Let's now move on to the reinsurance segment. During the quarter, our current accident year combined ratio EQECAT weather decreased by two point seven points. Again, as we've repositioned, this portfolio continues to earn through reinsurance segment gross premiums written off three hundred ninety five million for the third quarter was one hundred and sixteen million lower in the same period in the prior year. The third quarter is a lower quarter for the securities segment, typically representing only 15 percent of the reinsurance gross premiums written in the year.

[00:15:51] This year, the quarterly gross premiums written was impacted by our decision earlier in the year to exit the Middle East exit and help business and the engineering line of business, which we believe have a positive impact on the bottom line results. In addition, gross premiums written decreased in motorman's due to premium adjustments and other tiny effects. As we look year to date, the reinsurance gross premiums written is down 12 percent, and this is consistent with a trend we've seen earlier this year as we rebalanced our book with Lower Catastrophe, Agriculture and Credit Surety Business. The current accident year loss ratio, excluding catastrophe and weather related losses, decreased by over two points in the third quarter compared to the same period in twenty eighteen. This was principally due to changes in business mix and improved performance in aviation professional lines and liability lines. Net investment income of one hundred and two million for the quarter was 14 million lower than the third quarter of twenty nineteen, primarily due to the decrease in yields sequentially. We had a bit of a rebound in our alternative portfolio in the quarter as it produced twenty five dollars million of net investment income. Our current book Yield is two point three percent and our new money yield is one point four percent, the duration of our portfolio continues to be approximately three point four years, including book value per share, decreased by thirty four cents in the quarter to fifty four dollars and seventy five cents. This is primarily driven by the net loss and common dividends declared partially offset by net unrealized gains. With that, I'll turn the call back over to Albert.

[Albert Benchimol, President and Chief Executive Officer]

[00:17:36] Thank you, Pete. Let's do a brief overview of market conditions and outlook and then we'll open the call for questions. We continue to see acceleration across virtually every line of business that we write. With insurance, we saw average rate increases of more than 16 percent across the book, and so quarter, this compares to about 15 percent in the second quarter, 10 percent in the first quarter of this year and eight percent in the third quarter of 2019. Through the first nine months, the average rate increase was a little more than 13 percent. That's more than double the average increase in the first nine months of last year. In our U.S. division, we saw average rate increases of more than 16 percent. Within that access, casualty reported average rate increases in excess of 25 percent, while primary casualty averaged over 15 percent. Even as property rates were up almost 20 percent. And are U.S. programs business, which focuses on homogeneous books of smaller accounts, so increases of about six percent.

[00:18:48] Moving on to our North American professional lines, division pricing there also continue to accelerate, and weights were up by close to 17 percent in the quarter. Our Commercial Management Solutions unit average rate increases of over 35 percent. We saw particularly strong rate action across public V.A. where we're essentially in excess Reutter at more than 55 percent. In addition, private equity was up more than 40 percent and privately held companies up more than 30 percent. In addition, we're seeing rate increases of about 25 percent in our Canadian specialty business and 20 percent for Bermuda excess. Within cyber tech, we saw a six percent improvement as rates are now rising to reflect increased claims related to ransomware, among others. Actually, the house was essentially flat on low volume this quarter. In our London based international insurance division, rates were up close to 17 percent on average in the quarter. Renewable energy, where we're a global market leader, was up more than 35 percent. Professional and casualty lines were up over 20 percent. And aviation is finally correcting with pricing well over 55 percent in the quarter. Our London Marine political risks and property books averages is a bit shy of 10 percent held back a bit by terrorism and offshore energy. Within that group, though, Marine cargo continues to outperform and was up almost 25 percent at the global property, which was up close to 20 percent. Overall, in the quarter, 97 percent of our total insurance business renewed flat to up.

[00:20:38] More than half of the premiums experienced rate increases in excess of 10 percent, and within that, over 30 percent of the book had rate increases in excess of 20 percent. Let's move on to reinsurance. There we're seeing encouraging signs affirming, although not quite as high as insurance, with the understanding, of course, that there are meaningful variances by market. Our year to date, average increase in reinsurance is about eight percent. And here, too, we saw encouraging acceleration from lower levels at January one to about double digits on average as the years developed, catastrophe in some specialty lines, including liability, are in double digits. Other than those lines, the U.S. and global specialty markets are seeing the strongest rate increases with EMEA and Asia lagging behind. Nevertheless, while we see pricing and conditions starting to respond to loss trends and reinsurance, we believe they are not yet making up for much lower interest rates, leading to less attractive total returns and some lines. We responded appropriately by reducing our participation in certain trees and markets, although we're optimistic that conditions going into Twenty twenty one will provide opportunities to grow across a number of lines in markets. Overall, across both insurance and reinsurance markets. We are seeing some impressive numbers in terms of rate change.

[00:22:12] That said, I caution that with a significant increase in the frequency and severity of weather related events, social inflation, the uncertainties stemming from the current pandemic are significantly lower interest rates. Current pricing is approaching adequacy but does not yet translate into stellar release for the industry. We remain optimistic that we will continue to see progress with the understanding that more rate action is needed and very likely it will take increases beyond Twenty twenty one in some lines to get to rate adequacy. And access, we're leveraging a hybrid model to access risk across the globe and a different points of the risk transfer chain. We seek to grow the parts of our business where we're seeing the best opportunities and create a more balanced and diversified portfolio of risks, delivering an appropriate risk adjusted return. We're well positions in the lines and markets that are seeing some of the strongest pricing momentum and are confident that this will accelerate our progress. We feel well prepared and optimistic for the future. We've delivered meaningful progress in our portfolio results in recent quarters, and we're confident that we can continue this process, this positive momentum through the rigorous execution of our strategy. And with the favorable pricing environment anticipated to extend into 2021 and beyond, market conditions are working in our favor. As we look to the year ahead, it feels like all the pieces are coming into place.

[00:23:45] And with that, let's please open the lines for questions.

[Operator]

[00:23:50] When I begin the question and answer session, I ask a question, you may press star one on your touchtone phone. Using a speakerphone, please pick up your handset before pressing the keys. Withdraw your question, please, press star then to. At this time, a pause momentarily to assemble the roster. First question comes from Yaron Kinar, Goldman Sachs. Please go ahead.

[Yaron Kinar, Goldman Sachs]

[00:24:19] But thanks for taking my questions, I guess my first question goes to the underlying loss ratios in both reinsurance and insurance. Clearly, we're seeing significant improvement year over year. I seem to recall that last year you had called out some mid-sized losses. Are there any such losses in this quarter's results?

[Pete Vogt, Chief Financial Officer]

[00:24:41] They want to hero. Yeah, hey, you're on, this is Pete. First, I would like to do one thing before I answer that question. You know, Matt hit me on the shoulder, the durational event in my comments. I just want to clarify for everybody. We had 45 million dollars of losses on the D'Errico and that was all attributable to reinsurance that hit me on the shoulder. And he told me, I think I said insurance. So just to clarify for everyone, the duration was just purely a cat on the insurance side. So I just want to clarify that first. And then with regard to your question. Yeah. You know, last year in the third quarter, it was a bit spiky. You know, right now we're just looking at all losses as performance. We did have some in this quarter. But I would say year over year there was about a two point delta there. And so overall, the loss ratios down over three points. I'd say about two of that's due to that. The rest of it is good performance. I would also say that, as I mentioned in my comments, especially with regard to insurance, what we're getting rate over trend on the long tail lines right now, we're kind of holding our elders are booking our loss ratios essentially flat to last year just due to the uncertainties associated with the current economic climate, as well as covid and social inflation. So all in all, we feel really good about the improvement we're seeing in the book. But about two of the three associated to a large loss. But again, I would look even year to date, if we look at our loss ratio, year to date, it's at like 50. It's below fifty eight for the company. And that's got a fair amount of those normal puts and takes. We get on the large loss side and as we've underwritten the insurance portfolio, we have brought the limits down. So we are seeing less of those on an ongoing basis.

[Yaron Kinar, Goldman Sachs]

[00:26:30] That's very helpful,

[Pete Vogt, Chief Financial Officer]

[00:26:32] By the way, that I know fundamentally is that I think our year to date loss ratio is probably just a good base. I mean, there's so many puts and takes at this point, given some of the positions that we're taking with regard to the current environment. You know, we think we're in a good place with the loss ratios we have.

[Yaron Kinar, Goldman Sachs]

[00:26:49] Understood. And then with regards to holding, the philosophy shows steady compared to last year and for the long tail lines, certainly prudent in this environment of uncertainty. If you maybe give us some color as to how you're thinking about when you cross that threshold of feeling more comfortable, comfortable with booking the these loss trends, I'm sorry, the rates that you're getting over trend, is it like waiting for a vaccine to be readily available? Is it getting past the credit cycle? At what point do you become more comfortable to release some of that pent up demand?

[Pete Vogt, Chief Financial Officer]

[00:27:26] So there's two components to it, right? One is rate over trend. The second is the fact that we're seeing just less claims activity right now. You know, the position we're taking is that this lower claims activity is probably temporary. I mean, we'd love it to be true, but I don't think that's a good basis for reserving. I think that when you look at rate over trend, the rate over trend that we're earning right now was last year's rate over trend, which you'll recall was more like in the in the eight percent range. And so we think that given what's happening in this industry, you know, putting it all in the loss ratio this year makes perfect sense. I think obviously as we go into 2021, we're experiencing much higher rate over trend. And there I think we're going to start reflecting some of that. We're not going to put it all in the loss ratio. And then over time, you know, as we see, you know, a little bit of maturity in these lines of business, you know, we'll take we'll start to reflect the positive. But the way I look at it, there's no company has ever been punished for reserving prudently and then releasing afterwards.

[Yaron Kinar, Goldman Sachs]

[00:28:36] Great.

[Operator]

[00:28:43] Thank you. Next question comes from Brian Merideth of UBS. Please go ahead.

[Brian Meredith, UBS]

[00:28:49] Couple of them here for you. First, I want to talk a little bit about, you know, if we do get a double dip here, if we do get an increase in state homeowners and stuff, what kind of exposure is here going forward? You sure? Maybe some additional debt cancelation that kind of can hit? Where should we how should we kind of think about that and put in perspective?

[Albert Benchimol, President and Chief Executive Officer]

[00:29:14] I think we're in a good place there. Let me just kind of walk you through some of the numbers and feel free to jump in and compliment. So obviously, we didn't have a lot of business that was exposed to the event cancelation. And frankly, we only had one event, the Olympics. We took a partial reserve against the Olympics. If we get it to wave three, four or five and the Olympics were ultimately to be cancelled, obviously we'd be closer to a full limit loss on the Olympics and that full limit is 50 million. And I think we took about a third of that give or take, you know, in the first quarter with regard to policies, you know, for businesses that are that have business interruption. Obviously, we were very quick, as were a lot of people, to immediately change the wordings of our of our policies. And in particular, a good bunch of our policies were already in businesses that were cancelled or in the process of being cancelled. We believe that today we have reduced the number of policies exposed to the covid lockdown's in the U.K. by about 70 percent, simply through the attrition of those policies expiring, not being renewed and or new language being brought in. And the U.S., frankly, we've always had both physical damage and virus exclusion, except for a very small number of policies which are already reserved for. So by and large, I think we're in much better shape right now. You know, if there were to be a covid lockdown any more than you want to add to that, Peter?

[Pete Vogt, Chief Financial Officer]

[00:31:01] No, I just want to clarify. I think you did at the end there, Bryan. I think where we had most of the exposure this year was in the U.K. and that's the area where, as is that portfolio was turned over as well as it's just turned over that that we've been able to get exclusionary language on renewals, as well as other clients that have been not renewed so that the exposure down to about 70 percent. And we've always felt good about where we are in the U.S.

[Albert Benchimol, President and Chief Executive Officer]

[00:31:28] So that obviously speaks to our insurance book, you know, the reinsurance book is a little bit more difficult to evaluate, but I would expect that many of our customers would have taken similar kinds of corrective action. So less able to give you specific numbers there, Brian. But we think we're in a better place now than we were certainly at the beginning of this year.

[Brian Meredith, UBS]

[00:31:48] Got you two more here quickly. So I'm just curious, given the difference we're seeing and new money yields versus your current book yields, is there any way you can kind of give us some kind of outlook or guidance with respect to investment income pressures and fixed income investments?

[Albert Benchimol, President and Chief Executive Officer]

[00:32:04] Yes. So, Brian, I mean, we're looking at down to two point three. You'll see sequentially the rate came down about two tenths of a point. Again, that was some of the floaters which are pegged to resetting even lower. LIBOR is so low right now. I don't I don't think that's really going to go much lower. So, you know, if you look at new money, yields are at about one point four with a three year duration. I just think the headwinds there are going to be on the yields probably at about a tenth of a point a quarter. So, Brian, unless we can get an uptick back up into the middle twos on those yields.

[Brian Meredith, UBS]

[00:32:40] Gotcha. And then last question, Albert, for you. So maybe you could talk a little bit about where you are with respect to lowering volatility. And the reason I ask is that, you know, look at you guys. You lost money this quarter and granted, it was a big cat last quarter. But if you look a lot of other companies and companies that are reporting they're also having large cap losses, but they're actually still making money this quarter. Is there an issue with kind of scale taxes access that you maybe need some bigger scale, or you still need to reduce volatility? Maybe give us some perspective on that.

[Pete Vogt, Chief Financial Officer]

[00:33:15] Yeah, well, I don't think everybody's reported number one. Number two, as you know, there are different kinds of accounting. You know, some people put all of their changes in in the comprehensive income through the income statement. We don't. So there's a bunch of things. Some people have taken reserve releases. We've just told you that we think of that in this market. It's probably not a good idea to take reserve releases. So I'm not sure that things are comparable to the decimal point. But let me address your question more broadly.

[00:33:44] You know, our goal has been and continues to be to do two things. One is to increase the profitability of our noncash business, and, B, to reduce the volatility that our exposure to the cat business. And that's exactly what we're doing. I gave you some statistics in the early part of the presentation about how we're much less exposed this year than we were last year than the years before that. And we will continue to do that. We were explicit in telling everybody we are not going to be increasing our PMOS, you know, into 2021, as you know, even with even with the market growing there. So that would be the first thing. The second thing is making sure that our non-cash business contributes a bigger piece of profitability.

[00:34:29] And there I'm feeling really good about our trends. And obviously, this is not a number that we're going to be reporting on a regular basis. But when I look at the geography of this company, you know, EQECAT, which is just for the just for our own analysis of the of the drag of cat, our XCAP, are we in the third quarter was up over 230 basis points. So the two parts of our strategy increase the profitability of your overall noncash business. We're making great progress. You see that in the improvement in the ex-cat combined ratio, we're seeing that the improvement in the aurally and then secondly, continuing to reduce the volatility through more intelligent portfolio construction and netnet simply reducing the amount of got exposed business that we have, the net of which is going to be a better result. I absolutely am convinced that scale is not the issue. It's just it's just continuing to work on the two levers I've just discussed.

[Brian Meredith, UBS]

[00:35:30] Great. Thank you.

[Operator]

[00:35:36] Thank you. The next question comes from Meyer Shields, KBW. Please go ahead.

[Meyer Shields, Keefe, Bruyette & Woods]

[00:35:42] Great, thanks. Good morning. Well, I guess the biggest big picture question is when should we expect the heightened level of portfolio reshaping to be done? And maybe a simpler way of stating that it's given the pricing environment, should we expect overall top line growth in 2021?

[Albert Benchimol, President and Chief Executive Officer]

[00:36:03] Well, the answer is absolutely, we should expect the overall top line growth in Twenty twenty one. I think that fundamentally we feel that all of the big blocks of our repositioning are done. I mean, we're earning through it if you would, this year. We're writing it, you know, cancel the number of producer relationships and so on in January one, which are running through the year and so on and so forth. I think from now on it's really about optimizing the portfolio. And as I've discussed with you earlier, you know, we think that there are a number of areas that are not yet reflecting all of the headwinds that we've talked about and in particular interest rates. If we have lines of business in Twenty twenty, one that are not appropriately responding and not giving us adequate returns, obviously we will not look to grow those. But if those lines of business are giving us the returns that we want, then we're open to growth and just about every line subject, of course, to managing the overall volatility of our book of business. Anything you want to say that, Peter.

[Pete Vogt, Chief Financial Officer]

[00:37:11] Now, the only say is more you're spot on there, I think, as I look especially at insurance, where we did a fair amount through the course of twenty nineteen of shedding some business, they had a headwind of about two and a half points just due to discontinued businesses. That'll really be gone this year. So there'll be a little bit more of an impact headwind in the fourth quarter. But as we get it to twenty one, that should actually be away, you know, go away from the insurance side. And that and that segment is actually already started to show good growth as we go forward. And on reinsurance, we took a lot of the actions in the first half of this year. So again, as we get next year, I expect to see growth again.

[Meyer Shields, Keefe, Bruyette & Woods]

[00:37:51] Ok. That's the insurance get my.

[Albert Benchimol, President and Chief Executive Officer]

[00:37:54] I'm sorry, just I just want to be as complete as I can be. Obviously, you know, we talked earlier about a reduction in our credit exposed lines, you know, being a consequence. You know, there I think our growth is going to be very much subject to, you know, our expectation of where the economy is going, if there's going to be a lot of economic uncertainty. The odds are that, you know, we're not going to be looking for huge growth in the credit exposed lines. But I think what matters at this point in time is the book is where we want it to be. And from now on, it's really about are we getting the risk adjusted returns? Are we getting the risk that we want? And we're open for business and every life.

[Meyer Shields, Keefe, Bruyette & Woods]

[00:38:35] Ok, now that is very helpful in the past about how some business that I guess is essentially in run off, it has something like a two point loss ratio headwind in the first half of the year. Was that Tacker also relevant Enticer?

[Albert Benchimol, President and Chief Executive Officer]

[00:38:52] Yeah, you know, again, it's really running off Mayor. It probably hit it did hit the third quarter negatively, but by less than half a point. So it's at this point it's becoming inconsequential. But I mean, the exact math, what would have it at all, about four tenths of a point impact due to the due to the runoff business in the quarter. But, you know, at this point, that business is pretty much gone.

[Meyer Shields, Keefe, Bruyette & Woods]

[00:39:17] Ok, that's very good. And final question if I can. Are there the market, I think, is suggesting a lot of skepticism and catastrophe modeling or maybe just assuming that normalized losses after what we've seen for the past four years are much higher than the historical record. I was hoping you could share your perspective on that specific issue. In other words, how do you feel about the state of the industry's cap cat modeling relative to expectations in the near term?

[Pete Vogt, Chief Financial Officer]

[00:39:45] I think it's a fair observation, right? I mean, if you look at the last four years, I think three out of the last four years have been a disappointment to the industry. And frankly, that that's why we've been pushing for pricing on the one hand. But that's why you're also seeing a reduction in our cap premiums overall. And just look at our reported numbers. You see, we're writing less cap even on a gross basis, because we're just not feeling that the market is properly reflecting what we believe is an ongoing trend. I think at some point that's going to have to change. But I will tell you that our cat writings this year certainly would indicate our agreement with you, that we don't think it's there yet. Overall, you know, we are taking the position that we're going to see more frequency and severity of cat losses, which is why it continues to be our strategy to make our exposure to cat events a smaller part of our book.

[Meyer Shields, Keefe, Bruyette & Woods]

[00:40:46] Great, thank you very much. Very helpful.

[Operator]

[00:40:50] Thank you. Next question comes from Mike Phillips, Morgan Stanley. Please go ahead.

[Mike Phillips, Morgan Stanley]

[00:40:56] Yeah, thanks, everybody. I guess kind of continued on the reinsurance thing, but I think we hear you pretty clearly, Al, your stance on property cap and pulling away there. But I guess can you say where and reinsurance? Do you see any opportunities that you that you're looking at for reinsurance? And then secondly, should we consider what we see the drop in premium growth this quarter? Is that a trough or we can see more as we go forward the next couple of quarters?

[Albert Benchimol, President and Chief Executive Officer]

[00:41:22] So I think just looking at projection, Peter, obviously some of our businesses that we've already canceled is going to affect fourth quarter. So just a lot of that is on the quarter shares we put on a quarterly basis. So my expecting expectations, you'll see that certainly for the rest of the year. Peter, would you agree with that?

[Pete Vogt, Chief Financial Officer]

[00:41:38] Yeah, I would. But I'd say, Mike, that really when you looking at reinsurance, that the third and fourth quarter of such small volume quarters, it really looking at year to date a better, better indicator of where we've actually changed the book of business, where it's down 12 percent. I think this quarter in particular, there were timings, there were premium adjustments. That's typically what happens in the third quarter and just year over year. There were positives last year and negatives this year. So I wouldn't read into the twenty three percent down you saw in the quarter. Look, more year to date. And I think that gets to how we've been repositioning the portfolio, which I think is the second half of your question in Hollywood if you'd like to address that.

[Albert Benchimol, President and Chief Executive Officer]

[00:42:17] Yeah, so look, when you look at the big the big dollar numbers of reductions year to date, so we talked about that and that's already been addressed. You know, agriculture, same thing with a lot of climate change. There's been a couple of really difficult ag years. We asked for better terms. We didn't get them. There was a big reduction in agro this year. As we're continuing to optimize our portfolio, we you know, we felt that we were taking, you know, over lines between insurance and reinsurance on engineering and we determined to get out of engineering on the reinsurance side so we could offer our customers on the insurance side, you know, bigger lines and not have to worry about overline. You know, we're continuing to optimize the portfolio. And so my perspective on this is that the reductions that we've done in reinsurance are actually all moves that optimize the overall consolidated portfolio going forward. As I said, it's really going to be a question of will certain markets adjust pricing enough to give us the returns we want? Less, less. But, you know, when you think about our reinsurance business, over 70 percent of our business is quite quarter share. And we've just indicated to you that a lot of the lines of business and insurance are becoming quite attractive. So I would expect that a lot of the Cortazar business, we as reinsurers will be able to see that improvement and we will want to participate in that.

[Pete Vogt, Chief Financial Officer]

[00:43:43] So I do think that kind of a year over year Delta that you're seeing in in reinsurance certainly is a trough due to the repositioning that we've made.

[Mike Phillips, Morgan Stanley]

[00:43:54] Ok, great, thanks. Thanks, guys. And then one more on up on the reserve side, you mentioned adverse and liability offset by some of the short term headline liability. Can you say how much of that was on the insurance versus reinsurance? And then tell us about, I guess, how we can get comfortable with the professional lines on the reinsurance and there is some pressure there on reserves. And was there any adverse there and just kind of comfort level with your current reserves and the professional lines and reinsurance?

[Pete Vogt, Chief Financial Officer]

[00:44:25] Yeah, Mike, this this is Pete. I'll take that. You know, the changes were really centered or the reserves that we put up on the liability and pro-life side were very much centered in the quarter 16, 17, 18 kind of accident years. And, you know, looking at the pieces, you know, we did have you know, we saw some adverse development on the pro lies, about 20 million in total. I'd say 60, 70 percent of that was reinsurance, 30 percent of that was pro lines. And that was really centered in those years, 16, 17, 18. So we feel pretty good about where we are from that point forward. Overall, we do believe the reserves are adequate and we put them at the end of the at the end of the third quarter. So we do believe that that those increases were should get us to where we need to be in those both those lines of business and liability for liability. Now, what about a five million dollar adverse? The other thing that I would say is also really important is, is, again, looking at the books of business, we really like what we've done in our US based insurer of professional lives and casualty. And I think we've been changing the book. I think we're in the right place. Obviously, we, through our London based business, have had some challenges and some of the European professional lines and as you know, we exited a lot of them. So we feel good that we've either rehabilitated or exited the challenging professional lines in Europe. And we feel very comfortable with our book of business in the States.

[Mike Phillips, Morgan Stanley]

[00:46:15] If I could follow up on Pete's comment there on the professional liability insurance and you now at the end of the third quarter, you feel comfortable with where you are, can you maybe qualitatively say compare your level of comfort today versus maybe where you were in that specific line for about a year ago?

[Pete Vogt, Chief Financial Officer]

[00:46:32] I would say definitely more comfortable today because, again, our underlying scenes have been getting great and again, that's a big quarter share book for us. And so I do feel that the underlying business we have there is more profitable today than the where it was. And we haven't moved our elders. We haven't responded to that. And I'd say the same on our insurance side where we've been getting a lot of rate, especially this year, and we really haven't responded in our ears. But overall, I mean, this is a pro lines sort of on the reinsurance side. I would say, you know, this was the first quarter we've actually had an increase in the pide and adverse on reinsurance. Prologis, the first half of the year, it was essentially flat. So it was just this quarter responding to what we saw in a couple of years.

[Mike Phillips, Morgan Stanley]

[00:47:19] Ok, thank you, Peter, appreciate the comments. You're welcome.

[Operator]

[00:47:24] Thank you. Next question comes from Josh Shanker of Bank of America. Please go ahead.

[Josh Shanker, Bank of America Securities]

[00:47:38] Sorry about that. Thank you for taking my question. You laid out a scenario where there will be some lines of business that still at the end of 2021 still won't be rate adequate. So, I mean, there's two questions. And one is if we think about 2021, how much of your top line is going to be associated with exposures that covid-19 has sort of shrunk? Bryce. Lines of business that you're just not writing anymore are and verses willingness to grow the business. I know that it's going to be impossible for you to lay out all four things, but can you go through each of the items? I guess, price unknowingness. Right. Certain lines exposure's and willingness to expand it. Can you talk about those four categories?

[Pete Vogt, Chief Financial Officer]

[00:48:28] Yeah. And if you don't mind, I'll wrap them up because I think it would be difficult to actually pass it in those ways. So, again, probably the most important thing to say is that at this point in time, we're open for business and every single line of business that we're in, we've finished the macro exits. And now it is purely a question of rate adequacy and optimization of the portfolio. With regard to the optimization of the portfolio, I think we've been very clear that we are not looking to increase our PMOS. We think we're certainly going to get much better returns on property and property cat exposed lines of business. But our objective is to deliver a more balanced and a less volatile book of business. So we're happy to take all the rates. We're happy to continue to, you know, reposition the portfolio to optimize the construction through the, you know, the utilization of analytics and so on and so forth. But by and large, you know, we are you should not be looking to us to have any kind of meaningful increase in our RPM's. With regards to covid, I would say we've never been a big we've never been a big contingency writers. So that's really not frankly, after the Olympics. We don't have any. That's pretty straightforward with regard to our property and B.I related lines of business. As I've mentioned to an earlier question, we've significantly strengthened our language and exclusions. So we feel good about that. The real area is what industries are going to continue to be. More susceptible to the downsides of covid and its economic consequences, and there still are normal underwriting. We will certainly look to be more cautious in the professional lines and the D.A. wary of potential liability area, potential credit areas, and that's simply making sure that we take risk where we feel that, you know, the underwriting is right, that the risk is right.

[00:50:44] There is one more factor which we spoke about earlier today, and that is that there is less economic activity, which has been a bit of a headwind. So there's less new construction projects starting. Obviously, a number of small businesses, a number of restaurants have closed down. So that's reduced the renewals of those businesses. But that's less, if you would, our choice and the fact that economic activity has declined. And of course, as the economy recovers, we would certainly expect to participate in that recovery with those opportunities. But bottom line, I feel really good about where our teams have brought our book of business. I feel really strong about our relationships, where in all the right markets, the question will be, are we going to get the right pricing that meets our views of loss trends and in particular, the impact of lower interest rates and the uncertainties where pricing is going to give us that, where we can structure policies to protect us. Against that we will be looking to grow. And where we won't, we won't. And I expect that you will be happy that we won't want to grow there.

[Josh Shanker, Bank of America Securities]

[00:51:52] Ok, but that's fairly thorough, and then when we just one of them, when we look at lines of business that are absolutely not adequate today, some of them you were writing last year, to what extent? You know, we can't look at individual lines of business. We have some segmentation in the triangles. But to what extent do you think that you've put a layer of conservatism on those particular lines that you're certain aren't really adequate given the current interest rate environment that investors should be confident about the portfolio?

[Pete Vogt, Chief Financial Officer]

[00:52:27] You know, I think we've taken the corrective action to make sure that we're doing the right things here. I mean, I think that we've made excellent progress in our reported numbers. And we've just told you we've taken no credit for rate over trend in our long tail lines where interest rates have the biggest impact and we're covid may have an impact. It's also areas where we're seeing some of the strongest rate increase. So we told you, you know, we're seeing, you know, 15 percent plus one primary casualty. We're seeing 30 percent plus in excess casualty. We're seeing, you know, 35 percent in CM's. Obviously, we are not going to take all of those increases into the loss ratio on year one. So I think we're already prudently booking that business, being cautious not to reflect all the rates and twenty. We're certainly not going to reflect all the rates in Twenty one, but we think that those lines of business, we're taking the appropriate action in reserving them prudently. And we feel good about where they are. And we think many of them are going to get better. You know, in in cyber, we've talked about the fact that, you know, ransomware claims are increasing, that this has been a line of business that has not seen a lot of price action. We think in Twenty twenty one, that line of business will see more price action. And, you know, because we think we need to get paid for all of the increased ransomware claims and so on. If we don't get the pricing, we won't grow as much. But we like the business we're in.

[Josh Shanker, Bank of America Securities]

[00:53:51] Well, thank you for all the answers and best of luck in the New Year. Thank you.

[Pete Vogt, Chief Financial Officer]

[00:53:55] Thanks, Josh.

[Operator]

[00:53:58] Thank you. Final question today comes from Elyse Greenspan of Wells Fargo. Please go ahead.

[Elyse Greenspan, Wells Fargo]

[00:54:04] Sun, good morning. Hi, Liz. Hi, Albert, thanks for putting me in my first question on you guys. You know, kind of obviously you mentioned, you know, a lot of business initiatives, right? So we have a little slowdown in the insurance in the quarter. And you pointed to, you know, growth in Twenty twenty one. We're hearing, you know, that there's going to be a good amount of revenue increases that January one. So as you think about growing your top line in Twenty twenty one, how are you thinking about the gross to net and how that might play out? You know, twenty twenty one, I guess, in reference to Twenty twenty.

[Pete Vogt, Chief Financial Officer]

[00:54:46] Right. So when you think about our insurance book of business, I know you asked about retro, but let me give you the comprehensive answer. I think when you look at our reinsurance book of business, most of what we write or what we buy is quarter share. And so obviously, our reinsurers are getting the benefit of all of the improvements that we're delivering. So I think that that will continue. Whether we increase or decrease our retentions, frankly, is a decision that we'll make at the time. You know, when we see most of what we read, most of our book reinsurers sometime in the spring. So, you know, we'll be reactive to that. With regard to the reinsurance book, we're actually not a big buyer of retro. As you know, we use third party capital, but that's mostly quarter share. So because we're not a large writer of retro, we don't view changes in the retro market, not a large buyer. I apologize of retro changes in the retro market really don't affect us in a meaningful way.

[Elyse Greenspan, Wells Fargo]

[00:55:45] Ok, that's helpful, and then your Pitman's every return period, I think, came down in the quarter, you are obviously I think they came down like last quarter as well. Is that something, as you think about 20, 20 women considering rate? I think you mentioned earlier in the call that you desire to take down the cash exposure a little bit. Should we expect the PMS to continue to come down from you.

[Pete Vogt, Chief Financial Officer]

[00:56:11] Well, the polls in this quarter have a little bit of a benefit because frankly, with the activity that we've had this year, we've eroded a lot of the aggregate covers. So I think that has an impact on the on the net bills. But I think if you look at where we were July one, I think that's probably more of a of an independent view. And so to my point, I think around the levels of July one, maybe a little bit lower, is where I would expect where I would expect it to be.

[Elyse Greenspan, Wells Fargo]

[00:56:44] That's helpful. And my last question, the fourth quarter seems to also be pretty active. We've had Delta Zeta, the ongoing California fires. You guys just have a little bit of a sense of how we can think about the cat Lacerda exposure to some of these events in the fourth quarter. Maybe. I know some of them are ongoing, so not looking for an exact number, but more qualitative in terms of your exposure and how we should think about the fourth quarter.

[Albert Benchimol, President and Chief Executive Officer]

[00:57:12] Well, you're right, I mean, they're literally just happened, I think that I think just went through Louisiana yesterday. So but I think both of them tend to be reasonably low level cats. The other thing that I would say is Zeta in particular, looks like it's going to be following the same path as Laura, which means that I'll probably be some complications in terms of attributing losses to Laura or Zeta. So my guess is that's going to be an issue for the entire industry, certainly not just ourselves. But, you know, that's kind of where we are on it. And, you know, we'll see how it develops as the 4th quarter goes. You know, it's interesting. I mean if you look at the last. Five years, give or take, I think, mean kind of median cat losses were probably around 50 billion dollars for the industry. We think we're probably mid 60s already through the end of the third quarter. So I think that gives you an indication of what kind of year we're having.

[Pete Vogt, Chief Financial Officer]

[00:58:16] At least the only other thing I'd point out, and this is Pete, when you look historically, especially the 70s and 80s with the wildfires, we had been on a number of large aggregate treaties on the reinsurance side, and we're no longer on those treaties. So we don't we don't have those aggregates in our portfolio anymore. So just as you're looking historically, I thought I'd point that out.

[Elyse Greenspan, Wells Fargo]

[00:58:39] Ok, that's helpful, thanks, I appreciate the color.

[Operator]

[00:58:42] You're welcome. This concludes our question and answer session. Like to come back over to Mr. Albert Bunkroom all for closing remarks.

[Albert Benchimol, President and Chief Executive Officer]

: [00:58:53] Thank you, operator, and thank you to everybody for participating and for your interest and your questions. Clearly, this was a quarter with a lot of noise up and down and sideways. But at the end of the day, I think that axis responded very well to the challenges of this year in terms of having a lower exposure than historically to cats. I think that we've made significant progress in our book of business. And I think that, you know, we are advancing our strategy in building a global leader in specialty risk. Again, I want to leave you with. With what? With our commitment that we're focused on our plan. We're disciplined in our underwriting approach, and we're managing our portfolio and positioning our business to thrive in the eventual recovery. We did have a fair number of books of business that we were repositioning in Twenty, but we like where we are today and we are open for business when the pricing of the returns are attractive to the to my colleagues who are listening today.

[00:59:56] I want to say thank you. I want to express my appreciation to all of you. You know, you're working hard, your commitment, your dedication. Our clients and our brokers see it. We see it every day. I just want to thank you all for that. And so to everybody who joined our call. Thank you. And we look forward to reporting to you on our progress and future calls. Thank you, everybody. Operator, this ends our call.

[Operator]

[01:00:22] Conference is now concluded. Thank you for attending today's presentation, you may now disconnect.