AXIS Capital Holdings Ltd (AXS) 2023 Q4 法說會逐字稿

Good afternoon, and welcome to the AXIS Capital conference call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Cliff Gallant, Investor Relations. Please go ahead.

Thank you. Good afternoon, and welcome to the AXIS Capital conference call. I'm Cliff Gallant, and I recently started as Investor Relations here at AXIS, and I'm excited to be here.

We've allocated 30 minutes for today's call. (Operator Instructions) We will be happy to discuss our underlying financial results in more detail with you when we have our regularly scheduled call next week. If you would like a copy of the press release issued earlier this afternoon, please visit the Investor Information section of our website at axiscapital.com.

Joining me today on today's call are Vince Tizzio, our President and CEO; and Pete Vogt, our CFO. In addition, I would like to remind everyone that the statements made during this call, including the question-and-answer section, 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 forward-looking statements due to a variety of factors, including the risk factors set forth in the company's most recent report on the Form 10-K or our quarterly report on Form 10-Q and other reports the company files with the SEC. This includes the additional risks identified in the cautionary note regarding forward-looking statements in our press release issued earlier today. We undertake no obligation to publicly update or revise any forward-looking statements.

In addition, non-GAAP financial measures may be discussed during this conference call. Reconciliations are included in our press release issued today.

And with that, I'll turn the call over to Vince.

Thanks, Cliff, and welcome aboard. Good afternoon, and thank you for joining us. Today, our conversation will focus on our loss review and the decisive reserve action that we have taken. I'll first briefly share with you at the outset that AXIS delivered strong underlying performance in 2023, and we believe the company is on a clear trajectory to becoming a specialty underwriter that consistently generates double-digit ROE, combined ratios in the low 90s, consistent profitable growth and book value per share growth.

Indeed, we're operating in attractive markets and have a clear strategy on how to win in the markets where we choose to compete. We are significantly improving our operational backbone and becoming a more integrated and efficient company, and we're making the right investments in people, products, platforms and processes.

Across the organization, our team is relentlessly committed to further elevating AXIS as a specialty underwriting leader. I'm proud of the progress we're making and energized for the future. We look forward to having a detailed conversation with you next week about our fourth quarter and year-end financial performance and the exciting trajectory that we're on.

The reserve strengthening that we're taking this quarter, enables us to continue this trajectory. As you'll remember, in the third quarter, we announced our intention to review our loss reserves in light of development that we have seen in 2019 and earlier and in recognition of the current economic and social inflation trends impacting the U.S. casualty market. As we promised then, we completed these deep reviews in the fourth quarter coinciding with our normal internal quarterly review and annual independent review process. Based on this review and the impact of current conditions, we have strengthened our reserves by $425 million pre-tax.

I wanted to provide some color on the relevant principles and ultimate determination that we made. First, the reserve addition predominantly relates to the liability class in both our insurance and reinsurance business, primarily from 2019 and older accident years.

Second, our review was exhaustive and supplemented our existing processes. As I've previously communicated, Pete and I worked with our Chief Actuary and new Chief Claims Officer to lead this deep analysis. Among other items, it included an examination of trend assumptions, emerging development patterns and a rigorous review of open claims since the third quarter of 2019, while reflecting the reality that our U.S. casualty and professional lines have shown sustained adverse development, driven largely by economic and social inflation. We see the strengthening of reserves as a necessary step to progress forward as a specialty leader. Pete will detail specifics in his comments.

And with that, I'll now turn it over to Pete.

Thank you, Vince, and thank you, everyone, for joining the call. We felt it would be important to share with you today's news and give you some of the key data points. As Vince said, the fourth quarter will include a net reserve strengthening of $425 million pre-tax and $361 million after tax. The $425 million is essentially all IBNR, giving full weight to the longer development patterns and increased severity trends we are seeing emerge post-pandemic. With the work completed, including input from outside legal experts to confirm our view of claims, we feel the reserves are prudent.

For the full year 2023, which we view as the most logical way of analyzing the information as it will be consistent with our global loss triangles, the net reserve strengthening is $412 million pre-tax, with the fourth quarter strengthening being offset by some positive development through the first 3 quarters. As we break down the $412 million, the strengthening is $176 million in insurance and $236 million in reinsurance. Furthermore, in both insurance and reinsurance, the strengthening is all related to liability and professional lines.

In insurance, these 2 lines were strengthened by $276 million, with $235 million in liability and $41 million in professional lines. 84% of the total increase was for accident years 2019 and prior. These increases were partially offset by $100 million of reserve releases from other lines of business.

In reinsurance, these lines were strengthened by $354 million, with $262 million in liability and $92 million in professional lines. 90% of the total increase was for accident years 2019 and prior, and these increases were partially offset by $118 million of net reserve releases from the other lines of business.

We view these additions to be prudent and in keeping with our learnings from our in-depth study we conducted with our claims team and extrapolating the implications of current industry trends, the social inflation and development patterns. As you are aware, we have an outside actuarial firm through an independent bottoms-up review of our reserves, and our booked reserves are within their reasonable range and above their central estimate.

Taking a moment to review the full year 2023 highlights, I note that we have ended the year in a strong capital position. Book value has grown by over 15% during the year, and diluted book value per share at year-end was $54.06. Additionally, our underwriting -- our underlying operating earnings were $847 million, or $9.85 per share, driven by a current accident year combined ratio of 91.8% and strong investment income. We're proud of the underlying 2023 results, which we expect to build upon in 2024 and beyond with a determined focus on growing book value per share.

Thank you, operator. Now let's open the call for questions.

(Operator Instructions) Our first question today comes from Karol Chmiel with Citizens JMP.

Just one question really is how do you feel about your current capital position following this charge and if anything, what it might mean from the rating agencies and in particular, the S&P rating agency.

This is Pete. Thank you for the question. Even after taking the reserve charge, we feel very confident and comfortable in our strong capital position. I'll note that, at year-end, our financial leverage is actually reduced to 28.3. So it's comfortably below 30 now. And we actually have a really solid in excess of requirements for the rating agencies when we compare ourselves to their capital models. So we feel very good about where we are.

I would just remind you, as you know, S&P is currently going through their new model change. They currently have our holding company in debt on a negative watch due to the fact that it may get actually downgraded by a notch because of their view of what the BMA will become and what they think of that regulatory [scheme], but we're not worried about that. We also have now really good insights into what our capital position is with S&P, and we feel very comfortable with that as we sit here today. It's a strong position.

The next question is from Josh Shanker with Bank of America.

A question about the methodology here. If I go back in time to 2020 and work on the current reserves, were the reserves using the methodology, using the adequate in 2020? Or is all the change that you are taking the charge for today the development in the inflationary trends that we've seen in the past few years?

Josh, this is Vince. I'll start. Certainly, as part of our examination, all of our methods and assumptions were reassessed. And clearly, as a result of the strengthening, we have updated those assumptions with new information insights really resulting in part from our claims, deep dives, supplemented with our own challenge of our own methods and assumptions.

The only thing I would build on that, Vince, is as we've seen since 2020, we've seen increase in litigation funding. We've seen longer development patterns, meaning that cases take longer to get through the court system, and we've actually seen severity increases. So as we've actually continued to see that -- and we've actually been strengthening these reserves since that time, Josh. I think you know that. You're aware of that. I think as we did this deep dive, you can really now see those patterns coming post-pandemic. And we took the full weight of what we saw in our studies and applied them to our reserves for year-end 2023.

When we look at the triangles or the sort of background information on the charge in the 10-K and your global triangles when it comes out later, what proportion of the current charge relates to accident years prior to the pandemic? And what percentage is during and post-pandemic?

That's a great question, Josh. Most of it, if not, more than 100% of it is due to prior to the pandemic. So when I think about the $412 million that I referenced, that is our full year increase in reserves, so that will relate to the triangles. $452 million is related to 2019 and prior. And actually, when we look at the 2020 to 2022 years, we've got a slight release of $40 million, so more than 100% is due to 2019 and prior.

The next question is from Brian Meredith with UBS.

Two questions here for you, Pete. I'm just curious, did you all take a look at LPTs? And was that a possibility of kind of handling this situation and putting some finality to it instead?

Thanks, Brian. Thanks for the question. And as you're aware, we've done LPT transactions in the past, and we really do look at them as I've said, as a tool to manage both reserve risk and capital management. In this case, we reviewed a number of options that were available to us, and we view that the road we're taking has the best economic outcome for the company. And at this moment, we believe our reserves are prudent, and we believe that we're in a very strong capital position.

Great. And then my next question, Pete, I think you said that 90% of the liability development reinsurance was related to 2019 and prior. The 10% that was not, what years was that in? And I guess my question is if you're changing these methodologies, why wouldn't that have an impact on kind of your picks from 2020, 2021 and 2022?

Yes, so you're absolutely right, Brian. I mentioned that of the $354 million, 90% of it was 2019 and prior. When we look at the post or the '20 to '22 years, there was about 10% in there. A majority -- not a majority, a big portion of that was our U.S. multiline book, which we actually increased the reserves on by a bit. Now that book has been totally rewritten in the last 18 months, so while it was in the '20 to '22 years, we believe that book's very different on a go forward. That was our multiregional book that got changed once we exited property. So that was the big driver, I'll call it, in the 10% increase that we took post-2019.

With regard to why such a difference. One is we were strengthening -- we've talked about this. We've strengthened our trend assumptions since 2019, and our trend assumptions have moved up from mid-single digit to high single digits over the last 3 years. And that's really helped us get ahead of it a bit when you look at the years '20 to '22, which is why we also feel really good about the 91.8% current accident year combined ratio we have in 2023.

The next question is from Alex Scott with Goldman Sachs.

First one I had is on the releases. It sounded like they were an offset. I think it was somewhere around $200 million. Could you help us think through more specifics around what businesses saw those releases and from what years and the trends that were driving that?

Yes. This is Pete. I'll take that, Alex. The releases came across just about every other line we have. Probably the largest release came from our reinsurance run-off business. That was about $67 million, but that was our property, engineering and cat book. After that, again, these are all more short-tail type lines, so they are specialty short-tail type lines. So most of these releases are going to be in the '20 to '22 years. But we did see releases in our cyber book, in credit political risk, our reinsurance A&H as well as marine and aviation in both insurance and reinsurance. So there wasn't one huge driver. The biggest one was the $67 million in the run-off lines. The rest were anywhere from $10 million to $30 million in releases.

Got it. That's helpful. Next one I have for you is just thinking a little bit more holistically about this. I think you guys called it like the How We Work strategy that you had and part of it was fine-tuning some of these estimates. Is -- should we -- do we need to think about any changes in the way you're underwriting business going forward in response to this review in that program more broadly?

And I know you reiterated some of your combined ratio targets. But I mean do we need to think about trajectory and like how quickly you get there? And maybe just at a high level, what's being done with sort of the loss estimates on current accident years to sort of ensure that this never happens again kind of thing?

Alex, this is Vince. Clearly, through How We Work, we've set ourselves on a path aiming at strengthened underwriting acumen through our process, through our inclusion of data and analytics. Second, we've certainly put pressure on ourselves relative to our cost structure and are enabling efficiencies to be gained through this effort. And as you know, in the specialty world, the markets move, and we have to be responsive and have an appetite and underwriting acumen that matches where we see growth, profitable growth opportunities. And so we are organizing ourselves through these bodies of effort through How We Work to work with pace and to seize those opportunities.

With respect to our loss picks, they're certainly better informed and more informed by the work that we've done in this examination. And I think that we feel great confidence in where we're starting from, and we'll talk more about the '23 year next week.

The next question is from Hristian Getsov with Wells Fargo Securities.

I was hoping you could provide a little bit more color on why an LPT/ADC was not economically feasible, particularly around the terms you were offered and if there was any disagreement on -- with the reinsurer on the size of the whole.

Yes, this is Pete. I'll take that. I'm not going to get into specifics on anything that we actually talked to some folks about. But I would say that given where interest rates are now, given where we felt our capital position is today, which is strong, and given what we thought the initial discussions with outside folks were going to actually bear fruit to, we felt that actually doing this ourselves and keeping the reserves on our books was the best course of action.

Got you. And then for my second question, so the reserve charge, does it kind of impact your loss picks in the current accident year and maybe how you're booking the new book of business moving forward, particularly around like your expectations for social inflation?

Yes. so this is Pete again. Yes, as I said earlier, it really didn't impact our current book of business because we had materially moved up our loss picks and our thinking on inflation prior to this. As I mentioned over the last few years, we've -- especially in the liability lines, we've moved our thinking from mid-single digits to high single digits. And that's what we've been booking to in 2023.

As we continue to look at rate, at least getting us a trend, and next week when we have our earnings call, we'll tell you what we saw in the fourth quarter. But so far, we do not expect it to -- we actually feel really good about the loss picks for 2023. As we look forward into 2024, we'll continue to think and we'll talk to you next week about what we're seeing on the rate front. But right now on the liability lines, especially on the casualty side, we are getting rate at least equal to trend.

The next question is from Yaron Kinar with Jefferies.

My first question just goes back to the review of the methodology and the process and then kind of taking a more conservative view on inflationary trends in professional lines and in liability. Is there any reason to see that maybe impact other lines of business as well? And if not, why not?

Yaron, this is Pete. As we look at other lines of business, there are some impacts of social inflation but not as much as you have in these casualty lines, especially the liability line. Even the professional lines, it does get hit a little bit by social inflation, but what we see there more is class action -- securities class action lawsuits that will drive that.

Might see a severity trend there, but there, it's going to be more of a frequency-based issue that we look at. But overall, I'll ask Vince to pile on here, but for the most part, I think we're looking at it across our book, and we feel that we've priced for it well in areas like property, in marine, liability and other areas.

Yaron, it's Vince. I would just add to Pete's good answer a couple of things. First, we examined all of our classes both in insurance and reinsurance and certainly validated our assumptions and methods. And we have already, in our historical past, accounted for inflation in our A&H portfolio, our property portfolio, our marine portfolio. We tested those assumptions, and we made minor adjustments in certain of those lines. But the key and the thrust of this effort and story is a liability strengthening action that our company is taking.

Got it. And then my second question, so I think you got a couple of questions on LPTs. I'm actually going a little further back in history. So I think you put on an LPT back at the end of '22. You had an ADC cover for Novae that was put on, I think, perhaps in years '15 and prior. Is this charge, the $425 million, net of all of these?

Yes, yes. Those 2 transactions did not actually impact the $425 million, so we're fine. Actually, one thing I would just clarify. The deal we did with the Novae transaction back in 2017, Yaron, was actually a reinsurance closed transaction, not an LPT because it was all within the Lloyd's world.

So when we move those reserves off, unlike an ADC, which actually has a limit to it, those reserves don't come back to us unless they actually have to go through the Lloyd's central fund to come back to us. That was a reinsurance to close transaction. So that transaction is very, very safe. And then the $400 million LPT we did last year, actually, those reserves are still solid, and we did not actually use any of the limit that we have available to us for those $400 million of reserves.

Got it. So if I look at that $425 million, what does it come to as a percentage of professional lines and liability reserves for accident years '19 and prior?

When I look at that -- I have got that here. Actually, I'll give you a good stat I've got here. When I look at as a percentage of reserves for those classes, actually, the most impactful years, Yaron, will be 2015 to 2019, that 5-year cohort. In the insurance liability book, we increased the reserves in that 5-year period from year-end 2022 by 58%. In insurance professional lines, we increased the year-end 2022 reserves, in that 5-year period, by 20%. Reinsurance liability, again, that same 5-year period, we increased the reserves by 36%. And in reinsurance professional, again, that 5-year period, we increased the reserves by 20%.

The next question is a follow-up from Josh Shanker with Bank of America.

In past quarters, you've said that the review might be an overhang considering capital return and share repurchases as a common practice at the company. We're now past that gauntlet, so to speak. What is the outlook and the possibility of being more open-minded to a capital return plan at this point?

Thanks, Josh. This is Pete. I'll take that question. I guess what I'd say is that we did put out a press release in December. Our Board has authorized us to have a $100 million share repurchase program. We will look to use that opportunistically, and we do think today that our shares are undervalued. So that's about all I can say right now.

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

Like to thank you for taking time with us this afternoon to address our press release. We look forward to speaking with you next week and addressing the 2023 year. I would say in closing, we're very excited about where we are as an organization. We're very excited about what we have to report concerning the 2023 year. And I'd like to thank my colleagues that have been working very hard on behalf of our organization throughout all of our various functions. So thank you very much.

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