Well, thanks for joining us. I just introduced the conference to the audience. Again, I'm Ryan Tunis, property casualty insurance analyst here, and we're happy to have you. Joining us is Chris Schaper, the group CEO of AIG Re, global reinsurance business of AIG, which brings together organizations of Validus Re, AlphaCat, and Talbot. He is responsible for the implementation and execution of the firm's global assumed reinsurance strategy, including a focus on new capital markets initiatives. He joined AIG in 2019 and has over 30 years of insurance and reinsurance industry experience. I think he had a couple prepared remarks. Chris, you want to lead us off with that, and then I'll start by asking some questions.
Thanks, Ryan. I'm sorry we're not on video. I did have some remarks I just wanted to make. First, happy to be here today at the Autonomous Future of Insurance Conference. In my remarks, I plan to discuss two topics. First, an overview and refresher of what AIG Re is, and second, observations on the current market environment. Let me start. AIG Re formed in mid 2019. It is responsible for AIG's global assumed reinsurance business. It is wholly owned by AIG, and it is comprised of companies that were assumed from the purchase of Validus Holdings in 2018. Now, there are three operating entities that make up AIG Re, and they include the following. Validus Re, which is a traditional reinsurer. It was a flagship company when Validus Holdings initiated.
Validus Re deploys capital through a balance sheet-based approach, and they focus kind of across the board on property, casualty, and specialty lines. Talbot Treaty is another one of the operating entities. It is part of Talbot UK, but because it is a reinsurance operation, it sorts itself through Validus Re and ultimately to AIG Re. Talbot Treaty is also a traditional reinsurer utilizing Talbot's balance sheet in terms of its deployment of capital, and it too focuses on property, casualty, and specialty lines. AlphaCat is the third operating entity, and AlphaCat's an asset manager in the reinsurance space. It assumes capital through pension funds, sovereign wealth funds, family offices. Has about 40 to 50 competitors in its space. Does focus more so on short tail lines of business such as property catastrophe, treaty reinsurance, and has about $4 billion of assets under management.
Now, each of the entities were built through a focus on three core elements, those being capital, analytics, and risk selection, in particular to manage exposure and volatility. In terms of their business risk assumption, it is closely aligned with AIG General Insurance to make sure that the overall portfolio is taken on and properly established. Now, Validus Re is a global business. It has locations worldwide. It is based in Bermuda. It has offices in North America, in particular, U.S. as well as Canada. It has offices in the U.K. through Talbot, as I mentioned, and also in Europe, in Switzerland, and in Asia and Singapore, and also supports the Latin American market through its Miami office. That is Validus Re on a global basis. Talbot Treaty, as I mentioned, is based in the U.K. itself. AlphaCat has offices in Bermuda as well as the United States.
I would just say that the teams for each are very knowledgeable, certainly very capable, and also very disciplined. That's really important in any environment, whether it's hard or soft market, whatever it might be, it's very important. That disciplined approach was an approach that Validus had from its very beginning and continues very significantly to this day. One item that I think is important to note concerns why did AIG purchase Validus? First off, Validus was a well-established enterprise, but there were also a number of other aspects that were important to AIG, which included business diversification. The reinsurance business was certainly complementary to AIG. Geographic diversity was important as well. The ILS capabilities and accessing for growth was important.
The ability to scale the business up and down based on market conditions, and also the cat modeling and research capabilities that were brought to the table. There's really terrific intellect coming from the group, and also the sharing of best practices across both entities or enterprises. Real reasons and very significant reasons why AIG sought to purchase Validus. Lastly, just in terms of AIG Re, as you've heard on AIG's earnings calls, within AIG, a significant amount of work has gone into the turnaround of the organization. The assumed reinsurance business, though, at AIG Re did not need such changes. It was in very good shape when it came over. Not only are we and have we been in good position, we do view that we're in a very good position to enhance our business proposition in the current environment.
With that said, that actually brings me to my second topic, which involves observations on the current environment. Firstly, I would say clearly over the past year, and notably in recent months, we've seen new challenges arise between the pandemic situation as well as high-profile incidents that have raised the global attention to social injustice issues. These issues, plus those associated with climate change and past losses from climate risk, including wildfires and hurricane loss, now lead us to a point where we're in a highly dynamic environment. There are certain facts that are emerging, and they include the following. COVID-19 losses are going to be geographically widespread and will affect many lines within the insurance industry. Those losses will transfer into the reinsurance market Collectively, in both insurance and reinsurance, we're going to see rates along with terms and conditions. They have been, and they will strengthen. That's going to lead us to a hard market on a global basis. In this market, there will be firms that will execute well and will achieve terrific outcomes, but there are going to be other firms that need to focus internally and work themselves out of a problematic situation. It's dynamic in different ways.
AIG Re, just to bring it back to AIG Re for a moment, is well-positioned. We do have a strong capital base. We view we have a very strong parent, very strong leadership. We have a clean portfolio, and we have a very well-oiled internal operating structure, and also, as I mentioned, with a very sound personnel to execute. Overall, we view there will be a flight to quality. We view that that will serve us well in this environment.
With that, Ryan, I will shift back to you for Q&A.
Perfect. That's a fantastic overview. I think we're definitely going to want to hit on some of the market condition stuff. Yeah, let's just, I guess, start out by talking a little bit about Validus. What are some ways to think about how Validus has changed or evolved over the past couple of years since being acquired by AIG?
Okay. Well, let me just level set. Yeah, I'll talk about Validus, but I'll focus more so on the reinsurance side. The insurance has been spoken about others in earnings calls or other conferences. I'll level set it for a bit. Validus Holdings, as I mentioned, included insurance and reinsurance businesses. The insurance component went into the AIG insurance business side, and the reinsurance aspects were aggregated, as I mentioned, and form AIG Re. For both the insurance and reinsurance portions of Validus, the acquisition was a substantial change. You're talking about enterprises that were core to a standalone entity that are now within a Fortune 75 firm.
There was definitely work to be done to integrate the businesses to make sure the benefits of AIG were available, and at the same time, make sure the attributes, including the culture when combined, were greater in quality than being separate. To do that, actually take the deft hand, it was very important to both Brian Duperrault and Peter Zaffino from the onset of the acquisition that integration was handled well. I would say from an assumed reinsurance basis, we actually haven't made major changes to how the companies engage in transacting their business. They were each performing well. We felt that the real focus was to determine how to amplify their capabilities and their market reach and how best to create value utilizing AIG's broad market presence, its capabilities, and how we translate that into overall greater value for being owned by AIG versus being independent.
To that end, in essence, we engaged kind of across the board. We determined what we wanted to do, and then engaged brokers in the business to determine how do we enhance our position across the board. At the same time, in doing that, making sure that our tenets of underwriting discipline and technical analysis were very well maintained. That was paramount as we moved through this process. Again, we engaged brokers. We sought to determine how best to enhance our position. Now, what's interesting is that on the other side of that equation, and a lot of times talked about Validus and how things have evolved, et cetera, but Validus also brought to the table to AIG some very strong analytic capabilities, very strong research capabilities, very strong modeling capabilities that involve climate as well as property catastrophe risk.
AIG has actually been able to leverage those capabilities as well. It's been interesting in the sense that it's been a two-way street. The businesses of AIG brought this technical expertise that enabled AIG, and AIG brought its market presence and broader capabilities to AIG Re as it has sought to execute. A really terrific blend for both of the enterprises. That's kind of what's taken place over the last couple of years.
That's helpful. Yeah, I have a question coming in, and I'll try to kind of paraphrase it, but thinking about AlphaCat, I think one of the ingredients of this potentially hard reinsurance market is this view that you could have some dislocations in the alternative capital space or in the retro space. Yeah, I'm curious, what's going on, I guess, over at AlphaCat in terms of the availability of capital? I think on top of that, how is that when I think about Validus as actually having to buy retro, to what extent might you be getting squeezed on prices in terms of some of those hedges that you've been putting on? In other words, to what extent is retro pricing up significantly more than what we're seeing in the traditional side?
Yeah. Well, prices are up across the board. At this June one time period, we definitely saw rate increases happening in the reinsurance market as well as coming through on the retrocessional market. Retrocessional market started a little bit earlier, for sure. Everything's kind of caught up. On both sides, I want to say both sides, on the reinsurance side and on the retro side, we definitely are seeing and have seen rate movement that has been substantial and in some ways similar now relative to the June one renewals. Overall for AlphaCat, as a market that deploys capital, obviously their capital is desired, without a doubt. Frankly, AlphaCat's been able to execute quite well through this market cycle. As an enterprise ourselves that we do buy retrocessional protection. To be frank, we were front foot.
We were, I would say, ahead of the market in thinking that through, making sure that we were effectively purchasing at the earlier stages of this market. We've been able to secure ourselves quite well as a result. It's similar to where we were last year, to be frank about it. From our point of view in terms of buying, we're comfortable where we're at in terms of the protections and also in terms of the underwriting and the risk that we took on, and also the associated rate improvements that went along with that risk that we took on. It all kind of works well together. On the AlphaCat side, as I mentioned, as far as a distributor for capital into the retro space, that's going quite well for us also. I would say on both sides, we're okay.
I can imagine markets that were not ahead of the game, I think there are a number of things that they've had to deal with, to think about. Shed risk is one of them, for sure. Trying to think about raising capital in different ways, which we're kind of seeing to some extent in this market. I think everyone's taking a different position based on, I think, their actions that they undertook at the earlier stage of this cycle.
Got it. That's helpful. Yeah, I guess just thinking about market conditions and also on some follow-ups. I guess first just, I don't know if you can comment, but if you'd like to comment on from a rate standpoint, how you'd characterize the June 1 renewal. The other piece of this is, I think over the past few weeks, we've had some pretty strong language from I think other reinsurance executives that have described this as the best market for writing reinsurance in almost 20 years, comparing it to post 9/11. My question is just does that feel a little bit out ahead of our skis? Is it something that we know yet? Do you agree with that characterization? It's kind of a broad question, but yeah. How firm do you think pricing is?
Okay. Yeah. I'll talk a little bit about the June renewal cycle first. We'll talk about the second part of your question. Yeah, first off, I would say that the June renewal, frankly, was as expected from our point of view. Again, it's our point of view. There were significantly higher rates in the reinsurance market, particularly in the property catastrophe business lines, and different geographic zones. Generally what we see when we see rate movement happen, we see it happen first, frankly, in the U.S. markets. If there are other geographies that are changing, there might see some movement, but it's usually minimal. I would say that what we are seeing, and if I include all of second quarter, which includes the April 1 renewals from Japan, we were seeing increases really across the board.
We certainly saw them in the U.S. at the June 1 renewals. Japan at April 1 absolutely increased quite substantially. Those numbers are in the press, so you would've seen those numbers in the 35%-55% range. Up the wind. We're also seeing rate increases in the U.K. and the EU, and those are areas that you tend not to see rate increases. Frankly, in many of the prior, I won't say markets, but in any of the prior time periods where you might think you see some increase in rate, you might see it in the U.S. but again, you really wouldn't see it in the U.K. or in EU. We're seeing those rate movements happen. It's definitely increasing across the board on a global basis. That's what we saw at June 1.
We are in the midst of the July 1 renewals right now. Can't obviously talk about any of that. June 1 was definitely moving directionally up quite substantially. As far as your question about 9/11, are we ahead of our skis? Is it 9/11, et cetera? 9/11 was definitely different. 9/11 came in, it was a hit, and definitely the world changed, without a doubt. This situation, the pandemic, is very broad, and certainly having implications in multiple lines. I suspect when people say that 9/11 is similar, what they're talking about is you're seeing changes in multiple lines of business in terms of rate movement, in terms of capacity, maybe withdrawing a bit. I would say there are similarities relative to that because there are certainly lines of business are increasing in terms of rate. There is a restriction in capacity.
It's not just property, it's certainly other lines of business and happening on a global scale. There's a little bit of similarity there. Overall though, what I would say is that when you look at the catastrophes that have taken place over time, so if you look back to Andrew in 1992, if you look at 9/11, if you look at KRW, each one of those time periods did cause a significant spike in price, a hard market, that sort of thing. Where we are right now, and those losses are presently viewed as being less than what we're looking at relative to COVID. When you look at where we are today relative to COVID's even more significant. Each one of them definitely caused movement in rate and price and in available capacity, and we're certainly seeing that now.
I would say one other thing that I think there's some commonality to 9/11 was that prior to 9/11, the market had gone through its own problematic cycle. Combined ratio was very significant. People were underwriting at negative returns for a period of time, when 9/11 came in, it kind of just switched everybody over to everything has to move up. In this environment, certainly the past few years, we've seen catastrophe losses take place over the past three years or so. The market didn't move, but it started to move. Many of these significant events actually are just the added catalyst that's necessary for rates to move up and capacity to restrict. I think there's some similarity there. Are we ahead of our skis at this point? I do think it's kind of a wait and see.
We'll need to see how this year plays out. We haven't actually gone through the wind season yet either. We'll need to see that. The economies obviously are going to have issues from COVID, that needs to be played into this also, which is different from what we had seen in some of the other events. We need to be thinking about this issue more broadly, I would say-
Well-
-than what we were looking at before.
Chris, this isn't an issue for AIG. Obviously, you have access to organic capital, but are you surprised that at this juncture, in June, 1/1 renewals are 6 months off, that we've seen companies do purely opportunistic capital raises based on this setup? Does that surprise you that that's been something that the market's digested well?
Well, I'll put it this way. There may be a viewpoint that all raises are opportunistic, and I'm not so sure that that's the case. Because certainly, there's defensive moves that you make-
Sure
that are important as well. I think people need to keep that in mind. Roughly right now, if you put all the numbers together, it's in the neighborhood of $3 billion or so of additional capital that's come in based on what we've seen.
Sure.
Adding all the component parts together, it's somewhere in that neighborhood. The question comes down to, is all that truly for an offensive play?
Right. I want to get to that.
Yep. That's the biggest-
Yeah
That's an important aspect to this.
I wanted to get to that in a second. It's interesting, I have two similar questions from the audience. Thinking about the fact that we have seen capital raises in startups and your view on how much is the longevity of this cycle dependent on us not seeing quite as much as that. In other words, is this the type of cycle where if we keep seeing these startups, you're not going to get the same type of hard market? Or is it more that a lot of these price increases aren't so much supply and demand, it's more like thinking about the price of risk and all that?
Well, first off, when you look at starting a business, you're going to need personnel, There's a lot there to actually start the business and actually execute well. Ryan, I just want to make sure that I understand your question. Just give me your question one more time so I make sure.
Yeah.
Okay.
Just very simplistically, when we see these new capital raises or these new startups, whatever, to what extent is that a bad omen for this hard pricing market having any longevity, I guess, into 2021?
I see. Does it have legs?
Yeah.
Does it have legs? Yeah. I would say yes, to answer your question. The new capital raises that are coming through, we'll have to see, what does this fully look like as we get closer to the 1/1 time period? How did this wind season actually play out? That's an important aspect to it. I think that the capital itself, you need to measure that against what are the real losses that are going to happen from all of this? You also have issues where entities are suffering on both sides of their balance sheet. You have asset issues, and you also have liability issues.
Right.
That's a difference also.
Got it.
When you look at it in its broad context, the money coming in will support the market, that would not suggest that that means that the market rates kind of fall flat. Just to add maybe one last comment to it. If you think about what happened at 9/11, there were a significant number of companies that started up after 9/11, and that market itself remained hard for quite a period of time.
Sure.
As a comparison.
That makes a lot of sense. The one thing I wanted to hit on before, I did want to talk about some of those defensive things. What type of opportunities are you seeing? I guess what we're trying to understand are there a lot of opportunities for reinsurers to put capital to work at attractive rates between now and 1/1 that you wouldn't normally get? Whether it's COVID dynamics, one thing we've been trying to figure out is carriers deciding they want to buy more reinsurance mid-year. Is there an interesting demand dynamic that we're seeing right now in the wind season outside of June? In other words, with just large traditional carriers where you're seeing the opportunity to put on business at really attractive rates.
I think the cycle is as it is. Certainly, some companies didn't purchase as much as they would've liked and are kind of doing a wait and see. I think they're waiting and seeing to see how problematic the wind season actually becomes. They're in the market trying to figure out can they pick up some additional capital somewhere, right? For the most part, we're primarily in a similar renewal cycle in the sense that June and July are the key ones. After June and July, it kind of goes quiet for a bit. I would suspect that if you're looking at an active season, you're going to start seeing buying without a doubt in the midst of all of that. That's really where you're going to start seeing significant spikes happening.
we need a little
Beyond where they are today.
We need some hurricane activity for those type of opportunities to become significant.
Yeah. The opportunities are there. The numbers are so high right now that the market doesn't necessarily want to pay for it. They're kind of sitting back a bit and trying to protect some of their expense figures instead of paying it, and trying to be aware of what may be taking place in the environment and relative to events. It's just an expensive purchase, and a lot of them have decided, we're just going to scale back a bit and see how things go.
Now I have an interesting question here from the audience. I guess ignoring some of the technical nitty-gritty, what are you hearing from up top in terms, I guess, of how AIG is thinking about allocating capital into the reinsurance business as we go into 2021 versus other quarters? I think one interesting dynamic is AIG, it seems like has reduced a lot of its cat exposure. It doesn't sound like that's really impacted Validus as much. To what extent are you hearing internally, are there discussions about allocating more capital to reinsurance?
Certainly, from an AIG point of view, it takes a holistic view across the space. As they're looking at committing capital, they definitely look at where are there benefits and strong opportunities to do that. There certainly have and will be discussions on what is the best way to deploy. Those decisions will be made over time. At this stage, pretty much the businesses have sorted themselves prior to the 1/1 time period, right? As a result of sorting themselves, they've executed accordingly. Eventually, as you look at the market, AIG will definitely seek to determine where it's best to commit capital, and based on that may offer different parts of the organization additional PMLs to deploy. Those specific decisions have not been made at this point in time.
I wanted to shift back to the discussion, not necessarily defensive, but I think one question we've been trying to wrap our heads around is, it seems like relative to a normal cat, when you think about COVID losses, reinsurance participation doesn't seem like it's going to be quite as high. Do you have a view on how would you characterize that? Or do you have an overall view of if I gave you a number, do you think it's 30% to maybe half will be footed by reinsurance, more or less?
That's a tough one. First off, obviously the BI issue is extremely important kind of across the board, right? That needs to be well understood. The reality is that everything is on a case-by-case basis when it comes to the reinsurance market. Obviously, we seek to work with our clients and all of that. The contracts have wording in them. That wording obviously helps you sort through when these particular issues take place. I would say it's hard to say. It's all on case by case as we move through it. I think that's probably the best way that I could answer that question at this point in time, given the uncertainties that actually exist out in the market. Again, I would say where BI moves to is important.
Certainly if there are changes in court system, et cetera, in terms of some of the thought processes there, that's a bigger issue. Either way, again, it'll be on a case-by-case basis that everything will be determined.
I think one thing we're trying to figure out is if you had ballooning BI losses, and we're actually, if you want to stick around, we've got some BI lawyers in here in an hour.
I'm sure.
No, they're good. They're on the defense side. My question was going to be, when you think about the treaty side of things instead of the quota share side of things, it's still a little bit of a mystery to me how this could materialize when you think about things like hours clause, the definition of the event. What are the scenarios that could make this, if you really did have like kind of a Pandora's box BI thing, and we're thinking about the follow the fortunes, like why would reinsurers not be more protected on the treaty side based on how the policy works?
Again, I think it's another tough one to answer. Again, it's a case-by-case basis, Ryan. I think whether it's BI, whether it's different hours clause or different triggers, the wording differs in the contracts that are agreed to with cedents. I think, on both of those issues, it's going to come down to case by case, and everyone kind of sorting through it, and determining what's the proper way to go. I don't think we're going to find the proper answer at this point that you're looking for, except for it's going to be case by case. That's the way we're going to have to go through this particular situation.
Okay. Well, I have one question that sounds like a follow-up to that. Can you talk about what percentage of your reinsurance business has followed the fortunes language? Also, do you think all retro coverage you have would follow the fortunes, or is there certain pandemic exclusion language that could help your retro partners potentially avoid losses? How hedged are you?
Yeah. Again, case by case. That's going to have to be case by case. Yeah. Those are very particular questions.
Yeah
It's going to be case by case basis. I appreciate the question, it's going to need to be on a case-by-case basis that is determined.
I guess still what I'm trying to think about is it's interesting to me that we've seen a few of these capital raises. It's been a month and a half, two months since earnings, and I don't know. The tail of losses to me for the reinsurers does seem a little bit more straightforward, like you had some of the contingency stuff. But maybe that's not right. I guess what I'm trying to understand is, when the books closed at 1Q, how much more was there really to learn versus was it a lot of first-party losses? We have a pretty good feel. You set up reserves out to the end of the third quarter. In other words, how much do you really think we're still learning about what the loss is, forget about just the BI issue, but other types of losses.
How much do you think the industry learned 1Q, because when you add up the losses, we've done this. The losses for the industry and reinsurance in particular were not actually that big in just the first quarter. How much of this is still on the come, in other words, some of these players that are raising capital, are they learning a lot about potentially new losses as they're doing that?
I see. I can't speak to those that are raising capital and what they're learning, what they're not learning. I think the first quarter was the first quarter. I do view that we continue to learn in terms of first-order and second-order losses. There are losses that can happen as a result of just economic activity changing as opposed to direct losses from COVID itself. Second-order losses are still out there and still being vetted and still being verified. There's also that sits out there as well.
It's going to be key how the economies either turn around or don't. That's going to have an impact certainly on some of the second-order losses that are out there. To answer your question, yeah, I do think we're still learning from it and trying to derive what is the ultimate looking like. It can take a while, the losses are going to come in over time as well.
Okay.
I think it's a broader issue than just 1Q, without a doubt.
All right. Well, that's perfect, I think we're out of time. It sounds like you're cautious. I think that's good. Stay cautious. Tell everyone to stay cautious because it's the only way Hopefully we can keep this market hard. Yeah, it's been a really good discussion, Chris, thanks so much for joining us. We value your time and best of luck.
Great. Thank you, Ryan. I appreciate your time as well, thanks, everybody, for the questions. Okay. Be well.