In my judgment, the calendar year or published combined ratio is the primary measure of underwriting performance that investors and management should focus on, because natural catastrophes are a regular and expected occurrence and the volatility cannot be dismissed away.
Total exposure change is actually down 0.6% in the quarter. And it’s a combination of an increase in economic exposure of 3.4% due to higher payrolls, sales and other economically sensitive activity; and on the other hand, a decline in exposure due to underwriting changes, such as increased attachment points and higher deductibles, a good thing, though it negatively impacted growth.
Very specific discussion of rate change by geography and line.
On Re:
Rates and terms in most classes are still not adequate to earn what we believe is needed to justify the volatility and earn an appropriate risk adjusted return.
three key objectives. One, continue reducing volatility in our overall book by decreasing cat exposure and growing less volatile non-catastrophe loss.
Overall, we meaningfully reduce catastrophe loss potential in our book and achieve[d] gross premium reductions in key peak zones.
With regard to the guidance that Mark gave on the cat loss ratio, he said less than 6%. And that’s basically related to a lot of the de-risking actions that I spoke to, in my prepared remarks earlier in this call. The reality is we have meaningfully reduced catastrophe loss potential in our book. We’ve achieved PML reductions in key peaks zones, and we’ve improved their overall portfolio economics.
We incurred $125 million of pretax cat losses net of reinsurance and reinstatement premiums in the quarter, with the primary event being the Canadian crop loss and the amount of $80 million. We’ve profitably underwritten the Canadian crop market for a number of years and view this as an attractive long term business. The crop loss event is one of the largest property casualty losses in Canadian history at nearly $6 billion with the underlying drought conditions unseen for 60 years.
13% TSR target
2021 was a difficult year. The insurance industry experienced its fifth consecutive year of elevated catastrophe losses, which by several estimates exceeded a $100 billion in insured loss, and a continuation of the themes of climate change, rising inflation, and the increasing occurrence of secondary perils.
anticipating that the property renewal would be challenging and entail difficult conversations. Given this, we communicated our risk appetite and expectations, early declines and brokers and worked closely with them to avoid surprises. We had several goals we wanted to achieve and property at the renewal. The most important of which were seeking rate, improving terms and conditions, adjusting for our increased view of risk, decreasing exposure to aggregate deals and keeping our PMLs relatively flat. We achieved these goals at the renewal, which proceeded well despite being rather late. By January 1, most programs were filled and property catastrophe lines, however, lower layers and retro covers struggled more to be placed than higher layers.
As reinsurers increasingly shifted away from frequency exposed layers.
Have we executed our strategy effectively? It is essential for a company to have a consistent vision, clear purpose, and coherent long-term strategy. Thanks to the diligent efforts of our employees, we executed well on our strategy in 2021 and distinguish ourselves in the consistent application of our three superiors. Superior customer relationships, superior risk selection and superior capital management.
The market trend in 2021, was to move away from property cat risk due to fears of climate change, social and monetary inflation, as well as a lack of confidence in cat modeling. However, our expertise and experience gave us the confidence to know when we were being paid adequately to assume this risk, which we are uniquely positioned to understand in price due to our strong underwriting bench, with many of our underwriters having experience over multiple market cycles, are scientists, engineers, and risk modelers at RenaissanceReRisk Sciences and our integrated system.
I think investor skepticism is extremely high. And I think there is an – if you look at where we’re – I’ll separate us from the market for a second. Investors are flocking to CAT bonds, and if you look at the spectrum of transparency and simplicity to enter a CAT market, to take diversifying risk, CAT bonds are a good place to do that. As you move through the spectrum of reinsurance and then all the way to retro, the lack of transparency and understanding diminishes materially.
And I think there’ll be continued skepticism at the more risky end of the risk perspective from ILS Investors.
[Bob Qutub] Our property book readily absorbed the quarter’s volatility with a 64% combined ratio
JN: Our consolidated combined ratio for 2021 was in 90 which included $195 million or three points of losses on natural catastrophes including Hurricane Ida, the floods in Europe, and Winter Storm Uri. This compares to a combined ratio of 98 for 2020 which included $358 million or 6 points of losses from COVID-19 and $172 million or 3 points of losses from natural catastrophes.
Excluding the loss impacts of catastrophes and COVID-19 in both years, our consolidated combined ratio for 2021 was an 87% compared to an 88% for 2020. This improvement reflects a nearly 4-point improvement in our attritional loss ratio, given the benefit of a favorable pricing environment and the impact of underwriting actions taken to enhance our profitability.
RW: Natural catastrophe losses impacted our consolidated combined ratio by three points in 2021. This was a significant decrease from the average annual impact we’ve experienced over the previous four years. In 2021, our strategy is to manage the impact of nat cat volatility worked.
First, as previously discussed starting in the first quarter of 2021, we successfully transitioned our reinsurance property line from our Reinsurance segment underwriting operations to be managed by our Nephila ILS operations.
Second, we announced in the fourth quarter our plan to exit from Lodgepine in our retro property reinsurance book.
Finally, in the fourth quarter we purchased additional reinsurance protection to transition the remaining runoff of our property cat reinsurance book to third parties. With these changes, we will have minimal property cat exposure in our Reinsurance segment going forward.
As I’ve mentioned in the past, the last five years of cat activity have been particularly difficult for the ILS market and of course for Nephila. Despite these headwinds we have full confidence in Nephila to produce solid results over the long term. Nephila continues to identify new areas of opportunity to deploy capital and to launch new investment opportunities.
we look at this at a very granular level. We are looking at it by line, by exposure, by territory.
it’s all about specialty business these days. And we have the right people, with the right expertise whether it’s on the commercial line side, admitted or non-admitted, whether it’s domestic or international or certainly would not want to leave out our colleagues on the high net worth side.
Briefly on renewals at January 1st, while property cut raise were up broadly, the increases were not enough for us to deploy more capital into our peak zones. However, we found many opportunities to grow in the other 93% of our reinsurance business, that its specialty in nature, including property ex-cat.