Arch Capital Group (ACGL) Q1 2016 Earnings Call

Acrch Capital Group (ACGL) CEO Dinos Iordanou reported stong results which were helped by lower catastrophe cost

“We are staring the year on a good note, our first quarter, it was terrific from virtually all perspectives. Our reported combined ratio was excellent at 87.1, which was aided by low level of catastrophe losses and continued favorable loss reserve development in each of our segments.”

Sees the reinsurance market possibly bottoming out

“There are no significant changes in the property, casualty operating environment from last quarter, although there are some signs that reinsurance terms, especially ceding commissions maybe bottoming out. We are in a market where the importance of cycle management, not only in preserving capital, but also maintaining balance sheet integrity is paramount. Navigating through this phase of the cycle requires that our underwriters remain disciplined, opportunistic and laser-focused in execution.”

Shifting their insurance portfolio to where they see opportunity by shrinking unprofitable areas where they don’t feel they are being adequately compensated for the risk

“As far a longer term view of our mix changes, I would point out that four years ago, in the first quarter of 2012, within the reinsurance segment, the property cat line represented 26% at net earned premiums, whereas this quarter it is down to only 6.9% of earned premiums and this was accomplished through 71% reduction in net earned premiums over the four-year period. Yes, 71%. The insurance segment similarly reduced its property of marine net earned premiums by 38% over that same time period. Both actions reflect our view of sever margin compression in the property cat space.”

Focused on profits not revenue

“So we’re putting a lot of focus in trying to find this profitable segment for us. But let me reemphasize, we always look for bottom line results first and we look at premium growth second. At the end of the day, you can’t focus just on premium growth.”

Seeing pockets of opportunity as a result of some of their competitors going through mergers and footprint rationalizations

“On the insurance side I believe that we’ve seen an increase in submissions over the last quarter or so because some of our competitors have decided to exit the lines of business, there have been some mergers and acquisition. So we are seeing some movement, it is not widespread but it is certainly starting to occur and we are seizing the opportunity whenever we can and whenever we think it’s appropriate.”

Markel 1Q16 Earnings Call Notes

Thomas S. Gayner – Co-Chief Executive Officer

The pace of change in business has accelerated

“The pace of change in business continues to accelerate and I can assure you that we are working harder than ever in the several new and appropriate initiatives to power Markel forward. Financial results from any one quarter or any one year are inherently volatile. Things like weather, financial market volatility and competitive behavior are beyond our control and can highly influence short-term results.”

It’s led to an increase in turnover

“Historically, we’ve invested between 50% and 80% of our shareholders’ equity in equities. Over the last year, we’ve had a higher degree of turnover in the portfolio than normal, which reflects our view that the landscape for business is changing at a faster pace than historically was the case.”

We accumulate gradually and persistently over time. We sell quickly

“When we buy, we tend to accumulate gradually and persistently over time. We use dollar-cost averaging and periodic and regular purchasing to gradually build positions in line with our understanding of the businesses involved and the prices at which they are available. When we exit a position, we tend to sell it relatively quickly. The net of this behavior is that, despite our buying, our overall equity exposure remains relatively unchanged during the quarter.”

I’m finding it hard to understand negative numbers

“I remember that it was hard learning about negative numbers in fifth grade, I’m finding it even harder to understand them as a grown up as they pertain to interest rates. Fortunately, I figured out negative numbers and made it to the sixth grade eventually, and we will all do so as well with negative interest rates.”

Prices too high for M&A

“In general prices are high across the board. (46:08) looking at insurance deals or ventures deals, we do see a flow. Fortunately, we’re well known enough to be aware of a lot of transactions and we are anxious to add to the Markel family but not at these prices.”

Loews 1Q16 Earnings Call Notes

Loews (L) James S. Tisch on Q1 2016 Results

Agency distribution has helped keep us insulated from third party capital

“Over the last several years, there’s been a significant increase in third-party capital coming into the insurance and the reinsurance market, and this capital is increasing competition for the more generic insurance and reinsurance providers. It’s having less of effect on CNA’s book of business, however, because of the company’s extensive and well-established nationwide agency network. This network is a tremendous asset, and CNA is one of only a handful of industry players with this type of distribution channel. This web of distributed offices with local underwriters working with local agents is remarkably expensive to duplicate, creating high barriers to entry for new players.”

He who lives by the crystal ball…

“One of my favorite sayings is he who lives by the crystal ball must learn to eat ground glass. And while I’m not a fan of ground glass, I’ll share with you what I’m seeing and forecasting with respect to oil.”

US shale is now the worlds swing producer and it can come on quickly and cheaply

” it is now abundantly clear that in the absence of OPEC intervention, U.S. shale oil is the world’s swing producer. Shale production can come on quickly and relatively cheaply, and is largely developed by nimble independent producers who have the incentive to quickly respond to changing prices.”

US crude production should continue to decline

“The second point that’s becoming clear is that U.S. shale producers are unlikely to experience any time soon, the growth they enjoyed several years ago. In order to simply maintain production using internally generated cash, our guess is that the U.S. shale industry needs oil prices to be about $50 per barrel to $60 per barrel. With current prices at around $45 per barrel, U.S. production will continue to decline.”

The hedge fund space has become very crowded

“we’ve been reducing our hedge fund investments over the past year or year-and-a-half. But I would say – I have a slightly different take on it than Buffett. I would say that the space has become very crowded and returns have been competed away. When 20-years-ago, there were one or two or 10 payers (30:52) traders, market neutral hedge funds could earn very, very attractive returns. Now that there are hundreds of them, the rate of return that those hedge funds can earn has come down rather dramatically.”

Fairfax Financial 1Q16 Earnings Call Notes

Fairfax Financial Holdings’ (FRFHF) CEO Prem Watsa on Q1 2016 Results

Increased our position in long US treasury bonds

“During the quarter, Mark, we added to U.S. treasury bonds, long U.S. treasury bonds and reduced our cash position some. So, what you see is mainly the increase in U.S. treasury bonds.”

We’re concerned that central banks are out of bullets

“the worry we’ve said for some time is with all of this QE1, 2 and 3 in the United States and then followed by Europe and followed by Japan and negative interest rates in Japan and a whole bunch of negative interest rates in Europe, I think more than half the German market is now negative. And so, in spite of all of that the economy is very weak. And if we go into a recession after six-seven years of economic growth, it won’t be unusual, if we go into a recession. Our view has been for some time that we have no bullets; we have no ammunition. ”

You have a lot of debt that’s been raised in the United States and it’s sitting in mutual funds

“you have a lot of debt that’s been raised in the United States. So, the banks we think are relatively safe because they’ve gone through some tough times in ‘07, ‘08, ‘09 but the risk now is in mutual funds. So, there is a lot of high yield debt in mutual funds; there is a lot of corporate bonds and as emerging market bonds all in mutual fund setting where you can have redemptions at any time”

We watch closely for inflationary pressures but we don’t see them

“We watch it carefully of course but as we look and see there is no real pressure on wages yet. Velocity of money, we look at velocity, we talked about that in our annual meeting, velocity of money in the United States, in Europe and in Japan are coming down significantly. And that happens when you’ve got too much debt in the system. There is too much debt in the United States, there’s a lot of debt in Europe even more than the U.S. in terms of percentage of GDP and in Japan of course is the highest. So, you’re not able to, again, inflation going because velocity of money is just plummeting.”

WR Berkley 1Q16 Earnings Call Notes

Robert Berkley

Insurance marketplace more competitive but reinsurance slightly less

“The insurance marketplace continues to become incrementally more competitive while the reinsurance marketplace seems to be coming gradually a little less intensely competitive, though that is a very incremental change.”

Large purchasers of reinsurance started to come back to the market as they realized losses

“finally, we’re seeing a bit of a change in the reinsurance marketplace and if there was ever a part of the industry that deserved a break, it was probably the reinsurance market these days. And that is, a few years ago we started to see a change in buying habits of some of the largest purchasers of reinsurance. Ultimately they ended up increasing their intentions and reduced the amount of reinsurance they bought in a pretty dramatic way. Loss activity has come through and as a result of that it would seem as though they are yet again changing their habits and they are reentering the marketplace as customers.”

There are a lot of organizations that have become inwardly focused

“I think the answer is in some ways the period that we’re going through now is somewhat reminiscent of 2008, 2009, 2010 for different reasons and that is there is a lot of dislocation in the market, there are a lot of people or large organizations that for one reason or another are a very inwardly focused and that creates opportunity for organizations like ours to try and continue to find opportunities and to build and enhance the value of our franchise for our shareholders both organically through expanding our existing businesses as well as starting new operations. ”

There’s a battle for distribution going on between distribution and carriers

“our general observation is this, that the companies are trying to maintain or perhaps grow their margins, the distribution is trying to do the same thing. At the same time if you look at the insurance marketplace, rates are plateaued in all likelihood are gradually going to decrease and that creates tension and pressure and ultimately it would seem as though everyone is so focused on how they maintain their margins and how they keep the world happy every 90 days that is getting the way of distribution and carriers, finding ways to work together to bring more value to the customer.”

If price moves away from us we’re prepared to shrink

” we’re in business to make money not necessarily just to issue insurance policies for the sake of issuing insurance policies. We’re in the market every day trying to provide product and provide continuity to the marketplace in our offering. Having said that ultimately if there are parts of the market that move away from our pricing then we’re prepared to shrink. So yes, the answer is there are parts of our business that are shrinking right now, auto would be an example of that, again that’s just the reality of operating in a cyclical business when you’re focused on profitability and return.”

Ultimately the relationship between distribution and carriers is a partnership. Who is the senior partner shifts

“as my father reminds me and reminds others, that ultimately it’s a partnerships. There are moments in time when the carriers are the senior partner and there are moments in time when the distribution is the senior partner, but ultimately in the long run for us all to survive one needs to be conscious of their obligation to their partnership and their need to survive as well.”

We have grown our Florid exposure, but with significant caps

” first of all yes we have grown our Florida homeowners product and this is through our reinsurance, having said that, there are meaningful event caps and significant exclusions as far as coverage when it comes to natural catastrophes. So I think that while there is a modest amount of cat exposure that comes with it, I would encourage you to think of that less as a cat play. I know that – it shows up in the yellow books and in other filings where it could be misinterpreted so hopefully we been able to rectify the understanding.”

Gene Ballard

Technology is moving to disintermediate the current distribution system

“The long and the short of the situation is the big picture is technology is moving to dis-intermediate the current distribution system to some extent. The fact is that that’s a long term problem and at the same time as we’re moving in that direction, the existing distribution system instead of working with companies to try and find ways to deliver value to the customer is more focused on how to improve their margins and at the same time insurance companies are faced with the need for more underwriting margin because their investment margins are declining. So you have a natural crisis. Everyone wants a bigger piece of a shrinking pie.”

Travelers (TRV) Q1 2016 Earnings Call

Travelers (TRV) CEO Alan Schnitzer said some catastrophe losses hurt the company’s insurance results
To put the weather in some context, our catastrophe losses were about $100 million, after tax, higher in the quarter than they were last year, and these are the highest first quarter cat losses we’ve had since 2010. The timing of catastrophes is, of course, unpredictable, but this level of weather volatility is certainly within our playbook. We’re confident in our ability to model and manage our exposures and that we’re pricing appropriately for the risk. In this case, it just so happens that, by design, we have a healthy market share in the Dallas/Fort Worth Metroplex, where severe hailstorms were concentrated. “
Travelers (TRV) CFO Jay Benet partly blamed capital markets for decrease returns in the insurance company’s investment portfolio
Our net investment income was $439 million, after tax, this quarter, which was $39 million lower than the prior year quarter. In addition to the lower fixed income returns, non-fixed income NII was down $15 million after-tax, due to lower hedge fund returns that resulted from the more challenging capital market conditions in recent months.”
Working on a pilot project to determine whether to offer car insurance to Uber drivers
Second, we did roll out, in a couple of pilot states, for use for individuals when they’re using their car for Uber. And what it really does is, it covers what’s called the trolling period. Until there’s a match, then the coverage is clear that there isn’t any personal insurance coverage.”

Third Point Reinsurance 4Q15 Earnings Call Notes

Third Point Reinsurance’s Daniel Loeb

See a lot of alert, but not really seeing signs of recession

“we have hedges in place, but we’ve actually increased our net exposure over the course of the month, as some of these sellouts have created silly prices for securities and we’ve either added some existing positions or established a couple of new positions. So as your question about recession, look, along with the other things like China oil prices, Fed policy, et cetera, I mean, that’s kind on the top of people’s list as far as concerns go. We are looking at economic data. We are serving companies that are economically sensitive, and what we do see is weakness in companies with cyclical exposure. And we see the obvious things, overleveraged companies in cyclical businesses that are also maybe in some peril. But as far as industrial companies, consumer companies, certainly healthcare companies, we are not seeing any sign of a recession. We see a lot of people that are on alert, but there haven’t really been any signs of recession from either the economic data, the surveys or individual conversations with companies.”

You don’t have as many activist opportunities because you don’t have as many blatantly underperforming companies

“It’s an interesting question. We have not undertaken any new activist opportunities, but I think what’s happening actually is a lot of companies have undertaken the sorts of operational improvements and more rational capital structure moves, that is making it — I think that’s making it more difficult for activists, because you don’t have as many blatantly underperforming companies, because boards are holding the management teams more accountable, they’re getting lot of pitches from bankers.”

We’re more focused on undervalued securities right now

“So we’re not seeing — that that’s not really what we’re focusing on. We’re really focusing on securities that are under-valued where we can make investments in the constructive and not have to take any kind of confrontational role with management teams.”

Watching energy markets closely but think debt is more interesting than equity

“We’re watching the energy markets very, very closely. We think that the better opportunities are on the credit side than on equities. As far as discounting, potential bad news ahead, we think the equities reflect more optimism about the price. I mean, they’ve come in over the last weak or two, but there is two things going on equities at this point; debt, low oil prices and now the threat of equity offerings to shore up the balance sheets. So we think the more interesting way to play energy is through fulcrum securities of E&P companies, and in some of the distribution companies”

We aren’t investing in China

“We aren’t really investing in China. We’re obviously tracking what’s going in China in terms of the local economy, in terms of it being an end market for many of our companies including young brands. There is serious implication for materials and for luxury companies and other companies that have end markets there, but we aren’t investing directly in China. It’s hard for us not having a local presence and local knowledge to invest in Chinese securities.”

Fairfax Financial 4Q15 Earnings Call Notes

Prem Watsa

Our common stock portfolios are hedged 100%

“We have yet to significantly benefit from our hedges and our approximate $110 billion notional amount of deflation swaps, and of course, our cash position gives us great optionality. At our last annual meeting, we made the point that while we were protecting our capital on the downside, our investment portfolio could also do very well. Our common stock portfolios continued to be hedged at approximately 90%. Early in 2016, we increased the hedge to 100%.”

Deflation is a very difficult environment to make a return in

“Yes. So on the deflation swaps, deflation contracts that we put in, Dave, as I said it’s almost seven years yet to go. What we’re trying to do is protect our company from worst-case events. And deflation is the very difficult environment to make a return in. You’re seeing interest rates in Japan, tenure rates are negative. German rates are below – tenure German rates are below 0.3% like below 0.3 like 30 basis points, 10 years. So in that environment it’s very difficult to make a return and we’re trying to protect, and there’s all sorts of unintended consequences and so we’re protecting our company from that”

Pricing of derivative contracts is very volatile, really not meaningful until we sell them

“I’d say up and down and we saw the same in credit default swaps. But as looking back in our 2008 Annual Report and you can see what I said there, but in eight months from June 2007 to February 2008, the valuation of our credit default swaps went from $200 million to $2 billion, in eight months it went up 10 times. And for three or four years prior to that it did nothing. So these valuations from what we see, from where we said is, and it’s in our books, we have taken a big hit in terms of our cost. And the next important number is when we sell it. And till that time there – as you point out valuations.”

The US P&C insurance environment is soft, so our business is shrinking

“the U.S. property and casualty environment as you know it’s a soft environment. So our business broadly speaking is shrinking, Odyssey came down. We did not renew a major property account. The pricing wasn’t right. So, as we’re very focused on underwriting and are reserving very important to keep the reserving at a very good level.”

Many of our competitors have reached for yield and taken credit risk

“I’ve said for some time that we have on the left-hand side of the balance sheet there has been many of our competitors have reached the yield and have taken credit risk to get more income is one of the questions earlier, it is very difficult to get income. So they’ve gone up the credit risk. We think that’s probably not an appropriate thing to do and the spreads are very narrow.”

We buy these instruments to protect the company in a mark to market world

“Yes, so it’s a combination. We bought these hedges to protect our company, right? So it’s like the deflation swaps that we bought and Chris. And the – we’re in a mark-to-market world. So if we wanted to expand our insurance business, because prices are going up, but if the prices are going up in an environment where the stock price are coming down, spreads are widening, while our capital will be reduced significantly, and so we may not be able to take advantage of the opportunity to increase our insurance business.”

We think of it like storms

“So we protect our capital. In 2008, 2009, the last time we did that. The markets came down about 50% and we took our hedges off. We just think we’re facing an insurance business you think of it as a 150 within 100 years on like not often, but you get these storms, you get an earthquake in California sometimes or you get big wind storm in Florida. We’ve had many and we have to protect ourselves from that. So it’s just similar situation that we’re looking at. We want to protect ourselves. And we think right now with interest rates at zero for sometime and in many case, it’s going negative and a ton of debt in the system, we think that the possibilities on the downside are significant. So we want to protect our company and we have no intention of taking those hedges off soon.”

We’re well prepared for recession but if we continue to muddle through then returns will be mediocre

” if we go into recession in the next year or two, my suggestion is even I have all sorts of unintended consequences and that’s the worry we have, Tom. So our company is well structured for that. But if we muddle through like we have in the last few years, our returns are not going to be exceptional. They’re going to be mediocre. We accept that with the idea that these are very difficult times and we have to be careful.”

RenaissanceRe 3Q15 Earnings Call Notes

RenaissanceRe Holdings’ (RNR) CEO Kevin O’Donnell on Q3 2015 Results

There’s plenty of capital in reinsurance markets

“Capital has been and continues to be plentiful. While attractive risk remains elusive and we fully expect both of these trends to persist in 2016. We expect a challenging our operating environment in both property cat and casualty and specialty in 2016. ”

There hasn’t been a large catastrophic event to cut capital levels

“Actual returns in the property and casualty market place have been significantly above expected returns over the last several years. The lack of large catastrophic events and an overall benign claims environment for liability lines have held the actual returns in both property as well as casualty classes.”

We are in a soft rate environment

“Regardless of your focus, we are in a soft rate environment in all returns expected or actual will almost certainly degrade next year. This is one reason we are not planning to grow any of our joint venture vehicles.”

We’re way overdue for a big hurricane event

“For the 10th consecutive year latest news to report in the third quarter is what didn’t happen. Specifically there wasn’t a U.S. land falling major hurricane or any U.S. land falling hurricane for that matter. The odds of this long of a lucky streak occurring is less than 1% and in fact it’s statistically more remote than odds of the 2004 or the 2005 storm years.”

Anticipate that private equity holdings performance is mirroring the performance of public markets

“I just say that the decline in the private equity valuation was roughly in line with the decline in the public market, equity market indexes. So our process for doing that as we take estimates from each of our managers as best we can over the quarter. They are estimates there is always true ups. The strips tend to be small though that are generally made in the following quarter. But I — we certainly wouldn’t want to promise anything, but I would and certainly anticipate that our private equity valuations are somewhat mirroring the changes in the public equity markets.”

Markel 3Q15 Earnings Call Notes

Markel’s (MKL) Q3 2015 Results

No longer going to bring duration in

“after several years where we left the duration of the fixed income portfolio decrease due to our concern about the possibility of higher overall levels of interest rates, we now are at the point where we expect to keep our duration from coming in anymore.”

Dry powder on the balance sheet is a big advantage

“As you can see, we have got some dry powder on our balance sheet. I think the option value of having quickly available capital to deploy as opportunities present themselves is a big advantage for Markel going forward. I would also add that we incur very little in the way of opportunity costs in doing so, given the low overall level of yields and investment returns all along the curve.”

Having trouble finding acquisitions that are fairly priced

“the things we would look for when we – when we are doing acquisitions is that culture has to be a fit, it’s number one. It needs to be a great strategic fit, good reason for it. And then obviously, it’s got be at a fair price and that’s probably the one we are having the most trouble with right now.”

Competition is more disciplined than in previous cycles

” while everything is competitive, I don’t think anybody is under the delusion that they can operate on a sloppy fashion on the underwriting side and make it up on investments. So the nature and tone of competition and where that bar is set in terms of underwriting profitability is lower this time around than what it would have been in previous cycles, so that’s somewhat good news.’